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, 1998
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: $1,713,383.
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, 1998, was approximately $5.7 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, 1998, there were 493,320 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, 1998.
Part III of Form 10-KSB - Portions of Proxy Statement for 1998 Annual
Meeting of Stockholders.
<PAGE>
PART I
Item 1. Description of Business
Forward-Looking Statements
When used in this filing and in future filings by the Company with the
Securities and Exchange Commission, in the Company's press releases or other
public or shareholder communications, or in oral statements made with the
approval of an authorized executive officer, the words or phrases "would be,"
"will allow," "intends to," "will likely result," "are expected to," "will
continue," "is anticipated," "estimate," "project" or similar expressions are
intended to identify "forward-looking statements" within the meaning of the
Private Securities Litigation Reform Act of 1995. Such statements are subject to
risks and uncertainties, including but not limited to changes in economic
conditions in the Company's market area, changes in policies by regulatory
agencies, fluctuations in interest rates, demand for loans in the Company's
market area and competition, all or some of which could cause actual results to
differ materially from historical earnings and those presently anticipated or
projected.
The Company wishes to caution readers not to place undue reliance on any
such forward-looking statements, which speak only as of the date made, and
advises readers that various factors, including regional and national economic
conditions, substantial changes in levels of market interest rates, credit and
other risks of lending and investment activities and competitive and regulatory
factors, could affect the Company's financial performance and could cause the
Company's actual results for future periods to differ materially from those
anticipated or projected.
The Company does not undertake, and specifically disclaims any obligation,
to update any forward-looking statements to reflect occurrences or unanticipated
events or circumstances after the date of such statements.
Impact of the Year 2000
The Company has conducted a comprehensive review of its computer systems to
identify applications that could be affected by the "Year 2000" issue, and has
developed an implementation plan to address the issue. The Company's data
processing is performed by an outside service bureau. The Company has already
contacted each vendor to request time tables for year 2000 compliance and
expected costs, if any, to be passed along to the Company. To date, the Company
has been informed that its primary service providers anticipate that all
reprogramming efforts will be completed by December 31, 1999, allowing the
Company adequate time for testing. Certain other vendors have not yet responded,
however, the Company will pursue other options if it appears that these vendors
will be unable to comply. Management does not expect these costs to have a
significant impact on its financial position or results of operations however,
there can be no assurance that the vendors systems will be 2000 compliant,
consequently the Company could incur
1
<PAGE>
incremental costs to convert to another vendor. The Company has identified
certain of its hardware and software equipment that will not be Year 2000
compliant and intends to purchase new equipment and software prior to March 31,
1999. These capital expenditures are expected to total approximately $20,000.
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, 1998, the Company had $21.5 million of assets and stockholders'
equity of $7.0 million (or 32.9% 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, 1998, at least 64.4% 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.
2
<PAGE>
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, 1998, the Bank's
gross loans outstanding totaled $16.3 million, of which $6.6 million or 40.5%
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 $3.4 million or 21.2% of the Bank's total loan portfolio, commercial
real estate loans totaled $4.5 million or 27.3% of the Bank's total loan
portfolio, consumer loans totaled $711,000 or 4.4% of the Bank's total loan
portfolio, finance leases totaled $68,000 or .4% of the Bank's total loan
portfolio, and multi-family real estate loans totaled $220,000 or 1.3% of the
Bank's total loan portfolio.
3
<PAGE>
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,
---------------------------------------------------------------------------------------------------
1994 1995 1996 1997 1998
--------------- --------------- --------------- --------------- ----------------
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ ------- ------ ------- ------ -------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Real Estate Loans:
One- to four-family ....... $6,251 65.26% $6,704 69.10% $7,175 66.40% $5,801 41.66% $ 6,606 40.47%
Commercial ................ 838 8.74 969 9.99 702 6.50 3,419 24.55 4,463 27.34
Multi-family .............. 40 .42 156 1.61 206 1.91 187 1.34 220 1.35
Construction .............. 222 2.32 -- -- 101 .93 433 3.11 800 4.90
------ ----- ------ ----- ------ ----- ------ ----- ------- -----
Total real estate loans 7,351 76.74 7,829 80.70 8,184 75.74 9,840 70.66 12,089 74.06
------ ----- ------ ----- ------ ----- ------ ----- ------- -----
Other Loans:
Consumer Loans:
Deposit account .......... 93 .97 7 .07 10 .09 21 .15 126 .77
Unsecured ................ 116 1.21 150 1.55 148 1.37 207 1.49 146 .90
Secured .................. 396 4.14 256 2.64 268 2.48 743 5.33 439 2.69
------ ----- ------ ----- ------ ----- ------ ----- ------- -----
Total consumer loans .. 605 6.32 413 4.26 426 3.94 971 6.97 711 4.36
------ ----- ------ ----- ------ ----- ------ ----- ------- -----
Commercial business loans . 1,264 13.19 1,169 12.04 1,975 18.28 2,969 21.32 3,454 21.16
Financing leases .......... 359 3.75 291 3.00 220 2.04 146 1.05 68 .42
------ ------ ------ ------ -------
Total other loans ..... 2,228 1,873 2,621 4,086 4,233
Less:
Loans in process .......... 98 -- 440 291 606
Allowance for losses ...... 113 113 118 128 133
------ ------ ------- ------- -------
Total loans receivable, net $9,368 $9,589 $10,247 $13,507 $15,583
====== ====== ======= ======= =======
</TABLE>
4
<PAGE>
The following schedule illustrates the interest rate sensitivity of the
Bank's loan portfolio at June 30, 1998. The schedule does not reflect the
effects of possible prepayments or enforcement of due-on-sale clauses.
<TABLE>
<CAPTION>
Real Estate
------------------------------------
Multi-family and Commercial
One- to Four-Family Commercial Financing Leases Consumer Business Total
------------------- ---------------- ---------------- --------------- ---------------- ----------------
Weighted Weighted Weighted Weighted Weighted Weighted
Average Average Average Average Average Average
Amount Rate Amount Rate Amount Rate Amount Rate Amount Rate Amount Rate
--------- -------- ------ -------- ------ -------- ------ -------- ------ -------- ------ --------
(Dollars in Thousands)
Due During
Years Ending
June 30,
- ---------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1999(1) ............. $2,272 8.74% $4,438 9.50% $68 4.79% $711 10.51% $3,454 9.56% $10,943 9.40%
2000 ................ 1,399 9.13 1,045 8.74 -- -- -- -- -- -- 2,444 8.96
2001 ................ 2,913 8.85 -- -- -- -- -- -- -- -- 2,913 8.85
2002 and 2003 ....... 22 8.50 -- -- -- -- -- -- -- -- 22 8.50
</TABLE>
- ----------
(1) Includes demand loans, loans having no stated maturity and overdraft loans.
The total amount of loans due after June 30, 1999 which have predetermined
interest rates is $5.4 million, while there are no loans due after such dates
which have floating or adjustable interest rates.
5
<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, 1998,
the Bank's one- to four-family residential mortgage loans totaled $6.6 million,
or 40.5%, 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, 1998, the Bank originated $8,511,000 of loans of which $2,121,000
or 24.9% 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.
6
<PAGE>
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, 1998
approximately $3.5 million, or 21.6% 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 $300,000 for general operating expenses secured by
inventory and equipment of which $300,000 was outstanding at June 30, 1998. The
largest finance lease was for $328,000 secured by hospital equipment of which
$68,000 was outstanding at June 30, 1998.
The Bank offers only fixed-rate balloon commercial business loans with
various terms and amortization 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, 1998 approximately $4,463,000, or
27.3% 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 $750,000 secured primarily by an office building and
house in Knox County, Indiana.
7
<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, 1998, the Bank's consumer loan
portfolio totaled $711,000, or 4.4% 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 and state laws, including
bankruptcy and insolvency laws, may limit the amount which can be recovered on
such loans. At June 30, 1998,
8
<PAGE>
all of the Bank's consumer loans were performing in accordance with their terms.
See "- NonPerforming 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, 1998, the Bank
had $220,000 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, 1998, the Bank's construction loan portfolio totaled
$800,000 or 4.9% 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.
9
<PAGE>
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.
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, 1998, the Bank
originated $8,511,000 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, 1998, the Bank sold $42,000 in
fixed rate commercial real estate 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.
During fiscal 1998, the Bank did not purchase any whole loans or
participations of loans.
10
<PAGE>
The following table shows the loan origination and repayment activities of
the Bank for the periods indicated.
<TABLE>
<CAPTION>
Year Ended June 30,
---------------------------
1996 1997 1998
------ ------ ------
(In Thousands)
<S> <C> <C> <C>
Originations by type:
Fixed rate:
Real estate - one- to four-family ........... $ 726 $1,475 $2,121
- commercial .................... 653 2,628 1,844
- multi-family .................. 85 -- 49
- construction .................. 474 1,381 2,120
Non-real estate - consumer .................. 705 793 897
- commercial business ....... 1,387 2,524 1,480
------ ------ ------
Total fixed-rate ..................... 4,030 8,801 8,511
------ ------ ------
Total loans originated ............... 4,030 8,801 8,511
------ ------ ------
Purchases:
Real estate - commercial ...................... 190 -- --
Non-real estate - commercial business ......... 589 651 --
------ ------ ------
Total loans purchased ................ 779 651 --
------ ------ ------
Total purchased ...................... 779 651 --
------ ------ ------
Sales and Repayments:
Real estate - commercial ...................... 81 530 42
Non-real estate - commercial business ......... 409 -- --
------ ------ ------
Total loans sold ..................... 490 530 42
Mortgage-backed securities .................... 10 7 2
------ ------ ------
Principal repayments .......................... 3,643 5,663 6,391
------ ------ ------
Total reductions ..................... 3,653 6,200 6,435
------ ------ ------
Net increase (decrease) .............. $ 666 $3,252 $2,076
====== ====== ======
</TABLE>
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 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.
11
<PAGE>
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, 1998
<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........ --- $--- ---% --- $--- ---%
--- ---- --- ----
Total................. --- $--- ---% --- $--- ---%
=== ==== === ====
</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,
------------------------------------------------------------
1994 1995 1996 1997 1998
------ ------ ------ ------ -----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Accruing loans delinquent more than 90 days:
One- to four-family........................... $ --- $ --- $ --- $ --- $---
------ ------ ------ ------ ----
Total...................................... $ --- $ --- $ --- $ --- $---
------ ------ ------ ------ ----
Total non-performing assets..................... $ --- $ --- $ --- $ --- $---
====== ====== ====== ====== ====
Total as a percentage of total assets........... ---% ---% ---% ---% ---%
=== === === === ===
</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 classified as
"doubtful" have all of the weaknesses inherent in those classified "substandard"
with the added characteristic that the weaknesses present make "collection or
12
<PAGE>
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, 1998, the Bank had classified a total of none of its
assets as substandard, none as doubtful, and none as loss. At June 30, 1998,
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, 1998, 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 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.
13
<PAGE>
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, 1998, 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, 1998, the Bank had a total allowance for loan losses of
$133,417, representing .9% 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.
14
<PAGE>
The distribution of the Bank's allowance for losses on loans at the dates
indicated is summarized as follows:
<TABLE>
<CAPTION>
June 30,
---------------------------------------------------------------------------------------------------
1994 1995 1996
---------------------------------------------------------------------------------------------------
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 $6,251 65.30% $90 $6,704 69.10% $92 $7,175 66.40%
Commercial real
estate .......... 9 838 8.80 9 969 10.00 10 702 6.50
Multi-family ...... 1 40 .40 1 156 1.60 1 206 1.91
Construction ...... -- 222 2.30 -- -- -- -- 101 .93
Consumer .......... 4 605 6.30 4 413 4.30 4 426 3.94
Commercial
business ........ 8 1,264 13.20 8 1,169 12.00 10 1,975 18.28
Unallocated ....... 1 -- -- 1 -- -- 1 -- --
Financing leases .. -- 359 3.70 -- 291 3.00 -- 220 2.04
----- ------- ------ ------- ------- ------ ------- ------- ------
Total ........ $113 $9,579 100.00% $113 $9,702 100.00% $118 $10,805 100.00%
===== ======= ====== ======= ======= ====== ======= ======= ======
<CAPTION>
----------------------------------------------------------------
1997 1998
---------------------------------- -----------------------------
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
--------- -------- -------- --------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
One- to four-family $92 $5,801 41.66% $ 95 $ 6,606 40.47%
Commercial real
estate .......... 14 3,419 24.55 15 4,463 27.34
Multi-family ...... 1 187 1.34 1 220 1.35
Construction ...... 2 433 3.11 2 800 4.90
Consumer .......... 4 971 6.97 4 711 4.36
Commercial
business ........ 14 2,969 21.32 15 3,454 21.16
Unallocated ....... 1 -- -- 1 -- --
Financing leases .. -- 146 1.05 -- 68 .42
------ ------- ------ ------- ------- ------
Total ........ $128 $13,926 100.00% $133 $16,322 100.00%
====== ======= ====== ======= ======= ======
</TABLE>
15
<PAGE>
The following table sets forth an analysis of the Bank's allowance for loan
losses.
<TABLE>
<CAPTION>
Year Ended June 30,
---------------------------------------------------------
1994 1995 1996 1997 1998
------ ----- ------ ----- -----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Balance at beginning of period.................... $ 113 $ 113 $ 113 $ 118 $ 128
Provision for loan losses......................... --- 10 5 10 5
------- ----- ------ ------ --------
Charge-offs:
One- to four-family............................. --- --- --- --- ---
Multi-family.................................... --- (10) --- --- ---
------- ----- ------- ------- --------
--- (10) --- --- ---
------- ----- ------- ------- --------
Net charge-offs................................... --- (10) --- --- ---
------- ------ ------- ------ --------
Balance at end of period.......................... $ 113 $ 113 $ 118 $ 128 $ 133
===== ===== ====== ===== =====
Ratio of net charge-offs during the period to
average loans outstanding during the period...... ---% .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, 1998, the Bank's
investment securities (including a $155,300 investment in the common stock of
the Federal Reserve Bank of St. Louis and the Federal Home Loan Bank of Chicago
("FHLB")) totaled $2.8 million or 12.4% of its total assets. It has been the
Bank's general policy to invest in U.S. government securities and federal agency
obligations and other investment securities. As of June 30, 1998, the Bank held
$257,000 in Federal Home Loan Mortgage Corporation stock. See Note 2 of the
Notes to Financial Statements.
16
<PAGE>
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
$964,000 as of June 30, 1998, plus an additional 10% if the investments are
fully secured by readily marketable collateral. At June 30, 1998, 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.
17
<PAGE>
The following table sets forth the composition of the Bank's investments
and mortgage-backed securities at the dates indicated. See Note 2 of the Notes
to Financial Statements.
<TABLE>
<CAPTION>
At June 30,
1996 1997 1998
------------------ ------------------ ------------------
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 ....................................... $ -- ---% $ -- ---% $ -- ---%
FHLMC common stock ................................. 116 1.75 191 5.14 257 5.21
FHLB securities .................................... 990 14.89 1,003 26.98 1,000 20.30
FNMA securities .................................... -- -- -- -- 779 15.81
FRB stock .......................................... 68 1.02 68 1.83 68 1.38
FHLB stock ......................................... 66 .99 66 1.77 88 1.79
------ ----- ------ ----- ------ -----
Total equity securities and FHLB stock .......... $1,240 18.65% $1,328 35.72% $2,192 44.49%
====== ===== ====== ===== ====== =====
Other interest-earning assets:
Interest-bearing deposits with banks(1) ............ $4,351 65.45% $1,458 39.21% 2,121 43.05
------ ----- ------ ----- ------ -----
Total ........................................... $4,351 65.45% $1,458 39.21% $2,121 43.05%
====== ===== ====== ===== ====== =====
Mortgage-backed securities:
FHLMC pool ......................................... $1,025 15.42% $ 907 24.40 $ 592 12.01%
GNMA ............................................... 32 .48 25 .67% 22 .45
------ ----- ------ ----- ------ -----
Total mortgage-backed securities ................ $1,057 15.90% $ 932 25.07% $ 614 12.46%
====== ===== ====== ====== ====== =====
</TABLE>
- ----------
(1) Comprised substantially of over-night deposits with the FHLB-Chicago.
18
<PAGE>
The Bank's investment securities portfolio at June 30, 1998, 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, 1998, 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, 1998, the Bank's investment in mortgage-backed
securities totaled $614,000 or 2.9% of its total assets. The market value of the
Bank's mortgage-backed securities was $8,000 more than their carrying value at
June 30, 1998. At June 30, 1998, 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, 1998.
<TABLE>
<CAPTION>
Due in June 30,
----------------------------------------------------------- 1998
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....................... $60 $60 $243 $243 $ 8 $614
--- --- ---- ---- ---- ----
Total....................................... $60 $60 $243 $243 $ 8 $614
=== === ==== ==== === ====
</TABLE>
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.
19
<PAGE>
FHLB advances have been used recently to support lending activities and to
assist in the Bank's asset/liability management strategy. At June 30, 1998, the
Bank had $1,750,000 in FHLB advances, and 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.
June 30,
------------------------------------
1996 1997 1998
------- ------- -------
(Dollars in Thousands)
Opening balance ..................... $ 9,167 $ 8,912 $ 9,244
Deposits ............................ 4,692 6,221 8,344
Withdrawals ......................... 5,181 6,093 5,557
Interest credited ................... 234 204 263
------- ------- -------
Ending balance ...................... $ 8,912 $ 9,244 $12,294
======= ======= =======
Net increase (decrease) ............. $ (255) $ 332 $ 3,050
======= ======= =======
Percent increase (decrease) ......... (2.78)% 3.73% 32.99%
======= ======= =======
20
<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,
------------------------------------------------------------------------
1996 1997 1998
-------------------- -------------------- --------------------
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 ........... $ 1,426 15.91% $ 1,941 20.85% $ 1,871 15.10%
Variable Money Market Accounts 3.00 - 4.00% ....... 1,181 13.17 384 4.13 681 5.49
------- ------ ------- ------ ------- ------
Total Non-Certificates ............................ 2,607 29.08 2,325 24.98 2,552 20.59
------- ------ ------- ------ ------- ------
Certificates:
0.00-4.00% ....................................... 101 1.13 -- -- 40 .32
4.01-5.00% ....................................... 2,645 29.50 324 3.48 240 1.94
5.01-6.00% ....................................... 3,217 35.89 6,540 70.26 8,927 72.04
6.01-7.00% ....................................... 342 3.81 54 .58 534 4.31
7.01-8.00% ....................................... -- -- -- -- -- --
------- ------ ------- ------ ------- ------
Total Certificates ................................ 6,305 70.33 6,918 74.32 9,741 78.61
------- ------ ------- ------ ------- ------
Accrued Interest .................................. 53 .59 65 .70 99 .80
------- ------ ------- ------ ------- ------
Total Deposits .................................... $ 8,965 100.00% $ 9,308 100.00% $12,392 100.00%
======= ====== ======= ====== ======= ======
</TABLE>
21
<PAGE>
The following table shows rate and maturity information for the Bank's
certificates of deposit as of June 30, 1998.
<TABLE>
<CAPTION>
4.01- 5.01- 6.01- Percent
4.00% 5.00% 6.00% 7.00% Total of Total
------ ----- ----- ----- ----- --------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Certificate accounts
maturing
in quarter ending:
September 30, 1998............. $ 40 $240 $6,300 $459 $7,039 72.26%
December 31, 1998.............. --- --- 1,782 15 1,797 18.45
March 31, 1999................. --- --- 281 --- 281 2.88
June 30, 1999.................. --- --- 564 60 624 6.41
---- ----- ------ ----- -------- ------
Total....................... $ 40 $240 $8,927 $534 $9,741 100.00%
==== ==== ====== ==== ====== ======
Percent of total............ .41% 2.47% 91.64% 5.48%
==== ===== ====== =====
</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, 1998.
<TABLE>
<CAPTION>
Maturity
--------------------------
Over Over
3 Months 3 to 6 6 to 12
or Less Months Months Total
------- ------ ------ -----
(In thousands)
<S> <C> <C> <C> <C>
Certificates of deposit less than $100,000.... $6,039 $1,226 $ 705 $7,970
Certificates of deposit of $100,000 or more... 700 571 100 1,371
Public funds (1) ............................. 300 -- 100 400
------ ------ ------ ------
Total certificates of deposit ................ $7,039 $1,797 $ 905 $9,741
====== ====== ====== ======
</TABLE>
- ----------
(1) Deposits from governmental and other public entities.
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, 1998, the Bank had no subsidiaries.
22
<PAGE>
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, 1998, the maximum amount which the
Bank could have lent under this limit to any one borrower and the borrower's
related entities was approximately $964,000. At June 30, 1998, 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,
1998 were as follows: (i) $838,000 consisting of three loans to one borrower
secured primarily by real estate and agricultural equipment located in Lawrence
County, Illinois and Knox County, Indiana; (ii) $764,000 consisting of three
loans to one borrower secured primarily by office buildings and houses in Knox
County, Indiana; (iii) $597,000 consisting of nine loans secured primarily by
real estate in Champaign County, Illinois; (iv) $589,000 consisting of two loans
to one borrower secured by oil leases and real estate located in Crawford
County, Illinois; and (v) $564,500 consisting of five loans secured by titles,
equipment and inventory located in Lawrence County, Illinois. At June 30, 1998,
all of these loans totaling $3.4 million in the aggregate were performing in
accordance with their terms.
23
<PAGE>
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.
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
24
<PAGE>
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 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
25
<PAGE>
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
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
26
<PAGE>
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.
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.
27
<PAGE>
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, 1998, 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 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.
28
<PAGE>
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 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.
29
<PAGE>
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 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
30
<PAGE>
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, 1998, the Bank had $87,500 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 6.7% and were 6.4% for calendar year 1997.
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, 1998, dividends paid by the FHLB of Chicago to
the Bank totaled $5,087, which constitute a $331 increase over the amount of
dividends received in calendar year 1997.
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 $71,000,
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 began filing consolidated
tax returns with fiscal 1998.
31
<PAGE>
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."
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 twelve commercial banks and two credit unions, other than the
Bank, which compete for deposits and loans in the Bank's market area.
Employees
At June 30, 1998, the Bank had a total of five full-time and one part-time
employee. 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, 1998. The
total net book value of the Bank's premises and equipment
32
<PAGE>
(including land, buildings and leasehold improvements and furniture, fixtures
and equipment) at June 30, 1998 was approximately $51,000. See Note 5 of the
Notes to Financial Statements.
Total
Approximate
Date Square Net Book Value at
Location Acquired Footage June 30, 1998
-------- -------- ------- -------------
Main Office: 1965 6,285 $51,000
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 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, 1998.
PART II
Item 5. Market for Registrant's Common Equity and
Related Stockholder Matters
Page 34 of the attached 1998 Annual Report to Stockholders is herein
incorporated by reference.
33
<PAGE>
Item 6. Management's Discussion and Analysis of Financial
Condition and Results of Operation
Pages 4 through 13 of the attached 1998 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, 1998, 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, 1997 and 1998..... 15
Consolidated Statements of Operations for the Years Ended June 30, 1996,
1997 and 1998................................................................. 16
Consolidated Statements of Stockholders' Equity for
Years Ended June 30, 1996, 1997 and 1998....................................... 17
Consolidated Statements of Cash Flows for Years Ended June 30, 1996,
1997 and 1998.................................................................. 18
Notes to Consolidated Financial Statements...................................... 19 to 23
</TABLE>
With the exception of the aforementioned information, the Company's Annual
Report to Stockholders for the year ended June 30, 1998, 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.
34
<PAGE>
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 1998, 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 1998, 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.
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, 1998, 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 1998, a copy of which will be filed not later than
120 days after the close of the fiscal year.
35
<PAGE>
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 1998, 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 1998, a copy of which will be filed
not later than 120 days after the close of the fiscal year.
36
<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 3(ii)
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 ***
(c) Recognition and Retention Plan ***
11 Statement re: computation of per share earnings None
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 23
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.
*** Filed as exhibits to the Company's Form 10-KSB (File No. 0-27700) for the
fiscal year ended June 30, 1997.
(b) Reports on Form 8-K
The Company filed a report on Form 8-K on July 29, 1998 (File No. 0-27700)
regarding amendments to the bylaws.
37
<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 25, 1998 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.
<TABLE>
<S> <C>
By: /s/ Kevin J. Kavanaugh By: /s/ Cleora Gillespie
----------------------------------- -----------------------------------
Kevin J. Kavanaugh, Chairman of the Cleora Gillespie, Secretary and
Board, President and Chief Treasurer (Chief Financial
Executive Officer and Accounting Officer)
(Principal Executive and Operating
Officer)
Date: September 25, 1998 Date: September 25, 1998
By: /s/ Robert R. Ernst By: /s/ Henry J. DeBuisseret, Jr.
-------------------------- -----------------------------------
Robert R. Ernst, Director Henry J. DeBuisseret, Jr., Director
Date: September 25, 1998 Date: September 25, 1998
By: /s/ John H. White By: /s/ L. Patrick Kavanaugh
-------------------------- -----------------------------------
John H. White, Director L. Patrick Kavanaugh, Director
Date: September 25, 1998 Date: September 25, 1998
By: /s/ Mary E. Dennison
--------------------------
Mary E. Dennison, Director
Date: September 25, 1998
</TABLE>
38
HBANCORPORATION, INC.
BY-LAWS
<PAGE>
HBANCORPORATION, INC.
BY-LAWS
ARTICLE I
STOCKHOLDERS
Section 1. Annual Meeting.
An annual meeting of the stockholders, for the election of directors to
succeed those whose terms expire and for the transaction of such other business
as may properly come before the meeting, shall be held at such place, on such
date, and at such time as the Board of Directors shall each year fix.
Section 2. Special Meetings.
Subject to the rights of the holders of any class or series of preferred
stock of the Corporation, special meetings of stockholders of the Corporation
may be called only by the Board of Directors pursuant to a resolution adopted by
a majority of the total number of directors which the Corporation would have if
there were no vacancies on the Board of Directors (hereinafter the "Whole
Board").
Section 3. Notice of Meetings.
Written notice of the place, date, and time of all meetings of the
stockholders shall be given, not less than ten (10) nor more than sixty (60)
days before the date on which the meeting is to be held, to each stockholder
entitled to vote at such meeting, except as otherwise provided herein or
required by law (meaning, here and hereinafter, as required from time to time by
the Delaware General Corporation Law or the Certificate of Incorporation of the
Corporation).
When a meeting is adjourned to another place, date or time, written notice
need not be given of the adjourned meeting if the place, date and time thereof
are announced at the meeting at which the adjournment is taken; provided,
however, that if the date of any adjourned meeting is more than thirty (30) days
after the date for which the meeting was originally noticed, or if a new record
date is fixed for the adjourned meeting, written notice of the place, date and
time of the adjourned meeting shall be given in conformity herewith. At any
adjourned meeting, any business may be transacted which might have been
transacted at the original meeting.
Section 4. Quorum.
At any meeting of the stockholders, the holders of at least one-third of
all of the shares of the stock entitled to vote at the meeting, present in
person or by proxy, shall constitute a quorum for all purposes, unless or except
to the extent that the presence of a larger number may be required by law. Where
a separate vote by a class or classes is required, a majority of the shares of
such class or classes, present in person or represented by proxy, shall
constitute a quorum entitled to take action with respect to that vote on that
matter.
<PAGE>
If a quorum shall fail to attend any meeting, the chairman of the meeting
or the holders of a majority of the shares of stock entitled to vote who are
present, in person or by proxy, may adjourn the meeting to another place, date
or time.
If a notice of any adjourned special meeting of stockholders is sent to all
stockholders entitled to vote thereat, stating that it will be held with those
present constituting a quorum, then except as otherwise required by law, those
present at such adjourned meeting shall constitute a quorum, and all matters
shall be determined by a majority of the votes cast at such meeting.
Section 5. Organization.
Such person as the Board of Directors may have designated or, in the
absence of such a person, the President of the Corporation or, in his or her
absence, such person as may be chosen by the holders of a majority of the shares
entitled to vote who are present, in person or by proxy, shall call to order any
meeting of the stockholders and act as chairman of the meeting. In the absence
of the Secretary of the Corporation, the secretary of the meeting shall be such
person as the chairman appoints.
Section 6. Conduct of Business.
(a) The chairman of any meeting of stockholders shall determine the order
of business and the procedure at the meeting, including such regulation of the
manner of voting and the conduct of discussion as seem to him or her in order.
(b) At any annual meeting of the stockholders, only such business shall be
conducted as shall have been brought before the meeting (i) by or at the
direction of the Board of Directors or (ii) by any stockholder of the
Corporation who is entitled to vote with respect thereto and who complies with
the notice procedures set forth in this Section 6(b). For business to be
properly brought before an annual meeting by a stockholder, the stockholder must
have given timely notice thereof in writing to the Secretary of the Corporation.
To be timely, a stockholder's notice must be received at the principal executive
offices of the Corporation no later than sixty (60) days from the Corporation's
fiscal year end. A stockholder's notice to the Secretary shall set forth as to
each matter such stockholder proposes to bring before the annual meeting (i) a
brief description of the business desired to be brought before the annual
meeting and the reasons for conducting such business at the annual meeting, (ii)
the name and address, as they appear on the Corporation's books, of the
stockholder who proposed such business, (iii) the class and number of shares of
the Corporation's capital stock that are beneficially owned by such stockholder
and (iv) any material interest of such stockholder in such business.
Notwithstanding anything in these By-laws to the contrary, no business shall be
brought before or conducted at an annual meeting except in accordance with the
provisions of this Section 6(b). The officer of the Corporation or other person
presiding over the annual meeting shall, if the facts so warrant, determine and
declare to the meeting that business was not properly brought before the meeting
in accordance with the provisions of this Section 6(b) and, if he should so
determine, he shall so declare to the meeting and any such business so
determined to be not properly brought before the meeting shall not be
transacted.
At any special meeting of the stockholders, only such business shall be
conducted as shall have been brought before the meeting by or at the direction
of the Board of Directors or by or
<PAGE>
at the direction of the holders of not less than one-tenth of all the
outstanding capital stock of the Corporation at whose instance the special
meeting is called.
(c) Only persons who are nominated in accordance with the procedures set
forth in these By-laws shall be eligible for election as directors. Nominations
of persons for election to the Board of Directors of the Corporation may be made
at a meeting of stockholders at which directors are to be elected only (i) by or
at the direction of the Board of Directors or (ii) by any stockholder of the
Corporation entitled to vote for the election of directors at the meeting who
complies with the notice procedures set forth in this Section 6(c). Such
nominations, other than those made by or at the direction of the Board of
Directors, shall be made by timely notice in writing to the Secretary of the
Corporation and contain the following information and any other information
reasonably requested by the Board of Directors: (i) the personal history,
business background and experience of the nominee, including his or her material
business activities and affiliations during the past five years from the date of
nomination, (ii) a description of any material pending legal or administrative
proceedings in which the nominee is a party and any criminal indictment or
conviction of such nominee by a State or Federal court, (iii) a statement of the
assets and liabilities of the nominee as of the end of the fiscal year for each
of the five fiscal years immediately preceding the date of the nomination,
together with related statements of income and source or application of funds
for each of the fiscal years then concluded, all prepared in accordance with
generally accepted accounting principles consistently applied, and an interim
statement of the assets and liabilities of the nominee, together with related
statements of income and source and application of funds, as of a date not more
than ninety (90) days prior to the date of his or her nomination, and (iv) a
notarized certification from the nominee indicating whether the nominee has been
the subject of any criminal, civil or administrative judgements, consents,
undertakings or orders, or any past or ongoing indictments, formal
investigations, examinations, or administrative proceeding (excluding routine or
customary audits, inspections and investigations) issued by any federal or state
court, any department, agency, or commission of the United States Government,
any state or municipality, any self-regulatory trade or professional
organization or any foreign government or governmental agency, which involve:
(a) commission of a felony, fraud, moral turpitude, dishonesty or breach of
trust; (b) violation of securities or commodities laws or regulations; (c)
violation of depository institution laws or regulations; (d) violation of
housing authority laws or regulations; (e) violation of the rules, regulations,
codes of professional conduct or ethics of a self-regulatory trade or
professional organization; and (f) adjudication of bankruptcy or insolvency or
appointment of a receiver, conservator, trustee, referee, or guardian.. To be
timely, a stockholder's notice shall be delivered or mailed to and received at
the principal executive offices of the Corporation not less than 60 days prior
to the date of the meeting; provided, however, that in the event that less than
40 days' notice of the date of the meeting is given or made to stockholders,
notice by the stockholder to be timely must be so received not later than the
close of business on the 10th day following the day on which such notice of the
date of the meeting was mailed. Such stockholder's notice shall set forth (i) as
to each person whom such stockholder proposes to nominate for election or
re-election as a director, all information relating to such person that is
required to be disclosed in solicitations of proxies for election of directors,
or is otherwise required, in each case pursuant to Regulation 14A under the
Securities Exchange Act of 1934, as amended (including such person's written
consent to being named in the proxy statement as a nominee and to serving as a
director if elected); and (ii) as to the stockholder giving the notice: (x) the
name and address, as they appear on the Corporation's books, of such stockholder
and (y) the class and number of shares of the Corporation's capital stock that
are beneficially owned by such stockholder. At the request of the Board of
Directors, any person nominated by the Board of Directors for election as a
director shall furnish to the Secretary of the
<PAGE>
Corporation that information required to be set forth in a stockholder's notice
of nomination which pertains to the nominee. No person shall be eligible for
election as a director of the Corporation unless nominated in accordance with
the provisions of this Section 6(c). The officer of the Corporation or other
person presiding at the meeting shall, if the facts so warrant, determine that a
nomination was not made in accordance with such provisions and, if he or she
should so determine, he or she shall so declare to the meeting and the defective
nomination shall be disregarded.
Section 7. Proxies and Voting.
At any meeting of the stockholders, every stockholder entitled to vote may
vote in person or by proxy authorized by an instrument in writing (or as
otherwise permitted under applicable law) by the stockholder or his duly
authorized attorney-in-fact filed in accordance with the procedure established
for the meeting. Proxies solicited on behalf of the management shall be voted as
directed by the stockholder or in the absence of such direction, as determined
by a majority of the Board of Directors. No proxy shall be valid after eleven
months from the date of its execution except for a proxy coupled with an
interest.
Each stockholder shall have one (1) vote for every share of stock entitled
to vote which is registered in his or her name on the record date for the
meeting, except as otherwise provided herein or in the Certificate of
Incorporation of the Corporation or as required by law.
All voting, including on the election of directors but excepting where
otherwise required by law, may be by a voice vote; provided, however, that upon
demand therefore by a stockholder entitled to vote or his or her proxy, a stock
vote shall be taken. Every stock vote shall be taken by ballot, each of which
shall state the name of the stockholder or proxy voting and such other
information as may be required under the procedure established for the meeting.
Every vote taken by ballot shall be counted by an inspector or inspectors
appointed by the chairman of the meeting.
All elections shall be determined by a plurality of the votes cast, and
except as otherwise required by law or as provided in the Certificate of
Incorporation, all other matters shall be determined by a majority of the votes
cast.
Section 8. Stock List.
The officer who has charge of the stock transfer books of the Corporation
shall prepare and make, in the time and manner required by applicable law, a
list of stockholders entitled to vote and shall make such list available for
such purposes, at such places, at such times and to such persons as required by
applicable law. The stock transfer books shall be the only evidence as to the
identity of the stockholders entitled to examine the stock transfer books or to
vote in person or by proxy at any meeting of stockholders.
Section 9. Consent of Stockholders in Lieu of Meeting.
Subject to the rights of the holders of any class or series of preferred
stock of the Corporation, any action required or permitted to be taken by the
stockholders of the Corporation must be effected at a duly called annual or
special meeting of stockholders of the Corporation and may not be effected by
any consent in writing by such stockholders.
<PAGE>
Section 10. Inspectors of Election
The Board of Directors shall, in advance of any meeting of stockholders,
appoint one or more persons as inspectors of election, to act at the meeting or
any adjournment thereof and make a written report thereof, in accordance with
applicable law.
ARTICLE II
BOARD OF DIRECTORS
Section 1. General Powers, Number and Term of Office.
The business and affairs of the Corporation shall be managed by or under
the direction of the Board of Directors. The number of directors shall be as
provided for in the Certificate of Incorporation. The Board of Directors shall
annually elect a Chairman of the Board and a President from among its members
and shall designate, when present, either the Chairman of the Board or the
President to preside at its meetings.
The directors, other than those who may be elected by the holders of any
class or series of preferred stock, shall be divided into three classes, as
nearly equal in number as reasonably possible, with the term of office of the
first class to expire at the conclusion of the first annual meeting of
stockholders, the term of office of the second class to expire at the conclusion
of the annual meeting of stockholders one year thereafter and the term of office
of the third class to expire at the conclusion of the annual meeting of
stockholders two years thereafter, with each director to hold office until his
or her successor shall have been duly elected and qualified. At each annual
meeting of stockholders, commencing with the first annual meeting, directors
elected to succeed those directors whose terms expire shall be elected for a
term of office to expire at the third succeeding annual meeting of stockholders
after their election, with each director to hold office until his or her
successor shall have been duly elected and qualified.
Section 2. Vacancies and Newly Created Directorships.
Subject to the rights of the holders of any class or series of preferred
stock then outstanding, newly created directorships resulting from any increase
in the authorized number of directors or any vacancies in the Board of Directors
resulting from death, resignation, retirement, disqualification, removal from
office or other cause may be filled only by a majority vote of the directors
then in office, though less than a quorum, and directors so chosen shall hold
office for a term expiring at the annual meeting of stockholders at which the
term of office of the class to which they have been elected expires, and until
such director's successor shall have been duly elected and qualified. No
decrease in the number of authorized directors constituting the Board shall
shorten the term of any incumbent director.
Section 3. Regular Meetings.
Regular meetings of the Board of Directors shall be held at such place or
places, on such date or dates, and at such time or times as shall have been
established by the Board of Directors and publicized among all directors. A
notice of each regular meeting shall not be required.
<PAGE>
Section 4. Special Meetings.
Special meetings of the Board of Directors may be called by one-third (1/3)
of the directors then in office (rounded up to the nearest whole number) or by
the President and shall be held at such place, on such date, and at such time as
they or he or she shall fix. Notice of the place, date, and time of each such
special meeting shall be given to each director by whom it is not waived by
mailing written notice not less than five (5) days before the meeting or by
telegraphing or telexing or by facsimile transmission of the same not less than
twenty-four (24) hours before the meeting. Unless otherwise indicated in the
notice thereof, any and all business may be transacted at a special meeting.
Section 5. Quorum.
At any meeting of the Board of Directors, a majority of the authorized
number of directors then constituting the Board shall constitute a quorum for
all purposes. If a quorum shall fail to attend any meeting, a majority of those
present may adjourn the meeting to another place, date, or time, without further
notice or waiver thereof.
Section 6. Participation in Meetings By Conference Telephone.
Members of the Board of Directors, or of any committee thereof, may
participate in a meeting of such Board or committee by means of conference
telephone or similar communications equipment by means of which all persons
participating in the meeting can hear each other and such participation shall
constitute presence in person at such meeting.
Section 7. Conduct of Business.
At any meeting of the Board of Directors, business shall be transacted in
such order and manner as the Board may from time to time determine, and all
matters shall be determined by the vote of a majority of the directors present,
except as otherwise provided herein or required by law. Action may be taken by
the Board of Directors without a meeting if all members thereof consent thereto
in writing, and the writing or writings are filed with the minutes of
proceedings of the Board of Directors.
Section 8. Powers.
The Board of Directors may, except as otherwise required by law, exercise
all such powers and do all such acts and things as may be exercised or done by
the Corporation, including, without limiting the generality of the foregoing,
the unqualified power:
(1) To declare dividends from time to time in accordance with law;
(2) To purchase or otherwise acquire any property, rights or
privileges on such terms as it shall determine;
(3) To authorize the creation, making and issuance, in such form as it
may determine, of written obligations of every kind, negotiable or
non-negotiable, secured or unsecured, and to do all things necessary in
connection therewith;
<PAGE>
(4) To remove any officer of the Corporation with or without cause,
and from time to time to devolve the powers and duties of any officer upon
any other person for the time being;
(5) To confer upon any officer of the Corporation the power to
appoint, remove and suspend subordinate officers, employees and agents;
(6) To adopt from time to time such stock, option, stock purchase,
bonus or other compensation plans for directors, officers, employees and
agents of the Corporation and its subsidiaries as it may determine;
(7) To adopt from time to time such insurance, retirement, and other
benefit plans for directors, officers, employees and agents of the
Corporation and its subsidiaries as it may determine; and,
(8) To adopt from time to time regulations, not inconsistent with
these By-laws, for the management of the Corporation's business and
affairs.
Section 9. Compensation of Directors.
Directors, as such, may receive, pursuant to resolution of the Board of
Directors, fixed fees and other compensation for their services as directors,
including, without limitation, their services as members of committees of the
Board of Directors.
ARTICLE III
COMMITTEES
Section 1. Committees of the Board of Directors.
The Board of Directors, by a vote of a majority of the Board of Directors,
may from time to time designate committees of the Board, with such lawfully
delegable powers and duties as it thereby confers, to serve at the pleasure of
the Board and shall, for those committees and any others provided for herein,
elect a director or directors to serve as the member or members, designating, if
it desires, other directors as alternate members who may replace any absent or
disqualified member at any meeting of the committee. Any committee so designated
may exercise the power and authority of the Board of Directors to declare a
dividend, to authorize the issuance of stock or to adopt a certificate of
ownership and merger pursuant to Section 253 of the Delaware General Corporation
Law if the resolution which designated the committee or a supplemental
resolution of the Board of Directors shall so provide. In the absence or
disqualification of any member of any committee and any alternate member in his
or her place, the member or members of the committee present at the meeting and
not disqualified from voting, whether or not he or she or they constitute a
quorum, may by unanimous vote appoint another member of the Board of Directors
to act at the meeting in the place of the absent or disqualified member.
<PAGE>
Section 2. Conduct of Business.
Each committee may determine the procedural rules for meeting and
conducting its business and shall act in accordance therewith, except as
otherwise provided herein or required by law. Adequate provision shall be made
for notice to members of all meetings; one-third (1/3) of the members shall
constitute a quorum unless the committee shall consist of one (1) or two (2)
members, in which event one (1) member shall constitute a quorum; and all
matters shall be determined by a majority vote of the members present. Action
may be taken by any committee without a meeting if all members thereof consent
thereto in writing, and the writing or writings are filed with the minutes of
the proceedings of such committee.
Section 3. Nominating Committee.
The Board of Directors shall appoint a Nominating Committee of the Board,
consisting of three (3) members, one of which shall be the President if, and
only so long as, the President remains in office as a member of the Board of
Directors. The Nominating Committee shall have authority (a) to review any
nominations for election to the Board of Directors made by a stockholder of the
Corporation pursuant to Section 6(c)(ii) of Article I of these By-laws in order
to determine compliance with such By-law and (b) to recommend to the Whole Board
nominees for election to the Board of Directors to replace those directors whose
terms expire at the annual meeting of stockholders next ensuing.
ARTICLE IV
OFFICERS
Section 1. Generally.
(a) The Board of Directors as soon as may be practicable after the annual
meeting of stockholders shall choose a President, a Secretary and a Treasurer
and from time to time may choose such other officers as it may deem proper. The
President shall be chosen from among the directors. Any number of offices may be
held by the same person.
(b) The term of office of all officers shall be until the next annual
election of officers and until their respective successors are chosen, but any
officer may be removed from office at any time by the affirmative vote of a
majority of the authorized number of directors then constituting the Board of
Directors.
(c) All officers chosen by the Board of Directors shall each have such
powers and duties as generally pertain to their respective offices, subject to
the specific provisions of this Article IV. Such officers shall also have such
powers and duties as from time to time may be conferred by the Board of
Directors or by any committee thereof.
<PAGE>
Section 2. President.
The President shall be the chief executive officer and, subject to the
control of the Board of Directors, shall have general power over the management
and oversight of the administration and operation of the Corporation's business
and general supervisory power and authority over its policies and affairs. He
shall see that all orders and resolutions of the Board of Directors and of any
committee thereof are carried into effect.
Each meeting of the stockholders and of the Board of Directors shall be
presided over by such officer as has been designated by the Board of Directors
or, in his absence, by such officer or other person as is chosen at the meeting.
The Secretary or, in his absence, the General Counsel of the Corporation or such
officer as has been designated by the Board of Directors or, in his absence,
such officer or other person as is chosen by the person presiding, shall act as
secretary of each such meeting.
Section 3. Vice President.
The Vice President or Vice Presidents, if any, shall perform the duties of
the President in his absence or during his disability to act. In addition, the
Vice Presidents shall perform the duties and exercise the powers usually
incident to their respective offices and/or such other duties and powers as may
be properly assigned to them from time to time by the Board of Directors, the
Chairman of the Board or the President.
Section 4. Secretary.
The Secretary or an Assistant Secretary shall issue notices of meetings,
shall keep their minutes, shall have charge of the seal and the corporate books,
shall perform such other duties and exercise such other powers as are usually
incident to such offices and/or such other duties and powers as are properly
assigned thereto by the Board of Directors, the Chairman of the Board or the
President.
Section 5. Treasurer.
The Treasurer shall have charge of all monies and securities of the
Corporation, other than monies and securities of any division of the Corporation
which has a treasurer or financial officer appointed by the Board of Directors,
and shall keep regular books of account. The funds of the Corporation shall be
deposited in the name of the Corporation by the Treasurer with such associations
or trust companies as the Board of Directors from time to time shall designate.
He shall sign or countersign such instruments as require his signature, shall
perform all such duties and have all such powers as are usually incident to such
office and/or such other duties and powers as are properly assigned to him by
the Board of Directors, the Chairman of the Board or the President, and may be
required to give bond for the faithful performance of his duties in such sum and
with such surety as may be required by the Board of Directors.
Section 6. Assistant Secretaries and Other Officers.
The Board of Directors may appoint one or more assistant secretaries and
one or more assistants to the Treasurer, or one appointee to both such
positions, which officers shall have such
<PAGE>
powers and shall perform such duties as are provided in these By-laws or as may
be assigned to them by the Board of Directors, the Chairman of the Board or the
President.
Section 7. Action with Respect to Securities of Other Corporations
Unless otherwise directed by the Board of Directors, the President or any
officer of the Corporation authorized by the President shall have power to vote
and otherwise act on behalf of the Corporation, in person or by proxy, at any
meeting of stockholders of or with respect to any action of stockholders of any
other corporation in which this Corporation may hold securities and otherwise to
exercise any and all rights and powers which this Corporation may possess by
reason of its ownership of securities in such other Corporation.
ARTICLE V
STOCK
Section 1. Certificates of Stock.
Each stockholder shall be entitled to a certificate signed by, or in the
name of the Corporation by, the President or a Vice President, and by the
Secretary or an Assistant Secretary, or the Treasurer or an Assistant Treasurer,
certifying the number of shares owned by him or her. Any or all of the
signatures on the certificate may be by facsimile.
Section 2. Transfers of Stock.
Transfers of stock shall be made only upon the transfer books of the
Corporation kept at an office of the Corporation or by transfer agents
designated to transfer shares of the stock of the Corporation. Except where a
certificate is issued in accordance with Section 4 of Article V of these
By-laws, an outstanding certificate for the number of shares involved shall be
surrendered for cancellation before a new certificate is issued therefore.
Section 3. Record Date.
In order that the Corporation may determine the stockholders entitled to
notice of or to vote at any meeting of stockholders, or to receive payment of
any dividend or other distribution or allotment of any rights or to exercise any
rights in respect of any change, conversion or exchange of stock or for the
purpose of any other lawful action, the Board of Directors may fix a record
date, which record date shall not precede the date on which the resolution
fixing the record date is adopted and which record date shall not be more than
sixty (60) nor less than ten (10) days before the date of any meeting of
stockholders, nor more than sixty (60) days prior to the time for such other
action as hereinbefore described; provided, however, that if no record date is
fixed by the Board of Directors, the record date for determining stockholders
entitled to notice of or to vote at a meeting of stockholders shall be at the
close of business on the day next preceding the day on which notice is given or,
if notice is waived, at the close of business on the day next preceding the day
on which the meeting is held, and, for determining stockholders entitled to
receive payment of any dividend or other distribution or allotment of rights or
to exercise any rights of change, conversion or exchange
<PAGE>
of stock or for any other purpose, the record date shall be at the close of
business on the day on which the Board of Directors adopts a resolution relating
thereto.
A determination of stockholders of record entitled to notice of or to vote
at a meeting of stockholders shall apply to any adjournment of the meeting;
provided, however, that the Board of Directors may fix a new record date for the
adjourned meeting.
Section 4. Lost, Stolen or Destroyed Certificates.
In the event of the loss, theft or destruction of any certificate of stock,
another may be issued in its place pursuant to such regulations as the Board of
Directors may establish concerning proof of such loss, theft or destruction and
concerning the giving of a satisfactory bond or bonds of indemnity.
Section 5. Regulations.
The issue, transfer, conversion and registration of certificates of stock
shall be governed by such other regulations as the Board of Directors may
establish.
ARTICLE VI
NOTICES
Section 1. Notices.
Except as otherwise specifically provided herein or required by law, all
notices required to be given to any stockholder, director, officer, employee or
agent shall be in writing and may in every instance be effectively given by hand
delivery to the recipient thereof, by depositing such notice in the mail,
postage paid, by sending such notice by prepaid telegram or mailgram or by
sending such notice by facsimile machine or other electronic transmission. Any
such notice shall be addressed to such stockholder, director, officer, employee
or agent at his or her last known address as the same appears on the books of
the Corporation. The time when such notice is received, if hand delivered, or
dispatched, if delivered through the mail, by telegram or mailgram or by
facsimile machine or other electronic transmission, shall be the time of the
giving of the notice.
Section 2. Waivers.
A written waiver of any notice, signed by a stockholder, director, officer,
employee or agent, whether before or after the time of the event for which
notice is to be given, shall be deemed equivalent to the notice required to be
given to such stockholder, director, officer, employee or agent. Neither the
business nor the purpose of any meeting need be specified in such a waiver.
<PAGE>
ARTICLE VII
MISCELLANEOUS
Section 1. Facsimile Signatures.
In addition to the provisions for use of facsimile signatures elsewhere
specifically authorized in these By-laws, facsimile signatures of any officer or
officers of the Corporation may be used whenever and as authorized by the Board
of Directors or a committee thereof.
Section 2. Corporate Seal.
The Board of Directors may provide a suitable seal, containing the name of
the Corporation, which seal shall be in the charge of the Secretary. If and when
so directed by the Board of Directors or a committee thereof, duplicates of the
seal may be kept and used by the Treasurer or by an Assistant Secretary or
Assistant Treasurer.
<PAGE>
Section 3. Reliance upon Books, Reports and Records.
Each director, each member of any committee designated by the Board of
Directors, and each officer of the Corporation shall, in the performance of his
or her duties, be fully protected in relying in good faith upon the books of
account or other records of the Corporation and upon such information, opinions,
reports or statements presented to the Corporation by any of its officers or
employees, or committees of the Board of Directors so designated, or by any
other person as to matters which such director or committee member reasonably
believes are within such other person's professional or expert competence and
who has been selected with reasonable care by or on behalf of the Corporation.
Section 4. Fiscal Year.
The fiscal year of the Corporation shall be as fixed by the Board of
Directors.
Section 5. Time Periods.
In applying any provision of these By-laws which requires that an act be
done or not be done a specified number of days prior to an event or that an act
be done during a period of a specified number of days prior to an event,
calendar days shall be used, the day of the doing of the act shall be excluded
and the day of the event shall be included.
ARTICLE VIII
AMENDMENTS
The By-laws of the Corporation may be adopted, amended or repealed as
provided in Article SEVENTH of the Certificate of Incorporation of the
Corporation.
HBANCORPORATION, INC.
LAWRENCEVILLE, ILLINOIS
CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997 AND 1998
<PAGE>
HBANCORPORATION, INC.
LAWRENCEVILLE, ILLINOIS
TABLE OF CONTENTS
PAGE
----
INDEPENDENT AUDITOR'S REPORT 1
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION 2
CONSOLIDATED STATEMENTS OF OPERATIONS 3
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY 4
CONSOLIDATED STATEMENTS OF CASH FLOWS 5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 6 - 20
<PAGE>
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, 1997 and 1998, 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, 1998. 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, 1997 and 1998, and the results of their
operations and their cash flows for each of the three years in the period ended
June 30, 1998, in conformity with generally accepted accounting principles.
CERTIFIED PUBLIC ACCOUNTANTS
AND CONSULTANTS
Washington, Indiana
August 6, 1998
-1-
<PAGE>
HBANCORPORATION, INC.
LAWRENCEVILLE, ILLINOIS
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
JUNE 30,
<TABLE>
<CAPTION>
1997 1998
---------------- ---------------
ASSETS
Cash and Cash Equivalents:
<S> <C> <C>
Cash $ 357,424 $ 612,736
Interest bearing deposits 1,292,870 2,120,840
---------------- ---------------
Total Cash and Cash Equivalents 1,650,294 2,733,576
Certificates of deposit with other banks 164,730 -0-
Investment securities held-to-maturity at cost (fair
value $1,028,152 (1997) and $1,030,465 (1998)) 1,024,461 1,022,166
Investment securities available-for-sale at fair value 1,098,227 1,628,638
Loans receivable - net 13,506,764 15,582,966
Office properties and equipment, at cost,
less accumulated depreciation of $130,412
(1997) and $144,216 (1998) 39,153 51,451
Federal Home Loan Bank stock, at cost 66,000 87,500
Federal Reserve Bank stock, at cost 67,800 67,800
Other assets 184,849 284,153
---------------- ---------------
Total Assets $ 17,802,278 $ 21,458,250
================ ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Passbook savings $ 1,940,931 $ 1,871,150
Money market accounts 384,333 681,126
Certificates of deposit 6,282,479 7,969,700
Certificates of deposit $100,000 and over 635,853 1,771,564
---------------- ---------------
Total Deposits 9,243,596 12,293,540
---------------- ---------------
Advances from FHLB -0- 1,750,000
Other Liabilities 275,157 365,237
---------------- ---------------
Total Liabilities 9,518,753 14,408,777
---------------- ---------------
Stockholders' Equity:
Common stock, $.01 par value, 2 million shares authorized,
493,320 issued and outstanding (1997) and (1998) 4,933 4,933
Additional paid in capital 4,514,279 4,540,644
Retained earnings 4,015,104 4,166,189
Treasury stock, at cost (26,838) (1,359,078)
Net unrealized appreciation on investment securities
available-for-sale net of deferred tax 111,500 164,250
Unearned ESOP & recognition and retention shares (335,453) (467,465)
---------------- ----------------
Total Stockholders' Equity 8,283,525 7,049,473
---------------- ---------------
Total Liabilities and Stockholders' Equity $ 17,802,278 $ 21,458,250
================ ===============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
-2-
<PAGE>
HBANCORPORATION, INC.
LAWRENCEVILLE, ILLINOIS
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED JUNE 30,
<TABLE>
<CAPTION>
1996 1997 1998
--------------- --------------- ---------------
<S> <C> <C> <C>
INTEREST INCOME
Loans receivable $ 852,933 $ 1,119,132 $ 1,380,460
Investments 270,081 290,670 294,266
--------------- --------------- ---------------
Total Interest Income 1,123,014 1,409,802 1,674,726
--------------- --------------- ---------------
INTEREST EXPENSE
Deposits 469,235 402,304 502,437
Interest on FHLB advances -0- -0- 78,015
---------------- ---------------- ---------------
Total Interest Expense 469,235 402,304 580,452
--------------- --------------- ---------------
Net Interest Income 653,779 1,007,498 1,094,274
Provision for Loan Losses 5,000 10,000 5,000
--------------- --------------- ---------------
Net interest income after provision for
loan losses 648,779 997,498 1,089,274
--------------- --------------- ---------------
NONINTEREST INCOME
Gain (loss) on sale of securities 1,299 -0- -0-
Customer service fees and other 4,075 16,729 38,657
--------------- --------------- ---------------
Total Noninterest Income 5,374 16,729 38,657
--------------- --------------- ---------------
NONINTEREST EXPENSES
General and administrative
Compensation and benefits 230,410 321,426 369,336
Occupancy and equipment 38,148 39,094 41,813
Deposit insurance premium 26,199 22,140 19,751
SAIF Assessment -0- 62,144 -0-
Computer expense 14,660 21,877 18,005
Legal and professional expense 7,657 50,787 48,754
Other 92,175 104,224 104,249
--------------- --------------- ---------------
Total Noninterest Expense 409,249 621,692 601,908
--------------- --------------- ---------------
INCOME BEFORE INCOME TAX 244,904 392,535 526,023
Income Tax Expense 73,654 174,100 187,581
--------------- --------------- ---------------
NET INCOME $ 171,250 $ 218,435 $ 338,442
=============== =============== ===============
Earnings Per Share
Primary $ 0.42 $ 0.47 $ 0.85
=============== =============== ===============
Fully diluted $ 0.42 $ 0.47 $ 0.77
=============== ============== ===============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
-3-
<PAGE>
HBANCORPORATION, INC
LAWRENCEVILLE, ILLINOS
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, 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
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)
Net income for the year ended June 30, 1998 0 0 338,442 0
Purchase of treasury stock 0 0 0 (1,638,040)
Issuance of treasury stock to RRP 0 0 0 305,800
Dividends declared 0 0 (145,824) 0
Change in unrealized gain on securities available-for-sale
net of applicable deferred income taxes of $115,500 0 0 0 0
Effect of contribution to fund ESOP 0 0 0 0
ESOP and RRP cost 0 0 (41,533) 0
Allocation ESOP shares 0 26,365 0 0
--------------------------------------------------------------------
BALANCE, June 30, 1998 $4,933 $4,540,644 $4,166,189 ($1,359,078)
====================================================================
Unrealized ESOP RRP
Gain (Loss) Compen- Compen- Total
Securities sation sation Equity
--------------------------------------------------------------------
<CAPTION>
BALANCE, June 30, 1995 $51,157 $0 $0 $3,834,437
Net income for the year ended June 30, 1996 0 0 0 171,250
Proceeds from issuance of common stock 0 (394,650) 0 4,115,754
Effect of contribution to fund ESOP 19,732 0 19,732
Change in unrealized gain on securities available for sale
net of applicable deferred income taxes of $43,000 16,843 0 0 16,843
--------------------------------------------------------------------
BALANCE, June 30, 1996 68,000 (374,918) 0 8,158,016
Net income for the year ended June 30, 1997 0 0 0 218,435
Purchase of treasury stock 0 0 0 (26,838)
Dividends declared 0 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 0 43,500
Effect of contribution to fund ESOP 0 39,465 0 39,465
Allocation of shares from ESOP 0 0 0 8,808
--------------------------------------------------------------------
BALANCE, June 30, 1997 111,500 (335,453) 0 8,283,525
Net income for the year ended June 30, 1998 0 0 0 338,442
Purchase of treasury stock 0 0 0 (1,638,040)
Issuance of treasury stock to RRP 0 0 0 305,800
Dividends declared 0 0 0 (145,824)
Change in unrealized gain on securities available-for-sale
net of applicable deferred income taxes of $115,500 52,750 0 0 52,750
Effect of contribution to fund ESOP 0 39,465 0 39,465
ESOP and RRP cost 0 0 (171,477) (213,010)
Allocation ESOP shares 0 0 0 26,365
--------------------------------------------------------------------
BALANCE, June 30, 1998 $164,250 ($295,988) ($171,477) $7,049,473
====================================================================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
-4-
<PAGE>
HBANCORPORATION, INC.
LAWRENCEVILLE, ILLINOIS
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED JUNE 30,
<TABLE>
<CAPTION>
1996 1997 1998
--------------- --------------- ---------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income $ 171,250 $ 218,435 $ 338,442
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 7,825 11,024 13,804
(Increase) decrease in other asset (25,606) 38,980 (19,174)
(Increase) in interest receivable (36,418) (27,520) (80,130)
Increase in other liabilities 43,170 106,861 90,080
Provision for loan loss 5,000 10,000 5,000
(Gain) on sale of assets (1,299) -0- -0-
--------------- --------------- ---------------
Cash provided by operating activities 163,922 357,780 348,022
--------------- --------------- ---------------
CASH FLOWS FROM INVESTING ACTIVITIES
Investments in certificates of deposit in other
financial institutions, net (increase) decrease (543,425) 436,729 164,730
Purchase of Federal Home Loan Bank stock -0- -0- (21,500)
Purchase of Federal Reserve Bank stock (67,800) -0- -0-
Proceeds from maturities of investments
held-to-maturity 10,812 7,223 1,002,295
Purchase of investment securities held to maturity -0- -0- (1,000,000)
Proceeds from maturities of investments
available-for-sale 1,094,505 116,782 535,873
Purchase of investment securities available-for-sale (2,026,775) -0- (1,013,534)
Purchase of fixed assets (32,802) (7,233) (26,102)
Net (increase) decrease in loans 663,369 (3,269,487) (2,081,202)
--------------- --------------- ---------------
Cash (used) by investing activities (902,116) (2,715,986) (2,439,440)
--------------- --------------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES
Payment of dividends -0- (157,861) (145,824)
Advances from FHLB -0- -0- 1,750,000
Net increase (decrease) in demand deposits, NOW
Accounts, savings accounts and certificates of deposits (1,561,636) 331,235 3,049,944
Proceeds from issuance of common stock 4,115,754 -0- -0-
Purchase of treasury stock -0- (26,838) (1,638,040)
Issuance of treasury stock to RRP -0- -0- 305,800
Contribution to fund ESOP -0- -0- 39,465
Allocation of ESOP shares -0- 8,808 26,365
ESOP and RRP cost -0- -0- (213,010)
--------------- --------------- ---------------
Cash provided by financing activities 2,554,118 155,344 3,174,700
--------------- --------------- ---------------
Net increase in cash and cash equivalents 1,815,924 (2,202,862) 1,083,282
Cash and Cash Equivalents at Beginning of Period 2,037,232 3,853,156 1,650,294
--------------- --------------- ---------------
Cash and Cash Equivalents at End of Period $ 3,853,156 $ 1,650,294 $ 2,733,576
=============== =============== ===============
Cash paid for:
Interest $ 474,997 $ 390,253 $ 538,495
=============== =============== ===============
Income taxes $ 34,066 $ 126,418 $ 193,481
=============== =============== ===============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
-5-
<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. The
stock of this Company is traded on the OTC electronic Bulletin Board under the
symbol HBIN.
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.
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.
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.
-6-
<PAGE>
HBANCORPORATION, INC.
LAWRENCEVILLE, ILLINOIS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
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
over the period to maturity. Other marketable securities are classified as
available-for-sale and are carried at fair value. Unrealized holding gains and
losses net of tax, on securities available-for-sale are reported as a net amount
in a separate component of retained earnings, until realized. Gains and losses
on the sale of investment securities are determined using the specific
identification method. Premiums and discounts are recognized in interest income
using the interest method over the period to maturity.
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.
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.
-7-
<PAGE>
HBANCORPORATION, INC.
LAWRENCEVILLE, ILLINOIS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
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. Substantially all loans are secured
by consumer assets and real estate.
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.
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.
-8-
<PAGE>
HBANCORPORATION, INC.
LAWRENCEVILLE, ILLINOIS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
Accrued interest. The carrying amounts of accrued interest approximate their
fair values.
FHLB Advances. The fair value for FHLB advances is based on the estimates of the
rate the company would pay on such advances, applied for the time period until
maturity.
EARNINGS PER SHARE
Earnings per share has been computed on the basis of the weighted average number
of shares of common stock outstanding. 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.
EFFECT OF NEW FINANCIAL ACCOUNTING STANDARDS
In August 1996, the FASB issued Statement of Financial Accounting Standards No.
125, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishment of Liabilities" ("SFAS No. 125"). SFAS No. 125 provides
accounting and reporting standards for transfers and servicing of financial
assets and extinguishment of liabilities using a financial-components approach
that focuses on control of the asset or liability. It requires that an entity
recognize only assets it controls and liabilities it has incurred and should
derecognize assets only when control has been surrendered and derecognize
liabilities only when they have been extinguished. SFAS No. 125 is effective for
transfers and serving of financial assets and extinguishment of liabilities
occurring after December 31, 1996, and is to be applied prospectively. In
December 1996, the FASB issued SFAS No. 127, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishment of Liabilities," which defers
the effective date of SFAS No. 125 for one year. These standards did not have a
material impact on its consolidated financial statements.
In February of 1997, the FASB issued SFAS No. 128, "Earnings Per Share," that
specifies the computation, presentation, and disclosure requirements for
earnings per share for entities with publicly held common stock. SFAS No. 128 is
effective for financial statements ending after December 15, 1997. The Company
implemented SFAS No. 128 which effects disclosures only.
In February of 1997, the FASB issued SFAS No. 129, "Disclosure of Information
about Capital Structure," that specifies standards for disclosing information
about an entity's capital structure. SFAS No. 129 is effective for financial
statements ending after December 15, 1997. The Company implemented SFAS No. 129
which effects disclosures only.
In June of 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income,"
which establishes standards for reporting and display of comprehensive income
and its components in a full set of general purpose financial statements. This
statement requires classification of items of other compressive income by their
nature in the financial statements and display of the accumulated balance of
other comprehensive income separately from retained earnings and additional paid
in capital in the equity section of the statement of financial position. This
statement 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.
-9-
<PAGE>
HBANCORPORATION, INC.
LAWRENCEVILLE, ILLINOIS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
EFFECT OF NEW FINANCIAL ACCOUNTING STANDARDS, CONTINUED
In June of 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information," which establishes standards for reporting
information about operating segments in annual financial statements and requires
that those businesses report selective information about operating segments in
interim financial reports to shareholders. It also establishes standards for
related disclosures about products and services, geographic areas, and major
customers. This statement is effective for fiscal years beginning after December
31, 1997. This statement requires disclosure information in the financial
statements and is not expected to have any impact on the Company's financial
condition or results of operation.
The FASB has issued SFAS No. 133, "Comprehensive Standards Requiring Uniform
Hedge Accounting Rules". All derivatives must be recorded on the balance sheet
at fair value, with an offset to either current earnings if held as a trading
security, or other comprehensive income if held as available for sale. This
statement is effective for fiscal years beginning after June 15, 1999, and will
not effect the Bank.
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, 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
============= ============= ============= =============
June 30, 1998:
FHLMC Common Stock $ 4,563 $ 252,628 $ -0- $ 257,191
FHLMC Pool 582,846 9,284 -0- 592,130
FNMA Issue 761,479 17,838 -0- 779,317
------------- ------------- ------------- -------------
$ 1,348,888 $ 279,750 $ -0- $ 1,628,638
============= ============= ============= =============
Held-to-Maturity Securities:
June 30, 1997:
FHLB Securities $ 1,000,000 $ 2,884 $ -0- $ 1,002,884
GNMA Certificates 24,461 807 -0- 25268
------------- ------------- ------------- -------------
$ 1,024,461 $ 3,691 $ -0- $ 1,028,152
============ ============ ============ ============
June 30, 1998:
FHLB Securities $ 1,000,000 $ 7,177 $ -0- $ 1,007,177
GNMA Certificates 22,166 1,122 -0- 23,288
------------- ------------- ------------- -------------
$ 1,022,166 $ 8,299 $ -0- $ 1,030,465
============= ============= ============= =============
</TABLE>
-10-
<PAGE>
HBANCORPORATION, INC.
LAWRENCEVILLE, ILLINOIS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 - INVESTMENT SECURITIES, CONTINUED
There were no gross realized gains on sales of available-for-sale securities in
1997 and 1998. There were no proceeds received from the sales of
available-for-sale securities in 1997 and 1998.
The scheduled maturities of securities held-to-maturity and securities
available-for-sale at June 30, 1998, 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 $ 202,771 $ 204,417 $ 311,502 $ 376,105
Due from one to five years 813,855 820,463 1,037,386 1,252,533
Due from five to ten years 5,540 5,585 -0- -0-
Due after ten years -0- -0- -0- -0-
-------------- -------------- -------------- -------------
$ 1,022,166 $ 1,030,465 $ 1,348,888 $ 1,628,638
============= ============= ============= =============
</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,
1997 1998
----------- -----------
Real Estate Loans:
One- to four-family $5,801,198 $6,605,769
Commercial 3,695,066 4,462,368
Multi-family 187,030 220,131
Construction 432,101 800,000
----------- -----------
Total real estate loans 10,115,395 12,088,268
----------- -----------
Other Loans:
Consumer Loans:
Deposit account 21,123 126,144
Secured 458,452 438,696
Unsecured 200,904 146,301
----------- -----------
Total consumer loans 680,479 711,141
Commercial business loans 2,984,283 3,455,503
Financing leases 146,033 67,967
----------- -----------
Total other loans 3,810,795 4,234,611
----------- -----------
Total loans receivable, gross 13,926,190 16,322,879
Less:
Loans in process 291,009 606,496
Allowance for losses 128,417 133,417
----------- -----------
Total loans receivable, net $13,506,764 $15,582,966
=========== ===========
-11-
<PAGE>
HBANCORPORATION, INC.
LAWRENCEVILLE, ILLINOIS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 - LOANS RECEIVABLE, CONTINUED
The scheduled maturities of loans receivable at June 30, 1998 were as follows:
<TABLE>
<CAPTION>
One- Multi-family
to-Four and Financing Commercial
Family Commercial Leases Consumer Business Total
----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Due in one year or less $ 2,271,920 $ 5,016,497 $ 67,967 $ 711,141 $ 3,455,503 $11,523,028
Due from one to five years 4,333,849 466,002 -0- -0- -0- 4,799,851
Due from five to ten years -0- -0- -0- -0- -0- -0-
Due after ten years -0- -0- -0- -0- -0- -0-
----------- ----------- ----------- ----------- ----------- -----------
$ 6,605,769 $ 5,482,499 $ 67,967 $ 711,141 $ 3,455,503 $16,322,879
=========== =========== =========== =========== =========== ===========
</TABLE>
Activity in the allowance for loan losses is summarized as follows:
<TABLE>
<CAPTION>
June 30,
-----------------------------------------
1996 1997 1998
------------ ------------ ------------
<S> <C> <C> <C>
Balance at beginning of year $ 113,417 $ 118,417 $ 128,417
Provision charged to income 5,000 10,000 5,000
Charge-offs -0- -0- -0-
Recoveries -0- -0- -0-
------------ ------------ ------------
Balance at end of year $ 118,417 $ 128,417 $ 133,417
============ ============ ============
</TABLE>
At June 30, 1997 and 1998, 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, 1997 and 1998,
respectively. Interest income on impaired loans of -0- and -0- was recognized
for cash payments received in 1997 and 1998, 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, 1997 and 1998 were immaterial.
NOTE 4 - OFFICE PROPERTIES AND EQUIPMENT
Office properties and equipment consist of the following at June 30,
1997 1998
--------- ----------
Buildings and improvements $ 53,029 $ 54,514
Office equipment 116,536 141,153
--------- ---------
169,565 195,667
Less accumulated depreciation (130,412) (144,216)
--------- ---------
Office properties and equipment, net $ 39,153 $ 51,451
========= =========
Depreciation expense for the years ended June 30, 1997 and 1998, was $11,024 and
$13,804, respectively.
-12-
<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 $635,853 and $1,771,564 at June 30,
1997 and 1998, respectively.
At June 30, 1998, scheduled maturities of certificates of deposit are as
follows:
1999 $ 9,741,264
2000 -0-
2001 -0-
2002 -0-
2003 -0-
Thereafter -0-
-------------
$ 9,741,264
=============
Deposits in excess of $100,000 are not insured. Interest expense on certificates
of deposit exceeding $100,000 was approximately $17,528, $30,996, and $44,991,
for the years ended June 30, 1996, 1997, and 1998, respectively.
Interest expense on deposits is summarized as follows for the years ended June
30,
1996 1997 1998
-------- -------- --------
Passbook savings $ 60,589 $ 57,227 $ 81,471
Money Market Deposits 46,420 42,911 1,491
Certificates of deposits 362,226 302,166 419,475
-------- -------- --------
$469,235 $402,304 $502,437
======== ======== ========
NOTE 6 - BORROWED FUNDS
Borrowed funds consisted of the following at June 30,
1997 1998
------------ --------------
Advances from the Federal Home Loan Bank $ -0- $ 1,750,000
============ ==============
The Company may borrow funds from the Federal Home Loan Bank of Chicago subject
to certain limitations. The funds borrowed from the FHLB are collateralized by a
blanket security agreement.
Advances from the FHLB consist of the following:
June 30, 1998
Weighted Average
Interest
Maturity Rate Amount
------------- ------------- -------------
1999 -- -0-
2000 -- -0-
2001 6.02% 400,000
2002 -- -0-
2003 5.38% 1,350,000
Thereafter -- -0-
-------------
$ 1,750,000
=============
-13-
<PAGE>
HBANCORPORATION, INC.
LAWRENCEVILLE, ILLINOIS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6 - BORROWED FUNDS CONTINUED
Interest expense on FHLB advances for the years ended June 30, 1996, 1997 and
1998, was $-0-, $-0- and $78,015, respectively.
NOTE 7 - INCOME TAXES
The provision for income taxes for the years ended June 30 consists of the
following:
1996 1997 1998
--------- --------- ----------
Current $ 46,389 $ 170,038 $ 193,477
Deferred 27,265 4,062 (5,896)
--------- --------- ----------
$ 73,654 $ 174,100 $ 187,581
========= ========= =========
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,
------------------------------------------
1996 1997 1998
--------- --------- ---------
<S> <C> <C> <C>
Expected income tax at 34% rate $ 83,267 $ 145,991 $ 178,848
Increase (Decrease) resulting from
State income tax effect 9,796 20,856 23,121
Surtax exemption (5,930) -0- (14,388)
Other (13,479) 7,253 -0-
--------- --------- ---------
$ 73,654 $ 174,100 $ 187,581
========= ========= =========
Effective tax rate 30.1% 40.5% 35.7%
========= ========= =========
</TABLE>
Deferred tax liabilities have been provided for taxable temporary differences
related to unrealized gains on available-for-sale securities, accumulated
depreciation, employee benefit plans and cash-accrual differences. The deferred
tax liabilities in the accompanying consolidated statements of financial
condition include the following components at June 30:
1997 1998
--------- ----------
Unrealized gains on available-for-sale securities $ 78,500 $ 115,500
Accumulated depreciation 10,014 13,026
Cash-accrual conversions 42,559 55,087
Employee benefit plans -0- (21,436)
--------- ---------
Deferred tax liability $ 131,073 $ 162,177
========= =========
NOTE 8 - 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 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, 1996, and 1997, the Bank contributed $19,806,
and $3,822, respectively.
-14-
<PAGE>
LAWRENCEVILLE, ILLINOIS
HBANCORPORATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8 - EMPLOYEE BENEFIT AND STOCK OPTION PLANS, CONTINUED
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, 1997 and 1998 totaled $25,829, $39,465, and $35,764
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, 37,484 shares
committed to be allocated at June 30, 1997, and 28,217 shares committed to be
allocated at June 30, 1998. At June 30, 1998, 5,242 shares were allocated. The
fair value of unallocated shares at June 30, 1998 was $449,723.
Recognition and Retention Plans (RRP)
On April 28, 1997, the stockholders' approved a 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 shares of common stock in the open market at a total
cost of approximately $304,488, which reduced consolidated stockholders' equity.
The cost of shares granted under the plan will be amortized to compensation
expense over the related vesting period.
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.
-15-
<PAGE>
LAWRENCEVILLE, ILLINOIS
HBANCORPORATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9 - RELATED PARTIES
Transactions with related parties include loans receivable and savings accounts
of officers and directors. Loan balances of related parties at June 30, 1997 and
1998, are $47,176 and $841,865 respectively. For the year ended June 30, 1998,
new loans to such related parties amounted to $902,500 and repayments amounted
to $107,811. Savings account balances of related parties at June 30, 1997 and
1998, are $304,235 and $308,324, respectively.
NOTE 10 - REGULATIONS ON BANK DIVIDENDS AND CASH
The principal source of income and funds for the Company is dividends from the
Bank. During the year 1999, the amount of dividends that the Bank can pay to the
Company without obtaining prior regulatory approval is limited to the total of
their 1998 net income and $275,127 (the amount available at June 30, 1998). 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, 1998, the Bank had $67,800 of FRB stock,
which was in compliance with these reserve requirements.
NOTE 11 - FINANCIAL INSTRUMENTS
The Bank is a party to financial instruments with off-balance-sheet risk in the
normal course of business to meet the financing needs of its customers and to
reduce its own exposure to fluctuations in interest rates. These financial
instruments include commitments to extend credit and lines of credit. Those
instruments involve, to varying degrees, elements of credit and interest-rate
risk in excess of the amount recognized in the consolidated statements of
financial condition. The contract or notional amounts of these instruments
reflect the extent of the Bank's involvement in particular classed of financial
instruments.
The Bank's exposure to credit loss in the event of nonperformance by the other
party to the financial instrument for commitments to extend credit and lines of
credit is represented by the contractual notional amount of those instruments.
The Bank uses the same credit policies in making commitments and conditional
obligations as it does for on-balance-sheet instruments.
NOTE 12 - 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.
-16-
<PAGE>
LAWRENCEVILLE, ILLINOIS
HBANCORPORATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 12 - FAIR VALUES OF FINANCIAL INSTRUMENTS CONTINUED
The estimated fair values of the Company's financial instruments at June 30 were
as follows:
<TABLE>
<CAPTION>
1997 1998
--------------------------------- ---------------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
------------- ------------ ------------ -----------
<S> <C> <C> <C> <C>
Financial assets:
Cash and interest bearing deposits $ 1,650,294 $ 1,650,294 $ 2,733,576 $ 2,733,576
Certificates of deposits 164,730 164,730 -0- -0-
Investments securities held to maturity 1,024,461 1,028,152 1,022,166 1,030,465
Investment securities available-for-sale 1,098,227 1,098,277 1,628,638 1,628,638
Loans receivable, net 13,506,764 11,895,816 15,582,966 13,525,371
Interest receivable 167,307 167,307 247,437 247,437
Financial liabilities:
Deposits (9,243,596) (8,816,637) (12,293,540) (11,740,357)
Interest payable (64,728) (64,728) (106,685) (106,685)
FHLB advances -0- -0- (1,750,000) (1,335,321)
</TABLE>
NOTE 13 - 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>
1997 1998
----------- -----------
<S> <C> <C>
Assets:
Cash and cash equivalents $ 1,749,949 $ 274,170
Investment in subsidiary 6,233,373 6,427,053
Note receivable from ESOP 335,453 295,988
Income tax receivable from subsidiary -0- 70,442
Prepaid income taxes 1,600 -0-
Deferred tax asset -0- 24,669
----------- -----------
$ 8,320,375 $ 7,092,322
=========== ===========
Liabilities and Stockholders' Equity:
Accrued expenses $ 36,850 $ 42,849
Common stock 4,933 4,933
Paid in capital 4,514,279 4,540,644
Retained earnings 4,015,104 4,166,189
Treasury stock (26,838) (1,359,078)
Unearned ESOP compensation (335,453) (295,988)
Unearned RRP compensation -0- (171,477)
Unrealized gain on securities available-for-sale 111,500 164,250
----------- -----------
$ 8,320,375 $ 7,092,322
=========== ===========
</TABLE>
-17-
<PAGE>
HBANCORPORATION, INC.
LAWRENCEVILLE, ILLINOIS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 13 - CONDENSED FINANCIAL INFORMATION OF PARENT COMPANY, CONTINUED
STATEMENTS OF OPERATIONS
1997 1998
-------- --------
Interest income $ 75,924 $ 40,754
Income from subsidiary 259,279 401,465
Other income -0- 160
-------- --------
Total income 335,203 442,379
-------- --------
Compensation expense 45,658 110,167
Office expense 402 274
Legal expense 53,650 45,169
Franchise fees 17,060 16,076
Other expense -0- 5,885
-------- --------
Total expenses 116,770 177,571
-------- --------
Income before income taxes 218,433 264,808
Income tax benefit -0- 73,634
-------- --------
Net income $218,433 $338,442
======== ========
STATEMENTS OF CASH FLOWS
<TABLE>
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 218,433 $ 338,442
Adjustments to reconcile net income to net cash
provided by operating activities:
(Increase) in income taxes -0- (68,842)
(Decrease) in accounts payable (2,100) -0-
Increase in accrued expenses 36,032 5,999
(Increase) in deferred tax asset -0- (24,669)
Cash provided by operating activities 252,365 250,930
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Issuance of treasury stock to RRP -0- 305,800
Payments of note receivable 39,465 39,465
ESOP and RRP cost -0- (173,545)
Allocation of ESOP shares 8,808 26,365
Purchase of treasury stock (26,838) (1,638,040)
Investment in subsidiary (259,279) (140,930)
----------- -----------
Cash (used) by investing activities (237,844) (1,580,885)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payment of dividends (157,862) (145,824)
----------- -----------
Cash (used) by financing activities (157,862) (145,824)
----------- -----------
Net (decrease) in cash and cash equivalents (143,341) (1,475,779)
Cash and cash equivalents at beginning of period 1,893,290 1,749,949
----------- -----------
Cash and cash equivalents at end of period $ 1,749,949 $ 274,170
=========== ===========
</TABLE>
-18-
<PAGE>
HBANCORPORATION, INC.
LAWRENCEVILLE, ILLINOIS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 13 - CONDENSED FINANCIAL INFORMATION OF PARENT COMPANY, CONTINUED
STATEMENTS OF CASH FLOWS, CONTINUED
CASH FLOWS FROM FINANCING ACTIVITES CONTINUED:
<TABLE>
<CAPTION>
1997 1998
--------- -------
Cash paid for:
<S> <C> <C>
Income taxes $ 2,418 $ -0-
========= =======
Non-cash Investing Activities:
Subsidiary investment transferred to stock and
paid-in capital in connection with stock
conversion, net of expenses totaling $422,916 $ -0- $ -0-
========= =======
</TABLE>
NOTE 14 - 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, 1998 that the Bank
meets all capital adequacy requirements to which it is subject.
As of December 31, 1997, 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.
The Bank's actual capital amounts and ratios are also presented in the table.
-19-
<PAGE>
HBANCORPORATION, INC.
LAWRENCEVILLE, ILLINOIS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 14 - REGULATORY MATTERS, CONTINUED
<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, 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%
As of June 30, 1998
Total Capital
(to Risk-Weighted Assets) $ 6,427,053 40.3% >/=$ 1,276,000 >/=8.0% >/=$ 1,595,000 >/=10.0%
Tier I Capital
(to Risk-Weighted Assets) $ 6,262,803 39.3% >/=$ 638,000 >/=4.0% >/=$ 957,000 >/=6.0%
Tier I Capital
(to Average Assets) $ 6,262,803 31.9% >/=$ 785,210 >/=4.0% >/=$ 981,513 >/=5.0%
</TABLE>
-20-
EXHIBIT 21
SUBSIDIARIES OF REGISTRANT
<PAGE>
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
<TABLE>
<CAPTION>
Subsidiary or Percent of State of
Parent Organization Ownership Incorporation
------ ------------ --------- -------------
<S> <C> <C> <C>
HBancorporation, Inc. Heritage National 100% Federal
Bank
</TABLE>
EXHIBIT 23
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We hereby consent to the incorporation by reference to Registration
Statements on Form S-8 (File Nos. 333-37021 and 333-37023) of our report dated
August 6, 1998, on the consolidated financial statements of HBancorporation,
Inc., which report is incorporated by reference in the Annual Report on Form
10-KSB of HBancorporation, Inc.
KEMPER CPA GROUP LLC
Washington, Indiana
September 23, 1998
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
[TYPE] EX-27
<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, 1998 AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-END> JUN-30-1998
<CASH> 612,736
<INT-BEARING-DEPOSITS> 1,145,840
<FED-FUNDS-SOLD> 975,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 1,628,638
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 1,022,166
<LOANS> 15,716,384
<ALLOWANCE> (133,417)
<TOTAL-ASSETS> 21,458,250
<DEPOSITS> 12,293,540
<SHORT-TERM> 1,750,000
<LIABILITIES-OTHER> 365,237
<LONG-TERM> 0
<COMMON> 4,933
0
0
<OTHER-SE> 4,540,644
<TOTAL-LIABILITIES-AND-EQUITY> 21,458,250
<INTEREST-LOAN> 1,380,460
<INTEREST-INVEST> 294,266
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 1,674,726
<INTEREST-DEPOSIT> 502,437
<INTEREST-EXPENSE> 580,452
<INTEREST-INCOME-NET> 1,094,274
<LOAN-LOSSES> 5,000
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 601,908
<INCOME-PRETAX> 526,023
<INCOME-PRE-EXTRAORDINARY> 526,023
<EXTRAORDINARY> 0
<CHANGES> (187,581)
<NET-INCOME> 338,442
<EPS-PRIMARY> 0.85
<EPS-DILUTED> 0.77
<YIELD-ACTUAL> 0
<LOANS-NON> 0
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> (128,417)
<CHARGE-OFFS> (5,000)
<RECOVERIES> 0
<ALLOWANCE-CLOSE> (133,417)
<ALLOWANCE-DOMESTIC> (133,417)
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
