<PAGE>
As filed with the Securities and Exchange Commission on August 12, 1996
Registration No. 333-2470
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
AMENDMENT NO. 2
TO
FORM S-1
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
(INCLUDING EXHIBITS)
CHESTER BANCORP, INC.
----------------------------------------------------
(Exact name of registrant as specified in charter)
Delaware 6035 37-1359570
- ---------------------------- --------------- ------------------
(State or other jurisdiction (Primary SICC No.) (I.R.S. Employer
of incorporation or Identification No.)
organization)
1112 State Street
Chester, Illinois 62233-1659
(618) 826-5038
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(Address and telephone number of principal executive offices)
John F. Breyer, Jr., Esquire
Victor L. Cangelosi, Esquire
BREYER & AGUGGIA
Suite 470 East
1300 I Street, N.W.
Washington, D.C. 20005
------------------------------
(Name and address of agent for service)
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after this registration statement becomes effective.
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 of 1933, please check the
following bow 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 of 1933, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
<TABLE>
<CAPTION>
===================================================================================================================================
Calculation of Registration Fee
===================================================================================================================================
<S> <C> <C> <C> <C>
Title of Each Class of Securities Proposed Proposed Proposed Maximum Amount of
Being Registered Maximum Offering Aggregate Offering Registration Fee
Amount Being Price(1) Price(1)
Registered(1)
- -----------------------------------------------------------------------------------------------------------------------------------
Common Stock, $0.01 Par Value 2,314,375 $10.00 $23,143,750 $7,981(2)
===================================================================================================================================
</TABLE>
(1) Estimated solely for purposes of calculating the registration fee. As
described in the Prospectus, the actual number of shares to be issued and
sold are subject to adjustment based upon the estimated pro forma market
value of the registrant and market and financial conditions.
(2) Previously paid.
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.
<PAGE>
Cross Reference Sheet showing the location in the Prospectus
of the Items of Form S-1
<TABLE>
<CAPTION>
<S> <C> <C>
1. Forepart of the Registration Forepart of the Registration
Statement and Outside Statement; Outside Front
Front Cover of Prospectus Cover Page
2. Inside Front and Outside Inside Front Cover Page;
Back Cover Pages of Outside Back Cover Page
Prospectus
3. Summary Information, Risk Prospectus Summary; Risk
Factors and Ratio of Factors
Earnings to Fixed Charges
4. Use of Proceeds Use of Proceeds; Capitalization
5. Determination of Market for Common Stock
Offering Price
6. Dilution *
7. Selling Security Holders *
8. Plan of Distribution The Conversion
9. Description of Securities to Description of Capital Stock
be Registered
10. Interests of Named Experts Legal and Tax Opinions; Experts
and Counsel
11. Information with Respect to
the Registrant
(a) Description of Business Business of the Holding Company;
Business of the Bank
(b) Description of Property Business of the Bank -- Properties
(c) Legal Proceedings Business of the Bank -- Legal
Proceedings
(d) Market Price of and Dividends Outside Front Cover Page; Market
on the Registrant's Common Equity for Common Stock; Dividend Policy
and Related Stockholder Matters
(e) Financial Statements Financial Statements; Pro Forma
Data
(f) Selected Financial Data Selected Financial and Other Data
(g) Supplementary Financial *
Information
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C>
(h) Management's Discussion and Management's Discussion and
Analysis of Financial Condition Analysis of Financial Condition
and Results of Operations and Results of Operations
(i) Changes in and Disagreements *
with Accountants on Accounting
and Financial Disclosure
(j) Directors and Executive Management of the Holding Company;
Officers Management of the Bank
(k) Executive Compensation Management of the Holding Company;
Management of the Bank -- Benefits
-- Executive Compensation
(l) Security Ownership of Certain *
Beneficial Owners and Management
(m) Certain Relationships and Management of the Bank --
Related Transactions Transactions with the Bank
12. Disclosure of Commission Position Part II - Item 17
on Indemnification for Securities
Act Liabilities
</TABLE>
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*Item is omitted because answer is negative or item inapplicable.
<PAGE>
Chester Bancorp, Inc.
Up to 1,897,500 Shares of Common Stock (Anticipated Maximum)
(Proposed Holding Company for Chester Savings Bank, FSB to become
Chester National Bank and Chester National Bank of Missouri)
Chester Bancorp, Inc. ("Holding Company"), a Delaware corporation, is
offering between 1,402,500 and 1,897,500 shares of its common stock, $.01 par
value per share ("Common Stock"), in connection with the conversion of Chester
Savings Bank, FSB ("Savings Bank") from a federally chartered mutual savings
bank to a federally chartered capital stock savings bank ("Converted Savings
Bank") and the issuance of the Savings Bank's capital stock to the Holding
Company. The conversion of the Savings Bank to the Converted Savings Bank and
the acquisition of the Converted Savings Bank by the Holding Company are
collectively referred to herein as the "Stock Conversion." Immediately following
consummation of the Stock Conversion, the Converted Savings Bank intends to
convert from a federal stock savings bank to a national bank ("Bank
Conversion"), to be known as "Chester National Bank" ("Converted Bank"). In
connection with the Bank Conversion, the Holding Company will form a de novo
national bank subsidiary headquartered in Perryville, Missouri, to be known as
"Chester National Bank of Missouri" ("De Novo Bank"), which, following a $3.0
million initial capitalization funded by a portion of the Stock Conversion
proceeds, will purchase all of the installment loans and a portion of the
mortgage loans of the Savings Bank's branch office located in Perryville,
Missouri ("Bank Formation"). The Converted Bank and the De Novo Bank are
collectively referred to herein as the "Banks." The Stock Conversion, the Bank
Conversion and the Bank Formation are referred to herein collectively as the
"Conversion" and are being undertaken pursuant to a plan of conversion adopted
by the Board of Directors of the Savings Bank ("Plan" or "Plan of
Conversion"). Consummation of the Stock Conversion, Bank Conversion, and Bank
Formation are anticipated simultaneously; however, the timing of receipt of
certain regulatory approvals may delay consummation of the Stock Conversion
and/or result in the Bank Conversion and Bank Formation occurring after the
Stock Conversion. See "RISK FACTORS -- Risk of Delayed Offering."
Pursuant to the Plan, nontransferable rights to subscribe for the Common
Stock ("Subscription Rights") have been granted, in order of priority, to
(i) depositors with $50.00 or more on deposit at the Savings Bank as of
January 15, 1995 ("Eligible Account Holders"), (ii) the Banks' employee stock
ownership plan ("ESOP"), a tax-qualified employee benefit plan, (iii)
depositors with $50.00 or more on deposit at the Savings Bank as of June 30,
1996 ("Supplemental Eligible Account Holders"), and (iv) depositors of the
Savings Bank as of July 19, 1996 ("Voting Record Date") and borrowers of the
Savings Bank with loans outstanding as of December 18, 1989, which continue
to be outstanding as of the Voting Record Date ("Other Members"), subject to
the priorities and purchase limitations set forth in the Plan of Conversion
("Subscription Offering"). Subscription Rights are nontransferable. Persons
selling or otherwise transferring their Subscription Rights to subscribe for
Common Stock in the Subscription Offering or subscribing for Common Stock on
behalf of another person will be subject to forfeiture of such rights and
possible further sanctions and penalties imposed by the Office of Thrift
Supervision ("OTS") or another agency of the United States Government. See
"THE CONVERSION -- The Subscription, Direct Community and Public Offerings"
and "-- Limitations on Purchases of Shares." After, but subject to the prior
rights of holders of Subscription Rights, the Holding Company is offering the
Common Stock for sale to members of the general public through a direct
community offering ("Direct Community Offering") with preference given to
natural persons who are permanent residents of Randolph, Perry or Jackson
counties of Illinois or Perry County, Missouri ("Local Community"), subject to
the right of the Holding Company to accept or reject orders in whole or in part
in the Direct Community Offering. The Subscription Offering and the Direct
Community Offering are referred to herein as the "Subscrip-tion and Direct
Community Offering." Depending on market conditions, the shares of Common Stock
may be offered for sale in the Direct Community Offering to eligible members of
the general public on a best efforts basis by a selling group of broker-dealers
managed by EVEREN Securities, Inc. ("EVEREN Securities"). In addition, depending
on market conditions upon the completion of the Direct Community Offering, any
shares not subscribed for in the Subscription and Direct Community Offering may
be offered to the general public in an underwritten public offering ("Public
Offering") to be managed by EVEREN Securities. The Subscription and Direct
Community Offering and the Public Offering are referred to collectively as the
"Offerings."
FOR INFORMATION ON HOW TO SUBSCRIBE FOR SHARES OF COMMON STOCK, CALL THE
CONVERSION CENTER AT (618) 826-3217 AND ASK FOR AN EVEREN SECURITIES, INC.
REPRESENTATIVE.
--------------------------
FOR A DISCUSSION OF CERTAIN RISKS THAT SHOULD BE CONSIDERED BY EACH
PROSPECTIVE INVESTOR, SEE "RISK FACTORS" BEGINNING ON PAGE 1.
--------------------------
THE SECURITIES OFFERED HEREBY ARE NOT DEPOSITS OR ACCOUNTS AND WILL NOT BE
INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION ("FDIC"),
THE SAVINGS ASSOCIATION INSURANCE FUND ("SAIF"), BANK INSURANCE FUND
("BIF") OR ANY OTHER GOVERNMENT AGENCY.
--------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION ("SEC"), THE OTS, THE FDIC OR ANY OTHER FEDERAL AGENCY OR
ANY STATE SECURITIES COMMISSION, NOR HAS THE SEC, THE OTS, THE FDIC OR ANY OTHER
AGENCY OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY
OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
EVEREN Securities, Inc. (continued on the next page)
The date of this Prospectus is , 1996
------ --
<PAGE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------
Estimated Underwriting
Purchase and Other Fees and Estimated Net
Price(1) Expenses(2) Proceeds(3)
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<S> <C> <C> <C>
Minimum Price Per Share .................... $10.00 $0.46 $9.54
- --------------------------------------------------------------------------------------------------------
Midpoint Price Per Share ................... $10.00 $0.39 $9.61
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Maximum Price Per Share .................... $10.00 $0.34 $9.66
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Maximum Price Per Share, as adjusted(4) .... $10.00 $0.30 $9.70
- --------------------------------------------------------------------------------------------------------
Minimum Total(5) ........................... $14,025,000 $650,000 $13,375,000
- --------------------------------------------------------------------------------------------------------
Midpoint Total(6) .......................... $16,500,000 $650,000 $15,850,000
- --------------------------------------------------------------------------------------------------------
Maximum Total(7) ........................... $18,975,000 $650,000 $18,325,000
- --------------------------------------------------------------------------------------------------------
Maximum Total, as adjusted(4)(8) ........... $21,821,250 $650,000 $21,171,250
- --------------------------------------------------------------------------------------------------------
</TABLE>
(1) Determined in accordance with an independent appraisal prepared by
RP Financial, LC. ("RP Financial") as of June 14, 1996, as updated
as of August 2, 1996, which states that the estimated aggregate pro
forma market value of the Holding Company and the Savings Bank as
converted ranged from $14,025,000 to $18,975,000, with a midpoint of
$15,600,000 ("Estimated Valuation Range"). Based on the Estimated
Valuation Range, the Board of Directors of the Savings Bank
established the estimated aggregate price range of $14,025,000 to
$18,975,000, or between 1,402,500 and 1,897,500 shares of Common
Stock at the $10.00 price per share ("Purchase Price"). The final
aggregate Purchase Price, which will be determined at the time of
the closing of the Subscription and Direct Community Offering, is
subject to change due to material changes in the financial condition
or performance of the Savings Bank or in market conditions or
general financial or economic conditions. RP Financial's appraisal
is based upon estimates and projections that are subject to change,
and the valuation must not be construed as a recommendation as to
the advisability of purchasing such shares or that a purchaser 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."
(2) Includes estimated costs to the Holding Company and the Savings Bank
arising from the Conversion, including fees to be paid to EVEREN
Securities in connection with the Offerings. Such fees may be
deemed to be underwriting fees and EVEREN Securities may be deemed
to be an underwriter. Expenses of the Conversion are estimated to
total approximately $650,000. Actual expenses, and thus net
proceeds, may be more or less than estimated amounts. The Holding
Company and the Savings Bank have agreed to indemnify EVEREN
Securities against certain liabilities, including liabilities that
may arise under the Securities Act of 1933, as amended ("Securities
Act"). See "USE OF PROCEEDS" and "THE CONVERSION -- Plan of
Distribution for the Subscription, Direct Community and Public
Offerings."
(3) Actual net proceeds may vary substantially from the estimated
amounts depending upon the relative number of shares sold in the
Offerings. See "USE OF PROCEEDS" and "PRO FORMA DATA."
(4) Gives effect to an increase in the number of shares which could be
sold in the Conversion, either in the Subscription Offering, Direct
Community Offering or Public Offering, due to an increase in the pro
forma market value of the Holding Company and the Savings Bank as
converted up to 15% above the maximum of the Estimated Valuation
Range, without the resolicitation of subscribers or any right of
cancellation. The ESOP shall have a first priority right to
subscribe for such additional shares up to an aggregate of 8% of the
Common Stock issued in the Conversion. The issuance of such
additional shares will be conditioned on a determination by RP
Financial that such issuance is compatible with its determination of
the estimated pro forma market value of the Holding Company and the
Savings Bank, as converted and the approval of the OTS. See "THE
CONVERSION -- Stock Pricing and Number of Shares to be Issued."
(5) Assumes the issuance of 1,402,500 shares at $10.00 per share.
(6) Assumes the issuance of 1,650,000 shares at $10.00 per share.
(7) Assumes the issuance of 1,897,500 shares at $10.00 per share.
(8) Assumes the issuance of 2,182,125 shares at $10.00 per share.
With the exception of the ESOP, which is expected to purchase 8% of
the Common Stock issued in the Stock Conversion, subject to the approval
of the OTS, no Eligible Account Holder, Supplemental Eligible Account
Holder or Other Member may subscribe in their capacity as such in the
Subscription Offering for shares of Common Stock having an
aggregate purchase price of more than $400,000 (40,000 shares based on
the
<PAGE>
Purchase Price); no person may purchase in the Direct Community
Offering more than $400,000 (40,000 shares based on the Purchase Price);
and no person, together with associates of and persons acting in
concert with such person, may purchase in the Direct Community Offering
and the Public Offering more than 9.99% of the shares of Common Stock
issued in the Conversion; and no person, together with associates and
persons acting in concert with such person, may purchase more than 9.99%
of the shares of Common Stock issued in the Offerings. Under certain
circumstances, the maximum purchase limitation may be increased or
decreased at the sole discretion of the Savings Bank and the Holding
Company. See "THE CONVERSION -- The Subscription, Direct Community and
Public Offerings" and "-- Procedure for Purchasing Shares in the
Subscription and Direct Community Offering" for other purchase and sale
limitations. The minimum subscription is 25 shares.
The Subscription Offering will expire at Noon, Central Time, on
, 1996 ("Expiration Date"), unless extended by the Savings Bank and
-----
the Holding Company for up to days to , 1996. Such
-- -----------
extension may be granted without additional notice to subscribers. The
Direct Community Offering, if any, is also expected to terminate at ,
----
Central Time, on , 1996 or at a date thereafter, however, in no
------
event later than , 1996. The Holding Company must receive at
---------
the Savings Bank's main office the accompanying original Stock Order Form
(facsimile copies and photocopies will not be accepted) and a fully
executed separate Certification Form ("Certification Form") along with
full payment (or appropriate instructions authorizing a withdrawal from a
deposit account at the Savings Bank) of $10.00 per share for all shares
subscribed for or ordered by the Expiration Date. Funds so received will
be placed in segregated accounts created for this purpose at the Savings
Bank, and interest will be paid at the passbook rate from the date
payment is received until the Conversion is consummated or terminated.
These funds will be otherwise unavailable to the depositor until such
time. Payments authorized by withdrawals from deposit accounts will
continue to earn interest at the contractual rate until the Conversion is
consummated or terminated, although such funds will be unavailable for
withdrawal until the Conversion is consummated or terminated. Payment for
shares of Common Stock by wire transfer will not be accepted. Orders
submitted are irrevocable until the consummation of the Conversion. If
the Conversion is not consummated within 45 days after the last day of
the Subscription and Direct Community Offering (which date will be no
later than , 1996) and the OTS consents to an extension of
--------- --
time to consummate the Conversion, subscribers will be notified in
writing of the time period within which the subscriber must notify the
Savings Bank of his or her intention to increase, decrease or rescind his
or her subscription. If an affirmative response to any such
resolicitation is not received by the Holding Company or the Savings Bank
from subscribers, such orders will be rescinded and all funds will be
returned promptly with interest. If such period is not extended or, in
any event, if the Conversion is not consummated by , 1996, all
--------
subscription funds will be promptly returned, together with accrued
interest, and all withdrawal authorizations terminated.
The Savings Bank and the Holding Company have engaged EVEREN
Securities as their financial advisor and to assist the Holding Company
in the sale of the Common Stock in the Offerings. In addition, in the
event the Common Stock is not fully subscribed for in the Subscription
and Direct Community Offering, EVEREN Securities will manage the Public
Offering. Neither EVEREN Securities nor any other registered broker-
dealer is obligated to take or purchase any shares of Common Stock in the
Offerings. The Holding Company and the Savings Bank reserve the right,
in their absolute discretion, to accept or reject, in whole or in part,
any or all orders in the Direct Community or Public Offerings either at
the time of receipt of an order or as soon as practicable following the
termination of the Offerings. See "THE CONVERSION -- Plan of
Distribution for the Subscription, Direct Community and Public
Offerings."
Prior to the Offerings, the Holding Company has not issued any
capital stock and accordingly there has been no market for the shares
offered hereby. There can be no assurance that an active and liquid
trading market for the Common Stock will develop or, if developed, will
be maintained. See "RISK FACTORS -- Absence of Prior Market for the
Common Stock." The Holding Company has received conditional approval to
list the Common Stock on the Nasdaq National Market under the symbol
"CNBA." EVEREN Securities has advised the Holding Company that it
intends to act as a market maker for the Holding Company's Common Stock
following the Conversion. See "MARKET FOR COMMON STOCK."
<PAGE>
Chester Bancorp, Inc.
Chester, Illinois
THE CONVERSION IS CONTINGENT UPON APPROVAL OF THE PLAN OF CONVERSION BY
AT LEAST A MAJORITY OF THE ELIGIBLE VOTING MEMBERS OF THE SAVINGS BANK,
THE SALE OF AT LEAST 1,402,500 SHARES OF COMMON STOCK PURSUANT
TO THE PLAN OF CONVERSION, AND RECEIPT OF ALL APPLICABLE REGULATORY
APPROVALS.
<PAGE>
- -------------------------------------------------------------------------------
THE SECURITIES OFFERED HEREBY ARE NOT DEPOSITS OR ACCOUNTS AND WILL NOT BE
INSURED OR GUARANTEED BY THE FDIC, THE SAIF OR ANY OTHER GOVERNMENT AGENCY.
- -------------------------------------------------------------------------------
PROSPECTUS SUMMARY
The information set forth below should be read in conjunction with and is
qualified in its entirety by the more detailed information and Financial
Statements (including the Notes thereto) presented elsewhere in this Prospectus.
The purchase of Common Stock is subject to certain risks. See "RISK FACTORS."
Chester Bancorp, Inc.
The Holding Company is a Delaware corporation organized in March 1996 at
the direction of the Savings Bank for the purpose of serving as the holding
company of the Converted Savings Bank upon consummation of the Stock Conversion,
and of the Converted Bank and the De Novo Bank following consummation of the
Bank Conversion and the Bank Formation, respectively. The Holding Company has
engaged in organizational activities only to date. The Holding Company has
received OTS approval to become a savings and loan holding company through the
acquisition of the Converted Savings Bank. The Holding Company also has received
approval from the Board of Governors of the Federal Reserve System ("Federal
Reserve") to become a bank holding company under the Bank Holding Company Act,
as amended ("BHCA"), through the acquisition of the Converted Bank and the De
Novo Bank. Immediately following the Stock Conversion, the only significant
assets of the Holding Company will be all of the outstanding capital stock of
the Converted Savings Bank (and, following the Bank Conversion and the Bank
Formation, all of the outstanding capital stock of the Converted Bank and the De
Novo Bank), that portion of the Conversion proceeds permitted by the OTS to be
retained by the Holding Company and a note receivable from the ESOP. The Holding
Company has received approval from the OTS to retain 50% of the net proceeds
received in the Conversion, after deducting amounts necessary to fund the ESOP.
See "USE OF PROCEEDS." Upon consummation of the Conversion, the Holding
Company's principal business will be the business of the Converted Bank and the
De Novo Bank. Management believes that the holding company structure and
retention of proceeds could facilitate possible geographic expansion and
diversification through future acquisitions of other financial institutions and
national banks such as other mutual or stock savings institutions and also
enable the Holding Company to diversify, should it decide to do so, into a
variety of banking-related activities other than transactions described herein.
There are no present plans, arrangements, agreements, or understandings, written
or oral, regarding any such acquisitions or activities. The holding company
structure will also facilitate the repurchase of shares in the open market,
subject to regulatory restrictions and market conditions. The principal office
of the Holding Company is located at 1112 State Street, Chester, Illinois 62233,
and its telephone number is (618) 826-5038.
Chester Savings Bank, FSB
The Savings Bank is a federally chartered mutual savings bank located in
Chester, Illinois, which is approximately 60 miles south of St. Louis, Missouri.
Originally chartered in 1919 as an Illinois-chartered mutual savings and loan
association under the name "Chester Building and Loan Association," the Savings
Bank converted to a federal charter and adopted its current name in 1990. In
1989, the Savings Bank acquired Heritage Federal Savings and Loan Association
("Heritage Federal") which at the time of the acquisition had assets of
approximately $50 million and offices in Sparta, Red Bud and Pinckneyville,
Illinois. The Savings Bank is regulated by the OTS, its primary federal
regulator, and the FDIC, the insurer of its deposits. The Savings Bank's
deposits are federally insured by the FDIC under the SAIF. The Savings Bank is a
member of the Federal Home Loan Bank ("FHLB")
(i)
<PAGE>
System. At March 31, 1996, the Savings Bank had total assets of $136.8 million,
total deposits of $108.5 million and total equity of $11.9 million, or 8.7% of
total assets.
The Savings Bank is a community oriented financial institution which has
traditionally offered a variety of savings products to its retail customers
while concentrating its lending activities on real estate mortgage loans.
Lending activities have been focused primarily on the origination of loans
secured by one- to four-family residential dwellings. To a lesser extent,
lending activities also have included the origination of consumer loans and
commercial real estate and multi-family loans. At March 31, 1996, the Savings
Bank's gross loan portfolio totaled $56.7 million, of which 80.9% were one- to
four-family residential mortgage loans, 11.3% were consumer loans and 5.8% were
commercial real estate and multi-family loans. In addition, the Savings Bank has
maintained a significant portion of its assets in marketable securities. The
Savings Bank's investment portfolio has been weighted toward United States
Treasury and agency securities. This portfolio also has included a significant
amount of tax exempt state and municipal securities. In addition, the Savings
Bank has invested in mortgage-backed securities to supplement its lending
operations. Investment and mortgage-backed securities totaled $57.5 million and
$16.9 million, respectively, at March 31, 1996.
The Savings Bank's primary market area is comprised of Randolph, Perry,
Jackson and Williamson counties of Illinois and Perry and Cape Girardeau
counties in Missouri. The Savings Bank faces strong competition in its market
area. See "RISK FACTORS -- Dependence on Local Economy and Competition Within
Market Area." The Savings Bank's principal executive office is located at 1112
State Street, Chester, Illinois 62233, and its telephone number is (618) 826-
5038.
Chester National Bank and Chester National Bank of Missouri
Management of the Savings Bank believes that the Bank Conversion and
Bank Formation are in the best interests of the Savings Bank, its members and
the communities it serves. As national banks, the Banks will possess broader
investment and lending authorities than the Savings Bank now possesses as a
federally chartered savings bank, particularly in the areas of commercial real
estate and commercial business lending. See "RISK FACTORS -- Certain Loan
Underwriting Considerations and Risk of Lending Strategy" and " -- Bad
Debt Recapture."
Upon consummation of the Bank Conversion and the Bank Formation, the
Savings Bank will operate as a national bank. The Banks will succeed to all of
the assets and liabilities of the Converted Savings Bank (which, pursuant to the
Stock Conversion will have succeeded to all of the assets and liabilities of the
Savings Bank), and will initially continue to conduct business in substantially
the same manner as the Savings Bank prior to the Conversion. Over time, however,
management anticipates an increase in the percentage of commercial real estate
and commercial business loans in the Bank's loan portfolio subject to market
conditions. It is anticipated that the Banks will continue to diversify their
loan and deposit mix and add other services in connection with the Bank
Conversion and Bank Formation. Management anticipates considering the
introduction of a number of new business products including, debit cards, trust
powers, home equity loans and commercial deposits. Accordingly, management
anticipates that the Banks will incur initial start-up and ongoing expenses as
various programs and services are introduced or expanded and in connection with
the staffing, development and marketing of these products. These expenses could
negatively impact earnings for a period of time while the expected income from
these new programs and services increases to a degree sufficient to cover the
additional expenses. No final determination has been made by management in
connection with these services and products; therefore, no costs associated with
these services and products can be projected at this time. Diversification of
the Banks' loan portfolio is expected to alter each institution's risk profile.
Management believes, however, that the continued diversification of the Banks'
asset and deposit bases and the addition of new banking services are essential
for long-term earnings performance.
Upon the consummation of the Bank Conversion and Bank Formation, the
Banks' capital structure will resemble that of many recently converted mutual
thrift institutions, with relatively high capital levels. Subject to market
conditions, lending opportunities and other factors, however, the Banks expect
to continue their business strategy and will seek to deploy the capital received
in the Stock Conversion and Bank Formation into non-residential
(ii)
<PAGE>
lending so that their asset composition and capital structure will more closely
resemble that of national banks. This redeployment of funds may take a period of
time to accomplish and has certain risks associated with it. Non-residential
lending is generally considered to involve a higher degree of risk than
residential real estate lending. See "RISK FACTORS -- Return on Equity After
Conversion," "-- Certain Loan Underwriting Considerations" and "--Risks of
Lending Strategy."
Upon consummation of the Conversion, the Holding Company will be a bank
holding company regulated by the Federal Reserve. The deposits of the Converted
Bank will continue to be insured by the SAIF of the FDIC. Because the De Novo
Bank will acquire the deposits of the Savings Bank's Perryville Branch, which
are insured by the SAIF, the deposits of the De Novo Bank will also be insured
by the SAIF. Under current law, however, should the De Novo Bank acquire BIF-
insured deposits from another financial institution, such deposits would be BIF-
insured. Currently, there are no specific plans, arrangements, agreements or
understandings, written or oral, regarding any such acquisitions of BIF-insured
deposits. Accordingly, the Banks will continue to be subject to regulation and
supervision by the FDIC. The Banks will not be regulated and supervised by the
OTS, but rather by the Office of the Comptroller of the Currency ("OCC").
The Conversion
The Savings Bank is converting from a federally chartered mutual savings
bank to a federally chartered capital stock savings bank as a wholly owned
subsidiary of the Holding Company, and as soon as possible thereafter the
Converted Savings Bank intends to convert to a national bank, the Converted
Bank. The Converted Bank will be a national bank known as "Chester National
Bank." In connection with the Bank Conversion, the Holding Company will form the
De Novo Bank, to be known as "Chester National Bank of Missouri," which,
following a $3.0 million initial capitalization funded by a portion of the Stock
Conversion proceeds, will purchase all of the installment loans and a portion of
the mortgage loans of the Savings Bank's Perryville branch office. Upon
consummation of the Stock Conversion, the Converted Savings Bank will issue all
of its outstanding capital stock to the Holding Company in exchange for a
portion of the net proceeds from the sale of the Common Stock in the Stock
Conversion. Subject to receipt of all regulatory approvals, the Bank Conversion
and the Bank Formation would be consummated immediately thereafter and would
result in no change of management, directors, employees or office locations.
Consummation of the Conversion is subject to the approval of the Plan of
Conversion by the Savings Bank's members and the following regulatory approvals:
(i) OTS approval of the Plan of Conversion and the Holding Company's acquisition
of the Converted Savings Bank, (ii) OTS and OCC approvals of the Bank
Conversion, (iii) OCC approval of the Bank Formation, including the chartering
of the De Novo Bank, (iv) FDIC approval of insurance of accounts for the De Novo
Bank, and (v) Federal Reserve approval of the Holding Company's acquisition of
the Banks. While the Holding Company and the Savings Bank expect receipt of all
such approvals in a timely manner, delays in receiving any such approvals may
result in a significant delay in the consummation of the Conversion. See "RISK
FACTORS -- Risk of Delayed Offering."
The Plan of Conversion requires that the aggregate purchase price of the
Common Stock to be issued in the Stock Conversion be based upon an independent
appraisal of the estimated pro forma market value of the Holding Company and the
Banks as converted. RP Financial has advised the Savings Bank that in its
opinion, at June 14, 1996, as updated as of August 2, 1996, the aggregate
estimated pro forma market value of the Holding Company and the Savings Bank as
converted ranged from $14,025,000 to $18,975,000, or from 1,402,500 shares to
1,897,500 shares, assuming a $10.00 per share Purchase Price. The appraisal of
the pro forma market value of the Holding Company and the Savings Bank as
converted is based on a number of factors and should not be considered a
recommendation to buy shares of the Common Stock or any assurance that after the
Conversion shares of Common Stock will be able to be resold at or above the
Purchase Price. The appraisal will be updated or confirmed prior to the
consummation of the Stock Conversion.
(iii)
<PAGE>
The Savings Bank's Board of Directors has formed the Holding Company to
serve upon consummation of the Conversion as a holding company with the
Converted Savings Bank as its subsidiary, and, following the Bank Conversion and
the Bank Formation, the Banks as its subsidiaries. Management of the Savings
Bank believes that the Conversion offers a number of advantages which will be
important to the future growth and performance of the Savings Bank. The
Conversion is intended to: (i) provide substantially increased capital for
investment in its business to expand the operations of the Banks; (ii) provide
future access to capital markets; (iii) enhance the ability to expand through
mergers and acquisitions and to diversify its operations into new business
activities (currently, there are no specific plans, arrangements or
understandings, written or oral, regarding any such activities other than as
described herein); and (iv) afford depositors and others the opportunity to
become stockholders of the Holding Company and thereby participate more directly
in any future growth of the Banks.
The Subscription, Direct Community and Public Offerings
The Holding Company is offering up to 1,897,500 shares of Common Stock
at $10.00 per share to holders of Subscription Rights in the following order of
priority: (i) Eligible Account Holders; (ii) the Savings Bank's ESOP; (iii)
Supplemental Eligible Account Holders; and (iv) Other Members. In the event the
number of shares offered in the Conversion is increased above the maximum of the
Estimated Valuation Range, the Savings Bank's ESOP shall have a first priority
right to purchase any such shares exceeding the maximum of the Estimated
Valuation Range up to an aggregate of 8% of the Common Stock issued in the
Conversion. After, and subject to the prior rights of holders of Subscription
Rights, any shares of Common Stock not subscribed for in the Subscription
Offering may be offered in the Direct Community Offering to the general public
with preference being given to natural persons who are permanent residents of
the Local Community. The Holding Company and the Savings Bank have engaged
EVEREN Securities to consult with and advise the Holding Company and the Savings
Bank in the Offerings, and EVEREN Securities has agreed to use its best efforts
to assist the Holding Company with the solicitation of subscriptions and
purchase orders for shares of Common Stock in the Offerings. EVEREN Securities
is not obligated to take or purchase any shares of Common Stock in the
Offerings. If all shares of Common Stock to be issued in the Conversion are not
sold through the Subscription and Direct Community Offering, then the Holding
Company may offer the remaining shares in a Public Offering managed by EVEREN
Securities, which would occur as soon as practicable following the close of the
Subscription and Direct Community Offering but may commence during the
Subscription and Direct Community Offering, subject to the prior rights of
subscribers in the Subscription Offering and to the right of the Holding Company
to accept or reject orders in the Direct Community Offering and the Public
Offering in whole or in part. All shares of Common Stock will be sold at the
same price per share in the Public Offering as in the Subscription and Direct
Community Offering. Orders submitted are irrevocable until the consummation of
the Conversion. See "USE OF PROCEEDS," "PRO FORMA DATA" and "THE CONVERSION --
Stock Pricing and Number of Shares to be Issued." The Subscription Offering will
expire at Noon, Central Time, on , 1996, unless extended by the
-----------
Savings Bank and the Holding Company for up to days. The Direct Community
--
Offering and Public Offering, if any, are also expected to terminate on
, 1996, and may terminate on a date thereafter, however, in no
- --------- --
event later than , 1996.
-------- --
Restrictions on Transfer of Subscription Rights
Prior to the consummation of the Stock Conversion, no person may
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 the exercise of Subscription Rights.
Each person exercising Subscription Rights will be required to certify that a
purchase of Common Stock is solely for the purchasers' own account and there is
no agreement or understanding regarding the sale or transfer of such shares. The
Holding Company and the Savings Bank may pursue any and all legal and equitable
remedies in the event they become aware of the transfer of Subscription Rights
and will not honor orders known by them to involve the transfer or purported
transfer of Subscription Rights.
(iv)
<PAGE>
Prospectus Delivery and Procedure for Purchasing Common Stock
To ensure that each purchaser receives a Prospectus at least 48 hours
prior to the Expiration Date, in accordance with Rule 15c2-8 under the
Securities Exchange Act of 1934, as amended ("Exchange Act"), no Prospectus will
be mailed later than five days or hand delivered any later than two days prior
to the Expiration Date. Execution of the Stock Order Form will confirm receipt
or delivery of a Prospectus in accordance with Rule 15c2-8. Stock Order Forms
will be distributed only with a Prospectus.
To ensure that Eligible Account Holders, Supplemental Eligible Account
Holders, and Other Members are properly identified as to their stock purchase
priorities, such parties must list all deposit accounts, or in the case of Other
Members who are only borrowers, loans held at the Savings Bank, on the Stock
Order Form giving all names on each deposit account and/or loan and the account
and/or loan numbers at the applicable eligibility date.
Full payment by check, cash, money order, bank draft or withdrawal
authorization (payment by wire transfer will not be accepted) must accompany an
original Stock Order Form (facsimile copies and photocopies will not be
accepted) and a fully executed separate Certification Form. Orders cannot and
will not be accepted without a fully executed separate Certification Form. See
"THE CONVERSION -- Procedure for Purchasing Shares in the Subscription and
Direct Community Offering."
Purchase Limitations
With the exception of the ESOP, which is expected to subscribe for 8% of
the shares of Common Stock issued in the Stock Conversion, no Eligible Account
Holder, Supplemental Eligible Account Holder or Other Member may purchase in
their capacity as such in the Subscription Offering shares of Common Stock
having an aggregate purchase price of more than $400,000 (40,000 shares based on
the Purchase Price); no person, together with associates of and persons acting
in concert with such person, may purchase more than 9.99% of the Common Stock
issued in the Conversion in the Direct Community Offering and the Public
Offering and no person, together with associates and persons acting in concert
with such person, may purchase more than 9.99% of the shares of Common Stock
issued in the Offerings . This maximum purchase limitation may be decreased as
consistent with OTS regulations in the sole discretion of the Holding Company
and the Savings Bank, subject to any required regulatory approval. The minimum
purchase is 25 shares. In addition, stock orders received either through the
Direct Community Offering or the Public Offering may be accepted or rejected, in
whole or in part, at the discretion of the Holding Company and the Savings Bank.
See "THE CONVERSION -- Limitations on Purchases of Shares." In the event of an
oversubscription, shares will be allocated in accordance with the Plan of
Conversion. See "THE CONVERSION -- The Subscription, Direct Community and Public
Offerings."
Stock Pricing and Number of Shares to be Issued in the Conversion
The Purchase Price in the Offerings is a uniform price for all
subscribers, including members of the Savings Bank's Board of Directors, its
management and tax-qualified employee plans, and was set by the Boards of
Directors of the Holding Company and the Savings Bank. The number of shares to
be offered at the Purchase Price is based upon an independent appraisal of the
aggregate pro forma market value of the Holding Company and the Savings Bank, as
converted. The aggregate pro forma market value was estimated by RP Financial to
range from $14,025,000 to $18,975,000 as of June 14, 1996, as updated as of
August 2, 1996, or from 1,402,500 to 1,897,500 shares based on the Purchase
Price. See "THE CONVERSION--Stock Pricing and Number of Shares to be Issued."
The appraisal of the pro forma market value of the Holding Company and the Banks
as converted will be updated or confirmed at the completion of the Offerings.
The maximum of the Estimated Valuation Range may be increased by up to 15% and
the number of shares of Common Stock to be issued in the Conversion may be
increased to 2,182,125 shares due to material changes in the financial condition
or performance of the Savings Bank, changes in market conditions or general
financial and economic conditions. No resolicitation of subscribers will be made
and subscribers will not be permitted to modify or cancel their subscriptions
unless the gross proceeds from the sale of the Common Stock are less than the
minimum or more than 15% above the maximum of the current Estimated Valuation
Range. The
(v)
<PAGE>
appraisal is not intended and should not be construed as a recommendation of any
kind as to the advisability of purchasing such stock nor can assurance be given
that purchasers of the Common Stock in the Stock Conversion will be able to sell
such shares thereafter at a price that is equal to or above the Purchase Price.
Further, the pro forma stockholders' equity is not intended to represent the
fair market value of the Common Stock and may be greater than amounts that would
be available for distribution to stockholders in the event of liquidation.
Benefits of the Conversion to Management
ESOP. In connection with the Conversion, the Savings Bank will adopt the
ESOP, a tax-qualified employee benefit plan, for officers and employees of the
Savings Bank. The ESOP intends to purchase 8% of the shares of Common Stock
issued in the Offerings ($151,800 shares of Common Stock based on the issuance
of the maximum of the Estimated Valuation Range). In the event that the ESOP's
subscription is not filled in its entirety, the ESOP may purchase additional
shares in the open market or may purchase additional authorized but unissued
shares with cash contributed to it by the Savings Bank. For additional
information concerning the ESOP, see "MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS--Impact of New Accounting
Pronouncements and Regulatory Policies--Accounting for Employee Stock Ownership
Plans" and "MANAGEMENT OF THE SAVINGS BANK--Benefits--Employee Stock Ownership
Plan."
MRP. The Holding Company expects to seek approval of the Management
Recognition Plan and Trust ("MRP") at a meeting of stockholders occurring no
earlier than six months following consummation of the Conversion. The MRP, which
will be funded with a number of shares equal to 4% of the number of shares
issued in the Conversion, is a non-tax-qualified restricted stock plan intended
for the benefit of key employees and directors of the Holding Company and the
Savings Bank. If stockholder approval of the MRP is obtained, it is expected
that shares of Common Stock of the Holding Company will be awarded pursuant to
such plan to key employees and directors of the Holding Company and the Savings
Bank (which shares will be awarded at no cost to such recipients). Subject to
approval by stockholders and vesting provisions, key employees and directors are
initially intended to be granted $72,105 restricted shares of Common Stock under
the MRP (based on the issuance of the maximum of the Estimated Valuation Range),
with an aggregate value of $721,050 based on the Purchase Price of $10.00 per
share. It is presently intended that Michael W. Welge, Chairman of the Board,
Chief Financial Officer and a Director of the Savings Bank, Howard A. Boxdorfer,
President and Director of the Savings Bank, and Edward K. Collins, Executive
Vice President, Chief Executive Officer and Director of the Savings Bank, will
receive awards of restricted stock equal to 1.0%, 1.0% and 0.4%, respectively,
of the number of shares of Common Stock issued in the Conversion, or 45,540
shares (based on the issuance of the maximum of the Estimated Valuation Range)
with an aggregate value of $455,400 based on the Purchase Price. Other officers
and employees (7 persons) will be awarded a number of shares equal to in the
aggregate 0.76% of the shares of Common Stock issued in the Conversion, or
14,421 shares at the maximum of the Estimated Valuation Range. Each nonemployee
director of the Savings Bank (4 persons) will receive an award equal to 0.16% of
the number of shares issued in the Conversion, or 3,036 shares at the maximum of
the Estimated Valuation Range, for an aggregate of 12,144 shares. See
"MANAGEMENT OF THE SAVINGS BANK--Benefits--Management Recognition Plan."
Stock Option Plan. The Holding Company expects to seek stockholder
approval of the 1996 Stock Option Plan ("Stock Option Plan"), which will reserve
a number of shares equal to 10% of the number of shares issued in the
Conversion, at a meeting of stockholders occurring no earlier than six months
following consummation of the Conversion. If stockholder approval of the Stock
Option Plan is obtained, it is expected that options to acquire up to 189,750
shares of Common Stock of the Holding Company will be awarded to key employees
and directors of the Holding Company and the Savings Bank (based on the issuance
of the maximum of the Estimated Valuation Range). The exercise price of such
options will be 100% (110% for incentive stock options granted to a 10%
shareholder) of the fair market value of the Common Stock on the date the option
is granted. It is presently intended that Messrs. Welge, Boxdorfer and Collins
will be granted options to purchase a number of shares equal to 2.0%, 1.5% and
2.0%, respectively, of the number of shares of Common Stock sold in the
Offerings, or an aggregate of 104,363 shares based upon the maximum of the
Estimated Valuation Range. Other officers and employees (12
(vi)
<PAGE>
persons) will be granted options covering 2.0% of the number of shares of Common
Stock issued in the Conversion, or 37,950 shares at the maximum of the Estimated
Valuation Range. The current nonemployee directors of the Savings Bank (4
persons) will receive, in the aggregate, options for 2.0% of the shares of
Common Stock issued in the Conversion, or 37,950 shares at the maximum of the
Estimated Valuation Range. Options granted to officers and directors are
valuable only to the extent that such options are exercisable and the market
price for the underlying share of capital stock is in excess of the exercise
price. An option effectively eliminates the market risk of holding the
underlying security since no consideration is paid for the option until it is
exercised and, therefore, the recipient may, within the limits of the term of
the option, wait to exercise the option until the market price exceeds the
exercise price. For additional information concerning the Stock Option Plan, see
"MANAGEMENT OF THE SAVINGS BANK--Benefits--1996 Stock Option Plan."
Employment and Severance Agreements. The Holding Company and the Savings
Bank have agreed to enter into employment agreements with Messrs. M. Welge and
Collins which provide certain benefits in the event of their termination
following a change in control of the Holding Company and the Banks. In the event
of a change in control of the Holding Company or the Banks, as defined in the
agreements, Messrs. Welge and Collins will be entitled to a cash severance
amount equal to 2.99 times his average annual compensation during the five-year
period preceding the change in control. Assuming a change of control occurred as
of December 31, 1995, the aggregate amounts payable to Messrs. M. Welge and
Collins under these agreements would have been $388,700. See "MANAGEMENT OF THE
SAVINGS BANK--Executive Compensation--Employment Agreements. "
For information concerning the possible voting control of officers,
directors and employees following the Conversion, see "RISK FACTORS--Anti-
takeover Considerations--Voting Control by Insiders."
Use of Proceeds
The net proceeds from the sale of the Common Stock are estimated to
range from $13.4 million to $18.3 million, or to $21.2 million if the Estimated
Valuation Range is increased by 15%, depending upon the number of shares sold
and the expenses of the Conversion. The Holding Company has received the
approval of the OTS to purchase all of the capital stock of the Converted
Savings Bank to be issued in the Conversion in exchange for 50% of the net
proceeds. This will result in the Holding Company retaining approximately $6.7
million to $9.2 million of the net proceeds, or up to $10.6 million if the
Estimated Valuation Range is increased by 15%, and the Converted Savings Bank
receiving an equal amount.
Receipt of 50% of the net proceeds of the sale of the Common Stock will
increase the Converted Savings Bank's capital and will support the expansion of
the Converted Savings Bank's existing business activities. The Converted Savings
Bank will use the funds contributed to it for general corporate purposes, to
fund certain tax payments associated with a portion of the recapture of the
Savings Bank's bad debt reserve associated with the Bank Conversion as discussed
under "RISK FACTORS--Bad Debt Recapture" and investment in United States
Treasury and agency securities with laddered maturities up to five years. The
Converted Savings Bank plans to use a portion of the proceeds, initially up to
$10 million, to reduce or repay its outstanding reverse repurchase agreements.
The $3.0 million initial capital cash infusion into the De Novo Bank by the
Holding Company will be invested by the De Novo Bank in United States Treasury
or agency securities with laddered maturities up to five years. Shares of Common
Stock may be purchased with funds on deposit at the Savings Bank, which will
reduce deposits by the amounts of such purchases. The net amount of funds
available to the Savings Bank for additional investment following receipt of the
Conversion proceeds will be reduced to the extent shares are purchased with
funds on deposit.
A portion of the net proceeds retained by the Holding Company will be
used for a loan by the Holding Company to the ESOP to enable it to purchase 8%
of the shares of Common Stock issued in the Conversion. Such loan would fund the
entire purchase price of the ESOP shares ($1,518,000 at the maximum of the
Estimated Valuation Range) and would be repaid principally from the Converted
Savings Bank's contributions to the ESOP and from dividends payable on the
Common Stock held by the ESOP. The remaining proceeds retained by the Holding
Company initially will be used to capitalize the De Novo Bank and invested
primarily in certificates of deposit and securities of the type currently held
by the Savings Bank. Such proceeds will be available for additional
(vii)
<PAGE>
contributions to the Converted Savings Bank in the form of debt or equity, to
support future growth and diversification activities, as a source of dividends
to the stockholders of the Holding Company to the extent permitted under
Delaware law and OTS regulations (following the Bank Conversion and the Bank
Formation, such dividend payments will be regulated by Delaware law and
regulations and policies of the Federal Reserve and the OCC) and for future
repurchases of Common Stock (including possible repurchases to fund the MRP).
Currently, there are no specific plans, arrangements, agreements or
understandings, written or oral, regarding any of the foregoing activities.
Market for Common Stock
The Holding Company has never issued capital stock to the public and,
consequently, there is no existing market for the Common Stock. The Holding
Company has applied to have the Common Stock listed on the Nasdaq National
Market under the symbol "CNBA." EVEREN Securities has indicated its intention to
act as a market maker in the Common Stock following the consummation of the
Conversion, depending on trading volume and subject to compliance with
applicable laws and regulatory requirements. Furthermore, EVEREN Securities has
agreed to use its best efforts to assist the Holding Company in obtaining
additional market makers for the Common Stock. No assurance can be given that
the Common Stock will be listed on the Nasdaq National Market or that an active
and liquid trading market for the Common Stock will develop. Further, no
assurance can be given that purchasers will be able to sell their shares at or
above the Purchase Price after the Conversion. See "RISK FACTORS--Absence of
Prior Market for Common Stock" and "MARKET FOR COMMON STOCK."
Dividends
The Board of Directors of the Holding Company anticipates paying
quarterly cash dividends on the Common Stock, subsequent to the Conversion, at
an annual rate equal to $0.20 per share ($0.05 per share quarterly) commencing
in the first full quarter following the Conversion, subject to the following
factors that the Board of Directors of the Holding Company will consider at the
intended time of declaration and payment: the Banks' current and projected
earnings, financial condition, regulatory capital requirements, including
applicable statutory and regulatory restrictions on the payment of dividends,
and other relevant factors. Accordingly, no assurances can be given that any
dividends will be declared or, if declared, what the amount of dividends will be
or whether such dividends, once declared, will continue. The Holding Company may
pay stock dividends in lieu of or in addition to cash dividends, or may combine
periodic special dividends with regular dividends. See "DIVIDEND POLICY" and
"REGULATION--Regulation of the Banks."
Officers' and Directors' Common Stock Purchases and Beneficial Ownership
Officers and directors of the Savings Bank (11 persons) and their
associates are expected to subscribe for an aggregate of approximately $4.0
million of Common Stock, or 20.84% of the shares based on the maximum of the
Estimated Valuation Range. See "THE CONVERSION--Shares to be Purchased by
Management Pursuant to Subscription Rights." In addition, purchases by the ESOP
and subsequent purchases by the MRP, and the exercise of stock options issued
under the Stock Option Plan, will increase the number of shares beneficially
owned by officers, directors and employees. See "RISK FACTORS--Anti-takeover
Considerations--Voting Control by Insiders." The MRP and Stock Option Plan are
subject to approval by the stockholders of the Holding Company at a meeting to
be held no earlier than six months following consummation of the Conversion.
Risk Factors
See "RISK FACTORS" for a discussion of certain risks related to the
Offerings that should be considered by all prospective investors.
(viii)
<PAGE>
SELECTED FINANCIAL INFORMATION
The following tables set forth certain information concerning the
financial position, results of operations and other data of the Savings Bank at
the dates and for the periods indicated. This information is qualified in its
entirety by reference to the detailed information and Financial Statements and
notes thereto appearing elsewhere in this Prospectus.
<TABLE>
<CAPTION>
At December 31,
At March 31, ------------------------------------------------
1996 1995 1994 1993 1992 1991
------------ ---- ---- ---- ---- ----
(In Thousands)
<S> <C> <C> <C> <C> <C> <C>
SELECTED FINANCIAL
CONDITION DATA:
Total assets......................... $136,806 $134,781 $141,755 $141,396 $138,869 $136,431
Loans receivable, net................ 55,754 57,021 58,157 61,193 65,643 70,997
Mortgage-backed securities, net(1)... 16,906 15,413 13,136 7,402 10,559 14,661
Investments, net(2).................. 57,543 57,605 64,410 67,390 57,994 47,064
Savings deposits(3).................. 108,515 106,718 129,712 130,231 128,731 127,257
Securities sold under agreements
to repurchase(3).................... 15,000 15,000 -- -- -- --
Retained earnings --
substantially restricted............ 11,870 11,712 10,675 9,682 8,778 7,603
</TABLE>
<TABLE>
<CAPTION>
Three
Months
Ended
March 31, Year Ended December 31,
--------------- ----------------------------------------------
1996 1995 1995 1994 1993 1992 1991
---- ---- ---- ---- ---- ---- ----
(In Thousands)
SELECTED OPERATING DATA:
<S> <C> <C> <C> <C> <C> <C> <C>
Interest income............................ $2,280 $2,244 $9,035 $8,696 $9,132 $10,392 $11,843
Interest expense........................... 1,335 1,329 5,474 5,089 5,526 6,826 8,648
------ ------ ------- ------- ------- -------- --------
Net interest income....................... 945 915 3,561 3,607 3,606 3,566 3,195
Provision for loan losses................. 7 (2) 161 69 30 70 56
------ ------ ------- ------- ------- -------- --------
Net interest income after
provision for loan losses................ 938 917 3,400 3,538 3,576 3,496 3,139
Loss on sale of certificates of
deposit, net............................. (54) -- -- -- -- -- --
Gain (loss) on sale of investment
securities and mortgage-backed
securities, net.......................... 7 47 98 -- -- (228) --
Other noninterest income.................. 43 31 140 114 129 131 130
Noninterest expense....................... 613 572 2,338 2,374 2,277 2,216 1,967
------ ------ ------- ------- ------- -------- --------
Income before income tax expense and
cumulative effect of change in
accounting principle..................... 321 423 1,300 1,278 1,428 1,183 1,302
Income taxes.............................. 77 109 299 285 307 257 210
------ ------ ------- ------- ------- -------- --------
Income before cumulative effect of
change in accounting principle........... 244 314 1,001 993 1,121 926 1,092
Cumulative effect of change in
accounting principle(4)................... -- -- -- -- (227) -- --
------ ------ ------- ------- ------- -------- --------
Net income................................ $ 244 $ 314 $ 1,001 $ 993 $ 894 $ 926 $ 1,092
====== ====== ======= ======= ======= ======== ========
</TABLE>
(footnotes on second following page)
(ix)
<PAGE>
<TABLE>
<CAPTION>
At or for the
Three Months
Ended March 31, At or for the Year Ended December 31,
-----------------------------------------------------
1996 1995 1995 1994 1993 1992 1991
------- ------------- ------- --------- ------------ --------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
KEY OPERATING RATIOS:
Performance Ratios:
Return on average assets (net
income divided by average assets)......... 0.72% 0.91% 0.73% 0.69% 0.79%(5) 0.68% 0.80%
Return on average equity (net
income divided by average equity)......... 8.28 11.60 8.94 9.76 12.15(5) 11.31 15.72
Interest rate spread (difference
between average yield on interest-earning
assets and average cost of
interest-bearing liabilities)(6)........... 2.63 2.49 2.43 2.45 2.45 2.49 2.19
Net interest margin (net interest
income as a percentage of average
interest-earning assets)(7)................ 2.89 2.74 2.70 2.62 2.65 2.71 2.43
Non-interest expense to
average assets............................ 1.80 1.65 1.70 1.66 1.61 1.62 1.45
Average interest-earning assets to
average interest-bearing liabilities....... 106.47 106.10 106.48 104.91 104.66 104.29 103.60
Asset Quality:
Allowance for loan losses to total
loans at end of period..................... 0.71 0.42 0.68 0.42 0.34 0.28 0.22
Ratio of allowance for loan
losses to non-performing loans............. 178.38 65.85 244.79 64.65 59.53 38.78 0.16
Net charge-offs to average outstanding
loans during the period.................... -- -- 0.03 0.05 0.01 0.06 0.04
Ratio of non-performing assets to
total assets(8)............................ 0.32 0.33 0.27 0.31 0.44 0.84 1.24
Capital Ratios:
Average equity to average assets............ 8.65 7.81 8.15 7.12 6.53 6.01 5.10
Equity to assets at end of period........... 8.68 8.08 8.69 7.53 6.85 6.32 5.57
</TABLE>
<TABLE>
<CAPTION>
At December 31,
At March 31, -----------------------------------------------
1996 1995 1994 1993 1992 1991
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
OTHER DATA:
Number of:
Real estate loans outstanding.............. 1,469 1,484 1,542 1,704 1,899 2,097
Deposit accounts........................... 12,354 12,282 12,742 13,184 13,636 14,478
Full-service offices....................... 6 6 6 6 6 6
Loan production offices.................... 1 1 -- -- -- --
</TABLE>
(footnotes on next page)
(x)
<PAGE>
- --------------------
(1) Includes mortgage backed securities available for sale of $2.1 million and
$2.2 million at March 31, 1996 and December 31, 1995, respectively.
(2) Includes investment securities, interest-bearing deposits, federal funds
sold, certificates of deposits, and FHLB stock. Includes U.S. government
securities available for sale of $17.4 million and $6.5 million at March
31, 1996 and December 31, 1995, respectively.
(3) During the year ended December 31, 1995, $15.0 million of certificates of
deposit were converted into reverse repurchase agreements and, therefore,
are not reflected in deposit totals.
(4) Resulted from the adoption of SFAS No. 109, "Accounting for Income Taxes"
on January 1, 1993.
(5) Excludes cumulative effect of change in accounting principle.
(6) Does not consider tax-equivalent basis of tax exempt state and municipal
securities. Interest rate spread, after considering tax equivalent basis of
such securities, is 2.60%, 2.61%, 2.62%, 2.57%, and 2.19% for 1995, 1994,
1993, 1992 and 1991, respectively, and 2.79% and 2.65% for the three months
ended March 31, 1996 and 1995, respectively.
(7) Does not consider tax-equivalent basis of tax exempt state and municipal
securities. Net interest margin, after considering tax equivalent basis of
such securities, is 2.87%, 2.79%, 2.82%, 2.79% and 2.43% for 1995, 1994,
1993, 1992 and 1991, respectively, and 3.06% and 2.89% for the three months
ended March 31, 1996 and 1995, respectively.
(8) Non-performing assets include loans which are contractually past due 90
days or more, loans accounted for on a nonaccrual basis and real estate
acquired through foreclosure.
(xi)
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RISK FACTORS
Before investing in shares of the Common Stock offered hereby, prospective
investors should carefully consider the matters presented below, in addition to
matters discussed elsewhere in this Prospectus.
Certain Loan Underwriting Considerations and Risk of Lending Strategy
Historically, the Savings Bank's primary lending activity has been the
origination of conventional first mortgage loans secured by one- to four-family
owner occupied residences, which amounted to $45.8 million (including those
guaranteed by the Federal Housing Administration ("FHA")), or 80.9% of total
loans, at March 31, 1996. However, at that same date, the Savings Bank also had
$2.7 million, or 4.8% of total loans, in commercial real estate loans and $6.4
million, or 11.3% of total loans, in consumer loans outstanding. Although both
commercial real estate and consumer lending generally provide higher yields and
greater interest rate sensitivity than residential mortgage loans, they
generally involve greater risk than residential mortgage loans. Commercial real
estate lending risks include delays in leasing the collateral property and
excessive collateral vacancy rates, among others. Consumer lending risks include
rapid collateral depreciation rates, the susceptibility of the borrower's
financial stability to adverse personal events such as job loss, divorce,
illness or personal bankruptcy, among others. See "BUSINESS OF THE SAVINGS -
BANK -Lending Activities--Commercial Real Estate and Multi-family Lending" and
Consumer and Other Loans."
The Banks will operate in substantially the same manner as the Savings Bank
initially following the consummation of the Bank Conversion and Bank Formation.
However, it is anticipated that, subject to market conditions, competition and
related factors, among other things, the Banks intend to pursue a business
strategy that places greater emphasis on commercial business, commercial real
estate and consumer lending as these types of lending, as well as residential
mortgage lending, are emphasized by commercial banks, including national banks.
Accordingly, the risk profile of the Banks' loan portfolios can be expected to
be greater than that of the Savings Bank. There can be no assurances that this
change in risk profile will not have a material adverse effect on the Banks'
financial condition and results of operations as a result of higher levels of
loan delinquencies and loan losses. Furthermore, this strategy may take a period
of time to fully implement and may require the expenditure of additional funds
to provide the resources necessary to originate the anticipated volume of
commercial loans. The success of this strategy will depend on the level of
interest rates, market conditions and other factors that are beyond the control
of the Banks, and could be adversely affected by the condition of the national
economy and the economy of the Banks' primary market area in particular.
Dependence on Local Economy and Competition Within Market Area
The primary market served by the Savings Bank in southwestern Illinois has
experienced population shrinkage (Randolph and Perry Counties in Illinois) or
slow growth (in the other counties served) over the last several years, because
of the rural agricultural nature, the local troubled coal mining sector and a
number of plant/business closings, including a recent large printing plant
closing in Sparta, Illinois where the Savings Bank has a branch. Market area
conditions have limited local mortgage loan demand and led to some deposit
withdrawals. Local conditions led the Savings Bank to open a branch office and
loan production office in southwestern Missouri where the economy is more
attractive. Since local mortgage loan demand has been limited, in order to
continue to meet local financing needs, it became necessary to invest in
securities and become active in other forms of lending such as consumer lending.
At March 31, 1996, the Savings Bank's loan portfolio consisted of loans made to
borrowers and collateralized by properties located principally in this market
area. Principally all of the Savings Bank's depositors reside in this market
area as well.
A downturn in the economy of the Savings Bank's market area could have an
adverse effect on the quality of the Savings Bank's loan portfolio. In addition,
because the Savings Bank operates in a market area with a small population and
limited growth prospects, the Savings Bank's ability to achieve loan and deposit
growth is limited.
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Future growth opportunities for the Savings Bank depend largely on market area
growth and the Savings Bank's ability to compete effectively within and outside
its market area.
In the face of significant competition by financial and non-bank entities
over the last few years, the Savings Bank has had limited success in increasing
its retail deposit base, excluding the historical benefit of the large corporate
relationship described under "--Potential Reduction of Certain Funding
Liabilities" and the Heritage Federal acquisition. The Savings Bank competes for
deposits and loans with a number of financial institutions in a four contiguous
county market area that has a population of approximately 135,000. In three of
the counties served, the Savings Bank's market share is low and its average
branch size is below average. A number of the competing financial institutions
are larger than the Savings Bank and are subsidiaries of large regional bank
holding companies.
Risk of Delayed Offering
Consummation of the Conversion is subject to the receipt of all applicable
regulatory approvals from the OTS, OCC, FDIC and the Federal Reserve and the
satisfaction of all conditions of those approvals, including the expiration of
all applicable waiting periods. As of the printing of this Prospectus,
conditional approvals from the OTS and the OCC with respect to the Bank
Conversion, the FDIC with respect to deposit insurance for the De Novo Bank, and
the Federal Reserve with respect to the acquisition of the Banks by the Holding
Company have not been received. All such approvals are required to consummate
the Bank Conversion. It is currently anticipated that these approvals will be
received in a timely manner after the Expiration Date, however, it is possible
that the receipt of one or more of these approvals will be delayed. Although
management of the Holding Company and the Savings Bank currently intend to
consummate the Stock Conversion and the Bank Conversion simultaneously,
management may elect to consummate the Stock Conversion before the Bank
Conversion should there be significant delay in obtaining all applicable
regulatory approvals for the Bank Conversion. In that case, following the Stock
Conversion the Holding Company would operate as a savings and loan holding
company and the Converted Savings Bank as a federal stock savings
bank, both subject to regulation by the OTS as described herein, until
consummation of the Bank Conversion, which would occur as soon as practicable
thereafter. In any event if the Conversion (or the Stock Conversion if
management elects to consummate the Stock Conversion before the Bank Conversion)
is not completed by November 14, 1996 (45 days after the last date of the fully
extended Subscription Offering) and the OTS consents to an extension of time to
consummate the Conversion, subscribers will be given the right to rescind their
subscriptions. In such event, unless an affirmative indication is received from
subscribers that they wish to continue to subscribe for shares, their funds will
be returned promptly, together with interest at the Savings Bank's passbook
rate, or their withdrawal authorizations will be terminated.
Bad Debt Recapture
Under current applicable provisions of the Internal Revenue Code ("Code"),
certain thrift institutions (like the Savings Bank) are allowed to maintain
higher tax bad debt reserve levels than allowed for commercial banks. As a
result, such thrift institutions are able to shelter a larger portion of their
earnings from tax than can commercial banks. However, if such thrift
institutions convert to commercial banks, they must restate their tax bad debt
reserve as of the first year of conversion. As a result of the Bank Conversion,
therefore, the excess of the Savings Bank's bad debt tax reserve as of the close
of the tax year immediately preceding the year of Bank Conversion over the
restated reserve level must be included in the Converted Bank's taxable income
ratably over a six-year period. Accordingly, given that the Bank Conversion is
expected to be consummated during the Converted Bank's tax year ending December
31, 1996, such recapture by the Converted Bank is expected to amount to
approximately $2.5 million, which amount will be included ratably into taxable
income and the associated taxes paid over the subsequent six-year period.
Assuming an effective tax rate of 38.0% the amount of tax to be paid on such
recapture would total approximately $951,000. See "TAXATION--Federal Taxation
Tax Bad Debt Reserves."
Potential Reduction of Certain Funding Liabilities
Michael W. Welge, Chairman of the Board, President and Chief Financial
Officer of the Holding Company and Chairman of the Board and Chief Financial
Officer of the Savings Bank, is the Executive Vice President, Treasurer and
Secretary of Gilster-Mary Lee Corporation ("Gilster-Mary Lee"), a food
manufacturing and packaging company headquartered in Chester, Illinois. Over the
last several years, the Savings Bank has maintained a relationship (primarily a
deposit relationship) with Gilster-Mary Lee, which at times has had as much as
$25 million or more in funds on deposit typically with relatively short terms.
At March 31, 1996, the present balance of funds was approximately $21.2 million,
$15.0 million of which was in short-term reverse repurchase agreements. After
reviewing its cash management needs, Gilster-Mary Lee has notified the Savings
Bank of its intent to draw down the balance of such funds by at least $10
million in the short-term and maintain much smaller balances in the future. The
loss of funds will impair earnings as there is no intent to replace the reverse
repurchase agreements with other wholesale funds. Ample liquidity is maintained
by the Savings Bank to cover the withdrawal of such deposits, the reduction of
such borrowings, or both.
Potential Adverse Impact of Changes in Interest Rates
The financial condition and operations of the Savings Bank, and of savings
institutions in general, are influenced significantly by general economic
conditions, by the related monetary and fiscal policies of the federal
government and by the regulations of the OTS and the FDIC. Deposit flows and the
cost of funds are influenced by interest rates of competing investments and
general market rates of interest. Lending activities are affected by the demand
for mortgage financing and for consumer and other types of loans, which in turn
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earning assets and the interest expense incurred in connection with its
interest-bearing liabilities. At March 31, 1996, the Savings Bank's total
interest-bearing liabilities maturing or repricing within one-year exceeded
total interest-earning assets maturing or repricing in the same period by $14.0
million, representing a cumulative negative gap of 10.21% of total assets.
Accordingly, the Savings Bank, like other savings institutions, is vulnerable to
an increase in interest rates to the extent that its interest-earning assets
have longer effective maturities or periods to repricing than do its interest-
bearing liabilities. Under such circumstances, material and prolonged increases
in interest rates generally would adversely affect net interest income, while
material and prolonged decreases in interest rates generally would have a
favorable effect on net interest income.
Changes in the level of interest rates also affect the amount of loans
originated by the Savings Bank and, thus, the amount of loan and commitment
fees, as well as the value of the Savings Bank's investment securities and other
interest-earning assets. Moreover, volatility in interest rates also can result
in disintermediation, or the flow of funds away from savings institutions into
direct investments, such as United States Government and corporate securities
and other investment vehicles which, because of the absence of federal insurance
premiums and reserve requirements, generally pay higher rates of return than
insured savings deposits.
To better control the impact of changes in interest rates, the Savings Bank
has sought to improve the match between asset and liability maturities,
repricings and rates by, among other things, maintaining liquidity significantly
in excess of the regulatory requirements, originating adjustable-rate mortgage
("ARM") loans as market conditions permit, originating short-term consumer
loans, and investing in adjustable-rate securities. At March 31, 1996, the
Savings Bank had $18.7 million of adjustable-rate loans, net of undisbursed
loans in process, in its loan portfolio, most of which reprice every year, and
$37.5 million of fixed-rate loans in its loan portfolio. The Savings Bank
originates ARM loans at initial "teaser" rates below the rate that would prevail
were the market rate index used for repricing applied initially. Furthermore,
the Savings Bank's ARM loans contain annual and lifetime interest rate
adjustment limits which, in a rising interest rate environment, may prevent such
loans from repricing to market interest rates. While management anticipates that
the Savings Bank's ARM loans will better offset the adverse effects of an
increase in interest rates as compared to fixed-rate mortgages, the increased
mortgage payments required of ARM borrowers in a rising interest rate
environment could potentially cause an increase in delinquencies and defaults.
In order to address the foregoing risks, it is generally the practice of the
Savings Bank to qualify its borrowers based on the maximum interest rate that
could be charged at the first adjustment period. The Savings Bank has not
historically had an increase in such delinquencies and defaults on ARM loans,
but no assurance can be given that such delinquencies or defaults would not
occur in the future. The marketability of the underlying property also may be
adversely affected in a high interest rate environment. Moreover, the Savings
Bank's ability to originate ARM loans may be affected by changes in the level of
interest rates and by market acceptance of the terms of such loans.
Return on Equity After Conversion
Return on equity (net income for a given period divided by average equity
during that period) is a ratio used by many investors to compare the performance
of a particular financial institution to its peers. The Holding Company's post-
Conversion pro forma return on equity will be less than the Savings Bank's pre-
Conversion return on equity because of the increase in consolidated equity of
the Holding Company that will result from the net proceeds of the Offerings. See
"SELECTED FINANCIAL INFORMATION" for numerical information regarding the Savings
Bank's historical return on equity and "CAPITALIZATION" for a discussion of the
Holding Company's estimated pro forma consolidated capitalization as a result of
the Conversion.
In order for the Holding Company to achieve a return on equity comparable
to the historical levels achieved by the Savings Bank prior to the Conversion,
the Holding Company would have to either increase net income or reduce
stockholders' equity, or both, commensurate with the increase in equity as a
result of the Conversion. Reductions in equity could be achieved by, among other
things, the payment of regular cash dividends or periodic special dividends
(although no assurances can be given as to whether any dividends will be paid
or, if paid, their amount and frequency), the repurchase of shares of Common
Stock subject to regulatory restrictions, or the
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acquisition of other financial institutions (neither the Holding Company nor the
Savings Bank has any present plans, arrangements, or understandings, written or
oral, regarding any repurchase or acquisitions). See "DIVIDEND POLICY" and "USE
OF PROCEEDS." Achievement of increased net income levels will depend on several
important factors outside the control of management, such as general economic
conditions, including the level of market interest rates, competition and
related factors, among others. See "-- Dependence on Local Economy and
Competition Within Market Area" and "Potential Adverse Impact of Changes in
Interest Rates." The expenses associated with the ESOP and the MRP (see "PRO
FORMA DATA"), are expected to depress earnings levels. Other post-Conversion
expenses could also be expected to contribute initially to reduced earnings
levels. Although the Banks will operate initially in substantially the same
manner as the Savings Bank following the consummation of the Bank Conversion,
the Banks anticipate to continue to diversify their loan and deposit mix and add
other banking services. Management of the Banks anticipates considering the
introduction of various new business products including, but not limited to,
debit cards, trust powers, home equity loans and commercial deposits.
Accordingly, management anticipates that the Banks will incur start-up and on-
going expenses as various programs and services are introduced and banking
products are expanded and in connection with the staffing, development and
marketing of these products. Since no determination has been made by management
in connection with these services and products, the costs associated with these
services and products cannot be projected at this time. Accordingly, it is
uncertain whether these expenses would have a material adverse effect on
earnings and, therefore, further depress post-Conversion return on equity.
Furthermore, approximately 54.4% of the Savings Bank's assets at March 31, 1996
were invested in investment and mortgage-backed securities because of both
reduced loan demand in the Savings Bank's market area and the need to maintain
adequate liquidity should certain funding liabilities be withdrawn from the
Savings Bank (see "-- Potential Reduction of Certain Funding Liabilities.").
Investment and mortgage-backed securities generally earn lower yields than
loans. To the extent that the Banks' post-Conversion asset composition continues
to be weighted toward investment and mortgage-backed securities, return on
equity could be expected to be adversely affected.
The Savings Bank intends to deploy the net proceeds of the Offerings to
increase earnings per share and book value per share without assuming undue
risk, with the goal of achieving a return on equity comparable to the average
for publicly traded financial institutions and their holding companies. This
goal will likely take a number of years to achieve and no assurances can be
given that this goal can be attained.
Recapitalization of SAIF and its Impact on SAIF Premiums
In August 1995, the FDIC substantially reduced deposit insurance premiums
for well-capitalized, well-managed financial institutions that are members of
the Bank Insurance Fund ("BIF"). The initial reduction in BIF premiums went into
effect in September 1995. In November 1995 the FDIC further revised the premium
schedule for BIF-insured banks to provide a range of 0% to 0.27%, with a minimum
annual premium effective January 1996. Under the new assessment schedule,
approximately 92% of BIF members pay only the statutory minimum annual
assessment of $2,000. With respect to SAIF member institutions, the FDIC has
retained the existing rate schedule of 23 to 31 basis points. Chester National
Bank will be a member of SAIF and the deposits of Chester National Bank of
Missouri that are received from the Perryville Branch will be SAIF rather than
BIF insured. SAIF premiums may not be reduced for several years because SAIF has
lower reserves than BIF and is responsible for more troubled financial
institutions. Deposit insurance premiums are often a significant component of
noninterest expense for insured depository institutions. The reduction in BIF
premiums may place the Savings Bank at a competitive disadvantage because BIF-
insured institutions (such as most commercial banks) may be able to offer more
attractive loan rates, deposit rates, or both. The magnitude of the competitive
advantage of BIF-insured institutions due to a disparity in deposit insurance
premiums and its impact on the Savings Bank's results of operations cannot be
determined at this time.
Several alternatives to mitigate the effect of the BIF/SAIF premium
disparity have been suggested by the federal banking regulators, by members of
Congress, by industry groups and by the Clinton Administration, including a
merger of the funds and/or a payment by all SAIF-member institutions, including
the Savings Bank, of a one-time assessment to increase SAIF's reserves to $1.25
per $100 of deposits. Such assessment is estimated to be
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approximately 85 basis points on the amount of deposits held by a SAIF-member
institution at March 31, 1995. The payment of a one-time fee would have the
effect of immediately reducing the capital and earnings of SAIF-member
institutions by the amount of the fee. Based on the Savings Bank's assessable
deposits of $123.6 million at March 31, 1995 (the date specified in the proposed
legislation), a one-time assessment of 85 basis points would equal approximately
$1.1 million, or $651,000 after taxes assuming a 38.0% combined federal and
state tax rate. This assessment, if it occurred, would represent, on a pro forma
basis at March 31, 1996, a decrease in book value per share of $0.46 and $0.34
based on the sale of shares at the minimum of the Estimated Valuation Range and
at the maximum of the Estimated Valuation Range, respectively. Management cannot
predict whether any legislation, including legislation imposing such a fee, will
be enacted, or, if enacted, the amount of any one-time fee or whether ongoing
SAIF premiums will be reduced to a level equal to that of BIF premiums. See
"REGULATION."
Anti-takeover Considerations
Provisions in the Holding Company's Governing Instruments and Delaware Law.
Certain provisions included in the Holding Company's Certificate of
Incorporation and in the Delaware General Corporation Law ("DGCL") might
discourage potential takeover attempts, particularly those which have not been
negotiated with the Board of Directors. As a result, these provisions might
preclude takeover attempts which certain stockholders may deem to be in their
interest and might tend to perpetuate existing management. These provisions
include, among other things, a provision for approval of certain business
combinations. In addition, the Certificate of Incorporation provides for the
election of directors to staggered terms of three years and for their removal
without cause only upon the vote of holders of 80% of the outstanding voting
shares. Certain provisions of the Certificate of Incorporation of the Holding
Company cannot be amended by stockholders unless an 80% stockholder vote is
obtained. The Bylaws of the Holding Company also contain provisions regarding
the timing and content of stockholder proposals and nominations. The existence
of these anti-takeover provisions could result in the Holding Company being less
attractive to a potential acquiror and in stockholders receiving less for their
shares than otherwise might be available in the event of a takeover attempt. See
"RESTRICTIONS ON ACQUISITION OF THE HOLDING COMPANY."
Voting Control by Insiders. Directors and officers of the Savings Bank and
the Holding Company and their associates expect to purchase 395,353 shares of
Common Stock, or 20.84% of the shares issued in the Offerings at the maximum of
the Estimated Valuation Range. Directors and officers are also expected to
control indirectly the voting of approximately 8% of the shares of Common Stock
issued in the Conversion through the ESOP (assuming shares have been allocated
under the ESOP). Under the terms of the ESOP, the unallocated shares will be
voted by the ESOP trustees in the same proportion as the votes cast by
participants with respect to the allocated shares.
At a meeting of stockholders to be held no earlier than six months
following the consummation of the Conversion, the Holding Company expects to
seek approval of the Holding Company's MRP, which is a non-tax-qualified
restricted stock plan for the benefit of key employees and directors of the
Holding Company and the Savings Bank. Assuming the receipt of stockholder
approval, the Holding Company expects to reserve for issuance common stock of
the Holding Company on behalf of the MRP in an amount equal to 4% of the Common
Stock issued in the Conversion, or 75,900 shares at the maximum of the Estimated
Valuation Range. Under the terms of the MRP, the MRP committee or the MRP
trustees will have the power to vote unallocated and unvested shares. In
addition, the Holding Company intends to reserve for future issuance pursuant to
the Stock Option Plan a number of authorized shares of Common Stock equal to 10%
of the Common Stock issued in the Conversion (189,750 shares at the maximum of
the Estimated Valuation Range). The Holding Company also intends to seek
approval of the Stock Option Plan at a meeting of stockholders to be held no
earlier than six months following the consummation of the Conversion.
Assuming (i) the receipt of stockholder approval for the MRP and the Stock
Option Plan, (ii) the open market purchase of shares on behalf of the MRP, (iii)
the purchase by the ESOP of 8% of the Common Stock sold in the Offerings, and
(iv) the exercise of stock options equal to 10% of the number of shares of
Common Stock issued in the Conversion, directors, officers and employees of the
Holding Company and the Savings Bank would
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have voting control, on a fully diluted basis, of 38.47% of the Common
Stock, based on the issuance of the maximum of the Estimated Valuation Range.
Notwithstanding additional stockholder support, this potential voting
control by directors, officers and employees may effectively preclude or
impede takeover attempts that certain stockholders deem to be in their best
interest, and may tend to perpetuate existing management, particularly since the
Holding Company's Certificate of Incorporation requires an 80% stockholder vote
to approve certain business combinations and other corporate actions.
Provisions of Employment and Severance Agreements. The employment
agreements with Messrs. M. Welge and Collins provide for cash severance payments
in the event of a change in control of the Holding Company or the Savings Bank
in an amount equal to 2.99 times the executive's average annual compensation
during the five-year period preceding the change in control. Such agreements
also provide for the continuation of certain insurance benefits for a three-year
period following the change in control. These provisions may have the effect of
increasing the cost of acquiring the Holding Company, thereby discouraging
future attempts to take over the Holding Company or the Savings Bank.
See "MANAGEMENT OF THE SAVINGS BANK -- Benefits," "DESCRIPTION OF CAPITAL
STOCK OF THE HOLDING COMPANY" and "RESTRICTIONS ON ACQUISITION OF THE HOLDING
COMPANY."
Regulatory and Statutory Provisions. Federal regulations prohibit for a
period of three years after completion of the Conversion, the ownership of more
than 10% of the Savings Bank or the Holding Company without prior OTS approval.
Federal law also requires OTS approval prior to the acquisition of "control" (as
defined in OTS regulations) of an insured institution.
Absence of Prior Market for the Common Stock
The Holding Company has never issued capital stock and, consequently, there
is no existing market for the Common Stock. Although the Holding Company has
received conditional approval to list the Common Stock on the Nasdaq National
Market under the symbol "CNBA," there can be no assurance that the Holding
Company will meet Nasdaq National Market listing requirements upon the
consummation of the Conversion, which include a minimum market capitalization,
at least two market makers and a minimum number of record holders. Making a
market in securities involves maintaining bid and ask quotations and being able,
as principal, to effect transactions in reasonable quantities at those quoted
prices, subject to various securities laws and other regulatory requirements.
The development of a public trading market depends upon the existence of willing
buyers and sellers, the presence of which is not within the control of the
Holding Company, the Savings Bank or any market maker. It is not expected that
an active and liquid trading market for the Common Stock will develop due to the
relatively small size of the Offerings and the small number of shareholders
expected following the Conversion. Accordingly, purchasers should consider the
illiquid nature of any investment in the Common Stock. Furthermore, there can be
no assurance that purchasers will be able to sell their shares at or above the
Purchase Price. See "MARKET FOR COMMON STOCK."
Dilutive Effect of Benefit Programs
At a meeting held no earlier than six months following consummation of the
Conversion, the Holding Company expects to seek stockholder approval of the MRP.
If approved, the Holding Company intends to reserve for issuance under the MRP
an amount of Common Stock of the Holding Company equal to 4% of the shares
issued in the Conversion. Such shares of Common Stock of the Holding Company may
be acquired by the Holding Company in the open market or from authorized but
unissued shares of Common Stock of the Holding Company. In the event that the
MRP utilizes authorized but unissued shares of Common Stock from the Holding
Company, the voting interests of existing stockholders will be diluted and net
income per share and stockholders' equity per share will be decreased. See "PRO
FORMA DATA" and "MANAGEMENT OF THE SAVINGS BANK -- Benefits -- Management
Recognition Plan."
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At a meeting held no earlier than six months following consummation of the
Conversion, the Holding Company expects to seek stockholder approval of the
Stock Option Plan. If approved, the Stock Option Plan will provide for options
for up to a number of shares of Common Stock of the Holding Company equal to 10%
of the shares issued in the Conversion. Such shares may be authorized but
unissued shares of Common Stock of the Holding Company and, upon exercise of the
options, will result in the dilution of the voting interests of existing
stockholders and will decrease net income per share and stockholders' equity per
share. See "MANAGEMENT OF THE SAVINGS BANK -- Benefits -- 1996 Stock Option
Plan."
If the ESOP is not able to purchase 8% of the shares of Common Stock issued
in the Offerings, the ESOP may purchase newly issued shares from the Holding
Company. In such event, the voting interests of existing stockholders will be
diluted and net income per share and stockholders' equity per share will be
decreased. See "MANAGEMENT OF THE SAVINGS BANK -- Benefits -- Employee Stock
Ownership Plan."
Possible Increase in the Number of Shares Issued in the Conversion
The number of shares to be issued in the Conversion may be increased as a
result of an increase in the Estimated Valuation Range of up to 15% to reflect
changes in market and in the financial condition of the Savings Bank prior to
the consummation of the Conversion. In the event that the Estimated Valuation
Range is so increased, the Holding Company expects to issue up to 2,182,125
shares of Common Stock at the Purchase Price for an aggregate price of up to
$21,821,250 An increase in the number of shares issued will decrease the
Holding Company's net income per share and stockholders' equity and will
increase stockholders' equity and net income on a pro forma basis, and will also
increase the Purchase Price as a percentage of pro forma stockholders' equity
per share and net income per share.
The ESOP intends to purchase 8% of the Common Stock issued in the
Conversion. In the event the number of shares issued in the Conversion is
increased as a result of an increase in the Estimated Valuation Range, the ESOP
shall have a first priority right to subscribe for such 284,625 additional
shares, up to an aggregate of 8% of the Common Stock issued in the Conversion.
See "PRO FORMA DATA" and "THE CONVERSION -- Stock Pricing and the Number of
Shares to be Issued."
Possible Adverse Income Tax Consequences of the Distribution of Subscription
Rights
If the Subscription Rights granted to Eligible Account Holders,
Supplemental Eligible Account Holders and Other Members of the Savings Bank are
deemed to have an ascertainable value, receipt of such rights may be a taxable
event (either as capital gain or ordinary income), which may be recognizable by
all or only by those Eligible Account Holders, Supplemental Eligible Account
Holders or Other Members who exercise the Subscription Rights (either as capital
gain or ordinary income) in an amount equal to such value. Additionally, the
Savings Bank could be required to recognize a gain for tax purposes on such
distribution. Whether Subscription Rights are considered to have ascertainable
value is an inherently factual determination. The Savings Bank has been advised
by RP Financial that such rights have no value; however, RP Financial's
conclusion is not binding on the Internal Revenue Service ("IRS"). See "THE
CONVERSION -- Effects of Conversion to Stock Form on Depositors and Borrowers of
the Savings Bank -- Tax Effects."
Risk of Delayed Offering
The Holding Company and the Savings Bank expect to consummate the
Conversion within the time periods indicated in this Prospectus. Nevertheless,
it is possible, although not anticipated, that there could be a significant
delay in the consummation of the Conversion as a result of delays in receiving
OTS and OCC approvals of the Bank Conversion or in receiving the approval of the
Federal Reserve of the Holding Company's acquisition of the Banks. If the
Conversion is not completed by ___________, 1996 (45 days after the last day of
the fully extended Subscription Offering) and the OTS consents to an extension
of time to consummate the Conversion, subscribers will be given the right to
modify or rescind their subscriptions. In such event, unless an affirmative
indication is received
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from subscribers that they wish to continue to subscribe for shares, their funds
will be returned promptly, together with interest at the Savings Bank's passbook
rate, or their withdrawal authorizations will be terminated.
CHESTER BANCORP, INC.
The Holding Company was organized as a Delaware corporation at the
direction of the Savings Bank in March 1996 for the purpose of serving as the
holding company of the Converted Savings Bank upon its conversion from mutual to
stock form, and of the Banks following the Bank Conversion and the Bank
Formation. The Holding Company expects to receive the approval of the OTS to
become a savings and loan holding company and to acquire 100% of the capital
stock of the Savings Bank. The Holding Company also is expected to receive the
approval of the Federal Reserve to become a bank holding company and to acquire
100% of the capital stock of the Banks. Prior to the Conversion, the Holding
Company will not engage in any material operations. Upon consummation of the
Conversion, the Holding Company's principal business will be the business of the
Banks, and the Holding Company will register with the Federal Reserve as a bank
holding company under the BHCA. See "BUSINESS OF THE HOLDING COMPANY."
The management of the Holding Company is set forth under "MANAGEMENT OF THE
HOLDING COMPANY." Initially, the Holding Company will neither own nor lease any
property, but will instead use the premises, equipment and furniture of the
Savings Bank in accordance with applicable law and regulations. Presently, the
Holding Company does not intend to employ any persons other than officers who
are also officers of the Savings Bank, but will utilize the support staff of the
Savings Bank from time to time in accordance with applicable laws and
regulations. Additional employees will be hired as appropriate to the extent the
Holding Company expands or changes its business in the future.
The holding company structure will permit the Holding Company to expand the
financial services currently offered through the Savings Bank. Management
believes that the holding company structure and retention of a portion of the
proceeds of the Offerings will, should it decide to do so, facilitate the
expansion and diversification of its operations. The holding company structure
will also enable the Holding Company to repurchase its stock without adverse tax
consequences. There are no present plans, arrangements, agreements, or
understandings, written or oral, regarding any such activities or repurchases.
See "REGULATION -- Regulation of the Holding Company."
The Holding Company's principal executive office is located at 1112 State
Street, Chester, Illinois, and its telephone number is (618) 826-5038.
CHESTER SAVINGS BANK, FSB
The Savings Bank is a federally chartered mutual savings bank located in
Chester, Illinois, which is approximately 60 miles South of St. Louis, Missouri.
Originally chartered in 1919 as an Illinois-chartered mutual savings and loan
association under the name "Chester Building and Loan Association," the Savings
Bank converted to a federal charter and adopted its current name in 1990. In
1989, the Savings Bank acquired Heritage Federal which at the time of the
acquisition had assets of approximately $50 million and offices in Sparta, Red
Bud and Pinckneyville, Illinois. The Savings Bank is regulated by the OTS, its
primary federal regulator, and the FDIC, the insurer of its deposits. The
Savings Bank's deposits are federally insured by the FDIC under the SAIF. The
Savings Bank is a member of the FHLB System. At March 31, 1996, the Savings Bank
had total assets of $136.8 million, total deposits of $108.5 million and total
equity of $11.9 million, or 8.7% of total assets.
The Savings Bank is a community oriented financial institution which has
traditionally offered a variety of savings products to its retail customers
while concentrating its lending activities on real estate mortgage loans.
Lending activities have been focused primarily on the origination of loans
secured by one- to four-family residential dwellings. To a lesser extent,
lending activities also have included the origination of consumer loans and
commercial real estate and multi-family loans. At March 31, 1996, the Savings
Bank's gross loan portfolio totaled $56.7 million, of which 80.9% were one- to
four-family residential mortgage loans, 11.3% were consumer loans and 5.8% were
8
<PAGE>
commercial real estate and multi-family loans. In addition, the Savings Bank has
maintained a significant portion of its assets in marketable securities. The
Savings Bank's investment portfolio has been weighted toward United States
Treasury and agency securities. This portfolio also has included a significant
amount of tax exempt state and municipal securities. In addition, the Savings
Bank has invested in mortgage-backed securities to supplement its lending
operations. Investments and mortgage-backed securities totaled $57.5 million and
$16.9 million, respectively, at March 31, 1996.
The Savings Bank's primary market area is comprised of Randolph, Perry,
Jackson and Williamson counties of Illinois and Perry and Cape Girardeau
counties in Missouri. See "BUSINESS OF THE SAVINGS BANK -- Market Area." The
Savings Bank faces strong competition in its market area. See "RISK FACTORS --
Dependence on Local Economy and Competition Within Market Area." The Savings
Bank's principal executive office is located at 1112 State Street, Chester,
Illinois 62233, and its telephone number is (618) 826-5038.
CHESTER NATIONAL BANK AND CHESTER NATIONAL BANK OF MISSOURI
Upon consummation of the Conversion, the Banks will succeed to all of the
assets and liabilities of the Converted Savings Bank and will initially continue
to conduct business in substantially the same manner as the Savings Bank prior
to the Conversion. It is anticipated that the Banks will continue to diversify
their loan and deposit mix and add other services in connection with the
Conversion. Management anticipates considering the introduction of a number of
new business products including, but not limited to, debit cards, trust powers,
home equity loans and commercial deposits. Accordingly, management anticipates
that the Banks will incur initial start-up and ongoing expenses as various
programs and services are introduced and in connection with the staffing,
development and marketing of these products. Such expenses could negatively
impact earnings for a period of time while the expected income from these new
programs and services increases to a degree sufficient to cover the additional
expenses. No final determination has been made by management in connection with
these services and products; therefore, no costs associated with these services
and products can be projected at this time. Diversification of the Banks' loan
portfolio is expected to alter the risk profiles of the Banks. Management
believes, however, that the continued diversification of the Banks' asset and
deposit bases and the addition of new banking services are essential for long-
term earnings performance.
The deposits of Chester National Bank will continue to be insured by the
SAIF of the FDIC. Because the De Novo Bank will acquire the deposits of the
Savings Bank's Perryville Branch, which are insured by the SAIF, the deposits of
the De Novo Bank will also be insured by the SAIF. Under the current law,
however, should the De Novo Bank acquire BIF-insured deposits from another
financial institution, such deposits would be BIF-insured. Currently, there are
no specific plans, arrangements, agreements or understandings, written or oral,
regarding such acquisitions of BIF-insured deposits. Accordingly, the Banks will
continue to be subject to regulation and supervision by the FDIC. The Banks will
not be regulated and supervised by the OTS, but rather by the OCC.
USE OF PROCEEDS
The net proceeds from the sale of the Common Stock offered hereby are
estimated to range from $13.4 million to $18.3 million, or up to $21.2 million
if the Estimated Valuation Range is increased by 15%. See "PRO FORMA DATA" for
the assumptions used to arrive at such amounts. The Holding Company has received
the approval of the OTS to purchase all of the capital stock of the Converted
Savings Bank to be issued in the Conversion in exchange for 50% of the net
proceeds of the Offerings, $3.0 million of which will be infused into the De
Novo Bank as its initial capitalization. This will result in the Holding Company
retaining approximately $3.7 million to $6.2 million of net proceeds, or up to
$7.6 million if the Estimated Valuation Range is increased by 15%, and the
Savings Bank receiving an equal amount.
9
<PAGE>
Receipt of 50% of the net proceeds of the sale of the Common Stock
will increase the Banks' capital and will support the expansion of the
Banks' existing business activities. The Banks will use the funds
contributed to it for general corporate purposes, to fund certain tax
payments associated with a portion of the recapture of the Savings Bank's
bad debt reserve, and investment in United States Treasury and agency
securities with laddered maturities up to five years. The Converted
Savings Bank may consider using a portion of the proceeds to reduce its
outstanding reverse repurchase agreements. The $3.0 million initial
capital cash infusion into the De Novo Bank by the Holding Company is
expected to be invested initially by the De Novo Bank in United States
Treasury or agency securities with laddered maturities up to five years.
Shares of Common Stock may be purchased with funds on deposit at the
Savings Bank, which will reduce deposits by the amounts of such
purchases. The net amount of funds available to the Savings Bank for
additional investment following receipt of the Conversion proceeds will
be reduced to the extent shares are purchased with funds on deposit.
In connection with the Conversion and the establishment of the ESOP,
the Holding Company intends to loan the ESOP the amount necessary to
purchase 8% of the shares of Common Stock sold in the Conversion. The
Holding Company's loan to fund the ESOP may range from $1,122,000 to
$1,518,000 based on the sale of 112,200 shares to the ESOP (at the
minimum of the Estimated Valuation Range) and 151,800 shares (at the
maximum of the Estimated Valuation Range), respectively, at $10.00 per
share. If 15% above the maximum of the Estimated Valuation Range, or
2,182,125 shares, are sold in the Conversion, the Holding Company's loan
to the ESOP would be $1,745,700. It is anticipated that the ESOP loan
will have a 15-year term with interest payable at 8.00% per annum. The
loan will be repaid principally from the Banks' contributions to the ESOP
and from any dividends paid on the Common Stock.
The remaining net proceeds retained by the Holding Company initially
will be invested primarily in certificates of deposit and securities of
the type currently held by the Savings Bank. Such proceeds will be
available for additional contributions to the Banks in the form of debt
or equity, to support future diversification or acquisition activities,
as a source of dividends to the stockholders of the Holding Company and
for future repurchases of Common Stock to the extent permitted under
applicable law and federal regulations. Currently, there are no specific
plans, arrangements, agreements or understandings, written or oral,
regarding any diversification or acquisition activities other than as
described herein.
Upon consummation of the Conversion, the Board of Directors will
have the authority to adopt stock repurchase plans, subject to statutory
and regulatory requirements, including the regulations of the OTS
applicable for three years from the consummation date of the
Conversion. Since the Holding Company has not yet issued stock,
there is currently insufficient information upon which an intention to
repurchase stock could be based. The facts and circumstances upon which
the Board of Directors may determine to repurchase stock in the future
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 the ability to improve the Holding 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
Holding Company and its stockholders. Any stock repurchases will be
subject to a determination by the Board of Directors that both the
Holding Company and the Savings Bank will be capitalized in excess of all
applicable regulatory requirements after any such repurchases and that
capital will be adequate, taking into account, among other things, the
level of non-performing and other risk assets, the Holding Company's and
the Savings Bank's current and projected results of operations and
asset/liability structure, the economic environment and tax and other
regulatory considerations. See "THE CONVERSION -- Restrictions on
Repurchase of Stock."
After the Conversion, the Holding Company may consider making a tax-
free distribution to stockholders in the form a return of capital.
However, there are no current plans or understandings regarding such
distributions and the Holding Company has committed to the OTS not to
make any such distributions, or take any action with a view to ward such
distributions, within the first year following the consummation of the
Conversion.
10
<PAGE>
DIVIDEND POLICY
General
The Board of Directors of the Holding Company currently anticipates
paying quarterly cash dividends on the Common Stock subsequent to the
Conversion at an annual rate equal to $0.20 per share ($0.05 per share
quarterly) commencing in the first full quarter following the Conversion,
subject to the factors discussed below at the intended time of
declaration and payment. The payment of dividends on the Common Stock
will be subject to the requirements of applicable law and the
determination by the Board of Directors of the Holding Company that the
net income, capital and financial condition of the Holding Company,
industry trends and general economic conditions justify the payment of
dividends. The rate of such dividends and the initial or continued
payment thereon will depend upon various factors at the intended time of
declaration and payment, including the Banks' profitability and
liquidity, alternative investment opportunities, and regulatory
restrictions on dividend payments and on capital levels applicable to the
Banks. Accordingly, there can be no present assurance that any dividends
will be paid. Periodically, the Board of Directors, if market, economic
and regulatory conditions permit, may combine or substitute periodic
special dividends with or for regular dividends. In addition, since the
Holding Company initially will have no significant source of income other
than dividends from the Banks and earnings from investment of the net
proceeds of the Conversion retained by the Holding Company, the payment
of dividends by the Holding Company will depend in part upon the amount
of the net proceeds from the Conversion retained by the Holding Company
and the Holding Company's earnings thereon and the receipt of dividends
from the Banks, which are subject to various tax and regulatory
restrictions on the payment of dividends. Dividend payments by the
Holding Company are subject to regulatory restriction under Federal
Reserve policy as well as to limitation under applicable provisions of
Delaware corporate law. Under Delaware 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. Assuming the issuance of 1,650,000 shares of the Common
Stock at the midpoint of the Estimated Valuation Range, and based on the
assumptions set forth under "USE OF PROCEEDS," the Holding Company
estimated that it would retain approximately $3.7 million in net
proceeds after funding the ESOP loan and initially capitalizing the De
Novo Bank, which would be available for the payment of dividends and for
other corporate purposes. For additional information, see "REGULATION --
Regulation of the Bank" and "-- Regulation of the Holding Company,"
"TAXATION --Federal Taxation," and Notes 11 and 18 of Notes to Financial
Statements included elsewhere herein.
Current Regulatory Restrictions
Dividends from the Holding Company will depend, in part, upon
receipt of dividends from the Bank because the Holding Company initially
will have no source of income other than dividends from the Banks and
earnings from the investment of the net proceeds from the Conversion
retained by the Holding Company. At March 31, 1996, the Savings Bank met
the criteria to be designated a Tier 1 association, as defined herein,
and consequently could at its option (after prior notice to and no
objection made by the OTS) distribute up to 100% of its net income during
the calendar year plus 50% of its surplus capital ratio at the beginning
of the calendar year less any distributions previously paid during the
year. There can be no assurance that dividends will in fact be paid on
the Common Stock or that, if paid, such dividends will not be reduced or
eliminated in future periods.
Subsequent to the Bank Conversion and Bank Formation, dividends from
the Holding Company will depend upon the receipt of dividends from the
Banks and the payment of such dividends is subject to the restrictions
contained in the OCC regulations. See "REGULATION -- Regulation of the
Banks" for information regarding the payment of dividends by the Banks to
the Holding Company.
11
<PAGE>
MARKET FOR COMMON STOCK
The Holding Company has never issued capital stock and,
consequently, there is no existing market for the Common Stock. Although
the Holding Company has received conditional approval to list the Common
Stock on the Nasdaq National Market under the symbol "CNB," there can be
no assurance that the Holding Company will meet Nasdaq National Market
listing requirements, which include a minimum market capitalization, at
least two market makers and a minimum number of record holders. Making a
market involves maintaining bid and ask quotations and being able, as
principal, to effect transactions in reasonable quantities at those
quoted prices, subject to various securities laws and other regulatory
requirements. EVEREN Securities has indicated its intention to act as a
market maker in the Common Stock following the consummation of the
Conversion, depending on trading volume and subject to compliance with
applicable laws and regulatory requirements. Furthermore, EVEREN
Securities has agreed to use its best efforts to assist the Holding
Company in obtaining additional market makers for the Common Stock. There
can be no assurance there will be two or more market makers for the
Common Stock. 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 Savings Bank, the Holding Company or any market
maker. Furthermore, there can be no assurance that purchasers will be
able to sell their shares at or above the Purchase Price.
12
<PAGE>
CAPITALIZATION
The following table presents the historical capitalization of the
Savings Bank at March 31, 1996, and the pro forma consolidated
capitalization of the Holding Company after giving effect to the
assumptions set forth under "PRO FORMA DATA," based on the sale of the
number of shares of Common Stock set forth below in the Conversion at the
minimum, midpoint and maximum of the Estimated Valuation Range, and based
on the sale of 2,182,125 shares (representing the shares that would be
issued in the Conversion after giving effect to an additional 15%
increase in the maximum valuation in the Estimated Valuation Range,
subject to receipt of an updated appraisal confirming such valuation and
OTS approval). A change in the number of shares to be issued in the
Conversion may materially affect pro forma consolidated
capitalization.
<TABLE>
<CAPTION>
Holding Company
Pro Forma Consolidated Capitalization
Based Upon the Sale of
------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1,402,500 1,650,000 1,897,500 2,182,125
Savings Shares at Shares at Shares at Shares at
Bank $10.00 $10.00 $10.00 $10.00
Historical Per Share(1) Per Share(1) Per Share(1) Per Share(2)
---------- ------------ ------------ ------------ ------------
(In Thousands)
Savings deposits(3)...................... $108,515 $108,515 $108,515 $108,515 $108,515
Reverse repurchase agreements(4)......... 15,000 15,000 15,000 15,000 15,000
ESOP borrowings(5)....................... -- -- -- -- --
---------- ---------- ---------- ---------- ----------
Total savings deposits and
borrowed funds.......................... $123,515 $123,515 $123,515 $123,515 $123,515
========== ========== ========== ========== ==========
Stockholders' equity:
Preferred stock:
100,000 shares, par
value $.01 per share,
authorized; none to be issued
or outstanding...................... $ -- $ -- $ -- $ -- $ --
Common Stock:
3,000,000 shares, par
value $.01 per share, authorized;
specified number of shares
assumed to be issued and
outstanding as
reflected(6)........................ -- 14 17 19 22
Additional paid-in capital............ -- 13,361 15,834 18,306 21,149
Retained earnings(7).................. 11,870 10,919 10,919 10,919 10,919
Less:
Common Stock acquired
by ESOP(5)........................ -- (1,122) (1,320) (1,518) (1,746)
Common Stock to be acquired
by MRP(8)......................... -- (561) (660) (759) (873)
---------- ---------- ---------- ---------- ----------
Total stockholders' equity............... $ 11,870 $ 22,611 $ 24,789 $ 26,967 $ 29,472
========== ========== ========== ========== ==========
</TABLE>
(footnotes on following page)
13
<PAGE>
(1) Does not reflect the possible increase in the Estimated Valuation
Range to reflect changes in market or financial conditions or the
issuance of additional shares under the Stock Option Plan.
(2) This column represents the pro forma capitalization of the Holding
Company in the event the aggregate number of shares of Common Stock
issued in the Conversion is 15% above the maximum of the Estimated
Valuation Range as a result of changes in market or financial
conditions. See "PRO FORMA DATA" and Footnote 1 thereto.
(3) Withdrawals from deposit accounts for the purchase of Common Stock
are not reflected. Such withdrawals will reduce pro forma deposits
by the amounts thereof.
(4) See "RISK FACTORS -- Potential Reduction of Certain Funding
Liabilities" for a discussion of such reverse repurchase agreements.
(5) Assumes that 8% of the Common Stock issued in the Conversion will be
acquired by the ESOP in the Conversion with funds borrowed from the
Holding Company. In accordance with generally accepted accounting
principles ("GAAP"), the amount of Common Stock purchased by the ESOP
represents unearned compensation and is, accordingly, reflected as a
reduction of capital. As shares are released to ESOP participant
accounts, a corresponding reduction in the charge against capital
will occur. Since the funds are borrowed from the Holding Company,
the borrowing will be eliminated in consolidation and no liability
will be reflected in the consolidated financial statements of the
Holding Company. See "MANAGEMENT OF THE SAVINGS BANK -- Benefits --
Employee Stock Ownership Plan."
(6) Each of the Banks' authorized capital will consist solely of 1,000
shares of common stock, par value $1.00 per share, 1,000 shares of
which will be issued to the Holding Company, and 9,000 shares of
preferred stock, no par value per share, none of which will be issued
in connection with the Conversion.
(7) Retained earnings are substantially restricted by applicable
regulatory capital requirements and includes unrealized gain on
securities available-for-sale, net of taxes. Additionally, the
Converted Bank will be prohibited from paying any dividend that would
reduce its regulatory capital below the amount in the liquidation
account, which will be established for the benefit of the Savings
Bank's Eligible Account Holders and Supplemental Eligible Account
Holders at the time of the Conversion and adjusted downward
thereafter as such account holders cease to be depositors. See "THE
CONVERSION -- Effects of Conversion to Stock Form on Depositors and
Borrowers of the Savings Bank -- Liquidation Account." The
difference in amount between the pro forma retained earnings of the
Holding Company and the historical retained earnings of the Savings
Bank is attributable to the expected after-tax effect of the bad debt
recapture discussed under "RISK FACTORS -- Bad Debt Recapture" of
$951,000. Assuming the implementation of the one-time SAIF
assessment discussed under "RISK FACTORS -- Recapitalization of SAIF
and its Impact on SAIF Premiums," the pro forma retained earnings of
the Holding Company would be $10.3 million.
(8) Assumes the purchase in the open market at the Purchase Price,
pursuant to the proposed MRP, of a number of shares equal to 4% of
the shares of Common Stock issued in the Conversion at the minimum,
midpoint, maximum and 15% above the maximum of the Estimated
Valuation Range. The issuance of an additional 4% of the shares of
Common Stock for the MRP from authorized but unissued shares of
Holding Company Common Stock would dilute the ownership interest of
stockholders by 3.85%. The shares are reflected as a reduction of
stockholders' equity. See "RISK FACTORS -- Possible Dilutive Effect
of Benefit Programs," "PRO FORMA DATA" and "MANAGEMENT OF THE SAVINGS
BANK -- Benefits -- Management Recognition Plan." The MRP is subject
to stockholder approval and is expected to be adopted by stockholders
at a meeting to be held no earlier than six months following
consummation of the Conversion.
<PAGE>
HISTORICAL AND PRO FORMA CAPITAL COMPLIANCE
The Savings Bank is currently subject to OTS regulatory capital
requirements. After the Bank Conversion and Bank Formation, however, the Banks
will be required to satisfy OCC regulatory capital requirements, which are
similar but not identical to the OTS capital requirements. The following table
sets forth the Savings Bank's historical capital position relative to the
various minimum OTS regulatory capital requirements. The next table sets forth
the Banks' historical capital position relative to the OCC capital requirements
to which the Banks will be subject, and thereafter presents pro forma data of
the Holding Company relative to the Federal Reserve's regulatory capital
requirements. Pro forma data assumes that the Common Stock has been sold as of
March 31, 1996, at the minimum, midpoint, maximum and 15% above the maximum of
the Estimated Valuation Range, as well as the effect of the bad debt recapture
discussed under "RISK FACTORS--Bad Debt Recapture." For additional information
regarding the financial condition of the Savings Bank and the assumptions
underlying the pro forma capital calculations set forth below, see "USE OF
PROCEEDS," CAPITALIZATION" and "PRO FORMA DATA" and the Financial Statements and
related notes appearing elsewhere herein.
<TABLE>
<CAPTION>
March 31, 1996
-----------------------
Percent of
Adjusted
Total
Amount Assets (1)
------ ------------
<S> <C> <C>
CHESTER SAVINGS BANK, FSB
GAAP capital(2)..... $11,870 8.68%
======= ====
Tangible capital.... $11,920 8.71%
Tangible capital
requirement........ 2,053 1.50
------- -----
Excess.............. $ 9,867 7.21%
======= =====
Core capital........ $11,920 8.71%
Core capital
requirement(3)..... 4,106 3.00
------- -----
Excess.............. $ 7,814 5.71%
======= =====
Risk-based
capital(4)(5)...... $12,308 25.95%
Risk-based
capital requirement 3,795 8.00
------- -----
Excess.............. $ 8,513 17.95%
======= =====
</TABLE>
<TABLE>
<CAPTION>
PRO FORMA AT MARCH 31, 1996
------------------------------------------------------------------------------------------------
Minimum of 15% above
Estimated Midpoint of Estimated Maximum of Estimated Maximum of Estimated
Valuation Range Valuation Range Valuation Range Valuation Range
------------------- ---------------------- ---------------------- -------------------------
1,402,500 Shares 1,650,000 Shares 1,897,500 Shares 2,182,125 Shares
at $10.00 Per Share at $10.00 Per Share at $10.00 Per Share at $10.00 Per Share
------------------- ---------------------- ---------------------- -------------------------
Percent of Percent of Percent of Percent of
Adjusted Adjusted Adjusted Adjusted
Total Total Total Total
Amount Assets (1) Amount Assets (1) Amount Assets (1) Amount Assets (1)
------ ----------- ------ ------------- ------ ------------- ------ ------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
CHESTER SAVINGS BANK, FSB
GAAP capital(2)..... $16,645 11.86% $17,713 12.51% $18,780 13.15% $20,008 13.87%
======= ===== ======= ===== ======= ===== ======= =====
Tangible capital.... $16,695 11.89% $17,763 12.54% $18,830 13.18% $20,058 13.90%
Tangible capital
requirement........ 2,106 1.50 2,125 1.50 2,144 1.50 2,165 1.50
------- ----- ------- ----- ------- ----- ------- -----
Excess.............. $14,589 10.39 $15,638 11.04% $16,686 11.68% $17,893 12.40%
======= ===== ======= ===== ======= ===== ======= =====
Core capital........ $16,695 11.89% $17,763 12.54% $18,830 13.18% $20,058 13.90%
Core capital
requirement(3)..... 4,213 3.00 4,250 3.00 4,287 3.00 4,330 3.00
------- ----- ------- ----- ------- ----- ------- -----
Excess.............. $12,482 8.89% $13,513 9.54% $14,543 10.18% $15,728 10.90%
======= ===== ======= ===== ======= ===== ======= =====
Risk-based
capital(4)(5)...... $17,083 34.48% $18,151 37.50% $19,218 39.51% $20,466 41.78%
Risk-based
capital requirement 3,852 8.00 3,872 8.00 3,892 8.00 3,915 8.00
------- ----- ------- ----- ------- ----- ------- -----
Excess.............. $13,231 27.48% $14,279 29.50% $15,326 31.51% $16,531 33.78%
======= ===== ======= ===== ======= ===== ======= =====
</TABLE>
15
<PAGE>
<TABLE>
<CAPTION>
March 31, 1996
---------------------
Percent of
Adjusted
Total
Amount Assets (1)
------ -------------
<S> <C> <C>
CHESTER NATIONAL BANK
GAAP capital (2).... $11,870 8.68%
======== ====
Tier 1 capital (1).. $11,920 8.71%
Minimum Tier 1
(leverage)
requirement...... 4,106 3.00
-------- ----
Total.......... $ 7,814 5.71%
======== ====
CHESTER NATIONAL
BANK OF MISSOURI
GAAP capital........ $ -- --%
-------- ----
Tier 1 capital (1).. -- --
Minimum Tier 1
(leverage)
requirement...... -- --
-------- ----
Total.......... $ -- --%
======== ====
</TABLE>
<TABLE>
<CAPTION>
PRO FORMA AT MARCH 31, 1996
-------------------------------------------------------------------------------------------------
Minimum of 15% above
Estimated Midpoint of Estimated Maximum of Estimated Maximum of Estimated
Valuation Range Valuation Range Valuation Range Valuation Range
------------------- --------------------- -------------------- --------------------------
1,402,500 Shares 1,650,000 Shares 1,897,500 Shares 2,182,125 Shares
at $10.00 Per Share at $10.00 Per Share at $10.00 Per Share at $10.00 Per Share
------------------- --------------------- -------------------- --------------------------
Percent of Percent of Percent of Percent of
Adjusted Adjusted Adjusted Adjusted
Total Total Total Total
Amount Assets (1) Amount Assets (1) Amount Assets (1) Amount Assets (1)
------- ----------- ------ ----------- ------ ----------- ------ -----------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
CHESTER NATIONAL BANK
GAAP capital (2).... $16,645 11.86% $17,713 12.51% $18,780 13.15% $20,008 13.87%
======= ===== ======= ===== ======= ===== ======= =====
Tier 1 capital (1).. $16,695 11.89% $17,763 12.54% $18,830 13.18% $20,058 13.90%
Minimum Tier 1
(leverage)
requirement...... 4,213 3.00 4,250 3.00 4,287 3.00 4,330 3.00
------- ----- ------- ----- ------- ----- ------- -----
Total.......... $12,482 8.89% $13,513 9.54% $14,543 10.18% $15,728 10.90%
======= ===== ======= ===== ======= ===== ======= =====
CHESTER NATIONAL
BANK OF MISSOURI
GAAP capital........ $ 3,000 47.84% $ 3,000 47.62% $ 3,000 47.41% $ 3,000 47.17%
------- ----- ------- ----- ------- ----- ------- -----
Tier 1 capital (1).. $ 3,000 47.84% $ 3,000 47.62% $ 3,000 47.41% $ 3,000 47.17%
Minimum Tier 1
(leverage)
requirement...... 188 3.00 189 3.00 190 3.00 191 3.00
------- ----- ------- ----- ------- ----- ------- -----
Total.......... $ 2,812 44.84% $ 2,811 44.62% $ 2,810 44.41% $ 2,809 44.17%
======= ===== ======= ===== ======= ===== ======= =====
</TABLE>
<TABLE>
<CAPTION>
March 31, 1996
---------------------
Percent of
Adjusted
Total or
Risk-weighted
Amount Assets (1)
------ -------------
<S> <C> <C>
CHESTER BANCORP,
INC.
Tier 1 Capital...... $ -- --%
Tier 1 Leverage
Requirement........ -- --
-------- -------------
Excess.............. $ -- --%
======== =============
Risk-based
capital(1)......... $ -- --
Minimum risk-based
capital
requirement....... -- --
-------- -------------
Excess.............. $ -- --%
======== =============
</TABLE>
<TABLE>
<CAPTION>
PRO FORMA AT MARCH 31, 1996
--------------------------------------------------------------------------------------------------
Percent of Percent of Percent of Percent of
Risk-weighted Risk-weighted Risk-weighted Risk-weighted
Amount Assets (1) Amount Assets (1) Amount Assets (1) Amount Assets (1)
------ ------------- ------ ------------- ------- ------------- ------ -------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
CHESTER BANCORP, INC.
Tier 1 Capital...... $22,661 15.26% $24,893 16.48% $27,017 17.67% $29,522 19.00%
Tier 1 Leverage
Requirement........ 4,456 3.00 4,522 3.00 4,587 3.00 4,662 3.00
------- ----- ------- ----- ------- ----- ------- -----
Excess.............. $18,205 12.26% $20,317 13.48% $22,430 14.67% $24,960 16.00%
======= ===== ======= ===== ======= ===== ======= =====
Risk-based
capital(1)......... $23,049 46.31% $25,227 50.24% $27,405 54.11% $29,910 58.48%
Minimum risk-based
capital
requirement....... 3,892 8.00 4,017 8.00 4,052 8.00 4,092 8.00
------- ----- ------- ----- ------- ----- ------- -----
Excess.............. $19,067 38.31% $21,210 42.24% $23,353 46.11% $25,818 50.48%
======= ===== ======= ===== ======= ===== ======= =====
</TABLE>
16
<PAGE>
_____________
(1) Based upon adjusted total assets for purposes of the tangible capital and
core capital requirements, and risk-weighted assets for purposes of the
risk-based capital requirement.
(2) The following table presents a reconciliation of pro forma GAAP capital for
Chester Savings Bank, FSB (to become Chester National Bank) and Chester
National Bank of Missouri at March 31, 1996:
<TABLE>
<CAPTION>
15% Above
Minimum of Midpoint of Maximum of Maximum of
Estimated Estimated Estimated Estimated
Valuation Valuation Valuation Valuation
Range Range Range Range
----------- ----------- ----------- -----------
(In thousands)
<S> <C> <C> <C> <C>
Capital Impact on
Chester Savings
Bank, FSB/
Chester National
Bank:
GAAP Capital at
March 31, 1996..... $11,870 $11,870 $11,870 $11,870
Cash Infused into
Chester Savings
Bank, FSB/
Chester National
Bank............. 6,688 7,925 9,163 10,586
Less: ESOP
Adjustment...... (962) (1,131) (1,301) (1,496)
Less: Bad Debt
Recapture....... (951) (951) (951) (951)
------- ------- ------- -------
Pro Forma GAAP
Capital............ $16,645 $17,713 $18,781 $20,009
======= ======= ======= =======
Capital Impact on
Chester National
Bank of Missouri:
GAAP Capital at
March 31, 1996.... $ -- $ -- $ -- $ --
Cash Infused into
Chester National
Bank of Missouri.. 3,160 3,189 3,217 3,249
Less: ESOP
Adjustment...... (160) (189) (217) (249)
------- ------- ------- -------
Pro forma GAAP
Capital............ $ 3,000 $ 3,000 $ 3,000 $ 3,000
======= ======= ======= =======
</TABLE>
(3) The current OTS core capital requirement for savings associations is 3% of
total adjusted assets. The OTS has proposed core capital requirements which
would require a core capital ratio of 3% of total adjusted assets for
thrifts that receive the highest supervisory rating for safety and
soundness and a core capital ratio of 4% to 5% for all other thrifts.
(4) Percentage represents total core and supplementary capital divided by total
risk-weighted assets.
(5) Assumes reinvestment of net proceeds into assets with risk weights of 20%.
17
<PAGE>
PRO FORMA DATA
Under the Plan of Conversion, the Common Stock must be sold at an aggregate
price equal to the estimated pro forma market value of the Holding Company and
the Savings Bank, as converted, based upon an independent valuation. The
Estimated Valuation Range as of June 14, 1996, as updated as of August 2, 1996,
is from a minimum of $14.0 million to a maximum of $19.0 million with a midpoint
of $16.5 million or, at a price per share of $10.00, a minimum number of shares
of 1,402,500, a maximum number of shares of 1,897,500 and a midpoint number of
shares of 1,650,000. The actual net proceeds from the sale of the Common Stock
cannot be determined until the Conversion is consummated. However, net proceeds
set forth on the following table are based upon the following assumptions: (i)
EVEREN Securities will receive a non-refundable retainer fee of $15,000 and a
completion fee of $200,000 in the Offerings; (ii) none of the shares will be
sold in the Public Offering for which EVEREN Securities would receive an
underwriting fee of 7.0%; (iii) Conversion expenses will total approximately
$650,000. Actual expenses may vary from this estimate, and the fees paid will
depend upon the percentages and total number of shares sold in the Subscription
Offering, Direct Community Offering and the Public Offering and other
factors.
The pro forma consolidated net income of the Holding Company for the year
ended December 31, 1995 and the three months ended March 31, 1996 has been
calculated as if the Stock Conversion had been consummated at the beginning of
such period and the estimated net proceeds received by the Holding Company and
the Converted Savings Bank had been invested at 5.38% at the beginning of such
period, which represents the one-year United States Treasury Bill yield as of
March 31, 1996. While OTS regulations provide for the use of a yield
representing the arithmetic average of the weighted average yield earned by the
Savings Bank on its interest-earning assets and the rates paid on its deposits,
the Holding Company believes the U.S. Treasury Bill yield represents a more
realistic yield on the Savings Bank's investments. As discussed under "USE OF
PROCEEDS," the Holding Company expects to retain 50% of the net proceeds of the
Offerings from which it will fund the ESOP loan and the initial capitalization
of the De Novo Bank. A pro forma after-tax return of 3.3% is used for both the
Holding Company and the Savings Bank for both the year ended December 31, 1995
and the three months ended March 31, 1996, after giving effect to an incremental
combined federal and state tax rate of 38.0%. Historical and pro forma per share
amounts have been calculated by dividing historical and pro forma amounts by the
indicated number of shares of Common Stock. 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 per share historical or pro forma
stockholders' equity to reflect the earnings on the estimated net proceeds.
The following table summarizes the historical net income and total equity
of the Savings Bank and the pro forma consolidated net income and stockholders'
equity of the Holding Company for the periods and at the dates indicated, based
on the minimum, midpoint and maximum of the Estimated Valuation Range and based
on a 15% increase in the maximum of the Estimated Valuation Range. No effect has
been given to (i) the shares to be reserved for issuance under the Holding
Company's Stock Option Plan, which is expected to be adopted by stockholders at
a meeting to be held no earlier than six months following consummation of the
Conversion; (ii) withdrawals from deposit accounts for the purpose of purchasing
Common Stock in the Conversion; (iii) the issuance of shares from authorized but
unissued shares to the MRP, which is expected to be adopted by stockholders at a
meeting to be held no earlier than six months following consummation of the
Conversion; or (iv) the establishment of a liquidation account for the benefit
of Eligible Account Holders and Supplemental Eligible Account Holders. See
"MANAGEMENT OF THE SAVINGS BANK -- Benefits -- 1996 Stock Option Plan" and "THE
CONVERSION -- Stock Pricing and Number of Shares Issued." Shares of Common Stock
may be purchased with funds on deposit at the Savings Bank, which will reduce
deposits by the amounts of such purchases. Accordingly, the net amount of funds
available for investment will be reduced to the extent shares are purchased with
funds on deposit.
The following pro forma information may not be representative of the
financial effects of the Conversion at the date on which the Conversion actually
occurs and should not be taken as indicative of future results of operations.
Stockholders' equity represents the difference between the stated amounts of
consolidated assets and liabilities of the Holding Company computed in
accordance with GAAP. Stockholders' equity has not been increased or decreased
to reflect the difference between the carrying value of loans and other assets
and market value. Stockholders' equity is not intended to represent fair market
value nor does it represent amounts that would be available for distribution to
stockholders in the event of liquidation.
18
<PAGE>
<TABLE>
<CAPTION>
At or For the Year Ended December 31, 1995
------------------------------------------------
Minimum of Midpoint of Maximum of 15% Above
Estimated Estimated Estimated Maximum of
Valuation Valuation Valuation Estimated Valuation
Range Range Range Range
---------- ---------- ---------- -------------------
1,402,500 1,650,000 1,897,500 2,182,125(1)
Shares Shares Shares Shares
at $10.00 at $10.00 at $10.00 at $10.00
Per Share Per Share Per Share Per Share
---------- ---------- ---------- ----------
(In Thousands, Except Per Share Amounts)
<S> <C> <C> <C> <C>
Gross proceeds.................................. $14,025 $16,500 $18,975 $21,821
Less:
Estimated Offering expenses..................... 650 650 650 650
---------- ---------- ---------- ----------
Estimated net proceeds.......................... $13,375 $15,850 $18,325 $21,171
Less:
Common Stock acquired by ESOP................... (1,122) (1,320) (1,518) (1,746)
Common Stock to be acquired by MRP.............. (561) (660) (759) (873)
---------- ---------- ---------- ----------
Estimated investable proceeds
to the Holding Company........................ $11,692 $13,870 $16,048 $18,553
========== ========= ========== ==========
Consolidated net income:
Historical..................................... $ 1,001 $ 1,001 $ 1,001 $ 1,001
Pro forma income on net proceeds(2)............ 390 463 535 619
Pro forma ESOP adjustments(3).................. (46) (55) (63) (72)
Pro forma MRP adjustments(4)................... (70) (82) (94) (108)
---------- ---------- ---------- ----------
Pro forma(10)................................ $ 1,275 $ 1,327 $ 1,379 $ 1,440
========== ========= ========== ==========
Consolidated net income per share(5)(6):
Historical..................................... $ 0.77 $ 0.66 $ 0.57 $ 0.50
Pro forma income on net proceeds............... 0.30 0.30 0.31 0.31
Pro forma ESOP adjustments(3).................. (0.04) (0.04) (0.04) (0.04)
Pro forma MRP adjustments(4)................... (0.05) (0.05) (0.05) (0.05)
---------- ---------- ---------- ----------
Pro forma(10)................................ $ 0.98 $ 0.87 $ 0.79 $ 0.72
========== ========= ========== ==========
Consolidated stockholder's equity (book value)(7):
Historical..................................... $11,712 $11,712 $11,712 $11,712
Estimated net proceeds......................... 13,375 15,850 18,325 21,171
Less:
Bad debt recapture............................. (951) (951) (951) (951)
Common Stock acquired by ESOP.................. (1,122) (1,320) (1,518) (1,746)
Common Stock to be acquired by MRP(4).......... (561) (660) (759) (873)
---------- ---------- ---------- ----------
Pro forma(7)................................. $22,453 $24,631 $26,809 $29,314
========== ========== ========== ==========
Consolidated stockholders' equity per share(6)(8):
Historical(6).................................. $ 8.35 $ 7.10 $ 6.17 $ 5.37
Estimated net proceeds......................... 9.54 9.61 9.66 9.70
Bad debt recapture............................. (0.68) (0.58) (0.50) (0.46)
Common Stock acquired by ESOP.................. (0.80) (0.80) (0.80) (0.80)
Common Stock to be acquired by MRP(4).......... (0.40) (0.40) (0.40) (0.40)
--------- ---------- ---------- ----------
Pro forma(9)(11)............................. $16.01 $ 14.93 $ 14.13 $ 13.43
========= ========== ========== ==========
Purchase Price as a percentage of pro forma
stockholders' equity per share................. 62.46% 66.98% 70.77% 74.46%
========= ========== ========== ==========
Purchase Price as a multiple of pro forma
net earnings per share.......................... 10.20x 11.49x 12.66x 13.89x
========= ========== ========== ==========
</TABLE>
(footnotes on following page)
19
<PAGE>
<TABLE>
<CAPTION>
At or For the Three Months Ended March 31, 1996
--------------------------------------------------------------------------
Minimum of Midpoint of Maximum of 15% Above
Estimated Estimated Estimated Maximum of
Valuation Valuation Valuation Estimated
Range Range Range Valuation Range
---------- ---------- ---------- ---------------
1,402,500 1,650,000 1,897,500 2,182,125(1)
Shares Shares Shares Shares
at $10.00 at $10.00 at $10.00 at $10.00
Per Share Per Share Per Share Per Share
--------- --------- --------- ---------
(In Thousands, Except Per Share Amounts)
<S> <C> <C> <C> <C>
Gross proceeds.................................. $14,025 $16,500 $18,975 $21,821
Less:
Estimated Offering expenses.................... 650 650 650 650
------- ------- ------- -------
Estimated net proceeds.......................... $13,375 $15,850 $18,325 $21,171
Less:
Common Stock acquired by ESOP.................. (1,122) (1,320) (1,518) (1,746)
Common Stock to be acquired by MRP............. (561) (660) (759) (873)
------- ------- ------- -------
Estimated investable proceeds
to the Holding Company........................ $11,692 $13,870 $16,048 $18,553
======= ======= ======= =======
Consolidated net income:
Historical..................................... $244 $244 $244 $244
Pro forma income on net proceeds(2)........... 97 116 134 155
Pro forma ESOP adjustments(3)................. (12) (14) (16) (18)
Pro forma MRP adjustments(4).................. (17) (20) (24) (27)
------- ------- ------- -------
Pro forma(10)................................ $ 312 $ 326 $ 338 $ 354
======= ======= ======= =======
Consolidated net income per share(5)(6):
Historical..................................... $0.19 $0.16 $0.14 $0.12
Pro forma income on net proceeds.............. 0.08 0.08 0.08 0.08
Pro forma ESOP adjustments(3)................. (0.01) (0.01) (0.01) (0.01)
Pro forma MRP adjustments(4).................. (0.01) (0.01) (0.01) (0.01)
----- ----- ----- -----
Pro forma(10)................................ $0.25 $0.22 $0.20 $0.18
===== ===== ===== =====
Consolidated stockholders' equity (book value)(7):
Historical..................................... $11,870 $11,870 $11,870 $11,870
Estimated net proceeds........................ 13,375 15,850 18,325 21,171
Less:
Bad debt recapture............................. (951) (951) (951) (951)
Common Stock acquired by ESOP................. (1,122) (1,320) (1,518) (1,746)
Common Stock to be acquired by MRP(4)......... (561) (660) (759) (873)
------- ------- ------- -------
Pro forma(7)................................. $22,611 $24,789 $26,967 $29,472
======= ======= ======= =======
Consolidated stockholders' equity per share(6)(8):
Historical(6).................................. $8.46 $7.19 $6.26 $5.44
Estimated net proceeds........................ 9.54 9.61 9.66 9.70
Bad debt recapture............................. (0.68) (0.58) (0.50) (0.44)
Common Stock acquired by ESOP................. (0.80) (0.80) (0.80) (0.80)
Common Stock to be acquired by MRP(4)......... (0.40) (0.40) (0.40) (0.40)
------ ------ ------ ------
Pro forma(9)(11)............................. $16.12 $15.02 $14.22 $13.50
====== ====== ====== ======
Purchase Price as a percentage of pro forma
stockholders' equity per share................. 62.03% 66.58% 70.32% 74.07%
====== ====== ====== ======
Purchase Price as a multiple of pro forma
net earnings per share......................... 10.00x 11.36x 12.50x 13.89x
====== ====== ====== ======
</TABLE>
(footnotes on following page)
20
<PAGE>
(1) Gives effect to the sale of an additional 284,625 shares in the
Conversion, which may be issued as a result of an increase in the pro
forma market value of the Holding Company and the Savings Bank as
converted, without the resolicitation of subscribers or any right of
cancellation. The issuance of such additional shares will be
conditioned on a determination of the independent appraiser that such
issuance is compatible with its determination of the estimated pro
forma market value of the Holding Company and the Savings Bank as
converted. See "THE CONVERSION -- Stock Pricing and Number of Shares
to be Issued."
(2) No effect has been given to withdrawals from accounts for the purpose
of purchasing Common Stock in the Conversion.
(3) It is assumed that 8% of the shares of Common Stock offered in the
Stock Conversion will be purchased by the ESOP. The funds used to
acquire such shares will be borrowed by the ESOP (at an interest rate
equal to 8.00% per annum), from the net proceeds retained by the
Holding Company. The amount of this borrowing has been reflected as
a reduction from gross proceeds to determine estimated net proceeds.
The Savings Bank intends to make contributions to the ESOP in amounts
at least equal to the principal and interest requirement of the debt.
As the debt is paid down, stockholders' equity will be increased.
The Converted Savings Bank's payment of the ESOP debt is based upon
equal installments of principal over a 15-year period, assuming a
combined federal and state tax rate of 38.0%. Interest income earned
by the Holding Company on the ESOP debt offsets the interest paid by
the Savings Bank on the ESOP loan. No reinvestment is assumed on
proceeds contributed to fund the ESOP. The ESOP expense reflects
adoption of Statement of Position ("SOP") 93-6, which will require
recognition of expense based upon shares committed to be released and
the exclusion of unallocated shares from earnings per share
computations. The valuation of shares committed to be released would
be based upon the average market value of the shares during the year,
which, for purposes of this calculation, was assumed to be equal to
the $10.00 per share Purchase Price. See "MANAGEMENT OF THE SAVINGS
BANK -- Benefits -- Employee Stock Ownership Plan."
(4) In calculating the pro forma effect of the MRP, it is assumed that
the required stockholder approval has been received, that the shares
were acquired by the MRP at the beginning of the period presented in
open market purchases at the Purchase Price and that 20% of the
amount contributed was an amortized expense during such period. The
issuance of authorized but unissued shares of the Common Stock
instead of open market purchases would dilute the voting interests of
existing stockholders by approximately 3.85% and pro forma net income
per share would be $0.96, $0.85, $0.78 and $0.71 at the minimum,
midpoint, maximum and 15% above the maximum of the Estimated
Valuation Range for the year ended December 31, 1995, respectively,
and $0.24, $0.21, $0.19 and $0.18 at March 31, 1996, respectively,
and pro forma stockholders' equity per share would be $15.78, $14.75,
$13.97 and $13.30 at the minimum, midpoint, maximum and 15% above the
maximum of the Estimated Valuation Range at December 31, 1995,
respectively, and $15.89, $14.84, $14.05 and $13.37 for the three
months ended March 31, 1996, respectively. Shares issued under the
MRP vest 20% per year and, for purposes of this table, compensation
expense is recognized on a straight-line basis over each vesting
period. In the event the fair market value per share is greater than
$10.00 per share on the date of stockholder approval of the MRP,
total MRP expense would increase. The total estimated MRP expense
was multiplied by 20% (the total percent of shares for which expense
is recognized in the first year) resulting in pre-tax MRP expense of
$112,200, $132,000, $151,800, and $174,570 at the minimum, midpoint,
maximum and 15% above the maximum of the Estimated Valuation Range
for the year ended December 31, 1995, respectively, and $28,050,
$33,000, $37,950 and $43,643 for the three months ended March 31,
1996, respectively. No effect has been given to the shares reserved
for issuance under the proposed Stock Option Plan. If stockholders
approve the Stock Option Plan following the Conversion, the Holding
Company will have reserved for issuance under the Stock Option Plan
authorized but unissued shares of Common Stock representing an amount
of shares equal to 10% of the shares sold in the Conversion. If all
of the options were to be exercised utilizing these authorized but
unissued shares rather than treasury shares (which could be
acquired), the voting interests of existing stockholders would be
diluted by approximately 9.1%. See "MANAGEMENT OF THE SAVINGS BANK -
- Benefits -- 1996 Stock Option Plan" and "-- Management Recognition
Plan" and "RISK FACTORS -- Possible Dilutive Effect of Benefit
Programs."
(5) Per share amounts are based upon shares outstanding of 1,295,910,
1,524,600, 1,753,290 and 2,016,284 at the minimum, midpoint, maximum
and 15% above the maximum of the Estimated Valuation Range for the
year
21
<PAGE>
ended December 31, 1995 and 1,291,703, 1,519,650, 1,747,598 and
2,009,737 for the three months ended March 31, 1996, respectively,
which includes the shares of Common Stock sold in the Conversion
less the number of shares assumed to be held by the ESOP not
committed to be released on a weighted-average basis in the year
following the Conversion.
(6) Historical per share amounts have been computed as if the shares of
Common Stock expected to be issued in the Conversion had been
outstanding at the beginning of the period or on the date shown, but
without any adjustment of historical net income or historical
retained earnings to reflect the investment of the estimated net
proceeds of the sale of shares in the Conversion, the additional
ESOP expense or the proposed MRP expense, as described above.
(7) "Book value" represents the difference between the stated amounts of
the Savings Bank's assets and liabilities. The amounts shown do not
reflect the liquidation account that will be established for the
benefit of Eligible Account Holders and Supplemental Eligible
Account Holders in the Conversion, or the federal income tax
consequences of the restoration to income of the Savings Bank's
special bad debt reserves for income tax purposes, which would be
required in the unlikely event of liquidation. See "THE
CONVERSION--Effects of Conversion to Stock Form on Depositors and
Borrowers of the Savings Bank" and "TAXATION." The amounts shown for
book value do not represent fair market values or amounts
distributable to stockholders in the unlikely event of liquidation.
(8) Per share amounts are based upon shares outstanding of 1,402,500,
1,650,000, 1,897,500 and 2,182,125 at the minimum, midpoint, maximum
and 15% above the maximum of the Estimated Valuation Range,
respectively.
(9) Neither represents, nor is intended to represent, possible future
price appreciation or depreciation of the Common Stock.
(10) Pro forma consolidated net loss per share would be $0.25, $0.18,
$0.12 and $0.08 at the minimum, midpoint, maximum and 15% above the
maximum of the Estimated Valuation Range for the year ended December
31, 1995 and $0.99, $0.83, $0.72 and $0.62 for the three months
ended March 31, 1996, respectively, assuming the implementation of
the one-time SAIF assessment discussed under "RISK FACTORS --
Recapitalization of SAIF and its Impact on SAIF Premiums" and the
bad debt recapture discussed under "RISK FACTORS -- Bad Debt
Recapture."
(11) The proposed one-time SAIF assessment and the bad debt reserve
recapture discussed in footnote (10) above would have an effect on
pro forma consolidated stockholders' equity per share. Assuming
implementation of the proposed SAIF assessment and the bad debt
recapture, pro forma consolidated stockholders' equity per share
would be $15.55, $14.53, $13.79 and $13.13 at the minimum, midpoint,
maximum and 15% above the maximum of the Estimated Valuation Range
at December 31, 1995, respectively, and $15.66, $14.63, $13.87 and
$13.20 for three months ended March 31, 1996, respectively.
22
<PAGE>
CHESTER SAVINGS BANK, FSB
STATEMENTS OF INCOME
The Statement of Income of Chester Savings Bank, FSB for the fiscal
year ended December 31, 1995 has been audited by KPMG Peat Marwick LLP, St.
Louis, Missouri, independent auditors, whose report thereon appears elsewhere
in this Prospectus. The Statements of Income of Chester Savings Bank, FSB for
the fiscal years ended December 31, 1994 and 1993 have been audited by Kerber,
Eck & Braeckel LLP, independent auditors, whose report thereon also appears
elsewhere in this Prospectus. These statements should be read in conjunction
with the Financial Statements and related Notes included elsewhere herein.
The Statements of Income for the three months ended March 31, 1996 and 1995
are unaudited, but in the opinion of management, reflect all adjustments
necessary for a fair presentation of the results for such periods. All such
adjustments are of a normal recurring nature. The results for the three month
period ended March 31, 1996 are not necessarily indicative of the results of
the Savings Bank that may be expected for the entire year.
<TABLE>
<CAPTION>
Three Months Ended
March 31, Year Ended December 31,
---------------------- ------------------------------------
1996 1995 1995 1994 1993
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Interest income:
Loans receivable......................................... $1,244,178 $1,231,202 $5,026,068 $4,831,691 $5,542,355
Mortgage-backed securities............................... 263,074 229,763 955,249 770,264 750,997
Investment securities.................................... 520,886 568,892 2,139,821 1,821,823 1,418,384
Interest-bearing deposits and federal funds sold......... 241,241 204,587 874,839 1,230,257 1,372,017
Other.................................................... 10,662 9,173 39,064 41,890 48,043
---------- ---------- ---------- ---------- ----------
Total interest income................................ 2,280,041 2,243,617 9,035,041 8,695,925 9,131,796
---------- ---------- ---------- ---------- ----------
Interest expense:
Savings deposits......................................... 1,151,227 1,328,471 5,279,535 5,089,295 5,526,076
Securities sold under agreements to repurchase........... 183,336 -- 194,144 -- --
---------- ---------- ---------- ---------- ----------
Total interest expense............................... 1,334,563 1,328,471 5,473,679 5,089,295 5,526,076
---------- ---------- ---------- ---------- ----------
Net interest income.................................. 945,478 915,146 3,561,362 3,606,630 3,605,720
Provision for loan losses................................. 7,500 (2,300) 161,319 69,309 29,627
---------- ---------- ---------- ---------- ----------
Net interest income after
provision for loan losses.......................... 937,978 917,446 3,400,043 3,537,321 3,576,093
---------- ---------- ---------- ---------- ----------
Noninterest income:
Late charges and other fees.............................. 26,852 22,566 102,363 81,412 92,425
Loss on sale of certificates of deposit.................. (53,714) -- -- -- --
Gain on sale of investment securities, net............... 6,837 47,447 52,497 -- --
Gain on sale of mortgage-backed
securities, net........................................ -- -- 45,919 -- --
Other.................................................... 16,359 7,706 37,376 32,835 36,267
---------- ---------- ---------- ---------- ----------
Total noninterest income (loss)...................... (3,666) 77,719 238,155 114,247 128,692
---------- ---------- ---------- ---------- ----------
Noninterest expense:
General and administrative:
Compensation and employee benefits...................... 327,266 280,773 1,095,268 1,172,522 1,137,737
Occupancy............................................... 70,651 70,310 293,634 300,908 282,337
Data processing......................................... 41,041 40,646 166,809 158,242 156,522
Advertising............................................. 10,504 11,158 54,576 60,303 47,991
Federal insurance premiums.............................. 61,732 74,978 294,762 300,982 249,784
Other................................................... 102,198 94,590 415,255 414,451 384,292
---------- ---------- ---------- ---------- ----------
Total general and administrative..................... 613,392 572,455 2,320,304 2,407,408 2,258,663
(Gain) loss on real estate acquired by foreclosure, net.. 228 68 17,994 (33,626) 10,834
Provision for losses on real estate
acquired by foreclosure................................. -- -- -- -- 7,500
---------- ---------- ---------- ---------- ----------
Total noninterest expense............................ 613,620 572,523 2,338,298 2,373,782 2,276,997
---------- ---------- ---------- ---------- ----------
Income before income tax expense
and cumulative effect of change
in accounting principle............................ 320,692 422,642 1,299,900 1,277,786 1,427,788
Income tax expense........................................ 77,000 109,000 299,000 284,742 306,661
---------- ---------- ---------- ---------- ----------
Income before cumulative effect of
change in accounting principle....................... 243,692 313,642 1,000,900 993,044 1,121,127
Cumulative effect of change in accounting principle....... -- -- -- -- (227,097)
---------- ---------- ---------- ---------- ----------
Net income........................................... $ 243,692 $ 313,642 $1,000,900 $ 993,044 $ 894,030
========== ========== ========== ========== ==========
</TABLE>
See accompanying Notes to Financial Statements.
23
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General
The principal business of the Savings Bank consists of attracting deposits
from the general public and using these funds to originate mortgage loans
secured by one- to four-family residences and to invest in investments and
mortgage-backed securities. To a lesser extent, the Savings Bank engages in
various forms of consumer lending. The Savings Bank's profitability depends
primarily on its net interest income, which is the difference between the
interest income it earns on its loans, mortgage-backed securities and investment
portfolio and its cost of funds, which consists mainly of interest paid on
deposits and reverse repurchase agreements. Net interest income is affected by
the relative amounts of interest-earning assets and interest-bearing liabilities
and the interest rates earned or paid on these balances. When interest-earning
assets approximate or exceed interest-bearing liabilities, any positive interest
rate spread will generate net interest income. Net interest income is then
reduced to the extent of provisions for loan losses.
The Savings Bank's profitability is also affected by the level of
noninterest income and expense. Noninterest income consists primarily of gains
and losses on the sale of investment securities and mortgage-backed securities,
late charges on loans, and deposit account fees. Noninterest expense consists
of salaries and benefits, occupancy related expenses, data processing expenses,
deposit insurance premiums paid to the SAIF and other operating expenses.
The operations of the Savings Bank are significantly influenced by general
economic conditions and related monetary and fiscal policies of financial
institutions regulatory agencies. Deposit flows and the cost of funds are
influenced by interest rates on competing investments and general market rates
of interest. Lending activities are affected by the demand for financing real
estate and other types of loans, which in turn is affected by the interest rates
at which such financing may be offered and other factors affecting loan demand
and the availability of funds.
Business Strategy
The Savings Bank's current business strategy is to operate as a well
capitalized, profitable and independent community savings bank dedicated to
financing home ownership and consumer needs in its market area and to provide
quality service to its customers. The Savings Bank has implemented this
strategy by: (1) closely monitoring the needs of customers and providing
quality service; (2) emphasizing consumer banking by originating residential
mortgage loans and consumer loans, and by offering checking accounts and other
financial services and products; (3) maintaining asset quality; (4) maintaining
significant investments in investment and mortgage-backed securities and various
short-term investments; (5) maintaining capital in excess of regulatory
requirements; (6) increasing earnings; and, (7) managing interest rate risk by
attempting to match asset and liability maturities and rates.
The Banks will operate in substantially the same manner as the Savings Bank
initially following the consummation of the Bank Conversion. However, it is
anticipated that, subject to market conditions, competition and related factors,
among other things, the Banks intend to pursue a business strategy that places
greater emphasis on commercial real estate and consumer lending as these types
of lending, rather than residential mortgage lending, are emphasized by
commercial banks, including national banks. Commercial real estate and consumer
lending are generally considered to involve a greater degree of risk than
residential mortgage lending. See "RISK FACTORS -- Certain Loan Underwriting
Considerations and Risk of Lending Strategy." Furthermore, management
anticipates considering the introduction of various new business products,
including, but not limited to debit cards, trust powers, home equity loans and
commercial deposits. Accordingly, management anticipates that the Banks will
incur start-up and ongoing expenses as these new programs and services are
introduced. Since no determination has been made by management in connection
with these services and products, no costs associated with them can be projected
at this time. See "RISK FACTORS -- Return on Equity After Conversion."
24
<PAGE>
Financial Condition at March 31, 1996 Compared to December 31, 1995
Assets. The Savings Bank's total assets increased by $2.0 million, or
1.5%, to $136.8 million at March 31, 1996 from $134.8 million at December 31,
1995. The increase in the Savings Bank's asset size resulted primarily from a
$1.8 million increase in savings deposits. The funds received from the
additional deposits and the decline in certificates of deposit and loans
receivable of $5.6 million and $1.3, respectively, were used to increase
investment securities and mortgage-backed securities by $7.3 million and $1.5
million, respectively.
Loans receivable decreased $1.3 million, or 2.2%, to $55.8 million at March
31, 1996 from $57.0 million at December 31, 1995. Loan originations for the
three months ended March 31, 1996 totaled $3.4 million while principal
repayments totaled $4.6 million. Although loan originations remained relatively
consistent with the comparable period in 1995, principal repayments increased by
$1.0 million to $4.6 million for the three months ended March 31, 1996 from $3.6
million for the three months ended March 31, 1995. Because of conditions in
the Savings Bank's primary market area, such as population shrinkage, low
economic growth and significant competition, the demand for mortgage loans has
been limited. See "RISK FACTORS -- Dependence on Local Economy and Competition
Within Market Area." As a result, the Savings Bank has increased its investment
in mortgage-backed securities and investment securities and has sought to become
more active in consumer lending.
Mortgage-backed securities at March 31, 1996 were $16.9 million compared to
$15.4 million at December 31, 1995. Investment securities increased $7.3
million, or 18.9%, to $45.6 million at March 31, 1996 from $38.3 million at
December 31, 1995. The increase in 1996 was attributable to management's
decision to reinvest the proceeds from maturities and sales of certificates of
deposit into higher yielding investments. Since mortgage loan demand has been
limited in the Savings Bank's primary market area, the Savings Bank has
increased its investment in mortgage-backed securities and investment
securities.
Certificates of deposit, federal funds sold, interest-bearing deposits, and
cash, on a combined basis, decreased $6.0 million, or 29.3%, to $14.4 million at
March 31, 1996 from $20.4 million at December 31, 1995. The decrease in 1996
was due to the $5.6 million decline in certificates of deposit from December 31,
1995 to March 31, 1996. Management determined in 1995 to reinvest the proceeds
from certificate of deposit maturities and sales into other types of
investments with higher yields .
Liabilities. Savings deposits increased $1.8 million, or 1.7%, to $108.5
million at March 31, 1996 from $106.7 million at December 31, 1995. The
increase in the deposit base was mainly due to the $1.9 million of additional
deposits made during the three months ended March 31, 1996 by Gilster-Mary Lee.
Michael W. Welge, Chairman of the Board, President and Chief Financial
Officer of the Holding Company and Chairman of the Board and Chief Financial
Officer of the Savings Bank, is an executive officer of Gilster-Mary Lee, a food
manufacturing and packaging company headquartered in Chester, Illinois. Over
the last several years, Gilster-Mary Lee has maintained a deposit relationship
with the Savings Bank, which at times has increased to as much as $25 million,
typically with short term maturities. See "RISK FACTORS -- Potential Reduction
of Certain Funding Liabilities." Gilster-Mary Lee had savings deposits of
$6.2 million and $4.3 million with the Savings Bank at March 31, 1996 and
December 31, 1995, respectively. In addition, Gilster-Mary Lee had $15.0
million of reverse repurchase agreements at March 31, 1996. After reviewing
its cash management needs, Gilster-Mary Lee has notified the Savings Bank of
its intent to draw down the balance of such funds by at least $10.0 million in
the short-term and maintain much smaller balances in the future. The loss of
funds is expected to impair earnings as there is no intent to replace the
savings deposits or reverse repurchase agreements with other wholesale funds.
At March 31, 1996, the Savings Bank maintained an adequate liquidity level to
cover the withdrawal of such deposits, the reduction of such borrowings, or
both.
25
<PAGE>
Financial Condition At December 31, 1995 Compared to December 31, 1994
Assets. The Savings Bank's total assets decreased by $7.0 million, or
4.9%, to $134.8 million at December 31, 1995 from $141.8 million at December 31,
1994. The decline in the Savings Bank's asset size primarily resulted from an
$8.8 million reduction in the investment in certificates of deposit, the
proceeds of which were used to fund savings withdrawals in excess of those
converted to reverse repurchase agreements which reflected management's
determination to compete less aggressively on rates, thereby permitting some
deposit runoff.
Loans receivable decreased $1.1 million, or 2.0%, to $57.0 million at
December 31, 1995 from $58.2 million at December 31, 1994. Loan originations
for 1995 totaled $15.3 million while principal repayments totaled $16.1 million.
Although principal repayments remained relatively consistent with the 1994
amount, loan originations increased $2.2 million in 1995, compared to 1994
originations. Because of conditions in the Savings Bank's primary market
area, such as population shrinkage, low economic growth and significant
competition, the demand for mortgage loans has been limited. As a result, the
Savings Bank has increased its investment in mortgage-backed securities and
investment securities and has sought to become more active in consumer lending.
Mortgage-backed securities at December 31, 1995 were $15.4 million compared
to $13.1 million at December 31, 1994. The $2.3 million, or 17.3%, increase in
1995 resulted from $6.2 million of mortgage-backed security purchases exceeding
$1.6 million of principal repayments and $2.4 million of sales. The increased
investment in mortgage-backed securities was primarily the result of limited
mortgage loan demand in the Savings Bank's primary market area.
Investment securities decreased $2.8 million, or 6.7%, to $38.3 million at
December 31, 1995 from $41.1 million at December 31, 1994. The decrease in
1995 resulted primarily from the sale in December 1995 of $7.6 million of U.S.
agency securities and mortgage-backed bonds pursuant to the Special Report
adopted by the FASB under SFAS 115, which permitted a one-time reclassification
of securities classified held to maturity to the available for sale
classification without "tainting" the remainder of the held to maturity
securities. See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS -- Impact of New Accounting Pronouncements --
Accounting for Investments in Debt and Equity Securities."
Certificates of deposit, federal funds sold, interest-bearing deposits, and
cash, on a combined basis, decreased $5.4 million, or 20.9%, to $20.4 million at
December 31, 1995 from $25.8 million at December 31, 1994. The decrease in 1995
was the result of an $8.8 million decline in certificates of deposit from 1994
to 1995. Management determined in 1995 to reinvest the proceeds from
certificate of deposit maturities into other types of investments. Also, the
Savings Bank needed to use its excess liquidity to fund the $8.0 million net
outflow of savings deposits.
Liabilities. Savings deposits decreased $23.0 million, or 17.7%, to $106.7
million at December 31, 1995 from $129.7 million at December 31, 1994. The
declining deposit base in 1995 was partially due to the conversion of $15.0
million of deposit liabilities into reverse repurchase agreements to reduce
the deposit base and thereby reduce deposit insurance premiums. The
remaining $8.0 million reduction reflected management's determination to compete
less aggressively on rates, thereby permitting some deposit runoff.
Results of Operations
The Savings Bank's operating results depend primarily on the level of net
interest income, which is the difference between the interest income earned on
its interest-earning assets (loans, mortgage-backed securities, investment
securities, federal funds sold, Federal Home Loan Bank Stock, and interest-
bearing deposits) and the interest expense paid on its interest-bearing
liabilities (deposits and borrowings). Operating results are also significantly
affected by provisions for losses on loans, noninterest income and noninterest
expense. Each of these
26
<PAGE>
factors is significantly affected not only by the Savings Bank's policies, but,
to varying degrees, by general economic and competitive conditions and by
policies of federal regulatory authorities.
Comparison of Operating Results for the Three Months Ended March 31, 1996 and
1995
Net Income. The Savings Bank's net income for the three months ended March
31, 1996 was $244,000 compared to $314,000 for the three months ended March 31,
1995. The fluctuation in net income was positively affected by a $30,000
increase in net interest income and was negatively affected by an $81,000
decrease in noninterest income and a $41,000 increase in noninterest expense.
Net Interest Income. Net interest income totaled $945,000 for the three
months ended March 31, 1996 compared to $915,000 for the three months ended
March 31, 1995. The $30,000, or 3.3%, increase in net interest income was
primarily the result of an increase in the Savings Bank's interest rate spread
from 2.49% for the three months ended March 31, 1995 to 2.63% for the three
months ended March 31, 1996. The increase for the three months ended March 31,
1996 resulted from a more significant increase in the average yield on loans as
compared to the increase in the average cost of interest-bearing
liabilities.
Interest Income. Interest income totaled $2.3 million for the three months
ended March 31, 1996 compared to $2.2 million for the three months ended March
31, 1995. The $36,000, or 1.6%, increase in interest income resulted primarily
from an increase in the average yield on interest-earning assets to 6.98% in
1996 from 6.71% for the three months ended March 31, 1995. This increase was
partially offset by a $3.0 million, or 2.2%, decline in average interest-earning
assets from $133.7 million for the three months ended March 31, 1995 to $130.7
million for the three months ended March 31, 1996. The increase in average yield
on interest-earning assets was primarily the result of interest rates on
adjustable-rate mortgages repricing upward and the impact of higher short-term
interest rates during the first quarter of 1996.
Interest income earned on loans receivable increased $13,000, or 1.1%, for
the three months ended March 31, 1996. This fluctuation was mainly due to the
increase in the average yield on loans receivable from 8.49% for the three
months ended March 31, 1995 to 8.87% for the three months ended March 31, 1996.
This improvement in yield was partially offset by a $1.9 million, or 3.2%,
decline in the average balance of loans receivable. The higher yield for the
three months ended March 31, 1996 was primarily due to the impact of adjustable-
rate mortgages that repriced upward and the continued investment in higher
yielding consumer loans.
Interest income on mortgage-backed securities increased $33,000, or 14.5%,
to $263,000 for the three months ended March 31, 1996 from $230,000 for the
three months ended March 31, 1995. This increase is a result of the average
balance of mortgage-backed securities increasing from $12.8 million for the
three months ended March 31, 1995 to $15.8 million for the three months ended
March 31, 1996. The $3.0 million, or 23.7%, increase in the average balance was
attributable to $2.0 million and $6.2 million of mortgage-backed security
purchases made during the three months ended March 31, 1996 and the year ended
December 31, 1995, respectively. These purchases were well in excess of
repayment and sales activity. The increase in the average balance of mortgage-
backed securities was partially offset by the decline in the average yield on
mortgage-backed securities from 7.20% for the three months ended March 31, 1995
to 6.66% for the three months ended March 31, 1996. The average yield on
mortgage-backed securities decreased due to the impact of repayments of higher
yielding mortgage-backed securities that occurred in 1995 and 1994, and the
purchase of mortgage-backed securities with lower yields.
Interest earned on investment securities was $521,000 for the three months
ended March 31, 1996 compared to $569,000 for the three months ended March 31,
1995. The $48,000, or 8.4%, decrease was the result of a $3.9 million, or 8.5%,
decline in the average balance of investments. The reduction in the average
balance resulted from the continued liquidation of the Savings Bank's
certificate of deposit portfolio and reinvestment of the proceeds from
maturities and sales into mortgage-backed securities and other investment
securities. The certificates of deposit portfolio has declined $6.4 million, or
60.6%, since March 31, 1995. The average yield on investment securities
remained relatively constant at 5.15% and 5.11% for the three months ended March
31, 1996 and 1995, respectively.
27
<PAGE>
Interest income on interest-bearing deposits increased $37,000, or 17.9%,
to $241,000 for the three months ended March 31, 1996 compared to $205,000 for
the three months ended March 31, 1995. This fluctuation was attributable to an
increase in the average yield on interest-bearing deposits from 4.63% in 1995 to
5.54% in 1996. The increase in average yield on interest-bearing deposits was
primarily the result of higher short-term interest rates during the first
quarter of 1996. This increase was partially offset by a decrease in the average
balance of interest-bearing deposits from $17.7 million for the three months
ended March 31, 1995 to $17.4 million for the three months ended March 31, 1996.
Interest Expense. Interest expense increased $6,000, or 0.5%, for the three
months ended March 31, 1996 compared to the comparable prior period. Interest
expense on savings deposits decreased $177,000, or 13.3%, to $1.1 million for
the three months ended March 31, 1996 from $1.3 million for the three months
ended March 31, 1995. This decrease resulted from the $18.3 million, or 14.5%,
reduction in the average balance of deposits from $126.0 million for the three
months ended March 31, 1995 to $107.8 million for the three months ended March
31, 1996. The decline in average deposits was partially due to the conversion of
$15.0 million of deposit liabilities into reverse repurchase agreements during
October 1995. The reverse repurchase agreements were still outstanding during
the three months ended March 31, 1996 and had interest expense of $183,000. The
remaining decrease in average deposits was attributable to increased competition
in the Savings Bank's marketplace and also reflected management's decision to
compete less aggressively on deposit rates paid. The decrease in the average
balance of deposits was partially offset by a slight increase in the average
cost of deposits from 4.22% for the three months ended March 31, 1995 to 4.28%
for the three months ended March 31, 1996.
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.
During the three months ended March 31, 1996, the Savings Bank's provision
for loan losses was $7,500 compared to a negative provision of $2,300 for the
three months ended March 31, 1995. The negative provision for the three
months ended March 31, 1995 resulted from a decline in the level of credit
card loans at March 31, 1995.
The Savings Bank's allowance for loan losses was $396,000, or 0.71%, of
loans outstanding at March 31, 1996, compared to $390,000, or 0.68%, of loans
outstanding at December 31, 1995. The Savings Bank's level of net loans charged-
off during the three months ended March 31, 1996 was negligible. Based on
current levels in the allowance for loan losses in relation to loans receivable
and delinquent loans, management's continued effort to favorably resolve problem
loan situations, and the low level of chargeoffs in recent years, management
believes the allowance was adequate at March 31, 1996.
The breakdown of general loss allowances and specific loss allowances is
made for regulatory accounting purposes only. General loan loss allowances are
added back to capital to the extent permitted in computing risk-based capital.
Both general and specific loss allowances are charged to expense. The financial
statements of the Savings Bank are prepared in accordance with generally
accepted accounting principles ("GAAP") and, accordingly, provisions for loan
losses are based on management's assessment of the factors set forth above. The
Savings Bank regularly reviews its loan portfolio, including problem loans, to
determine whether any loans are impaired, require classification and/or the
establishment of appropriate reserves. Management believes it has established
its existing allowance for loan losses in accordance with GAAP, however, future
additions may be necessary if economic conditions or other circumstances differ
substantially from the assumptions used in making the initial determination.
Noninterest Income (Loss). Noninterest income decreased $81,000, or 104.7%,
from $78,000 for the three months ended March 31, 1995 to a loss of $4,000 for
the three months ended March 31, 1996. This decrease resulted from a $54,000
loss on the sale of certificates of deposit and a $41,000 decline in gains
recognized from the sale of investment securities. Proceeds from the sale of
investment securities for the
28
<PAGE>
three months ended March 31, 1996 and 1995 totaled $3.0 million and $4.0
million, respectively. The sales of investment securities for both periods
consisted of U.S. government obligations that were classified as available for
sale. The $4.5 million of proceeds from the sale of certificates of deposit
during the three months ended March 31, 1996 resulted from management's decision
to liquidate the certificate of deposit portfolio with one of its brokers due to
concerns related to the broker's management of the portfolio. The Savings Bank
also made the decision for the three months ended March 31, 1995 to not reinvest
in certificates of deposit as they matured. The proceeds from the maturity and
sale of certificates of deposit were invested in mortgage-backed securities and
other investment securities.
Noninterest Expense. Noninterest expense was $614,000 for the three months
ended March 31, 1996 and $573,000 for the three months ended March 31, 1995.
The $41,000, or 7.2%, increase resulted from a $46,000 increase in compensation
and employee benefits. The increase in compensation and employee benefits was
mainly attributable to the adoption in January 1996 of a retirement plan for
members of the Board of Directors who reach director emeritus status. During
the three months ended March 31, 1996, $52,000 of expense related to the plan
was recognized. During December 1995, the plan was funded through the purchase
of life insurance contracts on the directors. The cash surrender value of the
life insurance contracts totaled $182,000 as of March 31, 1996 and is included
in other assets in the balance sheet. Compensation and benefits can be expected
to increase following consummation of the Conversion as a result of the
implementation of the ESOP, MRP and other benefit plans. See "PRO FORMA DATA"
and "MANAGEMENT OF THE SAVINGS BANK." In addition, non-interest expense is also
expected to increase as a result of the enactment of proposed legislation that
would levy a one-time insurance assessment on all SAIF-member institutions.
See "RISK FACTORS -- Recapitalization of SAIF and its Impact on SAIF Premiums."
Income Tax Expense. The Savings Bank's effective tax rate for the three
months ended March 31, 1996 and 1995 was 24.0% and 25.8%, respectively. The
effective tax rate for each period was below the statutory federal rate of 34%
due to the Savings Bank's significant investment in tax exempt securities.
Income tax expense is also expected to increase in future periods as a result of
the recapture of the Savings Bank's bad debt reserve as a result of the Bank
Conversion. See "RISK FACTORS -- Bad Debt Recapture."
Comparison of Operating Results for the Years Ended December 31, 1995 and 1994
Net Interest Income. Net interest income totaled $3.56 million for 1995
compared to $3.61 million for 1994. The $45,000, or 1.3%, decrease in net
interest income was primarily the result of a decline in the Savings Bank's
interest rate spread from 2.45% in 1994 to 2.43% in 1995. Although the Savings
Bank's interest rate spread declined, net interest income benefitted from an
increase in the ratio of average interest-earning assets to average interest-
bearing liabilities from 104.91% in 1994 to 106.48% in 1995.
Interest Income. Interest income totaled $9.0 million for 1995 compared to
$8.7 million for 1994. The $339,000, or 3.9%, increase in interest income
resulted primarily from an increase in the average yield on interest-earning
assets to 6.84% in 1995 from 6.33% in 1994. This increase was partially offset
by a $5.4 million, or 3.9%, decline in average interest-earning assets from
$137.5 million in 1994 to $132.1 million in 1995. The increase in average yield
on interest-earning assets was primarily the result of market interest rates
which began rising in 1994 and continued through the first part of 1995 thus
resulting in upward adjustments in rates on the Savings Bank's ARMs and enabling
the Savings Bank to originate loans and purchase investments at higher rates.
Interest income earned on loans receivable increased $194,000, or 4.0%, to
$5.0 million in 1995 from $4.8 million in 1994. This fluctuation was mainly due
to the increase in the average yield on loans receivable from 8.23% in 1994 to
8.77% in 1995. This improvement in yield was partially offset by a $1.4
million, or 2.3%, decline in the average balance of loans receivable. The
higher yield in 1995 was primarily due to the impact of rising interest rates on
adjustable-rate mortgages that repriced during 1994 and 1995 and the continued
increase in the level of higher yielding consumer loans.
29
<PAGE>
Interest income on mortgage-backed securities increased $185,000, or 24.0%,
to $955,000 in 1995 from $770,000 in 1994. This increase is a result of the
average balance of mortgage-backed securities increasing from $11.0 million in
1994 to $13.6 million in 1995. This $2.6 million, or 24.0%, increase in the
average balance was attributable to $6.2 million and $8.1 million of mortgage-
backed securities purchases made in 1995 and 1994, respectively, which exceeded
repayment and sales activity. The average yield on mortgage-backed securities
remained constant at 7.02% for both 1995 and 1994.
Interest earned on investment securities was $2.1 million in 1995 compared
to $1.8 million in 1994. The $318,000, or 17.5%, increase was the result of an
increase in the average yield from 4.49% in 1994 to 5.08% in 1995, coupled with
a 3.2% increase in the average balance of investments. The increased yield in
1995 was due to the replacement of lower yielding investments that matured
during 1994 and 1995 with purchases of higher yielding investment securities.
Interest income on interest-bearing deposits decreased $355,000, or 28.9%,
to $875,000 in 1995 from $1.2 million in 1994. This decline was primarily
attributable to the average balance of interest-bearing deposits decreasing $8.0
million, or 30.3%, to $18.3 million in 1995 from $26.3 million in 1994. The
decline in the average balance was mainly due to the reinvestment of proceeds
from certificate of deposit maturities into higher yielding investment
securities and mortgage-backed securities. This decrease was partially offset
by an increase in the average yield on interest-bearing deposits from 4.68% in
1994 to 4.78% in 1995.
Interest Expense. Interest expense increased $384,000 or, 7.6%, to $5.5
million in 1995 from $5.1 million in 1994. This increase resulted from the net
impact of an increase in the average cost of deposits from 3.88% in 1994 to
4.39% in 1995, offset by an 8.2% decline in the average balance of deposits.
The increase in the average cost of deposits reflected the impact of rising
interest rates which began in 1994 and continued through the first part of 1995.
The decline in average deposits was partially due to the conversion of $15.0
million of deposit liabilities into reverse repurchase agreements during October
1995. The reverse repurchase agreements were outstanding only in 1995 and had
interest expense of $194,000. The remaining decrease in average deposits was
attributable to increased competition in the Savings Bank's marketplace and also
reflected management's decision to compete less aggressively on rates, thereby
permitting some deposit runoff.
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 the 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.
During 1995, the Savings Bank's provision for loan losses was $161,000
compared to $69,000 for 1994. Consequently, the allowance for loan losses
increased to $390,000, or 0.7% of loans outstanding at December 31, 1995,
compared to $246,000, or 0.4% of loans outstanding at December 31, 1994.
Management determined that an increase in the allowance for loan losses,
especially for residential real estate loans, was necessary based on the
following: the historical level of the allowance for loan losses to outstanding
loans was low compared to its peers; the continued increase in investment in
credit card loans, which are unsecured and generally have a higher risk of
default; the average level of non-performing residential real estate loans
increased in 1995; and the increased concern over prevailing economic conditions
in the Savings Bank's primary market area as discussed under "RISK FACTORS --
Dependence on Local Economy and Competition Within Market Area." Based on these
factors, management determined that an increase in the allowance for loan
losses, especially for residential real estate loans, to a level consistent with
it peers was necessary.
30
<PAGE>
The Savings Bank's allowance for loan losses was $390,000, or 0.68% of
loans outstanding at December 31, 1995, compared to $246,000, or 0.42% of loans
outstanding at December 31, 1994. The Savings Bank's level of net loans charged
off as a percentage of average loans receivable was 0.03% and 0.05% for 1995 and
1994, respectively. Based on current levels in the allowance for loan losses in
relation to loans receivable and delinquent loans, management's continued effort
to favorably resolve problem loan situations, and the low level of charge-offs
in recent years, management believes the allowance is adequate at December 31,
1995.
The breakdown of general loss allowances and specific loss allowances is
made for regulatory accounting purposes only. General loan loss allowances are
added back to capital to the extent permitted in computing risk-based capital.
Both general and specific loss allowances are charged to expense. The financial
statements of the Savings Bank are prepared in accordance with generally
accepted accounting principles ("GAAP")GAAP and, accordingly, provisions
for loan losses are based on management's assessment of the factors set forth
above. The Savings Bank regularly reviews its loan portfolio, including problem
loans, to determine whether any loans are impaired, require classification
and/or the establishment of appropriate reserves. Management believes it has
established its existing allowance for loan losses in accordance with GAAP,
however, future reserves may be necessary if economic conditions or other
circumstances differ substantially from the assumptions used in making the
initial determination.
Noninterest Income. The Savings Bank's noninterest income increased
$124,000, or 108.5%, from $114,000 in 1994 to $238,000 in 1995. This increase
resulted from a $21,000 increase in late charges and other fees and $52,000 and
$46,000 of gains recognized from the sale of investment securities and mortgage-
backed securities, respectively. Proceeds from the sale of investment securities
and mortgage-backed securities totaled $29.4 million and $2.4 million,
respectively. There were no sales of investment securities or mortgage-backed
securities in 1994. In accordance with the adoption of Statement of Accounting
Financial Standards No. 115, "Accounting for Certain Investments in Debt and
Equity Securities" ("SFAS 115") in 1994, the Savings Bank classified all
investment securities and mortgage-backed securities as held to maturity. On
November 15, 1995, the Financial Accounting Standards Board ("FASB") issued a
special report, "A Guide to Implementation of Statement 115 on Accounting for
Certain Investments in Debt and Equity Securities" ("Special Report"), that
allowed, from the date of issuance of the Special Report through December 31,
1995, all entities a one-time opportunity to reconsider their ability and of the
intent to hold securities to maturity and transfer securities from held to
maturity without "tainting" the remainder held to maturity securities. As a
result of the Special Report, management reconsidered the classification of held
to maturity securities and during on December 1, 1995 transferred $7.6 million
and $2.2 million of investment securities and mortgage-backed securities,
respectively, to available for sale. The investment securities transferred were
comprised of U.S. agency securities and mortgage-backed bonds.
The proceeds from sales of investment securities in 1995 consisted of $7.5
million of U.S. agency securities and mortgage-backed bonds transferred to
available for sale in conjunction with the provisions of the Special Report, as
discussed above, and $21.9 million of U.S. government obligations that were sold
prior to the issuance of the Special Report. The U.S. government obligations
sold consisted of $18.0 million of securities purchased during 1995 and
classified as available for sale and $3.9 million of securities purchased in
1994 that were classified as held to maturity at the end of 1994. Management
reclassified all U.S. Government obligations classified as held to maturity at
December 31, 1994 to available for sale in 1995 due to the change in intent that
was established with the initial purchase in 1995 of U.S. Government obligations
that were classified as available for sale. The amount of U.S. government
obligations transferred to available for sale in 1995 was $11.7 million.
The proceeds from the sale of mortgage-backed securities in 1995 consisted
of securities purchased prior to 1995 that were classified as held to maturity
at December 31, 1994. The sales of these mortgage-backed securities were in
effect maturities as the sales occurred only after a substantial portion of the
original principal outstanding had been collected.
31
<PAGE>
Though the Savings Bank recorded gains from sales of investment and
mortgage-backed securities in 1995, there can be no assurance that such gains,
from the available for sale portfolio, will continue or that losses will not
occur in future periods.
Noninterest Expense. Noninterest expense was $2.3 million for 1995 and
$2.4 million for 1994. The $35,000, or 1.5%, decrease primarily represented the
net result of a $77,000 decrease in compensation and employee benefits, offset
by a $52,000 reduction in gains on real estate acquired by foreclosure. The
decrease in compensation and employee benefits was mainly the result of a
$100,000 decline in bonuses paid to employees in 1995 as compared to 1994.
Compensation and benefits can be expected to increase following consummation of
the Conversion as a result of the implementation of the ESOP, MRP, Directors
Emeritus Plan, and other benefit plans. See "PRO FORMA DATA" and "MANAGEMENT OF
THE SAVINGS BANK -- Benefits." The fluctuation in gain/loss on real estate
acquired by foreclosure was due primarily to the 1994 balance including the
impact of a $43,000 gain on sale of one foreclosed property that had been
carried as real estate owned for a number of years.
Income Tax Expense. The Savings Bank's effective tax rate for 1995 and
1994 was 23.0% and 22.3%, respectively. The effective tax rate for each year
was below the statutory federal rate of 34% due to the Savings Bank's
significant investment in tax exempt securities.
Comparison of Operating Results for the Years Ended December 31, 1994 and 1993
Net Income. The Savings Bank's net income for 1994 was $993,000 compared
to $894,000 for 1993. Net income in 1993 included a $227,000 reduction for the
cumulative effect of a change in accounting principle which resulted from the
adoption of SFAS 109, "Accounting for Income Taxes." The fluctuation in net
income also reflected an increase in the provision for loan losses and
noninterest expense of $40,000 and $97,000, respectively.
Net Interest Income. Net interest income totaled $3.61 million for both
1994 and 1993. The consistency of net interest income is due to the interest
rate spread being constant at approximately 2.45% for both years. In addition,
the ratio of average interest-earning assets to average interest-bearing
liabilities remained relatively steady at 104.91% for 1994 and 104.66% for 1993.
The offsetting volume and rate effects that combined to result in these stable
ratios are set forth below.
Interest Income. Interest income was $8.7 million for 1994 compared to
$9.1 million for 1993. The $436,000, or 4.8%, decrease in interest income
resulted primarily from a decrease in the average yield on interest-earning
assets to 6.33% in 1994 from 6.70% in 1993. This decrease was partially offset
by a $1.3 million, or 0.9%, increase in average interest-earning assets from
$136.2 million in 1993 to $137.5 million in 1994. The decrease in average yield
on interest-earning assets was primarily the result of the lagging impact of a
declining interest rate environment that existed during 1993 and continued for
the first quarter of 1994. Another factor was the reinvestment of relatively
high levels of loan repayments that occurred due to refinancing in 1993 and the
first quarter of 1994 into lower yielding investments.
Interest income earned on loans receivable decreased $711,000, or 12.8%, to
$4.8 million in 1994 from $5.5 million in 1993. This fluctuation was the result
of a decrease in the average yield on loans receivable from 8.76% in 1993 to
8.23% in 1994, coupled with the $4.6 million, or 7.2%, decline in the average
balance of loans receivable. The lower yield in 1994 was primarily the result
of the impact of lower interest rates on adjustable-rate mortgages that repriced
during 1993 and the first quarter of 1994 and the significant level of
prepayments associated with higher yielding loans that occurred during 1993 and
the first part of 1994.
Interest income on the mortgage-backed securities increased $19,000, or
2.6%, to $770,000 in 1994 from $751,000 in 1993. This increase is the result of
an increase in the average balance of mortgage-backed securities from $8.9
million in 1993 to $11.0 million in 1995, offset by a decline in the average
yield on mortgage-backed securities from 8.41% in 1993 to 7.02% in 1994. The
$2.0 million, or 22.8%, increase in the average balance was attributable to $8.1
million of mortgage-backed security purchases made in 1994. Proceeds from loan
repayments
32
<PAGE>
were used to increase the investment in mortgage-backed securities. The average
yield on mortgage-backed securities decreased due to the impact of repayments of
higher yielding mortgage-backed securities that occurred in 1994 and 1993, and
the purchase in 1994 of mortgage-backed securities with lower yields.
Interest earned on investment securities was $1.8 million in 1994 compared
to $1.4 million in 1993. The $403,000, or 28.4%, increase was the result of an
increase in the average yield from 4.01% in 1993 to 4.49% in 1994, coupled with
a 13.5% increase in the average balance of investments. The increased yield in
1994 was due to the replacement of lower yielding investments that matured
during 1993 and 1994 with purchases of higher yielding investment securities.
Proceeds from loan repayments were also used to increase the level of investment
securities.
Interest income on interest-bearing deposits decreased $142,000, or 10.3%,
to $1.2 million in 1994 from $1.4 million in 1993. This decline was
attributable to the average balance of interest-bearing deposits decreasing $1.1
million, or 4.2%, to $26.3 million in 1994 from $27.4 million in 1993, coupled
with a decrease in the average yield on interest-bearing deposits from 5.00% in
1993 to 4.68% in 1994.
Interest Expense. Interest expense decreased $437,000 or, 7.9%, to $5.1
million in 1994 from $5.5 million in 1993. This decrease was due to the decline
in the average cost of deposits from 4.25% in 1993 to 3.88% in 1994. The level
of average deposits was relatively consistent from 1993 to 1994. The decrease
in the average cost of deposits resulted from the continued effect of declining
market rates of interest which permitted lowering of deposit rates that occurred
throughout 1993 and continued through the first part of 1994.
Provision for Loan Losses. The Savings Bank's provision for loan losses
was $69,000 in 1994 compared to $30,000 in 1993. The increased provision in
1994 was made by management to cover the loss exposure related to a larger
credit card portfolio. Credit card loans are generally unsecured and entail
greater credit risk than residential mortgage loans.
Noninterest Income. The Savings Bank's noninterest income decreased
$14,000, or 11.2%, from $129,000 in 1993 to $114,000 in 1994. This decrease
resulted primarily from an $11,000 decline in late charges and other fees.
Noninterest Expense. Noninterest expense was $2.4 million in 1994 and $2.3
million in 1993. The $97,000, or 4.3%, increase primarily represented the net
result of increased expenses for all general and administrative expense line
items, offset by a decrease in losses on real estate acquired by foreclosure.
The increases in compensation and employee benefits, occupancy expense, data
processing, advertising and other noninterest expense were relatively minimal
and not unusual. The increase in federal insurance premiums resulted from a
reduced insurance assessment in 1993 by the FDIC for the effect of the final
secondary reserve credit distribution. The fluctuation in the gain/loss on real
estate acquired by foreclosure was due primarily to the 1994 balance including
the impact of a $43,000 gain on sale of one foreclosed property that had been
carried as real estate owned for a number of years.
Income Tax Expense. The Savings Bank's effective tax rate for 1994 and
1993 was 22.3% and 21.5%, respectively. The effective tax rate for each year
was below the statutory federal rate of 34% due to the Savings Bank's
significant investment in tax exempt securities.
Cumulative Effect of Change in Accounting Principle. On January 1, 1993,
the Savings Bank adopted SFAS No. 109, "Accounting for Income Taxes" ("SFAS
109") which resulted in a decrease in net income of $227,000 for the cumulative
effect of a change in accounting principle. The net deferred tax liability that
was established as a result of the adoption of SFAS 109 represents future tax
expenses derived from temporary differences between the book carrying value and
tax basis of assets and liabilities which had not been previously recognized.
33
<PAGE>
Average Balances, Interest and Average Yields/Cost
The following table sets forth certain information for the periods indicated
regarding average balances of assets and liabilities as well as the total dollar
amounts of interest income from average interest-earning assets and interest
expense on average interest-bearing liabilities and average yields and costs.
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 instead of
daily balances, which management believes has not caused any material difference
in the information presented.
<TABLE>
<CAPTION>
Three Months
Ended March 31,
1996 1995
------------------------------ -----------------------------
At Average Average
March 31, Average Yield/ Average Yield/
1996 Balance Interest Cost Balance Interest Cost
--------- ------- -------- ------- ------- -------- -------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable, net (1)................ 8.74% $ 56,127 $1,244 8.87% $ 57,986 $1,231 8.49%
Investments, net (2)(6).................. 5.20 41,357 532 5.15 45,211 578 5.11
Mortgage-backed securities, net.......... 6.46 15,807 263 6.66 12,783 230 7.20
Interest-bearing deposits (3)............ 5.37 17,411 241 5.54 17,729 205 4.63
-------- ------ -------- ------
Total interest-earning assets......... 6.89 130,702 2,280 6.98 133,709 2,244 6.71
---- ------ ---- ------ ------
Non-interest-earning assets 5,561 4,978
-------- --------
Total assets.......................... $136,263 $138,687
======== ========
Interest-bearing liabilities:
Deposits................................. 4.28 $107,759 1,152 4.28 $126,024 1,329 4.22
Reverse repurchase
agreements.............................. 4.44 15,000 183 4.88 -- -- --
-------- ------ -------- ------
Total interest-bearing liabilities.... 4.30 122,759 1,335 4.35 126,024 1,329 4.22
---- ------ ---- ------ ------
Non-interest-bearing
liabilities.............................. 1,713 1,831
-------- --------
Total liabilities..................... 124,472 127,855
Retained earnings......................... 11,791 10,832
-------- --------
Total liabilities and
retained earnings.................... $136,263 $138,687
======== ========
Net interest income...................... $ 945 $ 915
====== ======
Interest rate spread (4)(7).............. 2.59% 2.63% 2.49%
==== ==== ======
Net interest margin (5)(8)............... N/A 2.89% 2.74%
==== ==== ======
Ratio of average
interest-earning assets to average
interest-bearing liabilities............ 106.47% 106.10%
====== ======
<CAPTION>
Year Ended December 31,
----------------------------------------------------------------
1995 1994
------------------------------ ------------------------------
Average Average
Average Yield/ Average Yield/
Balance Interest Cost Balance Interest Cost
------- -------- ------- ------- -------- -------
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable, net (1)................ $ 57,326 $5,026 8.77% $ 58,698 $4,832 8.23%
Investments, net (2)(6).................. 42,852 2,179 5.08 41,537 1,864 4.49
Mortgage-backed securities, net.......... 13,609 955 7.02 10,972 770 7.02
Interest-bearing deposits (3)............ 18,316 875 4.78 26,272 1,230 4.68
-------- ------ -------- -----
Total interest-earning
assets............................... 132,103 9,035 6.84 137,479 8,696 6.33
------ ---- ----- ----
Non-interest-earning assets 5,165 5,521
-------- --------
Total assets.......................... $137,268 $143,000
======== ========
Interest-bearing
liabilities:
Deposits................................. $120,308 5,280 4.39 $131,046 5,089 3.88
Reverse repurchase
agreements.............................. 3,750 194 5.17 -- -- --
-------- ------ -------- -----
Total interest-bearing
liabilities.......................... 124,058 5,474 4.41 131,046 5,089 3.88
------ ---- ----- ----
Non-interest-bearing
liabilities.............................. 2,016 1,775
-------- --------
Total liabilities..................... 126,074 132,821
Retained earnings......................... 11,194 10,179
-------- --------
Total liabilities and
retained earnings.................... $137,268 $143,000
======== ========
Net interest income...................... $3,561 $3,607
====== ======
Interest rate spread (4)(7).............. 2.43% 2.45%
==== ====
Net interest margin (5)(8)............... 2.70% 2.62%
==== ====
Ratio of average
interest-earning assets to average
interest-bearing liabilities............ 106.48% 104.91%
====== ======
</TABLE>
- ---------------------------
(1) Average balance includes non-accrual loans.
(2) Includes FHLB stock and investment securities.
(3) Includes interest-bearing deposits, federal funds sold, and certificates of
deposit.
(4) Represents the difference between the average yield on interest-earning
assets and the average cost of interest-bearing liabilities.
(5) Represents net interest income as a percentage of average interest-earning
assets.
(6) Does not consider tax equivalent basis of tax exempt state and municipal
securities. Average yield on investment securities, after considering tax
equivalent basis of such securities, is 5.67%, 5.57%, 5.62% and 5.04% for
the three months ended March 31, 1996 and 1995 and the years ended December
31, 1995 and 1994, respectively. The tax equivalent yield on such
securities was 5.89%, 5.56%, 5.87% and 5.69% for the three months ended
March 31, 1996 and 1995 and the years ended December 31, 1995 and 1994,
respectively.
(7) Does not consider tax-equivalent basis of tax exempt state and municipal
securities. Interest rate spread, after considering tax equivalent basis
of such securities, is 2.79%, 2.65%, 2.60% and 2.61% for the three months
ended March 31, 1996 and 1995 and the years ended December 31, 1995 and
1994, respectively.
(8) Does not consider tax-equivalent basis of tax exempt state and municipal
securities. Net interest margin, after considering tax equivalent basis of
such securities, is 2.89%, 2.74%, 2.87% and 2.79% for the three months ended
March 31, 1996 and 1995 and the years ended December 31, 1995 and 1994,
respectively.
34
<PAGE>
Rate/Volume Analysis
The following table sets forth the effects of changing volumes and rates on
net interest income of the Savings Bank. Information is provided with respect
to (i) effects on interest income and expense attributable to changes in volume
(changes in volume multiplied by prior rate); (ii) effects on interest income
and expense attributable to changes in rate (changes in rate multiplied by prior
volume); and (iii) changes in rate/volume (change in rate multiplied by change
in volume).
<TABLE>
<CAPTION>
Three Months Ended March 31, Year Ended December 31,
1996 Compared to Three 1995 Compared to Year
Months Ended March 31, 1995 Ended December 31, 1994
Increase (Decrease) Increase (Decrease)
Due to Due to
--------------------------------------------------- -------------------------------------------
Total Total
Rate/ Increase Rate/ Increase
Volume Rate Volume (Decrease) Volume Rate Volume (Decrease)
---------- ---------- ---------- ---------- -------- ------- ------- ----------
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable, net (1) $ (39) $ 58 $ (6) $ 13 $(113) $317 $(10) $ 194
Investments, net (2) (50) 5 (2) (47) 59 245 11 315
Mortgage-backed securities, net 54 (17) (4) 33 185 -- -- 185
Interest-bearing deposits (3) (4) 40 1 37 (372) 26 (9) (355)
----- ---- ---- ----- ----- ---- ---- -----
Total net change in income
on interest-earning assets (39) 86 (11) 36 (241) 588 (8) 339
----- ---- ---- ----- ----- ---- ---- -----
Interest-bearing
liabilities:
Deposits (193) 19 (3) (177) (417) 668 (61) 190
Reverse repurchase agreements 183 -- -- 183 194 -- -- 194
----- ---- ---- ----- ----- ---- ---- -----
Total net change in expense on
interest-bearing liabilities (10) 19 (3) 6 (223) 668 (61) 384
----- ---- ---- ----- ----- ---- ---- -----
Net change in net
interest income $ (29) $ 67 $ (8) $ 30 $ (18) $(80) $ 53 $ (45)
===== ==== ==== ===== ===== ==== ==== =====
<CAPTION>
Year Ended December 31,
1994 Compared to Year
Ended December 31, 1993
Increase (Decrease)
Due to
------------------------------------------------
Total
Rate/ Increase
Volume Rate Volume (Decrease)
------- ------ ------- ----------
(In thousands)
<S> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable, net (1) $(400) $(335) 25 $(710)
Investments, net (2) 198 175 24 397
Mortgage-backed
securities, net 171 (124) (28) 19
Interest-bearing deposits (3) (57) (88) 3 (142)
----- ----- ---- -----
Total net change in
income on interest-earning
assets (88) (372) 24 (436)
----- ----- ---- -----
Interest-bearing liabilities:
Deposits 38 (482) 7 (437)
Reverse repurchase agreements -- -- -- --
----- ----- ---- -----
Total net change in expense on
interest-bearing liabilities 38 (482) 7 (437)
----- ----- ---- -----
Net change in net
interest income $(126) $ 110 $ 17 $ 1
===== ===== ==== =====
- -------------------------------------------------
</TABLE>
(1) Average balance includes nonaccrual loans.
(2) Includes FHLB stock and investment securities.
(3) Includes interest-bearing deposits, federal funds sold, and certificates
of deposit.
35
<PAGE>
Asset and Liability Management
The principal operating objective of the Savings Bank is the
achievement of a positive interest rate spread that can be sustained during
fluctuations in prevailing interest rates. Since the Savings Bank's principal
interest-earning assets have substantially longer terms to maturity than its
primary source of funds, i.e., deposit liabilities, increases in general
interest rates will generally result in an increase in the Savings Bank's cost
of funds before the yield on its asset portfolio adjusts upward. The Savings
Bank has generally sought to reduce its exposure to adverse changes in interest
rates by attempting to achieve a closer match between the periods in which their
interest-bearing liabilities and interest-earning assets can be expected to
reprice through the origination of adjustable-rate mortgages and investment in
loans and securities with shorter terms.
The term "interest rate sensitivity" refers to those assets and
liabilities which mature and reprice periodically in response to fluctuations in
market rates and yields. Many savings banks have historically operated in a
mismatched position with interest-sensitive liabilities greatly exceeding
interest-sensitive assets in the short-term time periods. As noted above, one
of the principal goals of the Savings Bank's asset/liability program is to more
closely match the interest rate sensitivity characteristics of its asset and
liability portfolios.
In order to manage interest rate risk, the Savings Bank's Executive
Committee monitors the difference between the Savings Bank's maturing and
repricing assets and liabilities and to develop and implement strategies to
decrease the "negative gap" between the two. The primary responsibilities of
the committee are to assess the Savings Bank's asset/liability mix, recommend
strategies to the Board of Directors that will enhance income while managing the
Savings Bank's vulnerability to changes in interest rates and report to the
Board of Directors the results of the strategies used.
In order to increase the interest rate sensitivity of its assets, the
Savings Bank has originated adjustable rate residential mortgage loans and
maintained a consistent level of short- and intermediate-term investment
securities and interest-bearing deposits. At March 31, 1996, the Savings Bank
had $18.7 million of adjustable rate mortgages, $29.4 million of investment
securities, mortgage-backed securities and interest-bearing deposits maturing
within one year, and $33.3 million of investment securities, mortgage-backed
securities and interest-bearing deposits maturing within one to five years. The
Savings Bank had $1.9 million in adjustable rate mortgage-backed securities at
March 31, 1996, which were purchased in the secondary market. In addition, at
March 31, 1996 the Savings Bank had $6.4 million of consumer loans which
typically have maturities of five years or less.
In managing its future interest rate sensitivity, the Savings Bank
intends to continue to stress the origination of adjustable rate mortgages and
loans with shorter maturities, the maintenance of a consistent level of short
and intermediate-term securities, and pricing strategies that extend the term of
deposit liabilities.
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. Generally, during a period of rising interest rates, a
negative gap would adversely affect net interest income while a positive gap
would result in an increase in net interest income, while conversely during a
period of falling interest rates, a negative gap would result in an increase in
net interest income and a positive gap would negatively affect net interest
income.
36
<PAGE>
At March 31, 1996, total interest-bearing liabilities maturing or
repricing within one year exceeded total interest-earning assets maturing or
repricing in the same period by $14.0 million, representing a cumulative
negative one-year gap of 10.21% of total assets. Like many savings banks, the
Savings Bank has historically had a cumulative negative gap position. Although
the Savings Bank has made efforts to reduce its exposure as a result of this
one-year position, it is expected that the Savings Bank will maintain a negative
gap position in the immediate future, which to the extent interest rates rise,
will adversely impact the Savings Bank's net interest income.
37
<PAGE>
The following table presents the Savings Bank's interest sensitivity gap
between interest-earning assets and interest-bearing liabilities at March 31,
1996 based on the assumptions set forth on the following page.
<TABLE>
<CAPTION>
Within Over Over Over Over
Six 6 Months 1-3 3-5 5-10 10
Months to One Year Years Years Years Years Total
-------- ----------- ------- ------- ------- ------- --------
(Dollars in Thousands)
Interest-earning assets:
<S> <C> <C> <C> <C> <C> <C> <C>
Fixed-rate mortgage loans.................... $ 5,416 $ 4,385 $10,819 $ 5,093 $ 4,419 $ 1,103 $ 31,235
Adjustable-rate mortgage loans............... 10,436 7,502 769 -- -- -- 18,707
Mortgage-backed securities................... 2,919 2,178 6,313 3,935 1,561 -- 16,906
Consumer loans............................... 1,856 983 2,945 450 -- -- 6,234
Investments, net............................. 20,515 4,807 26,881 4,480 860 -- 57,543
-------- -------- ------- ------- ------- ------- --------
Total rate sensitive assets............... 41,142 19,855 47,727 13,958 6,840 1,103 130,625
-------- -------- ------- ------- ------- ------- --------
Interest-bearing liabilities:
Deposits:
Regular savings and NOW accounts............ 3,658 2,994 7,444 3,342 2,354 368 20,160
Money market deposit accounts............... 9,652 4,826 4,524 283 19 -- 19,304
Certificates of deposit..................... 29,194 9,641 29,184 1,032 -- -- 69,051
Borrowings:
Repurchase agreements....................... 15,000 -- -- -- -- -- 15,000
-------- -------- ------- ------- ------- ------- --------
Total rate sensitive liabilities......... 57,504 17,461 41,152 4,657 2,373 368 123,515
-------- -------- ------- ------- ------- ------- --------
Excess (deficiency) of interest
sensitivity assets over interest
sensitivity liabilities................... $(16,362) $ 2,394 $ 6,575 $ 9,301 $ 4,467 $ 735 $ 7,110
======== ======== ======= ======= ======= ======= ========
Cumulative excess (deficiency) of
interest sensitivity assets................ $(16,362) $(13,968) $(7,393) $ 1,908 $ 6,375 $ 7,110
======== ======== ======= ======= ======= =======
Cumulative ratio of interest-earning assets
to interest-bearing liabilities............ 71.55% 81.37% 93.63% 101.58% 105.18% 150.76%
Interest sensitivity gap to total assets..... (11.96) 1.75 4.81 6.80 3.26 .54
Ratio of interest-earning assets to
interest-bearing liabilities............... 71.55 113.71 115.98 299.72 288.24 299.73
Ratio of cumulative gap to total assets (11.96) (10.21) (5.40) 1.40 4.66 5.20
</TABLE>
38
<PAGE>
In preparing the table above, it has been assumed that: (i) adjustable-
rate first mortgage loans with a current index will prepay at a rate of 15% per
year; (ii) fixed-rate mortgage loans on one- to four-family residences with
terms to maturity of 15 years will prepay at a rate of 36% per year; (iii) fixed
rate mortgage loans on one- to four-family residences with terms to maturity of
other than 15 years will prepay at a rate of 10%; (iv) fixed-rate mortgage loans
on non-residential properties will prepay at a rate of 8%; (v) adjustable-rate
mortgage loans on non-residential properties will prepay at a rate of 9%; (vi)
consumer loans will prepay at rates ranging from 6% to 7%; (vii) fixed maturity
deposits will not be withdrawn prior to maturity; and, (viii) interest-bearing
checking, savings accounts and money market demand accounts will decay, based on
industry experience, at the following rates:
<TABLE>
<CAPTION>
6 Months Over 1 Over 3 Over 5
6 Months Through Through Through Through Over 10
or Less 1 Year 3 Years 5 Years 10 Years Years
--------- --------- -------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
Interest-bearing checking.. 18.1% 14.9% 36.9% 16.6% 11.7% 1.8%
Savings accounts........... 18.1 14.9 36.9 16.6 11.7 1.8
Money market demand........ 50.0 25.0 23.4 1.5 0.1 --
</TABLE>
Net Portfolio Value. The interest rate risk component ("IRR") of the
risk-based capital rule is a dollar amount that is deducted from total capital
for the purpose of calculating an institution's risk-based capital requirement
and is measured in terms of the sensitivity of its net portfolio value ("NPV")
to changes in interest rates. NPV is the difference between incoming and
outgoing discounted cash flows from assets, liabilities, and off-balance sheet
contracts. An institution's IRR is measured as the change to its NPV as a
result of a hypothetical 200 basis point change in market interest rates. A
resulting change in NPV of more than 2% of the estimated market value of its
assets will require the institution to deduct from its regulatory capital 50% of
that excess change.
The following table sets forth as of March 31, 1996 the estimated
changes in NPV based on the indicated interest rate environments, and is based
on information provided by the Savings Bank to an outside consulting firm. No
effect has been given to any steps that management of the Savings Bank may
take to counter the effects of interest rate movements presented in the
table.
<TABLE>
<CAPTION>
Change in
Interest Rates Net Portfolio Value
in Basis Points --------------------------------------------
(Rate Shock) Amount $ Change % Change
- ---------------------- ------- ---------------------- --------
(Dollars in Thousands)
<S> <C> <C> <C>
200 $10,968 $(1,259) (10.30)%
100 11,846 (381) (3.12)
Static 12,227 -- --
(100) 12,624 397 3.25
(200) 13,009 782 6.40
</TABLE>
NPV Is Not An Indication of the Market Value or Liquidation Value of the Savings
Bank.
The Savings Bank's asset and liability structure results in a decrease
in NPV in a rising interest rate scenario and an increase in NPV in a declining
interest rate scenario. During periods of rising rates, the value of monetary
assets declines. Conversely, during periods of falling rates, the value of
monetary assets increases. However, the amount of change in value of specific
assets and liabilities due to changes in rates is not the same in a rising rate
environment as in a falling rate environment (i.e., the amount of value increase
under a specific rate decline may not equal the amount of value decrease under
an identical upward rate movement).
As with any method of measuring interest rate risk, certain
shortcomings are inherent in the method of analysis presented in the foregoing
tables. For example, although certain assets and liabilities may have similar
39
<PAGE>
maturities or periods to repricing, they may react in different degrees to
changes in market interest rates. Also, the interest rates on certain types of
assets and liabilities may fluctuate in advance of changes in market interest
rates, while interest rates on other types may lag behind changes in market
rates. Additionally, certain assets, such as substantially all of the Savings
Bank's ARM loans, have features that restrict changes in interest rates on a
short-term basis and over the life of the asset. Further, in the event of a
change in interest rates, expected rates of prepayments on loans and early
withdrawals from certificates could likely deviate significantly from those
assumed in calculating the tables. Therefore, the data presented in the tables
should not be relied upon as indicative of actual results.
Liquidity and Capital Resources
The Savings 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 Savings Bank has historically maintained a
level of liquid assets in excess of regulatory requirements. The Savings Bank's
liquidity ratio at March 31, 1996 was 34.7%.
The Savings Bank's primary sources of funds consist of deposits,
reverse repurchase agreements, repayments and prepayments 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
predictable sources of funds, deposit flows and loan prepayments are greatly
influenced by general interest rates, economic conditions and competition. The
Savings Bank manages the pricing of its deposits to maintain a steady deposit
base. The Savings Bank uses its liquidity resources principally to fund
existing and future loan commitments, to fund maturing certificates of deposit
and deposit withdrawals, to invest in other interest-bearing assets, to maintain
liquidity, and to meet operating expenses. Management believes that loan
repayments and other sources of funds will be adequate to meet and exceed the
Savings Bank's liquidity needs for 1996.
A major portion of the Savings 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 Savings Bank's
operating, investing, lending and financing activities during any given period.
At March 31, 1996, cash and cash equivalents totaled $10.3 million.
The primary investing activities of the Savings Bank include
origination of loans and purchase of mortgage-backed securities and investment
securities. During 1995, purchases of investment securities and mortgage-backed
securities totaled $42.7 million and $6.2 million, respectively, while loan
originations totaled $15.3 million. These investments were funded primarily
from loan and mortgage-backed security repayments of $17.7 million, investment
security sales and maturities of $45.6 million, sales of mortgage-backed
securities of $2.4 million, and $10.8 million of certificate of deposit
maturities. In addition, during 1995, $15.0 million of savings deposits were
converted into reverse repurchase agreements and the $8.0 million deposit runoff
was funded with excess liquidity.
Liquidity management is both a daily and long-term function of
business management. If the Savings Bank requires funds beyond its ability to
generate them internally, the Savings Bank believes that it could borrow
additional funds from the FHLB. At March 31, 1996, the Savings Bank had no
outstanding advances from the FHLB.
At March 31, 1996, the Savings Bank had $377,000 in outstanding
commitments to originate loans, all of which were at fixed rates. In addition,
the Savings Bank had no commitments to fund outstanding credit lines at
March 31, 1996. The Savings Bank anticipates that it will have sufficient funds
available to meet its current commitments. Certificates of deposit which are
scheduled to mature in one year or less totaled $42.5 million at March 31, 1996.
Except as discussed under "RISK FACTORS -- Potential Reduction of Certain
Funding Liabilities", based on historical experience, management
believes that a significant portion of such deposits will remain with the
Savings Bank. If a significant portion of these deposits did not renew, the
loss of such funds could have an
40
<PAGE>
adverse effect on earnings to the extent that replacement funds, either in the
form of borrowings or new deposits, are at higher interest rates.
At March 31, 1996, the Savings Bank exceeded all of its regulatory
capital requirements. For further information regarding the Savings Bank's
regulatory capital at March 31, 1996, and on a pro forma basis, see "HISTORICAL
AND PRO FORMA REGULATORY CAPITAL COMPLIANCE."
Impact of Inflation and Changing Prices
The financial statements and related data presented herein have been
prepared in accordance with GAAP, which require the measurement of financial
position and results of operations in terms of historical dollars without
considering changes in the relative purchasing power of money over time because
of inflation. Unlike most industrial companies, virtually all of the assets and
liabilities of the Savings Bank are monetary in nature. As a result, interest
rates have a more significant impact on the Savings Bank's performance than the
effects of general levels of inflation. Interest rates do not necessarily move
in the same direction or in the same magnitude as the prices of goods and
services. In the current interest rate environment, liquidity and maturity
structure of the Savings Bank's assets and liabilities are critical to the
maintenance of performance levels.
Impact of New Accounting Pronouncements
Accounting by Creditors for Impairment of a Loan. In May 1993, the
FASB issued Statement of Financial Accounting Standards No. 114, "Accounting by
Creditors for Impairment of a Loan" ("SFAS 114"), which became effective for the
Savings Bank beginning January 1, 1995. SFAS 114 requires a lender to consider
a loan to be impaired if the lender believes it is probable that it will be
unable to collect all principal and interest due according to the contractual
terms of the loan. If a loan is impaired, the lender will be required to record
a loan valuation allowance equal to the difference between the present value of
the estimated future cash flows discounted at the loan's effective rate and the
current book value of the loan. This accounting change will significantly
change the accounting by lenders previously allowed under SFAS 15. Based upon
the status of the loan portfolio, the adoption of SFAS 114 did not have a
material effect on the Savings Bank's financial position.
Accounting for Investments in Debt and Equity Securities. In May
1993, the FASB issued SFAS 115. SFAS 115 expands the required use of fair value
accounting for investments in debt and equity securities, and allows debt
securities to be classified as "held to maturity" and reported in the financial
statements at amortized cost only if the reporting entity has the present intent
and ability to hold those securities to maturity. Furthermore, the statement
clarifies that securities which might be sold in response to changes in market
interest rates, changes in the security's prepayment risk, increases in loan
demand, or other similar factors must be classified as "available for sale" and
carried at fair value in the financial statements. Unrealized gains and losses
are recorded, net of related income tax effect, as a separate component of
stockholders' equity until realized. The Savings Bank adopted SFAS 115 on
January 1, 1994 and classified all investment securities and mortgage-backed
securities as "held to maturity." On November 15, 1995, the FASB issued the
Special Report. Due to uncertainties surrounding the regulatory capital
treatment for unrealized gains and losses on available for sale securities at
the time SFAS 115 was required to be implemented, the Special Report was issued
to allow all entities a one-time opportunity to reconsider their ability and
intent to hold securities to maturity and transfer securities from held to
maturity without "tainting" the remain ing held to maturity securities.
Those securities transferred would be accounted for prospectively under SFAS
115. These transfers were only allowed during the period from the date of
issuance of the Special Report through December 31, 1995.
As a result of the Special Report, management reconsidered the
classification of held to maturity securities and transferred $7.6 million and
$2.2 million of investment securities and mortgage-backed securities,
respectively, to available for sale during December 1995. As a result of the
transfers, a net decrease of $33,465 was recorded as a separate component of
retained earnings.
41
<PAGE>
Accounting by Creditors for Impairment of a Loan-Income Recognition
and Disclosures. During October 1994, the FASB issued Statement of Financial
Accounting Standards No. 118, "Accounting by Creditors for Impairment of a Loan-
Income Recognition and Disclosures" ("SFAS 118") which amends SFAS 114 to allow
a creditor to use existing methods for recognizing interest income on an
impaired loan. Prior to the issuance of SFAS 118, SFAS 114 provided for two
alternative income recognition methods to be used to account for changes in the
net carrying amount of an impaired loan subsequent to the initial measurement of
impairment. Under the first income recognition method, a creditor would accrue
interest on the net carrying amount of the loan as an adjustment to the
provision for losses. Under the second income recognition method, a creditor
would recognize all changes in the net carrying amount of the loan as an
adjustment to the provision for losses on loans. While those income recognition
methods are no longer required, SFAS 118 does not preclude a creditor from using
either of these methods.
The initial impact of applying SFAS 114 and SFAS 118 will not be
reported as an accounting change, but rather as a component of the provision for
losses on loans charged to operations. SFAS 114 and SFAS 118 are required to be
accounted for on a prospective basis and are effective for fiscal years
beginning after December 15, 1994 (January 1, 1995 for the Savings Bank).
Accounting for Mortgage Servicing Rights. In May 1995, the FASB
issued Statement of Financial Accounting Standards 122, "Accounting for Mortgage
Servicing Rights", an amendment of FASB Statement No. 65 ("SFAS 122"). SFAS 122
amends SFAS 65, "Accounting for Certain Mortgage Banking Activities", to require
that a mortgage banking enterprise recognize as separate assets rights to
service mortgage loans for others, however those servicing rights are acquired.
A mortgage banking enterprise that acquires mortgage servicing rights through
either the purchase or origination of mortgage loans and sells or securitizes
those loans with servicing rights retained should allocate the total cost of the
mortgage loans to the mortgage servicing rights and the loans (without the
mortgage servicing rights) based on their relative fair values, if it is
practicable to estimate those fair values. If it is not practicable to estimate
the fair values of the mortgage servicing rights and the mortgage loans (without
the mortgage servicing rights), the entire cost of purchasing or originating the
loans should be allocated to the mortgage loans, and no cost should be allocated
to mortgage servicing rights. SFAS 122 also requires that a mortgage banking
enterprise assess its capitalized mortgage servicing rights for impairment based
on the fair value of those rights. SFAS 122 must be applied prospectively for
fiscal years beginning after December 15, 1995, with earlier adoption
encouraged, to transactions in which a mortgage banking enterprise sells or
securitizes mortgage loans with servicing rights retained and to impairment
evaluations of all amounts capitalized as mortgage servicing rights, including
those purchased before the adoption of SFAS 122. Retroactive capitalization of
mortgage servicing rights retained in transactions in which a mortgage banking
enterprise originates mortgage loans and sells or securitizes those loans before
the adoption of SFAS 122 is prohibited. The Savings Bank plans to adopt the
provisions of SFAS 122 effective January 1, 1996. Management does not believe
the adoption of SFAS 122 will have a material effect on the Savings Bank's
financial position.
Accounting for Impairment of Long-Lived Assets. In March 1995, the
FASB issued SFAS 121, "Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to Be Disposed Of." SFAS 121 is effective for fiscal
years beginning after December 15, 1995. Earlier application is permitted.
SFAS 121 will require, among other things, that long-lived assets and certain
identifiable intangibles to be held and used by an entity be reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Management
adopt ed the provisions of SFAS 121 on January 1, 1996, but believes that
the adoption of SFAS 121 will not have a material impact on the Savings Bank's
financial statements.
Accounting for Employee Stock Ownership Plans. In November 1993, the
American Institute of Certified Public Accountants ("AICPA") issued SOP 93-6,
which requires an employer to record compensation expense in an amount equal to
the fair value of shares committed to be released to employees from an employee
stock ownership plan. Assuming 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 Stock Conversion as compared with
prior guidance which required the recognition of compensation expense based on
the cost of shares acquired
42
<PAGE>
by the ESOP. The effect of SOP 93-6 on net income and book value per share in
fiscal 1996 and future periods cannot be predicted due to the uncertainty of the
fair value of the shares of Common Stock subsequent to their issuance.
Disclosures of Certain Significant Risks and Uncertainties. In
December 1994, the AICPA issued SOP 94-6, "Disclosure of Certain Significant
Risks and Uncertainties." SOP 94-6 is effective for fiscal years ending after
December 15, 1995. Earlier application is permitted. SOP 94-6 will require,
among other things, that entities include in their financial statements
disclosures about the nature of their operations and the use of estimates in the
preparation of financial statements. In addition, SOP 94-6 requires disclosures
about current vulnerability due to certain concentrations. Management believes
that the adoption of SOP 94-6 did not have a material impact on the Savings
Bank's financial statements.
Accounting for Stock Based Compensation. In October 1995, the
FASB issued SFAS 123, "Accounting for Stock Based Compensation," which
establishes financial accounting and reporting standards for stock based
employee compensation plans and also applies to transactions in which an entity
issues its equity instruments to acquire goods or services from nonemployees.
SFAS 123 defines a fair value based method of accounting. However, it also
allows an entity to continue to measure compensation cost for those plans using
the intrinsic value based method of accounting prescribed by Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees ("APB
25"). SFAS 123 is effective for transactions entered into in fiscal years
beginning after December 15, 1995. Pro forma disclosures required for entities
that elect to continue to measure compensation cost using APB 25 must include
the effect of all awards granted in fiscal years that begin after December 15,
1994. The adoption of SFAS 123 will not have any impact on the Savings Bank's
financial condition or results of operations until the Stock Option Plan is
established after the Conversion.
Accounting for Transfers and Servicing of Financial Assets and
Extinguishment of Liabilities. In June 1995, the FASB issued SFAS 125,
"Accounting for Transfers and Servicing of Financial Assets and Extinguishment
of Liabilities." SFAS 125 provides accounting and reporting standards for
transfers and servicing of financial assets and the extinguishment of
liabilities based on consistent application of a financial components approach
that focuses on control. It distinguishes transfers of financial assets that
are sales from transfers that are secured borrowings. Under the financial
components approach, after a transfer of financial assets, an entity recognizes
all financial and servicing assets it controls and liabilities it has incurred
and derecognizes financial assets it no longer controls and liabilities that
have been extinguished. The financial components approach focuses on the assets
and liabilities that exist after the transfer. Many of these assets and
liabilities are components of financial assets that existed prior to the
transfer. If a transfer does not meet the criteria for a sale, the transfer is
accounted for as a secured borrowing with pledge of collateral.
SFAS 125 extends the "available for sale" or "trading" approach in
SFAS 115 to nonsecurity financial assets that can contractually be repaid or
otherwise settled in such a way that the holder of the assets would not recover
substantially all of its recorded investment. SFAS 125 also amends SFAS 115 to
prevent a security from being classified as held to maturity if the security can
be prepaid or otherwise settled in such a way that the holder of the security
would not recover substantially all of its recorded investment.
SFAS 125 provides implementation guidance for accounting for
(i) securitizations, (ii) transfers of partial interests, (iii) servicing of
financial assets, (iv) securities lending transactions, (v) repurchase
agreements including "dollar rolls," (vi) loan syndications and participations,
(vii) risk participations in banker's acceptances, (viii) factoring
arrangements, (ix) transfers of receivables with recourse, (x) transfers of
sales type and direct financing lease receivables, and (xi) extinguishments of
liabilities.
SFAS 125 is effective for transfers and servicing of financial assets
and extinguishments of liabilities occurring after December 31, 1996, and is to
be applied prospectively. Earlier or retroactive application is not permitted.
In addition, the extension of the SFAS 125 approach to certain nonsecurity
financial assets and the amendment of SFAS 115 is effective for financial assets
held on or acquired after January 1, 1997. Reclassifications
43
<PAGE>
that are necessary because of the amendment do not call into question an
entity's ability to hold other debt securities to maturity in the future.
Management of the Savings Bank does not expect the adoption of SFAS 125 will
have a material effect on the Savings Bank's financial position or results of
operations.
RECENT DEVELOPMENTS
The following tables set forth certain information concerning the
financial position and results of operations of the Savings Bank at the dates
and for the periods indicated. Information at June 30, 1996 and March 31, 1996,
and for each of the three- and six-month periods ended June 30, 1996 and 1995,
are unaudited, but, in the opinion of management, reflect all adjustments
necessary for a fair presentation of the results of such periods. All such
adjustments are of a normal recurring nature. The results of operations for the
three- and six-month periods ended June 30, 1996, are not necessarily indicative
of the results of operation for the entire fiscal year. This information should
be read in conjunction with the Financial Statements and Notes thereto presented
elsewhere in this Prospectus.
<TABLE>
<CAPTION>
At At At
June 30, March 31, December 31,
1996 1996 1995
------------- ------------ --------------
(Unaudited)
(In Thousands)
<S> <C> <C> <C>
SELECTED FINANCIAL CONDITION DATA:
Total assets...................................... $136,612 $136,806 $134,781
Loans receivable, net............................. 55,758 55,754 57,021
Mortgage-backed securities(1)..................... 16,535 16,906 15,413
Investments, net(2)............................... 58,996 57,543 57,605
Savings deposits.................................. 105,409 108,515 106,718
Securities sold under agreements to repurchase.... 17,740 15,000 15,000
Retained earnings, substantially restricted....... 12,196 11,870 11,712
Three Months Six Months
Ended June 30, Ended June 30,
-------------------- --------------------
1996 1995 1996 1995
---- ---- ---- ----
(Unaudited)
(In Thousands)
SELECTED OPERATING DATA:
<S> <C> <C> <C> <C>
Interest income................................... $2,264 $ 2,264 $ 4,544 $4,508
Interest expense.................................. 1,305 1,365 2,639 2,694
------ -------- ------- -----------
Net interest income............................... 959 899 1,905 1,814
Provision for loan losses......................... 8 5 15 3
------ -------- ------- -----------
Net interest income after provision for loan
losses....................................... 951 894 1,890 1,811
Loss on sale of certificates of deposit, net...... -- -- (54) --
Gain on sale of investment securities, net........ -- 54 7 102
Other noninterest income.......................... 33 32 76 62
Noninterest expense............................... 577 569 1,191 1,142
-------- -------- ------- --------
Income before income tax expense................. 407 411 728 833
Income taxes...................................... 104 102 181 211
-------- -------- ------- -------
Net income........................................ $ 303 $ 309 $ 547 $ 622
======== ======= ======= ========
</TABLE>
44
<PAGE>
<TABLE>
<CAPTION>
At or For the At or For the
Three Months Six Months
Ended June 30, Ended June 30,
-------------------- --------------------
1996 1995 1996 1995
---- ---- ---- ----
KEY OPERATING RATIOS(3):
<S> <C> <C> <C> <C>
Performance Ratios:
Return on average assets (net income
divided by average assets).................. 0.89% 0.89% 0.80% 0.90%
Return on average equity (net income
divided by average equity).................. 10.07 11.08 9.15 11.33
Interest rate spread (difference between
average yield on interest-earning
assets and average cost of interest-
bearing liabilities)(4)..................... 2.67 2.45 2.65 2.48
Net interest margin (net interest income
as a percentage of average
interest-earning assets)(5)................. 2.94 2.71 2.92 2.73
Noninterest expense to
average assets.............................. 1.70 1.65 1.75 1.65
Average interest-earning assets to average
interest-bearing liabilities................ 106.70 106.28 106.58 106.19
Asset Quality Ratios:
Allowance for loan losses to total
loans receivable at end of
period..................................... 0.71 0.43 0.71 0.43
Ratio of allowance for loan losses
to non-performing loans..................... 277.32 0.86 277.32 0.86
Net charge offs to average outstanding
loans during the period..................... 0.02 -- 0.02 --
Ratio of non-performing
assets to total assets(6)................... 0.16 0.30 0.16 0.30
Capital Ratios:
Average equity to average
assets...................................... 8.85 8.06 8.78 7.94
Equity to assets at end of
period...................................... 8.93 8.01 8.93 8.01
</TABLE>
45
<PAGE>
- ---------------------------
(1) Includes mortgage backed securities available for sale of $2.1 million, $2.1
million and $2.2 million at June 30, 1996, March 31, 1996 and December 31,
1995, respectively.
(2) Includes investment securities, interest-bearing deposits, federal funds
sold, certificates of deposits, and FHLB stock. Includes U.S. government
securities available for sale of $22.7 million, $17.4 million and $6.5
million at June 30, 1996, March 31, 1996 and December 31, 1995,
respectively.
(3) Annualized where appropriate.
(4) Does not consider tax-equivalent basis of tax exempt state and municipal
securities. Interest rate spread, after considering tax equivalent basis of
such securities, is 2.84%, 2.63%, 2.82% and 2.64% for the three months and
six months ended June 30, 1996 and 1995, respectively.
(5) Does not consider tax-equivalent basis of tax exempt state and municipal
securities. Net interest margin, after considering tax equivalent basis of
such securities, is 3.10%, 2.88%, 3.08% and 2.89% for the three and six
months ended June 30, 1996 and 1995, respectively.
(6) Non-performing assets include loans contractually past due 90 days or more,
loans accounted for on a nonaccrual basis and real estate acquired through
foreclosure.
Regulatory Capital
The table below sets forth the Savings Bank's capital position relative to its
OTS capital requirements at the date indicated.
<TABLE>
<CAPTION>
At June 30, 1996
-----------------------------------------
Percent of Adjusted Total
Amount or Risk-Weighted Assets
------ -------------------------
(In Thousands)
<S> <C> <C>
Tangible capital level....... $12,223 8.95%
Tangible capital requirement. 2,050 1.50
------- -----
Excess....................... $10,173 7.45%
======= =====
Core capital level........... $12,223 8.95%
Core capital requirement..... 4,099 3.00
------- -----
Excess....................... $ 8,124 5.95%
======= =====
Risk-based capital level..... $12,610 26.95%
Risk-based capital
requirement................. 3,744 8.00
------- -----
Excess....................... $ 8,866 18.95
======= =====
</TABLE>
Non-Performing Assets and Delinquencies
At June 30, 1996, the Savings Bank had $131,000 of loans accounted for on a
non-accrual basis ($89,000 in one- to four-family mortgage loans and $42,000 in
consumer loans) compared to $207,000 at March 31, 1996. Classified assets at
June 30, 1996 totalled $234,000 ($8,000 classified as loss and $226,000
classified as substandard) compared to $432,000 at March 31, 1996. The Savings
Bank had $12,000 of accruing loans which were contractually past due 90 days or
more, no troubled debt restructurings and $78,000 of real estate owned at June
30, 1996.
The allowance for loan losses was $395,000 at June 30, 1996. Charge-offs
totalled $9,000 and $10,000 for the three months and six months ended June 30,
1996, respectively. There were no recoveries during the three months ended June
30, 1996. Recoveries amounted to $1,000 during the six months ended June 30,
1996.
46
<PAGE>
The following table sets forth the breakdown of the allowance for loan losses
by category at June 30, 1996.
<TABLE>
<CAPTION>
Percent of
Loans in Each
Category to
Amount Total Loans
------ -------------
(in thousands)
<S> <C> <C>
Real estate mortgage:
Residential...................... $248 81.0%
Commercial....................... 69 5.8
Agricultural and land............ 7 1.4
Consumer........................... 71 11.8
---- -----
Total allowance for loan losses.. $395 100.0%
==== =====
</TABLE>
Management's Discussion and Analysis of Recent Developments
Net income for the three months ended June 30, 1996 was $303,000 compared
to $309,000 for the three months ended June 30, 1995, The change in net income
was primarily the result of a $60,000 increase in net interest income, offset by
a $54,000 decrease in noninterest income and an $8,000 increase in noninterest
expense. The return on average assets for the three months ended June 30, 1996
and June 30, 1995 was 0.89% for both quarters.
Net interest income totaled $959,000 for the three months ended June 30,
1996 compared to $899,000 for the three months ended June 30, 1995. The $60,000
or 6.7% increase in net interest income was the result of an increase in the
interest rate spread from 2.45% for the three months ended June 30, 1995 to
2.67% for the three months ended June 30, 1996. The increase for the three
months ended June 30, 1996 resulted from the combined impact of an increase in
the average yield on interest-earning assets and a slight decrease in the
average cost of deposits. The increase in the average yield on interest-earning
assets was primarily the result of an increase in the average yield on interest-
bearing deposits due to higher short-term rates during the second quarter of
1996.
Noninterest income decreased $54,000, or 62.1%, from $86,000 for the three
months ended June 30, 1995 to $33,000 for the three months ended June 30, 1996.
This change resulted from $54,000 of gains recognized from the sale of
investment securities for the three months ended June 30, 1995 versus no sales
for the three months ended June 30, 1996. The proceeds from the sale of
investment securities in 1995 totaled $6.8 million and consisted of U.S.
government obligations that were classified as available for sale.
The increase in noninterest expense in 1996 reflected the net impact of a
$55,000 increase in compensation and employee benefits, offset by declines in
all other noninterest expense categories. The increase in compensation and
employee benefits was primarily attributable to the additional accrual of
$52,000 related to the retirement plan adopted in January 1996 for members of
the Board of Directors who reach director emeritus status. See "MANAGEMENT OF
THE SAVINGS BANK -- Directors' Compensation -- Director Emeritus Plan."
Net income for the six months ended June 30, 1996 was $547,000 as compared
to $622,000 for the six months ended June 30, 1995. The change in net income
resulted from a $90,000 increase in net interest income and a $30,000 decrease
in income tax expense, offset by a $135,000 decrease in noninterest income, a
$49,000 increase in noninterest expense, and a $12,000 increase in the provision
for loan losses. The returns on average assets for the six months ended June
30, 1996 and June 30, 1995 were 0.80% and 0.90%, respectively.
The increase in net interest income between the six months ended June 30,
1996 and 1995 resulted from an increase in the interest rate spread from 2.48%
for the six months ended June 30, 1995 to 2.65% for the six months ended June
30, 1996. The decrease in noninterest income resulted from a $54,000 loss on
the sale of certificates of deposit and a $95,000 decline in gains recognized
from the sale of investment securities. The sale
47
<PAGE>
of $4.5 million of certificates of deposit for the six months ended June 30,
1996 resulted from management's decision to liquidate the certificate of deposit
portfolio with one of its brokers due to concerns related to the broker's
management of the portfolio. The decrease in investment securities gains
resulted from a decline in sales activity during the six months ended June 30,
1996 of U.S. government obligations classified as available for sale. The
increase in noninterest expense was primarily the result of the adoption in
January 1996 of a retirement plan for members of the Board of Directors who
reach director emeritus status. During the six months ended June 30, 1996
$104,000 of expense related to the plan was recognized, whereas no such expense
was recorded in the comparable 1995 period.
The allowance for loan losses was $395,000, or 0.71% of loans outstanding
at June 30, 1996, compared to $396,000, or 0.71% of loans outstanding at March
31, 1996. The $12,000 increase in the provision for loan losses during the six
months ended June 30, 1996 was made to continue to increase the allowance for
loan losses to a level consistent with peers.
Other Events
During the quarter ended June 30, 1996, the Savings Bank made an initial
equity investment of $2,000 in Kaskaskia Trail Community Development Corporation
("Kaskaskia Trail"). The Savings Bank's has committed to invest up to $75,000
as funds are required to fund the corporation's operations. Kaskaskia Trail is
a for-profit corporation chartered in May 1996 to promote small business
development and retention in Perry and Randolph Counties of Southern Illinois.
Its mission is to extend financial products to area small businesses, including
minority owned businesses, which demonstrate a need for economic development
financing. The Savings Bank is one of eight area financial institutions
represented on the Board of Directors of Kaskaskia Trail, each with equal voting
rights.
BUSINESS OF THE HOLDING COMPANY
General
The Holding Company was organized as a Delaware business corporation at the
direction of the Board of Directors of the Savings Bank in March 1996 for the
purpose of becoming a savings and loan holding company to own all of the
outstanding capital stock of the Converted Savings Bank in connection with the
Stock Conversion and thereafter, becoming a bank holding company to own all the
outstanding capital stock of the Banks in connection with the Bank Conversion
and the Bank Formation. Upon consummation of the Bank Conversion and Bank
Formation, the Banks will become wholly owned subsidiaries of the Holding
Company.
Business
Prior to the Conversion, the Holding Company will not engage in any
significant operations. Upon consummation of the Conversion, the Holding
Company's sole business activity will be the ownership of all of the capital
stock of the Banks. In the future, the Holding Company may acquire or organize
other operating subsidiaries, although there are no current plans, arrangements,
agreements or understandings, written or oral, to do so.
Initially, the Holding Company will neither own nor lease any property but
will instead use the premises, equipment and furniture of Chester National Bank
with the payment of appropriate rental fees, as required by applicable law.
Since the Holding Company will only hold the capital stock of the Banks,
the competitive conditions applicable to the Holding Company will be the same as
those confronting the Banks. See "BUSINESS OF THE SAVINGS BANK -- Competition."
48
<PAGE>
BUSINESS OF THE SAVINGS BANK
General
The Savings Bank's principal business consists of attracting deposits from
the general public through a variety of deposit programs and using these funds
to originate one- to four-family residential mortgage loans and consumer loans
within the Savings Bank's lending market area and to invest in investment and
mortgage-backed securities. To a lesser extent, the Savings Bank also
originates commercial real estate loans, consumer loans, and other loans.
Substantially all of the Savings Bank's first mortgage loans are secured by
properties located within Illinois or Missouri. At March 31, 1996, the Savings
Bank's gross loan portfolio totaled $56.7 million, of which 80.9% were one- to
four-family residential mortgage loans, 4.8% were commercial real estate loans
and 11.3% were consumer loans. At March 31, 1996, the Savings Bank's
investments and mortgage-backed securities totaled $74.4 million, or 54.4% of
total assets.
Market Area
The Savings Bank operates out of its headquarters in Chester, Illinois
(Randolph County), four full-service branch offices in Illinois and one full-
service branch office in Missouri. The Illinois branches are located in
Randolph County (Sparta and Red Bud), Perry County (Pinckneyville) and Jackson
County (Carbondale). The Missouri full-service branch is located just across
the Mississippi River in Perry County (Perryville), approximately 15 miles from
Chester. The Savings Bank also operates a loan production office in Cape
Girardeau County, Missouri (Cape Girardeau) approximately 45 miles southeast of
Chester.
The local market area is primarily rural and covers a fairly large
geographic area in southwestern Illinois and southeastern Missouri. The closest
major metropolitan area is the St. Louis area, approximately 60 miles to the
north. The largest town served is Carbondale, which has a population of
approximately 27,000, while the smallest town served, Red Bud, has a population
of approximately 3,000. Perryville, Missouri has a population of approximately
7,000.
The economy in southwestern Illinois is historically based in coal mining
and agriculture, although both industries have declined in recent decades. The
decline of mining employment has had a significant adverse impact on the economy
of the market area, particularly in Randolph and Perry counties, Illinois. Loan
demand in these counties has been limited as unemployment is high and the
population has been declining. Randolph County's already weak economy was
adversely effected in early 1996 when Spartan Printing Company, one of the
County's largest manufacturing employers with approximately 1,000 employees,
closed. Somewhat offsetting the unfavorable operating environment in Randolph
and Perry Counties has been the Jackson County market, whose largest city,
Carbondale, is home to Southern Illinois University ("University"). The
University has enhanced the economic stability of Jackson County both through
direct employment and by supporting a number of ancillary businesses. The
Perryville market is rural and small, and economic stability is supported by its
largest employer, Gilster-Mary Lee. The operating environment in Perryville has
generally been more favorable than Randolph and Perry Counties, Illinois.
The Savings Bank faces significant competition from many financial
institutions for deposits and loan originations. See "-- Competition" and "RISK
FACTORS -- Dependence on Local Economy and Competition Within Market Area."
Lending Activities
General. The principal lending activity of the Savings Bank is the
origination of conventional mortgage loans for the purpose of purchasing,
constructing or refinancing owner-occupied, one- to four-family residential
property. To a significantly lesser extent, the Savings Bank also originates
multi-family, commercial real estate, land
49
<PAGE>
and consumer loans. The Savings Bank's net loans receivable totalled $55.8
million at March 31, 1996, representing 40.8% of total assets.
Loan Portfolio Analysis. The following table sets forth the
composition of the Savings Bank's loan portfolio by type of loan and type of
security as of the dates indicated. The Savings Bank had no concentration of
loans exceeding 10% of total loans other than as set forth below.
<TABLE>
<CAPTION>
At December 31,
At March 31, --------------------------------------
1996 1995 1994
----------------- ------------------ ------------------
Amount Percent Amount Percent Amount Percent
------- -------- -------- -------- -------- --------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Type of Loan:
- ------------
Mortgage loans:
Conventional.................. $46,147 81.42% $ 47,213 81.45% $ 48,275 81.68%
FHA.......................... 322 0.57 344 0.59 405 0.69
Commercial................... 2,700 4.76 2,870 4.95 3,588 6.07
Construction................. 1,096 1.93 1,172 2.02 485 0.82
------ ----- ------- ------ ------- ------
Total mortgage loans....... 50,265 88.68 51,599 89.01 52,753 89.26
------ ----- ------- ------ ------- ------
Consumer loans:
Automobile................... 1,824 3.22 1,713 2.95 1,339 2.26
Home improvement............. 1,591 2.81 1,348 2.33 1,211 2.05
Credit cards................. 851 1.50 939 1.62 828 1.40
Savings account.............. 419 0.74 440 0.76 506 0.86
Other........................ 1,729 3.05 1,928 3.33 2,463 4.17
------ ----- ------- ------ ------- ------
Total consumer loans....... 6,414 11.32 6,368 10.99 6,347 10.74
------ ----- ------- ------ ------- ------
Total loans................ 56,679 100.00% 57,967 100.00% 59,100 100.00%
====== ====== ======
Less:
Loans in process............. 503 533 676
Deferred fees and discounts.. 26 23 21
Allowance for losses......... 396 390 246
------- -------- --------
Loans receivable, net....... $55,754 $ 57,021 $ 58,157
======= ======== ========
Type of Security:
- ----------------
Residential real estate:
One- to four-family.......... $45,842 80.88% $ 47,201 81.43% 47,579 80.51%
Multi-family................. 583 1.03 600 1.03 764 1.29
Commercial real estate........ 2,700 4.76 2,870 4.95 3,588 6.07
Agriculture and land.......... 1,140 2.01 928 1.60 822 1.39
Consumer loans................ 6,414 11.32 6,368 10.99 6,347 10.74
------- ------ ------- ------ ------- ------
Total loans................. 56,679 100.00% 57,967 100.00% 59,100 100.00%
====== ====== ======
Less:
Loans in process............. 503 533 676
Deferred fees and discounts.. 26 23 21
Allowance for losses......... 396 390 246
------- -------- --------
Total loans................. $55,754 $ 57,021 $ 58,157
======= ======== ========
</TABLE>
Residential Real Estate Lending. The primary lending activity of the
Savings Bank is the origination of mortgage loans to enable borrowers to
purchase or refinance existing one- to four-family homes. Management believes
that this policy of focusing on one- to four-family residential mortgage loans
located in its market area has been successful in contributing to interest
income while keeping credit losses low. At March 31, 1996, $45.8 million, or
80.9% of the Savings Bank's gross loan portfolio, consisted of loans secured by
one- to four-family residential real estate. The average principal balance of
the loans in the Savings Bank's one- to four-family portfolio was
50
<PAGE>
approximately $31,200 at March 31, 1996. The Savings Bank presently originates
for retention in its portfolio both ARM loans with terms of up to 25 years and
fixed-rate mortgage loans with terms of up to 20 years. Borrower demand for ARM
loans versus fixed-rate mortgage loans is a function of the level of interest
rates, the expectations of changes in the level of interest rates and the
difference between the initial interest rates and fees charged for each type of
loan. The relative amount of fixed-rate mortgage loans and ARM loans that can
be originated at any time is largely determined by the demand for each in a
competitive environment. At March 31, 1996, $18.7 million, or 33.0% of the
Savings Bank's gross loans, were subject to periodic interest rate adjustments.
The loan fees charged, interest rates and other provisions of the
Savings Bank's ARM loans are determined by the Savings Bank based on its own
pricing criteria and competitive market conditions. The Savings Bank originates
one-year ARM loans secured by owner-occupied residences whose interest rates and
payments generally are adjusted annually to a rate typically equal to 2.75%
above the one-year or, occasionally the three-year, constant maturity United
States Treasury ("CMT") index. At March 31, 1996, the Savings Bank had
approximately $3.3 million of ARM loans, the interest rates for which are based
on the Eleventh District Cost of Funds Index, a lagging index. Such loans were
acquired in connection with the Heritage Federal acquisition. The Savings Bank
occasionally offers ARM loans with initial rates below those which would prevail
under the foregoing computations, determined by the Savings Bank based on market
factors and competitive rates for loans having similar features offered by other
lenders for such initial periods. At March 31, 1996, the initial interest rate
on ARM loans offered by the Savings Bank ranged from 6.50% to 7.50% per annum.
The periodic interest rate cap (the maximum amount by which the interest rate
may be increased or decreased in a given period) on the Savings Bank's ARM loans
is generally 2% per year and the lifetime interest rate cap is generally 6% over
the initial interest rate of the loan.
The Savings Bank does not originate negative amortization loans. The
terms and conditions of the ARM loans offered by the Savings Bank, including the
index for interest rates, may vary from time to time. The Savings Bank believes
that the adjustment features of its ARM loans provide flexibility to meet
competitive conditions as to initial rate concessions while preserving the
Savings Bank's objectives by limiting the duration of the initial rate
concession.
The retention of ARM loans in the Savings Bank's loan portfolio helps
reduce the Savings Bank's exposure to changes in interest rates. There are,
however, unquantifiable credit risks resulting from the potential of increased
costs due to changed rates to be paid by the customer. It is possible that
during periods of rising interest rates the risk of default on ARM loans may
increase as a result of repricing and the increased costs to the borrower. See
"RISK FACTORS -- Potential Adverse Impact of Changes in Interest Rates."
Furthermore, because the ARM loans originated by the Savings Bank generally
provide, as a marketing incentive, for initial rates of interest below the rates
which would apply were the adjustment index used for pricing initially
(discounting), these loans are subject to increased risks of default or
delinquency. Another consideration is that although ARM loans allow the Savings
Bank to increase the sensitivity of its asset base to changes in the interest
rates, the extent of this interest sensitivity is limited by the periodic and
lifetime interest rate adjustment limits. Because of these considerations, the
Savings Bank has no assurance that yields on ARM loans will be sufficient to
offset increases in the Savings Bank's cost of funds.
While fixed-rate single-family residential real estate loans are
normally originated with five to seven year balloon payments or terms up to 20
years, such loans typically remain outstanding for substantially shorter
periods. This is because borrowers often prepay their loans in full upon sale
of the property pledged as security or upon refinancing the original loan. In
addition, substantially all mortgage loans in the Savings Bank's loan portfolio
contain due-on-sale clauses providing that the Savings Bank may declare the
unpaid amount due and payable upon the sale of the property securing the loan.
Typically, the Savings Bank enforces these due-on-sale clauses to the extent
permitted by law and as business judgment dictates. Thus, average loan maturity
is a function of, among other factors, the level of purchase and sale activity
in the real estate market, prevailing interest rates and the interest rates
payable on outstanding loans.
51
<PAGE>
The Savings Bank generally requires title insurance insuring the
status of its lien on all of the real estate secured loans. The Savings Bank
also requires earthquake, fire and extended coverage casualty insurance and, if
appropriate, flood insurance in an amount at least equal to the outstanding loan
balance.
Appraisals are obtained on all properties and are conducted by
independent fee appraisers approved by the Board of Directors. The Savings
Bank's lending policies generally limit the maximum loan-to-value ratio on
mortgage loans secured by owner-occupied properties to 80% of the lesser of the
appraised value or the purchase price, with the condition that the loan-to-value
ratio may be increased to 95% provided that private mortgage insurance coverage
is obtained for the amount in excess of 80%.
Commercial Real Estate and Multi-family Lending. Historically, the
Savings Bank has engaged in limited amounts of commercial real estate and multi-
family lending. At March 31, 1996, commercial real estate loans aggregated $2.7
million, or 4.8% of the total loan portfolio and multi-family loans aggregated
$583,000 or 1.0% of the total loan portfolio. The principal balance of such
loans in the Savings Bank's loan portfolio ranged from approximately $100,000 to
$600,000 at March 31, 1996. Substantially all of these loans are secured by
properties located in the Savings Bank's market area. Such properties include
churches, a library, golf courses and professional offices. Of this amount,
approximately $499,000 or 15.2% were secured by churches. Commercial real
estate and multi-family loans are generally made for balloon terms of 5 to 10
years with a maximum amortization of 20 years.
Commercial real estate and multi-family loans generally involve
greater risks than one- to four-family residential mortgage loans. Payments on
loans secured by such properties often depend on successful operation and
management of the properties. Repayment of such loans may be subject to a
greater extent to adverse conditions in the real estate market or the economy.
The Savings Bank seeks to minimize these risks in a variety of ways, including
limiting the size of such loans, limiting the maximum loan-to-value ratio to 75%
and strictly scrutinizing the financial condition of the borrower, the quality
of the collateral and the management of the property securing the loan. All of
the properties securing the Savings Bank's income property loans are inspected
by the Savings Bank's lending personnel before the loan is made. The Savings
Bank also obtains appraisals on each property in accordance with applicable
regulations.
Following the Conversion, the Savings Bank plans on placing greater
emphasis on commercial real estate lending and commercial business lending. See
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS -- Business Strategy" and "RISK FACTORS -- Certain Loan Underwriting
Considerations and Risk of Lending Strategy."
Construction Lending. The Savings Bank originates residential
construction loans to individuals to construct one- to four-family homes. The
Savings Bank generally does not originate speculative construction loans (i.e.,
loans to builders to construct homes for which there are no contracts for sale
in place). At March 31, 1996, construction loans totalled $1.1 million, or 1.9%
of the gross loan portfolio.
Substantially all construction loans made to individuals provide for
the Savings Bank to originate a permanent loan upon the completion of
construction, which is generally an ARM loan as described under "--Residential
Real Estate Lending." The origination fee for construction loans is generally
1.0% of the principal amount. Construction loans are generally made for terms
of up to six months.
Construction lending is generally considered to involve a higher level
of risk as compared to one- to four-family residential permanent lending because
of the inherent difficulty in estimating both a property's value at completion
of the project and the estimated cost of the project. The nature of these loans
is such that they are generally more difficult to evaluate and monitor. If the
estimate of value proves to be inaccurate, the Savings Bank may be confronted
at, or prior to, the maturity of the loan, with a project whose value is
insufficient to assure full repayment.
52
<PAGE>
Agriculture and Land Lending. The Savings Bank originates loans
secured by farm residences and combinations of farm residences and farm real
estate. The Savings Bank also originates loans for the acquisition of land upon
which the purchaser can then build. At March 31, 1996, the agriculture and land
loan portfolio totalled $1.1 or 2.0% of total loans, substantially all of which
were secured by properties located in the Savings Bank's market area.
Agriculture and land loans are generally made for the same terms and at the same
interest rates as those offered on commercial real estate and multi-family
loans, with a loan-to-value ratio which is generally limited to 75%.
Loans secured by farm real estate generally involve greater risks than
one- to four-family residential mortgage loans. Payments on loans secured by
such properties may, in some instances, be dependent on farm income from the
properties. To address this risk, the Savings Bank historically has not
considered farm income when qualifying borrowers. In addition, such loans are
more difficult to evaluate. If the estimate of value proves to be inaccurate,
the Savings Bank may be confronted with a property the value of which is
insufficient to assure full repayment in the event of default and foreclosure.
Consumer and Other Loans. The Savings Bank offers a variety of
secured or guaranteed consumer loans, including automobile loans, home
improvement loans, unsecured loans and loans secured by savings deposits.
Consumer loans are made at fixed interest rates and for varying terms. At March
31, 1996 the Savings Bank's consumer loans totalled approximately $6.4 million,
or 11.3% of total loans. The Savings Bank views consumer lending as an
important component of its business operations because consumer loans generally
have shorter terms and higher yields than one-to four-family real estate loans,
thus reducing exposure to changes in interest rates. In addition, the Savings
Bank believes that offering consumer loans helps to expand and create stronger
ties to its customer base.
The largest category of consumer loans in the Savings Bank's portfolio
consists principally of direct loans secured by automobiles. The Savings Bank
generally does not originate loans secured by recreational vehicles. At March
31, 1996, consumer loans secured by automobiles totalled $1.8 million, or 3.2%,
of the Savings Bank's total loan portfolio. Automobile loans are offered with
maturities of up to 60 months for new automobiles and up to 48 months for used
automobiles. Loans secured by used automobiles will have maximum terms which
vary depending upon the age of the automobile and will be made based on amounts
as set forth in the NADA "bluebook."
The second largest category of consumer loans in the Savings Bank's
portfolio consists of home improvement loans. At March 31, 1996, home
improvement loans totalled $1.6 million, or 2.8%, of the Savings Bank's total
loan portfolio. The Savings Bank's home improvement loans are secured by the
borrower's principal residence. The maximum amount of a home improvement loan
is generally 80% of the appraised value of a borrower's real estate collateral
less the amount of any prior mortgages or related liabilities. With respect to
substantially all home improvement loans, the Savings Bank holds the first
mortgage on the borrower's residence. Home improvement loans are approved with
fixed interest rates which are determined by the Savings Bank based upon market
conditions. Such loans may be fully amortized over the life of the loan or have
a balloon feature. The maximum term for a home improvement loan is five years.
The Savings Bank began offering proprietary VISA credit cards during
1993 and, at March 31, 1996, there were approximately 800 credit card accounts
with a total balance of $851,000. This program has been offered to residents of
the Savings Bank's primary market area but card recipients need not otherwise be
a customer of the Savings Bank. The VISA card program currently provides an
individual borrowing limit of $3,500 or less, a fixed rate of interest of 9.9%,
and a "rebate" feature. The Savings Bank may alter the general terms of this
program as it seeks to expand its credit card program.
The Savings Bank had $532,000, or 0.9% of total loans in unsecured
consumer loans at March 31, 1996. These loans are made for a maximum of 30
months or less with fixed rates of interest and are offered primarily to
existing customers of the Savings Bank.
53
<PAGE>
The Savings Bank employs strict underwriting standards for consumer
loans. These procedures include an assessment of the applicant's payment
history on other debts and ability to meet existing obligations and payments on
the proposed loans. Although the applicant's creditworthiness is a primary
consideration, the underwriting process also includes a comparison of the value
of the security, if any, to the proposed loan amount. The Savings Bank
underwrites and originates substantially all of its consumer loans internally
which management believes limits exposure to audit risks relating to loans
underwritten or purchased from brokers or other outside sources.
Consumer loans may entail greater risk than do residential mortgage
loans, particularly in the case of consumer loans which are unsecured or secured
by assets that depreciate rapidly, such as automobiles. In the latter case,
repossessed collateral for a defaulted consumer loan may not provide an adequate
source of repayment for the outstanding loan and the remaining deficiency often
does not warrant further substantial collection efforts against the borrower.
In addition, consumer loan collections are dependent on the borrower's
continuing financial stability, and thus are more likely to be adversely
affected by job loss, divorce, illness or personal bankruptcy. Furthermore, the
application of various federal and state laws, including federal and state
bankruptcy and insolvency laws, may limit the amount which can be recovered on
such loans. Such loans may also give rise to claims and defenses by the
borrower against the Savings Bank as the holder of the loan, and a borrower may
be able to assert claims and defenses which it has against the seller of the
underlying collateral.
Commercial Business Lending. The Savings Bank intends to attempt to
originate small commercial business loans in order to diversify its credit risk
and increase the average yield and repricing speed of its interest-earning
assets. The Savings Bank is developing the capabilities for this type of
lending, but as of March 31, 1996 has not originated any commercial business
loans. There can be no assurances that the Savings Bank will be successful in
its efforts to originate commercial business loans.
54
<PAGE>
Maturity of Loan Portfolio. The following table sets forth at March
31, 1996 certain information regarding the dollar amount of loans maturing in
the Savings Bank's portfolio based on their contractual terms to maturity.
Demand loans (loans having no stated repayment schedule and no stated maturity)
and overdrafts are reported as due in one year or less. Loan balances do not
include undisbursed loan proceeds, unearned discounts, and allowance for loan
losses.
<TABLE>
<CAPTION>
After After After
During the Year 3 Years 5 Years 10 Years
Ended March 31, Through Through Through Beyond
---------------------
1997 1998 1999 5 Years 10 Years 15 Years 15 Years Total
----- ----- ------ ------- -------- -------- -------- -------
(In Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Real estate mortgage.... $ 165 $ 130 $ 566 $1,300 $10,589 $17,989 $15,730 $46,469
Commercial real estate.. 238 17 295 174 969 525 482 2,700
Construction............ 1,096 -- -- -- -- -- -- 1,096
Home improvement........ 97 188 479 476 351 -- -- 1,591
Automobile.............. 147 219 596 862 -- -- -- 1,824
Credit cards............ 851 -- -- -- -- -- -- 851
Other................... 937 389 224 418 180 -- -- 2,148
------ ----- ------ ------ ------- -------- -------- -------
Total loans........... $3,531 $ 943 $2,160 $3,230 $12,089 $18,514 $16,212 $56,679
====== ===== ====== ====== ======= ======== ======== =======
</TABLE>
The following table sets forth the dollar amount of all loans due after March
31, 1997, which have fixed interest rates and have floating or adjustable
interest rates.
<TABLE>
<CAPTION>
Fixed Floating- or
Rates Adjustable-Rates
------- ----------------
<S> <C> <C>
(In Thousands)
Real estate mortgage.............. $28,212 $18,092
Commercial real estate............ 1,851 611
Construction...................... -- --
Home improvement.................. 1,494 --
Automobile........................ 1,677 --
Credit cards...................... -- --
Other............................. 1,211 --
------- -------
Total............................ $34,445 $18,703
======= =======
</TABLE>
55
<PAGE>
Scheduled contractual principal repayments of loans generally do not
reflect the actual life of such assets. The average life of loans ordinarily is
substantially less than their contractual terms because of prepayments. In
addition, due-on-sale clauses on loans generally give the Savings Bank the right
to declare loans 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, however,
when current mortgage loan market rates are higher than rates on existing
mortgage loans and, conversely, decrease when rates on existing mortgage loans
are higher than current mortgage loan market rates.
Loan Solicitation and Processing. Loan applicants come primarily from walk-
in customers including previous and present customers of the Savings Bank and to
a lesser extent referrals by real estate agents. Upon receipt of a loan
application from a prospective borrower, a credit report and other data are
obtained to verify specific information relating to the loan applicant's
employment, income and credit standing. An appraisal of the real estate offered
as collateral generally is undertaken by a Board-approved independent fee
appraiser who is certified by the State of Illinois.
All mortgage loans must be approved by the Savings Bank's Executive
Committee. Unsecured consumer loans up to $3,500 and secured consumer loans up
to $20,000 may be approved by an individual loan officer. Amounts in excess of
these limits must be approved by the Executive Committee. Management of the
Savings Bank believes its local decision-making capabilities and the
accessibility of its senior officers is an attractive quality to customers
within its market area. The Savings Bank's loan approval process allows
consumer loans to be approved in one to two days and mortgage loans to be
approved and closed in approximately two weeks.
Loan Originations, Sales and Purchases. During the years ended December 31,
1995 and 1994, the Savings Bank's total loan originations were $15.3 million and
$13.0 million, respectively and $3.4 million and $3.3 million for the three
months ended March 31, 1996 and 1995, respectively. While the Savings Bank
originates both adjustable-rate and fixed-rate loans, its ability to generate
each type of loan depends upon relative customer demand for loans in its market.
Consistent with its asset/liability management strategy, the Savings Bank's
policy has been to retain in its portfolio nearly all of the loans that it
originates. Any loan sales are generally made without recourse to the Savings
Bank. See "RISK FACTORS -- Certain Lending Considerations."
The Savings Bank has originated loans for sale through its newly formed Cape
Girardeau loan production office; however, such loans are funded by the
purchaser of the loan at closing and closed in the name of such purchaser.
During the year ended December 31, 1995, the Savings Bank originated $618,000 of
such loans which were funded by two investors and $702,000 for the three months
ended March 31, 1996.
56
<PAGE>
The following table shows total loans originated and repaid during the
periods indicated. No loans were purchased or sold during the periods
indicated.
<TABLE>
<CAPTION>
Three Months
Ended March 31, Year Ended December 31,
------------------ ------------------------
1996 1995 1995 1994
---- ---- ---- ----
(In Thousands)
<S> <C> <C> <C> <C>
Total loans at beginning
of period................. $57,021 $58,157 $58,157 $61,193
------- ------- ------- -------
Loans originated:
Single-family residential.. 1,417 1,040 6,349 3,833
Commercial real estate..... -- 69 57 1,436
Construction loans......... 235 799 2,262 699
Agriculture and land....... 182 18 364 278
Consumer................... 1,528 1,405 6,249 6,791
------- ------- ------- -------
Total loans originated... 3,362 3,331 15,281 13,037
------- ------- ------- -------
Loan principal repayments... 4,624 3,589 16,063 16,157
Increase (decrease) in
other items, net.......... (5) (13) (354) 84
------- ------- ------- -------
Total loans at
end of period............. $55,754 $57,886 $57,021 $58,157
======= ======= ======= =======
</TABLE>
Loan Commitments. The Savings Bank issues, without fee, commitments
for one- to four-family residential mortgage loans conditioned upon the
occurrence of certain events. Such commitments are made in writing on specified
terms and conditions and at a specified interest rate and are honored for up to
three months from the date of loan approval. The Savings Bank had outstanding
net loan commitments of approximately $377,000 at March 31, 1996, all of which
were for fixed rate loans. In addition, the Savings Bank had no commitments to
fund outstanding credit lines at March 31, 1996. See Note 13 of Notes to the
Financial Statements.
Loan Origination and Other Fees. The Savings Bank, in some instances,
receives loan origination fees. Loan fees are a percentage of the principal
amount of the mortgage loan which are charged to the borrower for funding the
loan. The amount of fees charged by the Savings Bank is generally up to 1.0%
for mortgage loans and construction loans. Current accounting standards require
that origination fees received (net of certain loan origination costs) for
originating loans to be deferred and amortized into interest income over the
contractual life of the loan. Net deferred fees or costs associated with loans
that are prepaid are recognized as income at the time of prepayment. The
Savings Bank had $14,000 of net deferred loan fees at March 31, 1996.
Non-performing Assets and Delinquencies. When a mortgage loan
borrower fails to make a required loan payment when due, the Savings Bank
institutes collection procedures. The first written notice is mailed to a
delinquent borrower 10-15 days after the due date, followed by a second written
notice mailed and a telephone call approximately 15 days thereafter. On or
about 60 days after the due date, a certified letter is sent to the delinquent
borrower. Foreclosure procedures are instituted on or about 90 days after the
due date if the delinquency continues to that date.
Consumer loan collection procedures are substantially the same as
those for mortgage loans. In most cases, delinquencies are cured promptly;
however, if, by the 120th day of delinquency the delinquency has not been cured,
the Savings Bank begins legal action to repossess the collateral. At the 120th
day of delinquency, the Savings Bank charges off the full principal amount of
the loan.
57
<PAGE>
The Savings Bank's Board of Directors is informed monthly as to the
status of all mortgage and consumer loans that are delinquent more than 30 days,
the status on all loans currently in foreclosure, and the status of all
foreclosed and repossessed property owned by the Savings Bank.
The following table sets forth information regarding the Savings
Bank's delinquent loans, excluding loans 90 days or more delinquent and
accounted for on a non-accrual basis.
<TABLE>
<CAPTION>
At March 31, At December 31,
----------------------- ------------------------------------------------
1996 1995 1994
----------------------- ----------------------- -----------------------
Percentage Percentage Percentage
Principal of Gross Principal of Gross Principal Of Gross
Balance Loans Balance Loans Balance Loans
---------- ----------- ---------- ----------- ---------- -----------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Loans delinquent for:
30 - 59 days......... $ 970 1.71% $ 443 0.76% $ 379 0.64%
60 - 89 days......... 85 0.15 65 0.12 56 0.10
----- ----- ----- ----- ----- ------
$1,055 1.86% $ 508 0.88% $ 435 0.74%
===== ===== ===== ===== ===== =====
</TABLE>
58
<PAGE>
The following table sets forth information with respect to the Savings
Bank's non-performing assets at the dates indicated. The Savings Bank had no
restructured loans within the meaning of SFAS No. 15 at any of the dates
indicated.
<TABLE>
<CAPTION>
At March 31, At December 31,
--------------------------
1996 1995 1994
-------- ---- ----
(Dollars in Thousands)
<S> <C> <C> <C>
Non-performing loans:
Loans accounted for on a non-accrual
basis:
Real estate:
Residential........................ $ 123 $ 56 $ 337
Commercial......................... 50 49 --
Consumer............................ 34 40 6
------- ------- ------
Total............................. 207 145 343
------- ------- ------
Accruing loans which are
contractually
past due 90 days or more:
Residential real estate............. -- -- 37
Consumer............................ 15 14 --
------- ------- ------
Total............................. 15 14 37
------- ------- ------
Total non-performing loans........ 222 159 380
Real estate acquired by
foreclosure, net................... 210 209 64
------- ------- ------
Total non-performing assets....... $ 432 $ 368 $ 444
======= ======= ======
Total non-performing loans to
net loans......................... 0.40% 0.28% 0.65%
======= ======= ======
Total allowance for loan losses
to non-performing loans........... 178.38% 244.79% 64.65%
======= ======= ======
Total non-performing assets to
total assets....................... 0.32% 0.27% 0.31%
======= ======= ======
</TABLE>
Interest income which would have been recorded for the year ended December 31,
1995 and the three months ended March 31, 1996 had non-accruing loans been
current in accordance with their original terms amounted to approximately
$25,000 and $4,000, respectively. The amount of interest included in the
results of operations on such loans for the year ended December 31, 1995 and the
three months ended March 31, 1996 amounted to approximately $18,000 and $512,
respectively.
At March 31, 1996, management of the Savings Bank was unaware of any material
loans not disclosed in the above table but where known information about
possible credit problems of the borrowers caused management to have serious
doubts as to the ability of such borrowers to comply with their loan repayment
terms at that date and which may result in future inclusion in the non-
performing assets category.
Real Estate Acquired by Foreclosure. See Note 1 of Notes to the Financial
Statements for a discussion of the Savings Bank's procedures for accounting for
real estate acquired by foreclosure. The Savings Bank had $210,000 in real
estate acquired by foreclosure at March 31, 1996, which consisted of three
parcels of residential real estate, the largest of which was $183,000.
59
<PAGE>
Asset Classification. The OTS has adopted various regulations
regarding problem assets of savings institutions. The regulations require that
each insured institution review and classify its assets on a regular basis. In
addition, in connection with examinations of insured institutions, OTS examiners
have authority to identify problem assets and, if appropriate, require them to
be classified. There are three classifications for problem assets:
substandard, doubtful and loss. Substandard assets have one or more defined
weaknesses and are characterized by the distinct possibility that the insured
institution will sustain some loss if the deficiencies are not corrected.
Doubtful assets have the weaknesses of substandard assets with the additional
characteristic that the weaknesses make collection or liquidation in full on the
basis of currently existing facts, conditions and values questionable, and there
is a high possibility of loss. An asset classified as loss is considered
uncollectible and of such little value that continuance as an asset of the
institution is not warranted. If an asset or portion thereof is classified as
loss, the insured institution establishes specific allowances for loan losses
for the full amount of the portion of the asset classified as loss. All or a
portion of general loan loss allowances established to cover possible losses
related to assets classified substandard or doubtful may be included in
determining an institution's regulatory capital, while specific valuation
allowances for loan losses generally do not qualify as regulatory capital.
Assets that do not currently expose the insured institution to sufficient risk
to warrant classification in one of the aforementioned categories but possess
weaknesses are designated "special mention" and monitored by the Savings Bank.
The aggregate amounts of the Savings Bank's classified assets including assets
designated special mention and general and specific loss allowances at the dates
indicated, were as follows:
<TABLE>
<CAPTION>
At March 31, At December 31,
--------------
1996 1995 1994
------------ ---- ----
(In Thousands)
<S> <C> <C> <C>
Loss...................... $ 8 $ 8 $ --
Doubtful.................. -- -- --
Substandard assets........ 424 344 497
Special mention........... -- -- --
----- ----- -----
Total................... $ 432 $ 352 $ 497
===== ===== =====
General loss allowances... $ 388 $ 382 $ 246
Specific loss allowances.. 8 8 --
----- ----- -----
Total loss allowances... $ 396 $ 390 $ 246
===== ===== =====
</TABLE>
Allowance for Loan Losses. The Savings Bank has established a
systematic methodology for determining provisions for loan losses. The
methodology is set forth in a formal policy and considers the need for an
overall general valuation allowance as well as specific allowances for
individual loans.
In originating loans, the Savings Bank recognizes that 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. The Savings Bank increases its allowance
for loan losses by charging provisions for loan losses against the Savings
Bank's income.
The allowance for loan losses is maintained to cover losses inherent
in the portfolio of performing loans. Management reviews the adequacy of the
allowance at least quarterly based on management's assessment of numerous
factors, including, but not necessarily limited to, general economic conditions,
loan portfolio composition, prior loss experience, and independent appraisals.
In addition to the allowance for estimated losses on identified problem loans,
an overall unallocated allowance is established to provide for unidentified
credit losses. In estimating such losses, management considers various risk
factors including geographic location, loan collateral, and payment history.
Specific valuation allowances are established to absorb losses on loans for
which full collectibility may not
60
<PAGE>
be reasonably assured. The amount of the allowance is based on the estimated
value of the collateral securing the loan and other analyses pertinent to each
situation.
At March 31, 1996, the Savings Bank had an allowance for loan losses
of $396,000. Management believes that the amount maintained in the allowance
will be adequate to absorb losses inherent in the portfolio. Although management
believes that it uses the best information available to make such
determinations, future adjustments to the allowance for loan losses may be
necessary and results of operations could be significantly and adversely
affected if circumstances differ substantially from the assumptions used in
making the determinations.
While the Savings Bank believes it has established its existing
allowance for loan losses in accordance with GAAP, there can be no assurance
that regulators, in reviewing the Savings Bank's loan portfolio, will not
request the Savings Bank to increase significantly its allowance for loan
losses. In addition, because future events affecting borrowers and collateral
cannot be predicted with certainty, there can be no assurance that substantial
increases will not be necessary should the quality of any loans deteriorate as a
result of the factors discussed above. Any material increase in the allowance
for loan losses may adversely affect the Savings Bank's financial condition and
results of operations.
The following table sets forth an analysis of the Savings Bank's allowance
for loan losses for the periods indicated.
<TABLE>
<CAPTION>
Three Months
Ended March 31, Year Ended December 31,
----------------- -----------------------
1996 1995 1995 1994
---- ---- ---- ----
<S> <C> <C> <C> <C>
Allowance at beginning of
period............................ $ 390 $ 246 $ 246 $ 207
----- ----- ----- -----
Provision for loan losses(1)...... 7 (2) 161 69
Recoveries........................ -- -- -- --
Charge-offs:
Residential real estate.......... -- -- -- 23
Consumer......................... 1 -- 17 7
----- ----- ----- -----
Total charge-offs............. 1 -- 17 30
----- ----- ----- -----
Allowance at end of period........ $ 396 $ 244 $ 390 $ 246
===== ===== ===== =====
Ratio of allowance to total
loans outstanding at
the end of the period............ 0.71% 0.42% 0.68% 0.42%
===== ===== ===== =====
Ratio of net charge-offs to
average loans outstanding
during the period................ --% --% 0.03% 0.05%
===== ===== ===== =====
- -----------------
</TABLE>
(1) See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS -- Comparison of Operating Results for the Years
Ended December 31, 1995 and 1994 -- Provision for Loan Losses" for a
discussion of the change between 1995 and 1994.
61
<PAGE>
The following table sets forth the breakdown of the allowance for loan
losses by loan category for the periods indicated. The portion of the allowance
to each loan category does not necessarily represent the total available for
losses within that category since the total allowance applies to the entire loan
portfolio. 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 other category.
<TABLE>
<CAPTION>
At March 31, At December 31,
----------------------------------------------------------
1996 1995 1994
---------------------------- ---------------------------- ----------------------------
As a % % of As a % % of As a % % of
of Out- Loans in of Out- Loans in of Out- Loans in
standing Category standing Category standing Category
Loans in to Total Loans in to Total Loans in to Total
Amount Category Loans Amount Category Loans Amount Category Loans
------ --------- --------- ------ --------- --------- ------ --------- ---------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Real estate -- mortgage:
Residential(1)................... $248 .53% 81.9% $244 0.51% 82.4% $143 0.30% 81.8%
Commercial....................... 69 2.56 4.8 69 2.40 5.0 42 1.17 6.1
Agriculture and land............. 7 .61 2.0 5 0.54 1.6 3 0.36 1.4
Consumer(1)........................ 72 1.12 11.3 72 1.13 11.0 58 0.91 10.7
---- ------ ---- ------ ---- -----
Total allowance for loan losses.. $396 100.00% $390 100.00% $246 100.0%
==== ====== ==== ====== ==== =====
- -------------------
</TABLE>
(1) See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS -- Comparison of Operating Results for the Years
Ended December 31, 1995 and 1994 -- Provision for Loan Losses" for a
discussion of the changes between December 31, 1995 and 1994.vv
Investment Activities
General. Federal savings banks have authority to invest in various
types of liquid assets, including United States Treasury obligations, securities
of various federal agencies and of state and municipal governments, deposits at
the FHLB-Chicago, certificates of deposit of federally insured institutions,
certain bankers' acceptances and federal funds. Subject to various restrictions,
such savings institutions may also invest a portion of their assets in
commercial paper, corporate debt securities and ARM funds, the assets of which
conform to the investments that federally chartered savings institutions are
otherwise authorized to make directly. Savings institutions are also required to
maintain minimum levels of liquid assets which vary from time to time. See
"REGULATION -- Federal Home Loan Bank System." The Savings Bank maintains its
liquidity above the required levels in part because of the large amount of funds
held from Gilster-Mary Lee. See "RISK FACTORS -- Potential Reduction of Certain
Funding Liabilities."
The Savings Bank's policies generally limit investments to U.S.
Government and agency securities, certificates of deposit in other financial
institutions and municipal bonds, and mortgage-backed securities. All of the
Savings Bank's investment securities are subject to market risk insofar as
increases in market rates of interest may cause a decrease in their market
value. Investment decisions are made by the Savings Bank's Chairman and Chief
Financial Officer Michael W. Welge and reported at monthly Board of Directors'
meetings.
At March 31, 1996, the Savings Bank's investment portfolio totaled
$74.4 million and consisted principally of United States Government and agency
obligations, mortgage-backed securities, certificates of deposit in other
financial institutions, municipal obligations, investment-bearing deposits and
FHLB Stock. At December 31, 1995, the Savings Bank's investment portfolio did
not contain any securities of a single issuer (other than the United States
62
<PAGE>
Government and agencies thereof) which had an aggregate book value in excess of
10% of the Savings Bank's equity at that date.
The Savings Bank adopted SFAS 115 effective January 1, 1994. SFAS 115
requires that investments be categorized as held to maturity, trading or
available for sale, based upon management's intent as to the ultimate
disposition of each security acquired. As of March 31, 1996, the held to
maturity investment portfolio of the Savings Bank contained securities with an
amortized cost of $28.2 million and a fair value of $28.2 million and consisted
of United States agency obligations, municipal and state obligations and
mortgage-backed bonds. At March 31, 1996, the Savings Bank's investment
securities available for sale portfolio consisted of U.S. Government obligations
with an amortized cost of $17.5 million and a fair value of $17.4 million. At
March 31, 1996, the Savings Bank held no securities that were classified as
trading securities.
Thrift Bulletin Number 52 ("TB-52"), the OTS Policy Statement on securities
portfolio policies and unsuitable investment practices, requires that
institutions classify mortgage derivative products acquired, including certain
tranches of CMOs, as "high-risk mortgage securities" if such products exhibit
greater price volatility than a benchmark fixed-rate 30-year mortgage-backed
pass-through security. Institutions may only hold high-risk mortgage securities
to reduce interest-rate risk in accordance with safe and sound practices and
must also follow certain prudent safeguards in the purchase and retention of
such securities. At December 31, 1995, the Savings Bank did not have any
securities that would be identified under TB-52 as "high-risk mortgage
securities." The Savings Bank does not invest in CMO residual interests or in
CMO tranches that met the definition of a high-risk mortgage security at the
time of investment.
Investment Strategy. Historically, the Savings Bank has maintained a
substantial proportion of its assets in investments and mortgage-related
securities. The objectives of these investments are to: (i) provide sufficient
liquidity to fund the operational needs of the Savings Bank, (ii) provide a
stable base of income with minimal credit risk, (iii) invest those deposit funds
in excess of the mortgage and consumer lending volumes available to the Savings
Bank in its market area, (iv) invest the deposit and reverse repurchase
agreement funds attributable to Gilster-Mary Lee, (v) assist the Savings Bank in
meeting its qualified thrift lender ("QTL") test for regulatory and tax
purposes, and (vi) generally assist in managing the interest rate risk of the
Savings Bank. The Savings Bank invests in U.S. Government and U.S. Government
agency securities, securities of U.S. Government-sponsored enterprises (e.g.,
FNMA and FHLMC), tax-exempt securities of states and municipalities, short-term
interest-bearing deposits and federally insured certificates of deposits in
other financial institutions, FHLB-Chicago stock, and mortgage-related
securities (including mortgage-backed securities and collateralized mortgage
obligations). The foregoing securities serve different functions within the
context of the Savings Bank's investment practices.
U.S. Government securities, all of which were available for sale at March
31, 1996, function as the Savings Bank's principal source of liquidity for its
operations. Accordingly, the Savings Bank limits maturities to five years or
less and typically purchases shorter maturities of two years or less. Though
the primary function of the U.S. Government securities portfolio is liquidity,
the Savings Bank seeks to improve the yield or expected total return of the
portfolio by selectively readjusting the maturity structure of the portfolio as
securities mature, or occasionally, through sale and reinvestment.
U.S. Government agency, Government-sponsored enterprise, and tax-exempt
state and municipal securities and short-term interest-bearing deposits and
federally insured certificates of deposits in other financial institutions
function as a income base and non-lending investment vehicle for the Savings
Bank. Management views the foregoing investments generally as substitutes for
each other, and the relative proportion of them in the portfolio depends on the
relative yields of each as compared to their perceived credit risks and interest
rate sensitivities. As these investments mature, the Savings Bank seeks to
reinvest the proceeds in those investments that, at that time, provide an
attractive trade-off among the foregoing factors. With respect to the tax-
exempt state and municipal securities portfolio, the Savings Bank also seeks to
invest so as to meet specific community needs in its primary market area and to
take advantage of the federal and, on some securities, state tax exemption for
the interest thereon. As a general rule, the Savings Bank limits it tax-exempt
investments to those having a rating by a nationally
63
<PAGE>
recognized statistical rating organization of "AA" or better or those unrated
securities issued by entities within its market area. Generally, the Savings
Bank also limits the maturities of all of the foregoing securities to five years
or less. Currently, the Savings Bank plans to replace maturing certificates of
deposit with other types of investments.
Mortgage-related securities also contribute to the Savings Bank's income
base and have the additional benefit of helping to satisfy the Savings Bank's
QTL test. Following consummation of the Bank Conversion, the Savings Bank will
likely reduce its mortgage-backed securities. The Savings Bank has no current
plans to expand or reduce its holdings of collateralized mortgage obligations.
Mortgage-Backed Securities. The Savings Bank purchases mortgage-backed
securities primarily to supplement its lending activities and to assist it in
satisfying the QTL Test (see "REGULATION -- Federal Regulations of Savings Banks
- -- Qualified Thrift Lender Test") and, to a lesser extent, to: (i) generate
positive interest rate spreads on large principal balances with minimal
administrative expense; (ii) lower the credit risk of the Savings Bank as a
result of the guarantees provided by FHLMC, FMNA, and GNMA; (iii) enable the
Savings Bank to use mortgage-backed securities as collateral for financing; and
(iv) increase the Savings Bank's liquidity. National banks are not subject to
the QTL Test. Accordingly, following the Conversion to the extent that there is
low loan demand in the Banks' primary market area, the Banks expect to reduce
the Savings Bank's current investment in mortgage-backed securities in favor of
United States Government and agency securities and other investment securities.
The Savings Bank has invested primarily in federal agency securities,
principally FNMA, FHLMC and GNMA. The Savings Bank also invests in
collateralized mortgage obligations ("CMOs") that have fixed interest rates. At
March 31, 1996, net mortgage-backed and related securities totaled $16.9
million, or 12.4% of total assets. At March 31, 1996,11.1% of the mortgage-
backed and mortgage related securities were adjustable-rate and 88.9% were
fixed-rate. The mortgage-backed securities portfolio had coupon rates ranging
from 5.45% to 9.00% and had a weighted average yield of 6.46% at March 31, 1996.
The estimated fair value of the Savings Bank's mortgage-backed securities
available for sale at March 31, 1996 was $2.1 million.
Mortgage-backed securities (which also are known as mortgage participation
certificates or pass-through certificates) typically represent a participation
interest in a pool of single-family or multi-family mortgages. The principal
and interest payments on these mortgages are passed from the mortgage
originators, through intermediaries (generally United States Government agencies
and government sponsored enterprises) that pool and resell the participation
interests in the form of securities, to investors such as the Savings Bank.
Such United States Government agencies and government sponsored enterprises,
which guarantee the payment of principal and interest to investors, primarily
include the FHLMC, FNMA and the GNMA. 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 fall within a specific range
and have varying maturities. Mortgage-backed securities generally yield less
than the loans that underlie such securities because of the cost of payment
guarantees and credit enhancements. In addition, mortgage-backed securities are
usually more liquid than individual mortgage loans and may be used to
collateralize certain liabilities and obligations of the Savings Bank. These
types of securities also permit the Savings Bank to optimize its regulatory
capital because they have a low risk weighting.
CMOs are generally classified as derivative financial instruments because
they are created by redirecting the cash flows from the pool of mortgages or
mortgage-backed securities underlying these securities to create two or more
classes (or tranches) with different maturity or risk characteristics designed
to meet a variety of investor needs and preferences. Management believes these
securities may represent attractive alternatives relative to other investments
due to the wide variety of maturity, repayment and interest rate options
available. Current investment practices of the Savings Bank prohibit the
purchase of high risk CMOs pursuant to TB 52. The Savings Bank held investment
grade CMOs with a net carrying value of $8.2 million at March 31, 1996. CMOs
may be sponsored by private issuers, such as mortgage bankers or money center
banks, or by United States Government agencies and government sponsored
entities. At March 31, 1996, the Savings Bank did not own any privately issued
CMOs.
64
<PAGE>
Derivatives also include "off balance sheet" financial products whose value
is dependent on the value of an underlying financial asset, such as a stock,
bond, foreign currency, or a reference rate or index. Such derivatives include
"forwards," "futures," "options" or "swaps." The Savings Bank has not invested
in, and currently does not intend to invest in, these "off balance sheet"
derivative instruments, although the Savings Bank's investment policy does not
prohibit such investments. The Savings Bank evaluates its mortgage-related
securities portfolio quarterly for compliance with applicable regulatory
requirements, including testing for identification of high risk investments
pursuant to Federal Financial Institutions Examination Council standards. At
March 31, 1996, the Savings Bank did not have any derivatives or high risk
securities.
Of the Savings Bank's $16.9 million mortgage-backed securities portfolio at
March 31, 1996, $10.3 million with a weighted average yield of 6.47% had
contractual maturities within ten years and $6.6 million with a weighted average
yield of 6.49% had contractual maturities over ten years. However, the actual
maturity of a mortgage-backed security may be less than its stated maturity due
to prepayments of the underlying mortgages. Prepayments that are faster than
anticipated may shorten the life of the security and may result in a loss of any
premiums paid and thereby reduce the net yield on such securities. Although
prepayments of underlying mortgages depend on many factors, including the type
of mortgages, the coupon rate, the age of 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 generally is the
most significant determinant of the rate of prepayments. During periods of
declining mortgage interest rates, if the coupon rate of the underlying
mortgages exceeds the prevailing market interest rates offered for mortgage
loans, refinancing generally increases and accelerates the prepayment of the
underlying mortgages and the related security. Under such circumstances, the
Savings Bank may be subject to reinvestment risk because, to the extent that the
Savings Bank's mortgage-backed securities amortize or prepay faster than
anticipated, the Savings Bank may not be able to reinvest the proceeds of such
repayments and prepayments at a comparable rate. In contrast to mortgage-backed
securities in which cash flow is received (and hence, prepayment risk is shared)
pro rata by all securities holders, the cash flow from the mortgages or
mortgage-backed securities underlying CMOs are segmented and paid in accordance
with a predetermined priority to investors holding various tranches of such
securities or obligations. A particular tranche of CMOs may therefore carry
prepayment risk that differs from that of both the underlying collateral and
other tranches. At March 31, 1996, adjustable-rate investments account for
11.1% of the Savings Bank's mortgage-backed securities portfolio.
65
<PAGE>
The following table sets forth the composition of the Savings Bank's
mortgage-backed securities portfolio at the dates indicated.
<TABLE>
<CAPTION>
At December 31,
--------------------------------------------
At March 31, 1996 1995 1994
--------------------- --------------------- ---------------------
Carrying Percent of Carrying Percent of Carrying Percent of
Value Portfolio Value Portfolio Value Portfolio
-------- ----------- -------- ----------- -------- -----------
(In Thousands)
<S> <C> <C> <C> <C> <C> <C>
Mortgage-backed securities:
Available for sale (at
market value):
GNMA............................. $ 497 2.94% $ 517 3.35% $ -- --%
FNMA............................. 1,618 9.57 1,690 10.97 -- --
------- ------ ------- ------ -------- ----------
Total mortgage-backed
securities available
for sale...................... 2,115 12.51 2,207 14.32 -- --
------- ------ ------- ------ -------- ----------
Held to maturity (at
amortized cost):
GNMA............................. 1,461 8.64 1,515 9.83 2,626 19.99
FNMA............................. 146 0.86 153 0.99 3,117 23.73
FHLMC............................ 4,993 29.54 5,326 34.56 7,393 56.28
Collateralized mortgage
obligations..................... 8,191 48.45 6,212 40.30 -- --
------- ------ ------- ------ -------- ----------
Total mortgage-backed
securities held to maturity.. 14,791 87.49 13,206 85.68 13,136 100.00
------- ------ ------- ------ -------- ----------
Total mortgage-backed
securities................... $16,906 100.00% $15,413 100.00% $13,136 100.00%
======= ====== ======= ====== ======== ==========
</TABLE>
The following table shows purchases, sales and repayments of mortgage-
backed securities during the periods indicated.
<TABLE>
<CAPTION>
Three Months
Ended
March 31, Year Ended December 31,
------------------- ------------------------
1996 1995 1995 1994
---- ---- ----- -----
(In Thousands)
<S> <C> <C> <C> <C>
Mortgage-backed
securities, net,
at beginning of period.... $15,413 $13,136 $13,136 $ 7,402
Purchases.................. 1,973 -- 6,200 8,060
Sales...................... -- -- (2,409) --
Repayments................. (463) (447) (1,637) (2,341)
Increase (decrease)
in other items, net........ (17) 5 123 15
--- ------ ----- ----
Mortgage-backed
securities, net,
at end of period.......... $16,906 $12,694 $15,413 $13,136
======= ======= ======== ========
</TABLE>
66
<PAGE>
The following table sets forth the composition of the Savings Bank's
investment portfolio at the dates indicated.
<TABLE>
<CAPTION>
At December 31,
At March 31, ----------------------------------------------
1996 1995 1994
------------------------- --------------------- ----------------------
Carrying Percent of Carrying Percent of Carrying Percent of
Value Portfolio Value Portfolio Value Portfolio
-------- ---------- -------- --------- --------- ----------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Investment securities:
Available for sale (at
market value)-
securities of U.S.
government................. $17,412 30.3% $ 6,524 11.3% $ -- --%
------- ------ ------- ------- ------ --------
Held to maturity (at cost):
Securities of U.S.
government................. -- -- -- -- 11,743 18.2
Securities of U.S.
agencies................... 6,947 12.1 10,017 17.4 7,392 11.5
Mortgage-backed bonds....... 8,071 14.0 8,606 15.0 7,296 11.3
Securities of states
and municipalities......... 13,171 22.9 13,199 22.9 14,679 22.8
------- ------- ------- ------- ------ --------
Total investment
securities held to
maturity.................. 28,189 49.0 31,822 55.3 41,110 63.8
------- ------- ------- ------- ------- --------
Total investment
securities................ 45,601 79.3 $38,346 66.6 41,110 63.8
------- ------- ------- ------- ------- --------
Interest-bearing deposits........ 1,678 2.9 3,493 6.1 1,623 2.5
Federal funds sold............... 5,500 9.5 5,400 9.4 2,500 3.9
Certificates of deposit.......... 4,142 7.2 9,762 16.9 18,582 28.9
FHLB stock, at cost.............. 622 1.1 604 1.0 595 0.9
------- ------- ------- ------- ------- --------
Total investments......... $57,543 100.00% $57,605 100.00% $64,410 100.00%
======= ======= ======= ======= ======= ========
</TABLE>
<TABLE>
<CAPTION> At March 31, 1996
--------------------------------------------------------------------------------------------
More than More than
One Year or Less One to Five Years Five to Ten Years More than Ten Years
-------------------- --------------------- -------------------- ---------------------
Weighted Weighted Weighted Weighted
Carrying Average Carrying Average Carrying Average Carrying Average
Value Yield Value Yield Value Yield Value Yield
-------- -------- ---------- -------- ---------- --------- --------- --------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Investment securities:
Available for sale (at
market value)-
securities of U.S.
government....................... $ 3,986 4.98% $13,426 5.58% $ -- --% $ -- --%
Held to maturity (at
amortized cost):
Securities of U.S.
agencies......................... 1,548 4.52 5,399 6.09 -- -- -- --
Mortgage-backed bonds............. 7,571 5.58 500 4.88 -- -- -- --
Securities of states and
municipalities(1)................ 4,882 5.63 7,469 6.05 705 7.47 115 9.84
------- ------- ---- ----
Total investment
securities..................... $17,987 5.37% $26,794 5.80% $705 7.47% $115 9.84%
======= ======= ==== ====
- -----------------
</TABLE>
(1) Tax exempt state and municipal securities are presented on a tax equivalent
basis.
U.S. Government and Agency Obligations. The Savings Bank's portfolio
of United States Government and agency obligations had a fair value of $24.3
million ($24.4 million at amortized cost) at March 31, 1996. The portfolio
consisted of short to medium-term (up to five years) securities, of which
$17.5 million (at amortized cost) of U.S. Government obligations were held
in the Savings Bank's available for sale portfolio.
67
<PAGE>
Municipal Bonds. The Savings Bank's municipal bond portfolio, which at
March 31, 1996, totaled $13.3 million at estimated fair value ($13.2 million at
amortized cost), was comprised primarily of general obligation bonds (i.e.,
----
backed by the general credit of the issuer) and revenue bonds (i.e., backed only
----
by revenues from the specific project being financed) issued by various housing
authorities and public hospital, water and sanitation districts in various
states. At March 31, 1996, general obligation bonds and revenue bonds totaled
$9.4 million and $3.8 million, respectively. The bonds are purchased with
laddered maturities of up to four years with an average principal amount of
approximately $250,000. Most of the municipal bonds are rated by a nationally
recognized statistical rating organization (e.g., Moody's or Standard and
Poor's) and the unrated bonds have been purchased principally from local
authorities. At March 31, 1996, the Savings Bank's municipal bond portfolio was
comprised of 82 bonds, the average principal amount of which was $157,000. At
such date the weighted average life of the portfolio was approximately 3.5 years
and had an weighted average coupon rate of 6.00%. At that date, the largest
security in the portfolio was a revenue bond issued by the local public
hospital, with an amortized cost of $945,000 and a fair value of $1.0 million.
Because interest earned on municipal bonds is exempt from federal, and, in
certain cases, state and local income taxes, the municipal bond portfolio has
contributed to an effective income tax rate for the Savings Bank below the
federal tax rate and one that the Savings Bank believes is below its peers. See
Note 11 of the Notes to the Financial Statements.
Certificates of Deposit. The Savings Bank has invested in certificates of
deposit at other banks with maturities of six months to five years and at March
31, 1996 had $4.1 million of such deposits. In order to obtain FDIC insurance
coverage, these deposits are placed at various financial institutions throughout
the United States by a broker in amounts less than $100,000.
Government Sponsored Enterprise Securities. At March 31, 1996, the Savings
Bank's held to maturity investment portfolio included securities issued by the
FNMA and the FHLMC. At March 31, 1996, such bonds had an aggregate amortized
cost of $8.1 million, an average life of approximately three years, and an
average coupon rate of 5.54%.
Deposit Activities and Other Sources of Funds
General. Deposits, repurchase agreements and loan repayments are the major
sources of the Savings Bank's funds for lending and other investment purposes.
Scheduled loan repayments are a relatively stable source of funds, while deposit
inflows and outflows and loan prepayments are influenced significantly by
general interest rates and money market conditions. Borrowings through the FHLB-
Chicago or reverse repurchase agreements may be used on a short-term basis to
compensate for reductions in the availability of funds from other sources. At
March 31, 1996, the Savings Bank had no borrowings from the FHLB-Chicago. At
March 31, 1996, the Savings Bank had $15.0 million outstanding in reverse
repurchase agreements which resulted from a transfer of funds from a money
market deposit account to a reverse repurchase agreement. See Note 9 and Note 10
of the Notes to the Financial Statements.
Deposit Accounts. Substantially all of the Savings Bank's depositors are
residents of the States of Illinois and Missouri. Deposits are attracted from
within the Savings Bank's market area through the offering of a broad selection
of deposit instruments, including NOW accounts, money market deposit accounts,
regular savings accounts, certificates of deposit and retirement savings plans.
Deposit account terms vary, according to the minimum balance required, the time
periods the funds must remain on deposit and the interest rate, among other
factors. In determining the terms of its deposit accounts, the Savings Bank
considers current market interest rates, profitability to the Savings Bank,
matching deposit and loan products and its customer preferences and concerns.
The Savings Bank reviews its deposit mix and pricing weekly.
In the unlikely event the Savings 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 Holding Company, as the sole stockholder of the
Savings Bank.
68
<PAGE>
The following table sets forth certain information concerning the Savings
Bank's time deposits and other interest-bearing deposits at March 31, 1996.
<TABLE>
<CAPTION>
Weighted Percentage
Average Original Minimum of Total
Interest Rate Term Category Amount Balance Deposits
- ------------- ----------- --------- -------- -------- ---------
(In Thousands)
<S> <C> <C> <C> <C> <C>
- -- % None Non-interest bearing checking $ 100 $ 35 0.03%
2.00 None NOW accounts 100 9,155 8.44
3.36 None Money market demand 2,500 19,304 17.79
2.75 None Passbook 30 10,970 10.11
Certificates of Deposit
-----------------------
3.61 91-day Fixed-term, fixed-rate 500 252 0.23
4.35 4 months Fixed-term, fixed-rate 5,000 2,377 2.19
4.21 6 months Fixed-term, fixed-rate 500 9,657 8.90
4.44 6 months Fixed-term, fixed-rate 50,000 963 0.89
6.44 11 months Fixed-term, fixed-rate 5,000 3,452 3.18
4.93 1 year Fixed-term, fixed-rate 500 8,865 8.17
5.08 18 months Fixed-term, fixed-rate 500 3,008 2.77
5.47 30 months Fixed-term, fixed-rate 100 8,773 8.08
5.23 30 months Fixed-term, fixed-rate 500 29,227 26.93
5.13 4 years Fixed-term, fixed-rate 500 1,281 1.18
7.75 6 years Fixed-term, fixed-rate 500 62 0.06
8.00 8 years Fixed-term, fixed-rate 500 31 0.03
5.03 Various Fixed-term, fixed rate 100,000 1,103 1.02
-------- -------
$108,515 100.00%
======== =======
</TABLE>
The following table indicates the amount of the Savings Bank's certificates
of deposit of $100,000 or more by time remaining until maturity as of March 31,
1996.
<TABLE>
<CAPTION>
Certificates
Maturity Period of Deposit
--------------- --------------
(In Thousands)
<S> <C>
Three months or less........... $1,517
Over three through six months.. 970
Over six through 12 months..... 689
Over 12 months................. 2,106
------
Total..................... $5,282
======
</TABLE>
69
<PAGE>
Deposit Flow
The following table sets forth the balances of savings deposits in the
various types of savings accounts offered by the Savings Bank at the dates
indicated.
<TABLE>
<CAPTION>
At March 31, At December 31,
------------------------------ ------------------------------------------------
1996 1995 1994
------------------------------ ---------------------------- -----------------
Percent Percent Percent
of Increase of Increase of
Amount Total (Decrease) Amount Total (Decrease) Amount Total
-------- -------- ---------- -------- ------- ---------- -------- -------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Non-interest-bearing checking........ $ 35 0.03% $ (13) $ 48 0.04% $ (15) $ 63 0.05%
NOW checking......................... 9,155 8.44 274 8,881 8.32 195 8,686 6.70
Passbook............................. 10,970 10.11 501 10,469 9.81 (970) 11,439 8.82
Money market demand(1)............... 19,304 17.79 2,648 16,656 15.61 (15,905) 32,561 25.10
Fixed-rate certificates which
mature in the year ending(2)(3):
Within 1 year...................... 42,540 39.20 (3,888) 46,428 43.51 (5,031) 51,459 39.67
After 1 year, but within 2 years... 15,941 14.69 2,751 13,190 12.36 (5,824) 19,014 14.66
After 2 years, but within 5 years.. 10,570 9.74 (476) 11,046 10.35 4,556 6,490 5.00
-------- ------ ------ -------- ------ ------- ------- -----
Total........................ $108,515 100.00% $1,797 $106,718 100.00% $(22,994) $129,712 100.00%
======== ====== ====== ======== ====== ======== ======== ======
- -------------------
</TABLE>
(1) The reduction in the balance of money market demand accounts was the result
of a $15.0 million transfer to reverse repurchase agreements by Gilster-
Mary Lee during the year ended December 31, 1995.
(2) At March 31, 1996 and at December 31, 1995, and 1994, jumbo certificates
amounted to $5.3 million, $5.8 million and $7.5 million, respectively.
(3) IRA accounts included in certificate balances are $8.8 million, $8.6
million and, $9.0 million at March 31, 1996 and December 31, 1995 and 1994,
respectively.
Time Deposits by Rates
The following table sets forth the time deposits in the Savings Bank
classified by rates at the dates indicated.
At March 31, At December 31,
-----------------
1996 1995 1994
------------ ------- --------
(In Thousands)
2.00 - 3.99%.. $ 436 $ 195 $11,110
4.00 - 5.99%.. 66,126 66,132 64,973
6.00 - 7.99%.. 2,458 4,306 789
8.00 - 9.99%.. 31 31 92
------- ------- -------
Total....... $69,051 $70,664 $76,964
======= ======= =======
70
<PAGE>
The following table sets forth the amount and maturities of time deposits at
March 31, 1996.
<TABLE>
<CAPTION>
Amount Due
-----------------------------------------
Percent
Over Over Over of Total
Less Than 1-2 2-3 3-4 Certificate
One Year Years Years Years Total Accounts
-------- ----- ----- ----- ----- --------
(In Thousands)
<S> <C> <C> <C> <C> <C> <C>
2.00 - 3.99%..... $ 436 $ -- $ -- $ -- $ 436 0.63%
4.00 - 5.99%..... 39,652 15,914 9,906 654 66,126 95.77
6.00 - 7.99%..... 2,421 27 10 -- 2,458 3.56
8.00 - 9.99%..... 31 -- -- -- 31 0.04
------- ------- ------ ----- ------ ------
Total.......... $42,540 $15,941 $9,916 $654 $69,051 100.00%
======= ======= ====== ===== ======= ======
</TABLE>
The following table sets forth the average balances and interest rates
based on monthly balances for transaction accounts and certificates of deposit
for the periods indicated.
<TABLE>
<CAPTION>
Three
Months Ended Year Ended
March 31, December 31,
------------------------------------------- ------------------------------------------------
1996 1995 1995 1994
--------------------- --------------------- ------------------------- ---------------------
Interest- Interest- Interest- Interest-
Bearing Certifi- Bearing Certifi- Bearing Certifi- Bearing Certifi-
Demand cates of Demand cates of Demand cates of Demand cates of
Deposits Deposit Deposits Deposit Deposits Deposit Deposits Deposit
---------- --------- ---------- --------- -------------- --------- ---------- ---------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Average Balance.................... $38,772 $68,987 $46,299 $79,725 $39,693 $79,365 $52,771 $78,275
Average Rate....................... 2.61% 5.21% 3.25% 4.78% 3.38% 4.96% 3.14% 4.39%
</TABLE>
Savings Activities
The following table sets forth the savings activities of the Savings Bank for
the periods indicated.
<TABLE>
<CAPTION>
Three Months Ended
March 31, Year Ended December 31,
------------------------ ---------------------------
1996 1995 1995 1994
---- ----- ----- ----
(In Thousands)
<S> <C> <C> <C> <C>
Beginning balance.................. $106,718 $129,712 $129,712 $130,231
-------- -------- -------- --------
Net increase (decrease)
before interest credited.......... 984 (7,083) (26,610) (4,441)
Interest credited.................. 813 956 3,616 3,922
-------- -------- ---------- ---------
Net increase (decrease) in
savings deposits.................. 1,797 (6,127) (22,994) (519)
-------- -------- ---------- ---------
Ending balance..................... $108,515 $123,585 $106,718 $129,712
======== ======== ========= =========
</TABLE>
71
<PAGE>
Borrowings
The Savings Bank has the ability to use advances from the FHLB-Chicago
to supplement its supply of lendable funds and to meet deposit withdrawal
requirements. The FHLB-Chicago functions as a central reserve bank providing
credit for savings and loan associations and certain other member financial
institutions. As a member of the FHLB-Chicago, the Savings Bank is required to
own capital stock in the FHLB-Chicago and is authorized to apply for advances on
the security of such stock and certain of its mortgage loans and other assets
(principally securities which are obligations of, or guaranteed by, the U.S.
Government) provided certain creditworthiness standards have been met. Advances
are made pursuant to several different credit programs. Each credit program has
its own interest rate and range of maturities. Depending on the program,
limitations on the amount of advances are based on the financial condition of
the member institution and the adequacy of collateral pledged to secure the
credit. At March 31, 1996 and December 31, 1995 and during the years ended
December 31, 1995 and 1994 and the three months ended March 31, 1996 and 1995,
the Savings Bank had no borrowings from the FHLB-Chicago, although it may decide
to make use of such instruments in the future.
The Savings Bank also uses reverse repurchase agreements due generally
within one year as a source of funds. At March 31, 1996, reverse repurchase
agreements totalled $15.0 million with a weighted average interest rate of 4.44%
secured by a pledge of certain investment and mortgage-backed securities with an
amortized cost of $16.0 million and a market value of $15.9 million. See "RISK
FACTORS -- Potential Reduction of Certain Funding Liabilities" and Note 10 of
the Notes to the Financial Statements.
The following tables set forth certain information regarding short-
term borrowings by the Savings Bank at the dates and for the periods indicated.
<TABLE>
<CAPTION> At December 31,
At March 31, --------------------------
1996 1995 1994
-------------- ---- ----
<S> <C> <C> <C>
Weighted average rate paid on:
Securities sold under agreements
to repurchase.................... 4.44% 5.10% --
</TABLE>
<TABLE>
<CAPTION>
At or For the
Three Months
Ended At or For the Year
March 31, Ended December 31,
------------- ---------------------
1996 1995 1995 1994
---- ---- ---- ----
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Maximum amount of borrowings outstanding
at any month end:
Securities sold under agreements to
repurchase.............................. $15,000 -- $15,000 --
Approximate average short-term borrowings
outstanding with respect to:
Securities sold under agreements to
repurchase............................. $15,000 -- N/M(2) --
Approximate weighted average rate paid
on:(1)
Securities sold under agreements to
repurchase.............................. 4.88 -- 5.17% --
- --------------------------
</TABLE>
(1) Computed using the weighted rates of each individual transaction.
(2) Not meaningful.
72
<PAGE>
Competition
In the face of significant competition by financial and non-bank
entities over the last few years, the Savings Bank has had limited success in
increasing its retail deposit base, excluding the historical benefit of the
large corporate relationship with Gilster-Mary Lee and the Heritage Federal
acquisition. The Savings Bank competes for deposits and loans with a number of
financial institutions in a four contiguous county market area that has
approximately 135,000 people. In three of the counties served, the Savings
Bank's market share is low and average branch size is below average. A number
of the competing financial institutions are larger than the Savings Bank and are
subsidiaries of larger regional bank holding companies. The Savings Bank also
faces competition, to an unquantifiable extent, from money market mutual funds
and local and regional securities firms.
73
<PAGE>
Properties
The following table sets forth the Savings Bank offices, as well as
certain additional information relating to the offices, as of March 31, 1996.
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
Year Building Land Building
Location County Opened Owned/Leased Owned/Leased Square Footage Deposits
- ------------------------------------- -------------- --------- --------------- ------------ -------------- --------------
(In Thousands)
Main Office
- -----------
1112 State Street Randolph 1919 Owned Owned 10,345 $57,662
Chester, Illinois 62233
Branch Offices
- --------------
2467 West Main Jackson 1988 Leased(2) Leased 3,400 5,008
Carbondale, Illinois 62903
101 South Main Perry 1989(1) Owned Owned 1,950 9,819
Pinckneyville, Illinois 62274
165 West Broadway Randolph 1989(1) Owned Owned 11,142 26,712
Sparta, Illinois 62286
1414 South Main Randolph 1989(1) Owned Owned 1,032 5,572
Red Bud, Illinois 62278
1010 North Main Perry 1990 Owned Owned 3,900 3,742
Perryville, Missouri 63775
Loan Production Office
- -------------------------------------
125 South Broadview Plaza, Suite #1 Cape Girardeau 1995 Leased(3) Leased 720 N/A
Cape Girardeau, Missouri 63703
</TABLE>
_____________
(1) Acquired in connection with the acquisition of Heritage Federal in 1989.
(2) Lease expires in 1997 with an option to renew.
(3) Lease expires in 1996 with an option to renew.
74
<PAGE>
Personnel
As of March 31, 1996, the Savings Bank had 37 full-time employees and six
part time employees, none of whom were represented by a collective bargaining
unit. The Savings Bank believes its relationship with its employees is
good.
Legal Proceedings
Periodically, there have been various claims and lawsuits involving the
Savings Bank, such as claims to enforce liens, condemnation proceedings on
properties in which the Savings Bank holds security interests, claims involving
the making and servicing of real property loans and other issues incident to the
Savings Bank's business. The Savings Bank is not a party to any pending legal
proceedings that it believes would have a material adverse effect on the
financial condition or operations of the Savings Bank.
75
<PAGE>
MANAGEMENT OF THE HOLDING COMPANY
The Board of Directors of the Holding Company is divided into three
classes, each of which contains approximately one third of the Board. The
Directors shall be elected by the stockholders of the Holding Company for
staggered three-year terms, or until their successors are elected and qualified.
One class of Directors, consisting of Messrs. Welsh, Beck and McDonald, has a
term of office expiring at the first annual meeting of stockholders, a second
class, consisting of Messrs. Collins, Verseman and C. Welge, has a term of
office expiring at the second annual meeting of stockholders, and a third class,
consisting of Messrs. M. Welge and Boxdorfer, has a term of office expiring at
the third annual meeting of stockholders. The executive officers of the Holding
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.
The following individuals are executive officers of the Holding Company and
hold the offices set forth opposite their names below.
<TABLE>
<CAPTION>
Name Position with Holding Company
---- ---------------------------
<S> <C>
Michael W. Welge Chairman of the Board, President and Chief Financial Officer
Edward K. Collins Treasurer and Secretary
</TABLE>
Since the formation of the Holding Company, none of the executive officers,
directors or other personnel has received remuneration from the Holding Company.
Information concerning the principal occupations, employment and compensation of
the directors and officers of the Holding Company during the past five years is
set forth under "MANAGEMENT OF THE SAVINGS BANK -- Biographical Information."
MANAGEMENT OF THE SAVINGS BANK
Directors and Executive Officers
The Board of Directors of the Savings Bank is presently composed of eight
members who are elected for terms of three years, approximately one third of
whom are elected annually in accordance with the Bylaws of the Savings Bank.
The executive officers of the Savings Bank are elected annually by the Board of
Directors and serve at the Board's discretion. The following table sets forth
information with respect to the Directors and executive officers of the Savings
Bank.
Directors
<TABLE>
<CAPTION>
Current Director Term
Name Age (1) Position with the Savings Bank Since Expires
- --------------------------- ------ ------------------------------ --------- --------
<S> <C> <C> <C> <C>
Michael W. Welge(2)(3) 55 Chairman of the Board,
Chief Financial Officer
and Director 1980 1999
Howard A. Boxdorfer(2)(3) 80 President and Director 1970 1999
Edward K. Collins(2) 51 Executive Vice President, Chief
Executive Officer and Director 1996 1998
Thomas E. Welch, Jr.(2) 56 Senior Vice President and Director 1990 1997
John R. Beck, M.D.(2)(3) 61 Director 1989 1997
Allen R. Verseman(2)(3) 61 Director 1992 1998
James C. McDonald(2) 66 Director 1990 1997
</TABLE>
76
<PAGE>
<TABLE>
<S> <C> <C> <C> <C>
Carl H. Welge(2)(3) 52 Director 1980 1998
</TABLE>
Executive Officers Who Are Not Directors
<TABLE>
<CAPTION>
Name Age (1) Position with the Savings Bank
- ---- ------- ---------------------------------
<S> <C> <C>
Robert H. Gross 39 Vice President and Secretary
William P. Wingerter, Sr.(4) 62 Vice President and Branch Manager
Mary Jo Homan 32 Treasurer
- ---------------------
(1) As of December 31, 1995.
(2) Proposed director of the Converted Bank.
(3) Proposed director of the De Novo Bank.
(4) Proposed Chief Executive Officer, Vice President and Cashier of the De Novo Bank.
</TABLE>
Biographical Information
Set forth below is certain information regarding the Directors and
executive officers of the Savings Bank. Unless otherwise stated, each Director
and executive officer has held his or her current occupation for the last five
years. All Directors and executive officers reside in Chester, Illinois, except
as otherwise noted. There are no family relationships among or between the
directors or executive officers except for Michael W. Welge and Carl H. Welge
who are second cousins.
Michael W. Welge is Chairman of the Board of Directors and Chief
Financial Officer. He has responsibility for various management functions,
including financial management and investment portfolio management,
determination of all employee compensation and employment decisions. Mr. Welge
has been employed for the past 34 years at Gilster-Mary Lee where he currently
serves as its Executive Vice President, Secretary and Treasurer. He has been
active in civic affairs and is a past President of both the Chester Chamber of
Commerce and the Chester School Board. He is a Board member and past Chairman
of the Board of Directors of Millers Mutual Insurance Company of Alton,
Illinois. For the past 16 years Mr. Welge has served as an Alderman of the City
Council of Chester. Mr. Welge has also been the President and a director of
several local corporations and clubs.
Howard A. Boxdorfer has been employed as an officer of the Savings
Bank since 1969 and has been President since 1980. He is a member of the Lions
Club and the Chester Chamber of Commerce.
Edward K. Collins has been an officer of the Savings Bank since
January 1995 and is responsible for the Savings Bank's supervisions and
performance of operations and lending. Prior to his employment at the Savings
Bank, Mr. Collins was Executive Vice President and Senior Loan Officer of Union
Bank of Illinois from August 1991 to December 1994 and was President, Chief
Executive Officer and a Director of First National Bank & Trust, Syracuse,
Nebraska, from August 1988 to August 1991. Mr. Collins resides in Ellis Grove,
Illinois. Mr. Collins is a member of the Board of Directors of the Chester
Chamber of Commerce.
Thomas E. Welch, Jr. has been employed as an officer of the Savings
Bank since 1990 when Heritage Federal was acquired by the Savings Bank. Mr.
Welch is the Senior Vice President and Compliance Officer for the Savings Bank
and manages the Sparta branch. He resides in Sparta, Illinois.
John R. Beck, M.D. is a self-employed physician. He is a member of
the Hospital staff of Memorial Hospital, Chester, Illinois, and a director of
Home Health Care.
77
<PAGE>
Allen R. Verseman has been employed for 27 years at Gilster-Mary Lee
and currently serves as Plant Superintendent.
James C. McDonald has been employed for 43 years at the U.S. Postal
Service. He is a Trustee of the Presbyterian Church, Sparta, Illinois, and is a
member of the Sparta Building Commission and the Sparta Senior Citizen Board.
Mr. McDonald resides in Sparta, Illinois.
Carl H. Welge has been employed for six years at Gilster-Mary Lee and
currently serves as Accounts Receivable Supervisor. He is a member of the
Memorial Hospital Board of Directors and a member of the Friends of Chester
Public Library.
Robert H. Gross has been employed by the Savings Bank since 1983. He
serves as the Senior Lending Officer and is Secretary for the Board of
Directors. Mr. Gross resides in Ellis Grove, Illinois.
William P. Wingerter, Sr. has been employed by the Savings Bank since
1988. He is the branch manager in Perryville, Missouri and is responsible for
Missouri operations. He is a member of the Chamber of Commerce and is the
elected Chairman of the Board of the Perry County Memorial Hospital. He resides
in Perryville, Missouri.
Mary Jo Homan has been employed by the Savings Bank since 1983 and is
responsible for accounting and personnel and has served as Treasurer since
January 1, 1996. She is a member of the Finance Committee of St. Mary's Church,
Ellis Grove, Illinois.
Meetings and Committees of the Board of Directors
The business of the Savings Bank is conducted through meetings and
activities of the Board of Directors and its committees. During the fiscal year
ended December 31, 1995, the Board of Directors held 16 meetings. No director
attended fewer than 75% of the total meetings of the Board of Directors and of
committees on which such director served.
Each year an Audit Committee is appointed, and consists of the entire
Board of Directors with the exception of those Directors that are employees of
the Savings Bank. The purpose of this Committee is to review financial data of
the Savings Bank and retain the Savings Bank's independent auditor. During the
fiscal year ended December 31, 1995, the Audit Committee met two times.
The Savings Bank's Executive Committee consists of Directors M. Welge,
Boxdorfer and Collins, the Secretary and two rotating Directors. The Executive
Committee meets weekly, and the committee has full authority of the Board of
Directors in order to conduct business in a timely manner. The Executive
Committee also functions as the Savings Bank's Loan Committee, Compensation
Committee, and Asset Liability Committee. All actions of the Executive Committee
are subsequently ratified by the full Board of Directors. The Executive
Committee met 52 times during the fiscal year ended December 31, 1995.
Directors' Compensation
Board and Committee Fees. Directors received a fee of $700 per month
during the year ended December 31, 1995, with no additional fees paid for
committee meetings, except for the rotating Directors who serve on the Executive
Committee who receive $50 per meeting attended. Director's fees totalled
$58,000 for the year ended December 31, 1995. It is currently anticipated that
after consummation of the Conversion directors' fees will be paid by the Holding
Company and no separate fees will be paid for service on the Board of Directors
of the Savings Bank.
78
<PAGE>
Director Emeritus Plan. Effective January 18, 1996, the Board of
Directors of the Savings Bank adopted the Director Emeritus Plan to compensate
and reward directors of the Savings Bank for service to the Savings Bank. Under
the Director Emeritus Plan, a director is designated a Director Emeritus upon
(i) attaining age 81 or (ii) upon resignation from the Board in the event of
retirement, or a change in control of the Savings Bank (as defined in the plan).
Upon designation, a Director Emeritus will receive an annual fee equal to the
product of $500 and the Director Emeritus' years of service as a regular Board
member. The fee is payable for a 10-year period beginning on the later to occur
of (i) the first anniversary of the Director Emeritus' designation or (ii) the
date the Director Emeritus attains age 65. In the event of a Director Emeritus'
death prior to his receipt of all Director Emeritus fees, the Savings Bank will
make a lump sum payment equal to the lesser of the remaining payments due or
three times the Director Emeritus fee to the Director Emeritus' designated
beneficiary. The Director Emeritus Plan will be funded with life insurance
policies. The estimated expense of the Director Emeritus Plan is expected to be
$170,000 for fiscal 1996.
Executive Compensation
Summary Compensation Table. The following information is furnished
for the Chief Executive Officer of the Savings Bank for the year ended December
31, 1995. No executive officer of the Savings Bank received salary and bonus in
excess of $100,000 during the year ended December 31, 1995.
================================================================================
SUMMARY COMPENSATION TABLE(1)
<TABLE>
<CAPTION>
Annual Compensation
Other
Annual
Name and Position Year Salary Bonus Compensation
<S> <C> <C> <C> <C>
Edward K. Collins 1995 $70,000 $7,000 $8,370
Executive Vice President, Chief
Executive Officer and Director
================================================================================
</TABLE>
- --------------------------
(1) Compensation information for fiscal years ended December 31, 1994 and
1993 has been omitted because the Savings Bank was not a public
company at such times. Excludes certain additional benefits, the
aggregate amounts of which do not exceed 10% of total salary and
bonus.
Employment Agreement. In connection with the Conversion, the Holding
Company and the Savings Bank (collectively, the "Employers") will enter into a
three-year employment agreement with Mr. Collins. Under the agreement, the
initial salary level for Mr. Collins will be $80,000, which amount will be paid
by the Savings Bank and may be increased at the discretion of the Board of
Directors or an authorized committee of the Board. On each anniversary of the
commencement date of the agreement, the term of the agreement may be extended
for an additional year. The agreement is terminable by the Employers at any time
or upon the occurrence of certain events specified by federal regulations.
The employment agreement provides for severance payments and other
benefits in the event of involuntary termination of employment in connection
with any change in control of the Employers. Severance payments also will be
provided on a similar basis in connection with a voluntary termination of
employment where, subsequent to
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a change in control, Mr. Collins is assigned duties inconsistent with his
position, duties, responsibilities and status immediately prior to such change
in control. The term "change in control" is defined in the agreement as having
occurred when, among other things, (a) a person other than the Holding Company
purchases shares of Common Stock pursuant to a tender or exchange offer for such
shares, (b) any person (as such term is used in Sections 13(d) and 14(d)(2) of
the Exchange Act) is or becomes the beneficial owner, directly or indirectly, of
securities of the Holding Company representing 25% or more of the combined
voting power of the Holding Company's then outstanding securities, (c) the
membership of the Board of Directors changes as the result of a contested
election, or (d) shareholders of the Holding Company approve a merger,
consolidation, sale or disposition of all or substantially all of the Holding
Company's assets, or a plan of partial or complete liquidation.
The severance payments from the Employers will equal 2.99 times Mr.
Collins' average annual compensation during the five-year period preceding the
change in control. Such amount will be paid in a lump sum within 10 business
days following the termination of employment. Assuming that a change in control
had occurred at December 31, 1995, Mr. Collins would be entitled to severance
payments of $209,300. Section 280G of the Internal Revenue Code of 1986, as
amended ("Code"), states that severance payments that equal or exceed three
times the base compensation of the individual are deemed to be "excess parachute
payments" if they are contingent upon a change in control. Individuals receiving
excess parachute payments are subject to a 20% excise tax on the amount of such
excess payments, and the Employers would not be entitled to deduct the amount of
such excess payments.
The agreement restricts Mr. Collins' right to compete against the
Employers for a period of one year from the date of termination of the agreement
if he voluntarily terminates his employment, except in the event of a change in
control. The Board of Directors of the Holding Company or the Savings Bank may,
from time to time, also extend employment agreements to other senior executive
officers.
The Employers also will enter into an employment agreement with
Mr. M. Welge on substantially the same terms as those contained in Mr. Collins'
agreement.
Benefits
General. The Savings Bank currently provides health, dental, life and
disability insurance benefits for full-time employees, subject to certain
deductibles.
Retirement Plan. The Savings Bank is a participant in the Financial
Institution Retirement Fund ("FIRF"), a multi-employer, non-contributory defined
benefit retirement plan. The FIRF plan covers all employees who have completed
one year of service and have attained the age of 21 years and provides for
monthly retirement benefits determined based on the employee's base salary and
years of service. The normal retirement age is 65 and the early retirement age
is before age 65, but generally after age 55. Normal retirement benefits are
equal to 2.0% multiplied by the years of service to the Savings Bank and the
employee's average salary for the five highest consecutive years preceding
retirement. Benefits under the plan are not subject to offset for social
security benefits. If an employee elects early retirement, but defers the
receipt of benefits until age 65, the formula for computation of early
retirement benefits is the same as if the employee had retired at the normal
retirement age. However, if the employee elects early retirement and receives
benefits prior to age 65, benefits are reduced by applying an early retirement
factor based on the number of years the early retirement date precedes age 65.
Benefits under the plan are fully vested upon the completion of five years of
employment. Separate actuarial valuations are not made for individual members of
the plan. Pension costs and funding include normal costs. According to FIRF,
plan assets exceeded vested benefits as of December 31, 1995, the date of the
most current actuarial valuation. Pension expense for the fiscal year ended
December 31, 1995 was $84,000. See Note 12 of the Notes to the Financial
Statements.
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The following table illustrates annual pension benefits payable upon
retirement, based on various levels of compensation and years of service.
<TABLE>
<CAPTION>
Highest Five-Year Years of Service
Average Annual -----------------------------------------------
Compensation 5 10 15 25 35
- ----------------- ----- ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
$ 10,000.. 1,000 2,000 3,000 5,000 7,000
20,000.. 2,000 4,000 6,000 10,000 14,000
30,000.. 3,000 6,000 9,000 15,000 21,000
40,000.. 4,000 8,000 12,000 20,000 28,000
60,000.. 6,000 12,000 18,000 30,000 42,000
80,000.. 8,000 16,000 24,000 40,000 56,000
100,000.. 10,000 20,000 30,000 50,000 70,000
120,000.. 12,000 24,000 36,000 60,000 84,000
</TABLE>
Employee Stock Ownership Plan. The Board of Directors has authorized
the adoption by the Savings Bank of an ESOP for employees of the Savings Bank to
become effective upon the consummation of the Conversion. The ESOP is intended
to satisfy the requirements for an employee stock ownership plan under the Code
and the Employee Retirement Income Security Act of 1974, as amended ("ERISA").
Full-time employees of the Holding Company and the Savings Bank who have been
credited with at least 1,000 hours of service during a 12-month period and who
have attained age 21 are eligible to participate in the ESOP .
In order to fund the purchase of up to 8% of the Common Stock to be
issued in the Conversion, it is anticipated that the ESOP will borrow funds from
the Holding Company. Such loan will equal 100% of the aggregate purchase price
of the Common Stock. The loan to the ESOP will be repaid principally from the
Savings Bank's contributions to the ESOP and any dividends paid on Common Stock
held by the ESOP over the anticipated 15-year term of the loan. The interest
rate for the ESOP loan is expected to be 8.00% per annum. See "PRO FORMA DATA."
In any plan year, the Savings Bank may make additional discretionary
contributions to the ESOP for the benefit of plan participants in either cash or
shares of Common Stock, which may be acquired through the purchase of
outstanding shares in the market or from individual stockholders or which
constitute authorized but unissued shares or shares held in treasury by the
Holding Company. The timing, amount, and manner of such discretionary
contributions will be affected by several factors, including applicable
regulatory policies, the requirements of applicable laws and regulations, and
market conditions.
Shares purchased by the ESOP with the proceeds of the loan will be
held in a suspense account and released on a pro rata basis as the loan is
repaid. Discretionary contributions to the ESOP and shares released from the
suspense account will be allocated among participants on the basis of each
participant's proportional share of total compensation. Forfeitures will be
reallocated among the remaining plan participants.
Participants will vest in their accrued benefits under the ESOP upon
the completion of five years of service. Benefits may be payable upon a
participant's retirement, early retirement, death, disability, or termination of
employment. The Savings Bank's contributions to the ESOP are not fixed, so
benefits payable under the ESOP cannot be estimated.
Messrs. M. Welge, Boxdorfer and Collins have been appointed by the
Board of Directors of the Savings Bank to serve as trustees of the ESOP. Under
the ESOP, the trustees must vote all allocated shares held in the ESOP in
accordance with the instructions of plan participants and allocated shares for
which no instructions are received must be voted in the same ratio on any matter
as those shares for which instructions are given.
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Pursuant to SOP 93-6, compensation expense for a leveraged employee
stock ownership, such as the ESOP, is recorded at the fair market value of the
ESOP shares committed to be released to participants' accounts. See
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS -- Impact of New Accounting Pronouncements -- Accounting for Employee
Stock Ownership Plans."
If the ESOP purchases newly issued shares from the Holding Company,
total stockholders' equity would neither increase nor decrease. However, on a
per share basis, stockholders' equity and per share net earnings would decrease
because of the increase in the number of outstanding shares.
The ESOP will be subject to the requirements of ERISA and the
regulations of the IRS and the Department of Labor issued thereunder. The
Savings Bank intends to request a determination letter from the IRS regarding
the tax-qualified status of the ESOP. Although no assurance can be given that a
favorable determination letter will be issued, the Savings Bank expects that a
favorable determination letter will be received by the ESOP.
1996 Stock Option Plan. The Board of Directors of the Holding Company
intends to adopt the Stock Option Plan and expects to submit the Stock Option
Plan to the stockholders for approval at a meeting held no earlier than six
months following consummation of the Conversion. The approval of a majority vote
of the Holding Company's outstanding shares is required prior to the
implementation of the Stock Option Plan. The Stock Option Plan will comply with
all applicable regulatory requirements. However, the Stock Option Plan will not
be approved or endorsed by the OTS.
The Stock Option Plan will be designed to attract and retain qualified
management personnel and nonemployee directors, to provide such officers, key
employees and nonemployee directors with a proprietary interest in the Holding
Company as an incentive to contribute to the success of the Holding Company and
the Banks, and to reward officers and key employees for outstanding performance.
The Stock Option Plan will provide for the grant of incentive stock options
("ISOs") intended to comply with the requirements of Section 422 of the Code and
nonqualified stock options ("NQOs"). Upon receipt of stockholder approval of the
Stock Option Plan, stock options may be granted to key employees of the Holding
Company and its subsidiaries, including the Banks. Nonemployee directors will
receive stock option awards in accordance with a formula set forth in the Stock
Option Plan. The Stock Option Plan will be administered and interpreted by a
committee of the Board of Directors ("Committee") which is "disinterested"
pursuant to applicable regulations under the federal securities laws. Unless
sooner terminated, the Stock Option Plan will continue in effect for a period of
10 years from the date the Stock Option Plan is adopted by the Board of
Directors.
A number of authorized shares of Common Stock equal to 10% of the
number of shares of Common Stock issued in connection with the Conversion will
be reserved for future issuance under the Stock Option Plan 189,750 shares based
on the issuance of 1,897,500 shares at the maximum of the Estimated Valuation
Range). Such shares will be authorized but unissued shares or treasury shares.
In the event of a stock split, reverse stock split, stock dividend, or similar
event, the number of shares of Common Stock under the Stock Option Plan, the
number of shares to which any award relates and the exercise price per share
under any option may be adjusted by the Committee to reflect the increase or
decrease in the total number of shares of Common Stock outstanding.
Under the Stock Option Plan, the Committee will determine which
officers and key employees will be granted options, whether such options will be
ISOs or NQOs, the number of shares subject to each option, and the
exercisability of such options. The per share exercise price of an option will
equal 100% (110% for ISOs granted to a 10% shareholder) of the fair market value
of a share of Common Stock on the date the option is granted.
The number of options granted to nonemployee directors and the terms
thereof will be determined under a formula set forth in the Stock Option Plan.
The formula will provide that no individual nonemployee director may be awarded
an option covering in excess of 5% of the number of shares of Common Stock
reserved under the Plan. All options granted to nonemployee directors will be
NQOs and such options will be granted at an exercise price
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equal to 100% of the fair market value of the Common Stock on the date the
option is granted. Options granted upon the effective date of the Stock Option
Plan will vest ratably over a five-year period following the date of grant.
However, unvested options will be immediately exercisable in the event of the
recipient's death or disability. Unvested options will also be immediately
exercisable in the event of a change in control of the Holding Company or the
Savings Bank (as defined in the Stock Option Plan), to the extent authorized or
not prohibited by applicable law or regulations.
Each stock option that is awarded to an officer or key employee will
remain exercisable at any time on or after the date it vests through the earlier
to occur of the tenth anniversary of the date of grant or two months after the
date on which the optionee terminates employment (one year in the event of the
optionee's termination by reason of death or disability), unless such period is
extended by the Committee. Each stock option that is awarded to a nonemployee
director will remain exercisable through the earlier to occur of the tenth
anniversary of the date of grant or one year (two years in the event of a
nonemployee director's death or disability) following the termination of a
nonemployee director's service on the Board. Except in limited circumstances,
all stock options are nontransferable except by will or the laws of descent or
distribution.
The Stock Option Plan also provides that upon the payment of an
"extraordinary dividend" by the Holding Company, each optionee will receive a
cash payment equivalent to the dividends that would have been payable to such
optionee had the options been exercised on or before the record date of such
dividend. For purposes of the Stock Option Plan, an "extraordinary dividend" is
a dividend payable at a rate in excess of the Savings Bank's weighted average
cost of funds on interest bearing liabilities for the 12-month period preceding
the record date of the dividend.
Under current provisions of the Code, the federal tax treatment of
ISOs and NQOs is different. With respect to ISOs, an optionee who satisfies
certain holding period requirements will not recognize income at the time the
option is granted or at the time the option is exercised. If the holding period
requirements are satisfied, the optionee will generally recognize capital gain
or loss upon a subsequent disposition of the shares of Common Stock received
upon the exercise of a stock option. If the holding period requirements are not
satisfied, the difference between the fair market value of the Common Stock on
the date of grant and the option exercise price, if any, will be taxable to the
optionee at ordinary income tax rates. A federal income tax deduction generally
will not be available to the Holding Company as a result of the grant or
exercise of an ISO, unless the optionee fails to satisfy the holding period
requirements. With respect to NQOs, the grant of an NQO is generally not a
taxable event for the optionee and no tax deduction will be available to the
Holding Company. However, upon the exercise of an NQO, the difference between
the fair market value of the Common Stock on the date of exercise and the option
exercise price generally will be treated as compensation to the optionee upon
exercise, and the Holding Company will be entitled to a compensation expense
deduction in the amount of income realized by the optionee.
Subject to stockholder approval of the Stock Option Plan, the
Committee intends to grant awards under the Stock Option Plan equal to the
following percentages of shares issued in the Offerings: Mr. M. Welge - 2.0%;
Mr. Boxdorfer - 1.5%; Mr. Collins -- 2.0%; and other officers and employees (12
persons) -- 2.0%. In addition, the current nonemployee directors of the Savings
Bank (four persons) are expected to receive an aggregate award equal to 2.0% of
the number of shares issued in the Offerings. The balance of the shares reserved
under the Stock Option Plan, or a number of shares equal to 0.5% of the number
of shares issued in the Offerings, are expected to be allocated in the future to
current and prospective officers and employees.
Management Recognition Plan. Following the Conversion, the Board of
Directors of the Holding Company intends to adopt the MRP for officers,
employees, and nonemployee directors of the Holding Company and the Banks. The
MRP will enable the Holding Company and the Bank, to provide participants with a
proprietary interest in the Holding Company as an incentive to contribute to the
success of the Holding Company and the Banks.
The MRP is expected to be submitted to stockholders for approval at a
meeting to be held no earlier than six months following consummation of the
Conversion. The approval of a majority vote of the Holding Company's
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<PAGE>
stockholders is required prior to implementation of the MRP. The MRP will comply
with all applicable regulatory requirements. However, the OTS will not approve
or endorse the MRP. The MRP expects to acquire a number of shares of Common
Stock equal to 4.0% of the Common Stock issued in connection with the Conversion
(75,900 shares based on the issuance of 1,897,500 shares in the Conversion at
the maximum of the Estimated Valuation Range). Such shares will be acquired on
the open market, if available, with funds contributed by the Holding Company to
a trust which the Holding Company may establish in conjunction with the MRP
("MRP Trust") or from authorized but unissued or treasury shares of the Holding
Company .
A committee of the Board of Directors of the Holding Company will
administer the MRP, the members of which will also serve as trustees of the MRP
Trust, if formed. The trustees will be responsible for the investment of all
funds contributed by the Holding Company to the MRP Trust. Shares of Common
Stock granted pursuant to the MRP will be in the form of restricted stock
vesting ratably over a five-year period following the date of grant. During the
period of restriction, all shares will be held in escrow by the Holding Company
or by the MRP Trust. If a recipient terminates employment for reasons other than
death or disability, the recipient will forfeit all rights to allocated but
unvested shares which are then subject to restriction. In the event of the
recipient's death or disability, all restrictions will expire and all allocated
shares will become fully vested. In addition, all allocated shares will vest
upon a change of control of the Holding Company or the Savings Bank (as defined
in the MRP), to the extent authorized or not prohibited by applicable law or
regulation .
The Board of Directors of the Holding Company may terminate the MRP at
any time and, upon termination, all unallocated shares of Common Stock will
revert to the Holding Company.
A recipient of an MRP award in the form of restricted stock will
generally not recognize income upon an award of shares of Common Stock, and the
Holding Company will not be entitled to a federal income tax deduction, until
the termination of the restrictions. Upon such termination, the recipient will
recognize ordinary income in an amount equal to the fair market value of the
Common Stock at the time and the Holding Company will be entitled to a deduction
in the same amount after satisfying federal income tax withholding requirements.
However, the recipient may elect to recognize ordinary income in the year the
restricted stock is granted in an amount equal to the fair market value of the
shares at that time, determined without regard to the restrictions. In that
event, the Holding Company will be entitled to a deduction in such year and in
the same amount. Any gain or loss recognized by the recipient upon subsequent
disposition of the stock will be either a capital gain or capital loss.
Subject to stockholder approval of the MRP, the Committee intends to
grant awards under the MRP equal to the following percentages of shares issued
in the Offerings: Mr. M. Welge - 1.0%; Mr. Boxdorfer - 1.0%; Mr. Collins --
0.4%; other officers and employees (7 persons) -- 0.76%. In addition, the
current nonemployee directors of the Savings Bank (four persons) will receive an
aggregate award equal to 0.64% of the number of shares issued in the Offerings.
A reserve of unallocated shares equal to 0.2% of the number of shares issued in
the Offerings may be allocated in the future to current and prospective
directors, officers and employees.
Transactions with the Savings Bank
Current law requires that all loans or extensions of credit to
executive officers and directors must be made on substantially the same terms,
including interest rates and collateral, as those prevailing at the time for
comparable transactions with other persons and does not involve more than the
normal risk of repayment or present other unfavorable features. The Savings Bank
is prohibited from making any new loans or extensions of credit to the Savings
Bank's executive officers and directors at different rates or terms than those
offered to the general public, and has adopted a policy to this effect. The
aggregate amount of loans by the Savings Bank to its executive officers and
directors was $219,000 at December 31, 1995, or approximately 0.81% of pro forma
stockholders' equity of the Holding Company (based on the issuance of the
maximum of the Estimated Valuation Range).
See also "RISK FACTORS -- Potential Reduction of Certain Funding
Liabilities" for information regarding the Savings Bank's relationship with
Gilster-Mary Lee, of which the Holding Company's Chairman of the Board,
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President and Chief Financial Officer and the Savings Bank's Chairman of the
Board and Chief Financial Officer, Michael W. Welge, is an executive
officer.
REGULATION
General
The Savings Bank is subject to extensive regulation, examination and
supervision by the OTS as its chartering agency, and the FDIC, as the insurer of
its deposits. The activities of federal savings institutions are governed by the
Home Owners' Loan Act, as amended (the "HOLA") and, in certain respects, the
Federal Deposit Insurance Act ("FDIA") and the regulations issued by the OTS and
the FDIC to implement these statutes. These laws and regulations delineate the
nature and extent of the activities in which federal savings associations may
engage. Lending activities and other investments must comply with various
statutory and regulatory capital requirements. In addition, the Savings Bank's
relationship with its depositors and borrowers is also regulated to a great
extent, especially in such matters as the ownership of deposit accounts and the
form and content of the Savings Bank's mortgage documents. The Savings Bank must
file reports with the OTS and the FDIC concerning its activities and financial
condition in addition to obtaining regulatory approvals prior to entering into
certain transactions such as mergers with, or acquisitions of, other financial
institutions. There are periodic examinations by the OTS and the FDIC to review
the Savings Bank's compliance with various regulatory requirements. The
regulatory structure also gives the regulatory authorities extensive discretion
in connection with their supervisory and enforcement activities and examination
policies, including policies with respect to the classification of assets and
the establishment of adequate loan loss reserves for regulatory purposes. Any
change in such policies, whether by the OTS, the FDIC or Congress, could have a
material adverse impact on the Holding Company, the Savings Bank and their
operations. The Holding Company, as a savings and loan holding company, will
also be required to file certain reports with, and otherwise comply with the
rules and regulations of the OTS.
Federal Regulation of Savings Banks
Office of Thrift Supervision. The OTS is an office in the Department
of the Treasury subject to the general oversight of the Secretary of the
Treasury. The OTS generally possesses the supervisory and regulatory duties and
responsibilities formerly vested in the Federal Home Loan Bank Board. Among
other functions, the OTS issues and enforces regulations affecting federally
insured savings associations and regularly examines these institutions.
Federal Home Loan Bank System. The FHLB System, consisting of 12
FHLBs, is under the jurisdiction of the Federal Housing Finance Board ("FHFB").
The designated duties of the FHFB are to: supervise the FHLBs; ensure that the
FHLBs carry out their housing finance mission; ensure that the FHLBs remain
adequately capitalized and able to raise funds in the capital markets; and
ensure that the FHLBs operate in a safe and sound manner.
The Savings Bank, as a member of the FHLB-Chicago, is required to
acquire and hold shares of capital stock in the FHLB-Chicago in an amount equal
to the greater of (i) 1.0% of the aggregate outstanding principal amount of
residential mortgage loans, home purchase contracts and similar obligations at
the beginning of each year, or (ii) 1/20 of its advances (borrowings) from the
FHLB-Chicago. The Savings Bank is in compliance with this requirement with an
investment in FHLB-Chicago stock of $622,000 at March 31, 1996.
Among other benefits, the FHLB provides a central credit facility
primarily for member institutions. It is funded primarily from proceeds derived
from the sale of consolidated obligations of the FHLB System. It makes advances
to members in accordance with policies and procedures established by the FHFB
and the Board of Directors of the FHLB-Chicago.
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Federal Deposit Insurance Corporation. The FDIC is an independent
federal agency established originally to insure the deposits, up to prescribed
statutory limits, of federally insured banks and to preserve the safety and
soundness of the banking industry. In 1989 the FDIC also became the insurer, up
to the prescribed limits, of the deposit accounts held at federally insured
savings associations and established two separate insurance funds: the BIF and
the SAIF. As insurer of deposits, the FDIC has examination, supervisory and
enforcement authority over all savings associations.
The Savings Bank's accounts are insured by the SAIF. The FDIC insures
deposits at the Savings Bank to the maximum extent permitted by law. The Savings
Bank currently pays deposit insurance premiums to the FDIC based on a risk-based
assessment system established by the FDIC for all SAIF-member institutions.
Under applicable regulations, institutions are assigned to one of three capital
groups which are based solely on the level of an institution's capital -- "well
capitalized," "adequately capitalized," and "undercapitalized" -- which are
defined in the same manner as the regulations establishing the prompt corrective
action system under Section 38 of the FDIA, as discussed below. These three
groups are then divided into three subgroups which reflect varying levels of
supervisory concern, from those which are considered to be healthy to those
which are considered to be of substantial supervisory concern. The matrix so
created results in nine assessment risk classifications, with rates currently
ranging from .23% for well capitalized, financially sound institutions with only
a few minor weaknesses to .31% for undercapitalized institutions that pose a
substantial risk of loss to the SAIF unless effective corrective action is
taken. Until the second half of 1995, the same rate matrix applied to BIF-member
institutions. The FDIC is authorized to raise assessment rates in certain
circumstances. The Savings Bank's assessments expensed for the year ended
December 31, 1995, were $295,000.
In August 1995 and again in November 1995, the FDIC substantially
reduced deposit insurance premiums for well-capitalized, well-managed financial
institutions that are members of the BIF. As a result of the revisions the rates
were reduced to a range of 0% to 0.27% with approximately 92% of BIF members
paying the statutory minimum annual assessment of $2,000. With respect to SAIF
member institutions, the FDIC has retained the existing rate schedule of 23 to
31 basis points. The latest reduction in BIF premiums went into effect January
1, 1996. The Savings Bank is, and after the Conversion will remain, a member of
the SAIF rather than the BIF. SAIF premiums may not be reduced for several years
because the SAIF has lower reserves than the BIF and is responsible for more
troubled financial institutions. See "RISK FACTORS -- Recapitalization of SAIF
and Its Impact on SAIF Premiums."
The FDIC may terminate the deposit insurance of any insured depository
institution if it determines after a hearing that the institution has engaged or
is engaging in unsafe or unsound practices, is in an unsafe or unsound condition
to continue operations, or has violated any applicable law, regulation, order or
any condition imposed by an agreement with the FDIC. It also may suspend deposit
insurance temporarily during the hearing process for the permanent termination
of insurance, if the institution has no tangible capital. If insurance of
accounts is terminated, the accounts at the institution at the time of
termination, less subsequent withdrawals, shall continue to be insured for a
period of six months to two years, as determined by the FDIC. Management is
aware of no existing circumstances which could result in termination of the
deposit insurance of the Savings Bank.
Liquidity Requirements. Under OTS regulations, each savings
institution is required to maintain an average daily balance of liquid assets
(cash, certain time deposits and savings accounts, bankers' acceptances, and
specified U.S. Government, state or federal agency obligations and certain other
investments) equal to a monthly average of not less than a specified percentage
(currently 5.0%) of its net withdrawable accounts plus short-term borrowings.
OTS regulations also require each savings institution to maintain an average
daily balance of short-term liquid assets at a specified percentage (currently
1.0%) of the total of its net withdrawable savings accounts and borrowings
payable in one year or less. Monetary penalties may be imposed for failure to
meet liquidity requirements. See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- Liquidity and Capital
Resources."
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Prompt Corrective Action. Under Section 38 of the FDIA, as added by
the Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA"),
each federal banking agency is required to implement a system of prompt
corrective action for institutions which it regulates. The federal banking
agencies have promulgated substantially similar regulations to implement this
system of prompt corrective action. Under the regulations, an institution shall
be deemed to be (i) "well capitalized" if it has a total risk-based capital
ratio of 10.0% or more, has a Tier I risk-based capital ratio of 6.0% or more,
has a leverage ratio of 5.0% or more and is not subject to specified
requirements to meet and maintain a specific capital level for any capital
measure; (ii) "adequately capitalized" if it has a total risk-based capital
ratio of 8.0% or more, a Tier I risk-based capital ratio of 4.0% or more and a
leverage ratio of 4.0% or more (3.0% under certain circumstances) and does not
meet the definition of "well capitalized;" (iii) "undercapitalized" if it has a
total risk-based capital ratio that is less than 8.0%, a Tier I risk-based
capital ratio that is less than 4.0% or a leverage ratio that is less than 4.0%
(3.0% under certain circumstances); (iv) "significantly undercapitalized" if it
has a total risk-based capital ratio that is less than 6.0%, a Tier I risk-based
capital ratio that is less than 3.0% or a leverage ratio that is less than 3.0%;
and (v) "critically undercapitalized" if it has a ratio of tangible equity to
total assets that is equal to or less than 2.0%.
Section 38 of the FDIA and the implementing regulations also provide
that a federal banking agency may, after notice and an opportunity for a
hearing, reclassify a well capitalized institution as adequately capitalized and
may require an adequately capitalized institution or an undercapitalized
institution to comply with supervisory actions as if it were in the next lower
category if the institution is in an unsafe or unsound condition or has received
in its most recent examination, and has not corrected, a less than satisfactory
rating for asset quality, management, earnings or liquidity. (The OTS may not,
however, reclassify a significantly undercapitalized institution as critically
undercapitalized.)
An institution generally must file a written capital restoration plan
which meets specified requirements, as well as a performance guaranty by each
company that controls the institution, with the appropriate federal banking
agency within 45 days of the date that the institution receives notice or is
deemed to have notice that it is undercapitalized, significantly
undercapitalized or critically undercapitalized. Immediately upon becoming
undercapitalized, an institution shall become subject to the provisions of
Section 38 of the FDIA, which sets forth various mandatory and discretionary
restrictions on its operations.
At March 31, 1996, the Savings Bank was categorized as "well
capitalized" under the prompt corrective action regulations of the OTS.
Standards for Safety and Soundness. The FDIA requires the federal
banking regulatory agencies to prescribe, by regulation, standards for all
insured depository institutions relating to: (i) internal controls, information
systems and internal audit systems; (ii) loan documentation; (iii) credit
underwriting; (iv) interest rate risk exposure; (v) asset growth; and (vi)
compensation, fees and benefits. The federal banking agencies recently adopted
final regulations and Interagency Guidelines Prescribing Standards for Safety
and Soundness ("Guidelines") to implement safety and soundness standards
required by the FDIA. The Guidelines set forth the safety and soundness
standards that the federal banking agencies use to identify and address problems
at insured depository institutions before capital becomes impaired. The agencies
also proposed asset quality and earnings standards which, if adopted in final,
would be added to the Guidelines. Under the final regulations, if the OTS
determines that the Savings Bank fails to meet any standard prescribed by the
Guidelines, the agency may require the Savings Bank to submit to the agency an
acceptable plan to achieve compliance with the standard, as required by the
FDIA. The final regulations establish deadlines for the submission and review of
such safety and soundness compliance plans.
Qualified Thrift Lender Test. All savings associations are required to
meet a qualified thrift lender ("QTL") test set forth in Section 10(m) of the
HOLA and regulations of the OTS thereunder to avoid certain restrictions on
their operations. A savings institution that fails to become or remain a QTL
shall either become a national bank or be subject to the following restrictions
on its operations: (1) the association may not make any new investment or engage
in activities that would not be permissible for national banks; (2) the
association may not establish any new branch office where a national bank
located in the savings institution's home state would not be
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able to establish a branch office; (3) the association shall be ineligible to
obtain new advances from any FHLB; and (4) the payment of dividends by the
association shall be subject to the rules regarding the statutory and regulatory
dividend restrictions applicable to national banks. Also, beginning three years
after the date on which the savings institution ceases to be a QTL, the savings
institution would be prohibited from retaining any investment or engaging in any
activity not permissible for a national bank and would be required to repay any
outstanding advances to any FHLB. In addition, within one year of the date on
which a savings association controlled by a company ceases to be a QTL, the
company must register as a bank holding company and become subject to the rules
applicable to such companies. A savings institution may requalify as a QTL if it
thereafter complies with the QTL test.
Currently, the QTL test requires that 65% of an institution's
"portfolio assets" (as defined) consist of certain housing and consumer-related
assets on a monthly average basis in nine out of every 12 months. Assets that
qualify without limit for inclusion as part of the 65% requirement are loans
made to purchase, refinance, construct, improve or repair domestic residential
housing and manufactured housing; home equity loans; mortgage-backed securities
(where the mortgages are secured by domestic residential housing or manufactured
housing); FHLB stock; and direct or indirect obligations of the FDIC. In
addition, the following assets, among others, may be included in meeting the
test subject to an overall limit of 20% of the savings institution's portfolio
assets: 50% of residential mortgage loans originated and sold within 90 days of
origination; 100% of consumer and educational loans (limited to 10% of total
portfolio assets); and stock issued by the FHLMC or the FNMA. Portfolio assets
consist of total assets minus the sum of (i) goodwill and other intangible
assets, (ii) property used by the savings institution to conduct its business,
and (iii) liquid assets up to 20% of the institution's total assets. At March
31, 1996, the qualified thrift investments of the Savings Bank were
approximately 68.1% of its portfolio assets.
Capital Requirements. Under OTS regulations a savings association must
satisfy three minimum capital requirements: core capital, tangible capital and
risk-based capital. Savings associations must meet all of the standards in order
to comply with the capital requirements. The Holding Company is not subject to
any minimum capital requirements.
OTS capital regulations establish a 3% core capital or leverage ratio
(defined as the ratio of core capital to adjusted total assets). Core capital is
defined to include common stockholders' equity, noncumulative perpetual
preferred stock and any related surplus, and minority interests in equity
accounts of consolidated subsidiaries, less (i) any intangible assets, except
for certain qualifying intangible assets; (ii) certain mortgage servicing
rights; and (iii) equity and debt investments in subsidiaries that are not
"includable subsidiaries," which is defined as subsidiaries engaged solely in
activities not impermissible for a national bank, engaged in activities
impermissible for a national bank but only as an agent for its customers, or
engaged solely in mortgage-banking activities. In calculating adjusted total
assets, adjustments are made to total assets to give effect to the exclusion of
certain assets from capital and to appropriately account for the investments in
and assets of both includable and nonincludable subsidiaries. Institutions that
fail to meet the core capital requirement would be required to file with the OTS
a capital plan that details the steps they will take to reach compliance. In
addition, the OTS' prompt corrective action regulation provides that a savings
institution that has a leverage ratio of less than 4% (3% for institutions
receiving the highest CAMEL examination rating) will be deemed to be
"undercapitalized" and may be subject to certain restrictions. See " -- Federal
Regulation of Savings Banks -- Prompt Corrective Action."
As required by federal law, the OTS has proposed a rule revising its
minimum core capital requirement to be no less stringent than that imposed on
national banks. The OTS has proposed that only those savings associations rated
a composite one (the highest rating) under the CAMEL rating system for savings
associations will be permitted to operate at or near the regulatory minimum
leverage ratio of 3%. All other savings associations will be required to
maintain a minimum leverage ratio of 4% to 5%. The OTS will assess each
individual savings association through the supervisory process on a case-by-case
basis to determine the applicable requirement. No assurance can be given as to
the final form of any such regulation, the date of its effectiveness or the
requirement applicable to the Savings Bank.
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Savings associations also must maintain "tangible capital" not less
than 1.5% of the Savings Bank's adjusted total assets. "Tangible capital" is
defined, generally, as core capital minus any "intangible assets" other than
purchased mortgage servicing rights.
Each savings institution must maintain total risk-based capital equal
to at least 8% of risk-weighted assets. Total risk-based capital consists of the
sum of core and supplementary capital, provided that supplementary capital
cannot exceed core capital, as previously defined. Supplementary capital
includes (i) permanent capital instruments such as cumulative perpetual
preferred stock, perpetual subordinated debt, and mandatory convertible
subordinated debt, (ii) maturing capital instruments such as subordinated debt,
intermediate-term preferred stock and mandatory convertible subordinated debt,
and (iii) general valuation loan and lease loss allowances up to 1.25% of risk-
weighted assets.
The risk-based capital regulation assigns each balance sheet asset
held by a savings institution to one of four risk categories based on the amount
of credit risk associated with that particular class of assets. Assets not
included for purposes of calculating capital are not included in calculating
risk-weighted assets. The categories range from 0% for cash and securities that
are backed by the full faith and credit of the U.S. Government to 100% for
repossessed assets or assets more than 90 days past due. Qualifying residential
mortgage loans (including multi-family mortgage loans) are assigned a 50% risk
weight. Consumer, commercial, home equity and residential construction loans are
assigned a 100% risk weight, as are nonqualifying residential mortgage loans and
that portion of land loans and nonresidential construction loans which do not
exceed an 80% loan-to-value ratio. The book value of assets in each category is
multiplied by the weighing factor (from 0% to 100%) assigned of that category.
These products are then totalled to arrive at total risk-weighted assets. Off-
balance sheet items are included in risk-weighted assets by converting them to
an approximate balance sheet "credit equivalent amount" based on a conversion
schedule. These credit equivalent amounts are then assigned to risk categories
in the same manner as balance sheet assets and included risk-weighted assets.
The OTS has incorporated an interest rate risk component into its
regulatory capital rule. Under the rule, savings associations with "above
normal" interest rate risk exposure would be subject to a deduction from total
capital for purposes of calculating their risk-based capital requirements. A
savings association's interest rate risk is measured by the decline in the net
portfolio value of its assets (i.e., the difference between incoming and
----
outgoing discounted cash flows from assets, liabilities and off-balance sheet
contracts) that would result from a hypothetical 200 basis point increase or
decrease in market interest rates divided by the estimated economic value of the
association's assets, as calculated in accordance with guidelines set forth by
the OTS. A savings association whose measured interest rate risk exposure
exceeds 2% must deduct an interest rate risk component in calculating its total
capital under the risk-based capital rule. The interest rate risk component is
an amount equal to one-half of the difference between the institution's measured
interest rate risk and 2%, multiplied by the estimated economic value of the
association's assets. That dollar amount is deducted from an association's total
capital in calculating compliance with its risk-based capital requirement. Under
the rule, there is a two quarter lag between the reporting date of an
institution's financial data and the effective date for the new capital
requirement based on that data. The rule also provides that the Director of the
OTS may waive or defer an association's interest rate risk component on a case-
by-case basis. Under certain circumstances, a savings association may request an
adjustment to its interest rate risk component if it believes that the OTS-
calculated interest rate risk component overstates its interest rate risk
exposure. In addition, certain "well-capitalized" institutions may obtain
authorization to use their own interest rate risk model to calculate their
interest rate risk component in lieu of the OTS-calculated amount. The OTS has
postponed the date that the component will first be deducted from an
institution's total capital until savings associations become familiar with the
process for requesting an adjustment to its interest rate risk component.
See "HISTORICAL AND PRO FORMA CAPITAL COMPLIANCE" for a table that
sets forth in terms of dollars and percentages the OTS tangible, core and
risk-based capital requirements, the Savings Bank's historical amounts and
percentages at March 31, 1996, and pro forma amounts and percentages based upon
the assumptions stated therein.
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Limitations On Capital Distributions. OTS regulations impose uniform
limitations on the ability of all savings associations to engage in various
distributions of capital such as dividends, stock repurchases and cash-out
mergers. In addition, OTS regulations require the Savings Bank to give the OTS
30 days' advance notice of any proposed declaration of dividends, and the OTS
has the authority under its supervisory powers to prohibit the payment of
dividends. The regulation utilizes a three-tiered approach which permits various
levels of distributions based primarily upon a savings association's capital
level.
A Tier 1 savings association has capital in excess of its fully
phased-in capital requirement (both before and after the proposed capital
distribution). A Tier 1 savings association may make (without application but
upon prior notice to, and no objection made by, the OTS) capital distributions
during a calendar year up to 100% of its net income to date during the calendar
year plus one-half its surplus capital ratio (i.e., the amount of capital in
----
excess of its fully phased-in requirement) at the beginning of the calendar year
or the amount authorized for a Tier 2 association. Capital distributions in
excess of such amount require advance notice to the OTS. A Tier 2 savings
association has capital equal to or in excess of its minimum capital requirement
but below its fully phased-in capital requirement (both before and after the
proposed capital distribution). Such an association may make (without
application) capital distributions up to an amount equal to 75% of its net
income during the previous four quarters depending on how close the association
is to meeting its fully phased-in capital requirement. Capital distributions
exceeding this amount require prior OTS approval. Tier 3 associations are
savings associations with capital below the minimum capital requirement (either
before or after the proposed capital distribution). Tier 3 associations may not
make any capital distributions without prior approval from the OTS.
The Savings Bank is currently meeting the criteria to be designated a
Tier 1 association and, consequently, could at its option (after prior notice
to, and no objection made by, the OTS) distribute up to 100% of its net income
during the calendar year plus 50% of its surplus capital ratio at the beginning
of the calendar year less any distributions previously paid during the year.
Loans to One Borrower. Under the HOLA, savings institutions are
generally subject to the national bank limit on loans to one borrower.
Generally, this limit is 15% of the Savings Bank's unimpaired capital and
surplus, plus an additional 10% of unimpaired capital and surplus, if such loan
is secured by readily-marketable collateral, which is defined to include certain
financial instruments and bullion. The OTS by regulation has amended the loans
to one borrower rule to permit savings associations meeting certain
requirements, including capital requirements, to extend loans to one borrower in
additional amounts under circumstances limited essentially to loans to develop
or complete residential housing units. At March 31, 1996, the Savings Bank's
limit on loans to one borrower was $1.7 million. At March 31, 1996, the Savings
Bank's largest aggregate amount of loans to one borrower was $605,000, all of
which were performing according to their original terms.
Community Reinvestment Act. Under the Community Reinvestment Act
("CRA"), a federal statute, all federally-insured financial institutions have a
continuing and affirmative obligation consistent with safe and sound operation
to help meet all the credit needs of its delineated community. The CRA does not
establish specific lending requirements or programs nor does it limit an
institution's discretion to develop the types of products and services that it
believes are best suited to meet the all the credit needs of its delineated
community. The CRA requires the federal banking agencies, in connection with
regulatory examinations, to assess an institution's record of meeting the credit
needs of its delineated community and to take such record into account in
evaluating certain regulatory applications filed by an institution. The CRA
requires public disclosure of an institution's CRA rating. The OTS has informed
the Savings Bank that it has received a "satisfactory" rating as a result of its
latest evaluation.
Activities of Savings Bank and Their Subsidiaries. When a savings
association establishes or acquires a subsidiary or elects to conduct any new
activity through a subsidiary that the association controls, the savings
association must notify the FDIC and the OTS 30 days in advance and provide the
information each agency may, by regulation, require. Savings associations also
must conduct the activities of subsidiaries in accordance with existing
regulations and orders.
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The OTS may determine that the continuation by a savings association
of its ownership control of, or its relationship to, the subsidiary constitutes
a serious risk to the safety, soundness or stability of the association or is
inconsistent with sound banking practices or with the purposes of the FDIA.
Based upon that determination, the FDIC or the OTS has the authority to order
the savings association to divest itself of control of the subsidiary. The FDIC
also may determine by regulation or order that any specific activity poses a
serious threat to the SAIF. If so, it may require that no SAIF member engage in
that activity directly.
Transactions with Affiliates. Savings associations must comply with
Sections 23A and 23B of the Federal Reserve Act ("Sections 23A and 23B")
relative to transactions with affiliates in the same manner and to the same
extent as if the savings association were a Federal Reserve member bank. A
savings and loan holding company, its subsidiaries and any other company under
common control are considered affiliates of the subsidiary savings association
under the HOLA. Generally, Sections 23A and 23B: (i) limit the extent to which
the insured association or its subsidiaries may engage in certain covered
transactions with an affiliate to an amount equal to 10% of such institution's
capital and surplus and place an aggregate limit on all such transactions with
affiliates to an amount equal to 20% of such capital and surplus, and (ii)
require that all such transactions be on terms substantially the same, or at
least as favorable to the institution or subsidiary, as those provided to a non-
affiliate. The term "covered transaction" includes the making of loans, the
purchase of assets, the issuance of a guaranty and similar types of
transactions.
Three additional rules apply to savings associations: (i) a savings
association may not make any loan or other extension of credit to an affiliate
unless that affiliate is engaged only in activities permissible for bank holding
companies; (ii) a savings association may not purchase or invest in securities
issued by an affiliate (other than securities of a subsidiary); and (iii) the
OTS may, for reasons of safety and soundness, impose more stringent restrictions
on savings associations but may not exempt transactions from or otherwise
abridge Section 23A or 23B. Exemptions from Section 23A or 23B may be granted
only by the Federal Reserve Board, as is currently the case with respect to all
FDIC-insured banks. The Savings Bank has not been significantly affected by the
rules regarding transactions with affiliates.
The Savings Bank's authority to extend credit to executive officers,
directors and 10% shareholders, as well as entities controlled by such persons,
is currently governed by Sections 22(g) and 22(h) of the Federal Reserve Act,
and Regulation O thereunder. Among other things, these regulations require that
such loans be made on terms and conditions substantially the same as those
offered to unaffiliated individuals and not involve more than the normal risk of
repayment. Regulation O also places individual and aggregate limits on the
amount of loans the Savings Bank may make to such persons based, in part, on the
Savings Bank's capital position, and requires certain board approval procedures
to be followed. The OTS regulations, with certain minor variances, apply
Regulation O to savings institutions.
Regulatory and Criminal Enforcement Provisions. Under the FDIA, the
OTS has primary enforcement responsibility over savings institutions and has the
authority to bring action against all "institution-affiliated parties,"
including stockholders, and any attorneys, appraisers and accountants who
knowingly or recklessly participate in wrongful action likely to have an adverse
effect on an insured institution. Formal enforcement action may range from the
issuance of a capital directive or cease and desist order to removal of officers
or directors, receivership, conservatorship or termination of deposit insurance.
Civil penalties cover a wide range of violations and can amount to $25,000 per
day, or $1 million per day in especially egregious cases. Under the FDIA, the
FDIC has the authority to recommend to the Director of the OTS that enforcement
action be taken with respect to a particular savings institution. If action is
not taken by the Director, the FDIC has authority to take such action under
certain circumstances. Federal law also establishes criminal penalties for
certain violations.
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Regulation of the Banks
The Banks will be national banks subject to regulation, supervision
and examination by the OCC. In addition, the Banks' deposits will be insured by
the FDIC up to the maximum amount permitted by law, and the Converted Bank is
therefore subject to regulation, supervision and examination by the FDIC.
The Holding Company and the Banks will be legal entities separate and
distinct. Various legal limitations restrict the Banks from lending or otherwise
supplying funds to the Holding Company (an "affiliate"), generally limiting such
transactions with the affiliate to 10% of the bank's capital and surplus and
limiting all such transactions to 20% of the bank's capital and surplus. Such
transactions, including extensions of credit, sales of securities or assets and
provision of services, also must be on terms and conditions consistent with safe
and sound banking practices, including credit standards, that are substantially
the same or at least as favorable to the bank as those prevailing at the time
for transactions with unaffiliated companies.
Federal banking laws and regulations govern all areas of the operation
of the Banks, including reserves, loans, mortgages, capital, issuance of
securities, payment of dividends and establishment of branches. Federal bank
regulatory agencies also have the general authority to limit the dividends paid
by insured banks and bank holding companies if such payments should be deemed to
constitute an unsafe and unsound practice. The respective primary federal
regulators of the Holding Company and the Banks have authority to impose
penalties, initiate civil and administrative actions and take other steps
intended to prevent the banks from engaging in unsafe or unsound practices.
Federally insured banks are subject, with certain exceptions, to
certain restrictions on extensions of credit to their parent holding companies
or other affiliates, on investments in the stock or other securities of
affiliates and on the taking of such stock or securities as collateral from any
borrower. In addition, such banks are prohibited from engaging in certain tie-in
arrangements in connection with any extension of credit or the providing of any
property or service.
Banks are also subject to the provisions of the Community Reinvestment
Act of 1977, which requires the appropriate federal bank regulatory agency, in
connection with its regular examination of a bank, to assess the bank's record
in meeting the credit needs of the community serviced by the bank, including low
and moderate income neighborhoods. The regulatory agency's assessment of the
bank's record is made available to the public. Further, such assessment is
required of any bank which has applied, among other things, to establish a new
branch office that will accept deposits, relocate an existing office or merge or
consolidate with, or acquire the assets or assume the liabilities of, a
federally regulated financial institution.
Dividends from the Banks will constitute the major source of funds for
dividends to be paid by the Holding Company. The amount of dividends payable by
the Banks to the Holding Company will depend upon the Banks' earnings and
capital position, and is limited by federal and state laws, regulations and
policies.
As national banks, the Banks may not pay dividends from their paid-in
surplus. All dividends must be paid out of undivided profits then on hand, after
deducting expenses, including reserves for losses and bad debts. In addition, a
national bank is prohibited from declaring a dividend on its shares of common
stock until its surplus equals its stated capital, unless there has been
transferred to surplus no less than one-tenth of the bank's net profits of the
preceding two consecutive half-year periods (in the case of an annual dividend).
The approval of the OCC is required if the total of all dividends declared by a
national bank in any calendar year exceeds the total of its net profits for that
year combined with its retained net profits for the preceding two years, less
any required transfers to surplus.
The OCC has the authority to prohibit any bank from engaging in an
unsafe or unsound practice in conducting its business. The payment of dividends,
depending upon the financial condition of the bank, could be deemed to
constitute such an unsafe or unsound practice. The Federal Reserve and the OCC
have indicated their
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view that it generally would be an unsafe and unsound practice to pay dividends
except out of current operating earnings. Moreover, the Federal Reserve has
indicated that bank holding companies should serve as a source of managerial and
financial strength to their subsidiary banks. Accordingly, the Federal Reserve
has stated that a bank holding company should not maintain a level of cash
dividends to its shareholders that places undue pressure on the capital of it
bank subsidiaries, or that can be funded only through additional borrowings or
other arrangements that may undermine the bank holding company's ability to
serve as a source of strength.
The amount of dividends actually paid during any one period will be
strongly affected by the Banks' management policy of maintaining a strong
capital position. Federal law further provides that no insured depository
institution may make any capital distribution (which would include a cash
dividend) if, after making the distribution, the institution would not satisfy
one or more of its minimum capital requirements. Moreover, the federal bank
regulatory agencies also have the general authority to limit the dividends paid
by insured banks if such payments should be deemed to constitute an unsafe and
unsound practice.
Bank Holding Company Regulation
General. Upon consummation of the Bank Conversion and the Bank
Formation, the Holding Company, as the sole shareholder of the Banks, will
become a bank holding company and will register as such with the Federal
Reserve. Bank holding companies are subject to comprehensive regulation by the
Federal Reserve under BHCA and the regulations of the Federal Reserve. As a bank
holding company, the Holding Company will be required to file with the Federal
Reserve annual reports and such additional information as the Federal Reserve
may require and will be subject to regular examinations by the Federal Reserve.
The Federal Reserve also has extensive enforcement authority over bank holding
companies, including, among other things, the ability to asses civil money
penalties to issue cease and desist or removal orders and to require that a
holding company divest subsidiaries (including its bank subsidiaries). In
general, enforcement actions may be initiated for violations of law and
regulations and unsafe or unsound practices.
Under the BHCA, a bank holding company must obtain Federal Reserve
approval before: (1) acquiring, directly or indirectly, ownership or control of
any voting shares of another bank or bank holding company if, after such
acquisition, it would own or control more than 5% of such shares (unless it
already owns or controls the majority of such shares); (2) acquiring all or
substantially all of the assets of another bank or bank holding company; or (3)
merging or consolidating with another bank holding company.
Any direct or indirect acquisition by a bank holding company or its
subsidiaries of more than 5% of the voting shares of, or substantially all of
the assets of, any bank located outside of the state in which the operations of
the bank holding company's banking subsidiaries are "principally conducted", may
not be approved by the Federal Reserve unless the laws of the state in which the
bank to be acquired is located specifically authorize such an acquisition. The
term "principally conducted" generally means the state in which the total
deposits of all banking subsidiaries is the largest. Accordingly, upon
consummation of the Bank Conversion the Holding Company's business will be
"principally conducted" in the State of Illinois because the total deposits of
the Converted Bank will exceed those of the De Novo Bank. Most states have
authorized interstate bank acquisitions by out-of-state bank holding companies
on either a regional or a national basis, and most such statutes require the
home state of the acquiring bank holding company to have enacted a reciprocal
statute. Illinois law permits bank holding companies located outside Illinois to
acquire banks or bank holding companies located in Illinois subject to the
requirements that the laws of the state in which the acquiring bank holding
company is located permit bank holding companies located in Illinois to acquire
banks or bank holding companies in the acquiror's state and that the laws of the
state in which the acquiror is located are not unduly restrictive when compared
to those imposed by the laws of Illinois.
The BHCA also prohibits a bank holding company, with certain
exceptions, from acquiring direct or indirect ownership or control of more than
5% of the voting shares of any company which is not a bank or bank holding
company, or from engaging directly or indirectly in activities other than those
of banking, managing or controlling banks, or providing services for its
subsidiaries. The principal exceptions to these prohibitions involve certain
non-
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bank activities which, by statute or by Federal Reserve regulation or order,
have been identified as activities closely related to the business of banking or
managing or controlling banks. The list of activities permitted by the Federal
Reserve includes, among other things, operating a savings institutions, mortgage
company, finance company, credit card company or factoring company, performing
certain data processing operations; providing certain investment and financial
advice; underwriting and acting as an insurance agent for certain types of
credit-related insurance; leasing property on a full-payout, non-operating
basis; selling money orders, travelers' checks and United States Savings Bonds;
real estate and personal property appraising; providing tax planning and
preparation services; and, subject to certain limitations, providing securities
brokerage services for customers. The Holding Company has no present plans to
engage in any of these activities.
Dividends. The Federal Reserve has issued a policy statement on the
payment of cash dividends by bank holding companies, which expresses the Federal
Reserve's view that a bank holding company should pay cash dividends only to the
extent that the company's net income for the past year is sufficient to cover
both the cash dividends and a rate of earning retention that is consistent with
the company's capital needs, asset quality and overall financial condition. The
Federal Reserve also indicated that it would be inappropriate for a company
experiencing serious financial problems to borrow funds to pay dividends.
Furthermore, under the prompt corrective action regulations adopted by the
Federal Reserve pursuant to FDICIA, the Federal Reserve may prohibit a bank
holding company from paying any dividends if the holding company's bank
subsidiary is classified as "undercapitalized." See " -- Prompt Corrective
Action."
Bank holding companies are required to give the Federal Reserve prior
written notice of any purchase or redemption of its outstanding equity
securities if the gross consideration for the purchase or redemption, when
combined with the net consideration paid for all such purchases or redemptions
during the preceding 12 months, is equal to 10% or more of their consolidated
net worth. The Federal Reserve may disapprove such a purchase or redemption of
it determines that the proposal would constitute an unsafe or unsound practice
or would violate any law, regulation, Federal Reserve order, or any condition
imposed by, or written agreement with, the Federal Reserve.
Capital Requirements. The Federal Reserve has established capital
requirements for bank holding companies that generally parallel the capital
requirements for national banks under the OCC's regulations. The Federal Reserve
regulations provide that capital standards will generally be applied on a bank
only (rather than a consolidated) basis on the case of a bank holding company
with less than $150 million in total consolidated assets. Assuming sales of
Common Stock at the minimum of the Estimated Valuation Range, the Holding
Company's total consolidated assets will exceed $150 million. See "HISTORICAL
AND PRO FORMA CAPITAL COMPLIANCE" for a numerical presentation of the Holding
Company's pro forma capital based on the assumptions stated therein.
Federal Securities Laws
The Holding Company has filed a Registration Statement with the SEC
under the Securities Act for the registration of the Common Stock to be issued
in the Conversion. Upon completion of the Conversion, the Common Stock will be
registered with the SEC under the Exchange Act and, under OTS regulations,
generally may not be deregistered for at least three years thereafter. The
Holding Company will then be subject to the information, proxy solicitation,
insider trading restrictions and other requirements of the Exchange Act.
The registration under the Securities Act of the Common Stock to be
issued in the Conversion does not cover the resale of such shares. Shares of the
Common Stock purchased by persons who are not affiliates of the Holding Company
may be resold without registration. Shares purchased by an affiliate of the
Holding Company may comply with the resale restrictions of Rule 144 under the
Securities Act. If the Holding Company meets the current public information
requirements of Rule 144 under the Securities Act, each affiliate of the Holding
Company who complies with the other conditions of Rule 144 (including those that
require the affiliate's sale to be aggregated with those of certain other
persons) would be able to sell in the public market, without registration, a
number of shares not to exceed, in any three-month period, the greater of (i) 1%
of the outstanding shares of the Holding Company
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or (ii) the average weekly volume of trading in such shares during the preceding
four calendar weeks. Provision may be made in the future by the Holding Company
to permit affiliates to have their shares registered for sale under the
Securities Act under certain circumstances. There are currently no demand
registration rights outstanding. However, in the event the Holding Company, at
some future time, determines to insure additional shares from its authorized but
unissued shares, the Holding Company might offer registration rights to certain
of its affiliates who want to sell their shares.
TAXATION
Federal Taxation
General. The following discussion summarizes certain Federal income
tax provisions applicable to the Savings Bank as a thrift institution and,
following the Bank Conversion, the Banks as national banks, and discusses all
material terms of the federal tax law as it applies to the Savings Bank. This
summary is based on the Code, IRS regulations, rulings and decisions currently
in effect, all of which are subject to change. For a discussion of the Federal
income tax consequences of the Plan of Conversion to the Savings Bank and its
the account holders and the holders of Common Stock, see "THE CONVERSION --
Effects of Conversion to Stock Form on Depositors and Borrowers of the Savings
Bank -- Tax Effects."
Tax Bad Debt Reserves. Federal thrift institutions are subject to the
provisions of the Code in the same general manner as other corporations.
However, savings institutions, such as the Savings Bank, which meet QTL tests
and other conditions prescribed by the Code, may benefit from certain favorable
provisions regarding their deductions from taxable income for annual additions
to their bad debt reserve. For purposes of the bad debt reserve deduction, loans
are separated into "qualifying real property loans," which generally are loans
secured by interests in real property, and nonqualifying real property loans,
which are all other loans. The bad debt reserve deduction with respect to
nonqualifying loans is based generally on actual loss experience over a period
of years ("experience method"). The amount of the bad debt reserve deduction
with respect to qualifying real property loans may be based upon the experience
method or a percentage of taxable income method determined without regard to
such deduction ("percentage of taxable income method").
The Savings Bank has elected to use the method which results in the
greatest deduction for federal income tax purposes. Historically, the Savings
Bank has elected to use the percentage of taxable income method. Under the
percentage of taxable income method, the bad debt reserve deduction for
qualifying real property loans is computed as a percentage, which Congress has
reduced from as much as 40% in recent years to 8% of "specially computed"
taxable income effective for taxable years beginning after 1986. The allowable
deduction under the percentage of taxable income method ("percentage bad debt
deduction") for taxable years beginning before 1987 was scaled downward if
certain assets ("qualifying assets") of an association amounted to less than 60%
of the dollar amount of the association's total assets. The percentage of
taxable income method was not available for any taxable years beginning before
1987 in which the qualifying assets of an association amounted to less than 60%
of its total assets. When the percentage of bad debt deduction was lowered to
8%, the 82% of qualifying assets requirement (72% for mutual savings banks) was
lowered to 60%. For all taxable years beginning after 1986, there is no bad debt
reserve deduction allowed under any method if less than 60% of the dollar amount
of the association's total assets are qualifying assets. Moreover, in such a
case, an association could be required to recapture, generally over a period of
up to six years, its existing bad debt reserve. As of March 31, 1996, more than
the required amount of the Savings Bank's total assets were qualifying assets.
The bad debt deduction under the percentage of taxable income method
is limited to the extent that (i) the amount of the deduction accumulated in
reserves for qualifying real property loans may not exceed 6% of such loans
outstanding at the end of the taxable year, and (ii) the amount of the deduction
for the taxable year cannot be greater than the larger of (a) the amount of the
deduction that would be allowable for the taxable year under the experience
method, or (b) the amount which, when added to the bad debt reserve for losses
on nonqualifying loans, equals the amount by which 12% of total deposits or
withdrawable accounts of depositors at the close of the taxable year
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exceeds the sum of surplus, undivided profits and reserves at the beginning of
such year. It is not expected that either limitation will restrict the Savings
Bank from making the maximum addition to its bad debt reserve. The Savings
Bank's annual percentage bad debt deduction is reduced by the amount of the
deduction for losses on nonqualifying loans.
Historically, the availability of the percentage of taxable income
method has permitted qualifying thrifts to be taxed at a significantly lower
maximum marginal federal income tax rate than that applicable to corporations
generally. The reduction of the bad debt reserve deduction to 8% of specially
computed taxable income, together with the current corporate income tax rate of
34%, should result in a negligible change after 1987 in the maximum effective
rate of federal income tax payable by a qualifying thrift fully able to use the
percentage of taxable income method.
Earnings appropriated to the Savings Bank's excess tax basis bad debt
reserve aggregated approximately $2.5 million at March 31, 1996. See Note 12 to
the Notes to Financial Statements. Applicable regulations under the Code will
require the Banks to restate their tax reserve for bad debts as of the first
year of the Bank Conversion, using a formula set forth in the IRS regulations.
In general, the excess of the Savings Bank's tax bad debt reserve as of the
close of the taxable year immediately preceding the year of the Bank Conversion
must be included ratably in the Converted Bank's taxable income over a six-year
period. See "RISK FACTORS -- Bad Debt Recapture."
Following the Bank Conversion, the Banks, as national banks each with
less than $500 million in assets, will be eligible to maintain a tax bad debt
reserve. However, the Banks will be required to use the experience method rather
than the percentage of taxable income method, which is only available to thrift
institutions. In the event that the Banks' assets exceed the $500 million
threshold, the Banks would be required to recapture their then outstanding tax
bad debt reserve in increasing increments over a four-year period. Thereafter,
the Banks would be required to use the direct or specific charge-off method
applicable to large banks in calculating their tax bad debt deduction. Under the
direct or specific charge-off method, the Banks would be entitled to a bad debt
deduction only in the taxable year in which a specific debt become worthless or
is shown to be recoverable only in part.
Corporate Alternative Minimum Tax. The Code imposes a tax on
alternative minimum taxable income ("AMTI") at a rate of 20%. The excess of the
tax bad debt reserve deduction using the percentage of taxable income method
over the deduction that would have been allowable under the experience method is
treated as a preference item for purposes of computing the AMTI. In addition,
only 90% of AMTI can be offset by net operating loss carryovers. AMTI is
increased by an amount equal to 75% of the amount by which the Savings Bank's
adjusted current earnings exceeds its AMTI (determined without regard to this
preference and prior to reduction for net operating losses). For taxable years
beginning after December 31, 1986, and before January 1, 1996, an environmental
tax of .12% of the excess of AMTI (with certain modification) over $2.0 million
is imposed on corporations, including the Savings Bank, whether or not an
Alternative Minimum Tax ("AMT") is paid.
Dividends-Received Deduction and Other Matters. The Holding Company
may exclude from its income 100% of dividends received from the Banks as members
of the same affiliated group of corporations. The corporate dividends-received
deduction is generally 70% in the case of dividends received from unaffiliated
corporations with which the Holding Company and the Banks will not file a
consolidated tax return, except that if the Holding Company owns or the Banks
own more than 20% of the stock of a corporation distributing a dividend, then
80% of any dividends received may be deducted.
Other. There have not been any IRS audits of the Savings Bank's
federal income tax returns during the past five years.
Illinois Taxation
The Savings Bank files Illinois income tax returns. For Illinois
income tax purposes, savings institutions are presently taxed at a rate equal to
7.3% of income. For these purposes, "net income" generally means federal
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taxable income, subject to certain adjustments (including the addition of
interest income on State and municipal obligations and the exclusion of interest
income on United States Government obligations) and an allocation of income
between Illinois and other states. The exclusion of income on United States
Government obligations has the effect of reducing significantly the Illinois
taxable income of savings institutions. The Savings Bank is not currently under
audit with respect to its Illinois income tax returns. There have not been any
audits of the Savings Bank's Illinois tax returns by Illinois tax authorities
during the past five years.
Missouri Taxation
A Missouri-based financial institution, such as Chester National Bank
of Missouri, is subject to an annual financial institution franchise tax of 7%
on its net income, generally computed in the same manner as federal taxable
income is computed. In addition, a Missouri-based financial institution is
responsible for Missouri corporate income tax, sales and use taxes and certain
property taxes. However, the payment of these taxes is available as a credit
against the financial institution franchise tax.
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THE CONVERSION
The OTS has given approval to the Plan subject to the Plan's approval by
the members of the Savings Bank entitled to vote on the matter and subject to
the satisfaction of certain other conditions imposed by the OTS in its approval.
OTS approval, however, does not constitute a recommendation or endorsement of
the Plan.
General
On March 12, 1996, the Savings Bank's Board of Directors adopted the Plan
of Conversion pursuant to which the Savings Bank will convert to stock form and
subsequently convert to a national bank to be known as Chester National Bank,
and a newly chartered bank subsidiary will be formed by the Holding Company to
be known as Chester National Bank of Missouri, which will purchase all of the
installment loans and a portion of the mortgage loans of the Savings Bank's
Perryville branch. All of the outstanding capital stock of the Chester National
Bank and Chester National Bank of Missouri will be held by the Holding Company,
a newly formed Delaware corporation. The Holding Company and the Savings Bank
intend to pursue the business strategy described in this Prospectus with the
goal of enhancing long-term shareholder value. Neither the Holding Company nor
the Savings Bank has any existing plan to pursue any possible business
combination, and neither has any agreement or understanding, written or oral,
with respect to any possible business combination.
The following discussion of the Plan of Conversion is qualified in its
entirety by reference to the Plan of Conversion, which is attached as Exhibit A
to the Savings Bank's Proxy Statement and is available from the Savings Bank
upon request. The OTS has approved the Plan of Conversion subject to the Plan's
approval by the members of the Savings Bank entitled to vote on the matter at a
Special Meeting called for that purpose to be held on September 13, 1996, and
subject to the satisfaction of certain other conditions imposed by the OTS in
its approval.
If the Board of Directors of the Savings Bank decides for any reason, such
as possible delays resulting from overlapping regulatory processing or policies
or conditions which could adversely affect the Savings Bank's or the Holding
Company's ability to consummate the Conversion and transact its business as
contemplated herein and in accordance with the Savings Bank's operating
policies, at any time prior to the issuance of the Common Stock, not to use the
holding company form of organization in implementing the Conversion, the Plan of
Conversion will be amended to not use the holding company form of organization
in the Conversion. In the event that such a decision is made, the Savings Bank
will promptly refund all subscriptions or orders received together with accrued
interest, withdraw the Holding Company's registration statement from the SEC and
will take all steps necessary to consummate the Conversion and proceed with a
new offering without the Holding Company, including filing any necessary
documents with the OTS. In such event, and provided there is no regulatory
action, directive or other consideration upon which basis the Savings Bank
determines not to consummate the Conversion, the Savings Bank will issue and
sell the common stock of the Savings Bank. There can be no assurance that the
OTS would approve the Conversion if the Savings Bank decided to proceed without
the Holding Company. The following description of the Plan assumes that a
holding company form of organization will be utilized in the Conversion. In the
event that a holding company form of organization is not utilized, all other
pertinent terms of the Plan as described below will apply to the Conversion of
the Savings Bank from mutual to stock form of organization and the sale of the
Savings Bank's common stock.
The Conversion will be accomplished through the adoption of a Federal Stock
Charter and Bylaws to authorize the issuance of capital stock by the Converted
Savings Bank, the issuance of all the Converted Savings Bank's capital stock to
be outstanding upon consummation of the Stock Conversion to the Holding Company,
the offer and sale of the Common Stock of the Holding Company and the conversion
of the Converted Savings Bank to the Converted Bank. Upon issuance of the
Converted Savings Bank's shares of capital stock to the Holding Company, the
Converted Savings Bank will be a wholly owned subsidiary of the Holding Company.
Following
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consummation of the Stock Conversion, the Bank Conversion whereby the Converted
Savings Bank will convert to the Converted Bank, and the Bank Formation whereby
the De Novo Bank will purchase all of the installment loans and a portion of the
mortgage loans of the Savings Bank's Perryville branch office, will be promptly
effectuated.
The Holding Company has applied for approval from the OTS to become the
holding company of the Converted Savings Bank subject to the satisfaction of
certain conditions and to acquire all of the common stock of the Converted
Savings Bank to be issued in the Stock Conversion. The Stock Conversion will be
effected only upon completion of the sale of all of the shares of Common Stock
to be issued by the Holding Company pursuant to the Plan of Conversion. The
Savings Bank has applied for approval for the Bank Conversion from the OCC and
the Holding Company has applied for approval from the Federal Reserve for
continued ownership of 100% of the stock of the Converted Bank and the De Novo
Bank following the Bank Conversion and the Bank Formation.
The aggregate purchase price of the Common Stock to be issued in the
Conversion will be within the Estimated Valuation Range of between $14,025,000
and $18,975,000 which may be increased to $21,821,250, based upon an independent
appraisal of the estimated pro forma market value of the Common Stock prepared
by RP Financial. All shares of the Common Stock to be issued and sold in the
Stock Conversion will be sold at the same price. The independent appraisal will
be updated, if necessary, and the final price of the shares of the Common Stock
will be determined at the completion of the Subscription and Direct Community
Offering. RP Financial is a consulting firm experienced in the valuation and
appraisal of savings institutions. For additional information, see "-- Stock
Pricing and Number of Shares to be Issued."
The Plan of Conversion provides generally that (i) the Savings Bank will
convert from a federally chartered mutual savings bank to a federally chartered
stock savings bank; (ii) the issuance of all the Converted Savings Bank's
capital stock to be outstanding upon consummation of the Stock Conversion to the
Holding Company; (iii) the offer and sale of the Common Stock by the Holding
Company in the Subscription Offering to persons having Subscription Rights and
in a Direct Community Offering to certain members of the general public with
preference given first to natural persons and trusts of natural persons residing
in the Local Community; (iv) shares of Common Stock not subscribed for in the
Subscription and Direct Community Offering will be offered to certain members of
the general public in a Public Offering; (v) the Converted Savings Bank will
convert to a national bank; and (vi) the Holding Company will form a de novo
national bank subsidiary to be known as Chester National Bank of Missouri, which
will purchase all of the installment loans and a portion of the mortgage loans
of the Savings Bank's Perryville branch. See "USE OF PROCEEDS." The Conversion
will be effected only upon completion of the sale of at least $14,025,000 of
Common Stock to be issued pursuant to the Plan of Conversion.
As part of the Conversion, the Holding Company is making a Subscription
Offering of its Common Stock to holders of Subscription Rights in the following
order of priority: (i) Eligible Account Holders (depositors with $50.00 or more
on deposit as of January 15, 1995); (ii) the Savings Bank's ESOP; (iii)
Supplemental Eligible Account Holders (depositors with $50.00 or more on deposit
as of June 30, 1996); and (iv) Other Members (depositors of the Savings Bank as
of July 19, 1996 and borrowers of the Savings Bank with loans outstanding as of
December 18, 1989 which continue to be outstanding as of July 19, 1996). After
the Subscription Offering and subject to the prior rights of holders of
Subscription Rights, the Holding Company is offering the Common Stock for sale
to certain members of the general public through a Direct Community
Offering.
Shares of Common Stock not sold in the Subscription and Direct Community
Offering may be offered in the Public Offering. Regulations require that the
Public Offering be completed within 45 days after completion of the Subscription
Offering unless extended by the Savings Bank or the Holding Company with the
approval of the regulatory authorities. If the Public Offering is determined
not to be feasible, the Board of Directors of the Savings Bank will consult with
the regulatory authorities to determine an appropriate alternative method for
selling the unsubscribed shares of Common Stock. The Plan of Conversion
provides that the Conversion must be completed within 24 months after the date
of the approval of the Plan of Conversion by the members of the Savings Bank.
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No sales of Common Stock may be completed, either in the Subscription,
Direct Community or Public Offerings, unless the Plan of Conversion is approved
by the members of the Savings Bank.
The completion of the Offerings, however, is subject to market conditions
and other factors beyond the Savings Bank's control. No assurance can be given
as to the length of time after approval of the Plan of Conversion at the Special
Meeting that will be required to complete the Public Offering or other sale of
the Common Stock. If delays are experienced, significant changes may occur in
the estimated pro forma market value of the Holding Company and the Savings Bank
as converted, together with corresponding changes in the net proceeds realized
by the Holding Company from the sale of the Common Stock. In the event the
Conversion is terminated, the Savings Bank would be required to charge all
Conversion expenses against current income.
Orders for shares of Common Stock will not be filled until at least
1,402,500 shares of Common Stock have been subscribed for or sold and the OTS
approves the final valuation and the Conversion closes. If the Conversion is not
consummated by ___________, 1996 (45 days after the last day of the fully
extended Subscription Offering) and the OTS consents to an extension of time to
consummate the Conversion, subscribers will be given the right to increase,
decrease or rescind their subscriptions. Unless an affirmative indication is
received from subscribers that they wish to continue to subscribe for shares,
the funds will be returned promptly, together with accrued interest at the
passbook rate from the date payment is received until the funds are returned to
the subscriber. If such period is not extended, or, in any event, if the
Conversion is not consummated by ______, 1996, all withdrawal authorizations
will be terminated and all funds held will be promptly returned together with
accrued interest at the Savings Bank's passbook rate from the date payment is
received until the Conversion is terminated.
Purposes of Conversion
Management of the Savings Bank believes that the Conversion offers a number
of advantages which will be important to the future growth and performance of
the Savings Bank in that it is intended to: (i) to improve the competitive
position of the Savings Bank in its market area and to support possible future
expansion (currently there are no specific plans, arrangements or
understandings, written or oral, regarding any such activities); (ii) to afford
members of the Savings Bank and others the opportunity to become stockholders of
the Holding Company and thereby participate more directly in, and contribute to,
any future growth of the Savings Bank; and (iii) to provide future access to
capital markets.
The Savings Bank's Board of Directors has formed the Holding Company to
serve upon consummation of the Conversion as a holding company with the Savings
Bank as its subsidiary. The Savings Bank, as a mutual savings bank, does not
have stockholders and has no authority to issue capital stock. By converting to
the stock form of organization, the Holding Company and the Savings Bank will be
structured in the form used by holding companies of commercial banks and by a
growing number of savings institutions.
Effects of Conversion to Stock Form on Depositors and Borrowers of the Savings
Bank
Voting Rights. Savings members and borrowers will have no voting rights in
the converted Savings Bank or the Holding Company and therefore will not be able
to elect directors of the Savings Bank or the Holding Company or to control
their affairs. Currently, these rights are accorded to savings members of the
Savings Bank. Subsequent to the Conversion, voting rights will be vested
exclusively in the Holding Company with respect to the Savings Bank and the
holders of the Common Stock as to matters pertaining to the Holding Company.
Each holder of Common Stock shall be entitled to vote on any matter to be
considered by the stockholders of the Holding Company. A stockholder will be
entitled to one vote for each share of Common Stock owned.
Savings Accounts and Loans. The Savings Bank's savings accounts, account
balances and existing FDIC insurance coverage of savings accounts will not be
affected by the Conversion. Furthermore, the Conversion
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will not affect the loan accounts, loan balances or obligations of borrowers
under their individual contractual arrangements with the Savings Bank.
Tax Effects. The Savings Bank has received an opinion from Breyer &
Aguggia, Washington, D.C., that the Conversion will constitute a nontaxable
reorganization under Section 368(a)(1)(F) of the Code. Among other things, the
opinion states that: (i) no gain or loss will be recognized to the Savings Bank
in its mutual or stock form by reason of its Conversion; (ii) no gain or loss
will be recognized to its account holders upon the issuance to them of accounts
in the Savings Bank immediately after the Conversion, in the same dollar amounts
and on the same terms and conditions as their accounts at the Savings Bank in
its mutual form plus interest in the liquidation account; (iii) the tax basis of
account holders' accounts in the Savings Bank immediately after the Conversion
will be the same as the tax basis of their accounts immediately prior to
Conversion; (iv) the tax basis of each account holder's interest in the
liquidation account will be zero; (v) the tax basis of the Common Stock
purchased in the Conversion will be the amount paid and the holding period for
such stock will commence at the date of purchase; and (vi) no gain or loss will
be recognized to account holders upon the receipt or exercise of Subscription
Rights in the Conversion, except to the extent Subscription Rights are deemed to
have value as discussed below. Unlike a private letter ruling issued by the
IRS, an opinion of counsel is not binding on the IRS and the IRS could disagree
with the conclusions reached therein. In the event of such disagreement, no
assurance can be given that the conclusions reached in an opinion of counsel
would be sustained by a court if contested by the IRS.
Based upon past rulings issued by the IRS, the opinion provides that the
receipt of Subscription Rights by Eligible Account Holders, Supplemental
Eligible Account Holders and Other Members under the Plan will be taxable to the
extent, if any, that the Subscription Rights are deemed to have a fair market
value. RP Financial, a financial consulting firm retained by the Savings Bank,
whose findings are not binding on the IRS, has indicated that the Subscription
Rights do not have any value, based on the fact that such rights are acquired by
the recipients without cost, are nontransferable 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
paid by purchasers in the Direct Community Offering for unsubscribed shares of
Common Stock. If the Subscription Rights are deemed to have a fair market
value, the receipt of such rights may only be taxable to those Eligible Account
Holders, Supplemental Eligible Account Holders (if any) and Other Members who
exercise their Subscription Rights. The Savings Bank could also recognize a
gain on the distribution of such Subscription Rights. Eligible Account Holders,
Supplemental Eligible Account Holders and Other Members are encouraged to
consult with their own tax advisers as to the tax consequences in the event the
Subscription Rights are deemed to have a fair market value.
The Savings Bank has also received an opinion from Bryan Cave LLP, St.
Louis, Missouri, that, assuming the Conversion does not result in any federal
income tax liability to the Savings Bank, its account holders, or the Holding
Company, implementation of the Plan of Conversion will not result in any
Illinois income tax liability to such entities or persons.
The opinions of Breyer & Aguggia and Bryan Cave LLP and the letter from RP
Financial are filed as exhibits to the Registration Statement. See "ADDITIONAL
INFORMATION."
PROSPECTIVE INVESTORS ARE URGED TO CONSULT WITH THEIR OWN TAX ADVISORS
REGARDING THE TAX CONSEQUENCES OF THE CONVERSION PARTICULAR TO THEM.
Liquidation Account. In the unlikely event of a complete liquidation of
the Savings Bank in its present mutual form, each depositor in the Savings Bank
would receive a pro rata share of any assets of the Savings Bank remaining after
payment of claims of all creditors (including the claims of all depositors up to
the withdrawal value of their accounts). Each depositor's pro rata share of
such remaining assets would be in the same proportion as the value of his or her
deposit account to the total value of all deposit accounts in the Savings Bank
at the time of liquidation.
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After the Conversion, holders of withdrawable deposit(s) in the Savings
Bank including certificates of deposit ("Savings Account(s)") shall not be
entitled to share in any residual assets in the event of liquidation of the
Savings Bank. However, pursuant to OTS regulations, the Savings Bank shall, at
the time of the Conversion, establish a liquidation account in an amount equal
to its total equity as of the date of the latest statement of financial
condition contained herein.
The liquidation account shall be maintained by the Savings Bank (and
assumed by the Banks) subsequent to the Conversion for the benefit of Eligible
Account Holders and Supplemental Eligible Account Holders who retain their
Savings Accounts in the Savings 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
balance ("subaccount").
The initial subaccount balance for a Savings Account held by an Eligible
Account Holder 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 such holder's "qualifying deposit" in the
Savings Account and the denominator is the total amount of the "qualifying
deposits" of all such holders. Such initial subaccount balance shall not be
increased, and it 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 at the close of business on any annual
closing day of the Savings Bank subsequent to January 15, 1995 is less than the
lesser of (i) the deposit balance in such Savings Account at the close of
business on any other annual closing date subsequent to January 15, 1995 or June
30, 1996 or (ii) the amount of the "qualifying deposit" in such Savings Account
on January 15, 1995 or June 30, 1996, then the subaccount balance for such
Savings Account shall be adjusted by reducing such subaccount balance in an
amount proportionate to the reduction in such deposit balance. In the event of
a downward adjustment, such 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 Savings Bank or the Banks
(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
balance(s) for Savings Account(s) then held by such holder before any
liquidation distribution may be made to stockholders. No merger, consolidation,
bulk purchase of assets with assumptions of Savings Accounts and other
liabilities or similar transactions with another federally insured institution
in which the Savings Bank (or the Banks) is not the surviving institution(s)
shall be considered to be a complete liquidation. In any such transaction the
liquidation account shall be assumed by the surviving institution.
The Subscription, Direct Community and Public Offerings
The Offerings (including the Public Offering) are expected to expire at
Noon, Central Time, on the Expiration Date, unless extended or continued as
described on the cover page of this Prospectus.
Subscription Offering. In accordance with the Plan, nontransferable
Subscription Rights to purchase the Common Stock have been issued to all persons
and entities entitled to purchase the Common Stock in the Subscription Offering.
The amount of the Common Stock which these parties may purchase will be subject
to the availability of the Common Stock for purchase under the categories set
forth in the Plan. Subscription priorities have been established for the
allocation of stock to the extent that the Common Stock is available. These
priorities are as follows:
Category 1: Eligible Account Holders. Each depositor with $50.00 or more
on deposit at the Savings Bank as of January 15, 1995 will receive
nontransferable Subscription Rights to subscribe for up to the greater of 40,000
shares of Common Stock, one-tenth of 1% of the total offering of Common Stock or
15 times the product
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(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 qualifying deposit of the Eligible Account Holder and the
denominator is the total amount of qualifying deposits of all Eligible Account
Holders. If the exercise of Subscription Rights in this category results in an
oversubscription, shares of Common Stock will be allocated among subscribing
Eligible Account Holders so as to permit each Eligible Account Holder, to the
extent possible, to purchase a number of shares sufficient to make his or her
total allocation equal 100 shares or the number of shares actually subscribed
for, whichever is less. Thereafter, unallocated shares will be allocated among
subscribing Eligible Account Holders proportionately, based on the amount of
their respective qualifying deposits as compared to total qualifying deposits of
all Eligible Account Holders. Subscription Rights received by officers and
directors in this category based on their increased deposits in the Savings Bank
in the one-year period preceding January 15, 1995 are subordinated to the
Subscription Rights of other Eligible Account Holders.
Category 2: ESOP. The Plan of Conversion provides that the ESOP shall
receive nontransferable Subscription Rights to purchase up to 8% of the shares
of Common Stock issued in the Conversion. The ESOP intends to purchase 8% of
the shares of Common Stock issued in the Conversion. In the event the number of
shares offered in the Conversion is increased above the maximum of the Estimated
Valuation Range, the ESOP shall have a priority right to purchase any such
shares exceeding the maximum of the Estimated Valuation Range up to an aggregate
of 8% of the Common Stock.
Category 3: Supplemental Eligible Account Holders. Each depositor with
$50.00 or more on deposit at the Savings Bank as of June 30, 1996 will receive
nontransferable Subscription Rights to subscribe for up to the greater of 40,000
shares of Common Stock, one-tenth of 1% of the total offering of Common Stock or
15 times the product (rounded down to the next whole number) obtained by
multiplying the total number of shares of Common Stock to be issued by a
fraction of which the numerator is the amount of qualifying deposit of the
Supplemental Eligible Account Holder and the denominator is the total amount of
qualifying deposits of all Supplemental Eligible Account Holders. If the
exercise of Subscription Rights in this category results in an oversubscription,
shares of Common Stock will be allocated among subscribing Supplemental Eligible
Account Holders so as to permit each Supplemental Eligible Account Holder, to
the extent possible, to purchase a number of shares sufficient to make his or
her total allocation equal 100 shares or the number of shares actually
subscribed for, whichever is less. Thereafter, unallocated shares will be
allocated among subscribing Supplemental Eligible Account Holders
proportionately, based on the amount of their respective qualifying deposits as
compared to total qualifying deposits of all Supplemental Eligible Account
Holders.
Category 4: Other Members. Each depositor of the Savings Bank as of the
Voting Record Date, and each borrower with a loan outstanding on December 18,
1989, which continues to be outstanding as of the Voting Record Date, will
receive nontransferable Subscription Rights to purchase up to 40,000 shares of
Common Stock in the Conversion to the extent available following subscriptions
by Eligible Account Holders and Supplemental Eligible Account Holders. In the
event of an oversubscription, the available shares will be allocated
proportionately based on the amount of their respective subscriptions.
Subscription Rights are nontransferable. Persons selling or otherwise
transferring their Subscription Rights to subscribe for Common Stock in the
Subscription Offering or subscribing for Common Stock on behalf of another
person will be subject to forfeiture of such right and possible further
sanctions and penalties imposed by the OTS or another agency of the U.S.
Government. Each person exercising Subscriptions Rights will be required to
certify that he or she is purchasing such shares solely 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. Once tendered, subscription
orders cannot be revoked without the consent of the Savings Bank and the Holding
Company.
The Subscription Offering and all Subscription Rights under the Plan will
expire at Noon, Central Time, on ___________, 1996, whether or not the Savings
Bank has been able to locate each person entitled to such Subscription Rights.
OTS regulations require that the Holding Company complete the sale of Common
Stock within 45 days after the close of the Subscription Offering. The
Subscription Offering may be extended by the Holding
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Company and the Savings Bank up to ___________, 1996 without the OTS's approval.
If the Direct Community Offering and the Public Offerings are not completed by
__________, 1996 (or ___________, 1996, if the Subscription Offering is fully
extended), all funds received will be promptly returned with interest at the
passbook rate and all withdrawal authorizations will be canceled or, if
regulatory approval of an extension of the time period has been granted, all
subscribers and purchasers will be given the right to increase, decrease or
rescind their orders. If an extension of time is obtained, all subscribers will
be notified of such extension and of the duration of any extension that has been
granted, and will be given the right to increase, decrease or rescind their
orders. If an affirmative response to any resolicitation is not received by the
Holding Company from a subscriber, the subscriber's order will be rescinded and
all funds received will be promptly returned with interest (or withdrawal
authorizations will be canceled). No single extension can exceed 90 days.
Direct Community Offering. After the Subscription Offering, the Holding
Company may offer shares of the Common Stock to certain members of the general
public in a Direct Community Offering with preference given to natural persons
residing in the Local Community. Purchasers in the Direct Community Offering,
together with their associates and groups acting in concert, are each eligible
to purchase up to 9.99% of the shares of Common Stock in the Conversion. In the
event an insufficient number of shares are available to fill orders in the
Direct Community Offering, the available shares will be allocated on a pro rata
basis determined by the amount of the respective orders. Orders for the Common
Stock in the Direct Community Offering will be filled to the extent such shares
remain available after satisfaction of all orders received in the Subscription
Offering. The Direct Community Offering may terminate as early as Noon, Central
Time, on ___________, 1996 or any date thereafter, however, in no case later
than ___________, 1996, unless extended. Any extensions beyond ___________,
1996 would require a resolicitation of orders, wherein subscribers would be
given the opportunity to continue their orders, in which case they will need to
reconfirm affirmatively their subscriptions prior to the expiration of the
resolicitation offering or their subscription funds will be promptly refunded
with interest at the passbook rate, or be permitted to modify or cancel their
subscriptions. The right of any person to purchase shares in the Direct
Community Offering is subject to the absolute right of the Holding Company and
the Savings Bank to accept or reject such purchases in whole or in part. The
Holding Company presently intends to terminate the Direct Community Offering as
soon as it has received orders for all shares available for purchase in the
Conversion.
If all of the Common Stock offered in the Subscription Offering is
subscribed for, no Common Stock will be available for purchase in the Direct
Community Offering and all funds submitted pursuant to the Direct Community
Offering will be refunded promptly with interest.
Public Offering. In the event that shares of Common Stock remain
unsubscribed for after the completion of the Subscription and Direct Community
Offering, these shares may be sold to underwriters for resale in the Public
Offering. It is anticipated that EVEREN Securities will serve as the managing
underwriter of such Public Offering. An underwriting agreement between the
Holding Company and EVEREN Securities, with respect to the Public Offering, will
not be executed until after the completion of the Subscription and Direct
Community Offering. Whether the Public Offering occurs and an underwriting
agreement with EVEREN Securities is executed will depend upon, among other
things, the negotiation of a mutually acceptable underwriting agreement, the
market conditions then prevailing, the aggregate market value of the Common
Stock not subscribed for in the Subscription and Direct Community Offering and
the then current financial condition of the Savings Bank. In the event that
there is a Public offering, it is expected that EVEREN Securities will receive
underwriting compensation in an amount to be determined by the Holding Company
and EVEREN Securities, which is currently estimated to be 7.0% of the aggregate
Actual Purchase Price of the Common Stock sold in the Public Offering.
The number of shares of Common Stock to be sold in the Public Offering, if
any, at the Purchase Price per share will be determined by EVEREN Securities and
the Holding Company. No person may purchase in the Public Offering shares of
Common Stock with an aggregate purchase price of more than $400,000. Shares of
Common Stock purchased in the Direct Community Offering will be counted toward
meeting the maximum purchase limitations of the Public Offering.
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The Public Offering will terminate no more than 45 days following the
Expiration Date, unless extended by the Holding Company with the approval of the
OTS. Such extensions may not be beyond _______, 1998.
In the event the Savings Bank is unable to find purchasers from the general
public for all unsubscribed shares, other purchase arrangements will be made by
the Board of Directors of the Savings Bank, if feasible. Such other
arrangements will be subject to the approval of the OTS. The OTS may grant one
or more extensions of the offering period, provided that (1) no single extension
exceeds 90 days, (2) subscribers are given the right to increase, decrease or
rescind their subscriptions during the extension period, and (3) the extensions
do not go more than two years beyond the date on which the members approved the
Plan. If the Conversion is not consummated by __________, 1996 (or, if the
Subscription, Direct Community and Public Offerings are fully extended, by
___________, 1996), either all funds received will be returned with interest
(and withdrawal authorizations canceled) or, if the OTS has granted an extension
of such period, all subscribers will be given the right to increase, decrease or
rescind their subscriptions at any time prior to 20 days before the end of the
extension period. If an extension of time is obtained, all subscribers will be
notified of such extension and of their rights to modify their orders. If an
affirmative response to any resolicitation is not received by the Holding
Company from a subscriber, the subscriber's order will be rescinded and all
funds received will be promptly returned with interest (or withdrawal
authorizations will be canceled). No single extension can exceed 90 days.
Persons in Non-Qualified States. The Holding Company and the Savings Bank
will make reasonable efforts to comply with the securities laws of all states in
the United States in which persons entitled to subscribe for stock pursuant to
the Plan reside. However, the Holding Company and the Savings Bank are not
required to offer stock in the Subscription Offering to any person who resides
in a foreign country or resides in a state of the United States with respect to
which (i) a small number of persons otherwise eligible to subscribe for shares
of Common Stock reside in such state; or (ii) the Holding Company or the Savings
Bank determines that compliance with the securities laws of such state would be
impracticable for reasons of cost or otherwise, including but not limited to a
request or requirement that the Holding Company and the Savings Bank or their
officers, directors or trustees register as a broker, dealer, salesman or
selling agent, under the securities laws of such state, or a request or
requirement to register or otherwise qualify the Subscription Rights or Common
Stock for sale or submit any filing with respect thereto in such state. Where
the number of persons eligible to subscribe for shares in one state is small,
the Holding Company and the Savings Bank will base their decision as to whether
or not to offer the Common Stock in such state on a number of factors, including
the size of accounts held by account holders in the state, the cost of reviewing
the registration and qualification requirements of the state (and of actually
registering or qualifying the shares) or the need to register the Holding
Company, its officers, directors or employees as brokers, dealers or salesmen.
Limitations on Purchases of Shares
The Plan of Conversion provides for certain additional limitations to be
placed upon the purchase of Common Stock by eligible subscribers and others in
the Conversion. Each subscriber must subscribe for a minimum of 25 shares.
Additionally, no person by himself may purchase more than $400,000 of the Common
Stock, and no person with any associate or group of persons acting in concert,
shall purchase more than 9.99% of the shares of Common Stock issued in the
Conversion. Officers, directors and their associates may not purchase, in the
aggregate, more than 33% of the shares of Common Stock offered in the
Conversion. For purposes of the Plan, the directors are not deemed to be acting
in concert solely by reason of their Board membership. Pro rata reductions
within each Subscription Rights category will be made in allocating shares to
the extent that the maximum purchase limitations are exceeded.
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.
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In general, a person who acts in concert with another person ("other party")
shall also be deemed to be acting in concert with any person who is also acting
in concert with that other party.
The term "associate" of a person is defined in the Plan to mean (i) any
corporation or organization (other than the Savings Bank or a majority-owned
subsidiary of the Savings Bank) 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 (excluding tax-qualified employee plans); and
(iii) any relative or spouse of such person, or any relative of such spouse, who
either has the same home as such person or who is a director or officer of the
Savings Bank or any of its parents or subsidiaries. For example, a corporation
of which a person serves as an officer would be an associate of such person,
and, therefore, all shares purchased by such corporation would be included with
the number of shares which such person could purchase individually under the
above limitations.
The term "officer" is defined in the Plan to mean an executive officer of
the Savings Bank, including its Chairman of the Board, President, Executive Vice
Presidents, Senior Vice Presidents, Chief Executive Officer and Chief Financial
Officer, and Vice Presidents in charge of principal business functions,
Secretary and Treasurer.
Common Stock purchased pursuant to the Conversion will be freely
transferable, except for shares purchased by directors and officers of the
Savings Bank and the Holding Company and for shares purchased by National
Association of Securities Dealers, Inc. ("NASD") members. See "-- Restrictions
on Transferability by Directors and Officers and NASD Members."
Plan of Distribution for the Subscription, Direct Community and Public Offerings
The Savings Bank has retained EVEREN Securities to consult with and to
advise the Savings Bank and the Holding Company, and to assist the Holding
Company, on a best efforts basis, in the distribution of the shares of Common
Stock in the Subscription and Community Offering. The services that EVEREN
Securities will provide include, but are not limited to (i) training the
employees of the Savings Bank who will perform certain ministerial functions in
the Subscription and Community Offering regarding the mechanics and regulatory
requirements of the stock offering process, (ii) managing the Conversion Center
by assisting interested stock subscribers and by keeping records of all stock
orders, (iii) preparing marketing materials, and (iv) assisting in the
solicitation of proxies from the Savings Bank's members for use at the Special
Meeting. For its services, EVEREN Securities will receive a completion fee of
$200,000 in addition to a $15,000 non-refundable retainer fee which the Savings
Bank has already paid. In the event that selected dealers are used to assist in
the sale of shares of Common Stock in the Community Offering, such dealers will
be paid a fee of up to 5.0% (including of a 1.5% management fee to be paid to
EVEREN Securities which will be credited against the completion fee) of the
aggregate Purchase Price of the shares sold by such dealers. The Holding Company
and the Savings Bank have agreed to reimburse EVEREN Securities for its out-of-
pocket expenses and its legal fees (up to a total of $45,000) and to indemnify
EVEREN Securities against certain claims or liabilities, including certain
liabilities under the Securities Act, and will contribute to payments EVEREN
Securities may be required to make in connection with any such claims or
liabilities.
Sales of shares of Common Stock will be made primarily by registered
representatives affiliated with EVEREN Securities or by the broker-dealers
managed by EVEREN Securities. A Conversion Center will be established at the
office of the Savings Bank. The Holding Company will rely on Rule 3a4-1 of the
Exchange Act and sales of Common Stock will be conducted within the requirements
of such Rule, so as to permit officers, directors and employees to participate
in the sale of the Common Stock in those states where the law so permits. No
officer, director or employee of the Holding Company or the Savings Bank will be
compensated directly or indirectly by the payment of commissions or other
remuneration in connection with his or her participation in the sale of Common
Stock.
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Procedure for Purchasing Shares in the Subscription and Direct Community
Offering
To ensure that each purchaser receives a prospectus at least 48 hours prior
to the Expiration Date in accordance with Rule 15c2-8 under the Exchange Act, no
Prospectus will be mailed any later than five days prior to such date or hand
delivered any later than two days prior to such date. Execution of the Order
Form will confirm receipt or delivery in accordance with Rule 15c2-8. Order
Forms will only be distributed with a Prospectus. The Savings Bank will accept
for processing only orders submitted on Order Forms.
To purchase shares in the Subscription and Direct Community Offering, the
accompanying original Stock Order Form (facsimile copies and photocopies will
not be accepted) and a fully executed separate Certification Form, along with
the required full payment for each share subscribed, or with appropriate
authorization for withdrawal from the subscriber's deposit account with the
Savings Bank (which may be given by completing the appropriate blanks in the
Order Form), must be received by the Savings Bank by Noon, Central Time, on the
Expiration Date. Stock Order Forms and Certification Forms which are not
received by such time or are executed defectively or are received without full
payment (or appropriate withdrawal instructions) are not required to be
accepted. The Holding Company and the Savings Bank have the right to waive or
permit the correction of incomplete or improperly executed Stock Order Forms,
but do not represent that they will do so. Pursuant to the Plan of Conversion,
the interpretation by the Holding Company and the Savings Bank of the terms and
conditions of the Plan of Conversion and of the Stock Order Form will be final.
Once received, an executed Stock Order Form or Certification Form may not be
modified, amended or rescinded without the consent of the Savings Bank unless
the Conversion has not been consummated within 45 days after the end of the
Subscription Offering, unless such period has been extended.
In order to ensure that Eligible Account Holders, Supplemental Eligible
Account Holders and Other Members are properly identified as to their stock
purchase priorities, depositors as of the Eligibility Record Date (January 15,
1995) and/or the Supplemental Eligibility Record Date (June 30, 1996) and/or the
Voting Record Date (July 19, 1996) must list all accounts on the Stock Order
Form giving all names in each account, the account number and the approximate
account balance as of such date.
Full payment for subscriptions may be made (i) in cash if delivered in
person at the Savings Bank, (ii) by check, bank draft, or money order, or (iii)
by authorization of withdrawal from deposit accounts maintained with the Savings
Bank. Appropriate means by which such withdrawals may be authorized are
provided on the Order Form. No wire transfers will be accepted and full payment
is required. Interest will be paid on payments made by cash, check, bank draft
or money order at the Savings Bank's passbook rate from the date payment is
received until the consummation or termination of the Conversion. If payment is
made by authorization of withdrawal from deposit accounts, the funds authorized
to be withdrawn from a deposit account will continue to accrue interest at the
contractual rates until consummation or termination of the Conversion (unless
the certificate matures after the date of receipt of the Order Form but prior to
closing, in which case funds will earn interest at the passbook rate from the
date of maturity until consummation of the Conversion), but a hold will be
placed on such funds, thereby making them unavailable to the depositor until
consummation or termination of the Conversion. At the consummation of the
Conversion the funds received in the Offerings will be used to purchase the
shares of Common Stock ordered. The shares issued in the Conversion cannot and
will not be insured by the FDIC or any other government agency. In the event
that the Conversion is not consummated for any reason, all funds submitted will
be promptly refunded with interest as described above.
If a subscriber authorizes the Savings Bank to withdraw the amount of the
purchase price from his or her deposit account, the Savings Bank will do so as
of the effective date of Conversion. The Savings Bank will waive any applicable
penalties for early withdrawal from certificate accounts. If the remaining
balance in a certificate account is reduced below the applicable minimum balance
requirement at the time that the funds actually are transferred under the
authorization the certificate will be canceled at the time of the withdrawal,
without penalty, and the remaining balance will earn interest at the Savings
Bank's passbook rate.
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If the ESOP subscribes for shares during the Subscription Offering, the
ESOP will not be required to pay for the shares subscribed for at the time it
subscribes, but rather may pay for such shares of Common Stock subscribed for at
the Purchase Price upon consummation of the Conversion, provided that there is
in force from the time of its subscription until such time, a loan commitment
from an unrelated financial institution or the Holding Company to lend to the
ESOP, at such time, the aggregate Purchase Price of the shares for which it
subscribed.
IRAs maintained in the Savings Bank do not permit investment in the Common
Stock. A depositor interested in using his or her IRA funds to purchase Common
Stock must do so through a self-directed IRA. Since the Savings Bank does not
offer such accounts, it will allow such a depositor to make a trustee-to-trustee
transfer of the IRA funds to a trustee offering a self-directed IRA program with
the agreement that such funds will be used to purchase the Holding Company's
Common Stock in the Offerings. There will be no early withdrawal or IRS
interest penalties for such transfers. The new trustee would hold the Common
Stock in a self-directed account in the same manner as the Savings Bank now
holds the depositor's IRA funds. An annual administrative fee may be payable to
the new trustee. Depositors interested in using funds in an Savings Bank IRA to
purchase Common Stock should contact the Conversion Center at the Savings Bank
no later than __________, 1996 so that the necessary forms may be forwarded for
execution and returned prior to the Expiration Date. In addition, the
provisions of ERISA and IRS regulations require that officers, directors and 10%
shareholders who use self-directed IRA funds to purchase shares of Common Stock
in the Subscription and Direct Community Offering make such purchases for the
exclusive benefit of the IRAs.
Certificates representing shares of Common Stock purchased, and any refund
due, will be mailed to purchasers at such address as may be specified in
properly completed Stock Order Form to or the last address of such persons
appearing on the records of the Savings Bank as soon as practicable following
completion of the sale of all shares of Common Stock. Any certificates returned
as undeliverable will be disposed of in accordance with applicable law. Until
certificates for the Common Stock are available and delivered to subscribers and
purchasers, subscribers and purchasers may not be able to sell the shares of
Common Stock for which they subscribed or purchased.
Stock Pricing and Number of Shares to be Issued
Federal regulations require that the aggregate purchase price of the
securities sold in connection with the conversion of a thrift institution be
based upon an estimated pro forma market value of the Holding Company and the
Savings Bank, as converted (i.e., taking into account the expected receipt of
----
proceeds from the sale of securities in the Conversion), as determined by an
independent appraisal. The Savings Bank and the Holding Company have retained RP
Financial to prepare an appraisal of the pro forma market value of the Holding
Company and the Savings Bank, as converted, as well as a business plan. RP
Financial will receive a fee expected to total approximately $27,500 for its
appraisal services and preparation of a business plan, plus reasonable out-of-
pocket expenses incurred in connection with the appraisal. The Savings Bank has
agreed to indemnify RP Financial under certain circumstances against liabilities
and expenses (including legal fees) arising out of, related to, or based upon
the Conversion.
RP Financial has prepared an appraisal of the estimated pro forma market
value of the Holding Company and the Savings Banks, as converted, taking into
account the formation of the Holding Company as the holding company for the
Savings Bank. For its analysis, RP Financial undertook substantial
investigations to learn about the Savings Bank's business and operations.
Management supplied financial information, including annual financial
statements, information on the composition of assets and liabilities, and other
financial schedules. In addition to this information, RP Financial reviewed the
Savings Bank's Form AC Application for Approval of Conversion and the Holding
Company's Form SB-2 Registration Statement. Further, RP Financial visited the
Savings Bank's facilities and had discussions with the Savings Bank's management
and its special conversion legal counsel, Breyer & Aguggia. No detailed
individual analysis of the separate components of the Holding Company's or the
Savings Bank's assets and liabilities was performed in connection with the
evaluation.
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In estimating the pro forma market value of the Holding Company and the
Banks, as required by applicable regulatory guidelines, RP Financial's analysis
utilized three selected valuation procedures, the Price/Book ("P/B") method, the
Price/Earnings ("P/E") method, and Price/Assets ("P/A") method, all of which are
described in its report. RP Financial placed the greatest emphasis on the P/E
and P/B methods in estimating pro forma market value. In applying these
procedures, RP Financial reviewed among other factors, the economic make-up of
the Savings Bank's primary market area, the Savings Bank's financial performance
and condition in relation to publicly-traded institutions that RP Financial
deemed comparable to the Savings Bank, the specific terms of the offering of the
Holding Company's Common Stock, the pro forma impact of the additional capital
raised in the Conversion, conditions of securities markets in general, and the
market for thrift institution common stock in particular. RP Financial's
analysis provides an approximation of the pro forma market value of the Holding
Company and the Savings Bank based on the valuation methods applied and the
assumptions outlined in its report. Included in its report were certain
assumptions as to the pro forma earnings of the Holding Company after the
Conversion that were utilized in determining the appraised value. These
assumptions included expenses of $650,000 an assumed after-tax rate of return on
the net conversion proceeds of 3.4% purchases by the ESOP of 8% of the stock
sold in the Conversion and purchases in the open market by the MRP of a number
of shares equal to 4% of the stock sold in the Conversion at the Purchase Price.
See "PRO FORMA DATA" for additional information concerning these assumptions.
The use of different assumptions may yield somewhat different results.
On the basis of the foregoing, RP Financial has advised the Holding Company
and the Savings Bank that, in its opinion, as of June 14, 1996, as updated as of
August 7, 1996, the aggregate estimated pro forma market value of the Holding
Company and the Banks and, therefore, the Common Stock was within the valuation
range of $14,025,000 to $18,975,000 with a midpoint of $16,500,000. After
reviewing the methodology and the assumptions used by RP Financial in the
preparation of the appraisal, the Board of Directors established the Estimated
Valuation Range which is equal to the valuation range of $14,025,000 to
$18,975,000 with a midpoint of $16,500,000. Assuming that the shares are sold at
$10.00 per share in the Conversion, the estimated number of shares would be
between 1,402,500 and 1,897,500 with a midpoint of 1,650,000. The Purchase Price
of $10.00 was determined by discussion among the Boards of Directors of the
Savings Bank and the Holding Company and EVEREN Securities, taking into account,
among other factors (i) the requirement under OTS regulations that the Common
Stock be offered in a manner that will achieve the widest distribution of the
stock and (ii) desired liquidity in the Common Stock subsequent to the
Conversion. Since the outcome of the Offerings relate in large measure to market
conditions at the time of sale, it is not possible to determine the exact number
of shares that will be issued by the Holding Company at this time. The Estimated
Valuation Range may be amended, with the approval of the OTS, if necessitated by
developments following the date of such appraisal in, among other things, market
conditions, the financial condition or operating results of the Savings Bank,
regulatory guidelines or national or local economic conditions.
RP Financial's appraisal report is filed as an exhibit to the Registration
Statement. See "ADDITIONAL INFORMATION."
If, upon completion of the Subscription and Direct Community Offering, at
least the minimum number of shares are subscribed for, RP Financial, after
taking into account factors similar to those involved in its prior appraisal,
will determine its estimate of the pro forma market value of the Banks and the
Holding Company upon Conversion, as of the close of the Subscription and Direct
Community Offering.
No sale of the shares will take place unless prior thereto RP Financial
confirms to the OTS that, to the best of RP Financial's knowledge and judgment,
nothing of a material nature has occurred which would cause it to conclude that
the actual total purchase price on an aggregate basis was incompatible with its
estimate of the total pro forma market value of the Holding Company and the
Banks at the time of the sale. If, however, the facts do not justify such a
statement, the Subscription, Direct Community and Public Offerings or other sale
may be canceled, a new Estimated Valuation Range and price per share set and new
Subscription, Direct Community and Public Offerings held. Under such
circumstances, subscribers would have the right to modify or rescind their
subscriptions and to have their subscription funds returned promptly with
interest and holds on funds authorized for withdrawal from deposit accounts
would be released or reduced.
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PAGE>
Depending upon market and financial conditions, the number of shares issued
may be more or less than the range in number of shares shown above. In the
event the total amount of shares issued is less than 1,402,500 or more than
2,182,125, 15% above the maximum of the Estimated Valuation Range), for
aggregate gross proceeds of less than $14,025,000 or more than $21,821,250
subscription funds will be returned promptly with interest to each subscriber
unless he indicates otherwise. In the event a new valuation range is
established by RP Financial, such new range will be subject to approval by the
OTS.
If purchasers cannot be found for an insignificant residue of unsubscribed
shares from the general public, other purchase arrangements will be made by the
Boards of Directors of the Savings Bank and the Holding Company, if possible.
Such other purchase arrangements will be subject to the approval of the OTS and
may provide for purchases for investment purposes by directors, officers, their
associates and other persons in excess of the limitations provided in the Plan
of Conversion and in excess of the proposed director purchases set forth herein,
although no such purchases are currently intended. If such other purchase
arrangements cannot be made, the Plan will terminate.
In formulating its appraisal, RP Financial relied upon the truthfulness,
accuracy and completeness of all documents the Savings Bank furnished it. RP
Financial also considered financial and other information from regulatory
agencies, other financial institutions, and other public sources, as
appropriate. While RP Financial believes this information to be reliable, RP
Financial does not guarantee the accuracy or completeness of such information
and did not independently verify the financial statements and other data
provided by the Savings Bank and the Holding Company or independently value the
assets or liabilities of the Holding Company and the Savings Bank. The
appraisal by RP Financial is not intended to be, and must not be interpreted as,
a recommendation of any kind as to the advisability of voting to approve the
Conversion or of purchasing shares of Common Stock. Moreover, because the
appraisal is necessarily based on many factors which change from time to time,
there is no assurance that persons who purchase such shares in the Conversion
will later be able to sell shares thereafter at prices at or above the Purchase
Price.
Restrictions on Repurchase of Stock
Upon consummation of the Conversion, the Board of Directors of the Holding
Company will have the authority to adopt stock repurchase plans, subject to
statutory and regulatory requirements, including the OTS regulations applicable
for three years from the consummation of the Conversion. Pursuant to OTS
regulations, OTS-regulated savings associations (and their holding companies)
may not for a period of three years from the date of an institution's mutual-to-
stock conversion repurchase any of its common stock from any person, except in
the event of (i) an offer made to all of its stockholders to repurchase the
common stock on a pro rata basis, approved by the OTS; (ii) the repurchase of
qualifying shares of a director; or (iii) a purchase in the open market by a
tax-qualified or non-tax-qualified employee stock benefit plan in an amount
reasonable and appropriate to fund the plan. Furthermore, any repurchases of its
common stock are prohibited if the effect thereof would cause the association's
regulatory capital to be reduced below (a) the amount required for the
liquidation account or (b) the regulatory capital requirements imposed by the
OTS. Repurchases are generally prohibited during the first year following
conversion. However, recent OTS policy has relaxed this restriction,
particularly during the second six months after conversion. While an applicant
needs to demonstrate the existence of "exceptional circumstances" during the
first six months after conversion, the OTS has indicated that it would analyze
repurchases during months six through 12 after conversion on a case-by-case
basis. Upon 10 days' written notice to the OTS, and if the OTS does not object,
an institution may make open market repurchases of its outstanding common stock
during years two and three following the conversion, provided that (x) no more
than 5% of the outstanding common stock is to be purchased during any 12-month
period, (y) the repurchases do not cause the association to become
undercapitalized as defined under the OTS prompt corrective action regulations
and (z) the repurchase would not adversely affect the financial condition of the
association. No assurances, however, can be given that the OTS will approve a
repurchase program under current policy or that such policy will not change or
become more restrictive.
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Shares to Be Purchased by Management Pursuant to Subscription Rights
The following table sets forth certain information as to the approximate
purchases of Common Stock by each director and executive officer of the Savings
Bank, including their associates, as defined by applicable regulations. No
individual has entered into a binding agreement with respect to such intended
purchases. Directors and officers of the Savings Bank and their associates may
not purchase in excess of 33% of the shares sold in the Conversion and,
therefore, actual purchases could be more or less than indicated below. For
purposes of the following table, it has been assumed that sufficient shares will
be available to satisfy subscriptions in all categories. Directors, officers
and staff members will pay the same price for the shares for which they
subscribe as the price that will be paid by all other subscribers.
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<TABLE>
<CAPTION>
Percent of
Shares at
Name and Maximum of
Position with Anticipated Number of Anticipated Dollar Estimated
the Savings Bank Shares Purchased(1) Amount Purchased(1) Valuation Range(1)
---------------- ---------------- ---------------- ---------------
<S> <C> <C> <C>
Michael W. Welge 187,853 $1,878,530 9.99%
Chairman of the Board,
Chief Financial Officer
and Director
Howard A. Boxdorfer 20,000 200,000 1.06
President and Director
Edward K. Collins 30,000 300,000 1.58
Executive Vice President,
Chief Executive Officer and
Director
Thomas E. Welch, Jr. 17,500 175,000 0.94
Senior Vice President
and Director
John R. Beck, M.D. 50,000 500,000 2.64
Director
Allen R. Verseman 50,000 500,000 2.64
Director
James C. McDonald 20,000 200,000 1.06
Director
Carl H. Welge 12,500 125,000 0.66
Director
Mary Jo Homan 1,500 15,000 0.09
Treasurer
Robert H. Gross 2,000 20,000 0.11
Vice President and Secretary
William P. Wingerter, Sr. 4,000 40,000 0.22
------- ---------- -----
Vice President
and Branch Manager
Total 395,353 $ 953,530 20.84%
------- ---------- -----
- -----------------
</TABLE>
(1) Excludes any shares awarded pursuant to the ESOP and MRP and options to
acquire shares pursuant to the Stock Option Plan. For a description of the
number of shares to be purchased by the ESOP and expected awards under the
MRP and Stock Option Plan, see "MANAGEMENT OF THE SAVINGS BANK -- Benefits
-- Employee Stock Ownership Plan," "-- Benefits -- 1996 Stock Option Plan"
and "-- Benefits -- Management Recognition Plan."
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Restrictions on Transferability by Directors and Officers and NASD Members
Shares of Common Stock purchased by directors and officers of the Holding
Company may not be sold for a period of one year following consummation of the
Conversion, except in the event of the death of the stockholder or in any
exchange of the Common Stock in connection with a merger or acquisition of the
Holding Company. Shares of Common Stock received by directors or officers upon
exercise of options issued pursuant to the Stock Option Plan are not subject to
this restriction. Accordingly, shares of Common Stock issued by the Holding
Company to directors and officers shall bear a legend giving appropriate notice
of the restriction, and, in addition, the Holding Company will give appropriate
instructions to the transfer agent for the Holding Company's Common Stock with
respect to the restriction on transfers. Any shares issued to directors and
officers as a stock dividend, stock split or otherwise with respect to
restricted Common Stock shall be subject to the same restrictions.
Purchases of outstanding shares of Common Stock of the Holding Company by
directors, executive officers (or any person who was an executive officer or
director of the Savings Bank after adoption of the Plan of Conversion) and their
associates during the three-year period following Conversion may be made only
through a broker or dealer registered with the SEC, except with the prior
written approval of the OTS. This restriction does not apply, however, to
negotiated transactions involving more than 1% of the Holding Company's
outstanding Common Stock or to the purchase of stock pursuant to the Stock
Option Plan.
The Holding Company has filed with the SEC a registration statement under
the Securities Act for the registration of the Common Stock to be issued
pursuant to the Conversion. The registration under the Securities Act of shares
of the Common Stock to be issued in the Conversion does not cover the resale of
such shares. Shares of Common Stock purchased by persons who are not affiliates
of the Holding Company may be resold without registration. Shares purchased by
an affiliate of the Holding Company will be subject to the resale restrictions
of Rule 144 under the Securities Act. If the Holding Company meets the current
public information requirements of Rule 144 under the Securities Act, each
affiliate of the Holding Company who complies with the other conditions of Rule
144 (including those that require the affiliate's sale to be aggregated with
those of certain other persons) would be able to sell in the public market,
without registration, a number of shares not to exceed, in any three-month
period, the greater of (i) 1% of the outstanding shares of the Holding Company
or (ii) the average weekly volume of trading in such shares during the preceding
four calendar weeks. Provision may be made in the future by the Holding Company
to permit affiliates to have their shares registered for sale under the
Securities Act under certain circumstances.
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.
RESTRICTIONS ON ACQUISITION OF THE HOLDING COMPANY
The following discussion is a summary of certain provisions of federal law
and regulations and Delaware corporate law, as well as the Certificate of
Incorporation and Bylaws of the Holding Company, relating to stock ownership and
transfers, the Board of Directors and business combinations, all of which may be
deemed to have "anti-takeover" effects. The description of these provisions is
necessarily general and reference should be made to the actual law and
regulations and to the Certificate of Incorporation and Bylaws of the Holding
Company. See "ADDITIONAL INFORMATION" as to how to obtain a copy of these
documents.
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<PAGE>
Conversion Regulations
OTS regulations prohibit any person from making an offer, announcing an
intent to make an offer or participating in any other arrangement to purchase
stock or acquiring stock or subscription rights in a converting institution (or
its holding company) from another person prior to completion of its conversion.
Further, upon consummation of the Conversion, the Holding Company will be
subject to an additional provision of OTS regulations that, without the prior
written approval of the OTS, no person may make such an offer or announcement of
an offer to purchase shares or actually acquire shares in the converting
institution (or its holding company) for a period of three years from the date
of the completion of the conversion if, upon the completion of such offer,
announcement or acquisition, that person would become the beneficial owner of
more than 10% of the outstanding stock of the institution (or its holding
company). The OTS has defined "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 other group
formed for the purpose of acquiring, holding or disposing of securities of an
insured institution. However, offers made exclusively to an association (or its
holding company) or an underwriter or member of a selling group acting on the
converting institution's (or its holding company's) behalf for resale to the
general public are excepted. The regulation also provides civil penalties for
willful violation or assistance in any such violation of the regulation by any
person connected with the management of the converting institution (or its
holding company) or who controls more than 10% of the outstanding shares or
voting rights of a converting or converted institution (or its holding company).
Change of Control Regulations
Under the Change in Bank Control Act, no person may acquire control of an
insured federal savings association or its parent holding company unless the OTS
has been given 60 days' prior written notice and has not issued a notice
disapproving the proposed acquisition. In addition, OTS regulations provide
that no company may acquire control of a savings association 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.
Control, as defined under federal law, means ownership, control of or
holding irrevocable proxies representing more than 25% of any class of voting
stock, control in any manner of the election of a majority of the savings
association's directors, or a determination by the OTS that the acquiror has the
power to direct, or directly or indirectly to exercise a controlling influence
over, the management or policies of the institution. Acquisition of more than
10% of any class of a savings association's voting stock, if the acquiror also
is subject to any one of eight "control factors," constitutes a rebuttable
determination of control under the regulations. Such control factors include
the acquiror being one of the two largest stockholders. The determination of
control may be rebutted by submission to the OTS, prior to the acquisition of
stock or the occurrence of any other circumstances giving rise to such
determination, of a statement setting forth facts and circumstances which would
support a finding that no control relationship will exist and containing certain
undertakings. The regulations provide that persons or companies which acquire
beneficial ownership exceeding 10% or more of any class of a savings
association's stock must file with the OTS a certification form that the holder
is not in control of such institution, is not subject to a rebuttable
determination of control and will take no action which would result in a
determination or rebuttable determination of control without prior notice to or
approval of the OTS, as applicable. There are also rebuttable presumptions in
the regulations concerning whether a group "acting in concert" exists, including
presumed action in concert among members of an "immediate family."
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 institution, or (iii) the competence,
experience or integrity of the acquiring person indicates that it would not be
in the interest of the depositors or the public to permit the acquisition of
control by such person.
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<PAGE>
Anti-takeover Provisions in the Holding Company's Certificate of Incorporation
and Bylaws and Delaware Law
A number of provisions of the Holding Company's Certificate of
Incorporation and Bylaws deal with matters of corporate governance and certain
rights of stockholders. The following discussion is a general summary of
certain provisions of the Holding Company's Certificate of Incorporation and
Bylaws and regulatory provisions relating to stock ownership and transfers, the
Board of Directors and business combinations, which might be deemed to have a
potential "anti-takeover" effect. These provisions may have the effect of
discouraging a future takeover attempt which is not approved by the Board of
Directors but which individual Holding Company 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 incumbent Board of
Directors or management of the Holding Company more difficult. The following
description of certain of the provisions of the Certificate of Incorporation and
Bylaws of the Holding Company is necessarily general, and reference should be
made in each case to such Certificate of Incorporation and Bylaws, which are
incorporated herein by reference. See "ADDITIONAL INFORMATION" as to how to
obtain a copy of these documents.
Board of Directors. The Board of Directors of the Holding Company is
divided into three classes, each of which shall contain approximately one-third
of the whole number of the members of the Board. The members of each class
shall be elected for a term of three years, with the terms of office of all
members of one class expiring each year so that approximately one-third of the
total number of directors are elected each year. The Holding Company's
Certificate of Incorporation provides that the size of the Board shall be as set
forth in the Bylaws. The Bylaws currently set the number of directors at eight.
The Certificate of Incorporation provides that any vacancy occurring in the
Board, including a vacancy created by an increase in the number of directors,
shall be filled by a vote of two-thirds of the directors then in office 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. The classified Board is intended to provide for continuity of
the Board of Directors and to make it more difficult and time consuming for a
stockholder group to fully use its voting power to gain control of the Board of
Directors without the consent of the incumbent Board of Directors of the Holding
Company. The Certificate of Incorporation of the Holding Company provides that
a director may be removed from the Board of Directors prior to the expiration of
his term only for cause and only upon the vote of 80% of the outstanding shares
of voting stock. In the absence of this provision, the vote of the holders of a
majority of the shares could remove the entire Board, but only with cause, and
replace it with persons of such holders' choice.
Cumulative Voting, Special Meetings and Action by Written Consent. The
Certificate of Incorporation does not provide for cumulative voting for any
purpose. Moreover, the Certificate of Incorporation provides that special
meetings of stockholders of the Holding Company may be called only by the Board
of Directors of the Holding Company and that stockholders may take action only
at a meeting and not by written consent.
Authorized Shares. The Certificate of Incorporation authorizes the
issuance of 3,000,000 shares of Common Stock and 100,000 shares of preferred
stock. The shares of Common Stock and preferred stock were authorized in an
amount greater than that to be issued in the Conversion to provide the Holding
Company's Board of Directors with as much flexibility as possible to effect,
among other transactions, financings, acquisitions, stock dividends, stock
splits and the exercise of employee stock options. However, these additional
authorized shares may also be used by the Board of Directors consistent with its
fiduciary duty to deter future attempts to gain control of the Holding Company.
The Board of Directors also has sole authority to determine the terms of any one
or more series of preferred stock, including voting rights, conversion rates,
and liquidation preferences. As a result of the ability to fix voting rights
for a series of preferred stock, the Board has the power to the extent
consistent with its fiduciary duty to issue a series of preferred stock to
persons friendly to management in order to attempt to block a tender offer,
merger or other transaction by which a third party seeks control of the Holding
Company, and thereby assist members of management to retain their positions.
The Holding Company's Board currently has no plans for the issuance of
additional shares, other than the issuance of shares of Common Stock upon
exercise of stock options.
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<PAGE>
Stockholder Vote Required to Approve Business Combinations with Principal
Stockholders. The Certificate of Incorporation requires the approval of the
holders of at least 80% of the Holding Company's outstanding shares of voting
stock to approve certain "Business Combinations" (as defined therein) involving
a "Related Person" (as defined therein) except in cases where the proposed
transaction has been approved in advance by a majority of those members of the
Holding Company's Board of Directors who are unaffiliated with the Related
Person and were directors prior to the time when the Related Person became an
Related Person. The term "Related Person" is defined to include any individual,
corporation, partnership or other entity (other than the Holding Company or its
subsidiary) which owns beneficially or controls, directly or indirectly, 10% or
more of the outstanding shares of voting stock of the Holding Company or an
affiliate of such person or entity. This provision of the Certificate of
Incorporation applies to any "Business Combination," which is defined to
include: (i) any merger or consolidation of the Holding Company with or into
any Related Person; (ii) any sale, lease, exchange, mortgage, transfer, or other
disposition of 25% or more of the assets of the Holding Company or combined
assets of the Holding Company and its subsidiaries to a Related Person; (iii)
any merger or consolidation of a Related Person with or into the Holding Company
or a subsidiary of the Holding Company; (iv) any sale, lease, exchange,
transfer, or other disposition of 25% or more of the assets of a Related Person
to the Holding Company or a subsidiary of the Holding Company; (v) the issuance
of any securities of the Holding Company or a subsidiary of the Holding Company
to a Related Person; (vi) the acquisition by the Holding Company or a subsidiary
of the Holding Company of any securities of a Related Person; (vii) any
reclassification of common stock of the Holding Company or any recapitalization
involving the common stock of the Holding Company; or (viii) any agreement or
other arrangement providing for any of the foregoing.
Under Delaware law, absent this provision, business combinations, including
mergers, consolidations and sales of substantially all of the assets of a
corporation must, subject to certain exceptions, be approved by the vote of the
holders of a majority of the outstanding shares of common stock of the Holding
Company and any other affected class of stock. One exception under Delaware law
to the majority approval requirement applies to stockholders owning 15% or more
of the common stock of a corporation for a period of less than three years.
Such 15% stockholder, in order to obtain approval of a business combination,
must obtain the approval of two-thirds of the outstanding stock, excluding the
stock owned by such 15% stockholder, or satisfy other requirements under
Delaware law relating to board of director approval of his or her acquisition of
the shares of the Holding Company. The increased stockholder vote required to
approve a business combination may have the effect of foreclosing mergers and
other business combinations which a majority of stockholders deem desirable and
place the power to prevent such a merger or combination in the hands of a
minority of stockholders.
Amendment of Certificate of Incorporation and Bylaws. Amendments to the
Holding Company's Certificate of Incorporation must be approved by a majority
vote of its Board of Directors and also by a majority of the outstanding shares
of its voting stock, provided, however, that an affirmative vote of at least 80%
of the outstanding voting stock entitled to vote (after giving effect to the
provision limiting voting rights) is required to amend or repeal certain
provisions of the Certificate of Incorporation, including the provision limiting
voting rights, the provisions relating to approval of certain business
combinations, calling special meetings, the number and classification of
directors, director and officer indemnification by the Holding Company and
amendment of the Holding Company's Bylaws and Certificate of Incorporation. The
Holding Company's Bylaws may be amended by its Board of Directors, or by a vote
of 80% of the total votes eligible to be voted at a duly constituted meeting of
stockholders.
Stockholder Nominations and Proposals. The Certificate of Incorporation of
the Holding Company requires a stockholder who intends to nominate a candidate
for election to the Board of Directors, or to raise new business at a
stockholder meeting to give not less than 30 nor more than 60 days' advance
notice to the Secretary of the Holding Company. The notice provision requires a
stockholder who desires to raise new business to provide certain information to
the Holding Company concerning the nature of the new business, the stockholder
and the stockholder's interest in the business matter. Similarly, a stockholder
wishing to nominate any person for election as a director must provide the
Holding Company with certain information concerning the nominee and the
proposing stockholder.
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Purpose and Takeover Defensive Effects of the Holding Company's Certificate
of Incorporation and Bylaws. The Board of Directors of the Savings Bank
believes that the provisions described above are prudent and will reduce the
Holding 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 Savings Bank in the orderly
deployment of the Conversion proceeds into productive assets during the initial
period after the Conversion. The Board of Directors believes these provisions
are in the best interest of the Savings Bank and the Holding Company and its
stockholders. In the judgment of the Board of Directors, the Holding Company's
Board will be in the best position to determine the true value of the Holding
Company and to negotiate more effectively for what may be in the best interests
of its stockholders. Accordingly, the Board of Directors believes that it is in
the best interest of the Holding Company and its stockholders to encourage
potential acquirors to negotiate directly with the Board of Directors of the
Holding Company and that these provisions will encourage such negotiations and
discourage hostile 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 a price reflective of the true value of the
Holding Company and which is in the best interest 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 of the Holding
Company and its stockholders, with due consideration given to matters such as
the management and business of the acquiring corporation and maximum strategic
development of the Holding Company's assets.
An unsolicited takeover proposal can seriously disrupt the business and
management of a corporation and cause it great expense. Although a tender offer
or other takeover attempt may be made at a price substantially above the current
market prices, such offers are sometimes made for less than all of 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 objective may not be similar to
those of the remaining stockholders. The concentration of control, which could
result from a tender offer or other takeover attempt, could also deprive the
Holding Company's remaining stockholders of benefits of certain protective
provisions of the Exchange Act, if the number of beneficial owners became less
than the 300 thereby allowing for Exchange Act deregistration.
Despite the belief of the Savings Bank and the Holding Company as to the
benefits to stockholders of these provisions of the Holding 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 Holding Company's Board, but pursuant to 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 any opportunity to do so. Such provisions will also render the removal
of the Holding Company's Board of Directors and of management more difficult.
The Board of Directors of the Savings Bank and the Holding Company, however,
have concluded that the potential benefits outweigh the possible disadvantages.
Pursuant to applicable law, at any annual or special meeting of its
stockholders after the Conversion, the Holding Company may adopt additional
charter provisions regarding the acquisition of its equity securities that would
be permitted for a Delaware business corporation. The Holding Company and the
Savings Bank do not presently intend to propose the adoption of further
restrictions on the acquisition of the Holding Company's equity securities.
The cumulative effect of the restriction on acquisition of the Holding
Company contained in the Certificate of Incorporation and Bylaws and Holding
Company, federal law and Delaware law may be to discourage potential takeover
attempts and perpetuate incumbent management, even though certain stockholders
of the Holding Company may deem a potential acquisition to be in their best
interests, or deem existing management not to be acting in their best interests.
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DESCRIPTION OF CAPITAL STOCK OF THE HOLDING COMPANY
General
The Holding Company is authorized to issue 3,000,000 shares of Common
Stock, par value of $.01 per share, and 100,000 shares of preferred stock, par
value of $.01 per share. The Holding Company currently expects to issue up to
1,897,500 shares of Common Stock and no shares of preferred stock in the
Conversion. Each share of the Holding Company's Common Stock will have the same
relative rights as, and will be identical in all respects with, each other share
of Common Stock. Upon payment of the Purchase Price for the common stock, in
accordance with the Plan of Conversion, all such stock will be duly authorized,
fully paid and nonassessable.
The Common Stock of the Holding 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 government agency.
Common Stock
Dividends. The Holding Company can pay dividends out of statutory surplus
or from certain net profits if, as and when declared by its Board of Directors.
The payment of dividends by the Holding Company is subject to limitations which
are imposed by law and applicable regulation. See "DIVIDEND POLICY" and
"REGULATION." The holders of Common Stock of the Holding Company will be
entitled to receive and share equally in such dividends as may be declared by
the Board of Directors of the Holding Company out of funds legally available
therefor. If the Holding Company issues preferred stock, the holders thereof
may have a priority over the holders of the Common Stock with respect to
dividends.
Stock Repurchases. The Plan and OTS regulations place certain limitations
on the repurchase of the Holding Company's capital stock. See "THE CONVERSION -
- - Restrictions on Repurchase of Stock" and "USE OF PROCEEDS."
Voting Rights. Upon Conversion, the holders of Common Stock of the Holding
Company will possess exclusive voting rights in the Holding Company. They will
elect the Holding Company's Board of Directors and act on such other matters as
are required to be presented to them under Delaware law or as are otherwise
presented to them by the Board of Directors. Except as discussed in
"RESTRICTIONS ON ACQUISITION OF THE HOLDING COMPANY," each holder of Common
Stock will be entitled to one vote per share and will not have any right to
cumulate votes in the election of directors. If the Holding Company issues
preferred stock, holders of the Holding Company preferred stock may also possess
voting rights. Certain matters require a vote of 80% of the outstanding shares
entitled to vote thereon. See "RESTRICTIONS ON ACQUISITION OF THE HOLDING
COMPANY."
As a federal mutual savings bank, corporate powers and control of the
Savings Bank are vested in its Board of Directors, who elect the officers of the
Savings Bank and who fill any vacancies on the Board of Directors as it exists
upon Conversion. Subsequent to Conversion, voting rights will be vested
exclusively in the owners of the shares of capital stock of the Savings Bank,
all of which will be owned by the Holding Company, and voted at the direction of
the Holding Company's Board of Directors. Consequently, the holders of the
Common Stock will not have direct control of the Savings Bank.
Liquidation. In the event of any liquidation, dissolution or winding up of
the Savings Bank, the Holding Company, as holder of the Savings Bank's capital
stock, would be entitled to receive, after payment or provision for payment of
all debts and liabilities of the Savings Bank (including all deposit accounts
and accrued interest thereon) and after distribution of the balance in the
special liquidation account to Eligible Account Holders and Supplemental
Eligible Account Holders (see "THE CONVERSION"), all assets of the Savings Bank
available for distribution. In the event of liquidation, dissolution or winding
up of the Holding Company, the holders of its common stock would be entitled to
receive, after payment or provision for payment of all its debts and
liabilities,
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all of the assets of the Holding Company available for distribution. If Holding
Company preferred stock is issued, the holders thereof may have a priority over
the holders of the Common Stock in the event of liquidation or dissolution.
Preemptive Rights; Redemption. Holders of the Common Stock of the Holding
Company will not be entitled to preemptive rights with respect to any shares
which may be issued. The Common Stock is not subject to redemption.
Preferred Stock
None of the shares of the authorized Holding Company preferred stock will
be issued in the Conversion and there are no plans to issue the preferred stock.
Such stock may be issued with such designations, powers, preferences and rights
as the Board of Directors may from time to time determine. The Board of
Directors can, without stockholder approval, issue preferred stock with voting,
dividend, liquidation and conversion rights which could dilute the voting
strength of the holders of the Common Stock and may assist management in
impeding an unfriendly takeover or attempted change in control.
Restrictions on Acquisition
Acquisitions of the Holding Company are restricted by provisions in its
Certificate of Incorporation and Bylaws and by the rules and regulations of
various regulatory agencies. See "REGULATION" and "RESTRICTIONS ON ACQUISITION
OF THE HOLDING COMPANY."
REGISTRATION REQUIREMENTS
The Holding Company will register the Common Stock with the SEC pursuant to
Section 12(g) of the Exchange Act upon the completion of the Conversion and will
not deregister its Common Stock for a period of at least three years following
the completion of the Conversion. Upon such registration, the proxy solicitation
and tender offer rules, insider trading reporting and restrictions, annual and
periodic reporting and other requirements of the Exchange Act will be
applicable.
LEGAL AND TAX OPINIONS
The legality of the Common Stock has been passed upon for the Holding
Company by Breyer & Aguggia, Washington, D.C. The federal tax consequences of
the Conversion have been opined upon by Breyer & Aguggia and the Illinois income
tax consequences of the Conversion have been opined upon by Bryan Cave LLP, St.
Louis, Missouri. Breyer & Aguggia and Bryan Cave LLP, have consented to the
references herein to their opinions. Certain legal matters will be passed upon
for EVEREN Securities, Inc. by Luse Lehman Gorman Pomerenk & Schick, P.C.,
Washington, D.C.
EXPERTS
The financial statements at December 31, 1995 and for the year ended
December 31, 1995 have been included in reliance on the report of KPMG Peat
Marwick LLP, independent certified public accountants, appearing elsewhere
herein and upon the authority of said firm as experts in accounting and
auditing.
The financial statements as of December 31, 1994 and for the two years in
the period ended December 31, 1994 included in this Prospectus have been audited
by Kerber, Eck & Braeckel LLP, independent certified public
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accountants, as stated in their report appearing herein, and have been so
included in reliance upon the report of such firm given upon their authority as
experts in accounting and auditing.
RP Financial has consented to the publication herein of the summary of its
letter to the Savings Bank setting forth its opinion as to the estimated pro
forma market value of the Holding Company and the Savings Bank and to the use of
its name and statements with respect to it appearing herein.
CHANGE IN ACCOUNTANTS
Prior to the fiscal year ended December 31, 1995, the Savings Bank's
financial statements were audited by Kerber, Eck & Braeckel LLP. Kerber, Eck &
Braeckel LLP was dismissed on December 12, 1995 and KPMG Peat Marwick LLP was
engaged on December 12, 1995 and continues as the independent auditors of the
Savings Bank. The decision to dismiss was recommended by the Audit Committee
and was approved by the Board of Directors. Accordingly, the Savings Bank's
statement of financial condition as of December 31, 1994 and related
consolidated statements of operations, equity and cash flows for the years ended
December 31, 1994 and 1993, and included in this Prospectus, were audited by
Kerber, Eck & Braeckel LLP and the financial statements for the year ended
December 31, 1995, and included in this Prospectus, were audited by KPMG Peat
Marwick LLP.
For the fiscal years ended December 31, 1994 and 1993 and up to the date of
the replacement of Kerber, Eck & Braeckel LLP, there were no disagreements with
Kerber, Eck & Braeckel LLP on any matter of accounting principles or practices,
financial statement disclosure or auditing scope or procedure which, if not
resolved to the satisfaction of Kerber, Eck & Braeckel LLP, would have caused it
to make a reference to the subject matter of the disagreement in connection with
its reports. The independent auditors' report on the financial statements for
the fiscal years ended December 31, 1994 and 1993 did not contain an adverse
opinion or a disclaimer of opinion, and was not qualified or modified as to
uncertainty, audit scope, or accounting principles. The Savings Bank did not
consult with KPMG Peat Marwick LLP during its two most recent fiscal years nor
during any subsequent interim period prior to its engagement regarding the
application of accounting principles to a specified transaction, either
completed or proposed, or the type of audit opinion that might be rendered on
the Savings Bank's financial statements.
ADDITIONAL INFORMATION
The Holding Company has filed with the SEC a Registration Statement on Form
S-1 (File No. 333-2470) under the Securities Act with respect to the Common
Stock to be offered in the Conversion. 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; 500 West
Madison Street, Suite 1400, Room 1100, Chicago, Illinois 60661; and 75 Park
Place, New York, New York 10007. 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 Savings Bank has filed with the OTS an Application for Approval of
Conversion, which includes proxy solicitation materials for the Savings Bank's
Special Meeting and certain other information. This Prospectus omits certain
information contained in such Application. The Application, including the proxy
solicitation materials, exhibits and certain other information that are a part
thereof, may 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 Regional Director
of the OTS at the Central Regional Office of the OTS, 200 West Madison Street,
Suite 1300, Chicago, Illinois, 60606.
120
<PAGE>
Index To Financial Statements
Chester Savings Bank, FSB
<TABLE>
<CAPTION>
Pages
<S> <C>
Independent Auditors' Reports..................................................... F-1
Balance Sheets as of March 31, 1996 (unaudited) December 31, 1995 and 1994........ F-3
Statements of Income for the Three Months Ended March 31, 1996 and 1995
(unaudited) and the Three Years Ended December 31, 1995, 1994 and 1993............ 23
Statements of Retained Earnings for the Three Months Ended March 31, 1996
and 1995 (unaudited) and the Three Years Ended December 31, 1995, 1994 and 1993... F-4
Statements of Cash Flows for Three Months Ended March 31, 1996 and 1995
(unaudited) and the Three Years Ended December 31, 1995, 1994 and 1993............ F-5
Notes to Financial Statements..................................................... F-6
</TABLE>
* * *
All schedules are omitted as the required information either is not
applicable or is included in the Financial Statements or related Notes.
Separate financial statements for the Holding Company have not been
included since it will not engage in material transactions, if any, until after
the Conversion. The Holding Company, which has engaged only in organizational
activities to date, has no significant assets, liabilities, revenues, expenses
or contingent liabilities.
121
<PAGE>
Independent Auditors' Report
----------------------------
The Board of Directors
Chester Savings Bank, FSB
Chester, Illinois:
We have audited the accompanying balance sheet of Chester Savings Bank, FSB (the
Savings Bank) as of December 31, 1995, and the related statements of income,
retained earnings, and cash flows for the year then ended. These financial
statements are the responsibility of the Savings Bank's management. Our
responsibility is to express an opinion on these financial statements based on
our audit. The accompanying financial statements of the Savings Bank as of
December 31, 1994 and for each of the years in the two-year period ended
December 31, 1994, were audited by other auditors whose report thereon dated
January 18, 1995, expressed an unqualified opinion on those statements.
We conducted our audit 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 audit provides a reasonable basis for our opinion.
In our opinion, the 1995 financial statements referred to above present fairly,
in all material respects, the financial position of Chester Savings Bank, FSB as
of December 31, 1995, and the results of its operations and its cash flows for
the year then ended, in conformity with generally accepted accounting
principles.
[SIGNATURE OF KPMG PEAT
MARWICK LLP APPEARS HERE]
KPMG Peat Marwick LLP
St. Louis, Missouri
February 13, 1996
F-1
<PAGE>
KERBER, ECK & BRAECKEL LLP
CERTIFIED PUBLIC ACCOUNTANT
1221 Broadway
Cape Girardeau, Missouri 63701-8502
314-334-0568 Fax 314-334-3962
---------------
Cape Girardeau, Missouri
Belleville, Illinois
Carbondale, Illinois
Milwaukee, Wisconsin
St. Louis, Missouri
Springfield, Illinois
Independent Auditors' Report
----------------------------
Board of Directors
Chester Savings Bank, FSB
We have audited the accompanying balance sheet of Chester Savings Bank, FSB as
of December 31, 1995, and the related statements of income, retained earnings,
and cash flows for each of the years inthe two year period ended December
31,1994. These financial statements are the responsibility of the
Savings 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 audit provides 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 Chester Savings Bank, FSB as of
December 31, 1994, and the results of its operations and its cash flows for each
of the years in the two year period ended December 31, 1994, in conformity with
generally accepted accounting principles.
[SIGNATURE OF KERBER ECK BRAECKEL LLP APPEARS HERE]
Cape Girardeau, Missouri
January 18, 1995
F-2
<PAGE>
CHESTER SAVINGS BANK, FSB
Balance Sheets
March 31, 1996 (Unaudited)
and December 31, 1995 and 1994
<TABLE>
<CAPTION>
December 31,
March 31, ---------------
Assets 1996 1995 1994
------ ---- ---- ----
(Unaudited)
<S> <C> <C> <C>
Cash $ 3,113,237 $ 1,773,061 $ 3,119,987
Interest-bearing deposits 1,677,511 3,493,066 1,623,319
Federal funds sold 5,500,000 5,400,000 2,500,000
------------ ------------ ------------
Total cash and cash equivalents 10,290,748 10,666,127 7,243,306
Certificates of deposit 4,141,673 9,761,774 18,582,302
Investment securities:
Available for sale, at market
value (cost of $17,503,111 and
$6,507,205 at March 31, 1996
and December 31, 1995,
respectively) 17,412,500 6,524,190 -
Held to maturity, at cost
(market value of $28,157,311,
$31,903,611, and $39,999,853
at March 31, 1996 and
December 31, 1995 and 1994,
respectively) 28,189,077 31,821,755 41,109,569
Mortgage-backed securities:
Available for sale, at market
value (cost of $2,105,408 and
$2,169,407 at March 31, 1996
and December 31, 1995,
respectively) 2,114,882 2,207,139 -
Held to maturity, at cost (market
value of $14,779,194,
$13,331,707, and $12,622,832
at March 31, 1996 and December
31, 1995 and 1994, respectively) 14,791,246 13,205,662 13,136,061
Loans receivable, net 55,753,534 57,021,009 58,156,573
Accrued interest receivable 927,895 636,592 785,112
Real estate acquired by
foreclosure, net 209,982 209,248 63,552
Stock in Federal Home Loan Bank,
at cost 622,000 604,300 595,200
Office property and equipment, net 1,831,262 1,843,286 1,946,084
Income taxes receivable - - 62,074
Other assets 521,501 279,910 75,628
------------ ------------ ------------
Total assets $ 136,806,300 $ 134,780,992 $ 141,755,461
------------ ============ ============ ============
Liabilities and Retained Earnings
---------------------------------
Savings deposits $ 108,514,632 $ 106,717,849 $ 129,711,933
Securities sold under agreements
to repurchase 15,000,000 15,000,000 -
Accrued interest on savings deposits 270,787 314,060 40,186
Accrued interest on securities
sold under agreements to repurchase 67,893 141,938 -
Advance payments by borrowers
for taxes and insurance 822,894 573,009 929,223
Income taxes payable 95,714 36,252 -
Deferred tax liability, net 39,781 103,886 120,260
Accrued expenses and other
liabilities 124,878 181,551 278,425
----------- ----------- -----------
Total liabilities 124,936,579 123,068,545 131,080,027
----------- ----------- -----------
Commitments and contingencies
Retained earnings -
substantially restricted 11,920,026 11,676,334 10,675,434
Unrealized gain (loss) on
securities available for
sale, net of tax (50,305) 36,113 -
----------- ----------- -----------
Total retained earnings 11,869,721 11,712,447 10,675,434
----------- ----------- -----------
Total liabilities and
retained earnings $ 136,806,300 $ 134,780,992 $ 141,755,461
=========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
F-3
<PAGE>
CHESTER SAVINGS BANK, FSB
Statements of Retained Earnings
Three months ended March 31, 1996 (Unaudited) and
years ended December 31, 1995, 1994, and 1993
<TABLE>
<CAPTION>
Unrealized
gain (loss)
Retained on securities
earnings - available Total
substantially for sale, retained
restricted net of tax earnings
---------- ---------- --------
<S> <C> <C> <C>
Balance, December 31, 1992 $ 8,788,360 $ (9,868) $ 8,778,492
Net income 894,030 - 894,030
Change in unrealized loss on
marketable equity securities - 9,868 9,868
---------- ------ ----------
Balance, December 31, 1993 9,682,390 - 9,682,390
Net income 993,044 - 993,044
---------- ------ ----------
Balance, December 31, 1994 10,675,434 - 10,675,434
Net income 1,000,900 - 1,000,900
Cumulative effect of transfer of
securities to available for
sale, net of tax - (33,465) (33,465)
Change in unrealized gain (loss)
on securities available for sale,
net of tax - 69,578 69,578
---------- ------ ----------
Balance, December 31, 1995 11,676,334 36,113 11,712,447
Net income 243,692 - 243,692
Change in unrealized gain (loss)
on securities available for sale,
net of tax - (86,418) (86,418)
---------- ------ ---------
Balance, March 31, 1996 $11,920,026 $(50,305) $11,869,721
========== ====== ==========
</TABLE>
See accompanying notes to financial statements.
F-4
<PAGE>
CHESTER SAVINGS BANK, FSB
Statements of Cash Flows
Three months ended March 31, 1996 and 1995 (Unaudited)
and years ended December 31, 1995, 1994, and 1993
<TABLE>
<CAPTION>
March 31, December 31,
------------- ----------------------------------
1996 1995 1995 1994 1993
---- ---- ---- ---- ----
(Unaudited)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income $ 243,692 $ 313,642 $ 1,000,900 $ 993,044 $ 894,030
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Cumulative effect of change in accounting
principle - - - - 227,097
Depreciation and amortization:
Office properties and equipment 25,770 29,675 118,168 128,605 113,897
Deferred fees, discounts, and premiums (26,655) (26,774) (82,198) (38,833) (25,071)
(Increase) decrease in accrued interest
receivable (291,303) (36,217) 148,520 (153,928) (18,286)
Increase (decrease) in accrued interest payable (117,318) 65,276 415,812 6,354 (15,091)
Increase (decrease) in income taxes, net 44,792 102,089 63,349 (12,475) (6,715)
Loss on sale of certificates of deposit 53,714 - - - -
Gain on sale of investment securities, net (6,837) (47,447) (52,497) - -
Gain on sale of mortgage-backed securities - - (45,919) - -
Provision for loan losses 7,500 (2,300) 161,319 69,309 29,627
FHLB stock dividend - (9,100) (9,100) - -
Net change in other assets and other liabilities (298,264) (414,205) (301,156) 58,569 68,497
------------ ----------- ------------ ------------ ------------
Net cash provided by (used in) operating
activities (364,909) (25,361) 1,417,198 1,050,645 1,267,985
------------ ----------- ------------ ------------ ------------
Cash flows from investing activities:
Principal repayments on:
Loans receivable 4,623,553 3,588,653 16,062,634 16,156,976 20,748,467
Mortgage-backed securities 462,698 447,388 1,637,310 2,340,955 3,164,335
Proceeds from the maturity of certificates of deposit 1,081,000 8,076,000 10,784,000 8,417,000 5,307,000
Proceeds from the sale of certificates of deposit 4,486,286 - - - -
Proceeds from the maturity of investment securities
available for sale 1,500,000 - 2,825,000 - -
Proceeds from the sale of investment securities
available for sale 3,010,078 3,993,047 29,417,029 - -
Proceeds from the maturity of investment securities
held to maturity 16,898,567 1,855,000 13,375,000 13,930,790 9,373,462
Proceeds from the sale of mortgage-backed securities
held to maturity - - 2,409,229 - -
Proceeds from redemption of Federal Home Loan Bank
stock - - - 280,200 -
Cash invested in:
Loans receivable (3,361,562) (3,330,722) (15,280,965) (13,036,846) (16,005,066)
Mortgage-backed securities held to maturity (1,972,500) - (6,199,609) (8,059,825) -
Investment securities held to maturity (13,250,000) (100,225) (20,951,499) (20,381,146) (20,735,687)
Investment securities available for sale (15,503,812) (8,558,028) (21,785,788) - -
Certificates of deposit - - (1,976,000) (5,041,055) (12,880,892)
FHLB stock (17,700) - - - -
Proceeds from sales of real estate acquired through
foreclosure - - 54,950 68,200 154,017
Purchase of office properties and equipment (13,746) (7,830) (15,370) (912,978) (204,721)
------------ ----------- ------------ ------------ ------------
Net cash provided by (used in)
investing activities (2,057,138) 5,963,283 10,355,921 (6,237,729) (11,079,085)
------------ ----------- ------------ ------------ ------------
Cash flows from financing activities:
Increase (decrease) in savings deposits 1,796,783 (6,127,135) (22,994,084) (519,546) 1,500,603
Increase in securities sold under agreements to
repurchase - - 15,000,000 - -
Increase (decrease) in advance payments by
borrowers for taxes and insurance 249,885 297,944 (356,214) (124,114) (79,713)
------------ ----------- ------------ ------------ ------------
Net cash provided by (used in) financing
activities 2,046,668 (5,829,191) (8,350,298) (643,660) 1,420,890
------------ ----------- ------------ ------------ ------------
Net increase (decrease) in cash and cash
equivalents (375,379) 108,731 3,422,821 (5,830,744) (8,390,210)
Cash and cash equivalents, beginning of period 10,666,127 7,243,306 7,243,306 13,074,050 21,464,260
------------ ----------- ------------ ------------ ------------
Cash and cash equivalents, end of period $ 10,290,748 $ 7,352,037 $ 10,666,127 $ 7,243,306 $ 13,074,050
============ =========== ============ ============ ============
Supplemental information:
Interest paid $ 1,454,605 $ 1,270,988 $ 5,057,867 $ 5,082,941 $ 5,541,167
Income taxes paid 32,208 6,911 235,651 297,000 370,000
============ =========== ============ ============ ============
Noncash investing and financing activities:
Loans transferred to real estate acquired by
foreclosure $ - $ 13,777 $ 296,524 $ 169,710 $ 260,962
Interest credited to savings deposits 812,979 956,104 3,616,000 3,922,000 4,093,000
Securities transferred to available for sale - 11,742,867 21,501,548 - -
============ =========== ============ ============ ============
</TABLE>
See accompanying notes to financial statements.
F-5
<PAGE>
CHESTER SAVINGS BANK, FSB
Notes to Financial Statements
March 31, 1996 and December 31, 1995 and 1994
(Information as of March 31, 1996 and for the three
months ended March 31, 1996 and 1995 is unaudited)
(1) Summary of Significant Accounting Policies
------------------------------------------
Following are the significant accounting policies which Chester Savings
Bank, FSB (the Savings Bank) follows in preparing and presenting its
financial statements:
Business
--------
The Savings Bank provides a full range of financial services to individual
and corporate customers through its home office in Chester, Illinois, and
its four branch offices in neighboring cities in Southern Illinois and
one branch office in Perryville, Missouri. The Savings Bank is subject to
competition from other financial institutions in the area, is subject to
the regulations of certain federal agencies, and undergoes periodic
examinations by those regulatory authorities.
Basis of Presentation
---------------------
The financial statements have been prepared in conformity with generally
accepted accounting principles. In preparing the financial statements,
management is required to make estimates and assumptions that affect the
reported amounts of assets and liabilities as of the date of the balance
sheet and revenues and expenses for the year. Actual results could differ
significantly from those estimates.
Material estimates that are particularly susceptible to significant change
in the near term relate to the determination of the allowance for loan
losses and the valuation of real estate acquired by foreclosure or in
satisfaction of loans. In connection with the determination of the
allowances for losses on loans and real estate acquired by foreclosure,
management obtains independent appraisals for significant properties.
Management believes that the allowances for losses on loans and real estate
acquired by foreclosure are adequate. While management uses available
information to recognize such losses, future additions to the allowances
may be necessary based upon changes in economic conditions. In addition,
various regulatory agencies, as an integral part of their examination
process, periodically review the Savings Bank's allowances for losses.
Such agencies may require the Savings Bank to recognize additions to the
allowances based upon their judgments about information available to them
at the time of their examination.
Statement of Financial Accounting Standards (SFAS) No. 107, Disclosures
About Fair Value of Financial Instruments, requires that the estimated
fair value of the Savings Bank's financial instruments be disclosed. Fair
value estimates of financial instruments are made at a specific point in
time, based on relevant market information and information about the
financial instruments. These estimates do not reflect any premium or
discount that could result from offering for sale at one time the entire
holdings or a significant portion of a particular financial instrument.
Because no market exists for a significant portion of the Savings Bank's
financial instruments, some fair value estimates are subjective in
(Continued)
F-6
<PAGE>
CHESTER SAVINGS BANK, FSB
Notes to Financial Statements
nature and involve uncertainties and matters of significant judgment.
Changes in assumptions could significantly affect these estimates. Fair
value estimates are presented for existing on-balance-sheet and off-
balance-sheet financial instruments without attempting to estimate the
value of anticipated future business and the value of assets and
liabilities that are not considered financial instruments. In addition,
the tax ramifications related to the realization of the unrealized gains
and losses can have a significant affect on fair value estimates and have
not been considered in any of the estimates (see note 15).
Statements of Cash Flows
------------------------
For purposes of the statements of cash flows, the Savings Bank considers
all interest-bearing deposits with original maturities of three months or
less and federal funds sold to be cash equivalents.
Unaudited Interim Financial Statements
--------------------------------------
The accompanying unaudited financial statements have been prepared in
accordance with the requirements for a fair presentation of interim
financial statements and are in accordance with generally accepted
accounting principles. In the opinion of management, all adjustments,
consisting only of normal recurring adjustments, that are necessary for a
fair presentation of interim periods presented have been reflected.
Investment Securities and Mortgage-Backed Securities
----------------------------------------------------
Effective January 1, 1994, the Savings Bank adopted SFAS No. 115,
Accounting for Certain Investments in Debt and Equity Securities.
SFAS No. 115 addresses the accounting and reporting for investments in
equity securities that have readily determinable fair values, and all
investments in debt securities. Under SFAS No. 115, the Savings Bank
classified its investment securities and mortgage-backed securities into
one of three categories:
. Held to maturity - includes investments in debt securities which
the Savings Bank has the positive intent and ability to hold until
maturity.
. Trading securities - includes investments in debt and equity
securities purchased and held principally for the purpose of
selling them in the near term.
. Available for sale - includes investments in debt and equity
securities not classified as held to maturity or trading (i.e.,
investments which the Savings Bank has no present plans to sell in
the near term but may be sold in the future under different
circumstances).
Accounting for investment securities and mortgage-backed securities under
SFAS No. 115 is summarized as follows:
. Held to maturity - carried at amortized cost, adjusted for
amortization of premiums and accretion of discounts using the
interest method.
(Continued)
F-7
<PAGE>
CHESTER SAVINGS BANK, FSB
Notes to Financial Statements
. Trading securities - carried at fair value. Gains and losses on
these securities, both realized and unrealized, are included in
income. The Savings Bank held no such securities at March 31, 1996,
December 31, 1995, or December 31, 1994.
. Available for sale - carried at fair value. Realized gains and
losses, based on amortized cost determined in accordance with the
specific identification method, are included in income. Unrealized
gains and losses are recorded, net of related income tax effects,
as a separate component of retained earnings until realized.
Prior to January 1, 1994, investment securities and mortgage-backed
securities were carried at cost, adjusted for amortization of premiums
and discounts, using a method that approximated the interest method.
These securities were carried at cost because management had determined
that the Savings Bank had both the intent and the ability to hold them to
maturity.
In accordance with the adoption of SFAS No. 115 on January 1, 1994, the
Savings Bank classified all investment securities and mortgage-backed
securities as "held to maturity" and continued to carry them at amortized
cost.
On November 15, 1995, the Financial Accounting Standards Board (FASB)
issued a special report, A Guide to Implementation of Statement 115 on
Accounting for Certain Investments in Debt and Equity Securities (the
Special Report). Due to uncertainties surrounding the regulatory capital
treatment for unrealized gains and losses on available-for-sale
securities at the time SFAS No. 115 was required to be implemented, the
Special Report was issued to allow all entities a one-time opportunity to
reconsider their ability and intent to hold securities to maturity and
transfer securities from held to maturity without "tainting" the
remainder held-to-maturity securities. Those securities transferred
would be accounted for prospectively under SFAS No.E115. These transfers
were only allowed during the period from the date of issuance of the
Special Report through December 31, 1995.
As a result of the Special Report, management reconsidered the
classification of held-to-maturity securities and transferred $7,589,274
and $2,169,407 of investment securities and mortgage-backed securities,
respectively, to available for sale on December 1, 1995. As a result of
-------------------
the transfers: a market valuation account was established for the
available-for-sale securities of $50,704 to decrease the recorded balance
of such securities to their fair value; a deferred tax asset of $17,239
was recorded to reflect the tax effect of the market valuation account;
and the net decrease resulting from the market valuation adjustment of
$33,465 was recorded as a separate component of retained earnings.
Loans Receivable and Related Fees
---------------------------------
Loans receivable are carried at cost, as management has determined that the
Savings Bank has the intent and the ability to hold them for the
foreseeable future. Interest is credited to income as earned; however,
interest receivable is accrued only if deemed collectible. Generally,
(Continued)
F-8
<PAGE>
CHESTER SAVINGS BANK, FSB
Notes to Financial Statements
the Savings Bank's policy is to place loans delinquent over 90 days on
nonaccrual status and exclude interest on such loans from income.
Interest ultimately collected is credited to income in the period
received.
Loan fees and the related incremental direct costs of originating loans are
deferred and are amortized over the contractual lives of the related
-----------
loans using the interest method.
The allowance for loan losses is maintained at an amount considered
adequate to provide for credit losses. The provision for loan losses is
------
based on periodic analysis of the loan portfolio by management. In this
regard, management considers numerous factors, including, but not
necessarily limited to, general economic conditions, loan portfolio
composition, prior loss experience, and independent appraisals. In
addition to the allowance for losses on identified problem loans, an
overall unallocated allowance is established to provide for unidentified
credit losses. In estimating such losses, management considers various
risk factors including geographic location, loan collateral, and payment
history.
Effective January 1, 1995, the Savings Bank adopted SFAS No. 114,
Accounting by Creditors for Impairment of a Loan, and SFAS No. 118,
Accounting by Creditors for Impairment of a Loan - Income Recognition and
Disclosures, which amends SFAS No. 114. SFAS No. 114, as amended by SFAS
No. 118, defines the recognition criteria for loan impairment and the
measurement methods for certain impaired loans and loans for which terms
have been modified in troubled-debt restructurings (a restructured loan).
Specifically, a loan is considered impaired when it is probable a
creditor will be unable to collect all amounts due - both principal and
interest - according to the contractual terms of the loan agreement. When
measuring impairment, the expected future cash flows of an impaired loan
are required to be discounted at the loan's effective interest rate.
Alternatively, impairment can be measured by reference to an observable
market price, if one exists, or the fair value of the collateral for a
collateral-dependent loan. Regardless of the historical measurement
method used, SFAS No. 114 requires a creditor to measure impairment based
on the fair value of the collateral when the creditor determines
foreclosure is probable. Additionally, impairment of a restructured loan
is measured by discounting the total expected future cash flows at the
loan's effective rate of interest as stated in the original loan
agreement.
The Savings Bank applies the recognition criteria of SFAS No. 114 to multi-
family residential loans, commercial real estate loans, agriculture
loans, and restructured loans. Smaller balance, homogeneous loans,
including one-to-four family residential loans and consumer loans, are
collectively evaluated for impairment. SFAS No. 118 amends SFAS No. 114
to allow a creditor to use existing methods for recognizing interest
income on impaired loans. The Savings Bank has elected to continue to
use its existing nonaccrual methods for recognizing interest on impaired
loans. The adoption of SFAS No. 114 and SFAS No. 118 resulted in no
prospective adjustment to the allowance for loan losses and did not
affect the Savings Bank's policies regarding charge-offs or recoveries.
(Continued)
F-9
<PAGE>
CHESTER SAVINGS BANK, FSB
Notes to Financial Statements
Real Estate Acquired by Foreclosure
-----------------------------------
Real estate acquired by foreclosure is initially recorded on an individual
property basis at estimated fair value on the date of foreclosure, thus
establishing a new cost basis. Subsequent to foreclosure, real estate is
periodically evaluated by management and a valuation allowance is
established if the estimated fair value, less cost to sell, of the
property declines. Subsequent increases in fair value are recorded
through a reversal of the valuation allowance, but not below zero. Costs
incurred in maintaining the properties are charged to expense.
Profit on sales of real estate owned is recognized when title has passed,
minimum down payment requirements have been met, the terms of any notes
received by the Savings Bank are such to satisfy continuing payment
requirements, and the Savings Bank is relieved of any requirement for
continued involvement in the real estate. Otherwise, recognition of
profit is deferred until such criteria are met.
Stock in Federal Home Loan Bank
-------------------------------
The Savings Bank, as a member of the reconstituted Federal Home Loan Bank
System administered by the Federal Housing Finance Board, is required to
maintain an investment in capital stock of the Federal Home Loan Bank of
Chicago (FHLB) in an amount equal to the greater of 1% of the aggregate
outstanding balance of the Savings Bank's loans secured by dwelling units
at the beginning of each year, or 5% of advances from the FHLB to the
Savings Bank. The stock is recorded at cost which represents redemption
value.
Office Properties and Equipment
-------------------------------
Office properties and equipment are stated at cost less accumulated
depreciation.
Depreciation is charged to expense using the straight-line method based on
the estimated useful lives of the related assets. Estimated lives are 10
to 35 years for buildings and improvements and three to 15 years for
furniture and equipment.
Securities Sold Under Agreements to Repurchase
----------------------------------------------
The Savings Bank enters into sales of securities under repurchase
agreements (the agreements). The agreements are treated as financings,
and the obligation to repurchase securities sold is reflected as a
liability in the balance sheet.
Income Taxes
------------
Deferred income taxes result from income and expense recognition in
different accounting periods for income tax purposes than for financial
reporting purposes (temporary differences).
Effective January 1, 1993, the Savings Bank adopted SFAS No. 109,
Accounting for Income Taxes. Under the asset and liability method of SFAS
No. 109, deferred tax assets and liabilities are recognized for the
future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
(Continued)
F-10
<PAGE>
CHESTER SAVINGS BANK, FSB
Notes to Financial Statements
respective tax bases. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the years
in which those temporary differences are expected to be recovered or
settled. Under SFAS No. 109, the effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date. The Savings Bank reported the
cumulative effect of the change in the method of accounting for income
taxes of $(227,097) in the statement of income for the year ended
December 31, 1993.
Reclassifications
-----------------
Certain reclassifications of 1995, 1994, and 1993 amounts have been made to
conform with the 1996 financial statement presentation.
(2) Regulatory Capital
------------------
As a result of the Financial Institutions Reform, Recovery and Enforcement
Act of 1989 (FIRREA), financial institutions are required to maintain
minimum tangible capital equal to 1.5% of total adjusted assets, a
minimum 3% core capital ratio, and an 8% risk-based capital ratio. The
risk-based capital requirement is calculated based on the credit risk
presented by both on-balance-sheet assets and off-balance-sheet
commitments and obligations. Assets are assigned a credit risk weighting
based upon their relative risk ranging from 0% for assets backed by the
full faith and credit of the United States or that pose no credit risk to
the institution to 100% for assets such as delinquent or repossessed
assets. As of March 31, 1996, the Savings Bank was in compliance with all
of these capital requirements.
The Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA)
added a new section 38, "Prompt Corrective Action," which established a
system of new capital standards for all insured depository institutions
and requires regulatory action against depository institutions which are
"undercapitalized," "significantly undercapitalized," or "critically
undercapitalized," as defined in the statute and related regulations. In
order to be "well capitalized," savings associations generally must have
minimum leverage ratios of 5% as well as meeting the total and Tier 1
risk-based capital requirements of 10% and 6%, respectively. At March 31,
1996, the Savings Bank's capital levels result in a determination of
"well capitalized" under section 38 of FDICIA.
The Savings Bank is required to maintain a minimum level of liquid assets
as defined by Office of Thrift Supervision (OTS) regulations. This
requirement, which may be varied at the direction of the OTS depending on
economic conditions and deposit flows, is based on a percentage of
deposits and short-term borrowings. The required minimum ratio is 5%. The
Savings Bank's liquidity ratio at March 31, 1996 and December 31, 1995
was 34.7% and 33.7%, respectively.
(Continued)
F-11
<PAGE>
CHESTER SAVINGS BANK, FSB
Notes to Financial Statements
(3) Investment Securities
---------------------
The amortized cost and market value of investment securities classified as
available for sale at March 31, 1996 and December 31, 1995 follows:
<TABLE>
<CAPTION>
March 31, 1996
-----------------------------------------------
Gross Gross
unreal- unreal-
Amortized ized ized Market
cost gains losses value
---- ----- ------ -----
<S> <C> <C> <C> <C>
Securities of
U.S. government $17,503,111 $ 1,863 $(92,474) $ 17,412,500
========== ===== ====== ==========
December 31, 1995
-------------------------------
Gross Gross
unreal- unreal-
Amortized ized ized Market
cost gains losses value
Securities of ---- ----- ------ -----
U.S. government $ 6,507,205 $ 22,826 $ (5,841) $ 6,524,190
========= ====== ===== =========
</TABLE>
Gross realized gains, gross realized losses, and gross proceeds on sales of
investment securities classified as available for sale follow:
<TABLE>
<CAPTION>
March 31, December 31,
------------
1996 1995 1995
---- ---- ----
<S> <C> <C> <C>
Gross realized gains $ 6,837 $ 47,447 $ 140,933
Gross realized losses - - (88,436)
--------- --------- ----------
Net realized gain $ 6,837 $ 47,447 $ 52,497
========= ========= ==========
Gross proceeds $3,010,078 $3,993,047 $29,417,031
========= ========= ==========
</TABLE>
The proceeds from sales of investment securities classified as available
for sale during the year ended December 31, 1995 consisted of $7.5
million of U.S. agency securities and mortgage-backed bonds transferred
to available for sale in conjunction with the provisions of the FASB
Special Report and $21.9 million of U.S. government obligations that were
sold prior to the issuance of the FASB Special Report. The U.S.
government obligations sold consisted of $18.0 million of securities
purchased during fiscal 1995 and classified upon purchase as available
for sale and $3.9 million of securities purchased in fiscal 1994 that
were classified as held to maturity at December 31, 1994. Management
reclassified all U.S. government obligations classified as held to
maturity at December 31, 1994 to available for sale in 1995 due to the
change in intent that was established with the initial purchase in 1995
of U.S. government obligations that were classified as available for
sale. The amount of U.S. government obligations transferred to available
for sale in 1995 was approximately $11.7 million.
(Continued)
F-12
<PAGE>
CHESTER SAVINGS BANK FSB
Notes to Financial Statements
The proceeds from sales of investment securities classified as available
for sale during the three months ended March 31, 1995 consisted of U.S.
government obligations that were purchased in 1995 and originally
classified as available for sale.
There were no sales of investment securities during the years ended
December 31, 1994 and 1993.
The amortized cost and market value of investment securities classified as
available for sale at March 31, 1996 and December 31, 1995, by
contractual maturity, follows:
<TABLE>
<CAPTION>
March 31, 1996 December 31, 1995
------------------------------- ----------------------------
Amortized Market Amortized Market
cost value cost value
---- ----- ---- -----
<S> <C> <C> <C> <C>
Within one year $ 3,993,760 $ 3,986,094 $ 3,503,413 $ 3,502,170
Between one and
five years 13,509,351 13,426,406 3,003,792 3,022,020
---------- ---------- --------- ---------
$ 17,503,111 $ 17,412,500 $ 6,507,205 $ 6,524,190
========== ========== ========= =========
</TABLE>
The amortized cost and market value of investment securities classified as
held to maturity at March 31, 1996 and December 31, 1995 and 1994
follows:
<TABLE>
<CAPTION>
March 31, 1996
-------------------------------------------------------
Gross Gross
unreal- unreal-
Amortized ized ized Market
cost gains losses value
---- ----- ------ -----
<S> <C> <C> <C> <C>
Securities of U.S. agencies $ 6,946,854 $ 7,302 $ (91,775) 6,862,381
Mortgage-backed bonds 8,071,068 6,137 (44,429) 8,032,776
Securities of states and
municipalities 13,171,155 113,377 (22,378) 13,262,154
---------- ------- ------- ----------
$ 28,189,077 126,816 $ (158,582) $ 28,157,311
========== ======= ======= ==========
December 31, 1995
--------------------------------------------------------
Gross Gross
unreal- unreal-
Amortized ized ized Market
cost gains losses value
---- ----- ------ ------
Securities of U.S. agencies 10,017,220 10,758 $ (15,838) 10,012,140
Mortgage-backed bonds 8,606,035 9,822 (18,145) 8,597,712
Securities of states and
municipalities 13,198,500 121,509 (26,250) 13,293,759
---------- ------- ------ ----------
$ 31,821,755 $ 142,089 $ (60,233) $ 31,903,611
========== ======= ====== ==========
</TABLE>
(Continued)
F-13
<PAGE>
CHESTER SAVINGS BANK, FSB
Notes to Financial Statements
<TABLE>
<CAPTION>
December 31, 1994
-------------------------------------------------
Gross Gross
unreal- unreal-
Amortized ized ized Market
cost gains losses value
---- ----- ------ -----
<S> <C> <C> <C> <C>
Securities of U.S. government
and agencies $ 19,134,851 $ 4,664 $ (414,805) $ 18,724,710
Mortgage-backed bonds 7,296,140 232 (306,247) 6,990,125
Securities of states and
municipalities 14,678,578 2,818 (396,378) 14,285,018
---------- ----- -------- ----------
$ 41,109,569 $ 7,714 $(1,117,430) $ 39,999,853
========== ===== ========= ==========
</TABLE>
The amortized cost and market value of investment securities classified as
held to maturity at March 31, 1996 and December 31, 1995, by contractual
maturity, follows:
<TABLE>
<CAPTION>
March 31, 1996 December 31, 1995
------------------- -------------------
Amortized Market Amortized Market
cost value cost value
---- ----- ---- -----
<S> <C> <C> <C> <C>
Within one year $ 14,000,872 $ 13,967,826 $ 15,592,370 $ 15,577,829
Between one and
five years 13,368,205 13,315,948 15,389,385 15,433,305
Between five and
ten years 705,000 744,874 725,000 764,059
After ten years 115,000 128,663 115,000 128,418
---------- ---------- ---------- ----------
$ 28,189,077 $ 28,157,311 $ 31,821,755 $ 31,903,611
========== ========== ========== ==========
</TABLE>
Mortgage-backed bonds at March 31, 1996, December 31, 1995, and December
31, 1994 represent investment securities issued by the Federal National
Mortgage Association or the Federal Home Loan Mortgage Corporation.
(4) Mortgage-Backed Securities
--------------------------
The amortized cost and market value of mortgage-backed securities
classified as available for sale at March 31, 1996 and December 31, 1995
follows:
<TABLE>
<CAPTION>
March 31, 1996
-------------------------------------------------
Gross Gross
Amortized unrealized unrealized Market
cost gains losses value
---- ----- ------ -----
<S> <C> <C> <C> <C>
GNMA $ 482,530 $ 14,314 $ - $ 496,844
FNMA 1,622,878 8,233 (13,073) 1,618,038
--------- ------- ------ ---------
$ 2,105,408 $ 22,547 $ (13,073) $ 2,114,882
========= ======= ====== =========
December 31, 1995
---------------------------------------------------
Gross Gross
Amortized unrealized unrealized Market
cost gains losses value
---- ----- ------ -----
GNMA $ 498,912 $ 17,830 $ - $ 516,742
FNMA 1,670,495 20,190 (288) 1,690,397
--------- ------ --- ---------
$ 2,169,407 $ 38,020 $ (288) $ 2,207,139
========= ====== === =========
</TABLE>
(Continued)
F-14
<PAGE>
CHESTER SAVINGS BANK, FSB
Notes to Financial Statements
The amortized cost and market value of mortgage-backed securities classified
as available for sale at March 31, 1996 and December 31, 1995, by
contractual maturity, are shown below. Expected maturities will differ
from contractual maturities due to scheduled repayments and because
borrowers may have the right to prepay obligations with or without
prepayment penalties. The following table does not take into consideration
the effects for scheduled repayments or the effects of possible
prepayments:
<TABLE>
<CAPTION>
March 31, 1996 December 31, 1995
------------------ --------------------
Amortized Market Amortized Market
cost value cost value
---- ----- ---- -----
<S> <C> <C> <C> <C>
Between one and
five years $1,622,878 $1,618,038 $1,670,495 $1,690,397
After ten years 482,530 496,844 498,912 516,742
--------- --------- --------- ---------
$2,105,408 $2,114,882 $2,169,407 $2,207,139
========= ========= ========= =========
</TABLE>
The amortized cost and market value of mortgage-backed securities classified
as held to maturity at March 31, 1996 and December 31, 1995 and 1994
follows:
<TABLE>
<CAPTION>
March 31, 1996
------------------------------------------
Gross Gross
Amortized unrealized unrealized Market
cost gains losses value
---- ----- ------ -----
<S> <C> <C> <C> <C>
GNMA $ 1,460,749 $ 40,517 $ - $ 1,501,266
FNMA 146,030 4,812 (403) 150,439
FHLMC 4,993,687 26,515 (5,688) 5,014,514
Collateralized
mortgage
obligations 8,190,780 9,733 (87,538) 8,112,975
---------- ------ ------ ----------
$ 14,791,246 $ 81,577 $(93,629) $14,779,194
========== ====== ====== ==========
December 31, 1995
---------------------------------------
Gross Gross
Amortized unrealized unrealized Market
cost gains losses value
---- ----- ------ -----
GNMA $ 1,514,450 $ 49,175 $ - $ 1,563,625
FNMA 153,343 5,300 - 158,643
FHLMC 5,326,161 63,628 - 5,389,789
Collateralized
mortgage
obligations 6,211,708 29,309 (21,367) 6,219,650
---------- ------- ------- ----------
$13,205,662 $147,412 $(21,367) $13,331,707
========== ======= ======= ==========
</TABLE>
(Continued)
F-15
<PAGE>
CHESTER SAVINGS BANK, FSB
Notes to Financial Statements
<TABLE>
<CAPTION>
December 31, 1994
----------------------------------------------------
Gross Gross
Amortized unrealized unrealized Market
cost gains losses value
---- ----- ------ -----
<S> <C> <C> <C> <C>
GNMA $ 2,625,626 $ 11,927 $ (56,424) $ 2,581,129
FNMA 3,117,256 39,125 (128,620) 3,027,761
FHLMC 7,393,179 25,387 (404,624) 7,013,942
---------- -------- ------- ----------
$ 13,136,061 $ 76,439 $ (589,668) $ 12,622,832
========== ======== ======= ==========
</TABLE>
The amortized cost and market value of mortgage-backed securities held to
maturity at March 31, 1996 and December 31, 1995, by contractual
maturity, are shown below. Expected maturities will differ from
contractual maturities due to scheduled repayments and because borrowers
may have the right to prepay obligations with or without prepayment
penalties. The following table does not take into consideration the
effects for scheduled repayments or the effects of possible prepayments:
<TABLE>
<CAPTION>
March 31, 1996 December 31, 1995
-------------------- -------------------
Amortized Market Amortized Market
cost value cost value
---- ----- ---- -----
<S> <C> <C> <C> <C>
Within one year $ 106,295 $ 107,926 $ 246,828 $ 253,246
Between one and
five years 4,887,393 4,906,588 5,079,332 5,136,543
Between five and
ten years 3,723,219 3,686,325 1,750,282 1,758,200
After ten years 6,074,339 6,078,355 6,129,220 6,183,718
----------- ----------- ----------- -----------
$14,791,246 $14,779,194 $13,205,662 $13,331,707
=========== =========== =========== ===========
</TABLE>
Gross realized gains, gross realized losses, and gross proceeds from sales
of mortgage-backed securities classified as held to maturity for the year
ended December 31, 1995 follows:
<TABLE>
<CAPTION>
<S> <C>
Gross realized gain $ 57,364
Gross realized losses (11,445)
----------
Net realized gain. $ 45,919
==========
Gross proceeds $2,409,229
==========
</TABLE>
The sale of mortgage-backed securities classified as held to maturity
during the year ended December 31, 1995 were in effect maturities as the
sale of these mortgage-backed securities occurred only after a
substantial portion of the original principal outstanding had been
collected.
Collateralized mortgage obligations at March 31, 1996 and December 31, 1995
were collateralized by mortgage-backed securities issued by the Federal
National Mortgage Association or the Federal Home Loan Mortgage
Corporation.
(Continued)
F-16
<PAGE>
CHESTER SAVINGS BANK, FSB
Notes to Financial Statements
(5) Loans Receivable, Net
-----------------------
A comparative summary of loans receivable follows:
<TABLE>
<CAPTION>
March 31, December 31,
--------------------
1996 1995 1994
------------ --------------- ------------
<S> <C> <C> <C>
Loans secured by real estate:
Residential:
1-4 family $45,842,564 $47,200,677 $47,578,387
Multifamily 583,102 600,141 763,934
---------- ---------- ----------
Total residential 46,425,666 47,800,818 48,342,321
Agriculture and land 1,139,535 928,001 822,024
Commercial 2,699,580 2,869,803 3,588,403
----------- ----------- -----------
Total loans secured by
real estate 50,264,781 51,598,622 52,752,748
---------- ---------- -----------
Consumer loans:
Automobile loans 1,824,378 1,712,752 1,339,354
Home improvement 1,590,944 1,348,307 1,211,201
Credit cards 851,342 939,105 827,745
Loans secured by deposits 418,770 440,367 505,965
Other 1,728,796 1,927,939 2,462,485
----------- ----------- -----------
Total consumer loans 6,414,230 6,368,470 6,346,750
----------- ----------- -----------
56,679,011 57,967,092 59,099,498
----------- ----------- -----------
Less:
Loans in process 503,233 532,810 676,091
Unearned discount, net 11,819 12,944 20,938
Deferred loan fees 14,428 10,615 171
Allowance for losses 395,997 389,714 245,725
----------- ----------- -----------
925,477 946,083 942,925
----------- ----------- -----------
$55,753,534 $57,021,009 $58,156,573
=========== =========== ===========
</TABLE>
The weighted average interest rate on loans was 8.74%, 8.76%, and 8.36% at
March 31, 1996 and December 31, 1995 and 1994, respectively.
At March 31, 1996 and 1995 and December 31, 1995, 1994, and 1993, the
Savings Bank was servicing loans for others with aggregate unpaid
principal balances of approximately $887,000, $1,146,000, $979,000,
$1,221,000, and $1,727,000, respectively.
A summary of activity in the allowance for losses for the three months
ended March 31, 1996 and 1995 and the years ended December 31, 1995,
1994, and 1993 follows:
<TABLE>
<CAPTION>
March 31, December 31,
---------------------- -------------------------------
1996 1995 1995 1994 1993
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Balance, beginning
of period $ 389,714 $ 245,725 $ 245,725 $ 207,005 $ 183,005
Provision charged
to expense 7,500 (2,300) 161,319 69,309 29,627
Charge-offs (1,217) - (17,380) (30,714) (5,627)
Recoveries - - 50 125 -
-------- -------- -------- -------- --------
Balance, end of period $ 395,997 $ 243,425 $ 389,714 $ 245,725 $ 207,005
======== ======== ======== ======== ========
</TABLE>
(Continued)
F-17
<PAGE>
CHESTER SAVINGS BANK, FSB
Notes to Financial Statements
A summary of loans receivable contractually in arrears three months or more
is as follows:
<TABLE>
<CAPTION>
March 31, December 31,
---------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Residential real estate loans $ 123,112 $ 55,982 $373,686
Commercial real estate loans 49,649 49,404 -
Consumer loans 49,229 53,818 6,400
-------- -------- --------
$ 221,990 $ 159,204 $380,086
======= ======= =======
Percent of loans receivable .40% .28% .65%
=== === ===
Number of loans 25 20 21
=== === ===
</TABLE>
A summary of loans on which interest is not being accrued and impaired
loans at March 31, 1996 and December 31, 1995 follows:
<TABLE>
<CAPTION>
March 31, December 31,
1996 1995
--------- ------------
<S> <C> <C>
Nonaccrual loans $41,945 $41,945
Impaired loans continuing to accrue interest - -
------- -------
Total impaired loans $41,945 $41,945
======= =======
</TABLE>
The allowance for losses on impaired loans was $8,389 at March 31, 1996 and
December 31, 1995. The average balance of impaired loans during the three
months ended March 31, 1996 and 1995 and the year ended December 31, 1995
was $41,945, $172,919, and $175,336, respectively.
A summary of interest income on nonaccrual and other impaired loans for the
three months ended March 31, 1996 and 1995 and the year ended December
31, 1995 follows:
<TABLE>
<CAPTION>
March 31, December 31,
---------
1996 1995 1995
---- ---- ----
<S> <C> <C> <C>
Income recognized:
Nonaccrual loans $ - $ 577 $ 6,133
Impaired loans continuing
to accrue interest - - -
--- ----- ------
$ - $ 577 $ 6,133
=== ===== ======
Interest income if interest
had accrued:
Nonaccrual loans $ 781 $2,880 $15,847
Impaired loans continuing
to accrue interest - - -
--- ----- ------
$ 781 $2,880 $15,847
=== ===== ======
</TABLE>
(Continued)
F-18
<PAGE>
CHESTER SAVINGS BANK, FSB
Notes to Financial Statements
(6) Accrued Interest Receivable
---------------------------
A comparative summary of accrued interest receivable follows:
<TABLE>
<CAPTION>
March 31, December 31,
---------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Loans receivable $ 231,606 $ 213,157 $ 154,836
Mortgage-backed securities 80,985 74,919 84,345
Investment securities 567,446 286,800 446,543
Interest-bearing deposits 47,858 61,716 99,388
-------- ------- -------
$ 927,895 $ 636,592 $ 785,112
======== ======= =======
</TABLE>
(7) Real Estate Acquired by Foreclosure
-----------------------------------
<TABLE>
<CAPTION>
A comparative summary of real estate acquired by
foreclosure is as follows:
<S> <C> <C> <C>
March 31, December 31,
----------------
1996 1995 1994
---- ---- ----
Foreclosed real estate $ 209,982 $ 26,434 $ -
Real estate in judgment - 182,814 63,552
------- ------- ------
$ 209,982 $ 209,248 $ 63,552
======= ======= ======
A summary of activity in the allowance for losses follows:
December 31,
--------------
1994 1993
---- ----
Balance, beginning of year $ 96,888 $ 99,388
Provision charged to expense - 7,500
Charge-offs (96,888) (10,000)
Recoveries - -
------ ------
Balance, end of year $ - $ 96,888
====== ======
</TABLE>
(8) Office Properties and Equipment
-------------------------------
<TABLE>
<CAPTION>
A comparative summary of office properties and equipment follows:
<S> <C> <C> <C>
December 31,
March 31, ---------------------
1996 1995 1994
----- ---- ----
Land $ 190,434 $ 190,434 $ 190,434
Office buildings and improvements 2,326,913 2,326,913 2,317,658
Furniture, fixtures and equipment 982,664 968,918 962,803
--------- --------- ---------
3,500,011 3,486,265 3,470,895
Less accumulated depreciation 1,668,749 1,642,979 1,524,811
--------- --------- ---------
$ 1,831,262 $ 1,843,286 $ 1,946,084
========= ========= =========
</TABLE>
Depreciation expense for the three months ended March 31, 1996 and 1995 and
the years ended December 31, 1995, 1994, and 1993 amounted to $25,770,
$29,675, $118,168, $128,605, and $113,897, respectively.
(Continued)
F-19
<PAGE>
CHESTER SAVINGS BANK, FSB
Notes to Financial Statements
(9) Deposits
--------
A comparative summary of deposits follows:
<TABLE>
<CAPTION>
March 31, 1996
-----------------
Percent
Stated to
rate Amount total
---- ------ -----
Demand deposits:
<S> <C> <C> <C>
NOW accounts 0-2.00% $ 9,189,875 8.5%
Money market demand 2.50-3.90 19,303,779 17.8
Passbook 2.50-2.75 10,970,210 10.1
----------- -----
39,463,864 36.4
----------- -----
Certificates of deposit:
Less than 3.00 183,331 .2
3.00-4.99 23,007,081 21.2
5.00-6.99 43,456,592 40.0
7.00-8.99 2,403,764 2.2
========= ----------- ----
69,050,768 63.6
----------- ----
$ 108,514,632 100.0%
=========== =====
</TABLE>
<TABLE>
<CAPTION>
December 31,
-------------------------------------------
1995 1994
------------------ ----------------
Percent Percent
Stated to to
rate Amount total Amount total
---- ------ ----- ------ -----
Demand deposits:
<S> <C> <C> <C> <C> <C>
NOW accounts 0-2.75% $ 8,928,957 8.4% $ 8,749,014 6.8%
Money market demand 2.40-4.15 16,655,540 15.6 32,560,742 25.1
Passbook 2.50-2.75 10,469,368 9.8 11,438,658 8.8
----------- ----- ------------ -----
36,053,865 33.8 52,748,414 40.7
----------- ----- ------------ -----
Certificates of deposit:
Less than 3.00 - - 619,470 .5
3.00-4.99 28,005,074 26.2 46,589,632 35.9
5.00-6.99 40,232,644 37.7 28,982,528 22.3
7.00-8.99 2,426,266 2.3 771,889 .6
========= ----------- ------ ----------- -----
70,663,984 66.2 76,963,519 59.3
----------- ------ ----------- -----
$ 106,717,849 100.0% $ 129,711,933 100.0%
=========== ===== =========== =====
</TABLE>
The weighted average interest rate on deposits was 4.28%, 4.36%, and 4.19% at
March 31, 1996 and December 31, 1995 and 1994, respectively.
F-20 (Continued)
<PAGE>
CHESTER SAVINGS BANK, FSB
Notes to Financial Statements
A summary of the maturities of certificates of deposit at March 31, 1996
and December 31, 1995 and 1994 follows:
<TABLE>
<CAPTION>
March 31, December 31,
---------------------------------
1996 1995 1994
----------------------- --------------------- ----------------------
Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ -------
<S> <C> <C> <C> <C> <C> <C>
Within one year $ 42,540,090 61.6% $ 46,427,751 65.7% $ 51,458,944 66.9%
Second year 15,940,665 23.1 13,190,439 18.7 19,014,581 24.7
Third year 9,915,776 14.4 10,389,828 14.7 5,815,256 7.6
Fourth year 654,237 .9 655,966 .9 254,134 .3
Thereafter - - - - 420,604 .5
---------- ----- ---------- ----- ---------- -----
$ 69,050,768 100.0% $ 70,663,984 100.0% $ 76,963,519 100.0%
========== ===== ========== ===== ========== =====
</TABLE>
Interest expense on deposits, by type, for the three months ended March 31,
1996 and 1995 and the years ended December 31, 1995, 1994, and 1993 is
summarized as follows:
<TABLE>
<CAPTION>
March 31, December 31,
------------------- ---------------------------------------
1996 1995 1995 1994 1993
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Passbook $ 73,078 $ 76,858 $ 295,348 $ 338,938 $ 390,228
NOW accounts 40,745 48,478 226,206 227,073 206,832
Money market
demand 139,485 251,050 819,795 1,088,818 848,641
Certificates
of deposit 897,919 952,085 3,938,186 3,434,466 4,080,375
--------- --------- --------- --------- ---------
$ 1,151,227 $ 1,328,471 $ 5,279,535 $ 5,089,295 $ 5,526,076
========= ========= ========= ========= =========
</TABLE>
Certificates of deposit of $100,000 or more totaled $5,282,404, $5,844,512,
and $7,450,919 at March 31, 1996 and December 31, 1995 and 1994,
respectively. Deposits in excess of $100,000 are not insured by the
-----------------------------------------------------
Federal Deposit Insurance Corporation. Investment securities and
-------------------------------------
mortgage-backed securities with a carrying value of approximately $8.8
million, $8.3 million, and $7.2 million at March 31, 1996 and December
31, 1995 and 1994, respectively, were pledged to secure certain
certificates of deposit in excess of insurance of accounts limitations.
A corporation affiliated with one of the Savings Bank's directors had
savings deposits of approximately $6.2 million, $4.3 million, and $15.8
million with the Savings Bank at March 31, 1996 and December 31, 1995 and
1994, respectively.
(Continued)
F-21
<PAGE>
CHESTER SAVINGS BANK, FSB
Notes to Financial Statements
(10) Securities Sold Under Agreements to Repurchase
----------------------------------------------
A summary of securities sold under agreements to repurchase (the
agreements) by contractual maturity, follows:
<TABLE>
<CAPTION>
March 31, 1996 December 31, 1996
-------------- -----------------
Weighted Weighted
average average
interest interest
Amount rate Amount rate
------ ---- ------ ----
<S> <C> <C> <C> <C>
Between 30 and 90 days $ 14,500,000 4.40% $ - - %
After 90 days 500,000 5.63 15,000,000 5.10
---------- ----------
$ 15,000,000 4.44% $ 15,000,000 5.10%
========== ==== =========== ====
</TABLE>
The agreements are treated as financings and the obligations to repurchase
securities sold are reflected as a liability. All of the agreements were
to repurchase identical securities. The investment securities and
mortgage-backed securities underlying the agreements had a carrying value
and a market value of $16,034,488 and $15,921,600, respectively, at March
31, 1996, and $16,567,655 and $16,612,086, respectively, at December 31,
1995.
The repurchase liability, stated rate, carrying value, and market value of
the agreements at March 31, 1996, by type of security and contractual
maturity, follows:
<TABLE>
<CAPTION>
Repurchase Stated Carrying Market
liability rate value value
--------- ---- ----- ----
<S> <C> <C> <C> <C>
Between 30 and 90 days:
Securities of
U.S. governments $ 500,000 4.40% $ 518,698 $ 518,698
Securities of
U.S. agencies 3,991,453 4.40 4,318,077 4,237,036
Mortgage-backed bonds 4,537,205 4.40 4,971,056 4,971,056
Mortgage-backed securities 5,471,342 4.40 5,470,974 5,442,787
---------- ---------- ----------
14,500,000 15,278,805 15,169,577
After 90 days - securities
of U.S. agencies 500,000 5.63 755,683 752,023
---------- ==== ---------- ----------
$ 15,000,000 $ 16,034,488 $ 15,921,600
========== ========== ==========
</TABLE>
The agreements averaged approximately $15,000,000 during the three months
ended March 31, 1996 and $3,750,000 during the year ended December 31,
1995. There were no such agreements during the three months ended March
31, 1995 or the years ended December 31, 1994 and 1993. The maximum
amount outstanding at any month-end during the three months ended March
31, 1996 and the year ended December 31, 1995 was approximately
$15,000,000.
F-22 (Continued)
<PAGE>
CHESTER SAVINGS BANK, FSB
Notes to Financial Statements
All of the agreements were with a corporation affiliated with one of the
Savings Bank's directors. The excess of the carrying value of the
securities sold over the amount of the repurchase liability, adjusted for
accrued interest, approximated $967,000 at March 31, 1996. The weighted
average maturity of the agreements was 38 days at March 31, 1996.
(11) Income Taxes
------------
If certain conditions are met, the Savings Bank, in determining taxable
income, is allowed a special bad debt deduction based on specified
experience formulas or on a percentage of taxable income before such
deduction. The Savings Bank used the percentage of taxable income method
in 1995, 1994, and 1993 and anticipates using this method in 1996, since
this method resulted in the maximum bad debt deduction. The bad debt
deduction under the percentage method is limited to 8% of taxable income.
The composition of income tax expense (benefit) for the three months ended
March 31, 1996 and 1995 and the years ended December 31, 1995, 1994, and
1993 is as follows:
<TABLE>
<CAPTION>
March 31, 1996 December 31, 1996
---------------- --------------------------
1996 1995 1995 1994 1993
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Current:
Federal $ 84,670 $ 97,051 $ 325,477 $ 272,989 $274,005
State 7,000 - 8,500 19,249 42,256
Deferred (14,670) 11,949 (34,977) (7,496) (9,600)
------ ------- ------- ------- -------
$ 77,000 $ 109,000 $ 299,000 $ 284,742 $ 306,661
====== ======= ======= ======= =======
</TABLE>
The reasons for the difference between expected federal income tax expense
computed at the federal statutory rate of 34% and the actual amount are
as follows:
<TABLE>
<CAPTION>
March 31, 1996 December 31, 1996
---------------- --------------------------
1996 1995 1995 1994 1993
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Computed "expected" income
tax expense $ 109,035 $ 143,698 $ 441,966 $ 434,447 $ 485,448
Items affecting federal
income tax rate:
State income taxes, net
of federal benefit 4,620 - 5,610 12,704 27,889
Tax-exempt interest (35,747) (34,545) (150,148) (152,500) (169,200)
Other (908) (153) 1,572 (9,909) (37,476)
------- ------- ------- ------- -------
$ 77,000 $ 109,000 $ 299,000 $ 284,742 $ 306,661
======= ======= ======= ======= =======
Effective tax rate 24.0% 25.8% 23.0% 22.3% 21.5%
==== ==== ==== ==== ====
</TABLE>
F-23 (Continued)
<PAGE>
CHESTER SAVINGS BANK, FSB
Notes to Financial Statements
The components of deferred tax assets and deferred tax liabilities at
March 31, 1996 and December 31, 1995 and 1994 are summarized as follows:
<TABLE>
<CAPTION>
March 31, December 31,
------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Deferred tax assets:
General loan loss allowance $ 150,159 $ 147,725 $ 95,194
Deferred compensation 20,079 - -
Available-for-sale securities
market valuation 30,832 - -
Other, net 4,519 4,953 8,114
--------- --------- ---------
Total deferred tax assets 205,589 152,678 103,308
--------- --------- ---------
Deferred tax liabilities:
Available-for-sale securities
market valuation - (18,603) -
Excess of tax bad debt reserves
over base year (159,323) (154,897) (155,934)
Tax depreciation in excess of
that recorded for book purposes (60,114) (57,131) (45,166)
FHLB stock dividends (25,933) (25,933) (22,468)
-------- -------- --------
Total deferred tax liabilities (245,370) (256,564) (223,568)
------- ------- -------
Net deferred tax liability $ (39,781) $(103,886) $(120,260)
======= ======= =======
</TABLE>
Retained earnings at March 31, 1996 include approximately $2.5 million for
which no deferred federal income tax liability has been recognized. These
amounts represent an allocation of income to bad debt deductions for tax
purposes only. If such retained earnings were subsequently used by the
Savings Bank for purposes other than to absorb loan losses, they would be
subject to federal income tax at the then prevailing corporate rate.
(12) Pension and Profit Sharing Plans
--------------------------------
Substantially all employees are included in a trusteed defined benefit
pension plan. The benefits contemplated by the plan are funded through
payments to the Financial Institutions Retirement Fund, which operates as
an industry-wide plan and does not report relative plan assets and
actuarial liabilities of the individual participating associations. The
cost of funding is charged to current operations. There is no unfunded
liability for past service. Expense for the three months ended March 31,
1996 and 1995 and the years ended December 31, 1995, 1994, and 1993 was
$16,707, $22,675, $83,840, $71,000, and $85,168, respectively.
(13) Financial Instruments With Off-Balance-Sheet Risk
-------------------------------------------------
The Savings Bank is a party to financial instruments with off-balance-sheet
risk in the normal course of business to meet the financing needs of its
customers. These financial instruments include commitments to extend
credit and financial guarantees.
The Savings 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 financial guarantees written is represented by the contractual
amount of these instruments. The Savings Bank uses the same credit
policies in making commitments and conditional obligations as it does for
on-balance-sheet instruments.
F-24 (Continued)
<PAGE>
CHESTER SAVINGS BANK, FSB
Notes to Financial Statements
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 certain of the
commitments are expected to expire without being drawn upon, the total
commitment amounts do not necessarily represent future cash requirements.
The Savings Bank evaluates each customer's creditworthiness on a case-by-
case basis. The amount of collateral obtained if deemed necessary by the
Savings Bank upon extension of credit is based on management's credit
evaluation of the counterparty.
The Savings Bank had outstanding commitments to originate residential loans
of approximately $377,000 and $65,000, of which $320,000 and $65,000 were
at fixed rates and $57,000 and $-0- were at adjustable rates at March 31,
1996 and December 31, 1995, respectively. The fixed rate loan commitments
at March 31, 1996 and December 31, 1995 had interest rates that ranged
from 7.25% to 8.50%. In addition, the Savings Bank had commitments to
fund outstanding credit lines of approximately $-0-, $25,000, and $-0- at
March 31, 1996 and December 31, 1995 and 1994, respectively. Commitments
to extend credit may involve elements of interest rate risk in excess of
the amount recognized in the balance sheets. Interest rate risk on
commitments to extend credit results from the possibility that interest
rates may have moved unfavorably from the position of the Savings Bank
since the time the commitment was made.
(14) Commitments and Contingencies
-----------------------------
As discussed more fully in note 13, the Savings Bank has outstanding
commitments to originate loans in the ordinary course of business.
The Savings Bank is involved in various litigation arising in the ordinary
course of business. In the opinion of management, at the present time,
disposition of the suits and claims will not have a material effect on
the financial position of the Savings Bank.
(15) Fair Values of Financial Instruments
------------------------------------
The estimated fair values of the Savings Bank's interest-earning assets and
interest-bearing liabilities at March 31, 1996 and December 31, 1995 are
as follows:
<TABLE>
<CAPTION>
March 31, 1996 December 31, 1995
------------------ ---------------------
Carrying Estimated Carrying Estimated
value fair value value fair value
----- ---------- ----- ----------
<S> <C> <C> <C> <C>
Interest-earning assets:
Cash and cash equivalents $ 10,290,748 $ 10,290,748 $ 10,666,127 $ 10,666,127
Certificates of deposit 4,141,673 4,141,673 9,761,774 9,761,774
Investment securities 45,601,577 45,569,811 38,345,945 38,427,801
Mortgage-backed securities 16,906,128 16,894,076 15,412,801 15,538,846
Loans receivable 55,753,534 56,317,000 57,021,009 57,982,083
Stock in Federal Home
Loan Bank 622,000 622,000 604,300 604,300
----------- ----------- ----------- -----------
$133,315,660 $133,835,308 $131,811,956 $132,980,931
=========== =========== =========== ===========
</TABLE>
F-25 (Continued)
<PAGE>
CHESTER SAVINGS BANK, FSB
Notes to Financial Statements
<TABLE>
<CAPTION>
March 31, 1996 December 31, 1995
---------------------------- ----------------------------
Carrying Estimated Carrying Estimated
value fair value value fair value
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Interest-bearing liabilities:
Deposits:
Checking, money market
demand, and passbooks $ 39,463,864 $ 39,463,864 $ 36,053,865 $ 36,053,865
Certificates of deposit 69,050,768 68,966,000 70,663,984 70,525,081
Securities sold under
agreements to repurchase 15,000,000 15,000,000 15,000,000 15,000,000
------------ ------------ ------------ -------------
$123,514,632 $123,429,864 $121,717,849 $121,578,946
============ ============ ============ =============
</TABLE>
The following methods and assumptions were used to estimate the fair value of
each class of financial instrument listed above:
Cash and Cash Equivalents
-------------------------
Cash and cash equivalents consist of cash, interest-bearing deposits with
maturities of three months or less, and federal funds sold. The carrying
value is considered a reasonable estimate of fair value of these
financial instruments due to their short-term nature.
Certificates of Deposit
-----------------------
The carrying value is considered a reasonable estimate of fair value of the
financial instrument due to original maturities not exceeding one year.
Investment and Mortgage-Backed Securities
-----------------------------------------
Fair values are based on quoted market prices or dealer quotes.
Loans Receivable
----------------
Fair values are estimated for portfolios of loans with similar financial
characteristics. Loans are segregated by type, such as residential real
estate, commercial real estate, and consumer loans. Each loan category
is further segmented into fixed and adjustable rate interest terms and by
performing and nonperforming categories.
The fair value of performing loans is calculated by discounting scheduled
cash flows through the estimated maturity using estimated market discount
rates that reflect the credit and interest rate risk inherent in the
loan. The estimate of maturity is based on the Savings Bank's historical
experience, with repayments for each loan classification modified, as
required, by an estimate of the effect of current economic and lending
conditions.
Fair value for significant nonperforming loans is based on recent external
appraisals. Assumptions regarding credit risk, cash flows, and discount
rates are judgmentally determined using available market information and
specific borrower information.
Stock in Federal Home Loan Bank
-------------------------------
Stock in Federal Home Loan Bank is valued at cost, which represents
redemption value and approximates fair value.
Deposits
--------
The fair value of deposits with no stated maturity, such as checking, money
market demand, and passbook, is equal to the amount payable on demand at
March 31, 1996 and December 31, 1995.
F-26
<PAGE>
CHESTER SAVINGS BANK, FSB
Notes to Financial Statements
The fair value of certificates of deposit, all of which have stated
maturities, is based on the discounted value of contractual cash flows.
The discount rate is estimated using the rates currently offered for
deposits of similar remaining maturities.
Securities Sold Under Agreements to Repurchase
----------------------------------------------
The carrying value is considered a reasonable estimate of fair value of
this financial instrument due to original maturities not exceeding one
year.
(16) Recent Regulatory Developments
------------------------------
The deposits of the Savings Bank are presently insured by the Savings
Association Insurance Fund (SAIF), which together with the Bank Insurance
Fund (BIF), which insures the deposits of commercial banks, are the two
deposit insurance funds administered by the Federal Deposit Insurance
Corporation (FDIC). In August 1995, the FDIC substantially reduced
deposit insurance premiums for well-capitalized BIF-insured members and
in November 1995, further revised the premium schedule to provide a range
of 0% to .27% with a minimum annual premium of $2,000 effective January
1996. With respect to SAIF members, the FDIC retained the existing rate
schedule of .23% to .31%. As a result, BIF members pay substantially
lower premiums than the SAIF members. The FDIC has indicated that the
SAIF will not be adequately recapitalized until 2002, absent a
substantial increase in premium rates or the imposition of special
assessments. As a result of the disparity, SAIF members are placed at a
significant, competitive disadvantage to BIF members due to higher costs
for deposit insurance. Proposed legislation under consideration by the
United States Congress provides for a one-time assessment to be imposed
on all SAIF-insured deposits in order to recapitalize the SAIF. The
special assessment rate is anticipated to be .85% to .90% of insured
deposits as of a certain specified date, after which it is expected that
the insurance premiums would be equalized for BIF and SAIF members. The
Savings Bank estimates the one-time assessment would approximate $1.1
million on a pretax basis.
(17) Director Emeritus Retirement Plan
---------------------------------
On January 18, 1996, the Savings Bank adopted a retirement plan for
directors who reach director emeritus status. Eligibility for director
emeritus status is achieved when a director reaches age 81 or when a
director resigns for any reason. A director emeritus, upon the later of
the first anniversary of designation as a director emeritus, or the date
on which the director emeritus attains age 65, will receive, on an annual
basis for a period of 10 years following designation as a director
emeritus, an amount equal to $500 multiplied by the number of full years
of service as a director of the Savings Bank or any predecessor
institution that was previously merged with the Savings Bank. Vesting for
past service as a director will occur on December 31, 1996. Benefits to
be paid for future service will be accrued over the remaining period of
service as a director. During December 1995, the plan was funded through
the purchase of life insurance contracts on the directors. The cash
surrender value of the life insurance contracts totaled $182,478 and
$181,481 as of March 31, 1996 and December 31, 1995, respectively, and is
included in other assets in the balance sheet. Expense related to the
plan was $51,831 for the three months ended March 31, 1996.
F-27
<PAGE>
CHESTER SAVINGS BANK, FSB
Notes to Financial Statements
(18) Adoption of Plan of Conversion to Stock Charter
-----------------------------------------------
On March 12, 1996, the Board of Directors of the Savings Bank adopted a
plan of conversion whereby the Savings Bank will be converted from a
federal mutual savings bank to a federal capital stock savings bank and
simultaneously form a Delaware corporation to act as the holding company
(the Holding Company) of the converted savings bank. Pursuant to the
plan, the Savings Bank will convert to a national bank to be known as
Chester National Bank (the Converted Bank), and a newly chartered bank
subsidiary will be formed by the Holding Company to be known as Chester
National Bank of Missouri. The stock of Chester National Bank and Chester
National Bank of Missouri will be held by the Holding Company. The price
will be determined by an independent appraisal of the Savings Bank and
will reflect its estimated pro forma market value, as converted. The plan
provides that nontransferrable subscription rights to purchase stock will
be offered first to the Savings Bank's eligible savings account holders,
second to the Savings Bank's tax-qualified employee stock ownership plan,
and then, to the extent that stock is available, to other Savings Bank
members. Concurrently with, during, or promptly after the subscription
offering, and on a lowest priority basis, an opportunity to subscribe may
also be offered to certain members of the general public in a direct
community offering.
Under current applicable provisions of the Internal Revenue Code, the
Savings Bank is allowed to maintain higher tax bad debt reserve levels
than allowed for national banks. As a result of the Savings Bank's
conversion to a national bank, the Converted Bank must restate its tax
bad debt reserve as of the first year of conversion. Accordingly, the
excess of the Savings Bank's bad debt reserve as of the close of the tax
year immediately preceding the year of conversion to a national bank over
the restated reserve level must be included in the Converted Bank's
taxable income ratably over a six-year period. The recapture by the
Converted Bank will total approximately $2.5 million.
Subsequent to conversion, savings account holders and borrowers will not
have voting rights in the Savings Bank. Voting rights will be vested
exclusively with the stockholders of the Holding Company. Savings
deposits will continue to be insured by the FDIC.
All costs associated with the conversion will be deferred and deducted from
the proceeds of the shares sold in the conversion. If the conversion is
--------------------
not successfully completed, the costs incurred in connection with the
---------------------------------------------------------------------
conversion will be expensed. Conversion costs of $167,236 and $10,756
---------------------------
were deferred at March 31, 1996 and December 31, 1995, respectively.
For the purpose of granting eligible members of the Savings Bank a priority
in the event of future liquidation, the Savings Bank will, at the time of
conversion, establish a liquidation account equal to its net worth as of
the date of the latest balance sheet used in the final conversion
prospectus. In the event (and only in such an event) of future
liquidation of the Converted Bank, an eligible savings account holder who
continues to maintain his/her savings account shall be entitled to
receive a distribution from the liquidation account, in the proportionate
amount of the then current adjusted balance of the savings deposits then
held, before any distributions may be made with respect to capital stock.
F-28
<PAGE>
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 other information or representation must not be relied upon as having been
authorized by the Holding Company, the Savings Bank or EVEREN Securities. This
Prospectus does not constitute an offer to sell or a solicitation of an offer to
buy any of the securities offered hereby to any person or 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 to make such offer or solicitation in such jurisdiction. 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 Holding Company or the Savings Bank since any of the dates as of
which information is furnished herein or since the date hereof.
<TABLE>
<CAPTION>
Table of Contents Page
----------------- ----
<S> <C>
Prospectus Summary...................................................
Selected Financial Information.......................................
Risk Factors.........................................................
Chester Bancorp, Inc.................................................
Chester Savings Bank, FSB............................................
Chester National Bank and Chester National Bank of Missouri..........
Use of Proceeds......................................................
Dividend Policy......................................................
Market for Common Stock..............................................
Capitalization.......................................................
Historical and Pro Forma Capital Compliance..........................
Pro Forma Data.......................................................
Chester Savings Bank, FSB Statements of Income.......................
Management's Discussion and Analysis of Financial
Condition and Results of Operations.................................
Recent Developments..................................................
Business of the Holding Company......................................
Business of the Savings Bank.........................................
Management of the Holding Company....................................
Management of the Savings Bank.......................................
Regulation...........................................................
Taxation.............................................................
The Conversion.......................................................
Restrictions on Acquisition of the Holding Company...................
Description of Capital Stock of the Holding Company..................
Registration Requirements............................................
Legal and Tax Opinions...............................................
Experts..............................................................
Change in Accountants................................................
Additional Information...............................................
Index to Financial Statements........................................
</TABLE>
Until the later of _________, 1996, or 25 days after commencement of the Direct
Community Offering or Public Offering, if any, 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.
Chester Bancorp, Inc.
[Logo]
1,317,500 to 1,782,500 Shares of
Common Stock
----------------
Prospectus
----------------
EVEREN Securities, Inc.
, 1996
-------- --
<PAGE>
PART II: INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution(1)
<TABLE>
<S> <C>
Legal.................................... $135,000
Securities marketing legal fees.......... 45,000
Printing, postage and mailing............ 75,000
Appraisal and business plan preparation.. 27,500
Accounting fees.......................... 75,000
Securities marketing fees(1)............. 215,000
Data processing fees..................... 7,450
SEC registration fee..................... 7,981
Blue Sky filing fees and expenses........ 10,000
OTS filing fees.......................... 8,400
Other expenses........................... 43,669
--------
Total................................ $650,000
========
</TABLE>
- -------------------------
(1) A flat fee across the Estimated Valuation Range, consisting of a non-
refundable retainer fee of $15,000 and a completion fee of $200,000.
Item 14. Indemnification of Officers and Directors
Section 145 of the Delaware General Corporation Law sets forth
circumstances under which directors, officers, employees and agents may be
insured or indemnified against liability which they may incur in their
capacities:
145 INDEMNIFICATION OF OFFICERS, DIRECTORS, EMPLOYEES AND AGENTS;
INSURANCE.--(a) A corporation may indemnify any person who was or is a party or
is threatened to be made a party to any threatened, pending or completed action,
suit or proceeding, whether civil, criminal, administrative or investigative
(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, shall not, of
itself, create a presumption that the person did not act in good faith and in a
manner which 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 reasonable cause to believe that his conduct was unlawful.
(b) A corporation may indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending or completed action or
suit by or in the right of the corporation to procure a judgment in its favor 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 and except that no indemnification shall 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 shall determine
upon application that, despite the adjudication of liability but in view of all
the circumstances of the case, such person is fairly and reasonably entitled to
indemnity for such expenses which the Court of Chancery or such other court
shall deem proper.
<PAGE>
(c) 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
action, suit or proceeding referred to in subsections (a) and (b) of this
section, or in defense of any claim, issue or matter therein, he shall be
indemnified against expenses (including attorneys' fees) actually and reasonably
incurred by him in connection therewith.
(d) Any indemnification under subsections (a) and (b) of this section
(unless ordered by a court) shall be made by the corporation only as authorized
in the specific case upon a determination that indemnification of the director,
officer, employee or agent is proper in the circumstances because he has met the
applicable standard of conduct set forth in subsections (a) and (b) of this
section. Such determination shall be made (1) by 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 (2) if such a quorum is not obtainable, or, even
if obtainable a quorum of disinterested directors so directs, by independent
legal counsel in a written opinion, or (3) by the stockholders.
(e) 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 such action, suit 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 as authorized in this section. Such expenses (including
attorneys' fees) incurred by other employees and agents may be so paid upon such
terms and conditions, if any, as the board of directors deems appropriate.
(f) The indemnification and advancement of expenses provided by, or
granted pursuant to, the other subsections of this section shall not be deemed
exclusive of any other rights to which those seeking indemnification or
advancement of expenses may be entitled under any bylaw, agreement, vote of
stockholders or disinterested directors or otherwise, both as to action in his
official capacity and as to action in another capacity while holding such
office.
(g) A corporation shall have power to purchase and maintain insurance on
behalf of any person who 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 any liability asserted against him or
incurred by him any such capacity, or arising out of his status as such, whether
or not the corporation would have the power to indemnify him against such
liability under this section.
(h) For purposes of this section, references to "the corporation" shall
include, in addition to the resulting corporation, any constituent corporation
(including any constituent of a constituent) absorbed in a consolidation or
merger which, if its separate existence had continued, would have had power and
authority to indemnify its directors, officers, and employees or agents, so that
any person who is or was a director, officer, employee or agents, so that any
person who is or was a director, officer, employee or agent of such constituent
corporation, or is or was serving at the request of such constituent corporation
as a director, officer, employee or agent of another corporation, partnership,
joint venture, trust or other enterprise, shall stand in the same position under
this section with respect to the resulting or surviving corporation as he would
have with respect to such constituent corporation if its separate existence had
continued.
(i) For purposes of this section, references to "other enterprises" shall
include employee benefit plans; references to "fines" shall include any excise
taxes assessed on a person with respect to any employee benefit plan; and
references to "serving at the request of the corporation" shall include any
service as a director, officer, employee or agent of the corporation which
imposes duties on, or involves services by, such director, officer, employee, or
agent with respect to an employee benefit plan, its participants or
beneficiaries; and a person who acted in good faith and in a manner he
reasonably believed to be in the interest of the participants and beneficiaries
of an employee benefit plan shall be deemed to have acted in a manner "not
opposed to the best interests of the corporation" as referred to in this
section.
(j) The indemnification and advancement of expenses provided by, or
granted pursuant to, this section shall, unless otherwise provided when
authorized or ratified, continue as to a person who has ceased to be a director,
officer, employee or agent and shall inure to the benefit of the heirs,
executors and administrators of such a person.
<PAGE>
Article XVI of the Certificate of Incorporation of the Registrant requires
indemnification of directors, officers and employees to the fullest extent
permitted by Delaware law, as follows:
"ARTICLE XVII
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 or employee 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 such person if such person satisfies the
standard in paragraph C, for expenses (including attorneys' fees but excluding
amounts paid in settlement) actually and reasonably incurred by such person 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. such person is successful on the merits or otherwise; or
2. such person acted in good faith in the transaction which is the
subject of the suit or action, and in a manner such person reasonably believed
to be in, or not opposed to, the best interest 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 XIV) not
approved by the board of directors. However, such person shall not be
indemnified in respect of any claim, issue or matter as to which such person 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, such person 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 such person if such person satisfies the standard in
paragraph E, for amounts actually and reasonably incurred by such person 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.
E. Standard -- Nonderivative Suits. In case of a nonderivative suit, a
-------------------------------
person named in paragraph A shall be indemnified only if:
1. such person is successful on the merits or otherwise; or
2. such person acted in good faith in the transaction which is the
subject of the nonderivative suit and in a manner such person 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 XIV of
this Certificate) not approved by the board of directors and, with respect to
any criminal action or proceeding, such person had no reasonable cause to
believe his conduct was unlawful. The termination of a nonderivative suit
<PAGE>
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 paragraph 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 paragraph C.2 (second sentence), the determination may be
made by:
1. a majority vote of the directors of the Corporation who are not
parties to the action, suit or proceeding, even though less than a quorum; 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 may pay in advance any expenses
---------------
(including attorneys' fees) which may become subject to indemnification under
paragraphs A through G if (i) the board of directors authorizes the specific
payment; and (ii) the person receiving the payment undertakes in writing to
repay the same if it is ultimately determined that such person is not entitled
to indemnification by the Corporation under paragraphs A through G.
I. Nonexclusive. The indemnification and advance 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 XVI 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 XVI
shall not affect any rights or obligations then existing with respect to any
state of facts then or theretofore existing or any action, suit or proceeding
theretofore or thereafter brought based in whole or in part upon any such state
of facts. The indemnification and advance payment provided by paragraphs A
through H shall continue as to a person who has ceased to hold a position named
in paragraph A and shall inure to such person's 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 such person in any such position, or
arising out of such person's status as such, whether or not the Corporation
would have power to indemnify such person against such liability under
paragraphs A through H.
L. Savings Clause. If this Article XVI 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 XVI that shall
not have been invalidated and to the full extent permitted by applicable law."
Item 15. Recent Sales of Unregistered Securities.
Not Applicable
<PAGE>
Item 16. Exhibits and Financial Statement Schedules:
The financial statements and exhibits filed as part of this
Registration Statement are as follows:
<TABLE>
<CAPTION>
(a) List of Exhibits
<S> <C>
1.1 - Form of proposed Agency Agreement among Chester Bancorp, Inc.,
Chester Savings Bank, FSB and EVEREN Securities, Inc. (a)
1.2 - Engagement Letter by and between Chester Savings Bank, FSB and
EVEREN Securities, Inc. (a)
2 - Plan of Conversion of Chester Savings Bank, FSB (attached as an
exhibit to the Proxy Statement included herein as Exhibit 99.5)
3.1 - Certificate of Incorporation of Chester Bancorp, Inc. (a)
3.2 - Bylaws of Chester Bancorp, Inc. (a)
4 - Form of Certificate for Common Stock (a)
5 - Opinion of Breyer & Aguggia regarding legality of securities
registered (a)
8.1 - Form of Federal Tax Opinion of Breyer & Aguggia (a)
8.2 - Form of State Tax Opinion of Bryan Cave LLP (a)
8.3 - Opinion of RP Financial, LC. as to the value of subscription rights
(a)
10.1 - Proposed Form of Employment Agreement with Michael W. Welge
10.2 - Proposed Form of Employment Agreement with Edward K. Collins
10.3 - Proposed Form of Stock Option Plan (a)
10.4 - Proposed Form of Management Recognition and Development Plan (a)
10.5 - Proposed Form of Employee Stock Ownership Plan and Trust Agreement
(a)
10.6 - Amended and Restated Director Emeritus Plan
21 - Subsidiaries of Chester Bancorp, Inc. (reference is made to the
section entitled "BUSINESS OF THE SAVINGS BANK --Subsidiaries" in
the Prospectus included in Part I of this registration statement)
23.1 - Consent of KPMG Peat Marwick LLP
23.2 - Consent of Kerber, Eck & Braeckel LLP
23.3 - Consent of Breyer & Aguggia (contained in their opinion filed as
Exhibit 5) (a)
23.4 - Consent of RP Financial, LC. (a)
24 - Power of Attorney (contained in the signature page to the
Registration Statement)
99.1 - Order and Acknowledgement Form (a)
</TABLE>
<PAGE>
<TABLE>
<S> <C>
99.2 - Solicitation and Marketing Materials (a)
99.3 - Appraisal Agreement with RP Financial, LC. (a)
99.4 - Appraisal Report of RP Financial, LC. (a)
99.5 - Proxy Statement for Special Meeting of Members of Chester Savings
Bank, FSB
</TABLE>
- ---------------------
(a) Previously filed.
Financial Statements and Schedules
<TABLE>
<CAPTION>
Chester Savings Bank, FSB
Pages
<S> <C>
Independent Auditors' Reports....................................... F-1
Balance Sheets as of December 31, 1995 and 1994..................... F-3
Statements of Income for the Three Years Ended
December 31, 1995.................................................. 23
Statements of Retained Earnings for the Three Years
Ended December 31, 1995............................................ F-4
Statements of Cash Flows for the Three Years Ended
December 31, 1995.................................................. F-5
Notes to Financial Statements....................................... F-6
</TABLE>
All schedules are omitted as the required information either is not
applicable or is included in the Financial Statements or related Notes.
----------------
Item 17. Undertakings
The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made,
a post-effective amendment to this registration statement:
(i) To include any prospectus required by section 10(a)(3) of
the Securities Act of 1933, as amended ("Securities Act");
(ii) To 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;
(iii) To 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.
<PAGE>
(2) That, for the purpose of 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 the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination of the
offering.
(4) The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act, each filing of the
registrant's annual report pursuant to Section 13(a) or Section 15(d) of the
Securities Exchange Act of 1934, as amended ("Exchange Act") (and, where
applicable, each filing of any employee benefit plan's annual report pursuant to
Section 15(d) of the Exchange Act) that is incorporated by reference in the
registration statement 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.
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 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 questions 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.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
registrant has duly caused this Amended Registration Statement to be signed on
its behalf by the undersigned, thereunto duly authorized, in Chester, Illinois
on the 8th day of August, 1996.
CHESTER BANCORP, INC.
By: /s/ Edward K. Collins
----------------------------------------------
Edward K. Collins
Chief Executive Officer, Secretary and
Director
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Amended Registration Statement has been signed below by the following
persons in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signatures Title Date
- ---------- ----- ----
<S> <C> <C>
/s/ Michael W. Welge* Chairman of the Board, August 8, 1996
- ------------------------------------- President and Director
Michael W. Welge (Principal Financial Officer)
/s/ Edward K. Collins Chief Executive Officer, August 8, 1996
- -------------------------------------- Secretary and Director
Edward K. Collins (Principal Executive Officer)
/s/Howard A. Boxdorfer* Director August 8, 1996
- -------------------------------------
Howard A. Boxdorfer
/s/Thomas E. Welch, Jr.* Director August 8, 1996
- -------------------------------------
Thomas E. Welch, Jr.
/s/John R. Beck, M.D.* Director August 8, 1996
- -------------------------------------
John R. Beck, M.D.
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C>
/s/Allen R. Verseman* Director August 8, 1996
- -------------------------------------
Allen R. Verseman
/s/James E. McDonald* Director August 8, 1996
- -------------------------------------
James E. McDonald
/s/Carl H. Welge* Director August 8, 1996
- -------------------------------------
Carl H. Welge
</TABLE>
- ------------
* By power of attorney dated March 15, 1996.
<PAGE>
As filed with the Securities and Exchange Commission on August 8, 1996
Registration No. 333-2470
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
EXHIBITS
TO
AMENDMENT NO. 2
TO
FORM S-1
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
CHESTER BANCORP, INC.
----------------------------------------------------
(Exact name of small business issuer in its charter)
Delaware 6035 37-1359570
- ------------------------------- ------------------- ------------------
(State or other jurisdiction of (Primary SICC No.) (I.R.S.Employer
incorporation or organization) Identification No.)
1112 State Street
Chester, Illinois 62233-1659
(618) 826-5038
------------------------------------------------------------------------
(Address and telephone number of principal executive offices and place of
business)
John F. Breyer, Jr., Esquire
Victor L. Cangelosi, Esquire
BREYER & AGUGGIA
1300 I Street, N.W.
Suite 470 East
Washington, D.C. 20005
(202) 737-7900
---------------------------------------------------------
(Name, address and telephone number of agent for service)
<PAGE>
INDEX TO EXHIBITS
1.1 - Form of proposed Agency Agreement among Chester Bancorp, Inc., Chester
Savings Bank, FSB and EVEREN Securities, Inc.(a)
1.2 - Engagement Letter by and between Chester Savings Bank, FSB and EVEREN
Securities, Inc. (a)
2 - Plan of Conversion of Chester Savings Bank, FSB (attached as an exhibit
to the Proxy Statement included herein as Exhibit 99.5)
3.1 - Certificate of Incorporation of Chester Bancorp, Inc. (a)
3.2 - Bylaws of Chester Bancorp, Inc. (a)
4 - Form of Certificate for Common Stock (a)
5 - Opinion of Breyer & Aguggia regarding legality of securities registered
(a)
8.1 - Form of Federal Tax Opinion of Breyer & Aguggia (a)
8.2 - Form of State Tax Opinion of Bryan Cave LLP (a)
8.3 - Opinion of RP Financial, LC. as to the value of subscription rights (a)
10.1 - Proposed Form of Employment Agreement with Michael W. Welge
10.2 - Proposed Form of Employment Agreement with Edward K. Collins
10.3 - Proposed Form of Stock Option Plan (a)
10.4 - Proposed Form of Management Recognition and Development Plan (a)
10.5 - Proposed Form of Employee Stock Ownership Plan and Trust Agreement
(a)
10.6 - Amended and Restated Director Emeritus Plan
21 - Subsidiaries of Chester Bancorp, Inc.(reference is made to the section
entitled "BUSINESS OF THE SAVINGS BANK -- Subsidiaries" in the
Prospectus included in Part I of this registration statement)
23.1 - Consent of KPMG Peat Marwick LLP
23.2 - Consent of Kerber, Eck & Braeckel LLP
23.3 - Consent of Breyer & Aguggia (contained in their opinion filed as
Exhibit 5) (a)
23.4 - Consent of RP Financial, LC. (a)
24 - Power of Attorney (contained in the signature page to the Registration
Statement)
99.1 - Order and Acknowledgement Form (a)
99.2 - Solicitation and Marketing Materials (a)
99.3 - Appraisal Agreement with RP Financial, LC. (a)
99.4 - Appraisal Report of RP Financial, LC. (a)
99.5 - Proxy Statement for Special Meeting of Members of Chester Savings Bank,
FSB
- ---------------------
(a) Previously filed.
<PAGE>
EXHIBIT 10.1
Proposed Form of Employment Agreement with Michael W. Welge
<PAGE>
EMPLOYMENT AGREEMENT
THIS AGREEMENT is made effective as of ________________, 1996, by and
between Chester National Bank, a national bank (the "Bank"), Chester Bancorp,
Inc., a Delaware corporation (the "Company"); and Michael W. Welge (the
"Executive").
WHEREAS, the Bank wishes to assure itself of the services of Executive for
the period provided in this Agreement; and
WHEREAS, the Executive is willing to serve in the employ of the Bank on a
substantial basis for said period.
NOW, THEREFORE, in consideration of the mutual covenants herein contained,
and upon the other terms and conditions hereinafter provided, the parties hereby
agree as follows:
1. POSITION AND RESPONSIBILITIES.
During the period of his employment hereunder, Executive agrees to serve as
the Chairman of the Board and Chief Financial Officer of the Bank and Chairman
of the Board, President and Chief Financial Officer of the Company. During said
period, Executive also agrees to serve, if elected, as a director and other
officer of the Company or any subsidiary or affiliate of the Company or the
Bank.
2. TERMS AND DUTIES.
(a) The term of this Agreement shall be deemed to have commenced as of the
date first above written and shall continue for a period of thirty-six (36) full
calendar months thereafter. Commencing on the first anniversary date, and
continuing at each anniversary date thereafter, the Board of Directors of the
Bank (the "Board") may extend the Agreement for an additional year. Prior to
the extension of the Agreement as provided herein, the Board of Directors of the
Bank will conduct a formal performance evaluation of the Executive for purposes
of determining whether to extend the Agreement, and the results thereof shall be
included in the minutes of the Board's meeting.
(b) During the period of his employment hereunder, except for periods of
absence occasioned by illness, reasonable vacation periods, and reasonable
leaves of absence, Executive shall devote sufficient time, attention, skill, and
efforts to the faithful performance of his duties hereunder including activities
and services related to the organization, operation and management of the Bank;
provided, however, that Executive may serve, or continue to serve, on the boards
of directors of, and hold any other offices or positions in, companies or
organizations, which, will not present any conflict of interest with the Bank,
or materially affect the performance of Executive's duties pursuant to this
Agreement.
3. COMPENSATION AND REIMBURSEMENT.
(a) The compensation specified under this Agreement shall constitute the
salary and benefits paid for the duties described in Sections 1 and 2. The Bank
shall pay Executive as compensation a salary of $60,000 per year ("Base
Salary"). Such Base Salary shall be payable in accordance with the customary
payroll practices of the Bank. During the period of this Agreement, Executive's
Base Salary shall be reviewed at least annually; the first such review will be
made no later than one year from the date
<PAGE>
of this Agreement. Such review shall be conducted by a Committee designated by
the Board, and the Board may increase Executive's Base Salary. In addition to
the Base Salary provided in this Section 3(a), the Bank shall provide Executive
at no cost to Executive with all such other benefits as are provided uniformly
to permanent full-time employees of the Bank.
(b) The Bank will provide Executive with employee benefit plans,
arrangements and perquisites substantially equivalent to those in which
Executive was participating or otherwise deriving benefit from immediately prior
to the beginning of the term of this Agreement, and the Bank will not, without
Executive's prior written consent, make any changes in such plans, arrangements
or perquisites which would adversely affect Executive's rights or benefits
thereunder. Without limiting the generality of the foregoing provisions of this
Subsection (b), Executive will be entitled to participate in or receive benefits
under any employee benefit plans including, but not limited to, retirement
plans, supplemental retirement plans, pension plans, profit-sharing plans,
health-and-accident plan, medical coverage or any other employee benefit plan or
arrangement made available by the Bank in the future to its senior executives
and key management employees, subject to, and on a basis consistent with, the
terms, conditions and overall administration of such plans and arrangements.
Executive will be entitled to incentive compensation and bonuses as provided in
any plan, or pursuant to any arrangement of the Bank, in which Executive is
eligible to participate. Nothing paid to the Executive under any such plan or
arrangement will be deemed to be in lieu of other compensation to which the
Executive is entitled under this Agreement, except as provided under Section
5(e).
(c) In addition to the Base Salary provided for by paragraph (a) of this
Section 3, the Bank shall pay or reimburse Executive for all reasonable travel
and other obligations under this Agreement and may provide such additional
compensation in such form and such amounts as the Board may from time to time
determine.
4. PAYMENTS TO EXECUTIVE UPON AN EVENT OF TERMINATION.
(a) Upon the occurrence of an Event of Termination (as herein defined)
during the Executive's term of employment under this Agreement, the provisions
of this Section shall apply. As used in this Agreement, an "Event of
Termination" shall mean and include any one or more of the following: (i) the
termination by the Bank of Executive's full-time employment hereunder for any
reason other than a Change in Control, as defined in Section 5(a) hereof;
disability, as defined in Section 6(a) hereof; death; retirement, as defined in
Section 7 hereof; or Termination for Cause, as defined in Section 8 hereof; (ii)
Executive's resignation from the Bank's employ, upon (A) unless consented to by
the Executive, a material change in Executive's function, duties, or
responsibilities, which change would cause Executive's position to become one of
lesser responsibility, importance, or scope from the position and attributes
thereof described in Sections 1 and 2, above, (any such material change shall be
deemed a continuing breach of this Agreement), (B) a relocation of Executive's
principal place of employment by more than 35 miles from its location at the
effective date of this Agreement, or a material reduction in the benefits and
perquisites to Executive from those being provided as of the effective date of
this Agreement, (C) the liquidation or dissolution of the Bank, or (D) any
breach of this Agreement by the Bank. Upon the occurrence of any event
described in clauses (A), (B), (C) or (D), above, Executive shall have the right
to elect to terminate his employment under this Agreement by resignation upon
not less than sixty (60) days prior written notice given within a reasonable
period of time not to exceed, except in case of a continuing breach, four (4)
calendar months after the event giving rise to said right to elect.
(b) Upon the occurrence of an Event of Termination, the Bank shall pay
Executive, or, in the event of his subsequent death, his beneficiary or
beneficiaries, or his estate, as the case may be, as severance pay or liquidated
damages, or both, a sum equal to the payments due to the Executive for the
remaining term of the Agreement, including Base Salary, bonuses, and any other
cash or deferred compensation paid or to be paid (including the value of
employer contributions that would have been
-2-
<PAGE>
made on the Executive's behalf over the remaining term of the agreement to any
tax-qualified retirement plan sponsored by the Bank as of the Date of
Termination), to the Executive for the term of the Agreement provided, however,
that if the Bank is not in compliance with its minimum capital requirements or
if such payments would cause the Bank's capital to be reduced below its minimum
capital requirements, such payments shall be deferred until such time as the
Bank is in capital compliance. All payments made pursuant to this Section 4(b)
shall be paid in substantially equal monthly installments over the remaining
term of this Agreement following the Executive's termination; provided, however,
that if the remaining term of the Agreement is less than one (1) year
(determined as of the Executive's Date of Termination), such payments and
benefits shall be paid to the Executive in a lump sum within thirty (30) days of
the Date of Termination.
(c) Upon the occurrence of an Event of Termination, the Bank will cause to
be continued life, medical, dental and disability coverage substantially
identical to the coverage maintained by the Bank for Executive prior to his
termination. Such coverage shall cease upon the expiration of the remaining
term of this Agreement.
5. CHANGE IN CONTROL.
(a) No benefit shall be paid under this Section 5 unless there shall have
occurred a Change in Control of the Company or the Bank. For purposes of this
Agreement, a "Change in Control" of the Company or the Bank shall be deemed to
occur if and when (a) an offeror other than the Company purchases shares of the
common stock of the Company or the Bank pursuant to a tender or exchange offer
for such shares, (b) any person (as such term is used in Sections 13(d) and
14(d)(2) of the Securities Exchange Act of 1934) is or becomes the beneficial
owner, directly or indirectly, of securities of the Company or the Bank
representing 25% or more of the combined voting power of the Company's then
outstanding securities, (c) the membership of the board of directors of the
Company or the Bank changes as the result of a contested election, such that
individuals who were directors at the beginning of any twenty-four (24) month
period (whether commencing before or after the date of adoption of this Plan) do
not constitute a majority of the Board at the end of such period, or (d)
shareholders of the Company or the Bank approve a merger, consolidation, sale or
disposition of all or substantially all of the Company's or the Bank's assets,
or a plan of partial or complete liquidation.
(b) If any of the events described in Section 5(a) hereof constituting a
Change in Control have occurred or the Board of the Bank or the Company has
reasonably determined that a Change in Control has occurred, Executive shall be
entitled to the benefits provided in paragraphs (c), (d) and (e) of this Section
5 upon his subsequent involuntary termination following the effective date of a
Change in Control (or voluntary termination following the effective date of a
Change in Control following any material change in Executive's function, duties,
or responsibilities, which change would cause Executive's position to become one
of lesser responsibility, importance, or scope from the position and attributes
thereof described in Sections 1 and 2, above, or relocation of his principal
place of employment by more than thirty-five (35) miles from its location
immediately prior to the Change in Control), unless such termination is because
of his death, retirement as provided in Section 7, termination for Cause, or
termination for Disability.
(c) Upon the occurrence of a Change in Control followed by the Executive's
termination of employment, the Bank shall pay Executive, or in the event of his
subsequent death, his beneficiary or beneficiaries, or his estate, as the case
may be, as severance pay or liquidated damages, or both, a sum equal to 2.99
times Executive's average annual compensation during the years of the five (5)
year period preceding the Change in Control in which Executive was employed by
the Bank or the Company. Such payment shall be made in a lump sum paid within
ten (10) days of the Executive's Date of Termination.
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(d) Upon the occurrence of a Change in Control followed by the Executive's
termination of employment, the Bank will cause to be continued life, medical,
dental and disability coverage substantially identical to the coverage
maintained by the Bank for Executive prior to his severance. In addition,
Executive shall be entitled to receive the value of employer contributions that
would have been made on the Executive's behalf over the remaining term of the
agreement to any tax-qualified retirement plan sponsored by the Bank as of the
Date of Termination. Such coverage and payments shall cease upon the expiration
of twelve (12) months.
(e) Upon the occurrence of a Change in Control, the Executive shall be
entitled to receive benefits due him under, or contributed by the Company or the
Bank on his behalf, pursuant to any retirement, incentive, profit sharing,
bonus, performance, disability or other employee benefit plan maintained by the
Bank or the Company on the Executive's behalf to the extent that such benefits
are not otherwise paid to the Executive upon a Change in Control.
6. TERMINATION FOR DISABILITY.
(a) If the Executive shall become disabled as defined in the Bank's then
current disability plan (or, if no such plan is then in effect, if the Executive
is permanently and totally disabled within the meaning of Section 22(e)(3) of
the Code as determined by a physician designated by the Board), the Bank may
terminate Executive's employment for "Disability."
(b) Upon the Executive's termination of employment for Disability, the
Bank will pay Executive, as disability pay, a bi-weekly payment equal to three-
quarters (3/4) of Executive's bi-weekly rate of Base Salary on the effective
date of such termination. These disability payments shall commence on the
effective date of Executive's termination and will end on the earlier of (i) the
date Executive returns to the full-time employment of the Bank in the same
capacity as he was employed prior to his termination for Disability and pursuant
to an employment agreement between Executive and the Bank; (ii) Executive's
full-time employment by another employer; (iii) Executive attaining the age of
65; or (iv) Executive's death; or (v) the expiration of the term of this
Agreement. The disability pay shall be reduced by the amount, if any, paid to
the Executive under any plan of the Bank providing disability benefits to the
Executive.
(c) The Bank will cause to be continued life, medical, dental and
disability coverage substantially identical to the coverage maintained by the
Bank for Executive prior to his termination for Disability. This coverage and
payments shall cease upon the earlier of (i) the date Executive returns to the
full-time employment of the Bank, in the same capacity as he was employed prior
to his termination for Disability and pursuant to an employment agreement
between Executive and the Bank; (ii) Executive's full-time employment by another
employer; (iii) Executive's attaining the age of sixty-five (65); (iv) the
Executive's death; or (v) the expiration of the term of this Agreement.
(d) Notwithstanding the foregoing, there will be no reduction in the
compensation otherwise payable to Executive during any period during which
Executive is incapable of performing his duties hereunder by reason of temporary
disability.
7. TERMINATION UPON RETIREMENT; DEATH OF EXECUTIVE.
Termination by the Bank of Executive based on "Retirement" shall mean
retirement at age sixty-five (65) or in accordance with any retirement
arrangement established with Executive's consent with respect to him. Upon
termination of Executive upon Retirement, Executive shall be entitled to all
benefits under any retirement plan of the Bank or the Company and other plans to
which Executive is a party. Upon the death of the Executive during the term of
this Agreement, the Bank shall pay to
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Executive's estate the compensation due to the Executive through the last day of
the calendar month in which his death occurred.
8. TERMINATION FOR CAUSE.
For purposes of this Agreement, "Termination for Cause" shall include
termination because of the Executive'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.
For purposes of this Section, no act, or the failure to act, on Executive's part
shall be "willful" unless done, or omitted to be done, not in good faith and
without reasonable belief that the action or omission was in the best interest
of the Bank or its affiliates. Notwithstanding the foregoing, Executive shall
not be deemed to have been terminated for Cause unless and until there shall
have been delivered to him a copy of a resolution duly adopted by the
affirmative vote of not less than three-fourths of the members of the Board at a
meeting of the Board called and held for that purpose (after reasonable notice
to Executive and an opportunity for him, together with counsel, to be heard
before the Board), finding that in the good faith opinion of the Board,
Executive was guilty of conduct justifying termination for Cause and specifying
the reasons thereof. The Executive shall not have the right to receive
compensation or other unvested benefits for any period after termination for
Cause. Any unvested stock options granted to Executive under any stock option
plan or any unvested awards granted under any other stock benefit plan of the
Bank, the Company, or any subsidiary or affiliate thereof, shall become null and
void effective upon Executive's receipt of Notice of Termination for Cause
pursuant to Section 9 hereof, and shall not be exercisable by Executive at any
time subsequent to such Termination for Cause.
9. REQUIRED PROVISIONS.
(a) The Bank may terminate Executive's employment at any time, but any
termination by the Bank, other than Termination for Cause, shall not prejudice
Executive's right to compensation or other benefits under this Agreement.
Executive shall not have the right to receive compensation or other benefits for
any period after Termination for Cause as defined in Section 8 herein.
(b) If Executive is suspended and/or temporarily prohibited from
participating in the conduct of the Bank's affairs by a notice served under
Section 8(e)(3) or (g)(1) of the Federal Deposit Insurance Act ("FDIA") (12
U.S.C. 1818(e)(3) and (g)(1)), the Bank's obligations under the Agreement shall
be suspended as of the date of service, unless stayed by appropriate
proceedings. If the charges in the notice are dismissed, the Bank may, in its
discretion, (i) pay Executive all or part of the compensation withheld while its
contract obligations were suspended and (ii) reinstate (in whole or in part) any
of its obligations that were suspended.
(c) If Executive is removed and/or permanently prohibited from
participating in the conduct of the Bank's affairs by an order issued under
Section 8(e)(4) or (g)(1) of the FDIA (12 U.S.C. 1818(e)(4) or (g)(1)), all
obligations of the Bank under the Agreement shall terminate as of the effective
date of the order, but vested rights of the contracting parties shall not be
affected.
(d) If the Bank is in default (as defined in Section 3(x)(1) of the
FDIA), all obligations under this Agreement shall terminate as of the date of
default, but this paragraph shall not affect any vested rights of the parties.
(e) All obligations under this Agreement shall be terminated (except to
the extent determined that continuation of the Agreement is necessary for the
continued operation of the Bank): (i) by the Director of the Office of Thrift
Supervision (the "Director") or his or her designee at the time the Federal
Deposit Insurance Corporation or the Resolution Trust Corporation enters into an
agreement to provide
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<PAGE>
assistance to or on behalf of the Bank under the authority contained in Section
13(c) of the FDIA or (ii) by the Director, or his or her designee at the time
the Director or such designee approves a supervisory merger to resolve problems
related to operation of the Bank or when the Bank is determined by the Director
to be in an unsafe or unsound condition. Any rights of the parties that have
already vested, however, shall not be affected by such action.
(f) Any payments made to Executive pursuant to this Agreement, or
otherwise, are subject to and conditioned upon compliance with 12 U.S.C.
(S)1828(k) and any regulations promulgated thereunder.
10. NOTICE.
(a) Any purported termination by the Bank or by Executive shall be
communicated by Notice of Termination to the other party hereto. For purposes
of this Agreement, a "Notice of Termination" shall mean a written notice which
shall indicate the specific termination provision in this Agreement relied upon
and shall set forth in reasonable detail the facts and circumstances claimed to
provide a basis for termination of Executive's employment under the provision so
indicated.
(b) "Date of Termination" shall mean (A) if Executive's employment is
terminated for Disability, thirty (30) days after a Notice of Termination is
given (provided that he shall not have returned to the performance of his duties
on a full-time basis during such thirty (30) day period), and (B) if his
employment is terminated for any other reason, the date specified in the Notice
of Termination (which, in the case of a Termination for Cause, shall not be less
than thirty (30) days from the date such Notice of Termination is given).
(c) If, within thirty (30) days after any Notice of Termination is given,
the party receiving such Notice of Termination notifies the other party that a
dispute exists concerning the termination, except upon the occurrence of a
Change in Control and voluntary termination by the Executive in which case the
Date of Termination shall be the date specified in the Notice, the Date of
Termination shall be the date on which the dispute is finally determined, either
by mutual written agreement of the parties, by a binding arbitration award, or
by a final judgment, order or decree of a court of competent jurisdiction (the
time for appeal there from having expired and no appeal having been perfected)
and provided further that the Date of Termination shall be extended by a notice
of dispute only if such notice is given in good faith and the party giving such
notice pursues the resolution of such dispute with reasonable diligence.
Notwithstanding the pendency of any such dispute, the Bank will continue to pay
Executive his full compensation in effect when the notice giving rise to the
dispute was given (including, but not limited to, Base Salary) and continue him
as a participant in all compensation, benefit and insurance plans in which he
was participating when the notice of dispute was given, until the dispute is
finally resolved in accordance with this Agreement. Amounts paid under this
Section are in addition to all other amounts due under this Agreement and shall
not be offset against or reduce any other amounts due under this Agreement.
11. NON-COMPETITION.
(a) Upon any termination of Executive's employment hereunder pursuant to
an Event of Termination as provided in Section 4 hereof, Executive agrees not to
compete with the Bank and/or the Company for a period of one (1) year following
such termination in any city, town or county in which the Bank and/or the
Company has an office or has filed an application for regulatory approval to
establish an office, determined as of the effective date of such termination.
Executive agrees that during such period and within said cities, towns and
counties, Executive shall not work for or advise, consult or otherwise serve
with, directly or indirectly, any entity whose business materially competes with
the depository, lending or other business activities of the Bank and/or the
Company. The parties hereto, recognizing that irreparable injury will result to
the Bank and/or the Company, its business and property in the event of
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Executive's breach of this Subsection 11(a) agree that in the event of any such
breach by Executive, the Bank and/or the Company will be entitled, in addition
to any other remedies and damages available, to an injunction to restrain the
violation hereof by Executive, Executive's partners, agents, servants,
employers, employees and all persons acting for or with Executive. Executive
represents and admits that in the event of the termination of his employment
pursuant to Section 8 hereof, Executive's experience and capabilities are such
that Executive can obtain employment in a business engaged in other lines and/or
of a different nature than the Bank and/or the Company, and that the enforcement
of a remedy by way of injunction will not prevent Executive from earning a
livelihood. Nothing herein will be construed as prohibiting the Bank and/or the
Company from pursuing any other remedies available to the Bank and/or the
Company for such breach or threatened breach, including the recovery of damages
from Executive.
(b) Executive recognizes and acknowledges that the knowledge of the
business activities and plans for business activities of the Bank and affiliates
thereof, as it may exist from time to time, is a valuable, special and unique
asset of the business of the Bank. Executive will not, during or after the term
of his employment, disclose any knowledge of the past, present, planned or
considered business activities of the Bank or affiliates thereof to any person,
firm, corporation, or other entity for any reason or purpose whatsoever.
Notwithstanding the foregoing, Executive may disclose any knowledge of banking,
financial and/or economic principles, concepts or ideas which are not solely and
exclusively derived from the business plans and activities of the Bank. In the
event of a breach or threatened breach by the Executive of the provisions of
this Section, the Bank will be entitled to an injunction restraining Executive
from disclosing, in whole or in part, the knowledge of the past, present,
planned or considered business activities of the Bank or affiliates thereof, or
from rendering any services to any person, firm, corporation, other entity to
whom such knowledge, in whole or in part, has been disclosed or is threatened to
be disclosed. Nothing herein will be construed as prohibiting the Bank from
pursuing any other remedies available to the Bank for such breach or threatened
breach, including the recovery of damages from Executive.
12. SOURCE OF PAYMENTS.
All payments provided in this Agreement shall be timely paid in cash or
check from the general funds of the Bank. The Company, however, guarantees all
payments and the provision of all amounts and benefits due hereunder to
Executive and, if such payments are not timely paid or provided by the Bank,
such amounts and benefits shall be paid or provided by the Company.
13. EFFECT ON PRIOR AGREEMENTS AND EXISTING BENEFITS PLANS.
This Agreement contains the entire understanding between the parties hereto
and supersedes any prior employment agreement between the Bank or any
predecessor of the Bank and Executive, except that this Agreement shall not
affect or operate to reduce any benefit or compensation inuring to the Executive
of a kind elsewhere provided. No provision of this Agreement shall be
interpreted to mean that Executive is subject to receiving fewer benefits than
those available to him without reference to this Agreement.
14. NO ATTACHMENT.
(a) Except as required by law, no right to receive payments under this
Agreement shall be subject to anticipation, commutation, alienation, sale,
assignment, encumbrance, charge, pledge, or hypothecation, or to execution,
attachment, levy, or similar process or assignment by operation of law, and any
attempt, voluntary or involuntary, to affect any such action shall be null,
void, and of no effect.
(b) This Agreement shall be binding upon, and inure to the benefit of,
Executive, the Bank, the Company and their respective successors and assigns.
15. MODIFICATION AND WAIVER.
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(a) This Agreement may not be modified or amended except by an instrument
in writing signed by the parties hereto.
(b) No term or condition of this Agreement shall be deemed to have been
waived, nor shall there by any estoppel against the enforcement of any provision
of this Agreement, except by written instrument of the party charged with such
waiver or estoppel. No such written waiver shall be deemed a continuing waiver
unless specifically stated therein, and each such waiver shall operate only as
to the specific term or condition waived and shall not constitute a waiver of
such term or condition for the future as to any act other than that specifically
waived.
16. SEVERABILITY.
If, for any reason, any provision of this Agreement, or any part of any
provision, is held invalid, such invalidity shall not affect any other provision
of this Agreement or any part of such provision not held so invalid, and each
such other provision and part thereof shall to the full extent consistent with
law continue in full force and effect.
17. HEADINGS FOR REFERENCE ONLY.
The headings of sections and paragraphs herein are included solely for
convenience of reference and shall not control the meaning or interpretation of
any of the provisions of this Agreement.
18. GOVERNING LAW.
This Agreement shall be governed by the laws of the State of Illinois,
unless otherwise specified herein; provided, however, that in the event of a
conflict between the terms of this Agreement and any applicable federal or state
law or regulation, the provisions of such law or regulation shall prevail.
19. ARBITRATION.
Any dispute or controversy arising under or in connection with this
Agreement shall be settled exclusively by arbitration, conducted before a panel
of three arbitrators sitting in a location selected by the employee within one
hundred (100) miles from the location of the Bank, in accordance with the rules
of the American Arbitration Bank then in effect. Judgment may be entered on the
arbitrator's award in any court having jurisdiction; provided, however, that
Executive shall be entitled to seek specific performance of his right to be paid
until the Date of Termination during the pendency of any dispute or controversy
arising under or in connection with this Agreement.
20. PAYMENT OF LEGAL FEES.
All reasonable legal fees paid or incurred by Executive pursuant to any
dispute or question of interpretation relating to this Agreement shall be paid
or reimbursed by the Bank, if successful pursuant to a legal judgment,
arbitration or settlement.
21. INDEMNIFICATION.
The Bank shall provide Executive (including his heirs, executors and
administrators) with coverage under a standard directors' and officers'
liability insurance policy at its expense, or in lieu thereof, shall indemnify
Executive (and his heirs, executors and administrators) to the fullest extent
permitted under law against all expenses and liabilities reasonably incurred by
him in connection with or arising out of any action, suit or proceeding in which
he may be involved by reason of his having been a director or officer of the
Bank (whether or not he continues to be a directors or officer at the time of
incurring such expenses
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or liabilities), such expenses and liabilities to include, but not be limited
to, judgment, court costs and attorneys' fees and the cost of reasonable
settlements.
22. SUCCESSOR TO THE BANK OR THE COMPANY.
The Bank and the Company shall require any successor or assignee, whether
direct or indirect, by purchase, merger, consolidation or otherwise, to all or
substantially all the business or assets of the Bank or the Company, expressly
and unconditionally to assume and agree to perform the Bank's or the Company's
obligations under this Agreement, in the same manner and to the same extent that
the Bank or the Company would be required to perform if no such succession or
assignment had taken place.
23. NO DUTY TO MITIGATE DAMAGES.
In the event of termination of Executive's employment hereunder, Executive
shall have no duty to mitigate any damages to the Bank or the Company caused by
such termination. No compensation received by Executive from other outside
sources following a termination of employment will have any effect on the
obligations of the Bank and the Company under this Agreement.
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IN WITNESS WHEREOF, the Bank and the Company hereto have caused this
Agreement to be executed and their seal to be affixed hereunto by a duly
authorized officer or director, and Executive has signed this Agreement, all on
the ____ day of _____________, 1996.
ATTEST: CHESTER SAVINGS BANK
BY:
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[SEAL]
ATTEST: CHESTER BANCORP, INC.
BY:
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[SEAL]
WITNESS:
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Executive
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EXHIBIT 10.2
Proposed Form of Employment Agreement with Edward K. Collins
<PAGE>
EMPLOYMENT AGREEMENT
THIS AGREEMENT is made effective as of ________________, 1996, by and
between Chester National Bank, a national bank (the "Bank"), Chester Bancorp,
Inc., a Delaware corporation (the "Company"); and Edward K. Collins (the
"Executive").
WHEREAS, the Bank wishes to assure itself of the services of Executive for
the period provided in this Agreement; and
WHEREAS, the Executive is willing to serve in the employ of the Bank on a
full-time basis for said period.
NOW, THEREFORE, in consideration of the mutual covenants herein contained,
and upon the other terms and conditions hereinafter provided, the parties hereby
agree as follows:
1. POSITION AND RESPONSIBILITIES.
During the period of his employment hereunder, Executive agrees to serve as
the Executive Vice President and Chief Executive Officer of the Bank and
Secretary and Treasurer of the Company. During said period, Executive also
agrees to serve, if elected, as a director and other officer of the Company or
any subsidiary or affiliate of the Company or the Bank.
2. TERMS AND DUTIES.
(a) The term of this Agreement shall be deemed to have commenced as of the
date first above written and shall continue for a period of thirty-six (36) full
calendar months thereafter. Commencing on the first anniversary date, and
continuing at each anniversary date thereafter, the Board of Directors of the
Bank (the "Board") may extend the Agreement for an additional year. Prior to
the extension of the Agreement as provided herein, the Board of Directors of the
Bank will conduct a formal performance evaluation of the Executive for purposes
of determining whether to extend the Agreement, and the results thereof shall be
included in the minutes of the Board's meeting.
(b) During the period of his employment hereunder, except for periods of
absence occasioned by illness, reasonable vacation periods, and reasonable
leaves of absence, Executive shall devote substantially all his business time,
attention, skill, and efforts to the faithful performance of his duties
hereunder including activities and services related to the organization,
operation and management of the Bank; provided, however, that, with the approval
of the Board, as evidenced by a resolution of such Board, from time to time,
Executive may serve, or continue to serve, on the boards of directors of, and
hold any other offices or positions in, companies or organizations, which, in
such Board's judgment, will not present any conflict of interest with the Bank,
or materially affect the performance of Executive's duties pursuant to this
Agreement.
3. COMPENSATION AND REIMBURSEMENT.
(a) The compensation specified under this Agreement shall constitute the
salary and benefits paid for the duties described in Sections 1 and 2. The Bank
shall pay Executive as compensation a salary of $80,000 per year ("Base
Salary"). Such Base Salary shall be payable in accordance with the customary
payroll practices of the Bank. During the period of this Agreement, Executive's
Base Salary
<PAGE>
shall be reviewed at least annually; the first such review will be made no later
than one year from the date of this Agreement. Such review shall be conducted
by a Committee designated by the Board, and the Board may increase Executive's
Base Salary. In addition to the Base Salary provided in this Section 3(a), the
Bank shall provide Executive at no cost to Executive with all such other
benefits as are provided uniformly to permanent full-time employees of the Bank.
(b) The Bank will provide Executive with employee benefit plans,
arrangements and perquisites substantially equivalent to those in which
Executive was participating or otherwise deriving benefit from immediately prior
to the beginning of the term of this Agreement, and the Bank will not, without
Executive's prior written consent, make any changes in such plans, arrangements
or perquisites which would adversely affect Executive's rights or benefits
thereunder. Without limiting the generality of the foregoing provisions of this
Subsection (b), Executive will be entitled to participate in or receive benefits
under any employee benefit plans including, but not limited to, retirement
plans, supplemental retirement plans, pension plans, profit-sharing plans,
health-and-accident plan, medical coverage or any other employee benefit plan or
arrangement made available by the Bank in the future to its senior executives
and key management employees, subject to, and on a basis consistent with, the
terms, conditions and overall administration of such plans and arrangements.
Executive will be entitled to incentive compensation and bonuses as provided in
any plan, or pursuant to any arrangement of the Bank, in which Executive is
eligible to participate. Nothing paid to the Executive under any such plan or
arrangement will be deemed to be in lieu of other compensation to which the
Executive is entitled under this Agreement, except as provided under Section
5(e).
(c) In addition to the Base Salary provided for by paragraph (a) of this
Section 3, the Bank shall pay or reimburse Executive for all reasonable travel
and other obligations under this Agreement and may provide such additional
compensation in such form and such amounts as the Board may from time to time
determine.
4. PAYMENTS TO EXECUTIVE UPON AN EVENT OF TERMINATION.
(a) Upon the occurrence of an Event of Termination (as herein defined)
during the Executive's term of employment under this Agreement, the provisions
of this Section shall apply. As used in this Agreement, an "Event of
Termination" shall mean and include any one or more of the following: (i) the
termination by the Bank of Executive's full-time employment hereunder for any
reason other than a Change in Control, as defined in Section 5(a) hereof;
disability, as defined in Section 6(a) hereof; death; retirement, as defined in
Section 7 hereof; or Termination for Cause, as defined in Section 8 hereof; (ii)
Executive's resignation from the Bank's employ, upon (A) unless consented to by
the Executive, a material change in Executive's function, duties, or
responsibilities, which change would cause Executive's position to become one of
lesser responsibility, importance, or scope from the position and attributes
thereof described in Sections 1 and 2, above, (any such material change shall be
deemed a continuing breach of this Agreement), (B) a relocation of Executive's
principal place of employment by more than 35 miles from its location at the
effective date of this Agreement, or a material reduction in the benefits and
perquisites to Executive from those being provided as of the effective date of
this Agreement, (C) the liquidation or dissolution of the Bank, or (D) any
breach of this Agreement by the Bank. Upon the occurrence of any event
described in clauses (A), (B), (C) or (D), above, Executive shall have the right
to elect to terminate his employment under this Agreement by resignation upon
not less than sixty (60) days prior written notice given within a reasonable
period of time not to exceed, except in case of a continuing breach, four (4)
calendar months after the event giving rise to said right to elect.
(b) Upon the occurrence of an Event of Termination, the Bank shall pay
Executive, or, in the event of his subsequent death, his beneficiary or
beneficiaries, or his estate, as the case may be, as severance pay or liquidated
damages, or both, a sum equal to the payments due to the Executive for the
remaining term of the Agreement, including Base Salary, bonuses, and any other
cash or deferred
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compensation paid or to be paid (including the value of employer contributions
that would have been made on the Executive's behalf over the remaining term of
the agreement to any tax-qualified retirement plan sponsored by the Bank as of
the Date of Termination), to the Executive for the term of the Agreement
provided, however, that if the Bank is not in compliance with its minimum
capital requirements or if such payments would cause the Bank's capital to be
reduced below its minimum capital requirements, such payments shall be deferred
until such time as the Bank is in capital compliance. All payments made
pursuant to this Section 4(b) shall be paid in substantially equal monthly
installments over the remaining term of this Agreement following the Executive's
termination; provided, however, that if the remaining term of the Agreement is
less than one (1) year (determined as of the Executive's Date of Termination),
such payments and benefits shall be paid to the Executive in a lump sum within
thirty (30) days of the Date of Termination.
(c) Upon the occurrence of an Event of Termination, the Bank will cause to
be continued life, medical, dental and disability coverage substantially
identical to the coverage maintained by the Bank for Executive prior to his
termination. Such coverage shall cease upon the expiration of the remaining
term of this Agreement.
5. CHANGE IN CONTROL.
(a) No benefit shall be paid under this Section 5 unless there shall have
occurred a Change in Control of the Company or the Bank. For purposes of this
Agreement, a "Change in Control" of the Company or the Bank shall be deemed to
occur if and when (a) an offeror other than the Company purchases shares of the
common stock of the Company or the Bank pursuant to a tender or exchange offer
for such shares, (b) any person (as such term is used in Sections 13(d) and
14(d)(2) of the Securities Exchange Act of 1934) is or becomes the beneficial
owner, directly or indirectly, of securities of the Company or the Bank
representing 25% or more of the combined voting power of the Company's then
outstanding securities, (c) the membership of the board of directors of the
Company or the Bank changes as the result of a contested election, such that
individuals who were directors at the beginning of any twenty-four (24) month
period (whether commencing before or after the date of adoption of this Plan) do
not constitute a majority of the Board at the end of such period, or (d)
shareholders of the Company or the Bank approve a merger, consolidation, sale or
disposition of all or substantially all of the Company's or the Bank's assets,
or a plan of partial or complete liquidation.
(b) If any of the events described in Section 5(a) hereof constituting a
Change in Control have occurred or the Board of the Bank or the Company has
reasonably determined that a Change in Control has occurred, Executive shall be
entitled to the benefits provided in paragraphs (c), (d) and (e) of this Section
5 upon his subsequent involuntary termination following the effective date of a
Change in Control (or voluntary termination following the effective date of a
Change in Control following any material change in Executive's function, duties,
or responsibilities, which change would cause Executive's position to become one
of lesser responsibility, importance, or scope from the position and attributes
thereof described in Sections 1 and 2, above, or relocation of his principal
place of employment by more than thirty-five (35) miles from its location
immediately prior to the Change in Control), unless such termination is because
of his death, retirement as provided in Section 7, termination for Cause, or
termination for Disability.
(c) Upon the occurrence of a Change in Control followed by the Executive's
termination of employment, the Bank shall pay Executive, or in the event of his
subsequent death, his beneficiary or beneficiaries, or his estate, as the case
may be, as severance pay or liquidated damages, or both, a sum equal to 2.99
times Executive's average annual compensation during the years of the five (5)
year period preceding the Change in Control in which Executive was employed by
the Bank
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<PAGE>
or the Company. Such payment shall be made in a lump sum paid within ten
(10) days of the Executive's Date of Termination.
(d) Upon the occurrence of a Change in Control followed by the Executive's
termination of employment, the Bank will cause to be continued life, medical,
dental and disability coverage substantially identical to the coverage
maintained by the Bank for Executive prior to his severance. In addition,
Executive shall be entitled to receive the value of employer contributions that
would have been made on the Executive's behalf over the remaining term of the
agreement to any tax-qualified retirement plan sponsored by the Bank as of the
Date of Termination. Such coverage and payments shall cease upon the expiration
of twelve (12) months.
(e) Upon the occurrence of a Change in Control, the Executive shall be
entitled to receive benefits due him under, or contributed by the Company or the
Bank on his behalf, pursuant to any retirement, incentive, profit sharing,
bonus, performance, disability or other employee benefit plan maintained by the
Bank or the Company on the Executive's behalf to the extent that such benefits
are not otherwise paid to the Executive upon a Change in Control.
6. TERMINATION FOR DISABILITY.
(a) If the Executive shall become disabled as defined in the Bank's then
current disability plan (or, if no such plan is then in effect, if the Executive
is permanently and totally disabled within the meaning of Section 22(e)(3) of
the Code as determined by a physician designated by the Board), the Bank may
terminate Executive's employment for "Disability."
(b) Upon the Executive's termination of employment for Disability, the
Bank will pay Executive, as disability pay, a bi-weekly payment equal to three-
quarters (3/4) of Executive's bi-weekly rate of Base Salary on the effective
date of such termination. These disability payments shall commence on the
effective date of Executive's termination and will end on the earlier of (i) the
date Executive returns to the full-time employment of the Bank in the same
capacity as he was employed prior to his termination for Disability and pursuant
to an employment agreement between Executive and the Bank; (ii) Executive's
full-time employment by another employer; (iii) Executive attaining the age of
65; or (iv) Executive's death; or (v) the expiration of the term of this
Agreement. The disability pay shall be reduced by the amount, if any, paid to
the Executive under any plan of the Bank providing disability benefits to the
Executive.
(c) The Bank will cause to be continued life, medical, dental and
disability coverage substantially identical to the coverage maintained by the
Bank for Executive prior to his termination for Disability. This coverage and
payments shall cease upon the earlier of (i) the date Executive returns to the
full-time employment of the Bank, in the same capacity as he was employed prior
to his termination for Disability and pursuant to an employment agreement
between Executive and the Bank; (ii) Executive's full-time employment by another
employer; (iii) Executive's attaining the age of sixty-five (65); (iv) the
Executive's death; or (v) the expiration of the term of this Agreement.
(d) Notwithstanding the foregoing, there will be no reduction in the
compensation otherwise payable to Executive during any period during which
Executive is incapable of performing his duties hereunder by reason of temporary
disability.
7. TERMINATION UPON RETIREMENT; DEATH OF EXECUTIVE.
Termination by the Bank of Executive based on "Retirement" shall mean
retirement at age sixty-five (65) or in accordance with any retirement
arrangement established with Executive's consent with respect to him. Upon
termination of Executive upon Retirement, Executive shall be entitled to all
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<PAGE>
benefits under any retirement plan of the Bank or the Company and other plans to
which Executive is a party. Upon the death of the Executive during the term of
this Agreement, the Bank shall pay to Executive's estate the compensation due
to the Executive through the last day of the calendar month in which his death
occurred.
8. TERMINATION FOR CAUSE.
For purposes of this Agreement, "Termination for Cause" shall include
termination because of the Executive'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.
For purposes of this Section, no act, or the failure to act, on Executive's part
shall be "willful" unless done, or omitted to be done, not in good faith and
without reasonable belief that the action or omission was in the best interest
of the Bank or its affiliates. Notwithstanding the foregoing, Executive shall
not be deemed to have been terminated for Cause unless and until there shall
have been delivered to him a copy of a resolution duly adopted by the
affirmative vote of not less than three-fourths of the members of the Board at a
meeting of the Board called and held for that purpose (after reasonable notice
to Executive and an opportunity for him, together with counsel, to be heard
before the Board), finding that in the good faith opinion of the Board,
Executive was guilty of conduct justifying termination for Cause and specifying
the reasons thereof. The Executive shall not have the right to receive
compensation or other unvested benefits for any period after termination for
Cause. Any unvested stock options granted to Executive under any stock option
plan or any unvested awards granted under any other stock benefit plan of the
Bank, the Company, or any subsidiary or affiliate thereof, shall become null and
void effective upon Executive's receipt of Notice of Termination for Cause
pursuant to Section 9 hereof, and shall not be exercisable by Executive at any
time subsequent to such Termination for Cause.
9. REQUIRED PROVISIONS.
(a) The Bank may terminate Executive's employment at any time, but any
termination by the Bank, other than Termination for Cause, shall not prejudice
Executive's right to compensation or other benefits under this Agreement.
Executive shall not have the right to receive compensation or other benefits for
any period after Termination for Cause as defined in Section 8 herein.
(b) If Executive is suspended and/or temporarily prohibited from
participating in the conduct of the Bank's affairs by a notice served under
Section 8(e)(3) or (g)(1) of the Federal Deposit Insurance Act ("FDIA") (12
U.S.C. 1818(e)(3) and (g)(1)), the Bank's obligations under the Agreement shall
be suspended as of the date of service, unless stayed by appropriate
proceedings. If the charges in the notice are dismissed, the Bank may, in its
discretion, (i) pay Executive all or part of the compensation withheld while its
contract obligations were suspended and (ii) reinstate (in whole or in part) any
of its obligations that were suspended.
(c) If Executive is removed and/or permanently prohibited from
participating in the conduct of the Bank's affairs by an order issued under
Section 8(e)(4) or (g)(1) of the FDIA (12 U.S.C. 1818(e)(4) or (g)(1)), all
obligations of the Bank under the Agreement shall terminate as of the effective
date of the order, but vested rights of the contracting parties shall not be
affected.
(d) If the Bank is in default (as defined in Section 3(x)(1) of the
FDIA), all obligations under this Agreement shall terminate as of the date of
default, but this paragraph shall not affect any vested rights of the parties.
(e) All obligations under this Agreement shall be terminated (except to
the extent determined that continuation of the Agreement is necessary for the
continued operation of the Bank): (i) by the
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<PAGE>
Director of the Office of Thrift Supervision (the "Director") or his or her
designee at the time the Federal Deposit Insurance Corporation or the Resolution
Trust Corporation 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 (ii)
by the Director, or his or her designee at the time the Director or such
designee approves a supervisory merger to resolve problems related to operation
of the Bank or when the Bank is determined by the Director to be in an unsafe or
unsound condition. Any rights of the parties that have already vested, however,
shall not be affected by such action.
(f) Any payments made to Executive pursuant to this Agreement, or
otherwise, are subject to and conditioned upon compliance with 12 U.S.C.
(S)1828(k) and any regulations promulgated thereunder.
10. NOTICE.
(a) Any purported termination by the Bank or by Executive shall be
communicated by Notice of Termination to the other party hereto. For purposes
of this Agreement, a "Notice of Termination" shall mean a written notice which
shall indicate the specific termination provision in this Agreement relied upon
and shall set forth in reasonable detail the facts and circumstances claimed to
provide a basis for termination of Executive's employment under the provision so
indicated.
(b) "Date of Termination" shall mean (A) if Executive's employment is
terminated for Disability, thirty (30) days after a Notice of Termination is
given (provided that he shall not have returned to the performance of his duties
on a full-time basis during such thirty (30) day period), and (B) if his
employment is terminated for any other reason, the date specified in the Notice
of Termination (which, in the case of a Termination for Cause, shall not be less
than thirty (30) days from the date such Notice of Termination is given).
(c) If, within thirty (30) days after any Notice of Termination is given,
the party receiving such Notice of Termination notifies the other party that a
dispute exists concerning the termination, except upon the occurrence of a
Change in Control and voluntary termination by the Executive in which case the
Date of Termination shall be the date specified in the Notice, the Date of
Termination shall be the date on which the dispute is finally determined, either
by mutual written agreement of the parties, by a binding arbitration award, or
by a final judgment, order or decree of a court of competent jurisdiction (the
time for appeal there from having expired and no appeal having been perfected)
and provided further that the Date of Termination shall be extended by a notice
of dispute only if such notice is given in good faith and the party giving such
notice pursues the resolution of such dispute with reasonable diligence.
Notwithstanding the pendency of any such dispute, the Bank will continue to pay
Executive his full compensation in effect when the notice giving rise to the
dispute was given (including, but not limited to, Base Salary) and continue him
as a participant in all compensation, benefit and insurance plans in which he
was participating when the notice of dispute was given, until the dispute is
finally resolved in accordance with this Agreement. Amounts paid under this
Section are in addition to all other amounts due under this Agreement and shall
not be offset against or reduce any other amounts due under this Agreement.
11. NON-COMPETITION.
(a) Upon any termination of Executive's employment hereunder pursuant to
an Event of Termination as provided in Section 4 hereof, Executive agrees not to
compete with the Bank and/or the Company for a period of one (1) year following
such termination in any city, town or county in which the Bank and/or the
Company has an office or has filed an application for regulatory approval to
establish an office, determined as of the effective date of such termination.
Executive agrees that during such period and within said cities, towns and
counties, Executive shall not work for or advise, consult or otherwise serve
with, directly or indirectly, any entity whose business materially competes with
the depository,
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<PAGE>
lending or other business activities of the Bank and/or the Company. The
parties hereto, recognizing that irreparable injury will result to the Bank
and/or the Company, its business and property in the event of Executive's breach
of this Subsection 11(a) agree that in the event of any such breach by
Executive, the Bank and/or the Company will be entitled, in addition to any
other remedies and damages available, to an injunction to restrain the violation
hereof by Executive, Executive's partners, agents, servants, employers,
employees and all persons acting for or with Executive. Executive represents
and admits that in the event of the termination of his employment pursuant to
Section 8 hereof, Executive's experience and capabilities are such that
Executive can obtain employment in a business engaged in other lines and/or of a
different nature than the Bank and/or the Company, and that the enforcement of a
remedy by way of injunction will not prevent Executive from earning a
livelihood. Nothing herein will be construed as prohibiting the Bank and/or the
Company from pursuing any other remedies available to the Bank and/or the
Company for such breach or threatened breach, including the recovery of damages
from Executive.
(b) Executive recognizes and acknowledges that the knowledge of the
business activities and plans for business activities of the Bank and affiliates
thereof, as it may exist from time to time, is a valuable, special and unique
asset of the business of the Bank. Executive will not, during or after the term
of his employment, disclose any knowledge of the past, present, planned or
considered business activities of the Bank or affiliates thereof to any person,
firm, corporation, or other entity for any reason or purpose whatsoever.
Notwithstanding the foregoing, Executive may disclose any knowledge of banking,
financial and/or economic principles, concepts or ideas which are not solely and
exclusively derived from the business plans and activities of the Bank. In the
event of a breach or threatened breach by the Executive of the provisions of
this Section, the Bank will be entitled to an injunction restraining Executive
from disclosing, in whole or in part, the knowledge of the past, present,
planned or considered business activities of the Bank or affiliates thereof, or
from rendering any services to any person, firm, corporation, other entity to
whom such knowledge, in whole or in part, has been disclosed or is threatened to
be disclosed. Nothing herein will be construed as prohibiting the Bank from
pursuing any other remedies available to the Bank for such breach or threatened
breach, including the recovery of damages from Executive.
12. SOURCE OF PAYMENTS.
All payments provided in this Agreement shall be timely paid in cash or
check from the general funds of the Bank. The Company, however, guarantees all
payments and the provision of all amounts and benefits due hereunder to
Executive and, if such payments are not timely paid or provided by the Bank,
such amounts and benefits shall be paid or provided by the Company.
13. EFFECT ON PRIOR AGREEMENTS AND EXISTING BENEFITS PLANS.
This Agreement contains the entire understanding between the parties hereto
and supersedes any prior employment agreement between the Bank or any
predecessor of the Bank and Executive, except that this Agreement shall not
affect or operate to reduce any benefit or compensation inuring to the Executive
of a kind elsewhere provided. No provision of this Agreement shall be
interpreted to mean that Executive is subject to receiving fewer benefits than
those available to him without reference to this Agreement.
14. NO ATTACHMENT.
(a) Except as required by law, no right to receive payments under this
Agreement shall be subject to anticipation, commutation, alienation, sale,
assignment, encumbrance, charge, pledge, or hypothecation, or to execution,
attachment, levy, or similar process or assignment by operation of law, and any
attempt, voluntary or involuntary, to affect any such action shall be null,
void, and of no effect.
(b) This Agreement shall be binding upon, and inure to the benefit of,
Executive, the Bank, the Company and their respective successors and assigns.
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<PAGE>
15. MODIFICATION AND WAIVER.
(a) This Agreement may not be modified or amended except by an instrument
in writing signed by the parties hereto.
(b) No term or condition of this Agreement shall be deemed to have been
waived, nor shall there by any estoppel against the enforcement of any provision
of this Agreement, except by written instrument of the party charged with such
waiver or estoppel. No such written waiver shall be deemed a continuing waiver
unless specifically stated therein, and each such waiver shall operate only as
to the specific term or condition waived and shall not constitute a waiver of
such term or condition for the future as to any act other than that specifically
waived.
16. SEVERABILITY.
If, for any reason, any provision of this Agreement, or any part of any
provision, is held invalid, such invalidity shall not affect any other provision
of this Agreement or any part of such provision not held so invalid, and each
such other provision and part thereof shall to the full extent consistent with
law continue in full force and effect.
17. HEADINGS FOR REFERENCE ONLY.
The headings of sections and paragraphs herein are included solely for
convenience of reference and shall not control the meaning or interpretation of
any of the provisions of this Agreement.
18. GOVERNING LAW.
This Agreement shall be governed by the laws of the State of Illinois,
unless otherwise specified herein; provided, however, that in the event of a
conflict between the terms of this Agreement and any applicable federal or state
law or regulation, the provisions of such law or regulation shall prevail.
19. ARBITRATION.
Any dispute or controversy arising under or in connection with this
Agreement shall be settled exclusively by arbitration, conducted before a panel
of three arbitrators sitting in a location selected by the employee within one
hundred (100) miles from the location of the Bank, in accordance with the rules
of the American Arbitration Bank then in effect. Judgment may be entered on the
arbitrator's award in any court having jurisdiction; provided, however, that
Executive shall be entitled to seek specific performance of his right to be paid
until the Date of Termination during the pendency of any dispute or controversy
arising under or in connection with this Agreement.
20. PAYMENT OF LEGAL FEES.
All reasonable legal fees paid or incurred by Executive pursuant to any
dispute or question of interpretation relating to this Agreement shall be paid
or reimbursed by the Bank, if successful pursuant to a legal judgment,
arbitration or settlement.
21. INDEMNIFICATION.
The Bank shall provide Executive (including his heirs, executors and
administrators) with coverage under a standard directors' and officers'
liability insurance policy at its expense, or in lieu thereof, shall indemnify
Executive (and his heirs, executors and administrators) to the fullest extent
permitted under law against all expenses and liabilities reasonably incurred by
him in connection with or arising out of any
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<PAGE>
action, suit or proceeding in which he may be involved by reason of his having
been a director or officer of the Bank (whether or not he continues to be a
directors or officer at the time of incurring such expenses or liabilities),
such expenses and liabilities to include, but not be limited to, judgment, court
costs and attorneys' fees and the cost of reasonable settlements.
22. SUCCESSOR TO THE BANK OR THE COMPANY.
The Bank and the Company shall require any successor or assignee, whether
direct or indirect, by purchase, merger, consolidation or otherwise, to all or
substantially all the business or assets of the Bank or the Company, expressly
and unconditionally to assume and agree to perform the Bank's or the Company's
obligations under this Agreement, in the same manner and to the same extent that
the Bank or the Company would be required to perform if no such succession or
assignment had taken place.
23. NO DUTY TO MITIGATE DAMAGES.
In the event of termination of Executive's employment hereunder, Executive
shall have no duty to mitigate any damages to the Bank or the Company caused by
such termination. No compensation received by Executive from other outside
sources following a termination of employment will have any effect on the
obligations of the Bank and the Company under this Agreement.
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<PAGE>
IN WITNESS WHEREOF, the Bank and the Company hereto have caused this
Agreement to be executed and their seal to be affixed hereunto by a duly
authorized officer or director, and Executive has signed this Agreement, all on
the ____ day of _____________, 1996.
ATTEST: CHESTER SAVINGS BANK
BY:
- ----------------- --------------------------------------
[SEAL]
ATTEST: CHESTER BANCORP, INC.
BY:
- ----------------- --------------------------------------
[SEAL]
WITNESS:
- ---------------- -----------------------------------------
Executive
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<PAGE>
EXHIBIT 10.6
Amended and Restated Director Emeritus Plan
<PAGE>
Chester Savings Bank, F.S.B.
Amended and Restated Director Emeritus Plan
August 1, 1996
1. Description of Plan.
-------------------
Chester Savings Bank, F.S.B., a federally chartered savings bank (the
"Bank"), and its successor national bank by charter conversion, desires to
implement this Director Emeritus Plan (this "Plan"), originally effective as of
January 18, 1996, and amended and restated as of August 1, 1996, in order to
compensate and reward the directors of the Bank who have given many valuable
years of service as directors of the Bank and who have contributed to the
success and financial stability of the Bank.
2. Eligibility for Director Emeritus Status.
----------------------------------------
A. Upon expiration of the term of a director of the Bank who has
attained eighty-one (81) years of age, such director of the Bank (i) shall be
designated a Director Emeritus, and (ii) shall not be eligible for re-election
as a director of the Bank.
B. Each director of the Bank that resigns from the Board of
Directors of the Bank for any reason, including but not limited to retirement or
change of control, shall be designated a Director Emeritus.
C. Any director of the Bank who dies prior to achieving Director
Emeritus status shall not be designated a Director Emeritus and his or her
estate shall not be entitled to fees or benefits under this Plan.
3. Director Emeritus Fees
----------------------
A. Each Director Emeritus shall be entitled to receive a Director
Emeritus benefit (the "Director Emeritus Benefit") equal to a Director Emeritus
fee (the "Director Emeritus Fee") on an annual basis for a period of ten (10)
years following designation as a Director Emeritus. The annual Director
Emeritus Fee shall be equal to the product of (i) $500.00 multiplied by (ii) the
number of full years of service as a director of the Bank. For purposes of
calculating the number of years of service as a director of the Bank, credit
shall be given for years of service as a director of any predecessor, by merger
or otherwise, of the Bank (e.g. Heritage Federal Savings and Loan Association of
Sparta, Illinois and its predecessors). The first Director Emeritus Fee shall be
due and payable on the latter of (i) the first anniversary of designation as a
Director Emeritus, and (ii) the date on which the Director Emeritus attains
sixty-five (65) years of age. Each remaining Director
<PAGE>
Emeritus Fee shall be due and payable each year on the anniversary of payment of
the first Director Emeritus Fee.
B. In the event of the death of a Director Emeritus prior to the
payment by the Bank of the entire Director Emeritus Benefit, the Bank will pay
the estate of the Director Emeritus a lump-sum final payment (the "Final
Payment") equal to the lesser of (i) three (3) times the Director Emeritus Fee
or (ii) the remaining Director Emeritus Benefit. Payment by the Bank of the
Final Payment will be in complete satisfaction of the Bank's obligations under
this Plan to pay the Director Emeritus Benefit.
C. Notwithstanding anything else contained herein, no Director
Emeritus shall be entitled or allowed to receive any Director Emeritus Fee or
Director Emeritus Benefit hereunder while such Director Emeritus is receiving
payments from a separate retirement or other pension type benefit plan of the
Bank.
D. Notwithstanding anything else contained herein, any person
electing Director Emeritus status prior to December 31, 1996 shall not vest in
the Director Emeritus Benefit until December 31, 1996; provided, however, that
any person electing Director Emeritus status prior to December 31, 1996 shall
receive the full Final Payment in the event of the death of such Director
Emeritus prior to December 31, 1996.
4. Change of Control.
-----------------
Notwithstanding anything else contained in the Plan, in the event of a
Change of Control (as hereinafter defined), (i) each director of the Bank shall
immediately be designated a Director Emeritus; provided, however, that each
director of the Bank may also retain their position as a director of the Bank,
and (ii) the entire unpaid Director Emeritus Benefit of each Director Emeritus
(including each simultaneously designated Director Emeritus), shall immediately
be paid to the Director Emeritus in a single cash lump sum. For the purpose of
this section, a "Change of Control" shall mean:
(i) The purchase or other acquisition (other than from the Bank) by
an person, entity or group of persons, within the meaning of
Section 13(d) or 14(d) of the Securities Exchange Act of 1934,
as amended (the "Exchange Act") (excluding, for this purpose,
the Bank or its subsidiaries or any employee benefit plan of the
Bank or its subsidiaries), of beneficial ownership (within the
meaning of Rule 13d-3 promulgated under the Exchange Act) of 20%
or more of either the then-outstanding shares of common stock of
the Bank or the combined voting power of the Bank's
3
<PAGE>
then-outstanding voting securities entitled to vote generally
in the election of directors; or
(ii) Individuals who, as of the date hereof, constitute the Board of
Directors of the Bank (the "Board" and, as of the date hereof,
the "Incumbent Board") cease for any reason to constitute at
least a majority of the Board, provided that any person who
becomes a director of the Bank subsequent to the date hereof
whose election, or nomination for election by the Bank's
shareholders, was approved by a vote of at least a majority of
the directors then comprising the Incumbent Board (other than an
individual whose initial assumption of office is in connection
with an actual or threatened election contest relating to the
election of directors of the Bank, as such terms are used in
Rule 14a-11 of Regulation 14A promulgated under the Exchange
Act) shall be, for purposes of this section, considered as
though such person were a member of the Incumbent Board; or
(iii) Approval by the stockholders of the Bank of a reorganization,
merger or consolidation, in each case with respect to which
persons who were the stockholders of the Bank immediately prior
to such reorganization, merger or consolidation do not,
immediately thereafter, own more than 50% of, respectively, the
common stock and the combined voting power entitled to vote
generally in the election of directors of the reorganized,
merged or consolidated corporation's then-outstanding voting
securities, or of a liquidation or dissolution of the Bank or of
the sale of all or substantially all of the assets of the Bank.
5. Designation of Beneficiary.
--------------------------
Each Director Emeritus may designate one or more beneficiaries to
receive all sums due under Section 3.B upon his or her death. Such beneficiary
-----------
designation may be revoked or amended by such Director Emeritus, from time to
time, by appropriate notice in writing delivered to the Bank. In the absence of
any beneficiary designation or in the event that the designated beneficiaries
shall not be living at the time of death of the Director Emeritus, the Final
Payment on the date of death of the Director Emeritus shall be payable and
delivered to the estate of such deceased Director Emeritus.
4
<PAGE>
6. Incapacity.
----------
In the event that any person to whom Director Emeritus Fees are
distributable under the terms of this Plan shall be unable to properly manage
his or her own affairs by reason of incapacity, all amounts payable hereunder
may be paid to a duly appointed personal representative, conservator or guardian
or to any person, firm or corporation furnishing or providing support and
maintenance to such person to whom Director Emeritus Fees are distributable.
The Bank and its officers and employees shall be fully and completely exonerated
from any and all liability to any Director Emeritus upon making payment in
accordance with the terms of this paragraph.
7. Alienation.
----------
No right or payment under this Plan shall be subject to anticipation,
alienation, sale, assignment, pledge, encumbrance or charge, and any attempt to
anticipate, alienate, sell, assign, pledge, encumber or charge the same shall be
null and void. No right or payment hereunder shall be liable for or subject to
the debts, contracts, liabilities or torts of the person entitled to such
benefit. If any participant or beneficiary hereunder should become bankrupt or
attempt to anticipate, alienate, sell, assign, pledge, encumber or charge any
right or payment hereunder, then such right or payment shall, in the discretion
of the Bank terminate. In such a case, the Bank may hold or apply the same or
any part thereof for the benefit of the participant or beneficiary, his or her
spouse, children or other dependents, or any of them, in such manner and in such
proportion as the Bank shall determine, and their decision shall be final,
conclusive and binding upon all persons involved.
8. Administration.
--------------
The Bank's Board of Directors shall designate a person or persons to
serve as a committee ("Committee") to administer the Plan. The Committee shall
have full power and authority to administer, construe and interpret this Plan.
The Committee may, from time to time, name a Bank employee to administer,
construe or interpret the terms of the Plan. The decisions of the Committee
concerning the administration, construction and interpretation of this Plan
shall be final, conclusive and binding upon all parties involved, including the
successors and assigns of the Bank. Payments required to be made under Section
-------
3.B or Section 4 shall be made as soon as practicable after the death of the
- --- ---------
Director Emeritus or Change of Control, as the case may be.
5
<PAGE>
9. Claims Procedure
----------------
A. A Participant who believes that he or she is being denied a
benefit to which he or she is entitled (hereinafter referred to as "Claimant")
may file a written request for such benefit with the Bank setting forth his or
her claim. The request must be addressed to: Chester Savings Bank, F.S.B.
Director Emeritus Plan, 1112 State Street, Chester, Illinois 62233, Attention:
Plan Administrator.
B. Upon receipt of a claim the Bank shall advise the Claimant that
a reply will be forthcoming within ninety (90) days and shall in fact deliver
such reply in writing within such period. The Bank may, however, extend the
reply period for an additional ninety (90) days for reasonable cause. If the
claim is denied in whole or in part, the Bank will adopt a written opinion using
language calculated to be understood by the Claimant setting forth:
1. the specific reason or reasons for denial,
2. the specific references to pertinent Plan provisions on which
the denial is based,
3. a description of any additional material or information
necessary for the Claimant to perfect the claim and an explanation why
such material or such information is necessary,
4. appropriate information as to the steps to be taken if the
Claimant wishes to submit the claim for review, and
5. the time limits for requesting a review under Subsection C
------------
and for the review under Subsection D.
------------
C. Within sixty (60) days after the receipt by the Claimant of the
written opinion described above, the Claimant may request in writing that the
President of the Bank review the determination of the Bank. Such request must
be addressed to: President, Chester Savings Bank, F.S.B., 1112 State Street,
Chester, Illinois 62233. The Claimant or his or her duly authorized
representative may, but need not, review the pertinent documents and submit
issues and comments in writing for consideration by the President.
D. Within sixty (60) days after the President's receipt of a
request for review, he or she will review the Bank's determination. After
considering all materials presented by the Claimant, the President will render a
written opinion, written in a manner calculated to be understood by the
Claimant, setting forth the specific reasons for the decision and containing
6
<PAGE>
specific references to the pertinent Plan provisions on which the decision is
based. If special circumstances require that the sixty-day time period be
extended, the President will so notify the Claimant and will render the decision
as soon as possible but not later than one hundred twenty (120) days after
receipt of the request for review.
E. If the Claimant is the President, then all references in this
Section 9 to the President shall be deemed to be references to the Chairman of
- ---------
the Board.
10. Amendment and Termination.
-------------------------
The Committee may at any time amend or terminate this Plan with
respect to Director Emeritus Fees earned on or after the date of amendment or
termination. No action of the Committee may permit anyone other than the
directors of the Bank eligible under Section 2 to participate in the Plan or
---------
withdraw the administration of the Plan from the Committee or the Administrator.
11. Funding.
-------
The benefits contemplated hereunder shall not be funded by trust or
otherwise, but shall be treated as a general expense of the Bank; provided,
however, the Bank may purchase insurance to fund the Bank's obligations under
this Plan.
12. Service of Process and Plan Administrator.
-----------------------------------------
A. The President of the Bank shall be the agent for service or
legal process.
B. The Bank shall constitute the Plan Administrator.
13. Governing Law.
-------------
The Plan shall be governed and construed according to the laws of the
State of Illinois.
14. Effective Date.
--------------
The Plan shall take effect January 18, 1996, and shall apply, in
accordance with its terms and conditions, to any director of the Bank who
achieves Director Emeritus status thereafter.
7
<PAGE>
IN WITNESS WHEREOF, the Bank has caused this Agreement to be executed
by one of its duly authorized officers as of the day and year above written.
CHESTER SAVINGS BANK, F.S.B.
By
---------------------------------
8
<PAGE>
EXHIBIT 23.1
Consent of KPMG Peat Marwick LLP
<PAGE>
Independent Auditors' Consent
-----------------------------
The Board of Directors
Chester Savings Bank, FSB
Chester, Illinois:
We consent to the use of our report in Amendment No. 2 to the Registration
Statement on Form S-1 under the heading "Experts" and "Change in Accountants"
contained in the Prospectus, which is a part of such Registration Statement.
KPMG Peat Marwick LLP
St. Louis, Missouri
August 12, 1996
<PAGE>
EXHIBIT 23.2
Consent of Kerber, Eck & Braeckel LLP
<PAGE>
[LETTER HEAD OF KERBER, ECK & BRAECKEL LLP APPEARS HERE]
CONSENT OF INDEPENDENT AUDITORS
-------------------------------
The Boards of Directors
Chester Bancorp, Inc.
Chester Savings Bank, FSB
Chester, Illinois 62233
We consent to the use in this Amendment No. 2 to the Registration Statement on
Form S-1 on behalf of Chester Bancorp, Inc. of our report dated January 18,
1995, relating to the financial statements of Chester Savings Bank, FSB, which
appears in such Registration Statement. We also consent to the references to us
under the headings "Experts" and "Change in Accountants" contained in the
Prospectus, which is part of such Registration Statement.
/s/KERBER, ECK, BRAECKEL LLP
August 12, 1996
Cape Girardeau, Missouri
<PAGE>
EXHIBIT 99.5
Proxy Statement for Special Meeting of Members of
Chester Savings Bank, FSB
<PAGE>
Chester Savings Bank, FSB
1112 State Street
Chester, Illinois 62233
(618) 826-5038
NOTICE OF SPECIAL MEETING OF MEMBERS
To be Held on September 13, 1996
Notice is hereby given that a special meeting ("Special Meeting") of
members of Chester Savings Bank, FSB ("Savings Bank") will be held at the
Savings Bank's office at 1112 State Street, Chester, Illinois, on Friday,
September 13, 1996 at __:__.m., Central Time. Business to be taken up at
the Special Meeting shall be:
(1) To approve a Plan of Conversion ("Plan") adopted by the Board of
Directors on March 12, 1996, said Plan providing for the conversion of the
Savings Bank from a federally chartered mutual savings bank to a federally
chartered stock savings bank (the "Converted Savings Bank"), as a subsidiary of
Chester Bancorp, Inc., including the adoption of a Federal Stock Charter and
amended Bylaws for the Converted Savings Bank (the "Stock Conversion"), the
conversion of the Converted Savings Bank to a national bank to be known as
"Chester National Bank" (the "Bank Conversion"), and the formation of a de novo
national bank by the Holding Company to be known as "Chester National Bank of
Missouri," and any other matters that may lawfully come before the meeting of
members in connection with the Plan, including the power to vote for any changes
in the Plan which are not materially adverse to the interest of the members of
the Savings Bank, are deemed advisable by the Board of Directors of the Savings
Bank, and are approved 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, 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 Savings Bank, at the close of business on July 19, 1996 and 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
ROBERT H. GROSS
SECRETARY
Chester, Illinois
___________, 1996
PLEASE SIGN AND RETURN PROMPTLY EACH PROXY CARD YOU RECEIVE IN THE ENCLOSED
POSTAGE-PAID ENVELOPE. THIS WILL ASSURE NECESSARY REPRESENTATION AT THE SPECIAL
MEETING, BUT WILL NOT PREVENT YOU FROM VOTING IN PERSON IF YOU SO DESIRE. THE
PROXY IS SOLICITED ONLY FOR THIS SPECIAL MEETING (AND ANY ADJOURNMENTS THEREOF)
AND WILL NOT BE USED FOR ANY OTHER MEETING. YOU MAY REVOKE YOUR WRITTEN PROXY
BY WRITTEN INSTRUMENT DELIVERED TO ROBERT H. GROSS, SECRETARY, CHESTER SAVINGS
BANK, FSB AT THE ABOVE ADDRESS AT ANY TIME PRIOR TO OR AT THE SPECIAL MEETING.
<PAGE>
Chester Savings Bank, FSB
1112 State Street
Chester, Illinois 62233
(618) 826-5038
PROXY STATEMENT
___________, 1996
YOUR PROXY, IN THE FORM ENCLOSED, IS SOLICITED BY THE BOARD OF DIRECTORS OF
CHESTER SAVINGS BANK, FSB FOR USE AT A SPECIAL MEETING OF MEMBERS TO BE HELD ON
FRIDAY, SEPTEMBER 13, 1996, AND ANY ADJOURNMENT OF THAT MEETING, FOR THE
PURPOSES SET FORTH IN THE FOREGOING NOTICE OF SPECIAL MEETING. YOUR BOARD OF
DIRECTORS AND MANAGEMENT URGE YOU TO VOTE FOR THE PLAN OF CONVERSION.
PURPOSE OF MEETING -- SUMMARY
A special meeting of members ("Special Meeting") of Chester Savings Bank,
FSB ("Savings Bank") will be held at the Savings Bank's office at 1112 State
Street, Chester, Illinois, on September 13, 1996, at _:__.m., Central Time, for
the purpose of considering and voting upon a Plan of Conversion from Federal
Mutual Savings Bank to National Bank and Formation of a Holding Company ("Plan
of Conversion"), which, if approved by a majority of the total votes of the
members eligible to be cast, will permit the Savings Bank to convert from a
federally chartered mutual savings bank to a federally chartered capital stock
savings bank ("Converted Savings Bank") and the issuance of the Savings Bank's
capital stock to the Holding Company. The conversion of the Savings Bank to the
Converted Savings Bank and the acquisition of the Converted Savings Bank by the
Holding Company are collectively referred to herein as the "Stock Conversion."
Immediately following consummation of the Stock Conversion, the Converted
Savings Bank intends to convert from a federal stock savings bank to a national
bank ("Bank Conversion"), to be known as "Chester National Bank" ("Converted
Bank"). In connection with the Bank Conversion, the Holding Company will form a
de novo national bank subsidiary headquartered in Perryville, Missouri, to be
known as "Chester National Bank of Missouri" ("De Novo Bank"), which, following
a $3.0 million initial capitalization funded by a portion of the Stock
Conversion proceeds, will purchase all of the installment loans and a portion of
the mortgage loans of the Savings Bank's branch office located in Perryville,
Missouri ("Bank Formation"). The Converted Bank and the De Novo Bank are
collectively referred to herein as the "Banks." The Stock Conversion, the Bank
Conversion and the Bank Formation are referred to herein collectively as the
"Conversion" and are being undertaken pursuant to a plan of conversion adopted
by the Board of Directors of the Savings Bank ("Plan" or "Plan of
Conversion").
Members entitled to vote on the Plan of Conversion are members of the
Savings Bank as of July 19, 1996, and 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. The Conversion requires the
approval of not less than a majority of the total votes eligible to be cast at
the Special Meeting.
The Plan of Conversion provides in part that, after receiving final
authorization from the Office of Thrift Supervision ("OTS"), the Savings Bank
will offer for sale shares of common stock of the Holding Company ("Common
Stock"), through the issuance of nontransferable rights to subscribe for the
Common Stock ("Subscription Rights") have been granted, in order of priority, to
(i) depositors with $50.00 or more on deposit at the Savings Bank as of January
15, 1995 ("Eligible Account Holders"), (ii) the Banks' employee stock ownership
plan ("ESOP"), a tax-qualified employee benefit plan, (iii) depositors with
$50.00 or more on deposit at the Savings Bank as of June 30, 1996 ("Supplemental
Eligible Account Holders"), and (iv) depositors of the Savings Bank as of July
19, 1996 ("Voting Record Date") and borrowers of the Savings Bank with loans
outstanding as of December 18, 1989, which continue to be outstanding as of the
Voting Record Date ("Other Members"), subject to the priorities and
purchase
1
<PAGE>
limitations set forth in the Plan of Conversion ("Subscription Offering").
After, but subject to the prior rights of holders of Subscription Rights, the
Holding Company is offering the Common Stock for sale to members of the general
public through a direct community offering ("Direct Community Offering") with
preference given to natural persons who are permanent residents of Randolph,
Perry or Jackson counties of Illinois or Perry County, Missouri ("Local
Community"), subject to the right of the Holding Company to accept or reject
orders in whole or in part in the Direct Community Offering. The Subscription
Offering and the Direct Community Offering are at times referred to herein as
the "Subscription and Direct Community Offering." Depending on market
conditions, the shares of Common Stock may be offered for sale in the Direct
Community Offering to eligible members of the general public on a best efforts
basis by a selling group of broker-dealers managed by EVEREN Securities, Inc.
("EVEREN Securities"). In addition, depending on market conditions upon the
completion of the Direct Community Offering, any shares not subscribed for in
the Subscription and Direct Community Offering may be offered to the general
public in an underwritten public offering ("Public Offering") to be managed by
EVEREN Securities. The Subscription and Direct Community Offering and the Public
Offering are referred to collectively as the "Offerings."
Adoption of a Federal Stock Charter ("Federal Stock Charter") and Bylaws
("Bylaws") of the Savings Bank is an integral part of the Plan of Conversion.
Copies of the Plan of Conversion and the proposed Federal Stock Charter and
Bylaws for the Savings Bank are attached to this Proxy Statement as exhibits.
They provide, among other things, for the termination of voting rights of
members and their rights to receive any surplus remaining after liquidation of
the Savings Bank. These rights, except for the rights of Eligible Account
Holders and Supplemental Eligible Account Holders in the liquidation account,
will vest exclusively in the holders of the stock in the Holding Company and the
Savings Bank. For further information, see "THE CONVERSION -- Effects of
Conversion to Stock Form on Depositors and Borrowers of the Savings Bank."
CHESTER SAVINGS BANK, FSB
The Savings Bank is a federally chartered mutual savings bank located in
Chester, Illinois, which is approximately 60 miles south of St. Louis, Missouri.
Originally chartered in 1919 as an Illinois-chartered mutual savings and loan
association under the name "Chester Building and Loan Association," the Savings
Bank converted to a federal charter and adopted its current name in 1990. In
1989, the Savings Bank acquired Heritage Federal Savings and Loan Association
("Heritage Federal") which at the time of the acquisition had assets of
approximately $50 million and offices in Sparta, Red Bud and Pinckneyville,
Illinois. The Savings Bank is regulated by the OTS, its primary federal
regulator, and the FDIC, the insurer of its deposits. The Savings Bank's
deposits are federally insured by the FDIC under the SAIF. The Savings Bank is a
member of the Federal Home Loan Bank ("FHLB") System. At March 31, 1996, the
Savings Bank had total assets of $136.8 million, total deposits of $108.5
million and total equity of $11.9 million, or 8.7% of total assets.
The Savings Bank is a community oriented financial institution which has
traditionally offered a variety of savings products to its retail customers
while concentrating its lending activities on real estate mortgage loans.
Lending activities have been focused primarily on the origination of loans
secured by one- to four-family residential dwellings. To a lesser extent,
lending activities also have included the origination of consumer loans and
commercial real estate and multi-family loans. At March 31, 1996, the Savings
Bank's gross loan portfolio totaled $56.7 million, of which 80.9% were one- to
four-family residential mortgage loans, 11.3% were consumer loans and 5.8% were
commercial real estate and multi-family loans. In addition, the Savings Bank has
maintained a significant portion of its assets in marketable securities. The
Savings Bank's investment portfolio has been weighted toward United States
Treasury and agency securities. This portfolio also has included a significant
amount of tax exempt state and municipal securities. In addition, the Savings
Bank has invested in mortgage-backed securities to supplement its lending
operations. Investments and mortgage-backed securities totaled $57.5 million and
$16.9 million, respectively, at March 31, 1996.
The Savings Bank's primary market area is comprised of Randolph, Perry,
Jackson and Williamson counties of Illinois and Perry and Cape Girardeau
counties in Missouri. The Savings Bank faces strong competition in its
2
<PAGE>
market area. See "RISK FACTORS -- Dependence on Local Economy and Competition
Within Market Area" in the Prospectus. The Savings Bank's principal executive
office is located at 1112 State Street, Chester, Illinois 62233, and its
telephone number is (618) 826-5038.
VOTING RIGHTS AND VOTE REQUIRED FOR APPROVAL
The Board of Directors of the Savings Bank has fixed the close of business
on July 19, 1996 as the record date ("Voting Record Date") for the determination
of members entitled to notice of and to vote at the Special Meeting. All holders
of the Savings Bank's savings or other authorized accounts are members of the
Savings Bank under its current charter. All members of record as of the close of
business on the Voting Record Date who continue to be members on the date of the
Special Meeting or any adjournment thereof will be entitled to vote at the
Special Meeting or such adjournment.
Each eligible 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 Savings Bank as of the Voting Record
Date. Borrowers with loans outstanding as of December 18, 1989, which continue
to be outstanding as of the Voting Record Date will be entitled to cast one vote
for the period of time such borrowings remain in existence. No member is
entitled to cast more than 1,000 votes. Any number of members present and
voting, represented in person or by proxy, at the Special Meeting will
constitute a quorum.
Approval of the Plan of Conversion will require the affirmative vote of a
majority of the total outstanding votes of the Savings Bank's members eligible
to be cast at the Special Meeting. As of the Voting Record Date for the Special
Meeting, there were approximately 942,290 votes eligible to be cast, of which
471,146 votes constitutes a majority.
PROXIES
Members may vote at the Special Meeting or any adjournment thereof in
person or by proxy. Enclosed is a proxy which may be used by any eligible
member to vote on the Plan of Conversion. All properly executed proxies
received by management will be voted in accordance with the instructions
indicated thereon by the members giving such proxies. If no instructions are
given, such proxies will be voted in favor of the Plan of Conversion. If any
other matters are properly presented at the Special Meeting and may properly be
voted on, all proxies will be voted on such matters in accordance with the best
judgment of the proxy holders named therein. If the enclosed proxy is returned,
it may be revoked at any time before it is voted by written notice to the
Secretary of the Savings Bank, by submitting a later dated proxy, or by
attending and voting in person at the Special Meeting. The proxies being
solicited are only for use at the Special Meeting and at any and all
adjournments thereof and will not be used for any other meeting. Management is
not aware of any other business to be presented at the Special Meeting.
The Savings Bank, as trustee for individual retirement accounts at the
Savings Bank, will vote in favor of the Plan of Conversion, unless the
beneficial owner executes and returns the enclosed proxy for the Special Meeting
or attends the Special Meeting and votes in person.
To the extent necessary to permit approval of the Plan of Conversion,
proxies may be solicited by officers, directors or regular employees of the
Savings Bank, in person, by telephone or through other forms of communication
and, if necessary, the Special Meeting may be adjourned to an alternative date.
Such persons will be reimbursed by the Savings Bank for their reasonable out-of-
pocket expenses incurred in connection with such solicitation.
RECOMMENDATION OF THE BOARD OF DIRECTORS
The Board of Directors of the Savings Bank unanimously recommends that you
vote "FOR" the Plan of Conversion. Voting in favor of the Plan of Conversion
will not obligate any voter to purchase any stock.
3
<PAGE>
THE CONVERSION
The OTS has given approval to the Plan subject to the Plan's approval by
the members of the Savings Bank entitled to vote on the matter and subject to
the satisfaction of certain other conditions imposed by the OTS in its approval.
OTS approval, however, does not constitute a recommendation or endorsement of
the Plan.
General
On March 12, 1996, the Savings Bank's Board of Directors adopted the Plan
of Conversion pursuant to which the Savings Bank will convert to stock form and
subsequently convert to a national bank to be known as Chester National Bank,
and a newly chartered bank subsidiary will be formed by the Holding Company to
be known as Chester National Bank of Missouri, which will purchase all of the
installment loans and a portion of the mortgage loans of the Savings Bank's
Perryville branch. All of the outstanding capital stock of the Chester National
Bank and Chester National Bank of Missouri will beheld by the Holding Company, a
newly formed Delaware corporation. The Holding Company and the Savings Bank
intend to pursue the business strategy described in this Prospectus with the
goal of enhancing long-term shareholder value. Neither the Holding Company nor
the Savings Bank has any existing plan to pursue any possible business
combination, and neither has any agreement or understanding, written or oral,
with respect to any possible business combination.
The following discussion of the Plan of Conversion is qualified in its
entirety by reference to the Plan of Conversion, which is attached as Exhibit A
to the Savings Bank's Proxy Statement and is available from the Savings Bank
upon request. The OTS has approved the Plan of Conversion subject to the Plan's
approval by the members of the Savings Bank entitled to vote on the matter at a
Special Meeting called for that purpose to be held on September 13, 1996, and
subject to the satisfaction of certain other conditions imposed by the OTS in
its approval.
If the Board of Directors of the Savings Bank decides for any reason, such
as possible delays resulting from overlapping regulatory processing or policies
or conditions which could adversely affect the Savings Bank's or the Holding
Company's ability to consummate the Conversion and transact its business as
contemplated herein and in accordance with the Savings Bank's operating
policies, at any time prior to the issuance of the Common Stock, not to use the
holding company form of organization in implementing the Conversion, the Plan of
Conversion will be amended to not use the holding company form of organization
in the Conversion. In the event that such a decision is made, the Savings Bank
will promptly refund all subscriptions or orders received together with accrued
interest, withdraw the Holding Company's registration statement from the SEC and
will take all steps necessary to consummate the Conversion and proceed with a
new offering without the Holding Company, including filing any necessary
documents with the OTS. In such event, and provided there is no regulatory
action, directive or other consideration upon which basis the Savings Bank
determines not to consummate the Conversion, the Savings Bank will issue and
sell the common stock of the Savings Bank. There can be no assurance that the
OTS would approve the Conversion if the Savings Bank decided to proceed without
the Holding Company. The following description of the Plan assumes that a
holding company form of organization will be utilized in the Conversion. In the
event that a holding company form of organization is not utilized, all other
pertinent terms of the Plan as described below will apply to the Conversion of
the Savings Bank from mutual to stock form of organization and the sale of the
Savings Bank's common stock.
The Conversion will be accomplished through the adoption of a Federal Stock
Charter and Bylaws to authorize the issuance of capital stock by the Converted
Savings Bank, the issuance of all the Converted Savings Bank's capital stock to
be outstanding upon consummation of the Stock Conversion to the Holding Company,
the offer and sale of the Common Stock of the Holding Company and the conversion
of the Converted Savings Bank to the Converted Bank. Upon issuance of the
Converted Savings Bank's shares of capital stock to the Holding Company, the
Converted Savings Bank will be a wholly owned subsidiary of the Holding Company.
Following consummation of the Stock Conversion, the Bank Conversion whereby the
Converted Savings Bank will convert to
4
<PAGE>
the Converted Bank, and the Bank Formation whereby the De Novo Bank will
purchase all of the installment loans and a portion of the mortgage loans of the
Savings Bank's Perryville branch office, will be promptly effectuated.
The Holding Company has applied for approval from the OTS to become the
holding company of the Converted Savings Bank subject to the satisfaction of
certain conditions and to acquire all of the common stock of the Converted
Savings Bank to be issued in the Stock Conversion. The Stock Conversion will be
effected only upon completion of the sale of all of the shares of Common Stock
to be issued by the Holding Company pursuant to the Plan of Conversion. The
Savings Bank has applied for approval for the Bank Conversion from the OCC and
the Holding Company has applied for approval from the Federal Reserve for
continued ownership of 100% of the stock of the Converted Bank and the De Novo
Bank following the Bank Conversion and the Bank Formation.
The aggregate purchase price of the Common Stock to be issued in the
Conversion will be within the Estimated Valuation Range of between $14,025,000
and $18,975,000 which may be increased to $21,821,250, based upon an independent
appraisal of the estimated pro forma market value of the Common Stock prepared
by RP Financial. All shares of the Common Stock to be issued and sold in the
Stock Conversion will be sold at the same price. The independent appraisal will
be updated, if necessary, and the final price of the shares of the Common Stock
will be determined at the completion of the Subscription and Direct Community
Offering. RP Financial is a consulting firm experienced in the valuation and
appraisal of savings institutions. For additional information, see "-- Stock
Pricing and Number of Shares to be Issued."
The Plan of Conversion provides generally that (i) the Savings Bank will
convert from a federally chartered mutual savings bank to a federally chartered
stock savings bank; (ii) the issuance of all the Converted Savings Bank's
capital stock to be outstanding upon consummation of the Stock Conversion to the
Holding Company; (iii) the offer and sale of the Common Stock by the Holding
Company in the Subscription Offering to persons having Subscription Rights and
in a Direct Community Offering to certain members of the general public with
preference given first to natural persons and trusts of natural persons residing
in the Local Community; (iv) shares of Common Stock not subscribed for in the
Subscription and Direct Community Offering will be offered to certain members of
the general public in a Public Offering; (v) the Converted Savings Bank will
convert to a national bank; and (vi) the Holding Company will form a de novo
national bank subsidiary to be known as Chester National Bank of Missouri, which
will purchase all of the installment loans and a portion of the mortgage loans
of the Savings Bank's Perryville branch. See "USE OF PROCEEDS." The Conversion
will be effected only upon completion of the sale of at least $14,875,000 of
Common Stock to be issued pursuant to the Plan of Conversion.
As part of the Conversion, the Holding Company is making a Subscription
Offering of its Common Stock to holders of Subscription Rights in the following
order of priority: (i) Eligible Account Holders (depositors with $50.00 or more
on deposit as of January 15, 1995); (ii) the Savings Bank's ESOP; (iii)
Supplemental Eligible Account Holders (depositors with $50.00 or more on deposit
as of June 30, 1996); and (iv) Other Members (depositors of the Savings Bank as
of July 19, 1996, and borrowers of the Savings Bank with loans outstanding as of
December 18, 1989, which continue to be outstanding as of July 19, 1996). After
the Subscription Offering and subject to the prior rights of holders of
Subscription Rights, the Holding Company is offering the Common Stock for sale
to certain members of the general public through a Direct Community
Offering.
Shares of Common Stock not sold in the Subscription and Direct Community
Offering may be offered in the Public Offering. Regulations require that the
Public Offering be completed within 45 days after completion of the Subscription
Offering unless extended by the Savings Bank or the Holding Company with the
approval of the regulatory authorities. If the Public Offering is determined
not to be feasible, the Board of Directors of the Savings Bank will consult with
the regulatory authorities to determine an appropriate alternative method for
selling the unsubscribed shares of Common Stock. The Plan of Conversion
provides that the Conversion must be completed within 24 months after the date
of the approval of the Plan of Conversion by the members of the Savings Bank.
No sales of Common Stock may be completed, either in the Subscription,
Direct Community or Public Offerings, unless the Plan of Conversion is approved
by the members of the Savings Bank.
5
<PAGE>
The completion of the Offerings, however, is subject to market conditions
and other factors beyond the Savings Bank's control. No assurance can be given
as to the length of time after approval of the Plan of Conversion at the Special
Meeting that will be required to complete the Public Offering or other sale of
the Common Stock. If delays are experienced, significant changes may occur in
the estimated pro forma market value of the Holding Company and the Savings Bank
as converted, together with corresponding changes in the net proceeds realized
by the Holding Company from the sale of the Common Stock. In the event the
Conversion is terminated, the Savings Bank would be required to charge all
Conversion expenses against current income.
Orders for shares of Common Stock will not be filled until at least
1,402,500 shares of Common Stock have been subscribed for or sold and the OTS
approves the final valuation and the Conversion closes. If the Conversion is
not consummated by ___________, 1996 (45 days after the last day of the fully
extended Subscription Offering) and the OTS consents to an extension of time to
consummate the Conversion, subscribers will be given the right to increase,
decrease or rescind their subscriptions. Unless an affirmative indication is
received from subscribers that they wish to continue to subscribe for shares,
the funds will be returned promptly, together with accrued interest at the
passbook rate from the date payment is received until the funds are returned to
the subscriber. If such period is not extended, or, in any event, if the
Conversion is not consummated by ______, 1996, all withdrawal authorizations
will be terminated and all funds held will be promptly returned together with
accrued interest at the Savings Bank's passbook rate from the date payment is
received until the Conversion is terminated.
Effects of Conversion to Stock Form on Depositors and Borrowers of the Savings
Bank
Voting Rights. Savings members and borrowers will have no voting rights in
the converted Savings Bank or the Holding Company and therefore will not be able
to elect directors of the Savings Bank or the Holding Company or to control
their affairs. Currently, these rights are accorded to savings members of the
Savings Bank. Subsequent to the Conversion, voting rights will be vested
exclusively in the Holding Company with respect to the Savings Bank and the
holders of the Common Stock as to matters pertaining to the Holding Company.
Each holder of Common Stock shall be entitled to vote on any matter to be
considered by the stockholders of the Holding Company. A stockholder will be
entitled to one vote for each share of Common Stock owned.
Savings Accounts and Loans. The Savings Bank's savings accounts, account
balances and existing FDIC insurance coverage of savings accounts will not be
affected by the Conversion. Furthermore, the Conversion will not affect the
loan accounts, loan balances or obligations of borrowers under their individual
contractual arrangements with the Savings Bank.
Tax Effects. The Savings Bank has received an opinion from Breyer &
Aguggia, Washington, D.C., that the Conversion will constitute a nontaxable
reorganization under Section 368(a)(1)(F) of the Code. Among other things, the
opinion states that: (i) no gain or loss will be recognized to the Savings Bank
in its mutual or stock form by reason of its Conversion; (ii) no gain or loss
will be recognized to its account holders upon the issuance to them of accounts
in the Savings Bank immediately after the Conversion, in the same dollar amounts
and on the same terms and conditions as their accounts at the Savings Bank in
its mutual form plus interest in the liquidation account; (iii) the tax basis of
account holders' accounts in the Savings Bank immediately after the Conversion
will be the same as the tax basis of their accounts immediately prior to
Conversion; (iv) the tax basis of each account holder's interest in the
liquidation account will be zero; (v) the tax basis of the Common Stock
purchased in the Conversion will be the amount paid and the holding period for
such stock will commence at the date of purchase; and (vi) no gain or loss will
be recognized to account holders upon the receipt or exercise of Subscription
Rights in the Conversion, except to the extent Subscription Rights are deemed to
have value as discussed below. Unlike a private letter ruling issued by the
IRS, an opinion of counsel is not binding on the IRS and the IRS could disagree
with the conclusions reached therein. In the event of such disagreement, no
assurance can be given that the conclusions reached in an opinion of counsel
would be sustained by a court if contested by the IRS.
Based upon past rulings issued by the IRS, the opinion provides that the
receipt of Subscription Rights by Eligible Account Holders, Supplemental
Eligible Account Holders and Other Members under the Plan will be taxable
6
<PAGE>
to the extent, if any, that the Subscription Rights are deemed to have a fair
market value. RP Financial, a financial consulting firm retained by the Savings
Bank, whose findings are not binding on the IRS, has indicated that the
Subscription Rights do not have any value, based on the fact that such rights
are acquired by the recipients without cost, are nontransferable 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 paid by purchasers in the Direct Community Offering for
unsubscribed shares of Common Stock. If the Subscription Rights are deemed to
have a fair market value, the receipt of such rights may only be taxable to
those Eligible Account Holders, Supplemental Eligible Account Holders (if any)
and Other Members who exercise their Subscription Rights. The Savings Bank could
also recognize a gain on the distribution of such Subscription Rights. Eligible
Account Holders, Supplemental Eligible Account Holders and Other Members are
encouraged to consult with their own tax advisers as to the tax consequences in
the event the Subscription Rights are deemed to have a fair market value.
The Savings Bank has also received an opinion from Bryan Cave LLP, St.
Louis, Missouri, that, assuming the Conversion does not result in any federal
income tax liability to the Savings Bank, its account holders, or the Holding
Company, implementation of the Plan of Conversion will not result in any
Illinois income tax liability to such entities or persons.
The opinions of Breyer & Aguggia and Bryan Cave LLP and the letter from RP
Financial are filed as exhibits to the Registration Statement. See "ADDITIONAL
INFORMATION."
PROSPECTIVE INVESTORS ARE URGED TO CONSULT WITH THEIR OWN TAX ADVISORS
REGARDING THE TAX CONSEQUENCES OF THE CONVERSION PARTICULAR TO THEM.
Liquidation Account. In the unlikely event of a complete liquidation of
the Savings Bank in its present mutual form, each depositor in the Savings Bank
would receive a pro rata share of any assets of the Savings Bank remaining after
payment of claims of all creditors (including the claims of all depositors up to
the withdrawal value of their accounts). Each depositor's pro rata share of
such remaining assets would be in the same proportion as the value of his or her
deposit account to the total value of all deposit accounts in the Savings Bank
at the time of liquidation.
After the Conversion, holders of withdrawable deposit(s) in the Savings
Bank including certificates of deposit ("Savings Account(s)") shall not be
entitled to share in any residual assets in the event of liquidation of the
Savings Bank. However, pursuant to OTS regulations, the Savings Bank shall, at
the time of the Conversion, establish a liquidation account in an amount equal
to its total equity as of the date of the latest statement of financial
condition contained herein.
The liquidation account shall be maintained by the Savings Bank (and
assumed by the Banks) subsequent to the Conversion for the benefit of Eligible
Account Holders and Supplemental Eligible Account Holders who retain their
Savings Accounts in the Savings 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
balance ("subaccount").
The initial subaccount balance for a Savings Account held by an Eligible
Account Holder 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 such holder's "qualifying deposit" in the
Savings Account and the denominator is the total amount of the "qualifying
deposits" of all such holders. Such initial subaccount balance shall not be
increased, and it 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 at the close of business on any annual
closing day of the Savings Bank subsequent to January 15, 1995 is less than the
lesser of (i) the deposit balance in such Savings Account at the close of
business on any other annual closing date subsequent to January 15, 1995 or June
30, 1996 or (ii) the amount of the "qualifying deposit"
7
<PAGE>
in such Savings Account on January 15, 1995 or June 30, 1996, then the
subaccount balance for such Savings Account shall be adjusted by reducing such
subaccount balance in an amount proportionate to the reduction in such deposit
balance. In the event of a downward adjustment, such 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 Savings Bank or the Banks
(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
balance(s) for Savings Account(s) then held by such holder before any
liquidation distribution may be made to stockholders. No merger, consolidation,
bulk purchase of assets with assumptions of Savings Accounts and other
liabilities or similar transactions with another federally insured institution
in which the Savings Bank (or the Banks) is not the surviving institution(s)
shall be considered to be a complete liquidation. In any such transaction the
liquidation account shall be assumed by the surviving institution.
REVIEW OF OTS ACTION
Any person aggrieved by a final action of the OTS which approves, with or
without conditions, or disapproves a plan of conversion pursuant to this part
may obtain review of such action by filing in the court of appeals of the United
States 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, a written petition praying that the final action of the OTS be
modified, terminated or set aside. Such petition must be filed within 30 days
after the publication of notice of such final action in the Federal Register, or
----------------
30 days after the mailing by the applicant of the notice to members as provided
for in 12 C.F.R. (S)563b.6(c), whichever is later. The further procedure for
review is as follows: A copy of the petition is forthwith transmitted to the
OTS by the clerk of the court and thereupon the OTS files in the court the
record in the proceeding, as provided in Section 2112 of Title 28 of the United
States Code. Upon the filing of the petition, the court has jurisdiction, which
upon the filing of the record is exclusive, to affirm, modify, terminate, or set
aside in whole or in part, the final action of the OTS. Review of such
proceedings is as provided in Chapter 7 of Title 5 of the United States Code.
The judgment and decree of the court is final, except that they are subject to
review by the United States Supreme Court upon certiorari as provided in Section
1254 of Title 28 of the United States Code.
ADDITIONAL INFORMATION
The Holding Company has filed with the Securities and Exchange Commission
("SEC") a Registration Statement on Form S-1 (File No. 333-2470) under the
Securities Act of 1933, as amended, with respect to the Common Stock offered in
the Conversion. The accompanying 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; 500 West
Madison Street, Suite 1400, Room 1100, Chicago, Illinois 60661; and 75 Park
Place, New York, New York 10007. 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 Savings Bank has filed with the OTS an Application for Approval of
Conversion, which includes proxy materials for the Savings Bank's Special
Meeting and certain other information. The accompanying Prospectus omits
certain information contained in such Application. The Application, including
the proxy materials, exhibits and certain other information that are a part
thereof, may 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 Regional Director
of the OTS at the Central Regional Office of the OTS, 200 West Madison Street,
Suite 1300, Chicago, Illinois, 60606.
8
<PAGE>
Copies of the Holding Company's Certificate of Incorporation and Bylaws may
be obtained by written request to the Savings Bank.
All persons eligible to vote at the Special Meeting should review both this
Proxy Statement and the accompanying Prospectus carefully. However, no person
is obligated to purchase any Common Stock. For additional information, you may
call the Conversion Center at (618) 826-3217.
BY ORDER OF THE BOARD OF DIRECTORS
ROBERT H. GROSS
SECRETARY
Chester, Illinois
____________, 1996
YOUR BOARD OF DIRECTORS URGES YOU TO CONSIDER CAREFULLY THE INFORMATION
CONTAINED IN THIS PROXY STATEMENT 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 SAVINGS 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 STOCK. THE OFFER WILL BE MADE ONLY BY THE PROSPECTUS IN THOSE
JURISDICTIONS IN WHICH IT IS LAWFUL TO MAKE SUCH OFFER.
9
<PAGE>
EXHIBIT A
CHESTER SAVINGS BANK, FSB
CHESTER, ILLINOIS
PLAN OF CONVERSION
FROM FEDERAL MUTUAL SAVINGS BANK TO NATIONAL BANK
AND FORMATION OF A HOLDING COMPANY
INTRODUCTION
------------
I. General
-------
On March 12, 1996, the Board of Directors of Chester Savings Bank, FSB,
Chester, Illinois ("Savings Bank"), after careful study and consideration,
adopted by unanimous vote this Plan of Conversion ("Plan"), which provides for
(i) the conversion of the Savings Bank from a federally chartered mutual savings
bank to a federally chartered stock savings bank under the name "Chester Savings
Bank, FSB" ("Converted Savings Bank"), (ii) the concurrent formation of a
holding company for the Converted Savings Bank ("Holding Company"), and (iii)
the subsequent (a) conversion of the Converted Savings Bank from a federally
chartered stock savings bank to a national bank under the name "Chester National
Bank" ("Converted Bank") and (b) the purchase of the assets and the assumption
of the liabilities of the Perryville, Missouri branch office of the Converted
Savings Bank by a de novo national bank subsidiary of the Holding Company under
the name "Chester National Bank of Missouri" ("De Novo Bank"). The conversion
of the Savings Bank to the Converted Savings Bank, the acquisition of control of
the Converted Savings Bank by the Holding Company and the issuance of stock by
the Holding Company as provided herein, are collectively referred to herein as
the "Stock Conversion." The conversion of the Converted Savings Bank to the
Converted Bank and the purchase of the assets and the assumption of the
liabilities of the Perryville, Missouri branch office of the Converted Savings
Bank by the De Novo Bank are collectively referred to herein as the "Bank
Conversion." The Stock Conversion and the Bank Conversion are referred to
herein collectively as the "Conversion."
All capitalized terms contained in the Plan shall have the meanings ascribed
to them in Section II hereof.
Pursuant to the Plan, shares of Conversion Stock in the Holding Company will
be offered as part of the Stock Conversion in a Subscription Offering pursuant
to nontransferable Subscription Rights at a predetermined and uniform price
first, to the Savings Bank's Eligible Account Holders, second to the 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 Savings Bank's application to convert to stock form, and fourth
to Other Members of the Savings Bank. Any shares of Conversion Stock remaining
unsold after the Subscription Offering may be offered for sale to the public
through a Direct Community Offering and/or an Underwritten Public Offering, as
determined by the Boards of Directors of the Savings Bank and the Holding
Company in their sole discretion. The aggregate Purchase Price of the
Conversion Stock will be based upon an independent appraisal of the Savings Bank
and will reflect the estimated pro forma market value of the Converted Bank and
the De Novo Bank as subsidiaries of the Holding Company.
Immediately following consummation of the Stock Conversion, the Holding
Company, as the sole stockholder of the Converted Savings Bank, shall approve
the Bank Conversion and use part of the net proceeds of the Stock Conversion
retained by it to initially capitalize the De Novo Bank, and the Converted
Savings Bank and the De Novo Bank shall take such actions as may be necessary to
consummate the Bank Conversion.
The Stock Conversion is subject to regulations of the Director of the OTS of
the United States Department of the Treasury pursuant to Section 5(i) of the
Home Owners' Loan Act (Part 563b of the Rules and Regulations Applicable to All
Savings Associations).
<PAGE>
Consummation of the Conversion is subject to the approval of this Plan and
the Conversion by the OTS and by the affirmative vote of Members of the Savings
Bank holding not less than a majority of the total votes eligible to be cast at
a special meeting of the Members to be called to consider the Conversion.
Consummation of the Bank Conversion also requires approval of the OCC and the
Federal Reserve Board.
It is the desire of the Board of Directors to attract new capital to the
Savings 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, to facilitate
future expansion and, because applicable laws and regulations do not provide for
the organization of mutual commercial banks, to enable the Savings Bank to
complete the Bank Conversion. In addition, the Board of Directors intends to
implement stock option plans and other stock benefit plans as part of the
Conversion in order to attract and retain qualified directors and officers. The
purpose of the Bank Conversion is to provide the Savings Bank with additional
operating flexibility and enhance its ability to provide a full range of banking
products and services to its community. The Savings Bank is currently
significantly in excess of the OTS reserve and liquidity requirements and will
be significantly in excess of the OCC's and Federal Reserve's requirements upon
conversion to a national bank. It is the further desire of the Board of
Directors to reorganize the Converted Savings Bank (or the Converted Bank and
the De Novo Bank upon the consummation of the Bank Conversion) 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
Savings Bank as a result of the Conversion.
II. Definitions
-----------
As used in this Plan, the terms set forth below have the following meanings:
A. Acting in Concert: (1) Knowing participation in a joint activity or
-----------------
interdependent conscious parallel action towards a common goal whether or not
pursuant to an express agreement; or (2) 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. A Person (as defined by 12 C.F.R.
(S)563b.2(a)(26)) who acts in concert with another Person ("other party") shall
also be deemed to be acting in concert with any Person who is also acting in
concert with that other party, except that any Tax-Qualified Employee Stock
Benefit Plan will not be deemed to be acting in concert with its trustee or a
Person who serves in a similar capacity solely for the purpose of determining
whether stock held by the trustee and stock held by the Tax-Qualified Employee
Benefit Plan will be aggregated.
B. Associate: When used to indicate a relationship with any Person, means
---------
(l) any corporation or organization (other than the Savings Bank or a majority-
owned subsidiary of the Savings Bank, or the Holding Company) of which such
Person is an officer or partner or is, directly or indirectly, the beneficial
owner of ten percent or more of any class of equity securities, (2) 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 it does not include a Tax-Qualified Employee Stock Benefit Plan and (3) 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 or officer of the Savings Bank,
any of its subsidiaries, or the Holding Company.
D. Bank Conversion: The (i) conversion of the Converted Savings Bank from a
---------------
federally chartered capital stock savings bank to a national bank and (ii) the
Purchase and Assumption Transaction.
E. Capital Stock: Any and all authorized stock in the Converted Savings
-------------
Bank.
A-2
<PAGE>
F. Common Stock: Any and all authorized common stock in the Holding Company
------------
subsequent to the Conversion.
G. Conversion: The Stock Conversion and the Bank Conversion together, except
----------
as provided in Paragraph III.H herein.
H. Conversion Stock: Common Stock to be issued and sold by the Holding
----------------
Company pursuant to the Plan.
I. Converted Bank: "Chester National Bank," the national bank resulting from
--------------
the Bank Conversion.
J. Converted Savings Bank: "Chester Savings Bank, FSB," the federally
----------------------
chartered capital stock savings bank resulting from the Stock Conversion.
K. De Novo Bank: "Chester National Bank of Missouri," the de novo national
------------
bank, initially capitalized by the Holding Company from the portion of the net
proceeds of the Stock Conversion retained by the Holding Company, that will
engage in the Purchase and Assumption Transaction.
L. Direct Community Offering: The offering for sale of Conversion Stock to
-------------------------
the public.
M. Eligibility Record Date: January 15, 1995.
-----------------------
N. Eligible Account Holder: Holder of a Qualifying Deposit in the Savings
-----------------------
Bank on the Eligibility Record Date.
O. FDIC: Federal Deposit Insurance Corporation.
----
P. FDIC Insurance Application: The application submitted to the FDIC to
--------------------------
obtain insurance for the deposit accounts of the De Novo Bank.
Q. Federal Reserve Board: The Board of Governors of the Federal Reserve
---------------------
System.
R. Form AC Application: The application submitted to the OTS for approval of
-------------------
the Stock Conversion.
S. H-(e)1 Application: The application submitted to the OTS on OTS Form
------------------
H-(e)1 or if applicable, Form H-(e)1-S, for approval of the Holding Company's
acquisition of all of the Capital Stock.
T. Holding Company: A corporation to be formed by the Savings Bank under
---------------
state law for the purpose of becoming a holding company through the issuance and
sale of its stock under the Plan, and concurrent acquisition of 100% of the
common stock of the Converted Savings Bank to be issued pursuant to the Plan and
100% of the common stock of the De Novo Bank.
U. Holding Company Stock: Any and all authorized stock of the Holding
---------------------
Company.
V. Local Community: Jackson, Perry and Randolph, Counties, Illinois, and
---------------
Cape Girardeau and Perry Counties, Missouri.
W. Market Maker: A dealer (i.e., any Person who engages 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) regularly publishes bona fide,
competitive bid and offer quotations in a recognized inter-dealer quotation
system or furnishes bona fide competitive bid and offer quotations
A-3
<PAGE>
on request and (ii) is ready, willing and able to effect transactions in
reasonable quantities at his quoted prices with other brokers or dealers.
X. Members: All Persons or entities who qualify as members of the Savings
-------
Bank pursuant to its Charter and Bylaws prior to the Stock Conversion.
Y. OCC: The Office of the Comptroller of the Currency.
---
Z. OCC Conversion Application: The application submitted to the OCC for the
--------------------------
approval of the Bank Conversion.
AA. OCC De Novo Application: The application submitted to the OCC to charter
-----------------------
the De Novo Bank.
BB. OCC Purchase and Assumption Application: The application submitted to
---------------------------------------
the OCC for the approval of the Purchase and Assumption Transaction.
CC. Officer: An executive officer of the Savings Bank, which includes the
-------
Chairman of the Board, President, Executive Vice President, Senior Vice
Presidents, Vice Presidents in charge of principal business functions, the
Secretary and the Treasurer as well as any other person performing similar
functions.
DD. Order Forms: Forms, including a certification form specified in 12
-----------
C.F.R. 563.76(c), to be used for the purchase of Conversion Stock sent to
Eligible Account Holders and other parties eligible to purchase Conversion Stock
in the Subscription Offering pursuant to the Plan.
EE. Other Member: Holder of a Savings Account (other than Eligible Account
------------
Holders and Supplemental Eligible Account Holders) as of the Record Date and
borrowers from the Savings Bank as provided in the Savings Bank's Federal Mutual
Charter who continue to be borrowers from the Savings Bank as of the Record
Date.
FF. OTS: Office of Thrift Supervision of the United States Department of
---
the Treasury.
GG. OTS Bank Conversion Application: The application submitted to the OTS
-------------------------------
for approval of the Bank Conversion, including the Purchase and Assumption
Transaction.
HH. Person: An individual, corporation, partnership, association, joint stock
------
company, trust, unincorporated organization or a government or any political
subdivision thereof.
II. Plan: This Plan of Conversion, which provides for the conversion of the
----
Savings Bank from a federally chartered mutual savings bank to a federally
chartered capital stock savings bank (i.e., the Converted Savings Bank), the
concurrent formation of a holding company for the Converted Savings Bank, and
the subsequent conversion of the Converted Savings Bank from a federally
chartered capital stock savings bank to a national bank (i.e., the Converted
Bank) and the purchase of the assets and assumption of the liabilities of the
Perryville, Missouri branch office of the Converted Savings Bank by a de novo
national bank subsidiary of the Holding Company (i.e., the De Novo Bank).
JJ. Purchase and Assumption Transaction: The purchase of the assets and
-----------------------------------
assumption of the liabilities of the Perryville, Missouri branch office of the
Converted Savings Bank by the De Novo Bank.
KK. Qualifying Deposit: The deposit balance in any Savings Account as of the
------------------
Eligibility Record Date or the Supplemental Eligibility Record Date, as
applicable; provided, however, that no Savings Account with a deposit balance of
less than $50 shall constitute a Qualifying Deposit.
A-4
<PAGE>
LL. Record Date: Date which determines which Members are entitled to vote at
-----------
the Special Meeting.
MM. Registration Statement: The registration statement on Form S-1 or other
----------------------
applicable forms filed by the Holding Company with the SEC for the purpose of
registering the Conversion Stock under the Securities Act of 1933, as amended.
NN. Savings Account(s): Withdrawable deposit(s) in the Savings Bank,
------------------
Converted Savings Bank or Converted Bank, as applicable, including certificates
of deposit.
OO. Savings Bank: Chester Savings Bank, FSB, in its present form as a
------------
federally chartered mutual savings bank.
PP. SEC: Securities and Exchange Commission.
---
QQ. Special Meeting: The special meeting of Members called for the purpose
---------------
of considering the Plan for approval.
RR. Stock Conversion: The conversion of the Savings Bank from a federally
----------------
chartered mutual savings bank to a federally chartered capital stock savings
bank through amendment of the Savings Bank's federal Charter and Bylaws, the
issuance and sale to the Holding Company of all the Capital Stock issued by the
Converted Savings Bank in connection therewith, and the issuance by the Holding
Company of the Conversion Stock, all in accordance with the Plan.
SS. Subscription Offering: The offering of Conversion Stock to Eligible
---------------------
Account Holders, Tax-Qualified Employee Stock Benefit Plans, Supplemental
Eligible Account Holders and Other Members under the Plan.
TT. Subscription Rights: Nontransferable, nonnegotiable, personal rights of
-------------------
Eligible Account Holders, Tax-Qualified Employee Stock Benefit Plans,
Supplemental Eligible Account Holders and Other Members to purchase Conversion
Stock.
UU. Supplemental Eligibility Record Date: The last day of the calendar
------------------------------------
quarter preceding the approval of the Plan by the OTS.
VV. Supplemental Eligible Account Holder: Holder of a Qualifying Deposit in
------------------------------------
the Savings Bank (other than an Officer or director or their Associates) on the
Supplemental Eligibility Record Date.
WW. Tax Qualified Employee Stock Benefit Plan: Any defined benefit plan or
-----------------------------------------
defined contribution plan of the Savings Bank or Holding Company, such as an
employee stock ownership plan, 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. A "non-tax-qualified employee stock
benefit plan" is any defined benefit plan or defined contribution plan that is
not so qualified.
XX. Underwriters: Investment banking firms purchasing Conversion Stock from
------------
the Holding Company for resale to the public.
YY. Underwritten Public Offering: The offering for sale to the public by the
----------------------------
Underwriters on a firm commitment basis of the Conversion Stock remaining
unsubscribed following the Subscription and Direct Community Offering.
ZZ. Y-3 Application: The application submitted to the Federal Reserve Board
---------------
on Federal Reserve Board Form FR Y-3 for approval for the Holding Company to
maintain control of the Converted Bank and acquire control of the De Novo Bank.
A-5
<PAGE>
III. Steps Prior to Submission of the Plan to the Members for Approval
-----------------------------------------------------------------
Prior to submission of the Plan to the Members for approval, the Savings
Bank must receive approval from the OTS of the Form AC Application. Prior to
such regulatory approval:
A. The Board of Directors shall adopt the Plan by a vote of not less than
two-thirds of its entire membership.
B. The Savings Bank shall notify the Members of the adoption of the Plan
by publishing a statement in a newspaper having a general circulation in each
community in which the Savings Bank maintains an office.
C. A press release relating to the proposed Conversion may be submitted
to the local media.
D. Copies of the Plan as adopted by the Board of Directors shall be made
available for inspection at each office of the Savings Bank.
E. The Savings 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. Promptly following the adoption of this Plan, the Savings Bank shall
file the OCC Conversion Application, the OCC Purchase and Assumption
Application, the FDIC Insurance Application and the OTS Bank Conversion
Application, and the Holding Company shall file a draft Y-3 Application.
G. As soon as practicable following the adoption of this Plan, the
Savings Bank shall file the Form AC Application, and the Holding Company shall
file the Registration Statement, the H-(e)1 Application and the final Y-3
Application. Upon filing of the Form AC Application, the Savings 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 Savings 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)1
Application, the Y-3 Application, the OCC Purchase and Assumption Application,
the OCC De Novo Application, the OCC Conversion Application and the FDIC
Insurance Application by the regulations and policies of the OTS, the Federal
Reserve Board, the OCC and the FDIC, respectively.
H. The Board of Directors of the Savings Bank may, at any time, elect not
to proceed with the Bank Conversion or elect to defer the Bank Conversion, in
which event the OCC Conversion Application, the OCC Purchase and Assumption
Application, the OCC De Novo Application, the FDIC Insurance Application, the
OTS Bank Conversion Application and the Y-3 Application shall be withdrawn. In
the event the Bank Conversion is not pursued or is deferred, any references in
this Plan to the Conversion shall be deemed to constitute references to the
Stock Conversion and references to the Converted Bank shall be deemed to
constitute references to the Converted Savings Bank.
I. The Savings 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 Savings Bank or its Eligible Account Holders, Supplemental
Eligible Account Holders and Other Members. Receipt of a favorable opinion or
ruling is a condition precedent to completion of the Conversion.
IV. Meeting of Members
------------------
Subsequent to the approval of the Plan by the OTS, the Special Meeting
shall be scheduled in accordance with the Savings Bank's Bylaws. Promptly after
receipt of approval and at least 20 days but not more than 45 days prior to the
Special Meeting, the Savings Bank shall distribute proxy solicitation materials
to all Members and
A-6
<PAGE>
beneficial owners of accounts held in fiduciary capacities where the beneficial
owners possess voting rights, as of the Record Date. The proxy solicitation
materials shall include a copy of the proxy statement to be used in connection
with such solicitation (the "Proxy Statement") and other documents authorized
for use by the regulatory authorities and may also include a copy of the Plan
and/or a prospectus ("Prospectus") as provided in Paragraph V below. The
Savings Bank shall 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
prepaid card on which to indicate whether he wishes to receive the Prospectus,
if the Subscription Offering is not held concurrently with the proxy
solicitation.
Pursuant to OTS regulations, an affirmative vote of not less than a
majority of the total outstanding votes of the Members is required for approval
of the Plan. Voting may be in person or by proxy. The OTS shall be notified
promptly of the actions of the Members.
By voting in favor of the adoption of the Plan and the Conversion, the
Members will be voting in favor of (i) the Stock Conversion and the adoption by
the Savings Bank of the Federal Stock Charter and Bylaws and (ii) the subsequent
Bank Conversion and the adoption by the Converted Savings Bank of the Converted
Bank articles of incorporation and bylaws.
V. Summary Proxy Statement
-----------------------
The Proxy Statement furnished to Members may be in summary form, provided
that a statement is made in bold-face type that a more detailed description of
the proposed transaction may be obtained by returning an enclosed postage
prepaid card or other written communication requesting supplemental information.
Without prior approval of the OTS, the Special Meeting shall not be held less
than 20 days after the last day on which the supplemental information statement
is mailed to requesting Members. The supplemental information statement may be
combined with the Prospectus if the Subscription Offering is commenced
concurrently with or during 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 Direct Community
Offering concurrently with or during the proxy solicitation of Members. The
Holding Company may close the Subscription Offering before the Special Meeting,
provided that the offer and sale of the Conversion Stock shall be conditioned
upon approval of the Plan by the Members at the Special Meeting. The Savings
Bank's proxy solicitation materials may require Eligible Account Holders,
Supplemental Eligible Account Holders (if applicable) and Other Members to
return to the Savings Bank by a reasonable certain date a postage prepaid card
or other written communication requesting receipt of a Prospectus with respect
to the Subscription Offering, provided that if the Prospectus is not mailed
concurrently with the proxy solicitation materials, the Subscription Offering
shall not be closed until the expiration of 30 days after the mailing of the
proxy solicitation materials. If the Subscription Offering is not commenced
within 45 days after the Special Meeting, the Savings Bank may transmit, not
more than 30 days prior to the commencement of the Subscription Offering, to
each Eligible Account Holder, Supplemental Eligible Account Holder and other
eligible subscribers who had been furnished with proxy solicitation materials a
notice which shall state that the Savings Bank is not required to furnish a
Prospectus to them unless they return by a reasonable date certain a postage
prepaid card or other written communication requesting the receipt of the
Prospectus.
Prior to commencement of the Subscription Offering, the Direct Community
Offering and, if necessary, the Underwritten Public Offering, the Holding
Company shall file the Registration Statement and any post-effective amendments
thereto, if necessary. The Holding Company shall not distribute the final
Prospectus for the Subscription and Direct Community Offering or the
Underwritten Public Offering until the Registration Statement containing same
has been declared effective by the SEC and the Prospectus has been declared
effective by the OTS.
A-7
<PAGE>
VII. Combined Subscription and Direct Community Offering
---------------------------------------------------
Instead of a separate Subscription Offering, all Subscription Rights may be
exercised by delivery of properly completed and executed Order Forms to the
Savings Bank or selling group utilized in connection with the Direct Community
Offering. If a separate Subscription Offering is not held, orders for
Conversion Stock in the Direct Community Offering shall first be filled pursuant
to the priorities and limitations stated in Paragraph IX.C., below.
VIII. Consummation of the Conversion
------------------------------
A. Consummation of the Stock Conversion
------------------------------------
After receipt of all orders for Conversion Stock, and concurrently with
the execution thereof, the amendment of the Savings 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 and loan
association will be declared effective by the OTS, the amended Charter and
Bylaws approved by the Members will become effective, and the Savings Bank will
thereby be and become the Converted Savings 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 Savings Bank will become a wholly owned subsidiary of the Holding
Company. The Converted Savings Bank will issue to the Holding Company 1,000
shares of its common stock, representing all of the shares of Capital Stock to
be issued by the Converted Savings Bank in the Conversion, and the Holding
Company will make payment to the Converted Savings Bank of that portion of the
aggregate net proceeds realized by the Holding Company from the sale of the
Conversion Stock under the Plan as may be authorized or required by the OTS.
B. Consummation of the Bank Conversion
-----------------------------------
The Bank Conversion shall be deemed to occur and shall be effective upon
completion of all actions necessary or appropriate under applicable statutes and
regulations and the policies of the OCC and the OTS to complete the conversion
of the Converted Savings Bank to a national bank, the chartering of the De Novo
Bank and the Purchase and Assumption Transaction, including without limitation
the approval of the Bank Conversion by the Holding Company as the sole
stockholder of the Converted Savings Bank and the De Novo Bank, and the
Converted Savings Bank will thereby be and become the Converted Bank. Subject to
Paragraph III. H. above, the Bank Conversion shall be consummated as soon as
practicable following the consummation of the Stock Conversion.
IX. Stock Offering
--------------
A. Number of Shares
----------------
The number of shares of Conversion Stock to be offered pursuant to the
Plan shall be determined initially by the Board of Directors of the Savings Bank
and the Board of Directors of the Holding Company in conjunction with the
determination of the Purchase Price (as that term is defined in Paragraph IX.B.
below). The number of shares to be offered may be subsequently adjusted by the
Board of Directors prior to completion of the offering.
B. Independent Evaluation and Purchase Price of Shares
-- ---------------------------------------------------
All shares of Conversion Stock sold in the Conversion, including shares
sold in any Direct Community Offering, including shares sold in any Subscription
Offering, Direct Community Offering and Underwritten Public Offering, shall be
sold at a uniform price per share, referred to herein as the "Purchase Price."
The Purchase Price shall be determined by the Board of Directors of the Savings
Bank and the Board of Directors of the Holding Company 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 at such time. The
estimated pro forma market value of the Converted Bank shall be determined for
such purpose by an independent appraiser on the basis of such
A-8
<PAGE>
appropriate factors not inconsistent with the regulations of the OTS.
Immediately prior to the Subscription Offering, a aggregate subscription price
range shall be established which shall vary from 15% above to 15% below the
average of the minimum and maximum of the estimated price range. The maximum
subscription price (i.e., the per share amount to be remitted when subscribing
for shares of Conversion Stock) shall then be determined within the aggregate
subscription price range by the Board of Directors of the Savings Bank. The
subscription price range and the number of shares to be offered may be revised
after the completion of the Subscription Offering with OTS approval without a
resolicitation of proxies or Order Forms or both.
C. Method of Offering Shares
-------------------------
Subscription Rights shall be issued at no cost to Eligible Account Holders,
Tax-Qualified Employee Stock Benefit Plans, Supplemental Eligible Account
Holders and Other Members pursuant to priorities established by this Plan and
the regulations of the OTS. In order to effect the Conversion, all shares of
Conversion Stock proposed to be issued in connection with the Conversion must be
sold and, to the extent that shares are available, no subscriber shall be
allowed to purchase less than 25 shares; provided, however, that if the purchase
price is greater than $20 per share, the minimum number of shares which must be
subscribed for shall be adjusted so that the aggregate actual purchase price
required to be paid for such minimum number of shares does not exceed $500. The
priorities established for the purchase of shares are as follows:
1. Category 1: Eligible Account Holders
-------------------------------------
a. Each Eligible Account Holder shall receive, without payment,
Subscription Rights entitling such Eligible Account Holder to purchase that
number of shares of Conversion Stock which is equal to the greater of the
maximum purchase limitation established for the Direct Community Offering,
one-tenth of one percent of the total offering 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. If the allocation made in this
paragraph results in an oversubscription, shares of Conversion Stock shall
be allocated among subscribing Eligible Account Holders so as to permit
each such account holder, to the extent possible, to purchase a number of
shares of Conversion Stock sufficient to make his total allocation equal to
100 shares of Conversion Stock or the total amount of his subscription,
whichever is less. Any shares of Conversion Stock 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 Eligible Account Holders.
b. Subscription Rights received by Officers and directors of the
Savings Bank and their Associates, as Eligible Account Holders, based on
their increased deposits in the Savings Bank in the one-year period
preceding the Eligibility Record Date shall be subordinated to all other
subscriptions involving the exercise of Subscription Rights pursuant to
this Category.
2. Category 2: Tax-Qualified Employee Stock Benefit Plans
------------------------------------------------------
a. Tax-Qualified Employee Stock Benefit Plans of the Savings Bank
shall receive, without payment, non-transferable Subscription Rights to
purchase in the aggregate up to 8% of the Conversion Stock, including
shares of Conversion Stock to be issued in the Conversion as result of an
increase in the estimated price range after commencement of the
Subscription Offering and prior to the completion of the Conversion. Tax-
Qualified Employee Stock Benefit Plans may use funds contributed or
borrowed by the Holding Company or the Savings Bank and/or borrowed from an
independent financial institution to exercise such Subscription Rights, and
the Holding Company and the Savings Bank may make scheduled discretionary
contributions thereto, provided that such contributions do not cause the
Holding Company or the Savings Bank to fail to meet any applicable capital
requirements.
A-9
<PAGE>
b. Subscription Rights received pursuant to this category
shall be subordinated to Subscription Rights granted to Eligible Account
Holders; provided, however, that in the event the number of shares offered
in the Conversion is increased to an amount greater than the maximum of the
estimated price range as set forth in the Prospectus ("Maximum Shares"),
the Tax-Qualified Employee Stock Benefit Plans shall have a priority right
to purchase any such shares exceeding the Maximum Shares up to an aggregate
of 8% of the Conversion Stock.
3. Category 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 to the Form AC
Application filed prior to OTS approval, then, and only in that event, each
Supplemental Eligible Account Holder shall receive, without payment,
Subscription Rights entitling such Supplemental Eligible Account Holder to
purchase that number of shares of Conversion Stock which is equal to the
greater of the maximum purchase limitation established for the Direct
Community Offering, one-tenth of one percent of the total offering 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 Supplemental Eligible Account Holder and the denominator is the
total amount of the Qualifying Deposits of all Supplemental Eligible
Account Holders.
b. Subscription Rights received pursuant to this category
shall be subordinated to Subscription Rights granted to Eligible Account
Holders and Tax-Qualified Employee Stock Benefit Plans.
c. Any Subscription Rights to purchase shares of Conversion
Stock received by an Eligible Account Holder in accordance with Category
Number 1 shall reduce to the extent thereof the Subscription Rights to be
distributed 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 as
follows:
(1) Shares of Conversion Stock shall be allocated 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 his total allocation
(including the number of shares of Conversion Stock, if any,
allocated in accordance with Category Number 1) equal to 100
shares of Conversion Stock or the total amount of his
subscription, whichever is less.
(2) Any shares of Conversion Stock not allocated in
accordance with subparagraph (1) above 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 Supplemental Eligible Account
Holders.
4. Category 4: Other Members
--------------------------
a. Other Members shall receive Subscription Rights to purchase
shares of Conversion Stock, after satisfying the subscriptions of Eligible
Account Holders, Tax-Qualified Employee Stock Benefit Plans and
Supplemental Eligible Account Holders pursuant to Category Nos. 1, 2 and 3
above, subject to the following conditions:
b. Each such Other Member shall be entitled to subscribe for
the greater of the maximum purchase limitation established for the Direct
Community Offering, or one-tenth of one percent of the total offering.
A-10
<PAGE>
c. In the event of an oversubscription for shares of Conversion
Stock pursuant to Category No. 4, the shares of Conversion Stock available
shall be allocated among the subscribing Other Members pro rata on the
basis of the amounts of their respective subscriptions.
D. Direct Community Offering
-------------------------
1. Any shares of Conversion Stock not purchased through the exercise
of Subscription Rights set forth in Category Nos. 1 through 4 above may be sold
by the Holding Company to Persons under such terms and conditions as may be
established by the Savings Bank's Board of Directors with the concurrence of the
OTS. The Direct Community Offering may commence concurrently with or as soon as
possible after the completion of the Subscription Offering and must be completed
within 45 days after completion of the Subscription Offering, unless extended
with the approval of the OTS. Subject to such terms, conditions and procedures
as may be determined by the Savings Bank and the Holding Company, shares of
Conversion Stock not subscribed for in the Subscription Offering may be sold by
a syndicate of broker-dealers to the general public in the Direct Community
Offering. No Person may purchase shares of Conversion Stock with an aggregate
purchase price that exceeds $400,000 pursuant to this Category. The right to
purchase shares of Conversion Stock under this Category is subject to the right
of the Savings Bank or the Holding Company to accept or reject such
subscriptions in whole or in part. In the event of an oversubscription for
shares in this Category, the shares available shall be allocated among
prospective purchasers in an amount equal to the lesser of 100 shares or the
number of shares subscribed for by each such prospective purchaser, if possible.
Thereafter, unallocated shares shall be allocated among the prospective
purchasers whose orders remain unsatisfied after the procedure described in the
immediately preceding sentence until such orders have been filled or the
remaining shares have been allocated. The offering price for which such shares
are sold to the general public in the Direct Community Offering shall be the
Purchase Price.
2. Orders received in the Direct Community Offering first shall be
filled up to a maximum of 2% of the Conversion Stock and thereafter remaining
shares shall be allocated on an equal number of shares basis per order until all
orders have been filled.
3. The Conversion Stock offered in the Direct Community Offering shall
be offered and sold in a manner that will achieve the widest distribution
thereof. Preference shall be given in the Direct Community Offering to natural
Persons and trusts of natural Persons residing in the Local Community.
E. Underwritten Public Offering
----------------------------
1. Any shares of Conversion Stock not purchased Subscription or Direct
Community Offering may be offered for sale to the Underwriters for resale to the
general public in an Underwritten Public Offering, under such terms and
conditions as may be established by the Holding Company's and the Savings Bank's
Boards of Directors with the concurrence of the OTS. The Underwritten Public
Offering may commence concurrently with or as soon as practicable after the
completion of the Subscription and Direct Community Offering and must be
completed within 45 days after completion of the Subscription Offering, unless
extended by the Savings Bank with the approval of the OTS. Such shares shall be
sold to the Underwriters for the Purchase Price less the underwriting discount,
which shall be an amount negotiated with the Underwriters and approved by the
OTS. The price at which such shares are sold to the general public in the
Underwritten Public Offering will be the same price paid for such shares in the
Subscription Offering and Direct Community Offering.
2. Orders received in the Underwritten Public Offering first shall be
filled up to a maximum of 2% of the Conversion Stock and thereafter remaining
shares shall be allocated on an equal number of shares basis per order until all
orders have been filled.
3. The Conversion Stock offered in the Underwritten Public Offering
shall be offered and sold in a manner that will achieve the widest distribution
thereof.
A-11
<PAGE>
4. In the event the Underwriters do not enter into an underwriting
agreement in a form satisfactory to the Holding Company, the Savings Bank and
the OTS, or if for any reason an Underwritten Public Offering of shares of
Conversion Stock not sold in the Subscription Offering and the Direct Community
Offering cannot be effected, or in the event that any insignificant residue of
shares of Conversion Stock is not sold in the Subscription Offering, Direct
Community Offering or Underwritten Public Offering, the Savings Bank and the
Holding Company shall use their best efforts to obtain other purchasers for such
shares in such manner and upon such conditions as may be satisfactory to the
OTS.
F. Limitations Upon Purchases
--------------------------
The following additional limitations and exceptions shall be imposed upon
purchases of shares of Conversion Stock:
1. Purchases of shares of Conversion Stock in the Conversion,
including purchases in the Direct Community Offering or any Underwritten Public
Offering by any Person shall not exceed $400,000 and purchases by any Person,
and Associates thereof, or a group of Persons Acting in Concert, shall not
exceed 9.99% of the shares of Conversion Stock issued in the Conversion, except
that Tax-Qualified Employee Stock Benefit Plans may purchase up to 8% of the
total Conversion Stock issued in the Conversion and shares to be held by the
Tax-Qualified Employee Stock Benefit Plans and attributable to a Person shall
not be aggregated with other shares purchased directly by or otherwise
attributable to such Person. The percentage amount by which any order for Common
Stock exceeds 5% of the total offering of Common Stock shall be aggregated with
the percentage amounts by which all other orders for the Common Stock exceed 5%
of the total offering of Common Stock. The aggregate amount shall not exceed 10%
of the total offering of Common Stock, except that this limitation shall not
apply to any Tax Qualified Employee Stock Benefit Plan.
2. Officers and directors and Associates thereof may not purchase in
the aggregate more than 33% of the shares issued in the Conversion.
3. The Savings Bank's and Holding Company's Boards of Directors will
not be deemed to be Associates or a group of Persons Acting in Concert with
other directors or trustees solely as a result of membership on the Board of
Directors.
4. No Person, together with Associates of or Persons Acting in Concert
with such Person, may purchase in the aggregate more than 9.99% of the shares of
Conversion Stock issued in the Conversion, including purchases in the Direct
Community Offering and any Underwritten Public Offering, except that Tax-
Qualified Employee Stock Benefit Plans may purchase up to 8% of the total
Conversion Stock issued and shares held or to be held by the Tax-Qualified
Employee Stock Benefit Plans and attributable to a Person shall not be
aggregated with other shares purchased directly by or otherwise attributable to
such Person. The percentage amount by which any order for Common Stock exceeds
5% of the total offering of Common Stock shall be aggregated with the percentage
amounts by which all other orders for the Common Stock exceed 5% of the total
offering of Common Stock. The aggregate amount shall not exceed 10% of the
total offering of Common Stock, except that this limitation shall not apply to
any Tax Qualified Employee Stock Benefit Plan.
5. The Savings Bank's and the Holding Company's Boards of Directors,
with the approval of the OTS and without further approval of Members, may, as a
result of market conditions and other factors, increase or decrease the purchase
limitation in paragraphs 1 and 4 above or the number of shares of Conversion
Stock to be sold in the Conversion. If the Savings Bank or the Holding Company,
as the case may be, increases the maximum purchase limitations or the number of
shares of Conversion Stock to be sold in the Conversion, the Savings Bank or the
Holding Company, as the case may be, is only required to resolicit Persons who
subscribed for the maximum purchase amount and may, in the sole discretion of
the Savings Bank or the Holding Company, as the case may be, resolicit certain
other large subscribers. If the Savings Bank or the Holding Company, as the case
may be, decreases the maximum purchase limitations or the number of shares of
Conversion Stock to be sold in the Conversion, the
A-12
<PAGE>
orders of any Person who subscribed for the maximum purchase amount shall be
decreased by the minimum amount necessary so that such Person shall be in
compliance with the then maximum number of shares permitted to be subscribed for
by such Person.
Each Person purchasing Conversion Stock in the Conversion shall be deemed
to confirm that such purchase does not conflict with the purchase limitations
under the Plan or otherwise imposed by law, rule or regulation. In the event
that such purchase limitations are violated by any Person (including any
Associate or group of Persons affiliated or otherwise Acting in Concert with
such Person), the Holding Company shall have the right, in its sole discretion,
either to reject the order or 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 from such Person 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 Persons. This right of the Holding Company to purchase such excess
shares shall be assignable by the Holding Company.
G. Restrictions On and Other Characteristics of the Conversion Stock
-----------------------------------------------------------------
1. Transferability. Conversion Stock purchased by Officers and
---------------
directors of the Savings Bank and officers and directors of the Holding Company
shall not be sold or otherwise disposed of for value for a period of one year
from the date of Conversion, except for any disposition (i) following the death
of the original purchaser or (ii) resulting from an exchange of securities in a
merger or acquisition approved by the regulatory authorities having
jurisdiction.
The Conversion Stock issued by the Holding Company to such Officers and
directors shall bear a legend giving appropriate notice of the one-year holding
period restriction. Said legend shall state as follows:
"The shares evidenced by this certificate are restricted
as to transfer for a period of one year from the date of
this certificate pursuant to Part 563b of the Rules and
Regulations of the Office of Thrift Supervision. These
shares may not be transferred prior thereto without a
legal opinion of counsel that said transfer is permissible
under the provisions of applicable laws and regulations."
In addition, the Holding Company shall give appropriate instructions to the
transfer agent of the Holding Company's Stock with respect to the foregoing
restrictions. 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 Persons
as may be then applicable to such restricted stock.
2. Subsequent Purchases by Officers and Directors. Without prior
----------------------------------------------
approval of the OTS, if applicable, Officers and directors of the Savings 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,
purchases involving more than 1% of the total outstanding shares of Holding
Company Stock and purchases made and shares held by a Tax-Qualified or non-Tax-
Qualified Employee Stock Benefit Plan which may be attributable to such
directors and officers may be made in negotiated transactions without OTS
permission or the use of a broker or dealer.
3. Repurchase and Dividend Rights. Pursuant to OTS regulations, the
------------------------------
Holding Company may not, for a period of three years from the date of
Conversion, repurchase Holding Company Stock from any Person, with the exception
of (i) a repurchase on a pro rata basis pursuant to an offer approved by the OTS
and made to all stockholders, (ii) the repurchase of qualifying shares of a
director or (iii) a purchase in the open market by a Tax-Qualified Employee
Stock Benefit Plan or a non-Tax-Qualified Employee Stock Benefit Plan of the
Converted Bank or the Holding Company in an amount reasonable and appropriate to
fund the plan. Repurchases during the first year following the consummation of
the Conversion are generally prohibited unless "exceptional circumstances" are
A-13
<PAGE>
deemed to exist by the OTS. However, upon 10 days' written notification to the
District Director and to the Chief Counsel, Corporate and Securities Division of
the OTS, if the District Director does not object, the Holding Company may make
open market repurchases of outstanding Holding Company Stock during the second
and third years following the consummation of the Conversion, provided that
(i) no more than 5% of the outstanding Holding Company Stock is to be purchased
during any twelve-month period, (ii) the Converted Savings Bank's ratio of
regulatory capital to total liabilities would not be reduced below 6%, and
(iii) the repurchases would not adversely affect the financial condition of the
Converted Savings Bank. These restrictions and limitations upon repurchases
shall not apply following consummation of the Bank Conversion as set forth in
Paragraph VIII.B. herein unless the OTS approval of the Bank Conversion
otherwise requires.
OTS regulations also provide that the Converted Savings 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
Savings 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, Capital Stock in the event applicable federal regulatory
limitations are liberalized subsequent to the Conversion. Further, such
restrictions and limitations upon repurchases of Capital Stock and upon the
declaration and payment of cash dividends thereon shall not apply following
consummation of the Bank Conversion as set forth in Paragraph VIII.B. herein
unless the OTS approval of the Bank Conversion otherwise requires.
4. Voting Rights. After the Stock Conversion, holders of Savings
-------------
Accounts in and obligors on loans of the Savings Bank will not have voting
rights in the Converted Savings Bank. After the Bank Conversion, holders of
Savings Accounts in and obligors on loans of the Converted 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 Conversion Stock; holders
of Savings Accounts in and obligors on loans of the Converted Savings Bank and
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
Converted Bank's Capital Stock.
H. Mailing of Offering Materials and Collation of Subscriptions
------------------------------------------------------------
The sale of all shares of Conversion Stock offered pursuant to the Plan
must be completed within 24 months after approval of the Plan at the Special
Meeting. After approval of the Plan by the OTS and the declaration of the
effectiveness of the Prospectus, the Holding Company shall distribute
Prospectuses and Order Forms for the purchase of shares of Conversion Stock in
accordance with the terms of the Plan.
The recipient of an Order Form shall be provided not less than 20 days nor
more than 45 days from the date of mailing, unless extended, properly to
complete, execute and return the Order Form to the Holding Company or the
Savings Bank. Self-addressed, postage prepaid, return envelopes shall accompany
all Order Forms when they are mailed. 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 eligible subscriber of any
rights to purchase shares of Conversion Stock under the Plan.
The sale of all shares of Conversion Stock proposed to be issued in
connection with the Conversion 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.
A-14
<PAGE>
I. Method of Payment
-----------------
Payment for all shares of Conversion Stock may be made in cash, by check or
by money order, or if a subscriber has a Savings Account in the Savings Bank
such subscriber may authorize the Savings Bank to charge the subscriber's
Savings Account. The Holding Company 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 Offering from the date payment is
received until the Conversion is completed or terminated. The Savings Bank is
not permitted knowingly to loan funds or otherwise extend any credit to any
Person for the purpose of purchasing Conversion Stock.
If a subscriber authorizes the Savings Bank to charge the subscriber's
Savings Account, the funds shall remain in the subscriber's Savings Account and
shall continue to earn interest, but may not be used by such subscriber until
the Conversion is completed or terminated, whichever is earlier. The withdrawal
shall be given effect only concurrently with the sale of all shares of
Conversion Stock proposed to be sold in the Conversion and only to the extent
necessary to satisfy the subscription at a price equal to the Purchase Price.
The Savings Bank shall allow subscribers to purchase shares of Conversion Stock
by withdrawing funds from certificate accounts held with the Savings Bank
without the assessment of early withdrawal penalties, subject to the approval,
if necessary, of the applicable regulatory authorities. In the case of early
withdrawal of only a portion of such account, the certificate evidencing such
account shall be canceled if the remaining balance of the account is less than
the applicable minimum balance requirement. In that event, the remaining
balance shall 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, along with evidence of a loan commitment from a
financial institution for the purchase of shares, during the Subscription
Offering and by making payment for the shares on the date of the closing of the
Conversion.
J. Undelivered, Defective or Late Order Forms; Insufficient Payment
----------------------------------------------------------------
If an Order Form (i) is not delivered and is returned to the Holding
Company or the Savings Bank by the United States Postal Service (or the Holding
Company or Savings Bank is unable to locate the addressee); (ii) is not returned
to the Holding Company or Savings Bank, or is returned to the Holding Company or
Savings Bank after expiration 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 shall not be honored and shall be
treated as though such Person failed to return the completed Order Form within
the time period specified therein. Alternatively, the Holding Company or
Savings Bank may, but shall not be required to, waive any irregularity relating
to any Order Form or require the submission of a corrected Order Form or the
remittance of full payment for the shares of Conversion Stock subscribed for by
such date as the Holding Company or Savings Bank may specify. Subscription
orders, once tendered, shall not be revocable. The Holding Company's and
Savings Bank's interpretation of the terms and conditions of the Plan and of the
Order Forms shall be final.
K. Members in Non-Qualified States or in Foreign Countries
-------------------------------------------------------
The Holding Company shall make reasonable efforts to comply with the
securities laws of all states of the United States in which Persons entitled to
subscribe for shares of Conversion Stock pursuant to the Plan reside. However,
no such Person shall be offered or receive any such shares under the Plan who
resides in a foreign country or who resides in a state of the United States with
respect to which any of the following apply: (a) a small number of Persons
otherwise eligible to subscribe for shares of Conversion Stock reside in such
state; (b) the granting of Subscription Rights or offer or sale of shares of
Conversion Stock to such Persons would require the Holding Company to register,
under the securities laws of such state, as a broker or dealer or to register or
otherwise qualify
A-15
<PAGE>
its securities for sale in such state; or (c) such registration or qualification
would be impractical for reasons of cost or otherwise.
X. Federal Stock Charter and Bylaws for the Converted Savings Bank; Articles
-------------------------------------------------------------------------
of Incorporation and Bylaws for the Converted Bank and the De Novo Bank
-----------------------------------------------------------------------
As part of the Stock Conversion, an amended federal stock Charter and
Bylaws will be adopted to authorize the Converted Savings Bank to operate as a
federal capital stock savings bank. By approving the Plan, the Members of the
Savings Bank will thereby approve the amended 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 XVII below. The effective date of the adoption
of the 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 Stock
Conversion.
As part of the Bank Conversion, articles of incorporation and bylaws for
the Converted Bank and the De Novo Bank will be adopted to allow the Converted
Bank and the De Novo Bank to operate as national banks. By approving the Plan,
the Members of the Savings Bank will thereby approve such articles of
incorporation and bylaws. Prior to completion of the Bank Conversion, the
articles of incorporation and bylaws may be amended in accordance with the
provisions and limitations for amending the Plan under Paragraph XVII below. The
effective date of the articles of incorporation and bylaws of the Converted Bank
and the De Novo Bank shall be the date of the consummation of the Bank
Conversion.
XI. Post Conversion Filing and Market Making
----------------------------------------
In connection with the Conversion, the Holding Company shall register the
Conversion Stock with the SEC pursuant to the Securities Exchange Act of 1934,
as amended, and shall undertake not to deregister such Conversion 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 shares of its
stock. The Holding Company shall also use its best efforts to list its stock
through the Nasdaq Stock Market or on a national or regional securities
exchange.
XII. Status of Savings Accounts and Loans Subsequent to Conversion
-------------------------------------------------------------
All Savings Accounts shall retain the same status after Conversion as
these accounts had prior to Conversion. Each Savings Account holder shall
retain, without payment, a withdrawable Savings Account or accounts after the
Conversion, equal in amount to the withdrawable value of such holder's Savings
Account or accounts prior to Conversion. All Savings Accounts will continue to
be insured by the Savings Association Insurance Fund of the FDIC up to the
applicable limits of insurance coverage. All loans shall retain the same status
after the Conversion as they had prior to the Conversion. See Paragraph IX.F.4.
with respect to the termination of voting rights of Members.
XIII. Liquidation Account
-------------------
After the Conversion, holders of Savings Accounts shall not be entitled
to share in any residual assets in the event of liquidation of the Savings Bank.
However, the Savings Bank shall, at the time of the Conversion, establish a
liquidation account in an amount equal to its total net worth as of the date of
the latest statement of financial condition contained in the final Prospectus.
The function of the liquidation account shall be to establish a priority on
liquidation and, except as provided in Paragraph IX.F.3 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 Savings Bank.
A-16
<PAGE>
The liquidation account shall be maintained by the Converted Savings 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 Savings 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 balance
("subaccount").
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 such holder's Qualifying Deposit in the
Savings Account and the denominator is the total amount of the Qualifying
Deposits of all Eligible Account Holders and Supplemental Eligible Account
Holders. Such initial subaccount balance shall not be increased, and it 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 at the close of business on any
annual closing date subsequent to the Eligibility Record Date is less than the
lesser of (i) the deposit balance in such Savings Account at the close of
business on any other annual closing date subsequent to the Eligibility Record
Date or the Supplemental Eligibility Record Date or (ii) the amount of the
Qualifying Deposit in such Savings Account on the Eligibility Record Date or the
Supplemental Eligibility Record Date, then the subaccount balance for such
Savings Account shall be adjusted by reducing such subaccount balance in an
amount proportionate to the reduction in such deposit balance. In the event of a
downward adjustment, such 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 Savings Bank 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 balance(s) for Savings
Account(s) then held by such holder before any liquidation distribution may be
made to stockholders. No merger, consolidation, bulk purchase of assets with
assumptions of Savings Accounts and other liabilities or similar transactions
with another federally-insured institution in which the Savings Bank is not the
surviving institution shall be considered to be a complete liquidation. In any
such transaction, the liquidation account shall be assumed by the surviving
institution.
The Bank Conversion shall not be deemed to be a complete liquidation of
the Converted Savings Bank for purposes of the distribution of the Liquidation
Account. Upon consummation of the Bank Conversion, the Liquidation Account, and
all rights and obligations of the Converted Savings Bank in connection
therewith, shall be assumed by the Converted Bank and the De Novo Bank.
XIV. Regulatory Restrictions on Acquisition of Holding Company
---------------------------------------------------------
A. OTS regulations provide that for a period of three years following
completion of the Conversion, no Person (i.e., individual, a group Acting in
Concert, a corporation, a partnership, an association, a joint stock company, a
trust, or any unincorporated organization or similar company, a syndicate or any
other group formed for the purpose of acquiring, holding or disposing of
securities of an insured institution or its holding company) shall directly, or
indirectly, offer to purchase or actually acquire the beneficial ownership of
more than 10% of any class of equity security of the Holding Company without the
prior approval of the OTS. However, approval is not required for purchases
directly from the Holding Company or the underwriters or selling group acting on
its behalf with a view towards public resale, or for purchases not exceeding 1%
per annum of the shares outstanding. 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 equity security of the Holding Company within such three-year period,
without the prior approval of the OTS, stock of the Holding Company 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
A-17
<PAGE>
vote. The provisions of this regulation shall not apply to the acquisition of
securities by Tax-Qualified Employee Stock Benefit Plans provided that such
plans do not have beneficial ownership of more than 25% of any class of equity
security of the Holding Company.
Upon consummation of the Bank Conversion, no Person (i.e., an individual,
a group Acting in Concert, a corporation, a partnership, an association, a joint
stock company, a trust or any unincorporated organization or similar company, a
syndicate or any other group formed for the purpose of acquiring, holding or
disposing of securities of an insured institution or its holding company) shall
directly, or indirectly, offer to purchase or actually acquire the beneficial
ownership of more than 10% of any class of Holding Company Stock without the
prior approval of the Federal Reserve Board.
B. The Holding Company may provide in its articles of incorporation 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 equity security of the Holding Company. Such provisions would not
apply to acquisition of securities by Tax-Qualified Employee Stock Benefit Plans
provided that such plans do not have beneficial ownership of more than 25% of
any class of equity security of the Holding Company. The Holding Company may
provide in its articles of incorporation for such other provisions affecting the
acquisition of its stock as shall be determined by its Board of Directors.
XV. Directors and Officers of the Converted Savings Bank
----------------------------------------------------
The Conversion shall not result in any change in the directors or
Officers. Each Person serving as a director of the Savings Bank at the time of
Conversion shall continue to serve as a member of the Converted Savings Bank's
Board of Directors, subject to the Converted Savings Bank's charter and bylaws.
The Persons serving as Officers immediately prior to the Conversion will
continue to serve at the discretion of the Board of Directors in their
respective capacities as Officers of the Converted Savings Bank.
XVI. Executive Compensation
----------------------
The Converted Bank, the De Novo Bank and the Holding Company may adopt,
subject to any required approvals, executive compensation or other benefit
programs, including but not limited to compensation plans involving stock
options, stock appreciation rights and restricted stock grants, employee
recognition programs, employment agreements and the like.
XVII. Amendment or Termination of Plan
--------------------------------
If necessary or desirable, the Plan may be amended by a two-thirds vote
of the Savings Bank's Board of Directors, at any time prior to submission of the
Plan and proxy materials to the Members. At any time 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 only with the concurrence of the OTS. The Plan
may be terminated by a two-thirds vote of the 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 meeting of the Members.
In the event that mandatory new regulations pertaining to conversions are
adopted by the OTS, the Federal Reserve Board or the OCC prior to the completion
of the Conversion, the Plan shall be amended to conform to the new mandatory
regulations without a resolicitation of proxies or another meeting of Members.
In the event that new conversion regulations adopted by the OTS 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 meeting of Members.
A-18
<PAGE>
By adoption of the Plan, the Members authorize the Board of Directors to
amend and/or terminate the Plan under the circumstances set forth above.
XVIII. Expenses of the Conversion
--------------------------
The Holding Company and the Savings Bank shall use their best efforts to
assure that expenses incurred in connection with the Conversion shall be
reasonable.
XIX. Contributions to Tax-Qualified Plans
------------------------------------
The Holding Company and/or the Savings Bank may make discretionary
contributions to the Tax-Qualified Employee Stock Benefit Plans, provided such
contributions do not cause the Savings Bank the Converted Savings Bank, the
Converted Bank or the De Novo Bank, as applicable, to fail to meet its
regulatory capital requirements.
A-19
<PAGE>
EXHIBIT B
FEDERAL STOCK CHARTER
CHESTER SAVINGS BANK, FSB
Section 1. Corporate title. The full corporate title of the bank is
Chester Savings Bank, FSB ("Bank").
Section 2. Office. The home office shall be located in the City of
Chester, the County of Randolph, in the State of Illinois.
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 and loan association
chartered under section 5 of the Home Owners' Loan Act and to exercise all of
the express, implied, and incidental powers conferred thereby and by all acts
amendatory thereof and supplemental thereto, subject to the Constitution and
laws of the United States as they are now in effect, or as they may hereafter be
amended, and subject to all lawful and applicable rules, regulations, and orders
of the Office of Thrift Supervision ("Office").
Section 5. Capital stock. The total number of shares of all classes of
the capital stock which the Bank has authority to issue is 10,000 of which 1,000
shares shall be common stock, of par value of $1.00 per share and of which 9,000
shares shall be serial preferred stock having no par value. The shares may be
issued from time to time as authorized by the board of directors without the
approval of its 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 to the Bank), 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. Upon
payment of such consideration, such shares shall be deemed to be fully paid and
nonassessable. In the case of a stock dividend, that part of the surplus of the
Bank which is transferred to stated capital upon the issuance of shares as a
share dividend shall be deemed to be the consideration for their issuance.
Except for shares issuable in connection with the conversion of the Bank
from the mutual to stock form of capitalization, no shares of common 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 their 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;
B-1
<PAGE>
(ii) To any provision which would require the holders of
preferred stock, voting as a class or series, to approve the
merger or consolidation of the 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, Federal Deposit Insurance Corporation or the
Resolution Trust 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
Bank 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 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.
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 provision 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 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-2
<PAGE>
(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 board 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.
Section 7. Liquidation account. Pursuant to the requirements of the
Office's Regulations (12 CFR Subchapter D), the Bank shall establish and
maintain a liquidation account for the benefit of its savings account holders as
of January 15, 1995 and March 31, 1996. 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 savers' inchoate interest in the
liquidation account shall not entitle such eligible saver to any voting rights
at meetings of the Bank's stockholders.
B-3
<PAGE>
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
number is approved by the Director of the Office.
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, then
preliminarily approved by the Office, which preliminary approval may be granted
by the Office pursuant to regulations specifying preapproved charter amendments,
and thereafter approved by the shareholders by a majority of the total votes
eligible to be cast at a legal meeting. Any amendment, addition, alteration,
change, or repeal so acted upon shall be effective upon filing with the Office
in accordance with regulatory procedures or on such other date as the Office may
specify in its preliminary approval.
Attest: By:
------------------------------ -----------------------------
Secretary Chief Executive Officer
Chester Savings Bank, FSB Chester Savings Bank, FSB
Declared effective this day of , 1996.
--- -----------------
Office of Thrift Supervision
By: By:
------------------------------ -----------------------------------
Secretary Director
Office of Thrift Supervision Office of Thrift Supervision
B-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
registrant has duly caused this Amended Registration Statement to be signed on
its behalf by the undersigned, thereunto duly authorized, in Chester, Illinois
on the ___ day of August, 1996.
CHESTER BANCORP, INC.
By: /s/ Edward K. Collins
----------------------------------------------
Edward K. Collins
Chief Executive Officer, Secretary and
Director
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Amended Registration Statement has been signed below by the following
persons in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signatures Title Date
- ---------- ----- ----
<S> <C> <C>
/s/ Michael W. Welge* Chairman of the Board, August__, 1996
- ------------------------------------- President and Director
Michael W. Welge (Principal Financial Officer)
/s/ Edward K. Collins Chief Executive Officer, August__, 1996
- -------------------------------------- Secretary and Director
Edward K. Collins (Principal Executive Officer)
/s/Howard A. Boxdorfer* Director August__, 1996
- -------------------------------------
Howard A. Boxdorfer
/s/Thomas E. Welch, Jr.* Director August__, 1996
- -------------------------------------
Thomas E. Welch, Jr.
/s/John R. Beck, M.D.* Director August__, 1996
- -------------------------------------
John R. Beck, M.D.
</TABLE>
<PAGE>
EXHIBIT C
BYLAWS
CHESTER SAVINGS BANK, FSB
ARTICLE I - Home Office
The home office of Chester Savings Bank, FSB ("Bank"), shall be located
at 1112 State Street, in the City of Chester, the County of Randolph, in the
State of Illinois.
ARTICLE II - Shareholders
Section 1. Place of Meetings. All annual and special meetings of
shareholders shall be held at the home office of the Bank or at such other place
in the State of Illinois as the Board of Directors may determine.
Section 2. Annual Meeting. A meeting of the shareholders of the Bank
for the election of directors and for the transaction of any other business of
the Bank shall be held annually within 120 days after the end of the Bank's
fiscal year on the third Wednesday of April, if not a legal holiday, and if a
legal holiday, then on the next day following which is not a legal holiday, at
10:00 a.m., Central Time, or at such other date and time within such 120-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 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 Bank addressed to the
Chairman of the Board, the President, or the Secretary.
Section 4. Conduct of Meetings. Annual and special meetings shall be
conducted in accordance with rules and procedures adopted by the Board of
Directors. The Board of Directors shall designate, when present, either the
Chairman of the Board or President to preside at such meetings.
Section 5. Notice of Meetings. Written notice stating the place, day,
and hour of the meeting and the purpose(s) for which the meeting is called shall
be delivered not fewer than 10 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 stock transfer
books or records of the 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
C-1
<PAGE>
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 Bank shall make a complete list of the shareholders entitled to
vote at such meeting, or any adjournment, arranged in alphabetical order, with
the address and the number of shares held by each. This list of shareholders
shall be kept on file at the home office of the Bank and shall be subject to
inspection by any shareholder 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 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
perform such acts as required by paragraphs (a) and (b) of Rule 14a-7 of the
General Rules and Regulations under the Securities Exchange Act of 1934, as may
be duly requested in writing, with respect to any matter which may be properly
considered at a meeting of shareholders, by any shareholder who is entitled to
vote on such matter and who shall defray the reasonable expenses to be incurred
by the Bank in performance of the act or acts required.
Section 8. Quorum. A majority of the outstanding shares of the 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.
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 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 Bank to the contrary, at any meeting of the shareholders of
the 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 shares
and present in person or by proxy at such meeting, but no votes shall be cast
for such stock if a majority cannot agree.
Section 11. Voting of Shares 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 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 name. Shares standing in the
name of a receiver may be voted by such receiver, and shares held by or under
the control of a receiver may be voted by such receiver without the transfer
into his 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.
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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 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 Bank, shall be
voted at any meeting or counted in determining the total number of outstanding
shares at any given time for purposes of any meeting.
Section 12. Cumulative Voting. Unless otherwise provided in the Bank's
charter, 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 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 a nominee substituted as a result of the death
or other incapacity of a management nominee, the nominating committee shall
deliver written nominations to the secretary at least 20 days prior to the date
of the annual meeting. Upon delivery, such nominations shall be posted in a
conspicuous place in each office of the 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 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 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 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 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
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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.
ARTICLE III - Board of Directors
Section 1. General Powers. The business and affairs of the 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
eight members and shall be divided into three classes as nearly equal in number
as possible. The members of each class shall be elected for a term of three
years and until their successors are elected and qualified. One class shall be
elected by ballot annually.
Section 3. Regular Meetings. A regular meeting of the Board of Directors
shall be held without other notice than this bylaw immediately after, and at the
same place as, the annual meeting of shareholders. The Board of Directors may
provide, by resolution, the time and place, within the Bank's normal lending
territory, for the holding of additional regular meetings without other notice
than such resolution.
Section 4. Qualification. Each director shall at all times be the
beneficial owner of not less than 100 shares of capital stock of the Bank unless
the 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 persons authorized to call special meetings
of the Board of Directors may fix any place, within the 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 participations
shall constitute presence in person but shall not constitute attendance for the
purpose of compensation pursuant to Section 12 of this Article.
Section 6. Notice. Written notice of any special meeting shall be given
to each director at least two days 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 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 of waiver of notice of such meeting.
Section 7. Quorum. A majority of the number of directors fixed by
Section 2 of this Article III shall constitute a quorum for the transaction of
business at any meeting of the Board of Directors; but if less than such
majority is present at a meeting, a majority of the directors present may
adjourn the meeting from time to time. Notice of any adjourned meeting shall be
given in the same manner as prescribed by Section 6 of this Article III.
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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 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 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 actual
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
actual attendance at committee meetings as the Board of Directors may determine.
Section 13. Presumption of Assent. A director of the Bank who is present
at a meeting of the Board of Directors at which action on any 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 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 for cause by a vote of
the holders of a majority of the shares then entitled to vote at an election of
directors. If less than the entire board is to be removed, no one of the
directors may be removed if the votes cast against the removal would be
sufficient to elect a director if then cumulatively voted at an election of the
class of directors of which such director is a part. Whenever the holders of
the shares of any class are entitled to elect one or more directors by the
provisions of the charter or supplemental sections thereto, the provisions of
this section shall apply, in respect to the removal of a director or directors
so elected, to the vote of the holders of the outstanding shares of that class
and not to the vote of the outstanding shares as a whole.
ARTICLE IV - Executive And Other Committees
Section 1. Appointment. The Board of Directors, by resolution adopted by
a majority of the full board, may designate the chief executive officer and two
or more of the other directors to constitute an executive committee. The
designation of any committee pursuant to this Article IV and the delegation of
authority shall not operate to relieve the Board of Directors, or any director,
of any responsibility imposed by law or regulation.
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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 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 Bank otherwise than
in the usual and regular course of its business; a voluntary dissolution of the
Bank; a revocation of any of the foregoing; or the approval of a transaction in
which any member of the executive committee, directly or indirectly, has any
material beneficial interest.
Section 3. Tenure. Subject to the provisions of Section 8 of this
Article IV, each member of the executive committee shall hold office until the
next regular annual meeting of the Board of Directors following his or her
designation and until a successor is designated as a member of the executive
committee.
Section 4. Meetings. Regular meetings of the executive committee may be
held without notice at such times and places as the executive committee may fix
from time to time by resolution. Special meetings of the executive committee
may be called by any member thereof upon not less than one day's notice stating
the place, date, and hour of the meeting, which notice may be written or oral.
Any member of the executive committee may waive notice of any meeting and no
notice of any meeting need be given to any member thereof who attends in person.
The notice of a meeting of the executive committee need not state the business
proposed to be transacted at the meeting.
Section 5. Quorum. A majority of the members of the executive committee
shall constitute a quorum for the transaction of business at any meeting
thereof, and action of the executive committee must be authorized by the
affirmative vote of a majority of the members present at a meeting at which a
quorum is present.
Section 6. Action Without a Meeting. Any action required or permitted to
be taken by the executive committee at a meeting may be taken without a meeting
if a consent in writing, setting forth the action so taken, shall be signed by
all of the members of the executive committee.
Section 7. Vacancies. Any vacancy in the executive committee may be
filled by a resolution adopted by a majority of the full Board of Directors.
Section 8. Resignations and Removal. Any member of the executive
committee may be removed at any time with or without cause by resolution adopted
by a majority of the full Board of Directors. Any member of the executive
committee may resign from the executive committee at any time by giving written
notice to the President or Secretary of the 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
Bank and may prescribe the duties, constitution, and procedures thereof.
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ARTICLE V - Officers
Section 1. Positions. The officers of the Bank shall be a President, one
or more Vice Presidents, a Secretary, and a Treasurer, each of whom shall be
elected by the Board of Directors. The Board of Directors may also designate the
Chairman of the Board as an officer. The President shall be the Chief Executive
Officer unless the Board of Directors designates the Chairman of the Board as
Chief Executive Officer. The President shall be a Director of the Bank. The
offices of the Secretary and Treasurer may be held by the same person and a Vice
President may also be either the Secretary or the Treasurer. The Board of
Directors may designate one or more vice presidents 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 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 Bank shall
be elected annually at the first meeting of the Board of Directors held after
each annual meeting of the stockholders. If the election of officers is not held
at such meeting, such election shall be held as soon thereafter as possible.
Each officer shall hold office until a successor has been duly elected and
qualified or until the officer's death, resignation, or removal in the manner
hereinafter provided. Election or appointment of an officer, employee, or agent
shall not of itself create contractual rights. The Board of Directors may
authorize the 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 Bank will be served thereby,
but such removal, other than for cause, shall be without prejudice to any
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.
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
Board, 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 Bank to enter into any contract or execute and deliver
any instrument in the name of and on behalf of the Bank. Such authority may be
general or confined to specific instances.
Section 2. Loans. No loans shall be contracted on behalf of the 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 Bank shall be signed by one or more officers, employees, or agents
of the Bank in such manner as shall from time to time be determined by the Board
of Directors.
Section 4. Deposits. All funds of the Bank not otherwise employed shall
be deposited from time to time to the credit of the Bank in any duly authorized
depositories as the Board of Directors may select.
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ARTICLE VII - Certificates for Shares and Their Transfer
Section 1. Certificates for Shares. Certificates representing shares of
capital stock of the 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 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 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 Bank. All
certificates surrendered to the Bank for transfer shall be canceled and no new
certificate shall be issued until the former certificate for a like number of
shares has been surrendered and canceled, except that in the case of a lost or
destroyed certificate, a new certificate may be issued upon such terms and
indemnity to the Bank as the Board of Directors may prescribe.
Section 2. Transfer of Shares. Transfer of shares of capital stock of
the Bank shall be made only on its stock transfer books. Authority for such
transfer shall be given only by the holder of record or by his legal
representative, who shall furnish proper evidence of such authority, or by his
attorney authorized by a duly executed power of attorney and filed with the
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 Bank shall be deemed by the Bank to be the owner for
all purposes.
ARTICLE VIII - Fiscal Year; Annual Audit
The fiscal year of the Bank shall end on the 31st day of December of each
year. The Bank 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. The appointment of such accountants shall be subject to annual
ratification by the shareholders.
ARTICLE IX - Dividends
Subject to the terms of the Bank's charter and the regulations and orders
of the Office, the Board of Directors may, from time to time, declare, and the
Bank may pay, dividends on its outstanding classes of capital stock.
ARTICLE X - Corporate Seal
The Board of Directors shall provide an Bank seal which shall be two
concentric circles between which shall be the name of the 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 at any time by a majority vote of the full Board of Directors or by a
majority vote of the votes cast by the stockholders of the Bank at any legal
meeting.
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