<PAGE>
Filed Pursuant to Rule 424(b)(3)
Registration No. 333-08591
HERITAGE FINANCIAL, LTD.
715 8th Street
Boone, Iowa 50036
(515) 432-1220
August 21, 1996
Dear Stockholder:
You are invited to attend a special meeting of stockholders (the
"Special Meeting") of Heritage Financial, Ltd. ("Heritage") to be held at the
main office of Hawkeye Federal Savings Bank, 715 8th Street, Boone, Iowa, on
Thursday, September 26, 1996 at 6:00p.m., local time. Notice of the Special
Meeting, a Prospectus/Proxy Statement and a Proxy Card are enclosed.
The Special Meeting has been called in connection with the proposed
acquisition of Heritage and its principal subsidiary, Hawkeye Federal Savings
Bank ("Hawkeye"), by Commercial Federal Corporation ("Commercial") and its
principal subsidiary, Commercial Federal Bank, a Federal Savings Bank (the
"Bank"), respectively, in accordance with the Reorganization and Merger
Agreement dated as of May 16, 1996 by and among Commercial, the Bank, Heritage
and Hawkeye (the "Merger Agreement"). Pursuant to the Merger Agreement (1)
Heritage will merge into Commercial and the outstanding shares of Heritage's
common stock will be converted into cash and shares of Commercial common stock
as set forth below and in the accompanying Prospectus/Proxy Statement (the
"Acquisition Merger") and (2) Hawkeye will, following the Acquisition Merger,
merge into the Bank (collectively, the "Merger"). Pursuant to the Merger
Agreement, each share of Heritage common stock outstanding at the time of the
Acquisition Merger (except for (i) shares held by Heritage stockholders who
have properly perfected dissenters' rights of appraisal ("Dissenting Shares");
and (ii) shares held by Heritage or any of its subsidiaries (other than shares
held in any 401(k) plan or in a fiduciary capacity) will be converted into the
right to receive (a) $18.73 in cash (subject to increase, as discussed below)
and (b) a number of shares of Commercial common stock (such number of shares
referred to as the "Exchange Ratio") based upon the "Average NYSE Closing
Price" of Commercial common stock (i.e., the arithmetic mean of the per share
closing price of the Commercial common stock as reported on the New York Stock
Exchange ("NYSE") for the twenty-fifth through the sixth trading day inclusive
immediately preceding the business day prior to the later of the date on which
all requisite federal and state regulatory approvals are obtained (including
the passage of any requisite waiting periods in respect thereof) or the date
of the Special Meeting) (the "Determination Period") as follows: (i) if the
Average NYSE Closing Price is equal to or greater than $33.50 but equal to or
less than $36.00, the Exchange Ratio shall be 2.719 shares of Commercial
common stock; (ii) if the Average NYSE Closing Price is less than $41.00 but
greater than $36.00, the Exchange Ratio shall be that number of shares of
Commercial common stock equal to the quotient that results by dividing 97.88
by the Average NYSE Closing Price; (iii) if the Average NYSE Closing Price is
equal to or greater than $41.00 but equal to or less than $45.00, the Exchange
Ratio shall be 2.387 shares of Commercial common stock; (iv) if the Average
NYSE Closing Price is greater than $45.00 but less than $47.50, the Exchange
Ratio shall be that number of shares of Commercial common stock equal to the
quotient that results by dividing 107.43 by the Average NYSE Closing Price;
(v) if the Average NYSE Closing Price is equal to or greater than $47.50 but
less than or equal to $50.00, then the Exchange Ratio shall be 2.262 shares of
Commercial common stock; and (vi) if the Average NYSE Closing Price is greater
than $50.00, then the Exchange Ratio shall be equal to the quotient that
results by dividing 113.08 by the Average NYSE Closing Price.
The cash consideration to be received by Heritage stockholders in the
Merger may be increased depending on the extent to which a currently impaired
asset of Heritage recovers value prior to or for a certain period of time
following the Merger. As of June 30, 1996, Heritage had approximately
$1.8 million invested in assets secured by equipment leases (the "Bennett
Funding Asset") sold by Bennett Funding Group and certain of its affiliates
("Bennett"). Pursuant to the Merger Agreement, Heritage has agreed that prior
to the Merger it will either (i) sell
<PAGE>
the Bennett Funding Asset in its entirety or (ii) establish a specific loan
loss reserve equal to the carrying value of the Bennett Funding Asset on the
accounting records of Heritage. As of the date of this Prospectus/Proxy
Statement, the Bennett Funding Asset has not been sold. However, as of June
30, 1996, Heritage established a specific loan loss reserve of $1.8 million
for the entire amount of the Bennett Funding Asset. If the Bennett Funding
Asset is sold prior to the effective time of the Merger, the cash portion of
the Merger Consideration will be increased by 64% of the recovery recognized
from such sale which represents the recovered amount less the agreed upon tax
impact of 36%. Commercial and Heritage have also agreed that, following the
Merger and until the earlier of September 30, 1999 or the full collection of
the Bennett Funding Asset, 64% of any cash proceeds (net of certain expenses)
received from the sale or collection of the Bennett Funding Asset will be
distributed to those individuals who were stockholders of Heritage immediately
prior to the Merger, in the manner set forth in the Merger Agreement and a
related agreement. See "The Merger -- Bennett Funding Asset" in the enclosed
Prospectus/Proxy Statement for detailed information on the Bennett Funding
Asset and the manner of its administration following consummation of the
Merger in the event it is not sold prior thereto.
Based on the closing price of Commercial common stock on the NYSE on
August 12, 1996 of $38.25 per share and assuming no value is recovered in
connection with the Bennett Funding Asset, each share of Heritage common stock
would be exchanged for $18.73 in cash and 2.559 shares of Commercial common
stock. Such Exchange Ratio may increase or decrease depending on the Average
NYSE Closing Price of Commercial common stock. Cash will be paid in lieu of
fractional shares.
Following the Merger, Commercial will be the resulting holding company,
and the Bank will be the resulting subsidiary savings institution. Consum-
mation of the Merger is conditioned upon, among other things, receipt of
all required regulatory approvals and approval by Heritage's stockholders.
At the Special Meeting, stockholders of Heritage will consider and vote
upon approval of the Acquisition Merger and the Merger Agreement. In
addition, the stockholders of Heritage may be asked to approve adjournment of
the Special Meeting if necessary to permit further solicitation of proxies in
the event that there are not sufficient votes at the time of the Special
Meeting to approve the Acquisition Merger and the Merger Agreement. Your
Board of Directors has approved the Merger Agreement, including the
Acquisition Merger, and believes that the Acquisition Merger and the Merger
Agreement are in the best interests of Heritage and its stockholders.
Accordingly, your Board of Directors unanimously recommends that you vote FOR
approval of the Acquisition Merger and the Merger Agreement and FOR
adjournment of the Special Meeting, if necessary.
Heritage's Board of Directors has received the opinion of its financial
advisor, Hovde Financial, Inc., that the consideration to be received by
Heritage's stockholders (without including any consideration resulting from
the Bennett Funding Asset) in the Acquisition Merger is fair from a financial
point of view.
You are urged to read the accompanying Prospectus/Proxy Statement, which
provides detailed information concerning the Merger and related matters.
Your vote is important, regardless of the number of shares you own. ON
BEHALF OF THE BOARD OF DIRECTORS, I URGE YOU TO SIGN, DATE AND RETURN THE
ENCLOSED PROXY CARD AS SOON AS POSSIBLE EVEN IF YOU CURRENTLY PLAN TO ATTEND
THE SPECIAL MEETING. This will not prevent you from voting in person but will
assure that your vote is counted if you are unable to attend the Special
Meeting.
Sincerely,
[SIGNATURE]
John F. Peterson
President and Chief Executive Officer
<PAGE>
HERITAGE FINANCIAL, LTD.
715 8th Street
Boone, Iowa 50036
(515) 432-1220
______________________________
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON SEPTEMBER, 1996
______________________________
NOTICE IS HEREBY GIVEN that a special meeting of stockholders (the
"Special Meeting") of Heritage Financial, Ltd. ("Heritage") will be held on
Thursday, September 26, 1996 at 6:00 p.m. at the main office of Hawkeye
Federal Savings Bank, 715 8th Street, Boone, Iowa, for the following
purposes:
(1) To approve the merger of Heritage into Commercial Federal
Corporation ("Commercial"), with Commercial as the surviving
corporation, pursuant to which the outstanding shares of Heritage's
common stock will be converted into cash and shares of Commercial
common stock as set forth in the accompanying Prospectus/Proxy
Statement (the "Acquisition Merger"), and to adopt the
Reorganization and Merger Agreement by and between Commercial,
Commercial Federal Bank, a Federal Savings Bank, Heritage and
Hawkeye Federal Savings Bank dated as of May 16, 1996 (the "Merger
Agreement"), which sets forth the terms and conditions of the
Acquisition Merger and also provides for the subsequent merger of
Hawkeye into the Bank, with the Bank as the surviving savings
institution.
(2) Adjournment of the Special Meeting if necessary to permit further
solicitation of proxies in the event that there are not sufficient
votes at the time of the Special Meeting to approve the Acquisition
Merger and the Merger Agreement.
(3) Such other business as may properly come before the Special Meeting
or any adjournments thereof.
NOTE: The Board of Directors of Heritage is not aware of any other business
to come before the Special Meeting.
The stockholders of Heritage have the statutory right to dissent from the
Acquisition Merger and, if the Acquisition Merger is consummated, to receive
payment in cash for the "fair value" of their shares of Heritage common stock
upon strict compliance with the provisions of the Iowa Business Corporation
Act ("IBCA"). A copy of Division XIII of the IBCA is attached to the
Prospectus/Proxy Statement as Annex C.
The Board of Directors of Heritage has fixed the close of business on
August 12, 1996 as the record date for the determination of stockholders
entitled to notice of and to vote at the Special Meeting. Only stockholders
of record at the close of business on that date will be entitled to notice of
and to vote at the Special Meeting.
By Order of the Board of Directors,
[SIGNATURE]
John F. Peterson
President and Chief Executive Officer
Boone, Iowa
August 21, 1996
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IT IS IMPORTANT THAT PROXIES BE RETURNED PROMPTLY. THEREFORE, WHETHER OR NOT
YOU PLAN TO BE PRESENT IN PERSON AT THE SPECIAL MEETING, PLEASE DATE, SIGN AND
COMPLETE THE ENCLOSED PROXY AND RETURN IT IN THE ENCLOSED ENVELOPE, WHICH
REQUIRES NO POSTAGE IF MAILED IN THE UNITED STATES.
-----------------------------------------------------------------------------
PLEASE DO NOT SEND IN ANY STOCK CERTIFICATES AT THIS TIME.
<PAGE>
Prospectus/Proxy Statement
-----------------------------------------
COMMERCIAL FEDERAL CORPORATION
Prospectus
Up to 554,129 Shares of Common Stock
par value $0.01 per share
-----------------------------------------
-----------------------------------------
HERITAGE FINANCIAL, LTD.
Proxy Statement
For Special Meeting of Stockholders
To be held on Setember 26, 1996
-----------------------------------------
This Prospectus/Proxy Statement is being furnished to the holders of the
common stock, par value $1.00 per share ("Heritage Common Stock"), of Heritage
Financial, Ltd. ("Heritage") in connection with the solicitation of proxies by
Heritage's Board of Directors for use at a special meeting of stockholders (the
"Special Meeting") to be held at the main office of Hawkeye Federal Savings
Bank, 715 8th Street, Boone, Iowa, on Thursday, September 26, 1996 at 6:00 p.m.,
local time.
The purposes of the Special Meeting and the matters to be acted upon are:
(i) to consider and vote upon the proposed merger of Heritage into Commercial
Federal Corporation ("Commercial"), with Commercial as the surviving corporation
(the "Acquisition Merger"), in accordance with a Reorganization and Merger
Agreement by and between Commercial; Commercial Federal Bank, a Federal Savings
Bank (the "Bank"), the wholly-owned savings institution subsidiary of
Commercial; Heritage; and Hawkeye Federal Savings Bank ("Hawkeye"), the wholly-
owned savings institution subsidiary of Heritage, dated as of May 16, 1996 (the
"Merger Agreement"), which sets forth the terms and conditions of the
Acquisition Merger and also provides for the subsequent merger of Hawkeye into
the Bank; (ii) to consider and vote upon adjournment of the Special Meeting if
necessary to permit further solicitation of proxies in the event that there are
not sufficient votes at the time of the Special Meeting to approve the
Acquisition Merger and the Merger Agreement; and (iii) to consider and vote upon
such other business as may properly come before the Special Meeting or any
adjournments thereof.
Pursuant to the Merger Agreement, each share of Heritage Common Stock
outstanding at the time of the Acquisition Merger (except for (i) shares held by
Heritage stockholders who have properly perfected dissenters' rights of
appraisal ("Dissenting Shares"); and (ii) shares held by Heritage or any of its
subsidiaries, other than shares held in any 401(k) plan or in a fiduciary
capacity) will be converted into the right to receive (a) $18.73 in cash
(subject to increase, as discussed below) and (b) a number of shares of common
stock, par value $0.01 per share (the "Commercial Common Stock") of Commercial
(such number of shares referred to as the "Exchange Ratio") based upon the
"Average NYSE Closing Price" of Commercial Common Stock (i.e., the arithmetic
mean of the per share closing price of the Commercial Common Stock as reported
on the New York Stock Exchange ("NYSE") for the twenty-fifth through the sixth
trading day immediately preceding the business day prior to the later of the
date on which all requisite federal and state regulatory approvals are obtained
(including the passage of any requisite waiting periods in respect thereof) or
the date of the Special Meeting (the "Determination Period")) as follows: (i)
if the Average NYSE Closing Price is equal to or greater than $33.50 but equal
to or less than $36.00, the Exchange Ratio shall be 2.719 shares of Commercial
Common Stock; (ii) if the Average NYSE Closing Price is less than $41.00 but
greater than $36.00, the Exchange Ratio shall be that number of shares of
Commercial Common Stock equal to the quotient that results by dividing 97.88 by
the Average NYSE Closing Price; (iii) if the Average NYSE Closing Price is equal
to or greater than $41.00 but equal to or less than $45.00, the Exchange Ratio
shall be 2.387 shares of Commercial Common Stock; (iv) if the Average NYSE
Closing Price is greater than $45.00 but less than $47.50, the Exchange Ratio
shall be that number of shares of Commercial Common Stock equal to the quotient
that results by dividing 107.43 by the Average NYSE Closing Price; (v) if the
Average NYSE Closing Price is equal to or greater than $47.50 but less than or
equal to $50.00, then the Exchange Ratio shall be 2.262 shares of Commercial
Common Stock; and (vi) if the Average NYSE Closing Price is greater than $50.00,
then the Exchange Ratio shall be equal to the quotient that results by dividing
113.08 by the Average NYSE Closing Price (the cash consideration, including any
increase as described below, and shares of Commercial Common Stock to be
received by holders of
<PAGE>
the Heritage Common Stock pursuant to the Merger Agreement are collectively
referred to herein, as the context requires, as the "Merger Consideration").
The cash consideration to be received by Heritage stockholders in the
Merger may be increased depending on the extent to which a currently impaired
asset of Heritage recovers value prior to or for a certain period of time
following the Merger. As of June 30, 1996, Heritage had approximately $1.8
million invested in assets secured by equipment leases sold by Bennett Funding
Group and certain of its affiliates (the "Bennett Funding Asset"). Pursuant to
the Merger Agreement, Heritage has agreed that prior to the Merger, it will
either (i) sell the Bennett Funding Asset in its entirety or (ii) establish a
specific loan loss reserve equal to the carrying value of the Bennett Funding
Asset on the accounting records of Heritage. As of the date of this
Prospectus/Proxy Statement, the Bennett Funding Asset has not yet been sold.
However, as of June 30, 1996, Heritage established a specific loan loss reserve
of $1.8 million for the entire amount of the Bennett Funding Asset. If the
Bennett Funding Asset is subsequently sold prior to the effective time of the
Merger, the cash portion of the Merger Consideration will be increased by 64% of
the recovery recognized from such sale which represents the recovered amount
less the agreed upon tax impact of 36%. Commercial and Heritage have also agreed
that, following the Merger and until the earlier of September 30, 1999 or the
full collection of the Bennett Funding Asset, 64% of any cash proceeds (net of
certain expenses) received from the sale or collection of the Bennett Funding
Asset will be distributed to those individuals who were stockholders of Heritage
immediately prior to the Merger in the manner set forth in the Merger Agreement
and a related agreement. For additional information, see "The Merger -- Bennett
Funding Asset."
Based on the closing price of Commercial Common Stock on the NYSE on August
12, 1996 of $38.25 per share and assuming no value is recovered in connection
with the Bennett Funding Asset, each share of Heritage Common Stock would be
exchanged for $18.73 in cash and 2.559 shares of Commercial Common Stock. Cash
will be paid in lieu of fractional shares.
Commercial has filed a registration statement on Form S-4 (the
"Registration Statement") with the Securities and Exchange Commission (the
"Commission") pursuant to the Securities Act of 1933, as amended (the
"Securities Act"), with respect to the shares of Commercial Common Stock to be
issued upon consummation of the Acquisition Merger. See "Available
Information." This Prospectus/Proxy Statement constitutes a prospectus of
Commercial with respect to the issuance of shares of Commercial Common Stock to
the stockholders of Heritage upon consummation of the Acquisition Merger.
THE BOARD OF DIRECTORS OF HERITAGE BELIEVES THAT THE MERGER IS IN THE BEST
INTERESTS OF HERITAGE'S STOCKHOLDERS AND UNANIMOUSLY RECOMMENDS THAT
STOCKHOLDERS VOTE FOR THE APPROVAL OF THE ACQUISITION MERGER, INCLUDING THE
MERGER AGREEMENT.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION, THE OFFICE OF THRIFT SUPERVISION, THE FEDERAL DEPOSIT
INSURANCE CORPORATION OR ANY STATE AGENCY, NOR HAS SUCH COMMISSION, OFFICE,
CORPORATION OR AGENCY PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS/PROXY STATEMENT. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
THE SHARES OFFERED HEREBY ARE NOT SAVINGS ACCOUNTS OR DEPOSITS AND ARE NOT
INSURED BY THE SAVINGS ASSOCIATION INSURANCE FUND, THE FEDERAL DEPOSIT INSURANCE
CORPORATION OR ANY OTHER GOVERNMENT AGENCY.
This Prospectus/Proxy Statement and the accompanying proxy card are first
being sent to the stockholders of Heritage on or about August 21, 1996.
This Prospectus/Proxy Statement does not cover any resales of the
Commercial Common Stock offered hereby to be received by the stockholders deemed
to be affiliates of Commercial or Heritage upon consummation of the Merger. No
person is authorized to make use of this Prospectus/Proxy Statement in
connection with such resales, although such securities may be traded without the
use of this Prospectus/Proxy Statement by those stockholders of Heritage not
deemed to be affiliates of Commercial or Heritage.
The date of this Prospectus/Proxy Statement is August 21, 1996.
<PAGE>
PROSPECTUS/PROXY STATEMENT
TABLE OF CONTENTS
<TABLE>
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Page
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<S> <C>
AVAILABLE INFORMATION.......................................................................... 1
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE................................................ 1
SUMMARY........................................................................................ 3
The Special Meeting of Heritage Stockholders................................................... 3
Commercial Federal Corporation and Commercial Federal Bank, a Federal Savings Bank............. 3
Heritage Financial, Ltd. and Hawkeye Federal Savings Bank...................................... 4
The Merger..................................................................................... 4
Comparison of Stockholder Rights............................................................... 8
Adjournment of Special Meeting................................................................. 8
SUMMARY CONSOLIDATED FINANCIAL INFORMATION OF
COMMERCIAL FEDERAL CORPORATION................................................................. 9
Financial Condition Data and Capital Ratios.................................................... 9
Operating Data................................................................................. 10
Operating Ratios and Other Data................................................................ 11
SUMMARY CONSOLIDATED FINANCIAL INFORMATION
OF HERITAGE FINANCIAL, LTD. ................................................................... 12
Financial Condition Data and Capital Ratios.................................................... 12
Operating Data................................................................................. 13
Operating Ratios and Other Data................................................................ 13
INFORMATION CONCERNING THE SPECIAL MEETING..................................................... 14
General........................................................................................ 14
Recent Events.................................................................................. 14
Solicitation, Voting and Revocability of Proxies............................................... 15
THE MERGER..................................................................................... 16
General........................................................................................ 16
Background of the Merger....................................................................... 17
Reasons for the Merger and Recommendation of the Heritage Board of Directors................... 20
Financial Advisor and Opinion of Financial Advisor............................................. 21
Conversion of Heritage Common Stock............................................................ 26
Treatment of Heritage Stock Options............................................................ 27
Bennett Funding Asset.......................................................................... 27
Dissenters' Rights of Appraisal................................................................ 28
Voting Agreements.............................................................................. 29
The Bank Merger................................................................................ 30
Management after the Merger.................................................................... 30
Representations and Warranties................................................................. 30
Covenants Pending the Acquisition Merger....................................................... 30
No Solicitation................................................................................ 33
Conditions to Consummation of the Merger....................................................... 33
Amendment or Termination of the Merger Agreement............................................... 35
</TABLE>
i
1
<PAGE>
<TABLE>
<CAPTION>
TABLE OF CONTENTS (continued) Page
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<S> <C>
Termination Fee.............................................................................. 36
Required Regulatory Approvals................................................................ 36
Expenses..................................................................................... 36
Closing; Merger Effective Times.............................................................. 36
Employee Benefits after the Merger........................................................... 37
Interests of Certain Persons in the Merger................................................... 38
Federal Income Tax Consequences.............................................................. 39
Accounting Treatment......................................................................... 41
Resale of Commercial Common Stock; Restrictions on Transfer.................................. 41
New York Stock Exchange Listing.............................................................. 41
Vote Required................................................................................ 41
COMMERCIAL FEDERAL CORPORATION AND
COMMERCIAL FEDERAL BANK, A FEDERAL SAVINGS BANK.............................................. 42
HERITAGE FINANCIAL, LTD...................................................................... 43
BUSINESS OF HERITAGE FINANCIAL, LTD.......................................................... 43
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS................................................................... 62
REGULATION................................................................................... 71
BENEFICIAL OWNERSHIP OF HERITAGE COMMON STOCK................................................ 79
COMMON STOCK PRICES AND DIVIDENDS............................................................ 81
Common Stock Prices.......................................................................... 81
Dividends.................................................................................... 82
COMPARISON OF STOCKHOLDER RIGHTS............................................................. 82
ADJOURNMENT OF SPECIAL MEETING............................................................... 86
LEGAL MATTERS................................................................................ 86
EXPERTS...................................................................................... 86
INDEPENDENT ACCOUNTANTS...................................................................... 87
OTHER MATTERS................................................................................ 87
INDEX TO FINANCIAL STATEMENTS OF HERITAGE FINANCIAL, LTD..................................... 88
ANNEX:
Annex A -- Reorganization and Merger Agreement (excluding exhibits);
Asset Management Agreement; As Amended...................................... A-1
Annex B -- Opinion of Hovde Financial, Inc............................................. B-1
Annex C -- Division XIII of the Iowa Business Corporation Act.......................... C-1
</TABLE>
ii
2
<PAGE>
No person is authorized to give any information or make any represen-
tation other than as contained or incorporated in this Prospectus/Proxy
Statement, and, if given or made, such information or representation should
not be relied upon as having been authorized. This Prospectus/Proxy Statement
does not constitute an offer to exchange or sell, or a solicitation of an
offer to exchange or purchase, the securities offered by this Prospectus/Proxy
Statement, or the solicitation of a proxy, in any jurisdiction in which such
offer or solicitation is not authorized or to or from any person to whom it is
unlawful to make such offer or solicitation. The information contained in this
Prospectus/Proxy Statement speaks as of the date hereof unless otherwise
specifically indicated. Information contained in this Prospectus/Proxy
Statement regarding Commercial has been furnished by Commercial, and
information herein regarding Heritage has been furnished by Heritage. Neither
Commercial nor Heritage warrants the accuracy or completeness of information
relating to the other party.
AVAILABLE INFORMATION
Commercial has filed with the Commission the Registration Statement under
the Securities Act relating to the shares of Commercial Common Stock to be
issued in connection with the Acquisition Merger. This Prospectus/Proxy
Statement does not contain all the information set forth in the Registration
Statement, certain portions of which have been omitted pursuant to the rules
and regulations of the Commission. The information omitted may be obtained
from the public reference facilities of the Commission or inspected and copied
at the principal or regional offices of the Commission at the addresses listed
below.
Commercial is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act") and, in accordance
therewith, files reports, proxy statements and other information with the
Commission. Such reports, proxy statements and other information can be
inspected and copied at the public reference facilities maintained by the
Commission at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington,
D.C. 20549, and at its regional offices at Northwestern Atrium Center, 500
West Madison, Suite 1400, Chicago, Illinois 60601, and World Trade Center,
13th Floor, New York, New York 10048. Copies of such materials also can be
obtained from the Commission's Public Reference Section, 450 Fifth Street,
N.W., Washington, D.C. 20549 at prescribed rates. Reports, proxy statements
and other information that have been filed electronically with the Commission
may also be obtained from the Commission's Website, the address of which is
http://www.sec.gov.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents previously filed with the Commission by
Commercial are hereby incorporated by reference in this Prospectus/Proxy
Statement:
(i) Commercial's Annual Report on Form 10-K for the fiscal year ended
June 30, 1995;
(ii) Commercial's Quarterly Reports on Form 10-Q for the quarters ended
September 30, 1995, December 31, 1995 and March 31, 1996;
(iii) Commercial's Current Reports on Form 8-K dated August 8, 1995,
August 18, 1995, October 17, 1995, December 20, 1995, March 19,
1996 and May 16, 1996 and Form 8-K/A dated December 18, 1995; and
(iv) the description of the Commercial Common Stock set forth at Item 1
of Commercial's registration statement on Form 8-A dated July 3,
1985 (File No. 0-13082).
1
<PAGE>
All documents subsequently filed by Commercial with the Commission
pursuant to Sections 13(a), 13(c), 14 or 15(d) of the Exchange Act subsequent
to the date of this Prospectus/Proxy Statement and prior to the date of the
Special Meeting shall be deemed to be incorporated by reference in this
Prospectus/Proxy Statement and to be part hereof from the date of filing of
such documents.
Any statement contained in a document incorporated or deemed to be
incorporated by reference herein shall be deemed to be modified or superseded
for purposes of this Prospectus/Proxy Statement to the extent that a statement
contained herein or in any subsequently filed document which also is or is
deemed to be incorporated herein modifies or supersedes such statement. Any
statement so modified or superseded shall not be deemed to constitute a part
of this Prospectus/Proxy Statement, except as so modified or superseded.
This Prospectus/Proxy Statement incorporates by reference other documents
relating to Commercial which are not presented herein or delivered herewith.
These documents are available, without charge, upon request directed to Mr.
Gary L. Matter, Commercial's Corporate Secretary, 2120 South 72nd Street,
Omaha, Nebraska 68124, telephone (402) 390-5176. In order to ensure timely
delivery of any requested documents, the request should be made no later than
the close of business on September 19, 1996.
2
<PAGE>
SUMMARY
This summary does not purport to be complete and is qualified in its
entirety by the more detailed information and definitions appearing elsewhere
herein, the annexes hereto and documents incorporated by reference herein and
the consolidated financial statements of Heritage, including the notes
thereto, included in this Prospectus/Proxy Statement.
The Special Meeting of Heritage Stockholders
The Special Meeting will be held on Thursday, September 26, 1996 at 6:00
p.m. at the main office of Hawkeye Federal Savings Bank, 715 8th Street,
Boone, Iowa. At the Special Meeting, stockholders of Heritage will consider
and vote upon proposals (1) to approve the Acquisition Merger and the Merger
Agreement; (2) to adjourn the Special Meeting if necessary to permit further
solicitation of proxies in the event that there are not sufficient votes at
the time of the Special Meeting to approve the Acquisition Merger and the
Merger Agreement; and (3) to vote upon any other business which may be
properly brought before the Special Meeting. Stockholders of record at the
close of business on August 12, 1996 (the "Record Date") will be entitled to
one vote for each share then so held. The presence, in person or by proxy, of
a majority of the total number of outstanding shares of Heritage Common Stock
entitled to vote at the Special Meeting is necessary to constitute a quorum at
the Special Meeting. The affirmative vote of the holders of at least a
majority of the issued and outstanding shares of Heritage Common Stock is
required to approve the Acquisition Merger and the Merger Agreement. The
affirmative vote of a majority of the shares of Heritage Common Stock
represented and voting at the Special Meeting is required to approve an
adjournment of the Special Meeting. Heritage's directors and executive
officers, and their affiliates, are expected to vote substantially all of the
56,064 shares of Heritage Common Stock (excluding stock options), beneficially
owned by them as of the Record Date for approval of the Acquisition Merger and
the Merger Agreement. See "The Merger --Voting Agreements."
For additional information, see "Information Concerning the Special
Meeting" herein.
Commercial Federal Corporation and Commercial Federal Bank, a Federal Savings
Bank
Commercial is a unitary non-diversified savings and loan holding company
whose primary asset is the Bank, the largest depository institution
headquartered in Nebraska. At March 31, 1996, Commercial had assets of $6.6
billion and stockholders' equity of $400.4 million. Based upon total assets
at that date, Commercial was the 18th largest publicly held thrift holding
company in the United States. The Bank is a consumer-oriented financial
institution that emphasizes traditional savings and loan operations, including
single-family residential real estate lending, retail deposit activities and
mortgage banking. At March 31, 1996, the Bank operated 38 branch offices in
Nebraska, 20 branch offices in greater metropolitan Denver, Colorado, 18
branch offices in Oklahoma, 24 branch offices in Kansas and one branch office
in Iowa. Subsequent to March 31, 1996, the Bank consolidated four branches in
Nebraska due to market overlap resulting from the acquisition of Conservative
Savings Corporation ("Conservative") and opened an additional branch in
Oklahoma. Accordingly, at June 30, 1996, the Bank operated a 98 branch
network. Throughout its 109 year history, the Bank has emphasized customer
service. To serve its customers, the Bank conducts loan origination
activities through its branch office network, loan offices of its wholly-owned
mortgage banking subsidiary and a nationwide correspondent network consisting
of approximately 400 mortgage loan originators. The Bank also provides
insurance and securities brokerage and other retail financial services.
On October 2, 1995, Commercial completed the acquisition of Railroad
Financial Corporation ("Railroad"), headquartered in Wichita, Kansas, the
holding company for Railroad Savings Bank, FSB. Railroad operated 18 full-
service branch offices and 71 agency offices throughout the State of Kansas
and, at acquisition date, had $602.9 million in total assets, $421.4 million
in deposits and $27.7 million in stockholders' equity. On February 1, 1996,
Commercial completed the acquisition of Conservative, headquartered in Omaha,
Nebraska, the holding company for Conservative Savings Bank, FSB.
Conservative operated seven offices in Nebraska, one office in Iowa and one
3
<PAGE>
office in Kansas, and at February 1, 1996 had $302.9 million in total assets,
$197.9 million in deposits and $35.1 million in stockholders' equity.
Commercial's strategy for growth emphasizes both internal and external
growth. Operations focus on increasing deposits, including demand accounts,
making loans (primarily single-family mortgage and consumer loans) and
providing customers with a full array of financial products and a high level
of customer service. As part of its long-term strategic plan, Commercial
intends to expand its operations within its market areas either through direct
marketing efforts aimed at increasing market share, branch expansions, or
opening additional branches. Commercial's retail strategy will continue to be
centered on attracting new customers and selling both new and existing
customers multiple products and services. Additionally, Commercial will
continue to build and leverage an infrastructure designed to increase fee and
other income.
Complementing its strategy of internal growth, Commercial will continue
to grow its five-state franchise through an ongoing program of selective
acquisitions of other financial institutions. Acquisition candidates will be
selected based on the extent to which the candidates can enhance Commercial's
retail presence in new or underserved markets and complement Commercial's
existing retail network.
Commercial's principal executive offices are located at 2120 South 72nd
Street, Omaha, Nebraska 68124, and its telephone number is (402) 554-9200.
For additional information, see "Commercial Federal Corporation and
Commercial Federal Bank, a Federal Savings Bank" herein.
Heritage Financial, Ltd. and Hawkeye Federal Savings Bank
Heritage is a savings and loan holding company for Hawkeye. Heritage
became the holding company for Hawkeye effective February 23, 1990. In 1992,
Heritage acquired First Federal Savings Bank ("First Federal") of Carroll,
Iowa in a voluntary supervisory conversion. First Federal was merged with
Hawkeye in March 1995. Hawkeye's primary business is the solicitation of
savings deposits from the general public and the origination of loans secured
by residential real estate through its main office and six branch offices.
Hawkeye participates in the secondary mortgage market through the purchase of
mortgage-backed securities and through correspondent relationships which
involve the origination of residential real estate loans. It also invests
funds in securities approved for investment by federal regulations, including
obligations of the United States and its agencies. Hawkeye has expanded its
operations to include consumer and commercial lending, demand and commercial
checking, and money market deposit accounts. Hawkeye's income is derived
largely from interest and fees in connection with lending activities. Its
principal expenses are interest paid on savings deposits and operating
expenses. At March 31, 1996, Heritage had total consolidated assets of $185.4
million, total deposits of $160.1 million and total stockholders' equity of
$14.0 million.
Heritage's principal executive offices are located at 715 8th Street,
Boone, Iowa 50036, and its telephone number at that address is (515) 432-
1220.
For additional information, see "Heritage Financial, Ltd.," "Business of
Heritage Financial, Ltd." and the Consolidated Financial Statements of
Heritage included elsewhere herein.
The Merger
General. The Merger Agreement provides for the acquisition of Heritage
by Commercial, and the subsequent merger of Hawkeye into the Bank, as follows:
(i) Heritage will merge into Commercial, with Commercial as the surviving
corporation, pursuant to which the outstanding shares of Heritage Common Stock
(except for (a) Dissenting Shares and (b) shares of Heritage Common Stock held
by Heritage or any of its
4
<PAGE>
subsidiaries (other than shares held in any 401(k) plan or in a fiduciary
capacity)) will be converted into cash and shares of Commercial Common Stock
as set forth below under " -- Conversion of Heritage Common Stock" (the
"Acquisition Merger"); and (ii) Hawkeye will, following the Acquisition
Merger, merge into the Bank, with the Bank as the surviving savings
institution (the "Bank Merger") (collectively, the "Merger"). Upon
consummation of the Acquisition Merger (the "Acquisition Merger Effective
Time"), Heritage will have merged into Commercial. Upon consummation of the
Bank Merger (the "Bank Merger Effective Time"), Hawkeye will have merged into
the Bank. Commercial will be the resulting savings institution holding
company, and the Bank will be the resulting subsidiary savings institution.
It is anticipated that the Bank Merger Effective Time will occur immediately
following the Acquisition Merger Effective Time.
At a meeting held on May 16, 1996, the Board of Directors of Heritage
(the "Heritage Board") unanimously adopted the Merger Agreement and approved
the transactions contemplated thereby. The Heritage Board considered the
Merger and the terms of the Merger Agreement, including the Merger
Consideration, in light of economic, financial, legal, market and other
factors and concluded that the Merger is in the best interests of Heritage and
its stockholders.
The Heritage Board believes that the Merger is in the best interests of
Heritage and its stockholders and recommends that Heritage's stockholders vote
FOR approval of the Merger Agreement and the Acquisition Merger. For
additional information, see "The Merger -- General," "-- Background of the
Merger" and "-- Reasons for the Merger and Recommendation of the Heritage
Board of Directors" herein and the Merger Agreement attached as Annex A
hereto.
Financial Advisor and Opinion of Financial Advisor. The Board of
Directors of Heritage has received the written opinion of its financial
advisor Hovde Financial, Inc. ("Hovde") that, as of the date of such opinion,
based upon and subject to the assumptions, factors and limitations set forth
therein, the consideration to be received by holders of Heritage Common Stock
in the Acquisition Merger (without including any consideration which may
result from the sale or recovery of the Bennett Funding Asset) is fair from a
financial point of view. A copy of the Hovde opinion dated August 21, 1996
is attached as Annex B hereto, and the description set forth herein is
qualified in its entirety by reference to this opinion.
Conversion of Heritage Common Stock. Pursuant to the Merger Agreement,
each share of Heritage Common Stock outstanding at the Acquisition Merger
Effective Time (other than Dissenting Shares and shares of Heritage Common
Stock held by Heritage or any of its subsidiaries (other than shares held in
any 401(k) plan or in a fiduciary capacity) will be converted into the right
to receive (a) $18.73 in cash (subject to increase in the event of the sale or
recovery of the Bennett Funding Asset) and (b) a number of shares of
Commercial Common Stock (such number of shares referred to as the "Exchange
Ratio") based upon the Average NYSE Closing Price of Commercial Common Stock
(i.e., the arithmetic mean of the per share closing price of the Commercial
Common Stock as reported on the NYSE for the twenty-fifth through the sixth
trading day immediately preceding the business day prior to the later of the
date on which all requisite federal and state regulatory approvals are
obtained (including the passage of any requisite waiting periods in respect
thereof) or the date of the Special Meeting) as follows: (i) if the Average
NYSE Closing Price is equal to or greater than $33.50 but equal to or less
than $36.00, the Exchange Ratio shall be 2.719 shares of Commercial Common
Stock; (ii) if the Average NYSE Closing Price is less than $41.00 but greater
than $36.00, the Exchange Ratio shall be that number of shares of Commercial
Common Stock equal to the quotient that results by dividing 97.88 by the
Average NYSE Closing Price; (iii) if the Average NYSE Closing Price is equal
to or greater than $41.00 but equal to or less than $45.00, the Exchange Ratio
shall be 2.387 shares of Commercial Common Stock; (iv) if the Average NYSE
Closing Price is greater than $45.00 but less than $47.50, the Exchange Ratio
shall be that number of shares of Commercial Common Stock equal to the
quotient that results by dividing 107.43 by the Average NYSE Closing Price and
(v) if the Average NYSE Closing Price is equal to or greater than $47.50 but
less than or equal to $50.00, then the Exchange Ratio shall be 2.262 shares of
Commercial Common Stock; and (vi) if the Average NYSE Closing Price is greater
than $50.00, then the Exchange Ratio shall be equal to the quotient that
results by dividing 113.08 by the Average NYSE Closing Price.
5
<PAGE>
The cash consideration to be received by Heritage stockholders in the
Merger may be increased depending on the extent to which Heritage recovers
value on the Bennett Funding Asset prior to or following the Merger. As of May
16, 1996, Heritage had approximately $1.8 million invested in the Bennett
Funding Asset. Pursuant to the Merger Agreement, Heritage has agreed that
prior to the Merger, it will either (i) sell the Bennett Funding Asset in its
entirety, or (ii) establish a specific loan loss reserve equal to the carrying
value of the Bennett Funding Asset on the accounting records of Heritage. As
of the date of this Prospectus/Proxy Statement, the Bennett Funding Asset has
not yet been sold. However, as of June 30, 1996, Heritage established a
specific loan loss reserve of $1.8 million for the entire amount of the
Bennett Funding Asset. If the Bennett Funding Asset is subsequently sold prior
to the effective time of the Merger, the cash portion of the Merger
Consideration will be increased by 64% of the recovery recognized from such
sale which represents the recovered amount less the agreed upon tax impact of
36%. Commercial and Heritage have agreed that, following the Merger and until
the earlier to occur of September 30, 1999 or the full collection of the
Bennett Funding Asset, 64% of any cash proceeds received (net of expenses)
from the sale or collection of the Bennett Funding Asset will be distributed
to those individuals who were stockholders of Heritage immediately prior to
the Merger. For additional information see "The Merger--Bennett Funding
Asset."
Treatment of Heritage Stock Options. Immediately prior to the
Acquisition Merger Effective Time, each holder of an option outstanding under
the Heritage Financial, Ltd. 1994 Stock Option Plan (the "Heritage Option
Plan"), whether or not the option is then exercisable, shall receive in
cancellation of such option, for each share of Heritage Common Stock subject
to such option, a cash payment in an amount equal to the Merger Consideration
less the exercise price of such option, net of any cash which must be withheld
under federal and state income tax requirements. For additional information,
see "The Merger -- Treatment of Heritage Stock Options" and "-- Interests of
Certain Persons in the Merger" herein.
Dissenters' Appraisal Rights. Under the provisions of Iowa law,
stockholders of Heritage who object to the Acquisition Merger will have a
statutory right to demand payment of the "fair value" of their Heritage Common
Stock in cash. To perfect this right, a Heritage stockholder must (i) not
vote his or her shares in favor of the Merger Agreement and the Acquisition
Merger at the Special Meeting and (ii) must take such action as is required by
the provisions of Part B of Division XIII of the Iowa Business Corporation Act
("IBCA"), including delivering written notice of objection to Heritage prior
to the vote on the Merger Agreement and the Acquisition Merger at the Special
Meeting. See "The Merger -- Dissenters' Rights of Appraisal" and Annex C
hereto.
Voting Agreements. Concurrent with the execution of the Merger
Agreement, the directors and executive officers of Heritage entered into
agreements with Commercial (the "Voting Agreements") to vote their shares of
Heritage Common Stock in favor of the Merger Agreement and the Acquisition
Merger. Such Voting Agreements cover the shares of Heritage Common Stock
beneficially owned by the directors and executive officers of Heritage as of
May 16, 1996 as well as any shares subsequently acquired. A total of 56,064
shares of Heritage Common Stock (a total of 31% of the shares outstanding as
of the Record Date) are covered by the Voting Agreements. See "The Merger --
Voting Agreements."
Conditions to the Merger. The obligations of Commercial and Heritage to
effect the Merger are jointly subject to a number of conditions including,
among other things, the receipt of Heritage stockholder and regulatory
approval of the Merger and receipt of an opinion with respect to the tax
effects of the Merger. The obligations of Commercial and the Bank to effect
the Merger are subject to a number of additional conditions including, among
other things, (i) receipt of a customary legal opinion from Heritage's legal
counsel; (ii) receipt by Heritage and Hawkeye of certain third party consents
and approvals; (iii) receipt of a letter from Heritage's independent public
accountants regarding certain financial information included in this
Prospectus/Proxy Statement and other matters; (iv) the accuracy of Heritage's
and Hawkeye's representations and their performance of obligations and
compliance with covenants and conditions under the Merger Agreement; (v) the
receipt of all required governmental approvals without the imposition of any
conditions which Commercial and the Bank determine to be unduly burdensome on
the conduct of the business of Commercial or the Bank; (vi) the absence of a
material adverse change (as defined in the Merger Agreement) in the financial
condition, business and results of operations of Heritage and its
6
<PAGE>
subsidiaries taken as a whole; (vii) the holders of no more than 10% of
Heritage Common Stock having perfected dissenters' rights of appraisal; and
(viii) Heritage having charged off or sold the Bennett Funding Asset or
established a specific loan loss therefor. The obligations of Heritage and
Hawkeye to effect the Acquisition Merger and the transactions contemplated in
the Merger Agreement are subject to a number of additional conditions
regarding, among other things, (i) receipt of a customary legal opinion from
Commercial's legal counsel; (ii) the accuracy of Commercial's and the Bank's
representations and warranties and their performance of obligations and
compliance with covenants and conditions under the Merger Agreement; (iii) the
deposit by Commercial of the Merger Consideration with the Exchange Agent;
(iv) the holders of no more than 10% of Heritage Common Stock having perfected
dissenters' rights of appraisal; (v) the approval by the NYSE for listing of
the shares of Commercial Common Stock to be issued in the Acquisition Merger;
and (vi) receipt by Commercial and the Bank of certain third party consents
and approvals. For additional information, see "The Merger -- Conditions to
Consummation of the Merger" herein.
Required Regulatory Approvals. The Merger is subject to the approval of
the Office of Thrift Supervision (the "OTS"). Following OTS approval of the
Merger, the U.S. Department of Justice may review the Merger and raise
objections on antitrust grounds, though objections on such grounds are not
expected. For additional information, see "The Merger -- Required Regulatory
Approvals" herein.
Termination of the Merger. The Merger Agreement may be terminated at any
time before the Acquisition Merger Effective Time, whether before or after
approval by Heritage stockholders, in a number of circumstances, including:
(i) by mutual consent of the parties; (ii) at the election of either party, if
the closing of the Merger shall not have occurred on or before January 31,
1997; (iii) by either party upon the occurrence of an event which renders
satisfaction of one or more of the conditions to the obligations of the other
party impossible; (iv) by Heritage at any time during the two business days
commencing on the business day immediately following the end of the
Determination Period if the Average NYSE Closing Price of Commercial Common
Stock is less than $33.50; provided, however, that Heritage shall not be
entitled to terminate the Merger Agreement on this basis if Commercial
exercises its option to adjust the Merger Consideration so that it equals cash
in the amount of $18.73 (subject to increase in the event of the sale or
recovery of the Bennett Funding Asset) and that number of shares of Commercial
Common Stock arrived at by dividing 91.08 by the Average NYSE Closing Price of
Commercial Common Stock; or (v) by Heritage, in the event the fiduciary duties
of the Heritage Board of Directors require such termination in connection with
entering into an agreement with a third party. In the event the Merger
Agreement is terminated by Heritage and, prior to such termination, a
"Termination Event" (as such term is defined herein) has occurred (except if
such termination is due to the noncompliance of Commercial or the Bank with
their conditions under the Merger Agreement), Heritage will be obligated to
pay a termination fee in the amount of $1.0 million. For additional
information, see "The Merger -- Amendment or Termination of the Merger
Agreement" and " -- Termination Fee".
No Solicitation. The Merger Agreement provides that Heritage will not
authorize or permit any representative of Heritage or any subsidiary to
initiate contact with any person or entity in an effort to solicit, initiate
or encourage any "takeover proposal" (generally, any bona fide proposal other
than as contemplated by the Merger Agreement, for a merger or other business
combination involving Heritage or Hawkeye, for the acquisition of a 10.0% or
greater equity interest in Heritage or Hawkeye or for the acquisition of a
substantial portion of the assets of Heritage or Hawkeye). In addition,
except as the fiduciary duties of Heritage's Board of Directors may otherwise
require (as determined in consultation with legal counsel), Heritage may not
(or authorize any representative to): (i) cooperate with, or furnish, or cause
to be furnished, any non-public information concerning Heritage's business,
properties or assets to any person or entity in connection with any takeover
proposal; (ii) negotiate any takeover proposal with any person or entity; or
(iii) enter into any agreement, letter of intent or agreement in principle as
to any takeover proposal.
Interests of Certain Persons in the Merger. Shares of Heritage Common
Stock held by directors, officers and employees of Heritage will be converted
into cash and Commercial Common Stock under the Merger Agreement on the same
basis as shares held by other Heritage stockholders. Directors, officers and
employees of Heritage who
7
<PAGE>
hold unexercised options to purchase Heritage Common Stock under the Heritage
Option Plan at the Acquisition Merger Effective Time will have their stock
options converted into cash under the terms of the Merger Agreement. At the
Record Date, officers, directors and the estate of a former director of
Heritage held options to purchase 23,037 shares of Heritage Common Stock at an
exercise price of $56.00 per share.
It is also currently anticipated that, as a result of the Merger, three
executive officers and four other officers of Heritage will become entitled to
severance payments and benefits under their current employment or severance
agreements with Heritage and Hawkeye. The severance payments due such
officers in connection with their termination of employment following the
Merger have an approximate aggregate value of $892,000.
Commercial has also agreed to indemnify the employees, agents, directors
and officers of Heritage and its subsidiary to the same extent they are
indemnified under Heritage's Articles of Incorporation or Bylaws in effect at
the date of the Merger Agreement or arising by operation of law. In addition,
with respect to persons serving as officers or directors of Heritage and
Hawkeye immediately prior to the Acquisition Merger Effective Time, Commercial
has further agreed to purchase individual directors' and officers' liability
coverage with respect to acts or omissions occurring prior to the Acquisition
Merger Effective Time at an individual cost of not more than $3,500 per person
and an aggregate cost of $55,000.
For additional information, see "The Merger -- Management after the
Merger," "-- Employee Benefits after the Merger" and "-- Interests of Certain
Persons in the Merger" herein.
Federal Income Tax Consequences. Commercial and Heritage will rely upon
an opinion of Deloitte & Touche LLP, tax advisor to Commercial, to the effect
that, among other things, (i) the Acquisition Merger should be treated for
federal income tax purposes as a tax-free reorganization under Section 368(a)
of the Internal Revenue Code of 1986, as amended (the "Code"); (ii) the gain,
if any, to be realized by a Heritage stockholder who receives Commercial
Common Stock and cash in exchange for Heritage Common Stock should be
recognized, but not in excess of the amount of cash received; (iii) if the
exchange has the effect of the distribution of a dividend (which determination
is made on a stockholder-by-stockholder basis), then the amount of gain
recognized that is not in excess of each stockholder's ratable share of
undistributed earnings and profits should be treated as a dividend; and (iv)
cash received by Heritage stockholders in lieu of fractional share interests
in Commercial Common Stock should be treated as having been received as
distributions in full payment in exchange for the fractional share interests
in Commercial Common Stock which they would otherwise be entitled to receive
and should qualify as capital gain or loss if the stockholders held the
Heritage Common Stock as a capital asset at the Acquisition Merger Effective
Time. For additional information, see "The Merger -- Federal Income Tax
Consequences" herein.
Accounting Treatment. The Merger will be accounted for under the
purchase method of accounting in accordance with generally accepted accounting
principles, resulting in adjustments to Heritage's assets and liabilities to
reflect their fair values at the date of the Acquisition Merger.
Comparison of Stockholder Rights
Upon consummation of the Merger, holders of Heritage Common Stock, whose
rights are presently governed by Iowa law and Heritage's Articles of
Incorporation and Bylaws, and indirectly Hawkeye's Charter and Bylaws, will
become stockholders of Commercial, a Nebraska corporation. Accordingly, their
rights will be governed by Nebraska law and by the Articles of Incorporation
and Bylaws of Commercial, and indirectly by the Bank's Charter and Bylaws.
Certain differences arise from the differences between Iowa and Nebraska
corporate law, between the Articles of Incorporation and Bylaws of Heritage
and the Articles of Incorporation and Bylaws of Commercial and between the
Charter and Bylaws of Hawkeye and the Bank, including, among other things, the
number of authorized shares of capital stock, the calling of special meetings
of stockholders, cumulative voting in the election of directors, the number
and term of directors, advance notice requirements for nominations of
directors and presentation of new business at annual or special meetings of
stockholders, limitations on acquisitions of capital stock, approval
8
<PAGE>
requirements for mergers, consolidations, sales of substantially all assets
and dissolutions, limitations on directors' liability and amendment of
corporate governing documents. In addition, Commercial has in effect a
shareholder rights plans. For additional information, see "Comparison of
Stockholder Rights" herein.
Adjournment of Special Meeting
In the event that there are not sufficient votes to approve the
Acquisition Merger and the Merger Agreement at the time of the Special
Meeting, stockholders of Heritage will consider and vote upon a proposal to
adjourn the Special Meeting for the solicitation of additional votes in favor
of the Acquisition Merger and the Merger Agreement. A majority of the shares
of Heritage Common Stock represented and voting at the Special Meeting is
required in order to approve any such adjournment. Heritage's Board of
Directors unanimously recommends that stockholders vote FOR the proposal to
adjourn the Special Meeting if necessary to permit further solicitation of
proxies.
For additional information, see "Adjournment of Special Meeting" herein.
9
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL INFORMATION OF
COMMERCIAL FEDERAL CORPORATION
The following summary consolidated financial data of Commercial as of and
for the years ended June 30, 1995, 1994, 1993, 1992 and 1991 has been derived
from and should be read in conjunction with Commercial's consolidated
financial statements and the notes thereto, as restated to include the
accounts and results of operation of Railroad. The following summary
consolidated interim financial data for the nine months ended March 31, 1996
and 1995 has been derived from unaudited consolidated interim financial
statements which, in the opinion of management, include all adjustments
(consisting of normal recurring adjustments except for the restatement of all
prior periods as a result of the pooling of Railroad and the accelerated
amortization of goodwill recorded during the nine months ended March 31,
1995), considered necessary for a fair presentation. The summary consolidated
financial data should be read in conjunction with Commercial's audited
Consolidated Financial Statements and related Notes, which have been restated
to include the accounts and results of operations of Railroad, as reflected on
the Company's Current Report on Form 8-K dated March 19, 1996, which is
incorporated herein by reference. The consolidated financial data for the
nine months ended March 31, 1996 is not necessarily indicative of the
operating results to be expected for the entire fiscal year.
Financial Condition Data and Capital Ratios:
<TABLE>
<CAPTION>
At At June 30,
March 31, --------------------------------------------------------------
1996 1995 1994 1993 1992 1991
---------- ---- ---- ---- ---- ----
(Dollars in thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C>
Total assets............................... $6,617,488 $6,569,579 $5,982,307 $5,262,336 $5,035,913 $5,457,741
Investment securities (1).................. 261,286 300,481 290,807 254,889 316,366 248,554
Mortgage-backed securities (2)............. 1,185,824 1,364,907 1,350,402 952,539 779,969 1,017,359
Loans receivable, net (3).................. 4,792,918 4,540,692 3,970,626 3,655,740 3,460,294 2,962,688
Goodwill and core value of deposits........ 40,717 37,263 67,661 87,946 98,490 109,879
Deposits................................... 4,334,125 4,011,323 3,675,825 2,731,127 2,660,489 2,608,811
Advances from Federal Home Loan Bank....... 1,508,089 1,787,352 1,625,456 1,868,779 1,465,062 1,326,103
Other borrowings........................... 220,090 273,676 224,072 231,828 499,790 1,192,371
Stockholders' equity....................... 400,399 337,614 304,568 297,848 253,528 178,542
Book value per common share................ 26.57 23.65 21.51 21.28 20.95 20.97
Tangible book value per common share (4)... 23.87 21.04 16.73 15.00 12.81 8.07
Regulatory capital ratios of the Bank:
Tangible capital......................... 5.97% 5.16% 4.69% 4.62% 2.95% 1.30%
Core capital (Tier 1 capital)............ 6.21% 5.47% 5.53% 5.93% 4.63% 3.19%
Risk-based capital (Total capital)....... 13.39% 13.12% 13.16% 12.81% 8.87% 6.66%
</TABLE>
- --------------------
(1) Includes investment securities available for sale totaling $9.8 million,
$3.0 million, $5.4 million and $1.3 million, respectively, at March 31,
1996, June 30, 1995, 1994 and 1993. No investment securities were
available for sale at June 30, 1992 and 1991.
(2) Includes mortgage-backed securities available for sale totaling $288.8
million, $37.0 million, $45.0 million, $41.3 million, $20.8 million and
$500.9 million, respectively, at March 31, 1996 and June 30, 1995, 1994,
1993, 1992 and 1991.
(3) Includes loans held for sale amounting to $102.9 million, $113.4 million,
$187.7 million, $171.8 million, $158.4 million and $154.4 million,
respectively, at March 31, 1996 and June 30, 1995, 1994, 1993, 1992 and
1991.
(4) Calculated by dividing stockholders' equity, reduced by the amount of
goodwill and core value of deposits, by the number of shares of
Commercial Common Stock outstanding at the respective dates.
10
<PAGE>
COMMERCIAL FEDERAL CORPORATION
Operating Data:
<TABLE>
<CAPTION>
Nine Months Ended
March 31, Year Ended June 30,
------------------- ----------------------------------------------------
1996 1995 1995 1994 1993 1992 1991
-------- -------- -------- -------- -------- -------- --------
(Dollars in thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C>
Interest income................................. $367,958 $334,038 $454,368 $393,854 $404,628 $447,883 $520,153
Interest expense................................ 248,673 221,709 304,526 256,102 276,584 352,527 456,651
-------- -------- -------- -------- -------- -------- --------
Net interest income............................. 119,285 112,329 149,842 137,752 128,044 95,356 63,502
Provision for loan losses....................... (4,599) (4,825) (6,408) (6,248) (6,185) (7,981) (9,937)
-------- -------- -------- -------- -------- -------- --------
Net interest income after provision
for loan losses............................... 114,686 107,504 143,434 131,504 121,859 87,375 53,565
Noninterest income.............................. 35,939 33,779 45,066 44,693 34,442 77,817 57,349
General and administrative expenses............. 84,860 76,088 102,554 94,115 89,560 80,314 71,283
Amortization of goodwill and core value
of deposits................................... 6,891 8,008 10,262 14,131 10,544 11,389 12,502
Accelerated amortization of goodwill............ -- 21,357 21,357 -- -- -- --
Intangible assets valuation adjustment.......... -- -- -- 52,703 -- -- --
-------- -------- -------- -------- -------- -------- --------
Income before income taxes, extraordinary
items and cumulative effects of changes
in accounting principles...................... 58,874 35,830 54,327 15,248 56,197 73,489 27,129
Provision for income taxes...................... 19,412 17,348 23,146 16,875 22,081 27,652 16,279
-------- -------- -------- -------- -------- -------- --------
Income (loss) before extraordinary items
and cumulative effects of changes
in accounting principles...................... 39,462 18,482 31,181 (1,627) 34,116 45,837 10,850
Extraordinary items (1)......................... -- -- -- -- -- (5,046) 11,699
Cumulative effects of changes in
accounting principles (2)..................... -- -- -- 6,597 -- -- --
-------- -------- -------- -------- -------- -------- --------
Net income...................................... $ 39,462 $ 18,482 $ 31,181 $ 4,970 $ 34,116 $ 40,791 $ 22,549
======== ======== ======== ======== ======== ======== ========
</TABLE>
(Table continued on following page)
11
<PAGE>
COMMERCIAL FEDERAL CORPORATION
<TABLE>
<CAPTION>
Nine Months Ended
March 31, Year Ended June 30,
------------------- -------------------------------------------------
1996 1995 1995 1994 1993 1992 1991
------- ------ ------ ------ ------- ------- -------
(Dollars in thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C>
Operating Data, Continued:
Earnings per share (fully diluted):
Income (loss) before extraordinary
items and cumulative effects of
changes in accounting principles......... $ 2.68 $1.28 $2.16 $(.11) $ 2.42 $ 4.68 $ 1.24
Extraordinary items (1).................... -- -- -- -- -- (.52) 1.33
Cumulative effects of changes in
accounting principles (2)............... -- -- -- .46 -- -- --
------ ----- ----- ----- ------ ------ ------
Net income................................. $ 2.68 $1.28 $2.16 $ .35 $ 2.42 $ 4.16 $ 2.57
====== ===== ===== ===== ====== ====== ======
Cash dividends per common share (5).......... $ .30 N/A N/A N/A N/A N/A N/A
====== ===== ===== ===== ====== ====== ======
Operating Ratios and Other Data (3):
Net interest rate spread during period..... 2.31% 2.30% 2.26% 2.43% 2.57% 2.03% 1.45%
Net yield on interest-earning assets....... 2.52% 2.48% 2.46% 2.59% 2.65% 2.01% 1.18%
Interest rate spread at end of period...... 2.52% 2.17% 2.21% 2.33% 2.59% 2.25% 1.80%
Return on average assets (4)............... .80% .39% .49% .09% .67% .79% .39%
Return on average equity (4)............... 14.45% 7.91% 9.98% 1.54% 12.39% 20.12% 14.29%
Total number of branches at end of period.. 101 78 89 73 55 54 55
- --------------------
</TABLE>
(1) For fiscal year 1992, represents the loss on early extinguishment of
debt, net of income tax benefits, less the effect of the utilization of
net operating losses carried forward; and for fiscal year 1991,
represents the utilization of net operating losses carried forward that
were not previously recognized for financial reporting purposes.
(2) Represents the cumulative effect of the change in the method of
accounting for income taxes less the cumulative effect of the change in
accounting for postretirement benefits, net of income tax benefit.
(3) Ratios for the nine months ended March 31, 1996 and 1995 are annualized.
Such annualized data does include nonrecurring items and is not
necessarily indicative of results for the entire fiscal years.
(4) Based on daily average balances during fiscal years 1995 and 1994 and on
average monthly balances for fiscal years 1993, 1992 and 1991. Return on
average assets and return on average stockholders' equity for the nine
months ended March 31, 1996 are .87% and 15.69%, respectively, excluding
the after-tax effect of the nonrecurring expenses associated with the
Railroad merger ($2.8 million) and Commercial's 1995 proxy contest
($582,000). Return on average assets and return on average stockholders'
equity for fiscal year 1995 are .83% and 16.82%, respectively, excluding
the accelerated amortization of goodwill totaling $21.4 million. Return
on average assets and return on average stockholders' equity for fiscal
year 1994 are .75% and 13.11%, respectively, excluding the after-tax
effect of the intangible assets valuation adjustment and the cumulative
effects of changes in accounting principles totaling $43.9 million and
$6.6 million, respectively.
(5) Commercial established a quarterly dividend policy, and paid its first
dividend thereunder, on October 31, 1995. See "Common Stock Prices and
Dividends -- Dividends."
12
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL INFORMATION
OF HERITAGE FINANCIAL, LTD.
The following table sets forth certain information concerning the
consolidated financial data of Heritage Financial, Ltd. and subsidiaries as of
and for the years ended June 30, 1995, 1994, 1993, 1992 and 1991 and is
derived in part from, and should be read in conjunction with Heritage's
consolidated financial statements and the notes thereto included in this
Prospectus/Proxy Statement. With respect to the information for the nine
month periods ended March 31, 1996 and 1995, which is unaudited, in the
opinion of management, all adjustments necessary for a fair presentation of
such interim periods have been included (consisting solely of normal recurring
accruals). The results for the nine months ended March 31, 1996, are not
necessarily indicative of the results of the Company that may be expected for
the entire year.
Financial Condition Data and Capital Ratios:
<TABLE>
<CAPTION>
At At June 30,
March 31, ----------------------------------------------------
1996 1995 1994 1993 1992 1991
---------- --------- --------- --------- --------- --------
(Dollars in thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C>
Total assets................................. $185,399 $177,671 $172,459 $175,563 $178,802 $95,597
Loans and mortgage-backed securities (1)(2).. 147,151 136,094 131,472 132,169 133,884 76,523
Investments, including interest-bearing
deposits (3)............................... 31,931 35,357 34,761 37,638 40,120 16,066
Deposits..................................... 160,082 157,148 157,698 160,697 164,842 87,057
Borrowed funds............................... 10,000 5,000 -- 800 2,450 --
Stockholders' equity......................... 14,046 13,654 12,975 11,457 9,132 7,755
Book value per common share.................. 77.71 76.26 73.23 65.78 52.78 49.33
Regulatory capital ratios of Hawkeye:
Tangible capital (4)....................... 7.16% 7.17% 7.38% 6.66% 6.18% 7.02%
Core capital (Tier 1 capital) (4).......... 7.16% 7.17% 7.38% 6.66% 6.18% 7.02%
Risk-based capital (Total capital) (4)..... 14.63% 16.82% 18.54% 18.08% 17.60% 16.15%
- --------------------
</TABLE>
(1) Includes mortgage-backed securities held for sale totaling $16.1 million,
$18.2 million and $18.6 million, respectively, at June 30, 1993, 1992 and
1991. No mortgage-backed securities were available for sale at March 31,
1996, June 30, 1995 and 1994.
(2) Includes loans held for sale amounting to $523,000, $7.9 million, and
$1.9 million, respectively, at March 31, 1996, June 30, 1994 and 1993.
No loans were held for sale at June 30, 1995, 1992 and 1991.
(3) Includes investment securities available for sale totaling $19.6 million,
$15.5 million, $18.4 million, $12.4 million, $5.1 million and $10,000,
respectively, at March 31, 1996, June 30, 1995, 1994, 1993, 1992 and
1991.
(4) Ratios at June 30, 1994, 1993 and 1992 are combined average capital
ratios of Hawkeye and First Federal Savings Bank of Carroll, Iowa. Each
institution independently met minimum capital requirements for each
respective period.
13
<PAGE>
HERITAGE FINANCIAL, LTD.
<TABLE>
<CAPTION>
Nine Months Ended
March 31, Years Ended June 30,
------------------ ------------------------------------------------------------
1996 1995 1995 1994 1993 1992 1991
---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
(Dollars in thousands, except per share)
Operating Data:
Interest income............................ $10,598 $8,918 $12,107 $11,021 $12,935 $9,467 $8,891
Interest expense........................... 5,993 4,929 6,734 5,704 6,845 5,671 5,796
------- ------ ------- ------- ------- ------ ------
Net interest income....................... 4,605 3,989 5,373 5,317 6,090 3,796 3,095
Provision for (reduction in allowance
for) loans losses......................... -- 40 40 (130) (130) 150 180
------- ------ ------- ------- ------- ------ ------
Net interest income after provision
for (reduction in) allowance for
loan losses............................... 4,605 3,949 5,333 5,447 6,220 3,646 2,915
Noninterest income......................... 652 189 329 902 858 460 354
Noninterest expense........................ 3,324 3,290 4,447 4,657 3,778 2,495 2,082
------- ------ ------- ------- ------- ------ ------
Income before income taxes and
cumulative effect of change
in accounting principles.................. 1,933 848 1,215 1,692 3,300 1,611 1,187
Income tax expense......................... 757 282 389 205 887 560 468
------- ------ ------- ------- ------- ------ ------
Income before cumulative effects of
changes in accounting principles.......... 1,176 566 826 1,487 2,413 1,051 719
Cumulative effects of change in
accounting principle...................... -- -- -- 418 -- -- --
------- ------ ------- ------- ------- ------ ------
Net income................................. $ 1,176 $ 566 $ 826 $ 1,905 $ 2,413 $1,051 $ 719
======= ====== ======= ======= ======= ====== ======
Earnings per share (fully diluted):
Income before cumulative effect of
change in accounting principle............ $ 6.09 $ 3.20 $ 4.64 $ 8.46 $ 13.89 $ 6.57 $ 4.57
Cumulative effect of change in
accounting principle...................... -- -- -- 2.38 -- -- --
------- ------ ------- ------- ------- ------ ------
Net income................................. $ 6.09 $ 3.20 $ 4.64 $ 10.84 $ 13.89 $ 6.57 $ 4.57
======= ====== ======= ======= ======= ====== ======
Cash dividends per common share............. $ 3.00 $ 2.51 $ 3.50 $ 2.46 $ .56 $ .39 $ .40
======= ====== ======= ======= ======= ====== ======
Operating Ratios and Other Data (1):
Net interest rate spread during period..... 3.12% 2.93% 2.93% 2.93% 3.28% 3.37% 2.80%
Net yield on average interest-earning
assets.................................... 3.46% 3.23% 3.24% 3.16% 3.52% 3.60% 3.30%
Return on average assets (2)............... .86% .44% .48% 1.09% 1.35% .96% .77%
Return on average equity (2)............... 11.28% 5.70% 6.30% 15.67% 23.55% 14.41% 10.09%
Total number of branches at end of period.. 6 6 6 6 6 6 3
</TABLE>
- --------------------
(1) Ratios for the nine months ended March 31, 1996 and 1995 are annualized.
Such annualized data does include nonrecurring items and is not
necessarily indicative of results for the entire fiscal years.
(2) Based on average monthly balances.
14
<PAGE>
INFORMATION CONCERNING THE SPECIAL MEETING
General
This Prospectus/Proxy Statement is being furnished as part of the
solicitation of proxies by the Board of Directors of Heritage from holders of
the outstanding shares of Heritage Common Stock as of the Record Date for use
at the Special Meeting to be held on September 26, 1996, and any adjournments
thereof. This Prospectus/Proxy Statement, and the accompanying proxy card,
are first being mailed to stockholders of Heritage on or about August 21,
1996.
The principal purpose of the Special Meeting is to consider and vote upon
the approval of the Acquisition Merger, pursuant to which Heritage will merge
into Commercial, and the Merger Agreement among Commercial, the Bank, Heritage
and Hawkeye, which sets forth the terms and conditions of the Acquisition
Merger and also provides for the Bank Merger. See "The Merger -- Conversion
of Heritage Common Stock." The Merger is subject to certain conditions,
including regulatory approval of the OTS.
In addition to approval of the Acquisition Merger and the Merger
Agreement, the stockholders of Heritage may be asked to approve a proposal to
adjourn the Special Meeting if necessary to permit further solicitation of
proxies in the event that there are not sufficient votes at the time of the
Special Meeting to approve the Acquisition Merger and the Merger Agreement.
In this Prospectus/Proxy Statement, the terms "Commercial" and "Heritage"
refer to the parent corporation only or to both the parent corporation and its
subsidiaries, depending on the context.
Recent Events
Repurchase of Stock. On August 21, 1996, Commercial consummated the
repurchase of 1,250,100 shares (8.3% of the outstanding shares of Commercial
Common Stock prior to the repurchase) of Commercial Common Stock from CAI
Corporation ("CAI"), a Dallas-based investment company, for an aggregate
purchase price of $48.9 million, consisting of cash of $28.2 million and a
warrant (valued at $20.7 million) which would have enabled Commercial to
purchase stock in CAI. Commercial has also agreed to reimburse certain
expenses of CAI. After repurchase of such shares, a total of 13,844,036 shares
of Commercial Common Stock were issued and outstanding. The cash portion of
the repurchase was financed by a loan from a financial institution. Such loan
is secured by a portion of the outstanding shares of the common stock of the
Bank. Concurrent with the close of the repurchase, two directors of
Commercial, Robin R. Glackin and Steven M. Ellis, who also serve as executive
officers of CAI, resigned from the Board of Directors.
Deposit Insurance Premiums. The Bank's and Hawkeye's savings deposits
are insured by the Savings Association Insurance Fund ("SAIF"), which is
administered by the Federal Deposit Insurance Corporation ("FDIC"). The
assessment rate currently ranges from 0.23% of deposits for well capitalized
institutions to 0.31% of deposits for undercapitalized institutions.
The FDIC also administers the Bank Insurance Fund ("BIF"), which has the
same designated reserve ratio as the SAIF. On August 8, 1995, the FDIC
adopted an amendment to the BIF risk-based assessment schedule which lowered
the deposit insurance assessment rate for most commercial banks and other
depository institutions with deposits insured by the BIF to a range of from
0.31% of insured deposits for undercapitalized BIF-insured institutions to
0.04% of deposits for well-capitalized institutions, which constitute over 90%
of BIF-insured institutions. The FDIC amendment became effective September
30, 1995. Subsequently, the FDIC reduced the premium rate for the most highly
rated BIF-insured institutions to the statutory minimum of $1,000 per
semi-annual period. The FDIC amendment creates a substantial disparity in the
deposit insurance premiums paid by BIF and SAIF members and places
SAIF-insured savings institutions at a significant competitive disadvantage
to BIF-insured institutions.
A number of proposals have been considered to recapitalize the SAIF in
order to eliminate the premium disparity. The U.S. Senate and the U.S. House
of Representatives have both, as part of a budget reconciliation package to
balance the federal budget, approved legislation requiring a one time
assessment of an amount sufficient to bring the SAIF to a level equal to 1.25%
of insured deposits (estimated to be approximately 0.85% of insured deposits)
to be imposed on all SAIF-insured deposits held as of March 31, 1995. This
assessment was originally scheduled to be payable during the first quarter of
1996. However, on April 25, 1996, this measure was dropped in order to pass
the 1996 budget reconciliation bill. It is anticipated that this measure may
be offered again this year but details are unclear. Assuming a 0.85%
assessment on a $4.2 billion deposit base, the assessment would result, on a
pro forma basis as of March 31, 1996, in a one-time after-tax charge of
approximately $22.9 million to Commercial. Such assessment would have the
effect of reducing the Bank's tangible capital to $371.7 million, or
15
<PAGE>
5.64% of adjusted total assets (historical - $394.6 million, or 5.97%), core
capital to $389.2 million, or 5.89% of adjusted total assets (historical -
$412.1 million or 6.21%), and risk-based capital to $425.1 million, or 12.70%
of risk-weighted assets (historical - $448.0 million or 13.39%). The Bank
would, on a pro forma basis as of March 31, 1996, continue to exceed the
minimum requirements to be classified as a "well capitalized" institution
under applicable regulations. If such a special assessment were required and
the SAIF as a result was fully recapitalized, it could have the effect of
reducing the Bank's deposit insurance premiums to the SAIF, thereby increasing
net income in future periods.
Also under consideration by Congress are proposals relating to merger of
the BIF and SAIF funds and the elimination of the thrift charter. Management
of Commercial is unable to predict accurately at this time whether any of
these proposals will be adopted in their current form or the impact of these
proposals on Commercial.
Payment of Accrued Tax Liabilities. As a result of the final disposition
of a subsidiary's interest in a nuclear generating facility in Palo Verde,
Arizona in February 1996, Commercial will pay accrued federal and state tax
liabilities which were previously deferred for financial reporting purposes
totalling approximately $51.8 million. These tax payments were paid in June
1996 for the federal tax liability and will be paid in September and October
1996 for the state tax liability. While these payments affect Commercial's
cash flow position, they are not expected to have a material adverse impact on
its financial condition and results of operations.
Bennett Funding Asset. At June 30, 1996, Heritage had approximately $1.8
million in loans outstanding to Bennett and certain of its affiliates secured
by equipment leases. Management of Heritage understands that approximately
10,000 individual investors and 200 financial institutions nationwide had
similar investments or lending relationships with Bennett. Bennett filed for
Chapter 11 bankruptcy protection on March 29, 1996, after the principals of
the company were charged with various criminal offenses relating to the
leasing transactions. Upon the filing of the Bennett bankruptcy case, the
Bennett Funding Asset became nonperforming.
Heritage management has retained legal counsel to assist Heritage in the
bankruptcy proceedings and collection efforts. The reports from the
bankruptcy trustee and legal counsel allege that significant fraudulent
activity took place at Bennett. Based on this and other pertinent
information, at June 30, 1996, Heritage management decided to fully reserve
the entire Bennett Funding Asset which had the effect of reducing June 30,
1996 fourth quarter earnings by $1.8 million less the tax benefit of $600,000
for a net effect of $1.2 million. See "The Merger -- Bennett Funding Asset."
Solicitation, Voting and Revocability of Proxies
The Board of Directors of Heritage has fixed the close of business on the
Record Date for the determination of the Heritage stockholders entitled to
notice of and to vote at the Special Meeting. Accordingly, only holders of
record of shares of Heritage Common Stock at the close of business on the
Record Date will be entitled to vote at the Special Meeting, with each such
share entitling its owner to one vote on all matters properly presented at the
Special Meeting. On the Record Date, there were approximately 228 holders of
record of the 180,762 shares of Heritage Common Stock then outstanding. The
presence, in person or by proxy, of a majority of the total number of
outstanding shares of Heritage Common Stock entitled to vote at the Special
Meeting is necessary to constitute a quorum at the Special Meeting.
Abstentions and broker non-votes will be treated as shares present at the
Special Meeting for purposes of determining the presence of a quorum. The
affirmative vote of at least a majority of the outstanding shares of Heritage
Common Stock is required to approve the Acquisition Merger and the Merger
Agreement. The affirmative vote of a majority of the shares of Heritage
Common Stock represented and voting at
16
<PAGE>
the Special Meeting is required to approve an adjournment of the Special
Meeting. It is expected that substantially all of the 56,064 shares of
outstanding Heritage Common Stock (excluding shares subject to stock options)
beneficially owned by directors and executive officers of Heritage and their
affiliates as of the Record Date will be voted FOR approval of the Acquisition
Merger and the Merger Agreement. See also "The Merger -- Voting Agreements."
If the accompanying proxy card is properly executed and returned to
Heritage in time to be voted at the Special Meeting, the shares represented
thereby will be voted in accordance with the instructions marked thereon.
Executed but unmarked proxies will be voted FOR approval of the Acquisition
Merger and the Merger Agreement and FOR the proposal to adjourn the Special
Meeting if necessary to permit further solicitation of proxies. Except for
procedural matters incident to the conduct of the Special Meeting, the Board
of Directors of Heritage does not know of any matters other than those
described in the Notice of Special Meeting that are to come before the Special
Meeting. If any other matters are properly brought before the Special
Meeting, the persons named in the Heritage proxy will vote the shares
represented by such proxy on such matters as determined by a majority of
Heritage's Board of Directors. Abstentions and broker non-votes will not be
voted and, therefore, with respect to the proposal to approve the Acquisition
Merger and the Merger Agreement, abstentions and broker non-votes will have
the same effect as votes against approval of that proposal.
The presence of a stockholder at the Special Meeting will not
automatically revoke such stockholder's proxy. A stockholder may, however,
revoke a proxy at any time prior to its exercise by filing a written notice of
revocation with, or by delivering a duly executed proxy bearing a later date
to, the Corporate Secretary of Heritage at its headquarters address or by
attending the Special Meeting and voting in person.
The cost of soliciting proxies for the Special Meeting will be borne by
Heritage. In addition to use of the postal system, proxies may be solicited
personally or by telephone or telecopy by directors, officers and employees of
Heritage, who will not be specially compensated for such activities. Heritage
will also request persons, firms and companies holding shares in their names
or in the name of their nominees, which are beneficially owned by others, to
send proxy materials to and obtain proxies from such beneficial owners and
will reimburse such holders for their reasonable expenses incurred in that
connection.
THE MERGER
(Proposal 1 -- Approval of the Acquisition Merger and Merger Agreement)
The following information with respect to the Merger, insofar as it
relates to matters contained in the Merger Agreement, including the exhibits
thereto, is qualified in its entirety by reference to the full text of such
Merger Agreement, which is attached as Annex A to this Prospectus/Proxy
Statement and is incorporated by reference herein.
General
The Merger Agreement provides for the acquisition of Heritage by
Commercial, and the subsequent merger of Hawkeye into the Bank, as follows:
(i) Heritage will merge into Commercial, with Commercial as the surviving
corporation, pursuant to which the outstanding shares of Heritage Common Stock
would be converted into cash and shares of Commercial Common Stock as set
forth below (the Acquisition Merger); and (ii) Hawkeye will then merge into
the Bank, with the Bank as the surviving savings institution (the Bank Merger)
(collectively, the Merger). At the Acquisition Merger Effective Time,
Heritage will have merged into Commercial. At the Bank Merger Effective Time,
Hawkeye will have merged into the Bank, Commercial will be the resulting
savings institution holding company, and the Bank will be the resulting
subsidiary savings institution. It is anticipated that the Bank Merger
17
<PAGE>
Effective Time will occur immediately following the Acquisition Merger
Effective Time. For additional information regarding the Merger, see the
Merger Agreement, which is attached as Annex A hereto.
Stockholders of Heritage are being asked to approve the Merger Agreement
and the Acquisition Merger. The affirmative vote of at least a majority of
the outstanding shares of Heritage Common Stock is required for Heritage's
stockholders to approve the Merger Agreement and the Acquisition Merger.
Background of the Merger
Hawkeye converted from a federal mutual savings and loan association to a
federal stock savings bank in 1984 and was later acquired by Heritage in 1990
as part of a holding company reorganization. In 1992, Hawkeye acquired First
Federal in a voluntary supervisory conversion. First Federal was merged with
Hawkeye in March 1995.
Hawkeye's primary business has been the solicitation of deposits from the
public and the origination of one- to four- family mortgage loans. However,
over the period 1984-1996, Hawkeye has expanded its operations to include
consumer and commercial lending, placed a greater emphasis on the development
of retail banking products and initiated measures, such as the acquisition of
First Federal, to expand market share in several Iowa communities. Heritage
has also pursued the objective of controlling operating expenses as a means of
improving overall profitability.
Throughout the period following the conversion, Heritage considered its
strategic alternatives, taking into account its market area and size, in light
of the increased rate of consolidation in the financial services industry. In
addition, consistent with the overall objective of enhancing the long-term
value of stockholders' interests, management and the Board of Directors of
Heritage considered unsolicited business combination proposals from various
parties, including stockholders.
Enhancing shareholder value has always been a priority for the Heritage
Board. From time to time, Heritage has received expressions of interest from
parties, usually another financial institution, seeking to acquire Heritage.
Because a properly structured sale of Heritage could generally have the effect
of maximizing shareholder value, such expressions of interest have been
carefully evaluated by the Board. The Board has also periodically consulted
with financial advisors regarding the value of Heritage and to obtain an
overview of the market for community financial institutions.
During 1993 and 1994, Heritage received acquisition proposals from three
parties, including two Midwest-based community financial institutions. The
Board responded to these proposals and authorized the potential acquirors to
initiate a due diligence review of Heritage and Hawkeye. However, discussions
with these parties either failed to lead to a firm and serious proposal or
contemplated an inadequate level of consideration.
At a regular board meeting in August 1995, the Board discussed the
effects of the rapid consolidation that had been occurring among the providers
of banking and financial services in Hawkeye's market. The Board considered
the fact that the larger financial institutions that emerge from such
consolidations may acquire substantial competitive advantages, including
greater diversity in their loan portfolios, cost savings through the
integration of redundant operations and support functions, improved access to
capital and funding and the ability to spread the costs of developing new
products and services over a wider customer base. The Board also reviewed
other developments, such as the uncertainty surrounding the thrift industry
due to the deposit insurance premium differential between institutions insured
by the SAIF and those insured by the BIF, the anticipated effects on the
thrift industry of regulatory agency consolidation and the attractiveness of
thrift acquisition premiums.
The Board concluded that, in light of current market conditions for
thrift acquisitions, management should develop strategic options to enhance
shareholder value, including the possible sale of Heritage. Further, the
Board authorized the engagement of Hovde to assist in the development of
strategic options and to assist the Board in
18
<PAGE>
determining whether a business combination would result in a return of value
to Heritage stockholders that could not be achieved through Heritage's
continued operation as an independent entity with continued emphasis on
building shareholder value through expansion of operations, increasing
earnings and enhancing operating efficiencies. Finally, the Board established
an informal threshold of $22 million in total consideration for evaluation of
the aggregate value of any proposal to acquire Heritage.
In October 1995, Heritage entered into an agreement relating to financial
advisory services with Hovde. During December 1995 and January 1996, Hovde
contacted a number of financial institutions to determine whether they might
be interested in a business combination with Heritage. Hovde also advised the
Board of Directors throughout this period regarding the relative merits of
remaining an independent entity.
In early February 1996, Hovde reported to the Board that expressions of
interest had been received from six potential acquirors, four of whom had
submitted specific proposals in excess of the Board's threshold level and each
of whom had commenced or completed a preliminary due diligence review of
Heritage. The potential acquirors, which included Commercial, ranged from
community financial institutions similar in business and geographic profile to
Heritage to a large commercial bank headquartered in the Midwest. The
proposals contemplated various forms of consideration ranging from (i) all
cash, (ii) a combination of cash and/or common or preferred stock, or (iii)
all common stock, or (iv) all preferred stock.
After extensive review and discussion of the relative merits of each of
the proposals obtained through Hovde, the Board concluded that the Commercial
proposal, which at that point in time contemplated convertible preferred stock
as consideration, was the most attractive based on the level and form of
consideration offered by Commercial and the anticipated return to Heritage
stockholders. The Board authorized management to enter into discussions with
Commercial in order to refine certain issues relating to its proposal. The
initial discussions with Commercial in mid-February 1996 focused on the
acquisition of Heritage in a merger in which each outstanding share of
Heritage Common Stock would be converted into shares of a new issue of
Commercial convertible preferred stock valued at $125 per share or an
aggregate purchase price of $24.2 million. However, those negotiations were
discontinued after a brief period when concerns arose about the illiquidity
and certain other features of the preferred stock, concerns which the Board
believed could not be satisfactorily resolved with Commercial prior to the
execution of a definitive agreement.
Following the termination of discussions with Commercial, the Board
concluded that it would be in the best interest of Heritage stockholders to
continue the ongoing process of evaluation of the three remaining acquisition
proposals obtained through Hovde. Based on further analysis of the these
proposals, the Board eliminated two potential acquirors based on concerns
about the illiquidity of the consideration being offered, the financial
strength of the acquirors and the acquirors' ability to consummate the
transaction in a timely manner. Consequently, the Board directed management
to enter into discussions with the remaining possible acquiror, the large
Midwestern commercial bank. Over a three-week period, management of Heritage,
with the assistance of special legal counsel, Breyer & Aguggia, and its
financial advisor, Hovde, attempted to negotiate the key terms of a definitive
agreement with this potential acquiror. However, the negotiations were
terminated in early March 1996 after a substantial disagreement emerged among
the parties regarding the level of consideration as well as certain other
terms of the proposed definitive agreement.
After the termination of these discussions, the Board met on March 20,
1996 to review Heritage's strategic options, including consideration of
Hawkeye's continued operation on a stand-alone basis and the prospects for
continuing to pursue a business combination. The Board determined that,
notwithstanding the fact that earlier discussions with Commercial has reached
an impasse, significant shareholder value could be realized through a business
combination with Commercial at the level of aggregate consideration previously
discussed if the parties could resolve the Board's earlier concerns regarding
the terms of the Commercial preferred stock. Accordingly, the Board
authorized management to resume discussions with Commercial to determine if
agreement could be reached on the earlier points of disagreement among the
parties.
19
<PAGE>
Discussions with Commercial resumed following the Board's March 20, 1996
meeting. Management of Heritage reported to the Board on March 27, 1996 that
significant progress had been made regarding the structure of the preferred
stock issue proposed by Commercial. However, management further indicated
that, as the discussions developed, new concerns had arisen regarding the
possible impact of proposed federal income tax law changes on the tax-free
status of the transaction if the form of consideration received by Heritage
stockholders was Commercial preferred stock. Under certain congressional and
Clinton Administration proposals then pending, which included a retroactive
effective date, the receipt of preferred stock by the stockholders of a
corporation that was a party to an otherwise tax-free reorganization would
result in immediate recognition of taxable gain for the recipients if, under
the proposed rules, the preferred stock was deemed to be functionally
equivalent to a debt, rather than an equity, security. Although the parties
believed that it might be possible to structure a transaction that would not
be adversely affected by the enactment of this proposed legislation, as a
consequence of the uncertainty regarding the effects of these proposals on the
proposed transaction, as well as some continuing concern among Board members
regarding the lack of liquidity in the proposed preferred stock, the Heritage
Board concluded that it would be advisable to discuss with Commercial the
possibility of an exchange of Heritage Common Stock for Commercial Common
Stock.
Following additional discussions, the parties reached a tentative
agreement on an exchange of Heritage Common Stock for consideration of $122.35
per share with 80% of this amount payable in Commercial Common Stock and the
balance in cash. The aggregate value of the proposed exchange was $23.6
million. However, immediately thereafter, as the parties proceeded to
negotiate other terms of the definitive agreement, an issue arose, as
described below, with respect to certain transactions involving Hawkeye and
Bennett.
During the period of negotiations with Commercial in late March 1996,
Hawkeye had approximately $1.8 million invested in the Bennett Funding Asset.
Approximately 10,000 investors and 200 financial institutions nationwide had
similar investments or lending relationships with Bennett. Bennett filed for
Chapter 11 bankruptcy protection on March 29, 1996 after the principals of the
company were charged with various criminal offenses relating to the leasing
transactions. Upon the filing of the Bennett bankruptcy case, Hawkeye's
Bennett Funding Asset became nonperforming.
Based on available information regarding the status of Hawkeye's interest
in the Bennett Funding Asset, management of Heritage believed that it had a
reasonable expectation of recovery with respect to some or all of the
projected value of the Bennett Funding Asset. However, Commercial sought a
downward price adjustment in light of the pending Bennett bankruptcy
proceeding and questions regarding the adequacy of Hawkeye's lien priority to
the leases collateralizing the Bennett Funding Asset.
Over the course of negotiations, which continued through April and May
1996, the parties considered several alternative structures whereby Heritage
stockholders would have the opportunity to realize the value of the Bennett
Funding Asset. Ultimately, the parties agreed to structure the Merger
Consideration in the manner detailed in this Prospectus/Proxy Statement. Over
the same period, the parties continued to negotiate the other key terms and
conditions of the definitive agreement. Throughout the negotiations, the
Heritage Board periodically reviewed with management the status of the
negotiations and provided its views on key issues. In addition,
representatives of Heritage conducted a due diligence examination of
Commercial since Commercial Common Stock would be issued as consideration to
Heritage stockholders under the terms of the proposed transaction.
On May 14, 1996, the Heritage Board met to consider the proposed
definitive agreement with Commercial, including the proposed resolution of
issues related to the Bennett Funding Asset. At the meeting, Breyer & Aguggia
reviewed the Board's fiduciary obligations and Hovde reviewed the proposed
Merger Consideration and the collar and price adjustments relative to the
Merger Consideration in the event of potential movements in the price of
Commercial Common Stock. Hovde also specifically reviewed the relationship
between the Bennett Funding Asset and the Merger Consideration. The Board
also extensively reviewed with legal counsel and with its financial advisor
the proposed terms of the transaction compared to other comparable
transactions; financial information regarding Commercial; the results of a due
diligence analysis of Commercial; the proposed treatment of Hawkeye employees;
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and alternative valuations of Heritage. The Board also reviewed the prospects
for realizing comparable stockholder returns by remaining an independent
entity. Finally, the Board reviewed and discussed the text of Hovde's
proposed opinion to the effect that the Merger Consideration (without any
value attributed to the Bennett Funding Asset), as of such date, was fair,
from a financial point of view, to the holders of Heritage Common Stock. The
Board also reviewed the anticipated tax consequences of the transaction.
On May 16, 1996, the Heritage Board met again, discussed the proposed
transaction in detail, reviewed the text of Hovde's opinion dated May 16, 1996
and unanimously approved the Merger Agreement. The Board authorized
management, in consultation with legal counsel, to enter into and carry out
the Merger Agreement.
Reasons for the Merger and Recommendation of the Heritage Board of Directors
Heritage's Board of Directors believes that the terms of the Merger
Agreement, which are the product of arm's length negotiations between
representatives of Heritage and Commercial, are fair and in the best interests
of Heritage and its stockholders. In the course of reaching its
determination, the Heritage Board consulted with legal counsel with respect to
its legal duties, the terms of the Merger Agreement and the issues related
thereto; with its financial advisor with respect to the financial aspects and
fairness of the transaction; and with senior management regarding, among other
things, operational matters. It should be noted that there is no affiliation
between any of the directors and officers of the respective companies.
In reaching its determination to approve the Merger Agreement, the
Heritage Board considered all factors it deemed material, which included the
following:
(a) The Heritage Board analyzed information with respect to the financial
condition, results of operations, cash flow, business and prospects of
Heritage. In this regard, the Heritage Board analyzed the options of selling
Heritage or continuing on a stand-alone basis. The range of values on a sale
of control basis were determined generally to exceed the present value of
Heritage shares on a stand-alone basis under business strategies that could be
reasonably implemented by Heritage.
(b) The Heritage Board considered the written opinion of Hovde that, as
of May 16, 1996, the Merger Consideration (without any value attributed to the
Bennett Funding Asset) to be received by holders of Heritage Common Stock
pursuant to the Merger Agreement was fair to Heritage stockholders from a
financial point of view. See "-- Financial Advisor and Opinion of Financial
Advisor."
(c) The Heritage Board considered the current operating environment,
including, but not limited to, the continued consolidation and increasing
competition in the banking and financial services industries, the prospect for
further changes in these industries, the controversy pertaining to the
BIF/SAIF deposit insurance premium differential and federal regulatory agency
consolidation and the importance of being able to capitalize on developing
opportunities in these industries.
(d) The Heritage Board considered the other terms of the Merger Agreement
and exhibits, including the fact that the merger would, to the extent that the
consideration consisted of Commercial Common Stock, generally be income tax
free to Heritage stockholders. In addition, the Board considered the fact
that the structure of the Merger Consideration would offer Heritage
stockholders the opportunity to maximize the value of the Bennett Funding
Asset while, at the same time, permit the sale of Heritage at a significant
premium. The Heritage Board also considered the likelihood that another
acquiror would treat the Bennett Funding Asset in a manner more favorable to
Heritage stockholders and concluded that the approach to the Bennett Funding
Asset set forth in the Merger Agreement had been negotiated fully and in good
faith by the parties and was in the best interest of Heritage stockholders.
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(e) The Heritage Board considered detailed financial analyses, pro forma
and other information with respect to Heritage and Commercial discussed by
Hovde, as well as the Heritage Board's own knowledge of Heritage, Commercial
and their respective businesses. In this regard, the latest publicly-
available financial and other information for Heritage and Commercial were
analyzed, including a comparison to publicly-available financial and other
information for other similar savings institutions. The Board also considered
the relative liquidity of Heritage Common Stock and Commercial Common Stock.
(f) The Heritage Board considered the value of Heritage continuing as a
stand-alone entity compared to the effect of Heritage combining with
Commercial in light of the factors summarized above and the current economic
and financial environment, including, but not limited to, other possible
strategic alternatives.
(g) The Heritage Board considered the likelihood of the Merger being
approved by the appropriate regulatory authorities, including factors such as
market share analyses, Commercial's Community Reinvestment Act rating at that
time and the estimated pro forma financial impact of the Merger on Commercial.
(h) The Heritage Board considered the fact that the Merger Agreement
prohibits Heritage from initiating, soliciting or encouraging discussions with
third parties relating to alternative transactions and requires the payment of
a termination fee of $1.0 million to Commercial in certain events, and the
fact that Commercial required such provisions as a condition to entering into
the Merger Agreement.
The foregoing discussion of the information and factors considered by the
Heritage Board is not intended to be exhaustive, but constitutes the material
factors considered by the Heritage Board. In reaching its determination to
approve and recommend the Merger Agreement, the Heritage Board did not assign
any relative or specific weights to the foregoing factors, and individual
directors may have weighed factors differently. After deliberating with
respect to the Merger and the other transactions contemplated by the Merger
Agreement, considering, among other things, the matters discussed above and
the opinion of Hovde referred to above, the Heritage Board unanimously
approved and adopted the Merger Agreement and the transactions contemplated
thereby as being in the best interests of Heritage and its stockholders.
FOR THE REASONS SET FORTH ABOVE, THE HERITAGE BOARD HAS UNANIMOUSLY
APPROVED THE MERGER AGREEMENT AS ADVISABLE AND IN THE BEST INTERESTS OF
HERITAGE AND HERITAGE STOCKHOLDERS AND RECOMMENDS THAT THE STOCKHOLDERS OF
HERITAGE VOTE FOR THE APPROVAL OF THE MERGER AGREEMENT.
---
Financial Advisor and Opinion of Financial Advisor
Hovde has delivered to the Heritage Board its opinion that, based upon
and subject to the various considerations set forth in its written opinion
dated May 16, 1996, the Merger Consideration is fair from a financial point of
view to the stockholders of Heritage as of such date. Such opinion was
updated as of the date hereof. In requesting Hovde's advice and opinion, no
limitations were imposed by Heritage upon Hovde with respect to the
investigations made or procedures followed by it in rendering its opinion.
The full text of the opinion of Hovde, dated August 21, 1996, which
describes the procedures followed, assumptions made, matters considered and
limitations on the review undertaken, is attached hereto as Annex B.
Stockholders of Heritage should read this opinion in its entirety.
HOVDE'S OPINION IS DIRECTED ONLY TO THE FAIRNESS, FROM A FINANCIAL POINT
OF VIEW, OF THE MERGER CONSIDERATION, AND DOES NOT CONSTITUTE A RECOMMENDATION
TO ANY STOCKHOLDER OF HERITAGE AS TO HOW SUCH STOCKHOLDER SHOULD VOTE AT THE
SPECIAL MEETING. THE SUMMARY OF THE OPINION OF HOVDE SET FORTH IN THIS
PROSPECTUS/PROXY STATEMENT IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE
FULL TEXT OF SUCH OPINION.
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The following is a brief summary of the analyses performed by Hovde in
connection with its fairness opinion.
During the course of its engagement, and as a basis for arriving at its
opinion, Hovde reviewed and analyzed material bearing upon the financial and
operating condition of Commercial and Heritage and material prepared in
connection with the Merger, including, among other things, the following: (i)
the Merger Agreement; (ii) certain publicly available information concerning
Heritage and Commercial, including the consolidated statements of financial
condition of Heritage and Commercial for each of the three fiscal years ended
June 30, 1995, and the statements of financial condition and results of
operations of Heritage and Commercial for the subsequent quarterly periods
through March 31, 1996; (iii) the nature and terms of recent acquisition and
merger transactions involving thrift institutions and thrift holding companies
that Hovde considered reasonably similar to Heritage in size, financial
character, operating character, historical performance and geographic market;
and (iv) financial and other information provided to Hovde by the management
of Commercial and Heritage. Hovde conducted meetings with members of senior
management of Heritage and Commercial for purposes of reviewing the future
prospects of Heritage and Commercial. Hovde also took into account its
experience in other transactions, as well as its knowledge of the commercial
banking and thrift industries and its general experience in securities
valuations.
In rendering its opinion, Hovde assumed, without independent
verification, the accuracy and completeness of the financial and other
information and has relied upon the accuracy of the representations of the
parties contained in the Merger Agreement. Hovde has not made any independent
evaluation or appraisal of any properties, assets or liabilities of Heritage.
Hovde assumed and relied upon the accuracy and completeness of the publicly
available and other financial and other information provided to it, relied
upon the representations and warranties of Commercial and Heritage made
pursuant to the Merger Agreement, and did not independently attempt to verify
any of such information.
In connection with its opinion, Hovde performed various analyses with
respect to Heritage. The following is a brief summary of such analyses,
certain of which were presented to the Heritage Board by Hovde on or before
May 16, 1996.
Analysis of the Merger Consideration. Hovde reviewed the value of the
Merger Consideration to be received by each Heritage stockholder. Hovde
calculated that the Merger Consideration equated to approximately 159.88% of
Heritage's fully diluted tangible book value at March 31, 1996, a multiple of
approximately 27.2 times Heritage's earnings for the fiscal year ended June
30, 1995, a multiple of approximately 15.7 times Heritage's earnings for the
12 months ended March 31, 1996, and a premium to core deposits of
approximately 5.25%. These multiples exclude the value of any contingent
proceeds which may be received by the Heritage stockholders in the future in
the event of recoveries of the Bennett Funding Asset, and further do not
reflect the 100% reserve by Heritage of the Bennett Funding Asset in the
quarter and fiscal year ended June 30, 1996, and the attendant reduction in
Heritage's book value per share and earnings per share.
Summary of Proposals. Hovde summarized the sales process, the parties
contacted and the level of interest expressed by each party, including the
value of the aggregate consideration offered to the stockholders of Heritage.
Hovde also compared the significant terms of the Commercial proposal to
that of the other institutions submitting proposals, including the value of
the consideration offered. This analysis showed, among other things, that
the value of the Commercial proposal of $116.61 per share of Heritage Common
Stock, plus the contingent proceeds of up to $5.83 per share based upon
potential future recoveries of the Bennett Funding Asset, was considered
higher than the value per share offered by the other prospective acquirors,
especially given that 80% of the consideration was in the form of a tax-
deferred, common stock exchange. Hovde examined the trading price and volume
for Commercial Common Stock and the relationship between the trading
characteristics of the common stocks of the other companies, as well as to a
peer group of comparable companies.
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Analysis of Selected Mergers. As part of its analysis, Hovde reviewed
three sets of mergers: (i) selected mergers involving thrifts headquartered
anywhere in the United States completed since June 30, 1993 and announced on
or before May 1, 1996 in which the total deal value was between $20 million
and $30 million (the "Nationwide Mergers"); (ii) selected mergers involving
thrifts headquartered in the Midwest announced between January 1, 1993 and May
1, 1996 in which the total deal value was between $20 million and $30 million
(the "Midwestern Mergers"); and (iii) all mergers involving thrifts
headquartered in Iowa announced since January 1, 1992 (the "Iowa Mergers").
The Nationwide Mergers consisted of 37 mergers involving thrifts headquartered
anywhere in the United States; the Midwestern Mergers consisted of 18 mergers
of thrifts headquartered in the Midwest; and the Iowa Mergers consisted of
nine thrifts headquartered in Iowa. For each transaction, Hovde calculated
the multiple of the offer value to the acquired company's: (i) earnings per
share ("EPS") for the twelve months preceding ("LTM") the announcement date of
the transaction; (ii) book value per share; (iii) tangible book value per
share; and (iv) the tangible book premium to core deposits.
The calculations for the Nationwide Mergers yielded a range of multiples
of offer value to LTM EPS of 3.7 times to 33.5 times, with an average of 16.0
times and a median of 14.6 times; a range of multiples of offer value to book
value of 0.83 times to 1.98 times, with an average of 1.51 times and a median
of 1.51 times; a range of multiples of offer value to tangible book value of
1.02 times to 1.98 times, with an average of 1.53 times and a median of 1.53
times; and a range of tangible book premium to core deposits of 0.17% to
15.49%, with an average of 6.81% and a median of 5.85%.
The calculations for the Midwestern Mergers yielded a range of multiples
of offer value to LTM EPS of 5.3 times to 33.5 times, with an average of 17.8
times and a median of 15.7 times; a range of multiples of offer value to book
value of 1.13 times to 1.98 times, with an average of 1.46 times and a median
of 1.39 times; a range of multiples of offer value to tangible book value of
1.14 times to 1.98 times, with an average of 1.47 times and a median of 1.39
times; and a range of tangible book premium to core deposits of 1.99% to
15.49%, with an average of 7.08% and a median of 5.79%.
The calculations of the Iowa Mergers yielded a range of multiples of
offer value to LTM EPS of 10.1 times to 33.5 times, with an average of 16.6
times and a median of 13.5 times; a range of multiples of offer value to book
value of 1.08 times to 1.71 times, with an average of 1.36 times and a median
of 1.36 times; a range of multiples of offer value to tangible book value of
1.08 times to 1.71 times, with an average of 1.38 times and a median of 1.36
times; and a range of tangible book premium to core deposits of 2.17% to
9.05%, with an average of 5.80% and a median of 5.91%.
Hovde compared these multiples with the corresponding multiples for the
Merger, valuing the shares of Commercial Common Stock that would be received
pursuant to the Merger Agreement at $116.61 per share of Heritage Common
Stock. In calculating the multiples for the Merger, Hovde used Heritage's EPS
for the fiscal year ended June 30, 1995, and the 12 months ended March 31,
1996, book value per share and tangible book value per share as of March 31,
1996, and Hovde calculated that Heritage's fiscal year EPS, LTM EPS, book
value per share, tangible book value per share and tangible book premium to
core deposits were 27.2 times, 15.7 times, 1.6 times, 1.6 times, and 5.25%,
respectively. These multiples exclude the value of any contingent proceeds
which may be received by the Heritage stockholders in the future in the event
of recoveries of the Bennett Funding Asset, and further do not reflect the
100% reserve by Heritage of the Bennett Funding Asset in the quarter and
fiscal year ended June 30, 1996, and the attendant reduction in Heritage's
book value per share and earnings per share.
No company or transaction used in the above analysis as a comparison is
identical to Heritage, Commercial or the Merger. Accordingly, an analysis of
the results of the foregoing is not mathematical; rather, it involves complex
considerations and judgments concerning differences in financial and operating
characteristics of the companies and other facts that could affect the public
trading value of the companies to which they are being compared.
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Contribution Analysis. Hovde prepared a contribution analysis showing
percentages of assets, deposits, common equity, and 1995 and estimated 1996
net income contributed to the combined company on a pro forma basis by
Heritage and Commercial. This analysis showed, assuming Commercial's Common
Stock price was at $37.00 per share, that Heritage, as of March 31, 1996,
would contribute 2.73% of pro forma consolidated total assets, 3.56% of
deposits, 3.39% of common equity, 2.91% of 1995 net income, and 2.54% of
estimated 1996 net income (excluding the 100% reserve by Heritage in the
quarter and fiscal year ended June 30, 1996, in connection with the Bennett
Funding Asset). The stockholders of Heritage would own approximately 3.64% of
the pro forma Common Shares outstanding of Commercial, assuming Commercial's
Common Stock price was at $37.00 per share, based upon a price of $116.61 per
share of Heritage Common Stock and excluding Heritage's outstanding stock
options.
Financial Implications to Heritage Stockholders. Hovde prepared an
analysis of the financial implications of the Commercial offer to a Heritage
stockholder. This analysis indicated that on a pro forma equivalent basis, at
a $116.61 price per share of Heritage Common Stock with Commercial Common
Stock trading at $37.00 per share, a stockholder of Heritage would achieve an
increase in earnings per share of initially 43.3% in 1996 increasing to 84.1%
in 2000, a decrease in per share dividends of initially 68.5% in 1996 but
decreasing to 22.3% in 2000, and an increase in fully diluted book value per
share of initially 13.1% in 1996 and increasing to 44.9% in 2000, as a result
of the consummation of the Merger.
Comparative Stockholder Returns. Hovde presented an analysis of
comparative theoretical stockholder returns in several scenarios, including
Heritage remaining independent, Heritage being acquired in 2001 and Heritage
being acquired by Commercial at $116.61 per share. This analysis, which was
based on the net present value of projected dividend streams and projected
1996 common stock valuations (using current price-to-earnings multiples),
indicated total stockholder returns of 9.37% if Heritage remained independent,
22.45% for a merger in 2001 on the terms specified in the following paragraph,
and 27.21% based on the acceptance of the offer from Commercial at $116.61 per
share with the Commercial Common Stock trading at an assumed price of $37.00
per share.
Discounted Cash Flow Analysis. Hovde performed a discounted cash flow
analysis to determine a present value per share of Heritage Common Stock
assuming Heritage continued to operate as a stand-alone entity and was
acquired at a later date. This present value was determined by projecting
Heritage's after-tax net income for the five fiscal years ended June 30, 1996
through 2000. Projected net income was determined through consultation with
Heritage's management and generally included aggressive growth in assets (5%
per year from 1996 through 2000), as well as progressively higher net income
as a percent of average assets (increasing from .82% for 1996 to 1.01% for the
twelve months ended June 30, 2000). "Terminal value" per share of Heritage
Common Stock was determined by applying a price to earnings multiple of 14.6
times (being the median price to earnings multiple for Nationwide Mergers and
acquisitions of similar-sized transactions) against Heritage's projected
earnings at June 30, 2000. The present value of the terminal value was then
determined using an annual discount rate of 13%. The above calculations
resulted in a present value per fully diluted share of Heritage Common Stock
of $105.58 per share.
Although the summary set forth above does not purport to be a complete
description of the analysis performed by Hovde, the material analyses
performed by Hovde in rendering its opinion has been summarized above.
However, the preparation of a fairness opinion is not necessarily susceptible
to partial analysis or summary description. Hovde believes that its analyses
and the summary set forth above must be considered as a whole and that
selecting portions of its analyses, without considering all factors and
analysis, would create an incomplete view of the process underlying the
analyses by which Hovde reached its opinion. In addition, Hovde may have
given various analyses more or less weight than other analyses, but no
analysis was given materially more weight than any other analysis. Also,
Hovde may have deemed various assumptions more or less probable than other
assumptions so that the ranges of valuations resulting from any particular
analysis described above should not be taken to be Hovde's view of the actual
value of Heritage or the combined company.
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In performing its analyses, Hovde made numerous assumptions with respect
to industry performance, general business and economic conditions and other
matters, many of which are beyond the control of Heritage and Commercial. The
analyses performed by Hovde are not necessarily indicative of actual value or
actual future results, which may be significantly more or less favorable than
suggested by such analyses. Such analyses were prepared solely as part of
Hovde's analyses of the fairness of the Merger Consideration, from a financial
point of view, to the holders of Heritage Common Stock. The analyses do not
purport to be an appraisal or to reflect the prices at which a company might
actually be sold or the prices at which any securities may trade at the
present time or at any time in the future. Hovde used in its analyses various
projections of future performance prepared by the management of Heritage. The
projections are based on numerous variables and assumptions which are
inherently unpredictable and must be considered not certain of occurrence as
projected. Accordingly, actual results could vary significantly from those
assumed in the projections and any related analysis. Hovde's opinion does not
address the relative merits of the Merger as compared to any other business
combination in which Heritage might engage. In addition, as described above,
Hovde's opinion to the Heritage Board was one of several factors taken into
consideration by the Heritage Board in making its determination to approve the
Merger Agreement.
Based upon the foregoing analyses and other investigations and
assumptions set forth in its opinions without giving specific weightings to
any one factor or comparison, Hovde determined that the Merger Consideration
was fair from a financial point of view to the stockholders of Heritage.
Hovde's fairness opinion does not take into account any adjustment to the
Merger Consideration that may be provided for in the Merger Agreement.
THE SUMMARY OF THE PRESENTATION BY HOVDE TO THE HERITAGE BOARD AS SET
FORTH ABOVE DOES NOT PURPORT TO BE A COMPLETE DESCRIPTION OF SUCH
PRESENTATION. THE PREPARATION OF A FAIRNESS OPINION INVOLVES VARIOUS
DETERMINATIONS AS TO THE MOST APPROPRIATE AND RELEVANT METHODS OF FINANCIAL
ANALYSES AND THE APPLICATION OF THOSE METHODS TO THE PARTICULAR CIRCUMSTANCES,
AND, THEREFORE, SUCH AN OPINION IS NOT READILY SUSCEPTIBLE TO SUMMARY
DESCRIPTION. FURTHERMORE, IN ARRIVING AT ITS OPINION, HOVDE DID NOT ATTRIBUTE
ANY PARTICULAR WEIGHT TO ANY ANALYSIS OR FACTOR CONSIDERED BY IT, BUT RATHER
MADE QUALITATIVE JUDGMENTS AS TO THE SIGNIFICANCE AND RELEVANCE OF EACH
ANALYSIS AND FACTOR. ACCORDINGLY, HOVDE BELIEVES THAT ITS ANALYSES AND THE
SUMMARY SET FORTH ABOVE MUST BE CONSIDERED AS A WHOLE AND THAT SELECTING
PORTIONS OF ITS ANALYSES, WITHOUT CONSIDERING ALL FACTORS AND ANALYSES, COULD
CREATE AN INCOMPLETE VIEW OF THE PROCESS UNDERLYING THE ANALYSES SET FORTH IN
ITS REPORT TO THE HERITAGE BOARD AND ITS FAIRNESS OPINION. IN PERFORMING ITS
ANALYSES, HOVDE MADE NUMEROUS ASSUMPTIONS WITH RESPECT TO INDUSTRY
PERFORMANCE, GENERAL BUSINESS AND ECONOMIC CONDITIONS AND OTHER MATTERS, MANY
OF WHICH ARE BEYOND THE CONTROL OF COMMERCIAL OR HERITAGE. THE ANALYSES
PERFORMED BY HOVDE ARE NOT NECESSARILY INDICATIVE OF ACTUAL VALUES OR ACTUAL
FUTURE PERFORMANCE.
Hovde will receive a fee of approximately $422,000 for services rendered
in connection with advising Heritage regarding the Merger Agreement, including
the fairness opinion, plus reimbursement of out-of-pocket expenses. As of the
date of this Prospectus/Proxy Statement, Hovde has received $105,640 of such
fee.
Conversion of Heritage Common Stock
Exchange Ratio. Each share of Heritage Common Stock issued and
outstanding at the Acquisition Merger Effective Time (other than (i)
Dissenting Shares or shares owned or held by Heritage or its subsidiaries
other than in a 401(k) plan or in a fiduciary capacity) will be converted into
and represent solely the right to receive (a) $18.73 in cash (subject to
increase in connection with the Bennett Funding Asset) and (b) a number of
shares of Commercial Common Stock as follows: (i) if the Average NYSE Closing
Price is equal to or greater than $33.50 but equal to or less than $36.00, the
Exchange Ratio shall be 2.719 shares of Commercial Common Stock; (ii) if the
Average NYSE Closing Price is less than $41.00 but greater than $36.00, the
Exchange Ratio shall be that number of shares
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of Commercial Common Stock equal to the quotient that results by dividing
97.88 by the Average NYSE Closing Price; (iii) if the Average NYSE Closing
Price is equal to or greater than $41.00 but equal to or less than $45.00, the
Exchange Ratio shall be 2.387 shares of Commercial Common Stock; (iv) if the
Average NYSE Closing Price is greater than $45.00 but less than $47.50, the
Exchange Ratio shall be that number of shares of Commercial Common Stock equal
to the quotient that results by dividing 107.43 by the Average NYSE Closing
Price; (v) if the Average NYSE Closing Price is equal to or grater than $47.50
but less than or equal to $50.00, then the Exchange Ratio shall be 2.262
shares of Commercial Common Stock; and (vi) if the Average NYSE Closing Price
is greater than $50.00, then the Exchange Ratio shall be equal to the quotient
that results by dividing 113.08 by the Average NYSE Closing Price.
The cash consideration to be received by Heritage stockholders in the
Merger may be increased depending on the extent to which the Bennett Funding
Asset recovers value prior to or for a certain period of time following the
Merger. Pursuant to the Merger Agreement, Heritage has agreed that prior to
the Merger, it will either (i) sell the Bennett Funding Asset in its entirety,
or (ii) establish a specific loan loss reserve equal to the carrying value of
the Bennett Funding Asset on Heritage's accounting records. As of this
Prospectus/Proxy Statement, the Bennett Funding Asset has not yet been sold.
However, as of June 30, 1996, Heritage established a specific loan loss
reserve of $1.8 million for the entire amount of the Bennett Funding Asset. If
the Bennett Funding Asset is subsequently sold prior to the effective time of
the Merger, the cash portion of the Merger Consideration will be increased by
64% of the recovery recognized from such sale which represents the recovered
amount less the agreed upon tax impact of 36%. Commercial and Heritage have
also agreed that, following the Merger and until the earlier of September 30,
1999 or the full collection of the Bennett Funding Asset, 64% of any cash
proceeds (net of certain expenses) received from the sale or collection of the
Bennett Funding Asset will be distributed to those individuals who were
stockholders of Heritage immediately prior to the Merger. For additional
information see " -- Bennett Funding Asset." Based on the closing price of
Commercial Common Stock on the NYSE on August 12, 1996, of $38.25 per share
and assuming no value is recovered in connection with the Bennett Funding
Asset, each share of Heritage Common Stock would be exchanged for $18.73 in
cash and 2.559 shares of Commercial Common Stock.
No Fractional Shares. No fractional shares of Commercial Common Stock
will be issued in the Merger. Instead, cash will be paid in lieu of any
fractional share interests of Commercial Common Stock resulting from the
Merger. No dividend or distribution with respect to Commercial Common Stock
will be payable on or with respect to any fractional share interests, and no
fractional share interest will entitle the owner thereof to vote or to any
other rights of a stockholder of Commercial. The applicable cash value of
each fractional share interest will be equal to the product of such fraction
multiplied by the Average NYSE Closing Price for shares of Commercial Common
Stock.
Exchange of Heritage Stock Certificates. Prior to the Acquisition Merger
Effective Time, Commercial will appoint an exchange agent (the "Exchange
Agent") to effect the exchange of stock certificates in connection with the
Acquisition Merger. As soon as practicable after the Acquisition Merger
Effective Time, the Exchange Agent will send a notice and transmittal form to
each Heritage stockholder of record at such date whose Heritage Common Stock
has been converted into cash and Commercial Common Stock, advising such
stockholder of the effectiveness of the Acquisition Merger and the procedure
for surrendering to the Exchange Agent outstanding certificates formerly
evidencing Heritage Common Stock in exchange for cash and for new certificates
of Commercial Common Stock. Promptly following receipt of such notice and
transmittal form, holders of Heritage Common Stock certificates should
surrender their certificates in accordance with the specified procedures. Upon
surrender, each Heritage Common Stock certificate will be cancelled. The same
procedures will apply to holders of certificates representing shares of
Hawkeye common stock that were not exchanged for certificates of Heritage
Common Stock upon the formation of Heritage in 1990.
Until surrendered, certificates that prior to the Acquisition Merger
Effective Time represented outstanding shares of Heritage Common Stock or, if
applicable, Hawkeye common stock (other than Dissenting Shares) will be deemed
for all corporate purposes to evidence the right to receive cash and that
number of shares of Commercial Common Stock into which such shares of Heritage
Common Stock have been converted. Until such certificates are so surrendered,
no dividend payable to holders of Commercial Common Stock as of any record
date subsequent to
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the Acquisition Merger Effective Time will be paid to the holders of such
certificates. However, upon surrender of such certificates, there will be
paid to the record holder of the certificates of Commercial Common Stock
issued in exchange therefor the amount of dividends that theretofore have
become payable with respect to such shares of Commercial Common Stock along
with the amount of cash, if any, payable to the holder in lieu of fractional
shares. No interest will be payable with respect to such dividends, cash paid
in lieu of fractional shares or the cash portion of the consideration to be
received in the Merger.
If any certificate for shares of Commercial Common Stock is to be issued
in a name other than the name in which the surrendered certificate is
registered, it will be a condition of issuance that the certificate so
surrendered is properly endorsed and otherwise in proper form for transfer and
that the person requesting the issuance of such certificate either pay to the
Exchange Agent any transfer or other taxes required by reason of the issuance
of the certificate in a name other than the registered holder of the
certificate surrendered or establish to the satisfaction of the Exchange Agent
that such tax has been paid or is not owed. In the event any certificate for
Heritage Common Stock has been lost, stolen or destroyed, the Exchange Agent
will issue, in exchange for such certificate, upon the making of an affidavit
of that fact by the holder thereof, the Merger Consideration; provided,
however, that Commercial may require the owner of such certificate to deliver
a bond in such sum as it may direct as indemnity against any claim that may be
made against Commercial, Heritage, the Exchange Agent or any other party.
Holders of Heritage Common Stock should NOT surrender their certificates
until they receive written instructions from the Exchange Agent.
Treatment of Heritage Stock Options
Immediately prior to the Acquisition Merger Effective Time, each holder
of an option outstanding under the Heritage Option Plan, whether or not the
option is then exercisable, shall, in cancellation of such option, (such
cancellation to be reflected in a written agreement) receive from Heritage per
share of Heritage Common Stock subject to such option a cash payment in an
amount equal to the per share value of the Merger Consideration, less the
exercise price of such option, net of any cash which must be withheld under
federal and state tax requirements. Immediately thereafter, Heritage will
cancel each such option.
See " -- Interests of Certain Persons in the Merger" for information
regarding outstanding Heritage stock options.
Bennett Funding Asset
As of the date of this Prospectus/Proxy Statement, Heritage had
approximately $1.8 million invested in the Bennett Funding Asset. Pursuant to
the terms of the Merger Agreement, Heritage has agreed that it will either (i)
sell the Bennett Funding Asset in its entirety or (ii) establish a specific
loan loss reserve equal to the carrying value of the Bennett Funding Asset on
Heritage's accounting records. If the Bennett Funding Asset is sold prior to
the Acquisition Merger Effective Time, the cash portion of the Merger
Consideration will be increased by 64% of the recovery recognized from such
sale which represents the recovered amount less the agreed upon tax impact of
36%. If the Bennett Funding Asset is not sold prior to the Acquisition Merger
Effective Time, such asset will be managed pursuant to the terms of the Asset
Management Agreement (the "Asset Management Agreement") entered into by the
parties concurrent with the execution of the Merger Agreement and amended on
August 21, 1996. Any recovered value of the Bennett Funding Asset during the
term of the Asset Management Agreement (net of certain expenses) will be
disbursed to those parties who were stockholders of Heritage immediately prior
to the Acquisition Merger Effective Time.
Pursuant to the Asset Management Agreement, effective upon the
Acquisition Merger Effective Time, the Bennett Funding Asset will be
administered by a committee (the "Committee") consisting of three individuals,
two of whom shall be individuals appointed by Hawkeye and the other of whom
will be the Chairman of the Credit Committee of the Bank. The Committee's
duties will consist of using its good faith efforts to collect any and all
value recoverable on the Bennett Funding Asset through the sale thereof or
otherwise, and to distribute such funds, net of certain expenses, to the
former Heritage stockholders. The Bennett Funding Asset will be directly
managed by such individuals designated by the Bank who serve in the Bank's
corporate credit group (the "Managers").
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Pursuant to the Asset Management Agreement, however, the Bank's obligation to
provide the Managers may be terminated at the sole option of the Bank at any
time beginning one year after the Acquisition Merger Effective Time if the
hours actually spent by one or more Managers exceeds 160 hours within a six-
month period. In the event of such early termination, the Committee may
appoint another person or entity to manage the Bennett Funding Asset and seek
to collect the value on or relating to the Bennett Funding Asset upon such
terms and conditions as the Committee may determine; provided that in no event
may the term of such alternative engagement exceed the term of the Asset
Management Agreement. The Bank will be compensated for the time spent by such
Managers in collecting the Bennett Funding Asset. Although the Managers will
be directly responsible for the management of the asset, certain decisions
will be reserved for the Committee.
Under the Asset Management Agreement, distributions of proceeds allocable
to Heritage stockholders from the collection of the Bennett Funding Asset, net
of all related expenses, will be made on an annual basis, beginning on or
about the first anniversary of the Acquisition Merger Effective Time.
Distributions will be made semi-annually in the event the proceeds to be
distributed to Heritage stockholders (net of expenses and a reserve necessary
to pay the expenses reasonably expected to be incurred in the 30 days
following the distribution) exceed $100,000. The Asset Management Agreement
provides that it will terminate upon the earlier of (i) the full collection of
the Bennett Funding Asset, through sale or otherwise, and the distribution of
the proceeds collected therefrom to the former stockholders of Heritage, or
(ii) September 30, 1999; provided, however, that this date may be extended to
December 31, 1999 if in the reasonable good faith and unanimous opinion of the
Committee, immediately prior to September 30, 1999, further collection efforts
are warranted. All funds, if any, received from the collection of the Bennett
Funding Asset subsequent to the termination of the Asset Management Agreement
will be for the benefit of the Bank.
For additional information, see the Asset Management Agreement which is
attached hereto as part of Annex A.
Dissenters' Rights of Appraisal
Under provisions of Division XIII of the IBCA and in accordance with the
procedures set forth in Part B thereof, a copy of which is attached to this
Prospectus/Proxy Statement as Annex C, any holder of record or beneficial
holder of Heritage Common Stock has the right to dissent from the Merger and
demand payment of the fair value of his or her shares in cash. Any stockholder
who wishes to assert dissenters' rights must file a written notice of his or
her intent to demand payment with Heritage, Attention: John F. Peterson,
President, 715 8th Street, Boone, Iowa 50036, before the vote on the Merger
Agreement is taken at the Special Meeting and must refrain from voting in
favor of the Merger Agreement. A PROXY OR VOTE AGAINST THE MERGER AGREEMENT
WILL NOT, BY ITSELF, BE REGARDED AS A WRITTEN NOTICE OF INTENT TO DEMAND
PAYMENT FOR PURPOSES OF ASSERTING DISSENTERS' RIGHTS.
A record holder of Heritage Common Stock may assert dissenters' rights as
to fewer than all shares registered in that stockholder's name only if the
holder dissents with respect to all shares beneficially owned by any one
person and notifies Heritage in writing of the name and address of each person
on whose behalf the stockholder asserts dissenters' rights.
A beneficial stockholder may assert dissenters' rights as to shares held
on the stockholders's behalf only if, in addition to meeting the other
requirements to dissent, the beneficial stockholder (i) submits to Heritage
the record stockholder's written consent to the dissent not later than the
time the beneficial stockholder asserts dissenters' rights and (ii) asserts
dissenters' rights with respect to all shares of which such stockholder is the
beneficial stockholder or over which that beneficial stockholder has power to
direct the vote.
If the Merger Agreement is approved by the requisite vote of holders of
Heritage Common Stock, Heritage is required to send a notice to all dissenting
stockholders containing a form for demanding payment and payment demand and
certificate surrender information (the "Dissenters' Notice") within 10 days
after such approval. The date (the "Payment Demand Date") specified by
Heritage for receiving payment demand (the "Payment Demand") from dissenting
stockholders will be not less than 30 nor more than 60 days after the date on
which the Dissenters' Notice was sent. Upon receipt of the Dissenters' Notice,
each dissenting stockholder must return his or her Payment
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Demand and certificates no later than the Payment Demand Date as provided in
the notice and certify whether he or she acquired beneficial ownership of the
shares prior to the first public announcement of the terms of the Merger on
May 16, 1996.
If the Acquisition Merger is effected within 60 days after the Payment
Demand Date, Heritage will pay each dissenting stockholder who properly
complied with the statutory requirements the amount that Heritage estimates to
be the fair value of such dissenting stockholder's shares, plus accrued
interest from the Acquisition Merger Effective Time.
If the Acquisition Merger is not effected within 60 days of the Payment
Demand Date, Heritage will return all deposited certificates to any dissenting
stockholders. If the Acquisition Merger is thereafter effected, Heritage will
send a new Dissenters' Notice within 10 days of effecting the Acquisition
Merger and repeat the payment demand procedures.
If any dissenter is dissatisfied with Heritage's payment or offer, as the
case may be, such dissenting stockholder may notify Heritage in writing of his
or her own estimate of the fair value of his or her shares and the amount of
interest due and demand payment of such amount. This demand must be made by
the dissenting stockholder within 30 days after Heritage made or offered
payment for the dissenter's shares. Heritage may either accept such
dissenting stockholder's estimate of fair value or commence a proceeding in
the Iowa District Court of Boone County to determine the fair value of the
shares of all dissenting stockholders whose own estimates of fair value are
not accepted by Heritage.
In the event any holder of Heritage Common Stock fails to perfect his or
her rights to dissent by failing to comply strictly with the applicable
statutory requirements, the stockholder will be bound by the terms of the
Merger Agreement and will not be entitled to payment for his or her shares
under the IBCA. Any holder of Heritage Common Stock who wishes to object to
the transaction and demand payment in cash for his or her shares should
consider consulting his or her own legal advisor.
Because an executed proxy relating to Heritage Common Stock on which no
voting direction is made will be voted at the Special Meeting in favor of the
Merger Agreement, a dissenting stockholder who wishes to have his or her
shares of Heritage Common Stock represented by proxy at the Special Meeting
but preserve dissenters' rights must, in addition to the foregoing
requirements, mark the proxy card either to vote against the Merger Agreement
or to abstain from voting thereon.
The foregoing, while a summary of all material provisions of Part B of
Division XIII of the IBCA, is qualified in its entirety by reference to the
text of such statutory provisions, which is set forth in Annex C herein.
Voting Agreements
As a condition to Commercial entering into the Merger Agreement, the 16
directors and executive officers of Heritage have entered into Voting
Agreements with Commercial. Each Voting Agreement provides that the
respective director or officer will vote all of his or her shares of Heritage
Common Stock beneficially owned in favor of the Merger Agreement and the
Acquisition Merger and prohibits such individual from voting his or her shares
in favor of any (i) issuance of stock to any party other than Commercial or
its affiliates or (ii) acquisition of stock or all or substantially all of the
assets of Heritage by any party other than Commercial and its affiliates, or
from exercising dissenters' rights under the IBCA. Each Voting Agreement
prohibits the sale, assignment, pledge or transfer of shares subject to the
Voting Agreement to a third party unless, as a condition to such transfer,
such third party executes a voting agreement in the form acceptable to
Commercial. Each Voting Agreement provides that it will terminate upon the
earlier of (i) the Acquisition Merger Effective Time, and (ii) the termination
of the Merger Agreement.
The total number of shares of Heritage Common Stock subject to the Voting
Agreements is 56,064, or 31.0% of the total shares outstanding as of the
Record Date and entitled to vote at the Special Meeting.
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The Bank Merger
Following the Acquisition Merger, Hawkeye will merge into the Bank, as a
result of which the Bank will be the surviving savings institution. The Bank
Merger will be undertaken subject to and upon the terms and conditions
contained in the Merger Agreement and in the Bank Plan of Merger between
Hawkeye and the Bank dated May 16, 1996. At the Bank Merger Effective Time,
the shares of Hawkeye Common Stock issued and outstanding immediately prior
thereto will be cancelled and the shares of the capital stock of the Bank
outstanding immediately prior thereto will constitute the only outstanding
shares of the capital stock of the Bank following consummation of the Bank
Merger, the Charter and Bylaws of the Bank in effect immediately before the
Bank Merger will be the Charter and Bylaws of the Bank immediately after the
Bank Merger, the current home office of the Bank will continue to be the home
office of the Bank, and the former home office of Hawkeye and all branch
offices of the Bank and former branch offices of Hawkeye will be branch
offices of the Bank. Following the Bank Merger, the Bank will continue to
operate under the name "Commercial Federal Bank, a Federal Savings Bank." For
additional information, see " -- Management after the Merger," " -- Employee
Benefits after the Merger" and " -- Interests of Certain Persons in the
Merger."
The obligations of the parties to consummate the Bank Merger are subject
to the receipt of OTS approval of the Bank Merger.
Management after the Merger
The directors and officers of Commercial and the Bank will not be
affected by the Merger.
Representations and Warranties
Commercial and the Bank, and Heritage and Hawkeye, have given certain
representations and warranties to each other in the Merger Agreement relating
to, among other things, the following: the validity of their respective
organizations; capitalization; ownership of their subsidiaries; financial
statements and other reports; the absence of any undisclosed material adverse
change in their business, financial conditions or results of operations; the
accuracy and completeness of information contained in this Prospectus/Proxy
Statement; disclosure of financial advisory, brokers' and finders' fees; the
absence of undisclosed material pending or threatened litigation; their
compliance with applicable state and federal law; their authority with respect
to the Merger Agreement and related matters; absence of any violation of a
provision of their governing documents, regulation or material agreement as a
result of the Merger Agreement and the transactions contemplated thereby; the
veracity of the information furnished to each other; certain agreements and
instruments; and certain tax matters. Heritage and Hawkeye have made
additional representations as to employment agreements and arrangements;
employee benefits; their properties and assets; absence of any material
contract defaults; certain environmental matters; the loan portfolio; real
estate loans and investments; derivatives contracts; and insurance.
Covenants Pending the Acquisition Merger
In the Merger Agreement, Commercial, the Bank, Heritage and Hawkeye have
agreed to use their best efforts, and to take all actions necessary or
appropriate, to consummate the transactions contemplated by the Merger
Agreement. Each party has also agreed to give to the other party and its
respective representatives and agents full access (to the extent lawful) to
all of the premises, books, records and employees of it and its subsidiaries
at all reasonable times, and to furnish and cause its subsidiaries to furnish
to the other party and its respective agents or representatives access to and
true and complete copies of such financial and operating data and all
documents with respect to matters to which reference is made in the Merger
Agreement.
Pursuant to the Merger Agreement, Heritage has agreed that it and its
subsidiaries, including Hawkeye, will conduct their business only in the
ordinary course, and maintain their books and records in accordance with past
practices. Further, Heritage has agreed that it will not, without the prior
written consent of Commercial: (i) declare, set aside or pay any dividend or
make any other distribution with respect to Heritage's capital stock,
including, but not limited to, any distribution related to the Bennett Funding
Asset not otherwise contemplated by the Merger
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Agreement, except for the regular quarterly dividends on the Heritage Common
Stock in an amount not to exceed $1.00 per share, per quarter to the extent
that, with respect to each such quarterly dividend, (A) the dividend does not
exceed Heritage's net income (as determined in accordance with generally
accepted accounting principles ("GAAP") exclusive of the effects of the
following two items: (1) the charge-off or reserve on the Bennett Funding
Asset taken by Heritage and (2) any additional provisions for loan and real
estate owned losses established by Heritage and Hawkeye pursuant to the Merger
Agreement for the quarter for which the respective dividend is paid; and (B)
such dividends are paid on or about the dates customarily fixed by Heritage
for the payment of dividends; (ii) reacquire any of Heritage's outstanding
shares; (iii) issue, sell or buy any shares of capital stock of Heritage or
any of its subsidiaries, except for shares of Heritage Common Stock issued
under the Heritage Option Plan; (iv) effect any stock split, stock dividend or
other reclassification of Heritage Common Stock; or (v) grant any options or
issue any warrants exercisable for, or securities convertible or exchangeable
into, capital stock of Heritage or any Heritage subsidiary or grant any stock
appreciation or other rights with respect to shares of capital stock of
Heritage or any of its subsidiaries.
In addition, except as otherwise permitted by the Merger Agreement,
Heritage and its subsidiaries shall not, without the prior written consent of
Commercial:
(i) sell or dispose of any significant assets of Heritage or any of
its subsidiaries other than in the ordinary course of business consistent with
past practices;
(ii) merge or consolidate Heritage or any of its subsidiaries with, or
otherwise acquire any other entity, or file any application or make any
contract with respect to branching by Hawkeye (whether de novo, purchase, sale
or relocation) or acquire or construct, or enter into any agreement to acquire
or construct, any interest in real property (other than with respect to
security interests in properties securing loans and properties acquired in
settlement of loans in the ordinary course) or improvements to real property;
(iii) change the articles of incorporation, charter documents or other
governing instruments of Heritage or any of its subsidiaries, except as
required by law or regulation;
(iv) grant to any executive officer, director or employee of Heritage
or any of its subsidiaries (a) any increase in annual compensation, except as
previously disclosed to Commercial, or (b) any bonus type payment, except as
previously disclosed to Commercial;
(v) adopt any new or amend or terminate any existing employee plans
or benefit arrangements of any type, or amend the terms of any outstanding
awards under existing employee benefit plans;
(vi) authorize severance pay or other benefits for any officer,
director or employee of Heritage or any of its subsidiaries, other than as
previously disclosed to Commercial;
(vii) incur any material indebtedness or obligation or enter into or
extend any material agreement or lease, except in the ordinary course of
business consistent with past practices;
(viii) engage in any lending activities other than in the ordinary
course of business consistent with past practices;
(ix) form any new subsidiary or cause or permit a material change in
the activities presently conducted by any Heritage subsidiary or make
additional investments in subsidiaries;
(x) purchase any debt securities or derivative securities, including
collateralized mortgage obligations ("CMOs") or real estate mortgage
investment conduits products ("REMICs"), that are defined as "high risk
mortgage securities" under OTS Thrift Bulletin No. 52 dated January 10, 1992,
as revised, or purchase any derivatives contracts or structured notes;
(xi) purchase any equity securities other than Federal Home Loan Bank
("FHLB") stock;
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(xii) make any investment which would cause Hawkeye to not be a
qualified thrift lender under Section 10(m) of the Home Owners' Loan Act or
not to be a "domestic building and loan association" as defined in Section
7701(a)(19) of the Code;
(xiii) make any loan with a principal balance of $250,000 or more;
(xiv) authorize capital expenditures other than in the ordinary course
of business;
(xv) adopt or implement any change in its accounting principles,
practices or methods other than as may be required by GAAP, or adopt or
implement any change in its methods of accounting for federal income tax
purposes;
(xvi) make any loan in which participation interests therein are to be
sold to other persons or entities or acquire a participation interest in a
loan originated by another person or entity; or
(xvii) commit to do any of the above.
Notwithstanding the foregoing, Hawkeye is permitted to engage in any of the
foregoing activities exclusively with the Bank.
Heritage has further undertaken (i) to call the Special Meeting for the
purpose of voting upon the Acquisition Merger and related matters, as soon as
practicable, but in no event later than 60 days after the Registration
Statement becomes effective; (ii) to recommend approval of the Acquisition
Merger, except as the fiduciary duties of its Board of Directors otherwise
requires; (iii) to use its best efforts to solicit from its stockholders
proxies in favor of the approval of the Acquisition Merger and the Merger
Agreement and to take all actions necessary to secure a vote of the holders of
the Heritage Common Stock in favor of the transaction, except as the fiduciary
duties of its Board of Directors may require; (iii) with Hawkeye, to use their
respective best efforts to obtain the consent or approval of each person whose
consent or approval is required in order to consummate the Acquisition Merger
and the Bank Merger; (iv) to refrain from taking any action that would
materially impede or delay consummation of the transactions contemplated by
the Merger Agreement or that would prevent the transactions from qualifying as
a reorganization within the meaning of Section 368 of the Code; (v) to refrain
from making any press release, disclosure or statement to the press or any
third party with respect to the transactions contemplated by the Merger
Agreement, except as required by law, without the prior approval of
Commercial; (vi) to furnish to Commercial, as soon as reasonably practicable
after they become publicly available, its statements of financial condition
and related statements of operations for all periods prior to the closing of
the Acquisition Merger, such statements to be prepared in accordance with GAAP
applied on a consistent basis and present fairly the financial condition and
results of operations of Heritage (subject, in the case of unaudited financial
statements to (A) normal year-end audit adjustments, (B) any other adjustments
described therein, and (C) the absence of notes which, if presented, would not
differ materially from those included in its most recent audited consolidated
balance sheet); (vii) prior to the Acquisition Merger Effective Time, with
Hawkeye, to establish such additional provisions for loan and real estate
owned losses as may be necessary in the sole determination of Commercial to
conform Heritage's and Hawkeye's loan and real estate owned allowance
practices and methods to those of Commercial and the Bank; provided, however,
that Heritage and Hawkeye will not be required to take such action until (A)
Heritage and Hawkeye provide to Commercial a written statement dated the date
of the closing of the Acquisition Merger regarding the satisfaction of certain
covenants or alternatively setting forth the circumstances that have prevented
such conditions from being satisfied, and (B) Commercial and the Bank, after
reviewing such certificate, provides to Heritage and Hawkeye a written waiver
of any right they may have to terminate the Merger Agreement; and (viii) until
the Acquisition Merger Effective Time, to promptly, but not less frequently
than monthly, update the disclosure schedule provided to Commercial in
connection with the execution of the Merger Agreement, to reflect any matters
which have occurred from and after the date of the Merger Agreement which, if
existing on the date of the Merger Agreement, would have been required to be
described therein and which, in the case of all such updates other than the
last such update prior to the Acquisition Merger Effective Time, reflect a
material change from the information provided in the disclosure schedule.
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No Solicitation
The Merger Agreement provides that Heritage will not authorize or permit
any representative of Heritage or any subsidiary to initiate contact with any
person or entity in an effort to solicit, initiate or encourage any "takeover
proposal" (generally, any bona fide proposal other than as contemplated by the
Merger Agreement, for a merger or other business combination involving
Heritage or Hawkeye, for the acquisition of a 10.0% or greater equity interest
in Heritage or Hawkeye or for the acquisition of a substantial portion of the
assets of Heritage or Hawkeye). In addition, except as the fiduciary duties of
Heritage's Board of Directors may otherwise require (as determined in
consultation with legal counsel), Heritage may not (or authorize any
representative to): (i) cooperate with, or furnish, or cause to be furnished,
any non-public information concerning Heritage's business, properties or
assets to any person or entity in connection with any takeover proposal;
(ii) negotiate any takeover proposal with any person or entity; or (iii) enter
into any agreement, letter of intent or agreement in principle as to any
takeover proposal. Further, Heritage has agreed to give prompt written notice
to Commercial upon becoming aware of any takeover proposal, such notice to
contain, at a minimum (except as the fiduciary duties of Heritage's Board of
Directors may otherwise require), the identity of the persons submitting the
takeover proposal, a copy of any written inquiry or other communication, the
terms of the takeover proposal, any information requested or discussions
sought to be initiated and the status of any requests, negotiations or
expressions of interest.
Conditions to Consummation of the Merger
The obligations of Commercial, the Bank, Heritage and Hawkeye to effect
the Acquisition Merger and the Bank Merger are subject to the following
conditions:
(i) holders of the outstanding shares of Heritage Common Stock shall
have approved the Merger Agreement and the Acquisition Merger;
(ii) no order, decree or injunction shall have been entered and remain
in force restraining or prohibiting the Merger in any legal, administrative,
arbitration, investigatory or other proceedings by any governmental or
judicial or other authority;
(iii) to the extent required by applicable law or regulation, all
approvals of or filings with any governmental authority, including without
limitation those of the OTS, the FDIC, the Federal Trade Commission, the
Department of Justice, the Commission, and any state securities or blue sky
authorities, shall have been obtained or made and any waiting periods shall
have expired in connection with the consummation of the Merger and all other
statutory or regulatory requirements for the valid consummation of the Merger
and related transactions shall have been satisfied;
(iv) the Registration Statement of which this Prospectus/Proxy Statement
is a part shall have been declared effective and shall not be subject to a
stop order of the Commission and, if the offer and sale of Commercial Common
Stock in the Merger pursuant to the Merger Agreement is subject to the blue
sky laws of any state, shall not be subject to a stop order of any state
securities commissioner; and
(v) receipt of an opinion of either Deloitte & Touche LLP, or other tax
advisor reasonably acceptable to Commercial and Heritage, or a private letter
ruling from the Internal Revenue Service ("IRS"), in form and content
reasonably satisfactory to Commercial and Heritage, and upon which Heritage
shareholders may rely, as to certain of the federal income tax consequences of
the Acquisition Merger and the Bank Merger (see " -- Federal Income Tax
Consequences").
The obligations of Commercial and the Bank to effect the Merger and the
transactions contemplated in the Merger Agreement are subject to the following
additional conditions, among others, any of which may be waived by Commercial
and the Bank: (i) Commercial shall have received from Heritage's counsel an
opinion dated as of the closing date of the Merger covering certain matters;
(ii) Heritage and Hawkeye shall have obtained all necessary third party
consents or approvals in connection with the Merger, the absence of which
would materially and adversely affect Heritage and its subsidiaries, taken as
a whole including, but not limited to, the consents of all lessors to their
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respective real estate and other leases that may be required for the
consummation of the Merger; (iii) Commercial shall have received from
McGladrey & Pullen, LLP letters regarding certain financial information
included in this Prospectus/Proxy Statement and other matters; (iv) between
the date of the Merger Agreement and the closing date of the Merger, there
shall not have occurred any material adverse change in the financial
condition, business or results of operations of Heritage and any Heritage
subsidiaries, taken as a whole, other than (A) any such change attributable to
or resulting from any change in law, regulation or GAAP or regulatory
accounting principles, including but not limited to, changes resulting from
amendments to or modifications of any law, rule or regulation relating to the
bad debt reserve of or the deduction taken by thrift institutions or any
special insurance premium assessment by the FDIC on SAIF-insured deposits
which impairs Heritage and other comparably sized and otherwise comparable
thrift institutions in a substantially similar manner, (B) the effects of any
change attributable to or resulting from changes in economic conditions
applicable to depository institutions generally or in general levels of
interest rates affecting Heritage and other comparably sized and otherwise
comparable thrift institutions to a similar extent and in a similar manner,
and (C) any change in circumstances regarding the Bennett Funding Asset;
(v) the representations and warranties of Heritage and Hawkeye shall be true
in all material respects at the Acquisition Merger Effective Time with the
same effect as though made at the Acquisition Merger Effective Time (or on the
date when made in the case of any representation or warranty that specifically
relates to an earlier date); Heritage and Hawkeye shall have performed all
obligations and complied with each covenant, in all material respects, and all
conditions under the Merger Agreement on their parts to be performed or
complied with at or prior to the Acquisition Merger Effective Time; and
Heritage shall have delivered to Commercial a certificate, dated the
Acquisition Merger Effective Time and signed by its chief executive officer
and chief financial officer, to that effect; (vi) all governmental approvals
required by the Merger Agreement to consummate the transactions contemplated
thereby shall have been obtained without the imposition of any conditions
which Commercial and the Bank reasonably and in good faith determine to be
unduly burdensome upon the conduct of the business of Commercial or the Bank;
and, in the sole discretion of Commercial, substantially diminish the benefits
expected to be received by Commercial from the transactions contemplated by
the Merger Agreement; (vii) holders of no more than 10% of the issued and
outstanding shares of Heritage Common Stock, net of treasury shares, shall
have made the demands and given the notices required under the IBCA to assert
dissenters' appraisal rights; and (viii) Heritage shall have charged off the
Bennett Funding Asset and either sold the Bennett Funding Asset or, if
applicable, established a specific loan loss reserve therefor in accordance
with the provisions of the Merger Agreement.
The obligations of Heritage and Hawkeye to effect the Acquisition Merger
and the transactions contemplated by the Merger Agreement are subject to the
following additional conditions, among others, any of which may be waived by
Heritage and Hawkeye: (i) Heritage shall have received from counsel to
Commercial an opinion dated as of the closing date of the Merger covering
certain matters; (ii) the representations and warranties of Commercial and the
Bank shall be true in all material respects at the Acquisition Merger
Effective Time with the same effect as though made at the Acquisition Merger
Effective Time (or on the date when made in the case of any representation or
warranty which specifically relates to an earlier date); Commercial and the
Bank shall have performed all obligations and complied with each covenant, in
all material respects, and all conditions under the Merger Agreement on their
parts to be performed or complied with at or prior to the Acquisition Merger
Effective Time; and Commercial shall have delivered to Heritage a certificate,
dated the Acquisition Merger Effective Time and signed by its chief executive
officer and chief financial officer, to that effect; (iii) a certificate for
the required number of whole shares of Commercial Common Stock, as determined
in accordance with the Merger Agreement, and cash for the cash consideration
to be received by Heritage stockholders and cash for the fractional share
interests, as so determined, shall have been delivered to the Exchange Agent
and Heritage shall have received a certificate to that effect from the
Exchange Agent; (iv) in addition to the required governmental approvals,
Commercial and the Bank shall have obtained all necessary third party consents
or approvals in connection with the Merger, the absence of which would
materially and adversely affect Commercial and its subsidiaries, taken as a
whole; (v) holders of no more than 10% of the issued and outstanding shares of
Heritage Common Stock, net of treasury shares, shall have made the demands and
given the notices required under the IBCA to assert dissenters' appraisal
rights; and (vi) the shares of Commercial Common Stock issuable pursuant to
the Merger Agreement shall have been approved for listing on the NYSE, subject
to official notice of issuance.
35
<PAGE>
There can be no assurance that the conditions to consummation of the
Merger will be satisfied or waived. In the event the conditions to either
party's obligations become impossible to satisfy in any material respect, the
other party may elect to terminate the Merger Agreement. See " -- Amendment
or Termination of the Merger Agreement."
Amendment or Termination of the Merger Agreement
The Merger Agreement may be amended, whether before or after approval by
stockholders of Heritage, by an agreement in writing executed in the same
manner as the Merger Agreement and authorized or ratified by the Boards of
Directors of Heritage, Hawkeye, Commercial and the Bank, except that after
approval of the Merger Agreement by Heritage's stockholders, no such amendment
without further approval by Heritage's stockholders may change the amount or
form of the consideration to be received by Heritage's stockholders in the
Merger.
The Merger Agreement may be terminated at any time before the Acquisition
Merger Effective Time, whether before or after approval by Heritage
stockholders: (i) by mutual written consent of the parties; (ii) at the
election of either party, if the closing of the Merger shall not have occurred
on or before January 31, 1997 or such later date as may be agreed to in
writing by the parties, provided that the right to terminate under this
provision shall not be available to any party whose failure to perform an
obligation has been the cause of, or has resulted in, the failure of the
closing to occur on or before such date; (iii) by Commercial upon delivery of
written notice of termination to Heritage if any event occurs which renders
impossible the satisfaction in any material respect of one or more of the
conditions to the obligations of Commercial and the Bank to effect the Merger
as set forth in the Merger Agreement and noncompliance is not waived by
Commercial; (iv) by Heritage upon delivery of written notice of termination to
Commercial if any event occurs which renders impossible the satisfaction in
any material respect of one or more of the conditions to the obligations of
Heritage to effect the Merger set forth in the Merger Agreement and
noncompliance is not waived by Heritage; (v) by Heritage at any time during
the two business days commencing on the business day immediately following the
end of the Determination Period, if the Average NYSE Closing Price of
Commercial Common Stock is less than $33.50, as adjusted for any stock split,
stock dividend, reclassification, combination of shares or similar corporate
rearrangement; provided, however, that Heritage shall not be entitled to
terminate the Merger Agreement on this basis if Commercial exercises its
option to adjust the Merger Consideration so that the aggregate per share
value of the Merger Consideration Merger Consideration consists of cash in the
amount of $18.73 (subject to increase in the event of the sale or recovery of
the Bennett Funding Asset) and that number of shares of Commercial Common
Stock arrived at by dividing 91.08 by the Average NYSE Closing Price; and (vi)
by Heritage if in the exercise of its good faith and reasonable judgment as to
fiduciary duties to its stockholders imposed by law, as advised by special
counsel, the Board of Directors of Heritage determines that such termination
is required in connection with entering into an agreement with a third party
to engage in an "Acquisition Transaction" (as such term is defined below),
provided that Heritage must notify Commercial promptly of its intention to
terminate the Merger Agreement and Heritage's ability to terminate the Merger
Agreement is conditioned upon its prior payment of the $1.0 million
termination fee required by the Merger Agreement.
In the event the Merger Agreement is terminated, the Merger Agreement
becomes void and will have no further effect with the exception that the
provisions regarding (i) brokers and finders fees; (ii) publicity regarding
the Merger Agreement; (iii) payment of expenses; and (iv) confidentiality will
survive any such termination and abandonment. In addition, in the event of a
termination due to the inability of one of the parties to satisfy one or more
of the conditions to its obligation to effect the Merger, the termination of
the Merger Agreement will not relieve the breaching party from liability for
an uncured, intentional and willful breach of a representation, warranty,
covenant or agreement giving rise to such termination.
Termination Fee
The Merger Agreement further provides that in the event the Merger
Agreement is terminated by either Commercial or Heritage in accordance with
the Merger Agreement (other than if terminated by Heritage as a result of
Commercial's or the Bank's noncompliance with the conditions set forth in
Section 5.3(b) of the Merger Agreement) and, prior to such termination a
"Termination Event" (as defined below) has occurred, Heritage or Hawkeye shall
be obligated to pay to Commercial or the Bank, upon demand, a termination fee
of $1.0 million. A "Termination Event" is defined in the Merger Agreement to
mean either of the following: (i) Heritage, or any
36
<PAGE>
subsidiary having entered into an agreement to engage in an "Acquisition
Transaction" (as defined below) with any person or group other than Commercial
or an affiliate of Commercial, or the Board of Directors of Heritage having
recommended that the stockholders of Heritage approve or accept any
"Acquisition Transaction" (as defined below) with any party other than
Commercial or an affiliate of Commercial; or (ii) after a bona fide proposal
is made by any party other than Commercial or an affiliate of Commercial to
Heritage or its stockholders to engage in an "Acquisition Transaction", either
(A) Heritage breaches any covenant or obligation contained in the Merger
Agreement and such breach would entitle Commercial to terminate the Merger
Agreement or (B) the holders of Heritage Common Stock do not approve the
Merger Agreement at the Special Meeting, such meeting is not held or is
cancelled prior to the termination of the Merger Agreement, or Heritage's
Board of Directors withdraws or modifies in a manner adverse to Commercial its
recommendation with respect to the Merger Agreement.
For purposes of the Merger Agreement, the term "Acquisition Transaction"
is defined to mean: (i) a merger or consolidation or any similar transaction
involving Heritage or any subsidiary of Heritage; (ii) a purchase, lease or
other acquisition of all or substantially all of the assets of Heritage or any
Heritage subsidiary; or (iii) a purchase or other acquisition (including by
way of merger, consolidation, share exchange or otherwise) of securities
representing 50% or more of the equity securities of Heritage or any Heritage
subsidiary.
Required Regulatory Approvals
The Merger is subject to the approval of the OTS. Commercial has filed
an application with the OTS for approval of the Merger. As of the date of
this Prospectus/Proxy Statement, the approval of the OTS has not been
received. There can be no assurance as to the timing of such approval, if
given, or as to the conditions, if any, on which approval will be given. In
addition, the approval, if and when granted, may contain conditions which
Commercial may find unduly burdensome. It is a condition to Commercial and
the Bank's obligations to effect the Merger that such approval does not
contain any conditions which Commercial and the Bank reasonably and in good
faith determine to be unduly burdensome upon the conduct of the business of
Commercial or the Bank and, in the sole discretion of Commercial,
substantially diminish the benefits expected to be received by Commercial from
the transactions contemplated by the Merger Agreement. When such approval is
received, material changes to the Merger Agreement, material conditions, or
other changes of a material nature may be imposed by regulatory authorities in
connection therewith which could require a resolicitation of Heritage's
stockholders for approval. Following OTS approval of the Merger, the U.S.
Department of Justice may review the Merger and raise objections on antitrust
grounds, though objections on such grounds are not expected. If the required
regulatory approvals are not obtained, the Merger Agreement will be
terminated, and the Merger will not occur.
Expenses
Pursuant to the Merger Agreement, each of the parties shall bear and pay
all costs and expenses incurred by it or on its behalf in connection with the
transactions contemplated thereunder.
Closing; Merger Effective Times
As promptly as practicable but in any event no more than 30 days after
the satisfaction or waiver of all conditions and/or obligations of the parties
contained in the Merger Agreement, a closing shall take place at which the
parties thereto will exchange documents required by the Merger Agreement. The
Acquisition Merger Effective Time will be at the time and date which is the
later of the time at which (i) the Nebraska articles of merger are filed with
the appropriate authorities in Nebraska and (ii) the Iowa articles of merger
are filed with the appropriate authorities of Iowa. Following the Acquisition
Merger, the Bank Merger Effective Time shall be at the time the articles of
combination for such merger are endorsed by the OTS.
Employee Benefits after the Merger
Not later than 30 days following the Acquisition Merger Effective Time,
the employees of Heritage and Hawkeye who become employees of Commercial
and/or the Bank shall be eligible to participate in all benefit plans
sponsored by Commercial or the Bank to the same extent as other similarly
situated employees of Commercial and
37
<PAGE>
the Bank; provided, however, that comparable Heritage and Hawkeye benefit
plans will be maintained until such time as such employees commence
participation in the Commercial benefit plans. Commercial shall honor accrued
vacation leave for the employees of Heritage and Hawkeye, with full credit for
prior service with Heritage or Hawkeye for purposes of vesting and eligibility
for participation and co-payments and deductibles. With respect to employees
of Heritage or Hawkeye who are covered by the Commercial health plan following
the Acquisition Merger Effective Time, there shall be no exclusion from
coverage for pre-existing conditions that were covered under any health
insurance plan of Heritage or Hawkeye.
Severance Benefits. Employees of Hawkeye who are not offered a similar
position with the Bank upon consummation of the Merger, or who have worked for
the Bank through an assigned transition period and are not offered similar
employment with the Bank, will receive severance benefits of one week's salary
per credited year of service with Hawkeye, up to a maximum of sixteen weeks
salary.
Interests of Certain Persons in the Merger
Heritage Stock Options. The following table sets forth as of the Record
Date information regarding outstanding options under the Heritage Option Plan
held by directors and executive officers of Heritage. Immediately prior to
the Acquisition Merger Effective Time, each holder of an option outstanding
under the Heritage Option Plan, whether or not the option is then exercisable,
will receive in cancellation of such option (per share of Heritage Common
Stock subject to such option) a cash payment in an amount equal to the per
share value of the Merger Consolidation, less the exercise price of such
option, net of any cash which must be withheld under federal and state tax
requirements.
<TABLE>
<CAPTION>
Estimated Amount of
Cash to be Received
Outstanding Upon Consummation of
Principal Position Stock the Merger for Cancellation
Name with Heritage Options (1) of Stock Options (2)
---- ------------------ ----------- ---------------------------
<S> <C> <C> <C>
Estate of Lloyd W. Courter Former Director of Heritage 5,822 $ 386,290
John F. Peterson President, Chief Executive Officer
and Director of Heritage 5,193 344,556
Paul H. Stark Director of Heritage 2,046 135,752
Stanley L. Moffitt Director of Heritage 2,261 150,017
James R. Grabau Director of Heritage 1,338 88,776
Bernie E. Saggau Director of Heritage 998 66,217
Carolyn M. Herrald Director of Heritage 595 39,478
Robert E. Runyan Senior Vice President of Hawkeye 1,000 66,350
R.T. Schreck Vice President of Hawkeye 1,250 82,938
R. Michael Riddle Vice President of Hawkeye 500 33,175
Executive Officers, Directors
and Estate of Lloyd W. Courter
as a group (10 persons) -- 21,003 $1,393,549
--------- ----------
Other Officers of Hawkeye
(4 persons) -- 2,034 $ 134,956
--------- ----------
Total (14 persons) 23,037 $1,528,505
========= ==========
</TABLE>
- --------------------
(1) Includes options that will vest as a result of the consummation of the
Merger.
(2) Assumes Merger Consideration of $122.35 per share if the full value of
the Bennett Funding Asset were realized by Heritage prior to the
Acquisition Merger Effective Time.
38
<PAGE>
Employment and Severance Agreements. Three executive officers of
Hawkeye, Messrs. John F. Peterson, R.T. Schreck and R. Michael Riddle, are
parties to employment agreements with Heritage and Hawkeye that provide for
severance payments and continuation of other employee benefits upon the
occurrence of certain events, including termination of their respective
employment under such agreements following a change in control of Heritage or
Hawkeye. It is currently anticipated that, as a result of the Merger, the
three executive officers will become entitled to severance payments under
their current employment agreements in the approximate amounts of $324,000,
$185,000 and $154,000, respectively.
In addition to the foregoing, four other officers of Hawkeye, Messrs. Jon
Aldrich, Robert E. Runyan, Randy P. Schmitz and Ms. Vicki Berg, are parties to
agreements with Heritage and Hawkeye which provide for severance payments and
continuation of other employee benefits for 12 months upon their involuntary
termination of employment following a change of control of Heritage or
Hawkeye. It is currently anticipated that, as a result of the Merger, Messrs.
Aldrich, Runyan, Schmitz and Ms. Berg will be entitled to severance payments
in the approximate amounts of $49,000, $77,000, $59,000 and $44,000,
respectively.
The payments and benefits to be provided to the above-mentioned executive
and other officers of Hawkeye pursuant to their individual employment or other
agreements will be limited to an amount that would not cause the aggregate
value of such payments and benefits to be treated as an "excess parachute
payment" within the meaning of Section 280G of the Code. Section 280G
provides that severance payments or benefits which equal or exceed three times
the "base amount" (as defined in Section 280G) of compensation of the
individual are deemed to be "excess parachute payments" if they are contingent
upon a change in control.
Indemnification of Heritage Management. Pursuant to the Merger
Agreement, Commercial has agreed to indemnify the employees, agents, directors
and officers of Heritage and its subsidiaries to the same extent they are
indemnified under Heritage's Articles of Incorporation or Bylaws in effect at
the date of the Merger Agreement or arising by operation of law. Commercial
has further agreed to cause the persons serving as officers and directors of
Heritage immediately prior to the Acquisition Merger Effective Time to be
covered for the duration of any applicable statute of limitation by individual
directors' and officers' liability insurance policy with respect to acts or
omissions occurring prior to the Acquisition Merger Effective Time which were
committed by such officers and directors in their capacity as such. The
amount of the coverage obtained for each director and officer will be the
amount available under the terms of such individual policies when $3,500 is
expended per person. In no event will Commercial be required to expend in the
aggregate in excess of $55,000 to obtain such coverage.
Federal Income Tax Consequences
Commercial and Heritage have determined not to seek a ruling from the IRS
concerning the federal income tax consequences of the Merger. Instead,
Commercial and Heritage will rely upon an opinion of Deloitte & Touche LLP,
tax advisor to Commercial, to the following effect:
. the Acquisition Merger should qualify as a reorganization within
the meaning of Section 368(a)(1)(A) of the Code. Heritage and
Commercial should each be a "party to a reorganization" within the
meaning of Section 368(b) of the Code.
. Heritage should recognize no gain or loss on the transfer of its
assets to Commercial in exchange for the Commercial Common Stock,
cash and the assumption of its liabilities by Commercial, by reason
of the application of Sections 361(a), 361(b) and 357(a) of the
Code.
. no gain or loss should be recognized by Heritage upon the
distribution of the Commercial Common Stock to the Heritage
stockholders, by reason of the application of Section 361(c)(1) of
the Code.
39
<PAGE>
. no gain or loss should be recognized by Commercial on the receipt
of Heritage's assets in exchange for Commercial Common Stock, and
the assumption by Commercial of Heritage's liabilities, by reason
of the application of Section 1032(a) of the Code.
. the basis of the assets of Heritage in the hands of Commercial
should be the same as the basis of such assets in the hands of
Heritage immediately prior to the Merger, by reason of the
application of Section 362(b) of the Code.
. the holding period of the property acquired by Commercial from
Heritage should include the holding period of such property in the
hands of Heritage immediately prior to the Merger, by reason of the
application of Section 1223(2) of the Code.
. the gain, if any, to be realized by a Heritage stockholder who
receives Commercial Common Stock (including fractional share
interests a Heritage stockholder would otherwise be entitled to
receive) and cash (including amounts, if any, to be received
relating to the Bennett Funding Asset) in exchange for Heritage
Common Stock should be recognized, but not in excess of the amount
of cash received. If the exchange has the effect of the
distribution of a dividend (determined with application of Section
318(a) of the Code), then the amount of gain recognized that is not
in excess of each stockholder's ratable share of undistributed
earnings and profits will be treated as a dividend. The
determination of whether the exchange has the effect of the
distribution of a dividend will be made on a stockholder-by-
stockholder basis. No loss will be recognized on the exchange.
. the basis of the Commercial Common Stock (including fractional
share interests a Heritage stockholder would otherwise be entitled
to receive) to be received by a Heritage stockholder who exchanges
Heritage Common Stock for Commercial Common Stock and cash will be
the same as the basis of the Heritage Common Stock surrendered in
the Merger, decreased by the amount of cash received, and increased
by the amount that is treated as a dividend (if any), and by the
amount of gain recognized on the exchange (not including any
portion of that gain that was treated as a dividend).
. the holding period of the Commercial Common Stock (including
fractional share interests that they would otherwise be entitled to
receive) to be received by Heritage stockholders should, in each
instance, include the holding period of the Heritage Common Stock
surrendered in the exchange, provided the Heritage Common Stock was
held as a capital asset on the date of the exchange, by reason of
the application of Section 1223(1) of the Code.
. Commercial as the survivor should succeed to and take into account
as of the close of the day of the distribution or transfer the
items of Heritage described in Section 381(c) of the Code, subject
to the conditions and limitations specified in Sections 381(b) and
381(c) of the Code, by reason of the application of Section
381(a)(2) of the Code.
. as provided in Section 381(c)(2) of the Code and Regulation
Section 1.381(c)(2)-1, Commercial as the survivor should succeed to
and take into account the earnings and profits, or deficit in
earnings and profits, of Heritage as of the date or dates of
transfer. Any deficit in earnings and profits of either Commercial
or Heritage will be used only to offset earnings and profits
accumulated after the date or dates of transfer.
. cash received by a stockholder of Heritage otherwise entitled to
receive a fractional share of Commercial Common Stock in exchange
for his Heritage Common Stock should be treated as if the
fractional shares were distributed as part of the Merger and then
were redeemed by Commercial. These cash payments should be treated
as having been received as distributions in full payment in
exchange for the stock redeemed as provided in Section 302(a) of
the Code. This
40
<PAGE>
receipt of cash should result in gain or loss measured by the
difference between the basis of such fractional share interest and
the cash received. Such gain or loss should be a capital gain or
loss to the former Heritage stockholder, provided that the Heritage
Common Stock was a capital asset in such former stockholder's hands
and as such, will be subject to the provisions and limitations of
Subchapter P of Chapter 1 of the Code.
. when cash is received by a dissenting stockholder of Heritage, such
cash will be treated as received by the dissenting stockholder as a
distribution in redemption of the stockholder's Heritage Common
Stock, subject to the provisions and limitations of Section 302 of
the Code.
Unlike a ruling from the IRS, the opinion of Deloitte & Touche LLP has no
binding effect on the IRS. The opinion of Deloitte & Touche LLP is filed with
the Commission as an exhibit to the Registration Statement of which this
Prospectus/Proxy Statement is a part. See " -- Available Information."
Cash payments made to the holders of Heritage Common Stock upon the
exchange thereof in connection with the Acquisition Merger (other than certain
exempt entities and persons) will be subject to a 31.0% backup withholding tax
under federal income tax law unless certain requirements are met. Generally,
Commercial will be required to deduct and withhold the tax if (i) the
stockholder fails to furnish a taxpayer identification number ("TIN") or fails
to certify under penalty of perjury that such TIN is correct, (ii) the IRS
notifies Commercial that the TIN furnished by the stockholder is incorrect,
(iii) the IRS notifies Commercial that the stockholder has failed to report
interest, dividends or original issue discount in the past, or (iv) there has
been a failure by the stockholder to certify under penalty of perjury that
such stockholder is not subject to the 31.0% backup withholding tax. Any
amounts withheld in collection of the 31.0% backup withholding tax will reduce
the federal income tax liability of the stockholders from whom such tax was
withheld. The TIN of an individual stockholder is that stockholder's Social
Security number.
THE FOREGOING CONSTITUTES ONLY A GENERAL DESCRIPTION OF THE FEDERAL
INCOME TAX CONSEQUENCES OF THE MERGER, WITHOUT CONSIDERATION OF THE PARTICULAR
FACTS AND CIRCUMSTANCES OF EACH HERITAGE STOCKHOLDER'S SITUATION. EACH
HERITAGE STOCKHOLDER IS ENCOURAGED TO CONSULT HIS OR HER OWN TAX AND FINANCIAL
ADVISORS AS TO PARTICULAR FACTS AND CIRCUMSTANCES THAT MAY BE UNIQUE TO SUCH
STOCKHOLDER AND NOT COMMON TO STOCKHOLDERS AS A GROUP AND ALSO AS TO ANY
ESTATE, GIFT, STATE, LOCAL OR FOREIGN TAX CONSEQUENCES ARISING OUT OF THE
MERGER AND/OR ANY SALE THEREAFTER OF COMMERCIAL COMMON STOCK RECEIVED IN THE
MERGER.
Accounting Treatment
The Merger will be accounted for under the purchase method of accounting
in accordance with GAAP, resulting in adjustments to Heritage's assets and
liabilities to reflect their respective fair values at the date of the
Acquisition Merger.
Resale of Commercial Common Stock; Restrictions on Transfer
The shares of Commercial Common Stock to be issued in the Acquisition
Merger will be registered under the Securities Act and will be freely
transferable under the Securities Act, except for shares issued to any
stockholder who may be deemed to be an "affiliate" of Heritage or Commercial
for purposes of Rule 145 under the Securities Act (generally, individuals or
entities that control, are controlled by or are under common control with
Heritage or Commercial). Affiliates may not sell their shares of Commercial
Common Stock acquired in connection with the Acquisition Merger except
pursuant to an effective registration statement under the Securities Act
covering such shares or in compliance with Rule 145 or another applicable
exemption from the registration requirements of the Securities Act.
41
<PAGE>
New York Stock Exchange Listing
Commercial Common Stock is traded on the NYSE under the symbol "CFB". It
is expected that Commercial Common Stock will continue to be quoted on the
NYSE under the symbol "CFB" following the Merger.
Vote Required
The affirmative vote of at least a majority of the outstanding Heritage
Common Stock is required for Heritage's stockholders to approve the Merger
Agreement and the Acquisition Merger. Each share of Heritage Common Stock
outstanding at the close of business on the Record Date is entitled to one
vote on each matter to be considered at such meeting. Heritage's directors
and executive officers have executed Voting Agreements which require such
individuals to vote substantially all of the 56,064 shares of Heritage Common
Stock (excluding stock options), beneficially owned by them as of the Record
Date for approval of the Acquisition Merger and the Merger Agreement.
COMMERCIAL FEDERAL CORPORATION AND
COMMERCIAL FEDERAL BANK, A FEDERAL SAVINGS BANK
Commercial is a unitary non-diversified savings and loan holding company
whose primary asset is the Bank, the largest depository institution
headquartered in Nebraska. At March 31, 1996, Commercial has assets of $6.6
billion and stockholders' equity of $400.4 million. Based upon total assets
at that date, Commercial was the 18th largest publicly held thrift holding
company in the United States. The Bank is a consumer-oriented financial
institution that emphasizes traditional savings and loan operations, including
single-family residential real estate lending, retail deposit activities and
mortgage banking. At March 31, 1996, the Bank operated 38 branch offices in
Nebraska, 20 branch offices in greater metropolitan Denver, Colorado, 18
branch offices in Oklahoma, 24 branch offices in Kansas and one branch office
in Iowa. Subsequent to March 31, 1996, the Bank consolidated four branches in
Nebraska due to market overlap resulting from the acquisition of Conservative
and opened an additional branch in Oklahoma. Accordingly, at June 30, 1996,
the Bank operated a 98 branch network. Throughout its 109 year history, the
Bank has emphasized customer service. To serve its customers, the Bank
conducts loan origination activities through its branch office network, loan
offices of its wholly-owned mortgage banking subsidiary and a nationwide
correspondent network consisting of approximately 400 mortgage loan
originators. The Bank also provides insurance and securities brokerage and
other retail financial services.
On October 2, 1995, Commercial completed the acquisition of Railroad
headquartered in Wichita, Kansas, the holding company for Railroad Savings
Bank, FSB. Railroad operated 18 full-service branch offices and 71 agency
offices throughout the State of Kansas and at acquisition date had $602.9
million in total assets, $421.4 million in deposits and $27.7 million in
stockholders' equity. On February 1, 1996, Commercial completed the
acquisition of Conservative, headquartered in Omaha, Nebraska, the holding
company for Conservative Savings Bank, FSB. Conservative operated seven
offices in Nebraska, one office in Iowa and one office in Kansas and at
February 1, 1996, had $302.9 million in total assets, $197.9 million in
deposits and $35.1 million in stockholders' equity.
Commercial's strategy for growth emphasizes both internal and external
growth. Operations focus on increasing deposits, including demand accounts,
making loans (primarily single-family mortgage and consumer loans) and
providing customers with a full array of financial products and a high level
of customer service. As part of its long-term strategic plan, Commercial
intends to expand its operations within its market areas either through direct
marketing efforts aimed at increasing market share, branch expansions, or
opening additional branches. Commercial's retail strategy will continue to be
centered on attracting new customers and selling both new and existing
customers multiple products and services. Additionally, Commercial will
continue to build and leverage an infrastructure designed to increase fee and
other income.
Complementing its strategy of internal growth, Commercial will continue
to grow its five-state franchise through an ongoing program of selective
acquisitions of other financial institutions. Acquisition candidates will be
42
<PAGE>
selected based on the extent to which the candidates can enhance Commercial's
retail presence in new or underserved markets and complement Commercial's
existing retail network.
Commercial's principal executive offices are located at 2120 South 72nd
Street, Omaha, Nebraska 68124, and its telephone number is (402) 554-9200.
The Bank is a member of the FHLB System and the FHLB of Topeka, and its
deposits are insured up to prescribed limits by the FDIC. The Bank is subject
to comprehensive examination, supervision and regulation by the OTS and the
FDIC.
For additional information regarding Commercial and the Bank, see
Commercial's Annual Report on Form 10-K for the fiscal year ended June 30,
1995, Quarterly Reports on Form 10-Q and the Current Report on Form 8-K dated
March 19, 1996, filed to restate financial information of Commercial to
include the accounts and results of operations of Railroad, which are
incorporated by reference herein.
HERITAGE FINANCIAL, LTD.
Heritage is a savings and loan holding company for Hawkeye. Heritage
became the holding company for Hawkeye effective February 23, 1990.
Accordingly, the information set forth in this Prospectus/Proxy Statement,
including financial statements and related data, relates primarily to Hawkeye
and its subsidiaries.
Hawkeye was originally chartered by the State of Iowa in 1926 as a mutual
savings and loan association. In 1984, Hawkeye converted from a mutual
savings and loan association to a capital stock savings and loan association
through the sale and issuance of 152,090 shares of capital stock at $8.00 per
share. In January 1985, Hawkeye converted from an Iowa chartered stock
savings and loan association to a federally chartered stock savings bank. In
1992, Heritage acquired First Federal in a voluntary supervisory conversion.
First Federal was merged with Hawkeye in March 1995.
Hawkeye's primary business is the solicitation of savings deposits from
the general public and the origination of loans secured by residential real
estate. Hawkeye participates in the secondary mortgage market through the
purchase of mortgage-backed securities and through correspondent relationships
which involve the origination of residential real estate loans. It also
invests funds in securities approved for investment by federal regulations,
including obligations of the United States and its agencies. Hawkeye
continues to expand its operations to include consumer and commercial lending,
demand and commercial checking, and money market deposit accounts. Hawkeye's
income is derived largely from interest and fees in connection with lending
activities. Its principal expenses are interest paid on savings deposits and
operating expenses.
Hawkeye is a member of the FHLB System and its deposits are insured by
the FDIC under the SAIF. Hawkeye is subject to extensive federal regulation,
see "Regulation -- Federal Regulation of Hawkeye."
For additional information, see the Consolidated Financial Statements of
Heritage included in pages F-1 through F-34 herein.
BUSINESS OF HERITAGE FINANCIAL, LTD.
Lending Activities
General. Hawkeye's principal lending activity is the origination of
conventional mortgage loans (loans that are neither insured nor partially
guaranteed by government agencies), including construction loans secured by
residential real estate located in its primary market areas. See
" -- Competition" for a description of Hawkeye's primary market areas.
Hawkeye also originates consumer loans, home equity loans and loans secured
by savings deposits.
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<PAGE>
Loan Portfolio Analysis. Set forth below is selected data relating to
the composition of loan portfolio, including mortgage-backed securities, by
type of loan and type of security on the dates indicated.
<TABLE>
<CAPTION>
At At June 30,
March 31, --------------------------------------------------------------
1996 1995 1994 1993
--------------------- --------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Loan Portfolio:
Real Estate Loans:
1-to-4 family......................... $ 50,849 33.98% $ 53,147 38.23% $ 54,207 40.33% $ 60,197 44.77%
Multi-family and commercial........... 7,614 5.09 8,700 6.26 7,732 5.75 8,429 6.27
Construction.......................... 1,657 1.10 2,573 1.86 2,068 1.54 550 .41
--------- ------ --------- ------ --------- ------ --------- ------
Total............................... 60,120 40.17 64,420 46.35 64,007 47.62 69,176 51.45
Mortgage-backed securities............. 32,258 21.56 36,279 26.10 39,824 29.63 44,614 33.18
--------- ------ --------- ------ --------- ------ --------- ------
Total Real Estate................... 92,378 61.73 100,699 72.45 103,831 77.25 113,790 84.63
--------- ------ --------- ------ --------- ------ --------- ------
Consumer and other:
Home improvement and other consumer.. 51,623 34.50 33,742 24.28 26,855 19.98 19,076 14.19
Savings account loans................ 327 .22 389 .28 418 .31 573 .42
Commercial loans..................... 5,313 3.55 4,169 2.99 3,302 2.46 1,019 1.76
--------- ------ --------- ------ --------- ------ --------- ------
Total consumer and other............ 57,263 38.27 38,300 27.55 30,575 22.75 20,668 15.37
--------- ------ --------- ------ --------- ------ --------- ------
149,641 100.00% 138,999 100.00% 134,406 100.00% 134,458 100.00%
--------- ====== --------- ====== --------- ====== --------- ======
Less:
Loans in process..................... 709 1,007 1,199 510
Unamortized yield adjustments........ (91) 117 23 (3)
Allowance for loan losses............ 1,872 1,781 1,712 1,782
--------- --------- --------- ---------
Total............................... $ 147,151 $ 136,094 $ 131,472 $ 132,169
========= ========= ========= =========
</TABLE>
44
<PAGE>
Residential Real Estate Loans. Hawkeye grants loans secured by single-
family residential real estate to enable borrowers to purchase existing homes
or to construct new single family homes. Hawkeye's real estate loan portfolio
also includes loans secured by two-to-four family dwellings. Hawkeye offers
fixed-rate and adjustable-rate mortgage ("ARM") loans.
At March 31, 1996, approximately $83.5 million, or 56.0% of total loans
outstanding (including mortgage-backed securities and certain construction
loans), consisted of loans and mortgage-backed securities secured by one-to-
four family residential real estate. At March 31, 1996, one-to-four family
ARM loans represent 55% of the mortgage portfolio.
The average remaining contractual maturity of Hawkeye's mortgage loan
portfolio is approximately 16 years and Hawkeye is currently originating loans
with maturities of 15, 20, 25 and 30 years. Hawkeye's experience, however,
indicates that residential loans remain outstanding for significantly shorter
periods than their contractual terms. Borrowers may refinance or prepay loans
at their option.
Hawkeye's lending policies generally limit the maximum loan-to-value
ratio on fixed-rate and ARM loans, without private mortgage insurance, to
either 80% or less of the lesser of the appraised value or purchase price of
the underlying residential property or up to 95% with private mortgage
insurance. The loan-to-value ratio, maturity and other provisions of the
loans made by Hawkeye have generally reflected the policy of making loans at
less than the maximum loan-to-value ratio permissible under federal
regulations, in accordance with established lending practices, market
conditions and underwriting standards maintained by Hawkeye.
Hawkeye has also engaged in construction lending. These loans involve a
construction period requiring monthly interest payments, followed by a
permanent loan requiring monthly principal and interest payments. At
March 31, 1996, Hawkeye's construction loan portfolio totaled $1.7 million.
Commercial Real Estate Loans. At March 31, 1996, Hawkeye had
approximately $8.9 million of commercial real estate loans, including loans
secured by apartments with more than four units and commercial construction
loans. This represents 6% of its outstanding loan portfolio (before
deductions). In recent years, commercial lending as a percentage of the loan
portfolio has been decreasing. All new loans are made on an adjustable-rate
basis, with loan terms ranging up to a maximum of 20 years.
Although commercial real estate loans typically have shorter terms to
maturity and higher interest rates than residential mortgage loans, they also
may involve greater credit risk than residential mortgage loans. Such loans
may involve large loan balances to single borrowers or groups of related
borrowers. In addition, payment experience on loans secured by income
producing properties is typically dependent on the successful operation of the
properties and thus may be subject to a greater extent to adverse conditions
in the real estate market or in the economy generally. At March 31, 1996,
Hawkeye's largest commercial real estate loan totaled $1.5 million. Hawkeye's
largest commercial real estate loan is secured by a multi-family apartment
complex located in Sergeant Bluff, Iowa and was performing according to its
terms at March 31, 1996.
Consumer and Other Loans. At March 31, 1996, Hawkeye had $51.6 million
in home improvement and other consumer loans. Federal regulations permit
federal thrift institutions to make secured and unsecured consumer loans up to
35% of the institution's assets. In addition, a federal thrift institution
has lending authority above this percentage for certain consumer loans, such
as home equity loans, property improvement loans and loans secured by savings
accounts. Loans are made to purchase, maintain, repair, improve, landscape or
equip the secured property, including additions to or new construction on
existing property. It has been Hawkeye's experience that these loans are made
primarily on property secured by a first mortgage to Hawkeye. Hawkeye
generally makes these loans for terms of seven to 10 years, but the term may
extend to 15 years. Hawkeye makes unsecured and secured consumer loans on
automobiles, boats, trailers and equipment at a typical loan to value ratio of
75% for a typical term of 36 to 48 months.
45
<PAGE>
Hawkeye also makes loans secured by savings deposits. At March 31, 1996,
Hawkeye had $327,000 in loans secured by savings deposits.
In addition to commercial real estate loans, Hawkeye also makes
commercial loans secured by other business assets. At March 31, 1996, Hawkeye
had $5.3 million in commercial loans secured other than by real estate.
Included in this balance is the $1.8 million loan to Bennett. This loan was
non performing at March 31, 1996. Subsequent to March 31, 1996, management
subsequently determined to fully reserve for the entire balance of this loan.
Such reserve had the effect of reducing fourth quarter earnings by $1.8
million less the tax benefit of $600,000 for a net effect of $1.2 million.
See "Information Concerning the Special Meeting -- Recent Events -- Bennett
Funding Asset."
46
<PAGE>
Loan and Mortgage-Backed Securities Maturity and Repricing. The
following table sets forth certain information at June 30, 1995 regarding the
dollar amount of loans and mortgage-backed securities maturing in Hawkeye's
portfolio based on their contractual terms to maturity. Demand loans, loans
having no stated schedule of repayments and no stated maturity, and overdrafts
are reported as due in one year or less. Loan balances do not include
undisbursed loan proceeds, unearned discounts, unearned income and allowance
for loan losses.
<TABLE>
<CAPTION>
Due During
the Year ended Due After Due After Due After
June 30, 3 through 5 5 through 10 10 through 20 Due After
------------------------------ Years After Years After Years After 20 Years After
1996 1997 1998 June 30, 1995 June 30, 1995 June 30, 1995 June 30, 1995 Total
------ ------ ------ ------------- ------------- ------------- -------------- --------
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Real Estate Loans......... $ 9,296 $ 8,264 $ 7,425 $ 14,551 $ 22,312 $ 26,603 $ 12,248 $ 100,699
Consumer and Other Loans.. 10,469 8,318 6,464 7,464 5,426 159 -- 38,300
-------- -------- -------- -------- -------- -------- -------- ---------
Total................. $ 19,765 $ 16,582 $ 13,889 $ 22,015 $ 27,738 $ 26,762 $ 12,248 $ 138,999
======== ======== ======== ======== ======== ======== ======== =========
</TABLE>
The following table sets forth loans with maturities in excess of one
year from June 30, 1995.
<TABLE>
<CAPTION>
Fixed Rates Adjustable Rates Total
----------- ---------------- --------
(In thousands)
<S> <C> <C> <C>
Real Estate Loans......... $31,790 $59,613 $ 91,403
Consumer and Other Loans.. 25,212 2,619 27,831
------- ------- --------
$57,002 $62,232 $119,234
======= ======= ========
</TABLE>
47
<PAGE>
Loan Solicitation and Processing. Hawkeye's primary sources of loans
include referrals, brokers, contractors, repeat business from existing and
former borrowers.
Once an application for a mortgage loan is received by Hawkeye, a credit
and property analysis is completed, including obtaining a credit report from
reporting agencies, verification of income and deposits, and assets and
liabilities. An appraisal of the property offered as collateral is prepared
by a fee appraiser approved by Hawkeye.
The completed loan file is then submitted for underwriting. Once
underwritten, the loan is submitted to the appropriate committee for review
and approval. Single-family residential loans up to $250,000 may be approved
by certain officers of Hawkeye. Approval of the Board of Directors of Hawkeye
is required for Hawkeye to make a loan in excess of $250,000.
Similar procedures and guidelines apply to the processing of commercial
and consumer loans.
Mortgage-Backed Securities. Hawkeye invests in mortgage-backed
securities guaranteed by the Government National Mortgage Association
("GNMA"), Federal National Mortgage Association ("FNMA") and the Federal Home
Loan Mortgage Corporation ("FHLMC") and CMOs issued by various entities
including FNMA and FHLMC. Of Hawkeye's total mortgage-backed securities of
$32.5 million, $20.8 million carried adjustable rates at March 31, 1996.
Management considers mortgage-backed securities investments to be advantageous
since they offer yields above those available for investments of comparable
credit quality and duration and qualify as thrift investments under the
Qualified Thrift Lender ("QTL") Test. See "Regulation -- Qualified Thrift
Lender Test."
Loan Originations, Purchases and Sales. Most of Hawkeye's loan portfolio
consist of loans originated by Hawkeye. However, Hawkeye also acquires dealer
paper without recourse from market area auto dealers, purchases conventional
loans secured by residential real estate from various mortgage brokers located
within Iowa, purchases participations in commercial and multi-family
residential loans from other lenders, purchases home equity loans on 1-4
family residences originated by other lenders and purchases mortgage-backed
securities. For the years ended June 30, 1995, 1994 and 1993, Hawkeye
purchased mortgage-backed securities in the amount of approximately $1.9
million, $11.1 million and $10.4 million, respectively.
Hawkeye periodically sells loans that it originates into the secondary
market. These sales, primarily to FNMA, are made without recourse to Hawkeye.
The sale of loans in the secondary mortgage market reduces Hawkeye's risk of
interest rates escalating while holding long-term, fixed-rate loans in periods
when savings flows decline or funds are not otherwise available for lending
purposes. In connection with such sales, Hawkeye retains the servicing of the
loans (i.e., collection of principal and interest payments), for which it
----
generally receives a fee payable monthly of .25% or more per annum of the
unpaid balance of each loan. As of March 31, 1996, Hawkeye's servicing
portfolio totaled $26.4 million. The success of these efforts, however, is
limited by Hawkeye's ability to acquire loans at yields which are competitive
with other loans in the market area.
48
<PAGE>
The following table sets forth Hawkeye's loan origination, purchase and
sale activities for the periods indicated.
<TABLE>
<CAPTION>
Nine Months Ended
March 31, Year Ended June 30,
------------------- ---------------------------------
1996 1995 1995 1994 1993
------ ------ ------ ------ ------
(In thousands)
<S> <C> <C> <C> <C> <C>
Loans Originated:
Conventional Real Estate Loans:
Construction................... $ 1,027 $ 1,073 $ 1,780 $ 2,070 $ 729
Existing Property.............. 5,716 6,449 8,295 8,747 8,498
Refinanced..................... 3,439 1,366 1,892 11,880 5,179
-------- ------- -------- -------- --------
Total Originations............ $ 10,182 $ 8,888 $ 11,967 $ 22,697 $ 14,406
======== ======= ======== ======== ========
Loans Purchased.................. $ 24,236 $ 2,822 $ 4,742 $ 5,990 $ 888
======== ======= ======== ======== ========
Loans Sold....................... $ 8,140 $ 3,559 $ 5,415 $ 11,158 $ 5,576
======== ======= ======== ======== ========
</TABLE>
Loan Commitments. Hawkeye makes commitments to purchase loans and
mortgage-backed securities and originate loans to borrowers within its market.
These commitments are subject to the occurrence of certain events and are made
under specified terms and conditions. Hawkeye generally makes these
commitments for a duration of up to 60 days. At March 31, 1996, Hawkeye had
outstanding loan origination commitments of approximately $1.5 million.
Loan Origination and Other Fees. In addition to interest earned on
loans, Hawkeye received loan origination fees or "points" for originating
loans. Loan points are a percentage of the principal amount of the mortgage
loan which are charged to the borrower for creation of the loan. Hawkeye's
loan origination fees are generally 1.0% on conventional residential
mortgages. Such loan origination fees, net of costs to originate, are
deferred and amortized using an interest method over the contractual life of
the loan. Fees deferred are recognized immediately upon prepayment or sale of
the related loan. The total amount of deferred loan fees for Hawkeye at
March 31, 1996 was $184,000.
Hawkeye also receive other fees and charges relating to existing loans,
which may include prepayment penalties, late charges, and fees collected in
connection with a change in borrower or other loan modifications. These fees
and charges have not constituted a material source of income.
Problem Assets and Asset Classification. Loans are reviewed on a regular
basis and are placed on a non-accrual status when, in the opinion of
management of Hawkeye, the collection of additional interest is doubtful.
Residential mortgage loans generally are placed on non-accrual status when
either principal or interest is 90 days or more past due. Consumer loans
generally are charged off or reserved when the loan becomes 90-120 days
delinquent. Commercial business and real estate loans are generally placed on
non-accrual status when the loan is 90 days or more past due. Interest accrued
and unpaid at the time a loan is placed on non-accrual status is charged
against interest income. Subsequent payments are either applied to the
outstanding principal balance or recorded as interest income, depending on the
assessment of the ultimate collectibility of the loan.
Real estate acquired by Hawkeye as a result of foreclosure or by deed in
lieu of foreclosure is classified as foreclosed real estate until such time as
it is sold. When such property is acquired it is recorded at the lower of the
unpaid principal balance of the related loan or its fair value, less estimated
selling expenses. Any write-down of the property is charged to the allowance
for loan losses at the time of foreclosure with subsequent declines in value,
if any, credited directly to foreclosed real estate.
49
<PAGE>
The following table sets forth information with respect to Hawkeye's non-
performing assets for the periods indicated. During the periods shown, Hawkeye
had no restructured loans within the meaning of Statement of Financial
Accounting Standards No. 15, other than any loans foreclosed and reported as
real estate owned.
<TABLE>
<CAPTION>
At June 30,
At March 31, ----------------------
1996 1995 1994
------------ ------ ------
(In thousands)
<S> <C> <C> <C>
Non performing Assets:
Nonaccrual Loans:
Real Estate.................................... $ -- $ -- $ --
Consumer and Other (Bennett Funding Asset)..... 1,829 -- --
------- ------ ------
Total non accrual loans...................... $ 1,829 $ -- $ --
------- ------ ------
Other Non Performing Assets:
Real Estate Owned.............................. $ 150 $ 41 $ --
Other.......................................... 26 5 19
------- ------ ------
Total other non performing assets............ $ 176 $ 46 $ 19
------- ------ ------
Total Non Performing Assets..................... $ 2,005 $ 46 $ 19
======= ====== ======
</TABLE>
During the year ended June 30, 1995, no gross interest income would have
been recorded on loans accounted for on a non-accrual basis if the loans had
been current throughout the period. There was no interest on such loans
included in income during the period.
During the period of negotiations with Commercial in late March 1996,
Hawkeye had $1.8 million in loans to Bennett or its subsidiaries and loans to
Bennett or its subsidiaries secured by equipment leases. Approximately 10,000
investors and 200 financial institutions nationwide had similar investments or
lending relationships with Bennett. Bennett filed for Chapter 11 bankruptcy
protection on March 29, 1996 after the principals of the company were charged
with various criminal offenses relating to the leasing transactions. Upon the
filing of the Bennett bankruptcy case, the Bennett Funding Asset became non
performing. At March 31, 1996, Hawkeye had not established a specific loss
reserve for the Bennett Funding Asset but rather, considered its non
performing nature when evaluating the adequacy of the allowance for loan
losses. At June 30, 1996, the Bennett Funding Asset was fully reserved in the
amount of $1.8 million. See "Information Concerning the Special Meeting --
Recent Events -- Bennett Funding Asset."
50
<PAGE>
The following table sets forth an analysis of Hawkeye's allowance for
possible loan losses for the periods indicated.
<TABLE>
<CAPTION>
Nine Months Ended
March 31, Year Ended June 30,
------------------ ---------------------
1996 1995 1995 1994
------ ------ ------ ------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Beginning Balance...................... $ 1,781 $ 1,712 $ 1,712 $ 1,782
Loans Charged Off:
Real estate.......................... (7) (22) (22) --
Commercial........................... (42) (12) (15) (42)
------- ------- ------- -------
Total charge offs.................. (49) (34) (37) (42)
------- ------- ------- -------
Recoveries:
Real estate......................... -- 10 10 41
Consumer............................ 5 22 22 43
------- ------- ------- -------
Total recoveries................... 5 32 32 84
------- ------- ------- -------
Net loans (charged off) recovered.... (44) (2) (5) 42
------- ------- ------- -------
Provision for (reduction in
allowance for) loan losses............ -- 40 40 (130)
Transfer from allowance for specific
loan losses (1)....................... 135 11 34 18
------- ------- ------- -------
Ending Balance......................... $ 1,872 $ 1,761 $ 1,781 $ 1,712
======= ======= ======= =======
Ratio of net charge offs (recoveries)
to average loans outstanding.......... .04% --% .01% (.05)%
======== ======= ======= =======
</TABLE>
- --------------------
(1) Hawkeye maintained a specific loan loss reserve which had not been
included as part of the allowance for loan losses in the Consolidated
Financial Statements or schedules herein, but rather was netted against
loans receivable. As of March 31, 1996, this specific loan loss reserve
has been transferred to the allowance for loan losses.
The following table sets forth the components of the allowance for loan
losses by loan category for the periods indicated. Management believes that
the allowance can be allocated by category only on an approximate basis. The
allocation of the allowance to each category is not necessarily indicative of
further losses and does not restrict the use of the allowance to absorb losses
in any category.
<TABLE>
<CAPTION>
At June 30,
At March 31, ----------------------
1996 1995 1994
------------- ------ ------
(Dollars in thousands)
<S> <C> <C> <C>
Allowance for real estate loan losses.................. $ 1,539 $ 1,363 $ 1,612
Allowance for consumer and other loan losses........... 333 418 100
------- ------- -------
Total................................................ $ 1,872 $ 1,781 $ 1,712
======= ======= =======
Ratio of allowance for loan losses to total loans...... 1.59% 1.73% 1.81%
======= ======= =======
</TABLE>
51
<PAGE>
Investment Activities
Interest income from cash deposits and investment securities generally
provide the second largest source of income for Hawkeye after interest
payments on loans. At March 31, 1996, Hawkeye's interest-bearing deposits,
cash, and investment securities portfolio of $32.8 consisted primarily of FHLB
overnight and fixed-term deposits and U.S. Government and agency obligations.
Hawkeye is required under federal regulations to maintain a minimum
amount of liquid assets which may be invested in specified short-term
securities and is also permitted to make certain other investments. It has
been Hawkeye's policy to maintain a liquidity portfolio well in excess of
federal regulatory requirements, and at March 31, 1996, Hawkeye's liquidity of
$37.9 million exceeded federal requirements by $30.0 million. Investment
decisions are made by authorized officers of Hawkeye under the supervision of
Hawkeye's Board of Directors.
The following table sets forth the carrying value of Hawkeye's investment
portfolio at the dates indicated.
<TABLE>
<CAPTION>
At June 30,
At March 31, ------------------------
1996 1995 1994
------------ ------ ------
(In Thousands)
<S> <C> <C> <C>
Investment securities held to maturity:
U.S. Government and agency securities....... $ -- $ 8,431 $ 9,231
Municipal obligations....................... 657 668 --
Other....................................... 3,481 1,050 651
-------- -------- --------
Total investment securities held to
maturity................................. 4,138 10,149 9,882
Investment securities available for sale:
U.S Government and agency securities........ 18,099 14,048 16,874
FHLB stock.................................. 1,453 1,424 1,478
-------- -------- --------
Total investment securities available
for sale................................. 19,552 15,472 18,352
Interest-bearing deposits..................... 8,241 9,736 6,527
-------- -------- --------
Total..................................... $ 31,931 $ 35,357 $ 34,761
======== ======== ========
</TABLE>
52
<PAGE>
The following table sets forth the scheduled maturities, carrying values,
market values and average yields for Hawkeye's investment securities at
March 31, 1996.
<TABLE>
<CAPTION>
At March 31, 1996
-----------------------------------------------------------------------------------------------
One Year One to Five Five to Ten
or Less Years Years Total Investment Securities
------------------ ------------------- ------------------- ----------------------------
Amortized Average Amortized Average Amortized Average Amortized Market Average
Cost Yield Cost Yield Cost Yield Cost Value Yield
--------- ------- --------- ------- --------- ------- --------- ------ -------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Investment securities held to
maturity:
Municipal obligations........... $ -- --% $ -- --% $ 657 7.24% $ 657 $ 657 7.24%
Other securities................ 3,000 5.10 -- -- -- -- 3,000 3,000 5.10
--------- --------- --------- --------- --------
3,000 -- 657 3,657 3,657
--------- --------- --------- --------- --------
Investment securities available
for sale:
U.S. Government and agency
securities..................... 1,000 7.80 15,976 6.04 995 6.08 17,971 18,099 6.14
Interest-bearing deposits......... 8,241 3.91 -- -- -- -- 8,241 8,241 3.91
--------- --------- --------- --------- --------
$ 12,241 $ 15,976 $ 1,652 29,869 29,997
========= ========= ========= --------- --------
FHLB stock and other securities... 1,934 1,934
--------- --------
Total............................ $ 31,803 $ 31,931
========= ========
</TABLE>
53
<PAGE>
Savings Activities and Other Sources of Funds
Deposits are the major source of Hawkeye's funds for lending and other
investment purposes. In addition to deposits, Hawkeye derives funds from loan
principal repayments, interest payments and advances from the FHLB of Des
Moines. Loan repayments and interest payments are a relatively stable source
of funds, while deposit inflows and outflows may be influenced by changes in
general interest rates. Borrowings may be used on a short-term basis to
augment traditional sources of funds. They also may be used on a longer term
basis for general business purposes. As of March 31, 1996, Hawkeye had
borrowed $10.0 million from the FHLB of Des Moines with amounts and terms
varying from $1.0 to $5.0 million and one to five years in maturity. The
funds were used to purchase second mortgage loans.
Hawkeye offers a number of deposit accounts, including passbook savings
accounts, NOW/checking, money market accounts and certificate accounts ranging
in maturity from 14 days to five years or more. Deposit account interest
rates vary according to minimum balance requirements and maturity dates. Such
accounts are not subject to the maximum interest rates imposed by government
regulation. There may be a penalty imposed on all deposit accounts withdrawn
prior to the end of any required fixed or minimum term.
Deposits in Hawkeye at March 31, 1996 were represented by various types
of savings programs described below.
<TABLE>
<CAPTION>
Weighted
Average Balances Percentage
Interest Minimum Minimum in of Total
Rate Term Category Amount Thousands Savings
- -------- ------- --------- ------- --------- ----------
<S> <C> <C> <C> <C> <C>
1.49% None Demand and NOW Accounts $ 100 $ 16,390 10.24%
3.31 None Money Market Deposit Accounts 1,000 13,164 8.22
2.43 None Passbook Deposits 10 19,289 12.05
Certificates of Deposit
-----------------------
3.72 3 months Fixed-rate, Fixed-term 500 547 .34
5.12 6 months Fixed-rate, Fixed-term 500 14,835 9.27
5.25 12 months Fixed-rate, Fixed-term 500 25,508 15.93
5.45 24 months Fixed-rate, Fixed-term 500 17,337 10.83
5.18 30 months Fixed-rate, Fixed-term 500 3,453 2.16
5.48 36 months Fixed-rate, Fixed-term 500 15,827 9.89
5.40 48 months Fixed-rate, Fixed-term 500 1,007 .63
6.28 60 months Fixed-rate, Fixed-term 500 24,542 15.33
6.47 120 months Fixed-rate, Fixed-term 500 691 .43
5.01 18 months Variable-rate IRA accounts 25 3,596 2.25
5.81 18 months Fixed-rate IRA accounts 500 3,125 1.95
5.36 14 days Negotiated Jumbo 100,000 771 .48
-------- ------
$160,082 100.00%
======== ======
</TABLE>
54
<PAGE>
The following table shows the composition of average deposit balances and
average rates for the periods indicated.
<TABLE>
<CAPTION>
Nine Months Ended March 31, Year Ended June 30,
-------------------------------------- ---------------------------------------------------------
1996 1995 1995 1994 1993
----------------- ----------------- ----------------- ----------------- -----------------
Average Average Average Average Average Average Average Average Average Average
Balance Rate Balance Rate Balance Rate Balance Rate Balance Rate
------- ------- -------- ------- ------- ------- ------- ------- -------- -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Demand and NOW............. $ 15,340 1.0% $ 13,899 1.0% $ 14,108 0.6% $ 14,595 1.3% $ 21,365 1.0%
Money market............... 11,563 3.9 8,862 2.4 9,478 3.1 9,264 4.4 10,193 4.9
Savings.................... 18,984 2.5 24,881 2.9 23,701 2.8 25,735 2.1 24,674 2.4
Certificates of deposit.... 111,284 5.7 108,030 5.1 108,659 5.2 109,050 4.2 106,089 5.1
-------- -------- -------- -------- --------
Total.................... $157,171 4.8 $155,672 4.3 $155,946 4.4 $158,644 3.6 $162,321 4.2
======== ======== ======== ======== ========
</TABLE>
55
<PAGE>
The following table sets forth the certificates of deposit in Hawkeye
classified by rates as of the dates indicated:
<TABLE>
<CAPTION>
At At June 30,
March 31, ------------------------------------
1996 1995 1994 1993
--------- -------- -------- ---------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Rate:
- -----
Less than 3.00%............................ $ 601 $ 142 $ 1,113 $ 188
3.00% - 4.99%.............................. 23,760 22,742 66,821 56,569
5.00% - 6.99%.............................. 73,184 69,459 28,981 28,302
7.00% - 8.99%.............................. 13,694 17,698 9,346 21,049
9.00% 10.99%............................... -- 968 1,377 1,419
11.00% - 12.99%............................ -- -- 458 4,182
-------- -------- -------- --------
Certificates of deposit.................... $111,239 $111,009 $108,096 $111,709
======== ======== ======== ========
</TABLE>
The following table sets forth the amount and maturities of Hawkeye's
certificates of deposit at March 31, 1996.
<TABLE>
<CAPTION>
Amount Due
-------------------------------------------------------------------
Less Than After
One Year 1-2 Years 2-3 Years 3 Years Total
--------- --------- --------- ------- --------
(In thousands)
<S> <C> <C> <C> <C> <C>
Rate:
- -----
Less than 3.00%................ $ 599 $ 2 $ -- $ -- $ 601
3.00% - 4.99%.................. 20,799 2,388 518 55 23,760
5.00% - 6.99%.................. 39,117 21,803 6,336 5,928 73,184
7.00% - 8.99%.................. 1,178 2,371 70 10,075 13,694
-------- -------- ------- -------- ---------
$ 61,693 $ 26,564 $ 6,924 $ 16,058 $ 111,239
======== ======== ======= ======== =========
</TABLE>
The following table indicates the amount of Hawkeye's certificates of
deposit of $100,000 or more by time remaining until maturity at
March 31, 1996.
<TABLE>
<CAPTION>
Certificates
Maturity Period of Deposits
- --------------- ------------
(In thousands)
<S> <C>
Three months or less.................... $ 2,299
Over three through six months........... 1,357
Over six through twelve months.......... 1,066
Over twelve months...................... 2,034
-------
Total................................... $ 6,756
=======
</TABLE>
56
<PAGE>
Deposit Flow. The following table sets forth the change in dollar amount
of savings deposits in the various types of savings accounts offered by
Hawkeye between the dates indicated.
<TABLE>
<CAPTION>
March 31, 1996 June 30, 1995
-------------------------------------- ------------------------------------
% of Increase % of Increase
Amount Deposits (Decrease) Amount Deposits (Decrease)
------ -------- ---------- ------ -------- ---------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Demand and NOW........... $ 16,390 10.24% $ 1,511 $ 14,879 9.47% $ 115
Money market............. 13,164 8.22 1,816 11,348 7.22 (2,772)
Savings.................. 19,289 12.05 (623) 19,912 12.67 (806)
Certificates of deposit.. 111,239 69.49 230 111,009 70.64 2,913
-------- ------ ------- -------- ------ -------
Total.................. $160,082 100.00% $ 2,934 $157,148 100.00% $ (550)
======== ====== ======= ======== ====== =======
<CAPTION>
June 30, 1994 June 30, 1993
------------------------------------ ---------------------
% of Increase % of
Amount Deposits (Decrease) Amount Deposits
------ -------- ---------- ------ --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Demand and NOW........... $ 14,764 9.36% $ 572 $ 14,192 8.83%
Money market............. 14,120 8.95 (152) 14,272 8.88
Savings.................. 20,718 13.14 194 20,524 12.77
Certificates of deposit.. 108,096 68.55 (3,613) 111,709 69.52
--------- ------ -------- --------- ------
Total.................. $ 157,698 100.00% $ (2,999) $ 160,697 100.00%
========= ====== ======== ========= ======
</TABLE>
57
<PAGE>
Substantially all of Hawkeye's depositors are residents of the State of
Iowa.
Borrowings. Savings deposits are the primary source of funds for
Hawkeye's lending and investment activities. However, during periods when the
supply of lendable funds cannot meet the demand for such loans, the FHLB
System seeks to provide a portion of the funds necessary through loans
(advances) to its members. The FHLB of Des Moines has served as Hawkeye's
primary borrowing source. Advances may be on a secured or unsecured basis,
depending on a number of factors, including the purpose for which the funds
are being borrowed and existing advances outstanding.
As of March 31, 1996, Hawkeye had $10.0 million in advances outstanding
with the FHLB of Des Moines. The advances all carry fixed rates ranging from
5.94% to 6.21% and mature at various dates beginning on July 5, 1996, and
ending on July 7, 2000.
58
<PAGE>
Yields Earned and Rates Paid. Hawkeye's earnings depend significantly
upon the difference between the income it receives from its loan and
investment portfolios and its cost of borrowings, consisting of the interest
paid on deposit accounts and borrowings, if any. The ratios for the nine
months ended March 31, 1996 and 1995 are annualized.
The following table sets forth for the periods and at the date indicated,
the weighted average yields earned on Hawkeye's interest-earning assets, the
weighted average interest rates paid on their interest-bearing liabilities,
the interest rate spread and the net yield on interest-earning assets.
<TABLE>
<CAPTION>
Nine Months
Ended March 31, Year Ended June 30, At At
---------------- -------------------------- March 31, June 30,
1996 1995 1995 1994 1993 1996 1995
---- ---- ---- ---- ---- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Weighted average yield on loan and
mortgage-backed security
portfolio.............................. 8.24% 7.55% 7.63% 7.11% 8.21% 8.07% 7.80%
Weighted average yield on investment
portfolio and other interest-earning
assets................................. 6.37 5.67 5.80 4.59 4.97 6.44 5.86
Weighted average yield on all interest-
earning assets......................... 7.97 7.21 7.30 6.56 7.48 7.78 7.40
Weighted average rate paid on deposit
accounts............................... 4.77 4.28 4.37 3.63 4.17 4.64 4.75
Weighted average rate paid on FHLB
advances and other borrowings.......... 6.10 -- 3.90 7.34 7.21 6.10 6.09
Weighted average rate paid on all
interest-bearing liabilities........... 4.85 4.28 4.37 3.63 4.20 4.73 4.79
Net interest rate spread................ 3.12% 2.93% 2.93% 2.93% 3.28% 3.05% 2.61%
Net yield on average interest-earning
assets................................. 3.46% 3.23% 3.24% 3.16% 3.52% 3.46% 3.13%
</TABLE>
59
<PAGE>
Service Corporations
Hawkeye is permitted under OTS regulations to invest up to 2% of its
assets in service corporations, with an additional investment of 1% of assets
where such investment serves primarily inner-city and community development
purposes. Under such limitations, at March 31, 1996 Hawkeye was authorized to
invest up to approximately $3.7 million and $5.5 million, respectively, in the
stock of, or loans to, service corporations (based upon the 3% limitation).
At March 31, 1996 Hawkeye's investment in stock in its service corporation was
approximately $337,000 and there were no secured or unsecured loans to the
service corporation.
Hawkeye incorporated a wholly-owned service corporation, Mid Central
Service Corporation ("Mid Central"), in August 1975. Mid Central is
headquartered at 715 Eighth Street, Boone, Iowa, in Hawkeye's main office
building and provides Hawkeye with a subsidiary for expanding customer
services.
Competition
Hawkeye faces strong competition in the attraction of savings deposits
(its primary source of lendable funds) and in the origination of real estate
loans. The most direct competition for savings deposits has historically come
from other thrift institutions and from commercial banks located in their
primary market areas. Particularly in times of high interest rates, however,
Hawkeye faces additional significant competition for investors' funds from
short-term money market securities and other corporate and government
securities. Competition for real estate loans comes principally from other
thrift institutions, commercial banks, mortgage banking companies, insurance
companies and other institutional lenders.
Personnel
At March 31, 1996 Hawkeye had 63 full-time employees and 10 part-time
employees. The employees are not represented by a collective bargaining
agreement. Hawkeye believes its employee relations are good.
60
<PAGE>
Properties
The following table sets forth the location of Hawkeye's offices and
other facilities, as well as certain additional information relating to these
offices and facilities at March 31, 1996, and June 30, 1995.
<TABLE>
<CAPTION>
Year Facility Leased Total Net Book Total Net Book Approximate
Office Commenced or Investment at Value at Investment at Value at Square
Location Operation Owned March 31, 1996 March 31, 1996 June 30, 1995 June 30, 1995 Footage
- -------- ------------- ----- -------------- -------------- ------------- ------------- -------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Main Office & Drive Up 1969
715 8th St. and 8th & Arden and Owned $ 2,020 $ 1,649 $ 2,018 $ 1,687 12,000
Boone, Iowa 1985
Madrid Branch
114 S Kennedy 1978 Owned 193 122 190 123 1,200
Madrid, Iowa
Ogden Branch
338 W Walnut St. 1979 Owned 131 82 131 85 1,100
Ogden, Iowa
Boone Lot acquired
S Marshall St. 1990 Owned 67 67 67 67
Boone, Iowa
Carroll Branch
109 E 7th St. 1960 Owned 1,058 666 1,058 685 7,500
Carroll, Iowa
Lake City Branch
106 W Illinois St. 1972 Owned 83 46 83 49 1,500
Lake City, Iowa
Manning Branch
304 Main St. 1975 Owned 70 37 70 38 1,500
Manning, Iowa
</TABLE>
61
<PAGE>
Legal Proceedings
Although Heritage and Hawkeye are, from time to time, involved in various
legal proceedings in the normal course of business, there are, with the
exception noted below, no material legal proceedings to which Heritage or
Hawkeye is a party or to which any of their properties are subject. Hawkeye
has filed a claim in connection with the bankruptcy proceedings involving
Bennett with respect to Hawkeye's interest in the Bennett Funding Asset. See
"Information Concerning the Special Meeting -- Recent Events -- Bennett
Funding Asset."
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
General
Management's Discussion and Analysis of Financial Condition and Results
of Operations is intended to assist in understanding the financial condition
and results of operations of Heritage. The information contained in this
section should be read in conjunction with the Consolidated Financial
Statements of Heritage as of June 30, 1995 and 1994 and for the years ended
June 30, 1995, 1994 and 1993 and the unaudited consolidated condensed
financial statements as of March 31, 1996 and for the nine month periods ended
March 31, 1996 and 1995 and the accompanying notes for such periods which are
included elsewhere in this Prospectus/Proxy Statement.
Average Balance Sheet
The following table sets forth certain information relating to Hawkeye's
average balance sheet and reflects the average yield on assets and average
cost of liabilities for the periods indicated and the average yields earned
and rates paid. Such yields and costs are derived by dividing income or
expense by the average balance of assets or liabilities, respectively, for the
periods presented. For purposes of these tables, average balances were
computed on a monthly basis.
The table also presents information for the periods indicated with
respect to the difference between the weighted average yield earned on
interest-earning assets and weighted average rate paid on interest-bearing
liabilities, or "interest rate spread," which savings institutions have
traditionally used as an indicator of profitability. Another indicator of an
institution's net interest income is its "net yield on interest-earning
assets." Net interest income is affected by the interest rate spread and by
the relative amounts of interest-earning assets and interest-bearing
liabilities. When interest-earning assets approximate or exceed interest-
bearing liabilities, any positive interest rate spread will generate net
interest income.
62
<PAGE>
<TABLE>
<CAPTION>
For the Nine Months Ended March 31,
-------------------------------------------------------------
At March 31, 1996 1995
1996 ----------------------------- ----------------------------
--------------------- Average Average
Yield/ Average Yield/ Average Yield/
Balance Cost Balance Interest Cost Balance Interest Cost
-------- ----------- ------- -------- ------- ------- -------- -------
(Annualized) (Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans.......................... $114,640 8.44% $117,123 $ 7,633 8.69% $ 96,951 $ 5,920 8.14%
Investment securities.......... 31,931 6.44 25,927 1,238 6.37 29,991 1,276 5.67
Mortgage-backed securities..... 32,511 6.77 34,307 1,727 6.71 37,937 1,722 6.05
-------- -------- -------- -------- --------
Total interest-earning assets. 179,082 7.78 177,357 10,598 7.97 164,879 8,918 7.21
-------- --------
Noninterest-earning assets...... 6,317 -- 5,649 5,552
-------- -------- --------
Total assets.................. $185,399 $183,006 $170,431
======== ======== ========
Interest-bearing liabilities:
Deposits....................... $157,313 4.64% $154,485 $ 5,529 4.77% $153,475 $ 4,923 4.28%
Borrowed funds................. 10,000 6.10 10,142 464 6.10 -- 6 --
-------- -------- -------- -------- --------
Total interest-bearing
liabilities.................. 167,313 4.73 164,627 5,993 4.85 153,475 4,929 4.28
-------- --------
Noninterest-bearing liabilities. 4,040 4,488 3,950
-------- -------- --------
Total liabilities............. $171,353 $169,115 $157,425
======== ======== ========
Stockholders' Equity............ 14,046 13,891 13,006
-------- -------- --------
Total liabilities and retained
earnings..................... $185,399 $183,006 $170,431
======== ======== ========
Net interest income............. $ 4,605 $ 3,989
======== ========
Interest rate spread............ 3.05% 3.12% 2.93%
====== ======= =======
Net yield on interest-earning
assets......................... 3.46% 3.46% 3.23%
====== ======= =======
Ratio of average
interest-earning
assets to average interest-
bearing liabilities............ 107.03% 107.73% 107.43%
====== ======= =======
</TABLE>
63
<PAGE>
<TABLE>
<CAPTION>
Year Ended June 30,
------------------------------------------------------------------------------------------------
1995 1994 1993
------------------------------ ----------------------------- ----------------------------
Average Average Average
Average Yield/ Average Yield/ Average Yield/
Balance Interest Cost Balance Interest Cost Balance Interest Cost
-------- -------- ----- -------- -------- ----- -------- -------- -----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans.......................... $ 98,206 $ 8,040 8.19% $ 89,393 $ 7,329 8.20% $ 89,451 $ 8,164 9.13%
Investment securities.......... 29,992 1,741 5.80 36,903 1,694 4.59 38,824 1,930 4.97
Mortgage-backed securities..... 37,684 2,326 6.17 41,733 1,998 4.79 44,598 2,841 6.37
-------- ------- -------- ------- -------- -------
Total interest-earning assets. 165,882 12,107 7.30 168,029 11,021 6.56 172,873 12,935 7.48
------- ------- -------
Noninterest-earning assets...... 5,380 6,081 5,427
-------- -------- --------
Total assets.................. $171,262 $174,110 $178,300
======== ======== ========
Interest-bearing liabilities:
Deposits....................... $153,720 $ 6,719 4.37% $156,718 $ 5,683 3.63% $161,078 $ 6,716 4.17%
Borrowed funds................. 385 15 3.90 286 21 7.34 1,788 129 7.21
-------- ------- -------- ------- -------- -------
Total interest-bearing
liabilities.................. 154,105 6,734 4.37 157,004 5,704 3.63 162,866 6,845 4.20
------- ------- -------
Noninterest-bearing liabilities. 4,047 4,947 5,189
-------- -------- --------
Total liabilities............. $158,152 $161,951 $168,055
======== ======== ========
Stockholders' Equity............ 13,110 12,159 10,245
-------- -------- --------
Total liabilities and retained
earnings..................... $171,262 $174,110 $178,300
======== ======== ========
Net interest income............. $ 5,373 $ 5,317 $ 6,090
======= ======= =======
Interest rate spread............ 2.93% 2.93% 3.28%
====== ====== ======
Net yield on interest-earning
assets......................... 3.24% 3.16% 3.52%
====== ====== ======
Ratio of average
interest-earning
assets to average interest-
bearing liabilities............ 107.64% 107.02% 106.14%
====== ====== ======
</TABLE>
64
<PAGE>
Rate/Volume Analysis. The table below sets forth certain information
regarding changes in interest income for Hawkeye for the periods indicated.
For each category of interest-earning asset and interest-bearing liability,
information is provided on changes attributable to (1) changes in volume
(change in volume multiplied by old rate); (2) changes in rates (change in
rate multiplied by old volume); and (3) changes to rate-volume (changes in
rate multiplied by the change in volume).
<TABLE>
<CAPTION>
Nine Months Ended March 31, Year Ended June 30,
------------------------------- --------------------------------------------------------------------
1996 vs. 1995 1995 vs. 1994 1994 vs. 1993
------------------------------- -------------------------------- ---------------------------------
Increase (Decrease) Increase (Decrease) Increase (Decrease)
Due to Due to Due to
------------------------------- -------------------------------- ---------------------------------
Rate/ Rate/ Rate/
Volume Rate Volume Total Volume Rate Volume Total Volume Rate Volume Total
------ ---- ------ ----- ------ ---- ------ ----- ------ ---- ------ -----
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest income:
Loans and mortgage-backed
securities............... $ 937 $698 $ 83 $1,718 $ 338 $ 682 $ 19 $1,039 $(240) $(1,475) $37 $(1,678)
Investments and other
interest-
earning assets........... (173) 157 (22) (38) (317) 446 (82) 47 (95) (148) 7 (236)
----- ---- ----- ------ ----- ------ ---- ------ ----- ------- --- -------
Total interest income.... 764 855 61 1,680 21 1,128 (63) 1,086 (335) (1,623) 44 (1,914)
----- ---- ----- ------ ----- ------ ---- ------ ----- ------- --- -------
Interest expense:
Deposits.................. 32 610 (36) 606 (109) 1,160 (15) 1,036 (182) (869) 18 (1,033)
Borrowed funds............ -- -- 458 458 7 (9) (4) (6) (108) -- -- (108)
----- ---- ----- ------ ----- ------ ---- ------ ----- ------- --- -------
Total interest expense... 32 610 422 1,064 (102) 1,151 (19) 1,030 (290) (869) 18 (1,141)
----- ---- ----- ------ ----- ------ ---- ------ ----- ------- --- -------
Net effect on net interest
income.................... $ 732 $245 $(361) $ 616 $ 123 $ (23) $(44) $ 56 $ (45) $ (754) $26 $ (773)
===== ==== ===== ====== ===== ====== ==== ====== ===== ======= === =======
</TABLE>
65
<PAGE>
Comparison of Financial Condition as of March 31, 1996, June 30, 1995 and June
30, 1994
Total assets of Heritage increased by $7.7 million to $185.4 million at
March 31, 1996 from $177.7 million at June 30, 1995, primarily due to an
increase in loans receivable, offset by a decrease in investment securities
and mortgage-backed securities. Securities available for sale increased $4.1
million during the nine month period ended March 31, 1996 to $19.6 million
from $15.5 million at June 30, 1995 while securities held to maturity
decreased by $6.0 million during the same nine month period to $4.1 million
from $10.1 million at June 30, 1995. The change in securities available for
sale and securities held to maturity is primarily due to the transfer of $8.4
million of securities from held to maturity to available for sale
classification and the subsequent sale of certain securities available for
sale. During the year ended June 30, 1994, Heritage adopted the provisions of
Statement of Financial Accounting Standards ("SFAS") No. 115, "Accounting for
Certain Investments in Debt and Equity Securities." SFAS No. 115 requires
classification of debt and equity securities into three securities. Debt
securities classified as "held to maturity" are those securities which
Heritage has the positive intent and ability to hold to maturity and are
reported at amortized cost. Debt and equity securities that are bought and
held principally for the purpose of selling them in the near term must be
reported at fair value, with unrealized gains and losses included in earnings.
All other debt and equity securities must be considered available for sale and
must be reported at fair value, with unrealized gains and losses excluded from
earnings but reported as a separate component of stockholders' equity (net of
tax effects). During 1995, Financial Accounting Standards Board("FASB")
Special Report - "A Guide to Implementation of Statement No. 115 on Accounting
for Certain Investments in Debt and Equity Securities" allowed a reassessment
of the appropriateness of the classification of securities under certain
circumstances. In connection therewith, in December 1995 Heritage reclassified
held-to-maturity securities with an amortized cost of $8.4 million and a fair
value of $8.3 million as available for sale in accordance with the guidance
provided by the report. The reclassification was made at fair value and the
difference between the amortized cost and fair value on the date of transfer
was recognized as a decrease in stockholders' equity, net of the related
deferred tax effect.. Mortgage-backed securities held to maturity decreased
$4.1 million to $32.5 million at March 31, 1996 from $36.6 million at June 30,
1995 due to normal principal paydowns. Loans receivable, net increased $15.1
million to $114.6 million at March 31, 1996 from $99.5 million at June 30,
1995 primarily due to the purchase of approximately $21 million of home equity
loans with a yield of approximately 9.0%. Hawkeye purchased these loans due to
their greater spread as compared to other investment opportunities. Deposits
of Hawkeye increased $2.9 million to $160.1 million at March 31, 1996 from
$157.1 million at June 30, 1995. The increase in deposits was due to an
increase in demand and money market accounts and is considered to be a normal
fluctuation. Borrowed funds increased $5.0 million during the nine month
period to $10.0 million at March 31, 1996 from $5.0 million on June 30, 1995.
These funds were borrowed from the FHLB of Des Moines and were used to acquire
home equity loans. Total stockholders' equity increased to $14.0 million at
March 31, 1996 from $13.7 million at June 30, 1995. The $392,000 increase was
primarily due to the retention of net income recorded during the nine month
period less cash dividends paid of $541,000 and a decrease in the unrealized
gain on securities available for sale, net of taxes, totaling $324,000. The
portfolio of available for sale securities is comprised primarily of
investment securities carrying fixed interest rates. The fair value of these
securities is subject to change in interest rates and fair value of these
securities decreased due to an increase in interest rates since the previous
report period.
Total assets of Heritage increased by $5.2 million to $177.7 million at
June 30, 1995 from $172.5 million at June 30, 1994, primarily due to an
increase in loans receivable, offset by a decrease in investment securities
and mortgage-backed securities. Securities available for sale decreased by
$2.9 million to $15.5 million at June 30, 1995 from $18.4 million at June 30,
1994 from the sale of securities available for sale. Securities held to
maturity increased $200,000 to $10.1 million at June 30, 1995 from $9.9
million at June 30, 1994. Mortgage-backed securities decreased $3.7 million to
$36.6 million from $40.2 million, due primarily to normal principal paydowns.
Loans receivable, net increased $8.3 million to $99.5 million at June 30, 1995
from $91.2 million at June 30, 1994. This increase is attributed to an
increase of $5.0 million in automobile loans, primarily acquired dealer paper,
and an increase in demand for home equity and second mortgage loans. The
increase in dealer paper was accomplished by the Bank becoming more aggressive
in its pricing structure with auto dealers. Deposits were virtually unchanged,
decreasing $550,000 to $157.1 million at June 30, 1995 from $157.7 million at
June 30, 1994. Borrowed funds increased $5.0 million to $5.0 million at June
30, 1995 from none at June 30, 1994. These funds were borrowed from the FHLB
of Des Moines in order to fund a purchase of home equity loans in July 1995.
Total stockholders'
66
<PAGE>
equity increased $700,000 to $13.7 million at June 30, 1995 from $13.0 million
at June 30, 1994. This change was primarily due to net earnings for fiscal
year 1995, offset by dividends of $623,000 and an increase in the unrealized
gain on securities available for sale, net of taxes, totaling $395,000. These
funds were used to increase liquidity in order to purchase higher yielding
home equity loans in July 1995. The portfolio of securities available for
sale is comprised primarily of investment securities carrying fixed interest
rates. The fair value of these securities is subject to change in interest
rates and the fair value of these securities increased due to a decrease in
interest rates since the previous reporting period.
Comparison of Operating Results for the Nine Months Ended March 31, 1996 and
1995
Interest Income. Total interest income increased $1.7 million for the
---------------
nine months ended March 31, 1996 to $10.6 million as compared to $8.9 million
for the same nine month period a year earlier. The increase was due primarily
to the purchase of approximately $21 million in home equity loans yielding
approximately 9.0%. Such yield was in excess of what had been realized from
other interest-earning alternatives. The average balance of loans outstanding
increased by $20.0 million and the average yield increased from 8.14% to 8.69%
from March 31, 1995 to March 31, 1996.
Interest Expense. Interest on savings deposits increased by $607,000 to
----------------
$5.5 million from $4.9 million for the nine month period ended March 31, 1996
compared to the same period a year earlier. The increase was primarily due to
the increase in the average rate paid on deposit accounts increasing from
4.28% for 1995 to 4.77% for 1996, due to a general increase in market interest
rates. Interest on borrowed funds increased by $458,000 to $464,000 from
$6,000 for the nine month period ended March 31, 1996 compared to the same
period a year earlier. The increase was due to the increase in borrowed funds
used to fund the purchase of home equity loans discussed above.
Provision for Loans Losses. No provision for loan losses was made during
--------------------------
the nine month period ended March 31, 1996 as compared to a $40,000 provision
for loan losses during the nine months ended March 31, 1995. The decrease of
$40,000 for the nine month period was due to management's decision that the
allowance for loan losses was adequate and no provision was deemed necessary.
The allowance is maintained at an amount that management believes will be
adequate to absorb estimated losses on existing loans that may become
uncollectible, based on evaluation of the collectibility of loans and prior
loss experience. This evaluation also takes into consideration such factors
as changes in the nature and volume of the loan portfolio, overall portfolio
quality, review of specific problem loans, and current economic conditions
that may affect the borrower's ability to pay. While management uses the best
information available to make its evaluation, future adjustments to the
allowance may be necessary if there are significant changes in economic
conditions. The level of non-performing assets increased from $46,000 at June
30, 1995 to $2.0 million at March 31, 1996, primarily due to the Bennett
Funding Asset of approximately $1.8 million being placed on nonaccrual status.
In evaluating the March 31, 1996 allowance for loan losses, Bank management
reviewed the Bank's files relating to this loan. Based on this review, and
the limited information available at that time, management did not believe
that an adjustment to the allowance for loan losses was warranted. As of June
30, 1996, a specific reserve totaling $1.8 million was established for the
Bennett Funding Asset. See "Information Concerning the Special Meeting --
Recent Events -- Bennett Funding Asset."
Noninterest Income. Total noninterest income increased $463,000 to
------------------
$652,000 from $189,000 for the nine months ended March 31, 1996. The increase
was due primarily to a $244,000 gain on the sale of interest-earning assets,
compared to a loss of $188,000 in the previous period.
Noninterest Expense. Total noninterest expense is unchanged at $3.3
-------------------
million for the nine months ended March 31, 1996 and 1995. Compensation and
benefits increased by $138,000 due to an increase in accrued bonuses, which
was offset by a decrease in other noninterest expense of $117,000. The
decrease in other noninterest expense was due primarily to the general
decrease in operating expenses, including advertising costs, professional fees
and other expenses associated with merging First Federal with Hawkeye.
Net Income. Net income increased by $609,000, or $2.89 per share, to
----------
$1.2 million, or $6.09 per share, for the nine months ended March 31, 1996 as
compared to the period a year earlier. In calculating earnings per
67
<PAGE>
share, the weighted average number of shares outstanding increased during the
nine month period ended March 31, 1996 to 193,045, including the effect of
dilutive stock options. The increase in the weighted average number of
Heritage Common Stock outstanding was due to certain directors and officers of
Hawkeye exercising a total of 1,721 stock options.
Comparison of Operating Results for the Fiscal Years Ended June 30, 1995, 1994
and 1993
Interest Income. Total interest income for the fiscal year ended June
---------------
30, 1995 was $12.1 million compared to $11.0 million and $12.9 million for the
fiscal years ended June 30, 1994 and 1993, respectively. The increase in
interest income between 1995 and 1994 of $1.1 million was caused primarily by
an increase in consumer loans receivable and the increase in interest rates
during the fiscal year increasing the yield of the adjustable-rate mortgage-
backed securities and short-term investment securities.
The decrease of $1.9 million from 1993 to 1994 was due primarily to an
overall decrease in interest rates during the fiscal year. The overall rate
on interest-earning assets decreased from 7.48% in 1993 to 6.56% in 1994.
Interest Expense. Total interest expense for Hawkeye for the fiscal year
----------------
ended June 30, 1995 was $6.7 million compared to $5.7 million and $6.8 million
for the fiscal years ended June 30, 1994 and 1993, respectively. The
composition of total interest expense consisted of interest paid on savings
deposits, which totaled $6.7 million, $5.7 million and $6.7 million for the
fiscal years ended June 30, 1995, 1994 and 1993, respectively, and interest on
borrowed money, which totaled $15,000, $21,000 and $129,000 for the fiscal
years ended June 30, 1995, 1994 and 1993, respectively. The increase in
interest on savings deposits between 1995 and 1994 was caused primarily by the
increase in market interest rates during the fiscal year and change in mix of
deposits toward higher earning certificate of deposit accounts. The decrease
in interest on savings deposits between 1994 and 1993 was caused primarily by
a decrease in certificate of deposit accounts and a decrease in market
interest rates during the fiscal year. The interest on borrowed money for the
fiscal year ended June 30, 1993 was due to Heritage borrowing money to
facilitate the purchase of First Federal.
Although market interest rates have fluctuated over the past three years,
Hawkeye has maintained a relatively consistent interest rate spread of 2.93%,
2.93% and 3.28% for the fiscal years ended June 30, 1995, 1994 and 1993,
respectively.
Provision for Loan Losses. The provision for loan losses was $40,000 for
-------------------------
the fiscal year ended June 30, 1995 compared to a reduction in the allowance
of $130,000 for each of the fiscal years ended June 30, 1994 and 1993. The
loan loss provision was provided by Hawkeye in order to reserve against
potential losses from present to future dispositions of foreclosed and
repossessed assets and loan losses. The reduction of the allowance was due to
management reviewing its loan loss reserve position and determining that the
reserve was more than adequate after the acquisition of First Federal, based
on loss experience known and inherent risk in the loan portfolio, prevailing
market conditions, and management's judgment as to total loan portfolio
collectibility.
Noninterest Income. Noninterest income decreased to $329,000 for the
------------------
fiscal year ended June 30, 1995 compared to $902,000 and $857,000 for the
fiscal years ended June 30, 1994 and 1993, respectively. The $573,000
decrease between 1995 and 1994 was due primarily to a loss on the sale of
interest-earning assets of $197,000 as compared to a gain of $189,000 in 1994.
Noninterest Expense. Noninterest expense for the fiscal year ended June
-------------------
30, 1995 was $4.4 million compared to $4.7 million and $3.8 million for the
fiscal years ended June 30, 1994 and 1993, respectively. The decrease of
$210,000 between 1995 and 1994 was due primarily to the $51,000 decrease in
compensation, payroll taxes and fringe benefits and a $252,000 decrease in
unrealized loss from loans held for sale. These decreases were offset by a
general increase in other expenses caused partially by expenses associated
with merging First Federal with Hawkeye. The increase in noninterest expense
between 1994 and 1993 of $880,000 was primarily due to a $231,000 increase in
compensation and benefits, a $213,000 net gain from foreclosed real estate in
1993 compared to a net loss of $9,000 in 1994 and a $284,000 increase in
unrealized loss from loans held for sale. The unrealized loss on
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<PAGE>
loans held for sale was caused by an increase in interest rates during the
time period in which the loans were being held for sale.
Net Income. Net income for Heritage for the fiscal year ended June 30,
----------
1995 was $826,000, or $4.64 per share, compared to $1.9 million, or $10.84 per
share, and $2.4 million, or $13.89 per share, for the fiscal years ended June
30, 1994 and 1993, respectively.
In calculating earnings per share, the weighted average number of shares
of Heritage Common Stock outstanding was 177,969 at June 30, 1995 compared to
175,676 and 173,686 at June 30, 1994 and 1993, respectively. The increase in
the weighted average number of outstanding shares was due to certain officers
and directors exercising stock options.
Impact of New Accounting Standards
The Financial Accounting Standards Board has approved for the year ending
June 30, 1996, Statement No. 114, Accounting by Creditors for Impairment of a
Loan and Statement No. 118 which amended certain provisions of Statement No.
114 with respect to income recognition and disclosures. The Financial
Accounting Standards Board has also approved Statement No. 121, Accounting for
Impairment of Long-Lived Assets or Long-Lived Assets to Be Disposed Of,
Statement No. 122, Accounting for Mortgage Servicing Rights and Statement No.
123, Accounting for Stock-Based Compensation, which are effective for years
beginning after December 15, 1995. Adoption of Statements 114, 118, 121, 122
and 123 are not expected to have a material adverse effect on the Company's
financial statements when adopted.
Liquidity
The ability of Hawkeye to satisfy its short-term commitments requires the
maintenance of adequate liquidity. Liquidity is the ability to generate
sufficient cash to meet loan commitments, savings withdrawals and maturing
liabilities. Funds to meet these demands are obtained from conversion of
assets to cash, savings in-flows, loan principal payments, interest payments,
advances from the FHLB and the ability of Hawkeye to obtain other funds in the
marketplace. In addition, OTS regulations require all thrift institutions to
maintain a certain percentage of their assets in short-term investments.
Liquidity management requires the monitoring of portfolio maturities, future
commitments and the relative cost of funds in the marketplace. Hawkeye is in
compliance with federal regulatory liquidity requirements.
As of June 30, 1995, $10.7 million, or 6.04% of assets, were in interest
or noninterest-bearing deposits, an additional $25.6 million, or 14.42% of
assets, were invested in securities available for sale or held to maturity,
and $36.6 million, or 20.59% of assets, were invested in mortgage-backed
securities held to maturity.
The ability of Hawkeye to declare and pay dividends to the Company is
limited by regulatory restrictions. See "Regulation -- Federal Regulation of
Hawkeye -- Dividend Limitations."
Asset/Liability Management and Interest Rate Sensitivity
Hawkeye continuously monitors its asset and liability sensitivity to
interest rates.
Hawkeye concentrates on originating mortgage loans with typical interest
adjustment periods of three years or less, or which mature in seven years or
less, and consumer loans with maturities of five years or less. Generally,
Hawkeye no longer originates long-term, fixed-rate loans unless they qualify
for sale in the secondary market. Hawkeye also invests its excess cash in
U.S. Government obligations, which typically mature within five years.
Interest rate sensitivity management (management of rate sensitive
interest-earning assets and rate sensitive interest-bearing liabilities)
focuses on maintaining stability of the net interest margin by matching rate
sensitive sources of funds with compatible rate sensitive uses of funds. The
effective matching of interest-earning assets and
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<PAGE>
interest-bearing liabilities is necessary to achieve satisfactory financial
results for Hawkeye. Such matching has been necessitated by changes in the
financial markets, government deregulation, economic volatility and customer
awareness of alternative investments.
With the current customer trend toward shorter term market rate
investments, Hawkeye's portfolio has become even more sensitive to interest
rate fluctuation. To more properly match interest-earning assets with these
liabilities, Hawkeye has developed a plan to shorten the maturities of rate
sensitive assets. This plan includes the sale of fixed-rate loans, the
purchase and origination of variable interest rate loans with shorter
maturities, the origination of shorter-term consumer loans and the purchase of
government obligations with shorter maturities of one-to-five years.
The matching of assets and liabilities may be analyzed by examining the
extent to which such assets and liabilities are "interest rate sensitive" and
by monitoring an institution's interest rate sensitivity "gap." An asset or
liability is said to be interest rate sensitive within a specified time period
if it will mature or reprice within that period. The interest rate
sensitivity gap is defined as the difference between the amount of interest-
earning assets maturing or repricing within a specific time period and the
amount of interest-bearing liabilities maturing or repricing within that time
period. A gap is considered positive when the amount of interest rate
sensitive assets exceeds the amount of interest rate sensitive liabilities,
and is considered negative when the amount of interest rate sensitive
liabilities exceeds the amount of interest rate sensitive assets. Generally,
during a period of rising interest rates, a negative gap would adversely
affect net interest income while a positive gap would result in an increase in
net interest income, while conversely during a period of falling interest
rates, a negative gap would result in an increase in net interest income,
while a positive gap would negatively affect net interest income.
The following table presents Hawkeye's interest sensitivity gap between
interest-earning assets and interest-bearing liabilities at March 31, 1996.
Prepayment rates on loans and decay rates on deposits are based upon
assumptions used by the OTS.
<TABLE>
<CAPTION>
Over One Over Five Over Ten Over
One Year Through Through Through Twenty
or Less Five Years Ten Years Twenty Years Years Total
------- ---------- --------- ------------ ------- -------
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Fixed-rate mortgage loans and
mortgage-backed securities......... $ 7,342 $18,889 $ 6,717 $ 1,757 $ 174 $ 34,879
Variable-rate mortgage loans and
mortgage-backed securities......... 33,668 23,327 -- -- -- 56,995
Other loans......................... 24,020 30,333 2,796 -- -- 57,149
Investment securities............... 14,286 15,211 2,434 -- -- 31,931
------- ------- ------- ------- ------- --------
Total............................. 79,316 87,760 11,947 1,757 174 180,954
------- ------- ------- ------- ------- --------
Interest-bearing liabilities:
Deposits............................ 79,325 67,712 6,358 3,918 -- 157,313
Borrowings.......................... 1,000 9,000 -- -- -- 10,000
------- ------- ------- ------- ------- --------
Total............................. 80,325 76,712 6,358 3,918 -- 167,313
------- ------- ------- ------- ------- --------
Interest sensitivity gap............. $(1,009) $11,048 $ 5,589 $(2,161) $ 174 $ 13,641
======= ======= ======= ======= ======= ========
Cumulative interest sensitivity gap.. $(1,009) $10,039 $15,628 $13,467 $13,641
======= ======= ======= ======= =======
Cumulative interest sensitivity gap
to total interest-earning assets.... (0.56)% 5.55% 8.64% 7.44% 7.54%
======= ======= ======= ======= =======
</TABLE>
70
<PAGE>
REGULATION
As a federally chartered and federally insured savings association,
Hawkeye is subject to extensive regulation. Lending activities and other
investments must comply with various statutory and regulatory capital
requirements. Hawkeye is regularly examined by its federal regulators and
files periodic reports concerning Hawkeye's activities and financial
condition. Hawkeye's relationship with its depositors and borrowers also is
regulated to a great extent by federal and state laws, especially in such
matters as the ownership of savings accounts and the form and content of the
Hawkeye's mortgage documents.
Federal Regulation of Hawkeye
The OTS has extensive authority over the operations of all insured
savings associations. As part of this authority, Hawkeye is required to file
periodic reports with the OTS and is subject to periodic examinations by the
OTS and the FDIC.
The OTS has established a schedule for the assessment of fees upon all
savings associations to fund the operations of the OTS. A schedule of fees
has also been established for the various types of applications and filings
made by savings associations with the OTS. The general assessment, to be paid
on a semi-annual basis, is computed upon the savings association's total
assets, including consolidated subsidiaries, as reported in the association's
latest quarterly thrift financial report. Savings associations that are
classified as "troubled" (i.e., having a supervisory rating of "4" or "5" or
subject to a conservatorship) are required to pay a 50% premium over the
standard assessment. For the first half of 1996, Hawkeye's assessment under
the semi-annual assessment procedure was $27,000.
The investment and lending authority of Hawkeye is prescribed by federal
laws and regulations, and Hawkeye is prohibited from engaging in any
activities not permitted by such laws and regulations. These laws and
regulations generally are applicable to all federally chartered savings
associations and many also apply to state-chartered savings associations.
Among other things, OTS regulations provide that no savings association
may invest in corporate debt securities not rated in one of the four highest
rating categories by a nationally recognized rating organization. In
addition, the HOLA provides that loans secured by nonresidential real property
may not exceed 400% of regulatory capital, subject to increase by the OTS on a
case-by-case basis.
Hawkeye is subject to limitations on the aggregate amount of loans that
it can make to any one borrower, including related entities. Applicable
regulations generally do not permit loans-to-one borrower to exceed 15% of
unimpaired capital and surplus, provided that loans in an amount equal to an
additional 10% of unimpaired capital and surplus also may be made to a
borrower if the loans are fully secured by readily marketable securities. The
OTS by regulation has amended the loans-to-one borrower rule to permit savings
associations meeting certain requirements, including fully phased-in capital
requirements, to extend loans-to-one borrower in additional amounts under
circumstances limited essentially to loans to develop or complete residential
housing units. At March 31, 1996, Hawkeye's lending limit under this
restriction was $2.3 million.
Proposed Federal Legislation. Currently, Congress has under
consideration various proposals which, if implemented, would have a material
effect on the financial institutions in general, and Hawkeye in particular.
These proposals include, among others: (i) the consolidation of the four
Federal banking agencies (the Federal Reserve Board, OTS, FDIC, and the Office
of the Comptroller of the Currency), (ii) the imposition of a one-time
assessment on all SAIF-member institutions, like Hawkeye (See "-- Insurance of
Accounts") and (iii) requiring all thrifts, like Hawkeye, to convert to a
national or state bank charter (which may result in adverse income tax
consequences if a thrift's bad debt reserve would be required to be recaptured
into taxable income). The outcome of these various proposals is uncertain and
Hawkeye is unable to determine the extent to which legislation, if enacted,
would affect its business.
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<PAGE>
Federal Home Loan Bank System. The FHLB System, consisting of 12 FHLBs,
now is under the jurisdiction of the Federal Housing Finance Board ("FHFB").
The designated duties of the FHFB are to: supervise the FHLBs; ensure that
the FHLBs carry out their housing finance mission; ensure that the FHLBs
remain adequately capitalized and able to raise funds in the capital market;
and ensure that the FHLBs operate in a safe and sound manner.
Hawkeye, as a member of the FHLB of Des Moines, is required to acquire
and hold shares of capital stock in the FHLB of Des Moines equal to the
greater of (i) 1.0% of the aggregate outstanding principal amount of
residential mortgage loans, home purchase contracts and similar obligations at
the beginning of each year, or (ii) 1/20 of its advances (borrowings) from the
FHLB of Des Moines. Hawkeye complied with this requirement with an investment
in FHLB of Des Moines stock of $1.5 million at March 31, 1996.
Among other benefits, the FHLB provides a central credit facility
primarily for member institutions. It is funded primarily from proceeds
derived from the sale of consolidated obligations of the FHLB System. It
makes advances to members in accordance with policies and procedures
established by the FHFB and the Board of Directors of the FHLB of Des Moines.
At March 31, 1996, Hawkeye had $10 million in advances from the FHLB of Des
Moines.
Liquidity. Under OTS regulations, a member thrift institution is
required to maintain an average daily balance of liquid assets (cash, certain
time deposits and savings accounts, bankers' acceptances, and specified U.S.
Government, state or federal agency obligations and certain other investments)
equal to a monthly average of not less than a specified percentage of its net
withdrawable accounts plus short-term borrowings. This liquidity requirement,
which is currently 5% may be changed from time to time by the OTS depending
upon economic conditions and the deposit flows of member associations.
Existing OTS regulations also require each member institution to maintain an
average daily balance of short-term liquid assets at a specified percentage
(currently 1%) of the total of its net withdrawable savings accounts and
borrowings payable in one year or less. Monetary penalties may be imposed for
failure to meet liquidity requirements. Hawkeye's average liquidity ratio for
the month of March, 1996 was 23.93%, which exceeded the applicable
requirements. Hawkeye has never been subject to monetary penalties for
failure to meet its liquidity requirements.
Insurance of Accounts. The deposits of Hawkeye are presently insured by
the SAIF, which together with the BIF are the two insurance funds administered
by the FDIC. As a result of the BIF reaching its statutory reserve ratio, the
FDIC revised the premium schedule for BIF insured institutions to provide a
range of .04% to .31% of deposits. The revisions became effective in the
third quarter of 1995. The BIF premium schedule was further revised,
effective January 1996, to provide a range of 0% to .27% with an annual
minimum assessment of $2,000, essentially eliminating deposit insurance
premiums for many BIF-insured institutions. As a result of these adjustments,
BIF insured institutions now generally pay lower premiums than SAIF insured
institutions.
The FDIC has stated that the SAIF is not expected to attain its
designated reserve ratio until the year 2002. As a result, SAIF insured
members will generally be subject to higher deposit insurance premiums than
BIF insured institutions until, all things being equal, the SAIF attains its
required reserve ratio.
The effect of this disparity on Hawkeye and other SAIF members is
uncertain at this time. It may have the effect of permitting BIF members
banks to offer loan and deposit products on more attractive terms that SAIF
members due to the cost savings achieved through lower premiums, thereby
placing SAIF at a competitive disadvantage. In order to eliminate this
disparity, a number of proposals to recapitalize the SAIF have been considered
recently by the United States Congress. One plan under current consideration
by the United States Congress provides for a one-time assessment to be imposed
on all deposits assessed at the SAIF rates, as of March 31, 1995, in order to
recapitalize the SAIF to a level equal to 1.25% of insured deposits and
eliminate the disparity. The special assessment rate under such plan is
anticipated to range from .80% to .90%. Based on Hawkeye's level of SAIF
deposits at March 31, 1995, and assuming a special assessment of .85%,
Hawkeye's assessment would be
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<PAGE>
approximately $1.3 million on a pre-tax basis. Accordingly, this special
assessment would significantly increase noninterest expense and adversely
affect Hawkeye's results of operation. Conversely, depending on Hawkeye's
capital level and supervisory rating, and assuming, although there can be no
assurance, that if the insurance premium levels for BIF and SAIF members are
again equalized, deposits insurance premiums could decrease significantly to
the minimum assessment for future periods.
The United States Congress is also considering legislation that would
require all Federal thrift institutions such as Hawkeye, to either convert to
a national bank or a state charted depository institution by January 1, 1998.
The OTS would also be abolished and its functions transferred among the other
federal banking regulators. Certain aspects of the legislation remain to be
resolved and therefore no assurance can be given as to whether or in what form
the legislation will be enacted or its effect on Heritage and Hawkeye. See
"Information Concerning the Special Meeting -- Recent Events -- Deposit
Insurance Premiums".
The FDIC may terminate the deposit insurance of any insured depository
institutions if it determines after a hearing that the institutions has
engaged or is engaging in unsafe or unsound practices, is in an unsafe or
unsound condition to continue operations, or has violated any applicable law,
regulation, order or any condition imposed by an agreement with the FDIC. It
also may suspend deposit insurance temporarily during the hearing process for
the permanent termination of insurance, if the institution has no tangible
capital. If insurance of accounts is terminated, the accounts at the
institution at the time of termination, less subsequent withdrawals, shall
continue to be insured for a period of six months to two years, as determined
by the FDIC. Management is aware of no existing circumstances which could
result in termination of the deposit insurance of Hawkeye.
Prompt Corrective Action. Under Section 38 of the FDIA, as added by the
Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA"), each
federal banking agency is required to implement a system of prompt corrective
action for institutions which it regulates. In September 1992, the federal
banking agencies adopted substantially similar regulations which are intended
to implement the system of prompt corrective action established by Section 38
of the FDIA, which became effective on December 19, 1992. Under the
regulations, an institution shall be deemed to be (i) "well capitalized" if it
has a total risk-based capital ratio of 10.0% or more, has a Tier I risk-based
capital ratio of 6.0% or more, has a Tier I leverage capital ratio of 5.0% or
more and is not subject to specified requirements to meet and maintain a
specific capital level for any capital measure: (ii) "adequately capitalized"
if it has a total risk-based capital ratio of 8.0% or more, a Tier I risk-
based capital ratio of 4.0% or more and a Tier I leverage capital ratio of
4.0% or more (3.0% under certain circumstances) and does not meet the
definition of "well capitalized," (iii) "undercapitalized" if it has a total
risk-based capital ratio that is less than 8.0%, a Tier I risk-based capital
ratio that is less than 1.0% or a Tier I leverage capital ratio that is less
than 4.0% (3.0% under certain circumstances), (iv) "significantly
undercapitalized" if it has a total risk-based capital ratio that is less than
6.0%, a Tier I risk-based capital ratio that is less than 3.0% or a Tier I
leverage capital ratio that is less than 3.0% and (v) "critically
undercapitalized" if it has a ratio of tangible equity to total assets that is
equal to or less than 2.0%.
Section 38 of the FDIA and the implementing regulations also provide that
a federal banking agency may, after notice and an opportunity for a hearing,
reclassify a well capitalized institution as adequately capitalized and may
require an adequately capitalized institution or an undercapitalized
institution to comply with supervisory actions as if it were in the next lower
category if the institution is in an unsafe or unsound condition or engaging
in an unsafe or unsound practice. (The FDIC may not, however, reclassify a
significantly undercapitalized institution as critically undercapitalized.)
An institution generally must file a written capital restoration plan
which meets specified requirements, as well as a performance guaranty by each
company that controls the institution, with the appropriate federal banking
agency within 45 days of the date that the institution receives notice or is
deemed to have notice that it is undercapitalized, significantly
undercapitalized or critically undercapitalized. Immediately upon becoming
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<PAGE>
undercapitalized, an institution shall become subject to the provisions of
Section 38 of the FDIA, which sets forth various mandatory and discretionary
restrictions on its operations.
At March 31, 1996, Hawkeye was a "well capitalized" institution under the
prompt corrective action regulations of the OTS.
Standards for Safety and Soundness. Federal law requires the federal
banking regulatory agencies to prescribe, by regulation or guideline,
standards for all insured depository institutions and depository institution
holding companies relating to: (i) internal controls, information systems and
internal audit systems; (ii) loan documentation; (iii) credit underwriting;
(iv) interest rate risk exposure; (v) asset growth; and (vi) compensation,
fees and benefits. The OTS, as well as the other federal banking agencies,
has adopted safety and soundness guidelines on matters such as loan
underwriting and documentation, internal controls and audit systems, interest
rate risk exposure and compensation and other employee benefits. Any
institution which fails to comply with these standards must submit a
compliance plan. A failure to submit a compliance plan or to comply with an
approved compliance plan will result in further enforcement action against the
institution. Savings and loan holding companies are also required to ensure
that transactions and relationship with their subsidiary savings associations
do not have a detrimental effect on the safe and sound operation of the
association.
Qualified Thrift Lender Test. All savings associations are required to
meet a QTL test set forth in Section 10(m) of the HOLA and regulations of the
OTS thereunder to avoid certain restrictions on their operations. A savings
institution that fails to become or remain a QTL shall either become a
national bank or be subject to the following restrictions on its operations:
(1) the association may not make any new investment or engage in activities
that would not be permissible for national banks; (2) the association may not
establish any new branch office where a national bank located in the savings
institution's home state would not be able to establish a branch office; (3)
the association shall not be eligible to obtain new advances from any FHLB;
and (4) the payment of dividends by the association shall be subject to the
rules regarding the statutory and regulatory dividend restrictions applicable
to national banks. Also, beginning three years after the date on which the
savings institution ceases to be a qualified thrift lender, the savings
institution would be prohibited from retaining any investment or engaging in
any activity not permissible for a national bank and would be required to
repay any outstanding advances to any FHLB. In addition, within one year of
the date on which a savings association controlled by a company ceases to be a
QTL, the company must register as a bank holding company and, consequently,
becomes subject to the rules applicable to such companies. A savings
institution may requalify as a qualified thrift lender if it thereafter
complies with the QTL test.
Currently, the QTL test requires that 65% of an institution's "portfolio
assets" (as defined) consist of certain housing and consumer-related assets on
a monthly average basis in nine out of every 12 months. Assets that qualify
without limit for inclusion as part of the 65% requirement are loans made to
purchase, refinance, construct, improve or repair domestic residential housing
and manufactured housing; home equity loans; mortgage-backed securities (where
the mortgages are secured by domestic residential housing or manufactured
housing); FHLB stock; and direct or indirect obligations of the FDIC. In
addition, the following assets, among others, may be included in meeting the
test subject to an overall limit of 20% of the savings institution's portfolio
assets: 50% of residential mortgage loans originated and sold within 90 days
of origination; 100% of consumer and educational loans (limited to 10% of
total portfolio assets); and stock issued by the FHLMC or the FNMA. Portfolio
assets consist of total assets minus the sum of (i) goodwill and other
intangible assets, (ii) property used by the savings institution to conduct
its business, and (iii) liquid assets up to 20% of the institution's total
assets.
At March 31, 1996, Hawkeye complied with the current QTL requirement.
Capital Requirements. Under OTS regulations a savings association must
satisfy three minimum capital requirements: core capital, tangible capital and
risk-based capital. Savings associations must meet all of the standards in
order to comply with the capital requirements.
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<PAGE>
OTS capital regulations establish a 3% core capital ratio (defined as the
ratio of core capital to adjusted total assets). Core capital is defined to
include common stockholders' equity, noncumulative perpetual preferred stock
and any related surplus, and minority interests in equity accounts of
consolidated subsidiaries, less (i) any intangible assets; and (ii) equity and
debt investments in subsidiaries that are not "includable subsidiaries," which
is defined as subsidiaries engaged solely in activities not impermissible for
a national bank, engaged in activities impermissible for a national bank but
only as an agent for its customers, or engaged solely in mortgage-banking
activities. In calculating adjusted total assets, adjustments are made to
total assets to give effect to the exclusion of certain assets from capital
and to account appropriately for the investments in and assets of both
includable and nonincludable subsidiaries. Institutions that fail to meet the
core capital requirement would be required to file with the OTS a capital plan
that details the steps they will take to reach compliance. In addition, the
OTS prompt corrective action regulation provides that a savings institution
that has a core capital leverage ratio of less than 4% (3% for institutions
receiving the highest CAMEL examination rating) will be deemed to be
"undercapitalized" and may be subject to certain restrictions. See "- Prompt
Corrective Action."
Savings associations also must maintain "tangible capital" not less than
1.5% of it's adjusted total assets. "Tangible capital" is defined, generally,
as core capital minus any "intangible assets."
Each savings institution must maintain total capital equal to at least 8%
of risk-weighted assets. Total capital consists of the sum of core and
supplementary capital, provided that supplementary capital cannot exceed core
capital, as previously defined. Supplementary capital includes (i) permanent
capital instruments such as cumulative perpetual preferred stock, perpetual
subordinated debt, and mandatory convertible subordinated debt, (ii) maturing
capital instruments such as subordinated debt, intermediate-term preferred
stock and mandatory redeemable preferred stock, subject to an amortization
schedule, and (iii) general valuation loan and lease loss allowances up to
1.25% of risk-weighted assets.
The risk-based capital regulation assigns each balance sheet asset held
by a savings institution to one of four risk categories based on the amount of
credit risk associated with that particular class of assets. Assets not
included for purposes of calculating capital are not included in calculating
risk-weighted assets. The categories range from 0% for cash and securities
that are backed by the full faith and credit of the U.S. Government to 100%
for repossessed assets or assets more than 90 days past due. Qualifying
residential mortgage loans (including multi-family mortgage loans) are
assigned a 50% risk weight. Consumer, commercial, home equity and residential
construction loans are assigned a 100% risk weight, as are nonqualifying
residential mortgage loans and that portion of land loans and nonresidential
construction loans which do not exceed an 80% loan-to-value ratio. The book
value of assets in each category is multiplied by the weighing factor (from 0%
to 100%) assigned to that category. These products are then totalled to
arrive at total risk-weighted assets. Off-balance sheet items are included in
risk-weighted assets by converting them to an approximate balance sheet
"credit equivalent amount" based on a conversion schedule. These credit
equivalent amounts are then assigned to risk categories in the same manner as
balance sheet assets and included risk-weighted assets.
The OTS has incorporated an interest rate risk component into its
regulatory capital rule. Under the rule, savings associations with "above
normal" interest rate risk exposure would be subject to a deduction from total
capital for purposes of calculating their risk-based capital requirements. A
savings association's interest rate risk is measured by the decline in the net
portfolio value of its assets (i.e., the difference between incoming and
outgoing discounted cash flows from assets, liabilities and off-balance sheet
contracts) that would result from a hypothetical 200 basis point increase or
decrease in market interest rates divided by the estimated economic value of
the association's assets, as calculated in accordance with guidelines set
forth by the OTS. A savings association whose measured interest rate risk
exposure exceeds 2% must deduct an interest rate component in calculating its
total capital under the risk-based capital rule. The interest rate risk
component is an amount equal to one-half of the difference between the
institution's measured interest rate risk and 2%, multiplied by the estimated
economic value of the association's assets. That dollar amount is deducted
from an association's total capital in calculating compliance with its risk-
based capital requirement. Under the rule, there is a two quarter lag between
the reporting date of an institution's financial data and the effective date
for the new capital requirement based on that data. A savings association
with
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<PAGE>
assets of less than $300 million and risk-based capital ratios in excess of
12% is not subject to the interest rate risk component, unless the OTS
determines otherwise. The rule also provides that the Director of the OTS may
waive or defer an association's interest rate risk component on a case-by-case
basis. The OTS has recently postponed the date that the component will first
be deducted from an institution's total capital until an appeals process is
developed for the measurement of an institution's interest rate risk.
The following table presents Hawkeye's capital levels as of March 31,
1996.
<TABLE>
<CAPTION>
Percent
Amount of Assets
------ ---------
(Dollars in thousands)
<S> <C> <C>
Tangible capital................ $ 13,340 7.16%
Tangible capital requirement.... 2,794 1.50
--------- -----
Excess........................ $ 10,546 5.66%
========= =====
Core capital.................... $ 13,340 7.16%
Core capital requirement........ 5,588 3.00
--------- -----
Excess........................ $ 7,752 4.16%
========= =====
Risk based capital.............. $ 14,595 14.63%
Risk based capital requirement.. 7,983 8.00
--------- -----
Excess........................ $ 6,612 6.63%
========= =====
</TABLE>
Dividend Limitations. OTS regulations require Hawkeye to give the OTS 30
days' advance notice of any proposed declaration of dividends to Heritage, and
the OTS has the authority under its supervisory powers to prohibit the payment
of dividends to the Heritage. In addition, Hawkeye may not declare or pay a
cash dividend on its capital stock if the effect thereof would be to reduce
the regulatory capital of Hawkeye below the amount required for the
liquidation account.
OTS regulations impose uniform limitations on the ability of all savings
associations to engage in various distributions of capital such as dividends,
stock repurchases and cash-out mergers. The regulation utilizes a three-
tiered approach which permits various levels of distributions based primarily
upon a savings association's capital level.
A Tier 1 savings association generally has capital in excess of its fully
phased-in capital requirement (both before and after the proposed capital
distribution) and has not been notified by the OTS that it is in need of more
than normal supervision. A Tier 1 savings association may make (without
application but upon prior notice to, and no objection made by, the OTS)
capital distributions during a calendar year up to 100% of its net income to
date during the calendar year plus one-half its surplus capital ratio (i.e.,
the amount of capital in excess of its fully phased-in requirement) at the
beginning of the calendar year. Capital distributions in excess of such
amount require advance approval from the OTS.
A savings association with either (i) capital equal to or in excess of
its minimum capital requirement but below its fully phased-in capital
requirement (both before and after the proposed capital distribution), or (ii)
capital in excess of its fully phased-in capital requirement (both before and
after the proposed capital distribution) but which has been notified by the
OTS that it is in need of more than normal supervision may be designated by
the OTS as a Tier 2 association. Such an association may make (without
application) capital distributions up to an amount equal to 75% of its net
income during the previous four quarters depending on how close the
association is to meeting its fully phased-in capital requirement. Capital
distributions exceeding this amount require prior OTS approval.
76
<PAGE>
Tier 3 associations include savings associations with either (i) capital
below the minimum capital requirement (either before or after the proposed
capital distribution), or (ii) capital in excess of the fully phased-in
capital requirement but which has been notified by the OTS that it shall be
treated as a Tier 3 association because it is in need of more than normal
supervision. Tier 3 associations may not make any capital distributions
without prior approval from the OTS.
The OTS issued a proposed rule in December 1994 that would amend its
capital distributions regulation to incorporate the definition of "capital
distributions" used under the system of prompt corrective action established
by FDICIA. The proposed rule would allow capital distributions without notice
to the OTS by associations that are adequately capitalized that receive a
composite rating of 1 or 2, and that are not held by a holding company. Other
associations that are at least adequately capitalized after making a capital
distribution would be permitted to make a capital distribution upon notice to
the OTS. Applications for capital distributions would be accepted from
troubled associations and undercapitalized associations but would be approved
only under certain restrictive conditions.
Investment Rules. The OTS permissible amount of loans-to-one borrower
now follows the national bank standard for all loans made by savings
institutions. This standard generally does not permit loans-to-one borrower
to exceed 15% of unimpaired capital and surplus. Loans in an amount equal to
an additional 10% of unimpaired capital and surplus also may be made to a
borrower if the loans are fully secured by readily marketable securities.
Hawkeye believes that these provisions have not had any material adverse
effect on its lending activities.
Savings institutions and their subsidiaries may not acquire or retain
investments in corporate debt securities that at the time of acquisition were
not rated in one of the four highest rating categories by at least one
nationally recognized rating organization. Investments in a savings
institution's portfolio not meeting this requirement must be divested as
quickly as can be done on a prudent basis, but not later than July 1, 1994.
Pursuant to regulatory accounting rules, securities subject to divestment are
not to be treated as "held for sale;" however, GAAP may still require mark-to-
market accounting by virtue of the divestment requirement. Hawkeye does not
hold any investments that must be divested under this provision.
In addition, the permissible amount of commercial real estate loans for
federal associations is reduced from the pre-FIRREA standard of 40% of assets
to an amount equal to four times capital. This limitation is not expected to
have a material adverse effect on Hawkeye.
At March 31, 1996, the largest loan by Hawkeye outstanding to any one
borrower, including related entities, was the Bennett Funding Asset with a
balance at that date of $1.8 million. For additional information, see
"Information Concerning the Special Meeting -- Recent Events -- Bennett
Funding Asset".
Activities of Savings Associations and Their Subsidiaries. OTS
regulations provide that, when a savings association establishes or acquires a
subsidiary or elects to conduct any new activity through a subsidiary that the
association controls, the savings association shall notify the FDIC and the
OTS 30 days in advance and provide the information each agency may, by
regulation, require. Savings associations also must conduct the activities of
subsidiaries in accordance with existing regulations and orders.
Accounting and Regulatory Standards. An OTS policy statement applicable
to all savings associations clarifies and re-emphasizes that the investment
activities of a savings association must be in compliance with approved and
documented investment policies and strategies, and must be accounted for in
accordance GAAP. Under the policy statement, management must support its
classification of an accounting for loans and securities (i.e., whether held
for investment, sale or trading) with appropriate documentation. Hawkeye is in
compliance with these amended rules.
77
<PAGE>
The OTS has adopted an amendment to its accounting regulations, which may
be made more stringent than generally accepted accounting principles by the
OTS, to require that transactions be reported in a manner that best reflects
their underlying economic substance and inherent risk and that financial
reports must incorporate any other accounting regulations or orders prescribed
by the OTS.
Investment Portfolio Policy. OTS supervisory policy requires that
securities owned by thrift institutions must be classified and reported in
accordance with FASB 115.
Transactions with Affiliates. Savings associations must comply with
Sections 23A and 23B of the Federal Reserve Act ("Sections 23A and 23B")
relative to transactions with affiliates in the same manner and to the same
extent as if the savings association were a Federal Reserve member bank.
Generally, Sections 23A and 23B: (i) limit the extent to which the insured
association or its subsidiaries may engage in certain covered transactions
with an affiliate to an amount equal to 10% of such institution's capital and
surplus and place an aggregate limit on all such transactions with affiliates
to an amount equal to 20% of such capital and surplus, and (ii) require that
all such transactions be on terms substantially the same, or at least as
favorable to the institution or subsidiary, as those provided to a non-
affiliate. The term "covered transaction" includes the making of loans,
purchase of assets, issuance of a guaranty and similar other types of
transactions.
Three additional rules apply to savings associations: (i) a savings
association may not make any loan or other extension of credit to an affiliate
unless that affiliate is engaged only in activities permissible for bank
holding companies; (ii) a savings association may not purchase or invest in
securities issued by an affiliate (other than securities of a subsidiary); and
(iii) the OTS may, for reasons of safety and soundness, impose more stringent
restrictions on savings associations but may not exempt transactions from or
otherwise abridge Section 23A or 23B. Exemptions from Section 23A or 23B may
be granted only by the Federal Reserve Board, as is currently the case with
respect to all FDIC-insured banks. Hawkeye has not been significantly
affected by the rules regarding transactions with affiliates.
Regulation of Heritage
Heritage is a unitary savings and loan holding company within the meaning
of the Home Owner's Loan Act ("HOLA"). As such, Heritage is registered with
the OTS and subject to OTS regulations, examinations, supervision and
reporting requirements. Heritage is required to file certain reports with, and
otherwise comply with the regulations of, the OTS. As a subsidiary of a
savings and loan holding company, Hawkeye is subject to certain restrictions
in its dealings with the Heritage and with other companies affiliated with
Heritage and also are subject to regulatory requirements and provisions as
federal institutions.
Affiliate Restrictions. The affiliate restrictions contained in Section
23A and 23B of the Federal Reserve Act apply to all federally insured savings
associations and any such "affiliate". A savings and loan holding company,
its subsidiaries and any other company under common control are considered
affiliates of the subsidiary savings association under the HOLA.
Qualified Thrift Lender Test. The HOLA requires any savings and loan
holding company that controls a savings association that fails the QTL test,
as explained under "-- Federal Regulation of Hawkeye -- Qualified Thrift
Lender Test," must, within one year after the date on which the association
ceases to be a QTL, register as and be deemed a bank holding company subject
to all applicable laws and regulations.
78
<PAGE>
BENEFICIAL OWNERSHIP OF HERITAGE COMMON STOCK
The following tables set forth information with respect to the shares of
Heritage Common Stock beneficially owned by (1) those persons who were
beneficial owners of more than 5.0% of the outstanding shares of Heritage
Common Stock (2) Heritage's directors and certain executive officers, and (3)
all directors and executive officers of Heritage as a group.
<TABLE>
<CAPTION>
Principal Stockholders
Amount and Nature of Percent of Shares
Beneficial Ownership of Heritage
Name and Address of Heritage Common Common Stock
of Beneficial Owner Stock at the Record Date (1) Outstanding
------------------- --------------------------- ---------------
<S> <C> <C>
Sally H. Courter 35,758 (2) 19.16%
610 Prairie Avenue
Boone, Iowa 50036
John F. Peterson 28,432 (3) 15.43
P.O. Box 243
Boone, Iowa 50036
Paul H. Stark 17,211 (4) 9.47
609 7th Street
Boone, Iowa 50036
Stanley L. Moffitt 11,905 (5) 6.53
525 Story Street
Boone, Iowa 50036
Nancy W. Putz 10,000 5.53
8535 Odyssey Drive
Universal City, Texas 78248
John A. Walker 10,000 5.53
P.O. Box 98
Stanhope, Iowa 50246
</TABLE>
- --------------------
(1) Unless otherwise indicated, ownership is direct and each individual
exercises sole voting and investment power.
(2) Includes 10,375 shares owned by Mrs. Courter's adult children, 13,213
shares owned by the Estate of Lloyd W. Courter, her deceased spouse, of
which her son, Jeffrey Courter, is Executor and 5,822 stock options owned
by the Lloyd W. Courter Estate exercisable within 60 days of the Record
Date.
(3) Includes 5,000 shares owned individually by Mr. Peterson's spouse, 7,600
shares owned by his parents and 3,462 stock options exercisable within 60
days of the Record Date.
(4) Includes 6,023 shares owned by Mr. Stark's spouse, 250 shares owned by
his adult son and 1,023 stock options exercisable within 60 days of the
Record Date.
(5) Includes 8,947 shares owned through a retirement plan in which Mr.
Moffitt participates, 1,300 shares owned by his spouse, 150 shares owned
by his adult son and 1,508 stock options exercisable within 60 days of
the Record Date.
79
<PAGE>
Management
<TABLE>
<CAPTION>
Shares of Heritage Percent of Shares
Common Stock of Heritage
Beneficially Owned at Common Stock
Name the Record Date (1) Outstanding
---- --------------------- ---------------
<S> <C> <C>
John F. Peterson, President 28,432 (2) 15.43%
Chief Executive Officer
and Director
Carolyn M. Herrald, Director 2,913 1.61
Robert E. McKone, Director 649 *
Sally H. Courter, Director 35,758 (3) 19.16
James R. Grabau, Director 5,841 (4) 3.22
Paul H. Stark, Director 17,211 (5) 9.47
Bernie E. Saggau, Jr., Director 3,608 1.99
Stanley L. Moffitt, Director 11,905 (6) 6.53
Robert E. Runyan 2,914 (7) 1.61
Senior Vice President of Hawkeye
R. Michael Riddle 1,134 (8) *
Vice President of Hawkeye
R.T. Schreck 1,722 (9) *
Vice President of Hawkeye
All Executives Officers and 117,087 (10) 59.7
Directors as a Group (11 persons)
</TABLE>
- --------------------
* Less than 1.0%.
(1) Unless otherwise indicated, ownership is direct and each individual
exercises sole voting and investment power.
(2) Includes 5,000 shares owned individually by Mr. Peterson's spouse, 7,600
shares owned by his parents and 3,462 stock options exercisable within 60
days of the Record Date.
(3) Includes 10,375 shares owned by Mrs. Courter's adult children, 13,213
shares owned by the Estate of Lloyd W. Courter, her deceased spouse, of
which her son, Jeffrey Courter, is Executor and 5,822 stock options owned
by the Estate of Lloyd W. Courter exercisable within 60 days of the
Record Date.
(4) Includes 501 shares owned by his son in a Uniform Gift to Minors Act
Trust of which his spouse is custodian.
(5) Includes 6,023 shares owned by Mr. Stark's spouse, 250 shares owned by
his adult son and 1,023 stock options exercisable within 60 days of the
Record Date.
(6) Includes 8,947 shares owned by Mr. Moffitt's retirement plan, 1,300
shares owned by his spouse, 150 shares owned by his adult son and 1,508
stock options exercisable within 60 days of the Record Date.
(7) Includes 666 stock options exercisable within 60 days of the Record Date.
(8) Includes 334 stock options exercisable within 60 days of the Record Date.
(9) Includes 834 stock options exercisable within 60 days of the Record Date.
(10) Includes 5,000 shares held by the Hawkeye 401(k) Retirement Plan for the
benefit of plan participants, including the executive officers of
Hawkeye.
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<PAGE>
COMMON STOCK PRICES AND DIVIDENDS
Common Stock Prices
The Commercial Common Stock is currently traded on the NYSE under the
symbol "CFB." Prior to August 2, 1995, the Commercial Common Stock was quoted
on the Nasdaq National Market under the symbol "CFCN." Therefore, any
references herein to the closing price of the Commercial Common Stock for the
period up to and including August 1, 1995 shall be the closing price as
reported on the Nasdaq National Market.
The following table sets forth the market prices of Commercial Common
Stock for the periods indicated, indicated by the high and low closing sales
prices for the Commercial Common Stock as reported on the Nasdaq National
Market up to and including August 1, 1995 and as reported on the NYSE
thereafter. Information is presented from the beginning of 1993 to the
present (through August 12, 1996).
There is currently no public market for the Heritage Common Stock nor any
uniformly quoted price. As of the Record Date, there were approximately 228
holders of record of the Heritage Common Stock.
<TABLE>
<CAPTION>
Commercial
Common Stock
--------------------
Quarter Ended High Low
------------- ---- ---
<S> <C> <C>
1993
----
March 31, 1993................................ $ 25.125 $ 16.50
June 30, 1993................................. 27.00 19.25
September 30, 1993............................ 27.75 24.125
December 31, 1993............................. 26.75 19.25
1994
----
March 31, 1994................................ 21.625 17.875
June 30, 1994................................. 25.75 17.875
September 30, 1994............................ 27.875 23.75
December 31, 1994............................. 24.8125 18.875
1995
----
March 31, 1995................................ 24.875 20.375
June 30, 1995................................. 31.25 24.875
September 30, 1995............................ 37.00 27.125
December 31, 1995............................. 37.75 32.375
1996
----
March 31, 1996................................ 38.875 35.00
June 30, 1996................................. 38.875 36.875
September 30, 1996 (through August 12, 1996).. 38.125 36.00
</TABLE>
On May 15, 1996, the last trading day preceding the public announcement
of the execution of the Merger Agreement, the reported closing sale price of
Commercial Common Stock was $38.50 per share. On August 12, 1996, the
closing sale price for Commercial Common Stock was $38.25 per share.
81
<PAGE>
Dividends
On October 4, 1995, Commercial established a policy of paying a regular
quarterly cash dividend. Accordingly, on October 31, 1995, January 12, 1996,
April 12, 1996 and July 12, 1996, Commercial paid quarterly dividends of $.10
per share on the Commercial Common Stock. Prior to October 4, 1995,
Commercial had never paid dividends. During the past two fiscal years and the
nine months ended March 31, 1996, Heritage has paid a quarterly dividend as
follows:
<TABLE>
<CAPTION>
Fiscal Year Ended Fiscal Year Ended Nine Months Ended
June 30, 1994 June 30, 1995 March 31, 1996
----------------- ----------------- -----------------
<S> <C> <C> <C>
First Quarter $ -- $ .50 $ 1.00
Second Quarter 1.44 1.00 1.00
Third Quarter .50 1.00 1.00
Fourth Quarter .50 1.00
</TABLE>
The payment of dividends by Commercial and Heritage is subject to the
discretion of each company's Board of Directors and depends on a variety of
factors, including each company's operating results and financial condition,
regulatory limitations, tax considerations and other factors. Under Nebraska
law, dividends may be paid in cash, in property or in shares of capital stock
only out of unreserved and unrestricted earned surplus.
At the present time, the only significant independent sources of funds
available for the payment of dividends by Commercial are dividends paid by the
Bank to Commercial and Commercial's unrestricted liquid assets ($6.6 million
at March 31, 1996), and the only significant sources of funds available for
the payment of dividends by Heritage are dividends paid by Hawkeye to
Heritage. Under regulations of the OTS, neither the Bank nor Hawkeye is
permitted to pay dividends on its capital stock if its regulatory capital
would thereby be reduced below the amount then required for the liquidation
account established for the benefit of certain depositors at the time of its
conversion to stock form. In addition, the Bank and Hawkeye are required to
give the OTS 30 days' prior notice of any proposed declaration of a dividend
to Commercial and Heritage, respectively, and are subject to federal
regulations which impose additional limitations on the payment of dividends
and other capital distributions (including stock repurchases and cash
mergers).
COMPARISON OF STOCKHOLDER RIGHTS
Introduction. Upon consummation of the Merger, holders of Heritage
Common Stock, whose rights are presently governed by Iowa law and Heritage's
Articles of Incorporation and Bylaws, and indirectly by Hawkeye's Charter and
Bylaws, will become stockholders of Commercial, a Nebraska corporation.
Accordingly, their rights will be governed by Nebraska law and the Articles of
Incorporation and Bylaws of Commercial and indirectly by the Bank's Charter
and Bylaws. Certain differences arise from the differences between Iowa and
Nebraska corporate law, between the Articles of Incorporation and Bylaws of
Heritage and the Articles of Incorporation and Bylaws of Commercial and
between the Charter and Bylaws of Hawkeye and the Bank. The following
discussion is not intended to be a complete statement of all differences
affecting the rights of stockholders, but summarizes material differences and
is qualified in its entirety by reference to the Articles of Incorporation and
Bylaws of Commercial and the Articles of Incorporation and Bylaws of Heritage.
See "Available Information."
Issuance of Capital Stock. The Articles of Incorporation of Commercial
authorize the issuance of 25,000,000 shares of Commercial Common Stock and
10,000,000 shares of preferred stock, par value $0.01 per share. The Articles
of Incorporation of Heritage authorize the issuance of 5,000,000 shares of
Heritage Common Stock and 1,000,000 shares of preferred stock, par value $1.00
per share. At August 12, 1996, 15,094,136 and 180,762 shares of Commercial
Common Stock and Heritage Common Stock, respectively, were issued and
outstanding.
82
<PAGE>
outstanding. Neither Commercial nor Heritage had any shares of preferred
stock outstanding. Under Commercial's Articles of Incorporation and Heritage's
Articles of Incorporation, Commercial and Heritage are authorized to issue
additional shares of capital stock up to the authorized without stockholders
approval.
Voting Rights. Holders of the Commercial Common Stock are entitled to
one vote per share on all matters submitted to a vote of stockholders, other
than in the election of directors, where voting rights are cumulative. Holders
of Heritage Common Stock are also entitled to one vote per share on all
matters submitted to a vote of stockholders. Pursuant to Heritage's Articles
of Incorporation, however, Heritage stockholders are not entitled to cumulate
their votes in the election of directors.
Special Meetings of Stockholders. Commercial's Articles of Incorporation
provide that special meetings of stockholders of Commercial may be called by a
majority of the Board of Directors, by the holders of seventy-five percent or
more of the shares entitled to vote at such meeting, or by a duly authorized
committee of the Board of Directors. Special meetings of the holders of
Heritage's stock may be called by the President of Heritage, by the Board of
Directors or by the holders of ten percent (10%) or more of the shares of
Heritage Common Stock entitled to vote at such meeting.
Number and Term of Directors. Commercial's Board of Directors consists
of nine persons, divided into three classes. Under the terms of Commercial's
Articles of Incorporation, the number of directors may only be changed by the
affirmative vote of not less than 75.0% of all outstanding shares of stock of
the corporation entitled to vote generally, other than in the election of
directors, and the affirmative vote of the holders of not less than a majority
of the outstanding shares of stock of the corporation entitled to vote
generally, other than in the election of directors and other than "Principal
Stockholders" (as defined in the Articles of Incorporation). Heritage's Board
of Directors consists of seven persons, divided into three classes in nearly
equal number as possible. The authorized number of Directors of Heritage may
only be changed by an amendment to the Bylaws, which requires Board action.
Advance Notice Requirements for Nominations of Directors and Presentation
of New Business at Annual Meeting of Stockholders. Commercial's Bylaws
provide that any new business to be taken up at an annual meeting shall be
made in writing and filed with the Secretary of Commercial at least twenty
days before the date of the annual meeting. Heritage's Bylaws provide that
nominations for the election of directors and proposals for any new business
to be taken up at any annual or special meeting of stockholders may be made by
any stockholder of Heritage. In order to make any such nomination or
proposal, a stockholder must give notice in writing, delivered or mailed to
the Secretary of Heritage, not less than ten nor more than 15 days prior to
such meeting, together with certain information relating to the nomination or
proposal.
Approval of Mergers, Consolidations, Sale of Substantially All Assets and
Dissolutions. Commercial's Articles of Incorporation require that any merger,
reorganization, or consolidation, or any sale, lease, exchange, mortgage,
pledge, transfer, or other disposition of at least 25% of the fair market
value of the total assets of Commercial with any affiliate or any person who
beneficially owns in the aggregate 20% or more of the outstanding shares of
voting stock of Commercial must first be approved by the affirmative vote of
the holders of not less than 75% of the outstanding shares of voting stock and
the affirmative vote of the holders of not less than a majority of the
outstanding shares of voting stock held by shareholders other than a principal
shareholder (a person who owns at least 20% of the outstanding shares of
Commercial's voting stock). Commercial's Articles of Incorporation also
require that certain fair price criteria designed to ensure that Commercial's
stockholders receive a fair price for their shares in a business combination
be met, unless a business combination is first approved by three-quarters of
the board of directors who were directors prior to the time the person became
a principal shareholder. Heritage's Articles of Incorporation do not contain
any approval requirements for mergers or similar corporate action, other than
those imposed by Iowa law generally.
Limitations on Directors' Liability. The Nebraska Business Corporation
Act does not expressly limit or eliminate the liability of directors. However,
Commercial's Articles of Incorporation provide that an "outside director"
shall not be personally liable to the respective corporation or its
stockholders for monetary damages for
83
<PAGE>
breach of his fiduciary duty as a director and authorizes the respective
corporation to indemnify such outside director against monetary damages for
such breach to the full extent permitted by law. This provision does not limit
---
liability for (i) any act or omission not in good faith which involves
intentional misconduct or a knowing violation of law, (ii) any transaction
from which the outside director derived an improper direct or indirect
financial benefit, (iii) paying a dividend or approving a stock repurchase in
violation of the Nebraska Business Corporation Act or (iv) any act or omission
which violates a declaratory or injuctive order obtained by the respective
corporation or its stockholders. "Outside director" is defined as any member
of the Board of Directors who is not an officer or a person who may control
the conduct of the respective corporation through management agreements,
voting trusts, directorships in related corporation or any other device or
relationship. Heritage's Articles of Incorporation provide that its directors
will not be liable to Heritage or its stockholders for monetary damages for
breach of fiduciary duty as a director with the exceptions of: (i) breaches of
a director's duty of loyalty to Heritage or its stockholders; (ii) acts or
omissions that are not in good faith or that involve intentional misconduct or
a knowing violation of law; (iii) for any transactions from which the director
derives an improper personal benefit; or (iv) due to Section 496A.44 of the
IBCA.
Amendment of Articles of Incorporation and Bylaws. Commercial's
Articles of Incorporation may be amended upon the approval of two-thirds of
Commercial's shareholders. However, the affirmative vote of 75% of all
outstanding shares of Commercial entitled to vote generally, other than in the
election of directors, and the affirmative vote of the holders of not less
than a majority of outstanding shares entitled to vote generally, other than
in the election of directors other than "principal shareholders" (as defined
in Commercial's articles) are required to alter or amend certain provisions in
the Articles, including provisions which: (i) require that there be nine
directors; (ii) classify the board into three classes with staggered terms;
(iii) provide that a director may only be removed upon the affirmative vote of
75% of the shares entitled to vote; (iv) allow the board of directors to fill
vacancies on the board; (v) require a supermajority vote to approve certain
business combinations with a 20% or greater stockholder; (vi) mandate that
certain business combinations comply with the fair price provisions contained
in the Articles; (vii) permit the stockholders to amend Commercial's bylaws
only upon the affirmative vote of 75% or more of the shares entitled to vote.
Commercial's Bylaws may be amended either by the board of directors or by the
affirmative vote of 75% of the outstanding shares of Commercial's stock.
Heritage's Articles of Incorporation do not contain limitations on amendment.
As such, Heritage's Articles of Incorporation may be amended only in
accordance with Iowa law, which requires the Board of Directors to adopt a
resolution setting forth the proposed amendment, which must then be approved
by a majority vote of the stockholders entitled to vote on the proposed
amendment except for certain immaterial amendments.
Rights Plan. On December 19, 1988, the Board of Directors of Commercial
adopted a Shareholder Rights Plan (the "Rights Plan") and declared a
distribution of stock purchase rights (the "Rights") payable to shareholders
of record on December 30, 1988. The Rights consist of primary rights (the
"Primary Rights"), which generally entitle the holders thereof to purchase
shares of Commercial Common Stock at 20% of the market price of such shares in
the event any person acquires an interest in 15% or more of Commercial Common
Stock without complying with a procedure intended to ensure fair treatment of
all shareholders of Commercial, and secondary rights (the "Secondary Rights"),
which generally entitle the holders thereof to purchase shares of Series A
Junior Participating Cumulative Preferred Stock of Commercial (the "Preferred
Shares") in the event a person acquires an interest in 25% or more of the
outstanding shares of Commercial Common Stock without complying with such
procedural requirements. The December 30, 1988 distribution consisted of one
Primary Right and One Secondary Right for each share of Commercial Common
Stock outstanding on that date and, subject to adjustment under certain
circumstances, unless the Rights expire or are earlier redeemed, one Primary
Right and one Secondary Right shall be issued with each share of Commercial
Common Stock issued following December 30, 1988 until the Rights become
exercisable under the terms of the Rights Plan.
The Primary Rights will become exercisable, subject to extension, 10
business days following a public announcement that any person (other than
certain entities who beneficially owned more than 15% of Commercial's
outstanding Commercial Common Stock as of the date of adoption of the Rights
Plan and certain persons who
84
<PAGE>
acquire their shares directly from Commercial) has acquired, or has obtained
the right to acquire, beneficial ownership of 15% or more of the outstanding
shares of Commercial Common Stock and has not complied with the procedural
requirements set forth in the Rights Plan (such person being referred to as a
"15% Person"). Secondary Rights will become exercisable upon the earlier of
(i) one business day following a public announcement that any person (other
than Commercial or certain related entities) has acquired, or has obtained the
right to acquire, beneficial ownership of 25% or more of the outstanding
shares of Commercial Common Stock, provided that such acquisition is not
deemed a "Fair Offer," as described in the Rights Plan (such person being
known as a "25% Person"), or (ii) one business day following the commencement
of a tender offer, other than a Fair Offer, or exchange offer, the
consummation of which would result in the beneficial ownership of 25% or more
of the outstanding shares of Commercial Common Stock by any person other than
Commercial or certain related entities. A public announcement for this
purpose shall be made by Commercial or, as the case may be, by a 15% Person or
a 25% Person.
The number of shares which may be purchased upon exercise of each Primary
Right is determined by dividing (i) that number of shares which equals 50% of
the outstanding shares of Commercial Common Stock, as of the date a person
became a 15% Person, by (ii) the number of Primary Rights outstanding,
exclusive of Primary Rights beneficially owned by the 15% Person, which shall
become void. The per share exercise price of shares issued upon the exercise
of a Primary Right is 20% of the market price of such shares as of the date
the 15% Person became a 15% Person.
Unless the Secondary Rights are earlier redeemed, in the event a person
becomes a 25% Person, each holder of a Secondary Right (other than Secondary
Rights beneficially owned by such 25% Person, which will thereafter become
void) will have the Right to purchase one-hundredth of a share of Preferred
Shares at a price of $42.00 per one-hundredth of a share. Unless the
Secondary Rights are earlier redeemed, in the event that (i) Commercial is the
surviving corporation in a merger with a 25% Person and Commercial Common
Stock is not changed or exchanged in such merger, (ii) a 25% Person engages in
one of a number of "self dealing" transactions, including certain preferential
sales, transfers or exchanges of Commercial assets or securities, (iii) during
such time as there is a 25% Person, there shall be any reclassification of
securities or recapitalization of Commercial or any merger or consolidation of
Commercial with any of its subsidiaries or any other transaction or series of
transactions which has the effect of increasing by more than 1% the
proportionate share of the outstanding shares of any class of equity
securities or of securities exercisable for or convertible into securities of
Commercial or any of its subsidiaries which is beneficially owned by a 25%
Person, or (iv) a person (other than Commercial or certain related entities)
becomes the beneficial owner of 25% or more of the outstanding shares of
Commercial Common Stock (other than pursuant to certain transactions set forth
in the Rights Plan), then each holder of a Secondary Right will have the right
to receive, upon exercise and payment of the Secondary Right exercise price,
Commercial Common Stock having a value equal to two times the then current
Secondary Right exercise price.
In the event Commercial is acquired in a merger or other business
combination transaction or 50% or more of its consolidated assets or earnings
power is sold, each holder of a Secondary Right will thereafter have the right
to receive, upon the exercise and payment of the Secondary Right exercise
price, that number of shares of common stock of the acquiring company which at
the time of such transaction has a value equal to two times the then current
Secondary Right exercise price.
A majority of the independent directors of Commercial may authorize the
redemption of either or both of the Primary or Secondary Rights at a price of
$0.01 per Right at any time prior to the close of business on the tenth
business day, subject to extension, following the date of a public
announcement that any person has become a 15% Person, other than pursuant to
certain cash tender offers described in the Rights Plan, and at any time prior
to the public announcement that any person has become a 25% Person, other than
pursuant to such a cash tender offer. Commercial's right of redemption with
respect to the Secondary Rights will be reinstated if each 25% Person reduces
its beneficial ownership to less than 15% of Commercial Common Stock in a
transaction not involving a purchase by Commercial or its subsidiaries.
Immediately upon any redemption of the Rights, the right to exercise the
Rights will terminate and the only right of the holders thereof will be to
receive the redemption price.
85
<PAGE>
The terms of the Rights may be amended by the Board of Directors of
Commercial without the consent of the holders of the Rights, except that
following the date on which the Rights become exercisable, such amendment may
not adversely affect the interests of the holders of the Rights.
Until a Right is exercised, the holder thereof, as such, will have no
rights as a stockholder of Commercial (other than rights resulting from such
holder's ownership of Commercial Common Stock), including, without limitation,
the right to vote or to receive dividends.
The Rights have certain anti-takeover effects. The Rights could cause
substantial dilution to a person or group that attempts to acquire Commercial
without conditioning the offer on the Rights being redeemed or substantially
all of the Rights being acquired.
Heritage does not have any similar shareholder rights plan.
ADJOURNMENT OF SPECIAL MEETING
(Proposal 2 - Special Meeting)
In the event that there are not sufficient votes to approve the
Acquisition Merger and the Merger Agreement at the time of the Special
Meeting, such proposal cannot be approved unless the Special Meeting is
adjourned in order to permit further solicitation of proxies and the necessary
votes are obtained. In order to allow proxies that have been received by
Heritage at the time of the Special Meeting to be voted for such adjournment,
if necessary, Heritage has submitted the question of adjournment under such
circumstances to its stockholders as a separate matter for their
consideration. A majority of the shares of Heritage Common Stock represented
and voting at the Special Meeting is required in order to approve any such
adjournment. The Board of Directors of Heritage recommends that stockholders
vote their proxies in favor of such adjournment so that their proxies may be
used for such purpose in the event it should become necessary. Properly
executed proxies will be voted in favor of any such adjournment unless
otherwise indicated thereon. Abstentions and broker non-votes will not be
voted in favor of this proposal. If it is necessary to adjourn the Special
Meeting, no notice of the time and place of the adjourned meeting is required
to be given to stockholders other than an announcement of such time and place
at the Special Meeting.
Heritage's Board of Directors unanimously recommends that stockholders
vote FOR the proposal to adjourn the Special Meeting if necessary to permit
further solicitation of proxies.
LEGAL MATTERS
The legality of the Commercial Common Stock to be issued pursuant to the
Merger Agreement will be passed upon for Commercial by Fitzgerald, Schorr,
Barmettler & Brennan, Omaha, Nebraska.
Certain other legal matters in connection with the Merger will be passed
upon for Commercial by Housley Kantarian & Bronstein, P.C., Washington, D.C.,
and for Heritage by Breyer & Aguggia, Washington, D.C.
EXPERTS
The consolidated financial statements of Commercial, except Railroad and
subsidiaries, as of June 30, 1995 and 1994, and for each of the three years in
the period ended June 30, 1995 incorporated in this Prospectus/Proxy Statement
by reference from Commercial's Current Report on Form 8-K filed on March 19,
1996 have been audited by Deloitte & Touche LLP, independent auditors, as
stated in their report, which is incorporated herein by reference (those
financial statements have been restated to give retroactive effect to the
merger of Commercial and Railroad which has been accounted for as a pooling of
interest), and have been so included in reliance upon the report of such
86
<PAGE>
firm given upon their authority as experts in accounting and auditing. The
consolidated financial statements of Railroad as of December 31, 1994 and
1993, and for each of the years in the three-year period ended December 31,
1994, have been audited by KPMG Peat Marwick LLP as stated in their report
incorporated by reference herein and in the Registration Statement. Such
report of KPMG Peat Marwick LLP, independent certified public accountants, is
incorporated by reference herein in reliance upon such report, and upon the
authority of said firm as experts in accounting and auditing. The report of
KPMG Peat Marwick LLP refers to a change in the method of accounting for
certain investments in debt and equity securities in 1993 and a change in the
method of accounting for income taxes in 1992.
The consolidated financial statements of Heritage as of June 30, 1995 and
1994 and each of the years in the three-year period ended June 30, 1995, have
been included herein in reliance upon the report of McGladrey & Pullen, LLP,
independent certified public accountants, included herein, and upon the
authority of said firm as experts in accounting and auditing.
INDEPENDENT ACCOUNTANTS
Representatives of McGladrey & Pullen, LLP, Heritage's independent
certified public accountants, are expected to be present at the Special
Meeting. They will be afforded the opportunity to make a statement if they
desire to do so and are expected to be available to respond to appropriate
questions.
OTHER MATTERS
The Heritage Board of Directors is not aware of any business to come
before the Special Meeting other than those matters described in this
Prospectus/Proxy Statement. However, if any other matter should properly come
before the Special Meeting, it is intended that holders of the proxies will
act in accordance with their best judgment.
87
<PAGE>
INDEX TO FINANCIAL STATEMENTS
OF HERITAGE FINANCIAL, LTD.
<TABLE>
<CAPTION>
Page
----
<S> <C>
Independent Auditor's Report................................. F-1
Consolidated Statements of Financial Condition as of
June 30, 1995 and 1994..................................... F-2
Consolidated Statements of Income for the Years Ended
June 30, 1995, 1994 and 1993............................... F-3
Consolidated Statements of Stockholders' Equity for
the Years Ended June 30, 1995, 1994 and 1993............... F-4
Consolidated Statements of Cash Flows for the Years
Ended June 30, 1995, 1994 and 1993......................... F-5
Notes to Consolidated Financial Statements................... F-7
Consolidated Condensed Statements of Financial Condition
(Unaudited) as of March 31, 1996 and June 30, 1995......... F-28
Consolidated Condensed Statements of Income (Unaudited)
for the Nine Months Ended March 31, 1996 and 1995.......... F-29
Consolidated Condensed Statements of Stockholders' Equity
(Unaudited) for the Nine Months Ended March 31, 1996....... F-30
Consolidated Condensed Statements of Cash Flows (Unaudited)
for the Nine Months Ended March 31, 1996 and 1995.......... F-31
Notes to Consolidated Condensed Financial Statements......... F-33
</TABLE>
88
<PAGE>
[LOGO OF MCGLADREY & PULLEN APPEARS HERE]
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors
Heritage Financial, Ltd.
Boone, Iowa
We have audited the accompanying consolidated statements of
financial condition of Heritage Financial, Ltd. and subsidiaries
as of June 30, 1995 and 1994, and the related consolidated
statements of income, stockholders' equity, and cash flows for
each of the three years in the period ended June 30, 1995. These
financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred
to above present fairly, in all material respects, the financial
position of Heritage Financial, Ltd. and subsidiaries as of June
30, 1995 and 1994, and the results of their operations and their
cash flows for each of the three years in the period ended June
30, 1995, in conformity with generally accepted accounting
principles.
As described in Note 1 to the consolidated financial statements,
during the year ended June 30, 1994 the Company changed its
methods of accounting for income taxes and certain investments
in debt and equity securities to adopt Financial Accounting
Standards Board Statement No.'s 109 ("Accounting for Income
Taxes") and 115 ("Accounting for Certain Investments in Debt and
Equity Securities"), respectively.
/s/ McGladrey & Pullen
Des Moines, Iowa
August 3, 1995
F-1
<PAGE>
Heritage Financial, Ltd. and Subsidiaries
Consolidated Statements of Financial Condition
June 30, 1995 and 1994
<TABLE>
<CAPTION>
ASSETS 1995 1994
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash:
Interest-bearing $ 9,736,485 $ 6,527,259
Non-interest-bearing 1,000,775 1,004,794
Securities held to maturity (Note 2) 10,149,208 9,881,289
Securities available for sale (Notes 2 and 9) 15,471,628 18,352,365
Mortgage-backed securities held to maturity (Notes 2 and 3) 36,583,097 40,247,767
Loans held for sale, net of unrealized loss 1995 none;
1994 $284,300 - 7,864,784
Loans receivable, net (Note 4) 99,510,529 83,359,940
Accrued interest receivable (Note 6) 1,463,406 1,052,669
Income tax refund claims receivable (Note 10) 51,217 -
Deferred taxes (Note 10) - 400,012
Premises and equipment, net (Note 7) 3,199,510 3,346,526
Other assets 504,987 421,227
--------------------------------------------
Total assets $ 177,670,842 $ 172,458,632
============================================
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Deposits (Note 8) $ 157,148,405 $ 157,698,438
Borrowed funds (Note 9) 5,000,000 -
Advances from borrowers for taxes and insurance 510,310 519,367
Income taxes (Note 10):
Current - 67,341
Deferred 15,024 -
Accrued expenses and other liabilities 1,343,129 1,198,216
--------------------------------------------
Total liabilities 164,016,868 159,483,362
--------------------------------------------
COMMITMENTS AND CONTINGENCIES (Note 13)
STOCKHOLDERS' EQUITY (Notes 11 and 14)
Common stock, par value $1 per share; authorized 5,000,000
shares, issued and outstanding 1995 179,041 shares;
1994 177,191 shares 179,041 177,191
Additional paid-in capital 1,302,057 1,222,357
Retained earnings, substantially restricted (Note 10) 11,772,351 11,569,789
Unrealized gain on securities available for sale, net (Note 2) 400,525 5,933
---------------------------------------------
Total stockholders' equity 13,653,974 12,975,270
---------------------------------------------
Total liabilities and stockholders' equity $ 177,670,842 $ 172,458,632
=============================================
</TABLE>
See Notes to Consolidated Financial Statements.
F-2
<PAGE>
HERITAGE FINANCIAL, LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME YEARS
Ended June 30, 1995, 1994 and 1993
<TABLE>
<CAPTION>
1995 1994 1993
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest income:
Loans receivable $ 8,040,322 $ 7,328,560 $ 8,164,394
Securities 1,704,792 1,511,419 1,753,336
Mortgage-backed securities 2,325,430 1,998,513 2,840,686
Other interest-earning assets 36,086 183,028 177,065
--------------------------------------------------------------------
Total interest income 12,106,630 11,021,520 12,935,481
--------------------------------------------------------------------
Interest expense
Deposits (Note 8) 6,719,088 5,683,870 6,716,571
Borrowed funds 15,387 20,609 128,636
--------------------------------------------------------------------
Total interest expense 6,734,475 5,704,479 6,845,207
--------------------------------------------------------------------
Net interest income 5,372,155 5,317,041 6,090,274
Provision for (reduction in allowance for) loan
losses (Note 4 ) 40,000 (130,000) (130,000)
Net interest income after provision for --------------------------------------------------------------------
(reduction in allowance for) loan losses 5,332,155 5,447,041 6,220,274
--------------------------------------------------------------------
Non-interest income:
Gain (loss) on sale of interest-earning assets,
net (Note 2) (197,446) 188,902 149,960
Service charges and fees 392,599 460,226 409,133
Other 133,759 252,977 298,261
--------------------------------------------------------------------
Total non-interest income 328,912 902,105 857,354
--------------------------------------------------------------------
Non-interest expense:
Compensation and benefits 2,057,200 2,108,220 1,877,119
Occupancy and equipment 559,886 517,511 357,021
SAIF deposit insurance premiums 359,468 367,133 331,010
Net (income) loss from foreclosed real estate 1,328 8,880 (212,838)
Unrealized loss from loans held for sale 32,508 284,300 -
Other (Note 15) 1,436,147 1,370,881 1,425,370
--------------------------------------------------------------------
Total non-interest expense 4,446,537 4,656,925 3,777,682
--------------------------------------------------------------------
Income before income taxes and the cumulative
effect of the change in accounting for 1,214,530 1,692,221 3,299,946
income taxes
Income tax expense (Note 10) 388,750 204,650 887,200
--------------------------------------------------------------------
Income before the cumulative effect of the
change in accounting for income taxes 825,780 1,487,571 2,412,746
Cumulative effect on prior years of the change
in accounting for income taxes (Note 10) - 417,600 -
--------------------------------------------------------------------
Net income $ 825,780 $ 1,905,171 $ 2,412,746
====================================================================
Earnings per common share $ 4.64 $ 10.84 $ 13.89
====================================================================
Dividends per common share $ 3.50 $ 2.46 $ 0.56
====================================================================
Weighted average number of common shares outstanding 177,969 175,676 173,686
====================================================================
</TABLE>
See Notes to Consolidated Financial Statements.
F-3
<PAGE>
HERITAGE FINANCIAL, LTD. AND SUBSIDIARIES CONSOLIDATED
STATEMENTS OF STOCKHOLDERS' EQUITY
Years Ended June 30, 1995, 1994 and 1993
<TABLE>
<CAPTION>
Unrealized
Gain on
Additional Securities
Common Paid-in Retained Available for
Stock Capital Earnings Sale, Net Total
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance, June 30, 1992 $ 173,021 $ 1,177,417 $ 7,781,748 $ - $ 9,132,186
Insuance of 1,140 shares of
common stock upon exercise
of options (Note 14) 1,140 7,980 - - 9,120
Net income - - 2,412,746 - 2,412,746
Dividends on common stock - - (97,530) - (97,530)
--------------------------------------------------------------------------------------------------
Balance, June 30, 1993 174,161 1,185,397 10,096,964 - 11,456,522
Issuance of 3,030 shares of
common stock upon exercise
of options (Note 14) 3,030 36,960 - - 39,990
Net income - - 1,905,171 - 1,905,171
Net change in unrealized gain
on securities available for
sale, net - - - 5,933 5,933
Dividends on common stock - - (432,346) (432,346)
---------------------------------------------------------------------------------------------------
Balance, June 30, 1994 177,191 1,222,357 11,569,789 5,933 12,975,270
Issuance of 1,850 shares of
common stock upon exercise
of options (Note 14) 1,850 79,700 - - 81,550
Net income - - 825,780 - 825,780
Net change in unrealized gain
on securities available for
sale, net - - - 394,592 394,592
Dividends on common stock - - (623,218) - (623,218)
---------------------------------------------------------------------------------------------------
Balance, June 30, 1995 $ 179,041 $ 1,302,057 $ 11,772,351 $ 400,525 $ 13,653,974
===================================================================================================
</TABLE>
See Notes to Consolidated Financial Statements.
F-4
<PAGE>
HERITAGE FINANCIAL, LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED
June 30, 1995, 1994 and 1993
<TABLE>
<CAPTION>
1995 1994 1993
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 825,780 $ 1,905,171 $ 2,412,746
Adjustments to reconcile net income to net
cash provided by operating activities:
Amortization of deferred loan origination fees (61,740) (148,839) (85,236)
Amortization of premiums and discounts on loans,
mortgage-backed securities and investment securities (124,108) 141,672 47,914
Provision for (reduction in allowance for) loan losses 40,000 (130,000) (130,000)
Unrealized loss on loans held for sale 32,508 284,300 -
Net (gain) loss on sales of securities and
mortgage-backed securities (Note 2) 171,643 (32,524) (126,262)
Net (gain) loss on sales of loans 25,803 (156,378) (117,707)
Net (gain) on sales of foreclosed real estate - - (47,487)
Depreciation of premises and equipment 301,821 261,044 130,573
Deferred taxes 149,404 (568,400) 35,000
Dividend income reinvested - - (115,900)
Net change in:
Accrued interest receivable and other assets (494,497) 109,970 249,148
Income tax refund claims receivable (51,217) 5,898 (82,572)
Accrued expenses and other liabilities 144,913 (410,091) 28,513
Income taxes payable (67,341) (174,605) 210,127
Other - - 50,000
---------------------------------------------------------------------
Net cash provided by operating activities 892,969 1,087,218 2,458,857
---------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Loan originations and principal payments on loans and
mortgage-backed securities, net (8,117,406) (1,736,564) 6,735,756
Purchase of mortgage-backed securities (1,948,437) (11,088,536) (10,394,284)
Purchase of securities (held to maturity
classification for 1995) (1,172,503) (12,941,282) (11,762,587)
Proceeds from sales of securities (available for sale
classification for 1995) 12,591,559 12,739,208 7,566,862
Proceeds from maturity of securities available for sale 1,000,000 - -
Purchase of securities available for sale (10,195,663) - -
Proceeds from the maturity of securities
(held to maturity classification for 1995) 1,020,721 1,066,667 5,314,657
Proceeds from sales of mortgage-backed securities - 2,307,682 -
Proceeds from sales of loans 5,389,530 11,314,322 5,694,011
Proceeds from sales of foreclosed real estate - 28,404 442,616
Purchase of premises and equipment (213,305) (472,610) (1,501,233)
Proceeds from sale of land 58,500 - -
----------------------------------------------------------------------
Net cash provided by (used in) investing
activities (1,587,004) 1,217,291 2,095,798
----------------------------------------------------------------------
</TABLE>
See Notes to Consolidated Financial Statements.
F-5
<PAGE>
HERITAGE FINANCIAL, LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended June 30, 1995, 1994 and 1993
<TABLE>
<CAPTION>
1995 1994 1993
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from borrowed funds $ 5,000,000 $ - $
Principal payments on borrowed funds (800,000) (1,650,000)
Net (decrease) in deposits (550,033) (2,998,320) (4,145,437)
Cash dividends paid (623,218) (432,346) (97,530)
Proceeds from issuance of common stock, net 81,550 39,990 9,120
Net increase (decrease) in advances from
borrowers for taxes and insurance (9,057) 44,335 (41,017)
----------------------------------------------
Net cash provided by (used in) financing
activities 3,899,242 (4,146,341) (5,924,864)
----------------------------------------------
Net increase (decrease) in cash 3,205,207 (1,841,832) (1,370,209)
CASH
Beginning 7,532,053 9,373,885 10,744,094
----------------------------------------------
Ending $ 10,737,260 $ 7,532,053 $ 9,373,885
==============================================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION
Cash payments for:
Interest $ 6,574,613 $ 6,850,462 $ 8,036,931
==============================================
Income taxes $ 357,904 $ 524,157 $ 761,574
==============================================
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING
AND FINANCING ACTIVITIES
Net change in unrealized gain on securities
available for sale, net of deferred taxes $ 394,592 $ 5,933 $ -
==============================================
</TABLE>
See Notes to Consolidated Financial Statements.
F-6
<PAGE>
HERITAGE FINANCIAL, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 1. Significant Accounting Policies
Organization and Nature of Business: Heritage Financial, Ltd. is a holding
- ------------------------------------
company which owns 100% of the stock of its subsidiary, Hawkeye Federal Savings
Bank (Hawkeye Federal). Hawkeye Federal Savings Bank is a federally chartered
savings bank that conducts its operations from its main office located in Boone,
Iowa and five branch offices located in Carroll, Madrid, Ogden, Lake City, and
Manning, Iowa.
Prior to March 31, 1995, the Company had two savings bank subsidiaries, Hawkeye
Federal and First Federal Savings Bank (First Federal), Carroll, Iowa. Effective
March 31,1995, First Federal was merged with and into Hawkeye Federal. The
assets and liabilities transferred to Hawkeye Federal were transferred at
historical cost.
Principles of consolidation: The accompanying consolidated financial statements
- ----------------------------
include the accounts of the Company and its wholly-owned subsidiary, Hawkeye
Federal Savings Bank and, for periods prior to the merger of Hawkeye Federal and
First Federal, the accounts of First Federal.
All significant intercompany balances and transactions have been eliminated in
consolidation.
Cash: Cash consists of cash on hand and interest-bearing and non-interest-
- -----
bearing deposits in banks. All certificates of deposit, regardless of maturity,
are considered to be other investments.
Investment in securities and mortgage-backed securities: The Company elected to
- --------------------------------------------------------
adopt the provisions of FASB Statement No. 115, "Accounting for Certain
Investments in Debt and Equity Securities", as of June 30, 1994. In accordance
with Statement No. 115, the comparative financial statements prior to this date
have not been restated for the change in accounting principle. The June 30, 1994
balance of stockholders' equity was increased by $5,933, net of the $1,388
related deferred tax affect, to recognize the net unrealized holding gain on
securities as of June 30, 1994.
Statement 115 requires that management determine the appropriate classification
of securities at the date of adoption, and thereafter at the date individual
investment securities are acquired. The classifications are as follows:
Securities and mortgage-backed securities held to maturity: Securities and
-----------------------------------------------------------
mortgage-backed securities classified as held to maturity are carried at cost
adjusted for amortization of premium and accretion of discount using a method
that approximates the level yield method.
Securities available for sale: Securities classified as available for sale are
------------------------------
those instruments that the Company intends to hold for an indefinite period of
time, but not necessarily to maturity. Any decision to sell a security
classified as available for sale would be based on various factors, including
significant movements in interest rates, changes in the maturity mix of the
Company's assets and liabilities, liquidity needs, regulatory capital
considerations, and other similar factors. Securities available for sale are
carried at fair value. Unrealized gains or losses are reported as increases or
decreases in stockholders' equity, net of the related deferred tax effect.
Realized gains or losses, determined on the basis of the cost of specific
securities sold, are included in earnings.
F-7
<PAGE>
HERITAGE FINANCIAL, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Prior to the adoption of Statement 115, the Company carried its debt securities
at amortized cost. Equity securities were stated at the lower of their aggregate
cost or market and mortgage-backed securities which were designated as held for
sale were carried at the lower of aggregate cost or estimated market value.
Loans held for sale: Mortgage loans originated and intended for sale in the
- --------------------
secondary market are carried at the lower of aggregate cost or estimated market
value. Loans held for sale which are transferred to loans receivable are
transferred at the lower of aggregate cost or estimated market value at the date
of transfer. Net unrealized losses are recognized in a valuation allowance
through charges to income.
Lending activities: The Company grants residential, commercial, real estate, and
- -------------------
consumer loans to customers meeting Board approved underwriting guidelines,
primarily in the Carroll and Boone County, Iowa areas and through established
correspondent lending relationships. Generally, these loans are collateralized
by real estate or other personal property.
Loans receivable: Loans receivable are stated at unpaid principal balances, less
- -----------------
an allowance for loan losses, and net deferred loan origination fees, costs and
discounts.
Discounts on first mortgage loans are amortized to income using the interest
method over the remaining period to contractual maturity, adjusted for
prepayments. Discounts on consumer loans are recognized over the lives of the
loans using methods that approximate the interest method.
The allowance for loan losses is established through a provision for loan losses
charged to expense. Loans are charged against the allowance for loan losses when
management believes that collectibility of the principal is unlikely. The
allowance is an amount that management believes will be adequate to absorb
estimated losses on existing loans that may become uncollectible, based on
evaluation of the collectibility of loans and prior loss experience. This
evaluation also takes into consideration such factors as changes in the nature
and volume of the loan portfolio, overall portfolio quality, review of specific
problem loans, and current economic conditions that may affect the borrower's
ability to pay. While management uses the best information available to make its
evaluation, future adjustments to the allowance may be necessary if there are
significant changes in economic conditions.
Uncollectible interest on loans that are contractually past due is charged off
or an allowance is established based on management's periodic evaluation. The
allowance is established by a charge to interest income equal to all interest
previously accrued, and income is subsequently recognized only to the extent
cash payments are received until, in management's judgment, the borrower's
ability to make periodic interest and principal payments is no longer in doubt,
in which case the loan is returned to accrual status.
Loan origination and related costs: Loan fees and certain direct loan
- -----------------------------------
origination costs are deferred, and the net fee or cost is recognized as an
adjustment to interest income using the interest method over the contractual
life of the loans, adjusted for estimated prepayments based on the Company's
historical prepayment experience.
F-8
<PAGE>
HERITAGE FINANCIAL, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Foreclosed real estate: Real estate properties acquired through loan foreclosure
- -----------------------
are initially recorded at the lower of cost or fair value less estimated selling
expenses at the date of foreclosure. Costs relating to development and
improvement of property are capitalized, whereas costs relating to holding
property are expensed.
Valuations are periodically performed by management. If the carrying value of a
property exceeds its estimated fair value less estimated selling expenses,
either an allowance for losses is established, or the property's carrying value
is reduced, by a charge to income.
Income taxes: Beginning July 1, 1993, deferred taxes are provided on a liability
- -------------
method (FASB Statement No. 109) whereby deferred tax assets are recognized for
deductible temporary differences and operating loss and tax credit carryforwards
and deferred tax liabilities are recognized for taxable temporary differences.
Temporary differences are the difference between the reported amounts of assets
and liabilities and their income tax bases. Deferred tax assets are reduced by a
valuation allowance when, in the opinion of management, it is more likely than
not that some portion or all of the deferred tax assets will not be realized.
Deferred tax assets and liabilities are adjusted for the effects of changes in
tax laws and rates on the date of enactment.
Prior to July 1, 1993, deferred income taxes were recorded under the deferral
method (APB 11) to reflect the tax consequences of timing differences between
the recording of income and expenses for financial statement purposes and income
tax purposes. Deferred income taxes were recorded at the tax rates in effect
when the differences arose.
Premises and equipment: Premises and equipment are carried at cost, net of
- -----------------------
accumulated depreciation. Depreciation is computed by the straight-line and
declining balance methods over the estimated useful lives of the assets.
Earnings per share: Earnings per share is calculated by dividing net income by
- -------------------
the weighted average number of common shares outstanding.
Reclassification: Certain amounts from the 1994 and 1993 financial statements
- -----------------
have been reclassified to conform with the 1995 presentation. These
reclassifications did not effect previously reported net income or stockholders'
equity.
F-9
<PAGE>
HERITAGE FINANCIAL, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 2. Securities
Carrying amounts and fair values of securities being held to maturity as of June
30 are summarized as follows:
<TABLE>
<CAPTION>
1995
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains (Losses) Value
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Treasury securities $ 8,431,221 $ - $ (184,031) $ 8,247,190
Municipal obligations 667,500 - - 667,500
Other securities, primarily
certificates of deposit 1,050,487 - - 1,050,487
--------------------------------------------------------
$ 10,149,208 $ - $ (184,031) $ 9,965,177
========================================================
Mortgage-backed securities $ 36,583,097 $ 301,734 $ (410,080) $ 36,474,751
========================================================
</TABLE>
<TABLE>
<CAPTION>
1994
--------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains (Losses) Value
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Treasury securities $ 9,230,515 $ 711 $ (495,794) $ 8,735,432
Other securities, primarily
certificates of deposit 650,774 - - 650,774
--------------------------------------------------------
$ 9,881,289 $ 711 $ (495,794) $ 9,386,206
========================================================
Mortgage-backed securities $ 40,247,767 $ 146,238 $ (701,752) $ 39,692,253
========================================================
</TABLE>
F-10
<PAGE>
HERITAGE FINANCIAL, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Carrying amounts and fair values of securities available for
sale as of June 30 are summarized as follows:
<TABLE>
<CAPTION>
1995
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains (Losses) Value
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Treasury securities $ 1,489,367 $ 13,838 $ - $ 1,503,205
U.S. Government agencies
and corporations 11,891,016 653,707 - 12,544,723
Equity security, stock in
Federal Home Loan Bank 1,423,700 - 1,423,700
--------------------------------------------------------
$ 14,804,083 $ 667,545 $ - $ 15,471,628
========================================================
</TABLE>
<TABLE>
<CAPTION>
1994
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains (Losses) Value
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Treasury securities $ 13,911,144 $ 65,910 $ (175,389) $ 13,801,665
U.S. Government agencies
and corporations 3,000,000 72,812 - 3,072,812
Equity security:
Stock in Sallie Mae 10,200 43,988 - 54,188
Stock in Federal Home
Loan Bank 1,423,700 - - 1,423,700
--------------------------------------------------------
$ 18,345,044 $ 182,710 $ (175,389) $ 18,352,365
========================================================
</TABLE>
The amortized cost and fair value of securities being held to maturity and
available for sale as of June 30, 1995 by contractual maturity are shown below.
Maturities may differ from contractual maturities in mortgage-backed securities
because the mortgages underlying the securities may be called or repaid without
any penalties. Therefore, these securities are not included in the maturity
categories in the following maturity summary. The equity and certain other
securities have also been excluded from the maturity table because they do not
have contractual maturities associated with debt securities.
F-11
<PAGE>
HERITAGE FINANCIALL, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Securities Held to Maturity Securities Available for Sale
-----------------------------------------------------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Due in one year or less $ - $ - $ 1,486,229 $ 1,500,775
Due after one year through 5 years 8,431,221 8,247,190 10,100,458 10,603,093
Due after five years through 10 years 667,500 667,500 1,793,696 1,944,060
------------------------------------------------------------
9,098,721 8,914,690 13,380,383 14,047,928
Federal Home Loan Bank stock - - 1,423,700 1,423,700
Other securities 1,050,487 1,050,487 - -
------------------------------------------------------------
$ 10,149,208 $ 9,965,177 $ 14,804,083 $ 15,471,628
============================================================
Mortgage-backed securities $ 36,583,097 $ 36,474,751 $ - $ -
============================================================
</TABLE>
Proceeds from sales of securities and mortgage-backed securities and the gross
realized gains and losses on those sales during the periods ended June 30 are as
follows:
<TABLE>
<CAPTION>
1995 1994 1993
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Proceeds from sales $ 12,591,559 $ 15,046,890 $ 7,566,852
=================================================
Realized gains $ 51,545 $ 103,811 $ 126,262
Realized losses (223,188) (71,287) -
-------------------------------------------------
$ (171,643) $ 32,524 $ 126,262
=================================================
</TABLE>
At June 30, 1995, the Company has pledged a U.S. Treasury note with an
approximate carrying value of $1,000,000 on its tax and loan account.
F-12
<PAGE>
HERITAGE FINANCIAL, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 3. Mortgage-Backed Securities
The amortized cost and fair values of mortgage-backed securities at June 30 are
summarized as follows:
<TABLE>
<CAPTION>
Principal Unamortized Unearned Amortized Fair
Balance Premiums Discounts Cost Value
--------------------------------------------------------------------------------
1995
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
GNMA
certificates $ 3,872,795 $ 21,236 $ (9,819) $ 3,884,212 $ 3,917,637
FHLMC
certificates 20,921,537 196,803 (13,815) 21,104,525 20,923,557
FNMA
certificates 6,178,834 145,348 - 6,324,182 6,275,459
Collateralized
mortgage
obligations 5,305,908 18,125 (53,855) 5,270,178 5,358,098
-------------------------------------------------------------------------------
$ 36,279,074 $ 381,512 $ (77,489) $ 36,583,097 $ 36,474,751
===============================================================================
</TABLE>
<TABLE>
<CAPTION>
1994
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
GNMA
certificates $ 4,328,561 $ 23,345 $ (10,881) $ 4,341,025 $ 4,344,261
FHLMC
certificates 24,548,406 229,360 (15,375) 24,762,391 24,534,725
FNMA
certificates 7,595,780 182,550 - 7,778,330 7,601,930
Collateralized
mortgage
obligations 3,350,497 18,153 (2,629) 3,366,021 3,211,337
--------------------------------------------------------------------------------
$ 39,823,244 $ 453,408 $ (28,885) $ 40,247,767 $ 39,692,253
================================================================================
</TABLE>
At June 30, 1995 the Company has pledged mortgage-backed securities with an
approximate carrying value of $2,760,000 on public deposits.
F-13
<PAGE>
HERITAGE FINANCIAL, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 4. Loans Receivable
Loans receivable at June 30 are summarized as follows:
<TABLE>
<CAPTION>
1995 1994
--------------------------------
<S> <C> <C>
First mortgage loans (principally conventional):
Principal balances:
Secured by one-to-four family residences $ 53,147,077 $ 46,342,479
Secured by other properties 8,700,092 7,731,720
Construction loans 2,572,675 2,068,400
--------------------------------
64,419,844 56,142,599
Less:
Loans in process (15,742) (109,320)
Undisbursed portion of construction loans (986,102) (1,075,425)
Unearned discounts (178,044) (228,376)
Net deferred loan origination fees (243,612) (218,697)
--------------------------------
Total first mortgage loans 62,996,344 54,510,781
--------------------------------
Consumer and other loans:
Principal balances:
Automobile 15,822,881 10,752,851
Home equity and second mortgage 14,340,783 12,546,431
Commercial 4,169,121 3,301,562
Student loans 3,286,693 3,273,199
Other 680,684 701,071
--------------------------------
38,300,162 30,575,114
Less loans in process (4,666) (14,421)
--------------------------------
Total consumer and other loans 38,295,496 30,560,693
--------------------------------
Total loans 101,291,840 85,071,474
Less allowance for loan losses (1,781,311) (1,711,534)
--------------------------------
$ 99,510,529 $ 83,359,940
================================
</TABLE>
F-14
<PAGE>
HERITAGE FINANCIALL, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Activity in the allowance for loan losses is summarized as follows for the years
ended June 30:
<TABLE>
<CAPTION>
1995 1994 1993
-----------------------------------------
<S> <C> <C> <C>
Balance, beginning $ 1,711,534 $ 1,781,666 $ 1,896,678
Provision for (reduction in
allowance for) loan losses 40,000 (130,000) (130,000)
Charge-offs and recoveries, net 29,777 60,022 (43,099)
Transfer (to) from allowance
for losses on foreclosed real
estate - (154) 58,087
-----------------------------------------
Balance, ending $ 1,781,311 $ 1,711,534 $ 1,781,666
=========================================
</TABLE>
The Company has had, and may be expected to have in the future, banking
transactions in the ordinary course of business with directors, executive
officers and their immediate families (commonly referred to as related parties),
all of which have been, in the opinion of management, on the same terms,
including interest rates and collateral, as those prevailing at the time for
comparable transactions with others.
Activity in loans receivable from certain executive officers and directors of
the Bank consisted of the following:
<TABLE>
<CAPTION>
Beginning Ending
Balance Additions Payments Balance
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1995 $ 528,466 $ 171,292 $ 95,962 $ 603,796
1994 555,246 12,099 38,879 528,466
</TABLE>
Note 5. Loan Servicing
Mortgage loans serviced for others are not included in the accompanying
consolidated statements of financial condition. The unpaid principal balances of
these loans at June 30 are summarized as follows:
<TABLE>
<CAPTION>
1995 1994
----------------------------
<S> <C> <C>
Mortgage loans underlying pass
through securities:
FHLMC $ 1,661,964 $ 2,161,173
FNMA 19,495,012 15,796,406
-----------------------------
21,156,976 17,957,579
Mortgage loan portfolios serviced
for other investors 1,726,761 1,871,715
-----------------------------
$ 22,883,737 $ 19,829,294
=============================
</TABLE>
Custodial escrow balances maintained in connection with the foregoing loan
servicing were approximately $220,000 and $181,000 at June 30, 1995 and 1994,
respectively.
F-15
<PAGE>
HERITAGE FINANCIAL, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 6. Accrued Interest Receivable
Accrued interest receivable at June 30 is summarized as follows:
<TABLE>
<CAPTION>
1995 1994
----------------------------
<S> <C> <C>
Mortgage-backed securities $ 291,155 $ 198,626
Securities 497,782 186,825
Loans receivable 674,469 667,218
----------------------------
$ 1,463,406 $ 1,052,669
============================
</TABLE>
Note 7. Premises and Equipment
Premises and equipment consisted of the following at June 30:
<TABLE>
<CAPTION>
1995 1994
----------------------------
<S> <C> <C>
Land $ 491,295 $ 552,015
Buildings and improvements 3,125,891 3,056,350
Furniture, fixtures and equipment 1,777,886 1,631,902
----------------------------
5,395,072 5,240,267
Less accumulated depreciation 2,195,562 1,893,741
----------------------------
$ 3,199,510 $ 3,346,526
============================
</TABLE>
F-16
<PAGE>
HERITAGE FINANCIAL, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 8. Deposits
Deposits at June 30 are as follows:
<TABLE>
<CAPTION>
Weighted-
Average
Rate At
June 30, 1995 1994
-------------------------------------------------------
1995 Amount Percent Amount Percent
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Demand and NOW accounts,
including non-interest-bearing
deposits of $2,486,825 in
1995, and $2,038,369 in 1994. 1.59% $ 14,879,246 9.5% $ 14,764,708 9.4%
Money Market 2.62 11,348,324 7.2 14,120,144 8.9
Savings 2.34 19,912,258 12.6 20,717,817 13.1
-------------------------------------------------------
46,139,828 29.3 49,602,669 31.4%
-------------------------------------------------------
Certificates of deposit:
1.00% - 2.99% 2.70 141,958 0.1% 1,112,921 0.7%
3.00% - 4.99% 4.46 22,741,238 14.5 66,821,318 42.4
5.00% - 6.99% 5.70 69,459,108 44.2 28,980,582 18.4
7.00% - 8.99% 7.20 17,698,083 11.3 9,345,950 5.9
9.00% - 10.99% 9.15 968,190 0.6 1,377,452 0.9
11.00% - 12.99% - - 0.0 457,546 0.3
-------------------------------------------------------
111,008,577 70.7% 108,095,769 68.6%
-------------------------------------------------------
4.69 157,148,405 100.0% 157,698,438 100.0%
=======================================================
</TABLE>
The aggregate amount of certificates of deposit with a balance of $100,000 or
more was $5,016,263 and $4,072,394 at June 30, 1995 and 1994, respectively.
At June 30, 1995, scheduled maturities of certificates of deposit are as
follows:
<TABLE>
<CAPTION>
Year Ending June 30,
1996 1997 1998 1999 2000 Thereafter
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
1.00% - 2.99% $ 139,352 $ 2,606 $ - $ - $ - $ -
3.00% - 4.99% 16,744,211 5,801,774 90,166 90,178 - 14,909
5.00% - 6.99% 41,930,398 12,755,726 9,262,203 3,741,889 1,499,287 269,605
7.00% - 8.99% 4,681,880 731,522 2,315,467 72,857 9,730,459 165,898
9.00% - 10.99% 968,190 - - - - -
-----------------------------------------------------------------------------------------------------
$ 64,464,031 $ 19,291,628 $ 11,667,836 $ 3,904,924 $ 11,229,746 $ 450,412
=====================================================================================================
</TABLE>
F-17
<PAGE>
HERITAGE FINANCIAL, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Interest expense on deposits for the years ended June 30 is summarized as
follows:
<TABLE>
<CAPTION>
1995 1994 1993
-----------------------------------------------------
<S> <C> <C> <C>
Money market $ 298,461 $ 408,792 $ 499,333
Savings 670,293 539,618 598,250
NOW 89,648 189,348 208,124
Certificates of deposit 5,684,647 4,557,382 5,431,288
-----------------------------------------------------
6,743,049 5,695,140 6,736,995
Less penalties on early
withdrawals 23,961 11,270 20,424
------------------------------------------------
Net interest on
deposits $ 6,719,088 $ 5,683,870 $ 6,716,571
================================================
</TABLE>
Note 9. Borrowed Funds
As of June 30, 1995, the Company has an outstanding advance of $5,000,000 from
the Federal Home Loan Bank of Des Moines (FHLB) which matures on June 18, 1998,
and carries a fixed rate of interest at 6.09%. This advance is collateralized by
the stock in the FHLB and sufficient real estate loans to at least equal 150% of
the total advance outstanding. In addition, the Company has a line of credit at
the FHLB in the amount of $2,000,000. There were no amounts outstanding under
this line of credit at June 30, 1995.
F-18
<PAGE>
HERITAGE FINANCIAL, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 10. Accounting Change, Income Taxes and Retained Earnings
As explained in Note 1, the Company adopted FASB Statement No. 109, Accounting
for Income Taxes effective July 1, 1993. The cumulative effect of this change as
of June 30, 1993 has been reflected in the consolidated statement of income for
1994, and prior year financial statements have not been restated.
Under existing provisions of the Internal Revenue Code and similar sections of
the Iowa income tax law, the subsidiary bank is allowed a special bad debt
deduction which is based on a percentage of otherwise taxable income. If the
amounts that qualify as deductions for income tax purposes are used for purposes
other than to absorb bad debt losses, they will be subject to income taxes at
the then corporate rate.
The Company and its subsidiaries file consolidated federal income tax returns.
Income taxes are allocated to each entity based on each entity's income tax
liability as if it would have filed a separate return.
Income tax expense for the years ended June 30 is summarized as follows:
<TABLE>
<CAPTION>
1995 1994 1993
------------------------------------------
<S> <C> <C> <C>
Current $ 239,346 $ 355,450 $ 852,200
Deferred 149,404 (150,800) 35,000
------------------------------------------
$ 388,750 $ 204,650 $ 887,200
==========================================
</TABLE>
Deferred tax assets and liabilities consist of the following components as of
June 30, 1995 and 1994:
<TABLE>
<CAPTION>
1995 1994
----------------------------
<S> <C> <C>
Deferred tax assets:
Allowance for loan losses $ 298,000 $ 330,000
Capital loss carryover 34,000 51,200
Lower of cost or market adjustment
for loans held for sale 102,000 102,200
Other 16,996 118,500
----------------------------
Total gross deferred tax assets 450,996 601,900
----------------------------
Deferred tax liabilities:
Federal Home Loan Bank stock 154,000 157,000
Premises and equipment basis differences 45,000 43,500
Unrealized gain on securities available
for sale 267,020 1,388
----------------------------
Total gross deferred tax
liabilities 466,020 201,888
----------------------------
Net deferred tax asset
(liability) $ (15,024) $ 400,012
============================
</TABLE>
F-19
<PAGE>
HERITAGE FINANCIAL, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Total income tax expense differed from the amounts computed by applying the U.S.
federal income tax rate to pretax income for the periods ended June 30 due to
the following:
<TABLE>
<CAPTION>
1995 1994 1993
----------------------------------------
<S> <C> <C> <C>
Income taxes at federal
income tax rate $ 425,086 $ 592,277 $ 1,154,981
Bad debt deductions - - (172,058)
Effect of purchase
accounting adjustment:
Nontaxable amortization:
Discounts on deposits - (314,887) (352,895)
Other - 216,217 94,366
Other (36,336) (288,957) 162,806
----------------------------------------
$ 388,750 $ 204,650 $ 887,200
========================================
</TABLE>
Retained earnings at June 30, 1995 and 1994 includes approximately $1,900,000
for which no deferred tax liability has been recognized. This amount represents
an allocation of income to bad-debt deductions for tax purposes only. Reduction
of the amount so allocated for purposes other than tax bad-debt losses or
adjustments arising from carryback of net operating losses would create income
for tax purposes only, which would be subject to the then current corporate
income tax rate. The unrecorded deferred income tax liability on this amount for
financial statement purposes was approximately $655,000 at June 30, 1995 and
1994.
F-20
<PAGE>
HERITAGE FINANCIAL, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 11. Stockholders' Equity
Regulatory Capital Requirements The Financial Institutions Reform, Recovery,
- -------------------------------
and Enforcement Act of 1989 (FIRREA) and OTS regulations require institutions to
meet certain regulatory requirements. The regulations require minimum regulatory
tangible capital of 1.5% of total assets, a 3% core capital ratio and an 8%
risk-based capital ratio. The Federal Deposit Insurance Corporation Improvement
Act of 1991 (FDICIA) contains provisions which require institutions to maintain
a core capital ratio of at least 4% to be considered adequately capitalized
unless its supervisory condition is such to allow it to maintain a 3% ratio. At
June 30, 1995, the Bank meets all regulatory capital requirements.
The following is a reconciliation of the Bank's capital in accordance with
generally accepted accounting principles (GAAP) to the three components of
regulatory capital calculated under the requirement of FIRREA at June 30, 1995:
<TABLE>
<CAPTION>
Regulatory Capital (000's)
-----------------------------------------------------------------------------------
Percent of Percent of Percent of
Tangible Tangible Tangible Risk-Based Risk-Based
Capital Assets Core Capital Assets Capital Assets
-----------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Equity $ 13,149 $ 13,149 $ 13,149
Unrealized (gains) on certain
available-for-sale securities (400) (400) (400)
Qualifying general allowance for
loan losses 1,033
-----------------------------------------------------------------------------------
Regulatory capital computed $ 12,749 7.17% $ 12,749 7.17% $ 12,749 16.82%
Minimum capital requirement 2,668 1.50 5,335 3.00 6,555 8.00
-----------------------------------------------------------------------------------
Regulatory Capital Excess $ 10,081 5.67% $ 7,414 4.17% $ 6,194 8.82%
===================================================================================
</TABLE>
There were no differences in capital and net income in this financial report as
compared to the quarterly report filed with the Office of Thrift Supervision
dated June 30, 1995.
Limitations on Dividends and Other Capital Distributions OTS regulations impose
limitations on dividends and other capital distributions by savings
institutions. Capital distributions include cash dividends, payments to
repurchase or otherwise acquire the savings association's shares, payments to
stockholders of another institution in a cash out merger, and other
distributions charged against capital. The rule establishes three tiers of
institutions. An institution such as the Bank that exceeds all fully phased-in
capital requirements before and after a proposed capital distribution ("Tier 1
Association") may, after prior notice but without the approval of the OTS, make
capital distributions during a calendar year up to the higher of (i) 100% of its
net income to date during the calendar year plus the amount that would reduce by
one-half its surplus capital at the beginning of the calendar year or (ii) 75%
of its net income over the most recent four-quarter period, subject to certain
limitations and restrictions as described in the regulations. Any additional
capital distributions would require prior regulatory approval. A savings
institution that does not meet its current regulatory capital requirement before
or after payment of a proposed capital distribution may not make any capital
distributions without the prior approval of the OTS. At June 30, 1995 the Bank
was considered a Tier 1 Association.
F-21
<PAGE>
HERITAGE FINANCIAL, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 12. Employee Benefits
The Company has a 401(k) retirement plan that covers substantially all employees
whereby employees may elect to defer a portion of their salary through
contribution to the plan. The employers' double participant contributions up to
3% of the employee's compensation. The employer may also contribute an
additional discretionary amount to be determined on an annual basis. The total
contributions to the plan were $142,848, $141,907 and $107,380 for the years
ended June 30, 1995, 1994 and 1993, respectively.
The Company has employment agreements with certain officers. The agreements
provide for a continuation of compensation for a period of three years for three
of the officers and one year for four of the officers. The agreements become
effective if the officers are terminated from employment subsequent to a change
in control of the Company.
Note 13. Financial Instruments With Off-Statement of Financial Condition Risk
The Company is a party to financial instruments with off-statement of financial
condition risk in the normal course of business to meet the financing needs of
its customers. These financial instruments consist primarily of loans sold with
recourse and commitments to extend credit. Those instruments involve, to varying
degrees, elements of credit and interest rate risk in excess of the amount
recognized in the statement of financial condition. The contract or notional
amounts of those instruments reflect the extent of involvement the banks have in
particular classes of financial instruments.
The Company uses the same credit policies in making commitments and conditional
obligations as it does for on-statement of financial condition instruments.
The Company requires collateral or other security to support financial
instruments with credit risk.
A summary of the contract amount of the Company's exposure to off-statement of
financial condition risk for commitments to extend credit as of June 30 are as
follows:
<TABLE>
<CAPTION>
Contract Or
Notional Amount
--------------------------
1995 1994
--------------------------
<S> <C> <C>
Mortgage loans $ 497,104 $ 920,960
Undisbursed overdraft loan privileges 380,000 119,000
</TABLE>
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. Since some of the commitments are expected to expire
without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. The Company evaluates each customer's credit
worthiness on a case-by-case basis. The amount of collateral obtained, if deemed
necessary by the Company, upon extension of credit, is based on management's
credit evaluation of the counterparty. Collateral held varies but normally
includes real estate and personal property.
As of June 30, 1995, the Company has sold 51 loans with recourse with a
remaining principal balance of $605,047.
F-22
<PAGE>
HERITAGE FINANCIAL, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Subsequent to June 30, 1995, the Company purchased $15,000,000 in second
mortgage loans which was funded by the utilization of existing liquid assets and
an additional $5,000,000 in advances from the Federal Home Loan Bank of Des
Moines.
At June 30, 1995, the Company had no outstanding commitments to sell loans or
securities.
Note 14. Stock Options
The Company has a stock option plan for certain officers, directors and
employees. As of June 30, 1995 options to purchase 24,858 shares of common stock
at a price of $56 per share and 400 shares of common stock at a price of $19.25
per share are outstanding which are exercisable over a ten-year period expiring
in August, 2004. 1,000 shares remain available for future grants to the officers
and employees.
Note 15. Other Non-interest Expense
Other non-interest expense amounts are summarized as follows for the years ended
June 30:
<TABLE>
<CAPTION>
1995 1994 1993
------------------------------------------
<S> <C> <C> <C>
Data processing $ 337,875 $ 319,411 328,048
Professional fees 128,239 191,691 189,662
Office supplies and postage 201,319 175,335 193,321
Insurance 64,966 43,684 69,035
Dues and subscriptions 40,779 33,647 37,382
Advertising and promotion 142,160 133,655 122,332
Other 520,809 473,458 485,590
------------------------------------------
$ 1,436,147 $ 1,370,881 1,425,370
==========================================
</TABLE>
F-23
<PAGE>
HERITAGE FINANCIAL, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ---------------------------------------------------------------------------
Note 16. Estimated Fair Values of Financial Instruments
FASB Statement No. 107, Disclosures about Fair Value of Financial Instruments,
requires disclosures of fair value information about financial instruments,
whether or not recognized in the statement of financial condition, for which it
is practicable to estimate that value. In cases where quoted market prices are
not available, fair values are based on estimates using present value or other
valuation techniques. Those techniques are significantly affected by the
assumptions used, including the discount rate and estimates of future cash
flows. In that regard, the derived fair value estimates cannot be substantiated
by comparison to independent markets and, in many cases, could not be realized
in immediate settlement of the instrument. Statement 107 excludes all
nonfinancial instruments from its disclosure requirements. Accordingly, the
aggregate fair value amounts presented do not represent the underlying value of
the Company.
The following methods and assumptions were used by the Company in estimating the
value of its financial instruments:
Cash: The carrying amount reported in the consolidated statement of financial
- ----
condition for cash approximates its fair value.
Securities available for sale and securities held to maturity: Fair values for
- -------------------------------------------------------------
securities available for sale and held to maturity securities are based on
quoted market prices, where available. If quoted market prices are not
available, fair values are based on quoted market prices of comparable
instruments.
Mortgage-backed securities: Fair values for mortgage-backed securities are based
- --------------------------
on quoted market prices.
Loans receivable and loans held for sale: The fair values of loans receivable
- ----------------------------------------
and loans held for sale are estimated using discounted cash flow analyses, using
interest rates currently being offered for loans receivable and loans held for
sale with similar terms to borrowers with similar credit quality.
Accrued interest receivable: The carrying amount of accrued interest receivable
- ---------------------------
approximates its fair value.
Deposits: The carrying amount reported in the statement of financial condition
- --------
for demand and savings deposits, which represents the amount payable on demand,
approximates their fair values. Fair values for fixed-rate and variable-rate
certificates of deposit are estimated using a discounted cash flow calculation
that applies interest rates currently being offered on certificates to a
schedule of aggregated expected maturities on time deposits.
Borrowed funds: The carrying value of borrowed funds approximates their fair
- --------------
value.
Accrued interest payable and advances from borrowers for taxes and insurance:
- ----------------------------------------------------------------------------
The carrying value of accrued interest payable and advances from borrowers for
taxes and insurance approximates their fair value.
Commitments to extend credit: The fair values of commitments are considered
- ----------------------------
equal to their notional values, based on the fees currently charged to enter
into similar agreements, taking into account the remaining terms of the
agreements and credit worthiness of the counterparties.
F-24
<PAGE>
HERITAGE FINANCIAL, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ---------------------------------------------------------------------------
The carrying amounts and approximate fair values are as follows at June 30:
<TABLE>
<CAPTION>
1995 1994
--------------------------------------------------------------
Approximate Approximate
Carrying Fair Carrying Fair
Amounts Values Amounts Values
--------------------------------------------------------------
<S> <C> <C> <C> <C>
Financial assets:
Cash $ 10,737,260 $ 10,737,000 $ 7,532,053 $ 7,532,000
Securities held to maturity 10,149,208 9,965,000 9,881,289 9,386,000
Securities available for sale 15,471,628 15,472,000 18,352,365 18,352,000
Mortgage-backed securities 36,583,097 36,475,000 40,247,767 39,362,000
Loans, net 99,510,529 100,290,000 91,224,724 92,353,000
Accrued interest receivable 1,463,406 1,463,000 1,052,669 1,053,000
Financial liabilities:
Deposits 157,148,405 157,406,000 157,698,438 158,147,000
Borrowed funds 5,000,000 5,000,000
Accrued interest payable and
advances from borrowers
for taxes and insurance 1,516,746 1,517,000 1,365,940 1,366,000
Commitments to extend credit:
Mortgage loans 497,104 497,000 920,960 921,000
Undisbursed overdraft loan privileges 380,000 380,000 119,000 119,000
</TABLE>
Note 17. Pending Accounting Pronouncements
The Financial Accounting Standards Board has approved for the year ending June
30, 1996, Statement No. 114, Accounting by Creditors for Impairment of a Loan
and Statement No. 118 which amended certain provisions of Statement No. 114 with
respect to income recognition and disclosures. The Financial Accounting
Standards Board has also approved Statement No. 121, Accounting for Impairment
of Long-Lived Assets or Long-Lived Assets to Be Disposed Of and Statement No.
122, Accounting for Mortgage Servicing Rights, which are effective for years
beginning after December 15, 1995. FASB Statements 114, 118, 121 and 122 are not
expected to have a material effect on the Company's financial statements when
adopted.
F-25
<PAGE>
HERITAGE FINANCIAL, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ---------------------------------------------------------------------------
Note 18. Heritage Financial, Ltd. (Parent Company Only) Financial Information
STATEMENTS OF FINANCIAL CONDITION
JUNE 30, 1995 AND 1994
<TABLE>
<CAPTION>
1995 1994
-------------------------------
<S> <C> <C>
ASSETS
Cash $ 341,678 $ 14,700
Investment in subsidiary banks 13,149,201 12,729,661
Other assets 163,095 137,835
-------------------------------
$ 13,653,974 $ 12,882,196
===============================
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities $ - $ (93,074)
-------------------------------
Stockholders' equity:
Common stock, at par value 179,041 177,191
Additional paid-in capital 1,302,057 1,222,357
Retained earnings 11,772,351 11,569,789
Unrealized gain on securities available
for sale, net 400,525 5,933
-------------------------------
13,653,974 12,975,270
-------------------------------
$ 13,653,974 $ 12,882,196
===============================
</TABLE>
<TABLE>
<CAPTION>
STATEMENTS OF INCOME
Years Ended June 30, 1995, 1994 and 1993
1995 1994 1993
------------------------------------------------
<S> <C> <C> <C>
Operating income:
Equity in net income of bank
subsidiaries $ 969,948 $ 1,624,364 2,609,311
Interest and other income 3,577 11,885 16,239
------------------------------------------------
973,525 1,636,249 2,625,550
Operating expenses and taxes (147,745) (148,678) (212,804)
================================================
Income before the cumulative effect
on prior years of the change in
accounting for income taxes 825,780 1,487,571 2,412,746
Cumulative effect on prior years of
the change in accounting for
income taxes - 417,600 -
------------------------------------------------
Net income $ 825,780 $ 1,905,171 2,412,746
================================================
</TABLE>
F-26
<PAGE>
HERITAGE FINANCIAL, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ---------------------------------------------------------------------------
STATEMENTS OF CASH FLOWS
Years Ended June 30, 1995, 1994 and 1993
<TABLE>
<CAPTION>
1995 1994 1993
-------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 825,780 1,905,171 2,412,746
Adjustments to reconcile net income to
net cash provided by operating
activities:
Equity in undistributed net income
of subsidiaries (24,948) (1,046,964) (614,311)
(Increase) decrease in other assets and
liabilities net 67,814 84,824 (65,490)
-------------------------------------------------
Net cash provided by operating
activities 868,646 943,031 1,732,945
-------------------------------------------------
Cash flows from financing activities:
Principal payments on borrowed funds (800,000) (1,650,000)
Dividends paid (623,218) (432,346) (97,530)
Proceeds from issuance of common
stock, net 81,550 39,990 9,120
-------------------------------------------------
Net cash (used in) financing
activities (541,668) (1,192,356) (1,738,410)
-------------------------------------------------
Net increase (decrease) in cash 326,978 (249,325) (5,465)
Cash:
Beginning 14,700 264,025 269,490
-------------------------------------------------
Ending $ 341,678 $ 14,700 264,025
=================================================
</TABLE>
F-27
<PAGE>
HERITAGE FINANCIAL, LTD. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF FINANCIAL CONDITION (Unaudited)
<TABLE>
<CAPTION>
March 31, June 30,
ASSETS 1996 1995
- -------------------------------------------------------------------------------
<S> <C> <C>
Cash:
Interest-bearing $ 8,241,182 $ 9,736,485
Non-interest-bearing 918,588 1,000,775
Securities held to maturity 4,138,329 10,149,208
Securities available for sale 19,551,175 15,471,628
Mortgage-backed securities held to maturity 32,510,991 36,583,097
Loans held for sale 522,508 -
Loans receivable, net 114,117,339 99,510,529
Accrued interest receivable 1,370,298 1,463,406
Income tax refund claims receivable - 51,217
Deferred taxes 110,940 -
Premises and equipment, net 3,072,155 3,199,510
Other assets 845,423 504,987
----------------------------------
Total assets $ 185,398,928 $ 177,670,842
==================================
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Deposits $ 160,081,584 $ 157,148,405
Borrowed funds 10,000,000 5,000,000
Advances from borrowers for taxes and
insurance 270,626 510,310
Income taxes:
Current 66,030 -
Deferred - 15,024
Accrued expenses and other liabilities 934,355 1,343,129
----------------------------------
Total liabilities 171,352,595 164,016,868
----------------------------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Common stock 180,762 179,041
Additional paid-in capital 1,382,012 1,302,057
Retained earnings, substantially restricted 12,406,980 11,772,351
Unrealized gain on securities available
for sale, net 76,579 400,525
----------------------------------
Total stockholders' equity 14,046,333 13,653,974
----------------------------------
Total liabilities and stockholders'
equity $ 185,398,928 $ 177,670,842
==================================
</TABLE>
See Notes to Consolidated Condensed Financial Statements.
F-28
<PAGE>
HERITAGE FINANCIAL, LTD. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF INCOME (Unaudited)
Nine Months Ended March 31, 1996 and 1995
<TABLE>
<CAPTION>
1996 1995
- -------------------------------------------------------------------------------
<S> <C> <C>
Interest income:
Loans receivable $ 7,632,952 $ 5,919,999
Securities 1,099,282 1,268,580
Mortgage-backed securities 1,727,106 1,721,764
Other interest-earning assets 139,010 7,372
---------------------------------
Total interest income 10,598,350 8,917,715
---------------------------------
Interest expense
Deposits 5,529,395 4,922,863
Borrowed funds 464,433 6,083
---------------------------------
Total interest expense 5,993,828 4,928,946
---------------------------------
Net interest income 4,604,522 3,988,769
Provision for loan losses - 40,000
---------------------------------
Net interest income after provision for
loan losses 4,604,522 3,948,769
---------------------------------
Non-interest income:
Gain (loss) on sale of interest-earning
assets, net 244,499 (188,291)
Service charges and fees 338,442 300,086
Other 69,407 77,169
---------------------------------
Total non-interest income 652,348 188,964
---------------------------------
Non-interest expense:
Compensation and benefits 1,724,594 1,586,133
Occupancy and equipment 395,258 381,742
SAIF deposit insurance premiums 272,489 271,417
Net loss from foreclosed real estate - 1,328
Other 931,735 1,048,547
----------------------------------
Total non-interest expense 3,324,076 3,289,167
----------------------------------
Income before income taxes 1,932,794 848,566
Income tax expense 757,200 282,109
----------------------------------
Net income $ 1,175,594 $ 566,457
==================================
Earnings per common share (fully diluted) $ 6.09 $ 3.20
==================================
Dividends per common share $ 3.00 $ 2.51
==================================
Weighted average number of common shares
outstanding 193,045 177,191
==================================
</TABLE>
See Notes to Consolidated Condensed Financial Statements.
F-29
<PAGE>
HERITAGE FINANCIAL, LTD. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF STOCKHOLDERS' EQUITY (unaudited)
Nine Month Period Ended March 31, 1996
<TABLE>
<CAPTION>
Unrealized
Gain on
Additional Securities
Common Paid-in Retained Available for
Stock Capital Earnings Sale, Net Total
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance, June 30, 1995 179,041 1,302,057 11,772,351 400,525 13,653,974
Net income for the nine months
ended March 31, 1996 - - 1,175,594 - 1,175,594
Dividends on common stock
for the nine months ended
March 31, 1996 - - (540,965) - (540,965)
Issuance of 1,721 shares of
common stock upon exercise
of options 1,721 79,955 - - 81,676
Reclassification of securities to
available for sale - - - (73,483) (73,483)
Net change in unrealized
gain on securities available
for sale, net - - - (250,463) (250,463)
-------------------------------------------------------------------------------------------------
Balance, March 31, 1996 $ 180,762 $ 1,382,012 $ 12,406,980 $ 76,579 $ 14,046,333
=================================================================================================
</TABLE>
See Notes to Consolidated Condensed Financial Statements.
F-30
<PAGE>
HERITAGE FINANCIAL, LTD. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (Unaudited)
Nine Months Ended March 31, 1995 and 1996
<TABLE>
<CAPTION>
1996 1995
- ------------------------------------------------------------------------------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 1,175,594 $ 566,457
Adjustments to reconcile net income to net
cash provided by operating activities:
Amortization of deferred loan origination fees (95,591) (53,339)
Amortization of premiums and discounts on loans,
mortgage-backed securities and investment securities 20,483 (98,142)
Provision for loan losses - 40,000
Unrealized loss on loans held for sale - 32,508
Net (gain) loss on sales of securities and
mortgage-backed securities (157,632) 171,643
Net (gain) loss on sales of loans (86,867) 16,649
Depreciation of premises and equipment 206,299 180,918
Deferred taxes 90,000 35,004
Stock dividend on Federal Home Loan Bank Stock (28,700) -
Net change in:
Accrued interest receivable and other assets (247,328) (397,553)
Income tax refund claims receivable 51,217 -
Accrued expenses and other liabilities (408,774) (237,752)
Income taxes payable 66,030 91,506
------------------------------------
Net cash provided by operating activities 584,731 347,899
------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Loan originations and principal payments on loans and
mortgage-backed securities, net (19,120,534) (5,482,101)
Purchase of mortgage-backed securities - (1,948,437)
Purchase of securities held to maturity (5,128,342) (1,172,503)
Proceeds from sales of securities available for sale 5,959,811 12,591,559
Proceeds from maturity of securities available for sale 500,000 1,000,000
Purchase of securities available for sale (2,463,644) (10,195,663)
Proceeds from the maturity of securities
held to maturity 2,708,000 72,721
Proceeds from sales of loans 8,227,226 3,541,940
Purchase of premises and equipment (78,944) (130,641)
Proceeds from sale of land - 58,500
----------------------------------
Net cash (used in) investing
activities (9,396,427) (1,664,625)
----------------------------------
</TABLE>
(Continued)
See Notes to Consolidated Condensed Financial Statements.
F-31
<PAGE>
HERITAGE FINANCIAL, LTD. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (Unaudited)(Continued)
Nine Months Ended March 31, 1996 and 1995
<TABLE>
<CAPTION>
1996 1995
- -----------------------------------------------------------------------------
<S> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from borrowed funds $ 6,000,000 $ -
Principal payments on borrowed funds (1,000,000) -
Net increase (decrease) in deposits 2,933,179 (89,265)
Cash dividends paid (540,965) (444,178)
Proceeds from issuance of common stock, net 81,676 11,550
Net (decrease) in advances from borrowers for
taxes and insurance (239,684) (272,586)
----------------------------------
Net cash provided by (used in)
financing activities 7,234,206 (794,479)
----------------------------------
Net (decrease) in cash (1,577,490) (2,111,205)
CASH
Beginning 10,737,260 7,532,053
----------------------------------
Ending $ 9,159,770 $ 5,420,848
==================================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION
Cash payments for:
Interest $ 6,511,086 $ 5,202,357
==================================
Income taxes $ 549,953 $ 155,599
==================================
</TABLE>
See Notes to Consolidated Condensed Financial Statements.
F-32
<PAGE>
HERITAGE FINANCIAL, LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
- -----------------------------------------------------------------------------
Significant Accounting Policies
- -------------------------------
The consolidated financial statements for the nine month periods ended March 31,
1996 and 1995 are unaudited. In the opinion of the management of Heritage
Financial, Ltd. these financial statements reflect all adjustments, consisting
only of normal recurring accruals necessary to present fairly these consolidated
financial statements. The results of operations for the interim periods are not
necessarily indicative of results which may be expected for an entire year.
Certain information and footnote disclosure normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been omitted.
The consolidated condensed financial statements include the accounts of Heritage
Financial, Ltd (the Company) and its wholly owned subsidiary, Hawkeye Federal
Savings Bank of Boone (the Bank). All significant intercompany balances and
transactions have been eliminated in consolidation.
Reclassification of Securities
- ------------------------------
During 1995, Financial Accounting Standards Board Special Report- "A Guide to
Implementation of Statement No. 115 on Accounting for Certain Investments in
Debt and Equity Securities" allowed a reassessment of the appropriateness of the
classification of securities under certain circumstances. Held-to-maturity
securities with an amortized cost of $8,398,314 and a fair value of $8,275,842
were reclassified as available for-sale in December, 1995 in accordance with
guidance provided by the report. The reclassification was made at fair value and
the difference between the amortized cost and fair value on the date of transfer
was recognized as a decrease in stockholders' equity, net of the related
deferred tax effect.
Regulatory Capital Requirements
- -------------------------------
Pursuant to the Financial Institutions Reform, Recovery and Enforcement Act of
1989 ("FIRREA"), savings institutions must meet three separate minimum capital-
to-asset requirements. As of March 31, 1996, the Bank substantially exceeded all
current regulatory capital standards.
Earnings Per Share
- ------------------
Earnings per share is calculated using the weighted average number of shares of
common stock outstanding and the effect of dilutive stock options for the nine
month period ended March 31, 1996 and 1995. The weighted average number of
shares of common stock outstanding for the nine months ended March 31, 1996 and
1995 are 193,045 and 177,191, respectively.
Nonperforming Assets and Subsequent Event
- -----------------------------------------
The level of nonperforming assets increased from $46,000 at June 30, 1995 to $2
million at March 31, 1996, primarily due to the Bennett Funding loans of
approximately $1.8 million being placed on nonaccrual status. The Bennett
Funding loans are loans to the Bennett Funding Group and certain affiliates
which are collateralized by equipment leases. Approximately 10,000 investors and
200 financial institutions nationwide had similar investments or lending
relationships with Bennett. Bennett filed for Chapter 11 bankruptcy protection
on March 29, 1996 after the principals of the company were charged with various
criminal offenses relating to the leasing transactions. Upon the filing of the
Bennett bankruptcy case, Hawkeye's Bennett Funding Loan became nonperforming.
F-33
<PAGE>
HERITAGE FINANCIAL, LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
- -----------------------------------------------------------------------------
In evaluating the March 31, 1996 allowance for loan losses, Bank management
reviewed the Bank's files relating to this loan. Based on this review, and the
limited information available at that time, management did not believe that an
adjustment to the allowance for loan losses was warranted at March 31, 1996.
Heritage management is closely following the developments at the Bennett Funding
Group and has retained legal counsel to guide it through the Bennett bankruptcy
proceedings. The reports from the bankruptcy trustee and legal counsel allege
that significant fraudulent activity took place at Bennett Funding. Based on
this and other pertinent information, at June 30, 1996. Heritage management
decided to establish a specific reserve for the entire balance via a charge to
the provision for loan losses. This had the affect of reducing fourth quarter
earnings by $1.8 million less the tax effect of $600,000 for a net effect of
$2.7 million.
Subsequent Event - Merger
- -------------------------
On May 16, 1996, the Company entered into a "Reorganization and Merger
Agreement" (the Agreement) with Commercial Federal Corporation (Commercial
Federal) of Omaha, Nebraska. The Agreement calls for Company stockholders to
receive cash and stock of approximately $116.61 per share (subject to
adjustment, as described below), the actual amount to be determined based upon
the price of Commercial Federal's stock prior to closing (as defined in the
Agreement). The payment to Company stockholders will, in the aggregate, be
comprised of approximately 80% of Commercial Federal stock and 20% cash.
As more fully described in the Agreement, the cash consideration to be received
by Heritage stockholders may be increased depending on the extent to which the
Bennett Funding Loans previously described recover value prior to or for a
certain period of time following the merger.
The Agreement is subject to regulatory and shareholder approval and is
cancelable only if certain conditions are met, as specified in the Agreement.
The Company expects the transaction to close prior to October 31, 1996.
F-34
<PAGE>
- --------------------------------------------------------------------------------
REORGANIZATION AND MERGER AGREEMENT
By and Among
COMMERCIAL FEDERAL CORPORATION
AND
COMMERCIAL FEDERAL BANK, A FEDERAL SAVINGS BANK
And
HERITAGE FINANCIAL, LTD.
AND
HAWKEYE FEDERAL SAVINGS BANK
Dated as of May 16, 1996
- --------------------------------------------------------------------------------
A-1
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
<S> <C> <C>
ARTICLE I - THE MERGER AND RELATED MATTERS....................... 2
1.1 Merger: Surviving Institution......................... 2
1.2 Effective Time of the Merger.......................... 3
1.3 Conversion of Shares.................................. 3
1.4 Surviving Corporation in the Merger................... 5
1.5 Authorization for Issuance of Commercial Common
Stock; Exchange of Certificates................... 6
1.6 Dissenting Shares..................................... 8
1.7 Shareholders' Meeting................................. 8
1.8 Company Stock Options................................. 9
1.9 Registration Statement; Prospectus/
Proxy Statement................................... 9
1.10 Cooperation; Regulatory Approvals.................... 11
1.11 Closing.............................................. 11
1.12 Closing of Transfer Books............................ 11
1.13 Bank Merger.......................................... 12
1.14 No Fractional Shares................................. 12
1.15 Bennett Funding Asset................................ 13
ARTICLE II - REPRESENTATIONS AND WARRANTIES
OF THE COMPANY AND HAWKEYE........................ 13
2.1 Organization, Good Standing, Authority,
Insurance, Etc.................................... 14
2.2 Capitalization........................................ 14
2.3 Ownership of Subsidiaries............................. 15
2.4 Financial Statements and Reports...................... 15
2.5 Absence of Changes.................................... 16
2.6 Prospectus/Proxy Statement............................ 17
2.7 No Broker's or Finder's Fees.......................... 18
2.8 Litigation and Other Proceedings...................... 18
2.9 Compliance with Law................................... 18
2.10 Corporate Actions.................................... 18
2.11 Authority............................................ 19
2.12 Employment Arrangements.............................. 20
2.13 Employee Benefits.................................... 20
2.14 Information Furnished................................ 22
2.15 Property and Assets.................................. 22
2.16 Agreements and Instruments........................... 22
2.17 Material Contract Defaults........................... 23
2.18 Tax Matters.......................................... 23
2.19 Environmental Matters................................ 24
2.20 Loan Portfolio: Portfolio Management................ 24
2.21 Real Estate Loans and Investments.................... 25
2.22 Derivatives Contracts................................ 25
2.23 Insurance............................................ 25
</TABLE>
A-2
<PAGE>
<TABLE>
<S> <C> <C>
ARTICLE III - REPRESENTATIONS AND WARRANTIES OF COMMERCIAL
AND THE BANK..................................... 26
3.1 Organization, Good Standing, Authority,
Insurance, Etc.................................... 26
3.2 Capitalization........................................ 27
3.3 Ownership of Subsidiaries............................. 27
3.4 Financial Statements and Reports...................... 27
3.5 Absence of Changes.................................... 29
3.6 Prospectus/Proxy Statement............................ 29
3.7 No Broker's or Finder's Fees.......................... 29
3.8 Compliance With Law................................... 30
3.9 Corporate Actions..................................... 30
3.10 Authority............................................. 30
3.11 Information Furnished................................. 31
3.12 Litigation and Other Proceedings...................... 31
3.13 Agreements and Instruments............................ 31
3.14 Tax Matters........................................... 31
ARTICLE IV - COVENANTS........................................... 32
4.1 Investigations; Access and Copies..................... 32
4.2 Conduct of Business of the Company and the
Company Subsidiaries.................................. 32
4.3 No Solicitation....................................... 34
4.4 Shareholder Approvals................................. 35
4.5 Filing of Holding Company and Merger Applications..... 35
4.6 Consents.............................................. 35
4.7 Certain Actions....................................... 35
4.8 Publicity............................................. 35
4.9 Cooperation Generally................................. 36
4.10 Additional Financial Statements and Reports........... 36
4.11 Stock Listing......................................... 36
4.12 Allowance for Loan and Real Estate Owned Losses....... 36
4.13 D&O Indemnification and Insurance..................... 37
4.14 Tax Treatment......................................... 38
4.15 Update Disclosure..................................... 38
4.16 Cash Consideration.................................... 38
ARTICLE V - CONDITIONS OF THE MERGER; TERMINATION
OF AGREEMENT....................................... 38
5.1 General Conditions.................................... 38
5.2 Conditions to Obligations of Commercial and Bank...... 41
5.3 Conditions to Obligations of Company and Hawkeye...... 44
5.4 Termination of Agreement and Abandonment
of Merger......................................... 44
ARTICLE VI - TERMINATION OF OBLIGATIONS; PAYMENT
OF EXPENSES......................................... 46
6.1 Termination; Lack of Survival of Representations
and Warranties......................................... 46
6.2 Payment of Expenses.................................... 47
</TABLE>
A-3
<PAGE>
<TABLE>
<C> <S> <C>
ARTICLE VII - CERTAIN POST-MERGER AGREEMENTS..................... 48
7.1 Reports to the SEC................................... 48
7.2 Employees............................................ 48
ARTICLE VIII - GENERAL........................................... 49
8.1 Amendments........................................... 49
8.2 Confidentiality...................................... 49
8.3 Governing Law........................................ 49
8.4 Notices.............................................. 49
8.5 Assignment........................................... 50
8.6 Headings............................................. 50
8.7 Counterparts......................................... 50
8.8 Construction and Interpretation...................... 51
8.9 Entire Agreement..................................... 51
8.10 Severability........................................ 51
8.11 No Third Party Beneficiaries........................ 51
</TABLE>
<TABLE>
<S> <C>
Schedules:
Schedule I Disclosure Schedule for the Company
and Hawkeye......................................
Schedule II Disclosure Schedule for Commercial
and the Bank.....................................
Exhibits:
Exhibit 1.1(a) Acquisition Plan of Merger.....................
Exhibit 1.1(c) Bank Plan of Merger............................
Exhibit 5.2 Form of Opinion of Counsel for
the Company.................................
Exhibit 5.3 Form of Opinion of Counsel for
Commercial..................................
Exhibit 7.2 Severance Payment Policy.......................
</TABLE>
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<PAGE>
REORGANIZATION AND MERGER AGREEMENT
================================================================================
THIS REORGANIZATION AND MERGER AGREEMENT ("Agreement") is dated as of May
16, 1996, by and among COMMERCIAL FEDERAL CORPORATION, a Nebraska corporation
("Commercial"), and COMMERCIAL FEDERAL BANK, A FEDERAL SAVINGS BANK, a Federally
chartered savings bank and wholly-owned subsidiary of Commercial ("Bank"); and
Heritage Financial, Ltd. an Iowa corporation ("Company"), and Hawkeye Federal
Savings Bank, a Federally chartered savings bank and wholly-owned subsidiary of
Company ("Hawkeye").
WHEREAS, Commercial, a non-diversified, unitary savings and loan holding
company, with principal offices in Omaha, Nebraska, owns all of the issued and
outstanding capital stock of Bank, with its principal offices in Omaha,
Nebraska;
WHEREAS, Company, a non-diversified, unitary savings and loan holding
company, with principal offices in Boone, Iowa, owns all of the issued and
outstanding capital stock of Hawkeye, with principal offices in Boone, Iowa;
WHEREAS, Commercial and Company desire to combine their respective holding
companies through a tax-free exchange so that the respective shareholders of
both Commercial and Company will have an equity ownership in the combined
holding company;
WHEREAS, following the combination of Commercial and Company, it is
intended that Bank and Hawkeye will be merged such that the resulting holding
company will retain the advantage of a unitary savings and loan holding company
status and that the resulting savings institution will achieve certain economies
of scale and efficiencies as a result of such subsequent merger;
WHEREAS, it is intended that to accomplish this result, the Company will be
acquired by means of a merger (the "Acquisition Merger") of the Company with and
into Commercial, followed by the merger of Hawkeye with and into the Bank (the
"Bank Merger"). The Acquisition Merger and the Bank Merger are collectively
referred to as the "Merger";
WHEREAS, it is intended that for federal income tax purposes, the Merger
shall qualify as a reorganization within the meaning of Section 368 of the
Internal Revenue Code of 1986, as amended (the "Code") and this Agreement shall
constitute a plan of reorganization pursuant to Section 368 of the Code; and
WHEREAS, the Boards of Directors of Commercial and the Company (at meetings
duly called and held) have determined that this Agreement and the transactions
contemplated hereby are in the best interests of Commercial and the Company,
respectively, and their
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<PAGE>
respective stockholders and have approved this Agreement. Consummation of the
Merger is subject to the prior approval of the Office of Thrift Supervision
("OTS") and the stockholders of the Company, among other conditions specified
herein.
NOW THEREFORE, in consideration of the premises and mutual promises
hereinafter set forth, and of other good and valuable consideration, the receipt
and sufficiency of which are hereby acknowledged, the parties hereto hereby
agree as follows:
ARTICLE I
THE MERGER AND RELATED MATTERS
1.1 Merger: Surviving Institution. Subject to the terms and conditions of
-----------------------------
this Agreement, and pursuant to the provisions of the Nebraska Business
Corporation Act ("NBCA"), the Iowa Business Corporation Act ("IBCA"), Home
Owners Loan Act, as amended ("HOLA"), and the rules and regulations promulgated
thereunder (the "Thrift Regulations"), (a) at the Acquisition Merger Effective
Time (as hereinafter defined), the Company shall be merged with and into
Commercial pursuant to the terms and conditions set forth herein and in the Plan
of Merger set forth as Exhibit 1.1(a) attached hereto (the "Acquisition Plan of
Merger"), and the separate corporate existence of the Company shall cease, and
(b) thereafter, at the Bank Merger Effective Time (as hereinafter defined)
Hawkeye shall be merged with and into the Bank pursuant to the terms and
conditions set forth herein and in the Plan of Merger set forth in Exhibit
1.1(c) (the "Bank Plan of Merger"). The Acquisition Merger shall have the
effects specified in the NBCA and the IBCA, Section 1.4(e) hereof and the
Acquisition Plan of Merger. Upon the consummation of the Acquisition Merger,
the separate corporate existence of the Company shall cease and Commercial shall
continue as the surviving corporation (sometimes referred to herein as the
"Surviving Corporation"). Upon consummation of the Bank Merger, the separate
existence of Hawkeye shall cease and the Bank shall continue as the surviving
institution of the Bank Merger. The name of the Bank, as the surviving
institution of the Bank Merger, shall remain "Commercial Federal Bank, a Federal
Savings Bank". From and after the Bank Merger Effective Time, the Bank, as the
surviving institution of the Bank Merger, shall possess all of the properties
and rights and be subject to all of the liabilities and obligations of the Bank
and Hawkeye, all as more fully described in the Thrift Regulations, Section 1.13
hereof and the Bank Plan of Merger. Commercial may at any time change the
method of effecting the Merger if and to the extent it deems such change to be
desirable, provided, however, that no such change shall (A) alter or change the
-------- -------
amount or kind of consideration to be issued to holders of Company common stock
as provided for in this Agreement, (B) adversely affect the tax treatment to
Company shareholders as a result of receiving the consideration described in
Section 1.3 herein or (C) materially impede or delay the consummation of the
transactions contemplated by this Agreement.
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<PAGE>
1.2 Effective Time of the Merger. As soon as practicable after each of
----------------------------
the conditions set forth in Article V hereof have been satisfied or waived, but
in no event later than thirty (30) days following such satisfaction or waiver
(unless otherwise agreed by the parties hereto) Commercial will file, or cause
to be filed, articles of merger with appropriate authorities of Nebraska and
Iowa for the Acquisition Merger and articles of combination with the OTS for the
Bank Merger which articles of merger and articles of combination shall in each
case be in the form required by and executed in accordance with applicable
provisions of law and the Thrift Regulations, respectively. The Acquisition
Merger shall become effective at the time and date which is the later of the
time at which (i) the Nebraska articles of merger are filed with the appropriate
authorities of Nebraska and (ii) the Iowa articles of merger are filed with the
appropriate authorities of Iowa (the "Acquisition Merger Effective Time"), which
shall be immediately following the Closing (as defined in Section 1.11 herein)
and on the same day as the Closing if practicable. The Bank Merger shall become
effective at the time the articles of combination for such merger are endorsed
by the OTS pursuant to Section 552.13(k) of the Thrift Regulations (the "Bank
Merger Effective Time"). The parties shall cause the Acquisition Merger to
become effective prior to the Bank Merger.
1.3 Conversion of Shares.
--------------------
(a)(i) At the Acquisition Merger Effective Time, by virtue of the
Merger and without any action on the part of Commercial or Company or the
holders of shares of Commercial or Company common stock, each outstanding share
of Company common stock issued and outstanding at the Acquisition Merger
Effective Time (except for Dissenting Shares as defined in Section 1.6 hereof
and shares referred to in paragraph (ii) of this Section 1.3) shall be converted
into and exchanged for the right to receive: (x) cash without interest (the
"Cash Consideration") and (y) a number of shares of Commercial common stock,
$.01 par value per share (the "Commercial Common Stock") (such number of shares
of Commercial Common Stock the "Stock Consideration") (the Stock Consideration
and the Cash Consideration are individually or collectively referred to herein,
as the context requires, as the "Merger Consideration"), as follows:
(A) If the Average NYSE Closing Price, as defined below, is less than
$41.00, but greater than $36.00, then the aggregate per share value of the
Merger Consideration shall equal $122.35, consisting of Cash Consideration in an
amount of $24.47 and Stock Consideration consisting of that number of shares of
Commercial Common Stock arrived at by dividing 97.88 by the Average NYSE Closing
Price.
(B) If the Average NYSE Closing Price is equal to or greater than
$33.50 but equal to or less than $36.00, then the
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<PAGE>
aggregate per share value of the Merger Consideration shall equal (i) 2.719
shares of Commercial Common Stock in Stock Consideration and (ii) $24.47 in Cash
Consideration.
(C) If the Average NYSE Closing Price is equal to or greater than
$41.00 but equal to or less than $45.00, then the aggregate per share value of
the Merger Consideration shall equal (i) 2.387 shares of Commercial Common Stock
in Stock Consideration and (ii) $24.47 in Cash Consideration.
(D) If the Average NYSE Closing Price is greater than $45.00 but less
than $47.50, then the aggregate per share value of the Merger Consideration
shall equal $131.90, consisting of Cash Consideration in an amount of $24.47 and
Stock Consideration consisting of that number of shares of Commercial Common
Stock arrived at by dividing 107.43 by the Average NYSE Closing Price.
(E) In the event the Average NYSE Closing Price is equal to or greater
than $47.50 but equal to or less than $50.00, then the aggregate per share value
of the Merger Consideration shall equal (i) 2.262 shares of Commercial Common
Stock in Stock Consideration and (ii) $24.47 in Cash Consideration.
(F) In the event the Average NYSE Closing Price is greater than
$50.00, then the aggregate per share value of the Merger Consideration shall
equal $137.55, consisting of Cash Consideration in an amount of $24.47 and Stock
Consideration consisting of that number of shares of Commercial Common Stock
arrived at by dividing 113.08 by the Average NYSE Closing Price.
The Cash Consideration to be received by the Company shareholders
hereunder shall in each case be reduced on a pro rata basis in accordance with
the provisions of Section 1.15 of this Agreement.
(ii) Any shares of Company common stock which are owned or held by
the Company or any of its subsidiaries (except shares held in any 401(k) plan of
the Company or any of its subsidiaries or held in a fiduciary capacity) or by
Commercial or any of Commercial's subsidiaries (other than in a fiduciary
capacity) at the Acquisition Merger Effective Time shall cease to exist, and the
certificates for such shares shall as promptly as practicable be cancelled and
no shares of capital stock of Commercial shall be issued or exchanged therefor.
(iii) At the Acquisition Merger Effective Time, the holders of
certificates representing shares of Company common stock shall cease to have any
rights as stockholders of the Company, except the right to receive the Merger
Consideration as provided herein.
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<PAGE>
(iv) If the holders of Commercial common stock shall have received or
shall have become entitled to receive, without payment therefor, during the
period commencing on the date hereof and ending with the Acquisition Merger
Effective Time, additional shares of common stock or other securities for their
stock by way of a stock split, stock dividend, reclassification, combination of
shares or similar corporate rearrangement ("Stock Adjustment"), then the amount
of Commercial common stock to be exchanged at the Acquisition Merger Effective
Time for Company common stock shall be proportionately adjusted to take into
account such Stock Adjustment. In addition, the Average NYSE Closing Price, as
defined below, shall be proportionately adjusted to compensate for any such
Stock Adjustment.
(b) The term "NYSE Closing Price" shall mean the closing price per
share (carried to four decimal places and rounded down) of the Commercial Common
Stock on the New York Stock Exchange. The term "Average NYSE Closing Price"
shall mean the arithmetic mean of the NYSE Closing Prices of the Commercial
Common Stock for the twenty-fifth through the sixth trading day, inclusive,
immediately preceding the business day prior to the later of (A) the date on
which all requisite federal and state regulatory approvals required to
consummate the transactions contemplated by this Agreement are obtained (and
Commercial shall notify the Company of the date when all such approvals are
obtained), including for this purpose the period of any requisite waiting
periods in respect thereof, or (B) the date of the Company's meeting of
shareholders to be held pursuant to Section 1.7 herein (the "Determination
Period").
(c) Each share of Commercial Common Stock to be issued to the
Company's shareholders pursuant to this Section 1.3 shall include the
corresponding number of rights associated with the Commercial Common Stock
pursuant to the Rights Agreement dated as of December 19, 1988 by and between
Commercial and Manufacturers Hanover Trust Company, as Rights Agent ("Commercial
Rights Agreement").
1.4 Surviving Corporation in the Merger.
-----------------------------------
(a) The name of the Surviving Corporation in the Acquisition Merger
shall be Commercial Federal Corporation.
(b) The Articles of Incorporation of Commercial as in effect on the
Acquisition Merger Effective Time shall be the Articles of Incorporation of the
Surviving Corporation as the Surviving Corporation.
(c) The bylaws of Commercial, together with all amendments thereto, if
any, as in effect immediately prior to the Acquisition Merger Effective Time,
shall thereafter be the bylaws of the Surviving Corporation, until amended as
provided therein or by law.
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<PAGE>
(d) The directors and officers of Commercial in office immediately
prior to the Acquisition Merger Effective Time shall be the directors and
officers of the Surviving Corporation following the Acquisition Merger, until
their successors shall be duly elected and qualified.
(e) From and after the Acquisition Merger Effective Time:
(i) The Surviving Corporation shall possess all assets and
property of every description, and every interest in the assets and property,
wherever located, and the rights, privileges, immunities, powers, franchises,
and authority, of a public as well as of a private nature, of each of Commercial
and Company, and all obligations belonging or due to each of Commercial and
Company, all of which are vested in the Surviving Corporation without further
act or deed. Title to any real estate or any interest in the real estate vested
in Commercial or the Company shall not revert or in any way be impaired by
reason of the Acquisition Merger.
(ii) The Surviving Corporation shall be liable for all the
obligations of each of Commercial and Company. Any claim existing, or action or
proceeding pending, by or against the Company or Commercial, may be prosecuted
to judgement, with right of appeal, as if the Acquisition Merger had not taken
place, or the Surviving Corporation may be substituted in its place.
(iii) All the rights of creditors of each of Company and
Commercial shall be preserved unimpaired, and all liens upon the property of
Company and Commercial shall be preserved unimpaired, on only the property
affected by such liens immediately prior to the Acquisition Merger Effective
Time.
1.5 Authorization for Issuance of Commercial Common Stock;
-------------------------------------------------------
Exchange of Certificates.
------------------------
(a) Commercial has reserved for issuance a sufficient number of shares
of its Common Stock for the purpose of issuing its shares to the Company's
shareholders in accordance with this Article I. Immediately prior to the
Acquisition Merger Effective Time, Commercial shall make available for exchange
or conversion, by transferring to an exchange agent appointed by Commercial (the
"Exchange Agent") for the benefit of the holders of Company common stock: (i)
such number of shares of Company common stock as shall be issuable in connection
with the payment of the aggregate Stock Consideration, and (ii) such funds as
may be payable in connection with the aggregate Cash Consideration and as may be
payable in lieu of fractional shares of Commercial Common Stock.
(b) After the Acquisition Merger Effective Time, holders of
certificates theretofore evidencing outstanding shares of Company common stock
(other than as provided in Section
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<PAGE>
1.3(a)(iii)), upon surrender of such certificates to the Exchange Agent, shall
be entitled to receive certificates representing the number of shares of
Commercial Common Stock into which shares of Company common stock theretofore
represented by the certificates so surrendered shall have been converted, as
provided in Section 1.3 hereof, cash payable for the Cash Consideration, and
cash payments in lieu of fractional shares as provided in Section 1.14 hereof.
As soon as practicable after the Acquisition Merger Effective Time, the Exchange
Agent will send to each Company shareholder of record at the Acquisition Merger
Effective Time whose Company common stock shall have been converted into
Commercial Common Stock a letter of transmittal and instructions for
surrendering to the Exchange Agent outstanding certificates formerly evidencing
Company common stock in exchange for new certificates for Commercial Common
Stock and for cash payable for the Cash Consideration. Upon surrender, each
certificate evidencing Company common stock shall be cancelled.
(c) Until surrendered as provided in this Section 1.5 hereof, each
outstanding certificate which, prior to the Acquisition Merger Effective Time,
represented Company common stock (other than shares cancelled at the Acquisition
Merger Effective Time pursuant to Section 1.3(a)(ii) hereof) will be deemed for
all purposes to evidence ownership of the number of shares of Commercial Common
Stock into which the shares of Company common stock formerly represented thereby
were converted and the right to receive cash payable for the Cash Consideration.
However, until such outstanding certificates formerly representing Company
common stock are so surrendered, no dividend or distribution payable to holders
of record of Commercial Common Stock shall be paid to any holder of such
outstanding certificates, but upon surrender of such outstanding certificates by
such holder there shall be paid to such holder the amount of any dividends or
distribution, without interest, theretofore paid with respect to such shares of
Commercial Common Stock, but not paid to such holder, and which dividends or
distribution had a record date occurring on or subsequent to the Acquisition
Merger Effective Time and the amount of any cash, without interest, payable to
such holder for the Cash Consideration and in lieu of fractional shares pursuant
to Section 1.14 hereof. After the Acquisition Merger Effective Time, there
shall be no further registration of transfers on the records of the Company of
outstanding certificates formerly representing shares of Company common stock
and, if a certificate formerly representing such shares is presented to
Commercial, it shall be forwarded to the Exchange Agent for cancellation and
exchange for certificates representing shares of Commercial Common Stock as
herein provided.
(d) All shares of Commercial Common Stock and cash for the Cash
Consideration and in lieu of any fractional share issued and paid upon the
surrender for exchange of Company common stock as provided herein shall be
deemed to have been issued in full satisfaction of all rights pertaining to such
shares of Company common stock.
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<PAGE>
(e) If any new certificate for Commercial Common Stock is to be issued
in the name other than that in which the certificate surrendered in exchange
thereof is registered, it shall be a condition of the issuance therefor that the
certificate surrendered in exchange shall be properly endorsed and otherwise in
proper form for transfer and that the person requesting such transfer pay to the
Exchange Agent any transfer or other taxes required by reason of the issuance of
a new certificate for shares of Commercial Common Stock in any name other than
that of the registered holder of the certificate surrendered, or establish to
the satisfaction of the Exchange Agent that such tax has been paid or is not
payable.
(f) In the event any certificate for Company common stock shall have
been lost, stolen or destroyed, the Exchange Agent shall issue in exchange for
such lost, stolen or destroyed certificate, upon the making of an affidavit of
that fact by the holder thereof, such shares of Commercial Common Stock and cash
for the Cash Consideration and in lieu of fractional shares, if any, as may be
required pursuant hereto; provided, however, that Commercial may, in its
reasonable discretion and as a condition precedent to the issuance thereof,
require the owner of such lost, stolen or destroyed certificate to deliver a
bond in such sum as it may direct as indemnity against any claim that may be
made against Commercial, the Company, the Exchange Agent or any other party with
respect to the certificate alleged to have been lost, stolen or destroyed.
1.6 Dissenting Shares. Any shares of Company common stock held by a
-----------------
holder who dissents from the Merger and becomes entitled to obtain payment for
the value of such shares of Company common stock pursuant to the applicable
provisions of the IBCA shall be herein called "Dissenting Shares." Any
Dissenting Shares shall not, after the Acquisition Merger Effective Time, be
entitled to vote for any purpose or receive any dividends or other distributions
and shall not be entitled to receive the Merger Consideration; provided,
however, that shares of Company common stock held by a dissenting stockholder
who subsequently withdraws a demand for payment, fails to comply fully with the
requirements of the IBCA, or otherwise fails to establish the right of such
stockholder to be paid the value of such stockholders' shares under the IBCA
shall be deemed to be converted into the right to receive the Merger
Consideration pursuant to the terms and conditions referred to above.
1.7 Shareholders' Meeting. The Company shall, at the earliest practicable
---------------------
date, hold a meeting of its shareholders (the "Company Shareholders' Meeting")
to submit for shareholder approval this Agreement and the Acquisition Merger.
The affirmative vote of the holders of at least a majority of the issued and
outstanding shares of Company common stock shall be required for such approval.
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<PAGE>
1.8 Company Stock Options. Each holder of an option (a "Company Stock
---------------------
Option") which is an outstanding option under the Company's 1994 Stock Option
Plan (the "Company Option Plan") shall, in cancellation of such option (such
cancellation to be reflected in a written agreement), receive from Company,
immediately prior to the Acquisition Merger Effective Time, per share of Company
common stock subject to such option, a cash payment in the amount of the per
share value of the Merger Consideration, less the exercise price of such option,
net of any cash which must be withheld under federal and state income tax
requirements. Immediately thereafter, Company shall cancel each such option.
At least ten (10) business days prior to the Closing (as defined in Section 1.11
hereof), and then immediately prior to the Closing, Company shall afford
Commercial the right to review the cash amounts proposed to be paid to optionees
hereunder.
1.9 Registration Statement; Prospectus/Proxy Statement.
--------------------------------------------------
(a) For the purposes (i) of registering the Commercial Common Stock to
be issued to holders of Company common stock in connection with the Merger with
the Securities and Exchange Commission ("SEC") and with applicable state
securities authorities, and (ii) of holding the Company Shareholders' Meeting,
the parties hereto shall cooperate in the preparation of an appropriate
registration statement (such registration statement, together with all and any
amendments and supplements thereto, being herein referred to as the
"Registration Statement"), including the prospectus/proxy statement satisfying
all applicable requirements of applicable state laws, and of the Securities Act
of 1933, as amended (the "1933 Act") and the Securities Exchange Act of 1934, as
amended (the "1934 Act") and the rules and regulations thereunder (such
prospectus/proxy statement, together with any and all amendments or supplements
thereto, being herein referred to as the "Prospectus/Proxy Statement").
(b) Commercial shall furnish such information concerning Commercial
and the Commercial Subsidiaries (as defined in Section 3.1 hereof) as is
necessary in order to cause the Prospectus/Proxy Statement, insofar as it
relates to such corporations, to comply with Section 1.9(a) hereof. Commercial
agrees promptly to advise the Company if at any time prior to the Company
Shareholders' Meeting any information provided by Commercial in the
Prospectus/Proxy Statement becomes incorrect or incomplete in any material
respect and to provide the information needed to correct such inaccuracy or
omission. Commercial shall promptly provide to the Company and file such
supplemental information as may be necessary in order to cause such
Prospectus/Proxy Statement, insofar as it relates to Commercial and the
Commercial Subsidiaries, to comply with Section 1.9(a).
(c) The Company shall furnish Commercial with such information
concerning the Company and the Company Subsidiaries (as defined in Section 2.1
hereof) as is necessary in order to cause
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<PAGE>
the Prospectus/Proxy Statement, insofar as it relates to such corporations, to
comply with Section 1.9(a) hereof. The Company agrees promptly to advise
Commercial if at any time prior to the Company Shareholders' Meeting any
information provided by the Company in the Prospectus/Proxy Statement becomes
incorrect or incomplete in any material respect and to provide Commercial with
the information needed to correct such inaccuracy or omission. The Company
shall furnish Commercial with such supplemental information as may be necessary
in order to cause the Prospectus/Proxy Statement, insofar as it relates to the
Company and the Company Subsidiaries, to comply with Section 1.9(a).
(d) Commercial shall promptly file the Registration Statement with the
SEC and applicable state securities agencies. Commercial shall use its best
efforts to cause the Registration Statement to become effective under the 1933
Act and applicable state securities laws at the earliest practicable date. The
Company authorizes Commercial to utilize in the Registration Statement the
information concerning the Company and the Company Subsidiaries provided to
Commercial by the Company or its representatives for the purpose of inclusion in
the Prospectus/Proxy Statement. The Company shall have the right to review and
comment on the Prospectus/Proxy Statement included in the Registration
Statement. Commercial shall advise the Company promptly when the Registration
Statement has become effective and of any supplements or amendments thereto, and
Commercial shall furnish the Company with copies of all such documents. Prior
to the Acquisition Merger Effective Time or the termination of this Agreement,
each party shall consult with the other with respect to any material (other
than the Prospectus/Proxy Statement) that might constitute a "prospectus"
relating to the Merger within the meaning of the 1933 Act.
(e) The Company shall consult with Commercial in order to determine
whether any directors, officers or shareholders of the Company may be deemed to
be "affiliates" of Company ("affiliated persons") within the meaning of Rule 145
of the SEC promulgated under the 1933 Act. All shares of Commercial Common
Stock issued to such Company affiliated persons in connection with the Merger
shall bear a legend upon the face thereof stating that transfer of the
securities is or may be restricted by the provisions of the 1933 Act, and notice
shall be given to Commercial's transfer agent of such restriction, provided that
such legend shall be removed by delivery of a substitute certificate without
such legend if such Company affiliated person shall have delivered to Commercial
a copy of a letter from the staff of the SEC or an opinion of counsel, in form
and substance satisfactory to Commercial, to the effect that such legend is not
required for purposes of the 1933 Act, and, in any event, at any time after the
expiration of three years from the Acquisition Merger Effective Time unless, in
the opinion of the counsel for Commercial, such person was an "affiliate" of
Commercial within the meaning of Rule 145 within three months prior to the
expiration of such three year period. So long as shares of
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<PAGE>
such Commercial Common Stock bear such legend, no transfer of such Commercial
Common Stock shall be allowed unless and until the transfer agent is provided
with such information as may reasonably be requested by counsel for Commercial
to assure that such transfer will not violate applicable provisions of the 1933
Act, or rules, regulations or policies of the SEC.
1.10 Cooperation; Regulatory Approvals. The parties shall cooperate and
---------------------------------
use reasonable best efforts to complete the transactions contemplated hereunder
at the earliest practicable date. Each party shall use its best efforts to
cause each of its affiliates and subsidiaries to cooperate, in the preparation
and submission by them, as promptly as reasonably practicable, of such
applications, petitions, and other documents and materials as any of them may
reasonably deem necessary or desirable to the OTS, Federal Trade Commission
("FTC"), Department of Justice ("DOJ"), SEC, applicable Secretary of State,
other regulatory authorities, holders of the voting shares of common stock of
the Company, and any other persons for the purpose of obtaining any approvals or
consents necessary to consummate the transactions contemplated by this
Agreement. At the date hereof, none of the parties is aware of any reason that
the regulatory approvals required to be obtained by it would not be obtained.
1.11 Closing. If (i) this Agreement has been duly approved by the
-------
shareholders of the Company, and (ii) all relevant conditions of this Agreement
have been satisfied or waived, a closing (the "Closing") shall take place as
promptly as practicable thereafter at the principal office of Commercial at
which the parties hereto will exchange certificates, opinions, letters and other
documents as required hereby and will make the filings described in Section 1.2
hereof. Such Closing will take place as soon as practicable as agreed by the
parties, provided, however, that the Closing shall be no more than thirty (30)
-------- -------
days after the satisfaction or waiver of all conditions and/or obligations
contained in Article V of this Agreement.
1.12 Closing of Transfer Books. At the Acquisition Merger Effective Time,
-------------------------
the transfer books for Company common stock shall be closed, and no transfer of
shares of Company common stock shall thereafter be made on such books.
1.13 Bank Merger.
-----------
(a) At the Bank Merger Effective Time, each share of Hawkeye Common
Stock issued and outstanding immediately prior thereto shall, by virtue of the
Bank Merger, be cancelled. No new shares of the capital stock or other
securities or obligations of the Bank shall be issued or be deemed issued with
respect to or in exchange for such cancelled shares, and such cancelled shares
of Hawkeye Common Stock shall not be converted into any shares or other
securities or obligations of the Bank.
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(b) The charter and bylaws of the Bank, as in effect immediately prior
to the Bank Merger Effective Time, shall be the charter and bylaws of the Bank,
as the surviving institution of the Bank Merger, and may thereafter be amended
in accordance with applicable law.
(c) The directors and officers of the Bank immediately prior to the
Bank Merger Effective Time shall be the directors and officers of the Bank, as
the surviving institution of the Bank Merger, and shall continue in office until
their successors are duly elected or otherwise duly selected.
(d) The liquidation account established by Hawkeye pursuant to the
plan of conversion adopted in connection with its conversion from mutual to
stock form shall continue to be maintained by the Bank after the Bank Merger
Effective Time for the benefit of those persons and entities who were savings
account holders of Hawkeye on the eligibility record date for such conversion
and who continue from time to time to have rights therein. If required by the
rules and regulations of the OTS, the Bank shall amend its charter to
specifically provide for the continuation of the liquidation account established
by Hawkeye.
1.14 No Fractional Shares. Notwithstanding any term or provision hereof,
--------------------
no fractional shares of Commercial Common Stock, and no certificates or scrip
therefor, or other evidence of ownership thereof, will be issued in exchange for
any shares of Company common stock; no dividend or distribution with respect to
Commercial Common Stock shall be payable on or with respect to any fractional
share interests; and no such fractional share interest shall entitle the owner
thereof to vote or to any other rights of a shareholder of Commercial. In lieu
of such fractional share interest, any holder of Company common stock who would
otherwise be entitled to a fractional share of Commercial Common Stock will,
upon surrender of his certificate or certificates representing Company common
stock outstanding immediately prior to the Acquisition Merger Effective Time, be
paid the applicable cash value of such fractional share interest, which shall be
equal to the product of the fraction multiplied by the Average NYSE Closing
Price. For the purposes of determining any such fractional share interests, all
shares of Commercial Common Stock received by a holder of the Company common
stock shall be combined so as to calculate the maximum number of whole shares of
Commercial Common Stock issuable to such Company shareholder in the Acquisition
Merger.
1.15 Bennett Funding Asset.
---------------------
(a) The Company, which, as of the date hereof, has $1,828,603 invested in
assets secured by equipment leases sold by Bennett Funding Group and certain of
its affiliates (collectively, the "Bennett Funding Asset"), and Commercial agree
as follows:
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(i) Effective prior to the Acquisition Merger Effective Time, the
Company shall charge off the Bennett Funding Asset in accordance with generally
accepted accounting principles, as such value is confirmed by the independent
auditors of the Company, and the Company hereby acknowledges that the Bennett
Funding Asset is material to the balance sheet of the Company as a whole.
(ii) Prior to the Acquisition Merger Effective Time, the Company
shall either (A) sell the Bennett Funding Asset in its entirety (any such sale
to be without recourse and subject to customary representations and warranties),
or (B) establish a specific loan loss reserve (the "Reserve") in the amount of
the difference between the carrying value of the Bennett Funding Asset following
the charge-off referred to in subparagraph (i) above and zero. If the Bennett
Funding Asset is sold in its entirety, the Cash Consideration to be received by
the Company's shareholders pursuant to Section 1.3 hereof shall be reduced by
64% of the difference between the principal balance of the Bennett Funding Asset
(not taking into account any charge-off as provided in subparagraph (i) above)
and the proceeds of such sale. If the Bennett Funding Asset is not sold and the
Reserve is established, the Cash Consideration to be received by the Company's
shareholders hereunder shall be reduced by 64% of (AA) the amount of the charge-
off referred to in subparagraph (i) above, and (BB) the amount of the Reserve.
(iii) Following the Acquisition Merger Effective Time, the Bennett
Funding Asset shall be administered in accordance with the terms of, and
Heritage shareholders shall be entitled to receive payments in accordance with
and to the extent provided by, the Asset Management Agreement entered into as of
May 16, 1996 among the parties hereto.
ARTICLE II
REPRESENTATIONS AND WARRANTIES OF THE COMPANY AND HAWKEYE
Company and Hawkeye represent and warrant to Commercial and the Bank that,
except as disclosed in Schedule I attached hereto and except that Hawkeye makes
no representations or warranties regarding the Company:
2.1 Organization, Good Standing, Authority, Insurance, Etc. The Company
------------------------------------------------------
is a corporation duly organized, validly existing and in good standing under the
laws of the State of Iowa. Section 2.1 of Schedule I lists each "subsidiary" of
the Company and Hawkeye within the meaning of Section 10(a)(1)(G) of HOLA,
(individually a "Company Subsidiary" and collectively the "Company
Subsidiaries") (unless otherwise noted herein all references to a "Company
Subsidiary" or to the "Company Subsidiaries" shall include Hawkeye). Each of
the Company Subsidiaries is duly organized, validly existing, and in good
standing under the laws of the respective jurisdiction under which it is
organized, as set forth
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in Section 2.1 of Schedule I. The Company and each Company Subsidiary has all
requisite power and authority and is duly qualified and licensed to own, lease
and operate its properties and conduct its business as it is now being
conducted. The Company has delivered to Commercial a true, complete and correct
copy of the articles of incorporation, charter, or other organizing document and
of the bylaws, as in effect on the date of this Agreement, of the Company and
each Company Subsidiary. The Company and each Company Subsidiary is qualified
to do business as a foreign corporation and is in good standing in each
jurisdiction in which qualification is necessary under applicable law, except to
the extent that any failures to so qualify would not, in the aggregate, have a
material adverse effect on the business, financial condition or results of
operations of the Company and the Company Subsidiaries, taken as a whole.
Hawkeye is a member of the Federal Home Loan Bank of Des Moines and all eligible
accounts issued by Hawkeye are insured by the Savings Association Insurance Fund
("SAIF") to the maximum extent permitted under applicable law. Hawkeye is a
"domestic building and loan association" as defined in Section 7701(a)(19) of
the Code and is a "qualified thrift lender" as defined in Section 10(m) of the
HOLA and the Thrift Regulations. The Company is duly registered as a savings
and loan holding company under the HOLA.
The minute books of the Company and the Company's Subsidiaries contain
complete and accurate records of all meetings and other corporate actions held
or taken of their respective shareholders and Boards of Directors (including the
committees of such Boards). Except for those minutes which the Company agrees
to furnish to Commercial within five (5) days hereof pursuant to Section 4.1 of
this Agreement, the Company has furnished Commercial with minutes of all
meetings of the Boards of Directors of the Company and the Company's
Subsidiaries (including the committees of such Boards) held during the period
January 1992 through the date hereof.
2.2 Capitalization. The authorized capital stock of the Company consists
--------------
of 5,000,000 shares of common stock, par value $1.00 per share, of which 180,762
shares were issued and outstanding as of the date of this Agreement. All
outstanding shares of Company common stock are duly authorized, validly issued,
fully paid, nonassessable and free of preemptive rights. Except for outstanding
options to purchase 23,037 shares of Company common stock under the Company
Option Plan, as of the date of this Agreement, there are no options, convertible
securities, warrants, or other rights (preemptive or otherwise) to purchase or
acquire any of the Company's capital stock from the Company and no oral or
written agreement, contract, arrangement, understanding, plan or instrument of
any kind to which the Company or any of its affiliates is subject with respect
to the issuance, voting or sale of issued or unissued shares of the Company's
capital stock. A true and complete copy of the Company Option Plan, as in
effect on the date of this Agreement, is attached as Section 2.2 of Schedule I.
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2.3 Ownership of Subsidiaries. All the outstanding shares of the capital
-------------------------
stock of the Company Subsidiaries are validly issued, fully paid, nonassessable
and owned beneficially and of record by the Company or a Company Subsidiary free
and clear of any lien, claim, charge, restriction or encumbrance (collectively,
"Encumbrance"). Except as set forth in Section 2.3 of Schedule I, all of the
outstanding capital stock or other ownership interests in all of the Company
Subsidiaries is owned either by the Company or Hawkeye. There are no options,
convertible securities, warrants, or other rights (preemptive or otherwise) to
purchase or acquire any capital stock of any Company Subsidiary and no contracts
to which the Company or any of its affiliates is subject with respect to the
issuance, voting or sale of issued or unissued shares of the capital stock of
any of the Company Subsidiaries. Neither the Company nor any Company Subsidiary
owns any of the capital stock or other equity securities (including securities
convertible or exchangeable into such securities) of or profit participations in
any "company" (as defined in Section 10(a)(1)(C) of the HOLA) other than the
Federal Home Loan Bank of Des Moines or except as set forth in Section 2.3 of
Schedule I.
2.4 Financial Statements and Reports.
--------------------------------
(a) No proxy statement or other communication with shareholders, on
the date of mailing or release, contained any untrue statement of a material
fact or omitted to state a material fact required to be stated therein or
necessary to make the statements therein, in light of the circumstances under
which they were made, not misleading. For the past five years, the Company and
the Company Subsidiaries have timely filed all reports and documents required to
be filed by them with the SEC (if any), the OTS, or the Federal Deposit
Insurance Corporation (the "FDIC") under various securities and financial
institution laws and regulations except to the extent that all failures to so
file, in the aggregate, would not have a material adverse effect on the
business, financial condition or results of operations of the Company and the
Company Subsidiaries, taken as a whole; and all such documents, as finally
amended, complied in all material respects with applicable requirements of law
and, as of their respective date or the date as amended, did not contain any
untrue statement of a material fact or omit to state a material fact required to
be stated therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading. Except to the extent
stated therein, all financial statements and schedules included in the documents
referred to in the preceding sentences (or to be included in similar documents
to be filed after the date hereof) (i) are or will be (with respect to financial
statements in respect of periods ending after June 30, 1995) in accordance with
the Company's books and records and those of any of the Company Subsidiaries,
and (ii) present (and in the case of financial statements in respect of periods
ending after June 30, 1995, will present) fairly the consolidated statement of
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financial condition and the consolidated statements of income, changes in
stockholders' equity and cash flows of the Company and the Company Subsidiaries
as of the dates and for the periods indicated in accordance with generally
accepted accounting principles applied on a basis consistent with prior periods
(except for the omission of notes to unaudited statements, year end adjustments
to interim results and changes to generally accepted accounting principles).
The consolidated financial statements of the Company at June 30, 1995 and for
the three years then ended and the consolidated financial statements for all
periods thereafter up to the Closing disclose or will disclose, as the case may
be, all liabilities (whether accrued, absolute, contingent, unliquidated or
otherwise, whether due or to become due and regardless of when asserted), as of
their respective dates, of the Company and the Company Subsidiaries required to
be reflected in such financial statements according to generally accepted
accounting principles and contain or will contain, in the opinion of management
of the Company, adequate reserves for losses on loans and properties acquired in
settlement of loans, taxes and all other material accrued liabilities and for
all reasonably anticipated material losses in accordance with generally accepted
accounting principles, if any, as of such date. There exists no set of
circumstances that could reasonably be expected to result in any liability or
obligation material to the Company or the Company Subsidiaries, taken as a
whole, except as disclosed in such consolidated financial statements at June 30,
1995 or for transactions effected or actions occurring or omitted to be taken
after June 30, 1995 (i) in the ordinary course of business, or (ii) as permitted
by this Agreement.
(b) The Company has delivered to Commercial each shareholder
communication used or circulated by it with respect to periods since June 30,
1995 through the date of this Agreement and will promptly deliver each such
communication used or circulated after the date hereof, each in the form used or
circulated.
2.5 Absence of Changes.
------------------
(a) Except as disclosed in Section 2.5 to Schedule I, since June 30,
1995, there has been no material adverse change in the business, properties,
financial condition, results of operations or assets of the Company and the
Company Subsidiaries, taken as a whole. Since June 30, 1995, except as
disclosed in Section 2.5 to Schedule I, and through the date hereof, there is no
occurrence, event or development of any nature existing or, to the best
knowledge of the Company, threatened which may reasonably be expected to have a
material adverse effect upon the business, properties, financial condition,
operations or assets of Company or any Company Subsidiary, other than the
effects of any such change attributable to or resulting from any change in law,
regulation or generally accepted accounting principles or regulatory accounting
principles, including, but not limited to, changes resulting from
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<PAGE>
amendments to or modifications of any law, rule or regulation relating to the
bad debt reserve of or deduction taken by thrift institutions or any special
insurance premium assessments by the FDIC on SAIF-insured deposits, which
impairs the Company and other comparably sized and otherwise comparable thrift
institutions in a substantially similar manner and other than the effects of any
change attributable to or resulting from changes in economic conditions
applicable to depository institutions generally or in general levels of interest
rates affecting the Company and other comparably sized and otherwise comparable
thrift institutions to a similar extent and in a similar manner.
(b) Except as set forth in Section 2.5 of Schedule I, since June 30,
1995, each of the Company and the Company Subsidiaries has owned and operated
their respective assets, properties and businesses in the ordinary course of
business and consistent with past practice.
2.6 Prospectus/Proxy Statement. At the time the Prospectus/ Proxy
--------------------------
Statement is mailed to the shareholders of the Company for the solicitation of
proxies for the approvals referred to in Section 1.7(a) hereof and at all times
subsequent to such mailings up to and including the times of such approval, such
Prospectus/Proxy Statement (including any supplements thereto), with respect to
all information set forth therein provided by the Company or its representatives
and relating to the Company (including the Company Subsidiaries), its
shareholders and representatives, Company common stock and all other
transactions contemplated hereby, will:
(a) Comply in all material respects with applicable provisions of the
1933 Act, the 1934 Act and the rules and regulations under such Acts; and
(b) Not contain any untrue statement of a material fact or omit to
state any material fact required to be stated therein or necessary in order to
make the statements contained therein, in light of the circumstances under which
it is made, not misleading.
2.7 No Broker's or Finder's Fees. No agent, broker, investment banker,
----------------------------
person or firm acting on behalf or under authority of the Company or any of the
Company Subsidiaries is or will be entitled to any broker's or finder's fee or
any other commission or similar fee directly or indirectly in connection with
the Merger or any other transaction contemplated hereby, except the Company has
engaged Hovde Financial, Inc. to provide financial advisory services and to
deliver a "fairness opinion" to the effect that the consideration to be received
by the Company shareholders in the Merger is fair to the Company shareholders
from a financial point of view. A copy of the engagement agreement with Hovde
Financial, Inc. is attached to Section 2.7 of Schedule I.
A-21
<PAGE>
2.8 Litigation and Other Proceedings.
--------------------------------
(a) Except as set forth in Section 2.8 of Schedule I and except for
matters which would not have a material adverse effect on the business,
financial condition or results of operations of the Company and the Company
Subsidiaries taken as a whole, neither the Company nor any Company Subsidiary is
a defendant in, nor is any of its property subject to, any pending, or, to the
best knowledge of the management of the Company, threatened, claim, action,
suit, investigation, or proceeding, or subject to any judicial order, judgment
or decree.
(b) Section 2.8(b) of Schedule I sets forth all other claims, actions,
suits, investigations and proceedings in which the Company or any Company
Subsidiary is a defendant, and all other judicial orders, judgments or decrees
to which the Company or any Company Subsidiary is subject.
2.9 Compliance with Law.
-------------------
(a) The Company and the Company Subsidiaries are in compliance in all
material respects with all material laws and regulations applicable to their
respective business or operations or with respect to which compliance is a
condition of engaging in the business thereof, and neither the Company nor any
Company Subsidiary has received notice from any federal, state or local
government or governmental agency of any material violation of, and does not
know of any material violations of, any of the above.
(b) The Company and each of its Subsidiaries have all material
permits, licenses, certificates of authority, orders and approvals of, and have
made all material filings, applications and registrations with, all federal,
state, local and foreign governmental or regulatory bodies that are required in
order to permit them to carry on their respective business as they are presently
conducted.
2.10 Corporate Actions.
-----------------
(a) The Boards of Directors of the Company and Hawkeye have duly
authorized their respective officers to execute and deliver (as applicable) this
Agreement, the Acquisition Plan of Merger and the Bank Plan of Merger and to
take all action necessary to consummate the Merger and the other transactions
contemplated hereby. The Board of Directors of the Company has authorized and
directed the submission for shareholders' approval of this Agreement, together
with the Merger and any other action requiring such approval, and such
submission will not be subject to any condition referred to in IBCA Section
490.1103. All corporate authorization by the Board of Directors of the Company
required for the consummation of the Merger has been obtained.
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<PAGE>
(b) The Company's Board of Directors has taken or will take all
necessary action to exempt this Agreement, the Acquisition Plan of Merger and
the Bank Plan of Merger and the transactions contemplated hereby and thereby
from, (i) any applicable state takeover laws, (ii) any Iowa laws limiting or
restricting the voting rights of shareholders, (iii) any Iowa laws requiring a
shareholder approval vote in excess of the vote normally required in
transactions of similar type not involving a "related person," "interested
shareholder" or person or entity of similar type, and (iv) any provision in its
or any of the Company Subsidiaries' articles/certificate of incorporation,
charter or bylaws, (A) restricting or limiting stock ownership or the voting
rights of shareholders, or (B) requiring a shareholder approval vote in excess
of the vote normally required in transactions of similar type not involving a
"related person," interested shareholder" or person or entity of similar type.
2.11 Authority. Except as set forth in Section 2.11 of Schedule I, the
---------
execution, delivery and performance of its obligations under this Agreement by
the Company and Hawkeye does not violate any of the provisions of, or constitute
a default under or give any person the right to terminate or accelerate payment
or performance under (i) the articles of incorporation or bylaws of the Company,
the articles of incorporation, charter or bylaws of any Company Subsidiary, (ii)
any regulatory restraint on the acquisition of the Company or Hawkeye or control
thereof, (iii) any law, rule, ordinance, or regulation or judgment, decree,
order, award or governmental or non-governmental permit or license to which it
or any of the Company Subsidiaries is subject or (iv) any material agreement,
material lease, material contract, note, mortgage, indenture, arrangement or
other obligation or instrument ("Contract") to which the Company or any of the
Company Subsidiaries is a party or is subject or by which any of their
properties or assets is bound. The parties acknowledge that the consummation of
the Merger and the other transactions contemplated hereby is subject to various
regulatory approvals. The Company and Hawkeye, as applicable, have all
requisite corporate power and authority to enter into this Agreement and the
Acquisition Plan of Merger and to perform their respective obligations hereunder
and thereunder, except, with respect to this Agreement and the Acquisition
Merger, the approval of the Company's shareholders required under applicable
law. Other than the receipt of Governmental Approvals (as defined in Section
5.1(c)), the approval of shareholders and the consents specified in Schedule I
with respect to the Contracts, no consents or approvals are required on behalf
of Company in connection with the consummation of the transactions contemplated
by this Agreement, the Acquisition Plan of Merger and the Bank Plan of Merger.
This Agreement, the Acquisition Plan of Merger and the Bank Plan of Merger
constitute the valid and binding obligation of the Company and Hawkeye, as
applicable, and each is enforceable in accordance with its terms, except as
enforceability may be limited by applicable laws relating
A-23
<PAGE>
to bankruptcy, insolvency or creditors rights generally and general principles
of equity.
2.12 Employment Arrangements. Except as disclosed in Section 2.12 of
-----------------------
Schedule I, there are no employment, severance or other agreements, plans or
arrangements with any current or former directors, officers or employees of
Company or any Company Subsidiary which may not be terminated without penalty
(including any augmentation or acceleration of benefits) on thirty (30) days or
less notice to such person. No payments to directors, officers or employees of
the Company or the Company Subsidiaries resulting from the transactions
contemplated hereby will cause the imposition of excise taxes under Section 4999
of the Code or the disallowance of a deduction to the Company or any Company
Subsidiary pursuant to Sections 162, 280G or any other section of the Code. No
later than thirty (30) days prior to consummation of the Merger, Company shall
furnish Commercial for its review a computation of the amounts expected to be
payable under the employment and severance agreements disclosed in Section 2.12
of Schedule I as a result of the Merger.
2.13 Employee Benefits.
-----------------
(a) Except as disclosed in Section 2.13 to Schedule I, neither the
Company nor any of the Company Subsidiaries maintains any funded deferred
compensation plans (including profit sharing, pension, savings or stock bonus
plans), unfunded deferred compensation arrangements or employee benefit plans as
defined in Section 3(3) of the Employee Retirement Income Security Act of 1974,
as amended ("ERISA"), other than any plans ("Employee Plans") set forth in
Section 2.13 of Schedule I (true and correct copies of which have been delivered
to Commercial). None of Company or any of the Company Subsidiaries has incurred
or reasonably expects to incur any liability to the Pension Benefit Guaranty
Corporation except for required premium payments which, to the extent due and
payable, have been paid. The Employee Plans intended to be qualified under
Section 401(a) of the Code are so qualified, and Company is not aware of any
fact which would adversely affect the qualified status of such plans. Except as
set forth in Section 2.13 of Schedule I, neither the Company nor any of the
Company Subsidiaries (a) provides health, medical, death or survivor benefits to
any former employee or beneficiary thereof, or (b) maintains any form of current
(exclusive of base salary and base wages) or deferred compensation, bonus, stock
option, stock appreciation right, benefit, severance pay, retirement, incentive,
group or individual health insurance, welfare or similar plan or arrangement for
the benefit of any single or class of directors, officers or employees, whether
active or retired (collectively "Benefit Arrangements").
(b) Except as disclosed in Section 2.13 to Schedule I, all Employee
Plans and Benefit Arrangements which are in effect
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<PAGE>
were in effect for substantially all of calendar year 1995 and there has been no
material amendment thereof (other than amendments required to comply with
applicable law) or no material increase in the cost thereof or benefits payable
thereunder on or after January 1, 1995.
(c) To the best knowledge of the Company, with respect to all Employee
Plans and Benefit Arrangements, the Company and each Company Subsidiary are in
substantial compliance with the requirements prescribed by any and all statutes,
governmental or court orders, or rules or regulations currently in effect,
including but not limited to ERISA and the Code, applicable to such Employee
Plans or Benefit Arrangements. Except as disclosed in Section 2.13 of Schedule
I, no condition exists that could constitute grounds for the termination of any
Employee Plan under Section 4042 of ERISA; no "prohibited transaction," as
defined in Section 406 of ERISA and Section 4975 of the Code, has occurred with
respect to any Employee Plan, or any other employee benefit plan maintained by
Company or any Company Subsidiary which is covered by Title I of ERISA, which
could subject any person to liability under Title I of ERISA or to the
imposition of any tax under Section 4975 of the Code which could have an adverse
effect on the business, assets, financial condition or results of operations of
Company or any Company Subsidiary; nor to the best knowledge of Company has any
Employee Plan subject to Part III of Subtitle B of Title I of ERISA or Section
412 of the Code, or both, incurred any "accumulated funding deficiency," as
defined in Section 412 of the Code, whether or not waived; nor has Company or
any Company Subsidiary failed to make any contribution or pay any amount due and
owing as required by the terms of any Employee Plan or Benefit Arrangement. To
the best of its knowledge, neither Company nor any Company Subsidiary has
incurred or expects to incur, directly or indirectly, any liability under Title
IV of ERISA arising in connection with the termination of, or a complete or
partial withdrawal from, any plan covered or previously covered by Title IV of
ERISA which could constitute a liability of Commercial, or any of its affiliates
at or after the Acquisition Merger Effective Time.
2.14 Information Furnished. No statement contained in any schedule,
---------------------
certificate or other document furnished (whether prior to or subsequent to the
date of this Agreement) or to be furnished in writing by or on behalf of Company
to Commercial pursuant to this Agreement contains or will contain any untrue
statement of a material fact or any material omission.
2.15 Property and Assets. The Company and the Company Subsidiaries have
-------------------
good and marketable title to all of their real property reflected in the
financial statements at June 30, 1995, referred to in Section 2.4 hereof, or
acquired subsequent thereto, free and clear of all Encumbrances, except for (a)
such items shown in such financial statements or in the notes thereto, (b) liens
for
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<PAGE>
current real estate taxes not yet delinquent, (c) customary title exceptions
that have no material adverse effect upon the value of such property, (d)
property sold or transferred in the ordinary course of business since the date
of such financial statements, (e) pledges or liens incurred in the ordinary
course of business and (f) as otherwise specifically indicated in Section 2.15
of Schedule I. Company and the Company Subsidiaries enjoy peaceful and
undisturbed possession under all material leases for the use of real property
under which they are the lessee; all of such leases are valid and binding and in
full force and effect and neither Company nor any Company Subsidiary is in
default in any material respect under any such lease. No consent of the lessor
of any material real property or material personal property lease is required
for consummation of the Merger except as set forth in Section 2.15 of Schedule
I. Except as set forth in Section 2.15 of Schedule I, there has been no
material physical loss, damage or destruction, whether or not covered by
insurance, affecting the real properties of Company and the Company Subsidiaries
since June 30, 1995, except such loss, damage or destruction which does not have
a material adverse effect on the Company and the Company Subsidiaries, taken as
a whole. All property and assets material to their business and currently used
by Company and the Company Subsidiaries are, in all material respects, in good
operating condition and repair, normal wear and tear excepted.
2.16 Agreements and Instruments. Except as set forth in Section 2.16 of
--------------------------
Schedule I, neither the Company nor any Company Subsidiary is a party to (a) any
material agreement, arrangement or commitment not made in the ordinary course of
business, (b) any agreement, indenture or other instrument relating to the
borrowing of money by the Company or any Company Subsidiary or the guarantee by
the Company or any Company Subsidiary of any such obligation (other than Federal
Home Loan Bank advances with a maturity of one year or less from the date
hereof), (c) any agreements to make loans or for the provision, purchase or sale
of goods, services or property between Company or any Company Subsidiary and any
director or officer of Company or Hawkeye, or any member of the immediate family
or affiliate of any of the foregoing, (d) any agreements with or concerning any
labor or employee organization to which Company or any Company Subsidiary is a
party, (e) any agreements between the Company or any Company Subsidiary and any
greater than five (5) percent or more shareholder of Company, and (f) any
agreements, directives, orders, or similar arrangements between or involving the
Company or any Company Subsidiary and any state or federal savings institution
regulatory authority.
2.17 Material Contract Defaults. Neither the Company nor any Company
--------------------------
Subsidiary nor the other party thereto is in default in any respect under any
contract, agreement, commitment, arrangement, lease, insurance policy, or other
instrument to which the Company or a Company Subsidiary is a party or by which
its respective assets, business, or operations may be bound or affected or under
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<PAGE>
which it or its respective assets, business, or operations receives benefits,
and which default is reasonably expected to have either individually or in the
aggregate a material adverse effect on the Company and any Company Subsidiary,
taken as a whole, and there has not occurred any event that, with the lapse of
time or the giving of notice or both, would constitute such a default.
2.18 Tax Matters.
-----------
The Company and each of the Company Subsidiaries have duly and
properly filed all federal, state, local and other tax returns required to be
filed by them and have made timely payments of all taxes due and payable,
whether disputed or not; the current status of audits of such returns by the
Internal Revenue Service ("IRS") and other applicable agencies is as set forth
in Section 2.18 of Schedule I; and, except as set forth in Section 2.18 of
Schedule I, there is no agreement by the Company or any Company Subsidiary for
the extension of time or for the assessment or payment of any taxes payable.
Except as set forth in Section 2.18 of Schedule I, neither the IRS nor any other
taxing authority is now asserting or, to the best knowledge of Company,
threatening to assert any deficiency or claim for additional taxes (or interest
thereon or penalties in connection therewith), nor is Company aware of any basis
for any such assertion or claim. The Company and each of the Company
Subsidiaries have complied in all material respects with applicable IRS backup
withholding requirements and have filed all appropriate information reporting
returns for all tax years for which the statute of limitations has not closed.
The Company and each Company Subsidiary have complied with all applicable state
law sales and use tax collection and reporting requirements.
(b) Adequate provision for any federal, state, local, or foreign taxes
due or to become due for the Company or any of the Company Subsidiaries for any
period or periods through and including June 30, 1995, has been made in
accordance with generally accepted accounting principles and is reflected on the
June 30, 1995 audited Company consolidated financial statements and has been or
will be made with respect to periods ending after June 30, 1995.
2.19 Environmental Matters. Except as set forth in Section 2.19 of
---------------------
Schedule I, to the best knowledge of the Company, neither the Company nor any
Company Subsidiary owns or leases any properties affected by toxic waste, radon
gas or other hazardous conditions or constructed in part with the use of
asbestos. Except as set forth in Section 2.19 of Schedule I, neither the
Company nor any Company Subsidiary has knowledge of, nor has the Company or any
Company Subsidiary received written notice from any governmental or regulatory
body of, any conditions, activities, practices or incidents which are reasonably
likely to interfere with or prevent compliance or continued compliance with
hazardous substance laws or any regulation, order, decree, judgment or
injunction, issued,
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<PAGE>
entered, promulgated or approved thereunder, or which may give rise to any
common law or legal liability, or otherwise form the basis of any claim, action,
suit, proceeding, hearing or investigation based on or related to the
manufacture, processing, distribution, use, treatment, storage, disposal,
transport, or handling, or the emission, discharge, release or threatened
release into the environment, of any pollutant, contaminant or chemical, or
industrial, toxic or hazardous substance or waste. There is no civil, criminal
or administrative claim, action, suit, proceeding, hearing or investigation
pending or, to Company's knowledge, threatened against Company or any Company
Subsidiary relating in any way to such hazardous substance laws or any
regulation, order, decree, judgment or injunction issued, entered, promulgated
or approved thereunder.
2.20 Loan Portfolio: Portfolio Management.
-------------------------------------
(a) Except as provided in Section 2.20 of Schedule I, all evidences of
indebtedness reflected as assets in the consolidated balance sheet of the
Company as of June 30, 1995, or acquired since such date, are (except with
respect to those assets which are no longer assets of the Company or any Company
Subsidiary) binding obligations of the respective obligers named therein except
as enforcement may be limited by bankruptcy, insolvency or other similar laws
affecting the enforcement of creditors rights generally, and except that the
availability of equitable remedies, including specific performance, is subject
to the discretion of the court before which any proceeding may be brought, and
the payment of no material amount thereof (either individually or in the
aggregate with other evidences of indebtedness) is subject to any defenses which
have been threatened or asserted against the Company or any Company Subsidiary.
All such indebtedness which is secured by an interest in real property is
secured by a valid and perfected mortgage lien having the priority specified in
the loan documents. All loans originated or purchased by Hawkeye were at the
time entered into and at all times since have been in compliance in all material
respects with all applicable laws (including, without limitation, all consumer
protection laws) and regulations. To the best knowledge of the Company and
Hawkeye, Hawkeye administers its loan and investment portfolios (including, but
not limited to, adjustments to adjustable mortgage loans) in accordance with all
applicable laws and regulations and the terms of applicable instruments. The
records of Hawkeye regarding all loans outstanding on its books are accurate in
all material respects and the risk classification system has been established in
accordance with the requirements of the OTS.
(b) Section 2.20 of Schedule I sets forth a list, accurate and
complete in all material respects, of the aggregate amounts of loans, extensions
of credit and other assets of Hawkeye and its subsidiaries that have been
adversely designated,
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criticized or classified by it as of March 31, 1996, separated by category of
classification or criticism (the "Asset Classification"); and no amounts of
loans, extensions of credit or other assets that have been adversely designated,
classified or criticized as of the date hereof by any representative of any
government entity as "Special Mention," "Substandard," "Doubtful," "Loss" or
words of similar import are excluded from the amounts disclosed in the Asset
Classification, other than amounts of loans, extensions of credit or other
assets that were charged off by it or any of its Subsidiaries before the date
hereof.
2.21 Real Estate Loans and Investments. Except for properties acquired in
---------------------------------
settlement of loans and except as disclosed in Section 2.21 of Schedule I, there
are no facts, circumstances or contingencies known to the Company or any Company
Subsidiary which exist which would require a material reduction under generally
accepted accounting principles in the present carrying value of any of the real
estate investments, joint ventures, construction loans, other investments or
other loans of the Company or any Company Subsidiary (either individually or in
the aggregate with other loans and investments).
2.22 Derivatives Contracts. Neither the Company nor any of its
---------------------
Subsidiaries is a party to or has agreed to enter into an exchange-traded or
over-the-counter swap, forward, future, option, cap, floor or collar financial
contract or any other contract not included on its Balance Sheet which is a
derivatives contract (including various combinations thereof) (each, a
"Derivatives Contract") or owns securities that are identified in Thrift
Bulletin No. 65 or otherwise referred to as structured notes (each, a
"Structured Note"), except for those Derivatives Contracts and Structured Notes
set forth in Section 2.22 of Schedule I, including a list, as applicable, of any
of its or any of its Subsidiaries' assets pledged as security for a Derivatives
Contract.
2.23 Insurance. Except as set forth in Section 2.23 of Schedule I, the
---------
Company and the Company Subsidiaries have in effect insurance coverage with
reputable insurers which, in respect to amounts, types and risks insured, is
reasonably adequate for the business in which the Company and the Company
Subsidiaries are engaged. A schedule of all insurance policies in effect as to
the Company and the Company Subsidiaries (the "Insurance Policies") is as set
forth on Section 2.23 of Schedule I (other than policies pertaining to mortgage
loans made in the ordinary course of business). Except as set forth on Section
2.23 of Schedule I, all Insurance Policies are in full force and effect, all
premiums with respect thereto covering all periods up to and including the date
of this Agreement have been paid, such premiums covering all periods from the
date hereof up to and including the Acquisition Merger Effective Date shall have
been paid on or before the Acquisition Merger Effective Date, to the extent then
due and payable (other than retrospective premiums which may be payable
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with respect to worker's compensation insurance policies, adequate reserves for
which are reflected in the Company's financial statements). The Insurance
Policies are valid, outstanding and enforceable in accordance with their
respective terms and will not in any way be affected by, or terminated or lapsed
solely by reason of, the transactions contemplated by this Agreement. Except as
set forth on Section 2.23 of Schedule I, neither the Company nor any Company
Subsidiary has been refused any insurance with respect to any material
properties, assets or operations, nor has any coverage been limited or
terminated by any insurance carrier to which it has applied for any such
insurance or with which it has carried insurance during the last three (3)
years.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF COMMERCIAL AND THE BANK
Commercial and the Bank represent and warrant to Company and Hawkeye that,
except as disclosed in Schedule II attached hereto, and except that Bank makes
no representations or warranties regarding Commercial:
3.1 Organization, Good Standing, Authority, Insurance, Etc. Commercial is
------------------------------------------------------
a corporation duly organized, validly existing, and in good standing under the
laws of the State of Nebraska. Each of the subsidiaries of Commercial within
the meaning of Section 10(a)(1)(G) of HOLA (individually a "Commercial
Subsidiary" and collectively the "Commercial Subsidiaries") is duly organized,
validly existing, and in good standing under the laws of the respective
jurisdiction under which it is organized. Commercial and each Commercial
Subsidiary has all requisite power and authority and is duly qualified and
licensed to own, lease and operate its properties and conduct its business as it
is now being conducted. Commercial has delivered to the Company a true,
complete and correct copy of the articles of incorporation and bylaws of
Commercial as in effect on the date of this Agreement. Commercial and each
Commercial Subsidiary is qualified to do business as a foreign corporation and
is in good standing in each jurisdiction in which qualification is necessary
under applicable law, except to the extent that any failures to so qualify would
not, in the aggregate, have a material adverse effect on the business, financial
condition or results of operations of Commercial and the Commercial
Subsidiaries, taken as a whole. The Bank is a member in good standing of the
Federal Home Loan Bank of Topeka, and all eligible accounts issued by the Bank
are insured by the SAIF to the maximum extent permitted under applicable law.
The Bank is a "domestic building and loan association" as defined in Section
7701(a)(19) of the Code, and is a "qualified thrift lender" as defined in
Section 10(m) of the HOLA and the Thrift Regulations. Commercial is duly
registered as a savings and loan holding company under the HOLA.
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3.2 Capitalization. The authorized capital stock of Commercial consists
--------------
of 25,000,000 shares of Commercial Common Stock, par value $.01 per share, of
which 15,076,452 shares were issued and outstanding as of the date of this
Agreement and 10,000,000 shares of serial preferred stock, par value of $.01 per
share, of which no shares were outstanding as of the date of this Agreement.
All outstanding shares of Commercial Common Stock are duly authorized, validly
issued, fully paid, nonassessable and free of preemptive rights.
3.3 Ownership of Subsidiaries. All the outstanding shares of the capital
-------------------------
stock of the Commercial Subsidiaries are validly issued, fully paid,
nonassessable and owned beneficially and of record by Commercial or a Commercial
Subsidiary free and clear of any Encumbrance. Except as disclosed in Section
3.3 of Schedule II, all of the outstanding capital stock or other ownership
interests in all of the Commercial Subsidiaries is owned either by Commercial or
the Bank. There are no options, convertible securities, warrants, or other
rights (preemptive or otherwise) to purchase or acquire any capital stock of any
Commercial Subsidiary and no contracts to which Commercial or any of its
affiliates is subject with respect to the issuance, voting or sale of issued or
unissued shares of the capital stock of any of the Commercial Subsidiaries.
3.4 Financial Statements and Reports.
--------------------------------
(a) No registration statement, prospectus, proxy statement, schedule or
report filed by Commercial or any Commercial Subsidiary with the SEC or the OTS
under the 1933 Act, or the 1934 Act, on the date of effectiveness in the case of
such registration statements, or on the date of filing in the case of such
reports or schedules, or on the date of mailing in the case of such proxy
statements, contained any untrue statement of a material fact or omitted to
state a material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which they were made,
not misleading. For the past five years, Commercial and the Commercial
Subsidiaries have timely filed all documents required to be filed by them with
the SEC, the OTS, or the FDIC under various securities and financial institution
laws and regulations, except to the extent that all failures to so file, in the
aggregate, would not have a material adverse effect on the business, financial
condition or results of operations of Commercial and the Commercial
Subsidiaries, taken as a whole; and all such documents, as finally amended,
complied in all material respects with applicable requirements of law and, as of
their respective date or the date as amended, did not contain any untrue
statement of a material fact or omit to state a material fact required to be
stated therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading. Except to the extent
stated therein, all financial statements and schedules included in the documents
referred to in
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the preceding sentences (or to be included in similar documents to be filed
after the date hereof) (i) are or will be (with respect to financial statements
in respect of periods ending after June 30, 1995) in accordance with
Commercial's books and records and those of any of its Subsidiaries, and (ii)
present (and in the case of financial statements in respect of periods ending
after June 30, 1995 will present) fairly the consolidated statement of financial
condition and the consolidated statements of operations, stockholders' equity
and cash flows of Commercial and its Subsidiaries as of the dates and for the
periods indicated in accordance with generally accepted accounting principles
(except for the omission of notes to unaudited statements, year end adjustments
to interim results and changes in generally accepted accounting principles).
The consolidated financial statements of Commercial as of June 30, 1995 and for
the three years then ended and the consolidated financial statements for all
periods thereafter up to the Closing disclose or will disclose, as the case may
be, all liabilities (whether accrued, absolute, contingent, unliquidated or
otherwise, whether due or due to become due and regardless of when asserted), as
of their respective dates, of Commercial and the Commercial Subsidiaries
required to be reflected in such financial statements according to generally
accepted accounting principles, other than liabilities which are not, in the
aggregate, material to Commercial and the Commercial Subsidiaries, taken as a
whole, and contain or will contain in the opinion of management adequate
reserves for losses on loans and properties acquired in settlement of loans,
taxes and all other material accrued liabilities and for all reasonably
anticipated material losses, if any as of such date. There exists no set of
circumstances that could reasonably be expected to result in any liability or
obligation material to Commercial or the Commercial Subsidiaries, taken as a
whole, except as disclosed in such consolidated financial statements at June 30,
1995, or for transactions effected or actions occurring or omitted to be taken
after June 30, 1995, (i) in the ordinary course of business, or (ii) as
permitted by this Agreement.
(b) Commercial has delivered to the Company all periodic reports filed
with the SEC under the 1934 Act for periods since June 30, 1995 through the date
hereof and will upon request promptly deliver copies of 1934 Act reports for
future periods.
3.5 Absence of Changes. Since June 30, 1995, there has been no material
------------------
adverse change in the business, properties, financial condition, results of
operations or assets of Commercial and the Commercial Subsidiaries, taken as a
whole. There is no occurrence, event or development of any nature existing or,
to the best knowledge of Commercial, threatened which may reasonably be expected
to have a material adverse effect upon the business, properties, financial
condition, operations or assets of Commercial or any Commercial Subsidiary,
other than the effects of any such
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change attributable to or resulting from any change in law, regulation or
generally accepted accounting principles or regulatory accounting principles,
including, but not limited to, changes resulting from amendments to or
modifications of any law, rule or regulation relating to the bad debt reserve of
or deduction taken by thrift institutions or any special insurance premium
assessment by the FDIC on SAIF-insured deposits which impairs Commercial and
other comparably sized and otherwise comparable thrift institutions in a
substantially similar manner and other than the effects of any change
attributable to or resulting from changes in economic conditions applicable to
depository institutions generally or in general levels of interest rates
affecting Commercial and other comparably sized and otherwise comparable thrift
institutions to a similar extent and in a similar manner.
3.6 Prospectus/Proxy Statement. At the time the Registration Statement
--------------------------
becomes effective and at the time the Prospectus/Proxy Statement is mailed to
the shareholders of the Company for the solicitation of proxies for the approval
referred to in Section 1.7 hereof and at all times subsequent to such mailings
up to and including the times of such approval, such Registration Statement and
Prospectus/Proxy Statement (including any amendments or supplements thereto),
with respect to all information set forth therein relating to Commercial
(including the Commercial Subsidiaries) and its shareholders, Commercial Common
Stock, this Agreement, the Merger and all other transactions contemplated
hereby, will:
(a) comply in all material respects with applicable provisions of the
1933 Act, the 1934 Act and the rules and regulations under such Acts; and
(b) not contain any untrue statement of a material fact or omit to
state any material fact required to be stated therein or necessary in order to
make the statements contained therein, in light of the circumstances under which
it is made, not misleading.
3.7 No Broker's or Finder's Fees. No agent, broker, investment banker,
----------------------------
person or firm acting on behalf or under authority of Commercial or any of the
Commercial Subsidiaries is or will be entitled to any broker's or finder's fee
or any other commission or similar fee directly or indirectly in connection with
the Merger or any other transaction contemplated hereby, except Commercial has
engaged Merrill Lynch & Co., an investment banking firm, to provide financial
advisory services and to deliver a "fairness opinion" as to whether or not the
Merger Consideration is fair to Commercial's shareholders from a financial point
of view.
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<PAGE>
3.8 Compliance With Law.
-------------------
(a) Commercial and the Commercial Subsidiaries are in compliance in
all material respects with all material laws and regulations applicable to their
respective business or operations or with respect to which compliance is a
condition of engaging in the business thereof, and neither Commercial nor any
Commercial Subsidiary has received notice from any federal, state or local
government or governmental agency of any material violation of, and does not
know of any material violations of, any of the above.
(b) Commercial and each of it Subsidiaries have all material permits,
licenses, certificates of authority, orders and approvals of, and have made all
material filings, applications and registrations with, all federal, state, local
and foreign governmental or regulatory bodies that are required in order to
permit it to carry on its respective business as it is presently conducted.
3.9 Corporate Actions. The Boards of Directors of Commercial and the Bank
-----------------
have duly authorized their respective officers to execute and deliver (as
applicable) this Agreement, the Acquisition Plan of Merger and the Bank Plan of
Merger and to take all action necessary to consummate the Merger and the other
transactions contemplated hereby. All corporate authorizations by the Board of
Directors of Commercial required for the consummation of the Merger have been
obtained.
3.10 Authority. The execution, delivery and performance of this Agreement
---------
by Commercial and the Bank does not violate any of the provisions of, or
constitute a default under or give any person the right to accelerate payment or
performance under (i) the articles of incorporation or bylaws of Commercial, the
charter or bylaws of the Bank, or the articles of incorporation or bylaws or of
any other Commercial Subsidiary, (ii) any regulatory restraint on the
acquisition of the Company or Hawkeye or control thereof, (iii) any law, rule,
ordinance or regulation or judgment, decree, order, award or governmental or
non-governmental permit or license to which Commercial or any of the Commercial
Subsidiaries is subject or (iv) any other Contract to which Commercial or any of
the Commercial Subsidiaries is a party or is subject to or by which any of their
properties or assets is bound which default, termination or acceleration would
have a material adverse effect on the financial condition, business or results
of operations of Commercial and the Commercial Subsidiaries, taken as a whole.
The parties acknowledge that the consummation of the Merger and the other
transactions contemplated hereby is subject to various regulatory approvals.
Commercial and the Bank have all requisite corporate power and authority to
enter into this Agreement and to perform their obligations hereunder and
thereunder. Other than the receipt of Governmental Approvals, no consents or
approvals are required on behalf of Commercial or any Commercial Subsidiary in
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<PAGE>
connection with the consummation of the transactions contemplated by this
Agreement or the Acquisition Plan of Merger. This Agreement, the Acquisition
Plan of Merger and the Bank Plan of Merger constitute the valid and binding
obligations of Commercial and the Bank, and are enforceable in accordance with
their terms, except as enforceability may be limited by applicable laws relating
to bankruptcy, insolvency or creditors' rights generally and general principles
of equity.
3.11 Information Furnished. No statement contained in any schedule,
---------------------
certificate or other document furnished (whether prior to or subsequent to the
date of this Agreement) or to be furnished in writing by or on behalf of
Commercial to Company pursuant to this Agreement contains or will contain any
untrue statement of a material fact or any material omission.
3.12 Litigation and Other Proceedings. Except for matters which would not
--------------------------------
have a material adverse effect on the business, financial condition or results
of operations of Commercial and the Commercial Subsidiaries taken as a whole,
neither Commercial nor any Commercial Subsidiary is a defendant in, nor is any
of its property subject to, any pending, or, to the best knowledge of the
management of Commercial, threatened, claim, action, suit, investigation, or
proceeding, or subject to any judicial order, judgment or decree.
3.13 Agreements and Instruments. As of the date of this Agreement, there
--------------------------
are no agreements, directives, orders or similar arrangements between or
involving Commercial or any Commercial Subsidiary and any state or federal
savings institution regulatory authority.
3.14 Tax Matters. Commercial and each of the Commercial Subsidiaries have
-----------
duly and properly filed all federal, state, local and other tax returns required
to be filed by them and have made timely payments of all taxes due and payable,
whether disputed or not; except as set forth in Section 3.15 of Schedule II,
there is no agreement by Commercial or any Commercial Subsidiary for the
extension of time or for the assessment or payment of any taxes payable. Except
as set forth in Section 3.15 of Schedule II, neither the IRS nor any other
taxing authority is now asserting or, to the best knowledge of Commercial,
threatening to assert any deficiency or claim for additional taxes (or interest
thereon or penalties in connection therewith), nor is Commercial aware of any
basis for any such assertion or claim. Commercial and each of the Commercial
Subsidiaries have complied in all material respects with applicable IRS backup
withholding requirements and have filed all appropriate information reporting
returns for all tax years for which the statute of limitations has not closed.
Commercial and each Commercial Subsidiary have complied with all applicable
state law sales and use tax collection and reporting requirements.
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<PAGE>
ARTICLE IV
COVENANTS
4.1 Investigations; Access and Copies. Between the date of this Agreement
---------------------------------
and the Acquisition Merger Effective Time, each party agrees to give to the
other party and its respective representatives and agents full access (to the
extent lawful) to all of the premises, books, records and employees of it and
its subsidiaries at all reasonable times, and to furnish and cause its
subsidiaries to furnish to the other party and its respective agents or
representatives access to and true and complete copies of such financial and
operating data, all documents with respect to matters to which reference is made
in Articles II or III of this Agreement or on any list, schedule or certificate
delivered or to be delivered in connection herewith, and such other documents,
records, or information with respect to the business and properties of it and
its subsidiaries as the other party or its respective agents or representative
shall from time to time reasonably request; provided, however, that any such
-------- -------
inspection (a) shall be conducted in such manner as not to interfere
unreasonably with the operation of the business of the entity inspected and (b)
shall not affect any of the representations and warranties hereunder. Each
party will also give prompt written notice to the other party of any event or
development (x) which, had it existed or been known on the date of this
Agreement, would have been required to be disclosed under this Agreement, (y)
which would cause any of its representations and warranties contained herein to
be inaccurate or otherwise materially misleading, or (z) which materially relate
to the satisfaction of the conditions set forth in Article V of this Agreement.
The Company agrees to furnish to Commercial within five (5) days of the date
hereof complete and accurate minutes of meetings of the Company's Board of
Directors held on February 5, 1996, February 13, 1996, February 14, 1996, March
5, 1996, March 20, 1996, March 27, 1996, April 17, 1996, May 14 and May 16, 1996
which minutes have previously been withheld.
4.2 Conduct of Business of the Company and the Company Subsidiaries.
---------------------------------------------------------------
Between the date of this Agreement and the Acquisition Merger Effective Time,
the Company and Hawkeye agree:
(a) That the Company and the Company Subsidiaries shall conduct their
business only in the ordinary course, and maintain their books and records in
accordance with past practices;
(b) That the Company shall not, without the prior written consent of
Commercial: (i) declare, set aside or pay any dividend or make any other
distribution with respect to Company's capital stock, including, but not limited
to, any distribution related to the Bennett Funding Asset not otherwise
contemplated in this Agreement, (provided, however, that the Company shall be
permitted to declare and pay the regular quarterly dividends on the Company's
common stock in an amount not to exceed $1.00 per share
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<PAGE>
per quarter, to the extent (x) with respect to each such quarterly dividend,
that the dividend does not exceed the Company's net income (determined in
accordance with generally accepted accounting principles but exclusive of the
effects of (A) the charge-off or reserve on the Bennett Funding Asset taken by
the Company pursuant to Section 1.15 of this Agreement and (B) any additional
provisions for loan and real estate owned losses established by the Company and
Hawkeye pursuant to Section 4.12 of this Agreement) for the quarter for which
the dividend is paid, i.e., the quarter preceding the dividend's payment and (y)
such dividends are paid on or about the dates customarily fixed by the Company
for the payment of dividends; (ii) reacquire any of Company's outstanding shares
of capital stock; (iii) issue or sell or buy any shares of capital stock of the
Company or any Company Subsidiary, except shares of Company common stock issued
pursuant to the Company Option Plan; (iv) effect any stock split, stock dividend
or other reclassification of Company's common stock; or (v) grant any options or
issue any warrants exercisable for or securities convertible or exchangeable
into capital stock of Company or any Company Subsidiary or grant any stock
appreciation or other rights with respect to shares of capital stock of Company
or of any Company Subsidiary;
(c) Subject to the terms of this Agreement (including, but not limited
to, the terms regarding the Bennett Funding Asset), that the Company and the
Company Subsidiaries shall not, without the prior written consent of Commercial:
(i) sell or dispose of any significant assets of the Company or of any Company
Subsidiary other than in the ordinary course of business consistent with past
practices; (ii) merge or consolidate the Company or any Company Subsidiary with
or otherwise acquire any other entity, or file any applications or make any
contract with respect to branching by Hawkeye (whether de novo, purchase, sale
or relocation) or acquire or construct, or enter into any agreement to acquire
or construct, any interest in real property (other than with respect to security
interests in properties securing loans and properties acquired in settlement of
loans in the ordinary course) or improvements to real property; (iii) change the
certificate of incorporation, charter documents or other governing instruments
of the Company or any Company Subsidiary, except as provided in this Agreement
or as required by law or regulation; (iv) grant to any executive officer,
director or employee of the Company or any Company Subsidiary (A) except as set
forth in Section 4.2(c) of Schedule I any increase in annual compensation, or
(B) except as set forth in Section 4.2(c) of Schedule I, any bonus type payment;
(v) adopt any new or amend or terminate any existing Employee Plans or Benefit
Arrangements of any type or amend the terms of any outstanding awards under
existing Employee Plans; (vi) authorize severance pay or other benefits for any
officer, director or employee of Company or any Company Subsidiary, other than
as disclosed in Section 4.2(c) of Schedule I; (vii) incur any material
indebtedness or obligation or enter into or extend any material agreement or
lease, except in the
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<PAGE>
ordinary course of business consistent with past practices; (viii) engage in any
lending activities other than in the ordinary course of business consistent with
past practices; (ix) form any new subsidiary or cause or permit a material
change in the activities presently conducted by any Company Subsidiary or make
additional investments in subsidiaries; (x) purchase any debt securities or
derivative securities, including CMO or REMIC products, that are defined as
"high risk mortgage securities" under OTS Thrift Bulletin No. 52 dated January
10, 1992 as revised or purchase any Derivatives Contracts or Structured Notes;
(xi) purchase any equity securities other than Federal Home Loan Bank stock;
(xii) make any investment which would cause Hawkeye to not be a qualified thrift
lender under Section 10(m) of the HOLA, or not to be a "domestic building and
loan association" as defined in Section 7701(a)(19) of the Code; (xiii) make any
loan with a principal balance of $250,000 or more; (xiv) authorize capital
expenditures other than in the ordinary course of business; (xv) adopt or
implement any change in its accounting principles, practices or methods other
than as may be required by generally accepted accounting principles or adopt or
implement any change in its methods of accounting for Federal income tax
purposes; or (xvi) make any loan in which participation interests therein are to
be sold to other persons or entities or acquire a participation interest in a
loan originated by another person or entity. The limitations contained in this
Section 4.2(c) shall also be deemed to constitute limitations as to the making
of any commitment with respect to any of the matters set forth in this Section
4.2(c). Notwithstanding the foregoing, Hawkeye may engage in any of the
foregoing activities exclusively with the Bank.
4.3 No Solicitation. The Company will not authorize any officer,
---------------
director, employee, investment banker, financial consultant, attorney,
accountant or other representative of Company or any Company Subsidiary,
directly or indirectly, to initiate contact with any person or entity in an
effort to solicit, initiate or encourage any "Takeover Proposal" (as such term
is defined below). Except as the fiduciary duties of the Company Board of
Directors may otherwise require (as determined in consultation with legal
counsel), the Company will not authorize any officer, director, employee,
investment banker, financial consultant, attorney, accountant or other
representative of the Company or any Company Subsidiary, directly or indirectly,
(A) to cooperate with, or furnish or cause to be furnished any non-public
information concerning its business, properties or assets to, any person or
entity in connection with any Takeover Proposal; (B) to negotiate any Takeover
Proposal with any person or entity; or (C) to enter into any agreement, letter
of intent or agreement in principle as to any Takeover Proposal. The Company
will promptly give written notice to Commercial upon becoming aware of any
Takeover Proposal, such notice to contain, at a minimum (except as the fiduciary
duties of the Company's Board of Directors may otherwise require), the identity
of the persons submitting the Takeover Proposal, a copy of any written inquiry
or other communication, the terms of
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<PAGE>
any Takeover Proposal, any information requested or discussions sought to be
initiated and the status of any requests, negotiations or expressions of
interest. As used in this Agreement with respect to the Company, "Takeover
Proposal" shall mean any bona fide proposal, other than as contemplated by this
Agreement, for a merger or other business combination involving the Company or
Hawkeye or for the acquisition of a ten percent (10%) or greater equity interest
in Company or Hawkeye, or for the acquisition of a substantial portion of the
assets of Company or Hawkeye (other than loans or securities sold in the
ordinary course).
4.4 Shareholder Approvals. The Company shall call the meeting of its
---------------------
shareholders to be held for the purpose of voting upon the Acquisition Merger
and related matters, as referred to in Section 1.7 hereof, as soon as
practicable, but in no event later than sixty (60) days after the Registration
Statement becomes effective under the 1933 Act. In connection with such
meeting, the Company Board of Directors shall recommend approval of the Merger,
except as the fiduciary duties of the Company's Board of Directors may otherwise
require. The Company shall use its best efforts to solicit from its
shareholders proxies in favor of approval and to take all other action necessary
to secure a vote of the holders of the shares of Company common stock in favor
of the Merger, except as the fiduciary duties of the Boards of Directors may
otherwise require.
4.5 Filing of Holding Company and Merger Applications. Commercial shall
-------------------------------------------------
use its best efforts promptly to prepare, submit and file within seventy-five
(75) days of the date hereof a holding company application to the OTS pursuant
to 12 C.F.R. (S)574.3 for acquisition of control of Company and Hawkeye and a
merger application to the OTS pursuant to the Bank Merger Act and 12 C.F.R.
563.22(a) for the Bank Merger and any other applications required to be filed in
connection with the transactions contemplated hereby.
4.6 Consents. The Company and Hawkeye will use their best efforts to
--------
obtain the consent or approval of each person whose consent or approval shall be
required of them in order to permit Company or Hawkeye, as the case may be, to
consummate the Acquisition Merger and the Bank Merger.
4.7 Certain Actions. Neither Commercial nor the Company (including the
---------------
Company Subsidiaries) shall take any action which would materially impede or
delay consummation of the Merger, or prevent the transactions contemplated
hereby from qualifying as a reorganization within the meaning of Section 368 of
the Code.
4.8 Publicity. Between the date of this Agreement and the Acquisition
---------
Merger Effective Time, neither Commercial, Company or any of their subsidiaries
shall, without the prior approval of the other, issue or make, or permit any of
its directors, employees,
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<PAGE>
officers or agents to issue or make, any press release, disclosure or statement
to the press or any third party with respect to the Merger or the transactions
contemplated hereto, except as required by law. The parties shall cooperate
when issuing or making any press release, disclosure or statement with respect
to Merger or the transactions contemplated hereby, except as required by law.
4.9 Cooperation Generally. Between the date of this Agreement and the
---------------------
Acquisition Merger Effective Time, subject to the provisions of this Agreement,
Commercial, the Company and their respective subsidiaries shall use their
respective best efforts, and take all actions necessary or appropriate, to
consummate the Merger and the other transactions contemplated by this Agreement
at the earliest practicable date. Commercial and the Bank, on one hand, and the
Company and the Company Subsidiaries, on the other hand, agree not to knowingly
take any action that would (i) adversely affect their respective ability to
obtain the Governmental Approvals or (ii) adversely affect their respective
ability to perform their obligations under this Agreement.
4.10 Additional Financial Statements and Reports. As soon as reasonably
-------------------------------------------
practicable after they become publicly available, the Company shall furnish to
Commercial and Commercial shall furnish to the Company, respectively, its
balance sheet and related statements of operations (and, in the case of
Commercial, cash flows and stockholders' equity) for all periods prior to the
Closing. Such financial statements will be prepared in conformity with
generally accepted accounting principles applied on a consistent basis and
fairly present the financial condition and results of operations (and in the
case of Commercial, cash flows) of the Company or Commercial, as the case may be
(subject, in the case of unaudited financial statements, to (a) normal year-end
audit adjustments, (b) any other adjustments described therein and (c) the
absence of notes from which, if presented, would not differ materially from
those included in its most recent audited consolidated balance sheet), and all
of such financial statements will be prepared in conformity with, in the case of
Commercial, the requirements of Form 10-Q or Form 10-K, as the case may be,
under the 1934 Act, and in the case of Commercial or the Company, such other
requirements under the 1933 Act or 1934 Act as may be applicable.
4.11 Stock Listing. Commercial agrees to use its best efforts to cause to
-------------
be listed on the New York Stock Exchange, subject to official notice of
issuance, the shares of Commercial Common Stock to be issued in the Merger.
4.12 Allowance for Loan and Real Estate Owned Losses. At the request of
-----------------------------------------------
Commercial and in an amount specified by Commercial, prior to the Acquisition
Merger Effective Time, the Company and Hawkeye shall establish such additional
provisions for loan and real estate owned losses as may be necessary in the sole
determination of Commercial to conform the Company's and Hawkeye's
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loan and real estate owned allowance practices and methods to those of
Commercial and the Bank (as such practices and methods are to be applied to
Company and Hawkeye from and after the Acquisition Merger Effective Time);
provided, however, that Company and Hawkeye shall not be required to take such
action until: (i) the Company and Hawkeye provide to Commercial a written
statement dated the date of Closing certified by the Chairman of the Board, the
President and the Chief Financial Officer of the Company and Hawkeye, that the
conditions in Sections 5.1 and 5.2 to be satisfied by the Company or Hawkeye or
both of them have been satisfied by either or both of them or, alternatively,
setting forth in detail the circumstances that have prevented such conditions
from being satisfied (the "Reliance Certificate"), and Commercial and Bank
provide to Company and Hawkeye a Reliance Certificate relating to the
satisfaction of the conditions in Sections 5.1 and 5.3; and (ii) Commercial and
the Bank, after reviewing the Reliance Certificate, provide the Company and
Hawkeye a written waiver of any right either entity may have to terminate the
Agreement which waiver shall contain an express condition precedent that Company
and Hawkeye have established such additional provisions for loan and real estate
losses as requested by Commercial pursuant to this Section 4.12. No additional
provision for loan and real estate owned losses taken by Hawkeye pursuant to
this Section 4.12 shall be deemed in and of itself to be a breach or violation
of any representation, warranty, covenant, condition or other provision of this
Agreement.
4.13 D&O Indemnification and Insurance. For a period of three (3) years
---------------------------------
following the Acquisition Merger Effective Time, Commercial shall indemnify the
employees, agents, directors or officers of the Company and the Company
Subsidiaries to the extent they are indemnified under the Company's Articles of
Incorporation and Bylaws in the form in effect at the date of this Agreement or
arising by operation of law. Commercial shall cause the directors and officers
listed in Schedule 4.13 to be covered under individual directors' and officers'
liability insurance policies, which coverage is available in the form of tail
coverage under the Company's existing directors' and officers' liability policy
for the duration of any applicable statute of limitations. The amount of the
coverage obtained for each director and officer shall be the amount available
under the terms of such individual policies when $3,500 is expended per person.
In no event shall Commercial be required to expend in the aggregate in excess of
$55,000 to obtain such coverage.
4.14 Tax Treatment. Commercial and Company shall use their best efforts
-------------
to cause the Merger to qualify as a reorganization under Section 368(a)(1) of
the Code. The Company agrees to consent to the form of representation letter
provided by Deloitte & Touche LLP for purposes of issuing its federal tax
opinion pursuant to Section 5.1(e) of this Agreement no later than thirty (30)
days prior to the Closing.
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<PAGE>
4.15 Update Disclosure. From and after the date hereof until the
-----------------
Acquisition Merger Effective Time, the Company shall promptly, but not less
frequently than monthly, update Schedule I hereto by notice to Commercial to
reflect any matters which have occurred from and after the date hereof which, if
existing on the date hereof, would have been required to be described therein
and which, in the case of all such updates other than the last such update prior
to the Acquisition Merger Effective Time, reflect a material change from the
information provided in Schedule I as of the date hereof; provided, however,
that no such update shall affect the conditions to the obligation of Company and
Hawkeye to consummate the transactions contemplated hereby, and any and all
changes reflected in any such update shall be considered in determining whether
such conditions have been satisfied.
4.16 Cash Consideration. Commercial will have sufficient cash on hand to
------------------
pay the Cash Consideration as of the Acquisition Merger Effective Time.
ARTICLE V
CONDITIONS OF THE MERGER; TERMINATION OF AGREEMENT
5.1 General Conditions. The obligations of Commercial, the Bank, the
------------------
Company and Hawkeye to effect the Acquisition Merger and the Bank Merger shall
be subject to the following conditions:
(a) Stockholder Approval. The holders of the outstanding shares of
--------------------
Company common stock shall have approved this Agreement and the Acquisition
Merger as specified in Section 1.7 hereof or as otherwise required by applicable
law.
(b) No Proceedings. No order, decree or injunction shall have been
--------------
entered and remain in force restraining or prohibiting the Merger in any legal,
administrative, arbitration, investigatory or other proceedings (collectively,
"Proceedings").
(c) Government Approvals. To the extent required by applicable law or
--------------------
regulation, all approvals of or filings with any governmental authority
(collectively, "Governmental Approvals"), including without limitation those of
the OTS, the FDIC, the Federal Trade Commission, DOJ, the SEC, and any state
securities or Blue Sky authorities, shall have been obtained or made and any
waiting periods shall have expired in connection with the consummation of the
Merger. All other statutory or regulatory requirements for the valid
consummation of the Merger and related transactions shall have been satisfied.
(d) Registration Statement. The Registration Statement shall have
----------------------
been declared effective and shall not be subject to a stop order of the SEC and,
if the offer and sale of Commercial's common stock in the Merger pursuant to
this Agreement is subject to
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<PAGE>
the Blue Sky laws of any state, shall not be subject to a stop order of any
state securities commissioner.
(e) Federal Tax Opinion. Receipt of either an opinion of Deloitte &
-------------------
Touche LLP, or other tax advisor reasonably acceptable to Commercial and the
Company, or a private letter ruling from the IRS, in form and content reasonably
satisfactory to Commercial and the Company, and upon which Company shareholders
may rely to the effect that for federal income tax purposes:
. The Acquisition Merger should qualify as a reorganization within the
meaning of Section 368(a)(1)(A) of the Code. Company and Commercial
should each be a "party to a reorganization" within the meaning of
Code Section 368(b).
. Company should recognize no gain or loss on the transfer of its assets
to Commercial in exchange for the Commercial Common Stock, cash and
the assumption of its liabilities by Commercial, by reason of the
application of Code Sections 361(a), 361(b) and 357(a).
. No gain or loss should be recognized by Company upon the distribution
of the Commercial Common Stock to the Company shareholders, by reason
of the application of Code Section 361(c)(1).
. No gain or loss should be recognized by Commercial on the receipt of
Company's assets in exchange for Commercial Common Stock, and the
assumption by Commercial of Company's liabilities, by reason of the
application of Code Section 1032(a).
. The basis of the assets of Company in the hands of Commercial should
be the same as the basis of such assets in the hands of Company
immediately prior to the Merger, by reason of the application of Code
Section 362(b).
. The holding period of the property acquired by Commercial from Company
should include the holding period of such property in the hands of
Company immediately prior to the Merger, by reason of the application
of Section 1223(2) of the Code.
. The gain, if any, to be realized by a Company shareholder who receives
Commercial stock and cash in exchange for Company stock will be
recognized, but not in excess of the amount of cash received. If the
exchange has the effect of the distribution of a dividend (determined
with application of Code Section 318(a)), then the amount of gain
recognized that is not in excess of each shareholder's ratable share
of undistributed earnings and
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<PAGE>
profits will be treated as a dividend. The determination of whether
the exchange has the effect of the distribution of a dividend will be
made on a shareholder-by-shareholder basis. No loss will be
recognized on the exchange.
. Where cash is received by a dissenting shareholder of the Company,
such cash will be treated as received by the dissenting shareholder as
a distribution in redemption of the shareholder's Company common
stock, subject to the provisions and limitations of Section 302.
. The basis of the Commercial Common Stock (including fractional share
interests a Company shareholder would otherwise be entitled to
receive) received by a Company shareholder who exchanges Company
common stock for Commercial Common Stock and cash will be the same as
the basis of the Company common stock surrendered in the Merger,
decreased by the amount of cash received, and increased by the amount
of cash received that is treated as a dividend (if any), and by the
amount of gain recognized on the exchange (not including any portion
of that gain that was treated as a dividend).
. The holding period of the Commercial Common Stock (including
fractional share interests that they would otherwise be entitled to
receive) to be received by Company shareholders should, in each
instance, include the holding period of the Company shares surrendered
in the exchange, provided Company stock was held as a capital asset on
the date of the Merger, by reason of the application of Code Section
1223(1).
. Commercial as the Surviving Corporation should succeed to and take
into account as of the close of the day of the distribution or
transfer the items of Company described in Code Section 381(c),
subject to the conditions and limitations specified in Code Sections
381(b) and 381(c), by reason of the application of Code Section
381(a)(2).
. As provided in Code Section 381(c)(2) and Regulation Section
1.381(c)(2)-1 of the IRS, Commercial as the Surviving Corporation
should succeed to and take into account the earnings and profits, or
deficit in earnings and profits, of Company as of the date or dates of
transfer. Any deficit in earnings and profits of either Commercial or
Company will be used only to offset earnings and profits accumulated
after the date or dates of transfer.
. Cash received by a shareholder of Company otherwise entitled to
receive a fractional share of Commercial
A-44
<PAGE>
Common Stock in exchange for his Company stock should be treated as if
the fractional shares were distributed as part of the Merger and then
were redeemed by Commercial. These cash payments should be treated as
having been received as distributions in full payment in exchange for
the stock redeemed as provided in Code Section 302(a). This receipt
of cash should result in gain or loss measured by the difference
between the basis of such fractional share interest and the cash
received. Such gain or loss should be capital gain or loss to the
former Company shareholder, provided the Company stock was a capital
asset in such former shareholder's hands and as such, will be subject
to the provisions and limitations of Subchapter P of Chapter 1 (Rev.
Rul. 66-365 and Rev. Rul. 77-41).
5.2 Conditions to Obligations of Commercial and Bank. The obligations of
------------------------------------------------
Commercial and Bank to effect the Merger and the transactions contemplated
herein shall be subject to the following additional conditions:
(a) Opinion of Counsel for Company. Commercial shall have received
------------------------------
from Breyer & Aguggia, special counsel to Company, an opinion dated as of the
Closing covering the matters to be set forth in Exhibit 5.2(a).
(b) Required Consents. The Company and Hawkeye shall have obtained
-----------------
all necessary third party consents or approvals in connection with the Merger,
the absence of which would materially and adversely affect Company and the
Company Subsidiaries, taken as a whole; in this connection, the Company and
Hawkeye shall obtain consents from all lessors to their respective real estate
and other leases that may be required for consummation of the Merger.
(c) Company Accountants' Letter. Commercial shall have received from
---------------------------
McGladrey & Pullen, LLP, letters dated the date of mailing the Prospectus/Proxy
Statement and the date of the Closing to the effect that: (i) with respect to
the Company they are independent accountants within the meaning of the 1933 Act
and 1934 Act and the applicable rules and regulations thereunder, (ii) it is
their opinion that the audited financial statements of the Company included in
the Prospectus/Proxy Statement comply as to form in all material respects with
the applicable accounting requirements of the 1933 Act and 1934 Act and the
applicable published accounting rules and regulations thereunder, (iii) on the
basis of such procedures as are set forth therein but without performing an
examination in accordance with generally accepted auditing standards nothing has
come to their attention which would cause them to believe that (A) any unaudited
interim financial statements appearing in the Prospectus/Proxy Statement do not
comply as to form in all material respects with the applicable accounting
A-45
<PAGE>
requirements of the 1933 Act and 1934 Act and the published rules and
regulations thereunder; (B) said financial statements are not stated on a basis
substantially consistent with that of the audited financial statements; (C) (1)
at the date of the latest available consolidated financial statements of the
Company and at a specific date not more than five (5) business days prior to the
date of each such letter there has been, except as specified in such letter, any
increase in the outstanding capital stock, or indebtedness for borrowed money of
the Company (other than deposits and Federal Home Loan Bank advances with a
maturity of one year or less) or any decrease in the stockholders' equity
thereof as compared with amounts shown in the latest statement of financial
condition included in the Prospectus/Proxy Statement, or (2) for the period from
the date of the latest audited financial statements of the Company included in
the Prospectus/Proxy Statement to a specific date not more than five (5)
business days prior to the date of each such letter, there were, except as
specified in such letter, any decreases, as compared with the corresponding
period in the preceding year, in consolidated net income for Company or any
increase, as compared with the corresponding period in the preceding year, in
the provision for loan losses for Company, (iv) they have performed certain
specific procedures as a result of which they determined that certain
information of an accounting, financial or statistical nature included in the
Prospectus/Proxy Statement and requested by Commercial and agreed upon by such
accountants, which is expressed in dollars (or percentages obtained from such
dollar amounts) and obtained from accounting records which are subject to the
internal controls of the Company's accounting system or which has been derived
directly from such accounting records by analysis or computation is in agreement
with such records or computations made therefrom (excluding any questions of
legal interpretation), and (v) on the basis of such procedures as are set forth
in such letter, nothing came to their attention with respect to the Company
which would cause them to believe that the pro forma financial statements had
not been properly compiled on the pro forma basis described therein.
(d) No Material Adverse Change. Between the date of this Agreement
--------------------------
and the date of Closing, there shall not have occurred any material adverse
change in the financial condition, business or results of operations of Company
and the Company Subsidiaries, taken as a whole, it being agreed that a material
adverse change shall not include (i) any change attributable to or resulting
from any change in law, regulation or generally accepted accounting principles
or regulatory accounting principles, including, but not limited to, changes
resulting from amendments to or modifications of any law, rule or regulation
relating to the bad debt reserve of or deduction taken by thrift institutions or
any special insurance premium assessment by the FDIC on SAIF-insured deposits
which impairs the Company and other comparably sized and otherwise comparable
thrift institutions in a substantially similar manner, (ii) the effects of any
change attributable to or resulting
A-46
<PAGE>
from changes in economic conditions applicable to depository institutions
generally or in general levels of interest rates affecting the Company and other
comparably sized and otherwise comparable thrift institutions to a similar
extent and in a similar manner, and (iii) any change in circumstances regarding
the Bennett Funding Asset.
(e) Representations and Warranties to be True; Fulfillment of
---------------------------------------------------------
Covenants and Conditions. The representations and warranties of the Company and
- ------------------------
Hawkeye shall be true in all material respects at the Acquisition Merger
Effective Time with the same effect as though made at the Acquisition Merger
Effective Time (or on the date when made in the case of any representation or
warranty which specifically relates to an earlier date); the Company and Hawkeye
shall have performed all obligations and complied with each covenant, in all
material respects, and all conditions under this Agreement on their parts to be
performed or complied with at or prior to the Acquisition Merger Effective Time;
and the Company shall have delivered to Commercial a certificate, dated the
Acquisition Merger Effective Time and signed by its chief executive officer and
chief financial officer, to such effect.
(f) Regulatory Approval. All Governmental Approvals required
-------------------
hereunder to consummate the transactions contemplated hereby shall have been
obtained without the imposition of any conditions which Commercial and the Bank
reasonably and in good faith determine to be unduly burdensome upon the conduct
of the business of Commercial or the Bank and, in the sole discretion of
Commercial, substantially diminish the benefits expected to be received by
Commercial from the transactions contemplated hereby.
(g) Limitation on Dissenting Shares. Holders of no more than 10% of
-------------------------------
the issued and outstanding shares of Company common stock, net of treasury
shares, shall have made the demands and given the notices required under the
IBCA to assert dissenters' appraisal rights.
(h) The Company shall have charged off the Bennett Funding Asset and
either sold the Bennett Funding Asset or, if applicable, established a specific
loan loss reserve therefor in accordance with the provisions of Section 1.15 of
this Agreement.
5.3 Conditions to Obligations of Company and Hawkeye. The obligations of
------------------------------------------------
Company and Hawkeye to effect the Acquisition Merger and the transactions
contemplated herein shall be subject to the following additional conditions:
(a) Opinion of Counsel for Commercial. Company shall have received
---------------------------------
from Housley Kantarian & Bronstein, P.C., special counsel to Commercial, an
opinion dated as of the Closing covering the matters to be set forth in Exhibit
5.3(a).
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<PAGE>
(b) Representations and Warranties to be True; Fulfillment of
---------------------------------------------------------
Covenants and Conditions. The representations and warranties of Commercial and
- ------------------------
the Bank shall be true in all material respects at the Acquisition Merger
Effective Time with the same effect as though made at the Acquisition Merger
Effective Time (or on the date when made in the case of any representation or
warranty which specifically relates to an earlier date); Commercial and the Bank
shall have performed all obligations and complied with each covenant, in all
material respects, and all conditions under this Agreement on their parts to be
performed or complied with at or prior to the Acquisition Merger Effective Time;
and Commercial shall have delivered to Company a certificate, dated the
Acquisition Merger Effective Time and signed by its chief executive officer and
chief financial officer, to such effect.
(c) Commercial Common Stock. A certificate for the required number of
-----------------------
whole shares of Commercial Common Stock, as determined pursuant to Section 1.3
hereof, and cash for the Cash Consideration and for fractional share interests,
shall have been delivered to the Exchange Agent and the Company shall have
received a certificate to such effect from the Exchange Agent.
(d) Required Consents. In addition to Governmental Approvals,
-----------------
Commercial and the Bank shall have obtained all necessary third party consents
or approvals in connection with the Merger, the absence of which would
materially and adversely affect Commercial and the Commercial Subsidiaries,
taken as a whole.
(f) Limitation on Dissenting Shares. Holders of no more than 10% of
-------------------------------
the issued and outstanding shares of Company common stock, net of treasury
shares, shall have made the demands and given the notices required under the
IBCA to assert dissenters' appraisal rights.
(g) NYSE Listing. The shares of Commercial Common Stock issuable
------------
pursuant to this Agreement shall have been approved for listing on the NYSE,
subject to official notice of issuance.
5.4 Termination of Agreement and Abandonment of Merger. This Agreement
--------------------------------------------------
and the Acquisition Plan of Merger may be terminated at any time before the
Acquisition Merger Effective Time, whether before or after approval thereof by
shareholders of Company, as provided below:
(a) Mutual Consent. By mutual consent of the parties, evidenced by
--------------
their written agreement.
(b) Closing Delay. At the election of either party, evidenced by
-------------
written notice, if the Closing shall not have occurred on or before January 31,
1997, or such later date as shall have been agreed to in writing by the parties;
provided, however, that the right to terminate under this Section 5.4(b) shall
- -------- -------
not be
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<PAGE>
available to any party whose failure to perform an obligation hereunder has been
the cause of, or has resulted in, the failure of the Closing to occur on or
before such date.
(c) Conditions to Commercial Performance Not Met. By Commercial upon
--------------------------------------------
delivery of written notice of termination to the Company if any event occurs
which renders impossible the satisfaction in any material respect one or more of
the conditions to the obligations of Commercial and the Bank to effect the
Merger set forth in Sections 5.1 and 5.2 and noncompliance is not waived by
Commercial, provided, however, that the right to terminate under this Section
-------- -------
5.4(c) shall not be available to Commercial where Commercial's or Bank's failure
to perform an obligation hereunder has been the cause of, or has resulted in,
the failure of the Closing to occur on or before such date.
(d) Conditions to Company Performance Not Met. By the Company upon
-----------------------------------------
delivery of written notice of termination to Commercial if any event occurs
which renders impossible the satisfaction in any material respect one or more of
the conditions to the obligations of Company and Hawkeye to effect the Merger
set forth in Sections 5.1 and 5.3 and noncompliance is not waived by Company,
provided, however, that the right to terminate under this Section 5.4(d) shall
- -------- -------
not be available to the Company where the Company's or Hawkeye's failure to
perform an obligation hereunder has been the cause of, or has resulted in, the
failure of the Closing to occur on or before such date.
(e) Average NYSE Closing Price. (i) By the Company at any time
--------------------------
during the two business day period commencing on the business day immediately
after the end of the Determination Period, if the Average NYSE Closing Price
shall be less than $33.50 (adjusted as indicated in Section 1.3(a)(iv)),
subject, however, to the following three sentences. If the Company elects to
exercise its termination right pursuant to this Section 5.4(e), it shall give
written notice to Commercial no later than the end of the aforementioned two day
period. During the two business day period commencing with the business day
after its receipt of such notice, Commercial shall have the option to increase
the consideration to be received by the holders of Company common stock
hereunder, so that the aggregate per share value of the Merger Consideration
shall equal $115.55, such aggregate per share value to consist of Cash
Consideration in an amount of $24.47 and Stock Consideration consisting of that
number of shares of Commercial Common Stock arrived at by dividing 91.08 by the
Average NYSE Closing Price. If Commercial so elects within such two day period,
it shall give written notice to the Company no later than the end of the
aforementioned two day period of such election and the revised Exchange Ratio,
whereupon no termination shall have occurred pursuant to this Section 5.4(e) and
this Agreement shall remain in effect in accordance with its terms (except as
the Exchange Ratio shall have been so modified).
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<PAGE>
(f) By the Company if in the exercise of its good faith and
reasonable judgment as to fiduciary duties to its stockholders imposed by law,
as advised by special counsel, the Board of Directors of the Company determines
that such termination is required in connection with entering into an agreement
with a third party to engage in an Acquisition Transaction (as defined in
Section 6.2(c)(i)), provided that the Company shall notify Commercial promptly
of its intention to terminate this Agreement and that the Company's ability to
terminate this Agreement pursuant to this paragraph is conditioned upon the
prior payment by the Company of the amounts owed by it to Commercial pursuant to
Section 6.2(b).
For purposes of this Section 5.4, "Average NYSE Closing Price" shall have
the meaning specified in Section 1.3(b) and "Determination Period" shall have
the meaning specified in Section 1.3(b).
ARTICLE VI
TERMINATION OF OBLIGATIONS; PAYMENT OF EXPENSES
6.1 Termination; Lack of Survival of Representations and Warranties. In
---------------------------------------------------------------
the event of the termination and abandonment of this Agreement pursuant to
Section 5.4 of this Agreement, this Agreement shall become void and have no
effect, except that (i) the provisions of Sections 2.7 and 3.7 (Brokers and
Finders), 4.8 (Publicity), 6.2 (Expenses) and 8.2 (Confidentiality) of this
Agreement shall survive any such termination and abandonment, and (ii) a
termination pursuant to Sections 5.4(c) or 5.4(d) of this Agreement shall not
relieve the breaching party from liability for an uncured intentional and
willful breach of a representation, warranty, covenant, or agreement giving rise
to such termination.
The representations, warranties and agreements of the parties set forth in
this Agreement shall not survive the Acquisition Merger Effective Time, and
shall be terminated and extinguished at the Acquisition Merger Effective Time,
and from and after the Acquisition Merger Effective Time none of the parties
hereto shall have any liability to the other on account of any breach or failure
of any of those representations, warranties and agreement; provided, however,
-------- -------
that the foregoing clause shall not (i) apply to agreements of the parties which
by their terms are intended to be performed after the Acquisition Merger
Effective Time, and (ii) shall not relieve any person for liability for fraud,
deception or intentional misrepresentation.
6.2 Payment of Expenses.
-------------------
(a) Each of the parties hereto shall bear and pay all costs and expenses
incurred by it or on its behalf in connection with the transactions contemplated
hereunder.
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<PAGE>
(b) Notwithstanding any provision in this Agreement to the contrary, in
order to induce Commercial and the Bank to enter into this Agreement and as a
means of compensating Commercial and the Bank for the substantial direct and
indirect monetary and other costs incurred and to be incurred in connection with
this Agreement and the transactions contemplated hereby, the Company and Hawkeye
agree that if this Agreement is terminated in accordance with Section 5.4 (other
than if terminated by the Company pursuant to Section 5.4(d) hereof as a result
of Commercial's or the Bank's noncompliance with the conditions set forth in
Section 5.3(b) hereof) and prior to such termination a Termination Event, as
defined in paragraph (c) of this Section 6.2, shall have occurred, the Company
or Hawkeye will upon demand pay to Commercial or the Bank in immediately
available funds $1,000,000.
(c) For purposes of this Agreement, a Termination Event shall mean either
of the following:
(i) The Company or any Company Subsidiary, without having received
Commercial's prior written consent, shall have entered into an agreement to
engage in an Acquisition Transaction (as defined below) with any person (the
term "person" for purposes of this Agreement having the meaning assigned thereto
in Sections 3(a)((9) and 13(d)(3) of the Securities Exchange Act of 1934, and
the rules and regulations thereunder) other than Commercial or any affiliate of
Commercial (the term "affiliate" for purposes of this Agreement having the
meaning assigned thereto in Rule 405 under the 1933 Act) or the Board of
Directors of the Company shall have recommended that the shareholders of the
Company approve or accept any Acquisition Transaction with any person other than
Commercial or any affiliate of Commercial. For purposes of this Agreement
"Acquisition Transaction" shall mean (x) a merger or consolidation, or any
similar transaction, involving the Company or any Company Subsidiary, (y) a
purchase, lease or other acquisition of all or substantially all of the assets
of the Company or any Company Subsidiary or (z) a purchase or other acquisition
(including by way of merger, consolidation, share exchange or otherwise) of
securities representing 50% or more of the equity securities of the Company or
any Company Subsidiary; or
(ii) After a bona fide proposal is made by any person other than
Commercial or any affiliate of Commercial to the Company or its shareholders to
engage in an Acquisition Transaction, either (A) the Company shall have breached
any covenant or obligation contained in this Agreement and such breach would
entitle Commercial to terminate this Agreement or (B) the holders of Company
common stock shall not have approved this Agreement at the meeting of such
shareholders held for the purpose of voting on this Agreement, such meeting
shall not have been held or shall have been cancelled prior to termination of
this Agreement or the Company's Board of Directors shall have withdrawn or
modified in a manner adverse to Commercial the recommendation of the Company's
Board of Directors with respect to this Agreement.
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<PAGE>
ARTICLE VII
CERTAIN POST-MERGER AGREEMENTS
7.1 Reports to the SEC. Commercial shall continue to file all
------------------
reports and data with the SEC necessary to permit the shareholders of Company
who may be deemed "underwriters" (within the meaning of Rule 145 under the 1933
Act) of Company common stock to sell the Company common stock received by them
in connection with the Merger pursuant to Rules 144 and 145(d) under such Act if
they would otherwise be so entitled.
7.2 Employees. Not later than thirty (30) days after the
---------
Acquisition Merger Effective Time, employees of the Company or Hawkeye who
become employees of Commercial or the Bank after the Acquisition Merger
Effective Time shall be eligible to participate in all benefit plans sponsored
by Commercial or the Bank to the same extent as other similarly situated
Commercial or Bank employees; provided, however, that comparable Company or
Hawkeye plans shall be maintained by Commercial until such time as such
employees commence participation in the Commercial benefit plans. Commercial
shall honor all accrued vacation leave for the employees of Company and the
Company Subsidiaries following the Acquisition Merger Effective Time, with full
credit for prior service with Company or Hawkeye for purposes of vesting and
eligibility for participation and co-payments and deductibles. Commercial
agrees that for a period of ninety (90) days following the Acquisition Merger
Effective Time, any employee of the Company or Hawkeye who is not, and has not
been, a party to an employment or severance agreement with Company or Hawkeye
and whose employment terminates after the Acquisition Merger Effective Time
shall be entitled to receive payment for accrued vacation time, provided such
accrued vacation time does not exceed five weeks, and a severance payment in
accordance with Exhibit 7.2 attached hereto.
With respect to employees of the Company or Hawkeye who are covered by
the Commercial health insurance plan following the Acquisition Merger Effective
Time, there shall be no exclusion from coverage for pre-existing conditions that
were covered under any health insurance plan of the Company or Hawkeye.
Commercial agrees to honor the employment and severance agreements
disclosed in Schedule 2.12, as such agreements may be amended by mutual
agreement of the parties hereto. Commercial further agrees that the Acquisition
Merger will constitute a change in control for purposes of such agreements.
Commercial further agrees that the severance agreements with Ms. Berg and
Messrs. Runyan, Schmitz and Aldrich may be amended prior to the Acquisition
Effective Time to provide that, for purposes of Section 2(a) of such agreements,
"involuntary termination" shall include the officer's resignation following the
relocation of the officer's principal place of employment immediately prior to
the Acquisition Merger Effective Time. The Company agrees to use its reasonable
A-52
<PAGE>
best efforts to amend the employment agreements with Messrs. Peterson, Schreck
and Riddle prior to the Acquisition Merger Effective Time to provide that at the
Acquisition Merger Effective Time and for a period of 120 days thereafter, each
such officer may voluntarily resign from any position in which they are retained
by Commercial or the Bank and receive the amounts payable under Section 5 of
such agreements.
ARTICLE VIII
GENERAL
8.1 Amendments. Subject to applicable law, this Agreement may be
----------
amended, whether before or after any relevant approval of shareholders, by an
agreement in writing executed in the same manner as this Agreement and
authorized or ratified by the Boards of Directors of the parties hereto;
provided that, after the adoption of the Agreement by the shareholders of the
- -------------
Company, no such amendment without further shareholder approval may change the
amount or form of the consideration to be received by the Company shareholders
in the Merger.
8.2 Confidentiality. All information disclosed hereafter by any
---------------
party to this Agreement to any other party to this Agreement, including, without
limitation, any information obtained pursuant to Sections 4.1 hereof, shall be
kept confidential by such other party and shall not be used by such other party
otherwise than as herein contemplated except to the extent that (i) it is or
hereafter becomes lawfully obtainable from other sources, (ii) it is necessary
or appropriate to disclose to the OTS, the FDIC or any other regulatory
authority having jurisdiction over the parties or their subsidiaries or as may
otherwise be required by law, or (iii) to the extent such duty as to
confidentiality is waived by the other party. In the event of the termination
of this Agreement, each party shall use all reasonable efforts to return upon
request to the other parties all documents (and reproductions thereof) received
from such other parties (and, in the case of reproductions, all such
reproductions made by the receiving party) that include information not within
the exceptions contained in the first sentence of this Section 8.2.
8.3 Governing Law. This Agreement and the legal relations between
-------------
the parties shall be governed by and construed in accordance with the laws of
the State of Nebraska without taking into account a provision regarding choice
of law, except to the extent certain matters may be governed by federal law by
reason of preemption.
8.4 Notices. Any notices or other communications required or
-------
permitted hereunder shall be sufficiently given if sent by registered mail or
certified mail, postage prepaid, addressed, if to Commercial or Company, to
A-53
<PAGE>
Commercial Federal Corporation
2120 South 72nd Street
Omaha, Nebraska 68124
Attention: William A. Fitzgerald, Chairman of
the Board and Chief Executive
Officer
with a copy to:
Housley Kantarian & Bronstein, P.C.
Suite 700
1220 19th Street, N.W.
Washington, DC 20036
Attention: Gary R. Bronstein, Esq.
and
Heritage Financial, Ltd.
715 8th Street
Boone, Iowa 50036
Attention: John F. Peterson, President
with a copy to:
Breyer & Aguggia
1300 I Street, N.W.
Suite 470 East
Washington, D.C. 20005
Attention: Paul M. Aguggia, Esq.
or such other address as shall be furnished in writing by any such party, and
any such notice or communication shall be deemed to have been given two business
days after the date of such mailing (except that the notice of change of address
shall not be deemed to have been given until received by the addressee).
Notices may also be sent by telegram, telex, facsimile transmission or hand
delivery and in such event shall be deemed to have been given as of the date
received.
8.5 Assignment. This Agreement may not be assigned by any of the parties
----------
hereto, by operation of law or otherwise, without the prior written consent of
the other parties. Subject to the preceding sentence, this Agreement will be
binding upon, inure to the benefit of and be enforceable by the parties and
their respective successors and assigns.
8.6 Headings. The description heading of the several Articles and
--------
Sections of this Agreement are inserted for convenience only and do not
constitute a part of this Agreement.
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<PAGE>
8.7 Counterparts. This Agreement may be executed in one or more
------------
counterparts, all of which shall be considered one and the same agreement and
shall become effective when one or more counterparts have been signed by each of
the parties hereto and delivered to each of the other parties hereto.
8.8 Construction and Interpretation. Except as the context otherwise
-------------------------------
requires, (a) all references herein to any state or federal regulatory agency
shall also be deemed to refer to any predecessor or successor agency, and (b)
all references to state and federal statutes or regulations shall also be deemed
to refer to any successor statute or regulation.
8.9 Entire Agreement. This Agreement, together with the schedules, lists,
----------------
exhibits and certificates required to be delivered hereunder, and any amendment
hereafter executed and delivered in accordance with Section 8.1, and together
with the Asset Management Agreement referred to in Section 1.15 hereof,
constitutes the entire agreement of the parties, and supersedes any prior
written or oral agreement or understanding among any of the parties hereto
pertaining to the Merger, except for the Confidentiality and Non-Disclosure
Agreement between the Company and Commercial dated November 14, 1995, which
shall remain in full force and effect. This Agreement is not intended to confer
upon any other persons any rights or remedies hereunder except as expressly set
forth herein and except as set forth in the Asset Management Agreement referred
to in Section 1.15 hereof, which confers certain rights on shareholders of
Heritage.
8.10 Severability. Whenever possible, each provision of this Agreement
------------
shall be interpreted in such manner as to be effective and valid under
applicable law, but if any provision of this Agreement is held to be prohibited
by or invalid under applicable law, such provision will be ineffective only to
the extent of such prohibition or invalidity, without invalidating the remainder
of such provision or the remaining provisions of the Agreement.
8.11 No Third Party Beneficiaries. Nothing in this Agreement shall entitle
----------------------------
any person (other than the Company, Hawkeye, Commercial or the Bank and their
respective successors and assigns permitted hereby) to any claim, cause of
action, remedy or right of any kind, except as otherwise expressly provided
herein (including, but not limited to, Sections 4.13 and 7.2, which may be
enforced by the parties referred to therein) and except that the Heritage
shareholders have certain rights under the Asset Management Agreement referred
to in Section 1.15 hereof, which may be enforced as provided in such Asset
Management Agreement.
A-55
<PAGE>
IN WITNESS WHEREOF, each of the parties has caused this Agreement to be
executed on its behalf by its officers thereunder duly authorized, all as of the
date set forth above.
COMMERCIAL FEDERAL CORPORATION HERITAGE FINANCIAL, LTD.
By: /s/James A. Laphen By: /s/ John F. Peterson
------------------------------ -------------------------
Name: James A. Laphen Name: John F. Peterson
-----------------------
Title: Title: President and Chief
Chief Executive Officer
COMMERCIAL FEDERAL BANK, A HAWKEYE FEDERAL SAVINGS BANK
FEDERAL SAVINGS BANK
By: /s/ James A. Laphen By: /s/ John F. Peterson
------------------------------ --------------------
Name: James A. Laphen Name: John F. Peterson
----------------
Title: Title: President and Chief
Chief Executive Officer
A-56
<PAGE>
ASSET MANAGEMENT AGREEMENT
AGREEMENT dated this 16th day of May, 1996 by and among Commercial Federal
Corporation ("CFC"), Commercial Federal Bank, A Federal Savings Bank (the
"Bank"), Heritage Financial, Ltd. ("Heritage") and Hawkeye Federal Savings Bank
("Hawkeye") (collectively, the "Parties").
On the date hereof, the Parties have entered into a Reorganization and
Merger Agreement (the "Merger Agreement") which provides for the merger of
Heritage with and into CFC, with CFC as the surviving company and the merger of
Hawkeye with and into the Bank, with the Bank as the surviving institution.
Capitalized terms not otherwise defined herein shall have the meaning ascribed
thereto in the Merger Agreement.
WHEREAS, pursuant to the Merger Agreement, the Bank will succeed to all of
the assets of Hawkeye, including the Bennett Funding Asset; and
WHEREAS, the Parties have agreed that all value recovered on the Bennett
Funding Asset is to be distributed to those individuals who were stockholders or
option holders of Heritage immediately prior to the Acquisition Merger Effective
Time (collectively, the "Heritage Stockholders"); and
WHEREAS, the Parties wish to establish a procedure for managing and
disbursing the recovered value of the Bennett Funding Asset following the
Acquisition Merger Effective Time to the Heritage Stockholders.
NOW, THEREFORE, in consideration of the mutual agreements hereinafter set
forth, the Parties agree as follows:
Formation and Functions of the Bennett Funding Asset Committee
- --------------------------------------------------------------
1. Effective upon the Acquisition Merger Effective Time, the Bennett Funding
Asset and all attempts to recover value thereon shall be administered by a
committee (the "Committee") consisting of three individuals, two of whom
shall be individuals appointed by Hawkeye and the other of whom shall be
the Chairman of the Credit Committee of the Bank. The Committee shall meet
every 90 days or as needed (either telephonically or in person) to review
any developments related to the Bennett Funding Asset.
2. In the event that any member of the Committee resigns or is otherwise
unable to serve, a replacement shall be designated by (i) the remaining
representative of Hawkeye, in the event such individual was a
representative of Hawkeye, (ii) the former directors of Hawkeye in the
event both representatives of Hawkeye simultaneously become unable to
serve, or (ii) a duly authorized officer of the Bank in the event such
individual was the representative of the Bank.
3. The Committee shall be obligated to use its good faith best efforts to
collect any and all value recoverable on the Bennett Funding Asset
("Bennett Value"), including, but not limited to, through the sale thereof,
and to distribute such Bennett Value to the Heritage
A-57
<PAGE>
Stockholders. The Committee shall (a) monitor the progress of the
collection of the Bennett Value by the Managers (as defined below), (b) in
accordance with the provisions hereof, pay all expenses associated
therewith out of the recovered Bennett Value, (c) use its best efforts to
maintain a current list of the names and addresses of the Heritage
Stockholders (such a list as of the Acquisition Merger Effective Time shall
be attached to this Agreement as Exhibit A promptly following the Closing),
and (d) distribute the recovered Bennett Value to the Heritage Stockholders
in accordance with the provisions hereof.
4. All decisions of the Committee shall be approved by a majority of the
members of the Committee with the exception that decisions to pursue
litigation reasonably estimated to involve expenditures in excess of the
amount recovered or held in reserve on the Bennett Funding Asset must be
approved by a unanimous vote of the Committee's members.
5. All reasonable and documented expenses incurred by Committee members in the
performance of their duties hereunder shall be reimbursed from the
recovered Bennett Value.
6. The Bank agrees to indemnify the Committee members for any liability
arising out of the performance of their duties as set forth herein, except
where such liability arises from the member's gross negligence or willful
misconduct. In no case, however, shall the Bank's liability for
indemnification hereunder exceed the recoverable value of the Bennett
Funding Asset as of the date hereof.
Appointment of the Managers
- ---------------------------
7. The Bennett Funding Asset shall be managed by such individuals designated
by the Bank who serve in the Bank's corporate credit group (the
"Managers"). The Bank agrees that the Managers will use their best efforts
to collect the Bennett Value. In no event, however, will the Bank be
obligated to incur any expenses in the collection of the Bennett Value.
All such expenses shall be paid out of the recovered proceeds of the
Bennett Funding Asset.
8. The Bank shall be compensated for the time spent by the Managers in
collecting the Bennett Value at the rate of $50 per hour for a principal
officer such as the Chairman of the Bank's Credit Committee (or such other
officer of similar position) and $35 per hour for an associate officer. In
addition, all expenses incurred by the Managers in connection with the
collection of the Bennett Value shall be reimbursed by the Committee from
such Bennett Value. The Managers shall submit time sheets on at least a
bi-monthly basis reflecting the actual time spent in collecting the Bennett
Value.
9. The Managers shall be authorized to take all actions necessary in their
judgment to collect the Bennett Value with the exception that (i) no
litigation may be commenced and (ii) no sale of the Bennett Funding Asset
may be effectuated, without the prior written approval of the Committee.
A-58
<PAGE>
10. The Managers shall be obligated to make such progress reports on the
collection of the Bennett Value as the Committee may reasonably request.
11. The Bank's obligation hereunder to provide Managers may be terminated at
the sole option of the Bank at any time beginning one year after the
Acquisition Merger Effective Time if the hours actually spent by one or
more Managers exceeds 160 hours within a six-month period. In the event of
such early termination, the Committee may appoint another person or entity
to manage the Bennett Funding Asset and seek to collect the Bennett Value
upon such terms and conditions as the Committee may determine; provided
that in no event may the term of such alternative engagement exceed the
term of this Asset Management Agreement.
Distribution of Proceeds
- ------------------------
12. All proceeds from the collection of the Bennett Value shall be held in a
federally insured, interest-bearing deposit account. Such proceeds shall
be applied as follows: (a) first, to pay any and all unpaid reasonable and
documented expenses associated with such collection; (b) second, to
establish a reserve in an amount necessary to pay the expenses reasonably
expected to be incurred in the following 30 days as determined by the
unanimous vote of the Committee; (c) third, to the Heritage Stockholders
based on their pro rata interest in Heritage immediately prior to the
Acquisition Merger Effective Time as set forth on Exhibit A hereto.
13. Distributions shall be made on an annual basis beginning on or about the
first anniversary date of the Acquisition Merger Effective Time; provided,
however, that where the recovered Bennett Value (net of the expenses and
after establishing the reserve referred to in subparagraph (b) of the
preceding paragraph) exceeds $100,000, distributions shall be made semi-
annually.
Termination of this Agreement
- -----------------------------
14. This Agreement will terminate upon the earlier of (i) the full collection
of the Bennett Value, through sale or otherwise, and the distribution of
the proceeds collected thereon to the Heritage Stockholders or (ii)
September 30, 1999; provided, however, that this date shall be extended to
December 31, 1999 if in the reasonable good faith and unanimous opinion of
the Committee, immediately prior to September 30, 1999, further collection
efforts are warranted.
15. If, upon the date of termination of this Agreement, there remain net
proceeds attributable to the Bennett Value which have been collected but
not distributed to the Heritage Stockholders, such proceeds shall be
distributed to the Heritage Stockholders as soon as practicable following
termination of this Agreement; provided that any unpaid expenses, including
the costs associated with the distribution of the proceeds, shall be
deducted prior to distribution.
16. All funds received from the collection of the Bennett Value subsequent to
the termination of this Agreement will be for the benefit of the Bank.
A-59
<PAGE>
Assignment
- ----------
17. This Agreement may not be assigned by any of the parties hereto, by
operation of law or otherwise, without the prior written consent of the
other parties. Subject to the preceding sentence, this Agreement will be
binding upon, inure to the benefit of and be enforceable by the parties and
their respective successors and assigns.
Rights of Heritage Stockholders
- -------------------------------
18. It is hereby acknowledged by the Parties hereto that the Heritage
Stockholders are third-party beneficiaries of this Agreement; provided,
however, that (i) no Heritage Stockholder may file an action in an attempt
to enforce its rights under this Agreement unless such Heritage Stockholder
has been named as the designated representative of Heritage Stockholders
representing at least 25% of the shares of Heritage common stock
outstanding immediately prior to the Acquisition Merger Effective Time, and
(ii) Commercial's liability on claims to shareholders hereunder shall in no
event exceed the recoverable value of the Bennett Funding Asset as of the
date hereof. Except to the extent that expenses incurred in the collection
of the Bennett Value are deducted from gross proceeds collected prior to
distribution to the Heritage Stockholders in accordance with the provisions
hereof and except for any expenses incurred by the Heritage Stockholders in
connection with an attempt to enforce their rights hereunder, the Heritage
Stockholders shall not incur any liability in connection with the
transactions contemplated by this Agreement.
Applicable Law
- --------------
19. This Agreement and the legal relations among the parties hereto shall be
governed by and construed in accordance with the internal laws of the State
of Nebraska.
Severability
- ------------
20. If any provision of this Agreement is held to be prohibited by or invalid
under applicable law, such provision will be ineffective only to the extent
of such prohibition or invalidity, without invalidating the remainder of
such provision or the remaining provisions of the Agreement.
IN WITNESS WHEREOF, each of the parties has caused this Agreement to be
executed on its behalf by its officers thereunder duly authorized, all as of the
date set forth above.
COMMERCIAL FEDERAL CORPORATION HERITAGE FINANCIAL, LTD.
By: /s/ James A. Laphen By: /s/ John F. Peterson
--------------------------- ---------------------------
COMMERCIAL FEDERAL BANK, A HAWKEYE FEDERAL SAVINGS BANK
FEDERAL SAVINGS BANK
By: /s/ James A. Laphen By: /s/ John F. Peterson
--------------------------- ---------------------------
A-60
<PAGE>
This is Amendment Number 1 to the Asset Management Agreement dated as of
May 16, 1996 by and among Commercial Federal Corporation ("CFC"), Commercial
Federal Bank, A Federal Savings Bank (the "Bank"), Heritage Financial, Ltd.
("Heritage") and Hawkeye Federal Savings Bank ("Hawkeye") (collectively, the
"Parties").
WHEREAS, the Parties entered into the Asset Management Agreement which sets
forth the procedure for managing and disbursing the recovered value of the
Bennett Funding Asset following the Acquisition Merger Effective Time.
WHEREAS, the Parties wish to amend the Asset Management Agreement as
hereinafter set forth to clarify certain provisions of the Asset Management
Agreement.
NOW THEREFORE, in consideration of the mutual covenants herein and for
other good and valuable consideration, the receipt and sufficiency of which is
hereby acknowledged, the Parties hereto agree as follows:
1. The second recital is hereby amended to read as follows:
"WHEREAS, the Parties have agreed that 64% of the net value recovered
on the Bennett Funding Asset is to be distributed to those individuals who
were stockholders or option holders of Heritage immediately prior to the
Acquisition Merger Effective Time (collectively, the "Heritage
Stockholders"); and"
2. Paragraph 12 of the Asset Management Agreement is hereby amended to
read as follows:
"All proceeds from the collection of the Bennett Value shall be held in a
federally insured, interest-bearing deposit account. Such proceeds shall be
applied as follows: (a) first, to pay any and all unpaid reasonable and
documented expenses associated with such collection; (b) second, to
establish a reserve in an amount necessary to pay the expenses reasonably
expected to be incurred in the following 30 days as determined by the
unanimous vote of the Committee; (c) third, 64% of the remaining proceeds
to the Heritage Stockholders based on their pro rata interest in Heritage
immediately prior to the Acquisition Merger Effective Time as set forth on
Exhibit A hereto with the remaining 36% to be retained by the Bank."
3. Paragraph 13 of the Asset Management Agreement is hereby amended to
read as follows:
"Distributions shall be made on an annual basis beginning on or about the
first anniversary date of the Acquisition Merger Effective Time; provided,
however, that when 64%
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<PAGE>
of the recovered Bennett Value (net of the expenses and after establishing
the reserve referred to in subparagraph (b) of the preceding paragraph)
exceeds $100,000, distributions shall be made semi-annually."
4. Except as specifically revised by this Amendment Number 1, the Asset
Management Agreement remains in full force and effect. Should there be conflict
or ambiguity between the matters expressed in this Amendment Number 1 and the
terms and conditions of the Asset Management Agreement the parties intend that
the provisions of this Amendment Number 1 shall prevail and supersede any such
conflict or ambiguity. This Amendment Number 1 may be executed in one or more
counterparts, all of which shall be considered one and the same agreement and
shall become effective when one or more counterparts have been signed by each of
the parties hereto and delivered to each of the other parties hereto.
IN WITNESS WHEREOF, each of the parties hereto has duly executed and
delivered this Amendment Number 1 to the Asset Management Agreement, or has
caused this Amendment Number 1 to the Asset Management Agreement to be executed
and delivered in its name and on its behalf by its representative thereunto duly
authorized, as of the 21st day of August, 1996.
COMMERCIAL FEDERAL CORPORATION HERITAGE FINANCIAL, LTD.
By: /s/ James A. Laphen By: /s/ John F. Peterson
------------------------------- --------------------------------
James A. Laphen John F. Peterson
COMMERCIAL FEDERAL BANK, A HAWKEYE FEDERAL SAVINGS BANK
FEDERAL SAVINGS BANK
By: /s/ James A. Laphen By: /s/ John F. Peterson
------------------------------- --------------------------------
James A. Laphen John F. Peterson
A-62
<PAGE>
Hovde Financial, Inc.
INVESTMENT BANKERS & FINANCIAL ADVISORS
August 21, 1996
Board of Directors
Heritage Financial, Ltd.
715 Eighth Street
Boone, IA 50036
Members of the Board:
We understand that Heritage Financial, Ltd., an Iowa corporation
("Heritage"), its wholly-owned subsidiary, Hawkeye Federal Savings Bank, a
federally-chartered savings bank ("Hawkeye" and, collectively with Heritage, the
"Sellers"), and Commercial Federal Corporation, a Nebraska corporation
("Commercial"), and its wholly-owned subsidiary, Commercial Federal Bank, a
federally-chartered savings bank (the "Bank" and, collectively with Commercial,
the "Buyers"), have entered into a Reorganization and Merger Agreement, dated as
of May 14, 1996 (the "Agreement"), pursuant to which Heritage will merge with
and into Commercial, followed by the merger of Hawkeye with and into the Bank
(collectively, the "Merger").
As set forth in the Agreement, each of the outstanding shares of Heritage
common stock, including outstanding stock options (collectively "Heritage Common
Stock") will be converted into and have the right to receive, pursuant to
Section 1.3(a)(i)(A) of the Agreement (the "Exchange Ratio"), the following: (i)
an amount in cash equal to no less than $18.73 (the "Cash Consideration" as
adjusted); (ii) that number of shares of Commercial common stock ("Commercial
Common Stock") arrived at by dividing $97.88 by the average NYSE closing price
(as defined by Section 1.3(b) of the Agreement (the "Stock Consideration").
Furthermore pursuant to Section 1.15 of the Agreement, the Heritage shareholders
have the potential to receive an additional amount in cash up to $5.74, which
may be received subsequent to Closing, depending upon the level of collections
by Commercial subsequent to Closing on a leasing portfolio owned by Hawkeye
which was purchased from Bennett Funding Corporation, an entity which recently
declared bankruptcy (the "Bennett Transfer Consideration"). In connection
therewith, you have requested our opinion as to the fairness of the Merger
Consideration (as defined in the Agreement), from a financial point of view, to
the shareholders of Heritage. For purposes of this opinion, we have assumed that
the Bennett Transfer Consideration portion of the Merger Consideration is
allocated a zero ($0.00) value, and that shareholders of Heritage receive no
additional cash, even though the management of Heritage believes (and we concur)
that some portion of the $5.74 in maximum Bennett Transfer Consideration will be
received by shareholders of Heritage.
<PAGE>
Board of Directors
Heritage Financial, Ltd.
Page Two
Hovde Financial, Inc. ("Hovde") specializes in providing investment banking
and financial advisory services to commercial bank and thrift institutions. Our
principals are experienced in the independent valuation of securities in
connection with negotiated underwritings, subscription and community offerings,
private placements, merger and acquisition transactions and recapitalizations.
We are familiar with Heritage, having entered into a consulting agreement with
Heritage pursuant to which we have acted as its financial advisor in connection
with, and having participated in the negotiations leading, to the Agreement.
Pursuant to this consulting agreement, we have received and will receive
compensation from Heritage in connection with our services, a significant
portion of which is contingent upon the consummation of the Merger.
During the course of our engagement, we reviewed and analyzed material
bearing upon the financial and operating conditions of Heritage and Commercial
and material prepared in connection with the proposed transaction, including the
following: the Agreement; certain publicly available business and financial
information concerning Heritage and Commercial; certain unaudited financial
information as of June 30, 1996 for Heritage and Commercial; the terms of
recent merger and acquisition transactions involving thrifts and thrift holding
companies that we considered relevant; historical market prices and trading
volumes for Commerical Common Stock; and certain financial and other information
provided to us by the managements of Heritage and Commercial. We also compared
Heritage and Commercial from a financial point of view with certain other
companies we deemed to be relevant.
In addition, we have conducted meetings with members of the senior
management of Heritage and Commercial for the purpose of reviewing the future
prospects of Heritage and Commercial. We also evaluated the pro forma ownership
of Commercial Common Stock by Heritage's shareholders relative to the pro forma
contribution of Heritage's assets, liabilities, equity and earnings to the pro
forma company, and conducted such other studies, analyses and examinations as we
deemed appropriate. We also took into account our assessment of general
economic, market and financial conditions and our experience in other
transactions, as well as our knowledge of the bank and thrift industries and
our general experience in securities valuations.
In rendering this opinion, we have relied upon and assumed, without
independent verification, the accuracy and completeness of the financial and
other information and representations that were provided or made available to
us by Heritage, Commercial and their respective representatives and of the
publicly available information reviewed by us. We also relied upon Commercial's
management as to the reasonableness and achievability of the financial and
operating forecasts provided to us. In that regard, we assumed that such
forecasts reflected the best currently available estimates and judgments of
Commercial's management and that such projections and forecasts would be
realized in the amounts and in the time periods currently
<PAGE>
Board of Directors
Heritage Financial, Ltd.
Page Three
estimated by Commercial's management. We did not independently verify and have
relied on and assumed that the aggregate allowances for loan losses set forth in
the balance sheets of each of Heritage and Commercial at June 30, 1996 were
adequate to cover potential losses and complied fully with applicable law,
regulatory policy and sound banking practices as of the date of such financial
statements. We were not retained to and did not conduct a physical inspection of
any of the properties or facilities of Heritage or Commercial, nor did we make
any independent evaluation or appraisal of the assets, liabilities or prospects
of Heritage or Commercial; we were not furnished with any such evaluation or
appraisal. In addition, we were not retained to and did not review any
individual credit files.
We have assumed that the Merger is, and will be, in compliance with all
laws and regulations that are applicable to Heritage and Commercial. In
rendering this opinion, we have been advised by Heritage and Commercial and we
have assumed that there are not factors that would impede any necessary
regulatory or governmental approval for the Merger and we have further assumed
that in the course of obtaining the necessary regulatory and governmental
approvals, no restriction will be imposed on Commercial or the surviving
corporation that would have a material adverse effect on Commercial or the
contemplated benefits of the Merger. We have also assumed that there would not
occur any change in the applicable law or regulation that would cause a material
adverse change in the prospects or operations of Commercial or the surviving
corporation after the Merger.
Our opinion is based solely upon the information available to us and the
economic, market and other circumstances as they exist as of the date hereof.
Events occurring after and information that becomes available after the date
hereof could materially affect the assumptions and analyses used in preparing
this opinion. We have not undertaken to reaffirm or revise this opinion or
otherwise comment upon any events occurring or information that becomes
available after the date hereof.
We are not expressing any opinion herein as to the prices at which shares
of Commercial Common Stock issued in the Merger may trade if and when they are
issued or at any future time, nor does our opinion constitute a recommendation
to any holder of Heritage Common Stock as to how such holder should vote with
respect to the Agreement at any meeting of holders of Heritage Common Stock.
This letter is solely for the information of the Board of Directors and
stockholders of Heritage and is not to be used, circulated, quoted or otherwise
referred to for any other purpose, nor is it to be filed with, included in or
referred to in whole or in part in any registration statement, proxy statement
or any other document, except in each case in accordance with our prior written
consent which shall not be unreasonably withheld; provided, however, that we
<PAGE>
Board of Directors
Heritage Financial, Ltd.
Page Four
hereby consent to the inclusion and reference to this letter in any registration
statement, proxy statement, information statement or tender offer document to
be delivered to the holders of Heritage Common Stock in connection with the
Merger if and only if this letter is quoted in full or attached as an exhibit to
such document and this letter has not been withdrawn prior to the date of
such document.
Subject to the foregoing and based on our experience as investment bankers,
our activities and assumptions as described above, and other factors we have
deemed relevant, we are of the opinion that, as of the date hereof, the Merger
Consideration is fair, from a financial point of view, to the shareholders of
Heritage.
Sincerely,
HOVDE FINANCIAL, INC.
By: /s/ Hovde Financial, Inc.
--------------------------
<PAGE>
Annex C
IOWA BUSINESS CORPORATION ACT
DIVISION XIII
DISSENTERS' RIGHTS
PART A
490.1301 DEFINITIONS FOR DIVISION XIII. -- In this division:
1. "Beneficial shareholder" means the person who is a beneficial owner
of shares held by a nominee as the record shareholder.
2. "Corporation" means the issuer of the shares held by a dissenter
before the corporate action, or the surviving or acquiring corporation by
merger or share exchange of that issuer.
3. "Dissenter" means a shareholder who is entitled to dissent from
corporate action under section 490.1302 and who exercises that right when and
in the manner required by sections 490.1320 through 490.1328.
4. "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.
5. "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.
6. "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.
7. "Shareholder" means the record shareholder or the beneficial
shareholder.
490.1302 SHAREHOLDERS' RIGHT TO DISSENT. -- 1. A shareholder is entitled to
dissent from, and obtain payment of the fair value of the shareholder's shares
in the event of, any of the following corporate actions:
a. Consummation of a plan of merger to which the corporation is a
party if either of the following apply:
(1) Shareholder approval is required for the merger by section
490.1103 or the articles of incorporation and the shareholder is entitled
to vote on the merger.
(2) The corporation is a subsidiary that is merged with its parent
under section 490.1104.
b. 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.
c. Consummation of a sale or exchange of all, or substantially
all, of the property of the corporation other than in the usual and
regular course of business, if the shareholder is entitled to vote on the
sale or exchange, including a sale in dissolution, but not including a
sale pursuant to court order or a
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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.
d. An amendment of the articles of incorporation that materially
and adversely affects rights in respect of a dissenter's shares because
it does any or all of the following:
(1) Alters or abolishes a preferential right of the shares.
(2) Creates, alters, or abolishes a right in respect of
redemption, including a provision respecting a sinking fund for the
redemption or repurchase, of the shares.
(3) Alters or abolishes a preemptive right of the holder of
the shares to acquire shares or other securities.
(4) Excludes or limits the right of the shares to vote on any
matter, or to cumulate votes, other than a limitation by dilution
through issuance of shares or other securities with similar voting
rights.
(5) Reduces the number of share owned by the shareholder to a
fraction of a share if the fractional share so created is to be
acquired for cash under section 490.604.
(6) Extends, for the first time after being governed by this
chapter, the period of duration of a corporation organized under
chapter 491 or 496A and existing for a period of years on the day
preceding the date the corporation is first governed by this
chapter.
e. 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.
2. A shareholder entitled to dissent and obtain payment for the
shareholder's shares under this chapter is not entitled to challenge the
corporate action creating the shareholder's entitlement unless the action is
unlawful or fraudulent with respect to the shareholder or the corporation.
490.1303 DISSENT BY NOMINEES AND BENEFICIAL OWNERS. -- 1. A record
shareholder may assert dissenters' rights as to fewer than all the shares
registered in that shareholder's name only if the shareholder 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
the shareholder asserts dissenters' rights. The rights of a partial dissenter
under this subsection are determined as if the shares as to which the
shareholder dissents and the shareholder's other shares were registered in the
names of different shareholders.
2. A beneficial shareholder may assert dissenters' rights as to shares
held on the shareholder's behalf only if the shareholder does both of the
following:
a. Submits to the corporation the record shareholder's written
consent to the dissent not later than the time the beneficial shareholder
asserts dissenters' rights.
b. Does so with respect to all shares of which the shareholder is
the beneficial shareholder or over which that beneficial shareholder has
power to direct the vote.
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PART B
490.1320 NOTICE OF DISSENTERS' RIGHTS. -- 1. If proposed corporate action
creating dissenters' rights under section 490.1302 is submitted to a vote at a
shareholders' meeting, the meeting notice must state that shareholders are or
may be entitled to assert dissenters' rights under this part and be
accompanied by a copy of this part.
2. If corporate action creating dissenters' rights under section
490.1302 is taken without a vote of shareholders, the corporation shall notify
in writing all shareholders entitled to assert dissenters' rights that the
action was taken and send them the dissenters' notice described in section
490.1322.
490.1321 NOTICE OF INTENT TO DEMAND PAYMENT. -- 1. If proposed corporate
action creating dissenters' rights under section 490.1302 is submitted to a
vote at a shareholder's meeting, a shareholder who wishes to assert
dissenters' rights must do all of the following:
a. Deliver to the corporation before the vote is taken written
notice of the shareholder's intent to demand payment for the
shareholder's shares if the proposed action is effectuated.
b. Not vote the dissenting shareholder's shares in favor of the
proposed action.
2. A shareholder who does not satisfy the requirements of subsection
1, is not entitled to payment for the shareholder's shares under this part.
490.1322 DISSENTERS' NOTICE. -- 1. If proposed corporate action creating
dissenters' rights under section 490.1302 is authorized at a shareholders'
meeting, the corporation shall deliver a written dissenters' notice to all
shareholders who satisfied the requirements of section 490.1321.
2. The dissenters' notice must be sent no later than ten days after
the proposed corporate action is authorized at a shareholders' meeting or, if
the corporate action is taken without a vote of the shareholders, no later
than ten days after the corporate action is taken, and must do all of the
following:
a. State where the payment demand must be sent and where and when
certificates for certificated shares must be deposited.
b. Inform holders of uncertificated shares to what extent transfer
of the shares will be restricted after the payment demand is received.
c. 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 the person acquired beneficial
ownership of the shares before that date.
d. Set a date by which the corporation must receive the payment
demand, which date shall not be fewer than thirty nor more than sixty
days after the date the dissenters' notice is delivered.
e. Be accompanied by a copy of this division.
490.1323 DUTY TO DEMAND PAYMENT. -- 1. A shareholder sent a dissenter's
notice described in section 490.1322 must demand payment, certify whether the
shareholder acquired beneficial ownership of the shares before the date
required to be set forth in the dissenter's notice pursuant to section
490.1322, subsection 2, paragraph "c", and deposit the shareholder's
certificates in accordance with the terms of the notice.
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2. The shareholder who demands payment and deposits the shareholder's
shares under subsection 1 retains all other rights of a shareholder until
these rights are canceled or modified by the taking of the proposed corporate
action.
3. A shareholder who does not demand payment or deposit the
shareholder's share certificates where required, each by the date set in the
dissenters' notice, is not entitled to payment for the shareholder's shares
under this division.
490.1324. SHARE RESTRICTIONS. -- 1. The corporation may restrict the
transfer of uncertificated shares from the date the demand for their payment
is received until the proposed corporate action is taken or the restrictions
released under section 490.1326.
2. The person for whom dissenters' rights are asserted as to
uncertificated shares retains all other rights of a shareholder until these
rights are canceled or modified by the taking of the proposed corporate
action.
490.1325 PAYMENT. -- 1. Except as provided in section 490.1327, at the time
the proposed corporate action is taken, or upon receipt of a payment demand,
whichever occurs later, the corporation shall pay each dissenter who complied
with section 490.1323 the amount the corporation estimates to be the fair
value of the dissenter's shares, plus accrued interest.
2. The payment must be accompanied by all of the following:
a. The corporation's balance sheet as of the end of a fiscal year
ending not more than sixteen months before the date of payment, 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.
b. A statement of the corporation's estimate of the fair value of
the shares.
c. An explanation of how the interest was calculated.
d. A statement of the dissenter's right to demand payment under
section 490.1328.
e. A copy of this division.
490.1326 FAILURE TO TAKE ACTION. -- 1. If the corporation does not take the
proposed action within sixty days after the date set for demanding payment and
depositing share certificates, the corporation shall return the deposited
certificates and release the transfer restrictions imposed on uncertificated
shares.
2. If after returning deposited certificates and releasing transfer
restrictions, the corporation takes the proposed action, it must send a new
dissenters' notice under section 490.1322 as if the corporate action was taken
without a vote of the shareholders and repeat the payment demand procedure.
490.1327 AFTER-ACQUIRED SHARES. -- 1. A corporation may elect to withhold
payment required by section 490.1325 from a dissenter unless a dissenter was
the beneficial owner of the shares before the date set forth in the
dissenters' notice as the date of the first announcement to news media or to
shareholders of the terms of the proposed corporate action.
2. To the extent the corporation elects to withhold payment under
subsection 1, after taking the proposed corporate action, it shall estimate
the fair value of the shares, plus accrued interest, and shall pay this amount
to each dissenter who agrees to accept it in full satisfaction of the
dissenter's demand. The corporation shall send with its offer a statement of
its estimate of the fair value of the shares, an explanation of how the
interest was calculated, and a statement of the dissenter's right to demand
payment under section 490.1328.
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490.1328 PROCEDURE IF SHAREHOLDER DISSATISFIED WITH PAYMENT OR OFFER. -- 1.
A dissenter may notify the corporation in writing of the dissenter's own
estimate of the fair value of the dissenter's shares and amount of interest
due, and demand payment of the dissenter's estimate, less any payment under
section 490.1325, or reject the corporation's offer under section 490.1327 and
demand payment of the fair value of the dissenter's shares and interest due,
if any of the following apply:
a. The dissenter believes that the amount paid under section
490.1325 or offered under section 490.1327 is less than the fair value of
the dissenter's shares or that the interest due is incorrectly
calculated.
b. The corporation fails to make payment under section 490.1325
within sixty days after the date set for demanding payment.
c. The corporation, having failed to take the proposed action,
does not return the deposited certificates or release the transfer
restrictions imposed on uncertificated shares within sixty days after the
date set for demanding payment.
2. A dissenter waives the dissenter's right to demand payment under
this section unless the dissenter notifies the corporation of the dissenter's
demand in writing under subsection 1 within thirty days after the corporation
made or offered payment for the dissenter's shares.
PART C
490.1330 COURT ACTION. -- 1. If a demand for payment under section 490.1328
remains unsettled, the corporation shall commence a proceeding within sixty
days after receiving the payment demand and petition the court 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.
2. The corporation shall commence the proceeding in the district court
of the county where a corporation's principal office or, its none in this
state, its registered office is located. If the corporation is a foreign
corporation without a registered office in this state, it shall commence the
proceeding in the county in this state where the registered office of the
domestic corporation merged with or whose shares were acquired by the foreign
corporation was located.
3. The corporation shall make all dissenters, whether or not residents
of this state, whose demands remain unsettled parties to the proceeding as in
an action against their shares and all parties must be served with a copy of
the petition. Nonresidents may be served by registered or certified mail or
by publication as provided by law.
4. The jurisdiction of the court in which the proceeding is commenced
under subsection 2 is plenary and exclusive. The court may appoint one or
more persons as appraisers to receive evidence and recommend 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.
5. Each dissenter made a party to the proceeding is entitled to
judgment for either of the following:
a. The amount, if any, by which the court finds the fair value of
the dissenter's shares, plus interest, exceeds the amount paid by the
corporation.
b. The fair value, plus accrued interest, of the dissenter's
after-acquired shares for which the corporation elected to withhold
payment under section 490.1327.
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490.1331 COURT COSTS AND COUNSEL FEES. -- 1. The court in an appraisal
proceeding commenced under section 490.1330 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 acted arbitrarily, vexatiously, or not in good faith in
demanding payment under section 490.1328.
2. The court may also assess the fees and expenses of counsel and
experts for the respective parties, in amounts the court finds equitable, for
either of the following:
a. 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 section 490.1320 through 490.1328.
b. 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 acted arbitrarily, vexatiously, or not in good
faith with respect to the rights provided by this chapter.
3. If the court finds that the services of counsel for any dissenter
were of substantial benefit to other dissenters similarly situated, and that
the fees for those services should not be assessed against the corporation,
the court may award to these counsel reasonable fees to be paid out of the
amounts awarded the dissenters who were benefited.
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