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As filed with the Securities and Exchange Commission on September 14, 1998
Registration No. 333-
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
-----------------------------------
MEGABANK FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
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<S> <C> <C>
COLORADO 6719 84-1449911
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(State or other jurisdiction of (Primary S.I.C. Code Number) (I.R.S. Employer
incorporation or organization) Identification Number)
</TABLE>
8100 EAST ARAPAHOE ROAD
ENGLEWOOD, COLORADO 80112
(303) 740-2265
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(Address, including zip code, and telephone number, including area code,
of principal executive offices and principal place of business)
THOMAS R. KOWALSKI
CHAIRMAN AND CHIEF EXECUTIVE OFFICER
8100 EAST ARAPAHOE ROAD
ENGLEWOOD, COLORADO 80112
(303) 740-2265
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(Name, address, including zip code, and telephone number,
including area code, of agent for service)
COPIES TO:
REID A. GODBOLT, ESQ. MATTHEW C. BOBA, ESQ.
JONES & KELLER, P.C. CHAPMAN AND CUTLER
1625 BROADWAY, SUITE 1600 111 WEST MONROE STREET
DENVER, COLORADO 80202 CHICAGO, ILLINOIS 60603
TELEPHONE: (303) 573-1600 TELEPHONE: (312) 845-3000
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APPROXIMATE DATE OF PROPOSED SALE TO THE PUBLIC:
AS SOON AS PRACTICABLE AFTER THE EFFECTIVE DATE OF THIS REGISTRATION STATEMENT.
If this Form is filed to register additional securities for an
offering pursuant to Rule 462(b) under the Securities Act, check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule
462(c) under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier registration statement for the
same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule
462(d) under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to
Rule 434, check the following box. [X]
CALCULATION OF REGISTRATION FEE
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Proposed Maximum Proposed Maximum Amount of
Title of Each Class of Securities Amount to be Offering Price Aggregate Offering Registration
to be Registered Registered(2) Per Security(1) Price Fee
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Common Stock 1,667,500 $ 13.00 $ 21,677,500 $ 6,395
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(1) Estimated solely for purposes of calculating the registration fee.
(2) Includes 217,500 shares of Common Stock subject to the Underwriters'
over-allotment option.
---------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE
OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
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<PAGE> 2
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these securities
in any State in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of any such State.
SUBJECT TO COMPLETION, DATED SEPTEMBER 14, 1998
1,450,000 SHARES
MEGABANK FINANCIAL CORPORATION
[MEGABANK LOGO]
COMMON STOCK
Of the 1,450,000 shares of Common Stock offered hereby (the
"Offering"), 1,200,000 shares are being offered by MegaBank Financial
Corporation (the "Company") and 250,000 shares are being offered by Thomas R.
Kowalski, the Company's Chairman and Chief Executive Officer (the "Selling
Shareholder"). See "Principal and Selling Shareholders."
Prior to the Offering, there has been no public market for the
Common Stock. It is currently estimated that the initial public offering price
per share of the Common Stock will be between $11 and $13. For information
relating to the determination of the initial public offering price of the Common
Stock, see "Underwriting." The Company has filed an application to have the
Common Stock approved for inclusion on the Nasdaq National Market(R) under the
symbol "MBFC."
SEE "RISK FACTORS" BEGINNING ON PAGE 8 FOR A DISCUSSION OF CERTAIN
FACTORS THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE COMMON STOCK.
-------------------
THE SHARES OF COMMON STOCK OFFERED HEREBY ARE NOT SAVINGS ACCOUNTS OR DEPOSITS
AND ARE NOT INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE BANK
INSURANCE FUND, THE SAVINGS ASSOCIATION INSURANCE FUND OR ANY OTHER
GOVERNMENT AGENCY.
-------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF
THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
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Proceeds to
Price to Underwriting Proceeds to Selling
Public Discount(1) Company(2) Shareholder (2)
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<S> <C> <C> <C> <C>
Per Share ........................ $____ $____ $____ $____
Total(3).......................... $____ $____ $____ $____
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(1) See "Underwriting" for information concerning indemnification
arrangements with the Underwriters.
(2) Before deducting expenses of the Offering payable by the Company
estimated at $300,000 and by the Selling Shareholder estimated at
$5,000.
(3) The Company and the Selling Shareholder have granted the
Underwriters a 30-day option to purchase up to an additional 192,500
shares and 25,000 shares of Common Stock, respectively, solely to
cover over-allotments, if any, on the same terms and conditions as
shown above. If such option is exercised in full, the total Price to
Public, Underwriting Discount and Proceeds to Company and Proceeds
to Selling Shareholder will be $_____, $_____, $_____, and $_____,
respectively.
The shares of Common Stock are offered hereby severally by the
Underwriters named herein, subject to receipt and acceptance by them and subject
to the right to reject any order in whole or in part. See "Underwriting." It is
anticipated that delivery of the shares of Common Stock will be made against
payment therefor on or about ________, 1998.
HOWE BARNES INVESTMENTS, INC.
________, 1998
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[MAP]
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CERTAIN PERSONS PARTICIPATING IN THE OFFERING MAY ENGAGE IN
TRANSACTIONS THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE
COMMON STOCK, INCLUDING OVER-ALLOTMENT, STABILIZING AND SHORT-COVERING
TRANSACTIONS IN SUCH COMMON STOCK, AND THE IMPOSITION OF A PENALTY BID, IN
CONNECTION WITH THE OFFERING. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE
"UNDERWRITING."
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IN CONNECTION WITH THE OFFERING, CERTAIN PERSONS MAY ENGAGE IN
PASSIVE MARKET MAKING TRANSACTIONS IN THE COMMON STOCK ON THE NASDAQ NATIONAL
MARKET(R) IN ACCORDANCE WITH RULE 103 UNDER REGULATION M.
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The Company intends to furnish its shareholders with annual reports
containing audited financial statements, together with a report from its
independent auditors, and quarterly reports for the first three quarters of each
fiscal year containing unaudited financial information. The Company is a
reporting company under the Securities Exchange Act of 1934. See "Available
Information."
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PROSPECTUS SUMMARY
This summary should be read in conjunction with, and is qualified in
its entirety by, the more detailed information, including "Risk Factors" and the
Consolidated Financial Statements and related notes included elsewhere in this
Prospectus. Unless otherwise indicated, all information in this Prospectus (i)
gives effect to the 30-for-1 stock split of the Company's Common Stock (the
"Common Stock"), effected in September 1998, (ii) assumes that the Underwriters'
over-allotment option is not exercised, and (iii) for purposes of regulatory
disclosure, gives effect to the Company's and Bank's conversion to a unitary
thrift holding company and federal savings bank, respectively, effected in
September 1998.
THE COMPANY
MegaBank Financial Corporation (the "Company") was founded in 1984
by its Chairman and Chief Executive Officer, Thomas R. Kowalski, with the
objective of building a banking franchise in the Denver, Colorado metropolitan
area that would deliver a broad based package of products and services to
businesses and individuals. The Company's banking subsidiary, MegaBank (the
"Bank") was organized in 1983. Since the advent of branch banking in Colorado in
1993, the Bank has opened seven additional banking locations throughout the
Denver area for a total of eight locations, with two more branches in the
planning and construction phases.
Since inception, the Bank has specialized its lending practice in
the residential construction industry. The Company's Chairman has extensive
experience in the home building industry and has expanded the Bank's lending
practice to date such that the Bank is one of the area's leading originators of
land development and residential construction loans to small- and medium-sized
homebuilders. Currently, the Bank can finance a builder or developer from the
acquisition and development loan process, including assistance with special
district financing, through the construction loan phase. During the five years
ended December 31, 1997, the Bank originated over $750 million in total loans
and during the six months ended June 30, 1998, originated an additional $144
million in such loans. While some of these loans remain on the Company's balance
sheet, most have been repaid, refinanced or participated out to other financial
institutions.
The Company has achieved significant growth measured from the end of
1995. Total assets have increased to $199 million as of June 30, 1998, from $158
million, $119 million and $102 million as of December 31, 1997, 1996 and 1995,
respectively. This represents a 30.22% average annualized growth in assets over
the past two-and-one-half years. During the same time period, net income
increased to $2.8 million for the year ended December 31, 1997 from $2.4 million
and $1.6 million for the years ended December 31, 1996 and 1995, respectively.
During the past three years ended December 31, 1997, the Company's return on
average assets and return on average equity has averaged 2.20% and 29.83%,
respectively. For the six months ended June 30, 1998, net income was $1.7
million representing a 36.33% increase over the $1.3 million of net income
earned in the first six months of 1997. On an annualized basis, as of June 30,
1998, return on average assets for the Company equaled 1.93% while return on
average equity equaled 27.85%. With respect to the Bank, a recent industry
publication ranked it 35th nationally in overall profitability for banks between
$100 million and $1 billion in assets with a return on average assets of 2.21%
during the five years ended December 31, 1997.
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In September 1998, the Company changed its status to a unitary
thrift holding company within the meaning of the Home Owners' Loan Act of 1933,
as amended ("HOLA"). The Company is registered with the Office of Thrift
Supervision ("OTS") and is subject to OTS regulations, examinations, supervision
and reporting requirements. Also, in September 1998, the Bank converted its
charter from a Colorado state-chartered commercial bank to a federal savings
bank. Management believes that the flexibilities and opportunities with a thrift
charter complement the Bank's current lending practices and should enhance the
Company's long-term plans, including the establishment of a real estate
subsidiary. Management's plan is that the real estate subsidiary will purchase
undeveloped real estate in the Denver, Colorado area, and develop and sell the
land to small- to medium-sized homebuilders who do not have resources to develop
land but are able to build homes economically. The Company would receive income
from the land sales as well as fee and interest income upon funding the
homebuilders' loans through the Bank. The Company also contemplates entering
into related activities, such as the formation or purchase of a title company.
The Bank intends to continue to focus on its niche of residential
construction lending in addition to providing a complete array of products and
services for its customers. High quality customer service has been a fundamental
tenet of the Bank's operating strategy since its inception. The Bank intends to
continue to pursue its strategies and concentrate on increasing its market share
through referrals from existing customers and the implementation of advertising
and marketing strategies.
The Company's principal executive office is located at 8100 East
Arapahoe Road, Englewood, Colorado 80112, and its telephone number is (303)
740-2265.
THE OFFERING
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Common Stock offered by
the Company..................................................... 1,200,000 shares
Common Stock offered by the
Selling Shareholder............................................. 250,000
Common Stock to be outstanding
after the Offering(1)........................................... 7,607,340
Proposed Nasdaq National Market(R)
symbol.......................................................... MBFC
Use of Proceeds................................................... The Company intends to contribute approximately
$5.0 million of capital to the Bank, contribute
approximately $3.5 million to a planned real
estate subsidiary, to use approximately $1.5
million to complete the Bank's tenth branch
location which is expected to begin operations in
1999, and use the remainder of the proceeds for
general corporate purposes, which may include,
without limitation, the purchase and construction
of future bank branch locations, additional
capital contributions to the Bank and subsidiaries
(including a real estate title company) and
possible future acquisitions of financial
institutions. See "Use of Proceeds."
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(1) As of September 1, 1998. Excludes up to 500,000 shares of Common Stock
reserved for possible issuance pursuant to existing and future grants
of options or other rights to officers, directors and employees of the
Company under the Company's 1998 Long-Term Incentive Plan.
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CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION
Statements contained in this Prospectus that relate to the Company's
beliefs or expectations as to future events relating to, among other things, (i)
the success of the Company's growth strategy, (ii) the competitive banking
environment, (iii) the sufficiency of the Company's allowance for loan losses,
(iv) risks relating to the Company's concentration of land development and
construction loans, (v) changes in economic conditions, including interest
rates, management's ability to manage interest rates, and credit risks, and (vi)
the impact of future regulations, are not statements of historical fact and are
forward-looking statements. Although the Company believes that the assumptions
upon which such forward-looking statements are based are reasonable within the
bounds of its knowledge of its business and operations, it can give no assurance
that the assumptions will prove to have been correct. Reference to sections in
this Prospectus which contain forward-looking statements and important factors
that could cause actual results to differ materially and adversely from the
Company's expectations and beliefs are set out under "Risk Factors" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations." These factors should be carefully considered by potential
investors.
SELECTED CONSOLIDATED FINANCIAL DATA
The consolidated statements of operations data for the years ended
December 31, 1997 and 1996 and the consolidated balance sheet data as of
December 31, 1997 are derived from the Company's consolidated financial
statements and notes thereto which have been audited by Fortner, Bayens,
Levkulich & Co., P.C., independent public accountants and are included elsewhere
in this Prospectus. The consolidated statements of operations data for the years
ended December 31, 1995 and 1994 and the balance sheet data as of December 31,
1996 and 1995 are derived from the Company's consolidated financial statements
which have been audited by Fortner, Bayens, Levkulich & Co., P.C. but are not
included herein. The consolidated statements of operations data for the six
months ended June 30, 1998 and 1997, and the consolidated balance sheet data at
June 30, 1998 and 1997, have been derived from unaudited consolidated financial
statements, which, in the opinion of the Company, reflect all adjustments,
consisting only of normal recurring accruals, necessary for a fair presentation
of the financial position and results of operations of the Company for those
periods. The statements of operations data for interim periods are not
necessarily indicative of results for subsequent periods or the full year. The
following information should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the Consolidated Financial Statements and related notes included elsewhere in
this Prospectus.
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AT OR FOR THE SIX MONTHS AT OR FOR THE YEAR
ENDED JUNE 30, ENDED DECEMBER 31,
-------------------------- ----------------------------------------
1998 1997 1997 1996 1995
---- ---- ---- ---- ----
(Dollars in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Consolidated Statements of Operations Data:
Interest income ..................................... $ 9,193 $ 7,145 $ 15,383 $ 11,359 $ 8,427
Interest expense .................................... 3,186 2,344 4,966 3,131 2,154
Net interest income ................................. 6,007 4,801 10,417 8,228 6,273
Provision for loan losses ........................... 220 250 880 457 280
Other income ........................................ 462 328 996 961 807
Other expenses ...................................... 3,700 2,968 6,427 4,959 4,136
Income tax expense .................................. 834 653 1,272 1,353 1,017
Net income .......................................... 1,715 1,258 2,834 2,420 1,647
Consolidated Balance Sheet Data:
Total assets ........................................ $ 199,393 $ 149,469 $ 157,880 $ 118,929 $ 102,076
Total loans ......................................... 147,416 109,219 126,087 94,973 68,845
Allowance for loan losses ........................... 2,306 1,456 2,083 1,150 759
Investment securities available for sale ............ 16,212 9,743 13,999 11,137 6,985
Investment securities held to maturity .............. -- -- -- -- 550
Nonperforming assets(1) ............................. 1,371 1,424 1,604 14 76
Deposits ............................................ 171,734 135,024 141,878 104,661 90,192
Shareholders' equity ................................ 13,314 10,083 11,578 8,827 6,393
Per Common Share:
Basic earnings per share(2) ......................... $ .27 $ .20 $ .44 $ .38 $ .26
Book value per share ................................ 2.08 1.57 1.80 1.38 1.00
Tangible book value per share ....................... 2.08 1.57 1.80 1.38 1.00
Selected Financial Ratios:
Return on average assets ............................ 1.93% 1.84% 1.96% 2.36% 2.27%
Return on average common equity ..................... 27.85 26.61 27.78 31.80 29.92
Net interest margin(3) .............................. 7.76 7.95 8.14 9.01 9.81
Net interest spread(3) .............................. 6.51 6.69 6.83 7.60 8.34
Shareholders' equity to total assets ................ 6.68 6.75 7.33 7.42 6.26
Tangible and core (tier 1) capital ratios
(Bank only) ....................................... 10.64 7.49 8.02 8.97 8.93
Risk-based capital ratio (Bank only) ................ 13.61 10.96 10.30 12.62 13.18
Nonperforming assets to total assets ................ 0.69 0.95 1.02 0.01 0.07
Nonperforming loans to total loans .................. 0.93 1.30 1.27 0.01 0.11
Allowance for loan losses to total loans ............ 1.56 1.16 1.65 1.21 1.10
Allowance for loan losses to nonperforming loans .... 168.20 102.24 129.92 8463.03 998.23
</TABLE>
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(1) Includes loans 90 days or more delinquent and still accruing
interest, nonaccrual loans and restructured loans.
(2) No difference exists between basic and diluted earnings per share.
Gives effect to the 30-for-1 stock split of the Company's Common
Stock in September 1998.
(3) On a tax equivalent basis.
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RISK FACTORS
Prospective purchasers of the Common Stock should carefully consider
the following risk factors, as well as the other information contained in this
Prospectus in evaluating the Company and its business and in deciding whether to
purchase any of the Common Stock offered hereby.
Loan and Business Concentration. Since the 1980's the Bank has been
one of the leading originators of land development and residential construction
loans to small- and medium-sized builders in the Denver, Colorado area. As of
June 30, 1998 these loans, in the aggregate, comprised 62.3% of the Bank's total
loans. Also, the Company's planned expansion into real estate through a real
estate subsidiary that will buy and develop land for resale to homebuilders will
further concentrate the Company in the home building industry and subject the
Company to risks associated with holding real property, such as holding costs,
maintenance costs and illiquidity of the investment. Accordingly, adverse
economic conditions in the home building industry could materially impact the
Company's primary business. These conditions could occur as a result of
significant increases in interest rates, moratoriums on new building by
municipalities, overbuilding of new homes in the Denver area and a general
economic downturn. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
Economic Conditions and Impact of Interest Rates. Results of
operations for financial institutions, including the Company, may be materially
and adversely affected by changes in prevailing economic conditions, including
declines in real estate values, housing starts, rapid changes in interest rates
and the monetary and fiscal policies of the federal government. The
profitability of the Company is in part a function of the spread between the
interest rates earned on assets and the interest rates paid on deposits and
other interest-bearing liabilities. Although management believes that the
maturities of the Company's assets are moderately balanced in relation to
maturities of liabilities ("asset/liability management"), asset/liability
management involves estimates as to how changes in the general level of interest
rates will impact the yields earned on assets and the rates paid on liabilities.
A decrease in interest rate spreads would have a negative effect on the net
interest income and profitability of the Company, and there can be no assurance
that this spread will not decrease. Although economic conditions in the market
area of the Company have been generally stronger than those in many other
regions of the country, there can be no assurance that such conditions will
continue to prevail. Moreover, substantially all of the loans of the Company are
to individuals and businesses in the Denver area, and any decline in the economy
of this market area could have an adverse impact on the Company. There can be no
assurance that positive trends or developments discussed in this Prospectus will
continue or that negative trends or developments will not have a material
adverse effect on the Company. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
Growth and Acquisition Risks. The Company has pursued and intends to
continue to pursue an internal growth strategy, the success of which will depend
primarily on generating an increasing level of loans and deposits at acceptable
risk levels and terms without proportionate increases in noninterest expenses. A
significant portion of the net proceeds from the sale by the Company of the
Common Stock hereunder is intended to be used to support future growth,
including the establishment of the Bank's tenth branch. The Company has grown
and intends to grow by the establishment of new branches. Establishing new
branches through land purchase and development takes significant amounts of
capital and time to build. Delays can be encountered in the process as a result
of zoning, building moratoriums by municipalities, and
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general construction and weather problems. In addition, successful growth
through branch expansion will depend on the Company's ability to maintain
sufficient regulatory capital levels and on continued favorable economic
conditions in the Company's market. There can be no assurance that the Company
will be successful in continuing its internal growth strategy.
The Company will also face risks in attempting to achieve growth
through the planned establishment of a real estate subsidiary whose purpose is
to develop land for resale to homebuilders. Among the risks the Company faces
are: having adequate staff to oversee acquisition and development of land;
establishing and maintaining proper internal controls with respect to land
inventory and development; using adequate procedures to ensure compliance with
zoning requirements; and other risks associated with the establishment of new
operations. Although the Company does not presently have any discussions or
negotiations underway relating to acquisitions, the Company in the future
intends to review and solicit acquisition opportunities and, at any given time,
may attempt to acquire financial institutions. However, the Company may not be
successful in identifying acquisition candidates, integrating acquired
institutions or preventing deposit erosion at acquired institutions. In
addition, the Company faces significant competition in making acquisitions in
its market area. As a result, the Company may not be able to acquire
institutions on terms beneficial to the Company, if at all.
Government Regulation, Recent Legislation and Monetary Policy. The
Company and the Bank are subject to extensive federal and state legislation,
regulation and supervision which is intended primarily to protect depositors and
the Bank Insurance Fund, rather than investors. Recently enacted, proposed and
future legislation and regulations designed to strengthen the banking industry
have had and may have a significant impact on the banking industry. Although
some of the legislative and regulatory changes may benefit the Company and the
Bank, others may increase their costs of doing business or otherwise adversely
affect them and create competitive advantages for non-bank competitors. In
addition, federal economic and monetary policy may affect the Bank's ability to
attract deposits, make loans and achieve satisfactory interest spreads.
See "Supervision and Regulation."
Competitive Banking Environment. The banking business in the Denver
metropolitan area is highly competitive. The Company competes for loans and
deposits with commercial banks, other savings and loan associations, finance
companies, mutual funds, credit unions and mortgage bankers. In addition to
traditional financial institutions, the Company also competes for loans with
brokerage and investment banking companies, nonfinancial institutions, including
retail stores that
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maintain their own credit programs, and governmental agencies that make
available low cost or guaranteed loans to certain borrowers. Particularly in
times of high interest rates, the Company also faces significant competition for
deposits from sellers of short-term money market securities and other corporate
and government securities. Many of the Company's competitors have substantially
greater resources and lending limits than the Company and perform other
functions that the Company offers only through correspondents. Interstate
banking is permitted in Colorado, and, since January 1, 1997, unlimited
state-wide branch banking has been permitted. As a result, the Company's results
of operations and cash flows may be adversely affected by an increase in
competition. Moreover, recent legislation has focused on expanding the ability
of participants in the banking industry to engage in other lines of business.
The enactment of additional legislation could put the Company at a competitive
disadvantage because it may not have the capital to participate in other lines
of business to the same extent as more highly capitalized holding companies. See
"Business--Competition" and "Supervision and Regulation."
Allowance for Loan Losses. Inability of borrowers to repay loans can
erode earnings and capital. Like all financial institutions, the Bank maintains
an allowance for loan losses to provide for loan defaults and nonperformance.
The allowance is based on prior experience with loan losses, as well as an
evaluation of the risks in the current portfolio, and is maintained at a level
considered adequate by management to absorb anticipated losses. The amount of
future losses is susceptible to changes in economic, operating and other
conditions, including changes in interest rates, that may be beyond management's
control, and such losses may exceed current estimates. At June 30, 1998, the
Company had nonperforming loans of $1.4 million and an allowance for loan losses
of $2.3 million or 1.56% of total loans and 168.20% of nonperforming loans. At
December 31, 1997, the Company had nonperforming loans of $1.6 million and an
allowance for loan losses of $2.1 million or 1.65% of total loans and 129.92% of
nonperforming loans. There can be no assurance that the Company's allowance for
loan losses will be adequate to cover actual losses. Future provisions for loan
losses could materially and adversely affect results of operations of the
Company. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
Dependence on Key Person. The Company is highly dependent on the
continued services of Thomas R. Kowalski, its Chairman and Chief Executive
Officer. The Company does not have an employment agreement with Mr. Kowalski.
Although the Company has a $3.0 million key man life insurance policy on Mr.
Kowalski, proceeds under the policy paid to the Company will, at the option of
certain affiliated shareholders of Mr. Kowalski, be utilized by the Company for
the repurchase of all or a portion of such shareholders' Common Stock. The loss
of the services of Mr. Kowalski could adversely affect the Company. See
"Management."
Year 2000 Compliance. As the year 2000 approaches, a significant
business issue has emerged regarding how existing application software programs
and operating systems can accommodate the date value for the year 2000. Many
existing software application products, including software application products
used by the Bank and its suppliers and customers, were designed to accommodate
only a two-digit date value, which represents the year. For example, information
relating to the year 1996 is stored in the system as "96." As a result, the year
1999 (i.e., "99") could be the maximum date value that these systems will be
able to process accurately. In response to concerns about this issue, regulatory
agencies have begun to monitor holding companies' and banks' readiness for the
year 2000 as part of the regular examination process. The Company presently
believes that with modifications to existing software and conversion to new
software, the year 2000 issue will not pose significant operational problems for
the Company's
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computer systems or business operations. Implementation of the Company's plan to
test in-house and out-sourced software has been underway since the first quarter
of 1998. Testing of applications considered to be "mission critical" are
scheduled for completion by first quarter of 1999. Total compliance for all
systems is expected by management to be completed by the third quarter of 1999;
management currently estimates that such compliance will cost $150,000. However,
if such modifications and conversions are not made, or are not completed timely,
the year 2000 issue could have a material adverse impact on the operations of
the Company. In addition, there can be no assurance that unforeseen problems in
the Company's computer systems, or the systems of third parties on which the
Company's computers rely, will not have an adverse effect on the Company's
systems or operations. Additionally, failure of the Bank's customers to prepare
for year 2000 compatibility could have a significant adverse effect on such
customers' operations and profitability, thus inhibiting their ability to repay
loans and adversely affecting the Bank's operations. The Company does not have
sufficient information accumulated from customers of the Bank to enable the
Company to assess the degree to which customers' operations are susceptible to
potential problems relating to the year 2000 issue. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations--Year 2000
Considerations."
Potential Liability for Undercapitalized Subsidiary. Under federal
law, a thrift holding company may be required to guarantee a capital plan filed
by an undercapitalized bank subsidiary with its primary regulator. If the
subsidiary defaults under the plan, the holding company may be required to
contribute to the capital of the subsidiary bank an amount equal to the lesser
of 5% of the bank's assets at the time it became undercapitalized or the amount
necessary to bring the bank into compliance with the applicable capital
standards. Therefore, it is possible that the Company will be required to
contribute capital to the Bank or any other bank that it may acquire in the
event that such bank becomes undercapitalized. Moreover, the Company may be
required to make such capital contribution at a time when it has other
significant capital needs, and, therefore, such requirement may adversely affect
the Company's business, financial condition, results of operations and cash
flows. See "Supervision and Regulation."
Need for Technological Change. The banking industry is undergoing
technological change, with introductions of new technology-driven products and
services. The Company's future success will depend, in part, on its ability to
address the needs of its customers by using technology to provide products and
services that will satisfy customer demands for convenience, as well as its
ability to create additional efficiencies in its operations. Many of the
Company's competitors have substantially greater resources to invest in
technological improvements. There can be no assurance that the Company will be
able to implement new technology-driven products and services effectively or be
successful in marketing such products and services to its customers.
No Prior Market. Prior to the Offering, there has been no public
market for the Common Stock. An application to list the Common Stock on the
Nasdaq National Market(R) has been filed but not yet approved. Even if the
application is approved there can be no assurance that a market for the Common
Stock will develop or, if developed, will be sustained. The Company and Howe
Barnes Investments, Inc. have had discussions with other investment firms
regarding market making activity and such firms, as well as Howe Barnes
Investments, Inc., have indicated a willingness to act as market makers with
respect to the Common Stock. See "Description of Capital Stock."
No Dividends, Restrictions on Payments of Dividends. The Company has
not paid cash dividends on its Common Stock and does not intend to pay cash
dividends in the foreseeable
11
<PAGE> 12
future. The Company intends to retain earnings to support the growth of its
business. Pursuant to the terms of the Company's outstanding 8.75% Junior
Subordinated Debentures, the Company generally cannot pay dividends if interest
payments on the debentures have been deferred or the Company is in default on
the debentures. Moreover, the Company's ability to pay a cash dividend on its
Common Stock, if it determines to do so, is largely dependent upon the payment
of dividends by the Bank to the Company. The Bank's ability to pay dividends to
the Company is restricted by federal regulations. Without prior regulatory
approval, the Bank cannot pay dividends during any calendar year in excess of
the sum of its earnings during that year and one-half of its capital in excess
of its capital requirements (less previous capital distributions during that
period). See "Dividend Policy," "Supervision and Regulation" and "Description of
Capital Stock."
Concentration of Ownership. As of June 30, 1998, directors,
executive officers and key employees of the Company beneficially owned 63.5% of
the Common Stock. Upon completion of the Offering, directors, executive officers
and key employees of the Company will beneficially own 50.2% of the Common
Stock. Accordingly, such persons will be in a position to exercise substantial
influence over the affairs of the Company and may impede the acquisition of
control of the Company by a third party. See "Management" and "Principal and
Selling Shareholders."
Anti-takeover Provisions. The Company's Articles of Incorporation
and Bylaws include provisions that may have the effect of encouraging persons
considering unsolicited tender offers or other unilateral takeover proposals to
negotiate with the Board of Directors of the Company rather than pursue
non-negotiated takeover attempts such as tender offers, proxy contests, open
market purchases or otherwise. These provisions include preferred stock as to
which the Company's Board of Directors has the authority to issue additional
series and to fix the rights, preferences and limitations thereof without
shareholder approval and the availability for issuance of authorized but
unissued Common Stock. See "Description of Capital Stock." In addition, no
person or entity, individually or together with persons or entities acting in
concert with such person or entity, may acquire the ownership, control, right to
vote or right to acquire 10% or more of the Company's total outstanding Common
Stock, without first complying with the requirements of the HOLA. These
requirements also may have the effect of delaying or preventing a change of
control of the Company. See "Supervision and Regulation."
Dilution. Purchasers of the Common Stock offered hereby will incur
substantial and immediate dilution in net tangible book value per share of
Common Stock. The net tangible book value of the Company at June 30, 1998 was
approximately $13.3 million or $2.08 per share of Common Stock. Based upon an
assumed initial public offering price of $12 per share, the dilution per share
to new investors in the Offering would be $8.53. See "Dilution."
Shares of Common Stock Eligible for Future Sale. Following
completion of the Offering, the Company will have 7,607,340 shares of Common
Stock outstanding (7,799,840 if the Underwriters' over-allotment option is
exercised in full), assuming no exercise of any outstanding options to purchase
shares of Common Stock. The 1,450,000 shares offered hereby (1,667,500 shares if
the Underwriters' over-allotment option is exercised in full) will be freely
tradeable without restriction under the Securities Act of 1933, as amended (the
"Securities Act"), except for any shares which are purchased by affiliates of
the Company. The directors, executive officers and certain shareholders of the
Company, who will hold an aggregate of 5,387,270 shares upon completion of the
Offering, have agreed not to offer, sell, or contract to sell any Common Stock
for a period of 180 days after the date of this Prospectus without the prior
written consent of the Representative. See "Underwriting." Upon expiration of
this 180-day period all of these shares
12
<PAGE> 13
(representing 70.8% of the total number of shares which will be outstanding
following completion of the Offering) could be resold by these and other persons
who are affiliates of the Company, subject to certain requirements of Rule 144
under the Securities Act, including a limit on the number of shares that may be
sold in any three-month period equal to the greater of (a) 1% of the shares
outstanding (approximately 76,000 shares following completion of the Offering or
approximately 78,000 if the over-allotment option is exercised in full) or (b)
the average weekly trading volume of shares of Common Stock for the four-week
period prior to the time of such resale. Sales of a significant number of shares
of Common Stock in the public market following the Offering, or the perception
that such sales could occur, could adversely affect the market price of the
Common Stock. See "Shares Eligible for Future Sale."
13
<PAGE> 14
USE OF PROCEEDS
The net proceeds to the Company from the sale of the Common Stock in
the Offering, assuming an initial offering price of $12 per share and after
deducting the estimated underwriting discount and offering expenses, are
estimated to be $13.1 million ($15.2 million if the over-allotment option is
exercised in full).
The Company intends to contribute approximately $5.0 million of
capital to the Bank, to contribute approximately $3.5 million to a planned
subsidiary of the Company which will invest in real estate for the purpose of
development and resale, and to use approximately $1.5 million of the net
proceeds to complete the Bank's tenth branch location, which is expected to
begin operations in 1999, with the remainder to be used for general corporate
purposes, which may include, without limitation, purchase and construction of
future bank branch locations, additional capital contributions to the Bank and
subsidiaries (including a title company) and possible future acquisitions of
financial institutions. The $5.0 million of additional capital contribution to
the Bank will result in an increased legal lending limit which is designed to
further the Bank's internal growth objectives. Although the Company does not
presently have any discussions or negotiations underway relating to
acquisitions, the Company in the future intends to review and solicit
acquisition opportunities and, at any given time, may attempt to acquire
financial institutions. Pending their application, the net proceeds may be
invested in short-term, marketable, investment grade interest-bearing
securities.
14
<PAGE> 15
DIVIDEND POLICY AND NO PRIOR MARKET
The Company's current policy is to retain its earnings to support
the growth of its business. The Board of Directors of the Company has not
declared cash dividends on the Common Stock and does not plan to do so in the
foreseeable future. The ability of the Company to pay cash dividends largely
depends on the amount of cash dividends paid to it by the Bank. Capital
distributions, including dividends, by institutions such as the Bank are subject
to restrictions tied to the institutions' earnings and capital. Without prior
regulatory approval, the Bank cannot pay dividends during any calendar year in
excess of the sum of its earnings during that year and one-half of its capital
in excess of its capital requirements (less previous capital distributions
during that period). The Company's ability to pay cash dividends will also be
significantly limited if it is in default of, or defers interest payments on,
the 8.75% Junior Subordinated Debentures.
Prior to the Offering, there has been no public market for the
Common Stock. An application to list the Common Stock on the Nasdaq National
Market(R) has been filed but not yet approved. Even if the application is
approved there can be no assurance that a market for the Common Stock will
develop or, if developed, will be sustained. The 8.75% Cumulative Trust
Preferred Securities issued by the Company's subsidiary, MB Capital I, are
traded on the American Stock Exchange under the symbol MFC.Pr.A. See
"Supervision and Regulation" and "Description of Capital Stock."
15
<PAGE> 16
DILUTION
The net tangible book value of the Company at June 30, 1998 was
approximately $13.3 million, or approximately $2.08 per share of Common Stock.
"Net tangible book value" is defined as the total shareholders' equity of the
Company less intangible assets. "Net tangible book value per share" is
determined by dividing the net tangible book value of the Company by the number
of outstanding shares of Common Stock. After giving effect to the Offering (at
an assumed offering price of $12 per share) and the application of the estimated
net proceeds therefrom, the net tangible book value of the Common Stock at June
30, 1998 would have been approximately $26.4 million, or $3.47 per share. This
represents an immediate dilution of $8.53 per share to investors who purchase
shares of Common Stock in the Offering. "Dilution" is the difference between the
Offering price per share and the pro forma net tangible book value per share as
adjusted for the Offering. The following table illustrates this per share
dilution as of June 30, 1998, which is determined by subtracting the net
tangible book value per share after the Offering from the price paid by a new
investor.
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share(1)....................................... $ 12.00
Net tangible book value per share of Common Stock at June 30, 1998....................... $ 2.08
Increase per share of Common Stock attributable to new investors(2)...................... 1.39
------
Pro forma net tangible book value per share of Common Stock
after the Offering..................................................................... 3.47
------
Dilution per share of Common Stock to new investors...................................... $ 8.53
======
</TABLE>
- -----------
(1) Before deducting the estimated underwriting discount and offering
expenses.
(2) After deducting the estimated underwriting discount and offering
expenses.
There have been no shares of Common Stock issued by the Company
during the past five years.
16
<PAGE> 17
CAPITALIZATION
The following table sets forth the consolidated borrowings and
capitalization of the Company at June 30, 1998 and as adjusted to give effect to
the issuance and sale by the Company of 1,200,000 shares of the Common Stock in
the Offering at an assumed initial public offering price of $12 per share and
the use of net proceeds therefrom as described in "Use of Proceeds."
<TABLE>
<CAPTION>
JUNE 30, 1998
------------------------
ACTUAL AS ADJUSTED
------ -----------
(Dollars in thousands)
<S> <C> <C>
Borrowings:
Securities sold under agreements to repurchase .......................... $ 1,253 $ 1,253
-------- --------
Total borrowings .............................................. $ 1,253 $ 1,253
======== ========
Company obligated mandatorily redeemable preferred
securities of subsidiary trust holding solely Junior
Subordinated Debentures(1) .............................................. $ 12,000 $ 12,000
-------- --------
Shareholders' equity:
Preferred Stock, 10,000,000 shares authorized; no shares issued
or outstanding ........................................................ $ -- $ --
Common Stock, 50,000,000 shares authorized; 6,407,340
shares issued and outstanding, 7,607,340 shares issued and
outstanding, as adjusted .............................................. 1,961 15,053
Retained earnings ....................................................... 11,293 11,293
Accumulated other comprehensive income .................................. 60 60
-------- --------
Total shareholders' equity .................................... $ 13,314 $ 26,406
-------- --------
Total capitalization ...................................... $ 25,314 $ 38,406
======== ========
Bank regulatory capital ratios(2):
Tangible capital requirement ratio (1.5%) ............................... 10.64% 12.90%
Core capital requirement ratio (3%) ..................................... 10.64% 12.90%
Risk-based capital requirement ratio (8%) ............................... 13.61% 16.61%
</TABLE>
- --------
(1) MB Capital I, formed by the Company, holds as its sole asset, $12.4
million principal amount of Junior Subordinated Debentures issued by
the Company. The Junior Subordinated Debentures will mature on
February 9, 2028, which date may be shortened by the Company to a
date not earlier than February 9, 2003 if certain conditions are
met. See "Description of Capital Stock--Securities of Subsidiary
Trust."
(2) Adjusted to reflect a $5.0 million capital contribution to the Bank.
See "Use of Proceeds."
17
<PAGE> 18
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
BUSINESS ENVIRONMENT AND RISK FACTORS
The following discussion should be read in conjunction with the
Consolidated Financial Statements and related notes included elsewhere herein.
The Company's future operating results may be affected by various trends and
factors that are beyond the Company's control. These include, among other
factors, the competitive banking environment in which the Company operates,
provisions for loan losses, risks relating to the Company's concentration of
loans related to residential construction, changes in general economic
conditions and interest rates, rapid or unexpected changes in technologies and
other uncertain business conditions that may affect the Company's business.
Accordingly, past results and trends may not be reliable indicators of future
results or trends.
With the exception of historical information, the matters discussed
below include forward-looking statements that involve risks and uncertainties.
The Company wishes to caution readers that a number of important factors
discussed herein could affect the Company's actual results and cause actual
results to differ materially from those in the forward-looking statements.
OVERVIEW
Since inception, the Company, through the Bank, has specialized its
lending practice in the land development and residential construction industry.
The Company's Chairman has extensive experience in the home building industry
and has expanded the Bank's lending practice to date such that the Bank is one
of the area's leading originators of land development and residential
construction loans to small- and medium-sized homebuilders. Currently, the Bank
can finance a builder or developer from the acquisition and development loan
process, including assistance with special district financing, through the
construction loan phase.
The Company has achieved significant profitable growth measured from
the end of 1995. Total assets have increased to $199 million as of June 30,
1998, from $158 million, $119 million and $102 million as of December 31, 1997,
1996 and 1995, respectively. This represents a 30.22% average annualized growth
in assets over the past two-and-a-half years. During the same time period, net
income increased to $2.8 million for the year ended December 31, 1997 from $2.4
million and $1.6 million for the years ended December 31, 1996 and 1995,
respectively. During the past three years ended December 31, 1997, the Company's
return on average assets and return on average equity has averaged 2.20% and
29.83%, respectively. For the six months ended June 30, 1998, net income was
$1.7 million representing a 36.33% increase over the $1.3 million of net income
earned in the first six months of 1997. On an annualized basis, as of June 30,
1998, return on average assets for the Company equaled 1.93% while return on
average equity equaled 27.85%. With respect to the Bank, a recent industry
publication ranked it 35th nationally in overall profitability for banks between
$100 million and $1 billion in assets with a return on average assets of 2.21%
during the five years ended December 31, 1997.
18
<PAGE> 19
RESULTS OF OPERATIONS
Net Interest Income. The Company's income is derived primarily from
net interest income. Net interest income is the difference between interest
income (including loan fees), principally from loans, investment securities and
funds sold, and interest expense, principally on customer deposits. Changes in
net interest income result from changes in volume, net interest spread and net
interest margin. Volume refers to the average dollar levels of interest-earning
assets and interest-bearing liabilities. Net interest spread refers to the
difference between the average yield on interest-earning assets and the average
cost of interest-bearing liabilities. Net interest margin refers to net interest
income divided by average interest-earning assets and is influenced by the level
and relative mix of interest-earning assets and interest-bearing liabilities.
The following tables set forth the average balances, net interest
income and expense and average yields and rates for the Company's earning assets
and interest-bearing liabilities for the indicated periods on a tax-equivalent
basis assuming a 34% tax rate.
19
<PAGE> 20
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,(1)
------------------------------------------
1998
------------------------------------------
INTEREST AVERAGE
AVERAGE EARNED YIELD
BALANCE OR PAID OR COST
------- ------- -------
(Dollars in thousands)
<S> <C> <C> <C>
INTEREST-EARNING ASSETS
Investment securities:
Taxable ...................................... $ 6,005 $ 184 6.13%
Tax exempt (tax equivalent) .................. 8,402 567 13.50
Funds sold and interest-bearing deposits ....... 13,357 353 5.29
Loans(2) ....................................... 134,100 8,282 12.35
Allowance for loan losses ...................... (2,172) --
--------- --------- ---------
Total interest-earning assets .................. $ 159,692 $ 9,386 11.76
========= ========= =========
INTEREST-BEARING LIABILITIES
Interest-bearing deposits:
Demand, interest-bearing ..................... $ 65,070 $ 1,472 4.52
Savings ...................................... 4,750 79 3.33
Certificates of deposit:
Under $100,000 ............................. 28,202 813 5.77
$100,000 and over .......................... 11,061 301 5.44
--------- --------- ---------
Total interest-bearing deposits ................ 109,083 2,665 4.89
Advances from the Federal Home
Loan Bank and federal funds purchased ........ 1,154 65 11.27(4)
Notes payable .................................. 10,333 437 8.46
Repurchase agreements .......................... 711 19 5.34
--------- --------- ---------
Total interest-bearing liabilities ............. $ 121,281 3,186 5.25
========= --------- =========
Net interest income (tax equivalent) ........... $ 6,200
=========
Net interest margin(3) ......................... 7.76%
Net interest spread ............................ 6.51%
Ratio of average interest-bearing liabilities
to average interest-earning assets ........... 75.95%
<CAPTION>
SIX MONTHS ENDED JUNE 30,(1)
--------------------------------------
1997
--------------------------------------
INTEREST AVERAGE
AVERAGE EARNED YIELD
BALANCE OR PAID OR COST
------- ------- -------
(Dollars in thousands)
<S> <C> <C> <C>
INTEREST-EARNING ASSETS
Investment securities:
Taxable ...................................... $ 4,393 $ 150 6.83%
Tax exempt (tax equivalent) .................. 6,203 417 13.45
Funds sold and interest-bearing deposits ....... 12,035 313 5.20
Loans(2) ....................................... 103,022 6,406 12.44
Allowance for loan losses ...................... (1,280) --
--------- --------- ---------
Total interest-earning assets .................. $ 124,373 $ 7,286 11.72
========= ========= =========
INTEREST-BEARING LIABILITIES
Interest-bearing deposits:
Demand, interest-bearing ..................... $ 50,744 $ 1,157 4.56%
Savings ...................................... 4,707 78 3.31
Certificates of deposit:
Under $100,000 ............................. 22,898 645 5.63
$100,000 and over .......................... 9,582 279 5.82
--------- --------- ---------
Total interest-bearing deposits ................ 87,931 2,159 4.91
Advances from the Federal Home
Loan Bank and federal funds purchased ........ 2,952 94 6.37
Notes payable .................................. 2,250 91 8.09
Repurchase agreements .......................... -- -- --
--------- --------- ---------
Total interest-bearing liabilities ............. $ 93,133 2,344 5.03
========= --------- =========
Net interest income (tax equivalent) ........... $ 4,942
=========
Net interest margin(3) ......................... 7.95%
Net interest spread ............................ 6.69%
Ratio of average interest-bearing liabilities
to average interest-earning assets ........... 74.88%
</TABLE>
- -----------------------
(1) Yields and costs are annualized.
(2) Loans are net of unearned discount. Nonaccrual loans are included in
average loans outstanding. Loan fees are included in interest income
as follows for the six months ended June 30, 1998 - $1,566,766; 1997
- $1,237,520.
(3) Net interest margin is net interest income divided by average total
interest-earning assets (on an annualized basis).
(4) Includes a one-time prepayment penalty incurred on the early
retirement of FHLB advances which management determined was
advantageous to the Company compared to the cost of such funds.
Net interest income, on a tax-equivalent basis, was $6.2 million for
the six months ended June 30, 1998, an increase of $1.3 million from $4.9
million for the same period in 1997. Interest income for the six months ended
June 30, 1998 and 1997 was $9.4 million and $7.3 million, respectively. The
increase of $2.1 million is primarily due to higher balances of interest-earning
assets, which offset lower investment rates. The various changes in the mix of
taxable investment securities and tax exempt securities as well as funds sold
were a result of the Company attempting to maximize its yield on
interest-earning assets other than loans. The Company achieved an increase of
$35.3 million or 28.4% in average interest-earning assets to $159.7 million for
the six months ended June 30, 1998 from $124.3 million for the same period in
1997. The majority of the increase in interest-earning assets was attributable
to the $31.1 million increase in average loans outstanding. The majority of the
loans in the Company's lending portfolio are floating rate loans tied to the
prime rate. The average yield on interest-earning assets increased slightly to
11.76%
20
<PAGE> 21
for the six months ended June 30, 1998 from 11.72% for the comparable period in
1997 on a tax equivalent basis.
Interest expense increased $842,000 to $3.2 million for the six
months ended June 30, 1998 compared to $2.3 million for the same period in 1997.
The increase in average demand-bearing deposits to $65.1 million for the six
months ended June 30, 1998 from $50.7 million for the comparable period in 1997
was due to the Bank's growth at existing facilities, as well as the opening of
two additional branches. The increase in average balances of certificates of
deposit under $100,000 to $28.2 million for the six months ended June 30, 1998
from $22.9 million for the comparable period in 1997 was due to the Bank's
growth as well as promotional campaigns by the Bank directed at obtaining new
accounts. The increase in certificates of deposit of $100,000 and over was again
due to the growth in the Bank. The increase in average notes payable to $10.3
million for the six months ended June 30, 1998 from $2.2 million for the
comparable period in 1997 was due to the Company's issuance of $12.4 million of
Junior Subordinated Debentures in February 1998, and the corresponding
retirement of its note with a commercial lender with a portion of the proceeds
of issuance. The cost of interest-bearing liabilities for the six months ended
June 30, 1998 and 1997 was 5.25% and 5.03%, respectively, and, when combined
with noninterest-bearing deposits, the cost of funds for the six months ended
June 30, 1998 and 1997 was 3.89% and 3.71%, respectively. See "--Deposits."
These increases were primarily due to an increase in the cost of the Federal
Home Loan Bank ("FHLB") borrowings to 11.27% from 6.37% due to a one-time
prepayment penalty incurred on the early retirement of FHLB advances which
management determined was advantageous to the Company compared to the costs of
such funds. Management expects that borrowings will continue to supplement
deposits with FHLB advances when necessary to fund the lending and investing
activities of the Bank. As a result of the foregoing, net interest margin, on a
tax-equivalent basis, decreased to 7.76% for the six months ended June 30, 1998
from 7.95% for the comparable period in 1997.
21
<PAGE> 22
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------
1997
----------------------------------------
INTEREST AVERAGE
AVERAGE EARNED YIELD
BALANCE OR PAID OR COST
------- ------- -------
(Dollars in thousands)
<S> <C> <C> <C>
INTEREST-EARNING ASSETS
Investment securities:
Taxable ........................................... $ 4,486 $ 286 6.38%
Tax exempt (tax equivalent) ....................... 6,667 897 13.45
Funds sold and interest-bearing deposits ............ 12,876 699 5.43
Loans(1) ............................................ 109,167 13,806 12.65
Allowance for loan losses ........................... (1,446) --
--------- --------- ---------
Total interest-earning assets ....................... $ 131,750 $ 15,688 11.91
========= ========= =========
INTEREST-BEARING LIABILITIES
Interest-bearing deposits:
Demand, interest-bearing .......................... $ 53,370 $ 2,453 4.60
Savings ........................................... 4,775 160 3.35
Certificates of deposit:
Under $100,000 .................................. 25,295 1,444 5.71
$100,000 and over ............................... 9,749 578 5.93
--------- --------- ---------
Total interest-bearing deposits ..................... 93,189 4,635 4.97
Advances from the Federal Home
Loan Bank and federal funds purchased ............. 2,281 152 6.66
Notes payable ....................................... 2,250 179 7.96
Repurchase agreements ............................... -- -- --
--------- --------- ---------
Total interest-bearing liabilities .................. $ 97,720 4,966 5.08
========= --------- =========
Net interest income (tax equivalent) ................ $ 10,722
=========
Net interest margin(2) .............................. 8.14%
Net interest spread ................................. 6.83%
Ratio of average interest-bearing liabilities
to average interest-earning assets ................ 74.17%
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------
1996
------------------------------------------
INTEREST AVERAGE
AVERAGE EARNED YIELD
BALANCE OR PAID OR COST
------- ------- -------
(Dollars in thousands)
<S> <C> <C> <C>
INTEREST-EARNING ASSETS
Investment securities:
Taxable ........................................... $ 7,127 $ 487 6.83%
Tax exempt (tax equivalent) ....................... 2,780 374 13.45
Funds sold and interest-bearing deposits ............ 3,471 215 6.19
Loans(1) ............................................ 80,213 10,410 12.98
Allowance for loan losses ........................... (909) --
--------- --------- ---------
Total interest-earning assets ....................... $ 92,682 $ 11,486 12.39
========= ========= =========
INTEREST-BEARING LIABILITIES
Interest-bearing deposits:
Demand, interest-bearing .......................... $ 37,983 $ 1,717 4.52
Savings ........................................... 5,442 186 3.42
Certificates of deposit:
Under $100,000 .................................. 9,639 522 5.42
$100,000 and over ............................... 6,885 369 5.36
--------- --------- ---------
Total interest-bearing deposits ..................... 59,949 2,794 4.66
Advances from the Federal Home
Loan Bank and federal funds purchased ............. 1,771 97 5.48
Notes payable ....................................... 3,673 240 6.53
Repurchase agreements ............................... -- -- --
--------- --------- ---------
Total interest-bearing liabilities .................. $ 65,393 3,131 4.79
========= --------- =========
Net interest income (tax equivalent) ................ $ 8,355
=========
Net interest margin(2) .............................. 9.01%
Net interest spread ................................. 7.60%
Ratio of average interest-bearing liabilities
to average interest-earning assets ................ 70.56%
</TABLE>
- ------------------------
(1) Loans are net of unearned discount. Nonaccrual loans are included in
average loans outstanding. Loan fees are included in interest income
as follows: 1997 - $2,723,678; 1996 - $2,239,017.
(2) Net interest margin is net interest income divided by average total
interest-earning assets.
Net interest income, on a tax-equivalent basis, was $10.7 million
for the year ended December 31, 1997, an increase of $2.3 million from $8.4
million in 1996. Interest income increased $4.2 million to $15.7 million in 1997
from $11.5 million in 1996. This increase resulted primarily from an increase of
$39.1 million in average interest-earning assets to $131.8 million in 1997 from
$92.7 million in 1996. The majority of the asset growth was due to growth in the
loan portfolio. Average loans increased $29.0 million or 36.1% to $109.2 million
in 1997 from $80.2 million in 1996 due primarily to growth in the Company's
market and continuing demand for land development and residential construction
loans. The change in the relative mix of interest-earning assets other than
loans was due primarily to the Company's objective of maximizing its yield on
funds not used for loans, including investing in double tax exempt securities.
The average yield on interest-earning assets decreased to 11.91% in 1997 from
12.39% in 1996 on a tax equivalent basis.
22
<PAGE> 23
Interest expense increased $1.9 million to $5.0 million in 1997 from
$3.1 million in 1996. A $15.4 million increase in interest-bearing demand
deposits accounted for $736,000 of the increase. These deposits increased due to
the Company's growth, including the addition of two new branches in 1997 and
corresponding marketing efforts. Changes in the relative mix of average
interest-bearing liabilities included a $510,000 increase in advances from the
FHLB. The cost of interest-bearing liabilities for the years ended December 31,
1997 and 1996 was 5.08% and 4.79%, respectively, and, when combined with
noninterest-bearing deposits, the cost of funds was 3.72% in 1997 compared to
3.31% in 1996, see "--Deposits." As a result of lower interest earning asset
yields and the higher cost of funds, net interest margin, on a tax-equivalent
basis, decreased to 8.14% in 1997 from 9.01% in 1996.
The following table illustrates, for the periods indicated, the
changes in the Company's net interest income (on a tax-equivalent basis) due to
changes in volume and changes in interest rates. Changes in net interest income
due to both volume and rate have been allocated to volume and rate in proportion
to the relationship of the absolute dollar amounts of the change in each.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30, YEAR ENDED DECEMBER 31,
--------------------------------- ----------------------------------
1998 COMPARED TO 1997: 1997 COMPARED TO 1996:
--------------------------------- ----------------------------------
INCREASE (DECREASE) IN INCREASE (DECREASE) IN
NET INTEREST INCOME NET INTEREST INCOME
DUE TO CHANGE IN DUE TO CHANGE IN
--------------------------------- ----------------------------------
VOLUME RATE TOTAL VOLUME RATE TOTAL
------ ------ ----- ------ ------ -----
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Interest-earning securities
Taxable ................................... $ 49 $ (15) $ 34 $ (168) $ (33) $ (201)
Tax exempt (tax equivalent) ............... 148 2 150 523 -- 523
Fund sold ................................. 35 5 40 511 (27) 484
Loans ..................................... 1,920 (44) 1,876 3,661 (265) 3,396
-------- -------- -------- -------- -------- --------
Total interest-earning assets ............. 2,152 (52) 2,100 4,527 (325) 4,202
-------- -------- -------- -------- -------- --------
Interest-bearing liabilities:
Demand, interest bearing .................. 324 (9) 315 707 29 736
Savings ................................... 1 -- 1 (22) (4) (26)
Certificates of deposit:
Under $100,000 .......................... 153 15 168 894 28 922
$100,000 and over ....................... 40 (18) 22 170 39 209
Advances from the Federal Home
Loan Bank and federal funds purchased ... (101) 72 (29) 34 21 55
Notes payable ............................. 342 4 346 (113) 52 (61)
Repurchase agreement ...................... 19 -- 19 -- -- --
-------- -------- -------- -------- -------- --------
Total interest-bearing liabilities ........ 778 64 842 1,670 165 1,835
-------- -------- -------- -------- -------- --------
Net increase (decrease) in net interest
income (tax equivalent) ................. $ 1,374 $ (116) $ 1,258 $ 2,857 $ (490) $ 2,367
======== ======== ======== ======== ======== ========
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------
1996 COMPARED TO 1995
--------------------------------
INCREASE (DECREASE) IN
NET INTEREST INCOME
DUE TO CHANGE IN
--------------------------------
VOLUME RATE TOTAL
------ ------ -----
(IN THOUSANDS)
<S> <C> <C> <C>
Interest-earning assets:
Interest-earning securities
Taxable ................................... $ (17) $ 20 $ 3
Tax exempt (tax equivalent) ............... 374 -- 374
Fund sold ................................. 31 (120) (89)
Loans ..................................... 3,373 (602) 2,771
-------- -------- --------
Total interest-earning assets ............. 3,761 (702) 3,059
-------- -------- --------
Interest-bearing liabilities:
Demand, interest bearing .................. 696 17 713
Savings ................................... 24 5 29
Certificates of deposit:
Under $100,000 .......................... 87 8 95
$100,000 and over ....................... 99 7 106
Advances from the Federal Home
Loan Bank and federal funds purchased ... 76 (2) 74
Notes payable ............................. (4) (36) (40)
Repurchase agreement ...................... -- -- --
-------- -------- --------
Total interest-bearing liabilities ........ 978 (1) 977
-------- -------- --------
Net increase (decrease) in net interest
income (tax equivalent) ................. $ 2,783 $ (701) $ 2,082
======== ======== ========
</TABLE>
23
<PAGE> 24
Other Income. The following table sets forth the Company's other
income for the indicated periods.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30, YEAR ENDED DECEMBER 31,
----------------- -----------------------
1998 1997 1997 1996
---- ---- ---- ----
(In thousands)
<S> <C> <C> <C> <C>
Service charges ............................. $ 66 $ 34 $ 68 $ 56
Bank charges ................................ 183 135 267 269
Building rent ............................... 46 87 130 206
Payroll services ............................ -- -- -- 233
Gain on sale of subsidiary .................. -- -- -- 65
Gain on sale of investment securities ....... 25 -- 341 --
Other ....................................... 142 72 190 132
----- ----- ----- -----
Total other income .......................... $ 462 $ 328 $ 996 $ 961
===== ===== ===== =====
</TABLE>
During the six months ended June 30, 1998 total other income
increased to $462,000 from $328,000 for the comparable period in 1997 due
primarily to an increase in fee income including fees from ATM operations. Other
income for the year ended December 31, 1997 compared to 1996 increased by
approximately $35,000 due primarily to a recognition of gain following the sale
of investment securities which offset decreases in other areas. Management sold
the payroll services operation in 1996.
Other Expenses. The following table sets forth the Company's
operating expenses for the indicated periods.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30, YEAR ENDED DECEMBER 31,
------------------ -----------------------
1998 1997 1997 1996
------ ------ ------ -----
(In thousands)
<S> <C> <C> <C> <C>
Salaries and employee benefits .............. $ 1,904 $ 1,432 $ 3,135 $ 2,261
Occupancy expense of premises ............... 387 318 708 642
Furniture and equipment expense ............. 229 128 342 298
Payroll services ............................ -- -- -- 384
Contract labor .............................. 27 42 74 130
Printing .................................... 33 35 65 19
Computer systems and services ............... 54 59 133 42
Postage and freight ......................... 17 34 95 55
Supplies .................................... 82 83 154 113
Consulting fees ............................. 32 27 78 55
Loan, legal and collection fees ............. 57 50 234 73
Other ....................................... 878 760 1,409 887
------- ------- ------- -------
Total other expenses ............ $ 3,700 $ 2,968 $ 6,427 $ 4,959
======= ======= ======= =======
</TABLE>
During the six months ended June 30, 1998 total other expenses
increased by $732,000 over the comparable 1997 period to $3.7 million, primarily
as a result of salaries and employee benefits increasing by $472,000 due to
increased operations of the Bank and salary increases to Bank personnel.
Generally, the remaining expenses increased due to an increased level of
operations and increased expenses associated with opening two additional
branches in 1997 and 1998. Loan, legal and collection fees increased due to a
greater amount of loan documentation required on certain loans, as well as fees
incurred in connection with non-accrual loans. Payroll services expenses were
not incurred in 1997 as a result of the sale of the payroll services operation
in 1996. During the year ended December 31, 1997 total operating expenses
increased $1.5
24
<PAGE> 25
million to $6.4 million from $4.9 million in 1996, with increases occurring
among the various components due to the Company's continued growth.
Federal Income Tax. The Company's consolidated income tax rate
varies from statutory rates principally due to interest income from tax-exempt
securities and loans. The provision for income taxes was increased to $834,000
for the six months ended June 30, 1998 from $653,000 for the comparable period
in 1997. The Company recorded income tax expenses totaling $1.3 million in 1997
and $1.4 million in 1996. Although net income increased in 1997 compared to
1996, the decrease in income tax expense for 1997 was due to an increase in tax
exempt income for the same period.
FINANCIAL CONDITION
Loan Portfolio Composition. The following table sets forth the
composition of the Company's loan portfolio by type of loan at the dates
indicated. Management believes that the balance sheet information as of the
dates indicated should be read in conjunction with the average balance
information in the tables above under "--Net Interest Income." As indicated
above, the Company specializes its lending practice in the land development and
residential construction industry. Depending on life cycles of real estate
development, balances of the Company's commercial loans, land development and
construction loans may fluctuate significantly. Therefore, the data below are
not necessarily indicative of trends within a particular category.
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
---------------------- -----------------------------------------------------
1998 1997 1996
---- ---- ----
AMOUNT % AMOUNT % AMOUNT %
------ - ------ - ------ -
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Land development and construction ...... $ 92,723 63.9% $ 88,825 71.7% $ 47,306 50.4%
Commercial ............................. 49,442 34.1 33,530 27.0 44,356 47.2
Installment and other .................. 6,711 4.6 4,710 3.8 4,103 4.4
Mortgage ............................... -- -- -- -- 67 .1
Loans held for sale .................... -- -- -- -- -- --
--------- ----- --------- ----- --------- -----
Total face amount of loans ............. 148,876 102.6 127,065 102.5 95,832 102.1
Deferred loan fees, discounts
and costs, net ....................... (1,460) (1.0) (978) (.8) (859) (.9)
--------- ----- --------- ----- --------- -----
Loans .................................. 147,416 101.6 126,087 101.7 94,973 101.2
Less allowance for loan
losses ............................... (2,306) (1.6) (2,083) (1.7) (1,150) (1.2)
--------- ----- --------- ----- --------- -----
Net loans .............................. $ 145,110 100.0% $ 124,004 100.0% $ 93,823 100.0%
========= ===== ========= ===== ========= =====
</TABLE>
As of June 30, 1998, loans were $147.4 million, or $21.3 million
greater than loans of $126.1 million as of December 31, 1997. The difference is
due primarily to a greater amount of land development, construction and
commercial loans. Loans as of December 31, 1997 were up $31.1 million compared
to December 31, 1996, principally due to greater amounts of land development,
construction and commercial loans, which reflect the Company's growth discussed
above.
The Company's two primary categories of loans, construction loans
and commercial loans, trended upward as indicated at the various dates. These
loans as a group were $142.2 million as of June 30, 1998, $19.8 million over the
$122.4 million balance as of December 31, 1997, which in turn was $30.7 million
greater than such loans as of December 31, 1996. In addition, the significantly
lower commercial loans as of December 31, 1997 compared to December 31, 1996
25
<PAGE> 26
is in large part due to the Company's reclassification in 1997 of land and
acquisition loans to construction loans, with the corresponding increase in
construction loans.
Installment loans increased slightly with a balance of $6.7 million
as of June 30, 1998 compared to $4.7 million as of December 31, 1997.
Installment loan balances were relatively constant during 1997 with a balance of
$4.1 million as of December 31, 1996, again due to the Company's growth.
Mortgage loans have comprised less than 1% of the Company's loan
portfolio since year-end 1994. As discussed earlier, the Company concentrates on
land development and construction lending rather than residential mortgage
lending.
Although the risk of non-payment exists for a variety of reasons
with respect to all loans, certain other more specific risks are associated with
each type of loan. Several risks are present in construction loans, including
economic conditions in the home building industry, fluctuating land values, the
failure of the contractor to complete the work and the borrower's inability to
repay. The primary risks of land loans include a general slowdown in the market
resulting in fewer building permits and lower absorption of newly developed
sites to major homebuilders, building moratoriums by municipalities, the general
economy, and the fiscal condition of the developer. Risks associated with
commercial loans are quality of the borrower's management and the impact of
local economic factors. Installment loans also have risks associated in a single
type of loan. Installment loans additionally face the risk of a borrower's
unemployment as a result of deteriorating economic conditions as well as the
personal circumstances of the borrower.
The Company believes that its philosophy in extending credit is
relatively conservative in nature, with a presumption that most credit should
have both a primary and a secondary source of repayment, and that the primary
source should generally be operating cash flows, while the secondary source
should generally be disposition of collateral. The Company engages in very
little unsecured lending, and generally requires personal guarantees of
principals for business obligations. The Company practices a system of
concurrence in the approval of commercial credit whereby the documented
concurrence of the loan committee is obtained in addition to that of the
recommending loan officer.
At June 30, 1998, net loans totaled approximately 84.5% of total
deposits and approximately 72.8% of total assets.
Loan Maturities. The following tables present, at June 30, 1998 and
December 31, 1997, loans by maturity in each major category of the Company's
portfolio based on contractual repricing schedules. Actual maturities may differ
from the contractual repricing maturities shown below as a result of renewals
and prepayments. Loan renewals are re-evaluated as necessary.
26
<PAGE> 27
<TABLE>
<CAPTION>
JUNE 30, 1998
---------------------------------------------------------------------------------------
OVER ONE YEAR
THROUGH FIVE YEARS OVER FIVE YEARS
ONE YEAR --------------------------- ------------------------------
OR LESS FIXED RATE FLOATING RATE FIXED RATE FLOATING RATE TOTAL
---------- ---------- ------------- ---------- ------------- --------
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Land development and construction ...... $ 91,553 $ 451 $ -- $ 719 $ -- $ 92,723
Commercial ............................. 37,687 8,620 118 3,017 -- 49,442
Installment and other .................. 3,790 2,860 -- 61 -- 6,711
Mortgage ............................... -- -- -- -- -- --
--------- --------- --------- --------- --------- ---------
Total face amount of loans ........... $ 133,030 $ 11,931 $ 118 $ 3,797 $ -- $ 148,876
Deferred loans fees .................... (1,299) (117) -- (44) -- (1,460)
--------- --------- --------- --------- --------- ---------
Total loans .......................... $ 131,731 $ 11,814 $ 118 $ 3,753 $ -- $ 147,416
========= ========= ========= ========= ========= =========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1997
---------------------------------------------------------------------------------------
OVER ONE YEAR
THROUGH FIVE YEARS OVER FIVE YEARS
ONE YEAR --------------------------- ------------------------------
OR LESS FIXED RATE FLOATING RATE FIXED RATE FLOATING RATE TOTAL
---------- ---------- ------------- ---------- ------------- --------
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Land development and construction ...... $ 88,516 $ 309 $ -- $ -- $ -- $ 88,825
Commercial ............................. 24,504 7,823 -- 1,203 -- 33,530
Installment and other .................. 1,455 3,255 -- -- -- 4,710
Mortgage ............................... -- -- -- -- -- --
--------- --------- --------- --------- --------- ---------
Total face amount of loans ........... $ 114,475 $ 11,387 $ -- $ 1,203 $ -- $ 127,065
Deferred loans fees .................... (777) (190) -- (11) -- (978)
--------- --------- --------- --------- --------- ---------
Total loans .......................... $ 113,698 $ 11,197 $ -- $ 1,192 $ -- $ 126,087
========= ========= ========= ========= ========= =========
</TABLE>
Nonperforming Loans. Nonperforming loans consist of loans 90 days or
more delinquent and still accruing interest, nonaccrual loans and restructured
loans. When, in the opinion of management, a reasonable doubt exists as to the
collectibility of interest, regardless of the delinquency status of a loan, the
accrual of interest income is discontinued and interest accrued during the
current year is reversed through a charge to current year's earnings. While the
loan is on nonaccrual status, interest income is recognized only upon receipt
and then only if, in the judgment of management, there is no reasonable doubt as
to the collectibility of the principal balance. Loans 90 days or more delinquent
generally are changed to nonaccrual status unless the loan is in the process of
collection and management determines that full collection of principal and
accrued interest is probable.
Restructured loans are those for which concessions, including the
reduction of interest rates below a rate otherwise available to the borrower or
the deferral of interest or principal, have been granted due to the borrower's
weakened financial condition. Interest on restructured loans is accrued at the
restructured rates when it is anticipated that no loss of original principal
will occur. The Company did not have any restructured loans as of June 30, 1998,
December 31, 1997 or December 31, 1996.
27
<PAGE> 28
The following table sets forth information concerning the
nonperforming assets of the Company at the dates indicated:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
-------- ---------------------
1998 1997 1996
---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C>
Nonaccrual loans: ................................ $ 1,371 $ 1,604 $ 14
Other loans 90 days past due ..................... -- -- --
Other real estate ................................ -- -- --
--------- --------- ------
Total nonperforming loans ........................ $ 1,371 $ 1,604 $ 14
========= ========= ======
Ratio of nonaccrual and other loans 90
days past due to total loans ................... 0.93% 1.27% 0.01%
Ratio of nonperforming assets to total loans
plus other real estate ......................... 0.93 1.27 0.01
Ratio of nonperforming assets to total assets .... 0.69 1.02 0.01
</TABLE>
Of the amount of nonaccrual loans as of June 30, 1998 and December
31, 1997, approximately $1.3 million is the Bank's portion of five related loans
totaling approximately $4.0 million which are subject to a Chapter 11 bankruptcy
proceeding. Principal reductions on these loans were made in April and July
1998. The loans were originated by the Bank and were made at various times
during 1994, 1995 and 1996 in connection with a real estate development on which
the developer has constructed a residential building assembly plant. The loans
are secured by real estate, certificates of deposit, two personal guarantees
from the owners of the developer, as well as guaranteed by a related limited
partnership. Management believes that the Company is adequately collateralized
on these loans. Management is not aware of any adverse trend relating to the
Company's loan portfolio.
As of June 30, 1998, there was no significant balance of loans
excluded from non performing loans set forth above, where known information
about possible credit problems of borrowers caused management to have serious
doubts as to the ability of such borrowers to comply with the present loan
repayment terms and which may result in such loans becoming nonperforming.
Analysis of Allowance for Loan Losses. The allowance for loan losses
represents management's recognition of the risks of extending credit and its
evaluation of the quality of the loan portfolio. The allowance is maintained at
a level considered adequate to provide for anticipated loan losses based on
management's assessment of various factors affecting the loan portfolio,
including a review of problem loans, business conditions, historical loss
experience, evaluation of the quality of the underlying collateral and holding
and disposal costs. The allowance is increased by additional charges to
operating income and reduced by loans charged off, net of recoveries.
28
<PAGE> 29
The following table sets forth information regarding changes in the
allowance for loan losses of the Company for the periods indicated.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30, YEAR ENDED DECEMBER 31,
---------------- -----------------------------
1998 1997 1996
---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C>
Average total loans ......................... $ 134,100 $ 109,167 $ 80,213
========= ========= =========
Total loans at end of period ................ $ 147,416 $ 126,087 $ 94,973
========= ========= =========
Allowance at beginning of year .............. $ 2,083 $ 1,150 $ 759
Charge-offs:
Land development and construction ......... -- -- --
Commercial ................................ (2) (1) --
Installment ............................... (1) (7) (78)
Mortgage .................................. -- -- --
Other ..................................... -- (1) (1)
--------- --------- ---------
Total charge-offs ............... (3) (9) (79)
Recoveries:
Land development and construction ......... -- -- --
Commercial ................................ 3 -- 10
Installment ............................... 3 62 3
Mortgage .................................. -- -- --
Other ..................................... -- -- --
--------- --------- ---------
Total recoveries ................ 6 62 13
--------- --------- ---------
Net (charge-offs) recoveries ................ 3 53 (66)
Provisions for loan losses .................. 220 880 457
--------- --------- ---------
Allowance at end of period .................. $ 2,306 $ 2,083 $ 1,150
========= ========= =========
Ratio of net (charge-offs) recoveries
to average total loans .................... 0.00% 0.05% (0.08%)
Allowance to total loans at end of
period .................................... 1.56% 1.65% 1.21%
Allowance to nonperforming loans ............ 168.20% 129.92% 8,463.03%
</TABLE>
Net recoveries during the six months ended June 30, 1998 totaled
approximately $3,000 or less than .01% of average loans compared to
approximately $56,000 of net recoveries or .05% of average loans for the six
months ended June 30, 1997. Net recoveries during 1997 totaled approximately
$53,000 or .05% of average loans compared to net charge offs of approximately
$66,000 or .08% of average loans in 1996.
The Company's lending personnel are responsible for continuous
monitoring of the quality of loan portfolios. The loan portfolios are also
monitored and examined by the Company loan review personnel. These reviews
assist in loan grading which in turn aids the identification of potential and
probable losses, and also in the determination of the level of the allowance for
loan losses. The allowance for loan losses is based primarily on management's
estimates of possible loan losses from the foregoing processes and historical
experience. These estimates involve
29
<PAGE> 30
ongoing judgments and may be adjusted over time depending on economic conditions
and changing historical experience.
Federal regulatory agencies, as an integral part of their
examination process, usually review the Company's loans and its allowance for
loan losses. Management believes that the Company's allowance for loan losses is
adequate to cover anticipated losses. There can be no assurance, however, that
management will not determine a need to increase the allowance for loan losses
or that regulators, when reviewing the Company's loan portfolios in the future,
will not require the Company to increase such allowance, either of which could
adversely affect the Company's earnings. Further, there can be no assurance that
the Company's actual loan losses will not exceed its allowance for loan losses.
The following tables set forth an allocation of the allowance for
loan losses by loan category as of the dates indicated. Portions of the
allowance have been allocated to categories based on analysis of the status of
particular loans; however, the majority of the allowance is utilized as a single
unallocated allowance available for all loans. The allocation table should not
be interpreted as an indication of the specific amounts, by loan classification,
to be charged to the allowance. Management believes that the table may be a
useful device for assessing the adequacy of the allowance as a whole. The table
has been derived in part by applying historical loan loss ratios to both
internally classified loans and the portfolio as a whole in determining the
allocation of the loan losses attributable to each category of loans.
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
------------------------ --------------------------------------------------------
1998 1997 1996
------------------------ -------------------------- --------------------------
LOANS IN LOANS IN LOANS IN
CATEGORY CATEGORY CATEGORY
AS A AS A AS A
AMOUNT PERCENTAGE AMOUNT PERCENTAGE AMOUNT PERCENTAGE
OF GROSS OF TOTAL OF GROSS OF TOTAL OF GROSS OF TOTAL
ALLOWANCE LOANS ALLOWANCE LOANS ALLOWANCE LOANS
------------------------ -------------------------- --------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Land development and
construction .......... $ 131 62.3% $ 155 69.9% $ 155 49.3%
Commercial .............. 122 33.2 127 26.4 33 46.3
Installment and other ... 15 4.5 16 3.7 4 4.2
Mortgage ................ -- 0.0 -- 0.0 -- 0.2
Unallocated ............. 2,038 0.0 1,785 0.0 958 0.0
------- ----- ------- ----- ------- -----
Total ....... $ 2,306 100.0% $ 2,083 100.0% $ 1,150 100.0%
======= ======= =======
</TABLE>
As of June 30, 1998, the Company increased its loan loss reserve by
$223,000 compared to December 31, 1997 due to a significant increase in loan
production of $55 million over the amount originated in the first half of 1997
and management's expectation of continued increases in total loans in 1998. The
total loan loss reserve at December 31, 1997 was $2,083,000 or 1.65% of total
loans and 129.9% of nonperforming assets. The loan loss reserve increase at June
30, 1998 compared to December 31, 1997 was included in the unallocated category.
The allocation for loan losses takes into account many factors such
as the Company's prior experience with loan losses and an evaluation of the
risks in the loan portfolio at any given time, including changes in economic,
operating and other conditions of borrowers, and changes in the Denver and
national economies. As indicated in the table above, a majority of the loan loss
allowance was not allocated to a single category. The Company's loan portfolio
contains a
30
<PAGE> 31
significant amount of loans that are construction and/or development loans, and
management assesses general risks to the portfolio that are common to both
categories. These risks include the economic conditions in the building industry
that could effect a slowdown in the market resulting in fewer building permits
and lower absorption of newly developed sites, fluctuating land values, building
moratoriums by municipalities, and the overall general economy of the Company's
area of operations.
Management believes that the approximate amount of charge-offs by
category during 1998 and 1999 will be in the range of 0.23% to 0.27% for
consumer loans, 0.14% to 0.17% for construction loans, and 0.12% to 0.15% for
commercial loans, for an overall total of approximately 0.15% of total loans.
The foregoing is a good faith best estimate only and is subject to several
factors beyond the control of the Company, including the risks discussed above.
Investments. The Company's investment policy is designed to ensure
liquidity for cash-flow requirements; to help manage interest rate risk; to
ensure collateral is available for public deposits, FHLB advances and repurchase
agreements; and to manage asset quality diversification. Investments are managed
centrally to maximize compliance and effectiveness of overall investing
activities. The Bank's President is responsible for implementing investment
strategy. Ongoing review of the performance of the investment portfolio, market
values, market conditions, current economic conditions, profitability, capital
ratios, liquidity needs, collateral position with the FHLB and other matters
related to investing activities is made.
The Company's investment portfolio at June 30, 1998 is comprised of
U.S. Treasury bonds and bills, corporate equity securities and general
obligation and revenue municipal bonds. Although the municipal securities are
non-rated and privately placed, none of these investments are derivatives,
structured notes or similar instruments that are classified as "High-Risk
Securities" as defined by the Federal Financial Institutions Examinations
Counsel. In accordance with the principles of the Financial Accounting Standards
Board ("FASB") in its statement of financial accounting standards no. 115 ("FASB
115"), Accounting for Certain Investment in Debt and Equity Securities, all
investments are accounted for as "Available for Sale."
The following table sets forth the estimated market value of the
available for sale securities in the Company's investment portfolio by type at
the dates indicated.
<TABLE>
<CAPTION>
DECEMBER 31,
JUNE 30, ---------------------
1998 1997 1996
---- ---- ----
(In thousands)
<S> <C> <C> <C>
U.S. Treasury securities .......... $ 4,027 $ 4,774 $ 4,390
Corporate debt securities ......... 2,812 -- --
Corporate equity securities ....... 500 454 231
FHLB Stock ........................ 471 368 313
Municipal securities(1) ........... 8,402 8,403 6,203
-------- -------- --------
Total ................... $ 16,212 $ 13,999 $ 11,137
======== ======== ========
</TABLE>
- ----------
(1) Exempt from both federal and state income taxation.
31
<PAGE> 32
Investment Maturities and Yield. The following table sets forth the
estimated market value and approximate yield of debt securities in the
investment portfolio by type and maturity at June 30, 1998.
<TABLE>
<CAPTION>
JUNE 30, 1998
-------------
TYPE AND MATURITY AMOUNT YIELD
----------------- ------ -----
(Dollars in thousands)
<S> <C> <C>
U.S. Treasury securities:
One year or less.......................................... $ 500 5.99%
Over one through five years............................... 3,527 6.24
Over five through 10 years................................ -- --
--------
Total........................................... $ 4,027 6.21
========
Corporate debt securities:
One year or less.......................................... $ -- --
Over one through five years............................... -- --
Over five through 10 years................................ -- --
Over 10 years............................................. 2,812 7.39
--------
Total........................................... $ 2,812 7.39
========
Municipal securities:
One year or less.......................................... $ -- --
Over one through five years............................... -- --
Over five through 10 years................................ 716 9.00
Over 10 years............................................. 7,686 8.93
--------
Total........................................... $ 8,402 8.94
========
Total investment in securities:
One year or less.......................................... $ 500 5.99
Over one through five years............................... 3,527 6.24
Over five through 10 years................................ 716 9.00
Over 10 years............................................. 10,498 8.52
--------
Total........................................... $ 15,241 7.93
========
</TABLE>
Deposits. The Company's primary source of funds has historically
been customer deposits, and deposits have experienced significant growth in
recent years with average deposits increasing to $151.8 million for the six
months ended June 30, 1998 from $128.9 million for the year ended December 31,
1997 and $89.0 million for the year ended December 31, 1996. These increases are
primarily a result of two new branch openings and overall growth. At June 30,
1998, noninterest-bearing deposits comprised 28.1% of total deposits. Management
believes this ratio may decrease as the mix of deposits in new branches tend to
be more interest-bearing rather than noninterest-bearing due to start up
marketing activities.
32
<PAGE> 33
The following table presents the average balances for each major
category of deposits and the weighted average interest rates paid for
interest-bearing deposits for the period indicated.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
SIX MONTHS ENDED -----------------------------------------------------
JUNE 30, 1998 1997 1996
--------------------- ------------------------- ------------------------
AVERAGE AVERAGE AVERAGE
AVERAGE INTEREST AVERAGE INTEREST AVERAGE INTEREST
BALANCE COST BALANCE COST BALANCE COST
------- ---- ------- ---- ------- ----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Demand, interest-bearing ......................... $ 65,070 4.52% $ 53,370 4.60% $ 37,983 4.52%
Savings .......................................... 4,750 3.33 4,775 3.35 5,442 3.42
Certificates of deposit under $100,000 ........... 28,202 5.77 25,295 5.71 9,639 5.42
Certificates of deposit $100,000 and over ........ 11,061 5.44 9,749 5.93 6,885 5.36
--------- -------- --------
Total interest-bearing demand deposits ... 109,083 4.89 93,189 4.97 59,949 4.66
Noninterest-bearing demand deposits .............. 42,720 35,683 29,096
--------- -------- --------
Total Deposits ........................... $ 151,803 $128,872 $ 89,045
========= ======== ========
</TABLE>
The increases in average costs were due primarily to higher rates offered in
connection with new branch promotions. See "--Net Interest Income."
The following table sets forth the amount and maturity of
certificates of deposit that had balances of more than $100,000 at June 30,
1998.
<TABLE>
<CAPTION>
REMAINING MATURITY (In thousands)
------------------
<S> <C>
Less than three months.................................................. $ 2,342
Three months up to six months........................................... 1,988
Six months up to one year............................................... 3,296
One year and over....................................................... 2,452
--------
Total......................................................... $ 10,078
========
</TABLE>
FHLB Borrowings. The Bank is a member of the Federal Home Loan Bank
of Topeka, which is one of 12 regional FHLB's. The FHLB system functions as a
central bank providing credit for members. As a member of the FHLB, the Bank is
entitled to borrow funds from the FHLB and is required to own FHLB stock in an
amount determined by a formula based upon the Bank's total assets and its FHLB
borrowings. The Bank may use FHLB borrowings to supplement deposits as a source
of funds. See "Liquidity--Asset/Liability Management." Average FHLB borrowings
for the six months ended June 30, 1998 were $1.2 million compared to $2.3
million and $1.8 for the years ended December 31, 1997 and 1996, respectively.
At June 30, 1998, based on its FHLB stockholdings, the Bank's total available
and unused borrowing capacity based on the Bank's current FHLB stockholdings was
approximately $7.0 million, which was available through a line of credit and
term advances. FHLB borrowings are collateralized by the Bank's FHLB stock,
other investment securities and certain loans.
A variety of borrowing terms and maturities can be chosen from the
FHLB. Maturities available range generally from one day to 10 years. Interest
rates can be either fixed or variable and prepayment options are available if
desired. The FHLB offers both amortizing and
33
<PAGE> 34
nonamortizing advances. To date, FHLB stock has been redeemable at the preset
price of $100 per share, but there can be no assurance that this will continue
to be the case.
CAPITAL RESOURCES
The Company monitors compliance with federal regulatory capital
requirements, focusing primarily on risk-based capital guidelines. Under the
risk-based capital method of capital measurement, the ratio computed is
dependent upon the amount and composition of assets recorded on the balance
sheet, and the amount and composition of off-balance sheet items, in addition to
the level of capital.
The following tables set forth the Bank's capital ratios as of the
indicated dates.
TANGIBLE RATIOS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
SIX MONTHS ENDED --------------------------------------------------
JUNE 30, 1998 1997 1996
--------------------- ------------------ ---------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
------ ----- ------ ----- ------ -----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Core (Tier 1) capital ............. $ 20,775 10.64% $ 12,579 8.02% $ 10,632 8.97%
Core (Tier 1) capital minimum
requirement (1) ................. 5,856 3.00 4,707 3.00 3,555 3.00
--------- ------- --------- ------ --------- -------
Excess ............................ $ 14,919 7.64 $ 7,872 5.02 $ 7,077 5.97
========= ======= ========= ====== ========= =======
Tangible capital .................. $ 20,775 10.64 $ 12,579 8.02 $ 10,632 8.97
Tangible capital minimum
requirement (1) ................. 2,928 1.50 2,354 1.50 1,777 1.50
--------- ------- --------- ------ --------- -------
Excess ............................ $ 17,847 9.14 $ 10,225 6.52 $ 8,855 7.47%
========= ======= ========= ====== ========= =======
Adjusted tangible assets .......... $ 195,216 $ 156,909 $ 118,484
========= ========= =========
</TABLE>
- ----------
(1) Based on risk-based capital guidelines of the Office of Thrift
Supervision, a savings association is required to maintain a Core
(Tier 1) capital requirement of 3% of adjusted tangible assets and a
tangible capital requirement of 1.5% of tangible assets. See
"Supervision and Regulation--Federal Savings Association
Regulation--OTS Capital Requirements" for definitions of the ratio
terms.
34
<PAGE> 35
RISK-BASED CAPITAL RATIO
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
SIX MONTHS ENDED -----------------------------------------------
JUNE 30, 1998 1997 1996
------------------- ------------------- -------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
------ ----- ------ ----- ------ -----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Risk-Based capital ................ $ 22,216 13.61% $ 14,321 10.30% $ 11,782 12.62%
Minimum requirement(1) ........... 13,057 8.00 11,122 8.00 7,471 8.00
--------- ----- --------- ----- --------- ------
Excess ............................ $ 9,159 5.61% $ 3,199 2.30% $ 4,311 4.62%
========= ===== ========= ===== ========= ======
Total risk-based assets ........... $ 163,216 $ 139,023 $ 93,391
========= ========= ========
</TABLE>
- ----------
(1) Based on risk-based capital guidelines of the Office of Thrift
Supervision, a savings association generally is required to maintain
a total capital to risk-based assets ratio of 8%. See "Supervision
and Regulation--Federal Savings Association Regulation--OTS Capital
Requirement" for definitions of terms relating to the ratio.
LIQUIDITY
Sources of Liquidity. The Company manages its liquidity in order to
satisfy cash flow requirements of depositors and borrowers and allow the Company
to meet its own cash flow needs. The Company has two basic sources of liquidity.
The first is its retail deposit market served by its banking offices. The
Company has increased core deposits through growth of its existing deposits and
through promotions directed at existing and potential customers. Average
deposits increased by $30.7 million or 25.4% in the six months ended June 30,
1998 compared to the same period in 1997, and by $39.8 million, or 44.7% in 1997
compared to 1996.
The second source of the Company's liquidity is FHLB advances and
Company lines of credit. FHLB advances are used regularly in the cash management
function both to fund a portion of the investment portfolio and to manage the
day-to-day fluctuations in liquidity resulting from needs of depositors and
borrowers. At June 30, 1998 the Company had available $7.0 million of unused
borrowing capacity from the FHLB and $10.0 million from its other lenders in
unsecured credit lines. The Company anticipates that it will continue to rely
primarily upon customer deposits, FHLB borrowings, other lending sources, loan
repayments, loan sales and retained earnings to provide liquidity, and will use
funds so provided primarily to make loans and to purchase investment securities.
Asset/Liability Management. A principal function of asset/liability
management is to coordinate the levels of interest-sensitive assets and
liabilities to minimize net interest income fluctuations in times of fluctuating
market interest rates. Interest-sensitive assets and liabilities are those that
are subject to repricing in the near term, including both variable rate
instruments and those fixed-rate instruments which are approaching maturity.
Changes in net yield on interest-sensitive assets arise when interest rates on
those assets (e.g. loans and investment securities) change in a different time
period from that of interest rates on liabilities (e.g. time deposits). Changes
in net yield on interest-sensitive assets also arise from changes in the mix and
volumes of earning assets and interest-bearing liabilities.
The following table sets forth the interest rate sensitivity of the
Company's assets and liabilities as of June 30, 1998, and sets forth the
repricing dates of the Company's interest-earning
35
<PAGE> 36
assets and interest-bearing liabilities as of that date, as well as the
Company's interest rate sensitivity gap percentages for the periods presented.
The table is based upon assumptions as to when assets and liabilities will
reprice in a changing interest rate environment, and since such assumptions can
be no more than estimates, certain assets and liabilities indicated as maturing
or otherwise repricing within a stated period may, in fact, mature or reprice at
different times and at different volumes than those estimated. Also, the renewal
or repricing of certain assets and liabilities can be discretionary and subject
to competitive and other pressures. Therefore, the following table does not and
cannot necessarily indicate the actual future impact of general interest rate
movements on the Company's net interest income.
<TABLE>
<CAPTION>
ESTIMATED MATURITY OR REPRICING AT JUNE 30, 1998
-------------------------------------------------------------------------------
THREE MONTHS
LESS THAN TO LESS THAN ONE TO OVER
THREE MONTHS ONE YEAR FIVE YEARS FIVE YEARS TOTAL
------------ -------- ---------- ---------- -----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Interest-earning assets:
Funds sold and interest-bearing deposits ....... $ 17,415 $ -- $ 82 $ -- $ 17,497
Investment securities available for sale ....... 500 -- 3,527 11,214 15,241
Loans .......................................... 125,310 6,421 11,932 3,753 147,416
--------- --------- --------- --------- ---------
Total interest-earning assets .................. 143,225 6,421 15,541 14,967 180,154
Interest-bearing liabilities:
Deposits:
Demand, interest-bearing ..................... 71,641 -- -- -- 71,641
Savings ...................................... 5,477 -- -- -- 5,477
Certificates of deposit
under $100,000 ............................. 2,669 16,002 12,562 -- 31,233
$100,000 and over .......................... 2,342 5,284 2,452 -- 10,078
Federal Home Loan Bank borrowings .............. -- -- -- -- --
8.75% Junior Subordinated Debentures ........... -- -- -- 12,000 12,000
Repurchase agreements .......................... 1,253 -- -- -- 1,253
--------- --------- --------- --------- ---------
Total interest-bearing liabilities ............. 83,382 21,286 15,014 12,000 131,682
--------- --------- --------- --------- ---------
Interest rate gap ................................ $ 59,843 $ (14,865) $ 527 $ 2,967 $ 48,472
========= ========= ========= ========= =========
Cumulative interest rate gap at
June 30, 1998 .................................. $ 59,843 $ 44,978 $ 45,505 $ 48,472
========= ========= ========= =========
Cumulative interest rate gap
to total assets ................................ 30.01% 22.56% 22.82% 24.31%
========= ========= ========= =========
</TABLE>
Due to the volume of loans that reprice with changes in the prime
lending rate and the volume of noninterest-bearing deposits, the Company has
experienced a positive gap in assets and deposits that reprice or mature in less
than three months. Of the total interest-earning assets at June 30, 1998, 79.5%
reprice or mature in less than three months while 63.32% of all interest-bearing
liabilities reprice or mature in that same time frame. The Bank's positive
interest rate gaps indicate that the Bank's net income would increase in the
event of rising interest rates and would decrease in the event of decreasing
interest rates. In the highly unlikely event of an immediate, parallel and
sustained shift of market interest rates of 200 basis points, management
estimates that the Bank's net income during the 12 months ending June 30, 1999
would likely increase greater than 10% compared to the prior like 12-month
period if interest rates rose by 200 basis points and likely fall by greater
than 10% compared to the prior like 12-month period if rates fell of the same
amount. These are good faith estimates assuming all other factors do not change
materially, and, in management's belief, are not necessarily indicative of what
actually could occur in the event of immediate interest rate increases or
deceases of this magnitude. Management believes that it is
36
<PAGE> 37
highly unlikely that such changes would occur in a short time period. As
interest-bearing assets and liabilities reprice at different time frames and
proportions to market interest rate movements, various assumptions must be made
based on historical relationships of these variables in reaching any conclusion.
Since these correlations are based on competitive and market conditions, future
results would, in management's belief, be materially different from the
foregoing estimates.
EFFECTS OF INFLATION AND CHANGING PRICES
Unlike most industrial companies, virtually all of the assets and
liabilities of a financial institution are monetary in nature. As a result,
interest rates generally have a more significant impact on a financial
institution's performance than inflation. Although interest rates do not
necessarily move in the same direction or to the same extent as the prices of
goods and services, increases in inflation generally have resulted in increased
interest rates. Over short periods of time interest rates may not move in the
same direction or magnitude as inflation.
YEAR 2000 CONSIDERATIONS
As the year 2000 approaches, a significant business issue has
emerged regarding how existing application software programs and operating
systems can accommodate the date value for the year 2000. Many existing software
application products, including software application products used by the Bank
and its suppliers and customers, were designed to accommodate only a two-digit
date value, which represents the year. For example, information relating to the
year 1996 is stored in the system as "96." As a result, the year 1999 (i.e.,
"99") could be the maximum date value that these systems will be able to process
accurately. In response to concerns about this issue, regulatory agencies have
begun to monitor holding companies' and banks' readiness for the year 2000 as
part of the regular examination process. The Company presently believes that
with modifications to existing software and conversion to new software, the year
2000 issue will not pose significant operational problems for the Company's
computer systems or business operations. Implementation of the Company's plan to
test in-house and out-sourced software has been underway since the first quarter
of 1998. Testing of applications considered to be "mission critical" are
scheduled for completion by first quarter of 1999. Total compliance for all
systems is expected by management to be completed by the third quarter of 1999;
management currently estimates that such compliance will cost $150,000. The team
for the plan is responsible for the implementation of the plan and progress
reports to the Company's Board of Directors on a quarterly basis until October
1998 and on a monthly basis thereafter until the plan is completed. However, if
such modifications and conversions are not made, or are not completed timely,
the year 2000 issue could have a material adverse impact on the operations of
the Company. In addition, there can be no assurance that unforeseen problems in
the Company's computer systems, or the systems of third parties on which the
Company's computers rely, will not have an adverse effect on the Company's
systems or operations. Additionally, failure of the Bank's customers to prepare
for year 2000 compatibility could have a significant adverse effect on such
customers' operations and profitability, thus inhibiting their ability to repay
loans and adversely affecting the Bank's operations. The Company does not have
sufficient information accumulated from customers of the Bank to enable the
Company to assess the degree to which customers' operations are susceptible to
potential problems relating to the year 2000 issue.
37
<PAGE> 38
BUSINESS
GENERAL
MegaBank Financial Corporation (the "Company") was founded in 1984
by its Chairman and Chief Executive Officer, Thomas R. Kowalski, with the
objective of building a banking franchise in the Denver, Colorado metropolitan
area that would deliver a broad based package of products and services to
businesses and individuals. The Company's banking subsidiary, MegaBank (the
"Bank") was organized in 1983. Since the advent of branch banking in Colorado in
1993, the Bank has opened seven additional banking locations throughout the
Denver area and has two more locations in the planning and construction phase.
Since inception, the Bank has specialized its lending practice in
the residential construction industry. The Company's Chairman has extensive
experience in the home building industry and has expanded the Bank's lending
practice to date such that the Bank is one of the area's leading originators of
land development and residential construction loans to small- and medium-sized
homebuilders. Currently, the Bank can finance a builder or developer from the
acquisition and development loan process, including assistance with special
district financing, through the construction loan phase. During the five years
ended December 31, 1997, the Bank originated over $750 million in total loans
and during the six months ended June 30, 1998, originated an additional $144
million of loans. While some of these loans remain on the Company's balance
sheet, most have been repaid, refinanced or participated out to other financial
institutions.
In September 1998, the Company changed its status to a unitary
savings and loan holding company within the meaning of HOLA. The Company is
registered with the OTS and is subject to OTS regulations, examinations,
supervision and reporting requirements. Also in September 1998, the Bank
converted its charter from a state-chartered stock institution to a federal
stock savings bank. Management believes that the flexibilities and opportunities
with a thrift charter complement the Bank's current lending practices and its
long-term plans which are discussed below under "Strategy."
The Bank intends to continue to focus on its niche of residential
land development and construction lending in addition to providing a complete
array of products and services for its customers. High quality customer service
has been a fundamental tenet of the Bank's operating strategy since its
inception. The Bank intends to continue to pursue its strategies and concentrate
on increasing its market share through referrals from existing customers and
focus on the implementation of advertising and marketing strategies.
In addition to the Company's core business of residential land
development and construction lending through the Bank, the Company intends to
expand its activities into other areas which complement its current business,
such as establishing a subsidiary for purposes of investing in real estate and
is considering starting or acquiring a real estate title business.
STRATEGY
Bank Growth. The Bank's goal in continuing its expansion is to
maintain a profitable, customer-focused financial institution. Management
believes that the Company's existing capital structure, management, data and
operational systems are sufficient to achieve further growth in
38
<PAGE> 39
asset size, revenues and capital. This growth should allow the Bank to increase
its lending limits, thereby enabling it to continue to serve the needs of its
customers.
The Bank expects to continue its growth strategy primarily through
internal growth and potentially through acquisitions. Management believes that
the Bank's largest source of growth is through referrals by existing customers,
and that the primary reason for referrals is positive customer feedback
regarding the Bank's customer service and response time. The Colorado banking
market is dominated by large national and regional financial institutions. This
dominance was achieved through the purchase of Colorado-based holding companies
over the past several years, which resulted in a significant consolidation of
the Colorado banking industry. Management believes that small- and medium-size
businesses often are not of sufficient size to be of interest to these large
banks, particularly as it relates to residential land development and
construction lending, and that individuals frequently have difficulty in finding
personalized banking services. Many of these customers seek a banking
relationship with a smaller and more service-oriented community banking
organization such as the Bank. Through the Bank's primary emphasis on customer
service, management's experience and the Company's product line, the Company
will continue to focus on attracting these customers in achieving internal
growth. Management also believes that the economic expansion in the Company's
market area contributes significantly to internal growth.
The Bank's market area is the Denver metropolitan area, which is the
most densely populated area in the Rocky Mountain region. Total population is
approximately 2.2 million. Employment in the area is diversified across the
manufacturing, construction, financial services, tourism, transportation,
technology, cable television, retail trade, services and government sectors. Job
growth in 1997 gained an estimated 51,000 jobs, or a 4.4% increase, representing
the largest job gain in the 1990's. In addition, according to the Denver
Homebuilders Association, the number of units authorized by permit in the first
four months of 1998 was up 16% over the same period last year.
In addition to internal growth, management believes there are
opportunities to grow through branching. The Bank has recently opened its eighth
branch, has a ninth branch under construction, and has a tenth branch in the
planning stage. The ninth and tenth branches are expected to begin operations in
1999. Branching opportunities have also arisen through eliminations by bank
holding companies of certain overlapping branches resulting from acquisitions.
As a result, branch locations have become available from time to time for
purchase by the Company. To date, the Company has acquired one such branch from
a large bank holding company. Also, management intends to pursue acquisitions of
financial institutions, although the sales prices of such institutions are
currently at significant premiums over those paid the past few years. Thus, it
may be difficult to complete such a transaction. Management has considered and
intends to consider a variety of criteria when evaluating expansion. These
include (i) the geographic location, (ii) the investment required for, and
opportunity costs of, the branch or acquisition, (iii) the financial strength of
a potential acquisition target and (iv) economies of scale that may be achieved.
Proposed Expansion Activities. The Company intends to expand its
business by entering into activities which complement its core banking
activities in residential land development and construction lending. Currently,
management is considering the following expansion activities.
o The Company intends to use approximately $3.5 million of the
proceeds from the Offering to establish and fund a subsidiary
that will purchase real estate for
39
<PAGE> 40
development and sale to homebuilders. Management believes
that this activity will supplement the Company's revenues
since many smaller homebuilders do not have the resources to
develop sites for home building. Management believes that
the subsidiary can generate revenues through the sale to
these homebuilders of individual or bulk lots. Also,
management believes that the Bank can provide construction
lending in connection with the sales of lots to homebuilders,
thereby providing additional loans to the Bank.
o The Company is also considering engaging in the real estate
title business, which management believes will complement its
banking services and proposed real estate investment and
development activities. Since this activity is only in the
planning stage, the Company has not allocated any proceeds
from the Offering to establishing or acquiring a real estate
title business.
Management believes that the addition of the foregoing activities
should complement the Company's existing banking business. Management envisions
a "one-stop" service network whereby homebuilders can obtain developed or
undeveloped building sites, construction lending and real estate title services
from one source. Management believes that offering these combined services
should allow the Company to remain competitive in the Bank's lending activities.
Operations and Marketing. The Bank's objective is to continue to
build a profitable, growing community banking franchise. Management believes
that, in meeting the needs of consumers and small- to medium-sized businesses in
its market area, the Bank's first and foremost strategy is to provide excellent
customer service. This strategy is emphasized above all others of the Company,
from top management down to each bank teller. The Bank's operational systems
have been designed to complement customer service. Management believes the
Company's banking locations are small enough to facilitate personalized services
and decision-making, yet of sufficient size to meet most customers' needs.
The Bank seeks to maximize operational and support efficiencies
consistent with maintaining high quality customer service. Various management
and administrative functions are consolidated, including consumer credit
administration and lending, investment management and accounting, enabling
branch personnel to better focus on customer service and sales.
In expanding its banking franchise, the Bank has focused on
identifying and developing products and services that satisfy customer needs,
particularly customer service. The Bank offers a wide range of consumer deposit
products including regular checking, checking with interest, money market
accounts, regular savings, certificates of deposit, and IRAs. The Bank also
offers additional access to its customers with an ATM/Visa Debit Card. The
Bank's consumer loan products are customized to meet the needs and requests of
its customers. The Bank also offers installment loans, including auto,
recreational vehicle, classic car and other secured and unsecured loans sourced
directly by its branches and from indirect sources. See "Loans" below for a
discussion of products that the Bank provides to commercial accounts.
40
<PAGE> 41
LOANS
The Company has the ability to provide a broad range of commercial
and retail lending services. However, the vast majority of the Bank's loans are
land development and residential construction loans. The Company follows a
uniform credit policy which sets forth underwriting and loan administration
criteria, including levels of loan commitment, loan types, credit criteria,
concentration limits, loan administration, loan review and grading and related
matters. In addition, the Company obtains outside independent loan reviews,
operates a centralized processing, underwriting and servicing center for
consumer loans and manages problem assets centrally. At June 30, 1998,
substantially all loans outstanding were to customers within the Company's
market area. For a discussion of risks associated with the Company's various
types of loans, see "Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Financial Condition -- Loan Portfolio Composition."
Land Development and Construction Loans. Construction loans include
real estate construction loans and land loans. Real estate construction loans
are principally made to builders to construct single family residences. These
loans typically have maturities of six to 12 months and adjustable interest
rates, and are subject to origination fees. Terms may vary depending upon many
factors, including, but are not limited to, location, type of project and
financial condition of the builder.
Land loans consist of loans made on raw land for the acquisition
and/or development of real property. At June 30, 1998, approximately $48.7
million in loans were land loans to customers where the collateral for the loan
is raw or partially developed land. These loans typically have maturities of 12
to 18 months and variable interest rates. Terms may vary depending upon many
factors, including adverse economic conditions in the home building industry,
location, type of project and financial condition of the builder.
Commercial Loans. Commercial loans consist primarily of loans to
businesses for various purposes, including revolving lines of credit, equipment
financing, and commercial real estate lending. The commercial loans secured by
real estate are typically 20 to 25 year amortizing loans, callable in three to
five years, with fixed interest rates. The loans secured by collateral other
than real estate generally mature within one year, have adjustable interest
rates and are secured by inventory, accounts receivable or other commercial
assets. Revolving lines of credit generally are for business purposes, generally
mature annually and have adjustable interest rates.
Installment Loans. Installment loans to individuals which are not
secured by real estate generally have terms of two to five years and bear
interest at fixed rates. These loans usually are secured by motor vehicles,
equipment, receivables, inventory, investment securities or other personal
assets, and in some instances are unsecured.
The Company maintains a loan committee approach to commercial
lending, which it believes yields positive results in both responsiveness to
customer needs and asset quality. The loan committee usually meets twice per
week to review and discuss new loan requests.
Interest rates charged on loans vary with the degree of risk,
maturity, underwriting and servicing costs, loan amount, and extent of other
banking relationships maintained with customers, and are further subject to
competitive pressures, money market rates, availability of funds and
41
<PAGE> 42
government regulations. Most of the loans in the Company's portfolio at June 30,
1998, had interest rates that float with the prime rate.
In the ordinary course of business, the Company issues letters of
credit. See Note N of Notes to Consolidated Financial Statements. The Company
applies the same credit standards to these commitments as it uses in all its
lending activities and has included these commitments in its lending risk
evaluations. The Company's exposure to credit loss under letters of credit is
represented by the amount of these commitments. Under applicable federal law,
permissible loans to one borrower were limited to an aggregate of $3.0 million
for the Company at June 30, 1998. As of July 16, 1998, that limit was raised to
$3.2 million due to increased equity in the Bank. With the infusion of
approximately $5.0 million in capital to the Bank (see "Use of Proceeds"), the
Company expects that the Bank's lending limit will increase by approximately
$750,000 to a total of $4.0 million.
COMPETITION
The Company faces a high degree of competition. In its marketplace,
there are numerous small banks and several larger national and regional
financial banking groups. The Company also competes with insurance companies,
savings and loan associations, credit unions, leasing companies, mortgage
companies, and other financial service providers. Many of the banks and other
financial institutions with which the Company competes have capital resources
and legal lending limits substantially in excess of the capital resources and
legal lending limits of the Company.
The Company competes for loans and deposits principally based on the
range and quality of services provided, interest rates, loan fees and office
locations. The Company actively solicits deposit customers and competes by
offering them superior customer service and a complete product line. Over the
past few years, competition has increased as a result of changes in Colorado
banking laws that permit statewide branching and allow out-of-state holding
companies to acquire Colorado-based financial institutions. The Company believes
its customer service, broad product line and banking franchise enable it to
compete in its market area.
The Company will also face significant competition from other
financial institutions in any potential acquisitions. Many of these competitors
have substantially greater resources than the Company as well as the ability to
issue marketable equity securities that can be used as part of the purchase
price.
PROPERTIES
The principal offices of both the Company and the Bank are located
in a three story building at 8100 East Arapahoe Road, Englewood, Colorado. The
building is owned by Nagrom LLC. See "Related Party Transactions." The Company
and the Bank lease approximately 22,300 square feet at this facility.
The Bank maintains seven branch banking facilities in the Denver
metropolitan area. The North Denver Branch is located at 4988 Federal Boulevard,
Denver; the land is leased from an unaffiliated third party but the facility,
consisting of approximately 3,000 square feet, is owned by the Company. The
Monaco Branch is located at 777 South Monaco, Denver, and the Company
42
<PAGE> 43
owns the land and building at this site, of which the banking facility is
approximately 3,000 square feet. The South Broadway Branch is located at 4600
South Broadway, Englewood, and the Company owns the land and the building. The
South Broadway facility comprises approximately 3,000 square feet. The West
Highland Branch is located at 3804 West 32nd Avenue, Denver, and the Company
leases the land and facility, comprising approximately 2,600 square feet, from
1996 Newton LLC. See "Related Party Transactions." The Greenwood Village Branch
is located at 6300 South Syracuse Way, Greenwood Village, and the Company leases
the facilities from an unaffiliated third party. The Greenwood Village facility
comprises approximately 850 square feet. The Lower Downtown ("LoDo") Branch is
located at 1401 17th Street, and the Company leases the 3,400 square foot
facility from an unaffiliated third party. The Northglenn branch is located at
120th Street and Pennsylvania, and the Company owns the land and the 5,200
square foot building.
The Bank is renovating a 6,390 square foot building located at 3734
Osage Street, Denver. Given its central Denver location, this facility will be
used as a central processing center for the Bank and its branch system. The
facility will be leased from Osage 3734, LLC. See "Related Party Transactions."
LEGAL PROCEEDINGS
The Company and its subsidiaries are from time to time parties to
various legal actions arising in the normal course of business. Management
believes that there is no proceeding threatened or pending against the Company
or any of its subsidiaries which, if determined adversely, would have a material
adverse effect on the financial condition or results of operations of the
Company.
EMPLOYEES
As of June 30, 1998, the Company had 89 full-time equivalent
employees. Management considers its relationship with its employees to be good.
43
<PAGE> 44
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The executive officers and directors of the Company, their
respective ages and positions as of September 1, 1998, are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITIONS
- ---- --- ---------
<S> <C> <C>
Thomas R. Kowalski 58 Chairman of the Board and Chief Executive Officer of the
Company and the Bank
Larry A. Olsen(1) 53 President, Chief Operating Officer and Director of the
Company and the Bank
Raymond L. Anilionis 51 Vice President and Director of the Company and Director of
the Bank
Susan A. Putland 51 Vice President, Finance and Secretary of the Company and
Vice President, Financial Services and Secretary of the Bank
Hiram J. Welton 48 Treasurer and Chief Accounting Officer of the Company and
Vice President, Finance and Treasurer of the Bank
Dr. Donald B. Brown(1) 69 Director of the Company and the Bank
William F. Sievers(1) 54 Director of the Company and the Bank
</TABLE>
- ----------
(1) Member of the Audit Committee.
There are no family relationships among any of the directors and
executive officers of the Company or the Bank except that Thomas R. Kowalski is
the father of the Bank's Vice President of Real Estate and Director of the Bank,
Ryan Kowalski. All directors of the Company hold office until the next meeting
of shareholders or until their successors are elected and qualified.
THOMAS R. KOWALSKI has been Chairman of the Board and Chief
Executive Officer of the Company since he founded it in 1984, and has served in
the same positions for the Bank since November 1983. Since 1980 he has been
Chairman of the Board and Chief Executive Officer of the First State Bank of
Hotchkiss, a Colorado bank. Mr. Kowalski is also Chief Executive Officer, and
beneficial owner of approximately 97.0% of the outstanding stock, of Orchard
Valley Financial Corporation, the bank holding company that owns First State
Bank of Hotchkiss. From October 1972 through September 1992, Mr. Kowalski was
President of Realtek Company, a general contractor and real estate development
corporation he sold to Ryan Kowalski in 1992.
LARRY A. OLSEN has been President, Chief Operating Officer and
Director of the Company since 1997 and has served in the same positions of the
Bank since 1994. From 1989 to 1994, Mr. Olsen was the Chief Operating Officer of
Non-Legal Affairs for Codilis and Stawiarski, P.C., a law
44
<PAGE> 45
firm. From 1972 to 1988, Mr. Olsen was employed by Columbia Savings & Loan
Association, having served from 1986 to 1988 as President and Chief Operating
Officer.
RAYMOND L. ANILIONIS has been a Vice President and Director of the
Company since 1984 and a Director of the Bank since 1984. Since January 1994,
Mr. Anilionis has been the President of Landmark Realty Advisors, a real estate
consulting and appraisal company. From 1974 to December 1993, Mr. Anilionis was
employed in the mortgage banking and real estate development and management
industry by Mortgage Investment Company and Associated Investment Company in
various positions, including Senior Vice President. He is also the owner of
First Fidelity Service Corp., a real estate consulting firm.
SUSAN A. PUTLAND has been Vice President, Finance and Secretary of
the Company since 1997 and Vice President, Financial Services for the Bank since
1996. Ms. Putland also serves as an independent director of FirstPlus Funding
Corp. CITGO Funding Corporation and CITGO Funding Corporation II, special
purpose finance securitization entities. Ms. Putland was Vice President,
Structured Finance for The Chotin Group Corporation and its affiliates, a
privately-held securities issuer and investor, from 1989 to December 1995.
HIRAM J. WELTON has been Treasurer and Chief Accounting Officer of
the Company since 1997 and Vice President, Finance for the Bank since April
1998. Mr. Welton was Vice President of Red Rocks Federal Credit Union from 1996
to 1997. He was Vice President of Trepp Risk Management from 1994 to 1996. Prior
to 1994, Mr. Welton was Manager of GRA, Thompson, White & Co. P.A., an
accounting and consulting firm.
DR. DONALD B. BROWN has been a Director of the Company since 1997
and a Director of the Bank since 1989. Dr. Brown previously served as a Director
of the Company from 1989 to 1994. Dr. Brown has practiced medicine as an
endocrinologist since 1961.
WILLIAM F. SIEVERS has been a Director of both the Company and the
Bank since 1997. Since 1994, Mr. Sievers has been employed with Lucent
Technologies as Program Management Vice President in the Network Systems
Division. Previously, he worked for AT&T for over 30 years in several
capacities, including the senior management positions of Manufacturing Vice
President and Regional Vice President.
Directors of the Company have not been compensated by the Company
for their services, but in 1997 received $200 per Board meeting attended in
their capacities as Directors of the Bank. In 1998 each Director will receive
$500 for each board meeting attended. In addition, directors are reimbursed for
expenses incurred in attending board meetings.
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<PAGE> 46
EXECUTIVE COMPENSATION
Cash Compensation. The following table sets forth the cash
compensation paid by the Company to its Chairman/Chief Executive Officer for
1997, 1996 and 1995. No other executive officer of the Company received
compensation from the Company exceeding $100,000 during 1997, 1996 or 1995.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
Awards Payouts
--------------------------------------
Securities
Other Under-
Annual Restricted lying All Other
Compen- Stock Options/ LTIP Compen-
Name Salary Bonus sation Award(s) SARs Payouts sation
and Principal Position Year ($) ($) ($) ($) (#) ($) ($)
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Thomas R. Kowalski, 1997 150,000 275,000 -- -- -- -- --
Chairman of the Board and
Chief Executive Officer 1996 150,000 238,101 -- -- -- -- --
1995 150,000 143,500 -- -- -- -- --
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
Stock Incentive Plan. In August 1998, the Company adopted the 1998
Long-Term Incentive Plan (the "Incentive Plan"). The purpose of the Incentive
Plan is to provide continuing incentives to the Company's and its subsidiaries'
key employees, which may include officers and members of the Board of Directors.
The Incentive Plan provides for an authorization of 500,000 shares of Common
Stock to be reserved for issuance thereunder. Under the Incentive Plan, the
Company may grant to participants awards of stock options, restricted stock,
stock appreciation rights, performance shares or any combination thereof. The
Incentive Plan is to be administered by the Board of Directors or a Compensation
Committee of the Board of Directors composed of at least two non-employee
members. Subject to the terms of the Incentive Plan, the Board or Compensation
Committee determines, among other matters, the persons to whom awards are
granted and the terms of the awards.
Under the stock option component of the Incentive Plan, the Company
may grant both incentive stock options ("incentive stock options") intended to
qualify under Section 422 of the Internal Revenue Code of 1986, as amended (the
"Code"), and options which are not qualified as incentive stock options.
Incentive stock options may not be granted at an exercise price of less than the
fair market value of the Common Stock on the date of grant, while non-qualified
stock options may be granted at any exercise price. The exercise price may be
paid in cash, in shares of Common Stock (valued at fair market value at the date
of exercise) or by a combination of such means of payment, as may be determined
by the Board or Compensation Committee.
Under the restricted stock component of the Incentive Plan, the
Company may award shares of restricted stock upon payment of consideration as
determined by the Board or Compensation Committee. Upon the award, a restriction
period (not to exceed 10 years) and/or performance goal may be set. Subject to
the terms of each individual award, a restricted stock
46
<PAGE> 47
award is forfeited upon termination of employment by the recipient during the
restriction period and any consideration paid by the participant is returned.
An award of a stock appreciation right allows a recipient to receive
a cash payment or shares of Common Stock to the extent of any appreciation in
the book value or the fair market value of the Common Stock of the Company over
a specified period of time. Stock appreciation rights may also be awarded in
tandem with stock options, and recipients of such tandem awards may elect to
exercise the award as a stock option or as a stock appreciation right.
Under the performance share component of the Incentive Plan,
recipients are awarded a specified number of shares of Common Stock of the
Company subject to the recipient or the Company attaining specified performance
goals as the Board or Compensation Committee may determine. The Board or
Compensation Committee, under certain circumstances, may waive or modify
performance criteria on existing performance share awards.
The Incentive Plan will be discontinued in the event of the
dissolution or liquidation of the Company or in the event of a reorganization
(such as a merger, consolidation, or sale of substantially all of the assets of
the Company) in which the Company is not the surviving or acquiring company, or
in which the Company is or becomes a wholly-owned subsidiary of another company
after the effective date of the reorganization and no plan or agreement
respecting the reorganization is established which specifically provides for the
continuation of the Incentive Plan and the change, conversion, or exchange of
the Common Stock relating to existing awards under the Incentive Plan for
securities of another corporation. Upon the dissolution of the Incentive Plan,
all awards will become fully vested and all outstanding options and stock
appreciation rights will become immediately exercisable by the holder thereof.
In the case of any reclassification, recapitalization, stock
dividend, stock split or other similar event, the Board or Compensation
Committee is empowered to make adjustments as to the number and kind of
securities covered by each outstanding award and, where applicable to adjust the
exercise price thereunder.
On September 1, 1998, the Company granted options to purchase up to
58,500 shares of Common Stock to various officers, directors and employees of
the Company. All options are exercisable at a price of $10 per share, vest as to
30% of the shares on September 1, 2001, and vest as to the remaining 70% of the
shares on September 1, 2002. The Company also granted an option for 50,000
shares to Thomas R. Kowalski, Chairman and Chief Executive Officer of the
Company, which is exercisable at a price of $11 per share and vests as to 20% of
the shares on September 1, 2000, an additional 30% of the shares on September 1,
2001, and vests as to the remaining shares on September 1, 2002.
Stock Purchase Agreement. In December 1990, the Company, Thomas R.
Kowalski, Ryan R. Kowalski Trust, Realtek Company Profit Sharing Plan and Trust,
Thomas Investments and Orchard Valley Financial Corporation (the "Shareholders")
entered into a Stock Purchase Agreement in order to provide for the orderly
continuation of the affairs of the Company. The agreement, as amended, provides
that upon the death of Thomas R. Kowalski, the Shareholders will have the option
to require the Company to purchase their shares of Company Common Stock to the
extent the Company receives proceeds from a life insurance policy on the life of
Thomas R. Kowalski. As of June 30, 1998, the Shareholders held an aggregate of
3,271,650 shares of Common Stock. The agreement specifies that the purchase
price for the stock shall be the greater
47
<PAGE> 48
of 80% of the average closing bid price of the Common Stock of the Company on
any national securities exchange or recognized quotation system for five trading
days preceding the death of Thomas R. Kowalski or the appraised value as
determined by an appraiser selected mutually by the Company and the surviving
Shareholders.
INDEMNIFICATION
The Company's Articles of Incorporation provide that the board of
directors is authorized, without the need for shareholder approval, to indemnify
directors, officers and other persons without regard to whether or not such
powers are expressly provided for by Colorado law; provided, however, that the
exercise of such indemnification powers by the board of directors are consistent
with Colorado law. Generally under Colorado law, any director or officer who is
made or threatened to be made a party to any suit or proceeding may be
indemnified if such director or officer acted in good faith and had no
reasonable basis to believe that (i) in the case of conduct in an official
capacity with the Company, his or her conduct was in the Company's best
interests; and (ii) in all other cases, his or her conduct was at least not
opposed to the best interests of the Company; and, with respect to any criminal
proceeding, he or she had no reasonable cause to believe his or her conduct was
unlawful. Colorado law further provides that such indemnification is not
exclusive of any other rights to which such individuals may be entitled under a
company's Articles of Incorporation or Bylaws, or pursuant to any agreement,
insurance policies, vote of shareholders or disinterested directors or
otherwise.
In addition, the Company's Articles of Incorporation provide that to
the fullest extent permitted by Colorado law, the Company's directors will not
be liable for monetary damages for breach of the directors' fiduciary duty of
care to the Company and its shareholders. Notwithstanding such limitations on
liability, each director will continue to be subject to liability for breach of
the director's duty of loyalty to the Company or its shareholders, for acts or
omissions not in good faith or involving intentional misconduct or knowing
violations of law, for certain activities prohibited by Colorado law (relating
primarily to the unlawful payment of dividends, repurchase of stock or improper
loans or guarantees to directors), and for any transaction from which the
director derived an improper personal benefit. This provision also does not
affect a director's responsibilities under any other laws, such as the federal
securities laws or state or federal environmental laws.
There is no pending litigation or proceeding involving a director,
officer, employee or other agent of the Company as to which indemnification is
being sought. The Company is not aware of any other threatened litigation that
may result in claims for indemnification by any director, officer, employee or
other agent.
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<PAGE> 49
RELATED PARTY TRANSACTIONS
Nagrom LLC, a Colorado limited liability company, owns the building
and land in which the Company's principal office is located. The Company and the
Bank lease office space in the building. The lease began in 1995 and is for a
period of 10 years. The rent for 1997 was approximately $328,000, and will
increase 3.5% per year. The Board of Directors of the Company believes that the
rates are comparable to those which could be obtained from unaffiliated third
parties. Nagrom LLC is beneficially owned by Kowalski Capital LLC, a Colorado
limited liability company (71.0%), Raymond L. Anilionis (13.0%), an officer and
director of the Company, and Med Partnership (16.0%) an entity controlled by
Warren P. Cohen, a director of the Bank. Kowalski Capital LLC is owned 95.0% by
the Thomas R. Kowalski Irrevocable Trust. The beneficiaries of the trust are
Ryan Kowalski (the adult son of Thomas R. Kowalski) and Ryan Kowalski's minor
daughter. The remaining 5.0% of Kowalski Capital LLC is owned by Respond Corp.,
of which Thomas R. Kowalski is the sole shareholder.
1996 Newton LLC, a Colorado limited liability company, leases space
to the Bank for its branch at 32nd Avenue and Newton, Denver. 1996 Newton LLC is
owned by Kowalski Capital (50.0%), Raymond L. Anilionis (25.0%) and the Warren
P. Cohen Beneficial Trust (25.0%). The lease commenced in May 1996 and runs for
a period of 10 years. Rent is approximately $30,300 for the period of May 1997
through May 1998, and incrementally increases to $36,000 per year for the last
five years of the lease. The Board of Directors of the Company believes that the
rates are comparable to those which could be obtained from unaffiliated third
parties.
Osage 3734, LLC, a Colorado limited liability company, will lease
space to the Bank for its new centralized processing center at 3734 Osage
Street, Denver. Osage 3734, LLC is owned equally by Raymond L. Anilionis, Ryan
Kowalski, Vice President and Director of the Bank and son of Thomas R. Kowalski,
and Respond Corporation, an entity owned by Thomas R. Kowalski. The building is
currently undergoing renovations to suit the needs of the Bank. The Bank expects
to occupy the building in 1999 under the terms of a ten-year triple net lease.
The Board of Directors of the Company believes that the leasing terms are
comparable to those which could be obtained from unaffiliated third parties.
In July 1995, Thomas R. Kowalski, Raymond L. Anilionis and Warren P.
Cohen (the "Guarantors"), all of whom are officers and/or directors of the
Company and/or the Bank and significant shareholders of the Company, entered
into an agreement with the Company in connection with their personal guarantee
of a $3.0 million loan to the Bank from First Interstate Bank of Denver. In
return for the guarantee, the Company agreed to indemnify the Guarantors for all
liabilities, costs or expenses relating to the guarantee and to provide
additional compensation to the Guarantors. The additional compensation has
consisted of an aggregate fee, allocated among the three Guarantors, equal to
1.5% of the outstanding balance of the loan on each anniversary date plus a
performance bonus based on earnings of the Bank as specified in the agreement.
The loan was repaid in February 1998. The fees paid to the Guarantors from 1995
through June 30, 1998 in the aggregate were as follows: Mr. Kowalski - $497,965;
Mr. Anilionis - $121,191; and Mr. Cohen - $121,191. No further fees will be paid
to the Guarantors.
In March 1997, the Bank entered into a Consulting Agreement with
First Fidelity Service Corp. ("First Fidelity"), a consulting firm which is
wholly-owned by Raymond L. Anilionis. The agreement provides that First Fidelity
will render services regarding bank site acquisitions, real
49
<PAGE> 50
estate acquisitions, management of construction projects, evaluation and
assistance with negotiations of complex loans and work out transactions and any
other services reasonably requested by the Bank. The term of the agreement is
for one year, but automatically renews each year unless terminated by either
party upon 30 days notice. Pursuant to the terms of the consulting agreement,
First Fidelity is paid $5,000 per month for its services.
The Bank has entered into certain loan participations with First
State Bank of Hotchkiss, an entity controlled by Thomas R. Kowalski. Approximate
loan principal balances outstanding under these participations are summarized as
follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
JUNE 30, ------------------------
1998 1997 1996
-------- -------- ---------
(In thousands)
<S> <C> <C> <C>
Participations sold ............... $ 10,072 $ 8,227 $ 10,916
Participations purchased .......... 1,471 3,459 250
</TABLE>
The Bank has also sold loan participations to shareholders, officers
and directors of the Company on the same terms as sold to third parties. At June
30, 1998, the participations sold to related parties were approximately $3.5
million. At December 31, 1997 and 1996, the participations sold to related
parties were approximately $2.4 million and $7.9, respectively.
In September 1993 the Bank entered into an agreement with First
State Bank of Hotchkiss to purchase its branching rights. In total, the Bank
paid First State Bank of Hotchkiss $2,500 a month over 40 months ending in
September 1997.
The officers, directors and principal shareholders of the Company
and members of their immediate families and businesses in which they hold
controlling interests are customers of the Bank. Credit transactions with these
parties are subject to review by the Bank's board of directors. All outstanding
loans and extensions of credit by the Bank to these parties were made in the
ordinary course of business on substantially the same terms, including interest
rates and collateral, as those prevailing at the time for comparable
transactions with other persons, and in the opinion of management did not
involve more than the normal risk of collectibility or present other unfavorable
features. At June 30, 1998, the aggregate balance of loans and advances under
existing lines of credit to these parties was approximately $0.4 million or 0.3%
of the Bank's total loans.
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<PAGE> 51
PRINCIPAL AND SELLING SHAREHOLDERS
The following table sets forth certain information regarding the
beneficial ownership of the Company's Common Stock as of September 1, 1998, and
as adjusted to reflect the sale of the Common Stock offered hereby, for: (a)
each of the Company's directors; (b) each person known by the Company to own
beneficially more than 5% of the outstanding Common Stock; (c) each executive
officer; and (d) the Company's executive officers and directors as a group. All
information with respect to beneficial ownership by the Company's directors,
officers or beneficial owners has been furnished by the respective director,
officer or beneficial owners, as the case may be. Except as otherwise described
in the notes below, the following beneficial owners have sole voting power and
sole investment power with respect to all Common Stock set forth opposite their
names.
<TABLE>
<CAPTION>
Company Common Shares Beneficially Owned
-----------------------------------------------------------------------------
Before the After the
Offering Shares Offering
-------------------------- Being --------------------------
Beneficial Owner Number Percent Offered Number Percent
---------------- ------ ------- ------- ------ -------
<S> <C> <C> <C> <C> <C>
Thomas R. Kowalski................................. 3,271,650(1) 51.1% 250,000 3,021,650 39.7%
8100 East Arapahoe Road
Englewood, Colorado 80112
Raymond L. Anilionis............................... 642,780(2) 10.0% -- 642,780 8.4%
9034 East Easter Place, Suite 202
Englewood, Colorado 80112
Warren P. Cohen ................................... 712,500 11.1% -- 712,500 9.4%
595 South Broadway, Suite 200
Denver, Colorado 80209
Orchard Valley Financial Corporation............... 631,950(3) 9.9% -- 631,950 8.3%
8100 East Arapahoe Road
Englewood, Colorado 80112
Realtek Company Employees' Profit.................. 614,820(3) 9.6% -- 614,820 8.1%
Sharing Plan and Trust
8100 East Arapahoe Road, Suite 214
Englewood, Colorado 80112
Vernon J. Purdy.................................... 468,750 7.3% -- 468,750 6.2%
1900 East Girard, Suite 509
Englewood, Colorado 80110
William D. Kenny................................... 390,000 6.1% -- 390,000 5.1%
38 Eagle Drive
Littleton, Colorado 80123
Larry A. Olsen..................................... 151,590 2.4% -- 151,590 2.0%
8100 East Arapahoe Road
Englewood, Colorado 80112
Dr. Donald B. Brown................................ -- -- -- -- --
4545 East Ninth Avenue
Denver, Colorado 80220
William F. Sievers................................. -- -- -- -- --
26 West Dry Creek Circle, Suite 750
Littleton, Colorado 80120
All executive officers and
directors as a group (seven persons) ............ 4,066,020 63.5% 250,000 3,816,020 50.2%
</TABLE>
- ------------
(1) Of this amount, 1,594,800 shares are owned directly, and all other
shares owned indirectly through entities or persons controlled by
Mr. Kowalski.
(2) Of this amount, 549,000 shares are owned directly, and all other
shares are owned by an entity controlled by Mr. Anilionis.
(3) Due to Mr. Kowalski's significant beneficial ownership of the named
entities, these shares are included in the ownership of Thomas R.
Kowalski in the table.
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<PAGE> 52
SUPERVISION AND REGULATION
GENERAL
The Bank is chartered under federal law by the Office of Thrift
Supervision ("OTS"). It is a member of the Federal Home Loan Bank ("FHLB")
System, and its deposit accounts are insured up to legal limits by the Federal
Deposit Insurance Corporation ("FDIC") under the Bank Insurance Fund ("BIF").
The OTS is charged with overseeing and regulating the Bank's activities and
monitoring its financial condition. This regulatory framework sets parameters
for the Bank's activities and operations and grants the OTS extensive discretion
with regard to its supervisory and enforcement powers and examination policies.
The Bank files periodic reports with the OTS concerning its activities and
financial condition, must obtain OTS approval prior to entering into certain
transactions or initiating new activities, and is subject to periodic
examination by the OTS to evaluate the Bank's compliance with various regulatory
requirements.
The Company is a unitary savings and loan holding company and, like
the Bank, is subject to regulation by the OTS. As part of this regulation, the
Company is required to file certain reports with, and is subject to periodic
examination by, the OTS.
PENDING FINANCIAL MODERNIZATION LEGISLATION
In June 1998, the Senate began hearings on the legislation on a
sweeping financial modernization bill, H.R. 10, "The Financial Services Act of
1998", which was passed by the U.S. House of Representatives. If passed by the
Senate, the bill would not become law unless it is signed by the President,
whose Administration has commented publicly that it will not support the
legislation in the form passed by the House. Accordingly, whether the bill will
pass in the near future remains uncertain, and the ultimate form the legislation
might take if enacted cannot be predicted at this time.
The bill, among other things, addresses the ongoing debate
concerning mixing banking and commerce. Under the proposal, banks could
affiliate with insurance and securities companies in a holding company
structure, subject to functional regulation. The proposal provides for further
study of the issues relating to merging the SAIF and BIF. If adopted, the
legislation would represent the most significant overhaul of financial services
laws since the 1930's when the Glass- Steagall Act of 1933 was enacted.
With respect to the thrift industry, H.R.10 does not contain
provisions eliminating the federal thrift charter and requiring all federal
thrifts to convert to national banks within two years. The version of the bill
passed by the House allows unitary thrift holding companies to continue
operating, but prohibits the establishment of new unitary thrifts if the
application for unitary thrift status is filed after March 31, 1998. In its
review of the bill, the Senate has changed this date to September 3, 1998. A
unitary thrift holding company is defined as a company that owns one savings
association, provided the savings association that it owns meets the "Qualified
Thrift Lender" test. See "--Federal Savings Association Regulation--Qualified
Thrift Lender Test." The Company is a unitary thrift holding company, and as
such it generally is not restricted under existing laws as to the types of
business activities in which it may engage. See "--Holding Company Regulation."
The Company filed its application to become a savings and loan holding company
on April 14, 1998. Accordingly, if the House version of H.R. 10 is enacted into
law and the March 31, 1998 grandfather date is retained, the Company could lose
its unitary thrift holding company status, thereby subjecting the Company
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<PAGE> 53
to more restrictive regulation of its activities. Considering the Senate's
revision of this date, management of the Company believes that the Company's
status as a unitary thrift holding company will not be affected by the bill.
However, if the bill is enacted, the form of the final legislation cannot be
predicted at this time, including the grandfather date for unitary savings and
loan holding company powers. Prior versions of the bill would have eliminated
the federal thrift charter, while allowing existing unitary thrift holding
companies to retain their status and affiliations with nonfinancial enterprises
and to engage in all currently permissible activities.
FEDERAL SAVINGS ASSOCIATION REGULATION
Business Activities. The activities of savings associations are
governed by the Home Owners' Loan Act of 1933, as amended (the "HOLA"), and, in
certain respects, the Federal Deposit Insurance Act (the "FDI Act"). The HOLA
and the FDI Act were amended by the Financial Institutions Reform, Recovery and
Enforcement Act of 1989 ("FIRREA") and the Federal Deposit Insurance Corporation
Improvement Act of 1991 ("FDICIA"). FIRREA was enacted for the purpose of
resolving problem savings associations, establishing a new thrift insurance
fund, reorganizing the regulatory structure applicable to savings associations,
and imposing bank-like standards on savings associations. FDICIA, among other
things, requires that federal banking regulators intervene promptly when a
depository institution experiences financial difficulties, mandates the
establishment of a risk-based deposit insurance assessment system and requires
imposition of numerous additional operational standards and restrictions
regarding safety and soundness. FIRREA and FDICIA both contain provisions
affecting numerous aspects of the operations and regulations of
federally-insured savings associations and empowers the OTS and the FDIC, among
other agencies, to promulgate regulations implementing its provisions.
Qualified Thrift Lender Test. Savings associations are required to
satisfy a qualified thrift lender test ("QTL" test) by (i) maintaining 65% of
their portfolio assets (defined as all assets minus intangible assets, property
used by the association in conducting its business and liquid assets equal to
20% of total assets) in certain "qualified thrift investments" (primarily
residential mortgages and related investments, including certain mortgage-backed
securities, along with small business, credit card, agriculture and education
loans) on a monthly basis in nine out of every twelve months, or (ii)
maintaining a similar-but different 60% asset test under the Internal Revenue
Code.
If a federal savings association fails the QTL test, it must convert
to a bank or conform its activities to those permitted to a national bank (but
which activities also are not inconsistent with the powers permitted to a
savings association), particularly as they relate to investments, branching and
dividends, and it also becomes ineligible for new advances from any Federal Home
Loan Bank. A federal savings association that fails the QTL test may requalify.
As of June 30, 1998, the Bank satisfied the QTL test.
Branching. A federally-chartered savings association, like the Bank,
can establish branches in any state or states in the United States and its
territories, subject to a few exceptions. The exercise by the OTS of its
authority to permit interstate branching by federal savings associations is
preemptive of any state law purporting to address the subject of branching by a
federal savings association.
Commercial and Consumer Lending Authority. Federal savings
associations may lend up to 20% of their assets in commercial business loans
(i.e., secured or unsecured loans for commercial, corporate, business or
agricultural purposes), provided that amounts in excess of 10%
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may be used only for small business loans and, subject to OTS approval for a
higher amount, up to 400% of their capital in commercial real estate loans. In
addition, federal savings associations are permitted to make consumer loans
(i.e., loans for personal, family or household purposes) in an amount not to
exceed 35% of their assets. Credit card and educational loans are exempted from
any percentage of asset limitations applicable to consumer loans.
Loans to One Borrower. Savings associations are generally subject to
the national bank limits regarding loans to one borrower, meaning they may not
make a loan or extend credit to a single or related group of borrowers in excess
of 15% of the association's unimpaired capital and surplus, where the borrowing
is not fully secured by readily-marketable collateral. An additional amount may
be lent, equal to 10% of the association's unimpaired capital and surplus, if
such additional borrowing is secured by readily-marketable collateral at least
equal to the amount of such additional funds. At June 30, 1998, the Bank had no
outstanding loans or commitments that exceeded the loans to one borrower limit
at the time made or committed.
Enforcement. The OTS has primary enforcement responsibility over
savings associations and has the authority to bring enforcement action against
all "institution-related parties," including stockholders, and any attorneys,
appraisers and accountants who knowingly or recklessly participate in wrongful
action likely to have an adverse effect on an insured association. Civil
penalties cover a wide range of violations and actions. Criminal penalties for
most financial association crimes include fines and imprisonment. In addition,
regulators have substantial discretion to impose enforcement action on an
association that fails to comply with its regulatory requirements, particularly
with respect to amounts of capital. Possible enforcement action ranges from
requiring the preparation of a capital plan or imposition of a capital directive
to receivership, conservatorship or the termination of deposit insurance. Under
the FDI Act, the FDIC has the authority to recommend to the Director of OTS
enforcement action be taken with respect to a particular savings association. If
action is not taken by the Director, the FDIC has authority to take enforcement
action under certain circumstances.
Assessments. Savings associations are required by OTS regulation to
pay assessments to the OTS to fund the operations of the OTS. In the past, the
general assessment paid on a semi-annual basis has been computed based upon the
savings association's total assets, including consolidated subsidiaries, as
reported in the association's latest quarterly thrift financial report. The OTS
announced in August 1998 that it intends to propose a regulation revising its
assessment schedule, so that assessments will be based on the asset size and
financial condition of the institution and the complexity of its operations.
Federal Home Loan Bank System. The Bank is a member of the FHLB
System, which consists of 12 regional FHLB's. The FHLB provides a central credit
facility primarily for member associations. The Bank, as a member of the
FHLB-Topeka, is required to acquire and hold shares of capital stock in that
FHLB in an amount at least equal to 1% of the aggregate principal amount of its
unpaid residential mortgage loans and similar obligations at the beginning of
each year, or 1/20th of its advances from the FHLB-Topeka, whichever is greater.
The Bank is in compliance with this requirement, with an investment in
FHLB-Topeka stock at June 30, 1998 of $470,000. FHLB advances must be secured by
specified types of collateral and may be obtained only for the purpose of
purchasing or funding new residential housing finance assets.
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OTS Capital Requirements. The OTS capital regulations require
savings associations to meet three capital standards: a 1.5% tangible capital
standard, a 3% leverage ratio (or core capital ratio) and an 8% risk-based
capital standard.
Tangible capital is defined as common stockholders' equity
(including retained earnings), noncumulative perpetual preferred stock and
related earnings, certain non-withdrawable accounts and pledged deposits of
mutual savings associations, and minority interests in equity accounts of fully
consolidated subsidiaries, less (i) intangible assets (other than purchased
credit card relationships and core deposit intangibles), (ii) non-mortgage
servicing assets, (iii) purchased credit card relationships, (iv) the amount of
mortgage servicing assets in excess of the lesser of 90 percent of their fair
market value, determined pursuant to a special OTS valuation formula, or 100
percent of their remaining unamortized book value, subject to certain aggregate
limits applicable to inclusion of servicing assets in tangible capital, and (v)
certain equity and debt investments in "non-qualifying subsidiaries"
(subsidiaries engaged in activities not permissible for a national bank). For
purposes of determining capital under OTS capital standards, the term
"intangible assets" means those assets considered to be intangible under
generally accepted accounting principles, such as goodwill, core deposit
premiums, purchased credit card relationships and favorable leaseholds.
Servicing assets are not intangible assets, and interest-only strips receivable
and other non-security financial instruments are not intangible assets under
this definition.
Core capital (or leverage) ratio is the ratio of core capital to
adjusted tangible assets. Core capital is defined as common stockholders' equity
(including retained earnings), certain noncumulative perpetual preferred stock
and related surplus, minority interests in equity accounts of consolidated
subsidiaries, certain non-withdrawable accounts and pledged deposits of mutual
savings associations, certain amounts of goodwill resulting from prior
regulatory accounting practices, less (i) intangible assets (other than
purchased credit card relationships and core deposit intangibles), (ii) the
amount of servicing assets in excess of the lesser of 90 percent of their fair
market value, determined pursuant to a special OTS valuation formula, or 100
percent of their remaining unamortized book value, subject to certain aggregate
limits applicable to inclusion of servicing assets and sub-limits applicable to
inclusion of non-mortgage-related servicing assets in core capital, and (iii)
certain equity and debt investments in non-qualifying subsidiaries, such as the
proposed real estate investment and title subsidiaries.
The OTS' risk-based capital standard requires that savings
associations maintain a ratio of total capital (which is defined as core capital
and supplementary capital) to risk-weighted assets of 8%. In calculating total
capital, a savings association must deduct reciprocal holdings of depository
institution capital instruments, all equity investments and that portion of land
loans and nonresidential construction loans in excess of 80% loan-to-value ratio
and its interest rate risk component (as discussed below), in addition to the
assets that must be deducted in calculating core capital. In determining the
amount of risk-weighted assets, all assets, including certain off- balance sheet
assets, are multiplied by a risk-weight of 0% to 100%, as assigned by the OTS
capital regulation based on the risks OTS believes are inherent in the type of
asset. Also, 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. Savings associations with
assets of less than $300 million and risk-based capital ratios in excess of 12%
are not subject to the interest rate risk component. As of June 30, 1998, the
Bank was not subject to interest rate risk exposure for purposes of calculating
its risk-based capital requirements.
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The components of core capital are equivalent to those discussed
above under the 3% leverage standard. The components of supplementary capital
include cumulative preferred stock, long-term perpetual preferred stock, mutual
capital certificates, certain non-withdrawable accounts and pledged deposits,
certain net worth certificates, income capital certificates, certain perpetual
subordinated debt, mandatory convertible subordinated debt, certain
intermediate-term preferred stock, certain mandatorily redeemable preferred
stock and allowance for loan and lease losses (up to 1.25% of risk-weighted
assets). Allowance for loan and lease losses includable in supplementary capital
is limited to a maximum of 1.25%. Overall, the amount of capital counted toward
supplementary capital cannot exceed 100% of core capital. The table below sets
forth the Bank's capital ratios at June 30, 1998.
<TABLE>
<CAPTION>
AT JUNE 30, 1998
-----------------------
MINIMUM
RATIO ACTUAL REQUIRED
----- -------- --------
<S> <C> <C>
Tangible capital............................. 10.64% 1.50%
Core (Tier 1) capital........................ 10.64% 3.00%
Risk-Based capital........................... 13.61% 8.00%
</TABLE>
In 1991, the OTS issued a proposal to amend its regulatory capital
regulation to establish a new framework for assessing capital adequacy. The new
regulation has yet to be enacted, and if enacted in final form as proposed,
management does not believe that the proposed regulation would have a material
effect on the Bank.
Liquidity. The Bank is required to maintain an average daily balance
of liquid assets (e.g., cash, accrued interest on liquid assets, certain time
deposits, savings accounts, bankers' acceptances, specified United States
Government, state or federal agency obligations, shares of certain mutual funds
and certain corporate debt securities and commercial paper) equal to not less
than a specified percentage of the average daily balance of its net withdrawal
deposit accounts plus short-term borrowings. This liquidity requirement may be
changed from time to time by the OTS to any amount within the range of 4% to 10%
depending upon economic conditions and the savings flows of member associations;
this requirement is currently 4%.
Insurance of Deposit Accounts and Deposit Insurance Premiums. FDICIA
required the FDIC to establish a risk-based assessment system for insured
depository associations that takes into account the risks attributable to
different categories and concentrations of assets and liabilities. Under the
rule, the FDIC assigns an association to one of three capital categories
consisting of (i) "well capitalized," (ii) "adequately capitalized" or (iii)
"undercapitalized," and one of three supervisory subcategories consisting of
Group "A" (for financially solid institutions with only a few minor weaknesses),
Group "B" (for those institutions with weaknesses which, if uncorrected could
cause substantial deterioration of the institution and increase the risk to the
deposit insurance fund) and Group "C" (for those institutions with a substantial
probability of loss to the fund absent effective corrective action). The
supervisory subgroup to which an association is assigned is based on a
supervisory evaluation provided to the FDIC by the association's primary federal
regulator and information that the FDIC determines to be relevant to the
association's financial condition and the risk posed to the deposit insurance
funds (which may include, if applicable, information provided by the
association's state supervisor). An association's assessment rate depends on the
capital category and supervisory category to which it is assigned. There are
nine assessment risk classifications (i.e., combinations of capital groups and
supervisory subgroups) to which different
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assessment rates are applied. Assessment rates range from 23 basis points for an
association in the highest category (i.e., well-capitalized and healthy) to 31
basis points for an association in the lowest category (i.e., undercapitalized
and of substantial supervisory concern).
Although the Bank recently converted its charter from a Colorado
state-chartered commercial bank to a federal savings bank, the Bank will
continue as a member of the Bank Insurance Fund ("BIF"), rather than the Savings
Association Insurance Fund ("SAIF").
On September 30, 1996, President Clinton signed the Deposit
Insurance Funds Act of 1996 ("DIFA") that was part of the omnibus spending bill
enacted by Congress at the end of its 1996 session. DIFA mandated, among other
things, the merger of the SAIF and BIF, effective January 1, 1999, but only if
no insured depository institution is a savings association on that date. The
combined deposit insurance fund, if the funds are merged, will be called the
"Deposit Insurance Fund," or "DIF."
Prompt Corrective Regulatory Action. FDICIA establishes a system of
prompt corrective action to resolve the problems of undercapitalized
associations. Under this system, the OTS is required to take certain supervisory
actions against undercapitalized associations, the severity of which depends
upon the association's degree of undercapitalization. Generally, subject to a
narrow exception, FDICIA requires the OTS to appoint a receiver or conservator
for an association that is critically undercapitalized. FDICIA authorizes the
OTS to specify the ratio of tangible equity to assets at which an association
becomes critically undercapitalized and requires that ratio be no less than 2%
of assets.
Under OTS regulations, a savings association is considered to be
undercapitalized if it has risk-based capital of less than 8% or has a Tier 1
risk-based capital ratio that is less than 4% or has a leverage ratio that is
less than 4% or has a leverage ratio less than 3% if the savings association is
rated composite 1 under the composite numerical rating assigned to the
association by the OTS under the Uniform Financial Institutions Rating System or
an equivalent rating under a comparable rating system adopted by the OTS in the
most recent rating of which the association has been notified in writing (the
"UFIRS"). A savings association that has risk-based capital less than 6% or a
Tier 1 risk-based capital ratio that is less than 3% or a leverage ratio that is
less than 3% would be considered to be "significantly undercapitalized." A
savings association that has a tangible equity to total assets ratio equal to or
less than 2% would be deemed to be "critically undercapitalized." Generally, a
capital restoration plan must be filed with the OTS within 45 days of the date
an association receives notice that it is undercapitalized, significantly
undercapitalized or critically undercapitalized. In addition, numerous mandatory
supervisory actions become immediately applicable to the association, including,
but not limited to, restrictions on growth, investment activities, capital
distributions, and affiliate transactions. In addition, the OTS could issue a
capital directive to the savings association that includes additional
discretionary restrictions on the savings association.
Limitation on Capital Distributions. The OTS regulations impose
limitations upon all capital distributions by savings associations, such as cash
dividends, payments to repurchase or otherwise acquire its shares, payments to
shareholders of another association in a cash-out merger and other distributions
charged against capital. The regulations establish three tiers of associations.
An association that exceeds all fully phased-in capital requirements before and
after the proposed capital distribution ("Tier 1 Association") and has not been
advised by the OTS that it is in need of more than normal supervision, could,
after prior notice but without the approval of the OTS, make
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capital distributions during a calendar year up to the higher of (a) 100% of its
net income to date during the calendar year plus the amount that would reduce by
one-half its "surplus capital ratio" (the excess capital over its fully
phased-in capital requirements) at the beginning of the calendar year or (b) 75%
of its net reserve over the most recent four-quarter period. Any additional
capital distributions would require prior regulatory approval. In computing the
association's permissible percentage of capital distributions, previous
distributions made during the prior four quarter period must be included. As of
June 30, 1998, the Bank met the requirements of a Tier 1 Association. In the
event the Bank's capital fell below its fully phased-in requirement or the OTS
notified it that it was in need of more than normal supervision, the Bank's
ability to make capital distributions could be restricted. In addition, the OTS
could prohibit a proposed capital distribution by any association, which would
otherwise be permitted by regulation, if the OTS determines that such
distribution would constitute an unsafe or unsound practice.
On March 9, 1998, the OTS issued a Notice of Proposed Rulemaking
that, if adopted in final form, would amend its capital distribution regulation.
The proposed rule updates, simplifies, and streamlines the capital distribution
regulation to reflect OTS's implementation of the system of prompt corrective
action established under FDICIA.
Community Reinvestment. The OTS, the FDIC, the Federal Reserve Board
and the OCC have jointly issued a final rule (the "Final Rule") under the
Community Reinvestment Act (the "CRA"). The Final Rule eliminates the existing
CRA regulation's 12 assessment factors and substitutes a performance based
evaluation system. The Final Rule was phased in over a period of time and became
fully effective by July 1, 1997. Under the Final Rule, an institution's
performance in meeting the credit needs of its entire community, including low-
and moderate- income areas, as required by the CRA, is generally evaluated under
three tests: the "lending test," the "investment test," and the "service test."
An independent financial institution with assets of less than $250
million, or a financial institution with assets of less than $250 million that
is a subsidiary of a holding company with assets of less than $1 billion, will
be evaluated under a streamlined assessment method based primarily on its
lending record. As of June 30, 1998, the Company's assets were approximately
$200 million, thereby meeting the streamlined assessment method. The streamlined
test considers an institution's loan-to-deposit ratio adjusted for seasonal
variation and special lending activities, its percentage of loans and other
lending related activities in the assessment area, its record of lending to
borrowers of different income levels and businesses and farms of different
sizes, the geographic distribution of its loans, and its record of taking
action, if warranted, in response to written complaints. In lieu of being
evaluated under the three assessment tests or the streamlined test, a financial
institution can adopt a "strategic plan" and elect to be evaluated on the basis
of achieving the goals and benchmarks outlined in the strategic plan.
Failure to comply with the CRA's regulations could jeopardize future
growth plans of the Bank. The Bank is currently in compliance with the CRA.
Transactions with Related Parties. The Bank's authority to engage in
transactions with related parties or "affiliates," (i.e., any company that
controls or is under common control with an association) including the Company
and its non-savings-association subsidiaries or to make loans to certain
insiders, is limited by the Federal Reserve Act ("FRA"). The FRA limits the
aggregate amount of transactions with any individual affiliate to 10% of the
capital and surplus of the savings association and also limits the aggregate
amount of transactions with all affiliates to 20% of the
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savings association's capital and surplus. Certain transactions with affiliates
are required to be secured by collateral in an amount and of a type described in
the FRA and the purchase of low quality assets from affiliates is generally
prohibited. Also, certain transactions with affiliates, including loans and
asset purchases, must be on terms and under circumstances, including credit
standards, that are substantially the same or at least as favorable to the
association as those prevailing at the time for comparable transactions with
non-affiliated companies. In the absence of comparable transactions, such
transactions may only occur under terms and circumstances, including credit
standards, that in good faith would be offered to or would apply to
non-affiliated companies. Notwithstanding the above, FIRREA prohibits any
savings association from lending to any affiliate that is engaged in activities
that are not permissible for bank holding companies under Section 4(c) of the
Bank Holding Company Act ("BHC Act"). Further, no savings association may
purchase the securities of any affiliate other than a subsidiary.
Real Estate Lending Standards. The OTS and the other federal banking
agencies have uniform regulations prescribing real estate lending standards. The
OTS regulation requires each savings association to establish and maintain
written internal real estate lending standards consistent with safe and sound
banking practices and appropriate to the size of the institution and the nature
and scope of its real estate lending activities. The policy must also be
consistent with accompanying OTS guidelines, which include maximum loan-to-value
ratios for the following types of real estate loans: raw land (65%), land
development (75%), nonresidential construction (80%), improved property (85%)
and one- to four-family residential construction (85%). Owner-occupied one- to
four-family mortgage loans and home equity loans do not have maximum
loan-to-value ratio limits, but those with a loan-to-value ratio at origination
of 90% or greater are to be backed by private mortgage insurance or readily
marketable collateral. Institutions are also permitted to make a limited amount
of loans that do not conform to the proposed loan-to-value limitations so long
as such exceptions are appropriately reviewed and justified. The guidelines also
list a number of lending situations in which exceptions to the loan-to-value
standard are justified.
Standards for Safety and Soundness. As required by FDICIA and
subsequently amended by the Riegle Community Development and Regulatory
Improvement Act of 1994, the federal banking regulators adopted interagency
guidelines establishing standards for safety and soundness for depository
institutions on matters such as internal controls, loan documentation, credit
underwriting, interest-rate risk exposure, asset growth, compensation and other
benefits and asset quality and earnings (the "Guidelines"). The agencies expect
to request a compliance plan from an institution whose failure to meet one or
more of the standards is of such severity that it could threaten the safe and
sound operation of the institution. FDIC regulations enacted under FDICIA also
require all depository institutions to be examined annually by the banking
regulators and depository institutions having $500 million or more in total
assets to have an annual independent audit, an audit committee comprised solely
of outside directors, and to hire outside auditors to evaluate the institution's
internal control structure and procedures and compliance with laws and
regulations relating to safety and soundness. The FDIC, in adopting the
regulations, reiterated its belief that every depository institution, regardless
of size, should have an annual independent audit and an independent audit
committee.
Proposed Rules Governing Financial Derivatives. In April 1998, the
OTS published a Notice of Proposed Rulemaking that, if adopted in final form,
would apply to all financial derivatives and would replace its regulations on
forward commitments, futures transactions, and financial options transactions.
The proposal would continue to permit a savings association to engage in
transactions involving financial derivatives to the extent that these
transactions are authorized
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under applicable law and are otherwise safe and sound. In addition, the proposed
rule would describe the responsibilities of a savings association's board of
directors and management with respect to financial derivatives. The rule defines
a financial derivative as a financial contract whose value depends on the value
of one or more underlying assets, indices, or reference rates. The most common
types of financial derivatives are futures, forward commitments, options, and
swaps. A mortgage derivative security, such as a collateralized mortgage
obligation or a real estate mortgage investment conduit, is not a financial
derivative under the proposed rule. As of June 30, 1998, the Bank did not own
any financial derivatives as defined under the proposed rule.
FEDERAL RESERVE SYSTEM
The Federal Reserve Board regulations require savings institutions
to maintain non-interest-earning reserves against their transaction accounts
(primarily NOW and regular checking accounts), non-personal time deposits (those
which are transferable or held by a person other than a natural person) with an
original maturity of less than one and one-half years and certain money market
accounts. The Federal Reserve Board regulations generally require that reserves
of 3% must be maintained against aggregate transaction accounts of $47.8 million
or less (subject to adjustment by the Federal Reserve Board) and an initial
reserve of $1.4 million plus 10% against that portion of total transaction
accounts in excess of $47.8 million. The first $4.7 million of otherwise
reservable balances (subject to adjustments by the Federal Reserve Board) are
exempted from the reserve requirements. As of June 30, 1998, the Bank is in
compliance with the foregoing requirements.
The balances maintained to meet the reserve requirements imposed by
the Federal Reserve Board may be used to satisfy liquidity requirements by the
OTS. Because required reserves must be maintained in the form of either vault
cash, a non-interest-bearing account at a Federal Reserve Bank or a pass-through
account as defined by the Federal Reserve Board, the effect of this reserve
requirement is to reduce the Bank's interest-earning assets.
FHLB System members are also authorized to borrow from the Federal
Reserve "discount window," but Federal Reserve Board regulations require
institutions to exhaust all FHLB sources before borrowing from a Federal Reserve
Bank.
HOLDING COMPANY REGULATION
The Company is considered a non-diversified, savings and loan
holding company within the meaning of the HOLA, has registered as a savings and
loan holding company with the OTS and is subject to OTS regulations,
examinations, supervision and reporting requirements. In addition, the OTS has
enforcement authority over the Company and its non-savings association
subsidiaries. Among other things, this authority permits the OTS to restrict or
prohibit activities that are determined to be a serious risk to the subsidiary
savings association.
The HOLA prohibits a savings and loan holding company, directly or
indirectly, or through one or more subsidiaries, from (i) acquiring control of,
or acquiring by merger or purchase of assets, another savings association or
holding company thereof, without prior written approval of the OTS; (ii)
acquiring or retaining, with certain exceptions, more than 5% of a
non-subsidiary savings association, a non-subsidiary holding company, or a
non-subsidiary company engaged in activities other than those permitted by the
HOLA; or (iii) acquiring or retaining control of an
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institution that is not federally insured. In evaluating applications by holding
companies to acquire savings associations, the OTS must consider the financial
and managerial resources and future prospects of the company and institution
involved, the effect of the acquisition on the risk to the insurance funds, the
convenience and needs of the community and competitive factors.
As a unitary savings and loan holding company, the Company generally
is not restricted under existing laws as to the types of business activities in
which it may engage, provided that its savings association subsidiary continues
to satisfy the QTL test. Upon any acquisition by the Company of a savings
association or a state-chartered BIF-insured savings bank meeting the QTL test
that is deemed to be a savings institution by OTS, except for a supervisory
acquisition, the Company would become a multiple savings and loan holding
company (if the acquired institution is held as a separate subsidiary) and would
be subject to extensive limitations on the types of business activities in which
it could engage. The HOLA, as amended by the FIRREA, limits the activities of a
multiple savings and loan holding company and its non-insured institution
subsidiaries primarily to activities permissible for bank holding companies
under Section 4(c)(8) of the BHC Act, subject to the prior approval of the OTS,
and activities in which multiple savings and loan holding companies were
authorized by regulation to engage in on March 5, 1987. Such activities include,
among others, mortgage banking, consumer finance, operation of a trust company,
and certain types of securities brokerage.
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DESCRIPTION OF CAPITAL STOCK
COMMON STOCK
The Company is authorized to issue 50,000,000 shares of Common
Stock, of which 6,407,340 shares of Common Stock were issued and outstanding as
of September 1, 1998. Holders of shares of Common Stock are entitled to
dividends as and when declared by the Company's Board of Directors from funds
legally available therefor, and upon liquidation, dissolution or winding up of
the Company to share ratably in all assets remaining after payment of
liabilities. The Company has not paid any dividends to date nor does it
anticipate paying any dividends on its Common Stock in the foreseeable future.
It is the Company's present policy to retain earnings, if any, for use in the
development and expansion of its business. The holders of shares of the Common
Stock are entitled to one vote for each share held of record by them, and do not
have the right to cumulate their votes for election of directors. The holders of
shares of Common Stock do not have preemptive rights.
PREFERRED STOCK
The Company is authorized to issue up to 10,000,000 shares of
Preferred Stock with such designations, rights and preferences as may be
determined from time to time by the Board of Directors. Accordingly, the Board
of Directors is empowered, without shareholder approval, to issue Preferred
Stock with dividend, liquidation, conversion, voting or other rights that could
aversely affect the voting power or other rights of the holders of the Company's
Common Stock. In the event of issuance, the Preferred Stock could be utilized,
under certain circumstances, as a method of discouraging, delaying or preventing
a change in control of the Company. The Company has no present intention to
issue any shares of its Preferred Stock, and no shares of Preferred Stock are
currently outstanding.
CERTAIN ANTI-TAKEOVER PROVISIONS
The Company's Articles of Incorporation and Bylaws, along with
savings bank regulations, include provisions that may have the effect of
hindering or delaying a change in control of the Company or the sale of
substantially all of the assets of the Company. These provisions include: (i)
preferred stock as to which the Company's Board of Directors has the authority
to issue additional series and to fix the rights, preferences and limitations
thereof without shareholder approval and the availability for issuance of
authorized but unissued Common Stock; (ii) no person or entity, individually or
together with persons or entities acting in concert with such person or entity,
may acquire the ownership, control, right to vote or right to acquire 10% or
more of the Company's total outstanding Common Stock, without first complying
with the requirements of HOLA; (iii) an affirmative vote of at least two-thirds
of the capital stock then issued and outstanding and entitled to vote is
required to approve the sale of all or substantially all of the assets of the
Company; and (iv) an affirmative vote of at least two-thirds of the shares
entitled to vote thereon is required to approve an amendment to the Company's
Articles of Incorporation.
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SECURITIES OF SUBSIDIARY TRUST
In February 1998, the Company, through MB Capital I (the "Trust"), a
wholly-owned subsidiary, completed the sale of $12 million of 8.75% Cumulative
Trust Preferred Securities (the "Trust Preferred Securities"). The Trust was
formed for the sole purpose of issuing the Trust Preferred Securities and
investing the proceeds thereof into 8.75% Junior Subordinated Debentures (the
"Debentures") which were issued by the Company and mature on February 9, 2028,
which date may be shortened by the Company. The interest payable to the Trust by
the Company on the Debentures funds the distributions payable to the holders of
the Trust Preferred Securities.
Holders of the Trust Preferred Securities are entitled to receive
preferential cumulative cash distributions payable quarterly in arrears on the
15th day of January, April, July and October of each year (subject to possible
deferral as described below) at the annual rate of 8.75% of the Liquidation
Amount of $10 per Trust Preferred Security ("Distributions"). The Company has
the right to defer payments of interest on the Debentures at any time or from
time to time for a period not exceeding 20 consecutive quarters with respect to
each deferral period (each, an "Extension Period"), provided that no Extension
Period may extend beyond the Stated Maturity of the Debentures. Upon the
termination of any such Extension Period and the payment of all amounts then
due, the Company may elect to begin a new Extension Period subject to the
requirements set forth herein. If interest payments on the Debentures are so
deferred, Distributions on the Trust Preferred Securities will also be deferred
and the Company will not be permitted, subject to certain exceptions, to declare
or pay any cash distributions with respect to its capital stock or to make any
payment with respect to its debt securities that rank pari passu with or junior
to the Debentures. During an Extension Period, interest on the Debentures will
continue to accrue (and the amount of Distributions to which holders of the
Trust Preferred Securities are entitled will accumulate) at the rate of 8.75%
per annum, compounded quarterly. Similar dividend restrictions apply if the
Company is in default on the Debentures.
The Company has, through a Guarantee and other documents, fully,
irrevocably and unconditionally guaranteed, on a subordinated basis, all of the
Trust's obligations under the Trust Preferred Securities. Under the Guarantee,
the Company guarantees the payment of Distributions by the Trust and payments on
liquidation of or redemption of the Trust Preferred Securities (subordinate to
the right to payment of senior and subordinated debt of the Company) to the
extent of funds held by the Trust. The Guarantee does not cover payment of
Distributions when the Trust does not have sufficient funds to pay such
Distributions. If the Company does not make required payments on the Debentures,
in such event a holder of the Trust Preferred Securities may institute a legal
proceeding directly against the Company to enforce payment of such Distributions
to such holder. The obligations of the Company under the Guarantee and the
Debentures are subordinate and junior in right of payment to all senior and
subordinated Debt of the Company.
The Trust Preferred Securities are subject to mandatory redemption,
in whole or in part, upon repayment of the underlying Debentures at maturity or
to the extent of their earlier redemption in an amount equal to the amount of
Debentures maturing or being redeemed. The redemption price will equal the
aggregate liquidation preference of the Trust Preferred Securities plus any
accumulated and unpaid Distributions thereon to the date of redemption. The
Debentures are redeemable prior to maturity at the option of the Company,
subject to any required prior approval of the Federal Reserve, (i) on or after
February 9, 2003, in whole at any time or in part from time
63
<PAGE> 64
to time, or (ii) at any time, in whole (but not in part), upon the occurrence
and continuation of a certain tax or securities event, in each case at a
redemption price equal to the accrued and unpaid interest on the Debentures to
the date fixed for redemption, plus 100% of the principal amount thereof.
The Company will have the right at any time to terminate the Trust
and cause the Debentures to be distributed to the holders of the Trust Preferred
Securities in liquidation of the Trust, subject to the Company having received
prior approval of the Federal Reserve if required. The Debentures are unsecured
and subordinated to all senior and subordinated debt, which essentially consists
of all debt of the Company. The terms of the Debentures place no limitation on
the amount of senior and subordinated debt that the Company can incur.
TRANSFER AGENT
__________________ will act as transfer agent for the Company's
Common Stock.
64
<PAGE> 65
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the Offering, the Company will have 7,607,340
shares of Common Stock outstanding (or 7,799,840 shares of Common Stock if the
Underwriters' over-allotment option is exercised in full). The shares of Common
Stock sold in the Offering will be freely transferable without restriction under
the Securities Act, by persons who are not deemed to be affiliates of the
Company or acting as underwriters, as those terms are defined in the Securities
Act. The remaining 5,907,340 shares of Common Stock held by existing
shareholders are "restricted securities" within the meaning of Rule 144.
Consequently, such shares may not be resold unless they are registered under the
Securities Act or are sold pursuant to an applicable exemption from
registration, such as Rule 144.
In general, under Rule 144, as currently in effect, if at least one
year has elapsed since shares of Common Stock that constitute restricted
securities were last acquired from the Company or an affiliate of the Company,
the holder is entitled to sell within any three-month period a number of shares
that does not exceed the greater of one percent of the total shares of Common
Stock then outstanding or the average weekly trading volume of the Common Stock
in the over-the-counter market during the four calendar weeks preceding the date
on which notice of the sale is filed with the Securities and Exchange
Commission. Sales under Rule 144 are subject to certain manner of sale
provisions, notice requirements and the availability of current public
information about the Company. If at least two years have elapsed since the
shares were last acquired from the Company or an affiliate, a person who has not
been an affiliate of the Company at any time during the three months preceding
the sale is entitled to sell such shares under Rule 144(k) without regard to
volume limitations, manner of sale provisions, notice requirements or the
availability of current public information concerning the Company.
The Company, its directors and executive officers and certain other
shareholders, who will hold an aggregate of 5,387,270 shares upon completion of
the Offering, have agreed that they will not, with certain limited exceptions,
issue, offer for sale, sell, transfer, grant options to purchase or otherwise
dispose of any shares of Common Stock without the prior written consent of the
Representative for a period of 180 days from the date of this Prospectus.
Prior to the Offering, there was no public market for the Common
Stock, and there can be no assurance that a significant public market for the
Common Stock will develop or be sustained after the Offering. Any future sale of
substantial amounts of Common Stock in the open market or the perception that
such sales may occur could adversely affect the market price of the Common Stock
offered hereby.
65
<PAGE> 66
UNDERWRITING
The Company and the Selling Shareholder have entered into an
Underwriting Agreement (the "Underwriting Agreement") with the underwriters
listed in the table below (referred to individually as "Underwriter" and
collectively as "Underwriters"), for whom Howe Barnes Investments, Inc. is
acting as representative (the "Representative"). Subject to the terms and
conditions set forth in the Underwriting Agreement, the Company and the Selling
Shareholder have agreed to sell to each of the Underwriters, and each of the
Underwriters has severally agreed to purchase from the Company and the Selling
Shareholder, the number of shares of Common Stock set forth below opposite each
Underwriter's name in the table below.
<TABLE>
<CAPTION>
Underwriters Number of Shares of Common Stock
------------ --------------------------------
<S> <C>
Howe Barnes Investments, Inc.............................
---------
Total ..................... 1,450,000
=========
</TABLE>
Subject to the terms and conditions of the Underwriting Agreement,
the Underwriters have agreed to purchase all of the Common Stock being sold
pursuant to the Underwriting Agreement if any is purchased (excluding shares
covered by the over-allotment option granted therein). In the event of a default
by any Underwriter, the Underwriting Agreement provides that, in certain
circumstances, purchase commitments of the nondefaulting Underwriters may be
increased or the Underwriting Agreement may be terminated.
The Representative has advised the Company and the Selling
Shareholder that the Underwriters propose to offer the Common Stock to the
public initially at the public offering price set forth in the cover page of
this Prospectus and to selected dealers at such price less a concession of not
more than $___ per share. Additionally, the Underwriters may allow, and such
dealers may reallow, a concession not in excess of $___ per share to certain
other dealers. After the initial public offering, the public offering price and
other selling terms may be changed by the Underwriters.
The Company and the Selling Shareholder have granted to the
Underwriters options, exercisable within 30 days after the date of this
Prospectus, to purchase up to an additional 217,500 shares of Common Stock at
the same price per share to be paid by the Underwriters for the other shares
offered hereby. If the Underwriters purchase any of such additional shares
pursuant to this option, each Underwriter will be committed to purchase such
additional shares in approximately the same proportion as set forth in the table
above. The Underwriters may exercise the option only for the purpose of covering
over-allotments, if any, made in connection with the distribution of the Common
Stock offered hereby.
The initial public offering price of the shares of Common Stock will
be determined by negotiation between the Company and the Representative. Among
the factors to be considered in determining the initial public offering price
are prevailing market and economic conditions, revenues and earnings of the
Company, estimates of the business potential and prospects of the Company, the
present state of the Company's business operations, an assessment of the
Company's management and the consideration of the above factors in relation to
market valuations of companies in related businesses.
66
<PAGE> 67
The Representative has informed the Company that the Underwriters
will not, without customer authority, confirm sales to any accounts over which
they exercise discretionary authority.
The Company and the Selling Shareholder have jointly and severally
agreed to indemnify the Underwriters and their controlling persons against
certain liabilities, including civil liabilities under the Securities Act, or to
contribute to payments the Underwriters may be required to make in respect
thereof.
Until the distribution of the Common Stock is completed, rules of
the Securities and Exchange Commission may limit the ability of the Underwriters
and certain selling group members to bid for and purchase shares of Common
Stock. As an exception to these rules, the Representative is permitted to engage
in certain transactions that stabilize the price of the Common Stock. Such
transactions may consist of bids or purchases for the purpose of pegging, fixing
or maintaining the price of the Common Stock.
In addition, if the Representative over-allots (i.e., if it sells
more shares of Common Stock than are set forth on the cover page of this
Prospectus), and thereby creates a short position in the Common Stock in
connection with the Offering, the Representative may reduce that short position
by purchasing Common Stock in the open market. The Representative also may elect
to reduce any short position by exercising all or part of the over-allotment
option described herein.
The Representative also may impose a penalty bid on certain
Underwriters and selling group members. This means that if the Representative
purchases shares of Common Stock in the open market to reduce the Underwriters'
short position or to stabilize the price of the Common Stock, it may reclaim the
amount of the selling concession from the Underwriters and selling group members
who sold those shares as part of the Offering.
In general, purchases of the Common Stock for the purpose of
stabilization or to reduce a syndicate short position could cause the price of
the Common Stock to be higher than it might otherwise be in the absence of such
purchases. The imposition of a penalty bid might have an effect on the price of
the Common Stock to the extent that it were to discourage resales of the
security by purchasers in the Offering.
Certain of the Underwriters acting as market makers for the Common
Stock may engage in passive market making in the Common Stock on the Nasdaq
National Market(R) in accordance with Rule 103 of Regulation M under the
Securities Exchange Act of 1934, as amended. Subject to certain conditions, Rule
103 permits underwriters participating in a distribution to engage in limited
market making transactions during the period when Regulation M would otherwise
prohibit such activity. Rule 103 generally prohibits underwriters engaged in
passive market making activities from entering a bid or effecting a purchase at
a price which exceeds the highest bid by a market maker not participating in the
distribution. Rule 103 also limits the volume of purchases which may be made by
an underwriter in passive market making activities. Subject to these
limitations, certain Underwriters and other members of the selling group intend
to engage in passive market making in the Common Stock.
None of the Company, the Selling Shareholder nor any of the
Underwriters makes any representation or prediction as to the direction or
magnitude of any effect that the transactions described above may have on the
price of the Common Stock. In addition, none of the Company, the Selling
Shareholder nor any of the Underwriters makes any representation that the
67
<PAGE> 68
Representative will engage in such transactions or that such transactions, once
commenced, will not be discontinued without notice.
LEGAL MATTERS
The validity of the Common Stock offered hereby will be passed upon
for the Company by Jones & Keller, P.C., Denver, Colorado. Certain legal matters
in connection with the Offering will be passed upon for the Underwriters by
Chapman and Cutler, Chicago, Illinois.
EXPERTS
The Consolidated Financial Statements of the Company as of December
31, 1997 and for each of the years in the two-year period ended December 31,
1997 have been included and incorporated herein by reference in reliance upon
the report of Fortner, Bayens, Levkulich & Co., P.C., independent certified
public accountants, appearing elsewhere herein, and upon the authority of said
firm as experts in accounting and auditing.
AVAILABLE INFORMATION
The Company is subject to the information requirements of the
Securities Exchange Act of 1934, as amended, and in accordance therewith files
reports and other information with the Securities and Exchange Commission (the
"Commission") . Such reports and other information filed by the Company with the
Commission may be inspected and copied at the public reference facilities
maintained by the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549,
and are also available for inspection and copying at the regional offices of the
Commission located at 500 West Madison Street, Suite 140, Chicago, Illinois
60661 and at 75 Park Place, New York, New York 10007. Copies of such information
can also be obtained by mail from the Public Reference Section of the Commission
at 450 Fifth Street, N.W., Washington, D.C. 20549 at prescribed rates. In
addition, the Commission maintains a worldwide web site that contains reports,
proxy and information statements and other information. The address of the site
is http://www.sec.com.
The Company has filed with the Commission a Registration Statement
on Form SB-2 (the "Registration Statement") (which term shall encompass all
amendments, exhibits and schedules thereto) under the Securities Act of 1933, as
amended, with respect to the securities being offered hereby. This Prospectus
does not contain all the information set forth in the Registration Statement,
certain parts of which are omitted in accordance with the rules and regulations
of the Commission, and to which reference is hereby made. Statements made in
this Prospectus as to the contents of any contract, agreement or other document
referred to are not necessarily complete. With respect to each such contract,
agreement or other document filed as an exhibit to the Registration Statement,
reference is made to the exhibit for a more complete description of the matter
involved, and each such statement shall be deemed qualified in its entirety by
such reference. Copies of the Registration Statement together with exhibits may
be inspected at the office of the Commission in Washington, D.C. without charge
and copies thereof may be obtained therefrom upon payment of a prescribed fee.
68
<PAGE> 69
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Independent Auditors' Report...............................................................................F-2
Consolidated Balance Sheets................................................................................F-3
Consolidated Statements of Income..........................................................................F-4
Consolidated Statements of Comprehensive Income............................................................F-5
Consolidated Statement of Shareholders' Equity.............................................................F-6
Consolidated Statements of Cash Flows......................................................................F-7
Notes to Consolidated Financial Statements ................................................................F-8
</TABLE>
F-1
<PAGE> 70
INDEPENDENT AUDITORS' REPORT
Board of Directors
MegaBank Financial Corporation
Englewood, Colorado
We have audited the consolidated balance sheet of MegaBank Financial
Corporation and Subsidiary as of December 31, 1997 and the related consolidated
statements of income, comprehensive income, shareholders' equity and cash flows
for each of the two years in the period ended December 31, 1997. These
consolidated 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 consolidated financial position of
MegaBank Financial Corporation and Subsidiary at December 31, 1997 and the
consolidated results of their operations and consolidated cash flows for each of
the two years in the period ended December 31, 1997, in conformity with
generally accepted accounting principles.
/s/ FORTNER, BAYENS, LEVKULICH AND CO., P.C.
Denver, Colorado
February 11, 1998 (except for note Q, as
to which the date is September 1, 1998)
F-2
<PAGE> 71
MEGABANK FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1998 1997
------------ ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Cash and due from banks..................................... $ 10,540 $ 9,910
Interest-bearing deposits................................... 582 1,470
Federal funds sold.......................................... 16,915 1,775
Investment securities available for sale.................... 16,212 13,999
Loans....................................................... 147,416 126,087
Less allowance for loan losses.............................. (2,306) (2,083)
-------- --------
145,110 124,004
Bank premises, leasehold improvements and equipment, net.... 7,349 4,799
Accrued interest receivable................................. 1,043 898
Deferred tax asset.......................................... 683 636
Trust preferred securities issuance costs, net.............. 740 255
Other....................................................... 219 134
-------- --------
$199,393 $157,880
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Deposits
Demand, non-interest bearing........................... $ 53,305 $ 42,515
Demand, interest bearing............................... 71,641 56,339
Savings................................................ 5,477 4,562
Time, $100,000 and over................................ 10,078 10,141
Other time............................................. 31,233 28,321
-------- --------
171,734 141,878
Federal Home Loan Bank borrowings......................... -- 1,423
Securities sold under agreements to repurchase............ 1,253 --
Income taxes payable...................................... 188 132
Accrued interest payable.................................. 372 152
Note payable.............................................. -- 2,000
Other..................................................... 532 717
-------- --------
Total liabilities................................. 174,079 146,302
Company obligated mandatorily redeemable preferred
securities of subsidiary trust holding solely Junior
Subordinated Debentures................................... 12,000 --
Commitments (notes I, J, and L)
Shareholders' equity
Preferred stock; no par value, 10,000,000 shares
authorized, none issued................................ -- --
Common stock; no par value, 50,000,000 shares authorized,
6,407,340 shares issued and outstanding (note Q)....... 1,961 1,961
Retained earnings......................................... 11,293 9,578
Accumulated other comprehensive income.................... 60 39
-------- --------
13,314 11,578
-------- --------
$199,393 $157,880
======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
F-3
<PAGE> 72
MEGABANK FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEARS ENDED
JUNE 30, DECEMBER 31,
----------------------- -----------------------
1998 1997 1997 1996
---------- ---------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Interest income
Loans, including fees...................... $ 8,282 $ 6,406 $ 13,806 $ 10,410
Taxable investment securities.............. 184 150 286 487
Nontaxable investment securities........... 374 276 592 247
Funds sold................................. 307 310 636 180
Other interest............................. 46 3 63 35
---------- ---------- ---------- ----------
Total interest income.............. 9,193 7,145 15,383 11,359
Interest expense
Deposits................................... 2,665 2,159 4,635 2,794
Borrowed funds............................. 84 94 152 97
Trust preferred securities................. 418 -- -- --
Notes payable.............................. 19 91 179 240
---------- ---------- ---------- ----------
Total interest expense............. 3,186 2,344 4,966 3,131
---------- ---------- ---------- ----------
Net interest income................ 6,007 4,801 10,417 8,228
Provision for loan losses.................... 220 250 880 457
---------- ---------- ---------- ----------
Net interest income after provision for loan
losses..................................... 5,787 4,551 9,537 7,771
Other income
Service charges on deposit accounts........ 249 169 335 325
Payroll services........................... -- -- -- 233
Gain on sale of investment securities...... 25 -- 341 --
Other income............................... 188 159 320 403
---------- ---------- ---------- ----------
Total other income................. 462 328 996 961
Other expenses
Salaries and employee benefits............. 1,904 1,432 3,135 2,261
Occupancy expenses of premises............. 387 318 708 642
Furniture and equipment expense............ 229 128 342 298
Payroll services........................... -- -- -- 384
Other expenses............................. 1,180 1,090 2,242 1,374
---------- ---------- ---------- ----------
Total other expenses............... 3,700 2,968 6,427 4,959
---------- ---------- ---------- ----------
Income before income taxes......... 2,549 1,911 4,106 3,773
Income tax expense........................... 834 653 1,272 1,353
---------- ---------- ---------- ----------
NET INCOME................................... $ 1,715 $ 1,258 $ 2,834 $ 2,420
========== ========== ========== ==========
Income per share
Basic and diluted earnings per share....... $ 0.27 $ 0.20 $ 0.44 $ 0.38
========== ========== ========== ==========
Weighted average and common shares
outstanding (note Q).................... 6,407,340 6,407,340 6,407,340 6,407,340
========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
F-4
<PAGE> 73
MEGABANK FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEARS ENDED
JUNE 30, DECEMBER 31,
----------------- ---------------
1998 1997 1997 1996
------- ------- ------ ------
(UNAUDITED)
<S> <C> <C> <C> <C>
Net income................................................. $1,715 $1,258 $2,834 $2,420
Other comprehensive income, net of tax:
Unrealized gains (losses) on investment securities
available for sale.................................... 21 (2) (83) 14
------ ------ ------ ------
Other comprehensive income (loss).......................... 21 (2) (83) 14
------ ------ ------ ------
Comprehensive income....................................... $1,736 $1,256 $2,751 $2,434
====== ====== ====== ======
</TABLE>
The accompanying notes are an integral part of these statements.
F-5
<PAGE> 74
MEGABANK FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
TWO YEARS ENDED DECEMBER 31, 1997
AND SIX MONTHS ENDED JUNE 30, 1998 (UNAUDITED)
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
ACCUMULATED
OTHER
COMMON RETAINED COMPREHENSIVE
STOCK EARNINGS INCOME TOTAL
------ -------- -------------- -------
<S> <C> <C> <C> <C>
Balance at January 1, 1996......................... $1,961 $ 4,324 $108 $ 6,393
Comprehensive income
Net income....................................... -- 2,420 -- 2,420
Other comprehensive income....................... -- -- 14 14
------ ------- ---- -------
Balance at December 31, 1996....................... 1,961 6,744 122 8,827
Comprehensive income
Net income....................................... -- 2,834 -- 2,834
Other comprehensive income (loss)................ -- -- (83) (83)
------ ------- ---- -------
Balance at December 31, 1997....................... 1,961 9,578 39 11,578
Comprehensive income
Net income....................................... -- 1,715 -- 1,715
Other comprehensive income....................... -- -- 21 21
------ ------- ---- -------
Balance at June 30, 1998 (unaudited)............... $1,961 $11,293 $ 60 $13,314
====== ======= ==== =======
</TABLE>
The accompanying notes are an integral part of these statements.
F-6
<PAGE> 75
MEGABANK FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEARS ENDED
JUNE 30, DECEMBER 31,
------------------- -------------------
1998 1997 1997 1996
-------- -------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C>
Cash flows from operating activities
Net income....................................... $ 1,715 $ 1,258 $ 2,834 $ 2,420
Adjustments to reconcile net income to net cash
provided by operating activities
Provision for loan losses..................... 220 250 880 457
Depreciation and amortization of fixed
assets...................................... 233 114 325 238
Amortization of preferred securities issuance
costs....................................... 10 -- -- --
Net discount accretion on investment
securities.................................. (12) (11) (29) (20)
Stock dividend................................ (14) (10) (16) (15)
Gain on sale of investment securities
available for sale.......................... (25) -- (341) --
Deferred income taxes......................... (65) (64) (336) (78)
Changes in deferrals and accruals
Accrued interest receivable................... (145) (129) (217) (76)
Accrued interest payable...................... 220 44 46 (1)
Other, net.................................... (214) 226 723 237
-------- -------- -------- --------
Net cash provided by operating
activities............................. 1,923 1,678 3,869 3,162
Cash flows from investing activities
Net (increase) decrease in federal funds sold.... (15,140) (13,125) (990) 11,985
Net (increase) decrease in interest-bearing
deposits...................................... 888 (1,133) (1,470) --
Purchase of securities available for sale........ (3,479) (534) (6,214) (6,676)
Proceeds from maturities of securities available
for sale...................................... 750 2,000 3,160 2,550
Proceeds from maturities of securities held to
maturity...................................... -- -- -- 550
Proceeds from sales of securities available for
sale.......................................... 606 -- 495 --
Net increase in loans............................ (21,326) (14,190) (31,061) (26,195)
Expenditures for bank premises and equipment..... (2,783) (1,192) (2,494) (1,623)
-------- -------- -------- --------
Net cash used in investing activities.... (40,484) (28,174) (38,574) (19,409)
Cash flows from financing activities
Net increase in deposits......................... 29,856 30,363 37,217 14,469
Trust preferred securities issuance costs........ (495) -- (255) --
Increase (decrease) in Federal Home Loan Bank
borrowings.................................... (1,423) (484) (849) 2,272
Increase (decrease) in securities sold under
repurchase agreements......................... 1,253 -- -- --
Proceeds from issuance of trust preferred
securities.................................... 12,000 -- -- --
Principal payments on notes payable.............. (2,000) (628) (628) (735)
-------- -------- -------- --------
Net cash provided by financing
activities............................. 39,191 29,251 35,485 16,006
-------- -------- -------- --------
Net increase (decrease) in cash and due from
banks............................................ 630 2,755 780 (241)
Cash and due from banks at beginning of period..... 9,910 9,130 9,130 9,371
-------- -------- -------- --------
Cash and due from banks at end of period........... $ 10,540 $ 11,885 $ 9,910 $ 9,130
======== ======== ======== ========
Supplemental disclosures of cash flow information
Cash paid during the period for:
Interest expense.............................. $ 2,955 $ 2,301 $ 4,920 $ 3,077
Income taxes.................................. 854 746 1,499 1,433
Noncash transaction:
Note receivable exchanged for extinguishment
of note payable............................. $ -- $ -- $ -- $ 1,700
</TABLE>
The accompanying notes are an integral part of these statements
F-7
<PAGE> 76
MEGABANK FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION AS OF AND FOR THE SIX MONTHS ENDED JUNE 30, 1998 IS UNAUDITED)
NOTE A -- SUMMARY OF ACCOUNTING POLICIES
NATURE OF OPERATIONS
MegaBank Financial Corporation ("the Company") owns the shares of and acts
as parent holding company for MegaBank ("the Bank"). The Bank provides a full
range of banking services to individual and corporate customers principally in
the Denver metropolitan area. A majority of the Bank's loans are related to real
estate (principally residential construction) and commercial activities. The
Bank is subject to competition from other financial institutions for loans and
deposit accounts. The Bank is also subject to regulation by certain governmental
agencies and undergoes periodic examinations by those regulatory agencies. In
connection with an offering of Cumulative Trust Preferred Securities in 1998,
the Company formed MB Capital I, which is treated as a wholly-owned subsidiary
of the Company.
BASIS OF FINANCIAL STATEMENT PRESENTATION
The financial statements have been prepared in conformity with generally
accepted accounting principles. In preparing the financial statements,
management is required to make estimates and assumptions that affect the
reported amounts of assets and liabilities as of the date of the balance sheet
and revenues and expenses for the period. Actual results could differ
significantly from those estimates.
Material estimates that are particularly susceptible to significant change
in the near-term relate to the determination of the allowance for loan losses.
In connection with the determination of the allowance for loan losses,
management obtains independent appraisals for significant properties and
assesses estimated future cash flows from borrowers' operations and the
liquidation of loan collateral.
Management believes that the allowance for loan losses is adequate. While
management uses available information to recognize loan losses, changes in
economic conditions may necessitate revisions in future years. In addition,
various regulatory agencies, as an integral part of their examination process,
periodically review the Bank's allowance for loan losses. Such agencies may
require the Bank to recognize additional losses based on their judgments about
information available to them at the time of their examination.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and its subsidiaries, MegaBank and, in 1998, MB Capital I. All intercompany
accounts and transactions have been eliminated in the consolidated financial
statements.
INTERIM FINANCIAL INFORMATION (UNAUDITED)
The unaudited interim financial statements have been prepared in conformity
with generally accepted accounting principles and include all adjustments which
are, in the opinion of management, normal and recurring in nature and necessary
to a fair presentation of the interim periods presented. Results of operations
for the six months ended June 30, 1998 are not necessarily indicative of the
results to be expected for the full year.
INVESTMENT SECURITIES
Management determines the classification of debt securities at the time of
purchase and reevaluates such designation as of each balance sheet date. Debt
securities are classified as held-to-maturity when the Bank has the positive
intent and ability to hold the securities to maturity. Held-to-maturity
securities are stated at amortized cost.
F-8
<PAGE> 77
MEGABANK FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF AND FOR THE SIX MONTHS ENDED JUNE 30, 1998 IS UNAUDITED)
Debt securities not classified as held to maturity are classified as
available for sale. Available for sale securities are stated at fair value, with
the unrealized gains and losses, net of tax, reported as a component of retained
earnings in shareholders' equity.
The amortized cost of debt securities classified as held to maturity or
available for sale is adjusted for amortization of premiums and accretion of
discounts to maturity or, in the case of mortgage-backed securities, over the
estimated life of the security. Such amortization and accretion is included as
an adjustment to interest income from investments. Realized gains and losses and
declines in value judged to be other-than-temporary are included in net
securities gains (losses). The cost of securities sold is based on the specific
identification method.
LOANS
Loans are reported at the principal amount outstanding, net of loan fees
and the allowance for credit losses. Interest on loans is calculated by using
the simple interest method on the daily balance of the principal amount
outstanding.
Loan fees which represent an adjustment to interest yield are deferred and
amortized over the estimated life of the loan. Most of the loans originated by
the Company are short-term.
Loans on which the accrual of interest has been discontinued are designated
as nonaccrual loans. Accrual of interest on loans is discontinued either when
reasonable doubt exists as to the full, timely collection of interest or
principal or when a loan becomes contractually past due by ninety days or more
with respect to interest or principal. When a loan is placed on nonaccrual
status, all interest previously accrued but not collected is reversed against
current period interest income. Interest accruals are resumed on such loans only
when they are brought fully current with respect to interest and principal and
when, in the judgement of management, the loans are estimated to be fully
collectible as to both principal and interest.
Renegotiated loans are those loans on which concessions in terms have been
granted because of a borrower's financial difficulty. Interest is generally
accrued on such loans in accordance with the new terms.
ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses is established through a provision for loan
losses charged to expenses. Loans are charged against the allowance for loan
losses when management believes that the collectibility of the principal is
unlikely or, with respect to consumer installment loans, according to an
established delinquency schedule. The allowance is an amount that management
believes will be adequate to absorb losses inherent in existing loans, leases
and commitments to extend credit, based on evaluations of the collectibility and
prior loss experience of loans, leases and commitments to extend credit. The
evaluations take into consideration such factors as changes in the nature and
volume of the portfolio, overall portfolio quality, loan concentrations,
specific problem loans, leases and commitments, and current and anticipated
economic conditions that may affect the borrowers' ability to pay.
Impaired loans are measured based on the present value of expected future
cash flows discounted at the loan's original effective interest rate. As a
practical expedient, impairment may be measured based on the loan's observable
market price or the fair value of the collateral if the loan is collateral
dependent. When the measure of the impaired loan is less than the recorded
investment in the loan, the impairment is recorded through a valuation
allowance.
F-9
<PAGE> 78
MEGABANK FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF AND FOR THE SIX MONTHS ENDED JUNE 30, 1998 IS UNAUDITED)
LEASEHOLD IMPROVEMENTS AND EQUIPMENT
Leasehold improvements and equipment are stated at cost. Depreciation is
provided for in amounts sufficient to relate the cost of depreciable assets to
operations over their estimated service lives, principally on the straight-line
method.
TRUST PREFERRED SECURITIES ISSUANCE COSTS
Direct costs incurred in connection with the issuance of Trust Preferred
Securities have been capitalized. These costs are amortized on a straight-line
basis through the maturity date of the securities.
INCOME TAXES
Provisions for income taxes are based on taxes payable or refundable for
the current year (after exclusion of non-taxable income such as interest on
state and municipal securities) and deferred taxes on temporary differences
between the amount of taxable income and pretax financial income and between the
tax bases of assets and liabilities and their reported amounts in the financial
statements. Deferred tax assets and liabilities are included in the financial
statements at currently enacted income tax rates applicable to the period in
which the deferred tax assets and liabilities are expected to be realized or
settled. As changes in tax laws or rates are enacted, deferred tax assets and
liabilities are adjusted through the provision for income taxes.
STATEMENT OF CASH FLOWS
For purposes of the Statement of Cash Flows, the Company has defined cash
equivalents as those amounts included in the balance sheet caption "Cash and Due
from Banks".
PER SHARE COMPUTATIONS
Basic earnings per share is based on the weighted average number of common
shares outstanding during each year. Share amounts have been adjusted to reflect
a planned thirty-for-one common stock split. The Company had no material
dilutive-potential common shares and therefore has not presented per share
earnings data on a diluted basis.
STOCK-BASED COMPENSATION
The Company has elected to follow Accounting Principles Board Opinion No.
25, Accounting for Stock Issued to Employees, (APB 25) and related
interpretations in accounting for any stock options issued to employees. Under
APB 25, no compensation expense is recorded for any stock options for which the
exercise price equals the market price of the underlying stock on the date of
the grant. The Company has adopted the disclosure-only provisions of Statement
of Financial Accounting Standards No. 123, Accounting for Stock-Based
Compensation (SFAS No. 123).
ACCOUNTING CHANGES
Comprehensive Income
The Company adopted Financial Accounting Standards Board No. 130, Reporting
Comprehensive Income, (SFAS No. 130), effective January 1, 1998. SFAS No. 130
establishes standards for reporting comprehensive income and its components
(revenues, expenses, gains, and losses). Components of comprehensive income are
net income and all other non-owner changes in equity. The statement requires
that an enterprise (a) classify items of other comprehensive income by their
nature in a financial statement and (b) display the accumulated balance of other
comprehensive income separately from retained earnings and
F-10
<PAGE> 79
MEGABANK FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF AND FOR THE SIX MONTHS ENDED JUNE 30, 1998 IS UNAUDITED)
additional paid-in capital in the equity section of a statement of financial
position. Reclassification of financial statements for earlier periods provided
for comparative purposes is required.
The Company has disclosed comprehensive income in a separate income
statement.
The only component of comprehensive income consists of unrealized holding
gains and losses on available for sale investment securities.
Operating Segments
The Company adopted Financial Accounting Standards Board Statement No. 131,
Disclosures About Segments of an Enterprise and Related Information, (SFAS No.
131) effective January 1, 1998. This statement establishes standards for
reporting information about segments in annual and interim financial statements.
SFAS No. 131 introduces a new model for segment reporting called the "management
approach". The management approach is based on the way the chief operating
decision-maker organizes segments within the company for making operating
decisions and assessing performance. Reportable segments are based on products
and services, geography, legal structure, management structure and any other in
which management disaggregates a company. Based on the "management approach"
model, the Company has determined that its business is comprised of a single
operating segment and that SFAS No. 131 therefore has no impact on its financial
statements.
NOTE B -- INVESTMENT SECURITIES
At December 31, 1997, the Company had securities with the following
amortized cost and estimated fair market values (in thousands):
<TABLE>
<CAPTION>
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
--------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
Securities available for sale
U.S. Treasury securities.................. $ 4,734 $40 $ -- $ 4,774
State and political subdivisions.......... 8,371 34 (2) 8,403
Federal Home Loan Bank stock.............. 368 -- -- 368
Corporate equity securities............... 466 -- (12) 454
------- --- ---- -------
$13,939 $74 $(14) $13,999
======= === ==== =======
</TABLE>
The amortized cost and estimated market value of debt securities at
December 31, 1997 by contractual maturity are shown below (in thousands).
Expected maturities will differ from contractual maturities because borrowers
may have the right to call or prepay obligations without call or prepayment
penalties.
<TABLE>
<CAPTION>
AMORTIZED MARKET
COST VALUE
--------- -------
<S> <C> <C>
Due in one year or less..................................... $ 1,241 $ 1,244
Due after one year through five years....................... 3,494 3,531
Due after five years through ten years...................... 715 717
Due after ten years......................................... 7,655 7,685
------- -------
$13,105 $13,177
======= =======
</TABLE>
Securities included in the accompanying balance sheet at December 31, 1997
with a carrying amount of $6,120,000 have been pledged as collateral for public
deposits and for other purposes as required or permitted by law.
Available for sale securities were sold in 1997 for a gross gain of
$341,000.
F-11
<PAGE> 80
MEGABANK FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF AND FOR THE SIX MONTHS ENDED JUNE 30, 1998 IS UNAUDITED)
NOTE C -- LOANS AND ALLOWANCE FOR POSSIBLE LOAN LOSSES
The components of the loan portfolio are summarized as follows (in
thousands):
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1998 1997
----------- ------------
(UNAUDITED)
<S> <C> <C>
Construction............................................... $ 92,723 $ 88,825
Commercial................................................. 49,442 33,530
Installment and other...................................... 6,711 4,710
-------- --------
148,876 127,065
Less unearned loan fees.................................... (1,460) (978)
-------- --------
$147,416 $126,087
======== ========
</TABLE>
Transactions in the allowance for loan losses are as follows (in
thousands):
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
SIX MONTHS ENDED ---------------
JUNE 30, 1998 1997 1996
---------------- ------ ------
(UNAUDITED)
<S> <C> <C> <C>
Balance at beginning of period...................... $2,083 $1,150 $ 759
Provision for loan losses........................... 220 880 457
Recoveries.......................................... 6 62 13
Loans charged off................................... (3) (9) (79)
------ ------ ------
Balance at end of period............................ $2,306 $2,083 $1,150
====== ====== ======
</TABLE>
There were no accruing loans having payments delinquent more than ninety
days at December 31, 1997 and 1996.
Loans on which the accrual of interest has been discontinued or reduced
amounted to $1,604,000 and $14,000 at December 31, 1997 and 1996, respectively.
No component of the allowance for loan losses was specifically allocated to
these loans.
Unaudited data as of June 30, 1998, follows:
<TABLE>
<S> <C>
Outstanding principal balance of accruing loans having
payments delinquent more than 90 days..................... $ --
Loans on which the accrual of interest has been
discontinued.............................................. 1,371,000
</TABLE>
Substantially all of the balances of nonaccrual loans as of June 30, 1998
and December 31, 1997, relate to one borrower.
No loans were transferred to foreclosed real estate in 1998, 1997 or 1996.
The Company is not committed to lend funds to debtors whose loans have been
modified.
F-12
<PAGE> 81
MEGABANK FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF AND FOR THE SIX MONTHS ENDED JUNE 30, 1998 IS UNAUDITED)
NOTE D -- BANK PREMISES, LEASEHOLD IMPROVEMENTS AND EQUIPMENT
At December 31, 1997, bank premises, leasehold improvements and equipment,
less accumulated depreciation and amortization, consisted of the following (in
thousands):
<TABLE>
<S> <C>
Buildings and improvements................................ $ 2,216
Leasehold improvements.................................... 383
Equipment................................................. 2,223
Land...................................................... 1,137
-------
5,959
Less accumulated depreciation and amortization............ (1,160)
-------
$ 4,799
=======
</TABLE>
NOTE E -- DEPOSITS
At December 31, 1997, the scheduled maturities of certificates of deposit
are as follows (in thousands):
<TABLE>
<S> <C>
1998...................................................... $23,680
1999...................................................... 8,829
2000...................................................... 2,793
2001...................................................... 1,615
2002...................................................... 136
Thereafter................................................ 1,409
-------
$38,462
=======
</TABLE>
NOTE F -- FEDERAL HOME LOAN BANK BORROWINGS
As of December 31, 1997, the Bank had $1,423,000 in Federal Home Loan Bank
borrowings. The advances outstanding at December 31, 1997 are as follows (in
thousands):
<TABLE>
<CAPTION>
INTEREST
AMOUNT RATE
- ------ --------
<S> <C>
$ 506..................................................... 6.90%
102..................................................... 6.87
439..................................................... 6.81
100..................................................... 6.76
176..................................................... 6.72
100..................................................... 6.58
$1,423
</TABLE>
The Bank has a blanket pledge agreement with the FHLB of Topeka
collateralizing the above advances.
Maturities of the aforementioned borrowings are as follows (in thousands):
<TABLE>
<S> <C>
1998....................................................... $ 176
1999....................................................... 1,247
------
$1,423
======
</TABLE>
These borrowings were repaid in 1998.
F-13
<PAGE> 82
MEGABANK FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF AND FOR THE SIX MONTHS ENDED JUNE 30, 1998 IS UNAUDITED)
NOTE G -- NOTE PAYABLE
At December 31, 1997, the Company has a note payable to Wells Fargo Bank
for $2,000,000. This loan was repaid in February 1998 from proceeds of the
Company's Cumulative Trust Preferred Securities Offering.
NOTE H -- COMPANY OBLIGATED MANDATORILY REDEEMABLE PREFERRED SECURITIES
In February 1998, MB Capital I, a special-purpose wholly-owned Delaware
trust subsidiary of the Company, completed an offering of 1,200,000 shares
(issue price of $10 per share) totaling $12.0 million of fixed-rate 8.75%
Cumulative Trust Preferred Securities (Preferred Securities), which are
guaranteed by the Company. MB Capital I invested the total proceeds it received
in 8.75% Junior Subordinated Deferrable Interest Debentures (Debentures) issued
by the Company. Interest paid on the Debentures will be distributed to the
holders of the Preferred Securities. As a result, under current tax law,
distributions to the holders of the Preferred Securities will be tax deductible
by the Company. Distributions payable on the Preferred Securities are recorded
as interest expense in the consolidated statements of income. These Debentures
are unsecured and rank junior and are subordinate in right of payment to all
senior debt of the Company.
The distribution rate payable on the Preferred Securities is cumulative and
payable quarterly in arrears commencing on April 15, 1998. The Company has the
right, subject to events of default, to defer payments of interest on the
Debentures at any time by extending the interest payment period for a period not
exceeding 20 consecutive quarters with respect to each deferral period, provided
that no extension period may extend beyond the redemption or maturity date of
the Debentures. The Preferred Securities are subject to mandatory redemption
upon repayment of the Debentures. The Debentures mature on February 9, 2028,
which may be shortened to not earlier than February 9, 2003, if certain
conditions are met, or at any time upon the occurrence and continuation of
certain changes in either the tax treatment or the capital treatment of MB
Capital I, the Debentures or the Preferred Securities. The Company has the right
to terminate MB Capital I and cause the Debentures to be distributed to the
holders of the Capital Securities in liquidation of such trust, all subject to
the Company having received prior approval of the Office of Thrift Supervision,
if required.
NOTE I -- FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK
The Company is a party to financial instruments with off-balance-sheet risk
in the normal course of business to meet the financing needs of its customers.
These financial instruments include commitments to extend credit and stand-by
letters of credit.
Those instruments involve, to a varying degree, elements of credit risk in
excess of the amount recognized in the statement of financial position. The
contract amounts of those instruments reflect the extent of involvement the Bank
has in particular classes of financial instruments.
The Company's exposure to credit loss in the event of non-performance by
the other party to the financial instrument for commitments to extend credit and
stand-by letters of credit is represented by the contractual notional amount of
those instruments. The Company uses the same credit policies in making
commitments and conditional obligations as it does for on-balance-sheet
instruments.
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1998 1997
----------- ------------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C>
Financial instruments whose contract amounts represent
credit risk
Commitments to extend credit.............................. $78,791 $51,758
Stand-by letters of credit................................ 6,396 9,277
</TABLE>
F-14
<PAGE> 83
MEGABANK FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF AND FOR THE SIX MONTHS ENDED JUNE 30, 1998 IS UNAUDITED)
Commitments to extend credit are agreements to lend to a customer as long
as there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination clauses
and may require payment of a fee. Since many of the commitments may expire
without being drawn upon or be participated to other financial institutions, 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. Collateral held
varies, but may include accounts receivable, inventory, property, plant and
equipment and income-producing commercial properties.
Stand-by letters of credit are conditional commitments issued by the
Company to guarantee the performance of a customer to a third party. The credit
risk involved in issuing letters of credit is essentially the same as that
involved in extending loan facilities to customers.
NOTE J -- LEASE COMMITMENTS
Future minimum rental and lease payments under noncancellable operating
leases for premises, expiring at various dates through 2006 are as follows (in
thousands):
<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER 31,
- ------------
<S> <C>
1998..................................................... $ 403
1999..................................................... 361
2000..................................................... 359
2001..................................................... 353
2002..................................................... 353
Thereafter.................................................. 1,121
------
$2,950
======
</TABLE>
Total lease expense for all operating leases was $436,000 and $382,000 for
the years ended December 31, 1997 and 1996, respectively.
NOTE K -- INCOME TAXES
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
1997 1996
------ ------
(IN THOUSANDS)
<S> <C> <C>
Current
Federal........................................... $1,406 $1,262
State............................................. 202 169
------ ------
1,608 1,431
Deferred
Federal........................................... (299) (74)
State............................................. (37) (4)
------ ------
(336) (78)
------ ------
$1,272 $1,353
====== ======
</TABLE>
F-15
<PAGE> 84
MEGABANK FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF AND FOR THE SIX MONTHS ENDED JUNE 30, 1998 IS UNAUDITED)
The effective income tax rate varies from the statutory federal rate
because of several factors, the most significant being nontaxable interest
income earned on obligations of state and municipalities. The following table
reconciles the Company's effective tax rate to the statutory federal rate.
<TABLE>
<CAPTION>
1997 1996
------------------------ ------------------------
AMOUNT PERCENT AMOUNT PERCENT
-------------- ------- -------------- -------
(IN THOUSANDS) (IN THOUSANDS)
<S> <C> <C> <C> <C>
Tax expense at statutory rate................ $1,396 34.0% $1,283 34.0%
Increase (decrease) in taxes due to:
Tax exempt municipal interest.............. (187) (4.5) (84) (2.2)
State tax, net of federal tax effect....... 122 3.0 109 2.9
Other...................................... (59) (1.5) 45 1.2
------ ---- ------ ----
Total provision for income taxes... $1,272 31.0% $1,353 35.9%
====== ==== ====== ====
</TABLE>
Deferred tax assets and liabilities are recorded based on the differences
between financial statement and tax basis of assets and liabilities and the tax
rates in effect when these differences are expected to reverse. Timing
differences in the recognition of revenue and expense for tax and financial
reporting purposes resulted in a deferred tax asset as of December 31, 1997 as
follows (in thousands):
<TABLE>
<S> <C>
Deferred tax assets
Provision for loan losses................................. $686
Recognition of loan fees.................................. 37
Other..................................................... 7
----
Total deferred tax assets......................... 730
Deferred tax liabilities
Depreciation.............................................. (68)
Market value adjustment to investment securities available
for sale............................................... (20)
Other..................................................... (6)
----
Total deferred tax liabilities.................... (94)
----
Net deferred tax asset............................ $636
====
</TABLE>
NOTE L -- RELATED PARTY TRANSACTIONS
The Bank has entered into certain loan participations with First State Bank
of Hotchkiss, a financial institution related through common ownership.
Approximate loan principal balances outstanding under these participations are
summarized as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
JUNE 30, ----------------
1998 1997 1996
----------- ------ -------
(UNAUDITED)
<S> <C> <C> <C>
Participations sold.................................... $10,072 $8,227 $10,916
Participations purchased............................... 1,471 3,459 250
</TABLE>
The Bank has also sold loan participations to other related parties
(shareholders, directors, family members, businesses related through common
ownership). At December 31, 1997 and 1996, the participations sold to related
parties were approximately $2,391,000 and $7,882,000, respectively. As of June
30, 1998, participations sold to related parties were approximately $3,470,000.
F-16
<PAGE> 85
MEGABANK FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF AND FOR THE SIX MONTHS ENDED JUNE 30, 1998 IS UNAUDITED)
The following is an analysis of loans that were made to shareholders,
directors and executive officers of the Company, and to corporations and others
associated with those individuals (in thousands):
<TABLE>
<S> <C>
Balance at January 1, 1997................................. $ 1,062
New loans.................................................. 1,299
Repayments................................................. (1,831)
-------
Balance at December 31, 1997............................... $ 530
=======
</TABLE>
Certain officers, directors, and shareholders of the Company personally
guaranteed the Company's note payable (note G). In return for the guarantee, the
Company agreed to indemnify the guarantors for all liabilities, costs or
expenses relating to the guarantee and to provide additional compensation to the
guarantors. The additional compensation has consisted of an aggregate fee equal
to 1.5% of the outstanding balance of the loan on each anniversary date plus a
performance bonus based on earnings of the Bank as specified in the agreement.
Total fees paid to the guarantors were $329,000 and $40,000 in 1997 and 1996,
respectively.
In March 1997, the Company entered into a consulting agreement with a
company owned by an individual who is an officer, director and shareholder of
the Company. Payments by the Company under the agreement are $5,000 per month.
The term of the agreement is for one year, but automatically renews unless
explicitly terminated by either party.
NOTE M -- EMPLOYEE BENEFITS
The Bank has an IRA contribution plan available for all personnel who have
been employed at least six months. If an employee contributes 2 1/2% of his or
her salary to an IRA the Company will provide a contribution of up to two times
the employee's contribution to an aggregate total of $2,000. Contributions in
1997 and 1996 were $32,000 and $29,000, respectively.
NOTE N -- FAIR VALUE OF FINANCIAL INSTRUMENTS
The following summary presents the methodologies and assumptions used to
estimate the fair value of the Company's financial instruments. The Company
operates as a going concern and except for its investment portfolio, no active
market exists for its financial instruments. Much of the information used to
determine fair value is highly subjective and judgmental in nature and,
therefore, the results may not be precise. The subjective factors include, among
other things, estimates of cash flows, risk characteristics, credit quality and
interest rates, all of which are subject to change. Since the fair value is
estimated as of the balance sheet date, the amounts which will actually be
realized or paid upon settlement or maturity of the various financial
instruments could be significantly different.
CASH AND CASH EQUIVALENTS
For these short-term instruments, the carrying amount approximates fair
value.
INVESTMENTS
For securities held as investments, fair value equals quoted market price,
if available. If a quoted market price is not available, fair value is estimated
using quoted market prices for similar securities. The carrying amount of
accrued interest receivable approximates its fair value.
LOANS
The fair value of fixed rate loans is estimated by discounting the future
cash flows using the current rates at which similar loans would be made to
borrowers with similar credit ratings and for the same remaining
F-17
<PAGE> 86
MEGABANK FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF AND FOR THE SIX MONTHS ENDED JUNE 30, 1998 IS UNAUDITED)
maturities. For variable rate loans, the carrying amount is a reasonable
estimate of fair value. For loans where collection of principal is in doubt, an
allowance for losses has been estimated. Loans with similar characteristics were
aggregated for purposes of the calculations. The carrying amount of accrued
interest approximates its fair value.
DEPOSITS
The fair value of demand deposits, savings accounts, NOW accounts, and
certain money market deposits is the amount payable on demand at the reporting
date (i.e. their carrying amount). The fair value of fixed maturity time
deposits is estimated using a discounted cash flow calculation that applies the
rates currently offered for deposits of similar remaining maturities. The
carrying amount of accrued interest payable approximates its fair value.
SHORT-TERM BORROWINGS
For short-term borrowings, the carrying amount is a reasonable estimate of
fair value.
LONG-TERM BORROWINGS
The fair value of long-term borrowings is estimated by discounting the
future cash flows using the current rate at which a similar loan could be
financed.
COMMITMENTS TO EXTEND CREDIT, STANDBY LETTERS OF CREDIT AND LINES OF CREDIT
The fair value of commitments is estimated using the fees currently charged
to enter into similar agreements, taking into account the remaining terms of the
agreements and the present credit worthiness of the counterparts. For fixed-rate
loan commitments, fair value also considers the difference between current
levels of interest rates and the committed rates. The fair value of letters of
credit and lines of credit is based on fees currently charged for similar
agreements or on the estimated cost to terminate them or otherwise settle the
obligations with the counterparts at the reporting date.
The following table presents estimated fair values of the Company's
financial instruments as of December 31, 1997:
<TABLE>
<CAPTION>
CARRYING FAIR
AMOUNT VALUE
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Financial assets
Cash and due from banks................................... $ 9,910 $ 9,910
Interest-bearing deposits................................. 1,775 1,775
Investment securities available for sale.................. 13,999 13,999
Loans, less allowance for loan losses..................... 124,004 123,926
Accrued interest receivable............................... 898 898
Financial liabilities
Deposits
Non-interest bearing................................... $ 42,515 $ 42,515
Interest bearing....................................... 99,363 99,374
Other borrowings.......................................... 3,423 3,423
Accrued interest payable.................................. 152 152
Unrecognized financial instruments (net of contract
amount)
Commitments to extend credit........................... $ 51,452 $ 51,452
Standby letters of credit.............................. 9,277 9,277
</TABLE>
F-18
<PAGE> 87
MEGABANK FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF AND FOR THE SIX MONTHS ENDED JUNE 30, 1998 IS UNAUDITED)
NOTE O -- SHAREHOLDERS' EQUITY AND REGULATORY RESTRICTIONS
The Company has a Stock Purchase Agreement with certain of its
shareholders. This agreement, as amended and restated on December 4, 1997,
provides that upon the death of the Company's Chairman of the Board of
Directors, the shareholders will have the option to require the Company to
purchase a pro rata portion of their shares of the Company's stock to the extent
the Company receives proceeds from a life insurance policy on the life of the
Chairman. These shareholders currently hold an aggregate of 3,285,300 shares of
common stock (on a post-stock split basis). The agreement specifies that each
year the shareholders are to determine the value of the stock for purposes of
establishing the purchase price to be paid by the Company. If the shareholders
do not determine a value, the value of the most recent determination will be
used, subject to appropriate adjustment to reflect book value per share of the
Company since the effective date of the last valuation. On February 19, 1998,
the Board of Directors of the Company determined the value to be $4 per share
(on a post-stock split basis). The Company has purchased a life insurance policy
in the amount of $3,000,000 on the Chairman. Based on the current set value of
the stock, a purchase of all of the shares of the shareholders who are a party
to the agreement would be approximately $13.1 million. As described in note Q,
the terms of this agreement were amended on September 1, 1998.
Cash dividends paid to the Company by the Bank amounted to $1,000,000 and
$950,000 in 1997 and 1996, respectively. The payment of dividends to the Company
by the Bank is subject to various state and federal regulatory limitations.
Effective January 15, 1998, the Company increased its authorized capital
stock to 50 million shares of Common Stock and authorized 10 million shares of
Preferred Stock. The increase was made to provide for possible future needs of
the Company.
The Company is subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory, and possibly additional
discretionary, actions by regulators that, if undertaken, could have a direct
material effect on the Company's financial statements. Under capital adequacy
guidelines and the regulatory framework for prompt corrective action, the
Company must meet specific capital guidelines that involve quantitative measures
of the bank's assets, liabilities, and certain off-balance sheet items as
calculated under regulatory accounting practices. The Company's capital amounts
and classification are also subject to qualitative judgments by the regulators
about components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the bank to maintain minimum amounts and ratios (set forth in the table
below) of total and Tier 1 capital (as defined in the regulations) to
risk-weighted assets (as defined), and of Tier 1 capital (as defined) to average
assets (as defined). Management believes, as of December 31, 1997, that the
Company meets all capital adequacy requirements to which it is subject.
The Company is adequately capitalized under the regulatory framework for
prompt corrective action. To be categorized as well capitalized, institutions
must maintain minimum total risk-based, Tier 1 risk-based, and
F-19
<PAGE> 88
MEGABANK FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF AND FOR THE SIX MONTHS ENDED JUNE 30, 1998 IS UNAUDITED)
Tier 1 leverage ratios as set forth in the table. Capital ratios as of December
31, 1997, presented on a consolidated basis, are as follows:
<TABLE>
<CAPTION>
TO BE WELL
CAPITALIZED UNDER
FOR CAPITAL PROMPT CORRECTIVE
ACTUAL ADEQUACY PURPOSES ACTION PROVISIONS
--------------- ------------------------------- -------------------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
------- ----- --------------- ----------- -------------- ------------
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Total capital to risk
weighted assets......... $13,226 9.7% > or = $10,864 > or = 8.0% > or = $13,579 > or = 10.0%
Tier 1 capital to risk
weighted assets......... 11,539 8.5 > or = 5,432 > or = 4.0 > or = 8,148 > or = 6.0
Tier 1 capital to average
assets.................. 11,539 7.2 > or = 6,371 > or = 4.0 > or = 7,964 > or = 5.0
</TABLE>
Unaudited capital ratios as of June 30, 1998, are as follows:
<TABLE>
<S> <C>
Total capital to risk-weighted assets....................... 16.53%
Tier 1 capital to risk-weighted assets...................... 10.69%
Tier 1 capital to average assets............................ 8.98%
</TABLE>
Trust Preferred Securities have been structured to qualify as Tier 1
capital of the Company for regulatory capital purposes. However, they cannot be
used to constitute more than 25% of the Company's total Tier 1 capital. At June
30, 1998, $4.4 million of the $12 million in capital securities qualified as
Tier 1 capital under capital guidelines of the Federal Reserve. The remaining
$7.6 million qualified as Tier 2 capital.
The Federal Reserve Board requires banks to maintain reserve balances
composed of cash on hand and balances maintained at the Federal Reserve Bank.
These reserve balances are based primarily on deposit levels and totaled
approximately $271,000 at December 31, 1997.
NOTE P -- CONDENSED FINANCIAL STATEMENTS -- PARENT COMPANY ONLY
The following presents the condensed balance sheets as of June 30, 1998
(unaudited) and December 31, 1997 and statements of income and of cash flows for
the six months ended June 30, 1998 and 1997 (unaudited) and for each of the two
years ended December 31, 1997 for MegaBank Financial Corporation.
F-20
<PAGE> 89
MEGABANK FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF AND FOR THE SIX MONTHS ENDED JUNE 30, 1998 IS UNAUDITED)
MEGABANK FINANCIAL CORPORATION
BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1998 1997
----------- ------------
(UNAUDITED)
(AMOUNTS IN THOUSANDS)
<S> <C> <C>
ASSETS
Cash and interest bearing deposits.......................... $ 510 $ 296
Investment securities available for sale.................... 2,000 454
Investment in bank subsidiary............................... 20,854 12,626
Investment in trust subsidiary.............................. 371 --
Investment in future bank premises.......................... 1,247 --
Trust preferred securities issuance cost, net............... 740 255
Other assets................................................ 232 277
------- -------
Total assets...................................... $25,954 $13,908
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Note payable................................................ $ -- $ 2,000
Accrued interest and other liabilities...................... 269 330
Company obligated mandatorily redeemable preferred
securities of subsidiary trust holding solely Junior
Subordinated Debentures................................... 12,371 --
Shareholders' equity........................................ 13,314 11,578
------- -------
Total liabilities and shareholders' equity........ $25,954 $13,908
======= =======
</TABLE>
F-21
<PAGE> 90
MEGABANK FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF AND FOR THE SIX MONTHS ENDED JUNE 30, 1998 IS UNAUDITED)
MEGABANK FINANCIAL CORPORATION
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEARS ENDED
JUNE 30, DECEMBER 31,
----------------- ---------------
1998 1997 1997 1996
------- ------- ------ ------
(UNAUDITED)
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C>
Income
Dividends from bank subsidiary........................... $ -- $1,000 $1,000 $ 950
Interest................................................. 40 3 12 32
Rental income from subsidiary............................ 203 148 341 263
Other rental income...................................... 51 91 137 206
Gain on sale of investment securities available for
sale.................................................. 25 -- 341 --
------ ------ ------ ------
Total income..................................... 319 1,242 1,831 1,451
Expenses
Interest................................................. 450 92 179 240
Occupancy and equipment expense.......................... 184 177 362 360
Other.................................................... 452 363 463 203
------ ------ ------ ------
Total expenses................................... 1,086 632 1,004 803
------ ------ ------ ------
Income (loss) before income taxes and equity in
undistributed net income of subsidiaries................. (767) 610 827 648
Income tax benefit......................................... 286 133 64 114
------ ------ ------ ------
Income (loss) before undistributed net income of
subsidiaries............................................. (481) 743 891 762
Equity in undistributed net income of subsidiaries......... 2,196 515 1,943 1,658
------ ------ ------ ------
Net income................................................. $1,715 $1,258 $2,834 $2,420
====== ====== ====== ======
</TABLE>
F-22
<PAGE> 91
MEGABANK FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF AND FOR THE SIX MONTHS ENDED JUNE 30, 1998 IS UNAUDITED)
MEGABANK FINANCIAL CORPORATION
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEARS ENDED
JUNE 30, DECEMBER 31,
---------------- -----------------
1998 1997 1997 1996
------- ------ ------- -------
(UNAUDITED)
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C>
Cash flows from operating activities
Net income.............................................. $ 1,715 $1,258 $ 2,834 $ 2,420
Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation....................................... 4 1 3 5
Amortization of preferred securities issuance
costs............................................ 10 -- -- --
Equity in undistributed net income of
subsidiaries..................................... (2,196) (515) (1,942) (1,658)
Gain on sale of investment securities available for
sale............................................. (25) -- (341) --
(Increase) decrease in other assets................ 51 (8) (67) (158)
Increase (decrease) in accrued expenses and other
liabilities...................................... (61) (33) 268 (12)
------- ------ ------- -------
Net cash provided by (used in) operating
activities.................................. (502) 703 755 597
Cash flows from investing activities
Purchase of securities available for sale............. (2,516) (36) (466) --
Proceeds for sales of securities available for sale... 606 -- 495 --
Investment in future bank premises.................... (1,250) -- -- --
Capital investment in bank subsidiary................. (6,000) -- -- --
------- ------ ------- -------
Net cash provided by (used in) investing
activities.................................. (9,160) (36) 29 --
Cash flows from financing activities
Preferred securities issuance costs................... (495) -- (255) --
Principal payments on note payable.................... (2,000) (500) (500) (656)
Proceeds from issuance of preferred securities........ 12,371 -- -- --
------- ------ ------- -------
Net cash provided by (used in) financing
activities.................................. 9,876 (500) (755) (656)
------- ------ ------- -------
Net increase (decrease) in cash......................... 214 167 29 (59)
Cash, beginning of period............................... 296 267 267 326
------- ------ ------- -------
Cash, end of period..................................... $ 510 $ 434 $ 296 $ 267
======= ====== ======= =======
</TABLE>
F-23
<PAGE> 92
MEGABANK FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF AND FOR THE SIX MONTHS ENDED JUNE 30, 1998 IS UNAUDITED)
NOTE Q -- SUBSEQUENT EVENTS (UNAUDITED)
STOCK SPLIT
As part of its strategy in completing an initial public offering of common
stock, the Company plans to effect a thirty-for-one stock split. Because a
majority of the Board of Directors have advised the Company that they will vote
in favor of this proposal, approval is reasonably assured. Accordingly,
references in the accompanying financial statements to numbers of shares and per
share amounts have been retroactively restated to reflect the stock split.
401(k) PLAN
On May 21, 1998, the Board of Directors of the Bank approved the MegaBank
401(k) Savings Plan. The Plan is effective July 1, 1998. Employees who have
completed one year of service, and meet other conditions, are eligible for the
Plan. The Bank will match 50% of the first 6% of compensation which employees
contribute to the Plan. The Bank's contributions to the Plan vest ratably over
six years. The Plan replaces the existing IRA contribution plan.
CHARTER CONVERSION
The Company has applied to the Office of Thrift Supervision, Department of
Treasury, to change its status to a savings and loan holding company within the
meaning of the Home Owners' Loan Act of 1933 ("HOLA"), as amended. Under the
proposal, the Company will be registered with the Office of Thrift Supervision
("OTS") and subject to OTS regulations, examinations, supervision and reporting
requirements. In addition, the Bank has applied to the Office of Thrift
Supervision to convert the Bank's charter from a state-chartered stock
institution to a federal stock savings bank. Management believes that the Bank's
balance sheet is currently more reflective of a thrift than a commercial bank,
and that the flexibilities and opportunities with a thrift charter are more in
line with the long range plans of the Bank than those that are available under
its present charter. The Office of Thrift Supervision approved the applications.
The Company effected both of the conversions on September 1, 1998. In connection
with its charter conversion, the Bank changed its name from MegaBank of Arapahoe
to MegaBank.
STOCK INCENTIVE PLAN
In August 1998, the Company adopted the 1998 Long-Term Incentive Plan (the
"Incentive Plan"). The purpose of the Incentive Plan is to provide continuing
incentives to the Company's and its subsidiaries' key employees, which may
include officers and members of the Board of Directors. The Incentive Plan
provides for an authorization of 500,000 shares of common stock for issuance
thereunder. Under the Incentive Plan, the Company may grant to participants
awards of stock options, restricted stock, stock appreciation rights,
performance shares or any combination thereof.
The Incentive Plan is to be administered by the Board of Directors or a
Compensation Committee of the Board of Directors composed of at least two
non-employee members. Subject to the terms of the Incentive Plan, the Board or
Compensation Committee determines, among other matters, the persons to whom
awards are granted and the terms of the awards.
Under the stock option component of the Incentive Plan, the Company may
grant both incentive stock options ("incentive stock options") intended to
qualify under Section 422 of the Internal Revenue Code of 1986, as amended (the
"Code"), and options which are not qualified as incentive stock options.
Incentive stock options may not be granted at an exercise price of less than the
fair market value of the common stock on the date of grant, while non-qualified
stock options may be granted at any exercise price. The exercise price may be
paid in cash, in shares of common stock (valued at fair market value at the date
of exercise) or by a combination of such means of payment, as may be determined
by the Board or Compensation Committee.
F-24
<PAGE> 93
MEGABANK FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF AND FOR THE SIX MONTHS ENDED JUNE 30, 1998 IS UNAUDITED)
Under the restricted component of the Incentive Plan, the Company may award
shares of restricted stock upon payment of consideration as determined by the
Board or Compensation Committee. Upon the award, a restriction period (not to
exceed ten years) and/or performance goals may be set. Subject to the terms of
each individual award, a restricted stock award is forfeited upon termination of
employment by the recipient during the restriction period and any consideration
paid by the participant is returned.
An award of a stock appreciation right allows a recipient to receive a cash
payment or shares of common stock to the extent of any appreciation in the book
value or the fair market value of the common stock of the Company over a
specified period of time. Stock appreciation rights may also be awarded in
tandem with stock options, and recipients of such tandem awards may elect to
exercise the award as a stock option or as a stock appreciation right.
Under the performance share component of the Incentive Plan, recipients are
awarded a specified number of shares of common stock of the Company subject to
the recipient or the Company attaining specified performance goals as the Board
or Compensation Committee may determine. The Board or Compensation Committee,
under certain circumstances, may waive or modify performance criteria on
existing performance share awards.
The Incentive Plan will be discontinued in the event of the dissolution or
liquidation of the Company or in the event of a reorganization (such as a
merger, consolidation, or sale of substantially all of the assets of the
Company) in which the Company is not the surviving or acquiring company, or in
which the Company is or becomes a wholly-owned subsidiary of another company
after the effective date of the reorganization and no plan or agreement
respecting the reorganization is established which specifically provides for the
continuation of the Incentive Plan and the change, conversion, or exchange of
the common stock relating to existing awards under the Incentive Plan for
securities of another corporation. Upon the dissolution of the Incentive Plan,
all awards will become fully vested and all outstanding options and stock
appreciation rights will become immediately exercisable by the holder thereof.
On September 1, 1998, the Company granted and issued options to purchase up
to 108,500 shares of common stock (on a post-stock split basis) to directors and
employees of the Company, exercisable as follows:
<TABLE>
<CAPTION>
OPTIONS EXERCISE PRICE
GRANTED PER SHARE
- ------- --------------
<S> <C>
58,500................................................. $10
50,000................................................. 11
</TABLE>
Of the 108,500 options issued, 15,000 were nonqualified stock options and
93,500 were incentive stock options. Options must be exercised within a ten-year
period. Options to purchase shares of common stock are exercisable as follows:
<TABLE>
<CAPTION>
EXERCISABLE
ON OR AFTER OPTIONS
- ----------- -----------
<S> <C>
September 1, 2000........................................ 21,700
September 1, 2001........................................ 32,550
September 1, 2002........................................ 54,250
-------
108,500
=======
</TABLE>
The effect of these options for the determination of diluted earnings per
share for each of the periods, computed under the "treasury-stock" method, is
immaterial.
F-25
<PAGE> 94
MEGABANK FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF AND FOR THE SIX MONTHS ENDED JUNE 30, 1998 IS UNAUDITED)
AMENDMENT OF STOCK PURCHASE AGREEMENT
The terms of the Company's Stock Purchase Agreement are described in note
O. On September 1, 1998, the method of determining the purchase price to be paid
by the Company in the event of the death of the Company's Chairman of the Board
of Directors was amended. Under the amendment, the purchase price of the common
stock would be based on the greater of 80% of its average closing bid price on
any recognized quotation system for a designated period or its appraised value.
F-26
<PAGE> 95
================================================================================
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS IN
CONNECTION WITH THE OFFER CONTAINED HEREIN AND, IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED
BY THE COMPANY OR ANY UNDERWRITERS. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR
ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION
THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE AS OF
WHICH INFORMATION IS SET FORTH HEREIN. THIS PROSPECTUS DOES NOT CONSTITUTE AN
OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY OF THE SECURITIES OFFERED
HEREBY IN ANY JURISDICTION TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH
OFFER OR SOLICITATION.
---------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary........................................ 4
Selected Consolidated Financial
Data..................................................... 6
Risk Factors.............................................. 8
Use of Proceeds........................................... 14
Dividend Policy........................................... 15
Dilution.................................................. 16
Capitalization............................................ 17
Management's Discussion and
Analysis of Financial Condition
and Results of Operations................................ 18
Business ................................................. 38
Management................................................ 44
Related Party Transactions................................ 49
Principal and Selling Shareholders........................ 51
Supervision and Regulation................................ 52
Description of Capital Stock.............................. 62
Shares Eligible for Future Sale........................... 65
Underwriting.............................................. 66
Legal Matters............................................. 68
Experts................................................... 68
Available Information..................................... 68
Index to Financial Statements............................. F-1
</TABLE>
================================================================================
================================================================================
1,450,000 SHARES
MEGABANK FINANCIAL
CORPORATION
COMMON STOCK
---------------
MEGABANK
[LOGO]
---------------
---------------
PROSPECTUS
---------------
HOWE BARNES INVESTMENTS, INC.
__________, 1998
================================================================================
<PAGE> 96
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Directors, officers, employees and agents of the Company and/or the
Bank may be entitled to benefit from the indemnification provisions contained in
the Colorado Business Corporation Act, Title Seven of the Colorado Revised
Statutes (the "CBCA"), the Company's Articles of Incorporation and certain
indemnification agreements. In addition, certain provisions in the CBCA and the
Articles of Incorporation limit the liability of directors of the Company. The
general effect of these provisions is summarized below:
Article 109 of the CBCA permits a Colorado corporation to indemnify any
person who was or is a party or is threatened to be made a party to any suit,
action or other proceeding by reason of the fact that such person is or was a
director, officer, employee or agent of the corporation, or is or was serving at
the request of the corporation as a director, officer, employee or agent of
another corporation, partnership, or other enterprise. Such indemnification may
be against expenses, including attorneys' fees, judgments, fines and other
amounts in connection with such proceeding. Indemnification is available if such
person acted in good faith and in a manner reasonably believed to be in or not
opposed to the best interests of the corporation, or, with respect to any
criminal action or proceeding, such person had no reasonable cause to believe
that the conduct was unlawful. Unless a court of competent jurisdiction
otherwise orders, indemnification is not available in connection with a
proceeding by or in the right of the corporation if the person is adjudged
liable to the corporation or derived an improper personal benefit. A corporation
is required to indemnify a director or officer who is wholly successful in the
defense of any such proceeding. Expenses (including attorneys' fees) incurred by
a director, officer, employee or agent of the corporation in defending any such
proceeding may be advanced by the corporation before the final disposition if
such person furnishes an undertaking to repay such advances if it is ultimately
determined that such person is not entitled to be indemnified. Before a
corporation may indemnify or advance expenses to a person under these
provisions, the board of directors (excluding any directors who are parties to
such a proceeding), independent legal counsel appointed by the board of
directors, or the shareholders must provide authorization. A corporation may
purchase insurance against any liability of individuals for whom the corporation
may provide such indemnification. Any provisions in a corporation's articles of
incorporation, bylaws, resolutions or in a contract (except an insurance policy)
for such indemnification are valid only to the extent not inconsistent with
Article 109 of the CBCA.
Article XIII of the Company's Articles of Incorporation states that the
Company shall have all powers to indemnify and make advances in connection with
such indemnification to its directors, officers and others, provided that such
powers and the exercise thereof are consistent with the Colorado Corporation
Code (which preceded the CBCA). This Article also states that the board of
directors is authorized, without shareholder action, to exercise the Company's
powers of indemnification, whether by provision in the bylaws or otherwise.
The Bank has entered into indemnification agreements with certain of
its officers and directors in consideration of their agreement to serve in such
capacities. The terms of each agreement are identical for each such officer or
director. The indemnification agreement provides that the Bank will indemnify
and pay advances to the director or officer to the maximum extent
II-1
<PAGE> 97
provided in the Bank's articles of incorporation or bylaws, subject to approval
by the board of directors and certain conditions and limitations. Such
indemnification is not available in connection with expenses, penalties or other
amounts in connection with proceedings brought by a regulatory agency resulting
in the assessment of civil money penalties of requiring the director or officer
to make payments to the Bank, nor will the Bank pay any advances in connection
with a proceeding brought by an regulatory agency. For each annual period
following the date of the indemnification agreement, the total liability of the
Bank for indemnification of all officers and directors of the bank, whether
under the agreement or otherwise, cannot exceed $1,000,000. The indemnification
available under the agreement does not limit any other indemnification which may
be available. However, indemnification under the agreement is available only
after the exhaustion of any available insurance coverage.
Section 7-108-402 of the CBCA permits a corporation, if so provided in
the articles of incorporation, to eliminate or limit the personal liability of a
director to the corporation or its shareholders for monetary damages for breach
of fiduciary duty. However, such a provision cannot eliminate or limit such
liability arising out of a breach of the director's duty of loyalty, acts or
omissions not in good faith or which involve intentional misconduct or knowing
violations of law, unlawful distributions, or any transaction for which the
director derived an improper personal benefit. Article XV of the Company's
Articles of Incorporation provides for such elimination of director liability.
Section 11 of the proposed Underwriting Agreement filed herewith as
Exhibit 1.1 among the Registrant, the Selling Shareholder and the Underwriter
contains customary cross indemnification provisions.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
<TABLE>
<S> <C>
Securities and Exchange Commission registration fee $ 6,395
NASD fee 2,668
Nasdaq National Market fee 37,000
Legal fees and expenses 80,000
Blue Sky fees and expenses 3,000
Accounting fees and expenses 50,000
Printing expenses 80,000
Transfer agent fees 10,000
Miscellaneous expenses 30,937
--------
Total $300,000
========
</TABLE>
All of the above items except the registration fee are estimated. The
Selling Shareholder may incur and will pay offering expenses estimated at $5,000
for custodian and other fees.
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES
None.
II-2
<PAGE> 98
ITEM 27. EXHIBITS
(a) Exhibits
Exhibit No. Description
1.1 Form of Underwriting Agreement (1).
3.1 Amended and Restated Articles of Incorporation of MegaBank
Financial Corporation (2).
3.2 Bylaws of MegaBank Financial Corporation (2).
4.1 Form of Subordinated Indenture dated February 9, 1998 entered
into between the Registrant and Wilmington Trust Company, as
Indenture Trustee (2).
4.2 Form of Junior Subordinated Debenture (included as an exhibit
to Exhibit 4.1) (2).
4.7 Preferred Securities Guarantee Agreement (2).
4.8 Agreement as to Expenses and Liabilities (included as an
exhibit to Exhibit 4.5) (2).
4.9 Specimen Common Stock Certificate of Registrant (1).
5.1 Form of opinion of Jones & Keller, P.C. (1).
10.1 Federal Funds Transactions Purchase Agreement dated November
8, 1993 between MegaBank of Arapahoe and Bankers' Bank of the
West and renewal letter dated October 20, 1997 from Bankers'
Bank of the West (2).
10.2 Lease dated December 29, 1994 between Nagrom, L.L.C. and
MegaBank Financial Corporation (2).
10.3 Advance, Pledge and Security Agreement dated October 26, 1995
between Federal Home Loan Bank of Topeka and MegaBank of
Arapahoe (2).
10.4 Federal Funds line of credit agreement signed September 24,
1997 between Norwest Bank Colorado, N.A. and MegaBank of
Arapahoe (2).
10.5 Consulting Agreement - First Fidelity Corp. (2).
10.6 Branching Rights Purchase Agreement - First State Bank of
Hotchkiss (2).
II-3
<PAGE> 99
10.7 Amended and Restated Stock Purchase Agreement by and among
MegaBank Financial Corporation, Thomas R. Kowalski, the Ryan
R. Kowalski Trust, the Realtek Company Profit Sharing Plan and
Trust, Thomas Investments Partnership and Orchard Valley
Financial Corporation dated as of December 4, 1997 and as
further amended on September 1, 1998 (1).
10.8 Indemnification Agreement dated July 20, 1995 between MegaBank
Financial Corporation ("MegaBank") and Raymond L. Anilionis,
Warren P. Cohen and Thomas R. Kowalski (the "Guarantors") (2).
10.9 Registrant's 1998 Long-Term Incentive Plan (1).
11.1 Statement re Computation of per share earnings - see
Consolidated Financial Statements.
21 Subsidiaries of the Registrant (2).
23.1 Consent of Fortner, Bayens, Levkulich & Co., P.C. (1).
23.2 Consent of Jones & Keller, P.C. (included in Exhibit 5.1
above).
24.1 Power of attorney (included on the signature page).
- ---------
(1) Filed herewith.
(2) Incorporated by reference herein to the filing under the same exhibit
number to the Registrant's Registration Statement on Form SB-2
(Registration No. 333-42189 and 333- 42191) dated December 12, 1997 and
as amended on January 22, 1998 and January 29, 1998.
ITEM 28. UNDERTAKINGS
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Registrant of expenses incurred
or paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
The undersigned Registrant hereby undertakes to provide to the
Underwriters at the closing specified in the Underwriting Agreement certificates
in such denominations and registered in such names as required by the
Underwriters to permit prompt delivery to each purchaser.
II-4
<PAGE> 100
The Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part of a
registration statement in reliance upon Rule 430A and contained in the form of
prospectus filed by Registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under
the Securities Act shall be deemed to be part of the registration statement as
of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of prospectus
shall be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
II-5
<PAGE> 101
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
Registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form SB-2 and has duly caused this Amendment
to this Registration Statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of Englewood, State of Colorado, on this
14th day of September, 1998.
MEGABANK FINANCIAL CORPORATION
By: /s/ THOMAS R. KOWALSKI
-----------------------------------------
Thomas R. Kowalski,
Chairman and Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL BY THESE PRESENTS, that each person whose signature appears
below hereby constitutes and appoints Thomas R. Kowalski and Susan A. Putland
and each of them, his true and lawful attorneys-in-fact and agents, with full
power of substitution and resubstitution for him and in his name, place and
stead, in any and all capacities, to sign any and all amendments (including
post-effective amendments) to this Registration Statement and to sign any
registration statement and amendments thereto for the same offering filed
pursuant to Rule 462(b), and to file the same, with all exhibits thereto, and
other documents in connection therewith, with the Securities and Exchange
Commission, granting upon said attorneys-in-fact and agents, and each of them,
full power and authority to do and perform each and every act and thing
requisite or necessary to be done in and about the premises, as fully to all
intents and purposes as he or she might or could do in person, hereby ratifying
and confirming all that said attorneys-in-fact and agents or either of them, or
their or his or her substitute or substitutes, may lawfully do or cause to be
done by virtue thereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signatures Title Date
---------- ----- ----
<S> <C> <C>
/s/ THOMAS R. KOWALSKi Director, Chairman and Chief September 14, 1998
- -------------------------- Executive Officer (Principal
Thomas R. Kowalski Executive Officer)
/s/ LARRY A. OLSEN Director, President and Chief September 14, 1998
- -------------------------- Operating Officer
Larry A. Olsen
/s/ RAYMOND L. ANILIONIS Director September 14, 1998
- --------------------------
Raymond L. Anilionis
</TABLE>
II-6
<PAGE> 102
<TABLE>
<S> <C> <C>
/s/ DR. DONALD B. BROWN Director September 14, 1998
- ---------------------------
Dr. Donald B. Brown
/s/ WILLIAM F. SIEVERS Director September 14, 1998
- ---------------------------
William F. Sievers
/s/ HIRAM J. WELTON Treasurer, Principal Financial September 14, 1998
- --------------------------- and Accounting Officer
Hiram J. Welton
</TABLE>
II-7
<PAGE> 103
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit No. Description
- ----------- -----------
<S> <C>
1.1 Form of Underwriting Agreement
4.9 Specimen Common Stock Certificate of Registrant
5.1 Form of opinion of Jones & Keller, P.C.
10.7 Amended and Restated Stock Purchase Agreement by and among
MegaBank Financial Corporation, Thomas R. Kowalski, the Ryan
R. Kowalski Trust, the Realtek Company Profit Sharing Plan and
Trust, Thomas Investments Partnership and Orchard Valley
Financial Corporation dated as of December 4, 1997 and as
further amended on September 1, 1998
10.9 Registrant's 1998 Long-Term Incentive Plan
11.1 Statement re Computation of per share earnings - see Consolidated Financial
Statements
23.1 Consent of Fortner, Bayens, Levkulich & Co., P.C.
23.2 Consent of Jones & Keller, P.C. (included in Exhibit 5.1 above)
24.1 Power of attorney (included on the signature page)
</TABLE>
<PAGE> 1
EXHIBIT 1.1
MEGABANK FINANCIAL CORPORATION
1,450,000 SHARES COMMON STOCK(1)
UNDERWRITING AGREEMENT
_______________, 1998
Howe Barnes Investments, Inc.
As Representative of the several Underwriters
named in Schedule A
135 South LaSalle Street
Chicago, Illinois 60603
Ladies and Gentlemen:
Section 1. Introductory. MegaBank Financial Corporation (the
"Company"), a Colorado corporation, has an authorized capital stock consisting
of 10,000,000 shares of Preferred Stock, no par value, none of which were
outstanding as of ____________, 1998 and 50,000,000 shares, no par value, of
Common Stock ("Common Stock"), of which 6,407,340 shares were outstanding as of
such date. The Company proposes to issue and sell 1,200,000 shares of its
authorized but unissued Common Stock and a shareholder of the Company (referred
to as the "Selling Shareholder" and named in Schedule B) proposes to sell
250,000 shares of the Company's issued and outstanding Common Stock to the
several underwriters named in Schedule A, as it may be amended by the Pricing
Agreement hereinafter defined (the "Underwriters"), who are acting severally
and not jointly. Collectively, such total of 1,450,000 shares of Common Stock
proposed to be sold by the Company and the Selling Shareholder is hereinafter
referred to as the "Firm Shares." In addition, the Company and the Selling
Shareholder propose to grant to the Underwriters an option to purchase up to
217,500 additional shares of Common Stock ("Option Shares") as provided in
Section 5 hereof. The Firm Shares and, to the extent such option is exercised,
the Option Shares, are hereinafter collectively referred to as the "Shares."
You have advised the Company and the Selling Shareholder that the
Underwriters propose to make a public offering of their respective portions of
the Shares as soon as you deem advisable after the registration statement
hereinafter referred to becomes effective, if it has not yet become effective,
and the Pricing Agreement hereinafter defined has been executed and delivered.
Prior to the purchase and public offering of the Shares by the several
Underwriters, the Company, the Selling Shareholder and the Representative,
acting on behalf of the several Underwriters, shall enter into an agreement
substantially in the form of Exhibit A hereto ("Pricing Agreement"). The
Pricing Agreement may take the form of an exchange of any standard form of
written telecommunication between the Company, the Selling Shareholder and the
Representative and shall specify such applicable information as is indicated in
Exhibit A hereto. The offering of the Shares will be governed by this
Agreement, as supplemented by the Pricing Agreement. From and
__________________________________
(1) Plus an option to acquire up to 217,500 additional shares to cover
overallotments.
1
<PAGE> 2
after the date of the execution and delivery of the Pricing Agreement, this
Agreement shall be deemed to incorporate the Pricing Agreement.
The Company and the Selling Shareholder hereby confirm their
agreements with the Underwriters as follows:
Section 2. Representations and Warranties of the Company. The
Company represents and warrants to the several Underwriters that:
(a) A registration statement on Form SB-2 (File No. 333-_______)
and a related preliminary prospectus with respect to the Shares have been
prepared and filed with the Securities and Exchange Commission ("Commission")
by the Company in conformity with the requirements of the Securities Act of
1933, as amended, and the rules and regulations of the Commission thereunder
(collectively, the "1933 Act"; unless indicated to the contrary, all references
herein to specific rules are rules promulgated under the 1933 Act); and the
Company has so prepared and has filed such amendments thereto, if any, and such
amended preliminary prospectuses as may have been required to the date hereof
and will file such additional amendments thereto and such amended prospectuses
as may hereafter be required. There have been or will promptly be delivered to
you three signed copies of such registration statement and amendments, three
copies of each exhibit filed therewith, and conformed copies of such
registration statement and amendments (but without exhibits) and of the related
preliminary prospectus or prospectuses and final forms of prospectus for each
of the Underwriters. Such registration statement (as amended, if applicable)
at the time it becomes effective and the prospectus constituting a part thereof
(including the information, if any, deemed to be part thereof pursuant to Rule
430A(b) and/or Rule 434), as from time to time amended or supplemented, are
hereinafter referred to as the "Registration Statement," and the "Prospectus,"
respectively, except that if any revised prospectus shall be provided to the
Underwriters by the Company for use in connection with the offering of the
Shares which differs from the Prospectus on file at the Commission at the time
the Registration Statement became or becomes effective (whether or not such
revised prospectus is required to be filed by the Company pursuant to Rule
424(b)), the term Prospectus shall refer to such revised prospectus from and
after the time it was provided to the Underwriters for such use. If the
Company elects to rely on Rule 434 of the 1933 Act, all references to
"Prospectus" shall be deemed to include, without limitation, the form of
prospectus and the term sheet, taken together, provided to the Underwriters by
the Company in accordance with Rule 434 of the 1933 Act ("Rule 434
Prospectus"). Any registration statement (including any amendment or
supplement thereto or information which is deemed part thereof) filed by the
Company under Rule 462(b) ("Rule 462(b) Registration Statement") shall be
deemed to be part of the "Registration Statement" as defined herein, and any
prospectus (including any amendment or supplement thereto or information which
is deemed part thereof) included in such registration statement shall be deemed
to be part of the "Prospectus," as defined herein, as appropriate. The
Securities Exchange Act of 1934, as amended, and the rules and regulations of
the Commission thereunder are hereinafter collectively referred to as the
"Exchange Act."
(b) The Commission has not issued any order preventing or
suspending the use of any preliminary prospectus, and each preliminary
prospectus has conformed in all material respects with the requirements of the
1933 Act and, as of its date, has not included any untrue statement of a
material fact or omitted to state a material fact necessary to make the
statements therein not misleading; and when the Registration Statement became
or becomes effective, and at all times subsequent thereto, up to the First
Closing Date or the Second Closing Date hereinafter defined, as the case may
be, the Registration Statement, including the information deemed to be part of
the
2
<PAGE> 3
Registration Statement at the time of effectiveness pursuant to Rule 430A(b),
if applicable, and the Prospectus and any amendments or supplements thereto,
contained or will contain all statements that are required to be stated therein
in accordance with the 1933 Act and in all material respects conformed or will
in all material respects conform to the requirements of the 1933 Act, and
neither the Registration Statement nor the Prospectus, nor any amendment or
supplement thereto, included or will include any untrue statement of a material
fact or omitted or will omit to state a material fact required to be stated
therein or necessary to make the statements therein not misleading; provided,
however, that the Company makes no representation or warranty as to information
contained in or omitted from any preliminary prospectus, the Registration
Statement, the Prospectus or any such amendment or supplement in reliance upon
and in conformity with written information furnished to the Company by or on
behalf of any Underwriter through the Representative specifically for use in
the preparation thereof.
(c) The Company has been duly organized and is validly existing
and in good standing as a unitary thrift holding company within the meaning of
the Home Owners' Loan Act of 1933, as amended ("HOLA") and is registered with
the Office of Thrift Supervision ("OTS"). Except as otherwise noted to you,
the Company does not directly or indirectly own any stock or other equity
interest in any corporation, partnership, joint venture, unincorporated
association or other entity other than MegaBank (the "Bank") and MB Capital I,
(the Bank and any other entities owned by the Company being collectively
referred to herein as the "Subsidiaries"). Each Subsidiary has been duly
incorporated, is validly existing as a corporation in good standing under the
laws of the jurisdiction of its incorporation, has the corporate power and
authority to own or lease its properties and conduct its business as described
in the Prospectus, and is duly qualified to transact business in all
jurisdictions in which the conduct of its business or its ownership or leasing
or property requires such qualification and the failure so to qualify would
have a material adverse effect on the business or condition, financial or
otherwise, of the Company and the Subsidiaries, taken as a whole; and no
proceeding of which the Company has knowledge has been instituted in any such
jurisdiction, revoking, limiting or curtailing, or seeking to revoke, limit or
curtail, such power and authority or qualification. All outstanding shares of
capital stock of each of the Subsidiaries have been duly authorized and validly
issued, are fully paid and non-assessable, and are owned, directly or
indirectly, by the Company free and clear of all liens, encumbrances and
security interests, except as otherwise noted to you. No options, warrants or
other rights to purchase, agreements or other obligations to issue, or other
rights to convert any obligations into, shares of capital stock or ownership
interests in any of the Subsidiaries are outstanding.
(d) Except as disclosed in the Registration Statement, the Company
owns directly or indirectly 100 percent of the issued and outstanding capital
stock of each of its Subsidiaries, free and clear of any claims, liens,
encumbrances or security interests and all of such capital stock has been duly
authorized and validly issued and is fully paid and nonassessable.
(e) The issued and outstanding shares of capital stock of the
Company as set forth in the Prospectus have been duly authorized and validly
issued, are fully paid and nonassessable, and conform to the description
thereof contained in the Prospectus.
(f) The Shares to be sold by the Company have been duly authorized
and when issued, delivered and paid for pursuant to this Agreement, will be
validly issued, fully paid and nonassessable, and will conform to the
description thereof contained in the Prospectus.
(g) The making and performance by the Company of this Agreement
and the Pricing Agreement have been duly authorized by all necessary corporate
action and will not violate any
3
<PAGE> 4
provision of the Company's charter or bylaws and will not result in the breach,
or be in contravention, of any provision of any agreement, franchise, license,
indenture, mortgage, deed of trust, or other instrument to which the Company or
any subsidiary is a party or by which the Company, any subsidiary or the
property of any of them may be bound or affected, or any order, rule or
regulation applicable to the Company or any subsidiary of any court or
regulatory body, administrative agency or other governmental body having
jurisdiction over the Company or any subsidiary or any of their respective
properties, or any order of any court or governmental agency or authority
entered in any proceeding to which the Company or any subsidiary was or is now
a party or by which it is bound. No consent, approval, authorization or other
order of any court, regulatory body, administrative agency or other
governmental body is required for the execution and delivery of this Agreement
or the Pricing Agreement or the consummation of the transactions contemplated
herein or therein, except for compliance with the 1933 Act and blue sky laws
applicable to the public offering of the Shares by the several Underwriters and
clearance of such offering with the National Association of Securities Dealers,
Inc. ("NASD"). This Agreement has been duly executed and delivered by the
Company.
(h) The accountants who have expressed their opinions with respect
to certain of the financial statements and schedules included in the
Registration Statement are independent accountants as required by the 1933 Act.
(i) The financial statements, together with the related notes and
schedules, contained in the Registration Statement and Prospectus present
fairly the consolidated financial position, results of operations,
shareholders' equity and cash flows of the Company and its consolidated
Subsidiaries on the basis stated therein at the indicated dates and for the
indicated periods. Such financial statements have been prepared in accordance
with generally accepted accounting principles consistently applied throughout
the periods involved, and all adjustments necessary for a fair presentation of
results for such periods have been made, except as otherwise stated therein.
The selected financial and statistical data included in the Registration
Statement present fairly the information shown therein on the basis stated in
the Registration Statement and have been compiled on a basis consistent with
the financial statements presented therein.
(j) Neither the Company nor any Subsidiary is in violation of its
charter or in default under any consent decree, or in default with respect to
any material provision of any lease, loan agreement, franchise, license, permit
or other contract obligation to which it is a party; and there does not exist
any state of facts which constitutes an event of default as defined in such
documents or which, with notice or lapse of time or both, would constitute such
an event of default, in each case, except for defaults which neither singly nor
in the aggregate are material to the Company and its Subsidiaries taken as a
whole.
(k) There are no material legal or governmental proceedings
pending, or to the Company's knowledge, threatened to which the Company or any
Subsidiary is or may be a party or of which material property owned or leased
by the Company or any Subsidiary is or may be the subject, or related to
environmental or discrimination matters which are not disclosed in the
Prospectus, or which question the validity of this Agreement or the Pricing
Agreement or any action taken or to be taken pursuant hereto or thereto.
(l) There are no holders of securities of the Company having
rights to registration thereof or preemptive rights to purchase Common Stock
except as disclosed in the Prospectus. Holders of registration rights have
waived such rights with respect to the offering being made by the Prospectus.
4
<PAGE> 5
(m) The Company and each of its Subsidiaries have good and
marketable title to all the properties and assets reflected as owned in the
financial statements hereinabove described (or elsewhere in the Prospectus),
subject to no lien, mortgage, pledge, charge or encumbrance of any kind except
those, if any, reflected in such financial statements (or elsewhere in the
Prospectus) or which are not material to the Company and its Subsidiaries taken
as a whole. The Company and each of its Subsidiaries hold their respective
leased properties which are material to the Company and its Subsidiaries taken
as a whole under valid and binding leases.
(n) The Company has not taken and will not take, directly or
indirectly, any action designed to or which has constituted or which might
reasonably be expected to cause or result, under the Exchange Act or otherwise,
in stabilization or manipulation of the price of any security of the Company to
facilitate the sale or resale of the Shares.
(o) Since the respective dates as of which information is given in
the Registration Statement, as it may be amended or supplemented, (A) there has
not been any material adverse change, or any development involving a
prospective material adverse change, in or affecting the condition, financial
or otherwise, of the Company and the Subsidiaries taken as a whole, or the
business affairs, management, financial position, shareholders' equity or
results of operations of the Company and the Subsidiaries, taken as a whole,
whether or not occurring in the ordinary course of business, (B) there has not
been any transaction not in the ordinary course of business entered into by the
Company or any of the Subsidiaries which is material to the Company and the
Subsidiaries, taken as a whole, other than transactions described or
contemplated in the Registration Statement, (C) the Company and the
Subsidiaries have not incurred any material liabilities or obligations, which
are not in the ordinary course of business or which could result in a material
reduction in the future earnings of the Company and the Subsidiaries, (D) the
Company and the Subsidiaries have not sustained any material loss or
interference with their respective businesses or properties from fire, flood,
windstorm, accident or other calamity, whether or not covered by insurance, (E)
there has not been any change in the capital stock of the Company or the
Subsidiaries (other than upon the exercise of options and warrants described in
the Registration Statement), or any material increase in the short-term or
long-term debt (including capitalized lease obligations) of the Company and the
Subsidiaries, taken as a whole, and (F) there has not been any declaration or
payment of any dividends or any distributions of any kind with respect to the
capital stock of the Company or the Subsidiaries other than any dividends or
distributions described or contemplated in the Registration Statement.
(p) The Company agrees not to sell, contract to sell or otherwise
dispose of any Common Stock or securities convertible into Common Stock (except
Common Stock issued pursuant to currently outstanding options, warrants or
convertible securities) for a period of 180 days after this Agreement becomes
effective without the prior written consent of the Representatives. The
Company has obtained similar agreements from each of its officers, directors
and principal shareholders.
(q) There is no material document of a character required to be
described in the Registration Statement or the Prospectus or to be filed as an
exhibit to the Registration Statement which is not described or filed as
required.
(r) The Company together with its Subsidiaries owns and possesses
all right, title and interest in and to, or has duly licensed from third
parties, all patents, patent rights, trade secrets, inventions, know-how,
trademarks, trade names, copyrights, service marks and other proprietary rights
("Trade Rights") material to the business of the Company and each of its
Subsidiaries taken
5
<PAGE> 6
as a whole. Neither the Company nor any of its Subsidiaries has received any
notice of infringement, misappropriation or conflict from any third party as to
such material Trade Rights which has not been resolved or disposed of and
neither the Company nor any of its subsidiaries has infringed, misappropriated
or otherwise conflicted with material Trade Rights of any third parties, which
infringement, misappropriation or conflict would have a material adverse effect
upon the condition (financial or otherwise) or results of operations of the
Company and its Subsidiaries taken as a whole.
(s) The conduct of the business of the Company and each of its
Subsidiaries is in compliance in all respects with applicable federal, state,
local and foreign laws and regulations, except where the failure to be in
compliance would not have a material adverse effect upon the condition
(financial or otherwise) or results of operations of the Company and its
Subsidiaries taken as a whole.
(t) All offers and sales of the Company's capital stock prior to
the date hereof were at all relevant times exempt from the registration
requirements of the 1933 Act and were duly registered with or the subject of an
available exemption from the registration requirements of the applicable state
securities or blue sky laws.
(u) The Company has filed all necessary federal and state income
and franchise tax returns and has paid all taxes shown as due thereon, and
there is no tax deficiency that has been, or to the knowledge of the Company
might be, asserted against the Company or any of its properties or assets that
would or could be expected to have a material adverse affect upon the condition
(financial or otherwise) or results of operations of the Company and its
subsidiaries taken as a whole.
(v) The Company has filed a registration statement pursuant to
Section 12(g) of the Exchange Act to register the Common Stock thereunder, has
filed an application to list the Shares on the Nasdaq National Market, and has
received notification that the listing has been approved, subject to notice of
issuance or sale of the Shares, as the case may be.
(w) The Company is not, and does not intend to conduct its
business in a manner in which it would become, an "investment company" as
defined in Section 3(a) of the Investment Company Act of 1940, as amended
("Investment Company Act").
(x) The deposit accounts of the Bank are insured by the Federal
Deposit Insurance Corporation (the "FDIC") to the fullest extent provided by
law. No proceeding for the termination of such insurance is pending or is
threatened. Neither the Company nor any Subsidiary has received or is subject
to any directive or order from the FDIC or the OTS or any other regulatory
authority to make any material change in the method of conducting their
respective businesses that has not been complied with in all material respects.
(y) Neither the Company nor any of its affiliates does any
business, directly or indirectly, with the government of Cuba or with any
person or entity located in Cuba.
(z) The Company and its Subsidiaries maintain a system of internal
accounting controls sufficient to provide reasonable assurances that (A)
transactions are executed in accordance with management's general or specific
authorization; (B) transactions are recorded as necessary to permit preparation
of financial statements in conformity with generally accepted accounting
principles and to maintain accountability for assets; (C) access to records is
permitted only in accordance with
6
<PAGE> 7
management's general or specific authorization; and (D) the recorded
accountability for assets is compared with existing assets at reasonable
intervals and appropriate action is taken with respect to any differences.
(aa) Other than as contemplated by this Agreement and as
disclosed in the Registration Statement, the Company has not incurred any
liability for any finder's or broker's fee or agent's commission in connection
with the execution and delivery of this Agreement or the consummation of the
transactions contemplated hereby.
(bb) No report or application filed by the Company or any
of its subsidiaries with the FDIC or the OTS, as of the date it was filed,
contained an 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
not misleading when made or failed to comply with the applicable requirements
of the FDIC or the OTS, as the case may be.
Section 3. Representations, Warranties and Covenants of the
Selling Shareholder.
(a) The Selling Shareholder represents and warrants to, and agrees
with, the Company and the Underwriters that:
(i) Such Selling Shareholder has, and on the First
Closing Date or the Second Closing Date hereinafter defined, as the case may
be, will have, valid marketable title to the Shares proposed to be sold by such
Selling Shareholder hereunder on such date and full right, power and authority
to enter into this Agreement and the Pricing Agreement and to sell, assign,
transfer and deliver such Shares hereunder, free and clear of all voting trust
arrangements, liens, encumbrances, equities, claims and community property
rights; and upon delivery of and payment for such Shares hereunder, the
Underwriters will acquire valid marketable title thereto, free and clear of all
voting trust arrangements, liens, encumbrances, equities, claims and community
property rights.
(ii) Such Selling Shareholder has not taken and will not
take, directly or indirectly, any action designed to or which might be
reasonably expected to cause or result, under the Exchange Act or otherwise, in
stabilization or manipulation of the price of any security of the Company to
facilitate the sale or resale of the Shares.
(iii) Such Selling Shareholder further represents, warrants
and agrees that such Selling Shareholder has deposited in custody, under a
Custody Agreement ("Custody Agreement") with _____________________________, as
custodian ("Custodian"), certificates in negotiable form for the Shares to be
sold hereunder by such Selling Shareholder, for the purpose of further delivery
pursuant to this Agreement. Such Selling Shareholder agrees that the Shares to
be sold by such Selling Shareholder on deposit with the Custodian are subject
to the interests of the Company and the Underwriters, that the arrangements
made for such custody, are to that extent irrevocable, and that the obligations
of such Selling Shareholder hereunder and under the Custody Agreement shall not
be terminated except as provided in this Agreement or the Custody Agreement by
any act of such Selling Shareholder, by operation of law, whether, in the case
of the individual Selling Shareholder, by the death or incapacity of such
Selling Shareholder or, in the case of a trust or estate, by the death of the
trustee or trustees or the executor or executors or the termination of such
trust or estate, or, in the case of a partnership or corporation, by the
dissolution, winding-up or other event affecting the legal life of such entity,
or by the occurrence of any other event. If the Selling Shareholder, trustee
or executor should die or become incapacitated, or any such trust, estate,
partnership or corporation should be terminated, or if any other event should
occur before the
7
<PAGE> 8
delivery of the Shares hereunder, the documents evidencing Shares then on
deposit with the Custodian shall be delivered by the Custodian in accordance
with the terms and conditions of this Agreement as if such death, incapacity,
termination or other event had not occurred, regardless of whether or not the
Custodian shall have received notice thereof. The Custodian has been
authorized to receive and acknowledge receipt of the proceeds of sale of the
Shares to be sold by such Selling Shareholder against delivery thereof and
otherwise act on behalf of such Selling Shareholder. The Custody Agreement has
been duly executed by such Selling Shareholder and a copy thereof has been
delivered to you.
(iv) Each preliminary prospectus, insofar as it has
related to such Selling Shareholder and, to the knowledge of such Selling
Shareholder in all other respects, as of its date, has conformed in all
material respects with the requirements of the 1933 Act and, as of its date,
has not included any untrue statement of a material fact or omitted to state a
material fact necessary to make the statements therein not misleading; and the
Registration Statement at the time of effectiveness, and at all times
subsequent thereto, up to the First Closing Date or the Second Closing Date
hereinafter defined, as the case may be, (1) such parts of the Registration
Statement and the Prospectus and any amendments or supplements thereto as
relate to such Selling Shareholder, and the Registration Statement and the
Prospectus and any amendments or supplements thereto, to the knowledge of such
Selling Shareholder in all other respects, contained or will contain all
statements that are required to be stated therein in accordance with the 1933
Act and in all material respects conformed or will in all material respects
conform to the requirements of the 1933 Act, and (2) neither the Registration
Statement nor the Prospectus, nor any amendment or supplement thereto, as it
relates to such Selling Shareholder, and, to the knowledge of such Selling
Shareholder in all other respects, included or will include any untrue
statement of a material fact or omitted or will omit to state any material fact
required to be stated therein or necessary to make the statements therein not
misleading; provided that neither clause (1) nor (2) shall have any effect if
information has been given by such Selling Shareholder to the Company and the
Representative in writing which would eliminate or remedy any such untrue
statement or omission.
(v) Such Selling Shareholder agrees with the Company and
the Underwriters not to sell, contract to sell or otherwise dispose of any
Common Stock for a period of 180 days after this Agreement becomes effective
without the prior written consent of the Representative.
The Selling Shareholder represents and warrants to, and agrees with,
the Underwriters to the same effect as the representations and warranties of
the Company set forth in Section 2 of this Agreement.
In order to document the Underwriters' compliance with the reporting
and withholding provisions of the Internal Revenue Code of 1986, as amended,
with respect to the transactions herein contemplated, the Selling Shareholder
agrees to deliver to you prior to or on the First Closing Date, as hereinafter
defined, a properly completed and executed United States Treasury Department
Form W-8 or W-9 (or other applicable form of statement specified by Treasury
Department regulations in lieu thereof).
Section 4. Representations and Warranties of the Underwriters.
The Representative, on behalf of the several Underwriters, represents and
warrants to the Company and the Selling Shareholder that the information set
forth (a) on the cover page of the Prospectus with respect to price,
underwriting discount and terms of the offering and (b) under "Underwriting" in
the Prospectus was furnished to the Company by and on behalf of the
Underwriters for use in connection with the preparation of the Registration
Statement and is correct and complete in all material respects.
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Section 5. Purchase, Sale and Delivery of Shares. On the basis
of the representations, warranties and agreements herein contained, but subject
to the terms and conditions herein set forth, the Company and the Selling
Shareholder, severally and not jointly, agree to sell to the Underwriters named
in Schedule A hereto, and the Underwriters agree, severally and not jointly, to
purchase from the Company and the Selling Shareholder, respectively, 1,200,000
Firm Shares from the Company and 250,000 Firm Shares from the Selling
Shareholder at the price per share set forth in the Pricing Agreement. The
obligation of each Underwriter to the Company shall be to purchase from the
Company that number of full shares which (as nearly as practicable, as
determined by you) bears to 1,200,000, the same proportion as the number of
Shares set forth opposite the name of such Underwriter in Schedule A hereto
bears to the total number of Firm Shares to be purchased by all Underwriters
under this Agreement. The obligation of each Underwriter to the Selling
Shareholder shall be to purchase from such Selling Shareholder the number of
full shares which (as nearly as practicable, as determined by you) bears to
250,000, the same proportion as the number of Shares set forth opposite the
name of such Underwriter in Schedule A hereto bears to the total number of Firm
Shares to be purchased by all Underwriters under this Agreement. The initial
public offering price and the purchase price shall be set forth in the Pricing
Agreement.
At 9:00 A.M., Chicago Time, on the fourth business day, if permitted
under Rule 15c6-1 under the Exchange Act, (or the third business day if
required under Rule 15c6-1 under the Exchange Act or unless postponed in
accordance with the provisions of Section 12) following the date the
Registration Statement becomes effective (or, if the Company has elected to
rely upon Rule 430A, the fourth business day, if permitted under Rule 15c6-1
under the Exchange Act, (or the third business day if required under Rule
15c6-1 under the Exchange Act) after execution of the Pricing Agreement), or
such other time not later than ten business days after such date as shall be
agreed upon by the Representative and the Company, the Company and the
Custodian will deliver to you at the offices of counsel for the Underwriters or
through the facilities of The Depository Trust Company for the accounts of the
several Underwriters, certificates representing the Firm Shares to be sold by
them, respectively, against payment of the purchase price therefor by delivery
of federal or other immediately available funds, by wire transfer or otherwise,
to the Company and the Custodian. Such time of delivery and payment is herein
referred to as the "First Closing Date." The certificates for the Firm Shares
so to be delivered will be in such denominations and registered in such names
as you request by notice to the Company and the Custodian prior to 10:00 A.M.,
Chicago Time, on the second business day preceding the First Closing Date, and
will be made available at the Company's expense for checking and packaging by
the Representative at 10:00 A.M., Chicago Time, on the business day preceding
the First Closing Date. Payment for the Firm Shares so to be delivered shall
be made at the time and in the manner described above at the offices of counsel
for the Underwriters.
In addition, on the basis of the representations, warranties and
agreements herein contained, but subject to the terms and conditions herein set
forth, the Company and the Selling Shareholder hereby grant an option to the
several Underwriters to purchase, severally and not jointly, up to an aggregate
of 217,500 Option Shares, at the same purchase price per share to be paid for
the Firm Shares, for use solely in covering any overallotments made by the
Underwriters in the sale and distribution of the Firm Shares. The option
granted hereunder may be exercised at any time (but not more than once) within
30 days after the date of the initial public offering upon notice by you to the
Company setting forth the aggregate number of Option Shares as to which the
Underwriters are exercising the option, the names and denominations in which
the certificates for such shares are to be registered and the time and place at
which such certificates will be delivered. Such time of delivery (which may
not be earlier than the First Closing Date), being herein referred to as the
"Second Closing Date," shall be determined by you, but if at any time other
than the First Closing
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Date, shall not be earlier than three nor later than 10 full business days
after delivery of such notice of exercise. The number of Option Shares to be
purchased from the Company shall be 192,500 and the number of Option Shares to
be purchased from the Selling Shareholder shall be 25,000. [If less than all
Option Shares are to be purchased by the Underwriter, the reduction will be
first to the Selling Shareholder and then the Company.] The number of Option
Shares to be purchased by each Underwriter shall be determined by multiplying
the number of Option Shares to be sold by the Company and the Selling
Shareholder pursuant to such notice of exercise by a fraction, the numerator of
which is the number of Firm Shares to be purchased by such Underwriter as set
forth opposite its name in Schedule A and the denominator of which is the total
number of Firm Shares (subject to such adjustments to eliminate any fractional
share purchases as you in your absolute discretion may make). Certificates for
the Option Shares will be made available at the Company's expense for checking
and packaging at 10:00 A.M., Chicago Time, on the business day preceding the
Second Closing Date. The manner of payment for and delivery of the Option
Shares shall be the same as for the Firm Shares as specified in the preceding
paragraph.
You have advised the Company and the Selling Shareholder that each
Underwriter has authorized you to accept delivery of its Shares, to make
payment and to receipt therefor. You, individually and not as the
Representative of the Underwriters, may make payment for any Shares to be
purchased by any Underwriter whose funds shall not have been received by you by
the First Closing Date or the Second Closing Date, as the case may be, for the
account of such Underwriter, but any such payment shall not relieve such
Underwriter from any obligation hereunder.
Section 6. Covenants of the Company. The Company covenants and
agrees that:
(a) The Company will advise you and the Selling Shareholder
promptly of the issuance by the Commission of any stop order suspending the
effectiveness of the Registration Statement or of the institution of any
proceedings for that purpose, or of any notification of the suspension of
qualification of the Shares for sale in any jurisdiction or the initiation or
threatening of any proceedings for that purpose, and will also advise you and
the Selling Shareholder promptly of any request of the Commission for amendment
or supplement of the Registration Statement, of any preliminary prospectus or
of the Prospectus, or for additional information.
(b) The Company will give you and the Selling Shareholder notice
of its intention to file or prepare any amendment to the Registration Statement
(including any post-effective amendment) or any Rule 462(b) Registration
Statement or any amendment or supplement to the Prospectus (including any
revised prospectus which the Company proposes for use by the Underwriters in
connection with the offering of the Shares which differs from the prospectus on
file at the Commission at the time the Registration Statement became or becomes
effective, whether or not such revised prospectus is required to be filed
pursuant to Rule 424(b) and any term sheet as contemplated by Rule 434) and
will furnish you and the Selling Shareholder with copies of any such amendment
or supplement a reasonable amount of time prior to such proposed filing or use,
as the case may be, and will not file any such amendment or supplement or use
any such prospectus to which you or counsel for the Underwriters shall
reasonably object.
(c) If the Company elects to rely on Rule 434 of the 1933 Act, the
Company will prepare a term sheet that complies with the requirements of Rule
434. If the Company elects not to rely on Rule 434, the Company will provide
the Underwriters with copies of the form of prospectus, in such numbers as the
Underwriters may reasonably request, and file with the Commission such
prospectus in accordance with Rule 424(b) of the 1933 Act by the close of
business in New York City on the second business day immediately succeeding the
date of the Pricing Agreement. If the Company
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elects to rely on Rule 434, the Company will provide the Underwriters with
copies of the form of Rule 434 Prospectus, in such numbers as the Underwriters
may reasonably request, by the close of business in New York on the business
day immediately succeeding the date of the Pricing Agreement.
(d) If at any time when a prospectus relating to the Shares is
required to be delivered under the 1933 Act any event occurs as a result of
which the Prospectus, including any amendments or supplements, would include an
untrue statement of a material fact, or omit to state any material fact
required to be stated therein or necessary to make the statements therein, in
the light of the circumstances under which they were made, not misleading, or
if it is necessary at any time to amend the Prospectus, including any
amendments or supplements thereto and including any revised prospectus which
the Company proposes for use by the Underwriters in connection with the
offering of the Shares which differs from the prospectus on file with the
Commission at the time of effectiveness of the Registration Statement, whether
or not such revised prospectus is required to be filed pursuant to Rule 424(b)
to comply with the 1933 Act, the Company promptly will advise you thereof and
will promptly prepare and file with the Commission an amendment or supplement
which will correct such statement or omission or an amendment which will effect
such compliance; and, in case any Underwriter is required to deliver a
prospectus nine months or more after the effective date of the Registration
Statement, the Company upon request, but at the expense of such Underwriter,
will prepare promptly such prospectus or prospectuses as may be necessary to
permit compliance with the requirements of Section 10(a)(3) of the 1933 Act.
(e) Neither the Company nor any of its Subsidiaries will, prior to
the earlier of the Second Closing Date or termination or expiration of the
related option, incur any liability or obligation, direct or contingent, or
enter into any material transaction, other than in the ordinary course of
business, except as contemplated by the Prospectus.
(f) Neither the Company nor any of its Subsidiaries will acquire
any capital stock of the Company prior to the earlier of the Second Closing
Date or termination or expiration of the related option nor will the Company
declare or pay any dividend or make any other distribution upon the Common
Stock payable to shareholders of record on a date prior to the earlier of the
Second Closing Date or termination or expiration of the related option, except
in either case as contemplated by the Prospectus.
(g) The Company will make generally available to its shareholders,
as soon as it is practicable to do so, but in any event not later than 18
months after the effective date of the Registration Statement, an earnings
statement (which need not be audited) in reasonable detail, covering a period
of at least 12 consecutive months beginning after the effective date of the
Registration Statement, which earnings statement shall satisfy the requirements
of Section 11(a) of the Act and Rule 158 thereunder and will advise you in
writing when such statement has been so made available.
(h) During such period as a prospectus is required by law to be
delivered in connection with offers and sales of the Shares by an Underwriter
or dealer, the Company will furnish to you at its expense, subject to the
provisions of subsection (d) hereof, copies of the Registration Statement, the
Prospectus, each preliminary prospectus and all amendments and supplements to
any such documents in each case as soon as available and in such quantities as
you may reasonably request, for the purposes contemplated by the 1933 Act.
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(i) The Company will cooperate with the Underwriters in qualifying
or registering the Shares for sale under the blue sky laws of such
jurisdictions as you designate, and will continue such qualifications in effect
so long as reasonably required for the distribution of the Shares. The Company
shall not be required to qualify as a foreign corporation or to file a general
consent to service of process in any such jurisdiction where it is not
currently qualified or where it would be subject to taxation as a foreign
corporation.
(j) During the period of five years hereafter, the Company will
furnish you and each of the other Underwriters with a copy (i) as soon as
practicable after the filing thereof, of each report filed by the Company with
the Commission, any securities exchange or the NASD; (ii) as soon as
practicable after the release thereof, of each material press release in
respect of the Company; and (iii) as soon as available, of each report of the
Company mailed to shareholders.
(k) The Company will use the net proceeds received by it from the
sale of the Shares being sold by it in the manner specified in the Prospectus.
(l) If, at the time of effectiveness of the Registration
Statement, any information shall have been omitted therefrom in reliance upon
Rule 430A and/or Rule 434, then immediately following the execution of the
Pricing Agreement, the Company will prepare, and file or transmit for filing
with the Commission in accordance with such Rule 430A, Rule 424(b) and/or Rule
434, copies of an amended Prospectus, or, if required by such Rule 430A and/or
Rule 434, a post-effective amendment to the Registration Statement (including
an amended Prospectus), containing all information so omitted. If required,
the Company will prepare and file, or transmit for filing, a Rule 462(b)
Registration Statement not later than the date of the execution of the Pricing
Agreement. If a Rule 462(b) Registration Statement is filed, the Company shall
make payment of, or arrange for payment of, the additional registration fee
owing to the Commission required by Rule 111.
(m) The Company will comply with all registration, filing and
reporting requirements of the Exchange Act and the Nasdaq National Market.
Section 7. Payment of Expenses. Whether or not the transactions
contemplated hereunder are consummated or this Agreement becomes effective as
to all of its provisions or is terminated, the Company agrees to pay (i) all
costs, fees and expenses (other than legal fees and disbursements of counsel
for the Underwriters and the expenses incurred by the Underwriters) incurred in
connection with the performance of the Company's obligations hereunder,
including without limiting the generality of the foregoing, all fees and
expenses of legal counsel for the Company and of the Company's independent
accountants, all costs and expenses incurred in connection with the
preparation, printing, filing and distribution of the Registration Statement,
each preliminary prospectus and the Prospectus (including all exhibits and
financial statements) and all amendments and supplements provided for herein,
this Agreement, the Pricing Agreement and the Blue Sky Memorandum, (ii) all
costs, fees and expenses (including legal fees not to exceed $3,000 and
disbursements of counsel for the Underwriters) incurred by the Underwriters in
connection with qualifying or registering all or any part of the Shares for
offer and sale under blue sky laws, including the preparation of a blue sky
memorandum relating to the Shares and clearance of such offering with the NASD;
and (iii) all fees and expenses of the Company's transfer agent, printing of
the certificates for the Shares and all transfer taxes, if any, with respect to
the sale and delivery of the Shares to the several Underwriters.
The provisions of this Section shall not affect any agreement which
the Company and the Selling Shareholder may make for the allocation or sharing
of such expenses and costs.
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Section 8. Conditions of the Obligations of the Underwriters.
The obligations of the several Underwriters to purchase and pay for the Firm
Shares on the First Closing Date and the Option Shares on the Second Closing
Date shall be subject to the accuracy of the representations and warranties on
the part of the Company and the Selling Shareholder herein set forth as of the
date hereof and as of the First Closing Date or the Second Closing Date, as the
case may be, to the accuracy of the statements of officers of the Company made
pursuant to the provisions hereof, to the performance by the Company and the
Selling Shareholder of their respective obligations hereunder, and to the
following additional conditions:
(a) The Registration Statement shall have become effective either
prior to the execution of this Agreement or not later than 1:00 P.M., Chicago
Time, on the first full business day after the date of this Agreement, or such
later time as shall have been consented to by you but in no event later than
1:00 P.M., Chicago Time, on the third full business day following the date
hereof; and prior to the First Closing Date or the Second Closing Date, as the
case may be, no stop order suspending the effectiveness of the Registration
Statement shall have been issued and no proceedings for that purpose shall have
been instituted or shall be pending or, to the knowledge of the Company, the
Selling Shareholder or you, shall be contemplated by the Commission. If the
Company has elected to rely upon Rule 430A and/or Rule 434, the information
concerning the initial public offering price of the Shares and price-related
information shall have been transmitted to the Commission for filing pursuant
to Rule 424(b) within the prescribed period and the Company will provide
evidence satisfactory to the Representative of such timely filing (or a
post-effective amendment providing such information shall have been filed and
declared effective in accordance with the requirements of Rules 430A and
424(b)). If a Rule 462(b) Registration Statement is required, such
Registration Statement shall have been transmitted to the Commission for filing
and become effective within the prescribed time period and, prior to the First
Closing Date, the Company shall have provided evidence of such filing and
effectiveness in accordance with Rule 462(b).
(b) The Shares shall have been qualified for sale under the blue
sky laws of such states as shall have been specified by the Representative.
(c) The legality and sufficiency of the authorization, issuance
and sale or transfer and sale of the Shares hereunder, the validity and form of
the certificates representing the Shares, the execution and delivery of this
Agreement and the Pricing Agreement, and all corporate proceedings and other
legal matters incident thereto, and the form of the Registration Statement and
the Prospectus (except financial statements) shall have been approved by
counsel for the Underwriters exercising reasonable judgment.
(d) You shall not have advised the Company that the Registration
Statement or the Prospectus or any amendment or supplement thereto, contains an
untrue statement of fact, which, in the opinion of counsel for the
Underwriters, is material or omits to state a fact which, in the opinion of
such counsel, is material and is required to be stated therein or necessary to
make the statements therein not misleading.
(e) Subsequent to the execution and delivery of this Agreement,
there shall not have occurred any change, or any development involving a
prospective change, in or affecting particularly the business or properties of
the Company or its Subsidiaries, whether or not arising in the ordinary course
of business, which, in the judgment of the Representative, makes it impractical
or inadvisable to proceed with the public offering or purchase of the Shares as
contemplated hereby.
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(f) There shall have been furnished to you, as Representative of
the Underwriters, on the First Closing Date or the Second Closing Date, as the
case may be, except as otherwise expressly provided below:
(i) An opinion of Jones & Keller, P.C., Denver, Colorado,
counsel for the Company and for the Selling Shareholders, addressed to the
Underwriters and dated the First Closing Date or the Second Closing Date, as
the case may be, to the effect that:
(1) the Company has been duly incorporated and is
validly existing in good standing as a unitary thrift holding company under
HOLA with corporate power and authority to own its properties and conduct its
business as described in the Prospectus; and the Company has been duly
qualified to do business as a foreign corporation under the corporation law of,
and is in good standing as such in, every jurisdiction where the ownership or
leasing of property, or the conduct of its business requires such qualification
except where the failure so to qualify would not have a material adverse effect
upon the condition (financial or otherwise) or results of operations of the
Company and its Subsidiaries taken as a whole;
(2) an opinion to the same general effect as
clause (1) of this subparagraph (i) in respect of each direct and indirect
Subsidiary of the Company;
(3) all of the issued and outstanding capital
stock of each Subsidiary of the Company has been duly authorized, validly
issued and is fully paid and nonassessable, and, except as disclosed in the
Registration Statement, the Company owns directly or indirectly 100 percent of
the outstanding capital stock of each Subsidiary, and to the best knowledge of
such counsel, such stock is owned free and clear of any claims, liens,
encumbrances or security interests;
(4) the authorized capital stock of the Company,
of which there is outstanding the amount set forth in the Registration
Statement and Prospectus (except for subsequent issuances, if any, pursuant to
stock options or other rights referred to in the Prospectus), conforms as to
legal matters in all material respects to the description thereof in the
Registration Statement and Prospectus;
(5) the issued and outstanding capital stock of
the Company has been duly authorized and validly issued and is fully paid and
nonassessable;
(6) the certificates for the Shares to be
delivered hereunder are in due and proper form, and when duly countersigned by
the Company's transfer agent and delivered to you or upon your order against
payment of the agreed consideration therefor in accordance with the provisions
of this Agreement and the Pricing Agreement, the Shares represented thereby
will be duly authorized and validly issued, fully paid and nonassessable;
(7) the Registration Statement has become
effective under the 1933 Act, and, to the best knowledge of such counsel, no
stop order suspending the effectiveness of the Registration Statement has been
issued and no proceedings for that purpose have been instituted or are pending
or contemplated under the 1933 Act, and the Registration Statement (including
the information deemed to be part of the Registration Statement at the time of
effectiveness pursuant to Rule 430A(b) and/or Rule 434, if applicable), the
Prospectus and each amendment or supplement thereto (except for the financial
statements and other statistical or financial data included therein as to which
such counsel need express no opinion) comply as to form in all material
respects with the requirements of the 1933 Act; such counsel have no reason to
believe that either the Registration
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<PAGE> 15
Statement (including the information deemed to be part of the Registration
Statement at the time of effectiveness pursuant to Rule 430A(b) and/or Rule
434, if applicable) or the Prospectus, or the Registration Statement or the
Prospectus as amended or supplemented (except as aforesaid), as of their
respective effective or issue dates, 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 not misleading or that the
Prospectus as amended or supplemented, if applicable, as of the First Closing
Date or the Second Closing Date, as the case may be, contained any untrue
statement of a material fact or omitted to state any material fact necessary to
make the statements therein not misleading in light of the circumstances under
which they were made; the statements in the Registration Statement and the
Prospectus summarizing statutes, rules and regulations are accurate and fairly
and correctly present the information required to be presented by the 1933 Act
or the rules and regulations thereunder, in all material respects and such
counsel does not know of any statutes, rules and regulations required to be
described or referred to in the Registration Statement or the Prospectus that
are not described or referred to therein as required; and such counsel does not
know of any legal or governmental proceedings pending or threatened required to
be described in the Prospectus which are not described as required, nor of any
contracts or documents of a character required to be described in the
Registration Statement or Prospectus or to be filed as exhibits to the
Registration Statement which are not described or filed, as required;
(8) the statements under the captions "Management
- - Executive Compensation - Stock Incentive Plan," "Related Party Transactions,"
"Description of Capital Stock" and "Shares Eligible for Future Sale" in the
Prospectus, insofar as such statements constitute a summary of documents
referred to therein or matters of law, are accurate summaries and fairly and
correctly present, in all material respects, the information called for with
respect to such documents and matters;
(9) this Agreement and the Pricing Agreement and
the performance of the Company's obligations hereunder have been duly
authorized by all necessary corporate action and this Agreement and the Pricing
Agreement have been duly executed and delivered by and on behalf of the
Company, and are legal, valid and binding agreements of the Company,
enforceable in accordance with their respective terms, except as enforceability
of the same may be limited by bankruptcy, insolvency, reorganization,
moratorium or other similar laws affecting creditors' rights and by the
exercise of judicial discretion in accordance with general principles
applicable to equitable and similar remedies and except as to those provisions
relating to indemnities for liabilities arising under the 1933 Act as to which
no opinion need be expressed; and no approval, authorization or consent of any
public board, agency, or instrumentality of the United States or of any state
or other jurisdiction is necessary in connection with the issue or sale of the
Shares by the Company pursuant to this Agreement (other than under the 1933
Act, applicable blue sky laws and the rules of the NASD) or the consummation by
the Company of any other transactions contemplated hereby;
(10) the execution and performance of this
Agreement will not contravene any of the provisions of, or result in a default
under, any agreement, franchise, license, indenture, mortgage, deed of trust,
or other instrument known to such counsel, of the Company or any of its
subsidiaries or by which the property of any of them is bound and which
contravention or default would be material to the Company and its subsidiaries
taken as a whole; or violate any of the provisions of the charter or bylaws of
the Company or any of its subsidiaries or, so far as is known to such counsel,
violate any statute, order, rule or regulation of any regulatory or
governmental body having jurisdiction over the Company or any of its
subsidiaries;
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(11) to such counsel's knowledge, all offers and
sales of the Company's capital stock since August 1, 1995 were at all relevant
times exempt from the registration requirements of the 1933 Act and were duly
registered or the subject of an available exemption from the registration
requirements of the applicable state securities or blue sky laws;
(12) with respect to the Selling Shareholder, this
Agreement and the Pricing Agreement have been duly authorized, executed and
delivered by or on behalf of such Selling Shareholder; the Custodian for such
Selling Shareholder has been duly and validly authorized to carry out all
transactions contemplated herein on behalf of such Selling Shareholder; and the
performance of this Agreement and the Pricing Agreement and the consummation of
the transactions herein contemplated by such Selling Shareholder will not
result in a breach or violation of any of the terms and provisions of, or
constitute a default under, any statute, any indenture, mortgage, deed of
trust, note agreement or other agreement or instrument known to such counsel to
which such Selling Shareholder is a party or by which he is bound or to which
any of the property of such Selling Shareholder is subject, or any order, rule
or regulation known to such counsel of any court or governmental agency or body
having jurisdiction over such Selling Shareholder or any of his properties; and
no consent, approval, authorization or order of any court or governmental
agency or body is required for the consummation of the transactions
contemplated by this Agreement and the Pricing Agreement in connection with the
sale of Shares to be sold by such Selling Shareholder hereunder, except such as
have been obtained under the 1933 Act and such as may be required under
applicable blue sky laws in connection with the purchase and distribution of
such Shares by the Underwriters and the clearance of such offering with the
NASD;
(13) the Selling Shareholder has full right, power
and authority to enter into this Agreement and the Pricing Agreement and to
sell, transfer and deliver the Shares to be sold on the First Closing Date or
the Second Closing Date, as the case may be, by such Selling Shareholder
hereunder and good and marketable title to such Shares so sold, free and clear
of all voting trust arrangements, liens, encumbrances, equities, claims and
community property rights whatsoever, has been transferred to the Underwriters
(who counsel may assume to be bona fide purchasers) who have purchased such
Shares hereunder;
(14) this Agreement and the Pricing Agreement are
legal, valid and binding agreements of the Selling Shareholder except as
enforceability of the same may be limited by bankruptcy, insolvency,
reorganization, moratorium or other similar laws affecting creditors' rights
and by the exercise of judicial discretion in accordance with general
principles applicable to equitable and similar remedies and except with respect
to those provisions relating to indemnities for liabilities arising under the
1933 Act, as to which no opinion need be expressed; and
(15) the Company is not an "investment company" or
a person "controlled by" an "investment company" within the meaning of the
Investment Company Act.
In rendering such opinion, such counsel may state that they are
relying upon the certificate of _______________, the transfer agent for the
Common Stock, as to the number of shares of Common Stock at any time or times
outstanding, and that insofar as their opinion under clause (7) above relates
to the accuracy and completeness of the Prospectus and Registration Statement,
it is based upon a general review with the Company's representatives and
independent accountants of the information contained therein, without
independent verification by such counsel of the accuracy or completeness of
such information. Such counsel may also rely upon the opinions of other
competent counsel and, as to factual matters, on certificates of the Selling
Shareholders and of officers of the Company and of state officials, in which
case their opinion is to state that they are so doing and copies of said
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opinions or certificates are to be attached to the opinion unless said opinions
or certificates (or, in the case of certificates, the information therein) have
been furnished to the Representatives in other form.
(ii) An opinion of Slivka Robinson Waters & O'Dorisio,
P.C., banking counsel for the Company, dated the Closing Date, addressed to the
Underwriters, to the effect that:
(1) The Bank has been duly chartered to conduct
the business of banking in its state of domicile and the Company has all
necessary power and authority to own the Bank. The Company and the Bank have
all necessary consents and approvals under applicable federal and state laws
and regulations relating to banks and bank holding companies ("banking laws")
to own their respective assets and carry on their respective businesses as
currently conducted.
(2) The statements in the Prospectus under the
captions "Risk Factors -- Competitive Banking Environment, -- Government
Regulation, Recent Legislation and Monetary Policy," and -- Potential Liability
for Undercapitalized Subsidiary" insofar as such statements constitute a
summary of banking laws, are accurate summaries and fairly present the
information called for with respect to such matters.
(3) Such counsel knows of no legal or
governmental proceeding, pending or threatened, before any court or
administrative body or regulatory agency, to which the Company or any of the
Subsidiaries is a party or to which any of the properties of the Company or any
of the Subsidiaries is subject that are required to be described in the
Registration Statement or Prospectus and are not so described, or statutes or
regulations that are required to be described in the Registration Statement or
the Prospectus that are not so described.
(4) The execution and delivery of this Agreement
and the Pricing Agreement and the consummation of the transactions herein and
therein contemplated do not and will not conflict with or result in a violation
of or default under any banking laws, or any permit, judgment, decree or order
known to such counsel, or any lease, contract, indenture, mortgage, loan
agreement or other agreement or other instrument or obligation known to such
counsel to which the Company or the Bank is a party or by which the Company or
the Banks or any of their respective properties is bound.
(5) No approval, consent, order, authorization,
designation, declaration or filing by or with any regulatory, administrative or
other governmental body under banking laws is necessary in connection with the
execution and delivery of this Agreement and the Pricing Agreement and the
consummation of the transactions herein and therein contemplated, except such
as have been obtained or made, specifying the same.
(iii) Such opinion or opinions of Chapman and Cutler,
counsel for the Underwriters, dated the First Closing Date or the Second
Closing Date, as the case may be, with respect to the incorporation of the
Company, the validity of the Shares to be sold by the Company, the Registration
Statement and the Prospectus and other related matters as you may reasonably
require, and the Company shall have furnished to such counsel such documents
and shall have exhibited to them such papers and records as they request for
the purpose of enabling them to pass upon such matters.
(iv) A certificate of the chief executive officer and the
principal financial officer of the Company, dated the First Closing Date or the
Second Closing Date, as the case may be, to the effect that:
17
<PAGE> 18
(1) the representations and warranties of the
Company set forth in Section 2 of this Agreement are true and correct as of the
date of this Agreement and as of the First Closing Date or the Second Closing
Date, as the case may be, and the Company has complied with all the agreements
and satisfied all the conditions on its part to be performed or satisfied at or
prior to such Closing Date; and
(2) the Commission has not issued an order
preventing or suspending the use of the Prospectus or any preliminary
prospectus filed as a part of the Registration Statement or any amendment
thereto; no stop order suspending the effectiveness of the Registration
Statement has been issued; and to the best knowledge of the respective signers,
no proceedings for that purpose have been instituted or are pending or
contemplated under the 1933 Act.
The delivery of the certificate provided for in this
subparagraph shall be and constitute a representation and warranty of the
Company as to the facts required in the immediately foregoing clauses (1) and
(2) of this subparagraph to be set forth in said certificate.
(v) A certificate of the Selling Shareholder dated the
First Closing Date or the Second Closing Date, as the case may be, to the
effect that the representations and warranties of such Selling Shareholder set
forth in Section 3 of this Agreement are true and correct as of such date and
the Selling Shareholder has complied with all the agreements and satisfied all
the conditions on the part of such Selling Shareholder to be performed or
satisfied at or prior to such date.
(vi) At the time the Pricing Agreement is executed and
also on the First Closing Date or the Second Closing Date, as the case may be,
there shall be delivered to you a letter addressed to you, as Representatives
of the Underwriters, from Fortner, Bayens, Levkulich and Co., independent
accountants, the first one to be dated the date of the Pricing Agreement, the
second one to be dated the First Closing Date and the third one (in the event
of a second closing) to be dated the Second Closing Date, to the effect set
forth in Schedule C. There shall not have been any change or decrease
specified in the letters referred to in this subparagraph which makes it
impractical or inadvisable in the judgment of the Representative to proceed
with the public offering or purchase of the Shares as contemplated hereby.
(vii) Such further certificates and documents as you may
reasonably request.
All such opinions, certificates, letters and documents shall be in
compliance with the provisions hereof only if they are satisfactory to you and
to Chapman and Cutler, counsel for the Underwriters, which approval shall not
be unreasonably withheld. The Company shall furnish you with such manually
signed or conformed copies of such opinions, certificates, letters and
documents as you request.
If any condition to the Underwriters' obligations hereunder to be
satisfied prior to or at the First Closing Date is not so satisfied, this
Agreement at your election will terminate upon notification to the Company and
the Selling Shareholder without liability on the part of any Underwriter or the
Company or the Selling Shareholder, except for the expenses to be paid or
reimbursed by the Company pursuant to Sections 7 and 9 hereof and except to the
extent provided in Section 11 hereof.
Section 9. Reimbursement of Underwriters' Expenses. If the sale
to the Underwriters of the Shares on the First Closing Date is not consummated
because any condition of the
18
<PAGE> 19
Underwriters' obligations hereunder is not satisfied or because of any refusal,
inability or failure on the part of the Company or the Selling Shareholder to
perform any agreement herein or to comply with any provision hereof, unless
such failure to satisfy such condition or to comply with any provision hereof
is due to the default or omission of any Underwriter, the Company agrees to
reimburse you and the other Underwriters upon demand for all out-of-pocket
expenses (including reasonable fees and disbursements of counsel) that shall
have been reasonably incurred by you and them in connection with the proposed
purchase and the sale of the Shares. Any such termination shall be without
liability of any party to any other party except that the provisions of this
Section, Section 7 and Section 11 shall at all times be effective and shall
apply.
Section 10. Effectiveness of Registration Statement. You, the
Company and the Selling Shareholder will use your, its and their best efforts
to cause the Registration Statement to become effective, if it has not yet
become effective, and to prevent the issuance of any stop order suspending the
effectiveness of the Registration Statement and, if such stop order be issued,
to obtain as soon as possible the lifting thereof.
Section 11. Indemnification. (a) The Company and the Selling
Shareholder, jointly and severally, agree to indemnify and hold harmless each
Underwriter and each person, if any, who controls any Underwriter within the
meaning of the 1933 Act or the Exchange Act against any losses, claims, damages
or liabilities, joint or several, to which such Underwriter or such controlling
person may become subject under the 1933 Act, the Exchange Act or other federal
or state statutory law or regulation, at common law or otherwise (including in
settlement of any litigation if such settlement is effected with the written
consent of the Company and/or such Selling Shareholder, as the case may be),
insofar as such losses, claims, damages or liabilities (or actions in respect
thereof) arise out of or are based upon any untrue statement or alleged untrue
statement of any material fact contained in the Registration Statement,
including the information deemed to be part of the Registration Statement at
the time of effectiveness pursuant to Rule 430A and/or Rule 434, if applicable,
any preliminary prospectus, the Prospectus, or any amendment or supplement
thereto, or arise out of or are based upon the omission or alleged omission to
state therein a material fact required to be stated therein or necessary to
make the statements therein not misleading; and will reimburse each Underwriter
and each such controlling person for any legal or other expenses reasonably
incurred by such Underwriter or such controlling person in connection with
investigating or defending any such loss, claim, damage, liability or action;
provided, however, that neither the Company nor the Selling Shareholder will be
liable in any such case to the extent that (i) any such loss, claim, damage or
liability arises out of or is based upon an untrue statement or alleged untrue
statement or omission or alleged omission made in the Registration Statement,
any preliminary prospectus, the Prospectus or any amendment or supplement
thereto in reliance upon and in conformity with written information furnished
to the Company by or on behalf of any Underwriter through the Representatives,
specifically for use therein; or (ii) if such statement or omission was
contained or made in any preliminary prospectus and corrected in the Prospectus
and (1) any such loss, claim, damage or liability suffered or incurred by any
Underwriter (or any person who controls any Underwriter) resulted from an
action, claim or suit by any person who purchased Shares which are the subject
thereof from such Underwriter in the offering and (2) such Underwriter failed
to deliver or provide a copy of the Prospectus to such person at or prior to
the confirmation of the sale of such Shares in any case where such delivery is
required by the 1933 Act. In addition to their other obligations under this
Section 11(a), the Company and the Selling Shareholder agree that, as an
interim measure during the pendency of any claim, action, investigation,
inquiry or other proceeding arising out of or based upon any statement or
omission, or any alleged statement or omission, described in this Section
11(a), they will reimburse the Underwriters on a monthly basis for all
reasonable legal and other expenses incurred in connection with investigating
or defending any such
19
<PAGE> 20
claim, action, investigation, inquiry or other proceeding, notwithstanding the
absence of a judicial determination as to the propriety and enforceability of
the Company's and the Selling Shareholder's obligation to reimburse the
Underwriters for such expenses and the possibility that such payments might
later be held to have been improper by a court of competent jurisdiction. This
indemnity agreement will be in addition to any liability which the Company and
the Selling Shareholder may otherwise have.
Without limiting the full extent of the Company's agreement to
indemnify each Underwriter, as herein provided, the Selling Shareholder shall
be liable under the indemnity agreements contained in paragraph (a) of this
Section only for an amount not exceeding the proceeds received by such Selling
Shareholder from the sale of Shares hereunder.
(b) Each Underwriter will severally indemnify and hold harmless
the Company, each of its directors, each of its officers who signed the
Registration Statement, and each Selling Shareholder and each person, if any,
who controls the Company within the meaning of the 1933 Act or the Exchange
Act, against any losses, claims, damages or liabilities to which the Company,
or any such director, officer, Selling Shareholder or controlling person may
become subject under the 1933 Act, the Exchange Act or other federal or state
statutory law or regulation, at common law or otherwise (including in
settlement of any litigation, if such settlement is effected with the written
consent of such Underwriter), insofar as such losses, claims, damages or
liabilities (or actions in respect thereof) arise out of or are based upon any
untrue or alleged untrue statement of any material fact contained in the
Registration Statement, any preliminary prospectus, the Prospectus, or any
amendment or supplement thereto, or arise out of or are based upon the omission
or alleged omission to state therein a material fact required to be stated
therein or necessary to make the statements therein not misleading, in each
case to the extent, but only to the extent, that such untrue statement or
alleged untrue statement or omission or alleged omission was made in the
Registration Statement, any preliminary prospectus, the Prospectus, or any
amendment or supplement thereto in reliance upon and in conformity with Section
4 of this Agreement or any other written information furnished to the Company
by such Underwriter through the Representatives specifically for use in the
preparation thereof; and will reimburse any legal or other expenses reasonably
incurred by the Company, or any such director, officer, the Selling Shareholder
or controlling person in connection with investigating or defending any such
loss, claim, damage, liability or action. In addition to their other
obligations under this Section 11(b), the Underwriters agree that, as an
interim measure during the pendency of any claim, action, investigation,
inquiry or other proceeding arising out of or based upon any statement or
omission, or any alleged statement or omission, described in this Section
11(b), they will reimburse the Company and the Selling Shareholder on a monthly
basis for all reasonable legal and other expenses incurred in connection with
investigating or defending any such claim, action, investigation, inquiry or
other proceeding, notwithstanding the absence of a judicial determination as to
the propriety and enforceability of the Underwriters' obligation to reimburse
the Company and the Selling Shareholder for such expenses and the possibility
that such payments might later be held to have been improper by a court of
competent jurisdiction. This indemnity agreement will be in addition to any
liability which such Underwriter may otherwise have.
(c) Promptly after receipt by an indemnified party under this
Section of notice of the commencement of any action, such indemnified party
will, if a claim in respect thereof is to be made against an indemnifying party
under this Section, notify the indemnifying party of the commencement thereof;
but the omission so to notify the indemnifying party will not relieve it from
any liability which it may have to any indemnified party except to the extent
that the indemnifying party was prejudiced by such failure to notify. In case
any such action is brought against any indemnified party, and it notifies an
indemnifying party of the commencement thereof, the indemnifying party will be
entitled
20
<PAGE> 21
to participate in, and, to the extent that it may wish, jointly with all other
indemnifying parties similarly notified, to assume the defense thereof, with
counsel satisfactory to such indemnified party; provided, however, if the
defendants in any such action include both the indemnified party and the
indemnifying party and the indemnified party shall have reasonably concluded
that there may be legal defenses available to it and/or other indemnified
parties which are different from or additional to those available to the
indemnifying party, or the indemnified and indemnifying parties may have
conflicting interests which would make it inappropriate for the same counsel to
represent both of them, the indemnified party or parties shall have the right
to select separate counsel to assume such legal defense and otherwise to
participate in the defense of such action on behalf of such indemnified party
or parties. Upon receipt of notice from the indemnifying party to such
indemnified party of its election so to assume the defense of such action and
approval by the indemnified party of counsel, the indemnifying party will not
be liable to such indemnified party under this Section for any legal or other
expenses subsequently incurred by such indemnified party in connection with the
defense thereof unless (i) the indemnified party shall have employed such
counsel in connection with the assumption of legal defense in accordance with
the proviso to the next preceding sentence (it being understood, however, that
the indemnifying party shall not be liable for the expenses of more than one
separate counsel, approved by the Representatives in the case of paragraph (a)
representing all indemnified parties not having different or additional
defenses or potential conflicting interest among themselves who are parties to
such action), (ii) the indemnifying party shall not have employed counsel
satisfactory to the indemnified party to represent the indemnified party within
a reasonable time after notice of commencement of the action or (iii) the
indemnifying party has authorized the employment of counsel for the indemnified
party at the expense of the indemnifying party. No indemnifying party shall,
without the prior written consent of the indemnified party, effect any
settlement of any pending or threatened proceeding in respect of which any
indemnified party is or could have been a party and indemnity could have been
sought hereunder by such indemnified party, unless such settlement includes an
unconditional release of such indemnified party from all liability arising out
of such proceeding.
(d) If the indemnification provided for in this Section is
unavailable to an indemnified party under paragraphs (a) or (b) hereof in
respect of any losses, claims, damages or liabilities referred to therein, then
each applicable indemnifying party, in lieu of indemnifying such indemnified
party, shall contribute to the amount paid or payable by such indemnified party
as a result of such losses, claims, damages or liabilities (i) in such
proportion as is appropriate to reflect the relative benefits received by the
Company, the Selling Shareholder and the Underwriters from the offering of the
Shares or (ii) if the allocation provided by clause (i) above is not permitted
by applicable law, in such proportion as is appropriate to reflect not only the
relative benefits referred to in clause (i) above but also the relative fault
of the Company, the Selling Shareholder and the Underwriters in connection with
the statements or omissions which resulted in such losses, claims, damages or
liabilities, as well as any other relevant equitable considerations. The
respective relative benefits received by the Company, the Selling Shareholders
and the Underwriters shall be deemed to be in the same proportion in the case
of the Company and the Selling Shareholder, as the total price paid to the
Company and the Selling Shareholder for the Shares by the Underwriters (net of
underwriting discount but before deducting expenses), and in the case of the
Underwriters as the underwriting discount received by them bears to the total
of such amounts paid to the Company and the Selling Shareholder and received by
the Underwriters as underwriting discount in each case as contemplated by the
Prospectus. The relative fault of the Company and the Selling Shareholder and
the Underwriters shall be determined by reference to, among other things,
whether the untrue or alleged untrue statement of a material fact or the
omission to state a material fact relates to information supplied by the
Company or by the Selling Shareholder or by the Underwriters and the parties'
relative intent, knowledge, access to information and opportunity to correct or
prevent such
21
<PAGE> 22
statement or omission. The amount paid or payable by a party as a result of
the losses, claims, damages and liabilities referred to above shall be deemed
to include any legal or other fees or expenses reasonably incurred by such
party in connection with investigating or defending any action or claim.
The Company, the Selling Shareholder and the Underwriters agree that
it would not be just and equitable if contribution pursuant to this Section
were determined by pro rata allocation or by any other method of allocation
which does not take account of the equitable considerations referred to in the
immediately preceding paragraph. Notwithstanding the provisions of this
Section, no Underwriter shall be required to contribute any amount in excess of
the amount by which the total price at which the Shares underwritten by it and
distributed to the public were offered to the public exceeds the amount of any
damages which such Underwriter has otherwise been required to pay by reason of
such untrue or alleged untrue statement or omission or alleged omission. No
person guilty of fraudulent misrepresentation (within the meaning of Section
11(f) of the 1933 Act) shall be entitled to contribution from any person who
was not guilty of such fraudulent misrepresentation. The Underwriters'
obligations to contribute pursuant to this Section are several in proportion to
their respective underwriting commitments and not joint.
(e) The provisions of this Section shall survive any termination
of this Agreement.
Section 12. Default of Underwriters. It shall be a condition to
the agreement and obligation of the Company and the Selling Shareholder to sell
and deliver the Shares hereunder, and of each Underwriter to purchase the
Shares hereunder, that, except as hereinafter in this paragraph provided, each
of the Underwriters shall purchase and pay for all Shares agreed to be
purchased by such Underwriter hereunder upon tender to the Representatives of
all such Shares in accordance with the terms hereof. If any Underwriter or
Underwriters default in their obligations to purchase Shares hereunder on the
First Closing Date and the aggregate number of Shares which such defaulting
Underwriter or Underwriters agreed but failed to purchase does not exceed 10
percent of the total number of Shares which the Underwriters are obligated to
purchase on the First Closing Date, the Representative may make arrangements
satisfactory to the Company and the Selling Shareholder for the purchase of
such Shares by other persons, including any of the Underwriters, but if no such
arrangements are made by such date the nondefaulting Underwriters shall be
obligated severally, in proportion to their respective commitments hereunder,
to purchase the Shares which such defaulting Underwriters agreed but failed to
purchase on such date. If any Underwriter or Underwriters so default and the
aggregate number of Shares with respect to which such default or defaults occur
is more than the above percentage and arrangements satisfactory to the
Representative and the Company and the Selling Shareholder for the purchase of
such Shares by other persons are not made within 36 hours after such default,
this Agreement will terminate without liability on the part of any
nondefaulting Underwriter or the Company or the Selling Shareholder, except for
the expenses to be paid by the Company pursuant to Section 7 hereof and except
to the extent provided in Section 11 hereof.
In the event that Shares to which a default relates are to be
purchased by the nondefaulting Underwriters or by another party or parties, the
Representative or the Company shall have the right to postpone the First
Closing Date for not more than seven business days in order that the necessary
changes in the Registration Statement, Prospectus and any other documents, as
well as any other arrangements, may be effected. As used in this Agreement,
the term "Underwriter" includes any person substituted for an Underwriter under
this Section. Nothing herein will relieve a defaulting Underwriter from
liability for its default.
22
<PAGE> 23
Section 13. Effective Date. This Agreement shall become
effective immediately as to Sections 7, 9, 11 and 14 and as to all other
provisions at 10:00 A.M., Chicago Time, on the day following the date upon
which the Pricing Agreement is executed and delivered, unless such a day is a
Saturday, Sunday or holiday (and in that event this Agreement shall become
effective at such hour on the business day next succeeding such Saturday,
Sunday or holiday); but this Agreement shall nevertheless become effective at
such earlier time after the Pricing Agreement is executed and delivered as you
may determine on and by notice to the Company and the Selling Shareholder or by
release of any Shares for sale to the public. For the purposes of this
Section, the Shares shall be deemed to have been so released upon the release
for publication of any newspaper advertisement relating to the Shares or upon
the release by you of telegrams (i) advising Underwriters that the Shares are
released for public offering, or (ii) offering the Shares for sale to
securities dealers, whichever may occur first.
Section 14. Termination. Without limiting the right to terminate
this Agreement pursuant to any other provision hereof:
(a) This Agreement may be terminated by the Company by notice to
you and the Selling Shareholder or by you by notice to the Company and the
Selling Shareholder at any time prior to the time this Agreement shall become
effective as to all its provisions, and any such termination shall be without
liability on the part of the Company or the Selling Shareholder to any
Underwriter (except for the expenses to be paid or reimbursed pursuant to
Section 7 hereof and except to the extent provided in Section 11 hereof) or of
any Underwriter to the Company or the Selling Shareholder.
(b) This Agreement may also be terminated by you prior to the
First Closing Date, and the option referred to in Section 5, if exercised, may
be canceled at any time prior to the Second Closing Date, if (i) trading in
securities on the New York Stock Exchange shall have been suspended or minimum
prices shall have been established on such exchange, or (ii) a banking
moratorium shall have been declared by Illinois, New York, or United States
authorities, or (iii) there shall have been any change in financial markets or
in political, economic or financial conditions which, in the opinion of the
Representative, either renders it impracticable or inadvisable to proceed with
the offering and sale of the Shares on the terms set forth in the Prospectus or
materially and adversely affects the market for the Shares, or (iv) there shall
have been an outbreak of major armed hostilities between the United States and
any foreign power which in the opinion of the Representative makes it
impractical or inadvisable to offer or sell the Shares. Any termination
pursuant to this paragraph (b) shall be without liability on the part of any
Underwriter to the Company or the Selling Shareholder or on the part of the
Company to any Underwriter or the Selling Shareholder (except for expenses to
be paid or reimbursed pursuant to Section 7 hereof and except to the extent
provided in Section 11 hereof).
Section 15. Representations and Indemnities to Survive Delivery.
The respective indemnities, agreements, representations, warranties and other
statements of the Company, of its officers, of the Selling Shareholder and of
the several Underwriters set forth in or made pursuant to this Agreement will
remain in full force and effect, regardless of any investigation made by or on
behalf of any Underwriter or the Company or any of its or their partners,
principals, members, officers or directors or any controlling person, or the
Selling Shareholder as the case may be, and will survive delivery of and
payment for the Shares sold hereunder.
Section 16. Notices. All communications hereunder will be in
writing and, if sent to the Underwriters will be mailed, delivered or
telegraphed and confirmed to you c/o Howe Barnes Investments, Inc. 135 South
LaSalle Street, Chicago, Illinois 60603, Attention: Daniel E. Coughlin;
23
<PAGE> 24
if sent to the Company will be mailed, delivered or telegraphed and confirmed
to the Company at its corporate headquarters; and if sent to the Selling
Shareholder will be mailed, delivered or telegraphed and confirmed to the
Custodian at such address as they have previously furnished to the Company and
the Representative.
Section 17. Successors. This Agreement and the Pricing Agreement
will inure to the benefit of and be binding upon the parties hereto and their
respective successors, personal representatives and assigns, and to the benefit
of the officers and directors and controlling persons referred to in Section
11, and no other person will have any right or obligation hereunder. The term
"successors" shall not include any purchaser of the Shares as such from any of
the Underwriters merely by reason of such purchase.
Section 18. Representation of Underwriters. You will act as
Representative for the several Underwriters in connection with this financing,
and any action under or in respect of this Agreement taken by you will be
binding upon all the Underwriters.
Section 19. Partial Unenforceability. If any section, paragraph
or provision of this Agreement is for any reason determined to be invalid or
unenforceable, such determination shall not affect the validity or
enforceability of any other section, paragraph or provision hereof.
Section 20. Applicable Law. This Agreement and the Pricing
Agreement shall be governed by and construed in accordance with the laws of the
State of Illinois.
24
<PAGE> 25
If the foregoing is in accordance with your understanding of our
agreement, kindly sign and return to us the enclosed duplicates hereof,
whereupon it will become a binding agreement among the Company, the Selling
Shareholder and the several Underwriters including you, all in accordance with
its terms.
Very truly yours,
MEGABANK FINANCIAL CORPORATION
By:
Thomas R. Kowalski
Chairman and Chief Executive Officer
SELLING SHAREHOLDER
By
Thomas R. Kowalski
The foregoing Agreement is hereby
confirmed and accepted as of
the date first above written.
HOWE BARNES INVESTMENTS, INC.
Acting as Representative of the
several Underwriters named in
Schedule A.
By
------------------------------
Daniel E. Coughlin
Senior Vice President
25
<PAGE> 26
SCHEDULE A
<TABLE>
<CAPTION>
Underwriter Number of Firm
----------- Shares to
be Purchased
--------------
<S> <C>
Howe Barnes Investments, Inc.
---------
TOTAL 1,450,000
=========
</TABLE>
26
<PAGE> 27
SCHEDULE B
<TABLE>
<CAPTION>
Number of Number of Option
Firm Shares Shares
to be Sold to be Sold
---------- ----------
<S> <C> <C>
Company 1,200,000 192,500
Thomas R. Kowalski 250,000 25,000
--------- --------
TOTAL 1,450,000 217,500
========= ========
</TABLE>
27
<PAGE> 28
SCHEDULE C
Comfort Letter of Fortner, Bayens, Levkulich and Co.
(1) They are independent public accountants with respect to the
Company and its subsidiaries within the meaning of the 1933 Act.
(2) In their opinion the consolidated financial statements and
schedules of the Company and its Subsidiaries included in the Registration
Statement and the consolidated financial statements of the Company from which
the information presented under the caption "Selected Consolidated Financial
Data" has been derived which are stated therein to have been examined by them
comply as to form in all material respects with the applicable accounting
requirements of the 1933 Act.
(3) On the basis of specified procedures (but not an examination
in accordance with generally accepted auditing standards), including inquiries
of certain officers of the Company and its Subsidiaries responsible for
financial and accounting matters as to transactions and events subsequent to
December 31, 1997, a reading of minutes of meetings of the shareholders and
directors of the Company and its Subsidiaries since December 31, 1997, a
reading of the latest available interim unaudited consolidated financial
statements of the Company and its Subsidiaries (with an indication of the date
thereof) and other procedures as specified in such letter, nothing came to
their attention which caused them to believe that (i) the unaudited
consolidated financial statements of the Company and its Subsidiaries included
in the Registration Statement do not comply as to form in all material respects
with the applicable accounting requirements of the 1933 Act or that such
unaudited financial statements are not fairly presented in accordance with
generally accepted accounting principles applied on a basis substantially
consistent with that of the audited financial statements included in the
Registration Statement, and (ii) at a specified date not more than five days
prior to the date thereof in the case of the first letter and not more than two
business days prior to the date thereof in the case of the second and third
letters, there was any change in the capital stock or long-term debt or
short-term debt (other than normal payments) of the Company and its
Subsidiaries on a consolidated basis or any decrease in consolidated net
current assets or consolidated shareholders' equity as compared with amounts
shown on the latest unaudited balance sheet of the Company included in the
Registration Statement or for the period from the date of such balance sheet to
a date not more than five days prior to the date thereof in the case of the
first letter and not more than two business days prior to the date thereof in
the case of the second and third letters, there were any decreases, as compared
with the corresponding period of the prior year, in consolidated net sales,
consolidated income before income taxes or in the total or per share amounts of
consolidated net income except, in all instances, for changes or decreases
which the Prospectus discloses have occurred or may occur or which are set
forth in such letter.
(4) They have carried out specified procedures, which have been
agreed to by the Representative, with respect to certain information in the
Prospectus specified by the Representative, and on the basis of such
procedures, they have found such information to be in agreement with the
general accounting records of the Company and its Subsidiaries.
28
<PAGE> 29
EXHIBIT A
MEGABANK FINANCIAL CORPORATION
1,450,000 SHARES COMMON STOCK(2)
PRICING AGREEMENT
________________, 1998
Howe Barnes Investments, Inc.
As Representative of the several Underwriters
135 South LaSalle Street
Chicago, Illinois 60603
Ladies and Gentlemen:
Reference is made to the Underwriting Agreement dated
_________________, 1998 (the "Underwriting Agreement") relating to the sale by
the Company and the Selling Shareholder and the purchase by the several
Underwriters for whom Howe Barnes Investments, Inc. is acting as the
representative (the "Representative"), of the above Shares. All terms herein
shall have the definitions contained in the Underwriting Agreement except as
otherwise defined herein.
Pursuant to Section 5 of the Underwriting Agreement, the Company and
the Selling Shareholder agree with the Representative as follows:
1. The initial public offering price per share for the Shares
shall be $__________.
2. The purchase price per share for the Shares to be paid by the
several Underwriters shall be $_____________, being an amount equal to the
initial public offering price set forth above less $____________ per share.
Schedule A is amended as follows:
If the foregoing is in accordance with your understanding of our
agreement, kindly sign and return to us the enclosed duplicates hereof,
whereupon it will become a binding agreement among the Company, the Selling
Shareholder and the several Underwriters, including you, all in accordance with
its terms.
__________________________________
(2)Plus an option to acquire up to 217,500 additional shares to cover
overallotments.
29
<PAGE> 30
Very truly yours,
MEGABANK FINANCIAL CORPORATION
By
Thomas R. Kowalski
Chairman and Chief Executive Officer
SELLING SHAREHOLDER
By
Thomas R. Kowalski
The foregoing Agreement is hereby
confirmed and accepted as of the
date first above written.
HOWE BARNES INVESTMENTS, INC.
Acting as Representative of the
several Underwriters.
By
Daniel E. Coughlin
Senior Vice President
30
<PAGE> 1
EXHIBIT 4.9
COMMON STOCK COMMON STOCK
NUMBER SHARES
MEGABANK FINANCIAL CORPORATION
Incorporated Under the Laws of the State of Colorado
-----------------------
CUSIP Applied for
-----------------------
SEE REVERSE
FOR CERTAIN DEFINITIONS
THIS CERTIFIES THAT
Is The Owner of
FULLY PAID AND NON-ASSESSABLE SHARES OF COMMON STOCK OF
MEGABANK FINANCIAL CORPORATION
transferable on the books of the Corporation by the owner thereof in person or
by authorized attorney upon surrender of this Certificate properly endorsed.
This Certificate and the shares represented herein are issued and shall be held
subject to all of the provisions of the Articles of Incorporation of the
Corporation and the Bylaws of the Corporation and all amendments thereto, to all
of which the owner by the acceptance hereof assents. This certificate is not
valid unless countersigned and registered by the and Transfer Agent and
Registrar.
WITNESS the facsimile seal of the Corporation and the facsimile signatures
of its duly authorized officers.
Dated:
SECRETARY [SEAL] PRESIDENT
COUNTERSIGNED AND REGISTERED:
By ________________________________________________
Transfer Agent & Registrar Authorized Signature .
<PAGE> 2
MEGABANK FINANCIAL CORPORATION
The following abbreviations, when used in the inscription on the face of
this certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
<TABLE>
<S> <C> <C>
TEN COM -as tenants in common UNIF GIFT MIN ACT-..............Custodian..............
TEN ENT -as tenants by the entireties (Cust) (Minor)
JT TEN -as joint tenants with right of under Uniform Gifts to Minors
survivorship and not as tenants Act ...............................
in common (State)
</TABLE>
Additional abbreviations may also be used though not in the above list.
- -------------------------------------------------------------------------------
For Value Received, _________________________does hereby sell, assign and
transfer unto
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
- --------------------
- --------------------
- -------------------------------------------------------------------------------
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS,INCLUDING ZIP CODE, OF ASSIGNEE)
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- ------------------------------------------------------------------------ Shares
of the Common Stock represented by the within Certificate, and does hereby
irrevocably constitute and appoint
- -------------------------------------------------------------- attorney-in-fact
to transfer the said stock on the books of the within-named Corporation, with
full power of substitution in the premises.
Dated ____________________________
Signature:
----------------------------------------------------
----------------------------------------------------
NOTICE: THE SIGNATURE(S) TO THIS ASSIGNMENT MUST
CORRESPOND WITH THE NAME(S) AS WRITTEN UPON
THE FACE OF THE CERTIFICATE IN EVERY
PARTICULAR, WITHOUT ALTERATION OR
ENLARGEMENT OR ANY CHANGE WHATSOEVER.
Signature(s) Guaranteed:
- -----------------------------------------
The signature(s) must be guaranteed by an eligible guarantor institution (Banks,
Stockbrokers, Savings and Loan Associations and Credit Unions with membership in
an approved signature guarantee Medallion Program), pursuant to S.E.C. Rule
17Ad-15.
THE CORPORATION IS AUTHORIZED TO ISSUE STOCK OF MORE THAN ONE CLASS OR SERIES.
THE CORPORATION WILL FURNISH UPON REQUEST AND WITHOUT CHARGE WRITTEN INFORMATION
ON THE DESIGNATIONS, RELATIVE RIGHTS, PREFERENCES AND LIMITATIONS OF THE SHARES
OF EACH CLASS OR SERIES AUTHORIZED TO BE ISSUED AND THE VARIATIONS IN RIGHTS,
PREFERENCES AND LIMITATIONS FOR EACH CLASS OR SERIES OF STOCK, SO FAR AS THE
SAME HAVE BEEN FIXED AND DETERMINED, AND THE AUTHORITY OF THE BOARD OF DIRECTORS
TO DETERMINE VARIATIONS FOR FUTURE CLASSES OR SERIES.
<PAGE> 1
EXHIBITS 5.1
and 23.2
September ___, 1998
MegaBank Financial Corporation
8100 East Arapahoe Road
Englewood, Colorado 80112
Re: Common Stock of MegaBank Financial Corporation
Ladies and Gentlemen:
We have examined the Registration Statement (No. 333-________, as
amended) on Form SB-2 (the "Registration Statement") filed on September ____,
1998 by MegaBank Financial Corporation (the "Company") with the Securities and
Exchange Commission (the "Commission") in connection with the registration under
the Securities Act of 1933, as amended (the "Securities Act"), of 1,667,500
shares of the Company's Common Stock (the "Registered Shares), including
1,200,000 shares which are to be sold by the Company, 250,000 shares which are
to be sold by a selling shareholder and 217,500 shares subject to an
over-allotment option granted by the Company and the selling shareholder to the
underwriters. All of the Registered Shares are to be sold to several
underwriters (the "Underwriters") of which Howe Barnes Investments, Inc. is the
representative (the "Representative") pursuant to an underwriting agreement (the
"Underwriting Agreement") to be entered into between the Company and the
Representative. We are familiar with the proceedings taken and proposed to be
taken by the Company in connection with the proposed authorization, issuance and
sale of the Registered Shares.
We have examined originals or copies, certified or otherwise identified
to our satisfaction, of such documents, corporate records and other instruments
as we have deemed necessary for the purposes of this opinion, including the
following: (a) the Amended and Restated Articles of Incorporation of the
Company; (b) the Bylaws of the Company; and (c) resolutions by unanimous written
consent of the Board of Directors of the Company dated as of September ____,
1998.
For purposes of this opinion, we have assumed the authenticity of all
documents submitted to us as originals, the conformity to the originals of all
documents submitted to us as copies, and the authenticity of the originals of
all documents submitted to us as copies. We have also assumed the genuineness of
the signatures of persons signing all documents in connection with which this
opinion is rendered, the authority of such persons signing on behalf of the
parties thereto other than the Company, and the due authorization, execution and
<PAGE> 2
MegaBank Financial Corporation
September ___, 1998
Page 2
delivery of all documents by the parties thereto other than the Company.
Based upon the foregoing, we are of the opinion that: when, as and if
(i) the Registration Statement shall have become effective pursuant to the
provisions of the Securities Act, (ii) the Registered Shares are sold to the
Underwriters and paid for pursuant to the terms of the Underwriting Agreement,
(iii) the Registered Shares shall have been issued in the form and containing
the terms described in the Registration Statement, and (iv) any legally required
consents or any other regulatory authorities shall have been obtained, the
Registered Shares will be legally issued, fully paid and nonassessable.
We consent to the use of this opinion as an exhibit to the Registration
Statement and to the use of our name under the heading "Legal Matters" in the
Registration Statement.
We are admitted to practice law in the State of Colorado and we express
no opinions as to the matters under or involving any laws other than the laws of
the State of Colorado and the federal laws of the United States of America.
This opinion is furnished to you in connection with the filing of the
Registration Statement, and is not to be used, circulated, quoted or otherwise
relied upon for any other purposes.
Very truly yours,
JONES & KELLER, P.C.
<PAGE> 1
EXHIBIT 10.7
AMENDED AND RESTATED STOCK PURCHASE AGREEMENT
This Amended and Restated Stock Purchase Agreement (this "Agreement")
is entered into as of this 4th day of December, 1997, by and among MegaBank
Financial Corporation, a Colorado corporation (the "Corporation"), and Thomas R.
Kowalski, the Ryan R. Kowalski Trust, the Realtek Company Profit Sharing Plan
and Trust, Thomas Investments Partnership, a Colorado partnership, Respond
Corp., a Colorado corporation, and Orchard Valley Financial Corporation, a
Colorado corporation (each a "Stockholder" and collectively the "Stockholders").
The Corporation and Stockholders hereby agree as follows:
RECITALS
WHEREAS, the Corporation and certain of the Stockholders entered into a
Stock Purchase Agreement, dated December 20, 1990 (the "Original Stock Purchase
Agreement"), wherein the Corporation agreed to redeem all of the shares of
capital stock of the Corporation owned by such Stockholders upon the terms and
conditions set forth in the Original Stock Purchase Agreement; and
WHEREAS, the Corporation and the Stockholders entered into an Amendment
to Stock Purchase Agreement, dated April 16, 1992 ("Amendment No. 1"), wherein
the Original Stock Purchase Agreement was amended to add additional Stockholders
and to make certain other modifications; and
WHEREAS, the parties hereto desire to further amend and restate the
Original Stock Purchase Agreement, as previously amended by Amendment No. 1, as
hereinafter described;
AGREEMENT
NOW, THEREFORE, IT IS AGREED:
ARTICLE 1.00-PURPOSE
The purpose of this Agreement is to provide:
A. For the orderly continuation of the affairs of the Corporation at
the time that certain events occur which may require the sale, transfer, or
exchange of the stock of the Corporation held by the Stockholders as provided by
the terms of this Agreement.
B. For a means by which the Stockholders may sell shares of stock when
certain events set out in this Agreement take place.
ARTICLE 2.00-PURCHASE AND SALE
At the time of the execution of this Agreement, the Stockholders own
the following shares of the common stock (the "Stock") in the Corporation:
<TABLE>
<S> <C>
Thomas R. Kowalski 53,160 shares
Ryan R. Kowalski Trust 2,563 shares
Realtek Company Profit Sharing Plan and Trust 20,494 shares
Thomas Investments Partnership 1,663 shares
Orchard Valley Financial Corporation 21,815 shares
Respond Corp. 9,360 shares
</TABLE>
Pursuant to the terms of this Agreement, the Stockholders agree to sell certain
of their shares of Stock in accordance with the terms of this Agreement and the
Corporation agrees to purchase the same in accordance with its terms and
conditions. In the event of any stock dividends or stock splits, the shares
received thereby by the Stockholders shall be similarly subject to the terms of
this Agreement.
<PAGE> 2
ARTICLE 3.00-ENCUMBRANCE
The parties acknowledge and agree that they do not wish to prevent any
Stockholder from pledging, hypothecating or otherwise encumbering his shares of
Stock.
ARTICLE 4.00-PURCHASE AT DEATH
4.01 Purchase by the Corporation. Upon the death of Thomas R. Kowalski
(herein "Kowalski"), each Stockholder shall have an option for ninety (90) days
from the date of Kowalski's death to cause a Purchase (as hereinafter defined)
by the Corporation. Such option may be exercised by any Stockholder by
delivering a written notice (an "Exercise Notice") to the Corporation, signed by
the Stockholder, requesting that a number of such Stockholder's shares be
purchased pursuant to this Agreement. The number of shares to be purchased shall
be designated by the Stockholder in the Exercise Notice and shall not exceed the
number of shares owned by such Stockholder's at the time of Kowalski's death.
The Exercise Notice must be received by the Corporation within ninety (90) days
from the date of Kowalski's death. Once given and timely received, the Exercise
Notice shall be irrevocable with respect to the Stockholders executing such
Exercise Notice (the "Selling Stockholders"), and the Corporation and the
Selling Stockholders, respectively, agree to consummate a Purchase, on the terms
set forth in Section 4.02.
4.02 Purchase. A "Purchase" shall mean the purchase for cash by the
Corporation of a number of whole shares of Stock from a Selling Stockholder,
said number to be determined by subtracting from such Selling Stockholder's
Allocable Insurance Proceeds (as hereinafter defined) any indebtedness due and
payable to the Corporation by such Selling Stockholder and dividing the
remainder by the price for shares of Stock (to be determined in accordance with
Article 5.00), rounded down to the next whole share of Stock. The "Allocable
Insurance Proceeds" for each Selling Stockholder shall mean the net proceeds
payable to the Corporation following Kowalski's death from the insurance policy
listed on Exhibit B (the "Net Insurance Proceeds"), multiplied by a fraction,
the numerator of which is the number of shares of Stock designated in the
Exercise Notice by such Selling Stockholder, and the denominator of which is the
number of shares of Stock designated in all Exercise Notices by all Selling
Stockholders.
4.03 Net Insurance Proceeds. To the extent that an Exercise Notice is
not timely delivered following Kowalski's death or the Net Insurance Proceeds
exceed the amounts necessary for the Corporation to purchase Stock of the
Selling Stockholders pursuant to this Article 4.00, the Corporation shall be
entitled to retain the entire amount of the Net Insurance Proceeds or such
excess, respectively, without liability to any Stockholder or any other party
therefor.
4.04 Closing. The closing of a Purchase shall take place at the office
of the Corporation at a date designated by the Corporation, which date shall be
not more than thirty (30) days after the date of receipt by the Corporation of
the Exercise Notice or payment to the Corporation of the Net Insurance Proceeds,
whichever is later.
4.05 Certain Definitions. For purposes of this Article 4.00, the term
"Stockholder" shall include, in addition to the Stockholders specifically named
herein, Kowalski's estate, the trustee of any trust created by Kowalski which
was treated during his lifetime as owned by Kowalski under the provisions of
Subpart E of Part I of Subchapter J of the Internal Revenue Code of 1986 as
amended, and any entity hereafter formed by Kowalski in which he beneficially
owns greater than 50% of the voting rights.
ARTICLE 5.00-STOCK VALUE AND RE-EVALUATION
The purchase price for the shares of Stock shall be Forty Five Dollars
($45.00) per share until altered by re-evaluation as hereinafter provided. The
Stockholders and the Corporation agree that the value of the Stock includes an
amount representing the good will of the Corporation as a going concern. Within
three (3) months after the end of each fiscal year of the Corporation and/or 45
days after review of audited financial statements of the Corporation for the
preceding fiscal year, the Stockholders and the Corporation may, by mutual
agreement, redetermine such value as of the end of the preceding fiscal year,
and such redetermination
2
<PAGE> 3
shall be entered into the valuation schedule attached hereto as Exhibit A. If
the Stockholders and the Corporation fail to redetermine the value for any
fiscal year(s), the last previously stipulated value shall be used, with an
appropriate adjustment, upward or downward, to reflect changes in the book value
per share of the Corporation since the effective date of the last valuation.
ARTICLE 6.00-CORPORATE RESTRICTIONS AFTER PURCHASE
[intentionally omitted]
ARTICLE 7.00-LIFE INSURANCE
7.01 Owner and Beneficiary. The Corporation has purchased a life
insurance policy on the life of Thomas R. Kowalski. (See Exhibit B). The
Corporation hereby reserves the right to exercise all incidents of ownership
with respect to such policy.
7.02 Insurance Companies. The insurance company that has issued the
policy of life insurance listed on Exhibit B of this Agreement is authorized to
act in accordance with the terms of such policy regardless of the provisions of
this Agreement. Payments made by any such insurance company, pursuant to the
policy terms, shall be a complete discharge of its obligations.
ARTICLE 8.00-RELEASE FROM INDEBTEDNESS
With respect to a Selling Stockholder which sells all shares of Stock
owned by such Stockholder pursuant to this Agreement: (i) the Corporation agrees
to use its best efforts to release any property of a Selling Stockholder that is
used as security for any indebtedness of the Corporation, said release to occur,
to the extent practicable, within twelve (12) months of the date of the death of
Thomas R. Kowalski; (ii) the Corporation shall also use its best efforts to
release the Selling Stockholders from any liability on any notes or other
obligations incurred for the benefit of the Corporation for which they are
individually or jointly liable, said releases to occur, to the extent
practicable, within twelve (12) months after the date of death of Thomas R.
Kowalski; provided, however, that in the event that the Corporation is unable to
secure said releases, it shall indemnify and hold harmless the Selling
Stockholders, their estates and successors, from any and all liabilities which
are incurred in the event of a default by the Corporation.
ARTICLE 9.00-SECURITY
[intentionally omitted]
ARTICLE 10.00-TERMINATION OF AGREEMENT
This Agreement shall terminate upon the occurrence of any of the
following events:
10.01 The cessation of the Corporation's business;
10.02 The bankruptcy, receivership or dissolution of the Corporation;
10.03 On the date that the insurance described on Exhibit B lapses or
is canceled; or
10.04 Upon written notice by Kowalski to the Corporation.
ARTICLE 11.00-BINDING UPON LEGAL REPRESENTATIVES
This Agreement shall be binding upon and shall inure to the benefit of
the respective heirs, legal representatives, assigns, transferees and successors
of each of the parties hereto.
3
<PAGE> 4
ARTICLE 12.00-CONSTRUCTION
The titles appearing herein are used for purpose of convenience only
and shall in no way change the meaning of this Agreement. If any conflict
between any heading and the text of this Agreement exists, the text shall
control.
ARTICLE 13.00-NOTICES
Any and all notices, designations, consents, offers, acceptances or any
other communications provided for herein shall be given in writing either by:
(a) Registered or certified mail which shall be addressed, in
the case of the Corporation, to its principal office, and in the case
of any Stockholder, to his address appearing on the stock books of the
Corporation or his residence or at such other address as may be
designated for him; or
(b) Personal delivery to the party requiring notice and
securing a written receipt.
The effective date of the notice shall be the date of the written receipt
received upon personal delivery or five (5) days after mailing in the case of
certified mail.
ARTICLE 14.00-INVALID PROVISION
The invalidity and unenforceability of any particular provision of this
Agreement shall not affect the other provisions hereof and this Agreement shall
be construed in all respects as if such invalid and unenforceable provisions
were omitted.
ARTICLE 15.00-MODIFICATION
No change or modification of this Agreement shall be valid unless the
same is in writing and signed by all the parties hereto.
ARTICLE 16.00-ATTORNEYS' FEES
In the event suit is brought to enforce any or all of the provisions of
this Agreement, the prevailing party shall be entitled to reimbursement of his
court costs and attorneys' fees.
ARTICLE 17.00-GENDER AND NUMBER
As used herein, the masculine gender shall include the feminine and
neuter genders, and the singular shall include the plural, and vice versa, where
the context requires.
ARTICLE 18.00-ADDITIONAL DOCUMENTS AND FURTHER ASSURANCES
The parties hereto agree to execute any other documents that are
necessary to effectuate the provisions of this Agreement.
ARTICLE 19.00-GOVERNING LAW
This Agreement and all of its provisions shall be governed and
construed in accordance with the laws of the State of Colorado.
4
<PAGE> 5
IN WITNESS WHEREOF, the parties hereto have executed this Amended and
Restated Stock Purchase Agreement as of the date first above written.
The Corporation:
MEGABANK FINANCIAL CORPORATION
By: /s/ Larry A. Olsen
---------------------------------------
Larry A. Olsen, President
The Stockholders:
/s/ Thomas R. Kowalski
------------------------------------------
Thomas R. Kowalski
THE RYAN R. KOWALSKI TRUST
By: /s/ Thomas R. Kowalski
---------------------------------------
Thomas R. Kowalski, Trustee
THE REALTEK COMPANY PROFIT
SHARING PLAN AND TRUST
By: /s/ Thomas R. Kowalski
---------------------------------------
Thomas R. Kowalski, Administrator
THOMAS INVESTMENTS PARTNERSHIP
By: /s/ Thomas R. Kowalski
---------------------------------------
Thomas R. Kowalski, General Partner
ORCHARD VALLEY FINANCIAL CORP.
By: /s/ Thomas R. Kowalski
---------------------------------------
Thomas R. Kowalski, President
RESPOND CORP.
By: /s/ Thomas R. Kowalski
---------------------------------------
Thomas R. Kowalski, President
5
<PAGE> 6
Each of the undersigned hereby acknowledges that this Agreement was
prepared by legal counsel representing the Corporation. Further, each of the
undersigned recognize that said legal counsel was acting solely on behalf of the
Corporation and not on behalf of any Stockholder, individually or collectively.
Each of the undersigned represent and warrant that he/she/it has been advised to
seek independent legal and financial counsel with respect to the execution of
this Agreement and that he/she/it has had the opportunity to do so. Each of the
undersigned agrees that the statements, representations and warranties made in
this paragraph may be relied upon by the Corporation and it legal counsel and
their respective successors in interest.
The Corporation:
MEGABANK FINANCIAL CORPORATION
By: /s/ Larry A. Olsen
-----------------------------------------
Larry A. Olsen, President
The Stockholders:
/s/ Thomas R. Kowalski
--------------------------------------------
Thomas R. Kowalski
THE RYAN R. KOWALSKI TRUST
By: /s/ Thomas R. Kowalski
-----------------------------------------
Thomas R. Kowalski, Trustee
THE REALTEK COMPANY PROFIT
SHARING PLAN AND TRUST
By: /s/ Thomas R. Kowalski
-----------------------------------------
Thomas R. Kowalski, Administrator
THOMAS INVESTMENTS PARTNERSHIP
By: /s/ Thomas R. Kowalski
-----------------------------------------
Thomas R. Kowalski, General Partner
ORCHARD VALLEY FINANCIAL CORP.
By: /s/ Thomas R. Kowalski
-----------------------------------------
Thomas R. Kowalski, President
RESPOND CORP.
By: /s/ Thomas R. Kowalski
-----------------------------------------
Thomas R. Kowalski, President
6
<PAGE> 7
EXHIBIT A
VALUE OF SHARES
<TABLE>
<CAPTION>
DATE VALUE INITIALS OF PARTIES
- ---- ----- -------------------
<S> <C> <C>
Fiscal Year
1998
Fiscal Year
1999
Fiscal Year
2000
Fiscal Year
2001
Fiscal Year
2002
Fiscal Year
2003
</TABLE>
<PAGE> 8
EXHIBIT B
POLICIES OF INSURANCE OWNED
ON THE LIVES OF THE THOMAS R. KOWALSKI
<TABLE>
<CAPTION>
Name of
Insurance Policy Face
Company Number Owner Insured Amount
- --------- ------ ----- ------- ------
<S> <C> <C> <C> <C>
Transamerica Life 40779161 MegaBank Thomas R. $3,000,000
Financial Kowalski
Corporation
</TABLE>
<PAGE> 9
AMENDMENT NO. 1 TO AMENDED AND RESTATED STOCK PURCHASE AGREEMENT
This Amendment No. 1 to the Amended and Restated Stock Purchase Agreement
dated December 4, 1997 (the "Agreement") is entered into as of September 1,
1998.
RECITALS
WHEREAS, the parties hereto desire to amend the Agreement to provide for a
purchase price to reflect market value of the Stock.
NOW, THEREFORE, Article 5.00 "Stock Value and Re-Evaluation" is amended in
its entirety to read:
ARTICLE 5.00-STOCK VALUE AND RE-EVALUATION
The purchase price for the shares of Stock shall be the greater of 80% of
the average closing bid price of the Common Stock of the Corporation on any
recognized quotation system for five trading days preceding the death of Thomas
R. Kowalski or appraised value as determined by an appraiser selected mutually
by the Corporation and the surviving Stockholders, after notice by such persons
to the Corporation within 60 days of the death of Thomas R. Kowalski. The
Stockholders and the Corporation agree that the value of the Stock shall include
an amount representing good will of the Corporation as a going concern.
IN WITNESS WHEREOF, the parties hereto have executed this Amendment No. 1
to the Amended and Restated Stock Purchase Agreement as of the date first above
written.
The Corporation:
MEGABANK FINANCIAL CORPORATION
By: /s/ Larry A. Olsen
----------------------------------------
Larry A. Olsen, President
The Stockholders:
/s/ Thomas R. Kowalski
-------------------------------------------
Thomas R. Kowalski
THE RYAN R. KOWALSKI TRUST
By: /s/ Thomas R. Kowalski
----------------------------------------
Thomas R. Kowalski, Trustee
THE REALTEK COMPANY PROFIT
SHARING PLAN AND TRUST
By: /s/ Thomas R. Kowalski
----------------------------------------
Thomas R. Kowalski, Administrator
THOMAS INVESTMENTS PARTNERSHIP
By: /s/ Thomas R. Kowalski
----------------------------------------
Thomas R. Kowalski, General Partner
<PAGE> 10
ORCHARD VALLEY FINANCIAL CORP.
By: /s/ Thomas R. Kowalski
----------------------------------------
Thomas R. Kowalski, President
RESPOND CORP.
By: /s/ Thomas R. Kowalski
----------------------------------------
Thomas R. Kowalski, President
2
<PAGE> 11
Each of the undersigned hereby acknowledges that this Amendment No. 1
to the Agreement was prepared by legal counsel representing the Corporation.
Further, each of the undersigned recognize that said legal counsel was acting
solely on behalf of the Corporation and not on behalf of any Stockholder,
individually or collectively. Each of the undersigned represent and warrant that
he has been advised to seek independent legal and financial counsel with respect
to the execution of this Agreement and that he has had the opportunity to do so.
Each of the undersigned agrees that the statements, representations and
warranties made in this paragraph may be relied upon by the Corporation and it
legal counsel and their respective successors in interest.
The Corporation:
MEGABANK FINANCIAL CORPORATION
By: /s/ Larry A. Olsen
----------------------------------------
Larry A. Olsen, President
The Stockholders:
/s/ Thomas R. Kowalski
-------------------------------------------
Thomas R. Kowalski
THE RYAN R. KOWALSKI TRUST
By: /s/ Thomas R. Kowalski
----------------------------------------
Thomas R. Kowalski, Trustee
THE REALTEK COMPANY PROFIT
SHARING PLAN AND TRUST
By: /s/ Thomas R. Kowalski
----------------------------------------
Thomas R. Kowalski, Administrator
THOMAS INVESTMENTS PARTNERSHIP
By: /s/ Thomas R. Kowalski
----------------------------------------
Thomas R. Kowalski, General Partner
ORCHARD VALLEY FINANCIAL CORP.
By: /s/ Thomas R. Kowalski
----------------------------------------
Thomas R. Kowalski, President
RESPOND CORP.
By: /s/ Thomas R. Kowalski
----------------------------------------
Thomas R. Kowalski, President
3
<PAGE> 1
EXHIBIT 10.9
MEGABANK FINANCIAL CORPORATION
1998 LONG-TERM INCENTIVE PLAN
SECTION I
DESIGNATION AND PURPOSE OF PLAN
The purpose of the MegaBank Financial Corporation (the "Company") 1998
Long-Term Incentive Plan (the "Plan") is to provide key management employees who
are mainly responsible for the continued growth, development, and financial
success of the Company and its subsidiaries with added incentives to continue in
the long-term service of the Company and to create a direct interest in the
future success of the Company. The Plan also enables the Company to attract and
retain such employees and reward them for the continued performance beneficial
to the Company.
SECTION II
DEFINITIONS
The following definitions are applicable herein:
A. "AWARD" - Individually or collectively, Options, Stock Appreciation
Rights, Performance Shares or Restricted Stock granted hereunder.
B. "AWARD PERIOD" - the period of time during which a Stock
Appreciation Right which has not been granted pursuant to an Option may be
exercised. The Award Period shall be set forth in the document issuing the Stock
Appreciation Right to the selected Eligible Employee.
C. "BOARD" - the Board of Directors of the Company.
D. "BOOK VALUE" - the book value of a share of Stock determined in
accordance with the Company's regular accounting practices as of the last
business day of the month immediately preceding the month in which a Stock
Appreciation Right is exercised as provided in Section IX(D).
E. "CODE" - the Internal Revenue Code of 1986, as amended. Reference in
the Plan to any section of the Code shall be deemed to include any amendments or
successor provisions to such section and any regulations promulgated thereunder.
F. "COMMITTEE" - the Incentive Plan Committee appointed to administer
the Plan pursuant to Section IV.
G. "COMPANY" - MegaBank Financial Corporation, including any present or
future "subsidiary corporation" as such term is defined in Section 424(f) of the
1986 Internal Revenue Code, as amended.
H. "DATE OF GRANT" - the date on which the granting of an Award is
authorized by the Committee or Board or such later date as may be specified by
the Committee or Board in such authorization.
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I. "ELIGIBLE EMPLOYEE" - any person who satisfies all of the
requirements of Section VI.
J. "EXERCISE PERIOD" - the period or periods during which a Stock
Appreciation Right is exercisable as described in Section IX(B).
K. "FAIR MARKET VALUE" - the fair market value of the Stock as
determined in accordance with Section VIII(D).
L. "INCENTIVE STOCK OPTION" - an incentive stock option within the
meaning of Section 422 of the Code.
M. "OPTION" OR "STOCK OPTION" - either a non-qualified stock option or
an Incentive Stock Option granted under Section VIII. It also means any Option
which remains after a Participant has exercised his Option with respect to part
of the shares covered by a Stock Option Agreement as described in Section
VIII(B).
N. "OPTION PERIOD" OR "OPTION PERIODS" - the period or periods during
which an Option is exercisable as described in Section VIII(E).
O. "OPTION PRICE" - the price, expressed on a per share basis, for
which the Company Stock can be acquired by the holder of an Option pursuant to
the exercise of such Option.
P. "PARTICIPANT" - an Eligible Employee of the Company or a Subsidiary
who has been granted an Option, a Stock Appreciation Right, a Performance Share
Award or a Restricted Stock Award under this Plan.
Q. "PERFORMANCE SHARE" - an Award granted under Section X.
R. "RESTRICTED STOCK" - an Award granted under Section VII.
S. "STOCK" AND "COMPANY STOCK" - the common stock of the Company.
T. "STOCK APPRECIATION RIGHT" - an Award granted under Section IX.
U. "STOCK OPTION AGREEMENT" - shall have the meaning set forth in
Section VIII(B).
V. "SUBSIDIARY" - any corporation of which fifty percent (50%) or more
of its outstanding voting stock or voting power is beneficially owned, directly
or indirectly, by the Company.
W. "TEN PERCENT SHAREHOLDER" - a Participant who, at the Date of Grant,
owns directly or indirectly (within the meaning of Section 424(d) of the
Internal Revenue Code) stock possessing more then ten percent (10%) of the total
combined voting power of all classes of stock of the Company or a subsidiary
thereof.
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X. Wherever appropriate, words used in this Plan in the singular may
mean the plural, the plural may mean the singular, and the masculine may mean
the feminine.
SECTION III
EFFECTIVE DATE, DURATION AND STOCKHOLDER APPROVAL
A. EFFECTIVE DATE AND STOCKHOLDER APPROVAL. Subject to the approval of
the Plan by a majority of the outstanding shares of Stock, the Plan shall be
effective as of August 15, 1998.
B. PERIOD FOR GRANT OF AWARDS. Awards may be made as provided herein
for a period of ten (10) years.
SECTION IV
ADMINISTRATION
A. APPOINTMENT OF COMMITTEE. The Plan shall be administered by the
Board or an Incentive Plan Committee appointed by the Board. Such Committee
shall consist of not less than two (2) members of the Board and such members
shall be non-employee directors as defined in Rule 16b-3 under the Securities
Exchange Act of 1934, as amended (or such greater number of members which may be
required by Rule 16b-3). In addition, the Board shall designate a member of the
Committee to act as Chairman of the Committee, and the Board may remove any
member of the Committee at any time and appoint any non-employee director to
fill any vacancy on the Committee.
B. COMMITTEE MEETINGS. The Committee, if any, shall hold its meetings
at such times and places as specified by the Committee Chairman. A majority of
the Committee shall constitute a quorum. All actions of the Committee shall be
taken by all of the members of the meeting duly called by its Chairman;
provided, however, any action taken by a written document signed by a majority
of the members of the Committee shall be as effective as action taken by the
Committee at a meeting duly called and held.
C. COMMITTEE POWERS. References in the Plan to the Committee shall also
mean the Board insofar as the Board administers the Plan rather than appointing
a Committee. Subject to the provisions of this Plan, the Committee shall have
full authority in its discretion to (i) designate the Participants to whom
Awards shall be granted, (ii) determine the number of shares of Stock to be made
available under each such Award, (iii) determine the period or periods in which
the Participant may exercise such Award, (iv) determine the date when such Award
expires, (v) determine the price for Stock under such Award, and (vi) determine
the grounds of forfeiture of an Award. The Committee shall have all powers
necessary to administer the Plan in accordance with its terms, including the
power to interpret this Plan and resolve all questions arising thereunder. The
Committee may prescribe such rules and regulations for administering this Plan
as the Committee deems appropriate.
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<PAGE> 4
SECTION V
GRANT OF AWARDS AND
LIMITATION OF NUMBER OF SHARES SUBJECT TO AWARD
The Committee may, from time to time, grant Awards to one or more
Eligible Employees, provided that (i) subject to any adjustment pursuant to
Section XI, the aggregate number of shares of Stock subject to Stock Options,
Stock Appreciation Rights, Performance Share Awards or Restricted Stock Awards
under this Plan may not exceed 16,667 shares; (ii) to the extent that a Stock
Option, Stock Appreciation Right, Performance Share Award or Restricted Stock
Award lapses or the rights of the Participant to whom it was granted terminate,
expire or are canceled for any other reason, in whole or in part, shares of
Stock (or remaining shares) subject to such Award shall again be available for
the grant of an Award under the Plan; and (iii) shares delivered by the Company
under the Plan may be authorized and unissued Stock, Stock held in the treasury
of the Company or Stock purchased on the open market (including private
purchases) in accordance with applicable securities laws. In determining the
size of Awards, the Committee shall take into account the responsibility level,
performance, potential, and cash compensation level of a Participant, and the
Fair Market Value of the Stock at the time of Awards, as well as such other
considerations it deems appropriate.
SECTION VI
ELIGIBILITY
Key employees and directors of the Company and its Subsidiaries
(including employees who are members of the Board) who, in the opinion of the
Committee, are mainly responsible for the continued growth and development and
financial success of the business of the Company or one or more of its
Subsidiaries shall be eligible to be granted Awards under the Plan. Subject to
the provisions of the Plan, the Committee may from time to time select from such
eligible persons those to whom Awards shall be granted and determine the nature
and amount of each Award. No employee of the Company or its Subsidiaries shall
have any right to be granted an Award under this Plan. A member of the Committee
shall not be eligible for any Award hereunder, unless such Award is granted by
the full Board.
SECTION VII
RESTRICTED STOCK AWARDS
A. GRANTS OF SHARES OF RESTRICTED STOCK. An Award made pursuant to this
Section VII shall be granted in the form of shares of Stock, restricted as
provided in this Section VII. Shares of Restricted Stock shall be issued to the
Eligible Employee upon the payment of consideration as determined by the
Committee; provided, however, that such consideration may not be less than the
par value of the Stock. The shares of Restricted Stock shall be issued in the
name of the Participant and shall bear a restrictive legend prohibiting sale,
transfer, pledge or hypothecation of the shares of Restricted Stock until the
expiration of the restriction period.
The Committee may also impose such other restrictions and conditions on
the shares of Restricted Stock as it deems appropriate, including but not
limited to requiring the Participant to
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<PAGE> 5
keep the restricted stock certificates, duly endorsed, in the custody of the
Company while the restrictions remain in effect.
B. RESTRICTION PERIOD. At the time a Restricted Stock Award is made,
the Committee may establish a restriction period applicable to such Award which
shall not be more than ten (10) years. Each Restricted Stock Award may have a
different restriction period, at the discretion of the Committee. In addition to
or in lieu of a restriction period, the Committee may establish a performance
goal which must be achieved as a condition to the retention of the Restricted
Stock. The performance goal may be based on the attainment of specified types of
performance measurement criteria, which may differ as to various Participants or
classes or categories of Participants. Such criteria may include, without
limitation, the attainment of certain performance levels by the individual
Participant, the Company, a department or division of the Company and/or a group
or class of participants. Grants of Restricted Stock Awards to Eligible
Employees shall be set from time to time by the Committee and shall be timely
communicated in writing to the Eligible Employees in advance of the commencement
of the performance of services to which such performance goals relate.
C. FORFEITURE OR PAYOUT OF AWARD. In the event a Participant ceases
employment during a restriction period, or in the event performance goals
attributable to a Restricted Stock Award are not achieved, subject to the terms
of each particular Restricted Stock Award, and subject to discretionary action
by the Committee as set forth below in Section XIII, a Restricted Stock Award is
subject to forfeiture of the shares of Stock which had not previously been
removed from restriction under the terms of the Award.
Any shares of Restricted Stock which are forfeited will be transferred
to the Company. Any consideration paid by the Participant for the Restricted
Stock shall be returned, without interest, to the Participant upon forfeiture.
Upon completion of the restriction period and/or satisfaction of any
performance-goal criteria, all restrictions upon the Award will expire and new
certificates representing the Award will be issued or released without the
restrictive legend described in Section VII (A). As a condition precedent to
receipt of the certificates, the Participant (or the designated beneficiary or
personal representative of the Participant) will agree to make payment to the
Company in the amount of any taxes, payable by the Participant, which are
required to be withheld with respect to such shares of Stock.
SECTION VIII
STOCK OPTIONS
A. GRANT OF OPTION. One or more Options may be granted to any Eligible
Employee. Upon the grant of an Option to an Eligible Employee, the Committee
shall specify whether the Option is intended to constitute a non-qualified stock
option or an Incentive Stock Option; provided, however, that Incentive Stock
Options may only be issued to persons who are employees of the Company.
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<PAGE> 6
B. STOCK OPTION AGREEMENT. Each Option granted under the Plan shall be
evidenced by a written Stock Option Agreement between the Company and the
Participant containing such terms and conditions as the Committee determines,
including, without limitation, provisions to qualify Incentive Stock Options as
such under Section 422 of the Code. Such agreements shall incorporate the
provisions of this Plan by reference. The date of granting an Option is the date
specified in the written Stock Option Agreement which is signed by the
Participant and the Company.
C. DETERMINATION OF OPTION PRICE. The Option Price for shares of Stock
shall be determined by the Committee, but in no event shall the Option Price for
each share covered by an Incentive Stock Option be less than the Fair Market
Value of the Stock on the date of grant; the Option Price for shares covered by
a non-statutory Option may be less than Fair Market Value. Notwithstanding the
foregoing, in the case of an Option which is designed to qualify as an Incentive
Stock Option (as defined in Section 422 of the Code) which is granted to a Ten
Percent Shareholder, the Option Price shall not be less than 110% of such Fair
Market Value.
D. DETERMINATION OF FAIR MARKET VALUE. The Fair Market Value of the
Stock on the date of granting an Option shall be the officially quoted mean of
the high and low prices at which the Stock was sold on the market on such date.
If there are no Stock transactions on such date, the Fair Market Value shall be
determined as of the immediately preceding date on which there were Stock
transactions. In the event the Stock is not publicly traded, the Fair Market
Value of the Stock shall be determined by the Committee in accordance with
applicable regulations of the Internal Revenue Service.
E. TERM OF OPTION. The term of an Option may vary within the
Committee's discretion; provided, however, that the term of an Option shall not
exceed ten (10) years from the date of granting the Option to the Participant,
and, to this end, all Options granted pursuant to this Plan must provide that
each such Option cannot be exercised after the expiration of ten (10) years from
the date each such Option is granted. Notwithstanding the foregoing, in the case
of any Option which is designed to qualify as an Incentive Stock Option (as
defined in Section 422 of the Code) which is granted to a Ten Percent
Shareholder, the term of such Option may not exceed five (5) years from the date
of grant of such Option.
F. VESTING OF OPTIONS. The Committee may limit an Option by restricting
its exercise in whole or in part for specified periods in its sole discretion.
G. METHOD OF EXERCISING AN OPTION. Subject to the terms of a particular
Option, a Participant may exercise it in whole or in part by written notice to
the Secretary of the Company stating in such written notice the number of shares
of Stock such Participant elects to purchase under his Option. Such written
notice shall be in a form satisfactory to the Committee and shall specify the
particular Option (or portion there of) which is being exercised.
H. NO OBLIGATION TO EXERCISE OPTION. A Participant is under no
obligation to exercise an Option or any part thereof.
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<PAGE> 7
I. PAYMENT FOR OPTION STOCK. Stock purchased pursuant to an Option
shall be paid in full at the time of purchase. Payment may be made (a) in cash,
(b) with the approval of the Committee, by delivery to the Company of shares of
Stock having an aggregate fair market value equal to the exercise price, or (c)
a combination of (a) and (b). Payment may also be made, in the discretion of the
Committee, by delivery (including by facsimile transmission) to the Company or
its designated agent of an executed irrevocable Option exercise form together
with irrevocable instructions to a broker-dealer to sell (or margin) a
sufficient portion of the shares and deliver the sale (or margin loan) proceeds
directly to the Company to pay for the exercise price. Upon receipt of payment
and subject to paragraph J of this Section VIII, the Company shall, without
transfer or issue tax to the Participant or other person entitled to exercise
the Option, deliver to the Participant (or other person entitled to exercise the
Option) a certificate or certificates for such shares.
J. DELIVERY OF STOCK TO PARTICIPANT. The Company shall undertake and
follow all necessary procedures to make prompt delivery of the number of shares
of Stock which the Participant elects to purchase upon exercise of an Option
granted under this Plan. Such delivery, however, may be postponed, at the sole
discretion of the Company, to enable the Company to comply with any applicable
procedures, regulations or listing requirements of any government agency, stock
exchange or quotation system, or regulatory authority.
K. FAILURE TO ACCEPT DELIVERY OF STOCK. If a Participant refuses to pay
for Stock which he has elected to purchase under his Option, in accordance with
the terms of payment which had previously been agreed upon, his Option shall
thereupon, at the sole discretion of the Committee, terminate, and such funds
previously paid for unissued Stock shall be refunded. Stock which has been
previously issued to the Participant and been fully paid for shall remain the
property of the Participant and shall be unaffected by such termination.
L. NON-TRANSFERABILITY OF OPTIONS. During the lifetime of a
Participant, an Option granted to him may be exercised only by him. It may not
be sold, assigned, pledged or otherwise transferred except by will or by the
laws of descent and distribution.
M. PURCHASE FOR INVESTMENT.
(a) Written Agreement by Participants. Unless a registration
statement under the Securities Act of 1933 is then in effect with respect to the
Stock a Participant receives upon exercise of his Option, a Participant shall
acquire the Stock he receives upon exercise of his Option for investment and not
for resale or distribution, and he shall furnish the Company with a written
statement to that effect when he exercises his Option and a reference to such
investment warranty shall be inscribed on the Stock certificate(s).
(b) Registration Requirement. Each Option shall be subject to
the requirement that, if at any time the Committee determines that the listing,
registration or qualification of the Stock subject to the Option upon any
securities exchange or quotation system, or under any state or Federal law is
necessary or desirable as a condition of, or in connection with, the issuance of
the Stock thereunder, the Option may not be exercised in whole or in part unless
such listing,
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<PAGE> 8
registration or qualification shall have been effected or obtained (and the same
shall have been free of any conditions not acceptable to the Committee).
N. SPECIAL LIMITATIONS ON EXERCISE OF INCENTIVE STOCK OPTIONS. The
aggregate Fair Market Value (determined at the time the Incentive Stock Option
is granted) of the Stock with respect to which any Incentive Stock Option is
first exercisable during any calendar year shall not exceed $100,000.
SECTION IX
STOCK APPRECIATION RIGHTS
A. GRANT OF STOCK APPRECIATION RIGHTS. Stock Appreciation Rights may be
granted under the Plan in tandem with an Option either at the time of grant or
by amendment or may be separately awarded. Stock Appreciation Rights shall be
subject to such terms and conditions not inconsistent with the Plan as the
Committee shall impose.
B. RIGHT TO EXERCISE; EXERCISE PERIOD. A Stock Appreciation Right
issued in tandem with an Option shall be exercisable to the extent the Option is
exercisable. A Stock Appreciation Right issued independent of an Option shall be
exercisable pursuant to such terms and conditions established in the grant.
C. AUTOMATIC REDEMPTION OF UNEXERCISED STOCK APPRECIATION RIGHTS. If on
the last day of the Option Period, in the case of a Stock Appreciation Right
granted in tandem with an Option, or the specified Award Period, in the case of
a Stock Appreciation Right issued independent of an Option, the Participant has
not exercised such Stock Appreciation Right, then such Stock Appreciation Right
shall be automatically redeemed by the Company for an amount equal to the
payment that would otherwise have been made to the Participant if the
Participant had chosen to exercise the Stock Appreciation Right on the last day
of the Option Period or the specified Award Period, as the case may be.
D. RIGHTS UPON EXERCISE. An exercisable Stock Appreciation Right
granted in tandem with an Option shall entitle the Participant to surrender
unexercised the Option or any portion thereof to which the Stock Appreciation
Right is attached, and to receive in exchange for the Stock Appreciation Right a
payment (in cash or Stock or a combination thereof as described below) equal to
the Fair Market Value of one share of Stock at the date of exercise minus the
Option Price times the number of shares called for by the Stock Appreciation
Right (or portion thereof) which is so exercised. For example, assume that a
Participant is granted a tandem Award of an Option to purchase 1,000 shares of
Stock at an Option Price of $2.00 per share and 1,000 Stock Appreciation Rights.
In such a case, the exercise of 700 Options by the Participant would relinquish
and terminate 700 Stock Appreciation Rights; similarly, the exercise of the
remaining 300 Stock Appreciation Rights would relinquish and terminate the
remaining 300 Options. If the Fair Market Value of the Stock was $5.00 per share
at both the time of the exercise of the Options and Stock Appreciation Rights,
then the Participant would receive 700 shares of Stock upon payment of $1,400
(700 times the Option Price of $2.00) and the Company would pay the Participant
$900 upon the exercise of the 300 Stock Appreciation Rights (($5.00 minus $2.00)
times 300).
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With respect to the issuance of Stock Appreciation Rights which are not
granted in tandem with an Option, the Committee shall specify upon the Date of
Grant of the Stock Appreciation Right whether the Stock Appreciation Right is a
"regular" Stock Appreciation Right or a "book value" Stock Appreciation Right.
Upon the exercise of a "regular" Stock Appreciation Right, the Participant will
receive a payment equal to the Fair Market Value of one share of Stock at the
date of exercise minus the Fair Market Value of one share of Stock as of the
Date of Grant of the Stock Appreciation Right times the number of shares called
for by the Stock Appreciation Right (or portion thereof) which is so exercised.
Upon the exercise of a "book value" Stock Appreciation Right, the Participant
will receive a payment equal to the Book Value of one share of Stock at the date
of exercise minus the Book Value of one share of Stock as of the Date of the
Grant of the Stock Appreciation Right times the number of shares called for by
the Stock Appreciation Right (or portion thereof) which is so exercised.
The value of any Stock to be received upon exercise of a Stock
Appreciation Right shall be the Fair Market Value of the Stock on such date of
exercise. To the extent that a Stock Appreciation Right issued in tandem with an
Option is exercised, such Option shall be deemed to have been exercised, and
shall not be deemed to have lapsed.
E. TRANSFERABILITY. The Committee may impose such restrictions on
transferability of Stock Appreciation Rights, if any, as it may in its sole
discretion determine; provided however, that Stock Appreciation Rights issued in
tandem with the grant of an Incentive Stock Option must be subject to the same
transferability restriction as the Incentive Stock Option itself.
SECTION X
PERFORMANCE SHARES
A. GRANT OF PERFORMANCE SHARE UNITS. Awards made pursuant to this
Section X shall be granted in the form of Performance Shares, subject to such
terms and conditions not inconsistent with this Plan as the Committee shall
impose. Performance Shares shall be issued to the Eligible Employee without the
payment of consideration by the Eligible Employee. Awards shall be based on the
attainment of specified types and combination of performance measurement
criteria, which may differ as to various Participants or classes or categories
of Participants. Such criteria may include, without limitation, the attainment
of certain performance levels by the individual Participant, the Company, a
department or division of the Company and/or a group or class of Participants.
Such criteria, together with the ranges of Performance Shares from which
employees may be eligible shall be set from time to time by the Committee and
shall be communicated in writing to the Eligible Employees.
B. PERFORMANCE PERIOD. The measuring period to establish the
performance criteria set forth in a Performance Share Award shall be determined
by the Committee. A Performance Share Award may initially provide, or the
Committee may at any time thereafter, but no more frequently than once in any
six (6) month period, amend it to provide, for waiver or reduction of the
measuring period and, if appropriate, for adjustment of the performance criteria
set forth in the Performance Share Award, upon the occurrence of events
determined by the Committee in its sole discretion to justify such waiver,
reduction or adjustment.
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C. FORM OF PAYMENT. Upon the completion of the applicable measuring
period, a determination shall be made by the Committee in accordance with the
Award as to (i) the extent to which performance criteria have been attained,
(ii) the satisfaction of any other terms and conditions with respect to the
award, and (iii) the number of shares of Stock to be awarded to the Participant.
The appropriate number of shares of Stock shall thereupon be issued to the
Participant in accordance with the Award in satisfaction of such Performance
Share Award.
SECTION XI
CHANGES IN CAPITAL STRUCTURE OF SHARES
In the event any recapitalization, liquidation, reclassification, stock
dividend, stock split, combination of shares, rights offering, or extraordinary
dividend or divestiture (including a spin-off), or any other change in the
capital structure or shares of the Company, the Committee shall make
adjustments, determined by the Committee in its discretion to be appropriate, as
to the number and kind of securities subject to this Plan as specified in
Section V herein, and as to the number and kind of securities covered by each
outstanding Award and, where applicable, the price per share thereunder;
provided, however, that with respect to Incentive Stock Options, such
adjustments shall be made in accordance with Section 424(h) of the Code (and any
other applicable sections or regulations of the Code) unless the Committee
determines otherwise.
SECTION XII
CORPORATE REORGANIZATION OR DISSOLUTION
A. DISCONTINUATION OF THE PLAN. The Plan shall be discontinued in the
event of the dissolution or liquidation of the Company or in the event of a
Reorganization (as hereinafter defined) in which the Company is not the
surviving or acquiring company, or in which the Company is or becomes a
wholly-owned subsidiary of another company after the effective date of the
Reorganization and no plan or agreement respecting the Reorganization is
established which specifically provides for the continuation of the Plan and the
change, conversion, or exchange of the Stock relating to existing Awards under
this Plan for securities of another corporation. Upon the dissolution of the
Plan in connection with an event described in this Paragraph A, all Awards shall
become fully vested and all outstanding Options and Stock Appreciation Rights
shall become immediately exercisable by the holder thereof. Any Options or Stock
Appreciation Rights granted under the Plan may be terminated as of a date fixed
by the Committee, provided that no less than fifteen (15) days written notice of
the date so fixed shall be given to each Participant and each such Participant
shall have the right during such period to exercise all or any portion of such
Options or Stock Appreciation Rights. Any Stock Appreciation Right not so
exercised shall be redeemed.
B. CONTINUATION OF THE PLAN UPON A REORGANIZATION. In the event of a
Reorganization (as hereinafter defined) (i) in which the Company is not the
surviving or acquiring company, or in which the Company is or becomes a
wholly-owned subsidiary of another company after the effective date of the
Reorganization, and (ii) with respect to which there is a reorganization
agreement which undertakes to continue the Plan and to provide for the change,
conversion or exchange of the Stock attributable to outstanding Awards for
securities of another corporation, then the Plan shall continue and the
Committee shall adjust the shares under such
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outstanding Awards (and shall adjust the shares remaining under the Plan which
are then to be available for the grant of additional Awards under the Plan, if
the reorganization agreement makes specific provisions therefor), in a manner
not inconsistent with the provisions of the reorganization agreement and this
Plan for the adjustment, change, conversion or exchange of such Awards.
The term "Reorganization" as used in this Section XII shall mean any
statutory merger, statutory consolidation, sale of all or substantially all of
the assets of the Company, or sale, pursuant to an agreement with the Company,
of securities of the Company pursuant to which the Company is or becomes a
wholly-owned subsidiary of another company after the effective date of the
Reorganization.
C. ADJUSTMENTS AND DETERMINATIONS. Adjustments and determinations under
this Section XII shall be made by the Committee, whose decisions as to what
adjustments or determinations shall be made, and the extent thereof, shall be
final, binding, and conclusive.
SECTION XIII
RETIREMENT AND DISABILITY
The Committee may, in its discretion, waive the forfeiture,
termination, or lapse of an Award in the event of retirement or disability of a
Participant (each as determined by the Committee, in its discretion). Exercise
of such discretion by the Committee in any individual case, however, shall not
be deemed to require, or to establish a precedent suggesting such waiver in any
other case.
SECTION XIV
MISCELLANEOUS PROVISIONS
A. NON-TRANSFERABILITY. The Committee may impose such restrictions on
the transferability of an Award, if any, as it may in its sole discretion
determine.
B. NO EMPLOYMENT RIGHT. Neither this Plan nor any action taken
hereunder shall be construed as giving any right to the Participants to be
retained as an officer or employee of the Company or any of its Subsidiaries.
C. TAX WITHHOLDING. Either the Company or a Subsidiary, as appropriate,
shall have the right to deduct from all Awards paid in cash any federal, state
or local taxes as it deems to be required by law to be withheld with respect to
such cash payments. In the case of Awards paid in Stock, the employee or other
person receiving such Stock may be required to pay to the Company or a
Subsidiary, as appropriate, the amount of any such taxes which the Company or
Subsidiary is required to withhold with respect to such Stock. At the request of
a Participant, or as required by law, such sums as may be required for the
payment of any estimated or accrued income tax liability may be withheld and
paid over to the governmental entity entitled to receive the same. The Committee
may from time to time establish procedures for withholding of Stock.
D. FRACTIONAL SHARES. Any fractional shares concerning Awards shall be
eliminated at the time of payment by rounding down for fractions of less than
one-half and rounding up for
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fractions of equal to or more than one-half. No cash settlements shall be made
with respect to fractional shares eliminated by rounding.
E. GOVERNMENT AND OTHER REGULATIONS. The obligation of the Company to
make payment of Awards in Stock or otherwise shall be subject to all applicable
laws, rules, and regulations, and to such approvals by any government agency as
may be required. The Company shall be under no obligation to register under the
Securities Act of 1933, as amended ("Act"), any of the shares of Stock issued,
delivered or paid in settlement under the Plan. If Stock awarded under the Plan
may in certain circumstances be exempt from registration under the Act, the
Company may restrict its transfer in such manner as it deems advisable to ensure
such exempt status.
F. TERMINATION OF EMPLOYMENT, DEATH , DISABILITY, ETC. Except as
otherwise determined by the Committee, each Option shall provide as follows with
respect to the exercise of the Option and/or Stock Appreciation Right upon the
termination of employment or the death or disability of the Participant :
(a) if the employment of the Participant is terminated within
the Option or Exercise Period for cause, as determined by the Company, the
Option and/or Stock Appreciation Right shall thereafter be void for all
purposes. As used in this Section XIV(F)(a) "cause" shall mean a gross
violation, as determined by the Company, of the Company's established policies
and procedures. The effect of this Section XIV(F)(a) shall be limited to
determining the consequences of a termination, and nothing in this Section
XIV(F)(a) shall restrict or otherwise interfere with the Company's discretion
with respect to the termination of any employee.
(b) If the Participant dies during the Option or Exercise Period
while still employed, the Option and/or Stock Appreciation Right may be
exercised by those entitled to do so under the Participant's will or by the laws
of descent and distribution within three (3) months following the Participant's
death, but not thereafter. In any such case, the Option and/or Stock
Appreciation Right may be exercised only as to the number of shares of Stock as
to which the Option and/or Stock Appreciation Right had become exercisable on or
before the date of the Participant's death (provided that such exercise occurs
within the Option or Exercise Period).
(c) If the Participant becomes disabled (within the meaning of
section 22(e) of the Code) during the Option or Exercise Period while still
employed, the Option and/or Stock Appreciation Right may be exercised by the
Participant (or legal representative) within twelve (12) months following the
disability, but not thereafter. In any such case, the Option and/or Stock
Appreciation Right may be exercised only as to those number of shares of Stock
which had become exercisable on or before the date of the Participant's
disability (provided that such exercise occurs within the Option or Exercise
Period).
(d) If employment of the Participant by the Company is
terminated within the Option or Exercise Period for any reason other than cause,
or the Participant's disability or death, the Option and/or Stock Appreciation
Right may be exercised by the Participant within three (3) months following the
date of such termination (provided that such exercise must occur within the
Option Period), but not thereafter. In any such case, the Option and/or Stock
Appreciation Right may be exercised only as to the number of shares of Stock
which had become exercisable on or
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before the date of termination of employment (provided that such exercise occurs
within the Option or Exercise Period).
G. LIMITATION. In no event may an Option be exercised by anyone after
the expiration date set forth in the Stock Option Agreement.
H. LIMITS ON DISCRETION. Anything in this Plan to the contrary
notwithstanding, if the Award so provides, the Committee shall not have any
discretion to increase the amount of compensation payable under the Award to the
extent such discretion would cause the Award to lose its qualification as
performance-based compensation for purposes of Section 162(m)(4)(C) of the Code
and the regulations thereunder.
I. GOVERNING LAW. All matters relating to the Plan or to Awards granted
hereunder shall be governed by the laws of the State of Colorado.
J. TITLES AND HEADINGS. The titles and headings of the sections in the
Plan are for convenience of reference only, and in the event of any conflict,
the text of the Plan, rather than such titles and headings, shall control.
SECTION XV
AMENDMENT OF PLAN
A. DISCRETION OF THE BOARD. The Board may at any time and from time to
time alter, amend, suspend or terminate the Plan in whole or in part, except (i)
any such action affecting Options granted or to be granted under this Plan which
are intended to qualify as Incentive Stock Options shall be subject to
stockholder approval to the extent such stockholder approval is required
pursuant to Section 422 of the Internal Revenue Code and (ii) no such action may
be taken without the consent of the Participant to whom any Award shall
theretofore have been granted, which adversely affects the rights of such
Participant concerning such Award, except as such termination or amendment of
the Plan is required by statute, or rules and regulations promulgated
thereunder.
B. AUTOMATIC TERMINATION. This Plan shall terminate on July 31, 2008.
Awards may be granted under this Plan at any time and from time to time prior to
the termination of the Plan. Any Award outstanding at the time the Plan is
terminated shall remain in effect until said Award is exercised or expires
pursuant to its terms.
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EXHIBIT 23.1
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We hereby consent to the use in this Registration Statement of MegaBank
Financial Corporation on Form SB-2 of our report on the consolidated financial
statements of MegaBank Financial Corporation and Subsidiary dated February 11,
1998 (except for note Q, as to which the date is September 1, 1998), appearing
in the Prospectus, which is part of this Registration Statement.
We also consent to the reference to us under the headings "Selected
Consolidated Financial Data" and "Experts" in such Prospectus.
FORTNER, BAYENS, LEVKULICH & CO., P.C.
Denver, Colorado
September 11, 1998
