-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, ON4rw4BJfd1YCIN27JaBbKbfX1rHGYme8+l6u49Fn38/mOISCpqGrVf0IGYcf0qc jlTWlW6QLXxx9Tx7hV3Dng== 0000950133-96-002951.txt : 19970102 0000950133-96-002951.hdr.sgml : 19970102 ACCESSION NUMBER: 0000950133-96-002951 CONFORMED SUBMISSION TYPE: SB-2 PUBLIC DOCUMENT COUNT: 17 FILED AS OF DATE: 19961231 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: HCB BANCSHARES INC CENTRAL INDEX KEY: 0001029740 STANDARD INDUSTRIAL CLASSIFICATION: [] STATE OF INCORPORATION: OK FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: SB-2 SEC ACT: 1933 Act SEC FILE NUMBER: 333-19093 FILM NUMBER: 96689064 BUSINESS ADDRESS: STREET 1: HEARTLAND COMMUNITY BANK STREET 2: 237 JACKSON STREET CITY: CAMDEN STATE: AK ZIP: 71701 BUSINESS PHONE: 5018366841 MAIL ADDRESS: STREET 1: HEARTLAND COMMUNITY BANK STREET 2: 237 JACKSON STREET CITY: CAMDEN STATE: AK ZIP: 71701 SB-2 1 FORM SB-2 1 As filed with the Securities and Exchange Commission on December 31, 1996 Registration No. 333-________ - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ________________ FORM SB-2 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ________________ HCB BANCSHARES, INC. (Name of small business issuer in its charter)
OKLAHOMA 6035 REQUESTED -------- ---- --------- (State or other jurisdiction of (Primary standard industrial (I.R.S. employer incorporation or organization) classification code number) identification number)
237 JACKSON STREET, CAMDEN, ARKANSAS 71701-0878 (501) 836-6841 - -------------------------------------------------------------------------------- Address and telephone number of principal executive offices and principal place of business) MRS. VIDA H. LAMPKIN PRESIDENT AND CHIEF EXECUTIVE OFFICER HCB BANCSHARES, INC. 237 JACKSON STREET CAMDEN, ARKANSAS 71701-0878 (501) 836-6841 - -------------------------------------------------------------------------------- (Name, address, and telephone number of agent for service) PLEASE SEND COPIES OF ALL COMMUNICATIONS TO: Gary R. Bronstein, Esquire K. Scott Fife, Esquire Housley Kantarian & Bronstein, P.C. 1220 19th Street, N.W., Suite 700 Washington, D.C. 20036 APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as practicable after this registration statement becomes effective. If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. [ ]
CALCULATION OF REGISTRATION FEE - ------------------------------------------------------------------------------------------------------------------------------ PROPOSED PROPOSED DOLLAR MAXIMUM MAXIMUM AMOUNT OF TITLE OF EACH CLASS AMOUNT OFFERING AGGREGATE REGISTRATION OF SECURITIES TO BE PRICE PER OFFERING FEE TO BE REGISTERED REGISTERED SECURITY PRICE (1) - ------------------------------------------------------------------------------------------------------------------------------ Common Stock, par value $.01 per share................ $ 26,450,000 $10.00 $ 26,450,000 $ 8,015.15 - ------------------------------------------------------------------------------------------------------------------------------
(1) Estimated solely for the purpose of calculating the registration fee. The registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the registration statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine. 2 PROSPECTUS [LOGO] HCB BANCSHARES, INC. (HOLDING COMPANY FOR HEARTLAND COMMUNITY BANK) Up to 2,645,000 Shares of Common Stock HCB Bancshares, Inc. (the "Company"), an Oklahoma corporation and the proposed holding company for Heartland Community Bank (the "Bank"), is offering up to 2,645,000 shares of its common stock, par value $0.01 per share (the "Common Stock"), to be issued upon the conversion of the Bank from a federal mutual savings bank to a federal stock savings bank and the issuance of the Bank's capital stock to the Company pursuant to the Bank's Plan of Conversion (the "Conversion"). The shares are being offered pursuant to nontransferable subscription rights in the following order of priority: (i) depositors of the Bank as of December 31, 1993 ("Eligible Account Holders"); (ii) the Company's Employee Stock Ownership Plan (the "ESOP") (a tax-qualified employee stock benefit plan of the Company, as defined in the Plan), provided that any shares sold in excess of the maximum of the estimated valuation range may be first sold to the ESOP; (iii) depositors of the Bank as of ___________, 19___ ("Supplemental Eligible Account Holders"); (iv) certain depositors and borrowers of the Bank as of ____________, 1997 ("Other Members"); and (v) depositors and borrowers of the Bank's subsidiary capital stock savings bank, which operates the Bank's full service branch offices in Little Rock and Monticello and loan production office in Bryant, Arkansas, as of ________, 19___ ("Other Customers") in a subscription offering (the "Subscription Offering"). SUBSCRIPTION RIGHTS ARE NOT TRANSFERABLE, AND PERSONS WHO ATTEMPT TO TRANSFER THEIR SUBSCRIPTION RIGHTS MAY LOSE THE RIGHT TO PURCHASE STOCK IN THE CONVERSION AND MAY BE SUBJECT TO OTHER SANCTIONS AND PENALTIES IMPOSED BY THE OFFICE OF THRIFT SUPERVISION ("OTS"). During or after the Subscription Offering, shares of the Common Stock not sold in the Subscription Offering may be offered to the general public in a community offering, with preference given to natural persons and trusts of natural persons permanently residing in Calhoun, Cleveland, Dallas, Drew, Grant, Ouachita and Pulaski Counties in Arkansas (the Bank's "Local Community") (the "Community Offering") (the Subscription and Community Offerings are sometimes referred to collectively as the "Offerings"), subject to the right of the Company and the Bank, in their absolute discretion, to reject orders in the Community Offering in whole or in part. The total number of shares to be issued in the Conversion may be significantly increased or decreased to reflect market and financial conditions at the completion of the Conversion. The aggregate purchase price of such shares will be based on the estimated pro forma market value of the Company and the Bank, as converted, as determined by an independent appraisal. All such shares will be sold for $10.00 per share. IN THE SUBSCRIPTION OFFERING, EACH ELIGIBLE SUBSCRIBER MAY SUBSCRIBE FOR UP TO 20,000 SHARES OF COMMON STOCK PER QUALIFYING DEPOSIT OR LOAN ACCOUNT, PROVIDED THAT THE AGGREGATE MAXIMUM AMOUNT OF THE COMMON STOCK TO BE ISSUED IN THE CONVERSION THAT MAY BE PURCHASED BY ANY PERSON, TOGETHER WITH ASSOCIATES, OR GROUP OF PERSONS ACTING IN CONCERT (OTHER THAN THE ESOP), IS 25,000 SHARES. NO PERSON MAY PURCHASE FEWER THAN 25 SHARES. See "The Conversion -- Limitations on Purchases of Shares." All directors and executive officers of the Bank as a group (8 persons), including their associates, are expected to purchase approximately 112,500 shares of the Common Stock to be issued in the Conversion (5.6% at the midpoint of the estimated valuation range), (continued on reverse side) THE SHARES OFFERED HEREBY ARE NOT SAVINGS ACCOUNTS OR DEPOSITS AND ARE NOT INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION ("FDIC"), THE SAVINGS ASSOCIATION INSURANCE FUND ("SAIF") OR ANY OTHER GOVERNMENT AGENCY. THE SHARES OFFERED HEREBY HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION ("SEC"), THE OTS, THE FDIC OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SEC, THE OTS, THE FDIC OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
- ------------------------------------------------------------------------------------------- Estimated Underwriting Purchase and Other Fees Estimated Net Price (1) and Expenses (2) Proceeds (3) - ------------------------------------------------------------------------------------------- Per Share (4).......................... $10.00 $0.37 $9.63 - ------------------------------------------------------------------------------------------- Total Minimum.......................... $17,000,000 $750,000 $16,250,000 - ------------------------------------------------------------------------------------------- Total Midpoint......................... $20,000,000 $750,000 $19,250,000 - ------------------------------------------------------------------------------------------- Total Maximum.......................... $23,000,000 $750,000 $22,250,000 - ------------------------------------------------------------------------------------------- Total Maximum, as adjusted............. $26,450,000 $750,000 $25,700,000 - -------------------------------------------------------------------------------------------
(footnotes on reverse side) TRIDENT SECURITIES, INC. The date of this Prospectus is ___________, 1997 3 (continued from reverse side) not including 8% (160,000 shares at the midpoint) expected to be purchased by the ESOP or additional shares which might be issued subsequent to the Conversion under a management recognition plan (the "MRP") and a stock option and incentive plan (the "Option Plan") expected to be adopted by the Company. The Bank has retained Trident Securities, Inc. ("Trident Securities") as its financial advisor to provide sales assistance with respect to the Offerings. Trident Securities has agreed to use its best efforts to assist the Company and the Bank in the sale of the Common Stock in the Offerings. Trident Securities is not obligated to purchase any shares of Common Stock in the Offerings. ALL SUBSCRIPTION RIGHTS ARE NONTRANSFERABLE AND WILL EXPIRE AT __:__ P.M., CENTRAL TIME, ON ____________, 1997, UNLESS EXTENDED BY THE COMPANY FOR UP TO AN ADDITIONAL 45 DAYS (THE "EXPIRATION DATE"). Any shares not sold in the Subscription Offering may be sold in the Community Offering which, if commenced, may terminate as late as ___________, 1997. Subscription rights are exercisable by completing and returning to any office of the Bank an order form, together with full payment for all Common Stock subscribed for at the subscription price stated below or appropriate instructions authorizing withdrawal of such an amount from existing accounts at the Bank. Once such withdrawal has been authorized, the designated withdrawal amount may not be used by a subscriber for any purpose other than to purchase Common Stock for which subscriptions have been made while the Plan of Conversion remains in effect. An executed order form, once received by the Bank, may not be modified, amended or rescinded without the consent of the Bank. Subscriptions made by check or cash will be held in separate accounts at the Bank (each insured by the FDIC up to the applicable $100,000 limit) and will earn interest at the Bank's passbook rate from the date of receipt until completion or termination of the Conversion. In the case of payments to be made through withdrawal from deposit accounts, all sums authorized for withdrawal will continue to earn interest at the contractual rate until the date of the completion of the Conversion. If the Conversion is not completed within 45 days after the last day of the Subscription Offering and the OTS consents to an extension of time to complete the Conversion, subscribers will be given the opportunity to continue their orders (in which case they will need to affirmatively reconfirm their subscriptions prior to the expiration of the resolicitation offering or their subscription funds will be promptly refunded with interest at the Bank's passbook rate) or modify or cancel their subscriptions. If the Conversion is not completed within such period or extended period, all funds held will be promptly returned after completion of the original or extended date together with accrued interest, and all withdrawal authorizations will be terminated. The Conversion is contingent upon approval of the Plan of Conversion by the Bank's members and the sale of the minimum number of shares offered pursuant to the Plan of Conversion. Prior to the Conversion, there has been no public market for the Common Stock. There can be no assurance that a stockholder base sufficiently large to create an active and liquid trading market will develop and be maintained subsequent to the Conversion. The Company has received conditional approval to have the Common Stock quoted on the Nasdaq National Market under the symbol "HCBB." However, no assurance can be given that the conditions to such approval will be satisfied or that the shares of Common Stock being offered in the Conversion can be resold at or above the purchase price. PROSPECTIVE INVESTORS SHOULD REVIEW AND CONSIDER THE DISCUSSIONS UNDER "RISK FACTORS." ------------------------- (table on reverse side) (1) The estimated aggregate value of the Common Stock is based on an independent appraisal by Ferguson & Co., LLP ("Ferguson & Co.") as of December 20, 1996. Based on such appraisal, the Company has determined to offer up to 2,645,000 shares for $10.00 per share. The final aggregate value will be determined at the time of closing of the offering and is subject to change due to changing market conditions and other factors. If a change in the final valuation is required, an appropriate adjustment will be made in the number of shares being offered within a range from 1,700,000 shares at the minimum of the estimated valuation range to 2,645,000 shares at 15% above the maximum of the estimated valuation range. The aggregate purchase price of the Common Stock sold in the Conversion will not be below $17,000,000 and will not exceed $26,450,000 without a resolicitation of subscribers. Such upward or downward adjustment will have a corresponding effect on the estimated net proceeds of the offering and the pro forma capitalization and per share data of the Company. (2) Includes estimated printing, postage, legal, accounting and miscellaneous expenses which will be incurred in connection with the Conversion. Also includes estimated fees and reimbursable expenses to be paid to Trident Securities in connection with the Offerings. Trident Securities may be deemed to be an underwriter, and certain amounts to be paid to Trident Securities may be deemed to be underwriting compensation, for purposes of the Securities Act of 1933, as amended ("Securities Act"). The Bank has agreed to indemnify Trident Securities against certain liabilities arising out of its services as financial advisor. (3) Includes the ESOP's expected purchase of 8% of the shares sold in the Conversion with funds borrowed from the Company. Does not reflect the MRP's possible purchase of a number of additional newly issued shares equal to 4% of the shares to be issued in the Conversion, within the year following the Conversion. See "Capitalization" and "Pro Forma Data." (4) At the midpoint; estimated net proceeds per share at the minimum, maximum and maximum, as adjusted, would be $9.56, $9.67 and $9.72, respectively. 4 [MAP of Arkansas highlighting the counties in the Bank's primary market area and the locations of the Bank's offices] 5 PROSPECTUS SUMMARY The following summary does not purport to be complete and is qualified in its entirety by the more detailed information and the consolidated financial statements and accompanying notes appearing elsewhere in this Prospectus. HCB BANCSHARES, INC. The Company was formed under Oklahoma law in December 1996 at the direction of the Bank for the purpose of becoming a holding company for the Bank as part of its conversion from mutual to stock form. Prior to the Conversion, the Company will not engage in any material operations. After the Conversion, the Company's primary assets will be the outstanding capital stock of the Bank, a portion of the net proceeds of the Conversion and a note receivable from the ESOP. For additional information, see "HCB Bancshares, Inc." HEARTLAND COMMUNITY The Bank was organized as a federally chartered mutual BANK savings and loan association named "First Federal Savings and Loan Association of Camden" in 1933, and in 1934 it became a member of the FHLB system and obtained federal deposit insurance. In May 1996, First Federal acquired the former Heritage Bank, FSB, which retained its separate federal savings bank charter and deposit insurance as a wholly owned capital stock subsidiary of First Federal, but whose business operations were fully integrated with those of First Federal. In September 1996, First Federal and Heritage changed their names to Heartland Community Bank (references herein to "Heartland Community Bank" and the "Bank" refer to First Federal and Heritage collectively, or to First Federal separately, as appropriate). In ________ 1997, First Federal updated its federal mutual charter and bylaws and converted from a savings and loan association to a savings bank. On a consolidated basis, the Bank currently operates through six full service banking offices located in Camden (2), Fordyce, Little Rock, Monticello and Sheridan, Arkansas and a loan production office in Bryant, Arkansas. At September 30, 1996, the Bank had total assets of $173.0 million, deposits of $147.2 million and equity of $13.5 million, or 7.79% of total assets. The Bank's principal business consists of attracting deposits from the general public and investing those funds in loans secured by first mortgages on existing owner-occupied single-family residences in the Bank's primary market area and, to a lesser but growing extent, commercial and multi-family real estate loans and consumer loans. The Bank also maintains a substantial investment portfolio of mortgage-related securities and U.S. government and agency securities. The Bank derives its income principally from interest earned on loans, investment securities and other interest-earning assets. The Bank's principal expenses are interest expense on deposits and borrowings and noninterest expenses such as employee compensation, deposit insurance and miscellaneous other expenses. Funds for these activities are provided principally by deposit growth, repayments of outstanding loans and investment securities, other operating revenues and, from time to time, advances from the Federal Home Loan Bank of Dallas. Historically, the principal business strategy of the Bank, like most other savings institutions in Arkansas and elsewhere, has been to accept deposits from residents of the communities served by the Bank's branch offices and to invest those funds in single-family mortgage loans to those and other local residents. In this manner, the Bank and countless other independent community-oriented savings institutions 1 6 operated safely and soundly for generations. In recent years, however, as the banking business nationwide and in the Bank's primary market area in particular has become more competitive, smaller savings institutions like the Bank have come under increasing market pressure either to grow and increase their profitability or to be acquired by a larger institution. In September 1995, the Bank's Board of Directors carefully considered the Bank's historical results of operations, current financial condition and future business prospects and, in consultation with the Bank's executive officers, determined to strengthen the Bank's competitiveness and profitability by concentrating its business strategy as an independent community bank on expanding the Bank's products and services and growing its customer and asset base. Since then, the Bank has actively sought to implement this strategy by adding two new executive officers -- Cameron McKeel as Executive Vice President and William Lyon as Senior Vice President and Chief Lending Officer -- and more than doubling the Bank's total employees, by acquiring the former Heritage Bank, FSB, which added to the Bank's branch network two additional full service offices and a loan production office in the growing and potentially lucrative Little Rock and Monticello banking markets, by upgrading selected branch office facilities, by expanding the types of loans and deposit accounts offered by the Bank, by updating the Bank's name and corporate identity from First Federal Savings and Loan Association of Camden to Heartland Community Bank and, now, by adopting the Plan of Conversion. Throughout this period, the Bank's executive officers have worked with the Bank's directors and with the Bank's entire staff to formulate and effectuate the Bank's current strategic plan. On a going forward basis, the Bank's current business strategy, as developed and adopted by all of the Bank's directors, officers and employees, incorporates the following key elements: (i) remaining an independent community-oriented financial institution by continuing to provide the quality service that only a locally based institution and its dedicated staff can deliver, including the possible retention of additional executive officers in the future as the Bank's growth and other needs may warrant; (ii) strengthening the Bank's core deposit base and decreasing interest costs and increasing fee income by expanding the Bank's deposit facilities and products, including the addition and expansion of branch offices, the planned installation of ATMs, the introduction of debit cards and a planned emphasis on attracting consumer demand deposits; (iii) increasing loan yields and fee income while maintaining asset quality by emphasizing the origination of higher yielding and shorter term loans, especially commercial and multi-family real estate loans and consumer and commercial business loans, for the Bank's portfolio while increasingly originating lower yielding longer term single-family residential loans principally for resale to investors; (iv) converting from mutual to stock form and using the capital raised in the Conversion to support the Bank's future growth; and, (v) to complement the Bank's internally generated growth, potentially acquiring one or more banking institutions or other financial companies if attractive opportunities arise. While it is expected that the Bank may experience especially high deposit and loan growth in the relatively high income and growth segments of the Bank's primary market area, particularly in the Sheridan, Monticello, Bryant and, possibly, Little Rock areas, management expects to find significant deposit growth and lending opportunities throughout central Arkansas. As federally chartered savings institutions, each of the Bank and its subsidiary savings bank is subject to extensive regulation by the OTS. The lending activities 2 7 and other investments of each institution must comply with various federal regulatory requirements, and the OTS periodically examines each institution for compliance with various regulatory requirements. The FDIC also has the authority to conduct special examinations. Each institution must file reports with the OTS describing its activities and financial condition and is also subject to certain reserve requirements promulgated by the Federal Reserve Board. See "Business of the Bank," "Regulation" and "Risk Factors." THE CONVERSION The Board of Directors of the Bank adopted the Plan of Conversion, pursuant to which the Bank is converting from a federally chartered mutual savings bank to a federally chartered stock savings bank and simultaneously forming a holding company. Upon Conversion, the Bank will issue all of its outstanding capital stock to the Company in exchange for a portion of the net proceeds from the sale of the Common Stock in the Conversion. The Conversion will strengthen the Bank's relationship with its communities by permitting the customers of the Bank and other members of the communities served by the Bank to purchase an ownership interest in the Bank's holding company. The portion of the net proceeds from the sale of the Common Stock in the Conversion to be distributed to the Bank by the Company will increase the Bank's capital position, which will in turn increase the amount of funds available for lending, investment and repayment of borrowings and provide greater resources to support both current operations and future expansion, including new programs and expanded services, by the Bank. The investment of the net proceeds from the sale of the Common Stock will provide the Company and the Bank with additional income to further increase their respective capital positions. The additional capital may also assist the Bank in offering new programs and expanded services to its customers. The holding company structure will provide greater flexibility than the Bank alone would have for diversification of business activities and geographic operations. Management believes that this increased capital and operating flexibility will enable the Bank to compete more effectively with other types of financial services organizations. The Company also will be able to use stock-related incentive programs to attract, compensate and retain executive and other personnel for itself and its subsidiaries. In addition, the unissued Common Stock and preferred stock authorized by the Company's Certificate of Incorporation will permit the Company, subject to market conditions and regulatory approval of an offering, to raise additional equity capital through further sales of securities and to issue securities in connection with possible acquisitions. At the present time, the Company has no plans with respect to additional offerings of securities, other than the possible issuance of additional shares upon the implementation of the MRP and the exercise of stock options under the Option Plan. THE SUBSCRIPTION AND The shares of Common Stock to be issued in the COMMUNITY OFFERINGS Conversion are being offered at the purchase price of $10.00 per share in the Subscription Offering pursuant to nontransferable subscription rights in the following order of priority: (1) Eligible Account Holders (i.e., depositors of the Bank as of December 31, 1993); (2) the ESOP (i.e., the Company's tax-qualified stock benefit plan), provided that any shares sold in excess of the maximum of the estimated valuation range may be first sold to the ESOP; (3) Supplemental Eligible Account Holders (i.e., depositors of the Bank as of ___________, 199__); (4) Other Members (i.e., depositors and borrower 3 8 members of the Bank, other than Eligible Account Holders and Supplemental Eligible Account Holders, on ___________, 1997) and (5) Other Customers (i.e., depositors and borrowers of the Bank's subsidiary capital stock savings bank, which operates the Bank's full service branch offices in Little Rock and Monticello and loan production office in Bryant, Arkansas, as of ________, 19___). Subscription rights will expire if not exercised by __:__ p.m., Central Time, on ___________, 1997, unless extended (the Expiration Date). THE COMPANY AND THE BANK RESERVE THE ABSOLUTE RIGHT TO REJECT OR ACCEPT ANY ORDERS IN THE COMMUNITY OFFERING, IN WHOLE OR IN PART, EITHER AT THE TIME OF RECEIPT OF AN ORDER OR AS SOON AS PRACTICABLE FOLLOWING THE EXPIRATION DATE. Subject to the prior rights of holders of subscription rights, any shares of Common Stock not subscribed for in the Subscription Offering may be offered at the same price in the Community Offering to members of the general public. In the Community Offering, preference may be given to natural persons and trusts of natural persons who are permanent residents of the Bank's Local Community. Unless permitted by the Company or otherwise required by the OTS, no resolicitation of subscribers or persons who otherwise submit orders will be made because of any change in the number of shares to be issued unless the aggregate purchase price of the shares of the Common Stock to be sold in the Conversion is below $17,000,000 (the minimum of the estimated valuation range, defined below) or is more than $26,450,000 (15% above the maximum of the estimated valuation range), in which case subscribers and such other persons will be offered the opportunity to increase, decrease or rescind their orders. The Bank and the Company have engaged Trident Securities as their financial advisor to provide sales assistance in connection with the Offerings. Trident Securities will receive a fee based on the amount of Common Stock sold in the Offerings. Total fees to and expenses of Trident Securities are expected to be approximately $241,000. The Plan of Conversion provides that the Conversion must be completed within 24 months after the date of the approval of the Plan of Conversion by the members of the Bank. The Plan of Conversion has been approved by the OTS and is subject to the approval of the Bank's members at the Special Meeting to be held on ___________, 1997. The Company expects to receive approval from the OTS to acquire control of the Bank and its subsidiary savings bank subject to satisfaction of certain conditions. PURCHASE LIMITATIONS No person may purchase fewer than 25 shares in the Offerings. In the Subscription Offering, each eligible subscriber may subscribe for up to 20,000 shares of Common Stock per qualifying deposit or loan account, provided that the aggregate maximum number of shares of the Common Stock that may be purchased by any person, together with associates, or group of persons acting in concert (other than the ESOP, which is expected to purchase 8% of the shares) in the Conversion, is 25,000 shares. As defined in the Plan of Conversion, the term "associate" generally includes (i) any entity of which a person is an officer, partner or 10% beneficial owner, (ii) any trust or estate in which a person has a substantial beneficial interest or which a person serves as trustee or other fiduciary and (iii) any relative or spouse, or relative of such spouse, who has the same home as a person or who is a director of the Company or any of its subsidiaries, and the term "acting in concert" refers to (i) knowing participation in a joint activity or interdependent conscious parallel action towards 4 9 a common goal or (ii) a combination or pooling of voting or other interests in the Common Stock for a common purpose. The Company may presume that persons are acting in concert based on the circumstances, including known relationships and previous action in concert. The purchase limitation was determined by the Boards of Directors of the Company and the Bank in accordance with the Plan of Conversion in order to encourage a wide distribution of the Common Stock in the Conversion, particularly among the Bank's customers and other persons residing in the communities served by the Bank, without permitting the undue concentration of stock ownership among a few investors. In the event of an oversubscription, shares will be allocated in accordance with the Plan of Conversion. In the event of an increase in the total number of shares up to the number issuable at 15% above the estimated valuation range, the additional shares may be distributed and allocated without the resolicitation of subscribers. See "The Conversion -- Limitations on Purchases of Shares." STOCK PRICING AND NUMBER Federal regulations require that the aggregate OF SHARES TO BE ISSUED purchase price of the Common Stock to be issued in the Conversion be consistent with an independent appraisal of the estimated pro forma market value of the Common Stock following the Conversion. Ferguson & Co., a firm experienced in valuing savings institutions, has made an independent appraisal of the estimated aggregate pro forma market value of the Common Stock to be issued in the Conversion. Ferguson & Co. has determined that as of December 20, 1996 such estimated pro forma market value was $20,000,000. The resulting valuation range in Ferguson & Co.'s appraisal, which under OTS regulations extends 15% below and above the estimated value, is from $17,000,000 to $23,000,000. The Company, in consultation with its advisors, has determined to offer the shares in the Conversion at a price of $10.00 per share. SUCH APPRAISAL IS NOT INTENDED AND MUST NOT BE CONSTRUED AS A RECOMMENDATION OF ANY KIND AS TO THE ADVISABILITY OF PURCHASING SUCH SHARES OR AS ANY FORM OF ASSURANCE THAT, AFTER THE CONVERSION, SUCH SHARES MAY BE RESOLD AT THE PURCHASE PRICE. The appraisal considered a number of factors and was based upon estimates derived from those factors, all of which are subject to change from time to time. In preparing the valuation, Ferguson & Co. relied upon and assumed the accuracy and completeness of financial and statistical information provided by the Bank and the Company. Ferguson & Co. did not verify the consolidated financial statements provided or independently value the assets of the Bank. The appraisal will be updated immediately prior to the completion of the Conversion. The total number of shares to be issued in the Conversion may be increased or decreased without a resolicitation of subscribers so long as the aggregate purchase price is not less than the minimum or more than 15% above the maximum of the estimated valuation range. Based on the purchase price of $10.00 per share, the total number of shares which may be issued without a resolicitation of subscribers is from 1,700,000 to 2,645,000. 5 10 POSSIBLE BENEFITS ESOP. The ESOP is expected to purchase 8% of the OF CONVERSION TO shares to be issued in the Conversion. These shares MANAGEMENT will be allocated under the ESOP to all eligible employees as the loan secured by the ESOP shares is repaid. MRP and Option Plan. At least six months following the Conversion, and subject to stockholder approval, the Company is expected to adopt the MRP, under which employees could be awarded an aggregate amount of Common Stock equal to 4% of the shares issued in the Conversion, and the Option Plan, under which employees and directors could be granted options to purchase an aggregate amount of Common Stock equal to 10% of the shares issued in the Conversion at exercise prices equal to the market price of the Common Stock on the date of grant. In anticipation of the implementation of the MRP and Option Plan, and depending on market conditions and other relevant considerations, at any time after the Conversion, including during the first six months thereafter, the Company may form one or more trusts which may purchase and hold some or all of the outstanding or newly issued shares of the Common Stock expected to be awarded in the future to participants under such plans. If the plans are implemented during the year following the Conversion, it is expected that, in accordance with applicable regulatory limitations, 20% of the shares under the MRP and 20% of the options under the Option Plan may be granted to each of the Company's three executive officers, 15% of such shares and options may be granted among other employees of the Company and the Bank, and 5% of such shares and options may be granted to each of the Company's five non-employee directors, upon the implementation of such plans. Under such regulations, at the midpoint of the estimated valuation range, all participants in such plans as a group could receive at no cost to them a total of up to 80,000 shares of the Company's outstanding Common Stock ($800,000 at the $10.00 price per share in the Conversion) as well as options to purchase a total of up to 200,000 shares at an exercise price equal to the value of such shares when the options are granted. If the MRP and/or Option Plan is adopted after the year following the Conversion, the foregoing regulatory restrictions would not apply, but the plans generally would remain subject to the regulatory authority of the OTS, and, so long as the Common Stock is quoted on the Nasdaq National Market, the Company would remain subject to applicable Nasdaq rules, which generally require stockholder approval of stock benefit plans like the MRP and the Option Plan. Employment and Severance Agreements. The Company and the Bank have entered into employment agreements with Vida H. Lampkin, President and Chief Executive Officer, and Cameron D. McKeel, Executive Vice President, and severance agreements with William Lyon, Senior Vice President and Chief Lending Officer. The employment agreements provide for annually renewable terms of three years. The employment and severance agreements provide for the payment to each officer of up to approximately three times his or her salary in the event of, among other things, involuntary termination of employment in connection with, or within one year after, a change in control of the Company or the Bank. See "Management of the Bank -- Certain Benefit Plans and Arrangements." PROPOSED PURCHASES Directors and executive officers of the Bank, including BY DIRECTORS AND all of their associates, as defined in the Plan of EXECUTIVE OFFICERS Conversion, are expected to purchase approximately 112,500 shares in the Conversion, or 5.6% of the shares to be issued at the midpoint of the estimated valuation range. See "Risk Factors -- Impact of Purchases by Management and Stock Benefit Plans" and "Proposed Purchases by Directors and Executive Officers." 6 11 PROSPECTUS DELIVERY To ensure that each subscriber receives a Prospectus at AND PROCEDURE FOR least 48 hours prior to the Expiration Date in PURCHASING SHARES accordance with Rule 15c2-8 of the Securities Exchange Act, no Prospectus will be mailed any later than five days prior to the Expiration Date or hand delivered any later than two days prior to such date. Execution of the order form will confirm receipt or delivery in accordance with Rule 15c2-8. The Bank will accept for processing only orders submitted on original order forms. Payment by check, money order, bank draft or debit authorization to an existing account at the Bank must accompany the order form. No wire transfers will be accepted. To ensure that eligible subscribers are properly identified as to their stock purchase priorities, as well as for purposes of allocating shares based on their deposit balances in the event of oversubscription, such persons must list all of their deposit and loan accounts at the Bank on the order form. USE OF PROCEEDS The amount of proceeds from the sale of the Common Stock in the Conversion will depend upon the total number of shares actually sold and the actual expenses of the Conversion. As a result, the actual net proceeds from the sale of the Common Stock cannot be determined until the Conversion is completed. It is anticipated that the net proceeds will be between approximately $16,250,000 and $22,250,000 if the aggregate purchase price is within the estimated valuation range and that the net proceeds will be approximately $25,700,000 if the aggregate purchase price is increased to 15% above the maximum of the estimated valuation range. The Company expects to receive OTS approval to purchase all of the capital stock of the Bank to be issued in the Conversion in exchange for at least 50% of the net proceeds from the sale of Common Stock under the Plan of Conversion. Assuming the issuance of 2,000,000 shares of the Common Stock at the midpoint of the estimated valuation range, and the purchase of 8% of such shares by the ESOP, it is anticipated that the Bank would receive $9,625,000 in cash, a portion of which would replenish deposits withdrawn to purchase shares in the Conversion, and the Company would retain $8,025,000 in cash and $1,600,000 in the form of a note receivable from the ESOP. The cash proceeds retained by the Company initially will be invested in short-term securities and will be available for a variety of corporate purposes, including additional capital contributions, loans to the Bank, future acquisitions and diversification of business, dividends to stockholders and future repurchases of the Common Stock to the extent permitted by the OTS. The cash proceeds contributed to the Bank will substantially increase the capital of the Bank. The Bank ultimately intends to use such funds for general corporate purposes, including the origination of loans and possibly the repayment of a portion of the Bank's FHLB advances. Initially, it is expected that the proceeds will be invested in short-term securities. See "Use of Proceeds." DIVIDENDS The Board of Directors currently intends to adopt a policy of paying regular quarterly cash dividends on the Common Stock at an initial annual rate of approximately 2% of the $10.00 per share purchase price of the Common Stock in the Conversion ($0.20 per share), with the first dividend to be declared and paid following the first full quarter of fiscal 1997 (i.e., following September 30, 1997). However, there can be no assurance that dividends will be paid or, if paid initially, will continue to be paid in the future. In addition, from time to time, the Board of Directors may determine to pay special cash dividends. Special cash dividends, if paid, may be paid in addition to, or in lieu of, regular cash dividends. Like all possible dividend 7 12 payments, there can be no assurance that special dividends will ever be paid. The payment of regular or special dividends will be subject to the requirements of applicable law and the determination by the Board of Directors of the Company that the net income, capital and financial condition of the Company and the Bank, banking industry trends and general economic conditions justify the payment of dividends. See "Dividends." MARKET FOR THE Neither the Company nor the Bank has previously issued COMMON STOCK capital stock. Consequently, there is no market for the Common Stock at this time. There can be no assurance that a stockholder base sufficiently large to create an active and liquid trading market will develop and be maintained. The Company has received conditional approval to have the Common Stock quoted on the Nasdaq National Market under the symbol "HCBB." However, no assurance can be given that the conditions to such approval will be satisfied or that the shares of Common Stock being offered in the Conversion can be resold at or above the purchase price. For additional information, see "Market for the Common Stock." RISK FACTORS Special attention should be given to the matters discussed under "Risk Factors," including (i) market conditions and the absence of a prior market for the Common Stock, (ii) below industry average return on equity after conversion, (iii) possible adverse impacts of interest rates and economic and industry conditions, (iv) the Bank's loan portfolio composition, (v) recent and planned changes in the Bank's management and business strategy, (vi) expected ESOP and MRP compensation expenses, (vii) possible dilutive effects of the MRP and the Option Plan, (viii) potential impacts of purchases of Common Stock by management and stock benefit plans, (ix) charter, bylaw and statutory provisions that could discourage hostile acquisitions of control, (x) Arkansas usury law and (xi) possible income tax consequences of distribution of subscription rights. 8 13 SELECTED CONSOLIDATED FINANCIAL INFORMATION AND OTHER DATA The following summary of selected consolidated financial information and other data does not purport to be complete and is qualified in its entirety by reference to the detailed information and consolidated financial statements and accompanying notes appearing elsewhere in this Prospectus. The information at September 30, 1996 and for the three months ended September 30, 1996 and 1995 is derived from unaudited financial data but, in the opinion of management of the Bank, reflects all adjustments (which comprise only normal recurring accruals) necessary for a fair presentation of the financial condition and results of operations at that date and for those periods. Information for dates and periods before May 3, 1996 does not include information for the Bank's savings bank subsidiary, which was acquired on that date. For additional information, see the consolidated financial statements and related notes appearing elsewhere herein. SELECTED FINANCIAL CONDITION DATA
At At June 30, September 30, -------------------------------------------------------------------- 1996 1996 1995 1994 1993 1992 ------------- ------------ ------------ ------------ ------------ ------------ Total assets .................... $172,971,862 $171,241,011 $126,987,168 $126,722,704 $123,748,431 $115,471,970 Loans receivable, net ........... 89,334,387 84,564,365 55,112,980 53,247,142 50,000,592 50,700,927 Cash and cash equivalents ....... 3,703,927 17,291,882 3,125,599 3,054,978 3,527,284 2,941,579 Investment securities: Available for sale ........... 16,693,638 5,279,625 957,500 3,386,625 -- -- Held to maturity ............. -- -- 2,000,000 -- 909,600 748,400 Mortgage-backed securities: Available for sale .......... 12,195,438 12,155,199 6,088,450 -- -- -- Held to maturity ............ 42,636,028 45,212,891 57,144,915 64,084,120 66,773,893 58,481,104 Deposits ........................ 147,172,744 145,919,251 112,005,588 113,350,670 111,771,582 104,301,919 FHLB advances ................... 10,000,000 10,000,000 -- -- -- -- Equity - substantially restricted ...................... 13,478,001 14,234,125 14,270,972 12,860,593 11,472,231 10,137,861 Number of: Real estate loans outstanding. 2,005 1,993 1,507 1,537 1,602 1,667 Savings accounts ............. 14,276 14,163 10,993 11,057 11,006 10,808 Offices open ................. 7 6 3 3 3 3
9 14 SELECTED OPERATIONS DATA
Three Months Ended September 30, --------------------------- 1996(1) 1995 ------------ ------------ Interest income ......................... $ 3,115,301 $ 2,419,447 Interest expense ........................ 2,066,022 1,530,698 ------------ ------------ Net interest income ..................... 1,049,279 888,749 Provision for loan losses ............... (560,738) -- ------------ ------------ Net interest income after provision for loan losses ....................... 488,541 888,749 Noninterest income ...................... 59,952 27,796 Noninterest expense ..................... 1,915,176 412,370 ------------ ------------ Income before income taxes and cumulative effect of change in method of accounting for income taxes and investment securities ................. (1,366,683) 504,175 Provision for income taxes (benefits) ... (523,265) 174,512 ------------ ------------ Income (loss) before cumulative effect of change in method of accounting for income taxes and investment securities ............................ (843,418) 329,663 Cumulative effect of change in method of accounting for income taxes ........... -- -- Cumulative effect of change in method of accounting for investment securities .. -- -- ------------ ------------ Net income (loss) ....................... $ (843,418) $ 329,663 ============ ============
Year Ended June 30, ----------------------------------------------------------------------- 1996 1995 1994 1993 1992 ------------ ------------ ------------ ------------ ------------ Interest income ......................... $ 10,333,181 $ 8,844,782 $ 8,416,735 $ 8,492,889 $ 9,446,035 Interest expense ........................ 6,766,598 5,112,481 4,645,404 4,920,251 5,855,192 ------------ ------------ ------------ ------------ ------------ Net interest income ..................... 3,566,583 3,732,301 3,771,331 3,572,638 3,590,843 Provision for loan losses ............... (42,483) -- (7,500) (120,000) (120,000) ------------ ------------ ------------ ------------ ------------ Net interest income after provision for loan losses ....................... 3,524,100 3,732,301 3,763,831 3,452,638 3,470,843 Noninterest income ...................... (733,652) 196,023 102,212 173,986 256,873 Noninterest expense ..................... 2,346,159 1,609,691 1,585,401 1,444,384 1,307,592 ------------ ------------ ------------ ------------ ------------ Income (loss) before income taxes and cumulative effect of change in method of accounting for income taxes and investment securities ................. 404,289 2,318,363 2,280,642 2,182,240 2,420,124 Provision for income taxes (benefits) ... 173,611 966,763 869,756 847,869 909,774 ------------ ------------ ------------ ------------ ------------ Income (loss) before cumulative effect of change in method of accounting for income taxes and investment securities ............................ 230,678 1,351,600 1,410,886 1,334,371 1,510,350 Cumulative effect of change in method of accounting for income taxes ........... -- -- (22,523) -- -- Cumulative effect of change in method of accounting for investment securities .. -- 77,567 -- -- -- ------------ ------------ ------------ ------------ ------------ Net income (loss) ....................... $ 230,678 $ 1,429,167 $ 1,388,363 $ 1,334,371 $ 1,510,350 ============ ============ ============ ============ ============
- ---------- (1) Noninterest expense and, therefore, net income (loss), for the three months ended September 30, 1996 were adversely affected by the imposition of a special deposit insurance assessment in connection with the resolution of the BIF/SAIF capitalization and premium disparity. Absent such assessment, management estimates that noninterest expense would have been approximately $1,033,000 and that net income (loss) would have been approximately ($288,000). See "Management's Discussion and Analysis of Financial Condition and Results of Operations." 10 15 SELECTED RATIOS
At or for the Three Months Ended September 30, At or for the Year Ended June 30, ------------------ ------------------------------------------- 1996 1995 1996 1995 1994 1993 1992 ---- ---- ---- ---- ---- ---- ---- PERFORMANCE RATIOS:(1) Return on assets (net income (loss) divided by average total assets) (2)............. (1.95)% 1.00% 0.16% 1.06% 1.11% 1.10% 1.36% Return on average equity (net income (loss) divided by average equity) (2)........... (23.80) 9.10 1.57 9.82 11.52 12.24 16.11 Interest rate spread (combined weighted average interest rate earned less combined weighted average interest rate cost)..... 2.28 2.18 2.16 2.51 2.66 2.74 2.93 Net interest margin (net interest income divided by average interest-earning assets) 2.54 2.74 2.58 2.96 3.03 3.08 3.36 Ratio of average interest-earning assets to average interest-bearing liabilities.. 105.26 111.81 108.47 111.22 110.06 108.09 118.09 Ratio of noninterest expense to average total assets)............................ 4.42 1.25 1.64 1.26 1.25 1.19 1.18 ASSET QUALITY RATIOS: Nonperforming assets to total assets at end of period......................... 0.17 0.16 0.14 0.23 0.37 0.35 0.26 Nonperforming loans to total loans at end of period......................... 0.17 0.21 0.19 0.29 0.27 0.62 0.50 Allowance for loan losses to total loans at end of period................... 1.54 1.46 1.04 1.33 1.37 1.45 1.23 Allowance for loan losses to nonperforming loans at end of period................... 9.00x 7.00x 5.28x 4.41x 5.08x 2.36x 2.45x Provision for loan losses to total loans (1)................................ 2.56 --% 0.05% --% --% 0.24% 0.23% Net charge-offs to average loans outstanding (1).......................... -- -- 0.02 -- 0.04 0.04 0.08 CAPITAL RATIOS: Equity to total assets at end of period..... 7.79 10.88 8.48 11.25 10.15 9.27 8.78 Average equity to average assets............ 8.20 10.96 10.25 10.76 9.66 9.02 8.46
- ---------- (1) Annualized. (2) Before cumulative effect adjustment. Returns on assets and equity for the three months ended September 30, 1996 were adversely affected by the imposition of a special deposit insurance assessment in connection with the resolution of the BIF/SAIF capitalization and premium disparity. Absent such assessment, management estimates that return on assets 11 16 would have been approximately (0.67)% and that return on average equity would have been approximately (8.04)%. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." 12 17 REGULATORY CAPITAL COMPLIANCE At September 30, 1996, the Bank and its subsidiary savings bank exceeded all regulatory minimum capital requirements. The table below presents certain information relating to the Bank's consolidated regulatory capital at that date. For additional information, see "Historical and Pro Forma Regulatory Capital Compliance" and "Regulation -- Regulation of the Bank -- Regulatory Capital Requirements."
Percent of Amount Assets (1) ------ ---------- (Dollars in Thousands) Tangible capital................ $ 11,717 6.84% Tangible capital requirement.... 2,568 1.50 --------- ------ Excess........................ $ 9,149 5.34% ========= ====== Core capital.................... $ 11,717 6.84% Core capital requirement........ 5,136 3.00 --------- ------ Excess........................ $ 6,581 3.84% ========= ====== Total regulatory capital........ $ 12,482 20.40% Risk-based capital requirement.. 4,896 8.00 --------- ------ Excess........................ $ 7,586 12.40% ========= ======
---------- (1) Based on adjusted total assets for purposes of the tangible capital and core capital requirements and risk-weighted assets for purpose of the risk-based capital requirement. 13 18 RISK FACTORS Before investing in the shares of the Common Stock offered by this Prospectus, prospective investors should carefully consider the matters presented below. The shares offered hereby are not savings accounts or deposits and are not insured by the FDIC, the SAIF or any other government agency. MARKET CONDITIONS AND ABSENCE OF PRIOR MARKET FOR THE COMMON STOCK The appraisal of Ferguson & Co. is based upon current conditions in the markets for the common stock of converting and publicly held savings institutions, among other factors. No assurance can be given that persons purchasing shares of the Common Stock in the Conversion will thereafter be able to sell such shares of Common Stock at or above the offering price per share. See "The Conversion -- Stock Pricing and Number of Shares to be Issued." Prior to the Conversion, no shares of stock have been publicly outstanding. There can be no assurance that an active and liquid trading market for the Common Stock will develop or be maintained or that the trading price per share of the Common Stock will equal or exceed the purchase price. See "Market for the Common Stock." BELOW INDUSTRY AVERAGE RETURN ON EQUITY AFTER CONVERSION Return on equity (net income for a given period divided by average equity during the period) is a ratio used by many investors to compare the performance of a particular financial institution to its peers. The Company's post- conversion return on equity initially will be below the average return on equity for publicly held thrift institutions and their holding companies. See "Selected Consolidated Financial Information and Other Data" for information regarding the Bank's historical return on equity and "Capitalization" for information regarding the Company's pro forma consolidated capitalization as a result of the Conversion. In addition, the expenses associated with the ESOP and the MRP (see "Pro Forma Data"), along with other post-conversion expenses, are expected to contribute to reduced earning levels. Over time, the Bank intends to deploy the net proceeds from the Conversion to increase earnings per share and book value per share, without assuming undue risk, with the goal of achieving a return on equity competitive with the average for publicly traded thrift institutions and their holding companies. This goal could take a number of years to achieve, and no assurances can be given that this goal can be attained. Consequently, investors should not expect a return on equity which will meet or exceed the average return on equity for publicly traded thrift institutions for the foreseeable future. POSSIBLE ADVERSE IMPACT OF INTEREST RATES AND ECONOMIC AND INDUSTRY CONDITIONS The savings institution industry is vulnerable to fluctuations in market interest rates, and, like most savings institutions, the Bank's net interest margin is affected by general economic conditions and other factors that influence market interest rates and the Bank's ability to respond to changes in such rates. Unlike most industrial companies, nearly all the assets and liabilities of the Bank are monetary. As a result, interest rates have a greater impact on the Bank's performance than do the effects of general levels of inflation. Interest rates do not necessarily move in the same direction or to the same extent as the price of goods and services. At September 30, 1996, the Bank's total interest-bearing liabilities maturing or repricing within one and five years exceeded its total interest-earning assets maturing or repricing in the same periods, and the Bank's cumulative one- and five-year gap ratios totalled negative 31.96% and 27.84%, respectively, and, based on information provided by the OTS, it was estimated that the Bank's consolidated NPV (the net present value of the Bank's cash flows from assets, liabilities and off-balance sheet items) would decrease approximately 14%, 30%, 46% and 64% in the event of 1%, 2%, 3% and 4% increases in market interest rates, respectively. These calculations indicate that the Bank's net interest income and portfolio value could be significantly exposed to increases in interest rates. In a rising interest rate environment, the Bank's net interest income could be adversely affected as liabilities would reprice to higher market rates more quickly than assets. This effect could be compounded, because the prepayment speeds of the Bank's long-term fixed-rate assets would decrease 14 19 in a rising interest rate environment. For additional information, see "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Asset/Liability Management." Significant and rapid changes have occurred in the savings institution industry in recent years, and the future of the industry is subject to various uncertainties. The traditional role of savings institutions as the nation's primary housing lenders has diminished, and savings institutions are subject to increasing competition for deposits and loans from commercial banks, mortgage bankers, mutual funds and other financial companies. In addition, the companies competing against savings institutions frequently are substantially larger, with much greater resources to attract and serve customers. The ability of savings institutions to diversify into lending activities other than real estate lending has been limited by federal regulations adopted in an attempt to strengthen an industry which has in the past exhibited, and continues to exhibit, weaknesses. The savings institution industry also faces an uncertain regulatory environment in which applicable laws, regulations and enforcement policies may be subject to significant change. For additional information, see "Business of the Bank" and "Regulation." LOAN PORTFOLIO COMPOSITION At September 30, 1996, the Bank's loan portfolio included $3,452,000 of one- to four-family residential construction loans, $23,348,000 of commercial and multi-family real estate loans, $5,156,000 of consumer loans and $1,110,000 of commercial business loans, which loans represented 35.3% of the Bank's total gross loans. Construction lending, commercial and multi-family real estate lending, consumer lending and commercial business lending generally are viewed as exposing a lender to a greater risk of loss than one- to four-family lending. Construction loans pose risks associated with the construction process and the quality of the resulting property. Commercial and multi-family real estate loans typically involve large amounts, and repayment generally is dependent on cash flows from the properties. Consumer loans may be unsecured or secured by property subject to depreciation or confiscation. Commercial business loans may be secured by collateral that is difficult to value or liquidate. While the Bank's losses on these types of loans have been minimal in recent years, and management maintains loan loss reserves for perceived risks of loss on these loans, during the past year management has substantially increased the Bank's portfolio of these loans because of their relatively high yields and short maturities, and the Bank could incur substantial losses on these types of loans in the future. See "-- Recent and Planned Changes in Management and Business Strategy" and "Business of the Bank." At September 30, 1996, the Bank's loan portfolio included $27,318,708 of loans with adjustable rates of interest. Adjustable rate loans generally pose the risk that as interest rates rise, the underlying payment of the borrower rises, thereby increasing the potential for loan delinquencies and loan losses. At the same time, the marketability of the underlying property may be adversely affected by higher interest rates. While the Bank's losses on this type of loan have not been significant, and management maintains loan loss reserves for perceived risks of loss on these loans, in the event of substantial and prolonged increases in market interest rates the Bank could incur significant losses on these loans in the future. See "Business of the Bank." At September 30, 1996, most of the Bank's loans were secured by properties located in southern and central Arkansas. The concentration of so many loans secured by properties within such a limited area presents risks that adverse changes in local economic, employment or other conditions could lead to widespread increases in loan delinquencies and losses. At that date, the Bank also had a substantial portfolio of loans secured by commercial and multi-family properties in localities outside of the Bank's primary market area, most of which were originated through one loan broker. The dispersion of such a substantial amount of commercial loans outside the Bank's primary market area and their origination through a single loan broker presents risks that nonlocal business or other conditions or developments unfamiliar to the Bank's staff could result in increases in loan delinquencies and losses. For additional information, see Note 16 of the Notes to Consolidated Financial Statements. At September 30, 1996, the Bank's assets included approximately $830,000 of accruing loans past due 90 days or more, $160,00 of nonaccruing loans, $119,000 of foreclosed real estate, $294,000 of loans modified in troubled debt restructurings and $2,139,000 of other loans with identified credit risks, which assets totalled 15 20 approximately $3,423,000, or 2.0% of the Bank's total assets, and the Bank's aggregate allowances for losses on loans and foreclosed real estate totalled approximately $1,500,000, or 27% of such assets. While the Bank's losses on nonperforming assets have been minimal in recent years, there can be no assurance that the Bank's allowances for losses will be adequate to absorb all losses that may be experienced by the Bank or that, in the future, the Bank's regulators or prevailing financial and economic conditions will not result in substantial charge-offs or increases in loss allowances. In such event, the financial condition and profitability of the Bank and the Company could be negatively affected. See "Business of the Bank -- Lending Activities -- Asset Classification, Allowances for Losses and Nonperforming Assets." At September 30, 1996, the Bank had loans outstanding to two borrowers or groups of affiliated borrowers with aggregate outstanding balances in excess of $1,000,000 and loans outstanding to another seven borrowers or groups of affiliated borrowers in excess of $500,000 each. While the largest of these lending relationships totalled less than half of the maximum amount permitted under applicable regulatory limitations, as a result of their size in relation to the Bank's size and profitability, these loans present more risk to the Bank than smaller loans, because adverse circumstances among a relatively small number of borrowers could have a disproportionate adverse effect on the Bank. At September 30, 1996, none of these loans was nonperforming. See "Business of the Bank -- Lending Activities -- Commercial and Multi-Family Real Estate Lending" and "Regulation -- Regulation of the Bank -- Limits on Loans to One Borrower." RECENT AND PLANNED CHANGES IN MANAGEMENT AND BUSINESS STRATEGY Until a little over a year ago, the principal business strategy of the Bank was to accept deposits from residents of the communities served by the Bank's branch offices and to invest those funds in single-family mortgage loans to those and other local residents. In September 1995, in light of the increasing competitiveness of the banking business in the Bank's primary market area, the Bank's Board of Directors determined to concentrate its business strategy as an independent community bank on expanding the Bank's products and services and growing its customer and asset base. Since then, the Bank has actively sought to implement this strategy by, among other things, (i) greatly expanding its management and staff, (ii) acquiring the former Heritage Bank, FSB, (iii) undertaking substantial branch office construction and renovation projects and (iv) greatly expanding the types of loans and deposit accounts offered by the Bank. The Bank's current business strategy is to achieve substantial growth and profitability by, among other things, (i) decreasing interest costs and increasing fee income by expanding the Bank's deposit facilities and products, (ii) increasing loan yields and fee income by emphasizing the origination of higher yielding and shorter term loans, especially commercial and multi-family real estate loans and consumer and commercial business loans, while increasingly originating lower yielding longer term single-family residential loans principally for resale to investors, (iii) converting from mutual to stock form and using the capital raised in the Conversion to support the bank's future growth and, (iv) to complement the Bank's internally generated growth, potentially acquiring one or more banking institutions or other financial companies if attractive opportunities arise. Each of these initiatives at the Bank, and in particular all of them together, introduce new risks for the Bank as it goes forward. The Bank's future performance will depend upon the successful implementation of these initiatives. The Bank will be highly dependent upon the new management team's ability to efficiently implement these changes, and to do so in a safe and sound manner. The Bank's future financial condition and profitability will be highly dependent on the costs of building the banking facilities and developing the operational structure necessary to implement the recent and planned large scale changes in the Bank's deposit gathering and loan making activities. Finally, if the Bank makes any acquisitions of any other financial institutions, those transactions could have substantial effects on the Bank's capitalization and business which cannot be foreseen at this time. There can be no assurance that the Bank's business strategy, as reflected in the recent and planned changes in the Bank's management, business activities and investments in banking facilities, will be fully implemented, that such implementation will occur on a timely and cost effective basis or that the strategy will result in improvements in the Bank's competitiveness or profitability. Prospective investors should carefully consider the Bank's historical and current business strategies when determining whether to purchase shares of the Common Stock. For additional information, see "Management's Discussion and Analysis of Financial Condition and Results of Operations," "Business of the Bank" and "Additional Information." 16 21 ESOP AND MRP COMPENSATION EXPENSE American Institute of Certified Public Accountants ("AICPA") Statement of Position No. 93-6, "Employers' Accounting for Employee Stock Ownership Plans" ("SOP 93-6"), requires an employer to record compensation expense in an amount equal to the fair value of shares committed to be released to employees from an employee stock ownership plan. If the Common Stock appreciates in value over time, the adoption of SOP 93-6 may increase compensation expense relating to the ESOP compared with prior guidance which required the recognition of compensation expense based on the cost of shares acquired by the ESOP. In addition, SOP 93-6 requires that, for the purpose of computing primary and fully diluted earnings per share, ESOP shares that have not been committed to be released are not considered outstanding. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Impact of New Accounting Standards." In addition, the implementation of the MRP will require the recognition of compensation expense in the amount of the fair market value of the shares awarded under the plan, pro rated over the years during which vesting occurs. While it is impossible to determine at this time the exact effects of these on future net income and net income per share, for pro forma information which includes assumptions with respect to the effects of these plans, including under SOP 93-6, on net income and stockholders' equity, see "Pro Forma Data." POSSIBLE DILUTIVE EFFECT OF MRP AND OPTION PLANS It is expected that, following the consummation of the Conversion, the Company will adopt the Option Plan and the MRP, both of which would be subject to stockholder and regulatory approval, and that such plans would be considered and voted upon at the Company's first annual meeting of stockholders after the Conversion. Under the MRP, employees could be awarded an aggregate amount of Common Stock equal to 4% of the shares issued in the Conversion, and under the Option Plan employees and directors could be granted options to purchase an aggregate amount of Common Stock equal to 10% of the shares issued in the Conversion at exercise prices equal to the market price of the Common Stock on the date of grant. Under these plans, the shares issued to participants could be newly issued shares or, subject to regulatory restrictions, shares repurchased in the market. In the event the shares issued under these plans consist of newly issued shares of Common Stock, the interests of existing stockholders would be diluted. At the midpoint of the estimated valuation range, if all shares under these plans were newly issued and the exercise price for the option shares were equal to the price per share in the Conversion, the number of outstanding shares of Common Stock would increase from 2,000,000 to 2,280,000, the pro forma book value per share of the outstanding Common Stock at September 30, 1996 and June 30, 1996 would decrease from $15.16 and $15.54 to $14.53 and $14.86, respectively, and the pro forma net income per share of the outstanding Common Stock for the fiscal year ended June 30, 1996 would decrease from $0.35 to $0.34. These plans are required to be approved by the Company's stockholders prior to implementation. See "Pro Forma Data" and "Management of the Bank -- Certain Benefit Plans and Arrangements -- Management Recognition Plan" and "-- Stock Option and Incentive Plan." POTENTIAL IMPACT OF PURCHASES BY MANAGEMENT AND STOCK BENEFIT PLANS The 112,500 shares of Common Stock expected to be purchased by members of management in the Conversion, combined with the shares expected to be awarded or sold to plan participants under the ESOP, the MRP and the Option Plan, could result in management controlling approximately 27.6% of the outstanding shares of the Common Stock at the midpoint of the estimated valuation range (assuming the shares issued under the MRP and the Option Plan are treasury shares) and could permit management to benefit from certain statutory and regulatory provisions, as well as certain provisions in the Company's Certificate of Incorporation and Bylaws, that may tend to promote the continuity of existing management. If the members of management were to act in concert with each other, they could have significant influence over the outcome of any stockholder vote requiring a majority vote and in the election of directors and could effectively exercise veto power in matters requiring the approval of two-thirds or more of the Company's outstanding Common Stock, such as certain business combinations. Management might thus have the power to authorize actions that may be viewed as contrary to the best interests of non-affiliated holders of the Common Stock and might have veto power over actions that such holders may deem to be in their best 17 22 interests. See "Pro Forma Data," "Proposed Purchases by Directors and Executive Officers," "Management of the Bank -- Certain Benefit Plans and Arrangements," "The Conversion -- Regulatory Restrictions on Acquisition of the Common Stock," "Certain Restrictions on Acquisition of the Company and the Bank" and "Certain Anti-Takeover Provisions in the Certificate of Incorporation and Bylaws." CERTIFICATE OF INCORPORATION AND BYLAW AND STATUTORY PROVISIONS THAT COULD DISCOURAGE HOSTILE ACQUISITIONS OF CONTROL The Company's Certificate of Incorporation and Bylaws contain certain provisions that could discourage nonnegotiated takeover attempts that certain stockholders might deem to be in their interests or through which stockholders might otherwise receive a premium for their shares over the then current market price and that may tend to perpetuate existing management. These provisions include: the classification of the terms of the members of the Board of Directors; supermajority provisions for the approval of certain business combinations; denial of cumulative voting by stockholders in the election of directors; certain provisions relating to meetings of stockholders; restrictions on the acquisition of the Company's equity securities; and provisions allowing the Board to consider nonmonetary factors in evaluating a business combination or a tender or exchange offer. The Certificate of Incorporation also authorizes the issuance of shares of serial preferred stock as well as additional shares of Common Stock. These shares could be issued without stockholder approval on terms or in circumstances that could deter a future takeover attempt. In addition, Oklahoma law provides for numerous restrictions on acquisition of the Company, and federal law contains various restrictions on the acquisition of control of savings institutions or their holding companies, particularly during the period following a conversion to stock form. Under the OTS' change in control regulations generally, and subject to the right to rebut the presumption under certain circumstances, a company or person is deemed to have acquired conclusive control of an institution if the person or company, directly or indirectly, acquires any combination of voting stock and irrevocable proxies representing more than 25% of any class of voting stock of the savings institution or controls in any manner the election of a majority of the directors of the savings institution. Additionally, a person or company that acquires more than 10% of any class of voting stock of an institution through either revocable or irrevocable proxies will be presumed under these regulations to have acquired control of the institution if, in addition to this percentage of stock, the person or company is subject to one of certain "control factors" which relate to, among other things, the level of the person's or entity's stock ownership or other economic interest in the institution, the extent to which the person or entity exercises voting and/or dispositive power over the shares held and whether the person or entity occupies a policymaking position with the institution. These Certificate of Incorporation, Bylaw, statutory and regulatory provisions, as well as certain other provisions of state and federal law and certain provisions in the Company's and the Bank's employee benefit plans and arrangements, may have the effect of discouraging or preventing a future takeover attempt in which stockholders of the Company otherwise might receive a substantial premium for their shares over then-current market prices. For a detailed discussion of those provisions, see "Management of the Bank -- Certain Benefit Plans and Arrangements," "Description of Capital Stock," "Certain Restrictions on Acquisition of the Company and the Bank" and "Certain Anti-Takeover Provisions in the Certificate of Incorporation and Bylaws." ARKANSAS USURY LAW The Interest Rate Control Amendment ("Constitutional Amendment") to the Constitution of the State of Arkansas, which was adopted in 1982, provides, in summary, that "consumer loans and credit sales" have a maximum percentage limitation of 17% per annum and that all "general loans" have a maximum limitation of 5% over the Federal Reserve Discount Rate in effect at the time the loan was made. In 1983, the Arkansas Supreme Court determined that "consumer loans and credit sales" are "general loans" and thus are subject to the limitation of 5% over the Federal Reserve Discount Rate, as well as a maximum limitation of 17% per annum. (However, federal law has preempted Arkansas law for loans secured by a first mortgage on residential real estate and for loans guaranteed by the Small Business Administration.) The Constitutional Amendment also provided penalties for 18 23 usurious "general loans" and "consumer loans and credit sales," including forfeiture of all principal and interest on "consumer loans and credit sales" made at a greater rate of interest than 17% per annum, and, forfeiture of uncollected interest and refund to the borrower of twice the interest collected on "general loans" made at a usurious rate. POSSIBLE INCOME TAX CONSEQUENCES OF DISTRIBUTION OF SUBSCRIPTION RIGHTS If the subscription rights granted to Eligible Account Holders, Supplemental Eligible Account Holders and Other Members of the Bank and to Other Customers of the Bank's subsidiary savings bank were deemed to have an ascertainable value, receipt of such rights could be taxable to recipients who exercise the subscription rights in an amount equal to such value, and the Bank could recognize a gain on such distribution. Whether subscription rights are considered to have any ascertainable value is an inherently factual determination. The Bank has received an opinion of Ferguson & Co. that such rights have no value. The opinion of Ferguson & Co. is not binding on the Internal Revenue Service ("IRS"). See "The Conversion -- Principal Effects of Conversion on Depositors and Borrowers of the Bank -- Tax Effects." HCB BANCSHARES, INC. HCB Bancshares, Inc. was incorporated under the laws of the State of Oklahoma in December 1996 at the direction of the Board of Directors of the Bank for the purpose of serving as a savings institution holding company of the Bank and its subsidiary savings bank upon the acquisition of all of the capital stock to be issued by the Bank upon the Conversion. The Company expects to receive approval from the OTS to acquire control of the Bank and its subsidiary savings bank subject to satisfaction of certain conditions. Prior to the Conversion, the Company has not engaged and will not engage in any material operations. Upon consummation of the Conversion, the Company will have no significant assets other than the outstanding capital stock of the Bank, a portion of the net proceeds of the Conversion and a note receivable from the ESOP. The Company's principal business will be the business of the Bank. The holding company structure will permit the Company to expand the financial services currently offered through the Bank. As a holding company, the Company will have greater flexibility than the Bank to diversify its business activities through existing or newly formed subsidiaries or through acquisition or merger with other financial institutions. The Company will be classified as a multiple savings institution holding company and will be subject to regulation by the OTS. As long as the Company remains a multiple savings institution holding company, the Company will be subject to regulatory restrictions on the activities in which it and its non-savings institution subsidiaries may engage. See "Regulation -- Regulation of the Company -- Activities Restrictions." The Company's executive offices are located at 237 Jackson Street, Camden, Arkansas 71701-0878, and its telephone number is (501) 836-6841. HEARTLAND COMMUNITY BANK Heartland Community Bank was organized as a federally chartered mutual savings and loan association named "First Federal Savings and Loan Association of Camden" in 1933, and in 1934 it became a member of the FHLB system and obtained federal deposit insurance. In May 1996, First Federal acquired the former Heritage Bank, FSB, which retained its separate federal savings bank charter and deposit insurance as a wholly owned subsidiary of First Federal, but whose business operations were fully integrated with those of First Federal. In September 1996, First Federal and Heritage changed their names to Heartland Community Bank. The Bank itself currently operates through four full service banking offices located in Camden (2), Fordyce and Sheridan, Arkansas, and its subsidiary savings bank operates through two full service banking offices located in Little Rock and Monticello, Arkansas and a loan production office in Bryant, Arkansas. At September 30, 1996, the Bank had total assets of $173.0 million, deposits of $147.2 million and equity of $13.5 million, or 7.79% of total assets. 19 24 Historically, the principal business strategy of the Bank, like most other savings institutions in Arkansas and elsewhere, has been to accept deposits from residents of the communities served by the Bank's branch offices and to invest those funds in single-family mortgage loans to those and other local residents. In this manner, the Bank and countless other independent community-oriented savings institutions operated safely and soundly for generations. In recent years, however, as the banking business nationwide and in the Bank's primary market area in particular has become more competitive, smaller savings institutions like the Bank have come under increasing market pressure either to grow and increase their profitability or to be acquired by a larger institution. In September 1995, the Bank's Board of Directors carefully considered the Bank's historical results of operations, current financial condition and future business prospects and, in consultation with the Bank's executive officers, determined to strengthen the Bank's competitiveness and profitability by concentrating its business strategy as an independent community bank on expanding the Bank's products and services and growing its customer and asset base. Since then, the Bank has actively sought to implement this strategy by adding two new executive officers -- Cameron McKeel as Executive Vice President and William Lyon as Senior Vice President and Chief Lending Officer -- and more than doubling the Bank's total employees, by acquiring the former Heritage Bank, FSB, which added to the Bank's branch network additional branches in the growing and potentially lucrative Little Rock and Monticello banking markets, by upgrading selected branch office facilities, by expanding the types of loans and deposit accounts offered by the Bank, by updating the Bank's name and corporate identity from First Federal Savings and Loan Association of Camden to Heartland Community Bank and, now, by adopting the Plan of Conversion. Throughout this period, the Bank's executive officers have worked with the Bank's directors and with the Bank's entire staff to formulate and effectuate the Bank's current strategic plan. On a going forward basis, the Bank's current business strategy, as developed and adopted by all of the Bank's directors, officers and employees, incorporates the following key elements: (i) remaining an independent community-oriented financial institution by continuing to provide the quality service that only a locally based institution and its dedicated staff can deliver, including the possible retention of additional executive officers in the future as the Bank's growth and other needs may warrant; (ii) strengthening the Bank's core deposit base and decreasing interest costs and increasing fee income by expanding the Bank's deposit facilities and products, including the addition and expansion of branch offices, the planned installation of ATMs, the introduction of debit cards and a planned emphasis on attracting consumer demand deposits; (iii) increasing loan yields and fee income while maintaining asset quality by emphasizing the origination of higher yielding and shorter term loans, especially commercial and multi-family real estate loans and consumer and commercial business loans, for the Bank's portfolio while increasingly originating lower yielding longer term single-family residential loans principally for resale to investors; (iv) converting from mutual to stock form and using the capital raised in the Conversion to support the bank's future growth; and, (v) to complement the Bank's internally generated growth, potentially acquiring one or more banking institutions or other financial companies if attractive opportunities arise. While it is expected that the Bank may experience especially high deposit and loan growth in the relatively high income and growth segments of the Bank's primary market area, particularly in the Sheridan, Monticello, Bryant and, possibly, Little Rock areas, management expects to find significant deposit growth and lending opportunities throughout central Arkansas. As federally chartered savings institutions, each of the Bank and its subsidiary savings bank is subject to extensive regulation by the OTS. The lending activities and other investments of each institution must comply with various federal regulatory requirements, and the OTS periodically examines each institution for compliance with various regulatory requirements. The FDIC also has the authority to conduct special examinations. Each institution must file reports with OTS describing its activities and financial condition and is also subject to certain reserve requirements promulgated by the Federal Reserve Board. For additional information, see "Business of the Bank" and "Regulation." USE OF PROCEEDS 20 25 The amount of proceeds from the sale of the Common Stock in the Conversion will depend upon the total number of shares actually sold, and the actual expenses of the Conversion. As a result, the actual net proceeds from the sale of the Common Stock cannot be determined until the Conversion is completed. Based on the sale of $20,000,000 of Common Stock (the midpoint of the estimated valuation range), the net proceeds from the sale of the Common Stock are estimated to be approximately $19,250,000. The Company expects to receive OTS approval to purchase all of the capital stock of the Bank to be issued in the Conversion in exchange for at least 50% of the net proceeds from sale of Common Stock under the Plan of Conversion. Based on the foregoing assumption, and the purchase of 8% of the shares to be issued in the Conversion by the ESOP, it is anticipated that the Bank would receive $9,625,000 in cash, a portion of which would replenish deposits withdrawn to purchase shares in the Conversion, and the Company would retain $8,025,000 in cash and $1,600,000 in the form of a note receivable from the ESOP. The cash proceeds retained by the Company initially will be invested in short-term securities and will be available for a variety of corporate purposes, including additional capital contributions, loans to the Bank, future acquisitions and diversification of business, dividends to stockholders and future repurchases of the Common Stock to the extent not prohibited by the OTS. For additional information, see "Dividends" and "Business of the Bank." The proceeds contributed to the Bank will ultimately become part of the Bank's general corporate funds to be used for its business activities, which will include the origination of loans and possibly the repayment of a portion of the Bank's FHLB advances. Initially, it is expected that the proceeds will be invested in short-term securities. The availability of the proceeds to the Bank for the payment of dividends to the Company will be limited by regulatory restrictions on capital distributions by the Bank. Due to the limited nature of the Company's business activities, the Company believes that the offering proceeds retained after the Conversion will be adequate to meet the Company's financial needs until dividends are paid by the Bank; however, no assurance can be given that the Company will not have a need for additional funds in the future. For additional information, see "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Capital Resources and Liquidity," "Business of the Bank," "Regulation -- Regulation of the Bank -- Dividend Restrictions" and "Management of the Bank -- Certain Benefit Plans and Arrangements -- Management Recognition Plan." Set forth below are the estimated net proceeds to the Company, assuming the sale of the Common Stock at the minimum, midpoint, maximum and 15% above the maximum of the estimated valuation range. The actual net proceeds from the sale of the Common Stock cannot be determined until the Conversion is completed. However, net proceeds set forth on the following table are based upon the following assumptions: (i) 100% of the shares of Common Stock will be sold in the Subscription Offering, as follows: (a) 8% will be sold to the ESOP, and 112,500 shares will be sold to directors, executive officers and their associates (as defined in the Plan of Conversion), for which commissions will not be paid, and (b) the remaining shares will be sold to others in the Subscription Offering, for which estimated fees and expenses of $241,000 would be paid to Trident Securities; and (ii) other conversion expenses would be approximately $509,000. Actual expenses may vary from those estimated, because the fees paid will depend upon the total number of shares sold in the Subscription and Community Offerings and other factors. 21 26
Maximum, as Minimum of Midpoint of Maximum of Adjusted, of 1,700,000 Shares 2,000,000 Shares 2,300,000 Shares 2,645,000 Shares at $10.00 at $10.00 at $10.00 at $10.00 Per Share Per Share Per Share Per Share ----------- ----------- ----------- ----------- Gross offering proceeds ........ $17,000,000 $20,000,000 $23,000,000 $26,450,000 Less estimated offering expenses .................... 750,000 750,000 750,000 750,000 ----------- ----------- ----------- ----------- Estimated net offering proceeds ................... 16,250,000 19,250,000 22,250,000 25,700,000 Less: ESOP .................... 1,360,000 1,600,000 1,840,000 2,116,000 MRP(1) ................. 680,000 800,000 920,000 1,058,000 ----------- ----------- ----------- ----------- Estimated investable net proceeds ................... $14,210,000 $16,850,000 $19,490,000 $22,526,000 =========== =========== =========== ===========
- ---------------- (1) Assuming number of shares equal to 4% of the shares to be issued in the Conversion is purchased at the price per share in the Conversion and does not reflect possible increases or decreases in the value of such stock relative to the price per share in the Conversion. See "Pro Forma Data." DIVIDENDS The payment of dividends on the Common Stock will be subject to determination and declaration by the Board of Directors of the Company. The Board of Directors currently intends to establish a policy of paying regular quarterly cash dividends on the Common Stock at an initial annual rate of 2.0% of the $10.00 per share purchase price of the Common Stock in the Conversion ($0.20 per share), with the first dividend to be declared and paid following the first full quarter of fiscal 1997 (i.e., following September 30, 1997). In addition, from time to time, the Board of Directors may determine to pay special cash dividends. Special cash dividends, if paid, may be paid in addition to, or in lieu of, regular cash dividends. The payment of dividends, however, will be subject to the requirements of applicable law and the determination by the Board of Directors of the Company that the net income, capital and financial condition of the Company and the Bank, banking industry trends and general economic conditions justify the payment of dividends, and there can be no assurance that dividends will be paid or, if paid, will continue to be paid in the future. Further, the OTS currently has a policy against permitting the Company to pay a dividend that would qualify for exemption from federal income taxation as a return of capital during the year following the Conversion. While the Board of Directors has no current plans to pay a return of capital dividend, investors should consider the possible effect of the payment of such a dividend when making their investment decision. Since the Company initially will have no significant source of income other than dividends from the Bank, principal and interest payments on the note receivable from the ESOP and earnings from investment of the cash proceeds of the Conversion retained by the Company, the payment of dividends by the Company will depend in part upon the amount of the proceeds from the Conversion retained by the Company and the Company's earnings thereon and the receipt of dividends from the Bank, which is subject to various tax and regulatory restrictions on the payment of dividends. Unlike the Bank, the Company generally is not subject to regulatory restrictions on the payment of dividends to stockholders. Under Oklahoma law, the Company is generally permitted to pay dividends out of its surplus, or, if there is no surplus, out of its net profits for the then-current or the preceding fiscal year or both. Assuming the issuance of 2,000,000 shares of the Common Stock at the midpoint of the estimated valuation range, and based on the assumptions set forth under "Use of Proceeds," it is estimated that the Company would retain approximately $8,025,000 in cash proceeds which would be available for the payment of dividends and for other corporate purposes and that the Bank would receive approximately $9,625,000 in cash proceeds, a portion of which would replenish deposits withdrawn to purchase shares in the Conversion and a portion of which could be available for the payment of dividends to the Company under current OTS regulations. All capital distributions by the Bank are subject to regulatory restrictions tied to its regulatory capital level. In addition, after the Conversion, the Bank 22 27 will be prohibited from paying any dividend that would reduce its regulatory capital below the amount in the liquidation account to be provided for the benefit of the Bank's Eligible Account Holders at the time of the Conversion and adjusted downward thereafter. For additional information, see "Regulation -- Regulation of the Bank -- Regulatory Capital Requirements" and " -- Dividend Restrictions" and "The Conversion -- Effect of Conversion to Stock Form on Depositors and Borrowers of the Bank -- Liquidation Account." MARKET FOR THE COMMON STOCK The Company has never issued Common Stock to the public. Consequently, there is no established market for the Common Stock. An active and liquid public trading market for the securities of any issuer, including the Common Stock of the Company, depends upon the presence in the marketplace of both willing buyers and willing sellers of the securities at any given time. The Company has received conditional approval to have the Common Stock quoted on the Nasdaq National Market under the symbol "HCBB" upon the successful closing of the Conversion, subject to certain conditions which the Company and the Bank believe will be met, including a minimum market capitalization and minimum numbers of market makers and stockholders of record. Trident Securities has agreed to make a market for the Common stock following consummation of the Conversion and will assist the Company in seeking to encourage at least one additional market maker to establish and maintain a market in the Common Stock. Making a market involves maintaining bid and ask quotations and being able, as principal, to effect transactions in reasonable quantities at those quoted prices, subject to various securities laws and other regulatory requirements. While the Company anticipates that prior to the completion of the Conversion it will be able to obtain the commitment from at least one additional broker-dealer to act as market maker for the Common Stock, there can be no assurance there will be two or more market makers for the Common Stock. As a result, due to the size of the offering, there can be no assurance that the conditions to the Nasdaq National Market conditional approval will be satisfied or that an active and liquid trading market will develop or be maintained. If for any reason the Common Stock does not qualify for quotation on the Nasdaq National Market, then management expects the Common Stock to qualify for quotation on the Nasdaq Small-Cap Market, although there can be no assurance. In addition, no assurance can be given that the trading price per share of the Common Stock will equal or exceed the purchase price. Purchasers of Common Stock should consider the potentially illiquid and long-term nature of their investment in the shares being offered hereby. The aggregate price of the Common Stock is based upon an independent appraisal of the pro forma market value of the Common Stock. For additional information, see "Risk Factors -- Market Conditions and Absence of Prior Market for the Common Stock." 23 28 PROPOSED PURCHASES BY DIRECTORS AND EXECUTIVE OFFICERS The following table sets forth information regarding the approximate number of shares of the Common Stock intended to be purchased by each of the directors and executive officers of the Bank, including each such person's associates, and by all directors and executive officers as a group, including all of their associates, and other related information. For purposes of the following table, it has been assumed that 2,000,000 shares of the Common Stock will be sold at $10.00 per share, the midpoint of the estimated valuation range (see "The Conversion -- Stock Pricing and Number of Shares to be Issued") and that sufficient shares will be available to satisfy subscriptions in all categories.
Percent Aggregate Purchase Name and Position Total of Price of with the Bank Shares Total Proposed Purchases - ------------- ---------- ---------- ------------------ Vida H. Lampkin 25,000 1.25% $ 250,000 Chairman of the Board, President and Chief Executive Officer Cameron P. McKeel 15,000 * 150,000 Executive Vice President and Director Carl E. Parker, Jr., Director 25,000 1.25 250,000 Bruce D. Murry, Director 5,000 * 50,000 Roy Wayne Moseley, Director 7,500 * 75,000 Lula Sue Silliman, Director 10,000 * 100,000 Clifford Steelman, Director 25,000 1.25 250,000 William C. Lyon, Senior Vice President(1) -- -- -- All directors and executive officers as a group (8 persons) 112,500 5.6 1,125,000 ESOP(2) 160,000 8.0 1,600,000 MRP(3) 80,000 4.0 800,000 ---------- ---------- ---------- Total(4) 352,500 17.6% $3,525,000 ========== ========== ==========
- --------------------- * Less than 1%. (1) Under applicable regulatory requirements, because his wife is employed by the FDIC, Mr. Lyon is prohibited from purchasing shares of common stock of the Company or of any other depository institution insured by the FDIC or holding company thereof. (2) Consists of shares that could be allocated to participants in the ESOP, under which executive officers and other employees could be allocated in the aggregate 8% of the Common Stock issued in the Conversion. See "Management of the Bank -- Certain Benefit Plans and Arrangements -- Employee Stock Ownership Plan." (3) Consists of shares that possibly could be awarded to participants in the MRP, under which directors, executive officers and other employees could be awarded an aggregate number of treasury or newly issued shares equal to 4% of the Common Stock issued in the Conversion (80,000 shares at the midpoint of the estimated valuation range). The dollar amount of the Common Stock to be purchased by the MRP is based on the price per share in the Conversion and does not reflect possible increases or decreases in the value of such stock relative to the price per share in the Conversion. The MRP is required to be approved by the Company's stockholders prior to implementation. See "Management of the Bank -- Certain Benefit Plans and Arrangements -- Management Recognition Plan." (4) Does not include shares that possibly could be purchased by participants in the Option Plan, under which directors, executive officers and other employees could be granted options to purchase an aggregate amount of Common Stock equal to 10% of the shares issued in the Conversion (200,000 shares at the midpoint of the estimated valuation range) at exercise prices equal to the market price of the Common Stock on the date of grant. Shares issued pursuant to the exercise of options could be from treasury or newly issued shares. The Option Plan is required to be approved by the Company's stockholders prior to implementation. See "Management of the Bank -- Certain Benefit Plans and Arrangements -- Stock Option Plan." 24 29 CAPITALIZATION The following table sets forth information regarding the historical capitalization, including deposits and borrowings, of the Bank at September 30, 1996 and the pro forma consolidated capitalization of the Company giving effect to the sale of the Common Stock at the minimum, midpoint, maximum and 15% above the maximum of the estimated valuation range based upon the assumptions set forth under "Use of Proceeds" and below. For additional financial information regarding the Bank, see the consolidated financial statements and related notes appearing elsewhere herein. Depending on market and financial conditions, the total number of shares to be issued in the Conversion may be significantly increased or decreased above or below the midpoint of the estimated valuation range. No resolicitation of subscribers and other purchasers will be made unless the aggregate purchase price of the Common Stock sold in the Conversion is below the minimum of the estimated valuation range or is above 15% above the maximum of the estimated valuation range. A CHANGE IN THE NUMBER OF SHARES TO BE ISSUED IN THE CONVERSION MAY MATERIALLY AFFECT THE COMPANY'S PRO FORMA CAPITALIZATION. SEE "USE OF PROCEEDS" AND "THE CONVERSION -- STOCK PRICING AND NUMBER OF SHARES TO BE ISSUED."
Capitalization of the Bank at September 30, 1996 --------- Deposits(1) ............................................ $ 147,173 Borrowings ............................................. 10,400 --------- Total deposits and borrowings ...................... $ 157,573 ========= Capital stock Preferred stock, par value $0.01 per share: authorized- 5,000,000; outstanding - none .......... -- Common Stock, par value $0.01 per share: authorized - 20,000,000; outstanding - as shown(2,3) -- Paid-in capital(2, 3) ................................ -- Less: Common Stock acquired by ESOP(4) .............. -- Common stock acquired by MRP(3) .............. -- Retained income -- substantially restricted(5) ....... 13,677 Unrealized (losses) on available-for-sale securities, net of tax ............................. (199) --------- Total stockholders' equity ..................... $ 13,478 =========
Pro Forma Consolidated Capitalization of the Company at September 30, 1996 Based on the Sale of -------------------------------------------------------------------- 1,700,000 Shares 2,000,000 Shares 2,300,000 Shares 2,645,000 Shares at $10.00 at $10.00 at $10.00 at $10.00 Per Share Per Share Per Share Per Share --------- --------- --------- --------- (In thousands) Deposits(1) ............................................ $ 147,173 $ 147,173 $ 147,173 $ 147,173 Borrowings ............................................. 10,400 10,400 10,400 10,400 --------- --------- --------- --------- Total deposits and borrowings ...................... $ 157,573 $ 157,573 $ 157,573 $ 157,573 ========= ========= ========= ========= Capital stock Preferred stock, par value $0.01 per share: authorized- 5,000,000; outstanding - none .......... -- -- -- -- Common Stock, par value $0.01 per share: authorized - 20,000,000; outstanding - as shown(2,3) 17 20 23 26 Paid-in capital(2, 3) ................................ 16,233 19,230 22,227 25,674 Less: Common Stock acquired by ESOP(4) .............. (1,360) (1,600) (1,840) (2,116) Common stock acquired by MRP(3) .............. (680) (800) (920) (1,058) Retained income -- substantially restricted(5) ....... 13,677 13,677 13,677 13,677 Unrealized (losses) on available-for-sale securities, net of tax ............................. (199) (199) (199) (199) --------- --------- --------- --------- Total stockholders' equity ..................... $ 27,688 $ 30,328 $ 32,968 $ 36,004 ========= ========= ========= =========
(footnotes on succeeding page) 25 30 (footnotes continued from preceding page) - -------------------- (1) Withdrawals from savings accounts for the purchase of stock have not been reflected in these adjustments. Any withdrawals will reduce pro forma capitalization by the amount of such withdrawals. (2) Does not reflect additional shares of Common Stock that possibly could be purchased by participants in the Option Plan, under which directors, executive officers and other employees could be granted options to purchase an aggregate amount of Common Stock equal to 10% of the shares issued in the Conversion (2,000,000 shares at the midpoint of the estimated valuation range) at exercise prices equal to the market price of the Common Stock on the date of grant. The Option Plan is required to be approved by the Company's stockholders prior to implementation. See "Management of the Bank -- Selected Benefit Plans and Arrangements -- Stock Option and Incentive Plan" and "Risk Factors -- Possible Dilutive Effect of MRP and Option Plan." (3) Assumes a number of outstanding shares of Common Stock equal to 4% of the Common Stock to be sold in the Conversion will be purchased by the MRP. The dollar amount of the Common Stock possibly to be purchased by the MRP is based on the price per share in the Conversion and represents unearned compensation and is reflected as a reduction of capital. Such amount does not reflect possible increases or decreases in the value of such stock relative to the price per share in the Conversion. As the Bank accrues compensation expense to reflect the vesting of such shares pursuant to the MRP, the charge against capital will be reduced accordingly. The MRP is required to be approved by the Company's stockholders prior to implementation. In the event the shares issued under the MRP consist of shares of Common Stock newly issued at the price per share in the Conversion, the per share financial condition and results of operations of the Company could be proportionately reduced and to that extent the interests of existing stockholders would be diluted. See "Management of the Bank -- Selected Benefit Plans and Arrangements -- Management Recognition Plan," "Pro Forma Data" and "Risk Factors -- Possible Dilutive Effect of MRP and Option Plan." (4) Assumes 8% of the shares to be sold in the Conversion are purchased by the ESOP under all circumstances, and that the funds used to purchase such shares are borrowed from the Company. Although repayment of such debt will be secured solely by the shares purchased by the ESOP, the Bank expects to make discretionary contributions to the ESOP in an amount at least equal to the principal and interest payments on the ESOP debt. The approximate amount expected to be borrowed by the ESOP is reflected in this table as a reduction of capital. See "Management of the Bank -- Selected Benefit Plans and Arrangements -- Employee Stock Ownership Plan." (5) The retained income of the Bank is substantially restricted. All capital distributions by the Bank are subject to regulatory restrictions tied to its regulatory capital level. In addition, after the Conversion, the Bank will be prohibited from paying any dividend that would reduce its regulatory capital below the amount in the liquidation account to be provided for the benefit of the Bank's eligible depositors at the time of the Conversion and adjusted downward thereafter. See "Regulation -- Regulation of the Bank -- Dividend Restrictions" and "The Conversion -- Effect of Conversion to Stock Form on Depositors and Borrowers of the Bank -- Liquidation Account." 26 31 HISTORICAL AND PRO FORMA REGULATORY CAPITAL COMPLIANCE The following table sets forth the Bank's historical and pro forma capital position relative to its various minimum statutory and regulatory capital requirements at September 30, 1996. Pro forma data assumes that the Common Stock has been sold as of September 30, 1996 at the minimum, the midpoint, the maximum and 15% above the maximum of the estimated valuation range. For additional information regarding the financial condition and regulatory capital requirements of the Bank and the assumptions underlying the pro forma capital calculations set forth below, see "Use of Proceeds," "Capitalization," "Pro Forma Data" and "Regulation -Regulation of the Bank -- Regulatory Capital Requirements" and the consolidated financial statements and related notes appearing elsewhere herein.
Pro Forma at September 30, 1996 Based on the Sale of (1): --------------------------------------------------------------------------- Minimum of Midpoint of Maximum of Maximum, as adjusted 1,700,000 Shares 2,000,000 Shares 2,300,000 Shares 2,645,000 Shares Historical at at $10.00 at $10.00 at $10.00 at $10.00 September 30, 1996 Per Share Per Share Per Share Per Share ------------------ --------------------------------------------------------------------------- Percent of Percent of Percent of Percent of Percent of Amount Assets(2) Amount Assets(2) Amount Assets(2) Amount Assets(2) Amount Assets(2) ------- ----- ------- ----- ------- ----- ------- ----- ------- ----- (Dollars in Thousands) Capital under generally accepted accounting principles ....... $13,478 7.79% $19,563 10.84% $20,703 11.39% $21,843 11.92% $23,154 12.53% ======= ===== ======= ===== ======= ===== ======= ===== ======= ===== Tangible capital ............... $11,717 6.84% $17,802 9.96% $18,942 10.52% $20,082 11.07% $21,393 11.69% Tangible capital requirement ... 2,568 1.50 2,680 1.50 2,701 1.50 2,721 1.50 2,745 1.50 ------- ----- ------- ----- ------- ----- ------- ----- ------- ----- Excess ...................... $ 9,149 5.34% $15,122 8.46% $16,241 9.02% $17,361 9.57% $18,648 10.19% ======= ===== ======= ===== ======= ===== ======= ===== ======= ===== Core capital ................... $11,717 6.84% $17,802 9.96% $18,942 10.52% $20,082 11.07% $21,393 11.69% Core capital requirement ....... 5,136 3.00 5,360 3.00 5,401 3.00 5,442 3.00 5,490 3.00 ------- ----- ------- ----- ------- ----- ------- ----- ------- ----- Excess ...................... $ 6,581 3.84% $12,442 6.96% $13,541 7.52% $14,640 8.07% $15,903 8.69% ======= ===== ======= ===== ======= ===== ======= ===== ======= ===== Total regulatory capital ....... $12,482 20.40% $18,567 28.90% $19,707 30.41% $20,847 31.89% $22,158 33.56% Risk-based capital requirement . 4,896 8.00 5,140 8.00 5,185 8.00 5,230 8.00 5,282 8.00 ------- ----- ------- ----- ------- ----- ------- ----- ------- ----- Excess ...................... $ 7,586 12.40% $13,427 20.90% $14,522 22.41% $15,617 23.89% $16,876 25.56% ======= ===== ======= ===== ======= ===== ======= ===== ======= =====
(1) Assumes the Company will purchase all of the capital stock of the Bank to be issued upon Conversion in exchange for 50% of the net proceeds from the Conversion stock offering. Assumes net proceeds distributed to the Company or the Bank initially are invested in short-term securities that carry a risk-weight equal to the ratio of risk-weighted assets to total assets at September 30, 1996. Assumes 8% of the shares to be sold in the Conversion are purchased by the ESOP under all circumstances, and that the funds used to purchase such shares are borrowed from the Company. Although repayment of such debt will be secured solely by the shares purchased by the ESOP, the Bank expects to make discretionary contributions to the ESOP in an amount at least equal to the principal and interest payments on the ESOP debt. The approximate amount expected to be borrowed by the ESOP is not reflected in this table as borrowed funds but is reflected as a reduction of capital. Assumes a number of issued and outstanding shares of Common Stock equal to 4% of the Common Stock to be sold in the Conversion will be purchased by the MRP after the Conversion. The dollar amount of the Common Stock possibly to be purchased by the MRP is based on the price per share in the Conversion and represents unearned compensation and is reflected as a reduction of capital. Such amount does not reflect possible increases or decreases in the value of such stock relative to the price per share in the Conversion. As the Bank accrues compensation expense to reflect the vesting of such shares pursuant to the MRP, the charge against capital will be reduced accordingly. Does not reflect a possible increase in capital upon the exercise of options by participants in the Option Plan, under which directors, executive officers and other employees could be granted options to purchase an aggregate amount of Common Stock equal to 10% of the shares issued in the Conversion (200,000 shares at the midpoint of the estimated valuation range) at exercise prices equal to the market price of the Common Stock on the date of grant. Under the MRP and the Option Plan, shares issued to participants could be newly issued shares or, subject to regulatory restrictions, shares repurchased in the market. The MRP and the Option Plan are required to be approved by the Company's stockholders and will not be implemented until at least six months after the Conversion. See "Management of the Bank -- Certain Benefit Plans and Arrangements." (2) Based on the Bank's total assets determined under generally accepted accounting principles for equity purposes, adjusted total assets for the purposes of the tangible and core capital requirements and risk-weighted assets for the purpose of the risk-based capital requirement. 27 32 PRO FORMA DATA The following tables set forth the actual and, after giving effect to the Conversion for the periods and at the dates indicated, pro forma consolidated net income, stockholders' equity and other data of the Bank prior to the Conversion and of the Company following the Conversion. Pro forma consolidated income and related data for the year ended June 30, 1996 and the three months ended September 30, 1996 have been calculated as if the Common Stock to be issued in the Conversion had been sold, and the estimated net proceeds had been invested at 5.70% at the beginning of the periods. The assumed yield is based on the market yield of short-term U.S. government securities at September 30, 1996, as adjusted for assumed income taxes at 37% of such assumed yield. Applying this tax rate resulted in after-tax yields of 3.59% for the periods. The use of these rates is viewed as more relevant than the use of an arithmetic average of the Bank's weighted average yield on all interest-earning assets and weighted average rate paid on deposits during such periods (as set forth in federal regulations). Unaudited pro forma consolidated stockholders' equity and related data have been calculated as if the Common Stock had been sold and was outstanding at the end of each period, without any adjustment of historical or pro forma equity to reflect assumed earnings on estimated net proceeds. Per share amounts have been computed as if the Common Stock had been outstanding at the beginning of the period or at the dates shown, but without any adjustment of historical or pro forma stockholders' equity to reflect the earnings on estimated net proceeds. The pro forma data set forth below do not reflect withdrawals from deposit accounts to purchase shares, accruals expected to be made by the Bank with regard to employee benefit plans to be adopted in connection with the Conversion or increases in capital and, in the case of newly issued shares, outstanding Common Stock upon the exercise of options by participants in the Option Plan, under which directors, executive officers and other employees could be granted options to purchase an aggregate amount of Common Stock equal to 10% of the shares issued in the Conversion (200,000 shares at the midpoint of the estimated valuation range) at exercise prices equal to the market price of the Common Stock on the date of grant. The Option Plan requires stockholder approval and will not be implemented until at least six months after the Conversion. For additional financial information regarding the Bank, see "Risk Factors," "Business of the Bank" and "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the consolidated financial statements and related notes appearing elsewhere herein. THE STOCKHOLDERS' EQUITY AND RELATED DATA PRESENTED HEREIN ARE NOT INTENDED TO REPRESENT THE FAIR MARKET VALUE OF THE COMMON STOCK, THE CURRENT VALUE OF ASSETS OR LIABILITIES, OR THE AMOUNTS, IF ANY, THAT WOULD BE AVAILABLE FOR DISTRIBUTION TO STOCKHOLDERS IN THE EVENT OF LIQUIDATION. FOR ADDITIONAL INFORMATION REGARDING THE LIQUIDATION ACCOUNT, SEE "THE CONVERSION -- EFFECTS OF CONVERSION TO STOCK FORM ON DEPOSITORS AND BORROWERS OF THE BANK -- LIQUIDATION ACCOUNT." THE PRO FORMA INCOME AND RELATED DATA DERIVED FROM THE ASSUMPTIONS SET FORTH ABOVE SHOULD NOT BE CONSIDERED INDICATIVE OF THE ACTUAL RESULTS OF OPERATIONS OF THE BANK AND THE COMPANY FOR ANY PERIOD. SUCH PRO FORMA DATA MAY BE MATERIALLY AFFECTED BY A CHANGE IN THE NUMBER OF SHARES TO BE ISSUED IN THE CONVERSION AND OTHER FACTORS. SEE "THE CONVERSION -- STOCK PRICING AND NUMBER OF SHARES TO BE ISSUED." 28 33
At or for the Three Months Ended September 30, 1996 ------------------------------------------------------------ Maximum, as Minimum of Midpoint of Maximum of Adjusted, of 1,700,000 2,000,000 2,300,000 2,645,000 Shares Shares Shares Shares at $10.00 at $10.00 at $10.00 at $10.00 Per Share Per Share Per Share Per Share ---------- ----------- ---------- ------------ (In thousands, except per share amounts) Gross offering proceeds............................. $ 17,000 $ 20,000 $ 23,000 $ 26,450 Less estimated offering expenses.................... (750) (750) (750) (750) --------- --------- -------- --------- Estimated net offering proceeds.................. 16,250 19,250 22,250 25,700 Less: Common Stock acquired by ESOP............... (1,360) (1,600) (1,840) (2,116) Common Stock acquired by MRP................ (680) (800) (920) (1,058) ---------- --------- -------- --------- Estimated investable net proceeds................ $ 14,210 $ 16,850 $ 19,490 $ 22,526 ========= ========= ======== ========== Net income (loss): Historical net income (loss)..................... $ (843) $ (843) $ (843) $ (843) Pro forma income on net proceeds................. 128 151 175 202 Pro forma ESOP adjustment (1).................... (21) (25) (29) (33) Pro forma MRP adjustment (2)..................... (21) (25) (29) (33) --------- --------- --------- --------- Total (3).................................... $ (758) $ (742) $ (726) $ (707) ========= ========= ======== ========= Net income (loss) per share: (4) Historical net income (loss)..................... $ (0.53) $ (0.45) $ (0.39) $ (0.34) Pro forma income on net proceeds................. 0.08 0.08 0.08 0.08 Pro forma ESOP adjustment (1).................... (0.01) (0.01) (0.01) (0.01) Pro forma MRP adjustment (2)..................... (0.01) (0.01) (0.01) (0.01) --------- --------- -------- --------- Total (3).................................... $ (0.48) $ (0.40) $ (0.34) $ (0.29) ========= ========= ========= ========= Number of shares used in calculating earnings per share................................ 1,577,600 1,856,000 2,134,400 2,454,560 Stockholders' equity: (5) Historical...................................... $ 13,478 $ 13,478 $ 13,478 $ 13,478 Estimated net offering proceeds (2)............. 16,250 19,250 22,250 25,700 Less: Common Stock acquired by ESOP (1)....... (1,360) (1,600) (1,840) (2,116) Common Stock acquired by MRP (2)........ (680) (800) (920) (1,058) --------- --------- ---------- ---------- Total........................................ $ 27,688 $ 30,328 $ 32,968 $ 36,004 ========= ========= ========= ========= Stockholders' equity per share: (4, 5) Historical....................................... $ 7.93 $ 6.74 $ 5.86 $ 5.10 Estimated net offering proceeds (2).............. 9.56 9.63 9.67 9.72 Less: Common Stock acquired by ESOP (1)....... (0.80) (0.80) (0.80) (0.80) Common Stock acquired by MRP (2)........ (0.40) (0.40) (0.40) (0.40) --------- --------- ---------- --------- Total........................................ $ 16.29 $ 15.16 $ 14.33 $ 13.61 ========= ========= ========= ========= Number of shares used in calculating equity per share.................................. 1,700,000 2,000,000 2,300,000 2,645,000 Offering price as a percentage of pro forma stockholders' equity per share (4, 5)............ 61.40% 65.95% 69.76% 73.46% ========= ========= ========== ========= Ratio of offering price to pro forma annualized net income per share (4).............. NM NM NM NM ========= ========== ========== =========
(Footnotes on succeeding page) 29 34 - ---------------- (Footnotes continued from preceding page) (1) Assumes 8% of the shares to be sold in the Conversion are purchased by the ESOP under all circumstances, and that the funds used to purchase such shares are borrowed from the Company. The approximate amount expected to be borrowed by the ESOP is reflected in this table as a reduction of capital. Although repayment of such debt will be secured solely by the shares purchased by the ESOP, the Bank expects to make discretionary contributions to the ESOP in an amount at least equal to the principal and interest payments on the ESOP debt. Pro forma net income has been adjusted to give effect to such contributions, based upon a fully amortizing debt with a ten-year term. Since the Company will be providing the ESOP loan, only principal payments on the ESOP loan are reflected as employee compensation and benefits expense. The provisions of SOP 93-6 have been applied for shares to be acquired by the ESOP and for purposes of computing earnings per share. See "Management of the Bank -- Certain Benefit Plans and Arrangements -- Employee Stock Ownership Plan." (2) Assumes a number of issued and outstanding shares of Common Stock equal to 4% of the Common Stock to be sold in the Conversion will be purchased by the MRP. The dollar amount of the Common Stock possibly to be purchased by the MRP is based on the price per share in the Conversion and represents unearned compensation and is reflected as a reduction of capital. Such amount does not reflect possible increases or decreases in the value of such stock relative to the price per share in the Conversion. As the Bank accrues compensation expense to reflect the vesting of such shares pursuant to the MRP, the charge against capital will be reduced accordingly. In the event the shares issued under the MRP consist of shares of Common Stock newly issued at the price per share in the Conversion, the per share financial condition and results of operations of the Company would be proportionately reduced and to that extent the interests of existing stockholders would be diluted by approximately 4%. See "Management of the Bank -- Certain Benefit Plans and Arrangements" and "Risk Factors -- Possible Dilutive Effect of MRP and Option Plan." (3) Includes after-tax charge of $555,000 taken during the period representing a special assessment of 65.7 basis points on the Bank's deposits at March 31, 1995 pursuant to legislation enacted to recapitalize the SAIF. Excluding that charge, based on the assumptions reflected in this table at the midpoint of the estimated valuation range, management estimates that pro forma net income (loss) for the period would have been approximately $(187,000), or $(0.10) per share. (4) In accordance with SOP 93-6, per share data is computed based on the assumed numbers of shares sold in the Conversion, less the shares acquired by the ESOP for earnings per share amounts, and ESOP shares are not included in earnings per share calculations until such shares are committed to be released, which will occur at the end of operating periods as related compensation is earned by the participants. (5) Consolidated stockholders' equity represents the excess of the carrying value of the assets of the Company over its liabilities. The amounts shown do not reflect the federal income tax consequences of the potential restoration to income of the bad debt reserves for income tax purposes, which would be required in the event of liquidation. The amounts shown also do not reflect the amounts required to be distributed in the event of liquidation to eligible depositors from the liquidation account which will be established upon the consummation of the Conversion. Pro forma stockholders' equity information is not intended to represent the fair market value of the Common Stock, the current value of the Bank's assets or liabilities, or the amounts, if any, that would be available for distribution to stockholders in the event of liquidation. Such pro forma data may be materially affected by a change in the number of shares to be sold in the Offerings and by other factors. 30 35
At or for the Year Ended June 30, 1996 ------------------------------------------------------------ Maximum, as Minimum of Midpoint of Maximum of Adjusted, of 1,700,000 2,000,000 2,300,000 2,645,000 Shares Shares Shares Shares at $10.00 at $10.00 at $10.00 at $10.00 Per Share Per Share Per Share Per Share ---------- ----------- ---------- ------------ (In thousands, except per share amounts) Gross offering proceeds............................. $ 17,000 $ 20,000 $ 23,000 $ 26,450 Less estimated offering expenses.................... (750) (750) (750) (750) --------- --------- -------- --------- Estimated net offering proceeds.................. 16,250 19,250 22,250 25,700 Less: Common Stock acquired by ESOP............... (1,360) (1,600) (1,840) (2,116) Common Stock acquired by MRP................ (680) (800) (920) (1,058) ---------- --------- -------- --------- Estimated investable net proceeds................ $ 14,210 $ 16,850 $ 19,490 $ 22,526 ========= ========= ======== ========== Net income: Historical net income............................ $ 231 $ 231 $ 231 $ 231 Pro forma income on net proceeds................. 510 605 700 809 Pro forma ESOP adjustment (1).................... (86) (101) (116) (133) Pro forma MRP adjustment (2)..................... (86) (101) (116) (133) --------- --------- -------- -------- Total........................................ $ 570 $ 634 $ 699 $ 773 ========== ========= ======== ======== Net income per share: (3) Historical net income............................ $ 0.15 $ 0.12 $ 0.11 $ 0.09 Pro forma income on net proceeds................. 0.32 0.33 0.33 0.33 Pro forma ESOP adjustment (1).................... (0.05) (0.05) (0.05) (0.05) Pro forma MRP adjustment (2)..................... (0.05) (0.05) (0.05) (0.05) --------- --------- -------- -------- Total........................................ 0.37 0.35 0.34 0.32 ========= ========= ======== ======== Number of shares used in calculating earnings per share............................... 1,577,600 1,856,000 2,134,400 2,454,560 Stockholders' equity: (4) Historical...................................... $ 14,234 $ 14,234 $ 14,234 $ 14,234 Estimated net offering proceeds (2)............. 16,250 19,250 22,250 25,700 Less: Common Stock acquired by ESOP (1)....... (1,360) (1,600) (1,840) (2,116) Common Stock acquired by MRP (2)........ (680) (800) (920) (1,058) --------- --------- --------- --------- Total........................................ $ 28,444 $ 31,084 $ 33,724 $ 36,760 ========= ========== ========= ========= Stockholders' equity per share: (3,4) Historical....................................... $ 8.37 $ 7.12 $ 6.19 $ 5.38 Estimated net offering proceeds (2).............. 9.56 9.63 9.67 9.72 Less: Common Stock acquired by ESOP (1)....... (0.80) (0.80) (0.80) (0.80) Common Stock acquired by MRP (2)........ (0.40) (0.40) (0.40) (0.40) --------- --------- --------- --------- Total........................................ $ 16.73 $ 15.54 $ 14.66 $ 13.90 ========= ========= ========= ========= Number of shares used in calculating equity per share.................................. 1,700,000 2,000,000 2,300,000 2,645,000 Offering price as a percentage of pro forma stockholders' equity per share (3,4)............. 59.77% 64.34% 68.20% 71.95% ========= ========= ========== ========= Ratio of offering price to pro forma annualized net income per share (3).............. 27.70x 29.27x 30.55x 31.75x ========= ========= ========== =========
(Footnotes on succeeding page) 31 36 (footnotes continued from preceding page) (1) Assumes 8% of the shares to be sold in the Conversion are purchased by the ESOP under all circumstances, and that the funds used to purchase such shares are borrowed from the Company. The approximate amount expected to be borrowed by the ESOP is reflected in this table as a reduction of capital. Although repayment of such debt will be secured solely by the shares purchased by the ESOP, the Bank expects to make discretionary contributions to the ESOP in an amount at least equal to the principal and interest payments on the ESOP debt. Pro forma net income has been adjusted to give effect to such contributions, based upon a fully amortizing debt with a ten-year term. Since the Company will be providing the ESOP loan, only principal payments on the ESOP loan are reflected as employee compensation and benefits expense. The provisions of SOP 93-6 have been applied for shares to be acquired by the ESOP and for purposes of computing earnings per share. See "Management of the Bank -- Certain Benefit Plans and Arrangements -- Employee Stock Ownership Plan." (2) Assumes a number of issued and outstanding shares of Common Stock equal to 4% of the Common Stock to be sold in the Conversion will be purchased by the MRP. The dollar amount of the Common Stock possibly to be purchased by the MRP is based on the price per share in the Conversion and represents unearned compensation and is reflected as a reduction of capital. Such amount does not reflect possible increases or decreases in the value of such stock relative to the price per share in the Conversion. As the Bank accrues compensation expense to reflect the vesting of such shares pursuant to the MRP, the charge against capital will be reduced accordingly. In the event the shares issued under the MRP consist of shares of Common Stock newly issued at the price per share in the Conversion, the per share financial condition and results of operations of the Company would be proportionately reduced and to that extent the interests of existing stockholders would be diluted by approximately 4%. See "Management of the Bank -- Certain Benefit Plans and Arrangements" and "Risk Factors -- Possible Dilutive Effect of MRP and Option Plan." (3) In accordance with SOP 93-6, per share data is computed based on the assumed numbers of shares sold in the Conversion, less the shares acquired by the ESOP for earnings per share amounts, and ESOP shares are not included in earnings per share calculations until such shares are committed to be released, which will occur at the end of operating periods as related compensation is earned by the participants. (4) Consolidated stockholders' equity represents the excess of the carrying value of the assets of the Company over its liabilities. The amounts shown do not reflect the federal income tax consequences of the potential restoration to income of the bad debt reserves for income tax purposes, which would be required in the event of liquidation. The amounts shown also do not reflect the amounts required to be distributed in the event of liquidation to eligible depositors from the liquidation account which will be established upon the consummation of the Conversion. Pro forma stockholders' equity information is not intended to represent the fair market value of the Common Stock, the current value of the Bank's assets or liabilities, or the amounts, if any, that would be available for distribution to stockholders in the event of liquidation. Such pro forma data may be materially affected by a change in the number of shares to be sold in the Offerings and by other factors. 32 37 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GENERAL The Bank's principal business consists of attracting deposits from the general public and investing those funds in loans secured by first mortgages on existing owner-occupied single-family residences in the Bank's primary market area and, to a lesser but growing extent, commercial and multi-family real estate loans and consumer and commercial business loans. The Bank also maintains a substantial investment portfolio of mortgage-related securities and U.S. government and agency securities. The Bank's net income is dependent primarily on its net interest income, which is the difference between interest income earned on its loans, mortgage-backed securities and securities portfolio and interest paid on customers' deposits. The Bank's net income is also affected by the level of noninterest income, such as service charges on customers' deposit accounts, net gains or losses on the sale of securities and other fees. In addition, net income is affected by the level of noninterest expense, which primarily consists of employee compensation expenses, deposit insurance premiums and other expenses. The financial condition and results of operations of the Bank and the thrift and banking industries as a whole are significantly affected by prevailing economic conditions, competition and the monetary and fiscal policies of governmental agencies. Lending activities are influenced by demand for and supply of credit, competition among lenders and the level of interest rates in the Bank's market area. The Bank's deposit flows and costs of funds are influenced by prevailing market rates of interest, primarily on competing investments, as well as account maturities and the levels of personal income and savings in the Bank's market area. Investors should carefully consider the important information regarding the Bank set forth in "Management's Discussion and Analysis of Financial Condition and Results of Operations" as well as "Business of the Bank," especially "-- Business Strategy" and "-- Lending Activities," and "Risk Factors," especially "-- Loan Portfolio Composition" and "-- Recent and Planned Changes in Management and Business Strategy," when determining whether to invest in the Common Stock. ASSET/LIABILITY MANAGEMENT Net interest income, the primary component of the Bank's net income, is determined by the difference or "spread" between the yield earned on the Bank's interest-earning assets and the rates paid on its interest-bearing liabilities and the relative amounts of such assets and liabilities. Key components of a successful asset/liability strategy are the monitoring and managing of interest rate sensitivity on both the interest-earning assets and interest-bearing liabilities. It has been the Bank's historical policy to mitigate the interest rate risk inherent in the historical savings institution business of originating long term single-family mortgage loans funded by short term deposits by maintaining substantial liquidity and capital levels to sustain unfavorable movements in market interest rates, by purchasing investment securities with adjustable-rates and/or short terms to maturity and by originating limited amounts of relatively shorter term consumer loans. In the future, however, it is anticipated that as the Bank sells more of its long term loan originations and originates for portfolio more commercial and multi-family real estate loans and consumer and commercial business loans with relatively shorter terms to maturity or repricing, the Bank's interest rate risk exposure may decline somewhat. The matching of the Bank's assets and liabilities may be analyzed by examining the extent to which its assets and liabilities are interest rate sensitive and by monitoring both its interest rate sensitivity "gap" and the expected effects of interest rate changes on its net portfolio value. Interest Rate Sensitivity Gap. An asset or liability is interest rate sensitive within a specific time period if it will mature or reprice within that time period. The interest rate sensitivity gap is defined as the difference between the amount of interest-earning assets maturing or repricing within a specific time period and the amount of interest- 33 38 bearing liabilities maturing or repricing within that time period. A gap is considered positive when the amount of interest rate sensitive assets exceeds the amount of interest rate liabilities. A gap is considered negative when the amount of interest rate sensitive liabilities exceeds the amount of interest rate sensitive assets. During a period of rising interest rates, a negative gap would tend to adversely affect net interest income while a positive gap would tend to positively affect net interest income. Similarly, during a period of falling interest rates, a negative gap would tend to positively affect net interest income while a positive gap would tend to adversely affect net interest income. At September 30, 1996, the Bank's total interest-bearing liabilities maturing or repricing within one and five years exceeded its total interest-earning assets maturing or repricing in the same periods, and the Bank's cumulative one-and five-year gap ratios totalled negative 31.96%, and 27.84%, respectively. The Bank's gap measures indicate that net interest income could be significantly exposed to increases in interest rates. In a rising interest rate environment, the Bank's net interest income could be adversely affected as liabilities would reprice to higher market rates more quickly than assets. This effect would be compounded, because the prepayment speeds of the Bank's long-term fixed-rate assets would decrease in a rising interest rate environment. The following table sets forth information regarding projected maturities and repricing of interest-earning assets and interest-bearing liabilities of the Bank at September 30, 1996. The computations were made without using assumptions for loan repayments or deposit decays. Except as stated below, the amounts of assets and liabilities shown to reprice or mature within a given period were determined in accordance with contractual terms of the assets or liabilities. In making the computations, all adjustable rate loans were considered to be due at the end of the next upcoming adjustment period. Fixed rate loans were considered to reprice at their contractual maturities with no consideration given to prepayments or scheduled payments. Liquid interest-earning investments with no contractual maturities are assumed to be subject to immediate repricing. Statement savings and money market accounts are subject to immediate availability and repricing and have been placed in the earliest gap category. In addition, fixed maturity deposits were assumed to reprice at their contractual maturities without consideration for early withdrawals. The interest rate sensitivity of the Bank's assets and liabilities illustrated in the following table could vary substantially if different assumptions were used or if actual experience differs from that indicated by such assumptions.
Over One Over Five Over Ten Over One Year Through Through Through Twenty or Less Five Years Ten Years Twenty Years Years Total -------- ---------- --------- ------------ ------- ----- Interest-earning assets: One- to four-family mortgage loans $ 15,490,924 $ 8,060,201 $ 14,148,441 $ 21,519,738 $ -- $ 59,219,304 Other mortgage loans.............. 3,110,616 10,302,041 7,497,210 3,124,073 -- 24,033,940 Consumer loans.................... 3,381,924 1,220,557 821,816 656,846 -- 6,081,143 Investment securities............. 948,728 15,744,910 -- -- -- 16,693,638 Mortgage-backed securities........ 40,536,998 1,518,917 6,121,933 451,505 6,202,113 54,831,466 FHLB of Dallas stock.............. 1,203,000 -- -- -- -- 1,203,000 Other interest-earning assets..... 2,900,234 -- -- -- -- 2,900,234 ------------- ------------- ------------- ------------ ----------- ------------ Total.......................... $ 67,572,424 $ 36,972,792 $ 28,589,400 $ 25,752,162 $ 6,202,113 $164,962,725 ------------- ------------- ------------- ------------ ----------- ------------ Interest-bearing liabilities: Deposits.......................... $ 122,771,802 $ 24,400,942 $ -- $ -- $ -- $147,172,744 FHLB advances..................... -- 5,000,000 5,000,000 -- -- 10,000,000 Notes payable..................... 80,000 320,000 -- -- -- 400,000 ------------- ------------- ------------- ------------ ----------- ------------ Total.......................... 122,851,802 29,400,942 5,000,000 -- -- 157,572,744 ------------- ------------- ------------- ------------ ----------- ------------ Interest sensitivity gap............. $ (55,279,378) $ 7,571,850 $ 23,589,400 $ 23,752,162 $ 6,202,113 $ 7,389,981 ============= ============= ============= ============ =========== ============ Cumulative interest sensitivity gap.................... $ (55,279,378) $ (48,153,694) $ (24,564,294) $ (1,187,368) $ 7,389,981 $ 7,389,981 ============= ============= ============= ============ =========== ============ Ratio of interest-earning assets to interest-bearing liabilities... 55.00% 123.98% 571.79% --% --% 105.31% ============= ============= ============= ============ =========== ============ Ratio of cumulative gap to total assets....................... (31.96)% (27.84)% (13.65)% 1.24% 4.83% 4.59% ============= ============= ============= ============ =========== =============
34 39 Certain shortcomings are inherent in the method of analysis presented in the preceding table. Although certain assets and liabilities may have similar maturity or periods of repricing they may react in different degrees to changes in the market interest rates. The interest rates on certain types of assets and liabilities may fluctuate in advance of changes in market interest rates, while rates on other types of assets and liabilities may lag behind changes in market interest rates. Certain assets, such as adjustable-rate mortgages, generally have features which restrict changes in interest rates on a short-term basis and over the life of the asset. In the event of a change in interest rates, prepayments and early withdrawal levels would likely deviate significantly from those assumed in calculating the table. Additionally, an increased credit risk may result as the ability of many borrowers to service their debt may decrease in the event of an interest rate increase. Virtually all of the adjustable-rate loans in the Bank's portfolio contain conditions which restrict the periodic change in interest rate. Net Portfolio Value. While the Bank historically has measured its interest rate sensitivity by computing the "gap" between the assets and liabilities which were expected to mature or reprice within certain periods, the OTS requires the Bank to measure its interest rate risk by computing estimated changes in the net present value of its cash flows from assets, liabilities and off-balance sheet items ("NPV") in the event of a range of assumed changes in market interest rates. These computations estimate the effect on the Bank's NPV of sudden and sustained 1% to 4% increases and decreases in market interest rates. The Bank's Board of Directors has adopted an interest rate risk policy which establishes maximum decreases in the Bank's estimated NPV of 30%, 50%, 75% and 100% in the event of assumed immediate and sustained 1%, 2%, 3% and 4% increases or decreases in market interest rates, respectively. At September 30, 1996, based on information provided by the OTS, it was estimated that the Bank's consolidated NPV could decrease 14%, 30%, 46% and 64% in the event of 1%, 2%, 3% and 4% respective increases in market interest rates, and no decreases were estimated in the event of equivalent decreases in market interest rates. Like the "gap" calculations above, these calculations indicate that the Bank's net portfolio value could be adversely affected by increases in interest rates. Changes in interest rates also may affect the Bank's net interest income, with increases in rates expected to decrease income and decreases in rates expected to increase income, as the Bank's interest-bearing liabilities would be expected to mature or reprice more quickly than the Bank's interest-earning assets. For information regarding regulatory capital requirements related to interest rate risk, see "Regulation -- Regulation of the Bank -- Regulatory Capital Requirements." The Bank's Board of Directors is responsible for reviewing the Bank's asset and liability policies. On at least a quarterly basis, the Board reviews interest rate risk and trends, as well as liquidity and capital ratios and requirements. The Bank's management is responsible for administering the policies and determinations of the Board of Directors with respect to the Bank's asset and liability goals and strategies. 35 40 AVERAGE BALANCES, INTEREST AND AVERAGE YIELDS AND RATES The following table sets forth information regarding the Bank's average interest-earning assets and interest-bearing liabilities and reflects the average yield of interest-earning assets and the average cost of interest-bearing liabilities for the periods and at the date indicated. Average balances are derived from monthly balances, and loans receivable include nonaccrual loans. The table also presents information for the periods indicated and at September 30, 1996 with respect to the difference between the weighted average yield earned on interest-earning assets and the weighted average rate paid on interest-bearing liabilities, or "interest rate spread," which savings institutions have traditionally used as an indicator of profitability. Another indicator of an institution's net interest income is its "net yield on interest-earning assets," which is its net interest income divided by the average balance of interest-earning assets. Net interest income is affected by the interest rate spread and by the relative amounts of interest-earning assets and interest-bearing liabilities. Whenever interest-earning assets equal or exceed interest-bearing liabilities, any positive interest rate spread will generate net interest income.
Three Months Ended September 30, ----------------------------------------------------------------- At September 30, 1996 1995 1996 ------------------------------ ------------------------------- --------------- Average Average Yield/ Average Yield/ Average Yield/ Balance Cost Balance Interest Cost(1) Balance Interest Cost(1) ------- ---- ------- -------- ------- ------- -------- ------- (Dollars in thousands) Interest-earning assets: Loans receivable........................ $ 89,334,387 8.28% $ 87,733,005 $1,861,425 8.49% $ 58,711,829 $1,184,115 8.07% Investment and mortgage-backed securities 71,525,104 6.66 67,086,410 1,057,293 6.30 69,256,548 1,174,225 6.78 Other interest-earning assets........... 4,103,234 7.25 10,484,365 196,583 7.50 1,866,768 61,107 13.09 ------------ ------------ ---------- ------------ ---------- Total interest-earning assets ........ 164,962,725 165,303,780 3,115,301 7.54 129,835,145 2,419,447 7.45 ---------- ---------- Non-interest-earning assets............... 8,009,137 7,689,494 2,456,081 ------------ ------------ ------------ Total assets.......................... $172,971,862 $172,993,274 $132,291,226 ============ ============ ============ Interest-bearing liabilities: Deposits................................ $147,172,744 4.67 $147,048,510 1,908,114 5.19 112,784,361 1,489,337 5.28 FHLB advances........................... 10,000,000 6.21 10,000,000 155,935 6.24 3,333,333 41,361 4.96 ------------ Notes payable........................... 400,000 7.50 133,333 1,973 5.92 -- -- -- ------------ ------------ ---------- ------------ ---------- Total interest-bearing liabilities.... 157,572,744 5.22 157,181,843 2,066,022 5.26 116,117,694 1,530,698 5.27 ---------- ---------- Non-interest-bearing liabilities.......... 1,921,117 1,627,246 1,659,768 ------------ ------------ ------------ Total liabilities..................... 159,493,861 158,675,756 117,777,462 Equity.................................... 13,478,001 14,317,518 14,513,764 ------------ ------------ ------------ Total liabilities and equity.......... $172,971,862 $172,993,274 $132,291,226 ============ ============ ============ Net interest income....................... $1,049,279 $ 888,749 ========== ========== Interest rate spread...................... 2.28% 2.18% ====== ====== Net yield on interest-earning assets...... 2.54% 2.74% ====== ====== Ratio of average interest-earning assets to average interest-bearing liabilities. 105.26% 111.81% ====== ======
36 41
Year Ended June 30, ------------------------------------------------------------------------------------ 1996 1995 1994 ---------------------------- ---------------------------- ---------------------- Average Average Average Yield/ Average Yield/ Average Balance Interest Cost Balance Interest Cost Balance Interest ------- -------- ---- ------- -------- ---- ------- -------- Interest-earning assets: Loans receivable.......................... $ 65,360,871 $ 5,352,338 8.19% $ 55,879,000 $4,526,621 8.10% $ 52,619,736 $4,386,848 Investment and mortgage-backed securities. 66,253,218 4,467,685 6.74 67,670,423 4,130,123 6.10 67,423,477 3,841,621 Other interest-earning assets............. 6,719,134 513,217 7.64 2,420,316 188,038 7.77 4,510,356 188,266 ------------ ----------- ------------ ---------- ------------ ---------- Total interest-earning assets .......... $138,333,223 10,333,240 7.47 125,969,739 8,844,782 7.02 124,553,569 8,416,735 ----------- ---------- ---------- Non-interest-earning assets................. 5,115,105 1,905,468 2,229,777 ------------ ------------ ------------ Total assets............................ $143,448,328 $127,875,207 $126,783,346 ============ ============ ============ Interest-bearing liabilities: Deposits.................................. $120,029,295 $ 6,314,641 5.26 $111,006,767 $4,979,125 4.49 $113,171,498 4,645,404 FHLB advances............................. 7,508,000 451,957 6.03 2,250,000 133,356 5.93 -- -- ------------ ------------ ---------- ------------ ---------- Total interest-bearing liabilities...... 127,529,295 6,766,598 5.31 113,256,767 5,112,481 4.51 113,171,498 4,645,404 ----------- ---------- Non-interest-bearing liabilities............ 1,215,854 854,350 1,364,426 ------------ ------------ ------------ Total liabilities....................... 128,745,149 114,111,117 114,535,924 Equity...................................... 14,703,179 13,764,090 12,247,422 ------------ ------------ ------------ Total liabilities and equity............ $143,448,328 $127,875,207 $126,783,346 ============ ============ ============ Net interest income......................... $ 3,566,642 $3,732,301 $3,771,331 =========== ========== ========== Interest rate spread........................ 2.16% 2.51% ====== ====== Net yield on interest-earning assets........ 2.58% 2.96% ====== ====== Ratio of average interest-earning assets to average interest-bearing liabilities... 108.47% 111.22% ====== ======
Year Ended June 30, --------- 1994 --------- Average Yield/ Cost ---- Interest-earning assets: Loans receivable.......................... 8.34% Investment and mortgage-backed securities. 5.70 Other interest-earning assets............. 4.37 Total interest-earning assets .......... 6.76 Non-interest-earning assets................. Total assets............................ Interest-bearing liabilities: Deposits.................................. 4.10 FHLB advances............................. -- Total interest-bearing liabilities...... 4.10 Non-interest-bearing liabilities............ Total liabilities....................... Equity...................................... Total liabilities and equity............ Net interest income......................... Interest rate spread........................ 2.66% ====== Net yield on interest-earning assets........ 3.03% ====== Ratio of average interest-earning assets to average interest-bearing liabilities... 110.06% ======
- ---------- (1) Annualized. 37 42 RATE/VOLUME ANALYSIS The following table analyzes dollar amounts of changes in interest income expense for major components of interest-earning assets and interest-bearing liabilities. The table distinguishes between (i) changes attributable to volume (changes in volume multiplied by the prior period's rate), (ii) changes attributable to rate (changes in rate multiplied by the prior period's volume) and (iii) net change (the sum of the previous columns). The change attributable to both rate and volume (changes in rate multiplied by changes in volume) has been allocated equally to both the changes attributable to volume and the changes attributable to rate.
Three Months Ended September 30, Year Ended June 30, -------------------------------- -------------------------------------------------------------- 1996 vs. 1995 1996 vs. 1995 1995 vs. 1994 -------------------------- ---------------------------- ---------------------------- Increase (Decrease) Increase (Decrease) Increase (Decrease) Due to Due to Due to -------------------------- ---------------------------- ---------------------------- Volume Rate Total Volume Rate Total Volume Rate Total ------ ---- ----- ------ ---- ----- ------ ---- ----- Interest income: Loans receivable .................$ 585,190 $ 92,120 $ 677,310 $ 766,893 $ 58,824 $ 825,717 $ 273,882 $(134,109) $ 139,773 Investment securities and mortgage- backed securities ............. (62,005) (54,927) (116,932) 319,673 17,889 337,562 17,821 270,681 288,502 Other interest-earning assets .... 135,476 -- 135,476 325,120 -- 325,120 (228) -- (228) --------- -------- --------- ---------- --------- ----------- --------- --------- --------- Total interest-earning assets .. 731,409 (35,555) 695,854 1,411,686 76,713 1,488,399 291,475 136,572 428,047 --------- -------- --------- ---------- --------- ----------- --------- --------- --------- Interest expense: Deposits .........................$ 422,704 $ (3,927) $ 418,777 $ 411,290 $ 924,226 $ 1,335,516 $ (97,196) $ 430,919 $ 333,721 FHLB advances .................... 114,574 -- 114,574 318,601 -- 318,601 133,356 -- 133,356 Note payable ..................... 1,973 -- 1,973 -- -- -- -- -- -- --------- -------- --------- ---------- --------- ----------- --------- --------- --------- Total interest-bearing liabilities ................. 539,251 (3,927) 535,324 729,891 924,226 1,654,117 36,160 430,917 47,077 --------- -------- --------- ---------- --------- ----------- --------- --------- --------- Change in net interest income ....$ 192,158 $(31,628) $ 160,530 $ 681,795 $(847,513) $ (165,718) $ 255,315 $(294,345) $ (39,030) ========= ======== ========= ========== ========= =========== ========= ========= =========
38 43 COMPARISON OF FINANCIAL CONDITION AT SEPTEMBER 30, 1996 AND JUNE 30, 1996 AND 1995 The Bank had total assets of $173.0 million, $171.2 million, and $126.9 million at September 30, 1996 and at June 30, 1996 and 1995, respectively. The Bank's ability to expand its lending base and the size of its loan portfolio has been constrained by the lack of strong loan demand in its primary lending market based on its prior product offerings. The economic base in the Bank's primary lending area has not grown significantly over the last several years. Investments in loans totalled $89.3 million, $89.6 million and $55.1 million at September 30, 1996 and at June 30, 1996 and 1995, respectively. During this same period, investment and mortgage-backed securities and other short-term interest-earning deposits fluctuated between $66.2 million at June 30, 1995, $62.6 million at June 30, 1996 and $71.5 million at September 30, 1996. The significant change in loan and investment amounts from June 30, 1995 to June 30, 1996 reflects the acquisition of the Bank's subsidiary savings bank effective May 3, 1996. Loans acquired in the purchase were $20.0 million and investment and mortgage-backed securities were $4.9 million. Due to the lack of strong loan demand, investment securities and other short-term interest-earning deposits tend to vary in conjunction with variations in savings activity. Deposits increased from $112.0 million at June 30, 1995 to $145.9 million at June 30, 1996 and $147.2 million at September 30, 1996. The Bank's level of deposits has been sufficient to fund its loan demand and provide for adequate liquidity until the year ended June 30, 1996. During the year ended June 30, 1996, the Bank utilized a credit line with the FHLB of Dallas to obtain advances. The outstanding balances of FHLB advances at June 30, 1996 and September 30, 1996 were $10 million and $10 million, respectively. These advances were utilized to reduce interest rate risk by better matching rates and maturities of existing interest-earning assets and interest-bearing liabilities. Equity amounted to $13.5 million at September 30, 1996, and to $14.2 million and $14.3 million at June 30, 1996 and 1995, respectively. The changes in equity were due solely to the Bank's net income earned for such periods. At June 30, 1996, the Bank's regulatory capital substantially exceeded all applicable regulatory capital requirements. Regulatory capital levels at September 30, 1996 were not substantially different from those at June 30, 1996. For additional information regarding recent and planned changes in the Bank's assets, liabilities and capitalization, see "Business of the Bank," "Risk Factors" and "Pro Forma Data." COMPARISON OF RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995 Net Income (Loss). Net income (loss) for the quarter ended September 30, 1996 was $(843,418) compared to $329,663 for the quarter ended September 30, 1995. The changes were attributable to a special deposit insurance assessment of $881,824 and a provision for loan loss of $560,738, despite an increase in net interest income of $160,530 and an increase in noninterest income of $32,156 for the quarter ended September 30, 1996, as compared to the quarter ended September 30, 1995. Income tax expense for the quarter ended September 30, 1996 compared to 1995 was a tax benefit of $523,265 compared to a tax expense of $174,512. Net Interest Income. Net interest income for the quarter ended September 30, 1996 was $1,049,279, an increase of 18.0% when compared to net interest income of $888,749 for the quarter ended September 30, 1995. This increase was attributable to an increase in total interest income of $695,854 and an increase in total interest expense of $535,324. The net interest margin for the quarter ended September 30, 1996 was 2.54% compared to 2.74% for the quarter ended September 30, 1995. This increase in the net interest income and net interest margin is due to an increase in the average volume of interest-earning assets, combined with a decrease in the average rate paid on interest-bearing liabilities. One cause for the increase in average interest-earning assets when comparing September 30, 1996 to September 30, 1995 was the acquisition of the subsidiary, Heritage Bank, FSB in May of 1996. The average volume of interest-earning assets increased from $129.8 million for the quarter ended September 30, 1995 to $165.3 million for the quarter ended September 30, 1996 which had the effect of increasing total interest 39 44 income by $658,661. The average rate paid on interest-bearing liabilities decreased during the quarter ended September 30, 1996 to 5.26% from 5.27% for the quarter ended September 30, 1995. The decrease in the average rate on interest-bearing liabilities had the effect of decreasing total interest expense between the quarter ended September 30, 1995 and the quarter ended September 30, 1996 by $3,927. The average yield on interest-earning assets remained relatively unchanged between the two periods, which is indicative of the fact that the Bank's interest-earning assets are not highly sensitive to the increases in market interest rates which occurred between the two periods. For the quarter ended September 30, 1996, the average yield on interest-earning assets was 7.54%, compared to 7.45% for the quarter ended September 30, 1995, which had the effect of increasing total interest income by $37,193. In addition, the average volume of interest-bearing liabilities increased by 36.3%, reflecting the acquisition of the Bank's subsidiary savings bank, when comparing September 30, 1996 to September 30, 1995. This volume increase attributed to an increase in total interest expense of $539,251. Provision for Loan Losses. During the quarter ended September 30, 1996, the Bank's management initiated an extensive internal loan review of all loan files both of the parent and subsidiary. The review resulted in the adoption of more conservative loan loss allowance standards than had been used in the past. This new policy on allowance for loan losses was deemed prudent in establishing credit underwriting standards for future expected lending areas, such as commercial real estate, business and consumer loans, which inherently have more risk. As a result of this review, management made a provision for loan loss in the 1996 quarter of $560,738. There was no provision made in the quarter ended September 30, 1995. This 1996 provision represented 0.63% of loans outstanding at September 30, 1996. Nonperforming loans as of September 30, 1996 and 1995, remained below 0.25%. See "Business of the Bank -- Asset Classification Allowances for Losses and Nonperforming Assets." Management evaluates the carrying value of the loan portfolio periodically and the allowance is adjusted accordingly. While management uses the best information available to make evaluations, future adjustments to the allowance may be necessary if conditions differ substantially from the assumptions used in making the evaluations. In particular, management recognizes that recent and planned changes in the amounts and types of lending by the Bank will result in further growth of the Bank's loan loss allowance and may justify further changes in the Bank's loan loss allowance policy in the future. See "Business of the Bank" and "Risk Factors." In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Bank's allowance for loan losses. Such agencies may require the Bank to recognize changes to the allowance based upon their judgments and the information available to them at the time of their examination. Noninterest Income. Noninterest income is comprised primarily of insurance commissions from sales of credit, life insurance, fees for banking service charges and sales of investment and mortgage-backed securities. Noninterest income for the quarter ended September 30, 1996, was $59,952, compared to $27,796 for the quarter ended September 30, 1995. The change was due to fluctuations in sales of credit life insurance policies and to an increase in new fee earning banking services offered by the Bank to its deposit customers. In light of the increasingly competitive markets for deposits and loans, management has recently shifted the Bank's deposit taking and loan making activities to reflect, among other things, the importance of offering valued customer services that generate additional fee income, and it is expected that management will continue this trend after the Conversion. See "Business of the Bank" and "Risk Factors." Noninterest Expense. The major components of noninterest expense are compensation and benefits paid to the Bank's employees and directors, occupancy expense for ownership and maintenance of the Bank's building and furniture and equipment, and insurance premiums paid to the FDIC for insurance of deposits. Total noninterest expense for the quarter ended September 30, 1996 was $1,915,176, compared to $412,370 for the quarter ended September 30, 1995. The increase was largely due to an increase in expense related to a one time assessment by the FDIC to the Bank to replenish the FDIC reserves depleted by prior years losses in the thrift industry. During the years in which thrifts as an industry, suffered many publicized and non-publicized "bailouts" by the FDIC deposit 40 45 insurance fund, the "fund" for the thrift industry overall was severely depleted. After several years of debates the FDIC consummated a plan of action to replenish the thrift deposit insurance fund to a more satisfactory level of coverage for the remaining covered institutions. The FDIC's plan of remedy included a one time assessment to each thrift institution based on capital levels, and deposits among other factors. This one time assessment was recognized in the quarter ended September 30, 1996, in the amount of $881,824 and was expensed in the same period. The second largest component of noninterest expense for 1996 and 1995 was compensation expense, which totalled $496,389 in 1996, compared to $208,587 in 1995. This increase was attributable to increases in directors fees due to additional time incurred by the Board in evaluating and working on various strategic plans for the Bank, and increases in salary expense due to increase in personnel for future growth and the acquisition of the Bank's subsidiary savings bank. Other noninterest expense incurred during the quarter ended September 30, 1996, included amounts incurred to facilitate the name change of the Bank to Heartland Community Bank in September 1996. In addition, fees were incurred for personnel placement services to attract key personnel for hire, a computer consultant was engaged to evaluate operating systems and further growth needs, and marketing consultants were approached for market strategies and implementation. These expense categories increased $126,299 during the quarter ended September 30, 1996 compared with the same quarter in 1995. In light of the substantial costs associated with the recent, pending and planned expansions of the Bank's activities, facilities and staff, including the additional costs associated with adding staff, building or renovating branches, introducing new deposit and loan products and services and implementing the planned stock benefit plans after the Conversion, it is expected that the Bank's noninterest expense levels may remain somewhat high relative to the historical levels for the Bank, as well as the prevailing levels for institutions that are not undertaking such expansions, for an indefinite period of time, as management implements the Bank's business strategy. See "Business of the Bank," "Management of the Bank" and "Risk Factors." Income Taxes. The effective income tax rate for the Bank for the quarters ended September 30, 1996 and 1995 was 38.3% which includes federal and Arkansas tax components. A tax benefit of $523,265 for 1996 and an expense of $174,512 for 1995 was recognized resulting in a decrease of $697,777. COMPARISON OF RESULTS OF OPERATIONS FOR THE YEARS ENDED JUNE 30, 1996 AND 1995 General. During the year ended June 30, 1996 interest rates on interest-earning assets remained fairly constant while interest rates paid on interest-bearing deposits increased due to competition for local deposits. Also, during the year ended June 30, 1996, the Bank acquired its subsidiary savings bank. The acquisition resulted in recognition of cost in excess of fair value of assets, "goodwill," and likewise amortization of the intangible asset. In addition, the Bank liquidated investment and mortgage-backed securities having low fixed coupon rates and long-term maturities for a substantial realized loss. Net Income. Net income for the year ended June 30, 1996 was $230,678, compared to $1,429,167 for the year ended June 30, 1995. The decrease in net income of $1,198,489 is due to several factors, including a decrease in net interest income of $165,718, a decrease in noninterest income of $969,675, and an increase in noninterest expense of $736,198. This was somewhat offset by a decrease of $793,152 in income tax expense. Net Interest Income. Net interest income for the year ended June 30, 1996 was $3,566,583, a decrease of 4.4% when compared to net interest income of $3,732,301 for the year ended June 30, 1995. This decrease was attributable to an increase in total interest income of $1,488,399, and an increase in total interest expense of $1,654,117. The net interest margin for the year ended June 30, 1996 was 2.58% compared to 2.96% for the year ended June 30, 1995. This decrease in the net interest margin occurred largely because of an increase in the average rate paid on interest-bearing deposits from 4.49% in 1995 to 5.26% in 1996. This rate increase of .77% contributed $1,335,516 of the increase in interest expense. 41 46 Also impacting net interest income was the change in the mix of interest-earning assets. Between June 30, 1995 and 1996, the percentage of loans to total interest-earning assets increased from 43.4% in 1995 to 49.4% in 1996. Since loans generally earn a higher rate of interest than other types of investments, an increase in this percentage will have a positive impact on total interest income. The Bank attributes this change primarily to the purchase of its subsidiary and to a lesser extent an overall increase in loan demand in its primary market area. Total interest income increased primarily due to an increase in interest income on loans of $825,717. This change was primarily the result of an increase in the loan volume. The average yield on loans increased to 8.19% in 1996 from 8.10% in 1995 resulting in a related increase in interest income on loans of $58,824. Approximately 27.2% of the Bank's loans were adjustable rate loans, and these loans generally only reprice every one to three years, causing a delayed repricing of these loans in response to changes in market interest rates. In addition, interest income on investment securities increased to $4,467,685 for 1996 from $4,130,123 for 1995. This increase is attributable to the fact that the Bank maintains a portfolio of investment securities with relatively short terms-to-maturity, which benefited the Bank during 1996 when interest rates increased. At June 30, 1996, approximately 25.8% of the Bank's investment securities portfolio matured within one year. Total interest expense increased to $6,766,598 in 1996 from $5,112,481 in 1995. This increase in interest expense was due to increases in the average volume of deposits when compared to 1995. In 1995, the average volume of deposits was $111,006,767, compared to $120,029,295 for 1996. The average rate paid on deposits for 1996 was 5.26%, compared to 4.49% for 1995, primarily because of competitive pressures on deposit pricing. This rate increase accounted for $924,226 of the $1,335,516 increase in total interest paid on deposits. During the later part of the year ended June 30, 1996, the Bank utilized FHLB advances to minimize the interest rate risk associated with the increase in competitive rates being paid on deposits. These FHLB advances are of a longer maturity with fixed rates whereby management can better target the interest rate spread due to the competition for deposits mentioned above. The related interest expense attributed to the FHLB advances was $451,957 in 1996 compared to $133,356 in 1995. Provision for Loan Losses. During the year ended June 30, 1996, the Bank recorded a provision for loan losses of $42,483, compared to no provision for loan losses for 1995. During 1996, the Bank had net charge-offs of $11,880, and its non-performing loans remained below .20% of total loans. The increase in the provision for loan losses was largely attributable to management's recognition of the increased credit risk in the loan portfolio attributed to the loan portfolio acquired in the purchase of its wholly owned subsidiary. Noninterest Income. Noninterest income typically is derived from insurance commissions on sales of credit life insurance and fee income from banking services but is subject to substantial fluctuations upon the recognition of gains or losses on sales of investments. Noninterest income (loss) for the year ended June 30, 1996 was a (loss) of ($773,651), compared with income of $196,023 for the year ended June 30, 1995. This charge represented a decrease of $969,674. The major component of the decrease in noninterest income for the year ended June 30, 1996 compared to 1995 was a realized loss on sale of investment securities of $926,947. These securities were sold from the investment portfolio due to their long term maturities and low fixed coupon rates. As competition forced rates paid on deposits to grow, carrying these investments became less practical for overall long term planning. Therefore, a decision was made to sell the securities and replace them with investments with higher and/or adjustable rates and shorter terms. Other noninterest income components, such as banking service charges and sales of life insurance policies, increased $59,267 reflecting somewhat the increase in average loan and deposit volume. Noninterest Expense. The major components of noninterest expense are compensation and benefits paid to the Bank's employees and directors, occupancy expense for ownership and maintenance of the Bank's building and furniture and equipment, and insurance premiums paid to the FDIC for insurance of deposits. Total noninterest expense for the year ended June 30, 1996 was $2,346,150, compared to $1,609,961 for the year ended June 30, 1995. 42 47 The largest component of noninterest expense for 1996 and 1995 was compensation expense, which totalled $1,239,769 for 1996, compared to $835,254 for 1995. This increase was attributable to increases in directors fees due to additional time incurred by the Board in evaluating various strategic plans for the Bank and increase in personnel for future growth. In addition, other salary and compensation expense increased to $463,113 in 1996, compared to $247,631 in 1995. This was due largely to the funding of an officers and directors retirement plan in the amount of $242,511. Professional fees for 1996 and 1995 totalled $109,986 and 47,376, respectively. These fees were incurred, above those capitalized through the acquisition of the Bank's subsidiary savings bank, for consulting services regarding personnel, equipment and a variety of other items, all part of an objective to prepare the Bank for the dynamic changes that are expected from future growth. Advertising increased to $56,895 in 1996 from $33,324 in 1995. Federal insurance premiums increased to $268,370 in 1996 from $257,126 in 1995, largely because of an increase in the volume of deposits. COMPARISON OF RESULTS OF OPERATIONS FOR THE YEARS ENDED JUNE 30, 1995 AND 1994 General. Despite a decrease in the average yield on the Bank's loan portfolio during the year ended June 30, 1995 due primarily to refinancing activity, the Bank's average yield on all interest-earning assets increased due primarily to an increase in the average yield on mortgage-backed securities and other interest-earning assets. Net Income. Net income for the year ended June 30, 1995 was $1,429,167, compared to $1,388,363 for the year ended June 30, 1994. The increase in net income of $40,804 was primarily due to an increase in net interest income of $31,530 between 1995 and 1994 and an increase in noninterest income of $93,841. Noninterest expense increased by $24,560 between 1995 and 1994. The effective income tax rate increased during 1995 to 41.7% from 38.1% in 1994. Net Interest Income. Net interest income for the year ended June 30, 1995 was $3,732,301, a decrease of 1.0% when compared to net interest income of $3,771,331 for the year ended June 30, 1994. This decrease was attributable to a lesser increase in total interest income than in total interest expense. The net interest margin for the year ended June 30, 1995 was 2.96%, compared to 3.03% for the year ended June 30, 1994. This decrease in the net interest margin occurred largely because of the increase in the average rate paid on interest-bearing deposits from 4.10% in 1994 to 4.49% in 1995. Such increase reflects an upward movement in general market interest rates and increased competition for deposits. Provision for Loan Losses. During the year ended June 30, 1995, the Bank recorded no provision for loan losses, compared to $7,500 which was recorded for the year ended June 30, 1994. During 1995, the Bank did not charge-off any loans, and non-performing loans as a percentage of total loans remained below .20%. Noninterest Income. Noninterest income is derived primarily from insurance commissions on sales of credit life insurance, fee income earned from banking services and gains realized on sales of investment securities. Noninterest income for the year ended June 30, 1995 was $196,023, compared to $102,212 for the year ended June 30, 1994. Noninterest Expense. The major components of noninterest expense are compensation and benefits paid to the Bank's employees and directors, occupancy expense for ownership and maintenance of the Bank's building and furniture and equipment, and insurance premiums paid to the FDIC for insurance of deposits. Total noninterest expense for the year ended June 30, 1996 was $1,609,961, compared to $1,585,401 for the year ended June 30, 1994. The largest component of noninterest expense for 1995 and 1994 was compensation expense, which totalled $835,254 in 1995, compared to $795,134 for 1994. This increase was attributable to normal cost-of-living adjustments to employee compensation levels, as well as increases in the cost of providing employee benefits. 43 48 Income Taxes. Income tax expense for the year ended June 30, 1995 was $966,763, compared to $869,756 for the year ended June 30, 1994. The effective income tax rate was 41.7% in 1995, compared to 38.1% in 1994. The increase was largely attributable to allowances for deferred tax assets during 1995. Cumulative Effect of Change in Accounting Principle. On July 1, 1993, the Bank recorded a cumulative effect of a change in accounting method of $22,523. This was recorded in connection with the Bank's adoption of Statement of Financial Accounting Standards No. 109, "Accounting For Income Taxes." SOURCES OF CAPITAL AND LIQUIDITY Following completion of the Conversion, the Company initially will have no business other than that of the Bank. Management expects that the net proceeds of the Conversion to be retained by the Company, together with dividends that may be paid from the Bank to the Company following the Conversion, will provide sufficient funds for its initial operations. The Company's primary sources of liquidity in the future will be dividends paid by the Bank and repayment of the ESOP loan. The Bank will be subject to certain regulatory limitations with respect to the payment of dividends to the Company. See "Dividends" and "Regulation -- Regulation of the Bank -- Dividend Restrictions." The Bank has historically maintained substantial levels of capital. The assessment of capital adequacy is dependent on several factors including assets quality, earnings trends, liquidity and economic conditions. Maintenance of adequate capital levels is integral to provide stability to the Bank. The Bank seeks to maintain substantial levels of regulatory capital to give it maximum flexibility in the changing regulatory environment and to respond to changes in the market and economic conditions. These levels of capital have been achieved through consistent earnings enhanced by low levels of noninterest expense and have been maintained at those high levels as a result of its historical policy of moderate growth. The Bank will, as a result of the Conversion, have increased capital. See "Selected Consolidated Financial Information and Other Data," "Capitalization," "Historical and Pro Forma Regulatory Capital Compliance" and "Regulation -- Regulation of the Bank -- Regulatory Capital Requirements." The Bank is required to maintain minimum levels of liquid assets as defined by the OTS regulations. This requirement which may be varied at the discretion of the OTS depending on economic conditions and deposit outflows, is based upon a percentage of deposits and short term borrowings. Current OTS regulations require that a savings association maintain liquid assets of not less than 5% of its average daily balance of net withdrawal deposit accounts and borrowings payable in one year or less, of which short-term liquid assets must consist of not less than 1%. At September 30, 1996, the Bank's liquidity, as measured for regulatory purposes, was 13.3%, or $5.9 million in excess of the minimum OTS liquidity requirement of 5%, and 12.4% or $4.7 million in excess of the OTS short term liquidity requirement of 1%. Management of the Bank seeks to maintain a relatively high level of liquidity in order to retain flexibility in terms of investment opportunities and deposit pricing and in order to meet funding needs of deposit outflows and loan commitments. Historically, the Bank has been able to meet its liquidity demands through internal sources of funding supplemented from time to time by advances from the FHLB of Dallas. The Bank's primary source of funds are deposits, proceeds from principal and interest payments on loans and mortgage-backed securities, interest payments and maturities of investment securities, and earnings. While scheduled principal repayments on loans and mortgage-backed securities and interest payments on investment securities are a relatively predictable source of funds, deposit flows and loan and mortgage-backed prepayments are greatly influenced by general interest rates, economic conditions, competition and other factors. The Bank does not solicit deposits outside of its market area through brokers or other financial institutions. The Bank has also designated certain securities as available for sale in order to meet liquidity demands. At September 30, 1996, the Bank had designated securities with a fair value of approximately $28.9 million as available for sale. In addition to internal sources of funding, the Bank as a member of the FHLB has substantial 44 49 borrowing authority with the FHLB. The Bank's use of a particular source of funds is based on need, comparative total costs and availability. Another source of liquidity is the anticipated net proceeds of the Conversion. Following the completion of the Conversion, the Bank will receive at least half of the net proceeds of the Conversion. These funds are expected to be used by the Bank for its business activities, including investment in interest-earning assets. See "Use of Proceeds." For additional information about cash flows from the Bank's operating, investing and financing activities see the consolidated financial statements presented elsewhere herein. At September 30, 1996, the Bank had outstanding $4,336,707 in commitments to originate loans (including unfunded portions of construction loans) and $120,000 in unused lines of credit. At the same date, the total amount of certificates of deposit which were scheduled to mature in one year or less was $60.5 million. Management anticipates that the Bank will have adequate resources to meet its current commitments through internal funding sources described above. Historically, the Bank has been able to retain a significant amount of its deposits as they mature. Management is not aware of any current recommendations by its regulatory authorities, legislation, competition, trends in interest rate sensitivity, new accounting guidance or other material events and uncertainties that would have a material effect on the Bank's ability to meet its liquidity demands. IMPACT OF INFLATION AND CHANGING PRICES The consolidated financial statements and accompanying notes thereto, presented elsewhere herein, have been prepared in accordance with generally accepted accounting principles, which require the measurement of financial position and operating results in terms of historical dollars without considering the change in the relative purchasing power of money over time due to inflation. Unlike most industries, virtually all of the Bank's assets and liabilities are monetary. As a result, changes in interest rates have a greater impact on the Bank's performance than do the effects of general levels of inflation. Interest rates do not necessarily move in the same direction or to the same extent as the price of goods and services. For additional information, see "Risk Factors -- Potential Adverse Impact of Interest Rates and Economic and Industry Conditions." IMPACT OF NEW ACCOUNTING STANDARDS The Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 107, "Disclosure About Fair Value of Financial Instruments," which the Bank had not been required to adopt as of June 30, 1995. The statement, which was in effect for the Bank's fiscal year ending June 30, 1996, required disclosure as to the fair value of all financial instruments. The statement also required disclosure of the methods and significant assumptions used to estimate the fair value of financial instruments. SFAS No. 107 will not affect the Bank's recorded amounts of financial instruments nor its future reported net income. The FASB has also issued SFAS No. 114, "Accounting by Creditors for Impairment of a Loan," which has been amended by SFAS No. 118, "Accounting by Creditors for Impairment of a Loan - Income Recognition and Disclosures." The Bank was not required to adopt either statement as of June 30, 1995. However, the statements were adopted by the Bank on July 1, 1995. SFAS No. 114 requires all creditors to measure the impairment of certain loans based upon the present value of the loan's future cash flows discounted using the loan's effective interest rate. The loan can also be valued at its fair value or the market price of its underlying collateral if the loan is primarily collateral dependent. SFAS No. 114 does not apply to large groups of smaller balance homogeneous loans that are collectively evaluated for impairment, and is therefore not expected to have a material effect on the 45 50 Bank's reporting for impaired loans since the majority of the Bank's loans are collectively assessed and individually troubled loans are typically foreclosed upon promptly. SFAS No. 118 amended SFAS No. 114 by adding additional disclosure requirements for impaired loans. It also permits greater latitude in the manner in which income on impaired loans may be recognized and reported as long as the creditor's policies are disclosed. SFAS No. 118 is not expected to have a material effect on the Bank's reporting for income on impaired loans. The FASB has also issued SFAS No. 119, "Disclosure About Derivative Financial Instruments and Fair Value of Financial Instruments," which the Bank was not required to adopt as of June 30, 1995. The statement, which was in effect for the Bank's fiscal year ending June 30, 1996, requires additional disclosures for entities that hold or issue certain types of derivative financial instruments. The statement in not expected to have a material effect on the Bank's financial statements since the Bank currently neither holds nor issues derivative financial instruments. The FASB has issued SFAS No. 122, "Accounting for Mortgage Servicing Rights," which amends SFAS No. 65, "Accounting for Certain Mortgage Banking Activities," to require that a mortgage banking enterprise recognize as separate assets rights to serve mortgage loans for others, regardless of how those servicing rights are acquired. SFAS No. 122 also requires that a mortgage banking enterprise assess its capitalized mortgage servicing rights for impairment based on the fair value of those rights, as set forth in the statement. This statement applies prospectively in fiscal years beginning after December 15, 1995. Since the Bank does not engage in mortgage banking activities, it is not expected that SFAS No. 122 will have an impact on its financial statements. In October 1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based Compensation," which is effective for transactions entered into after December 15, 1995. This statement establishes financial accounting and reporting standards for stock-based employee compensation plans. This statement defines a fair value based method of accounting for an employee stock option or similar instrument and encourages all entities to adopt that method of accounting for all of their employee stock compensation plans. However, it also allows an entity to continue to measure compensation cost for those plans using the intrinsic value based method of accounting prescribed by Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees." Under the fair value based method, compensation cost is measured at the grant date based on the value of the award and is recognized over the service period, which is usually the vesting period. Under the intrinsic value based method, compensation cost is the excess, if any, of the quoted market price of the stock at grant date or other measurement date over the amount an employee must pay to acquire the stock. Management presently anticipates that it will elect to use the intrinsic value based method if the Option Plan is implemented as expected following the Conversion. The American Institute of Certified Public Accountants ("AICPA") has issued SOP 93-6, "Employers' Accounting for Employee Stock Ownership Plans," which is effective for fiscal years beginning after December 15, 1993 and applies to shares of capital stock of sponsoring employers acquired by ESOPs after December 31, 1992 that have been committed to be released as of the beginning of the year in which the ESOP is adopted. SOP 93-6 will, among other things, change the measure of compensation recorded by the Bank from the cost of ESOP shares to the fair value of the ESOP shares. In connection with the Conversion, the Bank will adopt an ESOP. Since the fair value of the shares of the Holding Company's Common Stock following the Conversion cannot be reasonably predicted, the Bank cannot reasonably estimate the impact of SOP 93-6 on the Holding Company's consolidated financial statements, except that an increase in the fair value of the Common Stock will cause an increase in ESOP related compensation expense. BUSINESS OF THE COMPANY The Company was organized at the direction of the Board of Directors of the Bank for the purpose of becoming a holding company to own all of the outstanding capital stock of the Bank. Upon the Conversion, the 46 51 Bank will become a wholly owned subsidiary of the Company. For additional information, see "HCB Bancshares, Inc." Following the Conversion, the Company will be primarily engaged in the business of directing, planning and coordinating the business activities of the Bank. In the future, the Company may become an operating company or acquire or organize other operating subsidiaries, including other financial institutions. Initially, the Company will not maintain offices separate from those of the Bank or employ any persons other than its officers who will not be separately compensated for such service. BUSINESS OF THE BANK GENERAL The Bank's principal business consists of attracting deposits from the general public and investing those funds in loans secured by first mortgages on existing owner-occupied single-family residences in the Bank's market area and, to a lesser but growing extent, commercial and multi-family real estate loans and consumer and commercial business loans. The Bank also maintains a substantial investment portfolio of mortgage-related securities and U.S. government and agency securities. The Bank derives its income principally from interest earned on loans, investment securities and other interest-earning assets. The Bank's principal expenses are interest expense on deposits and borrowings and noninterest expenses such as employee compensation, deposit insurance and miscellaneous other expenses. Funds for these activities are provided principally by deposit growth, repayments of outstanding loans and investment securities, other operating revenues and, from time to time, advances from the Federal Home Loan Bank of Dallas. MARKET AREA Management considers the Bank's primary market area to comprise the following counties in Arkansas: Calhoun, Cleveland, Dallas, Drew, Grant, Ouachita and Pulaski. To a lesser extent, the Bank accepts deposits and offers loans throughout central and southern Arkansas. In recent years, population has experienced low to moderate growth in Drew, Grant and Pulaski Counties, while population has declined somewhat in Calhoun, Cleveland, Dallas and Ouachita Counties. Household income has increased substantially throughout the Bank's primary market area in recent years, and household income is well above the Arkansas average in Grant and Pulaski Counties and somewhat above the Arkansas average in Ouachita County but somewhat below the Arkansas average in Calhoun, Cleveland and Drew Counties and well below the Arkansas average in Dallas County, though the Arkansas average is below the national average. With respect to unemployment rates, while the Arkansas average tends to fall somewhat below the national average, and unemployment rates are well below the Arkansas average in Grant and Pulaski Counties, unemployment rates are well above the Arkansas and national averages in Calhoun, Cleveland, Dallas, Drew and Ouachita Counties. The economies in the Bank's primary market area include a variety of industries, including manufacturing, government, services and retail trade. Important employers include International Paper and Georgia Pacific in the timber industry and Lockheed Martin and Atlantic Richfield in the defense industry. COMPETITION The Bank experiences substantial competition both in attracting and retaining savings deposits and in the making of mortgage and other loans. Direct competition for savings deposits comes from other savings institutions, credit unions, regional bank holding companies and commercial banks. Significant competition for the Bank's other deposit products and services comes from money market mutual funds and brokerage firms. The primary factors in competing for loans are 47 52 interest rates and loan origination fees and the quality and range of services offered by various financial institutions. Competition for origination or real estate loans normally comes from other savings institutions, commercial banks, credit unions, mortgage bankers and mortgage brokers. The Bank's primary competition comes from institutions headquartered in the Bank's primary market area and from various non-local commercial banks that have branch offices located in the Bank's primary market area. Many competing financial institutions have financial resources substantially greater than the Bank and offer a wider variety of deposit and loan products. Management's principal competitive strategy has been to emphasize quality customer service. BUSINESS STRATEGY Historically, the principal business strategy of the Bank, like most other savings institutions in Arkansas and elsewhere, has been to accept deposits from residents of the communities served by the Bank's branch offices and to invest those funds in single-family mortgage loans to those and other local residents. In this manner, the Bank and countless other independent community-oriented savings institutions operated safely and soundly for generations. In recent years, however, as the banking business nationwide and in the Bank's primary market area in particular has become more competitive, smaller savings institutions like the Bank have come under increasing market pressure either to grow and increase their profitability or to be acquired by a larger institution. In September 1995, the Bank's Board of Directors carefully considered the Bank's historical results of operations, current financial condition and future business prospects and, in consultation with the Bank's executive officers, determined to strengthen the Bank's competitiveness and profitability by concentrating its business strategy as an independent community bank on expanding the Bank's products and services and growing its customer and asset base. Since then, the Bank has actively sought to implement this strategy by adding two new executive officers -- Cameron McKeel as Executive Vice President and William Lyon as Senior Vice President and Chief Lending Officer -- and more than doubling the Bank's total employees, by acquiring the former Heritage Bank, FSB, which added to the Bank's branch network additional branches in the growing and potentially lucrative Little Rock and Monticello banking markets, by upgrading selected branch office facilities, by expanding the types of loans and deposit accounts offered by the Bank, by updating the Bank's name and corporate identity from First Federal Savings and Loan Association of Camden to Heartland Community Bank and, now, by adopting the Plan of Conversion. Throughout this period, the Bank's executive officers have worked with the Bank's directors and with the Bank's entire staff to formulate and effectuate the Bank's current strategic plan. On a going forward basis, the Bank's current business strategy, as developed and adopted by all of the Bank's directors, officers and employees, incorporates the following key elements: (i) remaining an independent community- oriented financial institution by continuing to provide the quality service that only a locally based institution and its dedicated staff can deliver, including the possible retention of additional executive officers in the future as the Bank's growth and other needs may warrant; (ii) strengthening the Bank's core deposit base and decreasing interest costs and increasing fee income by expanding the Bank's deposit facilities and products, including the addition and expansion of branch offices, the planned installation of ATMs, the introduction of debit cards and a planned emphasis on attracting consumer demand deposits; (iii) increasing loan yields and fee income while maintaining asset quality by emphasizing the origination of higher yielding and shorter term loans, especially commercial and multi-family real estate loans and consumer and commercial business loans, for the Bank's portfolio while increasingly originating lower yielding longer term single-family residential loans principally for resale to investors; (iv) converting from mutual to stock form and using the capital raised in the Conversion to support the bank's future growth; and, (v) to complement the Bank's internally generated growth, potentially acquiring one or more banking institutions or other financial companies if attractive opportunities arise. While it is expected that the Bank may experience especially high deposit and loan growth in the relatively high income and growth segments of the Bank's primary market area, particularly in the Sheridan, Monticello, Bryant and, possibly, Little Rock areas, management expects to find significant deposit growth and lending opportunities throughout central Arkansas. See 48 53 "Risk Factors -- Recent and Planned Changes in Management and Business Strategy" and "-- Loan Portfolio Composition." LENDING ACTIVITIES The Bank's principal lending activity consists of the origination of loans secured by mortgages on existing single-family residences in the Bank's primary market area. The Bank also makes commercial and multi-family real estate loans and a variety of consumer and commercial business loans, and management expects to continue and expand the Bank's recently increased emphasis on these types of lending following the Conversion. With certain limited exceptions, the maximum amount that a savings institution may lend to any borrower (including certain related entities of the borrower) at one time may not exceed 15% of the unimpaired capital and surplus of the institution, plus an additional 10% of unimpaired capital and surplus for loans fully secured by readily marketable collateral. At September 30, 1996, the maximum amounts that the Bank and its subsidiary savings institution could have lent to any one borrower without prior OTS approval under those regulations were $1,757,000 and $500,000, respectively. At such date, the largest aggregate amounts of loans that the Bank and its subsidiary savings institution had outstanding to any one borrower were $1,107,000 and $495,000, respectively. For additional information, see "Regulation -- Regulation of the Bank -- Limits on Loans to One Borrower." 49 54 Loan Portfolio Composition. The following table sets forth information regarding the composition of the Bank's loan portfolio by type of loan at the dates indicated. At September 30, 1996, the Bank had no concentrations of loans exceeding 10% of gross loans other than as disclosed below. Information for dates before May 3, 1996 does not include information for the Bank's savings bank subsidiary, which was acquired on that date.
At June 30, At September 30, ----------------------------------------------------------------- 1996 1996 1995 1994 ---------------- ---------------- ---------------- ---------------- Amount % Amount % Amount % Amount % ------ --- ------ --- ------ --- ------ --- Type of Loan - ------------ Real estate loans: One- to four-family residential .. $63,213,264 67.51% $61,681,460 70.79% $36,844,183 65.23% $36,860,523 67.83% Multi-family loans ............... 7,002,247 7.48 6,819,212 7.83 4,928,219 8.72 3,607,108 6.64 Non-residential .................. 16,345,518 17.46 13,746,549 15.78 11,367,097 20.12 10,366,724 19.08 Loans to facilitate sale of foreclosed real estate ......... 689,956 0.74 720,749 0.83 1,144,993 2.03 1,339,086 2.46 Land and other mortgage loans .... 122,385 0.13 36,944 0.04 53,044 0.09 53,099 0.10 Consumer loans: Loans secured by deposits ........ 1,608,626 1.72 1,832,180 2.10 1,623,155 2.87 1,586,932 2.92 Home improvement ................. 216,676 0.23 204,776 0.24 5,340 0.01 9,007 0.02 Auto ............................. 1,101,834 1.18 786,656 0.90 42,070 0.07 66,477 0.12 Other consumer ................... 2,228,442 2.38 418,027 0.48 344,452 0.61 302,313 0.56 Commercial ......................... 1,110,440 1.19 880,311 1.01 132,877 0.24 148,948 0.27 ----------- ------ ----------- ------ ----------- ------ ----------- ------ Total .......................... $93,639,388 100.00% $87,126,864 100.00% $56,485,430 100.00% $54,340,217 100.00% ----------- ====== ----------- ====== ----------- ====== ----------- ====== Less: Loans in process.................. $ 2,674,892 $ 1,544,097 $ 529,862 $ 195,985 Deferred loan fees and discounts.. 188,304 137,335 114,097 168,599 Allowance for loan losses......... 1,441,805 881,067 728,491 728,491 ----------- ----------- ----------- ----------- Total........................... $89,334,387 $84,564,365 $55,112,980 $53,247,142 =========== =========== =========== ===========
50 55 Loan Maturity Schedules. The following table sets forth information regarding dollar amounts of loans maturing in the Bank's portfolio based on their contractual terms to maturity, including scheduled repayments of principal, at June 30, 1996. Demand loans, loans having no stated schedule of repayments and no stated maturity and overdrafts are reported as due in one year or less. The table does not include any estimate of prepayments which significantly shorten the average life of all mortgage loans and may cause the Bank's repayment experience to differ from that shown below.
Due During the Year Ending Due After Due After Due After June 30, 3 Through 5 Through 10 Through Due After 15 -------------------------- 5 Years After 10 Years After 15 Years After Years After 1997 1998 1999 June 30, 1996 June 30, 1996 June 30, 1996 June 30, 1996 Total ---- ---- ---- ------------- ------------- ------------- ------------- ----- Real estate loans: One- to four-family mortgage loans ....................$3,542,577 $ 337,022 $3,508,333 $5,109,590 $11,069,553 $25,249,088 $12,865,297 $61,681,460 Other mortgage loans ....... 951,912 1,640,179 626,047 1,756,613 3,689,288 3,537,649 9,121,766 21,323,454 Consumer loans: Loans secured by deposits .. 1,465,744 366,436 -- -- -- -- -- 1,832,180 Home improvement and Other ................... 989,744 533,915 199,303 412,664 117,058 37,308 -- 2,289,770 ---------- ---------- ---------- ---------- ----------- ----------- ----------- ----------- Total ...................$6,949,755 $2,877,552 $4,333,683 $7,278,867 $14,875,899 $28,824,045 $21,987,063 $87,126,864 ========== ========== ========== ========== =========== =========== =========== ===========
The following table sets forth dollar amounts of loans due one year or more after June 30, 1996 that had predetermined interest rates and that had adjustable interest rates at that date.
Predetermined Rate Adjustable Rate ------------- --------------- Real estate loans: One- to four-family residential................. $38,020,263 $19,089,024 Multi-family residential ...... 14,362,736 8,229,604 Consumer loans: Loans secured by deposits ..... 605,457 -- Home improvement and other .... 146,240 -- ----------- ----------- Total ....................... $53,134,696 $27,318,628 =========== ===========
51 56 Scheduled contractual principal repayments of loans do not reflect the actual life of such assets. The average life of loans is substantially less than their contractual terms because of prepayments. In addition, due-on-sale clauses on loans generally give the Bank the right to declare a loan immediately due and payable in the event, among other things, that the borrower sells the real property subject to the mortgage and the loan is not repaid. The average life of mortgage loans tends to increase when current mortgage loan market rates are substantially higher than rates on existing mortgage loans and, conversely, decrease when current mortgage loan market rates are substantially lower than rates on existing mortgage loans. Loan Originations, Purchases and Sales. The following table sets forth information regarding the Bank's loan originations, purchases and sales during the periods indicated. Information for periods before May 3, 1996 does not include information for the Bank's savings bank subsidiary, which was acquired on that date.
Three Months Ended September 30, Year Ended June 30, ------------------- ------------------------------------- 1996 1995 1996 1995 1994 ---- ---- ---- ---- ---- Loans originated: Real estate loans: One- to four-family residential ................ $ 5,422,578 $2,119,960 $ 6,766,000 $2,645,000 $ 5,003,000 Other mortgage loans .......... 2,686,600 1,480,500 3,928,000 3,756,000 4,249,000 Consumer loans .................. 2,616,746 17,500 1,867,292 1,296,000 1,364,000 ----------- ---------- ----------- ---------- ----------- Total loans originated ....... $10,725,924 $3,617,960 $12,561,292 $7,697,000 $10,616,000 =========== ========== =========== ========== =========== Loans purchased: Real estate loans ............... $ 1,004,776 $2,064,999 $ 4,555,000 $2,628,000 $ 3,018,000 =========== ========== =========== ========== =========== Loans sold ........................ $ 287,681 $ -- $ 244,230 $ -- $ -- =========== ========== =========== ========== ===========
The Bank has recently increased both its range of loan products offered and its loan origination efforts, including the addition of new consumer and commercial business loan offerings and an increased emphasis on the origination of such loans and commercial and multi-family real estate loans. The Bank has purchased loans from established and reputable loan originators from time to time to supplement the Bank's internally generated originations. Historically, substantially all of the Bank's loan purchases have been from large home builders, and a commercial and multi-family mortgage banker, with which the Bank has a long-standing relationship, and the Bank's experience with its purchased loans has been successful. In light of the expected continuation and expansion of the Bank's increased loan originations, management expects to reduce the Bank's loan purchasing activities following the Conversion. The Bank has not sold substantial amounts of loans in the past. However, management expects the Bank to increase its origination of selected types of loans which do not meet the Bank's loan portfolio needs, such as long-term fixed-rate residential mortgage loans, for sale to investors, and it is expected that increases in such originations will result in increases in the Bank's loan sales. One- to Four-Family Residential Lending. Historically, the Bank's principal lending activity has been the origination of fifteen-year fixed-rate loans secured by first mortgages on existing single-family residences in the Bank's primary market area. The purchase price or appraised value of most of such residences generally has been between $50,000 and $200,000, with the Bank's loan amounts averaging approximately $85,000. At September 30, 1996, $63.9 million, or 68.2%, of the Bank's total loans were secured by one- to four-family residences, substantially all of which were existing, owner-occupied, single-family residences in the Bank's primary market area. While the Bank offers a variety of one- to four-family residential mortgage loans with fixed or adjustable interest rates and terms of up to 30 years, substantially all of the fixed rate loans retained in the Bank's portfolio have terms of 15 years or less. Despite the relatively low credit risks associated with the Bank's one- to four-family 52 57 portfolio loans, due to the unfavorable yield and interest rate risks associated with such loans, management has recently shifted the Bank's one- to four-family residential lending emphasis away from the origination of such loans for the Bank's portfolio and toward the origination of such loans for sale, and management has recently revised the Bank's underwriting guidelines specifically to facilitate the sale of such loans without undue delay or expense. Currently, it is the Bank's policy to originate all one- to four-family residential loans in accordance with the Bank's underwriting guidelines and to sell all such originations promptly to investors, servicing released, though it is recognized that the Bank will continue to occasionally make nonconforming loans to be held in the Bank's portfolio. It is expected that management will continue these policies after the Conversion, though, in order to increase the Bank's fee income, management may determine to retain the servicing on loans sold in the future as the Bank's loan servicing capacity grows. It is expected that management will continue this trend after the Conversion. With respect to one- to four-family residential loans originated for retention in the Bank's portfolio, the Bank's lending policies generally limit the maximum loan-to-value ratio to 90% (with private mortgage insurance or other collateral for the amount over 80%) for owner-occupied properties and 80% for non-owner-occupied properties. Loans originated expressly for sale are originated in accordance with the lending policies and underwriting guidelines of the investor. From time to time, the Bank makes loans to individuals for construction of one- to four-family owner-occupied residences located in the Bank's primary market area, with such loans usually converting to permanent financing upon completion of construction. At September 30, 1996, the Bank's loan portfolio included $3,452,000 of loans secured by properties under construction, some of which were construction/permanent loans structured to become permanent loans upon the completion of construction and some of which were interim construction loans structured to be repaid in full upon completion of construction and receipt of permanent financing. The Bank also offers loans to qualified builders for the construction of one- to four-family residences located in the Bank's primary market area. Because such homes are intended for resale, such loans are generally not covered by permanent financing commitments by the Bank. All construction loans are secured by a first lien on the property under construction. Loan proceeds are disbursed in increments as construction progresses and as inspections warrant. Construction/permanent loans are underwritten in accordance with the same requirements as the Bank's permanent mortgages, except the loans generally provide for disbursement in stages during a construction period of up to nine months, during which period the borrower may be required to make monthly payments. Borrowers must satisfy all credit requirements that would apply to the Bank's permanent mortgage loan financing prior to receiving construction financing for the subject property. Construction financing generally is considered to involve a higher degree of risk of loss than financing on existing properties. The Bank has sought to minimize this risk by limiting construction lending to qualified borrowers in the Bank's primary market area, by requiring the involvement of qualified builders, and by limiting the aggregate amount of outstanding construction loans. Commercial and Multi-Family Real Estate Lending. The Bank offers commercial and multi-family real estate loans in order to benefit from the higher origination fees and interest rates, as well as shorter terms to maturity, than could be obtained from single-family mortgage loans. The Bank has offered commercial and multi-family loans for years with many of such loans having been indirectly originated and underwritten by the Bank through a broker in the Memphis, Tennessee area with whom the Bank has had a long and successful relationship. It is anticipated that the Bank will continue to make loans through the broker in Memphis as opportunities arise, but management also has recently increased the Bank's emphasis on the direct origination of commercial and multi-family real estate loans, particularly in Central Arkansas, and it is expected that management will continue to expand these activities after the Conversion. Most of the Bank's commercial and multi-family real estate loans are secured by properties located in communities within Central Arkansas that have experienced significant growth in recent years, particularly communities in or near the greater Little Rock area. The Bank's acquisition of the former Heritage Bank, FSB, which was headquartered in Little Rock, resulted in the addition to the Bank's staff of a commercial and multi-family real estate loan origination specialist who works closely with borrowers and various members of the commercial real estate industry throughout central Arkansas. As opportunities for increased originations of such loans have increased, the Bank has been expanding its loan underwriting and servicing staff. All commercial and multi-family loans are 53 58 reviewed and approved by the Bank's staff at the headquarters office in Camden prior to any funding or the issuance of any binding commitment by the Bank. The Bank's commercial and multi-family real estate loans may be secured by apartments, offices, warehouses, shopping centers and other income-producing multi-family and commercial properties. At September 30, 1996, the Bank had 65 of these loans, with an average loan balance of approximately $350,000, of which 55 loans totalling approximately $11 million were secured by properties outside central Arkansas. The following paragraphs set forth information regarding the Bank's commercial and multi-family real estate loans with outstanding balances exceeding $500,000 at September 30, 1996. None of these loans was classified by management as substandard, doubtful or loss or designated by management as special mention at that date. For information regarding the Bank's asset classification policies, see "Asset Classification, Allowances for Losses and Nonperforming Assets." Nursing Home in Castroville, Texas. In July 1992, the Bank made a $900,000 loan secured by a 90 bed nursing home. The borrowers of this loan are residents of Central Arkansas and are known by management of the Bank. At that time, an appraisal indicated a loan-to-value ratio of approximately 33%. The loan is being amortized over 15 years for the purpose of monthly payments of principal and interest, and the full balance of the loan will be due in July 2007. At September 30, 1996, the outstanding balance was $763,000, and the loan was fully performing in accordance with its terms. Apartments in El Dorado, Arkansas. In August 1994, the Bank made a $720,000 loan secured by a 44 unit apartment building. At that time, an appraisal indicated a loan-to-value ratio of approximately 80%. The loan is being amortized over 15 years for the purpose of monthly payments of principal and interest, but the full balance of the loan will be due in August 1997. At September 30, 1996, the outstanding balance was $662,000, and the loan was fully performing in accordance with its terms. Apartments in San Marcos, Texas. In February 1992, the Bank made a $750,000 loan secured by a 69 unit apartment building. This loan was made to facilitate the sale of the property, which had been acquired by the Bank following a default on a prior loan. At that time, an appraisal indicated a loan-to-value ratio of approximately 64%. The loan is being amortized over 15 years for the purpose of monthly payments of principal and interest, and the full balance of the loan will be due in March 2010. At September 30, 1996, the outstanding balance was $633,000, and the loan was fully performing in accordance with its terms. Retail Center in Memphis, Tennessee. In July 1996, the Bank made a $560,000 loan secured by a 118,000 square foot retail center. At that time, an appraisal indicated a loan-to-value ratio of approximately 26%. The loan is being amortized over 15 years for the purpose of monthly payments of principal and interest, and the full balance of the loan will be due in August 2011. At September 30, 1996, the outstanding balance was $557,000, and the loan was fully performing in accordance with its terms. Office Building in Memphis, Tennessee. In September 1996, the Bank made a $625,000 loan secured by a 30,000 square foot office building. At that time, an appraisal indicated a loan-to-value ratio of approximately 69%. The loan is being amortized over 20 years for the purpose of monthly payments of principal and interest, and the full balance of the loan will be due in September 2016. At September 30, 1996, the outstanding balance was $625,000, and the loan was fully performing in accordance with its terms. 54 59 Apartments in Conway, Arkansas. In July 1996, the Bank made a $600,000 loan secured by a 20 unit apartment building. At that time, an appraisal indicated a loan-to-value ratio of approximately 65%. The loan currently requires monthly payments of interest only, and the full balance of the loan will be due in June 1997. At September 30, 1996, the loan was fully performing in accordance with its terms. Retail Store in Fordyce, Arkansas. In January 1992, the Bank made a $650,000 loan secured by a 32,500 square foot retail store. At that time, an appraisal indicated a loan-to-value ratio of approximately 73%. The loan is being amortized over 5 years for the purpose of monthly payments of principal and interest, but the full balance of the loan will be due in February 2000. At September 30, 1996, the outstanding balance was $526,000, and the loan was fully performing in accordance with its terms. Blockbuster Video in Conway, Arkansas. In September 1996, the Bank made a $520,000 loan secured by a 5,400 square foot building. At that time, an appraisal indicated a loan-to-value ratio of approximately 69%. The loan is being amortized over 20 years for the purpose of monthly payments of principal and interest, but the full balance of the loan will be due in September 1999. At September 30, 1996, the outstanding balance was $520,000, and the loan was fully performing in accordance with its terms. In addition, at September 30, 1996 the Bank had $8,692,000 in 28 commercial and multi-family real estate loans with outstanding balances exceeding $200,000, only two of which were adversely classified or designated by management. For additional information, see "Asset Classification, Allowances for Losses and Nonperforming Assets." The Bank's commercial and multi-family real estate loans generally are limited to loans not exceeding $1,750,000 on properties located either in Central Arkansas or other areas selected by management and approved by the Board of Directors, with terms of up to 20 years and loan-to-value ratios of up to 80%. Interest rates may be fixed for up to five years, after which period the rate may adjust or the loan may become due. Commercial and multi-family real estate lending entails significant additional risks compared with one- to four-family residential lending. For example, commercial and multi-family real estate loans typically involve large loan balances to single borrowers or groups of related borrowers, the payment experience on such loans typically is dependent on the successful operation of the real estate project, and these risks can be significantly impacted by supply and demand conditions in the market for multi-family residential units and commercial office, retail and warehouse space. The Bank's recent and planned increases in commercial and multi-family lending also introduce additional risk as demands on the Bank's loan origination and administration increase and as the Bank's aggregate exposure to these types of loans increases. See "Risk Factors - -- Loan Portfolio Composition" and " -- Recent and Planned Changes in Management and Business Strategy." The aggregate amount of loans which federally chartered savings institutions may make on the security of liens on commercial real estate generally may not exceed 400% of the institution's capital. Consumer Lending. Historically, the Bank's consumer loans have primarily consisted of loans secured by deposits at the Bank, home improvement loans secured by first or second mortgages on single-family residences in the Bank's primary market area and other loans secured by second mortgages. These loans totalled approximately $1,607,000, $217,000 and $2,063,000, respectively, at September 30, 1996. The Bank has recently expanded its consumer loan offerings to include a full variety of such loans, with a particular emphasis on loans secured by new and used automobiles and other vehicles, including boats. These vehicle loans increased from approximately $787,000 at June 30, 1996 to $1,102,500, at September 30, 1996. Management plans to continue the expansion of the Bank's consumer lending activities following the Conversion as part of management's plan to provide a wider 55 60 range of financial services to the Bank's customers while increasing the Bank's portfolio yields and improving its asset/liability management. The Bank makes savings account loans for up to 100% of the balance of the account. The interest rate on these loans typically is fixed at least two percentage points above the rate paid on a deposit at the Bank or four percentage points above the rate paid on a deposit at another institution, with the maturity and payment frequency matched to the terms of the deposit. The account must be pledged as collateral to secure the loan. The Bank makes home improvement loans secured by the borrower's residence. These loans, combined with any higher priority mortgage loan, which usually is from the Bank, generally are limited to 90% of the appraised value of the residence. Home improvement loans generally have fixed interest rates and terms of up to ten years. The Bank's new and used automobile loans generally are underwritten in amounts up to 90% of the purchase price, dealer cost or the loan value as published by the National Automobile Dealers Association or the "Black Book." The terms of such loans generally do not exceed 60 months, with loans for older used cars underwritten for shorter terms. The Bank requires that the vehicles be insured and that the Bank be listed as loss payee on the insurance policy. The Bank originates a portion of its automobile loans on an indirect basis through various dealerships located in its primary market area, and the Bank offers floor plan loans to selected dealers on a case by case basis. Consumer loans generally involve more risk than first mortgage loans. Repossessed collateral for a defaulted loan may not provide an adequate source of repayment of the outstanding loan balance as a result of damage, loss or depreciation, and the remaining deficiency often does not warrant further substantial collection efforts against the borrower. In addition, loan collections are dependent on the borrower's continuing financial stability, and thus are more likely to be adversely affected by job loss, divorce, illness or personal bankruptcy. Further, the application of various federal and state laws, including federal and state bankruptcy and insolvency laws, may limit the amount which can be recovered. These loans may also give rise to claims and defenses by a borrower against the Bank, and a borrower may be able to assert against the Bank claims and defenses which it has against the seller of the underlying collateral. In underwriting consumer loans, the Bank considers the borrower's credit history, an analysis of the borrower's income, expenses and ability to repay the loan and the value of the collateral. The Bank's recent and planned increases in consumer lending also introduce additional risk as demands on the Bank's loan origination and administration increase and as the Bank's aggregate exposure to these types of loans increases. Commercial Business Lending. Before the acquisition of the former Heritage Bank, FSB, the Bank did not offer commercial business loans, except on a limited basis in modest amounts as an accommodation to customers of the Bank. Upon the acquisition, the Bank acquired approximately $768,000 of commercial business loans, and since then the Bank has been expanding its commercial business offerings and increasing its loan origination efforts. The Bank currently offers, or plans to offer, working capital loans, accounts receivable loans, floor plan loans to dealers of automobiles, and business equipment loans, and the Bank has recently added to its staff an additional loan officer with extensive experience originating and servicing indirect automobile loans. At September 30, 1996, the Bank's commercial business loans totalled $1,110,000 and primarily consisted of automobile dealer floor plan loans and equipment loans. At that date, the Bank had one commercial business loan with an outstanding balance or loan commitment exceeding $300,000. The loan consisted of a floor plan lending arrangement dating back to August 1996 and begun by the former Heritage Bank, FSB. The loan is secured by used automobiles at a dealership in Monticello, Arkansas. The loan requires regular payments of interest, and the Bank requires principal paydowns as vehicles are sold and periodically in accordance with specified repayment schedules. At September 30, 1996, the Bank had committed to lend up to $500,000, the outstanding balance was $201,000, the loan was fully performing in accordance with its terms, and the loan was not adversely classified or designated by management. Commercial business loans generally involve more risk than single family residential loans. In underwriting commercial business loans, The Bank considers the obligor's credit history, an analysis of the obligor's income, expenses and ability to repay the obligation and the value of the collateral. 56 61 Loan Solicitation and Processing. The Bank's loan originations are derived from a number of sources, including referrals by realtors, builders, depositors, borrowers and mortgage brokers, as well as walk in customers. The Bank's solicitation programs consist of calls by the Bank's officers, branch managers and other responsible employees to local realtors and builders and advertisements in local newspapers and billboards and radio broadcasts. Real estate loans are originated by the Bank's staff loan officers as well as the Bank's branch managers and executive officers, none of whom receives commissions for loan originations. Loan applications are accepted at each of the Bank's offices and, depending on the loan type and amount, may be processed and underwritten at the originating office or forwarded to the main office. Upon receipt of a loan application from a prospective borrower, the Bank's staff preliminarily reviews the information provided and makes an initial determination regarding the qualification of the borrower. If not disapproved, the application then is placed in processing, and a credit report and verifications are ordered to verify specific information relating to the loan applicant's employment, income and credit standing. It is the Bank's policy to obtain an appraisal of the real estate intended to secure a proposed mortgage loan from independent fee appraisers. It is the Bank's policy to obtain personal guarantees from the principals on all loans. Except when the Bank becomes aware of a particular risk of environmental contamination, the Bank generally does not obtain a formal environmental report on the real estate at the time a loan is made. It is the Bank's policy to record a lien on the real estate securing the loan and to obtain a title insurance policy which insures that the property is free of prior encumbrances. Borrowers must also obtain hazard insurance policies prior to closing and, when the property is in a designated flood plain, paid flood insurance policies. Most borrowers are also required to advance funds on a monthly basis together with each payment of principal and interest to a mortgage escrow account from which the Bank makes disbursements for items such as real estate taxes. The Board of Directors has the overall responsibility and authority for general supervision of the Bank's loan policies. The Board has established written lending policies for the Bank. The Bank's officers and loan committee approve loans up to specified limits above which the approval of the Board may be required. Loan applicants are promptly notified of the decision of the Bank. It has been management's experience that substantially all approved loans are funded. Interest Rates and Loan Fees. Interest rates charged by the Bank on mortgage loans are primarily determined by competitive loan rates offered in its primary market area and the Bank's minimum yield requirements. Mortgage loan rates reflect factors such as prevailing market interest rate levels, the supply of money available to the savings industry and the demand for such loans. These factors are in turn affected by general economic conditions, the monetary policies of the federal government, including the Federal Reserve Board, the general supply of money in the economy, tax policies and governmental budget matters. The Bank receives fees in connection with loan commitments and originations, loan modifications, late payments and changes of property ownership and for miscellaneous services related to its loans. Loan origination fees are calculated as a percentage of the loan principal. The Bank typically receives fees of up to one point (one point being equivalent to 1% of the principal amount of the loan) in connection with the origination of mortgage loans. The excess, if any, of loan origination fees over direct loan origination expenses is deferred and accreted into income over the contractual life of the loan using the interest method. If a loan is prepaid, refinanced or sold, all remaining deferred fees with respect to such loan are taken into income at such time. Collection Policies. When a borrower fails to make a payment on a loan, the Bank generally takes prompt steps to have the delinquency cured and the loan restored to current status. Once the payment grace period has expired (in most instances 15 days after the due date), a late notice is mailed to the borrower, and a late charge is imposed, if applicable. If payment is not promptly received, a second notice is sent 15 days after the expiration of the grace period. If the loan becomes 30 days delinquent, the borrower is contacted, and efforts are made to formulate an affirmative plan to cure the delinquency. If a loan becomes 60 days delinquent, the loan is reviewed 57 62 by the Bank's management, and if payment is not made, management may pursue foreclosure or other appropriate action. If a loan remains delinquent 90 days or more, the Bank generally initiates foreclosure proceedings. Asset Classification, Allowances for Losses and Nonperforming Assets. Federal regulations require savings institutions to classify their assets on the basis of quality on a regular basis. An asset is classified as substandard if it is determined to be inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. An asset is classified as doubtful if full collection is highly questionable or improbable. An asset is classified as loss if it is considered uncollectible, even if a partial recovery could be expected in the future. The regulations also provide for a special mention designation, described as assets which do not currently expose an institution to a sufficient degree of risk to warrant classification but do possess credit deficiencies or potential weaknesses deserving management's close attention. Assets classified as substandard or doubtful require an institution to establish general allowances for loan losses. If an asset or portion thereof is classified loss, an institution must either establish a specific allowance for loss in the amount of the portion of the asset classified loss, or charge off such amount. Federal examiners may disagree with an institution's classifications. If an institution does not agree with an examiner's classification of an asset, it may appeal this determination to the OTS Regional Director. Management regularly reviews the Bank's assets to determine whether assets require classification or re-classification, and the Board of Directors reviews and approves all classifications. Following the Bank's acquisition of the former Heritage Bank, FSB, and in light of management's intention of increasing the Bank's emphasis on originating more commercial and multi-family real estate loans and consumer and commercial business loans, in August 1996 the Bank retained a consultant with extensive commercial banking experience in both executive and advisory capacities, both to perform a detailed initial evaluation of the Bank's loan portfolio and on an ongoing basis to assist management in planning and implementing these changes in the Bank's lending activities. The Bank also recently hired a staff loan analyst, whose responsibilities include assisting with monitoring the Bank's loan portfolio quality. As of September 30, 1996, based on the consultant's preliminary findings and recommendations in connection with the ongoing comprehensive loan portfolio review, and management's resulting reevaluation of the Bank's loan portfolio, the Bank had approximately $39,000 of assets classified as loss, $81,000 of assets classified as doubtful, $2,596,000 of assets classified as substandard and $584,000 of assets designated as special mention. The Bank's total adversely classified assets represented approximately 2.0% of the Bank's total assets and 23.5% of the Bank's tangible regulatory capital at September 30, 1996. At that date, substantially all of the Bank's adversely classified or designated assets were one- to four-family residences in the Bank's primary market area, and none of such assets was in excess of $100,000, except two commercial real estate loans totalling $424,000 secured by interests in a partnership that owns and operates a strip shopping center in Little Rock, Arkansas, all of which was classified as substandard due to concern about the borrowers' ability to repay the loans. At September 30, 1996, management did not expect the Bank to incur any loss in excess of attributable existing reserves on any of the Bank's adversely classified or designated assets. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." In extending credit, the Bank recognizes that losses will occur and that the risk of loss will vary with, among other things, the type of credit being extended, the creditworthiness of the obligor over the term of the obligation, general economic conditions and, in the case of a secured obligation, the quality of the security. It is management's policy to maintain adequate allowances for losses based on management's assessment of the Bank's loan portfolio. The Bank increases its allowance for losses by charging provisions for losses against the Bank's income. Federal examiners may disagree with an institution's allowance for losses. The Bank's methodology for establishing the allowance for losses takes into consideration probable losses that have been identified in connection with specific assets as well as losses that have not been identified but can be expected to occur. Management conducts regular reviews of the Bank's assets and evaluates the need to establish allowances on the basis of this review. Allowances are established by the Board of Directors on a regular basis based on an assessment of risk in the Bank's assets taking into consideration the composition and quality of the portfolio, delinquency trends, current charge-off and loss experience, the state of the real estate market, regulatory reviews 58 63 conducted in the regulatory examination process and economic conditions generally. Allowances are provided for individual assets, or portions of assets, when ultimate collection is considered improbable by management based on the current payment status of the assets and the fair value or net realizable value of the security. At the date of foreclosure or other repossession or at the date the Bank determines a property is an "in-substance foreclosed" property, the Bank transfers the property to real estate acquired in settlement of loans at the lower of cost or fair value. Fair value is defined as the amount in cash or cash-equivalent value of other consideration that a property would yield in a current sale between a willing buyer and a willing seller. Fair value is measured by market transactions. If a market does not exist, fair value of the property is estimated based on selling prices of similar properties in active markets or, if there are no active markets for similar properties, by discounting a forecast of expected cash flows at a rate commensurate with the risk involved. Fair value generally is determined through an appraisal at the time of foreclosure. At September 30, 1996, the Bank held no properties acquired in settlement of loans for which market values were unavailable. Any amount of cost in excess of fair value is charged-off against the allowance for loan losses. The Bank records an allowance for estimated selling costs of the property immediately after foreclosure. Subsequent to acquisition, the property is periodically evaluated by management and an allowance is established if the estimated fair value of the property, less estimated costs to sell, declines. If, upon ultimate disposition of the property, net sales proceeds exceed the net carrying value of the property, a gain on sale of real estate is recorded. The banking regulatory agencies, including the OTS, have adopted a policy statement regarding maintenance of an adequate allowance for loan and lease losses and an effective loan review system. This policy includes an arithmetic formula for checking the reasonableness of an institution's allowance for loan loss estimate compared to the average loss experience of the industry as a whole. Examiners will review an institution's allowance for loan losses and compare it against the sum of (i) 50% of the portfolio that is classified doubtful; (ii) 15% of the portfolio that is classified as substandard; and (iii) for the portions of the portfolio that have not been classified (including those loans designated as special mention), estimated credit losses over the upcoming twelve months given the facts and circumstances as of the evaluation date. This amount is considered neither a "floor" nor a "safe harbor" of the level of allowance for loan losses an institution should maintain, but examiners will view a shortfall relative to the amount as an indication that they should review management's policy on allocating these allowances to determine whether it is reasonable based on all relevant factors. Management actively monitors the Bank's asset quality and charges off loans and properties acquired in settlement of loans against the allowances for losses on such loans and such properties when appropriate and provides specific loss allowances when necessary. Although management believes it uses the best information available to make determinations with respect to the allowances for losses, future adjustments may be necessary if economic conditions differ substantially from the economic conditions in the assumptions used in making the initial determinations. 59 64 As of September 30, 1996, in light of the consultant's preliminary findings and recommendations in connection with the ongoing comprehensive loan portfolio review, and based on management's resulting reevaluation of the Bank's loan portfolio, the Bank's reserve for losses on loans was increased from $881,000 to $1,441,805, or 1.59% of gross loans. The following table sets forth an analysis of the Bank's allowance for loan losses for the periods indicated. Information for periods before May 3, 1996 does not include information for the Bank's savings bank subsidiary, which was acquired on that date. See "Management's Discussion and Analysis of Financial Condition and Results of Operations."
Three Months Ended September 30, Year Ended June 30, ------------------------ ------------------------------------- 1996 1995 1996 1995 1994 ---------- --------- --------- ---------- ---------- Balance at beginning of period.......... $ 881,067 $ 728,491 $ 728,491 $ 728,491 $ 740,803 ---------- --------- --------- ---------- ---------- Loans charged-off: Real estate mortgage: One- to four-family residential..... -- -- 12,130 -- 34,315 Other mortgage loans................ -- -- -- -- -- Consumer.............................. -- -- -- -- -- ---------- -------- --------- ---------- ---------- Total charge-offs....................... -- -- 12,130 -- 34,315 ---------- --------- --------- ---------- ---------- Recoveries: Real estate mortgage: One- to four-family residential..... -- -- 250 -- 14,503 Other mortgage loans................ -- -- -- -- -- Consumer.............................. -- -- -- -- -- ---------- -------- --------- ---------- ---------- Total recoveries........................ -- -- 250 -- 14,503 ---------- --------- --------- ---------- ---------- Net loans charged-off................... -- -- 11,880 -- 19,812 ---------- --------- --------- ---------- ---------- Acquisition of subsidiary............... -- -- 121,973 -- -- Provision for loan losses............... 560,738 -- 42,483 -- 7,500 ---------- --------- --------- ---------- ---------- Balance at end of period................ $1,441,805 $ 728,491 $ 881,067 $ 728,491 $ 728,491 ========== ========= ========= ========== ========== Ratio of net charge-offs to average loans outstanding during the period... -- % -- % 0.018% -- % 0.04% ========== ========= ========= ========== ==========
60 65 The following table allocates the allowance for loan losses by asset category at the dates indicated. The allocation of the allowance to each category is not necessarily indicative of future losses and does not restrict the use of the allowance to absorb losses in any category. Information for dates before May 3, 1996 does not include information for the Bank's savings bank subsidiary, which was acquired on that date.
At June 30, --------------------------------------------------------- At September 30, 1996 1996 1995 ----------------------- -------------------------- ------------------------- Percent of Percent of Percent of Loans in Each Loans in Each Loans in Each Category to Category to Category to Amount Total Loans Amount Total Loans Amount Total Loans ------ ----------- ------ ----------- ------ ----------- Allocated to: Real estate loans............... $1,414,434 93.31% $ 878,432 95.27% $725,856 96.20% Other loans..................... 27,371 6.69 2,635 4.73 2,635 3.80 ---------- ------ --------- ------- -------- ------- Total allowance for loan losses $1,441,805 100.00 $ 881,067 100.00 $728,491 100.00 ========== ====== ========= ======= ======== =======
At June 30, ------------------------- 1994 ------------------------- Percent of Loans in Each Category to Amount Total Loans ------ ----------- Allocated to: Real estate loans............... $725,856 96.11% Other loans..................... 2,635 3.89 -------- ------- Total allowance for loan losses $728,491 100.00 ======== =======
61 66 In addition to its allowance for loan losses, the Bank maintains an allowance for losses on real estate acquired in settlement of loans, including in-substance foreclosures. This allowance is established to cover losses on such properties. At September 30, 1996, the Bank had such an allowance in the amount of approximately $59,000. Numerous financial institutions throughout the United States have incurred losses in recent years due to significant increases in loss provisions and charge-offs resulting largely from higher levels of loan delinquencies and foreclosures. Depressed real estate market conditions have adversely affected the economies of various regions and have had a severe impact on the financial condition and businesses of many of the financial institutions doing business in these areas. Considerable uncertainty exists as to the future improvement or deterioration of the real estate markets in these regions, or of its ultimate impact on these financial institutions. Moreover, the Bank's increasing emphasis on the origination of commercial and multi-family loans and consumer and commercial business loans may increase the Bank's risk of corresponding increases in loan loss provisions and charge-offs. Finally, as a result of declines in real estate market values and significant losses experienced by many financial institutions, there has been a greater level of scrutiny by regulatory authorities of the loan portfolios of financial institutions undertaken as part of examinations of such institutions by the FDIC, OTS or other federal or state regulators. Results of recent examinations indicate that these regulators may be applying more conservative criteria in evaluating real estate market values, requiring significantly increased provisions for losses on loans and real estate acquired in settlement of such loans. While management believes the Bank has established its existing loss allowances in accordance with generally accepted accounting principles, there can be no guaranty or assurance that such reserves are, or in the future will be, adequate to absorb all loan losses or that regulators, in reviewing the Bank's assets, will not make the Bank increase its loss allowance, thereby negatively affecting the Bank's reported financial condition and results of operations. The following table sets forth information with respect to the Bank's nonperforming assets at the dates indicated. Information for dates before May 3, 1996 does not include information for the Bank's savings bank subsidiary, which was acquired on that date. For information regarding the Bank's interest accrual practices, see the Notes to Consolidated Financial Statements.
At At June 30, September 30, ---------------------------------------- 1996 1996 1995 1994 ------------ ----------- ---------- ----------- Loans accounted for on a nonaccrual basis:(1) Real estate: One- to four-family residential.......... $ 160,234 $ 166,228 $ 165,009 $ 143,289 Other mortgage loans..................... -- -- -- -- Consumer................................... -- -- -- -- ------------ ----------- ---------- ----------- Total.................................... $ 160,234 $ 166,228 $ 165,009 $ 143,289 ============ =========== ========== =========== Accruing loans which are contractually past due 90 days or more: Real estate: One- to four-family residential.......... $ 703,350 $ 725,487 $ 502,064 $ 314,939 Other mortgage loans..................... -- -- -- -- Consumer loans............................. 126,718 127,142 5,525 6,735 ------------ ----------- ---------- ----------- Total.................................... $ 830,068 $ 852,629 $ 507,589 $ 321,674 ============ =========== ========== =========== Total nonperforming loans................ $ 990,302 $ 1,018,857 $ 672,598 $ 464,963 ============ =========== ========== =========== Percentage of total loans.................... 1.09% 1.20% 1.23% 0.87% ============ =========== ========== =========== Other nonperforming assets (2)............... $ 118,685 $ 168,206 $ 659,917 $ 842,895 ============ =========== ========== =========== Loans modified in troubled debt restructurings $ 293,756 $ 298,195 $ 313,970 $ 328,573 ============ =========== ========== ===========
- ---------------------- (1) Designated nonaccrual loan payments received applied first to contractual principal; interest income recognized when contractually current. (2) Other nonperforming assets includes foreclosed real estate. In 1995 and 1994, loans to facilitate the sale of foreclosed real estate with little or no consumer equity have been reclassified to foreclosed real estate. 62 67 During the three months ended September 30, 1996 and the year ended June 30, 1996, gross interest income of $7,656 and $7,718, respectively, would have been recorded on loans accounted for on a nonaccrual basis if the loans had been current throughout the respective periods. Interest on such loans included in income during such respective periods amounted to $1,313 and $2,604, respectively. At September 30, 1996, management had identified approximately $2,170,000 of loans which amount is not reflected in the preceding table but as to which known information about possible credit problems of borrowers caused management to have doubts as to the ability of the borrowers to comply with present loan repayment terms. None of this amount was included in the Bank's adversely classified or designated asset amounts at that date. Of this aggregate amount, $383,000 was attributable to 13 one- to four-family residential loans, and $421,000 was attributable to a commercial real estate loan in Camden, Arkansas secured by a first mortgage on former motel most recently used as a medical care facility. At September 30, 1996, the loan was past due, and the property was being sold. At September 30, 1996, management did not expect the Bank to incur any loss in excess of attributable existing reserves on any of the Bank's assets. INVESTMENT ACTIVITIES General. The Bank is permitted under federal law to make certain investments, including investments in securities issued by various federal agencies and state and municipal governments, deposits at the FHLB of Dallas, certificates of deposit in federally insured institutions, certain bankers' acceptances and federal funds. It may also invest, subject to certain limitations, in commercial paper rated in one of the two highest investment rating categories of a nationally recognized credit rating agency, and certain other types of corporate debt securities and mutual funds. Federal regulations require the Bank to maintain an investment in FHLB stock and a minimum amount of liquid assets which may be invested in cash and specified securities. From time to time, the OTS adjusts the percentage of liquid assets which savings banks are required to maintain. See "Regulation -- Depository Institution Regulation -- Liquidity Requirements." The Bank makes investments in order to maintain the levels of liquid assets required by regulatory authorities and manage cash flow, diversify its assets, obtain yield and, under prior federal income tax law, satisfy certain requirements for favorable tax treatment. The investment activities of the Bank consist primarily of investments in mortgage-backed securities and other investment securities, consisting primarily of securities issued or guaranteed by the U.S. government or agencies thereof. Typical investments include federally sponsored agency mortgage pass-through and federally sponsored agency and mortgage-related securities. Investment and aggregate investment limitations and credit quality parameters of each class of investment are prescribed in the Bank's investment policy. The Bank performs analyses on mortgage-related securities prior to purchase and on an ongoing basis to determine the impact on earnings and market value under various interest rate and prepayment conditions. Securities purchases are approved by the Bank's Investment Committee, and the Board of Directors reviews all securities transactions on a monthly basis. Securities designated as "held to maturity" are those assets which the Bank has the ability and intent to hold to maturity. The held to maturity investment portfolio is carried at amortized cost. Securities designated as "available for sale" are those assets which the Bank might not hold to maturity and thus are carried at market value with unrealized gains or losses, net of tax effect, recognized in equity. Mortgage-backed securities typically represent an interest in a pool of fixed-rate or adjustable-rate mortgage loans, the principal and interest payments on which are passed from the mortgage borrowers to investors such as the Bank. Mortgage-backed security sponsors may be private companies or quasi-governmental agencies such as FHLMC, FNMA and GNMA, which guarantee the payment of principal and interest to investors. Mortgage-backed securities can represent a proportionate participation interest in a pool of loans or, alternatively, an obligation to repay a specified amount secured by a pool of loans (commonly referred to as a "collateralized mortgage obligation," or "CMO"). Mortgage-backed securities generally increase the quality of the Bank's assets by virtue of the credit 63 68 enhancements that back them, are more liquid than individual mortgage loans and may be used to collateralize borrowings or other obligations of the Bank. The Bank's mortgage-backed securities portfolio primarily consists of seasoned securities either issued by a one of the quasi-governmental agencies or rated in one of the top two categories by a recognized rating organization. The actual maturity of a mortgage-backed security varies, depending on when the mortgagors prepay or repay the underlying mortgages. Prepayments of the underlying mortgages may shorten the life of the investment, thereby adversely affecting its yield to maturity and the related market value of the mortgage-backed security. The yield is based upon the interest income and the amortization of the premium or accretion of the discount related to the mortgage-backed security. Premiums and discounts on mortgage-backed securities are amortized or accredited over the estimated term of the securities using a level yield method. The prepayment assumptions used to determine the amortization period for premiums and discounts can significantly affect the yield of the mortgage-backed security, and these assumptions are reviewed periodically to reflect the actual prepayment. The actual prepayments of the underlying mortgages depend on many factors, including the type of mortgage, the coupon rate, the age of the mortgages, the geographical location of the underlying real estate collateralizing the mortgages and general levels of market interest rates. The difference between the interest rates on the underlying mortgages and the prevailing mortgage interest rates is an important determinant in the rate of prepayments. During periods of falling mortgage interest rates, prepayments generally increase, and, conversely, during periods of rising mortgage interest rates, prepayments generally decrease. If the coupon rate of the underlying mortgage significantly exceeds the prevailing market interest rates offered for mortgage loans, refinancing generally increases and accelerates the prepayment of the underlying mortgages. Prepayment experience is more difficult to estimate for adjustable-rate mortgage-backed securities. The following table sets forth information regarding carrying values of the Bank's investment securities at the dates indicated. Information for dates before May 3, 1996 does not include information for the Bank's savings bank subsidiary, which was acquired on that date.
At At June 30, September 30, ---------------------------------------------- 1996 1996 1995 1994 ------------ ----------- ------------- ------------ Securities available for sale: U.S. government and agencies.............. $ 16,693,638 $ 5,279,625 $ 957,500 $ 3,386,625 Collateralized mortgage obligations....... 8,636,795 9,034,604 1,655,352 -- Other mortgage-backed securities.......... 3,558,643 3,120,595 4,433,098 -- ------------ ----------- ------------- ------------ $ 28,889,076 $17,434,824 $ 7,045,950 $ 3,386,625 ============ =========== ============= ============ Securities held to maturity: U.S. government and agencies.............. $ -- $ -- $ 2,000,000 $ 2,474,525 Collateralized mortgage obligations....... -- -- 24,968,493 28,057,031 Other mortgage-backed securities.......... 42,636,028 45,212,891 32,176,422 36,027,089 ------------ ----------- ------------- ------------ Total.................................. $ 71,525,104 $62,647,715 $ 66,190,865 $ 67,470,745 ============ =========== ============= ============
64 69 The following table sets forth information in the scheduled maturities, amortized cost, market values and average yields for the Bank's investment portfolio at September 30, 1996.
One Year or Less One to Five Years Five to Ten Years More than Ten Years ------------------ ------------------ ------------------ ------------------- Carrying Average Carrying Average Carrying Average Carrying Average Value Yield Value Yield Value Yield Value Yield ----- ----- ----- ----- ----- ----- ----- ----- Securities available for sale: U.S. government and agencies... $ 1,146,091 3.96% $14,634,322 6.61% $ 232,092 6.73% $ 681,133 6.38% Collateralized mortgage obligations................. -- -- -- -- 2,587,579 7.52 6,049,216 6.58 Other mortgage-backed securities 714,036 7.88 998,562 7.45 402,565 7.79 1,443,480 6.47 ----------- ----------- ---------- ----------- 1,860,127 15,632,884 3,222,236 8,173,829 Securities held to maturity: Mortgage-backed securities..... -- 520,355 9.34 3,131,789 8.39 $38,983,884 6.73 ----------- ----------- ---------- ----------- Total....................... $ 1,860,127 $16,153,239 $6,354,025 $47,157,713 =========== =========== ========== ===========
Total Investment Portfolio ---------------------------- Carrying Market Average Value Value Yield ----- ----- ----- Securities available for sale: U.S. government and agencies... $16,693,638 $16,693,638 6.54% Collateralized mortgage obligations................. 8,636,795 8,636,795 6.84 Other mortgage-backed securities 3,558,643 3,558,643 7.08 ----------- ----------- 28,889,076 28,889,076 Securities held to maturity: Mortgage-backed securities..... 42,636,028 43,210,151 6.79 ----------- ----------- Total....................... $71,525,104 $72,099,227 =========== ===========
65 70 DEPOSIT ACTIVITY AND OTHER SOURCES OF FUNDS General. Deposits are the primary source of the Bank's funds for lending, investment activities and general operational purposes. While the Bank, like most independent savings institutions, historically has relied on certificates of deposit for a substantial portion of its deposits, management has recently shifted the Bank's deposit gathering emphasis away from certificates of deposit and toward transaction accounts with more favorable interest costs, interest rate risk characteristics and opportunities for the Bank to perform valued customer services that generate additional fee income, and it is expected that management will continue this trend after the Conversion. In addition to deposits, the Bank derives funds from loan principal and interest repayments, maturities of investment securities and mortgage-backed securities and interest payments thereon. Although loan repayments are a relatively stable source of funds, deposit inflows and outflows are significantly influenced by general interest rates and money market conditions. Borrowings may be used on a short-term basis to compensate for reductions in the availability of funds, or on a longer term basis for general operational purposes. The Bank has access to borrow advances from the FHLB of Dallas, which the Bank uses from time to time. Deposits. The Bank attracts deposits principally from within its primary market area by offering competitive rates on its deposit instruments, including money market accounts, passbook savings accounts, Individual Retirement Accounts and certificates of deposit which range in maturity from 90 days to three years. Deposit terms vary according to the minimum balance required, the length of time the funds must remain on deposit and the interest rate. Maturities, terms, service fees and withdrawal penalties for its deposit accounts are established by the Bank on a periodic basis. In determining the characteristics of its deposit accounts, the Bank considers the rates offered by competing institutions, lending and liquidity requirements, growth goals and federal regulations. The Bank does not accept brokered deposits or pay negotiated rates for jumbo deposits. The Bank attempts to compete for deposits with other institutions in its market area by offering competitively priced deposit instruments that are tailored to the needs of its customers. Additionally, the Bank seeks to meet customers' needs by providing convenient customer service to the community, efficient staff and convenient hours of service. Substantially all of the Bank's depositors are Arkansas residents who reside in the Bank's primary market area. Savings deposits in the Bank at September 30, 1996 were represented by the various types of savings programs listed below.
Interest Minimum Minimum Percentage of Rate (1) Term Category Amount Balances Total Deposits ------ ---- -------- ------ -------- -------------- Demand Deposits --------------- 2.75% None NOW accounts $ 500 $ 5,959,839 4.05% 4.21 None Money market deposits 2,500 17,691,103 12.02 ------------ ------- Total Demand Deposits 23,650,942 16.07 3.30 None Savings deposits-passbook 7,742,694 5.26 Certificates of Deposit ----------------------- 4.23 3 months or less Fixed-term, fixed-rate 1,000 5,739,396 3.90 4.97 6 months Fixed-term, fixed-rate 1,000 25,591,057 17.39 5.42 12 months Fixed-term, fixed-rate 1,000 29,129,484 19.79 5.94 15-72 months Fixed-term, fixed-rate 1,000 55,319,171 37.59 ------------ ------- Total certificates of deposit 115,779,108 78.67 ------------ ------- Total deposits $147,172,744 100.00% ============ =======
- ------------------ (1) Represents weighted average interest rate. 66 71 The following table sets forth information regarding average deposit balances and rates during the periods presented. Information for periods before May 3, 1996 does not include information for the Bank's savings bank subsidiary, which was acquired on that date.
Three Months Ended September 30, ------------------------------------------ 1996 1995 ------------------- ------------------ Average Average Average Average Balance Rate Balance Rate ------- ---- ------- ---- NOW accounts................................... $ 6,140,939 2.90% $ 4,243,239 2.91% Money market deposits.......................... 17,615,963 3.94 13,916,038 3.51 Savings deposits - passbook.................... 7,864,765 3.67 5,562,952 3.79 Certificates of deposit........................ 115,426,843 5.79 89,062,131 5.65 ------------ ------------ Total...................................... $147,048,510 $112,784,361 ============ ============
Year Ended June 30, ----------------------------------------------------------------- 1996 1995 1994 ------------------- ------------------- ------------------- Average Average Average Average Average Average Balance Rate Balance Rate Balance Rate ------- ---- ------- ---- ------- ---- NOW accounts.................. $ 4,387,731 2.92% $ 3,952,237 2.88% $ 3,525,838 2.91 Money market deposits......... 13,777,197 3.94 15,144,070 3.51 18,159,372 3.13 Savings deposits - passbook... 6,632,913 3.71 5,784,072 2.89 5,668,697 3.28 Certificates of deposit....... 95,231,454 5.66 86,126,388 4.94 85,817,591 4.41 ------------- ------------- ------------- Total..................... $ 120,029,295 $ 111,006,767 $ 113,171,498 ============= ============= =============
The following table sets forth information regarding changes in dollar amounts of deposits in various types of accounts offered by the Bank between the dates indicated. Information for dates before May 3, 1996 does not include information for the Bank's savings bank subsidiary, which was acquired on that date.
At September 30, 1996 Increase At June 30, 1996 Increase ---------------------- (Decrease) --------------------- (Decrease) % of from June % of from June Balance Deposits 30, 1996 Balance Deposits 30, 1995 ------- -------- --- ---- ------- -------- -------- NOW accounts............................... $ 5,959,839 4.05% $ (708,696) $ 6,668,535 4.57% $ 2,360,286 Money market deposits....................... 17,691,103 12.02 2,199,512 15,491,591 10.62 1,539,568 Savings deposits - passbook................. 7,742,694 5.26 (285,461) 8,028,155 5.50 2,202,261 Certificates of deposits.................... 115,779,108 78.67 48,138 115,730,970 79.31 27,811,548 ------------- ------- ------------ ------------- -------- ------------ $ 147,172,744 100.00% $ 1,253,493 $ 145,919,251 100.00% $ 33,913,663 ============= ======= ============ ============= ======== ============
At June 30, 1995 Increase At June 30, 1994 ------------------------ (Decrease) ------------------------- % of from June % of Balance Deposits 30, 1994 Balance Deposits ------- -------- -------- ------- -------- NOW accounts............................... $ 4,308,249 3.85% $ 687,920 $ 3,620,329 3.19% Money market deposits....................... 13,952,023 12.46 (3,011,739) 16,963,762 14.97 Savings deposits - passbook................. 5,825,894 5.20 (329,342) 6,155,236 5.43 Certificates of deposits.................... 87,919,422 78.50 1,308,079 86,611,343 76.41 ------------- ------ ------------ ------------- ------ ...................................... $ 112,005,588 100.00% $ (1,345,082) $ 113,350,670 100.00% ============= ====== ============ ============= ======
67 72 The following table sets forth information regarding time deposits classified by rates at the dates indicated. Information for dates before May 3, 1996 does not include information for the Bank's savings bank subsidiary, which was acquired on that date.
At At June 30, September 30, ---------------------------------------------- 1996 1996 1995 1994 ------------- -------------- ------------- ------------ 2.00 - 3.99%............................. $ -- $ -- $ -- $ 37,361,228 4.00 - 5.99%............................. 94,078,456 75,847,271 61,799,314 46,310,867 6.00 - 7.99%............................. 21,700,652 39,883,699 26,056,756 2,310,111 8.00 - 9.99%............................. -- -- 63,352 629,137 ------------- -------------- ------------- ------------ $ 115,779,108 $ 115,730,970 $ 87,919,422 $ 86,611,343 ============= ============== ============= ============
The following table sets forth information regarding amounts and maturities of time deposits at September 30, 1996.
Amount Due ---------------------------------------------------------------------------- Less Than After Rate One Year 1-2 Years 2-3 Years 3 Years Total ----------- ----------- ----------- ---------- -------------- 2.00 - 3.99%.................. $ -- $ -- $ -- $ -- $ -- 4.00 - 5.99%.................. 66,080,877 24,867,832 3,129,748 -- 94,078,457 6.00 - 7.99%.................. 8,300,718 9,578,673 3,821,260 -- 21,700,651 ----------- ----------- ----------- ---------- -------------- $74,381,595 $34,446,505 $ 6,951,008 $ -- $ 115,779,108 =========== =========== =========== ========== ==============
The following table sets forth information regarding amounts of certificates of deposit of $100,000 or more by time remaining until maturity at September 30, 1996.
Certificates Maturity Period of Deposit --------------- ---------- Three months or less....................... $ 2,797,577 Over three through six months.............. 3,395,291 Over six through 12 months................. 3,125,766 Over 12 months............................. 1,844,627 ------------ Total.................................. $ 11,163,261 ============
68 73 The following table sets forth information regarding savings activities of the Bank for the periods indicated. Information for periods before May 3, 1996 does not include information for the Bank's savings bank subsidiary, which was acquired on that date.
Three Months Ended September 30, Year Ended June 30, --------------------------- ---------------------------------------- 1996 1995 1996 1995 1994 ------------ ------------ ------------ ----------- ----------- Deposits................................ $ 43,800,573 $ 17,922,866 $ 93,534,688 $83,892,579 $72,013,266 Withdrawals............................. (44,455,194) (17,527,276) (91,037,454) (90,216,784) (75,079,582) Net increase (decrease) before interest credited..................... (654,621) 395,590 2,497,234 (6,324,207) (3,066,316) Subsidiary acquisition.................. -- -- 25,101,788 -- -- Interest credited....................... 1,908,114 1,480,919 6,314,641 4,979,125 4,645,404 ------------ ------------ ------------ ----------- ----------- Net increase (decrease) in savings deposits.......................... $ 1,253,493 $ 1,876,509 $ 33,913,663 $(1,345,082) $ 1,579,088 ============ ============ ============ =========== ===========
In the unlikely event the Bank is liquidated after the Conversion, depositors will be entitled to full payment of their deposit accounts prior to any payment being made to the sole stockholder of the Converted Bank or the Bank, which is the Company. Borrowings. Savings deposits historically have been the primary source of funds for the Bank's lending, investments and general operating activities. The Bank is authorized, however, to use advances from the FHLB of Dallas to supplement its supply of lendable funds and to meet deposit withdrawal requirements. The FHLB of Dallas functions as a central reserve bank providing credit for savings institutions and certain other member financial institutions. As a member of the FHLB System, the Bank is required to own stock in the FHLB of Dallas and is authorized to apply for advances. Advances are pursuant to several different programs, each of which has its own interest rate and range of maturities. Advances from the FHLB of Dallas are secured by the Bank's stock in the FHLB of Dallas and first mortgage loans. The following tables set forth certain information regarding short-term borrowings by the Bank for the periods indicated. Averages are based on monthly balances.
Three Months Ended September 30, Year Ended June 30, ----------------------- ---------------------------------- 1996 1995 1996 1995 1994 ---- ---- ---- ---- ---- Amounts outstanding at end of period: FHLB advances.............................. $10,000,000 $5,000,000 $ 10,000,000 $ -- $ -- Maximum amount of borrowings outstanding at any month end: FHLB advances.............................. $10,000,000 $5,000,000 $ 10,000,000 $ -- $ -- Approximate average short-term borrowings outstanding with respect to: FHLB advances.............................. $10,000,000 $5,000,000 $ 7,500,000 $ -- $ --
SUBSIDIARY ACTIVITIES As federally chartered savings banks, the Bank and its separate subsidiary savings bank, are each permitted to invest an amount equal to 2% of its assets in non-savings institution service corporation subsidiaries, with an additional investment of 1% of assets where such investment serves primarily community, inner-city and community development purposes. Under such limitations, as of September 30, 1996 on a consolidated basis the Bank was authorized to invest up to approximately $5,231,000 in the stock of or loans to such subsidiaries, including the additional 1% investment for community inner-city and community development purposes. Institutions meeting their 69 74 applicable minimum regulatory capital requirements may invest up to 50% of their regulatory capital in conforming first mortgage loans to such subsidiaries in which they own 10% or more of the capital stock. The Bank has one subsidiary service corporation, HCB Properties, Inc., which was formed in August 1996 to hold certain properties acquired by the Bank for possible future expansion, because the properties are larger than the Bank's anticipated expansion needs, and it is expected that portions of the properties eventually will be sold. At September 30, 1996, the Bank's aggregate investment in, and loans to, the subsidiary service corporation totalled $357,000, all of which was subject to exclusion from the Bank's regulatory capital under applicable legal requirements (see "Regulation of the Bank--Regulatory Capital Requirements"). For additional information regarding the Bank's subsidiary savings bank, see "Heartland Community Bank." OFFICES AND OTHER MATERIAL PROPERTIES The following table sets forth information regarding the Bank's offices at September 30, 1996.
Year Owned or Approximate Opened Leased Book Value Square Footage ------ ------ ---------- -------------- Main Office: 237 Jackson Street, S.W. 1933 Owned $ 717,123 12,000 Camden, Arkansas Branch Offices: 23233 Interstate 30, No. 20(1) 1996 Leased -- 1,000 Bryant, Arkansas 208 Cardinal Shopping Center 1981 Owned $ 137,717 1,200 Camden, Arkansas 610 West 4th Street 1969 Owned 621,306 3,500 Fordyce, Arkansas 109 North Chester 1993 Owned 624,745 1,800 Little Rock, Arkansas 207 North Church(2) 1993 Leased 175,644 2,200 Monticello, Arkansas 108 East Pine(3) 1996 Leased 233,437 900 Sheridan, Arkansas
- -------------- (1) Limited service loan production office opened in November 1996. (2) The Bank is building a 7,400 square foot replacement branch at 473 Highway 425 North in Monticello, which is expected open in July 1997 at an aggregate building cost of approximately $1,250,000. (3) The Bank is building a 5,500 square foot replacement branch at 113 South Main Street in Sheridan, which is expected to open in August 1997 at aggregate building cost of approximately $975,000. In addition to the offices described above, at September 30, 1996 the Bank held five other properties, with an aggregate net book value of $1,174,000, located in various communities within the Bank's primary market area. While these properties were acquired for possible future construction of additional offices and related facilities, certain of them are larger than the Bank's anticipated expansion needs, and it is expected that portions of those properties eventually will be sold. It is anticipated that in the future management may determine to expand the Bank's network of banking facilities by installing ATMs in existing or new banking facilities, by building branches 70 75 or other facilities on the properties held by the Bank, by acquiring other facilities or sites and/or by acquiring banks or other financial companies with their own facilities. The book value of the Bank's aggregate investment in properties, premises and equipment totalled approximately $3,267,000 at September 30, 1996. See Note 7 of the Notes to Consolidated Financial Statements. EMPLOYEES As of September 30, 1996, the Bank had 57 full-time and two part-time employees, none of whom was represented by a collective bargaining agreement. Management considers the Bank's relationships with its employees to be good. LEGAL PROCEEDINGS From time to time, the Bank is a party to various legal proceedings incident to its business. At September 30, 1996, there were no legal proceedings to which the Company or the Bank was a party, or to which any of their property was subject, which were expected by management to result in a material loss to the Company or the Bank, and there were no pending regulatory proceedings to which the Company, the Bank or its subsidiaries was a party, or to which any of their properties was subject, which were expected to result in a material loss. REGULATION GENERAL As federally chartered savings institutions, each of the Bank and its savings bank subsidiary (collectively, the "Banks") is subject to extensive regulation by the OTS and the FDIC and to OTS regulations governing such matters as capital standards, mergers, establishment of branch offices, subsidiary investments and activities and general investment authority. The OTS periodically examines the Banks for compliance with various regulatory requirements. The FDIC also has the authority to conduct special examinations of the Banks because their deposits are insured by the SAIF. The Banks must file reports with the OTS describing their activities and financial condition and also are subject to certain reserve requirements promulgated by the Federal Reserve Board. This supervision and regulation is intended primarily for the protection of depositors. REGULATION OF THE BANKS Federal Home Loan Bank System. The Banks are members of the FHLB System, which consists of 12 district FHLBs subject to supervision and regulation by the Federal Housing Finance Board ("FHFB"). The FHLBs provide a central credit facility primarily for member institutions. As members of the FHLB of Dallas, the Banks are required to acquire and hold shares of capital stock in the FHLB of Dallas in an amount at least equal to 1% of the aggregate unpaid principal of their home mortgage loans, home purchase contracts and similar obligations at the beginning of each year, or 1/20 of their advances (borrowings) from the FHLB of Dallas, whichever is greater. The FHLB of Dallas serves as a reserve or central bank for its member institutions within its assigned district. It is funded primarily from proceeds derived from the sale of consolidated obligations of the FHLB System. It makes advances to members in accordance with policies and procedures established by the FHLB and the Board of Directors of the FHLB of Dallas. Long-term advances may only be made for the purpose of providing funds for residential housing finance. At September 30, 1996, the Bank had $10.0 million in advances outstanding with the FHLB of Dallas. See "Business of the Bank -- Deposit Activity and Other Sources of Funds -- Borrowings." Liquidity Requirements. The Banks are required to maintain average daily balances of liquid assets (cash, deposits maintained pursuant to Federal Reserve Board requirements, time and savings deposits in certain institutions, obligations of the United States and states and political subdivisions thereof, shares in mutual funds with certain 71 76 restricted investment policies, highly rated corporate debt and mortgage loans and mortgage-related securities with less that one year to maturity or subject to pre-arranged sale within one year) equal to the monthly average of not less than a specified percentage (currently 5%) of their net withdrawable savings deposits plus short-term borrowings. The Banks are also required to maintain average daily balances of short-term liquid assets at a specified percentage (currently 1%) of the total of their net withdrawable savings accounts and borrowings payable in one year or less. Monetary penalties may be imposed for failure to meet liquidity requirements. Qualified Thrift Lender Test. The Banks are subject to OTS regulations which use the concept of a Qualified Thrift Lender to determine eligibility for Federal Home Loan Bank advances and for certain other purposes. To qualify as a Qualified Thrift Lender, a savings institution must maintain at least 65% of its "portfolio" assets in Qualified Thrift Investments. Portfolio assets are defined to include total assets less intangibles, property used by a savings institution in its business and liquidity investments in an amount not exceeding 20% of assets. Qualified Thrift Investments consist of (i) loans, equity positions or securities related to domestic, residential real estate or manufactured housing, (ii) 50% of the dollar amount of residential mortgage loans subject to sale under certain conditions, and (iii) stock in a Federal Home Loan Bank or the FHLMC. In addition, subject to a 20% of portfolio assets limit, savings institutions are able to treat as Qualified Thrift Investments 200% of their investments in loans to finance "starter homes" and loans for construction, development or improvement of housing and community service facilities or for financing small businesses in "credit-needy" areas. To be qualified as a Qualified Thrift Lender, a savings institution must maintain its status as a Qualified Thrift Lender for nine out of every 12 months. Failure to qualify as a Qualified Thrift Lender results in a number of sanctions, including the imposition of certain operating restrictions imposed on national banks and a restriction on obtaining additional advances from the Federal Home Loan Bank System. Upon failure to qualify as a Qualified Thrift Lender for two years, a savings institution must convert to a commercial bank in excess of the required percentage. At September 30, 1996, approximately 79.52% of the Banks' portfolio assets were invested in Qualified Thrift Investments. Regulatory Capital Requirements. Under OTS capital standards, savings institutions must maintain "tangible" capital equal to at least 1.5% of adjusted total assets, "core" capital equal to at least 3% of adjusted total assets and "total" capital (a combination of core and "supplementary" capital) equal to at least 8% of "risk-weighted" assets. In addition, the OTS has recently adopted regulations which impose certain restrictions on institutions that have a total risk- based capital ratio that is less than 8.0%, a ratio of Tier 1 capital to risk-weighted assets of less than 4.0% or a ratio of Tier 1 capital to adjusted total assets of less than 4.0% (or 3.0% if the institution is rated CAMEL 1 under the OTS examination rating system). For purposes of these regulations, Tier 1 capital has the same definition as core capital. See " -- Prompt Corrective Regulatory Action." Core capital is defined as common stockholders' equity (including retained earnings), noncumulative perpetual preferred stock and related surplus, minority interests in the equity accounts of fully consolidated subsidiaries, certain nonwithdrawable accounts and pledged deposits and "qualifying supervisory goodwill." Core capital is generally reduced by the amount of an institution's intangible assets for which no market exists. Limited exceptions to the deduction of intangible assets are provided for purchased mortgage servicing rights, purchased credit card relationships and qualifying supervisory goodwill held by an eligible institution. Tangible capital is given the same definition as core capital but does not include an exception for qualifying supervisory goodwill and is reduced by the amount of all the savings institution's intangible assets with only a limited exception for purchased mortgage servicing rights and purchased credit card relationships. Core and tangible capital generally are required to be reduced by an amount equal to a savings institution's debt and equity investments in subsidiaries engaged in activities not permissible to national banks other than subsidiaries engaged in activities undertaken as agent for customers or in mortgage banking activities and depository institutions or holding companies therefor. As of September 30, 1996, the Bank had approximately $357,000 of investments in, or extensions of credit to, non-includible subsidiaries. 72 77 Adjusted total assets for purposes of the core and tangible capital requirements are a savings institution's total assets as determined under generally accepted accounting principles, adjusted for certain goodwill amounts, and increased by a pro rated portion of the assets of subsidiaries in which the institution holds a minority interest and which are not engaged in activities for which the capital rules require the institution to net its debt and equity investments against capital, as well as a pro rated portion of the assets of other subsidiaries for which netting is not fully required under phase-in rules. Adjusted total assets are reduced by the amount of assets that have been deducted from capital, the portion of the institution's investments in subsidiaries that must be netted against capital under the capital rules and, for purposes of the core capital requirement, qualifying supervisory goodwill. In determining compliance with the risk-based capital requirement, a savings institution is allowed to use both core capital and supplementary capital provided the amount of supplementary capital used does not exceed the institution's core capital. Supplementary capital is defined to include certain preferred stock issues, nonwithdrawable accounts and pledged deposits that do not qualify as core capital, certain approved subordinated debt, certain other capital instruments and a portion of the institution's general loan and lease loss allowances. Total core and supplementary capital are reduced by the amount of capital instruments held by other depository institutions pursuant to reciprocal arrangements and, after July 1, 1990, by an increasing percentage of the institution's high loan-to-value ratio land loans, non-residential construction loans and equity investments other than those deducted from core and tangible capital. As of September 30, 1996, the Bank had no high ratio land or non-residential construction loans and no equity investments for which OTS regulations require a deduction from total capital. The risk-based capital requirement is measured against risk-weighted assets which equal the sum of each asset and the credit-equivalent amount of each off-balance sheet item after being multiplied by an assigned risk weight. Under the OTS risk-weighting system, one- to four-family first mortgages not more than 90 days past due with loan-to-value ratios under 80% and average annual occupancy rates of at least 80% and certain qualifying loans for the construction of one- to four-family residences pre-sold to home purchasers are assigned a risk weight of 50%. Consumer and residential construction loans are assigned a risk weight of 100%. Mortgage-backed securities issued, or fully guaranteed as to principal and interest, by the FNMA or FHLMC are assigned a 20% risk weight. Cash and U.S. Government securities backed by the full faith and credit of the U.S. Government (such as mortgage-backed securities issued by GNMA) are given a 0% risk weight. At September 30, 1996, the Banks exceeded all regulatory minimum capital requirements. For additional information relating to the Bank's consolidated regulatory capital compliance at September 30, 1996, see "Selected Consolidated Financial Information and Other Data." The OTS has proposed an amendment to its capital regulations establishing a minimum core capital ratio of 3% for institutions rated CAMEL 1 under the OTS examination rating system. For all other institutions, the minimum core capital ratio will be from 4% to 5%. In determining the amount of additional core capital, the OTS will assess both the quality of risk management systems and the level of overall risk in each individual institution through the supervisory process on a case-by-case basis. The risk-based capital standards of the OTS requires savings institutions with more than a "normal" level of interest rate risk to maintain additional total capital. An institution's interest rate risk will be measured in terms of the sensitivity of its "net portfolio value" to changes in interest rates. Net portfolio value is defined, generally, as the present value of expected cash inflows from existing assets and off-balance sheet contracts less the present value of expected cash outflows from existing liabilities. A savings institution will be considered to have a "normal" level of interest rate risk exposure if the decline in its net portfolio value after an immediate 200 basis point increase or decrease in market interest rates (whichever results in the greater decline) is less than two percent of the current estimated economic value of its assets. An institution with a greater than normal interest rate risk will be required to deduct from total capital, for purposes of calculating its risk-based capital requirement, an amount (the "interest rate risk component") equal to one-half the difference between the institution's measured interest rate risk and the normal level of interest rate risk, multiplied by the economic value of its total assets. The OTS calculates the sensitivity of an institution's net portfolio value based on data submitted by the institution in a schedule to its quarterly Thrift Financial Report and using the interest rate risk measurement model 73 78 adopted by the OTS. The amount of the interest rate risk component, if any, to be deducted from an institution's total capital will be based on the institution's Thrift Financial Report filed two quarters earlier. Savings institutions with less than $300 million in assets and a risk-based capital ratio above 12% are generally exempt from filing the interest rate risk schedule with their Thrift Financial Reports. However, the OTS will require any exempt institution that it determines may have a high level of interest rate risk exposure to file such schedule on a quarterly basis and may be subject to an additional capital requirement based upon its level of interest rate risk as compared to its peers. Due to their net size and risk-based capital level, the Banks are exempt from the interest rate risk component. In addition to requiring generally applicable capital standards for savings institutions, the Director of the OTS is authorized to establish the minimum level of capital for an institution at such amount or at such ratio of capital-to-assets as the Director determines to be necessary or appropriate for such institution in light of the particular circumstances of the institution. The Director of the OTS may treat the failure of any institution to maintain capital at or above such level as an unsafe or unsound practice and may issue a directive requiring any institution which fails to maintain capital at or above the minimum level required by the Director to submit and adhere to a plan for increasing capital. Such an order may be enforced in the same manner as an order issued by the FDIC. Deposit Insurance. The Banks are required to pay assessments based on a percentage of its insured deposits to the FDIC for insurance of its deposits by the SAIF. Under the FDIC's risk-based deposit insurance assessment system, the assessment rate for an insured depository institution depends on the assessment risk classification assigned to the institution by the FDIC, which is determined by the institution's capital level and supervisory evaluations. Based on the data reported to regulators for the date closest to the last day of the seventh month preceding the semi-annual assessment period, institutions are assigned to one of three capital groups -- well capitalized, adequately capitalized or undercapitalized -- using the same percentage criteria as in the prompt corrective action regulations. See "-- Prompt Corrective Regulatory Action." Within each capital group, institutions are assigned to one of three subgroups on the basis of supervisory evaluations by the institution's primary supervisory authority and such other information as the FDIC determines to be relevant to the institution's financial condition and the risk posed to the deposit insurance fund. Subgroup A consists of financially sound institutions with only a few minor weaknesses. Subgroup B consists of institutions that demonstrate weaknesses which, if not corrected, could result in significant deterioration of the institution and increased risk of loss to the deposit insurance fund. Subgroup C consists of institutions that pose a substantial probability of loss to the deposit insurance fund unless effective corrective action is taken. The assessment rate for SAIF members had ranged from 0.23% of deposits for well capitalized institutions in Subgroup A to 0.31% of deposits for undercapitalized institutions in Subgroup C while assessments for over 90% of the BIF members had been the statutory minimum of $2,000. Recently enacted legislation provided for a one-time assessment of 65.7 basis points of insured deposits as of March 31, 1995, that fully capitalized the SAIF and had the effect of reducing future SAIF assessments. Accordingly, although the special assessment resulted in one-time charges to the Banks totalling approximately $911,000 pre-tax, the recapitalization of the SAIF had the effect of reducing the Banks' future deposit insurance premiums to the SAIF. Under the recently enacted legislation, both BIF and SAIF members will be assessed an amount for the Financing Corporation ("FICO") Bond payments. BIF members will be assessed approximately 1.3 basis points while the SAIF rate will be approximately 6.4 basis points until January 1, 2000. At that time, BIF and SAIF members will begin pro rata sharing of the payment at an expected rate of 2.43 basis points. The FDIC has proposed a rule that would lower the regular semi-annual SAIF assessment rates by establishing a base assessment rate schedule ranging from 4 to 31 basis points effective October 1, 1996. The rule widens the range between the lowest and highest assessment rates among healthy and troubled institutions with the intent of creating an incentive for savings institutions to control risk-taking behavior. The rule also prevents the FDIC from collecting more funds than needed to maintain the SAIF's capitalization at 1.25% of insured deposits. Under law, the FDIC may not impose semi-annual assessments which would cause it to collect more funds than are necessary to maintain the SAIF's designated reserve ratio. As a result, the base assessment rate schedule will be immediately modified in two ways. The first modification, applying to institutions such as certain BIF-members and SAIF-member banks that do not pay assessments to the FICO, reduces the base assessment rate by 4 basis points for a range from 0 to 27 basis points. The second modification sets a special interim rate schedule from 74 79 18 to 27 basis points for the period from October 1, 1996 to December 31, 1996 for SAIF-member savings associations that pay assessments to the FICO. After December 31, 1996, the special interim rates would terminate and these institutions would also pay the base assessment rate as reduced by the 4 basis point adjustment. Any excess funds collected by the FDIC in the last six months of 1996 would be refunded or credited, with interest, to the institution. SAIF members generally are prohibited from converting to the status of members of the BIF administered by the FDIC or merging with or transferring assets to a BIF member before the later of August 9, 1994 or the date on which the SAIF first meets or exceeds the designated reserve ratio. The FDIC, however, may approve such a transaction in the case of a SAIF member in default or if the transaction involves an insubstantial portion of the deposits of each participant. In addition, mergers, transfers of assets and assumptions of liabilities may be approved by the appropriate bank regulator so long as deposit insurance premiums continue to be paid to the SAIF for deposits attributable to the SAIF members plus an adjustment for the annual rate of growth of deposits in the surviving bank without regard to subsequent acquisitions. An institution may adopt a commercial bank or savings bank charter if the resulting bank remains a SAIF member. The FDIC has adopted a regulation which provides that any insured depository institution with a ratio of Tier 1 capital to total assets of less than 2% will be deemed to be operating in an unsafe or unsound condition, which would constitute grounds for the initiation of termination of deposit insurance proceedings. The FDIC, however, would not initiate termination of insurance proceedings if the depository institution has entered into and is in compliance with a written agreement with its primary regulator, and the FDIC is a party to the agreement, to increase its Tier 1 capital to such level as the FDIC deems appropriate. Tier 1 capital is defined as the sum of common stockholders' equity, noncumulative perpetual preferred stock (including any related surplus) and minority interests in consolidated subsidiaries, minus all intangible assets other than mortgage servicing rights and qualifying supervisory goodwill eligible for inclusion in core capital under OTS regulations and minus identified losses and investments in certain securities subsidiaries. Insured depository institutions with Tier 1 capital equal to or greater than 2% of total assets may also be deemed to be operating in an unsafe or unsound condition notwithstanding such capital level. The regulation further provides that in considering applications that must be submitted to it by savings institutions, the FDIC will take into account whether the institution is meeting with the Tier 1 capital requirement for state non-member banks of 4% of total assets for all but the most highly rated state non-member banks. Federal Reserve System. Pursuant to regulations of the Federal Reserve Board, all FDIC-insured depository institutions must maintain average daily reserves against their net transaction accounts. This percentage is subject to adjustment by the Federal Reserve Board. No reserves are required to be maintained on the first $4.4 million of transaction accounts, reserves equal to 3% must be maintained on the next $49.3 million of transaction accounts, and a reserve of 10% must be maintained against all remaining transaction accounts. These reserve requirements are subject to adjustment by the Federal Reserve Board. Because required reserves must be maintained in the form of vault cash or in a noninterest-bearing account at a Federal Reserve Bank, the effect of the reserve requirement is to reduce the amount of the institution's interest-earning assets. Dividend Restrictions. Under OTS regulations, the Bank will not be permitted to pay dividends on its capital stock if its regulatory capital would thereby be reduced below the amount then required for the liquidation account established for the benefit of certain depositors of the Bank at the time of the Conversion. See "The Conversion -- Principal Effects of Conversion on Depositors and Borrowers of the Bank -- Liquidation Account." In addition, the Banks will be required by OTS regulations to give the OTS 30 days' prior notice of any proposed declaration of dividends. OTS regulations impose additional limitations on the payment of dividends and other capital distributions (including stock repurchases and cash mergers) by the Banks. Under these regulations, an institution that, immediately prior to, and on a pro forma basis after giving effect to, a proposed capital distribution, has total capital (as defined by OTS regulations) that is equal to or greater than the amount of its fully phased-in capital requirements (a "Tier 1 Association") is generally permitted, after notice, to make capital distributions during a calendar year in the amount equal to the greater of: (i) 75% of its net income for the previous four quarters; or (ii) 100% of its net 75 80 income to date during the calendar year plus an amount that would reduce by one-half the amount by which its ratio of total capital to assets exceeded regulatory requirements at the beginning of the calendar year. An institution with total capital in excess of current minimum capital ratio requirements but not in excess of the fully phased-in requirements (a "Tier 2 Association") is permitted, after notice, to make capital distributions without OTS approval of up to 75% of its net income for the previous four quarters, less dividends already paid for such period. An institution that fails to meet current minimum capital requirements (a "Tier 3 Association") is prohibited from making any capital distributions without the prior approval of the OTS. A Tier 1 Association that has been notified by the OTS that it is in need of more than normal supervision will be treated as either a Tier 2 or Tier 3 Association. The Banks are Tier 1 Associations. Despite the above authority, the OTS may prohibit any institution from making a capital distribution that would otherwise be permitted by the regulation, if the OTS were to determine that the distribution constituted an unsafe or unsound practice. Under the OTS prompt corrective action regulations, the Banks would be prohibited from making any capital distributions if, after making the distribution, it would have: (i) a total risk-based capital ratio of less than 8.0%; (ii) a Tier 1 risk-based capital ratio of less than 4.0%; or (iii) a leverage ratio of less than 4.0%. See " -- Prompt Corrective Regulatory Action." Furthermore, during the first year following completion of the Conversion, the Bank will not pay dividends to the Company if, as a result of any such dividend, the Bank's tangible capital would be reduced below 10% of its adjusted total assets. In addition to the foregoing, earnings of the Banks appropriated to bad debt reserves and deducted for federal income tax purposes are not available for payment of cash dividends or other distributions to the Company without payment of taxes at the then current tax rate on the amount of earnings removed from the reserves for such distributions. See "Taxation." The Company intends to make full use of this favorable tax treatment afforded to the Banks, and the Company and does not contemplate use of any post-Conversion earnings of the Banks in a manner which would limit either Bank's bad debt deduction or create federal tax liabilities. Limits on Loans to One Borrower. Savings institutions generally are subject to the lending limits applicable to national banks. With certain limited exceptions, an institution's loans and extensions of credit outstanding to a person at one time shall not exceed 15% of the unimpaired capital and surplus of the institution. An institution may lend an additional amount, equal to 10% of unimpaired capital and surplus, if such loan is fully secured by readily marketable collateral. Savings institutions are additionally authorized to make loans to one borrower, for any purpose, in an amount not to exceed $500,000 or, by order of the Director of the OTS, in an amount not to exceed the lesser of $30,000,000 or 30% of unimpaired capital and surplus to develop residential housing, provided: (i) the purchase price of each single-family dwelling in the development does not exceed $500,000; (ii) the institution is in compliance with its fully phased-in capital requirements; (iii) the loans comply with applicable loan-to-value requirements, and; (iv) the aggregate amount of loans made under this authority does not exceed 150% of unimpaired capital and surplus. The lending limits generally do not apply to purchase money mortgage notes taken from the purchaser of real property acquired by the institution in satisfaction of debts previously contracted if no new funds are advanced to the borrower and the institution is not placed in a more detrimental position as a result of the sale. Certain types of loans are excepted from the lending limits, including loans secured by savings deposits. At September 30, 1996, the maximum aggregate amounts that the Bank and its subsidiary savings bank could have lent to any one borrower under the 15% limit were approximately $1,757,000 and $500,000, respectively, for a total of $2,257,000. At such date, the largest aggregate amounts of loans that the Bank and its subsidiary savings bank had outstanding to any one borrower were $1,107,000 and $495,000, respectively. On a pro forma basis, after giving effect to the Conversion based on the assumptions set forth at "Use of Proceeds" at the midpoint of the estimated valuation range, the Banks' aggregate lending limit as of September 30, 1996 would have been approximately $3.0 million. Transactions with Related Parties. Transactions between savings institutions and any affiliate are governed by Sections 23A and 23B of the Federal Reserve Act. An affiliate of an institution is any company or entity which controls, is controlled by or is under common control with the savings institution. In a holding company context, the parent holding company of an institution (such as the Company) and any companies which are controlled by such parent holding company are affiliates of the savings institution. Generally, Sections 23A and 23B (i) limit the extent to which the savings institution or its subsidiaries may engage in "covered transactions" with any one affiliate to an 76 81 amount equal to 10% of such institution's capital stock and surplus, and contain an aggregate limit on all such transactions with all affiliates to an amount equal to 20% of such capital stock and surplus and (ii) require that all such transactions be on terms substantially the same, or at least as favorable, to the institution or subsidiary as those provided to a non-affiliate. The term "covered transaction" includes the making of loans, purchase of assets, issuance of a guarantee and similar other types of transactions. In addition to the restrictions imposed by Sections 23A and 23B, no savings institution may (i) loan or otherwise extend credit to an affiliate, except for any affiliate which engages only in activities which are permissible for bank holding companies, or (ii) purchase or invest in any stocks, bonds, debentures, notes or similar obligations of any affiliate, except for affiliates which are subsidiaries of the savings institution. Further, savings institutions are subject to the restrictions contained in Section 22(h) of the Federal Reserve Act and the Federal Reserve Board's Regulation O thereunder on loans to executive officers, directors and principal stockholders. Under Section 22(h), loans to a director, executive officer and to a greater than 10% stockholder of an institution and certain affiliated interests of such persons, may not exceed, together with all other outstanding loans to such person and affiliated interests, the institution's loans-to-one-borrower limit (generally equal to 15% of the institution's unimpaired capital and surplus). Section 22(h) also prohibits the making of loans above amounts prescribed by the appropriate federal banking agency, to directors, executive officers and greater than 10% stockholders of an institution, and their respective affiliates, unless such loan is approved in advance by a majority of the board of directors of the institution with any "interested" director not participating in the voting. Regulation O prescribes the loan amount (which includes all other outstanding loans to such person) as to which such prior board of director approval is required as being the greater of $25,000 or 5% of capital and surplus (up to $500,000). Further, Section 22(h) requires that loans to directors, executive officers and principal stockholders be made on terms substantially the same as offered in comparable transactions to other persons. Section 22(h) also generally prohibits a depository institution from paying the overdrafts of any of its executive officers or directors. Savings institutions are also subject to the requirements and restrictions of Section 22(g) of the Federal Reserve Act and Regulation O on loans to executive officers and the restrictions of 12 U.S.C. Section 1972 on certain tying arrangements and extensions of credit by correspondent banks. Section 22(g) of the Federal Reserve Act requires that loans to executive officers of depository institutions not be made on terms more favorable than those afforded to other borrowers, requires approval by the board of directors of a depository institution for extension of credit to executive officers of the institution, and imposes reporting requirements for and additional restrictions on the type, amount and terms of credits to such officers. Section 1972 (i) prohibits a depository institution from extending credit to or offering any other services, or fixing or varying the consideration for such extension of credit or service, on the condition that the customer obtain some additional service from the institution or certain of its affiliates or not obtain services of a competitor of the institution, subject to certain exceptions, and (ii) prohibits extensions of credit to executive officers, directors, and greater than 10% stockholders of a depository institution by any other institution which has a correspondent banking relationship with the institution, unless such extension of credit is on substantially the same terms as those prevailing at the time for comparable transactions with other persons and does not involve more than the normal risk of repayment or present other unfavorable features. Prompt Corrective Regulatory Action. Under FDICIA, the federal banking regulators are required to take prompt corrective action if an institution fails to satisfy certain minimum capital requirements, including a leverage limit, a risk-based capital requirement, and any other measure of capital deemed appropriate by the federal banking regulators for measuring the capital adequacy of an insured depository institution. All institutions, regardless of their capital levels, are restricted from making any capital distribution or paying any management fees that would cause the institution to become undercapitalized. An institution that fails to meet the minimum level for any relevant capital measure (an "undercapitalized institution") generally is: (i) subject to increased monitoring by the appropriate federal banking regulator; (ii) required to submit an acceptable capital restoration plan within 45 days; (iii) subject to asset growth limits; and (iv) required to obtain prior regulatory approval for acquisitions, branching and new lines of businesses. The capital restoration plan must include a guarantee by the institution's holding company that the institution will comply with the plan until it has been adequately capitalized on average for four consecutive quarters, under which the holding company would be liable up to the lesser of 5% of the institution's total assets or the amount necessary to bring the institution into capital compliance as of the date it failed to comply with its capital restoration plan. A "significantly undercapitalized" institution, as well as any undercapitalized institution that does not submit an acceptable capital restoration plan, may be subject to regulatory demands for recapitalization, broader 77 82 application of restrictions on transactions with affiliates, limitations on interest rates paid on deposits, asset growth and other activities, possible replacement of directors and officers, and restrictions on capital distributions by any bank holding company controlling the institution. Any company controlling the institution may also be required to divest the institution or the institution could be required to divest subsidiaries. The senior executive officers of a significantly undercapitalized institution may not receive bonuses or increases in compensation without prior approval and the institution is prohibited from making payments of principal or interest on its subordinated debt, with certain exceptions. In their discretion, the federal banking regulators may also impose the foregoing sanctions on an undercapitalized institution if the regulators determine that such actions are necessary to carry out the purposes of the prompt corrective action provisions. If an institution's ratio of tangible capital to total assets falls below the "critical capital level" established by the appropriate federal banking regulator, the institution is subject to conservatorship or receivership within 90 days unless periodic determinations are made that forbearance from such action would better protect the deposit insurance fund. Unless appropriate findings and certifications are made by the appropriate federal bank regulatory agencies, a critically undercapitalized institution must be placed in receivership if it remains critically undercapitalized on average during the calendar quarter beginning 270 days after the date it became critically undercapitalized. Under the OTS regulation, implementing the prompt corrective action provisions of FDICIA, the OTS measures an institution's capital adequacy on the basis of its total risk-based capital ratio (the ratio of its total capital to risk-weighted assets), Tier 1 risk-based capital ratio (the ratio of its core capital to risk-weighted assets) and leverage ratio (the ratio of its core capital to adjusted total assets). An institution that is not subject to an order or written directive to meet or maintain a specific capital level is deemed "well capitalized" if it also has: (i) a total risk-based capital ratio of 10% or greater; (ii) a Tier 1 risk-based capital ratio of 6% or greater; and (iii) a leverage ratio of 5% or greater. An "adequately capitalized" savings institution is an institution that does not meet the definition of well capitalized and has: (i) a total risk-based capital ratio of 8% or greater; (ii) a Tier 1 capital risk-based ratio of 4% or greater; and (iii) a leverage ratio of 4% or greater (or 3% or greater if the savings institution has a composite 1 CAMEL rating). An "undercapitalized institution" is an institution that has (i) a total risk-based capital ratio less than 8%; or (ii) a Tier 1 risk-based capital ratio of less than 4%; or (iii) a leverage ratio of less than 4% (or 3% if the institution has a composite 1 CAMEL rating). A "significantly undercapitalized" institution is defined as an institution that has: (i) a total risk-based capital ratio of less than 6%; or (ii) a Tier 1 risk-based capital ratio of less than 3%; or (iii) a leverage ratio of less than 3%. A "critically undercapitalized" savings institution is defined as an institution that has a ratio of core capital to total assets of less than 2%. The OTS may reclassify a well capitalized savings institution as adequately capitalized and may require an adequately capitalized or undercapitalized institution to comply with the supervisory actions applicable to institutions in the next lower capital category if the OTS determines, after notice and an opportunity for a hearing, that the savings institution is in an unsafe or unsound condition or that the institution has received and not corrected a less-than-satisfactory rating for any CAMEL rating category. As of September 30, 1996, the Bank and its subsidiary savings bank were classified as "well capitalized" under the prompt corrective action regulations. Safety and Soundness Guidelines. Under FDICIA, as amended by the Riegle Community Development and Regulatory Improvement Act of 1994 (the "CDRI Act"), each Federal banking agency is required to establish safety and soundness standards for institutions under its authority. On July 10, 1995, the federal banking agencies, including the OTS and Federal Reserve Board, released Interagency Guidelines Establishing Standards for Safety and Soundness and published a final rule establishing deadlines for submission and review of safety and soundness compliance plans. The final rule and the guidelines went into effect on August 9, 1995. The guidelines require depository institutions to maintain internal controls and information systems and internal audit systems that are appropriate for the size, nature and scope of the institution's business. The guidelines also establish certain basic standards for loan documentation, credit underwriting, interest rate risk exposure, and asset growth. The guidelines further provide that depository institutions should maintain safeguards to prevent the payment of compensation, fees and benefits that are excessive or that could lead to material financial loss, and should take into account factors such as comparable compensation practices at comparable institutions. If the appropriate federal banking agency determines that a depository institution is not in compliance with the safety and soundness guidelines, it may require the institution to submit an acceptable plan to achieve compliance with the guidelines. A depository institution must submit an acceptable compliance plan to its primary federal regulator within 30 days of receipt of a request for such a plan. Failure to submit or implement a compliance plan may subject the institution to regulatory sanctions. Management believes that the Banks already meet substantially all the standards adopted in the interagency 78 83 guidelines, and therefore does not believe that implementation of these regulatory standards will materially affect the Banks' operations. Additionally under FDICIA, as amended by the CDRI Act, the federal banking agencies are required to establish standards relating to the asset quality and earnings that the agencies determine to be appropriate. On July 10, 1995, the federal banking agencies, including the OTS and Federal Reserve Board, issued proposed guidelines relating to asset quality and earnings. Under the proposed guidelines, an FDIC insured depository institution should maintain systems, commensurate with its size and the nature and scope of its operations, to identify problem assets and prevent deterioration in those assets as well as to evaluate and monitor earnings and ensure that earnings are sufficient to maintain adequate capital and reserves. Management believes that the asset quality and earnings standards, in the form proposed by the banking agencies, would not have a material effect on the Banks' operations. REGULATION OF THE COMPANY General. Following the Conversion, the Company will be a savings institution holding company as defined by the Home Owners' Loan Act. As such, the Company will be registered with the OTS and will be subject to OTS regulation, examination, supervision and reporting requirements. As subsidiaries of a savings institution holding company, the Banks will be subject to certain restrictions in their dealings with the Company and affiliates thereof. The Company also will be required to file certain reports with, and otherwise comply with the rules and regulations of, the SEC under the federal securities laws. Activities Restrictions. The Board of Directors of the Company presently intends to operate the Company as a multiple savings institution holding company. As the activities of the Company and any of its subsidiaries (other than the Banks or other subsidiary savings institutions) will be subject to various restrictions. Among other things, no multiple savings institution holding company or subsidiary thereof which is not an institution shall commence or continue for a limited period of time after becoming a multiple savings institution holding company or subsidiary thereof, any business activity, upon prior notice to, and no objection by, the OTS, other than: (i) furnishing or performing management services for a subsidiary savings institution; (ii) conducting an insurance agency or escrow business; (iii) holding, managing, or liquidating assets owned by or acquired from a subsidiary savings institution; (iv) holding or managing properties used or occupied by a subsidiary savings institution; (v) acting as trustee under deeds of trust; (vi) those activities authorized by regulation as of March 5, 1987 to be engaged in by multiple holding companies; or (vii) unless the Director of the OTS by regulation prohibits or limits such activities for savings institution holding companies, those activities authorized by the Federal Reserve Board as permissible for bank holding companies. A multiple savings institution holding company must obtain the approval of the OTS prior to engaging in the activities described in (vii) above. In addition, if the Director of the OTS determines that there is reasonable cause to believe that the continuation by an institution holding company of an activity constitutes a serious risk to the financial safety, soundness or stability of its subsidiary savings institution, the Director of the OTS may impose such restrictions as deemed necessary to address such risk including limiting: (i) payment of dividends by the savings institution; (ii) transactions between the savings institution and its affiliates; and (iii) any activities of the savings institution that might create a serious risk that the liabilities of the holding company and its affiliates may be imposed on the savings institution. Restrictions on Acquisitions. Savings institution holding companies may not acquire, without prior approval of the Director of the OTS, (i) control of any other savings institution or savings institution holding company or substantially all the assets thereof or (ii) more than 5% of the voting shares of an institution or holding company thereof which is not a subsidiary. Under certain circumstances, a registered savings institution holding company is permitted to acquire, with the approval of the Director of the OTS, up to 15% of the voting shares of an under-capitalized savings institution pursuant to a "qualified stock issuance" without that savings institution being deemed controlled by the holding company. In order for the shares acquired to constitute a "qualified stock issuance," the shares must consist of previously unissued stock or treasury shares, the shares must be acquired for cash, the savings institution holding company's other subsidiaries must have tangible capital of at least 6 1/2% of total assets, there must not be more than one common director or officer between the savings institution holding company and the issuing savings institution, and transactions between the savings institution and the savings institution holding company and any of its affiliates must conform to Sections 23A and 23B of the Federal Reserve Act. Except with the prior approval of the Director of the OTS, no director or officer of an institution holding company or person 79 84 owning or controlling by proxy or otherwise more than 25% of such company's stock, may also acquire control of any savings institution, other than a subsidiary savings institution, or of any other savings institution holding company. The Director of the OTS may only approve acquisitions resulting in the formation of a multiple savings institution holding company which controls savings institutions in more than one state if: (i) the multiple savings institution holding company involved controls an institution which operated a home or branch office in the state of the institution to be acquired as of March 5, 1987; (ii) the acquiror is authorized to acquire control of the savings institution pursuant to the emergency acquisition provisions of the FDIC Act; or (iii) the statutes of the state in which the institution to be acquired is located specifically permit institutions to be acquired by state-chartered institutions or savings institution holding companies located in the state where the acquiring entity is located (or by a holding company that controls such state-chartered savings institutions). OTS regulations permit federal savings institutions to branch in any state or states of the United States and its territories. Except in supervisory cases or when interstate branching is otherwise permitted by state law or other statutory provision, a federal institution may not establish an out-of-state branch unless (i) the federal institution qualifies as a "domestic building and loan association" under Section 7701(a)(19) of the Internal Revenue Code and the total assets attributable to all branches of the institution in the state would qualify such branches taken as a whole for treatment as a domestic building and loan association and (ii) such branch would not result in (a) formation of a prohibited multi-state multiple savings holding company or (b) a violation of certain statutory restrictions on branching by savings institution subsidiaries of banking holding companies. Federal savings institutions generally may not establish new branches unless the institution meets or exceeds minimum regulatory capital requirements. The OTS will also consider the institution's record of compliance with the Community Reinvestment Act of 1977 in connection with any branch application. Under the Bank Holding Company Act of 1956, as amended ("Bank Holding Company Act"), bank holding companies are specifically authorized to acquire control of any savings institution. Pursuant to rules promulgated by the Federal Reserve Board, owning, controlling or operating an institution is a permissible activity for bank holding companies, if the savings institution engages only in deposit-taking activities and lending and other activities that are permissible for bank holding companies. In approving such an application, the Federal Reserve Board may not impose any restriction on transactions between the savings institutions and its holding company affiliates except as required by Section 23A and 23B of the Federal Reserve Act. A bank holding company that controls an institution may merge or consolidate the assets and liabilities of the savings institution with, or transfer assets and liabilities to, any subsidiary bank which is a member of the BIF with the approval of the appropriate federal banking agency and the Federal Reserve Board. The resulting bank will be required to continue to pay assessments to the SAIF at the rates prescribed for SAIF members on the deposits attributable to the merged savings institution plus an annual growth increment. In addition, the transaction must comply with the restrictions on interstate acquisitions of commercial banks under the Bank Holding Company Act. Federal Securities Law. The Company has filed with the SEC a Registration Statement under the Securities Act, for the registration of the Common Stock to be issued in the Conversion. Upon completion of the Conversion, the Common Stock will be registered with the SEC under the Securities Exchange Act of 1934, as amended ("Securities Exchange Act"), and, under OTS regulations, generally may not be deregistered for at least three years thereafter. The Company will then be subject to the information, proxy solicitation, insider trading restrictions and other requirements of the Securities Exchange Act. The registration under the Securities Act of the Common Stock does not cover the resale of such shares. Shares of the Common Stock purchased by persons who are not affiliates of the Company may be resold without registration. Shares purchased by an affiliate of the Company will be subject to the resale provisions of Rule 144 under the Securities Act. If the Company meets the current public information requirements of Rule 144 under the Securities Act, each affiliate of the Company who complies with the other conditions of Rule 144 (including those that require the affiliate's sale to be aggregated with those of certain other persons) would be able to sell in the public market, without registration, a number of shares not to exceed, in any three-month period, the greater of (i) 1% of the outstanding shares of the Company or (ii) the average weekly volume of trading in such shares during the preceding four calendar weeks. Provision may be made in the future by the Company to permit affiliates to have 80 85 their shares registered for sale under the Securities Act under certain circumstances. There are currently no demand registration rights outstanding. However, in the event the Company at some future time determines to issue additional shares from its authorized but unissued shares, the Company might offer registration rights to certain of its affiliates who want to sell their shares. TAXATION FEDERAL INCOME TAXATION Savings institutions such as the Bank are subject to the provisions of the Internal Revenue Code of 1986, as amended (the "Internal Revenue Code") in the same general manner as other corporations. Through tax years beginning before December 31, 1995, institutions such as the Bank which met certain definitional tests and other conditions prescribed by the Internal Revenue Code benefitted from certain favorable provisions regarding their deductions from taxable income for annual additions to their bad debt reserve. For purposes of the bad debt reserve deduction, loans are separated into "qualifying real property loans," which generally are loans secured by interests in certain real property, and "nonqualifying loans," which are all other loans. The bad debt reserve deduction with respect to nonqualifying loans must be based on actual loss experience. The amount of the bad debt reserve deduction with respect to qualifying real property loans may be based upon actual loss experience (the "experience method") or a percentage of taxable income determined without regard to such deduction (the "percentage of taxable income method"). Under the experience method, the bad debt deduction for an addition to the reserve for qualifying real property loans was an amount determined under a formula based generally on the bad debts actually sustained by a savings institution over a period of years. Under the percentage of taxable income method, the bad debt reserve deduction for qualifying real property loans was computed as 8% of a savings institution's taxable income, with certain adjustments. The Bank generally elected to use the method which has resulted in the greatest deductions for federal income tax purposes in any given year. Legislation that is effective for tax years beginning after December 31, 1995 requires institutions to recapture into taxable income over a six taxable year period the portion of the tax loan reserve that exceeds the pre-1988 tax loan loss reserve. The Bank will no longer be allowed to use the reserve method for tax loan loss provisions, but would be allowed to use the experience method of accounting for bad debts. There will be no future effect on net income from the recapture because the taxes on these bad debts reserves has already been accrued as a deferred tax liability. The Bank's federal income tax returns have not been examined by the regulatory authorities in the past five years. For additional information, see Note 12 of the Notes to Consolidated Financial Statements contained elsewhere herein. For taxable years beginning after June 30, 1986, the Internal Revenue Code imposes an alternative minimum tax at a rate of 20%. The alternative minimum tax generally applies to a base of regular taxable income plus certain tax preferences ("alternative minimum taxable income" or "AMTI") and is payable to the extent such AMTI exceeds an exemption amount. The Internal Revenue Code provides that an item of tax preference is the excess of the bad debt deduction allowable for a taxable year pursuant to the percentage of taxable income method over the amount allowable under the experience method. The other items of tax preference that constitute AMTI include (a) tax-exempt interest on newly-issued (generally, issued on or after August 8, 1986) private activity bonds other than certain qualified bonds and (b) for taxable years including 1987 through 1989, 50% of the excess of (i) the taxpayer's pre-tax adjusted net book income over (ii) AMTI (determined without regard to this latter preference and prior to reduction by net operating losses). For taxable years beginning after 1989, this latter preference has been replaced by 75% of the excess (if any) of (i) adjusted current earnings as defined in the Internal Revenue Code, over (ii) AMTI (determined without regard to this preference and prior to reduction by net operating losses). For any taxable year beginning after 1986, net operating losses can offset no more than 90% of AMTI. Certain payments of alternative minimum taxes may be used as credits against regular tax liabilities in future years. In addition, for taxable years after 1986 and before 1992, corporations, including savings institutions, are also subject to an environmental tax equal to 0.12% of the excess of AMTI for the taxable year (determined without regard to net operating losses and the deduction for the environmental tax) over $2.0 million. The Banks are not currently paying 81 86 any amount of alternative minimum tax but may, depending on future results of operations, become subject to this tax. STATE INCOME TAXATION The Banks will continue to be subject to Arkansas corporation income tax which is 6.5% of all taxable earnings when income exceeds $100,000. The Company is incorporated under Oklahoma law and qualified to do business in Arkansas as a foreign corporation and, accordingly, the Company will incur certain franchise and other taxes, which management does not expect to be material to the Company as a whole. MANAGEMENT OF THE COMPANY The Board of Directors of the Company consists of the same individuals who serve as directors of the Bank. Their biographical information is set forth under "Management of the Bank -- Directors." The Board of Directors of the Company is divided into three classes. Directors of the Company serve for three-year terms or until their successors are elected and qualified, with approximately one-third of the directors being elected at each annual meeting of stockholders, beginning with the first annual meeting of stockholders following the Conversion. Mr. Parker and Mr. Moseley have terms of office expiring in 1997, Mrs. Lampkin and Mr. Steelman have terms of office expiring in 1998, and Mr. McKeel, Mrs. Silliman and Mr. Murry have terms of office expiring in 1999. The following table sets forth information regarding the officers of the Company and the principal offices held by them.
Officer Office ------- ------ Vida H. Lampkin Chairman of the Board, President and Chief Executive Officer Cameron D. McKeel Vice President William C. Lyon Vice President Douglas Thorne Treasurer Paula J. Bergstrom Secretary
The officers of the Company are elected annually and hold office until their respective successors have been elected and qualified or until death, resignation or removal by the Board of Directors of the Company. Since the formation of the Company, none of the directors, officers or other personnel has received remuneration from the Company. Information concerning the principal occupations, employment and compensation of the directors and executive officers of the Company is set forth under "Management of the Bank." 82 87 MANAGEMENT OF THE BANK DIRECTORS AND EXECUTIVE OFFICERS Because the Bank is a mutual savings institution, its members have elected its Board of Directors. Upon completion of the Conversion, exclusive voting rights over the Bank will be vested in the Company, whose Board of Directors will be elected by the stockholders of the Company. Under the Bank's Certificate of Incorporation, directors of the Bank are elected for terms of three years, with approximately one-third standing for election each year. Upon Conversion, the directors of the Bank will continue in office until the Annual Meetings of Stockholders following the fiscal years set forth below, at which time they may stand for reelection, and until their successors, if any, are elected and qualified. The following table sets forth information regarding the directors and executive officers of the Bank.
Age at September 30, Directors 1996 Director Since Term to Expire - --------- ------- -------------- -------------- Vida H. Lampkin 58 1983 1998 Chairman of the Board, President and Chief Executive Officer of the Bank Cameron D. McKeel 57 1996 1999 Executive Vice President of the Bank Roy Wayne Moseley 60 1990 1997 Bruce D. Murry 57 1994 1999 Carl E. Parker, Jr. 49 1981 1997 Lula Sue Silliman 68 1962 1999 Clifford Steelman 55 1984 1998 Executive Officer - ----------------- William C. Lyon 55 -- -- Senior Vice President and Chief Lending Officer of the Bank
The principal occupation of each director and executive officer of the Bank is set forth below. VIDA H. LAMPKIN has served as Chairman of the Board, President and Chief Executive Officer of the Bank since January 1990. Mrs. Lampkin is currently a Board member of the Arkansas League of Savings Institutions, a member of the Arkansas Community of Excellence Committee for Camden, and is immediate past president of the Camden, Arkansas Chamber of Commerce. CAMERON D. MCKEEL has served as Executive Vice President of the Bank since May 1996. Prior to that time, Mr. McKeel was Executive Vice President of Arkansas State Bank in Clarksville, Arkansas. He has been secretary for the Clarksville Lions Club and is a member of First Baptist Church of Clarksville and Camden Noon Lions Club. ROY WAYNE MOSELEY has been the owner of Wayne's Greenhouse, a wholesale flower production business, in Fordyce, Arkansas since 1960. Mr. Moseley serves as the Fordyce, Arkansas Fire Chief. 83 88 BRUCE D. MURRY is owner of Bruce's, Inc., a menswear and retail establishment, located in Camden, Arkansas. He was president of the Camden, Arkansas Chamber of Commerce in 1995 and is a member of the Economic Development Task Force. CARL E. PARKER, JR. has been General Manager of Camden Monument Co. from 1970 to the present. He is a member of the Camden, Arkansas Rotary Club and Chamber of Commerce. LULA SUE SILLIMAN served as partner and office manager of the Silliman Insurance Agency, Inc., from 1949 until her retirement in 1970. CLIFFORD STEELMAN has been the Human Resources Manager of International Paper Co. located in Camden, Arkansas from 1968 to the present. He currently is serving on the Employers Advisory Committee for the Arkansas Employment Security Division and is a member of the Board of Directors of the Camden Fairview School District. WILLIAM C. LYON has been Senior Vice President and Chief Lending Officer of the Bank since May 1996. From January 1994 to May 1996, Mr. Lyon was a self-employed banking consultant, and from 1991 to 1994 he served as Senior Vice President of American National Bank and Trust Co. in Shawnee, Oklahoma. Mr. Lyon is a member of the Lions Club and serves on various Chamber of Commerce committees. COMMITTEES OF THE BOARD OF DIRECTORS The Board of Directors of the Bank holds regular meetings and special meetings as needed. During the year ended June 30, 1996, the Bank's Board met 19 times. No director attended fewer than 75% in the aggregate of the total number of Board meetings held while he or she was a member during the year ended June 30, 1996 and the total number of meetings held by committees on which he or she served during such fiscal year. The Bank's full Board of Directors acts as an audit committee and met once in this capacity in fiscal 1996 to examine and approve the independent audit report. The compensation committee of the Bank's Board of Directors includes the Bank's five non-employee directors which, for fiscal 1996, consisted of Messrs. Moseley, Murry and Parker, Ms. Silliman and Mr. Steelman. This committee reviews the performance of the Bank's officers and met twice in fiscal 1996. The Bank does not have a standing nominating committee. Under the Bank's current Bylaws, the Bank's full Board of Directors acts as the nominating committee. The Board of Directors met twice in this capacity during fiscal 1996. Following the Conversion, it is anticipated that the Company's full Board of Directors will act as a nominating committee for selecting the management nominees for election as directors of the Company in accordance with the Company's Bylaws. DIRECTOR COMPENSATION The Bank's directors receive fees of $1,000 per month, effective January 1, 1997. This fee includes any Executive, Compensation or Lending Committee meeting. During fiscal 1996, when fees were $600 per month, the Bank's directors' fees totalled $41,975. Directors' Retirement Plan. The Bank's Board of Directors has adopted the First Federal Savings and Loan Association Directors' Retirement Plan (the "Directors' Plan"), effective June 13, 1996 (the "Effective Date"), for its directors who are members of the Bank's Board of Directors at some time on or after the Directors' Plan's Effective Date, provided that an employee who becomes a director after June 30, 1996 will not become a participant unless the Board of Directors adopts a specific resolution to that effect. On the Effective Date, (1) the account of each participant who is a director on the Effective Date (other than directors Lampkin and McKeel) was credited with an amount of $1,900 for each full year of service as a director; (2) the account of Director Lampkin was credited 84 89 with an amount projected to provide her with an annual retirement benefit, commencing at age 65 and continuing for her lifetime, in an amount equal to the difference between (i) 70% of her projected annual rate of pay at retirement, and (ii) the annuity value of her accrued benefits under the Bank's tax-qualified retirement plans plus her annual social security benefit at age 65; and (3) the account of Director McKeel was credited with an amount projected to provide him with an annual retirement benefit, commencing at age 65 and continuing for a period of ten years, in an amount equal to the difference between (i) 40% of his projected annual rate of pay at retirement, and (ii) the annuity value of his accrued benefits under the Bank's tax-qualified retirement plans plus his annual social security benefit at age 65. On the first day of each calendar month after the Effective Date, each participant who is a director on said date, with the exception of Directors Lampkin and McKeel, will have his or her account credited with an amount equal to the product of $158.33 and the Safe Performance Factor for the preceding fiscal year. The Safe Performance Factor is determined annually based on the Bank's return on equity, non-performing asset ratio, and CAMEL rating for the year as compared to targets set for the fiscal year. In addition, prior to the Stock Conversion, each participant's vested account balance will be credited with a rate of return equal to the highest rate of interest paid by the Bank on certificates of deposit having a term of one year or less. However, after the Stock Conversion each participant's vested account balance will be credited with investment returns as if it were invested in Common Stock. Amounts credited to the accounts of participants other than Directors Lampkin and McKeel will be fully vested at all times. The amounts credited to Director Lampkin and Director McKeel will become vested at the rate of 1.18% for each full month of service as a director, starting with 15% vested interest on June 30, 1996, and becoming fully vested after 72 or more months of service after June 30, 1996. Upon a non-employee director's termination of service on the Board due to death, disability, or mandatory retirement due to age restrictions, the director's account will be credited with an amount equal to the difference between $38,000 and the amount previously credited to his or her account, exclusive of investment returns. In the event of Director Lampkin's or Director McKeel's disability or death prior to his or her attainment of 50% vesting, the vested percentage on his or her account will be increased to 50%. If Director Lampkin's or Director McKeel's service on the Board is terminated for any reason other than "just cause" following a change in control, the vested percentage of his or her account will become 100%. Distribution of account balances will be made in cash, over a ten-year period, unless the participant elects to receive a lump sum or annual installments over a period of less than ten years. If a participant dies before receiving all benefits payable under the plan, distribution will be made to his or her beneficiary or, in the absence of a beneficiary, to his or her estate, in a lump sum, unless the participant has elected to have the distribution made in installments over a period of up to ten years. Benefits under the Directors' Plan are non-transferable. The Bank will pay all benefits in cash from its general assets, and has established a trust in order to hold assets with which to pay benefits. Trust assets will be subject to the claims of the Bank's general creditors. In the event a participant prevails over the Bank in a legal dispute as to the terms or interpretation of the Directors' Plan, he or she will be reimbursed for his or her legal and other expenses. 85 90 EXECUTIVE COMPENSATION The following table sets forth cash and noncash compensation for the fiscal year ended June 30, 1996 awarded to or earned by the Bank's Chief Executive Officer for services rendered in all capacities to the Bank and its subsidiary.
Annual Compensation --------------------- All Other Name Year Salary Bonus Compensation(1) - ---- ---- ------ ----- --------------- Vida H. Lampkin 1996 $ 76,000 $ 905 $15,763
- ---------- (1) Includes director fees ($6,900), life, health, dental and disability insurance ($6,142) and matching contribution to defined contribution plan ($2,721); excludes indirect compensation in the form of certain perquisites and other personal benefits which did not exceed 10% of salary and bonus. CERTAIN BENEFIT PLANS AND ARRANGEMENTS In connection with the Conversion, the Company's and the Bank's Boards of Directors have approved certain stock incentive plans, employment and severance agreements. Basis for Awards of Benefits and Compensation. The Company's and the Bank's Boards of Directors have evaluated and approved the terms of the employment agreement, severance agreement, and other benefits described below. In its review of the benefits and compensation of the executive officers and the terms of the employment agreements and severance agreements, the Boards of Directors considered a number of factors, including the experience, tenure and ability of the executive officers, their performance for the Bank during their tenure and the various legal and regulatory requirements regarding the levels of compensation which may be paid to employees of savings associations. Employee Stock Ownership Plan. The Company's Board of Directors has adopted an employee stock ownership plan ("ESOP"), effective July 1, 1996. Employees of the Company and its subsidiaries who have attained age 21 and completed one year of service will be eligible to participate in the ESOP, provided that any employee who is employed full-time on the closing date of the Conversion will automatically become a Participant as of July 1, 1996. The Company will submit an application to the IRS for a letter of determination as to the tax-qualified status of the ESOP. Although no assurances can be given, the Company expects the ESOP to receive a favorable letter of determination from the IRS. The ESOP is to be funded by contributions made by the Company or the Bank in cash or shares of Common Stock. The ESOP intends to borrow funds from the Company in an amount sufficient to purchase 8% of the Common Stock issued in the Conversion. This loan will be secured by the shares of Common Stock purchased and earnings thereon. Shares purchased with such loan proceeds will be held in a suspense account for allocation among participants as the loan is repaid. The Company expects to contribute sufficient funds to the ESOP to repay such loan over a ten-year period, plus such other amounts as the Company's Board of Directors may determine in its discretion. Contributions to the ESOP and shares released from the suspense account will be allocated among participants on the basis of their annual wages subject to federal income tax withholding, plus any amounts withheld under a plan qualified under Sections 125 or 401(k) of the Code and sponsored by the Company or the Bank. Participants must be employed at least 500 hours in a plan year in order to receive an allocation. Each participant's vested interest under the ESOP is determined according to the following schedule: 0% for less than three years of 86 91 service with the Company or the Bank; 100% for three or more years of service. For vesting purposes, a year of service means any plan year in which an employee completes at least 1,000 hours of service, whether before or after the ESOP's July 1, 1996 effective date. Vesting accelerates to 100% upon a participant's attainment of age 65, death or disability. Forfeitures will be reallocated to participants on the same basis as other contributions. Benefits are payable upon a participant's retirement, death, disability, or separation from service and will be paid in a lump sum in whole shares of Common Stock (with cash paid in lieu of fractional shares). Benefits paid to a participant in Common Stock that is not publicly traded on an established securities market will be subject both to a right of first refusal by the Company and to a put option by the participant. Dividends paid on allocated shares are expected to be allocated to participants' accounts or paid to participants, and dividends on unallocated shares are expected to be used to repay the ESOP loan. It is expected that the Company will administer the ESOP, and that the Bank's five non-employee directors -- Messrs. Moseley, Murry and Parker, Ms. Silliman and Mr. Steelman -- as a group, will be appointed as trustee of the ESOP (the "ESOP Trustee"). The ESOP Trustee must vote all allocated shares held in the ESOP in accordance with the instructions of the participants. Unallocated shares and allocated shares for which no timely direction is received will be voted by the ESOP Trustee in the same proportion as the participant-directed voting of allocated shares. Management Recognition Plan. The Company's Board of Directors intends to submit the MRP for approval to stockholders at a meeting of the Company's stockholders, which is expected to be held not earlier than six months following completion of the Conversion. The purpose of the MRP is to enable the Company and the Bank to retain personnel of experience and ability in key positions of responsibility. Those eligible to receive benefits under the MRP will be such employees as are selected by members of a committee appointed by the Company's Board of Directors (the "MRP Committee"). Non-employee directors will be ineligible to receive discretionary awards, but will receive the awards set forth in the MRP itself as described below. It is expected that the MRP Committee will initially consist of the Bank's five non-employee directors -- Messrs. Moseley, Murry and Parker, Ms. Silliman and Mr. Steelman. These directors are also expected to serve as trustees of the trust associated with the MRP (the "MRP Trust"). The trustees of the MRP Trust (the "MRP Trustees") will have the responsibility to hold and invest all funds contributed to the MRP Trust. In anticipation of the implementation of the MRP, and depending on market conditions and other relevant considerations, at any time after the Conversion, including during the first six months thereafter, the Company may form the MRP Trust which may purchase and hold some or all of the outstanding or newly issued shares of the Common Stock expected to be awarded in the future to participants under the MRP. The Bank or the Company will contribute sufficient funds to the MRP Trust so that the MRP Trust can purchase shares of Common Stock. Shares purchased by the MRP Trust may be already outstanding shares purchased in the open market or newly issued shares purchased direct from the Company, depending upon the judgement of the trustees of the MRP Trust and the directors of the Company, based on market conditions and other relevant considerations at the time of purchase. The compensation expense for the Company for MRP awards will equal the fair market value of the Common Stock on the date of the grant, pro rated over the years during which vesting occurs. The shares awarded pursuant to the MRP will be in the form of awards which may be transferred to family members or trusts under specified circumstances, but may not otherwise be sold, pledged, assigned, hypothecated, transferred or disposed of in any manner other than by will or by the laws of descent and distribution. If the MRP is implemented within one year following completion of the Conversion, under the OTS conversion regulations, the MRP Trust may purchase up to 4% of the number of shares of Common Stock issued in the Conversion, and the MRP awards will be payable over a period specified by the Board of Directors, which shall not be faster than 20% per year, beginning one year from the date of the award. If the MRP is implemented more than one year after the closing of the Conversion, the OTS conversion regulations will not apply, and it is expected that the awards will also become 100% vested upon a participant's retirement or termination of service with the Bank or the Company in connection with a change in control of the Bank or the Company. Participants in the MRP may elect to defer all or a percentage of their MRP awards that would have otherwise been transferred to the participants upon the vesting of said awards. Dividends on unvested shares will be held in the MRP trust for payment as vesting occurs. All shares subject to an MRP award held by a participant 87 92 whose service with the Company or the Bank terminates due to death or disability will be deemed 100% vested as of the participant's last day of service with the Bank or Company. If a participant terminates employment for reasons other than death, or disability (or retirement or a change in control, if applicable), he or she forfeits all rights to the allocated shares under restriction. Shares held in the MRP Trust will be voted by the MRP Trustees in the same proportion as the trustee of the Company's ESOP trust votes Common Stock held therein, and will be distributed as the award vests. Because the MRP may be acquiring additional authorized but unissued shares after the Conversion, the interests of existing shareholders may be diluted. See "Pro Forma Data." Participants will recognize compensation income and the Company will recognize compensation expense when their interest vests, or at such earlier date pursuant to a participant's election to accelerate income recognition pursuant to Section 83(b) of the Code. The Company's Board of Directors can terminate the MRP at any time, and, if it does so, any shares not allocated will revert to the Company. At the time the MRP receives stockholder approval, each of the Company's three executive officers -- Ms. Lampkin and Messrs. McKeel and Lyon -- is expected to receive an MRP award of 20% of the shares reserved for award under the MRP, other employees of the Company and the Bank are expected to receive, in the aggregate, MRP awards of 15% of such shares and each of the Company's non-employee directors -- Messrs. Moseley, Murry and Parker, Ms. Silliman and Mr. Steelman -- is expected to receive an MRP award of 5% of such shares. The initial grant of awards under the MRP is expected to occur on the date the MRP receives stockholder approval. No awards will be made prior to stockholder approval of the MRP. Stock Option and Incentive Plan. The Board of Directors of the Company intends to submit the Option Plan for approval to stockholders at a meeting which is expected to be held not earlier than six months following completion of the Conversion. No options shall be awarded under the Option Plan unless stockholder approval is obtained. The purpose of the Option Plan is to provide additional incentive to directors and employees by facilitating their purchase of Common Stock. The Option Plan is expected to have a term of 10 years from the date of its approval by the Company's stockholders, after which no awards may be made. The Option Plan may be terminated by the Board of Directors of the Company prior to the expiration of the 10-year term. Pursuant to the Option Plan, a number of shares equal to 10% of the shares of Common Stock that are issued in the Conversion are expected to be reserved for future issuance by the Company, in the form of newly issued shares, treasury shares, or shares held in a grantor trust, upon exercise of stock options ("Options") or stock appreciation rights ("SARs"). Options and SARs are collectively referred to herein as "Awards." If Awards should expire, become unexercisable, or be forfeited for any reason without having been exercised or having become vested in full, the shares of Common Stock subject to such Awards would be available for the grant of additional Awards under the Option Plan, unless the Option Plan shall have been terminated. It is expected that the Option Plan will be administered by a committee (the "Option Committee") of at least two directors of the Company who (i) are designated by the Board of Directors and (ii) are "non-employee Directors" within the meaning of the federal securities laws. It is expected that the Option Committee will initially consist of the Bank's five non-employee directors -- Messrs. Moseley, Murry and Parker, Ms. Silliman and Mr. Steelman. These directors are also expected to serve as trustees of the trust associated with the Option Plan (the "Option Plan Trust"). The Option Committee will select the employees to whom Awards are to be granted, the number of shares to be subject to such Awards, and the terms and conditions of such Awards (provided that any discretion exercised by the Option Committee must be consistent with the terms of the Option Plan), and the trustees of the Option Plan Trust (the "Option Plan Trustees") will have the authority to hold and invest all funds contributed to the Option Plan Trust. Awards will be available for grants to directors and key employees of the Company and any subsidiaries, except that non-employee directors will not be eligible to receive discretionary Awards. If the Option Plan is implemented within one year following completion of the Conversion, under the OTS conversion regulations no employee may receive Awards covering more than 25% of the shares reserved for issuance under the Option Plan, and non-employee directors may not receive awards individually exceeding 5% of the shares available under the 88 93 Option Plan or 30% in the aggregate. The initial grant of Options under the Option Plan is expected to occur on the date the Option Plan receives stockholder approval. It is intended that Options granted under the Option Plan will constitute both incentive stock options (Options that afford favorable tax treatment to recipients upon compliance with certain restrictions pursuant to Section 422 of the Code and that do not result in tax deductions to the Company unless participants fail to comply with Section 422 of the Code) ("ISOs"), and Options that do not so qualify ("Non-ISOs"). The exercise price for Options may not be less than 100% of the fair market value of the shares on the date of the grant. The Option Plan permits the Option Committee to impose transfer restrictions, such as a right of first refusal, on the Common Stock that optionees may purchase. Awards may be transferred to family members or trusts under specified circumstances, but may not otherwise be sold, pledged, assigned, hypothecated, transferred or disposed of in any manner other than by will or the laws of descent and distribution. No Option shall be exercisable after the expiration of ten years from the date it is granted; provided, however, that in the case of any employee who owns more than 10% of the outstanding Common Stock at the time an ISO is granted, the option price for the ISO shall not be less than 110% of the fair market value of the shares on the date of the grant, and the ISO shall not be exercisable after the expiration of five years from the date it is granted. If the Option Plan is implemented within one year after completion of the Conversion, Options are expected to become exercisable at the rate of 20% per year, beginning one year from the date of grant. If an optionee dies or terminates service due to disability while serving as an employee or non-employee director, all unvested Options will become 100% vested and immediately exercisable. If the Option Plan is implemented more than one year after the completion of the Stock conversion, it is expected that (i) Options may become exercisable according to a different schedule and (ii) the vesting of Options may also accelerate to 100% upon an optionee's retirement or termination of service in connection with a change in control. An otherwise unexpired Option is expected to, unless otherwise determined by the Option Committee, cease to be exercisable upon (i) an employee's termination of employment for "just cause" (as defined in the Option Plan), (ii) the date three months after an employee terminates service for a reason other than "just cause," death, or disability, (iii) the date one year after an employee terminates service due to disability or (iv) the date two years after termination of such service due to the employee's death. Options granted to non-employee directors are expected to automatically expire one year after termination of service on the Board of Directors (two years in the event of death). An SAR may be granted in tandem with all or any part of any Option or without any relationship to any Option. Whether or not an SAR is granted in tandem with an Option, exercise of the SAR will entitle the optionee to receive, as the Option Committee prescribes in the grant, all or a percentage of the excess of the then fair market value of the shares of Common Stock subject to the SAR at the time of its exercise, over the aggregate exercise price of the shares subject to the SAR. Payment to the Optionee may be made in cash or shares of Common Stock, as determined by the Option Committee. The Company will receive no monetary consideration for the granting of Awards under the Option Plan, and will receive no monetary consideration other than the Option exercise price for each share issued to optionees upon the exercise of Options. The Option exercise price may be paid in cash or Common Stock or a combination of cash and Common Stock. Upon an optionee's exercise of any option, the Company may pay the optionee a cash amount equal to any dividends declared on the underlying shares between the date of grant and the date of exercise of the Option. The exercise of Options and SARs will be subject to such terms and conditions established by the Option Committee as are set forth in a written agreement between the Option Committee and the optionee (to be entered into at the time an Award is granted). In the event of a special large and nonrecurring dividend which has the effect of a return of capital to stockholders, the exercise price of outstanding Options and SARs will be proportionately adjusted to reflect such dividend. Common stock of the Company that is purchased pursuant to the exercise of an Option or SAR may not be sold within the six-month period following the grant of that Option or SAR. 89 94 In anticipation of the implementation of the Option Plan, and depending on market conditions and other relevant considerations, at any time after the Conversion, including during the first six months thereafter, the Company may form the Option Plan Trust which may purchase and hold some or all of the outstanding or newly issued shares of the Common Stock expected to be awarded in the future to participants under the Option Plan. The initial grant of stock options under the Option Plan is expected to take place on the date of its receipt of stockholder approval. Assuming implementation of the Option Plan during the year following the Conversion, it is expected that (i) the Company's executive officers -- Ms. Lampkin and Messrs. McKeel and Lyon -- will receive Options to purchase 20% of the number of shares of Common Stock reserved for issuance under the Option Plan, (ii) other employees of the Company and the Bank will receive, in the aggregate, Options to purchase 15% of such shares and (iii) the Company's non-employee directors -- Messrs. Moseley, Murry and Parker, Ms. Silliman and Mr. Steelman -- will each receive options to purchase 5% of such shares. The Option exercise price would be the then fair market value of the Common Stock subject to the Option. No SARs are expected to be granted when the Option Plan becomes effective, and any Options granted prior to the Option Plan's receipt of regulatory approval would be contingent thereon. Employment Agreements. The Company and the Bank maintain separate employment agreements (the "Employment Agreements") with Vida H. Lampkin, President and Chief Executive Officer of the Bank and the Company, and Cameron D. McKeel, Executive Vice President of the Bank and Vice President of the Company (the "Employees"). In such capacities, the Employees are responsible for overseeing all operations of the Bank and the Company, and for implementing the policies adopted by the Board of Directors. Such Boards believe that the Employment Agreements assure fair treatment of the Employee in relation to his or her careers with the Company and the Bank by assuring him or her of some financial security. The Employment Agreements became effective on the date of their execution and provide for a term of three years. On each anniversary date of the Employment Agreements' effective date (the "Effective Date"), the term of employment will be extended for an additional one-year period beyond the then effective expiration date, upon a determination by the Board of Directors that the performance of the Employee has met the required performance standards and that such Employment Agreements should be extended. The Employment Agreements provide the Employee with a salary review by the Board of Directors not less often than annually, as well as with inclusion in any discretionary bonus plans, retirement and medical plans, customary fringe benefits, vacation and sick leave. The Employment Agreements will terminate upon the Employee's death, may terminate upon the Employees' disability, and are terminable by the Bank for "just cause" (as defined in the Employment Agreements). In the event of termination for "just cause," no severance benefits are available. In the event of (i) the Employee's involuntary termination of employment for any reason other than "just cause," (ii) the Employee's voluntary termination within 90 days of the occurrence of a "good reason" (as defined in the Employment Agreements), the Employee will be entitled to receive (a) his or her salary up to the Employment Agreements' expiration date (the "Expiration Date") plus an additional 12- month salary, (b) a put option requiring the Bank or the Company to purchase Common Stock held by the Employee to the extent that it is not readily tradeable on an established securities market, and (c), at the Employee's election, either cash in an amount equal to the cost of benefits the Employee would have been eligible to participate in through the Expiration Date or continued participation in the benefits plans through the Expiration Date. If the Employment Agreements are terminated due to the Employees' "disability" (as defined in the Employment Agreements), the Employee will be entitled to a continuation of his or her salary and benefits through the date of such termination, including any period prior to the establishment of the Employee's disability. In the event of the Employee's death during the term of the Employment Agreements, his or her estate will be entitled to receive his or her salary through the last day of the calendar month in which the Employee's death occurred. The Employee is able to voluntarily terminate his or her Employment Agreements by providing 90 days' written notice to the Boards of Directors of the Bank and the Company, in which case the Employee is entitled to receive only his or her compensation, vested rights and benefits up to the date of termination. In the event of (i) a "change in control," or (ii) the Employee's termination for a reason other than just cause during the "protected period (as defined in the Agreements)," the Employee will be paid within 10 days following the later to occur of such events an amount equal to the difference between (i) 2.99 times his or her "base amount," 90 95 as defined in Section 280G(b)(3) of the Internal Revenue Code, and (ii) the sum of any other parachute payments, as defined under Section 280G(b)(2) of the Internal Revenue Code, that the Employee receives on account of the change in control. "Change in control" generally refers to (i) the acquisition, by any person or entity, of the ownership or power to vote more than 25% of the Bank's or Company's voting stock, (ii) the transfer by the Bank of substantially all of its assets to a corporation which is not an "affiliate" (as defined in the Employment Agreement), (iii) a sale by the Bank or the Company of substantially all the assets of an affiliate which accounts for 50% or more of the controlled group's assets immediately prior to such sale, (iv) the replacement of a majority of the existing board of directors by the Bank or the Company in connection with an initial public offering, tender officer, merger, exchange offer, business combination, sale of assets or contested election, or (v) a merger of the Bank or the Company which results in less than seventy percent (70%) of the outstanding voting securities of the resulting corporation being owned by former stockholders of the Company or the Bank. Notwithstanding the foregoing, a change in control will not occur in connection with the conversion of the Bank to stock form or the formation of a holding company by the Bank. The Employment Agreements provide that within 10 business days of a change in control, the Bank shall fund, or cause to be funded, a trust in the amount of 2.99 times the Employee's base amount, that will be used to pay the Employee amounts owed to him or her. The aggregate payments that would be made to Ms. Lampkin and Mr. McKeel, assuming their termination of employment under the foregoing circumstances at September 30, 1996, would have been approximately $350,000 and $250,000, respectively. These provisions may have an anti-takeover effect by making it more expensive for a potential acquiror to obtain control of the Company. For more information, see "Certain Anti-Takeover Provisions in the Certificate of Incorporation and Bylaws -- Additional Anti-Takeover Provisions." In the event that the Employee prevails over the Company and the Bank in a legal dispute as to the Employment Agreements, he or she will be reimbursed for his or her legal and other expenses. Change-in-Control Protective Agreements. The Company and the Bank have entered into severance agreements (the "Severance Agreements") with William S. Lyon, Senior Vice President and Chief Lending Officer of the Bank and Vice President of the Company (the "Employee"). The Severance Agreements have a term beginning on June 13, 1996 (the "Effective Date") and ending on the earlier of (a) three years after the Effective Date and (b) the date on which the Employee terminates employment with the Company and the Bank, provided that the Employee's rights under the Severance Agreements will continue following termination of employment if the Severance Agreements are in effect at the time of a change in control or in the event the Employee's employment is terminated for any reason other than "just cause" (as defined in the Severance Agreements) during the "protected period" (as defined in the Severance Agreements). On each annual anniversary date from the effective date of the Severance Agreements, the term of the Severance Agreements may be extended for additional one-year periods beyond the then effective expiration date, upon a determination by the Board of Directors that the performance of the Employee has met the required performance standards and that such Severance Agreements should be extended. In the event of (i) a "change in control," or (ii) the Employee's termination for a reason other than just cause during the "protected period," the Employee will be paid within 10 days following the later to occur of such events an amount equal to the difference between (i) 2.99 times his "base amount," as defined in Section 280G(b)(3) of the Internal Revenue Code, and (ii) the sum of any other parachute payments, as defined under Section 280G(b)(2) of the Internal Revenue Code, that the Employee receives on account of the change in control. "Change in control" has the same meaning under the Severance Agreements as under the Employment Agreements (see above). The Severance Agreements provide that within 10 business days of a change in control, the Bank shall fund, or cause to be funded, a trust in the amount necessary to pay amounts owed to the Employee as a result of the change in control. The amount to be paid to the Employee from this trust upon his termination is determined according to the procedures outlined in the Severance Agreements, and any money not paid to the Employee is returned to the Bank. 91 96 The aggregate payments that would be made to Mr. Lyon assuming termination of employment under the foregoing circumstances at September 30, 1996 would have been approximately $215,000. These provisions may have an anti-takeover effect by making it more expensive for a potential acquiror to obtain control of the Company. For more information, see "Certain Anti-Takeover Provisions in the Charter and Bylaws -- Additional Anti-Takeover Provisions." In the event that the Employee prevails over the Company and the Bank in a legal dispute as to the Severance Agreement, the Employee will be reimbursed for his legal and other expenses. TRANSACTIONS WITH MANAGEMENT The Bank offers loans to its directors, officers and employees. These loans currently are made in the ordinary course of business with the same collateral, interest rates and underwriting criteria as those of comparable transactions prevailing at the time and do not involve more than the normal risk of collectibility or present other unfavorable features. Under current federal law, the Bank's loans to directors and executive officers are required to be made on substantially the same terms, including interest rates, as those prevailing for comparable transactions and must not involve more than the normal risk of repayment or present other unfavorable features. At September 30, 1996, the Bank's loans to directors and executive officers totalled approximately $412,000, or 3.0% of the Bank's equity and .2% of the Bank's total assets at that date. THE CONVERSION THE OTS HAS APPROVED THE BANK'S PLAN OF CONVERSION, SUBJECT TO THE APPROVAL OF THE PLAN OF CONVERSION BY THE MEMBERS OF THE BANK ENTITLED TO VOTE ON THE MATTER AND SUBJECT TO THE SATISFACTION OF CERTAIN OTHER CONDITIONS IMPOSED BY THE OTS IN ITS APPROVAL. APPROVAL BY THE OTS DOES NOT, HOWEVER, CONSTITUTE A RECOMMENDATION OR ENDORSEMENT OF THE PLAN OF CONVERSION. GENERAL On November 21, 1996, the Board of Directors of the Bank unanimously adopted, subject to approval by the OTS and the members of the Bank, the Plan of Conversion, pursuant to which the Bank would convert from a federal mutual savings bank to a federal stock savings bank as a wholly owned subsidiary of the Company. On December 19, 1996, the Board of Directors amended the Plan of Conversion. The OTS has approved the Plan of Conversion, as amended, subject to its approval by the members of the Bank at the Special Meeting of Members ("Special Meeting") called for that purpose to be held on ___________, 1997. The Conversion will be accomplished through the amendment of the Bank's existing Federal Mutual Charter and Bylaws to read in the form of the proposed Federal Stock Charter and Bylaws to authorize the issuance of capital stock by the Bank, the issuance of all the Bank's capital stock to be outstanding upon consummation of the Conversion to the Company and the offer and sale of the Common Stock. Upon issuance of the Bank's shares of capital stock to the Company, the Bank will be a wholly owned subsidiary of the Company. The Company expects to receive approval from the OTS to become a savings institution holding company subject to the satisfaction of certain conditions and to acquire all of the common stock of the Bank to be issued in the Conversion. The Company expects to purchase the capital stock of the Bank to be issued in the Conversion in exchange for at least 50% of the net proceeds from the sale of Common Stock under the Plan of Conversion. The Conversion will be effected only upon completion of the sale of all of the shares of Common Stock to be issued by the Company pursuant to the Plan of Conversion. The aggregate purchase price of the Common Stock to be issued in the Conversion will be within the estimated valuation range of between $17,000,000 and $23,000,000, which may be increased to $26,450,000, based upon an independent appraisal of the estimated pro forma market value of the Common Stock prepared by Ferguson & Co. All shares of the Common Stock to be issued and sold in the Conversion will be sold at the same price. The 92 97 independent appraisal will be updated, if necessary, and the final price of the shares of the Common Stock will be determined at the completion of the Subscription and Community Offerings. Ferguson & Co. is a consulting firm experienced in the valuation and appraisal of savings institutions. For additional information, see "Stock Pricing and Number of Shares to be Issued." The following is a summary of material aspects of the Conversion. The summary is qualified in its entirety by reference to the provisions of the Plan of Conversion. A copy of the Plan of Conversion is available for inspection at each office of the Bank and at the office of the OTS. The Plan of Conversion is also filed as an exhibit to the Registration Statement of which this Prospectus is a part, copies of which may be obtained from the SEC. See "Additional Information." OFFERING OF COMMON STOCK Under the Plan of Conversion, the Company is offering shares of the Common Stock first to Eligible Account Holders of the Bank, second to the ESOP, provided that any shares sold in excess of the maximum of the estimated valuation range may be first sold to the ESOP, third to Supplemental Eligible Account Holders of the Bank, fourth to Other Members of the Bank who are not Eligible Account Holders or Supplemental Eligible Account Holders in the Subscription Offering and fifth to Other Customers of the Bank's subsidiary savings bank who are not Eligible Account Holders, Supplemental Eligible Account Holders or Other Members of the Bank. In the event of an oversubscription within any subscription priority category, preference may be given within that category to natural persons and trusts of natural persons who permanently reside in the Bank's Local Community (i.e., Calhoun, Cleveland, Dallas, Drew, Grant, Ouachita and Pulaski Counties in Arkansas), but only if such preference is permitted by applicable law and is approved by the Bank's Board of Directors in its sole discretion. During or after the Subscription Offering, the Company may offer the Common Stock to the general public in the Community Offering. In the Community Offering preference may be given to natural persons and trusts of natural persons who are permanent residents of the Bank's Local Community. Subscriptions in the Community Offering will be subject to the availability of shares of the Common Stock for purchase after satisfaction of all subscriptions in the Subscription Offering, as well as the maximum and minimum purchase limitations set forth in the Plan of Conversion, and to the right of the Company to reject any such orders, in whole or in part. For additional information, see "Limitations on Purchases of Shares." The Plan of Conversion provides that the Conversion must be completed within 24 months after the date of the approval of the Plan of Conversion by the members of the Bank. In the event that the Conversion is not effected, the Bank will remain a mutual savings bank, all subscription funds will be promptly returned to subscribers with interest earned thereon, and all withdrawal authorizations will be cancelled. Completion of the Offerings is subject to market conditions and other factors beyond the Bank's control. No assurance can be given as to the length of time after approval of the Plan of Conversion at the Special Meeting that will be required to complete the sale of the Common Stock to be offered in the Conversion. If delays are experienced, significant changes may occur in the estimated pro forma market value of the Company and the Bank upon Conversion, together with corresponding changes in the aggregate offering amount and the net proceeds realized by the Bank from the sale of the Common Stock. The Bank would also incur substantial additional printing, legal and accounting expenses in completing the Conversion. In the event the Conversion is terminated, the Bank would be required to charge all Conversion expenses against current income. SUBSCRIPTION AND COMMUNITY OFFERINGS Subscription Offering and Subscription Rights. Nontransferable subscription rights to purchase shares of the Common Stock have been issued to all persons entitled to purchase stock in the Subscription Offering at no cost to such persons. The amount of the Common Stock which these parties may purchase will be determined, in part, 93 98 by the total stock to be issued, and the availability of stock for purchase under the categories set forth in the Plan of Conversion. Preference categories have been established for the allocation of the Common Stock to the extent that shares are available. These categories are as follows: Subscription Category No. 1 is reserved for the Bank's Eligible Account Holders (i.e., qualifying depositors of the Bank on December 31, 1993), who will each receive, with respect to each qualifying deposit, nontransferable subscription rights to subscribe for Common Stock in the Subscription Offering equal to the greater of $200,000, one-tenth of one percent of the total offering of shares of Common Stock, or 15 times the product (rounded down to the next whole number) obtained by multiplying the total number of shares of Common Stock to be issued by a fraction of which the numerator is the amount of the qualifying deposit of the Eligible Account Holder and the denominator is the total amount of qualifying deposits of all Eligible Account Holders in the Bank in each case on December 31, 1993, subject to the overall purchase limitation. See "Limitations on Purchases of Shares." If the exercise of subscription rights in this category results in an oversubscription, shares shall be allocated among subscribing Eligible Account Holders, giving preference to natural persons and trusts of natural persons who permanently reside in the Bank's Local Community if permitted by applicable law and approved by the Bank's Board of Directors in its sole discretion, so as to permit each such Eligible Account Holder, to the extent possible, to purchase a number of shares sufficient to make his total allocation equal 100 shares or the amount subscribed for, whichever is less. Any shares not so allocated shall be allocated among the subscribing Eligible Account Holders on an equitable basis related to the amounts of their respective qualifying deposits, as compared with the total qualifying deposits of all subscribing Eligible Account Holders. TO ENSURE A PROPER ALLOCATION OF COMMON STOCK, EACH ELIGIBLE ACCOUNT HOLDER MUST LIST ON HIS SUBSCRIPTION ORDER FORM ALL ACCOUNTS IN WHICH HE HAS AN OWNERSHIP INTEREST. FAILURE TO LIST AN ACCOUNT COULD RESULT IN LESS SHARES BEING ALLOCATED THAN IF ALL ACCOUNTS HAD BEEN DISCLOSED. A qualifying deposit is the amount (required to be at least $50.00) contained in a deposit account in the Bank on December 31, 1993. Subscription rights received by directors and officers of the Bank and their associates in this category based on their increased deposits in the Bank in the one-year period preceding December 31, 1993 are subordinated to the subscription rights of other Eligible Account Holders. Subscription Category No. 2 is reserved for the Bank's tax-qualified employee stock benefit plans (i.e., the ESOP), which will receive nontransferable subscription rights to purchase in the aggregate up to 10% of the shares issued in the Conversion. As a tax-qualified employee stock benefit plan of the Bank, the ESOP is expected to purchase 8% of the Common Stock offered in the Conversion. Subscriptions in this category will be filled only to the extent that there are sufficient shares of Common Stock remaining after satisfaction of subscriptions by Eligible Account Holders, provided that any shares sold in excess of the maximum of the estimated valuation range may be first sold to the ESOP. Subscription Category No. 3 is reserved for the Bank's Supplemental Eligible Account Holders (i.e., holders of a qualifying deposit account on the last day of the calendar quarter preceding the approval of the Plan of Conversion by the OTS -- ___________, 19__) who will each receive, with respect to each qualifying deposit, nontransferable subscription rights to subscribe for Common Stock in the Subscription Offering in an amount equal to the greater of $200,000, one-tenth of one percent of the total offering of shares of Common Stock or 15 times the product (rounded down to the next whole number) obtained by multiplying the total number of shares of Common Stock to be issued in the Conversion by a fraction of which the numerator is the amount of the qualifying deposit of the Supplemental Eligible Account Holder and the denominator is the total amount of qualifying deposits of all Supplemental Eligible Account Holders in the Bank in each case on ___________, 19__, to the extent available following subscriptions by Eligible Account Holders and the ESOP. Subscriptions by Eligible Account Holders and the ESOP will reduce to the extent thereof the subscription rights to be distributed pursuant to this category. In the event of an 94 99 oversubscription pursuant to this category, the available shares will be allocated among the subscribing Supplemental Eligible Account Holders, giving preference to natural persons and trusts of natural persons who permanently reside in the Bank's Local Community if permitted by applicable law and approved by the Bank's Board of Directors in its sole discretion, so as to permit each such Supplemental Eligible Account Holder, to the extent possible, to purchase a number of shares sufficient to make his total allocation (including the number of shares of Common Stock, if any, allocated to him as an Eligible Account Holder) equal to 100 shares or the total amount of his subscription, whichever is less. Any shares not so allocated shall be allocated among the subscribing Supplemental Eligible Account Holders on an equitable basis, related to their respective qualifying deposits, as compared to the total deposits of all subscribing Supplemental Eligible Account Holders. Subscription Category No. 4 is reserved for Other Members (i.e., depositor and borrower members as of the voting record date for the Special Meeting -- _________________, 1997) who will receive, with respect to each deposit in, or loan from, the Bank as of that date, nontransferable subscription rights to subscribe for Common Stock in the Subscription Offering an amount equal to the greater of $200,000 or one-tenth of one percent of the total offering of shares of Common Stock to the extent then available following subscriptions by Eligible Account Holders, the ESOP and Supplemental Eligible Account Holders. In the event of an over-subscription pursuant to this category, the available shares will be allocated among subscribing Other Member, giving preference to natural persons and trusts of natural persons who permanently reside in the Bank's Local Community if permitted by applicable law and approved by the Bank's Board of Directors in its sole discretion, so as to permit each Other Member, to the extent possible, to purchase a number of shares sufficient to make his total allocation equal to the lesser of 100 shares of the number of shares subscribed for by the Other Member. The shares remaining thereafter will be allocated among subscribing Other Members whose subscriptions remain unsatisfied on an equitable basis, as determined by the Board of Directors. Subscription Category No. 5 is reserved for Other Members of the Bank's savings bank subsidiary (i.e., depositors and borrowers of Heartland Community Bank, FSB as of _____________, 199__, other than those persons who are Eligible Account Holders, Supplemental Eligible Account Holders or Other Members, who have a deposit account in, or loan from, Heartland Community Bank, FSB, on the last day of the calendar quarter preceding the approval of the Plan of Conversion by the OTS -- ___________, 19__) who will receive, with respect to each deposit in, or loan from, the Heartland Community Bank, FSB as of that date, nontransferable subscription rights to subscribe for Common Stock in the Subscription Offering in an amount equal to the greater of $200,000 or one-tenth of one percent of the total offering of shares of Common Stock, to the extent available following subscriptions by persons listed in Subscription Categories 1, 2, 3 and 4 above. In the event of an oversubscription pursuant to this category, the available shares will be allocated among the subscribing depositors and borrowers, giving preference to natural persons and trusts of natural persons who permanently reside in the Bank's Local Community if permitted by applicable law and approved by the Bank's Board of Directors in its sole discretion, so as to permit each such depositor and borrower, to the extent possible, to purchase a number of shares sufficient to make his total allocation equal to the lesser of 100 shares or the total amount of his subscription. The shares remaining thereafter will be allocated among such depositors and borrowers whose subscriptions remain unsatisfied on an equitable basis as determined by the Bank's Board of Directors. The Company will make reasonable efforts to comply with the securities laws of all states in the United States in which persons entitled to subscribe for the Common Stock pursuant to the Plan of Conversion reside. However, no person will be offered or allowed to purchase any Common Stock under the Plan of Conversion if he resides in a foreign country or in a state of the United States with respect to which any or all of the following apply: (i) a small number of persons otherwise eligible to subscribe for shares under the Plan of Conversion reside in such state or foreign country; (ii) the granting of subscription rights or the offer or sale of shares of Common Stock to such persons would require the Company or the Bank or their employees to register, under the securities laws of such 95 100 state, as a broker, dealer, salesman or agent or to register or otherwise qualify its securities for sale in such state or foreign country; and (iii) such registration or qualification would be impracticable for reasons of cost or otherwise. No payments will be made in lieu of the granting of subscription rights to any such person. Community Offering. During or after the Subscription Offering, the Company may offer shares of the Common Stock not subscribed for in the Subscription Offering to the general public in a Community Offering, giving preference to natural persons and trusts of natural persons who are permanent residents of Calhoun, Cleveland, Dallas, Drew, Grant, Ouachita and Pulaski Counties in Arkansas. Orders accepted in the Community Offering shall be filled up to a maximum of 2% of the Common Stock, and thereafter remaining shares shall be allocated on an equal number of shares basis per order until all orders have been filled. The Common Stock to be offered in the Community Offering will be offered and sold in a manner that will achieve the widest distribution of the Common Stock. No person, together with any associate or group of persons acting in concert, will be permitted to subscribe in the Community Offering for more than the maximum amount permitted to be purchased in the Community Offering under the Plan of Conversion (currently 25,000 shares). See "Limitations on Purchases of Shares." Orders for Common Stock in the Community Offering will be filled to the extent shares of Common Stock remain available after satisfaction of all orders received in the Subscription Offering. THE RIGHT OF ANY PERSON TO PURCHASE SHARES IN THE COMMUNITY OFFERING IS SUBJECT TO THE ABSOLUTE RIGHT OF THE COMPANY AND THE BANK TO ACCEPT OR REJECT SUCH PURCHASES IN WHOLE OR IN PART. THE COMPANY MAY TERMINATE THE COMMUNITY OFFERING WHEN IT HAS RECEIVED ORDERS FOR AT LEAST THE MINIMUM NUMBER OF SHARES AVAILABLE FOR PURCHASE IN THE CONVERSION. Cash, checks and money orders received in the Community Offering will be placed in segregated savings accounts (each insured by the FDIC up to the applicable $100,000 limit) established specifically for this purpose. Interest will be paid on orders made by check or by money order at the Bank's passbook rate from the date the payment is received by the Company until the consummation of the Conversion. In the event that the Conversion is not consummated for any reason, all funds submitted pursuant to the Community Offering will be promptly refunded with interest as described above. Trident Securities may enter into agreements with other dealers (the "Selected Dealers") to assist in the sale of shares in the Community Offering. During the Community Offering, Selected Dealers may solicit only indications of interest from their customers to place orders with the Bank as of a certain date (the "Order Date") for the purchase of shares of the Common Stock. When and if the Bank believes that enough indications of interest and orders have been received in the Subscription and Community Offerings to consummate the Conversion, Trident Securities will request, as of the Order Date, Selected Dealers to submit orders to purchase shares for which they have previously received indications of interest from their customers. Selected Dealers will send confirmations of the orders to such customers on the next business day after the Order Date. Selected Dealers will debit the accounts of their customers on the date which will be within three business days from the Order Date (the "Settlement Date"). On the Settlement Date, funds received by Selected Dealers will be remitted to the Bank. It is anticipated that the Conversion would be consummated on the Settlement Date. However, if consummation is delayed after payment has been received by the Bank from Selected Dealers, funds will earn interest at the passbook rate until the completion of the Community Offering. Funds will be returned promptly in the event the Conversion is not consummated. If all of the Common Stock offered in the Subscription Offering is subscribed for, no Common Stock will be available for purchase in the Community Offering, and all funds submitted pursuant to the Community Offering will be promptly refunded with interest. If the Community Offering extends beyond 45 days following the expiration of the Subscription Offering, subscribers will have the right to increase, decrease or rescind subscriptions for stock previously submitted. PROCEDURE FOR PURCHASING SHARES IN SUBSCRIPTION AND COMMUNITY OFFERINGS Expiration Date. The Subscription Offering will expire at __:__ p.m., Central Time, on ____________ __, 1997, unless extended by the Board of Directors of the Company (the Expiration Date). 96 101 102 Orders will not be executed by the Company until all shares of Common Stock have been subscribed for or sold. If all shares of Common Stock have not been subscribed for or sold within 45 days of the end of the Subscription Offering (unless such period is extended with consent of the OTS), all funds delivered to the Company pursuant to the Subscription Offering will be promptly returned to the subscribers with interest, and all charges to savings accounts will be rescinded. Use of Order Forms. Rights to subscribe may only be exercised by completion of an order form. Any person who desires to subscribe for shares of Common Stock must do so prior to the Expiration Date by delivering (by mail or in person) to any office of the Bank a properly executed and completed order form, together with full payment for all shares for which the subscription is made. All checks or money orders must be made payable to "Heartland Community Bank." Order forms must be received by the Expiration Date. All subscription rights under the Plan of Conversion will expire on the Expiration Date, whether or not the Company has been able to locate each person entitled to such subscription rights. ONCE TENDERED, NEITHER SUBSCRIPTION NOR COMMUNITY ORDERS MAY BE REVOKED. In order to ensure that Eligible Account Holders, Supplemental Eligible Account Holders, Other Members and eligible depositors and borrowers of Heartland Community Bank, FSB are properly identified as to their stock purchase priorities, such persons must list all of their deposit and loan accounts on the order form. To ensure that each purchaser receives a prospectus at least 48 hours prior to the Expiration Date in accordance with Rule 15c2-8 under the Securities Exchange Act, no Prospectus will be mailed any later than five days prior to such date or hand delivered any later than two days prior to such date. Execution of the order form will confirm receipt or delivery in accordance with Rule 15c2-8. Order forms will only be distributed with a prospectus. An acknowledgement form is required to be signed and returned with an order form. The Bank will accept for processing only orders submitted on original order forms. Photocopies and facsimile copies of order forms will not be accepted. Payment by cash (if delivered in person), check, money order, bank draft or debit authorization to an existing account at the Bank must accompany the order form. No wire transfers will be accepted. Each subscription right may be exercised only by the person to whom it is issued and only for his or her own account. THE SUBSCRIPTION RIGHTS GRANTED UNDER THE PLAN OF CONVERSION ARE NONTRANSFERABLE, AND PERSONS WHO ATTEMPT TO TRANSFER THEIR SUBSCRIPTION RIGHTS MAY LOSE THE RIGHT TO PURCHASE STOCK IN THE CONVERSION AND MAY BE SUBJECT TO OTHER SANCTIONS AND PENALTIES IMPOSED BY THE OTS. Each person subscribing for shares of Common Stock is required to represent to the Company that he is purchasing such shares for his own account and that he has no agreement or understanding with any other person for the sale or transfer of such shares. In the event order forms (i) are not delivered and are returned to the sender by the United States Postal Service or the Bank is unable to locate the addressee, or (ii) are not returned or are received after the Expiration Date, or (iii) are defectively filled out or executed, or (iv) are not accompanied by the full required payment for the shares subscribed for (including instances where a savings account or certificate balance from which withdrawal is authorized is insufficient to fund the amount of such required payment), the subscription rights for the person to whom such rights have been granted will lapse as though such person failed to return the completed order form within the time period specified. The Company, however, may, but will not be required to, waive any irregularity on any order form or require the submission of corrected order forms or the remittance of full payment for subscribed shares by such date as the Company may specify. The interpretation by the Company of the terms and conditions of the Plan of Conversion and of the order form will be final. Payment for Shares. Payment for all subscribed shares of Common Stock is required to accompany all completed order forms for subscriptions to be valid. Payment for subscribed shares of Common Stock may be made (i) by cash (if delivered in person), check, bank draft or money order, or (ii) by authorization of withdrawal from deposit accounts maintained with the Bank. Appropriate means by which such withdrawals may be authorized are provided in the order form. Once such a withdrawal has been authorized, none of the designated withdrawal amount may be used by a subscriber for any purpose other than to purchase stock for which subscription has been made while the Plan of Conversion remains in effect. In the case of payments authorized to be made through withdrawal 97 103 from deposit accounts, all sums authorized for withdrawal will continue to earn interest at the contract rate until the date of consummation of the Conversion. In the case of payments made by cash, check or money order, such funds will be placed in a segregated savings account established for each subscriber specifically for this purpose (each insured by the FDIC up to the applicable $100,000 limit), and interest will be paid at the Bank's passbook rate from the date payment is received until the Conversion is completed or terminated. Interest penalties for early withdrawal applicable to certificate accounts will not apply to withdrawals authorized for the purchase of shares of Common Stock; however, if a partial withdrawal results in a certificate account with a balance less than the applicable minimum balance requirement, the certificate evidencing the remaining balance will earn interest at the passbook rate subsequent to the withdrawal. An executed order form, once received by the Company, may not be modified, amended or rescinded without the consent of the Company, unless the Conversion is not completed within 45 days of the termination of the Subscription Offering. Payments accompanying such order forms would not be available to subscribers for such 45-day period, and may not be available for up to an additional period of time if an extension of the period of time for completion of the Conversion is approved by the OTS and subscribers affirm or modify but do not rescind their orders after the initial 45-day period. If an extension of the period of time to complete the Conversion is approved by the OTS, subscribers will be resolicited and must affirmatively reconfirm their orders prior to the expiration of the resolicitation offering, or their subscription funds will be promptly refunded and may also modify or cancel their subscriptions. Interest will be paid on such funds at the above rate during the 45-day period and any approved extension period. Owners of self-directed IRAs may use the assets of such IRAs to purchase shares of Common Stock in the Subscription and Community Offerings, provided that such IRAs are not maintained on deposit at the Bank. Persons with self-directed IRAs maintained at the Bank must have their accounts transferred to an unaffiliated institution or broker to purchase shares of Common Stock in the Subscription and Community Offerings. Anyone interested in doing so should contact the Stock Information Center no later than five business days before the Expiration Date. The ESOP will not be required to pay for the shares subscribed for at the time it subscribes, but, rather, may pay for such shares upon consummation of the Subscription and Community Offerings, if all shares are sold, or upon consummation of any subsequent offering, if shares remain to be sold in such an offering, provided that there is in force from the time of its subscription until such time a loan commitment to lend to the ESOP at such time an amount equal to the aggregate purchase price of the shares for which it subscribed. For information regarding procedures for payment for shares from Selected Dealers, see "Community Offering." FEDERAL REGULATIONS PROHIBIT THE BANK FROM LENDING FUNDS OR EXTENDING CREDIT TO ANY PERSON TO PURCHASE SHARES OF THE COMMON STOCK IN THE CONVERSION. Delivery of Certificates. Certificates representing shares of the Common Stock will be delivered to subscribers promptly after completion of the sale of all the Common Stock. Until certificates for the Common Stock are available and delivered to subscribers, subscribers may not be able to sell the shares of Common stock for which they subscribed even though trading of the Common Stock will have commenced. BUSINESS PURPOSES The Bank's Board of Directors has formed the Company to serve upon consummation of the Conversion as a holding company with the Bank as its principal subsidiary. The portion of the net proceeds from the sale of the Common Stock in the Conversion to be distributed to the Bank by the Company will substantially increase the Bank's capital position which will in turn increase the amount of funds available for lending, investment and repayment of borrowings and provide greater resources to support both current operations and future expansion by the Bank. The holding company structure will provide greater flexibility than the Bank alone would have for diversification of business activities and geographic operations. Management believes that this increased capital and operating flexibility will enable the Bank to compete more effectively with other types of financial services 98 104 organizations. In addition, the Conversion will also enhance the future access of the Company and the Bank to the capital markets. The potential impact of the Conversion upon the Bank's capital base is significant. See "Historical and Pro Forma Regulatory Capital Compliance." The investment of the net proceeds from the sale of the Common Stock will provide the Company and the Bank with additional income to further increase their respective capital positions. The additional capital will also assist the Bank in offering new programs and expanded services to its customers. After completion of the Conversion, the unissued Common Stock and preferred stock authorized by the Company's Certificate of Incorporation will permit the Company, subject to market conditions and regulatory approval of an offering, to raise additional equity capital through further sales of securities and to issue securities in connection with possible acquisitions. At the present time, the Company has no plans with respect to additional offerings of securities, other than the possible issuance of additional shares upon the implementation of the MRP and the exercise of stock options under the Option Plan. Following the consummation of the Conversion, the Company also will be able to use stock-related incentive programs to attract and retain executive and other personnel for itself and its subsidiaries. See "Management of the Bank -- Certain Benefit Plans and Arrangements." EFFECT OF CONVERSION TO STOCK FORM ON DEPOSITORS AND BORROWERS OF THE BANK General. Each depositor in a mutual savings institution such as the Bank has both a deposit account and a pro rata ownership interest in the equity of that institution based upon the balance in his or her deposit account. However, this ownership interest is tied to the depositor's account and has no tangible market value separate from such deposit account. Any other depositor who opens a deposit account obtains a pro rata interest in the net worth of the institution without any additional payment beyond the amount of the deposit. A depositor who reduces or closes his or her account receives a portion or all of the balance in the account but nothing for his or her ownership interest, which is lost to the extent that the balance in the account is reduced. Consequently, depositors normally do not have a way to realize the value of their ownership, which has realizable value only in the unlikely event that the mutual institution is liquidated. In such event, the depositors of record at that time, as owners, would share pro rata in any residual equity after other claims are paid. Upon consummation of the Conversion, permanent nonwithdrawable capital stock will be created to represent the ownership of the institution. The stock is separate and apart from deposit accounts and is not and cannot be insured by the FDIC. Transferable certificates will be issued to evidence ownership of the stock, which will enable the stock to be sold or traded, if a purchaser is available, with no effect on any account held in the Bank. Under the Plan of Conversion, all of the capital stock of the Bank will be acquired by the Company in exchange for a portion of the net proceeds from the sale of the Common Stock in the Conversion. The Common Stock will represent an ownership interest in the Company and will be issued upon consummation of the Conversion to persons who elect to participate in the Conversion by purchasing the shares being offered. Continuity. During the Conversion process, the normal business of the Bank of accepting deposits and making loans will continue without interruption. The Bank will continue to be subject to regulation by the OTS and the FDIC, and its FDIC insurance will continue without interruption. After the Conversion, the Bank will continue to provide services for depositors and borrowers under current policies and by its present management and staff. The Board of Directors serving the Bank at the time of the Conversion will serve as the Board of Directors of the Bank after the Conversion. The Board of Directors of the Company consists of the individuals currently serving on the Board of Directors of the Bank. All officers of the Bank at the time of the Conversion will retain their positions with the Bank after the Conversion. Voting Rights. Upon the completion of the Conversion, depositor and borrower members as such will have no voting rights in the Bank or the Company and, therefore, will not be able to elect directors of the Bank or the Company or to control their affairs. Currently these rights are accorded to depositor and borrower members of the 99 105 Bank. Following the Conversion, voting rights will be vested exclusively in the stockholders of the Company which, in turn, will own all of the stock of the Bank. Each holder of Common Stock shall be entitled to vote on any matter to be considered by the stockholders of the Company, subject to the provisions of the Company's Certificate of Incorporation. Deposit Accounts and Loans. THE BANK'S DEPOSIT ACCOUNTS, THE BALANCES OF INDIVIDUAL ACCOUNTS AND EXISTING FEDERAL DEPOSIT INSURANCE COVERAGE WILL NOT BE AFFECTED BY THE CONVERSION. Furthermore, the Conversion will not affect the loan accounts, the balances of these accounts and the obligations of the borrowers under their individual contractual arrangements with the Bank. Tax Effects. The Bank has received an opinion from its special counsel, Housley Kantarian & Bronstein, P.C., Washington, D.C., as to federal income tax consequences of the Conversion to the Bank, and as to generally applicable federal income tax consequences of the Conversion to the Bank's account holders and to persons who purchase Common Stock in the Conversion. The opinion provides that the Conversion will constitute one or more reorganizations for federal income tax purposes under Section 368(a)(1)(F) of the Internal Revenue Code of 1986, as amended ("Internal Revenue Code"). Among other things, the opinion also provides that: (i) no gain or loss will be recognized by the Bank in its mutual or stock form by reason of the Conversion; (ii) no gain or loss will be recognized by its account holders upon the issuance to them of accounts in the Bank in stock form immediately after the Conversion, in the same dollar amounts and on the same terms and conditions as their accounts at the Bank immediately prior to the Conversion; (iii) the tax basis of each account holder's interest in the liquidation account will be equal to the value, if any, of that interest; (iv) the tax basis of the Common Stock purchased in the Conversion will be equal to the amount paid therefor increased, in the case of Common Stock acquired pursuant to the exercise of subscription rights, by the fair market value, if any, of the subscription rights exercised; (v) the holding period for the Common Stock purchased in the Conversion will commence upon the exercise of such holder's subscription rights and otherwise on the day following the date of such purchase; and (vi) gain or loss will be recognized to account holders upon the receipt of liquidation rights or the receipt or exercise of subscription rights in the Conversion, to the extent such liquidation rights and subscription rights are deemed to have value, as discussed below. The opinion of Housley Kantarian & Bronstein, P.C. is based in part upon, and subject to the continuing validity in all material respects through the date of the Conversion of, various representations of the Bank and upon certain assumptions and qualifications, including that the Conversion is consummated in the manner and according to the terms provided in the Plan. Such opinion is also based upon the Internal Revenue Code, regulations now in effect or proposed thereunder, current administrative rulings and practice and judicial authority, all of which are subject to change and such change may be made with retroactive effect. Unlike private letter rulings received from the Internal Revenue Service ("IRS"), an opinion is not binding upon the IRS and there can be no assurance that the IRS will not take a position contrary to the positions reflected in such opinion, or that such opinion will be upheld by the courts if challenged by the IRS. Housley Kantarian & Bronstein, P.C. has advised the Bank that an interest in a liquidation account has been treated by the IRS, in a series of private letter rulings which do not constitute formal precedent, as having nominal, if any, fair market value and therefore it is likely that the interests in the liquidation account established by the Bank as part of the Conversion will similarly be treated as having nominal, if any, fair market value. Accordingly, it is likely that such depositors of the Bank who receive an interest in such liquidation account established by the Bank pursuant to the Conversion will not recognize any gain or loss upon such receipt. Housley Kantarian & Bronstein, P.C. has further advised the Bank that the federal income tax treatment of the receipt of subscription rights pursuant to the Conversion is uncertain, and recent private letter rulings issued by the IRS have been in conflict. For instance, the IRS adopted the position in one private ruling that subscription rights will be deemed to have been received to the extent of the minimum pro rata distribution of such rights, together with the rights actually exercised in excess of such pro rata distribution, and with gain recognized to the extent of the combined fair market value of the pro rata distribution of subscription rights plus the subscription rights actually exercised. Persons who do not exercise their subscription rights under this analysis would recognize gain 100 106 upon receipt of rights equal to the fair market value of such rights, regardless of exercise, and would recognize a corresponding loss upon the expiration of unexercised rights that may be available to offset the previously recognized gain. Under another IRS private ruling, subscription rights were deemed to have been received only to the extent actually exercised. This private ruling required that gain be recognized only if the holder of such rights exercised such rights, and that no loss be recognized if such rights were allowed to expire unexercised. There is no authority that clearly resolves this conflict among these private rulings, which may not be relied upon for precedential effect. However, based upon express provisions of the Internal Revenue Code and in the absence of contrary authoritative guidance, Housley Kantarian & Bronstein, P.C. has provided in its opinion that gain will be recognized upon the receipt rather than the exercise of subscription rights. Further, also based upon a published IRS ruling and consistent with recognition of gain upon receipt rather than exercise of the subscription rights, Housley Kantarian & Bronstein, P.C. has provided in its opinion that the subsequent exercise of the subscription rights will not give rise to gain or loss. Regardless of the position eventually adopted by the IRS, the tax consequences of the receipt of the subscription rights will depend, in part, upon their valuation for federal income tax purposes. If the subscription rights are deemed to have a fair market value, the receipt of such rights will be taxable to Eligible Account Holders, Supplemental Eligible Account Holders, Other Members and eligible depositors and borrowers of Heartland Community Bank, FSB who exercise their subscription rights, even though such persons would have received no cash from which to pay taxes on such taxable income. The Bank could also recognize a gain on the distribution of such subscription rights in an amount equal to their aggregate value. In the opinion of Ferguson & Co., whose opinion is not binding upon the IRS, the subscription rights do not have any value, based on the fact that such rights are acquired by the recipients without cost, are non-transferable and of short duration and afford the recipients the right only to purchase shares of the Common Stock at a price equal to its estimated fair market value, which will be the same price as the price paid by purchasers in the Community Offering for unsubscribed shares of Common Stock. Eligible Account Holders, Supplemental Eligible Account Holders, Other Members and eligible depositors and borrowers of Heartland Community Bank, FSB are encouraged to consult with their own tax advisors as to the tax consequences in the event that the subscription rights are deemed to have a fair market value. Because the fair market value, if any, of the subscription rights issued in the Conversion depends primarily upon the existence of certain facts rather than the resolution of legal issues, Housley Kantarian & Bronstein, P.C., has neither adopted the opinion of Ferguson & Co. as its own nor incorporated such opinion of Ferguson & Co. in its opinion issued in connection with the Conversion. The Bank has also received the opinion of Gaunt & Co., LTD, certified public accountants, Little Rock, Arkansas, to the effect that no gain or loss will be recognized as a result of the Conversion for purposes of Arkansas tax law. THE FEDERAL AND STATE INCOME TAX DISCUSSION SET FORTH ABOVE DOES NOT PURPORT TO CONSIDER ALL ASPECTS OF FEDERAL AND STATE INCOME TAXATION WHICH MAY BE RELEVANT TO EACH ELIGIBLE SUBSCRIBER ENTITLED TO SPECIAL TREATMENT UNDER THE INTERNAL REVENUE CODE, SUCH AS TRUSTS, INDIVIDUAL RETIREMENT ACCOUNTS, OTHER EMPLOYEE BENEFIT PLANS, INSURANCE COMPANIES AND ELIGIBLE SUBSCRIBERS WHO ARE NOT CITIZENS OR RESIDENTS OF THE UNITED STATES. DUE TO THE INDIVIDUAL NATURE OF TAX CONSEQUENCES, EACH ELIGIBLE SUBSCRIBER IS URGED TO CONSULT HIS OR HER OWN TAX AND FINANCIAL ADVISOR AS TO THE EFFECT OF SUCH FEDERAL AND STATE INCOME TAX CONSEQUENCES ON HIS OR HER OWN PARTICULAR FACTS AND CIRCUMSTANCES, INCLUDING THE RECEIPT AND EXERCISE OF SUBSCRIPTION RIGHTS, AND ALSO AS TO ANY OTHER TAX CONSEQUENCES ARISING OUT OF THE CONVERSION. Liquidation Account. In the unlikely event of a complete liquidation of the Bank in its present mutual form, each holder of a deposit account in the Bank would receive his pro rata share of any assets of the Bank remaining after payment of claims of all creditors (including the claims of all depositors to the withdrawal value of their accounts). His pro rata share of such remaining assets would be the same proportion of such assets as the value of his deposit account was to the total of the value of all deposit accounts in the Bank at the time of liquidation. 101 107 After the Conversion, each deposit account holder on a complete liquidation would have a claim of the same general priority as the claims of all other general creditors of the Bank. Therefore, except as described below, his claim would be solely in the amount of the balance in his deposit account plus accrued interest. He would have no interest in the value of the Bank above that amount. The Plan of Conversion provides for the establishment, upon the completion of the Conversion, of a special "liquidation account" for the benefit of Eligible Account Holders and Supplemental Eligible Account Holders in an amount equal to the regulatory capital of the Bank as of the date of its latest statement of financial condition contained in the final Prospectus to be used in connection with the Conversion. Each Eligible Account Holder and Supplemental Eligible Account Holder would be entitled, on a complete liquidation of the Bank after Conversion, to an interest in the liquidation account. Each Eligible Account Holder and Supplemental Eligible Account Holder would have an initial interest in such liquidation account determined by multiplying the opening balance in the liquidation account by a fraction of which the numerator is the amount of the qualifying deposit in the related deposit account and the denominator is the total amount of the qualifying deposits of all Eligible Account Holders and Supplemental Eligible Account Holders in the Bank. However, if the amount in the qualifying deposit account on any annual closing date of the Bank is less than the amount in such account on the initial applicable date or any subsequent closing date, then the Eligible Account Holder's or Supplemental Eligible Account Holder's interest in the liquidation account would be reduced from time to time by an amount proportionate to any such reduction. If any such qualified deposit account is closed, the interest in the liquidation account will be reduced to zero. Any assets remaining after the above liquidation rights of Eligible Account Holders and Supplemental Eligible Account Holders were satisfied would be distributed to the entity or persons holding the Bank's capital stock at that time. A merger, consolidation, sale of bulk assets, or similar combination or transaction with an FDIC-insured institution in which the Bank is not the surviving insured institution would not be considered to be a "liquidation" under which distribution of the liquidation account could be made. In such a transaction, the liquidation account would be assumed by the surviving institution. The creation and maintenance of the liquidation account will not restrict the use or application of any of the capital accounts of the Bank, except that the Bank may not declare or pay a cash dividend on, or repurchase any of, its capital stock if the effect of such dividend or repurchase would be to cause its equity to be reduced below the aggregate amount then required for the liquidation account. FINANCIAL ADVISORY AND SALES ASSISTANCE ARRANGEMENTS The Company and the Bank have engaged Trident Securities as financial and sales advisor in connection with the offering of the Common Stock, and Trident Securities has agreed to use its best efforts to solicit subscriptions and purchase orders for shares of Common Stock in the Offerings. Based upon negotiations between Trident Securities and the Company and the Bank concerning fee structure, and subject to certain limitations, Trident Securities will receive a fee in the amount up to between 1.30% and .65% of the aggregate purchase price of the Common Stock sold in the Offerings, based on the respective amounts of Common Stock sold in the Conversion to residents of the Bank's Local Community, contiguous Arkansas counties, other Arkansas counties and, finally, outside Arkansas, excluding shares sold to the Bank's directors and executive officers and their associates and the ESOP. Fees paid to Trident Securities may be deemed to be underwriting fees, and Trident Securities may be deemed to be an underwriter. Trident Securities will also be reimbursed for allocable expenses incurred by them, including legal fees. Trident's reimbursable out-of-pocket expenses other than legal fees will not exceed $10,000, and its reimbursable legal fees will not exceed $25,000. The Company and the Bank have agreed to indemnify Trident Securities for costs and expenses reasonably incurred in connection with certain claims or liabilities, including certain liabilities under the Securities Act. Trident Securities has received an advance towards its reimbursable expenses in the amount of $10,000. Total fees to and expenses of Trident Securities are expected to be approximately $241,000 assuming the sale of $20,000,000 of Common Stock at the midpoint of the estimated valuation range. For additional information, see "Stock Pricing and Number of Shares to be Issued" and "Use of Proceeds." 102 108 Officers of the Bank are available at segregated and separately identifiable areas apart from the areas accessible to the general public for the purposes of making or withdrawing deposits within each of the Bank's offices, to provide offering materials to prospective investors, to answer their questions (but only to the extent such information is derived from this Prospectus) and to receive completed order forms from prospective investors interested in subscribing for shares of Common Stock. None of the Bank's directors, officers or employees will receive any commissions or other compensation for their efforts in connection with sales of shares of Common Stock. ALTHOUGH INFORMATION REGARDING THE STOCK OFFERING IS AVAILABLE AT THE BANK'S OFFICES, AN INVESTMENT IN THE COMMON STOCK IS NOT A DEPOSIT, AND THE COMMON STOCK IS NOT FEDERALLY INSURED, AND OFFICERS, DIRECTORS AND OTHERS HAVE BEEN INSTRUCTED TO INFORM PURCHASERS OF THESE FACTS PRIOR TO SALE. The directors, officers and employees of the Bank who will be involved in selling stock are expected to be exempt from the requirement to register with the SEC as broker-dealers within the meaning of Rule 3a4-1 under the Securities Exchange Act. STOCK PRICING AND NUMBER OF SHARES TO BE ISSUED The Plan of Conversion requires that the purchase price of the Common Stock be based on the appraised pro forma market value of the Common Stock, as determined on the basis of an independent valuation. Ferguson & Co., which is experienced in the evaluation and appraisal of savings institutions involved in the conversion process, has been retained by the Bank to prepare an appraisal of the estimated pro forma market value of the Common Stock to be sold pursuant to the Conversion. Ferguson & Co. will receive aggregate fees and reimbursable expenses of approximately $25,000 for its appraisal of the pro forma market value of the Common Stock and other services in connection with the Conversion. The Bank has agreed to indemnify Ferguson & Co. under certain circumstances against liabilities and expenses arising out of the Bank's engagement of Ferguson & Co. The appraisal contains an analysis of a number of factors including, but not limited to, the Bank's financial condition and operating trends, the competitive environment within which the Bank operates, operating trends of certain savings institutions and savings institution holding companies, relevant economic conditions, both nationally and in Arkansas, which affect the operations of savings institutions, and stock market values of certain institutions. In addition, Ferguson & Co. has advised the Bank that it included in its analysis an examination of the potential effects of the Conversion on the Bank's operating characteristics and financial performance as they relate to the estimated pro forma market value of the Bank. Ferguson & Co. has determined that, as of December 20, 1996, the estimated pro forma market value of the Common Stock to be issued by the Company in the Conversion was $20,000,000. The Boards of Directors of the Company and the Bank, in consultation with their advisors, have determined to offer the shares in the Conversion at a price of $10.00 per share, and by dividing the price per share into the estimated aggregate value, initially plan to issue 2,000,000 shares of the Common Stock in the Conversion. The price per share was determined based on a number of factors, including the market price per share of the stock of other financial institutions. Regulations administered by the OTS require, however, that the appraiser establish a range of value for the stock of approximately 15% on either side of the estimated value to allow for fluctuations in the aggregate value of the stock due to changes in the market and other factors from the time of commencement of the Subscription Offering until completion. In accordance with such regulations, Ferguson & Co. has established a range of value of from $17,000,000 to $23,000,000 (the estimated valuation range), and the Boards of Directors of the Company and the Bank have determined to offer up to 2,645,000 shares of the Common Stock in the Conversion. Upon completion of the Offerings, Ferguson & Co., after taking into account factors similar to those involved in its prior appraisal, will determine its estimate of the pro forma market value of the Common Stock as of the close of the Offerings. If the pro forma market value is higher or lower than $20,000,000 but is nonetheless within the estimated valuation range or within 15% of the maximum of such range, the Company and the Bank will make an approximate adjustment by raising or lowering the total number of shares to be issued (within a range of 103 109 from 1,700,000 shares to 2,645,000 shares). No resolicitation of subscribers and other purchasers will be made because of any such change in the number of shares to be issued (within a range of from 1,700,000 shares to approximately 2,645,000 shares). No resolicitation of subscribers and other purchasers will be made because of any such changes in the number of shares to be issued unless the aggregate purchase price of the Common Stock is below $17,000,000 (the low end of the estimated valuation range) or is more than $26,450,000 (15% above the maximum of the estimated valuation range). If the aggregate purchase price falls outside the range of from $17,000,000 to $26,450,000, subscribers and other purchasers will be resolicited and given the opportunity to continue their orders, in which case they will need to affirmatively reconfirm their subscriptions prior to the expiration of the resolicitation, or their subscription funds will be promptly refunded with interest at the Bank's passbook rate. Subscribers will also be given the opportunity to increase, decrease or rescind their orders. Any change in the estimated valuation range must be approved by the OTS. The establishment of any new valuation range may be effected without a resolicitation of votes from the Bank's members to approve the Conversion. An increase in the number of shares to be issued in the Conversion (assuming no change in the per share purchase price) would decrease both a subscriber's ownership interest and the Company's pro forma net income and stockholders' equity on a per share basis while increasing pro forma net income and stockholders' equity on an aggregate basis. A decrease in the number of shares to be issued in the Conversion (assuming no change in the per share purchase price) would increase both a subscribers' ownership interest and the Company's pro forma net income and stockholders' equity on a per share basis while decreasing pro forma net income and stockholders' equity on an aggregate basis. For a presentation of the effects of such changes, see "Pro Forma Data." THE APPRAISAL IS NOT INTENDED, AND MUST NOT BE CONSTRUED, AS A RECOMMENDATION OF ANY KIND AS TO THE ADVISABILITY OF PURCHASING THE COMMON STOCK. IN PREPARING THE VALUATION, FERGUSON & CO. HAS RELIED UPON AND ASSUMED THE ACCURACY AND COMPLETENESS OF FINANCIAL AND STATISTICAL INFORMATION PROVIDED BY THE BANK AND THE COMPANY. FERGUSON & CO. DID NOT INDEPENDENTLY VERIFY THE CONSOLIDATED FINANCIAL STATEMENTS AND OTHER INFORMATION PROVIDED BY THE BANK AND THE COMPANY, AND FERGUSON & CO. DID NOT VALUE INDEPENDENTLY THE ASSETS AND LIABILITIES OF THE BANK AND THE COMPANY. WHILE THE COMPANY'S AND THE BANK'S BOARDS OF DIRECTORS HAVE CAREFULLY REVIEWED THE METHODOLOGY AND ASSUMPTIONS USED BY FERGUSON & CO. IN PREPARING THE APPRAISAL THE APPRAISAL AND THE METHODOLOGY AND ASSUMPTIONS USED BY FERGUSON & CO. IN PREPARING THE APPRAISAL, THE BOARDS HAVE RELIED UPON THE EXPERTISE OF FERGUSON & CO., AND THE BOARDS HAVE NOT EXPRESSLY EVALUATED THE REASONABLENESS OR ADEQUACY OF THE APPRAISAL OR THE METHODOLOGY OR ASSUMPTIONS USED BY FERGUSON & CO. THE VALUATION CONSIDERS THE BANK AND THE COMPANY ONLY AS A GOING CONCERN AND SHOULD NOT BE CONSIDERED AS AN INDICATION OF THE LIQUIDATION VALUE OF THE BANK AND THE COMPANY. MOREOVER, BECAUSE SUCH VALUATION IS NECESSARILY BASED UPON ESTIMATES AND PROJECTIONS OF A NUMBER OF MATTERS, ALL OF WHICH ARE SUBJECT TO CHANGE FROM TIME TO TIME, NO ASSURANCE CAN BE GIVEN THAT PERSONS PURCHASING THE COMMON STOCK WILL THEREAFTER BE ABLE TO SELL SUCH SHARES AT OR ABOVE THE INITIAL OFFERING PRICE PER SHARE. COPIES OF THE APPRAISAL REPORT OF FERGUSON & CO. SETTING FORTH THE METHOD AND ASSUMPTIONS FOR SUCH APPRAISAL ARE ON FILE AND AVAILABLE FOR INSPECTION AS SET FORTH IN "ADDITIONAL INFORMATION" AND AT THE MAIN OFFICE OF THE BANK. ANY SUBSEQUENT UPDATED APPRAISAL REPORT OF FERGUSON & CO. ALSO WILL BE AVAILABLE FOR INSPECTION. Promptly after the completion of the Offerings, Ferguson & Co. will confirm to the OTS, if such is the case, that, to the best of its knowledge and judgment, nothing of a material nature has occurred (taking into account all of the relevant factors including those which would be involved in a cancellation of the Offerings) that would cause it to conclude that the aggregate dollar amount of shares ordered in the Conversion was incompatible with its estimate of the consolidated pro forma market value of the Bank as a subsidiary of the Company. If, however, the facts do not justify such a statement, the Subscription and/or Community Offerings may be cancelled, a new estimated valuation range set, and a resolicitation of subscribers and other purchasers held. LIMITATIONS ON PURCHASES OF SHARES The Plan of Conversion provides for certain limitations to be placed upon the purchase of shares by eligible subscribers and others in the Conversion. Each subscriber must subscribe for a minimum of 25 shares. Additionally, no person by himself or herself or with an associate or group of persons acting in concert (other than tax-qualified 104 110 employee stock benefit plans of the Bank or the Company) currently may purchase more than 25,000 shares of the Common Stock offered in the Conversion, except that the ESOP may purchase up to 10% of the Common Stock to be issued in the Conversion, and shares purchased by the ESOP and attributable to a participant thereunder shall not be aggregated with shares purchased by such participant or any other purchaser of Common Stock in the Conversion. The current purchase limitation was determined by the Boards of Directors of the Company and the Bank in accordance with the Plan of Conversion in order to encourage a wide distribution of the Common Stock in the Conversion, particularly among the Bank's customers and other persons residing in the communities served by the Bank, without permitting the undue concentration of stock ownership among a few investors. Officers and directors and their associates may not purchase, in the aggregate, more than 33% of the shares to be issued in the Conversion. For purposes of the Plan of Conversion, the directors of the Company and the Bank are not deemed to be associates or a group acting in concert solely by reason of their Board membership. Subject to any required regulatory approval and the requirements of applicable laws and regulations, but without further approval of the members of the Bank, purchase limitations may be increased or decreased at the sole discretion of the Company and the Bank at any time. If such amount is increased, subscribers for the maximum amount will be given the opportunity to increase their subscriptions up to the then applicable limit, subject to the rights and preferences of any person who has priority subscription rights. The Boards of Directors of the Company and the Bank may, in their sole discretion, increase the maximum purchase limitation referred to above up to 9.99%, provided that orders for shares exceeding 5% of the shares to be issued in the Conversion shall not exceed, in the aggregate, 10% of the shares to be issued in the Conversion. In the event that the purchase limitation is decreased after commencement of the Subscription and Community Offerings, the orders of any person who subscribed for the maximum number of shares of Common Stock shall be decreased by the minimum amount necessary so that such person shall be compliance with the then maximum number of shares permitted to be subscribed for by such person. The term "associate" of a person is defined to mean: (i) any corporation or other organization (other than the Bank, the Company or a majority-owned subsidiary of the Bank or the Company) of which such person is an officer or partner or is directly or indirectly the beneficial owner of 10% or more of any equity securities; (ii) any trust or other estate in which such person has a substantial beneficial interest or serves as a director or in a similar fiduciary capacity, provided, however, such term shall not include any employee stock benefit plan of the Bank or the Company in which such person has a substantial beneficial interest or serves as a trustee or in a similar fiduciary capacity; and (iii) any relative or spouse of such person, or any relative of such spouse, who either has the same home as such person or who is a director or officer of the Bank or the Company or any of their subsidiaries. Directors are not treated as associates solely because of their Board membership. Each person purchasing Common Stock in the Conversion shall be deemed to confirm that such purchase does not conflict with the purchase limitations under the Plan of Conversion or otherwise imposed by law, rule or regulation. The Company may presume that persons are acting in concert based on the circumstances, including known relationships and previous action in concert. In the event that such purchase limitations are violated by any person (including any associate or group of persons affiliated or otherwise acting in concert with such person), the Company shall have the right to purchase from such person at the aggregate purchase price all shares acquired by such person in excess of such purchase limitations or, if such excess shares have been sold by such person, to receive the difference between the aggregate purchase price paid for such excess shares and the price at which such excess shares were sold by such person. This right of the Company to purchase such excess shares shall be assignable by the Company. In addition, persons who violate the purchase limitations may be subject to sanctions and penalties imposed by the OTS. Stock purchased pursuant to the Conversion will be freely transferable, except for shares purchased by directors and officers of the Bank and the Company. See "Limitations on Resales by Management." In addition, under guidelines of the NASD, members of the NASD and their associates are subject to certain restrictions on the transfer of securities purchased in accordance with subscription rights and to certain reporting requirements upon purchase of such securities. 105 111 REGULATORY RESTRICTIONS ON ACQUISITION OF THE COMMON STOCK Current federal regulations prohibit any person from making an offer, announcing an intent to make an offer, entering into any other arrangement to purchase Common Stock or acquiring Common Stock or subscription rights in the Company from another person prior to completion of the Conversion. Further, no person may make an offer or announcement of an offer to purchase shares or actually acquire shares in the Company for a period of three years from the date of the completion of the Conversion, if, upon the completion of such offer or acquisition, that person would become the beneficial owner of more than 10% of the Company's outstanding stock, without the prior written approval of the OTS. The OTS has defined the word "person" to include any individual, group acting in concert, corporation, partnership, association, joint stock company, trust, unincorporated organization or similar company, a syndicate or any group formed for the purpose of acquiring, holding or disposing of securities of an insured institution. However, offers made exclusively to the Company or underwriters or members of a selling group acting on behalf of the Company for resale to the general public are excepted. The regulations also provide civil penalties for willful violation or assistance of any such violation of the regulation by any person connected with the management of the Company following the Conversion. Moreover, when any person, directly or indirectly, acquires beneficial ownership of more than 10% of the Common Stock following the Conversion within such three-year period without the prior approval of the OTS, the Common Stock beneficially owned by such person in excess of 10% shall not be counted as shares entitled to vote and shall not be voted by any person or counted as voting shares in connection with any matter submitted to the stockholders for a vote. The Certificate of Incorporation of the Company includes a similar 10% beneficial ownership limitation. See "Certain Anti-Takeover Provisions in the Certificate of Incorporation and Bylaws." In addition to the foregoing restrictions, the acquisition of more than 10% of the Company's outstanding shares may in certain circumstances be subject to the provisions of the Change in Bank Control Act, and the acquisition of control of the Company by any company would be subject to regulatory approval under the Home Owners' Loan Act. See "Certain Restrictions on Acquisition of the Company and the Bank." RESTRICTIONS ON REPURCHASE OF STOCK Subject to the exceptions described herein, for a period of three years following the Conversion, the Company could be restricted from repurchasing any of its stock from any person, except by means of an offer to repurchase its stock on a pro rata basis made to all stockholders of the Company which is approved by the OTS. Federal regulations generally limit repurchases by the Company of its own capital stock during the three-year period after the Conversion to (i) repurchase on a pro rata basis pursuant to an offer, approved by the OTS, made to all stockholders and (ii) repurchase of qualifying shares of a director or (iii) repurchase shares to fund employee stock benefit plans of the Company or Bank. However, upon 10 days' written notification to the OTS Regional Director for the Bank and the Chief Counsel of the Corporate and Securities Division of the OTS, if neither the Regional Director nor the Chief Counsel objects, the Company may make open market repurchases of its outstanding Common Stock, provided that: (i) no repurchases may occur in the first year following the Conversion except as may be permitted by the OTS, (ii) in the second and third years after the Conversion, repurchases must be part of an open-market stock repurchase program that does not allow for the repurchase of more than 5% of the Company's outstanding Common Stock during a twelve-month period, (iii) the repurchases would not cause the Bank to become "undercapitalized" (as defined for regulatory purposes), (iv) the repurchases would not materially adversely affect the Company's financial condition, and (v) there is a valid business purpose for the repurchases. Furthermore, the Company may apply for regulatory approval to repurchase shares in excess of these amounts. The Company may not repurchase any of its stock if the effect thereof would cause the Bank's stockholders' equity to be reduced below the amount required for the liquidation account. Regulatory capital distribution limitations may effectively provide further restrictions on stock repurchases. 106 112 LIMITATIONS ON RESALES BY MANAGEMENT Shares of the Common Stock purchased by directors or officers of the Company and the Bank in the Conversion will be subject to the restriction that such shares may not be sold for a period of one year following completion of the Conversion, except in the event of the death of the original purchaser or in any exchange of such shares in connection with a merger or acquisition of the Company approved by the OTS. Accordingly, shares of the Common Stock issued by the Company to directors and officers shall bear a legend giving appropriate notice of the restriction imposed upon it and, in addition, the Company will give appropriate instructions to the transfer agent for the Common Stock with respect to the applicable restriction for transfer of any restricted stock. Any shares issued to directors and officers as a stock dividend, stock split or otherwise with respect to restricted stock shall be subject to the same restrictions. Shares acquired otherwise than in the Conversion, such as under the Company's incentive compensation plan and stock option and incentive plan, would not be subject to such restrictions. To the extent directors and officers are deemed affiliates of the Company, all shares of the Common Stock acquired by such directors and officers will be subject to certain resale restrictions and may be resold pursuant to Rule 144 under the Securities Act. See "Regulation -- Regulation of the Company -- Federal Securities Law." INTERPRETATION AND AMENDMENT OF THE PLAN OF CONVERSION To the extent permitted by law, all interpretations of the Plan of Conversion by the Bank will be final. The Plan of Conversion provides that, if deemed necessary or desirable by the Board of Directors, the Plan of Conversion may be substantively amended by the Board of Directors at any time prior to submission of the Plan of Conversion and proxy materials to the Bank's members. After submission of the Plan of Conversion and proxy materials to the members, the Plan of Conversion may be amended by the Board of Directors at any time prior to the Special Meeting and at any time following the Special Meeting with the concurrence of the OTS. In its discretion, the Board of Directors may modify or terminate the Plan of Conversion upon the order of the regulatory authorities without a resolicitation of proxies or another Special Meeting. The Plan of Conversion further provides that in the event that mandatory new regulations pertaining to conversions are adopted by the OTS or any successor agency prior to completion of the Conversion, the Plan of Conversion will be amended to conform to such regulations without a resolicitation of proxies or another Special Meeting. In the event that such new conversion regulations contain optional provisions, the Plan of Conversion may be amended to utilize such optional provisions at the discretion of the Board of Directors without a resolicitation of proxies or another Special Meeting. By adoption of the Plan of Conversion, the Bank's members will be deemed to have authorized amendment of the Plan of Conversion under the circumstances described above. CONDITIONS AND TERMINATION Completion of the Conversion requires the approval of the Plan of Conversion by the affirmative vote of not less than a majority of the total number of votes of the members of the Bank eligible to be cast at the Special Meeting and the sale of all shares of the Common Stock within 24 months following approval of the Plan of Conversion by the members. If these conditions are not satisfied, the Plan of Conversion will be terminated, and the Bank will continue its business in the mutual form of organization. The Plan of Conversion may be terminated by the Board of Directors at any time prior to the Special Meeting and, with the approval of the OTS, by the Board of Directors at any time thereafter. CERTAIN RESTRICTIONS ON ACQUISITION OF THE COMPANY AND THE BANK CONVERSION REGULATIONS OTS regulations prohibit a person from making an offer, announcing an intent to make an offer or other arrangement to purchase stock, or acquiring stock or subscription rights in the Bank or the Company from another person, prior to completion of the Conversion. Further, no person may make such an offer or announcement of an 107 113 offer to purchase shares or actually acquire shares in the Bank or the Company for a period of three years from the date of the completion of the Conversion if, upon the completion of such offer or acquisition, that person would become the beneficial owner of more than 10% of a class of equity security of the Bank or the Company, without the prior written approval of the Director of the OTS. For purposes of the regulations, "person" is defined to include any individual, group acting in concert, corporation, partnership, association, joint stock company, trust, unincorporated organization or similar company, a syndicate or any other group formed for the purpose of acquiring, holding or disposing of securities of the Bank or the Company. Offers made exclusively to the Bank or the Company, however, or underwriters or members of a selling group acting on the Bank's or Company's behalf for resale to the general public, are excepted. CHANGE IN BANK CONTROL ACT AND SAVINGS INSTITUTION HOLDING COMPANY PROVISIONS OF HOME OWNERS' LOAN ACT Federal laws and regulations contain a number of provisions which affect the acquisition of savings institutions, such as the Bank, and savings institution holding companies, such as the Company. The Change in Bank Control Act provides that no person, acting directly or indirectly or through or in concert with one or more persons, may acquire control of an institution unless the OTS has been given 60 days' prior written notice and the OTS does not issue a notice disapproving the proposed acquisition. In addition, certain provisions of the Home Owners' Loan Act provide that no company may acquire control of an institution without the prior approval of the OTS. Any company that acquires such control becomes an institution holding company subject to registration, examination and regulation by the OTS. Pursuant to applicable regulations, control of an institution is conclusively deemed to have been acquired by, among other things, the acquisition of more than 25% of any class of voting stock of an institution or the ability to control the election of a majority of the directors of an institution. Moreover, control is presumed to have been acquired, subject to rebuttal, upon the acquisition of more than 10% of any class of voting stock, or more than 25% of any class of stock, of an institution, where one or more enumerated "control factors" are also present in the acquisition. The OTS may prohibit an acquisition of control if it finds, among other things, that (i) the acquisition would result in a monopoly or substantially lessen competition, (ii) the financial condition of the acquiring person might jeopardize the financial stability of the savings institution, or (iii) the competence, experience, or integrity of the acquiring person indicates that it would not be in the interest of the depositors or the public to permit the acquisition of control by such person. The foregoing restrictions do not apply to the acquisition of the Company's capital stock by one or more tax-qualified employee stock benefit plans, provided that the plan or plans do not have beneficial ownership in the aggregate of more than 25% of any class of equity security. OKLAHOMA ANTI-TAKEOVER STATUTES Oklahoma has enacted several statutes which impose restrictions on acquisition of the Company. The Oklahoma "Control Share Acquisition Statute" generally precludes a person who acquires voting shares of the Company in excess of specified thresholds of the voting power (i.e., 20%, 33-1/3% and 50%) from voting the shares held in excess of the applicable threshold unless voting rights for such shares are approved by a majority vote of the Company's disinterested stockholders. The protections of this Act apply only to those corporations that elect, by express provision in their Certificate of Incorporation or Bylaws, to be governed by the Act. Article XIV of the Company's Certificate of Incorporation contains an express provision that control share acquisitions with respect to the Common Stock shall be governed by the Act. Under the Oklahoma General Corporation Act, mergers, consolidations and sales of substantially all of the assets of a Oklahoma corporation must generally be approved by the vote of the holders of a majority of the outstanding shares of stock entitled to vote thereon. Section 1090.3 of the Oklahoma General Corporation Act, however, restricts certain transactions between an Oklahoma corporation (or its majority owned subsidiaries), and a holder of 15% or more of the 108 114 corporation's outstanding voting stock, together with affiliates or associates thereof (excluding persons who become 15% stockholders by action of the corporation alone) (an "Interested Shareholder"). For a period of three years following the date that a stockholder became a holder of 15% or more of the corporation's outstanding voting stock, Section 1090.3 prohibits the following types of transactions between the corporation and the 15% stockholder (unless certain conditions, described below, are met): (i) mergers or consolidations, (ii) sales, leases, exchanges or other transfers of 10% or more of the aggregate assets of the corporation, (iii) issuances or transfers by the corporation of any stock of the corporation that would have the effect of increasing the 15% stockholders proportionate share of the stock of any class or series of the corporation, (iv) receipt by the 15% stockholder of the benefit, except proportionately as a shareholder of the corporation, of loans, advances, guarantees, pledges or other financial benefits provided by the corporation, and (v) any other transaction which has the effect of increasing the proportionate share of the stock of any class or series of the corporation that is owned by the 15% stockholder. This restriction does not apply if (1) before such person became an Interested Stockholder, the Board of Directors approved the transaction in which the Interested Stockholder becomes an Interested Stockholder or approved the business combination; or (2) upon consummation of the transaction which resulted in the shareholder's becoming an Interested Shareholder, the Interested Shareholder owned at least 85% of the voting stock of the Company outstanding at the time the transaction commenced, excluding for purposes of determining the number of shares outstanding, those shares owned by (i) persons who are directors and also officers and (ii) employee stock plans in which employee participants do not have the right to determine confidentially whether shares held subject to the plan will be tendered in a tender or exchange offer; or (3) on or subsequent to such date, the business combination is approved by the Board of Directors and authorized at an annual or special meeting of shareholders, and not by written consent, by the affirmative vote of at least 66-2/3% of the outstanding voting stock which is not owned by the Interested Stockholder. An Oklahoma corporation may exempt itself from the requirements of the statute by adopting an amendment to its Certificate of Incorporation. At the present time, the Board of Directors does not intend to propose any such amendment. CERTAIN ANTI-TAKEOVER PROVISIONS IN THE CERTIFICATE OF INCORPORATION AND BYLAWS While the Boards of Directors of the Company and the Bank are not aware of any effort that might be made to obtain control of the Company after Conversion, the Board of Directors, as discussed below, believes that it is appropriate to include certain provisions as part of the Company's Certificate of Incorporation to protect the interests of the Company and its stockholders from hostile takeovers which the Board of Directors might conclude are not in the best interests of the Bank, the Company or the Company's stockholders. These provisions may have the effect of discouraging a future takeover attempt which is not approved by the Board of Directors but which individual stockholders may deem to be in their best interests or in which stockholders may receive a substantial premium for their shares over then current market prices. As a result, stockholders who might desire to participate in such a transaction may not have an opportunity to do so. Such provisions will also render the removal of the current Board of Directors or management of the Company more difficult. The following discussion is a general summary of certain provisions of the Certificate of Incorporation and Bylaws of the Company which may be deemed to have such an "anti-takeover" effect. The description of these provisions is necessarily general and reference should be made in each case to the Certificate of Incorporation and Bylaws of the Company, which are incorporated herein by reference. See "Additional Information" as to how to obtain a copy of these documents without charge. CLASSIFIED BOARD OF DIRECTORS AND RELATED PROVISIONS Article XII of the Certificate of Incorporation of the provides that the Board of Directors is to be divided into three classes which shall be as nearly equal in number as possible. The directors in each class will hold office following their initial appointment to office for terms of one year, two years and three years, respectively, and, upon reelection, will serve for terms of three years thereafter. Each director will serve until his or her successor is elected and qualified. Article XIII provides that no director or the entire Board of Directors may be removed at any time for cause and upon the affirmative vote of the holders of at least 80% of the outstanding shares entitled to vote generally in the election of directors at a meeting of stockholders called for that purpose. 109 115 A classified Board of Directors could make it more difficult for stockholders, including those holding a majority of the outstanding shares, to force an immediate change in the composition of a majority of the Board of Directors. Since the terms of only one-third of the incumbent directors expire each year, it requires at least two annual elections for the stockholders to change a majority, whereas a majority of a non-classified board could be changed in one year. In the absence of the provisions of the Certificate of Incorporation classifying the Board, all of the directors would be elected each year. Management of the Company believes that the staggered election of directors tends to promote continuity of management because only one-third of the Board of Directors is subject to election each year. Staggered terms guarantee that in the ordinary course approximately two-thirds of the directors, or more, at any one time have had at least one year's experience as directors of the Company, and moderate the pace of changes in the Board of Directors by extending the minimum time required to elect a majority of directors from one to two years. STOCKHOLDER VOTE REQUIRED TO APPROVE CERTAIN BUSINESS COMBINATIONS Article XV of the Company's Certificate of Incorporation requires the approval of the holders of (i) at least 80% of the Company's outstanding shares of voting stock, and (ii) at least a majority of the Company's outstanding shares of voting stock, not including shares held by a "Related Person," to approve certain "Business Combinations" as defined therein, and related transactions. The increased voting requirements in the Company's Certificate of Incorporation apply in connection with business combinations involving a "Related Person," except in cases where the proposed transaction has been approved in advance by two-thirds of those members of the Company's Board of Directors who are unaffiliated with the Related Person and who were directors prior to the time when the Related Person became a Related Person (the "Continuing Directors") or except to the extent otherwise required by applicable law. The term "Related Person" is defined to include any individual, corporation, partnership or other entity who owns beneficially or controls, directly or indirectly, more than 10% of the outstanding shares of voting stock of the Company. A "Business Combination" is defined to include (i) any merger or consolidation of the Company with or into any Related Person; (ii) any sale, lease exchange, mortgage, transfer, or other disposition of all or a substantial part of the assets of the Company or of a subsidiary to any Related Person (the term "substantial part" is defined to include more than 25% of the Company's total assets); (iii) any merger or consolidation of a Related Person with or into the Company or a subsidiary of the Company; (iv) any sale, lease, exchange, transfer or other disposition of all or any substantial part of the assets of a Related Person to the Company or a subsidiary of the Company; (v) the issuance of any securities of the Company or a subsidiary of the Company to a Related Person; (vi) any reclassification of the Company Common Stock, or any recapitalization involving the Company Common Stock; (vii) the acquisition by the Company of any securities of the Related Person; and (viii) any agreement, contract or other arrangement providing for any of the above transactions. PROVISIONS RELATING TO MEETINGS OF STOCKHOLDERS Article X of the Company's Certificate of Incorporation provides that special meetings of stockholders may be called only by the Board of Directors or a committee thereof. Although management of the Company believes that this provision may discourage stockholder attempts to disrupt the business of the Company between annual meetings of stockholders, its effect may be to deter hostile takeovers by making it more difficult for a person or entity to obtain immediate control of the Company and impose its will on remaining stockholders prior to the next annual meeting of stockholders of the Company. Article X of the Company's Certificate of Incorporation also provides that there will be no cumulative voting by stockholders for the election of the Company's directors. The absence of cumulative voting rights effectively means that the holders of a majority of the shares voted at a meeting of stockholders could, if they so chose, elect all directors of the Company, thus precluding minority stockholder representation on the Company's Board of Directors. 110 116 RESTRICTIONS ON ACQUISITIONS OF SECURITIES LIMITATIONS ON ACQUISITIONS OF CAPITAL STOCK. Article XIV of the Certificate of Incorporation provides that for a period of five years from the effective date of the completion of the Conversion, no person shall directly or indirectly offer to acquire or acquire the beneficial ownership of more than 10% of any class of equity security of the Company. In addition, any person who acquires the beneficial ownership of more than 10% of any equity security of the Company, the equity securities in excess of 10% shall not be counted as shares entitled to vote and shall not be counted as outstanding for purposes of determining a quorum or the affirmative vote necessary to approve any matter submitted to the stockholders for a vote. If at any time after five years from the effective date of the Conversion, any person acquires the beneficial ownership of more than 10% of any class of equity security of the Company, then, with respect to each vote in excess of 10%, the record holders of voting stock of the Company beneficially owned by such person shall be entitled to cast only one-hundredth of one vote with respect to each vote in excess of 10% of the voting power of the outstanding shares of voting stock of the Company which such record holders would otherwise be entitled to cast without giving effect to the provision, and the aggregate voting power of such record holders shall be allocated proportionately among such record holders. An exception from the foregoing restrictions is provided if the acquisition of more than 10% of the securities received the prior approval by a two-thirds vote of the Company's Continuing Directors. Under the Company's Certificate of Incorporation, the restriction on voting shares beneficially owned in violation of the foregoing limitations is imposed automatically. In order to prevent the imposition of such restrictions, the Board of Directors must take affirmative action approving in advance a particular offer to acquire or acquisition. This provision does not apply to (i) any underwriter or member of an underwriting or selling group involving a public sale or resale of securities of the Company or a subsidiary of the Company, (ii) any proxy granted to one or more of the Company's "Continuing Directors," as defined, by a stockholder of the Company, (iii) any employee benefit plans of the Company or a subsidiary thereof or (iv) any transaction approved in advance by a majority of the Continuing Directors. BOARD CONSIDERATION OF CERTAIN NONMONETARY FACTORS IN THE EVENT OF AN OFFER BY ANOTHER PARTY Article XVI of the Certificate of Incorporation directs the Board of Directors, in evaluating a Business Combination or a tender or exchange offer or similar transaction or arrangement, to consider, in addition to the adequacy of the consideration to be received in connection with any such transaction, certain specified factors and any other factors the board deems relevant. Among the factors the board must consider are: the social and economic effects of the transaction on the Company and its subsidiaries, employees, depositors, loan and other customers and creditors and the other elements of the communities in which the Company and its subsidiaries operate or are located; the business and financial condition and earnings prospects of the acquiring person or entity; and the competence, experience and integrity of the acquiring person or entity and the possible effects of such conditions upon the Company and its subsidiaries and the other elements of the communities in which the Company and its subsidiaries operate or are located; and its or their management. The Board of Directors feels a responsibility for maintaining the financial and business integrity of the Company. Savings institutions and their holding companies occupy positions of special trust in the communities they serve. They also provide opportunities for abuse by those who are not of sufficient experience or competence or financial means to act professionally and responsibly with respect to management of a financial institution. It is of concern to the Company that it be managed in the interest of the communities that it serves and that it and its subsidiary association maintain its integrity as an institution. One effect of this provision might be to encourage consultation by an offeror with the Board of Directors prior to or after commencing a tender offer in an attempt to prevent a contest from developing. This provision thus may strengthen the Board of Directors' position in dealing with any potential offeror which might attempt to effect a takeover of the Company. The provision will not make a Business Combination regarded by the Board of Directors as being in the interests of the Company more difficult to accomplish, but it will permit the Board of Directors to determine that a Business Combination or tender or exchange offer is not in the interests of the Company (and thus to oppose it) on the basis of various factors deemed relevant. 111 117 ADDITIONAL ANTI-TAKEOVER PROVISIONS It should be noted that the foregoing provisions are not the only provisions having an anti-takeover effect. For example, the Company's Certificate of Incorporation authorizes the issuance of up to 5,000,000 shares of serial preferred stock, which may be issued with rights and preferences which could impede an acquisition. This preferred stock, none of which has been issued by the Company, together with authorized but unissued shares of common stock (the Certificate of Incorporation authorizes the issuance of up to 20,000,000 shares of the Common Stock), also could represent additional capital required to be purchased by the acquiror. Article XI of the Company's Certificate of Incorporation provides that any stockholder desiring to make a nomination for the election of directors or a proposal for new business at a meeting of stockholders must submit written notice to the Secretary of the Company not fewer than 30 or more than 60 days in advance of the meeting. Management believes that it is in the best interests of the Company and its stockholders to provide sufficient time to enable management to disclose to stockholders information about a dissident slate of nominations for directors. This advance notice requirement may also give management time to solicit its own proxies in an attempt to defeat any dissident slate of nominations should management determine that doing so is in the best interest of stockholders generally. Similarly, adequate advance notice of stockholder proposals will give management time to study such proposals and to determine whether to recommend to the stockholders that such proposals be adopted. Article XII of the Company's Certificate of Incorporation provides that the number of directors of the Company (exclusive of directors, if any, to be elected by the holders of any to-be-issued shares of preferred stock of the Company) shall be such number, not more than 15 as shall be provided from time to time in or in accordance with the Company's Bylaws. The power to determine the number of directors within these numerical limitations and the power to fill vacancies, whether occurring by reason of an increase in the number of directors or by resignation, is vested in the Company's Board of Directors. The overall effect of such provisions may be to prevent a person or entity from immediately acquiring control of the Company through an increase in the number of the Company's directors and election of his or its nominees to fill the newly created vacancies. Article XIX of the Company's Certificate of Incorporation provides for the Company's Bylaws to be amended by the affirmative vote of a majority of the Company's Board of Directors, but provides that the Bylaws may be amended by the stockholders only by vote of at least 80% of the outstanding shares of the Company's stock entitled to vote generally in the election of directors cast at a meeting called for that purpose. The Company's Bylaws contain numerous powers concerning its governance, such as fixing the number of directors and determining the number of directors constituting a quorum. By reducing the ability of a potential corporate raider to make changes in the Company's Bylaws and to reduce the authority of the Board of Directors or impede its ability to manage the Company, this provision could have the effect of discouraging a tender offer or other takeover attempt where the ability to make fundamental changes through bylaw amendments is an important element of the takeover strategy of the acquiror. Article XX of the Company's Certificate of Incorporation provides that specified provisions contained in the Certificate of Incorporation may not be repealed or amended unless approved by the affirmative vote of the holders of at least 80% of the outstanding shares of the Company's stock entitled to vote generally in the election of directors cast at a meeting called for that purpose; provided, however, that such provisions may be repealed or amended upon a majority stockholder vote if first approved by a majority of the Continuing Directors, as defined in Article XV. This requirement exceeds the majority vote of stockholders present and entitled to vote that would otherwise be required by Oklahoma law for the repeal or amendment of a provision of the Certificate of Incorporation. The specific provisions for which an 80% vote is required by Article XX are (i) Article X governing quorum requirements, the calling of special meetings and the absence of cumulative voting rights, (ii) Article XI requiring written notice to the Company of nominations for the election of directors and new business proposals, (iii) Article XII governing the number of the Company's Board of Directors, the filling of vacancies on the Board of Directors and classified terms of the Board of Directors, (iv) Article XIII governing removal of directors, (v) Article XIV restricting certain acquisitions of more than 10% of the Company's stock, (vi) Article XV governing the 112 118 requirement for the approval of certain business combinations, (vii) Article XVI regarding the consideration of certain nonmonetary factors in the event of an offer by another party, (viii) Article XVII providing for the indemnification of directors, officers, employees and agents of the Company, (ix) Article XVIII pertaining to the elimination of the liability of the directors to the Company and its stockholders for monetary damages, with certain exceptions, for breach of fiduciary duty, and (x) Articles XIX and XX governing the required stockholder vote for amending the Bylaws and Certificate of Incorporation of the Company. In addition to discouraging a takeover attempt which a majority of the stockholders of the Company might determine to be in their best interest or in which the stockholders of the Company might receive a premium over the current market prices for their shares, the effect of these provisions may render the removal of management more difficult. It is thus possible that incumbent officers and directors might be able to retain their positions (at least until their term of office expires) even though a majority of the stockholders desires a change. BENEFIT PLANS In addition to the provisions of the Company's Certificate of Incorporation and Bylaws described above, certain existing and proposed benefit plans of the Company and the Bank -- including the employment agreements entered with the Bank's President and Executive Vice President, the severance agreements entered with the Bank's other executive officer, the Option Plan and the MRP -- contain or are expected to contain provisions which also may discourage hostile takeover attempts which the Boards of Directors of the Company and the Bank might conclude are not in the best interests of the Company, the Bank or the Company's stockholders. For a description of certain benefit plans and provisions of such plans relating to changes in control of the Company or the Bank, see "Management of the Bank -- Certain Benefit Plans and Arrangements." THE PURPOSE AND ANTI-TAKEOVER EFFECT OF THE COMPANY'S CERTIFICATE OF INCORPORATION AND BYLAWS The Boards of Directors of the Company and the Bank believe that the provisions described above reduce the Company's vulnerability to takeover attempts and certain other transactions which have not been negotiated with and approved by its Board of Directors. These provisions will also assist the Company and the Bank in the orderly deployment of the net proceeds of the Conversion into productive assets during the initial period after the Conversion. The Boards of Directors of the Company and the Bank believe these provisions are in the best interests of the Bank and of the Company and its stockholders. In the judgment of the Boards of Directors of the Company and the Bank, the Company's Board is in the best position to consider all relevant factors and to negotiate for what is in the best interests of the stockholders and the Company's other constituents. Accordingly, the Boards of Directors of the Company and the Bank believe that it is in the best interests of the Company and its stockholders to encourage potential acquirors to negotiate directly with the Company's Board of Directors and that these provisions will encourage such negotiations and discourage nonnegotiated takeover attempts. It is also the view of the Board of Directors that these provisions should not discourage persons from proposing a merger or other transaction at prices reflective of the true value of the Company and which is in the best interests of all stockholders. Attempts to acquire control of financial institutions and their holding companies have recently become increasingly common. Takeover attempts which have not been negotiated with and approved by the Board of Directors present to stockholders the risk of a takeover on terms which may be less favorable than might otherwise be available. A transaction which is negotiated and approved by the Board of Directors, on the other hand, can be carefully planned and undertaken at an opportune time in order to obtain maximum value for the Company and stockholders, with due consideration given to matters such as the management and business of the acquiring corporation and maximum strategic development of the Company's assets. An unsolicited takeover proposal can seriously disrupt the business and management of a corporation and cause great expense. Although a tender offer or other takeover attempt may be made at a price substantially above then current market prices, such offers are sometimes made for less than all the outstanding shares of a target company. As a result, stockholders may be presented with the alternative of partially liquidating their investment 113 119 at a time that may be disadvantageous, or retaining their investment in an enterprise which is under different management and whose objectives may not be similar to those of the remaining stockholders. The concentration of control that could result from a tender offer or other takeover attempt could also deprive the Company's remaining stockholders of the benefits of having the Common Stock quoted on a Nasdaq market and of certain protective provisions of the Securities Exchange Act. Despite the belief of management of the Bank and the Company as to the benefits to stockholders of these provisions of the Company's Certificate of Incorporation and Bylaws, these provisions may also have the effect of discouraging a future takeover attempt which would not be approved by the Company's Board, but pursuant to which the stockholders may receive a substantial premium for their shares over then current market prices. As a result, stockholders who might desire to participate in such a transaction may not have any opportunity to do so. Such provisions will also render the removal of the Company's Board of Directors and management more difficult and may tend to stabilize the Company's stock price, thus limiting gains which might otherwise be reflected in price increases due to a potential merger or acquisition. The Board of Directors, however, has concluded that the potential benefits of these provisions outweigh the possible disadvantages. Pursuant to applicable regulations, at any annual or special meeting of its stockholders after the Conversion, the Company may adopt additional Certificate of Incorporation provisions regarding the acquisition of its equity securities that would be permitted to an Oklahoma corporation. The Company and the Bank do not presently intend to propose the adoption of further restrictions on the acquisition of the Company's equity securities. DESCRIPTION OF CAPITAL STOCK OF THE COMPANY GENERAL The Company is authorized to issue 20,000,000 shares of the Common Stock and 5,000,000 shares of serial preferred stock, par value $0.01 per share. The Company currently expects to issue a maximum of 2,645,000 shares of the Common Stock and will issue no shares of serial preferred stock in the Conversion. The Company expects to reserve for future issuance under the Option Plan an amount of authorized but unissued shares of Common Stock equal to 10% of the shares to be issued in the Conversion. The capital stock of the Company will represent nonwithdrawable capital, will not be an account of an insurable type, and will not be insured by the FDIC. COMMON STOCK Voting Rights. Each share of the Common Stock will have the same relative rights and will be identical in all respects with every other share of the Common Stock. The holders of the Common Stock will possess exclusive voting rights in the Company, except to the extent that shares of serial preferred stock issued in the future may have voting rights, if any. Each holder of shares of the Common Stock will be entitled to one vote for each share held of record on all matters submitted to a vote of holders of shares of the Common Stock. See "Certain Restrictions on Acquisition of the Company and the Bank -- Oklahoma Anti-Takeover Statutes" and "Certain Anti-Takeover Provisions in the Certificate of Incorporation and Bylaws -- Restrictions on Acquisitions of Securities" for information regarding a possible reduction in voting rights. Dividends. The Company may, from time to time, declare dividends to the holders of the Common Stock, who will be entitled to share equally in any such dividends. For information as to cash dividends, see "Dividends" and "Taxation." Liquidation. In the event of a liquidation, dissolution or winding up of the Company, each holder of shares of the Common Stock would be entitled to receive, after payment of all debts and liabilities of the Company, a pro rata portion of all assets of the Company available for distribution to holders of the Common Stock. If any serial preferred stock is issued, the holders thereof may have a priority in liquidation or dissolution over the holders of the Common Stock. 114 120 Restrictions on Acquisition of the Common Stock. See "The Conversion -- Regulatory Restrictions on Acquisition of the Common Stock," "Certain Restrictions on Acquisition of the Company and the Bank" and "Certain Anti-Takeover Provisions in the Certificate of Incorporation and Bylaws" for discussions of limitations on acquisition of shares of the Common Stock. Other Characteristics. Holders of the Common Stock will not have preemptive rights with respect to any additional shares of the Common Stock which may be issued. The Common Stock is not subject to call for redemption, and the outstanding shares of the Common Stock, when issued and upon receipt by the Company of the full purchase price therefor, will be fully paid and nonassessable. SERIAL PREFERRED STOCK None of the 5,000,000 authorized shares of serial preferred stock of the Company will be issued in the Conversion. After the Conversion is completed, the Board of Directors of the Company will be authorized to issue serial preferred stock and to fix and state voting powers, designations, preferences or other special rights of such shares and the qualifications, limitations and restrictions thereof. The serial preferred stock may rank prior to the Common Stock as to dividend rights or liquidation preferences, or both, and may have full or limited voting rights. The Board of Directors has no present intention to issue any of the serial preferred stock. REGISTRATION REQUIREMENTS The Company will register its Common Stock with the SEC pursuant to the Securities Exchange Act upon the completion of the Conversion and does not expect to deregister said shares for a period of at least three years following the completion of the Conversion. Upon such registration, the proxy and tender offer rules, insider trading reporting and restrictions, annual and periodic reporting and other requirements of the Securities Exchange Act will be applicable. LEGAL MATTERS The legality of the Common Stock and the federal income tax consequences of the Conversion will be passed upon for the Company by Housley Kantarian & Bronstein, P.C., Washington, D.C. The Arkansas income tax consequences of the Conversion will be passed upon by Gaunt & Co., LTD, certified public accountants, Little Rock, Arkansas. Housley Kantarian & Bronstein, P.C. and Gaunt & Co., LTD have consented to the references herein to their opinions. Certain legal matters may be passed upon for Trident Securities by Elias, Matz, Tiernan & Herrick, Washington, D.C. EXPERTS The consolidated financial statements of Heartland Community Bank and subsidiaries at June 30, 1996 and 1995 and for each of the years in the two year period ended June 30, 1996 have been included herein in reliance upon the report of Gaunt & Co., independent certified public accountants, appearing herein and upon the authority of said firm as experts in accounting and auditing. Ferguson & Co., has consented to the publication herein of the summary of its letter to the Bank setting forth its opinion as to the estimated pro forma aggregate market value of the Common Stock to be issued in the Conversion and the value of subscription rights to purchase the Common Stock and to the use of its name and statements with respect to it appearing herein. 115 121 ADDITIONAL INFORMATION The Company has filed with the SEC a Registration Statement on Form SB-2 (File No. _________) under the Securities Act with respect to the Common Stock offered hereby. This Prospectus does not contain all the information set forth in the Registration Statement, including the exhibits thereto, certain parts of which are omitted in accordance with the rules and regulations of the SEC. The exhibits include, among other things, the appraisal report prepared by Ferguson & Co. and a confidential business plan prepared on behalf of the Bank and the Company and filed as part of the Application for Conversion with the OTS (see below). Such information may be inspected at the public reference facilities maintained by the SEC at 450 Fifth Street, N.W., Room 1024, Washington, D.C. 20549. Copies may be obtained at prescribed rates from the Public Reference Section of the SEC at 450 Fifth Street, N.W., Washington, D.C. 20549, and at the regional offices of the SEC at 75 Park Place, Fourteenth Floor, New York, New York 10007 and Room 3190, John C. Kluczynski Building, 230 South Dearborn Street, Chicago, Illinois 60604. Copies of such material can be obtained by mail from the SEC at prescribed rates from the Public Reference Section of the SEC at 450 Fifth Street, N.W., Washington, D.C. 20549. In addition, the SEC maintains a World Wide Web site that contains reports, proxy and information statements and other information regarding registrants that file electronically with the SEC, including the Company. The address for the SEC's Website is "http://www.sec.gov". The statements contained in this Prospectus as to the contents of any contract or other document filed as an exhibit to the registration statement are, of necessity, brief descriptions thereof and are not necessarily complete; each such statement is qualified by reference to such contract or document. The Bank has filed with the OTS an Application for Conversion. This document omits certain information contained in such application, including the exhibits thereto. The exhibits include, among other things, the appraisal report prepared by Ferguson & Co. and a confidential business plan prepared on behalf of the Bank and the Company. The Application for Conversion can be inspected, without charge, at the offices of the OTS, 1700 G Street, N.W., Washington, D.C. 20552, and at the office of the OTS Regional Director, Midwest Regional Office, at 122 West John Carpenter Freeway, Suite 600, Irving, Texas 75039. 116 122 INDEX TO FINANCIAL STATEMENTS HEARTLAND COMMUNITY BANK AND SUBSIDIARIES (FORMERLY FIRST FEDERAL SAVINGS AND LOAN ASSOCIATION OF CAMDEN)
Page ---- Independent Auditors' Report . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-2 Consolidated statements of financial condition as of September 30, 1996 (unaudited) and June 30, 1996 and 1995 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-3 Consolidated statements of income for the quarters ended September 30, 1996 and 1995 (unaudited) and the years ended June 30, 1996 and 1995 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-5 Consolidated statements of equity for the quarters ended September 30, 1996 and 1995 (unaudited) and the years ended June 30, 1996 and 1995 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-7 Consolidated statements of cash flows for the quarters ended September 30, 1996 and 1995 (unaudited) and years ended June 30, 1996 and 1995 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-8 Notes to consolidated financial statements for quarters ended September 30, 1996 and 1995 (unaudited) and the years ended June 30, 1996 and 1995 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-10 Consolidated statements of income of subsidiary for the period July 1 1994 to May 3, 1996 (unaudited) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-31 Consolidated statements of stockholders' equity of subsidiary for the period July 1, 1994 to May 3, 1996 (unaudited) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-32 Consolidated statements of cash flows of subsidiary for the period July 1, 1994 to May 3, 1996(unaudited) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-33 Notes to financial statements of the subsidiary (unaudited) . . . . . . . . . . . . . . . . . . . . . . . . . . F-34
F-1 123 [GAUNT & COMPANY LETTERHEAD] INDEPENDENT AUDITORS' REPORT Board of Directors Heartland Community Bank and Subsidiaries (formerly First Federal Savings and Loan Association of Camden) Camden, Arkansas We have audited the accompanying consolidated statements of financial condition of Heartland Community Bank (formerly First Federal Savings and Loan Association of Camden) and its subsidiary as of June 30, 1996 and 1995 and the related consolidated statements of income, equity and cash flows for the years then ended. These financial statements are the responsibility of the Bank's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatements. 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 in significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Heartland Community Bank (formerly First Federal Savings and Loan Association of Camden) and its subsidiary as of June 30, 1996 and 1995 and the results of their consolidated operations and cash flows for the years ended in conformity with generally accepted accounting principles. As discussed in note 18, the financial statements for the year ended June 30, 1996, are consolidated as a result of the acquisition of the wholly owned-subsidiary on May 3, 1996. Also discussed in note 1c, as of July 1, 1994 the Bank changed its method of accounting for certain investments in debt and equity securities. August 28, 1996 /s/ GAUNT & COMPANY, LTD. F-2 124 HEARTLAND COMMUNITY BANK AND SUBSIDIARIES Consolidated Statements of Financial Condition September 30, 1996, June 30, 1996 and 1995 ASSETS
(UNAUDITED) ----------- 9/30/96 6/30/96 6/30/95 ------- ------- ------- Cash and cash equivalents $ 803,693 $ 422,509 $ 195,703 Interest-bearing deposits in other financial institutions 2,900,234 16,869,373 2,929,896 Investment Securities, (Note 2) Securities available for sale 16,693,638 5,279,625 957,500 Securities held-to-maturity (estimated market value of $1,849,200 at June 30, 1995) 2,000,000 Mortgage-backed securities, (Note 3) Securities available for sale 12,195,438 12,155,199 6,088,450 Securities held-to-maturity (estimated market value of $43,210,150, $44,934,075 and $55,739,699) 42,636,028 45,212,891 57,144,915 Loans, net (Note 4) 89,334,387 84,564,365 55,112,980 Accrued interest receivable 1,093,053 977,004 772,620 Foreclosed real estate, net 118,684 168,206 88,528 Premises and equipment (Note 7) 3,266,841 2,124,293 637,237 Stock in Federal Home Loan Bank 1,203,000 1,199,000 917,000 Refundable income taxes 856,627 556,989 Deferred tax asset 238,532 46,526 Goodwill, net of amortization (Note 18) 1,203,892 1,235,298 Other assets 427,815 429,733 142,339 -------------- ---------------- -------------- TOTAL ASSETS $ 172,971,862 $ 171,241,011 $ 126,987,168 ============== ================ ==============
The accompanying notes to consolidated financial statements are an integral part of these statements. F-3 125 HEARTLAND COMMUNITY BANK AND SUBSIDIARIES Consolidated Statements of Financial Condition September 30, 1996, June 30, 1996 and 1995 LIABILITIES AND EQUITY
(UNAUDITED) ----------- LIABILITIES 9/30/96 6/30/96 6/30/95 - ----------- ------- ------- ------- Deposits (Note 8) $ 147,172,744 $ 145,919,251 $ 112,005,588 Advances - Federal Home Loan Bank (Note 9) 10,000,000 10,000,000 Note payable (Note 10) 400,000 Accrued interest payable 417,368 395,939 235,169 Advances from borrowers for taxes and insurance 264,326 114,004 248,581 Accrued income taxes payable 10,191 Deferred tax liability 174,662 Accrued assessment FDIC 881,824 Other liabilities 357,599 577,692 42,005 -------------- ---------------- -------------- Total Liabilities $ 159,493,861 $ 157,006,886 $ 112,716,196 -------------- ---------------- -------------- EQUITY Retained earnings $ 13,677,020 $ 14,520,438 14,289,760 Unrealized loss on securities available for sale, net of applicable deferred taxes (199,019) (286,313) (18,788) -------------- ---------------- -------------- Total Equity $ 13,478,001 $ 14,234,125 $ 14,270,972 -------------- ---------------- -------------- TOTAL LIABILITIES and EQUITY $ 172,971,862 $ 171,241,011 $ 126,987,168 ============== ================ ==============
F-4 126 HEARTLAND COMMUNITY BANK AND SUBSIDIARIES Consolidated Statements of Income For the quarters ended September 30, 1996 and 1995, and the years ended June 30, 1996 and 1995
(UNAUDITED) (UNAUDITED) ----------- ----------- INTEREST INCOME 9/30/96 9/30/95 6/30/96 6/30/95 - --------------- ------- ------- ------- ------- Interest and fees on loans $ 1,861,425 $ 1,184,115 $ 5,352,338 $ 4,526,621 Investment securities 114,854 85,423 252,560 202,942 Mortgage-backed and related securities 942,439 1,088,802 4,215,125 3,927,181 Other interest income 196,583 61,107 513,158 188,038 -------------- ------------ --------------- ------------ Total interest income $ 3,115,301 $ 2,419,447 $ 10,333,181 $ 8,844,782 -------------- ------------ --------------- ------------ INTEREST EXPENSE - ---------------- Deposits (Note 8) $ 1,908,114 $ 1,489,337 $ 6,314,641 $ 4,979,125 Borrowed funds 155,935 41,361 451,957 133,356 Notes payable 1,973 -------------- ------------ --------------- ------------ Total interest expense $ 2,066,022 $ 1,530,698 $ 6,766,598 $ 5,112,481 -------------- ------------ --------------- ------------ Net interest income $ 1,049,279 $ 888,749 $ 3,566,583 $ 3,732,301 Provision for loan losses (Note 4) $ 560,738 $ $ 42,483 $ -------------- ------------ --------------- ------------ Net interest income after provision for loan losses $ 488,541 $ 888,749 $ 3,524,100 $ 3,732,301 -------------- ------------ --------------- ------------ NONINTEREST INCOME - ------------------ Net realized gain (loss) on sales of available for sale securities (Note 14) $ $ $ (926,947) $ 101,994 Banking service charges 41,506 16,010 79,245 62,093 Other income 18,446 11,786 74,050 31,936 -------------- ------------ --------------- ------------ Total noninterest income (loss) $ 59,952 $ 27,796 $ (773,652) $ 196,023 -------------- ------------ --------------- ------------
F-5 127 HEARTLAND COMMUNITY BANK AND SUBSIDIARIES Consolidated Statements of Income For the quarters ended September 30, 1996 and 1995, and the years ended June 30, 1996 and 1995
(UNAUDITED) (UNAUDITED) ----------- ----------- NONINTEREST EXPENSE 9/30/96 9/30/95 6/30/96 6/30/95 - ------------------- ------- ------- ------- ------- Salaries and compensation $ 496,389 $ 208,587 $ 1,239,769 $ 835,254 Occupancy and equipment 93,916 40,025 172,278 117,467 Federal deposit insurance premiums 971,067 63,160 268,370 257,126 Loss on foreclosed real estate 2,356 601 43,439 19,127 Data processing expenses 60,027 27,287 114,171 97,984 Professional fees 104,482 9,250 109,986 47,376 Amortization of goodwill 31,406 20,937 Other expenses 155,533 63,460 377,209 235,627 -------------- ------------ --------------- ------------ Total noninterest expense $ 1,915,176 $ 412,370 $ 2,346,159 $ 1,609,961 -------------- ------------ --------------- ------------ Net noninterest (expense) $ (1,855,224) $ (384,574) $ (3,119,811) $ (1,413,938) -------------- ------------ --------------- ------------ Income (loss) before income taxes and cumulative effect of change in accounting principle $ (1,366,683) $ 504,175 $ 404,289 $ 2,318,363 Provision for income taxes (523,265) 174,512 173,611 966,763 -------------- ------------ --------------- ------------ Income (loss) before cumulative effect of change in accounting principle $ (843,418) $ 329,663 $ 230,678 $ 1,351,600 Change in accounting principle - cumulative effect of application of Statement on Financial Accounting Standards No. 115 "Accounting for Certain Investments in Debt Equity Securities 77,567 -------------- ------------ --------------- ------------ Net income (loss) $ (843,418) $ 329,663 $ 230,678 $ 1,429,167 ============== ============ =============== ============
The accompanying notes to consolidated financial statements are an integral part of these statements. F-6 128 HEARTLAND COMMUNITY BANK AND SUBSIDIARIES Consolidated Statements of Equity For the quarters ended September 30, 1996 and 1995, and the years ended June 30, 1996 and 1995
(UNAUDITED) (UNAUDITED) ----------- ----------- RETAINED EARNINGS 9/30/96 9/30/95 6/30/96 6/30/95 - ----------------- ------- ------- ------- ------- Balance beginning of period $ 14,520,438 $ 14,289,760 $ 14,289,760 $ 12,860,593 Net income (loss) (843,418) 329,663 230,678 1,429,167 -------------- ------------- --------------- ------------- Balance end of period $ 13,677,020 $ 14,619,423 $ 14,520,438 $ 14,289,760 -------------- ------------- --------------- ------------- UNREALIZED DEPRECIATION ON SECURITIES - ------------------------------------- AVAILABLE FOR SALE ------------------ Balance beginning of period $ (286,313) $ (18,788) $ (18,788) $ 0 Net increase (decrease), net of applicable deferred income taxes 87,294 10,371 (267,525) (18,788) -------------- ------------- --------------- ------------- Balance end of period $ (199,019) $ (8,417) $ (286,313) $ (18,788) -------------- ------------- --------------- ------------- Total equity at period end $ 13,478,001 $ 14,611,006 $ 14,234,125 $ 14,270,972 ============== ============= =============== =============
The accompanying notes to consolidated financial statements are an integral part of these statements. F-7 129 HEARTLAND COMMUNITY BANK AND SUBSIDIARIES Consolidated Statements of Cash Flow For the quarters ended September 30, 1996 and 1995, and the years ended June 30, 1996 and 1995
(UNAUDITED) (UNAUDITED) ----------- ----------- CASH FLOWS FROM OPERATING ACTIVITIES 9/30/96 9/30/95 6/30/96 6/30/95 - ------------------------------------ ------- ------- ------- ------- Net Income (Loss) $ (843,418) $ 329,663 $ 230,678 $ 1,429,167 Adjustments to reconcile net income to cash provided by operating activities: Depreciation $ 43,102 $ 20,250 $ 66,005 $ 51,234 Amortization of: Deferred loan origination fees (8,121) 6,142 6,258 55,349 Goodwill 31,406 20,937 Premiums and discounts on loans (5,197) (478) 309 (119) Premiums and discounts on investment securities 52,737 29,125 125,952 106,296 Provision for loan loss 560,738 42,483 Provision for loss on foreclosed real estate 30,000 Deferred income taxes (217,899) (59,176) 147,239 Cumulative effect of FASB #115 adoption (77,567) Net (gain) loss on sale of investments: Available for sale 941,324 (99,093) Held-to-maturity (14,378) (2,902) (Gain) loss on disposal of other assets (3,118) (5,732) 12,468 Decrease (increase) in accrued interest receivable (116,050) (36,928) 4,743 (60,723) Increase in accrued interest payable 22,878 (6,444) 29,818 35,718 (Increase) decrease in other assets 53,094 52,151 (174,649) (93,218) Increase in other liabilities 549,699 379,167 442,156 5,691 (Increase) in prepaid / payable income taxes (138,045) 109,079 (567,830) 37,729 ------------ ------------- --------------- ------------- Total adjustments $ 825,224 $ 552,064 $ 888,221 $ 118,102 ------------ ------------- --------------- ------------- Net cash flows provided (used) by operating activities $ (18,194) $ 881,727 $ 1,118,899 $ 1,547,269 ------------ ------------- --------------- -------------
F-8 130 HEARTLAND COMMUNITY BANK AND SUBSIDIARIES Consolidated Statements of Cash Flow For the quarters ended September 30, 1996 and 1995, and the years ended June 30, 1996 and 1995
(UNAUDITED) (UNAUDITED) ----------- ----------- 9/30/96 9/30/95 6/30/96 6/30/95 ------- ------- ------- ------- CASH FLOWS FROM INVESTING ACTIVITIES: - ------------------------------------- Loan originations and principal payments on loans $ (5,332,238) $ (4,697,660) $ (9,594,279) $ (1,226,817) Proceeds from sale of investment securities: Available for sale 18,151,851 7,023,989 Held-to-maturity 406,779 Purchase of investment securities available for sale (12,195,000) (5,745,073) (1,995,000) (9,780,348) Purchase of investment securities held-to-maturity (20,475,412) (5,094,695) Principal payments on investment securities 3,431,700 2,987,725 10,506,353 8,641,932 Investment in subsidiary (1,492,782) Investment foreclosed real estate (2,378) Proceeds from sale of other assets 3,215 19,723 55,514 Purchases of premises and equipment (1,185,949) (18,002) (762,178) (167,526) ------------- ------------- --------------- ------------- Net cash flows used by investing activities $ (15,278,272) $ (7,473,010) $ (5,641,724) $ (143,550) ------------- ------------- --------------- ------------- CASH FLOWS FROM FINANCING ACTIVITIES: - ------------------------------------- Net increase (decrease) in demand deposits, NOW accounts, passbook savings accounts and certificates of deposit $ 1,253,493 $ 1,388,774 $ 8,806,600 $ (1,345,081) Net (decrease) increase in mortgage escrow funds 55,018 49,632 (117,491) 11,983 Proceeds from note payable 400,000 Advances from FHLB 5,000,000 10,000,000 ------------- ------------- --------------- ------------- Net cash flows provided (used) by financing activities $ 1,708,511 $ 6,438,406 $ 18,689,109 $ (1,333,098) ------------- ------------- --------------- ------------- Net increase (decrease) in cash and cash equivalents $(13,587,955) $ (152,877) $ 14,166,283 $ 70,621 Cash and cash equivalents, beginning of year $ 17,291,882 $ 3,125,599 $ 3,125,599 $ 3,054,978 ------------- ------------- --------------- ------------- Cash and cash equivalents, end of year $ 3,703,927 $ 2,972,722 $ 17,291,882 $ 3,125,599 ============= ============= =============== ============= SUPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: - ------------------------------------------------- Cash paid during the period for: Interest $ 2,044,593 $ 1,344,028 $ 6,775,124 $ 4,961,607 Income taxes $ $ 10,191 $ 786,845 $ 782,602 Loans transferred to foreclosed real estate $ 126,307 $ 126,307 $ 126,307 $ 122,165
The accompanying notes to consolidated financial statements are an integral part of these statements. F-9 131 HEARTLAND COMMUNITY BANK AND SUBSIDIARIES Notes to Consolidated Financial Statements September 30, 1996 and 1995 (unaudited) and June 30, 1996 and 1995 (1) Summary of Significant Accounting Policies (a) Basis of Consolidation The consolidated financial statements as of June 30, 1996, include the accounts of Heartland Community Bank (formerly First Federal Savings and Loan Bank of Camden), (See Note 20), and its wholly-owned subsidiary, Heritage Banc Holding, Inc. and its wholly-owned subsidiary. All material intercompany balances and transactions have been eliminated in the consolidation. (See also Note 18) (b) Cash Equivalents For purposes of the statements of cash flows, the Bank considers all highly liquid debt instruments with original maturities when purchased of three months or less to be cash equivalents. (c) Investment Securities and Mortgage-Backed Securities In May 1993, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No.115, "Accounting for Certain Investments in Debt and Equity Securities." The Bank adopted the provisions of the new standard for investments held as of July 1, 1994. Under the new rules, securities that the Bank has both the positive intent and ability to hold to maturity are carried at amortized cost. Securities that the Bank does not have the positive intent and ability to hold to maturity are classified as available-for-sale or trading and are carried at fair value. Unrealized holding gains and losses, net of tax, on securities classified as available-for-sale are carried as a separate component of equity. The Bank does not carry any trading securities. The cumulative effect as of July 1, 1994, of adopting Statement No.115 included the reversal of $77,567 previously included in earnings that is to be excluded from earnings under this statement. Mortgage-backed securities represent participating interests in pools of long-term first mortgage loans originated and serviced by issuers of the securities. Mortgage-backed securities that are classified held-to-maturity are carried at unpaid principal balances, adjusted for unamortized premiums and unearned discounts. Premiums and discounts are amortized using methods approximating the interest method over the remaining period to contractual maturity, adjusted for anticipated prepayments. Gains and losses on the sale of securities are determined using the specific identification method. (d) Loans Receivable Loans receivable are stated at unpaid principal balances, less the allowance for loan losses, and net of deferred loan-origination fees and discounts. Discounts on first mortgage loans are amortized to income using the interest method over the remaining period to contractual maturity, adjusted for anticipated prepayments. Discounts on consumer loans are recognized over the lives of the loans using methods that approximate the interest method. F-10 132 HEARTLAND COMMUNITY BANK AND SUBSIDIARIES Notes to Consolidated Financial Statements September 30, 1996 and 1995 (unaudited) and June 30, 1996 and 1995 (1) Summary of Significant Accounting Policies (Continued) (d) Loans Receivable (continued) The allowance for loan losses is increased by charges to income and decreased by charge-offs (net of recoveries.) Management's periodic evaluation of the adequacy of the allowance is based on the Bank's past loan loss experience, known and inherent risks in the portfolio, adverse situations that may affect the borrower's ability to repay, the estimated value of any underlying collateral, and current economic conditions. The Bank has adopted SFAS No.114 "Accounting by Creditors for Impairment of a Loan" which was amended by SFAS No.118 "Accounting by Creditors for Impairment of a Loan - Income Recognition and Disclosures" on October 1, 1995. SFAS No.114 prescribed the recognition criterion for loan impairment and the measurement methods for certain impaired loans and loans whose terms are modified in troubled debt restructurings. When a loan is impaired, a creditor must measure impairment based on (1) the present value of the impaired loan's expected future cash flows discounted at the loan's original effective interest rate, (2) the observable market price of the impaired loan, or (3) the fair value of the collateral for a collateral-dependent loan. Any measurement losses are to be recognized through additions to the allowance for loan losses. SFAS No.114 and SFAS No.118 were effective for fiscal years beginning after December 15, 1994. The adoption of SFAS No.114 and SFAS No.118 had no material effect on the Bank's consolidated financial statements for the year ended June 30, 1996. Uncollectible interest on loans that are contractually past due is charged off, or an allowance is established based on management's periodic evaluation. The allowance is established by a charge to interest income equal to all interest previously accrued, and income is subsequently recognized only to the extent that cash payments are received until, in management's judgment, the borrower's ability to make periodic interest and principal payments is back to normal, in which case the loan is returned to accrual status. (e) Loan-Origination Fees, Commitment Fees, and Related Costs Prior to July 1, 1988, loan fees received were recognized as current income to the extent that they represented a reimbursement of loan underwriting costs, which were recognized as expense when incurred. Fees deferred prior to 1988 on loans are being amortized to income over ten years. Loan fees received on or after July 1, 1988, are accounted for in accordance with FASB Statement No. 91, "Accounting for Nonrefundable Fees and Cost Associated with Originating or Acquiring Loans and Initial Direct Costs of Leases". Loan fees and certain direct loan origination costs are deferred, and the net fee or cost is recognized as an adjustment to interest income using the interest method over the contractual life of the loans, adjusted for estimated prepayments based on the Bank's historical prepayment experience. Commitment fees and costs relating to commitments, the likelihood of exercise of which is remote, are recognized over the commitment period on a straight-line basis. If the commitment is subsequently exercised during the commitment period, the remaining unamortized commitment fee at the time of exercise is recognized over the life of the loan as an adjustment to yield. F-11 133 HEARTLAND COMMUNITY BANK AND SUBSIDIARIES Notes to Consolidated Financial Statements September 30, 1996 and 1995 (unaudited) and June 30, 1996 and 1995 (1) Summary of Significant Accounting Policies (Continued) (f) Foreclosed Real Estate Real estate properties acquired through, or in lieu of, loan foreclosure are initially recorded at the lower of the related loan balance, less any specific allowance for loss, or fair value (less selling costs) at the date of foreclosure. Costs relating to development and improvement of property are capitalized, whereas costs relating to the holding of property are expensed. Valuations are periodically performed by management, and an allowance for losses is established by a charge to operations if the carrying value of a property exceeds its estimated net realizable value. (g) Income Taxes The Bank records income tax expense based on the amount of taxes currently due on its tax return plus deferred taxes computed based on the expected future tax consequences of temporary differences between the carrying amounts and tax basis of assets and liabilities, using existing tax rates. (h) Premises and Equipment Land is carried at cost. Buildings and furniture, fixtures, and equipment are carried at cost, less accumulated depreciation and amortization. Buildings and furniture, fixtures and equipment are depreciated using the straight-line method over the estimated useful lives of the assets. (i) Fair Values of Financial Instruments Statement of Financial Accounting Standards No.107, "Disclosures About Fair Value of Financial Instruments", requires disclosure of fair value information about financial instruments, whether or not recognized in the statement of financial condition. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. In that regard, the derived fair value estimates cannot be substantiated by comparison to independent markets and, in many cases, could not be realized in immediate settlement of the instruments. Statement No.107 excludes certain financial instruments and all nonfinancial instruments from its disclosure requirements. Accordingly, the aggregate fair value amounts presented do not represent the underlying value of the Bank. The following methods and assumptions were used by the Bank in estimating its fair value disclosures for consolidated financial instruments at June 30, 1996: Cash and cash equivalents: The carrying amounts reported in the statement of financial condition for cash and cash equivalents approximate those assets' fair values. F-12 134 HEARTLAND COMMUNITY BANK AND SUBSIDIARIES Notes to Consolidated Financial Statements September 30, 1996 and 1995 (unaudited) and June 30, 1996 and 1995 (1) Summary of Significant Accounting Policies (Continued) (i) Fair Values of Financial Instruments (Continued) Time deposits: Fair values for time deposits are estimated using a discounted cash flow analysis that applies interest rates currently being offered on certificates to a schedule of aggregated contractual maturities on such time deposits. Investment securities: Fair values for investment securities are based on quoted market prices, where available. If quoted market prices are not available, fair values are based on quoted market prices of comparable instruments. Loans: For variable-rate loans that reprice frequently and with no significant change in credit risk, fair values are based on carrying amounts. The fair values for other loans are estimated using discounted cash flow analysis, based on interest rates currently being offered for loans with similar terms to borrowers of similar credit quality. Loan fair value estimates include judgments regarding future expected loss experience and risk characteristics. The carrying amount of accrued interest receivable approximates its fair value. Deposits: The fair values disclosed for demand deposits (for example, interest-bearing checking accounts and passbook accounts) are, by definition, equal to the amount payable on demand at the reporting date (that is, their carrying amounts.) The fair values for certificates of deposit are estimated using a discounted cash flow calculation that applies interest rates currently being offered on certificates to a schedule of aggregated contractual maturities on such time deposits. The carrying amount of accrued interest payable approximates fair value. Short-term borrowings and notes payable: The carrying amounts of short-term borrowings and notes payable approximate their fair values. Other liabilities: Commitments to extend credit were evaluated and fair value was estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the present credit worthiness of the counter-parties. For fixed-rate loan commitments, fair value also considers the difference between current levels of interest rates and the committed rates. F-13 135 HEARTLAND COMMUNITY BANK AND SUBSIDIARIES Notes to Consolidated Financial Statements September 30, 1996 and 1995 (unaudited) and June 30, 1996 and 1995 (2) Investment Securities The amortized cost and estimated market values of investment securities at September 30, 1996, are summarized as follows:
Available-for-Sale --------------------------------------------------------------------------------------- Gross Gross Estimated Amortized Unrealized Unrealized Market Cost Gains Losses Values ---- ----- ------ ------ Federal Agencies $16,745,580 $ $ 51,942 $16,693,638 =========== ============= ============== ============
The amortized cost and estimated market values of consolidated investment securities at June 30, 1996, are summarized as follows:
Available-for-Sale ------------------------------------------------------------------------------ Gross Gross Estimated Amortized Unrealized Unrealized Market Cost Gains Losses Values ---- ----- ------ ------ U.S. Government and Federal Agencies $ 5,306,383 $ $ 26,758 $ 5,279,625 =========== =============== ============== ===========
The amortized cost and estimated market values of investment securities at June 30, 1995, are summarized as follows:
Available-for-Sale -------------------------------------------------------------------------------- Gross Gross Estimated Amortized Unrealized Unrealized Market Cost Gains Losses Values ---- ----- ------ ------ Federal Agencies $ 960,854 $ 5,390 $ 8,744 $ 957,500 ========== ============= =============== ==========
Held-to-Maturity ------------------------------------------------------------------------------------- Gross Gross Estimated Amortized Unrealized Unrealized Market Cost Gains Losses Values ---- ----- ------ ------ Federal Agencies $ 2,000,000 $ $ 150,800 $ 1,849,200 =========== ============== =========== ============
The scheduled maturities of consolidated investment securities were as follows:
September 30, 1996 June 30, 1996 ------------------------------- ------------------------------ Amortized Market Amortized Market Cost Value Cost Value ---- ----- ---- ----- Available-for-Sale ------------------ Due in one year or less $ 971,179 $ 948,728 $ 1,398,728 $ 1,387,887 Due after one year through five years 15,774,401 15,744,910 3,352,836 3,340,631 Due after five through ten years 554,819 551,107 ------------ -------------- ------------- ------------ $ 16,745,580 $ 16,693,638 $ 5,306,383 $ 5,279,625 ============ ============= =========== ===========
Proceeds from sales of securities available-for-sale during the year ended June 30, 1996 were $1,006,875. Gross gains of $10,538 were realized on those sales. During the year ended June 30, 1995, the proceeds from sales of securities available-for-sale were $1,045,313. Gross gains of $48,738 were realized on those sales. F-14 136 HEARTLAND COMMUNITY BANK AND SUBSIDIARIES Notes to Consolidated Financial Statements September 30, 1996 and 1995 (unaudited) and June 30, 1996 and 1995 (3) Mortgage-Backed Securities Mortgage-backed securities, consolidated, consist of the following at September 30, 1996:
Available-for-Sale ------------------------------------------------------------------------------------------ Gross Gross Estimated Amortized Unrealized Unrealized Market Cost Gains Losses Values ---- ----- ------ ------ Mortgage-backed securities $ 2,897,793 $ 3,845 $ 14,420 $ 2,887,218 Mortgage derivative securities 9,281,877 32,082 5,739 9,308,220 ------------- ----------- --------- ------------- $12,179,670 $ 32,466 $ 20,159 $ 12,195,438 ============= =========== ========= =============
Held-to-Maturity ------------------------------------------------------------------------------------- Gross Gross Estimated Amortized Unrealized Unrealized Market Cost Gains Losses Values ---- ----- ------ ------ Mortgage-backed securities $42,636,028 $ 735,357 $ 161,235 $43,210,150 =========== ========= ========= ===========
Mortgage-backed securities, consolidated, consist of the following at June 30, 1996:
Available-for-Sale ------------------------------------------------------------------------------------- Gross Gross Estimated Amortized Unrealized Unrealized Market Cost Gains Losses Values ---- ----- ------ ------ Mortgage-backed securities $ 3,135,911 $ 8,612 $ 23,928 $ 3,120,595 Mortgage derivative securities 9,455,472 1,043 421,911 9,034,604 -------------- -------------- ---------- ------------- $ 12,591,383 $ 9,655 $ 445,839 $ 12,155,199 ============== ============== ========== =============
Held-to-Maturity ------------------------------------------------------------------------------------- Gross Gross Estimated Amortized Unrealized Unrealized Market Cost Gains Losses Values ---- ----- ------ ------ Mortgage-backed securities $ 45,212,891 $ 470,641 $ 749,458 $ 44,934,074 ============ ========= ========= ============
Mortgage-backed securities consist of the following at June 30, 1995:
Available-for-Sale ------------------------------------------------------------------------------------- Gross Gross Estimated Amortized Unrealized Unrealized Market Cost Gains Losses Values ----- ----- ------ ----- Mortgage-backed securities $ 4,411,027 $ 36,866 $ 14,795 $ 4,433,098 Mortgage derivative securities 1,704,514 49,162 1,655,352 ----------- ---------- --------- ----------- $ 6,115,541 $ 36,866 $ 63,957 $ 6,088,450 =========== ========== ========= ===========
F-15 137 HEARTLAND COMMUNITY BANK AND SUBSIDIARIES Notes to Consolidated Financial Statements September 30, 1996 and 1995 (unaudited) and June 30, 1996 and 1995 (3) Mortgage-Backed Securities (Continued) Mortgage-backed securities consist of the following at June 30, 1995: (Continued)
Held-to-Maturity --------------------------------------------------------------------------------------- Gross Gross Estimated Amortized Unrealized Unrealized Market Cost Gains Losses Values ---- ----- ------ ------- Mortgage-backed securities $ 32,176,422 $ 352,837 $ 817,902 $ 31,711,357 Mortgage derivative securities 24,968,493 940,151 24,028,342 ------------ --------- ------------- ------------ $ 57,144,915 $ 352,837 $ 1,758,053 $ 55,739,699 ============ ========= ============= ============
The amortized cost and fair value of consolidated mortgage-backed securities by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
September 30, 1996 June 30, 1996 ------------------------------ ------------------------------------- Amortized Market Amortized Market Cost Value Cost Value ---- ----- ---- ------ Available-for-Sale ------------------ Due in one year or less $ 714,036 $ 716,751 $ 995,571 $ 991,951 Due after one through five years 733,546 741,305 771,337 777,371 Due after five through ten years 2,587,429 2,587,579 2,578,400 2,341,674 Due after ten years 8,144,659 8,149,803 8,246,075 8,044,202 ------------- ------------- ------------- ------------ $ 12,179,670 $ 12,195,438 $ 12,591,383 $ 12,155,198 ============= ============= ============= ============ Held-to-Maturity ----------------- Due after one through five years 520,355 572,639 $ 285,348 $ 297,587 Due after five through ten years 3,131,788 3,149,652 2,485,383 2,597,545 Due after ten years 38,983,885 39,487,859 42,445,160 42,038,942 ------------ ------------ ------------- ------------ $ 42,636,028 $ 43,210,150 $ 45,212,891 $ 44,934,074 ============ ============ ============= ============
During the year ended June 30, 1996 and 1995, the Bank sold mortgage-backed securities available-for-sale for total proceeds of $17,144,876 and $5,978,676 resulting in gross realized gains of $3,839 and $77,132 and gross realized losses of $941,324 and $ 26,778 respectively. In the year ended June 30, 1995, proceeds from sale of mortgage-backed securities held-to-maturity from which a substantial portion of the principal was already collected were $406,779. Gross gains of $4,512 and gross losses of $1,610 were realized on those sales. During the year ended June 30, 1996, securities with an amortized cost of $26,270,667 were transferred from held-to-maturity to available-for-sale because of a one time reassessment in accordance with the implementation guidance of Statement No 115 on "Accounting for Certain Investments in Debt and Equity Securities". The securities had an unrealized loss of approximately $898,756. F-16 138 HEARTLAND COMMUNITY BANK AND SUBSIDIARIES Notes to Consolidated Financial Statements September 30, 1996 and 1995 (unaudited) and June 30, 1996 and 1995 (4) Loans Receivable Loans receivable at September 30, 1996, and June 30, 1996 and 1995 are summarized as follows:
Loans secured by first mortgages on real estate: 9/30/96 6/30/96 6/30/95 ------- ------- -------- Conventional 1-4 family residences $ 63,213,264 $ 61,681,460 $ 36,844,183 Conventional Other 23,470,150 20,602,705 16,348,360 Loans to facilitate sales of foreclosed real estate 689,956 720,749 1,144,993 ------------ ------------ ------------ Total first mortgage loans $ 87,373,370 $ 83,004,914 $ 54,337,536 ------------ ------------ ------------ Loans secured by deposits $ 1,608,626 1,832,180 $ 1,623,155 Commercial loans 1,110,440 880,311 132,877 Auto 1,101,834 786,656 42,070 Home improvement and consumer loans 2,445,118 622,803 346,792 ------------ ------------ ------------- Total installment loans $ 6,266,018 $ 4,121,950 $ 2,147,894 ------------ ------------ ------------- $ 93,639,388 $ 87,126,864 $ 56,485,430 Less: Allowance for loan losses $ 1,441,805 $ 881,067 728,491 Net deferred loan fees, premiums and discounts 188,304 137,335 114,097 Loans in process 2,674,892 1,544,097 529,862 ------------ ------------ ------------- $ 89,334,387 $ 84,564,365 $ 55,112,980 ============ ============ =============
Activity in the allowance for loan losses is summarized as follows for the quarters ended September 30, 1996 and 1995, and the years ended June 30, 1996 and 1995:
9/30/96 9/30/95 6/30/96 6/30/95 -------- ------- ------- ------- Balance at beginning of period $ 881,067 $ 728,491 $ 728,491 $ 728,491 Acquisition of subsidiary 121,973 Provision charged to income 560,738 42,483 Charge-offs and recoveries, net (11,880) ----------- --------- ---------- --------- Balance at end of period $ 1,441,805 $ 728,491 $ 881,067 $ 728,491 =========== ========= ========== =========
At September 30, 1996 and June 30 1996 and 1995, the Bank had loans totaling approximately $160,234, $166,228 and $165,009 respectively on which interest had ceased to be recognized. The interest income not recorded on these loans totaled $7,756, $7,718 and $7,038 respectively. Renegotiated loans for which interest has been reduced totaled $293,756, $298,195 and $313,970 at September 30, 1996 and June 30, 1996 and 1995. F-17 139 HEARTLAND COMMUNITY BANK AND SUBSIDIARIES Notes to Consolidated Financial Statements September 30, 1996 and 1995 (unaudited) and June 30, 1996 and 1995 (4) Loans Receivable (Continued) Interest income that would have been recorded under the original terms of such loans and the interest income actually recognized for the quarter ended September 30, 1996 and the years ended June 30, 1996 and 1995 are summarized below:
9/30/96 6/30/96 6/30/95 ------- -------- -------- Interest income that would have been recorded $ 8,562 $ 35,311 $ 35,816 Interest income recognized 6,025 21,383 22,539 --------- -------- -------- Interest income foregone $ 2,537 $ 13,927 $ 13,277 ========= ======== ========
The Bank is not committed to lend additional funds to debtors whose loans have been modified. (5) Accrued Interest Receivable Accrued interest receivable at September 30, 1996 and June 30, 1996 and 1995 is summarized below:
9/30/96 6/30/96 6/30/95 ------- ------- ------- Investment securities $ 10,853 $ 51,842 $ 38,812 Mortgage-backed securities 463,667 332,064 381,987 Loans receivable 618,533 593,098 351,821 ---------- --------- ---------- $1,093,053 $ 772,620 $ 772,620 ========== ========= ==========
(6) Foreclosed Real Estate Activity in the allowance for losses for real estate foreclosed for the quarters ended September 30, 1996 and 1995 and the years ended June 30, 1996 and 1995 are presented below:
9/30/96 9/30/95 6/30/96 6/30/95 ------- -------- ------- ------- Balance at beginning of year $58,587 $28,587 $28,587 $28,587 Provision charged to income 30,000 Charge-offs, net of recoveries ------- ------- ------- ------- Balance at end of year $58,587 $28,587 $58,587 $28,587 ======= ======= ======= =======
(7) Premises and Equipment Premises and equipment at September 30, 1996 and June 30 1996 and 1995 are summarized as follows:
9/30/96 6/30/96 6/30/95 ------- ------- ------- Cost: Land $ 1,500,672 $ 546,133 $ 196,069 Buildings 1,802,243 1,661,734 723,775 Leasehold improvements 28,480 34,549 Equipment 638,650 545,293 248,905 ----------- ----------- ---------- $ 2,785,709 2,785,709 1,168,750 Accumulated depreciation (703,204) (661,416) (531,513) ----------- ----------- ---------- $ 3,266,841 $ 2,124,293 $ 637,237 =========== =========== ==========
F-18 140 HEARTLAND COMMUNITY BANK AND SUBSIDIARIES Notes to Consolidated Financial Statements September 30, 1996 and 1995 (unaudited) and June 30, 1996 and 1995 (7) Premises and Equipment (Continued) Depreciation expense amounted to $43,102, $20,250, $66,005 and $51,234 for the quarters ended September 30, 1996 and 1995 and the years ended June 30, 1996 and 1995 respectively. (8) Deposits Deposits at September 30, 1996 and June 30, 1996 are presented below:
September 30, 1996 June 30, 1996 ---------------------------------- --------------------------------------- Weighted Weighted Average Average Rate Amount % Rate Amount % -------- ------------ ------- ----------- ------------ -------- Demand and NOW accounts: Non-interest bearing $ 382,694 .26 $ 215,162 .14 Interest bearing 2.75% 5,577,145 3.79 2.65% 6,453,373 4.42 Money market 4.21% 17,691,103 12.02 4.14% 15,491,591 10.62 Passbook savings 3.30% 7,742,694 5.26 3.06% 8,028,155 5.50 ------------ ------ ----------- ------ $ 31,393,636 21.33 $ 30,188,281 20.68 ------------ ------ ----------- ------ Certificates of Deposits: 4.00% to 4.99% 4.58% $ 19,856,121 13.49 4.83% $ 13,514,170 9.26 5.00% to 5.99% 5.56% 78,011,804 53.01 5.39% 62,333,102 42.71 6.00% to 6.99% 6.08% 17,655,283 12.00 6.17% 39,600,698 27.16 7.00% to 7.99% 7.20% 255,900 .17 7.73% 283,000 .19 8.00% to 8.99% 8.00% 63,352 .06 ------------- ------ ----------- ----- $115,779,108 78.67 $115,730,970 79.32 ------------ ------ ------------ ------ $147,172,744 100.00 $145,919,251 100.00 ============ ====== ============ ======
The aggregate amount of short-term jumbo certificates of deposit with a minimum denomination of $100,000 was approximately $11,163,261, $8,924,677 and $6,304,834 at September 30, 1996 and June 30, 1996 and 1995 respectively. At June 30, 1996 the scheduled maturities of consolidated certificates of deposit are as follows:
1997 1998 1999 Total ---- ---- ---- ----- 4.00% to 4.99% $ 13,514,170 $ $ $ 13,514,170 5.00% to 5.99% 51,271,061 8,881,296 2,510,744 62,333,101 6.00% to 6.99% 20,155,483 13,155,498 6,289,718 39,600,699 7.00% to 7.99% 173,000 100,000 10,000 283,000 ------------ ------------ ------------ ------------- $ 85,113,714 $ 21,806,794 $ 8,810,462 $ 115,730,970 ============ ============ ============ =============
F-19 141 HEARTLAND COMMUNITY BANK AND SUBSIDIARIES Notes to Consolidated Financial Statements September 30, 1996 and 1995 (unaudited) and June 30, 1996 and 1995 (8) Deposits (Continued) Interest expense on deposits for the years ended June 30, 1996 and 1995, is summarized as follows:
6/30/96 6/30/95 -------- ------- Money market 562,528 $ 534,322 Passbook savings 194,014 185,718 NOW 128,322 113,702 Certificate of Deposit 5,429,775 4,145,383 ------------ ----------- $ 6,314,641 $ 4,979,125 ============ ===========
(9) Federal Home Loan Bank Advances Pursuant to collateral agreements with the Federal Home Loan Bank (FHLB), advances are secured by qualifying single family first mortgage loans. Advances at September 30, 1996 and June 30, 1996 have the following maturities: Periods ending September 30, 1996 and June 30, 1996
Maturity Interest Rate -------- ------------- 2001 6.407% $ 5,000,000 2003 6.000% $ 5,000,000 ----------- $10,000,000 ===========
(10) Note Payable As of September 30, 1996, the Bank had a note payable outstanding to an unrelated Trust entity for the purchase of a future banking site in the amount of $400,000. The note is payable in five annual installments of $80,000, plus interest at, seven and one-half percent (71/2%) per anum. (11) Pension and Profit-Sharing Plans The Bank has a qualified, noncontributory defined benefit retirement plan covering all of its eligible employees. The Bank adopted a resolution on July 1, 1996 to terminate the defined-benefit pension plan as of September 16, 1996 and to freeze benefit accruals under the plan as of July 31, 1996. It is expected that the plan will qualify for a standard termination, meaning that plan assets are sufficient to provide all plan liabilities under the plan. All active participants will become fully vested in their accrued benefits. F-20 142 HEARTLAND COMMUNITY BANK AND SUBSIDIARIES Notes to Consolidated Financial Statements September 30, 1996 and 1995 (unaudited) and June 30, 1996 and 1995 (11) Pension and Profit-Sharing Plans (Continued) The following table sets forth the plan's funded status and amounts recognized in the Bank's consolidated statements of financial condition at June 30,1996: Actuarial present value of benefit obligations: Accumulated benefit obligation: Vested ($297,024) Nonvested (5,159) --------- ($302,183) Effect of projected compensation (108,348) --------- Projected benefit obligation for service rendered to date ($410,531) Plan assets at fair value 422,572 --------- Funded Status $ 12,041 Unrecognized net (gain) or loss from past experience different from that assumed and effects of changes in assumptions 15,555 Unrecognized net transition obligation (from adoption of FASB statement No. 87) being amortized over 26.35 years 14,968 --------- Prepaid (accrued) pension cost $ 42,564 =========
The components of net pension expense for the year ended June 30, 1996 is as follows: Service cost-benefits earned during the period $ 23,874 Interest cost on projected benefit obligation 27,179 Actual return on plan assets (54,544) Net amortization and deferral 29,059 --------- Net pension expense $ 25,568 ========= Assumptions used to develop the net periodic pension cost were: Discount rate 7.5% Expected long-term rate of return on assets 7.5% Rate of increase in compensation levels 3.5%
The Bank has a profit-sharing (cash bonus) program. The year end of the plan coincides with the Bank's year end. Contributions to the profit-sharing (cash bonus) plan are based on five percent (5%) of the net profit after taxes for the period July 1 to May 31, of each year as the figures are available. All employees share equally in the plan contribution. Employees hired after July 1 and before May 31 of each year will participate on a pro-rated basis. The contribution for the plan year ended May 31, 1996 was $37,512 and $70,672 for May 31,1995. F-21 143 HEARTLAND COMMUNITY BANK AND SUBSIDIARIES Notes to Consolidated Financial Statements September 30, 1996 and 1995 (unaudited) and June 30, 1996 and 1995 (11) Pension and Profit-Sharing Plans (Continued) Effective July 1, 1993, employees of the Bank may participate in a 401(k) savings plan, whereby the employees may elect to make contributions pursuant to a salary reduction agreement upon meeting length-of-service requirements. The Bank makes a matching contribution of twenty percent (20%) of the first eight percent (8%) of employee contributions. Matching contributions to the plan were $1,188 and $10,783 for each year ended June 30, 1996 and 1995 respectively. (12) Income Taxes The Bank filed consolidated federal income tax returns on a fiscal year basis for the year ended June 30, 1996. If certain conditions are met in determining taxable income, the Bank is allowed a special bad-debt deduction based on a Percentage of taxable income (presently eight (8) percent) or on specific experience formulas. The Bank used the percentage-of -taxable income method in the year ended June 30, 1996 and 1995. Income tax expense for the quarter end September 30, 1996 and the years ended June 30, 1996 and 1995 is summarized as follows:
Income Tax Expense (Benefit) 9/30/96 6/30/96 6/30/95 ---------------------------- -------- -------- -------- Current $ (308,696) $ 232,787 $819,524 Deferred (214,569) (59,176) 147,239 --------- --------- --------- Income tax expense (benefit) $ (523,265) $ 173,611 $966,763 ========== ========= ========= Deferred Tax Components ----------------------- Deferred tax assets $1,172,043 $ 622,040 $334,284 Deferred tax liabilities (412,859) (383,508) (313,689) ---------- --------- -------- $ 424,056 $ 238,532 $ 20,595 Valuation allowance for tax assets (192,006) (192,006) (195,257) -------- -------- --------- Deferred tax assets (liabilities) at period end $ 232,050 $ 46,526 ($174,662) ========== ========= =========
Effective July 1, 1993 the Bank adopted Statement No.109 of the Financial Accounting Standards Board in accounting for income taxes. Deferred tax components include timing differences related to depreciation, allowance for loan loss reserves and premium and discounts on loans and investments. F-22 144 HEARTLAND COMMUNITY BANK AND SUBSIDIARIES Notes to Consolidated Financial Statements September 30, 1996 and 1995 (unaudited) and June 30, 1996 and 1995 (12) Income Taxes (Continued) Total income tax expense for the years ended June 30, 1996 and 1995 differed from the amounts computed by applying the federal income tax rate of 34% and the Arkansas income tax rates of 6.5% to pretax income as a result of the following:
Expected income tax expense at 1996 1995 ---- ---- federal and state rates $ 154,825 $ 887,701 Goodwill amortization 8,017 Tax bad-debt deduction, net of valuation allowance 5,681 55,231 Other, net 5,088 23,831 ---------- --------- Total income tax expense $ 173,611 $ 966,763 ========== =========
The difference between federal and state taxable income is generally attributable to interest income on U.S. Obligations that is tax exempt for state taxation purposes. Retained earnings at June 30, 1996 include approximately $3,462,860 for which no deferred federal income tax liability has been recognized. This amount represents an allocation of income to bad-debt deductions for tax purposes only. Reduction of amounts so allocated for purposes other than tax bad-debt losses or adjustments arising from carryback of net operating losses would create income for tax purposes only, which would be subject to the then current corporate income tax rate. The unrecorded deferred income tax liability in the above amounts was approximately $1,326,0200 at June 30, 1996 and 1995. (13) Capital Requirements FIRREA was signed into law on August 9, 1989; regulations for savings institutions' minimum-capital requirements went into effect on December 7, 1989. In addition to the capital requirements, FIRREA includes provisions for changes in the federal regulatory structure for institutions, including a new deposit insurance system, increased deposit insurance premiums, and restricted investment activities with respect to non-investment grade corporate debt and certain other investments. FIRREA also increases the required ratio of housing-related assets needed to qualify as a savings institution. Regulations require institutions to have minimum regulatory tangible capital equal to 1.5 percent of total assets a core capital ratio of 3% of adjusted assets, and a risk-based capital ratio equal to 8% of risk adjusted assets as defined by regulation. F-23 145 HEARTLAND COMMUNITY BANK AND SUBSIDIARIES Notes to Consolidated Financial Statements September 30, 1996 and 1995 (unaudited) and June 30, 1996 and 1995 (13) Capital Requirements (Continued) The Bank, at June 30, 1996, meets the regulatory-tangible-capital, core-capital and risk-based requirements as defined by FIRREA. At June 30, 1996, the Bank unaudited regulatory tangible capital was $14,549,387, or 8.42 percent of total assets; core capital was $14,549,387 or 8.42 percent of total assets; and risk-based capital was $15,265,387, or 25.56 percent of total risk-adjusted assets, as defined by FIRREA.
Unaudited - Regulatory ------------------------------------------ Net GAAP Tangible Core Total Income Capital Capital Capital Capital ------ ------- -------- ------- ------- Per quarterly reports submitted to the OTS $ 174,798 $ 14,493,507 $ $ $ Audit adjustments: ------------------ Net 55,880 55,880 --------- ------------ ----------- ------------ ----------- Association amounts, as adjusted $ 230,678 $ 14,549,387 $14,549,387 $ 14,549,387 $14,549,387 ========= ============ Additional capital items: ------------------------- Allowances for loan and lease losses 716,000 ----------- ------------ ----------- Regulatory capital-computed $14,549,387 $ 14,549,387 $15,265,387 Minimum-capital requirement 2,580,000 5,160,000 4,764,000 ----------- ------------ ----------- Regulatory capital-excess $11,969,387 $ 9,389,387 $10,501,387 =========== ============ ===========
FIRREA also includes restrictions on loans to one borrower, certain types of investment and loans, loans to officers, directors' and principal stockholders, brokered deposits, and transactions with affiliates. Federal regulations require the Bank to comply with a Qualified Thrift Lender (QTL) test which requires that 65% of assets be maintained in housing-related finance and other specified assets. If the QTL test is not met, limits are placed on growth, branching, new investments, FHLB advances, and dividends, or the Bank must convert to a commercial bank charter. Management considers the QTL test to have been met. Regulations of the Office of Thrift Supervision limit the amount of dividends and other capital distributions that may be paid by a savings institution without prior approval of the Office of Thrift Supervision. This regulatory restriction is based on three-tiered system with the greatest flexibility being afforded to well-capitalized (Tier 1) institutions. The Bank currently meets the requirements of a Tier 1 institution and has not been informed by the OTS of the need for more than normal supervision. Accordingly, the Bank can make, without prior regulatory approval, distributions during a fiscal year up to 100% of its net income to date during a fiscal year, plus an amount that would reduce by one-half its "surplus capital ratio" (the excess over its Fully Phased-in Capital Requirements) at the beginning of the fiscal year. F-24 146 HEARTLAND COMMUNITY BANK AND SUBSIDIARIES Notes to Consolidated Financial Statements September 30, 1996 and 1995 (unaudited) and June 30, 1996 and 1995 (14) Gains (Losses) on Sales of Interest Earning Assets, Net Gains are summarized as follows for the years ended June 30, 1996 and 1995:
1996 1995 ---- ---- Realized gain on sales of: Mortgage-backed securities 3,839 $ 53,256 Investment securities 10,538 48,738 ----------- --------- $ 14,377 $ 101,994 Realized losses on sales of: Mortgaged-back securities (941,324) ----------- --------- Net income (loss) ($ 926,947) $ 101,994 ===-======= =========
(15) Commitments and Contingencies In the ordinary course of business, the Bank has various outstanding commitments and contingent liabilities that are not reflected in the accompanying financial statements. In addition, the Bank is a defendant in certain claims and legal actions arising in the ordinary course of business. In the opinion of management, after consultation with legal counsel, the ultimate disposition of these matters is not expected to have a material adverse effect on the financial position of the Bank. The principal commitments of the Bank and its subsidiary are as follows: Loan Commitments At June 30, 1996 and 1995, the Bank and had outstanding firm commitments to originate or purchase loans as follows:
1996 1995 ---- ---- Fixed Rate ---------- First-mortgage loans $ 1,127,500 $ 313,450 Consumer and other loans 23,800 7,375 ----------- ----------- $ 1,151,300 $ 320,825 ----------- ----------- Adjustable Rate --------------- First-mortgage loans $ 2,000,000 $ 2,084,200 ----------- ----------- $ 3,151,300 $ 2,405,025 =========== ===========
Fees received in connection with these commitments have not been recognized in income. (16) Significant Group Concentrations of Credit Risk The Bank grants real estate loans for 1-4 family residential housing and consumer loans primarily in the designated trade areas within and adjacent to Camden, Arkansas and Central Arkansas. In addition, real estate mortgage loans for multi-family residential and commercial real estate, which meet pre-established "loan to value" ratios and other financial criteria are also granted in specific areas outside this trade area under the Bank's loan diversification policies. F-25 147 HEARTLAND COMMUNITY BANK AND SUBSIDIARIES Notes to Consolidated Financial Statements September 30, 1996 and 1995 (unaudited) and June 30, 1996 and 1995 (16) Significant Group Concentrations of Credit Risk (Continued) As of June 30, 1996 and 1995, loans secured by real estate mortgages amounted to 95% and 97% respectively of the Bank's total consolidated loan portfolio. Real estate mortgage loans in areas outside the Camden, Arkansas and Central Arkansas trade areas and identified as preferred markets by the loan diversification policy equaled 31% and 19% of the Bank's real estate loan portfolio. 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. These financial instruments include commitments to extend credit (Note 15). The Bank exposure to credit loss in the event of non-performance by the other party to the financial instrument for commitments to extend credit is represented by the contractual amount of these instruments. The Bank and its subsidiary use the same credit policies in making commitments and conditional obligations as it does for on-balance-sheet instruments. Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since some of the commitments will expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Bank evaluates each customer's credit worthiness on a case-by-case basis. The amount of collateral obtained, if it is deemed necessary by the Bank upon extension of credit, is based on management's credit evaluation of the counterpart. (17) Related Party Transactions The directors, officers and employees had checking, savings and certificates totaling $2,505,599 and $1,885,420 at June 30, 1996 and 1995 respectively. In the normal course of business, the Bank has made loans to its directors, officers and their related business interests. Related party loans are made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with unrelated persons and do not involve more than the normal risk of collectibility. The aggregate dollar amount of loans outstanding to directors, officers and their related business interests total approximately $435,156 and $451,000 at June 30, 1996 and 1995 respectively. F-26 148 HEARTLAND COMMUNITY BANK AND SUBSIDIARIES Notes to Consolidated Financial Statements September 30, 1996 and 1995 (unaudited) and June 30, 1996 and 1995 (18) Purchase of Subsidiary On May 3, 1996 the Bank purchased 100% of the outstanding stock of Heritage Banc Holding, Inc. Heritage Banc Holding, Inc. is the parent company for its wholly owned subsidiary, Heritage Bank, a federal savings bank, in Little Rock, Arkansas. The investment in Heritage was $3,500,451 and was accounted for using the purchase method. As a result of the investment, cost in excess of the fair value of net assets of $1,256,235, was recognized and recorded as "pushed down goodwill" on the accounts of the subsidiary. The accompanying consolidated statement of income and cash flows for the year ended June 30, 1996, includes the operations of the subsidiary for the period May 4, 1996 through June 30, 1996. The aforementioned "goodwill" is to be amortized over a period of ten years. For the period May 4, 1996 to June 30, 1996, $20,937 of amortization expense was recorded. Supplemental Disclosure The proforma statements of income for the consolidated companies for the years ended June 30, 1996 and 1995 restated to give effect for the purchase of the subsidiary by the Bank at the beginning of the 1995 fiscal year is presented below:
6/30/96 6/30/95 ------- -------- Interest income $ 12,145,063 $ 10,952,927 Interest expense 7,896,737 6,341,253 ------------ ------------ 4,248,326 4,611,674 Provision for loan losses 67,483 0 ------------ ------------ 4,180,843 4,611,674 Noninterest income (563,780) 120,577 Goodwill amortization (125,623) (125,623) Noninterest expense (2,806,670) (2,523,182) ------------ ------------ Net income before taxes and cumulative effect of accounting change 684,770 2,083,446 Provision for taxes (262,198) (797,751) Cummulative effect of accounting change (Note 1c) 77,767 ------------ ------------ Net income $ 422,572 $ 1,363,262 ============ ============
(19) Officers' and Directors' Retirement Plan During the year ended June 30, 1996, the Bank adopted a "non-qualified" retirement plan for its officers and directors in recognition of their years of service to the Bank. The plan is an annuity contract plan whereas funds are to be set aside annually in a grantor trust, with the Bank acting as trustee of the Trust. Distributions are scheduled to be paid upon completion of specified years of service. No tax deduction for the Plan is claimed until funds are paid to the beneficiaries. For the year ended June 30, 1996, the plan was funded with $242,511 and a related liability was also recognized. F-27 149 HEARTLAND COMMUNITY BANK AND SUBSIDIARIES Notes to Consolidated Financial Statements September 30, 1996 and 1995 (unaudited) and June 30, 1996 and 1995 (20) Event Subsequent to June 30, 1996 - Name Change Subsequent to year end June 30, 1996, the Bank applied for and obtained approval from the proper regulatory authorities to change its name along with its wholly-owned subsidiary, Heritage Banc Holding, Inc. (operating as Heritage Bank), to "Heartland Community Bank". The effective date of the change was to be September 9, 1996. (21) Event (s) Subsequent to June 30, 1996 - Commitments to Purchase Real Estate In July 1996, the Bank entered into separate agreements with unrelated parties to purchase real estate for future building sites. The parcels under consideration are located near existing facilities and/or planned future growth. The amount of commitments for these purchases totaled $871,000 (22) Fair Values of Financial Instruments The estimated fair values of the Bank's consolidated financial instruments are as follows;
At June 30, 1996 ---------------------------------------- Carrying Fair Amount Value ------ ----- Financial assets: Cash and cash equivalents $17,291,882 $17,291,882 Investment securities: Available-for-sale 5,279,625 5,279,625 Mortgage-backed securities: Available-for-sale 12,155,199 12,155,199 Held-to-maturity 45,212,891 44,934,074 Loans, net of allowances 84,564,365 85,344,161 Financial Liabilities Deposits, savings and NOW accounts 30,188,282 30,188,282 Deposits, time certificates 115,730,969 116,540,019 Advances FHLB 10,000,000 10,000,000 Unrecognized Financial Instruments: Commitment to extend credit 3,151,300 3,151,300
F-28 150 HEARTLAND COMMUNITY BANK AND SUBSIDIARIES Notes to Consolidated Financial Statements September 30, 1996 and 1995 (unaudited) and June 30, 1996 and 1995 (23) - Events Subsequent to June 30, 1996 - Incorporation of HCB Properties, Inc. During the quarter ended September 30, 1996, the Bank formed a wholly-owned subsidiary named HCB Properties, Inc. The Bank is the sole stockholder of the Company. HCB Properties, Inc. was formed to hold, as necessary, property acquired by the Bank for future expansion that in part is expected to be sold by the Bank when and if the original purchase does not fully meet with the future business plan of the Bank. As of September 30, 1996, HCB Properties held two parcels of land with a book value of $756,868. All intercompany transactions have been eliminated in the financial statements for the quarter ended September 30, 1996. (24) Plan of Conversion In October, 1996, the Board of Directors of Heartland Community Bank, formerly First Federal Savings and Loan Association of Camden approved a proposed plan to convert the Association from an Arkansas chartered mutual savings bank to an Arkansas chartered Stock savings bank. The proposed Plan of Conversion contemplates the organization of a holding company, HCB Bancshares, Inc., which will acquire and own the shares of Heartland issued in the conversion. The Plan of Conversion is subject to the approval of various regulatory agencies. The plan provides that non-transferable subscription rights to purchase Holding Company Conversion Stock will be offered first to Eligible Account Holders of record as of the Eligibility Record Date, then to the Bank's Tax-Qualified Employee Plans, then to Supplemental Eligible account Holders as of the Supplemental Eligibility Record Date, then to other members, and then to directors, officers and employees. Concurrently with, or at any time during, or promptly after the Subscription Offering, and on a lowest priority basis, an opportunity to subscribe may also be offered to the general public in a Direct Community Offering. The price of the Holding Company Conversion Stock will be based upon an independent appraisal of the Bank and will reflect its estimated pro forma market value, as converted. At the time of conversion the bank will establish a liquidation account in an amount equal to its net worth as reflected in its latest statement of financial condition used in its conversion offering circular. The liquidation account will be maintained for the benefit of the eligible deposit account holders who continue to maintain their deposit accounts in the Bank after conversion. Dividends paid by the Bank subsequent to conversion cannot be paid from this liquidation account. The Bank may not declare or pay a cash dividend on or repurchase any of its common stock if its net worth would thereby be reduced below either the aggregate amount then required for the liquidation account or the minimum regulatory capital requirements imposed by federal and state regulation. The cost of issuing the common stock will be deferred and deducted from the sales proceeds. If the offering is unsuccessful for any reason, the deferred cost will be charged to operations. At September 30, 1996, The Bank had incurred no such cost. F-29 151 HEARTLAND COMMUNITY BANK AND SUBSIDIARIES Notes to Consolidated Financial Statements September 30, 1996 and 1995 (unaudited) and June 30, 1996 and 1995 (25) FDIC Special Assessment During the quarter ended September 30, 1996, the Bank and its subsidiary was assessed a one time charge of $ 881,824. The special assessment, is to be used to replenish the FDIC reserves depleted by prior years savings & loan industry losses. The assessment has been charged to current operations as a current period expense. (26) Property Acquisition The Bank consummated previous outstanding purchase commitments to purchase future banking sites by closing the obligations during the quarter ended September 30, 1996. The total amount of said purchases capitalized at September 30, 1996 amounted to $ 1,024,120. F-30 152 HERITAGE BANC HOLDING, INC. AND SUBSIDIARY Consolidated Statements of Income For the year ended June 30, 1995, and the period July 1, 1995 to May 3, 1996 (UNAUDITED)
INTEREST INCOME 7/1/95 TO 5/3/1996 6/30/95 - -------------- ------------------ ------- Interest and fees on loans $ 1,515,653 $ 1,589,616 Investment securities 119,514 249,658 Mortgage-backed and related securities 123,933 109,715 Other interest income 56,846 159,156 ------------- -------------- Total interest income $ 1,815,946 $ 2,108,145 ------------- -------------- INTEREST EXPENSE - ---------------- Deposits $ 1,052,448 $ 1,123,359 Interest on FHLB advances 559 15,025 Interest notes payable 77,133 90,388 ------------- -------------- Total interest expense $ 1,130,140 $ 1,228,772 ------------- -------------- Net interest income $ 685,806 $ 879,373 Provision for loan losses $ 25,000 $ ------------- -------------- Net interest income after provision for loan losses $ 660,806 $ 879,373 ------------- -------------- NONINTEREST INCOME - ------------------ Net realized gain (loss) on sales of investment securities and mortgage-backed securities $ $ (245,223) Amortization of negative goodwill 63,040 75,648 Other income 133,319 94,129 ------------- -------------- Total noninterest income (loss) $ 196,359 $ (75,446) ------------- -------------- NONINTEREST EXPENSE - ------------------- Salaries and compensation $ 330,563 $ 442,801 Occupancy and equipment 81,968 87,277 Federal deposit insurance premiums 48,787 55,821 Data processing expenses 62,866 72,029 Professional fees 6,025 19,741 Other expenses 175,395 235,552 ------------- -------------- Total noninterest expense $ 705,604 $ 913,221 ------------- -------------- Income (loss) before income taxes 151,561 (109,294) Provision for income taxes 57,877 (57,877) ------------- -------------- NET INCOME (LOSS) $ 93,684 $ (51,417) ============= ==============
See notes to consolidated financial statements F-31 153 HERITAGE BANC HOLDING, INC. AND SUBSIDIARY Consolidated Statements of Stockholders' Equity For the year ended June 30, 1995 and the period July 1, 1995 to May 3, 1996 (UNAUDITED)
COMMON STOCK 7/1/95 TO 5/3/96 6/30/95 - ------------ ---------------- ------- Common stock; $20 par value, 1,000 shares issued and outstanding $ 20,000 $ 20,000 ---------------- ----------------- ADDITIONAL PAID-IN CAPITAL - -------------------------- Balance beginning of period $ 601,300 $ 601,300 Additional contributed capital, purchase 2,498,800 ---------------- ----------------- $ 3,100,100 $ 601,300 ---------------- ----------------- RETAINED EARNINGS - ----------------- Balance beginning of period $ 343,667 $ 436,584 Net income (loss) 93,684 (51,417) Cash dividends paid (57,000) (41,500) ---------------- ----------------- Balance end of period $ 380,351 $ 343,667 ---------------- ----------------- UNREALIZED DEPRECIATION ON SECURITIES - ------------------------------------- AVAILABLE FOR SALE ------------------ Balance beginning of period $ (51,359) $ (218,690) Net increase (decrease), net of applicable deferred income taxes 51,359 167,331 ---------------- ----------------- Balance end of period $ 0 $ (51,359) ---------------- ----------------- Total stockholders' equity at period end $ 3,500,451 $ 913,608 ================ =================
See notes to consolidated financial statements F-32 154 HERITAGE BANC HOLDING, INC. AND SUBSIDIARY Consolidated Statements of Cash Flow For the year ended June 30, 1996 and the period July 1, 1995 to May 3, 1996. (UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES 7/1/95 TO 5/3/96 6/30/95 - ------------------------------------ ---------------- ------- Net Income (Loss) $ 93,684 $ (51,417) -------------- --------------- Adjustments to reconcile net income to cash provided by operating activities: Depreciation $ 26,052 $ 25,012 Amortization, deferred loan origination fees 5,791 (7,990) Amortization, negative goodwill (63,040) (75,648) Amortization/accretion, premiums and discounts loans, securities (10,240) 24,755 Provision for loan loss 25,000 Net loss on sale of investment securities 245,223 Decrease (increase) in accrued interest receivable (15,761) 28,452 Increase in accrued interest payable (40,469) 75,142 (Increase) decrease in other assets 88,343 (36,857) Increase (decrease) in other liabilities (43,967) 39,698 (Increase) decrease in deferred / payable income taxes 59,530 (44,334) -------------- --------------- Total adjustments $ 31,239 $ 273,453 -------------- --------------- Net cash flows provided by operating activities $ 124,923 $ 222,036 -------------- --------------- CASH FLOWS FROM INVESTING ACTIVITIES: - ------------------------------------- Loan originations and principal payments on loans $ (2,479,546) $ (1,299,129) Proceeds from sale of investment securities 4,198,178 Purchase of investment securities and mortgage-backed securities (463,000) (2,100,000) Principal payments on investment securities 1,372,720 1,575,984 Purchases of premises and equipment (144,935) (488,096) -------------- --------------- Net cash flows provided (used) by investing activities $ (1,714,761) $ 1,886,937 -------------- --------------- CASH FLOWS FROM FINANCING ACTIVITIES: - ------------------------------------- Net increase (decrease) in demand deposits, NOW accounts, passbook savings accounts and certificates of deposit $ (790,839) $ 1,498,938 Net (decrease) increase in mortgage escrow funds (82,037) 40,860 Dividends paid (57,000) (41,500) Advances from FHLB (650,000) -------------- --------------- Net cash flows provided (used) by financing activities $ (929,876) $ 848,298 -------------- --------------- Net increase (decrease) in cash and cash equivalents $ (2,519,714) $ 2,957,271 Cash and cash equivalents, beginning of year $ 4,582,661 $ 1,625,390 -------------- --------------- Cash and cash equivalents, end of year $ 2,062,947 $ 4,582,661 ============== =============== SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: - -------------------------------------------------- Cash paid during the period for: Interest $ 1,093,322 $ 1,048,289 Income taxes $ 17,500 $ 26,500
See notes to consolidated financial statements F-33 155 HERITAGE BANC HOLDING, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements For the year ended June 30, 1995 and the period July 1, 1995 to May 3, 1996 (1) Summary of Significant Accounting Policies (a) Basis of Consolidation The consolidated financial statements as of the year ended June 30, 1995 and the period July 1, 1995 to May 3, 1996 include the accounts of Heritage Banc Holding, Inc. and its wholly-owned subsidiary, Heritage Bank, FSB. All material intercompany balances and transactions have been eliminated in the consolidation. For the period July 1, 1995 to May 3, 1996, the statements of income, stockholders equity and cash flows have been adjusted to give effect to the purchase of Heritage Banc Holding, Inc. by Heartland Community Bank, (formerly First Federal savings and Loan Association of Camden) on May 3, 1996. F-34 156 No dealer, salesman or any other person has been authorized to give any information or to make any representation other than as contained in this Prospectus in connection with the offering made hereby, and, if given or made such information shall not be relied upon as having been authorized by the Company, the Bank or Trident Securities. This Prospectus does not constitute an offer to sell or a solicitation of an offer to buy any of the securities offered hereby to any person in any jurisdiction in which such offer or solicitation is not authorized or in which the person making such offer or solicitation is not qualified to do so, or to any person to whom it is unlawful. Neither the delivery of this Prospectus nor any sale hereunder shall under any circumstances create any implication that there has been no change in the affairs of the Company or the Bank since any of the dates as of which information is furnished herein or since the date hereof. TABLE OF CONTENTS Page ---- Prospectus Summary.................................... Selected Consolidated Financial Information and Other Data.......................... Risk Factors.......................................... HCB Bancshares, Inc................................... Heartland Community Bank.............................. Use of Proceeds....................................... Dividends............................................. Market for the Common Stock........................... Proposed Purchases by Directors and Executive Officers.................................. Capitalization........................................ Historical and Pro Forma Regulatory Capital Compliance.......................................... Pro Forma Data........................................ Management's Discussion and Analysis of Financial Condition and Results of Operations....................................... Business of the Company............................... Business of the Bank.................................. Regulation............................................ Taxation.............................................. Management of the Company............................. Management of the Bank................................ The Conversion........................................ Certain Restrictions on Acquisition of the Company and the Bank............................ Certain Anti-Takeover Provisions in the Certificate of Incorporation and Bylaws......................... Description of Capital Stock of the Company........... Registration Requirements............................. Legal Matters......................................... Experts............................................... Additional Information................................ Index to Consolidated Financial Statements............ Until ___________, 1997, or 90 days after commencement of any offering by Selected Dealers in the Community Offering, whichever is later, all dealers effecting transactions in the registered securities, whether or not participating in this distribution, may be required to deliver a prospectus. This is in addition to the obligation of dealers to deliver a prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions. HCB BANCSHARES, INC. (HOLDING COMPANY FOR HEARTLAND COMMUNITY BANK) PROSPECTUS UP TO 2,645,000 SHARES COMMON STOCK TRIDENT SECURITIES, INC. ___________, 1997 157 PART II: INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS Article XVII of the Company's Certificate of Incorporation sets forth circumstances under which directors, officers, employees and agents may be indemnified against liability which they may incur in their capacities as follows: ARTICLE XVII INDEMNIFICATION A. Persons. The Corporation shall indemnify the persons named below as provided in this Article XVII and to the full extent permitted under applicable law: (1) any person who is or was a director, officer, employee, or agent of the Corporation; and (2) any person who serves or served at the Corporation's request as a director, officer, employee, agent, partner or trustee of another corporation, partnership, joint venture, trust or other enterprise. B. Extent. In case of a threatened, pending or completed suit, action, proceeding or other matter (whether civil, criminal, administrative or investigative) (together hereafter referred to as a suit) against a person named in paragraph A by reason of his holding a position named in paragraph A, the Corporation shall indemnify him if he satisfies the standard in paragraph C, for all amounts actually and reasonably incurred by him in connection with the defense or settlement of the suit, including, but not limited to (i) expenses (including attorneys' fees), (ii) amounts paid in settlement, (iii) judgments and (iv) fines. C. Standard. In case of a suit, a person named in paragraph A shall be indemnified only if: (1) he is successful on the merits or otherwise; or (2) he acted in good faith in the transaction which is the subject of the suit and in a manner he reasonably believed to be in, or not opposed to, the best interests of the Corporation, including, but not limited to, the taking of any and all actions in connection with the Corporation's response to any tender offer or any offer or proposal of another party to engage in a Business Combination (as defined in Article XV) not approved by the board of directors. The termination of a suit by judgment, order, settlement, or conviction, or upon a plea of nolo contendere or its equivalent, shall not, of itself, create a presumption that the person failed to satisfy the standard of this subparagraph E(2). D. Determination That Standard Has Been Met. A determination that the standard of paragraph C has been satisfied may be made by a court. Or, the determination may be made by: (1) the board of directors by a majority vote of a quorum consisting of directors of the Corporation who were not parties to the action, suit or proceeding; or (2) independent legal counsel (appointed by a majority of the disinterested directors of the Corporation, whether or not a quorum) in a written opinion; or (3) the shareholders of the Corporation. E. Proration. Anyone making a determination under paragraph D may determine that a person has met the standard as to some matters but not as to others, and may reasonably prorate amounts to be indemnified. II-1 158 F. Advance Payment. The Corporation shall pay in advance any expenses (including attorneys' fees) which may become subject to indemnification under paragraphs A through E if: (1) the board of directors authorizes the specific payment; and (2) the person receiving the payment undertakes in writing to repay the same if it is ultimately determined that he is not entitled to indemnification by the Corporation under paragraphs A through E. G. Nonexclusive. The indemnification and advance payment of expenses provided by paragraphs A through F shall not be exclusive of any other rights to which a person may be entitled by law, bylaw, agreement or vote of shareholders or disinterested directors, or otherwise. H. Continuation. The indemnification provided by this Article XVII shall be deemed to be a contract between the Corporation and the persons entitled to indemnification thereunder, and any repeal or modification of this Article XVII shall not affect any rights or obligations then existing with respect to any state of facts then or theretofore existing or any action, suit or proceeding theretofore or thereafter brought based in whole or in part upon any such state of facts. The indemnification and advance payment provided by paragraphs A through F shall continue as to a person who has ceased to hold a position named in paragraph A and shall inure to his heirs, executors and administrators. I. Insurance. The Corporation may purchase and maintain insurance on behalf of any person who holds or who has held any position named in paragraph A, against any liability incurred by him in any such position, or arising out of his status as such, whether or not the Corporation would have power to indemnify him against such liability under paragraphs A through F. J. Savings Clause. If this Article XVII or any portion hereof shall be invalidated on any ground by any court of competent jurisdiction, then the Corporation shall nevertheless indemnify each director, officer, employee, and agent of the Corporation or person who serves or served at the Corporation's request as a director, officer, employee, agent, partner or trustee of another corporation, partnership, joint venture, trust or other enterprise as to costs, charges, and expenses (including attorneys' fees), judgments, fines, and amounts paid in settlement with respect to any action, suit, or proceeding, whether civil, criminal, administrative, or investigative, including an action by or in the right of the Corporation to the full extent permitted by any applicable portion of this Article XVII that shall not have been invalidated and to the full extent permitted by applicable law. Article XVIII of the Company's Certificate of Incorporation sets forth the limits of a director's liability to the Company or its shareholders as follows: ARTICLE XVIII LIMITATIONS ON DIRECTORS' LIABILITY A director of the Corporation shall not be personally liable to the Corporation or its shareholders for monetary damages for breach of fiduciary duty as a director, except: (i) for any breach of the director's duty of loyalty to the Corporation or its shareholders, (ii) for acts or omissions that are not in good faith or that involve intentional misconduct or a knowing violation of law, (iii) under Section 1053 or of the Oklahoma General Corporation Act; or (iv) for any transaction from which the director derived an improper personal benefit. If the Oklahoma General Corporation Act is amended after the date of filing of this Certificate to permit further elimination or limitation of the personal liability of directors, then the liability of a director of the Corporation shall be eliminated or limited to the fullest extent permitted by the Oklahoma General Corporation Act, as so amended. Any repeal or modification of the foregoing paragraph by the shareholders of the Corporation shall not adversely affect any right or protection of a director of the Corporation existing at the time of such repeal or modification. II-2 159 ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION. * Legal fees and expenses, including special and local counsel............. $110,000 * EDGAR file conversions and filings, printing, postage and mailings.................. 100,000 * Accounting fees and expenses..................... 50,000 * Appraisal fees and expenses...................... 25,000 * Business Plan and related consulting fees and expenses.................... 15,000 * Blue Sky filing fees and expenses (including legal counsel)....................... 15,000 * Filing fees (OTS, SEC and Nasdaq)................ 35,000 * Conversion agent fees and expenses............... 12,000 * Stock transfer agent and certificates........... 15,000 ** Sales agent's expenses........................... 35,000 * Other expenses................................... 132,500 --------- Total.......................................... $544,500 ========
- ------------ * Estimated. ** Does not include sales agent's fee of up to $205,500. ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES. Not applicable. ITEM 27. EXHIBITS: (a) The exhibits schedules filed as a part of this registration statement are as follows: 1.1 Engagement Letter with Trident Securities, Inc. * 1.2 Agency Agreement with Trident Securities, Inc. 2 Plan of Conversion (Exhibit A to Proxy Statement filed as Exhibit 99.2) 3.1 Articles of Incorporation of HCB Bancshares, Inc. 3.2 Bylaws of HCB Bancshares, Inc. 4 Form of Stock Certificate of HCB Bancshares, Inc. 5 Opinion of Housley Kantarian & Bronstein, P.C. regarding legality of securities being registered 8.1 Federal Tax Opinion of Housley Kantarian & Bronstein, P.C. * 8.2 State Tax Opinion of Gaunt & Co. 8.3 Opinion of Ferguson & Co., LLP as to the value of subscription rights for tax purposes 10.1 Form of HCB Bancshares, Inc. 1997 Stock Option and Incentive Plan II-3 160 10.2 Form of HCB Bancshares, Inc. Management Recognition Plan and Trust Agreement 10.3(a) Employment Agreements by and between Heartland Community Bank and Vida H. Lampkin and Cameron D. McKeel * 10.3(b) Employment Agreements by and between HCB Bancshares, Inc. and Vida H. Lampkin and Cameron D. McKeel 10.4(a) Change-in-Control Protective Agreement between Heartland Community Bank and William C. Lyon * 10.4(b) Change-in-Control Protective Agreement between HCB Bancshares, Inc. and William C. Lyon * 10.5 Heartland Community Bank Directors' Retirement Plan 23.1 Consents of Housley Kantarian & Bronstein, P.C. (in opinions filed as Exhibits 5 and 8.1) 23.2 Consent of Gaunt & Co. 23.3 Consent of Ferguson & Co., LLP 24 Power of Attorney (reference is made to the signature page) 27 Financial Data Schedule * 99.1 Form of Stock Order Form 99.2 Form of Proxy Statement for Special Meeting of Members of Heartland Community Bank; Form of Proxy 99.3 Form of Miscellaneous Solicitation and Marketing Materials * 99.4 Appraisal Report - -------------- * To be filed by amendment. (b) FINANCIAL STATEMENT SCHEDULES. No financial statement schedules are filed because the required information is not applicable or is included in the consolidated financial statements or related notes. ITEM 28. UNDERTAKINGS The undersigned registrant hereby undertakes: (1) To file, during any period in which it offers or sells securities, a post-effective amendment to this registration statement to: (i) Include any prospectus required by Section 10(a)(3) of the Securities Act of 1933 ("Securities Act"). II-4 161 (ii) Reflect in the prospectus any facts or events which, individually or together, represent a fundamental change in the information in the registration statement. Notwithstanding the foregoing, any increase or decrease in volume of securities offered (if the total dollar value of securities offered would not exceed that which was registered) and any deviation from the low or high end of the estimated maximum offering range may be reflected in the form of prospectus filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the changes in volume and price represent no more than a 20 percent change in the maximum aggregate offering price set forth in the "Calculation of Registration Fee" table in the effective registration statement. (iii) Include any additional or changed material information on the plan of distribution. (2) For determining liability under the Securities Act, treat each such post-effective amendment as a new registration statement of the securities offered, and the offering of the securities at that time to be the initial bona fide offering. (3) File a post-effective amendment to remove from registration any of the securities that remain unsoldat the end of the offering. (4) The undersigned registrant hereby undertakes to provide to the underwriter at the closing specified in the underwriting agreement, certificates in such denominations and registered in such names as required by the underwriter to permit prompt delivery to each purchaser. Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the small business issuer pursuant to the foregoing provisions, or otherwise, the small business issuer has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act, and is therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the small business issuer of expenses incurred or paid by a director, officer or controlling person of the small business issuer in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the small business issuer will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue. II-5 162 SIGNATURES In accordance with the requirements of the Securities Act of 1933, the registrant certifies that it has reasonable grounds to believe that it meets all of the requirements for filing on Form SB-2 and authorized this registration statement to be signed on its behalf by the undersigned, in the City of Camden, State of Arkansas, as of the date set forth below. HCB BANCSHARES, INC. Date: December 31, 1996 By: /s/ Vida H. Lampkin __________________________________ Vida H. Lampkin Chairman of the Board, President and Chief Executive Officer (Duly Authorized Representative) POWER OF ATTORNEY We, the undersigned directors and executive officers of HCB Bancshares, Inc., hereby severally constitute and appoint Vida H. Lampkin and Cameron D. McKeel, with full power of substitution, our true and lawful attorneys and agents, to do any and all things in our names in the capacities indicated below which said Vida H. Lampkin and/or Cameron D. McKeel may deem necessary or advisable to enable HCB Bancshares, Inc. to comply with the Securities Act of 1933, as amended, and any rules, regulations and requirements of the Securities and Exchange Commission, in connection with the registration of HCB Bancshares, Inc. common stock, including specifically, but not limited to, power and authority to sign for us in our names in the capacities indicated below, the registration statement and any and all amendments (including post-effective amendments) thereto; and we hereby ratify and confirm all that said Vida H. Lampkin and/or Cameron D. McKeel shall do or cause to be done by virtue thereof. In accordance with the requirements of the Securities Act of 1933, this registration statement has been signed by the following persons in the capacities stated as of the date set forth above. /s/ Vida H. Lampkin /s/ Cameron D. McKeel __________________________________ _________________________________ Vida H. Lampkin Cameron D. McKeel Chairman of the Board, President Director and Vice President and Chief Executive Officer (Principal Executive, Financial and Accounting Officer) /s/ Roy Wayne Moseley /s/ Bruce D. Murry __________________________________ _________________________________ Roy Wayne Moseley Bruce D. Murry Director Director /s/ Carl E. Parker, Jr. /s/ Lula Sue Silliman __________________________________ _________________________________ Carl E. Parker, Jr. Lula Sue Silliman Director Director /s/ Clifford Steelman __________________________________ Clifford Steelman Director EX-1.1 2 ENGAGEMENT LETTER WITH TRIDENT SECURITIES, INC. 1 EXHIBIT 1.1 December 26, 1996 Board of Directors Heartland Community Bank 237 Jackson Street, SW Camden, Arkansas 71701 RE: Conversion Stock Marketing Services Gentlemen: This letter sets forth the terms of the proposed engagement between Trident Securities, Inc. ("Trident") and Heartland Community Bank (the "Bank") concerning our investment banking services in connection with the conversion of the Bank from a mutual to a capital stock form of organization. Trident is prepared to assist the Bank in connection with the offering of its shares of common stock during the subscription offering and community offering as such terms are defined in the Bank's Plan of Conversion (the "Plan"). The specific terms of the services contemplated hereunder shall be set forth in a definitive sales agency agreement (the "Agreement") between Trident and the Bank to be executed on the date the offering circular/prospectus is declared effective by the appropriate regulatory authorities. The price of the shares during the subscription offering and community offering will be the price established by the Bank's Board of Directors, based upon an independent appraisal as approved by the appropriate regulatory authorities, provided such price is mutually acceptable to Trident and the Bank. In connection with the subscription offering and community offering, Trident will act as financial advisor and exercise its best efforts to assist the Bank in the sale of its common stock during the subscription offering and community offering. Additionally, Trident may enter into agreements with other National Association of Securities Dealers, Inc., ("NASD") member firms to act as selected dealers, assisting in the sale of the common stock. Trident and the Bank will determine the selected dealers to assist the Bank during the community offering. At the appropriate time, Trident in conjunction with its counsel, will conduct an examination of the relevant documents and records of the Bank as Trident deems necessary and appropriate. The Bank will make all documents, records and other information deemed necessary by Trident or its counsel available to them upon request. 2 Board of Directors December 26, 1996 Page 2 For its services hereunder, Trident will receive the following compensation and reimbursement from the Bank: 1. A commission equal to 1.30% of the aggregate dollar amount of capital stock sold to investors who reside in the counties in which the Bank operates offices, a commission equal to 1.10% on sales to investors residing in the counties contiguous to those in which the Bank operates offices, a commission equal to 0.95% on sales to investors residing in other counties within the state of Arkansas and a commission equal to 0.65% on sales to investors residing outside the state of Arkansas. No commissions shall be payable on shares purchased by officers, directors, employees or their associates or employee benefit plans. Further, all commissions shall be based on the amount of stock sold; however, fees shall be capped at the midpoint of the final appraised value but in no case to exceed $18 million. In addition, in the event that the offering is closed above the midpoint appraised value the above described fee schedule will be applied on a pro rata basis as if the offering had closed at the midpoint. 2. For stock sold by other NASD member firms under selected dealer's agreements, the commission shall not exceed a fee to be agreed upon jointly by Trident and the Bank to reflect market requirements at the time of the stock allocation in a Syndicated Community Offering. 3. The foregoing fees and commissions are to be payable to Trident at closing as defined in the Agreement to be entered into between the Bank and Trident. 4. Trident shall be reimbursed for allocable expenses incurred by them, including legal fees, whether or not the Agreement is consummated. Trident's out-of-pocket expenses will not exceed $10,000 and its legal fees will not exceed $25,000. The Bank will forward to Trident a check in the amount of $10,000 as an advance payment to defray the allocable expenses of Trident. It further is understood that the Bank will pay all other expenses of the conversion including but not limited to its attorneys' fees (including out-of-pocket expenses), NASD filing fees, and filing and registration fees and fees of either Trident's attorneys or the attorneys relating to any required state securities law filings, telephone charges, air freight, rental equipment, supplies, transfer agent charges, fees relating to auditing and accounting and costs of printing all documents necessary in connection with the foregoing. For purposes of Trident's obligation to file certain documents and to make certain representations to the NASD in connection with the conversion, the Bank warrants that: (a) the Bank has not privately placed any securities within the last 18 months; (b) there have been no material dealings within the last 12 months between the Bank and any NASD member or any 3 Board of Directors December 26, 1996 Page 3 person related to or associated with any such member; (c) none of the officers or directors of the Bank has any affiliation with the NASD; (d) except as contemplated by this engagement letter with Trident, the Bank has no financial or management consulting contracts outstanding with any other person; (e) the Bank has not granted Trident a right of first refusal with respect to the underwriting of any future offering of the Bank stock; and (f) there has been no intermediary between Trident and the Bank in connection with the public offering of the Bank's shares, and no person is being compensated in any manner for providing such service. The Bank agrees to indemnify and hold harmless Trident and each person, if any, who controls the firm against all losses, claims, damages or liabilities, joint or several and all legal or other expenses reasonably incurred by them in connection with the investigation or defense thereof (collectively, "Losses"), to which they may become subject under the securities laws or under the common law, that arise out of or are based upon the conversion or the engagement hereunder of Trident. If the foregoing indemnification is unavailable for any reason, the Bank agrees to contribute to such Losses in the proportion that its financial interest in the conversion bears to that of the indemnified parties. If the Agreement is entered into with respect to the common stock to be issued in the conversion, the Agreement will provide for indemnification, which will be in addition to any rights that Trident or any other indemnified party may have at common law or otherwise. The indemnification provision of this paragraph will be superseded by the indemnification provisions of the Agreement entered into by the Bank and Trident. This letter is merely a statement of intent and is not a binding legal agreement except as to paragraph (4) above with regard to the obligation to reimburse Trident for allocable expenses to be incurred prior to the execution of the Agreement and the indemnity described in the preceding paragraph. While Trident and the Bank agree in principle to the contents hereof and propose to proceed promptly, and in good faith, to work out the arrangements with respect to the proposed offering, any legal obligations between Trident and the Bank shall be only as set forth in a duly executed Agreement. Such Agreement shall be in form and content satisfactory to Trident and the Bank, as well as their counsel, and Trident's obligations thereunder shall be subject to, among other things, there being in Trident's opinion no material adverse change in the condition or obligations of the Bank or no market conditions which might render the sale of the shares by the Bank hereby contemplated inadvisable. 4 Board of Directors December 26, 1996 Page 4 Please acknowledge your agreement to the foregoing by signing below and returning to Trident one copy of this letter. Trident acknowledges receipt of the advance payment of $10,000. Yours very truly, TRIDENT SECURITIES, INC. By: /s/ William M. Moore, Jr. __________________________ William M. Moore, Jr. Managing Director WMM/cs 10-10-2 Agreed and accepted to this 6th day of November, 1996 HEARTLAND COMMUNITY BANK By: /s/ Vida H. Lampkin ___________________ Vida H. Lampkin President 5 EXHIBIT 1.1 [TRIDENT LOGO] HEARTLAND COMMUNITY BANK At Trident, we endeavor to align your offering desires with our financial interest. Consequently, o Because Heartland needs to raise as little capital as possible - ALL TRIDENT FEES ARE CAPPED AT THE OFFERING MIDPOINT NOT TO EXCEED $18 MILLION! o Because Heartland desires a local ownership base, Trident proposes the following fee structure Assume: $18,000,000 Offering Size Assume: 8% Purchased by ESOP $1,440,000 Stock Purchased by Insiders $ 750,000 (Officers, Directors and Employees) Commission Schedule: Shares sold to Investors residing in Local Counties: 1.30% Shares sold to Investors residing in contiguous Arkansas Counties: 1.10% Shares sold to Investors residing in other Arkansas counties: 0.95% Shares sold to Investors residing outside the state of Arkansas: 0.65% Scenario 1 - ---------- Assume 100% of stock sold to Investors in Local Counties: $2,190,000 x 0% = $0.00 $15,810,000 x 1.30% = $205,530 Maximum Possible Fee (1.14% of total offering) Scenario 2 - ---------- Assume 75% of stock sold to Investors in Local Counties: $2,190,000 x 0% = $0.00 $11,310,000 x 1.30% = $147,030 Assume 15% of stock sold to Investors in Contiguous Counties: $2,700,000 x 1.10% = $29,700 Assume 10% of stock sold to other Arkansas Investors: $1,800,000 x 0.95% = $17,100 Total Commissions: $193,830 or 1.08% of total offering Scenario 3 - ---------- Assume 40% of stock sold to Investors in Local Counties: $2,190,000 x 0% = $0.00 $5,010,000 x 1.30% = $65,130 Assume 20% of stock sold to Investors in Contiguous Counties: $3,600,000 x 1.10% = $39,600 Assume 20% of stock sold to Investors in other Arkansas Counties: $3,600,000 x 0.95% = $34,200 Assume 20% of stock sold to Investors outside the state of Arkansas: $3,600,000 x 0.65% = $23,400 Total Commissions: $162,330 or 0.90% of total offering Legal: $25,000 Out-of-Pocket: $10,000 6 [TRIDENT LOGO] EXAMPLE OF OVERSUBSCRIPTION Assume: $18 Million Assume: $23.81 Million Super Maximum sold in Offering (we certainly hope this does not happen) Assume: Orders for $23.81 Million come in from these various constituencies: 40% of $9,524,000 sold locally (this includes $750,000 from officer, directors and employees and an 8% ESOP of $1,904,800) 20% or $4,762,000 sold in Contiguous Counties 20% or $4,762,000 sold to other Arkansas Investors 20% or $4,762,000 sold to Investors Outside Arkansas To determine fees, the above percentages would be applied to the offering as if it had closed at the $18 million midpoint and the fee schedule would be identical to Scenario #3 on the attached fee matrix. (This is described in the last sentence of paragraph 1 on page 2 of our proposal) EX-3.1 3 ARTICLES OF INCORPORATION OF HCB BANCSHARES, INC. 1 EXHIBIT 3.1 CERTIFICATE OF INCORPORATION OF HCB BANCSHARES, INC. TO THE SECRETARY OF STATE OF THE STATE OF OKLAHOMA: ARTICLE I NAME The name of the corporation is HCB Bancshares, Inc. (herein, the "Corporation"). ARTICLE II REGISTERED OFFICE The address of the Corporation's registered office in the State of Oklahoma is 735 First National Building, Oklahoma City, Oklahoma 73102. The name of the Corporation's registered agent at such address is CT Corporation System. ARTICLE III POWERS The nature of the business and the purpose of the Corporation shall be to engage in any lawful act or activity for which a savings institution holding company or bank holding company may be organized under the laws of the State of Oklahoma and applicable federal laws. The Corporation shall have all the powers of a corporation organized under the Oklahoma General Corporation Act, provided however, the Corporation shall not have the authority to engage in a general banking business pursuant to Title 6 of the Oklahoma Statutes. ARTICLE IV TERM The Corporation is to have perpetual existence. ARTICLE V INCORPORATOR The name and mailing address of the incorporator are as follows:
Name Mailing Address ---- --------------- Vida H. Lampkin 237 Jackson Street Camden, Arkansas 71701-0878
2 ARTICLE VI INITIAL DIRECTORS The number of directors constituting the initial board of directors of the Corporation is seven, and the names and mailing addresses of the persons who are to serve as directors until their successors are elected and qualified, together with the classes of directorships to which such persons have been assigned, are:
Name Address Class ---- ------- ----- Roy Wayne Moseley 237 Jackson Street I Camden, Arkansas 71701 Carl E. Parker, Jr. 237 Jackson Street I Camden, Arkansas 71701 Vida H. Lampkin 237 Jackson Street II Camden, Arkansas 71701 Clifford Steelman 237 Jackson Street II Camden, Arkansas 71701 Cameron D. McKeel 237 Jackson Street III Camden, Arkansas 71701 Bruce D. Murry 237 Jackson Street III Camden, Arkansas 71701 Lula Sue Silliman 237 Jackson Street III Camden, Arkansas 71701
ARTICLE VII CAPITAL STOCK The aggregate number of shares of all classes of capital stock which the Corporation has authority to issue is 25,000,000 of which 20,000,000 are to be shares of common stock, $.01 par value per share, and of which 5,000,000 are to be shares of serial preferred stock, $.01 par value per share. The shares may be issued by the Corporation from time to time as approved by the board of directors of the Corporation without the approval of the shareholders except as otherwise provided in this Article VII or the rules of a national securities exchange or association, if applicable. The consideration for the issuance of the shares shall be paid to or received by the Corporation in full before their issuance and shall not be less than the par value per share. The consideration for the issuance of the shares shall be cash, services rendered, personal property (tangible or intangible), real property, leases of real property or any combination of the foregoing. In the absence of actual fraud in the transaction, the judgment of the board of directors as to the value of such consideration shall be conclusive. Upon payment of such consideration such shares shall be deemed to be fully paid and nonassessable. In the case of a stock dividend, the part of the surplus of the Corporation which is transferred to stated capital upon the issuance of shares as a stock dividend shall be deemed to be the consideration for their issuance. A description of the different classes and series (if any) of the Corporation's capital stock, and a statement of the relative powers, designations, preferences and rights of the shares of each class and series (if any) of capital stock, and the qualifications, limitations or restrictions thereof, are as follows: 2 3 A. Common Stock. Except as provided in this Certificate, the holders of the common stock shall exclusively possess all voting power. Each holder of shares of common stock shall be entitled to one vote for each share held by such holders. Whenever there shall have been paid, or declared and set aside for payment, to the holders of the outstanding shares of any class of stock having preference over the common stock as to the payment of dividends, the full amount of dividends and sinking fund or retirement fund or other retirement payments, if any, to which such holders are respectively entitled in preference to the common stock, then dividends may be paid on the common stock, and on any class or series of stock entitled to participate therewith as to dividends, out of any assets legally available for the payment of dividends, but only when and as declared by the board of directors of the Corporation. In the event of any liquidation, dissolution or winding up of the Corporation, after there shall have been paid, or declared and set aside for payment, to the holders of the outstanding shares of any class having preference over the common stock in any such event, the full preferential amounts to which they are respectively entitled, the holders of the common stock and of any class or series of stock entitled to participate therewith, in whole or in part, as to distribution of assets shall be entitled, after payment or provision for payment of all debts and liabilities of the Corporation, to receive the remaining assets of the Corporation available for distribution, in cash or in kind. Each share of common stock shall have the same relative powers, preferences and rights as, and shall be identical in all respects with, all the other shares of common stock of the Corporation. B. Serial Preferred Stock. Except as provided in this Certificate of Incorporation, the board of directors of the Corporation is authorized, by resolution or resolutions from time to time adopted, to provide for the issuance of serial preferred stock in series and to fix and state the powers, designations, preferences and relative, participating, optional or other special rights of the shares of each such series, and the qualifications, limitations or restrictions thereof, including, but not limited to, determination of any of the following: (1) the distinctive serial designation and the number of shares constituting such series; (2) the dividend rates or the amount of dividends to be paid on the shares of such series, whether dividends shall be cumulative and, if so, from which date or dates, the payment date or dates for dividends, and the participating or other special rights, if any, with respect to dividends; (3) the voting powers, full or limited, if any, of the shares of such series; (4) whether the shares of such series shall be redeemable and, if so, the price or prices at which, and the terms and conditions upon which such shares may be redeemed; (5) the amount or amounts payable upon the shares of such series in the event of voluntary or involuntary liquidation, dissolution or winding up of the Corporation; (6) whether the shares of such series shall be entitled to the benefits of a sinking or retirement fund to be applied to the purchase or redemption of such shares, and, if so entitled, the amount of such fund and the manner of its application, including the price or prices at which such shares may be redeemed or purchased through the application of such funds; (7) whether the shares of such series shall be convertible into, or exchangeable for, shares of any other class or classes or any other series of the same or any other class of classes of stock of the Corporation and, if so convertible or exchangeable, the conversion price or prices, or the rate or rates of exchange, and the adjustments thereof, if any, at which such conversion or exchange may be made, and any other terms and conditions of such conversion or exchange; (8) the subscription or purchase price and form of consideration for which the shares of such series shall be issued; and 3 4 (9) whether the shares of such series which are redeemed or converted shall have the status of authorized but unissued shares of serial preferred stock and whether such shares may be reissued as shares of the same or any other series of serial preferred stock. Each share of each series of serial preferred stock shall have the same relative powers, preferences and rights as, and shall be identical in all respects with, all the other shares of the Corporation of the same series. ARTICLE VIII PREEMPTIVE RIGHTS Holders of the capital stock of the Corporation shall not be entitled to preemptive rights with respect to any shares or other securities of the Corporation which may be issued or any securities convertible into any such shares, including, without limitation, warrants, subscription rights and options to acquire shares. ARTICLE IX REPURCHASE OF SHARES The Corporation may from time to time, pursuant to authorization by the board of directors of the Corporation and without action by the shareholders, purchase or otherwise acquire shares of any class, bonds, debentures, notes, scrip, warrants, obligations, evidences of indebtedness, or other securities of the Corporation in such manner, upon such terms, and in such amounts as the board of directors shall determine; subject, however, to such limitations or restrictions, if any, as are contained in the express terms of any class of shares of the Corporation outstanding at the time of the purchase or acquisition in question or as are imposed by law. ARTICLE X MEETINGS OF SHAREHOLDERS; CUMULATIVE VOTING A. Notwithstanding any other provision of this Certificate or the bylaws of the Corporation, no action required to be taken or which may be taken at any annual or special meeting of shareholders of the Corporation may be taken without a meeting, and the power of shareholders to consent in writing, without a meeting, to the taking of any action is specifically denied. B. Special meetings of the shareholders of the Corporation for any purpose or purposes may be called at any time by the board of directors of the Corporation, or by a committee of the board of directors which has been duly designated by the board of directors and whose powers and authorities, as provided in a resolution of the board of directors or in the bylaws of the Corporation, include the power and authority to call such meetings, but such special meetings may not be called by any other person or persons. C. There shall be no cumulative voting by shareholders of any class or series in the election of directors of the Corporation. D. Meetings of shareholders may be held within or without the State of Oklahoma, as the bylaws may provide. 4 5 ARTICLE XI NOTICE FOR NOMINATIONS AND PROPOSALS A. Nominations for the election of directors and proposals for any new business to be taken up at any annual or special meeting of shareholders may be made by the board of directors of the Corporation or by any shareholder of the Corporation entitled to vote generally in the election of directors. In order for a shareholder of the Corporation to make any such nominations and/or proposals, he or she shall give notice thereof in writing, delivered or mailed by first class United States mail, postage prepaid, to the Secretary of the Corporation not less than 30 days nor more than 60 days prior to any such meeting; provided, however, that if less than 40 days' notice of the meeting is given to shareholders, such written notice shall be delivered or mailed, as prescribed, to the Secretary of the Corporation not later than the close of the tenth day following the day on which notice of the meeting was mailed to shareholders. Each such notice given by a shareholder with respect to nominations for the election of directors shall set forth (i) the name, age, business address and, if known, residence address of each nominee proposed in such notice, (ii) the principal occupation or employment of each such nominee, and (iii) the number of shares of stock of the Corporation which are beneficially owned by each such nominee. In addition, the shareholder making such nomination shall promptly provide any other information reasonably requested by the Corporation. B. Each such notice given by a shareholder to the Secretary with respect to business proposals to bring before a meeting shall set forth in writing as to each matter: (i) a brief description of the business desired to be brought before the meeting and the reasons for conducting such business at the meeting; (ii) the name and address, as they appear on the Corporation's books, of the shareholder proposing such business; (iii) the class and number of shares of the Corporation which are beneficially owned by the shareholder; and (iv) any material interest of the shareholder in such business. Notwithstanding anything in this Certificate to the contrary, no business shall be conducted at the meeting except in accordance with the procedures set forth in this Article XI. C. The Chairman of the annual or special meeting of shareholders may, if the facts warrant, determine and declare to such meeting that a nomination or proposal was not made in accordance with the foregoing procedure, and, if he should so determine, he shall so declare to the meeting, and the defective nomination or proposal shall be disregarded and laid over for action at the next succeeding adjourned, special or annual meeting of the shareholders taking place thirty days or more thereafter. This provision shall not require the holding of any adjourned or special meeting of shareholders for the purpose of considering such defective nomination or proposal. ARTICLE XII DIRECTORS A. Number; Vacancies. The number of directors of the Corporation shall be such number, not less than five nor more than 15 (exclusive of directors, if any, to be elected by holders of preferred stock of the Corporation, voting separately as a class), as shall be provided from time to time in or in accordance with the bylaws, provided that no decrease in the number of directors shall have the effect of shortening the term of any incumbent director, and provided further that no action shall be taken to decrease or increase the number of directors from time to time unless at least two-thirds of the directors then in office shall concur in said action. Vacancies in the board of directors of the Corporation, however caused, and newly created directorships shall be filled by a vote of two-thirds of the directors then in office, whether or not a quorum, and any director so chosen shall hold office for a term expiring at the annual meeting of shareholders at which the term of the class to which the director has been chosen expires and when the director's successor is elected and qualified. B. Classified Board. The board of directors of the Corporation shall be divided into three classes of directors which shall be designated Class I, Class II and Class III. The members of each class shall be elected for a term of three years and until their successors are elected and qualified. Such classes shall be as nearly equal in number as the then total number of directors constituting the entire board of directors shall permit, with the terms 5 6 of office of all members of one class expiring each year. When the number of directors is changed, the board of directors shall determine the class or classes to which the increased or decreased number of directors shall be apportioned; provided that the directors in each class shall be as nearly equal in number as possible; provided, further, that no decrease in the number of directors shall affect the term of any director then in office. At the first annual meeting of shareholders, directors of Class I shall be elected to hold office for a term expiring at the third succeeding annual meeting thereafter. At the second annual meeting of shareholders, directors of Class II shall be elected to hold office for a term expiring at the third succeeding annual meeting thereafter. At the third annual meeting of shareholders, directors of Class III shall be elected to hold office for a term expiring at the third succeeding annual meeting thereafter. Thereafter, at each succeeding annual meeting, directors of each class shall be elected for three year terms. Notwithstanding the foregoing, the director whose term shall expire at any annual meeting shall continue to serve until such time as his successor shall have been duly elected and shall have qualified unless his position on the board of directors shall have been abolished by action taken to reduce the size of the board of directors prior to said meeting. Should the number of directors of the Corporation be reduced, the directorship(s) eliminated shall be allocated among classes as appropriate so that the number of directors in each class is as specified in the immediately preceding paragraph. The board of directors shall designate, by the name of the incumbent(s), the position(s) to be abolished. Notwithstanding the foregoing, no decrease in the number of directors shall have the effect of shortening the term of any incumbent director. Should the number of directors of the Corporation be increased, the additional directorships shall be allocated among classes as appropriate so that the number of directors in each class is as specified in the immediately preceding paragraph. Whenever the holders of any one or more series of preferred stock of the Corporation shall have the right, voting separately as a class, to elect one or more directors of the Corporation, the board of directors shall consist of said directors so elected in addition to the number of directors fixed as provided in this Article XII. Notwithstanding the foregoing, and except as otherwise may be required by law, whenever the holders of any one or more series of preferred stock of the Corporation shall have the right, voting separately as a class, to elect one or more directors of the Corporation, the terms of the director or directors elected by such holders shall expire at the next succeeding annual meeting of shareholders. ARTICLE XIII REMOVAL OF DIRECTORS Notwithstanding any other provision of this Certificate or the bylaws of the Corporation, any director or the entire board of directors of the Corporation may be removed at any time, but only for cause and only by the affirmative vote of the holders of at least 80% of the outstanding shares of capital stock of the Corporation entitled to vote generally in the election of directors (considered for this purpose as one class) cast at a meeting of the shareholders called for that purpose. Notwithstanding the foregoing, whenever the holders of any one or more series of preferred stock of the Corporation shall have the right, voting separately as a class, to elect one or more directors of the Corporation, the preceding provisions of this Article XIII shall not apply with respect to the director or directors elected by such holders of preferred stock. ARTICLE XIV ACQUISITION OF CAPITAL STOCK A. Five-Year Prohibition. For a period of five years from the effective date of the completion of the conversion of Heartland Community Bank, Camden, Arkansas, from mutual to stock form (which entity shall become a wholly owned subsidiary of the Corporation upon such conversion), no person shall directly or indirectly offer to acquire or acquire the beneficial ownership of more than 10% of any class of equity security of the Corporation, unless such offer or acquisition shall have been approved in advance by a two-thirds vote of the Continuing Directors, as defined in Article XV. In addition, for a period of five years from the completion of the conversion 6 7 of Heartland Community Bank from mutual to stock form (which entity shall become a wholly owned subsidiary of the Corporation upon such conversion), and notwithstanding any provision to the contrary in this Certificate or in the bylaws of the Corporation, where any person directly or indirectly acquires beneficial ownership of more than 10% of any class of equity security of the Corporation in violation of this Article XIV, the securities beneficially owned in excess of 10% shall not be counted as shares entitled to vote, shall not be voted by any person or counted as voting shares in connection with any matter submitted to the stockholders for a vote, and shall not be counted as outstanding for purposes of determining a quorum or the affirmative vote necessary to approve any matter submitted to the stockholders for a vote. B. Prohibition After Five Years. If, at any time after five years from the effective date of the completion of the conversion of Heartland Community Bank from mutual to stock form (which entity shall become a wholly owned subsidiary of the Corporation upon such conversion), any person shall acquire the beneficial ownership of more than 10% of any class of equity security of the Corporation without the prior approval by a two-thirds vote of the Continuing Directors, as defined in Article XV hereof, then the record holders of voting stock of the Corporation beneficially owned by such acquiring person shall have only the voting rights set forth in this paragraph B on any matter requiring the vote or consent of shareholders. With respect to each vote in excess of 10% of the voting power of the outstanding shares of voting stock of the Corporation which such record holders would otherwise be entitled to cast without giving effect to this paragraph B, such record holders in the aggregate shall be entitled to cast only one-hundredth (1/100) of a vote, and the aggregate voting power of such record holders, so limited, for all shares of voting stock of the Corporation beneficially owned by such acquiring person shall be allocated proportionately among such record holders. For each such record holder, this allocation shall be accomplished by multiplying the aggregate voting power as so limited, of the outstanding shares of voting stock of the Corporation beneficially owned by such acquiring person by a fraction whose numerator is the number of votes represented by the shares of voting stock of the Corporation owned of record by such record holder (and which are beneficially owned by the acquiring person) and whose denominator is the total number of votes represented by the shares of voting stock of the Corporation that are beneficially owned by such acquiring person. A person who is a record owner of shares of voting stock of the Corporation that are beneficially owned simultaneously by more than one person shall have, with respect to such shares, the right to cast the least number of votes that such person would be entitled to cast under this paragraph B by virtue of such shares being so beneficially owned by any of such acquiring persons. C. Definitions. The term "person" means an individual, a group acting in concert, a corporation, a partnership, an association, a joint stock company, a trust, an unincorporated organization or similar company, a syndicate or any other group acting in concert formed for the purpose of acquiring, holding, or disposing of securities of the Corporation. The term "acquire" includes every type of acquisition, whether effected by purchase, exchange, operation of law or otherwise. The term "offer" includes every offer to buy or otherwise acquire, solicitation of an offer to sell, tender offer for, or request for invitation for tenders of, a security or interest in a security for value. The term "acting in concert" includes (a) knowing participation in a joint activity or conscious parallel action towards a common goal whether or not pursuant to an express agreement, and (b) a combination or pooling of voting or other interest in the Corporation's outstanding shares for a common purpose, pursuant to any contract, understanding, relationship, agreement or other arrangement, whether written or otherwise. The term "beneficial ownership" shall have the meaning defined in Rule 13d-3 of the General Rules and Regulations under the Securities Exchange Act of 1934, as in effect on the date of filing this Certificate. D. Exclusion for Employee Benefit Plans, Directors, Officer, Employee and Certain Proxies. The restrictions contained in this Article XIV shall not apply to (i) any underwriter or member of an underwriting or selling group involving a public sale or resale of securities of the Corporation or a subsidiary thereof; provided, however, that upon completion of the sale or resale of such securities, no such underwriter or member of such selling group is a beneficial owner of more than 10% of any class of equity security of the Corporation, (ii) any proxy granted to one or more Continuing Directors, as defined in Article XV hereof, by a shareholder of the Corporation or (iii) any employee benefit plans of the Corporation or a subsidiary thereof. In addition, the Continuing Directors, as defined in Article XV hereof, the officers and employees of the Corporation and its subsidiaries, the directors of subsidiaries of the Corporation, the employee benefit plans of the Corporation and its subsidiaries, entities organized or established by the Corporation or any subsidiary thereof pursuant to the terms of such plans and trustees and 7 8 fiduciaries with respect to such plans acting in such capacity shall not be deemed to be a group with respect to their beneficial ownership of voting stock of the Corporation solely by virtue of their being directors, officers or employees of the Corporation or a subsidiary thereof or by virtue of the Continuing Directors, as defined in Article XV hereof, the officers and employees of the Corporation and its subsidiaries and the directors of subsidiaries of the Corporation being fiduciaries or beneficiaries of an employee benefit plan of the Corporation or a subsidiary of the Corporation. Notwithstanding the foregoing, no director, officer or employee of the Corporation or any of its subsidiaries or group of any of them shall be exempt from the provisions of this Article XIV should any such person or group become a beneficial owner of more than 10% of any class of equity security of the Corporation. E. Determinations. A majority of the Continuing Directors, as defined in Article XV hereof, shall have the power to construe and apply the provisions of this Article XIV and to make all determinations necessary or desirable to implement such provisions, including but not limited to matters with respect to (a) the number of shares beneficially owned by any person, (b) whether a person has an agreement, arrangement, or understanding with another as to the matters referred to in the definition of beneficial ownership, (c) the application of any other definition or operative provision of this Article XIV to the given facts, or (d) any other matter relating to the applicability or effect of this Article XIV. Any constructions, applications, or determinations made by the Continuing Directors, as defined in Article XV hereof, pursuant to this Article XIV in good faith and on the basis of such information and assistance as was then reasonably available for such purpose shall be conclusive and binding upon the Corporation and its shareholders. F. Applicability of Sections 1145 through 1155 of Oklahoma General Corporation Act. In addition to paragraphs A, B, C and D of this Article XIV, the provisions of Sections 1145 through 1155 of the Oklahoma General Corporation Act, as in effect on the date of this Certificate of Incorporation or as hereafter amended, shall apply to the Corporation as of and after January 1, 1997, except to the extent expressly resolved in advance with respect to any control share acquisition (as defined in Section 1146) by two-thirds of the Continuing Directors (as hereinafter defined). ARTICLE XV APPROVAL OF CERTAIN BUSINESS COMBINATIONS A. (1) The shareholder vote required to approve Business Combinations (as hereinafter defined) shall be as set forth in this paragraph, except to the extent otherwise required by applicable law. Except as otherwise expressly provided in this Article XV, the affirmative vote of the holders of (i) at least 80% of the outstanding shares entitled to vote thereon (and, if any class or series of shares is entitled to vote thereon separately, the affirmative vote of the holders of at least 80% of the outstanding shares of each such class or series), and (ii) at least a majority of the outstanding shares entitled to vote thereon, not including shares deemed beneficially owned by a Related Person (as hereinafter defined), shall be required in order to authorize any of the following: (a) any merger or consolidation of the Corporation with or into a Related Person (as hereinafter defined); (b) any sale, lease, exchange, transfer or other disposition, including without limitation, a mortgage, or any other capital device, of all or any Substantial Part (as hereinafter defined) of the assets of the Corporation (including without limitation any voting securities of a subsidiary) or of a subsidiary, to a Related Person; (c) any merger or consolidation of a Related Person with or into the Corporation or a subsidiary of the Corporation; 8 9 (d) any sale, lease, exchange, transfer or other disposition of all or any Substantial Part of the assets of a Related Person to the Corporation or a subsidiary of the Corporation; (e) the issuance of any securities of the Corporation or a subsidiary of the Corporation to a Related Person; (f) the acquisition by the Corporation or a subsidiary of the Corporation of any securities of a Related Person; (g) any reclassification of the common stock of the Corporation, or any recapitalization involving the common stock of the Corporation; and (h) any agreement, contract or other arrangement providing for any of the transactions described in this Article. (2) Such affirmative vote shall be required notwithstanding any other provision of this Certificate, any provision of law, or any agreement with any regulatory agency or national securities exchange which might otherwise permit a lesser vote or no vote. (3) The term "Business Combination" as used in paragraph A of this Article XV shall mean any transaction which is referred to in any one or more of subparagraphs A(1)(a) through (h) above. B. For the purposes of paragraph A of this Article XV the following definitions apply: (1) The term "Related Person" shall mean and include (a) any individual, corporation, partnership or other person or entity which together with its "affiliates" (as that term is defined in Rule 12b-2 of the General Rules and Regulations under the Securities Exchange Act of 1934), "beneficially owns" (as that term is defined in Rule 13d-3 of the General Rules and Regulations under the Securities Exchange Act of 1934) in the aggregate 10% or more of the outstanding shares of the common stock of the Corporation; and (b) any "affiliate" (as that term is defined in Rule 12b-2 under the Securities Exchange Act of 1934) of any such individual, corporation, partnership or other person or entity. Without limitation, any shares of the common stock of the Corporation which any Related Person has the right to acquire pursuant to any agreement, or upon exercise or conversion rights, warrants or options, or otherwise, shall be deemed "beneficially owned" by such Related Person. (2) The term "Substantial Part" shall mean more than 25 percent of the total assets of the Corporation, as of the end of its most recent fiscal year ending prior to the time the determination is made. (3) The term "Continuing Director" shall mean any member of the board of directors of the Corporation who is unaffiliated with the Related Person and was a member of the board prior to the time that the Related Person became a Related Person, and any successor of a Continuing Director who is unaffiliated with the Related Person and is recommended to succeed a Continuing Director by a majority of Continuing Directors then on the board. (4) The term "Continuing Director Quorum" shall mean two-thirds of the Continuing Directors capable of exercising the powers conferred on them. C. In addition to Sections A and B of this Article XV, the provisions of Section 1090.3 of the Oklahoma General Corporation Act, as in effect on the date of this Certificate of Incorporation or as hereafter amended, shall apply to the Corporation, except to the extent otherwise required by applicable law. D. The provisions of paragraphs A, B and C shall not be applicable to any particular transaction or arrangement, and such transaction or arrangement shall require only such affirmative vote as is required by any other provision of this Certificate, any provision of law or any agreement with any regulatory agency or national securities 9 10 exchange, if the transaction or arrangement shall have been approved by two-thirds of the Continuing Directors (as hereinafter defined); provided, however, that such approval shall only be effective if obtained at a meeting at which a Continuing Director Quorum (as hereinafter defined) is present. ARTICLE XVI EVALUATION OF BUSINESS COMBINATIONS In connection with the exercise of its judgment in determining what is in the best interests of the Corporation and of the shareholders, when evaluating a Business Combination (as defined in Article XV) or a tender or exchange offer, or similar transaction or arrangement, the board of directors of the Corporation may, in addition to considering the adequacy of the amount to be paid in connection with any such transaction, consider all of the following factors and any other factors which it deems relevant; (i) the social and economic effects of the transaction on the Corporation and its subsidiaries, employees, depositors, loan and other customers, creditors and other elements of the communities in which the Corporation and its subsidiaries operate or are located; (ii) the business and financial condition and earnings prospects of the acquiring person or entity, including, but not limited to, debt service and other existing financial obligations, financial obligations to be incurred in connection with the acquisition and other likely financial obligations of the acquiring person or entity and the possible effect of such conditions upon the Corporation and its subsidiaries and the other elements of the communities in which the Corporation and its subsidiaries operate or are located; and (iii) the competence, experience, and integrity of the acquiring person or entity and its or their management. ARTICLE XVII INDEMNIFICATION A. Persons. The Corporation shall indemnify the persons named below as provided in this Article XVII and to the full extent permitted under applicable law: (1) any person who is or was a director, officer, employee, or agent of the Corporation; and (2) any person who serves or served at the Corporation's request as a director, officer, employee, agent, partner or trustee of another corporation, partnership, joint venture, trust or other enterprise. B. Extent. In case of a threatened, pending or completed suit, action, proceeding or other matter (whether civil, criminal, administrative or investigative) (together hereafter referred to as a suit) against a person named in paragraph A by reason of his holding a position named in paragraph A, the Corporation shall indemnify him if he satisfies the standard in paragraph C, for all amounts actually and reasonably incurred by him in connection with the defense or settlement of the suit, including, but not limited to (i) expenses (including attorneys' fees), (ii) amounts paid in settlement, (iii) judgments and (iv) fines. C. Standard. In case of a suit, a person named in paragraph A shall be indemnified only if: (1) he is successful on the merits or otherwise; or (2) he acted in good faith in the transaction which is the subject of the suit and in a manner he reasonably believed to be in, or not opposed to, the best interests of the Corporation, including, but not limited to, the taking of any and all actions in connection with the Corporation's response to any tender offer or any offer or proposal of another party to engage in a Business Combination (as defined in Article XV) not approved by the board of directors. The termination of a suit by judgment, order, settlement, or conviction, or upon a plea of nolo contendere or its equivalent, shall not, of itself, create a presumption that the person failed to satisfy the standard of this subparagraph E(2). 10 11 D. Determination That Standard Has Been Met. A determination that the standard of paragraph C has been satisfied may be made by a court. Or, the determination may be made by: (1) the board of directors by a majority vote of a quorum consisting of directors of the Corporation who were not parties to the action, suit or proceeding; or (2) independent legal counsel (appointed by a majority of the disinterested directors of the Corporation, whether or not a quorum) in a written opinion; or (3) the shareholders of the Corporation. E. Proration. Anyone making a determination under paragraph D may determine that a person has met the standard as to some matters but not as to others, and may reasonably prorate amounts to be indemnified. F. Advance Payment. The Corporation shall pay in advance any expenses (including attorneys' fees) which may become subject to indemnification under paragraphs A through E if: (1) the board of directors authorizes the specific payment; and (2) the person receiving the payment undertakes in writing to repay the same if it is ultimately determined that he is not entitled to indemnification by the Corporation under paragraphs A through E. G. Nonexclusive. The indemnification and advance payment of expenses provided by paragraphs A through F shall not be exclusive of any other rights to which a person may be entitled by law, bylaw, agreement or vote of shareholders or disinterested directors, or otherwise. H. Continuation. The indemnification provided by this Article XVII shall be deemed to be a contract between the Corporation and the persons entitled to indemnification thereunder, and any repeal or modification of this Article XVII shall not affect any rights or obligations then existing with respect to any state of facts then or theretofore existing or any action, suit or proceeding theretofore or thereafter brought based in whole or in part upon any such state of facts. The indemnification and advance payment provided by paragraphs A through F shall continue as to a person who has ceased to hold a position named in paragraph A and shall inure to his heirs, executors and administrators. I. Insurance. The Corporation may purchase and maintain insurance on behalf of any person who holds or who has held any position named in paragraph A, against any liability incurred by him in any such position, or arising out of his status as such, whether or not the Corporation would have power to indemnify him against such liability under paragraphs A through F. J. Savings Clause. If this Article XVII or any portion hereof shall be invalidated on any ground by any court of competent jurisdiction, then the Corporation shall nevertheless indemnify each director, officer, employee, and agent of the Corporation or person who serves or served at the Corporation's request as a director, officer, employee, agent, partner or trustee of another corporation, partnership, joint venture, trust or other enterprise as to costs, charges, and expenses (including attorneys' fees), judgments, fines, and amounts paid in settlement with respect to any action, suit, or proceeding, whether civil, criminal, administrative, or investigative, including an action by or in the right of the Corporation to the full extent permitted by any applicable portion of this Article XVII that shall not have been invalidated and to the full extent permitted by applicable law. 11 12 ARTICLE XVIII LIMITATIONS ON DIRECTORS' LIABILITY A director of the Corporation shall not be personally liable to the Corporation or its shareholders for monetary damages for breach of fiduciary duty as a director, except: (i) for any breach of the director's duty of loyalty to the Corporation or its shareholders, (ii) for acts or omissions that are not in good faith or that involve intentional misconduct or a knowing violation of law, (iii) under Section 1053 or of the Oklahoma General Corporation Act; or (iv) for any transaction from which the director derived an improper personal benefit. If the Oklahoma General Corporation Act is amended after the date of filing of this Certificate to permit further elimination or limitation of the personal liability of directors, then the liability of a director of the Corporation shall be eliminated or limited to the fullest extent permitted by the Oklahoma General Corporation Act, as so amended. Any repeal or modification of the foregoing paragraph by the shareholders of the Corporation shall not adversely affect any right or protection of a director of the Corporation existing at the time of such repeal or modification. ARTICLE XIX AMENDMENT OF BYLAWS In furtherance and not in limitation of the powers conferred by statute, the board of directors of the Corporation is expressly authorized to adopt, repeal, alter, amend and rescind the bylaws of the Corporation by a vote of a majority of the board of directors. Notwithstanding any other provision of this Certificate or the bylaws of the Corporation (and notwithstanding the fact that some lesser percentage may be specified by law), the bylaws shall not be adopted, repealed, altered, amended or rescinded by the shareholders of the Corporation except by the affirmative vote of the holders of not less than 80% of the outstanding shares of capital stock of the Corporation entitled to vote generally in the election of directors (considered for this purpose as one class) cast at a meeting of the shareholders called for that purpose (provided that notice of such proposed adoption, repeal, alteration, amendment or rescission is included in the notice of such meeting), or, as set forth above, by the board of directors. ARTICLE XX AMENDMENT OF CERTIFICATE OF INCORPORATION The Corporation reserves the right to repeal, alter, amend or rescind any provision contained in this Certificate in the manner now or hereafter prescribed by law, and all rights conferred on shareholders herein are granted subject to this reservation. Notwithstanding the foregoing, the provisions set forth in Articles X, XI, XII, XIII, XIV, XV, XVI, XVII, XVIII, XIX and this Article XX may not be repealed, altered, amended or rescinded in any respect unless the same is approved by the affirmative vote of the holders of not less than 80% of the outstanding shares of capital stock of the Corporation entitled to vote generally in the election of directors (considered for this purpose as a single class) cast at a meeting of the shareholders called for that purpose (provided that notice of such proposed adoption, repeal, alteration, amendment or rescission is included in the notice of such meeting), except, with the prior approval of a majority of the Continuing Directors, as defined in Article XV, the provisions set forth in Article XIV may be repealed, altered, amended or rescinded with the approval of the affirmative vote of the holders of a majority of the outstanding shares of capital stock of the Corporation entitled to vote generally in the election of directors cast at a meeting of the shareholders called for that purpose. 12 13 THE UNDERSIGNED, being the incorporator hereinbefore named, for the purpose of forming a corporation pursuant to the Oklahoma General Corporation Act, does make this Certificate, hereby declaring and certifying that this is my act and deed and the facts herein stated are true, and accordingly has hereunto set my hand this 19th day of December 1996. /s/ Vida H. Lampkin --------------------------------- Vida H. Lampkin Incorporator 13 EX-3.2 4 BYLAWS OF HCB BANCSHARES, INC. 1 EXHIBIT 3.2 BYLAWS OF HCB BANCSHARES, INC. ARTICLE I PRINCIPAL EXECUTIVE OFFICE The principal executive office of HCB Bancshares, Inc. (the "Corporation") shall be at 237 Jackson Street, Camden, Arkansas 71701. The Corporation may also have offices at such other places within or without the State of Arkansas as the board of directors shall from time to time determine. ARTICLE II SHAREHOLDERS SECTION 1. Place of Meetings. All annual and special meetings of shareholders shall be held at the principal executive office of the Corporation or at such other place within or without the State of Arkansas as the board of directors may determine and as designated in the notice of such meeting. SECTION 2. Annual Meeting. A meeting of the shareholders of the Corporation for the election of directors and for the transaction of any other business of the Corporation shall be held annually at such date and time as the board of directors may determine. SECTION 3. Special Meetings. Special meetings of the shareholders for any purpose or purposes may be called at any time by the Board of Directors or a duly authorized committee thereof only in accordance with the provisions of the Corporation's Certificate of Incorporation. SECTION 4. Conduct of Meetings. Annual and special meetings shall be conducted in accordance with these Bylaws or as otherwise prescribed by the board of directors. The board of directors shall designate, when present, the chairman or the chief executive officer of the Corporation to preside at such meetings. SECTION 5. Notice of Meeting. Written notice stating the place, day and hour of the meeting and the purpose or purposes for which the meeting is called shall be mailed by the secretary or the officer performing his duties, not less than ten days nor more than 60 days before the meeting to each shareholder of record entitled to vote at such meeting. If mailed, such notice shall be deemed to be delivered when deposited in the United States mail, postage prepaid, addressed to the shareholder at his address as it appears on the records of the Corporation as of the record date prescribed in Section 6 of this Article II. A shareholder's written waiver of notice of a meeting before or after a meeting, or the shareholder's presence at a meeting, shall relieve the Corporation of the requirement to give notice hereunder, except where the shareholder objects at the beginning of the meeting to the transaction of business because the meeting is not lawfully called or convened. When any shareholders' meeting, either annual or special, is adjourned for more than 30 days, notice of the adjourned meeting shall be given as in the case of an original meeting. It shall not be necessary to give any notice of the time and place of any meeting adjourned for 30 days or less or of the business to be transacted at such adjourned meeting, other than an announcement at the meeting at which such adjournment is taken. SECTION 6. Fixing of Record Date. For the purpose of determining shareholders entitled to notice of or to vote at any meeting of shareholders, or any adjournment thereof, the board of directors shall fix in advance a date as the record date for any such determination of shareholders. Such date in any case shall be not more than 60 days, and in case of a meeting of shareholders, not less than ten days prior to the date on which the particular action, requiring such determination of shareholders, is to be taken. When a determination of shareholders entitled to vote 2 at any meeting of shareholders has been made as provided in this section, such determination shall apply to any adjournment thereof. In order that the Corporation may determine the shareholders entitled to receive payment of any dividend or other distribution or allotment of any rights or the shareholders entitled 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 upon which the resolution fixing the record date is adopted, and which record date shall be not more than 60 days prior to such action. SECTION 7. Voting Lists. The officer who has charge of the stock ledger of the Corporation shall prepare and make, at least ten days before each meeting of shareholders, a complete list of the shareholders entitled to vote at such meeting or any adjournment thereof, arranged in alphabetical order, with the address of and the number of shares held by each. Such list shall be open to the examination of any shareholder, for any purpose germane to the meeting, during ordinary business hours, for a period of at least ten days prior to the meeting, either at a place within the city where the meeting is to be held, which place shall be specified on the notice of the meeting, or, if not so specified, at the place where the meeting is to be held. The list shall also be produced and kept at the time and place of the meeting during the whole time thereof, and may be inspected by any shareholder who is present. The stock ledger shall be the only evidence as to who are the shareholders entitled to examine the list required by this section. SECTION 8. Quorum. One-third of the outstanding shares of the Corporation entitled to vote, represented in person or by proxy, shall constitute a quorum at a meeting of shareholders. If less than one-third of the outstanding shares are represented at a meeting, a majority of the shares so represented may adjourn the meeting from time to time without further notice. At such adjourned meeting at which a quorum shall be present or represented, any business may be transacted which might have been transacted at the meeting as originally notified. The shareholders present at a duly organized meeting may continue to transact business until adjournment, notwithstanding the withdrawal of enough shareholders to leave less than a quorum. SECTION 9. Proxies. At all meetings of shareholders, a shareholder may vote by proxy executed in writing by the shareholder or by his duly authorized attorney in fact. Proxies solicited on behalf of the management shall be voted as directed by the shareholder or, in the absence of such direction, as determined by a majority of the board of directors. No proxy shall be valid after three years from the date of its execution unless the proxy provides for a larger period. SECTION 10. Voting. At each election for directors, every shareholder entitled to vote at such election shall be entitled to one vote for each share of stock held by him. Unless otherwise provided by the Corporation's Certificate of Incorporation, by statute or by these Bylaws in all matters other than the election of directors, a majority of those votes present in person or represented by proxy at a lawful meeting and entitled to vote on the subject matter shall be sufficient to pass on a transaction or matter. Directors shall be elected by a plurality of the votes of the shares present in person or represented by proxy at a lawful meeting and entitled to vote on the election of directors. SECTION 11. Voting of Shares in the Name of Two or More Persons. When ownership of stock stands in the name of two or more persons, in the absence of written directions to the Corporation to the contrary, at any meeting of the shareholders of the Corporation, any one or more of such shareholders may cast, in person or by proxy, all votes to which such ownership is entitled. In the event an attempt is made to cast conflicting votes, in person or by proxy, by the several persons in whose name shares of stock stand, the vote or votes to which these persons are entitled shall be cast as directed by a majority of those holding such stock and present in person or by proxy at such meeting. If the vote is evenly split on any particular matter, each fraction may vote the securities in question proportionally, or any person voting the shares, or a beneficiary, if any, may apply to the district court to appoint an additional person to act with the persons so voting the shares, which shall then be voted as determined by a majority of such persons and the person appointed by such court. If the instrument so filed shows that any such tenancy is held in unequal interests, a majority or even-split for the purpose of this Section 11 shall be a majority or even-split in interest. - 2 - 3 SECTION 12. Voting of Shares by Certain Holders. Shares standing in the name of another corporation may be voted by any officer, agent or proxy as the bylaws of such corporation may prescribe, or, in the absence of such provision, as the board of directors of such corporation may determine. Shares held by an administrator, executor, guardian or conservator may be voted by him, either in person or by proxy, without a transfer of such shares into his name. Shares standing in the name of a trustee may be voted by him, either in person or by proxy, but no trustee shall be entitled to vote shares held by him without a transfer of such shares into his name. Shares standing in the name of a receiver may be voted by such receiver, and shares held by or under the control of a receiver may be voted by such receiver without the transfer thereof into his name if authority to do so is contained in an appropriate order of the court or other public authority by which such receiver was appointed. Persons whose stock is pledged shall be entitled to vote, unless in the transfer by the pledgor on the books of the Corporation he has expressly empowered the pledgee to vote, in which case only the pledgee or his proxy may represent such stock and vote thereon. Neither treasury shares of its own stock held by the Corporation, nor shares held by another corporation, if a majority of the shares entitled to vote for the election of directors of such other corporation are held by the Corporation, shall be voted at any meeting or counted for quorum purposes. SECTION 13. Inspectors of Election. In advance of any meeting of shareholders, the chairman of the board or the board of directors may appoint any persons, other than nominees for office, as inspectors of election to act at such meeting or any adjournment thereof. The number of inspectors shall be either one or three. If the board of directors so appoints either one or three inspectors, that appointment shall not be altered at the meeting. If inspectors of election are not so appointed, the chairman of the board may make such appointment at the meeting. In case any person appointed as inspector fails to appear or fails or refuses to act, the vacancy may be filled by appointment in advance of the meeting or at the meeting by the chairman of the board or the president. Unless otherwise prescribed by applicable law, the duties of such inspectors shall include: determining the number of shares of stock and the voting power of each share, the shares of stock represented at the meeting, the existence of a quorum, the authenticity, validity and effect of proxies; receiving votes, ballots or consents; hearing and determining all challenges and questions in any way arising in connection with the right to vote; counting and tabulating all votes or consents; determining the result; and such acts as may be proper to conduct the election or vote with fairness to all shareholders. SECTION 14. Nominating Committee. The board of directors or a committee appointed by the board of directors shall act as a nominating committee for selecting the management nominees for election as directors. Except in the case of a nominee substituted as a result of the death or other incapacity of a management nominee, the nominating committee shall deliver written nominations to the secretary at least 20 days prior to the date of the annual meeting. Provided such committee makes such nominations, no nominations for directors except those made by the nominating committee shall be voted upon at the annual meeting unless other nominations by shareholders are made in writing and delivered to the secretary of the Corporation in accordance with the provisions of the Corporation's Certificate of Incorporation. SECTION 15. New Business. Any new business to be taken up at the annual meeting shall be stated in writing and filed with the secretary of the Corporation in accordance with the provisions of the Corporation's Certificate of Incorporation. This provision shall not prevent the consideration and approval or disapproval at the annual meeting of reports of officers, directors and committees, but in connection with such reports no new business shall be acted upon at such annual meeting unless stated and filed as provided in the Corporation's Certificate of Incorporation. - 3 - 4 ARTICLE III BOARD OF DIRECTORS SECTION 1. General Powers. The business and affairs of the Corporation shall be under the direction of its board of directors. The board of directors shall annually elect a chairman from among its members and shall designate, when present, the chairman to preside at its meetings. SECTION 2. Number, Term and Election. The board of directors shall consist of seven members and shall be divided into three classes as nearly equal in number as possible. The members of each class shall be elected for a term of three years and until their successors are elected or qualified. The board of directors shall be classified in accordance with the provisions of the Corporation's Certificate of Incorporation. SECTION 3. Regular Meetings. A regular meeting of the board of directors shall be held without other notice than this Bylaw immediately after, and at the same place as, the annual meeting of shareholders. The board of directors may provide, by resolution, the time and place for the holding of additional regular meetings without other notice than such resolution. SECTION 4. Special Meetings. Special meetings of the board of directors may be called by or at the request of the chairman, the chief executive officer or one-third of the directors. The person calling the special meetings of the board of directors may fix any place as the place for holding any special meeting of the board of directors called by such persons. SECTION 5. Participation in Meetings. Members of the board of directors, or any committee designated by the board of directors, may participate in meetings by means of conference telephone or similar communications equipment by which all persons participating in the meeting can hear each other. Such participation shall constitute presence in person. SECTION 6. Notice. Written notice of any special meeting shall be given to each director at least two days previous thereto delivered personally or by telegram or at least seven days previous thereto delivered by mail at the address at which the director is most likely to be reached. Such notice shall be deemed to be delivered when deposited in the United States mail so addressed, with postage thereon prepaid if mailed or when delivered to the telegraph company if sent by telegram. Any director may waive notice of any meeting by a writing filed with the secretary. The attendance of a director at a meeting shall constitute a waiver of notice of such meeting, except where a director attends a meeting for the express purpose of objecting to the transaction of any business because the meeting is not lawfully called or convened. Neither the business to be transacted at, nor the purpose of, any meeting of the board of directors need be specified in the notice or waiver of notice of such meeting. SECTION 7. Quorum. A majority of the number of directors fixed by Section 2 shall constitute a quorum for the transaction of business at any meeting of the board of directors, but if less than such majority is present at a meeting, a majority of the directors present may adjourn the meeting from time to time. Notice of any adjourned meeting shall be given in the same manner as prescribed by Section 6 of this Article III. SECTION 8. Manner of Acting. The act of the majority of the directors present at a meeting at which a quorum is present shall be the act of the board of directors, unless a greater number is prescribed by these Bylaws, the Certificate of Incorporation, or the Oklahoma General Corporation Act. SECTION 9. Action Without a Meeting. Any action required or permitted to be taken by the board of directors or any committee thereof at a meeting may be taken without a meeting if a consent in writing, setting forth the action so taken, shall be signed by all of the members of the board of directors, or committee, as the case may be, and filed with the minutes or proceedings of the board or committee. - 4 - 5 SECTION 10. Resignation. Any director may resign at any time by sending a written notice of such resignation to the home office of the Corporation addressed to the chairman or chief executive officer. Unless otherwise specified therein such resignation shall take effect upon receipt thereof by the chairman or chief executive officer. SECTION 11. Vacancies. Any vacancy occurring in the board of directors shall be filled in accordance with the provisions of the Corporation's Certificate of Incorporation. Any directorship to be filled by reason of an increase in the number of directors may be filled by the affirmative vote of two-thirds of the directors then in office or by election at an annual meeting or at a special meeting of the shareholders held for that purpose. The term of such director shall be in accordance with the provisions of the Corporation's Certificate of Incorporation. SECTION 12. Removal of Directors. Any director or the entire board of directors may be removed only in accordance with the provisions of the Corporation's Certificate of Incorporation. SECTION 13. Compensation. Directors, as such, may receive compensation for service on the board of directors. Members of either standing or special committees may be allowed such compensation for actual attendance at committee meetings as the board of directors may determine. ARTICLE IV EXECUTIVE AND OTHER COMMITTEES The board of directors may, by resolution passed by a majority of the whole board, designate one or more committees, as they may determine to be necessary or appropriate for the conduct of the business of the Corporation, and may prescribe the duties, constitution and procedures thereof. Each committee shall consist of one or more directors of the Corporation. The board may designate one or more directors as alternate members of any committee, who may replace any absent or disqualified member at any meeting of the committee. The board of directors shall have power, by the affirmative vote of a majority of the authorized number of directors, at any time to change the members of, to fill vacancies in, and to discharge any committee of the board. Any member of any such committee may resign at any time by giving notice to the Corporation; provided, however, that notice to the board, the chairman of the board, the chief executive officer, the chairman of such committee, or the secretary shall be deemed to constitute notice to the Corporation. Such resignation shall take effect upon receipt of such notice or at any later time specified therein; and, unless otherwise specified therein, acceptance of such resignation shall not be necessary to make it effective. Any member of any such committee may be removed at any time, either with or without cause, by the affirmative vote of a majority of the authorized number of directors at any meeting of the board called for that purpose. Notwithstanding the above, no committee of the board of directors shall have the power or authority in reference to amending the Corporation's Certificate of Incorporation (except that a committee, to the extent authorized in the resolution or resolutions providing for the issuance of shares of stock adopted by the board of directors as provided for in subsection A of Section 1032 of the Oklahoma General Corporation Act, may fix the designations and any of the preferences or rights of such shares relating to dividends, redemption, dissolution, any distribution of assets of the Corporation or the conversion into, or the exchange of such shares for, shares of any other class or classes or any other series of the same or any other class or classes of stock of the Corporation or fix the number of shares of any series of stock or authorize the increase or decrease of the shares of any series), adopting an agreement of merger or consolidation in accordance with the provisions of Sections 1081 or 1082 of the Oklahoma General Corporation Act, recommending to the shareholders the sale, lease or exchange of all or substantially all of the Corporation's property and assets, recommending to the shareholders a dissolution of the Corporation or a revocation of a dissolution, or amending the Bylaws of the Corporation; and, unless the resolution, Bylaws or Certificate of Incorporation expressly so provides, no such committee shall have the power or authority - 5 - 6 to declare a dividend, authorize the issuance of stock, or to adopt a certificate of ownership and merger pursuant to the provisions of Section 1083 of the Oklahoma General Corporation Act. ARTICLE V OFFICERS SECTION 1. Positions. The officers of the Corporation shall be a chairman, a president, one or more vice presidents, a secretary and a treasurer, each of whom shall be elected by the board of directors. The board of directors may designate one or more vice presidents as executive vice president or senior vice president. The board of directors may also elect or authorize the appointment of such other officers as the business of the Corporation may require. The officers shall have such authority and perform such duties as the board of directors may from time to time authorize or determine. In the absence of action by the board of directors, the officers shall have such powers and duties as generally pertain to their respective offices. SECTION 2. Election and Term of Office. The officers of the Corporation shall be elected annually by the board of directors at the first meeting of the board of directors held after each annual meeting of the shareholders. If the election of officers is not held at such meeting, such election shall be held as soon thereafter as possible. Each officer shall hold office until his successor shall have been duly elected and qualified or until his death or until he shall resign or shall have been removed in the manner hereinafter provided. Election or appointment of an officer, employee or agent shall not of itself create contract rights. The board of directors may authorize the Corporation to enter into an employment contract with any officer in accordance with state law; but no such contract shall impair the right of the board of directors to remove any officer at any time in accordance with Section 3 of this Article V. SECTION 3. Removal. Any officer may be removed by vote of two-thirds of the board of directors whenever, in its judgment, the best interests of the Corporation will be served thereby, but such removal, other than for cause, shall be without prejudice to the contract rights, if any, of the person so removed. SECTION 4. Vacancies. A vacancy in any office because of death, resignation, removal, disqualification or otherwise, may be filled by the board of directors for the unexpired portion of the term. SECTION 5. Remuneration. The remuneration of the officers shall be fixed from time to time by the board of directors, and no officer shall be prevented from receiving such salary by reason of the fact that he is also a director of the Corporation. ARTICLE VI CONTRACTS, LOANS, CHECKS AND DEPOSITS SECTION 1. Contracts. To the extent permitted by applicable law, and except as otherwise prescribed by the Corporation's Certificate of Incorporation or these Bylaws with respect to certificates for shares, the board of directors or the executive committee may authorize any officer, employee, or agent of the Corporation to enter into any contract or execute and deliver any instrument in the name of and on behalf of the Corporation. Such authority may be general or confined to specific instances. SECTION 2. Loans. No loans shall be contracted on behalf of the Corporation and no evidence of indebtedness shall be issued in its name unless authorized by the board of directors. Such authority may be general or confined to specific instances. - 6 - 7 SECTION 3. Checks, Drafts, Etc. All checks, drafts or other orders for the payment of money, notes or other evidences of indebtedness issued in the name of the Corporation shall be signed by one or more officers, employees or agents of the Corporation in such manner as shall from time to time be determined by resolution of the board of directors. SECTION 4. Deposits. All funds of the Corporation not otherwise employed shall be deposited from time to time to the credit of the Corporation in any of its duly authorized depositories as the board of directors may select. ARTICLE VII CERTIFICATES FOR SHARES AND THEIR TRANSFER SECTION 1. Certificates for Shares. The shares of the Corporation shall be represented by certificates signed by, or in the name of, the Corporation by the chairman or vice-chairman of the board of directors, or the president or vice-president, and by the treasurer or an assistant treasurer or the secretary or an assistant secretary of the Corporation certifying and representing the number of shares owned by him in the Corporation. Any or all the signatures on the certificate may be a facsimile. In case any officer, transfer agent, or registrar who has signed or whose facsimile signature has been placed upon a certificate shall have ceased to be such officer, transfer agent, or registrar before such certificate is issued, it may be issued by the Corporation with the same effect as if he were such officer, transfer agent or registrar at the date of issue. SECTION 2. Form of Share Certificates. All certificates representing shares issued by the Corporation shall set forth upon the face or back that the Corporation will furnish to any shareholder upon request and without charge a full statement of the powers, designations, preferences and relative participating optional or other special rights of the shares of each class of stock or series thereof and the qualifications, limitations or restrictions of such preferences and/or rights. Each certificate representing shares shall state upon the face thereof: That the Corporation is organized under the laws of the State of Oklahoma; the name of the person to whom issued; the number and class of shares, the designation of the series, if any, which such certificate represents; the par value of each share represented by such certificate, or a statement that the shares are without par value. Other matters in regard to the form of the certificates shall be determined by the board of directors or as may be required by the Oklahoma General Corporation Act. SECTION 3. Payment for Shares. No certificate shall be issued for any share until such share is fully paid. SECTION 4. Form of Payment for Shares. The consideration for the issuance of shares shall be paid in accordance with the provisions of the Corporation's Certificate of Incorporation. SECTION 5. Transfer of Shares. Transfer of shares of capital stock of the Corporation shall be made only on its stock transfer books. Authority for such transfer shall be given only by the holder of record thereof or by his legal representative, who shall furnish proper evidence of such authority, or by his attorney thereunto authorized by power of attorney duly executed and filed with the Corporation. Such transfer shall be made only on surrender for cancellation of the certificate for such shares. The person in whose name shares of capital stock stand on the books of the Corporation shall be deemed by the Corporation to be the owner thereof for all purposes. SECTION 6. Lost Certificates. The board of directors may direct a new certificate to be issued in place of any certificate theretofore issued by the Corporation alleged to have been lost, stolen, or destroyed, upon the making of an affidavit of that fact by the person claiming the certificate of stock to be lost, stolen, or destroyed. When authorizing such issue of a new certificate, the board of directors may, in its discretion and as a condition precedent to the issuance thereof, require the owner of such lost, stolen, or destroyed certificate, or his legal - 7 - 8 representative, to give the Corporation a bond in such sum as it may direct as indemnity against any claim that may be made against the Corporation with respect to the certificate alleged to have been lost, stolen, or destroyed. ARTICLE VIII FISCAL YEAR; ANNUAL AUDIT The fiscal year of the Corporation shall end on the last day of June of each year. The Corporation shall be subject to an annual audit as of the end of its fiscal year by independent public accountants appointed by and responsible to the board of directors. ARTICLE IX DIVIDENDS Dividends upon the stock of the Corporation, subject to the provisions of the Corporation's Certificate of Incorporation, if any, may be declared by the board of directors at any regular or special meeting, pursuant to law. Dividends may be paid in cash, in property or in the Corporation's own stock. ARTICLE X CORPORATION SEAL The corporate seal of the Corporation shall be in such form as the board of directors shall prescribe. ARTICLE XI AMENDMENTS In accordance with the Corporation's Certificate of Incorporation, these Bylaws may be repealed, altered, amended or rescinded by the shareholders of the Corporation only by vote of not less than 80% of the outstanding shares of capital stock of the Corporation entitled to vote generally in the election of directors (considered for this purpose as one class) cast at a meeting of the shareholders called for that purpose (provided that notice of such proposed repeal, alteration, amendment or rescission is included in the notice of such meeting). In addition, the board of directors may repeal, alter, amend or rescind these Bylaws by vote of a majority of the board of directors at a legal meeting held in accordance with the provisions of these Bylaws. - 8 - EX-4 5 FORM OF STOCK CERTIFICATE OF HCB BANCSHARES, INC. 1 EXHIBIT 4 COMMON STOCK NUMBER SHARES ---- --- HCB BANCSHARES, INC. CAMDEN, ARKANSAS CUSIP:
----------- This certifies that is the owner of fully paid and nonassessable shares of common stock, par value $0.01 per share, of HCB Bancshares, Inc. (the "Corporation"), an Oklahoma corporation. The shares represented by this certificate are transferable only on the stock transfer books of the Corporation by the holder of record hereof, or by his duly authorized attorney or legal representative, upon the surrender of this certificate properly endorsed. This certificate is not valid until counter signed and registered by the Corporation's transfer agent and registrar.
IN WITNESS WHEREOF, the Corporation has caused this certificate to be executed by the facsimile signature of its duly authorized officers and has caused a facsimile of its corporate seal to be hereunto affixed. Dated: - ------------------------------------------------- ------------------------------------------------ Paula J. Bergstrom Vida H. Lampkin Secretary President Countersigned and Registered: -------------------------------------------- Transfer Agent and Registrar By: --------------------------------------------- Authorized Signature
SEE REVERSE FOR CERTAIN RESTRICTIONS ON TRANSFER 2 The shares represented by this certificate are issued subject to all the provisions of the Certificate of Incorporation and Bylaws of the Corporation as from time to time amended (copies of which are on file at the principal executive office of the Corporation), to all of which the holder by acceptance hereof assents. The Corporation will furnish without charge to each stockholder who so requests, the powers, designations, preferences and relative participating, optional or special rights of each class of stock or series thereof, and the qualifications, limitations or restrictions of such preferences and/or rights. Such request shall be made in writing to the Secretary of the Corporation. The Certificate of Incorporation includes a provision which prohibits any person from directly or indirectly acquiring the beneficial ownership of more than 10% of any class of equity security of the Corporation. This provision does not apply to the purchase of shares by underwriters in connection with a public offering, the granting of proxies to certain directors of the Corporation by stockholders of the Corporation or the acquisition of shares by an employee benefit plan of the Corporation or a subsidiary. Such provision eliminates the voting rights of securities acquired in violation of the provision. Such provision will expire five years from the date of completion of the conversion of Heartland Community Bank, Camden, Arkansas from mutual to stock form. The Certificate of Incorporation also imposes certain restrictions on the voting rights of beneficial owners of more than 10% of any class of equity security of the Corporation after five years from the date of completion of the conversion of Heartland Community Bank from mutual to stock form. The following abbreviations, when used in the inscription on the face of this Certificate, shall be construed as though they were written out in full according to applicable laws or regulations. TEN COM - as tenants in common TEN ENT - as tenants by the entireties JT TEN - as joint tenants with right of survivorship and not as tenants in common UNIF TRANSFER MIN ACT - ..............Custodian.............. under Uniform (Cust) (Minor) Transfers to Minors Act....................... (State) Additional abbreviations may also be used though not in the above list. NOTE: THE SIGNATURE TO THIS ASSIGNMENT MUST CORRESPOND WITH THE NAME OF THE STOCKHOLDER(S) AS WRITTEN UPON THE FACE OF THE CERTIFICATE IN EVERY PARTICULAR, WITHOUT ALTERATION OR ENLARGEMENT OR ANY CHANGE WHATEVER. FOR VALUE RECEIVED, __________________________________ HEREBY SELL, ASSIGN AND TRANSFER UNTO PLEASE INSERT SOCIAL SECURITY OR OTHER IDENTIFYING NUMBER OF ASSIGNEE ----------------------------------- / / - ----------------------------------- - ------------------------------------------------------------------------------- (PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING ZIP CODE, OF ASSIGNEE) - ------------------------------------------------------------------------------- SHARES - ------------------------------------------------------------------------------- OF THE COMMON STOCK EVIDENCED BY THIS CERTIFICATE, AND DO HEREBY IRREVOCABLY CONSTITUTE AND APPOINT __________________________________, ATTORNEY, TO TRANSFER THE SAID SHARES ON THE BOOKS OF THE CORPORATION, WITH FULL POWER OF SUBSTITUTION. DATED --------------------- ------------------------------------ SIGNATURE ------------------------------------ SIGNATURE IN PRESENCE OF: --------------------------- EX-5 6 OPINION OF HOUSLEY, KANTARIAN & BRONSTEIN 1 EXHIBIT 5 [HOUSLEY, KANTARIAN & BRONSTEIN, P.C. LETTERHEAD] December 31, 1996 Board of Directors HCB Bancshares, Inc. 237 Jackson Street Camden, Arkansas 71701 RE: Registration Statement on Form SB-2 Ladies and Gentlemen: You have requested our opinion as special counsel to HCB Bancshares, Inc. (the "Corporation") in connection with the Registration Statement on Form SB-2 to be filed with the Securities and Exchange Commission under the Securities Act of 1933, as amended (the "Registration Statement"). The Registration Statement relates to shares of common stock of the Corporation (the "Common Stock") to be issued in connection with the simultaneous conversion of Heartland Community Bank from mutual to stock form and reorganization into the holding company form of ownership as a wholly owned subsidiary of the Corporation (the "Conversion"). In rendering this opinion, we understand that the Common Stock will be offered and sold in the manner described in the Prospectus which is a part of the Registration Statement. We have examined such records and documents and made such examination as we have deemed relevant in connection with this opinion. Based upon the foregoing, it is our opinion that the shares of Common Stock will, when issued and sold as contemplated by the Registration Statement, be legally issued, fully paid and nonassessable. We hereby consent to the filing of this opinion as an exhibit to the Registration Statement and to the reference to us in the Prospectus under the heading "Legal Matters." HOUSLEY KANTARIAN & BRONSTEIN, P.C. By: /s/ Leonard S. Volin _____________________ Leonard S. Volin EX-8.1 7 FEDERAL TAX OPINION OF HOUSLEY, KANTARIAN 1 EXHIBIT 8.1 [HOUSLEY, KANTARIAN & BRONSTEIN, P.C. LETTERHEAD] December 31, 1996 Board of Directors Heartland Community Bank 237 Jackson Street Camden, Arkansas 71701 Re: Certain Federal Income Tax Consequences Relating to Proposed Holding Company Conversion Ladies and Gentlemen: In accordance with your request, set forth hereinbelow is the opinion of this firm relating to certain federal income tax consequences of the proposed conversion of Heartland Community Bank (the "Bank") from a federally chartered mutual savings association to a federally chartered stock savings association (the "Converted Bank") and the concurrent acquisition of 100% of the outstanding capital stock of the Converted Bank by HCB Bancshares, Inc. (the "Company"), an Oklahoma corporation formed at the direction of the Board of Directors of the Bank to become the parent holding company of the Converted Bank (the "Conversion"). For purposes of this opinion, we have examined such documents and questions of law as we have considered necessary or appropriate, including but not limited to the Plan of Conversion as adopted on November 21, 1996 and amended on December 19, 1996 by the Board of Directors of the Bank (the "Plan"); the federal mutual charter and bylaws of the Bank; the Certificate of Incorporation and Bylaws of the Company; the Affidavit of representations dated December 31, 1996 provided to us by the Bank (the "Affidavit"), and the Prospectus (the "Prospectus") included in the Registration Statement on Form SB-2 being filed with the Securities and Exchange Commission ("SEC") on or about December 31, 1996 (the "Registration Statement"). In such examination, we have assumed, and have not independently verified, the genuineness of all signatures on original documents where due execution and delivery are requirements to the effectiveness thereof. Terms used but not defined herein, whether capitalized or not, shall have the same meaning as defined in the Plan. 2 Board of Directors Heartland Community Bank December 31, 1996 Page 2 BACKGROUND Based solely upon our review of such documents, and upon such information as the Bank has provided to us (which we have not attempted to verify in any respect), and in reliance upon such documents and information, we set forth hereinbelow a general summary of the relevant facts and proposed transactions, qualified in its entirety by reference to the documents cited above. The Bank is a federally chartered mutual savings association, which is in the process of converting to a federally chartered stock savings association. The Bank was organized as a federally chartered mutual savings and loan association under the name First Federal Savings and Loan Association of Camden ("First Federal") in 1933, and in 1934 it became a member of the Federal Home Loan Bank ("FHLB") System and obtained federal deposit insurance. In May 1996, First Federal acquired Heritage Bank, FSB ("Heritage"), which retained its separate federal savings association charter and deposit insurance, as a wholly owned subsidiary of the Bank, but whose business operations were fully integrated with those of First Federal. In September 1996, First Federal and Heritage changed their names to Heartland Community Bank and Heartland Community Bank, F.S.B., respectively. The Bank and its subsidiary savings association are members of the FHLB System, and the deposits of the Bank and its subsidiary savings association are insured by the Federal Deposit Insurance Corporation ("FDIC") up to applicable limits. Both savings institutions are subject to comprehensive regulation and supervision by the Office of Thrift Supervision ("OTS") and to examination by the OTS. The Bank is headquartered in Camden, Arkansas and, on a consolidated basis, operates through six full service offices and one loan production office. The Bank's principal business consists of attracting deposits from the general public and investing those funds in loans secured by first mortgages on existing owner-occupied single-family residences in the Bank's market area and, to a lesser but growing extent, commercial and multi-family real estate loans and consumer and commercial business loans. At September 30, 1996, the Bank had total assets of $173.0 million, deposits of $147.2 million and retained earnings of $13.4 million. As a federally chartered mutual savings association, the Bank has no authorized capital stock. Instead, the Bank, in mutual form, has a unique equity structure. A savings depositor of the Bank is entitled to payment of interest on his account balance as declared and paid by the 3 Board of Directors Heartland Community Bank December 31, 1996 Page 3 Bank, but has no right to a distribution of any earnings of the Bank except for interest paid on his deposit. Rather, such earnings become retained income of the Bank. However, a savings depositor does have a right to share pro rata, with respect to the withdrawal value of his respective savings account, in any liquidation proceeds distributed if the Bank is ever liquidated. Further, savings depositors and borrowers are members of the Bank and thereby have voting rights in the Bank. Under the Bank's federal mutual charter, savings depositors are entitled to cast one vote for each $100 or fraction thereof held in a withdrawable deposit account of the Bank, and each borrower member (hereinafter "borrower") is entitled to one vote in addition to the votes (if any) to which such person is entitled in such borrower's capacity as a savings depositor of the Bank. Also under such mutual charter, no member is entitled to cast more than 1,000 votes. All of the interests held by a savings depositor in the Bank cease when such depositor closes his accounts with the Bank. The Company was incorporated in December 1996 under the laws of the State of Oklahoma to act as the holding company of the Converted Bank upon consummation of the Conversion. Prior to consummation of the Conversion, the Company has not engaged and is not expected to engage in any material operations. After the Conversion, the Company's principal business will be overseeing the business of the Converted Bank and its subsidiary savings association. The Company has an authorized capital structure of 20,000,000 shares of common stock (the "Common Stock") and 5,000,000 shares of serial preferred stock, par value $0.01 per share. PROPOSED TRANSACTION The Board of Directors of the Bank has decided that in order to attract new capital to the Bank to increase its net worth, to support future savings growth, to increase the amount of funds available for lending and investment, to provide greater resources for the expansion of customer services, and to facilitate future expansion, it would be advantageous for the Bank to convert from a federally chartered mutual savings association to a federally chartered stock savings association. In addition, the Board of Directors intends to implement stock option plans and other stock benefit plans following the Conversion in order to better attract and retain qualified directors and officers. It is the further desire of the Board of Directors to reorganize the Converted Bank as the wholly owned subsidiary of the Company to enhance flexibility of operations, diversification of business opportunities and financial capability for business and regulatory purposes and to enable the Converted Bank to compete more effectively with other financial service organizations. 4 Board of Directors Heartland Community Bank December 31, 1996 Page 4 Accordingly, pursuant to the Plan, the Bank will undergo the Conversion whereby it will be converted from a federally chartered mutual savings association to a federally chartered stock savings association. The Converted Bank will then issue to the Company 100,000 shares of the Converted Bank's common stock, representing all of the shares of capital stock to be issued by the Converted Bank in the Conversion, in exchange for payment by the Company to the Converted Bank of at least 50% of the aggregate net proceeds realized by the Company from the sale of the Common Stock under the Plan, after deducting the amount necessary to fund a loan to an Employee Stock Option Plan being established in connection with the Conversion, or such other portion of the aggregate net proceeds as may be authorized or required by the OTS. Also pursuant to the Plan, the Company will offer its shares of Common Stock for sale in a Subscription Offering. Shares of Common Stock remaining, if any, may then be offered to the general public in a Community Offering. Shares of the Common Stock not otherwise subscribed for in the Subscription Offering and Community Offering may be offered at the discretion of the Company to certain members of the general public as part of a community offering on a best efforts basis by a selling group of selected broker-dealers. The purchase price per share and total number of shares of Common Stock to be offered and sold pursuant to the Plan will be determined by the Boards of Directors of the Bank and the Company, on the basis of the estimated pro forma market value of the Converted Bank, as a subsidiary of the Company, which will in turn be determined by an independent appraiser. The aggregate purchase price for all shares of the Common Stock will be equal to such estimated pro forma market value. Pursuant to the Plan, all such shares of Common Stock will be issued and sold at a uniform price per share. The Conversion, including the sale of newly issued shares of the stock of the Converted Bank to the Company, will be deemed effective concurrently with the closing of the sale of the Common Stock. Under the Plan and in accordance with regulations of the OTS, the shares of Common Stock will first be offered through the Subscription Offering pursuant to non-transferable subscription rights on the basis of preference categories in the following order of priority: (1) Eligible Account Holders; (2) Tax-Qualified Employee Stock Benefit Plans; 5 Board of Directors Heartland Community Bank December 31, 1996 Page 5 (3) Supplemental Eligible Account Holders; (4) Other Members; and (5) Certain depositors and borrowers of the Bank's subsidiary savings association. However, any shares of Common Stock sold in excess of the maximum of the Valuation Range may be first sold to Tax-Qualified Employee Stock Benefit Plans set forth in category (2) above. In the event of an oversubscription within any of the remaining subscription priority categories, preference may be given within such category to natural persons and trusts of natural persons who are permanent Residents of the Local Community, if permitted by applicable law and approved by the Bank's Board of Directors in its sole discretion. Any shares of Common Stock not subscribed for in the Subscription Offering may be offered in the Community Offering in the following order of priority: (a) Natural persons (including individual retirement and Keogh retirement accounts and personal trusts in which such natural persons have substantial interests) who are permanent Residents of the Local Community; and (b) The general public. Shares not sold in the Subscription Offering and the Community Offering, if any, may thereafter be offered for sale to certain members of the general public as part of a community offering on a best efforts basis by a selling group of selected broker-dealers. The sale of shares in the Subscription Offering, Community Offering, and as sold through the selected broker-dealers would be consummated at the same time. The Plan also provides for the establishment of a Liquidation Account by the Converted Bank for the benefit of all Eligible Account Holders and Supplemental Eligible Account Holders in an amount equal to the regulatory capital of the Bank as of the date of the latest statement of financial condition contained in the final prospectus issued in connection with the Conversion. The establishment of the Liquidation Account will not operate to restrict the use or application of any of the net worth accounts of the Converted Bank, except that the Converted Bank may not declare or pay cash dividends on or repurchase any of its stock if the result thereof would be to reduce its net worth below the amount required to maintain the Liquidation Account. All such account holders will have an inchoate interest in a proportionate amount of the Liquidation Account with respect to each savings account held and will be paid by the Converted Bank in 6 Board of Directors Heartland Community Bank December 31, 1996 Page 6 event of liquidation prior to any liquidating distribution being made with respect to capital stock. Under the Plan, the Conversion shall not be deemed to be a liquidation of the Bank for purposes of distribution of the Liquidation Account. Instead, upon consummation of the Conversion, the Liquidation Account, together with the related rights and obligations of the Converted Bank, shall be assumed by the Converted Bank. The Conversion will not interrupt the business of the Bank. The Converted Bank will, after the Conversion, engage in the same business as that of the Bank immediately prior to the Conversion, and will continue to be subject to regulation and supervision by the OTS and FDIC. Further, the deposits of the Converted Bank and those of the Bank's subsidiary savings association will continue to be insured by the FDIC. Each depositor will retain a withdrawable savings account or accounts equal in dollar amount to, and on the same terms and conditions as, the withdrawable account or accounts at the time of Conversion except to the extent funds on deposit are used to pay for Common Stock purchased in connection with the Conversion. All loans of the Bank will remain unchanged and retain their same characteristics in the Converted Bank immediately following the Conversion. Following the Conversion, voting rights in the Converted Bank will rest exclusively with the sole holder of stock in the Converted Bank, which will be the Company. Voting rights in the Company will rest exclusively in the holders of the Common Stock. The Plan must be approved by the OTS and by an affirmative vote of at least a majority of the total votes eligible to be cast at a meeting of the Bank's members called to vote on the Plan. Immediately prior to the Conversion, the Bank will have a positive net worth determined in accordance with generally accepted accounting principles. OPINION Based on the foregoing and in reliance thereon, and subject to the conditions stated herein, it is our opinion that the following federal income tax consequences will result from the proposed transaction. 1. The Conversion will constitute a reorganization within the meaning of Section 368(a)(1)(F) of the Internal Revenue Code of 1986, as amended (the "Code"), and no gain or loss will be recognized to either the Bank or the Converted Bank as a result of the Conversion (see Rev. Rul. 80-105, 1980-1 C.B. 78). 7 Board of Directors Heartland Community Bank December 31, 1996 Page 7 2. The assets of the Bank will have the same basis in the hands of the Converted Bank as in the hands of the Bank immediately prior to the Conversion (Section 362(b) of the Code). 3. The holding period of the assets of the Bank to be received by the Converted Bank will include the period during which the assets were held by the Bank prior to the Conversion (Section 1223(2) of the Code). 4. No gain or loss will be recognized by the Converted Bank upon its receipt of money from the Company in exchange for shares of common stock of the Converted Bank (Section 1032(a) of the Code). The Company will be transferring solely cash to the Converted Bank in exchange for all the outstanding capital stock of the Converted Bank and therefore will not recognize any gain or loss upon such transfer. (Section 351(a) of the Code; see Rev. Rul. 69-357, 1969-1 C.B. 101). 5. No gain or loss will be recognized by the Company upon its receipt of money in exchange for shares of the Common Stock (Section 1032(a) of the Code). 6. No gain or loss will be recognized by the Eligible Account Holders, Supplemental Eligible Account Holders or Other Members of the Bank upon the issuance to them of deposit accounts in the Converted Bank in the same dollar amount and on the same terms and conditions in exchange for their deposit accounts in the Bank held immediately prior to the Conversion. (Section 1001(a) of the Code; Treas. Reg. Section 1.1001-1(a)). 7. The tax basis of the savings accounts of the Eligible Account Holders, Supplemental Eligible Account Holders, and Other Members in the Converted Bank received as part of the Conversion will equal the tax basis of such account holders' corresponding deposit accounts in the Bank surrendered in exchange therefor (Section 1012 of the Code). 8. Each depositor of the Bank will recognize gain upon the receipt of his or her respective interest in the Liquidation Account established by the Converted Bank pursuant to the Plan and the receipt of his or her subscription rights deemed to have been received for federal income tax purposes, but only to the extent of the excess of the combined fair market value of a depositor's interest in such Liquidation Account and subscription rights over the depositor's basis in the former interests in the Bank other than deposit accounts. Persons who subscribe 8 Board of Directors Heartland Community Bank December 31, 1996 Page 8 in the Conversion but who are not depositors of the Bank will recognize gain upon the receipt of subscription rights deemed to have been received for federal income tax purposes, but only to the extent of the excess of the fair market value of such subscription rights over such person's former interests in the Bank, if any. Any such gain realized in the Conversion would be subject to immediate recognition. 9. The basis of each account holder's interest in the Liquidation Account received in the Conversion and to be established by the Converted Bank pursuant to the Conversion will be equal to the value, if any, of that interest. 10. No gain or loss will be recognized upon the exercise of a subscription right in the Conversion. (Rev. Rul. 56-572, 1956-2 C.B.182). 11. The basis of the shares of Common Stock acquired in the Conversion will be equal to the purchase price of such shares, increased, in the case of such shares acquired pursuant to the exercise of subscription rights, by the fair market value, if any, of the subscription rights exercised (Section 1012 of the Code). 12. The holding period of the Common Stock acquired in the Conversion pursuant to the exercise of subscription rights will commence on the date on which the subscription rights are exercised (Section 1223(6) of the Code). The holding period of the Common Stock acquired in the Community Offering will commence on the date following the date on which such stock is purchased (Rev. Rul. 70- 598, 1970-2 C.B. 168; Rev. Rul. 66-97, 1966-1 C.B. 190). SCOPE OF OPINION Our opinion is limited to the federal income tax matters described above and does not address any other federal income tax considerations or any state, local, foreign or other federal tax considerations. If any of the information upon which we have relied is incorrect, or if changes in the relevant facts occur after the date hereof, our opinion could be affected thereby. Moreover, our opinion is based on the case law, Code, Treasury Regulations thereunder and Internal Revenue Service rulings as they now exist. These authorities are all subject to change, and such change may be made with retroactive effect. We can give no assurance that, after such change, our opinion would not be different. We undertake no responsibility to update or supplement our opinion subsequent to consummation of the Conversion. Prior to that time, we undertake to update or supplement our opinion in the event of a material change in the federal 9 Board of Directors Heartland Community Bank December 31, 1996 Page 9 income tax consequences set forth above and to file such revised opinion as an exhibit to the Registration Statement and the Bank's Application for Conversion on Form AC ("Form AC"). This opinion is not binding on the Internal Revenue Service and there can be no assurance, and none is hereby given, that the Internal Revenue Service will not take a position contrary to one or more of the positions reflected in the foregoing opinion, or that our opinion will be upheld by the courts if challenged by the Internal Revenue Service. CONSENTS We hereby consent to the filing of this opinion with the OTS as an exhibit to the Application H-(e)2 filed by the Company with the OTS in connection with the Conversion and the reference to our firm in the Application H-(e)2 under Item 110.55 therein. We also hereby consent to the filing of this opinion with the SEC and the OTS as exhibits to the Registration Statement and Form AC, respectively, and the references to our firm in the Prospectus, which is a part of the Registration Statement and Form AC, under the headings "The Conversion -- Effect of Conversion to Stock Form on Depositors and Borrowers of the Bank -- Tax Effects" and "Legal Matters." Very truly yours, HOUSLEY KANTARIAN & BRONSTEIN, P.C. By:/s/ Leonard S. Volin ____________________ Leonard S. Volin EX-8.3 8 OPINION OF FERGUSON & CO. 1 EXHIBIT 8.3 [FERGUSON & CO., LLP LETTERHEAD] December 31, 1996 Board of Directors Heartland Community Bank 237 Jackson Street Southwest Camden, Arkansas 71701 Gentlemen: All capitalized terms not otherwise defined in this letter have the meanings given such terms in the Plan of Conversion adopted by the Board of Directors of Heartland Community Bank, Camden, Arkansas, ("Heartland") on November 21, 1996, and subsequently amended December 19, 1996. It is our understanding that, pursuant to Office of Thrift Supervision regulations, subscription rights are non-transferable. Persons violating such prohibition may lose their rights to purchase stock in the Conversion and be subject to other possible sanctions. Because the Subscription Rights to purchase shares of Common Stock in the Bank to be issued to the Bank's employee stock benefit plans, depositors of the Bank, and to other members of the Bank will be acquired by such recipients, without cost, will be non-transferable and of short duration and will afford the recipients the right only to purchase shares of Common Stock at the same price as will paid by members of the general public in a Community Offering, we are of the opinion that: 1. the Subscription Rights will have no ascertainable fair market value and, 2 Board of Directors December 31, 1996 Page 2 2. the price at which the Subscription Rights are exercisable will not be more or less than the fair market value of the shares on the date of exercise. Sincerely, Ferguson & Co., LLP /s/ Charles M. Hebert -------------------------------------------- Charles M. Hebert Principal EX-10.1 9 FORM OF HCB BANCSHARES 1997 STOCK OPTION & INCENT. 1 EXHIBIT 10.1 NOTES: This document is a preliminary draft and is subject to change. This document has not yet been approved or adopted by Heartland Community Bank or its Board of Directors or management. HCB BANCSHARES, INC. 1997 STOCK OPTION AND INCENTIVE PLAN 1. PURPOSE OF THE PLAN. The purpose of this Plan is to advance the interests of the Company through providing select key Employees and Directors of the Bank, the Company, and their Affiliates with the opportunity to acquire Shares. By encouraging such stock ownership, the Company seeks to attract, retain and motivate the best available personnel for positions of substantial responsibility and to provide additional incentives to Directors and key Employees of the Company or any Affiliate to promote the success of the business. 2. DEFINITIONS. As used herein, the following definitions shall apply. (a) "Affiliate" shall mean any "parent corporation" or "subsidiary corporation" of the Company, as such terms are defined in Section 424(e) and (f), respectively, of the Code. (b) "Agreement" shall mean a written agreement entered into in accordance with Paragraph 5(c). (c) "Awards" shall mean, collectively, Options and SARs, unless the context clearly indicates a different meaning. (d) "Bank" shall mean Heartland Community Bank. (e) "Board" shall mean the Board of Directors of the Company. (f) "Code" shall mean the Internal Revenue Code of 1986, as amended. (g) "Committee" shall mean the Stock Option Committee appointed by the Board in accordance with Paragraph 5(a) hereof. (h) "Common Stock" shall mean the common stock of the Company. (i) "Company" shall mean HCB Bancshares, Inc. (j) "Continuous Service" shall mean the absence of any interruption or termination of service as an Employee or Director of the Company or an Affiliate. Continuous Service shall not be considered interrupted in the case of sick leave, military leave or any other leave of absence approved by the Company, in the case of transfers between payroll locations of the Company or between the Company, an Affiliate or a successor, or in the case of a Director's performance of services in an emeritus or advisory capacity. (k) "Director" shall mean any member of the Board, and any member of the board of directors of any Affiliate that the Board has by resolution designated as being eligible for participation in this Plan. (l) "Disability" shall mean a physical or mental condition, which in the sole and absolute discretion of the Committee, is reasonably expected to be of indefinite duration and to substantially prevent a Participant from fulfilling his or her duties or responsibilities to the Company or an Affiliate. (m) "Effective Date" shall mean the date specified in Paragraph 14 hereof. (n) "Employee" shall mean any person employed by the Company, the Bank, or an Affiliate. 2 (o) "Exercise Price" shall mean the price per Optioned Share at which an Option or SAR may be exercised. (p) "ISO" means an option to purchase Common Stock which meets the requirements set forth in the Plan, and which is intended to be and is identified as an "incentive stock option" within the meaning of Section 422 of the Code. (q) "Market Value" shall mean the fair market value of the Common Stock, as determined under Paragraph 7(b) hereof. (r) "Non-employee Director" shall have the meaning provided in Rule 16b-3. (s) "Non-ISO" means an option to purchase Common Stock which meets the requirements set forth in the Plan but which is not intended to be and is not identified as an ISO. (t) "Option" means an ISO and/or a Non-ISO. (u) "Optioned Shares" shall mean Shares subject to an Award granted pursuant to this Plan. (v) "Participant" shall mean any person who receives an Award pursuant to the Plan. (w) "Plan" shall mean this HCB Bancshares, Inc. 1997 Stock Option and Incentive Plan. (x) "Rule 16b-3" shall mean Rule 16b-3 of the General Rules and Regulations under the Securities Exchange Act of 1934, as amended. (y) "Share" shall mean one share of Common Stock. (z) "SAR" (or "Stock Appreciation Right") means a right to receive the appreciation in value, or a portion of the appreciation in value, of a specified number of shares of Common Stock. (aa) "Year of Service" shall mean a full twelve-month period, measured from the date of an Award and each annual anniversary of that date, during which a Participant has not terminated Continuous Service for any reason. 3. TERM OF THE PLAN AND AWARDS. (a) Term of the Plan. The Plan shall continue in effect for a term of ten years from the Effective Date, unless sooner terminated pursuant to Paragraph 16 hereof. No Award shall be granted under the Plan after ten years from the Effective Date. (b) Term of Awards. The term of each Award granted under the Plan shall be established by the Committee, but shall not exceed 10 years; provided, however, that in the case of an Employee who owns Shares representing more than 10% of the outstanding Common Stock at the time an ISO is granted, the term of such ISO shall not exceed five years. 4. SHARES SUBJECT TO THE PLAN. (a) General Rule. Except as otherwise required under Section 11, the aggregate number of Shares deliverable pursuant to Awards shall not exceed ________ Shares, which equals 10% of the Shares issued by the Company in connection with the Bank's conversion from mutual to stock form. Such Shares may either be authorized but unissued Shares, Shares held in treasury, or Shares held in a grantor trust created by the Company. If any Awards should expire, become unexercisable, or be forfeited for any reason without having been exercised, - 2 - 3 the Optioned Shares shall, unless the Plan shall have been terminated, be available for the grant of additional Awards under the Plan. (b) Special Rule for SARs. The number of Shares with respect to which an SAR is granted, but not the number of Shares which the Company delivers or could deliver to an Employee or individual upon exercise of an SAR, shall be charged against the aggregate number of Shares remaining available under the Plan; provided, however, that in the case of an SAR granted in conjunction with an Option, under circumstances in which the exercise of the SAR results in termination of the Option and vice versa, only the number of Shares subject to the Option shall be charged against the aggregate number of Shares remaining available under the Plan. The Shares involved in an Option as to which option rights have terminated by reason of the exercise of a related SAR, as provided in Paragraph 10 hereof, shall not be available for the grant of further Options under the Plan. 5. ADMINISTRATION OF THE PLAN. (a) Composition of the Committee. The Plan shall be administered by the Committee, which shall consist of at least two Non-employee Directors appointed by the Board. Members of the Committee shall serve at the pleasure of the Board. In the absence at any time of a duly appointed Committee, the Plan shall be administered by those members of the Board who are Non-employee Directors. (b) Powers of the Committee. Except as limited by the express provisions of the Plan or by resolutions adopted by the Board, the Committee shall have sole and complete authority and discretion (i) to select Participants and grant Awards, (ii) to determine the form and content of Awards to be issued in the form of Agreements under the Plan, (iii) to interpret the Plan, (iv) to prescribe, amend and rescind rules and regulations relating to the Plan, and (v) to make other determinations necessary or advisable for the administration of the Plan. The Committee shall have and may exercise such other power and authority as may be delegated to it by the Board from time to time. A majority of the entire Committee shall constitute a quorum and the action of a majority of the members present at any meeting at which a quorum is present, or acts approved in writing by a majority of the Committee without a meeting, shall be deemed the action of the Committee. (c) Agreement. Each Award shall be evidenced by a written agreement containing such provisions as may be approved by the Committee. Each such Agreement shall constitute a binding contract between the Company and the Participant, and every Participant, upon acceptance of such Agreement, shall be bound by the terms and restrictions of the Plan and of such Agreement. The terms of each such Agreement shall be in accordance with the Plan, but each Agreement may include such additional provisions and restrictions determined by the Committee, in its discretion, provided that such additional provisions and restrictions are not inconsistent with the terms of the Plan. In particular, the Committee shall set forth in each Agreement (i) the Exercise Price of an Option or SAR, (ii) the number of Shares subject to, and the expiration date of, the Award, (iii) the manner, time and rate (cumulative or otherwise) of exercise or vesting of such Award, and (iv) the restrictions, if any, to be placed upon such Award, or upon Shares which may be issued upon exercise of such Award. The Chairman of the Committee and such other Directors and officers as shall be designated by the Committee are hereby authorized to execute Agreements on behalf of the Company and to cause them to be delivered to the recipients of Awards. (d) Effect of the Committee's Decisions. All decisions, determinations and interpretations of the Committee shall be final and conclusive on all persons affected thereby. (e) Indemnification. In addition to such other rights of indemnification as they may have, the members of the Committee shall be indemnified by the Company in connection with any claim, action, suit or proceeding relating to any action taken or failure to act under or in connection with the Plan or any Award, granted hereunder to the full extent provided for under the Company's governing instruments with respect to the indemnification of Directors. - 3 - 4 6. GRANT OF OPTIONS. (a) General Rule. Only Employees shall be eligible to receive Awards. In selecting those Employees to whom Awards will be granted and the number of shares covered by such Awards, the Committee shall consider the position, duties and responsibilities of the eligible Employees, the value of their services to the Company and its Affiliates, and any other factors the Committee may deem relevant. Notwithstanding the foregoing, the Committee shall automatically make the Awards specified in Sections 6(b) and 9 hereof, and (ii) no Employee shall receive Options to purchase more than 25% of the Shares reserved under Paragraph 4(a), and no non-Employee Director shall receive Options on the Effective Date to purchase more than 5% of the Shares reserved under Paragraph 4(a), with all non-Employee Directors as a group receiving Options on the Effective Date to purchase no more than 30% of the Shares reserved under Paragraph 4(a). [THESE RESTRICTIONS WILL BE INAPPLICABLE IF THE PLAN IS ADOPTED MORE THAN ONE YEAR AFTER THE CONVERSION.] (b) Automatic Grants to Employees. On the Effective Date, each of the following Employees shall receive an Option (in the form of an ISO, to the extent permissible under the Code) to purchase the number of Shares listed below, at an Exercise Price per Share equal to the Market Value of a Share on the Effective Date; provided that such grant shall not be made to an Employee whose Continuous Service terminates on or before the Effective Date:
Percentage of Shares Participant Reserved under Paragraph 4(a) ----------- ----------------------------- Vida H. Lampkin 20% Cameron D. McKeel 20% William Lyon 20%
With respect to each of the above-named Participants, the Option granted to the Participant hereunder (i) shall vest in accordance with the general rule set forth in Paragraph 8(a) of the Plan, (ii) shall have a term of ten years from the Effective Date, and (iii) shall be subject to the general rule set forth in Paragraph 8(c) with respect to the effect of a Participant's termination of Continuous Service on the Participant's right to exercise his Options. (c) Special Rules for ISOs. The aggregate Market Value, as of the date the Option is granted, of the Shares with respect to which ISOs are exercisable for the first time by an Employee during any calendar year (under all incentive stock option plans, as defined in Section 422 of the Code, of the Company or any present or future Affiliate of the Company) shall not exceed $100,000. Notwithstanding the foregoing, the Committee may grant Options in excess of the foregoing limitations, in which case such Options granted in excess of such limitation shall be Options which are Non-ISOs. 7. EXERCISE PRICE FOR OPTIONS. (a) Limits on Committee Discretion. The Exercise Price as to any particular Option shall not be less than 100% of the Market Value of the Optioned Shares on the date of grant. In the case of an Employee who owns Shares representing more than 10% of the Company's outstanding Shares of Common Stock at the time an ISO is granted, the Exercise Price shall not be less than 110% of the Market Value of the Optioned Shares at the time the ISO is granted. (b) Standards for Determining Exercise Price. If the Common Stock is listed on a national securities exchange (including the NASDAQ National Market System) on the date in question, then the Market Value per Share shall be the average of the highest and lowest selling price on such exchange on such date, or if there were no sales on such date, then the Exercise Price shall be the mean between the bid and asked price on such date. If the Common Stock is traded otherwise than on a national securities exchange on the date in question, then the Market Value per Share shall be the mean between the bid and asked price on such date, or, if there is no bid and asked price on such date, then on the next prior business day on which there was a bid and asked price. If no such - 4 - 5 bid and asked price is available, then the Market Value per Share shall be its fair market value as determined by the Committee, in its sole and absolute discretion. 8. EXERCISE OF OPTIONS. (a) Generally. Each Option shall become exercisable with respect to twenty percent (20%) of the Optioned Shares upon the Participant's completion of each of five Years of Service, provided that an Option shall become fully (100%) exercisable immediately upon termination of the Participant's Continuous Service due to the Participant's Disability or death. An Option may not be exercised for a fractional Share. [If the Plan is adopted more than one year after the Bank's conversion, each Option could become exercisable according to a different schedule, with vesting accelerated to 100% upon an Optionee's retirement or termination of service in connection with a change in control] (b) Procedure for Exercise. A Participant may exercise Options, subject to provisions relative to its termination and limitations on its exercise, only by (1) written notice of intent to exercise the Option with respect to a specified number of Shares, and (2) payment to the Company (contemporaneously with delivery of such notice) in cash, in Common Stock, or a combination of cash and Common Stock, of the amount of the Exercise Price for the number of Shares with respect to which the Option is then being exercised. Each such notice (and payment where required) shall be delivered, or mailed by prepaid registered or certified mail, addressed to the Treasurer of the Company at its executive offices. Common Stock utilized in full or partial payment of the Exercise Price for Options shall be valued at its Market Value at the date of exercise, and may consist of Shares subject to the Option being exercised. Upon a Participant's exercise of an Option, the Company may, in the discretion of the Committee, pay to the Participant a cash amount up to but not exceeding the amount of dividends, if any, declared on the underlying Shares between the date of grant and the date of exercise of the Option. (c) Period of Exercisability. Except to the extent otherwise provided in the terms of an Agreement, an Option may be exercised by a Participant only while he is an Employee and has maintained Continuous Service from the date of the grant of the Option, or within three months after termination of such Continuous Service (but not later than the date on which the Option would otherwise expire), except if the Employee's Continuous Service terminates by reason of -- (1) "Just Cause" which for purposes hereof shall have the meaning set forth in any unexpired employment or severance agreement between the Participant and the Bank and/or the Company (and, in the absence of any such agreement, shall mean termination because of the Employee's personal dishonesty, incompetence, willful misconduct, breach of fiduciary duty involving personal profit, intentional failure to perform stated duties, willful violation of any law, rule or regulation (other than traffic violations or similar offenses) or final cease-and-desist order), then the Participant's rights to exercise such Option shall expire on the date of such termination; (2) death, then to the extent that the Participant would have been entitled to exercise the Option immediately prior to his death, such Option of the deceased Participant may be exercised within two years from the date of his death (but not later than the date on which the Option would otherwise expire) by the personal representatives of his estate or person or persons to whom his rights under such Option shall have passed by will or by laws of descent and distribution; (3) Disability, then to the extent that the Participant would have been entitled to exercise the Option immediately prior to his or her Disability, such Option may be exercised within one year from the date of termination of employment due to Disability, but not later than the date on which the Option would otherwise expire. (d) Effect of the Committee's Decisions. The Committee's determination whether a Participant's Continuous Service has ceased, and the effective date thereof, shall be final and conclusive on all persons affected thereby. - 5 - 6 (e) Mandatory Six-Month Holding Period. Notwithstanding any other provision of this Plan to the contrary, common stock of the Company that is purchased upon exercise of an Option or SAR may not be sold within the six-month period following the grant of that Option or SAR. 9. GRANTS OF OPTIONS TO NON-EMPLOYEE DIRECTORS (a) Automatic Grants. Notwithstanding any other provisions of this Plan, each Director who is not an Employee but is a Director on the Effective Date shall receive, on said date, Non-ISOs to purchase a number of Shares equal to the quotient obtained by dividing -- (i) 25 percent (25%) of the number of Shares reserved under Paragraph 4(a) hereof, by (ii) the number of Directors entitled to receive an Option on the Effective Date, pursuant to this Paragraph 9(a). Such Non-ISOs shall have an Exercise Price per Share equal to the Market Value of a Share on the date of grant. Each Director who joins the Board after the Effective Date and who is not then an Employee shall receive, on the date of joining the Board, Non-ISOs to purchase ___% of the Shares reserved under Paragraph 4(a) of the Plan, at an Exercise Price per Share equal to its Market Value on the date of grant. (b) Terms of Exercise. Options received under the provisions of this Paragraph (i) shall become exercisable in accordance with paragraph 8(a) of the Plan, and (ii) may be exercised from time to time by written notice of intent to exercise the Option with respect to all or a specified number of the Optioned Shares, and payment to the Company (contemporaneously with the delivery of such notice), in cash, in Common Stock, or a combination of cash and Common Stock, of the amount of the Exercise Price for the number of the Optioned Shares with respect to which the Option is then being exercised. Each such notice and payment shall be delivered, or mailed by prepaid registered or certified mail, addressed to the Treasurer of the Company at the Company's executive offices. Upon a Director's exercise of an Option, the Company may, in the discretion of the Committee (which may not be utilized to pay out such dividends unless the Plan would maintain conformity with Rule 16b-3), pay to the Director a cash amount up to but not exceeding the amount of dividends, if any, declared on the underlying Shares between the date of grant and the date of exercise of the Option. A Director who exercises Options pursuant to this Paragraph may satisfy all applicable federal, state and local income and employment tax withholding obligations, in whole or in part, by irrevocably electing to have the Company withhold shares of Common Stock, or to deliver to the Company shares of Common Stock that he already owns, having a value equal to the amount required to be withheld; provided that to the extent not inconsistent herewith, such election otherwise complies with those requirements of Paragraphs 8 and 19 hereof. Options granted under this Paragraph shall have a term of ten years; provided that Options granted under this Paragraph shall expire one year after the date on which a Director terminates Continuous Service on the Board for a reason other than death, but in no event later than the date on which such Options would otherwise expire. In the event of such Director's death during the term of his directorship, Options granted under this Paragraph shall become immediately exercisable, and may be exercised within two years from the date of his death by the personal representatives of his estate or person or persons to whom his rights under such Option shall have passed by will or by laws of descent and distribution, but in no event later than the date on which such Options would otherwise expire. In the event of such Director's Disability during his or her directorship, the Director's Option shall become immediately exercisable, and such Option may be exercised within one year of the termination of directorship due to Disability, but not later than the date that the Option would otherwise expire. Unless otherwise inapplicable or inconsistent with the provisions of this Paragraph, the Options to be granted to Directors hereunder shall be subject to all other provisions of this Plan. (c) Effect of the Committee's Decisions. The Committee's determination whether a Participant's Continuous Service has ceased, and the effective date thereof, shall be final and conclusive on all persons affected thereby. - 6 - 7 10. SARS (STOCK APPRECIATION RIGHTS) (a) Granting of SARs. In its sole discretion, the Committee may from time to time grant SARs to Employees either in conjunction with, or independently of, any Options granted under the Plan. An SAR granted in conjunction with an Option may be an alternative right wherein the exercise of the Option terminates the SAR to the extent of the number of shares purchased upon exercise of the Option and, correspondingly, the exercise of the SAR terminates the Option to the extent of the number of Shares with respect to which the SAR is exercised. Alternatively, an SAR granted in conjunction with an Option may be an additional right wherein both the SAR and the Option may be exercised. An SAR may not be granted in conjunction with an ISO under circumstances in which the exercise of the SAR affects the right to exercise the ISO or vice versa, unless the SAR, by its terms, meets all of the following requirements: (1) The SAR will expire no later than the ISO; (2) The SAR may be for no more than the difference between the Exercise Price of the ISO and the Market Value of the Shares subject to the ISO at the time the SAR is exercised; (3) The SAR is transferable only when the ISO is transferable, and under the same conditions; (4) The SAR may be exercised only when the ISO may be exercised; and (5) The SAR may be exercised only when the Market Value of the Shares subject to the ISO exceeds the Exercise Price of the ISO. (b) Exercise Price. The Exercise Price as to any particular SAR shall not be less than the Market Value of the Optioned Shares on the date of grant. (c) Timing of Exercise. Any election by a Participant to exercise SARs shall be made during the period beginning on the 3rd business day following the release for publication of quarterly or annual financial information and ending on the 12th business day following such date. This condition shall be deemed to be satisfied when the specified financial data is first made publicly available. In no event, however, may an SAR be exercised within the six-month period following the date of its grant. The provisions of Paragraph 8(c) regarding the period of exercisability of Options are incorporated by reference herein, and shall determine the period of exercisability of SARs. (d) Exercise of SARs. An SAR granted hereunder shall be exercisable at such times and under such conditions as shall be permissible under the terms of the Plan and of the Agreement granted to a Participant, provided that an SAR may not be exercised for a fractional Share. Upon exercise of an SAR, the Participant shall be entitled to receive, without payment to the Company except for applicable withholding taxes, an amount equal to the excess of (or, in the discretion of the Committee if provided in the Agreement, a portion of) the excess of the then aggregate Market Value of the number of Optioned Shares with respect to which the Participant exercises the SAR, over the aggregate Exercise Price of such number of Optioned Shares. This amount shall be payable by the Company, in the discretion of the Committee, in cash or in Shares valued at the then Market Value thereof, or any combination thereof. (e) Procedure for Exercising SARs. To the extent not inconsistent herewith, the provisions of Paragraph 8(b) as to the procedure for exercising Options are incorporated by reference, and shall determine the procedure for exercising SARs. 11. EFFECT OF CHANGES IN COMMON STOCK SUBJECT TO THE PLAN. - 7 - 8 (a) Recapitalizations; Stock Splits, Etc. The number and kind of shares reserved for issuance under the Plan, and the number and kind of shares subject to outstanding Awards, and the Exercise Price thereof, shall be proportionately adjusted for any increase, decrease, change or exchange of Shares for a different number or kind of shares or other securities of the Company which results from a merger, consolidation, recapitalization, reorganization, reclassification, stock dividend, split-up, combination of shares, or similar event in which the number or kind of shares is changed without the receipt or payment of consideration by the Company. (b) Transactions in which the Company is Not the Surviving Entity. In the event of (i) the liquidation or dissolution of the Company, (ii) a merger or consolidation in which the Company is not the surviving entity, or (iii) the sale or disposition of all or substantially all of the Company's assets (any of the foregoing to be referred to herein as a "Transaction"), all outstanding Awards, together with the Exercise Prices thereof, shall be equitably adjusted for any change or exchange of Shares for a different number or kind of shares or other securities which results from the Transaction. (c) Special Rule for ISOs. Any adjustment made pursuant to subparagraphs (a) or (b)(1) hereof shall be made in such a manner as not to constitute a modification, within the meaning of Section 424(h) of the Code, of outstanding ISOs. (d) Conditions and Restrictions on New, Additional, or Different Shares or Securities. If, by reason of any adjustment made pursuant to this Paragraph, a Participant becomes entitled to new, additional, or different shares of stock or securities, such new, additional, or different shares of stock or securities shall thereupon be subject to all of the conditions and restrictions which were applicable to the Shares pursuant to the Award before the adjustment was made. (e) Other Issuances. Except as expressly provided in this Paragraph, the issuance by the Company or an Affiliate of shares of stock of any class, or of securities convertible into Shares or stock of another class, for cash or property or for labor or services either upon direct sale or upon the exercise of rights or warrants to subscribe therefor, shall not affect, and no adjustment shall be made with respect to, the number, class, or Exercise Price of Shares then subject to Awards or reserved for issuance under the Plan. (f) Certain Special Dividends. The Exercise Price of shares subject to outstanding Awards shall be proportionately adjusted upon the payment of a special large and nonrecurring dividend that has the effect of a return of capital to the stockholders, except that this subparagraph (f) shall not apply to any dividend which is paid to the Participant pursuant to Paragraph 8(b) or 9(b) hereof. 12. NON-TRANSFERABILITY OF AWARDS. Awards may not be sold, pledged, assigned, hypothecated, transferred or disposed of in any manner other than by will or by the laws of descent and distribution. Notwithstanding the foregoing, or any other provision of this Plan, a Participant who holds Awards may transfer such Awards (but not Incentive Stock Options) to his or her spouse, lineal ascendants, lineal descendants, or to a duly established trust for the benefit of one or more of these individuals. Awards so transferred may thereafter be transferred only to the Participant who originally received the grant or to an individual or trust to whom the Participant could have initially transferred the Awards pursuant to this Paragraph 12. Awards which are transferred pursuant to this Paragraph 12 shall be exercisable by the transferee according to the same terms and conditions as applied to the Participant. 13. TIME OF GRANTING AWARDS. The date of grant of an Award shall, for all purposes, be the later of the date on which the Committee makes the determination of granting such Award, and the Effective Date. Notice of the determination shall be given to each Participant to whom an Award is so granted within a reasonable time after the date of such grant. 14. EFFECTIVE DATE. - 8 - 9 The Plan shall become effective immediately upon its approval by a favorable vote of stockholders owning at least a majority of the total votes eligible to be cast at a duly called meeting of the Company's stockholders held in accordance with applicable laws, provided that the Plan shall not be submitted for such approval within the six-month period after the Bank completes its mutual-to-stock conversion. No Awards may be made prior to approval of the Plan by the stockholders of the Company. 15. MODIFICATION OF AWARDS. At any time, and from time to time, the Board may authorize the Committee to direct execution of an instrument providing for the modification of any outstanding Award, provided no such modification shall confer on the holder of said Award any right or benefit which could not be conferred on him by the grant of a new Award at such time, or impair the Award without the consent of the holder of the Award. 16. AMENDMENT AND TERMINATION OF THE PLAN. The Board may from time to time amend the terms of the Plan and, with respect to any Shares at the time not subject to Awards, suspend or terminate the Plan. No amendment, suspension or termination of the Plan shall, without the consent of any affected holders of an Award, alter or impair any rights or obligations under any Award theretofore granted. 17. CONDITIONS UPON ISSUANCE OF SHARES. (a) Compliance with Securities Laws. Shares of Common Stock shall not be issued with respect to any Award unless the issuance and delivery of such Shares shall comply with all relevant provisions of law, including, without limitation, the Securities Act of 1933, as amended, the rules and regulations promulgated thereunder, any applicable state securities law, and the requirements of any stock exchange upon which the Shares may then be listed. (b) Special Circumstances. The inability of the Company to obtain approval from any regulatory body or authority deemed by the Company's counsel to be necessary to the lawful issuance and sale of any Shares hereunder shall relieve the Company of any liability in respect of the non-issuance or sale of such Shares. As a condition to the exercise of an Option or SAR, the Company may require the person exercising the Option or SAR to make such representations and warranties as may be necessary to assure the availability of an exemption from the registration requirements of federal or state securities law. (c) Committee Discretion. The Committee shall have the discretionary authority to impose in Agreements such restrictions on Shares as it may deem appropriate or desirable, including but not limited to the authority to impose a right of first refusal or to establish repurchase rights or both of these restrictions. 18. RESERVATION OF SHARES. The Company, during the term of the Plan, will reserve and keep available a number of Shares sufficient to satisfy the requirements of the Plan. 19. WITHHOLDING TAX. The Company's obligation to deliver Shares upon exercise of Options and/or SARs shall be subject to the Participant's satisfaction of all applicable federal, state and local income and employment tax withholding obligations. The Committee, in its discretion, may permit the Participant to satisfy the obligation, in whole or in part, by irrevocably electing to have the Company withhold Shares, or to deliver to the Company Shares that he already owns, having a value equal to the amount required to be withheld. The value of the Shares to be withheld, or delivered to the Company, shall be based on the Market Value of the Shares on the date the amount of tax to be - 9 - 10 withheld is to be determined. As an alternative, the Company may retain, or sell without notice, a number of such Shares sufficient to cover the amount required to be withheld. 20. NO EMPLOYMENT OR OTHER RIGHTS. In no event shall an Employee's or Director's eligibility to participate or participation in the Plan create or be deemed to create any legal or equitable right of the Employee, Director, or any other party to continue service with the Company, the Bank, or any Affiliate of such corporations. Except to the extent provided in Paragraphs 6(b) and 9(a), no Employee or Director shall have a right to be granted an Award or, having received an Award, the right to again be granted an Award. However, an Employee or Director who has been granted an Award may, if otherwise eligible, be granted an additional Award or Awards. 21. GOVERNING LAW. The Plan shall be governed by and construed in accordance with the laws of the State of Arkansas, except to the extent that federal law shall be deemed to apply. - 10 - EX-10.2 10 FORM OF HCB BANCSHARES MGT.RECOGNITION PLAN 1 EXHIBIT 10.2 NOTES: This document is a preliminary draft and is subject to change. This document has not yet been approved or adopted by Heartland Community Bank or its Board of Directors or management. HCB BANCSHARES, INC. MANAGEMENT RECOGNITION PLAN ARTICLE I ESTABLISHMENT OF THE PLAN 1.01 The Company hereby establishes this Plan upon the terms and conditions hereinafter stated. 1.02 Through acceptance of their appointment to the Committee, each member of the Committee hereby accepts his or her appointment hereunder upon the terms and conditions hereinafter stated. ARTICLE II PURPOSE OF THE PLAN 2.01 The purpose of the Plan is to reward and retain personnel of experience and ability in key positions of responsibility by providing Employees and Directors of the Company, the Bank, and their Affiliates with a proprietary interest in the Company, and as compensation for their past contributions to the Bank, and as an incentive to make such contributions in the future. ARTICLE III DEFINITIONS The following words and phrases when used in this Plan with an initial capital letter, shall have the meanings set forth below unless the context clearly indicates otherwise. Wherever appropriate, the masculine pronoun shall include the feminine pronoun and the singular shall include the plural. 3.01 "Affiliate" shall mean any "parent corporation" or "subsidiary corporation" of the Company, as such terms are defined in Section 424(e) and (f), respectively, of the Internal Revenue Code of 1986, as amended. 3.02 "Bank" means Heartland Community Bank. 3.03 "Beneficiary" means the person or persons designated by a Participant to receive any benefits payable under the Plan in the event of such Participant's death. Such person or persons shall be designated in writing on forms provided for this purpose by the Committee and may be changed from time to time by similar written notice to the Committee. In the absence of a written designation, the Beneficiary shall be the Participant's surviving spouse, if any or if none, his estate. 3.04 "Board" means the Board of Directors of the Company. 3.05 "Committee" means the Management Recognition Plan Committee appointed by the Board pursuant to Article IV hereof. 3.06 "Common Stock" means shares of the common stock of the Company. 3.07 "Company" means HCB Bancshares, Inc. 3.08 "Continuous Service" shall mean the absence of any interruption or termination of service as an Employee or Director of the Company or an Affiliate. Continuous Service shall not be considered interrupted in the case of sick leave, military leave or any other leave of absence approved by the Company in the case of transfers between payroll locations of the Company or between the Company, an Affiliate or a successor, or in the case of a Director's performance of services in an emeritus or advisory capacity. 2 3.09 "Date of Conversion" means the date of the conversion of the Bank from mutual to stock form. 3.10 "Director" means a member of the Board. 3.11 "Disability" shall mean a physical or mental condition, which in the sole and absolute discretion of the Committee, is reasonably expected to be of indefinite duration and to substantially prevent a Participant from fulfilling his or her duties or responsibilities to the Company or an Affiliate. 3.12 "Effective Date" means the date on which the Plan first becomes effective, as determined under Section 8.07 hereof. 3.13 "Employee" means any person who is employed by the Company or an Affiliate. 3.14 "Non-Employee Director" shall have the meaning provided in Rule 16b-3 of the General Rules and Regulations under the Securities Exchange Act of 1934, as amended. 3.15 "Participant" means an Employee or Director who holds a Plan Share Award. 3.16 "Plan" means this HCB Bancshares, Inc. Management Recognition Plan. 3.17 "Plan Shares" means shares of Common Stock held in the Trust which are awarded or issuable to a Participant pursuant to the Plan. 3.18 "Plan Share Award" means a right granted under this Plan to receive Plan Shares. 3.19 "Plan Share Reserve" means the shares of Common Stock held by the Trustee pursuant to Sections 5.02 and 5.03. 3.20 "Trust" and "Trust Agreement" mean that agreement entered into pursuant to the terms hereof between the Company and the Trustee, and "Trust" means the trust created thereunder. 3.21 "Trustee" means that person(s) or entity appointed by the Board pursuant to the Trust Agreement to hold legal title to the Plan assets for the purposes set forth herein. 3.22 "Year of Service" shall mean a full twelve-month period, measured from the date of a Plan Share Award and each annual anniversary of that date, during which a Participant's Continuous Service has not terminated for any reason. ARTICLE IV ADMINISTRATION OF THE PLAN 4.01 ROLE AND POWERS OF THE COMMITTEE. The Plan shall be administered and interpreted by the Committee, which shall consist of not less than two members of the Board who are Non-Employee Directors. In the absence at any time of a duly appointed Committee, the Plan shall be administered by those members of the Board who are Non-Employee Directors, and by the Board if there are less than two Non-Employee Directors. The Committee shall have all of the powers allocated to it in this and other Sections of the Plan. Except as limited by the express provisions of the Plan or by resolutions adopted by the Board, the Committee shall have sole and complete authority and discretion (i) to make Plan Share Awards to such Employees as the Committee may select, (ii) to determine the form and content of Plan Share Awards to be issued under the Plan, (iii) to interpret the Plan, (iv) to prescribe, amend and rescind rules and regulations relating to the Plan, and (v) to make other determinations necessary or advisable for the administration of the Plan. The Committee shall have and may exercise such other power and authority as may be delegated to it by the Board from time to time. Subject to Section 4.02, the interpretation and construction by the Committee of any provisions of the Plan or of any Plan Share Award granted hereunder shall be final and binding. The Committee shall act by vote or written consent of a majority of 3 its members, and shall report its actions and decisions with respect to the Plan to the Board at appropriate times, but in no event less than one time per calendar year. The Committee may recommend to the Board one or more persons or entity to act as Trustee(s) in accordance with the provisions of this Plan and the Trust. 4.02 ROLE OF THE BOARD. The members of the Committee shall be appointed or approved by, and will serve at the pleasure of, the Board. The Board may in its discretion from time to time remove members from, or add members to, the Committee. The Board shall have all of the powers allocated to it in this and other Sections of the Plan, may take any action under or with respect to the Plan which the Committee is authorized to take, and may reverse or override any action taken or decision made by the Committee under or with respect to the Plan, provided, however, that the Board may not revoke any Plan Share Award already made or impair a participant's vested rights under a Plan Share Award. Members of the Board who are eligible for or who have been granted Plan Share Awards (other than pursuant to Section 6.04) may not vote on any matters affecting the administration of the Plan or the grant of Plan Shares or Plan Share Awards (although such members may be counted in determining the existence of a quorum at any meeting of the Board during which actions with regard thereto are taken). Further, with respect to all actions taken by the Board in regard to the Plan, such action shall be taken by a majority of the Board where such a majority of the directors acting in the matter are Non-Employee Directors. 4.03 LIMITATION ON LIABILITY. No member of the Board or the Committee or the Trustee(s) shall be liable for any determination made in good faith with respect to the Plan or any Plan Shares or Plan Share Awards granted under it. If a member of the Board or the Committee or any Trustee is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative, by reason of anything done or not done by him in such capacity under or with respect to the Plan, the Company shall indemnify such member against expenses (including attorneys' fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by him or her in connection with such action, suit or proceeding if he or she acted in good faith and in a manner he or she reasonably believed to be in the best interests of the Company and its Affiliates and, with respect to any criminal action or proceeding, had no reasonable cause to believe his conduct was unlawful. ARTICLE V CONTRIBUTIONS; PLAN SHARE RESERVE 5.01 AMOUNT AND TIMING OF CONTRIBUTIONS. The Board shall determine the amounts (or the method of computing the amounts) to be contributed by the Company to the Trust, provided that the Bank may also make contributions to the Trust. Such amounts shall be paid to the Trustee at the time of contribution. No contributions to the Trust by Employees shall be permitted. 5.02 INVESTMENT OF TRUST ASSETS; MAXIMUM PLAN SHARE AWARDS. The Trustee shall invest Trust assets only in accordance with the Trust Agreement; provided that the Trust shall not purchase, and Plan Share Awards shall not be made with respect to, more than four percent (4%) of the number of Shares issued on the Date of Conversion. Such Shares may be newly issued Shares, Shares held in Treasury, or Shares held in a grantor trust. 5.03 EFFECT OF ALLOCATIONS, RETURNS AND FORFEITURES UPON PLAN SHARE RESERVES. Upon the allocation of Plan Share Awards under Section 6.02, the Plan Share Reserve shall be reduced by the number of Shares subject to the Awards so allocated. Any Shares subject or attributable to an Award which may not be earned because of a forfeiture by the Participant pursuant to Section 7.01 shall be added to the Plan Share Reserve. 3 4 ARTICLE VI ELIGIBILITY; ALLOCATIONS 6.01 ELIGIBILITY. Except as otherwise provided in Section 6.04 hereof, the Committee shall make Plan Share Awards only to Employees. In selecting those Employees to whom Plan Share Awards will be granted and the number of shares covered by such Awards, the Committee shall consider the position, duties and responsibilities of the eligible Employees, the value of their services to the Company and its Affiliates, and any other factors the Committee may deem relevant. Notwithstanding the foregoing, (i) the Committee shall automatically make the Plan Share Awards specified in Sections 6.04 and 6.05 hereof; and (ii) no Employee shall receive Plan Share Awards relating to more than 25% of the Plan Shares reserved under Section 5.02, and no Non-Employee Director shall receive Plan Share Awards relating to more than 5% of the Plan Shares reserved under Section 5.02, with all Non- Employee Directors as a group receiving Plan Share Awards on the Effective Date relating to no more than 30% of the Plan Shares reserved under Section 5.02. [THESE RESTRICTIONS WILL BE INAPPLICABLE IF THE PLAN RECEIVES STOCKHOLDER APPROVAL MORE THAN ONE YEAR AFTER THE DATE OF CONVERSION.] 6.02 ALLOCATIONS. The Committee will determine which Employees will be granted discretionary Plan Share Awards, and the number of Shares covered by each Plan Share Award, provided that in no event shall any awards be made which will violate the governing instruments of the Bank or its Affiliates or any applicable federal or state law or regulation. In the event Plan Shares are forfeited for any reason or additional shares of Common Stock are purchased by the Trustee, the Committee may, from time to time, determine which of the Employees referenced in Section 6.01 above will be granted additional Plan Share Awards to be awarded from the forfeited or acquired Plan Shares. 6.03 FORM OF ALLOCATION. As promptly as practicable after a determination is made pursuant to Section 6.02 that a Plan Share Award is to be made, the Committee shall notify the Participant in writing of the grant of the award, the number of Plan Shares covered by the award, and the terms upon which the Plan Shares subject to the award may be earned. The date on which the Committee so notifies the Participant shall be considered the date of grant of the Plan Share Awards. The Committee shall maintain records as to all grants of Plan Share Awards under the Plan. 6.04 AUTOMATIC GRANTS TO NON-EMPLOYEE DIRECTORS. Notwithstanding any other provisions of this Plan, each Director who is not an Employee but is a Director on the Effective Date shall receive, on said date, a Plan Share Award for a number of Shares equal to the quotient obtained by dividing -- (i) 25 percent (4%) of the number of Plan Shares which the Trust is authorized to purchase pursuant to Section 5.02 of the Plan, by (ii) the number of Directors entitled to receive Plan Share Awards on the Effective Date, pursuant to this Section 6.04. Each Director who joins the Board after the Effective Date shall receive, on said date, a Plan Share Award of ___ percent (___%) of the number of Plan Shares which the Trust is authorized to purchase pursuant to Section 5.02 of the Plan (or such lesser number as are available hereunder for Plan Share Awards). Plan Share Awards received under the provisions of this Section shall become vested and nonforfeitable according to the general rules set forth in subsections (a), and (b) of Section 7.01, and the Committee shall have no discretion to alter or accelerate said vesting requirements. Unless otherwise inapplicable or inconsistent with the provisions of this Section , the Plan Share Awards to be granted hereunder shall be subject to all other provisions of this Plan. 6.05 AUTOMATIC GRANTS TO EMPLOYEES. On the Effective Date, each of the following individuals shall receive a Plan Share Award as to the number of Plan Shares listed below, provided that such award shall not be made to an individual who is not an Employee on the Effective Date:
Employee Shares Subject to Plan Share Award -------- ---------------------------------- Vida H. Lampkin 20%
4 5 Cameron D. McKeel 20% William Lyon 20%
Plan Share Awards received under the provisions of this Section shall become vested and nonforfeitable according to the general rules set forth in subsections (a) and (b) of Section 7.01, and the Committee shall have no discretion to alter said vesting requirements. Unless otherwise inapplicable or inconsistent with the provisions of this Section , the Plan Share Awards to be granted hereunder shall be subject to all other provisions of this Plan. 6.06 ALLOCATIONS NOT REQUIRED. Notwithstanding anything to the contrary in Sections 6.01 and 6.02, but subject to Sections 6.04 and 6.05, no Employee or Director shall have any right or entitlement to receive a Plan Share Award hereunder, such Awards being at the total discretion of the Committee, nor shall any Employees or Directors as a group have such a right. The Committee may, with the approval of the Board (or, if so directed by the Board) return all Common Stock in the Plan Share Reserve to the Company at any time, and cease issuing Plan Share Awards. ARTICLE VII EARNINGS AND DISTRIBUTION OF PLAN SHARES; VOTING RIGHTS 7.01 EARNING PLAN SHARES; FORFEITURES. (a) GENERAL RULES. Twenty percent (20%) of the Plan Shares subject to a Plan Share Award shall be earned and become non-forfeitable by a Participant upon his or her completion of each of five Years of Service. [MAY BE DIFFERENT IF PLAN RECEIVES STOCKHOLDER APPROVAL MORE THAN ONE YEAR AFTER THE DATE OF CONVERSION.] (b) EXCEPTION FOR TERMINATIONS DUE TO DEATH OR DISABILITY. Notwithstanding the general rule contained in Section 7.01(a) above, all Plan Shares subject to a Plan Share Award held by a Participant whose service with the Company or an Affiliate terminates due to the Participant's death or Disability, shall be deemed earned as of the Participant's last day of service with the Company or an Affiliate and shall be distributed as soon as practicable thereafter. [IF THE PLAN RECEIVES STOCKHOLDER APPROVAL MORE THAN ONE YEAR AFTER THE DATE OF CONVERSION, VESTING WOULD ACCELERATE TO 100% UPON A PARTICIPANT'S RETIREMENT OR TERMINATION OF SERVICE IN CONNECTION WITH A CHANGE IN CONTROL.] 7.02 ACCRUAL OF DIVIDENDS. Whenever Plan Shares are paid to a Participant or Beneficiary under Section 7.03, such Participant or Beneficiary shall also be entitled to receive, with respect to each Plan Share paid, an amount equal to any cash dividends (including special large and nonrecurring dividends, including one that has the effect of a return of capital to the Company's stockholders) and a number of shares of Common Stock equal to any stock dividends, declared and paid with respect to a share of Common Stock between the date the relevant Plan Share Award was initially granted to such Participant and the date the Plan Shares are being distributed. There shall also be distributed an appropriate amount of net earnings, if any, of the Trust with respect to any cash dividends so paid out. 7.03 DISTRIBUTION OF PLAN SHARES. (a) TIMING OF DISTRIBUTIONS: GENERAL RULE. Except as provided in Subsections (c), and (d) below, the Trustee shall distribute Plan Shares and accumulated cash from dividends and interest to the Participant or his Beneficiary, as the case may be, as soon as practicable after they have been earned. No fractional shares shall be distributed. (b) FORM OF DISTRIBUTION. The Trustee shall distribute all Plan Shares, together with any shares representing stock dividends, in the form of Common Stock. One share of Common Stock shall be given for each Plan Share earned. Payments representing cash dividends (and earnings thereon) shall be made in cash. (c) WITHHOLDING. The Trustee shall withhold from any cash payment made under this Plan sufficient amounts to cover any applicable withholding and employment taxes, and if the amount of such cash payment is not sufficient, the Trustee shall require the Participant or Beneficiary to pay to the Trustee the amount required to be 5 6 withheld as a condition of delivering the Plan Shares. The Trustee shall pay over to the Company or Affiliate which employs or employed such Participant any such amount withheld from or paid by the Participant or Beneficiary. (d) TIMING: EXCEPTION FOR 10% SHAREHOLDERS. Notwithstanding Subsections (a) and (b) above, no Plan Shares may be distributed prior to the date which is five (5) years from the Date of Conversion to the extent the Participant or Beneficiary, as the case may be, would after receipt of such Shares own in excess of ten percent (10%) of the issued and outstanding shares of Common Stock unless such action is approved in advance by a majority vote of Non-Employee Directors of the Board. To the extent this limitation would delay the date on which a Participant receives Plan Shares, the Participant may elect to receive from the Trust, in lieu of such Plan Shares, the cash equivalent thereof. Any Plan Shares remaining undistributed solely by reason of the operation of this Subsection (d) shall be distributed to the Participant or his Beneficiary on the date which is five years from the Date of Conversion. (e) REGULATORY EXCEPTIONS. No Plan Shares shall be distributed unless and until all of the requirements of all applicable law and regulation shall have been fully complied with, including the receipt of approval of the Plan by the stockholders of the Company by such vote, if any, as may be required by applicable law and regulations. 7.04 VOTING OF PLAN SHARES. All shares of Common Stock held by the Trust (whether or not subject to a Plan Share Award) shall be voted by the Trustee in the same proportion as the trustee of the Company's Employee Stock Ownership Plan votes Common Stock held in the trust associated therewith, and in the absence of any such voting, shall be voted in the manner directed by the Board. 7.05. DEFERRAL ELECTIONS BY PARTICIPANTS. At any time that is at least six months prior to the date on which a Participant becomes vested in the first 20% of his or her Plan Share Award, the Participant may irrevocably elect, on the form attached hereto as Exhibit "A" (the "Election Form"), to defer the receipt of all or a percentage of the Plan Shares that would otherwise be transferred to the Participant upon the vesting of such award (the "Deferred Shares"). The MRP Committee shall establish and maintain an individual account in the name of each Participant who files an Election Form for the purpose of tracking deferred earnings attributable to cash dividends paid on Deferred Shares (the "Cash Account"). On the last day of each fiscal year of the Company, the Committee shall credit to the Participant's Cash Account earnings on the balance of the Cash Account at a rate equal to the yield on Common Stock, as determined from time to time by the MRP Committee in its sole discretion. The Deferred Shares, together with any cash or stock dividends attributable thereto (the "Deferred Earnings"), will be distributed to the Participant in accordance with the deferral schedule (the "Deferral Schedule") selected by the Participant in his or her Election Form. The Trustees shall hold each Participant's Deferred Shares and Deferred Earnings in the Trust until distribution is required pursuant to the election set forth in the Participant's Election Form. The Trustee shall distribute a Participant's Deferred Shares and Deferred Earnings in accordance with the Participant's Election Form, unless the Participant terminates Continuous Service for a reason other than the Participant's (i) death, (ii) Disability, (iii) early retirement after age 55 and completion of 10 or more years of Continuous Service, or (iv) normal retirement after age 65. Within 90 days after receiving notice of a Participant's death, the Trustee shall distribute any balance of the Participant's Deferred Shares and Deferred Earnings to the Participant's designated beneficiary, if living, or if such designated beneficiary is deceased or the Participant failed to designate a beneficiary, to the Participant's estate. Notwithstanding the preceding, at any time prior to his or her death, a Participant may elect to have the balance of his or her Deferred Shares and Deferred Earnings distributed to his or her beneficiary or estate over a period of time designated by the Participant. If, on the other hand, a Participant's Continuous Service terminates for a reason other than the Participant's death, Disability, early retirement, or normal retirement, the Participant's Deferred Shares and Deferred Earnings shall be distributed to the Participant in a lump sum occurring as soon as reasonably practicable. Notwithstanding any other provision of the Plan or a Participant's Election Form, in the event the Participant suffers an unforeseeable emergency hardship within the contemplation of this paragraph, the Participant may apply to the Committee for a distribution of all or a portion of his Deferred Shares and Deferred Earnings prior to the basis for any such distribution. The hardship must result from a sudden and unexpected illness or accident 6 7 of the Participant or a dependent of the Participant, casualty loss of property, or other similar conditions beyond the control of the Participant. Examples of purposes which are not considered hardships include post-secondary school expenses or the desire to purchase a residence. In no event will a distribution be made to the extent the hardship could be relieved through reimbursement or compensation by insurance or otherwise, or by liquidation of the Participant's nonessential assets to the extent such liquidation would not itself cause a severe financial hardship. The amount of any distribution hereunder shall be limited to the amount necessary to relieve the Participant's financial hardship. The determination of whether a Participant has a qualifying hardship and the amount which qualifies for distribution, if any, shall be made by the Committee in its sole discretion. The Committee may require evidence of the purpose and amount of the need, and may establish such application or other procedures as it deems appropriate. No Participant may assign his or her claim to Deferred Shares and Deferred Earnings during his or her lifetime, and any deferral election made hereunder shall be irrevocable. A Participant's right to Deferred Shares and Deferred Earnings shall at all times constitute an unsecured promise of the Company to pay benefits as they come due. The right of the Participant or his or her beneficiary to receive benefits hereunder shall be solely an unsecured claim against the general assets of the Company. Neither the Participant nor his or her beneficiary shall have any claim against or rights in any specific assets or other fund of the Company, and any assets in the Trust shall be deemed general assets of the Company. All distributions made by the Company and/or the Trustees pursuant to elections made hereunder shall be subject to applicable federal, state, and local tax withholding and to such other deductions as shall at the time of such payment be required under any income tax or other law, whether of the United States or any other jurisdiction, and, in the case of payments to a beneficiary, the delivery to the Committee and/or Trustees of all necessary waivers, qualifications and other documentation. ARTICLE VIII MISCELLANEOUS 8.01 ADJUSTMENTS FOR CAPITAL CHANGES. (a) RECAPITALIZATIONS; STOCK SPLITS, ETC. The number and kind of shares which may be purchased under the Plan, and the number and kind of shares subject to outstanding Plan Share Awards, shall be proportionately adjusted for any increase, decrease, change or exchange of shares of Common Stock for a different number or kind of shares or other securities of the Company which results from a merger, consolidation, recapitalization, reorganization, reclassification, stock dividend, split-up, combination of shares, or similar event in which the number or kind of shares is changed without the receipt or payment of consideration by the Company. (b) TRANSACTIONS IN WHICH THE COMPANY IS NOT THE SURVIVING ENTITY. In the event of (i) the liquidation or dissolution of the Company, (ii) a merger or consolidation in which the Company is not the surviving entity, or (iii) the sale or disposition of all or substantially all of the Company's assets (any of the foregoing to be referred to herein as a "Transaction"), all outstanding Plan Share Awards shall be adjusted for any change or exchange of shares of Common Stock for a different number or kind of shares or other securities which results from the Transaction. 7 8 (c) CONDITIONS AND RESTRICTIONS ON NEW, ADDITIONAL, OR DIFFERENT SHARES OR SECURITIES. If, by reason of any adjustment made pursuant to this Section , a Participant becomes entitled to new, additional, or different shares of stock or securities, such new, additional, or different shares of stock or securities shall thereupon be subject to all of the conditions and restrictions which were applicable to the shares pursuant to the Plan Share Award before the adjustment was made. In addition, the Committee shall have the discretionary authority to impose on the Shares subject to Plan Share Awards to Employees such restrictions as the Committee may deem appropriate or desirable, including but not limited to a right of first refusal, or repurchase option, or both of these restrictions. (d) OTHER ISSUANCES. Except as expressly provided in this Section , the issuance by the Company or an Affiliate of shares of stock of any class, or of securities convertible into shares of Common Stock or stock of another class, for cash or property or for labor or services either upon direct sale or upon the exercise of rights or warrants to subscribe therefor, shall not affect, and no adjustment shall be made with respect to, the number or class of shares of Common Stock then subject to Plan Share Awards or reserved for issuance under the Plan. 8.02 AMENDMENT AND TERMINATION OF PLAN. The Board may, by resolution, at any time amend or terminate the Plan; provided that no amendment or termination of the Plan shall, without the written consent of a Participant, impair any rights or obligations under a Plan Share Award theretofore granted to the Participant. The power to amend or terminate the Plan in accordance with this Section 8.02 shall include the power to direct the Trustee to return to the Company all or any part of the assets of the Trust, including shares of Common Stock held in the Plan Share Reserve. However, the termination of the Trust shall not affect a Participant's right to earn Plan Share Awards and to receive a distribution of Common Stock relating thereto, including earnings thereon, in accordance with the terms of this Plan and the grant by the Committee or the Board. 8.03 NONTRANSFERABILITY. Plan Share Awards may not be sold, pledged, assigned, hypothecated, transferred or disposed of in any manner other than by will or by the laws of descent and distribution. Notwithstanding the foregoing, or any other provision of this Plan, a Participant who holds Plan Share Awards may transfer such Awards to his or her spouse, lineal ascendants, lineal descendants, or to a duly established trust for the benefit of one or more of these individuals. Plan Share Awards so transferred may thereafter be transferred only to the Participant who originally received the grant or to an individual or trust to whom the Participant could have initially transferred the Awards pursuant to this Section 8.03. Plan Share Awards which are transferred pursuant to this Section 8.03 shall be exercisable by the transferee according to the same terms and conditions as applied to the Participant. 8.04 NO EMPLOYMENT OR OTHER RIGHTS. Neither the Plan nor any grant of a Plan Share Award or Plan Shares hereunder nor any action taken by the Trustee, the Committee or the Board in connection with the Plan shall create any right, either express or implied, on the part of any Employee or Director to continue in the service of the Company, the Bank, or an Affiliate thereof. 8.05 VOTING AND DIVIDEND RIGHTS. No Participant shall have any voting or dividend rights or other rights of a stockholder in respect of any Plan Shares covered by a Plan Share Award prior to the time said Plan Shares are actually distributed to him. 8.06 GOVERNING LAW. The Plan and Trust shall be governed and construed under the laws of the State of Arkansas to the extent not preempted by Federal law. 8.07 EFFECTIVE DATE. The Plan shall become effective immediately upon its approval by a favorable vote of stockholders of the Company who own at least a majority of the total votes eligible to be cast at a duly called meeting of the Company's stockholders held in accordance with applicable laws, provided that the Plan shall not be submitted for such approval within the six-month period after the Date of Conversion. In no event shall Plan Share Awards be made prior to the Effective Date. 8 9 8.08 TERM OF PLAN. This Plan shall remain in effect until the earlier of (i) termination by the Board, or (ii) the distribution of all assets of the Trust. Termination of the Plan shall not affect any Plan Share Awards previously granted, and such Awards shall remain valid and in effect until they have been earned and paid, or by their terms expire or are forfeited. 8.09 TAX STATUS OF TRUST. It is intended that (i) the Trust associated with the Plan be treated as a grantor trust of the Company under the provisions of Section 671 et seq. of the Code, as the same may be amended from time to time, and (ii) that in accordance with Revenue Procedure 92-65 (as the same may be amended from time to time), Participants have the status of general unsecured creditors of the Company, the Plan constitutes a mere unfunded promise to make benefit payments in the future, the Plan is unfunded for tax purposes and for purposes of Title I of the Employee Retirement Income Security Act of 1974, as amended, and the Trust has been and will continue to be maintained in conformity with Revenue Procedure 92-64 (as the same may be amended from time to time). 9 10 HCB BANCSHARES, INC. MANAGEMENT RECOGNITION PLAN --------------- Trust Agreement --------------- This Agreement made this _____ day of _________, 1996 by and between HCB Bancshares, Inc. (the "Company") and ________________, ____________________, and __________________ (acting by majority, the "Trustee"). WHEREAS, the Company maintains the HCB Bancshares, Inc. Management Recognition Plan (the "Plan"), and has incurred or expects to incur liability under the terms of the Plan with respect to the individuals participating in the Plan ("Participants"); and WHEREAS, the Company wishes to establish a trust (the "Trust") and to contribute to the Trust assets that shall be held therein, subject to the claims of the Company's general creditors in the event of Insolvency, as defined in Section 3(a) hereof, until paid to Participants and their beneficiaries in such manner and at such times as specified in the Plan; WHEREAS, it is the intention of the parties that this Trust shall constitute an unfunded arrangement and shall not affect the status of the Plan as an unfunded plan maintained for the purpose of providing deferred compensation for a select group of management or highly compensated employees for purposes of Title I of the Employee Retirement Income Security Act of 1974; WHEREAS, it is the intention of the Company to make contributions to the Trust to provide itself with a source of funds to assist it in the meeting of its liabilities under the Plan; NOW, THEREFORE, the parties do hereby establish this Trust and agree that the Trust shall be comprised, held and disposed of as follows: Section 1. Establishment of Trust (a) The Company hereby deposits, or will shortly hereafter deposit, with the Trustee in trust (i) a number of shares of the Company's common stock ("Common Stock") equal to four percent (4%) of the number of shares of Common Stock issued by the Company in connection with the conversion of Heartland Community Bank (the "Bank") from mutual to stock form, or (ii) an amount expected to be sufficient to permit the Trust to purchase said shares. Said shares or amount shall become the initial principal of the Trust to be held, administered and disposed of by the Trustee as provided in this Trust Agreement. (b) The Trust shall become irrevocable upon the effective date of the Plan. (c) The Trust is intended to be a grantor trust, of which the Company is the grantor, within the meaning of subpart E, part I, subchapter J, chapter 1, subtitle A of the Internal Revenue Code of 1986, as amended (the "Code"), and shall be construed accordingly. (d) The principal of the Trust, and any earnings thereon, shall be held separate and apart from other funds of the Company and shall be used exclusively for the uses and purposes of Participants and general creditors as herein set forth. Participants and their beneficiaries shall have no preferred claim on, or any beneficial ownership interest in, any assets of the Trust. Any rights created under the Plan and this Trust Agreement shall be mere unsecured contractual rights of Participants and their beneficiaries against the Company. Any assets held by the 1 11 Trust will be subject to the claims of the Company's general creditors under federal and state law in the event of Insolvency, as defined in Section 3(a) herein. (e) The Company, in its sole discretion, may at any time, or from time to time, make additional deposits of cash or other property in trust with the Trustee to augment the principal to be held, administered and disposed of by Trustee as provided in this Trust Agreement. Neither the Trustee nor any Participant or beneficiary shall have any right to compel such additional deposits. Section 2. Payments to Plan Participants and Their Beneficiaries. (a) The Company shall deliver to the Trustee a schedule (the "Payment Schedule") that indicates the amounts payable in respect of each Participant (and his or her beneficiaries), that provides a formula or other instructions acceptable to the Trustee for determining the amounts so payable, the form in which such amount is to be paid (as provided for or available under the Plan), and the time of commencement for payment of such amounts. Except as otherwise provided herein, the Trustee shall make payments to Participants and their beneficiaries in accordance with such Payment Schedule. The Trustee shall make provision for the reporting and withholding of any federal, state or local taxes that may be required to be withheld with respect to the payment of benefits pursuant to the terms of the Plan and shall pay amounts withheld to the appropriate taxing authorities or determine that such amounts have been reported, withheld and paid by the Company. (b) The entitlement of a Participant or his or her beneficiaries to benefits under the Plan shall be determined by the Company or such party as it shall designate under the Plan, and any claim for such benefits shall be considered and reviewed under the procedures set out in the Plan. (c) The Company may make payment of benefits directly to Participants or their beneficiaries as they become due under the terms of the Plan. The Company shall notify the Trustee of its decision to make payment of benefits directly prior to the time amounts are payable to Participants or their beneficiaries. In addition, if the principal of the Trust, and any earnings thereon, are not sufficient to make payments of benefits in accordance with the terms of the Plan, the Company shall make the balance of each such payment as it falls due. The Trustee shall notify the Company where principal and earnings are not sufficient. Section 3. Trustee Responsibility Regarding Payments to Trust Beneficiary When Company Is Insolvent. (a) The Trustee shall cease payment of benefits to Participants and their beneficiaries if the Company is Insolvent. The Company shall be considered "Insolvent" for purposes of this Trust Agreement if (i) the Company is unable to pay its debts as they become due, or (ii) the Company becomes subject to a pending proceeding as a debtor under the United States Bankruptcy Code. (b) At all times during the continuance of this Trust, as provided in Section 1(d) hereof, the principal and income of the Trust shall be subject to claims of general creditors of the Company under federal and state law as set forth below. (c) The Board of Directors and the Chief Executive Officer of the Company shall have the duty to inform the Trustee in writing of the Company's Insolvency. If a person claiming to be a creditor of the Company alleges in writing to the Trustee that the Company has become Insolvent, the Trustee shall determine whether the Company is Insolvent and, pending such determination, the Trustee shall discontinue payment of benefits to Participants or their beneficiaries. (1) Unless the Trustee has actual knowledge of the Company's Insolvency, or has received notice from the Company or a person claiming to be a creditor alleging that the Company is Insolvent, the Trustee shall have no duty to inquire whether the Company is Insolvent. The Trustee may in all events rely on such 2 12 evidence concerning the Company's solvency as may be furnished to the Trustee and that provides the Trustee with a reasonable basis for making a determination concerning the Company's solvency. (2) If at any time the Trustee has determined that the Company is Insolvent, the Trustee shall discontinue payments to Plan participants or their beneficiaries, shall liquidate the Trust's investment in Common Stock, and shall hold the assets of the Trust for the benefit of the Company's general creditors. Nothing in this Trust Agreement shall in any way diminish any rights of Participants or their beneficiaries as general creditors of the Company with respect to benefits due under the Plan or otherwise. (3) The Trustee shall resume the payment of benefits to Participants or their beneficiaries in accordance with Section 2 of this Trust Agreement only after the Trustee has determined that the Company is not Insolvent (or is no longer Insolvent). (d) Provided that there are sufficient assets, if the Trustee discontinues the payment of benefits from the Trust pursuant to Section 3(b) hereof and subsequently resumes such payments, the first payment following such discontinuance shall include the aggregate amount of all payments due to Participants or their beneficiaries under the terms of the Plan for the period of such discontinuance, less the aggregate amount of any payments made to Participants or their beneficiaries by the Company in lieu of the payments provided for hereunder during any such period of discontinuance. Section 4. Payments to the Company. Except as provided in Section 3 hereof, after the Trust has become irrevocable, the Company shall have no right or power to direct the Trustee to return to the Company or to divert to others any of the Trust assets before all payment of benefits have been made to Plan Participants and their beneficiaries pursuant to the terms of the Plan. Section 5. Investment Authority. (a) The Trustee shall have sole discretion as to the investment of Trust assets, except that to the extent reasonably practicable, the Trustee shall invest all assets of the Trust in Common Stock provided that the Trust shall not purchase from time to time a number of shares of Common Stock exceeding 4% of the shares of Common Stock issued in the Bank's mutual-to-stock conversion. (b) All rights associated with assets of the Trust shall be exercised by the Trustee or the person designated by the Trustee, and shall in no event be exercisable by or rest with Participants, except that voting rights with respect to Common Stock will be exercised in accordance with the terms of the Plan. (c) Subject to applicable federal and state securities laws, if for any reason the Trustee will be selling shares of Common Stock, the Trustee shall sell such shares by (i) giving each Beneficiary 20 business days within which to purchase, at fair market value, all or part of the shares of Common Stock that the Trustee holds for the benefit of the Beneficiary, and (ii) to the extent purchases by Beneficiaries are insufficient to eliminate the Trusts' excess holdings of Common Stock, to offer to sell, and to sell, all or any part of the excess shares held by the Trust to the following purchasers, listed here by order of priority: first, the Company; second, any benefit plan maintained by the Company or the Bank; third, directors of the Bank; fourth, officers of the Bank; fifth, members of the general public. Section 6. - Disposition of Income. During the term of this Trust, all income received by the Trust, net of expenses and taxes, shall be accumulated and reinvested. 3 13 Section 7. Accounting by Trustee. The Trustee shall keep accurate and detailed records of all investments, receipts, disbursements, and all other transactions required to be made, including such specific records as shall be agreed upon in writing between the Company and the Trustee. Within 60 days following the close of each calendar year and within 20 days after the removal or resignation of the Trustee, the Trustee shall deliver to the Company a written account of its administration of the Trust during such year or during the period from the close of the last preceding year to the date of such removal or resignation, setting forth all investments, receipts, disbursements and other transactions effected by it, including a description of all securities and investments purchased and sold with the cost or net proceeds of such purchased and sold with the cost or net proceeds of such purchases or sales (accrued interest paid or receivable being shown separately), and showing all cash, securities and other property held in the Trust at the end of such year or as of the date of such removal or resignation, as the case may be. Section 8. Responsibility of Trustee. (a) The Trustee shall act with the care, skill, prudence and diligence under the circumstances then prevailing that a prudent person acting in like capacity and familiar with such matters would use in the conduct of an enterprise of a like character and with like aims, provided, however, that the Trustee shall incur no liability to any person for any action taken pursuant to a direction, request or approval given by the Company which is contemplated by, and in conformity, the terms of the Plan or this Trust and is given in writing by the Company. In the event of a dispute between the Company and a party, the Trustee may apply to a court of competent jurisdiction to resolve the dispute. (b) If the Trustee undertakes or defends any litigation arising in connection with this Trust, the Company agrees to indemnify the Trustee against Trustee's costs, expenses and liabilities (including, without limitation, attorneys' fees and expenses) relating thereto and to be primarily liable for such payments, except in those cases where the Trustee shall have been found by a court of competent jurisdiction to have acted with gross negligence or willful misconduct. If the Company does not pay such costs, expenses and liabilities in a reasonably timely manner, the Trustee may obtain payment from the Trust. (c) The Trustee may consult with legal counsel with respect to any of its duties or obligations hereunder. (d) The Trustee may hire agents, accountants, actuaries, investment advisors, financial consultants or other professionals to assist it in performing any of its duties or obligations hereunder. (e) The Trustee shall have, without exclusion, all powers conferred on trustees by applicable law, unless expressly provided otherwise herein, provided, however, that if an insurance policy is held as an asset of the Trust, the Trustee shall have no power to name a beneficiary of the policy other than the Trust, to assign the policy (as distinct from conversion of the policy to a different form) other than to a successor the Trustee, or to loan to any person the proceeds of any borrowing against such policy. (f) Notwithstanding any powers granted to the Trustee pursuant to this Trust Agreement or to applicable law, the Trustee shall not have any power that could give this Trust the objective of carrying on a business and dividing the gains therefrom, within the meaning of section 301.7701-2 of the Procedure and Administrative Regulations promulgated pursuant to the Code. Section 9. Compensation and Expenses of Trustee. The Company shall pay all administrative expenses and the Trustee's fees and expenses relating to the Plan and this Trust. If not so paid, the fees and expenses shall be paid from the Trust. 4 14 Section 10. Resignation and Removal of Trustee. The Trustee (or any individual serving as one of the trustees who act by majority as the Trustee) may resign at any time by written notice to the Company, which resignation shall be effective 30 days after the Company receives such notice (unless the Company and the Trustee agree otherwise). The Trustee (or any individual serving as one of the trustees who act by majority as the Trustee) may be removed by the Company on 30 days notice or upon shorter notice accepted by the Trustee. If the Trustee (or any individual serving as one of the trustees who act by majority as the Trustee) resigns or is removed, a successor shall be appointed, in accordance with Section 11 hereof, by the effective date or resignation or removal under this section. If no such appointment has been made, the Trustee may apply to a court of competent jurisdiction for appointment of a successor or for instructions. All expenses of the Trustee in connection with the proceeding shall be allowed as administrative expenses of the Trust. Upon resignation or removal of the Trustee and appointment of a successor trustee, all assets shall subsequently be transferred to the successor trustee. The transfer shall be completed within 60 days after receipt of notice of resignation, removal or transfer, unless the Company extends the time limit. Section 11. Appointment of Successor. If the Trustee resigns or is removed in accordance with Section 10 hereof, the Company may appoint any other party as a successor to replace the Trustee upon resignation or removal. The appointment shall be effective when accepted in writing by the new trustee, who shall have all of the rights and powers of the former trustee, including ownership rights in the Trust assets. The former trustee shall execute any instrument necessary or reasonably requested by the Company or the successor trustee to evidence the transfer. A successor trustee need not examine the records and acts of any prior trustee and may retain or dispose of existing Trust assets, subject to Sections 7 and 8 hereof. The successor trustee shall not be responsible for, and the Company shall indemnify and defend the successor trustee from, any claim or liability resulting from any action or inaction of any prior trustee or from any other past event, or any condition existing at the time it becomes successor trustee. Section 12. Amendment or Termination. (a) This Trust Agreement may be amended by a written instrument executed by the Trustee and the Company, provided that no such amendment shall make the Trust revocable. (b) The Trust shall not terminate until the date on which Participants and their beneficiaries are no longer entitled to benefits pursuant to the terms hereof. Upon termination of the Trust, the Trustee shall return any assets remaining in the Trust to the Company. (c) Upon written approval of all Participants (or their beneficiaries if they are then entitled to payment of benefits), the Company may terminate this Trust prior to the time all benefit payments under the Plan have been made. All assets in the Trust at termination shall be returned to the Company. Section 13. Miscellaneous. (a) Any provision of this Trust Agreement prohibited by law shall be ineffective to the extent of any such prohibition, without invalidating the remaining provisions hereof. (b) Benefits payable to Participants and their beneficiaries under this Trust Agreement may not be anticipated, assigned (either at law or in equity), alienated, pledged, encumbered or subjected to attachment, garnishment, levy, execution or other legal or equitable process, except pursuant to the terms of the Plan. 5 15 (c) This Trust Agreement shall be governed by and construed in accordance with the laws of the State of Arkansas, to the extent not preempted by federal law. (d) The Trustee agrees to be bound by the terms of the Plan, as in effect from time to time. (e) The Trustee shall act by vote or written consent of a majority of its duly-appointed members. IN WITNESS WHEREOF, the Company, by its duly authorized officer, has caused this Agreement to be executed, and its corporate seal affixed, and the Trustees have executed this Agreement, this ___ day of ________________, 1995. ATTEST: HCB BANCSHARES, INC. ____________________ By:_______________________ Its President ATTEST: __________________________ __________________________ Trustee __________________________ __________________________ Trustee __________________________ __________________________ Trustee 6 EX-10.3(A) 11 EMPLOYMENT AGREEMENT WITH HCB & LAMPKIN & MCKEEL 1 EXHIBIT 10.3(a) EMPLOYMENT AGREEMENT THIS AGREEMENT entered into this 13th day of June, 1996, by and between First Federal Savings and Loan Association (the "Association") and Vida H. Lampkin (the "Employee"), effective on the date (the "Effective Date") this agreement is executed. WHEREAS, the Employee has heretofore been employed by the Association as its President and is experienced in all phases of the business of the Association; and WHEREAS, the Board of Directors of the Association believes it is in the best interests of the Association to enter into this Agreement with the Employee in order to assure continuity of management of the Association and to reinforce and encourage the continued attention and dedication of the Employee to her assigned duties; and WHEREAS, the parties desire by this writing to set forth the continuing employment relationship of the Association and the Employee. NOW, THEREFORE, it is AGREED as follows: 1. Defined Terms When used anywhere in this Agreement, the following terms shall have the meaning set forth herein. (a) "Affiliate" shall mean any "parent corporation" or "subsidiary corporation" of the Association, as the terms are defined in Section 424(e) and (f), respectively, of the Code. (b) When the Association is in the "mutual" form of organization, a "Change in Control" shall be deemed to have occurred if: (i) as a result of, or in connection with, any exchange offer, merger or other business combination, sale of assets or contested election, any combination of the foregoing transactions, or any similar transaction, the persons who were non-employee directors of the Association before such transaction cease to constitute a majority of the Board of Directors of the Association or any successor to the Association; (ii) the Association transfers substantially all of its assets to another corporation which is not an Affiliate of the Association; (iii) the Association sells substantially all of the assets of an Affiliate which accounted for 50% or more of the controlled group's assets immediately prior to such sale; (iv) any "person" including a "group", exclusive of the Board of Directors of the Association or any committee thereof, is or becomes the "beneficial owner", directly 2 or indirectly, of proxies of the Association representing twenty-five percent (25%) or more of the combined voting power of the Association's members; or (v) the Association is merged or consolidated with another corporation and, as a result of the merger or consolidation, less than seventy percent (70%) of the outstanding proxies relating to the surviving or resulting corporation are given, in the aggregate, by the former members of the Association. (c) If the Association is in the "stock" form of organization, a "Change in Control" shall be deemed to have occurred if: (i) as a result of, or in connection with, any initial public offering, tender offer or exchange offer, merger or other business combination, sale of assets or contested election, any combination of the foregoing transactions, or any similar transaction, the persons who were non-employee directors of the Association before such transaction cease to constitute a majority of the Board of Directors of the Association or any successor to the Association; (ii) the Association transfers substantially all of its assets to another corporation which is not an Affiliate of the Association; (iii) the Association sells substantially all of the assets of a subsidiary or affiliate which accounted for 50% or more of the controlled group's assets immediately prior to such sale; (iv) any "person" including a "group" is or becomes the "beneficial owner", directly or indirectly, of securities of the Association representing twenty-five percent (25%) or more of the combined voting power of the Association's outstanding securities (with the terms in quotation marks having the meaning set forth under the federal securities laws); or (v) the Association is merged or consolidated with another corporation and, as a result of the merger or consolidation, less than seventy percent (70%) of the outstanding voting securities of the surviving or resulting corporation is owned in the aggregate by the former stockholders of the Association. Notwithstanding the foregoing, a "Change in Control" shall not be deemed to occur solely by reason of a transaction in which the Association converts to the stock form of organization, or creates an independent holding company in connection therewith. (d) "Code" shall mean the Internal Revenue Code of 1986, as amended from time to time, and as interpreted through applicable rulings and regulations in effect from time to time. -2- 3 (e) "Code Section 280G Maximum" shall mean product of 2.99 and her "base amount" as defined in Code Section 280G(b)(3). (f) "Good Reason" shall mean any of the following events, which has not been consented to in advance by the Employee in writing: (i) the requirement that the Employee move her personal residence, or perform her principal executive functions, more than thirty (30) miles from her primary office as of the later of the Effective Date and the most recent voluntary relocation by the Employee; (ii) a material reduction in the Employee's base compensation under this Agreement as the same may be increased from time to time; (iii) the failure by the Association to continue to provide the Employee with compensation and benefits provided under this Agreement as the same may be increased from time to time, or with benefits substantially similar to those provided to her under any of the employee benefit plans in which the Employee now or hereafter becomes a participant, or the taking of any action by the Association which would directly or indirectly reduce any of such benefits or deprive the Employee of any material fringe benefit enjoyed by her under this Agreement; (iv) the assignment to the Employee of duties and responsibilities materially different from those normally associated with her position; (v) a failure to reelect the Employee to the Board of Directors of the Association, if the Employee has served on such Board at any time during the term of the Agreement; (vi) a material diminution or reduction in the Employee's responsibilities or authority (including reporting responsibilities) in connection with her employment with the Association; or (vii) a material reduction in the secretarial or other administrative support of the Employee. In addition, "Good Reason" shall mean an impairment of the Employee's health to an extent that it makes continued performance of her duties hereunder hazardous to her physical or mental health. (g) "Just Cause" shall mean, in the good faith determination of the Association's Board of Directors, the Employee's personal dishonesty, incompetence, willful misconduct, breach of fiduciary duty involving personal profit, intentional failure to perform stated duties, willful violation of any law, rule or regulation (other than traffic violations or similar offenses) or final cease-and-desist order, or material breach of any provision of this Agreement. The Employee shall have no right to receive compensation or other benefits for any period after termination for Just Cause. No act, or failure to act, on the Employee's part shall be considered "willful" unless she has acted, or failed to act, with an absence of good faith and without a reasonable belief that her action or failure to act was in the best interest of the Association. (h) "Protected Period" shall mean the period that begins on the date one year before the Change in Control and ends on the closing date of the Change in Control. (i) "Trust" shall mean a grantor trust that is designed in accordance with Revenue Procedure 92-64 and has a trustee independent of the Association. 2. Employment. The Employee is employed as the President of the Association. The Employee shall render such administrative and management services for the Association as are currently rendered and as are customarily performed by persons situated in a similar executive capacity. The Employee shall also promote, by entertainment or otherwise, as and to the extent -3- 4 permitted by law, the business of the Association. The Employee's other duties shall be such as the Board of Directors (the "Board") of the Association may from time to time reasonably direct, including normal duties as an officer of the Association. 3. Base Compensation. The Association agrees to pay the Employee during the term of this Agreement a salary at the rate of $______ per annum, payable in cash not less frequently than monthly. The Board shall review, not less often than annually, the rate of the Employee's salary, and in its sole discretion may decide to increase her salary. Notwithstanding the foregoing, following a Change in Control, the Board of Directors of the Association shall continue to annually review the rate of the Employee's salary, and shall increase said rate of salary by a percentage which is not less than the average annual percentage increase in salary that the Employee received over the three calendar years immediately preceding the year in which the Change in Control occurs. 4. Discretionary Bonuses. The Employee shall participate in an equitable manner with all other senior management employees of the Association in discretionary bonuses that the Board may award from time to time to the Association's senior management employees. No other compensation provided for in this Agreement shall be deemed a substitute for the Employee's right to participate in such discretionary bonuses. Notwithstanding the foregoing, following a Change in Control, the Employee shall receive discretionary bonuses that are made no less frequently than, and in annual amounts not less than, the average annual discretionary bonuses paid to the Employee during each of the three calendar years immediately preceding the year in which such Change in Control occurs. 5. (a) Participation in Retirement, Medical and Other Plans. During the term of this Agreement, the Employee shall be eligible to participate in the following benefit plans: group hospitalization, disability, health, dental, sick leave, life insurance, travel and/or accident insurance, auto allowance/auto lease, retirement, pension, and/or other present or future qualified plans provided by the Association, generally which benefits, taken as a whole, must be at least as favorable as those in effect on the Effective Date. (b) Employee Benefits; Expenses. The Employee shall be eligible to participate in any fringe benefits which are or may become available to the Association's senior management employees, including for example: any stock option or incentive compensation plans, and any other benefits which are commensurate with the responsibilities and functions to be performed by the Employee under this Agreement. The Employee shall be reimbursed for all reasonable out-of-pocket business expenses which she shall incur in connection with her services under this Agreement upon substantiation of such expenses in accordance with the policies of the Association. 6. Term. The Association hereby employs the Employee, and the Employee hereby accepts such employment under this Agreement, for the period commencing on the Effective Date and ending thirty-six months thereafter (or such earlier date as is determined in accordance with Section 9). Additionally, on each annual anniversary date from the Effective Date, the -4- 5 Employee's term of employment shall be extended for an additional one-year period beyond the then effective expiration date provided the Board determines in a duly adopted resolution that the performance of the Employee has met the Board's requirements and standards, and that this Agreement shall be extended. Only those members of the Board of Directors who have no personal interest in this Employment Agreement shall discuss and vote on the approval and subsequent review of this Agreement. 7. Loyalty; Noncompetition. (a) During the period of her employment hereunder and except for illnesses, reasonable vacation periods, and reasonable leaves of absence, the Employee shall devote all her full business time, attention, skill, and efforts to the faithful performance of her duties hereunder; provided, however, from time to time, Employee may serve on the boards of directors of, and hold any other offices or positions in, companies or organizations, which will not present any conflict of interest with the Association or any of its subsidiaries or affiliates, or unfavorably affect the performance of Employee's duties pursuant to this Agreement, or will not violate any applicable statute or regulation. "Full business time" is hereby defined as that amount of time usually devoted to like companies by similarly situated executive officers. During the term of her employment under this Agreement, the Employee shall not engage in any business or activity contrary to the business affairs or interests of the Association, or be gainfully employed in any other position or job other than as provided above. (b) Permissible Investments. Nothing contained in this Section shall be deemed to prevent or limit the Employee's right to invest in the capital stock or other securities of any business dissimilar from that of the Association, or, solely as a passive or minority investor, in any business. 8. Standards. The Employee shall perform her duties under this Agreement in accordance with such reasonable standards as the Board may establish from time to time. The Association will provide Employee with the working facilities and staff customary for similar executives and necessary for her to perform her duties. 9. Vacation and Sick Leave. At such reasonable times as the Board shall in its discretion permit, the Employee shall be entitled, without loss of pay, to absent herself voluntarily from the performance of her employment under this Agreement, all such voluntary absences to count as vacation time, provided that: (a) The Employee shall be entitled to an annual vacation in accordance with the policies that the Board periodically establishes for senior management employees of the Association. (b) The Employee shall not receive any additional compensation from the Association on account of her failure to take a vacation or sick leave, and the Employee shall not -5- 6 accumulate unused vacation or sick leave from one fiscal year to the next, except in either case to the extent authorized by the Board. (c) In addition to the aforesaid paid vacations, the Employee shall be entitled without loss of pay, to absent herself voluntarily from the performance of her employment with the Association for such additional periods of time and for such valid and legitimate reasons as the Board may in its discretion determine. Further, the Board may grant to the Employee a leave or leaves of absence, with or without pay, at such time or times and upon such terms and conditions as such Board in its discretion may determine. (d) In addition, the Employee shall be entitled to an annual sick leave benefit as established by the Board. 10. Termination and Termination Pay. Subject to Section 12 hereof, the Employee's employment hereunder may be terminated under the following circumstances: (a) Death. The Employee's employment under this Agreement shall terminate upon her death during the term of this Agreement, in which event the Employee's estate shall be entitled to receive the compensation due the Employee through the last day of the calendar month in which her death occurred. (b) Disability. (1) The Association may terminate the Employee's employment after having established the Employee's Disability. For purposes of this Agreement, "Disability" means a physical or mental infirmity which impairs the Employee's ability to substantially perform her duties under this Agreement and which results in the Employee becoming eligible for long-term disability benefits under the Association's long-term disability plan (or, if the Association has no such plan in effect, which impairs the Employee's ability to substantially perform her duties under this Agreement for a period of one hundred eighty (180) consecutive days). The Employee shall be entitled to the compensation and benefits provided for under this Agreement for (i) any period during the term of this Agreement and prior to the establishment of the Employee's Disability during which the Employee is unable to work due to the physical or mental infirmity, or (ii) any period of Disability which is prior to the Employee's termination of employment pursuant to this Section 10(b); provided that any benefits paid pursuant to the Association's long term disability plan will continue as provided in such plan. (2) During any period that the Employee shall receive disability benefits and to the extent that the Employee shall be physically and mentally able to do so, she shall furnish such information, assistance and documents so as to assist in the continued ongoing business of the Association and, if able, shall make herself available to the Association to undertake reasonable assignments consistent with her prior position and her physical and mental health. The Association shall pay all reasonable expenses incident to the performance of any assignment given to the Employee during the disability period. -6- 7 (c) Just Cause. The Board may, by written notice to the Employee, immediately terminate her employment at any time, for Just Cause. The Employee shall have no right to receive compensation or other benefits for any period after termination for Just Cause. (d) Without Just Cause; Constructive Discharge. (1) The Board may, by written notice to the Employee, immediately terminate her employment at any time for a reason other than Just Cause, in which event the Employee shall be entitled to receive the following compensation and benefits (unless such termination occurs during the Protected Period in which event the benefits and compensation provided for in Section 12 shall apply): (i) the salary provided pursuant to Section 3 hereof, up to the expiration date of this Agreement including any renewal term (the "Expiration Date"), plus said salary for an additional 12-month period, (ii) a put option meeting the requirements set forth in subsection 3 hereof, provided that the Employee shall not be entitled to such put option if, on the date the Employee terminates employment, either the Employee does not own any common stock of the Association or an affiliated company, or such common stock is "readily tradeable" within the meaning of Code Section 401(a)(28)(C); and (iii) at the Employee's election either (A) cash in an amount equal to the cost to the Employee of obtaining all health, life, disability and other benefits which the Employee would have been eligible to participate in through the Expiration Date based upon the benefit levels substantially equal to those that the Association provided for the Employee at the date of termination of employment or (B) continued participation under such Association benefit plans through the Expiration Date, but only to the extent the Employee continues to qualify for participation therein. All amounts payable to the Employee shall be paid, at the option of the Employee, either (I) in periodic payments through the Expiration Date, or (II) in one lump sum within ten (10) days of such termination. (2) The Employee shall be entitled to receive the compensation and benefits payable under subsection 10(d)(1) hereof in the event that the Employee voluntarily terminates employment within 90 days of an event that constitutes Good Reason, (unless such voluntary termination occurs during the Protected Period, in which event the benefits and compensation provided for in Section 12 shall apply). (3) A put option deliverable to the Employee pursuant to this Section 10(d) shall, at a minimum, obligate the Association and any successor to purchase any shares of its common stock and the common stock of any affiliated company that the Employee owns on the date of terminating employment. The terms of such purchase shall be set forth in a written instrument prepared and executed by the Association, and shall require that (i) the purchase price be no less than the appraised value of such stock, determined in accordance with Code Section 401(a)(28)(C) by -7- 8 an appraiser mutually agreed upon by the Employee and the Association, as of the last day of the fiscal year in which the Employee's employment terminates, and (ii) the Association make such payment as soon as practicable after the Association receives said appraisal. (e) Termination or Suspension Under Federal Law. (1) If the Employee is removed and/or permanently prohibited from participating in the conduct of the Association's affairs by an order issued under Sections 8(e)(4) or 8(g)(1) of the Federal Deposit Insurance Act ("FDIA") (12 U.S.C. 1818(e)(4) and (g)(1)), all obligations of the Association under this Agreement shall terminate, as of the effective date of the order, but vested rights of the parties shall not be affected. (1) If the Association is in default (as defined in Section 3(x)(1) of FDIA), all obligations under this Agreement shall terminate as of the date of default; however, this Paragraph shall not affect the vested rights of the parties. (2) All obligations under this Agreement shall terminate, except to the extent that continuation of this Agreement is necessary for the continued operation of the Association: (i) by the Director of the Office of Thrift Supervision ("Director of OTS"), or his or her designee, at the time that the Federal Deposit Insurance Corporation ("FDIC") or the Resolution Trust Corporation enters into an agreement to provide assistance to or on behalf of the Association under the authority contained in Section 13(c) of FDIA; or (ii) by the Director of the OTS, or his or her designee, at the time that the Director of the OTS, or his or her designee approves a supervisory merger to resolve problems related to operation of the Association or when the Association is determined by the Director of the OTS to be in an unsafe or unsound condition. Such action shall not affect any vested rights of the parties. (3) If a notice served under Section 8(e)(3) or (g)(1) of the FDIA (12 U.S.C. 1818(e)(3) or (g)(1)) suspends and/or temporarily prohibits the Employee from participating in the conduct of the Association's affairs, the Association's obligations under this Agreement shall be suspended as of the date of such service, unless stayed by appropriate proceedings. If the charges in the notice are dismissed, the Association may in its discretion (i) pay the Employee all or part of the compensation withheld while its contract obligations were suspended, and (ii) reinstate (in whole or in part) any of its obligations which were suspended. (4) Any payments made to the Employee pursuant to this Agreement, or otherwise, are subject to and conditioned upon their compliance with 12 U.S.C. Section 1828(k) and any regulations promulgated thereunder. (f) Voluntary Termination by Employee. Subject to Section 12 hereof, the Employee may voluntarily terminate employment with the Association during the term of this Agreement, upon at least ninety (90) days' prior written notice to the Board of Directors, in which case the Employee shall receive only her compensation, vested rights and employee benefits up to the date of her termination (unless such termination occurs pursuant to Section -8- 9 10(d)(2) hereof or within the Protected Period in Section 12(a) hereof in which event the benefits and compensation provided for in Sections 10(d) or 12, as applicable, shall apply). 11. No Mitigation. The Employee shall not be required to mitigate the amount of any payment provided for in this Agreement by seeking other employment or otherwise and no such payment shall be offset or reduced by the amount of any compensation or benefits provided to the Employee in any subsequent employment. 12. Change in Control. (a) Trigger Events. The Employee shall be entitled to collect the severance benefits set forth in Subsection (b) hereof in lieu of any benefits under Section 10 hereof in the event that (i) a Change in Control occurs, or (ii) the Association or its successor(s) in interest terminate the Employee's employment without her written consent and for any reason other than Just Cause during the Protected Period. (b) Amount of Severance Benefit. If the Employee becomes entitled to collect severance benefits pursuant to Section 12(a) hereof, the Association shall: (i) pay the Employee a severance benefit equal to the difference between the Code Section 280G Maximum and the sum of any other "parachute payments" as defined under Code Section 280G(b)(2) that the Employee receives on account of the Change in Control, and (ii) pay for long-term disability and provide such medical benefits as are available to the Employee under the provisions of COBRA, for eighteen (18) months (or such longer period, up to 24 months, if COBRA is amended). Said sum shall be paid in one lump sum within ten (10) days of the later of the date of the Change in Control and the Employee's last day of employment with the Association, provided that the Employee may elect at any time on or before becoming entitled to collect benefits hereunder, to have such benefits be paid in substantially equal installments over a period of up to 10 years. In the event that the Employee and the Association jointly agree that the Employee has collected an amount exceeding the Code Section 280G Maximum, the parties may agree in writing that such excess shall be treated as a loan ab initio which the Employee shall repay to the Association, on terms and conditions mutually agreeable to the parties, together with interest at the applicable federal rate provided for in Section 7872(f)(2)(B) of the Code. (c) Funding of Grantor Trust upon Change in Control. Not later than ten business days after a Change in Control, the Association shall (i) deposit in a Trust an amount equal to the Code Section 280G Maximum, unless the Employee has previously provided a written release of any claims under this Agreement, and (ii) provide the trustee of the Trust with a written direction to hold said amount and any investment return thereon in a segregated account for the benefit of the Employee, and to follow the procedures set forth in the next paragraph as -9- 10 to the payment of such amounts from the Trust. Upon the later of the Trust's final payment of all amounts due under the following paragraph or the date twelve months after the Change in Control, the trustee of the Trust shall pay to the Association the entire balance remaining in the segregated account maintained for the benefit of the Employee. The Employee shall thereafter have no further interest in the Trust. During the 12-consecutive month period after a Change in Control, the Employee may provide the trustee of the Trust with a written notice requesting that the trustee pay to the Employee an amount designated in the notice as being payable pursuant to this Agreement. Within three business days after receiving said notice, the trustee of the Trust shall send a copy of the notice to the Association via overnight and registered mail return receipt requested. On the tenth (10th) business day after mailing said notice to the Association, the trustee of the Trust shall pay the Employee the amount designated therein in immediately available funds, unless prior thereto the Association provides the trustee with a written notice directing the trustee to withhold such payment. In the latter event, the trustee shall submit the dispute to non-appealable binding arbitration for a determination of the amount payable to the Employee pursuant to this Agreement, and the costs of such arbitration shall be paid by the Association. The trustee shall choose the arbitrator to settle the dispute, and such arbitrator shall be bound by the rules of the American Arbitration Association in making his determination. The parties and the trustee shall be bound by the results of the arbitration and, within 3 days of the determination by the arbitrator, the trustee shall pay from the Trust the amounts required to be paid to the Employee and/or the Association, and in no event shall the trustee be liable to either party for making the payments as determined by the arbitrator. 13. Indemnification. The Association agrees that its Bylaws shall continue to provide for indemnification of directors, officers, employees and agents of the Association, including the Employee during the full term of this Agreement, and to at all times provide adequate insurance for such purposes. 14. Reimbursement of Employee for Enforcement Proceedings. In the event that any dispute arises between the Employee and the Association as to the terms or interpretation of this Agreement, whether instituted by formal legal proceedings or otherwise, including any action that the Employee takes to defend against any action taken by the Association, the Employee shall be reimbursed for all costs and expenses, including reasonable attorneys' fees, arising from such dispute, proceedings or actions, provided that the Employee obtains either a written settlement or a final judgement by a court of competent jurisdiction substantially in her favor. Such reimbursement shall be paid within ten (10) days of Employee's furnishing to the Association written evidence, which may be in the form, among other things, of a cancelled check or receipt, of any costs or expenses incurred by the Employee. 15. Federal Income Tax Withholding. The Association may withhold all federal and state income or other taxes from any benefit payable under this Agreement as shall be required pursuant to any law or government regulation or ruling. -10- 11 16. Successors and Assigns. (a) Association. This Agreement shall not be assignable by the Association, provided that this Agreement shall inure to the benefit of and be binding upon any corporate or other successor of the Association which shall acquire, directly or indirectly, by merger, consolidation, purchase or otherwise, all or substantially all of the assets of the Association. (b) Employee. Since the Association is contracting for the unique and personal skills of the Employee, the Employee shall be precluded from assigning or delegating her rights or duties hereunder without first obtaining the written consent of the Association; provided, however, that nothing in this paragraph shall preclude (i) the Employee from designating a beneficiary to receive any benefit payable hereunder upon her death, or (ii) the executors, administrators, or other legal representatives of the Employee or her estate from assigning any rights hereunder to the person or persons entitled thereunto. (c) Attachment. Except as required by law, no right to receive payments under this Agreement shall be subject to anticipation, commutation, alienation, sale, assignment, encumbrance, charge, pledge, or hypothecation or to exclusion, attachment, levy or similar process or assignment by operation of law, and any attempt, voluntary or involuntary, to effect any such action shall be null, void and of no effect. 17. Amendments. No amendments or additions to this Agreement shall be binding unless made in writing and signed by all of the parties, except as herein otherwise specifically provided. 18. Applicable Law. Except to the extent preempted by federal law, the laws of the State of Arkansas shall govern this Agreement in all respects, whether as to its validity, construction, capacity, performance or otherwise. 19. Severability. The provisions of this Agreement shall be deemed severable and the invalidity or unenforceability of any provision shall not affect the validity or enforceability of the other provisions hereof. 20. Entire Agreement. This Agreement, together with any understanding or modifications thereof as agreed to in writing by the parties, shall constitute the entire agreement between the parties hereto and shall supersede any prior agreement between the parties. -11- 12 IN WITNESS WHEREOF, the parties have executed this Agreement on the day and year first hereinabove written. ATTEST: FIRST FEDERAL SAVINGS AND LOAN ASSOCIATION /s/ Betty C. Harris By: /s/ Clifford Steelman - -------------------------- ---------------------------------- Secretary Its Board Member ---------------------------------- WITNESS: /s/ Paula J. Bergstrom /s/ Vida H. Lampkin - -------------------------- -------------------------------------- Vida H. Lampkin -12- 13 EMPLOYMENT AGREEMENT THIS AGREEMENT entered into this 13th day of June, 1996, by and between First Federal Savings and Loan Association (the "Association") and Cameron D. McKeel (the "Employee"), effective on the date (the "Effective Date") this agreement is executed. WHEREAS, the Employee has heretofore been employed by the Association as its Executive Vice President and is experienced in all phases of the business of the Association; and WHEREAS, the Board of Directors of the Association believes it is in the best interests of the Association to enter into this Agreement with the Employee in order to assure continuity of management of the Association and to reinforce and encourage the continued attention and dedication of the Employee to his assigned duties; and WHEREAS, the parties desire by this writing to set forth the continuing employment relationship of the Association and the Employee. NOW, THEREFORE, it is AGREED as follows: 1. Defined Terms When used anywhere in this Agreement, the following terms shall have the meaning set forth herein. (a) "Affiliate" shall mean any "parent corporation" or "subsidiary corporation" of the Association, as the terms are defined in Section 424(e) and (f), respectively, of the Code. (b) When the Association is in the "mutual" form of organization, a "Change in Control" shall be deemed to have occurred if: (i) as a result of, or in connection with, any exchange offer, merger or other business combination, sale of assets or contested election, any combination of the foregoing transactions, or any similar transaction, the persons who were non-employee directors of the Association before such transaction cease to constitute a majority of the Board of Directors of the Association or any successor to the Association; (ii) the Association transfers substantially all of its assets to another corporation which is not an Affiliate of the Association; (iii) the Association sells substantially all of the assets of an Affiliate which accounted for 50% or more of the controlled group's assets immediately prior to such sale; (iv) any "person" including a "group", exclusive of the Board of Directors of the Association or any committee thereof, is or becomes the "beneficial owner", directly 14 or indirectly, of proxies of the Association representing twenty-five percent (25%) or more of the combined voting power of the Association's members; or (v) the Association is merged or consolidated with another corporation and, as a result of the merger or consolidation, less than seventy percent (70%) of the outstanding proxies relating to the surviving or resulting corporation are given, in the aggregate, by the former members of the Association. (c) If the Association is in the "stock" form of organization, a "Change in Control" shall be deemed to have occurred if: (i) as a result of, or in connection with, any initial public offering, tender offer or exchange offer, merger or other business combination, sale of assets or contested election, any combination of the foregoing transactions, or any similar transaction, the persons who were non-employee directors of the Association before such transaction cease to constitute a majority of the Board of Directors of the Association or any successor to the Association; (ii) the Association transfers substantially all of its assets to another corporation which is not an Affiliate of the Association; (iii) the Association sells substantially all of the assets of an Affiliate which accounted for 50% or more of the controlled group's assets immediately prior to such sale; (iv) any "person" including a "group" is or becomes the "beneficial owner", directly or indirectly, of securities of the Association representing twenty-five percent (25%) or more of the combined voting power of the Association's outstanding securities (with the terms in quotation marks having the meaning set forth under the federal securities laws); or (v) the Association is merged or consolidated with another corporation and, as a result of the merger or consolidation, less than seventy percent (70%) of the outstanding voting securities of the surviving or resulting corporation is owned in the aggregate by the former stockholders of the Association. Notwithstanding the foregoing, a "Change in Control" shall not be deemed to occur solely by reason of a transaction in which the Association converts to the stock form of organization, or creates an independent holding company in connection therewith. (d) "Code" shall mean the Internal Revenue Code of 1986, as amended from time to time, and as interpreted through applicable rulings and regulations in effect from time to time. -2- 15 (e) "Code Section 280G Maximum" shall mean product of 2.99 and his "base amount" as defined in Code Section 280G(b)(3). (f) "Good Reason" shall mean any of the following events, which has not been consented to in advance by the Employee in writing: (i) the requirement that the Employee move his personal residence, or perform his principal executive functions, more than thirty (30) miles from his primary office as of the later of the Effective Date and the most recent voluntary relocation by the Employee; (ii) a material reduction in the Employee's base compensation under this Agreement as the same may be increased from time to time; (iii) the failure by the Association to continue to provide the Employee with compensation and benefits provided under this Agreement as the same may be increased from time to time, or with benefits substantially similar to those provided to him under any of the employee benefit plans in which the Employee now or hereafter becomes a participant, or the taking of any action by the Association which would directly or indirectly reduce any of such benefits or deprive the Employee of any material fringe benefit enjoyed by him under this Agreement; (iv) the assignment to the Employee of duties and responsibilities materially different from those normally associated with his position; (v) a failure to reelect the Employee to the Board of Directors of the Association, if the Employee has served on such Board at any time during the term of the Agreement; (vi) a material diminution or reduction in the Employee's responsibilities or authority (including reporting responsibilities) in connection with his employment with the Association; or (vii) a material reduction in the secretarial or other administrative support of the Employee. In addition, "Good Reason" shall mean an impairment of the Employee's health to an extent that it makes continued performance of his duties hereunder hazardous to his physical or mental health. (g) "Just Cause" shall mean, in the good faith determination of the Association's Board of Directors, the Employee's personal dishonesty, incompetence, willful misconduct, breach of fiduciary duty involving personal profit, intentional failure to perform stated duties, willful violation of any law, rule or regulation (other than traffic violations or similar offenses) or final cease-and-desist order, or material breach of any provision of this Agreement. The Employee shall have no right to receive compensation or other benefits for any period after termination for Just Cause. No act, or failure to act, on the Employee's part shall be considered "willful" unless he has acted, or failed to act, with an absence of good faith and without a reasonable belief that his action or failure to act was in the best interest of the Association. (h) "Protected Period" shall mean the period that begins on the date one year before the Change in Control and ends on the closing date of the Change in Control. (i) "Trust" shall mean a grantor trust that is designed in accordance with Revenue Procedure 92-64 and has a trustee independent of the Association. 2. Employment. The Employee is employed as the Executive Vice President of the Association. The Employee shall render such administrative and management services for the Association as are currently rendered and as are customarily performed by persons situated in a similar executive capacity. The Employee shall also promote, by entertainment or otherwise, as -3- 16 and to the extent permitted by law, the business of the Association. The Employee's other duties shall be such as the Board of Directors (the "Board") of the Association may from time to time reasonably direct, including normal duties as an officer of the Association. 3. Base Compensation. The Association agrees to pay the Employee during the term of this Agreement a salary at the rate of $______ per annum, payable in cash not less frequently than monthly. The Board shall review, not less often than annually, the rate of the Employee's salary, and in its sole discretion may decide to increase his salary. Notwithstanding the foregoing, following a Change in Control, the Board of Directors of the Association shall continue to annually review the rate of the Employee's salary, and shall increase said rate of salary by a percentage which is not less than the average annual percentage increase in salary that the Employee received over the three calendar years immediately preceding the year in which the Change in Control occurs. 4. Discretionary Bonuses. The Employee shall participate in an equitable manner with all other senior management employees of the Association in discretionary bonuses that the Board may award from time to time to the Association's senior management employees. No other compensation provided for in this Agreement shall be deemed a substitute for the Employee's right to participate in such discretionary bonuses. Notwithstanding the foregoing, following a Change in Control, the Employee shall receive discretionary bonuses that are made no less frequently than, and in annual amounts not less than, the average annual discretionary bonuses paid to the Employee during each of the three calendar years immediately preceding the year in which such Change in Control occurs. 5. (a) Participation in Retirement, Medical and Other Plans. During the term of this Agreement, the Employee shall be eligible to participate in the following benefit plans: group hospitalization, disability, health, dental, sick leave, life insurance, travel and/or accident insurance, auto allowance/auto lease, retirement, pension, and/or other present or future qualified plans provided by the Association, generally which benefits, taken as a whole, must be at least as favorable as those in effect on the Effective Date. (b) Employee Benefits; Expenses. The Employee shall be eligible to participate in any fringe benefits which are or may become available to the Association's senior management employees, including for example: any stock option or incentive compensation plans, and any other benefits which are commensurate with the responsibilities and functions to be performed by the Employee under this Agreement. The Employee shall be reimbursed for all reasonable out-of-pocket business expenses which he shall incur in connection with his services under this Agreement upon substantiation of such expenses in accordance with the policies of the Association. 6. Term. The Association hereby employs the Employee, and the Employee hereby accepts such employment under this Agreement, for the period commencing on the Effective Date and ending thirty-six months thereafter (or such earlier date as is determined in accordance with Section 9). Additionally, on each annual anniversary date from the Effective Date, the -4- 17 Employee's term of employment shall be extended for an additional one-year period beyond the then effective expiration date provided the Board determines in a duly adopted resolution that the performance of the Employee has met the Board's requirements and standards, and that this Agreement shall be extended. Only those members of the Board of Directors who have no personal interest in this Employment Agreement shall discuss and vote on the approval and subsequent review of this Agreement. 7. Loyalty; Noncompetition. (a) During the period of his employment hereunder and except for illnesses, reasonable vacation periods, and reasonable leaves of absence, the Employee shall devote all his full business time, attention, skill, and efforts to the faithful performance of his duties hereunder; provided, however, from time to time, Employee may serve on the boards of directors of, and hold any other offices or positions in, companies or organizations, which will not present any conflict of interest with the Association or any of its subsidiaries or affiliates, or unfavorably affect the performance of Employee's duties pursuant to this Agreement, or will not violate any applicable statute or regulation. "Full business time" is hereby defined as that amount of time usually devoted to like companies by similarly situated executive officers. During the term of his employment under this Agreement, the Employee shall not engage in any business or activity contrary to the business affairs or interests of the Association, or be gainfully employed in any other position or job other than as provided above. (b) Permissible Investments. Nothing contained in this Section shall be deemed to prevent or limit the Employee's right to invest in the capital stock or other securities of any business dissimilar from that of the Association, or, solely as a passive or minority investor, in any business. 8. Standards. The Employee shall perform his duties under this Agreement in accordance with such reasonable standards as the Board may establish from time to time. The Association will provide Employee with the working facilities and staff customary for similar executives and necessary for him to perform his duties. 9. Vacation and Sick Leave. At such reasonable times as the Board shall in its discretion permit, the Employee shall be entitled, without loss of pay, to absent himself voluntarily from the performance of his employment under this Agreement, all such voluntary absences to count as vacation time, provided that: (a) The Employee shall be entitled to an annual vacation in accordance with the policies that the Board periodically establishes for senior management employees of the Association. (b) The Employee shall not receive any additional compensation from the Association on account of his failure to take a vacation or sick leave, and the Employee shall not -5- 18 accumulate unused vacation or sick leave from one fiscal year to the next, except in either case to the extent authorized by the Board. (c) In addition to the aforesaid paid vacations, the Employee shall be entitled without loss of pay, to absent himself voluntarily from the performance of his employment with the Association for such additional periods of time and for such valid and legitimate reasons as the Board may in its discretion determine. Further, the Board may grant to the Employee a leave or leaves of absence, with or without pay, at such time or times and upon such terms and conditions as such Board in its discretion may determine. (d) In addition, the Employee shall be entitled to an annual sick leave benefit as established by the Board. 10. Termination and Termination Pay. Subject to Section 12 hereof, the Employee's employment hereunder may be terminated under the following circumstances: (a) Death. The Employee's employment under this Agreement shall terminate upon his death during the term of this Agreement, in which event the Employee's estate shall be entitled to receive the compensation due the Employee through the last day of the calendar month in which his death occurred. (b) Disability. (1) The Association may terminate the Employee's employment after having established the Employee's Disability. For purposes of this Agreement, "Disability" means a physical or mental infirmity which impairs the Employee's ability to substantially perform his duties under this Agreement and which results in the Employee becoming eligible for long-term disability benefits under the Association's long-term disability plan (or, if the Association has no such plan in effect, which impairs the Employee's ability to substantially perform his duties under this Agreement for a period of one hundred eighty (180) consecutive days). The Employee shall be entitled to the compensation and benefits provided for under this Agreement for (i) any period during the term of this Agreement and prior to the establishment of the Employee's Disability during which the Employee is unable to work due to the physical or mental infirmity, or (ii) any period of Disability which is prior to the Employee's termination of employment pursuant to this Section 10(b); provided that any benefits paid pursuant to the Association's long term disability plan will continue as provided in such plan. (2) During any period that the Employee shall receive disability benefits and to the extent that the Employee shall be physically and mentally able to do so, he shall furnish such information, assistance and documents so as to assist in the continued ongoing business of the Association and, if able, shall make himself available to the Association to undertake reasonable assignments consistent with his prior position and his physical and mental health. The Association shall pay all reasonable expenses incident to the performance of any assignment given to the Employee during the disability period. -6- 19 (c) Just Cause. The Board may, by written notice to the Employee, immediately terminate his employment at any time, for Just Cause. The Employee shall have no right to receive compensation or other benefits for any period after termination for Just Cause. (d) Without Just Cause; Constructive Discharge. (1) The Board may, by written notice to the Employee, immediately terminate his employment at any time for a reason other than Just Cause, in which event the Employee shall be entitled to receive the following compensation and benefits (unless such termination occurs during the Protected Period in which event the benefits and compensation provided for in Section 12 shall apply): (i) the salary provided pursuant to Section 3 hereof, up to the expiration date of this Agreement including any renewal term (the "Expiration Date"), plus said salary for an additional 12-month period, (ii) a put option meeting the requirements set forth in subsection 3 hereof, provided that the Employee shall not be entitled to such put option if on the date the Employee terminates employment, either the Employee does not own any common stock of the Association or an affiliated company, or such common stock is "readily tradeable" within the meaning of Cod Section 401(a)(28)(C); and (iii) at the Employee's election either (A) cash in an amount equal to the cost to the Employee of obtaining all health, life, disability and other benefits which the Employee would have been eligible to participate in through the Expiration Date based upon the benefit levels substantially equal to those that the Association provided for the Employee at the date of termination of employment or (B) continued participation under such Association benefit plans through the Expiration Date, but only to the extent the Employee continues to qualify for participation therein. All amounts payable to the Employee shall be paid, at the option of the Employee, either (I) in periodic payments through the Expiration Date, or (II) in one lump sum within ten (10) days of such termination. (2) The Employee shall be entitled to receive the compensation and benefits payable under subsection 10(d)(1) hereof in the event that the Employee voluntarily terminates employment within 90 days of an event that constitutes Good Reason, (unless such voluntary termination occurs during the Protected Period, in which event the benefits and compensation provided for in Section 12 shall apply). (3) A put option deliverable to the Employee pursuant to this Section 10(d) shall, at a minimum, obligate the Association and any successor to purchase any shares of its common stock are the common stock of any affiliated company that the Employee owns on the date of terminating employment. The terms of such purchase shall be set forth in a written instrument prepared and executed by the Association, and shall require that (i) the purchase price be no less than the appraised value of such stock, determined in accordance with Code Section 401(a)(28)(C), by an appraiser mutually agreed upon by the Employee and the Association, as of the last day of the -7- 20 fiscal year in which the Employee's employment terminates, and (ii) the Association make such payment as soon as practicable after the Association receives said appraisal. (e) Termination or Suspension Under Federal Law. (1) If the Employee is removed and/or permanently prohibited from participating in the conduct of the Association's affairs by an order issued under Sections 8(e)(4) or 8(g)(1) of the Federal Deposit Insurance Act ("FDIA") (12 U.S.C. 1818(e)(4) and (g)(1)), all obligations of the Association under this Agreement shall terminate, as of the effective date of the order, but vested rights of the parties shall not be affected. (1) If the Association is in default (as defined in Section 3(x)(1) of FDIA), all obligations under this Agreement shall terminate as of the date of default; however, this Paragraph shall not affect the vested rights of the parties. (2) All obligations under this Agreement shall terminate, except to the extent that continuation of this Agreement is necessary for the continued operation of the Association: (i) by the Director of the Office of Thrift Supervision ("Director of OTS"), or his or her designee, at the time that the Federal Deposit Insurance Corporation ("FDIC") or the Resolution Trust Corporation enters into an agreement to provide assistance to or on behalf of the Association under the authority contained in Section 13(c) of FDIA; or (ii) by the Director of the OTS, or his or her designee, at the time that the Director of the OTS, or his or her designee approves a supervisory merger to resolve problems related to operation of the Association or when the Association is determined by the Director of the OTS to be in an unsafe or unsound condition. Such action shall not affect any vested rights of the parties. (3) If a notice served under Section 8(e)(3) or (g)(1) of the FDIA (12 U.S.C. 1818(e)(3) or (g)(1)) suspends and/or temporarily prohibits the Employee from participating in the conduct of the Association's affairs, the Association's obligations under this Agreement shall be suspended as of the date of such service, unless stayed by appropriate proceedings. If the charges in the notice are dismissed, the Association may in its discretion (i) pay the Employee all or part of the compensation withheld while its contract obligations were suspended, and (ii) reinstate (in whole or in part) any of its obligations which were suspended. (4) Any payments made to the Employee pursuant to this Agreement, or otherwise, are subject to and conditioned upon their compliance with 12 U.S.C. Section 1828(k) and any regulations promulgated thereunder. (f) Voluntary Termination by Employee. Subject to Section 12 hereof, the Employee may voluntarily terminate employment with the Association during the term of this Agreement, upon at least ninety (90) days' prior written notice to the Board of Directors, in which case the Employee shall receive only his compensation, vested rights and employee benefits up to the date of his termination (unless such termination occurs pursuant to Section 10(d)(2) hereof or within the Protected Period in Section 12(a) hereof in which event the benefits and compensation provided for in Sections 10(d) or 12, as applicable, shall apply). -8- 21 11. No Mitigation. The Employee shall not be required to mitigate the amount of any payment provided for in this Agreement by seeking other employment or otherwise and no such payment shall be offset or reduced by the amount of any compensation or benefits provided to the Employee in any subsequent employment. 12. Change in Control. (a) Trigger Events. The Employee shall be entitled to collect the severance benefits set forth in Subsection (b) hereof in lieu of any benefits under Section 10 hereof in the event that (i) a Change in Control occurs, or (ii) the Association or its successor(s) in interest terminate the Employee's employment without his written consent and for any reason other than Just Cause during the Protected Period. (b) Amount of Severance Benefit. If the Employee becomes entitled to collect severance benefits pursuant to Section 12(a) hereof, the Association shall: (i) pay the Employee a severance benefit equal to the difference between the Code Section 280G Maximum and the sum of any other "parachute payments" as defined under Code Section 280G(b)(2) that the Employee receives on account of the Change in Control, and (ii) pay for long-term disability and provide such medical benefits as are available to the Employee under the provisions of COBRA, for eighteen (18) months (or such longer period, up to 24 months, if COBRA is amended). Said sum shall be paid in one lump sum within ten (10) days of the later of the date of the Change in Control and the Employee's last day of employment with the Association, provided that the Employee may elect at any time on or before becoming entitled to collect benefits hereunder, to have such benefits be paid in substantially equal installments over a period of up to 10 years. In the event that the Employee and the Association jointly agree that the Employee has collected an amount exceeding the Code Section 280G Maximum, the parties may agree in writing that such excess shall be treated as a loan ab initio which the Employee shall repay to the Association, on terms and conditions mutually agreeable to the parties, together with interest at the applicable federal rate provided for in Section 7872(f)(2)(B) of the Code. (c) Funding of Grantor Trust upon Change in Control. Not later than ten business days after a Change in Control, the Association shall (i) deposit in a Trust an amount equal to the Code Section 280G Maximum, unless the Employee has previously provided a written release of any claims under this Agreement, and (ii) provide the trustee of the Trust with a written direction to hold said amount and any investment return thereon in a segregated account for the benefit of the Employee, and to follow the procedures set forth in the next paragraph as to the payment of such amounts from the Trust. Upon the later of the Trust's final payment of all amounts due under the following paragraph or the date twelve months after the Change in -9- 22 Control, the trustee of the Trust shall pay to the Association the entire balance remaining in the segregated account maintained for the benefit of the Employee. The Employee shall thereafter have no further interest in the Trust. During the 12-consecutive month period after a Change in Control, the Employee may provide the trustee of the Trust with a written notice requesting that the trustee pay to the Employee an amount designated in the notice as being payable pursuant to this Agreement. Within three business days after receiving said notice, the trustee of the Trust shall send a copy of the notice to the Association via overnight and registered mail return receipt requested. On the tenth (10th) business day after mailing said notice to the Association, the trustee of the Trust shall pay the Employee the amount designated therein in immediately available funds, unless prior thereto the Association provides the trustee with a written notice directing the trustee to withhold such payment. In the latter event, the trustee shall submit the dispute to non-appealable binding arbitration for a determination of the amount payable to the Employee pursuant to this Agreement, and the costs of such arbitration shall be paid by the Association. The trustee shall choose the arbitrator to settle the dispute, and such arbitrator shall be bound by the rules of the American Arbitration Association in making his determination. The parties and the trustee shall be bound by the results of the arbitration and, within 3 days of the determination by the arbitrator, the trustee shall pay from the Trust the amounts required to be paid to the Employee and/or the Association, and in no event shall the trustee be liable to either party for making the payments as determined by the arbitrator. 13. Indemnification. The Association agrees that its Bylaws shall continue to provide for indemnification of directors, officers, employees and agents of the Association, including the Employee during the full term of this Agreement, and to at all times provide adequate insurance for such purposes. 14. Reimbursement of Employee for Enforcement Proceedings. In the event that any dispute arises between the Employee and the Association as to the terms or interpretation of this Agreement, whether instituted by formal legal proceedings or otherwise, including any action that the Employee takes to defend against any action taken by the Association, the Employee shall be reimbursed for all costs and expenses, including reasonable attorneys' fees, arising from such dispute, proceedings or actions, provided that the Employee obtains either a written settlement or a final judgement by a court of competent jurisdiction substantially in his favor. Such reimbursement shall be paid within ten (10) days of Employee's furnishing to the Association written evidence, which may be in the form, among other things, of a cancelled check or receipt, of any costs or expenses incurred by the Employee. 15. Federal Income Tax Withholding. The Association may withhold all federal and state income or other taxes from any benefit payable under this Agreement as shall be required pursuant to any law or government regulation or ruling. -10- 23 16. Successors and Assigns. (a) Association. This Agreement shall not be assignable by the Association, provided that this Agreement shall inure to the benefit of and be binding upon any corporate or other successor of the Association which shall acquire, directly or indirectly, by merger, consolidation, purchase or otherwise, all or substantially all of the assets of the Association. (b) Employee. Since the Association is contracting for the unique and personal skills of the Employee, the Employee shall be precluded from assigning or delegating his rights or duties hereunder without first obtaining the written consent of the Association; provided, however, that nothing in this paragraph shall preclude (i) the Employee from designating a beneficiary to receive any benefit payable hereunder upon his death, or (ii) the executors, administrators, or other legal representatives of the Employee or his estate from assigning any rights hereunder to the person or persons entitled thereunto. (c) Attachment. Except as required by law, no right to receive payments under this Agreement shall be subject to anticipation, commutation, alienation, sale, assignment, encumbrance, charge, pledge, or hypothecation or to exclusion, attachment, levy or similar process or assignment by operation of law, and any attempt, voluntary or involuntary, to effect any such action shall be null, void and of no effect. 17. Amendments. No amendments or additions to this Agreement shall be binding unless made in writing and signed by all of the parties, except as herein otherwise specifically provided. 18. Applicable Law. Except to the extent preempted by federal law, the laws of the State of Arkansas shall govern this Agreement in all respects, whether as to its validity, construction, capacity, performance or otherwise. 19. Severability. The provisions of this Agreement shall be deemed severable and the invalidity or unenforceability of any provision shall not affect the validity or enforceability of the other provisions hereof. 20. Entire Agreement. This Agreement, together with any understanding or modifications thereof as agreed to in writing by the parties, shall constitute the entire agreement between the parties hereto and shall supersede any prior agreement between the parties. -11- 24 IN WITNESS WHEREOF, the parties have executed this Agreement on the day and year first hereinabove written. ATTEST: FIRST FEDERAL SAVINGS AND LOAN ASSOCIATION /s/ Betty C. Harris By: /s/ Vida H. Lampkin - ---------------------------------- ----------------------------- Secretary Its Chairman of the Board WITNESS: /s/ Paula J. Bergstrom /s/ Cameron D. McKeel - ---------------------------------- --------------------------------- Cameron D. McKeel -12- EX-10.4(A) 12 PROTECTIVE AGREEMENT BETWEEN HCB AND LYON 1 EXHIBIT 10.4(a) CHANGE-IN-CONTROL PROTECTIVE AGREEMENT THIS AGREEMENT entered into this 13th day of June, 1996, by and between First Federal Savings and Loan Association (the "Association") and Mr. William Lyon (the "Employee"), effective on the date (the "Effective Date") this agreement is executed. WHEREAS, the Employee has recently been hired by the Association as an executive officer, and the Association deems it to be in its best interest to enter into this Agreement in order to provide the Employee with security in the event of a Change in Control of the Association, and thereby to facilitate his retention and insure an orderly transition following a Change in Control; and WHEREAS, the parties desire by this writing to set forth their understanding as to their respective rights and obligations in the event a Change in Control occurs with respect to the Association. NOW, THEREFORE, the undersigned parties AGREE as follows: 1. Defined Terms When used anywhere in the Agreement, the following terms shall have the meaning set forth herein. (a) "Affiliate" shall mean any "parent corporation" or "subsidiary corporation" of the Association, as the terms are defined in Section 424(e) and (f), respectively, of the Code. (b) When the Association is in the "mutual" form of organization, a "Change in Control" shall be deemed to have occurred if: (i) as a result of, or in connection with, any exchange offer, merger or other business combination, sale of assets or contested election, any combination of the foregoing transactions, or any similar transaction, the persons who were Directors of the Association before such transaction cease to constitute a majority of the Board of Directors of the Association or any successor to the Association; (ii) the Association transfers substantially all of its assets to another corporation which is not an Affiliate of the Association; (iii) the Association sells substantially all of the assets of an Affiliate which accounted for 50% or more of the controlled group's assets immediately prior to such sale; (iv) any "person" including a "group", exclusive of the Board of Directors of the Association or any committee thereof, is or becomes the "beneficial owner", directly 2 or indirectly, of proxies of the Association representing twenty-five percent (25%) or more of the combined voting power of the Association's members; or (v) the Association is merged or consolidated with another corporation and, as a result of the merger or consolidation, less than seventy percent (70%) of the outstanding proxies relating to the surviving or resulting corporation are given, in the aggregate, by the former members of the Association. (c) If the Association shall be in the "stock" form of organization, a "Change in Control" shall be deemed to have occurred if: (i) as a result of, or in connection with, any initial public offering, tender offer or exchange offer, merger or other business combination, sale of assets or contested election, any combination of the foregoing transactions, or any similar transaction, the persons who were Directors of the Association before such transaction cease to constitute a majority of the Board of Directors of the Association or any successor to the Association; (ii) the Association transfers substantially all of its assets to another corporation which is not an Affiliate of the Association; (iii) the Association sells substantially all of the assets of an Affiliate which accounted for 50% or more of the controlled group's assets immediately prior to such sale; (iv) any "person" including a "group" is or becomes the "beneficial owner", directly or indirectly, of securities of the Association representing twenty-five percent (25%) or more of the combined voting power of the Association's outstanding securities (with the terms in quotation marks having the meaning set forth under the federal securities laws); or (v) the Association is merged or consolidated with another corporation and, as a result of the merger or consolidation, less than seventy percent (70%) of the outstanding voting securities of the surviving or resulting corporation is owned in the aggregate by the former stockholders of the Association. Notwithstanding the foregoing, a "Change in Control" shall not be deemed to occur solely by reason of a transaction in which the Association converts to the stock form of organization, or creates an independent holding company in connection therewith. (d) "Code" shall mean the Internal Revenue Code of 1986, as amended from time to time, and as interpreted through applicable rulings and regulations in effect from time to time. -2- 3 (e) "Code Section 280G Maximum" shall mean product of 2.99 and his "base amount" as defined in Code Section 280G(b)(3). (f) "Good Reason" shall mean any of the following events, which has not been consented to in advance by the Employee in writing: (i) the requirement that the Employee move his personal residence, or perform his principal executive functions, more than thirty (30) miles from his primary office as of the date of the Change in Control; (ii) a material reduction in the Employee's base compensation as in effect on the date of the Change in Control or as the same may be increased from time to time; (iii) the failure by the Association to continue to provide the Employee with compensation and benefits provided for on the date of the Change in Control, as the same may be increased from time to time, or with benefits substantially similar to those provided to him under any of the employee benefit plans in which the Employee now or hereafter becomes a participant, or the taking of any action by the Association which would directly or indirectly reduce any of such benefits or deprive the Employee of any material fringe benefit enjoyed by him at the time of the Change in Control; (iv) the assignment to the Employee of duties and responsibilities materially different from those normally associated with his position; (v) a failure to elect or reelect the Employee to the Board of Directors of the Association, if the Employee is serving on such Board on the date of the Change in Control; (vi) a material diminution or reduction in the Employee's responsibilities or authority (including reporting responsibilities) in connection with his employment with the Association; or (vii) a material reduction in the secretarial or other administrative support of the Employee. (g) "Just Cause" shall mean, in the good faith determination of the Association's Board of Directors, the Employee's personal dishonesty, incompetence, willful misconduct, breach of fiduciary duty involving personal profit, intentional failure to perform stated duties, willful violation of any law, rule or regulation (other than traffic violations or similar offenses) or final cease-and-desist order, or material breach of any provision of this Agreement. The Employee shall have no right to receive compensation or other benefits for any period after termination for Just Cause. No act, or failure to act, on the Employee's part shall be considered "willful" unless he has acted, or failed to act, with an absence of good faith and without a reasonable belief that his action or failure to act was in the best interest of the Association. (h) "Protected Period" shall mean the period that begins on the date one year before the Change in Control and ends on the closing date of the Change in Control. (i) "Trust" shall mean a grantor trust designed in accordance with Revenue Procedure 92-64 and having a trustee independent of the Association. 2. Trigger Events The Employee shall be entitled to collect the severance benefits set forth in Section 3 of this Agreement in the event that (i) a Change in Control occurs, or (ii) the Association or its successor(s) in interest terminate the Employee's employment for any reason other than Just Cause during the Protected Period. -3- 4 3. Amount of Severance Benefit If the Employee becomes entitled to collect severance benefits pursuant to Section 2 hereof, the Association shall pay the Employee a severance benefit equal to the difference between the Code Section 280G Maximum and the sum of any other "parachute payments" as defined under Code Section 280G(b)(2) that the Employee receives on account of the Change in Control. Said sum shall be paid in one lump sum within ten (10) days of the later of the date of the Change in Control and the Employee's last day of employment with the Association, provided that the Employee may elect at any time or before becoming entitled to collect benefits hereunder, to have such benefits be paid in substantially equal installments over a period of up to 10 years. In the event that the Employee and the Association agree that the Employee has collected an amount exceeding the Code Section 280G Maximum, the parties may jointly agree in writing that such excess shall be treated as a loan ab initio which the Employee shall repay to the Association, on terms and conditions mutually agreeable to the parties, together with interest at the applicable federal rate provided for in Section 7872(f)(2)(B) of the Code. 4. Funding of Grantor Trust upon Change in Control Not later than ten business days after a Change in Control, the Association shall (i) deposit in a Trust an amount equal to the Code Section 280G Maximum, unless the Employee has previously provided a written release of any claims under this Agreement, and (ii) provide the trustee of the Trust with a written direction to hold said amount and any investment return thereon in a segregated account for the benefit of the Employee, and to follow the procedures set forth in the next paragraph as to the payment of such amounts from the Trust. Upon the later of the Trust's final payment of all amounts due under the following paragraph or the date 12 months after the Change in Control, the trustee of the Trust shall pay to the Association the entire balance remaining in the segregated account maintained for the benefit of the Employee. The Employee shall thereafter have no further interest in the Trust. During the 12-consecutive month period after a Change in Control, the Employee may provide the trustee of the Trust with a written notice requesting that the trustee pay to the Employee an amount designated in the notice as being payable pursuant to this Agreement. Within three business days after receiving said notice, the trustee of the Trust shall send a copy of the notice to the Association via overnight and registered mail return receipt requested. On the tenth (10th) business day after mailing said notice to the Association, the trustee of the Trust shall pay the Employee the amount designated therein in immediately available funds, unless prior thereto the Association provides the trustee with a written notice directing the trustee to withhold such payment. In the latter event, the trustee shall submit the dispute to non-appealable binding arbitration for a determination of the amount payable to the Employee pursuant to this Agreement, and the costs of such arbitration shall be paid by the Association. The trustee shall choose the arbitrator to settle the dispute, and such arbitrator shall be bound by the rules of the American Arbitration Association in making his determination. The parties and the trustee shall be bound by the results of the arbitration and, within 3 days of the determination by the -4- 5 arbitrator, the trustee shall pay from the Trust the amounts required to be paid to the Employee and/or the Association, and in no event shall the trustee be liable to either party for making the payments as determined by the arbitrator. 5. Term of the Agreement. This Agreement shall remain in effect for the period commencing on the Effective Date and ending on the earlier of (i) the date 36 months after the Effective Date, and (ii) the date on which the Employee terminates employment with the Association; provided that the Employee's rights hereunder shall continue following the termination of this employment with the Association under any of the circumstances described in Section 2 hereof. Additionally, on each annual anniversary date from the Effective Date, the term of this Agreement shall be extended for an additional one-year period beyond the then effective expiration date provided the Board of Directors of the Association determines in a duly adopted resolutions that the performance of the Employee has met the requirements and standards of the respective Boards, and that this Agreement shall be extended. 6. Termination or Suspension Under Federal Law. (a) Any payments made to the Employee pursuant to this Agreement, or otherwise, are subject to and conditioned upon their compliance with 12 U.S.C. Section 1828(k) and any regulations promulgated thereunder. (b) If the Employee is removed and/or permanently prohibited from participating in the conduct of the Association's affairs by an order issued under Sections 8(e)(4) or 8(g)(1) of the Federal Deposit Insurance Act ("FDIA") (12 U.S.C. 1818(e)(4) or (g)(1)), all obligations of the Association under this Agreement shall terminate, as of the effective date of the order, but the vested rights of the parties shall not be affected. (c) If the Association is in default (as defined in Section 3(x)(1) of FDIA), all obligations under this Agreement shall terminate as of the date of default; however, this Paragraph shall not affect the vested rights of the parties. (d) All obligations under this Agreement shall terminate, except to the extent that continuation of this Agreement is necessary for the continued operation of the Association: (i) by the Director of the Office of Thrift Supervision ("Director of OTS"), or his or her designee, at the time that the Federal Deposit Insurance Corporation ("FDIC") or the Resolution Trust Corporation enters into an agreement to provide assistance to or on behalf of the Association under the authority contained in Section 13(c) of FDIA; or (ii) by the Director of the OTS, or his or her designee, at the time that the Director of the OTS, or his or her designee approves a supervisory merger to resolve problems related to operation of the Association or when the Association is determined by the Director of the OTS to be in an unsafe or unsound condition. Such action shall not affect any vested rights of the parties. -5- 6 (e) If a notice served under Section 8(e)(3) or (g)(1) of the FDIA (12 U.S.C. 1818(e)(3) and (g)(1)) suspends and/or temporarily prohibits the Employee from participating in the conduct of the Association's affairs, the Association's obligations under this Agreement shall be suspended as of the date of such service, unless stayed by appropriate proceedings. If the charges in the notice are dismissed, the Association shall (i) pay the Employee all or part of the compensation withheld while its contract obligations were suspended, and (ii) reinstate (in whole or in part) any of its obligations which were suspended. 7. Expense Reimbursement. In the event that any dispute arises between the Employee and the Association as to the terms or interpretation of this Agreement, whether instituted by formal legal proceedings or otherwise, including any action that the Employee takes to enforce the terms of this Agreement or to defend against any action taken by the Association, the Employee shall be reimbursed for all costs and expenses, including reasonable attorneys' fees, arising from such dispute, proceedings or actions, provided that the Employee shall obtain a final judgement in favor of the Employee in a court of competent jurisdiction or in binding arbitration under the rules of the American Arbitration Association. Such reimbursement shall be paid within ten (10) days of Employee's furnishing to the Association written evidence, which may be in the form, among other things, of a cancelled check or receipt, of any costs or expenses incurred by the Employee. 8. Successors and Assigns. (a) This Agreement shall inure to the benefit of and be binding upon any corporate or other successor of the Association which shall acquire, directly or indirectly, by merger, consolidation, purchase or otherwise, all or substantially all of the assets or stock of the Association. (b) Since the Association is contracting for the unique and personal skills of the Employee, the Employee shall be precluded from assigning or delegating his rights or duties hereunder without first obtaining the written consent of the Association. 9. Amendments. No amendments or additions to this Agreement shall be binding unless made in writing and signed by all of the parties, except as herein otherwise specifically provided. 10. Applicable Law. Except to the extent preempted by Federal law, the laws of the State of Arkansas shall govern this Agreement in all respects, whether as to its validity, construction, capacity, performance or otherwise. 11. Severability. The provisions of this Agreement shall be deemed severable and the invalidity or unenforceability of any provision shall not affect the validity or enforceability of the other provisions hereof. -6- 7 12. Entire Agreement. This Agreement, together with any understanding or modifications thereof as agreed to in writing by the parties, shall constitute the entire agreement between the parties hereto. IN WITNESS WHEREOF, the parties have executed this Agreement on the day and year first hereinabove written. ATTEST: FIRST FEDERAL SAVINGS AND LOAN ASSOCIATION /s/ Betty C. Harris By: /s/ Vida H. Lampkin - ------------------------- ----------------------------------- Secretary Its Chairman of the Board WITNESS: /s/ Paula J. Bergstrom /s/ William Lyon - ------------------------- --------------------------------------- William Lyon -7- EX-23.2 13 CONSENT OF GAUNT & CO. 1 EXHIBIT 23.2 [GAUNT & COMPANY, LTD. LETTERHEAD] CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANT As the independent certified public accountant of Heartland Community Bank and its subsidiaries, we hereby consent to the use of our report and to all references to our Firm included in or made part of this Registration Statement. December 31, 1996 Gaunt & Company, Ltd. EX-23.3 14 CONSENT OF FERGUSON & CO., LLP 1 EXHIBIT 23.3 [FERGUSON & CO., LLP LETTERHEAD] December 31, 1996 Board of Directors Heartland Community Bank 237 Jackson Street Southwest Camden, Arkansas 71701 Dear Directors: We hereby consent to the use of our firm's name in the Form AC Application for Conversion of Heartland Community Bank, Camden, Arkansas and any amendments thereto, and in the Form SB-2 Registration Statement of HCB Bancshares, Inc., and any amendments thereto. We also hereby consent to the inclusion of, summary of, and references to our Appraisal Report and our opinion concerning subscription rights in such filings including the Prospectus of HCB Bancshares, Inc. Sincerely, /s/ Charles M. Hebert -------------------------------------------- Charles M. Hebert Principal EX-27 15 FINANCIAL DATA SCHEDULE
9 3-MOS JUN-30-1996 SEP-30-1996 803,693 2,900,234 0 0 28,889,076 42,636,028 43,210,150 89,334,387 (1,441,805) 172,971,862 147,172,744 10,000,000 1,921,117 400,000 0 0 0 13,478,001 172,971,862 1,861,425 1,057,293 196,583 3,115,301 1,908,114 2,066,022 1,049,279 560,738 0 1,915,196 (1,366,683) (843,418) 0 0 (843,418) 0 0 7.25 160,234 838,000 293,756 2,139,000 881,067 0 0 1,441,805 1,441,805 0 0
EX-99.2 16 FORM OF PROXY STATEMENT FOR SPECIAL MTG. OF HCB 1 HEARTLAND COMMUNITY BANK 237 JACKSON STREET CAMDEN, ARKANSAS 71701-0878 (501) 836-6841 NOTICE OF SPECIAL MEETING OF MEMBERS Notice is hereby given that a Special Meeting of Members (the "Special Meeting") of Heartland Community Bank (the "Bank") will be held at ______________________________, ________________________________, Camden, Arkansas, on ___________, 1997 at __:__ _.m. Business to be taken up at the Special Meeting shall be: (1) To consider and vote upon a Plan of Conversion providing for the conversion of the Bank from a federally chartered mutual savings bank to a federally chartered stock savings bank as a wholly owned subsidiary of HCB Bancshares, Inc., a newly organized Oklahoma corporation formed by the Bank for the purpose of becoming the holding company for the Bank and the related transactions provided for in such plan, including the amendment of the Bank's existing Federal Mutual Charter and Bylaws to read in the form of a Federal Stock Charter and Bylaws for the Bank, pursuant to the laws of the United States and the Rules and Regulations administered by the Office of Thrift Supervision. (2) To consider and vote upon any other matters that may lawfully come before the Special Meeting. Note: As of the date of mailing of this Notice of Special Meeting of Members, the Board of Directors is not aware of any other matters that may come before the Special Meeting. The members entitled to vote at the Special Meeting shall be those members of the Bank at the close of business on __________ ___, 1997, who continue as members until the Special Meeting and, should the Special Meeting be, from time to time, adjourned to a later time, until the final adjournment thereof. BY ORDER OF THE BOARD OF DIRECTORS Paula J. Bergstrom Secretary ______________, 1997 Camden, Arkansas ______________________ YOUR BOARD OF DIRECTORS URGES YOU TO CONSIDER CAREFULLY THIS PROXY MATERIAL AND, WHETHER OR NOT YOU PLAN TO BE PRESENT IN PERSON AT THE SPECIAL MEETING, TO FILL IN, DATE, SIGN AND RETURN THE ENCLOSED PROXY CARD(S) AS SOON AS POSSIBLE TO ASSURE THAT YOUR VOTES WILL BE COUNTED. THIS WILL NOT PREVENT YOU FROM VOTING IN PERSON IF YOU ATTEND THE SPECIAL MEETING. 2 HEARTLAND COMMUNITY BANK 237 JACKSON STREET CAMDEN, ARKANSAS 71701-0878 (501) 836-6841 PROXY STATEMENT YOUR PROXY, IN THE FORM ENCLOSED, IS SOLICITED BY THE BOARD OF DIRECTORS OF HEARTLAND COMMUNITY BANK FOR USE AT A SPECIAL MEETING OF ITS MEMBERS TO BE HELD ON ____________, 1997 AND ANY ADJOURNMENT OF THAT MEETING, FOR THE PURPOSES SET FORTH IN THE FOREGOING NOTICE OF SPECIAL MEETING. YOUR BOARD OF DIRECTORS URGES YOU TO VOTE FOR THE PLAN OF CONVERSION. PURPOSE OF MEETING -- SUMMARY A Special Meeting of Members (the "Special Meeting") of Heartland Community Bank (the "Bank") will be held at ___________________________________________________, Camden, Arkansas on _________________, _____________, 1997, at __:__ _.m., Central Time, for the purpose of considering and voting upon a Plan of Conversion (the "Plan"), which was unanimously adopted by the Bank's Board of Directors and which, if approved by a majority of the total votes eligible to be cast by the members, will permit the Bank to convert from a federal mutual savings bank to a federal stock savings bank (the "Converted Bank") as a wholly owned subsidiary of HCB Bancshares, Inc. (the "Company"), an Oklahoma corporation formed by the Bank for the purpose of becoming the holding company for the Bank. The conversion of the Bank to the Converted Bank and the acquisition of control of the Converted Bank by the Company is referred to herein as the "Conversion". The Conversion is contingent upon the members' approval of the Plan at the Special Meeting or any adjournment thereof. The Plan provides in part that after receiving final authorization from the Office of Thrift Supervision ("OTS"), the Company will offer for sale shares of its common stock, par value $.01 per share (the "Common Stock"), through the issuance of nontransferable subscription rights, first to depositors of the Bank as of December 31, 1993 with $50.00 or more on deposit in the Bank on that date ("Eligible Account Holders"), second to the Company's Employee Stock Ownership Plan (the "ESOP") (a tax-qualified employee stock benefit plan of the Company, as defined in the Plan), third to depositors of the Bank as of ___________, 199__, with $50.00 or more on deposit in the Bank on December 31, 1996, the last day of the calendar quarter preceding approval of the Plan by the OTS who are not Eligible Account Holders ("Supplemental Eligible Account Holders"), fourth to other members, i.e., depositors and borrower members of the Bank, other than Eligible Account Holders and Supplemental Eligible Account Holders, on _______________, 1997 ("Other Members"), and fifth to depositors and borrowers of the Bank's subsidiary capital stock savings bank which operates the Bank's full service branch offices in Little Rock and Monticello and loan production office in Bryant, Arkansas, as of _______________, 199__ ("Other Customers") (the "Subscription Offering"). Subscription rights received in any of the foregoing categories will be subordinated to the subscription rights of those in a prior category, with the exception that any shares of Common Stock sold in excess of the high end of the estimated value range as established in an independent appraisal, as discussed below, may be first sold to the ESOP. During or after the Subscription Offering, shares of the Common Stock not sold in the Subscription Offering may be offered to the general public, in a community offering (the "Community Offering"). In the Community Offering, preference may be given to natural persons and trusts of natural persons who are permanent residents of Calhoun, Cleveland, Dallas, Drew, Grant, Ouachita and Pulaski Counties in Arkansas (the "Local Community"). Any shares of Common Stock not purchased in the Subscription and Community Offerings may be sold to a syndicate of underwriters to be managed by Trident Securities, Inc. ("Trident Securities"). The aggregate price of the Common Stock to be issued by the Company under the Plan is currently estimated to be between $17,000,000 and $23,000,000, subject to adjustment, as determined by an independent appraisal of the Bank's estimated pro forma market value as converted and as a wholly owned subsidiary of the Company. See "The Conversion -- Stock Pricing and Number of Shares to be Issued" in the accompanying Prospectus. 3 Adoption of the proposed Charter and Bylaws of the Converted Bank is an integral part of the Plan. Copies of the Plan and the proposed Charter and Bylaws for the Converted Bank are attached to this Proxy Statement as exhibits. These documents provide, among other things, for the termination of voting rights of members and their rights to receive any surplus remaining in the event of liquidation of the Bank. These rights, except for the rights of Eligible Account Holders and Supplemental Eligible Account Holders in the liquidation account established for their benefit upon completion of the Conversion, will vest exclusively in the Company as the sole holder of the Converted Bank's outstanding capital stock. For further information, see "The Conversion -- Effect of Conversion to Stock Form on Depositors and Borrowers of the Bank." RECOMMENDATION OF THE BOARD OF DIRECTORS THE BOARD OF DIRECTORS OF THE BANK UNANIMOUSLY RECOMMENDS THAT YOU VOTE "FOR" APPROVAL OF THE PLAN. VOTING IN FAVOR OF THE PLAN WILL NOT OBLIGATE ANY PERSON TO PURCHASE STOCK. The Conversion will be accomplished through adoption of a new Charter and Bylaws to authorize the issuance of capital stock by the Bank to the Company. Under the Plan, 2,000,000 shares of the Common Stock, subject to adjustment, are being offered for sale by the Company. Upon completion of the Conversion, the Converted Bank will issue all of its newly issued shares of capital stock (100,000 shares) to the Company in exchange for at least 50% of the net proceeds. None of the Bank's assets will be distributed in order to effect the Conversion other than to pay expenses incident thereto. The net proceeds from the sale of Common Stock in the Conversion will substantially increase the Bank's capital, which will increase the amount of funds available for lending and investment, and support current operations and the continued growth of the Bank's business. The holding company structure will provide greater flexibility than the Bank alone would have for diversification of business activities and geographic operations. Management believes that this increased capital and operating flexibility will enable the Bank to compete more effectively with other savings institutions and other types of financial service organizations. Management also believes that the Conversion will enhance the future access of the Company and the Converted Bank to the capital markets. HCB BANCSHARES, INC. HCB Bancshares, Inc. was incorporated under the laws of the State of Oklahoma in December 1996 at the direction of the Board of Directors of the Bank for the purpose of serving as a savings institution holding company of the Bank and its subsidiary savings bank upon the acquisition of all of the capital stock to be issued by the Bank upon the Conversion. The Company expects to receive approval from the OTS to acquire control of the Bank and its subsidiary savings bank subject to satisfaction of certain conditions. Prior to the Conversion, the Company has not engaged and will not engage in any material operations. Upon consummation of the Conversion, the Company will have no significant assets other than the outstanding capital stock of the Bank, a portion of the net proceeds of the Conversion and a note receivable from the ESOP. The Company's principal business will be the business of the Bank. The holding company structure will permit the Company to expand the financial services currently offered through the Bank. As a holding company, the Company will have greater flexibility than the Bank to diversify its business activities through existing or newly formed subsidiaries or through acquisition or merger with other financial institutions. The Company will be classified as a multiple savings institution holding company and will be subject to regulation by the OTS. As long as the Company remains a multiple savings institution holding company, the Company will be subject to regulatory restrictions on the activities in which it and its non-savings institution subsidiaries may engage. 2 4 The Company's executive offices are located at 237 Jackson Street, Camden, Arkansas 71701-0878, and its telephone number is (501) 836-6841. HEARTLAND COMMUNITY BANK Heartland Community Bank was organized as a federally chartered mutual savings and loan association named "First Federal Savings and Loan Association of Camden" in 1933, and in 1934 it became a member of the FHLB system and obtained federal deposit insurance. In May 1996, First Federal acquired the former Heritage Bank, FSB, which retained its separate federal savings bank charter and deposit insurance as a wholly owned subsidiary of First Federal, but whose business operations were fully integrated with those of First Federal. In September 1996, First Federal and Heritage changed their names to Heartland Community Bank. The Bank itself currently operates through four full service banking offices located in Camden (2), Fordyce and Sheridan, Arkansas, and its subsidiary savings bank operates through two full service banking offices located in Little Rock and Monticello, Arkansas and a loan production office in Bryant, Arkansas. At September 30, 1996, the Bank had total assets of $173.0 million, deposits of $147.2 million and equity of $13.5 million, or 7.79% of total assets. Historically, the principal business strategy of the Bank, like most other savings institutions in Arkansas and elsewhere, has been to accept deposits from residents of the communities served by the Bank's branch offices and to invest those funds in single-family mortgage loans to those and other local residents. In this manner, the Bank and countless other independent community-oriented savings institutions operated safely and soundly for generations. In recent years, however, as the banking business nationwide and in the Bank's primary market area in particular has become more competitive, smaller savings institutions like the Bank have come under increasing market pressure either to grow and increase their profitability or to be acquired by a larger institution. In September 1995, the Bank's Board of Directors carefully considered the Bank's historical results of operations, current financial condition and future business prospects and, in consultation with the Bank's executive officers, determined to strengthen the Bank's competitiveness and profitability by concentrating its business strategy as an independent community bank on expanding the Bank's products and services and growing its customer and asset base. Since then, the Bank has actively sought to implement this strategy by adding two new executive officers -- Cameron McKeel as Executive Vice President and William Lyon as Senior Vice President and Chief Lending Officer -- and more than doubling the Bank's total employees, by acquiring the former Heritage Bank, FSB, which added to the Bank's branch network additional branches in the growing and potentially lucrative Little Rock and Monticello banking markets, by upgrading selected branch office facilities, by expanding the types of loans and deposit accounts offered by the Bank, by updating the Bank's name and corporate identity from First Federal Savings and Loan Association of Camden to Heartland Community Bank and, now, by adopting the Plan. Throughout this period, the Bank's executive officers have worked with the Bank's directors and with the Bank's entire staff to formulate and effectuate the Bank's current strategic plan. On a going forward basis, the Bank's current business strategy, as developed and adopted by all of the Bank's directors, officers and employees, incorporates the following key elements: (i) remaining an independent community-oriented financial institution by continuing to provide the quality service that only a locally based institution and its dedicated staff can deliver, including the possible retention of additional executive officers in the future as the Bank's growth and other needs may warrant; (ii) strengthening the Bank's core deposit base and decreasing interest costs and increasing fee income by expanding the Bank's deposit facilities and products, including the addition and expansion of branch offices, the planned installation of ATMs, the introduction of debit cards and a planned emphasis on attracting consumer demand deposits; (iii) increasing loan yields and fee income while maintaining asset quality by emphasizing the origination of higher yielding and shorter term loans, especially commercial and multi-family real estate loans and consumer and commercial business loans, for the Bank's portfolio while increasingly originating lower yielding longer term single-family residential loans principally for resale to investors; (iv) converting from mutual to stock form and using the capital raised in the Conversion to support the bank's future growth; and, (v) to complement the Bank's internally generated growth, potentially acquiring one or 3 5 more banking institutions or other financial companies if attractive opportunities arise. While it is expected that the Bank may experience especially high deposit and loan growth in the relatively high income and growth segments of the Bank's primary market area, particularly in the Sheridan, Monticello, Bryant and, possibly, Little Rock areas, management expects to find significant deposit growth and lending opportunities throughout central Arkansas. As federally chartered savings institutions, each of the Bank and its subsidiary savings bank is subject to extensive regulation by the OTS. The lending activities and other investments of each institution must comply with various federal regulatory requirements, and the OTS periodically examines each institution for compliance with various regulatory requirements. The Federal Deposit Insurance Corporation ("FDIC") also has the authority to conduct special examinations. Each institution must file reports with OTS describing its activities and financial condition and is also subject to certain reserve requirements promulgated by the Federal Reserve Board. INFORMATION RELATING TO VOTING AT THE SPECIAL MEETING The Board of Directors of the Bank has fixed the close of business on ________ ___, 1997 as the record date (the "Voting Record Date") for the determination of members entitled to notice of and to vote at the Special Meeting. All holders of the Bank's deposit or other authorized accounts and certain borrowers are members of the Bank under its current mutual charter. All members of record as of the close of business on the Voting Record Date who continue as such until the date of the Special Meeting will be entitled to vote at the Special Meeting or any adjournment thereof. Each depositor member will be entitled at the Special Meeting to cast one vote for each $100, or fraction thereof, of the aggregate withdrawal value of all of his savings accounts in the Bank as of the Voting Record Date. Each borrower member will be entitled to one vote in addition to the number of votes to which he is entitled as a depositor. No member may cast more than 1,000 votes. Approval of the Plan to be presented at the Special Meeting will require the affirmative vote of at least a majority of the total outstanding votes of the Bank's members eligible to be cast at the Special Meeting. As of the Voting Record Date for the Special Meeting, there were approximately _____ votes eligible to be cast, of which _____ votes constitute a majority. Members may vote at the Special Meeting or any adjournment thereof in person or by proxy. All properly executed proxies received by the Bank will be voted in accordance with the instructions indicated thereon by the members giving such proxies. If no contrary instructions are given, such proxies will be voted in favor of the Plan described herein. If any other matters are properly presented before the Special Meeting and may properly be voted upon, the proxies solicited hereby will be voted on such matters by the proxy holders named therein as directed by the Board of Directors of the Bank. Valid, previously executed general proxies, which typically are obtained from members when they open their accounts at the Bank, will not be used to vote for approval of the Plan, even if the respective members do not execute another proxy or attend the Special Meeting and vote in person. Any member giving a proxy will have the right to revoke his proxy at any time before it is voted by delivering written notice or a duly executed proxy bearing a later date to the Secretary of the Bank, provided that such written notice is received by the Secretary prior to the Special Meeting or any adjournment thereof, or by attending the Special Meeting and voting in person. FAILURE TO RETURN AN EXECUTED PROXY FOR THE SPECIAL MEETING OR TO ATTEND THE SPECIAL MEETING AND VOTE IN PERSON WOULD HAVE THE SAME EFFECT AS VOTING AGAINST THE CONVERSION. 4 6 Proxies may be solicited by officers, directors or other employees of the Bank, in person, by telephone or through other forms of communication. Such persons will be reimbursed by the Bank only for their expenses incurred in connection with such solicitation. The proxies solicited hereby will be used only at the Special Meeting and at any adjournment thereof; they will not be used at any other meeting. DESCRIPTION OF PLAN THE OTS HAS APPROVED THE BANK'S PLAN, SUBJECT TO THE APPROVAL OF THE PLAN BY THE MEMBERS OF THE BANK ENTITLED TO VOTE ON THE MATTER AND SUBJECT TO THE SATISFACTION OF CERTAIN OTHER CONDITIONS IMPOSED BY THE OTS IN ITS APPROVAL. APPROVAL BY THE OTS, HOWEVER, DOES NOT CONSTITUTE A RECOMMENDATION OR ENDORSEMENT OF THE PLAN. EFFECT OF CONVERSION TO STOCK FORM ON DEPOSITORS AND BORROWERS OF THE BANK General. Each depositor in a mutual savings institution such as the Bank has both a deposit account and a pro rata ownership interest in the equity of that institution based upon the balance in his or her deposit account. However, this ownership interest is tied to the depositor's account and has no tangible market value separate from such deposit account. Any other depositor who opens a deposit account obtains a pro rata interest in the net worth of the institution without any additional payment beyond the amount of the deposit. A depositor who reduces or closes his or her account receives a portion or all of the balance in the account but nothing for his or her ownership interest, which is lost to the extent that the balance in the account is reduced. Consequently, depositors normally do not have a way to realize the value of their ownership, which has realizable value only in the unlikely event that the mutual institution is liquidated. In such event, the depositors of record at that time, as owners, would share pro rata in any residual equity after other claims are paid. Upon consummation of the Conversion, permanent nonwithdrawable capital stock will be created to represent the ownership of the institution. The stock is separate and apart from deposit accounts and is not and cannot be insured by the FDIC. Transferable certificates will be issued to evidence ownership of the stock, which will enable the stock to be sold or traded, if a purchaser is available, with no effect on any account held in the Bank. Under the Plan, all of the capital stock of the Bank will be acquired by the Company in exchange for a portion of the net proceeds from the sale of the Common Stock in the Conversion. The Common Stock will represent an ownership interest in the Company and will be issued upon consummation of the Conversion to persons who elect to participate in the Conversion by purchasing the shares being offered. Continuity. During the Conversion process, the normal business of the Bank of accepting deposits and making loans will continue without interruption. The Bank will continue to be subject to regulation by the OTS and the FDIC, and its FDIC insurance will continue without interruption. After the Conversion, the Bank will continue to provide services for depositors and borrowers under current policies and by its present management and staff. The Board of Directors serving the Bank at the time of the Conversion will serve as the Board of Directors of the Bank after the Conversion. The Board of Directors of the Company consists of the individuals currently serving on the Board of Directors of the Bank. All officers of the Bank at the time of the Conversion will retain their positions with the Bank after the Conversion. Voting Rights. Upon the completion of the Conversion, depositor and borrower members as such will have no voting rights in the Bank or the Company and, therefore, will not be able to elect directors of the Bank or the Company or to control their affairs. Currently these rights are accorded to depositor and borrower members of the 5 7 Bank. Following the Conversion, voting rights will be vested exclusively in the stockholders of the Company which, in turn, will own all of the stock of the Bank. Each holder of Common Stock shall be entitled to vote on any matter to be considered by the stockholders of the Company, subject to the provisions of the Company's Certificate of Incorporation. Deposit Accounts and Loans. THE BANK'S DEPOSIT ACCOUNTS, THE BALANCES OF INDIVIDUAL ACCOUNTS AND EXISTING FEDERAL DEPOSIT INSURANCE COVERAGE WILL NOT BE AFFECTED BY THE CONVERSION. Furthermore, the Conversion will not affect the loan accounts, the balances of these accounts and the obligations of the borrowers under their individual contractual arrangements with the Bank. Tax Effects. The Bank has received an opinion from its special counsel, Housley Kantarian & Bronstein, P.C., Washington, D.C., as to federal income tax consequences of the Conversion to the Bank, and as to generally applicable federal income tax consequences of the Conversion to the Bank's account holders and to persons who purchase Common Stock in the Conversion. The opinion provides that the Conversion will constitute one or more reorganizations for federal income tax purposes under Section 368(a)(1)(F) of the Internal Revenue Code of 1986, as amended ("Internal Revenue Code"). Among other things, the opinion also provides that: (i) no gain or loss will be recognized by the Bank in its mutual or stock form by reason of the Conversion; (ii) no gain or loss will be recognized by its account holders upon the issuance to them of accounts in the Bank in stock form immediately after the Conversion, in the same dollar amounts and on the same terms and conditions as their accounts at the Bank immediately prior to the Conversion; (iii) the tax basis of each account holder's interest in the liquidation account will be equal to the value, if any, of that interest; (iv) the tax basis of the Common Stock purchased in the Conversion will be equal to the amount paid therefor increased, in the case of Common Stock acquired pursuant to the exercise of subscription rights, by the fair market value, if any, of the subscription rights exercised; (v) the holding period for the Common Stock purchased in the Conversion will commence upon the exercise of such holder's subscription rights and otherwise on the day following the date of such purchase; and (vi) gain or loss will be recognized to account holders upon the receipt of liquidation rights or the receipt or exercise of subscription rights in the Conversion, to the extent such liquidation rights and subscription rights are deemed to have value, as discussed below. The opinion of Housley Kantarian & Bronstein, P.C. is based in part upon, and subject to the continuing validity in all material respects through the date of the Conversion of, various representations of the Bank and upon certain assumptions and qualifications, including that the Conversion is consummated in the manner and according to the terms provided in the Plan. Such opinion is also based upon the Internal Revenue Code, regulations now in effect or proposed thereunder, current administrative rulings and practice and judicial authority, all of which are subject to change and such change may be made with retroactive effect. Unlike private letter rulings received from the Internal Revenue Service ("IRS"), an opinion is not binding upon the IRS and there can be no assurance that the IRS will not take a position contrary to the positions reflected in such opinion, or that such opinion will be upheld by the courts if challenged by the IRS. Housley Kantarian & Bronstein, P.C. has advised the Bank that an interest in a liquidation account has been treated by the IRS, in a series of private letter rulings which do not constitute formal precedent, as having nominal, if any, fair market value and therefore it is likely that the interests in the liquidation account established by the Bank as part of the Conversion will similarly be treated as having nominal, if any, fair market value. Accordingly, it is likely that such depositors of the Bank who receive an interest in such liquidation account established by the Bank pursuant to the Conversion will not recognize any gain or loss upon such receipt. Housley Kantarian & Bronstein, P.C. has further advised the Bank that the federal income tax treatment of the receipt of subscription rights pursuant to the Conversion is uncertain, and recent private letter rulings issued by the IRS have been in conflict. For instance, the IRS adopted the position in one private ruling that subscription rights will be deemed to have been received to the extent of the minimum pro rata distribution of such rights, together with the rights actually exercised in excess of such pro rata distribution, and with gain recognized to the 6 8 extent of the combined fair market value of the pro rata distribution of subscription rights plus the subscription rights actually exercised. Persons who do not exercise their subscription rights under this analysis would recognize gain upon receipt of rights equal to the fair market value of such rights, regardless of exercise, and would recognize a corresponding loss upon the expiration of unexercised rights that may be available to offset the previously recognized gain. Under another IRS private ruling, subscription rights were deemed to have been received only to the extent actually exercised. This private ruling required that gain be recognized only if the holder of such rights exercised such rights, and that no loss be recognized if such rights were allowed to expire unexercised. There is no authority that clearly resolves this conflict among these private rulings, which may not be relied upon for precedential effect. However, based upon express provisions of the Internal Revenue Code and in the absence of contrary authoritative guidance, Housley Kantarian & Bronstein, P.C. has provided in its opinion that gain will be recognized upon the receipt rather than the exercise of subscription rights. Further, also based upon a published IRS ruling and consistent with recognition of gain upon receipt rather than exercise of the subscription rights, Housley Kantarian & Bronstein, P.C. has provided in its opinion that the subsequent exercise of the subscription rights will not give rise to gain or loss. Regardless of the position eventually adopted by the IRS, the tax consequences of the receipt of the subscription rights will depend, in part, upon their valuation for federal income tax purposes. If the subscription rights are deemed to have a fair market value, the receipt of such rights will be taxable to Eligible Account Holders, Supplemental Eligible Account Holders, Other Members and eligible depositors and borrowers of Heartland Community Bank, FSB who exercise their subscription rights, even though such persons would have received no cash from which to pay taxes on such taxable income. The Bank could also recognize a gain on the distribution of such subscription rights in an amount equal to their aggregate value. In the opinion of Ferguson & Co., LLP ("Ferguson & Co.") whose opinion is not binding upon the IRS, the subscription rights do not have any value, based on the fact that such rights are acquired by the recipients without cost, are non-transferable and of short duration and afford the recipients the right only to purchase shares of the Common Stock at a price equal to its estimated fair market value, which will be the same price as the price paid by purchasers in the Community Offering for unsubscribed shares of Common Stock. Eligible Account Holders, Supplemental Eligible Account Holders, Other Members and eligible depositors and borrowers of Heartland Community Bank, FSB are encouraged to consult with their own tax advisors as to the tax consequences in the event that the subscription rights are deemed to have a fair market value. Because the fair market value, if any, of the subscription rights issued in the Conversion depends primarily upon the existence of certain facts rather than the resolution of legal issues, Housley Kantarian & Bronstein, P.C., has neither adopted the opinion of Ferguson & Co. as its own nor incorporated such opinion of Ferguson & Co. in its opinion issued in connection with the Conversion. The Bank has also received the opinion of Gaunt & Co., LTD, certified public accountants, Little Rock, Arkansas, to the effect that no gain or loss will be recognized as a result of the Conversion for purposes of Oklahoma tax law. THE FEDERAL AND STATE INCOME TAX DISCUSSION SET FORTH ABOVE DOES NOT PURPORT TO CONSIDER ALL ASPECTS OF FEDERAL AND STATE INCOME TAXATION WHICH MAY BE RELEVANT TO EACH ELIGIBLE SUBSCRIBER ENTITLED TO SPECIAL TREATMENT UNDER THE INTERNAL REVENUE CODE, SUCH AS TRUSTS, INDIVIDUAL RETIREMENT ACCOUNTS, OTHER EMPLOYEE BENEFIT PLANS, INSURANCE COMPANIES AND ELIGIBLE SUBSCRIBERS WHO ARE NOT CITIZENS OR RESIDENTS OF THE UNITED STATES. DUE TO THE INDIVIDUAL NATURE OF TAX CONSEQUENCES, EACH ELIGIBLE SUBSCRIBER IS URGED TO CONSULT HIS OR HER OWN TAX AND FINANCIAL ADVISOR AS TO THE EFFECT OF SUCH FEDERAL AND STATE INCOME TAX CONSEQUENCES ON HIS OR HER OWN PARTICULAR FACTS AND CIRCUMSTANCES, INCLUDING THE RECEIPT AND EXERCISE OF SUBSCRIPTION RIGHTS, AND ALSO AS TO ANY OTHER TAX CONSEQUENCES ARISING OUT OF THE CONVERSION. 7 9 Liquidation Account. In the unlikely event of a complete liquidation of the Bank in its present mutual form, each holder of a deposit account in the Bank would receive his pro rata share of any assets of the Bank remaining after payment of claims of all creditors (including the claims of all depositors to the withdrawal value of their accounts). His pro rata share of such remaining assets would be the same proportion of such assets as the value of his deposit account was to the total of the value of all deposit accounts in the Bank at the time of liquidation. After the Conversion, each deposit account holder on a complete liquidation would have a claim of the same general priority as the claims of all other general creditors of the Bank. Therefore, except as described below, his claim would be solely in the amount of the balance in his deposit account plus accrued interest. He would have no interest in the value of the Bank above that amount. The Plan provides for the establishment, upon the completion of the Conversion, of a special "liquidation account" for the benefit of Eligible Account Holders and Supplemental Eligible Account Holders in an amount equal to the regulatory capital of the Bank as of the date of its latest statement of financial condition contained in the final Prospectus to be used in connection with the Conversion. Each Eligible Account Holder and Supplemental Eligible Account Holder would be entitled, on a complete liquidation of the Bank after the Conversion, to an interest in the liquidation account. Each Eligible Account Holder and Supplemental Eligible Account Holder would have an initial interest in such liquidation account determined by multiplying the opening balance in the liquidation account by a fraction of which the numerator is the amount of the qualifying deposit in the related deposit account and the denominator is the total amount of the qualifying deposits of all Eligible Account Holders and Supplemental Eligible Account Holders in the Bank. However, if the amount in the qualifying deposit account on any annual closing date of the Bank is less than the amount in such account on the initial applicable date or any subsequent closing date, then the Eligible Account Holder's or Supplemental Eligible Account Holder's interest in the liquidation account would be reduced from time to time by an amount proportionate to any such reduction. If any such qualified deposit account is closed, the interest in the liquidation account will be reduced to zero. Any assets remaining after the above liquidation rights of Eligible Account Holders and Supplemental Eligible Account Holders were satisfied would be distributed to the entity or persons holding the Bank's capital stock at that time. A merger, consolidation, sale of bulk assets, or similar combination or transaction with an FDIC-insured institution in which the Bank is not the surviving insured institution would not be considered to be a "liquidation" under which distribution of the liquidation account could be made. In such a transaction, the liquidation account would be assumed by the surviving institution. The creation and maintenance of the liquidation account will not restrict the use or application of any of the capital accounts of the Bank, except that the Bank may not declare or pay a cash dividend on, or repurchase any of, its capital stock if the effect of such dividend or repurchase would be to cause its equity to be reduced below the aggregate amount then required for the liquidation account. INTERPRETATION AND AMENDMENT OF THE PLAN To the extent permitted by law, all interpretations of the Plan by the Bank will be final. The Plan provides that, if deemed necessary or desirable by the Board of Directors, the Plan may be substantively amended by the Board of Directors at any time prior to submission of the Plan and proxy materials to the Bank's members. After submission of the Plan and proxy materials to the members, the Plan may be amended by the Board of Directors at any time prior to the Special Meeting and at any time following the Special Meeting with the concurrence of the OTS. In its discretion, the Board of Directors may modify or terminate the Plan upon the order of the regulatory authorities without a resolicitation of proxies or another Special Meeting. 8 10 The Plan further provides that in the event that mandatory new regulations pertaining to conversions are adopted by the OTS or any successor agency prior to completion of the Conversion, the Plan will be amended to conform to such regulations without a resolicitation of proxies or another Special Meeting. In the event that such new conversion regulations contain optional provisions, the Plan may be amended to utilize such optional provisions at the discretion of the Board of Directors without a resolicitation of proxies or another Special Meeting. By adoption of the Plan, the Bank's members will be deemed to have authorized amendment of the Plan under the circumstances described above. CONDITIONS AND TERMINATION Completion of the Conversion requires the approval of the Plan by the affirmative vote of not less than a majority of the total number of votes of the members of the Bank eligible to be cast at the Special Meeting and the sale of all shares of the Common Stock within 24 months following approval of the Plan by the members. If these conditions are not satisfied, the Plan will be terminated, and the Bank will continue its business in the mutual form of organization. The Plan may be terminated by the Board of Directors at any time prior to the Special Meeting and, with the approval of the OTS, by the Board of Directors at any time thereafter. REVIEW BY ADMINISTRATIVE AND JUDICIAL AUTHORITIES Federal law provides (i) that persons aggrieved by a final action of the OTS which approves, with or without conditions, a plan of conversion may obtain review of such final action only by filing a written petition in the United States Court of Appeals for the circuit in which the principal office or residence of such person is located, or in the United States Court of Appeals, for the District of Columbia Circuit, requesting that the final action of the OTS be modified, terminated or set aside, and (ii) that such petition must be filed within 30 days after publication of notice of such final action in the Federal Register, or 30 days after the date of mailing of the notice and proxy statement for the meeting of the converting institution's members at which the conversion is to be voted on, whichever is later. OTHER All statements made in this Proxy Statement are hereby qualified by the contents of the Plan which is attached hereto as Exhibit A and should be consulted for further information. In addition, attention is directed to the section entitled "The Conversion" in the accompanying Prospectus for a more detailed discussion of various aspects of the Plan. Adoption of the Plan by the Bank's members shall be deemed approval of the authority of the Board of Directors to amend or terminate the Plan in accordance with its terms. CHARTER AND BYLAWS The following is a summary of certain provisions of the Charter and Bylaws which will become effective upon the conversion of the Bank into a federally chartered stock savings bank. Complete copies of the Charter and Bylaws of the Converted Bank are attached as Exhibits B and C, respectively, to this Proxy Statement. The Converted Bank will be authorized to issue 20,000,000 shares of common stock with a par value of $0.01 per share. The Converted Bank's common stock will not be insured by the FDIC. All of the Converted Bank's outstanding common stock will be owned by the Company. Accordingly, exclusive voting rights with respect to the affairs of the Bank after the Conversion will be vested in the Board of Directors of the Company. The Converted Bank's Charter will provide that the number of Directors shall be not fewer than five or more than 15, with the exact number to be fixed in the Converted Bank's Bylaws. The proposed Bylaws provide 9 11 that the number of the Converted Bank's directors shall be seven. Directors generally will serve for terms of three years, and the terms of Directors will be staggered so that approximately one-third of the Board is elected each year. In addition to the common stock, the Converted Bank will be authorized to issue 5,000,000 shares of serial preferred stock, par value $0.01 per share. The Board of Directors will be permitted, without further stockholder approval, to authorize the issuance of preferred stock in series and to fix the voting powers, designations, preferences and relative, participating, optional, conversion and other special rights of the shares of each series of the preferred stock and the qualifications, limitations and restrictions thereof. Preferred stock may rank prior to common stock in dividend rights, liquidation preferences, or both, and may have voting rights. Neither the Charter nor the Bylaws of the Converted Bank provide for indemnification of officers and directors. However, the Converted Bank will be required by OTS regulations (as the Bank currently is) to indemnify its Directors, officers and employees against legal and other expenses incurred in defending lawsuits brought against them by reasons of the performance of their official duties. Indemnification may be made to any such person only if final judgment on the merits is in his favor or, in case of (i) settlement, (ii) final judgment against him or (iii) final judgment in his favor, other than on the merits, if a majority of the Directors of the Converted Bank determines that he was acting in good faith within the scope of his employment or authority as he could reasonably have perceived it under the circumstances and for a purpose he could have reasonably believed under the circumstances was in the best interest of the Converted Bank or its stockholders. If a majority of the Directors of the Converted Bank concludes that in connection with an action any person ultimately may become entitled to indemnification, the Directors may authorize payment of reasonable costs and expenses arising from defense or settlement of such action. HOW TO ORDER STOCK The accompanying Prospectus contains information about the business and financial condition of the Bank and additional information about the Conversion and the Subscription Offering and the concurrent Community Offering. Enclosed is a Stock Order Form to be used to subscribe for stock. You are not obligated to subscribe for stock, and voting to approve the Conversion will not obligate you to subscribe for stock. All Subscription Rights are nontransferable and will expire if not exercised by returning the accompanying Stock Order Form with full payment (or appropriate instructions authorizing withdrawal from a savings or certificate account at the Bank) for all shares for which subscription is made to the Company by __:__ _.m., Central Time, on ________ ___, 1997, unless extended by the Bank. A postage-paid reply envelope is provided for this purpose. Provided that not all of the shares are subscribed for in the Subscription Offering by members of the Bank, the remaining shares may be offered to the general public in the Community Offering with preference given to natural persons and trusts of natural persons who reside in the Local Community. THE INFORMATION CONTAINED IN THIS PROXY STATEMENT IS LIMITED IN ITS SCOPE TO USE IN THE SOLICITATION OF PROXIES FOR THE SPECIAL MEETING TO VOTE ON THE PLAN. IT IS NOT INTENDED FOR USE IN THE OFFERING OF THE COMMON STOCK. SUCH OFFERING IS MADE ONLY BY THE PROSPECTUS. ADDITIONAL INFORMATION The information contained in the accompanying Prospectus, including a more detailed description of the Plan, is intended to help you evaluate the Conversion and is incorporated herein by reference. All persons eligible to vote at the Special Meeting should review both this Proxy Statement and the accompanying Prospectus. 10 12 YOUR BOARD OF DIRECTORS URGES YOU TO CONSIDER CAREFULLY THIS PROXY MATERIAL AND, WHETHER OR NOT YOU PLAN TO BE PRESENT IN PERSON AT THE SPECIAL MEETING, TO FILL IN, DATE, SIGN AND RETURN THE ENCLOSED PROXY CARD(S) AS SOON AS POSSIBLE TO ASSURE THAT YOUR VOTES WILL BE COUNTED. THIS WILL NOT PREVENT YOU FROM VOTING IN PERSON IF YOU ATTEND THE SPECIAL MEETING. YOU MAY REVOKE YOUR PROXY BY WRITTEN INSTRUMENT DELIVERED TO THE SECRETARY OF THE BANK AT ANY TIME PRIOR TO OR AT THE SPECIAL MEETING OR BY ATTENDING THE SPECIAL MEETING AND VOTING IN PERSON. THIS PROXY STATEMENT IS NOT AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY THE COMMON STOCK. THE OFFER IS MADE ONLY BY THE PROSPECTUS. BY ORDER OF THE BOARD OF DIRECTORS Paula J. Bergstrom Secretary ______________, 1997 Camden, Arkansas 11 13 EXHIBIT 99.2 PLAN OF CONVERSION -------------------------------- Heartland Community Bank Camden, Arkansas 14 HEARTLAND COMMUNITY BANK CAMDEN, ARKANSAS PLAN OF CONVERSION FROM MUTUAL TO STOCK ORGANIZATION I. GENERAL. On November 21, 1996, the Board of Directors of Heartland Community Bank, Camden, Arkansas (the "Bank"), after careful study and consideration, adopted by unanimous vote this Plan of Conversion from Mutual to Stock Organization (the "Plan"), whereby the Bank will convert from a federal mutual savings bank to a federal capital stock savings bank (the "Converted Bank") as a wholly owned subsidiary of a Holding Company to be formed at the direction of the Bank (the "Conversion"). The Plan was amended by unanimous vote of the Board of Directors on December 19, 1996. The Conversion is subject to regulations of the Director of the Office of Thrift Supervision of the United States Department of the Treasury ("OTS") pursuant to Section 5(i) of the Home Owners' Loan Act and Part 563b of the Rules and Regulations Applicable to All Savings Associations. The Plan is subject to the prior written approval of the OTS and must be adopted by the affirmative vote of at least a majority of the total outstanding votes of the Members of the Bank. Pursuant to the Plan, shares of Conversion Stock in the Holding Company will be offered in a Subscription Offering pursuant to non-transferable Subscription Rights at a predetermined and uniform price first to the Bank's Eligible Account Holders of record as of December 31, 1993, second to the Bank's Tax-Qualified Employee Stock Benefit Plans, third to Supplemental Eligible Account Holders of record as of the last day of the calendar quarter preceding OTS approval of the Bank's application to convert to stock form, fourth to Other Members of the Bank and fifth to depositors and borrowers of the Bank's savings association subsidiary, Heartland Community Bank, F.S.B. Concurrently with the Subscription Offering, shares not subscribed for in the Subscription Offering may be offered by the Bank to the general public in a Community Offering. Shares remaining, if any, may then be offered to the general public in an underwritten public offering or otherwise. The aggregate Purchase Price of the Conversion Stock will be based upon an independent appraisal of the Bank and will reflect the estimated pro forma market value of the Converted Bank, as a subsidiary of the Holding Company. It is the desire of the Board of Directors to attract new capital to the Converted Bank to increase its net worth, to support future savings growth, to increase the amount of funds available for other lending and investment, to provide greater resources for the expansion of customer services and to facilitate future expansion. In addition, the Board of Directors currently intends to implement stock option plans and other stock benefit plans subsequent to the Conversion to better attract and retain qualified directors and officers. It is the further desire of the Board of Directors to reorganize the Converted Bank as the wholly owned subsidiary of the Holding Company to enhance flexibility of operations, diversification of business opportunities and financial capability for business and regulatory purposes and to enable the Converted Bank to compete more effectively with other financial service organizations. No change will be made in the Board of Directors or management of the Bank as a result of the Conversion. II. DEFINITIONS. Acting in Concert: The term "Acting in Concert" means (i) knowing participation in a joint activity or interdependent conscious parallel action towards a common goal whether or not pursuant to an express agreement; or (ii) a combination or pooling of voting or other interests in the securities of an issuer for a common purpose pursuant to any contract, understanding, relationship, agreement or other arrangement, whether written or otherwise. 1 15 A person (as defined by 12 C.F.R. Section 563b.2(a)(26)) who acts in concert with another person ("other party") shall also be deemed to be acting in concert with any person who is also acting in concert with that other party, except that any Tax-Qualified Employee Stock Benefit Plan will not be deemed to be acting in concert with its trustee or a person who serves in a similar capacity solely for the purpose of determining whether stock held by the trustee and stock held by the Tax-Qualified Employee Benefit Plan will be aggregated. Associate: The term "Associate," when used to indicate a relationship with any person, means (i) any corporation or organization (other than the Bank, the Holding Company or a majority-owned subsidiary of the Bank or the Holding Company) of which such person is an officer or partner or is, directly or indirectly, the beneficial owner of 10% or more of any class of equity securities; (ii) any trust or other estate in which such person has a substantial beneficial interest or as to which such person serves as trustee or in a similar fiduciary capacity, except that such term shall not include a "Tax-Qualified Employee Stock Benefit Plan," as defined herein; and (iii) any relative or spouse of such person, or any relative of such spouse, who has the same home as such person or who is a director of the Bank or the Holding Company, or any of their subsidiaries. Bank: The term "Bank" means Heartland Community Bank, either in its present form as a federal mutual savings and loan association or in its future form as a federal mutual savings bank after the amendment of its federal mutual charter and bylaws to substantially conform with the regulatory model federal mutual savings bank charter and bylaws expected to become effective after the adoption of the Plan but before the Conversion, as applicable. Capital Stock: The term "Capital Stock" means any and all authorized shares of stock of the Converted Bank. Community Offering: The term "Community Offering" means the offering of shares of Conversion Stock to the general public by the Holding Company concurrently with or after commencement of the Subscription Offering, giving preference to natural persons and trusts of natural persons (including individual retirement and Keogh retirement accounts and personal trusts in which such natural persons have substantial interests) who are permanent Residents of the Bank's Local Community. Conversion: The term "Conversion" means (i) the amendment of the Bank's federal mutual charter and bylaws to authorize issuance of shares of Capital Stock by the Converted Bank and to conform to the requirements of a federal capital stock savings bank under the laws of the United States and applicable regulations; (ii) the issuance and sale of Conversion Stock by the Holding Company in the Subscription and Community Offerings and/or in an underwritten public offering or otherwise; and (iii) the purchase by the Holding Company of all the Capital Stock of the Converted Bank to be issued in the Conversion immediately following or concurrently with the close of the sale of the Conversion Stock. Conversion Stock: The term "Conversion Stock" means the shares of common stock to be issued and sold by the Holding Company pursuant to the Plan. Converted Bank: The term "Converted Bank" means Heartland Community Bank in its form as a federal capital stock savings bank resulting from the conversion of the Bank to the stock form of organization in accordance with the terms of the Plan. Eligibility Record Date: The term "Eligibility Record Date" means the close of business on December 31, 1993. Eligible Account Holder: The term "Eligible Account Holder" means each holder of one or more Qualifying Deposits in the Bank on the Eligibility Record Date. Holding Company: The term "Holding Company" means a corporation to be incorporated by the Bank under state law for the purpose of becoming a holding company for the Converted Bank through the issuance and 2 16 sale of Conversion Stock under the Plan and the concurrent acquisition of 100% of the Capital Stock to be issued and sold pursuant to the Plan. Holding Company Stock: The term "Holding Company Stock" means any and all authorized shares of stock of the Holding Company. Independent Appraiser: The term "Independent Appraiser" means a person independent of the Bank, experienced and expert in the area of corporate appraisal, and acceptable to the OTS, retained by the Bank to prepare an appraisal of the pro forma market value of the Converted Bank, as a subsidiary of the Holding Company. Local Community: The term "Local Community" means the following counties, which include all counties in which the Bank's offices are located and selected counties contiguous to such counties, all of which are in Arkansas: Calhoun, Cleveland, Dallas, Drew, Grant, Ouachita and Pulaski. Market Maker: The term "Market Maker" means a dealer (i.e., any person who engages, either for all or part of such person's time, directly or indirectly, as agent, broker or principal in the business of offering, buying, selling or otherwise dealing or trading in securities issued by another person) who, with respect to a particular security, (i)(a) regularly publishes bona fide, competitive bid and offer quotations in a recognized interdealer quotation system or (b) furnishes bona fide competitive bid and offer quotations on request and (ii) is ready, willing and able to effect transactions in reasonable quantities at its quoted prices with other brokers or dealers. Member: The term "Member" means any person or entity who qualifies as a member of the Bank under its federal mutual charter and bylaws prior to the Conversion. Officer: The term "Officer" means an executive officer of the Holding Company or the Bank (as applicable), including the Chairman of the Board, President, Executive Vice Presidents, Senior Vice Presidents in charge of principal business functions, Secretary and Treasurer. Order Form: The term "Order Form" means the order form or forms to be used by Eligible Account Holders, Supplemental Eligible Account Holders and other persons eligible to purchase Conversion Stock pursuant to the Plan. Other Member: The term "Other Member" means any person, other than an Eligible Account Holder or a Supplemental Eligible Account Holder, who is a Member as of the Voting Record Date. OTS: The term "OTS" means the Office of Thrift Supervision of the United States Department of the Treasury or any successor agency having jurisdiction over the Conversion. Plan: The term "Plan" means this Plan of Conversion under which the Bank will convert from a federal mutual savings bank to a federal capital stock savings bank as a wholly owned subsidiary of the Holding Company, as originally adopted by the Board of Directors or amended in accordance with the terms hereof. Qualifying Deposit: The term "Qualifying Deposit" means each savings balance in any Savings Account in the Bank as of the close of business on the Eligibility Record Date or the Supplemental Eligibility Record Date, as applicable, which is equal to or greater than $50.00. Registration Statement: The term "Registration Statement" means the Registration Statement on Form S-1, or such other form as may be appropriate, and any amendments thereto, filed by the Holding Company with the SEC pursuant to the Securities Act of 1933, as amended, to register shares of Conversion Stock. 3 17 Resident: The term "Resident," as used in this Plan in relation to the preference afforded natural persons and trusts of natural persons in the Local Community, means any natural person who occupies a dwelling within the Local Community, has an intention to remain within the Local Community for a period of time (manifested by establishing a physical, ongoing, non-transitory presence within the Local Community) and continues to reside therein at the time of the Subscription and Community Offerings. The Bank may utilize deposit or loan records or such other evidence provided to it to make the determination as to whether a person is residing in the Local Community. To the extent the "person" is a corporation or other business entity, the principal place of business or headquarters shall be within the Local Community. To the extent the "person" is a personal benefit plan, the circumstances of the beneficiary shall apply with respect to this definition. In the case of all other benefit plans, circumstances of the trustee shall be examined for purposes of this definition. In all cases, such determination shall be in the sole discretion of the Bank. Sale: The terms "sale" and "sell" mean every contract to sell or otherwise dispose of a security or an interest in a security for value, but such terms do not include an exchange of securities in connection with a merger or acquisition approved by the OTS or any other federal agency having jurisdiction. Savings Account: The term "Savings Account" means a withdrawable deposit in the Bank. SEC: The term "SEC" means the Securities and Exchange Commission or any successor agency. Special Meeting: The term "Special Meeting" means the Special Meeting of Members to be called for the purpose of submitting the Plan to the Members for their approval. Subscription Offering: The term "Subscription Offering" means the offering of shares of Conversion Stock to Eligible Account Holders, Tax-Qualified Employee Stock Benefit Plans, Supplemental Eligible Account Holders, Other Members and depositors and borrowers of Heartland Community Bank, F.S.B. under the Plan, giving preference within each subscription priority category to natural persons and trusts of natural persons (including individual retirement and Keogh retirement accounts and personal trusts in which such natural persons have substantial interests) who are permanent Residents of the Local Community if such preference is permitted by applicable law and approved by the Bank's Board of Directors in its sole discretion. Subscription and Community Prospectus: The term "Subscription and Community Prospectus" means the final prospectus to be used in connection with the Subscription and Community Offerings. Subscription Rights: The term "Subscription Rights" means non-transferable, non-negotiable, personal rights of Eligible Account Holders, Tax-Qualified Employee Stock Benefit Plans, Supplemental Eligible Account Holders, Other Members and depositors and borrowers of Heartland Community Bank, F.S.B. to purchase Conversion Stock offered under the Plan. Supplemental Eligibility Record Date: The term "Supplemental Eligibility Record Date" means the last day of the calendar quarter preceding the approval of the Plan by the OTS. Supplemental Eligible Account Holder: The term "Supplemental Eligible Account Holder" means each holder of one or more Qualifying Deposits in the Bank (other than Officers and directors of the Bank and their Associates) on the Supplemental Eligibility Record Date. Tax-Qualified Employee Stock Benefit Plan: The term "Tax-Qualified Employee Stock Benefit Plan" means any defined benefit plan or defined contribution plan of the Bank or the Holding Company, such as an employee stock ownership plan, stock bonus plan, profit sharing plan or other plan, which, with its related trust, meets the requirements to be "qualified" under section 401 of the Internal Revenue Code of 1986, as amended. "Non-Tax-Qualified Employee Stock Benefit Plan" means any defined benefit plan or defined contribution plan which is not so qualified. 4 18 Voting Record Date: The term "Voting Record Date" means the date fixed by the Board of Directors of the Bank to determine Members of the Bank entitled to vote at the Special Meeting. III. STEPS PRIOR TO SUBMISSION OF THE PLAN TO THE MEMBERS FOR APPROVAL. Prior to submission of the Plan to its Members for approval, the Bank must receive approval from the OTS of an Application for Approval of Conversion on Form AC, which includes the Plan to convert to the stock form of organization (the "Application"). The following steps must be taken prior to such regulatory approval: A. The Board of Directors shall adopt the Plan by not less than a two-thirds vote. B. Promptly after adoption of the Plan by the Board of Directors, the Bank shall notify its Members of the adoption of the Plan by publishing a statement in a newspaper having a general circulation in each community in which the Bank maintains an office and/or by mailing a letter to each of its Members. C. A press release relating to the proposed Conversion may be submitted to the local media. D. Copies of the Plan adopted by the Board of Directors shall be made available for inspection by Members at each office of the Bank. E. The Bank shall cause the Holding Company to be incorporated under state law, and the Board of Directors of the Holding Company shall concur in the Plan by at least a two-thirds vote. F. The Bank shall submit or cause to be submitted the Application to the OTS. The Holding Company shall submit or cause to be submitted an Application H-(e)1 or Application H-(e)1-S to the OTS and the Registration Statement to the SEC. Upon receipt of advice from the regulatory authorities that the Application has been received and is in the prescribed form, the Bank shall publish a "Notice of Filing of an Application for Conversion to a Stock Savings Bank" in a newspaper of general circulation, as referred to in Paragraph III.B. herein. The Bank also shall prominently display a copy of such notice in each of its offices. The Holding Company shall publish notice of the filing of the Application H-(e)1 or H-(e)1-S in accordance with applicable regulations. G. The Bank shall obtain an opinion of its tax advisors or a favorable ruling from the United States Internal Revenue Service which shall state that the Conversion will not result in a taxable reorganization for federal income tax purposes to the Bank. Receipt of a favorable opinion or ruling is a condition precedent to completion of the Conversion. H. The Plan shall be submitted to a vote of the Members at the Special Meeting after approval by the OTS. IV. MEETING OF MEMBERS. Following receipt of approval of the Plan by the OTS, the Special Meeting to vote on the Plan shall be scheduled in accordance with the Bank's bylaws and applicable regulations. Notice of the Special Meeting will be given by means of a proxy statement authorized for use by the OTS. Promptly after receipt of approval and at least 20 days but not more than 45 days prior to the Special Meeting, the Bank will distribute proxy solicitation materials to all voting Members as of the Voting Record Date established for voting at the Special Meeting. Proxy materials will also be sent to each beneficial holder of an Individual Retirement Account where the name of the beneficial holder is disclosed on the Bank's records. The proxy solicitation materials will include a copy of the Proxy Statement and other documents authorized for use by the regulatory authorities and may also include a Subscription and Community Prospectus as provided in Paragraph VI. below. The Bank will also advise each Eligible Account Holder and Supplemental Eligible Account Holder not entitled to vote at the Special Meeting of the proposed 5 19 Conversion and the scheduled Special Meeting and provide a postage paid card on which to indicate whether he or she wishes to receive the Subscription and Community Prospectus, if the Subscription and Community Offerings are not held concurrently with the proxy solicitation. Pursuant to applicable regulations, an affirmative vote of at least a majority of the total outstanding votes of the Members will be required for approval of the Plan. Voting may be in person or by proxy. The OTS shall be promptly notified of the actions of the Members at the Special Meeting. V. SUMMARY PROXY STATEMENT. The Proxy Statement to be furnished to Members may be in summary form, provided that a statement is made in boldface type that a more detailed description of the proposed transaction may be obtained by returning an enclosed postage paid card or other written communication requesting a supplemental information statement. Without prior approval from the OTS, the Special Meeting shall not be held fewer than 20 days after the last day on which the supplemental information statement is mailed to Members requesting the same. The supplemental information statement may be combined with the Subscription and Community Prospectus if the Subscription and Community Offerings are commenced concurrently with the proxy solicitation of Members for the Special Meeting. VI. OFFERING DOCUMENTS. The Holding Company may commence the Subscription Offering and, provided that the Subscription Offering has commenced, may commence the Community Offering concurrently with or during the proxy solicitation of Members and may close the Subscription and Community Offerings before the Special Meeting, provided that the offer and sale of the Conversion Stock shall be conditioned upon approval of the Plan by the Members at the Special Meeting. The Bank's proxy solicitation materials may require Eligible Account Holders, Supplemental Eligible Account Holders, Other Members and depositors and borrowers of Heartland Community Bank, F.S.B. to return to the Bank by a reasonable date certain a postage-paid written communication requesting receipt of a Subscription and Community Prospectus in order to be entitled to receive a Subscription and Community Prospectus, provided that the Subscription Offering shall not be closed until the expiration of 30 days after mailing proxy solicitation materials to voting Members and a postage-paid written communication to non-voting Eligible Account Holders and Supplemental Eligible Account Holders. If the Subscription Offering is commenced within 45 days after the Special Meeting, the Bank shall transmit, no more than 30 days prior to the commencement of the Subscription Offering, to each voting Member who had been furnished with proxy solicitation materials and to each non-voting Eligible Account Holder and Supplemental Eligible Account Holder, written notice of the commencement of the Subscription Offering which shall state that the Bank is not required to furnish a Subscription and Community Prospectus to them unless they return by a reasonable date certain a postage-paid written communication requesting the receipt of the Subscription and Community Prospectus. Prior to commencement of the Subscription and Community Offerings, the Holding Company shall file the Registration Statement with the SEC pursuant to the Securities Act of 1933, as amended. The Holding Company shall not distribute the Subscription and Community Prospectus until the Registration Statement containing the same has been declared effective by the SEC and the aforementioned documents have been approved by the OTS. The Subscription and Community Prospectus may be combined with the Proxy Statement for the Special Meeting. VII. CONSUMMATION OF CONVERSION. The date of consummation of the Conversion will be the effective date of the amendment of the Bank's federal mutual charter to read in the form of a federal stock charter, which shall be the date of the issuance and sale of the Conversion Stock. After receipt of all orders for Conversion Stock, and concurrently with the execution thereof, the amendment of the Bank's federal mutual charter to authorize the issuance of shares of Capital Stock and 6 20 to conform to the requirements of a federal capital stock savings bank will be declared effective by the OTS, and the amended bylaws approved by the Members will become effective. At such time, the Conversion Stock will be issued and sold by the Holding Company, the Capital Stock to be issued in the Conversion will be issued and sold to the Holding Company, and the Converted Bank will become a wholly owned subsidiary of the Holding Company. The Converted Bank will issue to the Holding Company 100,000 shares of its common stock, representing all of the shares of Capital Stock to be issued by the Converted Bank in the Conversion, and the Holding Company will make payment to the Converted Bank of at least 50 percent of the aggregate net proceeds realized by the Holding Company from the sale of the Conversion Stock under the Plan, or such other portion of the aggregate net proceeds as may be authorized or required by the OTS. VIII. STOCK OFFERING. A. General. The aggregate purchase price of all shares of Conversion Stock which will be offered and sold will be equal to the estimated pro forma market value of the Converted Bank, as a subsidiary of the Holding Company, as determined by an independent appraisal. The exact number of shares of Conversion Stock to be offered will be determined by the Board of Directors of the Bank and the Board of Directors of the Holding Company, or their respective designees, in conjunction with the determination of the Purchase Price (as that term is defined in Paragraph VIII.B. below). The number of shares to be offered may be subsequently adjusted prior to completion of the Conversion as provided below. B. Independent Evaluation and Purchase Price of Shares. All shares of Conversion Stock sold in the Conversion will be sold at a uniform price per share referred to in this Plan as the "Purchase Price." The Purchase Price and the total number of shares of Conversion Stock to be offered in the Conversion will be determined by the Board of Directors of the Bank and the Board of Directors of the Holding Company, or their respective designees, immediately prior to the simultaneous completion of all such sales contemplated by this Plan on the basis of the estimated pro forma market value of the Converted Bank, as a subsidiary of the Holding Company, at such time. The estimated pro forma market value of the Converted Bank, as a subsidiary of the Holding Company, will be determined for such purpose by an Independent Appraiser on the basis of such appropriate factors as are not inconsistent with applicable regulations. Immediately prior to the Subscription and Community Offerings, a subscription price range of shares for the offerings will be established (the "Valuation Range"), which will vary from 15% above to 15% below the midpoint of such range. The number of shares of Conversion Stock ultimately issued and sold will be determined at the close of the Subscription and Community Offerings and any other offering. The subscription price range and the number of shares to be offered may be changed subsequent to the Subscription and Community Offerings as the result of any appraisal updates prior to the completion of the Conversion, without notifying eligible purchasers in the Subscription and Community Offerings and without a resolicitation of subscriptions, provided the aggregate Purchase Price is not below the low end or more than 15 percent above the high end of the Valuation Range previously approved by the OTS or if, in the opinion of the Boards of Directors of the Bank and the Holding Company, the new Valuation Range established by the appraisal update does not result in a materially different capital position of the Converted Bank. Notwithstanding the foregoing, no sale of Conversion Stock may be consummated unless, prior to such consummation, the Independent Appraiser confirms to the Bank and the Holding Company and to the OTS that, to the best knowledge of the Independent Appraiser, nothing of a material nature has occurred which, taking into account all relevant factors, would cause the Independent Appraiser to conclude that the aggregate value of the Conversion Stock at the Purchase Price is incompatible with its estimate of the aggregate consolidated pro forma market value of the Converted Bank, as a subsidiary of the Holding Company. If such confirmation is not received, the Bank may cancel the Subscription and Community 7 21 Offerings and/or any other offering, extend the Conversion, establish a new Valuation Range, extend, reopen or hold new Subscription and Community Offerings and/or other offerings or take such other action as the OTS may permit. C. Subscription Offering. Non-transferable Subscription Rights to purchase shares of Conversion Stock will be issued at no cost to Eligible Account Holders, Tax-Qualified Employee Stock Benefits Plans, Supplemental Eligible Account Holders, Other Members and depositors and borrowers of Heartland Community Bank, F.S.B. pursuant to priorities established by applicable regulations. All shares must be sold, and, to the extent that Conversion Stock is available, no subscriber will be allowed to purchase fewer than 25 shares of Conversion Stock, provided that this number shall be decreased if the aggregate purchase price exceeds $500. The priorities established by applicable regulations for the purchase of shares are as follows: 1. Category No. 1: Eligible Account Holders. a. Each Eligible Account Holder shall receive, without payment, with respect to each Qualifying Deposit in the Bank on the Eligibility Record Date, non-transferable Subscription Rights to purchase Conversion Stock in an amount equal to the greater of $200,000, one-tenth of one percent of the total offering of shares of Conversion Stock or 15 times the product (rounded down to the next whole number) obtained by multiplying the total number of shares of Conversion Stock to be issued by a fraction of which the numerator is the amount of the Qualifying Deposit of the Eligible Account Holder and the denominator is the total amount of Qualifying Deposits of all Eligible Account Holders in the Converted Bank in each case on the Eligibility Record Date. b. Non-transferable Subscription Rights to purchase Conversion Stock received by Officers and directors of the Bank and their Associates based on their increased deposits in the Bank in the one year period preceding the Eligibility Record Date shall be subordinated to all other subscriptions involving the exercise of non-transferable Subscription Rights to purchase shares pursuant to this Subscription Category. c. In the event of an oversubscription for shares of Conversion Stock pursuant to this Category, shares of Conversion Stock shall be allocated among subscribing Eligible Account Holders, giving preference to natural persons and trusts of natural persons who are permanent Residents of the Local Community, if such preference is permitted by applicable law and approved by the Bank's Board of Directors in its sole discretion, as follows: (I) Shares of Conversion Stock shall be allocated among subscribing Eligible Account Holders so as to permit each such Account Holder, to the extent possible, to purchase a number of shares of Conversion Stock sufficient to make its total allocation equal to 100 shares or the total amount of its subscription, whichever is less. (II) Any shares not so allocated shall be allocated among the subscribing Eligible Account Holders on an equitable basis, related to the amounts of their respective aggregate Qualifying Deposits, as compared to the total aggregate Qualifying Deposits of all subscribing Eligible Account Holders. 2. Category No. 2: Tax-Qualified Employee Stock Benefit Plans. a. Tax-Qualified Employee Stock Benefit Plans of the Converted Bank shall receive, without payment, non-transferable Subscription Rights to purchase up to 10% of the shares of Conversion Stock issued in the Conversion. 8 22 b. Subscription rights received in this Category shall be subordinated to the Subscription Rights received by Eligible Account Holders pursuant to Category No. 1, provided that any shares of Conversion Stock sold in excess of the high end of the Valuation Range may be first sold to Tax-Qualified Employee Stock Benefit Plans. 3. Category No. 3: Supplemental Eligible Account Holders. a. In the event that the Eligibility Record Date is more than 15 months prior to the date of the latest amendment of the Application filed prior to OTS approval, then each Supplemental Eligible Account Holder shall receive, without payment, with respect to each Qualifying Deposit in the Bank on the Supplemental Eligibility Record Date, non-transferable Subscription Rights to purchase Conversion Stock in an amount equal to the greater of $200,000, one-tenth of one percent of the total offering of shares of Conversion Stock or 15 times the product (rounded down to the next whole number) obtained by multiplying the total number of the shares of Conversion Stock to be issued by a fraction of which the numerator is the amount of the Qualifying Deposit of the Supplemental Eligible Account Holder and the denominator is the total amount of the Qualifying Deposits of all Supplemental Eligible Account Holders on the Supplemental Eligibility Record Date. b. Subscription Rights received pursuant to this Category shall be subordinated to the Subscription Rights received by the Eligible Account Holders and by Tax-Qualified Employee Stock Benefit Plans pursuant to Category Nos. 1 and 2. c. Any non-transferable Subscription Rights to purchase shares received by an Eligible Account Holder in accordance with Category No. 1 shall reduce to the extent thereof the Subscription Rights to be distributed to such Eligible Account Holder pursuant to this Category. d. In the event of an oversubscription for shares of Conversion Stock pursuant to this Category, shares of Conversion Stock shall be allocated among the subscribing Supplemental Eligible Account Holders, giving preference to natural persons and trusts of natural persons who are permanent Residents of the Local Community, if such preference is permitted by applicable law and approved by the Bank's Board of Directors in its sole discretion, as follows: (I) Shares of Conversion Stock shall be allocated among subscribing Supplemental Eligible Account Holders so as to permit each such Supplemental Eligible Account Holder, to the extent possible, to purchase a number of shares of Conversion Stock sufficient to make its total allocation (including the number of shares of Conversion Stock, if any, allocated in accordance with Category No. 1) equal to 100 shares of Conversion Stock or the total amount of its subscription, whichever is less. (II) Any shares of Conversion Stock not allocated in accordance with subparagraph (I) above shall be allocated among the subscribing Supplemental Eligible Account Holders on an equitable basis, related to the amounts of their respective aggregate Qualifying Deposits on the Supplemental Eligibility Record Date as compared to the total aggregate Qualifying Deposits of all subscribing Supplemental Eligible Account Holders in each case on the Supplemental Eligibility Record Date. 9 23 4. Category No. 4: Other Members. a. Each Other Member, other than those Members who are Eligible Account Holders or Supplemental Eligible Account Holders, shall receive, without payment, with respect to each deposit account in, or loan from, the Bank on the Voting Record Date, non-transferable Subscription Rights to purchase Conversion Stock in an amount equal to the greater of $200,000 or one-tenth of one percent of the total offering of shares of Conversion Stock. b. Subscription Rights received pursuant to this Category shall be subordinated to the Subscription Rights received by Eligible Account Holders, Tax-Qualified Employee Stock Benefit Plans and Supplemental Eligible Account Holders pursuant to Category Nos. 1, 2 and 3. c. In the event of an oversubscription for shares of Conversion Stock pursuant to this Category, the shares of Conversion Stock available shall be allocated among subscribing Other Members, giving preference to natural persons and trusts of natural persons who are permanent Residents of the Local Community, if such preference is permitted by applicable law and approved by the Bank's Board of Directors in its sole discretion, so as to permit each subscribing Other Member, to the extent possible, to purchase a number of shares sufficient to make his or her total allocation of Conversion Stock equal to the lesser of 100 shares or the number of shares subscribed for by the Other Member. The shares remaining thereafter will be allocated among subscribing Other Members whose subscriptions remain unsatisfied on an equitable basis as determined by the Board of Directors. 5. Category No. 5: Depositors and Borrowers of Heartland Community Bank, F.S.B. a. Each depositor and/or borrower of Heartland Community Bank, F.S.B. as of the Supplemental Eligibility Record Date, other than those who are Eligible Account Holders, Supplemental Eligible Account Holders or Other Members, shall receive, without payment, with respect to each deposit account in, or loan from, Heartland Community Bank, F.S.B. on the Supplemental Eligibility Record Date, non-transferable Subscription Rights to purchase Conversion Stock in an amount equal to the greater of $200,000 or one-tenth of one percent of the total offering of shares of Conversion Stock. b. Subscription Rights received pursuant to this Category shall be subordinated to the Subscription Rights received by Eligible Account Holders, Tax-Qualified Employee Stock Benefit Plans, Supplemental Eligible Account Holders and Other Members pursuant to Category Nos. 1, 2, 3 and 4. c. In the event of an oversubscription for shares of Conversion Stock pursuant to this Category, the shares of Conversion Stock available shall be allocated among such subscribing depositors and borrowers, giving preference to natural persons and trusts of natural persons who are permanent Residents of the Local Community, if such preference is permitted by applicable law and approved by the Bank's Board of Directors in its sole discretion, so as to permit each such subscribing depositor and borrower, to the extent possible, to purchase a number of shares sufficient to make his or her total allocation of Conversion Stock equal to the lesser of 100 shares or the number of shares subscribed for by the subscribing depositor and/or borrower. The shares remaining thereafter will be allocated among such subscribing depositors and borrowers whose subscriptions remain unsatisfied on an equitable basis as determined by the Board of Directors. Order Forms may provide that the maximum purchase limitation shall be based on the midpoint of the Valuation Range. In the event the aggregate Purchase Price of the Conversion 10 24 Stock issued and sold is below the midpoint of the Valuation Range, that portion of subscriptions in excess of the maximum purchase limitation will be refunded. In the event the aggregate Purchase Price of Conversion Stock issued and sold is above the midpoint of the Valuation Range, persons who have subscribed for the maximum purchase limitation may be given the opportunity to increase their subscriptions so as to purchase the maximum number of shares subject to the availability of shares. The Bank will not otherwise notify subscribers of any change in the number of shares of Conversion Stock offered. D. Community Offering. 1. Any shares of Conversion Stock not purchased through the exercise of Subscription Rights in the Subscription Offering may be sold in a Community Offering, which may commence concurrently with the Subscription Offering. Shares of Conversion Stock will be offered in the Community Offering to the general public, giving preference to natural persons and the trusts of natural persons (including individual retirement and Keogh retirement accounts and personal trusts in which such natural persons have substantial interests) who are permanent Residents of the Local Community. The Community Offering may commence concurrently with or as soon as practicable after the completion of the Subscription Offering and must be completed within 45 days after the last day of the Subscription Offering, unless extended by the Holding Company with the approval of the OTS. The offering price of the Conversion Stock to the general public in the Community Offering will be the same price paid for such stock by Eligible Account Holders and other persons in the Subscription Offering. If sufficient shares are not available to satisfy all orders in the Community Offering, the shares available will be allocated by the Holding Company in its discretion. The Holding Company shall have the right to accept or reject orders in the Community Offering in whole or in part. 2. Orders accepted in the Community Offering shall be filled up to a maximum of 2% of the Conversion Stock, and thereafter remaining shares shall be allocated on an equal number of shares basis per order until all orders have been filled. 3. The Conversion Stock to be offered in the Community Offering will be offered and sold in a manner that will achieve the widest distribution of the Conversion Stock. E. Other Offering. In the event a Community Offering does not appear feasible, the Bank will immediately consult with the OTS to determine the most viable alternative available to effect the completion of the Conversion. Should no viable alternative exist, the Bank may terminate the Conversion with the concurrence of the OTS. F. Limitations Upon Purchases of Shares of Conversion Stock. The following additional limitations and exceptions shall apply to all purchases of Conversion Stock: 1. No Person may purchase fewer than 25 shares of Conversion Stock in the Conversion, to the extent such shares are available. 2. Purchases of Conversion Stock in the Community Offering by any person, when aggregated with purchases by an Associate of that person, or a group of persons Acting in Concert, shall not exceed $250,000 of the Conversion Stock, except that Tax-Qualified Employee Stock Benefit Plans may purchase up to 10% of the total shares of Conversion Stock to be issued in the 11 25 Conversion, and shares to be held by the Tax-Qualified Employee Stock Benefit Plans and attributable to a participant thereunder shall not be aggregated with shares of Conversion Stock purchased by such participant or any other purchaser of Conversion Stock in the Conversion. 3. Officers and directors of the Bank and the Holding Company, and Associates thereof, may not purchase in the aggregate more than 33% of the shares of Conversion Stock issued in the Conversion, or such greater amount as may be permitted under applicable legal limits. 4. Directors of the Holding Company and the Bank shall not be deemed to be Associates or a group Acting in Concert with other directors solely as a result of membership on the Board of Directors of the Holding Company or the Bank or any of their subsidiaries. 5. Purchases of shares of Conversion Stock in the Conversion by any person, when aggregated with purchases by an Associate of that person, or a group of persons Acting in Concert, shall not exceed $250,000 of the Conversion Stock, except that Tax-Qualified Employee Stock Benefit Plans may purchase up to 10% of the total shares of Conversion Stock to be issued in the Conversion, and shares purchased by the Tax-Qualified Employee Stock Benefit Plans and attributable to a participant thereunder shall not be aggregated with shares purchased by such participant or any other purchaser of Conversion Stock in the Conversion. Subject to any required regulatory approval and the requirements of applicable laws and regulations, the Holding Company and the Bank may increase or decrease any of the purchase limitations set forth herein at any time. In the event that the individual purchase limitation is increased after commencement of the Subscription and Community Offerings, the Holding Company and the Bank shall permit any person who subscribed for the maximum number of shares of Conversion Stock to purchase an additional number of shares, such that such person shall be permitted to subscribe for the then maximum number of shares permitted to be subscribed for by such person, subject to the rights and preferences of any person who has priority Subscription Rights. In the event that either the individual purchase limitation or the number of shares of Conversion Stock to be sold in the Conversion is decreased after commencement of the Subscription and Community Offerings, the orders of any person who subscribed for the maximum number of shares of Conversion Stock shall be decreased by the minimum amount necessary so that such person shall be in compliance with the then maximum number of shares permitted to be subscribed for by such person. Each person purchasing Conversion Stock in the Conversion shall be deemed to confirm that such purchase does not conflict with the purchase limitations under the Plan or otherwise imposed by law, rule or regulation. In the event that such purchase limitations are violated by any person (including any Associate or group of persons affiliated or otherwise Acting in Concert with such person), the Holding Company shall have the right to purchase from such person at the actual Purchase Price per share all shares acquired by such person in excess of such purchase limitations or, if such excess shares have been sold by such person, to receive the difference between the actual Purchase Price per share paid for such excess shares and the price at which such excess shares were sold by such person. This right of the Holding Company to purchase such excess shares shall be assignable by the Holding Company. G. Restrictions on and Other Characteristics of Stock Being Sold. 1. Transferability. Except as provided in Paragraph XIII. below, Conversion Stock purchased by persons other than directors and Officers of the Bank and directors and Officers of the Holding Company will be transferable without restriction. Conversion Stock purchased by such directors or Officers shall not be sold for a period of one year from the date of Conversion except for any sale of such 12 26 shares (i) following the death of the original purchaser or (ii) resulting from an exchange of securities in a merger or acquisition approved by the applicable regulatory authorities. The Conversion Stock issued by the Holding Company to such directors and Officers shall bear the following legend giving appropriate notice of the one-year holding period restriction: "The shares of stock evidenced by this Certificate are restricted as to transfer for a period of one year from the date of this Certificate pursuant to applicable regulations of the Office of Thrift Supervision of the United States Department of the Treasury. Except in the event of the death of the registered holder, the shares represented by this Certificate may not be sold prior thereto without a legal opinion of counsel for the Holding Company that said sale is permissible under the provisions of applicable laws and regulations." In addition, the Holding Company shall give appropriate instructions to the transfer agent for the Holding Company Stock with respect to the applicable restrictions relating to the transfer of restricted stock. Any shares of Holding Company Stock subsequently issued as a stock dividend, stock split or otherwise, with respect to any such restricted stock, shall be subject to the same holding period restrictions for such directors and Officers as may be then applicable to such restricted stock. 2. Repurchase and Dividend Rights. Pursuant to present regulations, except as otherwise permitted by the OTS, the Holding Company may not, for a period of three years from the date of Conversion, repurchase Holding Company Stock from any person, with the exception of (i) repurchases on a pro rata basis pursuant to offers approved by the OTS and made to all stockholders, (ii) repurchases of qualifying shares of directors or, (iii) unless prohibited by the OTS, repurchases of shares to fund employee stock benefit plans of the Holding Company or the Bank. Upon 10 days' written notification to the OTS Regional Director for the Converted Bank and the Chief Counsel of the Corporate and Securities Division of the OTS, however, the Holding Company may make open market repurchases of outstanding Holding Company Stock, provided that (i) such Regional Director and Chief Counsel do not object based on a determination that (a) the repurchases would materially adversely affect the financial condition of the Converted Bank, (b) the information submitted by the Converted Bank is insufficient upon which to base a conclusion as to whether the Converted Bank's financial condition would be materially adversely affected, or (c) the Converted Bank does not demonstrate a valid purpose for the repurchases. Except as otherwise permitted by the OTS, (i) no repurchases may occur in the first year following the Conversion; (ii) any repurchases in the second and third years following the Conversion must be part of an open-market stock repurchase program that allows no more than five percent (5%) of the outstanding Holding Company Stock to be purchased during any 12 month period; and (iii) any repurchases within the first three years following the Conversion must not cause the Converted Bank to become "undercapitalized," as defined pursuant to 12 C.F.R. Section 565.4 or a successor regulation. Present regulations also provide that the Converted Bank may not declare or pay a cash dividend on or repurchase any of its Capital Stock if the result thereof would be to reduce the regulatory capital of the Converted Bank below the amount required for the Liquidation Account. Further, any dividend declared or paid on, or repurchase of, the Capital Stock shall be in compliance with the Rules and Regulations of the OTS, or other applicable regulations. The above limitations shall not preclude payment of dividends on, or repurchases of, Holding Company Stock in the event applicable federal regulatory limitations are liberalized subsequent to the Conversion. 13 27 3. Voting Rights. After Conversion, holders of Savings Accounts and obligors on loans will not have voting rights in the Converted Bank. Exclusive voting rights with respect to the Holding Company shall be vested in the holders of Holding Company Stock, and the Holding Company will have exclusive voting rights with respect to the Capital Stock. Each stockholder of the Holding Company will be entitled to vote on any matters coming before the stockholders of the Holding Company for consideration and will be entitled to one vote for each share of stock owned by said stockholder. 4. Purchases by Officers, Directors and Associates Following Conversion. Without the prior approval of the OTS, Officers and directors of the Converted Bank and Officers and directors of the Holding Company, and their Associates, shall be prohibited for a period of three years following completion of the Conversion from purchasing outstanding shares of Holding Company Stock, except from a broker or dealer registered with the SEC. Notwithstanding this restriction, negotiated transactions involving more than 1% of the total outstanding shares of Holding Company Stock and purchases made and shares held by a Tax-Qualified Employee Stock Benefit Plan or Non-Tax-Qualified Employee Stock Benefit Plan which may be attributable to Officers or directors may be made without OTS permission or the use of a broker or dealer. H. Mailing of Offering Materials and Collation of Subscriptions. The sale of all shares of Conversion Stock offered pursuant to the Plan must be completed within 24 months after approval of the Plan at the Special Meeting. After approval of the Plan by the OTS and the declaration of the effectiveness of the Subscription and Community Prospectus by the SEC, the Holding Company shall distribute such Subscription and Community Prospectus and Order Forms for the purchase of shares in accordance with the terms of the Plan. The recipient of an Order Form will be provided neither fewer than 20 days nor more than 45 days from the date of mailing, unless extended, to complete, execute and return properly the Order Form to the Holding Company or the Bank. Self-addressed, postage paid return envelopes will accompany these forms when mailed. The Bank or Holding Company will collate the returned executed Order Forms upon completion of the Subscription Offering. Failure of any eligible subscriber to return a properly completed and executed Order Form within the prescribed time limits shall be deemed a waiver and a release by such person of any rights to purchase shares of Conversion Stock hereunder. The sale of all shares of Conversion Stock shall be completed within 45 days after the last day of the Subscription Offering unless extended by the Holding Company and the Bank with the approval of the OTS. I. Method of Payment. Payment for all shares of Conversion Stock subscribed for in the Subscription and Community Offerings must be received in full by the Bank or the Holding Company, together with properly completed and executed Order Forms, indicating thereon the number of shares being subscribed for and such other information as may be required thereon, on or prior to the expiration date specified on the Order Form, unless such date is extended by the Holding Company and the Bank; provided, however, that payments by Tax-Qualified Employee Stock Benefit Plans for Conversion Stock may be made to the Bank concurrently with the completion of the Conversion. 14 28 Payment for all shares of Conversion Stock may be made in cash (if delivered in person) or by check or money order, or, if the subscriber has a Savings Account in the Bank (including a certificate of deposit), the subscriber may authorize the Bank to charge the subscriber's Savings Account for the purchase amount. The Bank shall pay interest at not less than the passbook rate on all amounts paid in cash or by check or money order to purchase shares of Conversion Stock in the Subscription and Community Offerings from the date payment is received until the Conversion is completed or terminated. The Bank shall not knowingly loan funds or otherwise extend credit to any person for the purpose of purchasing Conversion Stock. If a subscriber authorizes the Bank to charge its Savings Account, the funds will remain in the subscriber's Savings Account and will continue to earn interest, but may not be used by the subscriber until all Conversion Stock has been sold or the Conversion is terminated, whichever is earlier. The withdrawal will be given effect only concurrently with the sale of all shares of Conversion Stock in the Conversion and only to the extent necessary to satisfy the subscription at a price equal to the Purchase Price. The Bank will allow subscribers to purchase shares of Conversion Stock by withdrawing funds from certificate accounts without the assessment of early withdrawal penalties. In the case of early withdrawal of only a portion of such account, the certificate evidencing such account shall be cancelled if the remaining balance of the account is less than the applicable minimum balance requirement. In that event, the remaining balance will earn interest at the passbook rate. This waiver of the early withdrawal penalty is applicable only to withdrawals made in connection with the purchase of Conversion Stock under the Plan. Tax-Qualified Employee Stock Benefit Plans may subscribe for shares by submitting an Order From, and in the case of an employee stock ownership plan, together with evidence of a loan commitment from the Holding Company or an unrelated financial institution for the purchase of the shares of Conversion Stock, during the Subscription Offering and by making payment for the shares of Conversion Stock on the date of the closing of the Conversion. J. Undelivered, Defective or Late Order Forms; Insufficient Payment. In the event an Order Form (i) is not delivered and is returned to the Holding Company or the Bank by the United States Postal Service (or the Holding Company or the Bank is unable to locate the addressee); (ii) is not received by the Holding Company or the Bank, or is received by the Holding Company or the Bank after termination of the date specified thereon; (iii) is defectively completed or executed; or (iv) is not accompanied by the total required payment for the shares of Conversion Stock subscribed for (including cases in which the subscribers' Savings Accounts are insufficient to cover the authorized withdrawal for the required payment), the Subscription Rights of the person to whom such rights have been granted will not be honored and will be treated as though such person failed to return the completed Order Form within the time period specified therein. Alternatively, the Holding Company or the Bank may, but will not be required to, waive any irregularity relating to any Order Form or require the submission of a corrected Order Form or the remittance of full payment for subscribed shares of Conversion Stock by such date as the Holding Company or the Bank may specify. Subscription orders, once tendered, cannot be revoked. The Holding Company's and the Bank's interpretation of the terms and conditions of this Plan and acceptability of the Order Forms will be final and conclusive. K. Members in Non-Qualified States or in Foreign Countries. The Holding Company will make reasonable efforts to comply with the securities laws of all states in the United States in which persons entitled to subscribe for Conversion Stock pursuant to the Plan reside. However, no such person will be offered or receive any Conversion Stock under this Plan who resides in a foreign country or who resides in a state of the United States with respect to which any or all of the following apply: (i) a small number of persons otherwise eligible to subscribe for shares of Conversion Stock under this Plan reside in such state or foreign country; (ii) the granting of Subscription Rights or the 15 29 offer or sale of shares of Conversion Stock to such person would require the Holding Company or the Bank or their employees to register, under the securities laws of such state, as a broker, dealer, salesman or agent or to register or otherwise qualify its securities for sale in such state or foreign country; and (iii) such registration qualification would be impracticable for reasons of cost or otherwise. No payments will be made in lieu of the granting of Subscription Rights to any such person. L. Sales Commissions. Sales commissions may be paid as determined by the Boards of Directors of the Bank and the Holding Company or their designees to securities dealers assisting subscribers in making purchases of Conversion Stock in the Subscription Offering or in the Community Offering, if the securities dealer is named by the subscriber on the Order Form. In addition, a sales commission may be paid to a securities dealer for advising and consulting with respect to, or for managing the sale of Conversion Stock in, the Subscription Offering, the Community Offering or any other offering. IX. CHARTER AND BYLAWS. As part of the Conversion, a federal stock charter and bylaws will be adopted to authorize the Converted Bank to operate as a federal capital stock savings bank. By approving the Plan, the Members of the Bank will thereby approve amending the Bank's existing federal mutual charter and bylaws to read in the form of a federal stock charter and bylaws. Prior to completion of the Conversion, the proposed federal stock charter and bylaws may be amended in accordance with the provisions and limitations for amending the Plan under Paragraph XIV. below. The effective date of the amendment of the Bank's federal mutual charter and bylaws to read in the form of a federal stock charter and bylaws shall be the date of the issuance of the Conversion Stock, which shall be the date of consummation of the Conversion. X. REGISTRATION AND MARKET MAKING. In connection and concurrently with the Conversion, the Holding Company shall register the Holding Company Stock with the SEC pursuant to the Securities Exchange Act of 1934, as amended, and shall undertake not to deregister the Holding Company Stock for a period of three years thereafter. The Holding Company shall use its best efforts to encourage and assist various Market Makers to establish and maintain a market for the Holding Company Stock. The Holding Company shall also use its best efforts to have the Holding Company Stock quoted on the National Association of Securities Dealers, Inc. Automated Quotation System or listed on a national or regional securities exchange. XI. STATUS OF SAVINGS ACCOUNTS AND LOANS SUBSEQUENT TO CONVERSION. All Savings Accounts in the Bank will retain the same status after Conversion as these accounts had prior to Conversion. Subject to Paragraph VIII.I. hereof, each holder of a Savings Account in the Bank shall retain, without payment, a withdrawable Savings Account or Savings Accounts in the Converted Bank, equal in dollar amount and on the same terms and conditions as in effect prior to Conversion. All Savings Accounts will continue to be insured by the Savings Association Insurance Fund of the Federal Deposit Insurance Corporation up to the applicable limits of insurance coverage. All loans shall retain the same status after Conversion as these loans had prior to Conversion. After Conversion, holders of Savings Accounts and obligors on loans of the Bank will not have voting rights in the Converted Bank. Exclusive voting rights with respect to the Holding Company shall be vested in the holders of the Conversion Stock issued by the Holding Company, and the Holding Company will have exclusive voting rights with respect to the Converted Bank's Capital Stock. 16 30 XII. LIQUIDATION ACCOUNT. After the Conversion, holders of Savings Accounts will not be entitled to share in the residual assets after liquidation of the Converted Bank. However, pursuant to applicable regulations, the Bank shall, at the time of the Conversion, establish a Liquidation Account in an amount equal to its regulatory capital as of the date of the latest statement of financial condition contained in the final prospectus to be used in connection with the Conversion. The function of the Liquidation Account is to establish a priority on liquidation, and, except as provided in Paragraph VIII.G.2. above, the existence of the Liquidation Account shall not operate to restrict the use or application of any of the net worth accounts of the Converted Bank. The Liquidation Account shall be maintained by the Converted Bank subsequent to Conversion for the benefit of Eligible Account Holders and Supplemental Eligible Account Holders who retain their Savings Accounts in the Converted Bank. Each Eligible Account Holder and Supplemental Eligible Account Holder shall, with respect to each Savings Account held, have a related inchoate interest in a portion of the Liquidation Account ("subaccount balance"). The initial subaccount balance for a Savings Account held by an Eligible Account Holder and/or a Supplemental Eligible Account Holder shall be determined by multiplying the opening balance in the Liquidation Account by a fraction of which the numerator is the amount of the qualifying deposit in the related Savings Account and the denominator is the total amount of the qualifying deposits of all Eligible Account Holders and Supplemental Eligible Account Holders in the Bank. Such initial subaccount balance shall not be increased but shall be subject to downward adjustment as provided below. If the deposit balance in any Savings Account of an Eligible Account Holder or Supplemental Eligible Account Holder to which the subaccount relates at the close of business on any annual closing date subsequent to the Eligibility Record Date or Supplemental Eligibility Record Date is less than the lesser of (i) the deposit balance in such Savings Account at the close of business on any annual closing date subsequent to the Eligibility Record Date or the Supplemental Eligibility Record Date, or (ii) the amount of the Qualifying Deposit in such Savings Account on the Eligibility Record Date or the Supplemental Eligibility Record Date, then the subaccount balance for such Savings Account shall be adjusted by reducing such subaccount balance in an amount proportionate to the reduction in such deposit balance. In the event of a downward adjustment, the subaccount balance shall not be subsequently increased, notwithstanding any increase in the deposit balance of the related Savings Account. If any such Savings Account is closed, the related subaccount balance shall be reduced to zero. In the event of a complete liquidation of the Converted Bank (and only in such event), each Eligible Account Holder and Supplemental Eligible Account Holder shall be entitled to receive a liquidation distribution from the Liquidation Account in the amount of the then-current adjusted subaccount balances for Savings Accounts then held before any liquidation distribution may be made to stockholders. No merger, consolidation, sale of bulk assets or similar combination or transaction with another institution insured by the Federal Deposit Insurance Corporation shall be considered to be a complete liquidation for these purposes. In such transactions, the Liquidation Account shall be assumed by the surviving institution. XIII. RESTRICTIONS ON ACQUISITION OF HOLDING COMPANY. A. Present regulations provide that for a period of three years following completion of the Conversion, no person (i.e., an individual, a group acting in concert, a corporation, a partnership, an association, a joint stock company, a trust or any unincorporated organization or similar company, a syndicate or any other group formed for the purpose of acquiring, holding or disposing of securities of an insured institution or its holding company) shall directly, or indirectly, offer to purchase or actually acquire the beneficial ownership of more than 10% of any class of Holding Company Stock without the prior approval of the OTS. However, approval is not required for purchases directly from the Holding Company 17 31 or underwriters or a selling group acting on its behalf with a view towards public resale, or for purchases not exceeding 1% per annum of the shares outstanding, or for the acquisition of securities by one or more Tax-Qualified Employee Stock Benefit Plans of the Holding Company or the Converted Bank, provided that the plan or plans do not have beneficial ownership in the aggregate of more than 25% of any class of Holding Company Stock. Civil penalties may be imposed by the OTS for willful violation or assistance of any violation. Where any person, directly or indirectly, acquires beneficial ownership of more than 10% of any class of Holding Company Stock within such three-year period, without the prior approval of the OTS, Holding Company Stock beneficially owned by such person in excess of 10% shall not be counted as shares entitled to vote and shall not be voted by any person or counted as voting shares in connection with any matter submitted to the stockholders for a vote. B. The Holding Company may provide in its Articles of Incorporation a provision that, for a period of five years following the date of the completion of the Conversion, no person shall directly or indirectly offer to acquire or actually acquire the beneficial ownership of more than 10% of any class of Holding Company Stock except with respect to purchases by one or more Tax-Qualified Employee Stock Benefit Plans of the Holding Company or Converted Bank. The Holding Company may provide in its Articles of Incorporation for such other provisions affecting the acquisition of Holding Company Stock as shall be determined by its Board of Directors. XIV. INTERPRETATION AND AMENDMENT OR TERMINATION OF THE PLAN. The Bank's Board of Directors shall have the sole discretion to interpret and apply the provisions of the Plan to particular facts and circumstances and to make all determinations necessary or desirable to implement such provisions, including but not limited to matters with respect to giving preference to natural persons and trusts of natural persons who are permanent Residents of the Bank's Local Community, and any and all interpretations, applications and determinations made by the Board of Directors in good faith and on the basis of such information and assistance as was then reasonably available for such purpose shall be conclusive and binding upon the Bank and its members and subscribers in the Subscription and Community Offerings, subject to the authority of the OTS. If deemed necessary or desirable, the Plan may be substantively amended at any time prior to submission of the Plan and proxy materials to the Members by a two-thirds vote of the Bank's Board of Directors. After submission of the Plan and proxy materials to the Members, the Plan may be amended by a two-thirds vote of the Bank's Board of Directors at any time prior to the Special Meeting and at any time following such Special Meeting with the concurrence of the OTS. In its discretion, the Board of Directors may modify or terminate the Plan upon the order of the regulatory authorities without a resolicitation of proxies or another Special Meeting. In the event that mandatory new regulations pertaining to conversions are adopted by the OTS or any successor agency prior to the completion of the Conversion, the Plan will be amended to conform to the new mandatory regulations without a resolicitation of proxies or another Special Meeting. In the event that new conversion regulations adopted by the OTS or any successor agency prior to completion of the Conversion contain optional provisions, the Plan may be amended to utilize such optional provisions at the discretion of the Board of Directors without a resolicitation of proxies or another Special Meeting. By adoption of the Plan, the Bank's Members authorize the Board of Directors to amend and/or terminate the Plan under the circumstances set forth above. XV. EXPENSES OF THE CONVERSION. The Holding Company and the Bank will use their best efforts to assure that expenses incurred in connection with the Conversion shall be reasonable. 18 32 XVI. CONTRIBUTIONS TO TAX-QUALIFIED EMPLOYEE STOCK BENEFIT PLANS. The Holding Company and the Converted Bank may make scheduled discretionary contributions to their Tax-Qualified Employee Stock Benefit Plans, provided such contributions do not cause the Converted Bank to fail to meet its then-applicable regulatory capital requirements. 19 33 EXHIBIT B HEARTLAND COMMUNITY BANK FEDERAL STOCK CHARTER SECTION 1. CORPORATE TITLE. The full corporate title of the savings bank is Heartland Community Bank (the "savings bank"). SECTION 2. OFFICE. The home office shall be located in Camden, Arkansas. SECTION 3. DURATION. The duration of the savings bank is perpetual. SECTION 4. PURPOSE AND POWERS. The purpose of the savings bank is to pursue any or all of the lawful objectives of a Federal savings bank chartered under section 5 of the Home Owners' Loan Act and to exercise all of the express, implied, and incidental powers conferred thereby and by all acts amendatory thereof and supplemental thereto, subject to the Constitution and laws of the United States as they are now in effect, or as they may hereafter be amended, and subject to all lawful and applicable rules, regulations, and orders of the Office of Thrift Supervision ("Office"). SECTION 5. CAPITAL STOCK. The total number of shares of all classes of the capital stock which the savings bank has authority to issue is 25,000,000 of which 20,000,000 shares shall be common stock of par value of $0.01 per share and of which 5,000,000 shares shall be serial preferred stock of par value of $0.01 per share. The shares may be issued from time to time as authorized by the board of directors without the approval of its stockholders except as otherwise provided in this Section 5 or to the extent that such approval is required by governing law, rule, or regulation. The consideration for the issuance of the shares shall be paid in full before their issuance and shall not be less than the par value. Neither promissory notes nor future services shall constitute payment or part payment for the issuance of shares of the savings bank. The consideration for the shares shall be cash, tangible or intangible property (to the extent direct investment in such property would be permitted to the savings bank), labor or services actually performed for the savings bank, or any combination of the foregoing. In the absence of actual fraud in the transaction, the value of such property, labor, or services, as determined by the board of directors of the savings bank, shall be conclusive. Upon payment of such consideration, such shares shall be deemed to be fully paid and nonassessable. In the case of a stock dividend, that part of the retained earnings of the savings bank that is transferred to common stock or paid-in capital accounts upon the issuance of shares as a stock dividend shall be deemed to be the consideration for their issuance. Except for shares issued in the initial organization of the savings bank or in connection with the conversion of the savings bank from the mutual to the stock form of capitalization, no shares of capital stock (including shares issuable upon conversion, exchange or exercise of other securities) shall be issued, directly or indirectly, to officers, directors, or controlling persons of the savings bank other than as part of a general public offering or as qualifying shares to a director, unless the issuance or the plan under which they would be issued has been approved by a majority of the total votes eligible to be cast at a legal meeting. Nothing contained in this Section 5 (or in any supplementary sections hereto) shall entitle the holders of any class or series of capital stock to vote as a separate class or series or to more than one vote per share, except as to the cumulation of votes for the election of directors, unless the charter otherwise provides that there shall be no such cumulative voting: Provided, that this restriction on voting separately by class or series shall not apply: (i) To any provision which would authorize the holders of preferred stock, voting as a class or series, to elect some members of the board of directors, less than a majority thereof, in the event of default in the payment of dividends on any class or series of preferred stock; 34 (ii) To any provision which would require the holders of preferred stock, voting as a class or series, to approve the merger or consolidation of the savings bank with another corporation or the sale, lease, or conveyance (other than by mortgage or pledge) of properties or business in exchange for securities of a corporation other than the savings bank if the preferred stock is exchanged for securities of such other corporation: Provided, That no provision may require such approval for transactions undertaken with the assistance or pursuant to the direction of the Office, the Federal Deposit Insurance Corporation; (iii) To any amendment which would adversely change the specific terms of any class or series of capital stock as set forth in this Section 5 (or in any supplementary sections hereto), including any amendment which would create or enlarge any class or series ranking prior thereto in rights and preferences. An amendment which increases the number of authorized shares of any class or series of capital stock, or substitutes the surviving savings bank in a merger or consolidation for the savings bank, shall not be considered to be such an adverse change. A description of the different classes and series (if any) of the savings bank's capital stock and a statement of the designations, and the relative rights, preferences and limitations of the shares of each class of and series (if any) of capital stock are as follows: A. COMMON STOCK. Except as provided in this Section 5 (or in any supplementary sections thereto), the holders of common stock shall exclusively possess all voting power. Each holder of shares of common stock shall be entitled to one vote for each share held by such holder, except as to the cumulation of votes for the election of directors, unless the charter otherwise provides that there shall be no such cumulative voting. Whenever there shall have been paid, or declared and set aside for payment, to the holders of the outstanding shares of any class of stock having preference over the common stock as to the payment of dividends, the full amount of dividends and of sinking fund, retirement fund or other retirement payments, if any, to which such holders are respectively entitled in preference to the common stock, then dividends may be paid on the common stock and on any class or series of stock entitled to participate therewith as to dividends out of any assets legally available for the payment of dividends. In the event of any liquidation, dissolution, or winding up of the savings bank, the holders of the common stock (and the holders of any class or series of stock entitled to participate with the common stock in the distribution of assets) shall be entitled to receive, in cash or in kind, the assets of the savings bank available for distribution remaining after: (i) payment or provision for payment of the savings bank's debts and liabilities; (ii) distributions or provision for distributions in settlement of its liquidation account; and (iii) distributions or provisions for distributions to holders of any class or series of stock having preference over the common stock in the liquidation, dissolution, or winding up of the savings bank. Each share of common stock shall have the same relative rights as and be identical in all respects with all the other shares of common stock. B. PREFERRED STOCK. The savings bank may provide in supplementary sections to its charter for one or more classes of preferred stock, which shall be separately identified. The shares of any class may be divided into and issued in series, with each series separately designated so as to distinguish the shares thereof from the shares of all other series and classes. The terms of each series shall be set forth in a supplementary section to the charter. All shares of the same class shall be identical except as to the following relative rights and preferences, as to which there may be variations between different series: (a) The distinctive serial designation and the number of shares constituting such series; (b) The dividend rate or the amount of dividends to be paid on the shares of such series, whether dividends shall be cumulative and, if so, from which date(s) the payment date(s) for dividends, and the participating or other special rights, if any, with respect to dividends; B-2 35 (c) The voting powers, full or limited, if any, of shares of such series; (d) Whether the shares of such series shall be redeemable and, if so, the price(s) at which, and the terms and conditions on which, such shares may be redeemed; (e) The amount(s) payable upon the shares of such series in the event of voluntary or involuntary liquidation, dissolution, or winding up of the savings bank; (f) Whether the shares of such series shall be entitled to the benefit of a sinking or retirement fund to be applied to the purchase or redemption of such shares, and if so entitled, the amount of such fund and the manner of its application, including the price(s) at which such shares may be redeemed or purchased through the application of such fund; (g) Whether the shares of such series shall be convertible into, or exchangeable for, shares of any other class or classes of stock of the savings bank and, if so, the conversion price(s) or the rate(s) of exchange, and the adjustments thereof, if any, at which such conversion or exchange may be made, and any other terms and conditions of such conversion or exchange; (h) The price or other consideration for which the shares of such series shall be issued; and (i) Whether the shares of such series which are redeemed or converted shall have the status of authorized but unissued shares of serial preferred stock and whether such shares may be reissued as shares of the same or any other series of serial preferred stock. Each share of each series of serial preferred stock shall have the same relative rights as and be identical in all respects with all the other shares of the same series. The board of directors shall have authority to divide, by the adoption of supplementary charter sections, any authorized class of preferred stock into series, and, within the limitations set forth in this section and the remainder of this charter, fix and determine the relative rights and preferences of the shares of any series so established. Prior to the issuance of any preferred shares of a series established by a supplementary charter section adopted by the board of directors, the savings bank shall file with the Secretary to the Office a dated copy of that supplementary section of this charter establishing and designating the series and fixing and determining the relative rights and preferences thereof. SECTION 6. PREEMPTIVE RIGHTS. Holders of the capital stock of the savings bank shall not be entitled to preemptive rights with respect to any shares of the savings bank which may be issued. SECTION 7. LIQUIDATION ACCOUNT. Pursuant to the requirements of the Office's regulations (12 C.F.R. Part 563b), the savings bank shall establish and maintain a liquidation account for the benefit of its savings account holders as of December 31, 1993 and December 31, 1996 ("eligible savers"). In the event of a complete liquidation of the savings bank, it shall comply with such regulations with respect to the amount and the priorities on liquidation of each of the savings bank's eligible saver's inchoate interest in the liquidation account, to the extent it is still in existence; provided, that an eligible saver's inchoate interest in the liquidation account shall not entitle such eligible saver to any voting rights at meetings of the savings bank's stockholders. SECTION 8. DIRECTORS. The savings bank shall be under the direction of a board of directors. The authorized number of directors, as stated in the savings bank's bylaws, shall not be fewer than five or more than fifteen except when a greater or lesser number is approved by the Director of the Office, or his or her delegate. B-3 36 SECTION 9. AMENDMENT OF CHARTER. Except as provided in Section 5, no amendment, addition, alteration, change, or repeal of this charter shall be made, unless such is first proposed by the board of directors of the savings bank, approved by the stockholders by a majority of the votes eligible to be cast at a legal meeting, unless a higher vote is otherwise required, and approved or preapproved by the Office. HEARTLAND COMMUNITY BANK Attest: By: ------------------------------------ ------------------------------------------------------ Secretary President and Chief Executive Officer * * * OFFICE OF THRIFT SUPERVISION Attest: By: ------------------------------------ ------------------------------------------------------ Secretary Director Effective Date: , 1997 --------------------
B-4 37 EXHIBIT C HEARTLAND COMMUNITY BANK BYLAWS ARTICLE I - HOME OFFICE The home office of Heartland Community Bank shall be located at 237 Jackson Street, Camden, in the County of Ouachita in the State of Arkansas. ARTICLE II - STOCKHOLDERS SECTION 1. PLACE OF MEETINGS. All annual and special meetings of stockholders shall be held at the home office of the savings bank or at such other place in the State of Arkansas as the board of directors may determine. SECTION 2. ANNUAL MEETING. A meeting of the stockholders of the savings bank for the election of directors and for the transaction of any other business of the savings bank shall be held annually within 120 days after the end of the savings bank's fiscal year. SECTION 3. SPECIAL MEETINGS. Special meetings of the stockholders for any purpose or purposes, unless otherwise prescribed by the regulations of the Office of Thrift Supervision ("Office"), may be called at any time by the chairman of the board, the president, or a majority of the board of directors, and shall be called by the chairman of the board, the president, or the secretary upon the written request of the holders of not less than one-tenth of all of the outstanding capital stock of the savings bank entitled to vote at the meeting. Such written request shall state the purpose or purposes of the meeting and shall be delivered to the home office of the savings bank addressed to the chairman of the board, the president, or the secretary. SECTION 4. CONDUCT OF MEETINGS. Annual and special meetings shall be conducted in accordance with rules and procedures adopted by the board of directors. The board of directors shall designate, when present, either the chairman of the board or president to preside at such meetings. SECTION 5. NOTICE OF MEETINGS. Written notice stating the place, day, and hour of the meeting and the purpose(s) for which the meeting is called shall be delivered not fewer than 20 nor more than 50 days before the date of the meeting, either personally or by mail, by or at the direction of the chairman of the board, the president, or the secretary, or the directors calling the meeting, to each stockholder of record entitled to vote at such meeting. If mailed, such notice shall be deemed to be delivered when deposited in the mail, addressed to the stockholder at the address as it appears on the stock transfer books or records of the savings bank as of the record date prescribed in Section 6 of this Article II with postage prepaid. When any stockholders' meeting, either annual or special, is adjourned for 30 days or more, notice of the adjourned meeting shall be given as in the case of an original meeting. It shall not be necessary to give any notice of the time and place of any meeting adjourned for less than 30 days or of the business to be transacted at the meeting, other than an announcement at the meeting at which such adjournment is taken. SECTION 6. FIXING OF RECORD DATE. For the purpose of determining stockholders entitled to notice of or to vote at any meeting of stockholders or any adjournment, or stockholders entitled to receive payment of any dividend, or in order to make a determination of stockholders for any other proper purpose, the board of directors shall fix in advance a date as the record date for any such determination of stockholders. Such date in any case shall be not more than 60 days and, in case of a meeting of stockholders, not fewer than 10 days prior to the date on which the particular action, requiring such determination of stockholders, is to be taken. When a determination of stockholders entitled to vote at any meeting of stockholders has been made as provided in this section, such determination shall apply to any adjournment. 38 SECTION 7. VOTING LISTS. At least 20 days before each meeting of the stockholders, the officer or agent having charge of the stock transfer books for shares of the savings bank shall make a complete list of the stockholders entitled to vote at such meeting, or any adjournment, arranged in alphabetical order, with the address and the number of shares held by each. This list of stockholders shall be kept on file at the home office of the savings bank and shall be subject to inspection by any stockholder at any time during usual business hours for a period of 20 days prior to such meeting. Such list shall also be produced and kept open at the time and place of the meeting and shall be subject to inspection by any stockholder during the entire time of the meeting. The original stock transfer book shall constitute prima facie evidence of the stockholders entitled to examine such list or transfer books or to vote at any meeting of stockholders. In lieu of making the stockholder list available for inspection by stockholders as provided in the preceding paragraph, the board of directors may perform such acts as required by paragraphs (a) and (b) of Rule 14a-7 of the General Rules and Regulations under the Securities Exchange Act of 1934, as may be duly requested in writing, with respect to any matter which may be properly considered at a meeting of stockholders, by any stockholder who is entitled to vote on such matter and who shall defray the reasonable expenses to be incurred by the savings bank in performance of the act or acts required. SECTION 8. QUORUM. A majority of the outstanding shares of the savings bank entitled to vote, represented in person or by proxy, shall constitute a quorum at a meeting of stockholders. If less than a majority of the outstanding shares is represented at a meeting, a majority of the shares so represented may adjourn the meeting from time to time without further notice. At such adjourned meeting at which a quorum shall be present or represented, any business may be transacted which might have been transacted at the meeting as originally notified. The stockholders present at a duly organized meeting may continue to transact business until adjournment, notwithstanding the withdrawal of enough stockholders to constitute less than a quorum. SECTION 9. PROXIES. At all meetings of stockholders, a stockholder may vote by proxy executed in writing by the stockholder or by his duly authorized attorney in fact. 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 more than eleven months from the date of its execution except for a proxy coupled with an interest. SECTION 10. VOTING OF SHARES IN THE NAME OF TWO OR MORE PERSONS. When ownership stands in the name of two or more persons, in the absence of written directions to the savings bank to the contrary, at any meeting of the stockholders of the savings bank, any one or more of such stockholders may cast, in person or by proxy, all votes to which such ownership is entitled. In the event an attempt is made to cast conflicting votes, in person or by proxy, by the several persons in whose names shares of stock stand, the vote or votes to which those persons are entitled shall be cast as directed by a majority of those holding such shares and present in person or by proxy at such meeting, but no votes shall be cast for such stock if a majority cannot agree. SECTION 11. VOTING OF SHARES OF CERTAIN HOLDERS. Shares standing in the name of another corporation may be voted by any officer, agent, or proxy as the bylaws of such corporation may prescribe, or, in the absence of such provision, as the board of directors of such corporation may determine. Shares held by an administrator, executor, guardian, or conservator may be voted by him or her, either in person or by proxy, without a transfer of such shares into his or her name. Shares standing in the name of a trustee may be voted by him or her, either in person or by proxy, but no trustee shall be entitled to vote shares held by him or her without a transfer of such shares into his or her name. Shares standing in the name of a receiver may be voted by such receiver, and shares held by or under the control of a receiver may be voted by such receiver without the transfer into his or her name if authority to do so is contained in an appropriate order of the court or other public authority by which such receiver was appointed. C-2 39 A stockholder whose shares are pledged shall be entitled to vote such shares until the shares have been transferred into the name of the pledgee, and thereafter the pledgee shall be entitled to vote the shares so transferred. Neither treasury shares of its own stock held by the savings bank nor shares held by another corporation, if a majority of the shares entitled to vote for the election of directors of such other corporation are held by the savings bank, shall be voted at any meeting or counted in determining the total number of outstanding shares at any given time for purposes of any meeting. SECTION 12. CUMULATIVE VOTING. Unless otherwise provided in the savings bank's charter, every stockholder entitled to vote at an election for directors shall have the right to vote, in person or by proxy, the number of shares owned by the stockholder for as many persons as there are directors to be elected and for whose election the stockholder has a right to vote, or to cumulate the votes by giving one candidate as many votes as the number of such directors to be elected multiplied by the number of shares shall equal or by distributing such votes on the same principle among any number of candidates. SECTION 13. INSPECTORS OF ELECTION. In advance of any meeting of stockholders, the board of directors may appoint any persons other than nominees for office as inspectors of election to act at such meeting or any adjournment. The number of inspectors shall be either one or three. Any such appointment shall not be altered at the meeting. If inspectors of election are not so appointed, the chairman of the board or the president may, or on the request of not fewer than 10 percent of the votes represented at the meeting shall, make such appointment at the meeting. If appointed at the meeting, the majority of the votes present shall determine whether one or three inspectors are to be appointed. In case any person appointed as inspector fails to appear or fails or refuses to act, the vacancy may be filled by appointment by the board of directors in advance of the meeting or at the meeting by the chairman of the board or the president. Unless otherwise prescribed by applicable regulations, the duties of such inspectors shall include: determining the number of shares and the voting power of each share, the shares represented at the meeting, the existence of a quorum, and the authenticity, validity and effect of proxies; receiving votes, ballots, or consents; hearing and determining all challenges and questions in any way arising in connection with the rights to vote; counting and tabulating all votes or consents; determining the result; and such acts as may be proper to conduct the election or vote with fairness to all stockholders. SECTION 14. NOMINATING COMMITTEE. The board of directors shall act as a nominating committee for selecting the management nominees for election as directors. Except in the case of a nominee substituted as a result of the death or other incapacity of a management nominee, the nominating committee shall deliver written nominations to the secretary at least 20 days prior to the date of the annual meeting. Upon delivery, such nominations shall be posted in a conspicuous place in each office of the savings bank. No nominations for directors except those made by the nominating committee shall be voted upon at the annual meeting unless other nominations by stockholders are made in writing and delivered to the secretary of the savings bank at least five days prior to the date of the annual meeting. Upon delivery, such nominations shall be posted in a conspicuous place in each office of the savings bank. Ballots bearing the names of all persons nominated by the nominating committee and by stockholders shall be provided for use at the annual meeting. However, if the nominating committee shall fail or refuse to act at least 20 days prior to the annual meeting, nominations for directors may be made at the annual meeting by any stockholder entitled to vote and shall be voted upon. SECTION 15. NEW BUSINESS. Any new business to be taken up at the annual meeting shall be stated in writing and filed with the secretary of the savings bank at least five days before the date of the annual meeting, and all other business so stated, proposed, and filed shall be considered at the annual meeting; but no other proposal shall be acted upon at the annual meeting. Any stockholder may make any other proposal at the annual meeting and the same may be discussed and considered, but unless stated in writing and filed with the secretary at least five days before the meeting, such proposal shall be laid over for action at an adjourned, special, or annual meeting of the stockholders taking place 30 days or more thereafter. This provision shall not prevent the consideration and approval C-3 40 or disapproval at the annual meeting of reports of officers, directors, and committees; but in connection with such reports, no new business shall be acted upon at such annual meeting unless stated and filed as herein provided. SECTION 16. INFORMAL ACTION BY STOCKHOLDERS. Any action required to be taken at a meeting of the stockholders, or any other action which may be taken at a meeting of stockholders, may be taken without a meeting if consent in writing, setting forth the action so taken, shall be given by all of the stockholders entitled to vote with respect to the subject matter. ARTICLE III - BOARD OF DIRECTORS SECTION 1. GENERAL POWERS. The business and affairs of the savings bank shall be under the direction of its board of directors. The board of directors shall annually elect a chairman of the board and a president from among its members and shall designate, when present, the chairman of the board or the president to preside at its meetings. SECTION 2. NUMBER AND TERM. The board of directors shall consist of seven members, as determined by resolution of the board of directors, and shall be divided into three classes as nearly equal in number as possible. The members of each class shall be elected for a term of three years and until their successors are elected and qualified. One class shall be elected by ballot annually. SECTION 3. REGULAR MEETINGS. A regular meeting of the board of directors shall be held without other notice than this bylaw immediately after, and at the same place as, the annual meeting of stockholders. The board of directors may provide, by resolution, the time and place, within the savings bank's normal lending territory, for the holding of additional regular meetings without other notice than such resolution. SECTION 4. QUALIFICATION. Directors need not be the beneficial owners of capital stock of the savings bank. SECTION 5. SPECIAL MEETINGS. Special meetings of the board of directors may be called by or at the request of the chairman of the board, the president, or one-third of the directors. The persons authorized to call special meetings of the board of directors may fix any place, within the savings bank's normal lending territory, as the place for holding any special meeting of the board of directors called by such persons. Members of the board of directors may participate in special meetings by means of conference telephone or similar communications equipment by which all persons participating in the meeting can hear each other. Such participation shall constitute presence in person. SECTION 6. NOTICE OF SPECIAL MEETINGS. Written notice of any special meeting of the board of directors or of any committee designated thereby shall be given to each director at least 24 hours prior thereto at the address at which the director is most likely to be reached. Any director may waive notice of any meeting by a writing filed with the secretary. The attendance of a director at a meeting shall constitute a waiver of notice of such meeting, except where a director attends a meeting for the express purpose of objecting to the transaction of any business because the meeting is not lawfully called or convened. Neither the business to be transacted at, nor the purpose of, any meeting of the board of directors need be specified in the notice or waiver of notice of such meeting. SECTION 7. QUORUM. A majority of the number of directors fixed by Section 2 of this Article III shall constitute a quorum for the transaction of business at any meeting of the board of directors; but if less than such majority is present at a meeting, a majority of the directors present may adjourn the meeting from time to time. Notice of any adjourned meeting shall be given in the same manner as prescribed by Section 6 of this Article III. SECTION 8. MANNER OF ACTING. The act of the majority of the directors present at a meeting at which a quorum is present shall be the act of the board of directors, unless a greater number is prescribed by regulation of the Office or by these bylaws. C-4 41 SECTION 9. ACTION WITHOUT A MEETING. Any action required or permitted to be taken by the board of directors at a meeting may be taken without a meeting if a consent in writing, setting forth the action so taken, shall be signed by all of the directors. SECTION 10. RESIGNATION. Any director may resign at any time by sending a written notice of such resignation to the home office of the savings bank addressed to the chairman of the board or the president. Unless otherwise specified, such resignation shall take effect upon receipt by the chairman of the board or the president. SECTION 11. VACANCIES. Any vacancy occurring on the board of directors may be filled by the affirmative vote of a majority of the remaining directors although less than a quorum of the board of directors. A director elected to fill a vacancy shall be elected to serve until the next election of directors by the stockholders. Any directorship to be filled by reason of an increase in the number of directors may be filled by election by the board of directors for a term of office continuing only until the next election of directors by the stockholders. SECTION 12. COMPENSATION. Directors, as such, may receive compensation for service on the board of directors. Members of either standing or special committees may be allowed such compensation as the board of directors may determine. SECTION 13. PRESUMPTION OF ASSENT. A director of the savings bank who is present at a meeting of the board of directors at which action on any savings bank matter is taken shall be presumed to have assented to the action taken unless his dissent or abstention shall be entered in the minutes of the meeting or unless he shall file a written dissent to such action with the person acting as the secretary of the meeting before the adjournment thereof or shall forward such dissent by registered mail to the secretary of the savings bank within five days after the date a copy of the minutes of the meeting is received. Such right to dissent shall not apply to a director who voted in favor of such action. SECTION 14. REMOVAL OF DIRECTORS. At a meeting of stockholders called expressly for that purpose, any director may be removed for cause by a vote of the holders of a majority of the shares then entitled to vote at an election of directors. If less than the entire board is to be removed, no one of the directors may be removed if the votes cast against the removal would be sufficient to elect a director if then cumulatively voted at an election of the class of directors of which such director is a part. Whenever the holders of the shares of any class are entitled to elect one or more directors by the provisions of the charter or supplemental sections thereto, the provisions of this section shall apply, in respect to the removal of a director or directors so elected, to the vote of the holders of the outstanding shares of that class and not to the vote of the outstanding shares as a whole. ARTICLE IV - EXECUTIVE AND OTHER COMMITTEES SECTION 1. APPOINTMENT. The board of directors, by resolution adopted by a majority of the full board, may designate the chief executive officer and two or more of the other directors to constitute an executive committee. The designation of any committee pursuant to this Article IV and the delegation of authority shall not operate to relieve the board of directors, or any director, of any responsibility imposed by law or regulation. SECTION 2. AUTHORITY. The executive committee, when the board of directors is not in session, shall have and may exercise all of the authority of the board of directors except to the extent, if any, that such authority shall be limited by the resolution appointing the executive committee; and except also that the executive committee shall not have the authority of the board of directors with reference to: the declaration of dividends; the amendment of C-5 42 the charter or bylaws of the savings bank, or recommending to the stockholders a plan of merger, consolidation, or conversion; the sale, lease, or other disposition of all or substantially all of the property and assets of the savings bank otherwise than in the usual and regular course of its business; a voluntary dissolution of the savings bank; a revocation of any of the foregoing; or the approval of a transaction in which any member of the executive committee, directly or indirectly, has any material beneficial interest. SECTION 3. TENURE. Subject to the provisions of Section 8 of this Article IV, each member of the executive committee shall hold office until the next regular annual meeting of the board of directors following his or her designation and until a successor is designated as a member of the executive committee. SECTION 4. MEETINGS. Regular meetings of the executive committee may be held without notice at such times and places as the executive committee may fix from time to time by resolution. Special meetings of the executive committee may be called by any member thereof upon not less than one day's notice stating the place, date, and hour of the meeting, which notice may be written or oral. Any member of the executive committee may waive notice of any meeting and no notice of any meeting need be given to any member thereof who attends in person. The notice of a meeting of the executive committee need not state the business proposed to be transacted at the meeting. SECTION 5. QUORUM. A majority of the members of the executive committee shall constitute a quorum for the transaction of business at any meeting thereof, and action of the executive committee must be authorized by the affirmative vote of a majority of the members present at a meeting at which a quorum is present. SECTION 6. ACTION WITHOUT A MEETING. Any action required or permitted to be taken by the executive committee at a meeting may be taken without a meeting if a consent in writing, setting forth the action so taken, shall be signed by all of the members of the executive committee. SECTION 7. VACANCIES. Any vacancy in the executive committee may be filled by a resolution adopted by a majority of the full board of directors. SECTION 8. RESIGNATIONS AND REMOVAL. Any member of the executive committee may be removed at any time with or without cause by resolution adopted by a majority of the full board of directors. Any member of the executive committee may resign from the executive committee at any time by giving written notice to the president or secretary of the savings bank. Unless otherwise specified, such resignation shall take effect upon its receipt; the acceptance of such resignation shall not be necessary to make it effective. SECTION 9. PROCEDURE. The executive committee shall elect a presiding officer from its members and may fix its own rules of procedure which shall not be inconsistent with these bylaws. It shall keep regular minutes of its proceedings and report the same to the board of directors for its information at the meeting held next after the proceedings shall have occurred. SECTION 10. OTHER COMMITTEES. The board of directors may by resolution establish an audit, loan, or other committee composed of directors as it may determine to be necessary or appropriate for the conduct of the business of the savings bank and may prescribe the duties, constitution, and procedures thereof. ARTICLE V - OFFICERS SECTION 1. POSITIONS. The officers of the savings bank shall be a president, one or more vice presidents, a secretary, and a treasurer, each of whom shall be elected by the board of directors. The board of directors may also designate the chairman of the board as an officer. The president shall be the chief executive officer, unless the board of directors designates the chairman of the board as chief executive officer. The president shall be a director of the savings bank. The offices of the secretary and treasurer may be held by the same person and a vice president may also be either the secretary, or the treasurer. The board of directors may designate one or more vice presidents C-6 43 as executive vice president or senior vice president. The board of directors may also elect or authorize the appointment of such other officers as the business of the savings bank may require. The officers shall have such authority and perform such duties as the board of directors may from time to time authorize or determine. In the absence of action by the board of directors, the officers shall have such powers and duties as generally pertain to their respective offices. SECTION 2. ELECTION AND TERM OF OFFICE. The officers of the savings bank shall be elected annually at the first meeting of the board of directors held after each annual meeting of the stockholders. If the election of officers is not held at such meeting, such election shall be held as soon thereafter as possible. Each officer shall hold office until a successor has been duly elected and qualified or until the officer's death, resignation, or removal in the manner hereinafter provided. Election or appointment of an officer, employee, or agent shall not of itself create contractual rights. The board of directors may authorize the savings bank to enter into an employment contract with any officer in accordance with regulations of the Office; but no such contract shall impair the right of the board of directors to remove any officer at any time in accordance with Section 3 of this Article V. SECTION 3. REMOVAL. Any officer may be removed by the board of directors whenever in its judgment the best interests of the savings bank will be served thereby, but such removal, other than for cause, shall be without prejudice to any contractual rights of the person so removed. SECTION 4. VACANCIES. A vacancy in any office because of death, resignation, removal, disqualification, or otherwise may be filled by the board of directors for the unexpired portion of the term. SECTION 5. REMUNERATION. The remuneration of the officers shall be fixed from time to time by the board of directors by employment contracts or otherwise. ARTICLE VI - CONTRACTS, LOANS, CHECKS, AND DEPOSITS SECTION 1. CONTRACTS. To the extent permitted by applicable regulations, and except as otherwise prescribed by these bylaws with respect to certificates for shares, the board of directors may authorize any officer, employee, or agent of the savings bank to enter into any contract or execute and deliver any instrument in the name of and on behalf of the savings bank. Such authority may be general or confined to specific instances. SECTION 2. LOANS. No loans shall be contracted on behalf of the savings bank and no evidence of indebtedness shall be issued in its name unless authorized by the board of directors. Such authority may be general or confined to specific instances. SECTION 3. CHECKS, DRAFTS, ETC. All checks, drafts, or other orders for the payment of money, notes, or other evidences of indebtedness issued in the name of the savings bank shall be signed by one or more officers, employees, or agents of the savings bank in such manner as shall from time to time be determined by the board of directors. SECTION 4. DEPOSITS. All funds of the savings bank not otherwise employed shall be deposited from time to time to the credit of the savings bank in any duly authorized depositories as the board of directors may select. ARTICLE VII - CERTIFICATES FOR SHARES AND THEIR TRANSFER SECTION 1. CERTIFICATES FOR SHARES. Certificates representing shares of capital stock of the savings bank shall be in such form as shall be determined by the board of directors and approved by the Office. Such certificates shall be signed by the chief executive officer or by any other officer of the savings bank authorized by the board of directors, attested by the secretary or an assistant secretary, and sealed with the corporate seal or a facsimile thereof. The signatures of such officers upon a certificate may be facsimiles if the certificate is manually signed on behalf of a transfer agent or a registrar other than the savings bank itself or one of its employees. Each certificate C-7 44 for shares of capital stock shall be consecutively numbered or otherwise identified. The name and address of the person to whom the shares are issued, with the number of shares and date of issue, shall be entered on the stock transfer books of the savings bank. All certificates surrendered to the savings bank for transfer shall be cancelled and no new certificate shall be issued until the former certificate for a like number of shares has been surrendered and cancelled, except that in the case of a lost or destroyed certificate, a new certificate may be issued upon such terms and indemnity to the savings bank as the board of directors may prescribe. SECTION 2. TRANSFER OF SHARES. Transfer of shares of capital stock of the savings bank shall be made only on its stock transfer books. Authority for such transfer shall be given only by the holder of record or by his legal representative, who shall furnish proper evidence of such authority, or by his attorney authorized by a duly executed power of attorney and filed with the savings bank. Such transfer shall be made only on surrender for cancellation of the certificate for such shares. The person in whose name shares of capital stock stand on the books of the savings bank shall be deemed by the savings bank to be the owner for all purposes. ARTICLE VIII - FISCAL YEAR The fiscal year of the savings bank shall end on the 30th day of June of each year. ARTICLE IX - DIVIDENDS Subject to the terms of the savings bank's charter and the regulations and orders of the Office, the board of directors may, from time to time, declare, and the savings bank may pay, dividends on its outstanding classes of capital stock. ARTICLE X - CORPORATE SEAL The board of directors shall provide a savings bank seal which shall be two concentric circles between which shall be the name of the savings bank. The year of incorporation or an emblem may appear in the center. ARTICLE XI - AMENDMENTS These bylaws may be amended in a manner consistent with applicable regulations at any time by a majority vote of the full board of directors or by a majority vote of the votes eligible to be cast by the stockholders of the savings bank at any legal meeting. C-8 45 REVOCABLE PROXY (SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS OF HEARTLAND COMMUNITY BANK FOR A SPECIAL MEETING OF MEMBERS TO BE HELD ON ____________, 1997) The undersigned member of Heartland Community Bank (the "Bank") hereby appoints Vida H. Lampkin and Cameron D. McKeel, or any one of them, with full powers of substitution, as attorneys-in-fact and agents for and in the name of the undersigned, to vote such votes as the undersigned may be entitled to cast at the Special Meeting of Members of the Bank to be held at __________________, ____________________, Camden, Arkansas, on ________________, _____________, 1997, at __:__ _.m., Central Time, and at any adjournments thereof. They are authorized to cast all votes to which the undersigned is entitled, as follows: FOR AGAINST --- ------- Approval of the Plan providing for the conversion of the Bank from a federally chartered mutual savings bank to a federally chartered stock savings bank as a wholly owned subsidiary of HCB Bancshares, Inc., including the amendment of the Bank's Federal Mutual Charter and Bylaws to read in the form of a Federal Stock Charter and Bylaws for the Bank. [ ] [ ]
In their discretion, on any other matters that may lawfully come before the meeting. NOTE: The Board of Directors is not aware of any other matter that may come before the Meeting. 46 THIS PROXY WILL BE VOTED FOR THE PLAN IF NO CHOICE IS MADE HEREON Should the undersigned be present and elect to vote at said Meeting or at any adjournment thereof and, after notification to the Secretary of Heartland Community Bank at said Meeting of the member's decision to terminate this Proxy, then the power of said attorneys-in-fact or agents shall be deemed terminated and of no further force and effect. The undersigned hereby revokes any and all proxies heretofore given. The undersigned acknowledges receipt of a Notice of Special Meeting of the Members of Heartland Community Bank to be held on ___________, 1997 and a Proxy Statement dated ______________, 1997 and a Prospectus dated ______________, 1997 prior to the execution of this Proxy. _________________________ Date _________________________ Signature Note: Only one signature is required in the case of a joint account. EX-99.3 17 FORM OF MISC. SOLICITATION AND MARKETING MATERIALS 1 HCB BANCSHARES, INC. PROPOSED HOLDING COMPANY FOR HEARTLAND COMMUNITY BANK CAMDEN, ARKANSAS PROPOSED MARKETING MATERIALS 12-23-96 [DRAFT] 2 Marketing Materials HCB Bancshares, Inc. Camden, Arkansas Table of Contents I. Press Releases A. Explanation B. Schedule C. Distribution List D. Press Release Examples II. Advertisements A. Explanation B. Schedule C. Advertisement Examples III. Question and Answer Brochure A. Explanation B. Method of Distribution C. Example IV. IRA Mailing A. Explanation B. Quantity C. IRA Mailing Example V. Individual Letters A. Explanation B. Method of Distribution C. Examples VI. Counter Cards and Lobby Posters A. Explanation B. Quantity VII. Proxy Reminder A. Explanation B. Example VIII. Cover Letters 3 I. Press Releases A. Explanation In an effort to assure that all customers receive prompt accurate information in a simultaneous manner, Trident advises the Bank to forward press releases to area newspapers, radio stations, etc. at various points during the conversion process. Only press releases approved by Conversion Counsel and the OTS will be forwarded for publication in any manner. B. Schedule 1. OTS Approval of Conversion 2. Close of Stock Offering 4 C. Distribution List National Distribution List National Thrift News Wall Street Journal 212 West 35th Street World Financial Center 13th Floor 200 Liberty New York, New York 10001 New York, NY 10004 Richard Chang American Banker SNL Securities One State Street Plaza Post Office Box 2124 New York, New York 10004 Charlottesville, Virginia 22902 Michael Weinstein Barrons Investors Business Daily Dow Jones & Company 12655 Beatrice Street Barrons Statistical Information Post Office Box 661750 200 Burnett Road Los Angeles, California 90066 Chicopee, Massachusetts 01020 New York Times 229 West 43rd Street New York, NY 10036 5 Local Media List (To be provided) Newspaper Radio 6 D. Press Release Examples PRESS RELEASE FOR IMMEDIATE RELEASE For More Information Contact: Vida H. Lampkin (501) 836-6841 HEARTLAND COMMUNITY BANK CONVERSION TO STOCK FORM APPROVED Camden, Arkansas (__________ __, 1997) - Vida H. Lampkin, President of Heartland Community Bank ("Heartland Community Bank" or the "Bank"), Camden, Arkansas, announced that Heartland Community Bank has received approval from the Office of Thrift Supervision to convert from a federally-chartered mutual savings bank to a federally-chartered stock savings bank. In connection with the Conversion, Heartland Community Bank has formed a holding company, HCB Bancshares, Inc., to hold all of the outstanding capital stock of Heartland Community Bank. HCB Bancshares, Inc. is offering up to 2,300,000 shares of its common stock, subject to adjustment, at a price of $10.00 per share. Certain account holders and borrowers of the Bank and its subsidiary, the former Heritage Bank, FSB (the ASubsidiary@) will have an opportunity to subscribe for stock through a Subscription Offering that closes on ___________, 1997. Shares that are not subscribed for during the Subscription Offering may be offered subsequently to the general public in a Community Offering, with first preference given to natural persons and trusts of natural persons residing in Ouachita, Calhoun, Drew, Dallas, Cleveland, Grant and Pulaski Counties, Arkansas. The Subscription Offering and Community Offering, if conducted, will be managed by Trident Securities, Inc. of Raleigh, North Carolina. Copies of the Prospectus relating to the offerings and describing the Plan of Conversion will be mailed to customers on or about __________ __, 1997. As a result of the Conversion, Heartland Community Bank will be structured in the stock 7 form as are all commercial banks and an increasing number of savings institutions and will be a wholly-owned subsidiary of HCB Bancshares, Inc. According to Ms. Lampkin, "Our day to day operations will not change as a result of the Conversion and deposits will continue to be insured by the FDIC up to the applicable legal limits." Customers with questions concerning the stock offering should call Heartland Community Bank's Stock Information Center at (501) ________, or visit one of Heartland Community Bank's offices. 8 PRESS RELEASE FOR IMMEDIATE RELEASE For More Information Contact: Vida H. Lampkin or Cameron McKeel (501) 836-6841 HEARTLAND COMMUNITY BANK COMPLETES INITIAL STOCK OFFERING Camden, Arkansas - (____________, 1997) Vida H. Lampkin, President of Heartland Community Bank ("Heartland Community Bank" or the "Bank"), announced today that HCB Bancshares, Inc., the proposed holding company for Heartland Community Bank, has completed its initial stock offering in connection with the Bank's conversion from mutual to stock form. A total of ____________ shares were sold at the price of $10.00 per share. On ____________, 1997, Heartland Community Bank's Plan of Conversion was approved by the Bank's voting members at a special meeting of members. Ms. Lampkin said that the officers and boards of directors of HCB Bancshares, Inc. and Heartland Community Bank wished to express their thanks for the response to the stock offering and that Heartland Community Bank looks forward to serving the needs of its customers and new stockholders as a community-based stock institution. The stock is anticipated to commence trading on ____________, 1997 on the Nasdaq National Market System under the symbol "____". Trident Securities, Inc. of Raleigh, North Carolina managed the stock offering. 9 II. Advertisements A. Explanation The intended use of the attached advertisement "A" is to notify Heartland Community Bank's customers and members of the local community that the conversion offering is underway. The intended use of advertisement "B" is to remind Heartland Community Bank's customers of the closing date of the Subscription Offering. B. Media Schedule 1. Advertisement A - To be run immediately following OTS approval and possibly run weekly for the first three weeks. 2. Advertisement B - To be run during the last week of the subscription offering. Trident may feel it is necessary to run more ads in order to remind customers of the close of the Subscription Offering and the Community Offering, if conducted. Alternatively, Trident may, depending upon the response from the customer base, choose to run fewer ads or no ads at all. These ads will run in the local newspapers. The ad size will be as shown or smaller. 10 - -------------------------------------------------------------------------------- This announcement is neither an offer to sell nor a solicitation of an offer to buy these securities. The offer is made only by the prospectus. These shares have not been approved or disapproved by the Securities and Exchange Commission, the Office of Thrift Supervision or the Federal Deposit Insurance Corporation, nor has such commission, office or corporation passed upon the accuracy or adequacy of the prospectus. Any representation to the contrary is unlawful. New Issue __________ __, 1997 2,300,000 Shares These shares are being offered pursuant to a Plan of Conversion whereby Heartland Community Bank Camden, Arkansas, will convert from a federal mutual savings bank to a federal capital stock savings bank and become a wholly owned subsidiary of HCB Bancshares, Inc. Common Stock --------------- Price $10.00 Per Share --------------- Trident Securities, Inc. For a copy of the prospectus call (501) ________. Copies of the prospectus may be obtained in any State in which this announcement is circulated from Trident Securities, Inc. or such other brokers and dealers as may legally offer these securities in such state. The stock will not be insured by the FDIC or any other government agency. 11 Advertisement (B) HEARTLAND COMMUNITY BANK __________ __, 1997 IS THE DEADLINE TO ORDER STOCK OF HCB BANCSHARES, INC. Customers of Heartland Community Bank have the opportunity to invest in Heartland Community Bank by subscribing for common stock in its proposed holding company HCB BANCSHARES, INC. A Prospectus relating to these securities is available at our office or by calling our Stock Information Center at (501) ________. This announcement is neither an offer to sell nor a solicitation of an offer to buy the stock of HCB Bancshares, Inc. The offer is made only by the Prospectus. The shares of common stock are not deposits or savings accounts and will not be insured by the Federal Deposit Insurance Corporation or any other government agency. Copies of the Prospectus may be obtained in any State in which this announcement is circulated from Trident Securities, Inc. or such other brokers and dealers as may legally offer these securities in such state. 12 III. Question and Answer Brochure A. Explanation The Question and Answer brochure is an essential marketing piece in any conversion. It serves two purposes: a) to answer some of the most commonly asked questions in "plain, everyday language"; and b) to highlight in brochure form the purchase commitments of the Bank's officers and directors shown in the Prospectus. Although most of the answers are taken verbatim from the Prospectus, it saves the individual from searching for the answer to a simple question. B. Method of Distribution There are four primary methods of distribution of the Question and Answer brochure. However, regardless of the method the brochures are always accompanied by a Prospectus. 1. A Question and Answer brochure is sent out in the initial mailing to all members of the Bank. 2. Question and Answer brochures are available in Heartland Community Bank's offices. 3. Question and Answer brochures are sent out in a standard information packet to all interested investors who phone the Stock Information Center requesting information. 13 PROPOSED OFFICER AND DIRECTOR PURCHASES Shares of Name Common Stock Amount($) - ---- ------------ --------- (to be completed) 14 QUESTIONS AND ANSWERS REGARDING THE PLAN OF CONVERSION On ____________, ____, the Board of Directors of Heartland Community Bank ("Heartland Community Bank" or the "Bank") unanimously adopted the Plan of Conversion, pursuant to which Heartland Community Bank will convert from a federally-chartered mutual savings bank to a federally-chartered stock savings bank. In addition, all of Heartland Community Bank's outstanding capital stock will be issued to the holding company, HCB Bancshares, Inc. (the "Holding Company"), which was organized by Heartland Community Bank to own Heartland Community Bank as a subsidiary. This brochure is provided to answer general questions you might have about the Conversion. Following the Conversion, Heartland Community Bank will continue to provide financial services to its depositors, borrowers and other customers as it has in the past and will operate with its existing management and employees. The Conversion will not affect the terms, balances, interest rates or existing federal insurance coverage on Heartland Community Bank's deposits or the terms or conditions of any loans to existing borrowers under their individual contract arrangements with Heartland Community Bank. For complete information regarding the Conversion, see the Prospectus and the Proxy Statement dated __________ __, 1997. Copies of each of the Prospectus and the Proxy Statement may be obtained by calling the Stock Information Center at (501) ________. THIS INFORMATION DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY HCB BANCSHARES, INC. COMMON STOCK. OFFERS TO BUY OR TO SELL MAY BE MADE ONLY BY THE PROSPECTUS. PLEASE READ THE PROSPECTUS PRIOR TO MAKING AN INVESTMENT DECISION. THE SHARES OF HCB BANCSHARES, INC. COMMON STOCK BEING OFFERED IN THE SUBSCRIPTION AND COMMUNITY OFFERINGS ARE NOT SAVINGS OR DEPOSIT ACCOUNTS AND ARE NOT INSURED BY THE SAVINGS ASSOCIATION INSURANCE FUND OF THE FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY OTHER GOVERNMENT AGENCY. 15 QUESTIONS AND ANSWERS HCB BANCSHARES, INC. (THE PROPOSED HOLDING COMPANY FOR HEARTLAND COMMUNITY BANK) Questions and Answers Regarding the Subscription and Community Offerings MUTUAL TO STOCK CONVERSION 1. Q. WHAT IS A "CONVERSION"? A. Conversion is a change in the legal form of organization. Heartland Community Bank currently operates as a federally-chartered mutual savings bank with no stockholders. Through the Conversion, Heartland Community Bank will become a federally-chartered stock savings bank, and the stock of its holding company, HCB Bancshares, Inc. will be held primarily by stockholders who purchase stock in the Subscription and Community Offerings or in the open market following the Offerings. 2. Q. WHY IS HEARTLAND COMMUNITY BANK CONVERTING? A. Heartland Community Bank, as a mutual savings bank, does not have stockholders and has no authority to issue capital stock. By converting to the stock form of organization, the Bank will be structured in the form used by commercial banks, most business entities and a growing number of savings institutions. The Conversion will be important to the future growth and performance of the Bank by providing a larger capital base from which the Bank may operate, the ability to attract and retain qualified management through stock-based employee benefit plans, enhanced ability to diversify into other financial services related activities and expanded ability to render services to the public. The Board of Directors and management of Heartland Community Bank believe that the stock form of organization is preferable to the mutual form of organization for a financial institution. The Board and management recognize the decline in the number of mutual thrifts from over 12,500 mutual institutions in 1929 to under 800 mutual thrifts today. Heartland Community Bank believes that converting to the stock form of organization will allow Heartland Community Bank to more effectively compete with local community banks, thrifts, and with statewide and regional banks, which are in stock form. Heartland Community Bank believes that by combining its existing quality service and products with a local ownership base the Bank's customers and community members who become stockholders will be inclined to do more business with Heartland Community Bank. Furthermore, because Heartland Community Bank competes with local and regional banks not only for customers, but also for employees, Heartland Community Bank 16 believes that the stock form of organization will better afford Heartland Community Bank the opportunity to attract and retain employees, management and directors through various stock benefit plans which are not available to mutual savings institutions. 3. Q. IS HEARTLAND COMMUNITY BANK'S MUTUAL TO STOCK CONVERSION BENEFICIAL TO THE COMMUNITIES THAT THE BANK SERVES? A. Management believes that the structure of the Subscription and Community Offerings is in the best interest of the various communities that Heartland Community Bank serves because following the Conversion it is anticipated that a significant portion of the Common Stock will be owned by local residents desiring to share in the ownership of a local community financial institution. Management desires that a significant portion of the shares of common stock sold in the Offerings will be sold to residents of the Bank's Local Community (Ouachita, Calhoun, Drew, Dallas, Cleveland, Grant and Pulaski Counties, Arkansas). 4. Q. WHAT EFFECT WILL THE CONVERSION HAVE ON DEPOSIT ACCOUNTS AND LOANS? A. Terms and balances of accounts in Heartland Community Bank and interest rates paid on such accounts will not be affected by the Conversion. Insurable accounts will continue to be insured by the Federal Deposit Insurance Corporation ("FDIC") up to the maximum amount permitted by law. The Conversion also will not affect the terms or conditions of any loans to existing borrowers or the rights and obligations of these borrowers under their individual contractual arrangements with Heartland Community Bank. 5. Q. WILL THE CONVERSION CAUSE ANY CHANGES IN HEARTLAND COMMUNITY BANK'S PERSONNEL? A. No. Both before and after the Conversion, Heartland Community Bank's business of accepting deposits, making loans and providing financial services will continue without interruption with the same board of directors, management and staff. 6. Q. WHAT APPROVALS MUST BE RECEIVED BEFORE THE CONVERSION BECOMES EFFECTIVE? A. First, the Board of Directors of Heartland Community Bank must adopt the Plan of Conversion, which occurred on __________, ____. Second, the Office of Thrift Supervision must approve the applications required to effect the Conversion. These approvals have been obtained. Third, the Plan of Conversion must be approved by a majority of all votes eligible to be cast by Heartland Community Bank's voting members. A Special Meeting of voting members will be held on __________ __, 1997, to consider and vote upon the Plan of Conversion. 17 THE HOLDING COMPANY 7. Q. WHAT IS A HOLDING COMPANY? A. A holding company is a company that owns another entity. Concurrent with the Conversion, Heartland Community Bank will become a subsidiary of HCB Bancshares, Inc., a company organized by Heartland Community Bank to acquire all of the capital stock of Heartland Community Bank to be outstanding after the Conversion. 8. Q. IF I DECIDE TO BUY STOCK IN THIS OFFERING, WILL I OWN STOCK IN THE HOLDING COMPANY OR HEARTLAND COMMUNITY BANK? A. You will own stock in HCB Bancshares, Inc. However, HCB Bancshares, Inc., as a holding company, will own all of the outstanding capital stock of Heartland Community Bank. 9. Q. WHY DID THE BOARD OF DIRECTORS FORM THE HOLDING COMPANY? A. The Board of Directors believes that the Conversion of Heartland Community Bank and the formation of the Holding Company will result in a stronger financial institution with the ability to provide additional flexibility to diversify the Bank's business activities through existing or newly-formed subsidiaries, although there are no current arrangements or understandings with respect to such diversification. The Holding Company will also be able to use stock-based incentive programs to attract and retain executive and other personnel for itself and its subsidiaries. ABOUT BECOMING A STOCKHOLDER 10. Q. WHAT ARE THE SUBSCRIPTION AND COMMUNITY OFFERINGS? A. Under the Plan of Conversion adopted by Heartland Community Bank, the Holding Company is offering shares of stock in the Subscription Offering to certain current and former customers of the Bank, the Bank=s Subsidiary and to the Bank's Employee Stock Ownership Plan ("ESOP"). Shares which are not subscribed for in the Subscription Offering, if any, may be offered to the general public in a Community Offering with preference given to natural persons who are residents of the Bank's Local Community. These Offerings are consistent with the board's objective of HCB Bancshares, Inc. being a locally owned financial institution. The Subscription Offering and Community Offering, if conducted, are being managed by Trident Securities, Inc. It is anticipated that any shares not subscribed for in either the Subscription or Community Offerings may be offered for sale in a Syndicated Community Offering, which is an offering on a best efforts basis by a selling group of broker-dealers. 11. Q. MUST I PAY A COMMISSION TO BUY STOCK IN CONJUNCTION WITH THE SUBSCRIPTION, COMMUNITY OR SYNDICATED COMMUNITY OFFERINGS? A. No. You will not pay a commission to buy the stock if the stock is purchased in the Subscription, Community or Syndicated Community Offerings. 18 12. Q. HOW MANY SHARES OF HCB BANCSHARES, INC. STOCK WILL BE ISSUED IN THE CONVERSION? A. It is currently expected that between 1,700,000 shares and 2,300,000 shares of common stock will be sold at a price of $10.00 per share. Under certain circumstances the number of shares may be increased to 2,645,000. 13. Q. HOW WAS THE PRICE DETERMINED? A. The aggregate price of the common stock was determined by Ferguson & Company, LLC, an independent appraisal firm specializing in the thrift industry, and was approved by the Office of Thrift Supervision. The price is based on the pro forma market value of Heartland Community Bank and the Holding Company as determined by the independent evaluation. 14. Q. WHO IS ENTITLED TO BUY STOCK IN THE CONVERSION? A. The shares of HCB Bancshares, Inc. to be issued in the Conversion are being offered in the Subscription Offering in the following order of priority to: (i) depositors with $50.00 or more on deposit at the Bank as of December 31, 1993 ("Eligible Account Holders"), (ii) the Bank's ESOP, (iii) depositors with $50.00 or more on deposit at the Bank as of December 31, 1996 ("Supplemental Eligible Account Holders"), (iv) depositors of the Bank as of _______, 1997 ("Voting Record Date") and borrowers of the Bank whose loans were outstanding as of April 15, 1995, and continue to be outstanding as of the Voting Record Date ("Other Members") and (v) depositors with $50.00 or more on deposit at the Bank=s Subsidiary as of December 31, 1996 (ASubsidiary Members@), subject to the priorities and purchase limitations set forth in the Plan of Conversion. Subject to the prior rights of holders of subscription rights, Common Stock not subscribed for in the Subscription Offering may be offered subsequently in the Community Offering to certain members of the general public, with preference given to natural persons and trusts of natural persons residing in Ouachita, Calhoun, Drew, Dallas, Cleveland, Grant and Pulaski Counties, Arkansas (the Bank's "Local Community"). Shares, if any, not subscribed for in the Subscription or Community Offerings may be offered to the general public in a Syndicated Community Offering. 15. Q. ARE THE SUBSCRIPTION RIGHTS TRANSFERABLE? A. No. Subscription rights granted to Heartland Community Bank's Eligible Account Holders, Supplemental Eligible Account Holders, Other Members and Subsidiary Members in the Conversion are not transferable. Persons violating such prohibition, directly or indirectly, may lose their right to purchase stock in the Conversion and be subject to other possible sanctions. It is the responsibility of each subscriber qualifying as an Eligible Account Holder, Supplemental Eligible Account Holder, Other Member or Subsidiary Member to list completely all account numbers for qualifying savings accounts or loans as of the qualifying date on the stock order form. 19 16. Q. WHAT ARE THE MINIMUM AND MAXIMUM NUMBERS OF SHARES THAT I CAN PURCHASE IN THE CONVERSION? A. The minimum number of shares is 25. The maximum number of shares that may be purchased in the Conversion by any person or entity currently is 15,000. The maximum number of shares that may be purchased in the Conversion by any person or entity other than the ESOP, together with any associate or persons or entities acting in concert with such person, currently is 20,000 shares. 17. Q. ARE THE BOARD OF DIRECTORS AND MANAGEMENT OF HEARTLAND COMMUNITY BANK BUYING A SIGNIFICANT AMOUNT OF THE STOCK OF THE HOLDING COMPANY? A. Directors and executive officers of the Bank are expected to subscribe for _______ shares. The purchase price paid by directors and executive officers will be the same $10.00 per share price as that paid by all other persons who order stock in the Subscription or Community Offerings. 18. Q. HOW DO I SUBSCRIBE FOR SHARES OF STOCK? A. To subscribe for shares of stock in the Subscription Offering, you should send or deliver a stock order form together with full payment (or appropriate instructions for withdrawal from permitted deposit accounts as described below) to Heartland Community Bank in the postage-paid envelope provided, so that the stock order form and payment or withdrawal authorization instructions are received prior to the close of the Subscription Offering, which will terminate at _____ p.m., Central Time, on __________ __, 1997, unless extended. Payment for shares may be made in cash (if made in person) or by check or money order. Subscribers who have deposit accounts with Heartland Community Bank may include instructions on the stock order form requesting withdrawal from such deposit account(s) to purchase shares of HCB Bancshares, Inc. Withdrawals from certificates of deposit may be made without incurring an early withdrawal penalty. If shares remain available for sale after the expiration of the Subscription Offering, they may be offered in the Community Offering, which will begin as soon as practicable after the end of the Subscription Offering, but may begin at any time during the Subscription Offering. Persons who wish to order stock in the Community Offering should return their stock order form as soon as possible after the Community Offering begins because it may terminate at any time after it begins. Members of the general public should contact the Stock Information Center at (501) ________ for additional information. 19. Q. MAY I USE FUNDS IN A RETIREMENT ACCOUNT TO PURCHASE STOCK? A. Yes. If you are interested in using funds held in your retirement account at Heartland Community Bank, the Stock Information Center can assist you in transferring those funds to a self-directed IRA, if necessary, and directing the trustee to purchase the stock. This process may be done without an early withdrawal penalty and generally without a negative tax consequence to your retirement account. Due to the additional paperwork involved, IRA transfers should be completed by _________. For additional information, call the Stock Information 20 Center at (501) __________. 20. Q. WILL I RECEIVE INTEREST ON FUNDS I SUBMIT FOR A STOCK PURCHASE? A. Yes. Heartland Community Bank will pay interest at its passbook rate from the date the funds are received until completion of the stock offering or termination of the Conversion. All funds authorized for withdrawal from deposit accounts with Heartland Community Bank will continue to earn interest at the contractual rate until the date of the completion of the Conversion. 21. Q. MAY I OBTAIN A LOAN FROM HEARTLAND COMMUNITY BANK TO PAY FOR SHARES PURCHASED IN THE CONVERSION? A. No. Federal regulations prohibit Heartland Community Bank from making loans for this purpose. However, federal regulations do not prohibit you from obtaining a loan from another source for the purpose of purchasing stock in the Conversion. 22. Q. IF I BUY STOCK IN THE CONVERSION, HOW WOULD I GO ABOUT BUYING ADDITIONAL SHARES OR SELLING SHARES IN THE AFTERMARKET? A. HCB Bancshares, Inc. has received approval to have the Common Stock quoted on the Nasdaq National Market System under the symbol "____." Therefore, once the stock has commenced trading, interested investors may contact any broker to buy or sell shares. 23. Q. WHAT IS THE HOLDING COMPANY'S DIVIDEND POLICY? A. The Board of Directors of the Holding Company intends to adopt a policy of paying regular quarterly cash dividends at an annual rate of $__ per share (__%) in the second full quarter following consummation of the Conversion. Dividends will be subject to determination and declaration by the Board of Directors, which will take into account a number of factors, including the operating results and financial condition of the Holding Company, net worth and capital requirements and regulatory restrictions on the payment of dividends by the Bank to the Holding Company upon which dividends paid by the Holding Company eventually will be primarily dependent. There can be no assurance that dividends will in fact be paid on the Common Stock or that, if paid, such dividends will not be reduced or eliminated in future periods. 24. Q. WILL THE FDIC INSURE THE SHARES OF THE HOLDING COMPANY? A. No. The shares of HCB Bancshares, Inc. are not savings deposits or savings accounts and are not insured by the FDIC or any other government agency. 25. Q. IF I SUBSCRIBE FOR SHARES AND LATER CHANGE MY MIND, WILL I BE ABLE TO GET A REFUND OR MODIFY MY ORDER? A. No. Your order cannot be canceled, withdrawn or modified once it has been received by Heartland Community Bank without the consent of Heartland Community Bank. 21 ABOUT VOTING "FOR" THE PLAN OF CONVERSION 26. Q. AM I ELIGIBLE TO VOTE AT THE SPECIAL MEETING OF MEMBERS TO BE HELD TO CONSIDER THE PLAN OF CONVERSION? A. You are eligible to vote at the Special Meeting of Members to be held on __________ __, 1997 if you were a) a depositor of Heartland Community Bank at the close of business on the Voting Record Date (_______, 1997) and continue as such until the Special Meeting; or b) a borrower of the Bank whose loan was outstanding on April 15, 1995 and continues to be outstanding on the Voting Record Date. If you were a member on the Voting Record Date, you should have received a proxy statement and a proxy card with which to vote. 27. Q. HOW MANY VOTES DO I HAVE? A. Each account holder is entitled to one vote for each $100, or fraction thereof, on deposit in such account(s). Each borrower member is entitled to cast one vote in addition to the number of votes, if any, he or she is entitled to cast as an account holder. No member may cast more than 1,000 votes. 28. Q. IF I VOTE "AGAINST" THE PLAN OF CONVERSION AND IT IS APPROVED, WILL I BE PROHIBITED FROM BUYING STOCK DURING THE SUBSCRIPTION OFFERING? A. No. Voting against the Plan of Conversion in no way restricts you from purchasing HCB Bancshares, Inc. stock in the Subscription Offering. 29. Q. DID THE BOARD OF DIRECTORS OF HEARTLAND COMMUNITY BANK UNANIMOUSLY ADOPT THE CONVERSION? A. Yes. Heartland Community Bank's Board of Directors unanimously adopted the Plan of Conversion and urges that all members vote "FOR" approval of such Plan. 30. Q. WHAT HAPPENS IF HEARTLAND COMMUNITY BANK DOES NOT GET ENOUGH VOTES TO APPROVE THE PLAN OF CONVERSION? A. The Conversion would not take place, and Heartland Community Bank would remain a mutual savings institution. 31. Q. AS A QUALIFYING DEPOSITOR OR BORROWER OF HEARTLAND COMMUNITY BANK, AM I REQUIRED TO VOTE? A. No. However, failure to return your proxy card or otherwise vote will have the same effect as a vote AGAINST the Plan of Conversion. 32. Q. WHAT IS A PROXY CARD? A. A proxy card gives you the ability to vote without attending the Special Meeting in person. If you received more than one informational packet, then you should vote the proxy cards in all packets. Your proxy card(s) is (are) located in the window sleeve of your informational packet(s). You may attend the meeting and vote, even if you have returned your proxy card, if you choose to do so. However, if you are unable to attend, you still are represented 22 by proxy. Previously executed proxies, other than those proxies sent pursuant to the Conversion, will not be used to vote for approval of the Plan of Conversion, even if the respective members do not execute another proxy or attend the Special Meeting and vote in person. 33. Q. HOW CAN I GET FURTHER INFORMATION CONCERNING THE STOCK OFFERING? A. You may call the Stock Information Center at (501) ________ for further information or to request a copy of the Prospectus, a stock order form, a proxy statement or a proxy card. THIS INFORMATION DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY HCB BANCSHARES, INC. COMMON STOCK. SUCH OFFERS AND SOLICITATIONS MAY BE MADE ONLY BY MEANS OF THE PROSPECTUS. COPIES OF THE PROSPECTUS MAY BE OBTAINED BY CALLING THE STOCK INFORMATION CENTER AT (501) ______________. THE SHARES OF HCB BANCSHARES, INC. COMMON STOCK BEING OFFERED ARE NOT SAVINGS OR DEPOSIT ACCOUNTS AND ARE NOT INSURED BY THE SAVINGS ASSOCIATION INSURANCE FUND OF THE FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY OTHER GOVERNMENT AGENCY. 23 IV. IRA Mailing A. Explanation A special IRA mailing is proposed to be sent to all IRA customers of the Bank in order to alert the customers that funds held in an IRA can be used to purchase stock. Since this transaction is not as simple as designating funds from a certificate of deposit like a normal stock purchase, this letter informs the customer that this process is slightly more detailed and involves a personal visit to the Bank. B. Quantity One IRA letter is proposed to be mailed to each IRA customer of the Bank. These letters would be mailed following OTS approval for the conversion and after each customer has received the initial mailing containing a Proxy Statement and a Prospectus. C. Example - See following page. 24 [HEARTLAND COMMUNITY BANK LETTERHEAD] __________ __, 1997 Dear Individual Retirement Account Participant: As you know, Heartland Community Bank is in the process of converting from a federally-chartered mutual savings bank to a federally-chartered stock savings bank and has formed HCB Bancshares, Inc. to hold all of the stock of Heartland Community Bank (the "Conversion"). Through the Conversion, certain current and former depositors and borrowers of Heartland Community Bank and its subsidiary have the opportunity to purchase shares of common stock of HCB Bancshares, Inc. in a Subscription Offering. HCB Bancshares, Inc. currently is offering up to 2,300,000 shares, subject to adjustment, of HCB Bancshares, Inc. at a price of $10.00 per share. As the holder of an individual retirement account ("IRA") at Heartland Community Bank, you have an opportunity to become a shareholder in HCB Bancshares, Inc. using funds being held in your IRA. If you desire to purchase shares of common stock of HCB Bancshares, Inc. through your IRA, Trident Securities, Inc. and Heartland Community Bank can assist you in self-directing those funds. This process can be done without an early withdrawal penalty and generally without a negative tax consequence to your retirement account. If you are interested in receiving more information on self-directing your IRA, please contact our Conversion Center at (501) __________. Because it may take several days to process the necessary IRA forms, a response is requested by _______, 1997 to accommodate your interest. Sincerely, Vida H. Lampkin President This letter is neither an offer to sell nor a solicitation of an offer to buy HCB Bancshares, Inc. common stock. The offer is made only by the Prospectus, which was recently mailed to you. THE SHARES OF HCB BANCSHARES, INC. COMMON STOCK ARE NOT DEPOSITS AND WILL NOT BE INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY OTHER GOVERNMENT AGENCY. 25 V. Individual Letters A. Explanation In order to educate the public about the stock offering, Trident suggests holding Community meetings in various locations. In an effort to target a group of interested investors, Trident requests that each Director of the Bank submit a list of acquaintances that he or she would like to invite to a community meeting. B. Method of Distribution of Invitations and Prospect Letters Each Director submits his list of prospects. Invitations are sent to each Director's prospects through the mail. All invitations are preceded by a Prospectus and all attendees are given a Prospectus at the meeting. Letters will be sent to prospects to thank them for their attendance and to remind them of closing dates. C. Examples enclosed 26 * Sent to prospects who are customers* _______________, 1997 &salutation& &firstname& &lastname& &address& &city&, &state& &zip& Dear &prefername&: Recently you may have read in the newspaper that Heartland Community Bank of will convert from a federally chartered mutual savings bank to a federally chartered stock savings bank. This is the most significant event in the history of the Savings Bank in that it allows customers, employees and directors the opportunity to share in Heartland Community Bank's future by becoming charter stockholders of the Savings Bank's holding company, HCB Bancshares, Inc. As a customer of Heartland Community Bank, you should have received a packet of information regarding the conversion, including a Prospectus and a Summary Proxy Statement. In addition, we are holding several presentations for friends of the officers and directors to discuss the stock offering in more detail. You will receive an invitation in the near future. This does not constitute an offer to sell, or the solicitation of an offer to buy, shares of HCB Bancshares, Inc. common stock offered in the conversion, nor does it constitute the solicitation of a proxy in connection with the conversion. Such offers and solicitations of proxies are made only by means of the Prospectus and the Summary Proxy Statement, respectively. There shall be no sale of stock in any state in which any offer, solicitation of an offer or sale of stock would be unlawful. THE SHARES OF HCB BANCSHARES, INC. COMMON STOCK OFFERED IN THE CONVERSION ARE NOT DEPOSITS AND ARE NOT INSURED BY THE FDIC OR ANY OTHER GOVERNMENTAL AGENCY. Please feel free to call me or the Heartland Community Bank's Stock Information Center at (501) _________ if you have any questions. I look forward to seeing you at one of our informational presentations. Sincerely, Vida H. Lampkin President 27 *Sent to prospects who are not customers* ________________, 1997 &salutation& &firstname& &lastname& &address& &city&, &state& *zip& Dear &prefername& Recently you may have read in the newspaper that Heartland Community Bank will be converting from a federally chartered mutual savings bank to federally chartered stock savings bank. This is the most significant event in the history of the Bank in that it allows customers, employees and directors the opportunity to share in Heartland Community Bank's future by becoming charter stockholders of the Bank's holding company, HCB Bancshares, Inc. ___________ has asked that you be sent a Prospectus and stock order form which will allow you to become a charter stockholder, should you desire. In addition, we are holding several presentations for friends of the officers and directors of Heartland Community Bank to discuss the stock offering in more detail. You will receive an invitation in the near future. Please feel free to call me or the Heartland Community Bank's Stock Information Center at (501) _____________ if you have any questions. I look forward to seeing you at one of our informational presentations. Sincerely, Vida H. Lampkin President This does not constitute an offer to sell, or the solicitation of an offer to buy, shares of HCB Bancshares, Inc. common stock offered in the conversion, nor does it constitute the solicitation of a proxy in connection with the conversion. Such offers and solicitations of proxies are made only by means of the Prospectus and the Summary Proxy Statement, respectively. There shall be no sale of stock in any state in which any offer, solicitation of an offer or sale of stock would be unlawful. THE STOCK WILL NOT BE INSURED BY THE FDIC OR ANY GOVERNMENTAL AGENCY. 28 *Sent to those attending a community meeting* _______, 1997 &salutation& &firstname& &lastname& &address& &city&, &state& &zip& Dear &prefername&: Thank you for attending our informational presentation relating to Heartland Community Bank's conversion to a stock company. The information presented at the meeting and the Prospectus you recently received should assist you in making an informed investment decision. Obviously, we are excited about this stock offering and the opportunity to share in the future of Heartland Community Bank. This conversion is the most important event in our history and it gives the Savings Bank the strength to compete in the future and will provide the Savings Bank additional corporate flexibility. We will contact you in the near future to get an indication of your interest in our offering. If you make a decision to invest, please return your order form no later than ________, 1997. If you have any questions, please call the Stock Information Center at (501) ________. Sincerely, Vida H. Lampkin President This does not constitute an offer to sell, or the solicitation of an offer to buy, shares of HCB Bancshares, Inc. common stock offered in the conversion, nor does it constitute the solicitation of a proxy in connection with the conversion. Such offers and solicitations of proxies are made only by means of the Prospectus and the Summary Proxy Statement, respectively. There shall be no sale of stock in any state in which any offer, solicitation of an offer or sale of stock would be unlawful. THE STOCK WILL NOT BE INSURED BY THE FDIC OR ANY GOVERNMENTAL AGENCY. 29 *Sent to those not attending a community meeting* _______, 1997 &salutation& &firstname& &lastname& &address& &city&, &state& &zip& Dear &prefername&: I am sorry you were unable to attend our recent presentation regarding Heartland Community Bank's mutual to stock conversion. The Board of Directors and management team of Heartland Community Bank are committed to contributing to long term shareholder value and as a group we are personally investing approximately $_______ of our own funds. We are enthusiastic about the stock offering and the opportunity to share in the future of Heartland Community Bank. We have established a Stock Information Center to assist you with any questions regarding the stock offering. Should you require any assistance between now and __________, I encourage you to either stop by our Stock Information Center or call (501) _______. I hope you will join me as a charter stockholder in Heartland Community Bank. Sincerely, Vida H. Lampkin President This does not constitute an offer to sell, or the solicitation of an offer to buy, shares of HCB Bancshares, Inc. common stock offered in the conversion, nor does it constitute the solicitation of a proxy in connection with the conversion. Such offers and solicitations of proxies are made only by means of the Prospectus and the Summary Proxy Statement, respectively. There shall be no sale of stock in any state in which any offer, solicitation of an offer or sale of stock would be unlawful. THE STOCK WILL NOT BE INSURED BY THE FDIC OR ANY GOVERNMENTAL AGENCY. 30 *Final Reminder Letter* _______, 1997 &salutation&firstname&lastname& &address& &city&, &state& &zip& Dear &prefername&: I am writing to remind you that the deadline for purchasing stock in HCB Bancshares, Inc. is quickly approaching. I hope you will join me in becoming a charter stockholder in one of Arkansas's newest publicly owned financial institutions. The deadline for becoming a charter stockholder is _________, 1997. If you have any questions, please call our Stock Information Center at (501) _______. Once again, I look forward to having you join me as a charter stockholder in HCB Bancshares, Inc. Sincerely, Vida H. Lampkin President This does not constitute an offer to sell, or the solicitation of an offer to buy, shares of HCB Bancshares, Inc. common stock offered in the conversion, nor does it constitute the solicitation of a proxy in connection with the conversion. Such offers and solicitations of proxies are made only by means of the Prospectus and the Summary Proxy Statement, respectively. There shall be no sale of stock in any state in which any offer, solicitation of an offer or sale of stock would be unlawful. THE STOCK WILL NOT BE INSURED BY THE FDIC OR ANY GOVERNMENTAL AGENCY. 31 VI. Counter Cards and Lobby Posters A. Explanation Counter cards and lobby posters serve two purposes: (1) As a notice to Heartland Community Bank's customers and members of the local community that the stock sale is underway and (2) to remind the customers of the end of the Subscription Offering. Trident has learned in the past that many people forget the deadline for subscribing and therefore we suggest the use of these simple reminders. B. Quantity Approximately 2 - 3 Counter cards will be used at teller windows and on customer service representatives' desk. Approximately 1 - 2 Lobby posters will be used at each office of Heartland Community Bank C. Example D. Size The counter card will be approximately 8 1/2" x 11". The lobby poster will be approximately 16" x 20". 32 C. POSTER OR COUNTER CARD "TAKE STOCK IN OUR FUTURE" "STOCK OFFERING MATERIALS AVAILABLE HERE" HEARTLAND COMMUNITY BANK 33 VII. Proxy Reminder A. Explanation A proxy reminder is used when the majority of votes needed to adopt the Plan of Conversion is still outstanding. The proxy reminder is mailed to those "target vote" depositors who have not previously returned their signed proxy. The target vote depositors are determined by the conversion agent. B. Example C. Size Proxy reminder is approximately 8 1/2" x 11". 34 B. Example P R O X Y R E M I N D E R HEARTLAND COMMUNITY BANK YOUR VOTE ON OUR STOCK CONVERSION PLAN HAS NOT BEEN RECEIVED. YOUR VOTE IS VERY IMPORTANT, PARTICULARLY SINCE FAILURE TO VOTE IS EQUIVALENT TO VOTING AGAINST THE PLAN. VOTING FOR THE CONVERSION WILL NOT AFFECT THE INSURANCE OF YOUR ACCOUNTS. DEPOSIT ACCOUNTS WILL CONTINUE TO BE FEDERALLY INSURED UP TO THE APPLICABLE LIMITS. YOU MAY PURCHASE STOCK IF YOU WISH, BUT VOTING DOES NOT OBLIGATE YOU TO BUY STOCK. PLEASE ACT PROMPTLY! SIGN THE ENCLOSED PROXY CARD AND MAIL, OR DELIVER, THE PROXY CARD TO HEARTLAND COMMUNITY BANK TODAY. PLEASE VOTE ALL PROXY CARDS RECEIVED. WE RECOMMEND THAT YOU VOTE TO APPROVE THE PLAN OF CONVERSION. THANK YOU. THE BOARD OF DIRECTORS AND MANAGEMENT OF HEARTLAND COMMUNITY BANK ----------------------------------------------------------------- IF YOU RECENTLY MAILED THE PROXY, PLEASE ACCEPT OUR THANKS AND DISREGARD THIS REQUEST. FOR FURTHER INFORMATION CALL (501) _______. 35 VIII. Cover Letters for Initial Mailing A. Explanation These cover letters are used as an introduction for the Offering and Proxy materials mailed to potential investors. B. Examples 36 (Heartland Community Bank Letterhead) _________, 1997 Dear Valued Customer: Heartland Community Bank is pleased to announce that we have received regulatory approval to proceed with its plan to convert to a federally-chartered stock savings bank. This stock conversion is the most significant event in the history of Heartland Community Bank in that it allows customers, community members, directors and employees an opportunity to own stock in HCB Bancshares, Inc., the proposed holding company for the Savings Bank. For over __ years, the Savings Bank has successfully operated as a mutual company. We want to assure you that the Conversion will not affect the terms, balances, interest rates or existing FDIC insurance coverage deposits at the Savings Bank, or the terms or conditions of any loans to existing borrowers under their individual contract arrangements with the Savings Bank. Let us also assure you that the Conversion will not result in any changes in the management, personnel or the Board of Directors of the Savings Bank. As one of our valued members, you have the opportunity to invest in the Savings Bank's future by purchasing stock in HCB Bancshares, Inc. during the Subscription Offering, without paying a sales commission. If you decide to exercise your subscription rights to purchase shares you must return the properly completed stock order form together with full payment for the subscribed shares so that it is received by the Savings Bank not later than ___ p.m. Central Time on ________, 1997. Enclosed is a proxy card. Your Board of Directors solicits your vote "FOR" the Savings Bank's Plan of Conversion. A vote in favor of the Plan does not obligate you to purchase stock. Please sign and return your proxy card promptly; your vote is important to us. We have also enclosed a Prospectus and Proxy Statement which fully describes the Savings Bank, its management, board and financial strength and the Plan of Conversion. Please review it carefully before you vote or invest. For your convenience we have established a Stock Information Center. If you have any questions, please call the Stock Information Center collect at (501) ______. We look forward to continuing to provide quality financial services to you in the future. Sincerely, Vida H. Lampkin President Enclosures This does not constitute an offer to sell, or the solicitation of an offer to buy, shares of HCB Bancshares, Inc. common stock offered in the conversion, nor does it constitute the solicitation of a proxy in connection with the conversion. Such offers and solicitations of proxies are made only by means of the Prospectus and Proxy Statement. There shall be no sale of stock in any state in which any offer, solicitation of an offer or sale of stock would be unlawful. THE STOCK WILL NOT BE INSURED BY THE FDIC OR ANY GOVERNMENTAL AGENCY. 37 (Heartland Community Bank Letterhead) ___________, 1997 Dear Interested Investor: Heartland Community Bank is pleased to announce that we have received regulatory approval to proceed with its plan to convert to a federally- chartered stock savings bank. This stock conversion is the most significant event in the history of the Savings Bank in that it allows customers, community members, directors and employees an opportunity to own stock HCB Bancshares, Inc., the proposed holding company for the Savings Bank. For over ____ years, the Savings Bank has successfully operated as a mutual company. We want to assure you that the Conversion will not affect the terms, balances, interest rates or existing FDIC insurance coverage on the Savings Bank deposits, or the terms or conditions of any loans to existing borrowers under their individual contract arrangements with the Savings Bank. Let us also assure you that the Conversion will not result in any changes in the management, personnel or the Board of Directors of the Savings Bank. Enclosed is a Prospectus and Proxy Statement which fully describes the Savings Bank, its management, board and financial strength. Please review it carefully before you make an investment decision. If you decide to invest, please return to the Savings Bank a properly completed stock order form together with full payment for shares at your earliest convenience but not later than ____ p.m. Central Time on _______, 1997. For your convenience we have established a Stock Information Center. If you have any questions, please call the Stock Information Center collect at (501) _______. We look forward to continuing to provide quality financial services to you in the future. Sincerely, Vida H. Lampkin President Enclosures This does not constitute an offer to sell, or the solicitation of an offer to buy, shares of HCB Bancshares, Inc. common stock offered in the conversion, nor does it constitute the solicitation of a proxy in connection with the conversion. Such offers and solicitations of proxies are made only by means of the Prospectus and Proxy Statement. There shall be no sale of stock in any state in which any offer, solicitation of an offer or sale of stock would be unlawful. THE STOCK WILL NOT BE INSURED BY THE FDIC OR ANY GOVERNMENTAL AGENCY. 38 (Heartland Community Bank Letterhead) ___________, 1997 Dear Friend: Heartland Community Bank is pleased to announce that we have received regulatory approval to proceed with its plan to convert to a federally- chartered stock savings bank. This stock conversion is the most significant event in the history of Heartland Community Bank in that it allows customers, community members, directors and employees an opportunity to own stock in HCB Bancshares, Inc., the proposed holding company for the Savings Bank. For over ____ years, the Savings Bank has successfully operated as a mutual company. We want to assure you that the Conversion will not affect the terms, balances, interest rates or existing FDIC insurance coverage on the Savings Bank deposits, or the terms or conditions of any loans to existing borrowers under their individual contract arrangements with the Savings Bank. Let us also assure you that the Conversion will not result in any changes in the management, personnel or the Board of Directors of the Savings Bank. Our records indicate that you were a depositor of the Savings Bank on _______ but that you were not a member on _______, 1997. Therefore, under applicable law, you are entitled to subscribe for Common Stock in HCB Bancshares, Inc.'s Subscription Offering. Orders submitted by you and others in the Subscription Offering are contingent upon the current members' approval of the Plan of Conversion at a special meeting of members to be held on ______, 1997 and upon receipt of all required regulatory approvals. If you decide to exercise your subscription rights to purchase shares, you must return the properly completed stock order form together with full payment for the subscribed shares so that it is received at the Savings Bank not later than _____ p.m. Central Time on _________, 1997. Enclosed is a Prospectus and Proxy Statement which fully describes the Savings Bank, its management, board and financial strength. Please review it carefully before you invest. For your convenience we have established a Stock Information Center. If you have any questions, please call the Stock Information center collect at (501) _______. We look forward to continuing to provide quality financial services to you in the future. Sincerely, Vida H. Lampkin President Enclosures This does not constitute an offer to sell, or the solicitation of an offer to buy, shares of HCB Bancshares, Inc. common stock offered in the conversion, nor does it constitute the solicitation of a proxy in connection with the conversion. Such offers and solicitations of proxies are made only by means of the Prospectus and Proxy Statement. There shall be no sale of stock in any state in which any offer, solicitation of an offer or sale of stock would be unlawful. THE STOCK WILL NOT BE INSURED BY THE FDIC OR ANY GOVERNMENTAL AGENCY. -----END PRIVACY-ENHANCED MESSAGE-----