<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended June 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from to
----------- --------------
Commission file number 0-27700
HBANCORPORATION, INC
- -------------------------------------------------------------------------------
(Name of small business issuer in its charter)
Delaware 37-1351506
- -------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
619 12th Street, Lawrenceville, Illinois 62439
- -------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (618) 943-2515
--------------
Securities Registered Pursuant to Section 12(b) of the Act:
None
Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock, par value $0.01 per share
---------------------------------------
(Title of class)
Check whether the issuer (1) filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past
12 months (or for such shorter period that the registrant was required to file
such reports) and (2) has been subject to such filing requirements for the
past 90 days. YES X . NO .
--- ---
Check if there is no disclosure of delinquent filers in response to
Item 405 of Regulation S-B contained herein, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-KSB or any amendment to this Form 10-KSB. [X]
State the issuer's revenues for its most recent fiscal year:
$1,426,531.
The aggregate market value of the voting stock held by non-affiliates
of the registrant, computed by reference to the average of the bid and ask
price of such stock as of June 30, 1997, was approximately $5.6 million. (The
exclusion from such amount of the market value of the shares owned by any
person shall not be deemed an admission by the registrant that such person is
an affiliate of the registrant.)
As of June 30, 1997, there were 491,420 shares issued and outstanding
of the Registrant's Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE
Parts II of Form 10-KSB - Annual Report to Stockholders for the
fiscal year ended June 30, 1997.
Part III of Form 10-KSB - Portions of Proxy Statement for
1997 Annual Meeting of Stockholders.
<PAGE>
PART I
Item 1. Description of Business
General
The Company. HBancorporation, Inc. (the "Company") was formed in
December 1995 by Lawrenceville Federal Savings and Loan Association (the
"Association"), the predecessor institution to Heritage National Bank (the
"Bank"). The acquisition of the Association (and subsequently the Bank) by the
Company was consummated on March 29, 1996, in connection with the
Association's conversion from the mutual to the stock form. All references to
the Company prior to March 29, 1996, except where otherwise indicated, are to
the Bank.
At June 30, 1997, the Company had $17.8 million of assets and
stockholders' equity of $8.3 million (or 46.7% of total assets).
The executive offices of the Company are located at 619 12th Street,
Lawrenceville, Illinois 62439, and its telephone number at that address is
(618) 943-2515.
The activities of the Company itself have been limited to
interest-bearing deposits at financial institutions and a note receivable from
the Bank's Employee Stock Ownership Plan. Unless otherwise indicated, all
activities discussed below are of the Bank.
The Bank. The Bank is a national bank headquartered in Lawrenceville,
Illinois. Its deposits are insured up to applicable limits, by the Federal
Deposit Insurance Corporation (the "FDIC"), which is backed by the full faith
and credit of the United States. The Bank's primary market area is Lawrence
County, Illinois and Knox County, Indiana, which is serviced through its
office in Lawrenceville, Illinois.
The principal business of the Bank consists of attracting retail
deposits from the general public and using such deposits to originate mortgage
loans secured by one- to four-family residences and, to a lesser extent,
commercial business loans and financing leases, commercial real estate loans,
consumer loans and multi-family real estate loans. At June 30, 1997, at least
62.6% of the Bank's real estate mortgage loans were secured by properties
located in Illinois.
Lending Activities
Market Area. The Company's office is located at 619 12th Street,
Lawrenceville, Illinois. Through this office the Company primarily serves
Lawrence County, Illinois and Knox County, Indiana.
1
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General. The Bank's loan portfolio consists primarily of conventional,
first mortgage loans secured by one- to four-family residences and, to a lesser
extent, commercial business and financing loans, commercial real estate loans,
consumer loans and multi-family real estate loans. At June 30, 1997, the Bank's
gross loans outstanding totaled $13.9 million, of which $5.8 million or 41.7%
were one- to four-family residential mortgage loans. Of the one- to four-family
mortgage loans outstanding at that date, all were short-term to
intermediate-term fixed-rate loans. At that same date, commercial business loans
totaled $3.0 million or 21.6% of the Bank's total loan portfolio, commercial
real estate loans totaled $3,419,000 or 24.6% of the Bank's total loan
portfolio, consumer loans totaled $971,000 or 7.0% of the Bank's total loan
portfolio, finance leases totaled $146,000 or 1.0% of the Bank's total loan
portfolio, and multi-family real estate loans totaled $187,000 or 1.3% of the
Bank's total loan portfolio.
2
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Loan Portfolio Composition. The following information concerning the
composition of the Bank's loan portfolio in dollar amounts and in percentages
(before deductions for loans in process and allowances for losses) as of the
dates indicated. All loans are fixed-rate loans.
<TABLE>
<CAPTION>
June 30,
------------------------------------------------------------------------
1993 1994 1995
---------------------- ------------------- ----------------------
Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ -------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Real Estate Loans:
One- to four-family................ $ 7,644 78.85% $ 6,251 65.26% $ 6,704 69.10%
Commercial......................... 804 8.29 838 8.74 969 9.99
Multi-family....................... 57 .59 40 .42 156 1.61
Construction....................... --- --- 222 2.32 --- ---
-------- ------ -------- ------ -------- ------
Total real estate loans........ 8,505 87.73 7,351 76.74 7,829 80.70
-------- ------ -------- ------ -------- ------
Other Loans:
Consumer Loans:
Deposit account................... 45 .46 93 .97 7 .07
Unsecured......................... 173 1.78 116 1.21 150 1.55
Secured........................... 250 2.59 396 4.14 256 2.64
-------- ------ -------- ------ -------- ------
Total consumer loans........... 468 4.83 605 6.32 413 4.26
-------- ------ -------- ------ -------- ------
Commercial business loans.......... 721 7.44 1,264 13.19 1,169 12.04
Financing leases................... --- --- 359 3.75 291 3.00
-------- -------- --------
Total other loans.............. 1,189 2,228 1,873
Less:
Loans in process................... 150 98 ---
Allowance for losses............... 113 113 113
-------- -------- --------
Total loans receivable, net........ $ 9,431 $ 9,368 $ 9,589
======== ======== ========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
June 30,
---------------------------------------------
1996 1997
-------------------- -------------------
Amount Percent Amount Percent
------ ------- ------ -------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Real Estate Loans:
One- to four-family................ $ 7,175 66.40% $ 5,801 41.66%
Commercial......................... 702 6.50 3,419 24.55
Multi-family....................... 206 1.91 187 1.34
Construction....................... 101 .93 433 3.11
-------- ------ ------- --------
Total real estate loans........ 8,184 75.74 9,840 70.66
------ ------ ------- --------
Other Loans:
Consumer Loans:
Deposit account................... 10 .09 21 .15
Unsecured......................... 148 1.37 207 1.49
Secured........................... 268 2.48 743 5.33
-------- ------ ------- --------
Total consumer loans........... 426 3.94 971 6.97
-------- ------ ------- --------
Commercial business loans.......... 1,975 18.28 2,969 21.32
Financing leases................... 220 2.04 146 1.05
-------- -------
Total other loans.............. 2,621 4,086
Less:
Loans in process................... 440 291
Allowance for losses............... 118 128
-------- --------
Total loans receivable, net........ $ 10,247 $ 13,507
======== ========
</TABLE>
3
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The following schedule illustrates the interest rate sensitivity of
the Bank's loan portfolio at June 30, 1997. The schedule does not reflect the
effects of possible prepayments or enforcement of due-on-sale clauses.
<TABLE>
<CAPTION>
Real Estate
-----------------------------------------------
Multi-family and
One- to Four-Family Commercial Financing Leases
-------------------- --------------------- --------------------
Weighted Weighted Weighted
Average Average Average
Amount Rate Amount Rate Amount Rate
------ -------- ------ -------- ------ --------
(Dollars in Thousands)
Due During
Years Ending
June 30,
------------
<S> <C> <C> <C> <C> <C> <C>
1998(1)............... $1,080 8.69% $5,331 9.39% $78 4.79%
1999.................. 783 9.45 676 8.73 68 4.79
2000 ................. 1,434 9.39 808 8.55 --- ---
2001 and 2002......... 4 8.50 --- --- --- ---
</TABLE>
<TABLE>
<CAPTION>
Commercial
Consumer Business Total
-------------------- -------------------- --------------------
Weighted Weighted Weighted
Average Average Average
Amount Rate Amount Rate Amount Rate
------ -------- ------ -------- ------ --------
(Dollars in Thousands)
Due During
Years Ending
June 30,
------------
<S> <C> <C> <C> <C> <C> <C>
1998(1)............... $680 9.78% $2,984 10.25% $10,153 9.56%
1999.................. --- --- --- --- 1,527 8.92
2000 ................. --- --- --- --- 2,242 9.09
2001 and 2002......... --- --- --- --- 4 8.50
</TABLE>
- -----------
(1) Includes demand loans, loans having no stated maturity and overdraft
loans.
The total amount of loans due after June 30, 1998 which have
predetermined interest rates is $3.8 million, while there are no loans due
after such dates which have floating or adjustable interest rates.
4
<PAGE>
Underwriting Standards. All of the Bank's lending is subject to its
written underwriting standards and loan origination procedures. Decisions on
loan applications are made on the basis of detailed applications and, if
applicable, property valuations. Properties securing real estate loans made by
the Bank are generally appraised by Board-approved independent appraisers. In
the loan approval process, the Bank assesses the borrower's ability to repay
the loan, the adequacy of the proposed security, the employment stability of
the borrower and the credit-worthiness of the borrower.
The Bank requires evidence of marketable title and lien position or
appropriate title insurance on all loans secured by real property. The Bank
also requires fire and extended coverage casualty insurance in amounts at
least equal to the lesser of the principal amount of the loan or the value of
improvements on the property, depending on the type of loan. As required by
federal regulations, the Bank also requires flood insurance to protect the
property securing its interest if such property is located in a designated
flood area.
Management reserves the right to change the amount or type of lending
in which it engages to adjust to market or other factors.
One- to Four-Family Residential Mortgage Lending. Residential loan
originations are generated by the Bank's marketing efforts, its present
customers, walk-in customers and referrals from real estate brokers. The Bank
has focused its lending efforts primarily on the origination of loans secured
by one- to four-family residential mortgages in its market area. At June 30,
1997, the Bank's one- to four-family residential mortgage loans totaled $5.8
million, or 41.7%, of the Bank's gross loan portfolio.
The Bank currently offers only fixed-rate balloon mortgage loans for
terms of three and five years, and with amortization of up to 30 years. For
the year ended June 30, 1997, the Bank originated $8,801,000 of loans of which
$1,475,000 or 16.8% of originations were one- to four-family residential
mortgage loans, all of which were secured by one- to four-family residential
real estate located in the Bank's market area. See "- Originations, Purchases
and Sales of Loans."
The Bank will lend up to 90% of the lesser of the sales price or
appraised value of the security property on owner occupied one- to four-family
loans, provided that private mortgage insurance is obtained in an amount
sufficient to reduce the Bank's exposure to not more than 80% of the appraised
value or sales price, as applicable. Residential loans do not include
prepayment penalties, are non-assumable (other than government-insured or
guaranteed loans), and do not produce negative amortization. Real estate loans
originated by the Bank customarily contain a "due on sale" clause allowing the
Bank to declare the unpaid principal balance due and payable upon the sale of
the security property.
5
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The loans currently originated by the Bank are underwritten and
documented pursuant to the guidelines of the FHLMC. Accordingly, such loans
may be sold in the secondary market. Under current policy, the Bank originates
these loans for its portfolio. See "- Originations, Purchases and Sales of
Loans."
Commercial Business and Finance Lease Lending. The Bank also
originates commercial business loans and finance leases. For the year ended
June 30, 1997 approximately $3.1 million, or 22.4% of the Bank's gross loan
portfolio, was comprised of commercial business loans and finance leases, all
of which were performing in accordance with their terms at that date. The
largest commercial business loan was for $329,119 for general operating
expenses secured by inventory and equipment of which $370,000 was outstanding
at June 30, 1997. The largest finance lease was for $328,000 secured by
hospital equipment of which $146,000 was outstanding at June 30, 1997.
The Bank offers only fixed-rate balloon commercial business loans
with terms up to six months and with amortization schedules of up to 20 years.
The Bank's financing lease is a fixed-rate loan with a maturity schedule of
five years. The Bank will generally lend up to 80% of the value of the
collateral securing a commercial business loan or finance lease, although the
Bank has occasionally originated unsecured commercial credits. Unlike
residential mortgage loans, which generally are made on the basis of the
borrower's ability to make repayment from his or her employment and other
income and which are secured by real property whose value tends to be more
easily ascertainable, commercial business and financing lease loans typically
are made on the basis of the borrower's ability to make repayment from the
cash flow of the borrower's business. As a result, the availability of funds
for the repayment of commercial business and financing lease loans may be
substantially dependent on the success of the business itself (which, in turn,
is likely to be dependent, in part, upon the general economic environment).
The Bank's commercial business and financing lease loans are usually, but not
always, secured by business assets. However, the collateral securing the loans
may depreciate over time, may be difficult to appraise and may fluctuate in
value based on the success of the business.
The Bank's commercial business and financing lease lending policy
includes credit file documentation and analysis of the borrower's character,
capacity to repay the loan, the adequacy of the borrower's capital and
collateral as well as an evaluation of conditions affecting the borrower.
Analysis of the borrower's past, present and future cash flows is also an
important aspect of The Bank's current credit analysis. Nonetheless, such
loans, are believed to carry higher credit risk than residential mortgage
loans. The Bank requires personal guaranties of corporate borrowers.
Commercial Real Estate Lending. The Bank also originates commercial
real estate loans. For the year ended June 30, 1997 approximately $3,419,000,
or 24.6% of the Bank's gross loan portfolio, was comprised of commercial real
estate loans, all of which were performing at that date. The largest
commercial real estate loan was for $462,000 secured primarily by an office
building in Monroe County, Indiana.
6
<PAGE>
The Bank offers only fixed-rate balloon commercial real estate loans
for terms of six months, three years and five years, and with amortization
schedules of up to 20 years. The Bank will lend up to 80% of the value of the
collateral securing the loan. In underwriting these loans, the Bank currently
analyzes the financial condition of the borrower, the borrower's credit
history, and the reliability and predictability of the cash flow generated by
the property securing the loan. The Bank requires personal guaranties of
corporate borrowers. Appraisals on properties securing commercial real estate
loans originated by the Bank are performed by independent appraisers.
Commercial real estate loans generally present a higher level of risk
than loans secured by one- to four-family residences. This greater risk is due
to several factors, including the concentration of principal in a limited
number of loans and borrowers, the effect of general economic conditions on
income producing properties and the increased difficulty of evaluating and
monitoring these types of loans. Furthermore, the repayment of loans secured
by commercial real estate is typically dependent upon the successful operation
of the related real estate project. If the cash flow from the project is
reduced (for example, if leases are not obtained or renewed, or a bankruptcy
court modifies a lease term, or a major tenant is unable to fulfill its lease
obligations), the borrower's ability to repay the loan may be impaired.
Consumer Lending. The Bank offers secured and unsecured consumer
loans. Secured loans may be collateralized by a variety of asset types,
including automobiles, mobile homes, boats and deposits. The Bank currently
originates substantially all of its consumer loans in its primary market area
to existing or past customers. For the year ended June 30, 1997, the Bank's
consumer loan portfolio totaled $971,000, or 7.0% of its gross loan portfolio.
Generally, consumer loans are for terms of six months and with
amortization schedules of up to five years. Such loans are generally limited
to 80% or less of the value of the collateral, if any, securing the loan.
Consumer loan terms vary according to the type and value of
collateral, length of contract and creditworthiness of the borrower. The
underwriting standards employed by the Bank for consumer loans include an
application, a determination of the applicant's payment history on other debts
and an assessment of ability to meet existing obligations and payments on the
proposed loan. Although creditworthiness of the applicant is a primary
consideration, the underwriting process also includes a comparison of the
value of the security, if any, in relation to the proposed loan amount.
Consumer loans may entail greater credit risk than do residential
mortgage loans, particularly in the case of consumer loans which are unsecured
or are secured by rapidly depreciable assets, such as automobiles. Further,
any repossessed collateral for a defaulted consumer loan may not provide an
adequate source of repayment of the outstanding loan balance as a result of
the greater likelihood of damage, loss or depreciation. In addition, consumer
loan collections are dependent on the borrower's continuing financial
stability, and thus are more likely to be affected by adverse personal
circumstances. Furthermore, the application of various federal
7
<PAGE>
and state laws, including bankruptcy and insolvency laws, may limit the amount
which can be recovered on such loans. At June 30, 1997, all of the Bank's
consumer loans were performing in accordance with their terms. See "-
Non-Performing Assets and Classified Assets." There can be no assurances,
however, that delinquencies will not occur in the future.
Multi-Family Lending. The Bank offers fixed-rate balloon multi-family
loans for terms of six months, three years and five years, and with
amortization schedules of up to 20 years. The Bank will generally lend up to
80% of the value of the collateral securing the loan. For the year ended June
30, 1997, the Bank had $187,000 of multi-family real estate loans or 1.3% of
the Bank's gross loan portfolio none of these loans were non-performing at
that date.
Multi-family lending is generally considered to involve a higher
level of credit risk than one- to four-family residential lending. This
greater risk in multi-family lending is due to several factors, including the
concentration of principal in a limited number of loans and borrowers, the
effect of general economic conditions on income producing properties and the
increased difficulty of evaluating and monitoring these types of loans.
Furthermore, the repayment of loans secured by multi-family real estate is
typically dependent upon the successful operation of the related real estate
project. If the cash flow from the project is reduced (for example, if leases
are not obtained or renewed, or a bankruptcy court modifies a lease term, or a
major tenant is unable to fulfill its lease obligations), the borrower's
ability to repay the loan may be impaired.
Construction or Development Lending
The Bank offers construction loans to both builders and individuals
for the construction of one- to four-family residences or commercial
buildings. Currently, such loans are offered with fixed-rates of interest.
Following the construction period, these loans may become permanent loans,
with terms of six months, three years, and five years and with maturity
schedules of up to 30 years for residential property and 20 years for
commercial property. For the year ended June 30, 1997, the Bank's construction
loan portfolio totaled $433,000 or 3.1% of its gross loan portfolio.
Construction lending is generally considered to involve a higher
level of credit risk since the risk of loss on construction loans is dependent
largely upon the accuracy of the initial estimate of the individual property's
value upon completion of the project and the estimated cost (including
interest) of the project. If the cost estimate proves to be inaccurate, the
Bank may be required to advance funds beyond the amount originally committed
to permit completion of the project.
Originations, Purchases and Sales of Loans
Loan originations are developed from continuing business with
depositors and borrowers, soliciting realtors, builders, walk-in customers and
third-party sources.
8
<PAGE>
While the Bank currently originates only fixed-rate balloon loans,
its ability to originate loans to a certain extent is dependent upon the
relative customer demand for loans in its market, which is affected by the
interest rate environment, among other factors. For the year June 30, 1997,
the Bank originated $8,801,000 in fixed-rate loans.
The Bank from time-to-time has sold through participations fixed rate
commercial business and real estate loan originations as part of its
management policies. During the fiscal year ended June 30, 1997, the Bank sold
$530,000 in fixed rate commercial business loans. Sales of these loans
generally are beneficial to the Bank since these sales provide funds for
additional lending and other investments and increase liquidity.
Recently, loan purchases have been a significant portion of the
Bank's net new loans. During fiscal 1997, the Bank purchased either whole
loans and participations of loans of $651,000 originated by other lenders
located in Lawrence County, Illinois. These loan purchases consisted of
commercial business loans. At June 30, 1997, all of these loans were
performing in accordance with their terms. See "- Non-Performing Assets and
Classified Assets." The Bank employs the same underwriting standards for
purchased loans as for loans originated by the Bank.
9
<PAGE>
The following table shows the loan origination and repayment
activities of the Bank for the periods indicated.
Year Ended June 30,
-------------------------
1995 1996 1997
---- ---- ----
(In Thousands)
Originations by type:
Fixed rate:
Real estate - one- to four-family ............... $ 976 $ 726 $1,475
- commercial ........................ -- 653 2,628
- multi-family ...................... 50 85 --
- construction ...................... 240 474 1,381
Non-real estate - consumer ...................... 171 705 793
- commercial business ........... 214 1,387 2,524
- financing leases .............. -- -- --
------ ------ ------
Total fixed-rate ......................... 1,651 4,030 8,801
------ ------ ------
Total loans originated ................... 1,651 4,030 8,801
------ ------ ------
Purchases:
Real estate - one- to four-family ............... 337 -- --
- commercial ........................ -- 190 --
Non-real estate - consumer ...................... 42 -- --
- commercial business ........... 460 589 651
------ ------ ------
Total loans purchased .................... 839 779 651
------ ------ ------
Total purchased .......................... 839 779 651
------ ------ ------
Sales and Repayments:
Real estate - commercial .......................... -- 81 530
Non-real estate - commercial business ............. 60 409 --
------ ------ ------
Total loans sold ......................... 60 490 530
Mortgage-backed securities ........................ 9 10 7
------ ------ ------
Principal repayments .............................. 2,209 3,643 5,663
------ ------ ------
Total reductions ......................... 2,278 3,653 6,200
------ ------ ------
Net increase (decrease) .................. $ 212 $ 666 $3,252
====== ====== ======
Asset Quality
General. When a borrower fails to make a required payment on a loan,
the Bank attempts to cause the delinquency to be cured by contacting the
borrower. In the case of loans secured by real estate, reminder notices are
sent to borrowers. If payment is late, appropriate late charges are assessed
and a notice of late charges is sent to the borrower. If the loan is in excess
of 60 days delinquent, the loan will be referred to the Bank's legal counsel
for collection.
When a loan becomes more than 90 days delinquent or is otherwise
impaired, the Bank will place the loan on non-accrual status and previously
accrued interest income on the loan is
10
<PAGE>
charged against current income. The loan will remain on a non-accrual status
until it has performed in accordance with its terms for at least six months.
Delinquent consumer loans are handled in a similar manner as to those
described above; however, shorter time frames for each step apply due to the
type of collateral generally associated with such types of loans. The Bank's
procedures for repossession and sale of consumer collateral are subject to
various requirements under applicable consumer protection laws.
The following table sets forth the Bank's loan delinquencies by type,
by amount and by percentage of type at June 30, 1997.
<TABLE>
<CAPTION>
Loans Delinquent For:
60-89 Days Total Delinquent Loans
-----------------------------------------------------------------
Percent Percent
of Loan of Loan
Number Amount Category Number Amount Category
------ ------ -------- ------ ------ --------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Real Estate:
One- to four-family........ 1 $ 9 .16% 1 $ 9 .16%
--- --- -- ---
Total................. 1 $ 9 .16% 1 $ 9 .16%
=== === == ===
</TABLE>
Non-Performing Assets. The table below sets forth the amounts and
categories of non-performing assets in the Bank's loan portfolio. For all
periods presented, the Bank has had no troubled debt restructurings (which
involve forgiving a portion of interest or principal on any loans or making
loans at a rate materially less than that of market rates). Foreclosed assets
include assets acquired in settlement of loans.
<TABLE>
<CAPTION>
June 30,
---------------------------------------------------------------
1993 1994 1995 1996 1997
---------------------------------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Accruing loans delinquent more than 90 days:
One- to four-family.......................... $ 15 $ --- $ --- $ --- $ ---
----- ------ ------ ------ ------
Total..................................... $ 15 $ --- $ --- $ --- $ ---
----- ------ ------ ------ ------
Total non-performing assets.................... $ 15 $ --- $ --- $ --- $ ---
===== ====== ====== ====== ======
Total as a percentage of total assets.......... .12% ---% ---% ---% ---%
=== === === === ===
</TABLE>
Classified Assets. Federal regulations provide for the classification
of loans and other assets, such as debt and equity securities, considered by
the Office of the Comptroller of the Currency ("OCC") to be of lesser quality,
as "substandard," "doubtful" or "loss." An asset is considered "substandard"
if it is inadequately protected by the current net worth and paying capacity
of the obligor or the collateral pledged, if any. "Substandard" assets include
those characterized by the "distinct possibility" that the insured institution
will sustain "some loss" if the deficiencies are not corrected. Assets
11
<PAGE>
classified as "doubtful" have all of the weaknesses inherent in those
classified "substandard" with the added characteristic that the weaknesses
present make "collection or liquidation in full" on the basis of currently
existing facts, conditions and values, "highly questionable and improbable."
Assets classified as "loss" are those considered "uncollectible" and of such
little value that their continuance as assets without the establishment of a
specific loss reserve is not warranted.
When an insured institution classifies problem assets as either
substandard or doubtful, it may establish general allowances for losses in an
amount deemed prudent by management. General allowances represent loss
allowances which have been established to recognize the inherent risk
associated with lending activities, but which, unlike specific allowances,
have not been allocated to particular problem assets. When an insured
institution classifies problem assets as "loss," it is required either to
establish a specific allowance for losses equal to 100% of that portion of the
asset so classified or to charge-off such amount. An institution's
determination as to the classification of its assets and the amount of its
valuation allowances is subject to review by the regulatory authorities, who
may order the establishment of additional general or specific loss allowances.
In connection with the filing of its periodic reports with the OCC
and in accordance with its classification of assets policy, the Bank regularly
reviews loans in its portfolio to determine whether such assets require
classification in accordance with applicable regulations. On the basis of
management's review of its assets, at June 30, 1997, the Bank had classified a
total of none of its assets as substandard, none as doubtful, and none as
loss. At June 30, 1997, total classified assets comprised $0, or 0% of the
Bank's capital, or 0% of the Bank's total assets.
Other Loans of Concern. As of June 30, 1997, there were no loans
classified by the Bank with respect to which known information about the
possible credit problems of the borrowers or the cash flows of the security
properties have caused management to have some doubts as to the ability of the
borrowers to comply with present loan repayment terms and which may result in
the future inclusion of such items in the non-performing asset categories.
Allowance for Loan Losses. The allowance for loan losses is
maintained at a level which, in management's judgment, is adequate to absorb
credit losses inherent in the loan portfolio. The amount of the allowance is
based on management's evaluation of the collectibility of the loan portfolio,
including the nature of the portfolio, credit concentrations, trends in
historical loss experience, specific impaired loans and economic conditions.
As discussed in Note 1 to the financial statements, the Bank adopted SFAS No.
114 as amended by SFAS No. 118. Under these standards, impaired loans are to
be measured at the present value of expected future cash flows discounted at
the loan's effective interest rate or, as a practical expedient, at the loans
observable market price or the fair value of the collateral if the loan is
collateral dependent. Homogeneous loans, such as single-family loans and most
categories of consumer loans, are excluded from this requirement. Allowances
for impaired loans are generally determined based on collateral values or the
present value of estimated cash flows. The adoption of SFAS 114 as amended by
12
<PAGE>
SFAS 118 did not have a material impact on the comparability of the credit
risk tables presented herein. The allowance is increased by a provision for
loan losses, which is charged to expense and reduced by charge-offs, net of
recoveries.
Real estate properties acquired through foreclosure are recorded at
the lower of cost or fair value minus estimated cost to sell. If fair value at
the date of foreclosure is lower than the balance of the related loan, the
difference will be charged-off to the allowance for loan losses at the time of
transfer. Valuations are periodically updated by management and if the value
declines, a specific provision for losses on such property is established by a
charge to operations. At June 30, 1997, the Bank had no real estate properties
acquired through foreclosure.
Although management believes that it uses the best information
available to determine the allowance, unforeseen market conditions could
result in adjustments and net earnings could be significantly affected if
circumstances differ substantially from the assumptions used in making the
final determination. Future additions to the Bank's allowance for loan losses
will be the result of periodic loan, property and collateral reviews and thus
cannot be predicted in advance. In addition, federal regulatory agencies, as
an integral part of the examination process, periodically review the Bank's
allowance for loan losses. Such agencies may require the Bank to increase the
allowance based upon their judgment of the information available to them at
the time of their examination. At June 30, 1997, the Bank had a total
allowance for loan losses of $128,000, representing .95% of the Bank's loans,
net. The additional provision was recorded because of the increase in the
volume of commercial loans. See Note 3 of the Notes to Financial Statements.
13
<PAGE>
The distribution of the Bank's allowance for losses on loans at the
dates indicated is summarized as follows:
<TABLE>
<CAPTION>
June 30,
------------------------------------------------------------------------------------------------------
1993 1994 1995
--------------------------------- ------------------------------ ---------------------------------
Percent Percent Percent
of Loans of Loans of Loans
Loan in Each Loan in Each Loan in Each
Amount of Amounts Category Amount of Amounts Category Amount of Amounts Category
Loan Loss by to Total Loan Loss by to Total Loan Loss by to Total
Allowance Category Loans Allowance Category Loans Allowance Category Loans
------------ ---------- --------------------------------- --------------------------------- ----------
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
One- to four-family... $ 90 $7,644 78.90% $ 90 $6,251 65.30% $ 90 $6,704 69.10%
Commercial real
estate.............. 9 804 8.30 9 838 8.80 9 969 10.00
Multi-family.......... 1 57 .60 1 40 .40 1 156 1.60
Construction.......... --- --- --- --- 222 2.30 --- --- ---
Consumer.............. 4 468 4.80 4 605 6.30 4 413 4.30
Commercial
business............ 8 721 7.40 8 1,264 13.20 8 1,169 12.00
Unallocated........... 1 --- --- 1 --- --- 1 --- ---
Financing leases...... --- --- --- --- 359 3.70 --- 291 3.00
----- -------- ---- ------ ------- ------ ------ ------ ------
Total............ $113 $9,694 100.00% $113 $9,579 100.00% $113 $9,702 100.00%
==== ====== ====== ==== ====== ====== ==== ====== ======
------------------------------------------------------------------
1996 1997
--------------------------------- --------------------------------
Percent Percent
of Loans of Loans
Loan in Each Loan in Each
Amount of Amounts Category Amount of Amounts Category
Loan Loss by to Total Loan Loss by to Total
Allowance Category Loans Allowance Category Loans
---------------------- ---------- ----------- --------------------
One- to four-family... $ 92 $ 7,175 66.40% $ 92 $ 5,801 41.66%
Commercial real
estate.............. 10 702 6.50 14 3,419 24.55
Multi-family.......... 1 206 1.91 1 187 1.34
Construction.......... --- 101.93 2 433 3.11
Consumer.............. 4 426 3.94 4 971 6.97
Commercial
business............ 10 1,975 18.28 14 2,969 21.32
Unallocated........... 1 --- --- 1 --- ---
Financing leases...... --- 220 2.04 --- 146 1.05
----- ------- ------- ------ -------- -------
Total............ $118 $10,805 100.00% $128 $13,926 100.00%
==== ======= ====== ==== ======= ======
</TABLE>
14
<PAGE>
The following table sets forth an analysis of the Bank's allowance
for loan losses.
<TABLE>
<CAPTION>
Year Ended June 30,
------------------------------------------------------------
1993 1994 1995 1996 1997
------------------------- ----------------------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Balance at beginning of period.................... $ 113 $ 113 $ 113 $ 113 $ 118
Provision for loan losses......................... 47 --- 10 5 10
----- ------- ----- ------ ------
Charge-offs:
One- to four-family............................. (47) --- --- --- ---
Multi-family.................................... --- --- (10) --- ---
----- ------- ----- ------- -------
(47) --- (10) --- ---
----- ------- ----- ------- -------
Net charge-offs................................... (47) --- (10) --- ---
----- ------- ------ ------- ------
Balance at end of period.......................... $ 113 $ 113 $ 113 $ 118 $ 128
===== ===== ===== ====== =====
Ratio of net charge-offs during the period to
average loans outstanding during the period...... .50% ---% .10% ---% ---%
==== ====== ==== ====== ======
Ratio of net charge-offs during the period to
average non-performing assets.................... ---% ---% ---% ---% ---%
==== ====== ===== ====== ======
</TABLE>
Investment Activities
General. National banking associations have the authority to invest
in various types of liquid assets, including United States Treasury
obligations, securities of various federal agencies, certain certificates of
deposit of insured banks and savings institutions, certain bankers'
acceptances, repurchase agreements and federal funds. Subject to various
restrictions, national banks may also invest their assets in certain
investment securities and mutual funds whose assets conform to the investments
that a national bank is authorized to make directly.
Generally, the investment policy of the Bank, as established by the
Board of Directors, is to invest funds among various categories of investments
and maturities based upon the Bank's liquidity needs, asset/liability
management policies, investment quality, marketability and performance
objectives.
Investment Securities. For the year ended June 30, 1997, the Bank's
investment securities (including a $133,800 investment in the common stock of
the Federal Reserve Bank of St. Louis and the Federal Home Loan Bank of
Chicago ("FHLB")) totaled $2.3 or 12.7% of its total assets. It has been the
Bank's general policy to invest in mutual funds backed by U.S. government
securities and federal agency obligations and other investment securities. As
15
<PAGE>
of June 30, 1997, the Bank held $191,000 in Federal Home Loan Mortgage
Corporation stock. See Note 2 of the Notes to Financial Statements.
National Banks are restricted in investments in corporate debt and
equity securities. These restrictions include prohibitions against investments
in the debt securities of any one issuer in excess of 15% of the Bank's
unimpaired capital and unimpaired surplus as defined by federal regulations,
which totaled $935,000 as of June 30, 1997, plus an additional 10% if the
investments are fully secured by readily marketable collateral. At June 30,
1997, the Bank was in compliance with this regulation. See "Regulation -
Federal Regulation of National Banks" for a discussion of additional
restrictions on the Bank's investment activities.
16
<PAGE>
The following table sets forth the composition of the Bank's
investments and mortgage-backed securities at the dates indicated. See Notes 2
and 3 of the Notes to Financial Statements.
<TABLE>
<CAPTION>
At June 30,
--------------------------------------------------------------------------------
1995 1996 1997
------------------------- -------------------------- ---------------------------
Book % of Book % of Book % of
Value Total Value Total Value Total
----- ----- ----- ----- ----- -----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Securities:
Mutual funds.................................... $ 953 28.48% $ --- ---% $ --- ---%
FHLMC common stock.............................. 220 6.57 116 1.75 191 5.14
FHLB securities................................. --- --- 990 14.89 1,003 26.98
FRB stock....................................... --- --- 68 1.02 68 1.83
FHLB stock...................................... 75 2.24 66 .99 66 1.77
------ ----- ------ ----- ------ -----
Total equity securities and FHLB stock....... $1,248 37.29% $1,240 18.65% $1,328 35.72%
====== ===== ====== ===== ------ -----
Other interest-earning assets:
Interest-bearing deposits with banks(1)......... $2,057 61.46% $4,351 65.45% $ 1,458 39.21%
------ ------ ------ ----- ------- -----
Total........................................ $2,057 61.46% $4,351 65.45% $ 1,458 39.21%
====== ====== ====== ===== ------- -----
Mortgage-backed securities:
FHLMC pool...................................... $ --- ---% $1,025 15.42% $ 907 24.40
GNMA............................................ 42 1.25 32 .48 25 .67%
------ ------- ------ ----- ------- -----
Total mortgage-backed securities............. $ 42 1.25% $1,057 15.90% $ 932 25.07%
====== ======= ====== ===== ------- -----
</TABLE>
______________________
(1) Comprised substantially of over-night deposits with the FHLB-Chicago.
17
<PAGE>
The Bank's investment securities portfolio at June 30, 1997,
contained neither tax-exempt securities nor securities of any issuer with an
aggregate book value in excess of 10% of the Bank's retained earnings,
excluding those issued by the U.S. government, or its agencies.
The Bank's investments, including the mortgage-backed securities
portfolio, are managed in accordance with a written investment policy adopted
by the Board of Directors.
OCC guidelines, as well as those of the other federal banking
regulators, regarding investment portfolio policy and accounting require
savings associations to categorize securities and certain other assets as held
for "investment," "sale," or "trading." In addition, effective April 1, 1994,
the Bank adopted SFAS 115 which states that securities available for sale are
accounted for at fair value and securities which management has the intent and
the Bank has the ability to hold to maturity are accounted for on an amortized
cost basis. The Bank's investment policy has strategies for each type of
security. At June 30, 1997, the Bank classified investments in FHLMC as
available for sale. See Note 2 of the Notes to Financial Statements.
Mortgage-backed Securities. The Bank has historically invested
primarily in government agency obligations, which are backed by the full faith
and credit of the U.S. Government. At June 30, 1997, the Bank's investment in
mortgage-backed securities totaled $932,000 or 5.24% of its total assets. The
market value of the Bank's mortgage-backed securities was $3,990 more than
their carrying value at June 30, 1997. At June 30, 1997, the Bank's GNMA
securities have been classified as held-to-maturity, and the FHLMC pool has
been classified as available-for-sale. See Note 2 of the Notes to Financial
Statements.
The following table sets forth the contractual maturities of the
Bank's mortgage-backed securities at June 30, 1997.
<TABLE>
<CAPTION>
Due in June 30,
------------------------------------------------------------ 1997
6 Months 6 Months 1 to 3 to 5 5 to 10 Balance
or Less to 1 Year 3 Years Years Years Outstanding
------------ ------------------------------------- ----------------------
(In Thousands)
<S> <C> <C> <C> <C> <C> <C>
Mortgage-backed securities...... $66 $66 $396 $268 $136 $932
--- --- ---- ---- ---- ----
Total...................... $66 $66 $396 $268 $136 $932
=== === ==== ==== ==== ====
</TABLE>
18
<PAGE>
Sources of Funds
General. The Bank's primary sources of funds are deposits, receipt of
principal and interest on loans and securities, interest earned on deposits
with other banks, and other funds provided from operations.
While not used historically, FHLB advances may be used in the future
to support lending activities and to assist in the Bank's asset/liability
management strategy. At June 30, 1997, the Bank had no FHLB advances, but had
the capacity to borrow up to $3.6 million from the FHLB.
Deposits. The Bank offers a variety of deposit accounts having a wide
range of interest rates and terms. The Bank's deposits consist of passbook,
money market deposit accounts and certificate accounts. The certificate
accounts currently range in terms from 90 days to five years. The Bank has a
significant amount of deposits that will mature within one year. However,
management expects that virtually all of the deposits will be renewed.
The Bank relies primarily on advertising, competitive pricing
policies and customer service to attract and retain these deposits. Currently,
The Bank solicits deposits from its market area only, and does not use brokers
to obtain deposits. The flow of deposits is influenced significantly by
general economic conditions, changes in money market and prevailing interest
rates and competition.
The Bank has become more susceptible to short-term fluctuations in
deposit flows as customers have become more interest rate conscious. The Bank
endeavors to manage the pricing of its deposits in keeping with its
profitability objectives giving consideration to its asset/liability
management. The ability of the Bank to attract and maintain savings accounts
and certificates of deposit, and the rates paid on these deposits, has been
and will continue to be significantly affected by market conditions.
The following table sets forth the savings flows at the Bank during
the periods indicated.
Year Ended June 30,
-----------------------------------
1995 1996 1997
-------- ------- --------
(Dollars in Thousands)
Opening balance................... $ 9,031 $ 9,167 $ 8,912
Deposits.......................... 3,271 4,692 6,221
Withdrawals....................... 3,323 5,181 6,093
Interest credited................. 188 234 204
-------- ------- --------
Ending balance.................... $ 9,167 $ 8,912 $ 9,244
======= ======= =======
Net increase (decrease)........... $ 136 $ (255) $ 332
======= ======= =======
Percent increase (decrease)....... 1.51% (2.78)% 3.73%
===== ===== =====
19
<PAGE>
The following table sets forth the dollar amount of savings deposits
in the various types of deposit programs offered by the Bank for the periods
indicated.
<TABLE>
<CAPTION>
Year Ended June 30,
-------------------------------------------------------------------------------
1995 1996 1997
-------------------------------------------------------------------------------
Percent Percent Percent
Amount of Total Amount of Total Amount of Total
-------------------------------------------------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Transactions and Savings Deposits:
Passbook Accounts 3.00 - 3.75% variable......... $1,340 14.50% $1,426 15.91% $1,941 20.85%
Variable Money Market Accounts 3.00 - 4.00%..... 1,135 12.30 1,181 13.17 384 4.13
------ ------ ------ ------ ------ ------
Total Non-Certificates.......................... 2,475 26.80 2,607 29.08 2,325 24.98
------ ------ ------ ------ ------ ------
Certificates:
0.00 - 4.00%.................................. 276 3.00 101 1.13 --- ---
4.01 - 5.00%.................................. 612 6.60 2,645 29.50 324 3.48
5.01 - 6.00%.................................. 5,437 59.00 3,217 35.89 6,540 70.26
6.01 - 7.00%.................................. 364 4.00 342 3.81 54 .58
7.01 - 8.00%.................................. 3 --- --- --- --- ---
------ ------ ------ ------ ------ ------
Total Certificates.............................. 6,692 72.60 6,305 70.33 6,918 74.32
------ ------ ------ ------ ------ ------
Accrued Interest................................ 58 .60 53 .59 65 .70
------- ------ ------ ------ ------ ------
Total Deposits.................................. $9,225 100.00% $8,965 100.00% $9,308 100.00%
====== ====== ====== ====== ====== ======
</TABLE>
20
<PAGE>
The following table shows rate and maturity information for the
Bank's certificates of deposit as of June 30, 1997.
<TABLE>
<CAPTION>
4.01- 5.01- 6.01- Percent
5.00% 6.00% 7.00% Total of Total
------------------------ ---------------------- ----------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Certificate accounts
maturing
in quarter ending:
- ------------------
September 30, 1997............. $314 $2,260 $--- $2,574 37.21%
December 31, 1997.............. --- 1,702 --- 1,702 24.60
March 31, 1998................. --- 895 37 932 13.47
June 30, 1998.................. --- 1,185 --- 1,185 17.13
September 30, 1998............. 10 218 4 232 3.35
December 31, 1998.............. --- 72 --- 72 1.04
March 31, 1999................. --- 8 --- 8 .12
June 30, 1999.................. --- 54 --- 54 .78
September 30, 1999............. --- 1 --- 1 .01
December 31, 1999.............. --- 10 --- 10 .15
June 30, 2000.................. --- 104 13 117 1.69
September 30, 2000............. --- --- --- --- ---
Thereafter..................... --- 31 --- 31 .45
----- ------ ------ -------- -------
Total....................... $324 $6,540 $ 54 $6,918 100.00%
==== ====== ==== ====== ======
Percent of total............ 4.68% 94.54% .78%
===== ====== ====
</TABLE>
The following table indicates the amount of the Bank's certificates
of deposit and other deposits by time remaining until maturity as of June 30,
1997.
<TABLE>
<CAPTION>
Maturity
Over Over
3 Months 3 to 6 6 to 12 Over
or Less Months Months 12 months Total
-------- -------- ------- --------- -------
(In thousands)
<S> <C> <C> <C> <C> <C>
Certificates of deposit less than $100,000....... $2,174 $1,566 $1,967 $525 $6,232
Certificates of deposit of $100,000 or more...... 100 136 --- --- 236
Public funds (1)................................. 300 --- 150 --- 450
------ -------- ------- ------ -------
Total certificates of deposit.................... $2,574 $1,702 $2,117 $525 $6,918
====== ====== ====== ==== ======
</TABLE>
- ---------------
(1) Deposits from governmental and other public entities.
21
<PAGE>
Subsidiary Activities
The Bank is permitted by OCC regulations to invest unlimited amounts
in subsidiaries that are engaged in activities in which the parent bank may
engage. In addition, a national bank may invest limited amounts in
subsidiaries that provide banking services, such as data processing, to other
financial institutions. At June 30, 1997, the Bank had no subsidiaries.
REGULATION
General. The Company is a registered bank holding company, subject to
broad federal regulation and oversight by the FRB. The Bank is a national
bank, the deposits of which are federally insured and backed by the full faith
and credit of the United States Government. Accordingly, the Bank is subject
to broad federal regulation and oversight extending to all its operations by
the OCC, the FDIC and the FRB. The Bank is also a member of the FHLB of
Chicago. The Bank is a member of the SAIF and the deposits of the Bank are
insured by the FDIC.
Certain of these regulatory requirements and restrictions are
discussed below or elsewhere in this document.
Federal Regulation of National Banks
The OCC has extensive authority over the operations of national
banks. As part of this authority, the Bank is required to file periodic
reports with the OCC and is subject to periodic examinations by the OCC. All
national banks are subject to a semi-annual assessment, based upon the bank's
total assets, to fund the operations of the OCC.
The OCC also has extensive enforcement authority over all national
banks, including The Bank. This enforcement authority includes, among other
things, the ability to assess civil money penalties, to issue cease-and-desist
or removal orders and to initiate injunctive actions. In general, these
enforcement actions may be initiated for violations of laws and regulations
and unsafe or unsound practices. Other actions or inactions may provide the
basis for enforcement action, including misleading or untimely reports filed
with the OCC. Except under certain circumstances, public disclosure of final
enforcement actions by the OCC is required.
The Bank's loans-to-one borrower limit is generally limited to 15% of
unimpaired capital and surplus. At June 30, 1997, the maximum amount which the
Bank could have lent under this limit to any one borrower and the borrower's
related entities was approximately $935,000. At June 30, 1997, the Bank had no
loans or groups of loans to related borrowers with outstanding balances in
excess of this amount. The Bank's five largest lending relationship at June
30, 1997 were as follows: (i) $890,000 consisting of three loans to one
borrower secured primarily by real
22
<PAGE>
estate and agricultural equipment located in Lawrence County, Illinois and
Knox County, Indiana; (ii) $637,000 consisting of seven loans to one borrower
secured primarily by real estate in Champaign County, Illinois; (iii) $553,000
consisting of one loan secured primarily by mortgages in Crawford County,
Illinois; (iv) $494,000 consisting of three loans to one borrower secured by
titles, equipment and inventory located in Lawrence County, Illinois; and (v)
$462,000 consisting of one loan secured primarily by real estate and a
building located in Monroe County, Indiana. At June 30, 1997, all of these
loans totaling $3,036,000 in the aggregate were performing in accordance with
their terms.
The OCC, as well as the other federal banking agencies, has adopted
guidelines establishing safety and soundness standards on such matters as loan
underwriting and documentation, internal controls and audit systems, interest
rate risk exposure and compensation and other employee benefits. Any
institution which fails to comply with these standards must submit a
compliance plan. A failure to submit a plan or to comply with an approved plan
will subject the institution to further enforcement action. The OCC and the
other federal banking agencies have also proposed additional guidelines on
asset quality and earnings standards. No assurance can be given as to whether
or in what form the proposed regulations will be adopted.
Insurance of Accounts and Regulation by the FDIC
The Bank is a member of the SAIF, which is administered by the FDIC.
Deposits are insured up to applicable limits by the FDIC and such insurance is
backed by the full faith and credit of the United States Government. As
insurer, the FDIC imposes deposit insurance premiums and is authorized to
conduct examinations of and to require reporting by FDIC-insured institutions.
It also may prohibit any FDIC-insured institution from engaging in any
activity the FDIC determines by regulation or order to pose a serious risk to
the FDIC. The FDIC also has the authority to initiate enforcement actions
against savings associations, after giving the OCC an opportunity to take such
action, and may terminate the deposit insurance if it determines that the
institution has engaged in unsafe or unsound practices or is in an unsafe or
unsound condition.
The FDIC's deposit insurance premiums are assessed through a
risk-based system under which all insured depository institutions are placed
into one of nine categories and assessed insurance premiums based upon their
level of capital and supervisory evaluation. Under the system, institutions
classified as well capitalized (i.e., a core capital ratio of at least 5%, a
ratio of Tier 1 or core capital to risk-weighted assets ("Tier 1 risk-based
capital") of at least 6% and a risk-based capital ratio of at least 10%) and
considered healthy pay the lowest premium while institutions that are less
than adequately capitalized (i.e., core or Tier 1 risk-based capital ratios of
less than 4% or a risk-based capital ratio of less than 8%) and considered of
substantial supervisory concern pay the highest premium. Risk classification
of all insured institutions will be made by the FDIC for each semi-annual
assessment period.
23
<PAGE>
In order to equalize the deposit insurance premium schedules for BIF
and SAIF insured institutions, the FDIC imposed a one-time special assessment
on all SAIF-assessable deposits pursuant to federal legislation passed on
September 30, 1996. The Company's special assessment, which was $62,144, was
paid in November 1996, but accrued for the fiscal year ended June 30, 1997.
Effective January 1, 1997, the premium schedule for BIF and SAIF insured
institutions ranged from 0 to 27 basis points. However, SAIF-insured
institutions are required to pay a Financing Corporation (FICO) assessment, in
order to fund the interest on bonds issued to resolve thrift failures in the
1980s, equal to 6.48 basis points for each $100 in domestic deposits, while
BIF-insured institutions pay an assessment equal to 1.52 basis points for each
$100 in domestic deposits. The assessment is expected to be reduced to 2.43 no
later than January 1, 2000, when BIF insured institutions fully participate in
the assessment. These assessments, which may be revised based upon the level
of BIF and SAIF deposits will continue until the bonds mature in the year
2017.
National Banks. The Bank is subject to the capital regulations of the
OCC. The OCC's regulations establish two capital standards for national banks:
a leverage requirement and a risk-based capital requirement. In addition, the
OCC may, on a case-by-case basis, establish individual minimum capital
requirements for a national bank that vary from the requirements which would
otherwise apply under OCC regulations. A national bank that fails to satisfy
the capital requirements established under the OCC's regulations will be
subject to such administrative action or sanctions as the OCC deems
appropriate.
The leverage ratio adopted by the OCC requires a minimum ratio of
"Tier 1 capital" to adjusted total assets of 3% for national banks rated
composite 1 under the CAMEL rating system for banks. National banks not rated
composite 1 under the CAMEL rating system for banks are required to maintain a
minimum ratio of Tier 1 capital to adjusted total assets of 4% to 5%,
depending upon the level and nature of risks of their operations. For purposes
of the OCC's leverage requirement, Tier 1 capital generally consists of common
stockholders' equity and retained income and certain non-cumulative perpetual
preferred stock and related income, except that no intangibles and certain
purchased mortgage servicing rights and purchased credit card relationships
may be included in capital.
The risk-based capital requirements established by the OCC's
regulations require national banks to maintain "total capital" equal to at
least 8% of total risk-weighted assets. For purposes of the risk-based capital
requirement, "total capital" means Tier 1 capital (as described above) plus
"Tier 2 capital," provided that the amount of Tier 2 capital may not exceed
the amount of Tier 1 capital, less certain assets. The components of Tier 2
capital include certain permanent and maturing capital instruments that do not
qualify as core capital and general valuation loan and lease loss allowances
up to a maximum of 1.25% of risk-weighted assets.
The OCC has revised its risk-based capital requirements to permit the
OCC to require higher levels of capital for an institution in light of its
interest rate risk. In addition, the OCC has proposed that a bank's interest
rate risk exposure would be quantified using either the
24
<PAGE>
measurement system set forth in the proposal or the institution's internal
model for measuring such exposure, if such model is determined to be adequate
by the institution's examiner. Small institutions that are highly capitalized
and have minimal interest rate risk, such as the Bank, would be exempt from
the rule unless otherwise determined by the OCC. Management of the Bank has
not determined what effect, if any, the OCC's proposed interest rate risk
component would have on the National Bank's capital if adopted as proposed.
Prompt Corrective Action. The OCC is authorized and, under certain
circumstances required, to take certain actions against national banks that
fail to meet their capital requirements. The OCC is generally required to take
action to restrict the activities of an "undercapitalized association"
(generally defined to be one with less than either a 4% core capital ratio, a
4% Tier 1 risked-based capital ratio or an 8% risk-based capital ratio). Any
such association must submit a capital restoration plan and until such plan is
approved by the OCC may not increase its assets, acquire another institution,
establish a branch or engage in any new activities, and generally may not make
capital distributions. The OCC is authorized to impose the additional
restrictions that are applicable to significantly undercapitalized
associations.
Any national banking association that fails to comply with its
capital plan or is "significantly undercapitalized" (i.e., Tier 1 risk-based
or core capital ratios of less than 3% or a risk-based capital ratio of less
than 6%) must be made subject to one or more of additional specified actions
and operating restrictions which may cover all aspects of its operations and
include a forced merger or acquisition of the Bank. An association that
becomes "critically undercapitalized" (i.e., a tangible capital ratio of 2% or
less) is subject to further mandatory restrictions on its activities in
addition to those applicable to significantly undercapitalized associations.
In addition, the OCC must appoint a receiver (or conservator with the
concurrence of the FDIC) for an association, with certain limited exceptions,
within 90 days after it becomes critically undercapitalized. Any
undercapitalized association is also subject to the general enforcement
authority of the OCC, including the appointment of a conservator or a
receiver.
The OCC is also generally authorized to reclassify an association
into a lower capital category and impose the restrictions applicable to such
category if the institution is engaged in unsafe or unsound practices or is in
an unsafe or unsound condition.
The imposition by the OCC of any of these measures on the Bank may
have a substantial adverse effect on the Bank's operations and profitability
and the value of the Company's Common Stock.
Limitations on Dividends and Other Capital Distributions
The Bank's ability to pay dividends is governed by the National Bank
Act and OCC regulations. Under such statute and regulations, all dividends by
a national bank must be paid out of current or retained net profits, after
deducting reserves for losses and bad debts. The National Bank Act further
restricts the payment of dividends out of net profits by prohibiting a
national
25
<PAGE>
bank from declaring a cash dividend on its shares of common stock until the
surplus fund equals the amount of capital stock or, if the surplus fund does
not equal the amount of capital stock, until one-tenth of the Bank's net
profits for the preceding half year in the case of quarterly or semi-annual
dividends, or the preceding two half-year periods in the case of annual
dividends, are transferred to the surplus fund. In addition, the prior
approval of the OCC is required for the payment of a dividend if the total of
all dividends declared by a national bank in any calendar year would exceed
the total of its net profits for the year combined with its net profits for
the two preceding years, less any required transfers to surplus or a fund for
the retirement of any preferred stock.
The OCC has the authority to prohibit the payment of dividends by a
national bank when it determines such payment to be an unsafe and unsound
banking practice. In addition, the Bank would be prohibited by federal statute
and the OCC's prompt corrective action regulations from making any capital
distribution if, after giving effect to the distribution, the Bank would be
classified as "undercapitalized" under the OCC's regulations. See "-- Prompt
Corrective Action." Finally, the Bank would not be able to pay dividends on
its capital stock if its capital would thereby be reduced below the remaining
balance of the liquidation account established in connection with the
Association's Conversion.
Accounting
The OCC requires that investment activities of a national bank be in
compliance with approved and documented investment policies and strategies,
and must be accounted for in accordance with generally accepted accounting
principles ("GAAP"). Accordingly, management must support its classification
of and accounting for loans and securities (i.e., whether held for investment,
sale or trading) with appropriate documentation. The Bank is in compliance
with these requirements.
Community Reinvestment Act
Under the Community Reinvestment Act ("CRA"), every FDIC insured
institution has a continuing and affirmative obligation consistent with safe
and sound banking practices to help meet the credit needs of its entire
community, including low and moderate income neighborhoods. The CRA does not
establish specific lending requirements or programs for financial institutions
nor does it limit an institution's discretion to develop the types of products
and services that it believes are best suited to its particular community,
consistent with the CRA. The CRA requires the OCC, in connection with the
examination of the Bank, to assess the institution's record of meeting the
credit needs of its community and to take such record into account in its
evaluation of certain applications, such as a merger or the establishment of a
branch, by the Bank. An unsatisfactory rating may be used as the basis for the
denial of an application by the OCC.
26
<PAGE>
The federal banking agencies, including the OCC, have recently
revised the CRA regulations and the methodology for determining an
institution's compliance with the CRA. Due to the heightened attention being
given to the CRA in the past few years, the Bank may be required to devote
additional funds for investment and lending in its local community. The Bank
was examined for CRA compliance in 1997 and received a rating of satisfactory.
Transactions with Affiliates
Generally, transactions between a savings association or its
subsidiaries and its affiliates are required to be on terms as favorable to
the Bank as transactions with non-affiliates. In addition, certain of these
transactions, such as loans to an affiliate, are restricted to a percentage of
the Bank's capital. Affiliates of the Bank include any company which is under
common control with the Bank. In addition, the Bank may not acquire the
securities of most affiliates. Subsidiaries of the Bank are not deemed
affiliates. However, the FRB has the discretion to treat subsidiaries of
national banks as affiliates on a case by case basis.
Certain transactions with directors, officers or controlling persons
("Insiders") are also subject to conflict of interest rules enforced by the
OCC. These conflict of interest regulations and other statutes also impose
restrictions on loans to such persons and their related interests. Among other
things, as a general matter, loans to Insiders must be made on terms
substantially the same as for loans to unaffiliated individuals.
Federal Reserve System
The FRB requires all depository institutions to maintain non-interest
bearing reserves at specified levels against their transaction accounts
(primarily checking, NOW and Super NOW checking accounts). At June 30, 1997,
the Bank had $67,800 FRB stock, which was in compliance with these reserve
requirements.
National banks are authorized to borrow from the Federal Reserve Bank
"discount window," but FRB regulations require associations to exhaust other
reasonable alternative sources of funds, including FHLB borrowings, before
borrowing from the Federal Reserve Bank.
The Bank is a member of the Federal Reserve System.
Holding Company Regulation
General. The Company is a bank holding company, registered with the
FRB. Bank holding companies are subject to comprehensive regulation by the FRB
under the BHCA, and the regulations of the FRB. As a bank holding company, the
Company is required to file reports with the FRB and such additional
information as the FRB may require, and will be subject to regular
examinations by the FRB. The FRB also has extensive enforcement authority over
bank holding companies, including, among other things, the ability to assess
civil money penalties, to issue
27
<PAGE>
cease and desist or removal orders and to require that a holding company
divest subsidiaries (including its bank subsidiaries). In general, enforcement
actions may be initiated for violations of law and regulations and unsafe or
unsound practices.
Under FRB policy, a bank holding company must serve as a source of
strength for its subsidiary banks. Under this policy the FRB may require, and
has required in the past, a holding company to contribute additional capital
to an undercapitalized subsidiary bank.
Under the BHCA, a bank holding company must obtain FRB approval
before: (i) acquiring, directly or indirectly, ownership or control of any
voting shares of another bank or bank holding company if, after such
acquisition, it would own or control more than 5% of such shares (unless it
already owns or controls the majority of such shares); (ii) acquiring all or
substantially all of the assets of another bank or bank holding company; or
(iii) merging or consolidating with another bank holding company.
The BHCA also prohibits a bank holding company, with certain
exceptions, from acquiring direct or indirect ownership or control of more
than 5% of the voting shares of any company which is not a bank or bank
holding company, or from engaging directly or indirectly in activities other
than those of banking, managing or controlling banks, or providing services
for its subsidiaries. The principal exceptions to these prohibitions involve
certain non-bank activities which, by statute or by FRB regulation or order,
have been identified as activities closely related to the business of banking
or managing or controlling banks. The list of activities permitted by the FRB
includes, among other things, operating a savings institution, mortgage
company, finance company, credit card company or factoring company; performing
certain data processing operations; providing certain investment and financial
advice; underwriting and acting as an insurance agent for certain types of
credit-related insurance; leasing property on a full-payout, non-operating
basis; selling money orders, travelers' checks and United States Savings
Bonds; real estate and personal property appraising; providing tax planning
and preparation services; and, subject to certain limitations, providing
securities brokerage services for customers. The Holding Company has no
present plans to engage in any of these activities.
Interstate Banking and Branching. On September 29, 1994, the
Riegle-Neal Interstate Banking and Branching Act of 1994 (the "Act") was
enacted to ease restrictions on interstate banking. Effective September 29,
1995, the Act allows the FRB to approve an application of an adequately
capitalized and adequately managed bank holding company to acquire control of,
or acquire all or substantially all of the assets of, a bank located in a
state other than such holding company's home state, without regard to whether
the transaction is prohibited by the laws of any state. The FRB may not
approve the acquisition of the bank that has not been in existence for the
minimum time period (not exceeding five years) specified by the statutory law
of the host state. The Act also prohibits the FRB from approving an
application if the applicant (and its depository institution affiliates)
controls or would control more than 10% of the insured deposits in the United
States or 30% or more of the deposits in the target bank's home state or in
any state in which the target bank maintains a branch. The Act does not affect
the authority of states to limit the percentage of total insured deposits in
28
<PAGE>
the state which may be held or controlled by a bank or bank holding company to
the extent such limitation does not discriminate against out-of-state banks or
bank holding companies. Individual states may also waive the 30% state-wide
concentration limit contained in the Act. The State of Illinois does not
currently have any deposit concentration limits or age protection for new
banks.
Additionally, on June 1, 1997, the federal banking agencies were
authorized to approve interstate merger transactions without regard to whether
such transaction is prohibited by the law of any state, unless the home state
of one of the banks opts out of the Act by adopting a law after the date of
enactment of the Act and prior to June 1, 1997 which applies equally to all
out-of-state banks and expressly prohibits merger transactions involving
out-of-state banks. Interstate acquisitions of branches will be permitted only
if the law of the state in which the branch is located permits such
acquisitions. Interstate mergers and branch acquisitions will also be subject
to the nationwide and statewide insured deposit concentration amounts
described above. The State of Illinois has authorized interstate merger
transactions effective June 1, 1997.
The Act authorizes the OCC and FDIC to approve interstate branching
de novo by national and state banks, respectively, only in states which
specifically allow for such branching. The Act also requires the appropriate
federal banking agencies to prescribe regulations by June 1, 1997 which
prohibit any out-of-state bank from using the interstate branching authority
primarily for the purpose of deposit production. These regulations must
include guidelines to ensure that interstate branches operated by an
out-of-state bank in a host state are reasonably helping to meet the credit
needs of the communities which they serve.
Dividends. The FRB has issued a policy statement on the payment of
cash dividends by bank holding companies, which expresses the FRB's view that
a bank holding company should pay cash dividends only to the extent that the
Holding Company's net income for the past year is sufficient to cover both the
cash dividends and a rate of earning retention that is consistent with the
Holding Company's capital needs, asset quality and overall financial
condition. The FRB also indicated that it would be inappropriate for a company
experiencing serious financial problems to borrow funds to pay dividends.
Furthermore, under the prompt corrective action regulations adopted by the
FRB, the FRB may prohibit a bank holding company from paying any dividends if
the holding company's bank subsidiary is classified as "undercapitalized". See
" -- Regulatory Capital Requirements -- Prompt Corrective Action."
Bank holding companies are required to give the FRB prior written
notice of any purchase or redemption of its outstanding equity securities if
the gross consideration for the purchase or redemption, when combined with the
net consideration paid for all such purchases or redemptions during the
preceding 12 months, is equal to 10% or more of their consolidated net worth.
The FRB may disapprove such a purchase or redemption if it determines that the
proposal would constitute an unsafe or unsound practice or would violate any
law, regulation, FRB order, or any condition imposed by, or written agreement
with, the FRB. This notification requirement does not apply to any company
that meets the well-capitalized standard for commercial banks, has a safety
29
<PAGE>
and soundness examination rating of at least a "2" and is not subject to any
unresolved supervisory issues.
Capital Requirements. The FRB has established capital requirements
for bank holding companies that generally parallel the capital requirements
for national banks. For bank holding companies with consolidated assets of
less than $150 million, such as the Company, compliance is measured on a
bank-only basis. See "-- Regulatory Capital Requirements - National Banks."
The Company's capital exceeds such requirements and be at the same levels as
that of the National Bank.
Federal Home Loan Bank System
The Bank is a member of the FHLB of Chicago, which is one of 12
regional FHLBs, that administers the home financing credit function of savings
associations. Each FHLB serves as a reserve or central bank for its members
within its assigned region. It is funded primarily from proceeds derived from
the sale of consolidated obligations of the FHLB System. It makes loans to
members (i.e., advances) in accordance with policies and procedures,
established by the board of directors of the FHLB which are subject to the
oversight of the Federal Housing Finance Board. All advances from the FHLB are
required to be fully secured by sufficient collateral as determined by the
FHLB. In addition, all long-term advances are required to provide funds for
residential home financing.
As a member, the Bank is required to purchase and maintain stock in
the FHLB of Chicago. At June 30, 1997, the Bank had $66,000 in FHLB stock,
which was in compliance with this requirement. In past years, the Bank has
received substantial dividends on its FHLB stock. Over the past five calendar
years such dividends have averaged 6.91% and were 7.21% for calendar year
1996.
Under federal law the FHLBs are required to provide funds for the
resolution of troubled savings associations and to contribute to low- and
moderately priced housing programs through direct loans or interest subsidies
on advances targeted for community investment and low- and moderate-income
housing projects. These contributions have affected adversely the level of
FHLB dividends paid and could continue to do so in the future. These
contributions could also have an adverse effect on the value of FHLB stock in
the future. A reduction in value of The Bank's FHLB stock may result in a
corresponding reduction in the Bank's capital.
For the year ended June 30, 1997, dividends paid by the FHLB of
Chicago to the Bank totaled $4,493, which constitute a $264 decrease over the
amount of dividends received in calendar year 1996.
30
<PAGE>
Federal and State Taxation
Federal Taxation. In addition to the regular income tax,
corporations, including the Bank, generally are subject to a minimum tax. An
alternative minimum tax is imposed at a minimum tax rate of 20% on alternative
minimum taxable income, which is the sum of a corporation's regular taxable
income (with certain adjustments) and tax preference items, less any available
exemption. The alternative minimum tax is imposed to the extent it exceeds the
corporation's regular income tax and net operating losses can offset no more
than 90% of alternative minimum taxable income. For taxable years beginning
after 1986 and before 1996, corporations, such as the Bank, are also subject
to an environmental tax equal to 0.12% of the excess of alternative minimum
taxable income for the taxable year (determined without regard to net
operating losses and the deduction for the environmental tax) over $2 million.
The Bank has recorded a deferred tax liability of approximately
$131,073, relating to unrealized gains on available-for-sale securities,
accumulated depreciation and cash-accrual conversions.
The Bank files federal income tax returns on a fiscal year basis
using the accrual method of accounting. The Company and the Bank do not file
consolidated tax returns.
The Company nor the Bank have never been audited by the IRS with
respect to federal income tax returns.
Illinois Taxation. For Illinois income tax purposes, the Company is
taxed at an effective rate equal to 7.18% of Illinois taxable income. For
these purposes, "Illinois Taxable Income" generally means federal taxable
income, subject to certain adjustments (including the addition of interest
income on state and municipal obligations and the exclusion of interest income
on United States Treasury obligations). The exclusion of income on United
States Treasury obligations has had the effect of eliminating Illinois taxable
income for the Company.
The Company's accounting activities are maintained on an in-house
computer system and its record-keeping activities are maintained on an on-line
basis with an independent service bureau.
Competition
The Bank faces strong competition, both in originating real estate,
commercial and consumer loans and in attracting deposits. Competition in
originating loans comes primarily from commercial banks, credit unions and
savings institutions located in the Bank's market area. Commercial banks,
credit unions and savings institutions provide vigorous competition in
consumer lending. The Bank competes for real estate and other loans
principally on the basis of the quality of services it provides to borrowers,
the interest rates and loan processing fees it charges, and the types of loans
it originates. See "- Lending Activities."
31
<PAGE>
The Bank attracts all of its deposits through its retail banking
office. Therefore, competition for those deposits is principally from retail
brokerage offices, commercial banks, credit unions and savings institutions
located in the community. The Bank competes for these deposits by offering a
variety of account alternatives at competitive rates and by providing
convenient business hours.
The Bank primarily serves Lawrence County, Illinois and Knox County,
Indiana. There are nine commercial banks, two credit unions and one savings
institution, other than The Bank, which compete for deposits and loans in the
Bank's market area.
Employees
At June 30, 1997, the Bank had a total of two full-time and three
part-time employees. The Bank's employees are not represented by any
collective bargaining group. Management considers its employee relations to be
good.
Item 2. Description of Properties
The Bank conducts its business through one office, which is located
in Lawrence County, Illinois. The Bank owns its main office. The following
table sets forth information relating to the Bank's office as of June 30,
1997. The total net book value of the Bank's premises and equipment (including
land, buildings and leasehold improvements and furniture, fixtures and
equipment) at June 30, 1997 was approximately $39,000. See Note 5 of the Notes
to Financial Statements.
Total
Approximate
Date Square Net Book Value at
Location Acquired Footage June 30, 1997
- ----------------------------------------------------------- -------------------
Main Office: 1965 6,285 $39,000
619 12th Street
Lawrenceville, Illinois
The Bank believes that its current and planned facilities are
adequate to meet the present and foreseeable needs of the Bank and the Holding
Company.
Item 3. Legal Proceedings
The Company is involved, from time to time, as plaintiff or defendant
in various legal actions arising in the normal course of its businesses. While
the ultimate outcome of these proceedings cannot be predicted with certainty,
it is the opinion of management, after consultation
32
<PAGE>
with counsel representing the Company in the proceedings, that the resolution
of these proceedings should not have a material effect on Company's results of
operations on a consolidated basis.
Item 4. Submission of Matters to a Vote of Security Holders
No matter was submitted to a vote of security holders, through the
solicitation of proxies or otherwise, during the quarter ended June 30, 1997.
PART II
Item 5. Market for Registrant's Common Equity and
Related Stockholder Matters
Page 33 of the attached 1997 Annual Report to Stockholders is herein
incorporated by reference.
Item 6. Management's Discussion and Analysis of Financial
Condition and Results of Operation
Pages 4 through 13 of the attached 1997 Annual Report to Stockholders
are herein incorporated by reference.
Item 7. Financial Statements
The following information appearing in the Company's Annual Report to
Stockholders for the year ended June 30, 1997, is incorporated by reference in
this Annual Report on Form 10-KSB as Exhibit 13.
<TABLE>
<CAPTION>
Pages in
Annual
Annual Report Section Report
- --------------------- --------
<S> <C>
Report of Independent Auditors.......................................................... 14
Consolidated Statements of Financial Condition as of June 30, 1996 and 1997............. 15
Consolidated Statements of Operations for the Years Ended June 30, 1995,
1996 and 1997.......................................................................... 16
Consolidated Statements of Stockholders' Equity for
Years Ended June 30, 1995, 1996 and 1997............................................... 17
Consolidated Statements of Cash Flows for Years Ended June 30, 1997,
1996 and 1997.......................................................................... 18
Notes to Consolidated Financial Statements.............................................. 19 to 32
</TABLE>
33
<PAGE>
With the exception of the aforementioned information, the Company's
Annual Report to Stockholders for the year ended June 30, 1997, is not deemed
filed as part of this Annual Report on Form 10-KSB.
Item 8. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure
There have been no changes in or disagreements with the Company's
accountants on accounting and financial disclosure matters.
PART III
Item 9. Directors, Executive Officers, Promoters and
Control Persons; Compliance with Section 16(a)
of the Exchange Act
Directors
Information concerning Directors of the Company is incorporated
herein by reference from the definitive Proxy Statement for the Annual Meeting
of Stockholders to be held in 1997, a copy of which will be filed not later
than 120 days after the close of the fiscal year.
Executive Officers
Information concerning Executive Officers of the Company is
incorporated herein by reference from the definitive Proxy Statement for the
Annual Meeting of Stockholders to be held in October 1997, a copy of which
will be filed not later than 120 days after the close of the fiscal year.
Compliance with Section 16(a)
Section 16(a) of the Securities Exchange Act of 1934 requires the
Company's directors and executive officers, and persons who own more than 10%
of a registered class of the Bank's equity securities, to file with the SEC
initial reports of ownership and reports of changes in ownership of Common
Stock and other equity securities of the Company. Officers, directors and
greater than 10% stockholders are required by SEC regulation to furnish the
Company with copies of all Section 16(a) forms they file.
34
<PAGE>
To the Company's knowledge, based solely on a review of the copies of
such reports furnished to the Company and written representations that no
other reports were required, during the fiscal year ended June 30, 1997, all
Section 16(a) filing requirements applicable to its officers, directors and
greater than 10 percent beneficial owners were complied with.
Item 10. Executive Compensation
Information concerning executive compensation is incorporated herein
by reference from the definitive Proxy Statement for the Annual Meeting of
Stockholders to be held in 1997, a copy of which will be filed not later than
120 days after the close of the fiscal year.
Item 11. Security Ownership of Certain Beneficial
Owners and Management
Information concerning security ownership of certain beneficial
owners and management is incorporated herein by reference from the definitive
Proxy Statement for the Annual Meeting of Stockholders to be held in 1997, a
copy of which will be filed not later than 120 days after the close of the
fiscal year.
Item 12. Certain Relationships and Related Transactions
Information concerning certain relationships and related transactions
is incorporated herein by reference from the definitive Proxy Statement for
the Annual Meeting of Stockholders to be held in 1997, a copy of which will be
filed not later than 120 days after the close of the fiscal year.
35
<PAGE>
Item 13. Exhibits and Reports on Form 8-K
(a) Exhibits
<TABLE>
<CAPTION>
Regulation Reference to
S-B Prior Filing or
Exhibit Exhibit Number
Number Document Attached Hereto
------ -------- ---------------
<S> <C> <C>
2 Plan of acquisition, reorganization,
arrangement, liquidation or succession None
3(i) Certificate of Incorporation *
3(ii) By-Laws *
4 Instruments defining the rights of security **
holders, including debentures
9 Voting Trust Agreement None
10 Material Contracts
(a) Employment Contract between **
Kevin J. Kavanaugh and the Bank
(b) 1997 Stock Option and Incentive Plan 10(b)
(c) Recognition and Retention Plan 10(c)
11 Statement re: computation of per share None
earnings
13 Annual Report to Stockholders 13
16 Letter re: change in certifying accountants None
18 Letter re: change in accounting principles None
21 Subsidiaries of Registrant 21
22 Published report regarding matters submitted to None
vote of security holders
23 Consents of Experts and Counsel None
24 Power of Attorney Not required
27 Financial Data Schedule 27
99 Additional Exhibits None
</TABLE>
----------------
* Filed as exhibits to the Company's Form S-1 registration statement
filed on December 19, 1995 (File No. 33-80589) of the Securities Act of
1933. All of such previously filed documents are hereby incorporated
herein by reference in accordance with Item 601 of Regulation S-B.
** Filed as exhibits to the Company's Pre-effective Amendment No. One to
Form S-1 filed on January 31, 1996 (File No. 33-80589) of the Securities
Act of 1933. All of such previously filed documents are hereby
incorporated herein by reference in accordance with Item 601 of
Regulation S-B.
(b) Reports on Form 8-K
The Company filed a report on Form 8-K on March 3, 1997 (File No.
0-27700) regarding a press release concerning its name change.
The Company filed a report on Form 8-K on May 13, 1997 (File No.
0-27700) regarding stock repurchase.
36
<PAGE>
SIGNATURES
In accordance with Section 13 of 15(d) of the Exchange Act, the
Issuer caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
HBANCORPORATION, INC.
Date: September 26, 1997 By: /s/ Kevin J. Kavanaugh
--------------------------------- -------------------------------
Kevin J. Kavanaugh
(Duly Authorized Representative)
In accordance with the Exchange Act, this report has been signed
below by the following persons on behalf of the Issuer and in the capacities
and on the dates indicated.
By: /s/ Kevin J. Kavanaugh By: /s/ Cleora Gillespie
---------------------------------- --------------------------------
Kevin J. Kavanaugh, Chairman of Cleora Gillespie, Secretary and
the Board, President and Chief Treasurer (Chief Financial
Executive Officer and Accounting Officer)
(Principal Executive and Operating
Officer)
Date: September 26, 1997 Date: September 26, 1997
----------------------------------- ------------------------------
By: /s/ Robert R. Ernst By: /s/ Henry J. DeBuisseret, Jr.
----------------------------------- --------------------------------
Robert R. Ernst, Director Henry J. DeBuisseret, Jr.,
Director
Date: September 26, 1997 Date: September 26, 1997
----------------------------------- ------------------------------
By: /s/ John H. White By: /s/ L. Patrick Kavanaugh
----------------------------------- ------------------------------
John H. White, Director L. Patrick Kavanaugh, Director
Date: September 26, 1997 Date: September 26, 1997
----------------------------------- ------------------------------
By: /s/ Mary E. Dennison
-----------------------------------
Mary E. Dennison, Director
Date: September 26, 1997
-----------------------------------
37
<PAGE>
HBANCORPORATION, INC.
1997 STOCK OPTION AND INCENTIVE PLAN
1. Plan Purpose. The purpose of the Plan is to promote the long-term
interests of the Corporation and its stockholders by providing a means for
attracting and retaining directors, offi cers and employees of the Corporation
and its Affiliates. It is intended that designated Options granted pursuant to
the provisions of this Plan to persons employed by the Corporation or its
Affiliates will qualify as Incentive Stock Options. Options granted to persons
who are not employees will be Non-Qualified Stock Options.
2. Definitions. The following definitions are applicable to the Plan:
"Affiliate" - means any "parent corporation" or "subsidiary
corporation" of the Corporation, as such terms are defined in Section 424(e)
and (f), respectively, of the Code.
"Bank" - means Heritage National Bank.
"Award" - means the grant of an Incentive Stock Option, a
Non-Qualified Stock Option, a Stock Appreciation Right, a Limited Stock
Appreciation Right, or of Restricted Stock, or any combination thereof, as
provided in the Plan.
"Code" - means the Internal Revenue Code of 1986, as amended.
"Committee" - means the Committee referred to in Section 3
hereof.
"Continuous Service" - means the absence of any interruption
or termination of service as a director, advisory director, officer or
employee of the Corporation or an Affiliate, except that when used with
respect to persons granted an Incentive Option means the absence of any
interruption or termination of service as an employee of the Corporation or an
Affiliate. Service shall not be considered interrupted in the case of sick
leave, military leave or any other leave of absence approved by the
Corporation or in the case of transfers between payroll locations of the
Corporation or between the Corporation, its parent, its subsidiaries or its
successor. With respect to any advisory director, continuous service shall
plan mean availability to perform such functions as may be required of the
Bank's advisory directors.
"Corporation" - means HBancorporation, Inc., a Delaware
corporation.
"Employee" - means any person, including an officer or
director, who is employed by the Corporation or any Affiliate.
"ERISA" - means the Employee Retirement Income Security Act
of 1974, as amended.
"Exercise Price" - means (i) in the case of an Option, the
price per Share at which the Shares subject to such Option may be purchased
upon exercise of such Option and (ii) in the
<PAGE>
case of a Right, the price per Share (other than the Market Value per Share on
the date of exercise and the Offer Price per Share as defined in Section 10
hereof) which, upon grant, the Committee determines shall be utilized in
calculating the aggregate value which a Participant shall be entitled to
receive pursuant to Sections 9, 10 or 13 hereof upon exercise of such Right.
"Incentive Stock Option" - means an option to purchase
Shares granted by the Committee pursuant to Section 6 hereof which is subject
to the limitations and restrictions of Section 8 hereof and is intended to
qualify under Section 422 of the Code.
"Limited Stock Appreciation Right" - means a stock
appreciation right with respect to Shares granted by the Committee pursuant to
Sections 6 and 10 hereof.
"Market Value" - means the average of the high and low
quoted sales price on the date in question (or, if there is no reported sale
on such date, on the last preceding date on which any reported sale occurred)
of a Share on the Composite Tape for the New York Stock Exchange-Listed
Stocks, or, if on such date the Shares are not quoted on the Composite Tape,
on the New York Stock Exchange, or, if the Shares are not listed or admitted
to trading on such Exchange, on the principal United States securities
exchange registered under the Securities Exchange Act of 1934 on which the
Shares are listed or admitted to trading, or, if the Shares are not listed or
admitted to trading on any such exchange, the mean between the closing high
bid and low asked quotations with respect to a Share on such date on the
National Association of Securities Dealers, Inc., Automated Quotations System,
or any similar system then in use, or, if no such quotations are available,
the fair market value on such date of a Share as the Committee shall
determine.
"Non-Employee Director" - means a director who a) is not
currently an officer or employee of the Corporation; b) is not a former
employee of the Corporation who receives compensation for prior services
(other than from a tax-qualified retirement plan); c) has not been an officer
of the Corporation; d) does not receive remuneration from the Corporation in
any capacity other than as a director; and e) does not possess an interest in
any other transactions or is not engaged in a business relationship for which
disclosure would be required under Item 404(a) or (b) of Regulation S-K.
"Non-Qualified Stock Option" - means an option to purchase
Shares granted by the Committee pursuant to Section 6 hereof, which option is
not intended to qualify under Section 422(b) of the Code.
"Option" - means an Incentive Stock Option or a
Non-Qualified Stock Option.
"Participant" - means any director, officer or employee of
the Corporation or any Affiliate who is selected by the Committee to receive
an Award and any director or advisory director of the Corporation who is
granted an Award pursuant to Section 21 hereof.
"Plan" - means the 1997 Stock Option and Incentive Plan of
the Corporation.
2
<PAGE>
"Related" - means (i) in the case of a Right, a Right which
is granted in connection with, and to the extent exercisable, in whole or in
part, in lieu of, an Option or another Right and (ii) in the case of an
Option, an Option with respect to which and to the extent a Right is
exercisable, in whole or in part, in lieu thereof has been granted.
"Restricted Period" - means the period of time selected by
the Committee for the purpose of determining when restrictions are in effect
under Section 11 hereof with respect to Restricted Stock awarded under the
Plan.
"Restricted Stock" - means Shares which have been
contingently awarded to a Participant by the Committee subject to the
restrictions referred to in Section 11 hereof, so long as such restrictions
are in effect.
"Right" - means a Limited Stock Appreciation Right or a
Stock Appreciation Right.
"Shares" - means the shares of common stock of the
Corporation.
"Stock Appreciation Right" - means a stock appreciation
right with respect to Shares granted by the Committee pursuant to Sections 6
and 9 hereof.
3. Administration. The Plan shall be administered by a
Committee consisting of two or more members, each of whom shall be a
Non-Employee Director. The members of the Committee shall be appointed by the
Board of Directors of the Corporation. Except as limited by the express
provisions of the Plan, the Committee shall have sole and complete authority
and discretion to (i) select Participants and grant Awards; (ii) determine the
number of Shares to be subject to types of Awards generally, as well as to
individual Awards granted under the Plan; (iii) determine the terms and
conditions upon which Awards shall be granted under the Plan; (iv) prescribe
the form and terms of instruments evidencing such grants; and (v) establish
from time to time regulations for the administration of the Plan, interpret
the Plan, and make all determinations deemed necessary or advisable for the
administration of the Plan.
A majority of the Committee shall constitute a quorum, and the acts
of a majority of the members present at any meeting at which a quorum is
present, or acts approved in writing by a majority of the Committee without a
meeting, shall be acts of the Committee.
4. Participation in Committee Awards. The Committee may select from
time to time Participants in the Plan from those directors (including advisory
directors), officers and employees, of the Corporation or its Affiliates who,
in the opinion of the Committee, have the capacity for contributing to the
successful performance of the Corporation or its Affiliates.
5. Shares Subject to Plan. Subject to adjustment by the operation of
Section 12 hereof, the maximum number of Shares with respect to which Awards
may be made under the Plan is 12% of the total issued and outstanding Shares
of the Corporation on the date of ratification of the Plan by the
Corporation's stockholders. The Shares with respect to which
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Awards may be made under the Plan may be either authorized and unissued shares
or issued shares heretofore or hereafter reacquired and held as treasury
shares. Shares which are subject to Related Rights and Related Options shall
be counted only once in determining whether the maximum number of Shares with
respect to which Awards may be granted under the Plan has been exceeded. An
Award shall not be considered to have been made under the Plan with respect to
any Option or Right which terminates or with respect to Restricted Stock which
is forfeited, and new Awards may be granted under the Plan with respect to the
number of Shares as to which such termination or forfeiture has occurred.
6. General Terms and Conditions of Options and Rights. The
Committee shall have full and complete authority and discretion, except as
expressly limited by the Plan, to grant Options and/or Rights and to provide the
terms and conditions (which need not be identical among Participants) thereof.
In particular, the Committee shall prescribe the following terms and conditions:
(i) the Exercise Price of any Option or Right, which shall not be less than
the Market Value per Share at the date of grant of such Option, (ii) the
number of Shares subject to, and the expiration date of, any Option or Right,
which expiration date shall not exceed ten years from the date of grant, (iii)
the manner, time and rate (cumulative or otherwise) of exercise of such Option
or Right, and (iv) the restrictions, if any, to be placed upon such Option or
Right or upon Shares which may be issued upon exercise of such Option or
Right. The Committee may, as a condition of granting any Option or Right,
require that a Participant agree not to thereafter exercise one or more
Options or Rights previously granted to such Participant.
7. Exercise of Options or Rights.
(a) Except as provided herein, an Option or Right granted
under the Plan shall be exercisable during the lifetime of the Participant to
whom such Option or Right was granted only by such Participant and, except as
provided in paragraphs (c) and (d) of this Section 7, no such Option or Right
may be exercised unless at the time such Participant exercises such Option or
Right, such Participant has maintained Continuous Service since the date of
grant of such Option or Right.
(b) To exercise an Option or Right under the Plan, the
Participant to whom such Option or Right was granted shall give written notice
to the Corporation in form satisfactory to the Committee (and, if partial
exercises have been permitted by the Committee, by specifying the number of
Shares with respect to which such Participant elects to exercise such Option
or Right) together with full payment of the Exercise Price, if any and to the
extent required. The date of exercise shall be the date on which such notice
is received by the Corporation. Payment, if any is required, shall be made
either (i) in cash (including check, bank draft or money order) or (ii) if
permitted by the Committee, by delivering (A) Shares already owned by the
Participant and having a fair market value equal to the applicable exercise
price, such fair market value to be determined in such appropriate manner as
may be provided by the Committee or as may be required in order to comply with
or to conform to requirements of any applicable laws or regulations, or (B) a
combination of cash and such Shares.
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(c) If a Participant to whom an Option or Right was granted
shall cease to maintain Continuous Service for any reason, other than
termination for cause, such Participant may, but only within the period of
three years immediately succeeding such cessation of Continuous Service and in
no event after the expiration date of such Option or Right, exercise such
Option or Right to the extent that such Participant was entitled to exercise
such Option or Right at the date of such cessation, provided, however, that
such right of exercise after cessation of Continuous Service shall not be
available to a Participant if the Committee otherwise determines and so
provides in the applicable instrument or instruments evidencing the grant of
such Option or Right. If a Participant to whom an Option or Right was granted
shall cease to maintain Continuous Service by reason of death, disability or
retirement then, unless the Committee shall have otherwise provided in the
instrument evidencing the grant of an Option or Stock Appreciation Right, all
Options and Rights granted and not fully exercisable shall become exercisable
in full upon the happening of such event and shall remain so exercisable (i)
in the event of death for the period described in paragraph (d) of this
Section 7 and (ii) in the event of disability or retirement for a period of
three years following such date. If the Continuous Service of a Participant to
whom an Option or Right was granted by the Corporation is terminated for
cause, all rights under any Option or Right of such Participant shall expire
immediately upon the giving to the Participant of notice of such termination.
(d) In the event of the death of a Participant while in the
Continuous Service of the Corporation or an Affiliate or within the three year
period referred to in paragraph (c) of this Section 7, the person to whom any
Option or Right held by the Participant at the time of his death is
transferred by will or the laws of descent and distribution, or in the case of
an Award other than an Incentive Stock Option, pursuant to a qualified
domestic relations order, as defined in the Code or Title 1 of ERISA or the
rules thereunder may, but only to the extent such Participant was entitled to
exercise such Option or Right as set forth in paragraph (c) of this Section 7,
exercise such Option or Right at any time within a period of one year
succeeding the date of death of such Participant, but in no event later than
ten years from the date of grant of such Option or Right. Following the death
of any Participant to whom an Option was granted under the Plan, irrespective
of whether any Related Right shall have theretofore been granted to the
Participant or whether the person entitled to exercise such Related Right
desires to do so, the Committee may, as an alternative means of settlement of
such Option, elect to pay to the person to whom such Option is transferred by
will or by the laws of descent and distribution, or in the case of an Option
other than an Incentive Stock Option, pursuant to a qualified domestic
relations order, as defined in the Code or Title I of ERISA or the rules
thereunder, the amount by which the Market Value per Share on the date of
exercise of such Option shall exceed the Exercise Price of such Option,
multiplied by the number of Shares with respect to which such Option is
properly exercised. Any such settlement of an Option shall be considered an
exercise of such Option for all purposes of the Plan.
8. Incentive Stock Options. Incentive Stock Options may be
granted only to Participants who are Employees. Any provision of the Plan to
the contrary notwithstanding, (i) no Incentive Stock Option shall be granted
more than ten years from the date the Plan is adopted by the Board of
Directors of the Corporation and no Incentive Stock Option shall be
exercisable more than ten years from the date such Incentive Stock Option is
granted, (ii) the Exercise Price of any Incentive Stock Option shall not be
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less than the Market Value per Share on the date of grant of such Option, and
(iii) any Incentive Stock Option shall not be transferable by the Participant
to whom such Incentive Stock Option is granted other than by will or the laws
of descent and distribution, and shall be exercisable during such
Participant's lifetime only by such Participant.
9. Stock Appreciation Rights. A Stock Appreciation Right shall, upon
its exercise, entitle the Participant to whom such Stock Appreciation Right
was granted to receive a number of Shares or cash or combination thereof, as
the Committee in its discretion shall determine, the aggregate value of which
(i.e., the sum of the amount of cash and/or Market Value of such Shares on
date of exercise) shall equal (as nearly as possible, it being understood that
the Corporation shall not issue any fractional shares) the amount by which the
Market Value per Share on the date of such exercise shall exceed the Exercise
Price of such Stock Appreciation Right, multiplied by the number of Shares
with respect of which such Stock Appreciation Right shall have been exercised.
A Stock Appreciation Right may be Related to an Option or may be granted
independently of any Option as the Committee shall from time to time in each
case determine. At the time of grant of an Option the Committee shall
determine whether and to what extent a Related Stock Appreciation Right shall
be granted with respect thereto; provided, however, and notwithstanding any
other provision of the Plan, that if the Related Option is an Incentive Stock
Option, the Related Stock Appreciation Right shall satisfy all the
restrictions and limitations of Section 8 hereof as if such Related Stock
Appreciation Right were an Incentive Stock Option and as if other rights which
are Related to Incentive Stock Options were Incentive Stock Options. In the
case of a Related Option, such Related Option shall cease to be exercisable to
the extent of the Shares with respect to which the Related Stock Appreciation
Right was exercised. Upon the exer cise or termination of a Related Option,
any Related Stock Appreciation Right shall terminate to the extent of the
Shares with respect to which the Related Option was exercised or terminated.
10. Limited Stock Appreciation Rights. At the time of grant of an
Option or Stock Appreciation Right to any Participant, the Committee shall
have full and complete authority and discretion to also grant to such
Participant a Limited Stock Appreciation Right which is Related to such Option
or Stock Appreciation Right; provided, however and notwithstanding any other
provision of the Plan, that if the Related Option is an Incentive Stock
Option, the Related Limited Stock Appreciation Right shall satisfy all the
restrictions and limitations of Section 8 hereof as if such Related Limited
Stock Appreciation Right were an Incentive Stock Option and as if all other
Rights which are Related to Incentive Stock Options were Incentive Stock
Options. Not withstanding any other provision of the Plan, a Limited Stock
Appreciation Right shall be exercis able only during the period beginning on
the first day following the date of expiration of any "offer" (as such term is
hereinafter defined) and ending on the forty-fifth day following such date.
A Limited Stock Appreciation Right shall, upon its exercise,
entitle the Participant to whom such Limited Stock Appreciation Right was
granted to receive an amount of cash equal to the amount by which the "Offer
Price per Share" (as such term is hereinafter defined) or the Market Value on
the date of such exercise, as shall have been provided by the Committee in its
discretion at the time of grant, shall exceed the Exercise Price of such
Limited Stock Appreciation Right, multiplied by the number of Shares with
respect to which such Limited Stock Appreciation Right shall have been
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exercised. Upon the exercise of a Limited Stock Appreciation Right, any
Related Option and/or Related Stock Appreciation Right shall cease to be
exercisable to the extent of the Shares with respect to which such Limited
Stock Appreciation Right was exercised. Upon the exercise or termination of a
Related Option or Related Stock Appreciation Right, any Related Limited Stock
Appreciation Right shall terminate to the extent of the Shares with respect to
which such Related Option or Related Stock Appreciation Right was exercised or
terminated.
For the purposes of this Section 10, the term "Offer" shall mean any
tender offer or exchange offer for Shares other than one made by the
Corporation, provided that the corporation, person or other entity making the
offer acquires pursuant to such offer either (i) 25% of the Shares outstanding
immediately prior to the commencement of such offer or (ii) a number of Shares
which, together with all other Shares acquired in any tender offer or exchange
offer (other than one made by the Corporation) which expired within sixty days
of the expiration date of the offer in question, equals 25% of the Shares
outstanding immediately prior to the commencement of the offer in question.
The term "Offer Price per Share" as used in this Section 10 shall mean the
highest price per Share paid in any Offer which Offer is in effect any time
during the period beginning on the sixtieth day prior to the date on which a
Limited Stock Appreciation Right is exercised and ending on the date on which
such Limited Stock Appreciation Right is exercised. Any securities or property
which are part or all of the consideration paid for Shares in the Offer shall
be valued in determining the Offer Price per Share at the higher of (A) the
valuation placed on such securities or property by the corporation, person or
other entity making such Offer or (B) the valuation placed on such securities
or property by the Committee.
11. Terms and Conditions of Restricted Stock. The Committee shall
have full and complete authority, subject to the limitations of the Plan, to
grant awards of Restricted Stock and, in addition to the terms and conditions
contained in paragraphs (a) through (f) of this Section 11, to provide such
other terms and conditions (which need not be identical among Participants) in
respect of such Awards, and the vesting thereof, as the Committee shall
determine and provide in the agreement referred to in paragraph (d) of this
Section 11.
(a) At the time of an award of Restricted Stock, the
Committee shall determine and provide in the agreement referred to in
paragraph (d) of this Section 11, the Shares awarded as Restricted Stock shall
vest. Subject to any such other terms and conditions as the Committee shall
provide, shares of Restricted Stock may not be sold, assigned, transferred,
pledged or otherwise encumbered by the Participant, except as hereinafter
provided, during the Restricted Period. Except for such restrictions, and
subject to paragraphs (c), (d) and (e) of this Section 11 and Section 12
hereof, the Participant as owner of such shares shall have all the rights of a
stockholder, including but not limited to the right to receive all dividends
paid on such shares and the right to vote such shares. The Committee shall
have the authority, in its discretion, to accelerate the time at which any or
all of the restrictions shall lapse with respect to any shares of Restricted
Stock prior to the expiration of the Restricted Period with respect thereto,
or to remove any or all of such restrictions, whenever it may determine that
such action is appropriate by reason of changes in applicable tax or other
laws or other changes in circumstances occurring after the commencement of
such Restricted Period.
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(b) Except as provided in Section 14 hereof, if a
Participant ceases to maintain Continuous Service for any reason (other than
death, total or partial disability or normal or early retirement) unless the
Committee shall otherwise determine, all shares of Restricted Stock
theretofore awarded to such Participant and which at the time of such
termination of Continuous Service are subject to the restrictions imposed by
paragraph (a) of this Section 11 shall upon such termination of Continuous
Service be forfeited and returned to the Corporation. Unless the Committee
shall have provided in the agreement referred to in paragraph (d) of this
Section 11 for a ratable lapse of restrictions with respect to an award of
shares of Restricted Stock during the Restricted Period, if a Participant
ceases to maintain Continuous Service by reason of death, disability or
retirement, such portion of such shares of Restricted Stock awarded to such
Participant which at the time of such termination of Continuous Service are
subject to the restrictions imposed by paragraph (a) of this Section 11 as
shall be equal to the portion of the Restricted Period with respect to such
shares which shall have elapsed at the time of such termination of Continuous
Service shall be free of restrictions and shall not be forfeited.
(c) Each certificate in respect of shares of Restricted
Stock awarded under the Plan shall be registered in the name of the
Participant and deposited by the Participant, together with a stock power
endorsed in blank, with the Corporation and shall bear the following (or a
similar) legend:
"The transferability of this certificate and the shares of
stock represented hereby are subject to the terms and conditions
(including forfeiture) contained in the 1997 Stock Option and
Incentive Plan of HBancorporation, Inc. and an Agreement entered into
between the registered owner and HBancorporation, Inc. Copies of such
Plan and Agreement are on file in the offices of the Secretary of
HBancorporation, Inc., 619 12th Street, Lawrenceville, Illinois
62439.
(d) At the time of an award of shares of Restricted Stock,
the Participant shall enter into an Agreement with the Corporation in a form
specified by the Committee, agreeing to the terms and conditions of the award
and such other matters as the Committee shall in its sole discretion
determine.
(e) At the time of an award of shares of Restricted Stock,
the Committee may, in its discretion, determine that the payment to the
Participant of dividends declared or paid on such shares, or specified portion
thereof, by the Corporation shall be deferred until the earlier to occur of
(i) the lapsing of the restrictions imposed under paragraph (a) of this
Section 11 or (ii) the forfeiture of such shares under paragraph (b) of this
Section 11, and shall be held by the Corporation for the account of the
Participant until such time. In the event of such deferral, there shall be
credited at the end of each year (or portion thereof) interest on the amount
of the account at the beginning of the year at a rate per annum as the
Committee, in its discretion, may determine. Payment of deferred dividends,
together with interest accrued thereon as aforesaid, shall be made upon the
earlier to occur of the events specified in (i) and (ii) of the immediately
preceding sentence.
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(f) At the expiration or lapse of the restrictions imposed
by paragraph (a) of this Section 11, the Corporation shall redeliver to the
Participant (or where the relevant provision of paragraph (b) of this Section
11 applies in the case of a deceased Participant, to his legal representative,
beneficiary or heir) the certificate(s) and stock power deposited with it
pursuant to paragraph (c) of this Section 11 and the Shares represented by
such certificate(s) shall be free of the restrictions referred to in paragraph
(a) of this Section 11.
12. Adjustments Upon Changes in Capitalization. In the event of any
change in the outstanding Shares subsequent to the effective date of the Plan
by reason of any reorganization, recapitalization, stock split, stock
dividend, combination or exchange of shares, merger, consolidation or any
change in the corporate structure or Shares of the Corporation, the maximum
aggregate number, class and exercise price of shares as to which Awards may be
granted under the Plan and the number and class of shares with respect to
which Awards theretofore have been granted under the Plan shall be
appropriately adjusted by the Committee, whose determination shall be
conclusive. Any shares of stock or other securities received, as a result of
any of the foregoing, by a Participant with respect to Restricted Stock shall
be subject to the same restrictions and the certificate(s) or other
instruments representing or evidencing such shares or securities shall be
legended and deposited with the Corporation in the manner provided in Section
11 hereof.
13. Effect of Merger. In the event of any merger, consolidation or
combination of the Corporation (other than a merger, consolidation or
combination in which the Corporation is the continuing entity and which does
not result in the outstanding Shares being converted into or exchanged for
different securities, cash or other property, or any combination thereof)
pursuant to a plan or agreement the terms of which are binding upon all
stockholders of the Corporation (except to the extent that dissenting
stockholders may be entitled, under statutory provisions or provisions
contained in the certificate of incorporation, to receive the appraised or
fair value of their holdings), any Participant to whom an Option or Right has
been granted at least 6 months prior to such event shall have the right
(subject to the provisions of the Plan and any limitation applicable to such
Option or Right), thereafter and during the term of each such Option or Right,
to receive upon exercise of any such Option or Right an amount equal to the
excess of the fair market value on the date of such exercise of the
securities, cash or other property, or combination thereof, receivable upon
such merger, consolidation or combination in respect of a Share over the
Exercise Price of such Right or Option, multiplied by the number of Shares
with respect to which such Option or Right shall have been exercised. Such
amount may be payable fully in cash, fully in one or more of the kind or kinds
of property payable in such merger, consolidation or combination, or partly in
cash and partly in one or more of such kind or kinds of property, all in the
discretion of the Committee. Unless the Committee shall have provided
otherwise in the agreement referred to in paragraph (d) of Section 11 hereof,
in the event of any such merger, consolidation or combination any Restricted
Period shall lapse with respect to Shares of Restricted Stock awarded at least
six months prior to such event, all such Shares shall be fully vested in the
Participants to whom such Shares were awarded, and the holders of such Shares
shall be eligible to receive in respect thereof the full amount receivable per
Share in such merger, consolidation or combination.
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14. Effect of Change in Control. Each of the events specified in the
following clauses (i) through (iii) of this Section 14 shall be deemed a
"change of control": (i) any third person, including a "group" as defined in
Section 13(d)(3) of the Securities Exchange Act of 1934, shall become the
beneficial owner of shares of the Corporation with respect to which 25% or
more of the total number of votes for the election of the Board of Directors
of the Corporation may be cast, (ii) as a result of, or in connection with,
any cash tender offer, exchange offer, merger or other business combination,
sale of assets or contested election, or combination of the foregoing, the
persons who were directors of the Corporation shall cease to constitute a
majority of the Board of Directors of the Corporation or (iii) the
shareholders of the Corporation shall approve an agreement providing either
for a transaction in which the Corporation will cease to be an independent
publicly owned entity or for a sale or other disposition of all or
substantially all the assets of the Corporation. If the Continuous Service of
any Participant of the Corporation or any Affiliate is involuntarily
terminated for whatever reason, at any time within eighteen months after a
change in control, unless the Committee shall have otherwise provided in the
agreement referred to in paragraph (d) of Section 11 hereof, any Restricted
Period with respect to Restricted Stock theretofore awarded to such
Participant shall lapse upon such termination and all Shares awarded as
Restricted Stock shall become fully vested in the Participant to whom such
Shares were awarded. If a tender offer or exchange offer for Shares (other
than such an offer by the Corporation) is commenced, or if the event specified
in clause (iii) above shall occur, unless the Committee shall have otherwise
provided in the instrument evidencing the grant of an Option or Stock
Appreciation Right, all Options and Stock Appreciation Rights theretofore
granted and not fully exercisable shall become exercisable in full upon the
happening of such event and shall remain so exercisable for a period of sixty
days following such date, after which they shall revert to being exercisable
in accordance with their terms; provided, however, that no Option or Stock
Appreciation Right shall be exercisable by a director, Senior Officer or Ten
Percent Beneficial Owner of the Corporation within six months of the date of
grant of such Option or Stock Appreciation Right and no Option or Stock
Appreciation Right which has previously been exercised or otherwise terminated
shall become exercisable.
15. Assignments and Transfers. No Award nor any right or interest of
a Participant under the Plan in any instrument evidencing any Award under the
Plan may be assigned, encumbered or transferred except, in the event of the
death of a Participant, by will or the laws of descent and distribution or in
the case of Awards other than Incentive Stock Options pursuant to a qualified
domestic relations order, as defined in the Code or Title I of ERISA or the
rules thereunder.
16. Employee Rights Under the Plan. No director, officer or employee
shall have a right to be selected as a Participant nor, having been so
selected, to be selected again as a Participant and no director, officer,
employee or other person shall have any claim or right to be granted an Award
under the Plan or under any other incentive or similar plan of the Corporation
or any Affiliate. Neither the Plan nor any action taken thereunder shall be
construed as giving any employee any right to be retained in the employ of the
Corporation or any Affiliate.
17. Delivery and Registration of Stock. The Corporation's
obligation to deliver Shares with respect to an Award shall, if the Committee
so requests, be conditioned upon the receipt of a representation as to the
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investment intention of the Participant to whom such Shares are to be
delivered, in such form as the Committee shall determine to be necessary or
advisable to comply with the provisions of the Securities Act of 1933 or any
other Federal, state or local securities legislation or regulation. It may be
provided that any representation requirement shall become inoperative upon a
registration of the Shares or other action eliminating the necessity of such
representation under such Securities Act or other securities legislation. The
Corporation shall not be required to deliver any Shares under the Plan prior
to (i) the admission of such shares to listing on any stock exchange on which
Shares may then be listed, and (ii) the completion of such registration or
other qualification of such Shares under any state or Federal law, rule or
regulation, as the Committee shall determine to be necessary or advisable.
18. Withholding Tax. Upon the termination of the Restricted Period
with respect to any shares of Restricted Stock (or at any such earlier time,
if any, that an election is made by the Participant under Section 83(b) of the
Code, or any successor provision thereto, to include the value of such shares
in taxable income), the Corporation may, in its sole discretion, retain a
sufficient number of shares held by it to cover the amount required to be
withheld. The Corporation may, in its sole discretion, have the right to
deduct from all dividends paid with respect to shares of Restricted Stock the
amount of any taxes which the Corporation is required to withhold with respect
to such dividend payments.
The Corporation may, in its sole discretion, have the right to deduct
from all amounts paid in cash with respect to the exercise of a Right under
the Plan any taxes required by law to be withheld with respect to such cash
payments. Where a Participant or other person is entitled to receive Shares
pursuant to the exercise of an Option or Right pursuant to the Plan, the
Corporation may, in its sole discretion, shall have the right to require the
Participant or such other person to pay the Corporation the amount of any
taxes which the Corporation is required to withhold with respect to such
Shares.
19. Amendment or Termination. The Board of Directors of the
Corporation may amend, suspend or terminate the Plan or any portion thereof at
any time, but (except as provided in Section 12 hereof) no amendment shall be
made without approval of the stockholders of the Corporation which shall (i)
materially increase the aggregate number of Shares with respect to which
Awards may be made under the Plan, (ii) materially increase the aggregate
number of Shares which may be subject to Awards to Participants who are not
Employees or (iii) change the class of persons eligible to participate in the
Plan; provided, however, that no such amendment, suspension or termination
shall impair the rights of any Participant, without his consent, in any Award
theretofore made pursuant to the Plan.
20. Effective Date and Term of Plan. The Plan shall become effective
upon its ratification by the Corporation's stockholders. It shall continue in
effect for a term of ten years unless sooner terminated under Section 19
hereof.
21. Initial Grant. By, and simultaneously with, the adoption of this
Plan, each member of the Board of Directors of the Corporation at the time of
the stockholders ratification of the Plan who is not an Employee, is hereby
granted a ten year, Non-Qualified Stock Option to purchase
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2,500 shares of the Corporation's common stock at an exercise price per share
equal to the Market Value of the Corporation's common stock on the date of
grant of the Option. Each such Option shall be evidenced by a Non-Qualified
Stock Option Agreement in a form approved by the Board of Directors and shall
be subject in all respects to the terms and conditions of this Plan, which are
controlling. All options granted pursuant to this Section 21 shall be rounded
down to the nearest whole share to the extent necessary to ensure that no
options to purchase stock representing fractional shares are granted.
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HBANCORPORATION, INC.
RECOGNITION AND RETENTION PLAN
1. Plan Purpose. The purpose of the Plan is to promote the long-term
interests of the Corporation and its stockholders by providing a means for
attracting and retaining executive officers of the Corporation and its
Affiliates.
2. Definitions. The following definitions are applicable to the
Plan:
"Award" - means the grant by the Committee of Restricted
Stock, as provided in the Plan.
"Affiliate" - means any "parent corporation" or "subsidiary
corporation" of the Corporation, as such terms are defined in Section 424(e)
and (f), respectively, of the Code.
"Bank" - means Heritage National Bank.
"Code" - means the Internal Revenue Code of 1986, as amended.
"Committee" - means the Committee referred to in Section 7
hereof.
"Continuous Service" - means the absence of any interruption
or termination of service as a director, advisory director, officer or
employee of the Corporation or any Affiliate. Service shall not be considered
interrupted in the case of sick leave, military leave or any other leave of
absence approved by the Corporation or any Affiliate or in the case of
transfers between payroll locations of the Corporation or between the
Corporation, its subsidiaries or its successor.
"Corporation" - means HBancorporation, Inc., a Delaware
corporation.
"ERISA" - means the Employee Retirement Income Security Act
of 1974, as amended.
"Non-Employee Director" - means a director who a) is not
currently an officer or employee of the Corporation; b) is not a former
employee of the Corporation who receives compensation for prior services
(other than from a tax-qualified retirement plan); c) has not been an officer
of the Corporation; d) does not receive remuneration from the Corporation in
any capacity other than as a director; and e) does not possess an interest in
any other transactions or is not engaged in a business relationship for which
disclosure would be required under Item 404(a) or (b) of Regulation S-K.
"Participant" - means any director, advisory director,
officer or employee of the Corporation or any Affiliate who is selected by the
Committee to receive an Award and any director or advisory director of the
Corporation who is granted an Award pursuant to Section 13 hereof.
<PAGE>
"Plan" - means the Recognition and Retention Plan of the
Corporation.
"Restricted Period" - means the period of time selected by
the Committee for the purpose of determining when restrictions are in effect
under Section 3 hereof with respect to Restricted Stock awarded under the
Plan.
"Restricted Stock" - means Shares which have been
contingently awarded to a Participant by the Committee subject to the
restrictions referred to in Section 3 hereof, so long as such restrictions are
in effect.
"Shares" - means the common stock, par value $0.01 per
share, of the Corporation.
3. Terms and Conditions of Restricted Stock. The Committee shall have
full and complete authority, subject to the limitations of the Plan, to grant
awards of Restricted Stock and, in addition to the terms and conditions
contained in paragraphs (a) through (f) of this Section 3, to provide such
other terms and conditions (which need not be identical among Participants) in
respect of such Awards, and the vesting thereof, as the Committee shall
determine.
(a) At the time of an award of Restricted Stock, the
Committee shall establish for each Participant a Restricted Period, during
which or at the expiration of which, as the Committee shall determine and
provide in the agreement referred to in paragraph (d) of this Section 3, the
Shares awarded as Restricted Stock shall vest, and subject to any such other
terms and conditions as the Committee shall provide, shares of Restricted
Stock may not be sold, assigned, transferred, pledged or otherwise encumbered
by the Participant, except as hereinafter provided, during the Restricted
Period. Except for such restrictions, and subject to paragraphs (d) and (e) of
this Section 3 and Section 4 hereof, the Participant as owner of such shares
shall have all the rights of a stockholder, including but not limited to the
right to receive all dividends paid on such shares and the right to vote such
shares. The Committee shall have the authority, in its discretion, to
accelerate the time at which any or all of the restrictions shall lapse with
respect thereto, or to remove any or all of such restrictions, whenever it may
determine that such action is appropriate by reason of changes in applicable
tax or other laws or other changes in circumstances occurring after the
commencement of such Restricted Period.
(b) Except as provided in Section 5 hereof, if a Participant
ceases to maintain Continuous Service for any reason (other than death,
disability or retirement), unless the Committee shall otherwise determine, all
Shares of Restricted Stock theretofore awarded to such Participant and which
at the time of such termination of Continuous Service are subject to the
restrictions imposed by paragraph (a) of this Section 3 shall upon such
termination of Continuous Service be forfeited and returned to the
Corporation. If a Participant ceases to maintain Continuous Service by reason
of death, disability or retirement, the Restricted Stock then still subject to
restrictions imposed by paragraph (a) of this Section 3 will be free of those
restrictions as of the day prior to such death, disability or retirement.
2
<PAGE>
(c) Each certificate in respect of Shares of Restricted
Stock awarded under the Plan shall be registered in the name of the
Participant and deposited by the Participant, together with a stock power
endorsed in blank, with the Corporation and shall bear the following (or a
similar) legend:
"The transferability of this certificate and the shares of
stock represented hereby are subject to the terms and conditions
(including forfeiture) contained in the Recognition and Retention
Plan of HBancorporation, Inc. Copies of such Plan are on file in the
offices of the Secretary of HBancorporation, Inc., 619 12th Street,
Lawrenceville, Illinois 62439.
(d) At the time of any Award, the Participant shall enter
into an agreement with the Corporation in a form specified by the Committee,
agreeing to the terms and conditions of the Award and such other matters as
the Committee, in its sole discretion, shall determine (the "Restricted Stock
Agreement").
(e) At the time of an award of shares of Restricted Stock,
the Committee may, in its discretion, determine that the payment to the
Participant of dividends declared or paid on such shares, or specified
portions thereof, by the Corporation shall be deferred until the earlier to
occur of (i) the lapsing of the restrictions imposed under paragraph (a) of
this Section 3 or (ii) the forfeiture of such shares under paragraph (b) of
this Section 3, and shall be held by the Corporation for the account of the
Participant until such time. In the event of such deferral, there shall be
credited at the end of each year (or portion thereof) interest on the amount
of the account at the beginning of the year at a rate per annum as the
Committee, in its discretion, may determine. Payment of deferred dividends,
together with interest accrued thereon, shall be made upon the earlier to
occur of the events specified in (i) and (ii) of the immediately preceding
sentence.
(f) At the expiration of the restrictions imposed by
paragraph (a) of this Section 3, the Corporation shall redeliver to the
Participant (or where the relevant provision of paragraph (b) of this Section
3 applies in the case of a deceased Participant, to his legal representative,
beneficiary or heir) the certificate(s) and stock power deposited with it
pursuant to paragraph (c) of this Section 3 and the Shares represented by such
certificate(s) shall be free of the restrictions referred to in paragraph (a)
of this Section 3.
4. Adjustments Upon Changes in Capitalization. In the event
of any change in the outstanding Shares subsequent to the effective date of
the Plan by reason of any reorganization, recapitalization, stock split, stock
dividend, combination or exchange of shares, merger, consolidation or any
change in the corporate structure or Shares of the Corporation, the maximum
aggregate number and class of shares as to which Awards may be granted under
the Plan and the number and class of shares with respect to which Awards
theretofore have been granted under the Plan shall be appropriately adjusted
3
<PAGE>
by the Committee, whose determination shall be conclusive. Any shares of stock
or other securities received, as a result of any of the foregoing, by a
Participant with respect to Restricted Stock shall be subject to the same
restrictions and the certificate(s) or other instruments representing or
evidencing such shares or securities shall be legended and deposited with the
Corporation in the manner provided in Section 3 hereof.
5. Effect of Change in Control. Each of the events specified in the
following clauses (i) through (iii) of this Section 5 shall be deemed a
"change of control": (i) any third person, including a "group" as defined in
Section 13(d)(3) of the Securities Exchange Act of 1934, shall become the
beneficial owner of shares of the Corporation or the Bank with respect to
which 25% or more of the total number of votes which may be cast for the
election of the Board of Directors of the Corporation, (ii) as a result of, or
in connection with, any cash tender offer, merger or other business
combination, sale of assets or contested election, or combination of the
foregoing, the persons who were directors of the Corporation or the Bank shall
cease to constitute a majority of the Board of Directors of the Corporation,
or (iii) the shareholders of the Corporation shall approve an agreement
providing for a sale or other disposition of all or substantially all the
assets of the Corporation or the Bank. If the Continuous Service of any
Participant of the Corporation is involuntarily terminated for whatever
reason, at any time within twelve months after a change in control, unless the
Committee shall have otherwise provided, any Restricted Period with respect to
Restricted Stock theretofore awarded to such Participant shall lapse upon such
termination and all Shares awarded as Restricted Stock shall become fully
vested in the Participant to whom such Shares were awarded.
6. Assignments and Transfers. No Award nor any right or interest of a
Participant under the Plan in any instrument evidencing any Award under the
Plan may be assigned, encumbered or transferred except, in the event of the
death of a Participant, by will or the laws of descent and distribution or
pursuant to a qualified domestic relations order as defined in the Code or
Title I of ERISA or the rules thereunder.
7. Administration. The Plan shall be administered by a Committee
consisting of two or more members, each of whom shall be a Non-Employee
Director. The members of the Committee shall be appointed by the Board of
Directors of the Corporation. Except as limited by the express provisions of
the Plan, the Committee shall have sole and complete authority and discretion
to (i) select Participants and grant Awards; (ii) determine the number of
shares to be subject to types of Awards generally, as well as to individual
Awards granted under the Plan; (iii) determine the terms and conditions upon
which Awards shall be granted under the Plan; (iv) prescribe the form and
terms of instruments evidencing such grants; and (v) establish from time to
time regulations for the administration of the Plan, interpret the Plan, and
make all determinations deemed necessary or advisable for the administration
of the Plan.
A majority of the Committee shall constitute a quorum, and the acts
of a majority of the members present at any meeting at which a quorum is
present, or acts approved in writing by a majority of the Committee without a
meeting, shall be acts of the Committee.
8. Shares Subject to Plan. Subject to adjustment by the
operation of Section 4 hereof, the maximum number of Shares with respect to
which Awards may be made under the Plan is 5% of the total Shares of the
Corporation outstanding on the date of the ratification of the Plan by the
Corporation's stockholders. The shares with respect to which Awards may be
made under the Plan may be either authorized and unissued shares or issued
shares heretofore or hereafter reacquired and held as treasury shares. An
Award shall not be considered to have been made under the Plan with respect to
4
<PAGE>
Restricted Stock which is forfeited and new Awards may be granted under the
Plan with respect to the number of Shares as to which such forfeiture has
occurred.
9. Employee Rights Under the Plan. No director, officer or employee
shall have a right to be selected as a Participant nor, having been so
selected, to be selected again as a Participant and no director, officer,
employee or other person shall have any claim or right to be granted an Award
under the Plan or under any other incentive or similar plan of the Corporation
or any Affiliate. Neither the Plan nor any action taken thereunder shall be
construed as giving any employee any right to be retained in the employ of the
Corporation, the Bank or any Affiliate.
10. Withholding Tax. Upon the termination of the Restricted Period
with respect to any shares of Restricted Stock (or at any such earlier time,
if any, that an election is made by the Participant under Section 83(b) of the
Code, or any successor provision thereto, to include the value of such shares
in taxable income), the Corporation may withhold from any payment or
distribution made under this Plan sufficient Shares or may withhold or cause
to be paid by the Participant sufficient cash to cover any applicable
withholding and employment taxes. The Corporation shall have the right to
deduct from all dividends paid with respect to shares of Restricted Stock the
amount of any taxes which the Corporation is required to withhold with respect
to such dividend payments. No discretion or choice shall be conferred upon any
Participant with respect to the form, timing or method of any such tax
withholding.
11. Amendment or Termination. The Board of Directors of the
Corporation may amend, suspend or terminate the Plan or any portion thereof at
any time; provided, however, that no such amendment, suspension or termination
shall impair the rights of any Participant, without his consent, in any Award
theretofore made pursuant to the Plan.
12. Term of Plan. The Plan shall become effective upon its
ratification by the stockholders of the Corporation. It shall continue in
effect for a term of ten years unless sooner terminated under Section 11
hereof.
13. Initial Grants. By, and simultaneously with, the ratification of
the Plan by the Corporation's stockholders, each member of the Board of
Directors who is not a full-time Employee, is hereby granted an Award equal to
1,200 shares of the Corporation's common stock. Each such Award shall be
evidenced by a Restricted Stock Agreement in a form approved by the Committee
administering this Plan and shall be subject in all respects to the terms and
conditions of this Plan, which are controlling. All Awards of Restricted Stock
granted pursuant to this Section 13 shall be rounded down to the nearest whole
share to the extent necessary to ensure that no shares of Restricted Stock
representing fractional shares are issued. The Awards will vest in five equal
installments, with the first installment vesting immediately upon the
ratification of the Plan by the Corporation's stockholders and each additional
installment vesting after the end of the subsequent calendar years, as long as
the Director maintains Continuous Service with the Bank after the Conversion.
5
<PAGE>
- ------------------------------------------------------------------------------
1997 ANNUAL REPORT
- ------------------------------------------------------------------------------
HBANCORPORATION, INC.
<PAGE>
- ------------------------------------------------------------------------------
TABLE OF CONTENTS
- ------------------------------------------------------------------------------
President's Message........................................... 1
Selected Financial Information................................ 2
Management's Discussion and Analysis of Financial
Condition and Results of Operations......................... 4
Financial Statements.......................................... 15
Stockholder Information....................................... 33
Corporate Information......................................... 34
i
<PAGE>
[HBANCORPORATION, INC. LETTERHEAD]
Dear Stockholder:
I am pleased to report that HBancorporation, Inc. completed another
successful year in 1997. During the year ended June 30, 1997, total assets
increased from $17.2 million to $17.8 million, or 3.5%. Net income for the
fiscal year increased to $218,000 from $171,000 for the same period in 1996, or
27.5%. We attribute our fiscal 1997 results to an increase in loans receivable
(a result of the strategic focus placed on increasing market share) and
mortgage-backed securities, as well as a decrease in rates paid on average
interest-bearing liabilities. We also applaud the commitment and dedicated
performance by our employees and the continuing support from our customers.
We face a future that promises continuing change and challenge for the
financial services industry. Competition continues to increase, particularly
from nonbanks, and technology alters the nature of both our competition and our
customers' expectations. Change also brings opportunity, particularly for
institutions that have the flexibility to adapt. We believe that the franchise
we have developed since we converted to a stock company and adopted a bank
charter provides a solid base from which to continue building an organization
that can prosper in a changing environment.
Our goals for fiscal 1998 are aggressive as we continue to refine our
business mix, reallocate resources to areas with the most attractive
opportunities and maintain the high quality, customer service that is essential
for our success. We thank you for your continued support.
Sincerely,
/s/ Kevin J. Kavanaugh
-----------------------
Kevin J. Kavanaugh
President
1
<PAGE>
SELECTED FINANCIAL INFORMATION
<TABLE>
<CAPTION>
June 30,
---------------------------------------------------------------
1993 1994 1995 1996 1997
------------ ------------------------ -------------------------
(In Thousands)
Selected Financial Condition Data:
<S> <C> <C> <C> <C> <C>
Total assets.............................................. $12,864 $12,768 $13,127 $17,239 $17,802
Loans receivable, net..................................... 9,431 9,368 9,589 10,247 13,507
Mortgage-backed securities................................ 68 51 42 32 1,024
Securities available-for-sale............................. 1,089 1,107 1,173 2,132 1,098
FHLB stock................................................ 99 74 75 66 66
FRB stock................................................. --- --- --- 68 68
Interest-bearing deposits................................. 1,947 1,965 2,057 4,396 1,458
Deposits.................................................. 9,327 9,032 9,167 8,912 9,244
Retained earnings - substantially restricted.............. 3,444 3,653 3,834 8,158 8,284
Year Ended June 30,
-------------------------------------------------------------
1993 1994 1995 1996 1997
----------------------------------- -------------------------
(In Thousands)
Selected Operations Data:
Total interest income...................................... $1,018 $ 894 $ 962 $1,123 $1,410
Total interest expense..................................... 379 319 410 469 403
------- -------- ------- ------- --------
Net interest income........................................ 639 575 552 654 1,007
Provision for loan losses.................................. 47 --- 10 5 10
------- --------- ------- ------- --------
Net interest income after provision for loan losses........ 592 575 542 649 997
Fees and service charges................................... 2 2 3 3 17
Other non-interest income.................................. 6 4 1 2 ---
-------- --------- -------- ------- --------
Total non-interest income.................................. 8 6 4 5 17
Total non-interest expense................................. 264 271 330 409 622
------- -------- ------- ------- -------
Income before taxes and extraordinary item................. 336 310 216 245 392
Income tax provision....................................... 146 113 74 74 174
------- ------- -------- ------- -------
Net income................................................. $ 190 $ 197 $ 142 $ 171 $ 218
======= ======= ======= ======= =======
</TABLE>
2
<PAGE>
<TABLE>
<CAPTION>
Year Ended June 30,
--------------------------------------------------------------
1993 1994 1995 1996 1997
--------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Selected Financial Ratios and Other Data:
Performance Ratios:
Return on assets (ratio of net income to average total
assets)............................................... 1.45% 1.54% 1.10% 1.13% 1.24%
Return on retained earnings (ratio of net income to 2.65
average equity)....................................... 5.67 5.55 3.79 2.85
Interest rate spread information:
Average during period.................................. 3.90 3.59 3.00 3.14 3.19
End of period.......................................... 4.00 3.58 2.96 2.59 3.70
Net interest margin(1).................................. 4.88 4.53 4.24 4.51 5.58
Ratio of operating expense to average total assets...... 2.02 2.11 2.55 2.69 3.55
Ratio of average interest-earning assets to average
interest-bearing liabilities.......................... 1.34x 1.38x 1.39x 1.42x 2.07x
Quality Ratios:
Non-performing assets to total assets at end of period... .12 --- --- --- ---
Allowance for loan losses to non-performing loans........ 7.53x --- --- --- ---
Allowance for loan losses to loans receivable, net....... 1.20 1.21 1.18 1.16 .95
Capital Ratios:
Retained earnings to total assets at end of period....... 26.78 28.61 29.21 47.32 46.53
Average retained earnings to average assets.............. 25.64 27.69 28.91 39.49 47.28
Other Data:
Number of full-service offices........................... 1 1 1 1 1
</TABLE>
- ---------
(1) Net interest income divided by average interest earning assets.
3
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General
HBancorporation, Inc. (the "Company") was formed in December 1995 by
Lawrenceville Federal Savings and Loan Association (the "Association"), the
predecessor institution to Heritage National Bank (the "Bank"). The
acquisition of the Association by the Company was consummated on March 29,
1996, in connection with the Association's conversion (i) from the mutual to
the stock form and (ii) from a federal savings bank to a national bank. The
Company changed its name from Heritage Financial Corporation to
HBancorporation, Inc., on October 29, 1996. All references to the Company
prior to March 29, 1996, except where otherwise indicated, are to the Bank.
The earnings of the Company depend primarily on its level of net
interest income, which is the difference between interest earned on
interest-earning assets, consisting primarily of mortgage loans, commercial
business loans, including agricultural equipment loans, consumer loans,
finance leases and other investments, including mortgage-backed securities,
and the interest paid on interest-bearing liabilities, consisting of deposits.
Net interest income is a function of the Company's "interest rate spread,"
which is the difference between the average yield earned on interest-earning
assets and the average rate paid on interest-bearing liabilities. The interest
rate spread is affected by regulatory, economic and competitive factors that
influence interest rates, loan demand and deposit flows. The Company, like
other financial institutions, is subject to interest-rate risk to the degree
that its interest-earning assets mature or reprice at different times, or on a
different basis, than its interest-bearing liabilities. To a lesser extent,
the Company's operating results are also affected by the amount of its
non-interest income, including service charges and other income. Non-interest
expense consists primarily of compensation and benefits, occupancy and
equipment, federal insurance premiums, data processing, and other operating
expenses. The Company's operating results are significantly affected by
general economic conditions, in particular, the changes in market interest
rate, government policies and actions by regulatory authorities. Management is
not aware of any known trends, events or uncertainties that are likely to have
a material effect on the Company's liquidity, capital resources or operations.
The Company primarily serves Lawrence County, Illinois and Knox
County, Indiana. The Company currently has one office located in
Lawrenceville, Illinois.
Financial Condition
June 30, 1997 Compared to June 30, 1996
Total assets increased $563,000 or 3.3%, to $17,802,000 at June 30,
1997 from $17,239,000 at June 30, 1996, primarily as a result of a $3,260,000
increase in loans receivable offset by a $2,457,000 decrease in
interest-bearing deposits.
Cash and cash equivalents decreased by $2,203,000 or 57.2% to
$1,650,000 at June 30, 1997 from $3,853,000 at June 30, 1996. Certificates of
deposit with other banks decreased by $436,000 or 72.6%, to $165,000 at June
30, 1997 from $601,000 at June 30, 1996. These decreases are due to an
increase in loans receivable. Loans receivable, net increased by $3,260,000 or
31.8% to 13,507,000 at June 30, 1997 from $10,247,000 at June 30, 1996. This
increase is primarily due to increased loan originations as a result of
competitive interest rates and terms, aggressive marketing by cross-selling
existing individual and corporate customers and attracting new relationships
through a high level of personal service to individuals and small businesses.
Liabilities increased approximately $438,000 or 4.8%, to $9,519,000
at June 30, 1997 from $9,081,000 at June 30, 1996. Deposits increased by
$332,000 or 3.7%, to $9,244,000 at June 30, 1997 from $8,912,000 at June 30,
1996. Other liabilities increased by $107,000 or 63.6% to $275,000 at June 30,
1997 from $168,000 at June 30, 1996. Interest credited during 1997 totaled
$204,000, while deposits exceeded withdrawals by $128,000.
4
<PAGE>
Stockholders' equity increased by $126,000 or 1.5%, to $8,284,000 at
June 30, 1997 from $8,158,000 at June 30, 1996, primarily due to operations of
the bank less dividends paid.
June 30, 1996 Compared to June 30, 1995
Total assets increased $4,112,000 or 31.3%, to $17,239,000 at June
30, 1996 from $13,127,000 at June 30, 1995, primarily as a result of the
Association's conversion from mutual to stock form and the Company's sale of
stock as well as a $658,000 increase in loans receivable.
Cash and cash equivalents increased by $1,816,000 or 89.1%, to
$3,853,000 at June 30, 1996 from $2,037,000 at June 30, 1995. Securities
available-for-sale increased by $959,000 or 81.8%, to $2,132,000 at June 30,
1996 from $1,173,000 at June 30, 1995. Certificates of deposit with other
banks increased by $543,000 or 936.4%, to $601,000 at June 30, 1996 from
$58,000 at June 30, 1995. These increases are due to the sales of stock and
mutual funds which enabled the Bank to increase their investment portfolio.
Loans receivable, net increased by $658,000 or 6.9%, to $10,247,000 at June
30, 1996 from $9,589,000 at June 30, 1995. This increase is primarily due to
increased loan originations as a result of competitive interest rates and
terms, aggressive marketing by cross-selling existing individual and
corporate customers and attracting new relationships through a high level of
personal service to individuals and small businesses.
Liabilities decreased approximately $211,000 or 2.3%, to $9,081,000
at June 30, 1996 from $9,292,000 at June 30, 1995. Deposits decreased by
$255,000 or 2.8% to $8,912,000 at June 30, 1996 from $9,167,000 at June 30,
1995. Other liabilities increased by $43,000 or 34.5% to $168,000 at June 30,
1996 from $125,000 at June 30, 1995. Interest credited during 1996 totaled
$234,000, while withdrawals exceeded deposits by $489,000.
Stockholders' equity increased by $4,323,000 or 112.7% to $8,158,000
at June 30, 1996 from $3,835,000 at June 30, 1995, primarily due to the
infusion of capital from the stock offering.
Operating Results
Comparison of Operating Results for the Years Ended June 30, 1997 and 1996
Performance Summary. Net income increased by $47,000, or 27.5% to
$218,000 from $171,000 for the year ended June 30, 1997. The increase was
primarily due to an increase in net interest income of $353,000, offset by an
increase of non-interest expense of $213,000. For the years ended June 30,
1997 and 1996, the returns on average assets were 1.24% and 1.13%,
respectively; while the returns on average equity were 2.65% and 2.85%,
respectively.
Net Interest Income. Net interest income increased by $353,000 from
fiscal 1996 to 1997. This reflects an increase of $287,000 in interest income
to $1,410,000 from $1,123,000 and a decrease in interest expense of $66,000 to
$403,000 from $469,000. The net increase was primarily due to an increase in
the amount of interest-earning assets. The Company's ratio of average
interest-earning assets to average interest-bearing liabilities increased to
2.07x for 1997 compared to 1.42x for 1996.
For the year ended June 30, 1997, the average yield on
interest-earning assets was 7.81% compared to 7.75% for 1996. The average cost
of interest-bearing liabilities was 4.62% for the year ended June 30, 1997, an
increase from 4.61% for 1996. The average balance of interest-earning assets
increased by $3,551 to $18,046 for the year ended June 30, 1997, compared to
$14,495 for fiscal 1996. During this same time period, the average balance of
interest-bearing liabilities decreased by $1,449 to $8,725 for the year ended
June 30, 1997, compared to $10,174 for fiscal 1996.
Due to the higher rates on loans, the average interest rate spread
was 3.19% for the year ended June 30, 1997, compared to 3.14% for fiscal 1996.
The average net interest margin was 5.58% for the year ended June 30, 1997
compared to 4.51% for the year ended June 30, 1996.
5
<PAGE>
Provision for Loan Losses. During the year ended June 30, 1997, the
Company recorded a provision for additional loan losses of $10,000 compared to
$5,000 for fiscal 1996. The amount of the provision reflects management's
assessment of the total risk of its loan portfolio, and growth in the loan
portfolio, which consists primarily of one- to four-family loans, and the
amount of change that the Company has experienced in the composition of its
loan portfolio, and was made to maintain the allowance for loan losses at a
level deemed adequate by management.
Management will continue to monitor its allowance for loan losses and
make additions to the allowance through the provision for loan losses as
economic conditions and other factors dictate. Although the Company maintains
its allowance for loan losses at a level which it considers to be adequate to
provide for loan losses, there can be no assurance that future losses will not
exceed estimated amounts or that additional provisions for loan losses will
not be required in the future.
Non-Interest Income. For the year ended June 30, 1997, non-interest
income increased by $12,000 or 240.0%, to $17,000 from $5,000 for fiscal 1996.
This increase was due primarily to service charges on checking accounts and
loans for fees for issuing travelers' checks.
Non-Interest Expense. Non-interest expense increased by $213,000, or
52.1%, to $622,000 for the year ended June 30, 1997 from $409,000 for the year
ended June 30, 1996. Compensation increased $109,000 to $276,000 in fiscal
1997 from $167,000 in fiscal 1996, due primarily to raises, overtime, and ESOP
and RRP expense. Federal insurance premiums increased $58,000 to $84,000 in
fiscal 1997 from $26,000 in fiscal 1996, due to a one-time assessment fee on
SAIF/BIF deposits. General and administrative expenses increased due to the
Company becoming a publicly traded company.
Income Taxes. Income taxes increased by $100,000 to $174,000 for the
year ended June 30, 1997 from $74,000 for the year ended June 30, 1996. This
increase was due to higher income before income taxes. The Company's effective
tax rates were 41% and 30% for fiscal 1997 and 1996, respectively.
Comparison of Operating Results for the Years Ended June 30, 1996 and 1995
Performance Summary. Net income increased by $29,000, or 20.8%, to
$171,000 from $142,000 for the year ended June 30, 1996. The increase was
primarily due to an increase of net interest income of $101,000, offset by an
increase of non-interest expense of $79,000. For the years ended June 30, 1996
and 1995, the returns on average assets were 1.13% and 1.10% respectively,
while the returns on average equity were 2.85% and 3.79%, respectively.
Net Interest Income. Net interest income increased by $101,000 from
fiscal 1995 to 1996. This reflects an increase of $161,000 in interest income
to $1,123,000 from $962,000 and an increase in interest expense of $60,000 to
$469,000 from $410,000. The net increase was primarily due to an increase in
the amount of interest-earning assets. The Company's ratio of average
interest-earning assets to average interest-bearing liabilities increased to
1.42x for 1996 compared to 1.39x for 1995.
For the year ended June 30, 1996, the average yield on
interest-earning assets was 7.75% compared to 7.39% for 1995. The average cost
of interest-bearing liabilities was 4.61% for the year ended June 30, 1996, an
increase from 4.39% for 1995. The average balance of interest-earning assets
increased by $1,476 to $14,495 for the year ended June 30, 1996, compared to
$13,019 for fiscal 1995. During this same time period, the average balance of
interest-bearing liabilities increased by $824 to $10,174 for the year ended
June 30, 1996, compared to $9,350 for fiscal 1995.
Due to the higher rates on certificates of deposit and loans, the
average interest rate spread was 3.14% for the year ended June 30, 1996
compared to 3.00% for fiscal 1995. The average net interest margin was 4.51%
for the year ended June 30, 1996 compared to 4.24% for the year ended June 30,
1995.
6
<PAGE>
Provision for Loan Losses. During the year ended June 30, 1996, the
Company recorded a provision for additional loan losses of $5,000 compared to
$9,700 for fiscal 1995. The small amount of the provision reflects
management's assessment of the total risk of its loan portfolio, and growth in
the loan portfolio, which consists primarily of one-to-four family loans, and
the relatively small amount of change that the Company has experienced in the
composition of its loan portfolio, and was made to maintain the allowance for
loan losses at a level deemed adequate by management.
Management will continue to monitor its allowance for loan losses and
make additions to the allowance through the provision for loan losses as
economic conditions and other factors dictate. Although the Company maintains
its allowance for loan losses at a level which it considers to be adequate to
provide for loan losses, there can be no assurance that future losses will not
exceed estimated amounts or that additional provisions for loan losses will
not be required in the future.
Non-Interest Income. For the year ended June 30, 1996, non-interest
income increased by $1,000, or 25.0%, to $5,000 from $4,000 for fiscal 1995.
This increase was due primarily to a gain on the sales of stock and mutual
funds.
Non-Interest Expense. Non-interest expense increased by $79,000, or
23.9%, to $409,000 for the year ended June 30, 1996 from $330,000 for the year
ended June 30, 1995. Salaries increased $29,000 to $167,000 in fiscal 1996
from $138,000 in fiscal 1995, due primarily to raises and overtime expense.
Other operating expenses increased $44,000 to $100,000 in fiscal 1996 from
$56,000 in fiscal 1995, due primarily to a $34,000 deposit into an escrow
account to settle a loan dispute. General and administrative expenses
increased due to the conversion from a thrift to a national bank.
Income Taxes. Income taxes decreased by $1,000 to $74,000 for the
year ended June 30, 1996 from $75,000 for the year ended June 30, 1995. This
decrease was due to lower tax rates. The Company's effective tax rates were
30% and 35% for fiscal 1996 and 1995, respectively.
7
<PAGE>
Average Balances/Interest Rates and Yields. The following table
presents for the periods indicated the total dollar amount of interest income
from average interest earning assets and the resultant yields, as well as the
interest expense on average interest bearing liabilities, expressed both in
dollars and rates. No tax equivalent adjustments were made. All average
balances are monthly average balances. Non-accruing loans have been included
in the table as loans carrying a zero yield.
<TABLE>
<CAPTION>
Year Ended June 30,
-----------------------------------------------------------------------------------------------
1995 1996 1997
-----------------------------------------------------------------------------------------------
Average Interest Average Interest Average Interest
Outstanding Earned/ Yield/ Outstanding Earned/ Yield/ Outstanding Earned/ Yield/
Balance Paid Rate Balance Paid Rate Balance Paid Rate
------------- -------- ------ ----------- --------- ------- ----------- -------- ------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-Earning Assets:
Loans receivable(1)................ $ 9,795 $ 779 7.95% $ 9,796 $ 844 8.62% $13,517 $1,110 8.21%
Mortgage-backed securities......... 42 4 9.52 38 3 7.89 1,028 71 6.91
Securities available-for-sale...... 1,106 67 6.06 612 40 6.54 957 70 7.31
Interest-bearing deposits.......... 2,002 107 5.34 3,944 229 5.81 2,410 151 6.27
FHLB stock......................... 74 5 6.76 72 5 6.94 66 4 6.06
FRB stock.......................... --- --- -- 33 2 6.00 68 4 5.88
--------- ------ -------- ------- --------- -------
Total interest-earning assets(1).. $13,019 962 7.39 $14,495 1,123 7.75 $18,046 1,410 7.81
======= ----- ======= ------ ======= ------
Interest-Earning Liabilities:
Savings deposits................... $ 1,225 42 3.43 1,900 61 3.21 1,865 58 3.11
Money market....................... 1,256 46 3.66 1,349 46 3.41 420 13 3.10
Certificate accounts............... 6,869 322 4.69 6,925 362 5.23 6,440 332 5.16
------- ----- -------- ------ ------- ------
Total interest-bearing liabilities $ 9,350 410 4.39 $10,174 469 4.61 $ 8,725 403 4.62
======= ----- ======= ------ ======= ------
Net interest income................. $552 $ 654 $1,007
==== ====== ======
Net interest rate spread............ 3.00% 3.14% 3.19%
==== ==== ====
Net earning assets.................. $ 3,669 $ 4,321 $ 9,321
======= ======= =======
Net yield on average interest-
earning assets...................... 4.24% 4.51% 5.58%
==== ==== ====
Average interest-earning assets to
average interest-bearing liabilities 1.39x 1.42x 2.07x
==== ====
</TABLE>
- -----------------
(1) Includes finance leases. Loans receivable were calculated net of
deferred loan fees, loan discounts, loans in process and loss
reserves.
8
<PAGE>
The following table presents the weighted average yields earned on
loans, investments and other interest-earning assets, and the weighted average
rates paid on savings deposits and the resultant interest rate spreads at the
dates indicated. Weighted average balances are based on monthly balances.
<TABLE>
<CAPTION>
At June 30,
------------------------------
1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
Weighted average yield on:
Loans receivable......................................... 7.95% 8.62% 8.21%
Mortgage-backed securities............................... 9.52 7.89 6.91
Securities - available for sale.......................... 6.06 6.54 7.31
Interest-earning deposits................................ 5.34 5.81 6.27
FHLB stock .............................................. 6.76 6.94 6.06
FRB stock ............................................... --- 6.00 5.88
Combined weighted average yield on
interest-earning assets............................. 7.39 7.75 7.81
Weighted average rate paid on:
Savings deposits......................................... 3.43 3.21 3.11
Money market............................................. 3.66 3.41 3.10
Certificate accounts..................................... 4.69 5.23 5.16
Combined weighted average rate paid on interest-
bearing liabilities.................................. 4.39 4.61 4.62
Spread.................................................... 3.00% 3.14% 3.19%
</TABLE>
9
<PAGE>
Rate/Volume Analysis of Net Interest Income. The following schedule
presents the dollar amount of changes in interest income and interest expense
for major components of interest-earning assets and interest-bearing
liabilities. It distinguishes between the changes related to outstanding
balances and that due to the changes in interest rates. For each category of
interest-earning assets and interest-bearing liabilities, information is
provided on changes attributable to (i) changes in volume (i.e., changes in
volume multiplied by old rate) and (ii) changes in rate (i.e., changes in rate
multiplied by old volume). For purposes of this table, changes attributable to
both rate and volume, which cannot be segregated, have been allocated
proportionately to the change due to volume and the change due to rate.
<TABLE>
<CAPTION>
Year Ended June 30, Year Ended June 30,
---------------------------- ------------------------------
1995 vs. 1996 1996 vs. 1997
---------------------------- ------------------------------
Increase Increase
(Decrease) (Decrease)
Due to Total Due to Total
--------------- Increase ----------------- Increase
Volume Rate (Decrease) Volume Rate (Decrease)
------ ---- ---------- ------ ---- ----------
(Dollars in Thousands) (Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable....................... $ --- $ 65 $ 65 $314 $(48) $266
Mortgage-backed securities............. --- (1) (1) 73 (5) 68
Securities available-for-sale.......... (31) 4 (27) 23 7 30
Interest-bearing deposits.............. 108 14 122 (86) 8 (78)
FHLB stock............................. --- --- --- ---- (1) (1)
FRB stock.............................. 2 --- 2 2 ---- 2
---- ---- ---- ---- ---- -----
Total interest-earning assets........ $ 79 $ 82 161 $326 $(39) 287
==== ==== ---- ==== ==== -----
Interest-bearing liabilities:
Savings deposits....................... (4) 23 19 (1) (2) (3)
Money market........................... 3 (3) --- (31) (2) (33)
Certificate accounts................... (3) 43 40 (25) (5) (30)
----- ---- ---- ---- ---- ----
Total interest-bearing liabilities... $ (4) $ 63 59 $(57) $ (9) (66)
===== ==== ---- ==== ==== ----
Net interest income..................... $102 $353
==== ====
</TABLE>
Asset/Liability Management
One of the Company's principal financial objectives is to achieve
long-term profitability while reducing its exposure to fluctuations in
interest rates. The Company has sought to reduce exposure of its earnings to
changes in market interest rates by managing the mismatch between asset and
liability maturities and interest rates. The principal element in achieving
this objective has been to increase the interest-rate sensitivity of the
Company's assets by originating loans with interest rates subject to periodic
repricing to market conditions. Accordingly, the Company has emphasized the
origination of three to five year balloon mortgage loans, short-term
commercial business, real estate (with maximum maturities of five years) and
consumer loans for retention in its portfolio.
An asset or liability is interest rate sensitive within a specific
time period if it will mature or reprice within that time period. If the
Company's assets mature or reprice more quickly or to a greater extent than
its liabilities, the Company's net portfolio value and net interest income
would tend to increase during periods of rising interest rates but decrease
during periods of falling interest rates. If the Company's assets mature or
reprice more slowly or to a lesser extent than its liabilities, the Company's
net portfolio value and net interest income would tend to decrease during
periods of rising interest rates but increase during periods of falling
interest rates.
10
<PAGE>
The Company's Board of Directors has formulated an Asset/Liability
Management Policy designed to promote long-term profitability while managing
interest-rate risk. The Company recognizes the inherent risk in its portfolio,
particularly in periods of fluctuating interest rates. Management's principal
strategy in managing the Company's interest rate risk has been to maintain
short and intermediate term assets in the portfolio, including three and five
year balloon mortgage loans, as well as increased levels of commercial
business and real estate loans and consumer loans, which typically are for
short or intermediate terms and carry higher interest rates than residential
mortgage loans. In addition, in managing the Company's portfolio of investment
securities and mortgage-backed and related securities, management seeks to
purchase securities that mature on a basis that approximates as closely as
possible the estimated maturities of the Company's liabilities. The Company
does not engage in hedging activities.
Net Portfolio Value. The Company voluntarily measures its interest
rate risk ("IRR") into its internal risk-based capital calculation. The IRR
component is a dollar amount that measures the terms of the sensitivity of the
Company's net portfolio value ("NPV") to changes in interest rates. NPV is the
difference between incoming and outgoing discounted cash flows from assets,
liabilities, and off-balance sheet contracts. The Company measures the change
to its NPV as a result of a hypothetical 200 basis point ("bp") change in
market interest rates. Management reviews the IRR measurements on a quarterly
basis. In addition to monitoring selected measures on NPV, management also
monitors effects on net interest income resulting from increases or decreases
in rates. This measure is used in conjunction with NPV measures to identify
excessive interest rate risk. The following table presents the Company's NPV
at June 30, 1997, as calculated by the Company.
<TABLE>
<CAPTION>
At June 30, 1997
-----------------------------------------------------------------
Change in Rate Net Portfolio Value NPV as % of PV of Assets
- -------------- ---------------------------------- ------------------------
(Basis Points) $ Amount $ Change % Change NPV Ratio BP Change
-------------- -------- -------- -------- --------- ---------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
+400 $8,628 $344 4.1% 48.5% (167)bp
+300 8,535 251 3.0 47.9 (120)
+200 8,465 181 2.2 47.6 (86)
+100 8,376 92 1.1 47.1 (43)
0 8,284 --- --- 46.5 ---
-100 8,194 (90) (1.1) 46.0 41
-200 8,097 (187) (2.2) 45.5 85
-300 8,002 (282) (3.4) 45.0 127
-400 7,907 (377) (4.5) 44.4 167
</TABLE>
In the above table, the first column on the left presents the basis
point increments of yield curve shifts. The second column presents the overall
dollar amount of NPV at each basis point increment. The third and fourth
columns present the Company's actual position in dollar change and percentage
change in NPV at each basis point increment. The remaining columns present the
Company's percentage change and basis point change in its NPV as a percentage
of portfolio value of assets.
Certain shortcomings are inherent in the method of analysis presented
in the computation of NPV. Although certain assets and liabilities may have
similar maturities or periods within which they will reprice, they may react
differently to changes in market interest rates. The interest rates on certain
types of assets and liabilities may fluctuate in advance of changes in market
interest rates, while interest rates on other types may lag behind changes in
market rates.
The Company's Board of Directors is responsible for reviewing the
Company's asset and liability policies. The Board meets monthly to review
interest rate risk and trends, as well as liquidity and capital ratios and
requirements. The Company's management is responsible for administering the
policies and determinations of the Board of Directors with respect to the
Company's asset and liability goals and strategies.
11
<PAGE>
Liquidity and Capital Resources
The Company's primary sources of funds are deposits, repayments and
prepayments of loans and interest income. Although maturity and scheduled
amortization of loans are relatively predictable sources of funds, deposit
flows and prepayments on loans are influenced significantly by general
interest rates, economic conditions and competition.
The primary investment activity of the Company is originating one- to
four-family residential mortgages, commercial business and real estate loans,
and consumer loans to be held to maturity. The Company has in the past
purchased whole loans and loan participations, particularly with respect to
commercial loans, from other Illinois banks. For the fiscal years ended June
30, 1997, 1996, and 1995, the Company originated loans for its portfolio in
the amount of $8,801,000, $4,030,000, and $1,651,000 respectively. Purchases
of loans during fiscal 1997, 1996 and 1995 totaled $651,000, $779,000, and
$839,000 respectively. For the fiscal years ended June 30, 1997, 1996 and
1995, these activities were funded primarily by principal repayments of
$5,663,000, $3,643,000 and $2,209,000 respectively.
The Company's liquid assets are cash and cash equivalents, which
include short-term investments. At June 30, 1997, 1996 and 1995, cash and cash
equivalents were $1,650,000, $3,853,000 and $2,037,000 respectively.
Liquidity management for the Company is both an ongoing and long-term
function of the Company's Asset/Liability management strategy. Excess funds
generally are invested in deposits at the Federal Home Loan Bank ("FHLB") of
Chicago or the Federal Reserve Bank ("FRB") of St. Louis. Should the Company
require funds beyond its ability to generate internally, additional sources of
funds are available through the FHLB of Chicago and the FRB of St. Louis. The
Company has the ability to pledge its FHLB of Chicago and FRB of St. Louis
stock or certain other assets as collateral for such advances.
Federally insured financial institutions, such as the Bank, are
required to maintain a minimum level of regulatory capital. The regulations
issued by the Office of the Comptroller of the Currency ("OCC") establish two
capital standards for national banks: a leverage requirement and a risk-based
capital requirement. In addition, the OCC may, on a case-by-case basis,
establish individual minimum capital requirements for a national bank that
vary from the requirements which would otherwise apply under OCC regulations.
The Bank currently exceeds all of its regulatory capital
requirements. At June 30, 1997, the Bank had a leverage ratio of $6.2 million,
or 35.0% of adjusted total assets, which is approximately $5.7 million above
the minimum requirement of 3.0% of adjusted total assets. Also, on June 30,
1997, the Bank had $6.1 million available for risk-based capital, or 47.9% or
risk-weighted assets of $12.8 million, which was approximately $5.0 million
above the 8.0% in effect on that date.
Recent Accounting Developments
The Financial Accounting Standards Board has issued SFAS No. 114,
"Accounting by Creditors for Impairment of a Loan" and SFAS No. 118,
"Accounting by Creditors for Impairment of a Loan - Income Recognition and
Disclosures." SFAS No. 114, as amended by SFAS No. 118, requires that impaired
loans be measured at the present value of expected future cash flows
discounted at the loan's effective interest rate or, as a practical expedient,
at the loan's observable market price or the fair value of the collateral if
the loan is collateral dependent. Homogeneous loans, such as single-family
loans and most categories of consumer loans, are excluded from this
requirement. Adoption of these standards is effective for the fiscal year
beginning July 1, 1995, based on the present status of the loan portfolio. The
adoption of SFAS Nos. 114 and 118 did not have a material effect on the Bank's
financial condition or results of operation.
Statement of Financial Accounting Standards No. 123, "Accounting
for Stock-Based Compensation," is effective beginning calendar year 1996. The
statement encourages employers to account for stock compensation
12
<PAGE>
awards based on their fair value at the date the awards are granted. However,
under the statement, employers can choose not to apply the new accounting
method and continue to apply the current accounting requirements, which
generally result in no compensation cost for most fixed stock-option plans.
The adoption of this statement did not have a material effect on the Company's
financial position or results of operation.
The Financial Accounting Standards Board has issued SFAS No. 125,
"Accounting for Transfers and Servicing of Financial Assets and Extinguishment
of Liabilities" and SFAS No. 127, "Deferral of the Effective Date of Certain
Provisions of FASB Statement No. 125." These standards do not apply to the
Bank.
The Financial Accounting Standards Board has issued SFAS No. 128,
"Earnings per Share," and SFAS No. 129, "Disclosure of Information About
Capital Structure." These standards are effective for periods ending after
December 15, 1997, and are not expected to have any effect on the Bank.
The Financial Accounting Standards Board has issued SFAS No. 130,
"Reporting Comprehensive Income." SFAS No. 130 is effective for fiscal years
beginning after December 15, 1997. This standard requires disclosure only and
is not expected to have any impact on the Company's financial condition or
results of operation.
Impact of Inflation and Changing Prices
The Financial Statements and Notes thereto presented herein have been
prepared in accordance with generally accepted accounting principles, which
generally requires the measurement of financial position and operating results
in terms of historical dollars without considering the change in the relative
purchasing power of money over time due to inflation. The impact of inflation
is reflected in the increased cost of the Company's operations. Nearly all the
assets and liabilities of the Company are financial, unlike most industrial
companies. As a result, the Company's performance is directly impacted by
changes in interest rates, which are indirectly influenced by inflationary
expectations. The Company's ability to match the interest sensitivity of its
financial assets to the interest sensitivity of its financial liabilities in
its asset/liability management may tend to minimize the effect of change in
interest rates on the Company's performance. Changes in interest rates do not
necessarily move to the same extent as changes in the price of goods and
services. In the current interest rate environment, liquidity and the maturity
structure of the Company's assets and liabilities are critical to the
maintenance of acceptable performance levels.
13
<PAGE>
[LETTERHEAD OF KEMPER CPA GROUP LLC]
INDEPENDENT AUDITOR'S REPORT
To the Shareholders and Board of Directors
HBancorporation, Inc.
Lawrenceville, Illinois
We have audited the consolidated statements of financial condition of
HBancorporation, Inc. as of June 30, 1996 and 1997, and the related
consolidated statements of income, changes in stockholders' equity, and cash
flows for each of the three years in the period ended June 30, 1997. These
consolidated financial statements are the responsibility of the Corporation's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of HBancorporation, Inc. as of June 30, 1996 and 1997, and the results of
their operations and their cash flows for each of the three years in the
period ended June 30, 1997, in conformity with generally accepted accounting
principles.
As disclosed in Note 1 to the financial statements, the Company adopted
Statement of Financial Accounting Standards No. 114 and Statement of Financial
Accounting Standards No. 118, "Accounting by Creditors for Impairment of a
Loan," effective for the fiscal year beginning July 1, 1995.
/s/ Kemper CPA Group L.L.C.
------------------------------
CERTIFIED PUBLIC ACCOUNTANTS
AND CONSULTANTS
Washington, Indiana
July 15, 1997
14
<PAGE>
HBANCORPORATION, INC.
LAWRENCEVILLE, ILLINOIS
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
JUNE 30,
<TABLE>
<CAPTION>
1996 1997
---------------- ---------------
<S> <C> <C>
ASSETS
Cash and Cash Equivalents:
Cash $ 103,306 $ 357,424
Interest bearing deposits 3,749,850 1,292,870
---------------- ---------------
Total Cash and Cash Equivalents 3,853,156 1,650,294
Certificates of deposit with other banks 601,459 164,730
Investment securities held-to-maturity at cost (fair
value $32,406 (1996) and $1,028,152 (1997)) 31,684 1,024,461
Investment securities available-for-sale at fair value 2,132,044 1,098,227
Loans receivable - net 10,247,277 13,506,764
Office properties and equipment, at cost,
less accumulated depreciation of $119,388
(1996) and $130,412 (1997) 42,944 39,153
Federal Home Loan Bank stock, at cost 66,000 66,000
Federal Reserve Bank stock, at cost 67,800 67,800
Other assets 196,309 184,849
---------------- ---------------
Total Assets $ 17,238,673 $ 17,802,278
================ ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Passbook savings $ 1,426,133 $ 1,940,931
Money market deposit accounts 1,180,808 384,333
Certificates of deposit 6,076,221 6,282,479
Certificates of deposit $100,000 and over 229,199 635,853
---------------- ---------------
Total Deposits 8,912,361 9,243,596
Other Liabilities 168,296 275,157
---------------- ---------------
Total Liabilities 9,080,657 9,518,753
---------------- ---------------
Stockholders' Equity:
Common stock, $.01 par value, 2 million shares authorized, 493,320
issued and outstanding (1996), 491,339 issued and
outstanding (1997) 4,933 4,933
Additional paid in capital 4,505,471 4,514,279
Retained earnings 3,954,530 4,015,104
Treasury stock, at cost -0- (26,838)
Net unrealized appreciation on investment securities
available-for-sale net of deferred tax 68,000 111,500
Unearned ESOP compensation (374,918) (335,453)
---------------- ----------------
Total Stockholders' Equity 8,158,016 8,283,525
---------------- ---------------
Total Liabilities and Stockholders' Equity $ 17,238,673 $ 17,802,278
================ ===============
</TABLE>
See notes to consolidated financial statements.
15
<PAGE>
HBANCORPORATION, INC.
LAWRENCEVILLE, ILLINOIS
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED JUNE 30,
<TABLE>
<CAPTION>
1995 1996 1997
--------------- --------------- ---------------
<S> <C> <C> <C>
INTEREST INCOME
Loans receivable $ 779,018 $ 852,933 $ 1,119,132
Investments 183,008 270,081 290,670
--------------- --------------- ---------------
Total Interest Income 962,026 1,123,014 1,409,802
--------------- --------------- ---------------
INTEREST EXPENSE
Deposits 409,644 469,235 402,304
--------------- --------------- ---------------
Total Interest Expense 409,644 469,235 402,304
--------------- --------------- ---------------
Net Interest Income 552,382 653,779 1,007,498
Provision for Loan Losses 9,686 5,000 10,000
--------------- --------------- ---------------
Net interest income after provision for
loan losses 542,696 648,779 997,498
--------------- --------------- ---------------
NONINTEREST INCOME
Gain (loss) on sale of securities -0- 1,299 -0-
Customer service fees and other 3,659 4,075 16,729
--------------- --------------- ---------------
Total Noninterest Income 3,659 5,374 16,729
--------------- --------------- ---------------
NONINTEREST EXPENSES
General and administrative
Compensation and benefits 190,761 230,410 321,426
Occupancy and equipment 43,046 38,148 39,094
Deposit insurance premium 25,530 26,199 22,140
SAIF Assessment -0- -0- 62,144
Computer expense 15,038 14,660 21,877
Legal expense 1,579 7,657 50,787
Other 54,003 92,175 104,224
--------------- --------------- ---------------
Total Noninterest Expense 329,957 409,249 621,692
--------------- --------------- ---------------
INCOME BEFORE INCOME TAX 216,398 244,904 392,535
Income Tax Expense 74,681 73,654 174,100
--------------- --------------- ---------------
NET INCOME $ 141,717 $ 171,250 $ 218,435
=============== =============== ===============
Netincome per share since conversion on March 29, 1996,
based on weighted average shares outstanding of
493,320 (1996) and 465,207 (1997) N/A $ 0.42 $ 0.47
=============== =============== ===============
</TABLE>
See notes to consolidated financial statements.
16
<PAGE>
HBANCORPORATION, INC.
LAWRENCEVILLE, ILLINOIS
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Common Paid in Retained Treasury
Stock Capital Earnings Stock
------ ------- -------- --------
<S> <C> <C> <C> <C>
BALANCE, June 30, 1994 $ -0- $ -0- $ 3,641,563 $ -0-
Net income for the year ended June 30, 1995 -0- -0- 141,717 -0-
Change in net unrealized gain on securities
available-for-sale, net of applicable deferrred
income taxes of $25,437 -0- -0- -0- -0-
------------- ------------- ------------- -------------
BALANCE, June 30, 1995 -0- -0- 3,783,280 -0-
Net income for the year ended June 30, 1996 -0- -0- 171,250 -0-
Proceeds from issuance of common stock 4,933 4,505,471 -0- -0-
Effect of contribution to fund ESOP -0- -0- -0- -0-
Change in unrealized gain on securities available-for-
sale, net of applicable deferred income taxes of $43,000 -0- -0- -0- -0-
------------- ------------- ------------- -------------
BALANCE, June 30, 1996 4,933 4,505,471 3,954,530 -0-
Net income for the year ended June 30, 1997 -0- -0- 218,435 -0-
Purchase of treasury stock -0- -0- -0- (26,838))
Dividends declared -0- -0- (157,861) -0- )
Change in unrealized gain on securities available-for-
sale, net of applicable deferred income taxes of $78,500 -0- -0- -0- -0-
Effect of contribution to fund ESOP -0- -0- -0- -0-
Allocation of shares from ESOP -0- 8,808 -0- -0-
------------- ------------- ------------- -------------
BALANCE, June 30, 1997 $ 4,933 $ 4,514,279 $ 4,015,104 $ (26,838)
============= ============= ============= =============
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Unrealized Unearned
Gain (Loss) Compen- Total
Securities sation Equity
---------- --------- ------
<S> <S> <C> <C>
BALANCE, June 30, 1994 $ 11,370 $ -0- $ 3,652,933
Net income for the year ended June 30, 1995 -0- -0- 141,717
Change in net unrealized gain on securities
available-for-sale, net of applicable deferrred
income taxes of $25,437 39,787 -0- 39,787
------------- -------------- -------------
BALANCE, June 30, 1995 51,157 -0- 3,834,437
Net income for the year ended June 30, 1996 -0- -0- 171,250
Proceeds from issuance of common stock -0- (394,650) 4,115,754
Effect of contribution to fund ESOP -0- 19,732 19,732
Change in unrealized gain on securities available-for-
sale, net of applicable deferred income taxes of $43,000 16,843 -0- 16,843
------------- -------------- -------------
BALANCE, June 30, 1996 68,000 (374,918) 8,158,016
Net income for the year ended June 30, 1997 -0- -0- 218,435
Purchase of treasury stock -0- -0- (26,838)
Dividends declared -0- -0- (157,861)
Change in unrealized gain on securities available-for-
sale, net of applicable deferred income taxes of $78,500 43,500 -0- 43,500
Effect of contribution to fund ESOP -0- 39,465 39,465
Allocation of shares from ESOP -0- -0- 8,808
------------- -------------- -------------
BALANCE, June 30, 1997 $ 111,500 $ (335,453) $ 8,283,525
============= ============== =============
</TABLE>
See notes to consolidated financial statements.
17
<PAGE>
HBANCORPORATION, INC.
LAWRENCEVILLE, ILLINOIS
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED JUNE 30,
<TABLE>
<CAPTION>
1995 1996 1997
--------------- --------------- ---------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income $ 141,717 $ 171,250 $ 218,435
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 6,381 7,825 11,024
(Increase) decrease in other assets 4,621 (25,606) 38,980
(Increase) in interest receivable (12,911) (36,418) (27,520)
Increase in other liabilities 16,033 43,170 106,861
Provision for loan loss 9,686 5,000 10,000
(Gain) on sale of assets -0- (1,299) -0-
--------------- ---------------- ---------------
Cash provided by operating activities 165,527 163,922 357,780
--------------- --------------- ---------------
CASH FLOWS FROM INVESTING ACTIVITIES
Investments in certificates of deposit in other
financial institutions, net (increase) decrease (3,675) (543,425) 436,729
Purchase of Federal Home Loan Bank stock -0- (67,800) -0-
Proceeds from maturities of investments
held-to-maturity 8,832 10,812 7,223
Proceeds from maturities of investments
available-for-sale -0- 1,094,505 116,782
Purchase of investment securities available-for-sale -0- (2,026,775) -0-
Purchase of fixed assets (11,955) (32,802) (7,233)
Net (increase) decrease in loans (231,039) 663,369 (3,269,487)
--------------- --------------- ----------------
Cash (used) by investing activities (237,837) (902,116) (2,715,986)
--------------- --------------- ----------------
CASH FLOWS FROM FINANCING ACTIVITIES
Payment of dividends -0- -0- (157,861)
Net increase (decrease) in demand deposits, NOW
accounts, savings accounts and certificates of deposit 135,493 (1,561,636) 331,235
Proceeds from issuance of common stock -0- 4,115,754 -0-
Purchase of treasury stock -0- -0- (26,838)
Allocation of ESOP shares -0- -0- 8,808
--------------- --------------- ---------------
Cash provided by financing activities 135,493 2,554,118 155,344
--------------- --------------- ---------------
Net increase in cash and cash equivalents 63,183 1,815,924 (2,202,862)
Cash and Cash Equivalents at Beginning of Period 1,974,049 2,037,232 3,853,156
--------------- --------------- ---------------
Cash and Cash Equivalents at End of Period $ 2,037,232 $ 3,853,156 $ 1,650,294
=============== =============== ===============
Cash paid for:
Interest $ 387,629 $ 474,997 $ 390,253
=============== =============== ===============
Income taxes $ 68,100 $ 34,066 $ 126,418
=============== =============== ===============
</TABLE>
See notes to consolidated financial statements.
18
<PAGE>
HBANCORPORATION, INC.
LAWRENCEVILLE, ILLINOIS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
STOCK CONVERSION
HBancorporation, Inc. (the "Company") issued 493,320 shares; $.01 par value
common stock, for proceeds of $4,510,404 net expenses of approximately
$423,000. Heritage National Bank (the "Bank") converted from a mutual savings
association to a stock savings association and then to a national bank
immediately following the formation of the holding company and received
proceeds of $2,255,202 in exchange for all its common stock. This transaction
was accounted for using the historical cost method similar to that in pooling
of interest accounting. On April 1, 1996, the Company began trading as a
public company on the "pink sheets" published by the National Quotation
Bureau, Inc.
Federal regulations require that, upon conversion from a mutual to stock form
of ownership, a "liquidation account" be established by restricting a portion
of net worth for the benefit of eligible savings account holders who maintain
their savings accounts with the Bank after conversion. In the event of
complete liquidation (and only in such event) each savings account holder who
continues to maintain his savings account shall be entitled to receive a
distribution from the liquidation account after payment of all creditors, but
before any liquidation distribution with respect to capital stock. This
account will be proportionately reduced for any subsequent reduction in such
holders' savings account. Federal regulations impose limitations on the
payment of dividends and other capital distributions, including, among others,
that the Company may not declare or pay a cash dividend on any of its capital
stock if the effect thereof would cause the Bank's capital to be reduced below
the amount required for the liquidation account or the capital requirements
imposed by the Financial Institutions Reform, Recovery, and Enforcement Act.
The liquidation account balance was $3,819,589 at conversion.
EMPLOYEE STOCK OWNERSHIP PLAN
Compensation expense is recognized equal to the fair value of ESOP shares that
are committed to be released for allocation to participant accounts. To the
extent that the fair value of these shares differs from the original cost, the
difference is charged or credited to stockholders' equity (additional paid-in
capital). The cost of unallocated ESOP shares not yet committed to be released
is reflected as a reduction of stockholders' equity.
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of
HBancorporation, Inc. and its wholly owned subsidiary, Heritage National Bank.
All significant intercompany transactions and balances have been eliminated in
consolidation.
19
<PAGE>
HBANCORPORATION, INC.
LAWRENCEVILLE, ILLINOIS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
CASH EQUIVALENTS
For purposes of the statements of cash flows, the Bank considers cash and
deposits, except for certificates of deposits, with other financial
institutions to be cash equivalents.
INVESTMENT SECURITIES
Federal Home Loan Bank stock and Federal Reserve Bank stock are carried at
cost. Mortgage-backed securities that management has the ability and intent to
hold to maturity are classified as held-to-maturity and carried at cost,
adjusted for amortization of premiums and accretion of discounts using the
interest method. Other marketable securities are classified as
available-for-sale and are carried at fair value. Unrealized gains or losses
on securities available-for-sale are reported as a separate component of
retained earnings, net of related taxes. Gains and losses on the sale of
investment securities are determined on the specific identification method at
the time of sale.
LOANS RECEIVABLE
Loans receivable are stated at unpaid principal balances, less the allowance
for loan losses and uncollected interest. All loans are at fixed interest
rates.
Loans are placed on nonaccrual status when the collection of the interest
becomes doubtful. Interest previously accrued but not deemed collectible is
reversed and charged against current income. Interest income on nonaccrual
loans is then recognized only when collected. Loans are considered impaired
when it becomes probable that the Bank will be unable to collect all amounts
due according to the contractual terms of the loan agreement. Interest income
on these loans is recognized as described above depending on the accrual
status of the loan.
The allowance for loan losses is maintained at a level considered adequate to
absorb potential loan losses determined on the basis of management's
continuing review and evaluation of the loan portfolio and its judgment as to
the impact of economic conditions on the portfolio. The evaluation by
management includes consideration of past loan loss experience and trends,
changes in the composition of the loan portfolio, the current volume and
condition of loans outstanding and the probability of collecting all amounts
due. The allowance is increased by a provision for loan losses, which is
charged to expense, and reduced by charge-offs, net of recoveries. It is
reasonably possible that management's estimate of the allowance for loan
losses may change within a year.
20
<PAGE>
HBANCORPORATION, INC.
LAWRENCEVILLE, ILLINOIS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
LOAN-ORIGINATION FEES
The Bank does not charge any loan fees and the costs associated with making
loans are immaterial and are expensed when incurred.
OFFICE PROPERTIES AND EQUIPMENT
Property and equipment are carried at cost less accumulated depreciation.
Depreciation on property and equipment is computed using declining balance and
straight-line methods over the estimated useful lives of the various classes
of assets for both financial reporting and federal income tax purposes. When
assets are retired or otherwise disposed of, the cost and related accumulated
depreciation are removed from the accounts, and any resulting gain or loss is
recognized in income from the period. The cost of maintenance and repairs is
charged to income as incurred; significant renewals and betterments are
capitalized. Deduction is made for retirements resulting from renewals or
betterments.
SIGNIFICANT CONCENTRATION OF CREDIT RISK
Most of the Company's business activity is with customers located in southeast
Illinois and southwest Indiana. The loans are expected to be repaid from cash
flow of the borrowers. Credit losses arising from lending transactions with
highly leveraged entities compare favorably with the Bank's credit loss
experience on its loan portfolio as a whole. The Bank requires collateral for
all real estate and secured loans; and savings accounts are required as
collateral for share loans.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used by the Bank in estimating fair
values of financial instruments as disclosed in Note 10:
Cash and short-term instruments. The carrying amounts of cash and short-term
instruments approximate their fair value.
Available-for-sale and held-to-maturity securities. Fair values for
securities, excluding restricted equity securities, are based on quoted market
prices. The carrying values of restricted equity securities approximate fair
values.
Loans receivable. Fair values for mortgage loans, consumer loans, commercial
real estate, commercial business loans, and financing leases are estimated
using discounted cash flow analyses, using interest rates currently being
offered for loans with similar terms to borrowers of similar credit quality.
21
<PAGE>
HBANCORPORATION, INC.
LAWRENCEVILLE, ILLINOIS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
Deposit liabilities. The fair values disclosed for demand deposits are, by
definition, equal to the amount payable on demand at the reporting date (that
is, their carrying amounts). The carrying amounts of variable-rate, fixed-term
money-market accounts and certificates of deposit (CDs) approximate their fair
values at the reporting date. Fair values for fixed-rate CDs are estimated
using a discounted cash flow calculation that applies interest rates currently
being offered on certificates to a schedule of aggregated expected monthly
maturities on time deposits.
Accrued interest. The carrying amounts of accrued interest approximate their
fair values.
NET INCOME PER SHARE
Net income for the year ended June 30, 1996, consisted of a $35,952 loss prior
to conversion on March 29, 1996 and $207,202 earned subsequent to March 29,
1996. Only earnings subsequent to conversion have been used in the calculation
of earnings per share for the period.
RECENT ACCOUNTING DEVELOPMENTS
The Financial Accounting Standards Board has issued SFAS No. 114, "Accounting
by Creditors for Impairment of a Loan" and SFAS No. 118, "Accounting by
Creditors for Impairment of a Loan - Income Recognition and Disclosures." SFAS
No. 114, as amended by SFAS No. 118, requires that impaired loans be measured
at the present value of expected future cash flows discounted at the loan's
effective interest rate or, as a practical expedient, at the loan's observable
market price or the fair value of the collateral if the loan is collateral
dependent. Homogeneous loans, such as single-family loans and most categories
of consumer loans, are excluded from this requirement. Adoption of these
standards is effective for the fiscal year beginning July 1, 1995. The
adoption of SFAS Nos. 114 and 118 did not have a material effect on the Bank's
financial condition or results of operation.
The Financial Accounting Standards Board has issued SFAS No. 123, "Accounting
for Stock-Based Compensation," which provides guidance on accounting and
reporting for stock-based employee compensation plans, including stock
options, restricted stock, stock purchase plans, and stock appreciation
rights. SFAS No. 123 is effective for nonemployee transactions entered into
after December 15, 1995. The adoption of this statement did not have a
material effect on the financial statements.
The Financial Accounting Standards Board has issued SFAS No. 125, "Accounting
for Transfers and Servicing of Financial Assets and Extinguishment of
Liabilities" and SFAS No. 127, "Deferral of the Effective Date of Certain
Provisions of FASB Statement No. 125." These standards do not apply to the
Bank.
The Financial Accounting Standards Board has issued SFAS No. 128, "Earnings
per Share," and SFAS No. 129, "Disclosure of Information About Capital
Structure." These standards are effective for periods ending after December
15, 1997, and are not expected to have any effect on the Bank.
22
<PAGE>
HBANCORPORATION, INC.
LAWRENCEVILLE, ILLINOIS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
The Financial Accounting Standards Board has issued SFAS No. 130, "Reporting
Comprehensive Income." SFAS No. 130 is effective for fiscal years beginning
after December 15, 1997. This standard requires disclosure only and is not
expected to have any impact on the Company's financial condition or results of
operation.
NOTE 2 - INVESTMENT SECURITIES
Investment securities have been classified in the consolidated statements of
financial condition according to management's intent. The carrying amount of
securities and their approximate fair values at June 30 follow:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Available-for-Sale Securities:
June 30, 1996:
FHLMC Common Stock $ 4,563 $ 112,052 $ -0- $ 116,615
FHLB Securities 1,000,000 -0- 9,845 990,155
FHLMC Pool 1,016,480 8,794 -0- 1,025,274
------------- ------------- ------------- -------------
$ 2,021,043 $ 120,846 $ 9,845 $ 2,132,044
============= ============= ============= =============
June 30, 1997:
FHLMC Common Stock $ 4,563 $ 186,817 $ -0- $ 191,380
FHLMC Pool 903,664 3,183 -0- 906,847
------------- ------------- ------------- -------------
$ 908,227 $ 190,000 $ -0- $ 1,098,227
============= ============= ============= =============
Held-to-Maturity Securities:
June 30, 1996:
GNMA Certificates $ 31,684 $ 722 $ -0- $ 32,406
============= ============= ============= =============
June 30, 1997:
FHLB Securities $ 1,000,000 $ 2,884 $ -0- $ 1,002,884
GNMA Certificates 24,461 807 -0- 25,268
------------- ------------- ------------- -------------
$ 1,024,461 $ 3,691 $ -0- $ 1,028,152
============= ============= ============= =============
</TABLE>
Gross realized gains on sales of available-for-sale securities were $1,299 and
$-0-, respectively, in 1996 and 1997. Total proceeds received from the sales
of available-for-sale securities were $1,094,505 and $-0- respectively, in
1996 and 1997.
23
<PAGE>
HBANCORPORATION, INC.
LAWRENCEVILLE, ILLINOIS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 - INVESTMENT SECURITIES, CONTINUED
The scheduled maturities of securities held-to-maturity and securities
available-for-sale at June 30, 1997, were as follows:
<TABLE>
<CAPTION>
Held-to-Maturities Available-for-Sale
Securities Securities
----------------------------- ----------------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Due in one year or less $ 202,850 $ 203,521 $ 161,722 $ 176,851
Due from one to five years 814,249 817,026 628,636 707,402
Due from five to ten years 7,362 7,605 117,869 213,974
Due after ten years -0- -0- -0- -0-
------------- ------------- ------------- -------------
$ 1,024,461 $ 1,028,152 $ 908,227 $ 1,098,227
============= ============= ============= =============
</TABLE>
For purposes of the maturity table, mortgage-backed securities, which are not
due at a single maturity date, have been allocated over maturity groupings
based on the weighted average contractual maturities of underlying collateral.
The mortgage-backed securities may mature earlier than their weighted-average
contractual maturities because of principal prepayments.
NOTE 3 - LOANS RECEIVABLE
Loans receivable consisted of the following at June 30,
<TABLE>
<CAPTION>
1996 1997
---------------- ---------------
<S> <C> <C>
Real Estate Loans:
One- to four-family $ 7,175,121 $ 5,801,198
Commercial 702,070 3,695,066
Multi-family 206,125 187,030
Construction 101,174 432,101
---------------- ---------------
Total real estate loans 8,184,490 10,115,395
---------------- ---------------
Other Loans:
Consumer Loans:
Deposit account 9,828 21,123
Secured 268,237 458,452
Unsecured 148,010 200,904
---------------- ---------------
Total consumer loans 426,075 680,479
Commercial business loans 1,975,125 2,984,283
Financing leases 220,455 146,033
---------------- ---------------
Total other loans 2,621,655 3,810,795
---------------- ---------------
Total loans receivable, gross 10,806,145 13,926,190
Less:
Loans in process 440,451 291,009
Allowance for losses 118,417 128,417
---------------- ---------------
Total loans receivable, net $ 10,247,277 $ 13,506,764
================ ===============
</TABLE>
24
<PAGE>
HBANCORPORATION, INC.
LAWRENCEVILLE, ILLINOIS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 - LOANS RECEIVABLE, CONTINUED
The scheduled maturities of loans receivable at June 30, 1997 were as follows:
<TABLE>
<CAPTION>
One-
to-Four Multi-family Financing Commercial
Family Commercial Leases Consumer Business Total
----------- -------------- ----------- ----------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Due in one year or less $ 1,080,050 $ 5,329,895 $ 78,015 $ 680,479 $ 2,984,283 $ 10,152,722
Due from one to five years 2,221,345 1,484,105 68,018 -0- -0- 3,773,468
Due from five to ten years -0- -0- -0- -0- -0- -0-
Due after ten years -0- -0- -0- -0- -0- -0-
----------- -------------- ----------- ----------- ----------- -------------
$ 3,301,395 $ 6,814,000 $ 146,033 $ 680,479 $ 2,984,283 $ 13,926,190
=========== ============== =========== =========== =========== =============
</TABLE>
Activity in the allowance for loan losses is summarized as follows:
<TABLE>
<CAPTION>
June 30,
--------------------------------------------------
1995 1996 1997
--------------- --------------- ---------------
<S> <C> <C> <C>
Balance at beginning of year $ 113,417 $ 113,417 $ 118,417
Provision charged to income 9,686 5,000 10,000
Charge-offs (9,686) -0- -0-
Recoveries -0- -0- -0-
--------------- --------------- ---------------
Balance at end of year $ 113,417 $ 118,417 $ 128,417
=============== =============== ===============
</TABLE>
At June 30, 1996 and 1997, the total recorded investment in impaired loans was
- -0- and -0-, respectively. The average recorded investment in impaired loans
amounted to -0- and -0- for the years ended June 30, 1996 and 1997,
respectively. Interest income on impaired loans of -0-and -0- was recognized
for cash payments received in 1996 and 1997, respectively.
In the ordinary course of business, the Bank commits to extend credit for real
estate loans prior to making the loans. The Bank uses the same credit policies
for commitments as it does for on-balance sheet loans. Outstanding commitments
at June 30, 1996 and 1997 were immaterial.
NOTE 4 - OFFICE PROPERTIES AND EQUIPMENT
Office properties and equipment consist of the following at June 30,
1996 1997
-------------- -------------
Buildings and improvements $ 53,029 $ 53,029
Office equipment 109,303 116,536
-------------- -------------
162,332 169,565
Less accumulated depreciation (119,388) (130,412)
-------------- --------------
Office properties and equipment, net $ 42,944 $ 39,153
============== =============
Depreciation expense for the years ended June 30, 1996 and 1997, was $7,825
and $11,024, respectively.
25
<PAGE>
HBANCORPORATION, INC.
LAWRENCEVILLE, ILLINOIS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5 - DEPOSITS
The aggregate amount of short-term jumbo certificates of deposit with a
minimum denomination of $100,000 was approximately $229,199 and $635,853 at
June 30, 1996 and 1997, respectively.
Deposits in excess of $100,000 are not insured. Interest expense on
certificates of deposit exceeding $100,000 was approximately $10,398, $17,528,
and $30,996, for the years ended June 30, 1995, 1996, and 1997, respectively.
Interest expense of deposits is summarized as follows for the years ended June
30,
1995 1996 1997
------------- ------------- -------------
Passbook savings $ 41,479 $ 60,589 $ 57,227
Money Market Deposits 45,832 46,420 42,911
Certificates of deposits 322,333 362,226 302,166
------------- ------------- -------------
$ 409,644 $ 469,235 $ 402,304
============= ============= =============
NOTE 6 - INCOME TAXES
The provision for income taxes for the years ended June 30 consists of the
following:
1995 1996 1997
------------- ------------- -------------
Current $ 72,815 $ 46,389 $ 170,038
Deferred 1,866 27,265 4,062
------------- ------------- -------------
$ 74,681 $ 73,654 $ 174,100
============= ============= =============
Total income tax expense as shown in the statement of operation is reconciled
to the amount computed by applying the maximum rate to income taxes as
follows:
<TABLE>
<CAPTION>
Years ended June 30,
-------------------------------------------
1995 1996 1997
------------- ------------- -------------
<S> <C> <C> <C>
Expected income tax at 34% rate $ 73,575 $ 83,267 $ 145,991
Increase (Decrease) resulting from
State income tax effect 8,689 9,796 20,856
Surtax exemption (5,930) (5,930) -0-
Other (1,653) (13,479) 7,253
------------- ------------- -------------
$ 74,681 $ 73,654 $ 174,100
============= ============= =============
Effective tax rate 34.5% 30.1% 40.5%
============= ============= =============
</TABLE>
Deferred tax liabilities have been provided for taxable temporary differences
related to unrealized gains on available-for-sale securities, accumulated
depreciation and cash-accrual differences. The deferred tax liabilities in the
accompanying consolidated statements of financial condition include the
following components at June 30:
<TABLE>
<CAPTION>
1996 1997
---------------- ---------------
<S> <C> <C>
Unrealized gains on available-for-sale securities $ 43,000 $ 78,500
Accumulated depreciation 9,533 10,014
Cash-accrual conversions 38,977 42,559
---------------- ---------------
Deferred tax liability $ 91,510 $ 131,073
================ ===============
</TABLE>
26
<PAGE>
HBANCORPORATION, INC.
LAWRENCEVILLE, ILLINOIS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7 - EMPLOYEE BENEFIT AND STOCK OPTION PLANS
Pension Benefits
The Bank established a simplified employee pension-Individual Retirement
Account plan effective January 1, 1993, which was dissolved in August 1996,
covering all full-time employees with at least three years of service. The
Bank may contribute up to 15% of each employee's compensation or $30,000,
whichever is less. For the years ended June 30, 1995, 1996, and 1997, the Bank
contributed $17,284, $19,806, and $3,822, respectively.
Employee Stock Ownership Plan
Concurrent with the conversion the board of directors approved the adoption of
the HBancorporation, Inc. Employees Stock Ownership Plan (the "ESOP"). The
ESOP is intended to qualify under Sections 401(a) and 501(a) of the Internal
Revenue Code, eligibility is based on hours of service, date of hire, and age.
Contributions to the ESOP are determined by the board of directors, in the
form of cash or the Company's common stock. No employee contributions are
accepted. Contributions are allocated based on the ratio of the participant's
compensation to total compensation of all participants. Participant's account
balances are fully vested after five years of service. ESOP expense recorded
for the years ended June 30, 1996 and 1997 totaled $25,829 and $39,465,
respectively, with cost at the basis at issuance to the trust of $10 per share
or 39,465 shares committed to be allocated at June 30, 1996 and 37,484 shares
committed to be allocated at June 30, 1997. At June 30, 2997, 4,025 shares
were allocated and 700 shares were in suspense. The fair value of unallocated
shares at June 30, 1997 was $249,746.
Recognition and Retention Plan (RRP)
On April 28, 1997, the stockholders' approved the HBancorporation, Inc.
Recognition and Retention Plan. The purpose of this plan is to provide
directors, officers and employees with a proprietary interest in the Company
in a manner designed to encourage such individuals to remain with the Company
and the Bank. The terms of each RRP will be identical, only the participants
and the number of shares awarded to each participant vary. Eligible directors,
officers and other key employees of the Company will earn (i.e., become vested
in) shares of common stock covered by the award at a rate of 20% per year,
with the first installment vesting April 28, 1997 and annually thereafter.
Pursuant to the RRP, 24,666 shares of Common Stock (or 5.0% of the current
outstanding shares of the Company), funded from either authorized but unissued
shares or issued shares subsequently reacquired and held as treasury shares,
will be available for awards. The Company completed the funding of the plan in
August 1997 by purchasing 12,000 shares of common stock in the open market at
a total cost of approximately $188,388 which reduced consolidated
stockholders' equity. The cost of shares granted under the plan will be
amortized to compensation expense over the related vesting period. The Company
had purchased 1,900 shares prior to June 30, 1997, at a cost of $26,838, which
is shown as treasury stock on the consolidated statements of financial
condition.
27
<PAGE>
HBANCORPORATION, INC.
LAWRENCEVILLE, ILLINOIS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7 - EMPLOYEE BENEFIT AND STOCK OPTION PLANS, CONTINUED
1997 Stock Option and Incentive Plan
On April 28, 1997, the stockholders approved the HBancorporation, Inc. 1997
Stock Option and Incentive Plan. Pursuant to the Stock Option Plan, the
Company will reserve for issuance thereunder either from authorized but
unissued shares or from issued shares reacquired and held as treasury shares,
59, 198 shares of the Common Stock (12.0% of the Company's current shares
outstanding). Management currently intends, to the extent practicable and
feasible, to fund the Stock Option Plan from issued shares reacquired by the
Company in the open market. Awards under the plan may be in the form of stock
options, stock appreciation rights or limited stock appreciation rights.
Awards made under the plan vest at a rate of one-fifth of the initial award
per year, subject to the participant maintaining continuous service since the
date of grant.
NOTE 8 - RELATED PARTIES
Transactions with related parties include loans receivable and savings
accounts of officers and directors. Loan balances of related parties at June
30, 1996 and 1997, are $85,222 and $47,176, respectively. Savings account
balances of related parties at June 30, 1996 and 1997, are $216,812 and
$304,235, respectively.
NOTE 9 - REGULATIONS ON BANK DIVIDENDS AND CASH
The principal source of income and funds for the Company is dividends from the
Bank. During the year 1998, the amount of dividends that the Bank can pay to
the Company without obtaining prior regulatory approval is limited to the
total of their 1997 net income and $832,038 (the amount available at June 30,
1997). As a practical matter, the Bank may restrict dividends to a lesser
amount because of the need to maintain adequate capital structures.
The Bank is required by the Federal Reserve Bank to maintain non-interest
bearing cash reserve balances which are dependent on the amounts and types of
deposits held by the Bank. At June 30, 1997, the Bank had $67,800 of FRB
stock, which was in compliance with these reserve requirements.
NOTE 10 - FAIR VALUES OF FINANCIAL INSTRUMENTS
The estimated fair values of the Company's financial instruments are provided
in the following table. A financial instrument is defined as cash, evidence of
an ownership interest in an entity, or a contract that both: a) Imposes on one
entity a contractual obligation to deliver cash or another financial
instrument to a second entity or, b) Conveys to a second entity a contractual
right to receive cash or another financial instrument from the first entity.
All of the Company's assets and liabilities are not financial instruments, as
defined, and are therefore not included in the table.
28
<PAGE>
HBANCORPORATION, INC.
LAWRENCEVILLE, ILLINOIS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10 - FAIR VALUES OF FINANCIAL INSTRUMENTS, CONTINUED
The estimated fair values of the Company's financial instruments at June 30
were as follows:
<TABLE>
<CAPTION>
1996 1997
----------------------------- ----------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Financial assets:
Cash and interest bearing deposits $ 3,853,156 $ 3,853,156 $ 1,650,294 $ 1,650,294
Certificates of deposits 601,459 601,459 164,730 164,730
Investments securities held to maturity 31,684 32,406 1,024,461 1,028,152
Investment securities available-for-sale 2,132,044 2,132,044 1,098,227 1,098,227
Loans receivable, net 10,247,277 8,928,620 13,506,764 11,895,816
Interest receivable 139,787 139,787 167,307 167,307
Financial liabilities:
Deposits (8,912,361) (8,540,459) (9,243,596) (8,816,637)
Interest payable (52,677) (52,677) (64,728) (64,728)
</TABLE>
NOTE 11 - CONDENSED FINANCIAL INFORMATION OF PARENT COMPANY
Presented below is condensed financial information as to financial position
and results of operations of HBancorporation, Inc. only as of June 30,
STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
1996 1997
--------------- ---------------
<S> <C> <C>
Assets:
Cash and cash equivalents $ 1,893,288 $ 1,749,949
Investment in subsidiary 5,891,129 6,233,373
Note receivable from ESOP 374,918 335,453
Prepaid income taxes -0- 1,600
--------------- ---------------
$ 8,159,335 $ 8,320,375
=============== ===============
Liabilities and Stockholders' Equity:
Accounts payable $ 500 $ -0-
Accrued expenses 819 36,850
Common stock 4,933 4,933
Paid in capital 4,505,471 4,514,279
Retained earnings 3,954,530 4,015,104
Treasury stock -0- (26,838)
Unearned compensation (374,918) (335,453)
Unrealized gain on securities available-for-sale 68,000 111,500
--------------- ---------------
$ 8,159,335 $ 8,320,375
=============== ===============
</TABLE>
29
<PAGE>
HBANCORPORATION, INC.
LAWRENCEVILLE, ILLINOIS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11 - CONDENSED FINANCIAL INFORMATION OF PARENT COMPANY, CONTINUED
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
1996 1997
--------------- ---------------
<S> <C> <C>
Interest income $ 19,727 $ 75,924
Income from subsidiary 195,957 259,279
--------------- ---------------
Total income 215,684 335,203
--------------- ---------------
Compensation expense -0- 45,658
Office expense -0- 402
Legal expense 2,904 53,650
Franchise fees -0- 17,060
--------------- ---------------
Total expenses 2,904 116,770
--------------- ---------------
Income before income taxes 212,780 218,433
Income taxes 5,138 -0-
--------------- ---------------
Net income $ 207,642 $ 218,433
=============== ===============
STATEMENTS OF CASH FLOWS
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 207,642 $ 218,433
Adjustments to reconcile net income to net cash
provided by operating activities:
Increase (decrease) in accounts payable 500 (2,100)
Increase (decrease) in accrued expenses 818 36,032
--------------- ---------------
Cash provided by operating activities 208,960 252,365
--------------- ---------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Issuance of note receivable (394,650) -0-
Payments of note receivable 19,732 39,465
Proceeds from issuance of common stock 2,255,203 -0-
Allocation of ESOP shares -0- 8,808
Purchase of treasury stock -0- (26,838)
Investment in subsidiary (195,957) (259,279)
--------------- ----------------
Cash (used) provided by investing activities 1,684,328 (237,844)
--------------- -----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payment of dividends -0- (157,862)
--------------- -----------------
Cash (used) by financing activities -0- (157,862)
--------------- -----------------
Net increase (decrease) in cash and cash equivalents 1,893,288 (143,341)
Cash and cash equivalents at beginning of period -0- 1,893,288
--------------- ---------------
Cash and cash equivalents at end of period $ 1,893,288 $ 1,749,947
=============== ===============
</TABLE>
30
<PAGE>
HBANCORPORATION, INC.
LAWRENCEVILLE, ILLINOIS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11 - CONDENSED FINANCIAL INFORMATION OF PARENT COMPANY, CONTINUED
STATEMENTS OF CASH FLOWS, CONTINUED
<TABLE>
<CAPTION>
1996 1997
--------------- ---------------
<S> <C> <C>
Cash paid for:
Income taxes $ 4,320 $ 2,418
=============== ===============
Non-cash Investing Activities:
Subsidiary investment transferred to stock and
paid-in capital in connection with stock
conversion, net of expenses totaling $422,916 $ 4,128,388 $ -0-
=============== ===============
</TABLE>
NOTE 12 - REGULATORY MATTERS
The Bank 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
Bank's financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Bank 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 Bank'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 I capital (as defined in the regulations) to
risk-weighted assets (as defined), and of Tier I capital (as defined) to
average assets (as defined). Management believes, as of June 30, 1997 that the
Bank meets all capital adequacy requirements to which it is subject.
As of December 31, 1996, the most recent notification from the Office of the
Comptroller of the Currency categorized the Bank as well capitalized under the
regulatory framework for prompt corrective action. To be categorized as well
capitalized the Bank must maintain minimum total risk-based, Tier I
risk-based, and Tier I leverage ratios as set forth in the table. There are no
conditions or events since that notification that management believes have
changed the institution's category.
31
<PAGE>
HBANCORPORATION, INC.
LAWRENCEVILLE, ILLINOIS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 12 - REGULATORY MATTERS, CONTINUED
The Bank's actual capital amounts and ratios are also presented in the table.
<TABLE>
<CAPTION>
To Be Well
For Capital Capitalized Under
Actual Adequacy Purposes: Action Provisions:
------------------------ ---------------------- ----------------------
Amount Ratio Amount Ratio Amount Ratio
------------- -------- ------------ ------- ------------ -------
<S> <C> <C> <C> <C> <C> <C>
As of June 30, 1996
Total Capital
(to Risk-Weighted Assets) $ 5,891,000 62.1% *$ 759,120 *8.0% *$ 948,900 *10.0%
Tier I Capital
(to Risk-Weighted Assets) $ 5,815,000 61.3% *$ 379,560 *4.0% *$ 569,340 * 6.0%
Tier I Capital
(to Average Assets) $ 5,815,000 32.2% *$ 721,880 *4.0% *$ 902,350 * 5.0%
As of June 30, 1997
Total Capital
(to Risk-Weighted Assets) $ 6,233,000 48.8% *$ 1,022,640 *8.0% *$ 1,278,300 *10.0%
Tier I Capital
(to Risk-Weighted Assets) $ 6,121,000 47.9% *$ 511,320 *4.0% *$ 766,980 * 6.0%
Tier I Capital
(to Average Assets) $ 6,121,000 34.9% *$ 700,819 *4.0% *$ 876,024 * 5.0%
</TABLE>
*Equal to or greater than
32
<PAGE>
HBANCORPORATION, INC. AND SUBSIDIARY
STOCKHOLDER INFORMATION
ANNUAL MEETING
The annual meeting of stockholders will be held at 10:00 a.m., Tuesday,
October 28, 1997, at the Elks Lodge located at 519 12th Street, Lawrenceville,
Illinois.
STOCK LISTING
The Company's stock is traded on the "pink sheets" published by the National
Quotation Bureau, Inc. under the symbol "HBIN."
PRICE RANGE OF COMMON STOCK
The following table sets forth the high and low bid prices of the Common
Stock. These prices do not represent actual transactions and do not include
retail mark-ups, mark-downs or commissions.
High Low Dividends
June 30, 1996...................... $11.56 $11.00 $.08
September 30, 1996................. $12.00 $11.50 $.08
December 31, 1996.................. $13.75 $13.00 $.08
March 31, 1997..................... $13.75 $13.00 $.08
June 30, 1997...................... $15.50 $14.50 $.08
Dividend payment decisions are made with consideration of a variety of factors
including earnings, financial condition, market considerations and regulatory
restrictions. Restrictions on dividend payments are described in Note 9 of the
Notes to Financial Statements included in this report.
As of June 30, 1997, the Company had approximately 115 stockholders of record
and 491,420 outstanding shares of common stock.
SHAREHOLDERS AND GENERAL INQUIRIES TRANSFER AGENT
Kevin J. Kavanuagh, President Register and Transfer Company
HBancorporation, Inc. 10 Commerce Drive
619 12th Street Cranford, New Jersey 07016
Lawrenceville, Illinois 62439 (908) 272-8511
(618) 943-2515
ANNUAL AND OTHER REPORTS
The Company is required to file an annual report on Form 10-KSB for its fiscal
year ended June 30, 1997, with the Securities and Exchange Commission. Copies
of the Form 10-KSB annual report and the Company's quarterly reports may be
obtained without charge by contacting:
Kevin J. Kavanuagh, President
HBancorporation, Inc.
619 12th Street
Lawrenceville, Illinois 62439
(618) 943-2515
33
<PAGE>
HBANCORPORATION, INC. AND SUBSIDIARY
CORPORATE INFORMATION
COMPANY AND BANK ADDRESS
619 12th Street
Lawrenceville, Illinois 62439
Telephone: (618) 943-2515
Fax: (618) 943-6345
DIRECTORS OF THE BOARD
Kevin J. Kavanaugh
Chairman of the Board, President
and Chief Executive Officer of
HBancorporation, Inc.
Lawrenceville, Illinois
Robert R. Ernest
Retired Oil and Gas Company
General Foreman
Lawrenceville, Illinois
Henry J. DeBuisseret, Jr.
Owner of HJD Farms
and Fort Knox Incorporated
Liquor Stores
Vincennes, Indiana
John H. White
Retired Owner of Construction Company
Lawrenceville, Illinois
L. Patrick Kavanaugh
Chairman of the Board and Vice President of
Emulsion, Inc.
Lawrenceville, Illinois
Mary E. Denison
Retired Managing Officer of Lawrenceville
Federal Savings and Loan Company, the
predecessor institution to Heritage National
Bank
Lawrenceville, Illinois
HBANCORPORATION, INC. AND SUBSIDIARY OFFICERS
Kevin J. Kavanaugh
Chairman of the Board, President
and Chief Executive Officer
Cleora Gillespie
Secretary
INDEPENDENT AUDITORS
Kemper CPA Group, L.L.C.
515 East South Street
Washington, Indiana 47501
SPECIAL COUNSEL
Silver, Freedman & Taff, L.L.P.
1100 New York Avenue, N.W.
Washington, D.C. 20005
34
<PAGE>
SUBSIDIARIES OF THE REGISTRANT
<TABLE>
<CAPTION>
Subsidiary or Percent of State of
Parent Organization Ownership Incorporation
------ ------------ --------- -------------
<S> <C> <C> <C>
HBancorporation, Inc. Heritage National Bank 100% Federal
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE ANNUAL
REPORT ON FORM 10-KSB FOR THE FISCAL YEAR ENDED JUNE 30, 1997 AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-END> JUN-30-1997
<CASH> 357,424
<INT-BEARING-DEPOSITS> 1,142,870
<FED-FUNDS-SOLD> 150,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 1,098,227
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 1,024,461
<LOANS> 13,635,181
<ALLOWANCE> (128,417)
<TOTAL-ASSETS> 17,802,278
<DEPOSITS> 9,243,596
<SHORT-TERM> 0
<LIABILITIES-OTHER> 275,157
<LONG-TERM> 0
0
0
<COMMON> 4,933
<OTHER-SE> 8,278,592
<TOTAL-LIABILITIES-AND-EQUITY> 17,802,278
<INTEREST-LOAN> 304,278
<INTEREST-INVEST> 26,551
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 330,829
<INTEREST-DEPOSIT> 63,775
<INTEREST-EXPENSE> 63,775
<INTEREST-INCOME-NET> 267,054
<LOAN-LOSSES> 5,000
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 149,171
<INCOME-PRETAX> 124,378
<INCOME-PRE-EXTRAORDINARY> 124,378
<EXTRAORDINARY> 0
<CHANGES> (76,383)
<NET-INCOME> 47,995
<EPS-PRIMARY> 0.10
<EPS-DILUTED> 0
<YIELD-ACTUAL> 0
<LOANS-NON> 0
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> (123,417)
<CHARGE-OFFS> (5,000)
<RECOVERIES> 0
<ALLOWANCE-CLOSE> (128,417)
<ALLOWANCE-DOMESTIC> (128,417)
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
