-----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, C6HeRl2doZQ5KF6JQ5/JQZSXYMhiKOl5+yHsbliEgftTXFB7t5/s/lrDeYqXjrR2 C87bU4jbxZQePhnCBAgTdQ== 0000928385-97-001078.txt : 19970630 0000928385-97-001078.hdr.sgml : 19970630 ACCESSION NUMBER: 0000928385-97-001078 CONFORMED SUBMISSION TYPE: S-1 PUBLIC DOCUMENT COUNT: 15 FILED AS OF DATE: 19970627 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: HOPFED BANCORP INC CENTRAL INDEX KEY: 0001041550 STANDARD INDUSTRIAL CLASSIFICATION: [] STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-1 SEC ACT: 1933 Act SEC FILE NUMBER: 333-30215 FILM NUMBER: 97631690 BUSINESS ADDRESS: STREET 1: 2700 FORT CAMPBELL BLVD CITY: HOPKINSVILLE STATE: KY ZIP: 72240 BUSINESS PHONE: 5028851171 MAIL ADDRESS: STREET 1: 2700 FORT CAMPBELL BLVD CITY: HOPKINSVILLE STATE: KY ZIP: 72240 S-1 1 FORM S-1 As filed with the Securities and Exchange Commission on June 27, 1997 --- Registration No. 333-____ - ------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ___________________ FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ___________________ HOPFED BANCORP, INC. (Exact Name of Registrant as Specified in its Charter) __________________
DELAWARE 6035 REQUESTED (State or Other Jurisdiction (Primary Standard Industrial (I.R.S. Employer of Incorporation or Organization) Classification Code Number) Identification Number)
2700 FORT CAMPBELL BOULEVARD HOPKINSVILLE, KENTUCKY 42240 (502) 885-1171 (Address and telephone number of principal executive offices and principal place of business) BRUCE THOMAS PRESIDENT HOPFED BANCORP, INC. 2700 FORT CAMPBELL BOULEVARD HOPKINSVILLE, KENTUCKY 42240 (502) 885-1171 (Name, address, and telephone number of agent for service) Please send copies of all communications to: EDWARD B. CROSLAND, ESQUIRE LORI M. BERESFORD, ESQUIRE PAUL D. BORJA, ESQUIRE MULDOON MURPHY & FAUCETTE REINHART, BOERNER, VAN DEUREN, NORRIS & RIESELBACH, P.C. 5101 WISCONSIN AVENUE, N.W. 601 PENNSYLVANIA AVENUE, N.W. WASHINGTON, D.C. 20016 NORTH BUILDING, SUITE 750 (202) 362-0840 (PHONE) WASHINGTON, D.C. 20004 (202) 966-9409 (FAX) (202) 393-3636 (PHONE) (202) 393-0796 (FAX) APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as practicable after the effective date of this Registration Statement. If any of the securities being registered on this form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. [X] 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 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
=================================================================================================================================== Title of Each Class of Amount to be Proposed Maximum Proposed Maximum Amount of Securities to be Registered Registered (1) Offering Price Per Share (1) Aggregate Offering Price (1) Registration Fee (2) =================================================================================================================================== Common Stock, par value $.01 per share 3,174,000 $ 10.00 $ 31,740,000 $ 9,618.18 ===================================================================================================================================
____________ (1) Estimated solely for the purpose of calculating the Registration Fee. (2) Calculated pursuant to Rule 457(c) under the Securities Act of 1933, as amended. 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. - ------------------------------------------------------------------------------- PROSPECTUS HOPFED BANCORP, INC. (PROPOSED HOLDING COMPANY FOR HOPKINSVILLE FEDERAL SAVINGS BANK) UP TO 2,760,000 SHARES OF THE COMMON STOCK $10.00 PER SHARE HopFed Bancorp, Inc. (the "Company"), a Delaware corporation, is offering up to 2,760,000 shares, subject to adjustment, of its common stock, par value $.01 per share (the "Common Stock"), in connection with the conversion of Hopkinsville Federal Savings Bank (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 Plan of Conversion (the "Plan") of the Bank. The conversion of the Bank, the acquisition of all the outstanding capital stock of the Bank by the Company and the issuance and sale of the Common Stock are collectively referred to herein as the "Conversion." The shares of Common Stock are being offered pursuant to nontransferable subscription rights ("Subscription Rights") 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 SUBSCRIBE FOR STOCK IN THE CONVERSION AND MAY BE SUBJECT TO OTHER SANCTIONS AND PENALTIES IMPOSED BY THE OFFICE OF THRIFT SUPERVISION ("OTS"). The Company may offer any shares of the Common Stock not subscribed for in the Subscription Offering in a community offering (the "Community Offering") to certain members of the general public to whom the Company delivers a copy of this Prospectus and a stock order form (the "Stock Order Form"), with preference given to natural persons and trusts of natural persons who are permanent residents of Calloway, Christian, Todd and Trigg Counties, Kentucky. The Subscription Offering and the Community Offering are hereinafter referred to as the "Offerings." THE COMPANY AND THE BANK MAY, IN THEIR ABSOLUTE DISCRETION, REJECT ANY ORDERS IN THE COMMUNITY OFFERING IN WHOLE OR IN PART. The Company has applied to list the Common Stock on the Nasdaq Stock Market under the symbol "HFBC." There can be no assurance that such approval will be received or that an active public market will develop for the Common Stock or, if developed, will be sustained following the Offerings. See "Market for the Common Stock." FOR INFORMATION ON HOW TO SUBSCRIBE, PLEASE CALL THE STOCK INFORMATION CENTER AT (502) ___-____. PROSPECTIVE INVESTORS SHOULD CAREFULLY REVIEW AND CONSIDER THE DISCUSSION UNDER "RISK FACTORS" BEGINNING ON PAGE 1. THESE SHARES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION, THE OFFICE OF THRIFT SUPERVISION, THE FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY STATE SECURITIES COMMISSION, NOR HAS SUCH COMMISSION, OFFICE OR CORPORATION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. THE SHARES OF COMMON STOCK OFFERED BY THIS PROSPECTUS ARE NOT SAVINGS ACCOUNTS OR DEPOSITS AND ARE NOT INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE BANK INSURANCE FUND, THE SAVINGS ASSOCIATION INSURANCE FUND OR ANY OTHER GOVERNMENTAL AGENCY.
=========================================================================================================================== PURCHASE ESTIMATED NET PRICE (1) ESTIMATED FEES AND EXPENSES (2) PROCEEDS (3) - ---------------------------------------------------------------------------------------------------------------------------- Per Share (4) ...................................... $ 10.00 $ 0.27 $ 9.73 - ----------------------------------------------------------------------------------------------------------------------------- Total Minimum ...................................... $20,400,000 $650,000 $19,750,000 - ----------------------------------------------------------------------------------------------------------------------------- Total Midpoint ..................................... $24,000,000 $650,000 $23,350,000 - ----------------------------------------------------------------------------------------------------------------------------- Total Maximum ...................................... $27,600,000 $650,000 $26,950,000 - ----------------------------------------------------------------------------------------------------------------------------- Total Maximum, as adjusted (5) ..................... $31,740,000 $650,000 $31,090,000 =============================================================================================================================
(footnotes on following page) INVESTMENT BANK SERVICES, INC. FRIEDMAN, BILLINGS, RAMSEY & CO., INC. THE DATE OF THIS PROSPECTUS IS ___________, 1997 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 all shares of Common Stock will be based on the estimated pro forma market value of the Bank, as converted, as determined by an independent appraisal. All shares of Common Stock will be sold for $10.00 per share (the "Purchase Price"). With the exception of the ESOP, which intends to purchase 8% of the total number of shares of the Common Stock issued in the Conversion, no Eligible Account Holder, Other Member or person in the Community Offering may purchase more than $2 5 00,000 of the shares of the Common Stock issued in the Conversion. In addition, no person (together with associates and persons acting in concert therewith) may purchase in the aggregate more than the $ 50 200,000 of the shares of the Common Stock issued in the Conversion. The maximum overall purchase limitation and the amount permitted to be subscribed for may be increased or decreased under certain circumstances in the sole discretion of the Company and the Bank. The minimum purchase is 25 shares. See "The Conversion -- Limitations on Purchase of Shares." THE SUBSCRIPTION OFFERING WILL EXPIRE AT 4:00 P.M., LOCAL TIME, ON ___________, 1997, UNLESS EXTENDED BY THE COMPANY FOR UP TO AN ADDITIONAL 45 DAYS. THE COMMUNITY OFFERING, IF ANY, MAY COMMENCE WITHOUT NOTICE AT ANY TIME AFTER THE COMMENCEMENT OF THE SUBSCRIPTION OFFERING AND MAY TERMINATE AT ANY TIME WITHOUT NOTICE, BUT MAY NOT TERMINATE LATER THAN ________, 1997. An executed Stock Order Form, once received by the Bank, may not be modified, amended or rescinded without the consent of the Bank. Subscriptions paid by check, cash or money order will be held in a separate account at the Bank established specifically for this purpose, and interest will be paid at the Bank's passbook rate from the date payment is received until the Conversion is completed or terminated. In the case of payments to be made through withdrawal from deposit accounts at the Bank, all sums authorized for withdrawal will continue to earn interest at the contract rate until the date of the completion of the Conversion but, following completion of the Conversion, funds withdrawn from deposit accounts and used to purchase the (continued on following page) ________________________________ (footnotes from preceding table) (1) The estimated aggregate value of the Common Stock is based on an independent appraisal by National Capital Companies, LLC ("National Capital") as of May 29, 1997. See "The Conversion -- Stock Pricing and Number of Shares to be Issued." Based on such appraisal, the Company has determined to offer up to 2,760,000 shares, subject to adjustment, at a purchase price of $10.00 per share (the "Purchase Price"). The final aggregate value will be determined at the time of closing of the Conversion 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 of 2,040,000 shares at the minimum of the Estimated Valuation Range (defined herein) to 2,760,000 shares at the maximum of the Estimated Valuation Range and, with OTS approval, to 3,174,000 shares at approximately 15% above the maximum of the Estimated Valuation Range. (2) Includes estimated printing, postage, legal, accounting and miscellaneous expenses which will be incurred in connection with the Conversion. Also includes estimated fees, sales commissions and reimbursable expenses to be paid to the Agents of $225,000. The actual fees and expenses may vary from the estimates. See "Pro Forma Data" for the assumptions underlying these estimates. The Agents may each be deemed to be underwriters, and certain amounts to be paid to the Agents may be deemed to be underwriting compensation for purposes of the Securities Act of 1933, as amended (the "Securities Act"). The Company and the Bank have agreed to indemnify the Agents against certain liabilities arising out of their services in connection with the Conversion. (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 a possible purchase after the Conversion by a management recognition plan of a number of shares equal to up to 4% of the shares to be issued in the Conversion with funds contributed by the Bank. See "Capitalization" and "Pro Forma Data." (4) Based on the midpoint of the Estimated Valuation Range. At the minimum, maximum and 15% above the maximum of the Estimated Valuation Range, the estimated fees and expenses, including underwriting discounts and commissions, per share are expected to be $0.32, $0.24 and $0.20, respectively, and the estimated net proceeds per share are expected to be $9.68, $9.76 and $9.80, respectively. (5) Gives effect to an increase in the number of shares of up to 15% above the maximum of the Estimated Valuation Range which could occur without a resolicitation of subscribers or any right of cancellation and which would be due to an increase in the Estimated Valuation Range to reflect changes in market and financial conditions. See "The Conversion -- Stock Pricing and Number of Shares to be Issued." (continued from preceding page) Common Stock will no longer be deposit accounts and will not be insured by the Federal Deposit Insurance Company ("FDIC"), the Bank Insurance Fund, the Savings Association Insurance Fund ("SAIF") or any other governmental agency. If the Conversion is not completed within 45 days after the last day of the Subscription Offering (which date will be no later than __________, 1997) and the OTS consents to an extension of time to complete the Conversion, subscribers must affirmatively reconfirm their subscriptions prior to the expiration of the resolicitation offering and may, in the alternative, modify or cancel their subscriptions. See "The Conversion -- Subscription for Stock in Subscription and Community Offerings." The Bank and the Company have retained Investment Bank Services, Inc. ("IBS") and Friedman, Billings, Ramsey & Co., Inc. ("FBR") (hereinafter referred to as the "Agents"), to provide financial and sales assistance in connection with the Offerings. The Agents are each a broker-dealer registered with the Securities and Exchange Commission ("SEC") and a member of the National Association of Securities Dealers, Inc. ("NASD"). The Agents have agreed to use their best efforts to assist the Bank and the Company with the sale of the Common Stock in the Offerings. The Agents have no obligation to, and will not take or purchase, any shares in the Offerings. [MAP OF KENTUCKY AND EXPANDED MAP OF COUNTIES IN BANK'S MARKET AREA, WITH LOCATIONS NOTED OF BANK'S MAIN OFFICE AND BRANCHES] THE BANK'S CONVERSION TO A STOCK ORGANIZATION IS CONTINGENT UPON APPROVAL OF THE PLAN OF CONVERSION BY ITS MEMBERS, THE SALE OF AT LEAST THE MINIMUM NUMBER OF SHARES OFFERED PURSUANT TO THE PLAN OF CONVERSION AND THE SATISFACTION OF CERTAIN OTHER CONDITIONS IMPOSED BY THE OTS IN ITS APPROVAL. PROSPECTUS SUMMARY The following summary is qualified in its entirety by, and should be read in conjunction with, the more detailed information, risk factors and financial statements, including the related notes, appearing elsewhere in this Prospectus. Terms used but not defined herein are defined elsewhere in this Prospectus. HOPFED BANCORP, INC. The Company was incorporated under the laws of the State of Delaware in May 1997 at the direction of the Board of Directors of the Bank for the purpose of serving as a holding company of the Bank upon the conversion of the Bank from mutual to stock form. The Company has obtained approval from the OTS to acquire control of the 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. Following the Conversion, the Company's principal business will be overseeing and directing the business of the Bank and investing the net Conversion proceeds retained by it, and the Company will register with the OTS as a savings and loan holding company. HOPKINSVILLE FEDERAL SAVINGS BANK GENERAL. The Bank is a federal mutual savings bank headquartered in Hopkinsville with five offices: two offices in Hopkinsville (located in Christian County) and one office in each of Murray (Calloway County), Cadiz (Trigg County) and Elkton (Todd County), Kentucky. The Bank was chartered by the Commonwealth of Kentucky in 1879 under the name Hopkinsville Building and Loan Association. In 1940, the Bank converted to a federal mutual savings association bank and received federal insurance of its deposit accounts. In 1983, the Bank became a federal mutual savings bank and adopted its current name. At March 31, 1997, the Bank had total assets of $203.1 million, total deposits of $183.2 million and total equity of $17.2 million. The Bank is subject to examination and comprehensive regulation by the OTS, and the Bank's savings deposits are insured up to applicable limits by the Savings Association Insurance Fund ("SAIF"), which is administered by the FDIC. The Bank is a member of and owns capital stock in the Federal Home Loan Bank ("FHLB") of Cincinnati, which is one of 12 regional banks in the FHLB System. The Bank is further subject to regulations of the Board of Governors of the Federal Reserve System ("Federal Reserve Board") governing reserves to be maintained and certain other matters. Regulations significantly affect the operations of the Bank. See "Regulation -- Regulation of the Bank." Historically, the Bank has operated as a traditional savings institution by emphasizing the origination of loans secured by first mortgages on one-to-four family residences. At March 31, 1997, $79.6 million, or 81.6% of the Bank's net loan portfolio, consisted of one-to-four family residential mortgage loans, all of which are originated on properties in its market area of Christian, Calloway, Todd and Trigg Counties in Kentucky. See "Business of the Bank -- Market Area." Substantially all of these loans have terms of up to 25 years, and are adjustable rate loans. BUSINESS STRATEGY. The Bank is a community-oriented savings institution offering traditional deposit and loan products to meet the needs of its market area. The Bank emphasizes the origination of adjustable-rate one-to-four family residential mortgage loans secured primarily by owner-occupied properties in its market area. Additionally, due in part to the significant competition for lending in the Bank's market area and lower customer demand in the recent low interest rate environment for adjustable rate one-to-four family residential mortgage loans compared to 30-year fixed rate mortgage loans for which the Bank generally does not compete, the Bank has invested a substantial amount of funds in adjustable-rate mortgage-backed instruments and other securities. The need to find alternative investment options to one-to-four family loans was exacerbated by the Bank's practice prior to 1996 of aggressively seeking deposit liabilities from within its market area by offering above-market deposit rates. The resulting inflow of cash increased the Bank's total assets each year until it reached $212.6 million at December 31, 1995. Because of the weak demand in the Bank's market area for its loan products, the Bank invested the deposits into lower-yielding assets such as mortagage-backed securities. At the same time, the Bank incurred significant interest expense to attract and retain deposits at a level deemed appropriate by the Bank. This combination of lower overall yields and higher interest expense decreased the Bank's profitability as reflected in the decline in its interest rate spread to 0.84% for the year ended December 31, 1995 from 1.09% for the year ended December 31, 1994. (i) In 1996, the Bank began repricing its deposit liabilities so that its interest rates were more consistent with the rates offered by other financial institutions in its market area. This resulted in a decrease in deposits of $10.9 million at December 31, 1996 and a corresponding decrease in interest expense during 1996, which had the effect of increasing net interest income by $1.0 million from December 31, 1995 to December 31, 1996. The Bank intends to continue its strategy of offering deposits at not greater than market rates while emphasizing the ongoing shift of funds from investments in mortgage-backed and other securities to adjustable-rate mortgage loans depending upon loan demand in the Bank's market area. See "Business of the Bank -- Lending Activities." As a result of the Bank's revised business strategy, the Bank's interest rate spread increased to 1.35% for the year ended December 31, 1996, from 0.84% for the year ended December 31, 1995. During 1996, the Bank was required to pay a one-time deposit insurance assessment of $1.2 million (before taxes) to the SAIF. See Note 13 of Notes to Financial Statements. This special assessment was imposed on all thrift institutions in September 1996, and the Bank's net income, return on average assets and return on average equity for 1996 was $184,000, 0.09% and 1.12%, respectively. Excluding the effect of this one-time assessment, the Bank's net income, return on average assets and return on average equity for 1996 would have been $995,000, 0.48% and 6.05%, respectively. In comparison, the Bank's 1995 net income, return on average assets and return on average equity was $402,000, 0.19% and 2.56%, respectively. See "Selected Financial and Other Data." The Bank intends to continue this revised business strategy while maintaining its focus as a community-based financial institution serving the housing-related financing needs of customers in its market area. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." HIGHLIGHTS. Financial and operating characteristics of the Bank include the following: Community Orientation. The Bank has been committed to meeting the financial needs of the community in which it has operated for over 117 years. The Bank believes that with its long-term presence in the community, it is well positioned to provide personalized and efficient financial services to a loyal customer base. Management believes that the Bank can be more effective in servicing its customers because of the Bank's ability to quickly and effectively provide responses to customer needs and inquiries. Management plans to continue to emphasize the community orientation of the Bank and believes that this emphasis will represent a continuing competitive advantage to the Bank. Capital Strength. At March 31, 1997, the Bank exceeded all of its minimum regulatory capital requirements, with tangible and core capital of 7.5% of adjusted total assets and risk-based capital of 20.9% of total risk-weighted assets. See "Regulation -- Regulation of the Bank -- Regulatory Capital." As a result of the Conversion, assuming the Company retains 50.0% of the net proceeds of the Conversion at the midpoint of the Estimated Valuation Range, at March 31, 1997, the Bank would have had pro forma stockholders' equity of approximately $26.0 million, or 12.1% of pro forma total assets, and the Company would have had pro forma consolidated stockholders' equity of $37.7 million, or 16.7% of total pro forma consolidated assets. See "Historical and Pro Forma Regulatory Capital Compliance." Asset Quality. As a result of the conservative application by management of the Bank's underwriting criteria, the Bank has only experienced insignificant losses in its loan portfolio over the past five years. Further, through its aggressive loan management process, the Bank has significantly minimized its non-performing assets. At December 31, 1997, and 1995 and at March 31, 1997, the Bank's nonperforming assets to total assets were 0.13%, 0.06% and 0.09%, respectively. No loans have been accounted for on a nonaccrual basis in the last five years, or in the three months ended March 31, 1997. In addition, the Bank does not have any property that it has foreclosed and which would be reflected on the Bank's financial records as real estate owned ("REO"). The Bank's allowance for loan losses at March 31, 1997 totaled $217,000. THE CONVERSION The Board of Directors of the Bank adopted the Plan of Conversion (the "Plan") on May 21, 1997 pursuant to which the Bank will convert from a federally chartered mutual savings bank to a federally chartered stock savings bank, and will thereafter operate as a wholly owned subsidiary of a newly organized holding company formed by the Bank. See "The Conversion." Upon consummation of the Conversion, the Bank will issue all of its outstanding capital stock to the Company in exchange for at least 50% of the net proceeds from the sale of the Common Stock by the Company in the Conversion. The OTS has approved the Plan, subject to approval by the members of the Bank at a special meeting of members to be held on ____________, 1997 (the "Special Meeting") and satisfaction of certain other conditions. The OTS has also (ii) approved the Company's application to acquire all of the capital stock of the Bank and thereby become a savings and loan holding company. The Conversion is subject to certain conditions, including the prior approval of the Plan by the members of the Bank and the OTS. STOCK PRICING AND NUMBER OF SHARES TO BE ISSUED Federal regulations require that the aggregate 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. National Capital, 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. National Capital has determined that as of May 29, 1997, such estimated pro forma market value was $24,000,000. See "The Conversion -- Stock Pricing and Number of Shares to be Issued." The resulting valuation range in National Capital's appraisal, which under OTS regulations extends 15% below and above the estimated pro forma value, is from $20,400,000 to $27,600,000 (the "Estimated Valuation Range"). The Company, in consultation with its advisors, has determined to offer the shares of Common Stock in the Conversion at the Purchase Price of $10.00 per share. The appraisal will be further updated immediately prior to the completion of the Conversion and could be increased to up to $31,740,000 without a resolicitation of subscribers based on market and financial conditions at 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 2,040,000 to 3,174,000. For further information, see "The Conversion -- Stock Pricing and Number of Shares to be Issued." THE OFFERINGS The shares of Common Stock to be issued in the 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: (i) Eligible Account Holders (i.e., depositors whose accounts in the Bank totaled $50.00 or more on March 31, 1996); (ii) the ESOP (i.e., the Company's tax- qualified stock benefit plan); (iii) Supplemental Eligible Account Holders (i.e., depositors whose accounts in the Bank totaled $50.00 or more on June 30, 1997, other than Eligible Account Holders); and (iv) Other Members (i.e., certain depositors and borrower members of the Bank as of ___________, 1997, other than Eligible Account Holders or Supplemental Eligible Account Holders). Subscription Rights received in any of the foregoing categories will be subordinated to the Subscription Rights received by those in a prior category, with the exception that any shares of Common Stock sold in excess of the maximum of the Estimated Valuation Range may first be sold to the ESOP. The Company may offer any shares of Common Stock not subscribed for in the Subscription Offering in the Community Offering at the Purchase Price to members of the general public to whom the Company delivers a copy of this Prospectus and the Stock Order Form. In the Community Offering, preference will be given to natural persons and trusts of natural persons who are permanent residents of Calloway, Todd, Christian and Trigg Counties, Kentucky. Subscription Rights will expire if not exercised by 4:00 p.m., local time, on ____________, 1997, unless extended (the "Expiration Date"). The Company and the Bank reserve the absolute --------------------------------------------- right to accept or reject 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. - ------------------------------ The Bank and the Company have engaged the Agents to consult with and advise the Company and the Bank with respect to the Offerings, and the Agents have agreed to solicit subscriptions and purchase orders for shares of Common Stock in the Offerings. See "The Conversion -- Plan of Distribution and Marketing Arrangements." The Bank has established a Stock Information Center, which will be managed by IBS, to coordinate the Offerings, including tabulation of orders and answering questions about the Offerings by telephone (502- - - - - - ). All subscribers will be instructed to mail payment to the Stock Information Center or deliver payment directly to the office of the Bank. Payment for shares of Common Stock may be made by cash (if delivered in person), check or money order or by authorization of withdrawal from deposit accounts maintained with the Bank. If payment is made through such deposit account authorization, funds in the account to be used for such payment will not be available for withdrawal and will not be (iii) released until the Conversion is completed or terminated or if the subscriber fails to affirmatively confirm his or her order in the event of a resolicitation. See "The Conversion -- Subscriptions for Stock in the Offerings." The Plan provides that the Conversion must be completed within 24 months after the date of the approval of the Plan by the members of the Bank. The Plan 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. PURCHASE LIMITATIONS With the exception of the ESOP, which intends to purchase 8% of the total number of shares of Common Stock issued in the Conversion, no Eligible Account Holder, Supplemental Eligible Account Holder or Other Member nor person in the Community Offering may purchase more than $250,000 of the shares of Common Stock offered in the Conversion. In addition, no person (together with associates and persons acting in concert therewith) may purchase in the aggregate more than $500,000 of the shares of Common Stock offered in the Conversion. The maximum overall purchase limitation and the amount permitted to be subscribed for may be increased or decreased under certain circumstances in the sole discretion of the Company. The minimum purchase is 25 shares. See "The Conversion -- Limitations on Purchase of Shares." In the event of an oversubscription, shares will be allocated as provided in the Plan. See "The Conversion -- Subscription Offering," and "-- Community Offering." POTENTIAL BENEFITS OF CONVERSION TO MANAGEMENT In connection with the Conversion, the Company and the Bank intend to implement stock benefit plans, the primary effect of which is to compensate members of the Board of Directors and senior management through the use of stock and stock options. Also as part of the Conversion, the Company will adopt the ESOP for the benefit of employees of the Bank, including senior management, and will enter into an employment agreement with the Bank's current President. OPTION PLAN. The Board of Directors of the Company intends to implement the Option Plan, contingent upon receipt of OTS approval and stockholder approval at a meeting held no earlier than six months following completion of the Conversion. Pursuant to the Option Plan, a number of options to purchase shares equal to 10% of the shares of Common Stock issued in the Conversion would be reserved for future issuance by the Company. Assuming 2,400,000 shares of Common Stock are issued in the Conversion (assuming issuance of shares for the Purchase Price at the midpoint of the Estimated Valuation Range) and receipt of the required approvals, the Company currently plans to grant options to purchase 240,000 shares of Common Stock, of which options to purchase 48,000 shares of Common Stock will be granted to Bruce Thomas, President and Chief Executive Officer of the Bank, and options to purchase 192,000 shares of Common Stock will be granted to all executive officers and directors as a group (10 persons, including the Chief Executive Officer), respectively, under the Option Plan in the year following the Conversion. In addition, the Company currently plans to grant options to purchase 48,000 shares of Common Stock to four officers of the Bank who are not executive officers. The exercise price of the options, which would be granted at no cost to the recipients, would be equal to the fair market value of the underlying Common Stock on the date the option is granted. See "Management of the Bank -- Certain Benefit Plans and Agreements -- Stock Option Plan." MRP. The Board of Directors of the Company intends to implement the HopFed Bancorp, Inc. Management Recognition Plan ("MRP"), subject to receipt of OTS approval and to stockholder approval at a meeting of the Company's stockholders held no earlier than six months following the Conversion. Subject to the receipt of such approvals, the MRP will purchase an amount of shares after the Conversion equal to up to 4% of the shares issued in the Conversion (96,000 shares at the midpoint of the Estimated Valuation Range) for issuance to executive officers, other officers and directors of the Bank and the Company. At the Purchase Price in the Conversion of $10.00 per share, the shares to be awarded under the MRP to the directors and executive officers of the Company would have a value of $768,000. Assuming 2,400,000 shares of Common Stock are issued in the Conversion (at the midpoint of the Estimated Valuation Range) and receipt of the required approvals, the Company currently plans to award 19,200 shares of Common Stock to Bruce Thomas, President and Chief Executive Officer, and 76,800 shares of Common Stock to all executive officers and directors as a group (10 persons, including the Chief Executive Officer), respectively, under the MRP in the year following the Conversion. In addition, the Company currently plans to award 19,200 shares of Common Stock to four officers of the Bank who are not executive officers. However, no shares will be awarded under the MRP prior to receipt of regulatory and stockholder approval. Awards under the MRP would be granted at no cost to the recipients thereof. See "Management of the Bank -- Certain Benefit Plans and Agreements --Management Recognition Plan." (iv) OTHER BENEFITS. In addition to the Option Plan and the MRP, the following benefits may or will be realized as a result of the Conversion: (i) under the ESOP, employees of the Bank, including the executive officers, will have shares of Common Stock allocated to their respective accounts in the ESOP and (ii) the President Chief Executive Officer of the Bank (to be President of the Company and the Bank following the Conversion) has entered into an employment agreement with the Bank and the Company to serve in his post-Conversion positions. In addition to the possible financial benefits under the benefit plans, management could 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. See "Management of the Bank --Director Compensation," " -- Executive Compensation" and " -- Certain Benefit Plans and Agreements," "Certain Restrictions on Acquisitions of the Company and the Bank" and "Certain Anti-takeover Provisions in the Certificate of Incorporation and Bylaws." PROSPECTUS DELIVERY AND PROCEDURE FOR PURCHASING SHARES To ensure that each subscriber receives a Prospectus at least 48 hours prior to the Expiration Date in accordance with Rule 15c2-8 of the Securities Exchange Act of 1934, as amended (the "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 a Stock Order Form will confirm receipt or delivery in accordance with Rule 15c2-8. Stock Order Forms will be distributed only with a Prospectus. The executed Stock Order Form along with an executed certification form must be accompanied by payment by check, money order, bank draft or withdrawal authorization to an existing account at the Bank. To ensure that Eligible Account Holders and Other Members are properly identified as to their stock purchase priorities, as well as for purposes of allocating shares based on subscribers' deposit balances in the event of oversubscription, such persons must list all of their deposit accounts at the Bank on the Stock Order Form. Failure to list all such deposit accounts may result in the inability of the Company or the Bank to fill all or part of a subscription order. Neither the Company, the Bank nor any of their agents shall be responsible for any order on which all deposit accounts of the subscriber have not been fully and accurately disclosed. NON-TRANSFERABILITY OF SUBSCRIPTION RIGHTS Applicable federal regulations provide that prior to the completion of the Conversion, no person shall transfer or enter into any agreement or understanding to transfer the legal or beneficial ownership of the Subscription Rights issued under the Plan or the shares of Common Stock to be issued upon their exercise. Persons violating such prohibition may lose their right to subscribe for stock in the Conversion and may be subject to sanctions by the OTS. Each person exercising subscription rights will be required to certify that his or her purchase of common stock is solely for the purchaser's own account and that there is no agreement or understanding regarding the sale or transfer of such shares. USE OF PROCEEDS The proceeds retained by the Company after funding the ESOP initially will be invested in short-term and intermediate-term securities, including cash and cash equivalents and U.S. government and agency obligations. Also, such proceeds will be available for a variety of corporate purposes, including funding the MRP, if the MRP is implemented, future acquisitions and diversification of business, additional capital contributions, dividends to stockholders and future stock repurchases of the Common Stock to the extent permitted by applicable regulations. The Company currently has no specific plans, intentions, arrangements or understandings regarding any acquisitions or repurchases. 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 and investment and provide greater resources to support current operations by the Bank. DIVIDENDS The Company currently intends, subject to the factors noted below, to declare and pay a regular quarterly dividend commencing after the first full calendar quarter following completion of the Conversion. It is currently anticipated that the annual amount of such dividends will be equal to approximately 3% of the Purchase Price (which is equal to a quarterly (v) dividend of $0.075 per share). Dividends, when and if paid, will be subject to determination and declaration by the Board of Directors in its discretion, which will take into account the Company's consolidated financial condition and results of operations, the Bank's regulatory capital requirements, tax considerations, economic conditions, regulatory restrictions and other factors that the Board of Directors deem relevant, and there can be no assurance that dividends will be paid. See "Dividend Policy" and "Regulation -- Regulation of the Bank -- Limitation on Capital Distributions." RISK FACTORS See "Risk Factors" for a discussion of certain material factors that should be considered in connection with an investment in the Common Stock offered hereby. (vi) RISK FACTORS In addition to the other information in this Prospectus, the following factors should be carefully considered before investing in the Common Stock offered hereby. The discussion in this Prospectus contains certain forward-looking statements that involve risks and uncertainties, such as statements of the Company's plans, objectives, expectations and intentions. The Company's actual results could differ materially from those discussed here. Factors that could cause or contribute to such differences include those discussed below, as well as those discussed elsewhere herein or in the documents incorporated by reference herein. ANTICIPATED LOW RETURN ON EQUITY FOLLOWING CONVERSION Notwithstanding the recent improvement in the Bank's profitability, the Company's return on equity (net income divided by average equity for the period) following the Conversion is expected to be significantly lower than the Bank's historical return on equity due to the infusion of additional capital from the Offerings. At March 31, 1997 For the year ended December 31, 1996, the Bank's ratio of total equity to total assets was 8.5 27%, and, assuming the sale of 2,400,000 shares in the Conversion (i.e., the midpoint of the Estimated Valuation Range), such ratio at the Bank is expected to increase to 12.1%, and at the Company is expected to be 16.7% on a consolidated basis. See "Capitalization" and "Historical and Pro Forma Regulatory Capital Compliance." This increase in equity will prevent the Company from maintaining a return on equity at the levels historically maintained by the Bank unless it is accompanied by a corresponding increase in the Company's net income. The Company and the Bank intend to use the net proceeds for investments and loan originations to increase earnings per share, without assuming inappropriate risk. There can be no assurance that the Company will be able to increase net income in future periods to the same extent as the rate of increase in equity resulting from the Conversion. If the Company is not able to achieve a return on equity comparable to results achieved by publicly traded financial institutions with similar characteristics, the market price of the Common Stock may be adversely affected. UNCERTAINTY AS TO EXISTENCE OF GROWTH OPPORTUNITIES In order to fully deploy post-Conversion capital, the Bank may seek to expand into suitable market areas by either establishing one or more new branches or by acquiring another financial institution or branches of another financial institution if sufficient growth opportunities are not available in its market area. The Company's ability to expand internally by establishing new branch offices is dependent on its ability to identify advantageous branch office locations and generate new deposits and loans from those locations that will create an acceptable level of net income for the Company. At the same time, the Company's ability to grow through selective acquisitions of other financial institutions or branches of such institutions is dependent on successfully identifying, acquiring and integrating such institutions or branches. There can be no assurance the Company will be able to generate internal growth or to identify attractive acquisition candidates, acquire such candidates on favorable terms or successfully integrate any acquired institutions or branches into the Company. EFFECT OF FORT CAMPBELL ON ECONOMY OF THE BANK'S MARKET AREA The economy of the Bank's market area, which consists of Calloway, Christian, Todd and Trigg Counties, Kentucky, is affected in part by the operations of Fort Campbell, an Army base located approximately 11 miles south of Hopkinsville, Kentucky. For example, during the military conflict in the Persian Gulf in 1990 through 1991, certain of the Bank's borrowers who operated rental residential properties experienced severe vacancy rates. Further, much of the recent housing construction in the area has been for personnel at the base. In addition, recent international developments and budgetary constraints within the U.S. military establishment have resulted in closures of military facilities around the country. In the event the operations of Fort Campbell were to be reduced or closed, or a future military conflict were to result in the prolonged deployment of a significant number of the personnel from Fort Campbell, the economy in the Bank's market could suffer severe adverse effects. Although management is not aware of any plans to close or limit the operations at Fort Campbell, there can be no assurance that such change would not occur with little or no notice. POTENTIAL IMPACT OF CHANGES IN GOVERNMENT POLICIES CONCERNING TOBACCO PRODUCTS The economy of the Bank's primary market area is significantly influenced by the growth and sale of tobacco and tobacco products. As a result, the economy in the Bank's primary market area is significantly affected by policies of federal, state and foreign governments concerning tobacco. Any changes in governmental policies which tend to reduce financial 1 support for tobacco production or reduce the demand for and sale of tobacco products is likely to have a negative impact on the economy in the Bank's primary market area and a resulting negative impact upon the Bank's financial condition and results of operations. POTENTIAL EFFECTS OF CHANGES IN INTEREST RATES AND ECONOMIC CONDITIONS EFFECT ON NET INTEREST INCOME. The results of operations of the Bank are materially affected by general economic conditions, the monetary and fiscal policies of the federal government and the regulatory policies of governmental authorities. The results of operations of the Bank depend to a large extent on its level of "net interest income," which is the difference between interest income on interest-earning assets, such as loans, mortgage-backed securities and investment securities, and interest expense on interest-bearing liabilities, such as savings deposits and borrowings. The Bank has attempted to manage the sensitivity of its earnings to interest rate fluctuations by, among other measures, emphasizing adjustable-rate loans and investment securities and other loans such as consumer loans that adjust more rapidly to changes in interest rates. Nevertheless, a sustained increase in market interest rates could adversely affect the Bank's earnings. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Asset and Liability Management" and "Business of the Bank --Lending Activities" and " -- Deposit Activities and Other Sources of Funds." EFFECT ON SECURITIES. In addition to affecting interest income and expenses, changes in interest rates also can affect the value of the Bank's investment portfolio, a substantial portion of which is comprised of fixed-rate instruments. Generally, the value of fixed-rate instruments fluctuates inversely with changes in interest rates. The Bank has sought to reduce the vulnerability to changes in interest rates by managing the nature and composition of its securities portfolio and by maintaining a high level of liquid assets. As a consequence of the fluctuation in interest rates, the carrying value of the Bank's held-to-maturity securities, including mortgage-backed securities, can exceed or fall below the market value of such securities. At March 31, 1997, the fair value of such securities, including mortgage-backed securities, was below the carrying value by $722,000. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Asset and Liability Management." PREPAYMENT RISK. Changes in interest rates also can affect the average life of loans and mortgage-backed securities. Historically lower interest rates in recent periods have resulted in increased prepayments of loans and mortgage- backed securities, as borrowers refinanced to reduce borrowing costs. Under these circumstances, the Bank is subject to reinvestment risk to the extent that it is not able to reinvest such prepayments at rates which are comparable to the rates on the maturing loans or securities. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." CERTIFICATE OF INCORPORATION, 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 non-negotiated 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; elimination 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 of Directors to consider nonmonetary factors in evaluating a business combination or a tender or exchange offer. The provisions in the Company's Certificate of Incorporation requiring a supermajority vote for the approval of certain business combinations and containing restrictions on acquisitions of the Company's equity securities provide that the supermajority voting requirements or acquisition restrictions do not apply to business combinations or acquisitions meeting specified Board of Directors approval requirements. The Certificate of Incorporation also authorizes the issuance of 500,000 shares of serial preferred stock as well as additional shares of Common Stock up to a total of 8,000,000 outstanding shares of capital stock. These shares could be issued without stockholder approval on terms or in circumstances that could deter a future takeover attempt. The Certificate of Incorporation, Bylaw and statutory 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 employment agreements and change in control severance agreements, 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 2 Agreements," "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." VALUATION NOT INDICATIVE OF FUTURE PRICE OF THE COMMON STOCK The final aggregate purchase price of the Common Stock in the Conversion will be based upon an independent appraisal. Such valuation is not intended, and must not be construed, as a recommendation of any kind as to the advisability of purchasing such shares of Common Stock. 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 shares of Common Stock in the Conversion will thereafter be able to sell such shares at or above the Purchase Price. See "The Conversion --Stock Pricing and Number of Shares to be Issued." POSSIBLE INCOME TAX CONSEQUENCES OF DISTRIBUTION OF SUBSCRIPTION RIGHTS If the Subscription Rights granted to Eligible Account Holders and Other Members are deemed to have an ascertainable value, the receipt of such rights would 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 ascertainable value is an inherently factual determination. The Bank has received an opinion of National Capital that such rights have no value. The opinion of National Capital is not binding on the IRS. See "The Conversion -- Effect of Conversion to Stock Form on Depositors and Borrowers of the Bank -- Tax Effects." POSSIBLE DILUTIVE EFFECT OF MRP AND STOCK OPTIONS 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 approval, and that such plans would be considered and voted upon at a meeting of the Company's stockholders to be held no earlier than six months after the Conversion. Under the MRP, employees and directors could be awarded an aggregate amount of the 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 the 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 the MRP, the shares issued to directors and employees could be newly issued shares or shares purchased in the open market. In the event the shares issued under the MRP and the Option Plan consist of newly issued shares of Common Stock, the interests of existing stockholders would be diluted. See "Pro Forma Data" and "Management of the Bank - -- Certain Benefit Plans and Agreements -- Management Recognition Plan" and "-- Stock Option and Incentive Plan." POTENTIAL IMPACT ON VOTING CONTROL OF PURCHASES BY MANAGEMENT The level of ownership or control of the Common Stock after the Conversion by directors and officers of the Company is expected to be sufficiently high such that, if each member of management were to act consistently with each other, management as a whole would have significant influence over the outcome of any stockholder vote requiring a majority vote and in the election of directors, and would have veto power in matters requiring the approval of 80% of the Company's outstanding Common Stock. Thus, such level of ownership may tend to promote the continuity of existing management. Further, under such circumstances, management might have the power to authorize actions that could 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 interests. In particular, it is currently expected that directors and executive officers will subscribe for approximately 201,000 shares, or 8.4% of the Common Stock (assuming the sale of 2,400,000 shares at the midpoint of the Estimated Valuation Range). Based upon the ESOP's purchase of 8% of the Common Stock in the Conversion (192,000 shares at the midpoint of the Estimated Valuation Range) and assuming the issuance to the MRP of newly issued shares of Common Stock equal to 4% of the Common Stock issued in the Conversion (96,000 shares at the midpoint of the Estimated Valuation Range), directors and executive officers would initially control 20.4% of the Common Stock outstanding (based upon the midpoint of the Estimated Valuation Range). If, in addition, all of the options currently expected to be granted under the Option Plan (options for 192,000 shares at the midpoint of the Estimated Valuation Range) were exercised for newly issued shares by directors and executive officers, the percentage of shares controlled by such persons would be 25.8% of the total number of shares of Common Stock outstanding (based upon the midpoint of the Estimated Valuation Range). See "Pro Forma Data," "Proposed Management Purchases," "Management of the Bank -- Certain Benefit Plans and Agreements," "The Conversion 3 - -- 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." POTENTIAL COST OF BENEFIT PLANS The Company's adoption of the ESOP, the MRP and the Option Plan as part of the Conversion will generate significant compensation expenses after the Conversion that could depress the earnings of the Company for a number of years. It is anticipated that the ESOP will purchase 8% of the Common Stock sold in the Conversion with funds borrowed from the Company. The cost of acquiring the ESOP shares will be $1,632,000, $1,920,000, $2,208,000 and $2,539,200 at the minimum, midpoint, maximum and 15% above the maximum of the Estimated Valuation Range, respectively. Further, under American Institute of Certified Public Accountants ("AICPA") Statement of Position ("SOP") 93-6, "Employers' Accounting for Employee Stock Ownership Plans," an employer is required to record compensation expense in an amount equal to the fair value of shares committed to be released to employees from an ESOP. If shares of Common Stock appreciate in value over time, the adoption of SOP 93-6 may increase compensation expense relating to the ESOP to be established in connection with the Conversion as compared with prior guidance which required the recognition of compensation expense based on the cost of shares acquired by the ESOP. For an example of the effect that SOP 93-6 may have on the Company's net income, see "Pro Forma Data." In addition, following the Conversion, and subject to regulatory and stockholder approval, the Company intends to implement the MRP, under which employees and directors could be awarded (at no cost to them) an aggregate amount of the Common Stock equal to 4% of the shares issued in the Conversion. Assuming the sale in the Conversion of the minimum, midpoint, maximum and 15% above the maximum of the Estimated Valuation Range, and assuming the shares of Common Stock to be awarded under the MRP have a cost equal to the Purchase Price of $10.00 per share, the reduction to stockholders' equity of funding the MRP would be $816,000, $960,000, $1,104,000 and $1,269,600, respectively. Such amount would be in addition to the compensation expense that would be incurred by the Company as the shares of Common Stock awarded under the MRP vest to the recipients. The Company may also be required to recognize compensation expense associated with the grant of stock options in an amount equal to the excess of the market value of the underlying shares of Common Stock and the exercise price of the option. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Impact of New Accounting Standards." 4 SELECTED FINANCIAL INFORMATION AND OTHER DATA The following summary of selected financial information and other data does not purport to be complete and is qualified in its entirety by reference to the detailed information and Financial Statements and accompanying Notes appearing elsewhere in this Prospectus.
FINANCIAL CONDITION AND OTHER DATA: At March 31, At December 31, ------------------------------------------------------------------ 1997 1996 1995 1994 1993 1992 ---- ---- ---- ---- ---- ---- Total amount of: (Dollars in thousands) Assets......................... $ 203,058 $ 204,398 $ 212,598 $ 202,128 $ 188,826 $ 176,082 Loans receivable, net.......... 97,553 95,496 84,755 78,527 67,804 69,178 Cash and due from banks........ 1,272 1,452 1,303 1,578 1,106 1,377 Time deposits and interest-bearing deposits in FHLB....................... 9,000 2,000 12,550 38,200 24,425 23,525 Federal funds sold............. 8,806 500 7,948 1,330 10,465 3,450 Securities available for sale.. 5,109 5,125 4,053 2,955 2,859 1,387 Securities held to maturity: FHLB securities............... 56, 967 77,962 80,990 63,002 64,982 62,687 Mortgage-backed securities.... 20,702 17,984 17,563 13,343 15,124 12,983 Deposits....................... 183,162 183,827 194,775 185,699 173,184 162,919 FHLB advances.................. -- 1,317 -- -- -- -- Total equity................... 17,236 16,907 16,097 15,035 14,337 12,609 - ---------------------------------------------------------------------------------------------------------------- Number of: Real estate loans outstanding.. 2,165 2,151 2,074 2,026 1,932 2,064 Deposit accounts............... 22,979 23,778 25,473 24,648 24,492 24,746 Offices open................... 5 5 5 5 5 5
OPERATING DATA: Three Months Ended March 31, Year Ended December 31, ---------------------- --------------------------------------------------------- 1997 1996 1996 1995 1994 1993 1992 ---- ---- ---- ---- ---- ---- ---- (Dollars in thousands) Interest income................. $ 3,271 $ 3,234 $ 13,220 $ 12,472 $ 10,434 $ 10,573 $ 11,768 Interest expense................ 2,241 2,561 9,757 10,009 7,740 7,449 8,394 -------- -------- --------- --------- --------- --------- --------- Net interest income before provision for loan losses..... 1,030 673 3,463 2,463 2,694 3,124 3,374 Provision for loan losses....... -- -- 100 -- -- -- 47 -------- -------- --------- --------- --------- --------- --------- Net interest income............. 1,030 673 3,363 2,463 2,694 3,124 3,327 Non-interest income............. 125 125 590 398 512 596 487 Non-interest expense............ 616 578 3,690(1) 2,261 2,180 2,226 2,120 -------- -------- --------- --------- --------- --------- --------- Income before income taxes...... 539 220 263 600 1,026 1,494 1,694 Provision for income taxes...... 181 72 79 198 341 502 531 -------- -------- --------- --------- --------- --------- --------- Net income...................... $ 358 $ 148 $ 184 $ 402 $ 685 $ 992 $ 1,163 ======== ======== ========= ========= ========= ========= =========
________________ (1) Includes payment to the SAIF of a one-time deposit insurance special assessment of $1.2 million pursuant to legislation enacted to recapitalize SAIF. See Note 13 of Notes to Financial Statements. Excluding the effect of the SAIF assessment, the Bank's net income would have been $995,000. 5
KEY OPERATING RATIOS: At or for the Three Months At or for the Year Ended Ended March 31, (1) December 31, --------------------------------- -------------------------------- 1997 1996 1996 1995 1994 ---- ---- ---- ---- ---- PERFORMANCE RATIOS: Return on average assets (net income divided by average total assets).................................................. 0.70% 0.28% 0.09%(2) 0.19% 0.35% Return on average equity (net income divided by average total equity)......................................... 8.39% 3.66% 1.12%(2) 2.56% 4.63% Interest rate spread (combined weighted average interest rate earned less combined weighted average interest rate cost)..... 1.67% 0.92% 1.35% 0.84% 1.09% Ratio of average interest-earning assets to average interest-bearing liabilities.................................. 109.02% 107.44% 107.29% 107.36% 107.58% Ratio of non-interest expense to average total assets........... 1.21% 1.08% 1.76% 1.07% 1.11% ASSET QUALITY RATIOS: Nonperforming assets to total assets at end of period........... 0.09% 0.13% 0.13% 0.06% 0.02% Nonperforming loans to total loans at end of period............. 0.19% 0.32% 0.28% 0.16% 0.05% Allowance for loan losses to total loans at end of period....... 0.22% 0.14% 0.23% 0.14% 0.16% Allowance for loan losses to nonperforming loans at end of period................................................. 116.04% 42.96% 81.58% 91.04% 329.73% Provision for loan losses to total loans receivable, net........ N/A(3) N/A(3) 0.10% N/A(3) N/A(3) Net charge-offs to average loans outstanding.................... N/A(3) N/A(3) 0.005% N/A(3) N/A(3) CAPITAL RATIOS: Total equity to total assets at end of period................... 8.49% 7.58% 8.27% 7.57% 7.44% Average total equity to average assets.......................... 8.38% 7.58% 7.86% 7.46% 7.51%
(1) Annualized as appropriate. (2) Includes the effect of the payment of the Bank in 1996 of a one-time deposit insurance special assessment of $1.2 million to the SAIF. Excluding the effect of the SAIF assessment, the Bank's return on average assets would have been 0.48% and its return on average equity would have been 6.05%. (3) Ratio is not applicable because the Bank did not have any provision for loan losses or net charge-offs for this period.
REGULATORY CAPITAL RATIOS: March 31, 1997 ---------------------------------- (Dollars in thousands) Tangible capital............................................ $ 15,032 7.50% Less: Tangible capital requirement......................... 3,015 1.50 Excess.................................................. -------- ---- $ 12,017 6.00% ======== ==== Core capital................................................ $ 15,032 7.50% Less: Core capital requirement............................. 6,031 3.00 Excess.................................................. -------- ---- $ 9,001 4.50% ======== ==== Total risk-based capital..................................... $ 15,249 20.89% Less: Risk-based capital requirement........................ 5,840 8.00 Excess.................................................. -------- ----- $ 9,409 12.89% ======== =====
6 HOPFED BANCORP, INC. HopFed Bancorp, Inc. was incorporated under the laws of the State of Delaware in May 1997 at the direction of the Board of Directors of the Bank for the purpose of serving as a savings and loan holding company of the Bank upon the acquisition of all of the capital stock issued by the Bank in the Conversion. The Company has received approval from the OTS to acquire control of the 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, up to 50% of the net proceeds of the Conversion (after deducting amounts infused into the Bank and used to fund the ESOP) and a note receivable from the ESOP. Upon consummation of the Conversion, the Company's principal business will be overseeing the business of the Bank and investing the portion of the net Conversion proceeds retained by it, and the Company will register with the OTS as a savings and loan holding company. See "Regulation -- Regulation of the Company." 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, although the Company currently does not have any plans, agreements, arrangements or understandings with respect to any such acquisitions or mergers. After the Conversion, the Company will be classified as a unitary savings and loan holding company and will be subject to regulation by the OTS. The Company's executive offices are located at 2700 Fort Campbell Boulevard, Hopkinsville, Kentucky 42240, and its main telephone number is (502) 885-1171. HOPKINSVILLE FEDERAL SAVINGS BANK The Bank is a federal mutual savings bank headquartered in Hopkinsville, Kentucky and operating through five offices located in Hopkinsville, Murray, Cadiz and Elkton, Kentucky. The Bank was chartered by the Commonwealth of Kentucky in 1879 under the name Hopkinsville Building and Loan Association. In 1940, the Bank converted to a federal mutual savings association and received federal insurance of its deposit accounts. In 1983, the Bank became a federal mutual savings bank charter and adopted its current name. At March 31, 1997, the Bank had total assets of $203.1 million, total deposits of $ 183.2 million and total equity of $17.2 million. The principal business of the Bank consists of attracting deposits from the general public and investing these deposits in loans secured by first mortgages on one-to-four family residences in the Bank's market area. The Bank derives its income principally from interest earned on loans and, to a lesser extent, interest earned on investment securities, mortgage-backed securities and non- interest income. Funds for these activities are provided principally by operating revenues, deposits and repayments of outstanding loans and maturities of investment securities and mortgage-backed securities. 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 in the Subscription Offering and the Community Offering and the Syndicated Community Offering, if any, 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 $24,000,000 of the Common Stock at the midpoint of the Estimated Valuation Range, the net proceeds from the sale of the Common Stock are estimated to be approximately $23,350,000. The Company has received regulatory approval from the OTS 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. Based on the foregoing assumption and the purchase of 8% of the shares to be issued in the Conversion by the ESOP, the Bank would receive approximately $11,675,000 in cash, and the Company would retain approximately $9,755,000 in cash and $1,920,000 in the form of a note receivable from the ESOP. The ESOP note receivable will be for an eight-year term and carry a variable interest rate, which adjusts annually, equal to the prime rate as published in The Wall Street Journal plus 1%. ----------------------- The proceeds retained by the Company, after funding the ESOP, initially will be invested in short-term and intermediate-term securities including cash and cash equivalents and U.S. government and agency obligations. Such proceeds will be available for a variety of corporate purposes, including funding the MRP, if implemented, future 7 acquisitions and diversification of business, additional capital contributions, dividends to stockholders and future repurchases of the Common Stock to the extent permitted by applicable regulations. The Company currently has no specific plans, intentions, arrangements or understandings regarding acquisitions, capital contributions, or repurchases. Due to the limited nature of the Company's business activities, the Company believes that the net proceeds retained after the Conversion, earnings on such proceeds and payments on the ESOP note receivable 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 "Regulation --Depository Institution Regulation -- Dividend Restrictions." The proceeds contributed to the Bank will ultimately become part of the Bank's general corporate funds to be used for its business activities, including making loans and investments. Initially it is expected that the proceeds will be invested in short-term and intermediate-term securities including cash and cash equivalents and U.S. government and agency obligations. The additional capital will also provide the Bank with additional liquidity to improve the Bank's interest rate risk position and "cushion" the effect of a significant increase in interest rates. The Bank ultimately plans to use such proceeds primarily to originate loans in the ordinary course of business. Following the one-year anniversary of the completion of the Conversion (or sooner if permitted by the OTS), and based upon then existing facts and circumstances, the Company's Board of Directors may determine to repurchase shares of Common Stock, subject to any applicable statutory and regulatory requirements. Such facts and circumstances may include, but are not limited to: (i) market and economic factors such as the price at which the stock is trading in the market, the volume of trading, the attractiveness of other investment alternatives in terms of the rate of return and risk involved in the investment, the ability to increase the book value and/or earnings per share of the remaining outstanding shares, and an improvement in the Company's return on equity; (ii) the avoidance of dilution to stockholders by not having to issue additional shares to cover the exercise of stock options or to fund employee stock benefit plans; and (iii) any other circumstances in which repurchases would be in the best interests of the Company and its stockholders. Any stock repurchases will be subject to the determination of the Company's Board of Directors that the Company and the Bank will be capitalized in excess of all applicable regulatory requirements after any such repurchases. The payment of dividends or repurchasing of stock, however, would be prohibited if stockholders' equity would be reduced below the amount required for the liquidation account. See "Dividend Policy" and "The Conversion -- Certain Restrictions on Purchase or Transfer of Shares After the Conversion." Set forth below are the estimated investable net proceeds from the Conversion, assuming the sale of the Common Stock at the minimum, midpoint, maximum and maximum, as adjusted, of the Estimated Valuation Range and assuming that the ESOP purchases 8% of the shares issued in the Conversion and the MRP purchases 4% of the shares issued in the Conversion.
Minimum of Midpoint of Maximum of Maximum, as adjusted, of 2,040,000 shares at 2,400,000 shares 2,760,000 shares at 3,174,000 shares $10.00 per share at $10.00 per share $10.00 per share at $10.00 per share -------------------- ------------------- ------------------- ----------------------- (In thousands) Gross offering proceeds............ $20,400 $24,000 $27,600 $31,740 Estimated offering expenses........ (650) (650) (650) (650) -------- -------- -------- -------- Estimated net offering proceeds.... 19,750 23,350 26,950 31,090 ESOP funded by the Company......... (1,632) (1,920) (2,208) (2,539) MRP................................ (816) (960) (1,104) (1,270) -------- -------- -------- -------- Estimated investable net proceeds.. $17,302 $20,470 $23,638 $27,281 ======== ======== ======== ========
DIVIDEND POLICY The Company currently intends, subject to the factors noted below, to declare and pay quarterly dividends commencing after the first full calendar quarter following completion of the Conversion. It is currently anticipated that the annual amount of such dividend will be equal to approximately 3% of the Purchase Price (which is equal to a quarterly dividend of $0.075 per share). Dividends, when and if paid, will be subject to determination and declaration by the Board of Directors in its discretion, which will take into account the Company's consolidated financial condition and results of operations, the Bank's regulatory capital requirements, tax considerations, economic conditions, regulatory restrictions, other factors, and there can be no assurance that dividends will be paid, or if paid, will continue to be paid in the future. 8 Since the Company initially will have no significant source of income other than dividends from the Bank, principal and interest payments on the note payable 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 large 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. See "Regulation -- Regulation of the Bank -- Regulatory Capital," "-- Limitations on Capital Distributions" and "Taxation." Unlike the Bank, the Company is not subject to regulatory restrictions on the payment of dividends to stockholders. Under the Delaware General Corporation Law, dividends may be paid either out of surplus or, if there is no surplus, out of net profits for the fiscal year in which the dividend is declared and/or the preceding fiscal year. MARKET FOR THE COMMON STOCK The Company has never issued capital stock to the public. Consequently, there is no established market for the Common Stock. The Company will apply to list the Common Stock for quotation on the Nasdaq Stock Market ("Nasdaq") under the symbol "HFBC." There can be no assurance that such approval will be received. Further, there can be no assurance that an active and liquid trading market for the Common Stock will develop or that, if developed, it will continue, nor is there any assurance that persons purchasing shares of Common Stock will be able to sell them at or above the Purchase Price. The development of a liquid public market depends on the existence of willing buyers and sellers, the presence of which is not within the control of the Company or the Bank. The number of active buyers and sellers of the Common Stock at any particular time may be limited. Under such circumstances, investors in the Common Stock could have difficulty disposing of their shares and therefore should not view the Common Stock as a short-term investment. 9 CAPITALIZATION The following table sets forth information regarding the historical capitalization, including deposits, of the Bank at March 31, 1997 and the pro forma 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 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 "PRO FORMA DATA" AND "THE CONVERSION -- STOCK PRICING AND NUMBER OF SHARES TO BE ISSUED. "
Pro Forma consolidated capitalization of the Company Capitalization at March 31, 1997 based on the sale of -------------------------------------------------------------------------- of the Bank at 2,040,000 shares 2,400,000 shares 2,760,000 shares 3,174,000 shares March 31, 1997 at $10.00 per at $10.00 per at $10.00 per at $10.00 per --------------- share share share share -------------- -------------- -------------- -------------- (Dollars in thousands) Deposits (1)................. $ 183,162 $183,162 $183,162 $183,162 $183,162 FHLB advances................ -- -- -- -- -- ----------- ----------- ----------- ----------- ----------- Total deposits and borrowed funds....................... $ 183,162 $183,162 $183,162 $183,162 $183,16 =========== =========== =========== =========== =========== Preferred stock, par value $.01 per share; authorized - 500,000 shares; assumed outstanding - none...... -- -- -- -- -- Common Stock, par value $.01 per share; authorized - 7,500,000 shares; shares to be outstanding - as shown (2)(3)....... -- 20 24 28 32 Paid-in capital (2)(3)...... -- 19,730 23,326 26,922 31,058 Retained earnings (5)....... 15,033 15,033 15,033 15,033 15,033 Unrealized gain on securities available for sale........ 2,203 2,203 2,203 2,203 2,203 Common Stock acquired by ESOP (4)................... -- (1,632) (1,920) (2,208) (2,539) Common stock acquired by MRP (3)...................... -- (816) (960) (1,104) (1,270) ----------- ----------- ----------- ----------- ----------- Total stockholders' equity(6).................. $17,236 $ 34,538 $ 37,706 $ 40,874 $ 44,517 =========== =========== =========== =========== ===========
(Footnotes on following page) 10 __________________ (1) Does not reflect withdrawals from savings accounts for the purchase of the Common Stock in the Conversion; 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, if implemented, under which directors, executive officers and other employees could be granted options to purchase an aggregate amount of the Common Stock equal to 10% of the shares issued in the Conversion (240,000 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. Implementation of the Option Plan will require regulatory and stockholder approval. See "Management of the Bank -- Certain Benefit Plans and Agreements -- Stock Option and Incentive Plan" and "Risk Factors -- Possible Dilutive Effect of MRP and Stock Options." (3) Assumes a number of shares of Common Stock equal to 4% of the Common Stock to be sold in the Conversion will be purchased by the MRP through open market purchases. The dollar amount of the Common Stock to be purchased by the MRP is based on the $10.00 per share Purchase Price in the Conversion, 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 Purchase Price 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. Implementation of the MRP will require regulatory and stockholder approval. If the shares to fund the MRP are assumed to come from authorized but unissued shares purchased by the MRP from the Company at the Purchase Price within the year following the Conversion, at the minimum, midpoint, maximum and 15% above the maximum of the Estimated Valuation Range, the number of outstanding shares would be 2,121,600 shares, 2,496,000 shares, 2,870,400 shares and 3,300,960 shares, respectively, and total stockholders' equity would be $35,354,000, $38,666,000, $41,978,000 and $45,787,000, respectively. If the MRP acquires authorized but unissued shares from the Company, stockholders' ownership in the Company would be diluted by approximately 3.85%. See "Management of the Bank -- Certain Benefit Plans and Agreements -- Management Recognition Plan," "Pro Forma Data" and "Risk Factors -- Possible Dilutive Effect of MRP and Stock Options." (4) Assumes 8% of the shares of Common Stock to be sold in the Conversion are purchased by the ESOP, and that the funds used to purchase such shares are borrowed from the Company out of net proceeds. Although repayment of such debt will be secured solely by the shares purchased by the ESOP, the Bank or the Company 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. As the Bank accrues compensation expense to reflect the allocation of such shares pursuant to the ESOP, the charge against capital will be reduced accordingly. See "Management of the Bank -- Certain Benefit Plans and Agreements -- Employee Stock Ownership Plan." (5) The retained earnings of the Bank are 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 Account Holders and Supplemental Eligible Account Holders at the time of the Conversion and adjusted downward thereafter. See "Regulation -- Depository Institution Regulation -- Dividend Restrictions" and "The Conversion -- Effect of Conversion to Stock Form on Depositors and Borrowers of the Bank -- Liquidation Account." (6) 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 Conversion and by other factors. See "Pro Forma Data." 11 HISTORICAL AND PRO FORMA REGULATORY CAPITAL COMPLIANCE The table below presents the Bank's historical and pro forma capital position relative to its various minimum statutory and regulatory capital requirements at March 31, 1997 at the minimum, midpoint, maximum and maximum, as adjusted, of the Estimated Valuation Range. For a discussion of the assumptions underlying the pro forma capital calculations presented below, see "Use of Proceeds," "Capitalization," "Pro Forma Data" and the financial statements and related notes appearing elsewhere herein. For a detailed description of the regulatory capital requirements applicable to the Bank, see "Regulation -- Regulation of the Bank -- Regulatory Capital Requirements."
Pro Forma at March 31, 1997 (1) Assuming Issuance of Shares of the Common Stock at the: ----------------------------------------------------------------- Minimum of Midpoint of Historical at the Estimated the Estimated March 31, 1997 Valuation Range Valuation Range -------------- --------------- --------------- Percent of Percent of Percent of Amount Assets(2) Amount Assets (2) Amount Assets (2) --------- --------- --------- --------- --------- --------- (Dollars in thousands) Capital and retained earnings under generally accepted accounting accepted accounting principles............ $17,236 8,49% $24,663 11.58% $26,031 12.12% Tangible capital........ $15,032 7.50% $22.460 10.66% $23,828 11.21% Tangible capital requirement........... 3,015 1.50% 3.161 1.50% 3,188 1.50% -------- -------- --------- --------- --------- --------- Excess................ $12,017 6.00% $19,299 9.16% $20,640 9.71% ======== ======== ========= ========= ========= ========= Core capital............ $15,032 7.50% $22,460 10.66% $23,828 11.21% Core capital requirement (3)........ 6,031 3.00% 6,322 3.00% 6,376 3.00% -------- -------- --------- --------- --------- --------- Excess................ $ 9,001 4.50% $16,138 7.66% $17,452 8.21% ======== ======== ========= ========= ========= ========= Risk-based capital...... $15,249 20.89% $22,677 31.06% $24,045 32.94% Risk-based capital requirement............ 5,840 8.00% 5,840 8.00% 5,840 8.00% -------- -------- --------- --------- --------- --------- Excess................ $ 9,409 12.89% $16,837 23.06% $18,205 24.94% ======== ======== ========= ========= ========= ========= Maximum of Maximum, as adjusted, the Estimated of the Estimated Valuation Range Valuation Range ---------------- --------------- Percent of Percent of Amount Assets(2) Amount Assets (2) --------- ---------- ---------- ---------- Capital and retained earnings under generally accepted accounting accepted accounting principles............. $27,399 12.65% $28,973 13.25% Tangible capital......... $25,196 11.76% $26.769 12.37% Tangible capital requirement............ 3,215 1.50% 3,246 1.50% --------- -------- -------- -------- Excess................. $21,981 10.26% $23,523 10.87% ========= ======== ======== ======== Core capital............. $25,196 11.76% $26,769 12.37% Core capital requirement (3)........ 6,430 3.00% 6,492 3.00% --------- -------- -------- -------- Excess................. $18,766 8.76% $20,277 9.37% ========= -------- -------- -------- Risk-based capital....... $25,413 34.81% $26,986 36.97% Risk-based capital requirement............ 5,840 8.00% 5,840 8.00% --------- -------- -------- -------- Excess................. $19,573 26.81% $21,146 28.97% ========= ======== ======== ========
_______________ (1) Assumes that the Company will purchase all of the capital stock of the Bank to be issued upon Conversion in exchange for at least 50% of the net Conversion proceeds. Also assumes net proceeds distributed to the Bank are initially invested in short term U.S. government securities. Further assumes that 8% of the Common Stock to be sold in the Conversion is acquired by the ESOP, and that the funds used to acquire such shares are borrowed from the Company. In accordance with generally accepted accounting principles, the amount of the Common Stock to be purchased by the ESOP represents unearned compensation and is reflected in this table as a reduction of capital. Although repayment of such debt will be secured solely by the Common Stock 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. As the Bank makes contributions to the ESOP for simultaneous payment in an equal amount on the ESOP debt, there will be a corresponding reduction in the charge against capital. See "Management of the Bank -- Certain Benefit Plans and Agreements -- Employee Stock Ownership Plan." Also assumes that the MRP will purchase in the open market Common Stock in an amount equal to 4% of the Common Stock issued in the Conversion. The implementation of the MRP is subject to regulatory and stockholder approvals. For purposes of this table, the dollar amount of the Common Stock to be purchased by the MRP is assumed to be equal to the $10.00 price per share being offered in the Conversion. Such price may increase or decrease between the date of consummation of the Conversion and the date that, following receipt of regulatory and stockholder approvals, the shares are actually purchased by the MRP. The purchase of shares of Common Stock by the MRP following receipt of such approvals may be from authorized but unissued shares of Common Stock or in the open market. In accordance with generally accepted accounting principles, the amount of the Common Stock to be purchased by the MRP represents unearned compensation and is reflected in this table as a reduction of capital. As the Bank accrues compensation expense over the (2) Based on the Bank's adjusted total assets for the purpose of the tangible five year period following such purchase in accordance with generally and core capital requirements and risk-weighted assets for the purpose of accepted accounting principles to reflect the vesting of such shares of the risk-based capital requirement. See "Regulation -- Depository Common Stock pursuant to the MRP, there will be a corresponding reduction Institution Regulation -- Capital Requirements." (3) Does not reflect potential increases in the Bank's core capital requirement Benefit Plans and Agreements -- Management Recognition Plan." to between 4% and 5% of adjusted total assets in the event the OTS amends its capital requirements to conform to the more stringent leverage ratio adopted by the Office of the Comptroller of the Currency for national banks as described in "Regulation." 12 PRO FORMA DATA The following table sets forth the actual and, after giving effect to the Conversion for the periods and at the dates indicated, pro forma consolidated income, stockholders' equity and other data of the Bank prior to the Conversion and of the Company following the Conversion. Unaudited pro forma consolidated income and related data have been calculated for the three months ended March 31, 1997 and the year ended December 31, 1996 as if the Common Stock had been sold at the beginning of such periods, and the estimated net proceeds had been invested at 5.76% and 5.81% at the beginning of the respective periods. Pursuant to OTS regulations, the foregoing yields represent the arithmetic average of the average yield on the Bank's interest-earning assets and the average cost of deposits. The pro forma after-tax yields for the Company and the Bank are assumed to be 3.80% and 3.83% for the three months ended March 31, 1997 and for the year ended December 31, 1996, based on the effective tax rate of 34% in each the respective periods. 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 the periods, 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 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 an aggregate amount of the Common Stock equal to 10% of the shares issued in the Conversion (240,000 shares at the midpoint of the Current Valuation Range) are expected to be reserved for issuance to directors, executive officers and employees upon the exercise of stock options at exercise prices equal to the market price of the Common Stock on the date of grant. See "Management of the Bank -- Certain Benefit Plans and Agreements." The estimated net proceeds to the Company, as set forth in the following tables, assume 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 tables are estimated based upon the following assumptions: (i) 100% of the shares of Common Stock will be sold in the Subscription and Community Offerings as follows: (a) 8% will be sold to the ESOP and (b) the remaining shares will be sold to others in the Subscription and Community Offerings; and (ii) total Conversion expenses will be approximately $650,000. The foregoing assumptions regarding estimated purchases in the Subscription and Community Offerings are based on reasonable market assumptions, market conditions, consultations between the Bank and the Agents and planned purchases by the ESOP. Actual expenses may vary from those estimated. 13 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 -- EFFECT 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."
At or for the Three Months Ended March 31, 1997 --------------------------------------------------------------------------------------- 2,040,000 shares at 2,400,000 shares at 2,760,000 shares at 3,174,000 shares at $10.00 per share $10.00 per share $10.00 per share $10.00 per share ------------------- ------------------ ------------------ ----------------- (Dollars in thousands, except per share amounts) Gross offering proceeds..................... $ 20,400 $ 24,000 $ 27,600 $ 31,740 Estimated offering expenses................. (650) (650) (650) (650) ---------- ---------- ---------- ---------- Estimated net proceeds...................... 19,750 23,350 26,950 31,090 ESOP funded by the Company.................. (1,632) (1,920) (2,208) (2,539) MRP......................................... (816) (960) (1,104) (1,270) ---------- ---------- ---------- ---------- Estimated investable net proceeds........... $ 17,302 $ 20,470 $ 23,638 $ 27,281 ========== ========== ========== ========== Net income: Historical net income..................... $ 358 $ 358 $ 358 $ 358 Pro forma income on investable net........ 165 195 225 259 proceeds Pro forma ESOP adjustment (1)............. (34) (40) (46) (52) Pro forma MRP adjustment (2).............. (27) (32) (36) (42) ---------- ---------- ---------- ---------- Pro forma net income.................... $ 462 $ 481 $ 501 $ 523 ========== ========== ========== ========== Net income per share: Historical net income..................... $ 0.19 $ 0.16 $ 0.14 $ 0.12 Pro forma income on investable net........ 0.09 0.09 0.09 0.09 proceeds Pro forma ESOP adjustment (1)............. (0.02) (0.02) (0.02) (0.02) Pro forma MRP adjustment (2).............. (0.01) (0.01) (0.01) (0.01) ---------- ---------- ---------- ---------- Pro forma net income per share.......... $ 0.25 $ 0.22 $ 0.20 $ 0.18 ========== ========== ========== ========== Weighted average number of shares outstanding for earnings per share calculations....... 1,881,900 2,214,000 2,546,100 2,928,015 Stockholders' equity: (3) Historical.................................. $ 17,236 $ 17,236 $ 17,236 $ 17,236 Estimated net proceeds...................... 19,750 23,350 26,950 31,090 Common Stock acquired by ESOP (1)........... (1,632) (1,920) (2,208) (2,539) Common Stock acquired by MRP (2)............ (816) (960) (1,104) (1,269) ---------- ---------- ---------- ---------- Pro forma stockholders' equity.............. $ 34,538 $ 37,706 $ 40,874 $ 44,518 ========== ========== ========== ========== Stockholders' equity per share: (3) Historical................................ $ 8.45 $ 7.18 $ 6.25 $ 5.43 Estimated net proceeds.................... 9.68 9.73 9.76 9.80 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) ---------- ---------- ---------- ---------- Pro forma stockholders' equity per share.. $ 16.93 $ 15.71 $ 14.81 $ 14.03 ========== ========== ========== ========== Weighted average number of shares outstanding for stockholders' equity per share calculations (4).......................... 2,040,000 2,400,000 2,760,000 3,174,000 Offering price as a percentage of pro forma stockholders' equity per share (5)........ 59.1% 63.6% 67.5% 71.3% ========== ========== ========== ========== Ratio of offering price to pro forma annualized net income per share..................... 10.0 11.4 12.5 13.9 ========== ========== ========== ==========
(Footnotes on following page) 14 ________________ (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 not reflected as a liability but is reflected 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 an eight -year term. Because the Company will be providing the ESOP loan, only principal payments on the ESOP loan are reflected as employee compensation and benefits expense. For purposes of this table the Purchase Price of $10.00 was utilized to calculate the ESOP expense. The Bank intends to record compensation expense related to the ESOP in accordance with American Institute of Certified Public Accountants ("AICPA") Statement of Position ("SOP") No. 93-6. As a result, to the extent the value of the Common Stock appreciates over time, compensation expense related to the ESOP will increase. SOP 93-6 also changes the earnings per share computations for leveraged ESOPs to include as outstanding only shares that have been committed to be released to participants. For purposes of the preceding table, it was assumed that 3.13% of the ESOP shares purchased in the Conversion were committed to be released at March 31, 1997. If it is assumed that 100% of the ESOP shares were committed to be released at March 31, 1997, the application of SOP 93- 6 would result in net income per share of $0.23, $0.20, $0.18 and $0.16, respectively, and a ratio of offering price to pro forma net income per share of 10.9 times, 12.5 times, 13.9 times and 15.6 times, respectively, based on the sale of shares at the minimum, midpoint, maximum and 15% above the maximum of the Estimated Valuation Range. See "Management of the Bank -- Certain Benefit Plans and Agreements -- Employee Stock Ownership Plan." (2) Assumes a number of shares of Common Stock equal to 4% of the Common Stock to be sold in the Conversion will be purchased by the MRP in the open market in the year following the Conversion. The dollar amount of the Common Stock to be purchased by the MRP is based on the Purchase Price 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 Purchase Price 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. MRP adjustment is based on MRP expenses for the first year following the Conversion calculated in accordance with generally accepted accounting principles. MRP expenses are expected to be lower in subsequent years. Implementation of the MRP would require stockholder approval at a meeting of the Company's stockholders to be held within one year but no earlier than six months after the Conversion. For purposes of this table, it is assumed that the MRP will be adopted by the Bank's Board of Directors and approved by the Company's stockholders, and that the MRP will purchase the shares of Common Stock in the open market within the year following the Conversion. If the shares to be purchased by the MRP are assumed to be newly issued shares purchased from the Company by the MRP at the Purchase Price, at the minimum, midpoint, maximum and 15% above the maximum of the Estimated Valuation Range, the offering price as a percentage of pro forma stockholders' equity per share would be 60.01%, 64.55%, 68.38% and 72.09%, respectively, and pro forma net income per share would have been $0.24, $0.21, $0.19 and $0.17, respectively. As a result of the MRP, stockholders' interests will be diluted by approximately 3.85%. See "Management of the Bank -- Certain Benefit Plans and Agreements -- Management Recognition Plan" and "Risk Factors -- Possible Dilutive Effect of MRP and Stock Options." (3) 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 Conversion and by other factors. (4) Assumes that all shares of Common Stock held by the ESOP were committed to be released. (5) It is expected that following the consummation of the Conversion the Company will adopt the Option Plan, which would be subject to stockholder approval, and that such plan would be considered and voted upon at a meeting of the Company's stockholders to be held within one year but no earlier than six months after the Conversion. Upon adoption of the Option Plan, employees and directors could be granted options to purchase an aggregate amount of the 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 the event the shares issued under the Option Plan consist of newly issued shares of Common Stock and all options available for award under the Option Plan were awarded, the interests of existing stockholders would be diluted. At the minimum, midpoint, maximum and 15% above the maximum of the Estimated Valuation Range, if all shares under the Option Plan were newly issued and the exercise price for the option shares were equal to the Purchase Price in the Conversion, net income per share would be $0.22, $0.20, $0.18 and $0.16, respectively, and the stockholders' equity per share would be $16.30, $15.19, $14.37 and $13.66, respectively. See "Management of the Bank -- Certain Benefit Plans and Agreements -- Stock Option Plan." 15
At or for the Year Ended December 31, 1996 --------------------------------------------------------------------------------------- 2,040,000 shares at 2,400,000 shares at 2,760,000 shares at 3,174,000 shares at $10.00 per share $10.00 per share $10.00 per share $10.00 per share ------------------- ------------------ ------------------ ------------------ (Dollars in thousands, except per share amounts) Gross offering proceeds..................... $ 20,400 $ 24,000 $ 27,600 $ 31,740 Estimated offering expenses................. (650) (650) (650) (650) ---------- ---------- ---------- ---------- Estimated net proceeds...................... 19,750 23,350 26,950 31,090 ESOP funded by the Company.................. (1,632) (1,920) (2,208) (2,539) MRP......................................... (816) (960) (1,104) (1,270) ---------- ---------- ---------- ---------- Estimated investable net proceeds........... $ 17,302 $ 20,470 $ 23,638 $ 27,281 ========== ========== ========== ========== Net income: Historical net income (1)................. $ 184 $ 184 $ 184 $ 184 Pro forma income on investable net proceeds............................... 663 784 905 1,045 Pro forma ESOP adjustment (2)............. (135) (158) (182) (209) Pro forma MRP adjustment (3).............. (108) (127) (146) (168) ---------- ---------- ---------- ---------- Pro forma net income.................... $ 604 $ 683 $ 761 $ 852 ========== ========== ========== ========== Net income per share: Historical net income (1)................. $ 0.10 $ 0.08 $ 0.07 $ 0.06 Pro forma income on investable net proceeds............................... 0.35 0.36 0.36 0.36 Pro forma ESOP adjustment (2)............. (0.07) (0.07) (0.07) (0.07) Pro forma MRP adjustment (3).............. (0.06) (0.06) (0.06) (0.06) ---------- ---------- ---------- ---------- Pro forma net income per share.......... $ 0.32 $ 0.31 $ 0.30 $ 0.29 ========== ========== ========== ========== Weighted average number of shares outstanding for earnings per share calculations...... 1,897,200 2,232,000 2,566,800 2,951,820 Stockholders' equity: (4) Historical................................ $ 16,907 $ 16,907 $ 16,907 $ 16,907 Estimated net proceeds.................... 19,750 23,350 26,950 31,090 Common Stock acquired by ESOP (2)......... (1,632) (1,920) (2,208) (2,539) Common Stock acquired by MRP (3).......... (816) (960) (1,104) (1,270) ---------- ---------- ---------- ---------- Pro forma stockholders' equity............ $ 34,209 $ 37,377 $ 40,545 $ 44,188 ========== ========== ========== ========== Stockholders' equity per share: (4) Historical................................ $ 8.29 $ 7.04 $ 6.13 $ 5.33 Estimated net proceeds.................... 9.68 9.73 9.76 9.79 Common Stock acquired by ESOP (2)......... (0.80) (0.80) (0.80) (0.80) Common Stock acquired by MRP (3).......... (0.40) (0.40) (0.40) (0.40) ---------- ---------- ---------- ---------- Pro forma stockholders' equity per share.. $ 16.77 $ 15.57 $ 14.69 $ 13.92 ========== ========== ========== ========== Weighted average number of shares outstanding for stockholders' equity per share calculations (5).......................... 2,040,000 2,400,000 2,760,000 3,174,000 Offering price as a percentage of pro forma stockholders' equity per share (6)........ 59.6% 64.2% 68.1% 71.8% ========== ========== ========== ========== Ratio of offering price to pro forma net income per share................................. 31.3 32.3 33.3 34.5 =========== ========== ========== ==========
(Footnotes on following page) 16 ______________ (1) Historical net income and historical net income per share include an after- tax charge of $812,000 taken during the year ended December 31, 1996 representing a one-time special assessment of 65.7 basis points on the Bank's deposits held as of March 31, 1995 pursuant to legislation enacted to recapitalize the SAIF. If the one-time special assessment had been excluded, at the minimum, midpoint, maximum and 15% above the maximum of the Estimated Valuation Range, pro forma net income per share would have been $0.75, $0.67, $0.61 and $0.56, respectively. See Note 13 of Notes to Financial Statements. At the midpoint of the Estimated Valuation Range, and excluding the effect of the one-time SAIF assessment, the Company's pro forma and offering price as a percentage of pro forma stockholders' equity would have been 62.8%, and its pro forma ratio of offering price to pro forma net income per share would have been 14.9 times. (2) 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 not reflected as a liability but is reflected 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 an eight-year term. Because the Company will be providing the ESOP loan, only principal payments on the ESOP loan are reflected as employee compensation and benefits expense. For purposes of this table the Purchase Price of $10.00 was utilized to calculate the ESOP expense. The Bank intends to record compensation expense related to the ESOP in accordance with American Institute of Certified Public Accountants ("AICPA") Statement of Position ("SOP") No. 93-6. As a result, to the extent the value of the Common Stock appreciates over time, compensation expense related to the ESOP will increase. SOP 93-6 also changes the earnings per share computations for leveraged ESOPs to include as outstanding only shares that have been committed to be released to participants. For purposes of the preceding table, it was assumed that 12.5% of the ESOP shares purchased in the Conversion were committed to be released at December 31, 1996. If it is assumed that 100% of the ESOP shares were committed to be released at December 31, 1996, the application of SOP 93-6 would result in net income per share of $0.30, $0.28, $0.27 and $0.26, respectively, and a ratio of offering price to pro forma net income per share of 33.3 times, 35.7 times, 37.0 times and 38.5 times, respectively, based on the sale of shares at the minimum, midpoint, maximum and 15% above the maximum of the Estimated Valuation Range. See "Management of the Bank -- Certain Benefit Plans and Agreements -- Employee Stock Ownership Plan." (3) Assumes a number of shares of Common Stock equal to 4% of the Common Stock to be sold in the Conversion will be purchased by the MRP in the open market in the year following the Conversion. The dollar amount of the Common Stock to be purchased by the MRP is based on the Purchase Price 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 Purchase Price 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. MRP adjustment is based on MRP expenses for the first year following the Conversion calculated in accordance with generally accepted accounting principles. MRP expenses are expected to be lower in subsequent years. Implementation of the MRP would require stockholder approval at a meeting of the Company's stockholders to be held within one year but no earlier than six months after the Conversion. For purposes of this table, it is assumed that the MRP will be adopted by the Bank's Board of Directors and approved by the Company's stockholders, and that the MRP will purchase the shares of Common Stock in the open market within the year following the Conversion. If the shares to be purchased by the MRP are assumed to be newly issued shares purchased from the Company by the MRP at the Purchase Price, at the minimum, midpoint, maximum and 15% above the maximum of the Estimated Valuation Range, the offering price as a percentage of pro forma stockholders' equity per share would be 60.6%, 65.1%, 68.9% and 72.6%, respectively, and pro forma net income per share would have been $0.31, $0.29, $0.28 and $0.27, respectively. As a result of the MRP, stockholders' interests will be diluted by approximately 3.85%. See "Management of the Bank -- Certain Benefit Plans and Agreements -- Management Recognition Plan" and "Risk Factors -- Possible Dilutive Effect of MRP and Stock Options." (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 17 liquidation. Such pro forma data may be materially affected by a change in the number of shares to be sold in the Conversion and by other factors. (5) Assumes that all shares of Common Stock held by the ESOP were committed to be released. (6) It is expected that following the consummation of the Conversion the Company will adopt the Option Plan, which would be subject to stockholder approval, and that such plan would be considered and voted upon at a meeting of the Company's stockholders to be held within one year but no earlier than six months after the Conversion. Upon adoption of the Option Plan, employees and directors could be granted options to purchase an aggregate amount of the 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 the event the shares issued under the Option Plan consist of newly issued shares of Common Stock and all options available for award under the Option Plan were awarded, the interests of existing stockholders would be diluted. At the minimum, midpoint, maximum and 15% above the maximum of the Estimated Valuation Range, if all shares under the Option Plan were newly issued and the exercise price for the option shares were equal to the Purchase Price in the Conversion, net income per share would be $0.29, $0.28, $0.27 and $0.26, respectively, and the stockholders' equity per share would be $16.15, $15.07, $14.26 and $13.57, respectively. See "Management of the Bank -- Certain Benefit Plans and Agreements -- Stock Option Plan." 18 PROPOSED MANAGEMENT PURCHASES The following table sets forth information regarding the approximate number of shares of Common Stock intended to be purchased by each of the directors and officers of the Bank and by all directors and executive officers as a group, including their associates. For purposes of the following table, it has been assumed that 2,400,000 shares of Common Stock will be sold at $10.00 per share, the midpoint of the Estimated Valuation Range (see "-- Stock Pricing and Number of Shares to be Issued") and that sufficient shares will be available to satisfy subscriptions in all categories.
Aggregate Purchase Price Name and Position Total Shares Percent of Total of Proposed Purchases - -------------------------------------------- ------------------- ------------------ --------------------------- WD Kelly Chairman of the Board..................... 12,500 0.52% $ 125,000 Bruce Thomas Director, President and Chief Executive Office.................................... 20,000 0.83 200,000 Peggy R. Noel Director, Executive Vice President and Chief Financial Officer................... 50,000 2.09 500,000 Boyd M. Clark Director and Senior Vice President -- Loan Administration....................... 10,000 0.42 100,000 D.B. Bostick, Jr. Director.................................. 10,000 0.42 100,000 Clifton H. Cochran Director.................................. 20,000 0.83 200,000 Drury R. Embry Director.................................. 1,000 0.04 10,000 Walton G. Ezell Director.................................. 50,000 2.09 500,000 John Noble Hall, Jr. Director.................................. 20,000 0.83 200,000 Chester K. Wood Director.................................. 7,500 0.31 75,000 ------- ----- ---------- All directors and executive officers, as a group (10 persons) and their associates.............................. 201,000 8.38 2,010,000 ESOP (1)............................... 192,000 8.00 1,920,000 MRP (2)............................... 96,000 4.00 960,000 ------- ----- ---------- Total (3)......................... 489,000 20.38% $4,890,000 ======= ===== ==========
(Footnotes on following page) 19 _________ (1) Consists of shares that could be allocated to participants in the ESOP, under which executive officers and other employees would be allocated in the aggregate 8.0% of the Common Stock issued in the Conversion. See "Management of the Bank -- Certain Benefit Plans and Agreements -- Employee Stock Ownership Plan." (2) Consists of shares that are expected to be awarded to participants in the MRP, if implemented, under which directors, executive officers and other employees would be awarded an aggregate number of shares equal to 4.0% of the Common Stock sold in the Conversion. The dollar amount of the Common Stock to be purchased by the MRP is based on the Purchase Price in the Conversion and does not reflect possible increases or decreases in the value of such Stock relative to the Purchase Price per share in the Conversion. Implementation of the MRP would require stockholder approval. See "Management of the Bank -- Certain Benefit Plans and Agreements -- Management Recognition Plan." Such shares could be newly issued shares or shares purchased in the open market following implementation of the MRP, in the sole discretion of the Company's Board of Directors. The percentage shown assumes the shares are purchased in the open market. If all shares acquired by the MRP are newly issued shares, the percentage of the outstanding Common Stock owned by the MRP would be 3.85%. Any sale of newly issued shares to the MRP would be dilutive to existing stockholders. See "Risk Factors -- Potential Benefits of Conversion to Management." (3) Does not include shares that possibly would be purchased by participants in an Option Plan intended to be implemented following the Conversion, under which directors, executive officers and other employees would be granted options to purchase an aggregate amount of the 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. Shares issued pursuant to the exercise of options could be from treasury stock or newly issued shares. Implementation of the Option Plan would require regulatory and stockholder approval. See "Management of the Bank -- Certain Benefit Plans and Agreements -- Stock Option Plan." 20 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GENERAL The Company has only recently been formed and, accordingly, has no results of operations at this time. As a result, this discussion relates to the financial condition and results of operations of the Bank. The principal business of the Bank consists of accepting deposits from the general public and investing these funds primarily in loans and in investment securities and mortgage-backed securities. The Bank's loan portfolio consists primarily of loans secured by residential real estate located in its market area. See "Prospectus Summary --Hopkinsville Federal Savings Bank." The Bank has historically been profitable. For the three months ended March 31, 1997, the Bank recorded net income of $358,000, a return on average assets of 0.70% and a return on average equity of 8.39%. For the year ended December 31, 1996, the Bank recorded net income of $184,000, a return on average assets of 0.09% and a return on average equity of 1.12%. In 1996, the Bank paid the FDIC a special assessment of $1.2 million before taxes ($812,000 net of tax) to recapitalize the SAIF. Excluding the effect of this one-time assessment in 1996, the Bank would have recorded net income of $995,000, a return on average assets of 0.48% and a return on average equity of 6.05%. The Bank's net income is dependent primarily on its net interest income, which is the difference between interest income earned on its loan, investment securities and mortgage-backed securities portfolios and interest paid on interest-bearing liabilities. Net interest income is determined by (i) the difference between yields earned on interest-earning assets and rates paid on interest-bearing liabilities ("interest rate spread") and (ii) the relative amounts of interest-earning assets and interest-bearing liabilities. The Bank's interest rate spread is affected by regulatory, economic and competitive factors that influence interest rates, loan demand and deposit flows. To a lesser extent, the Bank's net income also is affected by the level of non-interest expenses such as compensation and employee benefits and FDIC insurance premiums. The operations of the Bank and the entire thrift industry are significantly affected by prevailing economic conditions, competition and the monetary, fiscal and regulatory policies of governmental agencies. Lending activities are influenced by the demand for and supply of housing, competition among lenders, the level of interest rates and the availability of funds. Deposit flows and costs of funds are influenced by prevailing market rates of interest, primarily on competing investments, account maturities and the levels of personal income and savings in the Bank's market area. CURRENT BUSINESS STRATEGY Until 1996, the Bank's primary focus was on asset growth by attracting deposits. The Bank determined that deposits were the most suitable source of funding for the Bank because of their relative stability and the opportunity for the Bank to offer other income-producing products to its depositors. To attract deposits, the Bank offered rates on accounts that were at or above then- prevailing rates in its market area. As a result of this practice, the Bank's total assets increased each year until it reached $212.6 million at December 31, 1995. This strategy substantially increased the Bank's interest expense and reduced profitability. The Bank, however, was unable to deploy the significant amount of funds generated by this strategy solely through loan originations in its market area as reflected in the Bank's loan-to-deposit ratio of 43.5% at December 31, 1995. As a result, the Bank invested these funds in securities, primarily U.S. government and agency securities and mortgage-backed securities. See "-- Asset/Liability Management." The yields on these investments were significantly less than the yields obtained by the Bank on its loan portfolio. The combined lower weighted average yield on the Bank's interest-earning assets, when reduced by the relatively high cost of the Bank's deposits due to the Bank's former deposit pricing strategy, tended to depress the Bank's overall profitability. For the year ended December 31, 1995, the Bank's interest rate spread was 0.84%, a decrease from 1.09% for the year ended December 31, 1994. Although the Bank has been profitable in each of the past five years, the reduced net yield was reflected in the Bank's return on average assets, which was 0.19% for the year ended December 31, 1995. See "Selected Financial Information and Other Data." In 1996, the Bank revised its business strategy to emphasize increased profitability over asset growth by attracting deposits on a less aggressive basis through a reduction in overall deposit rates. This reduction caused a deposit run-off during 1996 of approximately $10.9 million in higher-costing deposits. This run-off contributed to a reduction in the 21 Bank's total assets to $204.4 million at December 31, 1996 from $212.6 million at December 31, 1995. Deposits as a percentage of average assets decreased from 92.4% at December 31, 1995 to 87.8% at December 31, 1996. In addition, the Bank continued its emphasis on origination of adjustable rate loans in its market area. In 1996, average loans increased $9.9 million, or 12.0%, from the 1995 average resulting in an increase in the loan to deposit ratio of 51.9% at December 31, 1996. See " -- Asset/Liability Management" and "Business of the Bank." While the Bank's reduced emphasis on deposit-gathering decreased its liquidity, which was 45.63% at December 31, 1996, compared to 54.49% at December 31, 1995, the Bank remains well positioned to meet its liquidity needs. As a result of the Bank's revised business strategy, the Bank's interest rate spread increased to 1.35% for the year ended December 31, 1996, from 0.84% for the year ended December 31, 1995. During 1996, the Bank was required to pay a one-time deposit insurance assessment of $1.2 million ($811,000 after taxes) to the FDIC. See Note 13 of Notes to Financial Statements. This special assessment was imposed on all SAIF-insured financial institutions in September 1996, and the Bank's net income, return on average assets and return on average equity for 1996 were $184,000, 0.09%, and 1.12%, respectively. Excluding the after-tax effect of this one-time assessment, the Bank's 1996 net income, return on average assets and return on average equity would have been $995,000, 0.48% and 6.05%, respectively, as compared to the Bank's 1995 net income, return on average assets and return on average equity of $402,000, 0.19% and 2.56%, respectively. The Bank's profitability in the three months ended March 31, 1997 also was primarily attributable to its current business strategy. The Bank's net income, return on average assets and return on average equity were $358,000, 0.70% and 8.39%, respectively, for the three months ended March 31, 1997, as compared to $148,000, 0.28% and 3.66%, respectively, for the three months ended March 31, 1996. See "Selected Financial Information and Other Data." The Bank intends to continue to implement its revised business strategy by further reducing its cost of deposits while continuing to emphasize mortgage loans as well as diversifying its lending practice. See "Business of the Bank -- Lending Activities." However, the results to date which are attributable to the Bank's current business strategy are not necessarily indicative of future results. ASSET/LIABILITY MANAGEMENT Key components of a successful asset/liability strategy are the monitoring and managing of interest rate sensitivity of both the interest-earning asset and interest-bearing liability portfolios. The Bank has employed various strategies intended to minimize the adverse affect of interest rate risk on future operations by providing a better match between the interest rate sensitivity between its assets and liabilities. In particular, the Bank's strategies are intended to stabilize net interest income for the long-term by protecting its interest rate spread against increases in interest rates. Such strategies include the origination of adjustable-rate mortgage loans secured by one-to-four family residential real estate, and, to a lesser extent, multi-family real estate loans and the origination of other loans with greater interest rate sensitivities than long-term, fixed-rate residential mortgage loans. For the three months and year ended March 31, 1997 and December 31, 1996, respectively, approximately $2.7 million and $12.4 million of the one-to-four family residential loans originated by the Bank (comprising 96.1% and 76.5%, respectively, of such loans) had adjustable rates. As discussed above, the Bank has used excess funds to invest in U.S. government and agency securities and mortgage-backed securities. Such investments have been made in order to manage interest rate risk, as well as to diversify the Bank's assets, manage cash flow, obtain yields and maintain the minimum levels of qualified and liquid assets required by regulatory authorities. The U.S. government and agency securities consist of notes issued by the FHLB System and other government agencies. The securities generally are purchased for a term of five years or less, and are fixed-term, fixed rate securities, callable securities or securities which provide for interest rates to increase at specified intervals to pre-established rates, and thus improve the spread between the Bank's cost of funds and yield on investments. At March 31, 1997, approximately $9.0 million of the securities were due in one year or less and approximately $48.0 million were due in one to five years. However, at March 31, 1997, approximately $50.0 million of the securities have call provisions which authorize the issuing agency to prepay the securities at face value at certain pre-established dates. If, prior to their maturity dates, market interest rates decline below the rates paid on the securities, the issuing agency may elect to exercise its right to prepay the securities. At March 31, 1997, the Bank held approximately $47.0 million of securities which are callable prior to September 30, 1997. The Bank currently anticipates that it would seek to reinvest any funds available from a prepayment into those U.S. government and agency securities or mortgage-backed securities which the Bank believes to be the most appropriate 22 investments at that time, assuming lending opportunities are not then available. Notwithstanding their call feature, the Bank believes that it has benefited from its investments in callable securities, which have improved its portfolio yield over alternative fixed yield, fixed maturity investments. Mortgage- backed securities entitle the Bank to receive a pro rata portion of the cash flow from an identified pool of mortgages. Although mortgage-backed securities generally offer lesser yields than the loans for which they are exchanged, mortgage-backed securities present lower credit risk by virtue of the guarantees that back them, are more liquid than individual mortgage loans, and may be used to collateralize borrowings or other obligations of the Bank. Further, since they are primarily adjustable rate, mortgage-backed securities are helpful in limiting the Bank's interest rate risk. For more information regarding the Bank's investment securities, see "Business of the Bank -- Investment Securities" and Note 2 of Notes to Financial Statements. INTEREST RATE SENSITIVITY ANALYSIS The matching of assets and liabilities may be analyzed by examining the extent to which such assets and liabilities are "interest rate sensitive" and by monitoring an institution's interest rate sensitivity "gap." An asset or liability is said to be interest rate sensitive within a specific period if it will mature or reprice within that period. The interest rate sensitivity gap is defined as the difference between the amount of interest-earning assets maturing or repricing within a specific time period and the amount of interest-bearing liabilities maturing or repricing within that time period. A gap is considered positive when the amount of interest rate sensitive assets exceeds the amount of interest rate sensitive liabilities, and is considered negative when the amount of interest rate sensitive liabilities exceeds the amount of interest rate sensitive assets. At March 31, 1997, the Bank had a [POSITIVE/positive one-year interest rate sensitivity gap of 1.89 % of total interest-earning assets. Generally, during a period of rising interest rates, a negative gap position would be expected to adversely affect net interest income while a positive gap position would be expected to result in an increase in net interest income. Conversely during a period of falling interest rates, a negative gap would be expected to result in an increase in net interest income and a positive gap would be expected to adversely affect net interest income. 23 The following table sets forth the amounts of interest-earning assets and interest-bearing liabilities outstanding at March 31, 1997 which are expected to mature or reprice in each of the time periods shown.
Over One Over Five Over Ten One Year Through Through Through Over Fifteen or Less Five Years Ten Years Fifteen Years Years Total ------- ---------- --------- ------------- ----- ----- (Dollars in thousands) Interest-earning assets: Loans: One-to-four family.............. $ 70,082 $ 302 $ $ 9,199 $ $ 79,583 Multi-family residential........ 1,454 -- -- -- -- 1,454 Construction.................... 3,912 -- -- -- -- 3,912 Non-residential................. 6,548 -- -- -- -- 6,548 Secured by deposits............. 3,368 -- -- -- -- 3,368 Other consumer.................. 413 3,682 56 -- -- 4,151 Time deposits and interest bearing deposits in FHLB......... 9,000 -- -- -- -- 9,000 Federal funds sold............... 8,806 -- -- -- -- 8,806 Securities....................... 14,106 47,970 -- -- -- 62,076 Mortgage-backed securities....... 16,255 2,865 1,582 -- -- 20,702 -------- ------- ------ ------- ------- -------- Total........................ $133,944 $54,819 $1,638 $ 9,199 $ -- $199,600 -------- ------- ------ ------- ------- -------- Interest-bearing liabilities: Deposits.......................... $130,168 $50,815 -- -- -- $180,983 Interest sensitivity gap............ $ 3,776 $ 4,004 $1,638 $ 9,199 $ -- $ 18,617 ======== ======= ====== ======= ======= ======== Cumulative interest sensitivity gap................................ $ 3,776 $ 7,780 $9,418 $18,617 $18,617 $ 18,617 ======== ======= ====== ======= ======= ======== Ratio of interest-earning assets to interest-bearing liabilities....... 102.9% 107.9% N/A N/A N/A 110.3% ======== ======= ====== ======= ======= ======== Ratio of cumulative gap to total interest-earning assets...... 1.89% 3.90% 4.72% 9.33% N/A 9.33% ======== ======= ====== ======= ======= ========
The preceding table was prepared based upon the assumption that loans will not be repaid before their respective contractual maturities, except for adjustable rate loans which are classified based upon their next repricing date. Further, it is assumed that fixed maturity deposits are not withdrawn prior to maturity and that other deposits are withdrawn or repriced within one year. Management of the Bank does not believe that these assumptions will be materially different from the Bank's actual experience. However, the actual interest rate sensitivity of the Bank's assets and liabilities could vary significantly from the information set forth in the table due to market and other factors. The retention of adjustable-rate mortgage loans in the Bank's portfolio helps reduce the Bank's exposure to changes in interest rates. However, there are unquantifiable credit risks resulting from potential increased costs to borrowers as a result of repricing adjustable-rate mortgage loans. It is possible that during periods of rising interest rates, the risk of default on adjustable-rate mortgage loans may increase due to the upward adjustment of interest costs to the borrowers. See "Business of the Bank -- Lending Activities -- One-to-four Family Residential Lending." 24 AVERAGE BALANCE, INTEREST AND AVERAGE YIELDS AND RATES The following table sets forth certain information relating to the Bank's average interest-earning assets and interest-bearing liabilities and reflects the average yield on assets and average cost of liabilities for the periods and at the date indicated. Such yields and costs are derived by dividing income or expense by the average monthly balance of assets or liabilities, respectively, for the periods presented. Average balances are derived from month-end balances. Management does not believe that the use of month-end balances instead of daily balances has caused any material difference in the information presented. The table also presents information for the periods and at the date indicated with respect to the difference between the average yield earned on interest-earning assets and 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. When interest-earning assets approximate or exceed interest-bearing liabilities, any positive interest rate spread will generate net interest income.
At March 31, Three Months Ended March 31, ---------------------------------------------------------------- 1997 1997 1996 ----------------------- ---------------------------------- ---------------------------- Weighted Average Average Average Average Yield/ Average Yield/ Balance Yield/Cost Balance Interest Cost (1) Balance Interest Cost (1) -------- ---------- ------- -------- ---- ------- -------- ---- (Dollars in thousands) Interest-earning assets: Loans receivable, net................... $ 97,553 7.70% $ 96,525 $1,802 7.47% $ 86,101 $1,536 7.14% Securities available for sale........... 5,109 3.23% 5,117 38 2.97% 4,061 37 3.64% Securities held to maturity............. 77,669 5.94% 86,808 1,288 5.93% 102,296 1,392 5.44% Time deposits and other interest- bearing cash deposits............... 17,806 5.38% 10,153 143 5.63% 16,148 269 6.66% -------- --------- ----- -------- ------ Total interest-earning assets....... 198,137 6.69% 198,603 3,271 6.59% 208,606 3,234 6.20% ------ - ----- ------ ------ ------ Non-interest-earning assets.............. 4,921 5,126 4,829 -------- -------- -------- Total assets........................... $203,058 $203,729 $213,435 ======== ======== ======== Interest-bearing liabilities: Deposits............................... $180,983 4.85% $181,513 $2,232 4.92% $194,159 $2,561 5.28% Borrowings............................. -- ------% 659 9 5.46 -- -- -- -------- -------- ------ -------- ------ Total interest-bearing............... 180,983 4.85% 182,172 2,241 4.92% 194,159 2,561 5.28% liabilities.............................. ------ ------ ------ Non-interest-bearing liabilities......... 4,838 4,485 3,105 -------- -------- -------- Total liabilities.................... 185,821 186,657 197,264 Retained earnings........................ 15,033 14,854 14,565 Unrealized gain on securities available for sale................................ $ 2,204 $ 2,218 $ 1,606 -------- -------- -------- Total liabilities and retained earnings........................ $203,058 $203,729 $213,435 ======== ======== ======== Net interest income...................... $1,030 $ 673 ====== ====== Interest rate spread..................... 1.84% 1.67% .92% ====== ====== ====== Net yield on interest-earning assets..... 2.07% 1.29% ====== ====== Ratio of interest-earning assets interest-bearing liabilities............ 109.48% 109.02% 107.44% ====== ====== ======
(Continued on following page) 25
Year Ended December 31, -------------------------------------------------------------------------------------------- 1996 1995 1994 -------------------------------- --------------------------------- ------------------- Average Average Average Average Average Balance Interest Yield/Cost Balance Interest Yield/Cost Balance Interest ------- -------- ---------- ------- -------- ---------- -------- -------- (Dollars in thousands) Interest-earning assets: Loans receivable, net............ $ 92,066 $ 6,824 7.41% $ 82,212 $ 5,840 7.10% $ 74,278 $ 5,247 Securities available for sale.... 4,372 151 3.45% 3,641 135 3.71% 2,919 109 Securities held to maturity...... 98,139 5,624 5.73% 85,149 4,364 5.13% 74,177 3,320 Time deposits and other interest-bearing cash deposits....................... 9,459 621 6.57% 35,510 2,133 6.01% 42,100 1,758 -------- ------- -------- ------- -------- ------- Total interest-earning assets...................... 204,036 13,220 6.48% 206,512 12,472 6.04% 193,474 10,434 ------ ---- ------ ---- ------ Non-interest-earning assets....... 5,310 4,206 3,623 -------- -------- -------- Total assets.................... $209,346 $210,718 $197,097 ======== ======== ======== Interest-bearing liabilities: Deposits........................ $189,837 $ 9,732 5.13% $192,352 $ 10,009 5.20% $179,848 $ 7,740 Borrowings...................... 329 25 7.59% -- -- -- -- -- -------- ------- -------- -------- -------- ------ Total interest-bearing liabilities................ 190,166 9,757 5.13% 192,352 10,009 5.20% 179,848 7,740 ------- ------ -------- ------ Non-interest-bearing liabilities.. 2,724 2,655 2,450 -------- -------- -------- Total liabilities............... 192,890 195,007 182,298 Retained earnings................. 14,670 14,352 13,854 Unrealized gain on securities available for sale............... 1,786 1,359 945 -------- -------- -------- Total liabilities and retained earnings.......... $209,346 $210,718 $197.097 ======== ========= ======== Net interest income............... $ 3,463 $ 2,463 $ 2,694 ======= ======== ======== Interest rate spread.............. 1.35% 0.84% ====== ====== Net yield on interest-earning assets.......................... 1.70% 1.19% ====== ====== Ratio of average interest-earning assets to average interest- bearing liabilities............. 107.29% 107.36% ====== ====== ---------- Average Yield/Cost ---------- Interest-earning assets: Loans receivable, net........... 7.06% Securities available for sale... 3.73% Securities held to maturity..... 4.48% Time deposits and other interest-bearing cash deposits.................... 4.18% Total interest-earning assets................... 5.39% ------ Non-interest-earning assets Total assets..................... Interest-bearing liabilities: Deposits........................ 4.30% Borrowings...................... -- Total interest-bearing liabilities............... 4.30% ----- Non-interest-bearing liabilities Total liabilities.............. Retained earnings................ Unrealized gain on securities available for sale.............. Total liabilities and retained earnings......... Net interest income Interest rate spread.............. 1.09% ====== Net yield on interest-earning assets.......................... 1.39% ====== Ratio of average interest-earning assets to average interest- bearing liabilities............. 107.58% ======
____________________ (1) Annualized. 26 RATE/VOLUME ANALYSIS The following table sets forth certain information regarding changes in interest income and interest expense of the Bank for the periods indicated. For each category of interest-earning asset and interest-bearing liability, information is provided on changes attributable to: (i) changes in volume (changes in volume multiplied by old rate); (ii) changes in rate (changes in rate multiplied by new volume).
Three Months Ended March 31, Year Ended December 31, --------------------------------- ---------------------------------------------------------- 1997 vs. 1996 1996 vs. 1995 1995 vs. 1994 --------------------------------- ----------------------------- --------------------- Increase Increase Increase (Decrease) due to (Decrease) due to (Decrease) due to ------------------- ------------------ Total Total Total Increase Increase Increase Rate Volume (Decrease) Rate Volume (Decrease) Rate Volume (Decrease) ---- ------ ---------- ------- ------ ---------- ---- ------ ---------- (In thousands) Interest-earning assets: Loans receivable............ $ 79 $ 186 $ 265 $ 284 $ 700 $ 984 $ 33 $ 560 $ 593 Securities available for sale.................... (8) 10 2 (11) 27 16 (2) 27 25 Securities held to maturity................ 107 (211) (104) 594 666 1,260 553 491 1,044 Other interest-earning (26) (100) (126) ------ (1,565) (1,512) 650 (275) 375 assets.................. ----- ----- ----- 53 ------- ------- ------ ----- ------ ------ Total interest- earning assets...... $ 152 $(115) $ 37 $ 920 $ (172) $ 748 $1,234 $ 803 $2,037 ----- ----- ----- ------ ------- ------- ------ ----- ------ Interest-bearing liabilities: Deposits.................... $(163) $(167) $(330) $ (146) $ (131) $ (277) $1,731 $ 538 $2,269 Borrowings.................. -- 9 9 -- 25 25 -- -- -- ----- ----- ----- ------ ------- ------- ------ ----- ------ Total interest- bearing liabilities. $(163) $(158) $(321) $ (146) $ (106) $ (252) $1,731 $ 538 $2,269 ----- ----- ----- ------ ------- ------- ------ ----- ------ Increase (decrease) in net interest income............. $ 315 $ 43 $ 358 $1,066 $ (66) $ 1,000 $ (497) $ 265 $ (232) ===== ===== ===== ====== ======= ======= ====== ===== ======
COMPARISON OF FINANCIAL CONDITION AT MARCH 31, 1997 AND DECEMBER 31, 1996 The Bank's total assets decreased by $1.3 million, from $204.4 million at December 31, 1996 to $203.1 million at March 31, 1997. Securities held to maturity declined $18.3 million due to various issues maturing. Of such funds, $15.3 million were reinvested in short-term time deposits and Federal funds sold, which increased from $2.0 million and $500,000, respectively, at December 31, 1996, to $9.0 million and $8.8 million, respectively, at March 31, 1997. In addition, $1.3 million in maturing securities was utilized to repay FHLB advances, resulting in no borrowed funds at March 31, 1997. The decrease in assets was also due to a decrease in assets funded by deposits as the Bank continued to price its deposits less aggressively in 1997 in an effort to reduce its overall cost of funds. At March 31, 1997 deposits decreased to $183.2 million from $183.8 million at December 31, 1996, a net decrease of $665,000. Deposits decreased as depositors sought higher returns than those available on accounts being offered by the Bank. The Bank's average cost of deposits for the three months ended March 31, 1997 was 4.92%, compared to 5.13% for the year ended December 31, 1996. Management intends to continually evaluate the investment alternatives available to the Bank's customers, and adjusts the pricing on its deposit products to more actively manage its funding costs while remaining competitive in its market area. The Bank's loan portfolio increased by $2.1 million during the three months ended March 31, 1997. Net loans totaled $97.6 million and $95.5 million at March 31, 1997 and December 31, 1996, respectively. The increase in the loan activity during the three months ended March 31, 1997 was due to the Bank's efforts to increase its loan originations using funds currently held in investment securities. For the three months ended March 31, 1997, the Bank's average yield on loans was 7.47%, compared to 7.41% for the year ended December 31, 1996. At March 31, 1997, the Bank's investments classified as "held to maturity" were carried at amortized cost of $77.7 million and had an estimated fair market value of $76.9 million, and its equity securities classified as "available for sale" had an estimated fair market value of $5.1 million, including Federal Home Loan Mortgage Corporation ("FHLMC") stock with an estimated fair market value of $3.5 million. See Note 2 of Notes to Financial Statements. 27 The allowance for loan losses totaled $217,000 at each of March 31, 1997 and December 31, 1996. At March 31, 1997, the ratio of the allowance for loan losses to loans was 0.22%, compared to 0.23% at December 31, 1996. Also at March 31, 1997, the Bank's non-performing loans were $187,000, or 0.19% of total loans, compared to $266,000, or 0.28% of total loans, at December 31, 1996 and the Bank's ratio of allowance for loan losses to non-performing loans at March 31, 1997 and December 31, 1996 was 116.04% and 81.58%, respectively. The determination of the allowance for loan losses is based on management's analysis, performed on a quarterly basis. Various factors are considered, including the market value of the underlying collateral, growth and composition of the loan portfolio, the relationship of the allowance for loan losses to outstanding loans, historical loss experience, delinquency trends and prevailing economic conditions. Although management believes its allowance for loan losses is adequate, there can be no assurance that additional allowances will not be required or that losses on loans will not be incurred. The Bank has had minimal losses on loans in prior years. See Note 3 of Notes to Financial Statements. COMPARISON OF FINANCIAL CONDITION AT DECEMBER 31, 1996 AND DECEMBER 31, 1995 The Bank's total assets decreased by $8.2 million, or 3.9%, from $212.6 million at December 31, 1995 to $204.4 million at December 31, 1996, primarily as a result of a reduction in cash and maturing investments to fund deposit withdrawals. At December 31, 1996, deposits decreased to $183.8 million from $194.8 million at December 31, 1995, a net decrease of $11.0 million, or 5.6%. To reduce its overall cost of funds, the Bank began to price deposits less aggressively in 1996. The Bank's average cost of deposits for the year ended December 31, 1996 was 5.13%, compared to 5.20% for the year ended December 31, 1995. The Bank's loan portfolio increased by $10.7 million, or 12.7%, during the year ended December 31, 1996. Net loans totaled $95.5 million and $84.8 million at December 31, 1996 and 1995, respectively. The increase in the loan activity during the year ended December 31, 1996 was primarily due to the Bank's efforts to expand its loan originations and reduce the proportion of its interest- earning assets not invested in loans. For the year ended December 31, 1996, the Bank's average yield on loans was 7.41%, compared to 7.10% for the year ended December 31, 1995. At December 31, 1996, the Bank's investment portfolio included mortgage- backed and U.S. government and agency securities classified as "held to maturity" carried at amortized cost of $95.9 million and an estimated fair market value of $95.8 million and equity securities classified as "available for sale" with an estimated fair market value of $5.1 million, including FHLMC stock with a fair market value of $3.5 million. As part of the Bank's strategy to focus on profitability and loan growth, the Bank funded the increase in its loan portfolio internally by reducing its time deposits with other financial institutions from $7.0 million at December 31, 1995, to $2.0 million at December 31, 1996, reduced Federal funds sold from $7.9 million at December 31, 1995, to $500,000 at December 31, 1996, and eliminating interest-bearing deposits in the FHLB, which were $5.6 million at December 31, 1995. The allowance for loan losses totaled $217,000 at December 31, 1996, compared to $122,000 at December 31, 1995. As of those dates the Bank's non- performing loans were $266,000 and $134,000, respectively, or 0.28% and 0.16% of total loans, respectively. At December 31, 1996, the ratio of the allowance for loan losses to loans was .23%, compared to .14% at December 31, 1995. The increase in the ratio was primarily attributable to a $100,000 provision for loan losses for the year ended December 31, 1996, as a result of the increase in the loan portfolio. COMPARISON OF OPERATING RESULTS FOR THE THREE MONTHS ENDED MARCH 31, 1997 AND 1996 NET INCOME. The Bank's net income for the three months ended March 31, 1997 was $358,000, compared to $148,000 for the three months ended March 31, 1996. The increase in net earnings for the three months resulted primarily from an improvement in the Bank's net yield on interest-earning assets, offset in part by a slight increase in non-interest expense and income taxes. NET INTEREST INCOME. Net interest income for the three months ended March 31, 1997 was $1.0 million compared to $673,000 for the three months ended March 31, 1996. The increase in net interest income for the three months ended March 31, 1997 was primarily due to a lower cost of funds and a higher yield on interest-earning assets. For the three months ended March 31, 1997, the Bank's average yield on total interest-earning assets was 6.59%, compared to 6.20% for the three months ended March 31, 1996 and its average cost of deposits was 4.92%, compared to 5.28% for the three months ended March 31, 1996. As a result, the Bank's interest rate spread for the three months ended March 31, 1997 was 28 1.67%, compared to 0.92% for the three months ended March 31, 1996 and its net yield on interest-earning assets was 2.07% for the three months ended March 31, 1997, compared to 1.29% for the three months ended March 31, 1996. INTEREST INCOME. Interest income increased by $37,000 from $3.23 million to $3.27 million, or by 1.1%, during the three months ended March 31, 1997 compared to the same period in 1996. This increase primarily resulted from a continued strategic shift from the average balances of investment securities to higher- yielding loans of approximately $10.4 million. This increase was partially offset by a $10.0 million decrease in the average balances of lower yielding interest-earning assets. The average balance of securities held to maturity declined $15.5 million, from $102.3 million at March 31, 1996, to $86.8 million at March 31, 1997. In addition, average time deposits and other interest-bearing cash deposits declined $6.0 million, from $16.2 million at March 31, 1996 to $10.2 million at March 31, 1997. Overall, average total interest-earning assets declined $10.0 million, or 4.8%, from March 31, 1996 to March 31, 1997. However, the strategic repositioning of the balance sheet into higher-yielding assets resulted in an increase in the average yield on interest-earning assets from 6.20% at March 31, 1996, to 6.59% at March 31, 1997. In addition, the ratio of interest-earning assets to interest-bearing liabilities increased from 107.44% for the three months ended March 31, 1996 to 109.02% for the three months ended March 31, 1997. INTEREST EXPENSE. Interest expense decreased $320,000, or 12.5%, to $2.2 million for the three months ended March 31, 1997, compared to $2.6 million for the same period in 1996. The decrease was attributable to the combined effect of a lower cost of funds and a $12.0 million decline in the average balance of higher-costing interest-bearing liabilities. The average cost of average interest bearing deposits declined from 5.28% at March 31, 1996 to 4.92% at March 31, 1997. Over the same period, the average balance of deposits decreased $12.7 million, from $194.2 million at March 31, 1996 to $181.5 million at March 31, 1997, or 6.5%. PROVISION FOR LOAN LOSSES. The allowance for loan losses is established through a provision for loan losses based on management's evaluation of the risk inherent in its loan portfolio and the general economy. Such evaluation considers numerous factors including, general economic conditions, loan portfolio composition, prior loss experience, the estimated fair value of the underlying collateral and other factors that warrant recognition in providing for an adequate loan loss allowance. The Bank determined that no provision for loan loss was required for the quarter ended March 31, 1997. NON-INTEREST EXPENSE. The $38,000 increase in non-interest expense in the three months ended March 31, 1997 compared to the same period in 1996 was primarily attributable to increases in salaries, employee benefits and accounting fees. The decrease in FDIC deposit insurance premiums of $61,000 offset a portion of the other increases in non-interest expense. INCOME TAXES. The Bank's effective tax rate for the three months ended March 31, 1997 was 33.6%, compared to 32.7% for the same period in 1996. The increase in income tax expense of $109,000 in the three month period compared to the same period in 1996 was due to an increase in income. COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995 NET INCOME. The Bank's net income for the year ended December 31, 1996 was $184,000, compared to $402,000 for the year ended December 31, 1995. The decrease in net earnings for the year resulted primarily from the special SAIF assessment expense of $1.2 million, which negatively impacted net income by $812,000 net of tax, for the year ended December 31, 1996. Excluding the one- time special SAIF assessment, net income for the year ended December 31, 1996 would have been $995,000, an increase of $553,000, or 147.5% from net income of $402,000 for the year ended December 31, 1995. The improvement in net income from the year ended December 31, 1995 to December 31, 1996, was primarily the result of the Bank's repositioning funds into higher yielding assets as well as a decline in the cost of funds. NET INTEREST INCOME. Net interest income for the year ended December 31, 1996 was $3.5 million, compared to $2.5 million for the year ended December 31, 1995. The increase in net interest income for the year ended December 31, 1996 was primarily due to an increase in the Bank's interest income and a decline in the Bank's overall cost of funds. The average balance of the loan portfolio increased $9.9 million, from $82.2 million for the year ended December 31, 1995 to $92.1 million for the year ended December 31, 1996. The average yield on loans increased from 7.10% to 7.41% over the same periods. At the same time, the average balance of deposits decreased from $192.4 million for the year ended December 31, 1995 to $189.8 million for the year ended December 31, 1996. Further, the average cost of deposits declined from 5.20% to 5.13% for the same period resulting from the Bank's decision to reprice deposits to improve profitability. As 29 a result, for the year ended December 31, 1996, the Bank's interest rate spread and net yield on interest-earning assets were 1.35% and 1.70%, respectively, an increase from 0.84% and 1.19%, respectively, for the year ended December 31, 1995. INTEREST INCOME. Interest income increased by $748,000 from $12.5 million to $13.2 million, or by 6.0%, during 1996 compared to 1995. This increase primarily resulted from an increase in the average yield on the loan portfolio, which was 7.41% for 1996 compared to 7.10% for 1995, as well as an increase in the average balance of loans to $92.1 million in 1996 compared to $82.2 million in 1995. INTEREST EXPENSE. Interest expense decreased $252,000, or 2.5%, to $9.8 million for the year ended December 31, 1996 from $10.0 million for the year ended December 31, 1995. The Bank's strategy of less aggressively pricing its deposit products resulted in a decrease in its cost of funds as well as a reduction in the level of interest-bearing liabilities due to an outflow of higher cost deposits. At December 31, 1996, total deposits were $183.8 million, compared to $194.8 million at December 31, 1995, a decrease of 5.6%. PROVISION FOR LOAN LOSSES. Based on the increase in the Bank's loan portfolio and increased emphasis on consumer lending, the Bank determined that a provision for loan loss of $100,000 was required for the year ended December 31, 1996. NON-INTEREST INCOME. The $192,000 increase in non-interest income in the year ended December 31, 1996 compared to the year ended December 31, 1995 was primarily due to a $106,000 increase in loan fees due to higher loan originations, as well as increases in NOW account fees and service charges. NON-INTEREST EXPENSE. The $1.4 million increase in non-interest expense in 1996 compared to 1995 was primarily attributable to the $1.2 million special SAIF assessment during 1996, as well as higher compensation and benefit expenses. INCOME TAXES. The Bank's effective tax rate for the year ended December 31, 1996 was 30.0%. The decrease in income tax expense of $119,000 in 1996 compared to 1995 was due to the decrease in income in 1996 compared to 1995. COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1994 NET INCOME. The Bank's net income for the year ended December 31, 1995 was $402,000 compared to $685,000 for the year ended December 31, 1994. The decrease in net earnings for the year resulted primarily from a narrowing of the Bank's net yield on interest-earning assets, a reduction in non-interest income and a slight increase in non-interest expense. NET INTEREST INCOME. Net interest income for the year ended December 31, 1995 was $ 2.5 million compared to $2.7 million for the year ended December 31, 1994. The decrease in net interest income for the year ended December 31, 1995 was primarily due to an increase in interest expense which exceeded the increase in interest income. For the year ended December 31, 1995, the Bank's average cost of deposits was 5.20%, compared to 4.30% for the year ended December 31, 1994. For the year ended December 31, 1995, the average yield on total interest- earning assets was 6.04%, compared to 5.39% for the year ended December 31, 1994. For the year ended December 31, 1995, the Bank's interest rate spread and net interest margin were 0.84% and 1.19%, respectively, compared to 1.09% and 1.39%, respectively, for the year ended December 31, 1994. During the same period, the Bank's ratio of average interest-earning assets to average interest- bearing liabilities remained relatively unchanged, declining to 107.36% for the year ended December 31, 1995 from 107.58% for the year ended December 31, 1994. INTEREST INCOME. Interest income increased by $2.1 million from $10.4 million to $12.5 million, or by 20.2%, during 1995 compared to 1994. Higher interest income was primarily the result of a $13.0 million increase in average interest earning assets, from $193.5 million at December 31, 1994 to $206.5 million at December 31, 1995, or 7.5%. The Bank's average loan portfolio increased $7.9 million, or 10.7%, and the average yield on the loan portfolio increased slightly from 7.06% to 7.10%. Over this same period, the Bank's average portfolio of securities held to maturity increased $11.0 million, or 14.8%, while the average yield associated with these securities increased from 4.48% to 5.13%. INTEREST EXPENSE. Interest expense increased $2.3 million, or 29.3%, to $10.0 million for the year ended December 31, 1995 from $7.7 for the year ended December 31, 1994. The increase was primarily attributable to a higher cost of deposits and a $12.5 million, or 7.0%, increase in average interest bearing liabilities. The increase in average 30 deposits and deposit costs were the direct result of the Bank's aggressive deposit growth and pricing strategy. See " --Current Business Strategy." PROVISION FOR LOAN LOSSES. Due to minimal asset quality problems, the Bank determined that a provision for loan loss was not required for the year ended December 31, 1995. NON-INTEREST INCOME. Non-interest income decreased $114,000 during 1995 compared to 1994. The decrease primarily resulted from decreases in loan fees and service charges. NON-INTEREST EXPENSE. The $81,000 increase in non-interest expense in 1995 compared to 1994 was primarily attributable to the opening of a new banking facility. INCOME TAXES. The Bank's effective tax rate for the year ended December 31, 1995 was 33.0%. The decrease in income tax expense of $143,000 in 1995 compared to 1994 was due to the decrease in income in 1995 compared to 1994. LIQUIDITY AND CAPITAL RESOURCES Following the completion of the Conversion, the Company initially will have no business other than that of the Bank and investing the net Conversion proceeds retained by it. Management believes that the net proceeds to be retained by the Company, earnings on such proceeds and principal and interest payments on the ESOP loan, together with dividends that may be paid from the Bank to the Company following the Conversion, will provide sufficient funds for its initial operations and liquidity needs; however, no assurance can be given that the Company will not have a need for additional funds in the future. The Bank will be subject to certain regulatory limitations with respect to the payment of dividends to the Company. See "Dividend Policy" and "Regulation -- Regulation of the Bank -- Limitations on Capital Distributions." The Company intends to lend a portion of the net proceeds retained from the Conversion to the ESOP to permit its purchase of the Common Stock in the Conversion. See "Use of Proceeds." At March 31, 1997, the Bank exceeded all regulatory minimum capital requirements. For a detailed discussion of the OTS's regulatory capital requirements, and for a tabular presentation of the Bank's compliance with such requirements, see "Regulation -- Regulation of the Bank --Regulatory Capital," and Note 13 of Notes to Financial Statements. The following table reconciles the Bank's retained earnings as reported in its financial statements at March 31, 1997 to its tangible, core and risk-based capital levels and compares such totals to the regulatory requirements. OTS regulations eliminate the effect of unrealized gains and losses, net of tax effect, on available for sale securities from the computation of regulatory capital. This regulation has the effect of decreasing each of the Bank's tangible, core and risk-based capital by $2.2 million compared to the Bank's retained income.
Amounts Reported in Minimum Regulatory Amount of Financial Statements Requirement Excess Capital ---------------------- ------------------ ---------------------- Percent of Percent of Percent of Amount Assets (1) Amount Assets (1) Amount Assets (1) ------- ---------- ------ ---------- ------ --------- (Dollars in thousands) Bank's retained earnings.... $17,236 8.5% Adjustments................. 2,204 1.0% ------- ---- Tangible capital............ $15,032 7.5% $3,015 1.5% $12,017 6.0% ======= ==== Core capital................ $15,032 7.5% $6,031 3.0% $ 9,001 4.5% Allowable portion of general allowance for loans losses................... 217 ------- Risk-based capital.......... $15,249 20.9% $5,840 8.0% $ 9,409 12.9% =======
________________ 31 (1) Based on the Bank's adjusted total assets for the purpose of the tangible and core capital ratios and risk-weighted assets for the purpose of the risk-based capital ratio. The Bank's primary sources of funds consist of deposits, repayment of loans and mortgage-backed securities, maturities of investments and interest-bearing deposits, and funds provided from operations. While scheduled repayments of loans and mortgage-backed securities and maturities of investment securities are predicable sources of funds, deposit flows and loan prepayments are greatly influenced by the general level of interest rates, economic conditions and competition. The Bank uses its liquidity resources principally to fund existing and future loan commitments, to fund maturing certificates of deposit and demand deposit withdrawals, to invest in other interest-earning assets, to maintain liquidity, and to meeting operating expenses. Management believes that loan repayments and other sources of funds will be adequate to meet the Bank's liquidity needs for the immediate future. The Bank is required to maintain minimum levels of liquid assets as defined by OTS regulations. This requirement, which may be varied at the direction of the OTS depending upon economic conditions and deposit flows, is based upon a percentage of deposits and short-term borrowings. The required minimum ratio is currently 5%. The Bank has historically maintained a level of liquid assets in excess of regulatory requirements. The Bank's liquidity ratios at March 31, 1997 and December 31, 1996 and 1995 were 43.00%, 45.63% and 54.49%, respectively. A major portion of the Bank's liquidity consists of cash and cash equivalents, which include investments in highly liquid, short-term deposits. The level of these assets is dependent on the Bank's operating, investing, lending and financing activities during any given period. At March 31, 1997, cash and cash equivalents totaled $1.3 million. The primary investing activities of the Bank include origination of loans and purchase of investment securities. During the year ended December 31, 1996 and the three months ended March 31, 1997, purchases of investment securities and Mortgage-Backed Securities totaled $41.4 million and $3.2 million, respectively, while loan originations totaled $29.2 million and $5.7 million, respectively. These investments were funded in part by loan and mortgage-backed repayments of $20.4 million and $4.2 million, respectively, and investment securities maturities of $44.2 million and $21.5 million, respectively. Liquidity management is both a daily and long-term function of business management. If the Bank requires funds beyond its ability to generate them internally, the Bank believes that it could borrow funds from the FHLB. At March 31, 1997, the Bank had no outstanding advances from the FHLB. See Note 6 of Notes to Financial Statements. At March 31, 1997, the Bank had $1.5 million in outstanding commitments to originate loans. The Bank anticipates that it will have sufficient funds available to meet its current loan origination commitments. Certificates of deposit which are scheduled to mature in one year or less totaled $73.0 million at March 31, 1997. Based on historical experience, management believes that a significant portion of such deposits will remain with the Bank. Another source of liquidity is anticipated net proceeds from the Conversion. Following the completion of the Conversion, the Bank will receive at least 50% of the net proceeds from the Conversion. These funds are expected to be used by the Bank for its business activities. IMPACT OF INFLATION AND CHANGING PRICES The financial statements and notes thereto presented herein have been prepared in accordance with generally accepted accounting principles, which 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 and due to inflation. The impact of inflation is reflected in the increased cost of the Bank's operations. Unlike most industrial companies, nearly all the assets and liabilities of the Bank are monetary in nature. 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. 32 IMPACT OF NEW ACCOUNTING STANDARDS Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities. In June 1996, the FASB issued SFAS No. 125 "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities." SFAS No. 125 provides accounting and reporting standards for transfers and servicing of financial assets and extinguishments of liabilities based on consistent application of a financial-components approach that focuses on control. Under that approach, after a transfer of financial assets, an entity recognizes the financial and servicing assets it controls and the liabilities it has incurred, derecognizes financial assets when control has been surrendered, and derecognizes liabilities when extinguished. This statement is effective for transfers and servicing of financial assets and extinguishments of liabilities occurring after March 31, 1997, and is to be applied prospectively. Earlier or retroactive application is not permitted. The Bank adopted the provisions of the Standard in January 1997. Based on the Bank's current operating activities, management does not believe that the adoption of this statement will have a material impact on the Bank's financial condition or results of operations. 33 BUSINESS OF THE COMPANY The Company was organized at the direction of the Board of Directors of the Bank in May 1997 for the purpose of becoming a holding company to own all of the outstanding capital stock of the Bank. Upon completion of the Conversion, the Bank will become a wholly owned subsidiary of the Company. For additional information, see "HopFed Bancorp, Inc." The Company currently is not an operating company. Following the Conversion, the Company will be engaged primarily 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, though there are no current plans in this regard. BUSINESS OF THE BANK GENERAL The Bank is a federally chartered mutual savings bank headquartered in Hopkinsville, Kentucky, with branch offices in Hopkinsville, Murray, Cadiz and Elkton, Kentucky. The Bank was incorporated by the Commonwealth of Kentucky in 1879 under the name Hopkinsville Building and Loan Association. In 1940, the Bank converted to a federal mutual savings association and received federal insurance of its deposit accounts. In 1983, the Bank became a federal mutual savings bank and adopted its current corporate title. The business of the Bank primarily consists of attracting deposits from the general public and investing such deposits in loans secured by single family residential real estate and investment securities, including U.S. Government and agency securities and mortgage-backed securities. The Bank also makes single family residential/construction loans and multi-family and commercial real estate loans, as well as loans secured by deposits and other consumer loans. The Bank emphasizes the origination of residential real estate loans with adjustable interest rates and other assets which are responsive to changes in interest rates and allow the Bank to more closely match the interest rate maturation of its assets and liabilities. At March 31, 1997, the Bank's net loan portfolio comprised 48.0% of total assets, and 80.4% of total loans were secured by one-to-four family residential properties. At March 31, 1997, short-term investments and investment securities represented 39.3% of total assets and mortgage-backed securities represented 10.2% of total assets. At March 31, 1997, nonperforming loans totaled 0.09% of total assets. MARKET AREA The primary market area of the Bank consists of the adjacent counties of Calloway, Christian, Todd and Trigg located in southwestern Kentucky. The market area's economy depends primarily on a number of industrial facilities, including manufacturing operations for Dana Corporation Parish Frame Division, Freudenberg Nonwovens, Phelps Dodge Magnet Wire Company, Thomas Industries Lighting Fixtures, International Paper, Mitsubishi CNC Machining Center & CNC Turning Center, Rockwell International Suspension Systems Company U.S., Flynn Enterprises, ARDCO, Johnson Controls, Sun Chemical and Briggs and Stratton. The market area is an agricultural community and is affected by agriculture-related industries, including U.S. Tobacco, Southwestern Tobacco, Wayne Feeds, Case Power and Equipment and Agri-Chem. The market area also includes Fort Campbell Army Base, Murray State University, Western State Hospital and Community College of the University of Kentucky, as well as locally-owned companies which have achieved national recognition, including Dunlap Sales, Kentucky Derby Hosiery and Gardner Wallcoverings. LENDING ACTIVITIES General. The Bank's total gross loan portfolio totaled $99.0 million at March 31, 1997, representing 48.8% of total assets at that date. Substantially all loans are originated in the Bank's market area. At March 31, 1997, $79.6 million, or 80.4% of the Bank's loan portfolio, consisted of one-to-four family, residential mortgage loans. Other loans secured by real estate include non- residential real estate loans, which amounted to $6.5 million, or 6.6% of the Bank's loan portfolio at March 31, 1997, and multi-family residential loans, which were $1.5 million, or 1.4% of the Bank's loan portfolio at March 31, 1997. The Bank also originates construction and consumer loans. At March 31, 1997, construction 34 loans were $3.9 million, or 4.0% of the Bank's loan portfolio, and consumer loans totaled $7.5 million, or 7.6% of the Bank's loan portfolio. Analysis of Loan Portfolio. Set forth below is selected data relating to the composition of the Bank's loan portfolio by type of loan at the dates indicated. At March 31, 1997, the Bank had no concentrations of loans exceeding 10% of total loans other than as disclosed below.
At March 31, 1997 -------------------------- Amount Percent ------- ------- (Dollars in thousands) Type of Loan: - ------------- Real estate loans: One-to-four family residential .......................... $ 79,583 80.4% Multi-family residential ................................ 1,454 1.4% Construction ............................................ 3,912 4.0% Non-residential ......................................... 6,548 6.6% ---------- ------- Total real estate loans ............................... 91,497 92.4% ========== ======= Consumer loans: Secured by deposits ..................................... 3,368 3.4% Other consumer loans .................................... 4,151 4.2% ---------- ------- Total consumer loans .................................. 7,519 7.6% ---------- ------- 99,016 100.00% ------- Less: Loans in process .................................... 1,246 Allowance for loan losses ........................... 217 ---------- Total ................................................... $ 97,553 ==========
At December 31, ----------------------------------------------------------------------------------------------- 1996 1995 1994 1993 1992 ------------------- --------------- ---------------- --------------- ----------------- Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- (Dollars in thousands) Type of Loan: - ------------- Real estate loans: One-to-four family residential.................. $77,318 79.6% $70,417 81.5% $66,236 82.3% $56,259 81.3% $59,277 84.8% Multi-family residential........ 1,466 1.5% 492 0.6% 3,475 4.3% 1,391 2.0% 1,429 2.0% Construction.................... 5,389 5.6% 4,062 4.7% 3,748 4.7% 2,963 4.3% 1,418 2.0% Non-residential (1)............. 5,467 5.6% 5,107 5.9% 1,626 2.0% 4,523 6.5% 3,460 5.0% ------- ----- ------- ------ ------- -------- ------- -------- ------- -------- Total real estate loans...... 89,640 92.3% 80,078 92.7% 75,085 93.3% 65,136 94.1% 65,584 93.8% ======= ===== ======= ====== ======= ======== ======= ======== ======= ======== Consumer loans: Secured by deposits............. 3,484 3.6% 3,324 3.8% 3,135 3.9% 2,459 3.6% 2,659 3.8% Other consumer loans............ 4,004 4.1% 3,016 3.5% 2,296 2.8% 1,596 2.3% 1,697 2.4% ------- ----- ------- ------ ------- -------- ------- -------- ------- -------- Total consumer loans......... 7,488 7.7% 6,340 7.3% 5,431 6.7% 4,055 5.9% 4,356 6.2% ------- ----- ------- ------ ------- -------- ------- -------- ------- -------- 97,128 100% 86,418 100% 80,516 100% 69,191 100% 69,940 100% ===== ====== ======== ======== ======== Less: Loans in process........... 1,415 1,541 1,867 1,265 640 Allowance for loan losses....................... 217(2) 122 122 122 122 ------- ------- ------- ------- ------- Total............................ $95,496 $84,755 $78,527 $67,804 $69,178 ======= ======= ======= ======= =======
_________________ (1) Consists of loans secured by first liens on residential lots and loans secured by first mortgages on commercial real property. (2) Increase in allowance for loan loss reflects $100,000 provision in 1996 based upon management's assessment of risks associated with the Bank's increased loan growth and increased emphasis on consumer lending. See "-- Nonperforming Loans and Other Assets." 35 Loan Maturity Schedule. The following table sets forth certain information at December 31, 1996 regarding the dollar amount of loans maturing in the Bank's portfolio based on their contractual terms to maturity, including scheduled repayments of principal. Demand loans, loans having no stated schedule of repayments and no stated maturity, and overdrafts are reported as due in one year or less.
Due after Due after 5 Due after 10 3 through 5 through 10 through 15 Due during the year ending years after years after years after December 31, December 31, December 31, December 31, ----------------------------- 1997 1998 1999 1996 1996 1996 ------- ------ ------ ---- ----- ---- (In thousands) One-to-four family residential........... $ 1,538 $1,073 $ 435 $1,169 $ 9,324 $16,802 Multi-family residential................. 286 -- -- -- -- -- Construction............................. 5,389 -- -- -- -- -- Non-residential.......................... -- 76 14 102 1,922 1,923 Consumer................................. 3,737 464 1,074 2,004 209 -- ------- ------ ------ ------ ------- ------- Total................................... $10,950 $1,613 $1,523 $3,275 $11,455 $18,725 ======= ====== ====== ====== ======= ======= Due after 15 years after December 31, 1996 Total ---- ----- One-to-four family residential...................................... $46,977 $77,318 Multi-family residential............................................ 1,180 1,466 Construction........................................................ -- 5,389 Non-residential..................................................... 1,430 5,467 Consumer............................................................ -- 7,488 ------- ------- Total.............................................................. $49,587 $97,128 ======= =======
The following table sets forth at December 31, 1996, the dollar amount of all loans due one year or more after December 31, 1996 which had predetermined interest rates and have floating or adjustable interest rates.
Predetermined Floating or Rate Adjustable Rate -------------- --------------- (In thousands) One-to-four family residential............................................... $ 9,022 $ 66,758 Multi-family residential..................................................... -- 1,180 Construction................................................................. -- -- Non-residential.............................................................. -- 5,467 Consumer..................................................................... 3,751 -- ------- --------- Total....................................................................... $12,773 $ 73,405 ======= =========
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. Originations, Purchases and Sales of Loans. The Bank generally has authority to originate and purchase loans secured by real estate located throughout the United States. Consistent with its emphasis on being a community- oriented financial institution, the Bank conducts substantially all of its lending activities in its market area. The following table sets forth certain information with respect to the Bank's loan origination activity for the periods indicated. The Bank has not purchased or sold any loans in the periods presented.
Three Months Ended March 31, Year Ended December 31, ----------------------------- -------------------------- 1997 1996 1996 1995 1994 ---- ---- ---- ---- ---- (In thousands) Loan originations: One-to-four family residential................. $2,848 $3,296 $16,209 $11,252 $17,817 Multi-family residential....................... -- 1,014 1,434 360 225 Construction................................... 811 725 5,340 3,607 6,033 Non-residential................................ 411 2,300 536 738 435 Consumer....................................... 1,586 1,148 5,688 4,970 4,098 ------ ------ ------- ------- ------- Total loans originated....................... 5,656 8,483 29,207 20,927 28,608 ------ ------ ------- ------- ------- Loan principal reductions: Loan principal repayments...................... 3,599 5,792 18,372 14,698 17,886 ------ ------ ------- ------- ------- Net increase in loan portfolio.................... $2,057 $2,691 $10,835 $ 6,229 $10,722 ====== ====== ======= ======= =======
36 The Bank's loan originations are derived from a number of sources, including existing customers, referrals by real estate agents, depositors and borrowers and advertising, as well as walk-in customers. The Bank's solicitation programs consist of advertisements in local media, in addition to occasional participation in various community organizations and events. Real estate loans are originated by the Bank's loan personnel. All of the Bank's loan personnel are salaried, and the Bank does not compensate loan personnel on a commission basis for loans originated. Loan applications are accepted at any of the Bank's branches. Loan Underwriting Policies. The Bank's lending activities are subject to the Bank's written, non-discriminatory underwriting standards and to loan origination procedures prescribed by the Bank's Board of Directors and its management. Detailed loan applications are obtained to determine the ability of borrowers to repay, and the more significant items on these applications are verified through the use of credit reports, financial statements and confirmations. All loans must be reviewed by the Bank's loan committee, which is comprised of the Bank's lending officers and branch managers. Exceptions to the Bank's underwriting standards must be approved by the loan committee. In addition, the full Board of Directors reviews all loans on a monthly basis. Generally, upon receipt of a loan application from a prospective borrower, a credit report and verifications are ordered to confirm specific information relating to the loan applicant's employment, income and credit standing. If a proposed loan is to be secured by a mortgage on real estate, an appraisal of the real estate is undertaken by an appraiser approved by the Bank's Board of Directors and licensed or certified (as necessary) by the Commonwealth of Kentucky. In the case of one-to-four family residential mortgage 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. A formal environmental report may be required in connection with nonresidential real estate loans. It is the Bank's policy to record a lien on the real estate securing a loan and to obtain a title opinion from Kentucky counsel which provides that the property is free of prior encumbrances and other possible title defects. Borrowers must also obtain hazard insurance policies prior to closing and, when the property is in a flood hazard area, pay flood insurance policy premiums. Applications for real estate loans are underwritten and closed in accordance with the Bank's own lending guidelines, which generally do not conform to FHLMC and FNMA guidelines. Although such loans may not be readily salable in the secondary market, the Bank's management believes that, if necessary, such loans may be sold to private investors. The Bank is permitted to lend up to 100% of the appraised value of the real property securing a mortgage loan. The Bank is required by federal regulations to obtain private mortgage insurance on that portion of the principal amount of any loan that is greater than 90% of the appraised value of the property. Under its lending policies, the Bank will originate a one-to-four family residential mortgage loan for owner-occupied property with a loan-to-value ratio of up to 95%. For residential properties that are not owner-occupied, the Bank generally does not lend more than 80% of the appraised value. For all residential mortgage loans, the Bank may increase its lending level on a case-by-case basis, provided that the excess amount is insured with private mortgage insurance. The federal banking agencies, including the OTS, have adopted regulations that would establish new loan-to-value ratio requirements for specific categories of real estate loans. Under applicable law, with certain limited exceptions, loans and extensions of credit outstanding by a savings institution to a person at one time shall not exceed 15% of the institution's unimpaired capital and surplus. Loans and extensions of credit fully secured by readily marketable collateral may comprise an additional 10% of unimpaired capital and surplus. Applicable law additionally authorizes savings institutions to make loans to one borrower, for any purpose, in an amount not to exceed the lesser of $30.0 million or 30% of unimpaired capital and surplus to develop residential housing, provided certain requirements are satisfied. Under these limits, the Bank's loans to one borrower were limited to $4.5 million at March 31, 1997. At that date, the Bank had no lending relationships in excess of the loans-to-one-borrower limit. At March 31, 1997, the Bank's largest lending relationship was $2.3 million. The loans are to a local real estate developer and his business associate and are primarily for the development of apartments, the purchase of lots for residential construction, and construction of one-to-four residential housing. All loans within this relationship were current and performing in accordance with their terms at March 31, 1997. Interest rates charged by the Bank on loans are affected principally by competitive factors, the demand for such loans and the supply of funds available for lending purposes. These factors are, in turn, affected by general economic 37 conditions, monetary policies of the federal government, including the Federal Reserve Board, legislative tax policies and government budgetary matters. One-to-four family Residential Lending. The Bank historically has been and continues to be an originator of one-to-four family residential real estate loans in its market area. At March 31, 1997, one-to-four family residential mortgage loans, totaled approximately $79.6 million, or 80.4% of the Bank's loan portfolio. All loans originated by the Bank are maintained in its portfolio rather than sold in the secondary market. The Bank primarily originates residential mortgage loans with adjustable rates. As of March 31, 1997, 88.1% of one-to-four family mortgage loans in the Bank's loan portfolio carried adjustable rates. Such loans are primarily for terms of 25 years, although the Bank does occasionally originate adjustable rate mortgages for 15 year and 20 year terms, in each case amortized on a monthly basis with principal and interest due each month. The interest rates on these mortgages are adjusted once per year, with a maximum adjustment of 1% per adjustment period and a maximum aggregate adjustment of 5% over the life of the loan. A borrower may also obtain a loan in which the maximum annual adjustment is 0.5% with a higher initial rate. Rate adjustments on the Bank's adjustable rate loans are indexed to a rate which adjusts annually based upon changes in an index based on the National Monthly Median Cost of Funds, plus a margin of 2.75%. Because the National Monthly Median Cost of Funds is a lagging index, which results in rates changing at a slower pace than rates generally in the marketplace, the Bank intends to change to a different index that will reflect more current market information and thus allow the Bank to react more quickly to changes in the interest rate environment. The adjustable rate mortgage loans offered by the Bank also provide for initial rates of interest below the rates that would prevail when the index used for repricing is applied. Such initial rates, also referred to as "teaser rates," often reflect a discount from the prevailing rate greater than the 1.0% maximum adjustment allowed each year. As a result, the Bank may not be able to restore the interest rate of a loan with a teaser rate to its otherwise initial loan rate until at least the second adjustment period that occurs at the beginning of the third year of the loan. Further, in a rising interest rate environment, the Bank may not be able to adjust the interest rate of the loan to the prevailing market rate until an even later period because of the combination of the teaser discount and the 1% limitation on annual adjustments. The retention of adjustable rate loans in the Bank's portfolio helps reduce the Bank's exposure to increases in prevailing market interest rates. However, there are unquantifiable credit risks resulting from potential increases in costs to borrowers in the event of upward repricing of adjustable-rate loans. It is possible that during periods of rising interest rates, the risk of default on adjustable rate loans may increase due to increases in interest costs to borrowers. Further, although adjustable rate loans allow the Bank to increase the sensitivity of its interest-earning assets to changes in interest rates, the extent of this interest sensitivity is limited by the initial fixed-rate period before the first adjustment and the lifetime interest rate adjustment limitations. This risk is heightened by the Bank's practice of offering its adjustable rate mortgages with a discount to its initial interest rate that is greater than the annual increase in interest rates allowed under the terms of the loan. Accordingly, there can be no assurance that yields on the Bank's adjustable rate loans will fully adjust to compensate for increases in the Bank's cost of funds. Finally, adjustable rate loans increase the Bank's exposure to decreases in prevailing market interest rates, although the 1% limitation on annual decreases in the loans' interest rates tend to offset this effect. The Bank also originates, to a limited extent, fixed-rate loans for terms of 15 years. Such loans are secured by first mortgages on one-to-four family, owner-occupied residential real property located in the Bank's market area. Because of the Bank's policy to mitigate its exposure to interest rate risk through the use of adjustable rate rather than fixed rate products, the Bank does not emphasize fixed-rate mortgage loans. At March 31, 1997, only $9.5 million, or 9.6%, of the Bank's loan portfolio, consisted of fixed-rate mortgage loans. To further reduce its interest rate risk associated with such loans, the Bank may rely upon FHLB advances with similar maturities to fund such loans. See "-- Deposit Activity and Other Sources of Funds -- Borrowing." Neither the fixed rate or the adjustable rate residential mortgage loans of the Bank are originated in conformity with secondary market guidelines issued by FHLMC or FNMA. As a result, such loans may not be readily salable in the secondary market to institutional purchasers. However, such loans may still be sold to private investors whose investment strategies do not depend upon loans that satisfy FHLMC or FNMA criteria. Further, given its high liquidity, the Bank does not currently view loan sales as a necessary funding source. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources." Construction Lending. The Bank engages in construction lending involving loans to individuals for construction of one-to four- family residential housing located within the Bank's market area, with such loans converting to permanent 38 financing upon completion of construction. Such loans are generally made to individuals for construction primarily in established subdivisions within the Bank's market area. The Bank mitigates its risk with construction loans by imposing a maximum loan-to-value ratio of 95% for homes that will be owner- occupied and 80% for homes being built on a speculative basis. At March 31, 1997, the Bank's loan portfolio included $3.9 million of loans secured by properties under construction, including construction/permanent loans structured to become permanent loans upon the completion of construction and interim construction loans structured to be repaid in full upon completion of construction and receipt of permanent financing. The Bank also makes loans to qualified builders for the construction of one-to-four family residential housing located in established subdivisions in the Bank's market area. Because such homes are intended for resale, such loans are generally not converted to permanent financing at 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 may have adjustable or fixed interest rates and are underwritten in accordance with the same terms and requirements as the Bank's permanent mortgages. Such loans generally provide for disbursement in stages during a construction period of up to six months, during which period the borrower is not required to make payments as interest accrued is added to principal. The permanent loans are typically 25-year adjustable rate loans, with the same terms and conditions otherwise offered by the Bank. Monthly payments of principal and interest commence the month following the date the loan is converted to permanent financing. 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 long-term financing on improved, occupied real estate. Risk of loss on a construction loan is dependent largely upon the accuracy of the initial estimate of the property's value at completion of construction or development and the estimated cost (including interest) of construction. During the construction phase, a number of factors could result in delays and cost overruns. If the estimate of construction costs proves to be inaccurate, the Bank may be confronted at or prior to the maturity of the loan, with a project having a value which is insufficient to assure full repayment. The ability of a developer to sell developed lots or completed dwelling units will depend on, among other things, demand, pricing, availability of comparable properties and economic conditions. The Bank has sought to minimize this risk by limiting construction lending to qualified borrowers in the Bank's market area, by requiring the involvement of qualified builders, and by limiting the aggregate amount of outstanding construction loans. Multi-Family Residential and Non-Residential Real Estate Lending. The Bank's multi-family residential loan portfolio consists of adjustable rate loans secured by real estate. At March 31, 1997, the Bank had $1.5 million of multi- family residential loans, which amounted to 1.4% of the Bank's loan portfolio at such date. The Bank's non-residential real estate portfolio generally consists of adjustable rate loans secured by first mortgages on residential lots and rental property. In each case, such property is located in the Bank's market area. At March 31, 1997, the Bank had approximately $6.5 million of such loans, which comprised 6.6% of its loan portfolio. Multi-family residential real estate loans are underwritten with loan-to-value ratios up to 80% of the appraised value of the property. Non-residential real estate loans are underwritten with loan-to-value ratios up to 65% of the appraised value for raw land and 75% for land development loans. The Bank currently does not intend to significantly expand multi-family residential or non-residential real estate lending following the Conversion, but may do so if opportunities arise in the future. Multi-family residential and non-residential real estate lending entails significant additional risks as compared with one-to-four family residential property lending. Multi-family residential and commercial real estate loans typically involve larger 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, retail establishment or business. These risks can be significantly impacted by supply and demand conditions in the market for the office, retail and residential space, and, as such, may be subject to a greater extent to adverse conditions in the economy generally. To minimize these risks, the Bank generally limits itself to its market area or to borrowers with which it has prior experience or who are otherwise known to the Bank. It has been the Bank's policy to obtain annual financial statements of the business of the borrower or the project for which multi-family residential real estate or commercial real estate loans are made. Consumer and Other Lending. The consumer loans currently in the Bank's loan portfolio consist of loans secured by savings deposits and other consumer loans. Savings deposit loans are usually made for up to 90% of the depositor's savings account balance. The interest rate is approximately 2.0% above the rate paid on such deposit account serving as 39 collateral, and the account must be pledged as collateral to secure the loan. Interest generally is billed on a quarterly basis. At March 31, 1997, loans on deposit accounts totaled $3.4 million, or 3.4% of the Bank's loan portfolio. Other consumer loans include automobile loans, the amount and terms of which are determined by the loan committee, and home equity and home improvement loans, which are made for up to 95% of the value of the property but require private mortgage insurance on 100% of the value of the property. Following the Conversion, the Bank expects to focus its loan portfolio growth activities in this area. To prepare for such growth activities, the Bank recently employed a new loan officer with 25 years experience in mortgage and consumer lending. Consumer loans may entail greater credit risk than do residential mortgage loans, particularly in the case of consumer loans that are unsecured or are secured by rapidly depreciable assets, such as automobiles. In such cases, any repossessed collateral for a defaulted consumer loan may not provide an adequate source of repayment of the outstanding loan balance as a result of the greater likelihood of damage, loss or depreciation. In addition, consumer loan collections are dependent on the borrower's continuing financial stability, and therefore are more likely to be affected by adverse personal circumstances. Furthermore, the application of various federal and state laws, including bankruptcy and insolvency laws, may limit the amount which can be recovered on such loans. At March 31, 1997, there were $8,000 of consumer loans delinquent 90 days or more. There can be no assurance that delinquencies will not increase in the future, particularly in light of the Bank's decision to increase its efforts to originate a higher volume and greater variety of consumer loans. NONPERFORMING LOANS AND OTHER PROBLEM ASSETS The Bank's nonperforming loans totaled 0.9% of total assets at March 31, 1997. Loans are placed on a non-accrual status when the loan is past due in excess of 90 days and collection of principal and interest is doubtful. The Bank places a high priority on contacting customers by telephone as a primary method of determining the status of delinquent loans and the action necessary to resolve any payment problem. The Bank's management performs quality reviews of problem assets to determine the necessity of establishing additional loss reserves. Real estate acquired by the Bank as a result of foreclosure is classified as real estate owned until such time as it is sold. The Bank generally tries to sell the property at a price no less than its net book value, however, it will consider slight discounts to the appraised value to expedite the return of the funds to an earning status. When such property is acquired, it is recorded at its fair value less estimated costs of sale. Any required write-down of the loan to its appraised fair market value upon foreclosure is charged against the allowance for loan losses. Subsequent to foreclosure, in accordance with generally accepted accounting principles, a valuation allowance is established if the carrying value of the property exceeds its fair value net of related selling expenses. The Bank generally does not have any real estate owned. The following table sets forth information with respect to the Bank's non- performing assets at the dates indicated. No loans were recorded as restructured loans within the meaning of SFAS No. 15 at the dates indicated. In addition, the Bank had no real estate acquired as a result of foreclosure.
At March 31, At December 31, ------------------------------------------------ 1997 1996 1995 1994 1993 1992 -------------- ---- ---- ---- ---- ---- (Dollars in thousands) Accruing loans which are contractually past due 90 days or more: Residential real estate........ $ 179 $ 266 $ 133 $ 20 $ 80 $ 65 Consumer....................... 8 -- 1 17 -- -- ------- ------- ------- ------- ------- ------- Total........................ $ 187 $ 266 $ 134 $ 37 $ 80 $ 65 ------- ------- ------- ------- ------- ------- Total nonperforming loans...................... $ 187 $ 266 $ 134 $ 37 $ 80 $ 65 ------- ------- ------- ------- ------- ------- Percentage of total loans........ .19% .28% .16% .05% .12% .09% ------- ------- ------- ------- ------- -------
At March 31, 1997, the Bank had no loans accounted for on a nonaccrual basis, no other non-performing assets and no real estate owned. 40 At March 31, 1997, the Bank had no loans outstanding which were classified as nonaccrual, 90 days past due or restructured but where known information about possible credit problems of borrowers caused management to have serious concerns as to the ability of the borrowers to comply with present loan repayment terms and may result in disclosure as non-accrual, 90 days past due or restructured. Also, the Bank had no impaired loans under SFAS 114/118. As such, the impact of adopting these statements was not significant to the Bank. Federal regulations require savings institutions to classify their assets on the basis of quality on a regular basis. An asset meeting one of the classification definitions set forth below may be classified and still be a performing loan. An asset is classified as substandard if it is determined to be inadequately protected by the current retained earnings 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 a savings institution to a sufficient degree of risk to warrant classification but do possess credit deficiencies or potential weaknesses deserving management's close attention. Such assets designated as special mention may include nonperforming loans consistent with the above definition. Assets classified as substandard or doubtful require a savings institution to establish general allowances for loan losses. If an asset or portion thereof is classified loss, a savings 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 a savings institution's classifications. If a savings institution does not agree with an examiner's classification of an asset, it may appeal this determination to the OTS Regional Director. The Bank regularly reviews its assets to determine whether any assets require classification or re- classification. At March 31, 1997, the Bank had no assets classified as special mention, $187,000 in assets classified as substandard, no assets classified as doubtful and no assets classified as loss. Special mention assets consist primarily of residential real estate loans secured by first mortgages. This classification is primarily used by management as a "watch list" to monitor loans that exhibit any potential deviation in performance from the contractual terms of the loan. Allowance for Loan Losses. In originating loans, the Bank recognizes that credit losses will be experienced and that the risk of loss will vary with, among other things, the type of loan being made, the creditworthiness of the borrower over the term of the loan, general economic conditions and, in the case of a secured loan, the quality of the security for the loan. It is management's policy to maintain an adequate allowance for loan losses based on, among other things, the Bank's and the industry's historical loan loss experience, evaluation of economic conditions, regular reviews of delinquencies and loan portfolio quality and evolving standards imposed by federal bank examiners. The Bank increases its allowance for loan losses by charging provisions for possible loan losses against the Bank's income. Management will continue to actively monitor the Bank's asset quality and allowance for loan losses. Management will charge off loans and properties acquired in settlement of loans against the allowances for losses on such loans and such properties when appropriate and will provide specific loss allowances when necessary. Although management believes it uses the best information available to make determinations with respect to the allowances for losses and believes such allowances are adequate, future adjustments may be necessary if economic conditions differ substantially from the economic conditions in the assumptions used in making the initial determinations. The Bank's methodology for establishing the allowance for loan 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 quarterly 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, loan concentrations, the state of the real estate market, regulatory reviews conducted in the regulatory examination process and economic conditions generally. Specific reserves will be 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 of the security. At the date of foreclosure or other repossession, the Bank would transfer the property to real estate acquired in settlement of loans initially at the lower of cost or estimated fair value and subsequently at the lower of book value or fair value less estimated selling costs. Any portion of the outstanding loan balance in excess of fair value less estimated selling costs would be charged off against the allowance for loan losses. 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 would be recorded. 41 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 determining 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 12 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. The following table sets forth an analysis of the Bank's allowance for loan losses for the periods indicated.
Three Months Ended March 31, Year Ended December 31, --------------------- ---------------------------------------------- 1997 1996 1996 1995 1994 1993 1992 ---- ---- ---- ---- ---- ---- ---- (Dollars in thousands) Balance at beginning of period........... $ 217 $ 122 $ 122 $ 122 $ 122 $ 122 $ 75 Loans charged off: Real estate mortgage: Residential............................ -- -- (5) -- -- -- -- ------ ------ -------- ------ ------ ------ ------ Total charge-offs........................ -- -- (5) -- -- -- -- ------ ------ -------- ------ ------ ------ ------ Recoveries............................... -- -- -- -- -- -- -- ------ ------ -------- ------ ------ ------ ------ Net loans charged off.................... -- -- (5) -- -- -- -- ------ ------ -------- ------ ------ ------ ------ Provision for loan losses................ -- -- 100 -- -- -- 47 ------ ------ -------- ------ ------ ------ ------ Balance at end of period................. $ 217 $ 122 $ 217 $ 122 $ 122 $ 122 $ 122 ====== ====== ======== ====== ====== ====== ====== Ratio of net charge-offs to average loans outstanding during the period.......... 0% 0% 0.0053% 0% 0% 0% 0% ======= ======= ======== ======= ======= ======= =======
The following table sets forth the breakdown of the allowance for loan losses by loan category at the dates indicated. Management believes that the allowance can be allocated by category only on an approximate basis. The allocation of the allowance to each category is not necessarily indicative of future losses and does not restrict the use of the allowance to absorb losses in any category.
At March 31, At December 31, --------------------------------------------------------------- 1997 1996 1995 -------------------------- ------------------------- -------------------------- (Dollars in thousands) Percent of Loans Percent of Loans Percent of Loans in Each Category in Each Category in Each Category Amount to Total Loans Amount to Total Loans Amount to Total Loans ------ -------------- ------ -------------- ------ -------------- One-to-four family............ $ 163 80.4% $ 163 79.6% $ 94 81.5% Construction.................. 11 4.0% 11 5.6% 5 4.7% Multi-family residential...... 3 1.4% 3 1.5% 1 0.6% Non-residential............... 23 6.6% 23 5.6% 14 5.9% Secured by deposits........... -- 3.4% -- 3.6% -- 3.8% Other consumer loans.......... 17 4.2% 17 4.1% 8 3.5% ------- ------- ------- ------- ------- ------- Total allowance for loan losses.............. $ 217 100.0% $ 217 100.0% $ 122 100.0% ======= ======= ======= ======= ======= ======= ------------------------------- 1994 -------------------------- Percent of Loans in Each Category Amount to Total Loans ------ -------------- One-to-four family........... $ 99 82.3% Construction................. 6 4.7% Multi-family residential..... 5 4.3% Non-residential.............. 5 2.0% Secured by deposits.......... -- 3.9% Other consumer loans......... 7 2.8% -------- -------- Total allowance for loans losses............. $ 122 100.0% ======== ========
42
At December 31, -------------------------------------------------------------------------------- 1993 1992 ----------------------------------- ------------------------------------ Percent of Loans in Each Percent of Loans in Each Amount Category to Total Loans Amount Category to Total Loans ------ ----------------------- ------ ------------------------ (Dollars in thousands) One-to-four family............... $ 94 81.3% $ 100 84.8% Construction..................... 5 4.3% 2 2.0% Multi-family residential......... 3 2.0% 2 2.0% Non-residential.................. 15 6.5% 12 5.0% Secured by deposits.............. -- 3.6% -- 3.8% Other consumer loans............. 5 2.3% 6 2.4% ------- ------- ------- ------ Total allowance for loan losses.................. $ 122 100.0% $ 122 100.0% ======= ======= ======= ======
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 Cincinnati, 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 -- Regulation of the Bank -- 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 to satisfy certain requirements for favorable tax treatment. The investment activities of the Bank consist primarily of investments in Agency Securities and Mortgage-Backed Securities. 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 must be approved by the Bank's President. The Board of Directors reviews all securities transactions on a monthly basis. The principal objective of the Bank's investment policy is to earn as high a rate of return as possible, but to consider also financial or credit risk, liquidity risk and interest rate risk. See "Management's Discussion and Analysis of Financial Condition and Results of Operations --Asset/Liability Management." The Bank adopted SFAS No. 115 as of December 31, 1993. Pursuant to SFAS No. 115, the Bank has classified securities with an amortized cost of $1.8 million and an approximate market value of $5.1 million at March 31, 1997 as available for sale. Management of the Bank presently does not intend to sell such securities and, based on the Bank's current liquidity level and the Bank's access to borrowings through the FHLB of Cincinnati, management currently does not anticipate that the Bank will be placed in a position of having to sell securities with material unrealized losses. Securities designated as "held to maturity" are those assets which the Bank has both the ability and the intent to hold to maturity. Upon acquisition, securities are classified as to the Bank's intent, and a sale would only be effected due to deteriorating investment quality. The held to maturity investment portfolio is not used for speculative purposes and is carried at amortized cost. In the event the Bank sells securities from this portfolio for other than credit quality reasons, all securities within the investment portfolio with matching characteristics may be reclassified as assets available for sale. Securities designated as "available for sale" are those assets which the Bank may not hold to maturity and thus are carried at market value with unrealized gains or losses, net of tax effect, recognized in retained earnings. 43 Mortgage-Backed and Related Securities. Mortgage-backed securities represent a participation interest in a pool of one-to-four family or multi- family mortgages, the principal and interest payments on which are passed from the mortgage originators through intermediaries that pool and repackage the participation interest in the form of securities to investors such as the Bank. Such intermediaries may include quasi-governmental agencies such as FHLMC, FNMA and GNMA which guarantee the payment of principal and interest to investors. Of the Bank's $20.7 million mortgage-backed security portfolio at March 31, 1997, approximately $19.0 million were originated through GNMA and approximately $1.7 million were originated through FNMA. Mortgage-backed securities generally increase the quality of the Bank's assets by virtue of the guarantees that back them, are more liquid than individual mortgage loans and may be used to collateralize borrowings or other obligations of the Bank. Mortgage-backed securities typically are issued with stated principal amounts and the securities are backed by pools of mortgages that have loans with interest rates that are within a range and have similar maturities. The underlying pool of mortgages can be composed of either fixed-rate or adjustable- rate mortgage loans. Mortgage-backed securities generally are referred to as mortgage participation certificates or pass-through certificates. As a result, the interest rate risk characteristics of the underlying pool of mortgages, i.e., fixed-rate or adjustable-rate, as well as prepayment risk, are passed on to the certificate holder. The life of a mortgage-backed pass-through security is equal to the life of the underlying mortgages. 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. For further information regarding the Bank's mortgage-backed securities and agency securities, see "Management's Discussion and Analysis of Financial Condition and Results of Operations." See also "Regulation -- Regulation of the Bank-- Qualified Thrift Lender Test." The following table sets forth the carrying value of the Bank's investment securities at the dates indicated.
At March 31, At December 31, ---------------------------------- 1997 1996 1995 1994 ------------- ---- ---- ---- (In thousands) Securities available for sale: FHLB and FHLMC stock.................. $ 5,094 $ 5,110 $ 4,053 $ 2,955 Other................................. 15 15 -- -- Securities held to maturity: U.S. government and agency securities (1)..................... 56,967 77,962 80,990 63,002 Mortgage-backed securities............ 20,702 17,984 17,563 13,343 ------- -------- -------- ------- Total investment securities......... $82,778 $101,071 $102,606 $79,300 ======= ======== ======== =======
______________ (1) Primarily reflects debt securities purchased from the FHLB of Cincinnati. 44 The following table sets forth information in the scheduled maturities, amortized cost, market values and average yields for the Bank's investment portfolio at March 31, 1997. At such date, all securities in the Bank's investment portfolio, except for $7.0 million, were callable.
One One to Total Investment Year or Less Five Years Portfolio -------------------- --------------------- ---------------------------------- Carrying Average Carrying Average Carrying Market Average Value Yield Value Yield Value Value Yield ----- ----- ----- ----- ----- ----- ----- (Dollars in thousands) Securities held to maturity (1)............. $ 8,997 5.61% $ 47,969 6.07% $ 56,967 $ 56,098 6.00% ======== ======== ======== ========
_________________ (1) Excludes mortgage-backed securities. See Note 2 of Notes to Financial Statements. 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. 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 corporate purposes. The Bank has access to borrow from the FHLB of Cincinnati, and the Bank will continue to have access to FHLB of Cincinnati advances. The Bank may rely upon retail deposits rather than borrowings as its primary source of funding for future asset growth. DEPOSITS. The Bank attracts deposits principally from within its 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 three months to five 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. The Bank reviews its deposit mix and pricing on a weekly 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. 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. Substantially all of the Bank's depositors are Kentucky residents who reside in the Bank's market area. 45 Savings deposits in the Bank at March 31, 1997 were represented by the various types of savings programs described below.
Interest Minimum Minimum Balance Percentage of Rate* Term Category Amount (In thousands) Total Deposits - ----------- ---------------------- ---------------------------- --------- ---------------- ---------------- 0.00% None Non-interest bearing $ 100 $ 2,179 1.19% 2.50%* None Demand/NOW accounts 1.500 7,795 4.26 2.75% None Passbook accounts 10 11,795 6.44 3.75%* None Money market deposit accounts 2,500 37,588 20.52 -------- ------ 59,357 32.41 -------- ------ Certificates of Deposit ------------------------------- 3.85% 3 months or less Fixed-term, fixed rate 500 38 .02 4.70% Over 3 to 12-months Fixed-term, fixed-rate 500 37,594 20.52 5.16% Over 12 to 24-months Fixed-term, fixed-rate 500 45,814 25.01 5.29% Over 24 to 36-months Fixed-term, fixed-rate 500 14,447 7.89 5.39% Over 36 to 48-months Fixed-term, fixed-rate 500 15,934 8.70 5.44% Over 48 to 60-months Fixed-term, fixed rate 500 9,978 5.45 -------- ------ 123,805 67.59 -------- ------ $183,162 100.00% ======== ======
______________ * Represents weighted average interest rate. The following table sets forth, for the periods indicated, the average balances and interest rates based on month-end balances for interest-bearing demand deposits and time deposits.
Three Months Ended Year Ended December 31, -------------------------------------------------------- March 31, 1997 1996 1995 ------------------------------ ------------------------------ -------------------------------- Interest-bearing Time Interest-bearing Time Interest-bearing Time demand deposits deposits demand deposits deposits demand deposits deposits ---------------- -------- ---------------- -------- ---------------- -------- (Dollars in thousands) Average balance.......... $ 56,176 $ 125,337 $ 55,901 $ 133,400 $ 59,777 $ 130,460 Average rate............. 3.55% 5.45% 3.58% 5.48% 3.32% 6.18% --------------------------------- 1994 --------------------------------- Interest-bearing Time demand deposits ------ -------- deposits -------- Average balance.......... $ 78,338 $ 115,135 Average rate............. 3.31% 6.60%
46 The following table sets forth the change in dollar amount of deposits in the various types of accounts offered by the Bank between the dates indicated.
Balance at Increase Balance at Increase March 31, % of (Decrease) from December 31, % of (Decrease) from 1997 Deposits December 31, 1996 1996 Deposits December 31,1995 ---- -------- ----------------- ---- -------- ---------------- (Dollars in thousands) Non-interest bearing........... $ 2,179 1.19% $ 395 $ 1,784 0.97% $ 548 Demand and NOW accounts...................... 7,795 4.26% 192 7,603 4.14% (25) Money market................... 37,588 20.52% 648 36,940 20.09% 2,158 Passbook savings............... 11,795 6.44% 1,163 10,632 5.78% (565) Other time deposits............ 123,805 67.59% (3,063) 126,868 69.02% (13,064) --------- ------ ----------- ----------- ------- ------------- Total........................ $ 183,162 100.00% $ (665) $ 183,827 100.00% $ (10,948) ========= ====== =========== ========== ======= =============
Balance at Increase Balance at December 31, % of (Decrease) from December 31, % of 1995 Deposits December 31, 1994 1994 Deposits ---- -------- ----------------- ---- -------- (Dollars in thousands) Non-interest bearing........... $ 1,236 0.63% $ 102 $ 1,135 0.61% Demand and NOW accounts...................... 7,628 3.92% 817 6,811 3.67% Money market................... 34,782 17.86% (10,271) 45,053 24.26% Passbook savings............... 11,197 5.75% (516) 11,713 6.31% Other time deposits............ 139,932 71.84% 18,944 120,988 65.15% ------------ ------ ------------- ----------- ------- Total........................ $ 194,775 100.00% $ 9,076 $ 185,700 100.00% ============ ===== ============= =========== ======
The following table sets forth the time deposits in the Bank classified by rates at the dates indicated.
At March 31, At December 31, ----------------------------------------- 1997 1996 1995 1994 ---- ---- ---- ---- (In thousands) 2.01 - 4.00%..................... $ 38 $ 38 $ 58 $ 21,603 4.01 - 6.00%..................... 102,402 103,036 79,288 78,894 6.01 - 8.00%..................... 21,365 23,794 60,586 20,49 ---------- ----------- ------------- ----------- Total........................... $ 123,805 $ 126,868 $ 139,932 $ 120,988 ========== =========== ============ ===========
The following table sets forth the amount and maturities of time deposits at March 31, 1997.
Amount Due ------------------------------------------------------------------------------- Less Than One Year 1-2 Years 2-3 Years After 3 Years Total ------------------ --------- --------- ------------- ---------- (In thousands) 2.01 - 4.00%............... $ 38 $ -- $ -- $ -- $ 38 4.01 - 6.00%............... 65,373 29,229 5,235 2,565 102,402 6.01 - 8.00%............... 7,579 7,132 4,180 2,474 21,365 ------------ --------- --------- ------------- ---------- Total...................... $ 72,990 $ 36,361 $ 9,415 $ 5,039 $ 123,805 ============ ========= ========= ============ ==========
47 The following table indicates the amount of the Bank's certificates of deposit of $100,000 or more by time remaining until maturity as of March 31, 1997.
Maturity Period Certificates of Deposits - ------------------------------------------- ------------------------ (In thousands) Three months or less...................... $ 1,188 Over three through six months............. 1,205 Over six through 12 months................ 2,393 Over 12 months............................ 1,393 --------------- Total.................................... $ 6,179 ===============
Certificates of deposit at March 31, 1997 included approximately $6.2 million of deposits with balances of $100,000 or more, compared to $7.4 million and $12.2 million at December 31, 1996 and 1995, respectively. Such time deposits may be risky because their continued presence in the Bank is dependent partially upon the rates paid by the Bank rather than any customer relationship and, therefore, may be withdrawn upon maturity if another institution offers higher interest rates. The Bank may be required to resort to other funding sources such as borrowing or sales of its securities held available for sale if the Bank believes that increasing its rates to maintain such deposits would adversely affect its operating results. At this time, the Bank does not believe that it will need to significantly increase its deposit rates to maintain such certificates of deposit and, therefore, does not anticipate resorting to alternative funding sources. The Bank has reduced such time deposits by 49.4% since December 31, 1995. See Note 5 of Notes to Financial Statements. The following table sets forth the deposit activities of the Bank for the periods indicated.
Three Months Ended Year Ended December 31, ----------------------------------------- March 31, 1996 1995 1994 ------------------------ ---- ---- ---- 1997 1996 (In thousands) ---- ---- Deposits ........................... $ 60,872 $ 61,856 $ 149,771 $ 140,662 $ 136,357 Withdrawals......................... (63,366) (62,586) (167,560) (139,393) (129,749) Net increase (decrease) before interest credited................. (2,494) (730) (17,789) 1,269 6,608 Interest credited................... 1,829 2,004 6,841 7,807 5,907 ---------- --------- ---------- ------------ ------------ Net increase (decrease) in savings deposits.......................... $ (665) $ 1,274 $ (10,948) $ 9,076 $ 12,515 ========== ========= ========== ============ ============
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 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 Cincinnati to supplement its supply of lendable funds and to meet deposit withdrawal requirements. The FHLB of Cincinnati 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 Cincinnati 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. The Bank has entered into a Cash Management Advance program with FHLB. See Note 6 of Notes to Financial Statements. Advances from the FHLB of Cincinnati are secured by a $20.0 million FHLB investment security. As of March 31, 1997, the Bank had no advances outstanding. SUBSIDIARY ACTIVITIES As a federally chartered savings bank, the Bank is permitted to invest an amount equal to 2% of its assets in subsidiaries, with an additional investment of 1% of assets where such investment serves primarily community, inner-city and community development purposes. Institutions meeting their applicable minimum regulatory capital requirements 48 may invest up to 50% of their regulatory capital in conforming first mortgage loans to subsidiaries in which they own 10% or more of the capital stock. The Bank does not have any subsidiaries. COMPETITION The Bank faces significant competition both in originating mortgage and other loans and in attracting deposits. The Bank competes for loans principally on the basis of interest rates, the types of loans it originates, the deposit products it offers and the quality of services it provides to borrowers. The Bank also competes by offering products which are tailored to the local community. Its competition in originating real estate loans comes primarily from other savings institutions, commercial banks and mortgage bankers making loans secured by real estate located in the Bank's market area. Commercial banks, credit unions and finance companies provide vigorous competition in consumer lending. Competition may increase as a result of the continuing reduction of restrictions on the interstate operations of financial institutions. The Bank attracts its deposits through its five offices primarily from the local community. Consequently, competition for deposits is principally from other savings institutions, commercial banks and brokers in the local community as well as from credit unions. The Bank competes for deposits and loans by offering what it believes to be a variety of deposit accounts at competitive rates, convenient business hours, a commitment to outstanding customer service and a well-trained staff. The Bank believes it has developed strong relationships with local realtors and the community in general. The Bank is a community and retail-oriented financial institution. Management considers the Bank's branch network and reputation for financial strength and quality customer service as its major competitive advantage in attracting and retaining customers in its market area. A number of the Bank's competitors have been acquired by statewide/nationwide banking organizations, including Bank One, First City Bank (a wholly owned subsidiary of Area Bancshares, Corp.) and Nations Bank. While the Bank is subject to competition from other financial institutions which may have greater financial and marketing resources, management believes the Bank benefits by its community orientation and its long-standing relationship with many of its customers. 49 OFFICES AND OTHER MATERIAL PROPERTIES The following table sets forth information regarding the Bank's offices at March 31, 1997.
Approximate Year Opened Owned or Leased Book Value (1) Square Footage of ----------- --------------- -------------- ----------------- Office ------ (In thousands) MAIN OFFICE: 2700 Fort Campbell Boulevard Hopkinsville, Kentucky 42240......... 1995 Owned $ 1,940 16,575 BRANCH OFFICES: Downtown Branch Office (2) 612 South Main Street Hopkinsville, Kentucky.............. 1966 Owned $ 184 11,926 Murray Branch Office 7th and Main Streets Murray, Kentucky.................... 1969 Owned $ 82 4,800 Cadiz Branch Office (3) 67 Main Street Cadiz, Kentucky...................... 1974 Leased $ -- 600 Elkton Branch Office West Main Street Elkton, Kentucky..................... 1976 Owned $ 50 3,400 Real Estate Lot Cadiz, Kentucky (3)................. 1996 Owned $ 75 -- --------- $ 2,331 =========
__________________ (1) Represents the book value of land, building, furniture, fixtures and equipment owned by the Bank. (2) Currently for sale. The Bank plan is constructing a new branch office at 7th and Virginia Streets in Hopkinsville. (3) This branch office will be relocated to a new lot in Cadiz purchased by the Bank. EMPLOYEES As of March 31, 1997, the Bank had 28 full-time employees, none of whom were 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 March 31, 1997, 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. There are no pending regulatory proceedings to which the Company, the Bank or its subsidiaries is a party or to which any of their properties is subject which are currently expected to result in a material loss. 50 REGULATION GENERAL The Bank is chartered as a federal savings bank under the Home Owners' Loan Act, as amended (the "HOLA"), which is implemented by regulations adopted and administered by the OTS. As a federal savings bank, the Bank is subject to regulation, supervision and regular examination by the OTS. The OTS also has extensive enforcement authority over all savings institutions and their holding companies, including the Bank and the Company. Federal banking laws and regulations control, among other things, the Bank's required reserves, investments, loans, mergers and consolidations, payment of dividends and other aspects of the Bank's operations. The deposits of the Bank are insured by the SAIF administered by the FDIC to the maximum extent provided by law ($100,000 for each depositor). In addition, the FDIC has certain regulatory and examination authority over OTS-regulated savings institutions and may recommend enforcement actions against savings institutions to the OTS. The supervision and regulation of the Bank is intended primarily for the protection of the deposit insurance fund and the Bank's depositors rather than for holders of the Company's stock or for the Company as the holder of the stock of the Bank. As a savings and loan holding company, the Company will be registered with and subject to OTS regulation and supervision under the HOLA. The Company also will be required to file certain reports with, and otherwise comply with the rules and regulations of, the Commission under the federal securities laws. The following discussion is intended to be a summary of certain statutes, rules and regulations affecting the Bank and the Company. A number of other statutes and regulations have an impact on their operations. The following summary of applicable statutes and regulations does not purport to be complete and is qualified in its entirety by reference to such statutes and regulations. REGULATION OF THE BANK PROPOSED LEGISLATION. Legislation currently pending before the United States Congress would, if enacted, require all federal savings institutions (such as the Bank) to convert to a national bank or a state bank or savings bank charter. In addition, the proposed legislation would cause the Company to be regulated not as a savings and loan holding company, but rather as a bank holding company or a "financial services" holding company (a new regulatory classification created by the legislation). If the pending legislation were to be adopted in its current form, it would eliminate certain advantages now enjoyed by federal savings institutions, such as unrestricted interstate branching and the absence of restrictions on the business activities of unitary savings and loan holding companies. As consideration of the proposed legislation is in its early stages, the Company cannot predict whether or in what form the legislation will be enacted. However, based upon the provisions of the currently pending legislation, the management of the Company does not believe that the enactment of such legislation would have a material adverse effect on its financial condition or results of operations. BUSINESS ACTIVITIES. The Bank derives its lending and investment powers from the HOLA and the regulations of the OTS thereunder. Under these laws and regulations, the Bank may invest in mortgage loans secured by residential and commercial real estate, commercial and consumer loans, certain types of commercial paper and debt securities, and certain other assets. The Bank may also establish service corporations that may engage in activities not otherwise permissible for the Bank, including certain real estate equity investments and securities and insurance brokerage. These investment powers are subject to various limitations. BRANCHING. Subject to certain limitations, OTS regulations currently permit a federally chartered savings institution like the Bank to establish branches in any state of the United States, provided that the federal savings institution qualifies as a "domestic building and loan association" under the Internal Revenue Code. See "-- Qualified Thrift Lender Test." The authority for a federal savings institution to establish an interstate branch network would facilitate a geographic diversification of the institution's activities. However, recently proposed federal legislation could, if enacted, restrict the Bank's ability to open branches in states other than Kentucky. See "-- Proposed Legislation." REGULATORY CAPITAL. The OTS has adopted capital adequacy regulations that require savings institutions such as the Bank to meet three minimum capital standards: a "core" capital requirement of 3% of adjusted total assets, a "tangible" 51 capital requirement of 1.5% of adjusted total assets, and a "risk-based" capital requirement of 8% of total risk-based capital to total risk-weighted assets. In addition, the OTS has adopted regulations imposing certain restrictions on savings institutions that have a total risk-based capital ratio of less than 8%, a ratio of Tier 1 capital to risk-weighted assets of less than 4% or a ratio of Tier 1 capital to total assets of less than 4% (or 3% if the institution is rated Composite 1 under the CAMEL examination rating system). See "-- Prompt Corrective Regulatory Action." The core capital, or "leverage ratio," requirement mandates that a savings institution maintain core capital equal to at least 3% of its adjusted total assets. "Core capital" includes common stockholders' equity (including retained earnings), noncumulative perpetual preferred stock and related surplus, minority interests in the equity accounts of fully consolidated subsidiaries and certain nonwithdrawable accounts and pledged deposits and is generally reduced by the amount of the savings institution's intangible assets, with limited exceptions for permissible mortgage servicing rights ("MSRs"), purchased credit card relationships and certain intangible assets arising from prior regulatory accounting practices. Core capital is further reduced by the amount of a savings institution's investments in and loans to subsidiaries engaged in activities not permissible for national banks. At March 31, 1997, the Bank had no such investments. The risk-based capital standards of the OTS require maintenance of core capital equal to at least 4% of risk-weighted assets and total capital equal to at least 8% of risk-weighted assets. For purposes of the risk-based capital requirement, "total capital" includes core capital plus supplementary capital, provided that the amount of supplementary capital does not exceed the amount of core capital. Supplementary capital includes preferred stock that does not qualify as core capital, nonwithdrawable accounts and pledged deposits to the extent not included in core capital, perpetual and mandatory convertible subordinated debt and maturing capital instruments meeting specified requirements and a portion of the institution's loan and lease loss allowance. 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, which range from 0% to 100% as assigned by the OTS capital regulations based on the risks the OTS believes are inherent in the type of asset. Comparable risk weights are assigned to off-balance sheet assets. The OTS risk-based capital regulation also includes an interest rate risk ("IRR") component that requires savings institutions with greater than normal IRR, when determining compliance with the risk-based capital requirements, to maintain additional total capital. The OTS has, however, indefinitely deferred enforcement of its IRR requirements. The following table sets forth the Bank's compliance with its regulatory capital requirements at March 31, 1997.
Capital The Bank's Capital Requirements Excess Capital -------------------- ----------------- ------------------- Amount Percent Amount Percent Amount Percent ------ ------- ------ ------- ------ ------- (Dollars in thousands) Tangible capital........... $ 15,032 7.50% $ 3,015 1.50% $ 12,017 6.00% Core capital............... $ 15,032 7.50% $ 6,031 3.00% $ 9,001 4.50% Total Risk-based capital... $ 15,249 20.89% $ 5,840 8.00% $ 9,409 12.89%
PROMPT CORRECTIVE REGULATORY ACTION. Under the Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA"), the federal banking regulators are required to take prompt corrective action in respect of depository institutions that do not meet certain minimum capital requirements, including a leverage limit and a risk-based capital requirement. 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. As required by FDICIA, banking regulators, including the OTS, have issued regulations that classify insured depository institutions by capital levels and provide that the applicable agency will take various prompt corrective actions to resolve the problems of any institution that fails to satisfy the capital standards. 52 Under the joint prompt corrective action regulations, a "well-capitalized" institution is one that is not subject to any regulatory order or directive to meet any specific capital level and that has or exceeds the following capital levels: a total risk-based capital ratio of 10%, a Tier 1 risk-based capital ratio of 6%, and a ratio of Tier 1 capital to total assets ('leverage ratio") of 5%. An "adequately capitalized" institution is one that does not qualify as "well capitalized" but meets or exceeds the following capital requirements: a total risk-based capital of 8%, a Tier 1 risk-based capital ratio of 4%, and a leverage ratio of either (i) 4% or (ii) 3% if the institution has the highest composite examination rating. An institution not meeting these criteria is treated as "undercapitalized," "significantly undercapitalized," or "critically undercapitalized" depending on the extent to which its capital levels are below these standards. An institution that fails within any of the three "undercapitalized" categories will be subject to certain severe regulatory sanctions required by FDICIA and the implementing regulations. As of March 31, 1997, the Bank was "well-capitalized" as defined by the regulations. FEDERAL DEPOSIT INSURANCE. The Bank is 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 insurance assessment rate for an insured depository institution depends on the assessment risk classification assigned to the institution. Institutions are assigned by the FDIC to one of three capital groups -- well-capitalized, adequately capitalized, or undercapitalized -- and, within each capital category, to one of three supervisory subgroups. In order to recapitalize the SAIF and to equalize the deposit insurance premiums paid by SAIF-insured institutions and institutions with deposits insured by the Bank Insurance Fund, Congress enacted the Deposit Insurance Funds Act of 1996 (the "1996 Act"), which authorized the FDIC to impose a one-time special assessment on all institutions with SAIF-assessable deposits in the amount necessary to recapitalize the SAIF to the statutorily designated reserve ratio of 1.25% of insured deposits. Institutions were assessed at the rate of 65.7 basis points per $100 of each institution's SAIF-assessable deposits as of March 31, 1995. The 1996 Act provides the amount of the special assessment will be deductible for federal income tax purposes for the taxable year in which the special assessment is paid. Based on the foregoing, the Bank recorded an accrual for the special assessment of $1.23 million at September 30, 1996. Net of related tax effects, this reduced reported earnings by $811,800 for the year ended December 31, 1996. As a result of the recapitalization of the SAIF by the 1996 Act, the FDIC reduced the insurance assessment rate for SAIF-assessable deposits for periods beginning on October 1, 1996. For the first half of 1997, the FDIC set the effective insurance assessment rates for SAIF-insured institutions, such as the Bank, at zero to 27 basis points. In addition, SAIF-insured institutions will be required, until December 31, 1999, to pay assessments to the FDIC at an annual rate of between 6.0 and 6.5 basis points to help fund interest payments on certain bonds issued by the Financing Corporation ("FICO"), an agency of the federal government established to recapitalize the predecessor to the SAIF. During this period, BIF member banks will be assessed for payment of the FICO obligations at one-fifth the annual rate applicable to SAIF member institutions. After December 31, 1999, BIF and SAIF members will be assessed at the same rate (currently estimated at approximately 2.4 basis points) to service the FICO obligations. The 1996 Act also provides that the FDIC may not assess regular insurance assessments for the SAIF unless required to maintain or to achieve the designated reserve ratio of 1.25%, except for such assessments on those institutions that are not classified as "well-capitalized" or that have been found to have "moderately severe" or "unsatisfactory" financial, operational or compliance weaknesses. The Bank is classified as "well-capitalized" and has not been found by the OTS to have such supervisory weaknesses. QUALIFIED THRIFT LENDER TEST. The HOLA and OTS regulations require all savings institutions to satisfy one of two Qualified Thrift Lender ("QTL") tests or to suffer a number of sanctions, including restrictions on activities. To qualify as a QTL, a savings institution must either (i) be deemed a "domestic building and loan association" under the Internal Revenue Code (the "Code") by maintaining at least 60% of its total assets in specified types of assets, including cash, certain government securities, loans secured by and other assets related to residential real property, educational loans, and investments in premises of the institution or (ii) satisfy the HOLA's QTL test by maintaining at least 65% of "portfolio assets" in certain "Qualified Thrift Investments." For purposes of the HOLA's QTL test, portfolio assets are defined as 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 (a) loans, equity positions or securities related to domestic, residential real estate or manufactured housing, (b) 50% of the dollar amount of residential mortgage loans subject to sale under certain conditions, and (c) loans to small businesses, student loans and credit card loans. In addition, 53 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 business in "credit needy" areas. A savings institution must maintain its status as a QTL on a monthly basis in at least nine out of every 12 months. An initial failure to qualify as a QTL results in a number of sanctions, including the imposition of certain operating restrictions and a restriction on obtaining additional advances from its Federal Home Loan Bank. If a savings institution does not requalify under the QTL test within the three-year period after it fails the QTL test, it would be required to terminate any activity not permissible for a national bank and repay as promptly as possible any outstanding advances from its Federal Home Loan Bank. In addition, the holding company of such an institution, such as the Company, would similarly be required to register as a bank holding company with the Federal Reserve Board. At March 31, 1997, the Bank qualified as a QTL. SAFETY AND SOUNDNESS STANDARDS. FDICIA, as amended by the Riegle Community Development and Regulatory Improvement Act of 1994, requires the OTS, together with the other federal bank regulatory agencies, to prescribe standards, by regulation or guideline, relating to internal controls, information systems and internal audit systems, loan documentation, credit underwriting, interest rate risk exposure, asset growth, asset quality, earnings, stock valuation, and compensation, fees and benefits and such other operational and managerial standards as the agencies deem appropriate. The OTS and the federal bank regulatory agencies have adopted a set of guidelines prescribing safety and soundness standards pursuant to the statute. The safety and soundness guidelines establish general standards relating to internal controls and information systems, internal audit systems, loan documentation, credit underwriting, interest rate exposure, asset growth, and compensation, fees and benefits. In general, the guidelines require, among other things, appropriate systems and practices to identify and manage the risks and exposures specified in the guidelines. The guidelines prohibit excessive compensation as an unsafe and unsound practice and describe compensation as excessive when the amounts paid are unreasonable or disproportionate to the services performed by an executive officer, employee, director or principal stockholder. In addition, on July 10, 1995, the OTS and the federal bank regulatory agencies proposed guidelines for asset quality and earnings standards. Under the proposed standards, a savings institution would be required to 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 banking agencies, would not have a material effect on the operations of the Bank. LIMITATIONS ON CAPITAL DISTRIBUTIONS. OTS regulations impose limitations upon capital distributions by savings institutions, such as cash dividends, payments to repurchase or otherwise acquire its shares, payments to stockholders of another institution in a cash-out merger and other distributions charged against capital. A savings institution must give notice to the OTS at least 30 days before declaration of a proposed capital distribution to its holding company, and capital distributions in excess of specified earnings or by certain institutions are subject to approval by the OTS. A savings institution that has capital in excess of all regulatory capital requirements before and after a proposed capital distribution and that is not otherwise restricted in making capital distributions, may, after prior notice but without the approval of the OTS, make capital distributions during a calendar year equal to the greater of (a) 100% of its net income to date during the calendar year plus the amount that would reduce by one-half its "surplus capital ratio" (the excess capital over its fully phased-in capital requirements) at the beginning of the calendar year, or (b) 75% of its net income for the previous four quarters. Any additional capital distributions would require prior OTS approval. The OTS has proposed regulations that would simplify the existing procedures governing capital distributions by savings institutions. Under the proposed regulations, the approval of the OTS would be required only for capital distributions by an institution that is deemed to be in troubled condition or that is undercapitalized or would be undercapitalized after the capital distribution. A savings institution would be able to make a capital distribution without notice to or approval of the OTS if it is not held by a savings and loan holding company, is not deemed to be in troubled condition, has received either of the two highest composite supervisory ratings and would continue to be adequately capitalized after such distribution. Notice would have to be given to the OTS by any institution that is held by a savings and loan holding company or that had received a composite supervisory rating below the highest two composite supervisory ratings. An institution's capital rating would be determined under the prompt corrective action regulations. See "--Prompt Corrective Regulatory Action." 54 Under OTS regulations, the Bank would 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. In addition, under the OTC's prompt corrective action regulations, the Bank would be prohibited from paying dividends if the Bank were classified as "undercapitalized" under such rules. See "-- Prompt Corrective Regulatory Action." In addition to the foregoing, earnings of the Bank appropriated to bad debt reserves and deducted for federal income tax purposes are not available for payment of dividends or other distributions to the Company without payment of taxes at the then current tax rate by the Bank on the amount of earnings removed from the reserves for such distributions. See "Taxation." CONSUMER CREDIT REGULATION. The Bank's mortgage lending activities are subject to the provisions of various federal and state statutes, including, among others, the Truth in Lending Act, the Equal Credit Opportunity Act, the Real Estate Settlement Procedures Act, the Fair Housing Act, and the regulations promulgated thereunder. These statutes and regulations, among other provisions, prohibit discrimination, prohibit unfair and deceptive trade practices, require the disclosure of certain basic information to mortgage borrowers concerning credit terms and settlement costs, and otherwise regulate terms and conditions of credit and the procedures by which credit is offered and administered. Many of the above regulatory requirements are designed to protect the interests of consumers, while others protect the owners or insurers of mortgage loans. Failure to comply with these requirements can lead to administrative enforcement actions, class action lawsuits and demands for restitution or loan rescission. TRANSACTIONS WITH AFFILIATES. The Bank is subject to restrictions imposed by Sections 23A and 23B of the Federal Reserve Act on extensions of credit to, and certain other transactions with, the Company and other affiliates, and on investments in the stock or other securities thereof. Such restrictions prevent the Company and such other affiliates from borrowing from the Bank unless the loans are secured by specified collateral, and require such transactions to have terms comparable to terms of arms-length transactions with third persons. Further, such secured loans and other transactions and investments by the Bank are generally limited in amount as to the Company and as to any other affiliate to 10% of the Bank's capital and surplus and as to the Company and all other affiliates to an aggregate of 20% of the Bank's capital and surplus. These restrictions may limit the Company's ability to obtain funds from the Bank for its cash needs, including funds for acquisitions and for payment of dividends, interest and operating expenses. LOANS TO DIRECTORS, EXECUTIVE OFFICERS AND PRINCIPAL STOCKHOLDERS. The Bank's ability to extend credit to its directors, executive officers, and 10% stockholders, as well as to entities controlled by such persons, is governed by the requirements of Sections 22(g) and 22(h) of the Federal Reserve Act and Regulation O of the Federal Reserve Board thereunder. Among other things, these provisions require that an institution's extensions of credit to insiders (a) be made on terms that are substantially the same as, and follow credit underwriting procedures that are not less stringent than, those prevailing for comparable transactions with unaffiliated persons and that do not involve more than the normal risk of repayment or present other unfavorable features and (b) not exceed certain limitations on the amount of credit extended to such persons, individually and in the aggregate, which limits are based, in part, on the amount of the institution's capital. In addition, extensions of credit in excess of certain limits must be approved by the institution's Board of Directors. RESERVE REQUIREMENTS. Pursuant to regulations of the Federal Reserve Board, all FDIC-insured depository institutions must maintain average daily reserves against their transaction accounts. No reserves are required to be maintained on the first $4.4 million of transaction accounts, and reserves equal to 3% must be maintained on the next $49.3 million of transaction accounts, plus reserves equal to 10% on the remainder. These percentages are subject to adjustment by the Federal Reserve Board. Because required reserves must be maintained in the form of vault cash or in a non-interest-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. As of March 31, 1997, the Bank met its reserve requirements. LIQUIDITY REQUIREMENTS. The Bank is required by OTS regulation to maintain an average daily balance of liquid assets (cash, certain time deposits, bankers' acceptances, highly rated corporate debt and commercial paper, securities of certain mutual funds, and specified United Sates government, state or federal agency obligations) equal to the monthly average of not less than a specified percentage (currently 5%) of its net withdrawable savings deposits plus short- term borrowings. The average daily liquidity ratio of the Bank for the month ended March 31, 1997 was 43.62%. The Bank is also required to maintain average daily balances of short-term liquid assets at a specified percentage (currently 1%) of the 55 total of its net withdrawable savings accounts and borrowings payable in one year or less. The Bank was in compliance with the 1% requirement at March 31, 1997. The OTS has proposed to revise its liquidity regulations to decrease the burden of compliance with such rules. Specifically, the OTS proposal would (1) reduce the liquidity base by excluding withdrawable accounts payable in more than one year from the definition of "net withdrawable accounts," (2) reduce the liquidity requirement from 5% of net withdrawable accounts and short-term borrowings to 4%, (3) remove the 1% short-term liquidity requirement, and (4) expand the categories of liquid assets that may count toward satisfaction of the liquidity requirement. FEDERAL HOME LOAN BANK SYSTEM. The Federal Home Loan Bank System consists of 12 district Federal Home Loan Banks subject to supervision and regulation by the Federal Housing Finance Board ("FHFB"). The Federal Home Loan Banks provide a central credit facility primarily for member institutions. As a member of the FHLB, the Bank is required to acquire and hold shares of capital stock in the FHLB in an amount at least equal to 1% of the aggregate unpaid principal of its home mortgage loans, home purchase contracts, and similar obligations at the beginning of each year, or 1/20 of its advances (borrowings) from the FHLB, whichever is greater. The Bank was in compliance with this requirement, with an investment in FHLB stock at March 31, 1997 of $1,634,600. Long-term FHLB advances may only be made for the purpose of providing funds for residential housing finance. At March 31, 1997, the Bank had no total advances outstanding from the FHLB. REGULATION OF THE COMPANY Following the Conversion, the Company will be a savings and loan holding company under the HOLA and, as such, will be subject to OTS regulation, supervision and examination. In addition, the OTS has enforcement authority over the Company and its non-savings institution subsidiaries and may restrict or prohibit activities that are determined to represent a serious risk to the safety, soundness or stability of the Bank or any other subsidiary savings institution. Under the HOLA, a savings and loan holding company is required to obtain the prior approval of the OTS before acquiring another savings institution or savings and loan holding company. A savings and loan holding company may not (i) acquire, with certain exceptions, more than 5% of a non-subsidiary savings institution or a non-subsidiary savings and loan holding company; or (ii) acquire or retain control of a depository institution that is not insured by the FDIC. In addition, while the Bank generally may acquire a savings institution by merger in any state without restriction by state law, the Company could acquire control of an additional savings institution in a state other than Kentucky only if such acquisition is permitted under the laws of the target institution's home state. As a unitary savings and loan holding company, the Company generally will not be subject to any restriction as to the types of business activities in which it may engage, provided that the Bank continues to satisfy the QTL test. See "--Regulation and Supervision of the Bank -- Qualified Thrift Lender Test." However, recently proposed federal legislation would, if enacted, restrict the business activities of unitary savings and loan holding companies. See "-- Regulation and Supervision of the Bank -- Proposed Legislation." Upon any non-supervisory acquisition by the Company of another savings institution that is held as a separate subsidiary, the Company would become a multiple savings and loan holding company and would be subject to limitations on the types of business activities in which it could engage. The HOLA limits the activities of a multiple savings and loan holding company and its non-insured institution subsidiaries primarily to activities permissible for bank holding companies under the Bank Holding Company Act, subject to the prior approval of the OTS, and to other activities authorized by OTS regulation. TAXATION GENERAL The Bank files a federal income tax return based on a calendar year. After the Conversion, it is expected that the Company and the Bank will file a consolidated federal income tax return based on a year ending December 31. Consolidated returns have the effect of deferring gain or loss on intercompany transactions and allowing companies included within the consolidated return to offset income against losses under certain circumstances. 56 FEDERAL INCOME TAXATION The Company and the Bank have not yet determined whether they will file a consolidated federal income tax return following the conversion. Thrift institutions are subject to the provisions of the Code in the same general manner as other corporations. Prior to recent legislation, institutions such as the Bank which met certain definitional tests and other conditions prescribed by the Code benefited 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 were 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 was based on actual loss experience, however, the amount of the bad debt reserve deduction with respect to qualifying real property loans could 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"). Legislation recently signed by the President repealed the percentage of taxable income method of calculating the bad debt reserve. The Bank historically has elected to use the percentage method. Earnings appropriated to an institution's bad debt reserve and claimed as a tax deduction are not available for distribution to shareholders (including distributions made on dissolution or liquidation), unless such amount was included in taxable income, along with the amount deemed necessary to pay the resulting federal income tax. For information regarding additions to the tax bad debt reserves, see Note 10 to Financial Statements. The Bank's federal corporate income tax returns have not been audited in the last five years. STATE INCOME TAXATION The State of Delaware imposes no income or franchise taxes on savings institutions. The Bank is subject to an annual Kentucky ad valorem tax based on a calendar year and due before the following July 1. This tax is 0.1% of the Bank's savings accounts, common stock, capital and retained income with certain deductions allowed for amounts borrowed by depositors and for securities guaranteed by the U.S. Government or certain of its agencies. For the 1997 calendar year, the amount of such expense is expected to be approximately $96,000. 57 MANAGEMENT OF THE COMPANY The Board of Directors of the Company consists of the same individuals who serve as directors or officers 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 will 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. Their terms will be identical to their terms as directors of the Bank. The following individuals hold the offices in the Company set forth below opposite their names. Name Title ---- ----- Bruce Thomas President and Chief Executive Officer Peggy R. Noel Vice President, Chief Financial Officer and Treasurer Boyd M. Clark Vice President and Secretary The executive 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 executive officers, directors or other personnel have received remuneration from the Company. Information concerning the principal occupations, employment and compensation of the directors and officers of the Company during the past five years is set forth under "Management of the Bank -- Directors." Executive officers and directors of the Company will be compensated as described below under "Management of the Bank. " MANAGEMENT OF THE BANK DIRECTORS Because the Bank is a mutual savings bank, its members have elected its Board of Directors. Upon completion of the Conversion, each director of the Bank immediately prior to the Conversion will continue to serve as a director of the Bank. The term of each director is three years, and approximately one-third of the members of the Board of Directors are elected each year. The Conversion will not affect the classes or terms of the existing directors. Because the Company will own all the issued and outstanding capital stock of the Bank following the Conversion, the Board of Directors of the Company will elect the directors of the Bank. 58 The following table sets forth certain information with respect to the individuals who serve currently as members of the Bank's Board of Directors. There are no arrangements or understandings between the Bank and any director pursuant to which such person has been elected a director of the Bank, and no director is related to any other director or executive officer by blood, marriage or adoption.
Age at Director Term Name March 31, 1997 Since to Expire - ---------------------------------------------- ------------------ -------- --------- WD Kelley Chairman of the Board 76 1972 1998 Bruce Thomas President and Chief Executive Officer 59 1990 2000 Peggy R. Noel Executive Vice President, Chief Financial Officer and Chief Operations Officer 59 1995 2000 Boyd M. Clark Senior Vice President -- Loan Administration 51 1990 1999 David B. Bostick, Jr. 71 1972 1998 Clifton H. Cochran 76 1977 1998 Drury R. Embry 76 1969 2000 Walton G. Ezell 63 1965 1998 John Noble Hall, Jr. 76 1962 1999 Chester K. Wood 89 1957 1999
Presented below is certain information concerning the directors of the Bank. Unless otherwise stated, all directors have held the positions indicated for at least the past five years. WD KELLEY. Prior to his retirement in 1980, Mr. Kelley served as Superintendent of Schools for Christian County, Kentucky. Mr. Kelley currently serves as Chairman of the Board of Directors of the Bank, a position he has held since 1995. He also serves as Chairman of the Board of Directors of the Company. BRUCE THOMAS. Mr. Thomas has served as President and Chief Executive Officer of the Bank since 1992. He has been an employee of the Bank since 1962. Mr. Thomas also serves as President and Chief Executive Officer of the Company. PEGGY R. NOEL. Ms. Noel has served as Executive Vice President, Chief Financial Officer and Chief Operations Officer of the Bank since 1990. She has been an employee of the Bank since 1966. Ms. Noel also serves as Vice President, Chief Financial Officer and Treasurer of the Company. BOYD M. CLARK. Mr. Clark has served as Senior Vice President -- Loan Administration of the Bank since 1995. Prior to his current position, Mr. Clark served as First Vice President of the Bank. He has been an employee of the Bank since 1973. Mr. Clark also serves as Vice President and Secretary of the Company. DAVID B. BOSTICK, JR. Mr. Bostick is President and principal of D.B. Bostick & Sons, Inc., an industrial plumbing business. CLIFTON H. COCHRAN. Prior to his retirement in 1982, Mr. Cochran was in the retail clothing business. DRURY R. EMBRY. Prior to his retirement in 1996, Mr. Embry was Farm Director of WHOP, a radio station in Hopkinsville, Kentucky. WALTON G. EZELL. Mr. Ezell is a farmer. JOHN NOBLE HALL, JR. Prior to his retirement in 1980, Mr. Hall was a real estate agent. CHESTER K. WOOD. Prior to his retirement in 1968, Mr. Wood was a pharmacist. 59 COMMITTEES OF THE BOARD OF DIRECTORS The Board of Directors of the Bank meets monthly and may have additional special meetings. During the year ended December 31, 1996, the Board met 12 times. No director attended fewer than 75% in the aggregate of the total number of Board meetings held during the year ended December 31, 1996 and the total number of meetings held by committees on which he served during such fiscal year. The Bank's Board of Directors has standing Executive, Audit and Finance, Personal-Compensation, Investments and Building Committees. The Bank's Executive Committee consists of directors Kelley, Thomas, Ezell and Wood and is authorized to take actions it deems necessary or appropriate between regular meetings of the Board. The Executive Committee was established in 1997. The Board of Directors' Audit and Finance Committee consists of directors Ezell, Kelley and Cochran. The Audit and Finance Committee did not meet during ----------- the year ended December 31, 1996. The Audit and Finance Committee is authorized to examine and approve the audit report prepared by the independent auditors of the Bank, to review and recommend the independent auditors to be engaged by the Bank, to review the internal audit function and internal accounting controls, and to review and approve conflict of interest and audit policies. Following the Conversion, it is expected that the Audit and Finance Committee will meet at least quarterly. The Bank's Nominating Committee for the year ended December 31, 1996 consisted of directors Clark, Cochran and Wood, and is responsible for considering potential nominees to the Board of Directors. During the year ended December 31, 1996, the Nominating Committee met one time. Following the Conversion, it is expected 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. In its deliberations, the Board, functioning as a nominating committee, considers the candidate's knowledge of the banking business and involvement in community, business and civic affairs, and also considers whether the candidate would provide for adequate representation of its market area. The Bank's Personnel - Compensation Committee consists of director Hall, Embry and Cochran. The Personnel - Compensation Committee evaluates the compensation and benefits of the directors, officers and employees, recommends changes, and monitors and evaluates employee performance. All compensation decisions are made by the full Board of Directors. The Personnel - Compensation Committee met one time during the fiscal year ended December 31, 1996. EXECUTIVE COMPENSATION The following table sets forth the cash and noncash compensation for the last fiscal year awarded to or earned by the Chief Executive Officer. No executive officer of the Company earned salary and bonus in the year ended December 31, 1996 exceeding $100,000 for services rendered in all capacities to the Bank.
Annual Compensation ----------------------------------- Other Annual All Other Name Year Salary(1) Bonus Compensation (2) Compensation - ---------------------- ---- ---------- ------ ---------------- ------------ Bruce Thomas 1996 $70,000 $3,500 $ -- $ -- President and Chief Executive Officer
_____________ (1) Mr. Thomas' current base salary is $93,500. See "--Employment Agreements." (2) Executive officers of the Bank receive indirect compensation in the form of certain perquisites and other personal benefits. The amount of such benefits received by the named executive officers in the year ended December 31, 1996 did not exceed 10% of each of the executive officer's respective salary and bonus. 60 DIRECTOR COMPENSATION The Bank's non-employee directors receive a fee of $550 per meeting attended plus all non-employee directors receive a retainer of $250 per month. The Chairman of the Board receives a fee of $650 per meeting attended. Non- employee directors of the Bank also receive a fee of $275 per committee meeting attended. During the year ended December 31, 1996, the Bank's non-employee directors' fees totaled $69,950. CERTAIN BENEFIT PLANS AND AGREEMENTS In connection with the Conversion, the Company's and the Bank's Boards of Directors have approved certain stock incentive plans and employment 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 agreements and other benefits described below. In its review of the benefits and compensation of the executive officers and the terms of the employment agreement, 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. PENSION PLAN. The Bank maintains a non-contributory, defined benefit pension plan (the "Pension Plan") for the benefit of employees who are 21 years of age and have completed one year of service with the Bank. The benefits are based on years of service and the employee's average earnings which are computed using the five consecutive years prior to retirement that yield the highest average. The normal retirement benefit is equal to 1.75% of average earnings, multiplied by service not in excess of 35 years. The normal retirement date is age 65 and completion of five years of participation in the Pension Plan or age 60 with 30 years of vesting service, if earlier. The Pension Plan also provides for early retirement benefits beginning at age 55 and completion of 10 years of service, and for death benefits. See Note 9 of Notes to Financial Statements. STOCK OPTION 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 the Common Stock. The Option Plan will have a term of 10 years from the date of its approval by the Company's stockholders, after which no awards may be made, unless the plan is earlier terminated by the Board of Directors of the Company. Pursuant to the Option Plan, a number of options to purchase shares equal to 10% of the shares of Common Stock that are issued in the Conversion (240,000 shares at the midpoint of the Estimated Valuation Range) would be reserved for future issuance by the Company, in the form of newly issued shares or 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. 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). 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. Consistent with applicable regulations, if the Option Plan is implemented within one year following completion of the Conversion, no employee will receive Awards covering more than 25% of the shares reserved for issuance under the Option Plan, and non-employee directors will not receive awards individually exceeding 5% of the shares available under the Option Plan or 30% in the aggregate. It is expected that upon the implementation of the Option Plan, Bruce Thomas, Peggy R. Noel and Boyd M. Clark will receive Awards with respect to 20%, 18% and 12%, respectively, of the shares reserved under the Option Plan (48,000 shares, 43,200 shares and 28,800 shares, respectively, at the midpoint of the Estimated Valuation Range) and each director who is not an employee but is a 61 director on the effective date will receive an Award with respect to the lesser of (i) 5% of the shares reserved under the Option Plan, and (ii) 30% of the shares reserved under the Option Plan divided by the number of directors eligible to receive an Award on the effective date. In addition, the Company currently plans to grant options to purchase 48,000 shares of Common Stock to four officers of the Bank who are not executive officers. 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 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 by 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 Conversion, (i) Options may become exercisable according to a different schedule and (ii) the Options may also accelerate to 100% upon an optionee's retirement or termination of service in connection with a change in control. Upon a participant's exercise of an Option, the Company may, if provided by the Committee in the underlying Option agreement, 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. An otherwise unexpired Option shall, 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 one year after an employee terminates service for a reason other than just cause, death, or disability, or (iii) the date two years after termination of such service due to the employee's death. Options granted to non-employee directors will 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 at the time it was granted. 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 intends to 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 that the fair market value per share of the Common Stock falls below the option price of previously granted Options or SARs, the Option Committee will have the authority, with the consent of the optionee, to cancel outstanding Options or SARs and to reissue new Options or SARs at the then current fair market price per share of the Common Stock. At any time following consummation of the Conversion, the Bank or the Company may contribute sufficient funds to a grantor trust to purchase, and such trust may purchase, a number of shares of Common Stock equal to 10% of the shares issued in the Conversion. Such shares would be held by the trust for issuance to option holders upon the exercise of options in the event the Option Plan is implemented. Whether such shares are purchased, and the timing of such purchases, will depend on market and other conditions and the alternative uses of capital available to the Company. 62 EMPLOYEE STOCK OWNERSHIP PLAN. In connection with the Conversion, the Company's Board of Directors has adopted an employee stock ownership plan ("ESOP"), effective as of January 1, 1997. 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. 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 with no cost to participants. The ESOP intends to borrow funds from the Company in an amount sufficient to purchase 8.0% of the Common Stock issued in the Conversion. This loan will be secured by the shares of Common Stock purchased with loan proceeds 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 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 calendar year in order to receive an allocation. A participant becomes vested in his or her right to ESOP benefits upon his or her completion of three years of service. For vesting purposes, a year of service means any calendar year in which an employee completes at least 1,000 hours of service, whether before or after the ESOP's 1997 effective date. Vesting will be accelerated to 100% upon a participant's attainment of age 65, death, disability or a change in control of the Company or the Bank. 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 paid to participants or used to repay the ESOP loan, 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 certain of the directors will be appointed as trustees of the ESOP (the "ESOP Trustees"). The ESOP Trustees 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 Trustees 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 directors and key employees as are selected by a committee the Company's Board of Directors (the "MRP Committee"). Company's directors are expected to act by majority 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. 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. At any time following consummation of the Conversion, the Bank or the Company will contribute sufficient funds to the MRP Trust so that the MRP Trust can purchase a number of shares of Common Stock equal to up to a 4.0% of the number of shares of Common Stock issued in the Conversion (96,000 shares at the midpoint of the Estimated Valuation Range). Whether such shares purchased will be purchased in the open market or newly issued by the Company, and the timing of such purchases, will depend on market and other conditions and the alternative uses of capital available to the Company. 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, 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. 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 63 participant whose service with the Company or the Bank terminates due to death or disability, shall be deemed 100% vested as of the participant's last day of service with the Bank or Company. If the MRP is implemented more than one year after the closing of the Conversion, Awards may become vested according to a different schedule, 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. 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. 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. If the MRP is implemented within one year following consummation of the Conversion, no employee will receive MRP awards covering more than 25% of the shares reserved for issuance under the MRP, and non-employee directors will not receive awards individually exceeding 5% of the shares available under the MRP or 30% in the aggregate. It is expected that upon the implementation of the MRP, Bruce Thomas, Peggy R. Noel and Boyd M. Clark will receive Awards with respect to 20%, 18% and 12%, respectively, of the shares reserved under the MRP (19,200 shares, 17,280 shares and 11,520 shares, respectively, at the midpoint of the Estimated Valuation Range) and each director who is not an employee but is a director on the effective date shall receive an Award with respect to the lesser of (i) 5% of the shares reserved under the MRP, and (ii) 30% of the shares reserved under the MRP divided by the number of directors eligible to receive an Award on the effective date. The initial grant of awards under the MRP is expected to occur on the date the MRP receives stockholder approval. No awards shall be made prior to stockholder approval of the MRP. EMPLOYMENT AGREEMENTS. The Company and the Bank intend to enter into employment agreements (the "Employment Agreements") with the following officers of the Company and the Bank: Bruce Thomas, President and Chief Executive Officer of the Company and the Bank; Peggy R. Noel, Vice President, Chief Financial Officer and Treasurer of the Company and Executive Vice President, Chief Financial Officer and Chief Operations Officer of the Bank; and Boyd M. Clark, Vice President and Secretary of the Company and Senior Vice President -- Loans Administration of the Bank (collectively, the "Employees"). Such Boards believe that the Employment Agreements assure fair treatment of the Employee in his career with the Company and the Bank by assuring him of some financial security. The Employment Agreements will become effective for a term of one year, with an annual base salary equal to the Employees' current base salaries. See "-- Executive Compensation." On each anniversary date of the commencement of the Employment Agreements, the term of each Employee's employment may 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 Employees has met the required performance standards and that such Employment Agreements should be extended. The Employment Agreements provide the Employees 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 shall terminate upon the Employee's death, may terminate upon the Employee's 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. If the Company or the Bank terminates any of the Employees without just cause, the Employee will be entitled to a continuation of his or her salary and benefits from the date of termination through the remaining term of the Employment Agreements and, at the Employee's election, either continued participation in benefit plans which the Employee would have been eligible to participate in through the Employment Agreements' expiration date or the cash equivalent thereof. If the Employment Agreements are terminated due to the Employee's "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. Each of the Employees is able to voluntarily terminate his or her Employment Agreements by providing 60 days prior 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 accrued up to the date of termination. In the event of the Employee's involuntary termination of employment other than for "just cause" within 12 months after a change in control of the Company or the Bank which has not been approved in advance by a two-thirds vote of the full Board of Directors of each of the Company and the Bank, the Employee will be paid within 10 days of such termination 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. The term "change in control" is defined in 64 the Employment Agreements to mean (i) a change in the ownership, holding or power to vote more than 25% of the Bank's or Company's voting stock, (ii) a change in the ownership or possession of the ability to control the election of a majority of the Bank's or Company's directors, or (iii) a change in the ownership or possession of the ability to exercise a controlling influence over the management or policies of the Bank or the Company by any person or by persons acting as a group within the meaning of Section 13(d) of the Exchange Act. The aggregate payment that would be made to Mr. Thomas assuming his termination of employment under the foregoing circumstances at April 1, 1997 would have been approximately $204,000. 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 Certificate of Incorporation and Bylaws -- Additional Anti- Takeover Provisions." In the event that the Employee prevails over the Company and the Bank, or obtains a written settlement, in a legal dispute as to the Employment Agreement, the Employee will be reimbursed for his or her legal and other expenses. TRANSACTIONS WITH MANAGEMENT The Bank offers loans to its directors and officers. 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 to not involve more than the normal risk of collectibility or present other unfavorable features. Under current 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. No loans to directors and officers have terms more favorable than might be otherwise offered to customers. See Note 11 of Notes to Financial Statements. THE CONVERSION THE OTS HAS APPROVED THE PLAN, SUBJECT TO THE PLAN'S APPROVAL 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. GENERAL On May 21, 1997, the Board of Directors of the Bank unanimously adopted, subject to approval by the OTS and the members of the Bank, the Plan, pursuant to which the Bank would convert from a federal mutual savings bank to a federal capital stock savings bank as a wholly owned subsidiary of the Company. The OTS has approved the Plan, subject to its approval by the members of the Bank at the Special Meeting called for that purpose to be held on ____________, 1997. The Plan supersedes a plan of conversion which was previously adopted by the Board of Directors of the Bank on January 15, 1997, and terminated on May 21, 1977. The Board of Directors took such action in order to comply with certain federal regulations. The Conversion will be accomplished through the amendment of the Bank's existing Federal Mutual Charter and Bylaws to read in the form of a 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 of the Company. 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 has received approval from the OTS to become the holding company of the Bank subject to the satisfaction of certain conditions and to acquire all of the common stock of the Bank to be issued in the Conversion in exchange for at least 50% of the net proceeds from the sale of the Common Stock in the 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. The aggregate purchase price of the Common Stock to be issued in the Conversion will be within the Estimated Valuation Range of between $20,400,000 and $27,600,000, which may be increased to $31,740,000, based upon an independent appraisal of the estimated pro forma market value of the Common Stock prepared by National Capital. All shares of Common Stock to be issued and sold in the Conversion will be sold at the same price. The independent appraisal 65 will be updated, if necessary, and the final aggregate purchase price of the shares of Common Stock will be determined at the completion of the Subscription and Community Offerings. National Capital is experienced in the valuation and appraisal of financial institutions. For additional information, see " -- Stock Pricing and Number of Shares to be Issued." The following is a brief summary of material aspects of the Conversion. The summary is qualified in its entirety by reference to the provisions of the Plan. A copy of the Plan is available for inspection at the office of the Bank and at the office of the OTS. The Plan 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 THE COMMON STOCK Under the Plan, the Company is offering shares of Common Stock first to the Bank's Eligible Account Holders, second to the ESOP, third to Supplemental Eligible Account Holders and fourth to its Other Members who are not Eligible Account Holders or Supplemental Eligible Account Holders in the Subscription Offering. Subscription Rights received in any of the foregoing categories will be subordinated to the Subscription Rights received by those in a prior category, with the exception that any shares of Common Stock sold in excess of the maximum of the Estimated Valuation Range may first be sold to the ESOP. To the extent shares remain available for purchase after the Subscription Offering, the Company may offer any such remaining shares to the general public in the Community Offering. In the Community Offering, preference will be given to natural persons and trusts of natural persons who are permanent residents of the Local Community. The term "resident" as used in relation to the preference afforded 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, nontransitory presence within the Local Community) and continues to reside in the Local Community 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 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 circumstance 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, however, such determination shall be in the sole discretion of the Bank. The occurrence of the Community Offering is subject to the availability of shares of Common Stock for purchase after satisfaction of all subscriptions in the Subscription Offering. Additionally, all purchases in the Community Offering are subject to the maximum and minimum purchase limitations set forth in the Plan and the right of the Company to reject any such orders, in whole or in part. As part of the Community Offering, the Plan provides that, if feasible, all shares of Common Stock not purchased in the Subscription and Community Offerings, if any, may be offered for sale to the general public in a Syndicated Community Offering through selected dealers to be formed and managed by IBS. See " -- Syndicated Community Offering." If the Community Offering and Syndicated Community Offering are determined not to be 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 OTS. The Plan provides that the Conversion must be completed within 24 months after the date of the approval of the Plan by the members of the Bank. In the event that the Conversion is not effected, the Bank will remain a federal mutual savings bank, all subscription funds will be promptly returned to subscribers with interest earned thereon and all withdrawal authorizations will be canceled. The completion of the Conversion 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 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 consummation of the Conversion, together with corresponding changes in the offering price 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- related expenses against current income. 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 subsidiary. The portion of the net proceeds from the sale of the Common Stock in the 66 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 and investment, provide a "cushion" to compensate for the Bank's negative interest rate risk position, and provide greater resources to support both current operations and future expansion by the Bank, although there are no current agreements or understandings for such expansion. The holding company structure will provide greater flexibility than the Bank alone would have for diversification of business activities and geographic expansion. Management believes that this increased capital and operating flexibility will enable the Bank to compete more effectively with other types of financial services 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 Conversion upon the Bank's capital base is significant. The Bank had total equity in accordance with generally accepted accounting principles of $17.2 million, or 8.5% of assets, at March 31, 1997. Assuming approximately $23.4 million (based on the sale of 2,400,000 shares of Common Stock at the midpoint of the Estimated Valuation Range) of net proceeds are realized from the sale of the Common Stock (see "Pro Forma Data"), and after deducting amounts necessary to fund the ESOP and MRP, the Company's consolidated stockholders' equity would have been approximately $37.7 million as of March 31, 1997. See "Capitalization." The Bank's ratio of tangible capital to adjusted total assets would increase to 11.2% after the Conversion. See "Historical and Pro Forma Regulatory Capital Compliance." The investment of the net proceeds from the sale of the Common Stock will provide the Bank with additional income to further increase its capital position. The additional capital may 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, 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 issuance of additional shares under the MRP or Option Plan, if implemented. Following completion of 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 Agreements." 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 interest in the retained earnings of that institution based upon the balance in his or her deposit account. However, this 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 retained earnings 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 retained earnings 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 FDIC insurance of accounts 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. 67 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. Following the Conversion, the Board of Directors of the Company will consist of the individuals 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 depositors of the Bank. Subsequent to 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 the 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. After the Conversion, holders of savings accounts in and obligors on loans of the Bank will not have voting rights in the Bank. Exclusive voting rights with respect to the Company shall be vested in the holders of the Common Stock, holders of savings accounts in and obligors on loans of the Bank and the Bank will not have any voting rights in the Company except and to the extent that such persons become stockholders of the Company, and the Company will have exclusive voting rights with respect to the Bank's capital stock. 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 will receive an opinion from its special counsel, Reinhart, Boerner, Van Deuren, Norris & Rieselbach, P.C., Washington, D.C., as to the material federal income tax consequences of the Conversion to the Bank, and as to the generally applicable material 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 will provide that the Conversion will constitute a reorganization for federal income tax purposes under Section 368(a)(1)(F) of the Internal Revenue Code of 1986, as amended ("Code"). Among other things, the opinion will also provide 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 the 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 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 Reinhart, Boerner, Van Deuren, Norris & Rieselbach, P.C., will be 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 will also be based upon the 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. Reinhart, Boerner, Van Deuren, Norris & Rieselbach, P.C. will advise 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 68 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. Reinhart, Boerner, Van Deuren, Norris & Rieselbach, P.C. will further advise 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 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 Code and in the absence of contrary authoritative guidance, Reinhart, Boerner, Van Deuren, Norris & Rieselbach, P.C. will provide 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, Reinhart, Boerner, Van Deuren, Norris & Rieselbach, P.C. will provide 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 and other eligible members who exercise their Subscription Rights, even though such persons would not have received any 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 National Capital, 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 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 and Other Members 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, Reinhart, Boerner, Van Deuren, Norris & Rieselbach, P.C., will neither adopt the opinion of National Capital, as its own nor incorporate such opinion of National Capital in its opinion issued in connection with Conversion. The Bank will also receive the opinion of York, Neel & Co.-Hopkinsville, LLP that the Commonwealth of Kentucky will, for income tax purposes, accord the Conversion the identical treatment which it receives for federal income tax purposes. 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 ACCOUNT HOLDER, SUPPLEMENTAL ACCOUNT HOLDER AND OTHER MEMBER ENTITLED TO SPECIAL TREATMENT UNDER THE INTERNAL REVENUE CODE, SUCH AS TRUSTS, INDIVIDUAL RETIREMENT ACCOUNTS, OTHER EMPLOYEE BENEFIT PLANS, INSURANCE COMPANIES AND ELIGIBLE ACCOUNT HOLDERS, SUPPLEMENTAL ELIGIBLE ACCOUNT HOLDERS AND OTHER MEMBERS WHO ARE NOT CITIZENS OR RESIDENTS OF THE UNITED STATES. DUE TO THE INDIVIDUAL NATURE OF TAX CONSEQUENCES, EACH ELIGIBLE ACCOUNT HOLDER, SUPPLEMENTAL ELIGIBLE ACCOUNT HOLDER AND OTHER MEMBER 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. 69 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, a claim of such account holder would be solely in the amount of the balance in the related deposit account plus accrued interest, and the account holder would not have any 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 net worth of the Bank as of the date of its latest statement of financial condition contained in the final Prospectus. Each Eligible Account Holder (a person with a deposit account in the Bank on March 31, 1996) and each Supplemental Eligible Account Holder (a person with a qualifying deposit in the Bank on June 30, 1997) would be entitled, on a complete liquidation of the Bank after completion of the Conversion, to an interest in the liquidation account. Each Eligible Account Holder would have an initial interest in such liquidation account for each deposit account held in the Bank on March 31, 1996 and each Supplemental Eligible Account Holder would have an initial interest in such liquidation account for each qualifying deposit held in the Bank on June 30, 1997. The interest as to each qualifying deposit account would be in the same proportion of the total liquidation account as the balance of such qualifying deposit account was to the balance in all deposit accounts of Eligible Account Holders and Supplemental Eligible Account Holders on such respective date. However, if the amount in the qualifying deposit account on any annual closing date (December 31) of the Bank subsequent to the relevant eligibility date is less than the amount in such account on the relevant eligibility 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 reductions, and such interest would cease to exist if he or she ceases to maintain an account at the Bank that has the same Social Security number as appeared on his or her account(s) at the relevant eligibility date. The interest in the liquidation account would never be increased, notwithstanding any increase in the related deposit account after the Conversion. 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 retained earnings to be reduced below the aggregate amount then required for the liquidation account. SUBSCRIPTION OFFERING Nontransferable Subscription Rights to subscribe for shares of Common Stock have been issued to all persons entitled to subscribe for stock in the Subscription Offering at no cost to such persons. The amount of the Common Stock which these parties may subscribe for will be determined, in part, by the total stock to be issued, and the availability of stock for purchase under the categories set forth in the Plan. 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 March 31, 1996, who will each receive nontransferable Subscription Rights to subscribe for Common Stock in the Subscription Offering. Pursuant to the Plan, an Eligible Account Holder may purchase Common Stock in the Conversion in 70 an amount equal to the greater of (i) $250,000, (ii) one-tenth of one percent of the total offering of shares of Common Stock, or (iii) 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 the Eligibility Record Date (i.e., March 31, 1996). The Plan further provides that no person (together with associates and persons acting in concert therewith) may purchase in the aggregate more than $500,000 of the aggregate value of shares of Common Stock in the Conversion. 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 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 to the total qualifying deposits of all subscribing Eligible Account Holders. TO ENSURE A PROPER ALLOCATION OF THE COMMON STOCK, EACH ELIGIBLE ACCOUNT HOLDER MUST LIST ON HIS STOCK ORDER FORM ALL ACCOUNTS IN WHICH HE HAS AN OWNERSHIP INTEREST. FAILURE TO LIST ALL SUCH QUALIFYING DEPOSIT ACCOUNTS MAY RESULT IN THE INABILITY OF THE COMPANY OR THE BANK TO FILL ALL OR PART OF A SUBSCRIPTION ORDER. NEITHER THE COMPANY, THE BANK NOR ANY OF THEIR AGENTS SHALL BE RESPONSIBLE FOR ORDERS ON WHICH ALL QUALIFYING DEPOSIT ACCOUNTS HAVE NOT BEEN FULLY AND ACCURATELY DISCLOSED. A qualifying deposit is the amount (required to be at least $50.00) contained in a deposit account in the Bank on March 31, 1996. Subscription Rights received by directors and officers of the Bank in this category based on their increased deposits in the Bank in the one-year period preceding March 31, 1996 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 shall receive nontransferable Subscription Rights to purchase in the aggregate up to 10% of the shares issued in the Conversion and which is expected to purchase 8% of the Common Stock offered in the Conversion. Any shares of Common Stock 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., qualifying depositors of the Bank on the last day of the calendar quarter preceding OTS approval of the Plan (June 30, 1997) who will each receive nontransferable Subscription Rights to subscribe for Common Stock in the Subscription Offering. Pursuant to the Plan, a Supplemental Eligible Account Holder may purchase Common Stock in the Conversion in an amount equal to the greater of (i) $250,000, (ii) one-tenth of one percent of the total offering of shares of Common Stock, or (iii) 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 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 the Supplemental Eligibility Record Date (i.e., June 30, 1997). The Plan further provides that no person (together with associates and persons acting in concert therewith) may purchase in the aggregate more than $500,000 of the aggregate value of shares of Common Stock in the Conversion. 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 Supplemental Eligible Account Holders, 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 equal 100 shares or the amount subscribed for, whichever is less, and any shares not so allocated shall be allocated among the subscribing Supplemental Eligible Account Holders on an equitable basis related to the amounts of their respective qualifying deposits, as compared to the total qualifying deposits of all subscribing Supplemental Eligible Account Holders. TO ENSURE A PROPER ALLOCATION OF THE COMMON STOCK, EACH SUPPLEMENTAL ELIGIBLE ACCOUNT HOLDER MUST LIST ON HIS STOCK ORDER FORM ALL ACCOUNTS IN WHICH HE HAS AN OWNERSHIP INTEREST. FAILURE TO LIST ALL SUCH DEPOSIT ACCOUNTS MAY RESULT IN THE INABILITY OF THE COMPANY OR THE BANK TO FILL ALL OR PART OF A SUBSCRIPTION ORDER. NEITHER THE COMPANY, THE BANK NOR ANY OF THEIR AGENTS SHALL BE RESPONSIBLE FOR ORDERS ON WHICH ALL QUALIFYING DEPOSIT ACCOUNTS HAVE NOT BEEN FULLY AND ACCURATELY DISCLOSED. A qualifying deposit is the amount (required to be at least $50.00) contained in a deposit account in the Bank on June 30, 1997. Subscriptions in this Category No. 3 will be filled only to the extent that there are sufficient shares of Common Stock remaining after satisfaction of subscriptions by Category Nos. 1 and 2. Subscription Category No. 4 is reserved for Other Members, i.e., certain depositors and borrowers who are members of the Bank as of the Voting Record Date entitled to vote at the Special Meeting but who are not otherwise Eligible Account Holders or Supplemental Eligible Account Holders. To the extent then available following subscriptions by 71 Eligible Account Holders, tax-qualified employee stock benefit plans and Supplemental Eligible Account Holders, Other Members will receive, without payment therefor, nontransferable Subscription Rights to subscribe for Common Stock in the Subscription Offering up to $250,000. See "-- Limitations on Purchases of Shares." In the event that Other Members subscribe for a number of shares which, when added to the shares subscribed for by Eligible Account Holders, tax-qualified employee stock benefit plans and Supplemental Eligible Account Holders, is in excess of the total number of shares offered in the Conversion, the subscriptions of such Other Members will be allocated pro rata among subscribing Other Members on an equitable basis as determined by the 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 Common Stock pursuant to the Plan reside. However, no person will be offered or allowed to purchase any Common Stock under the Plan 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 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 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 To the extent shares remain available for purchase after the Subscription Offering, the Company may offer any such remaining shares of Common Stock to members of the general public to whom the Company delivers a copy of this Prospectus and a Stock Order Form in the Community Offering. The occurrence of the Community Offering is subject to the availability of shares of Common Stock for purchase after satisfaction of all orders received in the Subscription Offering. THE COMMUNITY OFFERING, IF ANY, MAY COMMENCE WITHOUT NOTICE AT ANY TIME AFTER THE COMMENCEMENT OF THE SUBSCRIPTION OFFERING AND MAY TERMINATE AT ANY TIME WITHOUT NOTICE, BUT MAY NOT TERMINATE LATER THAN __________, 1997. THE RIGHT OF ANY PERSON TO PURCHASE SHARES IN THE COMMUNITY OFFERING, IF ANY, 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 PRESENTLY INTENDS TO TERMINATE THE COMMUNITY OFFERING, IF ANY, AS SOON AS IT HAS RECEIVED ORDERS FOR SUFFICIENT SHARES AVAILABLE FOR PURCHASE IN THE CONVERSION. If all of the Common Stock offered in the Subscription Offering is subscribed for, there will be no Community Offering. In the event an insufficient number of shares are available to fill orders in the Community Offering, the available shares will be allocated by the Company in its discretion that a preference shall be given to natural persons and trusts of natural persons who are permanent residents of the Local Community. Orders received in the Community Offering shall be allocated with 100 share (or lesser) orders filled first, and remaining orders filled pro-rata, based on the size of the order, until all orders have been filled, with a preference given to permanent residents of the Local Community. 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. Purchasers in the Community Offering are each eligible to purchase up to $250,000 of the Common Stock issued in the Conversion. See "--Limitations on Purchases of Shares." Except as noted below, cash and checks 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, in cash 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. SYNDICATED COMMUNITY OFFERING As part of the Community Offering, all shares of Common Stock not purchased in the Subscription and Community Offerings, if any, may be offered for sale to the general public in a Syndicated Community Offering through selected dealers to be formed and managed by IBS. The Syndicated Community Offering, if any, will be conducted to achieve the widest distribution of the Common Stock subject to the Company and the Bank having the right to reject orders in whole or in part in their sole discretion in the Syndicated Community Offering. Neither IBS nor any registered broker-dealer shall have any obligation to take or purchase any shares of Common Stock in the Syndicated Community Offering. 72 Common Stock sold in the Syndicated Community Offering will be sold at the same price as in the Subscription and Community Offerings. Individual purchasers in the Syndicated Community Offering may purchase up to $250,000 of the Common Stock in the Conversion with any associate or group of persons acting in concert. The Bank shall be responsible for the payment of selling commissions to other NASD firms and licensed brokers participating in the Syndicated Community Offering. Other firms may participate under selected dealers agreements, and IBS and such selected dealers may receive fees which are not expected to exceed ________% of the amount of the stock sold by the selected dealers in the Syndicated Community Offering. IBS would not receive a fee for managing the Syndicated Community Offering. During the Syndicated Community Offering, selected dealers may only solicit indications of interest from their customers to place orders with the Company as of a certain date ("Order Date") for the purchase of shares of common Stock. When and if IBS and the Company believe that enough indications and orders have been received in the Offerings to consummate the Conversion, IBS will request, as of the Order Date, selected dealers to submit orders to purchase shares for which they have 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 may debit the accounts of their customers on a date which will be three business days from the Order Date ("Settlement Date"). Customers who authorize selected dealers to debit their brokerage accounts are required to have the funds for payment in their account on but not before the Settlement Date. On the Settlement Date, selected dealers will remit funds to the account that the Company established for each selected dealer. After payment has been received by the Company from selected dealers, funds will earn interest at the Bank's passbook savings rate until the consummation of the Conversion. In the event the Conversion is not consummated as described above, funds with interest will be returned promptly to the selected dealers, who, in turn, will promptly credit its customers' brokerage account. The Syndicated Community Offering, if any, will terminate no more than 45 days following the completion of the Subscription Offering, unless extended by the Company with the approval of the OTS. The Syndicated Community Offering may run concurrently with the Subscription and Community Offerings or subsequent to such offerings. SUBSCRIPTIONS FOR STOCK IN THE OFFERINGS EXPIRATION DATE. The Subscription Offering will expire at 4:00 p.m., local time, on __________, 1997 unless extended by the Board of Directors of the Bank for up to an additional 45 days, to no later than __________, 1997. Such date and time are referred to herein as the "Expiration Date." Subscription rights not exercised prior to the Expiration Date will be void. The Community Offering, if any, may terminate at any time without notice, but may not terminate later than __________, 1997. Orders will not be executed by the Company until at least the minimum number of shares of Common Stock offered hereby 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 STOCK ORDER FORMS AND CERTIFICATION FORMS. Rights to subscribe may only be exercised by completion of Stock Order Forms and certification forms. Any person receiving a Stock Order Form who desires to subscribe for shares of stock must do so prior to the Expiration Date by delivering (by mail or in person) to the office of the Bank a properly executed and completed Stock Order Form and certification form, together with full payment for all shares for which the subscription is made. All checks or money orders must be made payable to "HopFed Bancorp, Inc." The Stock Order Form and certification form must be received by the Expiration Date. All subscription rights under the Plan 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, subscription orders cannot be revoked. 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 are nontransferable; persons who attempt to transfer their subscription rights may lose the right to subscribe for stock in the conversion and may be subject to other sanctions and penalties imposed by the OTS. Each person subscribing for shares is required to represent to the Company that he or she is 73 purchasing such shares for his or her own account and that he or she has no agreement or understanding with any other person for the sale or transfer of such shares. In the event Stock Order Forms (i) are not delivered and are returned to the Company by the United States Postal Service or the Company is unable to locate the addressee, or (ii) are not returned or are received after the Expiration Date, or (iii) are defectively completed 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 of the person to whom such rights have been granted will lapse as though such person failed to return the completed Stock Order Form within the time period specified. However, the Company or the Bank may, but will not be required to, waive any irregularity on any Stock Order Form or require the submission of corrected Stock Order Forms or the remittance of full payment for subscribed shares by such date as the Company or the Bank may specify. The interpretation by the Company and the Bank of the terms and conditions of the Plan and of the Stock Order Form will be final. PAYMENT FOR SHARES. Payment for all subscribed shares of Common Stock will be required to accompany all completed Stock Order Forms for subscriptions to be valid. Payment for subscribed shares may be made (i) in cash, if delivered in person, (ii) by check or money order, or (iii) by authorization of withdrawal from deposit accounts maintained with the Bank. Appropriate means by which such withdrawals may be authorized are provided in the Stock 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 remains in effect. In the case of payments authorized to be made through withdrawal from deposit accounts, all sums authorized for withdrawal will continue to earn interest at the contract rate until the date of consummation of the sale. In the case of payments made in cash or by check or money order such funds will be placed in a segregated savings account established 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; 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 Bank's passbook rate subsequent to the withdrawal. An executed Stock 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. 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. Subscribers may also modify or cancel their subscriptions. Interest will be paid on such funds at the Bank's passbook rate during the 45- day period and any approved extension period. Wired funds will not be accepted for the payment for shares of Common Stock. Owners of self-directed IRAs or other self-directed tax-qualified retirement plans, may use the assets of such IRAs or plans to purchase shares of Common Stock in the Subscription and Community Offerings, provided that such IRAs or plans are not maintained at the Bank. Persons with IRAs or plans 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. Depositors interested in using funds in an IRA currently with the Bank or plan to purchase Common Stock should contact the Bank's Stock Information Center at (___) ________ as soon as possible but no later than seven days prior to closing of the offering period, so that the necessary forms may be forwarded for execution and returned at least one week prior to the Expiration Date of the Subscription Offering. The ESOP will not be required to pay for the shares subscribed for at the time it subscribes, but 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. SHARES PURCHASED. Certificates representing shares of Common Stock will be delivered to subscribers as soon as practicable after closing of the Conversion. 74 PLAN OF DISTRIBUTION AND MARKETING ARRANGEMENTS Officers of the Bank are available at the Bank's office 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 Stock Order Forms and certification 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 office, an investment in Common Stock is not a deposit, and Common Stock is not federally insured. 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 Exchange Act. Such persons will qualify under the safe harbor provisions of that rule on the basis of paragraphs (a)(4)(ii) and/or (iii), i.e., management of the Bank expects that such persons either (x) will perform substantial duties for the Company in its business, will not otherwise be broker-dealers and are not expected to participate in another offering in the next twelve months or (y) will limit their activities to preparing written communications, responding to customer inquiries and/or performing ministerial/clerical functions. The Bank and the Company have engaged the Agents as their exclusive financial and marketing advisor to provide sales assistance in connection with the Offerings. The Agents are members of the NASD and each is registered with the SEC. The services of the Agents will include, but are not limited to, (i) training and educating the Bank's employees who will be performing certain ministerial functions in the Offerings regarding the mechanics and regulatory requirements of the stock sales process and the solicitation of proxies from members, (ii) providing employees to manage the Stock Information Center, assisting Bank customers and interested stock purchasers and keeping records of orders for shares of the Common Stock, and (iii) supervising the Bank's sales efforts, including preparation of marketing materials. For their services rendered in the Conversion, the Agents will receive a fee of $180,000. The Agents will also be reimbursed for their reasonable out-of-pocket expenses, including legal fees, in an amount not to exceed $45,000. The Company and the Bank have agreed to indemnify the Agents for reasonable costs and expenses in connection with certain claims or liabilities, including certain liabilities under the Securities Act. The fees shall be payable upon consummation of the Conversion. STOCK PRICING AND NUMBER OF SHARES TO BE ISSUED National Capital, 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. Prior to the Conversion, the Bank did not have any business relationship with National Capital. National Capital will receive a fee of up to $30,000 for its appraisal and other services, and reimbursement for related expenses. The Bank has agreed to indemnify National Capital under certain circumstances against any losses, damages, expenses or liability arising out of the Bank's engagement of National Capital for the appraisal. National Capital has determined as of May 29, 1997 that the estimated pro forma market value of the stock to be issued by the Company in the Conversion was $24,000,000. In determining the reasonableness and adequacy of the appraisal submitted by National Capital, the Boards of Directors of the Bank and the Company reviewed with National Capital the methodology and the appropriateness of assumptions used by National Capital in preparing the appraisal. The Company, in consultation with IBS, has determined to offer the shares in the Conversion at the Purchase Price of $10.00 per share. 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 of the Community Offering. Accordingly, National Capital has established a range of value of from $20,400,000 to $27,600,000 for the Conversion. National Capital will either confirm the continuing validity of its appraisal or provide an updated appraisal immediately prior to the completion of the Conversion. Should it be determined at the close of the offering that the aggregate pro forma market value of the Common Stock is higher or lower than $24,000,000, but is nonetheless within the Estimated Valuation Range or within 15% of the maximum of such range, the Company will make an appropriate adjustment by raising or lowering by no more than 15% the total number of shares being offered (within a range from 2,040,000 shares to 2,760,000 shares). Unless permitted by the Company or otherwise required by the OTS, no resolicitation of subscribers and other purchasers will be made because of any such change in the number of shares to be issued unless the aggregate purchase price of the Common Stock sold in 75 the Conversion is below the minimum of the Estimated Valuation Range or is more than $31,740,000 (i.e., 15% above the maximum of the Estimated Valuation Range). If the aggregate purchase price falls outside the range of from $20,400,000 to $31,740,000, 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 price range may be effected without a resolicitation of votes from the Bank's members to approve the conversion. The appraisal is not intended, and must not be construed, as a recommendation of any kind as to the advisability of purchasing Common Stock. In preparing the valuation, National Capital has relied upon and assumed the accuracy and completeness of financial and statistical information provided by the Bank and the Company. National Capital did not independently verify the financial statements and other information provided by the Bank and the Company, nor did National Capital value independently the assets and liabilities of the Bank and the Company. 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 Common Stock will thereafter be able to sell such shares at prices equal to or above the price or prices paid for it. Copies of the appraisal report of National Capital setting forth the method and assumptions for such appraisal are on file and available for inspection at the offices set forth in "additional information" and at the office of the Bank. Further, any subsequent updated appraisal also will be filed with the SEC and will be available for inspection. LIMITATIONS ON PURCHASE OF SHARES Purchases of shares of Common Stock are subject to limitations as set forth in the Plan. All shares are offered to persons subscribing in the Subscription Offering, and shares are only offered to persons in the Community Offering and Syndicated Community Offering, if any, to the extent available after filling subscriptions in the Subscription Offering. Within the Subscription Offering, the maximum purchases by subscribers are limited under the Plan. Eligible Account Holders may only subscribe up to an amount equal to the greater (i) $250,000, (ii) one-tenth of one percent of the total offering of shares of Common Stock, or (iii) 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 the Eligibility Record Date (i.e., March 31, 1996). Supplemental Eligible Account Holders may only subscribe up to an amount equal to the greater of (i) $250,000, (ii) one-tenth of one percent of the total offering of shares of Common Stock, or (iii) 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 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 the Supplemental Eligibility Record Date (i.e., June 30, 1997). The Plan further provides that no person (together with associates and persons acting in concert therewith) may purchase in the aggregate more than $500,000 of the aggregate value of shares of Common Stock in the Conversion. The Plan provides for certain additional 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. The ESOP may purchase up to an aggregate of 10% of the shares of Common Stock to be issued in the Conversion and is expected to purchase 8% of such shares. No person, including associates (as defined below) of and persons acting in concert (as defined below) with such person (other than the ESOP), may purchase in the Subscription or Community Offerings more than $500,000 or 50,000 shares of the Common Stock. 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 the Common Stock in the Conversion. Officers and directors and their associates may not purchase, in the aggregate, more than 31.0% of the shares to be issued in the Conversion. For purposes of the Plan, 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 Bank's members, 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 76 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. 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 in compliance with the then maximum number of shares permitted to be subscribed for by such person. The term "acting in concert" is defined in the Plan to mean (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. The Company and the Bank may presume that certain persons are acting in concert based upon, among other things, joint account relationships and the fact that such persons have filed joint Schedules 13D with the SEC with respect to other companies. The term "associate" of a person is defined in the Plan to mean: (i) any corporation or 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 as to which such person serves as a trustee or in a similar fiduciary capacity, provided, however, such term shall not include any employee stock benefit plan of the Bank 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 of the Bank or the Company or any of their subsidiaries. Directors are not treated as associates solely because of their Board membership. Relatives who are neither officers nor directors of the Bank or the Company and who do not reside in the same home are not deemed to be associates or a group acting in concert solely as a result of their relationships. 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 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 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. Depending upon market conditions, the Boards of Directors of the Company and the Bank, with the approval of the OTS, may increase or decrease any of the above purchase limitations. In the event of such an increase or decrease, no further approval of members of the Bank would be required. OTS regulations authorize a plan of conversion to provide a minimum purchase limitation of a percentage as low as 1% and a maximum purchase limitation of a percentage not to exceed 10%, provided that orders for shares exceeding 5% of the shares being offered in the Conversion shall not exceed in the aggregate 10% of the shares being offered in the Conversion. 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 77 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 Company's capital stock following the conversion within such three-year period without the prior approval of the OTS, the Company's 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 include a similar 10% beneficial ownership limitation. See "Certain Anti- Takeover Provisions in the Certificate of Incorporation and Bylaws." In addition to the foregoing restrictions, any person or group of persons acting in concert who propose to acquire 10% or more of the Company's outstanding shares will be presumed under OTS regulations, to be acquiring control of the Company and will be required to submit prior notice to the OTS under the Change in Control Act. RESTRICTIONS ON REPURCHASE OF STOCK Subject to the exceptions described herein, for a period of three years following the Conversion, the Company may not repurchase any of its stock from any person, except (i) repurchases on a pro rata basis pursuant to an offer, approved by the OTS, made to all stockholders, and (ii) repurchases of qualifying shares of a director. However, upon 10 days' written notification to the OTS Regional Director for the Bank and the Chief Counsel of the Business Transactions Division of the OTS, if the Regional Director and Chief Counsel do not object, 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 without OTS approval; (ii) in the second and third years after the Conversion, repurchases must be part of an open-market program that does not allow for the repurchase of more than 5% of the Company's outstanding Common Stock during a 12-month period (a waiver may be obtained from the OTS which would allow for additional purchases); (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 Bank's financial condition; and (v) there is a valid business purpose for the repurchases. The Company may not repurchase any of its stock if the effect thereof would cause the Bank's regulatory capital to be reduced below the amount required for the liquidation account. Regulatory dividend limitations may provide further restrictions on stock repurchases. 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 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 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 Option Plan, would not be subject to such restrictions. To the extent directors and officers are deemed affiliates of the Company, all shares of 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 Following the Conversion -- Federal Securities Law." 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 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 in the Community Offering to natural persons and trusts of natural persons who are permanent residents of the 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. 78 The Plan provides that, if deemed necessary or desirable by the Board of Directors, the Plan may be substantively amended by a two-thirds vote of 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 a two-thirds vote of 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 generally modify or terminate the Plan upon the order of the regulatory authorities without resoliciting proxies or otherwise obtaining approval of the amended Plan by members at another Special Meeting. However, any modification of the Plan that results in a material change in the terms of the Conversion would require such a resolicitation of proxies and another meeting of members. 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 outstanding votes of the members of the Bank and the sale of all shares of 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. 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. Furthermore, without the prior written approval of the Director of the OTS, no person may make such an offer or announcement of an 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 the stock of the Bank or the Company. For purposes of the OTS 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 AND LOAN HOLDING COMPANY PROVISIONS OF HOME OWNERS' LOAN ACT Federal laws and regulations contain a number of provisions which govern the acquisition of insured institutions such as the Bank, including a savings and loan holding company 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 a savings association 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 a thrift without the prior approval of the OTS. Any company that acquires such control becomes a "savings and loan holding company" subject to registration, examination and regulation by the OTS. Pursuant to applicable regulations, control of a savings association is conclusively deemed to have been acquired by, among other things, the acquisition of more than 25% of any class of voting stock of a savings association 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 79 stock, of a savings association, 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 association, 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. DELAWARE GENERAL CORPORATION LAW ("DGCL") The DGCL contains a statute designed to provide Delaware corporations with additional protection against hostile takeovers. The takeover statute, which is codified in Section 203 of the DGCL, among other things, prohibits the Company from engaging in certain business combinations (including a merger) with a person who is the beneficial owner of 15% or more of the Company's outstanding voting stock (an Interested Stockholder) during the three-year period following the date such person became an Interested 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 stockholder's becoming an Interested Stockholder, the Interested Stockholder 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 stockholders, and not by written consent, by the affirmative vote of at least two-thirds of the outstanding voting stock which is not owned by the Interested Stockholder. The Company 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 Bank and the Company 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 the material 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. For information regarding how to obtain a copy of these documents without charge, see "Additional Information." BOARD OF DIRECTORS Certain provisions of the Company's Certificate of Incorporation and Bylaws will impede changes in control of the Board of Directors of the Company. The Certificate of Incorporation provides that the Board of Directors is to be divided into three classes, as nearly equal in number as possible, which shall be elected for staggered three-year terms. The Company's Certificate of Incorporation provides that a director may be removed only for cause by the affirmative vote of the holders of at least 80% of the outstanding shares entitled to vote and that the size of the Board of Directors may be changed only by a vote of two-thirds of the directors then in office. The Certificate of Incorporation 80 further provides that any vacancy occurring in the Board of Directors, including a vacancy created by an increase in the number of directors, shall be filled for the remainder of the unexpired term by a two-thirds vote of the directors then in office. STOCKHOLDER VOTE REQUIRED TO APPROVE BUSINESS COMBINATIONS WITH PRINCIPAL STOCKHOLDERS 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. Under the DGCL, absent this provision, Business Combinations, including mergers, consolidations and sales of substantially all of the assets of the Company must, subject to certain exceptions, be approved by the vote of the holders of a majority of the outstanding shares of Common Stock. For a discussion of an exception to the majority approval requirement under Delaware law, see "Certain Restrictions on Acquisition of the Company and the Bank -- Delaware General Corporation Law." 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"). The term "Related Person" is defined to include any individual, corporation, partnership or other entity which owns beneficially or controls, directly or indirectly, 10% or more 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) the acquisition by the Company of any securities of the Related Person; (vii) any reclassification of the Common Stock, or any recapitalization involving Common Stock; and (viii) any agreement, contract or other arrangement providing for any of the above transactions. RESTRICTIONS ON ACQUISITIONS OF SHARES The Certificate of Incorporation provides that for a period of five years from the effective date of the Conversion, no person may acquire directly or indirectly the beneficial ownership of more than 10% of any class of equity security of the Company, unless such offer or acquisition shall have been approved in advance by a two-thirds vote of the Company's Continuing Directors. This provision does not apply to any employee stock benefit plan of the Company. In addition, during such five-year period, no shares beneficially owned in violation of the foregoing percentage limitation, as determined by the Company's Continuing Directors, shall be entitled to vote in connection with any matter submitted to stockholders for a vote. Additionally, the Certificate of Incorporation provides for further restrictions on voting rights of shares owned in excess of 10% of any class of equity security of the Company beyond five years after the Conversion of the Bank. Specifically, the Certificate of Incorporation provides that if, at any time after five years from 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%, such person shall be entitled to cast only one-hundredth of one vote. An exception from the restriction 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. Unless the Board took such affirmative action, the provision would operate to restrict the voting by beneficial owners of more than 10% of the Company's Common Stock in a proxy contest. BOARD CONSIDERATION OF CERTAIN NONMONETARY FACTORS IN THE EVENT OF AN OFFER BY ANOTHER PARTY The Certificate of Incorporation of the Company permits the Board of Directors, in evaluating a Business Combination or a tender or exchange offer, to consider, in addition to the adequacy of the amount to be paid in connection with any such transaction, certain specified factors and any other factors the Board deems relevant, including (i) the social and economic effects of the transaction on the Company and its subsidiaries, employees, depositors, loan and other customers, creditors and other elements of the communities in which the Company and its subsidiaries operate or are located; (ii) the business and financial condition and earnings prospects of the acquiring party or parties; and (iii) the 81 competence, experience and integrity of the acquiring party or parties and its or their management. By having the standards in the Certificate of Incorporation of the Company, the Board of Directors may be in a stronger position to oppose any proposed business combination, tender or exchange offer if the Board concludes that the transaction would not be in the best interest of the Company, even if the price offered is significantly greater than the then market price of any equity security of the Company. LIMITATIONS ON CALL OF MEETINGS OF STOCKHOLDERS The Company's Certificate of Incorporation provides that special meetings of stockholders may only be called by the Company's Board of Directors or an appropriate committee appointed by the Board of Directors. Stockholders are not authorized to call a special meeting, and stockholder action may be taken only at a special or annual meeting of stockholders and not by written consent. ABSENCE OF CUMULATIVE VOTING The Company's Certificate of Incorporation provides that there shall not be 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 may, if they so choose, elect all directors of the Company to be selected at that meeting, thus precluding minority stockholder representation on the Company's Board of Directors. AUTHORIZATION OF PREFERRED STOCK The Company's Certificate of Incorporation authorizes the issuance of up to 500,000 shares of preferred stock, which conceivably would represent an additional class of stock required to approve any proposed acquisition. The Company is authorized to issue preferred stock from time to time in one or more series subject to applicable provisions of law, and the Board of Directors is authorized to fix the designations, powers, preferences and relative participating, optional and other special rights of such shares, including voting rights (which could be multiple or as a separate class) and conversion rights. Issuance of the preferred stock could adversely affect the relative voting rights of holders of the Common Stock. In the event of a proposed merger, tender offer or other attempt to gain control of the Company that the Board of Directors does not approve, it might be possible for the Board of Directors to authorize the issuance of a series of preferred stock with rights and preferences that would impede the completion of such a transaction. An effect of the possible issuance of preferred stock, therefore, may be to deter a future takeover attempt. The Board of Directors has no present plans or understandings for the issuance of any preferred stock and does not intend to issue any preferred stock except on terms which the Board of Directors deems to be in the best interests of the Company and its stockholders. 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 7,500,000 shares of Common Stock), also could represent additional capital required to be purchased by the acquiror. PROCEDURES FOR STOCKHOLDER NOMINATIONS 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 less than 30 or more than 60 days in advance of the meeting. "New business" within the meaning of this provision will be interpreted by the Company to exclude shareholder proposals which have been included in the Company's proxy solicitation materials pursuant to Rule 14a-8 under the Exchange Act. AMENDMENT OF BYLAWS The Company's Certificate of Incorporation provides that the Company's Bylaws may be amended either by a two-thirds vote of the Company's Board of Directors or by the affirmative vote of the holders of not less than 80% of the outstanding shares of the Company's stock entitled to vote generally in the election of directors, after giving effect to any limits on voting rights. Absent this provision, Delaware law provides that a corporation's bylaws may be amended by the holders of a majority of a corporation's outstanding capital stock. The Company's Bylaws contain numerous provisions concerning the Company's 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 82 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. AMENDMENT OF CERTIFICATE OF INCORPORATION The Company's Certificate of Incorporation provides that specified provisions contained in the Certificate of Incorporation may not be repealed or amended except upon the affirmative vote of not less than 80% of the outstanding shares of the Company's stock entitled to vote generally in the election of directors, after giving effect to any limits on voting rights. This requirement exceeds the majority vote of the outstanding stock that would otherwise be required by Delaware law for the repeal or amendment of a certificate provision. The specific provisions are those (i) governing the calling of special meetings, the absence of cumulative voting rights and the requirement that stockholder action be taken only at annual or special meetings, (ii) requiring written notice to the Company of nominations for the election of directors and new business proposals, (iii) governing the number of the Company's Board of Directors, the filling of vacancies on the Board of Directors and classification of the Board of Directors, (iv) providing the mechanism for removing directors, (v) limiting the acquisition of more than 10% of the capital stock of the Company or the Bank (except, with the prior approval of the Continuing Directors of the Company), (vi) governing the requirement for the approval of certain Business Combinations involving a "Related Person," (vii) regarding the consideration of certain nonmonetary factors in the event of an offer by another party, (viii) providing for the indemnification of directors, officers, employees and agents of the Company, (ix) 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) governing the required stockholder vote for amending the Certificate of Incorporation or Bylaws of the Company. This provision is intended to prevent the holders of less than 80% of the outstanding stock of the Company from circumventing any of the foregoing provisions by amending the Certificate of Incorporation to delete or modify one of such provisions. This provision would enable the holders of more than 20% of the Company's voting stock to prevent amendments to the Company's Certificate of Incorporation or Bylaws, even if such amendments were favored by the holders of a majority of the voting stock. BENEFIT PLANS In addition to the provisions of the Company's Certificate of Incorporation and Bylaws described above, certain benefit plans of the Company and the Bank adopted in connection with the Conversion 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 the benefit plans and the provisions of such plans relating to changes in control of the Company or the Bank, see "Management of the Bank -- Certain Benefit Plans and Agreements." THE PURPOSE OF ANTI-TAKEOVER PROVISIONS 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 non-negotiated 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 83 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 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. Despite the belief 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 a Delaware corporation. DESCRIPTION OF CAPITAL STOCK GENERAL The Company is authorized to issue 7,500,000 shares of Common Stock, par value $0.01 per share, and 500,000 shares of serial preferred stock, par value $0.01 per share. The Company currently expects to issue between 2,040,000 and 2,760,000 shares, subject to adjustment, of the Common Stock and no shares of serial preferred stock in the Conversion. The Company has reserved 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 or any other federal or state governmental agency. 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 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 Common Stock. For information regarding a possible reduction in voting rights, see "Certain Anti-Takeover Provisions in the Certificate of Incorporation and Bylaws -- Restrictions on Acquisitions of Shares." 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 "Dividend Policy", "Regulation -- Dividend Restrictions", and "Taxation." LIQUIDATION. In the event of any liquidation, dissolution or winding up of the Bank, the Company, as holder of all of the Bank's capital stock, would be entitled to receive all assets of the Bank after payment of all debts and liabilities of the Bank and after distribution of the balance in the liquidation account to Eligible Account Holders and Supplemental Eligible Account Holders. In the event of a liquidation, dissolution or winding up of the Company, each holder of shares of 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. 84 RESTRICTIONS ON ACQUISITION OF THE COMMON STOCK. For information regarding limitations on acquisition of shares of Common Stock, see "Certain Restrictions on Acquisition of the Company and the Bank," "Certain Anti-Takeover Provisions in the Certificate of Incorporation and Bylaws" and "The Conversion -- Regulatory Restrictions on Acquisition of the Common Stock." OTHER CHARACTERISTICS. Holders of the Common Stock will not have preemptive rights with respect to any additional shares of Common Stock which may be issued. The Common Stock is not subject to call for redemption, and the outstanding shares of Common Stock, when issued and upon receipt by the Company of the full purchase price therefor, will be fully paid and nonassessable. TRANSFER AGENT AND REGISTRAR. The transfer agent and registrar for Common Stock will be _________ Stock Transfer Company. SERIAL PREFERRED STOCK None of the 500,000 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 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. Should the Board of Directors of the Company subsequently issue serial preferred stock, no holder of any such stock shall have any preemptive right to subscribe for or purchase any stock or any other securities of the Company other than such, if any, as the Board of Directors, in its sole discretion, may determine and at such price or prices and upon such other terms as the Board of Directors, in its sole discretion, may fix. REGISTRATION REQUIREMENTS The Company will register its Common Stock with the SEC pursuant to the Exchange Act upon the completion of the Conversion and will not 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 Exchange Act will be applicable. The Company intends to have a December 31 fiscal year end. LEGAL OPINIONS The legality of the Common Stock will be passed upon for the Company by Reinhart, Boerner, Van Deuren, Norris & Rieselbach, P.C., Washington, D.C., which has consented to the references herein to its opinion. Certain legal matters will be passed upon for the Agents by Muldoon Murphy & Faucette, Washington, D.C. TAX OPINIONS The federal income tax consequences of the Conversion will be passed upon by Reinhart, Boerner, Van Deuren, Norris & Rieselbach, P.C., Washington, D.C., which has consented to the references herein to its opinion. The Kentucky income tax consequences of the Conversion will be opined upon by York, Neel & Co.- Hopkinsville, LLP, which has consented to the references herein to its opinion. EXPERTS The financial statements of Hopkinsville Federal Savings Bank at December 31, 1996 and 1995 and for each of the years in the three-year period ended December 31, 1996 have been included herein and elsewhere in the registration statement and the Bank's application for conversion in reliance upon the report of York, Neel & Co.-Hopkinsville, LLP, 85 independent certified public accountants, appearing elsewhere herein, and upon the authority of said firm as experts in accounting and auditing. National Capital 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 Common Stock and to the use of its name and statements with respect to it appearing herein. ADDITIONAL INFORMATION The Company has filed with the SEC a Registration Statement with respect to Common Stock offered hereby. This Prospectus does not contain all the information set forth in the Registration Statement, certain parts of which are omitted in accordance with the rules and regulations of the SEC. 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. The SEC also maintains an Internet address ("Web site") that contains reports, proxy and information statements and other information regarding registrants, including the Company, that file electronically with the SEC. The address for this Web site is "http://www.sec.gov." The Bank has filed with the OTS an Application for Conversion. This document omits certain information contained in such application. 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, Central Regional Office, at 200 West Madison Street, Suite 1300, Chicago, Illinois. 86 INDEX TO FINANCIAL STATEMENTS
Independent Auditors' Report F-2 Statement of Financial Condition as of March 31, 1997 (unaudited) and December 31, 1996 and 1995 F-3 Statements of Income for the Three Months Ended March 31, 1997 and 1996 (unaudited) and for each of the Three Years in the Period ended December 31, 1996 F-5 Statements of Equity for the Three Months ended March 31, 1997 (unaudited) and for each of the Three Years in the Period ended December 31, 1996 F-6 Statements of Cash Flow for the Three Months Ended March 31, 1997 and 1996 (unaudited) and for each of the Three Years in the Period ended December 31, 1996 F-7 Notes to Financial Statements F-8
SCHEDULES - All schedules are omitted because the required information is not applicable or is presented in the financial statements or accompanying notes. All financial statements of HopFed Bancorp, Inc. have been omitted because HopFed Bancorp, Inc. has not yet issued any stock, has no assets and no liabilities and has not conducted any business other than of an organizational nature. F-1 [LETTERHEAD OF YORK NEEL & CO. - HOPKINSVILLE LLP] Independent Auditor's Report To the Board of Directors Hopkinsville Federal Savings Bank We have audited the accompanying statements of financial condition of Hopkinsville Federal Savings Bank as of December 31, 1996 and 1995, and the related statements of income, equity, and cash flows for each of the three years in the period ended December 31, 1996. 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 audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Hopkinsville Federal Savings Bank as of December 31, 1996 and 1995, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1996 in conformity with generally accepted accounting principles. /s/ YORK, NEEL & CO. -- HOPKINSVILLE, LLP. Hopkinsville, Kentucky February 14, 1997 (except for Note 14, as to which the date is May 21, 1997) F-2 HOPKINSVILLE FEDERAL SAVINGS BANK STATEMENTS OF FINANCIAL CONDITION
ASSETS MARCH 31, DECEMBER 31, -------------------------- 1997 1996 1995 ------------ ------------ ----------- (Unaudited) Cash and due from banks $ 1,272,361 $ 1,451,727 $ 1,303,030 Time deposits 9,000,000 2,000,000 7,000,000 Interest-bearing deposits in Federal Home Loan Bank - - 5,550,000 Federal funds sold 8,806,000 500,000 7,948,000 Securities available for sale 5,108,869 5,125,452 4,053,144 Securities held to maturity 77,668,800 95,946,689 98,553,174 Loans receivable, net of allowance for loan losses of $217,444 in 1997, $217,444 in 1996 and $122,252 in 1995 97,553,277 95,495,890 84,755,375 Accrued interest receivable 1,095,988 1,290,408 1,060,974 Premises and equipment, net 2,330,980 2,332,876 2,347,113 Other assets 221,930 254,989 27,519 ------------ ------------ ------------ Total assets $203,058,205 $204,398,031 $212,598,329 ============ ============ ============
The accompanying notes are an integral part of these financial statements. F-3
LIABILITIES AND EQUITY MARCH 31, DECEMBER 31, -------------------------- 1997 1996 1995 ------------- ------------ ------------ (Unaudited) Deposits: Noninterest-bearing accounts $ 2,178,528 $ 1,784,472 $ 1,236,424 Interest-bearing accounts: Demand / NOW acounts 7,795,012 7,603,322 7,628,482 Money market accounts 37,588,049 36,939,552 34,781,597 Passbook savings 11,794,628 10,631,561 11,196,639 Other time deposits 123,805,418 126,868,459 139,932,047 ------------ ------------ ------------ Total deposits 183,161,635 183,827,366 194,775,189 Advances from borrowers for taxes and insurance 219,343 184,120 176,553 Federal income taxes payable: Current - - - Deferred 1,696,552 1,702,172 1,334,989 Other borrowed funds - 1,317,000 - Other liabilities 744,345 460,146 214,876 ------------ ------------ ------------ Total liabilities 185,821,875 187,490,804 196,501,607 ------------ ------------ ------------ Equity: Retained earnings 15,032,748 14,674,418 14,490,786 Net unrealized appreciation on available-for-sale securities, net of tax of $1,135,179 in 1997, $1,150,235 in 1996 and $827,300 in 1995 2,203,582 2,232,809 1,605,936 ------------ ------------ ------------ 17,236,330 16,907,227 16,096,722 ------------ ------------ ------------ Total liabilities and equity $203,058,205 $204,398,031 $212,598,329 ============ ============ ============
F-4 HOPKINSVILLE FEDERAL SAVINGS BANK STATEMENTS OF INCOME
FOR THE THREE MONTHS ENDED MARCH 31, FOR THE YEARS ENDED DECEMBER 31, ------------------------ ------------------------------------- 1997 1996 1996 1995 1994 ----------- ----------- ----------- ----------- ----------- (Unaudited) (Unaudited) Interest income: Loans receivable $1,801,731 $1,536,294 $ 6,823,842 $ 5,839,659 $ 5,247,026 Securities available for sale 38,522 36,865 150,814 134,894 109,441 Securities held to maturity 1,287,695 1,391,485 5,623,854 4,364,389 3,320,249 Time deposits 143,535 269,098 621,041 2,133,061 1,758,100 ---------- ---------- ----------- ----------- ----------- Total interest income 3,271,483 3,233,742 13,219,551 12,472,003 10,434,816 ---------- ---------- ----------- ----------- ----------- Interest expense: Deposits 2,231,286 2,561,178 9,731,511 10,009,266 7,740,293 Other borrowed funds 9,336 - 25,022 - - ---------- ---------- ----------- ----------- ----------- Total interest expense 2,240,622 2,561,178 9,756,533 10,009,266 7,740,293 ---------- ---------- ----------- ----------- ----------- Net interest income 1,030,861 672,564 3,463,018 2,462,737 2,694,523 Provision for loan losses - - 100,000 - - ---------- ---------- ----------- ----------- ----------- Net interest income after provision for loan losses 1,030,861 672,564 3,363,018 2,462,737 2,694,523 ---------- ---------- ----------- ----------- ----------- Noninterest income: NOW account fees 39,883 28,342 156,584 115,283 102,899 Loan fees 35,591 59,044 259,665 153,681 229,082 Service charges 28,008 28,652 112,251 77,163 124,023 Other 21,058 9,426 61,363 52,065 55,849 ---------- ---------- ----------- ----------- ----------- Total noninterest income 124,540 125,464 589,863 398,192 511,853 ---------- ---------- ----------- ----------- ----------- Noninterest expenses: Salaries and benefits 373,341 306,922 1,277,609 1,219,649 1,251,550 Deposit insurance premium 49,889 110,823 1,701,758 426,172 396,847 Occupancy expense 50,348 50,820 215,101 176,757 110,114 Data processing 25,061 17,245 86,674 102,334 103,533 Other 117,721 92,395 409,042 336,403 318,396 ---------- ---------- ----------- ----------- ----------- Total noninterest expense 616,360 578,205 3,690,184 2,261,315 2,180,440 ---------- ---------- ----------- ----------- ----------- Income before income taxes 539,041 219,823 262,697 599,614 1,025,936 Income tax expense 180,711 72,177 79,065 197,808 341,203 ---------- ---------- ----------- ----------- ----------- Net income $ 358,330 $ 147,646 $ 183,632 $ 401,806 $ 684,733 ========== ========== =========== =========== ===========
The accompanying notes are an integral part of these financial statements. F-5 HOPKINSVILLE FEDERAL SAVINGS BANK STATEMENTS OF EQUITY
Net Unrealized Appreciation On Available- Retained For-Sale Total Earnings Securities Equity ----------- -------------- ----------- BALANCE, DECEMBER 31, 1993 $13,404,247 $ 933,270 $14,337,517 Net income 684,733 - 684,733 Net changes in unrealized appreciation on available-for-sale securities, net of taxes of $6,538 - 12,692 12,692 ----------- ---------- ----------- BALANCE, DECEMBER 31, 1994 14,088,980 945,962 15,034,942 Net income 401,806 - 401,806 Net changes in unrealized appreciation on available-for-sale securities, net of taxes of $339,986 - 659,974 659,974 ----------- ---------- ----------- BALANCE, DECEMBER 31, 1995 14,490,786 1,605,936 16,096,722 Net income 183,632 - 183,632 Net changes in unrealized appreciation on available-for-sale securities, net of taxes of $322,935 - 626,873 626,873 ----------- ---------- ----------- BALANCE, DECEMBER 31, 1996 14,674,418 2,232,809 16,907,227 Net income (unaudited) 358,330 - 358,330 Net changes in unrealized appreciation on available-for-sale securities, net of taxes of $15,056 (unaudited) - (29,227) (29,227) ----------- ---------- ----------- BALANCE, MARCH 31, 1997 $15,032,748 $2,203,582 $17,236,330 =========== ========== ===========
The accompanying notes are an integral part of these financial statements. F-6 HOPKINSVILLE FEDERAL SAVINGS BANK STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, FOR THE YEARS ENDED DECEMBER 31, --------------------------- ------------------------------------------- 1997 1996 1996 1995 1994 ------------ ------------- ------------- ------------- ------------- (Unaudited) (Unaudited) CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 358,330 $ 147,646 $ 183,632 $ 401,806 $ 684,733 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses - - 100,000 - - Depreciation 24,991 28,438 117,094 97,700 37,358 Accretion of investment security discounts (1,800) (1,357) (5,499) (4,233) (2,703) Deferred income taxes 9,418 8,840 44,248 46,523 52,456 Stock dividend (27,700) (26,000) (107,500) (97,700) (77,300) Gain on sale of equipment - - (8,265) (400) (2,852) (Increase) decrease in: Accrued interest receivable 194,420 (189,794) (229,434) (267,530) (247,878) Other assets 33,059 (137,911) (227,470) 23,561 (11,307) Increase (decrease) in other liabilities 284,199 142,539 245,270 (30,941) 15,654 ----------- ------------ ------------ ------------ ------------ Net cash provided by (used in) operating activities 874,917 (27,599) 112,076 168,786 448,161 ----------- ------------ ------------ ------------ ------------ CASH FLOWS FROM INVESTING ACTIVITIES: Net (increase) decrease in time deposits (7,000,000) - 5,000,000 20,000,000 (12,000,000) Net (increase) decrease in interest-bearing deposits in FHLB - 2,975,000 5,550,000 5,650,000 (1,775,000) Net (increase) decrease in federal funds sold (8,306,000) 5,725,000 7,448,000 (6,618,000) 9,135,000 Proceeds from maturities of held-to-maturity securities 21,499,426 22,508,758 44,010,074 51,503,438 11,773,691 Purchases of held-to-maturity securities (3,219,719) (29,975,506) (41,398,090) (73,707,447) (8,009,818) Purchases of available-for- sale securities - (15,000) (15,000) - - Net increase in loans (2,057,387) (2,690,938) (10,840,515) (6,228,670) (10,722,488) Purchases of premises/equipment (23,095) (16,124) (108,724) (95,736) (911,452) Proceeds from sale of equipment - - 14,132 400 2,852 ----------- ------------ ------------ ------------ ------------ Net cash provided by (used in) investing activities 893,225 (1,488,810) 9,659,877 (9,496,015) (12,507,215) ----------- ------------ ------------ ------------ ------------ CASH FLOWS FROM FINANCING ACTIVITIES: Net increase (decrease) in demand deposits, savings and NOW deposits 2,397,310 3,890,636 2,115,765 (9,868,232) 809,934 Net increase (decrease) in time deposits (3,063,041) (2,617,047) (13,063,588) 18,943,928 11,705,448 Increase (decrease) in advance payments by borrowers for taxes and insurance 35,223 107,571 7,567 (22,947) 15,113 Net increase (decrease) in other borrowed funds (1,317,000) - 1,317,000 - - ----------- ------------ ------------ ------------ ------------ Net cash provided by (used in) financing activities (1,947,508) 1,381,160 (9,623,256) 9,052,749 12,530,495 ----------- ------------ ------------ ------------ ------------ Increase (decrease) in cash and cash equivalents (179,366) (135,249) 148,697 (274,480) 471,441 Cash and cash equivalents, beginning of period 1,451,727 1,303,030 1,303,030 1,577,510 1,106,069 ----------- ------------ ------------ ------------ ------------ Cash and cash equivalents, end of period $ 1,272,361 $ 1,167,781 $ 1,451,727 $ 1,303,030 $ 1,577,510 =========== ============ ============ ============ ============
The accompanying notes are an integral part of these financial statements. F-7 HOPKINSVILLE FEDERAL SAVINGS BANK NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1996, 1995 AND 1994 MARCH 31, 1997 AND 1996 (UNAUDITED) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Significant accounting policies of the Bank are as follows: A. NATURE OF BUSINESS Hopkinsville Federal Savings Bank (the "Bank") is a mutual savings bank which was organized in 1879. Its principal business consists of accepting deposits and residential mortgage loan originations in its primary market area of Christian, Calloway, Todd and Trigg Counties, Kentucky. The Bank is subject to the regulations of certain federal agencies and undergoes periodic examinations by those regulatory authorities. B. CASH AND CASH EQUIVALENTS For the purpose of presentation in the statements of cash flows, cash and cash equivalents are defined as those amounts included in the balance sheet caption "cash and due from banks. C. SECURITIES HELD TO MATURITY Bonds, notes and debentures for which Hopkinsville Federal Savings Bank (the "Bank") has the positive intent and ability to hold to maturity are reported at cost, adjusted for premiums and discounts that are recognized in interest income over the period to maturity using a method that approximates the level yield method. Declines in the fair value of individual held-to-maturity securities below their cost that are other than temporary result in write-downs of the individual securities to their fair value. The write-downs are included in earnings as realized losses. D. SECURITIES AVAILABLE FOR SALE Available-for-sale securities consist of certain equity securities not classified as trading securities nor as held-to-maturity securities. Unrealized holding gains and losses, net of tax, on available-for-sale securities are reported as a net amount in a separate component of equity until realized. Gains and losses on the sale of available-for-sale securities are determined using the specific identification method. CONTINUED F-8 HOPKINSVILLE FEDERAL SAVINGS BANK NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1996, 1995 AND 1994 MARCH 31, 1997 AND 1996 (UNAUDITED) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) D. SECURITIES AVAILABLE FOR SALE (CONTINUED) Declines in the fair value of individual available-for-sale securities below their cost that are other than temporary result in write-downs of the individual securities to their fair value. The write-downs are included in earnings as realized losses. Premiums and discounts are recognized in interest income over the period to maturity using a method that approximates the level yield method. E. LOANS RECEIVABLE Loans receivable are stated at unpaid principal balances, less the allowance for loan losses and discounts. Discounts on home improvement and consumer loans are recognized over the lives of the loans using methods that approximate the interest method. Loan origination fee income is recognized as received and direct loan origination costs are expensed as incurred. Statement of Financial Accounting Standard ("SFAS") No. 91 requires the recognition of loan origination fee income over the life of the loan and the recognition of certain direct loan origination costs over the life of the loan. However, deferral of such fees and costs would not have a material effect on the financial statements. 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 while the loan is classified as nonaccrual. Loans may be returned to accrual status when all principal and interest amounts contractually due (including arrearages) are reasonably assured of repayment within an acceptable period of time, and there is a sustained period of repayment performance by the borrower in accordance with the contractual terms of interest and principal. CONTINUED F-9 HOPKINSVILLE FEDERAL SAVINGS BANK NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1996, 1995 AND 1994 MARCH 31, 1997 AND 1996 (UNAUDITED) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) E. LOANS RECEIVABLE (CONTINUED) The Bank provides an allowance for loan losses and include in operating expenses a provision for loan losses determined by management. 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. Management believes it has established the allowance in accordance with generally accepted accounting principles and has taken into account the views of its regulators and the current economic environment. F. FORECLOSED REAL ESTATE Real estate properties acquired through, or in lieu of, loan foreclosure are carried at the lower of cost or fair value less cost to sell. Costs of developing such real estate are capitalized, whereas costs relating to holding the property are expensed. Valuations are periodically performed by management, and any adjustments to value are made through an allowance for losses. G. INCOME TAXES Income taxes are provided based on income reported in the financial statements adjusted for transactions that do not enter into the computation of income taxes payable. Deferred taxes result from timing differences in recognizing revenue and expense for income tax and financial reporting purposes. Deferred tax assets and liabilities are reflected at currently enacted income tax rates applicable to the period in which the deferred tax assets and liabilities are expected to be realized or settled. As changes in tax laws or rates are enacted, deferred tax assets and liabilities are adjusted through the provision for income taxes. CONTINUED F-10 HOPKINSVILLE FEDERAL SAVINGS BANK NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1996, 1995 AND 1994 MARCH 31, 1997 AND 1996 (UNAUDITED) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) H. PREMISES AND EQUIPMENT Land is carried at cost. Land improvements, buildings, and furniture and equipment are carried at cost, less accumulated depreciation and amortization. Buildings and furniture and equipment are depreciated generally by the straight-line method over the estimated useful lives of the assets. The estimated useful lives used to compute depreciation are as follows: Land improvements 5-15 years Buildings 40 years Furniture and equipment 5-15 years I. FINANCIAL INSTRUMENTS In the ordinary course of business the Bank entered into off-balance- sheet financial instruments consisting of commitments to extend credit, etc. Such financial instruments are recorded in the financial statements when they are funded or related fees are incurred or received. J. FAIR VALUES OF FINANCIAL INSTRUMENTS The following methods and assumptions were used by the Bank in estimating fair values of financial instruments as disclosed herein: CASH AND SHORT TERM INSTRUMENTS. The carrying amounts of cash and short term instruments approximate their fair value. AVAILABLE-FOR SALE AND HELD-TO-MATURITY SECURITIES. Fair values for securities are based on quoted market prices. LOANS RECEIVABLE. For variable rate loans that reprice annually and have no significant change in credit risk, fair values are based on carrying values. Fair values for fixed rate mortgage loans and fixed rate commercial loans are estimated using discounted cash flow analyses, using interest rates currently being offered for loans with similar terms to borrowers of similar credit quality. CONTINUED F-11 HOPKINSVILLE FEDERAL SAVINGS BANK NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1996, 1995 AND 1994 MARCH 31, 1997 AND 1996 (UNAUDITED) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) J. FAIR VALUES OF FINANCIAL INSTRUMENTS (CONTINUED) DEPOSIT LIABILITIES. The fair values disclosed for demand deposits are, by definition, equal to the amount payable on demand at the reporting date (that is, their carrying amounts). The carrying amounts of variable rate, fixed-term money market accounts approximate their fair values at the reporting date. Fair values for fixed rate certificates of deposits (CD's) are estimated using a discounted cash flow calculation that applies interest rates currently being offered on certificates of deposit to a schedule of aggregated expected annual maturities on time deposits. ADVANCES FROM BORROWERS FOR TAXES AND LICENSES. The carrying amounts of advances from borrowers approximate their fair value. OTHER BORROWED FUNDS. The carrying amounts of other borrowed funds approximate their fair values since such borrowings mature within 90 days. ACCRUED INTEREST. The carrying amounts of accrued interest approximate their fair values. OFF-BALANCE-SHEET INSTRUMENTS. Off-balance-sheet lending commitments approximate their fair values due to the short period of time before the commitment expires. K. ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. CONTINUED F-12 HOPKINSVILLE FEDERAL SAVINGS BANK NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1996, 1995 AND 1994 MARCH 31, 1997 AND 1996 (UNAUDITED) 2. SECURITIES Securities, which consist of debt and equity investments, have been classified in the statements of financial condition according to management's intent. The carrying amount of securities and their approximate fair values follow:
Gross Gross Estimated Amortized Unrealized Unrealized Market Cost Gains Losses Value ----------- ----------- ---------- ----------- AVAILABLE-FOR-SALE SECURITIES March 31, 1997 (unaudited): Restricted: FHLB stock $1,634,600 $ - $ - $1,634,600 Intrieve 15,000 - - 15,000 ---------- ----------- ---------- ----------- 1,649,600 - - 1,649,600 Unrestricted: FHLMC stock 120,508 3,338,761 - 3,459,269 ---------- ----------- ---------- ----------- $1,770,108 $3,338,761 $ - $5,108,869 ========== =========== ========== =========== December 31, 1996: Restricted: FHLB stock $1,606,900 $ - $ - $1,606,900 Intrieve 15,000 - - 15,000 ---------- ----------- ---------- ----------- 1,621,900 - - 1,621,900 Unrestricted: FHLMC stock 120,508 3,383,044 - 3,503,552 ---------- ----------- ---------- ----------- $1,742,408 $3,383,044 $ - $5,125,452 ========== =========== ========== =========== December 31, 1995: Restricted: FHLB stock $1,499,400 $ - $ - $1,499,400 Unrestricted: FHLMC stock 120,508 2,433,236 - 2,553,744 ---------- ----------- ---------- ----------- $1,619,908 $2,433,236 $ - $4,053,144 ========== =========== ========== ===========
CONTINUED F-13 HOPKINSVILLE FEDERAL SAVINGS BANK NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1996, 1995 AND 1994 MARCH 31, 1997 AND 1996 (UNAUDITED) 2. SECURITIES (CONTINUED)
Gross Gross Estimated Amortized Unrealized Unrealized Market Cost Gains Losses Value ---------------------- ---------- ---------- ----------- HELD-TO-MATURITY SECURITIES March 31, 1997 (unaudited): U.S. government and agency securities: FHLB investment securities $56,966,773 $ 3,964 $(872,267) $56,098,470 ----------- -------- --------- ----------- Mortgage-backed securities: GNMA 19,005,593 238,558 (32,082) 19,212,069 FNMA 1,696,434 - (60,245) 1,636,189 ----------- -------- --------- ----------- 20,702,027 238,558 (92,327) 20,848,258 ----------- -------- --------- ----------- $77,668,800 $242,522 $(964,594) $76,946,728 =========== ======== ========= =========== December 31, 1996: U.S. government and agency securities: FHLB investment securities $77,962,421 $ 38,984 $(512,772) $77,488,633 ----------- -------- --------- ----------- Mortgage-backed securities: GNMA 17,531,921 297,278 (3,430) 17,825,769 FNMA 452,347 - (5,075) 447,272 ----------- -------- --------- ----------- 17,984,268 297,278 (8,505) 18,273,041 ----------- -------- --------- ----------- $95,946,689 $336,262 $(521,277) $95,761,674 =========== ======== ========= =========== December 31, 1995: U.S. government and agency securities: FHLB investment securities $80,990,171 $123,901 $(318,122) 80,795,950 Mortgage-backed securities: GNMA 17,563,003 264,491 (5,511) 17,821,983 ----------- -------- --------- ----------- $98,553,174 $388,392 $(323,633) $98,617,933 =========== ======== ========= ===========
CONTINUED F-14 HOPKINSVILLE FEDERAL SAVINGS BANK NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1996, 1995 AND 1994 MARCH 31, 1997 AND 1996 (UNAUDITED) 2. SECURITIES (CONTINUED) The scheduled maturities of securities held-to-maturity at March 31, 1997 (unaudited), were as follows:
Amortized Fair Cost Value ----------- ----------- Due in one year or less $ 8,997,396 $ 8,972,960 Due in one to five years 47,969,377 47,125,510 ----------- ----------- 56,966,773 56,098,470 Mortgage-backed securities 20,702,027 20,848,258 ----------- ----------- $77,668,800 $76,946,728 =========== ===========
The scheduled maturities of securities held-to-maturity at December 31, 1996, were as follows:
Amortized Fair Cost Value ----------- ----------- Due in one year or less $24,996,242 $24,949,200 Due in one to five years 52,966,179 52,539,433 ----------- ----------- 77,962,421 77,488,633 Mortgage-backed securities 17,984,268 18,273,041 ----------- ----------- $95,946,689 $95,761,674 =========== ===========
CONTINUED F-15 HOPKINSVILLE FEDERAL SAVINGS BANK NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1996, 1995 AND 1994 MARCH 31, 1997 AND 1996 (UNAUDITED) 3. LOANS RECEIVABLE The components of loans in the statements of financial condition were as follows:
March 31, December 31, -------------------------- 1997 1996 1995 ------------ ------------ ------------ (Unaudited) Real estate loans: One-to-four family $79,583,258 $77,317,997 $70,417,160 Multi-family 1,453,908 1,466,486 491,621 Construction 3,911,871 5,388,959 4,062,183 Non-residential 6,548,181 5,466,414 5,107,504 ----------- ----------- ----------- Total mortgage loans 91,497,218 89,639,856 80,078,468 ----------- ----------- ----------- Consumer loans: Loans secured by deposits 3,367,983 3,484,074 3,323,604 Other consumer loans 4,151,412 4,004,177 3,016,321 ----------- ----------- ----------- Total consumer loans 7,519,395 7,488,251 6,339,925 ----------- ----------- ----------- 99,016,613 97,128,107 86,418,393 Less: Undisbursed portion of mortgage loans (1,245,892) (1,414,773) (1,540,766) ----------- ----------- ----------- Total loans 97,770,721 95,713,334 84,877,627 Less allowance for loan losses (217,444) (217,444) (122,252) ----------- ----------- ----------- $97,553,277 $95,495,890 $84,755,375 =========== =========== ===========
An analysis of the change in the allowance for loan losses follows:
March 31, December 31, ------------------- 1997 1996 1995 ----------- --------- -------- (Unaudited) Balance at January 1 $217,444 $122,252 $122,252 Loans charged off - (4,808) - Recoveries - - - ---------- -------- -------- Net loans charged off - (4,808) - Provision for loan losses - 100,000 - ---------- -------- -------- Balance at end of period $217,444 $217,444 $122,252 ========== ======== ========
CONTINUED F-16 HOPKINSVILLE FEDERAL SAVINGS BANK NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1996, 1995 AND 1994 MARCH 31, 1997 AND 1996 (UNAUDITED) 4. PREMISES AND EQUIPMENT Components of properties and equipment included in the statements of financial condition at December 31, 1996 and 1995 consisted of the following:
March 31, December 31, ------------------------ 1997 1996 1995 ------------ ----------- ----------- Land $ 577,497 $ 574,452 $ 499,452 Land improvements 82,032 78,625 78,625 Buildings 2,033,532 2,033,532 2,026,226 Furniture and equipment 660,952 644,309 632,760 ----------- ---------- ---------- 3,354,013 3,330,918 3,237,063 Less accumulated depreciation (1,023,033) (998,042) (889,950) ----------- ---------- ---------- $ 2,330,980 $2,332,876 $2,347,113 =========== ========== ==========
Depreciation expense was $24,991 and $ 28,438 for the three month periods ended March 31, 1997 and 1996, respectively, and $117,094 and $97,700 for the years ended December 31, 1996 and 1995, respectively. 5. DEPOSITS At March 31, 1997, the scheduled maturities of other time deposits are as follows: March 31, 1998 $ 72,989,589 March 31, 1999 36,360,850 March 31, 2000 9,414,861 March 31, 2001 4,413,368 March 31, 2002 625,376 Thereafter 1,374 ------------ $123,805,418 ============
At December 31, 1996, the scheduled maturities of other time deposits are as follows: 1997 $ 77,287,337 1998 32,362,134 1999 10,432,949 2000 6,152,509 2001 632,156 Thereafter 1,374 ------------ $126,868,459 ============
CONTINUED F-17 HOPKINSVILLE FEDERAL SAVINGS BANK NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1996, 1995 AND 1994 MARCH 31, 1997 AND 1996 (UNAUDITED) 5. DEPOSITS, (CONTINUED) The amount of other time deposits with a minimum denomination of $100,000 was $6,179,336 at March 31, 1997 and $7,374,548 and $12,206,055 at December 31, 1996 and 1995, respectively. The Bank maintains clearing arrangements for its demand, NOW and money market accounts with the Federal Home Loan Bank of Cincinnati. The Bank is required to maintain certain cash reserves in its account to cover average daily clearings. At March 31, 1997, average daily clearings were approximately $497,000. At December 31, 1996, average daily clearings were approximately $536,760. 6. OTHER BORROWED FUNDS During 1996, the Bank entered into a Cash Management Advance (CMA) program with the Federal Home Loan Bank. This program is a source of overnight liquidity to address day-to-day cash needs. The program has a term of up to 90 days and bears interest at a variable rate equal to the FHLB cost of funds (7.15% at December 31, 1996). The Bank may borrow up to $20,000,000 under this program and the amount is collateralized by a $20,000,000 FHLB investment security. As of December 31, 1996, the amount owed on the advance was $1,317,000. As of March 31, 1997, the amount owed on the advance was zero. 7. FINANCIAL INSTRUMENTS The Bank is a party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers and to reduce its own exposure to fluctuations in interest rates. These financial instruments include commitments to extend credit and commercial letters of credit. Those instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the statements of financial condition. The contract or notional amounts of those instruments reflect the extent of the Bank's involvement in particular classes of financial instruments. The Bank's exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and commercial letters of credit is represented by the contractual notional amount of those instruments. The Bank uses the same credit policies in making commitments and conditional obligations as it does for on-balance- sheet instruments. Unless noted otherwise, the Bank does not require collateral or other security to support financial instruments with credit risk. CONTINUED F-18 HOPKINSVILLE FEDERAL SAVINGS BANK NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1996, 1995 AND 1994 MARCH 31, 1997 AND 1996 (UNAUDITED) 7. FINANCIAL INSTRUMENTS (CONTINUED) COMMITMENTS TO EXTEND CREDIT. Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since some of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Bank's experience has been that most loan commitments are drawn upon by customers. The Bank has offered standby letters of credit on a limited basis. As of March 31, 1997, the Bank has not been requested to advance funds on any of the standby letters of credit. The estimated fair values of the Bank's financial instruments were as follows at March 31, 1997:
Carrying Fair Amount Value -------------- -------------- Financial assets: Cash and due from banks $ 1,272,361 $ 1,272,361 Time deposits 9,000,000 9,000,000 Federal funds sold 8,806,000 8,806,000 Securities available for sale 5,108,869 5,108,869 Securities held to maturity 77,668,800 76,946,728 Loans receivable 97,553,277 97,280,349 Accrued interest receivable 1,095,988 1,095,988 Financial liabilities: Deposit liabilities (183,161,635) (183,227,354) Advances from borrowers for taxes and licenses (219,343) (219,343) Off-balance-sheet assets (liabilities): Commitments to extend credit (1,497,600) Commercial letters of credit (735,469)
CONTINUED F-19 HOPKINSVILLE FEDERAL SAVINGS BANK NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1996, 1995 AND 1994 MARCH 31, 1997 AND 1996 (UNAUDITED) 7. FINANCIAL INSTRUMENTS (CONTINUED) The estimated fair values of the Bank's financial instruments were as follows at December 31, 1996:
Carrying Fair Amount Value -------------- -------------- Financial assets: Cash and due from banks $ 1,451,727 $ 1,451,727 Time deposits 2,000,000 2,000,000 Federal funds sold 500,000 500,000 Securities available for sale 5,110,452 5,110,452 Securities held to maturity 95,961,689 95,776,674 Loans receivable 95,495,890 95,216,624 Accrued interest receivable 1,290,408 1,290,408 Financial liabilities: Deposit liabilities (183,827,366) (183,910,399) Advances from borrowers for taxes and licenses (184,120) (184,120) Other borrowed funds (1,317,000) (1,317,000) Off-balance-sheet assets (liabilities): Commitments to extend credit (919,375) Commercial letters of credit (499,030)
The estimated fair values of the Bank's financial instruments were as follows at December 31, 1995:
Carrying Fair Amount Value -------------- -------------- Financial assets: Cash and due from banks $ 1,303,030 $ 1,303,030 Time deposits 7,000,000 7,000,000 Interest-bearing deposits in FHLB 5,550,000 5,550,000 Federal funds sold 7,948,000 7,948,000 Securities available for sale 4,053,144 4,053,144 Securities held to maturity 98,553,174 98,617,933 Loans receivable 84,755,375 84,755,375 Accrued interest receivable 1,060,974 1,060,974 Financial liabilities: Deposit liabilities (194,775,189) (195,352,312) Advances from borrowers for taxes and licenses (176,553) (176,553) Off-balance-sheet assets (liabilities): Commitments to extend credit (717,624) Commercial letters of credit (46,250)
CONTINUED F-20 HOPKINSVILLE FEDERAL SAVINGS BANK NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1996, 1995 AND 1994 MARCH 31, 1997 AND 1996 (UNAUDITED) 8. SIGNIFICANT GROUP CONCENTRATIONS OF CREDIT RISK Most of the Bank's business activity is with customers located within the western part of the Commonwealth of Kentucky. The majority of the loans are collateralized by a one-to-four family residence. The Bank requires collateral for all loans. The distribution of commitments to extend credit approximates the distribution of loans outstanding. The contractual amounts of credit- related financial instruments such as commitments to extend credit and commercial letters of credit represent the amounts of potential accounting loss should the contract be fully drawn upon, the customer default, and the value of any existing collateral become worthless. The Bank had $9,007,899, $2,001,890 and $12,618,655 of cash on deposit with the FHLB and $9,095,248, $1,018,015 and $8,175,728 on deposit with one financial institution and $500,000, $500,000 and $500,000 on deposit with one financial institution at March 31, 1997, December 31, 1996 and December 31, 1995, respectively. 9. PENSION PLAN Hopkinsville Federal Savings Bank has a noncontributory, defined benefit pension plan covering substantially all of its employees who satisfy certain age and service requirements. The benefits are based on years of service and the employee's average earnings which are computed using the five consecutive years prior to retirement that yield the highest average. Hopkinsville Federal's funding policy is to contribute annually, actuarially determined amounts to finance the plan benefits. The following table sets forth the plan's funded status and amounts recognized in the Bank's statements of financial condition at September 30:
1996 1995 1994 ---------- ---------- ---------- Actuarial present value of benefit obligations at September 30: Accumulated benefit obligation: Vested $1,474,702 $1,306,999 $1,083,400 Nonvested 2,332 2,900 6,903 ---------- ---------- ---------- $1,477,034 $1,309,899 $1,090,303 ========== ========== ==========
CONTINUED F-21 HOPKINSVILLE FEDERAL SAVINGS BANK NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1996, 1995 AND 1994 MARCH 31, 1997 AND 1996 (UNAUDITED) 9. PENSION PLAN (CONTINUED)
1996 1995 1994 ------------ ---------- ---------- Projected benefit obligation for service rendered to date ($1,880,152) ($1,723,791) ($1,531,558) Plan assets at fair value 1,369,023 1,214,937 1,009,355 ------------ ---------- ---------- Plan assets in excess of projected benefit obligation (511,129) (508,854) (522,203) Unrecognized net obligation existing at September 30 (94,429) (104,922) (115,415) Unrecognized prior serv. cost 143,305 161,538 179,771 Unrecognized net loss 440,656 421,962 448,280 ------------ ---------- ---------- Accrued pension cost $ (21,597) $ (30,276) $ (9,567) ============ ========== ==========
The components of net periodic pension cost for the years ended September 30 are as follows:
1996 1995 1994 ------------ ---------- ---------- Service costs $ 78,372 $ 77,369 $ 94,024 Interest cost on projected benefit obligation 129,284 114,867 142,254 Actual return on assets (83,148) (89,759) (71,618) Net amortization/deferral 7,308 34,055 (42,329) ------------ ---------- ---------- Net periodic pension cost $ 131,816 $ 136,532 $ 122,331 ============ ========== ==========
Assumptions used to develop the net periodic pension cost were:
1996 1995 1994 ------------ ---------- ----------- Discount rate 7.50% 7.50% 7.50% Expected long-term rate of return on assets 8.00% 8.00% 8.00% Rate of increase in compensation levels 4.50% 4.50% 4.50%
CONTINUED F-22 HOPKINSVILLE FEDERAL SAVINGS BANK NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1996, 1995 AND 1994 MARCH 31, 1997 AND 1996 (UNAUDITED) 10. FEDERAL INCOME TAXES The provision for income taxes consisted of the following:
For the Three Months Ended March 31, For the Years Ended December 31, -------------------- -------------------------------- 1997 1996 1996 1995 1994 -------- ---------- --------- ---------- --------- Current $171,275 $63,337 $34,817 $151,285 $288,747 Deferred 9,436 8,840 44,248 46,523 52,456 -------- ------- ------- -------- -------- $180,711 $72,177 $79,065 $197,808 $341,203 ======== ======= ======= ======== ========
Total income tax expense differed from the amounts computed by applying the U.S. federal income tax rate of 34 percent to income before income taxes as follows:
For the Three Months Ended March 31, For the Years Ended December 31, ------------------- ----------------------------------- 1997 1996 1996 1995 1994 -------- -------- --------- ---------- ---------- Expected income tax expense at federal tax rate $183,274 $74,740 $ 89,317 $203,869 $348,818 Dividends received deduction (2,563) (2,563) (10,284) (8,122) (7,019) Other - - 32 2,061 (596) -------- ------- -------- -------- -------- Total income tax expense $180,711 $72,177 $ 79,065 $197,808 $341,203 ======== ======= ======== ======== ========
Deferred tax expense results from timing differences in the recognition of income and expense for tax and financial reporting purposes. The source and tax effect of these timing differences are as follows:
For the Three Months Ended March 31, For the Years Ended December 31, -------------------- -------------------------------- 1997 1996 1996 1995 1994 -------- ------ ------- ------- --------- FHLB stock dividends $9,436 $8,840 $36,631 $33,262 $26,330 Provision for bad-debts - - 7,617 13,077 25,297 Other - - - 184 829 ------ ------ ------- ------- ------- $9,436 $8,840 $44,248 $46,523 $52,456 ====== ====== ======= ======= =======
The components of deferred tax liabilities are summarized as follows:
March 31, December 31, ---------------------- 1997 1996 1995 ---------- ---------- ---------- FHLB stock dividends $ 296,672 $ 287,236 $ 250,605 Bad debt reserves 264,701 264,701 257,084 Unrealized appreciation on securities available for sale 1,135,179 1,150,235 827,300 ---------- ---------- ---------- $1,696,552 $1,702,172 $1,334,989 ========== ========== ==========
CONTINUED F-23 HOPKINSVILLE FEDERAL SAVINGS BANK NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1996, 1995 AND 1994 MARCH 31, 1997 AND 1996 (UNAUDITED) 10. FEDERAL INCOME TAXES (CONTINUED) Thrift institutions, in determining taxable income, have historically been allowed special bad debt deductions based on specified experience formulae or on a percentage of taxable income before such deductions. The bad debt deduction based on the latter has been gradually reduced to 8%. During August 1996, the President signed the Small Business Protection Act of 1996 that will, among other things, repeal the tax bad debt reserve method for thrifts effective for taxable years beginning after December 31, 1995. As a result, thrifts must recapture into taxable income the amount of their post- 1987 tax bad debt reserves over a six-year period beginning after 1995. This recapture can be deferred for up to two years if the thrift satisfies a residential loan portfolio test. The Bank is expected to recapture approximately $878,800 of its tax bad debt reserves into taxable income over six years as a result of this new law. The recapture will not have any effect on the Bank's financial statements because the related tax expense has already been accrued. Because of such repeal, thrifts such as the Bank may only use the same tax bad debt reserve that is allowed for banks. Accordingly, a thrift with assets of $500 million or less may only add to its tax bad debt reserves based upon its moving six-year average experience of actual loan losses (i.e., the experience method). A thrift with assets greater than $500 million can no longer use the reserve method and may only deduct loan losses as they actually arise (i.e., the specific charge-off method). The Bank expects to continue to use the reserve method. The portion of a thrift's tax bad debt reserve that is not recaptured (generally pre-1988 bad debt reserves) under this new law is only subject to recapture at a later date under certain circumstances. These include stock repurchase redemptions by the thrift or if the thrift converts to a type of institution (such as a credit union) that is not considered a bank for tax purposes. However, no further recapture would be required if the thrift converted to a commercial bank charter or was acquired by a bank. The Bank does not anticipate engaging in any transactions at this time that would require the recapture of its remaining tax bad debt reserves. Therefore, retained earnings at March 31, 1997, December 31, 1996 and 1995 includes approximately $4,027,400 which represents such bad debt deductions for which no deferred income taxes have been provided. The Bank made income tax payments of $285,991, $146,000 and $279,046 for the years ended December 31, 1996, 1995 and 1994, respectively. CONTINUED F-24 HOPKINSVILLE FEDERAL SAVINGS BANK NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1996, 1995 AND 1994 MARCH 31, 1997 AND 1996 (UNAUDITED) 11. RELATED PARTIES The Bank has entered into transactions with its directors and their affiliates (related parties). The aggregate amount of loans to such related parties at March 31, 1997 and December 31, 1996, was $228,987 and $230,490, respectively. During 1996, new loans to such related parties amounted to $55,976 and repayments amounted to $44,323. 12. 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. The Bank had open loan commitments at March 31, 1997 and December 31, 1996 of $1,497,600 and $919,375, respectively. 13. REGULATORY MATTERS The Financial Institutions Reform Recovery and Enforcement Act of 1989 ("FIRREA"), which instituted major reforms in the operation and supervision of the savings and loan industry, contains provisions for capital standards. These standards require savings institutions to have a minimum regulatory tangible capital (as defined in the regulation) equal to 1.50% of adjusted total assets and a minimum 3.00% core capital (as defined) of adjusted total assets. Additionally, savings institutions are required to meet a total risk-based capital requirement of 8.00%. The Bank is also subject to the provisions of the Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA"). FDICIA includes significant changes to the legal and regulatory environment for insured depository institutions, including reductions in insurance coverage for certain kinds of deposits, increased supervision by the Federal regulatory agencies, increased reporting requirements for insured institutions, and new regulations concerning reporting on internal controls, accounting and operations. FDICIA's prompt corrective action regulations define specific capital categories based on an institutions' capital ratios. The capital categories, in declining order, are "well capitalized", "adequately capitalized", "undercapitalized", "significantly undercapitalized", and "critically undercapitalized." Institutions categorized as "undercapitalized" or worse are subject to certain restrictions, including the requirement to file a capital plan with OTS, and increased supervisory monitoring, among other things. Other restrictions may be imposed on the institution either by the OTS or by the FDIC, including requirements to raise additional capital, sell assets, or sell the entire institution. CONTINUED F-25 HOPKINSVILLE FEDERAL SAVINGS BANK NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1996, 1995 AND 1994 MARCH 31, 1997 AND 1996 (UNAUDITED) 13. REGULATORY MATTERS (CONTINUED) The following chart delineates the categories as defined in the FDICIA legislation:
Tier I Risk- Total Risk- Core Capital Based Capital Based Capital -------------- -------------- -------------- "Well capitalized" 5.0% 6.0% 10.0% "Adequately capitalized" 4.0% 4.0% 8.0% "Undercapitalized" Less than 4.0% Less than 4.0% Less than 8.0% "Significantly undercapitalized" Less than 3.0% Less than 3.0% Less than 6.0%
At March 31, 1997, the Bank's core, tier I risk-based, and total risk-based capital ratios were 7.5%, 23.6%, and 20.9%, respectively. These ratios placed the Bank in the "well capitalized" category. The following is a calculation of the Bank's regulatory capital (in thousands) at March 31, 1997:
Tier I Total Risk- Risk- GAAP Based Tangible Core Based Capital Capital Capital Capital Capital ------- ------- --------- -------- -------- GAAP capital, as reported $17,236 $17,236 $17,236 $17,236 $17,236 Unrealized gains on certain available-for- sale securities - (2,204) (2,204) (2,204) General valuation allowance - - - 217 ------- ------- ------- ------- Regulatory capital $17,236 15,032 15,032 15,249 ======= Minimum capital requirement % 1.50% 3.00% 8.00% Minimum capital requirement $ 3,015 6,031 5,840 ------- ------- ------- Regulatory capital excess $12,017 $ 9,001 $ 9,409 ======= ======= =======
CONTINUED F-26 HOPKINSVILLE FEDERAL SAVINGS BANK NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1996, 1995 AND 1994 MARCH 31, 1997 AND 1996 (UNAUDITED) 13. REGULATORY MATTERS (CONTINUED) At December 31, 1996, the Bank's core, tier I risk-based, and total risk- based capital ratios were 7.3%, 23.1%, and 20.4%, respectively. These ratios placed the Bank in the "well capitalized" category. The following is a calculation of the Bank's regulatory capital (in thousands) at December 31, 1996:
Tier I Total Risk- Risk- GAAP Based Tangible Core Based Capital Capital Capital Capital Capital ------- ------- --------- -------- -------- GAAP capital, as reported $16,907 $16,907 $16,907 $16,907 $16,907 Unrealized gains on certain available-for- sale securities - (2,233) (2,233) (2,233) General valuation allowance - - - 217 ------- ------- ------- ------- Regulatory capital $16,907 14,674 14,674 14,891 ======= Minimum capital requirement % 1.50% 3.00% 8.00% Minimum capital requirement $ 3,032 6,065 5,846 ------- ------- ------- Regulatory capital excess $11,642 $ 8,609 $ 9,045 ======= ======= =======
CONTINUED F-27 HOPKINSVILLE FEDERAL SAVINGS BANK NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1996, 1995 AND 1994 MARCH 31, 1997 AND 1996 (UNAUDITED) 13. REGULATORY MATTERS (CONTINUED) At December 31, 1995, the Bank's core, tier I risk-based, and total risk- based capital ratios were 6.9%, 22.8%, and 20.7%, respectively. These ratios placed the Bank in the "well capitalized" category. The following is a calculation of the Bank's regulatory capital (in thousands) at December 31, 1995:
Tier I Total Risk- Risk- GAAP Based Tangible Core Based Capital Capital Capital Capital Capital ------- ------- --------- -------- -------- GAAP capital, as reported $16,097 $16,097 $16,097 $16,097 $16,097 Unrealized gains on certain available-for- sale securities - (1,606) (1,606) (1,606) General valuation allowance - - - 122 ------- ------- ------- ------- Regulatory capital $16,097 14,491 14,491 14,613 ======= Minimum capital requirement % 1.50% 3.00% 8.00% Minimum capital requirement $ 3,165 6,330 5,639 ------- ------- ------- Regulatory capital excess $11,326 $ 8,161 $ 8,974 ======= ======= =======
The OTS risk-based capital regulation also includes an interest rate risk ("IRR") component that requires savings institutions with greater than normal IRR, when determining compliance with the risk-based capital requirements, to maintain additional total capital. The OTS has, however, indefinitely deferred enforcement of its IRR requirements. Under the regulation, a savings institution's IRR is measured in terms of the sensitivity of its "net portfolio value" to changes in interest rates. A savings institution is considered to have a "normal" level of IRR exposure if the decline in its net portfolio value after an immediate 200 basis point increase or decrease in market interest rates is less than 2% of the current estimated economic value of its assets. If the OTS determines in the future to enforce the regulation's IRR requirements, a savings institution with a greater than normal IRR would be required to deduct CONTINUED F-28 HOPKINSVILLE FEDERAL SAVINGS BANK NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1996, 1995 AND 1994 MARCH 31, 1997 AND 1996 (UNAUDITED) 13. REGULATORY MATTERS (CONTINUED) from total capital, for purposes of calculating its risk-based capital requirement, an amount equal to one half the difference between the institution's measured IRR and 2%, multiplied by the economic value of the institution's total assets. Management does not believe that this regulation, when enforced, will have a material impact on the Bank. The United States Congress has passed legislation that resulted in an assessment on all Savings Association Insurance Fund ("SAIF") insured deposits in order to recapitalize the SAIF Fund. This one-time assessment amounted to approximately 66 basis points on SAIF assessable deposits held as of March 31, 1995. The assessment was payable no later than November 30, 1996 and amounted to approximately $1.23 million for the Bank. Such amount was charged to earnings at September 30, 1996. 14. PLAN OF CONVERSION On May 21, 1997, the Board of Directors adopted a Plan of Conversion to convert the Bank from a federally chartered mutual savings bank to a federally chartered stock savings bank, as a wholly-owned subsidiary of a holding company chartered under Delaware law by the Bank for the purpose of acquiring control of the Bank following consummation of the Bank's conversion. The sale of stock to be issued in the conversion must be offered first to members, and then, at the Bank's discretion, stock not purchased by members may be sold to the general public at the same price as is paid by members. Costs associated with the conversion will be deducted from the proceeds of the sale of stock. Should the conversion be abandoned, the costs of conversion will be charged to expense in the year of abandonment. At the time of conversion, the Bank will establish a liquidation account in the amount equal to the Bank's net worth as of the latest practicable date prior to conversion. The liquidation account will be maintained for the benefit of eligible deposit account holders who maintain their deposit accounts in the Bank after conversion. CONTINUED F-29 HOPKINSVILLE FEDERAL SAVINGS BANK NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1996, 1995 AND 1994 MARCH 31, 1997 AND 1996 (UNAUDITED) 14. PLAN OF CONVERSION (CONTINUED) In the event of a complete liquidation (and only in such an event) and prior to any payment to stockholders, each eligible deposit account holder will be entitled to receive a liquidation distribution from the liquidation account in an amount proportionate to the depositor's current adjusted balance for deposit accounts held before any liquidation. Except for the repurchase of stock and payment of dividends by the Bank, the existence of the liquidation account will not restrict the use or application of such net worth. The Bank may not declare or pay a cash dividend on or repurchase any of its capital stock if the effect thereof would cause the Bank's net worth to be reduced below the capital requirements imposed by the OTS. F-30 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 INVESTMENT BANK SERVICES, INC. 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...................................... i Risk Factors............................................ 1 Selected Financial Information And Other Data........... 5 Hopfed Bancorp, Inc..................................... 7 Hopkinsville Federal Savings Bank....................... 7 Use Of Proceeds......................................... 7 Dividend Policy......................................... 8 Capitalization.......................................... 10 Historical And Pro Forma Regulatory Capital Compliance.. 12 Pro Forma Data.......................................... 13 Proposed Management Purchases........................... 19 Management's Discussion And Analysis Of................. 21 Financial Condition And Results Of Operations........... 21 Business Of The Company................................. 34 Business Of The Bank.................................... 34 Regulation.............................................. 51 Taxation................................................ 56 Management Of The Company............................... 58 Management Of The Bank.................................. 58 The Conversion.......................................... 65 Certain Restrictions On Acquisition Of.................. 79 The Company And The Bank................................ 79 Certain Anti-Takeover Provisions In..................... 80 The Certificate Of Incorporation And Bylaws............. 80 Description Of Capital Stock............................ 84 Registration Requirements............................... 85 Legal Opinions.......................................... 85 Tax Opinions............................................ 85 Experts................................................. 85 Additional Information.................................. 86 Index To Financial Statements........................... F-1
UNTIL _________, 1997 (90 DAYS AFTER THE DATE OF THIS PROSPECTUS), 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. HOPFED BANCORP, INC. (Proposed Holding Company for Hopkinsville Federal Savings Bank) (LOGO) Up to 2,760,000 Shares COMMON STOCK ----------------- PROSPECTUS ----------------- Investment Bank Services, Inc. Friedman, Billings, Ramsey & Co., Inc. _________________, 1997 PART II: INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION. The following table sets forth the expenses in connection with the sale and distribution of the securities being registered hereby, including underwriting discounts and commissions. All such expenses are to be paid by the Registrant.
Underwriting fees and expenses........... $ 225,000 Legal fees and expenses.................. 110,000 Printing, postage and mailing............ 90,000* Accounting fees and expenses............. 100,000* Appraisal and business plan fees and expenses................................ 30,000* Blue Sky filing fees and expenses (including legal counsel)............... 10,000* Filing fees (OTS, SEC and NASD).......... 39,000* Conversion Agent fees.................... 15,000* Stock certificates....................... 5,000* Transfer Agent........................... 10,000* Other expenses........................... 16,000* --------- Total $ 650,000 =========
______________ * Estimated ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS. Directors, officers and employees of the Company and/or the Bank may be entitled to benefit from the indemnification provisions contained in the Delaware General Corporation Law (the "DGCL"), the Company's Certificate of Incorporation and federal regulations applicable to the Bank. The general effect of these provisions is summarized below: Delaware General Corporation Law - -------------------------------- Section 145 of the DGCL permits a Delaware corporation to indemnify any person who was or is a party or is threatened to be made a party to any proceeding of any type (other than an action by or in the right of the corporation), by reason of the fact that he is or was a director, officer, employee or agent of the corporation, or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, against expenses (including attorneys' fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by him in connection with such action, suit or proceeding if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the corporation, and, with respect to any criminal action or proceeding, had no reasonable cause to believe his conduct was unlawful. The termination of any action, suit or proceeding by judgment, order, settlement, conviction, or upon a plea of nolo contendere or its equivalent, may not, of itself, create a presumption that these standards have not been met. A Delaware corporation may also indemnify any person who was or is a party or is threatened to be made a party to any proceeding by or in the right of the corporation by reason of the fact that he is or was a director, officer, employee or agent of the corporation, or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise against expenses (including attorneys' fees) actually and reasonably incurred by him in connection with the defense or settlement of such action or suit if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the corporation. However, no indemnification may be made in respect of any claim, issue or matter as to which such person shall have been adjudged to be liable to the corporation unless and only to the extent that the Court of Chancery or the court in which such action or suit was brought determines upon application that such person is fairly and reasonably entitled to be indemnified. To the extent that a director, officer, employee or agent of a corporation has been successful on the merits or otherwise in defense of any proceeding described above, indemnification against expenses (including attorneys' fees) actually and reasonably incurred by him is mandatory. Any determination that indemnification of the director, officer, employee or agent is proper in the circumstances because he or she has met the applicable standard of conduct noted above must be made by a majority of the board of directors by a majority vote of a quorum consisting of directors who were not parties to such action, suit or proceeding, or if such a quorum is not obtainable, or, even if obtainable and a quorum of disinterested directors so directs, by independent legal counsel in a written opinion, or by the stockholders. Expenses (including attorneys' fees) incurred by an officer or director in defending any civil, criminal, administrative or investigative action, suit or proceeding may be paid by the corporation in advance of the final disposition of or proceeding upon receipt of an undertaking by or on behalf of such director or officer to repay such amount if it shall ultimately be determined that he is not entitled to be indemnified by the corporation. The indemnification and advancement of expenses provided by, or granted pursuant to, the other subsections of this section is not exclusive. In addition, a corporation shall have power to purchase and maintain insurance against any liability of individuals whom the corporation is required to indemnify. Article XV of the Certificate of Incorporation of the Company - ------------------------------------------------------------- In addition to the statutory provision described above, Article XV of the Company's Certificate of Incorporation also provides for indemnification. With certain exceptions, the indemnification provided for by Article XV is identical to the statutory provision. Article XV states explicitly, however, that the indemnification provided by the Article shall be deemed to be a contract between the Company and the persons entitled to indemnification thereunder and further provides the indemnification and advance payment of expenses provided thereunder continues even after the individual ceases to hold a position with the Company and inures to the benefit of his or her heirs, executors and administrators. Federal Regulations Providing for Indemnification of Directors and Officers of - ------------------------------------------------------------------------------ Hopkinsville Federal Savings Bank - --------------------------------- Federal regulations require that Hopkinsville Federal Savings Bank (the "Bank") indemnify any person against whom an action is brought by reason of that person's role as a director or officer of the Bank for (i) any judgments resulting from the action; (ii) reasonable costs and expenses (including attorney's fees) incurred in connection with the defense or settlement of such action; and (iii) reasonable costs and expenses (including attorney's fees) incurred in connection with enforcing the individual's indemnification rights against the Bank, assuming a final judgment is obtained in his favor. The mandatory indemnification provided for by federal regulations is limited to (i) actions where a final judgment on the merits is in favor of the officer or director and (ii) in the case of a settlement, final judgment against the director or officer or final judgment not on the merits, except as to where the director or officer is found negligent or to have committed misconduct in the performance of his or her duties, where a majority of the Board of Directors of the Bank determines that the director or officer was acting in good faith within what he was reasonably entitled to believe was the scope of his or her employment or authority for a purpose that was in the best interests of the Bank or its members or stockholders. In addition, the Bank has a director' and officers' liability policy providing for insurance against certain liabilities incurred by directors and officers of the Bank while serving in their capacities as such. ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES. None. ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES. The following is the list of exhibits filed as part of this Registration Statement and also serves as the Exhibit Schedule.
Exhibit Number Description -------------- ----------- 1.1 Engagement Letter with Investment Bank Services, Inc. * 1.2 Agency Agreement 2 Plan of Conversion of Hopkinsville Federal Savings Bank 3.1 Certificate of Incorporation of HopFed Bancorp, Inc. 3.2 Bylaws of HopFed Bancorp, Inc. 4 Form of Stock Certificate of HopFed Bancorp, Inc. 5 Opinion of Reinhart, Boerner, Van Deuren, Norris & Rieselbach, P.C. * 8.1 Federal Tax Opinion * 8.2 State Tax Opinion 8.3 Opinion of National Capital Companies, LLC, as to the value of subscription rights for tax purposes 10.1 Proposed Employment Agreement by and between Hopkinsville Federal Savings Bank and Bruce Thomas 10.2 Proposed Employment Agreement by and between HopFed Bancorp, Inc. and Bruce Thomas 23.1 Consent of Reinhart, Boerner, Van Deuren, Norris & Rieselbach, P.C. (in opinion filed as Exhibit 8.1) 23.2 Consent of York, Neel & Co. -- Hopkinsville, LLP 23.3 Consent of National Capital Companies, LLC 24 Power of Attorney (reference is made to the signature page) 27 Financial Data Schedule (for SEC Use Only) * 99.1 Proposed Stock Order Form and Form of Certification 99.2 Proxy Statement for Special Meeting of Members of Hopkinsville Federal Savings Bank; Form of Proxy * 99.3 Micsellaneous Solicitation and Marketing Material 99.4 Appraisal Report
_____________ * To be filed by amendment. ITEM 17. UNDERTAKINGS. (a) 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: (i) Including any prospectus required by Section 10(a)(3) of the Securities Act of 1933 ("Securities Act"). (ii) Reflect in the prospectus any facts or events arising after the effective date of the registration statement (or the most recent post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set forth 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 material information with respect to the plan of distribution not previously disclosed in the registration statement or any material change to such information in the registration statement. (2) That, for determining any liability under the Securities Act, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. (3) To file a post-effective amendment to remove from registration any of the securities being registered that remain unsold at the termination of the offering. (b) 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. (c) Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission, such indemnification is against public policy as expressed in the Securities Act, and is therefore unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue. SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the registrant has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Hopkinsville, Commonwealth of Kentucky, on the 27th day of June, 1997. HOPFED BANCORP, INC. By /s/ Bruce Thomas ------------------------------------------ Bruce Thomas President and Chief Executive Officer (Duly Authorized Representative) Each person whose signature appears below hereby appoints Bruce Thomas his or her true and lawful attorney-in-fact, with power to act and with full power of substitution, in any and all capacities, to sign any or all amendments (including post-effective amendments) to the Registration Statement and file the same with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorney-in-fact and agent full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he or she might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or their substitutes, may lawfully cause to be done by virtue hereof. Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed by the following persons on behalf of the Registrant in the capacities and on the dates indicated. Signature Title Date --------- ----- ---- /s/ Bruce Thomas Director, President and June 27, 1997 - ------------------------------ --- Bruce Thomas Chief Executive Officer (Principal Executive Officer) /s/ WD Kelly Chairman of the Board June 27, 1997 - ------------------------------ --- WD Kelly /s/ Peggy R. Noel Director, Vice President, June 27, 1997 - ----------------------------- --- Peggy R. Noel Chief Financial Officer and Treasurer (Principal Financial and Accounting Officer) /s/ Boyd M. Clark Director and Senior Vice June 27, 1997 - ------------------------------ --- Boyd M. Clark President -- Loan Administration /s/ David B. Bostick, Jr. Director June 27, 1997 - ------------------------------ --- David B. Bostick, Jr. /s/ Clifton H. Cochran Director June 27, 1997 - ------------------------------ --- Clifton H. Cochran /s/ Drury R. Embry Director June 27, 1997 - ------------------------------ --- Drury R. Embry /s/ Walton G. Ezell Director June 27, 1997 - ------------------------------ --- Walton G. Ezell /s/ John Noble Hall, Jr. Director June 27, 1997 - ------------------------------ --- John Noble Hall, Jr. /s/ Chester K. Wood Director June 27, 1997 - ------------------------------ --- Chester K. Wood EX-1.1 2 EXHIBIT 1.1 [LETTERHEAD OF INVESTMENT BANK SERVICES] December 26, 1996 Board of Directors Hopkinsville Federal Savings Bank 2700 Fort Campbell Blvd. Hopkinsville, Kentucky 42240 To the Directorate: The following sets forth the terms of the proposed engagement between Investment Bank Services, Inc. ("IBS"), a subsidiary of Professional Bank Services, Inc., Louisville, Kentucky, and Hopkinsville Federal Savings Bank, Hopkinsville, Kentucky ("Hopkinsville Federal") generally outlining the investment banking services to be provided by IBS, compensation to be paid to IBS, as well as the projected miscellaneous costs and expenses that Hopkinsville Federal will be responsible for in the conversion from a federally-chartered mutual savings bank to a capital stock form of organization. IBS will assist in the marketing of common shares of the stock savings company. The specific terms of the services that will be provided by IBS will be set forth in an Agency Agreement to be executed on the date the offering circular is declared effective by the Office of Thrift Supervision ("OTS"). The price of the shares to be offered in the Conversion will be the price established by Hopkinsville Federal's Board of Directors, based upon an independent appraisal which will ultimately be approved by the OTS. GENERAL The sale of common stock in the Conversion will involve a subscription and community offering. IBS will act as the sales agent and financial advisor to Hopkinsville Federal and in that capacity will exercise its best efforts to assist Hopkinsville Federal in the sale of the company's common stock. In connection with the drafting of the offering circular, IBS and its counsel will conduct a due diligence examination of Hopkinsville Federal as IBS deems necessary and appropriate. Board of Directors Hopkinsville Federal Savings Bank December 26, 1996 Page 2 IBS will train Hopkinsville Federal's directors, officers and other employees in the mechanics and regulatory requirements of the Conversion. IBS will set up a Stock Information Center for the stock offering. IBS will respond to inquiries concerning the Conversion and investment opportunity, as well as organize and participate in informational community meetings. IBS will help prepare management for any questions they may receive from Hopkinsville Federal's customers and community. The purpose of these meetings is to attract potential investors and relieve any customer anxiety that may arise during the Conversion. IBS will work closely with management, continually advising and updating management of market conditions and the community's responsiveness to the offering. IBS will be available to discuss the merits of an investment in the stock savings bank with prospective investors. COMPENSATION For its services, Hopkinsville Federal will pay IBS the following compensation and reimbursement for expenses: 1. A $25,000 non-refundable advisory fee payable upon execution of this document. A $155,000 sales fee payable upon the successful completion of the offering. 2. IBS shall be reimbursed for reasonable expenses incurred by them, including legal fees. These expenses are not to exceed $45,000, whether or not the Agency Agreement is consummated. Hopkinsville Federal will bear the costs associated with preparing the Blue Sky Memorandum, the filing and registration fees and legal counsel's fees relating to any required state securities law filings. It also is understood that Hopkinsville Federal will pay all other expenses of the Conversion including but not limited to NASD filing fees, telephone charges, airfreight, rental equipment and other necessary and reasonable expenses in connection with the Conversion. INDEMNIFICATION Hopkinsville Federal shall agree to indemnify IBS, its Directors, Officers and Employees to the maximum extent permitted by Kentucky law against any losses, actions, claims, damages, expenses or liabilities (collectively "Losses") arising out of any acts in connection with such engagement unless it is Board of Directors Hopkinsville Federal Savings Bank December 26, 1996 Page 3 determined by a court of competent jurisdiction that such Losses are primarily the result of IBS' willful misconduct or gross negligence. Hopkinsville Federal will reimburse IBS for all reasonable expenses as they are incurred by IBS in connection with investigating or defending any such actions or claims. This indemnification shall remain in full force and effect following the conclusion or termination of this engagement. The indemnification provision of this paragraph will be superseded by the indemnification provision of the Agency Agreement to be entered into by Hopkinsville Federal and IBS. MARKET MAKING IBS works closely with several market makers and brokers and depending upon the needs or requirements of Hopkinsville Federal, IBS will assist Hopkinsville Federal in identifying potential market makers to make a market in the stock. DOCUMENTS Hopkinsville Federal and its counsel will complete, file with the appropriate regulatory authorities and, as appropriate, amend from time to time, the information to be contained in Hopkinsville Federal's Application for Conversion and any related exhibits thereto. In this connection, Hopkinsville Federal and its counsel will prepare an offering circular and any other necessary disclosure documents relating to the offering of the common stock in conformance with applicable rules and regulations. As Hopkinsville Federal's sales agent and financial advisor, IBS will, in conjunction with its counsel, conduct an examination of the relevant documents and records of Hopkinsville Federal and will make such other reasonable investigation as deemed necessary and appropriate under the circumstances. Hopkinsville Federal agrees to make all such documents, records and other information deemed necessary by IBS, or its counsel, available to them upon reasonable request. IBS' counsel will prepare, subject to the approval of Hopkinsville Federal and its counsel, the Agency Agreement. This letter is merely a statement of intent and is not a binding legal agreement except as to the paragraph above with regard to the obligation to reimburse IBS for allowable expenses to be incurred prior to the execution of the Agency Agreement and the paragraph regarding indemnity. While IBS and Hopkinsville Federal agree in principle to the contents thereof and propose to proceed promptly, and in good faith, to work out the arrangements with Board of Directors Hopkinsville Federal Savings Bank December 26, 1996 Page 4 respect to the proposed offering and Agency Agreement, any legal obligation between IBS and Hopkinsville Federal shall be only as set forth in a duly executed Agency Agreement. We look forward to working with Hopkinsville Federal and appreciate the opportunity to submit this proposal. Should the above fairly reflect your desires, kindly acknowledge acceptance of this proposal below and return one copy to our office. Sincerely, /s/ Christopher L. Hargrove Christopher L. Hargrove President Accepted this 31st day of December, 1996. HOPKINSVILLE FEDERAL SAVINGS BANK HOPKINSVILLE, KENTUCKY By: /s/ Bruce Thomas ----------------------------- Bruce Thomas Title: PRESIDENT -------------------------- EX-2 3 EXHIBIT 2 HOPKINSVILLE FEDERAL SAVINGS BANK HOPKINSVILLE, KENTUCKY PLAN OF CONVERSION FROM MUTUAL TO STOCK ORGANIZATION 1. GENERAL. On May 21, 1997, the Board of Directors of Hopkinsville Federal Savings Bank, Hopkinsville, Kentucky (the "Bank"), after careful study and consideration, adopted by unanimous vote this Plan of Conversion (the "Plan"), which provides for the conversion of the Bank from a federally chartered mutual savings bank to a federally chartered 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 "Holding Company"). The conversion of the Bank to the Converted Bank and the acquisition of control of the Converted Bank by the Holding Company are collectively referred to herein as the "Conversion." The Plan supersedes the Plan of Conversion which was adopted by the Board of Directors on January 15, 1997, and terminated on May 21, 1997. Pursuant to the Plan, shares of common stock in the Holding Company (the "Conversion Stock") will be offered as part of the Conversion in a Subscription Offering pursuant to non-transferable Subscription Rights, at a predetermined and uniform price, first to Eligible Account Holders of record as of March 31, ----- 1996, second to 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, and fourth to Other Members of the Bank. Concurrently with the ------ Subscription Offering, shares not subscribed for in the Subscription Offering may be offered as part of the Conversion to the general public in a Community Offering. Shares remaining will 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. 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 Banks. Consummation of the Conversion is subject to the approval of the Plan and the Conversion by the OTS and by members of the Bank (the "Members") at a special meeting of the Members to be called to consider the Conversion by the affirmative vote of Members of the Bank holding not less than a majority of the total votes eligible to be cast. 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 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 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. Any person (as defined by 12 C.F.R. (S)563b.2(a)(26)) Acting 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 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, for purposes of Paragraphs VIII.F. and VIII.G.4. hereof, such term shall not include a Tax-Qualified Employee Stock Benefit Plan in which a person has a substantial beneficial interest or serves as a trustee in a similar fiduciary capacity, and, for purposes of Paragraph VIII.G.1. hereof, such term shall not include any Tax-Qualified Employee Stock Benefit Plan; 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 Hopkinsville Federal Savings Bank, in its form ----- as a federal mutual savings bank. 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 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 permanently reside in 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 Hopkinsville Federal --------------- Savings 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 March 31, 1996. -2- Eligible Account Holder: The term "Eligible Account Holder" means the ----------------------- holder of a Qualifying Deposit in the Bank on the Eligibility Record Date. FDIC: The term "FDIC" means the Federal Deposit Insurance Corporation or ----- any successor federal agency which insures deposit accounts held in savings associations. Form AC Application: The term "Form AC Application" means the application ------------------- submitted to the OTS for approval of the Conversion. H-(e)l Application: The term "H-(e)l Application" means the application to ------------------- the OTS on OTS Application H-(e)1, or OTS Application H-(e) I -S if applicable, for approval of the Holding Company's acquisition of all of the Capital Stock. Holding Company: The term "Holding Company" means a corporation to be ---------------- incorporated by the Bank under state law for the purpose of becoming a savings and loan holding company for the Converted Bank through the issuance and 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 in connection with the Conversion. 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 counties in which ---------------- the Bank's offices are located. 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 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, 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 ---------- 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 which provides for the ----- conversion of the Bank from a federally chartered mutual savings bank to a federally chartered stock savings bank (i.e., the Converted Bank) and the concurrent formation of the Holding Company for the Converted Bank. -3- Qualifying Deposit: The term "Qualifying Deposit" means a 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 SB-2 or other applicable form 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. 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 the Eligible Account Holders, Tax-Qualified Employee Stock Benefit Plans, Supplemental Eligible Account Holders and Other Members under the Plan, and, with respect to Eligible Account Holders, Supplemental Eligible Account Holders and Other Members, 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 if and to the extent 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 and Other Members to purchase Conversion Stock offered under the Plan in connection with the Conversion. Supplemental Eligibility Record Date: The term "Supplemental Eligibility ------------------------------------ Record Date" means the last day of the calendar quarter preceding the date of approval of the Plan by the OTS. Supplemental Eligible Account Holder: The term "Supplemental Eligible ------------------------------------ Account Holder" means the holder of a Qualifying Deposit in the Bank (other than Officers and directors of the Bank and their Associates) on the Supplemental Eligibility Record Date. -4- 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 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, or any successor provision thereof. A "non tax qualified employee stock benefit plan" means any defined benefit plan or defined contribution plan which is not so qualified. 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 approvals from the appropriate regulatory authorities for consummation of the Conversion in accordance with applicable laws and regulations. The following steps must be taken prior to receipt of such regulatory approvals: 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 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. As soon as practicable following the adoption of this Plan, the Bank shall file the Form AC Application, and the Holding Company shall file the Registration Statement and the H-(e)l Application. Upon receipt of notification from the OTS that the Form AC Application is properly executed and not materially incomplete, the Bank shall publish notice of the filing of the Form AC Application 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, and shall publish such other notices of the Conversion as may be required in connection with the H-(e)l Application by the regulations and policies of the OTS. 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 any gain or loss 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. -5- IV. MEETING OF MEMBERS. Upon receipt of all regulatory approvals required for consummation of the Conversion, the Bank shall convene the Special Meeting scheduled in accordance with the Bank's Bylaws to vote on the Plan. Promptly after receipt of OTS approval of the Form AC Application 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 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 Offering is not held concurrently with the proxy solicitation of Members for the Special Meeting. Pursuant to applicable regulations, an affirmative vote of the Members of at least a majority of the total votes eligible to be cast will be required for approval of the Plan. Voting may be in person or by proxy. By voting in favor of the adoption of the Plan and the Conversion, the Members will be voting in favor of the Conversion and the adoption by the Bank of the Federal Stock Charter and Bylaws in the forms attached as Exhibits A and B to this Plan. The OTS shall be notified of the actions of the Members at the Special Meeting promptly following the Special Meeting. V. SUMMARY PROXY STATEMENT. The Proxy Statement furnished to Members may be in summary form, provided that a statement is made in bold-faced 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 Offering is 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 consummation of the sale of the Conversion Stock shall be conditioned upon approval of the Plan by the Members at the Special Meeting. The Bank may require Eligible Account Holders, Supplemental Eligible Account Holders and Other Members 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 -6- 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 Form AC has 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 and bylaws to authorize the issuance of shares of Capital Stock and to conform to the requirements of a federal capital stock savings bank will be declared effective by the OTS, and the Bank will thereby be and become the Converted Bank. 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% 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. 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 the midpoint (the "the high end") to 15% below the midpoint (the "low end") of the Valuation 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 -7- subscriptions, provided the aggregate Purchase Price is not below the low end or more than 15% 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 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 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 Benefit Plans, Supplemental Eligible Account Holders and Other Members of the Bank pursuant to priorities established by applicable regulations. Shares of Conversion Stock having an aggregate value at least equal to the low end of the Valuation Range must be sold for the Conversion to be consummated, 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 to the extent the aggregate purchase price exceeds $500. The priorities established by OTS 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, non- transferable Subscription Rights to purchase Conversion Stock in an amount equal to the greater of $250,000, 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 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 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 both 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 Eligible 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 whose subscriptions remain unsatisfied on an equitable basis, related to the -8- amounts of their respective Qualifying Deposits, as compared to the total 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. 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 Form AC Application filed prior to OTS approval then each Supplemental Eligible Account Holder shall receive, without payment, non-transferable Subscription Rights to purchase Conversion Stock in an amount equal to the greater of $250,000, 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, respectively. 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 both 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 whose subscriptions remain unsatisfied on an equitable basis, related to the amounts of their respective Qualifying Deposits on the Supplemental Eligibility Record Date as compared to the total Qualifying Deposits of all subscribing Supplemental Eligible Account Holders in each case on the Supplemental Eligibility Record Date. -9- 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, non-transferable Subscription Rights to purchase Conversion Stock in an amount equal to the greater of $250,000 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, respectively. 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 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, giving preference to natural persons and trusts of natural persons who are permanent Residents of the Local Community, if such preference is both permitted by applicable law and approved by the Bank's Board of Directors in its sole discretion. 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 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 shall 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 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 per order basis 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. -10- 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, subject to the provisions of Paragraph VIII.C herein. 2. Purchases of Conversion Stock in the Community Offering by any person 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 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 31% of the shares of Conversion Stock issued in the Conversion. 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. Relatives who are neither Officers nor directors of the Bank or the Holding Company, or any of their subsidiaries, and who do not reside in the same home shall not be deemed to be Associates or a group Acting in Concert solely as a result of their relationships. 6. 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 $500,000 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. -11- Each person purchasing Conversion Stock in the Conversion shall, upon submission of a validity completed and executed Order Form, 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 in cash 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 or receive such cash shall be assignable by the Holding Company. G. Restrictions on and Other Characteristics of Stock Being Sold. ------------------------------------------------------------- 1. Transferability. --------------- Except as provided in Paragraph XIV 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 effective date of the Conversion except for any sale or transfer of such 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. Such transfer restrictions shall be in addition to any other restrictions on transferability imposed by applicable laws, regulations, charter or bylaw provisions or agreements. 2. Repurchase and Dividend Rights. ------------------------------ Subject to applicable regulations, the Holding Company may not, for a period of three years from the date of the Conversion, repurchase Holding Company Stock from any person, with the exception of (i) a repurchase on a pro rata basis pursuant to an offer approved by the OTS and made to all stockholders, or (ii) the repurchase of qualifying shares of a director. However, upon 10 days' written notification to the OTS Regional Director for the Converted Bank and the Chief Counsel's Office, Business Transactions Division of the OTS, 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; (ii) no repurchases -12- occur in the first year following the Conversion, or a waiver of such restriction is obtained; (iii) in the second and third years following the Conversion, the repurchases are part of an open-market stock repurchase program that allows no more than 5% of the then-outstanding Holding Company Stock to be purchased during any 12 month period; and (iv) the repurchases do not cause the Converted Bank to become "undercapitalized," as defined pursuant to 12 C.F.R. (S)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. 3. Voting Rights. ------------- After the Conversion, holders of Savings Accounts in and obligors on loans of the Bank will not have voting rights in the Converted Bank. The Holding Company will have exclusive voting rights with respect to the Capital Stock. Exclusive voting rights with respect to the Holding Company shall be vested in the holders of Holding Company Stock, and holders of Savings Accounts in and obligors on loans of the Converted Bank will not have any voting rights in the Holding Company except and to the extent that such persons become stockholders of the Holding Company. Subject to notice and record holder provisions of the Holding Company's bylaws, 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 Holding Company Stock owned by said stockholder. 4. Purchases by Officers, Directors and Associates Following --------------------------------------------------------- Conversion. ---------- Without the prior written 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 plans which may be attributable to Officers or directors may be made without OTS permission or the use of such 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 appropriate regulatory authorities, the approval of the Form AC by the OTS and the declaration of the effectiveness of the Registration Statement containing 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. -13- 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, and, in the case of orders submitted at an office of the Bank, executed Forms of Certification as required by OTS regulations, 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 payment by Tax-Qualified Employee Stock Benefit Plans for Conversion Stock may be made to the Bank concurrently with the completion of the Conversion. 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 may remain in the subscriber's Savings Account and 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 Form, 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 the 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 -14- 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 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 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 or qualification would be impracticable for reasons of cost or other-wise. 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. FEDERAL STOCK CHARTER AND BYLAWS. As part of the Conversion, a federal stock charter and bylaws shall 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 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 XV 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. -15- 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 the 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 (except with respect to voting and liquidation rights) as in effect prior to consummation of the Conversion. All Savings Accounts will continue to be insured by the FDIC up to the applicable limits of insurance coverage. All loans shall retain the same status after the Conversion as these loans had prior to Conversion. After the Conversion, holders of Savings Accounts in 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. Holders of Savings Accounts in and obligors on loans of the Converted Bank will not have any voting rights in the Holding Company except and to the extent that such persons become stockholders of the Holding Company, and the Holding Company will have exclusive voting rights with respect to the Capital Stock. XII. EFFECT OF CONVERSION. Upon consummation of the Conversion, the corporate existence of the Bank shall not cease, but the Converted Bank shall be deemed to be a continuation of the Bank, and shall succeed to all the rights, interests, duties and obligations of the Bank as in existence as of immediately prior to the consummation of the Conversion as described in Paragraph VII herein, including but not limited to all rights and interests of the Bank in and to its assets and properties, whether real, personal or mixed. XIII. 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 net worth 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 the 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 -16- 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 FDIC shall be considered to be a complete liquidation for these purposes. In such transactions, the Liquidation Account shall be assumed by the surviving institution. XIV. RESTRICTIONS ON ACQUISITION OF HOLDING COMPANY. A. 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 Bank, 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 or underwriters or a selling group acting on their behalf with a view towards public resale, 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 charter a provision that, for a specified period of up to 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 charter for such other provisions affecting the acquisition of Holding Company Stock as shall be determined by its Board of Directors. XV. 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 -17- EX-3.1 4 EXHIBIT 3.1 Exhibit 3.1 CERTIFICATE OF INCORPORATION OF HOPFED BANCORP, INC. ARTICLE I NAME The name of the corporation is HopFed Bancorp, Inc. (herein the "Corporation"). ARTICLE II REGISTERED OFFICE The address of the Corporation's registered office in the State of Delaware is 1209 Orange Street, Corporation Trust Center, in the City of Wilmington, County of New Castle. The name of the Corporation's registered agent at such address is The Corporation Trust Company. ARTICLE III POWERS The purpose for which the Corporation is organized is to act as a financial institution holding company and to transact all lawful business for which corporations may be incorporated pursuant to the laws of the State of Delaware. The Corporation shall have all the powers of a corporation organized under the General Corporation Law of the State of Delaware. ARTICLE IV TERM The Corporation shall have perpetual existence. ARTICLE V CAPITAL STOCK The aggregate number of shares of all classes of capital stock which the Corporation has authority to issue is 8,000,000, of which 7,500,000 are to be shares of common stock, $.01 par value per share, and of which 500,000 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 stockholders except as otherwise provided in this Article V or the rules of a national securities exchange 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: 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 holder, except as otherwise expressly set forth in this Certificate. 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, except as otherwise expressly set forth in this Certificate. B. Serial Preferred Stock. Except as provided in this Certificate, 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 (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 or 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 (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, except as otherwise expressly set forth in this Certificate. ARTICLE VI PREEMPTIVE RIGHTS No holder of any of the shares of any class or series of stock or of options, warrants or other rights to purchase shares of any class or series of stock or of other securities of the Corporation shall have any preemptive right to purchase or subscribe for any unissued stock of any class or series, or any unissued bonds, certificates of indebtedness, debentures or other securities convertible into or exchangeable for stock of any class or series or carrying any right to purchase stock of any class or series; but any such unissued stock, bonds, certificates or indebtedness, debentures or other securities convertible into or exchangeable for stock or carrying any right to purchase stock may be issued 3 pursuant to resolution of the board of directors of the Corporation to such persons, firms, corporations or associations, whether or not holders thereof, and upon such terms as may be deemed advisable by the board of directors in the exercise of its sole discretion. ARTICLE VII 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 stockholders, 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 VIII MEETINGS OF STOCKHOLDERS; 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 stockholders of the Corporation may be taken without a meeting, and the power of stockholders to consent in writing, without a meeting, to the taking of any action is specifically denied. B. Special meetings of the stockholders 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 stockholders of any class or series in the election of directors of the Corporation. D. Meetings of stockholders may be held at such place as the bylaws may provide. ARTICLE IX 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 stockholders may be made by the board of directors of the Corporation or by any stockholder of the Corporation entitled to vote generally in the election of directors. In order for a stockholder of the Corporation to make any such nominations and/or proposals, 4 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 thirty days nor more than sixty days prior to the date of any such meeting; provided, however, that if less than forty days' notice of the meeting is given to stockholders, such written notice shall be delivered or mailed, as prescribed, to the Secretary of the Corporation not later than the close of business on the tenth day following the day on which notice of the meeting was mailed to stockholders. Each such notice given by a stockholder 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 stockholder making such nomination shall promptly provide any other information reasonably requested by the Corporation. B. Each such notice given by a stockholder to the Secretary with respect to business proposals to be brought 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 stockholder proposing such business; (iii) the class and number of shares of the Corporation which are beneficially owned by the stockholder; and (iv) any material interest of the stockholder in such business. Notwithstanding anything in this Certificate to the contrary, no new business shall be conducted at the meeting except in accordance with the procedures set forth in this Article IX. C. The Chairman of the annual or special meeting of stockholders 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 special or annual meeting of the stockholders taking place thirty days or more thereafter. This provision shall not require the holding of any adjourned or special meeting of stockholders for the purpose of considering such defective nomination or proposal. ARTICLE X DIRECTORS A. Number; Vacancies. The number of directors of the Corporation shall be ----------------- such number, not less than five (5) nor more than fifteen (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 set forth from time to time by action by the board of directors, provided that no action shall be taken to decrease or increase the number of directors 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 stockholders 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 5 board of directors shall permit, with the terms of office of all members of one class expiring each year. Subject to the provisions of this Article X, should the number of directors not be equally divisible by three, the excess director or directors shall be assigned to Classes I or II as follows: (i) if there shall be an excess of one directorship over a number equally divisible by three, such extra directorship shall be classified in Class I; and (ii) if there be an excess of two directorships over a number equally divisible by three, one shall be classified in Class I and the other in Class II. At the first annual meeting of stockholders, 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 stockholders, 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 stockholders, 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 X. Notwithstanding the foregoing, and except as otherwise may be required by law or by the terms and provisions of the preferred stock of the Corporation, 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 stockholders. ARTICLE XI 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 stockholders 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 XI shall not apply with respect to the director or directors elected by such holders of preferred stock. 6 ARTICLE XII ACQUISITION OF CAPITAL STOCK A. Five-Year Prohibition. For the period of five years from the effective --------------------- date of the completion of the conversion of Hopkinsville Federal Savings Bank, Hopkinsville, Kentucky, 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 XIII. In addition, for a period of five years from the completion of the conversion of Hopkinsville Federal Savings Bank from mutual to stock form 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 XII, 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 Hopkinsville Federal Savings Bank from mutual to stock form, 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 XIII 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 their vote or consent. 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, prior to imposing the limitations of this paragraph B, of the outstanding shares of voting stock of the Corporation beneficially owned by such record holder by a fraction whose numerator is the number of votes equal to 10% of the shares of voting stock of the Corporation 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; any share held by such record holder in excess of the allocated amount as determined in accordance with the previous clause shall be entitled to cast one-hundredth of a vote. 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, voting or disposing of securities of the Corporation. The term "acquire" includes every type of acquisition, whether effected by purchase, exchange, operation of law or 7 otherwise. The term group "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 and Exchange Act of 1934, as in effect on the date of filing of this Certificate. D. Exclusion for Employee Benefit Plans, Directors, Officers, Employees -------------------------------------------------------------------- and Certain Proxies. The restrictions contained in this Article XII 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 XIII, by a stockholder of the Corporation or (iii) any employee benefit plans of the Corporation. In addition, the Continuing Directors, as defined in Article XIII, 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 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 XIII, 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 XII 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 XIII, shall have the power to construe and apply the provisions of this Article XII 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 XII to the given facts or (d) any other matter relating to the applicability or effect of this Article XII. Any constructions, applications, or determinations made by the Continuing Directors pursuant to this Article XII 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 stockholders. ARTICLE XIII APPROVAL OF CERTAIN BUSINESS COMBINATIONS The stockholder vote required to approve Business Combinations (as hereinafter defined) shall be as set forth in this Article XIII. 8 A. (1) Except as otherwise expressly provided in this Article XIII, 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; (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 XIII. (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 this Article XIII shall mean any transaction which is referred to in any one or more of subparagraphs A(l)(a) through (h) above. B. The provisions of paragraph A shall not be applicable to any particular Business Combination, and such Business Combination 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 exchange, if the Business Combination shall have been approved by a two-thirds vote 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. 9 C. For the purposes of this Article XIII 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, as amended), "beneficially owns" (as that term is defined in Rule 13d-3 of the General Rules and Regulations under the Securities Exchange Act of 1934, as amended) 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, as amended) 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% 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. ARTICLE XIV 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 its stockholders, when evaluating a Business Combination (as defined in Article XIII) or a tender or exchange offer, 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. 10 ARTICLE XV INDEMNIFICATION A. Persons. The Corporation shall indemnify, to the extent provided in ------- paragraphs B, D or F: (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 -- Derivative Suits. In case of a threatened, pending or -------------------------- completed action or suit by or in the right of the Corporation 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 expenses (including attorneys' fees but excluding amounts paid in settlement) actually and reasonably incurred by him in connection with the defense or settlement of the action or suit. C. Standard -- Derivative Suits. In case of a threatened, pending or ---------------------------- completed action or suit by or in the right of the Corporation, 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 or action, 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 XIII) not approved by the board of directors. However, he shall not be indemnified in respect of any claim, issue or matter as to which he has been adjudged liable to the Corporation unless (and only to the extent that) the court in which the suit was brought shall determine, upon application, that despite the adjudication but in view of all the circumstances, he is fairly and reasonably entitled to indemnity for such expenses as the court shall deem proper. D. Extent -- Nonderivative Suits. In case of a threatened, pending or ----------------------------- completed suit, action or proceeding (whether civil, criminal, administrative or investigative), other than a suit by or in the right of the Corporation, together hereafter referred to as a nonderivative 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 E, for amounts actually and reasonably incurred by him in connection with the defense or settlement of the nonderivative suit, including, but not limited to (i) expenses (including attorneys' fees), (ii) amounts paid in settlement, (iii) judgments, and (iv) fines. 11 E. Standard -- Nonderivative Suits. In case of a nonderivative 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 nonderivative 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 XIII) not approved by the board of directors and, with respect to any criminal action or proceeding, he had no reasonable cause to believe his conduct was unlawful. The termination of a nonderivative suit by judgment, order, settlement, conviction, or upon a plea of nolo contendere or its ---- ---------- equivalent shall not, in itself, create a presumption that the person failed to satisfy the standard of this subparagraph E(2). F. Determination That Standard Has Been Met. A determination that the ---------------------------------------- standard of paragraph C or E has been satisfied may be made by a court, or, except as stated in subparagraph C(2) (second sentence), 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 stockholders of the Corporation. G. Proration. Anyone making a determination under paragraph F 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. H. Advance Payment. The Corporation shall pay in advance any expenses --------------- (including attorneys' fees) which may become subject to indemnification under paragraphs A through G 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 G. I. Nonexclusive. The indemnification and advance payment of expenses ------------ provided by paragraphs A through H shall not be exclusive of any other rights to which a person may be entitled by law, bylaw, agreement, vote of stockholders or disinterested directors, or otherwise. J. Continuation. The indemnification provided by this Article XV 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 XV 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 12 brought based in whole or in part upon any such state of facts. The indemnification and advance payment provided by paragraphs A through H 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. K. 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 H. L. Intention and Savings Clause. It is the intention of this Article XV ---------------------------- to provide for indemnification to the fullest extent permitted by the General Corporation Law of the State of Delaware, and this Article XV shall be interpreted accordingly. If this Article XV 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 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 XV that shall not have been invalidated and to the full extent permitted by applicable law. If the General Corporation Law of the State of Delaware is amended, or other Delaware law is enacted, to permit further or additional indemnification of the persons defined in paragraph A of this Article XV, then the indemnification of such persons shall be to the fullest extent permitted by the General Corporation Law of the State of Delaware, as so amended, or such other Delaware law. ARTICLE XVI LIMITATIONS ON DIRECTORS' LIABILITY A director of the Corporation shall not be personally liable to the Corporation or its stockholders 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 stockholders, (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 174 of the General Corporation Law of the State of Delaware, or (iv) for any transaction from which the director derived any improper personal benefit. If the General Corporation Law of the State of Delaware or other Delaware law is amended or enacted after the date of filing of this Certificate to further eliminate or limit 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 General Corporation Law of the State of Delaware, as so amended, or such other Delaware law. Any repeal or modification of this Article XVI by the stockholders 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 XVII 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 two- thirds of the board of directors. Notwithstanding any other provision of 13 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 stockholders of the Corporation except by the 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 stockholders 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 XVIII 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 stockholders herein are granted subject to this reservation. Notwithstanding the foregoing, the provisions set forth in Articles VIII, IX, X, XI, XII, XIII, XIV, XV, XVI, XVII and this Article XVIII 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 stockholders called for that purpose (provided that notice of such proposed repeal, alteration, amendment or rescission is included in the notice of such meeting); except that such repeal, alteration, amendment or rescission may be made by 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 (considered for this purpose as a single class) if the same is first approved by a majority of the Continuing Directors, as defined in Article XIII of this Certificate. ARTICLE XIX INCORPORATOR The name and mailing address of the incorporator are as follows: Name Mailing Address ---- --------------- Edward B. Crosland, Jr. Reinhart, Boerner, Van Deuren,Norris & Rieselbach, P.C. 601 Pennsylvania Avenue, N.W. North Building, Suite 750 Washington, D.C. 20004 14 ARTICLE XX INITIAL DIRECTORS The number of directors constituting the initial board of directors of the Corporation is ten (10), and the names and 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 David B. Bostick, Jr. 2700 Fort Campbell Boulevard I (1998) Hopkinsville, Kentucky 42240 Boyd M. Clark 2700 Fort Campbell Boulevard II (1999) Hopkinsville, Kentucky 42240 Clifton H. Cochran 2700 Fort Campbell Boulevard I (1998) Hopkinsville, Kentucky 42240 Drury R. Embry 2700 Fort Campbell Boulevard III (2000) Hopkinsville, Kentucky 42240 Walton G. Ezell 2700 Fort Campbell Boulevard I (1998) Hopkinsville, Kentucky 42240 John Noble Hall, Jr. 2700 Fort Campbell Boulevard II (1999) Hopkinsville, Kentucky 42240 WD Kelley 2700 Fort Campbell Boulevard I (1998) Hopkinsville, Kentucky 42240 Peggy R. Noel 2700 Fort Campbell Boulevard III (2000) Hopkinsville, Kentucky 42240 Bruce Thomas 2700 Fort Campbell Boulevard III (2000) Hopkinsville, Kentucky 42240 Chester K. Wood 2700 Fort Campbell Boulevard II (1999) Hopkinsville, Kentucky 42240 15 I, THE UNDERSIGNED, being the incorporator hereinbefore named, for the purpose of forming a corporation pursuant to the General Corporation Law of the State of Delaware, do make this Certificate, hereby declaring and certifying that this is my act and deed and the facts herein stated are true and accordingly have hereunto set my hand this _____ day of May, 1997. Edward B. Crosland, Jr. ----------------------- Incorporator 16 EX-3.2 5 EXHIBIT 3.2 Exhibit 3.2 BYLAWS OF HOPFED BANCORP, INC. ARTICLE I PRINCIPAL EXECUTIVE OFFICE The principal executive office of HopFed Bancorp, Inc. (the "Corporation") shall be at 2700 Fort Campbell Boulevard, Hopkinsville, Kentucky. The Corporation may also have offices at such other places within or outside of the Commonwealth of Kentucky as the board of directors shall from time to time determine. ARTICLE II STOCKHOLDERS SECTION 1. Place of Meetings. All annual and special meetings of ----------------- stockholders shall be held at the principal executive office of the Corporation or at such other place within or outside of the State of Delaware as the board of directors may determine and as designated in the notice of such meeting. SECTION 2. Annual Meeting. A meeting of the stockholders 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 stockholders for any ---------------- purpose or purposes may be called at any time by the board of directors or by a committee of the board of directors 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 chairman or the chief executive officer of the Corporation shall 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 fifty days before 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 United States mail, addressed to the stockholder at his address as it appears on the stock transfer books or records of the Corporation as of the record date prescribed in Section 6, with postage thereon prepaid. If a stockholder is present at a meeting, or in writing waives notice thereof before or after the meeting, notice of the meeting to such stockholder shall be unnecessary. When any stockholders' meeting, either annual or special, is adjourned for thirty 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 thirty days 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 --------------------- stockholders entitled to notice of or to vote at any meeting of stockholders, or any adjournment thereof, 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 sixty days, and in case of a meeting of stockholders not less than ten 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 thereof. SECTION 7. Voting Lists. The officer or agent having charge of the stock ------------ transfer books for shares of the Corporation shall make, at least ten days before each meeting of stockholders, a complete record of the stockholders entitled to vote at such meeting or any adjournment thereof, with the address of and the number of shares held by each. The record, for a period of ten days before such meeting, shall be kept on file at the principal office of the Corporation, whether within or outside the State of Florida, and shall be subject to inspection by any stockholder for any purpose germane to the meeting at any time during usual business hours. Such record shall also be produced and kept open at the time and place of the meeting and shall be subject to the inspection of any stockholder for any purpose germane to the meeting during the whole time of the meeting. The original stock transfer books shall be prima facie evidence as to who are the stockholders entitled to examine such record or transfer books or to vote at any meeting of stockholders. 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 stockholders. 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 stockholders present at a duly organized meeting may continue to transact business until adjournment, notwithstanding the withdrawal of enough stockholders to leave 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 after eleven months from the date of its execution unless otherwise provided in the proxy. SECTION 10. Voting. At each election for directors every stockholder ------ entitled to vote at such election shall be entitled to one vote for each share of stock held. Unless otherwise provided by the Certificate of Incorporation, by statute, or by these Bylaws, a majority of those votes cast by stockholders at a lawful meeting shall be sufficient to pass on a transaction or matter, except in the election of directors, which election shall be determined by a plurality of the votes of the shares present in person or by proxy at the meeting and entitled to vote on the election of directors. 2 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 stockholders of the Corporation 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 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, but no votes shall be cast for such stock if a majority cannot agree. 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. 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 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 in determining the total number of outstanding shares at any given time for purposes of any meeting. SECTION 13. Inspectors of Election. In advance of any meeting of ---------------------- stockholders, 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 stockholders. 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 3 twenty 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 stockholders 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. 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 chairman shall preside at all meetings of the board of directors. SECTION 2. Term and Election. The board of directors 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 at such time and place as shall be determined by resolution of the board of directors 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. 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 5. 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. 4 SECTION 6. 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 5 of this Article III. SECTION 7. 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 General Corporation Law of the State of Delaware. SECTION 8. 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 9. 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. Unless otherwise specified therein such resignation shall take effect upon receipt thereof by the chairman. SECTION 10. 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 stockholders held for that purpose. The term of such director shall be in accordance with the provisions of the Corporation's Certificate of Incorporation. SECTION 11. 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 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. ARTICLE IV COMMITTEES OF THE BOARD OF DIRECTORS 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 appointed by a majority of the whole board. 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 shall have power 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, 5 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. 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 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 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. 6 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. 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, including in facsimile form, 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 the chairman of the board of directors or the president or a vice president and by the treasurer or an assistant treasurer or the secretary or an assistant secretary of the Corporation, and may be sealed with the seal of the Corporation or a facsimile thereof. Any or all of the signatures upon a certificate may be facsimiles if the certificate is countersigned by a transfer agent, or registered by a registrar, other than the Corporation itself or an employee of the Corporation. If any officer who has signed or whose facsimile signature has been placed upon such certificate shall have ceased to be such officer before the certificate is issued, it may be issued by the Corporation with the same effect as if he were such officer at the date of its 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 stockholder upon request and without charge a full statement of the designations, preferences, limitations, and relative rights of the shares of each class authorized to be issued, the variations in the relative rights and preferences between the shares of each such series so far as the same have been fixed and determined, and the authority of the board of directors to fix and determine the relative rights and preferences of subsequent series. Each certificate representing shares shall state upon the face thereof: That the Corporation is incorporated under the laws of the State of Delaware; 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 7 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. 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 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 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 December 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 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. 8 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 stockholders 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 stockholders 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 two-thirds of the board of directors at a legal meeting held in accordance with the provisions of these Bylaws. 9 EX-4 6 EXHIBIT 4 HOPFED BANCORP, INC. Number__________ __________SHARES INCORPORATED UNDER THE LAWS OF THE STATE OF DELAWARE COMMON STOCK CUSIP__________ $.01 PAR VALUE THIS CERTIFIES THAT_____________________________________________________________ is the owner of _____________ fully paid and nonassessable shares of the common stock of HOPFED BANCORP, INC. (the "Corporation"), a corporation formed under the laws of the State of Delaware. The shares represented by this Certificate are transferable only on the books of the Corporation by the holder of record thereof, in person or by his or her duly authorized attorney or legal representative, upon surrender of this Certificate properly endorsed. The capital stock evidenced by this Certificate is not an account of an insurable type and is not insured by the Savings Association Insurance Fund administered by the Federal Deposit Insurance Corporation. This Certificate is not valid until countersigned 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 signatures of its duly authorized officers. DATED: _____________________ By:_________________________ By:__________________________ Corporate Secretary President HOPFED BANCORP, INC. 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 offices of the Corporation), to all of which the holder by acceptance hereof assents. The Corporation will furnish to any stockholder upon request and without charge a full statement of the powers, designations, preferences and relative, participating, optional or other special rights of each authorized class of stock or series thereof and the qualifications, limitations or restrictions of such preferences and/or rights, to the extent that the same have been fixed, and of the authority of the board of directors to designate the same with respect to other series. Such request may be made in writing to the Secretary of the Corporation. The following abbreviations, when used in the inscription on the face of this Certificate, shall be construed as though they were written out in full according to applicable laws or regulations:
TEN COM -- as tenants in common UNIF GIFT MIN ACT -- ..........Custodian.......... TEN ENT -- as tenants by the entireties (Cust) (Minor) JT TEN -- as joint tenants with right of under Uniform Gifts to Minors survivorship and not as Act.......................... tenants in common (State) UNIF TRANS MIN ACT --....................Custodian (Cust) (Minor) under Uniform Transfers to Minors Act................... (State)
Additional abbreviations may also be used though not in the above list. 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 in the premises. Dated __________________________ _________________________________________ Signature _________________________________________ Signature NOTICE: THE SIGNATURE(S) 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. SIGNATURE(S) GUARANTEED: _____________________________________________________ The signature(s) should be guaranteed by an eligible guarantor institution (banks, stockbrokers, savings and loan associations and credit unions with member ship in an approved signature guarantee medallion program), pursuant to SEC Rule 17Ad-15. EX-5 7 EXHIBIT 5 Exhibit 5 [Letterhead of Reinhart, Boerner, Van Deuren, Norris & Rieselbach P.C.] June 25, 1997 Board of Directors HopFed Bancorp, Inc. 2700 Fort Campbell Boulevard Hopkinsville, Kentucky 42240 RE: Registration Statement on Form S-1 Ladies and Gentlemen: You have requested our opinion as special counsel to HopFed Bancorp, Inc. (the "Corporation") in connection with the Registration Statement on Form S-1 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 Hopkinsville Federal Savings 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 Opinions." Very truly yours, REINHART, BOERNER, VAN DEUREN, NORRIS & RIESELBACH, P.C. By: /s/ Edward B. Crosland, Jr. ---------------------------- Edward B. Crosland, Jr. EX-8.3 8 EXHIBIT 8.3 Exhibit 8.3 [LETTERHEAD OF NATIONAL CAPITAL COMPANIES, LLC] June 17, 1997 Board of Directors Hopkinsville Federal Savings Bank 2700 Fort Campbell Boulevard Hopkinsville, Kentucky 41192 RE: Subscription Rights - Mutual to Stock Conversion of Hopkinsville Federal Savings Bank Ladies and Gentlemen: The purpose of this letter is to provide an opinion on the value of the nontransferable subscription rights in connection with the conversion of Hopkinsville Federal Savings Bank (the "Bank") from, federal mutual savings bank to a federal stock savings bank and the issuance of common stock pursuant to the Bank's Plan of Conversion. The shares of common stock are to be offered pursuant to nontransferable subscription rights in a subscription offering. The shares of common stock are to be issued in the Conversion at a purchase price of $10.00 per share with subscription rights being granted to certain depositors of the Bank, the Bank's tax-qualified employee stock benefit plan (the ESOP) and to certain other members of the Bank. The subscription rights will be acquired by such recipients without cost, will be nontransferable and of short duration (expiring prior to the closing of the stock offering), and will afford the recipients the right only to purchase shares of common stock at the same price as may be paid by the general public in a community offering. Based on these facts, we are of the opinion that: (1) The subscription rights will have no ascertainable fair market value, and; (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 the exercise. Further, it is our opinion that the subscription rights will have no economic value on the date of distribution or at the time of exercise, whether or not a community public offering takes place. Board of Directors June 17, 1997 Page 2 Our opinion is not and should not be considered a recommendation of any kind as to the desirability of purchasing common shares being offered in the Conversion. Nor is our opinion to be considered advice as to the potential future value of the common stock being offered. Sincerely, NATIONAL CAPITAL COMPANIES, LLC /s/ Stephen Clinton Stephen Clinton President EX-10.1 9 EXHIBIT 10.1 Exhibit 10.1 EMPLOYMENT AGREEMENT -------------------- THIS AGREEMENT is entered into as of the ___ day of _______, l997, by and between Hopkinsville Federal Savings Bank (the "Bank") and ________________ (the "Employee"). WHEREAS, the Employee has heretofore been employed by the Bank as its __________________________ and is experienced in all phases of the business of the Bank; and WHEREAS, the parties desire by this writing to establish and to set forth the continuing employment relationship between the Bank and the Employee. NOW, THEREFORE, it is AGREED as follows: 1. Employment. The Employee is hereby employed as the ___________________ ---------- ___________ of the Bank. The Employee shall render such administrative and management services for the Bank 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 permitted by law, the business of the Bank. The Employee's other duties shall be such as the Board of Directors of the Bank (the "Board") may from time to time reasonably direct, including normal duties as an officer of the Bank. 2. Base Compensation. The Bank 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. 3. Discretionary Bonuses. The Employee shall participate in an equitable --------------------- manner with all other senior management employees of the Bank in discretionary bonuses that the Board may award from time to time to the Bank'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. 4. (a) Participation in Retirement, Medical and Other Plans. The ---------------------------------------------------- Employee shall be entitled to participate in any plan that the Bank maintains for the benefit of its employees if the plan relates to (i) pension, profit- sharing, or other retirement benefits, (ii) medical insurance or the reimbursement of medical or dependent care expenses, or (iii) other group benefits, including disability and life insurance plans. (b) Employee Benefits; Expenses. The Employee shall participate in --------------------------- any fringe benefits that are or may become available to the Bank's senior management employees, including, for example: any stock option or incentive compensation plans, club memberships, and any other benefits that 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 that shall incur in connection with his services under this Agreement upon substantiation of such expenses in accordance with the policies of the Bank. 5. Term. The Bank hereby employs the Employee, and the Employee hereby ---- accepts such employment under this Agreement, for the period commencing on the effective date of the Federal Stock Charter of the Bank (the "Effective Date") and ending twelve (12) months thereafter (or such earlier date as is determined in accordance with Section 9 hereof). Additionally, on each annual anniversary date from the Effective Date, this Agreement and the Employee's term of employment shall be extended for an additional one-year period beyond the then effective expiration date, provided that 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. 6. Loyalty; Full Time and Attention. -------------------------------- (a) During the period of his employment hereunder and except for illness, 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 that, from time to time, the Employee may serve on the board of directors of, and hold any other offices or positions in, companies or organizations, that will not present any conflict of interest with the Bank 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 Bank, or be gainfully employed in any other position or job other than as provided above. (b) Nothing contained in this Section 6 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 Bank, or, solely as a passive or minority investor, in any business. 7. 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 Bank will provide the Employee with the working facilities and staff customary for similar executive officers and necessary for him to perform his duties. 8. Vacation and Sick Leave. The Employee shall be entitled, without loss ----------------------- of pay, to absent himself voluntarily from the performance of his duties under this Agreement in accordance with the terms set forth below, 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 periodically established by the Board for senior management employees of the Bank. 2 (b) The Employee shall not receive any additional compensation from the Bank on account of his failure to take a vacation, and the Employee shall not accumulate unused vacation 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 obligations with the Bank for such additional periods of time and for such valid and legitimate reasons as the Board may in its discretion approve. 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 the 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. 9. Termination and Termination Pay. Subject to Section 11 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. The Bank may terminate the Employee's employment ---------- after having established, through a determination by the Board, the Employee's Disability. For purposes of this Agreement, "Disability" means a physical or mental infirmity that impairs the Employee's ability to substantially perform his duties under this Agreement and that results in the Employee becoming eligible for long-term disability benefits under the Bank's long-term disability plan (or, if the Bank has no such plan in effect, that 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 that is prior to the Employee's termination of employment pursuant to this Section 9(b); provided that any benefits paid pursuant to the Bank's long-term disability plan will continue as provided in such plan. (c) For 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. Termination for "Just Cause" shall mean termination because of, in the good faith determination of the Board, 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. Notwithstanding 3 the foregoing, the Employee shall not be deemed to have been terminated for Just Cause unless there shall have been delivered to the Employee a copy of a resolution duly adopted by the affirmative vote of not less than a majority of the entire membership of the Board (excluding the Employee if a member of the Board) at a meeting of the Board called and held for the purpose (after reasonable notice to the Employee and an opportunity for the Employee to be heard before the Board), finding that in the good faith opinion of the Board the Employee was guilty of conduct set forth above in the second sentence of this Subsection (c) and specifying the particulars thereof in detail. (d) Without Just Cause. Subject to the provisions of Section 11 ------------------ hereof, the Board may, by written notice to the Employee, immediately terminate his employment at any time for any reason; provided that, if such termination is for any reason other than pursuant to Sections 9(a), (b) or (c) above, the Employee shall be entitled to receive the following compensation and benefits: (i) the salary provided pursuant to Section 2 hereof, up to the date of expiration of the term (including any renewal term then in effect) of this Agreement (the "Termination Date") and (ii) the cost to the Employee of obtaining all health, life, disability and other benefits (excluding any bonus, stock option or other compensation benefits) in which the Employee would have been eligible to participate through the Termination Date based upon the benefit levels substantially equal to those that the Bank provided for the Employee at the date of termination of employment. Said sum shall be paid, at the option of the Employee, either (I) in periodic payments over the remaining term of this Agreement, as if the Employee's employment had not terminated, or (II) in one lump sum within ten (10) days of such termination. (e) Termination or Suspension Under Federal Law. -------------------------------------------- (1) If the Employee is removed and/or permanently prohibited from participating in the conduct of the Bank'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. (S) 1818(e)(4) or (g)(1)), all obligations of the Bank under this Agreement shall terminate, as of the effective date of the order, but vested rights of the parties shall not be affected. (2) If the Bank 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 9(e)(ii) shall not affect the vested rights of the parties. (3) All obligations under this Agreement shall terminate, except to the extent that continuation of this Agreement is necessary for the continued operation of the Bank: (A) by the Director of the Office of Thrift Supervision ("OTS"), or his or her designee, at the time that the Federal Deposit Insurance Corporation ("FDIC") enters into an agreement to provide assistance to or on behalf of the Bank under the authority contained in Section 13(c) of the FDIA; or (B) 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 Bank or when the Bank 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. 4 (4) If a notice served under Section 8(e)(3) or (g)(1) of the FDIA (12 U.S.C. (S) 1818(e)(3) or (g)(1)) suspends and/or temporarily prohibits the Employee from participating in the conduct of the Bank's affairs, the Bank'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 Bank may in its discretion (A) pay the Employee all or part of the compensation withheld while its contract obligations were suspended, and (B) reinstate (in whole or in part) any of its obligations that were suspended. (f) Voluntary Termination by Employee. Subject to the provisions --------------------------------- of Section 11 hereof, the Employee may voluntarily terminate employment with the Bank during the term of this Agreement, upon at least sixty (60) days' prior written notice to the Board, in which case the Employee shall receive only his compensation, vested rights and employee benefits accrued up to the date of his termination. (G) LIMITATION BY SECTION 18(K) OF THE FDIA. NOTWITHSTANDING ANYTHING --------------------------------------- HEREIN TO THE CONTRARY, ANY PAYMENTS MADE TO THE EMPLOYEE PURSUANT TO THIS AGREEMENT, OR OTHERWISE, ARE SUBJECT TO AND CONDITIONED UPON THEIR COMPLIANCE WITH SECTION 18(K) OF THE FDIA (12 U.S.C. (S) 1828(K)) AND ANY REGULATIONS PROMULGATED THEREUNDER. 10. 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. 11. Change in Control. ----------------- (a) Notwithstanding any provision herein to the contrary, if the Employee's employment under this Agreement is terminated by the Bank, without the Employee's prior written consent and for a reason other than for Just Cause, death or disability in connection with or twelve (12) months after any change in control of the Bank or HopFed Bancorp, Inc. (the "Company") which has not been approved in advance by a two-thirds vote of the full Board of Directors of each of the Bank and the Company, the Employee shall be paid an amount equal to the difference between (i) the product of 2.99 times his "base amount" as defined in Section 280G(b)(3) of the Internal Revenue Code of 1986, as amended (the "Code") and regulations promulgated thereunder, and (ii) the sum of any other "parachute payments" (as defined under Section 280G(b)(2) of the Code) 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 such termination. The term "change in control" shall mean (1) a change in the ownership, holding or power to vote more than 25% of the Bank's or Company's voting stock, (2) a change in the ownership or possession of the ability to control the election of a majority of the Bank's or Company's directors, or (3) a change in the ownership or possession of the ability to exercise a controlling influence over the management or policies of the Bank or the Company by any person or by persons acting as a "group" (within the meaning of Section 13(d) of the Securities and Exchange Act of 1934) (except that, in the case of (1), (2) and (3) hereof, ownership or control of the Bank or its directors by the Company itself shall not constitute a change in control. The term "person" means 5 an individual other than the Employee, or a corporation, partnership, trust, association, joint venture, pool, syndicate, sole proprietorship, unincorporated organization or any other form of entity not specifically listed herein. (b) Notwithstanding the foregoing, but only to the extent required under federal banking law, the amount payable under Section 11(a) hereof shall be reduced to the extent that on the date of the Employee's termination of employment, the amount payable under Section 11(a) exceeds the limitation on severance benefits set forth in Regulatory Bulletin 27a of the Office of Thrift Supervision, as in effect on such termination date. (c) In the event that any dispute arises between the Employee and the Bank as to the terms or interpretation of this Agreement, including this Section 11, whether instituted by formal legal proceedings or otherwise, including an action that Employee takes to enforce the terms of this Section 11 or to defend against any action taken by the Bank, the Employee shall be reimbursed for all costs and expenses, including reasonable attorneys' fees, arising from such disputes or proceedings, provided that the Employee shall have obtained a final judgment by a court of competent jurisdiction in his favor. Such reimbursement shall be paid within ten (10) days of Employee's providing the Bank with written evidence, which may be in the form, among others, of a canceled check or receipt, of any costs or expenses incurred by the Employee. 12. Successors and Assigns. ---------------------- (a) This Agreement shall inure to the benefit of and be binding upon any corporate or other successor of the Bank that shall acquire, directly or indirectly, by merger, consolidation, purchase or otherwise, all or substantially all of the assets or stock of the corporation. (b) Since the Bank 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 Bank. 13. 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. 14. Applicable Law. This Agreement shall be governed in all -------------- whether as to its validity, construction, capacity, performance or otherwise, by the laws of the Commonwealth of Kentucky, except to the extent that Federal law shall be deemed to apply. 15. 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 16. 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 above written. ATTEST: HOPKINSVILLE FEDERAL SAVINGS BANK _____________________________ By:_______________________________ Secretary Its: WITNESS: _____________________________ __________________________________ _____________________("Employee") 7 EX-10.2 10 EXHIBIT 10.2 EXHIBIT 10.2 EMPLOYMENT AGREEMENT -------------------- THIS AGREEMENT is entered into as of the ___ day of _______, l997, by and between HopFed Bancorp, Inc. (the "Company") and ________________ (the "Employee"). WHEREAS, the Employee has heretofore been employed by Hopkinsville Federal Savings Bank (the "Bank") as its __________________________, is experienced in all phases of the business of the Bank, and has become the ______ of the Company; and WHEREAS, the parties desire by this writing to establish and to set forth the continuing employment relationship between the Company and the Employee. NOW, THEREFORE, it is AGREED as follows: 1. Employment. The Employee is hereby employed as the _________________ ---------- __________of the Company. The Employee shall render such administrative and management services for the Company 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 permitted by law, the business of the Company. The Employee's other duties shall be such as the Board of Directors of the Company (the "Board") may from time to time reasonably direct, including normal duties as an officer of the Company. 2. Consideration from Company: Joint and Several Liability. In lieu of ------------------------------------------------------- paying the Employee a base salary during the term of this Agreement, the Company hereby agrees that to the extent permitted by law, it shall be jointly and severally liable with its subsidiary, the Bank, for the payment of all amounts due under the employment agreement of even date herewith between the Bank and the Employee. Nevertheless, the Board may in its discretion at any time during the term of this Agreement agree to pay the Employee a base salary for the remaining term of this Agreement. If the Board agrees to pay such salary, the Board shall thereafter review, not less often than annually, the rate of the Employee's salary, and in its sole discretion may decide to increase his salary. 3. Discretionary Bonuses. The Employee shall participate in an --------------------- equitable manner with all other senior management employees of the Company in discretionary bonuses that the Board may award from time to time to the Company'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. 4. (a) Participation in Retirement, Medical and Other Plans. The ---------------------------------------------------- Employee shall be entitled to participate in any plan that the Company maintains for the benefit of its employees if the plan relates to (i) pension, profit- sharing, or other retirement benefits, (ii) medical insurance or the reimbursement of medical or dependent care expenses, or (iii) other group benefits, including disability and life insurance plans. (b) Employee Benefits; Expenses. The Employee shall participate in --------------------------- any fringe benefits that are or may become available to the Company's senior management employees, including, for example: any stock option or incentive compensation plans, club memberships, and any other benefits that 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 that shall incur in connection with his services under this Agreement upon substantiation of such expenses in accordance with the policies of the Company. 5. Term. The Company hereby employs the Employee, and the ---- Employee hereby accepts such employment under this Agreement, for the period commencing on the effective date of the Federal Stock Charter of the Bank (the "Effective Date") and ending twelve (12) months thereafter (or such earlier date as is determined in accordance with Section 9 hereof). Additionally, on each annual anniversary date from the Effective Date, this Agreement and the Employee's term of employment shall be extended for an additional one-year period beyond the then effective expiration date, provided that 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. 6. Loyalty; Full Time and Attention -------------------------------- (a) During the period of his employment hereunder and except for illness, 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 to the Company and its subsidiaries; provided that, from time to time, the Employee may serve on the board of directors of, and hold any other offices or positions in, companies or organizations, that will not present any conflict of interest with the Company 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 Company, or be gainfully employed in any other position or job other than as provided above. (b) Nothing contained in this Section 6 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 Company, or, solely as a passive or minority investor, in any business. 7. 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 Company will provide the Employee with the working facilities and staff customary for similar executive officers and necessary for him to perform his duties. 8. Vacation and Sick Leave. The Employee shall be entitled, ----------------------- without loss of pay, to absent himself voluntarily from the performance of his duties under this Agreement in accordance 2 with the terms set forth below, 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 periodically established by the Board for senior management employees of the Company. (b) The Employee shall not receive any additional compensation from the Company on account of his failure to take a vacation, and the Employee shall not accumulate unused vacation 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 obligations with the Company for such additional periods of time and for such valid and legitimate reasons as the Board may in its discretion approve. 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 the 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. 9. Termination and Termination Pay. Subject to Section 11 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. The Company may terminate the Employee's ---------- employment after having established, through a determination by the Board, the Employee's Disability. For purposes of this Agreement, "Disability" means a physical or mental infirmity that impairs the Employee's ability to substantially perform his duties under this Agreement and that results in the Employee becoming eligible for long-term disability benefits under the Company's long-term disability plan (or, if the Company has no such plan in effect, that 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 that is prior to the Employee's termination of employment pursuant to this Section 9(b); provided that any benefits paid pursuant to the Company's long-term disability plan will continue as provided in such plan. 3 (c) For 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. Termination for "Just Cause" shall mean termination because of, in the good faith determination of the Board, 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. Notwithstanding the foregoing, the Employee shall not be deemed to have been terminated for Just Cause unless there shall have been delivered to the Employee a copy of a resolution duly adopted by the affirmative vote of not less than a majority of the entire membership of the Board (excluding the Employee if a member of the Board) at a meeting of the Board called and held for the purpose (after reasonable notice to the Employee and an opportunity for the Employee to be heard before the Board), finding that in the good faith opinion of the Board the Employee was guilty of conduct set forth above in the second sentence of this Subsection (c) and specifying the particulars thereof in detail. (d) Without Just Cause. Subject to the provisions of Section 11 ------------------ hereof, the Board may, by written notice to the Employee, immediately terminate his employment at any time for any reason; provided that, if such termination is for any reason other than pursuant to Sections 9(a), (b) or (c) above, the Employee shall be entitled to receive the following compensation and benefits: (i) the salary provided pursuant to Section 2 hereof, up to the date of expiration of the term (including any renewal term then in effect) of this Agreement (the "Termination Date") and (ii) the cost to the Employee of obtaining all health, life, disability and other benefits (excluding any bonus, stock option or other compensation benefits) in which the Employee would have been eligible to participate through the Termination Date based upon the benefit levels substantially equal to those that the Company provided for the Employee at the date of termination of employment. Said sum shall be paid, at the option of the Employee, either (I) in periodic payments over the remaining term of this Agreement, as if the Employee's employment had not terminated, or (II) in one lump sum within ten (10) days of such termination. (e) Voluntary Termination by Employee. Subject to the provisions of --------------------------------- Section 11 hereof, the Employee may voluntarily terminate employment with the Company during the term of this Agreement, upon at least sixty (60) days' prior written notice to the Board, in which case the Employee shall receive only his compensation, vested rights and employee benefits accrued up to the date of his termination. (f) Limitation by Section 18 (k)of the FDIA. Notwithstanding --------------------------------------- anything herein to the contrary, any payments madee to the employee pursuant to this Agreement, or otherwise, are subject to and conditioned upon their compliance with section 18(K) of the FDIA (12 U.S.C. (S) 1828(K)) and any regulations promulgated thereunder. 4 10. 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. 11. Change in Control. ----------------- (a) Notwithstanding any provision herein to the contrary, if the Employee's employment under this Agreement is terminated by the Company, without the Employee's prior written consent and for a reason other than for Just Cause, death or disability in connection with or within twelve (12) months after any change in control of the Bank or the Company, which has not been approved in advance by a two-thirds vote of the full Board of Directors of each of the Bank and the Company, the Employee shall be paid an amount equal to the difference between (i) the product of 2.99 times his "base amount" as defined in Section 280G(b)(3) of the Internal Revenue Code of 1986, as amended (the "Code") and regulations promulgated thereunder, and (ii) the sum of any other "parachute payments" (as defined under Section 280G(b)(2) of the Code) 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 such termination. The term "change in control" shall mean (1) a change in the ownership, holding or power to vote more than 25% of the Bank's or the Company's voting stock, (2) a change in the ownership or possession of the ability to control the election of a majority of the Bank's or the Company's directors, or (3) a change in the ownership or possession of the ability to exercise a controlling influence over the management or policies of the Bank or the Company by any person or by persons acting as a "group" (within the meaning of Section 13(d) of the Securities and Exchange Act of 1934) (except that, in the case of (1), (2) and (3) hereof, ownership or control of the Bank or its directors by the Company itself shall not constitute a change in control. The term "person" means an individual other than the Employee, or a corporation, partnership, trust, association, joint venture, pool, syndicate, sole proprietorship, unincorporated organization or any other form of entity not specifically listed herein. (b) In the event that any dispute arises between the Employee and the Company as to the terms or interpretation of this Agreement, including this Section 11, whether instituted by formal legal proceedings or otherwise, including an action that Employee takes to enforce the terms of this Section 11 or to defend against any action taken by the Company, the Employee shall be reimbursed for all costs and expenses, including reasonable attorneys' fees, arising from such disputes or proceedings, provided that the Employee shall have obtained a final judgment by a court of competent jurisdiction in his or her favor. Such reimbursement shall be paid within ten (10) days of Employee's providing the Company with written evidence, which may be in the form, among others, of a canceled check or receipt, of any costs or expenses incurred by the Employee. 12. Successors and Assigns. ---------------------- (a) This Agreement shall inure to the benefit of and be binding upon any corporate or other successor of the Company that shall acquire, directly or indirectly, by merger, 5 consolidation, purchase or otherwise, all or substantially all of the assets or stock of the corporation. (b) Since the Company 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 Company. 13. 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. 14. Applicable Law. This Agreement shall be governed in all -------------- respects, whether as to its validity, construction, capacity, performance or otherwise, by the laws of the Commonwealth of Kentucky, except to the extent that Federal law shall be deemed to apply. 15. 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. 16. 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 above written. ATTEST: HOPFED BANCORP, INC. _____________________________ By: _______________________________ Secretary Its: WITNESS: _____________________________ ___________________________________ __________________("Employee") 6 EX-23.2 11 EXHIBIT 23.2 Exhibit 23.2 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the use of our report on the financial statements of Hopkinsville Federal Savings Bank in the Form AC Application for Approval of Conversion filed by HopFed Bancorp, Inc. with the Office of Thrift Supervision and in the Registration Statement on Form S-1 filed by HopFed Bancorp, Inc. with the Securities and Exchange Commission and to the reference to our firm under the heading "Experts" in the Prospectus constituting part of such Form AC and Form S-1. York Neel & Co.-Hopkinsville, LLP June 25, 1997 EX-23.3 12 EXHIBIT 23.3 Exhibit 23.3 CONSENT ------- We hereby consent to the use of our firm's name, to the references to our Independent Appraisal of the Estimated Proforma Fair Market Value under the headings "Prospectus Summary -- Stock Pricing and Number of Shares to be Issued" and "The Conversion -- Stock Pricing and Number of Shares to be Issued" and to the reference to our opinion regarding the value of Subscription Rights under the heading "The Conversion -- Effect of Conversion to Stock Form on Depositors of the Bank -- Tax Effects" in the Application for Approval of Conversion filed by Hopkinsville Federal Savings Bank with the Office of Thrift Supervision and in the Registration Statement on Form S-1 filed by HopFed Bancorp, Inc with the Securities and Exchange Commission. /s/ Steve Clinton _________________________________ Steve Clinton, President NATIONAL CAPITAL June 25, 1997 COMPANIES, L.L.C EX-27 13 FINANCIAL DATA SCHEDULE
9 3-MOS 12-MOS DEC-31-1997 DEC-31-1996 JAN-01-1997 JAN-01-1996 MAR-31-1997 DEC-31-1996 1,272,361 1,451,727 9,000,000 2,000,000 8,806,000 500,000 0 0 5,108,869 5,125,452 77,668,800 95,946,689 76,946,728 95,761,674 97,553,277 95,495,890 217,444 217,444 203,058,205 204,398,031 183,161,635 183,827,366 0 1,317,000 2,660,240 2,346,438 0 0 0 0 0 0 0 0 17,236,330 16,907,227 203,058,205 204,398,031 1,801,731 6,823,842 1,326,217 5,774,668 143,535 621,041 3,271,483 13,219,551 2,231,286 9,731,511 2,240,622 9,756,533 1,030,861 3,463,018 0 100,000 0 0 616,360 3,690,184 539,041 262,697 539,041 262,697 0 0 0 0 358,330 183,632 0 0 0 0 2.07 1.70 0 0 187,000 266,000 0 0 0 0 217,444 122,252 0 4,808 0 0 217,444 217,444 217,444 217,444 0 0 0 0
EX-99.2 14 EXHIBIT 99.2 Exhibit 99.2 HOPKINSVILLE FEDERAL SAVINGS BANK 2700 FORT CAMPBELL BOULEVARD HOPKINSVILLE, KENTUCKY 42440 (502) 885-1171 NOTICE OF SPECIAL MEETING OF MEMBERS Notice is hereby given that a Special Meeting of Members (the "Special Meeting") of Hopkinsville Federal Savings Bank (the "Bank") will be held at ____________________________, _____________________________, Hopkinsville, Kentucky, 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 (the "Converted Bank") as a wholly owned subsidiary of HopFed Bancorp, Inc., a newly organized Delaware 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 adoption of an amended Federal Stock Charter and Bylaws for the Converted 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 [SIGNATURE] ___________________________________ SECRETARY _________, 1997 Hopkinsville, Kentucky _______________ 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. HOPKINSVILLE FEDERAL SAVINGS BANK 2700 FORT CAMPBELL BOULEVARD HOPKINSVILLE, KENTUCKY 42240 (502) 88S-1171 PROXY STATEMENT YOUR PROXY, IN THE FORM ENCLOSED, IS SOLICITED BY THE BOARD OF DIRECTORS OF HOPKINSVILLE FEDERAL SAVINGS 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 Hopkinsville Federal Savings Bank (the "Bank") will be held at _____________________________, _____________________________, Hopkinsville, Kentucky on ________, ________, 1997, at __:__ __.m., local 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 HopFed Bancorp, Inc. (the "Company"), a Delaware 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 are collectively 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 Off~ce 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 as of March 31, 1996 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 with $50.00 or more on deposit in the Bank on June 30, 1997, the last day of the calendar quarter preceding approval of the Plan by the OTS ("Supplemental Eligible Account Holders"), and fourth to other members entitled to vote at the Special Meeting ("Other Members") (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. The Company may offer any shares remaining after the Subscription Offering to certain members of the general public in a community offering (the "Community Offering"). In the Community Offering, preference will be given to natural persons and trusts of natural persons who are permanent residents of Calloway, Christian, Todd and Trigg Counties, Kentucky (the "Local Community"). Any shares of Common Stock not purchased in the Subscription and Community Offerings may be sold as part of acommunity offering on a best efforts basis by a selling group of selected broker-dealers to be managed by Investment Bank Services, Inc. (the "Syndicated Community Offering"). The aggregate price of the Common Stock to be issued by the Company under the Plan is currently estimated to be between $________ and $_______, 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. 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 creation of 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" in the accompanying Prospectus. RECOMMENDATION OF THE BOARD OF DIRECTORS THE BOARD OF DIRECTORS OF THE BANK UNANIMOUSLY RECOMMENDS THAT YOU VOTE "FOR" APPROVAL OF THE PLAN OF CONVERSION. VOTING IN FAVOR OF THE PLAN OF CONVERSION 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, up to ________ 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 of the Conversion. 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. HOPFED BANCORP, INC. HopFed Bancorp, Inc. was incorporated under the laws of the State of Delaware in May 1997 at the direction of the Board of Directors of the Bank for the purpose of serving as a savings and loan holding company of the Converted Bank upon the acquisition of all of the capital stock issued by the Converted Bank in the Conversion. The Company has received approval from the OTS to acquire control of the Converted 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 Converted Bank, up to 50% of the net proceeds of the Conversion (after deducting amounts infused into the Convened Bank and used to fund the ESOP) and a note receivable from the ESOP. Upon consummation of the Conversion, the Company's principal business will be overseeing the business of the Bank and investing the portion of the net Conversion proceeds retained by it, and the Company will register with the OTS as a savings and loan holding company. 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, although the Company currently does not have any plans, agreements, arrangements or understandings with respect to any such acquisitions or mergers. After the Conversion, the Company will be classified as a unitary savings and loan holding company and will be subject to regulation by the OTS. The Company's executive offices are located at 2700 Fort Campbell Boulevard, Hopkinsville, Kentucky 42240, and its main telephone number is (502) 885-1171. 2 HOPKINSVILLE FEDERAL SAVINGS BANK The Bank is a federal mutual savings bank headquartered in Hopkinsville, Kentucky and operating through five offices located in Hopkinsville, Murray, Cadiz and Elkton, Kentucky. The Bank was chartered by the Commonwealth of Kentucky in 1879 under the name Hopkinsville Building and Loan Association. In 1940, the Bank converted to a federal mutual savings association and received federal insurance of its deposit accounts. In 1983, the Bank became a federal mutual savings bank and adopted its current name. At March 31, 1997, the Bank had total assets of $203.1 million, total deposits of $ 183.2 million and total equity of $ 17.2 million. The principal business of the Bank historically has consisted of attracting deposits from the general public and investing these deposits in loans secured by first mortgages on one- to four-family residences in the Bank's market area. The Bank derives its income principally from interest earned on loans and, to a lesser extent, interest earned on investment securities, mortgage-backed securities and noninterest income. Funds for these activities are provided principally by operating revenues, deposits and repayments of outstanding loans and maturities of investment securities and mortgage-backed securities. The Bank's executive offices are located at 2700 Fort Campbell Boulevard, Hopkinsville, Kentucky 42240, and its main telephone number is (502) 885-1171. 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 are members of the Bank under its current mutual charter. Borrowers as of April 14, 1997, the date of the Bank's adoption of its revised federal mutual charter, are members of the Bank for as long as such borrowings are in existence. However, persons who had borrowings at such date but who no longer had such borrowings on the Voting Record Date, as well as persons who became borrowers after such date, are not members of the Bank. 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. Borrower members will be entitled to one vote at the Special Meeting in addition to any votes such borrower member may have as a result of being a depositor in the Bank. 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. 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 of Conversion, 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. Attendance at the Special Meeting, by itself, will not be sufficient to revoke a proxy. 3 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. 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 OF CONVERSION THE OTS HAS APPROVED THE PLAN, SUBJECT TO THE PLAN'S APPROVAL 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 insititution such as the Bank has both a deposit account and a pro rata ownership interest in the retained earnings 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 retained earnings 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 retained earnings 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 Converted 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 of Common Stock being offered by the Company Continuity. During the Conversion process, the normal business of the Bank of accepting deposits and making loans will continue without interruption. The Converted Bank will continue to be subject to regulation by the OTS and the FDIC, and FDIC insurance of accounts will continue without interruption. After the Conversion, the Converted 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 Converted Bank after the Conversion. The Board of Directors of the Company will consist 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 Converted Bank after the Conversion. 4 Voting Rights. Upon the completion of the Conversion, depositor and borrower members as such will have no voting rights in the Converted Bank and, therefore, will not be able to elect directors of the Converted Bank or to control their affairs. Currently these rights are accorded to depositors of the Bank. Subsequent to the Conversion, exclusive voting rights with respect to the Company shall be vested in the holders of the Common Stock. Holders of Savings Accounts in and obligors on loans of the Converted Bank will not have any voting rights in the Company except and to the extent that such persons become stockholders of the Company, and the Company will have exclusive voting rights with respect to the Converted Bank's capital stock. 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 will receive an opinion from its special counsel, Reinhart, Boerner, Van Deuren, Norris & Rieselbach, P.C., Washington, D.C., as to the material federal income tax consequences of the Conversion to the Bank, and as to the generally applicable material 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 will provide that the Conversion will constitute a reorganization for federal income tax purposes under Section 368(a)(1)(F) of the Internal Revenue Code of 1986, as amended (the "Code"). Among other things, the opinion will also provide, 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 Converted 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 Reinhart, Boerner, Van Deuren, Norris & Rieselbach, P.C., will be 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 will also be based upon the 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. Reinhart, Boerner, Van Deuren, Norris & Rieselbach, P.C. will advise 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. Reinhart, Boerner, Van Deuren, Norris & Rieselbach, P.C. will further advise the Bank that the federal income tax treatment of the receipt of Subscription Rights pursuant to the Conversion is uncertain, and private 5 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 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 Code and in the absence of contrary authoritative guidance, Reinhart, Boerner, Van Deuren, Norris & Rieselbach, P.C. will provide 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, Reinhart, Boerner, Van Deuren,Norris & Rieselbach, P.C. will provide provide 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 and other eligible members who exercise their Subscription Rights, even though such persons would not have received any cash from which to pay taxes on such taxable income. The Bank could also revongize a gain on the distribution of such Subscription Rights in an amount equal to their aggregate value. In the opinion of National Capital Companies, LLC, whose opinion is not binding upon the IRS, the Subscription Rights do not have any value, based on the that fact 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 Accounts Holders, Supplemental Eligible Accounts Holders and Other Members 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 Reinhart, Boerner, Van Deuren, Norris & Rieselbach, P.C., will neither adopt the opinion of National Capital Companies, LLC, as its own nor incorporated such opinion of Naational Capital Companies, LLC. in its opinion issued in connection with Conversion. The Bank will also receive the opinion of York, Neel & Co.-Hopkinsville, LLP that the Commonwealth of Kentucky will, for income tax purposes, accord the Conversion the identical treatment which it receives for federal income tax purposes. 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 ACCOUNT HOLDER, SUPPLEMENTAL ACCOUNT HOLDER AND OTHER MEMBER ENTITLED TO SPECIAL TREATMENT UNDER THE INTERNAL REVENUE CODE, SUCH AS TRUSTS, INDIVIDUAL RETIREMENT ACCOUNTS, OTHER EMPLOYEE BENEFIT PLANS, INSURANCE COMPANIES AND ELIGIBLE ACCOUNT HOLDERS, SUPPLEMENTAL ELIGIBLE ACCOUNT HOLDERS AND OTHER MEMBERS WHO ARE NOT CITIZENS OR RESIDENTS OF THE UNITED STATES. DUE TO THE INDIVIDUAL NATURE OF TAX CONSEQUENCES, EACH ELIGIBLE ACCOUNT HOLDER, SUPPLEMENTAL ELIGIBLE ACCOUNT HOLDER AND OTHER MEMBER 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, 6 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. 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, a claim of such an account holder would be solely in the amount of the balance in the related deposit account plus accrued interest, and the account holder would not have any 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 net worth of the Bank as of the date of its latest statement of financial condition contained in the final Prospectus. Each Eligible Account Holder (a person with a deposit account in the Bank on June 30, 1994) and each Supplemental Eligible Account Holder (a person with a qualifying deposit in the Bank on March 31, 1996) would be entitled, on a complete liquidation of the Converted Bank after completion of the Conversion, to an interest in the liquidation account. Each Eligible Account Holder would have an initial interest in such liquidation account for each deposit account held in the Bank on March 31, 1996 and each Supplemental Eligible Account Holder would have an initial interest in such liquidation account for each qualifying deposit held in the Bank on June 30, 1997. The interest as to each qualifying deposit account would be in the same proportion of the total liquidation account as the balance of such qualifying deposit account was to the balance in all deposit accounts of Eligible Account Holders and Supplemental Eligible Account Holders on such respective date. However, if the amount in the qualifying deposit account on any annual closing date (June 30) of the Bank subsequent to the relevant eligibility date is less than the amount in such account on the relevant eligibility 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 reductions, and such interest would cease to exist if he or she ceases to maintain an account at the Converted Bank that has the same Social Security number as appeared on his or her account(s) at the relevant eligibility date. The interest in the liquidation account would never be increased, notwithstanding any increase in the related deposit account after the Conversion. 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 retained earnings 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 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 7 provisions, including but not limited to matters with respect to giving preference in the Community Offering to natural persons and trusts of natural persons who are permanent residents of the 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. The Plan provides that, if deemed necessary or desirable by the Board of Directors, the Plan may be substantively amended by a two-thirds vote of 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 a two-thirds vote of 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 generally modify or terminate the Plan upon the order of the regulatory authorities without resoliciting proxies or obtaining approval of the amended Plan by members at another Special Meeting. However, any modification of the Plan that results in a material change in the terms of the Conversion would require such a resolicitation of proxies and another meeting of members. The Plan further provides that if any 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 outstanding votes of the members of the Bank 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. 8 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 4,000,000 shares of common stock, 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 Converted 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 that the number of the Converted Bank's directors shall be 10. 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 1,000,000 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 is currently required of the Bank) 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 or her favor or, in case of (i) settlement, (ii) final judgment against him or her, or (iii) final judgment in his or her favor, other than on the merits, if a majority of the directors of the Converted Bank determines that he or she was acting in good faith within the scope of his or her employment or authority as he or she could reasonably have perceived it under the circumstances and for a purpose he or she 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 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 __:__ ______, local 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 certain members of the general public in the Community Offering with preference given to natural persons and trusts of natural persons who reside in the Local Community. Any shares of Common Stock not purchased in the Subscription and Community Offerings may be 9 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 broker-dealers to be managed by Investment Bank Services, Inc. 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 OF CONVERSION. 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. 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 [SIGNATURE] ____________________________________ Secretary ________, 1997 Hopkinsville, Kentucky 10 FORM OF CERTIFICATION I/WE ACKNOWLEDGE THAT THIS SECURITY IS NOT A DEPOSIT OR ACCOUNT AND IS NOT FEDERALLY INSURED, AND IS NOT GUARANTEED BY HOPKINSVILLE FEDERAL SAVINGS BANK (THE "BANK") OR BY THE FEDERAL GOVERNMENT. If anyone asserts that this security is federally insured or guaranteed, or is as safe as an insured deposit, I should call the Office of Thrift Supervision Regional Director, Ronald Karr at (312) 917-5000. I/We further certify that, before purchasing the common stock, par value $.01 per share, of First Lancaster Bancshares, Inc., the proposed holding company for Hopkinsville Federal Savings Bank, I/we received a Prospectus dated, 1997 (the "Prospectus'). The Prospectus that I/we received contains disclosure concerning the nature of the security being offered and describes the risks involved in the investment, including but not limited to: 1. Anticipated Low Return on Equity Following Conversion (page) 2. Uncertainty as to Existence of Growth Opportunities (page) 3. Effect of Fort Campbell on Economy of the Bank's Market Area (page) 4. Potential Impact of Changes in Government Policies Concerning Tobacco Products (page) 5. Potential Effects of Changes in Interest Rates and Economic Conditions (page) 6. Certificate of Incorporation, Bylaw and Statutory Provisions That Could Discourage Hostile Acquisitions of Control (page) 7. Valuation Not Indicative of Future Price of Common Stock 8. Possible Income Tax Consequences of Distribution of Subscription Rights (page) 9. Possible Dilutive Effect of MRP and Stock Options (page) 10. Potential Impact on Voting Control of Purchases by Management (page) 11. Potential Cost of Benefit Plans (page)
PRINT NAME: _____________________ SIGNATURE: ______________________ PRINT NAME: _____________________ SIGNATURE: ______________________ DATE: ______________________________________________ =============================================================================== REVOCABLE PROXY (SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS OF HOPKINSVILLE FEDERAL SAVINGS BANK FOR A SPECIAL MEETING OF MEMBERS TO BE HELD ON ______________, 1997) The undersigned member of Hopkinsville Federal Savings Bank (the "Bank") hereby appoints ___________________,___________________ and ___________________, 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 (the "Meeting") of Hopkinsville Federal Savings Bank to be held at ______________________________________, Hopkinsville, Kentucky, on ________, __________ 1997, at __:__ __.m., local time, and at any adjournments thereof They are authorized to cast all votes to which the undersigned is entitled, as follows: FOR AGAINST --- ------- [_] [_] Adoption of the Plan of Conversion dated May 21, 1997, providing for the conversion of the Bank from a federally chartered mutual savings bank to a federally chartered stock savings bank (the "Converted Bank"), as a wholly owned subsidiary of HopFed Bancorp, Inc., and the related transactions provided for in such plan, including the adoption of an amended Charter and Bylaws for the Converted 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 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 Hopkinsville Federal Savings 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 Hopkinsville Federal Savings 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. EXHIBIT A --------- HOPKINSVILLE FEDERAL SAVINGS BANK HOPKINSVILLE, KENTUCKY PLAN OF CONVERSION FROM MUTUAL TO STOCK ORGANIZATION 1. GENERAL. On May 21, 1997, the Board of Directors of Hopkinsville Federal Savings Bank, Hopkinsville, Kentucky (the "Bank"), after careful study and consideration, adopted by unanimous vote this Plan of Conversion (the "Plan"), which provides for the conversion of the Bank from a federally chartered mutual savings bank to a federally chartered 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 "Holding Company"). The conversion of the Bank to the Converted Bank and the acquisition of control of the Converted Bank by the Holding Company are collectively referred to herein as the "Conversion." The Plan supersedes the Plan of Conversion which was adopted by the Board of Directors on January 15, 1997, and terminated on May 21, 1997. Pursuant to the Plan, shares of common stock in the Holding Company (the "Conversion Stock") will be offered as part of the Conversion in a Subscription Offering pursuant to non-transferable Subscription Rights, at a predetermined and uniform price, first to Eligible Account Holders of record as of March 31, ----- 1996, second to 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, and fourth to Other Members of the Bank. Concurrently with the ------ Subscription Offering, shares not subscribed for in the Subscription Offering may be offered as part of the Conversion to the general public in a Community Offering. Shares remaining will 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. 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 Banks. Consummation of the Conversion is subject to the approval of the Plan and the Conversion by the OTS and by members of the Bank (the "Members") at a special meeting of the Members to be called to consider the Conversion by the affirmative vote of Members of the Bank holding not less than a majority of the total votes eligible to be cast. 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 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 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. Any person (as defined by 12 C.F.R. (S)563b.2(a)(26)) Acting 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 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, for purposes of Paragraphs VIII.F. and VIII.G.4. hereof, such term shall not include a Tax-Qualified Employee Stock Benefit Plan in which a person has a substantial beneficial interest or serves as a trustee in a similar fiduciary capacity, and, for purposes of Paragraph VIII.G.1. hereof, such term shall not include any Tax-Qualified Employee Stock Benefit Plan; 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 Hopkinsville Federal Savings Bank, in its form ----- as a federal mutual savings bank. 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 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 permanently reside in 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 Hopkinsville Federal -------------- Savings 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 March 31, 1996. -2- Eligible Account Holder: The term "Eligible Account Holder" means the ----------------------- holder of a Qualifying Deposit in the Bank on the Eligibility Record Date. FDIC: The term "FDIC" means the Federal Deposit Insurance Corporation or ----- any successor federal agency which insures deposit accounts held in savings associations. Form AC Application: The term "Form AC Application" means the application ------------------- submitted to the OTS for approval of the Conversion. H-(e)l Application: The term "H-(e)l Application" means the application to ------------------- the OTS on OTS Application H-(e)1, or OTS Application H-(e) I -S if applicable, for approval of the Holding Company's acquisition of all of the Capital Stock. Holding Company: The term "Holding Company" means a corporation to be ---------------- incorporated by the Bank under state law for the purpose of becoming a savings and loan holding company for the Converted Bank through the issuance and 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 in connection with the Conversion. 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 counties in which ---------------- the Bank's offices are located. 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 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, 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 ---------- 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 which provides for the ----- conversion of the Bank from a federally chartered mutual savings bank to a federally chartered stock savings bank (i.e., the Converted Bank) and the concurrent formation of the Holding Company for the Converted Bank. -3- Qualifying Deposit: The term "Qualifying Deposit" means a 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 SB-2 or other applicable form 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. 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 the Eligible Account Holders, Tax-Qualified Employee Stock Benefit Plans, Supplemental Eligible Account Holders and Other Members under the Plan, and, with respect to Eligible Account Holders, Supplemental Eligible Account Holders and Other Members, 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 if and to the extent 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 and Other Members to purchase Conversion Stock offered under the Plan in connection with the Conversion. Supplemental Eligibility Record Date: The term "Supplemental Eligibility ------------------------------------ Record Date" means the last day of the calendar quarter preceding the date of approval of the Plan by the OTS. Supplemental Eligible Account Holder: The term "Supplemental Eligible ------------------------------------ Account Holder" means the holder of a Qualifying Deposit in the Bank (other than Officers and directors of the Bank and their Associates) on the Supplemental Eligibility Record Date. -4- 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 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, or any successor provision thereof. A "non tax qualified employee stock benefit plan" means any defined benefit plan or defined contribution plan which is not so qualified. 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 approvals from the appropriate regulatory authorities for consummation of the Conversion in accordance with applicable laws and regulations. The following steps must be taken prior to receipt of such regulatory approvals: 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 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. As soon as practicable following the adoption of this Plan, the Bank shall file the Form AC Application, and the Holding Company shall file the Registration Statement and the H-(e)l Application. Upon receipt of notification from the OTS that the Form AC Application is properly executed and not materially incomplete, the Bank shall publish notice of the filing of the Form AC Application 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, and shall publish such other notices of the Conversion as may be required in connection with the H-(e)l Application by the regulations and policies of the OTS. 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 any gain or loss 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. -5- IV. MEETING OF MEMBERS. Upon receipt of all regulatory approvals required for consummation of the Conversion, the Bank shall convene the Special Meeting scheduled in accordance with the Bank's Bylaws to vote on the Plan. Promptly after receipt of OTS approval of the Form AC Application 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 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 Offering is not held concurrently with the proxy solicitation of Members for the Special Meeting. Pursuant to applicable regulations, an affirmative vote of the Members of at least a majority of the total votes eligible to be cast will be required for approval of the Plan. Voting may be in person or by proxy. By voting in favor of the adoption of the Plan and the Conversion, the Members will be voting in favor of the Conversion and the adoption by the Bank of the Federal Stock Charter and Bylaws in the forms attached as Exhibits A and B to this Plan. The OTS shall be notified of the actions of the Members at the Special Meeting promptly following the Special Meeting. V. SUMMARY PROXY STATEMENT. The Proxy Statement furnished to Members may be in summary form, provided that a statement is made in bold-faced 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 Offering is 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 consummation of the sale of the Conversion Stock shall be conditioned upon approval of the Plan by the Members at the Special Meeting. The Bank may require Eligible Account Holders, Supplemental Eligible Account Holders and Other Members 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 -6- 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 Form AC has 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 and bylaws to authorize the issuance of shares of Capital Stock and to conform to the requirements of a federal capital stock savings bank will be declared effective by the OTS, and the Bank will thereby be and become the Converted Bank. 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% 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. 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 the midpoint (the "the high end") to 15% below the midpoint (the "low end") of the Valuation 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 -7- subscriptions, provided the aggregate Purchase Price is not below the low end or more than 15% 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 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 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 Benefit Plans, Supplemental Eligible Account Holders and Other Members of the Bank pursuant to priorities established by applicable regulations. Shares of Conversion Stock having an aggregate value at least equal to the low end of the Valuation Range must be sold for the Conversion to be consummated, 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 to the extent the aggregate purchase price exceeds $500. The priorities established by OTS 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, non- transferable Subscription Rights to purchase Conversion Stock in an amount equal to the greater of $250,000, 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 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 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 both 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 Eligible 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 whose subscriptions remain unsatisfied on an equitable basis, related to the -8- amounts of their respective Qualifying Deposits, as compared to the total Qualifying Depsoits of all subscribing Eligible Accounts 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. 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 Form AC Application filed prior to OTS approval then each Supplemental Eligible Account Holder shall receive, without payment, non-transferable Subscription Rights to purchase Conversion Stock in an amount equal to the greater of $250,000, 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, respectively. 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 both 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 whose subscriptions remain unsatisfied on an equitable basis, related to the amounts of their respective Qualifying Deposits on the Supplemental Eligibility Record Date as compared to the total Qualifying Deposits of all subscribing Supplemental Eligible Account Holders in each case on the Supplemental Eligibility Record Date. -9- 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, non-transferable Subscription Rights to purchase Conversion Stock in an amount equal to the greater of $250,000 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, respectively. 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 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, giving preference to natural persons and trusts of natural persons who are permanent Residents of the Local Community, if such preference is both permitted by applicable law and approved by the Bank's Board of Directors in its sole discretion. 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 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 shall 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 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 per order basis 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. -10- 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, subject to the provisions of Paragraph VIII.C herein. 2. Purchases of Conversion Stock in the Community Offering by any person 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 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 31% of the shares of Conversion Stock issued in the Conversion. 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. Relatives who are neither Officers nor directors of the Bank or the Holding Company, or any of their subsidiaries, and who do not in the same home shall not be deemed to be Associates or a group Acting in Concert solely as a result of their relationships. 6. 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 $500,000 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. -11- Each person purchasing Conversion Stock in the Conversion shall, upon submission of a validity completed and executed Order Form, 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 in cash 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 or receive such cash shall be assignable by the Holding Company. G. Restrictions on and Other Characteristics of Stock Being Sold. ------------------------------------------------------------- 1. Transferability. --------------- Except as provided in Paragraph XIV 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 effective date of the Conversion except for any sale or transfer of such 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. Such transfer restrictions shall be in addition to any other restrictions on transferability imposed by applicable laws, regulations, charter or bylaw provisions or agreements. 2. Repurchase and Dividend Rights. ------------------------------ Subject to applicable regulations, the Holding Company may not, for a period of three years from the date of the Conversion, repurchase Holding Company Stock from any person, with the exception of (i) a repurchase on a pro rata basis pursuant to an offer approved by the OTS and made to all stockholders, or (ii) the repurchase of qualifying shares of a director. However, upon 10 days' written notification to the OTS Regional Director for the Converted Bank and the Chief Counsel's Office, Business Transactions Division of the OTS, 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; (ii) no repurchases -12- occur in the first year following the Conversion, or a waiver of such restriction is obtained; (iii) in the second and third years following the Conversion, the repurchases are part of an open-market stock repurchase program that allows no more than 5% of the then-outstanding Holding Company Stock to be purchased during any 12 month period; and (iv) the repurchases do not cause the Converted Bank to become "undercapitalized," as defined pursuant to 12 C.F.R. (S)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. 3. Voting Rights. ------------- After the Conversion, holders of Savings Accounts in and obligors on loans of the Bank will not have voting rights in the Converted Bank. The Holding Company will have exclusive voting rights with respect to the Capital Stock. Exclusive voting rights with respect to the Holding Company shall be vested in the holders of Holding Company Stock, and holders of Savings Accounts in and obligors on loans of the Converted Bank will not have any voting rights in the Holding Company except and to the extent that such persons become stockholders of the Holding Company. Subject to notice and record holder provisions of the Holding Company's bylaws, 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 Holding Company Stock owned by said stockholder. 4. Purchases by Officers, Directors and Associates Following --------------------------------------------------------- Conversion. ---------- Without the prior written 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 plans which may be attributable to Officers or directors may be made without OTS permission or the use of such 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 appropriate regulatory authorities, the approval of the Form AC by the OTS and the declaration of the effectiveness of the Registration Statement containing 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. -13- 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, and, in the case of orders submitted at an office of the Bank, executed Forms of Certification as required by OTS regulations, 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 payment by Tax-Qualified Employee Stock Benefit Plans for Conversion Stock may be made to the Bank concurrently with the completion of the Conversion. 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 may remain in the subscriber's Savings Account and 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 Form, 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 the 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 -14- 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 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 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 or qualification would be impracticable for reasons of cost or other-wise. 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. FEDERAL STOCK CHARTER AND BYLAWS. As part of the Conversion, a federal stock charter and bylaws shall 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 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 XV 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. -15- 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 the 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 (except with respect to voting and liquidation rights) as in effect prior to consummation of the Conversion. All Savings Accounts will continue to be insured by the FDIC up to the applicable limits of insurance coverage. All loans shall retain the same status after the Conversion as these loans had prior to Conversion. After the Conversion, holders of Savings Accounts in 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. Holders of Savings Accounts in and obligors on loans of the Converted Bank will not have any voting rights in the Holding Company except and to the extent that such persons become stockholders of the Holding Company, and the Holding Company will have exclusive voting rights with respect to the Capital Stock. XII. EFFECT OF CONVERSION. Upon consummation of the Conversion, the corporate existence of the Bank shall not cease, but the Converted Bank shall be deemed to be a continuation of the Bank, and shall succeed to all the rights, interests, duties and obligations of the Bank as in existence as of immediately prior to the consummation of the Conversion as described in Paragraph VII herein, including but not limited to all rights and interests of the Bank in and to its assets and properties, whether real, personal or mixed. XIII. 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 net worth 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 the 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 -16- 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 FDIC shall be considered to be a complete liquidation for these purposes. In such transactions, the Liquidation Account shall be assumed by the surviving institution. XIV. RESTRICTIONS ON ACQUISITION OF HOLDING COMPANY. A. 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 Bank, 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 or underwriters or a selling group acting on their behalf with a view towards public resale, 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 charter a provision that, for a specified period of up to 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 charter for such other provisions affecting the acquisition of Holding Company Stock as shall be determined by its Board of Directors. XV. 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 -17- 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 the Conversion 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. XVI. 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. XVII. 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 then-applicable regulatory capital requirements. -18- EXHIBIT B --------- HOPKINSVILLE FEDERAL SAVINGS BANK FEDERAL STOCK CHARTER SECTION 1. CORPORATE TITLE. The full corporate title of the savings bank is Hopkinsville Federal Savings Bank (the "Bank"). SECTION 2. OFFICE. The home office shall be located in the City of Hopkinsville, County of Christian, Commonwealth of Kentucky. SECTION 3. DURATION. The duration of the Bank is perpetual. SECTION 4. PURPOSE AND POWERS. The purpose of the 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 that the Bank has the authority to issue is 5,000,000, of which 4,000,000 shares shall be common stock of par value of $0.01 per share and of which 1,000,000 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 further approval of shareholders, 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 Bank. The consideration for the shares shall be cash, tangible or intangible property (to the extent direct investment in such property would be permitted), labor, or services actually performed for the 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 Bank, shall be conclusive. In the case of a stock dividend, that part of the surplus of the 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 Bank or in connection with the conversion of the 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 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: 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; (ii) To any provision that would require the holders of preferred stock, voting as a class or series, to approve the merger or consolidation of the 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 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 or 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 association in a merger or consolidation for the Bank, shall not be considered to be such an adverse change. A description of the different classes and series (if any) of the 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 the 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 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 Bank available for distribution remaining after: (i) Payment or provision for payment of the 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 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 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 -2- 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; (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 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 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 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 Bank shall not be entitled to preemptive rights with respect to any shares of the Bank which may be issued. -3- SECTION 7. LIQUIDATION ACCOUNT. Pursuant to the requirements of the Office's regulations (12 C.F.R. Subchapter D), the Bank shall establish and maintain a liquidation account for the benefit of its savings account holders as of March 31, 1996 and as of the last day of the calendar quarter preceding the Office's approval of the Bank's Plan of Conversion dated as of January 15, 1997 (collectively, "eligible savers"). In the event of a complete liquidation of the Bank, it shall comply with such regulations with respect to the amount and the priorities on liquidation of each of the Bank's eligible savers' 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 Bank's stockholders. SECTION 8. DIRECTORS. The Bank shall be under the direction of a board of directors. The authorized number of directors, as stated in the Bank's bylaws, shall not be fewer than five nor more than fifteen except when a greater or lesser number is approved by the Director of the Office, or his or her delegate. 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 Bank, approved by the shareholders 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. HOPKINSVILLE FEDERAL SAVINGS BANK Attest:___________________________ By:_________________________________ ___________________________ Bruce Thomas Secretary President Director of the Office of Thrift Supervision Attest:___________________________ By:_________________________________ Secretary of the Office of Thrift Supervision Effective Date:___________________ -4- EXHIBIT C --------- HOPKINSVILLE FEDERAL SAVINGS BANK BYLAWS ARTICLE I - HOME OFFICE The home office of the savings bank shall be at 2700 Fort Campbell Boulevard, Hopkinsville, in the County of Christian, in the State of Kentucky. ARTICLE II - SHAREHOLDERS SECTION 1. PLACE OF MEETINGS. All annual and special meetings of shareholders shall be held at the home office of the savings bank or at such other convenient place as the board of directors may determine. SECTION 2. ANNUAL MEETING. A meeting of the shareholders 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 150 days after the end of the savings bank's fiscal year on the third Wednesday of each April if not a legal holiday, and if a legal holiday, then on the next day following which is not a legal holiday, at 1:00 p.m., or at such other date and time within such 150-day period as the board of directors may determine. SECTION 3. SPECIAL MEETINGS. Special meetings of the shareholders 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 the most current edition of Robert's Rules of Order unless other prescribed by regulations of the Office or these bylaws or the board of directors adopts another written procedure for the conduct of meetings. 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 shareholder 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 shareholder at the address as it appears on the share 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 shareholders' 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 shareholders entitled to notice of or to vote at any meeting of shareholders or any adjournment, or shareholders entitled to receive payment of any dividend, or in order to make a determination of shareholders for any other proper purpose, 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 fewer than 10 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 at any meeting of shareholders has been made as provided in this section, such determination shall apply to any adjournment. SECTION 7. VOTING LISTS. At least 20 days before each meeting of the shareholders, the officer or agent having charge of the stock transfer books for shares of the savings bank shall make a complete list of the shareholders of record entitled to vote at such meeting, or any adjournment thereof, arranged in alphabetical order, with the address and the number of shares held by each. This list of shareholders shall be kept on file at the home office of the savings bank and shall be subject to inspection by any shareholder of record or the shareholder's agent 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 shareholder of record or any shareholder's agent during the entire time of the meeting. The original stock transfer book shall constitute prima facie evidence of the shareholders entitled to examine such list or transfer books or to vote at any meeting of shareholders. In lieu of making the shareholder list available for inspection by shareholders as provided in the preceding paragraph, the board of directors may elect to follow the procedures prescribed in (S) 552.6(d) of the Office's regulations as now or hereafter in effect. 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 shareholders. 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 shareholders present at a duly organized meeting may continue to transact business until adjournment, notwithstanding the withdrawal of enough shareholders to constitute less than a quorum. If a quorum is present, the affirmative vote of the majority of the shares represented at the meeting and entitled to vote on the subject matter shall be the act of the shareholders, unless the vote of a greater number of shareholders voting together or voting by classes is required by law or the charter. Directors, however, are elected by a plurality of the votes cast at an election of directors. SECTION 9. PROXIES. At all meetings of shareholders, a shareholder may vote by proxy executed in writing by the shareholder or by his or her duly authorized attorney in fact. Proxies may be given telephonically or electronically as long as the holder uses a procedure for verifying the identity of the shareholder. 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 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 -2- contrary, at any meeting of the shareholders of the savings bank 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 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 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 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 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 held in trust in an IRA or Keogh Account, however, may be voted by the savings bank if no other instructions are received. 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. A shareholder 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. Every shareholder 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 shareholder for as many persons as there are directors to be elected and for whose election the shareholder 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 shareholders, 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 regulations of the Office, the duties of such inspectors shall include: determining the number of shares and the voting power of each share, the shares represented at the -3- 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 shareholders. 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 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 shareholders 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 shareholders 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 shareholder 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 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 shareholder may make any other proposal at the annual meeting and the same may be discussed and considered, but not 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 shareholders taking place 30 days or more thereafter. 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 herein provided. SECTION 16. INFORMAL ACTION BY SHAREHOLDERS. Any action required to be taken at a meeting of the shareholders, or any other action which may be taken at a meeting of shareholders, may be taken without a meeting if consent in writing, setting forth the action so taken, shall be given by all of the shareholders entitled to vote with respect to the subject matter. -4- 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, either 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 ten 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 following 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. Directors may participate in a meeting by means of a conference telephone or similar communications device through which all persons participating can hear each other at the same time. Participation by such means shall constitute presence in person for all purposes. SECTION 4. QUALIFICATION. Each director shall at all times be the beneficial owner of not less than 100 shares of capital stock of the savings bank unless the savings bank is a wholly owned subsidiary of a holding company. 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 person 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 for all purposes. SECTION 6. NOTICE. Written notice of any special meeting shall be given to each director at least 24 hours prior thereto when delivered personally or by telegram or at least five days prior thereto when 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 mail so addressed, with postage prepaid if mailed, when delivered to the telegraph company if sent by telegram, or when the savings bank receives notice of delivery if electronically transmitted. 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 -5- 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. 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. More than three consecutive absences from regular meetings of the board of directors, unless excused by resolution of the board of directors, shall automatically constitute a resignation, effective when such resignation is accepted by the board of directors. 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 only until the next election of directors by the shareholders. 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 shareholders. SECTION 12. COMPENSATION. Directors, as such, may receive a stated salary for their services. By resolution of the board of directors, a reasonable fixed sum, and reasonable expenses of attendance, if any, may be allowed for attendance at each regular or special meeting of the board of directors. Members of either standing or special committees may be allowed such compensation for attendance at committee meetings 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 or her dissent or abstention shall be entered in the minutes of the meeting or unless he or she 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 shareholders called expressly for that purpose, any director may be removed only 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 -6- 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 the charter or bylaws of the savings bank, or recommending to the shareholders 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 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 he 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. -7- 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 they 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 or comptroller, 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 offices of the secretary and treasurer or comptroller may be held by the same person and a vice president may also be either the secretary or the treasurer or comptroller. 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 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 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 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 the contractual 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. -8- SECTION 5. REMUNERATION. The remuneration of the officers shall be fixed from time to time by the board of directors. ARTICLE VI - CONTRACTS, LOANS, CHECKS, AND DEPOSITS SECTION 1. CONTRACTS. To the extent permitted by regulations of the Office, 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 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 or her legal representative, who shall furnish proper evidence of such authority, or by his or her 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. -9- ARTICLE VIII - FISCAL YEAR The fiscal year of the savings bank shall end on the 31st day of December of each year. The appointment of accountants shall be subject to annual ratification by the shareholders. 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 shares of capital stock. ARTICLE X - CORPORATE SEAL The board of directors shall provide an 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 regulations of the Office and shall be effective after (i) approval of the amendment by a majority vote of the authorized board of directors, or by a majority vote of the votes cast by the shareholders of the savings bank at any legal meeting, and (ii) receipt of any applicable regulatory approval. When an savings bank fails to meet its quorum requirements, solely due to vacancies on the board, then the affirmative vote of a majority of the sitting board will be required to amend the bylaws. -10- EX-99.4 15 EXHIBIT 99.4 EXHIBIT 99.4 NATIONAL CAPITAL COMPANIES, LLC - -------------------------------------------------------------------------------- INDEPENDENT APPRAISAL OF THE ESTIMATED PROFORMA FAIR MARKET VALUE Prepared for HOPKINSVILLE FEDERAL SAVINGS BANK Hopkinsville, Kentucky May 29, 1997 - ------------------------------------------------------------------------------- NATIONAL CAPITAL COMPANIES, LLC
TABLE OF CONTENTS - ------------------------------------------------------------------------------- CHAPTER PAGE I. Overview of Hopkinsville Federal Savings Bank 1 II. Analysis of Financial Performance and Condition 4 III. Market Area Analysis 10 IV. Comparisons with Publicly Traded Savings Institutions 13 V. Market Value Adjustments 27
- ------------------------------------------------------------------------------- NATIONAL CAPITAL COMPANIES, LLC LIST OF TABLES HOPKINSVILLE FEDERAL SAVINGS BANK TABLE NUMBER DESCRIPTION - ------ ----------- 1 Consolidated Statements of Financial Condition 2 Statements of Financial Condition - Past Five Fiscal Years 3 Income Statement 4 Income Statement - Past Five Fiscal Years 5 Selected Financial Information and Other Data 6 Income and Expense Trends 7 Normalized Earnings Trend 8 Performance Indicators 9 Volume/Rate Analysis 10 Yield and Cost Trends 11 Market Value of Portfolio Equity 12 Loan Portfolio Composition 13 Loan Maturity Schedule 14 Loan Originations 15 Delinquent Loans 16 Nonperforming Assets 17 Classified Assets 18 Allowance for Loan Losses 19 Investment Portfolio Composition 20 Mortgage-backed Securities Portfolio Composition 21 Deposit Composition 22 Deposit Activity 23 Deposit Composition Analysis 24 Borrowed Funds 25 GAP Table 26 Offices of Hopkinsville Federal Savings Bank 27 List of Key Officers and Directors 28 National Interest Rates by Quarter 29 Market Data for Selected Publicly Traded Thrifts 30 Market Data for Selected Publicly Traded Thrifts - Geographic Regional Averages 31 Recent Conversion Activity NATIONAL CAPITAL COMPANIES, LLC LIST OF EXHIBITS HOPKINSVILLE FEDERAL SAVINGS BANK EXHIBIT NUMBER DESCRIPTION - ------ ----------- I Market Area DEMOGRAPHIC & ECONOMIC INFORMATION - ---------------------------------- II-1 Population II-2 Age Distribution II-3 Households II-4 Median Household Income II-5 Market Area Banks and Thrifts COMPARATIVE GROUP INFORMATION - ----------------------------- III-1 Comparison of Balance Sheet Profiles III-2 Comparison of Income Statements III-3 Employment by Place of Work Statistics III-4 Key Housing Data III-5 Market Share of Deposits IV-1 Selected Financial and Market Statistics IV-1a Index Values IV-2 Comparable Group Companies IV-2a Comparable Group - Selected Financial and Market Statistics IV-2b Comparable Group - Selected Financial and Market Statistics IV-2c Comparable Group - Selected Financial Ratios IV-2d Comparable Group - Selected Balance Sheet Data IV-2e Comparable Group - Selected Balance Sheet Data IV-2f Comparable Group - Selected Balance Sheet Detail IV-2g Comparable Group - Selected Deposit Detail IV-2h Comparable Group - Summary of Profitability IV-2i Comparable Group - Selected Operating Ratios - Last Twelve Months Operating Activity IV-2j Comparable Group - Selected Operating Ratios - Last Twelve Months Operating Activity IV-2k Comparable Group - Selected Operating Ratios - Most Recent Quarter Months Operating Activity IV-2l Comparable Group - Selected Operating Ratios - Most Recent Quarter Months Operating Activity NATIONAL CAPITAL COMPANIES, LLC List of Exhibits Page 2 PROFORMA ANALYSIS - STANDARD CONVERSION - --------------------------------------- V-1 Standard Conversion Analysis V-2 Proforma Effect of Conversion Proceeds V-3 Proforma Effect of Standard Conversion V-4 Proforma Pricing Multiples Compared to Peers ASSUMPTIONS AND PROCEDURES - -------------------------- VI Proforma Adjustments VI-a Updating Valuation AUDITED FINANCIAL STATEMENTS - ---------------------------- VII Incorporated by Reference FIRM QUALIFICATIONS - ------------------- VIII National Capital Companies, LLC Brochure RB 20 CERTIFICATION - ------------------- IX Certification Statement AFFIDAVIT OF INDEPENDENCE - ------------------------- X Affidavit NATIONAL CAPITAL COMPANIES, LLC CHAPTER I OVERVIEW OF HOPKINSVILLE FEDERAL SAVINGS BANK GENERAL DISCUSSION Hopkinsville Federal Savings Bank ("Hopkinsville Federal" or the "Bank") is a federally chartered, Federal Deposit Insurance Corporation ("FDIC") and Savings Association Insurance Fund ("SAIF") insured mutual savings bank headquartered in Hopkinsville, Kentucky. The Bank is a mutual thrift and accordingly, is owned by the Bank's depositors. In addition to its two offices in Hopkinsville, Hopkinsville Federal operates branches in the cities of Murray, Cadiz and Elkton. The offices serve Christian, Calloway, Trigg and Todd Counties. The primary mission of the Bank is to obtain retail savings deposits and provide loans for various purposes (predominately one-to-four family, owner-occupied mortgage loans) within its primary market area. As of March 31, 1997, Hopkinsville Federal had total assets of approximately $203.1 million and net worth of approximately $17.2 million on a basis of Generally Accepted Accounting Principles ("GAAP"). Total deposits were approximately $183.2 million as of March 31, 1997. Hopkinsville Federal operates as a traditional thrift and holds a high percentage of its loan portfolio secured by one-to-four family residential properties. At March 31, 1997, approximately 80.37% of total loans were secured by one-to-four family properties. The Bank holds a small portfolio of multifamily mortgages, construction loans, commercial loans and consumer loans. Most of these loans were originated by the Bank in its primary market area. Hopkinsville Federal's loan portfolio comprised approximately 48.04% of total assets as of March 31, 1997. To supplement the Bank's loan production, Hopkinsville Federal has also developed a portfolio of investments and mortgage- backed securities. As of March 31, 1997, short-term investments and investment securities represented approximately 39.34% of total assets and mortgage-backed securities represented approximately 10.20% of total assets. Hopkinsville Federal's nonperforming assets totaled approximately .09% of assets as of March 31, 1997 and the Bank held no real estate owned. All of the nonperforming assets were delinquent loans. Delinquent loans totaled $2.3 million as of March 31, 1997 with 91.71% of the total being delinquent loans categorized in the 30-89 day delinquency status. Currently, the Bank's principal sources of revenue are interest and fees on loans and interest and dividends from investments. The principal expenses of the Bank are interest on deposits and borrowings along with noninterest expenses. The Bank has a stable core deposit base consisting of NOW, passbook and money market deposit ("MMDA") accounts. These funding sources, as of March 31, 1997, represented approximately 32.41% of the Bank's total deposit base. Fixed assets total approximately $2.3 million, or approximately 1.15% of total assets, as of March 31, 1997. The Bank owns its main office facility, which was constructed in 1995, and all of its offices except Cadiz, which is leased. A new owned facility in Cadiz is contemplated in 1997. The Bank utilizes a third party for its data processing needs as well as its item processing. The Bank has historically been profitable. For the quarter ended March 31, 1997, the Bank recorded net income of approximately $358 thousand, a return on average assets ("ROAA") of approximately .70% and a return on average equity ("ROAE") of 8.39%. For the fiscal year ended December 31, 1996, the Bank recorded net income of approximately $183.6 thousand, a ROAA of approximately .09% and a ROAE of 1.11%. In 1996, the Bank 1 NATIONAL CAPITAL COMPANIES, LLC paid the FDIC a special assessment to strengthen the SAIF deposit fund of $1.23 million. The net income for the Bank without consideration of this one-time special assessment would have been approximately $995 thousand. Without consideration of the SAIF assessment, the Bank would have recorded a ROAA of .48% and a ROAE of 6.05% for the year ended December 31, 1996. Summarized financial information is presented in Table 1 at March 31, 1997 and December 31, 1996 and in Table 2 for the years ended December 31, 1992 through 1996. As indicated in Table 2, the Bank's asset base has shown moderate growth since December 31, 1992. The Bank permitted certain deposits to be withdrawn in 1996 in an effort to reduce its overall cost of funds which resulted in a decline in assets of 4.49% from December 31, 1995 to March 31, 1997. The Bank has increased the balance of its loan portfolio over the last two years in an effort to reduce its high proportion of securities by more actively expanding its efforts to originate loans in its market. The Bank recorded an increase in loans of 7.93% in 1995, 12.67% in 1996 and 2.15% from December 31, 1996 to March 31, 1997. Loan balances have risen from 35.90% of total assets as of December 31, 1993 to 48.04% of total assets as of March 31, 1997. The Bank's investment portfolio, including mortgage-backed securities, represented approximately 40.77% of total assets as of March 31, 1997, a decrease from 43.18% as of December 31, 1993. Additionally, Hopkinsville Federal has reduced its short-term deposits from approximately $35.7 million to $17.8 million. The Bank reported an equity-to-assets ratio of approximately 8.49% as of March 31, 1997. This capital level is significantly in excess of FIRREA mandated capital requirement tests concerning core and risk-based capital and qualifies the Bank as "well capitalized." Table 3 provides a summary of the Bank's operating performance for the three months ended March 31, 1997 and December 31, 1996 and Table 4 represents the years ended December 31, 1992 through 1996. Hopkinsville Federal has been able to significantly improve the Bank's net interest margin in 1996 and continued to do so into 1997. The Bank's net interest margin as of March 31, 1997 was 2.04%. This improvement has been achieved from three strategic actions which have been taken by the Bank. The Bank has concentrated on reducing its cost of funds by pricing deposits more conservatively. The Bank has attempted to expand its loan portfolio, which traditionally has afforded the Bank a higher yield than from its investment portfolio. Finally, the Bank has managed the investment portfolio with a focus on improving the securities portfolio's yield by taking advantage of market pricing opportunities. The Bank has benefited from its investments in callable securities, which have improved its portfolio yield over more traditional fixed yield, fixed maturity investments. Operating expenses, exclusive of the SAIF special assessment, have grown moderately over the last four years. From fiscal year 1993 to fiscal year 1996, operating expenses have grown approximately 3.39% annually. Personnel expenses have been held at a nominal growth since 1994. Occupancy expenses grew 8.24% from December 31, 1995 to December 31, 1996, which reflects the Bank's opening of its new main office in 1995. Other noninterest expenses grew on average 9.09% annually from fiscal year 1993 to fiscal year 1996. The Bank has not experienced a significant level of loan losses and had not recorded any provisions for loan losses from 1993 through 1995. In 1996, in recognition of the Bank's increased loan portfolio size, the Bank recorded a provision for loan losses of $100 thousand. The Bank did not add to its loan loss provision in the quarter ended March 31, 1997. Chapter II, Analysis of Financial Performance and Condition, examines the trends addressed in this section. These trends reflect the implications of Hopkinsville Federal's economic and competitive environment and management's operating objectives. This discussion is accompanied by the information outlined in the Index of Tables and Exhibits. 2 NATIONAL CAPITAL COMPANIES, LLC Exhibit VII presents Hopkinsville Federal's summarized, consolidated audited statements of condition and statements of income and retained earnings for the years ended December 31, 1995 and December 31, 1996 and unaudited financial information for March 31, 1997. CONVERSION TO A STOCK COMPANY The Board of Directors of the Bank has approved a Plan of Conversion (the "Plan") whereby Hopkinsville Federal will convert from a federally chartered mutual savings bank to a federally chartered stock savings bank (the "Conversion"), all the common stock of which will be acquired by HopFed Bancorp, Inc. (the "Company" or "HopFed") in exchange for approximately 50% of the net conversion proceeds. The Company will offer common shares to certain parties subject to the priorities and limitations noted in the Plan. The Conversion, subject to regulatory approval and satisfaction of all other conditions precedent to the Conversion, will be accomplished as detailed in the Plan. The Plan provides for a subscription offering whereby nontransferable rights to subscribe for shares of the Company's common stock will be granted first to eligible account holders of record, or those persons holding $50 or more in savings deposits in the Bank, as of March 31, 1996, second to the Bank's Employee Stock Ownership Plan (the "ESOP"), a tax-qualified employee stock benefit plan, third to supplemental eligible account holders of record, or savings depositors of the Bank with account balances of $50 or more, as of the last day of the calendar quarter preceding the Office of Thrift Supervision (the "OTS") approval of the Bank's application to convert to stock form, and fourth to other members of the Bank, or all members of the Bank entitled to vote at the special meeting called to approve the Plan under the Bank's mutual charter and bylaws. Concurrently with the subscription offering, shares not subscribed for in the subscription offering may be offered as part of the Conversion to the general public in a community offering. Shares may then be offered to the general public in an underwritten public offering or otherwise. (The subscription offering, the community offering and the public offering will be referred to herein as the "Offering.") National Capital has been retained as an independent appraiser to prepare the valuation of the estimated proforma fair market value of the to-be issued common shares in the Offering. 3 NATIONAL CAPITAL COMPANIES, LLC CHAPTER II ANALYSIS OF FINANCIAL PERFORMANCE AND CONDITION CAPITAL POSITION Hopkinsville Federal recorded an equity-to-assets ratio of 8.49% as of March 31, 1997 which was more than adequate to meet its FIRREA mandated regulatory capital requirements as of March 31, 1997. Hopkinsville Federal's GAAP net worth has increased from approximately $13.4 million as of December 31, 1993 to approximately $17.2 million as of March 31, 1997. This increase in capital reflects the Bank's profitability during this period. Hopkinsville Federal's capital position qualified the Bank as "well capitalized" according to OTS net worth requirements. Exhibit III-1 illustrates a comparison of balance sheet profiles of Hopkinsville Federal and for the central region of the United States savings institutions (the "central region"), 405 in total, as of December 31, 1996. The Bank's equity-to-assets ratio, as of December 31, 1996 of 8.27% compares to the equity- to-assets ratio for the central region of 8.44% as of the same date. LENDING ACTIVITY Hopkinsville Federal has historically concentrated its lending activities on first mortgage loans secured by residential property, which is similar to other traditional savings and loan associations. As of March 31, 1997, approximately 80.37% of the Bank's total loan portfolio was in single family residential loans. Loan production is generated through the Bank's loan officers (including branch mangers), other management individuals and referral from local real estate brokers. The Bank's proportion of net loans-to-total assets has increased from approximately 35.90% of total assets as of December 31, 1993 to 48.04% as of March 31, 1997. This is less than the 60.65% of net mortgage loans-to-assets that the central region holds, as shown in Exhibit III-1. The Bank's market area has not been sufficient, historically, to meet the Bank's asset funding needs. The Bank has made efforts to expand its loan origination capabilities and as a result, the Bank has grown its loan portfolio in the last two years. As of March 31, 1997, approximately 1.47% of Hopkinsville Federal's mortgage loans were comprised of loans secured by multifamily properties. Approximately 6.61% of the Bank's total loans were secured by commercial properties and land loans. Hopkinsville Federal has a consumer loan portfolio which represents 7.59% of the Bank's loan portfolio as of March 31, 1997. ASSET QUALITY Hopkinsville Federal's loan portfolio has not historically experienced significant losses. The Bank recorded no loan loss provision for the years ended December 31, 1993 through December 31, 1995. For the year ended December 31, 1996, the Bank recorded loan loss provisions of $100 thousand primarily in recognition of the larger loan portfolio held by Hopkinsville Federal. For the quarter ended March 31, 1997, Hopkinsville Federal did not record a loan loss provision. At March 31, 1997, allowances for loan losses totaled .22% of total loans. The Bank's current management has developed and enforced strict underwriting standards and policies while maintaining the highest level of service to customers. The Bank's nonperforming loans totaled approximately .09% of total assets as of March 31, 1997. Hopkinsville Federal has an established procedure regarding the treatment of delinquent loans. The procedure includes the mailing of past due notices followed by phone contact. Hopkinsville Federal places a high priority on 4 NATIONAL CAPITAL COMPANIES, LLC contacting customers by phone as a primary method of determining the status of a delinquent loan and quickly making a determination of what action the Bank must take to resolve the problem. Management and the Board of Directors are kept apprised of delinquencies through the production of regular reports. Hopkinsville Federal's management performs quarterly reviews of problem assets to determine the necessity of establishing additional loss reserves. Table 15 provides information on the delinquency status of the Bank's loan portfolio. Table 16 presents the breakdown of Hopkinsville Federal's nonperforming loans as of March 31, 1997. The Bank held no real estate owned or other nonperforming assets at March 31, 1997. Hopkinsville Federal holds a considerable level of cash and investment securities, including mortgage-backed securities, of 50.16% of total assets as of March 31, 1997. As shown in Exhibit III-1, the central region held approximately half that level, or 26.09%, in cash and investments and mortgage- backed securities as a percent of assets. As shown on Table 19, the market value of Hopkinsville Federal's investment portfolio, as of March 31, 1997, was approximately $723 thousand below the carrying value of the investments. The Bank has not recorded the adjustment between the market value and book value on certain securities, as they are categorized as "held to maturity". The Bank's held to maturity portfolio totaled 93.83% of total securities held as of March 31, 1997. The presence of a low level of nonperforming loans is an indication that management has exercised good judgment concerning the quality of the borrowers and the supporting collateral. The Bank's holding of primarily residential home loans and a high level of government securities reduces the Bank's level of credit risk. Our review of the Bank found no evidence of significant asset quality problems. DEPOSIT ACTIVITIES Hopkinsville Federal has attempted to become an asset-driven financial institution. Liabilities are acquired based upon asset funding needs. The choice of liabilities is based upon the cost and the repricing characteristics of the asset being funded. The Bank has, in the past, primarily depended upon retail deposits to provide for its asset funding needs. Hopkinsville Federal's primary market area for deposits is several counties in southwestern Kentucky. Hopkinsville Federal's market area includes Christian, Calloway, Trigg and Todd Counties. The Bank operates branches in the cities of Murray, Cadiz and Elkton, in addition to its two offices in Hopkinsville. The Bank believes that most of its depositors reside in areas close to its various branch offices and bank with Hopkinsville Federal for convenience. Hopkinsville Federal's deposits-to-assets ratio was 89.94% as of December 31, 1996 compared to 71.09% for the central region as of December 31, 1996. As of the same period as shown on Table 21, Hopkinsville Federal's deposit base consisted of 69.01% certificates of deposit, 20.09% MMDA accounts, 5.78% regular savings accounts and 5.12% in transaction type accounts. The Bank believes that the development of multiple account relationships strengthens Hopkinsville Federal's customer relationship. The Bank is not a dominant market force in the communities it serves. As shown on Exhibit II-5, the area banks and thrifts headquartered in Hopkinsville Federal's market area held total assets of $401.2 million compared to the Bank's $211.7 million as of June 30, 1996. In conjunction with Exhibit II-5, Exhibit III-5 illustrates Hopkinsville Federal's market share of deposits as of June 30, 1996. As shown, the Bank enjoys 86.70% of the $222.6 million thrift total deposits (100% in Christian County, 44.92% in Calloway County, 100% in Trigg County and 100% in Todd County). However, Hopkinsville Federal has only 13.78% of the total bank, thrift and credit union deposits (17.71% in Christian, 4.86% in Calloway, 18.03% in Trigg and 23.86% in Todd Counties). Detail on the Bank's deposit composition and deposit activity is provided on Tables 21, 22 and 23. 5 NATIONAL CAPITAL COMPANIES, LLC BORROWED FUNDS Hopkinsville Federal has become an asset-driven savings institution. As a result, the Bank has funded assets with moneys that were determined to be the best source in terms of cost and duration. In the past, the Bank has relied on deposits principally for its asset funding because of its determination that deposits are the most stable source of funding and provide the principal bank- customer relationship from which numerous cross-sales opportunities can be built. As of March 31, 1997, Hopkinsville Federal did not hold any borrowings compared to the 18.52% of borrowings-to-assets held by the central region, as shown in Exhibit III-1. The Bank does not anticipate that it will expand its asset base through the use of long-term FHLB borrowings. CASH AND INVESTMENTS In the area of investment management, the Bank's policy will be to use the investment portfolio primarily for purposes of liquidity and secondarily as a source of income from carefully selected investments. Hopkinsville Federal's liquid investment portfolio will be invested in overnight funds and other short- term and medium-term Treasury, United States Government and agency obligations, corporate obligations and other qualifying investments in compliance with regulatory requirements and the Bank's investment policy. It is the intention of management to continue the implementation of an investment strategy that adjusts the level of liquidity as necessary in order to fund lending requirements and to minimize its interest rate risk exposure at any given time. As of March 31, 1997, the Bank held short-term investments and other securities, including mortgage-backed securities, totaling $100.6 million. Mortgage-backed securities represented $20.7 million or 20.58% of the investment portfolio. The Bank holds the majority of its investment portfolio in the held to maturity category, including all of its mortgage-backed securities. The Bank does record its equity securities, FHLB stock, FHLMC stock and Intrieve stock as available for sale. As of March 31, 1997, the market value of the investment portfolio was approximately $723 thousand below the Bank's carrying value. As mentioned, the investment portfolio has decreased since December 31, 1995 from approximately $123.1 million as of December 31, 1995 to $100.6 million as of March 31, 1997. This reduction provided funding for the Bank's increase in its loan portfolio. Additional information on the Bank's investment portfolio is provided in Table 19 and Table 20. INTEREST MARGIN The Bank's operating strategy, market and economic conditions and capital position have a direct impact on the Bank's operating profitability, which is derived primarily from net interest margin (interest income minus interest expense). Tables 10 provides information for Hopkinsville Federal with respect to yields on loans and other earning assets and rates paid on savings deposits for the years ended December 31, 1994 through 1996 and for the quarter ended March 31, 1997. The level of interest rates has remained relatively stable over the last three years. Table 28 illustrates the nature of interest rates by quarter since 1993. Short term rates have remained, on average, in a range of 5.00% to 5.75% since mid-1994, as shown by the 90-day Treasury Bill average rates. Long term rates have been more volatile than short term rates and have moved in a range of 6.00% to 8.00% since 1994, as shown by the 30 Year Treasury Notes average rates. As Table 10 indicates, Hopkinsville Federal's average cost of funds has declined from 5.20% for the year ended December 31, 1995 to 4.92% for the three months ended March 31, 1997. This decline is comparable to the slight decline in the 1 year average Treasury Notes rates from a 1995 average of 5.72% to 5.57% in 1996. Hopkinsville Federal's average asset yield increased from 6.08% for the year ended December 31, 1995 to 6.59% for the quarter ended March 31, 1997. This increase was primarily the result of the Bank's increase 6 NATIONAL CAPITAL COMPANIES, LLC in its loan portfolio. The net result with an increase in the yield on assets and the decrease in the cost of funds was an increase in the net interest margin from 1.20% to 2.08% from the year ending December 31, 1995 to the quarter ended March 31, 1997. As shown on Exhibit III-2, this improved net interest margin remains significantly lower than the central region. SUBSIDIARY ACTIVITIES Hopkinsville Federal has no subsidiaries and none are envisioned in the future. OFFICE PROPERTY AND OTHER OPERATIONS Hopkinsville Federal owns all of its office facilities except the branch in Cadiz, which is leased. In 1995, the Bank constructed its main office facility and a new owned facility in Cadiz is contemplated in 1997. Table 26 provides a summary of the Bank's investment in properties as of March 31, 1997. As shown on Exhibit III-1, the Bank had invested 1.14% of its assets in fixed assets at December 31, 1996 which is comparable to the level of fixed assets held by the central region. Hopkinsville Federal utilizes Intrieve, Inc. which is located in Cincinnati, Ohio as its data processing service bureau. Intrieve provides the Bank on-line processing for its deposit and loan accounts. Intrieve is one of the country's largest service bureaus. The capabilities provided by Intrieve are believed to be more than adequate to meet the Bank's needs. The Bank utilizes Electronic Data Systems Corporation to process its inclearing items. EDS' services include an interlink to Intrieve to post these inclearings, as well as monthly statement processing. The Bank's general ledger is maintained on a PC and ledger postings are made by the accounting department. The Bank does not currently utilize loan processing and loan tracking software, but anticipates the purchase of some automated system to improve its lending operations. BOARD OF DIRECTORS The Bank's current Board of Director members are: . WD Kelley - Chairman of the Board . Bruce Thomas - Director, President and CEO . D. B. Bostick, Jr. - Director . J. Noble Hall, Jr. - Director . Boyd M. Clark - Director and Senior Vice President . Clifton H. Cochran - Director . Peggy R. Noel - Director and Executive Vice President . Drury R. Embry - Director . Walton G. Ezell - Director . C.K. Wood - Director The principal occupation and relevant experience of key management personnel of the Bank is set forth below: BRUCE THOMAS is President and Chief Executive Officer and Director of the Bank - ------------ and has been with the Bank for 35 years. During his tenure with Hopkinsville Federal, Mr. Thomas has served in a variety of positions within the 7 NATIONAL CAPITAL COMPANIES, LLC organization. Mr. Thomas is a graduate of Murray State University and is a member of the local Economic Development Council. PEGGY R. NOEL is Executive Vice President and a Director of the Bank. She - ------------- serves as Chief Financial Officer and Chief Operations Officer. Mrs. Noel joined Hopkinsville Federal in 1966. Prior to joining the Bank, Mrs. Noel worked for a commercial bank for ten years. Mrs. Noel attended Hopkinsville Community College and completed the certification program from the Institute of Financial Education. BOYD M. CLARK is Senior Vice President and a Director of the Bank. Mr. Clark - ------------- has been with the Bank 24 years serving in a variety of positions. Mr. Clark is responsible for loan operations within the organization. Mr. Clark also serves as Secretary to the Board and is the Bank's Compliance Officer. Additional information on these individuals is provided in Table 27. EARNING POWER ANALYSIS Hopkinsville Federal has maintained a positive net interest spread between interest-earning assets and interest-bearing liabilities. Table 10 illustrates the Bank's recent historical net interest margin. The Bank's high percentage of earning assets-to-interest-bearing liabilities of 109.02% as of March 31, 1997, as shown in Table 8, strengthens the earnings power of the Bank's balance sheet and future yield-cost spreads. This ratio will be further enhanced from the net proceeds of the Conversion. INTEREST RATE SENSITIVITY The volatility of interest rates, which our economy has experienced at times, increases the risk to financial institutions which have a substantial mismatch related to the re-pricing sensitivity of their assets and liabilities. Maintenance of earnings stability requires that the maturity composition of a financial institution's balance sheet be structured with similar interest rate sensitivity. To a certain extent, this can be accomplished by maturity matching which involves, for a traditional savings and loan, either shortening the weighted average maturity of its assets, lengthening the maturity of liabilities or a combination of both. Synthetic maturity matching is possible with the application of interest rate futures, options or forward contracts. However, expertise in the use of financial instruments to artificially manage interest rate sensitivity is essential. Mitigating the effects of interest rate exposure on earnings is important due to the adverse effects that volatile earnings could have on shareholder value. Table 25 indicates Hopkinsville Federal's structure of the repricing or maturity characteristics for the Bank's interest-earning assets and liabilities. This schedule is commonly referred to as a "GAP" report because it measures the difference ("GAP") between the Bank's assets, subject to repricing for a particular period of time, compared to liabilities repricing for the same period. For most thrifts, in the earlier time frames, a negative GAP position normally exists, which means that more liabilities are subject to repricing. With a negative GAP position, a bank benefits from declining rates since more liabilities are subject to repricing than assets, expanding the bank's net interest margin. Conversely, in a rising rate environment, liabilities normally reprice more rapidly than assets resulting in a narrowing of the net interest margin. As Table 25 indicates, Hopkinsville Federal has a 1.89% positive GAP position in the one year or less time frame and a 9.33% cumulative total GAP position. This interest rate structure is unusual for a thrift. The Bank's high level of adjustable rate loans and securities of shorter maturity or interest rate adjustability provides the Bank the ability to reprice its assets more rapidly than the thrift industry in general. The GAP report is one measure of interest rate sensitivity, however, the report is not an accurate measurement of the vulnerability a bank has from interest rate risk exposure. Several factors must be considered when evaluating 8 NATIONAL CAPITAL COMPANIES, LLC the potential repricing of interest-sensitive assets and liabilities. For example, a fixed rate loan, based upon the GAP report, would not reflect repricing potential in the early time frames. However, the loan will amortize and a certain portion of the fixed rate loans will prepay. Accordingly, the cash flow from loan amortization and prepayments can be reinvested at the then prevailing rates and more appropriately should be included in the early time horizons when evaluating their interest rate sensitivity. There are many other areas of the GAP report that do not accurately reflect the true interest sensitivity of a bank's balance sheet. To better measure the interest rate sensitivity of the interest-earning assets and liabilities, the GAP report information should be analyzed using computer modeling which considers loan prepayments, core deposit decay rates and other factors. Hopkinsville Federal utilizes a report provide by the OTS as one of the analytical tools to ascertain the sensitivity of the Bank's portfolio and therefore, the effects of fluctuating interest rates on net interest income. The OTS provides a Net Portfolio Value ("NPV") approach to the quantification of interest rate risk. This approach calculates the difference between the present value of expected cash flows from assets and the present value of expected cash flows from liabilities, as well as cash flows from off-balance sheet items. The March 31, 1997 NPV schedule prepared by the OTS included data reporting errors and a revised report was unavailable. Hopkinsville Federal's management recognizes the critical importance of interest rate risk and has limited the Bank's interest rate risk exposure as shown in Table 25. However, the Bank also recognizes that other factors must be considered in conjunction with a measurement of interest rate sensitivity. The Bank recognizes that there is limited opportunity for acceptable interest margin in today's low rate environment from short term interest-sensitive assets, especially adjustable loans and adjustable mortgage-backed securities. 9 NATIONAL CAPITAL COMPANIES, LLC CHAPTER III MARKET AREA ANALYSIS PRIMARY MARKET AREA Hopkinsville Federal's primary market consists of the counties in which the Bank's offices are located. Hopkinsville Federal operates branches in the cities of Murray, Cadiz and Elkton, in addition to its two offices in Hopkinsville. The offices serve Christian, Calloway, Trigg and Todd Counties in the southwestern section of Kentucky. Exhibit 1 provides a map showing the location of the Bank's primary market area. The local economy depends primarily on many industrial facilities such as the manufacturing operations for such major companies as: Dana Corporation, Freudenberg, Phelpa Dodge Magnet Wire, Thomas Industries, International Paper, Mitsubishi, Rockwell International, Flynn Enterprises, Ardco, Johnson Controls and Briggs and Stratton. This area is also considered a strong agricultural community and is affected by its related industries: U.S. Tobacco, Southwestern Tobacco, Wayne Feeds, Case Power & Equipment, Agri-Chem and others. It should also be noted that the market area of the Bank includes Fort Campbell Military Base and Murray State University, as well as locally owned industries which have gained national importance such as Dunlap Sales, Kentucky Derby Hosiery and Gardner Wallcovering. The Bank offers traditional thrift deposit products to its customers including savings accounts, NOW accounts, MMDA accounts and certificates of deposit. The Bank does not aggressively pursue commercial deposit accounts. Hopkinsville Federal's lending operations are primarily concentrated in the four counties where its branches are located. Loan production is generated through the Bank's loan officers (including branch managers), other management individuals and referral from real estate brokers. The Bank does not employ commissioned loan origination personnel. The Bank's loan products principally include first and second mortgages on residential properties. Most of these loans are on owner-occupied single family homes, but the Bank does make nonowner-occupied residential mortgages. The Bank has made selected commercial and commercial real estate loans and construction loans. The Bank also offers consumer loans to its customers. The Bank originates loans only for its own portfolio and is not actively involved in the origination and sale of loans to the secondary mortgage market. The following analysis addresses the Bank's primary market area and the prevailing economic conditions. For the purposes of this discussion, data for all of the counties served by the Bank has been utilized. DEPOSIT SHARE AND MARKET POSITION The Bank's market area has undergone significant changes as to the nature and number of competitors. At one time, most of the financial institutions were locally owned and managed institutions. In the age of financial institution consolidation, many of these local financial institutions have disappeared and become part of statewide/nationwide banking organizations including Bank One, First City Bank (a wholly-owned subsidiary of Area Bancshares, Corp.) and NationsBank. Exhibit II-5 provides a listing of financial institutions headquartered in the Bank's market area which compete with Hopkinsville Federal, in addition to the above mentioned statewide/nationwide banking organizations. In addition to the above noted bank and thrift competition, local credit unions have become strong competitors in Hopkinsville Federal's market. Additionally, mutual fund providers have aggressively competed to capture the Bank's deposit customers as have mortgage banking firms for the Bank's loan customers. POPULATION Exhibit II-1 depicts the comparative population trends for the United States, the state of Kentucky, and each county market area in which Hopkinsville Federal operates. The annual change in population form 1990 to 1994 was 10 NATIONAL CAPITAL COMPANIES, LLC slightly higher for the Bank's primary market area compared to the state of Kentucky's average and the average for the nation. Projected population growth for the counties in the Bank's primary market area from 1994 to 1999 is projected to be approximately 1.97%. HOUSEHOLDS Exhibit II-2 illustrates information on the number of households in the counties the Bank serves. As of 1990, the total number of households for all counties was 41.5 thousand. The projected growth of 2.38% from 1994 to 1999 is minimal which limits the Bank's ability to grow and expand. The limited growth in population and accordingly, the anticipated lack of growth in housing may limit Hopkinsville Federal's opportunities for loan generation. AGE DISTRIBUTION Exhibit II-3 depicts the age distribution by county throughout the Bank's primary market area compared to the state of Kentucky and the national average. The market's demand for new housing relies greatly upon the age distribution of the population. Often homes are purchased by people between the ages of 25 and 44 years old. Approximately 31.10% of the entire population of Kentucky falls within this age group, however, the county average for the primary market of the Bank has less than 30.00% of its population within this category. Additionally, the Bank's market area consists of an older population (65 and older) compared to either the state average or national average. The prime income earner, those between 25 and 60, represent a lower proportion of the Bank's customer base than for the state and national average. This results in less of an opportunity for the Bank to grow and expand than for financial institutions in more prosperous markets. MEDIAN HOUSEHOLD INCOME Exhibit II-4 provides information on median household income and projected median household income growth in Hopkinsville Federal's primary market areas. The median household income for the Bank's market area was estimated, as of 1994, at $23,513 by the 1990 census. This income level is approximately 69.00% of the national average of $33,900 and 90.00% of the state of Kentucky average of $26,165. The lower household income for the Bank's market, compared to other regions, translates into lower disposable income for its customers for either housing needs or for savings. Median household income provides a measurement of the economic stability and purchasing power of the market area. The demographics indicate that the Bank's market area is in decline. A decline in median household income for Hopkinsville Federal's market area reduces the Bank's opportunities to expand its conventional lines of business as well as complementary lines such as consumer lending. EMPLOYMENT BY PLACE OF WORK Exhibit III-3 provides information on employment by place of work for the United States, the state of Kentucky and for Christian, Calloway, Trigg and Todd Counties. This exhibit also gives the unemployment rates for each. The major source of personal income by industry group in all of the counties, except for one, in Hopkinsville Federal's market area was the manufacturing industry. The manufacturing industry contributed 27.50% of Christian County's, 36.70% of Trigg County's and 47.87% of Todd County's wages in 1995. The exception was Calloway County where the majority of personal income was the Wholesale/Retail Trade industry which contributed 27.10% of the employment in that county. All of these percentages are higher compared to the United States and Kentucky for 1996. The Services industry is the major contributor in the United States, as well as in Kentucky, with 28.74% and 24.43%, respectively. 11 NATIONAL CAPITAL COMPANIES, LLC KEY HOUSING DATA Key housing data is provided in Exhibit III-4 for the United States, Kentucky and for Christian, Calloway, Trigg and Todd Counties. The average value of a single-family home in each of the counties was approximately half of the average value for the United States of $112,474 (51.76% for Christian County, 42.90% for Calloway County, 50.69% for Trigg County and 55.60% for Todd County). An economic indicator that pertains more directly to the banking and thrift industries is the issuance of new housing permits. In 1996, there were 83 reported building permits issued for one-to-four housing units in the city of Hopkinsville in Christian County, 44 in the city of Murray in Calloway County, 7 in the city of Cadiz in Trigg County and none in Elkton and Guthrie in Todd County compared to 15,368 in the state of Kentucky. OCCUPANCY RATES Exhibit III-4 also provides information on occupancy rates for the United States, Kentucky and Christian, Calloway, Trigg and Todd Counties. All of the counties, except for Calloway County, are characterized by a higher level of owner-occupied housing (72.40% for Christian County, 75.80% for Trigg County and 79.40% for Todd County) than the United States at 64.20% and Kentucky at 69.60%. MARKET SHARE OF DEPOSITS The information provided in Exhibit III-5 is market share of deposits for banks, thrifts and credit unions in Hopkinsville Federal's market area. Hopkinsville Federal's market share of thrift deposits is 86.70% and 13.78% of all financial institution and credit union deposits which total slightly over $1.4 billion in Christian, Calloway, Trigg and Todd Counties. SUMMARY Hopkinsville Federal's market area, based upon demographic information, is slightly less prosperous than other market areas. The median household income for the Bank's market area is lower than the state average or the national average. The population of the Bank's market is older. Based upon the low number of building permits, market opportunities are limited for the Bank. The projected population growth is higher than the state of Kentucky average or the national average. However, Christian County, the market area where more than half of the Bank's customers reside, was projected to lose population in the 1990 to 1994 time frame. Accordingly, both lending and deposit growth opportunities appear to be more limited compared to financial institutions located in other areas where economic growth is anticipated to be more rapid. Overall, Hopkinsville Federal has a strong market presence and a long history in the markets it operates in. The Bank has been successful in competing in its lending and deposit market areas and has close ties to its community. Hopkinsville Federal has a good reputation in the community. The Bank is anticipated to be able to achieve the moderate growth in the future. 12 NATIONAL CAPITAL COMPANIES, LLC CHAPTER IV COMPARISONS WITH PUBLICLY TRADED SAVINGS INSTITUTIONS INTRODUCTION In order to estimate the proforma fair market value of the common stock of HopFed which will be issued in connection with the Conversion, a group of publicly-held savings institutions ("comparables") with actively-traded markets for their common stock was selected for comparison purposes. Since HopFed's market value will be determined by these comparables, the selection criteria and procedures are of special importance. In order to arrive at the valuation of HopFed's common stock, subsequent adjustments for size, interest rate sensitivity of the asset-liability structure, financial strength, earnings, asset quality and other considerations will be examined in order to adjust the estimated proforma fair market value of HopFed's common stock to the value of the comparables. The selection of the comparables was based on the establishment of both general and specific parameters using financial, operating and asset quality characteristics of Hopkinsville Federal as determinants for defining those parameters. The determination of parameters was also based on the uniqueness of each parameter as a normal indicator of a thrift institution's operating philosophy and perspective. The parameters established and defined are considered to be both reasonable and reflective of the Bank's basic operation. Inasmuch as the comparables should consist of at least ten institutions, the parameters relating to asset size and geographic location have been expanded as necessary in order to fulfill this requirement. We have chosen to select a group of comparable companies rather than rely on the "offsetting tendencies" of all publicly traded thrifts. In order to further refine our analysis, we have selected a group of thrifts that we believe reflects the estimated proforma fair market value of HopFed based on various selection criteria including those discussed below. Financial and market statistics for Midwestern savings institutions that have an initial public offering ("IPO") date before September 30, 1995 with assets of $500 million or less listed on the New York or American Stock Exchanges and companies traded OTC and listed on NASDAQ are presented in Exhibits IV-1. The population used for the selection of comparable companies was limited to this universe of publicly traded savings institutions. SELECTION CRITERIA GENERAL PARAMETERS - ------------------ MERGER AND ACQUISITION We eliminated those thrifts whose fair market value may have been influenced by publicly announced mergers or potential acquisitions. These companies were eliminated due to the possibility of the existence of an acquisition premium included in the market value of their common stock that may be attributed to nonquantifiable factors (e.g. local market competition and demographic characteristics). MUTUAL HOLDING COMPANIES The comparables will not include any mutual holding companies. Mutual holding companies typically demonstrate higher price-to-book valuation ratios that are the result of their minority ownership structure and are inconsistent with those of conventional, publicly traded institutions. 13 NATIONAL CAPITAL COMPANIES, LLC TRADING EXCHANGE It is necessary that each institution in the comparable group be listed on one of the two major stock exchanges, the New York Stock Exchange or the American Stock Exchange, or traded over-the-counter ("OTC") and listed on the National Association of Securities Dealers Automated Quotations ("NASDAQ"). Such a listing indicates that an institution's stock has demonstrated trading activity and is responsive to normal market conditions, which are requirements for listing. IPO DATE The large number of mutual to stock conversions that have occurred in recent years increases the availability of smaller publicly traded savings institutions with similar operating characteristics to Hopkinsville Federal. These comparables provide a good indication of the likely market reception of newly issued stock of financial institutions. Therefore, we have attempted to include savings institutions that have converted to the stock form of organization in recent years in the comparable group. These recently converted savings institutions should provide an accurate indication of the fair market value of recent public offerings. The IPO date must be at least four quarterly periods prior to the trading date of May 29, 1997 used in this report in order to insure at least four consecutive quarters of reported data as a publicly traded institution. The resulting parameter is a required IPO date prior to September 30, 1995. GEOGRAPHIC LOCATION Geographic location is an important consideration. The regional and state operating environment, consisting of various economic, regulatory and legal factors, can influence any given thrift's fair market value. At the same time, we believe it is important not to place undue reliance on the influence of a specific location since many national factors also affect the fair market value of thrift common stock. We chose to identify geographic markets with economic characteristics similar to Hopkinsville Federal's operating market area. We eliminated savings institutions located on the East Coast and the West Coast due to the different economic conditions in these regions of the country compared to southern Kentucky. We further eliminated thrifts which operate in major metropolitan markets. Hopkinsville Federal's market area is not located in a major metropolitan area and the market opportunities for thrifts in these areas can be significantly different from Hopkinsville Federal's operating market area opportunities. ASSET SIZE We limited our selection of savings institutions to those that do not exceed $500 million in assets. Generally, our studies and experience indicate that savings institutions larger than $500 million have substantially different operating characteristics, management structures and available resources. Given Hopkinsville Federal's total asset size, we believe that the $500 million total asset cut off limit successfully retains the savings institutions that have many of the same operating characteristics as Hopkinsville Federal. BALANCE SHEET PARAMETERS - ------------------------ INTRODUCTION The balance sheet parameters focused on five balance sheet ratios as determinants for selecting a comparable group. The balance sheet ratios consist of the following: 14 NATIONAL CAPITAL COMPANIES, LLC . Cash and Investments-to-Assets . One-to-Four Family Loans-to-Assets . Total Net Loans and Mortgage-backed Securities-to-Assets . Borrowed Funds-to-Assets . Equity-to-Assets The parameters enable the identification and elimination of thrift institutions that are distinctly different from Hopkinsville Federal with regard to asset composition and funding sources. CASH AND INVESTMENTS-TO-ASSETS Hopkinsville Federal's level of cash and investments-to-assets was 39.96% at March 31, 1997. The Bank's investments consist primarily of United States Government and Agency securities and FHLB time deposits. The parameter range we have selected for cash and investments is broad due to the volatility of this parameter and in recognition that most thrifts do not hold as high a level of cash and investments as the Bank. We have incorporated a broad parameter range to prevent the elimination of otherwise good potential comparable group candidates. The range has been defined as 40.00% of assets or less. ONE-TO-FOUR FAMILY LOANS-TO-ASSETS Hopkinsville Federal's lending activity is focused on the origination of residential mortgage loans secured by one-to-four family dwellings. One-to-four family loans, excluding construction loans, represented 80.37% of the Bank's loan portfolio as of March 31, 1997. The parameter for this characteristic requires any comparable group institution to have at least 60.00% of its assets in one-to-four family loans. The credit risk and earnings nature of thrifts with a focus in nonresidential forms of lending were not deemed to be comparable to Hopkinsville Federal. TOTAL NET LOANS AND MORTGAGE-BACKED SECURITIES-TO-ASSETS Hopkinsville Federal's holdings of mortgage-backed securities-to-assets and total net loans-to-assets were 10.20% and 48.04%, respectively, for a combined share of 58.24%. The Bank has expressed a desire to expand its lending activities and holdings of mortgage-backed securities. Accordingly, we have included thrifts with a higher level of loans and mortgage-backed securities holdings than the level currently held by the Bank. The parameter range for the comparable group in this category is 55.00% or higher. BORROWED FUNDS-TO-ASSETS Hopkinsville Federal did not have any FHLB advances at March 31, 1997. The use of borrowed funds by some thrift institutions indicates an alternative to retail deposits and may provide a source of longer term funds for lending. The formerly high cost of federal insurance premiums on deposits had also increased the attractiveness of borrowed funds prior to the enactment of the SAIF recapitalization legislation in 1996. The increased capital position of the Bank, upon completion of the Conversion, may result in the Bank reconsidering its emphasis on growth through deposits and the utilization of FHLB borrowings to increase the Bank's asset base. Many recently converted thrifts have expanded their size through wholesale asset and liability growth to enhance their earnings. In consideration of the fact that some thrifts use FHLB borrowings as a substitute to deposits and the potential that the Bank may seek to grow through borrowings upon completion of the Conversion, we have adopted a parameter range to include thrifts with borrowed funds-to-assets of 40.00% or less. 15 NATIONAL CAPITAL COMPANIES, LLC EQUITY-TO-ASSETS Hopkinsville Federal's equity-to-assets ratio as of March 31, 1997 was 8.49%. The proforma equity-to-assets ratio for HopFed after conversion, based upon the midpoint value of $24,000,000, is over 16.00%. Based upon this proforma equity ratio, we have defined the equity ratio parameter to be 6.50% to 20.00%. PERFORMANCE PARAMETERS - ---------------------- INTRODUCTION The performance parameters focused on five profitability ratios as determinants for selecting a comparable group. The performance ratios consist of the following: . Return on Average Assets . Return on Average Equity . Net Interest Margin . Noninterest Income-to-Assets . Operating Expenses-to-Assets The primary performance indicator of a thrift's profitability is its ROAA. The second performance indicator is the ROAE. To measure the Bank's ability to generate net interest income, we have included net interest margin as a performance parameter. The supplemental source of income for a thrift is noninterest income, and the parameter used to measure this factor is noninterest income-to-assets. The final performance indicator that has been identified is the ratio of operating expenses-to-assets (noninterest expenses-to-assets), a key factor in distinguishing different types of operations, particularly institutions that are aggressive in nontraditional thrift activities which may result in higher operating costs and overhead ratios. RETURN ON AVERAGE ASSETS The key performance parameter is the ROAA. Hopkinsville Federal's most recent ROAA for the last twelve months ("LTM") period ending March 31, 1997 was .19% and .58% adjusted to exclude the SAIF special assessment. The Banks' ROAA over the past three years has ranged from a low of .09% for the fiscal year 1996 to a high of .70% for the quarter ended March 31, 1997 with an average ROAA of .43% including the March 31, 1997 quarter. For the four quarters following conversion in the second quarter of 1997, HopFed's ROAA is projected to range between .60% and .67%, increasing further to approximately .91% by the end of fiscal year 1999. Hopkinsville Federal's recent and proforma profitability made it desirable to select savings institutions with current positive earnings and positive earnings over each of the past three years. In addition, we eliminated any thrift which recorded a ROAA in excess of 1.50% for the most recent twelve month period to remove savings institutions with operating profitability significantly greater than Hopkinsville Federal. This criteria will enable us to properly apply the price-to-earnings ("P/E") method. RETURN ON AVERAGE EQUITY The ROAE has been used as a secondary parameter to eliminate any institutions with an unusually high or low ROAE that is inconsistent with HopFed's proforma performance. This parameter does not provide as much 16 NATIONAL CAPITAL COMPANIES, LLC meaning for a newly converted thrift institution as it does for established stock institutions, due to the newness of the capital structure of the newly converted thrift and the inability to accurately reflect a mature ROAE for the newly converted thrift relative to other stock institutions (due to the initial purchase of the stock at a discount to book value). The proforma ROAE for HopFed at the time of conversion is 4.58% based on the midpoint valuation. The Bank's ROAE was 1.11% for the fiscal year ended December 31, 1996 (6.05% adjusted for the SAIF special assessment) and 8.39% for the quarter ended March 31, 1997. The parameter range for the comparable group is from 4.50% to 11.50%, adjusted to exclude the SAIF special assessment. NET INTEREST MARGIN Hopkinsville Federal had a net interest margin of 1.65% for the fiscal year ended December 31, 1996 and 2.04% for the quarter ended March 31, 1997. This level is significantly lower than average for the thrift industry. As mentioned, the Bank's low net interest margin is a function of its high level of investment securities. The net interest margin is projected to improve as the Bank expands its lending activities. The parameter range for the selection of the comparables we utilized was selected to represent the more normal net interest margin of the industry and ranged from a low of 2.00% to a high of 4.50%. NONINTEREST INCOME-TO-ASSETS As shown on Exhibit IV-2i, Hopkinsville Federal had a noninterest income-to- assets ratio of .33% from the LTM period ending March 31, 1997. The Bank's ratio of noninterest income-to-average assets for the last five years including the LTM period ending March 31, 1997 ranged from a low of .18% at December 31, 1993 to a high of .34% for the quarter ended March 31, 1997. The parameter range for the selection of the comparables was from a low of .01% to a high of .60%. OPERATING EXPENSES-TO-ASSETS Hopkinsville Federal had a relatively lower than average operating expenses-to- average assets ratio of 1.21% for the LTM period ending March 31, 1997 (exclusive of the SAIF assessment which is shown as a nonrecurring expense on Exhibit IV-2i). The Bank's annual ratio of operating expenses-to-average assets for the last three years has ranged from a low of 1.08% at December 31, 1995 to a high of 1.18% at December 31, 1996 with an average of 1.15%. The operating expense-to-assets parameter used for the selection of the comparables ranged from a low of .70% to a high of 2.50%. ASSET QUALITY PARAMETERS - ------------------------ INTRODUCTION The final set of financial parameters used in the selection of the comparable group are asset quality parameters. The purpose of these parameters is to insure that any thrift institution in the comparable group has an asset quality position similar to that of Hopkinsville Federal. The three defined asset quality parameters are: . Nonperforming Assets-to-Total Assets . Repossessed Assets-to-Total Assets . Loan Loss Reserves-to-Total Assets 17 NATIONAL CAPITAL COMPANIES, LLC NONPERFORMING ASSETS-TO-ASSETS RATIO Hopkinsville Federal's ratio of nonperforming assets-to-assets was .09% at March 31, 1997. For the past three fiscal years the Bank's ratio has ranged from a low of .02% at December 31, 1994 to a high of .13% at December 31, 1996 with an average of .07%. The parameter range used in the selection of the comparables for nonperforming assets-to-assets was defined as .90% of assets or less. REPOSSESSED ASSETS-TO-ASSETS Hopkinsville Federal has had no repossessed assets since the fiscal year ended December 31, 1994. The range used in the selection of the comparables for the repossessed assets-to-total assets parameter was .15% of assets or less. LOAN LOSS RESERVES-TO-ASSETS Hopkinsville Federal had a loan loss reserve, or allowance for loan losses, of $217 thousand representing an allowance for loan losses-to-total assets of .11% at March 31, 1997. The loan loss reserve-to-assets parameter range used for the selection of the comparables focused on a minimum required ratio of .15% of assets. THE COMPARABLE GROUP - -------------------- The above criteria results in the selection of ten publicly-held savings institutions. The ten savings institutions are located in a diverse geographic area with three in Indiana, three in Ohio, two in Missouri and one each in Kansas and Iowa. The resulting comparable group will not exactly resemble Hopkinsville Federal. Slight differences among the comparables and Hopkinsville Federal will remain, yet the overall differences can be identified and adjusted. The product of these selection procedures is a group of savings institutions that are representative of the relative market values for publicly traded, smaller sized savings institutions and, to the extent possible, are not influenced by unusual trading activity. Therefore, this group and the following analysis, provides a more useful and appropriate basis to determine the proforma value of the Company's common stock than a broad index of publicly traded savings and loans. Exhibit IV-2 through Exhibit IV-2l present general information for the ten savings institutions in the comparable group. 18 NATIONAL CAPITAL COMPANIES, LLC COMPARABLE GROUP OPERATING CHARACTERISTICS AND GENERAL DESCRIPTION AMERIANA BANCORP ("ASBI") is an Indiana based holding company which owns 100% of - ---------------- the outstanding common stock of Ameriana Savings Bank, FSB. ASBI converted from a mutual to stock form of organization in March 1987 and trades over-the-counter with a NASDAQ listing. ASBI is a financially strong and well capitalized savings and loan association. ASBI reported an equity-to-assets ratio of 10.85% as of March 31, 1997. ASBI operates as a traditional savings bank with assets of approximately $402.2 million at March 31, 1997 and is primarily engaged in attracting deposits from the general public and using such deposits to originate residential mortgage loans. Conventional one-to-four family loans comprised 76.92% and consumer loans represented 16.15% of gross loans as of March 31, 1997. ASBI also holds a slightly higher level of mortgage-backed securities, which totaled 9.10% of total assets as of March 31, 1997 compared to the average of the comparable group, . ASBI operates seven branches in and around New Castle, Indiana. ASBI is located in central Indiana, approximately 40 miles east of Indianapolis. New Castle is located in Henry County. Henry County is projected to grow in population by approximately .21% from 1994 to 1999 and had a reported 1994 median household income of $29,029 according to CACI, a demographic source book. For the LTM ending March 31, 1997, the Bank had a ROAA of .60% and a ROAE of 5.41% (.91% and 8.18%, respectively, adjusted to exclude the SAIF assessment). ASBI has grown, on average, in assets by 7.25%, in loans by 8.26% and in deposits by 5.04% over the last three years. The increase in assets was primarily attributable to an increase in its consumer loan portfolio as a result of the Bank's efforts to increase revenues while maintaining a reasonable short maturity on its portfolio. ASBI has consistently been profitable averaging 1.31% ROAA over the last five years. ASBI's net interest margin for the LTM period ended March 31, 1997 totaled 3.01%. Noninterest expense totaled 2.22%, while total interest expense totaled 4.28%. ASBI recorded a loan loss provision totaling .02% of average assets for the year ended March 31, 1997. FIRST BANCSHARES, INC. ("FBSI") is a unitary holding company which owns First - ---------------------- Home Savings Bank located in Mountain Grove, Missouri. Mountain Grove is located in Wright County in southern Missouri. Wright County is projected to grow in population approximately 3.50% from 1994 to 1999 and had a reported median household income of $17,470 for 1994 according to CACI. In December 1993, FBSI converted and began trading on the over-the-counter market. FBSI currently operates five offices. As of March 31, 1997 FBSI had total assets of approximately $160.0 million and an equity-to-assets ratio of 14.33%. FBSI recorded an average annual growth in assets of 17.14% and in loans of 20.85% over the last three years. Growth in deposits for the same time period was 10.78%, primarily due to a checking accounts program. FBSI's balance sheet is structured as a traditional thrift with loans making up 81.23% of the Bank's total assets as of March 31, 1997. Conventional one-to- four family mortgage loans made up 76.68% of FBSI's gross loans. FBSI experienced a significant decrease in nonperforming assets-to-total assets from June 30, 1996 of .88% to March 31, 1997 of .08%. As of March 31, 1997 FBSI held borrowings equal to 13.84% of assets. FBSI's historical earnings have been excellent, with its net income over the past five years averaging .96% of average assets. For the LTM period ended March 31, 1997, FBSI recorded a ROAA of .91% and a ROAE of 5.96% (1.19% and 7.78%, respectively, adjusted to exclude the SAIF assessment). FBSI's net interest margin was 3.38% for the LTM period. FBSI's profit performance was favorably impacted by the bank's high yield on interest-earning assets of 7.88%, which is higher than the average of the comparable group. FBSI's noninterest income for the LTM period totaled .29% of average assets. 19 NATIONAL CAPITAL COMPANIES, LLC FFW CORPORATION ("FFWC") owns all outstanding stock of First Federal Savings - --------------- Bank of Wabash, a federally-chartered stock savings bank, which converted from mutual ownership form to stock form in April 1993. FFWC is headquartered in Wabash, Indiana and operates two branches. Wabash is located in northeastern Indiana, approximately 35 miles southwest of Fort Wayne and Wabash is in Wabash County. Wabash County is projected to decline in population .09% between 1994 to 1999 and had a reported median household income of $30,572 for 1994 according to CACI. At March 31, 1997, FFWC had total assets of approximately $158.4 million and an equity-to-assets ratio of 10.01%. For the LTM period ending March 31, 1997, the Bank recorded a ROAA of .89% and a ROAE of 8.73% (1.13% and 11.01%, respectively, adjusted to exclude the SAIF assessment). The adjusted ROAA was 11 basis points higher than the average of the comparables. FFWC's assets are primarily invested in conventional single family mortgage loans which comprised 63.89% of FFWC's gross loans, the lowest of the comparable group. FFWC has sought to diversify its portfolio through the addition of consumer lending and has developed a consumer loan portfolio totaling 22.70% of gross loans as of March 31, 1997. FFWC's level of consumer lending, as a percentage of gross loans, was the highest of the comparable group. FFWC has funded its assets primarily with retail savings accounts and FHLB borrowings. FFWC's level of borrowings, as of March 31, 1997, totaled 27.28% of total liabilities and equity. FFWC, like most of the other comparables, recorded growth in deposits in the last year. FFWC reported nonperforming assets totaling .22% of total assets as of March 31, 1997. FFWC's profitability has been higher than that of many of the comparables. Over the last three years, FFWC has averaged a ROAA assets of 1.08%, however, its net interest margin of 3.12% was below the comparable group average of 3.22% for the LTM period ending March 31, 1997. The Bank's noninterest expense ratio was only 1.83% of average assets. WOOD BANCORP, INC. ("FFWD") owns all of the outstanding stock of First Federal - ------------------ Bank, a federally-chartered stock savings bank that completed its conversion from the mutual form of ownership to stock form in August 1993. FFWD is headquartered in Bowling Green, Ohio and operates five branches. The Bank's primary market area is located approximately 20 miles south of Toledo in Wood County. Wood County is projected to grow in population 1.60% from 1994 to 1999 and had a reported median household income of $33,928 for 1994 according to CACI. As of March 31, 1997, FFWD reported assets of approximately $163.5 million and an equity-to-assets ratio of 12.70%. For the LTM period ending March 31, 1997, the Bank had a ROAE of 7.51% (9.66% adjusted to exclude the SAIF assessment). FFWD's balance sheet is structured as a traditional thrift with loans making up 80.71% of the Bank's total assets. Conventional one-to-four family mortgage loans make up 78.24% of FFWD's gross loans. FFWD has also been active in the origination of consumer loans which totaled 9.25% of gross loans as of March 31, 1997, while construction mortgage loans totaled 4.86%. As of March 31, 1997, FFWD held borrowings totaling 14.45% of total liabilities and equity. FFWD has been profitable over the last three years, averaging a ROAA of 1.08%. For the LTM ended March 31, 1997, FFWD recorded a ROAA of 1.00% (1.29% adjusted to exclude the SAIF assessment). FFWD's net interest margin was 4.19%, the highest of the comparable group, but noninterest expenses were 2.39%, which was also the highest of the group. This level of expense may be reflective of the Bank's diversification into consumer lending which is more expensive to service. 20 NATIONAL CAPITAL COMPANIES, LLC INDUSTRIAL BANCORP, INC. ("INBI") is a state chartered savings bank which owns - ----------------------- all of the issued and outstanding common shares of The Industrial Savings and Loan Association located in Bellevue, Ohio. Bellevue is located in Huron County and is approximately 50 miles southeast of Toledo, Ohio. Huron County is projected to grow in population 5.0% from 1994 to 1999 and had a reported median household income of $29,722 for 1994 according to CACI. In August 1995, INBI converted from the mutual to stock form of ownership. INBI'S stock trades in the over-the-counter market and has a NASDAQ listing. The Bank operates nine branches. As of March 31, 1997, INBI reported total assets of approximately $333.8 million and an equity-to-assets ratio of 18.49%. INBI has experienced slightly less than average growth in assets and loans and slightly above average growth in deposits over the last three years. INBI'S balance sheet is structured as a traditional thrift with 87.84% of assets being loans. Of those loans, 86.80% are one-to-four family conventional mortgage loans. INBI'S has consistently been profitable. Over the last five years the bank averaged a ROAA of 1.04% and for the LTM period ending March 31, 1997 recorded a ROAA of .73% (1.35% excluding the SAIF assessment). INBI'S net interest margin for the LTM ended March 31, 1997 was an impressive 4.18% primarily attributable to growth in loans receivable and the reduced use of FHLB borrowings in 1996. The Bank's noninterest expense ratio was 2.06% with noninterest income totaling .14%. LANDMARK BANCSHARES, INC. ("LARK") was formed in March 1994 in connection with - ------------------------- the conversion from a mutual to stock form of ownership of Landmark Federal Savings Bank, a federally chartered savings bank headquartered in Dodge City, Kansas. Dodge City is located in southwestern Kansas, 155 miles west of Wichita. Dodge City is in Ford County which is projected to grow in population 4.30% from 1994 to 1999 and had a reported median household income of $27,358 for 1994 according to CACI. LARK operates five full service offices. At March 31, 1997, LARK had total assets of approximately $223.8 million and an equity-to-assets ratio of 14.63%. For the LTM period ending March 31, 1997, the Bank had a ROAE of 5.42% (7.27% adjusted to exclude the SAIF assessment). LARK's loan portfolio represented 64.87% of total assets as of March 31, 1997, the second lowest of the comparables. Conventional one-to-four family mortgages comprised 83.21% and consumer loans comprised 8.34% of gross loans as of the same date. LARK has experienced a three year average annual loan growth of 35.82% primarily due to increased lending and the purchase of approximately $16.4 million in mortgage loan packages throughout 1996. LARK has consistently been profitable with an ROAA of 1.13% for the LTM period ending March 31, 1997, adjusted to exclude the SAIF assessment. This profit performance compares to the comparable group average of 1.02%. LARK's net interest margin for the LTM period ended March 31, 1997 totaled 3.07%. Noninterest expenses were only 1.62% of assets, the second lowest of the comparables. The strong net interest and operating efficiency has enabled LARK to record consistently strong profitability. MBLA FINANCIAL CORP. ("MBLF") is a holding company which owns Macon Building and - -------------------- Loan Association, which is located in Macon, Missouri. Macon is located in northern Missouri approximately 100 miles northeast of Kansas City and is in Macon County. Macon County is projected to decline in population 2.3% from 1994 to 1999 and had a reported median household income of $22,069 for 1994 according to CACI. In June 1993, MBLF converted from mutual to stock and began trading on the over-the-counter market. As of March 31, 1997, MBLF had total assets of approximately $209.8 million and an equity-to-assets ratio of 13.50%. For the LTM period 21 NATIONAL CAPITAL COMPANIES, LLC ended March 31, 1997, MBLF recorded a ROAA of .66% and a ROAE of 4.90 (.83% and 6.18%, respectively, adjusted to exclude the SAIF assessment). MBLF, as of March 31, 1997, held 55.61% of total assets in loans, the lowest of the comparables. However, conventional one-to-four family mortgage loans make up 92.56% of the Bank's gross loans. MBLF also carries a higher percentage of borrowings-to-assets than the comparable group. MBLF's 39.05% borrowings-to- assets ratio is double that of the comparable's average. The Bank's level of loan loss provisions for the LTM period was a recovery totaling .02% of average assets. MBLF's net interest margin for the LTM period ending March 31, 1997 was 2.10%, the lowest of the comparables. The Bank's operating expense ratio of .71% is also the lowest of the comparables, which is reflective of its high level of wholesale funding. MBLF earns a majority of its income from interest-earning assets, which is reflective of the noninterest income for the LTM period of .01% of assets, below the comparables' average of .23%. MFB CORP. ("MFBC") is a unitary holding company which owns Mishawaka Federal - --------- Savings which converted from a federal mutual savings and loan association to a federal stock saving bank in March 1994. MFBC operates three branches and the bank's wholly-owned subsidiary, Mishawaka Financial Services, Inc., is engaged in the sale of insurance products to the bank's customers and the general public. MFBC is headquartered in Mishawaka, Indiana, a suburb of South Bend, and is located in St. Joseph County. St. Joseph County is projected to grow in population 2.4% from 1994 to 1999 and had a reported median household income of $30,959 for 1994 according to CACI. MFBC held total assets as of March 31, 1997 of approximately $234.3 million and an equity-to-assets ratio of 14.51%. MFBC has experienced average growth in assets over the last three years, however, annual loan growth was 32.83% as of March 31, 1997. This is attributable to the fact that in 1996 the Bank began offering a wider array of loan products. MFBC had no nonperforming assets as of March 31, 1997. The Bank's loan portfolio is comprised of 95.12% of gross loans in one-to-four family loans and a lower than average percentage, .76%, of commercial and land mortgage loans. MFBC's profitability has been slightly lower than average. Over the last five years MFBC has averaged a ROAA of .77%. MFBC's ROAA for the LTM period ended March 31, 1997 totaled .56% (.84% excluding the SAIF assessment). MFBC's LTM net interest margin was 3.15% and noninterest expenses were 1.93% of average assets. MILTON FEDERAL FINANCIAL CORPORATION ("MFFC") is a unitary holding company which - ------------------------------------ owns Milton Federal Savings Bank which is located in West Milton, Ohio. West Milton is located approximately 20 miles northwest of Dayton in Miami County. Miami County is projected to grow in population 3.8% from 1994 to 1999 and had a reported median household income of $35,575 for 1994 according to CACI. MFFC was formed upon a conversion in October, 1994 and operates one full-service branch. MFFC held assets of approximately $178.8 million as of March 31, 1997 and reported an equity-to-assets ratio of 14.74%. MFFC has experienced lower than average increased in asset growth over the last year. MFFC's balance sheet is traditionally structured with 84.68% of gross loans being one-to-four family mortgage loans as of March 31, 1997. The Bank holds a higher than average percentage of construction loans in response to construction activity in its market. MFFC has been profitable over the last five years, averaging a ROAA of 1.04%. However, for the LTM period ended March 31, 1997, MFFC recorded a ROAA of .53% (.80% excluding the SAIF assessment). MFFC's net interest margin was 3.21%. The Bank's operation expense ratio was 2.16%. 22 NATIONAL CAPITAL COMPANIES, LLC MIDWEST BANCSHARES INC. ("MWBI") is the unitary holding company for Midwest - ----------------------- Federal Savings and Loan Association of Eastern Iowa, a federally-chartered stock savings bank which converted from mutual ownership form to stock form in November 1992. MWBI is headquartered in Burlington and operates three branches. Burlington is located in Des Moines County in southeastern Iowa. Des Moines County is projected to decline in population by 1.2% from 1994 to 1999 and had a reported median household income of $29,170 for 1994 according to CACI. At March 31, 1997, MWBI reported total assets of approximately $139.0 million and an equity-to-assets ratio of 6.94%. MWBI's assets are primarily invested in loans and mortgage-backed securities. MWBI's loan portfolio totals 59.93% of total assets as of March 31, 1997. Mortgage loans secured by one-to-four family properties comprised 76.16% of MWBI's gross loans. The Bank had nonperforming assets-to-assets of .82% as of March 31, 1997, which is the highest of the comparables. MWBI recorded a decrease in deposits over the last three years and below average growth in assets, loans and deposits in the last year. MWBI's profitability has been consistent over the last five years, averaging a ROAA of .83%. MWBI's ROAA for the LTM period ended March 31, 1997 totaled .47% (.78% excluding the SAIF assessment). MWBI's net interest margin was 2.84% and its noninterest expense ratio was 1.85%. MWBI, in part due to its low level of capitalization, recorded a ROAE of 11.39%, adjusted to exclude the SAIF assessment. 23 NATIONAL CAPITAL COMPANIES, LLC COMPARABLE GROUP COMPARISON TO HOPKINSVILLE FEDERAL GROWTH: Hopkinsville Federal has experienced a lower level of growth than that of the comparables. Hopkinsville Federal recorded an average annual growth in assets over the last three years of 3.02% compared to the average of the comparables' three year growth of 12.48%. Hopkinsville Federal's three year average annual growth in its loan balances was 13.61% compared to the comparables increase of 14.12%. Hopkinsville Federal experienced a decline in deposits of 5.97% in the past year compared to the comparables increase of 7.14%. CAPITALIZATION: Hopkinsville Federal's GAAP equity-to-assets ratio was 8.49% compared to the comparables' average of 13.07% as of March 31, 1997. Upon the Conversion, the Company's level of capital will be above the level of the comparables. NON-PERFORMING ASSETS: Hopkinsville Federal's level of nonperforming assets as of March 31, 1997 was .09% of assets. This level is less than the comparables' average of .22% as shown in Exhibit IV-2c. PORTFOLIO COMPOSITION: As shown in Exhibit IV-2d, Hopkinsville Federal's asset portfolio is composed of a high level of cash, investment securities and mortgage-backed securities. These categories represent 50.16% of the Bank's total assets as of March 31, 1997. This is approximately twice that of the comparables' average of 27.12%. Exhibit IV-2f illustrates the loan composition of Hopkinsville Federal and the comparables. Hopkinsville Federal's loan portfolio is primarily one-to-four family collateral, totaling 80.37% of gross loans as of March 31, 1997, which is comparable to the comparables' average of 81.43%. Hopkinsville Federal's holding of multi-family mortgage loans is almost half that of the average of the comparables (1.47% and 2.25%, respectively), the Bank holds a slightly higher level of commercial real estate and land mortgage loans (6.61% and 3.68%, respectively), construction mortgage loans are comparable (3.95% and 3.50%, respectively) and consumer loans are comparable (7.59% and 7.22%, respectively). Hopkinsville Federal reported no commercial loans, while the comparables held an average of 1.92% of their loans in commercial loans. Hopkinsville Federal's asset funding has come from retail deposits and retained earnings. Hopkinsville Federal deposit funding had been less reliant on transaction accounts than the comparables. As shown on Exhibit IV-2g, however, the Bank's 26.96% of savings and money market accounts is higher than the comparables' composite of 18.96%. The comparables and the Bank held similar levels of time deposits, 66.95% for the comparables to 64.22% for the Bank. Exhibit IV-2e illustrates that the comparables utilized borrowings at a level of 16.21% of liabilities and equity, while Hopkinsville Federal held no borrowings as of March 31, 1997. Hopkinsville Federal, as of March 31, 1997, would have projected a 16.00% decrease (as a percentage of the net present value of the Bank's assets) in the Bank's NPV with a change in interest rates of positive 200 basis points compared to an average projected decrease of 13.81% for the comparables (where data was available). This would indicate that the Bank's net interest margin would be more negatively impacted by rising interest rates as the comparables. PROFITABILITY: Hopkinsville Federal's historical profitability, as measured by the last five year ROAA, has been significantly lower than the comparables as illustrated in Exhibit IV-2h. The Bank averaged a ROAA of .37% over the last five years compared to the comparables' average of .99%. For the LTM period ended March 31, 1997, the Bank recorded a ROAA of .19% (.58% adjusted to exclude the SAIF special assessment) versus the .72% (1.02% adjusted) for the comparables. Hopkinsville Federal's net interest margin, based upon the LTM period ended March 31, 1997, was 1.81% as shown in Exhibit IV-2i. This is significantly lower than the comparables' average of 3.22%. The lower net interest 24 NATIONAL CAPITAL COMPANIES, LLC margin is primarily attributable to Hopkinsville Federal's higher holding of securities and lower investment in loans. Additionally, there is a slight difference in the average effective tax rate of the comparables of 36.90% compared to Hopkinsville Federal's 33.50%. Exhibit IV-2i illustrates that for the LTM period ended March 31, 1997, neither Hopkinsville Federal nor the comparables' income was significantly impacted by loan loss provisions. The comparables recorded a comparable level of noninterest income than Hopkinsville Federal, .23% of average assets to .33%, respectively. There is a significant difference in operating efficiency between Hopkinsville Federal and the comparables. For the LTM period ended March 31, 1997, Hopkinsville Federal's operating expenses-to-average assets totaled 1.21% to the comparables' ratio of 1.87%. The Bank indicates that it operates at lower staffing levels than its peers which may explain a portion of the operating expense variances. MARKET ACTIVITY ANALYSIS Trading Characteristics - ----------------------- The thrift industry has experienced positive common stock price appreciation over the last year. As shown on Exhibit IV-1a, the average price for all publicly traded thrifts increased 41.30% from April 30, 1996 to April 30, 1997. Prices for Midwest thrifts increased 25.99% over the same period. This compares to a 22.50% increase in the average for the Standard & Poors 500 over the period. The one month and twelve month average weekly trading volume are shown on Exhibit IV-2b for the comparables. The range of activity for the prior twelve months was from .32% to 1.72%. The one month activity range was .04% to 2.71%. The active trading volume of the comparables reflects the active market which has developed for recently converted and smaller sized savings institutions. The industry profitability and the heightened merger activity have also contributed to the increased investor interest. Exhibits IV-2b contains detailed volume information for each of the comparables. The market pricing multiples of the individual companies provide the necessary indicators of the value the stock market has attached to companies with similar operating, financial and market characteristics as Hopkinsville Federal. Tables 29 and 30 present the market characteristics for public savings institutions according to various market segments. Table 31 provides data on recent stock conversion activity and the market's pricing of these issues. The P/E multiples for the comparable group reflect a wide range of market values, from a high of 32.27x (22.27x adjusted to exclude the SAIF assessment) for Milton Federal Financial Corp., to a low of 13.33x for FFW Corp. unadjusted and 9.91x for Midwest Bancshares, Inc. adjusted to exclude the SAIF assessment. However, the majority traded in the 16.0x to 22.0x range (10.0x to 16.0x adjusted to exclude the SAIF assessment). These multiples are generally reflective of the comparable group's strong capital position, operating profitability, stability of earnings, market strength and asset quality. The price-to-assets ratios ranged from 7.39% to 20.46%. The price-to-assets ratios for the comparable group were almost directly correlated with the tangible equity-to-assets ratios. Industrial Bancorp, which had the highest capital ratio, had the highest price-to-assets ratio. Conversely, Midwest Bancshares, Inc. had the lowest capital ratio along with the lowest price-to- assets ratio. The price-to-tangible book multiples varied widely among the comparables. Ameriana Bancorp and Wood Bancorp Inc. recorded the highest price-to-tangible book ratios of the comparables of 116.87% and 115.03%, respectively. 25 NATIONAL CAPITAL COMPANIES, LLC First Bancshares Inc. recorded the lowest price-to-book multiple of 95.96%. Exhibit IV-2a provides detailed pricing information for each of the comparables. The above ratios are influenced by a variety of factors including regional differences, operating history, market merger activity and other unusual trading factors. The variance within the comparable group reflects the stock market's perception of the different operating results, financial condition, credit risk and other factors among the comparable group members. For instance, the presence of institutional investors holding positions in the comparable group stocks should account for some of the price variations among those stocks. Institutional investors are generally financially sophisticated, however, they can at times lead to magnified price movements in thrift stocks due to the impact of the purchase or sale of such sizable positions at one time. Exhibits IV-2b presents the percentage amount held by these institutional investors of the outstanding shares of the comparable group. Exhibits IV-2a through IV-2l present a summary of key financial ratios and balance sheet information for Hopkinsville Federal based on statements of financial condition and income for the quarter ending and the LTM period ending March 31, 1997 and the comparable ratios for the comparables for the most recently available quarterly and last four quarters results. The information for the comparable group was obtained from the most recent 10K, 10Q and annual reports as provided by various sources. For the LTM period ending March 31, 1997, Hopkinsville Federal recorded a ROAA of .19% (.58% adjusted to exclude the SAIF assessment) compared to the comparables' average of .72% (1.02% adjusted to exclude the SAIF assessment). The ROAA for the quarter ended March 31, 1997 for Hopkinsville Federal was .70% compared to the comparables' average of 1.01%. The 7.00% yield on interest-earning assets for the LTM period ended March 31, 1997 for Hopkinsville Federal was below the 7.68% composite recorded by the comparables. This lower value would be reflective of the composition of Hopkinsville Federal's assets which include a high level of securities and a loan portfolio of one-to-four family lower yielding mortgages. Hopkinsville Federal's cost of funds for the LTM period was 5.03% of average assets which was comparable to the composite of 5.02% recorded by the comparables. Hopkinsville Federal's operating efficiency is significantly higher than the comparables' composite. The Bank's noninterest expense-to-total average assets ratio for the LTM period ended March 31, 1997 was 1.21%. The comparables' average was 1.87%, as shown in Exhibit IV-2i. The Bank also recorded a slightly higher level of noninterest income than the comparables' composite. The Bank's noninterest income-to-total average assets ratio for the LTM period ended March 31, 1997 was .33% compared to the comparables' composite of .23%. Hopkinsville Federal's credit risk, as evidenced by its smaller than average loan portfolio size, high level of investments and mortgage-backed securities and low level of troubled assets appeared to be equal to or better than the comparable group. This conclusion is further supported by the actual losses recorded by the Bank which have been minimal. These and other measures of comparative financial condition and operating results provide a base measure of the level and stability of profitability on Hopkinsville Federal's future earnings. These findings will provide a basis to make the adjustments to the estimated proforma fair market value of the Company by application of the market pricing multiples of the comparables. 26 NATIONAL CAPITAL COMPANIES, LLC CHAPTER V MARKET VALUE ADJUSTMENTS INTRODUCTION This chapter presents our valuation analysis and methodology used to determine the Company's estimated proforma fair market value for the purposes of pricing the to-be-issued common stock. In this chapter we evaluate adjustments to the comparable's market pricing which we believe are necessary to determine the proforma market value or appraised value of the Company based upon a comparison of HopFed with the comparables. It must be remembered that all of the companies in the comparable group have their differences, and as a result, such adjustments become necessary. VALUATION ANALYSIS The comparables' P/E values averaged 14.88x, adjusted to exclude the SAIF special assessment, as of the pricing date May 29, 1997. This is lower than the average for all publicly traded thrifts as of the same date, as shown on Table 29, of 16.94x. The median value for the P/E multiple for all publicly traded thrifts was 15.13x compared to the comparables' median of 14.72x (adjusted to exclude the SAIF assessment), which is more comparable than the average. The median P/E multiple for thrifts with less than $500 million in assets ("small public thrifts") who are traded in the over-the-counter market was 15.37x, which parallels the comparables' value as well. The median price-to-tangible book value for the comparables was 109.17% compared to the median of all publicly traded thrifts of 124.90% and the small public thrifts median pricing multiple of 110.65%. The price-to-assets ratio median for the comparables was 14.06% compared to the public thrift median of 13.53% and the small public thrifts who are traded at a median price-to-assets ratio of 14.64%. Overall, it would appear that the comparables' median P/E multiple is near the level of the thrift industry in general. As shown on Table 29, higher capitalized thrifts tend to have a higher P/E multiple. The comparables' price- to-asset value is similar to the various peer groups shown on Table 29, except for the over capitalized and under capitalized peer groups. The comparables median pricing multiple for the Price-to-Book ("P/B") was similar to the average for publicly traded thrifts in the Midwestern region while the P/E and Price-to- Assets ("P/A") multiples for the Midwestern region were slightly higher than the peer group. The following market value adjustments criteria will be applied to the Company: . level and stability of earnings . asset quality and credit risk . taxation . dividend payments . management . market area . liquidity and placement of the issue . prevailing stock market conditions 27 NATIONAL CAPITAL COMPANIES, LLC LEVEL AND STABILITY OF EARNINGS The level and quality of Hopkinsville Federal's profitability is a function of the amount and stability of the Bank's net interest margin, the level of noninterest income, amount of operating expenses and income tax level. Components impacting these variables include asset composition, asset-liability structure, interest rate risk management, staffing, operating efficiency, actions of competitors and other factors. Hopkinsville Federal has a conservative asset structure with a portfolio yield below the comparables. The market does not afford the opportunity to generate the same level of returns from investment securities as may be obtained by mortgage loans. As long as the Bank remains dependent upon wholesale assets, the Bank's earnings will be below industry averages. The Bank's current asset-liability structure contains a lower level of interest rate risk exposure than the comparables, which means that Hopkinsville Federal will be less impacted than the comparables from a rise in interest rates. As shown on Table 25, the Bank reported a positive one year gap of 1.89%, which is minimal by thrift standards. In a rising rate environment, this interest rate structure is likely to protect the Bank from an erosion to Hopkinsville Federal's net interest margin. The comparables' NPV, as of the most recently available annual reporting date, averaged a negative 13.81%, which would indicate that they would be more negatively impacted from a rising rate environment. Hopkinsville Federal's noninterest income has made a similar contribution to the Bank's profitability as that of the comparables. The operating expense ratio for Hopkinsville Federal is significantly lower than the comparables. We would anticipate that the Bank's level of operating expenses will continue to be lower than the comparable group in the foreseeable future. Overall, our proforma projections of Hopkinsville Federal's profitability (Exhibit V-3), with consideration of the impact of the Conversion, is that the Bank will have a level of profitability below the comparable group's average. The Bank's unfavorable net interest margin will result in a lower level of earnings which will only be partially offset by Hopkinsville Federal's lower level of operating expenses. The Bank's lower level of interest rate risk exposure to a rising rate environment would indicate that the Bank's earnings would be less impacted should interest rates rise. However, the Bank's lower than peer group net interest margin would be expected to prevail under projected market conditions. Accordingly, a downward adjustment to the pricing multiples of the comparables is warranted to reflect the Bank's lower earnings prospects relative to the comparable group. ASSET QUALITY AND CREDIT RISK Our analysis of the comparable group's asset composition revealed that comparable group members do not appear to have concentrated their lending in less traditional assets than single family mortgages and mortgage-backed securities. As shown on Exhibit IV-2f, Hopkinsville Federal holds 80.37% of the Bank's loan portfolio in residential one-to-four family properties and the comparables average 81.43%. However, Hopkinsville Federal holds only 48.04% of the Bank's total assets in net loans, while the comparables averaged 70.67% as shown in Exhibit IV-2d. Hopkinsville Federal does hold a considerably higher level of cash and investment securities than the comparables, 39.96% of assets compared to 19.82%. The level of credit risk is lower on investments than from loans. Most of the investments held by the Bank are Treasury or agency obligations which have the implicit government guarantee. Hopkinsville Federal holds a low level of nonperforming loans as shown in Table 16. As shown on Exhibit IV-2c, the Bank holds approximately 40% of the level of nonperforming assets as the comparable group. 28 NATIONAL CAPITAL COMPANIES, LLC Our analysis of Hopkinsville Federal related to asset quality and credit risk is that the Bank's risk related to credit losses is lower than the comparable group. As a result, our valuation will apply an upward adjustment to the comparables' market pricing multiples concerning asset quality and credit risk. TAXATION Hopkinsville Federal's income tax rate was slightly lower than the comparables for the most recent twelve month period. For the LTM period ended March 31, 1997, as shown in Exhibit IV-2j, the effective tax rate for the comparables was 36.90% compared to the Bank's 33.50%. Our inquiries with the Bank's accountants and management did not disclose any particular reason for the lower tax rate and management projects that Hopkinsville Federal's tax rate will be closer the comparables in the future. The future tax rates for the comparables and Hopkinsville Federal will be similarly affected. The differences that exist among the comparables and Hopkinsville Federal's are minimal. Hence, no adjustment in the Bank's proforma fair market value will be made for taxation. DIVIDEND PAYMENTS Hopkinsville Federal has indicated that it intends to establish a policy of paying cash dividends, initially at an annual rate of 3% of the purchase price of the stock beginning in the first full quarter following the Conversion. The Company will consider such factors including capital requirements, financial performance, tax considerations and general economic conditions in the future when adjusting its dividend policy. Thrift stock historically has not recently traded on the basis of current or potential dividend yields. However, the rise in industry profitability has enabled many thrifts the ability to pay modest dividends. This trend is evident in the comparable group. All of the ten selected members of the comparable group are paying regular dividends. The composite rate on these dividends, based upon the May 29, 1997 prevailing stock price, was an average of 2.55%. This information is contained in Exhibit IV-2b. Because the Company has stated that it will pay a dividend on the common stock, no adjustment will be made to the proforma fair market value in consideration of dividends. MANAGEMENT Hopkinsville Federal's management has responded well in this era of uncertainty and constant change related to the financial industry. Hopkinsville Federal has remained profitable, held operating expenses under control, increased its franchise value and maintained asset quality. The Bank has also developed an alternative investment strategy of investments and mortgage-backed securities to offset the lower level of loan production available in the current market. Hopkinsville Federal's management understands their deposit and lending markets, responds well to competition and has initiated the organizational and structural changes necessary to remain competitive, including the pursuit of a Conversion. The most important measure of management is their ability to earn a profit. Management has done this consistently, due in part to the reasons mentioned above. Based upon our analysis of the comparables, we believe that they also possess quality management. The best indication of the comparables' management capabilities is the consistent level of earnings recorded by the group. Based upon this assessment, we believe that no market adjustment is necessary for the quality of management. 29 NATIONAL CAPITAL COMPANIES, LLC MARKET AREA As discussed in Chapter III, Hopkinsville Federal's primary deposit area encompasses the southwestern area of Kentucky. The Bank's lending activities are also concentrated in this same market. The local economy is stable, however, the economic prospects for the Bank's primary market area are lower than for the state of Kentucky and for the nation as a whole. Exhibits II-1 through II-4 provide demographic information for Hopkinsville Federal, Kentucky and the United States. The annual population growth for Hopkinsville Federal's market area was 1.09%, which is a total for Christian, Calloway, Trigg and Todd Counties for the period from 1990 to 1994. This average is inflated due to the 2.10% growth for Trigg County. Christian County, where the major portion of the Bank's customers reside, was projected to experience a decline in population of .30% for the same period. The state average was .90%. The projected growth for 1999 is minimal which limits the Bank's ability to grow and expand. The estimated 1999 average household income for the Bank's market area is $24,771. This level of income is approximately 94.82% of the state average of $26,124. The lower household income for the Bank's market compared to other regions translates into lower disposable income for its customers for either housing needs or for savings. As shown in Exhibit II-3, the Bank's market area consists of an older population when compared to either the state average or the national average. The prime income earner, those between the ages of 25 and 60, represent a lower proportion of the Bank's customer base than for Kentucky and the United States. This results in less of an opportunity for Hopkinsville Federal to grow and expand compared to financial institutions in more prosperous markets. Hopkinsville Federal has a stable deposit base and has developed a loyal customer base. The cost of obtaining these funds is similar to the comparables. As shown on Exhibit IV-2j, Hopkinsville Federal's cost of funds for the LTM ended March 31, 1997 was 5.03% compared to the comparables' average of 5.02%. The Bank's lending market has not provided the level of loan production to meet Hopkinsville Federal's portfolio needs. However, the Bank has responded and has been able to increase its loan portfolio in the last two years. However, despite the concentrated effort to enhance loan production, Hopkinsville Federal has not yet been able to achieve the average loan growth of the comparables. As shown on Exhibit IV-2c, the comparables were able to grow their loan portfolios by an annual average of 14.12% over the last three years, while Hopkinsville Federal recorded an average increase of 13.61%. Loan growth for the Bank for the LTM ended March 31, 1997 was 9.59% while the comparable were able to record an average loan growth for the same time period of 15.86%. The comparable group were chosen to reflect nonmetropolitan market areas. Upon specific consideration of competitive factors and economic conditions between the comparables' and Hopkinsville Federal's market area, there does appear to be a difference between the composite of the comparables and Hopkinsville Federal in terms of the economic conditions prevailing in the local markets. The projected population growth for the counties in Hopkinsville Federal's market area is projected to be approximately 1.97% from 1994 to 1999 and the counties in the comparable group were projected to grow approximately 2.30% during the same time period. Additionally, based upon the demographic information presented in Exhibit II-1 through Exhibit II-4, the Bank's market area is slightly less prosperous than other market areas. Therefore, a downward valuation adjustment will be made regarding market area. 30 NATIONAL CAPITAL COMPANIES, LLC LIQUIDITY AND PLACEMENT OF THE ISSUE Hopkinsville Federal intends to enlist the marketing services of a broker-dealer to assist them with the community offering of their stock. The Bank also plans to pursue support from its depositors, local investors and residents in the Bank's market area in their efforts to market the stock offering. Hopkinsville Federal's market stature and community presence should contribute to local subscription interest. The thrifts that are included in the comparable group are traded on the NASDAQ system and have some degree of liquidity. It is anticipated that the after- market activity of the Company will be similar to the comparables. Therefore, in our opinion, the liquidity factor does not merit a market value adjustment. PREVAILING STOCK MARKET CONDITIONS The performance of stock prices for thrifts has been exceptional since late 1990, not unlike the conditions which have prevailed for common stock in general. There are several factors for this unusually advantageous market opportunity. The decline in interest rates has made thrift issues attractive because of the enhanced thrift profitability. Second, the rise in the stock market in general has helped buoy thrift equity including new conversion issues. Third, the strength of the savings and loan business, after the resolution of the troubled institutions by the RTC, has resulted in a high appreciation for the remaining industry and its profit potential. Fourth, many previously converted thrift issues are being considered potential takeover candidates as financial services participants rapidly pursue intrastate and interstate financial service expansion opportunities. A conversion sales process continues to experience a high level of interest from subscription rights holders as well as other investors. A vast majority of the conversions receive orders in excess of the maximum valuation level. This is favorable for three reasons. First the expense is considerably less than if underwritten issues were required to accomplish the conversion, second the shares are usually bought in small blocks by friendly local investors (which may reduce the potential for subsequent unfriendly takeovers), and third the loyalty of the local market for future retail savings deposit activities should strengthen. It is our opinion that no adjustment is warranted in our preparation of an estimate of the proforma fair market value of the Company's common stock related to prevailing stock market conditions. DEPTH OF THE CONVERSION MARKET As shown in Table 31, there has been a significant number of standard stock conversions of thrifts similar in nature to Hopkinsville Federal. Table 31 supports the fact that there is a strong after-market for such issues, showing an average price appreciation for new issues of 42.69%. The knowledge that shareholders can expect to be able to sell their investments in a active after- market is vital to many purchasing the stock. We believe that upon completion of Hopkinsville Federal's Conversion, their stock will develop a market similar to the comparable group's stock. HOPKINSVILLE FEDERAL SAVINGS BANK The general and regional economic and market conditions appear favorable and receptive for Hopkinsville Federal to conduct an initial public offering of common stock. The general market conditions, discussed above, that have recently propelled thrift conversion issues should remain positive within the time frame contemplated for Hopkinsville Federal to complete its Conversion. Moreover, the customers developed by the operation of Hopkinsville Federal as a community-oriented financial institution would contribute to the probability of a successful common stock issuance. 31 NATIONAL CAPITAL COMPANIES, LLC As discussed previously in this report, Hopkinsville Federal has similar characteristics to the comparable group who have all conducted standard stock conversions. Hopkinsville Federal has a history of operating profitability, has a sound balance sheet structure, has experienced management and has good prospects for the future. Hopkinsville Federal's decision to enter the market now is also timely, due to the possible unknown future market condition related to common stock in general of the savings and loan stocks in particular. Forecasting the future course of the economy or the regulatory environment for the thrift industry is difficult. Since the market receptiveness for stock offerings is positive today, it is beneficial to take advantage of the opportunities presented by the conditions of the market currently. In conclusion, we believe that the market would be receptive to an issuance of Hopkinsville Federal common stock conducted through a standard conversion. There is no reason to believe that the Company's common stock, upon issuance, will not trade at the current markets levels indicated by the comparable group market price multiples adjusted by the factors noted above. SUMMARY OF MARKET VALUE ADJUSTMENTS We have concluded that Hopkinsville Federal does warrant a downward adjustment for level and stability of earnings and market area. A positive adjustment is appropriate for the Bank's asset quality and credit risk. Our analysis found that Hopkinsville Federal does not significantly differ in any of the other market value adjustment criteria discussed above. It should be noted that Hopkinsville Federal may have several other positive and negative factors, but in relation to the comparable group these conditions are not materially different. We believe that the following market value adjustments are appropriate upon the application of the comparables' market pricing multiples for Hopkinsville Federal: SUMMARY OF MARKET VALUE ADJUSTMENTS
=========================================================== MARKET FACTOR ADJUSTMENT =========================================================== Level and Stability of Earnings Downward Asset Quality and Credit Risk Upward Taxation None Dividend Payments None Management None Market Area Downward Liquidity and Placement of the Issue None Prevailing Stock Market Conditions None ===========================================================
VALUATION METHODOLOGY - FULL CONVERSION VALUE The market valuation characteristics of the comparables are presented in Exhibits IV-2 through IV-2l. All three valuation methodologies will be examined P/B, P/E and P/A, although the central valuation methodology will be the P/E method. Since Hopkinsville Federal and all of the comparables have consistent earnings, the P/E method is the most direct and appropriate method of valuation. Investors consider earnings an important factor for the determination of the 32 NATIONAL CAPITAL COMPANIES, LLC value of a newly converted thrifts. The factors affecting earnings were addressed in the market value adjustment section. The P/B and the P/A methods will be applied as secondary measures of the Company's estimated proforma market value. These methods are more appropriately employed in situations that are not able to utilize the P/E method. This is due to the limitations caused by historical cost accounting, goodwill and the inability to distinguish the affects these factors have on the subject and comparables. PRICE-TO-EARNINGS The focal point of this method is the determination of the earnings base to be used and secondly, the determination of an appropriate P/E multiple. As indicated in Exhibit IV-2a, the P/E market multiples for the comparable group range from 9.91x to 22.27x, adjusted to exclude the SAIF special assessment. The mean and median for the comparables were 14.88x and 14.72x, respectively. In order to derive a multiple to apply to HopFed, we considered the downward adjustments required for the Bank's level and stability of earnings and market area and an upward adjustment for asset quality and credit risk. Because the P/E methodology considers the Company's lower level of earnings, the market discount for level of earnings is not applied to the P/E multiple. The earnings used in the application of the P/E approach will be $1.2 million, the Bank's LTM earnings adjusted to exclude the SAIF assessment to better evaluate the future earnings capacity of HopFed. The calculation for normalized earnings was determined as follows:
----------------------------------------------------- NORMALIZED EARNINGS CALCULATION (IN THOUSANDS) ----------------------------------------------------- March 31, 1997 LTM earnings (pre-tax) $ 583 ----------------------------------------------------- September 30, 1996 SAIF assessment (pre-tax 1,230 ----- ----------------------------------------------------- Adjusted earnings before tax $1,813 ----------------------------------------------------- Income tax expense (at 33.5% rate) 607 ----------------------------------------------------- Normalized earnings $1,206 ====== -----------------------------------------------------
The low and high multiples applied in our valuation were 12.00x and 15.75x. The following provides a range of the estimated proforma fair market values calculated: PRICE-TO-EARNINGS VALUATION
============================================================== P/E MULTIPLE CALCULATED PROFORMA FAIR MARKET VALUE -------------------------------------------------------------- 12.00x $20,817,675 -------------------------------------------------------------- 15.75x $27,323,199 ==============================================================
Please refer to Exhibit V-1 PRICE-TO-TANGIBLE BOOK As indicated in Exhibit IV-2a, the P/B market multiples for the comparable group range from 95.96% to 116.78%. The mean and median for the comparables' P/B multiples are 107.59% and 109.17%, respectively. The downward adjustments to reflect the discounts from the comparables regarding the level and stability of earnings and market area and the upward adjustment for asset quality and credit risk were made to these pricing multiples. An additional discount is attributable to HopFed's higher proforma equity-to-assets ratio of approximately 16.50%. 33 NATIONAL CAPITAL COMPANIES, LLC As shown on Table 29, the market discounts thrifts with capital in "excess" of capital requirements with a lower market price. Our valuation applied a discount of approximately 40% to the comparable group's median value for P/B. This discount resulted in a low and high P/B multiple of 62.00% and 65.50% being applied in the P/B calculation. The following provides a range of the estimated proforma fair market values calculated: PRICE-TO-BOOK VALUATION
--------------------------------------------------------- P/B MULTIPLE CALCULATED PROFORMA FAIR MARKET VALUE --------------------------------------------------------- 62.00% $22,362,421 --------------------------------------------------------- 65.50% $26,021,536 ---------------------------------------------------------
Please refer to Exhibit V-1 PRICE-TO-ASSETS As indicated in Table IV-2a, the P/A market multiples for the comparable group range from 7.39% to 20.46%. The mean and median comparable group's P/B multiples are 14.15% and 14.06%, respectively. The comparable group's values were adjusted downward in this valuation for consideration of the cited factors regarding the level and stability of earnings and market area and an upward adjustment was made for asset quality and credit risk. Our valuation applied approximately a discount of approximately 25% to the comparable group's median value for P/A. This discount resulted in a low and high P/A multiple of 10.00% and 11.50% being applied in the Company's P/A calculation. The following provides a range of the estimated proforma fair market values calculated: PRICE-TO-ASSETS VALUATION
--------------------------------------------------------- P/A MULTIPLE CALCULATED PROFORMA FAIR MARKET VALUE --------------------------------------------------------- 10.00% $22,489,801 --------------------------------------------------------- 11.50% $25,863,271 ---------------------------------------------------------
Please refer to Exhibit V-1 VALUATION ANALYSIS: CONCLUSION The primary valuation approaches discussed in the determination of the estimated proforma fair market value of HopFed indicated the following ranges as shown below: SUMMARY OF VALUATION APPROACHES
--------------------------------------------------------------------- VALUATION METHOD CALCULATED LOW VALUE CALCULATED HIGH VALUE --------------------------------------------------------------------- P/E $20,817,675 $27,323,199 --------------------------------------------------------------------- P/B $22,362,421 $26,021,536 --------------------------------------------------------------------- P/A $22,489,801 $25,863,271 ---------------------------------------------------------------------
Please refer to Exhibit V-1 It is our opinion, that the proforma fair market value of 100% of HopFed's to- be-issued common stock in the Conversion was $24,000,000 as of May 29, 1997 based upon 2,400,000 shares of stock offered at a price of $10.00 per share. The proforma valuation calculations are shown in Exhibits V-1 and V-2. The resultant valuation range was $20,400,000 to $27,600,000. In the event of a sale of stock to the "supermax", the gross stock sale proceeds would total $31,740,000. 34 NATIONAL CAPITAL COMPANIES, LLC This conclusion is based on the P/E method with secondary consideration of the P/B and P/A computations as included in Exhibits V-1 through V-2. As stated previously, we believe that the P/E method is the most appropriate methodology based on the conditions and characteristics analyzed throughout this valuation. Exhibit V-3 includes proforma ratios for P/A, P/B and P/E. Also included is a proforma calculation for tangible net worth-to-assets. A comparison of these values to the results of recent thrift conversions, as shown on Table 31, reveals that the proforma values calculated are near those achieved by recent transactions. The proforma earnings multiple for the Bank was 13.90x at the midpoint, 15.25x at the maximum and 16.66x at the super-maximum. This compares to the recent average achieved in the market of 14.13x and a median of 11.62x (both adjusted to exclude the SAIF assessment). Exhibit V-4 provides a calculation of the proforma discounts from the comparable group average and median pricing multiples at the various ranges of proforma market values. The proforma percentage of price-to-tangible net worth for Hopkinsville Federal was 63.65% for the midpoint, 67.52% at the maximum and 71.30% at the super- maximum compared to the recent market average of 73.70% and the median of 72.10%. The proforma price-to-assets at the midpoint for the Bank was 10.74%, 12.06% at the maximum and 13.63% at the super-maximum compared to the market average indicated in Table 31 of 16.70% and the median of 16.40%. 35 ================================================================================ TABLE 1 HOPKINSVILLE FEDERAL SAVINGS BANK Hopkinsville, Kentucky CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
--------------------------- MARCH 31, DECEMBER 31, 1997 1996 UNAUDITED AUDITED --------------------------- (IN THOUSANDS) ASSETS Cash and due from banks $1,272 $1,452 Interest-bearing deposits in other 17,806 2,500 financial institutions ------ ------ Cash and cash equivalents 19,078 3,952 Investment securities designated as available for sale - at market 5,109 5,125 Investment securities - at cost 77,669 95,946 Loans receivable - net 97,553 95,496 Office premises and equipment at 2,331 2,333 depreciated cost Stock in Federal Home Loan Bank - 0 0 at cost Accrued interest receivable 1,096 1,291 Prepaid expenses and other assets 222 255 --- --- TOTAL ASSETS $203,058 $204,398 ======== ======== LIABILITIES AND RETAINED EARNINGS Deposits $183,162 $183,827 Escrow deposits for taxes and insurance 219 184 Advances form the Federal Home Loan Bank 0 1,317 Other liabilities 2,440 2,163 ----- ----- TOTAL LIABILITIES $185,821 $187,491 Retained earnings - substantially restricted $15,033 $14,674 Unrealized gain on securities designated as available for sale - net of applicable tax effects 2,204 2,233 ----- ----- Total retained earnings 17,237 16,907 TOTAL LIABILITIES AND RETAINED EARNINGS $203,058 $204,398 ======== ========
Source: Hopkinsville Federal Savings Bank's Prospectus ================================================================================ ================================================================================ TABLE 2 HOPKINSVILLE FEDERAL SAVINGS BANK Hopkinsville, Kentucky STATEMENTS OF FINANCIAL CONDITION
------------------------------------------ FISCAL YEARS ENDED DECEMBER 31, 1996 1995 1994 1993 1992 ------------------------------------------ (IN THOUSANDS) ASSETS Cash and due from banks $1,452 $1,303 $1,578 $1,106 $1,377 Short term deposits 2,500 20,498 39,530 35,674 27,925 Investment securities designated as available for sale - at market 5,125 4,053 2,955 1,445 1,377 Investment securities - at cost 95,946 98,553 76,345 80,106 75,670 Loans receivable - net 95,496 84,755 78,527 67,804 69,212 Office premises and equipment at depreciated cost 2,333 2,347 2,349 1,475 849 Other assets 1,546 1,089 844 1,272 584 ----- ----- --- ----- --- TOTAL ASSETS $204,398 $212,59 $202,12 $188,82 $177,00 ======== ======= ======= ======= ======= LIABILITIES AND RETAINED EARNINGS Deposits 183,827 194,775 185,699 173,184 162,919 Advances form the Federal Home Loan Bank 1,317 0 0 0 0 Escrow 184 177 200 184 191 Other liabilities 2,163 1,549 1,194 2,110 1,285 ----- ----- ----- ----- ----- TOTAL LIABILITIES $187,491 $196,50 $187,09 $175,48 $164,395 Retained earnings - substantially restricted 14,674 14,491 14,089 13,404 12,609 Unrealized gain on securities designated as available for sale - net of applicable tax effects 2,233 1,606 946 0 0 ----- ----- --- - - Total retained earnings 16,907 16,097 15,035 13,404 12,609 TOTAL LIABILITIES AND RETAINED EARNINGS $204,398 $212,598 $202,128 $188,82 $177,004 ======== ======== ======== ======= ========
Source: Hopkinsville Federal Savings Bank's Prospectus ================================================================================ ================================================================================ Table 3 HOPKINSVILLE FEDERAL SAVINGS BANK Hopkinsville, Kentucky INCOME STATEMENT
----------------------------------------- THREE MONTHS ENDED THREE MONTHS ENDED MARCH 31, DECEMBER 31, 1997 1996 ----------------------------------------- (IN THOUSANDS) INTEREST INCOME Loans $1,802 $1,832 Investment securities 1,469 1,450 ----- ----- Total interest income 3,271 3,282 INTEREST EXPENSE Deposits 2,231 2,282 Borrowings 9 2 - - Total interest expense 2,240 2,284 Net interest income 1,031 998 Provision for loan losses 0 100 - --- Net interest income after provision for loan losses 1,031 898 OTHER INCOME Fees and charges 104 121 Other operating income 21 36 -- -- Total other income 125 157 GENERAL, ADMINISTRATIVE AND OTHER EXPENSE Employee compensation and benefits 373 357 Legal fees 0 0 Occupancy and equipment 50 83 Marketing and other professional services 25 42 Other operating expenses 168 207 --- --- Total general, administrative and other expense 616 689 Earnings before income taxes 540 366 FEDERAL INCOME TAXES 181 122 --- --- NET INCOME $359 $244 ==== ====
Source: Hopkinsville Federal Savings Bank's Prospectus ================================================================================ ================================================================================ TABLE 4 HOPKINSVILLE FEDERAL SAVINGS BANK Hopkinsville, Kentucky INCOME STATEMENT
---------------------------------------- FISCAL YEARS ENDED DECEMBER 31, 1996 1995 1994 1993 ---------------------------------------- INTEREST INCOME Loans $6,824 $5,840 $4,247 $5,848 Investment securities 6,396 6,632 6,188 4,993 ----- ----- ----- ----- Total interest income 13,220 12,472 10,435 10,841 INTEREST EXPENSE Deposits 9,732 10,009 7,740 7,450 Borrowings 25 0 0 0 -- - - - Total interest expense 9,757 10,009 7,740 7,450 Net interest income 3,463 2,463 2,695 3,391 Provision for loan losses 100 0 0 0 --- - - - Net interest income after provision for loan losses 3,363 2,463 2,695 3,391 OTHER INCOME Fees and charges 529 346 456 213 Other operating income 61 52 56 116 -- -- -- --- Total other income 590 398 512 329 GENERAL, ADMINISTRATIVE AND OTHER EXPENSE Employee compensation and benefits 1,277 1,220 1,252 1,344 Federal deposit insurance premiums (1) 1,702 426 397 342 Occupancy and equipment 302 279 214 225 Other operating expenses 409 336 318 315 --- --- --- --- Total general, administrative and other expense 3,690 2,261 2,181 2,226 Earnings before income taxes 263 600 1,026 1,494 FEDERAL INCOME TAXES 79 198 341 502 -- --- --- --- Net income (2) $184 $402 $685 $992 ==== ==== ==== ====
1)In 1996 the Bank paid a special assessment of $1.23 million to recapitalize the SAIF fund. 2)Without the SAIF special assessment, the Bank would have recorded net income of $1.2 million for the last twelve months ended March 31, 1997. Source: Hopkinsville Federal Savings Bank's Prospectus and Financial Records ================================================================================ ================================================================================ TABLE 5 HOPKINSVILLE FEDERAL SAVINGS BANK Hopkinsville, Kentucky SELECTED FINANCIAL INFORMATION
---------------------------------------------------------------------- AT MARCH 31, AT DECEMBER 31, 1997 1996 1995 1994 1993 1992 ---------------------------------------------------------------------- (IN THOUSANDS) Total amount of: Assets $203,058 $204,398 $212,598 $202,128 $188,882 $177,004 Investment securities Available for sale 5,109 5,125 4,053 2,955 1,445 1,387 Held to maturity 56,967 77,962 80,990 63,002 64,982 62,687 Mortgage-backed securities 20,702 17,984 17,563 13,343 15,124 12,983 Loans receivable - net 97,553 95,496 84,755 78,527 67,804 69,212 Deposits 183,162 183,827 194,775 185,699 173,184 162,919 FHLB advances 0 1,317 0 0 0 0 Retained earnings, substantially restricted 17,237 16,907 16,097 15,035 13,404 12,609
Source: Hopkinsville Federal Savings Bank's Prospectus ================================================================================ ================================================================================ TABLE 6 HOPKINSVILLE FEDERAL SAVINGS BANK Hopkinsville, Kentucky INCOME AND EXPENSE TRENDS
--------------------------------------------------------------------- FISCAL YEARS ENDED AT MARCH 31, DECEMBER 31, 1997 1996 1995 1994 1993 1992 --------------------------------------------------------------------- (IN THOUSANDS) SUMMARY OF EARNINGS: Interest income $3,271 $13,220 $12,472 $10,435 $10,841 $11,984 Interest expense 2,240 9,757 10,009 7,740 7,450 8,394 ----- ----- ------ ----- ----- ----- Net interest income 1,031 3,463 2,463 2,695 3,391 3,590 Provision for loan losses 0 100 0 0 0 43 - --- - - - -- Net interest income after provision for loan losses 1,031 3,363 2,463 2,695 3,391 3,547 Other income 125 590 398 512 329 271 General, administrative and other expense (1) 616 3,690 2,261 2,181 2,226 2,125 --- ----- ----- ----- ----- ----- Earnings before income taxes 540 263 600 1,026 1,494 1,693 Federal income taxes 181 79 198 341 502 531 --- -- --- --- --- --- Net Earnings (2) $359 $184 $402 $685 $992 $1,162 ==== ==== ==== ==== ==== ======
1) In 1996 the Bank paid a special assessment of $1.23 million to recapitalize the SAIF fund. 2) Without the SAIF special assessment, the Bank would have recorded net income of $1.2 million for the last twelve months ended March 31, 1997 Source: Hopkinsville Federal Savings Bank's Prospectus ================================================================================ ================================================================================ TABLE 7 HOPKINSVILLE FEDERAL SAVINGS BANK Hopkinsville, Kentucky NORMALIZED EARNINGS TREND
----------------------------------------------------------------------------- FISCAL YEARS ENDED AT MARCH 31, DECEMBER 31, 1997 1996 1995 1994 1993 1992 ------------------------------------------------------------------------------ (IN THOUSANDS) Net income after taxes $359 $184 $402 $685 $992 $1,162 Net income before taxes and effect of accounting adjustments 540 263 600 1,026 1,494 1,693 Income adjustments 0 0 0 0 0 0 Expense adjustments 0 (1,230) (2) 0 0 0 0 - ------- - - - - Normalized earnings before taxes 540 1,493 600 1,026 1,494 1,693 Taxes (1) 181 508 204 349 508 531 --- --- --- --- --- --- Normalized earnings after taxes $359 $985 $396 $677 $986 $1,162 ==== ==== ==== ==== ==== ======
(1) Assumed 34% Federal Tax Rate (2) SAIF Special Assessment Source: Hopkinsville Federal Savings Bank's Prospectus ================================================================================ ================================================================================ TABLE 8 HOPKINSVILLE FEDERAL SAVINGS BANK Hopkinsville, Kentucky PERFORMANCE INDICATORS
-------------------------------------------------- FISCAL YEARS ENDED AT MARCH 31, DECEMBER 31, 1997 1996 1995 1994 -------------------------------------------------- SELECTED FINANCIAL RATIOS AND OTHER DATA: Return on average assets * 0.70% 0.09% 0.19% 0.35% Return on average equity * 8.39% 1.12% 2.56% 4.63% Interest rate spread * 1.67% 1.35% 0.84% 1.09% Net interest margin * 2.04% 1.65% 1.18% 1.38% Operating expenses to average assets * 1.21% 1.18% (1) 1.07% 1.11% Average equity to average assets 8.38% 7.86% 7.46% 7.51% Nonperforming assets to total assets 0.09% 0.13% 0.06% 0.02% Nonperforming loans to total loans 0.19% 0.28% 0.16% 0.05% Allowance for loan losses to total loans 0.22% 0.23% 0.14% 0.16% Allowance for loan losses to nonperforming loans 116.04% 81.58% 91.04% 329.73% Net charge-offs to average loans * NA 0.005% NA NA Average interest-earning assets to average interest-bearing liabilities 109.02% 107.29% 107.36% 107.58%
* Annualized for the quarter ended March 31, 1997 (1) Adjusted to exclude the SAIF special assessment Source: Hopkinsville Federal Savings Bank's Prospectus ================================================================================ TABLE 9 HOPKINSVILLE FEDERAL SAVINGS BANK Hopkinsville, Kentucky RATE/VOLUME ANALYSIS
FOR THE THREE MONTHS ENDED MARCH 31, FOR THE FISCAL YEARS ENDED DECEMBER 31, 1997 VS. 1996 1996 VS. 1995 1995 VS. 1994 ----------------------------------- ------------------------------- ------------------------ INCREASE (DECREASE) TOTAL INCREASE (DECREASE) TOTAL INCREASE (DECREASE) DUE TO INCREASE DUE TO INCREASE DUE TO RATE VOLUME (DECREASE) RATE VOLUME (DECREASE) RATE VOLUME ---------------------------------- -------------------------------- ------------------------ (IN THOUSANDS) INTEREST INCOME ATTRIBUTABLE TO: Loans receivable $79 $186 $265 $284 $700 $984 $33 $560 Investment securities - AFS (8) 10 2 (11) 27 16 (2) 27 Investment securities - HTM 107 (211) (104) 594 666 1,260 553 491 Other interest earning assets (26) (100) (126) 53 (1,565) (1,512) 650 (275) --- ---- ----- -- ------- ------ --- ----- Total interest-earning assets $152 ($115) $37 $920 ($172) $748 $1,234 $803 INTEREST EXPENSE ATTRIBUTABLE TO: Deposits ($163) ($167) ($330) ($146) ($131) ($277) $1,731 $538 Borrowings 0 9 9 0 25 25 0 0 Total interest-bearing liabilities ($163) ($158) ($321) ($146) ($106) ($252) $1,731 $538 Increase (decrease) in net interest income $315 $43 $358 $1,066 ($66) $1,000 ($497) $265 ---- --- ---- ------ ----- ------ ------ ---- TOTAL INCREASE (DECREASE) ---------- INTEREST INCOME ATTRIBUTABLE TO: Loans receivable $ 593 Investment securities - AFS 25 Investment securities - HTM 1,044 Other interest-earning assets 374 --- Total interest-earning assets $2,037 INTEREST EXPENSE ATTRIBUTABLE TO: $2,269 Deposits 0 Borrowings $2,269 Total interest-bearing liabilities Increase (decrease) in net interest income $ (232) -------
Source: Hopkinsville Federal Savings Banks Prospectus ================================================================================ TABLE 10 HOPKINSVILLE FEDERAL SAVINGS BANK Hopkinsville, Kentucky YIELD AND COST TRENDS
-------------------------------------------------------------------------- THREE MONTHS ENDED FISCAL YEAR ENDED MARCH 31, DECEMBER 31, 1997 1996 1995 1994 -------------------------------------------------------------------------- Average yield on loans 7.47% 7.41% 7.10% 7.06% Average yield on investment securities - AFS 2.97% 3.45% 3.71% 3.73% Average yield on investment securities - HTM 5.93% 5.73% 5.13% 4.48% Average yield on other interest-earning assets 5.63% 6.57% 6.01% 4.18% Average yield on all interest-earning assets 6.59% 6.48% 6.04% 5.39% Average interest cost of deposits 4.92% 5.13% 5.20% 4.30% Average cost of FHLB advances 5.46% 7.59% 0.00% 0.00% Average cost of all interest-bearing liabilities 4.92% 5.13% 5.20% 4.30% Interest rate spread (spread between average interest rate on all interest-earning assets and interest-bearing liabilities) 1.67% 1.35% 0.84% 1.09% Net interest margin (net interest income as a percent of average interest-earning assets) 2.07% 1.70% 1.19% 1.39%
Source: Hopkinsville Federal Savings Bank's Prospectus ================================================================================ ================================================================================ TABLE 11 HOPKINSVILLE FEDERAL SAVINGS BANK Hopkinsville, Kentucky MARKET VALUE OF PORTFOLIO EQUITY AT MARCH 31, 1997 [UNAVAILABLE] ================================================================================ ================================================================================ Table 12 HOPKINSVILLE FEDERAL SAVINGS BANK Hopkinsville, Kentucky LOAN PORTFOLIO COMPOSITION
------------------------------------------------------------------------------------------ AT MARCH 31, AT DECEMBER 31, 1997 1996 1995 1994 ------------------- ----------------------- ----------------------- ----------------------- AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT ------------------------------------------------------------------------------------------- (DOLLARS IN THOUSANDS) REAL ESTATE LOANS: One-to-four family $ 79,583 80.37% $77,318 79.60% $ 70,417 81.48% $ 66,236 82.26% Construction 3,912 3.95% 5,389 5.55% 4,062 4.70% 3,748 4.65% Multifamily 1,454 1.47% 1,466 1.51% 492 0.57% 3,475 4.32% Nonresidential and land 6,548 6.61% 5,467 5.63% 5,107 5.91% 1,626 2.02% -------- ------- ------- -------- --------- -------- -------- ------- Total real estate loans 91,497 92.41% 89,640 92.29% 80,078 92.66% 75,085 93.25% CONSUMER LOANS: 7,519 7.59% 7,488 7.71% 6,340 7.34% 5,431 6.75% -------- ------- ------- -------- --------- -------- -------- ------- Total gross loans $ 99,016 100.00% $97,128 100.00% $ 86,418 100.00% $ 80,516 100.00% ======== ======= ======= ======== ========= ======== ======== ======= LESS: Loans in process $ 1,246 $ 1,415 $ 1,541 $ 1,867 Allowance for loan losses 217 217 122 122 -------- ------- --------- -------- Total $ 1,463 $ 1,632 $ 1,663 $ 1,989 Net loans $ 97,553 $95,496 $ 84,755 $ 78,527 ======== ======= ========= ========
Source: Hopkinsville Federal Savings Bank's Prospectus =============================================================================== =============================================================================== TABLE 13 HOPKINSVILLE FEDERAL SAVINGS BANK Hopkinsville, Kentucky LOAN MATURITY SCHEDULE December 31, 1996
----------------------------------------------------------------------------------------------------------- DUE DURING THE YEAR ENDING DUE DUE DUE DUE 15 OR DECEMBER 31, 3-5 YEARS 5-10 YEARS 10-15 YEARS MORE YEARS 1997 1998 1999 AFTER 12/31/96 AFTER 12/31/96 AFTER 12/31/96 AFTER 12/31/96 TOTAL ----------------------------------------------------------------------------------------------------------- (IN THOUSANDS) One-to-four family residential $ 1,538 $ 1,073 $ 435 $ 1,169 $ 9,324 $ 16,802 $ 46,977 $77,318 Multi-family residential 286 0 0 0 0 0 1,180 $1,466 Construction 5,389 0 0 0 0 0 0 5,389 Nonresidential and land 0 76 14 102 1,922 1,923 1,430 5,467 Consumer 3,737 464 1,074 2,004 209 0 0 7,488 -------- ------- --------- -------- -------- --------- -------- ------- Total $ 10,950 $ 1,613 $ 1,523 $ 3,275 $ 11,455 $ 18,725 $ 49,587 $97,128 ======== ======= ========= ======== ======== ========= ======== ======= DUE MORE THAN ONE YEAR AFTER MARCH 31, 1997 Predetermined Rate $ 16,611 Floating or Adjustable Rate 80,517 --------- $ 97,128 =========
Source: Hopkinsville Federal Savings Bank's Prospectus ================================================================================ ================================================================================ TABLE 14 HOPKINSVILLE FEDERAL SAVINGS BANK Hopkinsville, Kentucky LOAN ORIGINATIONS
------------------------------------------------------------------------- FISCAL YEAR ENDED AT MARCH 31, DECEMBER 31, 1997 1996 1995 1994 ------------------------------------------------------------------------- (IN THOUSANDS) Loans originated: One-to-four family residential $ 2,848 $ 16,209 $11,252 $17,817 Multifamily residential 0 1,434 360 225 Construction 811 5,340 3,607 6,033 Nonresidential and land 411 536 738 435 Consumer 1,586 5,688 4,970 4,098 ------- ------- -------- -------- Total loan originations $ 5,656 $ 29,207 $20,927 $28,608 Reductions: Principal loan repayments $ 3,599 $ 18,372 $14,698 $17,886 Transfers from loans to real estate owned 0 0 0 0 ------- ------- -------- -------- Total reductions $ 3,599 $ 18,372 $14,698 $17,886 Increase (decrease) in other items (net) 0 0 0 0 ------- ------- -------- -------- Net increase (decrease) $ 2,057 $ 10,835 $6,229 $10,722 ======= ======= ======== ========
Source: Hopkinsville Federal Savings Bank's Prospectus =============================================================================== =============================================================================== TABLE 15 HOPKINSVILLE FEDERAL SAVINGS BANK Hopkinsville, Kentucky DELINQUENT LOANS
---------------------------------------------------------------------------------------------- AT MARCH 31, AT DECEMBER 31, 1997 1996 1995 1994 -------------------- ------------------------ -------------------------- --------------------- AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT ---------------------------------------------------------------------------------------------- (DOLLARS IN THOUSANDS) LOANS DELINQUENT FOR: 30-89 days $ 2,068 91.71% $ 2,058 88.55% $ 2,199 94.26% $ 1,716 97.89% 90 days or more 187 8.29% 266 11.45% 134 5.74% 37 2.11% Nonaccrual 0 0.00% 0 0.00% 0 0.00% 0 0.00% -------- ------- ------- -------- --------- -------- -------- ------- Total delinquent loans $ 2,255 100.00% $ 2,324 100.00% $ 2,333 100.00% $ 1,753 100.00% ======== ======= ======= ======== ========= ======== ======== =======
Source: Hopkinsville Federal Savings Bank's Regulatory Report =============================================================================== =============================================================================== TABLE 16 HOPKINSVILLE FEDERAL SAVINGS BANK Hopkinsville, Kentucky NONPERFORMING ASSETS
---------------------------------------------------------------------- AT MARCH 31, AT DECEMBER 31, 1997 1996 1995 1994 ---------------------------------------------------------------------- (DOLLARS IN THOUSANDS) Nonperforming assets $ 0 $ 0 $ 0 $ 0 Accruing loans delinquent 90 days and over: $ 187 $ 266 $ 134 $ 37 Loans account for on a nonaccrual basis: Real estate: Residential $ 0 $ 0 $ 0 $ 0 Nonresidential 0 0 0 0 Consumer and other 0 0 0 0 - - - - Total nonaccrual loans $ 0 $ 0 $ 0 $ 0 Total nonperforming loans $ 187 $ 266 $ 134 $ 37 ========= ======== ======== ======== Allowance for loan losses $ 217 $ 217 $ 122 $ 122 Nonperforming loans as a percent of total loans 0.19% 0.28% 0.16% 0.05% Allowance for loan losses as a percent of nonperforming loans 116.28% 81.75% 91.23% 330.41%
Source: Hopkinsville Federal Savings Bank's Prospectus =============================================================================== ================================================================================ TABLE 17 HOPKINSVILLE FEDERAL SAVINGS BANK Hopkinsville, Kentucky CLASSIFIED ASSETS
---------------------------------------------------------------------------------- AT MARCH 31, AT DECEMBER 31, 1997 1996 1995 1994 ---------------------------------------------------------------------------------- (IN THOUSANDS) CLASSIFIED ASSETS: Substandard $ 187 $ 266 $ 134 $ 37 Doubtful 0 0 0 0 Loss 0 0 0 0 - - - - Total classified assets $ 187 $ 266 $ 134 $ 37 ========= ======== ======== ========
Source: Hopkinsville Federal Savings Bank's Regulatory Report ================================================================================ ================================================================================ TABLE 18 HOPKINSVILLE FEDERAL SAVINGS BANK Hopkinsville, Kentucky ALLOWANCE FOR LOAN LOSSES
------------------------------------------------------------------------------------- FISCAL YEAR ENDED AT MARCH 31, DECEMBER 31, 1997 1996 1995 1994 -------------------------------------------------------------------------------------- (DOLLARS IN THOUSANDS) Balance at beginning of period $ 217 $ 122 $ 122 $ 122 Charge-offs 0 5 0 0 Recoveries 0 0 0 0 - - - - Net (charge-offs) recoveries 0 5 0 0 Provision for loan losses 0 100 0 0 - --- - - Balance at end of period $ 217 $ 217 $ 122 $ 122 ========= ======== ======== ======== Ratio of net (charge-offs) recoveries to average loans outstanding during the period NA 0.0053% 0.0000% 0.0000% Ratio of allowance for loan losses to total loans 0.22% 0.23% 0.14% 0.16%
Source: Hopkinsville Federal Savings Bank's Prospectus ================================================================================ ================================================================================ TABLE 19 HOPKINSVILLE FEDERAL SAVINGS BANK Hopkinsville, Kentucky INVESTMENT PORTFOLIO COMPOSITION
------------------------------------------------------------------------------- AT MARCH 31, 1997 1996 ------------------------------------------------------------------------------- CARRYING % OF MARKET % OF CARRYING % OF MARKET % OF VALUE TOTAL VALUE TOTAL VALUE TOTAL VALUE TOTAL ------------------------------------------------------------------------------- (DOLLARS IN THOUSANDS) INVESTMENT SECURITIES: Available for sale:* $5,094 6.15% $5,094 6.21% $5,110 5.06% $5,110 5.07% Intrieve stock 15 0.02% 15 0.02% 15 0.01% 15 0.01% -- ----- -- ----- -- ----- -- ----- Total $5,109 6.17% $5,109 6.23% $5,125 5.07% $5,125 5.08% Held to maturity: Securities 56,967 68.82% 56,098 68.37% 77,963 77.14% 77,489 76.81% Mortgage-backed securities 20,702 25.01% 20,848 25.41% 17,984 17.79% 18,273 18.11% ------ ------ ------ ------ ------ ------ ------ ------ Total 77,669 93.83% 76,946 93.77% 95,947 94.93% 95,762 94.92% Total investments $82,778 100.00% $82,055 100.00% $101,072 100.00% $100,887 100.00% ======= ======= ======= ======= ======== ======= ======== ======= ------------------------------------- AT DECEMBER 31, 1995 ------------------------------------- CARRYING % OF MARKET % OF VALUE TOTAL VALUE TOTAL -------------------------------------- INVESTMENT SECURITIES: Available for sale:* $ 4,053 3.95% $ 4,053 3.95% Intrieve stock 0 0.00% 0 0.00% -------- ----- -------- ----- Total $ 4,053 3.95% $ 4,053 3.95% Held to maturity: Securities 80,990 78.93% 80,796 78.89% Mortgage-backed securities 17,563 17.12% 17,822 17.36% -------- ------- -------- ------- Total 96,553 96.05% 98,618 96.05% Total investments $102,606 100.00% $102,671 100.00% ======== ======= ======== =======
* Includes FHLMC stock Source: Hopkinsville Federal Savings Bank's Prospectus ================================================================================ ================================================================================ TABLE 20 HOPKINSVILLE FEDERAL SAVINGS BANK Hopkinsville, Kentucky MORTGAGE-BACKED SECURITIES PORTFOLIO
----------------------------------------------------------------------------------------------- AT MARCH 31, AT DECEMBER 31, 1997 1996 1995 ----------------------------------------------------------------------------------------------- CARRYING % OF CARRYING % OF CARRYING % OF VALUE TOTAL VALUE TOTAL VALUE TOTAL ------------------------------------------------------------------------------------------------ (DOLLARS IN THOUSANDS) BOOK VALUE GNMA $ 19,006 91.81% $ 17,532 97.49% $ 17,563 100.00% FNMA 1,696 8.19% 452 2.51% 0 0.00% FHLMC 0 0.00% 0 0.00% 0 0.00% - ----- - ----- - ----- Total-mortgage-backed securities $ 20,702 100.00% $ 17,984 86.87% $ 17,563 84.84% MARKET VALUE GNMA $ 19,212 92.15% $ 17,826 97.55% $ 17,822 100.00% FNMA 1,636 7.85% 447 2.45% 0 0.00% FHLMC 0 0.00% 0 0.00% 0 0.00% - ----- - ----- - ----- Total mortgage-backed securities $ 20,848 100.00% $ 18,273 100.00% $ 17,822 100.00% Variance between Book Value and Market Value $ 146 $ 289 $ 259 ======== ========= =========
Source: Hopkinsville Federal Savings Bank's Prospectus =============================================================================== ================================================================================ TABLE 21 HOPKINSVILLE FEDERAL SAVINGS BANK Hopkinsville, Kentucky DEPOSIT COMPOSITION
----------------------------------------------------- AT MARCH 31, 1997 1996 ---------------------------------------------------- AMOUNT PERCENT AMOUNT PERCENT ---------------------------------------------------- (DOLLARS IN THOUSAND) TRANSACTION ACCOUNTS: Non-interest bearing $ 2,178 1.19% $ 1,784 0.97% Demand and NOW accounts 7,795 4.26% 7,603 4.14% Money market 37,588 20.52% 36,940 20.09% Passbook savings 11,795 6.44% 10,632 5.78% ------ ----- ------ ----- Total transaction accounts $ 59,356 32.41% $ 56,959 30.99% CERTIFICATES OF DEPOSIT: 2.01% - 4.00% $ 38 0.02% $ 38 0.02% 4.01% - 6.00% 102,402 55.91% 103,036 56.05% 6.01% - 8.00% 21,365 11.66% 23,794 12.94% ------ ------ ------ ------ Total certificates of deposits $ 123,805 67.59% $126,868 69.01% Total deposits $ 183,161 100.00% $183,827 100.00% ========= ======= ======== ======= --------------------------------------------- AT DECEMBER 31, 1995 1994 --------------------------------------------- AMOUNT PERCENT AMOUNT PERCENT --------------------------------------------- (DOLLARS IN THOUSANDS) TRANSACTION ACCOUNTS: Non-interest bearing $ 1,236 0.63% $ 1,135 0.61% Demand and NOW accounts 7,628 3.92% 6,811 3.72% Money market 34,782 17.86% 45,053 24.60% Passbook savings 11,197 5.75% 11,713 6.31% ------ ----- ------ ----- Total transaction account $ 54,843 28.16% $64,712 34.85% CERTIFICATES OF DEPOSIT: 2.01% - 4.00% $ 58 0.03% $21,603 11.63% 4.01% - 6.00% 79,288 40.71% 78,894 42.48% 6.01% - 8.00% 60,586 31.11% 20,490 11.03% ------ ------ ------ ------ Total certificates of deposits $ 139,932 71.84% $120,987 65.15% Total deposits $ 194,775 100.00% $185,699 100.00% ========= ======= ======== =======
Source: Hopkinsville Federal Savings Bank's Prospectus =============================================================================== =============================================================================== TABLE 22 HOPKINSVILLE FEDERAL SAVINGS BANK Hopkinsville, Kentucky DEPOSIT ACTIVITY
-------------------------------------------------------------------------------- FISCAL YEAR ENDED AT MARCH 31, DECEMBER 31, 1997 1996 1995 1994 ------------------------------------------------------------------------------- (DOLLARS IN THOUSANDS) Beginning balance $ 183,827 $194,775 $ 185,699 $ 173,184 Deposits 60,872 149,771 140,622 136,357 Withdrawals 63,367 167,560 139,353 129,749 ------ ------- ------- ------- Net deposits before interest credited (2,495) (17,789) 1,269 6,608 Interest credited 1,829 6,841 7,807 5,907 ----- ----- ----- ----- Ending balance $ 183,161 $183,827 $ 194,775 $ 185,699 ========= ======== ========= ========= Net increase (decrease) ($666) ($10,948) $ 9,076 $ 12,515 Percent increase (decrease) -0.36% -5.62% 4.89% 7.23%
Source: Hopkinsville Federal Savings Bank's Prospectus =============================================================================== =============================================================================== TABLE 23 HOPKINSVILLE FEDERAL SAVINGS BANK Hopkinsville, Kentucky DEPOSIT COMPOSITION
At March 31, At December 31, 1997 1996 1996 1996 ------------------- ------------------- ------------------- ------------------- Amount Percent Amout Percent Amount Percent Amout Percent --------------------------------------------------------------------------------------------- (Dollars in thousands) CORE DEPOSITS $ 59,355 32.41% $56,959 30.99% $54,843 28.16% $64,712 34.85% CERTIFICATES OF DEPOSIT: Maturing in one year or less 72,990 39.85% 77,287 42.04% 91,198 46.82% 66,853 36.00% Maturing within one to two years 36,361 19.85% 32,362 17.60% 24,341 12.50% 31,255 16.83% Maturing with two to three years 9,415 5.14% 10,433 5.68% 12,611 6.47% 9,453 5.09% Maturing after three years 5,040 2.75% 6,786 3.69% 11,782 6.05% 13,427 7.23% ----- ----- ----- ----- ------ ----- ------ ----- Total certificates 123,806 67.59% 126,868 69.01% 139,932 71.84% 120,988 65.15% Total deposits $183,161 100.00% $183,827 100.00% $194,775 100.00% $185,700 100.00% ======== ======= ======== ======= ======== ======= ======== =======
Source: Hopkinsville Federal Savings Bank's Prospectus and Bank Financial Reports =============================================================================== ================================================================================ TABLE 24 HOPKINSVILLE FEDERAL SAVINGS BANK Hopkinsville, Kentucky BORROWED FUNDS
----------------------------------------------------------------------- AT MARCH 31, AT DECEMBER 31, 1997 1996 1995 1994 ----------------------------------------------------------------------- (DOLLARS IN THOUSANDS) FHLB advances $0 $1,317 $0 $0 Weighted average interest rate during the period of FHLB advances 0.00% 7.59% 0.00% 0.00% Weighted average interest rate at end of period of FHLB advances 0.00% 7.15% 0.00% 0.00%
Source: Hopkinsville Federal Savings Bank's Prospectus =============================================================================== ================================================================================ TABLE 25 HOPKINSVILLE FEDERAL SAVINGS BANK Hopkinsville, Kentucky GAP TABLE
----------------------------------------------------------------------------- ONE YEAR OVER OR LESS 1-5 YEARS 5-10 YEARS 10-15 YEARS 15 YEARS TOTAL ----------------------------------------------------------------------------- (DOLLARS IN THOUSANDS) INTEREST-EARNING ASSETS: One-to-four family loans $ 70,082 $302 $0 $9,199 $0 $ 79,583 Multi-family residential 1,454 0 0 0 0 1,454 Construction 3,912 0 0 0 0 3,912 Nonresidential 6,548 0 0 0 0 6,548 Secured by deposit loans 3,368 0 0 0 0 3,368 Other consumer loans 413 3,682 56 0 0 4,151 Time deposits and interest bearing deposits in FHLB 9,000 0 0 0 0 9,000 Federal funds sold 8,806 0 0 0 0 8,806 Investment securities 14,106 47,970 0 0 0 62,07 Mortgage-backed securities 16,255 2,865 1,582 0 0 20,702 -------- ----- ----- - - ------ Total interest earning assets $133,944 $54,819 $1,638 $9,199 $0 $199,600 ======== ======== ====== ====== ===== ======== INTEREST-BEARING LIABILITIES: Deposits 130,168 50, 815 0 0 0 180,983 Interest sensitivity gap $3,776 $4,004 $1,638 $ 9,199 $ 0 $ 18,617 Cumulative interest $3,776 $7,780 $9,418 $18,617 $18,617 $ 18,617 sensitivity gap Ratio of cumulative gap to interest-earning assets 1.89% 3.90% 4.72% 9.33% 9.33% 9.33%
================================================================================ Source: Hopkinsville Federal Savings Bank's Prospectus ================================================================================ TABLE 26 HOPKINSVILLE FEDERAL SAVINGS BANK Hopkinsville, Kentucky OFFICES OF HOPKINSVILLE FEDERAL SAVINGS BANK AT MARCH 31, 1997
- ----------------------------------------------------------------------------------------------------- BOOK VALUE (1) DESCRIPTION/ADDRESS LEASED/OWNED DATE ACQUIRED SQUARE FOOTAGE (IN THOUSANDS) - ----------------------------------------------------------------------------------------------------- Hopkinsville - main office Owned 1995 16,575 $1,940 Hopkinsville - downtown office (2) Owned 1966 11,926 183 Murray Owned 1969 4,800 82 Cadiz (3) Leased 1974 600 75 Elkton Owned 1976 3,400 50
(1) Represents the book value of land, building, furniture, fixtures and equipment owned by the Bank. (2) Currently for sale. The Bank plan is constructing a new branch office at 7th and Virginia Streets in Hopkinsville. (3) This branch office will be relocated in Cadiz on a lot purchased by the Bank. The $75 thousand shown represents the cost of the site for the new facility. Source: Hopkinsville Federal Savings Bank's Prospectus ================================================================================ ================================================================================ TABLE 27 HOPKINSVILLE FEDERAL SAVINGS BANK Hopkinsville, Kentucky LIST OF KEY OFFICERS AND DIRECTORS AT MARCH 31, 1997
- --------------------------------------------------------------------------------------------------------------- YEAR OF NAME POSITION TERM AGE COMMENCEMENT EXPIRES OF DIRECTORSHIP - ------------------------------------------------------------------------------------------------------------------ WD Kelley Chairman of the Board 1998 76 1972 D. B. Bostick, Director 1998 71 1972 Jr. J. Noble Hall, Director 1999 76 1962 Jr. Clifton H. Director 1998 76 1977 Cochran Drury R. Embry Director 2000 76 1969 Walton G. Ezell Director 1998 63 1965 Chester K. Wood Director 1999 89 1957 Bruce Thomas Director, President and CEO 2000 59 1990 Peggy R. Noel Director and Executive Vice 2000 58 1995 President Boyd M. Clark Director and Senior Vice President 1999 51 1990
Source: Hopkinsville Federal Savings Bank's Prospectus ================================================================================ ================================================================================ TABLE 28 NATIONAL INTEREST RATES BY QUARTER 1993 - FIRST QUARTER 1997
------------------------------------------------------------------------------------- FIRST QUARTER SECOND QUARTER THIRD QUARTER FOURTH QUARTER 1993 1993 1993 1993 ------------------------------------------------------------------------------------- Prime Rate 6.00% 6.00% 6.00% 6.00% 90-Day Treasury Bill 2.93% 3.07% 2.96% 3.05% 1 Year Treasury Note 3.27% 3.43% 3.35% 3.58% 30 Year Treasury Note 6.92% 6.67% 6.03% 6.35% ------------------------------------------------------------------------------------- FIRST QUARTER SECOND QUARTER THIRD QUARTER FOURTH QUARTER 1994 1994 1994 1994 ------------------------------------------------------------------------------------- Prime Rate 6.25% 7.25% 7.75% 8.50% 90-Day Treasury Bill 3.54% 4.23% 5.14% 5.66% 1 Year Treasury Note 4.40% 5.49% 6.13% 7.15% 30 Year Treasury Note 7.11% 7.43% 7.82% 7.88% ------------------------------------------------------------------------------------- FIRST QUARTER SECOND QUARTER THIRD QUARTER FOURTH QUARTER 1995 1995 1995 1995 ------------------------------------------------------------------------------------- Prime Rate 9.00% 9.00% 8.75% 8.50% 90-Day Treasury Bill 5.66% 5.58% 5.50% 5.32% 1 Year Treasury Note 6.51% 5.62% 5.72% 5.02% 30 Year Treasury Note 7.43% 6.71% 6.48% 5.96% ------------------------------------------------------------------------------------- FIRST QUARTER SECOND QUARTER THIRD QUARTER FOURTH QUARTER 1996 1996 1996 1996 ------------------------------------------------------------------------------------- Prime Rate 8.25% 8.25% 8.25% 8.25% 90-Day Treasury Bill 5.16% 5.24% 5.32% 5.05% 1 Year Treasury Note 5.40% 5.78% 5.60% 5.50% 30 Year Treasury Note 6.72% 6.90% 6.92% 6.58% ------------------------------------------------------------------------------------- FIRST QUARTER SECOND QUARTER THIRD QUARTER FOURTH QUARTER 1996 1996 1996 1996 ------------------------------------------------------------------------------------- Prime Rate 8.50% 90-Day Treasury Bill 5.30% 1 Year Treasury Note 5.83% 30 Year Treasury Note 7.08%
Source: The Wall Street Journal and Bloomberg Market Research ================================================================================ ================================================================================ TABLE 29 HOPKINSVILLE FEDERAL SAVINGS BANK Hopkinsville, Kentucky MARKET DATA FOR SELECTED PUBLICLY-TRADED THRIFT INSTITUTIONS * SELECTED GROUPS EXCLUDING MUTUAL HOLDING COMPANIES AS OF MAY 29, 1997
------------------------------------------------- PRICE TO PRICE TO PRICE TO BOOK LTM EPS ** ASSETS (%) (X) (%) ------------------------------------------------- SEGMENT DESCRIPTION: All Thrift - Medians 124.90 15.13 13.53 All Thrift - Averages 137.75 16.94 15.37 Thrifts with Assets more than $500 million Medians 153.79 14.67 11.74 Averages 165.24 16.50 13.26 Thrifts with Assets less than $500 million Medians 110.65 15.37 14.64 Averages 120.01 17.28 16.75 EQUITY-TO-ASSET GROUPS* Over 10% Medians 106.97 16.79 17.11 Averages 111.08 19.11 19.89 From 7% to 10% Medians 130.36 14.56 11.72 Averages 135.58 15.08 11.19 Under 7% Medians 135.53 12.47 7.84 Averages 141.08 13.64 9.92
* Selected publicly traded companies include those with assets less than $500 million. ** Adjusted to exclude SAIF assessment where applicable Source: SNL Securities, L.P. and National Capital calculations ================================================================================ ================================================================================ TABLE 30 HOPKINSVILLE FEDERAL SAVINGS BANK Hopkinsville, Kentucky MARKET DATA FOR SELECTED PUBLICLY-TRADED THRIFT INSTITUTIONS * EXCLUDING MUTUAL HOLDING COMPANIES GEOGRAPHIC REGIONAL AVERAGES AS OF MAY 29, 1997
----------------------------------------------------- PRICE TO PRICE TO PRICE TO BOOK LTM EPS ** ASSETS (%) (X) (%) ---------------------------------------------------- Mid-Atlantic 118.82 15.15 13.28 Midwestern 112.70 18.30 17.26 Northeastern 135.74 14.04 12.97 Southeastern 132.26 18.73 22.06 Southwestern 117.06 18.79 15.21 Western 124.51 17.74 15.05 DISTRICT AVERAGE 123.52 17.13 15.97
* Selected publicly traded thrifts with assets less than $500 million. ** Reflects adjustment to exclude SAIF assessment where applicable. Source: SNL Securities, L.P. and National Capital calculations ================================================================================ ================================================================================ Table 31 RECENT CONVERSION ACTIVITY Selected Smaller Publicity Traded Thrifts Original Offering Statistics and Current Market Pricing Since September 30, 1996 As of May 29, 1997
- ----------------------------------------------------------------------------------------------------------------------------------- CURRENT TOTAL STOCK SHARES IPO PRICE PRICE INCREASE TICKER START TIME CITY STATE IPO DATE ISSUED ($) ($) ($) - ------------------------------------------------------------------------------------------------------------------------------------ AFBC Advance Financial Bancorp Wellsburg WV 01/02/97 1,084,450 10.000 14.000 40.00% AFED AFSALA Bancorp Inc. Amsterdam NY 10/01/96 1,454,750 10.000 13.500 35.00% BFFC Big Foot Financial Corp. Long Grove IL 12/20/96 2,512,750 10.000 15.875 58.75% CENB Century Bancorp Inc. Thomasville NC 12/23/96 407,330 50.000 68.250 35.50% CFNC Carolina Fincorp Inc. Rockingham NC 11/25/96 1,651,500 10.000 14.250 42.50% CNBA Chester Bancorp Inc. Chester IL 10/98/96 2,182,125 10.000 15.000 50.00% DCBI Delphos Citizens Bancorp Inc. Delphos OH 11/21/96 2,038,719 10.000 14.000 40.00% EFBC Empire Federal Bancorp Inc. Livingston MT 01/27/97 2,592,100 10.000 13.375 33.75% FTNB Fulton Bancorp Inc. Fulton MO 10/18/96 1,719,250 10.000 19.000 90.00% GSLA GS Financial Corp. Metairie LA 04/01/97 3,438,500 10.000 14.250 42.50% HCBB HCB Bancshares Inc. Camden AR 05/07/97 2,645,000 10.000 13.000 30.00% HCFC Home City Financial Corp. Springfield OH 12/30/96 952,200 10.000 13.375 33.75% HMLK Hemlock Federal Financial Corp Oak Forest IL 04/02/97 2,076,325 10.000 13.250 32.50% MRKF Market Financial Corporation Mount Healthy OH 03/27/97 1,335,725 10.000 12.375 23.75% NSBC NewSouth Bancorp, Inc. Washington NC 04/08/97 2,909,500 15.000 24.000 60.00% PLSK Pulaski Savings Bank, MHC Springfield NJ 04/03/97 952,000 10.000 12.750 27.50% PSFC Peoples-Sidney Financial Corp. Sidney OH 04/28/97 1,785,375 10.000 13.250 32.50% PSFI PS Financial Inc. Chicago IL 11/27/96 2,182,125 10.000 13.750 37.50% RIVR River Valley Bancorp Madison IN 12/20/96 1,190,250 10.000 14.750 47.50% SCBS Southern Community Bancshares Cullman AL 12/23/96 1,137,350 10.000 14.000 40.00% SSFC South Street Financial Corp. Albemarie NC 10/03/96 4,496,500 10.000 16.250 62.50% ---------------------------------------------------------------------- AVERAGE 1,849,715 12.143 17.250 42.69% MEDIAN 1,861,500 10.,000 14.000 40.00% ---------------------------------------------------------------------- PRICE PRICE PRICE GROSS PRO-FORMA PRO-FORMA ADJUSTED CONVERSION PROCEEDS TANG BECK EARNINGS ASSETS ASSETS TICKER ($000) (%) (%) (%) ($000) - -------------------------------------------------------------------------- AFBC 10,845 71.086 9.68 10.6 91,852 AFED 14,458 71.731 8.32 9.9 133,046 BFFC 25,126 72.674 14.87 11.4 194,624 CENB 20,367 72.105 13.68 20.0 81,304 CFNC 18,515 76.979 11.62 16.4 94,110 CNBA 21,821 72.102 11.09 13.9 134,781 DCBI 20,387 72.228 10.89 18.8 88,022 EFBC 25,921 68.093 21.74 23.0 86,810 FTNB 17,193 72.528 10.77 18.7 85,496 GSLA 34,385 63.754 27.02 28.4 86,521 HCBB 28,450 71.953 28.57 13.4 171,241 HCFC 9,522 71.203 9.92 14.6 55,728 HMLK 20,763 71.624 13.30 12.4 146,595 MRKF 13,357 71.067 17.73 22.7 45,547 NSBC 43,643 76.654 14.92 18.4 194,139 PLSK 9,522 103.154 9.85 5.7 158,728 PSFC 17,854 71.242 11.49 17.0 88,882 PSFI 21,821 71.927 14.45 29.0 53.520 RIVR 11,903 72.961 9.24 12.1 86,604 SCBS 11,374 74.388 9.85 15.0 64,381 SSFC 44,985 76.319 17.66 21.2 166,978 ---------------------------------------------------------------- 20,966 72.70 14.12 16.70 109,863 20,367 72.10 11.82 16.40 86,022 ----------------------------------------------------------------
* Adjusted to exclude the SAIF assesment where applicable Source: SNL Securities, L.P. National Capital Companies, LLC ================================================================================ Exhibit 1 HOPKINSVILLE FEDERAL SAVINGS BANK OFFICE LOCATIONS [MAP APPEARS HERE] =============================================================================== EXHIBIT II-1 SELECTED KENTUCKY MARKET DEMOGRAPHICS POPULATION
---------------------------------------------------------------------------- 1990-94 ANNUAL COUNTY 1980 1990 1994 1999 CHANGE * ---------------------------------------------------------------------------- Christian 66,878 68,941 67,997 68,608 -0.30% Calloway 30,031 30,735 31,850 32,665 0.80% Trigg 9,384 10,361 11,307 12,199 2.10% Todd 11,874 10,940 11,147 11,240 0.40% ------- ------- ------- ------ ---- TOTAL 118,167 120,977 122,301 124,712 1.09% State Average 0.90% National Average 1.10%
* Calculations derived from The Sourcebook of County Demographics Source: The Sourcebook of County Demographics ============================================================================== ============================================================================== EXHIBIT II-2 SELECTED KENTUCKY MARKET DEMOGRAPHICS HOUSEHOLDS
---------------------------------------------------------------- 1990-94 ANNUAL COUNTY 1990 1994 1999 CHANGE * ---------------------------------------------------------------- Christian 21,636 21,439 21,714 -0.20% Calloway 11,607 12,052 12,379 0.90% Trigg 4,104 4,494 4,859 2.20% Todd 4,104 4,185 4,222 0.50% ------- ------- ------- ------ TOTAL 41,451 42,170 43,174 1.73% State Average 0.90% National Average 1.10%
* Calculations derived from The Sourcebook of County Demographics Source: The Sourcebook of County Demographics ============================================================================== ================================================================================ EXHIBIT II-3 SELECTED KENTUCKY MARKET DEMOGRAPHICS AGE DISTRIBUTION
- --------------------------------------------------------------------------- COUNTY less than 19 20-24 25-44 45-60 65+ - --------------------------------------------------------------------------- Christian 32.30% 10.40% 32.10% 15.10% 10.10% Calloway 22.90% 13.10% 28.90% 19.10% 16.00% Trigg 24.60% 5.80% 25.60% 23.70% 20.30% Todd 28.70% 6.10% 28.70% 20.50% 16.00% ------ ----- ------ ------ ------ AVERAGE 27.13% 8.85% 28.83% 19.60% 15.60% State Average 28.50% 7.30% 31.10% 20.10% 13.00% National Average 28.80% 7.20% 32.00% 19.30% 12.70%
Columns may not add due to rounding Source: The Sourcebook of County Demographics ================================================================================ ============================================================================== EXHIBIT II-4 SELECTED KENTUCKY MARKET DEMOGRAPHICS MEDIAN HOUSEHOLD INCOME
------------------------------------------------------ 1994-99 COUNTY 1994 1999 CHANGE* ------------------------------------------------------ Christian $25,617 $27,138 5.94% Calloway 21,878 21,855 -0.11% Trigg 22,606 24,218 7.13% Todd 23,952 25,871 8.01% ------- ------- ----- AVERAGE $23,513 $24,771 5.35% State Average $26,165 $26,124 -0.16% National Average $33,900 $34,564 1.96%
Source: The Sourcebook of County Demographics ============================================================================== =============================================================================== EXHIBIT II-5 SELECTED KENTUCKY MARKET DEMOGRAPHICS MARKET AREA BANKS AND THRIFTS* --------------------------------------------------------------------------
NUMBER TOTAL TOTAL OF ASSETS DEPOSITS NAME TYPE HEADQUARTERS BRANCHES (000S) (000S) ----------------------------------------------------------------------------------------------- Bank Of Cadiz Bank Trigg 1 $52,635 $42,498 Dees Bank of Hazel Bank Calloway 0 27,336 22,304 Elkton Bank & Trust Company Bank Todd 3 62,455 53,678 Pennyrile Citizens B & T Company Bank Christian 2 66,804 46,421 Trigg County Farmers Bank Bank Trigg 2 88,252 69,692 United Commonwealth Bank, FSB Thrift Calloway 0 43,704 29,640 United Southern Bank Bank Christian 3 60,033 53,814 ------ ------ TOTAL $401,219 $318,047 Hopkinsville Federal Savings Bank Thrift Christian 5 $211,702 $193,000
* Banks and thrifts headquartered in Hopkinsville Federal's market area As of June 30, 1996 Source: Sheshunoff Information Services, Inc. ================================================================================ =============================================================================== EXHIBIT III-1 HOPKINSVILLE FEDERAL SAVINGS BANK Hopkinsville, Kentucky COMPARISON OF BALANCE SHEET PROFILES
------------------------------------------------------ HOPKINSVILLE CENTRAL REGION FEDERAL SAVINGS INSTITUTIONS SAVINGS BANK (405 IN TOTAL) ------------------------------------------------------ PERCENT OF ASSETS PERCENT OF ASSETS DECEMBER 31, 1996 DECEMBER 31, 1996 Cash & Investments 42.58% 13.91% Mortgage Securities 8.80% 12.18% Net Mortgage Loans 43.03% 60.65% Other Loans 3.69% 8.03% ----- ----- Total Interest Bearing Assets 98.10% 94.77% Fixed Assets 1.14% 1.13% Other Real Estate Owned 0.00% 0.19% Investment in Subsidiaries 0.00% 1.23% Other Assets 0.76% 2.69% ----- ----- TOTAL ASSETS 100.00% 100.00% ======= ======= Deposits 89.94% 71.09% Borrowings 0.64% 18.52% Other Liabilities 1.15% 1.94% ----- ----- Total Liabilities 91.73% 91.56% Equity Capital 8.27% 8.44% ----- ----- TOTAL LIABILITIES AND EQUITY 100.00% 100.00% ======= =======
Columns may not add due to rounding Source: Office of Thrift Supervision ================================================================================ =============================================================================== EXHIBIT III-2 HOPKINSVILLE FEDERAL SAVINGS BANK Hopkinsville, Kentucky COMPARISON OF INCOME STATEMENTS
------------------------------------------------------ HOPKINSVILLE CENTRAL REGION FEDERAL SAVINGS INSTITUTIONS SAVINGS BANK (405 IN TOTAL) ------------------------------------------------------ PERCENT OF AVERAGE ASSETS FISCAL YEAR LAST TWELVE MONTHS ENDED ENDED DECEMBER 31, 1996 DECEMBER 31, 1996 Interest Income 6.34% 6.96% Interest Expense 4.68% 4.21% ----- ----- Net Interest Income 1.66% 2.75% Less: Provision for Loan Losses 0.05% 0.15% Noninterest Income 0.28% 0.93% Noninterest Expense 1.77% (1) 2.47% (2) ----- ----- Net Operating Income 0.13% 1.06% Less: Taxes 0.04% 0.35% Other 0.00% -0.03% ----- ----- NET INCOME AFTER TAXES 0.09% 0.68% ===== =====
(1) In 1996 the Bank paid a special assessment of $1.23 million to recapitalize the SAIF fund, totaling .59% of average assets. (2) Percentage includes the SAIF special assessment. Columns may not add due to rounding Source: Office of Thrift Supervision ================================================================================ =============================================================================== EXHIBIT III-3 HOPKINSVILLE FEDERAL SAVINGS BANK Hopkinsville, Kentucky EMPLOYMENT BY PLACE OF WORK
------------------------------------------------------------------------------------------------ 1996 1995 COUNTY INDUSTRY GROUP U.S. KENTUCKY CHRISTIAN CALLOWAY TRIGG TODD ------------------------------------------------------------------------------------------------ Mining 0.48% 1.38% 0.68% 0.00% N/A N/A Construction 4.52% 4.60% 3.50% 5.10% 4.50% 2.11% Finance/Insurance/Real Estate 5.84% 4.04% 3.30% 2.20% 3.50% 2.70% Manufacturing 15.29% 18.65% 27.50% 20.30% 36.70% 47.87% Services 28.74% 24.43% 21.70% 12.00% 12.70% 6.10% Transportation/Utilities 5.28% 5.58% 2.80% N/A 2.40% 3.10d Wholesale/Retail Trade 23.57% 23.99% 25.10% 27.10% 18.20% 19.77% Government 16.28% 17.33% 14.50% 25.10% 19.80% 16.90% Unemployment 5.40% 5.60% 5.50% 4.00% 4.70% 4.50%
Source: Employment and Earnings, U.S. Department of Labor, Bureau of Labor Statistics and Kentucky Workforce Development Cabinet, Department for Employment Services, Research and Statistics Branch ================================================================================ ================================================================================ EXHIBIT III-4 HOPKINSVILLE FEDERAL SAVINGS BANK Hopkinsville, Kentucky KEY HOUSING DATA
------------------------------------------------------------------ COUNTY U.S. KENTUCKY CHRISTIAN CALLOWAY TRIGG TODD ------------------------------------------------------------------ % Annual Rate 1990-1994 Number of Households 1.10% 0.90% -0.20% 0.90% 2.20% 0.50% Average Value of Single-Family Home* $112,474 $63,128 $54,253 $64,228 $55,460 $49,933 Average Price Asked of Vacant-for-Sale* $108,304 $60,691 $55,729 $57,356 $48,051 $33,074 Average Price Asked Vacant-for-Rent* $421 $278 $217 $204 $192 $155 Owner-Occupied* 64.20% 69.60% 72.40% 53.40% 75.80% 79.40% Renter-Occupied* 35.80% 30.40% 27.60% 46.60% 24.20% 20.60% Permits Issued:** One-to-four Units 1,139,435 15,368 83 44 7 0 Five Units or More 294,235 3,425 0 2 6 0
* As of 1990 ** Information for the United States and Kentucky is preliminary for 1996 and the information for the counties pertains to reported building permits in the major cities of the County (Hopkinsville - Christian, Murray - Calloway, Cadiz - Trigg, Elkton and Guthrie - Todd). Source: U.S. Department of Commerce, Bureau of the Census, 1990 Census of Population and, CACI Sourcebook of County Demographics and Residential Construction Branch, Manufacturing and Construction Division ================================================================================ ================================================================================ EXHIBIT III-5 HOPKINSVILLE FEDERAL SAVINGS BANK Hopkinsville, Kentucky MARKET SHARE OF DEPOSITS JUNE 30, 1996
---------------------------------------------------------------------------- CHRISTIAN CALLOWAY TRIGG TODD HOPKIN HOPKINSVILLE COUNTY COUNTY COUNTY COUNTY FEDERAL FEDERAL DEPOSITS DEPOSITS DEPOSITS DEPOSITS DEPOSITS SHARE (000S) (000S) (000S) (000S) (000S) (%) ---------------------------------------------------------------------------- Banks $421,977 $436,792 $112,190 $102,038 - - - - - - Thrifts 112,215 53,738 24,679 31,967 193,000 86.70% Credit Unions 99,427 5,899 0 0 - - - - - - ------ ----- - - ----- ----- Total $633,619 $496,429 $136,869 $134,005 $193,000 13.78%
Source: SNL Branch Migration DataSource v1.6 ================================================================================ - ------------------------------------------------------------------------------- EXHIBIT IV-1 SELECTED FINANCIAL AND MARKET STATISTICS PUBLICLY TRADED THRIFT INSTITUTIONS EXCLUDING MUTUAL HOLDING COMPANIES IN THE MIDWESTERN REGION WITH ASSETS LESS THAN $500 MILLION AND IPO DATE BEFORE SEPTEMBER 30, 1995 AS OF MAY 29, 1997
- ------------------------------------------------------------------------------------------------------------------------------------ CURRENT STOCK TICKER SHORT NAME CITY STATE EXCHANGE IPO DATE PRICE $ - ------------------------------------------------------------------------------------------------------------------------------------ ASBI AMERIANA BANCORP NEW CASTLE IN NASDAQ 03/02/97 15.625 ASBP ASB Financial Corp Portsmouth OH NASDAQ 05/11/95 11.750 ATSB AmTrust Capital Corp. Peru IN NASDAQ 03/28/95 12.125 BDJI First Federal Bancorporation Bemidji MN NASDAQ 04/04/95 18.500 BWFC Bank West Financial Corp. Grand Rapids MI NASDAQ 03/30/95 13.500 CAPS Capital Savings Bancorp, Inc. Jefferson City MO NASDAQ 12/29/93 17.750 CASH First Midwest Financial Inc. Storm Lake IA NASDAQ 09/20/93 15.500 CBCI Calumet Bancorp Inc. Dolton IL NASDAQ 02/20/92 38.000 CBCO CB Bancorp Inc. Michigan City IN NASDAQ 12/28/92 34.000 CIBI Community Investors Bancorp Bucyrus OH NASDAQ 02/07/95 19.000 CKFB CKF Bancorp Inc. Danville KY NASDAQ 01/04/95 19.250 CMRN Cameron Financial Corp Cameron MO NASDAQ 04/03/95 16.500 EFBI Enterprise Federal Bancorp West Chester OH NASDAQ 10/17/94 19.000 FBCI Fidelity Bancorp Inc. Chicago IL NASDAQ 12/15/93 18.750 FBCV 1ST Bancorp Vincennes IN NASDAQ 04/07/87 30.500 FBSI FIRST BANCSHARES INC. MOUNTAIN GROVE MO NASDAQ ##### 19.000 FCBF FCB Financial Corp. Neenah WI NASDAQ 09/24/93 24.500 FFBI First Financial Bancorp Inc. Belvidere IL NASDAQ 10/04/93 15.500 FFBZ First Federal Bancorp Inc. Zanesville OH NASDAQ 07/13/92 17.500 FFED Fidelity Federal Bancorp Evansville IN NASDAQ 08/31/87 7.750 FFHH FSF Financial Corp. Hutchinson MN NASDAQ 10/07/94 16.750 FFHS First Franklin Corporation Cincinnati OH NASDAQ 01/26/88 20.250 FFKY First Federal Financial Corp. Elizabethtown KY NASDAQ 07/15/87 18.875 FFSL First Independence Corp. Independence KS NASDAQ 10/08/93 11.281 FFWC FFW CORP. WABASH IN NASDAQ 26.000 FFWD WOOD BANCORP INC. BOWLING GREEN OH NASDAQ ##### 16.000 FKKY Frankfort First Bancorp Inc. Frankfort KY NASDAQ 07/10/95 10.375 FMBD First Mutual Bancorp Inc. Decatur IL NASDAQ 07/05/95 15.000 FTSB Fort Thomas Financial Corp. Fort Thomas KY NASDAQ 06/28/95 10.250 GFCO Glenway Financial Corp. Cincinnati OH NASDAQ 11/30/90 24.750 GFSB GFS Bancorp Inc. Grinnell IA NASDAQ 01/06/94 14.000 GTPS Great American Bancorp Champaign IL NASDAQ 06/30/95 15.750 GWBC Gateway Bancorp Inc. Catlettsburg KY NASDAQ 01/18/95 17.000 HALL Hallmark Capital Corp. West Allis WI NASDAQ 01/03/94 19.250 HBBI Home Building Bancorp Washington IN NASDAQ 02/08/95 21.000 HBFW Home Bancorp Fort Wayne IN NASDAQ 03/30/95 20.125 HFSA Hardin Bancorp Inc. Hardin MO NASDAQ 09/29/95 14.625 HHFC Harvest Home Financial Corp. Cheviot OH NASDAQ 10/10/94 11.000 HMCI HomeCorp Inc. Rockford IL NASDAQ 06/22/90 20.875 HVFD Haverfield Corporation Cleveland OH NASDAQ 03/19/85 24.750 HZFS Horizon Financial Svcs Corp. Oskaloosa IA NASDAQ 06/30/94 19.000 INBI INDUSTRIAL BANCORP BELLEVUE OH NASDAQ 08/01/95 12.625 INCB Indiana Community Bank SB Lebanon IN NASDAQ 12/15/94 15.000 KNK Kankakee Bancorp Inc. Kankakee IL AMSE 01/06/93 27.375 KYF Kentucky First Bancorp Inc. Cynthiana KY AMSE 08/29/95 10.625 - ------------------------------------------------------------------------------------------------------------------------------------ ADJUSTED TANGIBLES CURRENT CURRENT CURRENT TOTAL EQUITY PRICE PRICE PRICES ?? PRICE ASSETS ??? ASSETS LTM LPS LTM LPS BANK ??? ASSETS ($000) (%) (X) (X) (%) (%) NET ???? NET ?????? - ------------------------------------------------------------------------------------------------------------------------------------ ASBI AMERIANA BANCORP 21.70 14.30 116.87 12.67 402,163 10.84 ASBP ASB Financial Corp 28.66 18.98 110.64 18.49 109,414 15.74 ATSB AmTrust Capital Corp. 27.56 15.09 89.35 8.99 71,031 10.07 BDJI First Federal Bancorporation 35.58 17.36 107.68 12.03 107,716 11.17 BWFC Bank West Financial Corp. 23.28 17.73 106.97 16.38 147,019 15.31 CAPS Capital Savings Bancorp, Inc. 23.36 16.25 162.99 14.11 237,915 8.66 CASH First Midwest Financial Inc. 16.15 12.48 115.41 11.84 370,177 10.40 CBCI Calumet Bancorp Inc. 17.43 13.53 107.86 17.20 494,557 15.94 CBCO CB Bancorp Inc. 20.73 16.63 197.56 17.44 226,553 8.83 CIBI Community Investors Bancorp 18.81 13.02 107.16 12.34 97,446 11.52 CKFB CKF Bancorp Inc. 22.13 18.17 116.03 29.65 60,197 23.68 CMRN Cameron Financial Corp 20.63 16.79 97.52 22.39 197,693 22.96 EFBI Enterprise Federal Bancorp 22.35 17.40 120.87 14.88 256,704 12.32 FBCI Fidelity Bancorp Inc. 21.55 18.14 105.99 10.77 4??,910 10.17 FBCV 1ST Bancorp 33.52 NA 100.00 7.79 273,090 7.80 FBSI FIRST BANCSHARES INC. 16.10 12.46 96.11 13.77 160,048 14.33 FCBF FCB Financial Corp. 25.00 19.82 128.21 22.44 268,528 17.51 FFBI First Financial Bancorp Inc. NM NA 88.57 6.91 93,156 7.80 FFBZ First Federal Bancorp Inc. 22.15 15.61 209.08 14.35 191,686 7.65 FFED Fidelity Federal Bancorp 51.67 18.40 149.90 7.71 250,285 5.14 FFHH FSF Financial Corp. 22.95 18.15 105.55 14.11 367,312 11.77 FFHS First Franklin Corporation 77.88 22.45 120.46 10.55 226,235 8.76 FFKY First Federal Financial Corp. 17.64 14.23 165.28 21.12 372,300 12.88 FFSL First Independence Corp. 23.50 15.65 98.87 10.38 109,230 10.50 FFWC FFW CORP. 13.33 10.55 114.29 11.44 158,441 10.01 FFWD WOOD BANCORP INC. 16.16 12.49 115.03 14.61 163,498 12.70 FKKY Frankfort First Bancorp Inc. 39.90 28.26 104.48 27.37 128,328 26.19 FMBD First Mutual Bancorp Inc. 115.38 44.82 117.46 13.22 424,597 10.65 FTSB Fort Thomas Financial Corp. 35.34 23.04 100.59 16.19 94,681 16.09 GFCO Glenway Financial Corp. 26.33 14.54 109.03 10.08 280,813 9.42 GFSB GFS Bancorp Inc. 16.67 13.64 135.53 15.69 88,154 11.57 GTPS Great American Bancorp 98.44 44.92 85.78 20.10 137,898 21.15 GWBC Gateway Bancorp Inc. 32.69 23.74 106.52 27.79 65,806 26.09 HALL Hallmark Capital Corp. 15.91 11.99 97.12 6.79 409,287 6.99 HBBI Home Building Bancorp 67.74 27.02 105.63 13.98 46,804 12.07 HBFW Home Bancorp 28.35 18.33 115.46 16.11 327,789 13.95 HFSA Hardin Bancorp Inc. 28.68 18.39 95.15 12.16 103,354 12.78 HHFC Harvest Home Financial Corp. 47.83 22.64 99.01 12.37 83,103 12.50 HMCI HomeCorp Inc. 65.23 13.95 111.16 7.00 336,447 6.30 HVFD Haverfield Corporation 28.13 14.85 164.56 13.81 341,664 8.39 HZFS Horizon Financial Svcs Corp. 24.68 15.20 98.29 10.32 78,368 10.50 INBI INDUSTRIAL BANCORP 28.06 15.62 110.65 20.46 333,846 18.49 INCB Indiana Community Bank SB 100.00 30.98 122.25 15.14 91,329 12.39 KNK Kankakee Bancorp Inc. 19.14 12.38 113.59 11.36 342,379 10.06 KYF Kentucky First Bancorp Inc. 19.68 15.09 97.84 15.76 88,923 16.11 - --------------------------------------------------------------------------------------- MPAs/ RETURN AS RETURN AS ASSETS AVG ASSETS AVG EQUITY (%) (%) (%) ??? ???? LTM LTM - --------------------------------------------------------------------------------------- ASBI AMERIANA BANCORP 0.35 0.46 0.42 ASBP ASB Financial Corp 1.56 0.60 3.01 ATSB AmTrust Capital Corp. 2.84 0.29 2.91 BDJI First Federal Bancorporation 0.21 0.31 2.58 BWFC Bank West Financial Corp. 0.03 0.75 4.24 CAPS Capital Savings Bancorp, Inc. 0.16 0.64 7.20 CASH First Midwest Financial Inc. 0.79 0.75 6.51 CBCI Calumet Bancorp Inc. 1.40 1.12 6.91 CBCO CB Bancorp Inc. 2.40 1.02 10.70 CIBI Community Investors Bancorp 0.72 0.67 5.53 CKFB CKF Bancorp Inc. 0.89 1.30 5.08 CMRN Cameron Financial Corp 0.28 1.12 4.47 EFBI Enterprise Federal Bancorp 0.01 0.71 5.12 FBCI Fidelity Bancorp Inc. 0.70 0.52 4.85 FBCV 1ST Bancorp 0.71 0.24 2.94 FBSI FIRST BANCSHARES INC. 0.08 0.91 5.96 FCBF FCB Financial Corp. 0.11 0.91 5.09 FFBI First Financial Bancorp Inc. 0.27 0.02 -0.26 FFBZ First Federal Bancorp Inc. 0.52 0.74 9.61 FFED Fidelity Federal Bancorp 0.12 0.16 2.98 FFHH FSF Financial Corp. 0.10 0.64 4.76 FFHS First Franklin Corporation 0.50 0.14 1.57 FFKY First Federal Financial Corp. 0.11 1.25 8.98 FFSL First Independence Corp. 0.46 0.50 4.28 FFWC FFW CORP. 0.22 0.89 8.73 FFWD WOOD BANCORP INC. 0.02 1.00 7.51 FKKY Frankfort First Bancorp Inc. 0.00 0.64 2.31 FMBD First Mutual Bancorp Inc. 0.04 0.14 0.76 FTSB Fort Thomas Financial Corp. 2.02 0.50 2.48 GFCO Glenway Financial Corp. 0.16 0.38 3.97 GFSB GFS Bancorp Inc. 1.54 0.98 8.41 GTPS Great American Bancorp 0.01 0.25 1.00 GWBC Gateway Bancorp Inc. 0.60 0.82 3.26 HALL Hallmark Capital Corp. 0.01 0.45 6.32 HBBI Home Building Bancorp 0.52 0.20 1.48 HBFW Home Bancorp 0.00 0.56 3.78 HFSA Hardin Bancorp Inc. 0.36 0.50 3.17 HHFC Harvest Home Financial Corp. 0.15 0.27 1.89 HMCI HomeCorp Inc. 3.25 0.11 1.86 HVFD Haverfield Corporation 1.00 0.49 5.80 HZFS Horizon Financial Svcs Corp. 1.02 0.43 3.87 INBI INDUSTRIAL BANCORP 0.18 0.73 3.84 INCB Indiana Community Bank SB NA 0.17 1.29 KNK Kankakee Bancorp Inc. 0.57 0.61 5.99 KYF Kentucky First Bancorp Inc. 0.00 0.80 3.95
SELECTED FINANCIAL AND MARKET STATISTICS PUBLICITY TRADED THRIFT INSTITUTIONS EXCLUDING MUTUAL HOLDING COMPANIES IN THE MIDWESTERN REGION WITH ASSETS LESS THEN $500 MILLION AND IPO DATE BEFORE SEPTEMBER 30, 1995 AS OF MAY 28, 1997
- ------------------------------------------------------------------------------------------------------------------------------------ ADJUSTED CURRENT CURRENT CURRENT STOCK PRICE PRICE PRICES LTM LPS LTM LPS TICKER SHORT NAME CITY STATE EXCHANGE IPO DATE ($) (X) (X) - ----------------------------------------------------------------------------------------------------------------------------------- LARK LANDMARK BANCSHARES INC. DODGE CITY KS NASDAQ ##### 19.500 20.31 15.13 LOGN Logansport Financial Corp. Logansport IN NASDAQ 06/14/95 14.000 20.00 16.20 LSBI LSB Financial Corp. Lafayette IN NASDAQ 02/03/95 20.375 19.04 NA MARN Marion Capital Holdings Marion IN NASDAQ 03/18/93 23.250 18.90 15.46 MBLF MBLA FINANCIAL CORP. MACON MO NASDAQ ##### 20.750 21.17 16.63 MCBS Mid Continent Bancshares Inc. El Dorado KS NASDAQ 06/27/94 26.250 15.00 12.56 MFBC MFB CORP. MISHAWAKA IN NASDAQ ##### 19.375 28.49 19.48 MFCX Marshalltown Marshalltown IA NASDAQ 03/31/94 15.000 51.72 24.83 MFFC MILON FEDERAL WEST MILTON OH NASDAQ ##### 13.875 32.27 22.27 MIFC MidIowa Newton IA NASDAQ 10/14/92 8.500 13.71 10.27 MIVI Mississippi View Little Falls MN NASDAQ 03/24/95 15.000 25.86 17.67 MSBF MSB Financial Marshall MI NASDAQ 02/06/95 21.750 17.40 14.33 MWBI MIDWEST BANCSHARES INC. BURLINGTON IA NASDAQ ##### 29.500 17.15 9.91 MWFD Midwest Federal Financial Baraboo WI NASDAQ 07/08/92 20.000 16.81 13.06 NBSI North Bancshares Inc. Chicago IL NASDAQ 12/21/93 19.500 38.24 24.25 NEIB Northeast Indiana Bancorp Huntington IN NASDAQ 06/28/95 15.500 16.85 14.48 NSLB NS&L Bancorp Inc. Neosho MO NASDAQ 06/08/95 16.500 37.50 24.24 NWEQ Northwest Equity Corp. Amery WI NASDAQ 10/11/94 15.000 19.23 14.64 OHSL OHSL Financial Corp. Cincinnati OH NASDAQ 02/10/93 23.750 23.06 15.60 PCBC Perry County Financial Corp. Perryville MO NASDAQ 02/13/95 19.000 23.75 17.28 PERM Permanent Bancorp Inc. Evansville IN NASDAQ 04/04/94 24.500 55.68 25.03 PFDC Peoples Bancorp Auburn IN NASDAQ 07/07/87 21.750 16.23 12.36 PMFI Perpetual Midwest Financial Cedar Rapids IA NASDAQ 03/31/94 19.250 128.33 29.45 PTRS Potters Financial Corp. East Liverpool OH NASDAQ 12/31/93 21.000 28.77 13.50 PVFC PVF Capital Corp. Bedford Heights OH NASDAQ 12/30/92 18.000 12.50 9.39 QCFB QCF Bancorp Inc. Virginia MN NASDAQ 04/03/95 20.375 13.96 11.49 SBCN Suburban Bancorporation Inc. Cincinnati OH NASDAQ 09/30/93 17.750 24.32 16.25 SFFC StateFed Financial Corporation Des Moines IA NASDAQ 01/05/94 18.500 17.13 14.02 SFSB SuburbFed Financial Corp. Flossmoor IL NASDAQ 03/04/92 23.250 23.97 12.58 SJSB SJS Bancorp St. Joseph MI NASDAQ 02/16/95 26.500 80.30 32.01 SMBC Southern Missouri Bancorp Inc. Poplar Bluff MO NASDAQ 04/13/94 17.000 23.61 16.52 SMFC Sho-Me Financial Corp. Mt. Vernon MO NASDAQ 07/01/94 33.250 20.03 16.50 SOBI Sobieski Bancorp Inc. South Bend IN NASDAQ 03/31/95 14.750 50.86 24.82 SWBI Southwest Bancshares Hometown IL NASDAQ 06/24/92 19.000 19.39 13.61 THR Three Rivers Financial Corp. Three Rivers MI AMSE 08/24/95 15.000 23.81 15.89 WCBI Westco Bancorp Westchester IL NASDAQ 06/26/92 23.250 19.21 14.42 WEFC Wells Financial Corp. Wells MN NASDAQ 04/11/95 14.000 21.54 14.15 WFCO Winton Financial Corp. Cincinnati OH NASDAQ 08/04/88 14.500 13.81 9.83 WOFC Western Ohio Financial Corp. Springfield OH NASDAQ 07/29/94 21.250 44.27 27.46 AVERAGE 18.759 31.23 17.77 MEDIAN 18.813 23.28 15.65 - ----------------------------------------------------------------------------------------------------------------------------------- TANGIBLES CURRENT TOTAL EQUITY MPAs/ RETURN AS RETURN AS PRICES ?? PRICE ASSETS ??? ASSETS ASSETS AVG ASSETS AVG EQUITY BANK ??? ASSETS ($000) (%) (%) (%) (%) (%) (%) NET ???? NET ?????? ??? ???? LTM LTM - ----------------------------------------------------------------------------------------------------------------------------------- LARK LANDMARK BANCSHARES INC. 107.68 15.75 223,799 14.63 0.11 0.84 5.42 LOGN Logansport Financial Corp. 112.81 22.18 79,298 19.65 0.45 1.17 5.27 LSBI LSB Financial Corp. 99.93 9.75 188,027 9.08 1.34 0.50 5.28 MARN Marion Capital Holdings 105.73 24.37 174,415 23.05 0.76 1.32 5.71 MBLF MBLA FINANCIAL CORP. 96.47 13.02 209,783 13.50 0.25 0.66 4.90 MCBS Mid Continent Bancshares Inc. 134.89 13.85 371,169 10.04 0.19 1.03 9.21 MFBC MFB CORP. 98.90 14.34 234,290 14.51 0.00 0.56 3.38 MFCX Marshalltown 106.69 16.66 127,107 15.61 0.00 0.33 2.14 MFFC MILON FEDERAL 113.54 18.07 178,757 14.74 0.17 0.53 3.04 MIFC MidIowa 126.87 11.53 123,572 9.08 0.13 0.91 9.84 MIVI Mississippi View 96.46 17.61 69,755 18.26 0.21 0.68 3.74 MSBF MSB Financial 109.08 18.12 75,630 16.61 0.15 1.20 6.05 MWBI MIDWEST BANCSHARES INC. 106.5 7.3 139,00 6.94 0.82 0.47 6.77 MWFD Midwest Federal Financial 195.31 16.16 201,070 8.30 0.14 1.09 12.37 NBSI North Bancshares Inc. 115.11 16.82 120,011 14.61 0.00 0.45 2.93 NEIB Northeast Indiana Bancorp 104.24 15.81 172,874 15.16 0.49 1.04 6.00 NSLB NS&L Bancorp Inc. 100.86 20.10 58,089 19.92 0.00 0.50 2.31 NWEQ Northwest Equity Corp. 108.54 14.44 96,518 12.25 1.52 0.76 5.88 OHSL OHSL Financial Corp. 113.10 12.48 229,812 11.04 0.01 0.60 5.10 PCBC Perry County Financial Corp. 105.20 19.27 79,714 18.32 0.05 0.78 4.14 PERM Permanent Bancorp Inc. 128.61 12.36 412,967 9.61 1.08 0.24 2.37 PFDC Peoples Bancorp 115.32 17.50 283,242 15.18 0.40 1.10 7.15 PMFI Perpetual Midwest Financial 108.70 9.23 397,780 8.49 0.40 0.09 0.98 PTRS Potters Financial Corp. 98.18 8.74 116,921 8.90 0.83 0.31 3.47 PVFC PVF Capital Corp. 167.13 11.74 356,251 7.02 0.90 1.05 15.56 QCFB QCF Bancorp Inc. 107.35 19.42 149,637 18.09 NA 1.36 7.17 SBCN Suburban Bancorporation Inc. 98.50 11.80 221,926 11.67 0.19 0.50 4.10 SFFC StateFed Financial Corporation 97.37 17.14 85,282 17.60 0.70 1.04 5.61 SFSB SuburbFed Financial Corp. 109.98 7.19 407,800 6.54 0.25 0.33 4.94 SJSB SJS Bancorp 150.06 15.81 153,767 10.54 0.36 0.20 1.87 SMBC Southern Missouri Bancorp Inc. 107.26 16.81 165,688 15.67 1.10 0.71 4.44 SMFC Sho-Me Financial Corp. 158.41 16.59 304,496 9.54 0.08 0.91 8.65 SOBI Sobieski Bancorp Inc. 84.19 14.17 79,080 15.40 0.25 0.28 1.64 SWBI Southwest Bancshares 125.08 13.49 371,563 10.79 0.18 0.74 6.81 THR Three Rivers Financial Corp. 98.88 13.55 91,165 13.71 1.21 0.57 3.91 WCBI Westco Bancorp 123.08 19.16 309,921 15.57 0.84 1.10 7.05 WEFC Wells Financial Corp. 98.59 14.04 201,886 14.23 0.21 0.64 4.47 WFCO Winton Financial Corp. 134.14 9.38 307,174 7.00 NA 0.72 9.77 WOFC Western Ohio Financial Corp. 97.12 12.28 400,059 12.74 0.49 0.31 2.28 AVERAGE 115.60 14.740 210,372 12.97 0.53 0.65 4.93 MEDIAN 108.20 14.140 183,392 12.29 0.27 0.64 4.62
Source: SNL Securities, L.P. NATIONAL CAPITAL COMPANIES, LLC EXHIBIT IV-1A MONTHLY MARKET REPORT INDEX VALUES
INDEX VALUES PERCENT CHANGE --------------------------------------- ----------------------------- 04/30/97 1 MONTH YTD 52 WEEK 1 MONTH YTD 52 WEEK All Pub. Traded Thrifts 537.2 527.7 483.6 380.2 1.79 11.08 41.30 MHC Index . 587.7 600.3 538.0 455.7 -2.11 9.22 28.95 Insurance Indices - -------------------------------------------------------------------------------------------------------- SAIF Thrifts 484.2 475.6 439.2 356.3 1.80 10.23 35.88 BIF Thrifts 689.7 677.9 615.8 451.8 1.74 11.81 52.67 Stock Exchange Indices - ------------------------------------------------------------------------------------------------------- AMEX Thrifts 166.7 165.9 156.2 134.7 0.48 6.73 23.72 NYSE Thrifts 314.7 303.4 277.3 249.9 3.74 13.52 25.95 OTC Thrifts 622.5 617.2 569.7 460.3 0.85 9.26 35.24 Geographical Indices - ------------------------------------------------------------------------------------------------------- Mid-Atlantic Thrifts 1,077.4 1,051.1 970.7 746.3 2.50 10.99 44.36 Midwestern Thrifts 1,234.5 1,226.6 1,159.3 979.8 0.64 6.49 25.99 New England Thrifts 458.4 460.9 428.9 319.0 -0.54 6.88 43.70 Southeastern Thrifts 499.4 490.6 447.2 380.6 1.78 11.66 31.21 Southwestern Thrifts 347.5 349.1 315.9 255.6 -0.44 10.03 35.97 Western Thrifts 539.7 526.0 474.7 364.5 2.61 13.69 48.05 Asset Size Indices - ------------------------------------------------------------------------------------------------------- Less than $250M 639.4 634.8 588.6 544.7 0.73 9.01 17.40 $250M to $500M 865.2 861.7 789.8 691.6 0.41 9.55 25.11 $500M to $1B 558.9 565.1 521.8 429.5 -1.10 7.11 30.11 $1B to $5B 593.8 592.0 546.0 431.2 0.30 8.74 37.72 Over $5B 344.1 333.4 305.8 231.8 3.21 12.51 48.43 Comparative Indices - ------------------------------------------------------------------------------------------------------- Dow Jones Industrials 7,009.0 6,583.5 6,448.3 5,569.1 6.46 8.70 25.86 S&P 500 801.3 757.1 740.7 654.2 5.84 8.18 22.50
????????????????????????????????????????????????????????????????????????? Mid-Atlantic: DE, DC, PA, MD, NJ, NY, Midwestern: IA, IL, IN, KS, KY, MI,MN, MO, ND, NE, OH, SD, WI; New England: CT, ME, MA, NH, AI, VT; Southeastern: AL, AR, FL GA, MS, NC, SC, TN, VA, WV, Southwestern: CO, LA, NM. OK. TX, OT, UT; Western: AZ, AK, CA, HI, ID, MT, NV, OR, WA, WY ================================================================================ EXHIBIT IV-2 HOPKINSVILLE FEDERAL SAVINGS BANK Hopkinsville, Kentucky COMPARABLE GROUP
- --------------------------------------------------------------------------------------------------------------------- STATE OR TOTAL HOLDING FEDERAL ASSETS TICKER NAME HEADQUARTERS COMPANY? CHARTER ($000) - --------------------------------------------------------------------------------------------------------------------- ASBI Ameriana Bancorp New Castle, Indiana Yes Federal 402,163 FBSI First Bancshares Inc. Mountain Grove, Missouri Yes State 160,048 FFWC FFW Corp. Wabash, Indiana Yes Federal 158,441 FFWD Wood Bancorp Inc. Bowling Green, Ohio Yes Federal 163,498 INBI Industrial Bancorp Bellevue, Ohio Yes State 333,846 LARK Landmark Bancshares Inc. Dodge City, Kansas Yes Federal 223,799 MBLF MBLA Financial Corp. Macon, Missouri Yes State 209,783 MFBC MFB Corp. Mishawaka, Indiana Yes Federal 234,290 MFFC Milton Federal Financial Corp. West Milton, Ohio Yes Federal 178,757 MWBI Midwest Bancshares Inc. Burlington, Iowa Yes Federal 139,006 ------------------------------------- AVERAGE 220,363 MEDIAN 178,757 -------------------------------------
Financial information as of March 31, 1997 Source: SNL Securities, L.P. ================================================================================ ================================================================================ EXHIBIT IV-2A HOPKINSVILLE FEDERAL SAVINGS BANK Hopkinsville, Kentucky SELECTED FINANCIAL AND MARKET STATISTICS COMPARABLE GROUP
- ----------------------------------------------------------------------------------------------------------------------------------- CURRENT TANGIBLE MARKET PRICE/ * PRICE/ PRICE/ PRICE/TANG PRICE/ PUBLICLY REP PRICE VALUE LTM EPS LTM EPS BOOK VALUE BOOK VALUE ASSETS BOOK VALUE SHORT NAME ($) ($M) (X) (X) (%) (%) (%) ($) - ----------------------------------------------------------------------------------------------------------------------------------- Ameriana Bancorp 15.625 50.63 21.70 14.30 116.78 116.87 12.67 13.37 First Bancshares Inc. 19.000 21.71 16.10 12.46 95.96 96.11 13.77 19.77 FFW Corp. 26.000 18.12 13.33 10.55 114.29 114.29 11.44 22.75 Wood Bancorp Inc. 16.000 23.88 16.16 12.49 115.03 115.03 14.61 13.91 Industrial Bancorp 12.625 68.30 28.06 15.62 110.65 110.65 20.46 11.41 Landmark Bancshares Inc. 19.500 35.26 20.31 15.13 107.68 107.68 15.75 18.11 MBLA Financial Corp. 20.750 27.31 21.17 16.63 96.47 96.47 13.02 21.51 MFB Corp. 19.375 33.61 28.49 19.48 98.90 98.90 14.34 19.59 Milton Federal Financial Corp. 13.875 32.29 32.27 22.27 113.54 113.54 18.07 12.22 Midwest Bancshares Inc. 29.500 10.28 17.15 9.91 106.58 106.58 7.39 27.68 - --------------------------------------------------------------------------------------------------------------------------------- AVERAGE 19.225 32.14 21.47 14.88 107.59 107.61 14.15 18.03 MEDIAN 19.188 29.80 20.74 14.72 109.17 109.17 14.06 18.85 - ---------------------------------------------------------------------------------------------------------------------------------
* Reflects estimated adjustment for SAIF special assessment. Current pricing information as of May 29, 1997 Financial information as of March 31, 1997 Source: SNL Securities, L.P. ================================================================================ ================================================================================ EXHIBIT IV-2B HOPKINSVILLE FEDERAL SAVINGS BANK Hopkinsville, Kentucky SELECTED FINANCIAL AND MARKET STATISTICS COMPARABLE GROUP
- ------------------------------------------------------------------------------------------------------------------------------------ CURRENT CURRENT 1 MONTH AVG ONE YEAR AVG NET DIVIDEND ANNUALIZED WEEKLY VOL/ WEEKLY VOL/ INSIDER INSTITUTIONAL INCOME YIELD DIVIDEND SHARES OUT SHARES OUT OWNERSHIP OWNERSHIP SHORT NAME ($000) (%) ($) (%) (%) (%) (%) - ------------------------------------------------------------------------------------------------------------------------------------ Ameriana Bancorp 2,381 3.840 0.600 0.20 0.46 15.30 17.03 First Bancshares Inc. 1,368 1.053 0.200 2.71 0.86 11.90 4.38 FFW Corp. 1,383 2.308 0.600 0.68 0.97 25.05 14.05 Wood Bancorp Inc. 1,525 2.500 0.400 0.04 0.34 18.90 8.50 Industrial Bancorp 2,364 3.802 0.480 1.00 1.22 7.70 22.70 Landmark Bancshares Inc. 1,775 2.051 0.400 2.64 0.88 23.70 31.57 MBLA Financial Corp. 1,383 1.928 0.400 0.60 0.32 28.41 3.64 MFB Corp. 1,225 1.652 0.320 0.26 1.72 18.40 22.81 Milton Federal Financial Corp. 940 4.324 0.600 0.48 1.06 6.20 14.48 Midwest Bancshares Inc. 642 2.034 0.600 0.27 0.50 33.68 0.00 - ------------------------------------------------------------------------------------------------------------------------------------ AVERAGE 1,499 2.549 0.460 0.89 0.83 18.92 13.92 MEDIAN 1,383 2.180 0.440 0.54 0.87 18.65 14.27 - ------------------------------------------------------------------------------------------------------------------------------------ - ----------------------------------------------------------------------------------------- NET PORTFOLIO LTM * LTM VALUE % AT SHARES RETURN ON RETURN ON +200 B.P. OUTSTANDING AVG EQUITY AVG EQUITY SHORT NAME (%) (ACTUAL) (%) (%) - ----------------------------------------------------------------------------------------- Ameriana Bancorp -10.00 3,277,852 5.41 8.18 First Bancshares Inc. NA 1,206,376 5.96 7.78 FFW Corp. NA 702,060 8.73 11.01 Wood Bancorp Inc. -5.00 1,497,636 7.51 9.66 Industrial Bancorp -29.00 5,554,500 3.84 7.08 Landmark Bancshares Inc. NA 1,852,996 5.42 7.27 MBLA Financial Corp. 13.34 1,353,961 4.90 6.18 MFB Corp. -35.00 1,973,980 3.38 5.09 Milton Federal Financial Corp -27.00 2,449,932 3.04 4.56 Midwest Bancshares Inc. -4.00 349,379 6.77 11.39 - ------------------------------------------------------------------------------------------- AVERAGE -13.81 2,021,867 5.50 7.82 MEDIAN -10.00 1,675,316 5.42 7.53 - -------------------------------------------------------------------------------------------
* Reflects estimated adjustment for SAIF special assessment. Current pricing information as of May 29, 1997 Financial information as of March 31, 1997 Source: SNL Securities, L.P. ================================================================================ ================================================================================ EXHIBIT IV-2C HOPKINSVILLE FEDERAL SAVINGS BANK Hopkinsville, Kentucky SELECTED FINANCIAL RATIOS COMPARABLE GROUP
- ----------------------------------------------------------------------------------------------------------------------------------- ONE YEAR GROWTH THREE YEAR AVERAGE GROWTH NPAs/ ASSET LOAN DEPOSIT ASSET LOAN DEPOSIT ASSETS SHORT NAME (%) (%) (%) (%) (%) (%) (%) - ----------------------------------------------------------------------------------------------------------------------------------- Ameriana Bancorp 4.98 6.07 6.08 7.25 8.26 5.04 0.38 First Bancshares Inc. 13.94 12.32 11.25 17.14 20.85 10.78 0.08 FFW Corp. 6.41 9.68 6.60 21.07 15.81 7.66 0.22 Wood Bancorp Inc. 17.02 23.67 2.58 8.71 5.57 3.50 0.02 Industrial Bancorp 2.08 11.11 7.93 11.01 13.14 5.97 0.18 Landmark Bancshares Inc. 15.72 35.40 4.95 9.93 35.82 -0.82 0.11 MBLA Financial Corp. 7.54 11.21 12.78 21.35 5.87 -1.67 0.25 MFB Corp. 16.62 32.83 8.90 11.32 13.50 2.18 0.00 Milton Federal Financial Corp. 4.11 7.59 8.37 15.62 14.23 5.81 0.17 Midwest Bancshares Inc. 1.61 8.76 1.92 1.43 8.18 -1.50 0.82 - ----------------------------------------------------------------------------------------------------------------------------------- AVERAGE 9.00 15.86 7.14 12.48 14.12 3.70 0.22 - ----------------------------------------------------------------------------------------------------------------------------------- Hopkinsville Federal Savings Bank (4.83) 9.59 (5.97) 3.02 13.61 2.26 0.09
* Last twelve months ** Fiscal year-end Financial information as of March 31, 1997 Source: SNL Securities, L.P. and Audited Financial Statements ================================================================================ ================================================================================ EXHIBIT IV-2D HOPKINSVILLE FEDERAL SAVINGS BANK Hopkinsville, Kentucky SELECTED BALANCE SHEET DATA AS A PERCENTAGE OF ASSETS COMPARABLE GROUP
- ----------------------------------------------------------------------------------------------------------------------------------- MORTGAGE- CASH AND BACKED GROSS LOAN LOSS SHORT NAME INVESTMENTS SECURITIES LOANS RESERVES REO - ------------------------------------------------------------------------------------------------------------------------------------ Ameriana Bancorp 16.46% 9.10% 71.46% -0.27% 0.06% First Bancshares Inc. 15.63% 0.53% 81.23% -0.29% 0.04% FFW Corp. 17.13% 11.26% 69.67% -0.34% 0.03% Wood Bancorp Inc. 15.03% 2.83% 80.71% -0.33% 0.02% Industrial Bancorp 10.34% 0.16% 87.84% -0.48% 0.00% Landmark Bancshares Inc. 24.11% 9.44% 64.87% -0.37% 0.10% MBLA Financial Corp. 35.72% 8.16% 55.61% -0.27% 0.00% MFB Corp. 22.60% 1.66% 74.55% -0.15% 0.00% Milton Federal Financial Corp. 23.43% 9.83% 64.17% -0.30% 0.00% Midwest Bancshares Inc. 17.80% 20.01% 59.93% -0.50% 0.00% - ------------------------------------------------------------------------------------------------------------------------------------ AVERAGE 19.82% 7.30% 71.00% -0.33% 0.02% - ----------------------------------------------------------------------------------------------------------------------------------- Hopkinsville Federal Savings Bank 39.96% 10.20% 48.15% -0.11% 0.00% - ----------------------------------------------------------------------------------------------------------------- MEMO: INTEREST INTEREST LOAN EARNING BEARING SERVICING SHORT NAME INTANGIBLES OTHER ASSETS LIABILITIES RIGHTS - ----------------------------------------------------------------------------------------------------------------- Ameriana Bancorp 0.01% 3.19% 95.35% 87.10% 0.19% First Bancshares Inc. 0.02% 2.84% 93.62% 85.22% 0.00% FFW Corp. 0.00% 2.25% 96.23% 89.27% 0.00% Wood Bancorp Inc. 0.00% 1.74% 96.41% 86.57% 0.04% Industrial Bancorp 0.00% 2.15% 95.69% 80.58% 0.00% Landmark Bancshares Inc. 0.00% 1.86% 98.03% 84.05% 0.00% MBLA Financial Corp. 0.00% 0.79% 97.33% 85.98% 0.00% MFB Corp. 0.00% 1.34% 97.85% 84.43% 0.00% Milton Federal Financial Corp 0.00% 2.87% 95.93% 84.76% 0.06% Midwest Bancshares Inc. 0.00% 2.77% 96.51% 92.40% 0.00% - ----------------------------------------------------------------------------------------------------------------- AVERAGE 0.00% 2.18% 96.30% 86.04% 0.03% - ----------------------------------------------------------------------------------------------------------------- Hopkinsville Federal Savings Bank 0.00% 1.81% 97.67% 90.20% 0.00%
Financial information as of March 31, 1997 Source: SNL Securities, L.P. and Audited Financial Statements ================================================================================ ================================================================================ EXHIBIT IV-2E HOPKINSVILLE FEDERAL SAVINGS BANK Hopkinsville, Kentucky SELECTED BALANCE SHEET DATA COMPARABLE GROUP
- ------------------------------------------------------------------------------------------------------------------------------------ NET WORTH RATIOS TANGIBLE CORE RISK-BASED DEPOSITS/ BORROWINGS/ OTHER LIABS/ EQUITY/ EQUITY/ CAPITAL CAPITAL SHORT NAME ASSETS ASSETS ASSETS ASSETS ASSETS RATIO RATIO - -------------------------------------------------------------------------------------------------------------------------------- Ameriana Bancorp 80.10% 7.00% 2.05% 10.85% 10.84% 20.31% 35.60% First Bancshares Inc. 71.38% 13.84% 0.42% 14.35% 14.33% 11.77% 24.39% FFW Corp. 61.99% 27.28% 0.73% 10.01% 10.01% 11.92% 19.64% Wood Bancorp Inc. 72.13% 14.45% 0.73% 12.70% 12.70% 23.65% 46.49% Industrial Bancorp 78.18% 2.40% 0.93% 18.49% 18.49% 31.06% 58.13% Landmark Bancshares Inc. 66.76% 17.29% 1.32% 14.63% 14.63% 14.66% 24.06% MBLA Financial Corp. 46.93% 39.05% 0.52% 13.50% 13.50% 8.21% 18.88% MFB Corp. 69.71% 14.73% 1.06% 14.51% 14.51% 22.91% NA Milton Federal Financial Corp. 75.99% 8.77% 0.50% 14.74% 14.74% 20.90% 41.60% Midwest Bancshares Inc. 75.14% 17.27% 0.66% 6.94% 6.94% 14.15% 26.81% - -------------------------------------------------------------------------------------------------------------------------------- AVERAGE 69.83% 16.21% 0.89% 13.07% 13.07% 17.95% 32.84% - -------------------------------------------------------------------------------------------------------------------------------- Hopkinsville Federal Savings Bank 90.20% 0.00% 1.31% 8.49% 8.49% 7.50% 20.90%
Financial information as of March 31, 1997 Source: SNL Securities, L.P. and Audited Financial Statements ================================================================================ ================================================================================ EXHIBIT IV-2F HOPKINSVILLE FEDERAL SAVINGS BANK Hopkinsville, Kentucky SELECTED BALANCE SHEET DETAIL AS A PERCENTAGE OF GROSS LOANS COMPARABLE GROUP
- -------------------------------------------------------------------------------------------------------------- 1-4 FAMILY 5+ FAMILY COMMERCIAL PERMANENT PERMANENT AND LAND CONSTRUCTION COMMERCIAL CONSUMER SHORT NAME MORT LOANS MORT LOANS MORT LOANS MORT LOANS LOANS LOANS - -------------------------------------------------------------------------------------------------------------- Ameriana Bancorp 76.92% 0.90% 1.16% 4.45% 0.43% 16.15% First Bancshares Inc. 76.68% 0.95% 10.96% 3.50% 2.37% 5.54% FFW Corp. 63.89% 3.78% 2.88% 2.18% 4.57% 22.70% Wood Bancorp Inc. 78.24% 1.47% 2.32% 4.86% 3.86% 9.25% Industrial Bancorp 86.80% 2.92% 3.06% 5.76% 0.13% 1.33% Landmark Bancshares Inc. 83.21% 2.83% 1.43% 1.64% 2.55% 8.34% MBLA Financial Corp. 92.56% 0.00% 6.80% 0.00% 0.37% 0.28% MFB Corp. 95.12% 0.11% 0.76% 3.23% 0.73% 0.05% Milton Federal Financial Corp. 84.68% 1.82% 4.30% 7.36% 0.00% 1.83% Midwest Bancshares Inc. 76.16% 7.68% 3.18% 2.00% 4.20% 6.79% - -------------------------------------------------------------------------------------------------------------- AVERAGE 81.43% 2.25% 3.68% 3.50% 1.92% 7.22% - -------------------------------------------------------------------------------------------------------------- Hopkinsville Federal Savings Bank 80.37% 1.47% 6.61% 3.95% 0.00% 7.59%
Financial information as of March 31, 1997 Source: SNL Securities, L.P. and Audited Financial Statements ================================================================================ ================================================================================ EXHIBIT IV-2G HOPKINSVILLE FEDERAL SAVINGS BANK Hopkinsville, Kentucky SELECTED DEPOSIT DETAIL * AS A PERCENTAGE OF DEPOSITS COMPARABLE GROUP
- -------------------------------------------------------------------------------- SAVINGS AND TOTAL TOTAL TRANSACTION MONEY MARKET TIME JUMBO SHORT NAME ACCOUNTS ACCOUNTS DEPOSITS DEPOSITS - -------------------------------------------------------------------------------- Ameriana Bancorp 8.88% 14.68% 64.60% 11.84% First Bancshares Inc. 12.68% 16.95% 60.37% 10.00% FFW Corp. 3.53% 49.59% 46.88% 0.00% Wood Bancorp Inc. 9.23% 31.22% 53.12% 6.42% Industrial Bancorp 5.85% 19.37% 61.38% 13.40% Landmark Bancshares Inc. 12.27% 3.84% 79.23% 4.66% MBLA Financial Corp. 0.00% 7.44% 85.19% 7.37% MFB Corp. 1.22% 21.88% 76.90% 0.00% Milton Federal Financial Corp 6.99% 17.84% 72.76% 2.42% Midwest Bancshares Inc. 21.12% 6.79% 69.05% 3.05% - -------------------------------------------------------------------------------- AVERAGE 8.18% 18.96% 66.95% 5.92% - -------------------------------------------------------------------------------- Hopkinsville Federal Savings Bank 5.45% 26.96% 64.22% 3.37%
* As of the most recently available annual reporting date Columns may not add due to rounding Source: Audited Financial Statements ================================================================================ ================================================================================ EXHIBIT IV-2H HOPKINSVILLE FEDERAL SAVINGS BANK Hopkinsville, Kentucky SUMMARY OF PROFITABLITY RETURN ON AVERAGE ASSETS COMPARABLE GROUP
- --------------------------------------------------------------------------------------------------------------- FIVE YEAR THREE YEAR LAST TWELVE LAST TWELVE LATEST AVERAGE AVERAGE MONTHS MONTHS QUARTER SHORT NAME PROFITABILITY PROFITABILITY PROFITABILITY PROFITABILITY PROFITABILITY - --------------------------------------------------------------------------------------------------------------- Ameriana Bancorp 1.31% 1.20% 0.60% 0.91% 0.88% First Bancshares Inc. 0.96% 0.89% 0.91% 1.19% 1.13% FFW Corp. 1.03% 1.08% 0.89% 1.13% 1.13% Wood Bancorp Inc. 1.01% 1.08% 1.00% 1.29% 1.43% Industrial Bancorp 1.04% 0.99% 0.73% 1.35% 1.48% Landmark Bancshares Inc. 0.95% 0.83% 0.84% 1.13% 1.05% MBLA Financial Corp. 0.92% 0.86% 0.66% 0.83% 0.70% MFB Corp. 0.77% 0.67% 0.56% 0.84% 0.91% Milton Federal Financial Corp. 1.04% 0.99% 0.53% 0.80% 0.64% Midwest Bancshares Inc. 0.83% 0.76% 0.47% 0.78% 0.72% - --------------------------------------------------------------------------------------------------------------- AVERAGE 0.99% 0.94% 0.72% 1.02% 1.01% - --------------------------------------------------------------------------------------------------------------- Hopkinsville Federal Savings Bank 0.37% 0.21% 0.19% 0.58% 0.70% * Reflects estimated adjustment for SAIF special assessment. LTM and most recent quarter information as of March 31, 1997 Source: SNL Securities, L.P. and Audited Financial Statements ===============================================================================================================
================================================================================ EXHIBIT IV-2J HOPKINSVILLE FEDERAL SAVINGS BANK Hopkinsville, Kentucky SELECTED OPERATING RATIOS LAST TWELVE MONTHS OPERATING ACTIVITY COMPARABLE GROUP
- ------------------------------------------------------------------------------------------------------------------------------------ AMORTIZATION YIELD ON COST OF INTEREST NET CHARGE LOAN LOSS OF INTANGIBLES EFFECTIVE INTEREST-EARNING INTEREST-BEARNING RATE RESERVES/ OFFS/ PROVISION SHORT NAME ($000) TAX RATE ASSETS LIABILITIES SPREAD GROSS LOANS LOANS LOANS - ------------------------------------------------------------------------------------------------------------------------------------ Ameriana Bancorp 28 34.43% 7.59% 4.94% 2.65% 0.39% 0.02% 0.03% First Bancshares Inc. 14 35.83% 7.88% 5.05% 2.83% 0.37% 0.09% 0.05% FFW Corp. 0 28.49% 7.91% 5.17% 2.74% 0.52% 0.11% 0.11% Wood Bancorp Inc. 0 36.75% 8.25% 4.46% 3.79% 0.46% 0.06% 0.10% Industrial Bancorp 0 46.39% 8.14% 4.86% 3.28% 0.58% 0.00% 0.07% Landmark Bancshares Inc. 0 36.86% 7.44% 5.15% 2.29% 0.64% 0.04% 0.14% MBLA Financial Corp. 0 39.40% 6.94% 5.55% 1.39% 0.52% 0.00% 0.04% MFB Corp. 0 39.77% 7.43% 5.04% 2.39% 0.23% 0.00% 0.02% Milton Federal Financial Corp 0 33.90% 7.55% 5.05% 2.50% 0.45% 0.00% 0.13% Midwest Bancshares Inc. 0 37.18% 7.64% 4.97% 2.67% 0.86% 0.00% 0.06% - ----------------------------------------------------------------------------------------------------------------------------------- AVERAGE 4 36.90% 7.68% 5.02% 2.65% 0.50% 0.03% 0.07% - ----------------------------------------------------------------------------------------------------------------------------------- Hopkinsville Federal Savins Bank 0 33.50% 7.00% 5.03% 1.97% 0.22% NA 0.10% * Reflects estimated adjustment for SAIF special assessment. Financial information as of March 31, 1997 Source: SNL Securities, L.P. and Audited Financial Statements
================================================================================ ================================================================================ EXHIBIT IV-2k HOPKINSVILLE FEDERAL SAVINGS BANK Hopkinsville, Kentucky SELECTED OPERATING RATIOS MOST RECENT QUARTER OPERATING ACTIVITY AS A PERCENTAGE OF AVERAGE ASSETS COMPARABLE GROUP
- --------------------------------------------------------------------------------------------------------------- NET LOAN NON- TOTAL INTEREST INTEREST INTEREST LOSS INTEREST NONRECURRING SHORT NAME INCOME EXPENSE INCOME PROVISION INCOME INCOME - --------------------------------------------------------------------------------------------------------------- Ameriana Bancorp 7.31% 4.30% 3.01% 0.04% 0.53% 0.00% First Bancshares Inc. 7.57% 4.16% 3.42% 0.05% 2.27% 0.00% FFW Corp. 7.77% 4.55% 3.22% 0.09% 0.38% 0.00% Wood Bancorp Inc. 7.97% 3.88% 4.11% 0.07% 0.23% 0.00% Industrial Bancorp 7.97% 3.66% 4.11% 0.06% 0.13% 0.00% Landmark Bancshares Inc. 7.38% 4.28% 3.10% 0.10% 0.25% 0.00% MBLA Financial Corp. 6.69% 4.74% 1.94% 0.03% 0.01% 0.00% MFB Corp. 7.41% 4.21% 3.20% 0.01% 0.14% 0.00% Milton Federal Financial Corp. 7.27% 4.22% 3.05% 0.05% 0.12% 0.00% Midwest Bancshares Inc. 7.39% 4.56% 2.84% 0.03% 0.25% 0.00% - --------------------------------------------------------------------------------------------------------------- AVERAGE 7.47% 4.27% 3.20% 0.06% 0.23% 0.00% - --------------------------------------------------------------------------------------------------------------- Hopkins Federal Savings Bank 6.42% 4.40% 2.02% 0.00% 0.25% 0.00% - --------------------------------------------------------------------------------------------------------------- TOTAL NET INCOME NONINTEREST GAIN NONRECURRING BEFORE TAX NET CORE Short Name EXPENSE ON SALE EXPENSE TAXES PROVISION INCOME INCOME - --------------------------------------------------------------------------------------------------------------- Ameriana Bancorp 2.19% 0.07% 0.00% 1.38% 0.88% 0.50% 0.83% First Bancshares Inc. 1.79% -0.01% 0.00% 1.84% 0.70% 1.13% 1.14% FFW Corp. 1.84% 0.02% 0.00% 1.69% 0.56% 1.43% 1.12% Wood Bancorp Inc. 2.15% 0.10% 0.00% 2.22% 0.79% 1.43% 1.37% Industrial Bancorp 1.90% 0.00% 0.00% 2.29% 0.81% 1.48% 1.48% Landmark Bancshares Inc. 1.60% 0.12% 0.00% 1.77% 0.72% 1.05% 0.97% MBLA Financial Corp. 0.63% -0.11% 0.00% 1.18% 0.48% 0.70% 0.77% MFB Corp. 1.83% 0.01% 0.00% 1.50% 0.60% 0.91% 0.90% Milton Federal Financial Corp. 2.19% 0.03% 0.00% 0.96% 0.33% 0.64% 0.62% Midwest Bancshares Inc. 1.91% 0.00% 0.00% 1.14% 0.42% 0.72% 0.72% - --------------------------------------------------------------------------------------------------------------- AVERAGE 1.80% 0.02% 0.00% 1.60% 0.69% 1.01% 0.89% - --------------------------------------------------------------------------------------------------------------- Hopkins Federal Savings Bank 1.21% 0.00% 0.00% 1.06% 0.36% 0.70% 0.70%
Financial information as of March 31, 1997 Source: SNL Securities, L.P. and Audited Financial Statements ================================================================================ EXHIBIT IV-2I HOPKINSVILLE FEDERAL SAVINGS BANK Hopkinsville, Kentucky SELECTED OPERATING RATIOS MOST RECENT QUARTER OPERATING ACTIVITY COMPARABLE GROUP
- ------------------------------------------------------------------------------------------------------------------------------------ AMORTIZATION INTEREST NET CHARGE LOAN LOSS OF INTANGIBLES EFFECTIVE YIELD ON COST OF RATE RESERVES/ OFFS/ PROVISION/ SHORT NAME ($000) TAX RATE ASSETS FUNDS SPREAD NPAS LOANS LOANS - ----------------------------------------------------------------------------------------------------------------------------------- Ameriana Bancorp 7 36.26% 7.61% 4.94% 2.67% 72.60% 0.05% 0.01% First Bancshares Inc. 2 38.29% 7.93% 5.00% 2.93% 364.29% 0.02% 0.02% FFW Corp. 0 33.08% 7.97% 5.09% 2.88% 150.42% 0.12% 0.03% Wood Bancorp Inc. 0 35.53% 8.24% 4.49% 3.75% 1813.33% -0.04% 0.02% Industrial Bancorp 0 35.48% 8.13% 4.90% 3.23% 272.20% 0.00% 0.02% Landmark Bancshares Inc. 0 40.65% 7.53% 5.10% 2.43% 341.15% 0.04% 0.04% MBLA Financial Corp. 0 40.73% 6.76% 5.52% 1.24% 111.87% 0.00% 0.01% MFB Corp. 0 39.65% 7.59% 5.01% 2.58% NA 0.00% 0.00% Milton Federal Financial Corp. 0 33.72% 7.52% 5.00% 2.52% 172.55% 0.00% 0.02% Midwest Bancshares Inc. 0 36.99% 7.62% 4.96% 2.66% 61.28% 0.00% 0.01% - ----------------------------------------------------------------------------------------------------------------------------------- AVERAGE 0.90 37.04% 7.69% 5.00% 2.69% 373.30% 0.02% 0.02% - ----------------------------------------------------------------------------------------------------------------------------------- Hopkinsville Federal Savings 0 33.50% 6.59% 4.92% 1.67% 116.04% NA NA Bank Financial information as of March 31, 1997 Source: SNL Securities, L.P. and Audited Financial Statements ===================================================================================================================================
- -------------------------------------------------------------------------------- EXHIBIT V-1 HOPKINSVILLE FEDERAL SAVINGS BANK STANDARD CONVERSION ANALYSIS Page 1
As of May 29,1997 - ------------------------------------------------------------------------------------------------------ Comparable All Publicly Group Traded Thrifts PRICE MULTIPLE SYMBOL Subject [As of 5/29/97] [As of 5/29/97] Low High Mean Median Mean Median - ------------------------------------------------------------------------------------------------------ Price to-Earnings ratio P/E 12.00 15.76 14.88 14.72 16.94 15.13 Price to-book ratio P/B 62.00 65.50 107.61 109.17 137.75 124.90 Price to-Assets P/A 10.00 11.50 14.15 14.05 15.37 13.53 - -------------------------------------------------------------------------- PARAMETERS SYMBOL VALUE - -------------------------------------------------------------------------- Proforma Value after Conversion "V" Pre-conversion earnings (1) "Y" $1,200,000 Est ESOP Borrowings (8%) "E" 1,920,000 Est ESOP Borrowings Rate (2) "S" 5.61% Est Amort of ESOP Borrowings "T" 8 Pre-Conversion Tangible Book Value (3) "B" 17,238, 000 Pre-Conversion Assets (3) "A" 203,058,205 Reinvestment Rate (4) "R" 4.29% Est Conversion Expenses (5) "X" 650,000 Management Recognition Plan Amount (4%) "M" 960,000 Management Recognition Plan Expense "N" 192,000 Proceeds not Reinvested "Z" 0 Projected Dividend Amount "DA" 0 Projected Dividend Yield "DY" 0.00% Tax Rate (State and Federal) 34.00%
(1) LTM earnings as of March 31, 1997 (w/o SAIF assessment). (2) Based upon prime at 8.5% rate less the effective tax rate. (3) As of March 31, 1997. (4) Net return assumes a reinvestment rate of 5.5% the estimated incremental net assets yield for the Company for the most recent period, less the an estimated tax effect. (5) Estimated total costs for the conversion. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- HOPKINSVILLE FEDERAL SAVINGS BANK STANDARD CONVERSION ANALYSIS Page 2
Formula PRICE-TO-EARNINGS CALCULATION low 20,817,675 P/E [Y-R(X+Z)-ES-(1-Tax)E/T-(1-Tax)N] high 27,323,199 V= ---------------------------- average 24,070,378 1-(P/E)R PRICE-TO-BOOK CALCULATION low 22,362,421 P/B (B-X-E-M) high 26,021,536 V= ------------- average 24,131,978 1-P/B PRICE-TO-ASSETS CALCULATION low 22,489,801 P/A (A-X) high 25,863,271 V= ----------- average 24,176,636 1-P/A SUMMARY ESTIMATE - ------------------------------------------------------------------ As of May 29,1997 $24,000,000 - ------------------------------------------------------------------ Allowable Range from 85%---- $20,400,000 to 115% of---- $27,600,000
- -------------------------------------------------------------------------------- ================================================================================ EXHIBIT V-2 HOPKINSVILLE FEDERAL SAVINGS BANK PROFORMA EFFECT OF CONVERSION PROCEEDS ESTIMATED CONVERSION PROCEEDS $ 24,000,000 (Midpoint of conversion range) LESS Selling Expenses ($650,000) -------------------- Conversion Proceeds $ 23,350,000 ESOP Deduction ($1,920,000) MRP Deduction ($960,000) -------------------- ESTIMATED NET CAPITAL ADDITION FROM CONVERSION $ 20,470,000 ESTIMATED ADDITIONAL INCOME CONVERSION PROCESS - ---------------------------------------------- Conversion Proceeds (1) $ 21,430,000 Estimated Incremental Rate of Return 4.29% -------------------- $919,347 Less Amortization of ESOP Borrowing, net of taxes ($158,400) Less ESOP Borrowing Expenses, net of taxes (107,712) Less Management Recognition Program Expenses ($126,720) -------------------- ESTIMATED NET EARNINGS INCREASE $526,515
(1) less ESOP
-------------------------------------------------- BEFORE CONVERSION AFTER CONVERSION -------------------------------------------------- ESTIMATED PROFORMA EARNINGS Normalized Earnings (annualized) $1,200,000 $1,726,515 Return on Assets 0.59% 0.77% ----------------------------------------------------------------------------- ESTIMATED PROFORMA NET WORTH BEFORE CONVERSION CONVERSION PROCEEDS AFTER CONVERSION ----------------------------------------------------------------------------- As of March 31, 1997 $17,236,000 $20,470,000 $37,706,000 ----------------------------------------------------------------------------- ESTIMATED PROFORMA ASSETS BEFORE CONVERSION CONVERSION PROCEEDS AFTER CONVERSION ----------------------------------------------------------------------------- As of March 31, 1997 $203,058,205 $20,470,000 $223,528,205
================================================================================ - -------------------------------------------------------------------------------- EXHIBIT V-3 HOPKINSVILLE FEDERAL SAVINGS BANK PROFORMA EFFECT OF STANDARD CONVERSION
----------------------------------------------------------------------------- Minimum Midpoint Maximum Super Max ----------------------------------------------------------------------------- Estimated Gross Stock Sale Proceeds 20,400,000 24,000,000 27,600,000 31,740,000 Estimated Expenses (1) 650,000 650,000 650,000 650,000 ----------------- ------------- -------------- ---------------- Estimated Net Conversion Proceeds 19,750,000 23,350,000 26,950,000 31,090,000 ESTIMATED PROFORMA NET WORTH Tangible Net Worth as of March 31, 1997 17,236,000 17,236,000 17,236,000 17,236,000 Conversion Proceeds 19,750,000 23,350,000 26,950,000 31,090,000 ----------------- ------------- -------------- ---------------- Total 36,986,000 40,586,000 44,186,000 48,326,000 Less ESOP Debt (2) 1,632,000 1,920,000 2,208,000 2,539,200 Less MRP Obligated (2) 816,000 960,000 1,104,000 1,269,600 ----------------- ------------- -------------- ---------------- Est. Proforma Tangible Net Worth 34,538,000 37,708,000 40,874,000 44,517,200 ESTIMATED PROFORMA EARNINGS Normalized Earnings (annualized) 1,200,000 1,200,000 1,200,000 1,200,000 Incremental Earnings (3) 777,262 919,347 1,061,432 1,224,829 ----------------- ------------- -------------- ---------------- Sub-total 1,977,263 2,119,347 2,261,432 2,224,830 Less ESOP Adjustment (4) 226,195 266,112 306,029 351,933 Less MRP Adjustment (4) 107,712 126,720 145,728 187,587 ----------------- ------------- -------------- ---------------- Estimated Proforma Annual Earnings 1,643,355 1,726,515 1,809,675 1,905,309 ESTIMATED PROFORMA ASSETS Total as of March 31, 1997 230,058,205 230,058,205 230,058,205 203,058,205 Conversion Proceeds 19,750,000 21,430,000 26,950,000 31,090,000 Less MRP Obligation 816,000 960,000 1,104,000 1,269,600 ----------------- ------------- -------------- ---------------- Estimated Proforma Assets 221,992,205 223,528,205 228,904,205 232,878,605 - ----------------------------------------------------------------------------------------------------------------------------------- ESTIMATED PROFORMA RATIOS, PRICE TO: Tangible Net Worth 59.07% 63.65% 87.52% 71.30% Earnings Assets - ----------------------------------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------------------------------- EST.PROFORMA RETURN ON ASSETS 0.74% 0.77% 0.79% 0.82% EST.PROFORMA TANGIBLE NET WORTH to ASSETS 15.56% 16.87% 17.86% 19.12% - -----------------------------------------------------------------------------------------------------------------------------------
(1) Estimated insurance costs including legal, accounting and other direct expenses (2) Estimated (3) Estimated 6.5% incremental net on earning assets less the effective tax rate (4) Tax effected - -------------------------------------------------------------------------------- ================================================================================ EXHIBIT V-4 HOPKINSVILLE FEDERAL SAVINGS BANK HOPKINSVILLE, KENTUCKY PROFORMA PRICING MULTIPLES COMPARED TO COMPARABLE GROUP *
------------------------------------------------------------------------------- INSTITUTION COMPARABLE (DISCOUNT) PREMIUM PROFORMA GROUP -- FROM COMPARABLE GROUP -- VALUE AVERAGE MEDIAN AVERAGE MEDIAN ------------------------------------------------------------------------------- METHOD AT THE MINIMUM Price-to-Earnings (x) 12.41 14.88 14.72 -16.58% -15.67% Price-to-Book (%) 59.07 107.61 109.17 -45.11% -45.90% Price-to-Assets (%) 9.19 14.15 14.06 -35.06% -34.64% AT THE MIDPOINT Price-to-Earnings (x) 13.90 14.88 14.72 -6.58% -5.56% Price-to-Book (%) 63.65 107.61 109.17 -40.85% -41.70% Price-to-Assets (%) 10.74 14.15 14.06 -24.12% -23.64% AT THE MAXIMUM Price-to-Earnings (x) 15.25 14.88 14.72 2.50% 3.61% Price-to-Book (%) 67.52 107.61 109.17 -37.25% -38.15% Price-to-Assets (%) 12.06 14.15 14.06 -14.79% -14.24% AT THE SUPER MAX Price-to-Earnings (x) 16.66 14.88 14.72 11.95% 13.17% Price-to-Book (%) 71.30 107.61 109.17 -33.74% -34.69% Price-to-Assets (%) 13.63 14.15 14.06 -3.68% -3.06%
* BASED UPON A VALUATION OF $24,000,000 ================================================================================ EXHIBIT VI HOPKINSVILLE FEDERAL SAVINGS BANK Hopkinsville, Kentucky Assumptions in making proforma adjustments to Hopkinsville Federal Savings Bank net income for use of proceeds are as follows: 1. Net conversion proceeds are invested at 6.50%. (The estimated reinvestment rate for the Bank of the conversion proceeds based upon a composite rate of the yields currently available on short-term liquid investments, longer term mortgage-backed securities and Bank loan originations.) 2. A tax rate of 34% is deducted, that being the assumed tax rate for the Company for the projection period. 3. The total net amount of conversion proceeds is invested immediately upon receipt. 4. No effect is given for possible withdrawal of funds from deposit accounts at the Bank. Reviewing prior conversion offerings, use of deposit funds to purchase shares has generally been offset by new deposits attracted by conversion publicity and replacement of deposits withdrawn by subscribers with new deposits. Rate of Return on Conversion Proceeds (Return on Earnings Assets)...........................6.50% Less Income Tax Charge.....................................2.21% Net Incremental After-tax Return..........................4.29% EXHIBIT VIA HOPKINSVILLE FEDERAL SAVINGS BANK Hopkinsville, Kentucky This valuation will be updated as required. Our procedure will be as follows: 1. National Capital will review results of operations of the Bank subsequent to the original valuation, including quality of earnings. 2. National Capital will review the change of the Bank's financial condition subsequent to our original valuation. 3. National Capital will review changes in the market standing for publicly- held thrift shares within the overall stock market, paying special attention to the group of thrift companies used as comparable associations. Our revised valuation of the estimated proforma fair market value of the Bank will then be derived as follows: a. Updated operating and market ratios will be calculated for the Bank based upon the latest available financial statements. Comparable group market pricing ratios will be calculated and compared with Bank ratios. b. The estimated proforma fair market value of the Bank will then be adjusted, if necessary, to reflect material changes since the date of the original valuation. If, in our opinion, the original valuation is changed, the reasons for the change will be explained. EXHIBIT VII TABLE OF CONTENTS
PAGE Independent Auditor's Report F-2 Financial Statements: Statements of Financial Condition F-3 Statements of Income F-5 Statements of Equity F-6 Statements of Cash Flows F-7 Notes to Financial Statements F-8
Independent Auditor's Report To the Board of Directors Hopkinsville Federal Savings Bank We have audited the accompanying statements of financial condition of Hopkinsville Federal Savings Bank as of December 31, 1996 and 1995, and the related statements of income, equity, and cash flows for each of the three years in the period ended December 31, 1996. 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 audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Hopkinsville Federal Savings Bank as of December 31, 1996 and 1995, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1996 in conformity with generally accepted accounting principles. Hopkinsville, Kentucky February 14, 1997 F-2 HOPKINSVILLE FEDERAL SAVINGS BANK STATEMENTS OF FINANCIAL CONDITION ASSETS
DECEMBER 31, MARCH 31, ------------------------------- 1997 1996 1995 ------------ -------------- -------------- (Unaudited) Cash and due from banks $ 1,272,361 $ 1,451,727 $ 1,303,030 Time deposits 9,000,000 2,000,000 7,000,000 Interest-bearing deposits in Federal Home Loan Bank - - 5,550,000 Federal funds sold 8,806,000 500,000 7,948,000 Securities available for sale 5,108,869 5,125,452 4,053,144 Securities held to maturity 77,668,800 95,946,689 98,553,174 Loans receivable, net of allowance for loan losses of $217,444 in 1997, $217,444 in 1996 and $122,252 in 1995 97,553,277 95,495,890 84,755,375 Accrued interest receivable 1,095,988 1,290,408 1,060,974 Premises and equipment, net 2,330,980 2,332,876 2,347,113 Other assets 221,930 254,989 27,519 ------------ ------------- ----------------- Total assets $203,058,205 $204,398,031 $212,598,329 ============ ============= =================
The accompanying notes are an integral part of these financial statements. F-3 LIABILITIES AND EQUITY
DECEMBER 31, MARCH 31, ------------------------------ 1997 1996 1995 ------------- ------------ ---------------- (Unaudited) Deposits: Noninterest-bearing accounts $ 2,178,528 $ 1,784,472 $ 1,236,424 Interest-bearing accounts: Demand / NOW accounts 7,795,012 7,603,322 7,628,482 Money market accounts 37,588,049 36,939,552 34,781,597 Passbook savings 11,794,628 10,631,561 11,196,639 Other time deposits 123,805,418 126,868,459 139,932,047 ------------ ------------ ------------ Total deposits 183,161,635 183,827,366 194,775,189 Advances from borrowers for taxes and insurance 219,343 184,120 176,553 Federal income taxes payable: Current - - - Deferred 1,696,552 1,702,172 1,334,989 Other borrowed funds - 1,317,000 - Other liabilities 744,345 460,146 214,876 ------------ ------------ ------------ Total liabilities 185,821,875 187,490,804 196,501,607 ------------ ------------ ------------ Equity: Retained earnings 15,032,748 14,674,418 14,490,786 Net unrealized appreciation on available-for-sale securities, net of tax of $1,135,179 in 1997, $1,150,235 in 1996 and $827,300 in 1995 2,203,582 2,232,809 1,605,936 ------------ ------------ ------------ 17,236,330 16,907,227 16,096,722 ------------ ------------ ------------ Total liabilities and equity $203,058,205 $204,398,031 $212,598,329 ============ ============ ============
F-4 HOPKINSVILLE FEDERAL SAVINGS BANK STATEMENTS OF INCOME
FOR THE THREE MONTHS ENDED MARCH 31, FOR THE YEARS ENDED DECEMBER 31, -------------------------- --------------------------------------------- 1997 1996 1996 1995 1994 ----------- ----------- ----------- ----------- ----------- (Unaudited) (Unaudited) Interest income: Loans receivable $1,801,731 $1,536,294 $ 6,823,842 $ 5,839,659 $ 5,247,026 Securities available for sale 38,522 36,865 150,814 134,894 109,441 Securities held to maturity 1,287,695 1,391,485 5,623,854 4,364,389 3,320,249 Time deposits 143,535 269,098 621,041 2,133,061 1,758,100 ---------- ---------- ----------- ----------- ----------- Total interest income 3,271,483 3,233,742 13,219,551 12,472,003 10,434,816 ---------- ---------- ----------- ----------- ----------- Interest expense: Deposits 2,231,286 2,561,178 9,731,511 10,009,266 7,740,293 Other borrowed funds 9,336 - 25,022 - - ---------- ---------- ----------- ----------- ----------- Total interest expense 2,240,622 2,561,178 9,756,533 10,009,266 7,740,293 ---------- ---------- ----------- ----------- ----------- Net interest income 1,030,861 672,564 3,463,018 2,462,737 2,694,523 Provision for loan losses - - 100,000 - - ---------- ---------- ----------- ----------- ----------- Net interest income after provision for loan losses 1,030,861 672,564 3,363,018 2,462,737 2,694,523 ---------- ---------- ----------- ----------- ----------- Noninterest income: NOW account fees 39,883 28,342 156,584 115,283 102,899 Loan fees 35,591 59,044 259,665 153,681 229,082 Service charges 28,008 28,652 112,251 77,163 124,023 Other 21,058 9,426 61,363 52,065 55,849 ---------- ---------- ----------- ----------- ----------- Total noninterest income 124,540 125,464 589,863 398,192 511,853 ---------- ---------- ----------- ----------- ----------- Noninterest expenses: Salaries and benefits 373,341 306,922 1,277,609 1,219,649 1,251,550 Deposit insurance premium 49,889 110,823 1,701,758 426,172 396,847 Occupancy expense 50,348 50,820 215,101 176,757 110,114 Data processing 25,061 17,245 86,674 102,334 103,533 Other 117,721 92,395 409,042 336,403 318,396 ---------- ---------- ----------- ----------- ----------- Total noninterest expense 616,360 578,205 3,690,184 2,261,315 2,180,440 ---------- ---------- ----------- ----------- ----------- Income before income taxes 539,041 219,823 262,697 599,614 1,025,936 Income tax expense 180,711 72,177 79,065 197,808 341,203 ---------- ---------- ----------- ----------- ----------- Net income $ 358,330 $ 147,646 $ 183,632 $ 401,806 $ 684,733 ========== ========== =========== =========== ===========
The accompanying notes are an integral part of these financial statements. HOPKINSVILLE FEDERAL SAVINGS BANK STATEMENTS OF EQUITY
Net Unrealized Appreciation On Available- Retained For-Sale Total Earnings Securities Equity ----------- ---------------- ----------- BALANCE, DECEMBER 31, 1993 $13,404,247 $ 933,270 $14,337,517 Net income 684,733 - 684,733 Net changes in unrealized appreciation on available-for-sale securities, net of taxes of $6,538 - 12,692 12,692 ----------- ---------- ----------- BALANCE, DECEMBER 31, 1994 14,088,980 945,962 15,034,942 Net income 401,806 - 401,806 Net changes in unrealized appreciation on available-for-sale securities, net of taxes of $339,986 - 659,974 659,974 ----------- ---------- ----------- BALANCE, DECEMBER 31, 1995 14,490,786 1,605,936 16,096,722 Net income 183,632 - 183,632 Net changes in unrealized appreciation on available-for-sale securities, net of taxes of $322,935 - 626,873 626,873 ----------- ---------- ----------- BALANCE, DECEMBER 31, 1996 14,674,418 2,232,809 16,907,227 Net income (unaudited) 358,330 - 358,330 Net changes in unrealized appreciation on available-for-sale securities, net of taxes of $15,056 (unaudited) - (29,227) (29,227) ----------- ---------- ----------- BALANCE, MARCH 31, 1997 $15,032,748 $2,203,582 $17,236,330 =========== ========== ===========
The accompanying notes are an integral part of these financial statements. F-5 HOPKINSVILLE FEDERAL SAVINGS BANK STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, FOR THE YEARS ENDED DECEMBER 31, --------------------------- ----------------------------------------------- 1997 1996 1996 1995 1994 ------------ ----------- ------------- ------------- ------------- (Unaudited) (Unaudited) CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 358,330 $ 147,646 $ 183,632 $ 401,806 $ 684,733 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses - - 100,000 - - Depreciation 24,991 28,438 117,094 97,700 37,358 Accretion of investment security discounts (1,800) (1,357) (5,499) (4,233) (2,703) Deferred income taxes 9,418 8,840 44,248 46,523 52,456 Stock dividend (27,700) (26,000) (107,500) (97,700) (77,300) Gain on sale of equipment - - (8,265) (400) (2,852) (Increase) decrease in: Accrued interest receivable 194,420 (189,794) (229,434) (267,530) (247,878) Other assets 33,059 (137,911) (227,470) 23,561 (11,307) Increase (decrease) in other liabilities 284,199 142,539 245,270 (30,941) 15,654 ----------- ------------ ------------ ------------ ------------ Net cash provided by (used in) operating activities 874,917 (27,599) 112,076 168,786 448,161 ----------- ------------ ------------ ------------ ------------ CASH FLOWS FROM INVESTING ACTIVITIES: Net (increase) decrease in time deposits (7,000,000) - 5,000,000 20,000,000 (12,000,000) Net (increase) decrease in interest-bearing deposits in FHLB - 2,975,000 5,550,000 5,650,000 (1,775,000) Net (increase) decrease in federal funds sold (8,306,000) 5,725,000 7,448,000 (6,618,000) 9,135,000 Proceeds from maturities of held-to-maturity securities 21,499,426 22,508,758 44,010,074 51,503,438 11,773,691 Purchases of held-to-maturity securities (3,219,719) (29,975,506) (41,398,090) (73,707,447) (8,009,818) Purchases of available-for- sale securities - (15,000) (15,000) - - Net increase in loans (2,057,387) (2,690,938) (10,840,515) (6,228,670) (10,722,488) Purchases of premises/equipment (23,095) (16,124) (108,724) (95,736) (911,452) Proceeds from sale of equipment - - 14,132 400 2,852 ----------- ------------ ------------ ------------ ------------ Net cash provided by (used in) investing activities 893,225 (1,488,810) 9,659,877 (9,496,015) (12,507,215) ----------- ------------ ------------ ------------ ------------ CASH FLOWS FROM FINANCING ACTIVITIES: Net increase (decrease) in demand deposits, savings and NOW deposits 2,397,310 3,890,636 2,115,765 (9,868,232) 809,934 Net increase (decrease) in time deposits (3,063,041) (2,617,047) (13,063,588) 18,943,928 11,705,448 Increase (decrease) in advance payments by borrowers for taxes and insurance 35,223 107,571 7,567 (22,947) 15,113 Net increase (decrease) in other borrowed funds (1,317,000) - 1,317,000 - - ----------- ------------ ------------ ------------ ------------ Net cash provided by (used in) financing activities (1,947,508) 1,381,160 (9,623,256) 9,052,749 12,530,495 ----------- ------------ ------------ ------------ ------------ Increase (decrease) in cash and cash equivalents (179,366) (135,249) 148,697 (274,480) 471,441 Cash and cash equivalents, beginning of period 1,451,727 1,303,030 1,303,030 1,577,510 1,106,069 ----------- ------------ ------------ ------------ ------------ Cash and cash equivalents, end of period $ 1,272,361 $ 1,167,781 $ 1,451,727 $ 1,303,030 $ 1,577,510 =========== ============ ============ ============ ============
The accompanying notes are an integral part of these financial statements. F-6 HOPKINSVILLE FEDERAL SAVINGS BANK NOTES TO FINANCIAL STATEMENTS MARCH 31, DECEMBER 31, 1996, 1995 AND 1994 1997 AND 1996 (UNAUDITED) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Significant accounting policies of the Bank are as follows: A. NATURE OF BUSINESS Hopkinsville Federal Savings Bank (the "Bank") is a mutual savings bank which was organized in 1879. Its principal business consists of accepting deposits and residential mortgage loan originations in its primary market area of Christian, Calloway, Todd and Trigg Counties, Kentucky. The Bank is subject to the regulations of certain federal agencies and undergoes periodic examinations by those regulatory authorities. B. CASH AND CASH EQUIVALENTS For the purpose of presentation in the statements of cash flows, cash and cash equivalents are defined as those amounts included in the balance sheet caption "cash and due from banks. C. SECURITIES HELD TO MATURITY Bonds, notes and debentures for which Hopkinsville Federal Savings Bank (the "Bank") has the positive intent and ability to hold to maturity are reported at cost, adjusted for premiums and discounts that are recognized in interest income over the period to maturity using a method that approximates the level yield method. Declines in the fair value of individual held-to-maturity securities below their cost that are other than temporary result in write-downs of the individual securities to their fair value. The write-downs are included in earnings as realized losses. D. SECURITIES AVAILABLE FOR SALE Available-for-sale securities consist of certain equity securities not classified as trading securities nor as held-to-maturity securities. Unrealized holding gains and losses, net of tax, on available-for-sale securities are reported as a net amount in a separate component of equity until realized. Gains and losses on the sale of available-for-sale securities are determined using the specific identification method. CONTINUED F-7 HOPKINSVILLE FEDERAL SAVINGS BANK NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1996, 1995 AND 1994 MARCH 31, 1997 AND 1996 (UNAUDITED) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) D. SECURITIES AVAILABLE FOR SALE (CONTINUED) Declines in the fair value of individual available-for-sale securities below their cost that are other than temporary result in write-downs of the individual securities to their fair value. The write-downs are included in earnings as realized losses. Premiums and discounts are recognized in interest income over the period to maturity using a method that approximates the level yield method. E. LOANS RECEIVABLE Loans receivable are stated at unpaid principal balances, less the allowance for loan losses and discounts. Discounts on home improvement and consumer loans are recognized over the lives of the loans using methods that approximate the interest method. Loan origination fee income is recognized as received and direct loan origination costs are expensed as incurred. Statement of Financial Accounting Standard ("SFAS") No. 91 requires the recognition of loan origination fee income over the life of the loan and the recognition of certain direct loan origination costs over the life of the loan. However, deferral of such fees and costs would not have a material effect on the financial statements. 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 while the loan is classified as nonaccrual. Loans may be returned to accrual status when all principal and interest amounts contractually due (including arrearages) are reasonably assured of repayment within an acceptable period of time, and there is a sustained period of repayment performance by the borrower in accordance with the contractual terms of interest and principal. CONTINUED F-8 HOPKINSVILLE FEDERAL SAVINGS BANK NOTES TO FINANCIAL STATEMENTS DECEMBER 31,1996, 1995 AND 1994 MARCH 31, 1997 AND 1996 (UNAUDITED) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) E. LOANS RECEIVABLE (CONTINUED) The Bank provides an allowance for loan losses and include in operating expenses a provision for loan losses determined by management. 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. Management believes it has established the allowance in accordance with generally accepted accounting principles and has taken into account the views of its regulators and the current economic environment. F. FORECLOSED REAL ESTATE Real estate properties acquired through, or in lieu of, loan foreclosure are carried at the lower of cost or fair value less cost to sell. Costs of developing such real estate are capitalized, whereas costs relating to holding the property are expensed. Valuations are periodically performed by management, and any adjustments to value are made through an allowance for losses. G. INCOME TAXES Income taxes are provided based on income reported in the financial statements adjusted for transactions that do not enter into the computation of income taxes payable. Deferred taxes result from timing differences in recognizing revenue and expense for income tax and financial reporting purposes. Deferred tax assets and liabilities are reflected at currently enacted income tax rates applicable to the period in which the deferred tax assets and liabilities are expected to be realized or settled. As changes in tax laws or rates are enacted, deferred tax assets and liabilities are adjusted through the provision for income taxes. CONTINUED F-9 HOPKINSVILLE FEDERAL SAVINGS BANK NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1996, 1995 AND 1994 MARCH 31, 1997 AND 1996 (UNAUDITED) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) H. PREMISES AND EQUIPMENT Land is carried at cost. Land improvements, buildings, and furniture and equipment are carried at cost, less accumulated depreciation and amortization. Buildings and furniture and equipment are depreciated generally by the straight-line method over the estimated useful lives of the assets. The estimated useful lives used to compute depreciation are as follows: Land improvements 5-15 years Buildings 40 years Furniture and equipment 5-15 years I. FINANCIAL INSTRUMENTS In the ordinary course of business the Bank entered into off-balance- sheet financial instruments consisting of commitments to extend credit, etc. Such financial instruments are recorded in the financial statements when they are funded or related fees are incurred or received. J. FAIR VALUES OF FINANCIAL INSTRUMENTS The following methods and assumptions were used by the Bank in estimating fair values of financial instruments as disclosed herein: CASH AND SHORT TERM INSTRUMENTS. The carrying amounts of cash and short term instruments approximate their fair value. AVAILABLE-FOR SALE AND HELD-TO-MATURITY SECURITIES. Fair values for securities are based on quoted market prices. LOANS RECEIVABLE. For variable rate loans that reprice annually and have no significant change in credit risk, fair values are based on carrying values. Fair values for fixed rate mortgage loans and fixed rate commercial loans are estimated using discounted cash flow analyses, using interest rates currently being offered for loans with similar terms to borrowers of similar credit quality. CONTINUED F-10 HOPKINSVILLE FEDERAL SAVINGS BANK NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1996, 1995 AND 1994 MARCH 31, 1997 AND 1996 (UNAUDITED) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) J. FAIR VALUES OF FINANCIAL INSTRUMENTS (CONTINUED) DEPOSIT LIABILITIES. The fair values disclosed for demand deposits are, by definition, equal to the amount payable on demand at the reporting date (that is, their carrying amounts). The carrying amounts of variable rate, fixed-term money market accounts approximate their fair values at the reporting date. Fair values for fixed rate certificates of deposits (CD's) are estimated using a discounted cash flow calculation that applies interest rates currently being offered on certificates of deposit to a schedule of aggregated expected annual maturities on time deposits. ADVANCES FROM BORROWERS FOR TAXES AND LICENSES. The carrying amounts of advances from borrowers approximate their fair value. OTHER BORROWED FUNDS. The carrying amounts of other borrowed funds approximate their fair values since such borrowings mature within 90 days. ACCRUED INTEREST. The carrying amounts of accrued interest approximate their fair values. OFF-BALANCE-SHEET INSTRUMENTS. Off-balance-sheet lending commitments approximate their fair values due to the short period of time before the commitment expires. K. ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. CONTINUED F-11 HOPKINSVILLE FEDERAL SAVINGS BANK NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1996, 1995 AND 1994 MARCH 31, 1997 AND 1996 (UNAUDITED) 2. SECURITIES Securities, which consist of debt and equity investments, have been classified in the statements of financial condition according to management's intent. The carrying amount of securities and their approximate fair values follow:
Gross Gross Estimated Amortized Unrealized Unrealized Market Cost Gains Losses Value ------------ ----------- ------------ ----------- AVAILABLE-FOR-SALE SECURITIES March 31, 1997 (unaudited): Restricted: FHLB stock $ 1,634,600 $ - $ - $ 1,634,600 Intrieve 15,000 - - 15,000 ----------- ----------- ---------- ----------- 1,649,600 - - 1,649,600 Unrestricted: FHLMC stock 120,508 3,338,761 - 3,459,269 ----------- ----------- ---------- ----------- $ 1,770,108 $ 3,338,761 $ - $ 5,108,869 =========== =========== ========== =========== December 31, 1996: Restricted: FHLB stock $ 1,606,900 $ - $ - $ 1,606,900 Intrieve 15,000 - - 15,000 ----------- ----------- ---------- ----------- 1,621,900 - - 1,621,900 Unrestricted: FHLMC stock 120,508 3,383,044 - 3,503,552 ----------- ----------- ---------- ----------- $ 1,742,408 $ 3,383,044 $ - $ 5,125,452 =========== =========== ========== =========== December 31, 1995: Restricted: FHLB stock $ 1,499,400 $ - $ - $ 1,499,400 Unrestricted: FHLMC stock 120,508 2,433,236 - 2,553,744 ----------- ----------- ---------- ----------- $ 1,619,908 $ 2,433,236 $ - $ 4,053,144 =========== =========== ========== ===========
CONTINUED F-12 HOPKINSVILLE FEDERAL SAVINGS BANK NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1996, 1995 AND 1994 MARCH 31, 1997 AND 1996 (UNAUDITED) 2. SECURITIES (CONTINUED)
Gross Gross Estimated Amortized Unrealized Unrealized Market Cost Gains Losses Value ----------- ---------- ---------- ----------- HELD-TO-MATURITY SECURITIES March 31, 1997 (unaudited): U.S. government and agency securities: FHLB investment securities $56,966,773 $ 3,964 $ (872,267) $56,098,470 ----------- --------- ------------ ----------- Mortgage-backed securities: GNMA 19,005,593 238,558 (32,082) 19,212,069 FNMA 1,696,434 - (60,245) 1,636,189 ----------- --------- ------------ ----------- 20,702,027 238,558 (92,327) 20,848,258 ----------- --------- ------------ ----------- $77,668,800 $ 242,522 $ (964,594) $76,946,728 =========== ========= =========== =========== December 31, 1996: U.S. government and agency securities: FHLB investment securities $77,962,421 $ 38,984 $ (512,772) $77,488,633 ----------- --------- ----------- ----------- Mortgage-backed securities: GNMA 17,531,921 297,278 (3,430) 17,825,769 FNMA 452,347 - (5,075) 447,272 ----------- --------- ----------- ----------- 17,984,268 297,278 (8,505) 18,273,041 ----------- --------- ----------- ----------- $95,946,689 $ 336,262 $ (521,277) $95,761,674 =========== ========= =========== =========== December 31, 1995: U.S. government and agency securities: FHLB investment securities $80,990,171 $ 123,901 $ (318,122) 80,795,950 Mortgage-backed securities: GNMA 17,563,003 264,491 (5,511) 17,821,983 ----------- --------- ----------- ------------ $98,553,174 $ 388,392 $ (323,633) $98,617,933 =========== ========= =========== ===========
CONTINUED F-13 HOPKINSVILLE FEDERAL SAVINGS BANK NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1996, 1995 AND 1994 MARCH 31, 1997 AND 1996 (UNAUDITED) 2. SECURITIES (CONTINUED) The scheduled maturities of securities held-to-maturity at March 31, 1997 (unaudited), were as follows:
Amortized Fair Cost Value ----------- ----------- Due in one year or less $ 8,997,396 $ 8,972,960 Due in one to five years 47,969,377 47,125,510 ----------- ----------- 56,966,773 56,098,470 Mortgage-backed securities 20,702,027 20,848,258 ----------- ----------- $77,668,800 $76,946,728 =========== =========== The scheduled maturities of securities held-to-maturity at December 31, 1996, were as follows: Amortized Fair Cost Value ----------- ----------- Due in one year or less $24,996,242 $24,949,200 Due in one to five years 52,966,179 52,539,433 ----------- ----------- 77,962,421 77,488,633 Mortgage-backed securities 17,984,268 18,273,041 ----------- ----------- $95,946,689 $95,761,674 =========== ===========
CONTINUED F-14 HOPKINSVILLE FEDERAL SAVINGS BANK NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1996, 1995 AND 1994 MARCH 31, 1997 AND 1996 (UNAUDITED) 3. LOANS RECEIVABLE The components of loans in the statements of financial condition were as follows:
March 31, December 31, -------------------------- 1997 1996 1995 ------------ ------------ ------------ (Unaudited) Real estate loans: One-to-four family $79,583,258 $77,317,997 $70,417,160 Multi-family 1,453,908 1,466,486 491,621 Construction 3,911,871 5,388,959 4,062,183 Non-residential 6,548,181 5,466,414 5,107,504 ----------- ----------- ----------- Total mortgage loans 91,497,218 89,639,856 80,078,468 ----------- ----------- ----------- Consumer loans: Loans secured by deposits 3,367,983 3,484,074 3,323,604 Other consumer loans 4,151,412 4,004,177 3,016,321 ----------- ----------- ----------- Total consumer loans 7,519,395 7,488,251 6,339,925 ----------- ----------- ----------- 99,016,613 97,128,107 86,418,393 Less: Undisbursed portion of mortgage loans (1,245,892) (1,414,773) (1,540,766) ----------- ----------- ----------- Total loans 97,770,721 95,713,334 84,877,627 Less allowance for loan losses (217,444) (217,444) (122,252) ----------- ----------- ----------- $97,553,277 $95,495,890 $84,755,375 =========== =========== ===========
An analysis of the change in the allowance for loan losses follows:
March 31, December 31, ------------------- 1997 1996 1995 ----------- --------- -------- (Unaudited) Balance at January 1 $217,444 $122,252 $122,252 Loans charged off - (4,808) - Recoveries - - - ---------- -------- -------- Net loans charged off - (4,808) - Provision for loan losses - 100,000 - ---------- -------- -------- Balance at end of period $217,444 $217,444 $122,252 ========== ======== ========
CONTINUED F-15 HOPKINSVILLE FEDERAL SAVINGS BANK NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1996, 1995 AND 1994 MARCH 31, 1997 AND 1996 (UNAUDITED) 4. PREMISES AND EQUIPMENT Components of properties and equipment included in the statements of financial condition at December 31, 1996 and 1995 consisted of the following:
March 31, December 31, ------------------------ 1997 1996 1995 ------------ ----------- ----------- Land $ 577,497 $ 574,452 $ 499,452 Land improvements 82,032 78,625 78,625 Buildings 2,033,532 2,033,532 2,026,226 Furniture and equipment 660,952 644,309 632,760 ----------- ---------- ---------- 3,354,013 3,330,918 3,237,063 Less accumulated depreciation (1,023,033) (998,042) (889,950) ----------- ---------- ---------- $ 2,330,980 $2,332,876 $2,347,113 =========== ========== ==========
Depreciation expense was $24,991 and $ 28,438 for the three month periods ended March 31, 1997 and 1996, respectively, and $117,094 and $97,700 for the years ended December 31, 1996 and 1995, respectively. 5. DEPOSITS At March 31, 1997, the scheduled maturities of other time deposits are as follows:
March 31, 1998 $ 72,989,589 March 31, 1999 36,360,850 March 31, 2000 9,414,861 March 31, 2001 4,413,368 March 31, 2002 625,376 Thereafter 1,374 ------------ $123,805,418 ============
At December 31, 1996, the scheduled maturities of other time deposits are as follows:
1997 $ 77,287,337 1998 32,362,134 1999 10,432,949 2000 6,152,509 2001 632,156 Thereafter 1,374 ------------ $126,868,459 ============
CONTINUED F-16 HOPKINSVILLE FEDERAL SAVINGS BANK NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1996, 1995 AND 1994 MARCH 31, 1997 AND 1996 (UNAUDITED) 5. DEPOSITS, (CONTINUED) The amount of other time deposits with a minimum denomination of $100,000 was $6,179,336 at March 31, 1997 and $7,374,548 and $12,206,055 at December 31, 1996 and 1995, respectively. The Bank maintains clearing arrangements for its demand, NOW and money market accounts with the Federal Home Loan Bank of Cincinnati. The Bank is required to maintain certain cash reserves in its account to cover average daily clearings. At March 31, 1997, average daily clearings were approximately $497,000. At December 31, 1996, average daily clearings were approximately $536,760. 6. OTHER BORROWED FUNDS During 1996, the Bank entered into a Cash Management Advance (CMA) program with the Federal Home Loan Bank. This program is a source of overnight liquidity to address day-to-day cash needs. The program has a term of up to 90 days and bears interest at a variable rate equal to the FHLB cost of funds (7.15% at December 31, 1996). The Bank may borrow up to $20,000,000 under this program and the amount is collateralized by a $20,000,000 FHLB investment security. As of December 31, 1996, the amount owed on the advance was $1,317,000. As of March 31, 1997, the amount owed on the advance was zero. 7. FINANCIAL INSTRUMENTS The Bank is a party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers and to reduce its own exposure to fluctuations in interest rates. These financial instruments include commitments to extend credit and commercial letters of credit. Those instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the statements of financial condition. The contract or notional amounts of those instruments reflect the extent of the Bank's involvement in particular classes of financial instruments. The Bank's exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and commercial letters of credit is represented by the contractual notional amount of those instruments. The Bank uses the same credit policies in making commitments and conditional obligations as it does for on-balance- sheet instruments. Unless noted otherwise, the Bank does not require collateral or other security to support financial instruments with credit risk. CONTINUED F-17 HOPKINSVILLE FEDERAL SAVINGS BANK NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1996, 1995 AND 1994 MARCH 31, 1997 AND 1996 (UNAUDITED) 7. FINANCIAL INSTRUMENTS (CONTINUED) COMMITMENTS TO EXTEND CREDIT. Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since some of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Bank's experience has been that most loan commitments are drawn upon by customers. The Bank has offered standby letters of credit on a limited basis. As of March 31, 1997, the Bank has not been requested to advance funds on any of the standby letters of credit. The estimated fair values of the Bank's financial instruments were as follows at March 31, 1997:
Carrying Fair Amount Value -------------- -------------- Financial assets: Cash and due from banks $ 1,272,361 $ 1,272,361 Time deposits 9,000,000 9,000,000 Federal funds sold 8,806,000 8,806,000 Securities available for sale 5,108,869 5,108,869 Securities held to maturity 77,668,800 76,946,728 Loans receivable 97,553,277 97,280,349 Accrued interest receivable 1,095,988 1,095,988 Financial liabilities: Deposit liabilities (183,161,635) (183,227,354) Advances from borrowers for taxes and licenses (219,343) (219,343) Off-balance-sheet assets (liabilities): Commitments to extend credit (1,497,600) Commercial letters of credit (735,469)
CONTINUED F-18 HOPKINSVILLE FEDERAL SAVINGS BANK NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1996, 1995 AND 1994 MARCH 31, 1997 AND 1996 (UNAUDITED) 7. FINANCIAL INSTRUMENTS (CONTINUED) The estimated fair values of the Bank's financial instruments were as follows at December 31, 1996:
Carrying Fair Amount Value -------------- -------------- Financial assets: Cash and due from banks $ 1,451,727 $ 1,451,727 Time deposits 2,000,000 2,000,000 Federal funds sold 500,000 500,000 Securities available for sale 5,110,452 5,110,452 Securities held to maturity 95,961,689 95,776,674 Loans receivable 95,495,890 95,216,624 Accrued interest receivable 1,290,408 1,290,408 Financial liabilities: Deposit liabilities (183,827,366) (183,910,399) Advances from borrowers for taxes and licenses (184,120) (184,120) Other borrowed funds (1,317,000) (1,317,000) Off-balance-sheet assets (liabilities): Commitments to extend credit (919,375) Commercial letters of credit (499,030)
The estimated fair values of the Bank's financial instruments were as follows at December 31, 1995:
Carrying Fair Amount Value -------------- -------------- Financial assets: Cash and due from banks $ 1,303,030 $ 1,303,030 Time deposits 7,000,000 7,000,000 Interest-bearing deposits in FHLB 5,550,000 5,550,000 Federal funds sold 7,948,000 7,948,000 Securities available for sale 4,053,144 4,053,144 Securities held to maturity 98,553,174 98,617,933 Loans receivable 84,755,375 84,755,375 Accrued interest receivable 1,060,974 1,060,974 Financial liabilities: Deposit liabilities (194,775,189) (195,352,312) Advances from borrowers for taxes and licenses (176,553) (176,553) Off-balance-sheet assets (liabilities): Commitments to extend credit (717,624) Commercial letters of credit (46,250)
CONTINUED F-19 HOPKINSVILLE FEDERAL SAVINGS BANK NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1996, 1995 AND 1994 MARCH 31, 1997 AND 1996 (UNAUDITED) 8. SIGNIFICANT GROUP CONCENTRATIONS OF CREDIT RISK Most of the Bank's business activity is with customers located within the western part of the Commonwealth of Kentucky. The majority of the loans are collateralized by a one-to-four family residence. The Bank requires collateral for all loans. The distribution of commitments to extend credit approximates the distribution of loans outstanding. The contractual amounts of credit- related financial instruments such as commitments to extend credit and commercial letters of credit represent the amounts of potential accounting loss should the contract be fully drawn upon, the customer default, and the value of any existing collateral become worthless. The Bank had $9,007,899, $2,001,890 and $12,618,655 of cash on deposit with the FHLB and $9,095,248, $1,018,015 and $8,175,728 on deposit with one financial institution and $500,000, $500,000 and $500,000 on deposit with one financial institution at March 31, 1997, December 31, 1996 and December 31, 1995, respectively. 9. PENSION PLAN Hopkinsville Federal Savings Bank has a noncontributory, defined benefit pension plan covering substantially all of its employees who satisfy certain age and service requirements. The benefits are based on years of service and the employee's average earnings which are computed using the five consecutive years prior to retirement that yield the highest average. Hopkinsville Federal's funding policy is to contribute annually, actuarially determined amounts to finance the plan benefits. The following table sets forth the plan's funded status and amounts recognized in the Bank's statements of financial condition at September 30:
1996 1995 1994 ---------- ---------- ---------- Actuarial present value of benefit obligations at September 30: Accumulated benefit obligation: Vested $1,474,702 $1,306,999 $1,083,400 Nonvested 2,332 2,900 6,903 ---------- ---------- ---------- $1,477,034 $1,309,899 $1,090,303 ========== ========== ==========
CONTINUED F-20 HOPKINSVILLE FEDERAL SAVINGS BANK NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1996, 1995 AND 1994 MARCH 31, 1997 AND 1996 (UNAUDITED) 9. PENSION PLAN (CONTINUED)
1996 1995 1994 ------------ ---------- ---------- Projected benefit obligation for service rendered to date ($1,880,152) ($1,723,791) ($1,531,558) Plan assets at fair value 1,369,023 1,214,937 1,009,355 ------------ ----------- ----------- Plan assets in excess of projected benefit obligation (511,129) (508,854) (522,203) Unrecognized net obligation existing at September 30 (94,429) (104,922) (115,415) Unrecognized prior serv. cost 143,305 161,538 179,771 Unrecognized net loss 440,656 421,962 448,280 ------------ ----------- ----------- Accrued pension cost $ (21,597) $ (30,276) $ (9,567) ============ =========== =========== The components of net periodic pension cost for the years ended September 30 are as follows: 1996 1995 1994 ------------ ---------- ---------- Service costs $ 78,372 $ 77,369 $ 94,024 Interest cost on projected benefit obligation 129,284 114,867 142,254 Actual return on assets (83,148) (89,759) (71,618) Net amortization/deferral 7,308 34,055 (42,329) ------------ ---------- ---------- Net periodic pension cost $ 131,816 $ 136,532 $ 122,331 ============ ========== ==========
Assumptions used to develop the net periodic pension cost were:
1996 1995 1994 ----- ----- ----- Discount rate 7.50% 7.50% 7.50% Expected long-term rate of return on assets 8.00% 8.00% 8.00% Rate of increase in compensation levels 4.50% 4.50% 4.50%
CONTINUED F-21 HOPKINSVILLE FEDERAL SAVINGS BANK NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1996, 1995 AND 1994 MARCH 31, 1997 AND 1996 (UNAUDITED) 10. FEDERAL INCOME TAXES The provision for income taxes consisted of the following:
For the Three Months Ended March 31, For the Years Ended December 31, --------------------- -------------------------------- 1997 1996 1996 1995 1994 --------- ---------- --------- ---------- --------- Current $171,275 $63,337 $34,817 $151,285 $288,747 Deferred 9,436 8,840 2,877 46,523 52,456 -------- ------- ------- -------- -------- $180,711 $72,177 $79,065 $197,808 $341,203 ======== ======= ======= ======== ========
Total income tax expense differed from the amounts computed by applying the U.S. federal income tax rate of 34 percent to income before income taxes as follows:
For the Three Months Ended March 31, For the Years Ended December 31, ------------------- ----------------------------------- 1997 1996 1996 1995 1994 --------- -------- ---------- ----------- ---------- Expected income tax expense at federal tax rate $183,274 $74,740 $ 89,317 $203,869 $348,818 Dividends received deduction (2,563) (2,563) (10,284) (8,122) (7,019) Other - - 32 2,061 (596) -------- ------- -------- -------- -------- Total income tax expense $180,711 $72,177 $ 79,065 $197,808 $341,203 ======== ======= ======== ======== ========
Deferred tax expense results from timing differences in the recognition of income and expense for tax and financial reporting purposes. The source and tax effect of these timing differences are as follows:
For the Three Months Ended March 31, For the Years Ended December 31, -------------------- ----------------------------------- 1997 1996 1996 1995 1994 --------- --------- ---------- --------- --------- FHLB stock dividends $9,418 $8,840 $36,631 $33,262 $26,330 Provision for bad-debts - - (32,117) 13,077 25,297 Other - - (1,637) 184 829 ------ ------ ------- ------- ------- $9,418 $8,840 $2,877 $46,523 $52,456 ====== ====== ======= ======= =======
The components of deferred tax liabilities are summarized as follows:
March 31, December 31, --------------------------- 1997 1996 1995 ---------- ---------- ------------ FHLB stock dividends $ 296,672 $ 287,236 $ 250,605 Bad debt reserves 264,701 264,701 257,084 Unrealized appreciation on securities available for sale 1,135,179 1,150,235 827,300 ---------- ---------- ----------- $1,696,552 $1,702,172 $1,334,989 ========== ========== ===========
CONTINUED F-22 HOPKINSVILLE FEDERAL SAVINGS BANK NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1996, 1995 AND 1994 MARCH 31, 1997 AND 1996 (UNAUDITED) 10. FEDERAL INCOME TAXES (CONTINUED) Thrift institutions, in determining taxable income, have historically been allowed special bad debt deductions based on specified experience formulae or on a percentage of taxable income before such deductions. The bad debt deduction based on the latter has been gradually reduced to 8%. During August 1996, the President signed the Small Business Protection Act of 1996 that will, among other things, repeal the tax bad debt reserve method for thrifts effective for taxable years beginning after December 31, 1995. As a result, thrifts must recapture into taxable income the amount of their post- 1987 tax bad debt reserves over a six-year period beginning after 1995. This recapture can be deferred for up to two years if the thrift satisfies a residential loan portfolio test. The Bank is expected to recapture approximately $878,800 of its tax bad debt reserves into taxable income over six years as a result of this new law. The recapture will not have any effect on the Bank's financial statements because the related tax expense has already been accrued. Because of such repeal, thrifts such as the Bank may only use the same tax bad debt reserve that is allowed for banks. Accordingly, a thrift with assets of $500 million or less may only add to its tax bad debt reserves based upon its moving six-year average experience of actual loan losses (i.e., the experience method). A thrift with assets greater than $500 million can no longer use the reserve method and may only deduct loan losses as they actually arise (i.e., the specific charge-off method). The Bank expects to continue to use the reserve method. The portion of a thrift's tax bad debt reserve that is not recaptured (generally pre-1988 bad debt reserves) under this new law is only subject to recapture at a later date under certain circumstances. These include stock repurchase redemptions by the thrift or if the thrift converts to a type of institution (such as a credit union) that is not considered a bank for tax purposes. However, no further recapture would be required if the thrift converted to a commercial bank charter or was acquired by a bank. The Bank does not anticipate engaging in any transactions at this time that would require the recapture of its remaining tax bad debt reserves. Therefore, retained earnings at March 31, 1997, December 31, 1996 and 1995 includes approximately $4,027,400 which represents such bad debt deductions for which no deferred income taxes have been provided. The Bank made income tax payments of $285,991, $146,000 and $279,046 for the years ended December 31, 1996, 1995 and 1994, respectively. CONTINUED F-23 HOPKINSVILLE FEDERAL SAVINGS BANK NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1996, 1995 AND 1994 MARCH 31, 1997 AND 1996 (UNAUDITED) 11. RELATED PARTIES The Bank has entered into transactions with its directors and their affiliates (related parties). The aggregate amount of loans to such related parties at March 31, 1997 and December 31, 1996, was $228,987 and $230,490, respectively. During 1996, new loans to such related parties amounted to $55,976 and repayments amounted to $44,323. 12. 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. The Bank had open loan commitments at March 31, 1997 and December 31, 1996 of $1,497,600 and $919,375, respectively. 13. REGULATORY MATTERS The Financial Institutions Reform Recovery and Enforcement Act of 1989 ("FIRREA"), which instituted major reforms in the operation and supervision of the savings and loan industry, contains provisions for capital standards. These standards require savings institutions to have a minimum regulatory tangible capital (as defined in the regulation) equal to 1.50% of adjusted total assets and a minimum 3.00% core capital (as defined) of adjusted total assets. Additionally, savings institutions are required to meet a total risk-based capital requirement of 8.00%. The Bank is also subject to the provisions of the Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA"). FDICIA includes significant changes to the legal and regulatory environment for insured depository institutions, including reductions in insurance coverage for certain kinds of deposits, increased supervision by the Federal regulatory agencies, increased reporting requirements for insured institutions, and new regulations concerning reporting on internal controls, accounting and operations. FDICIA's prompt corrective action regulations define specific capital categories based on an institutions' capital ratios. The capital categories, in declining order, are "well capitalized", "adequately capitalized", "undercapitalized", "significantly undercapitalized", and "critically undercapitalized." Institutions categorized as "undercapitalized" or worse are subject to certain restrictions, including the requirement to file a capital plan with OTS, and increased supervisory monitoring, among other things. Other restrictions may be imposed on the institution either by the OTS or by the FDIC, including requirements to raise additional capital, sell assets, or sell the entire institution. CONTINUED F-24 HOPKINSVILLE FEDERAL SAVINGS BANK NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1996, 1995 AND 1994 MARCH 31, 1997 AND 1996 (UNAUDITED) 13. REGULATORY MATTERS (CONTINUED) The following chart delineates the categories as defined in the FDICIA legislation:
Tier I Risk- Total Risk- Core Capital Based Capital Based Capital -------------- -------------- -------------- "Well capitalized" 5.0% 6.0% 10.0% "Adequately capitalized" 4.0% 4.0% 8.0% "Undercapitalized" Less than 4.0% Less than 4.0% Less than 8.0% "Significantly undercapitalized" Less than 3.0% Less than 3.0% Less than 6.0%
At March 31, 1997, the Bank's core, tier I risk-based, and total risk-based capital ratios were 7.5%, 23.6%, and 20.9%, respectively. These ratios placed the Bank in the "well capitalized" category. The following is a calculation of the Bank's regulatory capital (in thousands) at March 31, 1997:
Tier I Total Risk- Risk- GAAP Based Tangible Core Based Capital Capital Capital Capital Capital ------- ------- --------- -------- -------- GAAP capital, as reported $17,236 $17,236 $17,236 $17,236 $17,236 Unrealized gains on certain available-for- sale securities - (2,204) (2,204) (2,204) General valuation allowance - - - 217 ------- ------- ------- ------- Regulatory capital $17,236 15,032 15,032 15,249 ======= Minimum capital requirement % 1.50% 3.00% 8.00% Minimum capital requirement $ 3,015 6,031 5,840 ------- ------- ------- Regulatory capital excess $12,017 $ 9,001 $ 9,409 ======= ======= =======
CONTINUED F-25 HOPKINSVILLE FEDERAL SAVINGS BANK NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1996, 1995 AND 1994 MARCH 31, 1997 AND 1996 (UNAUDITED) 13. REGULATORY MATTERS (CONTINUED) At December 31, 1996, the Bank's core, tier I risk-based, and total risk- based capital ratios were 7.3%, 23.1%, and 20.4%, respectively. These ratios placed the Bank in the "well capitalized" category. The following is a calculation of the Bank's regulatory capital (in thousands) at December 31, 1996:
Tier I Total Risk- Risk- GAAP Based Tangible Core Based Capital Capital Capital Capital Capital ------- ------- --------- -------- -------- GAAP capital, as reported $16,907 $16,907 $16,907 $16,907 $16,907 Unrealized gains on certain available-for- sale securities - (2,233) (2,233) (2,233) General valuation allowance - - - 217 ------- -------- -------- -------- Regulatory capital $16,907 14,674 14,674 14,891 ======= Minimum capital requirement % 1.50% 3.00% 8.00% Minimum capital requirement $ 3,032 6,065 5,846 -------- -------- -------- Regulatory capital excess $11,642 $ 8,609 $ 9,045 ======== ======== =======
CONTINUED F-26 HOPKINSVILLE FEDERAL SAVINGS BANK NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1996, 1995 AND 1994 MARCH 31, 1997 AND 1996 (UNAUDITED) 13. REGULATORY MATTERS (CONTINUED) At December 31, 1995, the Bank's core, tier I risk-based, and total risk- based capital ratios were 6.9%, 22.8%, and 20.7%, respectively. These ratios placed the Bank in the "well capitalized" category. The following is a calculation of the Bank's regulatory capital (in thousands) at December 31, 1995:
Tier I Total Risk- Risk- GAAP Based Tangible Core Based Capital Capital Capital Capital Capital ------- ------- --------- -------- -------- GAAP capital, as reported $16,097 $16,097 $16,097 $16,097 $16,097 Unrealized gains on certain available-for- sale securities - (1,606) (1,606) (1,606) General valuation allowance - - - 122 ------- ------- ------- ------- Regulatory capital $16,097 14,491 14,491 14,613 ======= Minimum capital requirement % 1.50% 3.00% 8.00% Minimum capital requirement $ 3,165 6,330 5,639 ------- ------- ------- Regulatory capital excess $11,326 $ 8,161 $ 8,974 ======= ======= =======
The OTS risk-based capital regulation also includes an interest rate risk ("IRR") component that requires savings institutions with greater than normal IRR, when determining compliance with the risk-based capital requirements, to maintain additional total capital. The OTS has, however, indefinitely deferred enforcement of its IRR requirements. Under the regulation, a savings institution's IRR is measured in terms of the sensitivity of its "net portfolio value" to changes in interest rates. A savings institution is considered to have a "normal" level of IRR exposure if the decline in its net portfolio value after an immediate 200 basis point increase or decrease in market interest rates is less than 2% of the current estimated economic value of its assets. If the OTS determines in the future to enforce the regulation's IRR requirements, a savings institution with a greater than normal IRR would be required to deduct CONTINUED F-27 HOPKINSVILLE FEDERAL SAVINGS BANK NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1996, 1995 AND 1994 MARCH 31, 1997 AND 1996 (UNAUDITED) 13. REGULATORY MATTERS (CONTINUED) from total capital, for purposes of calculating its risk-based capital requirement, an amount equal to one half the difference between the institution's measured IRR and 2%, multiplied by the economic value of the institution's total assets. Management does not believe that this regulation, when enforced, will have a material impact on the Bank. The United States Congress has passed legislation that resulted in an assessment on all Savings Association Insurance Fund ("SAIF") insured deposits in order to recapitalize the SAIF Fund. This one-time assessment amounted to approximately 66 basis points on SAIF assessable deposits held as of March 31, 1995. The assessment was payable no later than November 30, 1996 and amounted to approximately $1.23 million for the Bank. Such amount was charged to earnings at September 30, 1996. 14. PLAN OF CONVERSION On May 21, 1997, the Board of Directors adopted a Plan of Conversion to convert the Bank from a federally chartered mutual savings bank to a federally chartered stock savings bank, as a wholly-owned subsidiary of a holding company chartered under Delaware law by the Bank for the purpose of acquiring control of the Bank following consummation of the Bank's conversion. The sale of stock to be issued in the conversion must be offered first to members, and then, at the Bank's discretion, stock not purchased by members may be sold to the general public at the same price as is paid by members. Costs associated with the conversion will be deducted from the proceeds of the sale of stock. Should the conversion be abandoned, the costs of conversion will be charged to expense in the year of abandonment. At the time of conversion, the Bank will establish a liquidation account in the amount equal to the Bank's net worth as of the latest practicable date prior to conversion. The liquidation account will be maintained for the benefit of eligible deposit account holders who maintain their deposit accounts in the Bank after conversion. CONTINUED F-28 HOPKINSVILLE FEDERAL SAVINGS BANK NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1996, 1995 AND 1994 MARCH 31, 1997 AND 1996 (UNAUDITED) 14. PLAN OF CONVERSION (CONTINUED) In the event of a complete liquidation (and only in such an event) and prior to any payment to stockholders, each eligible deposit account holder will be entitled to receive a liquidation distribution from the liquidation account in an amount proportionate to the depositor's current adjusted balance for deposit accounts held before any liquidation. Except for the repurchase of stock and payment of dividends by the Bank, the existence of the liquidation account will not restrict the use or application of such net worth. The Bank may not declare or pay a cash dividend on or repurchase any of its capital stock if the effect thereof would cause the Bank's net worth to be reduced below the capital requirements imposed by the OTS. F-29 EXHIBIT VIII ================================================================================ NATIONAL CAPITAL COMPANIES, LLC FINANCIAL SERVICES ADVISORY GROUP MISSION STATEMENT ------------------------------------------------- "...NATIONAL CAPITAL BRINGS TOGETHER INNOVATIVE SOLUTIONS WITH IMPLEMENTATION RESOURCES TO ASSIST MANAGEMENT IN ACHIEVING SPECIFIC CAPITAL AND OPERATIONAL OBJECTIVES..." NATIONAL CAPITAL COMPANIES, LLC ------------------------------------------------- ================================================================================ ================================================================================ . THIS IS NATIONAL CAPITAL COMPANIES National Capital Companies, LLC ("National Capital") is a financial advisory firm that specializes in working with financial institutions. While National Capital has grown significantly and diversified into other areas of investment banking since its inception, the company's primary focus is to serve the financial services industry. National Capital has offices in Chevy Chase, Maryland and Dover, Ohio. National Capital and its affiliated companies have served more than 150 financial services companies throughout the United States. Since our founding in 1986, we have been dedicated to advising companies on capital strategies and mergers and acquisitions. We have assisted companies throughout the United States as well as serving as the Managing Member of FINANCIAL INSTITUTION PARTNERS, LLC, a fund which invests primarily in the equity securities of publicly-traded financial institutions. We are a small firm by choice. Our experienced professionals work on every facet of the engagement from beginning to end rather than transferring the work to junior associates. This leads to superior results which is part of the National Capital difference. Our record of performance has earned us the confidence of our clients. Our goal is to build upon this record by earning your confidence as well. . WHY ENGAGE NATIONAL CAPITAL? Simply put, we specialize in serving the financial services industry and have an unsurpassed ability to deliver. We have owned and operated a variety of small and middle market companies including financial institutions, as well as advising numerous others. Accordingly, we have the practical experience necessary whether we are serving as a management consultant, financial advisor or investment banker. When you engage us, you engage a team of experienced professionals who will provide you with the critical difference that will enable you to succeed in your company's objectives with respect to capital strategies and mergers and acquisitions. . CAPITAL STRATEGIES While most financial services companies have the capability to manage the daily operational issues that confront them, many need assistance in evaluating capital strategies. Our subsidiary, Potomac Securities, Inc., ("Potomac Securities") is an SEC registered, NASD member broker-dealer than can assist companies tap the capital markets. This is one major difference that National Capital affords companies today. Not only do we provide expert advisory services, but we have the ability to implement capital strategies. 1 ================================================================================ ================================================================================ ------------------------------------------------------------- Capital Strategies include: . analysis of public versus private capital market opportunities; . initial and secondary offerings of common stock; . mutual to stock conversions; . preferred stock issuance; . subordinated debt issuance; and . holding company debt arrangements and restructuring. ------------------------------------------------------------- . MERGERS AND ACQUISITIONS National Capital has the human resource skills, technical perspective and the regulatory expertise necessary to successfully consummate merger and acquisition transactions whether we represent the seller or the buyer. ------------------------------------------------------------- Merger and Acquisition Services include: . development of merger objectives and criteria; . targeting/screening of potential candidates; . selection and contact of potential merger parties; . negotiation with merger parties and regulators; . due diligence; . regulatory filings; . fairness opinions and pro-forma market valuations; . post-acquisition integration issues; and purchase price allocation. ------------------------------------------------------------- 2 ================================================================================ ================================================================================ * FIRM QUALIFICATIONS National Capital is unique to the financial institutions industry in that we have served as financial advisors to a number of financial institutions. In fact, we have advised over 150 financial institutions since our founding in 1986. While not all inclusive, some of our past financial services clients include: VALUATION SERVICES . Centennial Financial Corporation . Gateway Bancorp, Inc. . Geauga Savings Bank . Greater Delaware Valley Savings Bank . Roxborough-Manayunk Federal Savings and Loan Association . Sulphur Springs Loan and Building Association EQUITY OFFERINGS . Camco Financial Corporation . FFD Financial Corporation . First Keystone Federal Savings Bank . Glenway Financial Corporation . Greater Delaware Valley Savings Bank . Jefferson Savings & Loan Association, FA . North Cincinnati Savings Bank . Southern Financial Bancorp. Inc. . USA Bancshares, Inc. FINANCIAL ADVISORY SERVICES . Bank West Financial Corporation . First Federal Savings Bank of Dover . First Franklin Corporation . First Savings Bank of Virginia MERGERS AND ACQUISITIONS . Advanta Corporation . Camco Financial Corporation . Charter Oak Financial Corporation . First Harrisburg Bancor, Inc. . Glenway Financial Corporation . ITT Consumer Financial Services 3 ================================================================================ ================================================================================ . ACCOMPLISHMENTS Accomplishments are the true mark of any firm. National Capital has an impressive record of accomplishments, including: . National Capital, through an affiliate, has served as underwriter in the conversion to the stock form of organization of a number of mutually-chartered thrifts. National Capital has also been involved in transactions where mutual holding companies have been formed. . National Capital has served as financial advisor to thrifts converting from the mutual to the stock form of organization. In this role National Capital has prepared an independent appraisal of the thrift to determine the amount of stock to be sold in the conversion, among other matters. . National Capital has served as financial advisor to financial institutions who have acquired other financial institutions. This role has included identification of acquisition targets, negotiation of terms and the rendering of fairness opinions on the transactions. . National Capital has served as financial advisor to financial institutions who have been acquired by other financial institutions. This role has included the identification of potential acquired, negotiation of merger terms and the rendering of fairness opinions on the transaction. . National Capital, through an affiliate, has served as underwriter in equity offerings by stock financial institutions. Additionally, National Capital has been involved with de novo bank formations, including the development of business plans, issuance of equity and regulatory filings. . National Capital has also provided a variety of other services to financial institutions including: strategic planning assistance, business plan development, troubled asset resolution, capital planning, asset liability structure analysis, mark-to-market analysis, due diligence assistance and management organization and structure evaluation. HOW WE WORK When you engage us, we become part of your team. We represent your interests exclusively and pride ourselves on our integrity, commitment and action-oriented investment banking and advisory services. Upon commencing an engagement, we meet with management and fully discuss and analyze the company's goals and objectives. We develop a work plan together that is specifically tailored to our client's needs. 4 ================================================================================ ================================================================================ Our commitment to our clients is best exemplified in the quality of the professionals that are dedicated to serve you. All of our professionals are problem solvers who have extensive experience in their areas of expertise. We understand that the dynamics of companies vary and as such, we carefully select our professionals so that the skills, styles and personalities match the situation to which they are assigned. We believe in thorough, effective and timely communication with the members of management and the Board of Directors. We are totally dedicated to achieving the goals and objectives of our clients. This is the National Capital difference. . PROFESSIONALS The cornerstone of the services that are provided by National Capital is the key professionals who possess a wide array of experience and accomplishments and an unsurpassed ability to deliver. Below you will find the resumes of the National Capital's professionals. STEPHEN CLINTON Mr. Clinton serves as President of National Capital. Mr. Clinton serves National Capital as its senior financial institution analyst and directs research related to the financial institution industry. His experience includes advising financial institutions in all major areas including strategic planning, capital strategies, mergers and acquisitions, troubled asset resolution, asset/liability management and operations. Mr. Clinton has extensive experience working closely with clients in the development and implementation of strategic and capital plans. Mr. Clinton has served as a financial advisor to financial institutions since joining National Capital. He has consulted with clients related to mergers and acquisition strategies, equity offerings, mutual-to-stock conversions, recapitalization strategies, development of capital and business plans, performed valuations and assisted in due diligence of acquisition targets. He is also an editor of Financial Market Highlights which is published by National --------------------------- Capital. Additionally, Mr. Clinton serves on the investment committee of Financial Institution Partners, LLC, a partnership managed by National Capital formed primarily to invest in equity securities of financial institutions. Prior to joining National Capital in 1990, Mr. Clinton served as the President and Chief Executive Officer of a Midwestern savings bank. Previously he had served in the capacities of Chief Operating Officer and Chief Financial Officer during his career in the financial institutions industry. Mr. Clinton holds a B.B.A. in Finance from Kent State University and an M.B.A from Ashland University. He is also a graduate of The Ohio State University's Financial Management Program for Savings and Loan Executives. He currently serves on the Board of Directors of a Midwest financial institution. Mr. Clinton is a licensed NASD General Securities Principal and Registered Representative. LOUIS M. MAYBERG Mr. Mayberg is a Managing Director and Principal of National Capital. He serves as President of Potomac Services and is responsible for directing the security activities of the firm. Mr. Mayberg has been involved in equity and debt financing for financial institutions since 1986. In this capacity, he assists clients in the implementation of public and private capital raising activities and maintains relationships with numerous other broker-dealer firms which participate in selling groups and make markets in thrift and bank stocks. 5 ================================================================================ ================================================================================ Mr. Mayberg has served as a financial advisor to numerous companies and specializes in financial restructuring, evaluation of capital market alternatives and strategic planning issues related to corporate growth through mergers and acquisitions. Mr. Mayberg is also actively involved in the restructuring and turnaround of publicly- and closely-held businesses. His experience also includes commercial and residential real estate workouts. Mr. Mayberg serves on the investment committee of Financial Institutions Partners, LLC and is responsible for the management of the investment portfolio. From August 1983 until February 1986, he was a consultant with Deloitte Haskins & Sells, New York Region. In February 1986, he left Deloitte Haskins & Sells to form National Capital. Mr. Mayberg is a graduate of The George Washington University with a B.B.A. in Finance. He has served and currently serves on the Board of Directors of various companies serving a variety of industries including banking, real estate and high technology. Mr. Mayberg is a licensed NASD General Securities Principal and Registered Representative. JACKIE L. MACDONALD Ms. MacDonald serves as a Research Analyst and Sales Associate for National Capital. Ms. MacDonald joined National Capital in August 1996. Her responsibilities include analytical and technical support of our investment banking and advisory services. She has assisted in the development of client business plans, valuations, merger and acquisition strategies, equity offerings and mutual-to-stock conversions. Prior to joining National Capital, Ms. MacDonald served in a variety of positions with G.E. Capital. Ms. MacDonald graduated magna cum laude with a B.A. in Marketing from The University of Akron. She is a licensed NASD Registered Representative. 6 ================================================================================ ================================================================================ ---------------------------------------------------------- NATIONAL CAPITAL COMPANIES, LLC POTOMAC SECURITIES, INC. ---------------------------------------------------------- =================================================================== FOR FURTHER INFORMATION: For a more complete description of National Capital's services as they may apply to your company, as well as to discuss your company's objectives directly with one of our key professionals, please contact: STEPHEN CLINTON, PRESIDENT * All inquiries will be handled in the strictest confidence.* =================================================================== =================================================================== WASHINGTON, D.C. METROPOLITAN AREA OHIO OFFICE ----------------- ----------- The Park Avenue Centre P.O.Box 147 4600 N. Park Avenue Dover, OH 44622 Suite 100 or Chevy Chase, MD 20815 (328 Race Street Dover, OH 44622 (301) 657-0850 (330) 364-3345 =================================================================== 7 ================================================================================ NATIONAL CAPITAL COMPANIES, LLC EXHIBIT IX RB 20 CERTIFICATION I hereby certify that I have not been the subject of any criminal, civil or administrative judgments, consents, undertakings or orders, or any past or ongoing indictments, formal investigations, examinations, or administrative proceedings (excluding routine or customary audits, inspections and investigations) issued by any federal or state court, any department, agency or commission of the U.S. Government, any state or municipality, any self-regulatory trade or professional organization, or any foreign government or governmental entity, which involve: (i) commission of a felony, fraud, moral turpitude, dishonesty or breach of trust: (ii) violation of securities or commodities laws or regulations; (iii) violation of depository institution laws or regulations; (iv) violation of housing authority laws or regulations; (v) violation of the rules, regulations, codes of conduct or ethics of a self-regulatory trade or professional organization; (vi) adjudication of bankruptcy or insolvency or appointment of a receiver, conservator, trustee, referee or guardian. I hereby certify that the statements I have made herein are true, complete and correct to the best of my knowledge and belief. Conversion Appraiser June 17,1997 /s/ Stephen Clinton ------------------ ------------------------------------ DATE STEPHEN CLINTON President National Capital Companies, LLC NATIONAL CAPITAL COMPANIES, LLC EXHIBIT X AFFIDAVIT OF INDEPENDENCE ------------------------- STATE OF OHIO, COUNTY OF TUSCARAWAS I, Stephen Clinton, President of National Capital Companies, LLC ("National Capital"), being first duly sworn hereby depose and say that: The fee which National Capital received from the applicant, Hopkinsville Federal Savings Bank, Hopkinsville, Kentucky in the amount of $25,000 for the preparation of our appraisal and regulatory business plan was not related to the value determined in the appraisal; that the undersigned appraiser is independent and has fully disclosed to the Office of Thrift Supervision any relationships which may have a material bearing upon the question of our independence; and that nay indemnity agreement with the applicant has been fully disclosed in a written statement to the Office of Thrift Supervision. Further, affiant sayeth naught. /s/ Stephen Clinton ------------------------------------- STEPHEN CLINTON President National Capital Companies, LLC Sworn to before me and subscribed in my presence this 17th day of June, 1997. /s/ Jennifer L. Thomas ------------------------------------- NOTARY PUBLIC [SEAL APPEARS HERE] -----END PRIVACY-ENHANCED MESSAGE-----