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Filed Pursuant to 424(b)3
Registration No. 333-2474
SUPPLEMENT TO SUBSCRIPTION AND COMMUNITY OFFERING PROSPECTUS
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DATED: MAY 13, 1996
[LOGO]
EAGLE BANCGROUP, INC.
FIRST FEDERAL SAVINGS 401(k) PLAN
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This Prospectus Supplement relates to the offer and sale to participants
(the "Participants") in the First Federal Savings 401(k) Plan (the "Plan") of
participation interests in the Plan and up to 12,000 shares of Eagle BancGroup,
Inc. (the "Holding Company") common stock, par value $.01 per share (the
"Holding Company Stock"), as set forth herein.
The Holding Company's principal executive offices are located at 301
Fairway Drive, Bloomington, Illinois 61701. Its telephone number is (309) 663-
6345.
In connection with the proposed conversion of First Federal Savings and
Loan Association of Bloomington (the "Association") from mutual to stock form
and the simultaneous issuance of the Association's stock to the Holding Company
(the "Conversion"), the Plan has been amended to provide that each Participant
in the Plan may direct the trustee of the Plan (the "Trustee") to purchase
Holding Company Stock with amounts in the Plan attributable to such Participant.
This Prospectus Supplement relates to the election of a Participant to direct
the purchase of Holding Company Stock in the Conversion.
The Subscription and Community Offering Prospectus dated March 18, 1996 of
the Holding Company (the "Prospectus") which is attached to this Prospectus
Supplement includes detailed information with respect to the Conversion, the
Holding Company, the Association, the Holding Company Stock and the financial
condition, results of operations and business of the Holding Company and the
Association. This Prospectus Supplement, which provides detailed information
with respect to the Plan, should be read only in conjunction with the
Prospectus.
A Participant's eligibility to purchase Holding Company Stock in the
Conversion through the Plan is subject to the Participant's general eligibility
to purchase shares of Holding Company Stock in the Conversion and the maximum
and minimum purchase limitations set forth in the Plan of Conversion. See
"Limitations on Purchases of Shares" in the Prospectus. For a discussion of
certain factors that should be considered by each Participant, see "Risk
Factors" in the Prospectus.
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THESE SHARES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION (THE "COMMISSION"), THE OFFICE OF THRIFT
SUPERVISION ("OFFICE"), ANY STATE SECURITIES COMMISSION
("STATE COMMISSION") OR THE FEDERAL DEPOSIT INSURANCE
CORPORATION ("FDIC"), NOR HAS THE COMMISSION, OFFICE,
STATE COMMISSION OR FDIC PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
THE DATE OF THIS PROSPECTUS SUPPLEMENT IS MAY 13, 1996.
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NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THE PROSPECTUS OR THIS PROSPECTUS
SUPPLEMENT, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT
BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE HOLDING COMPANY, THE ASSOCIATION
OR THE PLAN. THIS PROSPECTUS SUPPLEMENT DOES NOT CONSTITUTE AN OFFER TO SELL OR
SOLICITATION OF AN OFFER TO BUY ANY SECURITIES IN ANY JURISDICTION TO ANY PERSON
TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION IN SUCH JURISDICTION.
NEITHER THE DELIVERY OF THIS PROSPECTUS SUPPLEMENT AND THE PROSPECTUS NOR ANY
SALE MADE HEREUNDER SHALL UNDER ANY CIRCUMSTANCES CREATE ANY IMPLICATION THAT
THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE HOLDING COMPANY, THE ASSOCIATION,
OR THE PLAN SINCE THE DATE HEREOF OR THAT THE INFORMATION HEREIN CONTAINED OR
INCORPORATED BY REFERENCE IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE
HEREOF. THIS PROSPECTUS SUPPLEMENT SHOULD BE READ ONLY IN CONJUNCTION WITH THE
PROSPECTUS THAT IS ATTACHED HERETO AND SHOULD BE RETAINED FOR FUTURE REFERENCE.
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TABLE OF CONTENTS
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PAGE
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THE OFFERING........................................................... 2
Securities Offered................................................ 2
Election to Purchase Holding Company Stock in the Conversion...... 2
Value of Participation Interests.................................. 2
Method of Election................................................ 2
Time for Election................................................. 2
Irrevocability of Election........................................ 3
Direction to Purchase Holding Company Stock After the Conversion.. 3
Purchase Price of Holding Company Stock........................... 3
Nature of a Participant's Interest in the Holding Company Stock... 3
Voting of Holding Company Stock................................... 3
DESCRIPTION OF THE PLAN................................................ 4
Introduction...................................................... 4
Eligibility....................................................... 4
Contributions Under the Plan...................................... 4
Limitations on Contributions...................................... 6
Investment of Contributions....................................... 7
Benefits Under the Plan........................................... 9
Withdrawals and Distributions from the Plan....................... 10
Administration of the Plan........................................ 11
Reports to Plan Participants...................................... 11
Amendment and Termination......................................... 12
Merger, Consolidation or Transfer................................. 12
Federal Tax Aspects of the Plan................................... 12
Restrictions on Resale of Holding Company Stock................... 14
LEGAL OPINIONS......................................................... 14
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THE OFFERING
SECURITIES OFFERED
The securities offered hereby are participation interests in the Plan and
up to 12,000 shares of Holding Company Stock which may be acquired by the Plan
for the Accounts of those employees participating in the Plan who elect to have
up to 50% of their Plan Account balances used to purchase Holding Company Stock.
Shares sold pursuant to the Plan will be included in the individual purchase
limitation of $200,000 of Common Stock sold in the Conversion. Accordingly, the
actual number of shares purchased by the Plan may be less than 12,000 shares of
Holding Company Stock. Information with regard to the Plan is contained in this
Prospectus Supplement and information with regard to the Conversion and the
financial condition, results of operations and business of the Holding Company
and the Association is contained in the attached Prospectus.
ELECTION TO PURCHASE HOLDING COMPANY STOCK IN THE CONVERSION
As part of the Association's Conversion, each Participant has an election
to allocate up to 50% of the funds which represent his or her beneficial
interest in the assets of the Plan to the purchase of Holding Company Stock. The
Trustee of the Plan will follow the Participants' directions and exercise
subscription rights to purchase Holding Company Stock in the Conversion. Funds
not allocated to the purchase of Holding Company Stock will be invested in other
Trust investments, including those authorized by Participants.
VALUE OF PARTICIPATION INTERESTS
The assets of the Plan are valued on an ongoing basis and each Participant
is informed by the Plan Administrator of the value of his or her beneficial
interest in the Plan on a quarterly basis. The value represents the market value
of contributions to the Plan by the Association and by the Participants and
earnings thereon, less distributions.
METHOD OF ELECTION
Enclosed with this Prospectus Supplement is an investment form (the
"Investment Form"). If a Participant wishes to allocate a part of his or her
beneficial interest in the assets of the Plan to the purchase of Holding Company
Stock in the Conversion, he or she should indicate that decision on the
Investment Form and return it to the Trustee. If a Participant does not wish to
make such an election, he or she does not need to take any action.
TIME FOR ELECTION
The deadline for the election for purchase of Holding Company Stock in the
Conversion is June 11, 1996. The Election Form should be returned to the Trustee
by 12:00 noon, local time, on such date.
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IRREVOCABILITY OF ELECTION
The election of a Participant to direct the Trustee to exercise
subscription rights in the Conversion becomes irrevocable at 12:00 noon, local
time, June 11, 1996. Prior to such time, a Participant may revoke or amend any
previously filed Investment Form by filing a new Investment Form with the
Association's Personnel Department.
DIRECTION TO PURCHASE HOLDING COMPANY STOCK AFTER THE CONVERSION
After the Conversion, a Participant will be able to direct that up to 50%
of such Participant's interests in the Plan be transferred to the Holding
Company Stock fund and invested in Common Stock. Alternatively, a Participant
may direct that a certain percentage of such Participant's interest in the
Holding Company Stock fund be transferred from the holding Company Stock fund to
the other investment funds available under the Plan. Participants will be
permitted to direct that future contributions made to the Plan by or on their
behalf be invested in Common Stock. Following the initial election, the
allocation of a Participant's interest in the Holding Company Stock fund may be
changed by the Participant. Special restrictions apply to transfers directed by
those Participants who are executive officers, directors and principal
stockholders of the Holding Company or the Association who are subject to the
provisions of Section 16(b) of the Securities Exchange Act of 1934, as amended
(the "Exchange Act").
PURCHASE PRICE OF HOLDING COMPANY STOCK
The funds allocated for the purchase of Holding Company Stock in the
Conversion will be used by the Trustee to purchase Holding Company Stock. The
price paid for such shares of Holding Company Stock will be the same price as is
paid by all other persons who purchase Holding Company Stock in the Conversion.
The price paid by the Trustee for shares of Holding Company Stock will not
exceed "adequate consideration" as defined in Section 3(18) of the Employee
Retirement Income Security Act of 1974, as amended ("ERISA"), and no fees or
commissions will be paid by the Plan with respect to the purchase of Holding
Company Stock in the Conversion. See "Stock Pricing and Number of Shares to be
Issued" in the Prospectus for a discussion of how the stock price will be
determined in the Conversion.
NATURE OF A PARTICIPANT'S INTEREST IN THE HOLDING COMPANY STOCK
The Holding Company Stock purchased for an Account of a Participant will be
held in the name of the Plan as a segregated, earmarked investment for the
Account. Any earnings, losses or expenses with respect to the Holding Company
Stock, including dividends and appreciation or depreciation in value, will be
credited or debited to the Account and will not be credited to or borne by any
other Accounts.
VOTING OF HOLDING COMPANY STOCK
Each Participant will have the opportunity to direct the Trustee as to the
manner in which the Holding Company Stock held in his or her Accounts will be
voted. In the event the Participant does not so direct the Trustee, the Trustee
will vote the Holding Company Stock held in the Participant's Accounts
proportionately in the same manner as it votes shares for which it has received
voting instructions.
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DESCRIPTION OF THE PLAN
INTRODUCTION
The Plan was originally adopted effective as of January 1, 1994 by the
Association and subsequently has been amended and restated, effective January 1,
1996. The Plan is a profit sharing plan with a cash or deferred arrangement
established in accordance with the requirements of Sections 401(a) and 401(k) of
the Internal Revenue Code (the "Code"). The Plan has a calendar year fiscal year
(the "Plan Year").
The Association will submit the Plan to the Internal Revenue Service for a
determination that the Plan, as amended, is qualified under Section 401(a) of
the Code and satisfies the requirements under Section 401(k) of the Code. The
Association intends that the Plan will comply in operation with each of the
requirements of the Code which are applicable to a plan qualified under Section
401(a) of the Code and the requirements which are applicable to a qualified cash
or deferred arrangement under Section 401(k) of the Code.
The Plan is an "individual account plan" other than a "money purchase
pension plan" within the meaning of The Employee Retirement Income Security Act
("ERISA"). As such, the Plan is subject to all the reporting, disclosure,
participation, vesting and fiduciary responsibility provisions of Title I
(Protection of Employee Benefit Rights) and Title II (Amendments to the Internal
Revenue Code Relating to Retirement Plans) of ERISA, except the funding
requirements contained in Part 3 of Title I of ERISA which by their terms do not
apply to an individual account plan (other than a money purchase plan). The Plan
is also subject to the provisions of Title III regarding jurisdiction,
administration and enforcement. The Plan is not subject to Title IV (Plan
Termination Insurance) of ERISA.
Reference of Full Text of Plan. The following statements are summaries of
certain provisions of the Plan. They are not complete and are qualified in their
entirety by the full text of the Plan (and trust). Copies of the Plan (and
trust) are available to all employees upon request. Each employee is urged to
read carefully the full text of the Plan (and trust).
ELIGIBILITY
Each employee of the Association is eligible to become a Participant in the
Plan as of the January 1st or July 1st (the "Entry Date") following or
coinciding with the date on which he or she meets the eligibility requirements.
To become a Participant an employee must have completed six months of service
and attained the age of twenty and one-half. An employee who has met the
eligibility requirements must complete and file with the Plan administrator (the
"Plan Administrator") a prescribed written application form and contribute to
the Plan.
As of May 1, 1996, there were 33 employees eligible to participate in the
Plan, and 32 employees had elected to participate in the Plan.
CONTRIBUTIONS UNDER THE PLAN
Elective Contributions. Each Participant in the Plan may elect to reduce
his or her Compensation (as defined below) from 1 to 15% and have that amount
contributed to the Plan on his or her behalf ("Elective Contributions"). For
purposes of the Plan, "Compensation" means the total compensation actually paid
by the Association that is reported in the "wages tips and other compensation"
box on Form W-2. The annual Compensation of each Participant taken into account
under the Plan is limited to $150,000 (adjusted periodically for increases in
the cost of living pursuant to the Code). A Participant may elect to commence
Elective
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Contributions as of any January 1st or July 1st. A Participant may modify his or
her Elective Contributions as of any January 1st, April 1st, July 1st or October
1st. A Participant may terminate his or her Elective Contributions at any time.
Such Elective Contributions are credited to the Participant's Elective Account.
Rollover Amounts from Other Plans. A Participant may, subject to the
approval of the Plan Administrator and consistent with the requirements of
Section 402(c) or Section 408(d)(3) of the Code, transfer to the Plan
distributions received by the employee from another qualified plan. Such amounts
are credited to the Participant's "Rollover Account."
Matching Contributions. The Association may make discretionary Matching
Contributions to the Plan for each Plan Year. Participants who make Elective
Contributions during such Plan Year, are employed on the last day of the Plan
Year and have earned at least 501 hours of service during the Plan Year are
eligible to share in the allocation of the Matching Contributions, if any, for
the Plan Year. (Participants who make Elective Contributions during such Plan
Year, but who terminate employment during the Plan Year due to retirement on or
after age 65, death or disability will receive an allocation even though they
are not employed on the last day of the Plan Year or have fewer than 501 hours
of service for such Plan Year.) Matching Contributions are allocated among
Participants on the basis of their Elective Contributions, as the Association
shall determine. Such Matching Contributions are credited to each Participant's
Matching Contribution Account.
Discretionary Contributions. The Association may make Discretionary
Contributions to the Plan for each Plan Year. Participants who are employed on
the last day of the Plan Year and have earned at least 501 hours of service
during the Plan Year are eligible to share in the allocation of the
Discretionary Contributions, if any, for the Plan Year. (Participants who
terminate employment during the Plan Year due to retirement on or after age 65,
death or disability will receive an allocation even though they are not employed
on the last day of the Plan Year or have fewer than 501 hours of service for
such Plan Year.) Discretionary Contributions are allocated among eligible
Participants according to the ratio of each such Participant's Compensation for
the Plan Year (earned while a Participant) to the total Compensation of all such
Participants for the Plan Year. Matching Contributions are credited to each
Participant's Discretionary Contributions Account.
Qualified Non-Elective Contributions. The Association may make Qualified
Non-Elective Contributions to the Plan for each Plan Year in an amount
determined by the Association. All Participants who are not "Highly Compensated
Employees" (as defined herein) and who are employed on the last day of the Plan
Year and have earned at least 501 hours of service during the Plan Year are
eligible to share in the allocation of the Qualified Non-Elective Contributions
for the Plan Year. (Eligible Participants who terminate employment during the
Plan Year due to retirement on or after age 65, death or disability will receive
an allocation, even though they are not employed on the last day of the Plan
Year or have fewer than 501 hours of service during the Plan Year.) The
Association's Qualified Non-Elective Contributions are allocated among eligible
Participants according to the ratio of each such Participant's Compensation for
the Plan Year (while a Participant) to the total Compensation of all such
Participants for such Plan Year. The Qualified Non-Elective Contributions are
credited to each Participant's Qualified Non-Elective Contributions Account.
LIMITATIONS ON CONTRIBUTIONS
Limitation on Annual Additions. Pursuant to the requirements of the Code,
the Plan provides that the annual additions to each Participant's Accounts
during any Plan Year may not exceed the lesser of 25% of the Participant's
taxable compensation for the Plan Year or $30,000 (adjusted for increases in the
cost of living as permitted by the Code).
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Limitation on Elective Contributions. The total amount of Elective
Contributions of a Participant (when aggregated with any elective deferrals of
the Participant under another qualified cash or deferred arrangement, a
simplified employee pension plan, a salary reduction arrangement, a deferred
compensation plan under Code Section 457 or a Section 501(c)(8) trust) may not
exceed $9,500 for the calendar year which began January 1, 1996. This limitation
is adjusted periodically for increases in the cost of living pursuant to the
Code. Elective Contributions in excess of this limitation ("excess deferrals")
will be included in the Participant's gross income for federal income tax
purposes in the year they are made. In addition, any excess deferral will again
be subject to federal income tax when distributed by the Plan to the
Participant, unless the excess deferral (and any income allocable to the excess
deferral) is distributed to the Participant not later than the April 15
following the close of the calendar year in which the excess deferral is made.
Any income on the excess deferral that is distributed not later than such April
15 will be treated, for federal income tax purposes, as earned and received by
the Participant in the taxable year in which the excess deferral is made. A
Participant must notify the Plan Administrator in writing not later than April 1
of the following Plan Year that he has excess elective deferrals for the
previous Plan Year which must be distributed.
Limitation on Contributions for Highly Compensated Employees. The Code
limits the amount of Elective Contributions and Matching Contributions that may
be made to the Plan in any Plan Year on behalf of Highly Compensated Employees
(defined below) in relation to the amount of Elective Contributions and Matching
Contributions made by all other employees eligible to participate in the Plan.
In the case of Elective Contributions, the actual deferral percentage (i.e., the
average of the ratios, calculated separately for each eligible employee in each
group, of the amount of Elective Contributions of such eligible employee to such
eligible employee's compensation for the Plan Year) of Highly Compensated
Employees may not exceed either (i) 125% of the actual deferral percentage of
all other eligible employees, or (ii) 200% of the actual deferral percentage of
all other eligible employees and does not exceed the actual deferral percentage
of all other eligible employees by more than two percentage points. In general,
a Highly Compensated Employee includes any employee of the Holding Company or
the Association who, during the Plan Year or the preceding Plan Year, (1) was at
any time a 5% owner (i.e., owns directly or indirectly more than 5% of the stock
of the Holding Company, or stock possessing more than 5% of the total combined
voting power of all stock of the Holding Company), (2) received compensation
from the Holding Company or the Association in excess of $100,000 (as adjusted
for cost-of-living increases pursuant to the Code), (3) received compensation
from the Holding Company or the Association in excess of $66,000 (as adjusted
for cost-of-living increases pursuant to the Code) and was in the group
consisting of the top 20% of employees when ranked on the basis of compensation
paid during the Plan Year, or (4) was at any time an officer and received
compensation in excess of $60,000 (as adjusted for cost-of-living increases
pursuant to the Code) (a "Highly Compensated Employee").
In order to avoid tax disqualification of the Plan, any Elective
Contributions of Highly Compensated Employees that exceed the foregoing
limitation in any Plan Year ("excess contributions"), together with any income
allocable thereto, must be distributed to such Highly Compensated Employees
before the close of the following Plan Year. However, the Association will be
subject to a 10% excise tax on any excess contributions unless such excess
contributions, together with any income allocable thereto, are distributed
before the close of the first 2 1/2 months following the Plan Year to which such
excess contributions relate. In addition, Qualified Non-Elective Contributions
shall be used in satisfying the average deferral percentage test.
Any Matching Contributions made under the Plan are subject to similar
limits, and if such limitations are exceeded for a Plan Year the excess
(including earnings allocable thereto) shall be returned to Highly Compensated
Employees or forfeited in accordance with procedures described above in order to
satisfy such limits.
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Top-Heavy Plan Requirements. If for any Plan Year the Plan is a Top-Heavy
Plan (as defined below), then (i) the Association may be required to make
certain minimum contributions to the Plan on behalf of non-Key Employees (as
defined below), and (ii) certain additional restrictions would apply with
respect to the combination of annual additions to the Plan and projected annual
benefits under any defined benefit plan maintained by the Association or Holding
Company.
In general, the Plan will be a "Top-Heavy Plan" for any Plan Year if, as of
the last day of the preceding Plan Year, the aggregate balance of the Accounts
of Participants who are Key Employees exceeds 60% of the aggregate balance of
the Accounts of all Participants. Key Employees generally include any employee
who, at any time during the Plan Year or any of the four preceding Plan Years,
is (1) an officer of the Holding Company or the Association having annual
compensation in excess of $60,000 (as adjusted for cost-of-living increases
pursuant to the Code), (2) one of the ten employees having annual compensation
in excess of $30,000 and owning, directly or indirectly, the largest interests
in the Holding Company or the Association, (3) a 5% owner of the Holding Company
or the Association (i.e., owns directly or indirectly more than 5% of the stock
of the Holding Company or the Association, or stock possessing more than 5% of
the total combined voting power of all stock of the Holding Company or the
Association), or (4) a 1% owner of the Holding Company or the Association having
annual compensation in excess of $150,000.
INVESTMENT OF CONTRIBUTIONS
All amounts credited to Participants' Accounts under the Plan are held in
the trust maintained under the Plan (the "Trust") which is administered by the
Trustee appointed by the Association's Board of Directors.
A Participant may elect to direct the investment of all or any portion of
his or her Accounts under the Plan. Accordingly, a Participant, in his or her
sole and absolute discretion, may give directions to the Trustee in such form as
the Trustee may require concerning the investment of the Participant's Accounts,
which directions must generally be followed by the Trustee. A Participant may
direct the Trustee to invest his or her Accounts in specific assets as permitted
by the Plan Administrator provided such investments are permitted by the Plan.
The Plan permits investments in Holding Company Stock.
The net gain (or loss) of the Plan from investments, other than Holding
Company Stock, (including interest payments, realized and unrealized gains and
losses on securities, and expenses paid from the Plan) will be determined daily
(the "Valuation Date") and will be allocated daily among the Accounts of
Participants according to the balance of each such Account, excluding the amount
of any Account invested in Holding Company Stock. For purposes of such
allocations, all assets of the Plan are valued at their fair market value.
Participants in the Plan may elect to have up to 50% of their Accounts
invested in Holding Company Stock. If an Account is invested in Holding Company
Stock, the shares will be held in the Plan as a separate investment for the
Account. Any earnings, losses or expenses with respect to the Holding Company
Stock held in the Account, including without limitation dividends and
appreciation or depreciation of the value of the shares, will be credited or
debited to the Account and will not be credited to or borne by any other Account
of any other Participant. Any cash dividends and other cash distributions paid
on any Holding Company Stock will be reinvested by the Trustee as directed by
each Participant under the Plan. A Participant may direct the Trustee to sell
all or any of the shares of Holding Company Stock held in his or her Plan
Accounts in accordance with Plan procedures. Any sales of Holding Company Stock
by the Trustee must be made in compliance with all federal and state securities
laws. Under current federal securities laws, it may be necessary for any such
sales to be made in compliance with Rule 144 under the Securities Act of 1933,
which places certain conditions on any such sale, including a limit on how many
shares may be sold by the Trustee during any three month period. If
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Holding Company Stock is sold, the proceeds will be credited to the Account from
which the shares were sold and thereafter invested by the Trustee as part of the
remainder of the general fund under the Plan. Accounts which are invested in
Holding Company Stock will continue to be invested in such shares until the
Participant directs the Trustee to sell the shares.
Investment Funds. The following table sets forth certain information about
the relative historical performance of each of the currently available
investment funds (other than the Holding Company Stock fund) in which amounts
credited to Participants' Accounts may be invested. The information is taken
from the prospectuses relating to such funds. Participants are advised that past
performance is not necessarily indicative of the future performance of these
funds.
TOTAL RETURN PERFORMANCE BASED ON NET ASSET VALUE
(NET OF ALL FEES AND EXPENSES) WITH ALL DISTRIBUTIONS
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NAME OF FUND 1995 1994 1993
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Hamilton, Allen & Associates (Gov't. 14.8% (4.3%) 9.9%
Bonds)
LaSalle National Trust (GIC) 5.6% 5.3% 5.3%
Brandes Investment Partners (Int'l. 10.3% (3.2%) 40.9%
Equity)
Highland Capital Management (Growth 28.9% (1.2%) 8.4%
Stocks/Bonds)
Thompson, Siegel & Walmsley (Value 24.9% (1.1%) 13.0%
Stocks/Bonds)
Trinity Investment Mgmt. (Value Stocks) 38.3% 2.6% 17.5%
T. Rowe Price (International Bonds) 15.4% (1.8%) 20.0%
Systematic Financial Mgmt. (Value 14.9% (0.4%) 17.0%
Stocks)
Frontier Capital Mgmt. (Growth Stocks) 27.6% 6.0% 9.1%
Provident Investment (Growth Stocks) 23.1% (1.4%) (0.2%)
Amerindo Investment Advisors (Bio- 106.2% 7.5% (8.5%)
Tech Stocks)
Navellier & Associates (Growth Stocks) 33.7% (1.2%) 27.2%
Sun Valley Advisors, Inc. (Global Stock 17.2% (1.1%) 19.7%
Funds)
Miller/Howard Investments (Utilities) 31.9% (7.5%) 13.7%
Roger Engemann & Assoc. (Growth 30.3% (0.6%) (3.9%)
Stocks)
</TABLE>
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<TABLE>
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NAME OF FUND 1995 1994 1993
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Sector Capital Management (Core 43.8% 1.2% 15.0%
Equity)
</TABLE>
A Participant may upon request obtain additional information about each
investment fund (e.g., each fund's operating expenses, the prospectus and
financial statements of each fund and a list of assets comprising each fund) by
contacting: Judy Donohue, 301 Fairway Drive, Bloomington, Illinois 61701,
telephone (309) 663-6345.
Equity securities in these investment funds, except for the Holding Company
Stock fund, will be voted by the Trustee. If a Participant has invested in the
Holding Company Stock fund, he is entitled to exercise any voting or tender
rights attributable to such participation. In this regard, prior to any
shareholders meeting at which the Holding Company Stock is entitled to be voted,
or if there is a tender offer made for the Holding Company Stock, each
Participant will receive information from the Trustee with instructions how to
exercise his or her voting or tender rights. If a Participant does not exercise
his or her voting rights, the Trustee will vote the shares representing his or
her portion of this fund proportionately in the same manner as it votes Holding
Company Stock for which it has received voting instructions. If a Participant
does not exercise his or her tender rights, the shares representing his or her
portion of this Fund will not be tendered. If a Participant exercises his or her
tender rights, the funds obtained when the shares of Holding Company Stock are
sold will be invested in the investment funds, other than the Holding Company
Stock fund, in the same proportions as are set forth in his or her election then
in effect, or based on a new investment election made by the Participant. All
information relating to the exercise of any voting or tender rights is
confidential and shall not be divulged or released to any officers or employees
of the Company. The responsibility for monitoring compliance with the procedures
for ensuring such confidentiality has been delegated to: Lori Campbell, 301
Fairway Drive, Bloomington, Illinois 61701, telephone (309) 663-6345.
BENEFITS UNDER THE PLAN
Vesting. A Participant has at all times a fully vested, nonforfeitable
interest in his or her Elective Contributions Account, Rollover Contributions
Account and Qualified Non-Elective Contributions Account. A Participant who
terminates employment on or after age 65, or due to death or disability, will
become fully vested in his or her Matching Contributions Account and
Discretionary Contributions Account. Any other Participant will become fully
vested and have a nonforfeitable interest in his or her Matching Contributions
Account and Discretionary Contributions Account according to the following
vesting schedule:
Years of Service Vested %
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1 0%
2 20%
3 40%
4 60%
5 80%
6 100%
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(A Participant earns a Year of Service for each 12 month period in which he
earns at least 501 hours of service.) Any forfeitures resulting from a
Participant's termination of employment prior to full vesting in his or her
Accounts shall be used to reduce the Association's future Matching Contributions
or Discretionary Contributions.
WITHDRAWALS AND DISTRIBUTIONS FROM THE PLAN
Hardship Withdrawals. The Plan may permit a Participant to make a
withdrawal from his or her Elective Contributions Account, Matching
Contributions Account and Discretionary Contributions Account (excluding amounts
attributable to any earnings in such Accounts). A hardship withdrawal shall be
approved only if necessary to pay for certain medical expenses, the purchase of
a principal residence, payment of tuition and related fees for post secondary
education, or to prevent eviction from or foreclosure on the Participant's
principal residence. The Participant must first obtain all other available
distributions from other plans of the Holding Company and the Association. A
Participant's future Elective Contributions shall be suspended for the twelve
months following receipt of the hardship withdrawal and may be subject to
additional Code limitations.
Distribution To Participant Upon Termination of Employment. A Participant
who terminates employment for any reason will be paid the vested portion of his
or her Accounts in one or more of the following forms, as chosen by the
Participant:
1. a lump sum
2. two or more annual installments
3. a nontransferable annuity contract
4. a direct rollover to another qualified retirement plan or to an IRA
If the vested portion of the Participant's Accounts exceeds $3,500, no
distribution generally will be made from the Plan to the Participant prior to
the Participant's attaining age 65 unless the Participant consents to an earlier
distribution. Notwithstanding the foregoing, if the vested portion of the
Participant's Accounts does not exceed $3,500, it will be distributed to him or
her in an immediate lump sum payment.
Distribution To Beneficiary Upon Death. The Accounts of a Participant who
dies will be paid to the Participant's designated beneficiary. If the
Participant is married at his or her death, his or her surviving spouse shall be
the beneficiary unless the spouse has consented to the designation of another
beneficiary. Distribution shall be made in one of the forms as described in the
preceding paragraph, as elected by the Participant (or if not elected by the
Participant, then by the beneficiary). Notwithstanding the foregoing, if the
value of the Participant's Accounts does not exceed $3,500, it will be
distributed to his or her beneficiary in an immediate lump sum payment.
Payment in Cash or Holding Company Stock. The amount which a Participant or
beneficiary is entitled to receive at any time from an Account which is invested
in Holding Company Stock will be paid by distributing cash, or if elected by the
Participant and agreed to by the Plan Administrator, shares of Holding Company
Stock, to the Participant or beneficiary. The amount payable to a Participant or
beneficiary which is not invested in Holding Company Stock will be paid in cash.
Nonalienation of Benefits. Except with respect to federal income tax
withholding and as provided with respect to a qualified domestic relations order
(as defined in the Code), benefits payable under the Plan are not subject in any
manner to anticipation, alienation, sale, transfer, assignment, pledge,
encumbrance, charge, garnishment, execution, or levy of any kind, either
voluntary or involuntary, and any attempt to anticipate,
-10-
<PAGE>
alienate, sell, transfer, assign, pledge, encumber, charge or otherwise dispose
of any rights to benefits payable under the Plan shall be void.
ADMINISTRATION OF THE PLAN
The Association is the Plan Administrator and is the named fiduciary of the
Plan for purposes of Section 402 of ERISA. The address of the Association is 301
Fairway Drive, Bloomington, Illinois 61701.
Trustee. The Trustee is appointed by the board of directors of the
Association. The current Trustee of the Plan is the Association's President,
Donald L. Fernandes. His address is 301 Fairway Drive, Bloomington, Illinois
61701. The Trustee receives and holds the contributions to the Plan in trust and
distributes them to Participants and beneficiaries in accordance with the
provisions of the Plan and the directions of the Plan Administrator. The Trustee
is responsible for investment of the assets of the Trust, other than assets
invested as directed by the Participants.
The Plan Administrator. The Plan Administrator is responsible for
administration of the Plan. The Plan Administrator has appointed individuals to
assist in the administration of the Plan and in carrying out its
responsibilities for interpretation of the provisions of the Plan, prescribing
procedures for filing applications for benefits, preparation and distribution of
information explaining the Plan, furnishing the Association with reports with
respect to the administration of the Plan, and receiving, reviewing and keeping
on file reports of the financial condition of the Trust. If so designated by the
Association, the Plan Administrator shall also be responsible for maintenance of
Plan records, preparation and filing of all returns and reports relating to the
Plan which are required to be filed with the U.S. Department of Labor and the
IRS, and for all disclosures required to be made to Participants and
beneficiaries under Sections 104 and 105 of ERISA.
REPORTS TO PLAN PARTICIPANTS
Not less than once each calendar quarter, each Participant will receive
statements showing (i) balances in the Participant's Accounts as of the end of
that period, (ii) the amount of contributions allocated to his or her Accounts
for that period, and (iii) the adjustments to his or her Accounts to reflect his
or her share of Plan earnings, including any dividends on Holding Company Stock
held in his or her Accounts.
AMENDMENT AND TERMINATION
It is the intention of the Association to continue the Plan indefinitely.
Nevertheless, the Association may terminate the Plan at any time. If the Plan is
terminated in whole or in part, then, regardless of other provisions in the
Plan, each Participant affected by such termination shall have a fully vested
interest in all of his or her Accounts, including his or her Matching
Contributions Account and Discretionary Contributions Account. The Association
reserves the right to make from time to time any amendment or amendments to the
Plan which do not cause any part of the Trust to be used for, or diverted to,
any purpose other than the exclusive benefit of Participants or their
beneficiaries; provided, however, that the Association may make any amendment it
determines necessary or desirable, with or without retroactive effect, to comply
with ERISA and/or the Code.
MERGER, CONSOLIDATION OR TRANSFER
In the event of the merger or consolidation of the Plan with another plan,
or the transfer of the Trust assets to another plan, the Plan requires that each
Participant would (if either the Plan or the other plan then terminated) receive
a benefit immediately after the merger, consolidation or transfer which is equal
to or greater
-11-
<PAGE>
than the benefit he would have been entitled to receive immediately before the
merger, consolidation or transfer (if the Plan had then terminated).
FEDERAL TAX ASPECTS OF THE PLAN
As noted above, the Association will submit the Plan to the IRS for a
determination from the IRS that the Plan is qualified under Section 401(a) of
the Code.
Assuming that the Plan is administered in accordance with the requirements
of the Code and that the Plan is otherwise qualified under Section 401(a) of the
Code, participation in the Plan should have the following implications under
existing federal income tax laws:
(a) Amounts contributed to Participants' Accounts, and the investment
earnings thereon, are not includable in Participants' federal taxable
income until such contributions or earnings are actually distributed
or withdrawn from the Plan. (The amount of a Participant's pre-tax
earnings will, however, be included in income in the year such amounts
are earned for purposes of Social Security taxes.)
(b) Income earned on assets of the Trust maintained under the Plan
will not be taxable to the Trust.
Distributions and Withdrawals. Distributions and withdrawals generally
become taxable in the year they are received by the Participant. A Participant
may, however, elect to defer federal income taxation of all or a portion of a
distribution or withdrawal that qualifies as an "eligible rollover distribution"
by rolling over the distribution or withdrawal to a qualified retirement plan of
another employer or to an IRA. In such event, the amount rolled over and
earnings thereon are not subject to federal income tax until subsequently
distributed to the Participant or his or her beneficiary. Any amount of an
eligible rollover distribution that is not rolled over will be subject to a
mandatory 20% withholding requirement (see "Income Tax Withholding" below).
Distribution in the Form of an Annuity. A distribution in the form of an
annuity from the Plan is taxed under the general annuity rules of Section 72 of
the Code. These rules apply to all "amounts received as an annuity", and
specific rules apply to distributions from qualified plans. The Code provides
that amounts actually distributed to any Participant or beneficiary under the
Plan excluding any non-deductible after tax employee contributions and life
insurance benefits, are generally taxable in the year distributed. Generally,
the taxable portion of each payment is ordinary income.
Distribution of Holding Company Stock. If a lump sum distribution (i.e., a
payment within one year of the entire vested balance of all Accounts) includes
shares of Holding Company Stock, the excess, if any, of the fair market value of
such Holding Company Stock over the cost of the Holding Company Stock to the
Trustee is not subject to federal income tax at the time of distribution but
generally will be subject to federal income tax when such Holding Company Stock
is subsequently sold. To the extent provided by the Code, a Participant may
elect not to defer the tax on net unrealized appreciation in Holding Company
Stock until the year of disposition of such Holding Company Stock, thus
subjecting the entire distribution to federal income tax at the time of
distribution.
Additional Tax on Early Distributions. An additional 10% excise tax will be
imposed on any distribution or withdrawal received by a Participant before he
reaches age 59 1/2 unless such distribution or withdrawal is (i) rolled over to
another qualified plan or an IRA; (ii) made to a beneficiary after the
Participant's
-12-
<PAGE>
death; (iii) made on Account of the Participant's retirement due to disability
(as defined by the Plan Administrator); (iv) made after the Participant's
separation from service after attainment of age 55; (v) made to the Participant
for payment of medical expenses that could be deducted on his or her tax return;
(vi) made to an alternate payee pursuant to a qualified domestic relations
order; or (vii) paid to the Participant over his or her life or life expectancy
or the joint lives or life expectancies of the Participant and his or her
beneficiary.
15% Tax of Excess Distributions. The Code also imposes a 15% excise tax on
the portion of a lump sum distribution that exceeds a dollar limitation in a
calendar year. Distributions from all tax-qualified plans and IRAs received in
the same calendar year will be aggregated in calculating this tax. The 15%
excise tax applies irrespective of the Participant's age at the time of
distribution, but does not apply to an excess distribution that is (i) rolled
over into another qualified retirement plan or an IRA; (ii) made to an alternate
payee under a qualified domestic relations orders; or (iii) made on Account of
the Participant's death (although an additional estate tax attributable to the
excess distribution is due in the event of death).
Forward Averaging Rules. Amounts that are included in taxable income may
qualify for five-year forward averaging tax treatment if a Participant receives
the amount in a lump sum distribution after he reaches age 59 1/2 and if he
actively participated in the Plan for at least five years prior to the year in
which the lump sum is distributed. Under a transitional rule, if he reached age
50 before January 1, 1986, he may make one election, without regard to the age
59 1/2 requirement, to use either five-year forward averaging (using current tax
rates) or 10-year forward averaging (using the 1986 tax rates) with respect to
the lump sum distribution, if otherwise eligible.
Income Tax Withholding. Most Plan distributions and withdrawals are subject
to mandatory federal income tax withholding. The Trustee is required to withhold
20% of any "eligible rollover distribution", unless the Participant elects to
have the Trustee make a direct rollover of such distribution into another
employer's qualified retirement plan that accepts rollovers or to an IRA. An
"eligible rollover distribution" generally includes any distribution and
withdrawal other than (i) one paid over the Participant's life or life
expectancy, or the joint lives or life expectancies of the Participant and his
or her beneficiary (i.e., an annuity); or (ii) one paid over a specified period
of 10 years or more. In addition, a distribution is not an "eligible rollover
distribution", and thus may not be rolled over, if it is (i) a distribution of
after-tax contributions; (ii) a required distribution due to attaining age
70 1/2; or (iii) a distribution made to a nonspousal beneficiary. If a
Participant requests a distribution or withdrawal of his or her Holding Company
Stock in the form of stock rather than cash, the Holding Company Stock will not
be liquidated to pay the withholding tax; however, the applicable taxes will be
withheld from any cash portion of the distribution or withdrawal.
A distribution or withdrawal that is not an "eligible rollover
distribution" is subject to voluntary federal income tax withholding, which
means that a Participant can request that no withholding tax be deducted from
his or her distribution.
The foregoing is only a brief summary of certain federal income tax aspects
of the Plan which are of general application under the Code and is not intended
to be a complete or definitive description of the federal income tax
consequences of participating in or receiving distributions from the Plan.
Accordingly, each Participant may wish to consult a tax advisor concerning the
federal, state and local tax consequences of participating in and receiving
distributions from the Plan.
RESTRICTIONS ON RESALE OF HOLDING COMPANY STOCK
-13-
<PAGE>
There are generally no restrictions on the resale of Holding Company Stock
purchased for or contributed to the Plan unless such shares have been
distributed to an employee who is deemed to be an "affiliate" of the Association
at the time such employee resells such shares. Any person receiving shares of
Holding Company Stock under the Plan who is an "affiliate" of the Association or
the Holding Company as the term "affiliate" is used in Rules 144 and 405 under
the Securities Act of 1933 (e.g., directors, officers and substantial
shareholders of the Association) may reoffer or resell such shares only pursuant
to a registration statement filed under the Securities Act of 1933 (the Holding
Company and the Association having no obligation to file such a registration
statement) or, assuming the availability thereof, pursuant to Rule 144 or some
other exemption from the registration requirements of the Securities Act of
1933. Any person who may be an "affiliate" of the Association or the Holding
Company may wish to consult with counsel before transferring any Holding Company
Stock owned by him. In addition, Participants are advised to consult with
counsel as to the applicability of Section 16 of the Exchange Act which may
restrict the sale of Holding Company Stock where acquired under the Plan, or
other sales of Holding Company Stock.
LEGAL OPINIONS
The legality of the Holding Company Stock will be passed upon by Schiff
Hardin & Waite which firm acted as special counsel for the Holding Company in
connection with the Conversion.
-14-
<PAGE>
INVESTMENT FORM
(HOLDING COMPANY STOCK FUND)
FIRST FEDERAL SAVINGS 401(k) PLAN
Name of Participant:
----------------------------------
Social Security Number:
-------------------------------
1. Instructions. In connection with the proposed conversion of First
Federal Savings and Loan Association of Bloomington (the "Association") to a
stock capital savings bank and the simultaneous formation of a holding company
(the "Conversion"), the 401(k) Plan has been amended to permit Participants to
direct up to 50% of their account balances under the Plan into a Holding Company
Stock Fund. Amounts transferred at the direction of Participants into the
Holding Company Stock Fund will be used to purchase shares of common stock of
the holding company Eagle BancGroup, Inc. (the "Common Stock").
You may use this form to direct a transfer of up to 50% of the funds
credited to your Plan accounts to the Holding Company Stock Fund, to be used to
purchase Common Stock in the Conversion. To direct such a transfer to the
Holding Company Stock Fund, you should complete and file this form with the
Personnel Department no later than 12:00 noon, Central Daylight Time, on June
11, 1996.
2. Transfer Direction. Check only one of the following:
_____ ALLOCATION CHANGE ONLY:
Please change the allocation percentages on file as follows:
(This change will affect all deposits made on or after June 11,
1996 and future deposits already made.)
_____ ALLOCATION CHANGE AND FUNDS TRANSFER:
Please change the allocation percentages on file and transfer
all funds to equal the following:
Note: If neither box is checked, "Allocation change only" will be
effective. All prior allocation percentages are hereby
cancelled. This designation shall remain in effect until
changed in writing.
<PAGE>
PERCENTAGE OF TOTAL ACCOUNT ASSETS
_____% Holding Company Stock*
_____% (205) Hamilton, Allen & Associates (Gov't. Bonds)
_____% (105) LaSalle National Trust (GIC)
_____% (605) Brandes Investment Partners (Int'l. Equity)
_____% (305) Highland Capital Management (Growth Stocks/Bonds)
_____% (310) Thompson, Siegel & Walmsley (Value Stocks/Bonds)
_____% (410) Trinity Investment Mgmt. (Value Stocks)
_____% (615) T. Rowe Price (International Bonds)
_____% (405) Systematic Financial Mgmt. (Value Stocks)
_____% (510) Frontier Capital Mgmt. (Growth Stocks)
_____% (520) Provident Investment (Growth Stocks)
_____% (705) Amerindo Investment Advisors (Bio-Tech Stocks)
_____% (515) Navellier & Associates (Growth Stocks)
_____% (610) Sun Valley Advisors, Inc. (Global Stock Funds)
_____% (210) Miller/Howard Investments (Utilities)
_____% (525) Roger Engemann & Assoc. (Growth Stocks)
_____% (710) Sector Capital Management (Core Equity)
100% Total Percent
------
*Investment limited to 50% of a Participant's Plan account.
3. Effectiveness of Direction. I understand that this Investment Form shall
be subject to all of the terms and conditions of the 401(k) Plan. I acknowledge
that I have received a copy of the Prospectus and the Prospectus Supplement.
--------------------------------- ------------------------------
Signature of Participant Date
4. Acknowledgement of Receipt. This Investment Form was received by the
Plan Administrator and will become effective on the date noted below.
--------------------------------- ------------------------------
Plan Administrator Date
<PAGE>
SUBSCRIPTION AND COMMUNITY OFFERING PROSPECTUS
[LOGO]
EAGLE BANCGROUP, INC.
(PROPOSED HOLDING COMPANY FOR
FIRST FEDERAL SAVINGS AND LOAN ASSOCIATION OF BLOOMINGTON)
UP TO 1,667,500 SHARES OF COMMON STOCK
$10.00 PURCHASE PRICE PER SHARE
Eagle BancGroup, Inc., a Delaware corporation (the "Holding Company"), is
offering up to 1,667,500 shares of its common stock, par value $0.01 per share
(the "Common Stock"), in a Subscription Offering (the "Subscription Offering")
and Community Offering (the "Community Offering" and, when referred to
together with the Subscription Offering, the "Subscription and Community
Offering" or "Offerings").
(Continued on next page)
FOR INFORMATION ON HOW TO SUBSCRIBE, CALL THE STOCK INFORMATION CENTER AT
(309) 664-2211.
FOR A DISCUSSION OF CERTAIN RISKS TO BE CONSIDERED BY EACH PROSPECTIVE
INVESTOR, SEE "RISK FACTORS" ON PAGE 14 OF THIS PROSPECTUS.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION ("SEC"), ANY STATE SECURITIES COMMISSION, THE OFFICE OF
THRIFT SUPERVISION ("OTS"), OR THE FEDERAL DEPOSIT INSURANCE CORPORATION
("FDIC") NOR HAS THE SEC, ANY STATE SECURITIES COMMISSION, THE OTS, OR
THE FDIC PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. THE SECURITIES
OFFERED HEREBY ARE NOT DEPOSITS AND WILL NOT BE INSURED BY THE OTS,
THE FDIC, THE SAVINGS ASSOCIATION INSURANCE FUND OR ANY OTHER
GOVERNMENTAL ENTITY.
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ESTIMATED
UNDERWRITING ESTIMATED NET
SUBSCRIPTION COMMISSIONS AND PROCEEDS TO
PRICE OTHER EXPENSES(1) ISSUER(2)
----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share.................................. $ 10.00 $ .49(3) $ 9.51
----------------------------------------------------------------------------------------------------
Minimum Total.............................. $12,325,000 $680,000 $11,645,000
----------------------------------------------------------------------------------------------------
Midpoint Total............................. $14,500,000 $715,000 $13,785,000
----------------------------------------------------------------------------------------------------
Maximum Total.............................. $16,675,000 $750,000 $15,925,000
----------------------------------------------------------------------------------------------------
Maximum Total, as adjusted(4).............. $19,176,000 $790,000 $18,386,000
----------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------
</TABLE>
(1) Includes estimated costs to the Holding Company and the Association
arising from the Conversion, including $229,000, $264,000, $299,000 and
$339,000 in fees for financial advisory, consulting and marketing services
and expense reimbursements (including legal fees) to be paid to Trident
Securities, Inc. ("Trident") in connection with the Subscription and
Community Offering if the minimum, midpoint, maximum and 15% above the
maximum number of shares are sold, respectively. Trident's fees may be
deemed to be underwriting fees, and Trident may be deemed to be an
underwriter. The Holding Company and the Association have agreed to
indemnify Trident against certain liabilities, including liabilities that
may arise under the Securities Act of 1933, as amended. See "USE OF
PROCEEDS" and "THE CONVERSION--Subscription and Community Offering
Marketing and Other Fees."
(2) Actual net proceeds may vary substantially from the estimated amounts
depending upon the number of shares sold in the Subscription and Community
Offering. See "PRO FORMA DATA."
(3) Assumes the sale of the midpoint number of shares. If the minimum, maximum
or 15% above the maximum number of shares are sold, estimated expenses per
share would be $.55, $.45 or $.41, respectively, resulting in estimated
net Conversion proceeds per share of $9.45, $9.55 or $9.59, respectively.
(4) Gives effect to the sale of an additional 250,125 shares in the
Conversion, either in the Subscription Offering or the Community Offering,
without the resolicitation of subscribers or any right of cancellation,
based on a determination by RP Financial, LC. ("RP Financial"), as the
Association's independent appraiser, that such issuance is compatible with
its determination of an increase in the appraised pro forma market value
of the Common Stock. See "THE CONVERSION--Stock Pricing and Number of
Shares to be Issued."
TRIDENT SECURITIES, INC.
THE DATE OF THIS SUBSCRIPTION AND COMMUNITY OFFERING PROSPECTUS IS MAY 13,
1996
<PAGE>
The Common Stock is being offered pursuant to the conversion of First
Federal Savings and Loan Association of Bloomington (the "Association") from a
federally-chartered mutual savings association to a federally-chartered
capital stock savings association and the simultaneous issuance of the
Association's capital stock to the Holding Company. The simultaneous
conversion of the Association to stock form, the issuance of the Association's
stock to the Holding Company and the offer and sale of the Common Stock by the
Holding Company are herein referred to as the "Conversion." The Conversion is
being undertaken pursuant to the Plan of Conversion, as amended, of the
Association (the "Plan" or "Plan of Conversion").
Non-transferable rights to subscribe for shares of Common Stock
("Subscription Rights") in the Subscription Offering have been granted to the
following persons (collectively, the "Eligible Subscribers") in the following
order of priority: (i) depositors with aggregate account balances of $50 or
more on deposit at the Association as of October 31, 1994 (the "Eligible
Account Holders"), (ii) the employee stock ownership plan (the "ESOP") adopted
by the Association, (iii) depositors with aggregate account balances of $50 or
more on deposit at the Association as of March 31, 1996, excluding directors
and officers of the Association and their associates ("Supplemental Eligible
Account Holders"), and (iv) depositors of the Association as of May 10, 1996
who are not Eligible Account Holders or Supplemental Eligible Account Holders
and certain borrowers of the Association as of November 19, 1991 who had
borrowings outstanding at such date which continue to be outstanding as of May
10, 1996 ("Other Members"), subject to the priorities and purchase limitations
set forth in the Plan. Subject to the prior rights of holders of Subscription
Rights, the Holding Company is also offering the Common Stock for sale in the
Community Offering to natural persons who reside in Illinois and to other
persons to whom the Prospectus is delivered for the purpose of offering the
Common Stock ("Other Purchasers"), giving preference to natural persons
residing in the Illinois county of McLean ("Preferred Other Purchasers"). The
Holding Company has the right to reject, in its sole discretion, orders in
whole or in part in the Community Offering. SUBSCRIPTION RIGHTS ARE NON-
TRANSFERABLE; PERSONS FOUND TO BE TRANSFERRING SUBSCRIPTION RIGHTS MAY BE
SUBJECT TO FORFEITURE OF SUCH RIGHTS AND POSSIBLE FURTHER SANCTIONS AND
PENALTIES IMPOSED BY THE OTS OR OTHER GOVERNMENT AGENCIES. See "THE
CONVERSION--The Subscription and Community Offering" and "--Restrictions on
Transfer of Subscription Rights and Shares."
The Association has engaged Trident to act as selling agent and to consult
with and advise the Holding Company and the Association with respect to the
Subscription and Community Offering. Selected dealers may be utilized to
assist in selling stock in the Community Offering in a Syndicated Community
Offering. Trident has agreed to solicit purchase orders and subscriptions for
shares of Common Stock in the Subscription and Community Offering, including
developing and managing a Syndicated Community Offering, if utilized. Neither
Trident nor any other registered broker-dealer is obligated to take or
purchase any shares of Common Stock in the Subscription and Community
Offering. The Association has also retained Trident to provide certain other
services in connection with the Conversion. See "THE CONVERSION--Subscription
and Community Offering Marketing and Other Fees."
With the exception of the ESOP, which is expected to purchase 8% of the
Common Stock sold in the Conversion, no person or entity, together with
associates of, or persons acting in concert with, such person or entity, may
purchase shares with an aggregate purchase price of more than $200,000 (or
20,000 shares based on the Purchase Price, as hereinafter defined). The
purchase limitation of $200,000 may be increased or decreased in the
discretion of the Boards of Directors of the Holding Company and the
Association, subject to approval by the OTS and certain other conditions, but
in no event may the purchase limitation be less than 1% or greater than 5% of
the total number of shares of Common Stock sold in the Conversion. Each person
subscribing for Common Stock in the Subscription and Community Offering must
subscribe for at least 25 shares. See "THE CONVERSION--Limitations on
Purchases of Shares" for other purchase and sale limitations.
The total number of shares to be issued in the Conversion will be based upon
an independent valuation of the aggregate pro forma market value of the Common
Stock performed by RP Financial. The price per share has been fixed at $10.00
(the "Purchase Price"). Based on the current aggregate valuation range of
$12.3 million to $16.7 million (the "Estimated Valuation Range"), the Holding
Company is offering from 1,232,500 to 1,667,500 shares in the Subscription and
Community Offering. If the aggregate purchase price of the Common Stock sold
ii
<PAGE>
in the Conversion is below $12.3 million or above $19.2 million (i.e., 15%
above the maximum of the Estimated Valuation Range), subscribers will be
resolicited and will have the opportunity to modify or cancel their
subscriptions and to have their subscription funds returned promptly with
interest. Any change in the total dollar amount of the Offerings outside of
this range will be subject to the approval of the OTS. If an affirmative
response to any resolicitation is not received by the Association or the
Holding Company from subscribers, such orders will be rescinded and all funds
will be returned promptly with interest. See "PRO FORMA DATA" and "THE
CONVERSION--Stock Pricing and Number of Shares to be Issued." The sale of
shares and completion of the Conversion are subject to, among other things,
approval of the Plan of Conversion by the Association's members. See "THE
CONVERSION--General."
SUBSCRIPTION RIGHTS WILL EXPIRE AT 12:00 NOON, BLOOMINGTON, ILLINOIS TIME,
ON JUNE 11, 1996, UNLESS THE SUBSCRIPTION OFFERING IS EXTENDED FOR UP TO 45
DAYS FROM THE DATE OF MAILING BY THE ASSOCIATION AND THE HOLDING COMPANY UPON
RECEIPT OF ANY REQUIRED APPROVAL OF THE OTS (THE "SUBSCRIPTION EXPIRATION
TIME"). SUCH EXTENSION MAY BE GRANTED WITHOUT ADDITIONAL NOTICE TO
SUBSCRIBERS. The Holding Company must receive, at the office of the
Association, a completed Order Form along with full payment (or withdrawal
authorization from a deposit account at the Association) of $10.00 per share
for each share ordered. Funds so received will be placed in a segregated
account established for purposes of the Conversion at the Association, and
interest on funds in such account will be paid at the Association's then
current passbook rate from the date payment is received until the Conversion
is completed or terminated. Payments authorized by withdrawals from deposit
accounts will continue to earn interest at the contractual rate of the deposit
account until the Conversion is completed or terminated. The Community
Offering, if one is held, is expected to begin immediately after the
Subscription Expiration Time, but may begin at any time during the
Subscription Offering. The Community Offering may terminate at any time, on or
after the Subscription Expiration Time, but not later than July 26, 1996 (or
August 14, 1996 if the Subscription Offering is fully extended (the "Community
Offering Expiration Time")), unless further extended with the consent of the
OTS. If the Offerings are not completed within 45 days after the date on which
the Subscription Expiration Time occurs (i.e., on or before August 14, 1996,
assuming the Subscription Offering has been fully extended) and the OTS
consents to an extension of time to complete the Offerings, subscribers will
be given the right to increase, decrease or rescind their orders. If an
affirmative response to any resolicitation is not received by the Association
or the Holding Company 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 Offerings are not completed by August 14, 1996, all
subscription funds will be promptly returned, together with accrued interest,
and all withdrawal authorizations terminated.
The Holding Company has never issued capital stock and, consequently, there
is no market for the Common Stock. The National Association of Securities
Dealers (the "NASD") had conditionally approved the Holding Company's
application to have the Common Stock listed as a National Market Security on
the Nasdaq Stock Market under the proposed symbol "EGLB," subject to the
Holding Company's continued compliance with all Nasdaq criteria for initial
listing at the time of listing of the Common Stock. If the Holding Company
fails to qualify the Common Stock for listing as a National Market Security,
the Holding Company intends to list the Common Stock on the Nasdaq SmallCap
Market, subject to the applicable listing criteria. For additional information
regarding listing of the Common Stock on the Nasdaq Stock Market, see "MARKET
FOR COMMON STOCK."
iii
<PAGE>
AVAILABLE INFORMATION
Neither the Holding Company nor the Association is currently subject to the
informational requirements of the Securities Exchange Act of 1934, as amended
(the "Exchange Act").
The Holding Company has filed a Registration Statement with the SEC on Form
S-1 under the Securities Act of 1933, as amended (the "Securities Act"), with
respect to the Common Stock offered hereby. As permitted by the rules and
regulations of the SEC, this Prospectus does not contain all of the information
set forth in the Registration Statement. Such information can be examined and
copied at the public reference facilities of the SEC located at 450 Fifth
Street, N.W., Washington, D.C. 20549, and at the regional offices of the SEC at
Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661
and 7 World Trade Center, New York, New York 10048. Copies of such material can
be obtained by mail from the SEC at prescribed rates from the Public Reference
Section of the SEC at 450 Fifth Street, N.W., Washington, D.C. 20549. Copies of
the Registration Statement, including RP Financial's appraisal report, are also
available for inspection at the office of the Association at 301 Fairway Drive,
Bloomington, Illinois 61701-3403. Inquiries concerning such inspections can be
made to the Association at (309) 663-6345.
The Association has filed an Application for Approval of Conversion with the
OTS for approval to convert from a federally-chartered mutual savings
association to a federally-chartered capital stock savings association. Such
application was approved on April 16, 1996. Pursuant to the rules and
regulations of the OTS, this Prospectus omits certain information contained in
such application. The application may be inspected at the Office of Thrift
Supervision, 1700 G Street, N.W., Washington, D.C. 20552, and Office of Thrift
Supervision, Central Regional Office, 200 West Madison, Suite 1300, Chicago,
Illinois 60606. Copies of the Plan, including copies of the Association's
proposed stock charter and bylaws and copies of the Holding Company's
certificate of incorporation and bylaws, are available for inspection at the
office of the Association and may be obtained by writing to the Association at
301 Fairway Drive, Bloomington, Illinois 61701-3403, or by telephoning the
Stock Information Center at (309) 664-2211.
iv
<PAGE>
FIRST FEDERAL SAVINGS AND LOAN
ASSOCIATION OF BLOOMINGTON
301 FAIRWAY DRIVE
BLOOMINGTON, ILLINOIS 61701-3403
[MAP]
v
<PAGE>
SUBSCRIPTION AND COMMUNITY OFFERING PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE
DETAILED INFORMATION AND CONSOLIDATED FINANCIAL INFORMATION APPEARING ELSEWHERE
IN THIS PROSPECTUS.
EAGLE BANCGROUP, INC.
The Holding Company was incorporated as a Delaware corporation on January 24,
1996 at the direction of the Board of Directors of the Association to acquire
all of the capital stock to be issued by the Association in the Conversion. The
Holding Company has not engaged in any business to date and is not expected to
engage in any business until the consummation of the Conversion. Following the
Conversion, the Holding Company will be engaged in the business of managing its
investments and directing, planning and coordinating the business activities of
the Association. In the future, the Holding Company may acquire or organize
other operating subsidiaries, although there are no current plans, arrangements,
agreements or understandings to do so. The Holding Company's offices are located
at 301 Fairway Drive, Bloomington, Illinois 61701, and its telephone number is
(309) 663-6345. See "EAGLE BANCGROUP, INC."
FIRST FEDERAL SAVINGS AND LOAN ASSOCIATION OF BLOOMINGTON
The Association is a federally-chartered mutual savings association regulated
by the OTS, and its deposits are insured by the FDIC through the Savings
Association Insurance Fund ("SAIF"). The Association was originally chartered in
1919. The Association conducts its business through its main office in the city
of Bloomington, Illinois, and two full-service branch offices located in
Bloomington and LeRoy, Illinois. At December 31, 1995, the Association had total
assets of $151.0 million, deposit accounts of $138.4 million and total equity of
$11.5 million. The Association's main office is located at 301 Fairway Drive,
Bloomington, Illinois 61701, and its telephone number is (309) 663-6345.
The Association provides its customers with a broad range of community
banking services. The Association is primarily engaged in the business of
attracting deposits from the general public and using such deposits to invest in
one- to four-family residential mortgage loans, automobile loans, collateralized
mortgage obligations, mortgage-backed securities, U.S. Government and Agency
securities and, to a lesser extent, multi-family residential, commercial real
estate, and commercial business and other consumer loans. See "FIRST FEDERAL
SAVINGS AND LOAN ASSOCIATION OF BLOOMINGTON."
THE CONVERSION
The Association is in the process of converting from a federally-chartered
mutual savings association to a federally-chartered capital stock savings
association which will become a wholly-owned subsidiary of the Holding Company.
The Holding Company will issue the Common Stock to be sold in the Offerings and
will use 50% of the net proceeds of the sale of the Common Stock to purchase the
capital stock of the converted Association.
The Board of Directors of the Association unanimously adopted the Plan on
November 21, 1995 and amendments to the Plan on February 13, 1996, March 12,
1996 and April 29, 1996. The Plan was adopted subject to approval by the OTS,
and to approval of the members of the Association holding not less than a
majority of the votes outstanding as of the record date fixed for the Special
Meeting. For a discussion of the reasons the Board of Directors considered when
approving the Plan of Conversion, see "THE CONVERSION--Purposes of the
Conversion."
On April 16, 1996, the OTS approved the Association's Application for
Approval of Conversion, subject to, among other things, approval of the Plan by
the Association's members. A special meeting of members has been called for this
purpose on June 11, 1996. The Holding Company's application to become
<PAGE>
the holding company of the converted Association must be approved by the OTS
before the Conversion can be completed. The Association expects to receive OTS
approval of the Holding Company's application to become the holding company for
the Association by the Subscription Expiration Date. See "THE CONVERSION--
General;" and "--Purposes of Conversion."
After the Conversion, the Association's account holders will not have voting
rights with respect to the converted Association. See "THE CONVERSION--Effects
of Conversion--Voting Rights."
THE OFFERINGS
The Holding Company is offering up to 1,667,500 shares of Common Stock at
$10.00 per share in a Subscription Offering and, under certain circumstances, a
Community Offering. Subscription Rights have been granted pursuant to the
Subscription Offering under the Plan to the following persons (collectively, the
"Eligible Subscribers") in the following order of priority: (1) Eligible
Account Holders (depositors with aggregate account balances of $50 or more on
deposit at the Association as of October 31, 1994); (2) the ESOP; (3)
Supplemental Eligible Account Holders (depositors with aggregate account
balances of $50 or more on deposit at the Association, other than officers or
directors of the Association or any of their associates, as of March 31, 1996);
and (4) Other Members (depositors as of May 10, 1996, the voting record date,
who are not Eligible Account Holders or Supplemental Eligible Holders and
certain borrowers of the Association as of November 19, 1991 who had borrowings
outstanding at such date which continue to be outstanding as of May 10, 1996).
No Eligible Subscriber is required to purchase any shares of Common Stock in the
Subscription Offering. All subscriptions received will be subject to the
availability of Common Stock after satisfaction of subscriptions of all Eligible
Subscribers having prior rights in the Subscription Offering and to the maximum
purchase limitations and other terms and conditions set forth in the Plan and
described below.
Subject to the availability of shares of Common Stock after satisfaction of
all subscriptions of Eligible Account Holders, the ESOP, Supplemental Eligible
Account Holders and Other Members, the remaining shares of Common Stock will be
offered in the Community Offering to natural persons who reside in Illinois and
to whomever else the Prospectus is delivered to ("Other Purchasers"), giving
preference to natural persons residing in the Illinois county of McLean
("Preferred Other Purchasers") in a manner designed to achieve the widest
possible distribution of Common Stock. The Holding Company reserves the right
to accept or reject, in whole or in part, any or all orders in the Community
Offering, either at the time of receipt of an order or as soon as practicable
following the termination of the Offerings.
The Subscription Offering will expire at the Subscription Expiration Time
(12:00 noon, Bloomington, Illinois time, on June 11, 1996, unless extended by
the Association and the Holding Company). The Community Offering, if one is
held, is expected to begin immediately after the Subscription Expiration Time,
but may begin at any time during the Subscription Offering. The Community
Offering may terminate at any time on or after the Subscription Expiration Time,
but not later than July 26, 1996 (or August 14, 1996 if the Subscription
Offering is fully extended) ("Community Offering Expiration Time"), unless
further extended with the consent of the OTS.
Rights to subscribe may only be exercised by completion of an Order Form.
For information on how to subscribe for shares in the Subscription and Community
Offering, see "THE CONVERSION--Procedure for Purchasing Shares in the
Subscription and Community Offering."
NON-TRANSFERABILITY OF SUBSCRIPTION RIGHTS
Subscription Rights may be exercised only by the person to whom they are
issued and only for his or her own account. Subscription Rights are non-
transferable; persons found to be transferring Subscription Rights may be
subject to forfeiture of such rights and possible further sanctions by the OTS
2
<PAGE>
or other government agencies. Each person subscribing for shares is required to
represent that he or she is purchasing shares for his or her own account and
that he or she has no agreement or understanding with any other person for the
sale or transfer of such shares.
PURCHASE LIMITATIONS
With the exception of the ESOP, which is expected to purchase 8% of the
Common Stock sold in the Conversion, no person or entity, together with
associates of, or persons acting in concert with, such person or entity, may
purchase shares with an aggregate purchase price of more than $200,000 (or
20,000 shares based on the Purchase Price). The purchase limitation of $200,000
may be increased or decreased in the discretion of the Boards of Directors of
the Holding Company and the Association, subject to the approval of the OTS and
certain other conditions, but in no event may the purchase limitation be less
than 1% or greater than 5% of the total number of shares sold in the Conversion.
Each person subscribing for Common Stock in the Subscription and Community
Offering must subscribe for at least 25 shares. See "THE CONVERSION--
Limitations on Purchases of Shares" for other purchase and sale limitations.
STOCK PRICING AND NUMBER OF SHARES TO BE ISSUED IN THE CONVERSION; APPRAISAL
The OTS's regulations and the Plan of Conversion require that the aggregate
purchase price of the Common Stock to be issued in the Conversion be based upon
an independent appraisal of the estimated pro forma market value of the Common
Stock. The Association has retained RP Financial to prepare an appraisal of the
pro forma market value of the Common Stock to be issued in connection with the
Conversion. RP Financial has advised the Holding Company and the Association
that, in its opinion, the appropriate range for the pro forma market value of
the Holding Company (and therefore the Association) as of April 19, 1996 was
from a minimum of $12.3 million to a maximum of $16.7 million (the "Estimated
Valuation Range") with a midpoint of $14.5 million. Assuming the Common Stock
is sold at $10.00 per share in the Conversion, the estimated number of shares of
Common Stock would be between 1,232,500 and 1,667,500 with a midpoint of
1,450,000. The $10.00 purchase price per share is a uniform price for all
purchasers in the Subscription and Community Offering and was set by the Board
of Directors of the Association.
The appraisal of the pro forma market value of the Common Stock is based upon
a number of factors and should not be considered a recommendation to buy shares
of the Common Stock or assurance that, after the Conversion, an investor will be
able to resell shares of Common Stock at the Purchase Price. RP Financial will
update or confirm its appraisal prior to completion of the Conversion, and the
number of shares to be sold will be fixed at that time. Consummation of the
Offering is subject to the OTS's approval of the pro forma market value
reflected in the updated or re-confirmed appraisal. See "THE CONVERSION--Stock
Pricing and Number of Shares to be Issued."
SUBSCRIPTION AND COMMUNITY OFFERING MARKETING, APPRAISAL AND RELATED FEES
The Association has engaged Trident to consult with and advise the Holding
Company and Association with respect to the Subscription and Community Offering
and will solicit subscriptions and purchase orders for shares of Common Stock in
the Subscription and Community Offering. Trident is a registered broker-dealer
and is a member of the NASD. Trident shall not have any obligation to take or
purchase shares of Common Stock in the Subscription or Community Offering,
however, Trident has agreed to use its best efforts to solicit orders for shares
in the Offerings. For its services, Trident will receive (i) a commission equal
to 1.75% of the aggregate dollar amount of Common Stock sold to Eligible Account
Holders who reside in the Illinois counties of McLean and DeWitt ("Preferred
Counties") and a commission equal to 1.50% on sales to Eligible Account Holders
who do not reside in the Preferred Counties; however, such commission shall not
be paid on shares of Common Stock purchased by officers, directors and employees
or their associates or any employee benefit plans of the Association or Holding
Company, (ii) a commission equal to 1.75% of the aggregate dollar amount of
Common Stock sold to Supplemental Eligible Account Holders and Other
3
<PAGE>
Members who reside in the Preferred Counties and a commission equal to 1.50% on
sales to Supplemental Eligible Account Holders and Other Members who do not
reside in the Preferred Counties, (iii) a commission equal to 1.75% of the
aggregate dollar amount of Common Stock sold in the Community Offering to
Preferred Other Purchasers and a commission equal to 1.50% of the aggregate
dollar amount of Common Stock sold in the Community Offering to Other Purchasers
who are not Preferred Other Purchasers, and (iv) an amount not to exceed $45,000
for reimbursement of certain out-of-pocket expenses (including fees of Trident's
legal counsel not to exceed $32,500). If a Syndicated Community Offering is
utilized, Trident and any Selected Dealers may be paid a fee to be agreed upon
jointly by Trident and the Association to reflect market requirements at the
time of the stock allocation in a Syndicated Community Offering. It is estimated
that such a fee will not exceed 5% of the aggregate dollar amount of Common
Stock sold in the Syndicated Community Offering.
The Association has retained RP Financial to prepare the regulatory business
plan and financial projections required by the OTS pursuant to the conversion
rules. For these services, RP Financial will receive a fee of $7,500. RP
Financial has also been retained by the Association to prepare an appraisal
report. RP Financial's fee for its appraisal services will be $25,000. RP
Financial's out-of-pocket expenses related to the preparation of the business
plan and appraisal report will not exceed $5,000, without the written
authorization of the Association.
BENEFITS OF THE CONVERSION TO MANAGEMENT AND RELATED PERSONS
GENERAL. The Board of Directors of the Holding Company has approved three
benefit plans pursuant to which officers, directors and employees of the Holding
Company and the Association may be entitled to receive, following the
Conversion, shares of Common Stock or options to acquire shares of Common Stock,
in addition to the shares which such officers, directors or employees may
purchase in the Subscription and Community Offering. Those benefit plans
consist of the ESOP, the MRP (as defined below) and the Stock Option Plan (as
defined below) (collectively, the "Employee Benefit Plans"). The Board of
Directors' approval of the Management Development and Recognition Plan and Trust
Agreement (the "MRP") and the 1996 Stock Option and Incentive Plan (the "Stock
Option Plan") is subject to the approval of such plans by the OTS and by the
stockholders of the Holding Company. The Board of Directors intends to submit
the MRP and the Stock Option Plan to the stockholders of the Holding Company for
their approval at either a special meeting or annual meeting of the
stockholders, in either case to be held no earlier than six months following
consummation of the Conversion. For information regarding management's
intentions with respect to the timing of the implementation of the MRP and Stock
Option Plan, see "MANAGEMENT OF THE HOLDING COMPANY AND ASSOCIATION--Employee
Benefit Plans--Management Recognition Plan;" and "--Stock Option Plan."
ESOP. Under the terms of the Plan of Conversion, the ESOP will be eligible
to purchase, in the aggregate, approximately 133,400 shares, or 8% of the
aggregate number of shares of Common Stock issued and sold in connection with
the Conversion (assuming the sale of 1,667,500 shares at the maximum of the
Estimated Valuation Range). Such shares will be allocated among the officers
and employees of the Association in accordance with the terms and conditions of
the ESOP. See "MANAGEMENT OF THE HOLDING COMPANY AND ASSOCIATION--Employee
Benefit Plans--Employee Stock Ownership Plan."
MRP. Subject to the approval of the MRP by stockholders of the Holding
Company, the MRP intends to purchase (with funds provided by the Holding
Company), either in the open market or from the Holding Company in the form of
newly issued shares, an additional 66,700 shares, or 4% of the aggregate number
of shares of Common Stock issued and sold in connection with the Conversion
(assuming the sale of 1,667,500 shares at the maximum of the Estimated Valuation
Range), for issuance to officers, directors and employees of the Holding Company
and the Association in accordance with the terms and conditions of the MRP and
applicable laws and regulations. See "MANAGEMENT OF THE HOLDING COMPANY AND
ASSOCIATION--Employee Benefit Plans--Management Recognition Plan."
4
<PAGE>
STOCK OPTION PLAN. Subject to and following the approval of the Stock Option
Plan by the stockholders of the Holding Company, options to purchase 166,750
shares of authorized but unissued shares, or treasury shares, of Common Stock,
or 10% of the aggregate number of shares of Common Stock issued and sold in
connection with the Conversion (assuming the sale of 1,667,500 shares at the
maximum of the Estimated Valuation Range), will be authorized to be granted to
officers, directors and employees of the Holding Company and the Association in
accordance with the terms and conditions of the Stock Option Plan and applicable
laws and regulations. See "MANAGEMENT OF THE HOLDING COMPANY AND ASSOCIATION--
Employee Benefit Plans--Stock Option Plan."
STOCK PURCHASES BY MANAGEMENT, AWARDS TO MANAGEMENT UNDER EMPLOYEE BENEFIT
PLANS AND POTENTIAL REALIZABLE VALUE OF STOCK OPTIONS AND MRP AWARDS. For a
discussion of approximate purchases of Common Stock by each director and
executive officer of the Association and the Holding Company and the number of
shares of Common Stock which the Board of Directors of the Holding Company and
the Association anticipate will be awarded to each of the executive officers,
directors and employees of the Holding Company and the Association under the
Employee Benefit Plans, see "MANAGEMENT OF THE HOLDING COMPANY AND ASSOCIATION--
Shares to be Purchased by Management Pursuant to Subscription Rights and Awards
Under Employee Stock Benefit Plans." For a discussion of the potential
realizable value of awards under the Stock Option Plan and the MRP, see
"MANAGEMENT OF THE HOLDING COMPANY AND ASSOCIATION--Employee Benefit Plans--
Stock Option Plan;" and "--Management Recognition Plan."
EMPLOYMENT AGREEMENT. The Association and the Holding Company intend to
enter into an employment agreement with Donald L. Fernandes, which would be
effective as of the consummation of the Conversion. The employment agreement
provides that Mr. Fernandes will be employed for a 36-month term. The term of
the agreement may be extended for an additional twelve-month period by action of
the Board of Directors of the Association and the Holding Company taken 60 days
prior to each anniversary of the effective date of the employment agreement.
Mr. Fernandes may terminate the employment agreement at any time upon 60 days'
prior written notice to the Board of Directors of the Holding Company and the
Association. Under the employment agreement, the base salary for Mr. Fernandes
will be $100,000 per year. The Board of Directors of the Holding Company and
the Association will review Mr. Fernandes's base salary at least once a year and
may increase that base salary. In addition to base salary, the agreement
provides for participation in any group health, medical, hospitalization, dental
care, sick leave pay, life insurance or death benefit, disability plans and
other employee benefit plans offered by the Association to its employees,
including the ESOP and other plans contemplated in connection with the
Conversion. Mr. Fernandes will also be entitled to severance payments upon
termination of his employment under certain circumstances, including as a result
of a change of control. See "MANAGEMENT OF THE HOLDING COMPANY AND ASSOCIATION
--Employment Agreement."
EMPLOYMENT SECURITY AGREEMENTS. The Board of Directors of the Holding Company
intends to enter into Employment Security Agreements, effective as of the
consummation of the Conversion, with three officers of the Association to
provide for severance arrangements in the event of a change of control of the
Holding Company or the Association. These agreements are intended to provide
employment security to certain key employees of the Association and to encourage
them to remain with the Association. Each Employment Security Agreements has a
term of three years and may be extended each year for an additional year by the
Board of Directors of the Holding Company. See "MANAGEMENT OF THE HOLDING
COMPANY AND ASSOCIATION--Employment Security Agreements."
USE OF PROCEEDS
The net proceeds from the sale of the Common Stock are expected to range from
$11.6 million, at the minimum of the Estimated Valuation Range, to $15.9
million, at the maximum of the Estimated Valuation Range. At the midpoint of
the Estimated Valuation Range, the estimated net proceeds of the Conversion
5
<PAGE>
would be $13.8 million. The OTS is expected to grant the Holding Company
permission to retain 50% of the net proceeds received in the Conversion. The
balance of the net proceeds will be paid to the Association in exchange for all
of its capital stock. Assuming that the Conversion is consummated at the
midpoint of the Estimated Valuation Range, the Association will receive
approximately $6.9 million and the Holding Company will retain approximately
$6.9 million out of which the Holding Company will make a loan to the ESOP in
the amount of $1.2 million and fund the MRP at a later date in the amount of
$580,000. Net proceeds raised in the Conversion will be used to make a loan to
the ESOP and to fund the MRP at all levels of the Estimated Valuation Range.
For information regarding the amount of net proceeds to be used for the ESOP
loan and to fund the MRP at various levels of the Estimated Valuation Range, see
"PRO FORMA DATA."
The Holding Company intends to invest the net proceeds of the Offering which
it retains initially in short-term and intermediate-term deposits, U.S.
government and federal agency securities and adjustable-rate mortgage-backed
securities. Thereafter, funds retained by the Holding Company will be deployed
in accordance with the Holding Company's business plan as determined by the
Board of Directors of the Holding Company, as specific business opportunities or
requirements arise and for general corporate purposes. The net proceeds
retained by the Holding Company may be used to support the future expansion of
operations or diversification into other banking-related businesses and for
other business or investment purposes, including the possible infusion of
additional equity into the Association, the possible payment of dividends and
the possible repurchase of shares of the Holding Company's Common Stock as
permitted by the OTS.
The Association expects to use the proceeds of the Offering that are made
available to it by the Holding Company in furtherance of its business plan,
which was adopted on February 13, 1996 in contemplation of the Conversion. The
Association will invest such proceeds initially in short-term investment
securities (i.e., remaining maturities ranging up to 12 months) pending their
application pursuant to its business plan. The business plan contemplates
continuation of the Association's current lending and investment strategies
which emphasize one- to four-family mortgage loans, indirect auto loans and
mortgage-backed securities. There can be no assurance, however, that the
Association will be able to effectively implement its business plan, as
currently in effect, and the business plan is subject to change by the Board of
Directors. See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS--Management Strategy;" "--Management of Interest Rate
Risk;" and "--Liquidity and Capital Resources." The Association may also use a
portion of the net proceeds to pay dividends to the Holding Company, subject to
applicable statutory and regulatory requirements.
The Holding Company and the Association also may use the net proceeds of the
Offering to expand their operations through acquisitions of other financial
institutions or other financial services companies or portions thereof, subject
to applicable regulatory restrictions. However, neither the Association nor the
Holding Company has any pending agreements or understandings regarding
acquisitions of any specific financial institutions or other financial services
companies or portions thereof. See "USE OF PROCEEDS."
DIVIDENDS
The Board of Directors of the Holding Company has not made a decision as to
the amount or timing of cash dividends, if any, on the Common Stock.
Declarations and payments of dividends by the Board of Directors will depend
upon a number of factors, including the amount of the net proceeds retained by
the Holding Company, capital requirements, regulatory limitations, the
Association's and the Holding Company's financial condition and results of
operations, tax considerations and general economic conditions. In order to pay
such cash dividends, however, the Holding Company must have available cash
either from the net proceeds raised in the Conversion and retained by the
Holding Company, dividends received from the Association or earnings on Holding
Company assets. In addition, from time to time in an effort to reduce capital
to a desirable level, the Board of Directors may determine to pay special cash
dividends. Special cash dividends, if paid, may be paid in addition to, or in
lieu of, any regular cash dividends. No assurances can be
6
<PAGE>
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. See
"DIVIDENDS."
Market for Common Stock
Neither the Holding Company nor the Association has previously issued
capital stock to the public, and, consequently, there is no established market
for the Common Stock to be issued in the Conversion. The Holding Company has
received conditional approval to have the Common Stock listed as a National
Market Security on the Nasdaq Stock Market under the symbol "EGLB." However, in
order for the Common Stock to be listed as a National Market Security on the
Nasdaq Stock Market, among other things, there must be at least 400 stockholders
holding the outstanding Common Stock and there must be two market makers for the
Common Stock. The Holding Company is unable to determine at this stage whether
the Common Stock will be held, or continue to be held, by at least 400
stockholders following consummation of the Conversion. Trident intends to act as
a market maker for the Common Stock and will assist the Holding Company in
retaining at least one other market maker. The Holding Company will use its best
efforts to encourage and assist market making to establish and maintain a market
for the Common Stock. There can be no assurance, however, that any additional
market makers for the Common Stock will be obtained or that the Common Stock
will be listed as a National Market Security on the Nasdaq Stock Market or, if
listed, will continue to be eligible for such listing. If the Holding Company
should prove unable, for any reason, to list the Common Stock as a National
Market Security or to continue to be eligible for such listing, then the Holding
Company intends to list the Common Stock on the Nasdaq SmallCap Market, subject
to the applicable listing criteria for that market.
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. In addition, 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 Holding Company, the Association or any market maker. The
smaller the number of holders of the stock, the less likely a liquid market will
develop. Accordingly, there can be no assurance that an active and liquid
trading market for the Common Stock will develop or, if developed, be
maintained, that resales of the Common Stock can be made at or above the
Purchase Price, or that quotations will be available on the Nasdaq Stock Market
as contemplated. In the absence of a liquid public market for the Common Stock,
investors in the Common Stock could have difficulty disposing of their shares on
short notice or upon favorable terms and should not view the Common Stock as a
short-term investment. See "MARKET FOR COMMON STOCK."
Risk Factors
See "RISK FACTORS" for a discussion of certain risks related to this
offering.
Selected Consolidated Financial Information of the Association
The following table sets forth, on an historical basis, certain selected
consolidated financial data for the Association and its subsidiary, FFS
Investment Services, Inc. ("FFS Investment Services"). This summary has been
derived from, and should be read in conjunction with, the audited consolidated
financial statements of the Association and the related notes thereto and
management's discussion and analysis of financial conditions and results of
operations included elsewhere in this Prospectus.
7
<PAGE>
<TABLE>
<CAPTION>
At and For the Fiscal Year Ended December 31,
---------------------------------------------------
1995 1994 1993 1992 1991
--------- --------- --------- -------- --------
<S> <C> <C> <C> <C> <C>
(Dollars in Thousands)
SELECTED FINANCIAL CONDITION DATA:
Total assets.................................. $150,974 $140,932 $137,368 $142,940 $150,433
Cash on hand and in other institutions........ 1,047 1,092 938 485 342
Federal funds sold and overnight deposits..... 2,853 1,611 8,882 10,376 9,857
Investments................................... 53,186 42,680 50,468 30,508 57,375
Loans receivable, net......................... 88,786 83,589 67,939 93,228 74,007
Deposits...................................... 138,396 122,388 125,156 132,265 140,654
FHLB advances and other borrowings............ -- 7,936 -- -- --
Total equity.................................. 11,515 9,501 11,320 10,190 9,414
SELECTED OPERATING DATA:
Interest income............................... $ 9,933 $ 8,594 $ 8,913 $ 11,219 $ 14,144
Interest expense.............................. 7,376 5,395 5,838 7,778 10,360
-------- -------- -------- -------- --------
Net interest income before provision for
loan losses................................. 2,557 3,199 3,075 3,441 3,784
Provision for loan losses..................... 100 (32) (3) -- 464
-------- -------- -------- -------- --------
Net interest income after provision for
loan losses................................. 2,457 3,231 3,078 3,441 3,320
Non-interest income........................... 394 254 1,206 105 388
Non-interest expenses......................... 2,954 2,833 2,584 2,426 2,984
-------- -------- -------- -------- --------
Income (loss) before federal income taxes
and change in accounting principle.......... (103) 652 1,700 1,120 724
Federal income taxes.......................... (30) 222 570 345 225
Income before cumulative effect of change in
accounting principle........................ (73) 430 1,130 775 499
Cumulative effect of change in accounting
principle................................... -- -- -- -- 508
-------- -------- -------- -------- --------
Net income (loss)............................. $ (73) $ 430 $ 1,130 $ 775 $ 1,007
======== ======== ======== ======== ========
</TABLE>
8
(Table continued on next page)
<PAGE>
<TABLE>
<CAPTION>
At and For the Fiscal Year Ended
December 31,
----------------------------------------------------
1995 1994 1993 1992 1991
------------ -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
(Dollars in Thousands)
SELECTED FINANCIAL RATIOS AND OTHER DATA:
Performance Ratios:/(1)/
Return on average assets/(2)/................ (0.05)% 0.31% 0.81% 0.53% 0.66%
Return on average equity/(2)/................ (0.68)% 4.15% 10.31% 8.48% 11.54%
Interest rate spread during period/(3)/...... 1.83% 2.54% 2.27% 2.39% 2.05%
Net interest margin/(4)/..................... 1.85% 2.55% 2.38% 2.47% 2.48%
Non-interest expense to average assets....... 1.98% 2.06% 1.86% 1.64% 1.94%
Non-interest income to average assets........ 0.26% 0.19% 0.87% 0.07% 0.25%
Average interest-earning assets
to average interest-bearing liabilities.... 1.01x 1.00x 1.02x 1.02x 1.06x
Asset Quality Ratios:/(1)/
Non-performing loans to gross loans/(5)/..... 0.57% 0.47% 1.19% 0.90% 14.25%
Non-performing assets to total assets/(6)/... 0.80%/(7)/ 4.86% 5.56% 4.39% 7.43%
Allowance for loan losses to total loans..... 1.01% 1.04% 1.38% 1.01% 1.50%
Allowance for loan losses to non-performing
loans...................................... 176.80% 219.35% 115.09% 111.66% 10.38%
Net charge-offs to average gross loans....... 0.08% 0.05% 0.00% 0.21% 1.61%
Regulatory Capital and Capital Ratios:
Tangible capital ratio....................... 7.73% 8.20% 8.22% 6.51% 5.50%
Core capital ratio........................... 7.73% 8.20% 8.22% 6.51% 5.50%
Risk-based capital ratio..................... 15.78% 15.80% 17.70% 13.60% 10.80%
Average equity to average assets............. 7.21% 7.55% 7.89% 6.19% 5.68%
Equity to total assets at end of period...... 7.63% 6.74% 8.24% 7.13% 6.26%
Other Data:
Number of deposit accounts................... 15,611 13,825 13,207 13,364 13,937
Number of real estate loans outstanding...... 1,027 1,077 1,002 1,624 1,418
Number of consumer loans outstanding......... 2,759 2,031 1,237 292 425
Real estate loan originations................ $14,653 $22,338 $37,552 $50,961 $ 7,922
Consumer loan originations................... $20,043 $16,403 $14,802 $ 2,573 $ 2,001
Full-service facilities...................... 3 3 2 2 2
_______________
</TABLE>
/(1)/ With the exception of end of period ratios, all ratios are based on
average monthly balances during the respective periods.
/(2)/ Ratios are calculated using net income including the cumulative effect
of a change in accounting principle in 1991.
/(3)/ Interest rate spread represents the difference between the weighted
average yield on interest-earning assets and the weighted average cost of
interest-bearing liabilities.
/(4)/ Net interest margin represents net interest income as a percentage of
average interest-earning assets.
/(5)/ Non-performing loans consist of non-accrual and accruing loans which are
contractually past due 90 days or more. See "BUSINESS OF THE
ASSOCIATION--Lending Activities--Non-Performing Assets."
/(6)/ Non-performing assets consist of non-performing loans and foreclosed
real estate owned.
/(7)/ The significant reduction in this ratio between the 1994 and 1995
periods occurred as a result of the sale by the Association of a
substantial real estate owned property during the fourth quarter of
1995. For additional information, see "BUSINESS OF THE ASSOCIATION--
Lending Activities--Non-Performing Assets."
9
<PAGE>
RECENT DEVELOPMENTS
The selected consolidated financial and other data of the Association set
forth below at and for the three months ended March 31, 1996 were derived from
unaudited financial statements.
<TABLE>
<CAPTION>
At At
March 31, 1996/(1)/ December 31, 1995
-------------------- -----------------
<S> <C> <C>
(Dollars in Thousands)
SELECTED FINANCIAL CONDITION DATA:
Total assets.......................................... $151,806 $150,974
Cash on hand and in other institutions................ 1,108 1,047
Federal funds sold and overnight deposits............. 818 2,853
Investments........................................... 54,707 53,186
Loans receivable, net................................. 89,655 88,786
Deposits.............................................. 139,426 138,396
FHLB advances and other borrowings.................... ---------- ----------
Total equity.......................................... 11,236 11,515
For the Three Months
Ended March 31,
------------------------------
1996/(1)/ 1995/(1)/
---------- ----------
(Dollars in Thousands)
SELECTED OPERATING DATA:
Interest income....................................... $2,598 $2,340
Interest expense...................................... 1,902 1,638
---------- ----------
Net interest income before provision for loan losses.. 696 702
Provision for loan losses............................. 15 15
---------- ----------
Net interest income after provision for loan losses... 681 687
Non-interest income................................... 113 96
Non-interest expense.................................. 843 688
---------- ----------
Income (loss) before federal income taxes............. (49) 95
Federal income taxes.................................. (15) 30
---------- ----------
Net income (loss)..................................... $ (34) $ 65
========== ==========
</TABLE>
10
<PAGE>
<TABLE>
<CAPTION>
At and For the
Three Months Ended
March 31,
------------------------
1996/(1)/ 1995/(1)/
----------- -----------
<S> <C> <C>
(Dollars in Thousands)
SELECTED FINANCIAL RATIOS AND OTHER DATA:
Performance Ratios:/(2)/
Return on average assets........................... (0.09)% 0.18%
Return on average equity........................... (1.19)% 2.68%
Interest rate spread during period/(3)/............ 1.65% 2.29%
Net interest margin/(4)/........................... 1.92% 2.17%
Non-interest expense to average assets............. 2.23% 1.91%
Non-interest income to average assets.............. 0.30% 0.27%
Average interest-earning assets
to average interest-bearing liabilities.......... 1.05x 0.98x
Asset Quality Ratios:/(2)/
Non-performing loans to gross loans/(5)/........... 0.76% 0.54%
Non-performing assets to total assets/(6)/......... 0.93% 4.56%
Allowance for loan losses to total loans........... 1.00% 0.99%
Allowance for loan losses to non-performing loans.. 132.31% 178.35%
Net charge-offs to average gross loans............. (0.02)% (0.03)%
Regulatory Capital and Capital Ratios:
Tangible capital ratio............................. 7.64% 8.04%
Core capital ratio................................. 7.64% 8.04%
Risk-based capital ratio........................... 15.52% 15.29%
Average equity to average assets................... 7.57% 6.72%
Equity to total assets at end of period............ 7.39% 7.18%
Other Data:
Number of deposit accounts......................... 15,781 14,610
Number of real estate loans outstanding............ 1,019 1,079
Number of consumer loans outstanding............... 2,909 2,329
Real estate loan originations...................... $8,264 $2,110
Consumer loan originations......................... $5,199 $5,536
Full-service facilities............................ 3 3
</TABLE>
_______________
/(1)/ The data presented at and for the three months ended March 31, 1996 and
1995 were derived from unaudited consolidated financial statements and reflect,
in the opinion of management, all adjustments (consisting only of normal
recurring adjustments) which are necessary to present fairly the results for
such interim periods. Interim results at and for the three months ended March
31, 1996 are not necessarily indicative of the results that may be expected for
the year ending December 31, 1996.
/(2)/ With the exception of end of period ratios, all ratios are based on
average monthly balances during the respective periods.
/(3)/ Interest rate spread represents the difference between the weighted
average yield on interest-earning assets and the weighted average cost of
interest-bearing liabilities.
/(4)/ Net interest margin represents net interest income as a percentage of
average interest-earning assets.
/(5)/ Non-performing loans consist of non-accrual and accruing loans which are
contractually past due 90 days or more. See "BUSINESS OF THE ASSOCIATION--
Lending Activities--Non-Performing Assets."
/(6)/ Non-performing assets consist of non-performing loans and foreclosed
real estate owned.
11
<PAGE>
Management's Discussion and Analysis of Recent Developments
Comparison of Operating Results for the Three Months Ended March 31, 1996 and
1995
General. The Association's net loss for the three months ended March 31,
1996 was $34,000 compared to net income for the three months ended March 31,
1995 of $65,000. The decline in income was due to a decrease in the interest
rate spread and an increase in non-interest expense.
Net Interest Income. For the three months ended March 31, 1996, net
interest income decreased to $696,000 from $702,000 in the prior year's period.
Interest income increased to $2,598,000 for the first three months of 1996 from
$2,340,000 for the same period in 1995 while interest expense increased to
$1,902,000 from $1,638,000 for the same periods in 1996 and 1995, respectively.
The interest rate spread (the rate earned on average interest earning
assets minus the rate paid on average interest bearing liabilities) decreased to
1.65% for the first three months of 1996 from 2.29% for the first three months
of 1995. The net interest margin (net interest income divided by average
interest earning assets) decreased to 1.92% from 2.17% during the same periods
in 1996 and 1995, respectively.
Average interest earning assets increased $13,958,000 to $145,445,000 for
the first quarter of 1996 from the same period in 1995 while the yield on
average interest earning assets decreased .04% to 7.18% in the first quarter of
1996 from the same period in 1995. The increase in interest earning assets in
1996 from 1995 was due to the 1995 effort to attract new deposits and the sale,
in the fourth quarter of 1995, of a large commercial property previously held as
real estate owned. The funds generated were invested primarily in mortgage-
backed securities, collateralized mortgage obligations and government
securities. The average balance of total investments increased to $56,153,000
for the first three months of 1996 from $45,817,000 for the first three months
of 1995.
Average total deposits increased to $138,200,000 in the first three months
of 1996 from $129,886,000 in the first three months of 1995 due to the
Association's efforts to increase certificate of deposit balances by matching
local competitor's terms on certain certificates during the first six months of
1995. 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--Net Interest Income." While the marketing effort was
successful in attracting new deposits, the rate paid on average total deposits
increased to 5.54% for the three months ended March 31, 1996 from 4.94% for the
first three months of 1995. Also during the first three months of 1995, the
Association had average FHLB advances of $4,649,000 while no funds were borrowed
during the first three months of 1996. Interest expense on the FHLB advances in
1995 was $74,000.
All loans that are contractually past due 90 days or more are non-accrual
and are considered non-performing. Interest income of $7,000 was recognized on
non-performing loans in the three months ended March 31, 1996. An additional
$10,000 would have been recognized on an accrual basis.
Provision for Loan Losses. The provision for loan losses was $15,000 for
both the first three months of 1996 and 1995. For both three-month periods, the
provision for loan losses was computed as the amount necessary to bring the
ending allowance to a level deemed adequate to absorb estimated losses inherent
in the loan portfolio. The allowance for loan losses increased to $905,000 or
1.00% of total loans at March 31, 1996 from $865,000 or .99% of total loans at
March 31, 1995. At December 31, 1995, the allowance for loan losses was
$907,000. The allowance was adjusted for the $15,000 provision for loan losses,
charge-offs of $18,000 and recoveries of $1,000 in the quarter ended March 31,
1996, resulting in the allowance balance of $905,000 at that date. Non-
performing loans were $684,000 or .76% of total loans at March 31, 1996 compared
to $485,000 or .54% of total loans at March 31, 1995.
12
<PAGE>
Non-Interest Income. Non-interest income for the first three months of
1996 increased to $113,000 from $96,000 for the same period in 1995. In the
first three months of 1995, $36,000 in income was recognized as the result of a
reduction in the valuation allowance for loans held for sale. Gains on loans
sold increased to $38,000 in the first three months of 1996 from $3,000 for the
same period in 1995 as mortgage loan originations increased to $8,264,000 during
the first three months of 1996 from $2,110,000 for the same period in 1995. In
addition, the Association adopted Statement of Financial Accounting Standards
No. 122, "Accounting for Mortgage Servicing Rights," as of January 1, 1996,
which resulted in the recognition of a servicing asset related to loans sold of
$21,000 in the first quarter of 1996. No adjustment to 1995 results was made as
the statement was not retroactively adopted. Loan fees and deposit account fees
both increased $5,000 in the first three months of 1996 from the same period in
1995.
Non-Interest Expense. Non-interest expense increased to $843,000 for the
first three months of 1996 from $688,000 for the prior year's period. In the
first three months of 1995, income of $93,000 was recognized on real estate
owned operations. The large commercial property included in real estate owned,
which generated the rental income in early 1995, was sold in the fourth quarter
of 1995. A market value adjustment of $13,000 was expensed in the first three
months of 1996 on loans held for sale compared to a gain in the first three
months of 1995 that was included in non-interest income. Marketing expense
increased to $36,000 in the first three months of 1996 from $10,000 in the same
period in 1995 due to increased advertising focusing on home mortgage lending
and customer service.
In addition, comparing the first three months of 1996 to the same period in
1995, data processing and ATM service charges increased $18,000 due to increased
transaction volumes processed and small price increases, and FDIC premium
expense increased $10,000 due to increased deposit levels. Partially offsetting
the increased expense items was compensation expense, which decreased to
$377,000 in the first three months of 1996 from $404,000 in the first three
months of 1995 due to staff changes.
Income Tax Expense. For the three months ended March 31, 1995, income tax
expense of $30,000 was recorded compared to an income tax benefit of $15,000 for
the same period in 1996 due to changes in pre-tax income. The effective tax
rate for both periods was 32%.
13
<PAGE>
RISK FACTORS
Before investing in shares of Common Stock offered hereby, prospective
investors should carefully consider the risk factors presented below, in
addition to other considerations discussed elsewhere in this Prospectus.
Effect of Interest Rates
The financial condition and results of operations of the Association, and
of savings institutions in general, are significantly influenced by general
economic conditions, by the related monetary and fiscal policies of the federal
government, and by the regulations of the OTS, the FDIC and the Board of
Governors of the Federal Reserve System (the "Federal Reserve Board"). 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 is affected by the interest rates at which such
financing may be offered and by other factors affecting the supply of housing
and the availability of funds.
The Association's profitability is substantially dependent on its net
interest income, which is the difference between the interest income received
from its interest-earning assets and the interest expense incurred in connection
with its interest-bearing liabilities. The mismatch between maturities and
interest rate sensitivities of balance sheet items (i.e. interest-earning assets
and interest-bearing liabilities) results in interest rate risk. The extent of
interest rate risk to which the Association is subject is monitored by
management by modeling the change in its net portfolio value ("NPV") over a
variety of interest rate scenarios. NPV is the present value of expected cash
flows from assets, liabilities and off-balance sheet contracts. The calculation
is intended to illustrate the change in NPV that will occur in the event of an
immediate change in interest rates of at least 200 basis points with no effect
given to any steps which management might take to counter the effect of that
interest rate movement. At December 31, 1995, there would have been an
estimated $1.7 million, or 16.0%, decrease in the Association's NPV as a percent
of the present value of assets, assuming a 200 basis point increase in interest
rates. See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS--Management of Interest Rate Risk" for a discussion of the
NPV method of analyzing interest rate risk.
At December 31, 1995, the Association had $16.9 million of adjustable rate
mortgage loans ("ARMs") and $9.7 million of balloon mortgage loans in its loan
portfolio. The retention of balloon mortgage loans in the Association's loan
portfolio is not as effective as ARMs in reducing the Association's exposure to
interest rate risk because interest rates on the Association's balloon mortgage
loans are fixed for the first five or seven years whereas ARMs may have interest
rate adjustment periods of one or three years. The Association's ARMs 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. See "BUSINESS OF THE ASSOCIATION--Lending Activities--One- to Four-
Family Residential Lending." While management anticipates that the
Association's ARMs and balloon mortgage loans will better offset the adverse
effects of an increase in interest rates as compared to fixed-rate mortgages,
the increase in mortgage payments required of ARM borrowers, and, to a lesser
extent, borrowers under balloon mortgage loans, in a rising interest rate
environment could potentially cause an increase in delinquencies and defaults.
Changes in interest rates can affect the amount of loans originated by an
institution, as well as the value of its loans and other interest-earning assets
and the resultant ability to realize gains on the sale of such assets. At
December 31, 1995 the Association had net unrealized losses of $215,000 in its
mortgage-backed and related securities portfolio and net unrealized losses of
$30,000 in its investment securities portfolio due primarily to changes in
interest rates since such securities were purchased by the Association. See Note
2 to Notes to Consolidated Financial Statements. In addition, at December 31,
1995, the
14
<PAGE>
Association held two mortgage derivative securities that were classified as
"high-risk" securities under a policy adopted by the OTS. For a discussion of
the OTS's policy with respect to the classification of securities as "high risk"
and the effects of such a classification, see "BUSINESS OF THE ASSOCIATION--
Investment Activities--Composition of the Association's Mortgage-Backed and
Related Securities Portfolio." At December 31, 1995, the Association had
unrealized losses of $10,000 on the two mortgage derivative securities
classified as "high-risk."
Changes in interest rates also can result in the flow of funds away from
savings associations into investments in U.S. Government and corporate
securities, and other investment vehicles which, because of the absence of
federal insurance premiums and reserve requirements among other reasons,
generally can pay higher rates of return than savings associations.
Return 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 Association's return on
equity for the year ended December 31, 1995 was, and the Holding Company's post-
Conversion return on equity will initially be, below the average return on
equity for publicly traded thrift institutions and their holding companies. See
"SUBSCRIPTION AND COMMUNITY OFFERING PROSPECTUS SUMMARY--Selected Consolidated
Financial Information of the Association" for information regarding the
Association'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 addition, the expenses associated with the ESOP
and the MRP (see "PRO FORMA DATA"), along with other post-Conversion expenses,
are expected to contribute initially to reduced earnings levels. The
Association 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 thrift 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. Consequently, investors should not expect a return on equity
which will meet or exceed the average return on equity for publicly traded
thrift institutions for the foreseeable future.
Effect of the Recapitalization of the SAIF, and the Effect of the SAIF and BIF
Deposit Premium Differential on the Association's Future Operations and
Prospects
Deposits of the Association are currently insured by the FDIC under the
SAIF. The FDIC also maintains another insurance fund, the Bank Insurance Fund
("BIF"), which primarily insures commercial bank and some state savings bank
deposits. Applicable law requires that the SAIF and BIF funds each achieve and
maintain a ratio of insurance reserves to total insured deposits equal to 1.25%.
The BIF reached this required reserve ratio during 1995, while the SAIF is not
expected to do so until 2002. The SAIF has not grown as quickly as the BIF due
to a number of factors, including the fact that a significant portion of SAIF
premiums have been and are currently being used to make payments on bonds issued
by the Financing Corporation ("FICO Bonds") in the late 1980s to recapitalize
the now defunct Federal Savings and Loan Insurance Corporation ("FSLIC"). In
addition to the SAIF's underfunding, the SAIF has also assumed the
responsibility for resolving savings association failures since June 30, 1995.
The FDIC reports that, because the SAIF is significantly underfunded,
significant insurance losses in the near-term could render the SAIF insolvent.
Until 1995, the BIF and SAIF assessment rate schedules had been identical.
However, on February 16, 1995, the FDIC issued proposed rules setting forth
modified assessment rate schedules for SAIF and BIF member institutions. While
the FDIC proposed that the assessments for SAIF members continue to range from
$0.23 to $0.31 per $100 of deposits, the proposal provided for a reduced
assessment rate schedule for BIF members, to range between $0.04 to $0.31 per
$100 of deposits. This proposal was
15
<PAGE>
adopted by the FDIC in a final rule dated August 8, 1995. The modified
assessment rate schedule for BIF member institutions is effective retroactive to
June 1, 1995, the first day of the month following the BIF's achieving the 1.25%
designated reserve ratio. On November 14, 1995, the FDIC reduced assessment
rates by $0.04 per $100 of deposits and again modified the assessment rate
schedule for BIF member institutions, approving a schedule ranging from $0.03 to
$0.27 of deposits. Based on the latest assessment rate modifications, which
became effective in January, 1996, the majority of BIF members pay only the
$2,000 minimum annual premium, and therefore BIF member institutions pay, on
average, $0.0043 per $100 of deposits, while the average SAIF member pays $0.23
per $100 of deposits. As a result of the new assessment rate provisions, BIF
member institutions benefit from reduced deposit insurance premiums and SAIF
member institutions have been placed at a competitive disadvantage based on
higher deposit insurance premium obligations. It is expected that BIF-insured
banks, which constitute some of the Association's primary competitors, will be
able to exploit this premium differential and offer higher yields on their
deposit products than their SAIF-insured counterparts because of the cost
savings resulting from the premium differential.
To address the BIF/SAIF disparity and the competitive disadvantage it
creates for savings associations, several large stock-based savings associations
have recently announced plans to charter BIF-insured banks as separate wholly-
owned subsidiaries of their holding company. Because the BIF insurance premiums
for the newly chartered commercial banks are lower than the SAIF insurance
premiums for the existing savings association, the new banks will be able to
offer rates on savings deposits that are higher than the rates offered by its
sister savings association. Accordingly, savings deposits will be drawn away
from the SAIF-insured savings association to the BIF-insured commercial banks.
If these savings associations are successful in transferring deposits away from
the SAIF, the assessment base for the SAIF will be reduced. This could mean
higher deposit insurance premiums for the remaining SAIF-insured savings
associations or a delay in the eventual reduction of insurance premiums beyond
the year 2002, or both.
SAIF Fund Recapitalization; Payment of Special Assessment. In order to
address the SAIF fund underfunding and to mitigate the effect of the BIF/SAIF
premium disparity, the United States Congress addressed deposit insurance fund
issues in connection with its consideration of a comprehensive deficit reducing
budget reconciliation bill. In mid-November, 1995, the United States Congress
passed the Balanced Budget Act of 1995 (the "Balanced Budget Act"), Title II of
which provided that: (i) the FDIC impose a one time special assessment on the
SAIF-assessable deposits of each FDIC-insured depository institution at a rate
which the FDIC determines will cause the SAIF to achieve the designated reserve
ratio; (ii) all FDIC-insured institutions share, on a pro rata basis, FICO Bond
obligations; and (iii) the SAIF and BIF be merged by January 1, 1998, provided
no FDIC-insured depository institution is a savings association on that date.
The Balanced Budget Act was vetoed by the President and therefore the
provisions described above are not in effect. Since the President's veto,
negotiations between Congressional leaders and the President continued. As a
compromise to end the continuing balanced budget stalemate, the Congress and the
President agreed on a budget package for the remainder of the fiscal year. On
April 29, 1996, the President signed into law the "Omnibus Consolidated
Rescissions and Appropriations Act of 1996" (the "1996 Budget Act") that funds
the United States Government for the remainder of the 1996 fiscal year. The 1996
Budget Act does not include Title II of the Balanced Budget Act. Several members
of Congress, the Clinton Administration and leaders of several federal bank
regulatory agencies have proposed including provisions similar to Title II of
the Budget Balanced Act in legislation for the United States Government's 1997
fiscal year budget or, alternatively in separate legislation independent of the
budget process. Association management cannot predict whether legislation will
be adopted that includes the provisions of Title II of the Balanced Budget Act
and, if so, when and in what form. However, if legislation is adopted containing
provisions similar to those described herein, the special assessment to
recapitalize the SAIF is presently estimated to be between 75-85 basis points
per $100 of insurable deposits. Such payment would
16
<PAGE>
have the effect of reducing earnings and capital of SAIF-insured institutions by
the amount of the special assessment on the date the assessment is paid. In
addition, the FICO Bond obligations would be spread to include all BIF-insured
institutions, which would benefit SAIF-insured institutions such as the
Association. It is also anticipated that the recapitalization of the SAIF and
the merger of the funds will result in the reduction or elimination of the SAIF
and BIF premium disparity with SAIF-insured institutions being made subject to
assessment schedules more nearly comparable to assessments of current BIF-
insured institutions. Under Title II of the Balanced Budget Act, merger of the
SAIF and BIF is made contingent on there being no FDIC-insured depository
institutions that are savings associations on January 1, 1998. The legislation
contemplates, but does not explicitly require, that all savings associations
convert their charters to commercial bank charters.
If legislation is adopted containing such provisions, the Association's
financial condition will be adversely affected. If the special assessment were
imposed at 85 basis points per $100 of insurable deposits, based on the
Association's deposit base at December 31, 1995, the amount of the assessment to
the Association would be approximately $1.2 million. Payment of the special
assessment will have the effect of reducing the Association's earnings and
capital by the amount of the assessment as of the date of the assessment.
Following the recapitalization of the SAIF, the Association anticipates that it
would benefit from a reduction in the ongoing premium assessments paid by SAIF-
insured institutions. At this time, it is not clear when, or if, separate
legislation containing provisions of Title II of the Balanced Budget Act will
become law.
Absence of Management Performance Record Due to Recent Change in Management
The Association has recently undergone a major change in its management.
On August 15, 1995, the Board of Directors of the Association appointed a new
president and chief executive officer, Donald L. Fernandes. Prior to that time,
Mr. Fernandes served as senior vice president and chief financial officer of the
Association. See "MANAGEMENT OF THE HOLDING COMPANY AND ASSOCIATION." The change
in chief executive officers has resulted in a new management strategy for the
Association. See "FIRST FEDERAL SAVINGS AND LOAN ASSOCIATION OF BLOOMINGTON--
Recent Developments and Strategies." The Association has not yet established a
performance record under its new management or new strategy on which investors
can rely in determining whether or not to invest in the Common Stock.
The Association's future financial performance will be largely dependent
upon Mr. Fernandes' abilities as chief executive officer, which as of yet are
untested. It will also be dependent upon the Association's ability to retain its
existing management and/or to attract additional management with the
qualifications and experience necessary to permit future growth in the
Association's assets without undue impairment of the quality of such assets. No
assurances can be given that the Association will succeed in attracting and/or
retaining management with such qualifications and experience.
Risks Related to Indirect Auto Lending
At December 31, 1995, approximately $21.6 million, or 24.0%, of the
Association's gross loan portfolio consisted of indirect automobile loans
originated by the Association through a network of automobile dealers in the
Bloomington-Normal area. The Association initiated its indirect auto lending in
1993. Although the Association hired a senior lending officer in 1993 who has
substantial experience with this type of lending, originating indirect auto
loans is a relatively new business activity for the Association. To a large
degree, the Association's ability to maintain or expand its indirect auto
lending business will be dependent upon the volume of sales of new and used
automobiles and the demand by consumers for financing in connection therewith,
factors which are beyond the control of the Association. While the Association
attempts to employ prudent credit standards in originating indirect auto loans,
there is an inherent risk that a portion of these loans will default. In such
instances, the repossessed automobile securing the loan may not be sufficient
for repayment of the loan and the remaining deficiency may not be
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collectible. The Association does not have recourse to the automobile dealer in
the event of a default of an indirect auto loan. Loans secured by assets that
depreciate rapidly, such as automobiles, are generally considered to entail
greater risks than residential mortgage loans. In light of these risks, the
Association currently maintains allowances for loan losses with respect to its
indirect auto loans. The Association established a provision for loan losses of
$100,000 in 1995. The increase relates principally to the continuing increase in
1995 of the Association's indirect auto loans. See "BUSINESS OF THE
ASSOCIATION--Lending Activities--Consumer Lending-Indirect Auto Loans;" and
"--Allowance for Loan Losses." There can be no assurance, however, that the
allowance for loan losses will prove sufficient to cover actual losses in the
future on the indirect auto loans.
Risk Related to Commercial Lending
As a federal savings association, the Association has traditionally
emphasized the origination of loans secured by one- to four-family residences.
In recent years, the Association has originated commercial real estate loans
only on a very limited basis and subject to restrictions imposed by the OTS. See
"FIRST FEDERAL SAVINGS AND LOAN ASSOCIATION OF BLOOMINGTON." The Association is
not currently soliciting the origination of commercial real estate loans, but
may make such loans in certain rare circumstances such as at the request of a
long-standing customer. In the future, the Association may decide to actively
pursue the origination of commercial real estate loans but would do so only
after hiring additional personnel with extensive experience in making commercial
real estate loans. Commercial real estate loans generally entail significant
additional risks as compared to one- to four-family residential mortgage lending
and carry larger loan balances. The increased credit risk is a result of several
factors, including the concentration of principal in a smaller number of loans
and borrowers, the effects of general economic conditions on income producing
properties and the increased difficulty in evaluating and monitoring these types
of loans. Furthermore, the repayment of loans secured by commercial real estate
is typically dependent upon the successful operation of the related property. If
the cash flow from the property is reduced, the borrower's ability to repay the
loan may be impaired. Loans secured by commercial real estate also may involve a
greater degree of environmental risk.
Depressed Earnings in Prior Years; Earnings Prospects
The Association has experienced depressed earnings in recent years,
culminating in a net loss of $73,000 for the fiscal year ended December 31,
1995. For the four fiscal years ended December 31, 1994, the Association
recorded net income of $1,007,000, $775,000, $1,130,000 and $430,000,
respectively. Accordingly, the Association's return on assets for the five
years ended December 31, 1995 was .66%, .53%, .81%, .31% and (.05)%,
respectively. Management of the Association believes that such ratios are
relatively low compared to other savings associations. Moreover, since 1991,
the Association has experienced an overall decline in its net interest margin,
recording net interest income for the five years ended December 31, 1995 of
$3,784,000, $3,441,000, $3,075,000, $3,199,000 and $2,557,000. The Association
opened a new branch office in Bloomington during the year ended 1995, which
increased the Association's overhead expenses. The Association also hired a new
compliance officer in 1996 and intends to hire at least two additional lending
officers in 1996. The salaries and benefits associated with adding these new
employees will also increase the Association's overhead for 1996. Interest
expense increased $1,981,000 during 1995, in part as a result of the
commencement in December 1994 of a marketing strategy of matching competitors'
rates on fixed-rate, fixed-term certificates of deposit during and immediately
following a period of rising interest rates. The weighted average rates paid on
all interest-bearing liabilities increased to 5.36% in 1995 compared to 4.30% in
1994. The matching rate marketing strategy was discontinued in July, 1995;
however, most of the growth in certificates of deposit was experienced prior to
the change in strategy and before rates began to decline during the last half of
1995. As a result the Association's interest rate spread (i.e., the difference
between the rate received on interest-earning assets and the rate paid on
interest-bearing liabilities) may be negatively affected until such certificates
of deposit mature. The Association's interest rate spread declined in 1995 to
1.83% from
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2.54% in 1994. See "BUSINESS OF THE ASSOCIATION--Deposit Activities and Other
Sources of Funds--Deposit Accounts." The Association has continued to experience
depressed earnings through the first quarter of 1996, recording a net loss of
$34,000 for the three months ended March 31, 1996. See "RECENT DEVELOPMENTS."
There can be no assurance that the Association will be able to improve its net
interest margin or net income in future years. The Association's ability to
generate earnings in the future will affect its ability to declare and pay
dividends to the Holding Company (and, therefore, the amount of earnings
available to pay dividends to the Holding Company's stockholders) and the market
price of the Common Stock.
Possible Inability to Invest Proceeds of the Offerings to Maximize Earnings Per
Share
Management of the Holding Company and the Association anticipate that a
portion of the proceeds of the Offerings will be used to take advantage of
growth opportunities, such as the establishment of new branch offices, the
acquisition of branches from other financial institutions or the acquisition of
other financial institutions. There are, however, no specific plans,
arrangements, agreements or understandings in place regarding any such
activities. No assurances can therefore be given that appropriate acquisition
targets will be identified by the Holding Company or the Association, or that
such acquisition targets, if acquired, will contribute positively to earnings
per share of the Common Stock. In the event that the proceeds of the Offerings
are not productively employed to support either internal growth through the
expansion of the Association's lending activities or external growth through
acquisitions, future increases in the earnings of the Holding Company and
Association, if any, are likely to be modest.
Adequacy of the Association's Allowance for Loan Losses
At December 31, 1995, the ratio of the allowance for loan losses to total
loans outstanding was 1.01%, and the ratio of the allowance for loan losses to
total non-performing loans was 176.8%. The Association determines the desired
level of allowance for loan losses based on an evaluation of the loan portfolio
including consideration of past loan experience, current economic conditions,
volume, growth and composition of the loan portfolio, and other relevant
factors. This evaluation is inherently subjective as it requires material
estimates including the amounts and timing of future cash flows expected to be
received on impaired loans that may be susceptible to significant change. The
Association has, in the past, experienced a high dollar level of non-performing
assets and has experienced significant charges to earnings for provisions for
loan losses, as well as charges against its allowance for loan losses. See
"FIRST FEDERAL SAVINGS AND LOAN ASSOCIATION OF BLOOMINGTON." While the
Association's asset quality improved significantly during 1995 as the result of
the disposition of a significant property held as real estate owned, no
assurance can be given that the Association will not experience significant
provisions for loan losses or charges against its allowance for loan losses in
the future related to a deterioration in the quality of its loan portfolio.
Moreover, the Association intends to continue to emphasize indirect automobile
and other consumer loans that are considered to involve a higher degree of
credit risk than one- to four-family residential mortgage loans. There can be
no assurance that the Association's provision for loan losses in any future
period will not be substantially greater than the provision in prior periods as
a result of an increase in this type of lending. Furthermore, because future
events affecting borrowers and collateral cannot be predicted with any
certainty, there can be no assurance that existing reserves will be adequate or
that substantial increases will not be required should the quality of the loans
deteriorate. The allowance for loan losses at December 31, 1995 is maintained at
a level believed adequate by management to absorb losses in the loan portfolio.
Management's determination of the adequacy of the allowance is based on an
evaluation of the portfolio including consideration of past loan experience,
current economic conditions, volume, growth and composition of the loan
portfolio, and other relevant factors. This evaluation is inherently subjective
as it requires material estimates including the amounts and timing of future
cash flows expected to be received on impaired loans that may be susceptible to
significant change. Any material increase in loan provisions or material loss
for which adequate reserves have not been
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established may materially adversely affect the Association's financial
condition or results of operations, including reducing or eliminating the
Association's profitability.
Competition
The Association faces intense and increasing competition both in making
loans and in attracting deposits. The Association's market area has a large
number of financial institutions, many of which have greater financial
resources, name recognition and market presence than the Association, and all of
which are competitors of the Association to varying degrees. Particularly
intense competition exists for deposits and the origination of all of the loan
products emphasized in the Association's business plan. The Association's
competition for loans comes principally from commercial banks, other savings and
loan associations, savings banks, mortgage banking companies, finance companies
and credit unions. The Association's most direct competition for deposits
historically has come from other savings and loan associations, savings banks,
commercial banks and credit unions. In addition, the Association faces
increasing competition for deposits from non-bank institutions such as brokerage
firms, insurance companies, money market mutual funds, other mutual funds (such
as corporate and government securities funds) and annuities. Trends toward the
consolidation of the banking industry and the lifting of interstate banking and
branching restrictions may make it more difficult for smaller institutions, such
as the Association, to compete effectively with large national and regional
banking institutions.
Dependence on Key Personnel
The Association depends to a considerable degree on a limited number of key
management personnel, and the loss of such personnel could adversely affect the
Association. In order to minimize the likelihood of such an occurrence, the
Association and the Holding Company intend to enter into an employment agreement
with Donald L. Fernandes, President and Chief Executive Officer of the Holding
Company and the Association, and the Holding Company intends to enter into
change in control agreements with the Association's other key management
personnel, namely, Gary L. Richardson, Vice President-Lending, Laurel B.
Donovan, Vice President, and Larry C. McClellan, Vice President-Operations. The
Association does not maintain "key man" life or disability insurance with
respect to any of its employees. See "MANAGEMENT OF THE HOLDING COMPANY AND
ASSOCIATION--Employment Agreement;" and "--Employment Security Agreements."
Effect of Anti-Takeover Provisions in Discouraging Takeover Offers and Changes
in Management
The Holding Company's certificate of incorporation and bylaws provide,
among other things, that (1) for a period of five years following the
Conversion, no person may acquire the beneficial ownership of more than 10% of
any class of equity security of the Holding Company, and no person who acquires
the beneficial ownership of more than 10% of any class of equity security of the
Holding Company may vote any shares owned in excess of 10% unless, in each case,
the acquisition has been approved by a majority of the disinterested directors
on the Board of Directors of the Holding Company; (2) the Holding Company's
Board of Directors will be divided into three classes with one class to be
elected each year; (3) special meetings of the Holding Company's stockholders
may be called only by the chairman of the Board of Directors, the president or a
majority of the Holding Company's Board of Directors; (4) the Board of Directors
may issue additional shares of authorized Common Stock and fix the terms and
designations of and issue shares of authorized preferred stock without any
further action by the stockholders; (5) certain Business Transactions (as
defined in the certificate of incorporation) must be approved in advance by a
majority of the Board of Directors, approved in advance by the holders of 80% of
the outstanding shares of voting stock other than shares owned by persons who
are Interested Parties (as defined in the certificate of incorporation) with
respect to the Business Transaction or approved after-the-fact by two-thirds of
directors who are not themselves Interested Directors (as defined in the
certificate of incorporation) with respect to the Business Transaction; and (6)
stockholders who propose to nominate a candidate for election
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to the Board of Directors of the Holding Company or to present new business at a
stockholders' meeting must give advance notice of, and furnish information
relating to, the proposed nominee and business to the Holding Company. The
management of the Holding Company does not have the ability to waive any of
these provisions. A vote of 80% of the total votes eligible to be cast, voting
together as a single class, is required to amend, repeal or adopt any provisions
inconsistent with certain provisions of the certificate of incorporation and the
bylaws, including most of the provisions enumerated above. See "RESTRICTIONS ON
ACQUISITION OF THE HOLDING COMPANY--Restrictions in Certificate of Incorporation
and Bylaws."
Such provisions are intended to encourage a potential acquiror of the Holding
Company to negotiate with the Board of Directors, which is in the best position
to act on behalf of all of the stockholders, before seeking to obtain control of
the Holding Company. Such provisions may, however, have the effect of
discouraging takeover offers that certain stockholders might deem to be in their
best interests, including takeover proposals in which stockholders might receive
a premium for their shares over the then-current market price. Such provisions
will also make it more difficult for individual stockholders or a group of
stockholders to replace existing management, whether or not such stockholders
believe that a change in management is in the best interests of the Holding
Company.
EFFECT OF VOTING CONTROL BY DIRECTORS AND EXECUTIVE OFFICERS ON CORPORATE
GOVERNANCE
Directors and executive officers of the Association and the Holding Company
expect to purchase approximately 82,500 shares of Common Stock, or 4.9% of the
number of shares outstanding if 1,667,500 shares are sold at the maximum of the
Estimated Valuation Range. Directors and executive officers are also expected
to control 203,250 shares of Common Stock through the Employee Benefit Plans, as
more fully described below. For additional information regarding the vesting
schedules, stockholder approval requirements, proposed allocations of stock
awards and other terms of the Employee Benefit Plans, see "MANAGEMENT OF THE
HOLDING COMPANY AND ASSOCIATION--Employee Benefit Plans."
Following stockholder approval of the MRP, directors and executive officers
are expected to control the voting of 66,700 shares, or 4% of the shares of
Common Stock sold in the Conversion, as a result of stock awards expected to be
granted under the MRP (including both allocated and unallocated). Directors and
executive officers are also expected to be granted stock options to purchase
108,400 shares of Common Stock, following stockholder approval of the Stock
Option Plan. If these options are exercised, directors and executive officers
would have voting control over an amount of shares equal to 6.1% of the Holding
Company's outstanding shares of Common Stock.
Upon completion of the initial allocation of shares of Common Stock under the
ESOP, executive officers of the Association will have been allocated 21.1% of
the allocated shares. Under the terms of the ESOP, each participant is entitled
to vote the shares allocated to his account, and unallocated shares will be
voted by the ESOP trustee in the same proportion as the allocated shares. The
ESOP will purchase 133,400 shares of Common Stock in the Offering. Accordingly,
executive officers will have effective voting control over 28,150 shares of
Common Stock, or 1.7% of the Holding Company's outstanding Common Stock,
assuming the executive officers earn 21.1% of the shares held by the ESOP over
the term of the ESOP loan.
As a result of the proposed purchases of the Common Stock by the Board of
Directors of the Holding Company and executive officers of the Association,
purchases under the ESOP and the MRP, as well as the potential acquisition of
the Common Stock under the Stock Option Plan, directors and executive officers
of the Association and the Holding Company could acquire the power to vote
285,750 shares, or 16.1% of total outstanding shares (including shares owned by
the ESOP and MRP). Such voting control could render it difficult to obtain
majority support for a stockholder proposal opposed by the Board of Directors of
the Holding Company and management.
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POSSIBLE DILUTIVE EFFECT OF GRANTS UNDER THE MRP AND STOCK OPTION PLAN
Subject to the approval of the MRP by the stockholders, the MRP may purchase
shares of Common Stock totaling up to 4% of the Common Stock issued and sold in
the Conversion. Such shares may be purchased by the MRP in the open market, or
if sufficient shares are not available in the open market, the MRP may purchase
authorized but previously unissued shares from the Holding Company at the then
current market price for the Common Stock. Such shares will be issued at no
cost to the participants in the MRP. If the MRP is funded entirely through
purchases of authorized but previously unissued shares from the Holding Company,
the percentage interests of stockholders of the Holding Company at the time of
the Conversion will be diluted, at the time of such purchase, by approximately
4%.
Subject to the approval of the Stock Option Plan by the stockholders, the
Holding Company intends to reserve for issuance under the Stock Option Plan
authorized but previously unissued shares of Common Stock in an amount equal to
10% of the number of shares of Common Stock issued in the Conversion. Options
to purchase such shares will be granted to the directors, officers and employees
of the Holding Company at an exercise price equal to the fair market value per
share of the Common Stock on the date of grant. In the event that all of the
options reserved under the Stock Option Plan are granted and exercised, the
percentage interests of stockholders of the Holding Company will be further
diluted, as of the time of such exercise, by approximately 9.0%.
POSSIBLE ADVERSE INCOME TAX CONSEQUENCES
The Association has received an opinion of Schiff Hardin & Waite which states
that, for federal and state income tax purposes, consummation of the Conversion
will not be taxable to the Association, the Holding Company or depositors of the
Association. However, the opinion also states that if the Subscription Rights
granted to Eligible Account Holders, Supplemental Eligible Account Holders and
Other Members are deemed to have an ascertainable fair market value, income or
gain may be recognized by the recipients of the Subscription Rights (in certain
cases, whether or not the rights are exercised) in an amount equal to such
value. Additionally, the Association could recognize a gain for tax purposes on
such distribution. This opinion is not binding on the Internal Revenue Service
("IRS"). No assurance can be given that the IRS will not take a contrary
position. See "FEDERAL AND STATE TAXATION" and "THE CONVERSION--Effects of
Conversion--Tax Effects."
RISK OF DELAYED OFFERING
The Holding Company and the Association expect to complete the Conversion on
schedule and within the time periods indicated in this Prospectus.
Nevertheless, it is possible, although not anticipated, that various factors
could significantly delay completion of the Conversion. For example, changes in
market, economic or other conditions could result in a change in the Conversion
valuation which could delay completion of the Conversion and necessitate the
receipt of approval from the OTS for an extension of the Subscription and
Community Offering. Subscriptions for shares of Common Stock are irrevocable,
except that if the OTS approves an extension of the Subscription and Community
Offering beyond August 14, 1996, subscribers will be given the opportunity to
modify or rescind their subscriptions and to have their subscription funds
returned promptly with interest at the Association's then current passbook rate
and/or to have their withdrawal authorizations terminated. No such extension
will be permitted without the approval of the OTS.
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EAGLE BANCGROUP, INC.
The Holding Company was incorporated as a Delaware corporation on January 24,
1996 at the direction of the Board of Directors of the Association to acquire
all of the capital stock to be issued by the Association in the Conversion. The
Holding Company has not engaged in any business to date and is not expected to
engage in any business until the consummation of the Conversion. The Holding
Company's offices are located at 301 Fairway Drive, Bloomington, Illinois 61701,
and its telephone number is (309) 663-6345.
The Holding Company will have no material assets or liabilities prior to the
consummation of the Conversion. Immediately following the consummation of the
Conversion, the Holding Company will have, as its only material assets, the
stock of the converted Association acquired in the Conversion and that portion
of the net proceeds of the Conversion that it retains. See "USE OF PROCEEDS"
for a discussion of how the Holding Company intends to invest the net proceeds
of the Conversion retained by it. Immediately following the Conversion, the
Holding Company will have no material liabilities. Following the Conversion,
the Holding Company will be engaged in the business of managing its investments
and directing, planning and coordinating the business activities of the
Association. In the future, the Holding Company may acquire or organize other
operating subsidiaries, although there are no current plans or agreements to do
so.
The Association expects the Holding Company's application to become a savings
and loan holding company under the Home Owners' Loan Act ("HOLA") and to acquire
the Association to be approved by the OTS prior to the Subscription Expiration
Date. Upon completion of the Conversion, the Holding Company will be subject to
regulation by OTS. See "SUPERVISION AND REGULATION--The Holding Company."
Under certain circumstances, the Board of Directors of the Association may
decide not to use the holding company form of organization in the Conversion.
See "THE CONVERSION--General."
FIRST FEDERAL SAVINGS AND LOAN
ASSOCIATION OF BLOOMINGTON
The Association is a federally-chartered mutual savings association regulated
by the OTS, and its deposits are insured by the FDIC through the SAIF. The
deposits of the Association will continue to be insured by the FDIC after the
Conversion. The Association was originally chartered in 1919. At December 31,
1995, the Association had total assets of $151.0 million, deposit accounts of
$138.4 million and total equity of $11.5 million. The Association's main office
is located at 301 Fairway Drive, Bloomington, Illinois 61701, and its telephone
number is (309) 663-6345.
The Association conducts its business through its main office in the city of
Bloomington, Illinois and two full-service branch offices located in Bloomington
and LeRoy, Illinois. LeRoy is approximately twenty miles southeast of
Bloomington. Bloomington is located in the central part of the state, adjacent
to its sister-city, Normal. Bloomington, LeRoy and Normal are located in McLean
County, Illinois. McLean County is the largest county geographically in the
State of Illinois.
The Association's deposit and lending area is concentrated in the Illinois
counties of McLean and DeWitt. DeWitt County is located directly southeast of
Bloomington adjacent to McLean county. Bloomington and Normal have a population
of approximately 58,000 and 40,000, respectively. Relative to the four other
major metropolitan areas in Illinois, outside of Chicago, Bloomington-Normal has
the highest projected population growth rate in Illinois through the year 2000.
Management believes the Bloomington-Normal economy has been growing in recent
years.
McLean and DeWitt Counties represent a mix of rural and small towns,
surrounding the more populous Bloomington-Normal area, and have diversified
economies based on four major sectors --
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agriculture, education, manufacturing and insurance. The Bloomington-Normal area
is home to insurance giants State Farm Insurance and Country Companies
Insurance, and also Illinois State University and Illinois Wesleyan University,
as well as several community colleges. Other primary employers located in and
around Bloomington-Normal include Mitsubishi Motors Manufacturing of America,
Inc., St. Joseph Medical Center, BroMenn Regional Medical Center, G.T.E. North
Incorporated, The Eureka Company, Bridgestone-Firestone and General Electric.
The Association provides its customers with a broad range of community
banking services. The Association is primarily engaged in the business of
attracting deposits from the general public and using such deposits to invest in
one- to four-family residential mortgage loans, automobile loans, mortgage-
backed and related securities, U.S. Government and Agency securities and, to a
lesser extent, multi-family residential, commercial real estate, and commercial
business loans and other consumer loans.
HISTORICAL OPERATIONS
Since the late 1980's, the Association's operations have been hampered by a
significant non-performing asset and difficulties managing interest-rate risk.
These operational problems resulted in regulatory encumbrances affecting the
Association's asset growth and, ultimately, two supervisory agreements with the
OTS that circumscribed the Association's lending and investment activities. As
a result of these difficulties, the Association in recent years has experienced
a decline in earnings.
The Association's financial condition and sensitivity to changes in interest
rates have improved significantly since the late 1980's. Recent strategies, and
the resolution of a significant non-performing asset, have enhanced the
Association's prospects for future earnings and growth. The most significant
development occurred in the fourth quarter of 1995 when the Association sold a
$5.9 million property that it had carried as real estate owned for many years,
thereby alleviating the Association's asset quality problems that had
overshadowed operations for more than seven years. The Association sold the
property for cash, all of which was paid at closing by the purchaser. The
Association did not enter into any unusual terms or conditions (including
guarantees or other accommodations) in order to facilitate the sale of this
property. The Association's asset quality had deteriorated to the point that in
1990 the Association's classified assets were as high as $14.6 million, or 9.1%
of the Association's total assets, consisting of several large delinquent
commercial real estate loans and certain investment securities. Approximately
$10 million, or 68.5%, of the $14.6 million of classified assets in 1990 related
to several loans to one borrower and that borrower's plastics manufacturing
facility in central Illinois and several other businesses. This high level of
classified assets ultimately led the Association to enter into a supervisory
agreement with the OTS on July 17, 1990. The supervisory agreement was amended
on April 8, 1992, and was terminated on June 15, 1995.
The 1990 supervisory agreement required, among other things, that (i) the
Association update the OTS quarterly regarding its workout plans for classified
assets and concentration of all loans secured by commercial real estate and
other income property, (ii) the Association not grant any new commercial or
commercial real estate loans and limit its lending to one- to four-family
residential loans and consumer lending, (iii) the Association develop a plan to
reverse the negative trend in profitability and capital adequacy and to augment
capital, (iv) the Association formulate a plan to substantially reduce its
interest rate risk, (v) the Association not enter into futures and options
transactions without prior approval of the OTS, (vi) the number of outside
directors be increased by two, and (vii) the Association's Loan Committee
consist of three outside directors with all loan approvals requiring the
signature of at least two of the three outside directors. The supervisory
agreement was amended on April 8, 1992, to permit the Association to lend
additional funds to existing commercial real estate borrowers and lend up to
$200,000 to new commercial real estate borrowers.
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Later in 1991, the plastics manufacturer filed for bankruptcy and the
Association initiated action to release the property from bankruptcy protection.
The Association transferred the collateral property to real estate owned at its
estimated fair value of $5.2 million, and concurrently charged-off $1.3 million
against its allowance for loan losses. At December 31, 1991, the Association's
real estate owned totaled $5.7 million. In May, 1992, the Association acquired
other properties securing loans to this borrower, which increased the
Association's real estate owned to $6.3 million at December 31, 1992. At
December 31, 1995, as a result of selling the last and most significant property
related to the loans to the plastics manufacturer, the Association's real estate
owned decreased to $644,000. Because the Association had resolved the most
significant of its asset quality problems, the OTS terminated the 1990
supervisory agreement on June 15, 1995.
At the same time asset quality was deteriorating, the Association experienced
severe asset/liability management problems. From 1985 through the early 1990's,
the Association purchased large amounts of 30-year U.S. Treasury securities and
long-term mortgage-backed and related securities, financed with short-term
funds. Moreover, the Association also originated long-term fixed-rate mortgage
loans for its portfolio, and purchased adjustable rate securities with interest
rate caps that limited the interest-rate sensitivity benefits of such
instruments. The Association's attempts to reduce its severe exposure to
interest-rate risk have, for several years, caused substantial changes in the
amount of the Association's loans receivable, investment securities, mortgage-
backed and related securities, and the relative proportion of these assets to
the Association's total assets. Changes in asset mix have not only affected the
Association's interest-rate sensitivity, but have also had a direct effect on
the Association's earnings.
The Association's difficulties managing interest-rate risk resulted in the
imposition of a second supervisory agreement with the OTS on July 12, 1991
(which was subsequently terminated on October 29, 1993). The Agreement
required, among other things, that the Association achieve a negative one-year
interest-rate sensitivity gap position of no more than 15% by March 31, 1992.
The interest-rate sensitivity gap is defined as the difference between the
amount of interest-earning assets anticipated, based upon certain assumptions,
to mature or reprice within a specific time period and the amount of interest-
bearing liabilities anticipated, based upon certain assumptions, to mature or
reprice within that same time period. A gap is considered negative when the
amount of interest-rate sensitive liabilities exceeds the amount of interest-
rate sensitive assets. At December 31, 1990 and March 31, 1991, the
Association's one-year interest-rate sensitive gap was a negative 41% and 33%,
respectively.
The Association's problems with asset quality and managing interest-rate
risk, and the attendant supervisory agreements, have hampered asset and deposit
growth, have adversely affected the Association's earnings for the past several
years and have affected the Association's lending focus. Notwithstanding these
problems, the Association's capital exceeds all regulatory requirements.
Over the past four years, the Association's assets have increased very
little, totaling $151.0 million at December 31, 1995 compared to $150.4 million
at December 31, 1991. Moreover, deposits have remained relatively constant
totaling $138.4 million at December 31, 1995 compared to $140.7 million at
December 31, 1991. The Association has in recent years intentionally reduced
assets on occasion, to as low as $137.4 million at December 31, 1993, in order
to improve the Association's position relative to its regulatory capital
requirements in response to its asset quality problems. Notwithstanding steps
to reduce assets, management believes its lending activity has been hampered in
the past by the Association's failure to emphasize one- to four-family mortgage
loans through focused loan origination efforts, intense competition from
mortgage banking organizations in the Association's market area and lending
restrictions related to the 1990 supervisory agreement.
The Association has produced returns on assets that, for many years, have
fallen below industry averages. The Association recorded net losses of $1.6
million and $762,000 for the fiscal years ended December 31, 1989 and 1990,
respectively. Thereafter, for the five years ended December 31, 1995, the
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Association's net income (loss) was $1,007,000, $775,000, $1,130,000, $430,000
and ($73,000), respectively, and the Association's return on assets for these
same periods was .66%, .53%, .81%, .31% and (.05)%, respectively. The
Association's net interest income before provision for loan losses has declined
over the past five years. Moreover, the Association's net income has been
adversely affected by substantial fluctuations in the provision for loan losses,
provision for loss on the sale of investment securities, gains on sale of loans
and salary and employee benefits expenses. Prior to December 31, 1995, the
Association's interest-earning assets to interest-bearing liabilities ratio has
been below industry averages as a result of the Association's high level of real
estate owned. See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS--Average Balance Sheet."
Although the Association resolved significant asset quality problems and took
other steps to improve operating performance in 1995, the Association recorded a
net loss in 1995, because of certain non-recurring items including (i) an
increase in interest expense associated with the Association's program in early
1995 to attract certificates of deposit by matching rates offered by its
competition, (ii) overhead expenses related to the opening of a new branch
office in November, 1994, (iii) the abatement of rent under a lease on the real
estate owned property in central Illinois for several months prior to the sale
of the properties to the tenant and (iv) a provision for loan losses of $100,000
in 1995 as a result of the increase in consumer loans. The Association does not
expect these factors to have an effect on the Association's earnings in periods
following 1995.
In order to diversify and attempt to improve its net interest margin, the
Association redirected its lending efforts in what has turned out to be a
profitable niche business. Since 1993, the Association has concentrated on
originating indirect automobile loans, while also continuing to focus on and
originate one- to four-family residential mortgage loans. The Association
initiated its indirect automobile lending in 1993, growing the portfolio to
$21.6 million at December 31, 1995. The Association has been able to develop a
substantial portfolio of high-yielding indirect automobile loans through the
efforts of its senior lending officer, Gary Richardson, who was hired in 1993
and has substantial experience with this type of lending. See "BUSINESS OF THE
ASSOCIATION--Lending Activities--Consumer Lending--Indirect Auto Loans."
Despite the Association's interest-rate risk, asset quality and earnings
problems in recent years, the Association has maintained a strong capital
position, which will be enhanced by the proceeds raised in the Conversion. At
December 31, 1995, the Association had $11.7 million of retained earnings, or
7.73% of tangible assets, which exceeded all minimum regulatory capital
requirements. At December 31, 1995, the Association's ratios of tangible, core
and risk-based capital to applicable assets were 7.73%, 7.73% and 15.78%,
respectively. See "HISTORICAL AND PRO FORMA CAPITAL COMPLIANCE" and
"SUPERVISION AND REGULATION--The Association--Capital Requirements." As a
result of the Conversion and assuming the Holding Company retains 50% of the net
proceeds of the Conversion at the midpoint of the Estimated Valuation Range,
plus an amount sufficient to fund the ESOP, the Association will have pro forma
stockholders' equity of approximately $16.7 million, or 10.6% of total pro forma
assets.
RECENT DEVELOPMENTS AND STRATEGIES
The Association's Board of Directors has taken significant steps since late
1994 to redirect the Association's operations in order to improve the
Association's operating performance. The Conversion proceeds will be used to
enhance these efforts.
. RESOLUTION OF PROBLEM ASSETS AND TERMINATION OF SUPERVISORY AGREEMENTS. On
November 7, 1995, the Association sold the plant and warehouse in central
Illinois, which it had carried as real estate owned since 1991, at a gain
of $30,000. Accordingly, the Association's real estate owned decreased by
approximately $5.8 million from $6.4 million at December 31, 1994 to
$644,000 at December
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<PAGE>
31, 1995. Moreover, the OTS terminated the Association's July 17, 1990
supervisory agreement in June, 1995. The July 12, 1991 supervisory
agreement had been terminated in 1993. At December 31, 1995, the
Association's classified assets and non-performing assets totaled $2.5
million and $1.2 million, respectively, representing 1.7% and .80% of total
assets, respectively. The remaining $644,000 of real estate owned consists
of real estate held for investment, primarily one property which the
Association did not acquire through foreclosure.
. MANAGEMENT CHANGES. In August, 1995, the Board of Directors appointed the
Association's Senior Vice President, Donald L. Fernandes, President and
Chief Executive Officer, replacing Jon C. Thetard who resigned his
positions with the Association. Mr. Fernandes has been employed by the
Association since 1983, and prior to joining the Association was employed
as an accountant for 4-1/2 years with Ernst & Young. The Association hired
a compliance officer and a mortgage lending officer in 1996 and intends to
hire another mortgage lending officer in the near future. See "MANAGEMENT
OF THE HOLDING COMPANY AND ASSOCIATION--Directors of the Association;" and
"--Executive Officers."
. OPENING OF NEW BRANCH OFFICE. The Association opened its second full-
service branch office in November, 1994 in Bloomington. This branch gives
the Association additional lending and deposit gathering capabilities and
further enhances the Association's presence in Bloomington-Normal. The
Association may use a portion of the proceeds raised in the Conversion to
establish one or more additional branch offices (whether purchased or
built), although no plans or arrangements exist at this time. See "USE OF
PROCEEDS."
. LENDING FOCUS. In past years, the Association has had neither the staff
nor the sustained marketing effort necessary to produce a consistent level
of one- to four-family mortgage loan originations. The Association has
increased its marketing campaign with respect to one- to four-family
mortgage loans, and believes that the addition of two more lending officers
will greatly enhance its ability to compete effectively in this market.
Moreover, the Association has begun a marketing campaign emphasizing the
origination of home equity loans. The Association also intends to continue
to emphasize the origination of indirect auto loans, further enhancing its
market niche in Bloomington-Normal for this type of loan product. To
maintain the quality of its automobile loan portfolio, the Association
recently hired a full-time collections officer who monitors delinquencies
and initiates collection efforts. Over time, the Association plans to use
proceeds from the repayment of mortgage-backed and related securities to
fund additional consumer and one- to four-family mortgage loans. While the
Association has no immediate plans to increase commercial real estate and
commercial business lending, the Association has the ability to originate
such loans, thereby increasing its flexibility to manage interest-earning
assets and improve earnings.
. ASSET/LIABILITY MANAGEMENT. In the past, the Association has relied
heavily on investing in mortgage-backed and related securities and
investment securities to improve its interest-rate risk position. In the
future, the Association intends to redirect funds into short-term consumer
and residential mortgage loans. Moreover, the Association will continue to
sell substantially all one-to four-family fixed-rate mortgage loans with
maturities over 15 years that it originates in the secondary mortgage
market. To further improve its interest rate sensitivity, the Association
intends to make future investments only in securities with short to
intermediate term maturities.
. ASSET GROWTH. The Association recognizes the need to increase its asset
size, and intends to fund this growth through increasing deposits
generally, through increased marketing efforts and through proceeds raised
in the Conversion. On the asset side, the Association intends to increase
its loan portfolio through marketing associated with the new branch and
additional lending efforts. The Association may also use a portion of the
Conversion proceeds to take advantage of growth
27
<PAGE>
opportunities, including the acquisition of other financial institutions.
Currently, there are no specific plans or agreements regarding any such
activities.
USE OF PROCEEDS
The net proceeds from the sale of the Common Stock are expected to range from
$11.6 million, at the minimum of the Estimated Valuation Range, to $15.9
million, at the maximum of the Estimated Valuation Range. At the midpoint of
the Estimated Valuation Range, the estimated net proceeds of the Conversion
would be $13.8 million.
The Holding Company will purchase all of the capital stock of the Association
to be issued in the Conversion. The consideration to be paid by the Holding
Company will be an amount equal to 50% of the proceeds of the sale of the Common
Stock (after expenses). Assuming that the Conversion is consummated at the
midpoint of the Estimated Valuation Range, (i) the Association will receive
approximately $6.9 million or 50% of the net proceeds of the Offering in
exchange for all of its issued and outstanding capital stock, and (ii) the
Holding Company will retain approximately $6.9 million or 50% of the net
proceeds, out of which the Holding Company will make a loan to the Association's
ESOP in the amount of $1.2 million and fund the MRP at a later date in the
amount of $580,000. The ESOP will repay such loan from the Holding Company with
contributions made to the ESOP by the Association and any dividends on the
Common Stock held by the ESOP. The loan will require annual interest and
principal payments over a 10-year period and will bear interest at a fixed rate
established at the prime rate, as reported by the Wall Street Journal, Midwest
Edition, in effect at the time of completion of the Conversion.
The Holding Company intends to invest the net proceeds of the Offering which
it retains initially in short-term and intermediate-term deposits, U.S.
government and federal agency securities and adjustable-rate mortgage-backed
securities. Thereafter, funds retained by the Holding Company will be deployed
in accordance with the Holding Company's business plan as determined by the
Board of directors of the Holding Company, as specific business opportunities or
requirements arise and for general corporate purposes. The net proceeds
retained by the Holding Company may be used to support the future expansion of
operations or diversification into other banking-related businesses and for
other business or investment purposes, including the possible infusion of
additional equity into the Association, the possible payment of dividends and
the possible repurchase of shares of the Holding Company's Common Stock as
permitted by the OTS. See "DIVIDEND POLICY" and "THE CONVERSION--Restrictions
on Repurchases of Common Stock." The Holding Company, upon consummation of the
Conversion, initially will be a unitary savings and loan holding company which,
under existing laws, would generally not be restricted as to investments or as
to the types of business activities in which it may engage, provided that the
Association continues to be a qualified thrift lender under applicable OTS
regulations.
It is expected that the Holding Company's return on equity will initially be
lower than historical levels as the Holding Company and the Association deploy
the proceeds from the Offering. While the Board of Directors and management
recognize this challenge will exist for the foreseeable future, the Holding
Company intends to manage capital through controlled growth, the payment of
regular cash dividends and possibly the payment of periodic special dividends.
In addition, the Holding Company may repurchase the Common Stock as market and
regulatory limits permit.
The Association expects to use the proceeds of the Offering that are made
available to it by the Holding Company in furtherance of its business plan,
which was adopted on February 13, 1996 in contemplation of the Conversion. The
Association will invest such proceeds initially in short-term investment
securities (i.e., remaining maturities ranging up to 12 months) pending their
application pursuant to its business plan. The business plan contemplates
continuation of the Association's current lending and investment strategies
which emphasize one- to four-family mortgage loans, indirect auto loans and
mortgage-backed securities. See "BUSINESS OF THE ASSOCIATION--Lending
Activities;" and
28
<PAGE>
"--Investment Activities." There can be no assurance, however, that the
Association will be able to effectively implement its business plan, as
currently in effect, and the business plan is subject to change by the Board of
Directors. The Association may also use a portion of the net proceeds to pay
dividends to the Holding Company, subject to applicable statutory and regulatory
requirements. See "SUPERVISION AND REGULATION--The Association--Restrictions on
Dividends and Capital Distributions."
The Holding Company and the Association also may use the net proceeds of the
Offering to expand their operations through acquisitions of other financial
institutions or other financial services companies or portions thereof, subject
to applicable regulatory restrictions. However, neither the Association nor the
Holding Company has any pending plans or agreements regarding acquisitions of
any specific financial institutions or other financial services companies or
portions thereof.
DIVIDEND POLICY
Upon consummation of the Conversion, the Board of Directors of the Holding
Company will have the authority to declare and pay dividends on the Common Stock
subject to statutory and regulatory requirements. The Board of Directors of the
Holding Company has not made a decision as to the amount or timing of cash
dividends, if any, on the Common Stock. Declarations and payments of dividends
by the Board of Directors will depend upon a number of factors, including the
amount of the net proceeds retained by the Holding Company, capital
requirements, regulatory limitations, the Association's and the Holding
Company's financial condition and results of operations, tax considerations and
general economic conditions. In order to pay such cash dividends, however, the
Holding Company must have available cash either from the net proceeds raised in
the Conversion and retained by the Holding Company, dividends received from the
Association or earnings on Holding Company assets. In addition, from time to
time in an effort to reduce capital to a desirable level, the Board of Directors
may determine to pay special cash dividends. Special cash dividends, if paid,
may be paid in addition to, or in lieu of, any regular cash dividends. 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.
It is anticipated that a source of income to the Holding Company in the
future could consist of dividends on the Association's stock paid to the Holding
Company. Consequently, future declarations of cash dividends by the Holding
Company could depend upon dividend payments by the Association to the Holding
Company or stock repurchases by the Association, which payments or repurchases
will be subject to various restrictions. The Association will not be permitted
to declare or pay a dividend on or repurchase any of its capital stock if the
effect would be to cause the Association's stockholder's equity to be reduced
below the amount required for the liquidation account established in connection
with the Conversion. See "THE CONVERSION--Effects of Conversion--Liquidation
Rights." In addition, the Association is subject to federal regulatory
restrictions on the declaration and payment of dividends. For information
concerning federal regulations that apply to the Association regarding a savings
institution's ability to make capital distributions including payment of
dividends to its holding company, see "SUPERVISION AND REGULATION--The
Association--Restrictions on Dividends and Capital Distributions." For a
discussion of federal income tax provisions that may limit the ability of the
Association to pay dividends to the Holding Company without causing the amount
distributed to be included in the Association's taxable income, see "FEDERAL AND
STATE TAXATION--Federal Taxation--Distributions."
Unlike the Association, the Holding Company is not subject to federal
regulatory restrictions on the declaration or payment of dividends to its
stockholders, although the source of such dividends could depend upon dividend
payments from the Association in addition to that portion of the net proceeds of
the Conversion retained by the Holding Company and earnings thereon. The
Holding Company is subject, however, to the requirements of Delaware law, which
generally limit dividends to an amount equal to the excess of its net assets
(the amount by which total assets exceed total liabilities) over its stated
capital or, if there is no such excess, to its net profits for the current
and/or immediately preceding fiscal year.
29
<PAGE>
MARKET FOR COMMON STOCK
Neither the Holding Company nor the Association has previously issued capital
stock to the public, and, consequently, there is no established market for the
Common Stock to be issued in the Conversion. The Holding Company has received
conditional approval to have the Common Stock listed as a National Market
Security on the Nasdaq Stock Market under the symbol "EGLB." However, in order
for the Common Stock to be listed as a National Market Security on the Nasdaq
Stock Market, among other things, there must be at least 400 stockholders
holding the outstanding Common Stock and there must be two market makers for the
Common Stock. The Holding Company is unable to determine at this stage whether
the Common Stock will be held, or continue to be held, by at least 400
stockholders following consummation of the Conversion. Trident intends to act
as a market maker for the Common Stock and will assist the Holding Company in
retaining at least one other market maker. The Holding Company will use its
best efforts to encourage and assist market making to establish and maintain a
market for the Common Stock. There can be no assurance, however, that any
additional market makers for the Common Stock will be obtained or that the
Common Stock will be listed as a National Market Security on the Nasdaq Stock
Market or, if listed, will continue to be eligible for such listing. If the
Holding Company should prove unable, for any reason, to list the Common Stock as
a National Market Security or to continue to be eligible for such listing, then
the Holding Company intends to list the Common Stock on the Nasdaq SmallCap
Market, subject to the applicable listing criteria for that market.
Making a market involves maintaining bid and asked 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.
In addition, 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 Holding Company, the Association or any market maker. The smaller the
number of holders of the stock, the less likely a liquid market will develop.
Accordingly, there can be no assurance that an active and liquid trading market
for the Common Stock will develop or, if developed, be maintained, that resales
of the Common Stock can be made at or above the Purchase Price, or that
quotations will be available on the Nasdaq Stock Market as contemplated. In the
absence of a liquid public market for the Common Stock, investors in the Common
Stock could have difficulty disposing of their shares on short notice and should
not view the Common Stock as a short-term investment.
30
<PAGE>
CAPITALIZATION
The following table presents the consolidated capitalization, including
deposits, of the Association as of December 31, 1995, adjustments as a result of
the Conversion, and the pro forma consolidated capitalization of the Holding
Company at that date, after giving effect to the Plan of Conversion.
<TABLE>
<CAPTION>
Pro Forma Consolidated Capitalization
of the Holding Company
Based Upon the Sale of Shares at $10.00 per Share
----------------------------------------------------
Adjusted
Minimum Midpoint Maximum Maximum
The ----------- ---------- ---------- ------------
Association, 1,232,500 1,450,000 1,667,500 1,917,625
Historical Shares Shares Shares Shares/(1)/
------------ ----------- ---------- ---------- ------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Deposits/(2)/............................ $138,396 $ 138,396 $ 138,396 $ 138,396 $ 138,396
======== ========== ========== ========== ==========
Stockholders' equity:
Preferred Stock:
100,000 shares authorized, $.01 par
value per share; none issued or
outstanding............................ $ -- $ -- $ -- $ -- $ --
Common Stock:
5,000,000 shares authorized, $.01 par
value per share; specified number of
shares assumed to be issued and
outstanding............................ -- 12 15 17 19
Additional paid-in capital............... -- 11,633 13,770 15,908 18,367
Common Stock acquired by ESOP/(3)/....... -- (986) (1,160) (1,334) (1,534)
Common Stock acquired by MRP/(4)/........ -- (493) (580) (667) (767)
Retained earnings - substantially
restricted/(5)/......................... 11,677 11,677 11,677 11,677 11,677
-------- ---------- ---------- ---------- ----------
Unrealized holding losses/(6)/........... (162) (162) (162) (162) (162)
-------- ---------- ---------- ---------- ----------
Total stockholders' equity.............. $ 11,515 $ 21,681 $ 23,560 $ 25,439 $ 27,600
======== ========== ========== ========== ==========
</TABLE>
______________
/(1)/ Gives effect to the sale of an additional 250,125 shares in the
Conversion, which may be issued based on a determination by RP Financial that
such issuance is compatible with its determination of an increase in the
appraised pro forma market value of the Common Stock. See "THE CONVERSION--
Stock Pricing and Number of Shares to be Issued."
/(2)/ Withdrawals from deposit accounts for the purchase of Common Stock are
not reflected. Such withdrawals will reduce pro forma deposits by the amounts
thereof.
/(3)/ Assumes that the ESOP will purchase 8% of the Common Stock sold in the
Conversion with funds to be borrowed from the Holding Company. The amount lent
to the ESOP is reflected as a reduction to stockholders' equity. Since the
Holding Company will finance the ESOP debt, the ESOP debt will be eliminated
through consolidation, and no liability will be reflected on the Holding
Company's Consolidated Financial Statements. The amount of Common Stock to be
purchased by the ESOP represents unearned compensation and is, accordingly,
reflected as a reduction to pro forma stockholders' equity. The Association
expects to make discretionary contributions to the ESOP in an amount at least
equal to the annual principal and interest payments on the ESOP debt. As such
payments are made, a corresponding reduction in the charge against
stockholders' equity will occur. See "MANAGEMENT OF THE HOLDING COMPANY AND
ASSOCIATION--Employee Benefit Plans--Employee Stock Ownership Plan." For a
discussion of recent accounting developments involving ESOPs, see
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS--Impact of New Accounting Pronouncements."
31
<PAGE>
/(4)/ Assumes that an amount of stock equal to 4% of the Common Stock sold in
the Conversion will be purchased by the MRP in the open market with funds
contributed to the MRP by the Holding Company no sooner than six months after
completion of the Conversion. In accordance with generally accepted accounting
principles ("GAAP"), the amount of Common Stock to be purchased by the MRP
represents unearned compensation and will, accordingly, be reflected as a
reduction to pro forma stockholders' equity. If the MRP is funded entirely
through purchases of authorized but previously unissued shares from the Holding
Company, the percentage interests of stockholders of the Holding Company at the
time of Conversion will be diluted, at the time of such purchase, by
approximately 4%. As shares of Common Stock granted to officers and directors
of the Association vest, a charge to compensation expense and a corresponding
reduction in the charge against stockholders' equity will occur. For
additional information with respect to the Board of Directors' intentions
concerning the implementation of the MRP, see "MANAGEMENT OF THE HOLDING
COMPANY AND ASSOCIATION--Employee Benefit Plans--Management Recognition Plan."
/(5)/ Retained earnings of the Association are restricted by the minimum
capital requirements of the OTS, and will be restricted by the liquidation
account to be established upon Conversion. See "SUPERVISION AND REGULATION,"
"THE CONVERSION--Effects of Conversion--Liquidation Rights" and Note 12 of
Notes to Consolidated Financial Statements included elsewhere herein. Retained
earnings do not reflect the impact of the recapture of the bad debt reserve in
the unlikely event of liquidation.
/(6)/ Relates to available-for-sale securities.
HISTORICAL AND PRO FORMA CAPITAL COMPLIANCE
The following table presents the Association's historical and pro forma
capital position relative to its capital requirements at December 31, 1995. The
amount of capital infused into the Association for purposes of the following
table is 50% of the net Conversion proceeds. For a discussion of the
assumptions underlying the pro forma capital calculations presented below, see
"CAPITALIZATION" and "PRO FORMA DATA." The definitions of the terms used in the
table are those provided in the capital regulations issued by the OTS. For a
discussion of the capital standards applicable to the Association, see
"SUPERVISION AND REGULATION--The Association--Capital Requirements."
32
<PAGE>
<TABLE>
<CAPTION>
PRO FORMA AT DECEMBER 31, 1995
---------------------------------------------------------------------------------------
15% above
Minimum of Midpoint of Maximum of Maximum of
Estimated Estimated Estimated Estimated
Valuation Range Valuation Range Valuation Range Valuation Range
------------------- ------------------- ------------------- --------------------
1,232,500 Shares 1,450,000 Shares 1,667,500 Shares 1,917,625 Shares
At December 31, 1995 at $10.00 Per Share at $10.00 Per Share at $10.00 Per Share at $10.00 Per Share
-------------------- ------------------- ------------------- ------------------- --------------------
Percent Percent Percent Percent Percent
of of of of of
Amount Assets Amount Assets/(1)/ Amount Assets/(1)/ Amount Assets/(1)/ Amount Assets/(1)/
------- ---------- ------- ----------- ------- ----------- ------- ------- ------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
(Dollars in Thousands)
GAAP Capital/(2)/..... $11,515 7.63% $15,859 10.15% $16,668 10.60% $17,477 11.04% $18,407 11.55%
======= ====== ======= ====== ======= ====== ======= ====== ======= ======
Tangible Capital:/(3)/
Capital level......... $11,677 7.73% $16,021 10.24% $16,830 10.69% $17,639 11.13% $18,569 11.64%
Requirement........... 2,267 1.50% 2,347 1.50% 2,362 1.50% 2,376 1.50% 2,393 1.50%
------- ------ ------- ------ ------- ------ ------- ------ ------- ------
Excess................ $ 9,410 6.23% $13,674 8.74% $14,468 9.19% $15,263 9.63% $16,176 10.14%
======= ====== ======= ====== ======= ====== ======= ====== ======= ======
Core Capital:
Capital level......... $11,677 7.73% $16,021 10.24% $16,830 10.69% $17,639 11.13% $18,569 11.64%
Requirement/(4)/...... 4,535 3.00% 4,694 3.00% 4,723 3.00% 4,753 3.00% 4,787 3.00%
------- ------ ------- ------ ------- ------ ------- ------ ------- ------
Excess................ $ 7,142 4.73% $11,327 7.24% $12,107 7.69% $12,886 8.13% $13,782 8.64%
======= ====== ======= ====== ======= ====== ======= ====== ======= ======
Risk-Based Capital:
Capital level/(5)/.... $12,487 15.78% $16,831 20.99% $17,640 21.94% $18,449 22.89% $19,379 23.98%
Requirement/(6)/...... 6,330 8.00% 6,416 8.00% 6,431 8.00% 6,447 8.00% 6,465 8.00%
------- ------ ------- ------ ------- ------ ------- ------ ------- ------
Excess................ $ 6,157 7.78% $10,415 12.99% $11,209 13.94% $12,002 14.89% $12,914 15.98%
======= ====== ======= ====== ======= ====== ======= ====== ======= ======
</TABLE>
/(1)/ Tangible and core capital levels are shown as a percentage of total
adjusted assets; risk-based capital levels are shown as a percentage of
risk-weighted assets.
/(2)/ GAAP capital at December 31, 1995 represents retained earnings less
unrealized holding losses on available-for-sale securities. Assumes that
the Association receives 50% of the net proceeds.
/(3)/ Unrealized gains and losses on securities available-for-sale are excluded
from tangible, core and risk-based capital.
/(4)/ In April, 1991, the OTS proposed a core capital requirement for savings
associations comparable to the requirement for national banks that became
effective on November 30, 1990. This proposed core capital ratio is 3% of
total adjusted assets for savings associations that receive the highest
supervisory rating for safety and soundness ("CAMEL" rating), with a 4% to
5% core capital requirement for all other savings associations. See
"SUPERVISION AND REGULATION--The Association--Capital Requirements."
/(5)/ Includes $810,000 of general valuation allowances, all of which qualify as
supplementary capital. See "SUPERVISION AND REGULATION--The Association--
Capital Requirements."
/(6)/ Assumes reinvestment of net proceeds in 20% risk-weighted assets.
33
<PAGE>
PRO FORMA DATA
Under the Plan of Conversion, the Common Stock must be sold at an aggregate
price equal to its estimated pro forma market value, based upon an independent
valuation. The actual net proceeds from the sale of the Common Stock cannot be
determined until the Conversion is completed. The Estimated Valuation Range as
of April 19, 1996 is from a minimum of $12.3 million to a maximum of $16.7
million, with a midpoint of $14.5 million. Based upon a share price of $10.00
per share, the maximum number of shares issued would be 1,667,500, the minimum
would be 1,232,500, and the midpoint would be 1,450,000.
The pro forma consolidated net income of the Holding Company for the year
ended December 31, 1995, has been calculated as if the Conversion had been
completed at the beginning of the period and the estimated net proceeds received
by the Holding Company and the Association had been invested in assets yielding
5.14%. Such yield represents the approximate yield management believes the
Holding Company could have obtained on one-year U.S. Treasury bills as of
December 31, 1995. Such yield is viewed by the Association's management as
being more indicative of actual yield than an arithmetic average of the weighted
average yield on all of the Association's interest-earning assets and the
weighted average rate paid on its deposits for the respective periods. As
discussed under "USE OF PROCEEDS," the Holding Company expects to retain 50% of
the net conversion proceeds. A pro forma after-tax return of 3.39% is used for
the Holding Company and the Association in the year ended December 31, 1995,
after giving effect to an effective tax rate of 34%. See "FEDERAL AND STATE
TAXATION."
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, 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 loss and retained
earnings of the Association and the pro forma consolidated net income and
stockholders' equity of the Holding Company at and for the year ended December
31, 1995, 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 reserved shares will
initially be in an aggregate amount equal to 10% of the shares sold in the
Conversion; (ii) withdrawals from deposit accounts for the purpose of purchasing
Common Stock in the Conversion; or (iii) the establishment of a liquidation
account for the benefit of Eligible Account Holders and Supplemental Eligible
Account Holders. See "MANAGEMENT OF THE HOLDING COMPANY AND ASSOCIATION--
Employee Benefit Plans--Stock Option Plan," "THE CONVERSION--Stock Pricing and
Number of Shares to be Issued;" and "--Effects of Conversion--Liquidation
Rights."
In determining net proceeds from the Conversion, total conversion expenses
were derived assuming that fixed expenses would be $496,000 (including $45,000
for out-of-pocket expenses payable to Trident), plus fees paid to Trident. In
calculating fees paid to Trident for its services as financial adviser,
consultant and selling agent in the Conversion, the pro forma table assumes (i)
no commission was paid on $825,000 of shares sold to directors, officers,
employees and their associates, (ii) 8% of the total shares sold in the
Conversion were sold to the ESOP at no commission, and (iii) the remaining
shares were sold at a 1.75% commission. These assumptions represent management's
estimate, based on consultations with Trident, that all of the shares sold in
the Conversion will be sold to Eligible Account Holders, Supplemental Account
Holders, Other Members and Preferred Other Purchasers at a commission of 1.75%
of the amount of stock sold. Management cannot know how the stock will be
distributed in the Conversion among eligible subscribers and other purchasers
until completion of the Conversion. Should the actual distribution of stock
34
<PAGE>
orders be inconsistent with management's assumptions for calculating Trident's
fees, the fees paid to Trident will be less than those reflected in the table.
For purposes of this expense calculation, a Syndicated Community Offering has
not been assumed. For additional information regarding a Syndicated Community
Offering, see "THE CONVERSION--Syndicated Community Offering." Actual expenses
may be more or less than estimated.
For purposes of this pro forma presentation, it has been assumed that the
ESOP will purchase 8% of the Common Stock sold in the Conversion with funds to
be borrowed from the Holding Company. The loan will require annual interest and
principal payments over a ten-year period and will bear interest at a fixed rate
established at the prime rate, as reported by the Wall Street Journal, Midwest
Edition, in effect at the time of completion of the Conversion. The amount lent
to the ESOP is reflected as a reduction to pro forma stockholders' equity. The
Association expects to make discretionary contributions to the ESOP in an amount
at least equal to the principal and interest payments on the ESOP debt. Pro
forma net income has been adjusted to give effect to such contributions, based
upon ten annual equal installments of principal on a tax-effected basis for each
of the periods. Income earned by the Holding Company on the ESOP debt offsets
the interest paid by the Association to the ESOP to amortize the ESOP debt;
accordingly, only the principal payments on the ESOP debt are recorded as an
expense (tax-effected) to the Holding Company on a consolidated basis. Such
contributions will be accounted for as employee compensation and benefits
expense. The contributions to repay principal and interest on the ESOP debt are
tax deductible to the Association and, therefore, have been tax-effected for
purposes of these tables assuming an effective tax rate of 34% for the year
ended December 31, 1995. The amount of Common Stock to be purchased by the ESOP
represents unearned compensation and is, accordingly, reflected as a reduction
to pro forma stockholders' equity. As Common Stock is allocated to ESOP
participants, a reduction in the charge against stockholders' equity will occur.
No reinvestment is assumed on proceeds contributed to fund the ESOP. See
"MANAGEMENT OF THE HOLDING COMPANY AND ASSOCIATION--Employee Benefit Plans--
Employee Stock Ownership Plan." For a discussion of recent accounting
developments involving ESOPs, see "MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS--Impact of New Accounting
Pronouncements." If an oversubscription for the Common Stock occurs and the
ESOP is not able to purchase up to 8% of the Common Stock sold in the
Conversion, under certain circumstances the ESOP may purchase Common Stock in
the open market or authorized but unissued shares of Common Stock from the
Holding Company at the then prevailing market price of the Common Stock. For
additional information, see "MANAGEMENT OF THE HOLDING COMPANY AND ASSOCIATION--
Employee Benefit Plans--Employee Stock Ownership Plan." If the ESOP purchases
Common Stock after the Conversion, the market value of the Common Stock may be
more or less than the Purchase Price and the pro forma information contained in
the following table may not represent the actual effect on the Holding Company's
consolidated net income or stockholders' equity.
For purposes of the following table, the Purchase Price of $10.00 was
utilized to calculate the ESOP expense. The Association intends to record
compensation expense related to the ESOP in accordance with Statement of
Position 93-6, "Employers' Accounting for Employee Stock Ownership Plans,"
issued by the American Institute of Certified Public Accountants ("SOP 93-6").
As a result, to the extent the value of the Common Stock appreciates over time,
compensation expense related to the ESOP will increase. SOP 93-6 changes the
earnings per share computations for leveraged ESOPs to include as outstanding
only shares that have been committed to be released to participants. For
purposes of the following table, it is assumed that the ESOP shares purchased in
the Conversion were committed to be released at December 31, 1995. See
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS--Impact of New Accounting Pronouncements."
35
<PAGE>
The following table for the year ended December 31, 1995 assumes that an
amount of stock equal to 4% of the Common Stock sold in the Conversion will be
purchased by the MRP with funds contributed to the MRP by the Holding Company no
sooner than six months after completion of the Conversion. In accordance with
GAAP, the amount of Common Stock to be purchased by the MRP will represent
unearned compensation and will, accordingly, be reflected as a reduction to
stockholders' equity in future periods. As shares of Common Stock granted to
officers and directors of the Association pursuant to the MRP vest, a
corresponding reduction in the charge against stockholders' equity will occur.
For additional information with respect to the Board of Directors' intentions
concerning the implementation of the MRP, see "MANAGEMENT OF THE HOLDING COMPANY
AND ASSOCIATION--Employee Benefit Plans--Management Recognition Plan."
Following consummation of the Conversion and stockholder approval, the MRP
may purchase outstanding shares of Common Stock in the open market at the then
prevailing market price or purchase authorized but unissued shares of Common
Stock from the Holding Company (which the Holding Company intends to reserve for
issuance) at the then prevailing market price of the Common Stock. It is
impossible to predict the price for the Common Stock on the date the MRP will
purchase the stock; accordingly, it is impossible to predict the precise effect
the MRP purchases will have on the Holding Company's consolidated net income.
However, management expects that the Holding Company's consolidated net income
will be reduced by approximately $77,000 during the Holding Company's fiscal
year in which the first 20% of the MRP awards are vested in recipients during
the twelve months following stockholder approval of the plan and stockholders'
equity will be reduced by $580,000 based on the following assumptions: (i) the
MRP purchases 58,000 shares of Common Stock (i.e., 4% of outstanding shares of
Common Stock based on the midpoint of the Estimated Valuation Range) immediately
after stockholders approve the MRP (currently expected sometime during calendar
year 1997); (ii) the market value of the Common Stock is $10.00 per share on the
date of the purchase by the MRP; and (iii) the Holding Company has an effective
tax rate of 34%.
THE PRO FORMA DATA PRESENTED BELOW SHOULD NOT BE RELIED UPON AS INDICATIVE
OF THE ACTUAL FINANCIAL POSITION OR RESULTS OF CONTINUING OPERATIONS THAT WILL
BE EXPERIENCED BY THE HOLDING COMPANY AFTER THE CONVERSION.
STOCKHOLDERS' EQUITY REPRESENTS THE DIFFERENCE BETWEEN THE STATED AMOUNTS
OF CONSOLIDATED ASSETS AND CONSOLIDATED 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 THEIR 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.
36
<PAGE>
<TABLE>
<CAPTION>
At or For the Year Ended December 31, 1995
--------------------------------------------------------------------------
<S> <C> <C> <C> <C>
15% Above
Minimum of Midpoint of Maximum of Maximum of
Estimated Estimated Estimated Estimated
Valuation Range Valuation Range Valuation Range Valuation Range
---------------- ---------------- ---------------- ----------------
1,232,500 1,450,000 1,667,500 1,917,625
Shares at $10.00 Shares at $10.00 Shares at $10.00 Shares at $10.00
Per Share Per Share Per Share Per Share/(1)/
---------------- ---------------- ---------------- ----------------
(Dollars in Thousands, except per share amounts)
Gross proceeds.................................. $ 12,325 $ 14,500 $ 16,675 $ 19,176
Less: Estimated offering expenses............... (680) (715) (750) (790)
---------- ---------- ---------- ----------
Estimated net proceeds........................ $ 11,645 $ 13,785 $ 15,925 $ 18,386
Less: Proceeds to fund ESOP..................... (986) (1,160) (1,334) (1,534)
Proceeds to fund MRP.......................... (493) (580) (667) (767)
---------- ---------- ---------- ----------
Estimated investable net proceeds............. $ 10,166 $ 12,045 $ 13,924 $ 16,085
========== ========== ========== ==========
Consolidated net income (loss):
Historical..................................... $ (73) $ (73) $ (73) $ (73)
Pro forma income on investable
net proceeds................................. 345 409 472 546
Pro forma ESOP adjustments..................... (65) (77) (88) (101)
Pro forma MRP adjustments...................... (65) (77) (88) (101)
---------- ---------- ---------- ----------
Pro forma consolidated
net income................................... $ 142 $ 182 $ 223 $ 271
========== ========== ========== ==========
Consolidated net income (loss) per share:/(2)/
Historical..................................... $ (0.06) $ (0.05) $ (0.05) $ (0.04)
Pro forma income on investable
net proceeds................................. .30 .30 .31 .31
Pro forma ESOP adjustments..................... (0.06) (0.06) (0.06) (0.06)
Pro forma MRP adjustments...................... (0.06) (0.06) (0.06) (0.06)
---------- ---------- ---------- ----------
Pro forma consolidated
net income per share......................... $ 0.12 $ 0.13 $ 0.14 $ 0.15
========== ========== ========== ==========
Consolidated stockholders' equity:/(3)/
Historical/(5)/................................ $ 11,515 $ 11,515 $ 11,515 $ 11,515
Estimated net proceeds......................... 11,645 13,785 15,925 18,386
Less: Common stock acquired by ESOP............ (986) (1,160) (1,334) (1,534)
Less: Common stock acquired by MRP............. (493) (580) (667) (767)
---------- ---------- ---------- ----------
Pro forma consolidated
stockholders' equity......................... $ 21,681 $ 23,560 $ 25,439 $ 27,600
========== ========== ========== ==========
Consolidated stockholders' equity per
share:/(4)/
Historical..................................... $ 9.34 $ 7.94 $ 6.91 $ 6.00
Estimated net proceeds......................... 9.45 9.51 9.55 9.59
Less: Common stock acquired by ESOP............ (0.80) (0.80) (0.80) (0.80)
Less: Common stock acquired by MRP............. (0.40) (0.40) (0.40) (0.40)
---------- ---------- ---------- ----------
Pro forma consolidated
stockholders' equity per share............... $ 17.59 $ 16.25 $ 15.26 $ 14.39
========== ========== ========== ==========
Offering price as a percentage of pro
forma stockholders' equity per share......... 56.9% 61.5% 65.5% 69.5%
Ratio of offering price to pro forma net
income per share............................. 83.3x 76.9x 71.4x 66.7x
</TABLE>
37
<PAGE>
_______________
/(1)/ Gives effect to the sale of an additional 250,125 shares in the
Conversion, which may be issued based on a determination by RP Financial
that such issuance is compatible with its determination of an increase in
the appraised pro forma market value of the Common Stock. See "THE
CONVERSION--Stock Pricing and Number of Shares to be Issued."
/(2)/ The weighted average number of shares used to calculate this per share
information was 1,143,760, 1,345,600, 1,547,440 and 1,779,556 at the
minimum, midpoint, maximum and 15% above the maximum of the Estimated
Valuation Range, respectively.
/(3)/ Stockholders' equity represents the excess of the assets of the
Association over its liabilities stated in accordance with GAAP. This
amount is not intended to represent fair market value or amounts, if any,
that would be available for distribution to stockholders in the event of
liquidation. Stockholders' equity does not take into account the effect of
the liquidation account to be established in the Conversion or the impact
of the bad debt reserve in the event of liquidation. See "FEDERAL AND
STATE TAXATION," "THE CONVERSION--Effects of Conversion--Liquidation
Rights" and Notes 8 and 12 of Notes to Consolidated Financial Statements
included elsewhere herein. In addition, stockholders' equity has not been
adjusted to reflect the difference between the carrying values of loans
and other assets and their market value.
/(4)/ The number of shares used to calculate this per share information was
1,232,500, 1,450,000, 1,667,500 and 1,917,625 at the minimum, midpoint,
maximum and 15% above the maximum of the Estimated Valuation Range,
respectively.
/(5)/ Includes retained earnings of $11,677,175, less $162,000 for unrealized
losses related to securities available for sale. See Note 2 to
Consolidated Financial Statements.
38
<PAGE>
FIRST FEDERAL SAVINGS AND LOAN
ASSOCIATION OF BLOOMINGTON
CONSOLIDATED STATEMENTS OF OPERATIONS
The Consolidated Statements of Operations of the Association for each of
the three years ended December 31, 1995 have been audited by Ernst & Young LLP,
independent auditors, whose report thereon appears elsewhere in this Prospectus.
The following statements should be read in conjunction with the Association's
Consolidated Financial Statements and related notes included elsewhere herein.
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
-----------------------------------------
1995 1994 1993
-----------------------------------------
<S> <C> <C> <C>
Interest income:
Interest and fees on loans................................................ $ 6,898,803 $5,807,961 $ 6,146,817
Interest on mortgage-backed securities.................................... 2,229,938 2,077,823 2,234,169
Interest on investment securities......................................... 803,762 708,778 531,553
----------- ---------- -----------
Total interest income................................................ 9,932,503 8,594,562 8,912,539
Interest expense:
Interest on passbooks..................................................... 493,696 473,665 473,740
Interest on MMDA and NOWs................................................. 189,042 237,673 267,236
Interest on certificates of deposit....................................... 6,611,714 4,542,525 5,097,084
----------- ---------- -----------
Interest on deposits................................................. 7,294,452 5,253,863 5,838,060
Interest on borrowings.................................................... 81,146 141,579 --
----------- ---------- -----------
Total interest expense............................................... 7,375,598 5,395,442 5,838,060
----------- ---------- -----------
Net interest income before provision for loan losses.................... 2,556,905 3,199,120 3,074,479
Provision for loan loss................................................... 100,000 (31,691) (3,506)
----------- ---------- -----------
Net interest income after provision for loan losses..................... 2,456,905 3,230,811 3,077,985
Non-interest income:
Gains on loans sold....................................................... 51,266 25,620 1,052,920
Other income.............................................................. 343,413 228,733 153,362
----------- ---------- -----------
Total non-interest income............................................ 394,679 254,353 1,206,282
Non-interest expenses:
Salaries and employee benefits............................................ 1,618,469 1,514,227 1,361,600
Net occupancy expenses.................................................... 551,068 423,009 391,808
Federal deposit insurance premium......................................... 334,776 319,208 247,735
Data processing expense................................................... 222,829 186,271 143,279
Other expenses............................................................ 226,967 390,647 439,666
----------- ---------- -----------
Total non-interest expense........................................... 2,954,109 2,833,362 2,584,088
----------- ---------- -----------
Income (loss) before federal taxes...................................... (102,525) 651,802 1,700,179
Federal income taxes (expense) benefit.................................... 29,500 (221,500) (570,000)
----------- ---------- -----------
Net income (loss)..................................................... $ (73,025) $ 430,302 $ 1,130,179
=========== ========== ===========
</TABLE>
See Notes to Consolidated Financial Statements.
39
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
GENERAL
Management's discussion and analysis of financial condition and results of
operations is intended to assist in understanding the Association's financial
condition, changes in financial condition and results of operations. The
information contained in this section should be read in conjunction with the
Consolidated Financial Statements, the accompanying Notes to Consolidated
Financial Statements and the other sections contained in this Prospectus.
MANAGEMENT STRATEGY
Management's strategy, as reflected in the Association's business plan, is
to continue its focus as a community-oriented institution serving its local
markets. The Association maintains three full service offices which are all
located in McLean County. Two of the offices, including the Association's
headquarters, are located in Bloomington, and the third office is located in
City of LeRoy. The Association maintains a healthy capital position and in
recent periods has successfully limited its interest rate risk, credit risk and
liquidity risk through the pursuit of conservative lending and investment
strategies. In general, the Association's strategies have been effective in
controlling risk; particularly, with the recent disposition of a large
commercial property held as real estate owned, which significantly reduced the
Association's non-performing asset balance. The Association sold the property
for cash, all of which was paid at closing by the purchaser. The Association
did not enter into any unusual terms or conditions (including guarantees or
other accommodations) in order to facilitate the sale of this property.
However, the Association's earnings have been depressed during the past two
fiscal years. See "--Comparison of Operating Results for the Years Ended
December 31, 1995 and 1994."
The Association's strategies, as set forth in its business plan, continue
to emphasize the control of interest rate, credit and liquidity risks, while
improving earnings primarily by strengthening net interest margin through a
focus on core business activities. The Association's business strategy is
designed to: (1) maintain a strong capital level; (2) maintain a high level of
asset quality; (3) limit exposure to fluctuations in market interest rates; (4)
emphasize local originations of fixed and adjustable rate one- to four-family
residential mortgage loans and consumer loans (including indirect auto loans);
and (5) continue to emphasize high quality customer service with a competitive
service fee structure. To most effectively achieve it's goals and objectives,
the Association will seek to maintain a positive work environment which promotes
the continued development of a knowledgeable, professional and stable work
force.
COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1994
GENERAL. The Association's net loss for the year ended December 31, 1995
was $73,000, as compared to net income of $430,000 for the year ended December
31, 1994. The decrease in income was primarily attributable to a decline in net
interest income.
NET INTEREST INCOME. Net interest income was $2,557,000 for the year ended
December 31, 1995 as compared to $3,199,000 for the year ended December 31,
1994, a decrease of $642,000 or 20.1%. Interest income increased 15.6% to
$9,933,000 during 1995 as compared to $8,594,000 during 1994. The increase was
primarily due to an increase in the average balance of interest-earning assets
of 9.9% during 1995 to $138.2 million, up from $125.7 million in 1994. The level
of interest-earning assets increased due to the attraction of new deposit
accounts during 1995 and the sale of a large commercial property previously held
as real estate owned. The weighted average yield on interest-earning assets
increased to 7.19% in 1995 as
40
<PAGE>
compared to 6.84% during 1994. Interest income from loans increased $1,091,000
or 18.8% in 1995 as the average loan balances increased to $87.8 million in 1995
from $75.3 million during 1994. Interest on mortgage-backed securities increased
$152,000 to $2,230,000 in 1995 versus $2,078,000 in 1994. Interest income from
investments increased to $804,000 during 1995, from $709,000 in 1994, an
increase of $95,000 or 13.4%.
Interest expense increased $1,981,000 during 1995 to $7,376,000, compared
to $5,395,000 during 1994. The increase was due to a combination of factors.
The opening by the Association of a new branch office in November of 1994 and
the commencement of a marketing strategy of matching competitors' rates on
fixed-rate, fixed-term certificates of deposit beginning in December, 1994
resulted in an increase of $15.9 million in the average balances of certificates
of deposit during 1995. Certificates of deposit increased to an average of
82.8% of interest-bearing liabilities during 1995 versus an average of 78.1%
during 1994. This increase in time deposits came during and immediately
following a period of rising interest rates. The weighted average rates paid on
all interest-bearing liabilities increased to 5.36% in 1995, as compared to
4.30% in 1994. The weighted average rate paid on certificates of deposit
increased to 5.81% during 1995 from 4.64% during 1994. The matching rate
marketing strategy was discontinued in July, 1995; however, most of the growth
was experienced prior to the change in strategy and before rates began to
decline during the last half of 1995.
PROVISION FOR LOAN LOSSES. A provision for loan losses of $100,000 was
recorded during the year ended December 31, 1995 compared to a negative
provision of $32,000 for the year ended December 31, 1994. An analysis of loan
quality in 1994 and 1993 indicated a slight reduction in the allowance was
appropriate. In 1995, a $100,000 provision for loan losses was deemed prudent.
This increase related principally to the consumer loan portfolio, which
continued to increase in 1995. While delinquencies and charge-offs on consumer
loans actually improved during 1995 (compared to 1994), management concluded,
after a review of industry practice and experience, that actual losses on the
consumer loan portfolio may be higher than the Association's experience to date
would indicate. Management will continue to refine its method of estimating
loan losses as appropriate and as additional experience with this type of
lending is developed. See "BUSINESS OF THE ASSOCIATION--Lending Activities--
Consumer Lending-Indirect Auto Loans." Non-performing loans represented .57% of
total gross loans at December 31, 1995 and .47% at December 31, 1994. The
allowance for loan losses as a percentage of total non-performing loans was
176.8% at December 31, 1995 and 219.4% at December 31, 1994. As a percentage of
total loans, the allowance was 1.01% at December 31, 1995, compared to 1.04% one
year earlier. Additionally, non-performing assets declined by $5,649,000 to
$1,203,000 at December 31, 1995 compared to $6,852,000 at December 31, 1994, due
primarily to the sale of a large commercial property held as real estate owned
during 1995.
NON-INTEREST INCOME. Total non-interest income increased to $395,000 for
the year ended December 31, 1995 from $254,000 for the year ended December 31,
1994. The increase was due primarily to the reversal of a valuation allowance
of $100,000 related to loans held for sale which had been established at
December 31, 1994. The 1994 valuation allowance was recorded because of a
decline in the market value of the loans held for sale. During the first part
of 1995, interest rates declined and the market value of the loans increased.
The loans were subsequently sold in 1995 resulting in a net loss of $20,000,
and, accordingly, the valuation allowance was reversed. Gains on loans sold
increased to $51,000 in 1995 from $26,000 in 1994. Also during 1995, other loan
fees increased $10,000 compared to 1994.
NON-INTEREST EXPENSE. Total non-interest expense increased $121,000 to
$2,954,000 during the year ended December 31, 1995, compared to $2,833,000
during 1994. The principal component of non-interest expense is compensation and
employee benefits, which increased to $1,618,000 during 1995, versus $1,514,000
during 1994, an increase of $104,000 or 6.9%. Included in this increase was a
payment of
41
<PAGE>
$55,000 made to a former employee as part of a severance agreement. Occupancy
expenses increased to $551,000 in 1995 from $423,000 in 1994 due primarily to
the depreciation, maintenance and other expenses related to the new branch
office which opened in November, 1994. Data processing expenses increased
$37,000 or 19.6% in 1995 compared to 1994 due primarily to having one full
year's expenses related to checking statement and document imaging services
performed by a third-party vendor starting in September, 1994. Other non-
interest expenses declined $164,000 to $227,000 during 1995, from $391,000 in
1994, primarily due to the provision for loss on loans held for sale of $100,000
recorded as non-interest expense in 1994. In addition, advertising expenses
decreased $40,000 because special checking account promotional advertising done
in 1994 was not repeated in 1995. Also, included in this category were decreases
of $13,000 in office supplies and $4,000 in postage in 1995 compared to 1994,
also related to the checking statement and document imaging that was no longer
done directly by the Association's personnel.
INCOME TAX EXPENSE. The Association recorded an income tax benefit of
$29,500 for 1995 as compared to income tax expense of $221,500 for 1994. The
fluctuation is directly attributable to the change in net pre-tax income. The
effective tax benefit rate for 1995 was 28.8% compared to an effective rate of
34% in 1994.
COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED DECEMBER 31, 1994 AND 1993
GENERAL. Net income declined to $430,000 for the year ended December 31,
1994 compared to $1,130,000 for the year ended December 31, 1993. The decrease
was due primarily to a decrease in gains and sales of loans in 1994 compared to
1993. Gains on the sales of loans in 1994 were $26,000 compared to $1,053,000
during 1993.
NET INTEREST INCOME. Net interest income increased $125,000 or 4.1% to
$3,199,000 for the year ended December 31, 1994 compared to $3,074,000 for the
year ended December 31, 1993. Interest income declined $319,000 or 3.6% during
1994 to $8,594,000 compared to $8,913,000 one year earlier. The decline in
interest income was due to both a reduction in the average level of interest-
earning assets to $125.7 million in 1994 from $129.4 million in 1993 and in the
weighted-average yield on interest-earning assets to 6.84% for 1994, from 6.89%
in 1993. Interest income from loans declined $339,000 due primarily to a
reduction in yield, as the weighted average yield on loans was 7.71% during 1994
compared to 8.24% in 1993. Interest from mortgage-backed securities decreased
$156,000 or 7.0% in 1994 compared to 1993, while interest from investments
increased to $709,000 in 1994 from $532,000 in 1993, an increase of 33.3%.
Interest expense declined to $5,395,000 for the year ended December 31,
1994 compared to $5,838,000 for 1993. The decrease is due primarily to the
decline in the weighted-average cost of interest-bearing liabilities of 32 basis
points to 4.30% in 1994 from 4.62% in 1993. The average level of interest-
bearing liabilities declined 0.7% during 1994 from 1993.
PROVISION FOR LOAN LOSSES. Based on a review of loan quality, a negative
provision of $32,000 was recorded in 1994, a decrease from a negative provision
of $3,000 recorded in 1993. Non-performing loans declined to 0.47% of total
loans during 1994, compared to 1.19% at December 31, 1993. The allowance for
loan losses as a percentage of non-performing loans was 219.4% at December
31, 1994 as compared to 115.1% at December 31, 1993. As a percentage of total
loans, the allowance was 1.04% at December 31, 1994 versus 1.38% at December 31,
1993.
NON-INTEREST INCOME. Total non-interest income decreased to $254,000
during 1994 from $1,206,000 in 1993. The decline was primarily associated with
a significant decrease in sales of mortgage loans during 1994. The Association
sold $44.8 million of fixed-rate mortgage loans during 1993 to restructure the
42
<PAGE>
Association's portfolio to further protect the Association in the event of
rising interest rates in future periods. The sale was a departure from the
Association's practice at the time of holding most loans for investment instead
of for sale. See Note 3 to Notes to Consolidated Financial Statements for
additional information with respect to loan sales in 1993. Loans sold in 1994
declined to $2.3 million and recognized gains on the sale of those loans were
$26,000 in 1994 compared to gains of $1,053,000 recognized in 1993.
NON-INTEREST EXPENSE. Total non-interest expense increased $249,000 or
9.6% for the year ended December 31, 1994 to $2,833,000 versus $2,584,000 for
the year ended December 31, 1993. Compensation and benefits increased $152,000
or 11.2% to $1,514,000 in 1994, compared to $1,362,000 for 1993. Compensation
increased partly due to staff increases in 1994 in anticipation of the opening
of a new branch office in November, 1994. Net occupancy expenses increased to
$423,000 in 1994 compared to $392,000 in 1993, an increase of $31,000 or 7.9%.
This increase resulted partly from a full year of depreciation expense in 1994
related to capital improvements made in the main office and new equipment
purchased in 1993 as well as additional expenses related to the opening of the
new branch office in November, 1994. Federal deposit insurance premiums
increased $71,000 or 28.6% to $319,000 in 1994 from $248,000 in 1993. Data
processing expenses increased to $186,000 in 1994 versus $143,000 in 1993.
Other non-interest expense declined $49,000 or 11.1% in 1994 to $391,000 from
$440,000 in 1993. This decrease was due to a net reduction in real estate owned
expenses in 1994 compared to 1993, partially offset by the provision for loss on
loans held for sale of $100,000 recorded as non-interest expense in 1994.
INCOME TAXES. Income tax expense was $221,500 for the year ended December
31, 1994 and $570,000 for the year ended December 31, 1993. The variation in
tax expense is directly attributable to fluctuations in pre-tax net income. The
effective tax rate was 34% for 1994 and 33.5% for 1993.
AVERAGE BALANCE SHEET
The Association's net income depends heavily on its net interest income,
which represents the difference between income on interest-earning assets
(primarily loans, mortgage-backed and related securities and investment
securities) and expense on interest-bearing liabilities (primarily deposit
accounts). Net interest income, in turn, depends upon the volumes of interest-
earning assets and interest-bearing liabilities and the interest rate spread,
which represents the difference between the interest rate earned on such assets
and paid on such liabilities.
The following table sets forth, for the periods indicated, information
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, resultant yields, interest rate
spreads, net interest margin, and ratio of interest-earning assets to interest-
bearing liabilities. Average balances for a period have been calculated using
the average of month-end balances during such period. Management of the
Association does not believe that the use of month-end balances results in
averages that are materially different from those calculated using daily average
balances.
43
<PAGE>
<TABLE>
<CAPTION>
For the Fiscal Year Ended December 31,
---------------------------------------------------------------------------------------- At December 31,
1995 1994 1993 1995
---------------------------- ---------------------------- ---------------------------- ---------------
Interest Interest Interest
Average & Yield/ Average & Yield/ Average & Yield/ Yield/
Balance Dividends Cost Balance Dividends Cost Balance Dividends Cost Balance Cost
-------- --------- ------- -------- --------- ------- -------- --------- ------- -------- ------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning
assets/(1)/:
Mortgage loans........ $ 60,081 $4,528 7.54% $ 54,351 $4,175 7.68% $ 64,150 $5,323 8.30% $ 59,697 7.63%
Indirect auto loans... 20,436 1,655 8.10% 14,730 1,081 7.34% 4,854 321 6.61% 21,473 8.86%
Other consumer loans.. 6,775 671 9.90% 5,741 504 8.78% 5,023 444 8.84% 7,076 8.63%
Other loans: 490 45 9.18% 526 48 9.13% 571 59 10.33% 540 9.82%
-------- ------ -------- ------ -------- ------ --------
Total loans......... 87,782 6,899 7.86% 75,348 5,808 7.71% 74,598 6,147 8.24% 88,786 8.02%
Mortgage-backed
securities:
Collateralized
mortgage
obligations........ 19,384 1,175 6.06% 20,359 1,184 5.82% 13,630 712 5.22% 20,972 5.75%
Other mortgage-
backed securities.. 17,347 1,055 6.08% 17,311 894 5.16% 28,896 1,522 5.27% 20,404 6.62%
Investment
securities........... 9,713 552 5.68% 10,046 571 5.68% 6,593 351 5.32% 11,116 5.68%
Overnight and
short-term
investments..........
Federal Home Loan Bank 3,335 207 6.21% 1,880 94 5.00% 4,689 123 2.62% 2,853 5.28%
stock................ 683 45 6.59% 734 43 5.86% 984 58 5.89% 694 7.00%
-------- ------ -------- ------ -------- ------ --------
Total interest earning
assets.............. 138,244 9,933 7.19% 125,678 8,594 6.84% 129,390 8,913 6.89% 144,825 7.31%
Non-interest earnings
assets:
Office properties and
equipment, net....... 3,234 2,628 1,756 3,112
Real estate, net...... 5,392 6,578 6,718 644
Other non-interest
earning assets....... 2,673 2,347 1,081 2,393
-------- -------- -------- --------
Total assets........ $149,543 $137,231 $138,945 $150,974
======== ======== ======== ========
Interest bearing
liabilities:
Passbook accounts..... $ 13,947 $ 494 3.54% $ 14,991 $ 474 3.16% $ 14,503 $ 474 3.27% $ 14,700 3.62%
NOW accounts.......... 4,821 86 1.78% 4,041 84 2.08% 3,127 77 2.46% 5,044 1.83%
Money market accounts. 3,611 103 2.85% 5,596 154 2.75% 6,104 190 3.11% 3,311 2.81%
Certificates of deposit 113,876 6,612 5.81% 97,950 4,542 4.64% 102,522 5,097 4.97% 115,018 6.12%
-------- ------ -------- ------ -------- ------ --------
Total deposits...... 136,255 7,295 5.35% 122,578 5,254 4.29% 126,256 5,838 4.62% 138,073 5.61%
FHLB advances and other
borrowed funds....... 1,243 81 6.52% 2,762 141 5.10% -- -- --
-------- ------ -------- ------ -------- ------ --------
Total interest bearing
liabilities........ 137,498 7,376 5.36% 125,340 5,395 4.30% 126,256 5,838 4.62% 138,073 5.61%
Non-interest bearing
liabilities:
Non-interest bearing
deposits............. 468 418 336 323
Other liabilities..... 802 1,111 1,392 1,063
-------- -------- -------- --------
Total liabilities... 138,768 126,869 127,984 139,459
Retained earnings....... 10,775 10,362 10,961 11,515
-------- -------- -------- --------
Total liabilities and
retained earnings.. $149,543 $137,231 $138,945 $150,974
======== ======== ======== ========
Net interest income..... $2,557 $3,199 $3,075 N/A
====== ====== ======
</TABLE>
44
<PAGE>
<TABLE>
<CAPTION>
For the Fiscal Year Ended December 31,
---------------------------------------------------------------------------------------- At December 31,
1995 1994 1993 1995
---------------------------- ---------------------------- ---------------------------- ---------------
Interest Interest Interest
Average & Yield/ Average & Yield/ Average & Yield/ Yield/
Balance Dividends Cost Balance Dividends Cost Balance Dividends Cost Balance Cost
-------- --------- ------- -------- --------- ------- -------- --------- ------- -------- ------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest rate spread.... 1.83% 2.54% 2.27% 1.70%
Net interest margin..... 1.85% 2.55% 2.38% N/A
Average interest-earning
assets to average
interest bearing
liabilities............ 1.01x 1.00x 1.02x N/A
Net yield on average
interest-earning
assets.................. 7.19% 6.84% 6.89% N/A
</TABLE>
_______________
/(1)/ Does not include interest on loans 90 days or more past due.
45
<PAGE>
RATE/VOLUME ANALYSIS
The following table sets forth the effects of changing interest rates
and volumes of interest-earning assets and interest-bearing liabilities on net
interest income of the Association. Information is provided with respect to (i)
effects on interest income attributable to changes in rate (changes in rate
multiplied by prior volume), (ii) effects on interest income attributable to
changes in volume (changes in volume multiplied by the prior rate), and (iii)
changes in rate/volume (change in rate multiplied by change in volume).
<TABLE>
<CAPTION>
1995 Compared to 1994 1994 Compared to 1993 1993 Compared to 1992
Increase (Decrease) Due to Increase (Decrease) Due To Increase (Decrease) Due To
---------------------------------- ---------------------------------- ------------------------------------
(In Thousands)
Rate/ Rate/ Rate/
Rate Volume Volume Net Rate Volume Volume Net Rate Volume Volume Net
------ ------ ------ ------- ------ ------ ------ ------- ------- ------ ------ -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning
assets:/(1)/
Mortgage loans... $ (79) $440 $ (8) $ 353 $(395) $(813) $ 60 $(1,148) $ (540) $(1,695) $ 123 $(2,112)
Indirect auto
loans........... 112 419 43 574 35 653 72 760 -- -- 321 321
Other consumer
loans........... 65 90 12 167 (3) 64 (1) 60 (37) (91) 6 (122)
Other loans...... -- (3) -- (3) (7) (5) 1 (11) 1 (6) -- (5)
------ ---- ---- ------ ----- ----- ---- ------- ------- ------- ----- -------
Total loans.... 98 946 47 1,091 (370) (101) 132 (339) (576) (1,792) 450 (1,918)
Mortgage-backed
securities:
Collateralized
mortgage
obligations.... 50 (57) (2) (9) 81 351 40 472 (157) (266) 38 (385)
Other mortgage
backed
securities..... 159 2 -- 161 (30) (610) 12 (628) (202) 884 (176) 506
Investment
securities..... -- (19) -- (19) 23 184 13 220 (244) (187) 64 (367)
Overnight and
short-term
investments..... 23 73 17 113 112 (74) (67) (29) (113) (60) 25 (148)
Federal Home Loan
Bank stock...... 5 (3) -- 2 -- (15) -- (15) 4 2 -- 6
------ ---- ---- ------ ----- ----- ---- ------- ------- ------- ----- -------
Total net change in
income on interest-
earning assets.... 335 942 62 1,339 (184) (265) 130 (319) (1,288) (1,419) 401 (2,306)
Interest bearing
liabilities:
Passbook accounts 57 (33) (4) 20 (15) 16 (1) -- (81) 83 (14) (12)
NOW accounts..... (12) 16 (2) 2 (12) 22 (3) 7 (25) 6 (2) (21)
Money market
accounts........ 6 (55) (2) (51) (22) (16) 2 (36) (41) 7 (1) (35)
Certificates of
deposit........ 1,145 739 186 2,070 (343) (227) 15 (555) (1,214) (783) 137 (1,860)
------ ---- ---- ------ ----- ----- ---- ------- ------- ------- ----- -------
Total deposits. 1,196 667 178 2,041 (392) (205) 13 (584) (1,361) (687) 120 (1,928)
FHLB advances and
other borrowed
funds........... 39 (78) (21) (60) -- -- 141 141 (12) (12) (12) (12)
------ ---- ---- ------ ----- ----- ---- ------- ------- ------- ----- -------
Total net change
in expense on
interest bearing
liabilities....... 1,235 589 157 1,981 (392) (205) 154 (443) (1,373) (699) 132 (1,940)
Net change in net
interest income.... $ (900) $353 $(95) $ (642) $ 208 $ (60) $(24) $ 124 $ 85 $ (720) $ 289 $ (366)
====== ==== ==== ====== ===== ===== ==== ======= ======= ======= ===== =======
---------------
</TABLE>
/(1)/ Does not include interest on loans 90 days or more past due.
46
<PAGE>
MANAGEMENT OF INTEREST RATE RISK
HISTORICAL DIFFICULTIES. Since the late 1980's, the Association's
operations have been hampered by difficulties managing interest-rate risk, and
ultimately led to a supervisory agreement with the OTS that mandated changes in
the Association's management of assets and liabilities. The Association's
attempts to reduce its severe exposure to interest-rate risk has, for several
years, caused substantial changes in the amount of the Association's loans
receivable, investment securities, mortgage-backed and related securities, and
the relative proportion of these assets to the Association's total assets.
Changes in asset mix have not only affected the Association's interest-rate
sensitivity, but have also had a direct effect on the Association's earnings.
The Association's interest-rate risk problems became acute shortly after
purchasing a significant amount of long-term U.S. Treasury securities in 1985
and 1986. At the end of 1991, these securities comprised 40% of the
Association's investment portfolio and had deteriorated by more than $2.5
million in value due to an upward movement in interest rates. The Association
continued to hold the securities because of the significant built-in losses
associated with them. In addition to the U.S. Treasury securities, in the late
1980's and early 1990's, the Association purchased long-term mortgage-backed and
related securities, some of which were "high-risk" securities according to
regulatory rules in effect at the time.
The Association's past interest-rate risk difficulties also involved
investments in long-term fixed-rate mortgage loans originated for its portfolio.
For example, while the Association sold $20 million in long-term U.S. Treasury
securities to improve its interest-rate risk in 1992, in that same year the
Association increased its long-term fixed-rate mortgage portfolio by $28
million. Moreover, the Association invested in a significant amount of
adjustable rate securities in the early 1990's; however, some of these
instruments had interest rate caps that limited the benefit of such instruments
to the Association's interest-rate sensitivity during periods of rising interest
rates. Later in 1993, the Association improved its interest-rate risk when it
began selling fixed-rate mortgage loans in the secondary mortgage market.
The Association has undertaken several asset and liability restructurings,
resulting in significant increases and decreases in certain asset categories.
For example, during the latter part of 1991 and 1992, the Association sold
approximately $28 million of U.S. Treasury securities and $16 million of
mortgage-backed and related securities and other investment securities. Some of
the mortgage-backed and related securities were sold to satisfy OTS supervisory
concerns. Losses on these sales realized or provided for in 1991 totaled
$619,000. These sales allowed the Association to redirect the proceeds into
investments less sensitive to fluctuations in interest rates. As a result, the
Association's loans receivable increased by $19.2 million to $93.2 million
between December 31, 1991 and 1992.
In 1993, as interest rates decreased, the Association sold $44.8 million in
fixed-rate mortgage loans, investing the proceeds in mortgage-backed and related
securities and other investment securities. Thus, the Association's loans
receivable decreased by $25.3 million to $67.9 million, and mortgage-backed and
related securities and investment securities increased by $20.0 million to $49.5
million between December 31, 1992 and 1993. Since December 31, 1993, the amount
of the Association's loans receivable, mortgage-backed and related securities
and investment securities have remained relatively constant, totaling $88.8
million and $53.2 million at December 31, 1995.
The Association's difficulties managing interest-rate risk resulted in the
imposition of a supervisory agreement with the OTS on July 12, 1991. The
Agreement required, among other things, that the Association achieve a negative
one-year interest-rate sensitivity gap position of 15% by March 31, 1992. At
December 31, 1990 and March 31, 1991, the Association's one-year interest-rate
sensitive gap was a negative 41% and
47
<PAGE>
33%, respectively. The Association was able to improve its interest-rate
sensitivity gap position to the point that the OTS terminated the supervisory
agreement on October 29, 1993.
CURRENT MEASUREMENT TECHNIQUES. The principal objective of the
Association's interest rate risk management function is to evaluate the interest
rate risk included in certain balance sheet accounts, determine the level of
risk appropriate given the Association's business strategy, operating
environment, capital and liquidity requirements and performance objectives, and
manage the risk consistent with the Board of Directors' approved guidelines.
Through such management, the Association seeks to reduce the vulnerability of
its operations to changes in interest rates. The extent of the movement of
interest rates is an uncertainty that could have a negative impact on the
earnings of the Association. See "RISK FACTORS--Effect of Interest Rates."
The Association's interest rate sensitivity is monitored by management,
through the use of a model produced by the OTS, on a quarterly basis based upon
data submitted on the Association's quarterly Thrift Financial Reports. The
model generates estimates of the change in net portfolio value ("NPV") over a
range of interest rate scenarios. NPV is the difference between incoming and
outgoing discounted cash flows from assets, liabilities and off-balance sheet
contracts. The NPV ratio, under any interest rate scenario, is defined as the
NPV in that scenario divided by the market value of assets in the same scenario.
The following table presents the Association's NPV at December 31, 1995, as
calculated by the OTS, based on information provided to the OTS by the
Association. At December 31, 1995, the changes in NPV in the various interest
rate scenarios noted below were substantially within the limits approved by the
Association's Board of Directors.
<TABLE>
<CAPTION>
At December 31, 1995
-----------------------------------------------------------------------------------
Net Portfolio Value NPV as % of PV of Assets
------------------------------------------------ ---------------------------------
Change in Rate $ Amount $ Change % Change NPV Ratio BP Change
---------------- -------- --------- --------- ---------- ---------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
+ 400bp 6,357 (4,428) (41)% 4.46% (259)bp
+ 300 7,811 (2,975) (28) 5.38% (168)
+ 200 9,073 (1,713) (16) 6.13% (93)
+ 100 10,066 (720) (7) 6.69% (37)
0 10,785 7.06%
- 100 11,324 538 5 7.31% 25
- 200 11,448 662 6 7.30% 24
- 300 11,852 1,067 10 7.45% 39
- 400 12,739 1,954 18 7.87% 81
At December 31, 1995
--------------------
RISK MEASURES: 200 BP RATE SHOCK:
Pre-Shock NPV Ratio: NPV as % of PV of Assets............... 7.06%
Exposure Measure: Post-Shock NPV Ratio...................... 6.13%
Sensitivity Measure: Change in NPV Ratio.................... (93)bp
CALCULATION OF CAPITAL COMPONENT:
Change in NPV as % of PV of Assets.......................... (1.12)%
Interest Rate Risk Capital Component ($000)................. --
</TABLE>
An asset or liability is interest rate sensitive within a specific time
period if it will mature or reprice within that time period. If the
Association's assets mature or reprice more quickly than its liabilities, the
Association's NPV would increase during periods of rising interest rates but
decrease during periods of falling interest rates. If the Association's assets
mature or reprice more slowly than its liabilities, the Association's NPV would
decrease during periods of rising interest rates but increase during periods of
falling interest rates.
48
<PAGE>
At December 31, 1995, the Association had net unrealized losses of $215,000
in its mortgage-backed and related securities portfolio due primarily to changes
in interest rates since such securities were purchased by the Association. The
Association's mortgage-backed and related securities portfolio is comprised
largely of securities with long periods to maturity. See "BUSINESS OF THE
ASSOCIATION--Lending Activities--Contractual Principal Repayments." Management
of the Association does not presently intend to sell any of the securities in
its mortgage-backed and related securities portfolio.
Certain shortcomings are inherent in the methodology used in the above
interest rate risk measurements. Modeling changes in NPV requires the making of
certain assumptions which may or may not reflect the manner in which actual
yields and costs respond to changes in market interest rates. In this regard,
the NPV model presented assumes that the composition of the Association's
interest sensitive assets and liabilities existing at the beginning of a period
remains constant over the period being measured and also assumes that a
particular change in interest rates is reflected uniformly across the yield
curve regardless of the duration to maturity or repricing of specific assets and
liabilities. Accordingly, although the NPV measurements provide an indication
of the Association's interest rate risk exposure at a particular point in time,
such measurements are not intended to and do not provide a precise forecast of
the effect of changes in market interest rates on the Association's net interest
income and will differ from actual results.
CURRENT STRATEGIES. In recent years, the Association has utilized the
following strategies to manage interest rate risk: (i) emphasizing the
origination of one- to four-family adjustable rate and balloon mortgage loans;
(ii) selling longer term fixed rate one- to four-family residential loans in the
secondary market at origination; (iii) diversifying into other types of lending
consisting primarily of short-term consumer loans (such as indirect auto lending
and home equity lending); (iv) maintaining its investments in short-term (five
years or less) or adjustable rate instruments; (v) holding its investments as
available-for sale; (vi) reducing the interest rate sensitivity of its
liabilities by offering attractive rates on longer term certificates of deposit
and implementing programs to attract low cost demand deposits; and (vii)
maintaining a strong capital position, which provides for a favorable level of
interest-earning assets relative to interest-bearing liabilities. Specifically,
the Association has recently hired a new mortgage loan officer, a compliance
officer and additional mortgage lending support staff to further emphasize one-
to four-family lending. The Association also recently began a home equity line
of credit lending promotion to continue emphasizing diversification into other
adjustable-rate lending activities. A new debit card product has been added as
an enhancement to the demand deposit account offerings and an advertising
campaign to promote the demand deposit products is planned for the near future.
The Association intends to continue pursuing these general strategies to
manage interest rate risk. The capital raised in the Offerings should enhance
the Association's efforts in minimizing its exposure to interest rate risk.
Specifically, the net proceeds of the Offering are expected to initially be
invested in short-term and adjustable rate investment securities. See "USE OF
PROCEEDS."
49
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
The Association's primary sources of funds are deposits and proceeds from
principal and interest payments on loans and from mortgage-backed and related
securities and investment securities. While scheduled maturities of loans and
of mortgage-backed and related securities and investment securities are
predictable sources of funds, deposit flows and mortgage prepayments are greatly
influenced by general interest rates, economic conditions and competition.
The primary investing activity of the Association is the origination of
one- to four-family residential mortgage loans and the purchase of mortgage-
backed and related securities. During each of the years ended December 31,
1995, 1994 and 1993, the Association originated one- to four-family residential
mortgage loans in the amounts of $13.2 million, $21.2 million and $36.9 million,
respectively, and purchased mortgage-backed and related securities in the
amounts of $9.9 million, $6.7 million and $54.1 million, respectively, during
each of such fiscal years. These activities were funded primarily by proceeds
from the sale of loans, principal repayments on loans and maturities of
mortgage-backed and related securities and investment securities. The net cash
used for investing activities for the fiscal year ended December 31, 1995
totaled $7.1 million. See the Consolidated Financial Statements--Consolidated
Statements of Cash Flows.
The Association must maintain an adequate level of liquidity to ensure the
availability of sufficient funds to support loan growth and deposit withdrawals,
satisfy financial commitments and take advantage of investment opportunities.
During the 1995, 1994 and 1993 fiscal years, the Association used its sources of
funds primarily to fund the origination of loans, purchase mortgage-backed and
related securities and investment securities and repay borrowed funds. At
December 31, 1995, the Association had approved loan commitments totaling
$704,000. In addition, the Association had unused lines of credit amounting to
$2.5 million at December 31, 1995.
At December 31, 1995, certificates of deposits totaled $115.0 million, or
83.2% of total deposits, including $57.8 million that were scheduled to mature
by December 31, 1996. Because of the reduction in the insurance premiums paid
on BIF-insured deposits, the Association may find it more difficult to retain
such deposits. See "RISK FACTORS--Effect of the Recapitalization of SAIF and
the SAIF and BIF Deposit Premium Differential on the Association's Future
Operations and Prospects." Management believes it will have adequate resources
to fund all of its commitments from additional deposits, proceeds of scheduled
repayments of loans and from interest and principal payments on mortgage-backed
and related securities and investment securities.
The Association is required to maintain a specific amount of capital
pursuant to the regulations of the OTS. As of December 31, 1995, the
Association was in compliance with all regulatory capital requirements. For a
discussion of the regulatory capital requirements applicable to the Association
and the Association's position in relation thereto, see "HISTORICAL AND PRO
FORMA CAPITAL COMPLIANCE" and "SUPERVISION AND REGULATION--The Association--
Capital Requirements."
EFFECT OF INFLATION AND CHANGING PRICES
The Consolidated Financial Statements and Notes thereto included in this
Prospectus have been prepared in accordance with GAAP, which require the
measurement of financial position and operating results in terms of historical
dollars without considering the changes in the relative purchasing power of
money over time due to inflation. The impact of inflation is reflected in the
increased cost of the Association's operations. Unlike industrial companies,
nearly all of the assets and liabilities of the Association are monetary in
nature. As a result, interest rates have a greater impact on the Association's
performance than do the effects of general
50
<PAGE>
levels of inflation. Interest rates do not necessarily move in the same
direction or to the same extent as the prices of goods and services.
RECENT FEDERAL LEGISLATIVE DEVELOPMENTS
RECENT DEVELOPMENTS AFFECTING DEPOSIT INSURANCE PREMIUMS. Deposits of the
Association are currently insured by the FDIC under the SAIF. The FDIC also
maintains another insurance fund, the BIF, which primarily insures commercial
bank and some state savings bank deposits. Applicable law requires that the
SAIF and BIF funds each achieve and maintain a ratio of insurance reserves to
total insured deposits equal to 1.25%. The BIF recently reached this 1.25%
reserve level, and the FDIC announced a reduction in BIF premiums for most
banks. Based on this reduction, the highest-rated institutions (approximately
92% of the nearly 11,000 BIF-insured banks) will pay the statutory annual
minimum of $2,000 for FDIC insurance. Rates for all other institutions were
reduced as well, leaving a premium range of $0.03 to $0.27 per $100 instead of
the previous $0.04 to $0.31 cents per $100. Currently, SAIF-member institutions
pay deposit insurance premiums based on a schedule of $0.23 to $0.31 per $100 of
deposits. The Omnibus Budget Reconciliation Act of 1995 passed by the U.S.
Congress and vetoed by President Clinton provided for the recapitalization of
the SAIF through a one-time special assessment of between 75 and 85 basis points
on the amount of deposits held by each SAIF-insured institution. The SAIF
recapitalization has been part of ongoing budget negotiations between the
Congress and the Clinton Administration. Ending the continuing balanced budget
stalemate, the Congress and the President agreed on a budget package for the
remainder of the fiscal year. On April 29, 1996, the President signed into law
the "Omnibus Consolidated Rescissions and Appropriations Act of 1996" that funds
the United States Government for the remainder of the 1996 fiscal year. The
1996 Budget Act does not include provisions to recapitalize the SAIF. Several
members of Congress, the Clinton Administration and leaders of several federal
bank regulatory agencies have proposed including provisions recapitalizing SAIF
in legislation for the United States Government's 1997 fiscal year budget or,
alternatively, separate legislation independent of the budget process. If
legislation is adopted in the future that includes the provisions of Title II of
the Balanced Budget Act (see "RISK FACTORS--Effect of the Recapitalization of
the SAIF, and the Effect of the SAIF and BIF Deposit Premium Differential on the
Association's Future Operations and Prospects"), the capital of SAIF-member
institutions would be reduced immediately by the amount of the special
assessment (provided SAIF-member institutions are not permitted to amortize the
expense of the one-time fee over a period of years). In such an instance, it is
expected that deposit premiums paid by SAIF-member institutions would be reduced
to approximately $.04 for every $100 of deposits. Management cannot predict
whether the special assessment proposals 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. If the one-time assessment is not enacted,
it is presently expected that the SAIF will not be recapitalized until 2002 and
the disparity between SAIF and BIF deposit premiums will continue.
PROPOSALS TO OVERHAUL THE SAVINGS ASSOCIATION INDUSTRY. Proposals recently
have been introduced in the U.S. Congress that, if adopted, would overhaul the
savings association industry. The most significant of these proposals would
recapitalize the SAIF through a one-time special assessment, spread the FICO
Bond obligation across depository institutions insured under the BIF and SAIF,
merge the OCC and the OTS, abolish the federal savings association charter,
require federal thrifts to convert to commercial banks and merge the SAIF and
the BIF. Current legislative proposals also provide for repeal of the special
bad debt deduction for federal income tax purposes that is currently available
for qualifying thrifts, such as the Association. If legislation repealing the
deduction for additions to bad debt reserves is enacted, all savings
institutions that currently benefit from the deduction would be adversely
affected. Repeal of the bad debt deduction could result on an ongoing basis in
an increase in the Association's federal income tax liability and potentially
its Illinois state tax liability as well. Management cannot predict whether
these or any other legislative proposals will be enacted, or, if enacted, the
final form of the law or the effect of such proposals on the Association's
operations or ability to compete in the financial services industry.
51
<PAGE>
IMPACT OF NEW ACCOUNTING PRONOUNCEMENTS
ACCOUNTING FOR CERTAIN INVESTMENTS IN DEBT AND EQUITY SECURITIES. In May,
1993 the Financial Accounting Standards Board ("FASB") issued Statement of
Financial Accounting Standard No. 115, "Accounting for Certain Investments in
Debt and Equity Securities," which was effective for fiscal years beginning
after December 31, 1993. SFAS No. 115 required the Association to classify all
of its investments in debt and equity securities into one of three categories:
held-to-maturity, trading securities or available-for-sale. Classification is
dependent upon management's ability and intent with regard to the ultimate
disposition of the security. The Association adopted SFAS No. 115 effective
January 1, 1994 and classified all debt and equity securities (including all
mortgage-backed and related securities) as available-for-sale at that date. All
debt and equity securities (including all mortgage-backed and related
securities) continue to be classified as available-for-sale. Under SFAS No.
115, available- for-sale securities are carried at fair value in the
consolidated statement of condition. Previously these securities were carried
at amortized cost. Unrealized holding gains and losses on available-for-sale
securities are excluded from earnings and reported as a separate component of
shareholder's equity, net of income tax effect, until realized.
ACCOUNTING FOR IMPAIRMENT OF A LOAN. In May, 1993, the FASB also issued
SFAS No. 114, "Accounting by Creditors for Impairment of a Loan," which was
amended in October, 1994 by SFAS No. 118, "Accounting by Creditors for
Impairment of a Loan - Income Recognition and Disclosures." The Association
adopted SFAS No. 114 and SFAS No. 118 effective January 1, 1995. These
statements require 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 is required to record a loan valuation allowance equal to
the amount by which the loan carrying amount exceeds the present value of the
estimated future cash flows discounted at the loan's effective rate. A lender
may also measure impairment based on the loan's observable market price, or the
fair market of the collateral if the loan is collateral dependent. A lender
must use the fair value of the collateral to measure impairment when it is
determined foreclosure is probable. The Statement has not had a material impact
on the results of operations, financial condition or disclosures contained in
the Association's financial statements.
ACCOUNTING FOR MORTGAGE SERVICING RIGHTS. In May, 1995, the FASB issued
SFAS No. 122, "Accounting for Mortgage Servicing Rights," which amends SFAS No.
65, "Accounting for Certain Mortgage Banking Activities." The statement is
effective for fiscal years beginning after December 15, 1995. The statement
requires that a mortgage banking enterprise recognize as separate assets, rights
to service mortgage loans for others, regardless of how those servicing rights
were acquired. Presently, no asset is recognized for servicing rights acquired
through the Association's loan origination activity. Additionally, the
statement requires that the capitalized mortgage servicing rights be assessed
for impairment based on the fair value of those rights, and the impairment be
recognized through a valuation allowance. These requirements will accelerate
the income recognition associated with mortgage banking activities, may increase
future operating expense due to amortization of servicing rights, and, may
result in greater earnings volatility. The impact of the statement on the
Association will depend on the level of loans sold and servicing rights retained
by the Association and, accordingly, the impact is unknown at this time. During
the first quarter of 1996, the Association recorded $21,000 of servicing rights
in accordance with SFAS No. 122.
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ACCOUNTING FOR EMPLOYEE STOCK OWNERSHIP PLANS. In November, 1993, the
AICPA issued Statement of Position 93-6 ("SOP") "Employers' Accounting for
Employee Stock Ownership Plans." The SOP, among other things, changes the
measure of compensation expense recorded by employers from the cost of employee
stock ownership plan shares allocated to employees during the period to the fair
value of employee stock ownership plan shares allocated. Assuming the
acquisition of shares of stock by the Association's ESOP, the application of SOP
93-6 is likely to result in fluctuations in compensation expense due to changes
in the fair value of the stock.
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BUSINESS OF THE HOLDING COMPANY
GENERAL
The Holding Company was organized at the direction of the Board of
Directors of the Association for the purpose of becoming a holding company to
own all of the outstanding capital stock of the Association. Upon consummation
of the Conversion, the Association will become a wholly-owned subsidiary of the
Holding Company.
BUSINESS
The Holding Company currently is not an operating company. Following the
Conversion, the Holding Company will be primarily engaged in the business of
managing its investments and directing, planning and coordinating the business
activities of the Association. In the future, the Holding Company may become an
operating company or acquire or organize other operating subsidiaries, including
other financial institutions. Presently, there are no agreements or
understandings for an expansion of the Holding Company's operations.
Initially, the Holding Company will not maintain offices separate from
those of the Association or employ any persons other than its officers who will
not be separately compensated for such service.
BUSINESS OF THE ASSOCIATION
GENERAL
The Association's principal business has been and continues to be
attracting retail deposits from the general public in McLean and surrounding
counties in Illinois and investing those deposits, together with funds generated
from operations and borrowings, in one- to four-family residential mortgage
loans, automobile loans, collateralized mortgage obligations ("CMOs"), real
estate mortgage investment conduits ("REMICs"), mortgage-backed securities and
U.S. Government and Agency securities and, to a lesser extent, multi-family
residential, commercial real estate, commercial business and other consumer
loans. The Association originates residential mortgage loans for investment and
for sale in the secondary market, generally retaining the servicing rights on
most loans sold. The Association's revenues are derived principally from
interest on its residential mortgage loans and consumer loans and interest and
dividends on its investment securities, CMOs, REMICs and other mortgage-backed
securities and, to a lesser extent, loan transaction fees and loan servicing
income. The Association's primary sources of funds are deposits, principal and
interest payments on loans and mortgage-backed securities, FHLB advances,
reverse repurchase agreements and proceeds from the sale of residential mortgage
loans.
LENDING ACTIVITIES
COMPOSITION OF THE LOAN PORTFOLIO. The Association's historical lending
strategy has focused primarily on the origination of residential mortgage loans
secured by one- to four-family homes. During the past five years, the
Association has not actively pursued the origination of commercial real estate
or commercial business loans as a result of restrictions imposed by the OTS and
has no present plans to increase its activity in this area. For information
concerning these lending restrictions and an OTS supervisory agreement, see
"FIRST FEDERAL SAVINGS AND LOAN ASSOCIATION OF BLOOMINGTON." In April of 1993,
the Association began originating indirect automobile loans through a network of
automobile dealerships in the Bloomington-Normal area. The Association's
indirect auto loans have since grown to comprise much of the remainder of the
Association's gross loan
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portfolio after residential mortgage loans and provides the Association with a
higher yielding and more interest rate sensitive component to its gross loan
portfolio than that provided by residential mortgage loans. The Association has
established a lending niche with respect to indirect auto loans and a low
delinquency rate relative to industry averages. Management believes the
Association has the second highest volume of this type of loan product of any
financial institution in the Bloomington-Normal area, and the Association plans
to maintain the current ratio of indirect auto loans to total loans, which at
December 31, 1995 was 24.0%. The Association also originates multi-family
mortgage loans, consumer loans other than indirect auto loans and commercial
business loans, although such loans presently constitute a relatively small
percentage of the Association's gross loan portfolio. On occasion, the
Association has originated commercial real estate loans subject to restrictions
imposed by the OTS. See "FIRST FEDERAL SAVINGS AND LOAN ASSOCIATION OF
BLOOMINGTON."
The Association's lending area is comprised principally of the Illinois
counties of McLean and DeWitt, with the majority of its loans originated by
customers from, or secured by property located in, the Bloomington-Normal area.
See "FIRST FEDERAL SAVINGS AND LOAN ASSOCIATION OF BLOOMINGTON."
At December 31, 1995, the Association's gross loan portfolio totaled $90.0
million, representing 59.6% of the Association's total assets at such date. At
December 31, 1995, $53.3 million, or 59.2%, of the Association's gross loan
portfolio represented loans secured by first mortgages on one- to four-family
homes. The balance of the gross loan portfolio consisted primarily of $28.7
million of consumer loans, or 31.9% of the gross loan portfolio, $21.6 million
of which (24.0% of the gross loan portfolio) were indirect auto loans, $1.8
million of loans secured by multi-family properties, or 2.0% of the gross loan
portfolio, $4.5 million of commercial real estate loans, or 5.0% of the gross
loan portfolio, $716,000 of construction loans, or 0.8% of the gross loan
portfolio and $541,000 of commercial business loans, or 0.6% of the gross loan
portfolio.
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The following table sets forth in greater detail the composition of the
Association's loan portfolio by type of loan as of the dates indicated:
<TABLE>
<CAPTION>
At December 31,
----------------------------------------------------------
1995 1994 1993
------------------ ------------------ ------------------
<S> <C> <C> <C> <C> <C> <C>
(Dollars in Thousands)
Amount Percent Amount Percent Amount Percent
------- ------- ------- ------ ------- -------
Mortgage Loans:
One- to four-family loans/(1)/............ $53,294 59.20% $53,850 63.61% $42,831 62.08%
Construction loans........................ 716 0.80% -- --% 599 0.87%
Multi-family loans........................ 1,776 1.97% 1,954 2.31% 2,644 3.83%
------- ------ ------- ------ ------- ------
Total mortgage loans.................... 55,786 61.97% 55,804 65.92% 46,074 66.78%
Commercial real estate loans................ 4,484 4.98% 4,902 5.79% 6,542 9.48%
Consumer loans:
Indirect auto loans....................... 21,598 23.99% 16,708 19.73% 10,554 15.30%
Direct auto loans......................... 1,515 1.68% 1,120 1.32% 509 0.74%
Home equity loans......................... 4,275 4.75% 3,872 4.57% 3,404 4.93%
Other consumer loans...................... 1,332 1.48% 1,328 1.57% 972 1.41%
------- ------ ------- ------ ------- ------
Total consumer loans.................... 28,720 31.90% 23,028 27.19% 15,439 22.38%
Commercial business loans................... 541 0.60% 496 0.59% 569 0.82%
Accrued interest receivable - all loans..... 489 0.55% 432 0.51% 369 0.54%
------- ------ ------- ------ ------- ------
Total loans............................. 90,020 100.00% 84,662 100.00% 68,993 100.00%
====== ====== ======
Less:
Due to borrowers on construction loans..
(246) (50) (81)
Unearned discounts........................ -- -- --
Unearned income........................... (81) (50) (27)
Allowance for possible loan losses........ (907) (973) (946)
------- ------- -------
Total loans receivable, net................. $88,786 $83,589 $67,939
======= ======= =======
</TABLE>
_______________
/(1)/ Includes construction loans converted to permanent loans.
ONE- TO FOUR-FAMILY RESIDENTIAL LENDING. The primary lending activity of
the Association in recent years has been the extension of first mortgage
residential loans to enable borrowers to purchase existing one- to four-family
homes or to construct new one- to four-family homes located in the Bloomington-
Normal and surrounding area. This type of lending includes both loans secured
by detached single-family residences and condominiums and loans secured by
individually owned residences in attached housing containing not more than four
separate dwelling units. Management believes that its policy of focusing on
residential mortgage lending has been successful in contributing to interest
income while keeping delinquencies and losses to a minimum. At December 31,
1995, 1994 and 1993, approximately $53.3 million, $53.9 million and $42.8
million, or 59.2%, 63.6% and 62.1%, respectively, of the Association's gross
loan portfolio consisted of loans secured by one- to four-family homes.
Virtually all of these first-mortgage loans were secured by properties located
in McLean County in central Illinois.
Because of the highly competitive mortgage market in which the Association
originates loans, the Association offers a variety of mortgage products with a
variety of interest rates, maturities, fees or other origination terms. Of the
Association's one- to four-family mortgage loans outstanding at December 31,
1995, $26.7 million or 50.1% were fixed-fixed rate loans, $16.9 million or 31.7%
were adjustable-rate loans ("ARMs") and $9.7 million or 18.2% were balloon
loans.
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The Association's fixed-rate residential mortgage loans are competitively
priced based on market conditions and the Association's cost of funds. At
December 31, 1995, the Association offered fixed-rate residential mortgage loans
with terms of 10, 15, 20 and 30 years. The Association's policy is to sell all
its newly originated fixed-rate residential mortgage loans with amortizations
greater than 15 years in the secondary market to the Federal National Mortgage
Association ("FNMA"), a U.S. government sponsored agency, and to Fleet Mortgage
Company, Milwaukee, Wisconsin, a private mortgage investor ("Fleet"). See "--
Loan Purchases and Sales." For the fiscal year ended December 31, 1995,
originations of fixed-rate mortgage loans with amortizations greater than 15
years constituted 68.4% of all fixed-rate mortgage loans originated.
The Association offers ARMs with an initial adjustment period of one,
three, five or seven years, a one-year adjustment period thereafter, and
maturities of up to 30 years. Its current emphasis is on the three-year ARM.
Interest rates on ARMs currently offered by the Association are adjusted at the
beginning of each adjustment period based upon a fixed spread above the average
yield on United States treasury securities, adjusted to a constant maturity
which corresponds to the adjustment period of the loan as published weekly by
the Federal Reserve Board. ARMs generally are subject to limitations on
interest rate increases of 2% per adjustment period and an aggregate adjustment
of 6% over the life of the loan.
The volume and types (one-, three-, five- or seven-year adjustment periods)
of ARMs originated by the Association have been affected by such market factors
as the level of interest rates, competition, consumer preferences and the
availability of funds. In general, consumers show a preference for ARMs in
periods of high interest rates and for fixed-rate residential mortgage loans in
periods of low interest rates. During periods of falling interest rates, the
Association may experience refinancing activity from ARMs to fixed-rate
residential mortgage loans.
ARMs generally involve credit risks different from those inherent in fixed-
rate mortgage loans, primarily because if interest rates rise, the underlying
payments of the borrower rise, thereby increasing the potential for default.
Management has attempted to minimize such risk by qualifying borrowers at the
maximum rate of interest payable under the terms of the ARM.
The Association also offers loans that provide for balloon payments,
commonly called balloon loans, under which the interest rate and monthly
payments are fixed for the first five or seven years of the mortgage loan and,
thereafter, provided certain conditions are met, the loan adjusts to then
current rates at the end of the fifth or seventh year, at which time the loan
balance would become due and payable in full; however, the borrower would have
the option to renew the note. Balloon loans typically provide for a 30 year
amortization period.
The retention of ARMs, and to a lesser extent balloon loans, as opposed to
fixed-rate mortgage loans, in the Association's loan portfolio helps reduce the
Association's exposure to interest rate risk. However, in an environment of
rapidly increasing interest rates as was experienced in the late 1970's, it is
possible for the interest rate increase to exceed the maximum aggregate
adjustment on ARMs and negatively affect the spread between the Association's
interest income and its cost of funds. In addition, because the interest earned
on ARMs or on balloon loans which are refinanced on a one-, three-, five- or
seven-year cycle varies with prevailing interest rates, such loans do not offer
the Association as predictable a cash flow as do longer-term, fixed-rate loans.
The outstanding balance of loans included in the Association's one- to
four-family mortgage loan portfolio at December 31, 1995 was approximately $53.3
million. Management estimates that the average size of a new single-family
residential first-mortgage loan in its market area is approximately $100,000.
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Residential mortgage loans are generally underwritten to FNMA guidelines to
facilitate sale in the secondary market. The loan-to-value ratio for first-
mortgage residential loans made by the Association is 80%. If the loan-to-value
ratio exceeds 80%, the Association requires private mortgage insurance to cover
the excess over 80%. If private mortgage insurance is obtained, the mortgage is
limited to 95% of the appraised value. The Association requires title
insurance, or an attorney's opinion as to title, and hazard insurance coverage
of the property securing any mortgage loan originated by the Association. All
of the Association's mortgage loans contain due-on-sale clauses which provide
that if the mortgagor sells, conveys or alienates any interest in the property
underlying the mortgage note, the Association has the right at its option to
declare the note immediately due and payable without notice. The Association's
practice is to enforce such due-on-sale clauses to the extent permitted by law.
Although the Association does not actively solicit construction loans, the
Association may from time to time originate a residential construction loan at
the request of a prospective borrower. The Association makes construction loans
primarily for the construction of owner-occupied, single-family dwellings.
Construction loans have a set term for construction of the dwelling and then are
converted to long term mortgage loans upon completion of the dwelling.
Construction loans are generally made with terms of 12 months or less and with
adjustable interest rates that are tied to a market index. The aggregate
outstanding balance of such loans at December 31, 1995 was $716,000 and the
Association had no commitments to lend additional funds under such loans at such
date. Loan-to-value ratios on construction loans generally do not exceed 80% at
the time of origination as determined by an appraisal of the collateral as if
the improvements were complete.
Construction lending is generally considered to involve a higher degree of
credit risk than residential mortgage lending. The Association's risk of loss
on a construction loan is dependent largely upon the accuracy of the initial
estimate of the property's value at completion of construction and the estimated
cost (including interest) of construction. If the estimate of construction cost
proves to be inaccurate, the Association may be required to advance funds beyond
the amount originally committed to permit completion of the dwelling. If the
estimate of value proves to be inaccurate, the Association may be confronted
with, at or before the maturity of the loan, loan security with a value which is
insufficient to assure full repayment. In addition, construction lending
entails the risk that the project may not be completed due to cost overruns or
changes in market conditions.
MULTI-FAMILY RESIDENTIAL LENDING. At December 31, 1995, 1994 and 1993,
approximately $1.8 million, $2.0 million and $2.6 million, or 2.0%, 2.3% and
3.8%, respectively, of the Association's gross loan portfolio consisted of loans
secured by multi-family residential real estate. At December 31, 1995, the
Association had a total of 14 multi-family loans, substantially all of which
were secured by properties located within the Association's market area. The
Association's multi-family loans had an average principal balance of $127,000 at
December 31, 1995, and the largest multi-family loan held in the Association's
portfolio had a principal balance of $471,000. Multi-family loans are generally
offered with adjustable rates tied to a market index for terms of 7 to 15 years
with adjustment periods from 1 to 3 years, but may be made at fixed rates for
terms of 10, 15 or 20 years.
Under the Association's current lending policies, multi-family real estate
loans are generally limited to 80% of the appraised value of the property. Loans
secured by multi-family real estate are generally larger and, like commercial
real estate loans, involve a greater degree of risk than one- to four-family
residential mortgage loans. See "--Commercial Real Estate Lending." The number
of multi-family residential dwellings in the Association's market area is
limited, and first-mortgage loans on such dwellings have historically
represented a relatively small percentage of the Association's loan portfolio.
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COMMERCIAL REAL ESTATE LENDING. In recent years, the Association has
originated commercial real estate loans only on a very limited basis and subject
to restrictions imposed by the OTS. See "FIRST FEDERAL SAVINGS AND LOAN
ASSOCIATION OF BLOOMINGTON." For the years ended December 31, 1995, 1994 and
1993, the Association's commercial real estate loan originations were $585,000,
$324,000 and $75,000, respectively. At December 31, 1995, 1994 and 1993, the
Association's commercial real estate loan portfolio amounted to $4.5 million,
$4.9 million and $6.5 million, or 5.0%, 5.8% and 9.5%, respectively, of the
Association's gross loan portfolio as of those dates, consisting primarily of
loans secured by restaurant, gas station/convenience store, doctor's offices and
retail shopping properties. At December 31, 1995, substantially all of the
Association's commercial real estate loans were secured by properties located
within the Association's market area, and in management's opinion consisted
primarily of seasoned loans. Commercial real estate loans are generally offered
with adjustable rates tied to a market index for terms of 7 to 15 years with
adjustment periods from 1 to 3 years, but may be made at fixed interest rates
for terms of 10, 15 or 20 years.
In the past five years, the Association has not actively pursued the
origination of commercial real estate loans as a result of a supervisory
agreement with the OTS that restricted this type of lending. Moreover, on
December 12, 1994, as a result of discussions with the OTS, the Board of
Directors of the Association adopted a resolution limiting the amount of
commercial loans the Association could make until the Association's ratio of
classified assets to tangible capital was reduced to below 50%. As of December
31, 1995, the Association's ratio of classified assets to tangible capital had
been reduced to 21.7%. On February 1, 1996, the Board of Directors of the
Association rescinded the December 12, 1994 resolution. For additional
information relating to the Association's past problems with commercial real
estate lending, see "FIRST FEDERAL SAVINGS AND LOAN ASSOCIATION OF BLOOMINGTON."
The Association's practice has been to underwrite such loans based on its
analysis of the amount of cash flow generated by the business in which the real
estate is used and the resulting ability of the borrower to meet its payment
obligations. Although such loans are secured by a first mortgage on the
underlying property, the Association also generally seeks to obtain a personal
guarantee of the loan by the owner of the business in which the property is
used. Generally, the Association makes commercial real estate loans up to 75%
of the appraised value of the property securing the loan. The Association is
not currently soliciting the origination of commercial real estate loans but may
make such loans on a limited basis in instances such as at the request of a
long-standing customer. In the future, the Association may decide to pursue
actively the origination of commercial real estate loans but would do so only
after hiring additional personnel with experience in making commercial real
estate loans. See "RISK FACTORS--Risks Relating to Commercial Lending" for a
discussion of the risks associated with commercial real estate lending.
Commercial real estate loans generally entail significant additional risks
as compared to one- to four-family residential mortgage lending and carry larger
loan balances. The increased credit risk is a result of several factors,
including the concentration of principal in a smaller number of loans and
borrowers, the effects of general economic conditions on income producing
properties and the increased difficulty in evaluating and monitoring these types
of loans. Furthermore the repayment of loans secured by commercial real estate
is typically dependent upon the successful operation of the related property. If
the cash flow from the property is reduced, the borrower's ability to repay the
loan may be impaired. Loans secured by commercial real estate also may involve a
greater degree of environmental risk.
CONSUMER LENDING-INDIRECT AUTO LOANS. The Association began originating
indirect automobile loans in April, 1993. At December 31, 1995, 1994 and 1993,
approximately $21.6 million, $16.7 million and $10.6 million, or 24.0%, 19.7%
and 15.3%, respectively, of the Association's gross loan portfolio consisted of
indirect auto loans. The Association has been able to develop a substantial
portfolio of high-yielding indirect auto loans through the efforts of its senior
lending officer, Gary Richardson, who was hired in 1993
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<PAGE>
and has substantial experience with this type of lending. To maintain the
quality of its indirect auto loan portfolio, the Association recently hired a
full-time collections officer who monitors delinquencies and initiates
collection efforts. Management believes the Association has the second highest
volume of this type of loan product of any financial institution in the
Bloomington-Normal area, and the Association plans to maintain the current ratio
of indirect auto loans to total loans.
The indirect auto loans originated by the Association are generally written
with maturities of between three to five years. Under the Association's current
lending policies, the Association may make an indirect auto loan to finance the
purchase of a new and previously untitled automobile in an amount up to the
manufacturer's suggested retail price. Indirect auto loans for the purchase of
used automobiles are limited to the amount of the retail price listed for the
vehicle in the National Automobile Dealers' Association used car guide. All of
the indirect auto loans are secured by the new or used automobile.
The Association originates indirect auto loans for both new and used
automobiles through a network of 18 dealers located principally in the
Bloomington-Normal area and otherwise in central Illinois, including virtually
all of the new-car dealerships in the Bloomington-Normal area. As of December
31, 1995, only one dealership accounted for more than 10% of the principal
amount of the Association's indirect auto loans. That dealership accounted for
$4.6 million or 21.4% of the principal amount of the Association's indirect auto
loans at December 31, 1995. During 1995 and the first quarter of 1996, the
Association decreased its purchases from that dealer to the point where that
dealer represents less than 10% of lending volumes in the first quarter of 1996.
The Association has been successful in establishing relationships with other
area dealers and management does not believe there are any significant risks due
to concentrations with individual dealers.
Relationships with automobile dealerships are established by the
Association after performing a credit review of the dealer. Approved dealers
enter into a contractual relationship with the Association. The Association
competes for business on the basis of service, namely in short response times
for approval or disapproval of credit applications, consistent application of
the Association's underwriting standards, and immediate funding of indirect auto
loans upon delivery of all required documents.
The Association originates each indirect auto loan in accordance with its
underwriting standards and procedures, which are intended to assess the
applicant's ability to repay the amounts due on the loan and the adequacy of the
financed vehicle as collateral. The Association has established a low
delinquency rate for its indirect auto loans relative to industry averages. The
Association does not have recourse to the automobile dealer in the event of a
default of an indirect auto loan. At December 31, 1995, five indirect auto
loans (representing $51,000 or 0.2% of the Association's total indirect auto
loans) were delinquent 90 days or more. For information with respect to
delinquent indirect auto loans and for a discussion of the Association's
collection procedures with respect thereto, see "--Delinquencies."
For a discussion of the risks associated with indirect auto lending, see
"RISK FACTORS--Risks Relating to Indirect Auto Lending;" and "--Consumer
Lending-Other Consumer Loans."
CONSUMER LENDING-OTHER CONSUMER LOANS. In addition to its indirect auto
loans, the Association originates a variety of other consumer loans, generally
consisting of direct installment loans for the purchase of automobiles, loans to
purchase consumer goods, loans secured by savings accounts at the Association,
unsecured personal loans and home equity loans. At December 31, 1995, 1994 and
1993, the Association's portfolio of consumer loans (excluding indirect auto
loans) totaled approximately $7.1 million, $6.3 million and $4.9 million, or
7.9%, 7.4% and 7.1%, respectively, of the Association's gross loan portfolio.
Under the Association's current lending policies, the Association may make
a direct loan to finance the purchase of a new and previously untitled
automobile in an amount equal to the manufacturer's suggested retail
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price. Loans for the purchase of used automobiles are limited to the amount of
the retail price listed for the vehicle in the National Automobile Dealers'
Association used car guide. Loans for the purchase of a new or used automobile
are secured by the purchased vehicle and are written with maturities of between
three to five years, depending on the age of the motor vehicle offered as
collateral.
Under the Association's current lending policies, loans to finance the
purchase of consumer goods may be made in an amount equal to 90% of the value of
such goods, as determined by a current appraisal or other approved method. Such
loans are secured by the goods purchased. Loans for the purchase of consumer
goods may be amortized for a maximum period of ten years.
Loans secured by a customer's savings account with the Association are
limited to an amount equal to 90% of the amount of the deposit. The maximum loan
amount generally may not exceed $100,000. The loan term will extend to the
specific maturity date of the deposit or 12 months, whichever is less.
Under the Association's current lending policies, unsecured personal loans
are limited to $20,000 per borrower and to a term of up to five years. As a
practical matter, most such loans do not exceed $5,000 and are amortized over a
period of 5 years or less. The Association's underwriting standards for such
loans include a review of the borrower's credit repayment history, the
borrower's identifiable cash flows and the borrower's overall creditworthiness.
At December 31, 1995, the Association's unsecured loans amounted, in the
aggregate, to $215,000 or .2% of the Association's gross loan portfolio.
Under the underwriting standards employed by the Association in connection
with consumer loans, the Association takes into account the applicant's
creditworthiness as well as the sufficiency of the collateral securing the loan,
if any.
Consumer loans may entail greater risk than do residential mortgage loans,
particularly in the case of consumer loans that 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 be sufficient for
repayment of the outstanding loan, and the remaining deficiency may not be
collectible.
From time to time, the Association originates loans secured by second liens
on residential real estate (i.e., home equity loans). Home equity loans are
included in the Association's portfolio of consumer loans. These loans are
generally offered as adjustable-rate "home equity lines of credit" or may also
be offered as fully amortizing fixed-rate loans for terms up to 15 years. The
maximum total loan-to-value ratio, taking into account all liens on the property
securing the loan, for second mortgage loans secured by one- to four-family
residential properties is 80%. The net changes in the Association's home equity
lines of credit were $(177,000), $247,000 and $(98,000) for the fiscal years
ended December 31, 1995, 1994 and 1993, respectively. The underwriting standards
for home equity loans are substantially the same as those for residential
mortgage loans. The Association intends to increase its marketing efforts
related to home equity loans, with a goal of increasing these loans to
approximately 8% of its total loan portfolio by 1998.
Commercial Business Lending. As of December 31, 1995, 1994, and 1993,
approximately $541,000, $496,000 and $569,000, or 0.6%, 0.6% and 0.8%,
respectively, of the Association's gross loan portfolio consisted of commercial
business loans secured by accounts receivable, inventory, capital stock, or real
estate. At December 31, 1995, the Association's commercial business loans had
an average principal balance of $90,000, and the largest of such loans, which
was secured by business equipment, had a principal balance of $356,000. Unlike
residential mortgage loans, which generally are made on the basis of the
borrower's ability to make repayment from his or her employment and other income
and which are secured by real property whose value tends to be more easily
ascertainable, commercial business loans typically are made on the basis of the
borrower's ability to make repayment from the cash flow of the borrower's
business. As a result, the
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availability of funds for the repayment of commercial business loans may be
substantially dependent on the success of the business itself (which, in turn,
is likely to be dependent, in part, upon the general economic environment). The
Association's commercial business loans are usually secured by business assets.
However, the collateral securing the loans may depreciate over time, may be
difficult to appraise and may fluctuate in value based on the success of the
business.
The Association's underwriting standards for commercial business loans
include credit file documentation and analysis of the borrower's character,
capacity to repay the loan, the adequacy of the borrower's capital and
collateral as well as an evaluation of conditions affecting the borrower.
Analysis of the borrower's past, present and future cash flows is also an
important aspect of the Association's current credit analysis. Nonetheless,
such loans, are believed to carry higher credit risk than residential mortgage
loans. The Association generally requires personal guarantees from corporate
borrowers.
Factors Affecting Interest Rates and Fees. Interest rates and fees charged
on the Association's loans are affected primarily by the market demand for
loans, competition and the supply of money available for lending purposes. These
factors are affected by, among other things, general economic conditions and the
policies of the federal government, including the Federal Reserve, legislative
tax policies and governmental budgetary matters.
Loan Solicitation and Processing. The Association receives loan
applications from a number of sources, including existing or past customers of
the Association, residents of the communities located in the Association's
primary market area, and prospective borrowers who have been referred to the
Association by real estate brokers or builders. Officers of the Association
routinely provide real estate brokers with mortgage rate sheets and generally
stay in contact with such brokers regarding potential new residential mortgage
loans. The Association also advertises its products and services in local
newspapers circulated in the Association's primary market area. Further
business is solicited from the Association's present customer base through
statement stuffers and from walk-in traffic through brochures and lobby signs.
The principal source for new automobile lending is the contractual relationship
maintained by the Association with automobile dealerships in the Bloomington-
Normal and surrounding area. See "--Consumer Lending-Indirect Auto Loans." The
Association's consumer loan officer is in contact with such dealerships on a
regular basis soliciting new business. The Association intends to hire two
additional loan origination officers in the near future. Management expects
these officers will significantly enhance the Association's ability to originate
one-to four-family residential mortgage loans, and will be part of the
Association's improved marketing efforts for residential mortgage loans. For
additional information, see "FIRST FEDERAL SAVINGS AND LOAN ASSOCIATION OF
BLOOMINGTON--Recent Developments and Strategies."
Upon receipt of a completed loan application from a prospective borrower,
the Association obtains a credit report from a credit reporting agency and,
depending on the type of loan, verifies employment, income and other financial
information received from the prospective borrower and requests additional
financial information, if necessary. In connection with all of the
Association's one- to four-family mortgage loans and loans (other than one- to
four-family mortgage loans) in amounts greater than $250,000 secured by real
estate, the Association requires an appraisal of the real estate securing the
loan conducted by an outside appraiser approved by the Association's Board of
Directors. The Association maintains a list of qualified appraisers approved by
its Board of Directors. In connection with loans (other than one- to four-
family mortgage loans) in amounts of $250,000 or less secured by real estate,
which would generally include home equity loans, the Association only requires
an internal appraisal conducted by an officer or officers of the Association.
Once such information and appraisals are complete, the application is submitted
for underwriting by designated staff. The application, together with the
underwriter's recommendations, is then forwarded for review and action to the
appropriate loan officer or the Loan Committee of the Board of Directors (which
is comprised
62
<PAGE>
of all the members of the Board of Directors), depending on the size and nature
of the loan. The Loan Committee meets on a monthly basis.
Normally, upon approval of a residential mortgage loan application, the
Association gives a commitment to the applicant that it will make the approved
loan at a stipulated rate at any time within a 30-day period from the date the
application is approved. The loan is typically funded at a rate of interest and
on other terms based on market conditions as of the date of the commitment. See
"--Loan Commitments."
Loan Originations, Purchases and Sales. In the past five years, the
Association has not purchased participations in loans originated by other
financial institutions or sold participations in loans it has originated. In
the past five years, the Association has purchased and sold whole loans on a
limited basis. At December 31, 1995, purchased whole loans constituted a
minimal amount of the Association's total loan portfolio. The Association does
not presently expect to actively engage in the purchases of whole loans or
participations in loans originated by other financial institutions or to sell
participations in its loans.
It is generally the policy of the Association to retain for its portfolio
all ARMs, balloon loans and one- to four-family fixed-rate mortgage loans with
maturities of 15 years or less that it originates and to sell substantially all
one- to four-family fixed-rate mortgage loans with maturities over 15 years that
it originates in the secondary market to FNMA and to Fleet. The servicing
rights on all loans sold to FNMA are retained by the Association, while the
Association does not retain the servicing rights on loans sold to Fleet. For
the year ended December 31, 1995, $5.6 million, or 79.6% of the loans sold by
the Association in the secondary market were sold to FNMA and the remainder,
$1.4 million, or 20.4%, were sold to Fleet. All of the Association's loans are
sold on a non-recourse basis. Residential mortgage loans are generally
underwritten to FNMA guidelines to facilitate their sale in the secondary
market.
63
<PAGE>
The following table shows total loans originated, sold and repaid during
the periods indicated. The Association did not purchase any loans, nor were any
loans converted to mortgage-backed securities, during the periods indicated.
<TABLE>
<CAPTION>
For the Fiscal
Year Ended December 31,
-------------------------------
1995 1994 1993
--------- --------- ---------
<S> <C> <C> <C>
(Dollars in Thousands)
Total loans at beginning of period.. $84,662 $68,993 $94,493
Loans originated:
Mortgage loans:
One- to four-family loans/(1)/.. 13,171 21,215 36,883
Construction loans.............. 897 162 594
Multi-family loans.............. -- 637 --
------- ------- -------
Total mortgage loans............ 14,068 22,014 37,477
Commercial real estate loans...... 585 324 75
Consumer loans:
Indirect auto loans............. 15,180 12,589 12,161
Direct auto loans............... 1,142 1,021 513
Home equity loans............... 976 718 273
Other consumer loans............ 2,568 2,323 1,756
------- ------- -------
Total consumer loans............ 19,866 16,651 14,703
Commercial business loans......... 226 41 50
------- ------- -------
Total loans originated.......... 34,745 39,030 52,305
Loans sold:
Total whole loans sold............ (7,039) (2,317) (44,757)
Loan principal repayments........... (22,456) (21,059) (32,694)
Other............................... 108 15 (354)
Net loan activity................... 5,358 15,669 (25,500)
------- ------- -------
Total loans at end of period........ $90,020 $84,662 $68,993
======= ======= =======
</TABLE>
_______________
/(1)/ Includes construction loans converted to permanent loans.
Contractual Principal Repayments. The following table sets forth the
scheduled contractual amortization of loans, mortgage-backed and related
securities at December 31, 1995 and the dollar amount of such loans and
securities at that date which are scheduled to mature after one year which have
fixed or adjustable rates. Demand loans, loans having no stated schedule of
repayment and no stated maturity, and overdraft loans are reported as due in one
year or less.
64
<PAGE>
<TABLE>
<CAPTION>
At December 31, 1995
-------------------------------------------------------------------------------------------------
Other
Residential Multi- Commercial Indirect Other Mortgage-
Mortgage Family Real Estate Auto Consumer Other Total CMOs and Backed
Loans Loans Loans Loans Loans Loans Loans REMICs Securities
------------ -------- ------------ -------- -------- ------ ------- -------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
(In thousands)
Amounts due:
Within one year.............. $ 2,920 $ 115 $ 690 $ 6,208 $1,593 $ 62 $11,588 $ -- $ --
After one year through
three years................. 4,928 267 768 11,436 2,574 112 20,085 -- 1,061
After three years through
five years.................. 5,113 304 713 4,052 1,444 112 11,738 -- --
After five years through
ten years................... 13,831 493 1,503 -- 1,304 265 17,396 3,670 997
After ten years through
fifteen years............... 10,312 287 763 -- 124 -- 11,486 1,005 2,083
After fifteen years.......... 16,994 309 68 -- 110 -- 17,481 16,297 16,263
------- ------ ------ ------- ------ ---- ------- ------- -------
Total due after one year... 51,178 1,660 3,815 15,488 5,556 489 78,186 20,972 20,404
Total amounts due.......... 54,098 1,775 4,505 21,696 7,149 551 89,774 20,972 20,404
Less:
Deferred fees and discounts.. (31) -- (5) -- -- -- (36) -- --
Allowance for loan losses.... (250) (18) (334) (221) (73) (11) (907) -- --
Allowance for uncollected
interest.................... (26) -- (17) (2) -- -- (45) -- --
------- ------ ------ ------- ------ ---- ------- ------- -------
Net loans receivable........... $53,791 $1,757 $4,149 $21,473 $7,076 $540 $88,786 $20,972 $20,404
======= ====== ====== ======= ====== ==== ======= ======= =======
Interest rate terms on
amounts due after one year:
Fixed........................ $34,259 $1,388 3,168 $15,488 $5,556 $489 $60,348 $17,883 $ 2,062
Adjustable................... 16,919 272 647 -- -- -- 17,838 3,089 18,342
</TABLE>
65
<PAGE>
As of December 31, 1995, the average remaining term to maturity of the
Association's residential mortgage loans was 200 months. While the majority of
the Association's one- to four-family residential mortgage loans at December 31,
1995 were originated with 15-year terms, such loans customarily remain
outstanding for substantially shorter periods because borrowers often prepay
their loans in full upon sale of the property securing the loan or upon
refinancing the original loan. Average loan maturity is thereby 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. As a general rule, when interest rates decline, borrowers refinance
their existing residential mortgage loans.
Loan Commitments. Normally, upon approval of a residential mortgage loan
application, the Association gives a written commitment to the applicant that it
will make the approved loan at a stipulated rate at any time within a 30-day
period from the date the application is approved, subject to the satisfaction of
certain specified conditions. Because the Association has not been active for
the last five years in multi-family, commercial real estate and commercial
business lending, it has not generally issued commitments for multi-family,
commercial real estate and commercial business loans. The Association had
outstanding loan commitments of approximately $704,000, $50,000 and $80,000 at
December 31, 1995, 1994 and 1993, respectively. As of December 31, 1995, 1994
and 1993, the Association also had commitments under unused lines of credit
(including home equity lines of credit) of $2.5 million, $2.3 million and $2.2
million, respectively.
In the opinion of management, these loan commitments, including undisbursed
proceeds on loans in process, represent no more than normal lending risk to the
Association and will be funded from normal sources.
Loan Origination, Servicing and Other Fees. In addition to interest earned
on loans, the Association receives income through fees charged in connection
with loan modifications, late payments, prepayments, loan originations and
miscellaneous services related to its loans. The fees vary from time to time,
generally depending on the supply of funds, the volume of loan originations,
real estate sales activity and other competitive conditions in the mortgage
market.
Origination fees ranging from zero to three points generally are quoted on
the Association's residential mortgage loans. Each "point" is equal to 1% of
the principal amount of the residential mortgage loan. The point structure
offered by the Association may vary from time to time, depending upon the type
of residential mortgage loan being made, the interest rate offered and other
competitive factors. A borrower is also required to reimburse the Association
for certain out-of-pocket expenses incurred by the Association in connection
with the processing and closing of a loan, including the cost of independent
appraisals, credit reports, title insurance, and private mortgage insurance (if
required).
Current accounting standards require 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. At December 31, 1995,
1994 and 1993, the Association's deferred loan fees totaled $36,000, $15,000 and
($23,000), respectively.
At December 31, 1995, loans aggregating $32.9 million were being serviced
for others by the Association. For the fiscal years ended December 31, 1995,
1994 and 1993, the ratio of servicing fee income to net interest income was
3.8%, 3.3% and 2.4%, respectively. The Association's policy is to retain the
servicing rights to the residential mortgage loans that it sells in the
secondary market to FNMA. In order to generate greater revenue, management
intends to continue this policy and believes that the growth of the servicing
portfolio will increase the level of loan servicing fee income in future years.
66
<PAGE>
Loans to One Borrower. Under the OTS regulations, the Association
generally is subject to the same loans-to-one borrower limits that apply to
national banks. With certain exceptions, loans and extensions of credit
outstanding at one time to one borrower (including certain related entities of
the borrower) may not exceed 15% of the Association's unimpaired capital and
surplus, plus an additional 10% of unimpaired capital and surplus for loans
fully secured by certain readily marketable collateral. As of December 31, 1995,
the Association's lending limit for loans to one borrower was approximately $1.7
million. As of that date, the Association's three largest outstanding loans to
single borrowers, consisted of commercial real estate loans in the amounts of
$601,000, $580,000 and $381,000 secured by a commercial warehouse, a truck
stop/convenience store and a retail strip shopping center, respectively. Each of
these loans was current as of such date and was well within the Association's
lending limit.
Delinquencies. The Association's collection procedures with respect to
delinquent loans include written notice of delinquency and contact by letter or
telephone by Association personnel. Most loan delinquencies are cured within 90
days and no legal action is taken. With respect to residential mortgage loans
and consumer loans (other than indirect auto loans), if the delinquency exceeds
90 days, the Association institutes measures to enforce its remedies resulting
from the default, including mailing a 30 day notice of the commencement of a
foreclosure action or the repossession of collateral. Repossession of collateral
is commenced after the 60th day with respect to a delinquent indirect auto loan.
To maintain the quality of its indirect auto loan portfolio, the Association
recently hired a full-time collections officer who monitors delinquencies and
initiates collection efforts. The Association has established a low delinquency
rate for its indirect auto loans relative to industry averages. The Association
handles delinquencies involving the Association's multi-family, commercial real
estate and commercial business loans on a case-by-case basis.
67
<PAGE>
At December 31, 1995, 1994 and 1993, delinquencies in the Association's
loan portfolio were as follows.
<TABLE>
<CAPTION>
At December 31, 1995
-------------------------------------------------------------
60-89 Days 90-179 Days/(1)/ 180 Days or More/(1)/
------------------- ----------------- ---------------------
Number Principal Number Principal Number Principal
of Balance of Balance of Balance
Loans of Loans Loans of Loans Loans of Loans
------ ---------- ------ --------- -------- -----------
<S> <C> <C> <C> <C> <C> <C>
(Dollars in Thousands)
Mortgage loans:
One- to four-family loans/(1)/..................................... 7 $ 165 2 $130 2 $175
Construction loans................................................. -- -- -- -- -- --
Multi-family loans................................................. -- -- -- -- -- --
----- ------- --- ---- --- ----
Total mortgage loans............................................. 7 165 2 130 2 175
Commercial real estate loans......................................... -- -- -- -- 1 146
Consumer loans:
Indirect auto loans................................................ 1 4 4 50 1 1
Direct auto loans.................................................. 1 8 -- -- -- --
Home equity loans.................................................. -- -- 1 10 -- --
Other consumer loans............................................... 1 5 1 1 -- --
----- ------- --- ---- --- ----
Total consumer loans............................................. 3 17 6 61 1 1
Commercial business loans............................................ -- -- -- -- -- --
----- ------- --- ---- --- ----
Total delinquent loans............................................... 10 $ 182 8 $191 4 $322
===== ======= === ==== === ====
Total gross loans.................................................... 3,796 $90,020
Delinquent loans to gross loans (including loans held for sale)...... 0.58% 0.77%
</TABLE>
_______________
/(1)/ The Association discontinues the accrual of interest on loans when the
borrower is delinquent as to a contractually due principal or interest payment
by 90 days or more.
68
<PAGE>
<TABLE>
<CAPTION>
At December 31, 1994
-------------------------------------------------------------
60-89 Days 90-179 Days/(1)/ 180 Days or More/(1)/
------------------- ----------------- ---------------------
Number Principal Number Principal Number Principal
of Balance of Balance of Balance
Loans of Loans Loans of Loans Loans of Loans
------- ---------- ------ --------- -------- -----------
<S> <C> <C> <C> <C> <C> <C>
(In Thousands)
Mortgage loans:
One- to four-family
loans/(1)/.................. 10 344 5 149 -- --
Construction loans.......... -- -- -- -- -- --
Multi-family loans.......... 1 19 -- -- -- --
----- ------- --- ---- --- ----
Total mortgage loans...... 11 363 5 149 -- --
Commercial real estate loans.. -- -- -- -- 1 145
Consumer loans:
Indirect auto loans......... 5 53 2 11 -- --
Direct auto loans........... -- -- 1 9 -- --
Home equity loans........... 1 3 -- -- -- --
Other consumer loans........ 1 4 1 9 1 46
----- ------- --- ---- --- ----
Total consumer loans...... 7 60 4 29 1 46
Commercial business loans..... 1 100 -- -- 1 29
----- ------- --- ---- --- ----
Total delinquent loans........ 19 $ 523 9 $178 3 $220
===== ======= === ==== === ====
Total gross loans............. 3,116 $84,662
Delinquent loans to gross loans
(including loans held for sale) 0.99% 1.09%
</TABLE>
_______________
/(1)/ The Association discontinues the accrual of interest on loans when the
borrower is delinquent as to a contractually due principal or interest payment
by 90 days or more.
69
<PAGE>
<TABLE>
<CAPTION>
At December 31, 1993
-------------------------------------------------------------
60-89 Days 90-179 Days/(1)/ 180 Days or More/(1)/
------------------- ----------------- ---------------------
Number Principal Number Principal Number Principal
of Balance of Balance of Balance
Loans of Loans Loans of Loans Loans of Loans
------- ---------- ------ --------- -------- -----------
<S> <C> <C> <C> <C> <C> <C>
(In Thousands)
Mortgage loans:
One- to four-family
loans/(1)/.................. 8 $ 335 11 $341 6 $230
Construction loans.......... -- -- -- -- -- --
Multi-family loans.......... -- -- -- -- -- --
----- ------- --- ---- --- ----
Total mortgage loans...... 8 335 11 341 6 230
Commercial real estate loans.. -- -- -- -- 2 181
Consumer loans:
Indirect auto loans......... -- -- -- -- -- --
Direct auto loans........... -- -- 1 2 -- --
Home equity loans........... -- -- -- -- -- --
Other consumer loans........ 3 23 1 8 3 28
----- ------- --- ---- --- ----
Total consumer loans...... 3 23 2 10 3 28
Commercial business loans..... -- -- -- -- 1 33
----- ------- --- ---- --- ----
Total delinquent loans........ 11 $ 358 13 $351 12 $472
===== ======= === ==== === ====
Total gross loans............. 2,251 $68,993
Delinquent loans to gross loans
(including loans held for sale) 1.60% 1.71%
</TABLE>
---------------
/(1)/ The Association discontinues the accrual of interest on loans when the
borrower is delinquent as to a contractually due principal or interest payment
by 90 days or more.
70
<PAGE>
Non-Performing Assets. Non-performing assets include loans placed on non-
accrual status, loans that are 90 or more days past due, troubled debt
restructurings, repossessed automobiles and certain real estate owned. The
Association places loans that are 90 days or more past due on non-accrual status
unless such loans are adequately collateralized and in the process of
collection. Accrual of interest on a non-accrual loan is resumed only when all
contractually past due payments are brought current and management believes that
the outstanding loan principal and contractually due interest are no longer
doubtful of collection. As of December 31, 1995, loans in the total amount of
$513,000 had been placed on non-accrual status. During the years ended December
31, 1995, 1994 and 1993, the amounts of additional interest income that would
have been recorded on non-accrual loans, had they been current, totaled $28,000,
$24,000 and $38,000, respectively. These amounts were not included in the
Association's interest income for the respective periods.
Property acquired by the Association as a result of a foreclosure, property
upon which a judgment of foreclosure has been entered but for which no
foreclosure sale has yet taken place and property which is in substance
foreclosed are classified as foreclosed property or "real estate owned."
Foreclosed properties are recorded at the lower of the unpaid principal balance
of the related loan or fair market value. The amount by which the recorded loan
balance exceeds the fair market value at the time the property is classified as
foreclosed property is charged against the allowance for loan losses. Any
subsequent reduction in the carrying value of a foreclosed property, along with
expenses to maintain or dispose of a foreclosed property, is charged against
current earnings. At December 31, 1995, the Association had no properties
acquired as a result of foreclosure.
The following table sets forth information with respect to the
Association's non-performing assets for the periods indicated. The Association
does not have any accruing loans which are contractually past due 90 days or
more.
<TABLE>
<CAPTION>
At December 31,
-------------------------
1995 1994 1993
------- ------- -------
<S> <C> <C> <C>
(Dollars in Thousands)
Loans accounted for on a nonaccrual basis:
Mortgage loans:
One- to four-family loans/(1)/............. $ 305 $ 149 $ 571
Construction loans......................... -- -- --
Multi-family loans......................... -- -- --
------ ------ ------
Total mortgage loans...................... 305 149 571
Commercial real estate loans................. 146 145 181
Consumer loans:
Indirect auto loans........................ 51 11 --
Direct auto loans.......................... -- 9 2
Home equity loans.......................... 11 -- --
Other consumer loans....................... -- 55 35
------ ------ ------
Total consumer loans...................... 62 75 37
Commercial business loans.................... -- 29 33
------ ------ ------
Total..................................... 513 398 822
Real estate owned/(1)/......................... 644 6,413 6,806
Troubled debt restructurings................... -- -- --
Repossessed automobiles........................ 46 41 7
------ ------ ------
Total non-performing assets................ $1,203 $6,852 $7,635
====== ====== ======
Total non-performing assets to total assets 0.80% 4.86% 5.56%
</TABLE>
_______________
/(1)/ At December 31, 1995, Real Estate Owned consisted entirely of real estate
purchased by the Association for investment purposes.
As of December 31, 1995, the Association's real estate owned consisted of
two properties both of which were purchased by the Association for investment
purposes and not acquired as a result of foreclosure
71
<PAGE>
proceedings. The larger of these two properties consists of 32 acres of
industrial property located in central Illinois with an appraised value as of
August 23, 1991 of $600,000. The Association acquired title to the property in
May, 1992. The Association is actively pursuing the sale of this property.
As of December 31, 1994, $5.4 million, or 87.4% of the Association's real
estate owned related to a 233,105 square foot warehouse facility in central
Illinois. The Association acquired title to the property through foreclosure on
February 24, 1993. The original loan was for $6.5 million to a plastics
manufacturer for the construction of the facility. The most recent appraisal of
the property on January 13, 1993, indicated a value of $6.5 million. On November
7, 1995 the property was sold for approximately $5.9 million. The Association
sold the property for cash, all of which was paid at closing by the purchaser.
The Association did not enter into any unusual terms or conditions (including
guarantees or other accommodations) in order to facilitate the sale of this
property. The high level of the Association's problem assets in the late 1980's
and early 1990's resulted in the imposition of a supervisory agreement with the
OTS that significantly restricted the Association's origination of commercial
real estate and commercial business loans. For additional information regarding
the Association's past problems with real estate owned and other problem assets
and the OTS supervisory agreement, see "FIRST FEDERAL SAVINGS AND LOAN
ASSOCIATION OF BLOOMINGTON."
Classified Assets. OTS regulations and the Association's policy require
that the Association review and classify its assets on a regular basis. In
addition, in connection with examinations of insured institutions, regulatory
examiners have the authority to identify problem assets and, if appropriate,
require them to be classified. The Association reviews and classifies its assets
at least quarterly. There are three classifications for problem assets:
substandard, doubtful and loss. Substandard assets must 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 continued treatment of the asset as
an asset on the books of the institution is not warranted.
An insured institution is required to establish prudent general allowances
for loan losses with respect to assets classified as substandard or doubtful.
The institution is required either to charge off assets classified as loss or to
establish a specific allowance for 100% of the portion of the asset classified
as loss.
As of December 31, 1995, the Association's classified assets totaled $2.5
million or 1.7% of total assets and 21.7% of tangible capital. As of December
31, 1995, the aggregate amounts of the Association's assets classified as
substandard, doubtful or loss were as follows:
<TABLE>
<CAPTION>
At December 31,
1995
----------------
(In Thousands)
<S> <C>
Substandard Assets $1,785
Doubtful 747
Loss --
------
Total Classified Assets $2,532
======
</TABLE>
Allowance For Loan Losses. Under applicable federal policies, the
Association is required to establish general allowances for loan losses. In
addition to such general valuation allowances, the Association may establish
specific loss reserves against specific assets with respect to which a loss may
be realized. General allowances represent loss allowances which have been
established to recognize the inherent risks associated with lending activities,
but which, unlike specific allowances, have not been allocated to recognize
probable
72
<PAGE>
losses on particular problem assets. The determination of the allocation of the
allowance for possible loan losses is based upon an analysis of the loan
portfolio, including such factors as past loan loss experience, current volume,
growth and composition of the loan portfolio, economic conditions and other
factors which management believes deserve consideration. See Note 1 of Notes to
Consolidated Financial Statements.
The Association's management evaluates the amount of its allowance for loan
losses at least quarterly. Such evaluation includes a review of all loans for
which full collectibility may not be reasonably assured and considers, among
other matters, the estimated market value of the underlying collateral of
problem loans, prior loss experience, economic conditions and overall portfolio
quality. The Association's determination as to its classification of assets and
the amount of its specific and general valuation allowances are subject to
review by the OTS, which can require the Association to establish additional
general or specific loan loss allowances. Provisions for losses are charged
against earnings in the year they are established and added to the allowance.
Loan losses are charged against the allowance.
The Association established provisions for loan losses for the years ended
December 31, 1995, 1994 and 1993, of $100,000, ($32,000) and ($3,000),
respectively. An analysis of loan quality in 1994 and 1993 indicated a slight
reduction in the allowance was appropriate. In 1995, a $100,000 provision for
loan losses was deemed prudent. This increase relates principally to the
consumer loan portfolio, which continued to increase in 1995. While
delinquencies and charge-offs on consumer loans actually improved during 1995
(compared to 1994), management concluded, after a review of industry practice
and experience, that actual losses on the consumer loan portfolio may be higher
than the Association's experience to date would indicate. Management will
continue to refine its method of estimating loan losses as appropriate and as
additional experience with this type of lending is developed. At December 31,
1995, 1994 and 1993, respectively, the Association had an allowance for loan
losses of $907,000, $873,000 and $946,000, or, 1.0%, 1.0% and 1.4%,
respectively, of gross loans, and 75.4%, 12.8% and 12.4%, respectively, of total
non-performing assets.
Management believes that the Association's loan loss reserves were adequate
at December 31, 1995. There can be no assurance, however, that the allowance for
loan losses will be adequate to cover losses which may in fact be realized in
the future and that additional provisions for loan losses will not be required.
Any material increase in reserves or material loss for which an adequate reserve
has not been established may adversely affect the Association's financial
condition and earnings.
The following table sets forth an analysis of the Association's gross
allowance for possible loan losses for the periods indicated. Where specific
loan loss reserves have been established, any difference between the loss
reserve and the amount of loss realized has been charged off or credited to
current income.
73
<PAGE>
<TABLE>
<CAPTION>
For the Fiscal Year Ended
December 31,
----------------------------
1995 1994 1993
-------- -------- --------
<S> <C> <C> <C>
(Dollars in Thousands)
Allowance at beginning of period.......................... $ 873 $ 946 $ 948
Provision for loan losses:
Provision for mortgage loans......................... -- (82) (3)
Provision for consumer loans......................... 100 50 --
------- ------- -------
Total provision for loan losses................. 100 (32) (3)
Charge offs:
Mortgage loans:
One- to four-family loans/(1)/.................. -- -- --
Construction loans.............................. -- -- --
Multi-family loans.............................. -- -- --
Total mortgage loans...................... -- -- --
Commercial real estate loans......................... -- -- --
Consumer loans:
Indirect auto loans............................. 54 30 --
Direct auto loans............................... 9 -- --
Home equity loans............................... -- -- --
Other consumer loans............................ 5 13 2
------- ------- -------
Total consumer loans...................... 68 43 2
Commercial business loans............................ -- -- --
------- ------- -------
Total charge offs............................... 68 43 2
Recoveries:
Mortgage loans:
One- to four-family loans/(1)/.................. -- 2 3
Construction loans.............................. -- -- --
Multi-family loans.............................. -- -- --
------- ------- -------
Total mortgage loans...................... -- 2 3
Commercial real estate loans......................... -- -- --
Consumer loans:
Indirect auto loans............................. 2 -- --
Direct auto loans............................... -- -- --
Home equity loans............................... -- -- --
Other consumer loans............................ -- -- --
------- ------- -------
Total consumer loans...................... 2 -- --
Commercial business loans........................... -- -- --
------- ------- -------
Total recoveries................................ 2 2 3
Net charge offs........................................... (66) (41) 1
------- ------- -------
Balance at end of period.................................. $ 907 $ 873 $ 946
======= ======= =======
Ratio of allowance to total loans outstanding at the end
of the period........................................... 1.01% 1.04% 1.38%
Ratio of net charge offs to average loans outstanding
during the period....................................... 0.07% 0.05% 0.00%
Allowance for loan losses to total non-performing assets.. 75.39% 12.74% 12.39%
Allowance for loan losses to total non-performing loans... 176.80% 219.35% 115.09%
</TABLE>
_______________
/(1)/ Includes construction loans converted to permanent loans.
74
<PAGE>
The following table sets forth the breakdown of the allowance for loan
losses by loan category for the periods indicated.
<TABLE>
<CAPTION>
At December 31,
-------------------------------------------------------------------------------------------
1995 1994
------------------------------------------ ------------------------------------------
% of % of
Allowance Allowance
Amount of Loan % of to Loans Amount of Loan % of to Loans
Loan Loss Amounts by Total in Each Loan Loss Amounts by Total in Each
Allowance Category Loans Category Allowance Category Loans Category
--------- ---------- ----- --------- --------- ---------- ----- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
(Dollars in Thousands)
Mortgage loans:
One- to four-family
loans/(1)/.............. $250 $53,294 59.53% 0.47% $278 $53,850 63.93% 0.52%
Construction loans....... -- 716 .80% --% -- -- --% --%
Multi-family loans....... 18 1,776 1.98% 1.01% 20 1,954 2.32% 1.02%
---- ------- ---- -------
Total mortgage loans... 268 55,786 62.31% 0.48% 298 55,804 66.25% 0.53%
Commercial real estate
loans..................... 334 4,484 5.01% 7.45% 327 4,902 5.82% 6.67%
Consumer loans:
Indirect auto loans...... 221 21,598 24.12% 1.02% 170 16,708 19.83% 1.02%
Direct auto loans........ 15 1,515 1.69% 0.99% 12 1,120 1.33% 1.07%
Home equity loans........ 57 4,275 4.78% 1.33% 40 3,872 4.60% 1.03%
Other consumer loans..... 1 1,332 1.49% 0.08% 1 1,328 1.58% 0.08%
---- ------- ---- -------
Total consumer loans... 294 28,720 32.08% 1.02% 223 23,028 27.34% 0.97%
Commercial business loans.. 11 541 .60% 2.03% 2 496 .59% 0.40%
Unallocated................ -- -- --% --% 23 -- --% --%
---- ------- ---- -------
Total allowance for loan
losses.................... $907 $89,531 100.00% 1.01% $873 $84,230 100.00% 1.04%
==== ======= ==== =======
</TABLE>
<TABLE>
<CAPTION>
At December 31,
---------------------------------------------
1993
---------------------------------------------
% of
Allowance
Amount of Loan % of to Loans
Loan Loss Amounts by Total in Each
Allowance Category Loans Category
--------- ---------- ----- ---------
<S> <C> <C> <C> <C>
Mortgage loans:
One- to four-family
loans/(1)/.............. $222 $42,831 62.42% 0.52%
Construction loans....... -- 599 .87% --%
Multi-family loans....... 26 2,644 3.85% 0.98%
---- -------
Total mortgage loans... 248 46,074 67.14% 0.54%
Commercial real estate
loans..................... 256 6,542 9.53% 3.91%
Consumer loans:
Indirect auto loans...... 53 10,554 15.38% 0.50%
Direct auto loans........ 3 509 .74% 0.59%
Home equity loans........ 17 3,404 4.96% 0.50%
Other consumer loans..... 10 972 1.42% 1.03%
---- -------
Total consumer loans... 83 15,439 22.50% 0.54%
Commercial business loans.. 3 569 .83% 0.53%
Unallocated................ 356 -- --% --%
---- -------
Total allowance for loan $946 $68,624 100.00% 1.38%
losses.................... ==== =======
</TABLE>
------------------------
/(1)/ Includes construction loans converted to permanent loans.
75
<PAGE>
INVESTMENT ACTIVITIES
GENERAL. The Association is permitted under federal law to make certain
investments, including investments in securities issued by various federal
agencies and state and municipal governments, deposits at the FHLB of Chicago,
certificates of deposit in federally insured institutions, certain bankers'
acceptances and federal funds. It may also invest, subject to certain
limitations, in commercial paper having one of the two highest investment
ratings of a nationally recognized rating agency, and certain other types of
corporate debt securities and mutual funds.
The Association purchases investment securities pursuant to an investment
policy established by and under the supervision of the Board of Directors. The
objectives of the investment policy are, among others, to provide and maintain
required liquidity and generate a favorable return on investments without
incurring undue interest rate risk. The Association's Investment Committee is
responsible for implementing the investment policy, and the Association's chief
executive officer is responsible for managing the securities portfolio.
The investment activities of the Association consist primarily of
investments in mortgage-backed and related securities (i.e., CMOs and REMICs)
and other investment securities, consisting primarily of securities issued or
guaranteed by the United States Government or agencies thereof. Typical
investments include federally sponsored agency (Federal Home Loan Mortgage
Corporation ("FHLMC"), FNMA and Government National Mortgage Association
("GNMA")) mortgage pass-through certificates and federally sponsored agency CMOs
and REMICs. The Association performs analyses on mortgage-backed and related
securities prior to purchase and on a monthly basis to determine the impact on
earnings and market value under various interest rate and prepayment conditions.
The Association does not currently engage in the purchase or sale of
futures, options, interest rate swaps, floors or caps or other derivatives or
securities with the purpose of hedging interest rate risk. See "MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS--
Management of Interest Rate Risk" for a discussion of the Association's
strategies for managing interest rate risk.
OTS guidelines regarding investment portfolio policy and generally accepted
accounting principles require the Association to categorize its investment
securities and mortgage-backed and related securities and certain other assets
as "held-to-maturity," "trading" or "available-for-sale." At December 31, 1995,
all of the Association's securities (including all mortgage-backed and related
securities) were classified as available-for-sale and were reported at fair
value. See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS--Impact of New Accounting Pronouncements."
MORTGAGE-BACKED SECURITIES. Mortgage-backed securities represent a
participation interest in a pool of single-family, multi-family or commercial
mortgages, the principal and interest payments of which are passed from the
mortgage originators through intermediaries that pool and repackage the
participation interest in the form of securities to investors such as the
Association. Such intermediaries may include quasi-governmental agencies such
as FHLMC, FNMA and GNMA which guarantee or insure the payment of principal and
interest to investors. Mortgage-backed securities generally increase the
quality of the Association's assets by virtue of the guarantees that back them,
are more liquid than individual mortgage loans and may be used to collateralize
borrowings or other obligations of the Association.
Mortgage-backed securities typically are issued with stated principal
amounts and the securities are backed by pools of mortgages that have loans with
interest rates that are within an identified range and have similar maturities.
The underlying pool of mortgages can be composed of either fixed rate
mortgages, ARMs or balloon loans. Mortgage-backed securities generally are
referred to as mortgage participation certificates or pass-through certificates.
As a result, the interest rate risk characteristics of the underlying pool of
76
<PAGE>
mortgages, i.e., fixed rate or adjustable rate, as well as prepayment risk, are
passed on to the certificate holder. The life of a mortgage-backed pass-through
security is equal to the life of the underlying mortgages.
The actual maturity of a mortgage-backed security varies, depending on when
the mortgagors prepay or repay the underlying mortgages. Prepayments of the
underlying mortgages may shorten the life of the investment, thereby adversely
affecting its yield to maturity and the related market value of the mortgage-
backed security. The yield is based upon the interest income and the
amortization of the premium or accretion of the discount related to the
mortgage-backed security. Premiums and discounts on mortgage-backed securities
are amortized or accreted over the estimated term of the securities using a
level yield method. The prepayment assumptions used to determine the
amortization period for premiums and discounts can significantly affect the
yield of the mortgage-backed security and these assumptions are reviewed
periodically to reflect the actual prepayment. The actual prepayments of the
underlying mortgages depend on many factors, including the type of 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 is an important
determinant in the rate of prepayments. If the coupon rate of the underlying
mortgages significantly exceeds the prevailing market interest rates offered for
mortgage loans, refinancing generally increases and accelerates the prepayment
of the underlying mortgages. Prepayment experience is more difficult to
estimate for adjustable rate mortgage-backed securities.
At December 31, 1995, the Association had $41.4 million in mortgage-backed
and related securities (representing 27.4% of total assets). At December 31,
1995, $3.8 million, or 9.2%, of the Association's mortgage-backed and related
securities were not guaranteed or insured by FHLMC, FNMA or GNMA. The
Association's mortgage-backed securities portfolio contains fixed rate and
floating rate securities. Certain of the Association's mortgage-backed
securities yield above-market rates of interest and are subject to substantial
risk of prepayment. In a declining interest rate environment, the Association
may experience significant prepayments of both fixed and adjustable rate
mortgage-backed and related securities. In such instances, the Association may
be unable to reinvest the cash flow from these securities into comparable
yielding investments, and would expect this reinvestment risk to continue so
long as interest rates remained relatively low.
MORTGAGE-RELATED SECURITIES. CMOs and REMICs are typically issued by a
special purpose entity, which may be organized in a variety of legal forms, such
as a trust, a corporation or a partnership. The entity aggregates pools of
pass-through securities or mortgage loans, which are used to collateralize the
mortgage related securities. Once combined, the cash flows can be divided into
"tranches" or "classes" of individual securities, thereby creating more
predictable average lives for each security than the underlying pass-through
pools or mortgage loans. Accordingly, under this security structure all
principal paydowns from the various mortgage pools or mortgage loans are
allocated to a mortgage related securities' class or classes structured to have
priority until it has been paid off. These securities generally have fixed
interest rates, and as a result, changes in interest rates generally would
affect the market value and possibly the prepayment rates of such securities.
The characterization of a mortgage-related security as a REMIC relates solely to
the tax treatment of the mortgage related security under the Internal Revenue
Code of 1986, as amended.
At December 31, 1995, the Association had $21.0 million in CMOs and
REMICs (representing 13.9% of total assets). The Association's current policy
is to purchase CMOs and REMICs issued principally by quasi-governmental agencies
such as FHLMC and FNMA.
77
<PAGE>
COMPOSITION OF THE ASSOCIATION'S MORTGAGE-BACKED AND RELATED SECURITIES
PORTFOLIO. The table below sets forth certain information regarding the carrying
value, weighted average yields and maturities of the Association's mortgage-
backed and related securities at December 31, 1995. At December 31, 1995, the
stated average maturity of the Association's mortgage-backed and related
securities portfolio was 20.8 years.
<TABLE>
<CAPTION>
At December 31, 1995
-------------------------------------------------------------------------------------------------------
Over One to Five Over Five to Ten
Years/(1)/ Years Over Ten Years Totals
--------------------- -------------------- ------------------- -------------------------------------
Average
Weighted Weighted Weighted Years to Estimated Weighted
Carrying Average Carrying Average Carrying Average Stated Carrying Market Average
Value Yield Value Yield Value Yield Maturity Value Value Yeild
---------- ---------- --------- ---------- -------- --------- -------- -------- ---------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Mortgage-backed securities:
GNMA..................... $ -- --% $ -- --% $ 4,929 6.79% 26.9 $ 4,929 $ 4,970 6.79%
FHLMC.................... 1,069 5.24% 1,032 5.38% 2,808 7.37% 16.2 4,909 4,903 6.49%
FNMA..................... -- --% -- --% 8,365 6.72% 24.5 8,365 8,448 6.72%
------
Adjustable rate mortgage-
backed security mutual
fund..................... -- --% -- --% 2,083 6.14% 14.3 2,083 2,083 6.14%
------ ------ ------- ------- -------
Total mortgage-backed
securities................ 1,069 5.24% 1,032 5.38% 18,185 6.77% 22.0 20,286 20,404 6.62%
------ ------ ------- ------- -------
CMOs and REMICs............ -- --% 3,732 5.77% 17,573 5.74% 19.7 21,305 20,972 5.75%
------ ------ ------- ------- -------
TOTAL...................... $1,069 5.24% $4,764 5.69% $35,758 6.27% 20.8 $41,591 $41,376 6.18%
====== ====== ======= ======= =======
---------------
</TABLE>
/(1)/ At December 31, 1995, the Association did not have any mortgage-backed or
related securities maturing in one year or less.
The following table sets forth certain information regarding carrying and
market values and percentage of total carrying values of the Association's
mortgage-backed and related securities portfolio.
<TABLE>
<CAPTION>
At December 31,
-------------------------------------------------------------------------------
1995 1994 1993
------------------------- ------------------------- -------------------------
Carrying % of Market Carrying % of Market Carrying % of Market
Value Total Value Value Total Value Value Total Value
-------- ------ ------- -------- ------ ------- -------- ------ -------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Mortgage-backed securities:
GNMA............................. $ 4,929 11.9% 4,970 3,983 11.3% 3,777 6,542 15.7% 6,653
FHLMC............................ 4,909 11.8% 4,904 5,695 16.2% 5,443 6,753 16.2% 6,833
FNMA............................. 8,365 20.1% 8,447 5,397 15.4% 5,277 6,942 16.7% 7,032
Adjustable rate mortgage-backed
security mutual fund............. 2,083 5.0% 2,083 77 0.2% 75 3,237 7.8% 3,221
------- ------- ------- ------- ------- -------
Total mortgage-backed securities... 20,286 48.8% 20,404 15,152 43.1% 14,572 23,474 56.4% 23,739
------- ------- ------- ------- ------- -------
CMOs and REMICs.................... 21,305 51.2% 20,972 19,974 56.9% 18,019 18,171 43.6% 18,056
------- ------- ------- ------- ------- -------
TOTAL.............................. $41,591 $41,376 $35,126 $32,591 $41,645 $41,795
======= ======= ======= ======= ======= =======
</TABLE>
78
<PAGE>
The following table sets forth the activity in the Association's mortgage-
backed and related securities during the periods indicated.
<TABLE>
<CAPTION>
For the Fiscal Year Ended December 31,
-----------------------------------------
1995 1994 1993
------------- ------------ ------------
<S> <C> <C> <C>
(In Thousands)
Mortgage-backed and related securities:
At beginning of period................. $35,126 $41,645 $ 26,632
Purchases............................ 9,892 6,714 54,130
Sales................................ -- (9,927) (24,200)
Repayments........................... (3,457) (3,318) (15,026)
Premium/discount amortization, net... 30 12 109
------- ------- --------
End of period.......................... $41,591 $35,126 $ 41,645
======= ======= ========
</TABLE>
Substantially all mortgage derivative securities held by the Association
are not classified as "high-risk" under regulatory guidelines and are subject to
normal effects of changes in interest rates. To assess price volatility, the
Federal Financial Institutions Examination Council ("FFIEC") adopted a policy in
1992 which requires an annual "stress" test of mortgage derivative securities.
This policy, which has been adopted by the OTS, as prescribed by Thrift Bulletin
52, requires the Association to annually test its mortgage-related securities to
determine whether they are high-risk securities. The Association performs such
a test on a monthly basis. Mortgage derivative securities with an average life
or price volatility in excess of a benchmark 30-year mortgage-backed pass-
through security are considered high-risk mortgage securities. Under the
policy, savings institutions may generally only invest in high-risk mortgage
securities in order to reduce interest rate risk. In addition, all high-risk
mortgage securities acquired after February 9, 1992 which are classified as high
risk at the time of purchase must be carried in the institution's trading
account or as assets held-for-sale. At December 31, 1995, the Association held
two mortgage derivative securities that did not meet the criteria established by
the FFIEC policy as expressed in Thrift Bulletin 52 and were classified as
"high-risk" with a combined carrying value of $2,006,000 and a market value of
$1,996,000. The Association's current investment policy is not to invest in
CMOs and REMICs classified as "high-risk." To date, the OTS has not required
the Association to dispose of any high-risk securities.
INVESTMENT SECURITIES. The Association may invest in various types of
liquid assets that are permissible investments for federally chartered savings
associations, including U.S. Treasury obligations, securities of various federal
agencies, certain certificates of deposit of insured banks and savings
institutions and federal funds. Subject to certain restrictions applicable to
all federally chartered savings associations, the Association may also invest
its assets in commercial paper and investment grade corporate debt securities.
COMPOSITION OF THE ASSOCIATION'S INVESTMENT SECURITIES PORTFOLIO. At
December 31, 1995, the Association had investment securities with a carrying
value of $11.8 million. Of these, $10.6 million (carrying value) were United
States government and agency securities.
79
<PAGE>
The table below sets forth certain information regarding the carrying value,
weighted average yields and maturities of the Association's investment
securities at December 31, 1995.
<TABLE>
<CAPTION>
At December 31, 1995
---------------------------------------------------------------------------------------------------------------
Less Than One Year One to Five Years Five to Ten Years Over Ten Years Investment Securities Totals
------------------ ----------------- ----------------- ----------------- -----------------------------------
Average
Weighted Weighted Weighted Weighted Remaining Weighted
Carrying Average Carrying Average Carrying Average Carrying Average Years to Carrying Market Average
Value Yield Value Yield Value Yield Value Yield Maturity Value Value Yield
-------- --------- -------- -------- -------- -------- -------- -------- --------- -------- ------ ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
(Dollars in Thousands)
U. S. Government
and other agency
obligations........ $ 528 4.75% $10,135 5.91% $ -- --% $ -- --% 2.95 $10,663 $10,634 5.57%
Other securities... 22 7.60% 74 7.60% 283 8.37% 103 7.60% 6.92 482 482 8.06%
FHLB stock......... 694 7.00% -- --% -- --% -- --% -- 694 694 7.00%
------ ------- ---- ---- ------- -------
Total............ $1,244 6.06% $10,209 5.92% $283 8.37% $103 7.60% 3.12 $11,839 $11,810 5.75%
====== ======= ==== ==== ======= =======
</TABLE>
The following table sets forth certain information regarding the carrying and
market values of the Association's investment securities.
<TABLE>
<CAPTION>
At December 31,
------------------------------------------------------------------------------------------
1995 1994 1993
---------------------------- ---------------------------- ----------------------------
Carrying Percent of Market Carrying Percent of Market Carrying Percent of Market
Value Portfolio Value Value Portfolio Value Value Portfolio Value
-------- ---------- ------ -------- ---------- ------ -------- ---------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
(Dollars in Thousands)
U.S. Government securities
and other agency obligations..... $10,663 90.07% $10,634 $ 9,684 89.21% $ 8,918 $7,248 82.15% $7,298
Other securities................. 482 4.07% 482 521 4.80% 521 591 6.70% 591
FHLB stock....................... 694 5.86% 694 650 5.99% 650 984 11.15% 984
------- ------- ------- ------- ------ ------
Total.......... .......... $11,839 $11,810 $10,855 $10,089 $8,823 $8,873
======= ======= ======= ======= ====== ======
</TABLE>
80
<PAGE>
The following table sets forth certain information with respect to each
security (other than U.S. Government and agency securities and mutual funds
which invest exclusively in such securities) which had an aggregate book value
in excess of 10% of the Association's retained earnings at the dates indicated.
<TABLE>
<CAPTION>
At December 31,
----------------------------------------------------
1995 1994 1993
---------------- ---------------- ----------------
Carrying Market Carrying Market Carrying Market
Value Value Value Value Value Value
-------- ------ -------- ------ -------- ------
<S> <C> <C> <C> <C> <C> <C>
(In Thousands)
Structured Asset Security Corp.,
1991 Series 2, Class FB CMO,
adjustable rate, due 12/20/21..... $1,796 $1,688 $1,010 $999 $2,012 $2,010
Asset Management Fund, Inc.
(Shay Financial Services Co.,),
Adjustable Rate Mortgage
Portfolio Mutual Fund............. 2,083 2,083 77 75 73 73
Federated Securities Corp.
Adjustable Rate Mortgage
Mutual Fund....................... - -- -- -- 3,164 3,148
</TABLE>
DEPOSIT ACTIVITIES AND OTHER SOURCES OF FUNDS
GENERAL. The Association's primary sources of funds for use in lending and
investing and for other general purposes are deposits and proceeds from
principal and interest payments on loans, mortgage-backed and related securities
and investment securities, and, to a lesser extent, FHLB advances and reverse
repurchase agreements. Contractual loan repayments are a relatively stable
source of funds, while deposit inflows and outflows and loan prepayments are
significantly influenced by general interest rates and money market conditions.
Borrowings may be used on a short-term basis to compensate for reductions in the
availability of funds from other sources, or on a longer term basis for general
operational purposes.
The following table sets forth information concerning the flow of deposits
for the Association during the periods indicated.
<TABLE>
<CAPTION>
At or For the Fiscal Year Ended December 31
----------------------------------------------
1995 1994 1993
-------------- -------------- --------------
<S> <C> <C> <C>
(In Thousands)
Total deposits at beginning of period........ $ 122,375 $ 125,145 $ 132,235
Deposits..................................... 148,874 116,457 94,378
Withdrawals.................................. (138,607) (123,393) (106,165)
--------- --------- ---------
Net deposits (withdrawals)................... 10,267 (6,936) (11,787)
Interest credited on deposits................ 5,735 4,166 4,697
--------- --------- ---------
Net increase (decrease) in savings deposits.. 16,002 (2,770) (7,090)
--------- --------- ---------
Total deposits at end of period.............. $ 138,377 $ 122,375 $ 125,145
========= ========= =========
</TABLE>
DEPOSIT ACCOUNTS. The Association attracts deposits within its primary
market area by offering a variety of deposit accounts, including non-interest
bearing checking accounts, negotiable order of withdrawal ("NOW") accounts,
passbook savings accounts and certificates of deposit which range in maturity
from 91 days to 6 years. Deposit terms vary according to the minimum balance
required, the length of time the funds
81
<PAGE>
must remain on deposit and the interest rate. The flow of deposits is
influenced significantly by general economic conditions, changes in money market
and prevailing interest rates, and competition. Management generally reviews on
a weekly basis the interest rates set for its deposit accounts.
The Association relies on customer service and long-standing relationships
with customers to attract and retain deposits. The Association competes for
deposits with other institutions in its market area by offering deposit
instruments that are competitively priced and by providing customer service
through convenient and attractive offices, knowledgeable and efficient staff and
hours of service that meet customers' needs. In December of 1994, the
Association commenced a program whereby it offered to match any interest rate on
a deposit account being offered by its competitors. This program remained in
place until July of 1995. From December 31, 1994 to June 30, 1995, the
Association's deposits increased by $17.2 million to $139.6 million
(representing a 13.9% increase in deposits). Since discontinuing the program
under current management, the Association's deposits have decreased to $138.4
million at December 31, 1995. For a discussion of the effect of this program on
net interest income for the fiscal year ended December 31, 1995, see
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS." The Association does not currently solicit or accept brokered
deposits.
82
<PAGE>
The following table sets forth the distribution of the Association's deposit
accounts at the dates indicated and the weighted average nominal rates on each
category of deposits presented.
<TABLE>
<CAPTION>
At December 31,
----------------------------------------------------------------------------------------------
1995 1994 1993
----------------------------------------------------------------------------------------------
Weighted Weighted Weighted
Percent Average Percent Average Percent Average
Average of Total Nominal Average of Total Nominal Average of Total Nominal
Balance Deposits Rate Balance Deposits Rate Balance Deposits Rate
-------- --------- --------- -------- --------- --------- -------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
(Dollars in Thousands)
Demand accounts:
Non-interest bearing..... $ 468 0.34% --% $ 418 0.34% --% $ 336 0.27% --%
NOW accounts............. 4,821 3.53% 1.78% 4,041 3.29% 2.08% 3,127 2.47% 2.46%
Money market accounts.... 3,611 2.64% 2.85% 5,596 4.55% 2.75% 6,104 4.82% 3.11%
Passbook accounts........ 13,947 10.20% 3.54% 14,991 12.19% 3.16% 14,503 11.46% 3.27%
-------- -------- --------
Total demand accounts.. 22,847 18.71% 2.99% 25,046 20.36% 2.84% 24,070 19.01% 3.08%
Certificates of deposit
accounts:
6 months and less........ 11,863 8.68% 5.24% 14,816 12.05% 3.46% 18,159 14.34% 3.61%
7 to 12 months........... 27,608 20.19% 5.57% 24,886 20.23% 3.77% 30,937 24.44% 4.05%
13 to 24 months.......... 18,733 13.70% 5.54% 16,001 13.01% 4.46% 14,868 11.74% 5.07%
25 to 36 months.......... 26,050 19.05% 5.64% 19,396 15.77% 5.02% 17,466 13.80% 5.92%
37 to 60 months.......... 12,187 8.91% 6.65% 11,096 9.02% 6.88% 12,458 9.84% 7.71%
Over 60 months........... 9,643 7.05% 6.59% 6,083 4.95% 5.85% 2,788 2.20% 5.52%
Jumbo.................... 7,792 5.70% 6.46% 5,672 4.61% 5.02% 5,846 4.62% 4.93%
-------- -------- --------
Total certificates of
deposit............... 113,876 83.29% 5.81% 97,950 79.64% 4.64% 102,522 80.99% 4.97%
-------- -------- --------
Total deposits......... 136,723 5.35% 122,996 4.29% 126,592 4.62%
-------- -------- --------
</TABLE>
83
<PAGE>
The following table indicates the amount of the Association's jumbo
certificates of deposit and other time deposits of $100,000 or more by time
remaining until maturity as of December 31, 1995. Jumbo certificates of deposit
require minimum deposits of $100,000 and rates paid on such accounts are
negotiable.
<TABLE>
<CAPTION>
Certificates
Maturity Period of Deposit
--------------- ------------
<S> <C>
Three months or less....... $2,005
Three through six months... 200
Six through twelve months.. 1,719
Over twelve months......... 3,840
------
Total.................... $7,764
======
</TABLE>
The following table sets forth, by various rate categories, the total amount
of certificate of deposit accounts at the Association outstanding as of the
dates indicated.
<TABLE>
<CAPTION>
At December 31,
-------------------------
1995 1994 1993
------- ------- -------
(Dollars in Thousands)
<S> <C> <C> <C>
Below 4.0%...... $ -- $19,907 $47,740
4.00 - 5.00%.... 11,052 35,510 23,378
5.01 - 6.00%.... 51,992 26,560 12,095
6.01 - 7.00%.... 21,029 4,440 3,766
7.01 - 8.00%.... 30,523 11,534 6,621
8.01 - 9.00%.... 422 1,664 5,801
Over 9.00%...... -- -- --
</TABLE>
The following table sets forth the amount and maturities of certificates of
deposit at December 31, 1995.
<TABLE>
<CAPTION>
Amount Due
------------------------------------------------------------
Less Than 1-2 2-3 3-4 4-5 After
One Year Years Years Years Years 5 Years Total
--------- ------- ------ ------ ------ ------- -------
(In Thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Below 4.00%... $ -- $ -- $ -- $ -- $ -- $ -- $ --
4.00 - 5.00%.. 9,518 1,534 -- -- -- -- 11,052
5.01 - 6.00%.. 28,201 13,396 4,350 4,014 2,031 -- 51,992
6.01 - 7.00%.. 10,411 4,913 3,494 604 1,341 266 21,029
7.01 - 8.00%.. 9,638 8,003 405 6,060 6,273 144 30,523
8.01 - 9.00%.. -- 256 66 -- 100 -- 422
Over 9.00%.... -- -- -- -- -- -- --
</TABLE>
In the unlikely event the Association is liquidated after the Conversion,
depositors will be entitled to full payment of their deposit accounts prior to
any payment being made to the stockholders of the Association, which will be the
Holding Company.
BORROWINGS. In the past, the Association has relied on advances from the
FHLB of Chicago in the event of a reduction in available funds from other
sources. The Association is a member of the FHLB of Chicago, which functions as
a central reserve bank providing credit for savings and loan associations and
other member financial institutions. As a member, the Association is required to
own capital stock in the FHLB of Chicago and is authorized to apply for advances
on the security of such stock and certain of its mortgage-based loans and other
assets, provided that certain standards relating to creditworthiness have been
met. Advances are made pursuant to several different programs, each of which has
its own interest rate and range of maturities. Depending on the program,
limitations on the amount of advances are based either on a fixed
84
<PAGE>
percentage of an institution's retained earnings or on the FHLB's assessment of
the institution's creditworthiness. The FHLB of Chicago determines specific
lines of credit for each member institution.
The Association has also relied in the past on reverse repurchase agreements
with nationally recognized securities dealers. Under a reverse repurchase
agreement, the Association sells securities and agrees to buy them back at a
specified higher price at a later date. Reverse repurchase agreements are
accounted for as borrowings by the Association and are secured by the securities
sold. At December 31, 1995, the Association had no borrowings under reverse
repurchase agreements.
The following table sets forth certain information regarding borrowings by
the Association at the end of and during the periods indicated.
<TABLE>
<CAPTION>
At and For the Fiscal Year Ended December 31,
------------------------------------------------
1995 1994 1993
---- ---- ----
(In Thousands)
<S> <C> <C> <C>
Amount outstanding with respect to:
Securities sold under agreements to repurchase....... $ -- $2,936 $ --
FHLB advances........................................ -- 5,000 --
Weighted average rate paid on:
Securities sold under agreements to repurchase....... --% 6.25% --%
FHLB advances........................................ --% 6.57% --%
Maximum amount of borrowings outstanding at any month
end:
Securities sold under agreements to repurchase....... -- 4,829 --
FHLB advances........................................ 5,000 5,000 --
Approximate average short-term borrowings outstanding
with respect to:
Securities sold under agreement to repurchase........ 171 1,202 --
FHLB advances........................................ 1,053 529 --
Approximate weighted average rate paid on:/(1)/
Securities sold under agreements to repurchase....... 6.31% 5.45% --%
FHLB advances........................................ 6.40% 6.21% --%
---------------
</TABLE>
/(1)/ Computed using the weighted rates of each individual transaction.
SUBSIDIARY ACTIVITIES
The Association has one wholly-owned service corporation, FFS Investment
Services, an Illinois corporation, which was incorporated on March 25, 1994. FFS
Investment Services is engaged in the business of selling investment products,
including annuities, offered by PrimeVest Financial Services, Inc., a specialty
brokerage firm, to customers of the Association interested in buying such
products. For the fiscal year ended December 31, 1995, FFS Investment Services
reported a net loss of ($14,000). As of December 31, 1995, the Association's
investment in FFS Investment Services amounted to $291,000 or 0.2% of the
Association's total assets. Management of the Association expects to place
greater emphasis in the future on marketing the business of FFS Investment
Services and anticipates that the amount of income derived from its investment
in FFS Investment Services will increase over the next few years.
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<PAGE>
COMPETITION
The Association has been, and intends to continue to be, a community-
oriented savings institution offering a wide variety of financial services to
meet the needs of the communities it serves. The Association is headquartered in
Bloomington, Illinois. It currently operates out of its main office and two
branch offices located in Bloomington and LeRoy, Illinois. LeRoy is
approximately twenty miles southeast of Bloomington. Bloomington is located in
the central part of Illinois, adjacent to its sister-city, Normal. Bloomington,
LeRoy and Normal are located in McLean County, Illinois. The Association's
deposit and lending area is concentrated in the Illinois counties of McLean and
DeWitt. DeWitt County is located directly southeast of Bloomington adjacent to
McLean County.
The Association faces intense competition both in making loans and in
attracting deposits. The Association's market area has a large number of
financial institutions, many of which have greater financial resources, name
recognition and market presence than the Association, and all of which are
competitors of the Association to varying degrees. Particularly intense
competition exists for deposits and in all of the lending activities engaged in
by the Association. The Association's competition for loans comes principally
from commercial banks, other savings and loan associations, savings banks,
mortgage banking companies, insurance companies, finance companies and credit
unions. Thus, no assurances can be made that the Association will be able to
maintain its current level of such loans. The Association's most direct
competition for deposits historically has come from other savings and loan
associations, commercial banks, savings banks and credit unions. In addition,
the Association faces increasing competition for deposits from non-bank
institutions such as brokerage firms and insurance companies in such areas as
money market funds, other mutual funds (such as corporate and government
securities funds) and annuities. Trends toward the consolidation of the banking
industry and the lifting of interstate banking and branching restrictions may
make it more difficult for smaller institutions, such as the Association, to
compete effectively with large, national and regional banking institutions.
Smaller institutions such as the Association will be forced to either
compete with larger institutions on pricing of products and services, or to
identify and operate in a "niche" that will allow for operating margins to be
maintained at profitable levels. As a locally-based financial institution, the
Association's strategy has been to position itself as a community-oriented
financial institution that provides high quality products and services to meet
the retail banking needs of its local customer base. This strategy is designed
to identify a niche in the Association's market where it can effectively compete
against much larger institutions.
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<PAGE>
PROPERTIES
The Association conducts its business through three full-service offices.
The Association's main office is located at 301 Fairway Drive, Bloomington,
Illinois. The Association owns its offices in fee and they are unencumbered. The
Association believes that its current facilities are adequate to meet the
present and foreseeable needs of the Association and the Holding Company.
<TABLE>
<CAPTION>
Date Net Book Value at
Office Acquired December 31, 1995
------ -------- -----------------
(In Thousands)
<S> <C> <C>
Main Office 1981 $1,296
301 Fairway Drive
Bloomington, Illinois 61701
Veterans Parkway Branch 1994 $1,479
1111 South Veterans Parkway
Bloomington, Illinois 61701
LeRoy Branch 1983 $ 284
207 South East Street
LeRoy, Illinois 61752
</TABLE>
EMPLOYEES
As of December 31, 1995, the Association had a total of 39 full-time and 8
part-time employees. The Association's employees are not represented by a union
or collective bargaining group. The Association considers its relationship with
its employees to be satisfactory.
LEGAL PROCEEDINGS
The Association is, from time to time, a party to legal proceedings arising
in the ordinary course of its business, including legal proceedings to enforce
its rights against borrowers. The Association is not currently a party to any
legal proceedings which could reasonably be expected to have a material adverse
effect on the financial condition or operations of the Association.
MANAGEMENT OF THE HOLDING COMPANY AND ASSOCIATION
DIRECTORS OF THE HOLDING COMPANY
The Board of Directors of the Holding Company is currently the same as that
of the Association. The names and biographical information of the directors
are set forth below under "--Directors of the Association." The Board of
Directors is divided into three classes, each of which will serve a three-year
term (except with respect to two of the classes for the first two years after
the incorporation of the Holding Company). One class of directors, consisting
of Gerald A. Bradley and William J. Hanfland, has a term of office expiring at
the first annual meeting of the Holding Company following the Conversion; a
second class, consisting of Donald L. Fernandes and Steven J. Wannemacher, has
a term of office expiring at the annual meeting to be held one year thereafter,
and a third class, consisting of Robert P. Dole and Louis F. Ulbrich, has a
term of office expiring at the annual meeting to be held two years thereafter.
Mr. Fernandes is the president and chief executive officer of the Holding
Company.
None of the directors has received remuneration from the Holding Company to
date, and it is expected that no compensation will initially be paid to them by
the Holding Company after the Conversion. Information concerning the principal
occupations and employment of, and compensation received from the
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<PAGE>
Association by, the directors of the Holding Company is set forth under
"--Directors of the Association;" and "--Directors' Fees."
DIRECTORS OF THE ASSOCIATION
The direction and control of the Association is vested in its Board of
Directors who, because the Association is organized in mutual form, have
previously been elected by the members of the Association. These elections
have, for the most part, been controlled by the Board of Directors of the
Association exercising the proxy powers granted to it by the individual members
of the Association. Upon completion of the Conversion, each director of the
Association immediately prior to the Conversion will continue to serve as a
director of the Association after the Conversion. Each director serves for a
term of three years. The terms are staggered so that approximately one-third
of the Board of Directors is elected each year. Because the Holding Company
will own all of the issued and outstanding capital stock of the Association
following the Conversion, the Holding Company will elect the directors of the
Association following the Conversion.
The following table sets forth certain information with respect to the
persons who currently serve as members of the Board of Directors of the
Association.
<TABLE>
<CAPTION>
Age at Positions Held
Name December 31, 1995 With the Association Director Since Term Expires
--------------------- ----------------- ------------------------ -------------- ------------
<S> <C> <C> <C> <C>
Gerald A. Bradley 68 Director and Chairman 1975 1997
of the Board
Robert P. Dole 72 Director 1982 1996
Donald L. Fernandes 38 Director, President and 1991 1998
Chief Executive Officer
William J. Hanfland 54 Director 1991 1997
Louis F. Ulbrich 67 Director 1990 1996
Steven J. Wannemacher 44 Director 1995 1996
</TABLE>
The business experience for the past five years of each of the current
directors is as follows:
Mr. Bradley has been the Chairman of the Board of the Association since
November 16, 1993. He has been the owner and operator of Bloomington Tent and
Awning Company for more than the past five years. Bloomington Tent and Awning
Company manufactures and installs awnings and other canvas products and provides
rentals of large tents.
Mr. Dole is the retired President and Chairman of National Union Electric
Corporation, a manufacturer of "Eureka" brand electric appliances. Mr. Dole
retired as the President and Chairman of National Union Electric Corporation on
January 31, 1989.
Mr. Fernandes has been the President and Chief Executive Officer of the
Association since August 15, 1995. For more than five years prior to assuming
his current position, Mr. Fernandes served as the Senior Vice President and
Chief Financial Officer of the Association. Mr. Fernandes joined the
Association in 1983 prior to which he was a senior accountant with Ernst &
Whinney (now Ernst & Young).
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<PAGE>
Mr. Hanfland has been the Assistant Treasurer and Director of Financial
Operations of the Illinois Agricultural Association, a membership organization
for farmers, for more than the past five years.
Mr. Ulbrich is the Secretary of the Holding Company and of the Association.
He has served as Secretary of the Association since July, 1995. Mr. Ulbrich has
also been an attorney with the law firm of Dunn, Ulbrich, Hundman, Stanczak and
Ogar in Bloomington, Illinois for more than the past five years. Mr. Ulbrich is
currently of counsel to the firm and served as a partner of the firm until
January 1, 1994.
Mr. Wannemacher has been the Senior Vice President of Heritage Enterprises,
Inc., a health care and commercial property management firm since July, 1992.
Mr. Wannemacher served as Senior Vice President of Champion Federal Savings and
Loan in Bloomington, Illinois for more than two years prior to July, 1992.
Meetings and Committees of the Boards of Directors
The Holding Company has established four standing committees: audit,
investment, personnel and nominating. The Board of Directors intends for each
committee to meet only a few times each year.
Messrs. Bradley, Hanfland, Dole, Ulbrich and Wannemacher are members of the
audit committee. The audit committee is principally responsible for
recommending which firm to engage as the Holding Company's external auditor and
for reviewing the Holding Company's annual financial statements and matters
relating thereto.
Messrs. Dole, Hanfland, Wannemacher and Fernandes are members of the
investment committee. The investment committee is principally responsible for
the Holding Company's investment activities.
Messrs. Bradley, Hanfland, Dole, Ulbrich and Wannemacher are members of the
personnel committee. The personnel committee is principally responsible for
administering the Holding Company's Stock Option Plan.
Messrs. Dole and Ulbrich are members of the nominating committee. The
nominating committee is principally responsible for matters relating to the
nomination of directors.
The Association's Board of Directors conducts its business through meetings
of the Board and the activities of committees of the Board. During the fiscal
year ended December 31, 1995, the Association's Board of Directors held 19
meetings. No director of the Association attended fewer than 75% of the
aggregate number of meetings of the Board of Directors or of the committees on
which such director served held during the 1995 fiscal year.
The Board of Directors of the Association has established four standing
committees: audit, loan, investment and personnel. The loan committee meets on
a regular basis while the audit, investment and personnel committees meet only a
few times per year.
Messrs. Bradley, Dole, Ulbrich, Hanfland and Wannemacher are members of the
audit committee. The audit committee is principally responsible for recommending
which firm to engage as the Association's external auditor and for reviewing the
Association's annual financial statements and matters relating thereto. The
audit committee met one time during the fiscal year ended December 31, 1995.
Upon consummation of the Conversion, the functions of this committee will be
performed by the audit committee of the Holding Company.
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<PAGE>
All the directors are members of the loan committee. The loan committee
meets before each meeting of the Board of Directors. The loan committee is
principally responsible for insuring that the lending policies of the
Association are implemented and observed and approving certain loan applications
within the limits set forth in the Association's lending policies. The loan
committee met twelve times during the fiscal year ended December 31, 1995.
Messrs. Dole, Fernandes, Hanfland and Wannemacher are members of the
investment committee. The investment committee is principally responsible for
insuring that the investment management policies of the Association are
implemented and observed. The investment committee met two times during the
fiscal year ended December 31, 1995.
Messrs. Bradley, Dole, Ulbrich, Hanfland and Wannemacher are members of the
personnel committee. The personnel committee is principally responsible for
directing and reviewing the Association's personnel policies, for administering
the Association's ESOP and for determining the compensation for the
Association's officers and directors. The personnel committee met one time
during the fiscal year ended December 31, 1995.
Matters relating to the nomination of directors for the Association are
considered by the entire Board of Directors.
Directors' Fees
Directors of the Association who are not also employees of the Association
receive a fee of $1,000 per month for their services as Directors of the
Association. The Chairman of the Board of Directors receives an additional fee
of $200 per month. Directors who are employees of the Association receive no
compensation for their services as Directors of the Association. No additional
committee fees or meeting fees are paid. Mr. Bradley defers a portion of his
fees which is then used by the Association to pay the premiums on two life
insurance policies for his benefit. The Association pays an aggregate of $4,800
per year as premiums on these policies, and Mr. Bradley's annual compensation as
a director is reduced accordingly. The policies provide life insurance coverage
for Mr. Bradley and will pay benefits to his beneficiaries in the event of his
death during the term of the policies.
The Holding Company's Board of Directors intends to meet quarterly.
Directors of the Holding Company will not receive any fees in consideration of
their service.
Executive Officers
Mr. Fernandes is the President and the sole executive officer of the
Holding Company. For information concerning Mr. Fernandes's prior business
experience, see "--Directors of the Association."
The Association currently has four executive officers. Mr. Fernandes is
the President and Chief Executive Officer of the Association and has held that
position since August 15, 1995.
Gary L. Richardson is Vice President - Lending of the Association and has
held that position since February, 1993. Mr. Richardson has responsibility for
all mortgage and consumer lending functions of the Association. From February,
1992 until February, 1993, Mr. Richardson served as Senior Consumer Lending
Officer for his former employer, First of America Bank--Illinois, National
Association in Bloomington, Illinois.
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<PAGE>
Laurel B. Donovan is Vice President of the Association and has held that
position for more than the past five years. Ms. Donovan has responsibility for
all retail and customer service matters, including teller services and
administration of deposits.
Larry C. McClellan is Vice President - Operations of the Association and
has held that position since August 15, 1995. For more than five years prior to
assuming his current position, Mr. McClellan served as the Controller of the
Association. Mr. McClellan has responsibility for the Association's data
processing operations and financial administration, including supervision of the
accounting department and preparation of financial statements.
Louis F. Ulbrich is a director and the Secretary of the Association, but he
only performs policy making functions in his capacity as a director.
Accordingly, the Board of Directors does not consider Mr. Ulbrich to be an
executive officer of the Association. Mr. Ulbrich is not paid any compensation
by the Holding Company or the Association for his services as Secretary. Thus,
Mr. Ulbrich is not considered to be an employee of the Holding Company or the
Association for purposes of participating in any employee benefit plan.
EXECUTIVE COMPENSATION
The table below sets forth the total amount of cash compensation awarded
to, earned by or paid to persons who held the position of chief executive
officer of the Association during the fiscal year ended December 31, 1995. No
other officers of the Association received compensation in excess of $100,000
during the fiscal year ended December 31, 1995.
<TABLE>
<CAPTION>
Annual Compensation
---------------------------------------
Other Annual All Other
Name and Principal Position Year Salary Bonus Compensation Compensation
--------------------------- ---- ------ ----- ------------ ------------
<S> <C> <C> <C> <C> <C>
Jon C. Thetard 1995 $59,428/(2)/ --/(3)/ -- $55,000/(4)/
President and Chief Executive
Officer/(1)/
Donald L. Fernandes 1995 $89,081 $3,000/(3)/ $1,604/(6)/ --
President and Chief Executive
Officer /(5)/
---------------
</TABLE>
/(1)/ Mr. Thetard served as President and Chief Executive Officer of the
Association from January 16, 1985 through June 30, 1995.
/(2)/ Consists of salary paid by the Association through July 15, 1995 in
consideration of Mr. Thetard's services through June 30, 1995 plus fifteen days
of accumulated vacation through June 30, 1995. Assuming Mr. Thetard had served
as President and Chief Executive Officer for the entire fiscal year, his base
annual salary would have been $106,560.
/(3)/ A bonus was authorized by the Board of Directors in December, 1995,
payable on January 4, 1996. The bonus amounts listed are those paid on January
4, 1996.
/(4)/ Represents a severance payment paid to Mr. Thetard by the Association
pursuant to the terms of an agreement with the Association attendant to Mr.
Thetard's termination of employment. See "--Severance Agreement."
/(5)/ Mr. Fernandes was appointed President and Chief Executive Officer of the
Association effective August 15, 1995. The compensation reflected under salary
includes compensation paid to Mr. Fernandes from January 1, 1995 through August
14, 1995 in his capacity as Senior Vice President - Finance of the Association.
Mr. Fernandes's base annual salary as President and Chief Executive Officer for
the fiscal year ending December 31, 1996 is $100,000.
/(6)/ Mr. Fernandes has a deferred compensation agreement with the Association
whereby the Association has agreed to purchase a life insurance policy on his
behalf. The amount listed is the annual premium paid by the Association for
this policy. See "--Deferred Compensation Agreement."
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<PAGE>
The Holding Company has paid no compensation to date to the sole executive
officer of the Holding Company. The Holding Company does not plan to pay
compensation to officers of the Holding Company for their services as such.
EMPLOYEE BENEFIT PLANS
HEALTH AND LIFE INSURANCE. The Association provides coverage for its full-
time employees (those who work 30 or more hours per week) under group insurance
plans for hospitalization and major medical, long-term disability and term life.
The Association pays up to $130 per month per employee towards the cost of the
premiums associated with the health care and term life insurance coverages for
that employee and his or her spouse and dependents. The employee pays any
amounts in excess of $130. The Association pays the entire expense of the other
plans.
PENSION PLAN. The Association currently maintains a defined benefit
pension plan (the "Pension Plan") to provide retirement benefits for its
employees. The Pension Plan is qualified under Section 401(a) and 501(a) of the
Internal Revenue Code of 1986, as amended (the "Code"). The Association
annually contributes an amount to the Pension Plan necessary to satisfy the
actuarially determined minimum funding requirements in accordance with the
Employee Retirement Income Security Act of 1974, as amended, ("ERISA").
The following table sets forth the estimated annual benefits payable upon
retirement at age 65 in calendar year 1995, expressed in the form of a ten-year
certain and life annuity, for the average salary and years of service
classifications specified.
<TABLE>
<CAPTION>
Years of Service
-------------------------------------------
<S> <C> <C> <C> <C> <C>
Average Salary 15 20 25 30 35
---------------- ------- ------- ------- ------- -------
$ 25,000 $ 5,625 $ 7,500 $ 9,375 $11,250 $13,125
50,000 $11,250 $15,000 $18,750 $22,500 $26,250
75,000 $16,875 $22,500 $28,125 $33,750 $39,375
100,000 $22,500 $30,000 $37,500 $45,000 $52,500
125,000 $28,125 $37,500 $46,875 $56,250 $65,625
</TABLE>
All employees over the age of 20-1/2 who have worked at least 500 hours in
a 6-month period of employment with the Association are eligible to participate
in the Pension Plan. Once eligible to participate in the Pension Plan an
employee accrues benefits for each year of service during which the employee
works at least 1,000 hours for the Association.
The amount of an employee's Pension Plan benefit is based on that
employee's years of service to the Association, up to a maximum of forty years,
and his or her average salary during his or her most highly compensated five
consecutive years of service. An employee's Pension Plan benefit vests
according to the following schedule: 20% after two years of service, 40% after
3 years of service, 60% after 4 years of service, 80% after 5 years of service
and 100% after 6 years of service. Normal retirement occurs at the later of age
65 or when an employee completes five years of service to the Association. An
employee may elect early retirement any time after reaching age 55 and
completing ten years of service to the Association. An employee may also elect
to delay retirement beyond his or her normal retirement date. An employee's
Pension Plan benefits are payable in full without deduction for Social Security
or any other offset amounts.
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<PAGE>
An employee retiring on his or her normal retirement date is entitled to a
monthly pension equal to 1.5% of his or her average monthly salary during his or
her five consecutive most highly-compensated years of service multiplied by the
number of that employee's years of service, up to a maximum of 40 years of
service. An employee electing early retirement or late retirement will have his
or her monthly benefit actuarially adjusted to account for such early or late
commencement of benefit payments. Under the Pension Plan, benefits are also
payable upon termination, disability and death.
The approximate years of service, as of December 31, 1995, for the named
executive is as follows:
<TABLE>
<CAPTION>
Name Years of Service
---- ----------------
<S> <C>
Donald L. Fernandes 13 Years
</TABLE>
Effective March 31, 1996, the Board of Directors of the Association froze
the Pension Plan. No further benefits will accrue under the Pension Plan after
that date. All participants became fully vested in their benefits accrued as of
that date. The Association will continue making contributions to the Pension
Plan until the plan is fully funded. For information on the current funding
levels of the Pension Plan, see Note 9 to Notes to Consolidated Financial
Statements.
PROFIT SHARING PLAN. The Association currently maintains a defined
contribution profit sharing plan (the "Profit Sharing Plan") to provide
employees eligible to participate in the Profit Sharing Plan the opportunity to
establish tax-favored savings plans. The Profit Sharing Plan is a qualified
plan under Section 401(k) of the Code. Donald L. Fernandes, as President of the
Association, is the trustee under the Profit Sharing Plan.
All employees who have attained age 20 1/2 and completed six months of
service with the Association are eligible to participate in the Profit Sharing
Plan. An employee may elect to contribute a portion of his or her compensation,
up to a maximum of 15%, to his or her account under the Profit Sharing Plan.
Any such contribution defers the amount of compensation so contributed, and the
participating employee is not taxed on that compensation, if at all, until he or
she withdraws such amount from the Profit Sharing Plan. A participant may not
make any other contributions to the Profit Sharing Plan.
The Association may, in its sole discretion, elect to match contributions
made by employees. In addition, the Association may, in its sole discretion,
elect in any year to make a designated qualified nonelective contribution to the
Profit Sharing Plan for the benefit of "Nonhighly Compensated Employees" (as
defined in the Profit Sharing Plan). The Association may also, in its sole
discretion, make nonelective contributions to the Profit Sharing Plan for the
benefit of all participants. The allocation of any such nonelective
contributions is in proportion to each participant's compensation for the plan
year in which such contributions are made. A participant is eligible to receive
an allocation of a nonelective contribution by the Association if that
participant is employed by the Association at the end of the plan year in which
such contribution is made and if that participant had completed at least 501
hours of service with the Association during that plan year, except that these
requirements do not apply to any employee whose employment with the Association
terminates during such plan year by reason of death, disability or retirement at
the normal retirement age or later. The Association does not intend to make any
contributions, other than matching contributions, to the Profit Sharing Plan for
several years following the Conversion because of the additional compensation
expense resulting from implementation of the ESOP.
A participant in the Profit Sharing Plan is 100% vested at all times in his
or her own deferred compensation contributions to the Profit Sharing Plan. A
participant's interest in matching and nonelective contributions made by the
Association vests based on that participant's years of service in which he or
she works 501 or more hours according to the following schedule: 20% after two
years of service, 40% after three
93
<PAGE>
years of service, 60% after four years of service, 80% after five years of
service and 100% after six years of service. A participant becomes fully vested
automatically, regardless of years of service, in all of the Association's
contributions upon that participant's death, disability or attainment of normal
retirement age.
EMPLOYEE STOCK OWNERSHIP PLAN. The Board of Directors of the Association
and the Holding Company have approved the adoption of an ESOP, to be effective
in connection with the Conversion. Employees of age 21 or older who have
completed at least 1,000 hours of service in a 12-month period of employment
with the Association will be eligible to participate in the ESOP. The
Association will submit an application for a "Letter of Determination" to the
Internal Revenue Service as to the tax-qualified status of the ESOP under
Section 401(a) of the Code. Although no assurances can be given, the
Association and the Holding Company expect that the ESOP will receive a
favorable determination letter.
Benefits under the ESOP will be paid in shares of Common Stock. The ESOP
anticipates borrowing funds from the Holding Company to acquire 8% of the Common
Stock sold in the Conversion. This loan will be secured by the shares purchased
with the proceeds and will be repaid by the ESOP with funds from the
Association's contributions to the ESOP. Shares purchased with such loan
proceeds will be held in a suspense account for allocation among participants as
the loan is repaid. Such shares will be allocated among the officers and
employees of the Association each year, pro rata, in accordance with their
compensation for such year. The Association expects to make contributions to
the ESOP at such times and in an amount that, at a minimum, will enable the ESOP
to meet its debt service obligations in accordance with the loan terms. Any
contributions in excess of this amount may be made at the Association's
discretion. While the loan is outstanding, any cash dividends received with
respect to the shares purchased with the proceeds of the loan will be applied to
the principal and interest payments due on such loan. This loan will require
annual interest and principal payments over a ten-year period and will bear
interest at a fixed rate established at the prime rate, as reported in the Wall
Street Journal, Midwest Edition, in effect at the time of completion of the
Conversion.
The Association's contributions to the ESOP to retire the principal and
interest on the ESOP debt will be accounted for as compensation and employee
benefits expense. The Holding Company expects that the annual compensation and
employee benefits expense will be approximately $133,000 on a pre-tax basis and
assuming that the ESOP purchases 8% ($1,334,000) of the Common Stock sold in the
Conversion based on the maximum of the Estimated Valuation Range ($16.7
million). The contributions to repay principal and interest on the ESOP debt
are tax deductible to the Association. The ESOP, in turn, will use the
Association's contribution with respect to principal and interest to repay the
ESOP loan. Interest paid by the ESOP to the Holding Company will be taxable
income to the Holding Company; however, such amount, when netted against the
deduction to the Association for its interest contribution to the ESOP, will
negate any income or deduction to the Holding Company on a consolidated tax
basis. The Association intends to record compensation and employee benefits
expense related to the ESOP in accordance with SOP 93-6. As a result, to the
extent the value of the Common Stock appreciates over time, compensation and
employee benefits expense related to the ESOP will increase. For additional
information regarding SOP 93-6, see "PRO FORMA DATA" and "MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS--Impact
of New Accounting Pronouncements."
The ESOP intends to purchase 8% of the Common Stock sold in the Conversion;
however, under certain circumstances the ESOP's purchases in the Conversion may
be limited to an amount less than 8% or may be prohibited altogether. If the
final Conversion valuation exceeds $16.7 million (the maximum of the Estimated
Valuation Range), an additional number of shares may be issued in the Conversion
to the ESOP to enable the ESOP to purchase 8% of the total number of shares sold
in the Offering, subject to the approval of OTS. If the final Conversion
valuation does not exceed $16.7 million, the ESOP will be permitted to purchase
Common Stock in the Offering only if stock is available after satisfaction of
orders by Eligible
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<PAGE>
Account Holders. If an insufficient amount of stock is available after the
satisfaction of orders by Eligible Account Holders to permit the ESOP to
purchase 8% of the total number of shares sold in the Offering, the ESOP intends
to purchase stock after the Conversion, either in the open-market or from the
Holding Company's authorized but unissued shares, so that, following such
purchase, the ESOP will own 8% of the Holding Company's then outstanding Common
Stock. If the ESOP purchases shares of Common Stock after the Conversion, the
ESOP must purchase the Common Stock at the then prevailing market price.
ESOP participants must have completed 1,000 hours of service during a plan
year and be employed on the last day of the plan year (December 31 of each year)
or have terminated their employment on account of death, disability or
retirement during the plan year in order to receive an allocation of shares for
that plan year. Participants' benefits vest according to the following
schedule: 20% after two years of service, 40% after three years of service, 60%
after four years of service, 80% after five years of service and 100% after six
years of service. Vesting will be accelerated upon retirement, death or
disability of the participant or upon termination of the ESOP. Vested benefits
will be payable upon retirement, death, disability, or separation from service.
Contributions and forfeitures will be allocated pro rata, based on the ratio
each participant's compensation bears to the compensation of all participants
entitled to share in such allocation.
The Personnel Committee of the Association's Board of Directors will
administer the ESOP. A trustee for the ESOP (the "ESOP Trustee") will be
appointed prior to the Conversion. The ESOP Trustee will invest the trust
assets only upon the direction of the Personnel Committee. The ESOP Trustee
will vote shares allocated to a participant's account in accordance with that
participant's written instructions, and the ESOP Trustee will vote unallocated
shares for which the ESOP Trustee does not receive written instructions in the
same proportions as the allocated shares for which the ESOP Trustee has received
written instructions are voted.
STOCK OPTION PLAN. The Stock Option Plan is intended to promote stock
ownership by directors and selected officers and employees of the Holding
Company and the Association to increase their proprietary interest in the
Holding Company and to encourage them to remain in the employ of the Holding
Company or the Association. The Board of Directors of the Holding Company has
approved the adoption of the Stock Option Plan, subject to receipt of
stockholder approval.
OTS conversion regulations prohibit the Association from seeking
ratification of the Stock Option Plan by the Holding Company's stockholders
sooner than six months after completion of the Conversion. Moreover, pursuant
to OTS conversion regulations, if the Stock Option Plan is effective within one
year after completion of the Conversion, options awarded under the plan cannot
vest at a rate greater than 20% per year, vesting of awards cannot be
accelerated in the event of a change of control of the Holding Company and the
number of options that can be allocated to directors and officers is subject to
certain limits set by OTS. The Board of Directors of the Holding Company has
not decided when the Stock Option Plan will be submitted to stockholders for
approval; however, in no event will the Stock Option Plan be submitted for
stockholder approval sooner than six months after completion of the Conversion.
The Holding Company and Association intend to comply with applicable law
governing implementation and terms of the Stock Option Plan (including OTS
regulations and policies) in effect at the time the Stock Option Plan is
submitted to the Holding Company's stockholders for approval.
Depending upon when the Board of Directors decides it wishes to submit the
Stock Option Plan to stockholders of the Holding Company for approval, the plan
could be submitted either at the Holding Company's first annual meeting of
stockholders (currently expected to be held in April, 1997)(the "First Annual
Meeting") or at a special meeting of stockholders which could be held earlier
than the First Annual Meeting (but not sooner than six months after completion
of the Conversion). The Stock Option Plan may
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<PAGE>
not, and will not, be established and become effective unless and until approved
by the Holding Company's stockholders.
The Stock Option Plan is to be administered, subject to OTS regulations, by
the Holding Company's personnel committee (the "Committee"). None of the
members of the Committee may be an officer or employee of the Holding Company or
the Association or may have received any discretionary stock-based incentive
awards under any plan of the Holding Company or the Association during the year
prior to, or during the term of, such director's service on the Committee. The
Committee will have the authority, among other things, to select the employees
to whom options may be granted, to determine the terms of each option, to
interpret the provisions of the Stock Option Plan and to make all other
determinations that it may deem necessary or advisable for the administration of
the Stock Option Plan. Each determination or other action made or taken
pursuant to the Stock Option Plan, including interpretation of the Stock Option
Plan and the specific terms and conditions of the options granted thereunder, by
the Committee will be final and conclusive for all purposes and upon all
persons.
The Stock Option Plan provides for the grant of "incentive stock options"
within the meaning of Section 422 of the Code and for options that do not
constitute incentive stock options (referred to herein as "nonstatutory
options"), as determined in each individual case by the Committee. Incentive
stock options granted under the Stock Option Plan have certain advantageous tax
attributes under federal and Illinois income tax laws. No taxable income is
recognized by the option holder for federal or Illinois income tax purposes at
the time of the grant or exercise of an incentive stock option, and no federal
or Illinois income tax deduction is available to the Holding Company or the
Association as a result of such a grant or exercise. Any gain or loss
recognized by an option holder on the later disposition of shares acquired
pursuant to the exercise of an incentive stock option generally will be treated
as long-term capital gain or loss if such disposition does not occur prior to
one year after the date of exercise of the option or two years after the date
the option was granted.
As in the case of incentive stock options, the grant of a nonstatutory
stock option will not result in taxable income to the recipient of the option
for federal or Illinois income tax purposes nor will the Holding Company or the
Association be entitled to an income tax deduction. Upon exercise of a
nonstatutory stock option, however, the option holder will generally recognize
ordinary income for federal and Illinois income tax purposes equal to the
difference between the exercise price and the fair market value of the shares
acquired on the date of exercise, and the Holding Company, the Association or
any other subsidiary of the Holding Company which is the employer of the option
holder will be entitled to federal and Illinois income tax deductions equal to
the amount of ordinary income recognized by the option holder. In general, any
further gain or loss realized by the option holder on the subsequent disposition
of such shares will be long-term or short-term capital gain or loss, depending
on the length of time the shares are held after the option is exercised.
The Committee will initially, and from time to time thereafter, select
those officers and other key employees of the Holding Company, the Association
or any of their subsidiaries to participate in the Stock Option Plan on the
basis of the special importance of their services in the management, development
and operations of the Holding Company, the Association or their subsidiaries.
Such officers and other key employees may receive either incentive stock options
or nonstatutory options under the Stock Option Plan. Unless expressly provided
otherwise at the time of the grant, however, such officers and other key
employees will receive incentive stock options.
The exercise price of options granted under the Stock Option Plan must at
least equal the fair market value of the Common Stock subject to the option
(determined as provided in the Stock Option Plan) on the date the option is
granted. Assuming the Stock Option Plan is submitted and the Company's
stockholders
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<PAGE>
approve it at the First Annual Meeting, the exercise price of options granted at
the time of such approval would equal the fair market value of the Company's
stock on the date of the First Annual Meeting.
Options granted under the Stock Option Plan will vest and become
exercisable at a rate of 20% per year, commencing one year after the grant date,
and 20% on each anniversary date thereof for the following four years.
Notwithstanding such a five-year vesting schedule, all awards will be 100%
vested upon the death or disability of the recipient, in which case all of the
recipient's options will expire on the earlier of (i) the first anniversary of
the date of the recipient's death or disability or (ii) the date that any option
of the recipient expires in accordance with its terms. Subject to the earlier
termination of an employee's employment with the Holding Company, the
Association or any of their subsidiaries, each option granted under the Stock
Option Plan will expire on the tenth anniversary of the date on which such
option was granted. If an employee's employment terminates with the Holding
Company, the Association or any of their subsidiaries for any reason other than
death or disability, all the employee's unvested options and vested options
which have not been exercised will be forfeited; provided, however, that an
employee who is also a director will not forfeit any of his or her unvested or
vested but unexercised options by reason of his or her retirement as an employee
of the Holding Company, the Association or any of their subsidiaries if such
director continues his or her service on the Board of Directors after retirement
as an employee, in which case that director's options will continue to vest and
will remain exercisable in the same manner and to the same extent as before that
director retired as an employee. If a director's service on the Board of
Directors terminates for any reason other than death, disability or retirement,
that director's unvested options and vested but unexercised options will be
forfeited. In the event of a director's death or disability, all of that
director's awards will be 100% vested, in which case all of that director's
options will expire on the earlier of (i) the first anniversary of the date of
the director's death or disability or (ii) the date that any option held by that
director expires in accordance with its terms. In the event of a director's
retirement from the Board of Directors, that director's options will continue to
vest and will remain exercisable in the same manner and to the same extent as
before that director retired as a director. In general, any shares of Common
Stock subject to issuance upon exercise of options but which are not issued
because of a surrender, forfeiture, expiration, termination or cancellation of
any such option will once again be available for issuance pursuant to
subsequently granted options.
An incentive stock option granted under the Stock Option Plan to an
employee owning more than 10% of the total combined voting power of all classes
of stock of the Holding Company is subject to the further restrictions that such
option must have an exercise price of at least 110% of the fair market value of
the shares issuable on exercise of the option (determined as of the date the
option is granted) and will expire, and all rights to purchase shares thereunder
will cease, no later than the fifth anniversary of the date on which the
incentive stock option was granted. Incentive stock options are subject to the
further restriction that the aggregate fair market value (determined as of the
date of grant) of stock as to which any such incentive stock option first
becomes exercisable in any calendar year is limited to $100,000. To the extent
options covering more than $100,000 worth of stock first become exercisable in
any one calendar year, the excess will be nonstatutory options.
The full exercise price for all shares purchased on exercise of options
granted under the Stock Option Plan may be purchased by paying cash, by paying
cash received from a broker-dealer to whom the optionee has submitted an
exercise notice consisting of a fully endorsed option, by delivering shares of
Common Stock having an aggregate fair market value on the date of exercise equal
to the exercise price, by directing the Holding Company to withhold such number
of shares of Common Stock otherwise issuable upon exercise of such option having
an aggregate fair market value on the date of exercise equal to the exercise
price, by using other medium of payment, in the case of an officer or employee,
as the Committee, in its discretion, shall authorize at the time of grant or by
using any combination of the above methods.
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The Board of Directors or the Committee has the authority to terminate,
suspend or amend the Stock Option Plan, in whole or in part, from time to time,
without the approval of the stockholders of the Holding Company to the extent
allowed by law; provided, however, that (i) no amendment will be effective until
approved by the stockholders of the Holding Company insofar as stockholder
approval thereof is required in order for the Stock Option Plan to continue to
satisfy the requirements of Rule 16b-3 under the Exchange Act and (ii) the
provisions of the Stock Option Plan applicable to nonemployee directors may not
be amended more than once every six months, except to comply with changes in the
Code, ERISA or the rules and regulations under each. The Stock Option Plan
provides for appropriate adjustment in the number and kind of shares subject to
the Stock Option Plan and in the number, kind and per share exercise price of
shares subject to unexercised options in the event of any change in the
outstanding Common Stock of the Holding Company by reason of a stock split,
stock dividend, combination or reclassification of shares, recapitalization,
merger or similar event.
Notwithstanding when the Stock Option Plan is submitted to and approved by
the stockholders, upon receipt of stockholder approval to establish the Stock
Option Plan, the Board of Directors intends to reserve an amount of stock equal
to 10% of the Common Stock sold in the Conversion for issuance under the Stock
Option Plan (or between 123,250 shares and 166,750 shares, assuming the sale of
between 1,232,500 shares and 1,667,500 shares of Common Stock in the
Conversion). Each nonemployee director of the Holding Company, as of the time
the Stock Option Plan is approved by stockholders, will receive (notwithstanding
when the Stock Option Plan is submitted to stockholders for their ratification),
subject to the vesting rules above, a nondiscretionary grant of a ten-year
nonstatutory option to purchase 8,337 shares of Common Stock (based on 1,667,500
shares of Common Stock sold at the maximum of the Estimated Valuation Range and
166,750 shares of Common Stock reserved under the Stock Option Plan). The
shares used to fund these option awards will come from authorized but unissued
shares or from treasury shares. As a result, in the event that all options
under the Stock Option Plan are awarded and exercised, the percentage interests
of stockholders as of the date the Conversion is consummated will be diluted by
approximately 9.0%. If more or less than 1,667,500 shares of Common Stock are
sold in the Conversion, the number of options granted under the Stock Option
Plan will be adjusted to maintain the ratio of the awards intended to be made to
the number of shares sold at the maximum of the Estimated Valuation Range.
The total number of shares of Common Stock that may be available for
options under the Stock Option Plan will be adjusted each January 1, through
January 1, 2006, so that the total number of shares of Common Stock that may be
issued and sold under the Stock Option Plan as of each January 1 will be equal
to 10% of the outstanding shares of Common Stock on such date; provided,
however, that no such adjustment may reduce the total number of shares of Common
Stock that may be issued and sold under the Stock Option Plan below 10% of the
shares originally reserved. The shares of Common Stock issued and sold under
the Stock Option Plan may be issued from shares specifically reserved for such
purpose by the Board of Directors or may be issued from shares repurchased by
the Holding Company ("Treasury Shares") (whether or not such Treasury Shares
were repurchased by the Holding Company specifically for the purpose of being
issued under the Stock Option Plan). In the event of a stock split, reverse
stock split or stock dividend, the number of shares of Common Stock reserved
under the Stock Option Plan and the number of options granted pursuant thereto
and exercise price of the options will be adjusted to reflect such increase or
decrease in the total number of shares of Common Stock outstanding.
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Notwithstanding when the Stock Option Plan is submitted to and approved by
stockholders, it is anticipated that the following awards of stock options will
be made pursuant to the Stock Option Plan to directors and executive officers of
the Holding Company and the Association as of the date of the approval of the
Stock Option Plan by the stockholders of the Holding Company (assuming the sale
of 1,667,500 shares of Common Stock in the Conversion at the maximum of the
Estimated Valuation Range, and the reservation of 166,750 shares of Common Stock
for issuance under the Stock Option Plan):
<TABLE>
<CAPTION>
Percent Potential Realizable Value at
Number of of Assumed Annual Rates of
Options Total Stock Price Appreciation for
Recipient Granted Options Option Term/(1)/
--------- ------- ------- --------------------------------
0% 5% 10%
-------- -------- ----------
<S> <C> <C> <C> <C> <C>
Nonemployee Directors
Gerald A. Bradley 8,337 5% $0 $ 52,000 $ 133,000
Robert P. Dole 8,337 5% $0 $ 52,000 $ 133,000
William J. Hanfland 8,337 5% $0 $ 52,000 $ 133,000
Louis F. Ulbrich 8,337 5% $0 $ 52,000 $ 133,000
Steven J. Wannemacher 8,337 5% $0 $ 52,000 $ 133,000
Executive Officers
Donald L. Fernandes 41,687 25% $0 $262,000 $ 665,000
Gary L. Richardson 8,337 5% $0 $ 52,000 $ 133,000
Laurel B. Donovan 8,337 5% $0 $ 52,000 $ 133,000
Larry C. McClellan 8,337 5% $0 $ 52,000 $ 133,000
All Directors and Executive Officers
as a Group (9 Persons) 108,383 65% $0 $678,000 $1,729,000
</TABLE>
_______________
/(1)/ Assumes the options are granted at the Purchase Price ($10.00 per share),
the options have a ten-year term, the market price of the Common Stock
underlying the option appreciates annually in value from the date of grant to
the end of the option term at a compounded rate of either 5% or 10% as
indicated in the columns. There can be no assurance that the Common Stock will
appreciate annually at a compounded rate of 5% or 10%. The Holding Company is
unaware of any formula which provides an accurate determination of the value of
a stock option as of the date of grant.
Under the Plan of Conversion and presently effective regulations and
policies of the OTS, the shares of Common Stock for which options may be granted
during the first year following the Conversion may not exceed 10% of the total
number of shares of Common Stock sold in the Conversion. Furthermore, during
that first year following the Conversion, no individual may be granted options
to purchase more than 25% of the total shares covered by the Stock Option Plan,
and nonemployee directors may not be granted options to purchase more than 5%
individually, or more than 30% as a group, of the shares covered by the Stock
Option Plan, unless the OTS allows greater awards. Although these limits
concerning the maximum number of options that may be granted to directors and
officers do not apply if the Stock Option Plan is submitted to and approved by
stockholders one year after completion of the Conversion, the Board of Directors
of the Holding Company and the Association does not intend to exceed these
limits regardless if the Stock Option Plan is submitted to and approved by
stockholders one year after completion of the Conversion.
Stockholder ratification of the Stock Option Plan will, among other things,
enable recipients of options who are directors or executive officers of the
Holding Company to qualify for certain exemptive treatment from the short-swing
profit provisions of Section 16(b) of the Exchange Act. The Stock Option Plan
may not and will not be established in the absence of stockholder approval.
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MANAGEMENT RECOGNITION PLAN. The MRP is intended as a method of providing
directors, officers and certain employees of the Holding Company or the
Association with a proprietary interest in the Holding Company and to encourage
such persons to remain with the Holding Company or the Association. The Board
of Directors of the Holding Company has approved the adoption of the MRP,
subject to receipt of stockholder approval.
OTS conversion regulations prohibit the Association from seeking
ratification of the MRP by the Holding Company's stockholders sooner than six
months after completion of the Conversion. Moreover, pursuant to OTS conversion
regulations, if the MRP is effective within one year after completion of the
Conversion, awards under the plan cannot vest at a rate greater than 20% per
year, vesting of awards cannot be accelerated in the event of a change of
control of the Holding Company and the number of MRP awards that can be
allocated to directors and officers is subject to certain limits set by OTS.
The Board of Directors of the Holding Company has not decided when the MRP will
be submitted to stockholders for approval; however, in no event will the MRP be
submitted for stockholder approval sooner than six months after the completion
of the Conversion. The Holding Company and the Association intend to comply
with applicable law governing implementation and terms of the MRP (including OTS
regulations and policies) in effect at the time the MRP is submitted to the
Holding Company's stockholders for approval.
Depending upon when the Board of Directors decides to submit the MRP to
stockholders of the Holding Company for approval, the plan could be submitted
either at the First Annual Meeting or at a special meeting of stockholders which
could be held earlier than the First Annual Meeting (but not sooner than six
months after completion of the Conversion). The MRP may not, and will not, be
established and become effective unless and until approved by the Holding
Company's stockholders.
The MRP will be administered by a committee appointed by the Board of
Directors of the Holding Company. Officers and employees of the Holding
Company, the Association and any of their subsidiaries as of the date the MRP is
approved by the stockholders of the Holding Company will be eligible for grants
of shares of Common Stock of the Holding Company held by the MRP. Nonemployee
directors, officers and employees will become vested in shares of Common Stock
awarded to them under the MRP at a rate of 20% per year, commencing one year
after the grant date, and 20% on each anniversary date thereof for the following
four years. Notwithstanding such a five-year vesting schedule, all awards will
be 100% vested upon the death or disability of the recipient. If an employee's
employment terminates (or a director's service as a director terminates) with
the Holding Company, the Association or any of their subsidiaries for any reason
other than death or disability, that employee's (or director's) unvested awards
will be forfeited.
MRP award recipients will recognize taxable ordinary income equal to the
aggregate fair market value of the shares of Common Stock awarded at the time
such shares become vested. Income recognized by MRP award recipients will be a
deductible expense to the Holding Company or the Association for tax purposes.
When cash dividends are paid with respect to plan shares vested and allocated to
a recipient, such recipient will be entitled to receive an amount equal to such
cash dividend. No recipient will have any voting or other rights of a
stockholder with respect to any plan shares awarded to such recipient prior to
the time such shares are actually distributed.
The Plan of Conversion and applicable regulations and policies of the OTS
prohibit the MRP from subscribing for shares of Common Stock in the Conversion
or otherwise being funded with shares of stock purchased in the Conversion.
Following completion of the Conversion and approval of the MRP, the MRP may
purchase either outstanding shares of Common Stock in the open market at the
then market price of the Common Stock or authorized but previously unissued
shares of stock from the Holding Company (which the Holding Company intends to
reserve for issuance) at the then market price of the Common Stock.
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Notwithstanding when the MRP is submitted to and approved by the
stockholders, when the Holding Company receives stockholder approval to
establish the MRP, the Holding Company will contribute funds to the MRP to
enable it to acquire shares of Common Stock in an amount equal to up to 4% of
the Common Stock sold in the Conversion, or up to 66,700 shares of Common Stock
assuming the sale of 1,667,500 shares at $10.00 per share (the maximum of the
Estimated Valuation Range). No contributions by employees or recipients will be
permitted. Each nonemployee director as of the effective date of the MRP will
be granted 3,335 shares of Common Stock held by the MRP (based on 1,667,500
shares of Common Stock sold at the maximum of the Estimated Valuation Range and
66,700 shares of Common Stock purchased by the MRP in the open market).
Assuming that the MRP is funded entirely through purchases of authorized but
previously unissued shares of stock from the Holding Company, the percentage
interest of stockholders as of the date of such purchase will be diluted by
approximately 4%. If more or less than 1,667,500 shares of Common Stock are
sold in the Conversion, the number of MRP awards granted to directors, executive
officers and other employees of the Holding Company and Association will be
adjusted to maintain the ratio of the awards intended to be made to the number
of shares sold at the maximum of the Estimated Valuation Range.
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Notwithstanding when the MRP is submitted to and approved by the
stockholders, it is anticipated that the following awards will be made pursuant
to the MRP to directors and executive officers of the Association and the
Holding Company as of the date of approval of the MRP by the stockholders of the
Holding Company (assuming the sale of 1,667,500 shares of Common Stock in the
Conversion, at the maximum of the Estimated Valuation Range, and the purchase of
66,700 shares of Common Stock by the MRP):
<TABLE>
<CAPTION>
Number Potential Realizable Value at
of Percent of Assumed Annual Rates of
Shares Total MRP Stock Price Appreciation for
Recipient Awarded Shares Ten Years from Grant Date/(1)/
--------- ------- ----------- ---------------------------------
<S> <C> <C> <C> <C> <C>
0% 5% 10%
-- -- ---
Nonemployee Directors
Gerald A. Bradley 3,335 5% $ 33,350 $ 54,000 $ 86,500
Robert P. Dole 3,335 5% $ 33,350 $ 54,000 $ 86,500
William J. Hanfland 3,335 5% $ 33,350 $ 54,000 $ 86,500
Louis F. Ulbrich 3,335 5% $ 33,350 $ 54,000 $ 86,500
Steven J. Wannemacher 3,335 5% $ 33,350 $ 54,000 $ 86,500
Executive Officers
Donald L. Fernandes 16,675 25% $166,750 $272,000 $ 432,500
Gary L. Richardson 3,335 5% $ 33,350 $ 54,000 $ 86,500
Laurel B. Donovan 3,335 5% $ 33,350 $ 54,000 $ 86,500
Larry C. McClellan 3,335 5% $ 33,350 $ 54,000 $ 86,500
All Directors and Executive
Officers as a Group (9 Persons) 43,355 65% $433,600 $704,000 $1,124,500
</TABLE>
_______________
/(1)/ Assumes the MRP awards are granted at the Purchase Price ($10.00 per
share) and the market price of the Common Stock underlying the MRP award
appreciates annually in value from the date of grant until ten years thereafter
at a compounded rate of either 5% or 10% as indicated in the columns. MRP
awards do not have a term like stock options; however, in order to compare the
value of the MRP awards to the value of the stock options granted to these
named individuals a comparable ten-year time period has been used. There can
be no assurance that the Common Stock will appreciate annually at a compounded
rate of either 5% or 10%.
Under the Plan of Conversion and presently effective regulations and
policies of the OTS, the total of the number of shares acquired by the MRP and
the number of shares for which options are granted under the ESOP during the
first year following the Conversion may not, in the aggregate, exceed 12% of the
total number of shares sold in the Conversion, and the MRP may not acquire a
number of shares exceeding 4% of the number of shares sold in the Conversion.
Accordingly, the Association intends for the ESOP to purchase 8% of the shares
sold in the Conversion and for the MRP to acquire a number of shares equal to 4%
of the number of shares sold in the Conversion. During that first year
following the Conversion, no individual may be awarded more than 25% of the
total number of shares of Common Stock held by the MRP, and nonemployee
directors may not be awarded more than 5% individually, or more than 30% as a
group, of the number of shares of Common Stock held by the MRP, unless the OTS
allows greater awards. Although these limits concerning the maximum number of
MRP awards that may be granted to directors and officers do not apply if the MRP
is submitted to and approved by stockholders one year after completion of the
Conversion, the Board of Directors of the Holding Company and the Association
does not intend to exceed these limits regardless if the MRP is submitted to and
approved by stockholders one year after completion of the Conversion.
Stockholder ratification of the MRP will, among other things, enable
recipients of MRP awards who are directors or executive officers of the Holding
Company to qualify for certain exemptive treatment from the short-swing profit
provisions of Section 16(b) of the Exchange Act. The MRP may not and will not be
established in the absence of stockholder approval.
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<PAGE>
Deferred Compensation Agreement
The Association entered into a deferred compensation agreement with Donald
L. Fernandes on September 22, 1992. Under the terms of this agreement, Mr.
Fernandes or his beneficiary is entitled to receive annual payments from the
Association after Mr. Fernandes' retirement at age 60 or beyond or in the event
that he is disabled or dies prior to age 60. The deferred compensation
agreement will be terminated if Mr. Fernandes ceases to be employed by the
Association at any time prior to his attaining age 60 if no benefits have been
paid under the agreement. To meet its obligations under the deferred
compensation agreement, the Association has purchased a life insurance policy
for the benefit of Mr. Fernandes, and the Association pays an annual premium on
this policy. See "--Executive Compensation." In the event that the deferred
compensation agreement is terminated, the Association will no longer have any
obligation to make premium payments on the insurance policy, and Mr. Fernandes
may receive ownership of the policy.
Employment Agreement
The Association and the Holding Company intend to enter into an employment
agreement with Donald L. Fernandes, which would be effective as of the
consummation of the Conversion. The employment agreement provides that Mr.
Fernandes will be employed for a 36-month term. The term of the agreement may
be extended for an additional twelve-month period by action of the Board of
Directors of the Association and the Holding Company taken 60 days prior to each
anniversary of the effective date of the employment agreement. Mr. Fernandes
may terminate the employment agreement at any time upon 60 days' prior written
notice to the Board of Directors of the Holding Company and the Association.
Under the employment agreement, the base salary for Mr. Fernandes will be
$100,000 per year. The Board of Directors of the Holding Company and the
Association will review Mr. Fernandes's base salary at least once a year and may
increase that base salary. In addition to base salary, the agreement provides
for participation in any group health, medical, hospitalization, dental care,
sick leave pay, life insurance or death benefit, disability plans and other
employee benefit plans offered by the Association to its employees, including
the ESOP and other plans contemplated in connection with the Conversion.
The employment agreement provides for continuing benefits in the event Mr.
Fernandes is terminated, or his employment agreement is not renewed, other than
for "just cause" (e.g., personal dishonesty, incompetence, willful misconduct,
breach of a fiduciary duty involving personal profit or willful violation of any
law, rule or regulation). In such instances, Mr. Fernandes will continue to
receive all benefits due to him under the employment agreement through the
remaining term of the agreement. If Mr. Fernandes is terminated within one year
after a "change of control" of the Holding Company or the Association, then the
Association will pay to Mr. Fernandes a lump sum equal to 2.99 times Mr.
Fernandes's "Base Amount," as that term is defined in Section 280G(b)(3) of the
Code, and will continue to provide coverage for Mr. Fernandes and his
dependents, beneficiaries and estate under all employee benefit plans of the
Holding Company and the Association for twenty-four months. If payments and
benefits under the employment agreement would constitute an "Excess Parachute
Payment" under Section 280G of the Code, then such payments and benefits will be
reduced to one dollar less than the maximum amount that the Association may pay
under Section 280G of the Code without losing its ability to deduct such
payments for tax purposes. A "change of control" is defined in the employment
agreement to include, among other events, the acquisition of more than 25% of
the Association's or the Holding Company's outstanding common stock, or the
equivalent in voting power of any class or classes of outstanding capital stock
of the Holding Company or the Association, by any corporation, person or group.
The employment agreement further provides that, within one year of a change of
control, Mr. Fernandes may elect to
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terminate his employment with the Holding Company or the Association and receive
the severance benefits described above if there is (i) any substantial change in
his duties and responsibilities, (ii) any material reduction in his aggregate
compensation or (iii) a change in his main place of work to a location outside
of a forty-mile radius of the Association's offices at which he is then based,
provided that any such event occurs without his express written consent.
In the event Mr. Fernandes's employment is terminated for "just cause," all
Mr. Fernandes's rights and benefits under the employment agreement cease as of
the date of such termination.
The agreement with Mr. Fernandes includes a covenant which will limit his
ability under certain circumstances to compete with the business of the
Association for a period of one year following the termination of his employment
with the Association.
Employment Security Agreements
The Board of Directors of the Holding Company intends to enter into
Employment Security Agreements, effective as of the consummation of the
Conversion, with Gary L. Richardson, Laurel B. Donovan and Larry C. McClellan,
each an executive officer of the Association, to provide for arrangements in the
event of a change of control of the Holding Company or the Association. These
agreements are intended to provide employment security to these key employees of
the Association and to encourage them to remain with the Association.
Each Employment Security Agreement provides for the payment of benefits to
the officer covered by that agreement if he or she is terminated for any reason
other than "good cause" (e.g., personal dishonesty, incompetence, willful
misconduct, breach of a fiduciary duty involving personal profit or willful
violation of any law, rule or regulation), disability, death or retirement when
such termination occurs within one year after a change of control of the Holding
Company or the Association. In such an instance, the terminated employee will
receive a lump sum payment equal to 1.0 times such employee's "Base Amount," as
that term is defined in Section 280G(b)(3) of the Code, and the employee and his
or her family will continue to receive medical, life and long-term disability
coverage for up to twelve months following such termination of employment, upon
the same terms as such benefits were provided prior to the employee's
termination and subject to earlier cessation if the employee waives such
continued coverage or if the employee receives coverage under another employer's
plan that does not contain any exclusion or limitation for the employee or his
or her dependents based on any preexisting condition. If payments and benefits
under the Employment Security Agreement would constitute an "Excess Parachute
Payment" under Section 280G of the Code, then such payments and benefits will be
reduced to one dollar less than the maximum amount that the Holding Company may
pay under Section 280G of the Code without losing its ability to deduct such
payments for tax purposes. A "change of control" is defined in the Employment
Security Agreement to include, among other events, the acquisition of more than
25% of the Association's or the Holding Company's outstanding common stock, or
the equivalent in voting power of any class or classes of outstanding capital
stock of the Association or the Holding Company by any corporation, person or
group. The Employment Security Agreement further provides that, within one year
of a change of control, an employee may elect to terminate his or her employment
with the Holding Company or the Association and receive the severance benefits
described above if there is (i) any material reduction or change in his or her
duties and responsibilities, (ii) any material reduction in his or her aggregate
compensation or (iii) a change in his or her main place of work to a location
outside of a forty-mile radius of the Association's offices at which he or she
is then based, provided that any such event occurs without his or her express
written consent.
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Each Employment Security Agreements has a term of three years and may be
extended each year for an additional year by the Board of Directors of the
Holding Company.
Severance Agreement
The Association entered into a Release and Settlement Agreement (the
"Severance Agreement") with Jon C. Thetard whereby the Association and Mr.
Thetard agreed to terminate his employment with the Association. The Association
released any claims it might have against Mr. Thetard and paid him a package of
severance benefits, and, in return, Mr. Thetard released any claims he might
have against the Association based on his employment or termination. See
"--Executive Compensation."
Transactions with Management and Certain Related Persons
Louis Ulbrich, the Secretary and a director of the Holding Company and the
Association, is of counsel to the law firm of Dunn, Ulbrich, Hundman, Stanczak
and Ogar in Bloomington, Illinois. The Association has retained the services of
Mr. Ulbrich's firm, and the firm performs certain legal work for the
Association.
The Association makes loans to executive officers and directors of the
Association and their affiliates in the ordinary course of its business. Such
loans to executive officers, directors and their affiliates are made on
substantially the same terms, including interest rates and collateral, as those
prevailing at the time the transaction is originated for comparable transactions
with nonaffiliated persons and do not, in the opinion of the Association's
management, involve more than the normal risk of collectability or present any
other unfavorable features. As of December 31, 1995, approximately $616,500 of
loans were outstanding from the Association to executive officers and directors
of the Association and their affiliates, which equals approximately 3.7% of the
Association's pro forma stockholders' equity at December 31, 1995, assuming the
sale of 1,450,000 shares at $10.00 per share, and approximately 5.3% of the
Association's retained earnings at December 31, 1995. See Note 10 to Notes to
Consolidated Financial Statements.
Shares to be purchased by Management Pursuant to Subscription Rights and Awards
Under Employee Stock Benefit Plans
The following table sets forth certain information as to approximate
purchases of Common Stock by each director and executive officer of the
Association and the Holding Company, including their associates, as defined by
applicable regulations. No individual has entered into a binding agreement with
respect to such intended purchases. The maximum number of shares of Common
Stock purchased by all directors and officers of the Holding Company and the
Association, together with all associates of such directors and officers, when
aggregated with any shares of Common Stock attributed to such directors and
officers and their associates may not exceed 33% of the total number of shares
sold in the Conversion. For information regarding the definition of an
"associate" of an officer or director, see "--Limitations on Purchases of
Shares." 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 other employees of the Association will pay the same
price for the shares they subscribe for as all other subscribers.
The table also sets forth the number of shares of Common Stock which the
Board of Directors of the Holding Company and the Association anticipate will be
awarded to each of the executive officers, directors and employees of the
Holding Company and the Association under the Employee Benefit Plans based on
the assumptions set forth in the footnotes to the table. See "SUBSCRIPTION AND
COMMUNITY OFFERING PROSPECTUS SUMMARY--Benefits of the Conversion to Management
and Related Persons"
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and "MANAGEMENT OF THE HOLDING COMPANY AND ASSOCIATION--Employee Benefit Plans."
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<TABLE>
<CAPTION>
Beneficial Ownership as of Initial Awards Under
Completion of the Offering Employee Benefit Plans
----------------------------------------- ----------------------------------------------
Subject to
Aggregate Intended Options
Purchase Purchases Awarded
Intended Price of to Total Allocated Under Stock Awarded
Name and Purchases of Intended Outstanding Under Option Plan Under
Position Common Stock Purchases Shares/(1)/ ESOP/(2)/ /(3)/ MRP/(4)/ Total
--------------------- ------------ --------- ------------ ---------- ----------- -------- -----
<S> <C> <C> <C> <C> <C> <C> <C>
Gerald A. Bradley
Director and Chairman
of the Board 10,000 $100,000 .69 -- 7,250 2,900 10,150
Robert P. Dole
Director 20,000 200,000 1.38 -- 7,250 2,900 10,150
Donald L. Fernandes
Director and President 10,000 100,000 .69 4,582 36,250 14,500 50,750
William J. Hanfland
Director 10,000 100,000 .69 -- 7,250 2,900 10,150
Louis F. Ulbrich
Director 20,000 200,000 1.38 -- 7,250 2,900 10,150
Steven J. Wannemacher
Director 5,000 50,000 .34 -- 7,250 2,900 10,150
All Directors and
Executive Officers as
a Group (9 persons) 82,500 825,000 5.69 12,238 94,250 37,700 131,950
</TABLE>
<TABLE>
<CAPTION>
No. of Shares of Aggregate Percentage
Common Stock Beneficially Ownership Five Years
Name and Owned Five Years Following Following Initial
Position Initial Awards /(5)/ Awards /(6)/
--------------------- -------------------------- --------------------
<S> <C> <C>
Gerald A. Bradley
Director and Chairman
of the Board 20,150 1.38
Robert P. Dole
Director 30,150 2.07
Donald L. Fernandes
Director and President 60,750 4.09
William J. Hanfland
Director 20,150 1.38
Louis F. Ulbrich
Director 30,150 2.07
Steven J. Wannemacher
Director 15,150 1.04
All Directors and
Executive Officers as
a Group (9 persons) 214,450 13.89
</TABLE>
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_______________
/(1)/ Based upon the assumption that a total of 1,450,000 shares are sold in
the Conversion at the midpoint of the Estimated Valuation Range.
/(2)/ Based upon the assumption that the ESOP acquires 116,000 shares of Common
Stock (8% of the amount of Common Stock sold in the Conversion at the midpoint
of the Estimated Valuation Range) and 58,000 shares (i.e., shares allocated
over the first five years of the ESOP loan term) are allocated to the employees
of the Association, pro rata, in accordance with their compensation (assuming
current amounts of compensation). See "MANAGEMENT OF THE HOLDING COMPANY AND
ASSOCIATION--Employee Benefit Plans--Employee Stock Ownership Plan."
/(3)/ Based upon the assumption that a total of 145,000 additional authorized
but unissued shares of common stock (10% of the amount of Common Stock sold in
the Conversion at the midpoint of the Estimated Valuation Range) are reserved
for issuance under the Stock Option Plan, that the Holding Company receives
stockholder approval for the establishment of the Stock Option Plan, and that
the options are allocated as described under "MANAGEMENT OF THE HOLDING COMPANY
AND ASSOCIATION--Employee Benefit Plans--Stock Option Plan." Pursuant to the
Stock Option Plan, such options will vest at the rate of 20% per year over a
five-year period from the date of grant. Shareholder approval of the Stock
Option Plan will be sought at a special or annual meeting of stockholders held
no sooner than six months following completion of the Conversion, and if such
approval is obtained, options will be granted as of the date of such meeting.
For information regarding the Board of Directors' intention with respect to the
implementation of the Stock Option Plan, see "MANAGEMENT OF THE HOLDING COMPANY
AND ASSOCIATION--Employee Benefit Plans--Stock Option Plan."
/(4)/ Based upon the assumption that the MRP acquires 58,000 shares of Common
Stock (4% of the amount of Common Stock sold in the Conversion at the midpoint
of the Estimated Valuation Range), that the Holding Company receives
stockholder approval for the establishment of the MRP, and that MRP awards are
allocated as described under "MANAGEMENT OF THE HOLDING COMPANY AND
ASSOCIATION--Employee Benefit Plans--Management Recognition Plan." Pursuant to
the MRP, awards will vest at the rate of 20% a year over a five-year period
from the date of grant. Shareholder approval of the MRP will be sought at a
special or annual meeting of stockholders held no sooner than six months
following completion of the Conversion, and if such approval is obtained, MRP
awards will be granted as of the date of such meeting. For information
regarding the Board of Directors' intention with respect to the implementation
of the MRP, see "MANAGEMENT OF THE HOLDING COMPANY AND ASSOCIATION--Employee
Benefit Plans--Management Recognition Plan."
/(5)/ Assumes all shares, or options to acquire shares, granted under the ESOP,
Stock Option Plan and the MRP vest in accordance with their terms and does not
give effect to subsequent grants, if any, under the ESOP, the Stock Option Plan
and the MRP following the grants reflected in this table.
/(6)/ On a partially diluted basis. Assumes, in each case, 1,450,000 shares of
Common Stock outstanding (including 116,000 shares purchased by the ESOP in the
Offerings and 58,000 shares purchased by the MRP in the open market after
completion of the Offerings, respectively), plus only those shares issued upon
the exercise of the options held by the named individual or the options held by
all directors and officers as a group, as applicable.
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SUPERVISION AND REGULATION
GENERAL
Financial institutions, such as the Association, and their holding
companies are extensively regulated under federal and state law by various
regulatory authorities including the OTS and the FDIC. The financial
performance of the Holding Company and the Association may be affected by such
regulation, although the extent to which they may be affected cannot be
predicted with a high degree of certainty.
Federal and state laws and regulations generally applicable to financial
institutions and their holding companies regulate, among other things, the scope
of business, investments, reserves against deposits, capital levels relative to
operations, the nature and amount of collateral for loans, the establishment of
branches, mergers, consolidations and dividends. The system of supervision and
regulation applicable to the Holding Company and the Association establishes a
comprehensive framework for their operations and is intended primarily for the
protection of the FDIC's deposit insurance funds and the depositors of the
Association, rather than the stockholders of the Holding Company.
The following references to material statutes and regulations affecting the
Holding Company and the Association are brief summaries thereof and are
qualified in their entirety by reference to such statutes and regulations. Any
change in applicable law or regulations may have a material effect on the
business of the Holding Company and the Association.
THE ASSOCIATION
GENERAL. The Association is subject to extensive regulation, examination
and supervision by the OTS, as its chartering agency, and the FDIC, as the
deposit insurer. The Association is a member of the FHLB-Chicago and its
deposit accounts are insured up to applicable limits by the SAIF. The
Association 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 test the Association's compliance with various
regulatory requirements. This regulation and supervision establishes a
framework of activities in which an institution can engage and is intended
primarily for the protection of the insurance fund and depositors. 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 the Congress, could
have a material adverse impact on the Holding Company, the Association and their
operations. Assuming that the holding company form of organization is utilized,
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 and of the SEC under the federal securities laws.
ENFORCEMENT. Under the Federal Deposit Insurance Act (the "FDI Act"), the
OTS has primary enforcement responsibility over savings institutions and has the
authority to bring action against all "institution-affiliated parties,"
including directors, officers, employees, controlling stockholders, stockholders
who participate in the conduct of the institution's affairs, 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
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$1 million per day in especially egregious cases. Under the FDI Act, 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.
ASSESSMENTS. Savings institutions are required by OTS regulations to pay
assessments to the OTS to fund the operations of the OTS. The general
assessment, paid on a quarterly or semi-annual basis, as determined from time to
time by the Director of the OTS, is computed upon the savings institution's
total assets, including consolidated subsidiaries, as reported in the
institution's latest quarterly thrift financial report. For the year ended
December 31, 1995, the Association's OTS assessments were $45,000.
BRANCHING. In April, 1992, the OTS amended its rule on branching by
federally chartered savings associations to permit interstate branching subject
to certain limitations. Federal savings associations are thereby permitted to
diversify geographically their loan portfolios and lines of business. The OTS
authority preempts any state law purporting to regulate branching by federal
savings associations.
CAPITAL REQUIREMENTS. The OTS capital regulations require savings
institutions to meet three capital standards: a 1.5% tangible capital standard,
a 3% leverage (core capital) ratio and an 8% risk based capital standard.
Tangible and core capital are defined as common stockholder's equity (including
retained earnings), certain non-cumulative perpetual preferred stock and related
surplus and minority interests in equity accounts of consolidated subsidiaries
(less intangibles other than certain purchased mortgage servicing rights and
credit card relationships), except that core capital may include goodwill
resulting from certain regulatory accounting practices. The OTS regulations
also require that, in meeting the leverage, tangible and risk-based capital
standards institutions generally must deduct investments in and loans to
subsidiaries engaged in activities not permissible for a national bank.
The risk-based capital standard for savings institutions requires the
maintenance of total capital (which is defined as core capital and supplementary
capital) to risk-weighted assets of 8%. In determining the amount of risk-
weighted assets, all assets, including certain off-balance sheet assets, are
multiplied by a risk-weight of 0% to 100%, as assigned by the OTS capital
regulation based on the risks OTS believes are inherent in the type of asset.
The components of core capital are equivalent to those discussed earlier under
the 3% leverage standard. The components of supplementary capital currently
include cumulative preferred stock, long-term perpetual preferred stock,
mandatory convertible securities, subordinated debt and intermediate preferred
stock and, within specified limits, the allowance for loan and lease losses.
Overall, the amount of supplementary capital included as part of total capital
cannot exceed 100% of core capital.
The OTS has incorporated an interest rate risk component into its
regulatory capital rule. The final interest rate risk rule also adjusts the
risk-weighting for certain mortgage derivative securities. 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. See
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS--Management of Interest Rate Risk." A savings association whose
measured interest rate risk exposure exceeds 2% must deduct an interest rate
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
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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 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. A savings
association with assets of less than $300 million and risk-based capital ratios
in excess of 12% is not subject to the interest rate risk component, unless the
OTS determines otherwise. 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. The OTS has postponed the date that the risk component will first be
deducted from an institution's total capital to allow, among other things, the
OTS to evaluate the interest rate risk proposals recently issued by the other
banking agencies. If the Association had been subject to an interest rate risk
capital component as of December 31, 1995, there would have been no material
effect on the Association's risk-weighted capital.
At December 31, 1995, the Association met each of its capital requirements.
See "HISTORICAL AND PRO FORMA CAPITAL COMPLIANCE" for a table which sets forth
in terms of dollars and percentages the OTS tangible, leverage and risk-based
capital requirements, the Association's historical amounts and percentages at
December 31, 1995, and pro forma amounts and percentages based upon the issuance
of the shares within the Estimated Valuation Range and assuming that a portion
of the net proceeds are retained by the Holding Company.
QTL TEST. The HOLA requires savings institutions to meet a QTL test.
Under the QTL test, a savings association is required to maintain at least 65%
of its "portfolio assets" (total assets less: (i) specified liquid assets up to
20% of total assets; (ii) intangibles, including goodwill; and (iii) the value
of property used to conduct business) in certain "qualified thrift investments"
(primarily residential mortgages and related investments, including certain
mortgage-backed and related securities) on a monthly basis in at least 9 months
out of each 12 month period. A savings association that fails the QTL test must
either convert to a bank charter or operate under certain restrictions. As of
December 31, 1995, the Association maintained in excess of 85.0% of its
portfolio assets in qualified thrift investments and, therefore, met the QTL
test.
LIQUIDITY. The Association is required to maintain an average daily
balance of specified liquid assets equal to a monthly average of not less than
5% of its net withdrawable deposit accounts plus short-term borrowings. OTS
regulations also require each savings institution to maintain an average daily
balance of short-term liquid assets at 1% of the total of its net withdrawable
deposit accounts and borrowings payable in one year or less. Monetary penalties
may be imposed for failure to meet these liquidity requirements. The
Association's average liquidity ratio at December 31, 1995 was 12.8% which
exceeded the then applicable requirements.
REAL ESTATE LENDING STANDARDS. As directed by FDICIA, effective March 19,
1993, the OTS and the other federal banking agencies adopted uniform regulations
prescribing real estate lending standards. The OTS regulation requires each
savings association to establish and maintain written internal real estate
lending standards consistent with safe and sound banking practices and
appropriate to the size of the institution and the nature and scope of its real
estate lending activities. The policy must also be consistent with accompanying
OTS guidelines, which include maximum loan-to-value ratios for the following
types of real estate loans: raw land (65%), land development (75%),
nonresidential construction (80%), improved property (85%) and one- to four-
family residential construction (85%). Owner-occupied one- to four-family
mortgage loans and home equity loans do not have maximum loan-to-value ratio
limits, but those with a loan-to-value ratio at origination of 90% or greater
are to be backed by private mortgage insurance or readily marketable collateral.
Institutions are also permitted to make a limited amount of loans that do not
conform to the proposed loan-to-value limitations so long as such exceptions are
appropriately reviewed
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and justified. The guidelines also list a number of lending situations in which
exceptions to the loan-to-value standard are justified.
LOANS TO ONE BORROWER LIMITS. The Association generally is subject to the
same loans-to-one borrower limits that apply to national banks. With certain
exceptions, loans and extensions of credit outstanding at one time to one
borrower (including certain related entities of the borrower) may not exceed 15%
of the Association's unimpaired capital and surplus, plus an additional 10% of
unimpaired capital and surplus for loans fully secured by certain readily
marketable collateral. At December 31, 1995, the largest amount the Association
could lend to one borrower was approximately $1.7 million, and at that date the
Association had no lending relationships which exceeded such loans-to-one
borrower limitation. See "BUSINESS OF THE ASSOCIATION--Lending Activities--
Loans to One Borrower."
RESTRICTIONS ON DIVIDENDS AND CAPITAL DISTRIBUTIONS. The Association is
subject to OTS limitations on capital distributions, which include cash
dividends, stock redemptions or repurchases, cash-out mergers and other
distributions charged to the Association's capital account. The OTS regulation
establishes three tiers of institutions, based primarily on their capital level.
Generally, the Tier 1 group is composed of institutions that before and after
the proposed distribution meet or exceed all applicable capital requirements and
have not been informed by the OTS that they are in need of more than normal
supervision. A Tier 1 institution may make capital distributions during any
calendar year equal to the higher of (i) 100% of net income for the calendar
year-to-date plus an amount that would reduce by one-half its "surplus capital
ratio" at the beginning of the calendar year or (ii) 75% of net income over the
previous four quarters. As applied to the Association, "surplus capital ratio"
means the percentage by which the Association's ratio of total capital to assets
exceeds the ratio of its capital requirement, as modified to reflect any
applicable individual minimum capital requirements imposed upon the Association.
Any additional capital distributions would require prior regulatory approval.
In the event the Association's capital fell below its capital requirement or the
OTS notified it that it was in need of more than normal supervision, the
Association's ability to make capital distributions would be restricted. In
addition, the OTS could prohibit a proposed capital distribution by any
institution, which would otherwise be permitted by the regulation, if the OTS
determines that such distribution would constitute an unsafe or unsound
practice. At December 31, 1995, the Association qualified as a Tier 1
institution for purposes of this regulation, and the Association's allowable
capital distribution at such date was approximately $3.6 million.
FEDERAL HOME LOAN BANK SYSTEM. The Association is a member of the FHLB
System which consists of 12 FHLBs under the jurisdiction of the Federal Housing
Finance Board ("FHFB"). As a member of the FHLB System, the Association is
required to acquire and hold shares of capital stock of the FHLB of Chicago in
an amount equal to the greater of (i) 1.0% of aggregate outstanding principal
amount of the Association's home mortgage loans, home-purchase contracts and
similar obligations, or (ii) 0.3% of the Association's total assets. The
Association's holdings of FHLB capital stock will be reviewed annually by the
FHLB of Chicago using calendar year-end financial data to ensure that the
Association is holding the minimum required amount of FHLB capital stock. If
the minimum amount required is decreased, the FHLB-Chicago may in its discretion
and upon application of the Association, retire excess shares of capital stock
held by the Association. The Association is in compliance with this requirement
with its investment in FHLB capital stock.
The FHLBs provide a central credit facility primarily for member
institutions. FHLBs make advances to member banks in accordance with each
Federal Home Loan Bank's policies and procedures established by the FHFB and the
Board of Directors of such FHLB. All long-term advances by a Federal Home Loan
Bank must be made only for the purpose of providing funds for residential
housing finance. Advances are made upon the note or obligation of a member
bank, must be fully secured and bear interest at a rate established by the FHFB.
At December 31, 1995, the Association did not have any advances
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outstanding from the FHLB of Chicago. The Association's aggregate outstanding
advances from the FHLB of Chicago may at no time exceed 20 times the amounts
paid in by the Association for its holdings of FHLB capital stock.
BROKERED DEPOSITS; REGULATION OF DEPOSIT RATES. FDIC regulations
promulgated under the Federal Deposit Insurance Corporation Improvement Act of
1991 ("FDICIA") govern the acceptance of brokered deposits by insured depository
institutions. The capital position of an institution determines whether and
with what limitations an institution may accept brokered deposits. A well-
capitalized institution (one that significantly exceeds specified risk-weighted
capital ratios) may accept brokered deposits without restriction.
Undercapitalized institutions (those that fail to meet minimum regulatory
capital requirements) may not accept brokered deposits and adequately
capitalized institutions (those that are not well capitalized or
undercapitalized) may only accept such deposits with the consent of the FDIC.
Adequately capitalized institutions may apply for a waiver by letter to the
FDIC. At December 31, 1995, the Association had no brokered deposits.
An institution that is not well-capitalized, even if meeting minimum
capital requirements, may not solicit deposits by offering interest rates that
are significantly higher than the relevant local or national rate as determined
under the regulations.
COMMUNITY REINVESTMENT ACT REQUIREMENTS. The OTS, the FDIC, the Federal
Reserve Board and the OCC have jointly issued a final rule (the "Final Rule")
under the Community Reinvestment Act (the "CRA"). The Final Rule eliminates the
existing CRA regulation's twelve assessment factors and substitutes a
performance based evaluation system. The Final Rule will be phased in over a
period of time and become fully effective by July 1, 1997. Under the Final
Rule, an institution's performance in meeting the credit needs of its entire
community, including low- and moderate-income areas, as required by the CRA,
will generally be evaluated under three tests: the "lending test," the
"investment test," and the "service test."
The lending test analyzes lending performance using five criteria: (i) the
number and amount of loans in the institution's assessment area, (ii) the
geographic distribution of lending, including the proportion of lending in the
assessment area, the dispersion of lending in the assessment area, and the
number and amount of loans in low-, moderate-, middle-, and upper-income areas
in the assessment area, (iii) borrower characteristics, such as the income level
of individual borrowers and the size of businesses or farms, (iv) the number and
amount, as well as the complexity and innovativeness of an institution's
community development lending and (v) the use of innovative or flexible lending
practices in a safe and sound manner to address the credit needs of low- or
moderate-income individuals or areas. The investment test analyzes investment
performance using four criteria: (i) the dollar amount of qualified investments,
(ii) the innovativeness or complexity of qualified investments, (iii) the
responsiveness of qualified investments to credit and community development
needs, and (iv) the degree to which the qualified investments made by the
institution are not routinely provided by private investors. The service test
analyzes service performance using six criteria: (i) the institution's branch
distribution among low-, moderate-, middle-, and upper-income areas, (ii) its
record of opening and closing branches, particularly in low- and moderate-income
areas, (iii) the availability and effectiveness of alternative systems for
delivering retail banking services, (iv) the range of services provided in
low-, moderate-, middle- and upper-income areas and extent to which those
services are tailored to meet the needs of those areas, (v) the extent to which
the institution provides community development services, and (vi) the
innovativeness and responsiveness of community development services provided.
An independent financial institution with assets of less than $250 million,
or a financial institution with assets of less than $250 million that is a
subsidiary of a holding company with assets of less than $1 billion, will be
evaluated under a streamlined assessment method based primarily on its lending
record.
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The streamlined test considers an institution's loan-to-deposit ratio
adjusted for seasonal variation and special lending activities, its percentage
of loans and other lending related activities in the assessment area, its record
of lending to borrowers of different income levels and businesses and farms of
different sizes, the geographic distribution of its loans, and its record of
taking action, if warranted, in response to written complaints. In lieu of
being evaluated under the three assessment tests or the streamlined test, a
financial institution can adopt a "strategic plan" and elect to be evaluated on
the basis of achieving the goals and benchmarks outlined in the strategic plan.
Based upon a review of the Final Rule, management of the Holding Company does
not anticipate that the new CRA regulations will adversely affect the
Association.
FEDERAL RESERVE SYSTEM. The Federal Reserve Board requires all depository
institutions to maintain reserves against their transaction accounts and non-
personal time deposits. At December 31, 1995, the Association was in compliance
with these requirements. The balances maintained to meet the reserve
requirements imposed by the Federal Reserve Board may be used to satisfy
liquidity requirements imposed by the OTS. Because required reserves must be
maintained in the form of vault cash or a non-interest-bearing account at a
Federal Reserve Bank directly or through another bank, the effect of this
reserve requirement is to reduce an institution's earning assets. The amount of
funds necessary to satisfy this requirement has not had a material effect on the
Association's operations.
The Association is also subject to certain regulations regarding savings
account disclosure and funds availability disclosure promulgated by the Federal
Reserve Board to implement the requirements of the Truth in Savings Act
contained in the FDICIA and the Expedited Funds Availability Act, as amended,
respectively.
THE HOLDING COMPANY
Following the Conversion, the Holding Company will be a non-diversified
unitary savings and loan holding company within the meaning of HOLA, will be
required to register with the OTS and will be subject to OTS regulations,
examinations, supervision and reporting requirements. In addition, the OTS has
enforcement authority over the Holding Company and any non-savings institution
subsidiaries it later forms. Among other things, this authority permits the OTS
to restrict or prohibit activities that it determines are a serious risk to the
Association. The Association must notify the OTS 30 days before declaring any
dividend to the Holding Company. See "--The Association--Restrictions on
Dividends and Capital Distributions."
HOLA prohibits a savings and loan holding company, directly or indirectly,
or through one or more subsidiaries, from acquiring another savings institution
or holding company thereof, without prior written approval of the OTS; acquiring
or retaining, with certain exceptions,more than 5% of a non-subsidiary savings
institution, a non-subsidiary holding company, or a non-subsidiary company
engaged in activities other than those permitted by HOLA; or acquiring or
retaining control of a depository institution that is not federally insured. In
evaluating applications by holding companies to acquire savings institutions,
the OTS will consider the financial and managerial resources and future
prospects of the company and institution involved, the effect of the acquisition
on the risk to the insurance funds, the convenience and needs of the community
and competitive factors.
As a unitary savings and loan holding company, the Holding Company
generally will not be restricted under existing laws as to the types of business
activities in which it may engage, provided that the Association continued to
meet the QTL test. See "--The Association--QTL Test." Upon any non-supervisory
acquisition by the Holding Company of another savings association or savings
bank that meets the QTL test and is deemed to be a savings institution by the
OTS, the Holding Company would become a multiple savings and loan holding
company (if the acquired institution is held as a separate subsidiary) and
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would be subject to extensive limitations on the types of business activities in
which it could engage. HOLA limits the activities of a multiple savings and loan
holding company and its non-insured institution subsidiaries primarily to
activities permissible for bank holding companies under Section 4(c) of the Bank
Holding Company Act, subject to the prior approval of the OTS, and activities
authorized by OTS regulation.
The OTS is prohibited from approving any acquisition that would result in a
multiple savings and loan holding company controlling savings institutions in
more than one state, subject to two exceptions: (i) the approval of interstate
supervisory acquisitions by savings and loan holding companies, and (ii) the
acquisition of a savings institution in another state if the laws of the state
of the target savings institution specifically permit such acquisitions. Under
Illinois law, reciprocal interstate acquisitions are authorized for savings and
loan holding companies and savings institutions. Certain states do not
authorize interstate acquisitions under any circumstances; however, federal law
authorizing acquisitions in supervisory cases preempts such state law.
OTHER REGULATIONS
FDICIA. FDICIA was enacted on December 19, 1991. FDICIA represents a
comprehensive and fundamental change to banking supervision. FDICIA imposes
relatively detailed standards and mandates the development of additional
regulations governing nearly every aspect of the operations, management and
supervision of savings institutions and savings and loan holding companies like
the Holding Company and the Association.
As required by FDICIA, and subsequently amended by the Riegle Community
Development and Regulatory Improvement Act of 1994, the federal banking
regulators have adopted (effective August 9, 1995) interagency guidelines
establishing standards for safety and soundness for depository institutions on
matters such as internal controls, loan documentation, credit underwriting,
interest-rate risk exposure, asset growth, and compensation and other benefits
(the "Guidelines"). In addition, the federal banking regulators have proposed
asset quality and earnings standards to be added to the Guidelines. The
agencies expect to request a compliance plan from an institution whose failure
to meet one or more of the standards is of such severity that it could threaten
the safe and sound operation of the institution. FDIC regulations enacted under
FDICIA also require all depository institutions to be examined annually by the
banking regulators and depository institutions having $500 million or more in
total assets to have an annual independent audit, an audit committee comprised
solely of outside directors, and to hire outside auditors to evaluate the
institution's internal control structure and procedures and compliance with laws
and regulations relating to safety and soundness. The FDIC, in adopting the
regulations, reiterated its belief that every depository institution, regardless
of size, should have an annual independent audit and an independent audit
committee.
FDICIA requires the banking regulators to take prompt corrective action
with respect to depository institutions that fall below certain capital levels
and prohibits any depository institution from making any capital distribution
that would cause it to be considered undercapitalized. Regulations establishing
five capital categories of well capitalized, adequately capitalized,
undercapitalized, significantly undercapitalized and critically undercapitalized
became effective December 19, 1992. Institutions that are not adequately
capitalized may be subjected to a broad range of restrictions on their
activities and will be required to submit a capital restoration plan which, to
be accepted by the regulators, must be guaranteed in part by any company having
control of the institution. Only well capitalized institutions and adequately
capitalized institutions receiving a waiver from the FDIC will be permitted to
accept brokered deposits, and only those institutions eligible to accept
brokered deposits may provide pass-through deposit insurance for participants in
employee benefit plans. In other respects, FDICIA provides for enhanced
supervisory authority, including greater authority for the appointment of a
conservator or receiver for undercapitalized institutions.
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A range of other regulations adopted as a result of FDICIA include
requirements applicable to closure of branches; additional disclosures to
depositors with respect to terms and interest rates applicable to deposit
accounts; requirements for the banking agencies to adopt uniform regulations for
extensions of credit secured by real estate; modification of accounting
standards to conform to generally accepted accounting principles including the
reporting of off-balance sheet items and supplemental disclosure of estimated
fair market value of assets and liabilities in financial statements filed with
the banking regulators; increased penalties in making or failing to file
assessment reports with the FDIC; greater restrictions on extensions of credit
to directors, officers and principal stockholders; and increased reporting
requirements on agricultural loans and loans to small businesses.
As required by FDICIA, the FDIC has established a risk-based assessment
system for the deposit insurance provided to depositors at depository
institutions whereby assessments to each institution are calculated upon the
probability that the insurance fund will incur a loss with respect to the
institution, the likely amount of such loss, and the revenue needs of the
insurance fund. Under the system, deposit insurance premiums are based upon an
institution's assignment to one of three capital categories and a further
assignment to one of three supervisory subcategories within each capital
category. The result is a nine category assessment system with initial
assessment rates ranging from twenty-three cents to thirty-one cents per one
hundred dollars of deposits in an institution. The classification of an
institution into a category will depend, among other things, on the results of
off-site surveillance systems, capital ratio, and CAMEL rating (a supervisory
rating of capital, asset quality, management, earnings and liquidity).
RECENT DEVELOPMENTS AFFECTING DEPOSIT INSURANCE PREMIUMS AND PROPOSALS TO
OVERHAUL THE SAVINGS ASSOCIATION INDUSTRY. Several Bills are pending in the
U.S.Congress that, if enacted, would reduce earnings and capital of all savings
associations, including the Association, and fundamentally change the way
savings associations operate. For additional information regarding these
proposals, see "RISK FACTORS--Effect of the Recapitalization of SAIF, and the
Effect of the SAIF and BIF Deposit Premium Differential on the Association's
Future Operations and Prospects" and "MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS--Recent Federal Legislative
Developments."
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FEDERAL AND STATE TAXATION
FEDERAL TAXATION
GENERAL. The following discussion of tax matters summarizes the material
tax rules applicable to the Holding Company and the Association. The
Association was last audited by the IRS in 1988 with respect to its federal
income tax return for 1986. No material adjustments to such tax return were
required as a result of the audit. The Holding Company and the Association will
report their income using a calendar year and the accrual method of accounting
and will be subject to federal income taxation in the same manner as other
corporations with some exceptions, including particularly the Association's
additions to its reserves for bad debts discussed below.
BAD DEBT RESERVES. Savings institutions that meet certain definitional
tests primarily relating to their assets and the nature of their business
("qualifying thrifts"), such as the Association, are permitted to establish a
reserve for bad debts and to make annual additions thereto, which additions may,
within specified formula limits, be deducted in arriving at their taxable
income. Earnings appropriated for bad debt reserves and deducted for federal
income tax purposes cannot be used by the Association to pay cash dividends
without the payment of income taxes by it at the then current income tax rate on
the amount deemed distributed, which would include the amount of any federal
income taxes attributable to the distribution. Thus, any distribution to the
Holding Company by the Association in excess of the amount of the earnings and
profits (calculated for tax purposes) of the Association would reduce amounts
appropriated to the Association's bad debt reserves and deducted for federal
income tax purposes and could create a tax liability for the Association. The
Association does not intend to pay dividends that would result in a recapture of
its bad debt reserves.
For purposes of the bad debt reserve deduction, loans are separated into
"qualifying real property loans," which are, in general, loans secured by
interests in improved real property or real property which is to be improved out
of the proceeds of the loan, and "nonqualifying loans," which are all other
loans. A qualifying thrift is allowed to calculate the deduction for the
addition to its bad debt reserve for qualifying real property loans based upon
the more favorable of two methods: (i) a method based on the thrift's actual
loss experience (the "experience" method); or (ii) a method based on a specified
percentage of the thrift's taxable income (the "percentage of taxable income"
method). The addition to the bad debt reserve under the percentage of taxable
income method is limited to 8% of the thrift's taxable income, as adjusted for
this purpose. The percentage of taxable income method may not be used in any
year in which less than 60% of the thrift's total assets are "qualifying
assets." "Qualifying assets" generally include cash, obligations of the United
States or an agency or instrumentality thereof, certain obligations of a state
or political subdivision thereof, residential real estate and related loans,
loans secured by savings accounts, student loans and property used by the thrift
in the conduct of its business. The Association presently satisfies the 60%
requirement, and management expects the Association to be able to satisfy this
test in the future upon consummation of the Conversion. An entity previously
treated as a thrift that does not meet the definition of a thrift institution
(i.e., if the institution fails to meet the 60% qualifying asset test) is
generally treated as a commercial bank and is permitted to continue to maintain
its bad debt reserve provided it otherwise satisfies the Code definition of a
bank. The Association has accumulated $3.6 million in its tax bad debt reserves
as of December 31, 1995.
The amount of the addition to the reserve for losses on qualifying real
property loans under the percentage of taxable income method cannot exceed the
amount necessary to increase the balance of the reserve for losses on qualifying
real property loans at the close of the taxable year to 6% of the balance of the
qualifying real property loans outstanding at the end of the taxable year. Also,
if the qualifying thrift uses the percentage of taxable income method, then the
qualifying thrift's aggregate addition to its reserve
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for losses on qualifying real property loans cannot, when added to the addition
to the reserve for losses on nonqualifying loans, exceed the amount by which (i)
12% of the amount that the total deposits or withdrawable accounts of depositors
of the qualifying thrift at the close of the taxable year exceeded (ii) the sum
of the qualifying thrift's surplus, undivided profits and reserves at the
beginning of such year. Finally, the deduction under the percentage of taxable
income method is reduced by the addition to the reserve for losses on
nonqualifying loans.
The Association used the experience method in its fiscal year ending
December 31, 1995 and was allowed a bad-debt deduction of $245,000.
Although the Holding Company and the Association and its subsidiary expect
to file consolidated returns, the Association is generally permitted to take
only its separate taxable income (as adjusted for this purpose) into account
when computing its allowable bad debt reserve deduction under the percentage of
taxable income method. If a non-thrift member of a consolidated group incurs
losses in activities "functionally related" to the thrift's business, however,
those losses will reduce the thrift's taxable income, as applicable, for
purposes of the computation.
For a discussion of recent legislative developments which could result in
repeal of the special bad debt reserve deduction, see "MANAGEMENT'S DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS--Recent Federal
Legislative Developments--Proposals to Overhaul the Savings Association
Industry."
CORPORATE ALTERNATIVE MINIMUM TAX. For taxable years beginning after
December 31, 1986, the Tax Reform Act of 1986 (the "TRA") changed the corporate
minimum tax from an add-on tax to a tax based on alternative minimum taxable
income ("AMTI"), and increased the tax rate from 15% to 20%. The excess of the
bad debt reserve deduction using the percentage of taxable income method over
the deduction that would have been allowable under an experience method is
treated as a preference item for purposes of computing the corporate minimum
tax, which was modified significantly by the TRA. The Code provisions relating
to the alternative minimum tax ("AMT") also: (i) treat as a preference item
interest on certain tax-exempt private activity bonds issued on or after August
8, 1986; and (ii) include in AMTI (for tax years beginning in 1987-1989) an
amount equal to one-half of the amount by which a corporation's book income (as
specifically defined) exceeds its AMTI (determined without regard to this
preference and prior to reduction by net operating losses). Also, only 90% of
AMTI can be offset by net operating losses. For taxable years beginning after
December 31, 1989, the adjustment to AMTI based on book income is an amount
equal to 75% of the amount by which a corporation's adjusted current earnings
exceeds its AMTI (determined without regard to this preference and prior to
reduction for net operation losses). The Association does not expect to be
subject to the alternative minimum tax.
DISTRIBUTIONS. To the extent that (i) the Association's reserves for
losses on qualifying real property loans exceed the amount that would have been
allowed under the experience method and (ii) the Association makes "nondividend
distributions" that are considered to result in distributions from the excess
bad debt reserve or the supplemental reserve for losses on loans ("Excess
Distributions"), then an amount based on the amount distributed will be included
in its taxable income. Nondividend distributions include distributions in
excess of the Association's current and accumulated earnings and profits,
distributions in redemption of stock and distributions in partial or complete
liquidation. However, dividends paid out of the Association's current or
accumulated earnings and profits, as calculated for federal income tax purposes,
will not be considered to result in a distribution from the Association's bad
debt reserves.
The amount of additional taxable income created from an Excess Distribution
is an amount that when reduced by the tax attributable to the income is equal to
the amount of the distribution. Thus, if after the
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Conversion, certain portions of the Association's accumulated tax bad debt
reserve are used for any purpose other than to absorb qualified bad debt losses,
such as for the payment of dividends or other distributions with respect to the
Association's capital stock (including distributions upon redemption or
liquidation), approximately one and one-half times the amount so used would be
includable in gross income for federal income tax purposes, assuming a 34%
corporate income tax rate (exclusive of state taxes). See "DIVIDEND POLICY" and
"SUPERVISION AND REGULATION--The Association--Restrictions on Dividends and
Capital Distributions" for limits on the payment of dividends of the
Association.
STATE TAXATION
The Association files and, following the Conversion, the Holding Company
and the Association will file Illinois income tax returns. For Illinois income
tax purposes, savings associations are presently taxed at a rate equal to 7.3%
of net income. For these purposes, "net income" generally means federal taxable
income, subject to certain adjustments (including the addition of interest
income on state and municipal obligations and the exclusion of interest income
on United States Treasury obligations). The exclusion of income on United
States Treasury obligations generally has the effect of reducing the Illinois
taxable income of savings institutions. As a result of the exclusion of such
interest income on United States Treasury obligations held by the Association,
the Association has, in recent years, shown a net operating loss for Illinois
income tax purposes. Thus, the Association has paid no Illinois income tax in
recent years and does not anticipate having any Illinois income tax liabilities
in the near future.
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THE CONVERSION
THE BOARD OF DIRECTORS OF THE ASSOCIATION AND THE OTS HAVE APPROVED THE
PLAN SUBJECT TO APPROVAL BY THE MEMBERS OF THE ASSOCIATION AND TO SATISFACTION
OF CERTAIN OTHER CONDITIONS. OTS APPROVAL DOES NOT CONSTITUTE A RECOMMENDATION
OR ENDORSEMENT OF THE PLAN BY THE OTS.
GENERAL
The Board of Directors of the Association unanimously adopted the Plan on
November 21, 1995, and amendments to the Plan on February 13, 1996, March 12,
1996 and April 29, 1996. The Plan was adopted subject to approval by the OTS,
and to approval of the members of the Association holding not less than a
majority of the votes outstanding as of the record date fixed for the Special
Meeting. Pursuant to the Plan, the Association will be converted from a
federally-chartered mutual savings association to a federally-chartered capital
stock savings association and will become a wholly-owned subsidiary of the
Holding Company, which is incorporated under Delaware law; and the Holding
Company will issue the Common Stock to be sold in the Offerings and will use 50%
of the net proceeds of the sale of the Common Stock to purchase the capital
stock of the converted Association.
On April 16, 1996, the OTS approved the Association's Application for
Approval of Conversion, subject to, among other things, approval of the Plan by
the Association's members. A special meeting of members has been called for
this purpose on June 11, 1996. The Holding Company's application to become the
holding company of the converted Association must be approved by the OTS before
the Conversion can be completed.
If the Board of Directors of the Association decides for any reason (such
as policies or conditions which could adversely affect the Association's or the
Holding Company's ability to consummate the Conversion and the Association's
ability to transact its business as contemplated herein and in accordance with
its 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 not to use the holding
company form of organization in the Conversion. In the event that such a
decision is made, the Association will withdraw the Holding Company's
registration statement from the SEC and will take all steps necessary to
complete the Conversion 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 basis upon which the Association
determines not to complete the Conversion, the Association will issue and sell
the common stock of the Association. A resolicitation for the Association's
common stock will be commenced and subscribers for the Common Stock will be
required to reconfirm their orders. The description of the Plan contained
herein 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 Association from a mutual to stock form of organization
and the sale of the Association's common stock.
The following is a brief summary of the material aspects of the Conversion.
It is qualified in its entirety by the provisions of the Plan, which contain a
more detailed description of the terms of the Conversion. Copies of the Plan,
including the proposed charter and bylaws of the converted Association, are
available without charge upon request from the Association. A copy of the Plan
is available for inspection at the office of the Association and at the offices
of the OTS in Chicago, Illinois and Washington, D.C. The Plan is also filed as
an exhibit to the Registration Statement of which this Prospectus is part and
may be obtained from the SEC. See "AVAILABLE INFORMATION."
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PURPOSES OF CONVERSION
The Association, as a federally-chartered mutual savings association, has
no stockholders and no authority to issue capital stock. By converting to the
stock form of organization, the Association will be structured in the form used
by commercial banks, most other business entities and a growing number of
savings institutions. Conversion to the stock form of organization and the
formation of a holding company in connection therewith offer a number of
advantages which may be important to the future growth and performance of the
Association, including (i) a larger capital base for the converted Association's
operations, (ii) enhanced future access to capital markets, and (iii) an
opportunity for depositors and borrowers of the Association to become
stockholders of the Holding Company and thereby participate more directly in any
future growth of the Association. In addition, the capital contributed to the
Association by the Holding Company may assist the Association in offering new
programs and expanded service to its customers.
The Association's Board of Directors has taken significant steps since late
1994 to redirect the Association's operations in order to improve the
Association's operating performance. The Conversion proceeds will be used to
enhance these efforts. The Board of Directors believes that the proceeds raised
in the Conversion and the operating flexibility offered by the stock and holding
company form of ownership will facilitate many of the changes the Board of
Directors believes are necessary to compete effectively.
The Association recognizes the need to increase its asset size, and intends
to fund this growth through increasing deposits, through increased marketing
efforts and through proceeds raised in the Conversion. On the asset side, the
Association intends to increase its loan portfolio through marketing associated
with the new branch and additional lending efforts.
The Association's strategy includes emphasizing the origination of indirect
automobile loans, further enhancing its market niche in Bloomington-Normal for
this type of loan product, and one- to four-family residential mortgage loans.
In addition, the Association intend to offer new consumer products and services
and create higher visibility for these products and services. As a corollary,
the Board of Directors of the Holding Company intends to use a portion of the
Conversion proceeds to take advantage of growth opportunities, such as the
establishment of new branch offices, the acquisition of branches from other
financial institutions and the acquisition of other financial institutions, if
and when such opportunities become available. See "FIRST FEDERAL SAVINGS AND
LOAN ASSOCIATION OF BLOOMINGTON--Recent Developments and Strategies."
Management believes that the formation of the Holding Company will provide
greater flexibility than the converted Association would have to diversify its
business activities through existing or newly formed subsidiaries or through
acquisitions of other financial institutions (including banks and savings
associations) and other companies. Although there are no current arrangements,
understandings or agreements regarding any such opportunities, the Holding
Company will be in a position after the Conversion, subject to regulatory
limitations and the Holding Company's financial position, to take advantage of
any such opportunities that may arise.
For example, the formation of the Holding Company will give the Association
the potential to form a new bank as a separate wholly-owned subsidiary of the
Holding Company for the purpose of lessening the effect of the disparity between
SAIF and BIF insurance premiums. For more information regarding this disparity
and the recent announcement by several large savings associations that they
intend to form new bank subsidiaries under their holding companies, see "RISK
FACTORS--Effect of the Recapitalization of SAIF, SAIF Premiums and Proposed BIF
Premiums on the Association's Future Operations and
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Prospects" and "SUPERVISION AND REGULATION--Recent Developments Affecting
Deposit Insurance Premiums."
After completion of the Conversion, the unissued common and preferred stock
authorized by the Holding Company's certificate of incorporation will permit the
Holding Company, subject to market conditions, to raise additional equity
capital through further sales of securities and to issue securities in
connection with possible acquisitions. At the present time, the Holding Company
has no plans with respect to acquisitions or additional offerings of securities.
Management of the Association believes that the converted Association will also
benefit from management and employee ownership of stock in the Holding Company,
because such stock ownership is an effective performance incentive and a means
of attracting, retaining and compensating personnel. Following the Conversion,
the Holding Company will also be able to use stock-related incentive programs to
attract, retain and provide incentives for qualified executive and other
personnel for itself and its subsidiaries. See "MANAGEMENT OF THE HOLDING
COMPANY AND ASSOCIATION--Employee Benefit Plans."
EFFECTS OF CONVERSION
GENERAL. The Association is presently a federally-chartered mutual savings
association. Each person with a deposit account in a mutual savings
association, such as the Association, has pro rata ownership rights, based upon
the balance in his or her account, to the net worth of the Association upon
liquidation. However, this right is tied to the depositor's account and has no
tangible market value separate from such deposit account. Further, mutual
savings association depositors can realize value with respect to their interests
only in the unlikely event that the mutual savings association is liquidated and
has a positive net worth. In such an event, the depositors of record at the
time of liquidation would share pro rata, based on the amounts of their
deposits, in any residual surplus after other claims, including those of
depositors for the amounts of their deposit accounts (including accrued
interest), are paid.
When a mutual savings association converts to stock form, the institution's
charter is amended to authorize the issuance of capital stock to represent
ownership of the association, including its net worth. The Common Stock is
separate and apart from deposit accounts and is not insured by the SAIF or any
other government agency. Certificates are issued to evidence ownership of the
stock. The stock certificates are transferable and, therefore, the stock may be
sold or traded if a purchaser is available, with no effect on any deposit
account the seller may hold in the institution.
In connection with the Conversion, the Association will amend its charter
to authorize the issuance of capital stock which will be separate and apart from
any deposit accounts of the converted Association and will not be insured by the
SAIF or any other government agency. Certificates evidencing ownership of this
capital stock will be issued to the Holding Company. The Holding Company's
certificate of incorporation likewise authorizes the issuance of capital stock,
which will be separate and apart from any deposit accounts of the converted
Association and will not be insured by the SAIF or any other government agency.
Persons who purchase shares of the Common Stock in the Conversion will be issued
certificates evidencing ownership of such shares, which will be transferable
and, therefore, may be sold or traded by the holder if a purchaser is available,
with no effect on any deposit account the seller may hold in the converted
Association.
DEPOSIT ACCOUNTS AND LOANS. The account balances, interest rates and other
terms of deposit accounts at the Association will not be affected by the
Conversion (except to the extent that a depositor directs the Association to
withdraw funds from his or her deposit account to pay for shares of Common Stock
and except with respect to voting and liquidation rights). Likewise, the
existing SAIF insurance coverage of such accounts will not be affected by the
Conversion. Upon completion of the Conversion,
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each depositor of the Association will continue as a depositor in the converted
Association, and will continue to hold a deposit account or accounts with the
same account balance(s), interest rate(s) and other terms as the deposit
account(s) held by such depositor in the Association immediately prior to
consummation of the Conversion (after taking into account any reduction in
account balance or change in interest rate resulting from a withdrawal of funds
at the direction of the depositor to pay for his or her Common Stock and except
with respect to voting and liquidation rights). Furthermore, the Conversion will
not affect any loan account, the balances, interest rates or maturities of these
accounts or the obligations of borrowers of the Association under their
individual contractual arrangements with the Association. Upon consummation of
the Conversion, all loans of the Association will automatically become loans of
the converted Association, with no change in the outstanding principal balances,
interest rates or other contract terms of such loans.
CONTINUITY. The Association will continue without interruption, during and
after completion of the Conversion, to provide its services to depositors and
borrowers pursuant to existing policies and will maintain its office operated by
the existing management and employees of the Association. No assets of the
Association will be distributed in the Conversion other than for the payment of
expenses incident to the Conversion.
VOTING RIGHTS. Under the Association's current charter, deposit account
holders of the Association have voting rights with respect to certain matters
relating to the Association, including the election of directors. For the most
part, deposit account holders of the Association exercised these voting rights
by granting proxies to the Association's Board of Directors at the time such
depositors opened their accounts at the Association ("Omnibus Proxies"). These
Omnibus Proxies gave the Association's Board of Directors the ability to control
the voting on any issue requiring member approval. The Board of Directors may
not, however, use the Omnibus Proxies to vote for the Plan of Conversion.
After the Conversion, (i) account holders will not have voting rights with
respect to the converted Association and will therefore not be able to elect
directors of the converted Association or to control its affairs; (ii) any
Omnibus Proxies previously granted by the Association's depositors to the
Association's Board of Directors will be of no further force and effect; (iii)
voting rights with respect to the converted Association will be vested in the
Holding Company, as the sole stockholder of the converted Association; and (iv)
voting rights with respect to the Holding Company will be vested in the Holding
Company's stockholders. Each purchaser of Common Stock will be entitled to vote
on any matters to be considered by the Holding Company's stockholders. For a
description of the voting rights of the holders of Common Stock, see
"DESCRIPTION OF CAPITAL STOCK--Common Stock."
TAX EFFECTS. An opinion has been received from Schiff Hardin & Waite with
respect to tax consequences of the proposed Conversion of the Association to
stock form that:
(i) the change in form of operation of the Association from a federally-
chartered mutual savings association to a federally-chartered capital
stock savings association through an acquisition of all of the
outstanding shares of the Association by the Holding Company will
constitute a reorganization within the meaning of Section 368(a)(1)(F) of
the Code, and no gain or loss will be recognized to the Association in
either its mutual or stock form as a result of the Conversion; the
Association in its mutual and stock form will each be "a party to a
reorganization" within the meaning of Section 368(b) of the Code;
(ii) no gain or loss will be recognized to the Association in stock form upon
the receipt of money from the Holding Company in exchange for shares of
common stock of the Association;
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(iii) no gain or loss will be recognized by the Holding Company on the
receipt of money and other property from stockholders in exchange for
shares of Common Stock;
(iv) the basis of the Association assets in the hands of the Association after
the Conversion will be the same, in each instance, as the basis of those
assets in the hands of the Association immediately prior to the
Conversion;
(v) the holding period of the Association assets in the hands of the
Association after the Conversion will include, in each instance, the
period during which such assets were held by the Association prior to the
Conversion;
(vi) each account holder will not recognize gain or loss upon the deemed
exchange of their deposit accounts in the Conversion;
(vii) gain, if any, will be recognized by Eligible Account Holders and others
upon issuance to them of interests in the Liquidation Account (as defined
below) and/or non-transferable Subscription Rights, but only in an amount
not in excess of the fair market value of the Subscription Rights and
Liquidation Account interests received;
(viii) based solely on a representation from management of the Association
that the Subscription Rights have no ascertainable fair market value, no
income, gain or loss will be recognized by Eligible Account Holders,
Supplemental Eligible Account Holders, Other Members, or other
subscribers under the Plan due to the issuance to them of Subscription
Rights or the exercise or lapse thereof; and no taxable income will be
recognized by the Association in either mutual or stock form on the
issuance or distribution of Subscription Rights; if it is ultimately
determined that the Subscription Rights have fair market value, income or
gain may be recognized by various recipients of the Subscription Rights
(in certain cases whether or not the Subscription Rights are exercised)
and the Association may be taxable on the distribution of the
Subscription Rights;
(ix) the initial basis of the deposit accounts in the Association after the
Conversion received by the account holders of the Association will be the
same as the basis of their deposit accounts in the Association prior to
the Conversion surrendered in exchange thereof;
(x) the initial basis of each account holder's interest in the Liquidation
Account of the Association will equal the fair market value, if any, of
that interest;
(xi) the initial basis of the Subscription Rights in the hands of the initial
recipients will equal the fair market value, if any, of the Subscription
Rights;
(xii) the Association in stock form will succeed to and take into account the
earnings and profits, or deficit earnings and profits, of the Association
in mutual form as of the date of transfer;
(xiii) the creation of the Liquidation Account on the records of the
Association will have no effect on its taxable income, deductions, or
additions to reserves for bad debts under Section 593 of the Code, or the
tax consequences of distributions to stockholders under Section 593(e) of
the Code;
(xiv) provided the Association in mutual and stock form are organizations
eligible to use the reserve method of accounting for bad debts under
Section 593 of the Code, the Association in stock form will succeed to
and take into account, immediately after the transaction, the dollar
amounts of those accounts of the Association in mutual form which
represent bad debt reserves in respect of
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which the Association in mutual form has taken a bad debt deduction for
taxable years ending on or before the date of the Conversion; the bad
debt reserves will have the same character in the hands of the
Association in stock form as they would have had in the hands of the
Association in mutual form if no distribution or transfer had occurred,
and such bad debt reserves will not be required to be restored to the
gross income of the Association in stock form for the taxable year of
transfer;
(xv) regardless of book entries made for the creation of the Liquidation
Account, the Conversion will not diminish the accumulated earnings and
profits of the Association in stock form available for the subsequent
distribution of dividends within the meaning of Section 316 of the Code;
(xvi) a purchaser of Common Stock in the Offerings will have an initial basis
in that stock equal to the stock purchase price increased, in the case of
stock acquired pursuant to the exercise of Subscription Rights, by the
fair market value (if any) of the Subscription Rights exercised; and
(xvii) a stockholder's holding period for Common Stock acquired through the
exercise of Subscription Rights shall begin on the date on which the
Subscription Rights are exercised and the holding period for Common Stock
purchased in the Community Offering will commence on the date following
the date on which the stock is purchased.
The opinion from Schiff Hardin & Waite is based on certain representations
made by the Association to Schiff Hardin & Waite, including the representation
that the exercise price of the Subscription Rights to purchase Common Stock will
not be less or greater than the fair market value of that stock at the time of
the completion of the proposed Conversion.
The opinion of Schiff Hardin & Waite is limited to applicable Federal and
Illinois law. No legal opinion has been or will be received with respect to the
value of the Holding Company, of the Association (in either mutual or stock
form) or of the Subscription Rights, or with respect to any tax consequences of
the Conversion not specifically described above, including the tax consequences
under the laws of any other state or local or foreign taxing jurisdiction to
which they may be subject.
Unlike a private letter ruling, the opinion of Schiff Hardin & Waite has no
binding effect or official status, and no assurance can be given that the
conclusions reached in such opinion would be sustained by a court if contested
by the IRS or the Illinois tax authorities.
LIQUIDATION RIGHTS. In the unlikely event of a complete liquidation of the
Association before the Conversion or of the converted Association after the
Conversion, account holders would have claims for the amount of their deposit
accounts, including accrued interest, and would receive the protection of SAIF
insurance up to applicable limits.
Prior to the Conversion, in the event of a complete liquidation of the
Association, each holder of a deposit account in the Association would receive
such holder's pro rata share of any assets of the Association remaining after
payment of the valid claims of all creditors (including the claims of all
depositors to the withdrawal value of their accounts, including accrued
interest). Such holder's pro rata share of such remaining assets, if any, would
be in the same proportion as the value of such holder's deposit account was to
the total value of all deposit accounts in the Association at the time of
liquidation.
As required by the OTS's regulations, the Plan provides that, upon
completion of the Conversion, a "Liquidation Account" will be established on the
converted Association's books, for the benefit of Eligible Account Holders and
Supplemental Eligible Account Holders who continue to maintain their deposit
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accounts at the converted Association. The amount of the Liquidation Account
will be equal to the regulatory capital of the Association as of the latest
practicable date prior to consummation of the Conversion. Under applicable
regulations of the OTS, the converted Association will not be permitted to pay
dividends on, or repurchase any of, its common stock if its regulatory capital
would thereby be reduced below the aggregate amount then required for the
Liquidation Account. After the Conversion, Eligible Account Holders and
Supplemental Eligible Account Holders will be entitled, in the event of
liquidation of the converted Association, to receive liquidating distributions
of any assets remaining after payment of all valid creditors' claims (including
the claims of all depositors to the withdrawal values of their deposit accounts,
including accrued interest), but before any distributions are made on the
converted Association's common stock, equal to their proportionate interests in
the Liquidation Account at the time of liquidation.
Each Eligible Account Holder and Supplemental Eligible Account Holder will
have an initial interest ("subaccount balance") in the Liquidation Account for
each deposit account as of the Eligibility Record Date or Supplemental
Eligibility Record Date, respectively. Each initial subaccount balance will be
the amount determined by multiplying the total opening balance in the
Liquidation Account by a fraction, (i) the numerator of which is the total of
the deposit balances of the deposit accounts (as defined in the Plan) of an
Eligible Account Holder and Supplemental Eligible Account Holder as of the close
of business on the Eligibility Record Date or, in the case of a Supplemental
Eligible Account Holder, the Supplemental Eligibility Record Date ("Qualifying
Deposit") (provided that deposit accounts of an Eligible Account Holder or
Supplemental Eligible Account Holder with total deposit balances of less than
$50 shall not constitute a Qualifying Deposit), and (ii) the denominator of
which is the total of all Qualifying Deposits of all Eligible Account Holders or
Supplemental Eligible Account Holders, respectively. If the amount in the
deposit account on any subsequent annual closing date (i.e., each December 31
commencing December 31, 1996) of the converted Association is less than the
balance in such deposit account on any other annual closing date or the balance
in such account on the Eligibility Record Date or Supplemental Eligibility
Record Date, as the case may be, this interest in the Liquidation Account will
be reduced by an amount proportionate to any such reduction and will not
thereafter be increased despite any subsequent increase in the related deposit
account. Each Eligible Account Holder's and Supplemental Eligible Account
Holder's interest in the Liquidation Account will cease to exist if the Eligible
Account Holder or Supplemental Eligible Account Holder ceases to maintain an
account at the converted Association. The Liquidation Account will never
increase and will be correspondingly reduced as the subaccount balances in the
Liquidation Account are reduced or cease to exist. Any assets remaining after
the above liquidation rights of Eligible Account Holders and Supplemental
Eligible Account Holders are satisfied would be distributed to the Holding
Company, as sole stockholder of the converted Association. A merger,
consolidation, sale of bulk assets or similar combination or transaction with
another SAIF-insured institution, whether or not the converted Association is
the surviving institution, would not be viewed as a complete liquidation for
purposes of distribution of the Liquidation Account. In any such transaction,
the Liquidation Account would be assumed by the surviving institution to the
full extent authorized by regulations of the OTS as then in effect.
THE SUBSCRIPTION AND COMMUNITY OFFERING
As part of the Conversion, the Holding Company is offering up to 1,667,500
shares of Common Stock at a Purchase Price of $10.00 per share in the
Subscription Offering. As described in more detail below, non-transferable
rights to subscribe for the Common Stock in the Subscription Offering have been
granted to certain persons according to certain preference categories and,
subject to the prior rights of holders of Subscription Rights, the Holding
Company is also offering shares of Common Stock in the Community Offering to
members of the general public. In the event of an oversubscription in the
Subscription and Community Offering, up to 250,125 additional shares may be
issued to reflect changes
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in market and financial conditions and to cover additional subscriptions. The
Holding Company may reject, in whole or in part, orders received in the
Community Offering in its sole discretion.
THE SUBSCRIPTION AND COMMUNITY OFFERING WILL EXPIRE AT THE SUBSCRIPTION
EXPIRATION TIME, AS DESCRIBED ON THE COVER PAGE OF THE PROSPECTUS.
SUBSCRIPTION OFFERING. In accordance with the OTS's regulations, Subscription
Rights have been granted pursuant to the Subscription Offering under the Plan to
the following persons (collectively, the "Eligible Subscribers") in the
following order of priority: (1) Eligible Account Holders (depositors with
aggregate account balances of $50 or more on deposit at the Association as of
October 31, 1994); (2) the ESOP; (3) Supplemental Eligible Account Holders
(depositors with aggregate account balances of $50 or more on deposit at the
Association, other than officers or directors of the Association or any of their
associates, as of March 31, 1996); and (4) Other Members (depositors as of May
10, 1996, the voting record date, who are not Eligible Account Holders or
Supplemental Eligible Holders). Subscription Rights are non-transferable and
have been granted to Eligible Subscribers without charge. No Eligible Subscriber
is required to purchase any shares of Common Stock in the Subscription Offering.
All subscriptions received will be subject to the availability of Common Stock
after satisfaction of subscriptions of all Eligible Subscribers having prior
rights in the Subscription Offering and to the maximum purchase limitations and
other terms and conditions set forth in the Plan and described below.
CATEGORY 1: ELIGIBLE ACCOUNT HOLDERS. Subject to the minimum purchase
limitation set forth in the Plan, each Eligible Account Holder has been granted,
without payment therefor, non-transferable Subscription Rights to purchase
shares with an aggregate purchase price of no more than $200,000 (or 20,000
shares based on the Purchase Price), which shall include shares of Common Stock
purchased by all of his or her associates and/or any persons acting in concert
with such Eligible Account Holder.
Subscription Rights of Eligible Account Holders that are received by officers
and directors of the Association and the Holding Company and their associates
based on their increased deposits in the Association in the one-year period
preceding the Eligibility Record Date shall be subordinated to all other
subscriptions involving the exercise of Subscription Rights by Eligible Account
Holders.
If Eligible Account Holders subscribe for more shares than are available for
purchase, available shares will be allocated among Eligible Account Holders in
accordance with the following formula. Available shares of Common Stock will
first be allocated so as to permit each subscribing Eligible Account Holder to
purchase the lesser of 100 shares of Common Stock or the amount of each such
subscriber's subscription, as the case may be. Thereafter, shares of Common
Stock remaining shall be allocated among subscribing Eligible Account Holders in
the proportion that the amount of the Qualifying Deposit of each such subscriber
bears to the total amount of the Qualifying Deposits of all such Eligible
Account Holders. If the amount of shares so allocated to one or more of such
subscribers exceeds the amount subscribed for by such subscriber(s), the excess
shall be reallocated (one or more times, as necessary) among those Eligible
Account Holders whose subscriptions are still not fully satisfied on the same
principle until all available shares have been allocated or all subscriptions
satisfied.
CATEGORY 2: ESOP. The ESOP has been granted, without payment therefor, non-
transferable Subscription Rights to purchase up to 8% of the Common Stock
offered in the Subscription Offering. It is anticipated that the ESOP will
exercise Subscription Rights to purchase 8% of the shares sold in the Offerings,
assuming such shares are available after subscriptions of Eligible Account
Holders have been filled. Under certain circumstances, the ESOP's purchases in
the Conversion may be limited to an amount less than 8% or may be prohibited
altogether. For information regarding these restrictions, see "MANAGEMENT OF THE
HOLDING COMPANY AND ASSOCIATION--Employee Benefit Plans--
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Employee Stock Ownership Plan." Pursuant to the Plan, shares of Common Stock
purchased by the ESOP will not be aggregated with shares of Common Stock
purchased directly by, or which are otherwise attributable to, any other
participants in the Offerings, including subscriptions of any of the
Association's directors, officers, employees or associates thereof.
CATEGORY 3: SUPPLEMENTAL ELIGIBLE ACCOUNT HOLDERS. Subject to the minimum
purchase limitation set forth in the Plan, each Supplemental Eligible Account
Holder has been granted, without payment therefor, non-transferable Subscription
Rights to purchase shares with an aggregate purchase price of no more than
$200,000 (or 20,000 shares based on the Purchase Price), which shall include
shares of Common Stock purchased by all of his or her associates and/or any
persons acting in concert with such Supplemental Eligible Account Holder. The
Subscription Rights of each Supplemental Eligible Account Holder will be reduced
by any Subscription Rights received by such person as an Eligible Account
Holder.
In the event of an oversubscription by Supplemental Eligible Account Holders,
shares of Common Stock available to Supplemental Eligible Account Holders will
be allocated in accordance with the following formula. Available shares of
Common Stock will be allocated so as to permit each subscribing Supplemental
Eligible Account Holder to purchase the lesser of 100 shares of Common Stock or
the amount of each such subscriber's subscription, as the case may be.
Thereafter, shares of Common Stock remaining shall be allocated among
subscribing Supplemental Eligible Account Holders in the proportion that the
amount of the Qualifying Deposit of each such Subscriber bears to the total
amount of the Qualifying Deposits of all such Supplemental Eligible Account
Holders. If the amount of shares so allocated to one or more of such subscribers
exceeds the amount subscribed for by such subscriber(s), the excess shall be
reallocated (one or more times, as necessary) among those Supplemental Eligible
Account Holders whose subscriptions are still not fully satisfied on the same
principle until all available shares have been allocated or all subscriptions
satisfied.
CATEGORY 4: OTHER MEMBERS. Subject to the minimum purchase limitation set
forth in the Plan, each Other Member has been granted, without payment therefor,
nontransferable Subscription Rights to purchase shares with an aggregate
purchase price of no more than $200,000 (or 20,000 shares based on the Purchase
Price), which shall include shares of Common Stock purchased by all of his or
her associates and any persons acting in concert with such Other Member. Orders
by Other Members will be filled to the extent that shares remain available for
purchase after satisfaction of all subscriptions of Eligible Account Holders,
the ESOP and Supplemental Eligible Account Holders. In the event of an
oversubscription by Other Members, available shares of Common Stock will be
allocated among Other Members in the proportion that the number of shares
subscribed for by each such Other Member bears to the total number of shares
subscribed for by all such Other Members.
THE COMMUNITY OFFERING. Subject to the availability of shares of the Common
Stock after satisfaction of all subscriptions of Eligible Account Holders, the
ESOP, Supplemental Eligible Account Holders and Other Members, the remaining
shares of the Common Stock will be offered in the Community Offering to natural
persons who reside in Illinois and to whomever else the Prospectus is delivered
("Other Purchasers"), giving preference to natural persons residing in the
Illinois county of McLean ("Preferred Other Purchaser") in a manner designed to
achieve the widest possible distribution of Common Stock.
No individual who purchases Common Stock in the Community Offering, directly
or indirectly or together with his or her associates or other persons with whom
such person is acting in concert, may subscribe for shares of Common Stock
having an aggregate purchase price of more than $200,000 (or 20,000 shares based
on the Purchase Price).
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If orders are received in the Community Offering for shares in excess of the
available shares of Common Stock to be offered in the Conversion, accepted
subscriptions from purchasers in the Community Offering shall first be filled in
full up to a maximum of 2% of the Common Stock offered in the Conversion and
thereafter remaining shares shall be allocated on an equal number of shares per
order until all orders of such purchasers have been filled (subject to the
minimum and maximum purchase limitations).
The Holding Company reserves the right to accept or reject, in whole or in
part, any or all orders in the Community Offering, either at the time of receipt
of an order or as soon as practicable following the termination of the
Offerings.
In the event that a Community Offering does not appear feasible, the
Association will consult with the OTS to determine the most viable alternative
available to effect completion of the Conversion. If no viable alternative
exists, the Association may terminate the Conversion with the concurrence of the
OTS.
SUBSCRIPTION AND COMMUNITY OFFERING MARKETING AND OTHER FEES
The Association has engaged Trident to consult with and advise the Holding
Company and Association with respect to the Subscription and Community Offering.
Trident is a registered broker-dealer and is a member of the NASD. Trident will
assist the Holding Company and the Association in the Conversion by, among other
things, (i) organizing the sales efforts in the Association's local community;
(ii) soliciting subscriptions and purchases of Common Stock; (iii) training the
Association's officers, directors and employees regarding, among other things,
the mechanics and regulatory requirements of the Conversion process and how to
respond to questions from customers and prospective investors about the
Conversion; (iv) maintaining a computer-based list of prospective subscribers
and purchasers of the Common Stock and follow-up contact with such prospects;
(v) organizing and conducting informational meetings for potential subscribers
and purchasers of the Common Stock; (vi) organizing and staffing the
Association's Stock Information Center, which will include, among other things,
answering questions from customers and prospective investors, collecting proxy
cards and stock order forms, tallying proxy cards and stock order forms,
determining the priority of stock orders and processing orders related to an
oversubscription for Common Stock, if necessary; (vii) preparing marketing
materials for the Offerings; (viii) providing after-market advice, support and
training, including, among other things, advice with respect to use of
Conversion proceeds, strategies for enhancing stockholder value and merger and
acquisition services; and (ix) developing and managing a Syndicated Community
Offering, if implemented, involving registered broker-dealers (see "--Syndicated
Community Offering"). Trident shall not have any obligation to take or purchase
shares of Common Stock in the Subscription or Community Offering, however,
Trident has agreed to use its best efforts in the sale of shares in the
Offerings.
For Trident's services, the Association and the Holding Company have agreed
to pay Trident as follows: (i) a commission equal to 1.75% of the aggregate
dollar amount of Common Stock sold to Eligible Account Holders who reside in the
Illinois counties of McLean and DeWitt ("Preferred Counties") and a commission
equal to 1.50% on sales to Eligible Account Holders who do not reside in the
Preferred Counties; however, such commission shall not be paid on shares of
Common Stock purchased by officers, directors and employees or their associates
or any employee benefit plans of the Association or Holding Company, (ii) a
commission equal to 1.75% of the aggregate dollar amount of Common Stock sold to
Supplemental Eligible Account Holders and Other Members who reside in the
Preferred Counties and a commission equal to 1.50% on sales to Supplemental
Eligible Account Holders and Other Members who do not reside in the Preferred
Counties, (iii) a commission equal to 1.75% of the aggregate dollar amount of
Common Stock sold in the Community Offering to Preferred Other Purchasers and a
commission equal to 1.50% of the aggregate dollar amount of Common Stock sold in
the Community Offering to Other Purchasers who are not Preferred Other
Purchasers, and (iv) an amount up to $45,000 for reimbursement
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of allocable expenses (including out-of-pocket expenses up to $12,500 and fees
of Trident's legal counsel up to $32,500). If a Syndicated Community Offering is
utilized, Trident and any Selected Dealers may be paid a fee to be agreed upon
jointly by Trident and the Association to reflect market requirements at the
time of the stock allocation in a Syndicated Community Offering. It is estimated
that such a fee will not exceed 5% of the aggregate dollar amount of Common
Stock sold in the Syndicated Community Offering.
If the Conversion is not consummated for any reason, or if the Conversion is
consummated without using the services of Trident, Trident shall be entitled to
payment of its allocable expenses incurred through the time that the Conversion
is terminated or Trident's services no longer are utilized. Under the agreement
with Trident, the Association and the Holding Company also have agreed to
indemnify Trident against certain liabilities and expenses, including legal
fees, to which Trident may become subject in connection with its engagement.
The Association has retained RP Financial to prepare the regulatory business
plan and financial projections required by the OTS pursuant to the Conversion
rules. For these services, RP Financial will receive a fee of $7,500. RP
Financial has also been retained by the Association to prepare an appraisal
report. For information concerning RP Financial's services and fees related to
the appraisal report, see "--Stock Pricing and Number of Shares to be Issued."
RP Financial's out-of-pocket expenses related to the preparation of the business
plan and appraisal report will not exceed $5,000, without the written
authorization of the Association.
PLAN OF DISTRIBUTION
Offering materials for the Subscription and Community Offering initially will
be distributed to certain persons by mail, with copies also available by request
or at the Association's office. In the Subscription and Community Offering,
officers and directors of the Association will be available to answer questions
concerning factual or historical information regarding the Association and may
also hold informational meetings for interested persons. A representative of
Trident will be present at all such meetings and will respond to questions
concerning the Offering. Officers and directors will not be permitted to make
statements about the Association unless such information is also set forth in
the Prospectus nor may they render investment advice. All subscribers for or
purchasers of the shares to be offered will be instructed to send payment
directly to the Association, where such funds will be held in a segregated
account and not released until all shares are sold or the Offering is
terminated.
In the event the Association 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 Association, 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 (i) no single extension exceeds
90 days, (ii) subscribers are given the right to increase, decrease or rescind
their subscriptions during the extension period, and (iii) the extensions do not
go more than two years beyond the date on which the members of the Association
approved the Plan. If the Conversion is not completed by June 11, 1996 (or, if
the Subscription and Community Offering is extended, by August 14, 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).
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DESCRIPTION OF SALES ACTIVITIES
The Common Stock will be offered in the Subscription and Community Offering
principally by the distribution of this Prospectus and through activities
conducted at an Association facility not open to the public (the "Stock
Information Center"). The Stock Information Center is expected to operate during
normal business hours throughout the Subscription and Community Offering.
Trident will manage the Stock Information Center. In such capacity Trident will
mail materials relating to the Subscription and Community Offering, respond to
questions regarding the Conversion and the Subscription and Community Offering
and process stock orders. It is expected that Association personnel will be
present in the Stock Information Center to assist Trident with questions
concerning factual or historical information regarding the Association. A
representative of Trident will respond to all questions regarding the mechanics
of the Subscription and Community Offerings.
The Association does not intend to offer or sell any shares of Common Stock
at the Stock Information Center; however, any person purchasing Common Stock
from the Association's office will be required to sign an acknowledgement that
the Common Stock is not a federally-insured or guaranteed instrument and that
the purchaser has received a Prospectus and understands the investment risks
involved. A conspicuous legend that the Common Stock is not a federally-insured
or guaranteed deposit or account appears on the Common Stock certificate and on
all offering documents used in connection with the Conversion.
Officers and directors of the Association may have occasion to discuss the
Subscription and Community Offering in social or business situations and
otherwise answer questions from interested parties concerning factual or
historical information regarding the Association. Parties interested in
participating in the Subscription and Community Offering or with questions
concerning the mechanics of the Subscription and Community Offering will be
directed to a representative of Trident at the Stock Information Center.
None of the Association's employees or directors who participate in the
Subscription and Community Offering, either in the Stock Information Center or
otherwise, will receive any special compensation or other remuneration for such
activities.
None of the Association's personnel participating in the Subscription and
Community Offering is registered or licensed as a broker or dealer or an agent
of a broker or dealer. The Association's personnel will assist in the above-
described activities pursuant to an exemption from registration as a broker or
dealer provided by Rule 3a4-1 ("Rule 3a4-1") promulgated under the Exchange Act.
Rule 3a4-1 generally provides that an "associated person of an issuer" of
securities shall not be deemed a broker solely by reason of participation in the
sale of securities of such issuer if the associated person meets certain
conditions. Such conditions include, but are not limited to, that the associated
person participating in the sale of an issuer's securities not be compensated in
connection therewith at the time of participation, that such person not be
associated with a broker or dealer and that such person observe certain
limitations on his participation in the sale of securities. For purposes of this
exemption, "associated person of an issuer" is defined to include any person who
is a director, officer or employee of the issuer or a company that controls, is
controlled by or is under common control with the issuer.
STOCK PRICING AND NUMBER OF SHARES TO BE ISSUED
The OTS's regulations and the Plan of Conversion require that the aggregate
purchase price of the Common Stock to be issued in the Conversion be based upon
an independent appraisal of the estimated pro forma market value of the Common
Stock. The Association has retained RP Financial to prepare an appraisal of the
pro forma market value of the Common Stock to be issued in connection with the
Conversion. RP Financial's fee for its appraisal services will be $20,000. The
Association has agreed to
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indemnify RP Financial under certain circumstances against liabilities and
expenses (including legal fees) arising out of, related to, or based upon the
Conversion.
For its analysis, RP Financial undertook substantial investigations to learn
about the Association'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 Association's Conversion
Application and the Registration Statement. Further, RP Financial visited the
Association's facilities and had discussions with the Association's management,
its independent auditing firm, Ernst & Young, LLP, and its special Conversion
legal counsel, Schiff Hardin & Waite. No detailed individual analysis of the
separate components of the Holding Company's or the Association's assets and
liabilities was performed in connection with the evaluation.
In rendering its appraisal, RP Financial relied upon the information
contained in the Prospectus, including the Consolidated Financial Statements. RP
Financial also considered the following factors, among others: (i) the present
and pro forma operating results and financial condition of the Holding Company
and the Association, (ii) the economic and demographic conditions in the
Association's existing marketing area, (iii) certain historical, financial and
other information relating to the Association, (iv) a comparative evaluation of
the operating and financial statistics of the Association with those of other
savings institutions, (v) the aggregate size of the offering of the Common
Stock, (vi) the impact of the Conversion on the Association's capital and
earnings potential, and (vii) the trading market for securities of comparable
institutions and general conditions in the market for such securities.
In determining the estimated pro forma market value of the Holding Company
(and therefore the Association), RP Financial applied the accepted valuation
methodology promulgated by the OTS, as revised in May, 1994, and issued in
written form in October, 1994. The methodology applied is the pro forma market
value approach, which is based on the market pricing of a comparative group of
publicly-traded financial institutions (the "Peer Group") that the appraiser
determined was comparable to the Association for purposes of the valuation. The
appraiser utilized Peer Group stock pricing information as of April 19, 1996,
the effective date of the valuation. The appraisal methodology examined three
key pricing ratios of the Peer Group, which were subsequently utilized in the
valuation. The ratios examined were the price/earnings ("P/E"), price/book value
ratio ("P/B"), and price/assets ratio ("P/A"). RP Financial utilized a
combination of the P/E approach, the P/B approach and the P/A approach. The
three approaches were performed on a pro forma basis, and therefore included the
incremental benefit of the net proceeds of the Conversion to the Association. In
its calculation, RP Financial incorporated the offering expenses, effective tax
rate and stock benefit plan assumptions as set forth under "PRO FORMA DATA." RP
Financial applied the average pricing ratios indicated for the Peer Group to the
pro forma financial data of the Association and the Holding Company, subject to
adjustments to account for differences between the Peer Group and the
Association, to derive the pro forma market value of the Holding Company (and
therefore the Association).
RP Financial concluded that earnings are a significant factor in determining
value since future dividend paying capacity and increases to book value are
primarily earnings based. RP Financial also took into consideration the P/B
approach in its valuation, because the P/B approach yielded a value that RP
Financial concluded captured a portion of the market anticipation of higher
earnings for the Association once the Conversion proceeds have been fully
deployed. RP Financial relied upon the P/A approach to a much lesser extent in
the final determination of value since the P/A approach has very little to do
with the various risks, current market values or investor returns, which are the
more traditional valuation considerations.
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At the midpoint of the Estimated Valuation Range, RP Financial concluded in
its Valuation Report dated April 19, 1996, that the pro forma market value of
the Common Stock was $14.5 million, which represented a pro forma P/B ratio of
62.32% versus an average P/B ratio of 88.10% for the Peer Group, for a discount
of 29.3%. The valuation represented a pro forma P/E multiple of 91.01 times pro
forma earnings, versus an average P/E multiple of 18.61 times for the Peer
Group, resulting in a premium of 389.0%. RP Financial concluded that the
discount represented by the pro forma P/B ratio was appropriate due to the
downward adjustments applied for earnings and dividend policies as well as the
relatively low, in comparison to the Peer Group, pro forma return on equity and
the resulting pro forma P/E multiple.
On the basis of the foregoing, RP Financial has advised the Holding Company
and the Association that, in its opinion, the appropriate range for the pro
forma market value of the Holding Company (and therefore the Association) as of
April 19, 1996 was from a minimum of $12.3 million to a maximum of $16.7 million
(the "Estimated Valuation Range") with a midpoint of $14.5 million. Assuming the
Common Stock is sold at $10.00 per share in the Conversion (the "Per Share
Purchase Price"), the estimated number of shares of Common Stock would be
between 1,232,500 and 1,667,500 with a midpoint of 1,450,000. The Estimated
Valuation Range may be amended with the approval of the OTS, if necessitated by
subsequent developments in the financial condition of the Holding Company or the
Association or market conditions generally. If the Estimated Valuation Range is
amended, subscribers will be given the right to increase, decrease or rescind
their orders. If an affirmative response to any resolicitation is not received
by the Association or the Holding Company from subscribers, such orders will be
rescinded and all funds will be returned promptly with interest.
The Per Share Purchase Price of $10.00 has been established by discussion
among the Association, the Holding Company and Trident taking into account,
among other factors, the desire that the Common Stock be offered in a manner
that would achieve a wide distribution of stock and liquidity in the Common
Stock following the Conversion.
If, upon completion of the Subscription and 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 Holding Company (and therefore
the Association) upon Conversion, as of the close of the Subscription and
Community Offering.
In the event that any insignificant amount of shares is not sold in the
Subscription and Community Offering or an extension thereof, other purchase
arrangements will be made by the Association for the sale of unsubscribed
shares, if possible. Such other purchase arrangements will be subject to the
approval of the OTS.
Promptly after the completion of the sale of all the Common Stock, RP
Financial will confirm to the OTS, if such is the case, that, to the best of
their knowledge and judgment, nothing of a material nature has occurred that
would cause it to conclude that the Final Aggregate Value at the Per Share
Purchase Price was incompatible with its estimate of the pro forma market value
of the Holding Company (and therefore the Association) at the time of the sale.
If such confirmation is not received, the Association and the Holding Company
may, after consulting with the OTS, (i) terminate the Plan and return all funds
promptly with interest at the Association's then current passbook rate of
interest and release holds placed on funds authorized for withdrawal from
deposit accounts in payment of subscription orders, (ii) establish a new
Estimated Valuation Range and commence a resolicitation of all subscribers with
the approval of the OTS, (iii) extend, reopen or commence new Subscription and
Community Offerings, or (iv) take such other actions as permitted by the OTS in
order to consummate the Conversion. In the event market or financial conditions
change or in the event of a required revision pursuant to regulatory reviews so
as to cause the Final Aggregate Value of the shares to be below the minimum or
above 15% above the maximum of the
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Estimated Valuation Range, and the Holding Company and the Association determine
to continue the Conversion, subscribers will be resolicited as described herein
(i.e., be permitted to continue their orders), in which case they will need to
affirmatively reconfirm their subscriptions prior to the expiration of the
resolicitation offering or their subscription funds will be promptly refunded
with interest at the Association's then current passbook rate of interest and
holds placed on funds authorized for withdrawal from deposit accounts would be
released or adjusted to reflect a modification of the subscription or be
permitted to decrease or cancel their subscriptions. Any change in the Estimated
Valuation Range must be approved by the OTS. A resolicitation, if any, following
the conclusion of the Subscription and Community Offerings or extensions thereof
would not exceed 45 days unless further extended by the OTS for periods of up to
90 days. If such resolicitation is not effected, the Association will return all
funds promptly with interest at the Association's then current passbook rate of
interest and release holds placed on funds authorized for withdrawal from
deposit accounts in payment of subscription orders.
Depending upon market or financial conditions or in the event of a required
revision pursuant to regulatory review, the total number of shares to be issued
in the Conversion may be increased or decreased, without a resolicitation of
subscribers, provided that the Final Aggregate Value is not below the minimum or
15% above the maximum of the Estimated Valuation Range. Based on the Per Share
Purchase Price, the total number of shares to be issued in the Conversion will
not be less than 1,232,500 or greater than 1,667,500.
In formulating its appraisal, RP Financial relied upon the truthfulness,
accuracy and completeness of all documents furnished by the Association. 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
Association and the Holding Company or independently value the assets or
liabilities of the Holding Company and the Association.
On March 12, 1996, and April 29, 1996, the Board of Directors of the
Association held meetings to review and discuss the appraisal report prepared by
RP Financial. A representative of RP Financial was available by telephone during
both meetings to explain the contents of the Appraisal Report. In connection
with its review, the Board of Directors reviewed the methodology that RP
Financial employed to determine the pro forma market value of the Holding
Company and the appropriateness of these assumptions RP Financial used in
determining this value.
A copy of the complete appraisal is filed as an exhibit to the Registration
Statement of which this Prospectus is a part. See "AVAILABLE INFORMATION." A
copy is also on file and available for inspection at the Office of Thrift
Supervision, 1700 G Street, N.W., Washington, D.C. 20552, and Office of Thrift
Supervision, Central Regional Office, 200 W. Madison, Chicago, Illinois 60606,
and at the executive offices of the Association, 301 Fairway Drive, Bloomington,
Illinois 61701. A copy of the complete appraisal report may be inspected at the
office of the Association, 301 Fairway Drive, Bloomington, Illinois, and
inquiries concerning such inspection can be made to the Association at
(309) 663-6345.
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
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PERSONS WHO PURCHASE SUCH SHARES IN THE CONVERSION WILL LATER BE ABLE TO SELL
SHARES THEREAFTER AT PRICES AT OR ABOVE THE PURCHASE PRICE.
PROCEDURE FOR PURCHASING SHARES IN THE SUBSCRIPTION AND COMMUNITY OFFERING
Orders for shares of Common Stock will not be filled until at least 1,232,500
shares of Common Stock have been subscribed for and sold. To purchase shares in
the Subscription and Community Offering, an executed original Order Form with
the required payment for each share subscribed for, or with appropriate
authorization for withdrawal from a deposit account at the Association (which
may be given by completing the appropriate blanks in the Order Form), must be
received by the Association at or before the Subscription Expiration Time or the
Community Offering Expiration Time, as the case may be. In the event Order Forms
(i) are not delivered or are returned to the Association or the Holding Company
as undeliverable by the United States Postal Service, (ii) are received after
the Subscription Expiration Time on the Community Offering Expiration Time, as
the case may be, (iii) are defectively filled out or executed, or (iv) are not
accompanied by the full required payment for the shares subscribed for
(including instances where a deposit account or other account from which
withdrawal is authorized is insufficient to fund the amount of such required
payment), the Subscription Rights of the persons to whom such rights have been
granted will lapse. The Association and the Holding Company have the right to
waive or permit the correction of incomplete or improperly executed Order Forms,
but do not represent that they will do so. ONCE RECEIVED, AN EXECUTED ORDER FORM
MAY NOT BE MODIFIED, AMENDED OR RESCINDED WITHOUT THE CONSENT OF THE HOLDING
COMPANY EXCEPT IN THE EVENT OF RESOLICITATION OR UNLESS THE CONVERSION HAS NOT
BEEN COMPLETED WITHIN 45 DAYS AFTER THE END OF THE SUBSCRIPTION OFFERING.
Pursuant to the Plan, the interpretation by the Association and the Holding
Company of the terms and conditions of the Plan and of the Order Form will be
final.
If the ESOP subscribes for shares during the Subscription and Community
Offering, it will not be required to pay for such shares at the time of
subscription but rather, may pay for such shares 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 unaffiliated 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.
Payments made in cash or by check or money order will be placed in a
segregated account at the Association and interest will be paid by the
Association on such payments for Common Stock at not less than the Association's
then current passbook rate. Such interest shall be paid from the date payments
are received by the Association until consummation or termination of the
Offerings. Any interest due will be paid after completion of the Conversion. The
Association will not knowingly lend funds or otherwise extend credit to any
person to purchase Common Stock.
To ensure that each purchaser receives a prospectus at least 48 hours prior
to the date on which the Subscription Expiration Time occurs, 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 Association will accept for processing only orders submitted on
Order Forms. Payment by cash, check, money order, bank draft or withdrawal
authorization from an existing account at the Association must accompany the
Order Form. All checks or money orders must be made payable to Eagle BancGroup,
Inc.
The Order Form will contain a withdrawal authorization by which funds may be
withdrawn from deposit accounts (including certificate of deposit accounts) at
the Association to pay for subscribed shares. Once such a withdrawal has been
authorized, a hold will be placed on the designated withdrawal amount
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and none of such amount may be withdrawn from the deposit account (except by the
Association as payment for Common Stock) until consummation or termination of
the Offerings. Pending completion of the Conversion, such deposits (including
the amount of the authorized withdrawal) will continue to earn interest at the
contractual rate. Deposit accounts will be permitted to be established for the
purpose of making payment for subscribed shares of Common Stock.
If a subscriber authorizes the Association to withdraw the amount of the
purchase price from a savings account, such subscriber's savings account will be
debited and the actual withdrawal will be made only on the effective date of the
Conversion. The Association will waive any applicable penalties for early
withdrawal from certificate of deposit accounts. If, as a result of such
withdrawal, the remaining balance of a certificate of deposit account is less
than the applicable minimum balance, the certificate evidencing such account
will be canceled as of the date of the actual withdrawal. In that event, the
remaining balance will earn interest at the Association's then current passbook
savings account rate.
Owners of self-directed Individual Retirement Accounts ("IRAs") may use the
assets of such IRAs to purchase shares of Common Stock in the Subscription and
Community Offerings. Depositors interested in using funds in an Association IRA
to purchase Common Stock should contact the Stock Information Center at (309)
664-2211 as soon as possible so that the necessary forms can be completed no
later than June 6, 1996. Once such a withdrawal has been authorized and prior to
termination of the Offering, none of the designated withdrawal amount may be
used by a subscriber for any purpose other than to purchase the subscribed
shares.
The Holding Company believes that offering shares of Common Stock or
Subscription Rights under the Plan in a foreign country would be impracticable
for reasons of cost.
NON-TRANSFERABILITY OF SUBSCRIPTION RIGHTS
Subscription Rights may be exercised only by the person to whom they are
issued and only for his or her own account. Subscription Rights are non-
transferable; persons found to be transferring Subscription Rights may be
subject to forfeiture of such rights and possible further sanctions by the OTS
or other government agencies. Each person subscribing for shares is required to
represent that he or she is purchasing shares for his or her own account and
that he or she has no agreement or understanding with any other person for the
sale or transfer of such shares.
DELIVERY OF STOCK CERTIFICATES
Certificates representing Common Stock issued in the Conversion will be
mailed by the Holding Company's transfer agent to persons entitled thereto at
the addresses of such persons appearing on the Order Form as soon as practicable
following consummation of the Conversion. Consummation of the Conversion will
occur as soon as practicable after the expiration of the Subscription and
Community Offering. Any certificates returned as undeliverable will be held by
the Holding Company until claimed by persons legally entitled thereto or
otherwise disposed of in accordance with applicable law. Until certificates for
Common Stock are available and delivered to subscribers, subscribers may not be
able to sell the shares of Common Stock for which they have subscribed, even
though trading of the Common Stock will have commenced.
SYNDICATED COMMUNITY OFFERING
The Plan also provides that shares of Common Stock may be made available in
the Community Offering through a direct community marketing program which may
provide for the utilization of a broker,
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dealer, consultant, or investment banking firm, experienced and expert in the
sale of financial institution securities. Should a Syndicated Community Offering
be utilized, Trident would, acting as agent of the Holding Company, organize and
form a syndicate of registered-broker dealers as Selected Dealers to assist the
Holding Company and the Association in the sale of the Common Stock as part of
the Community Offering. Neither Trident nor any registered broker-dealer shall
have any obligation to take or purchase shares of Common Stock in the Syndicated
Community Offering; however, Trident has agreed to use its best efforts in the
sale of shares in the Syndicated Community Offering. Stock sold in the
Syndicated Community Offering will be sold at the Purchase Price, and hence will
be sold at the same price as all other shares in the Conversion. See "--Stock
Pricing."
ALTERNATIVE OFFERINGS OF COMMON STOCK
If for any reason a Syndicated Community Offering of shares of Common Stock
not sold in the Subscription and Community Offerings cannot be effected, or in
the event that an insignificant amount of shares of Common Stock is not sold in
the Subscription and Community Offerings or in the Syndicated Community
Offering, other arrangements will be made for the disposition of unsubscribed
shares by the Holding Company, if possible. Such other purchase arrangements
would be subject to the approval of the OTS, and with respect to federal
securities matters, the SEC, and may provide for purchases for investment
purposes by directors, their associates and other persons in excess of the
limitations provided below and in excess of the proposed director and officer
purchases set forth above. If such other purchase arrangements cannot be made,
the Conversion will terminate.
LIMITATIONS ON PURCHASES OF SHARES
To the extent shares of Common Stock are available, each person subscribing
for Common Stock in the Offerings must subscribe for at least 25 shares of
Common Stock (or $250, assuming a Purchase Price of $10.00). In addition, all
purchases of Common Stock by any person or entity, other than the ESOP, in the
Offerings are subject to the following maximum purchase limitations:
. The maximum aggregate purchase price of Common Stock purchased in all
phases of the Offerings by any person, together with all associates of such
person, or group of persons otherwise acting in concert, is no more than
$200,000 (or 20,000 shares based on the Purchase Price); and
. The maximum number of shares of Common Stock purchased by all directors and
officers of the Association, together with all associates of such directors
and officers, when aggregated with any shares of Common Stock attributable
to such directors and officers and their associates may not exceed 33% of
the total number of shares sold in the Conversion.
Notwithstanding the foregoing limits the ESOP will be permitted, and is
expected, to subscribe for 8% of the total number of shares of Common Stock sold
in the Conversion.
In the event that, after completion of the Subscription Offering, the number
of shares of Common Stock to be issued is increased to an amount greater than
the number of shares representing the maximum of the Estimated Valuation Range
(the "Maximum Shares"), the ESOP shall have a priority right to purchase any
shares exceeding the Maximum Shares up to 8% of the total number of shares of
Common Stock sold in the Conversion.
The Plan also permits the Holding Company and the Association, in their sole
discretion, to increase the maximum amount of Common Stock which may be
purchased in the Offerings by any one person, together with all associates of
such person or group of persons otherwise acting in concert, above the
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generally applicable limit of $200,000 in the Conversion, but in no event
greater than 5% of the total number of shares of Common Stock sold in the
Conversion. If an increase is effected, each person who subscribed for the
maximum amount of Common Stock prior to such increase will be given the
opportunity to increase his or her subscription to the then applicable maximum
amount of Common Stock, and the Association and the Holding Company may, in
their sole discretion, resolicit certain other large subscribers. The
Association or the Holding Company may, with the approval of the OTS decrease
the maximum purchase limitation below $200,000, but in no event less than 1% of
the total number of shares of Common Stock sold in the Conversion. The purchase
limitations may be increased if, for example, there is a substantial
undersubscription for shares of Common Stock in the Offerings; conversely, the
purchase limitations may be decreased if, for example, there is a substantial
oversubscription for shares of Common Stock in the Offerings.
The Plan provides that for purposes of the maximum purchase limitations, the
term "associate" is used to indicate any of the following relationships with a
person:
. 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
Association, any of its subsidiaries or the Holding Company;
. any corporation or organization (other than the Association or a majority-
owned subsidiary of the Association or the Holding Company) of which the
person is an officer or partner or is, directly or indirectly, the
beneficial owner of 10% or more of any class of equity securities; or
. any trust or other estate in which such person has a substantial beneficial
interest or as to which such person serves as a trustee or in a similar
fiduciary capacity.
Further, for purposes of the maximum purchase limitations:
. persons will be deemed to be "acting in concert" if they are (i) engaged in
knowing participation in a joint activity or interdependent conscious
parallel action towards a common goal, whether pursuant to an express
agreement, or (ii) engaged in a combination or pooling of voting or other
interests in the securities of the Holding Company for a common purpose
pursuant to any contract, understanding, relationship, agreement or other
arrangement, whether written or otherwise.
The members of the Association's or the Holding Company's Board of Directors
will not be deemed to be associates, or affiliated with each other or a group of
persons acting in concert, solely as a result of being directors. Shares of
Common Stock attributed to directors, officers or employees of the Association
or the Holding Company but held in the ESOP will not be included in calculating
the maximum number of shares that may be purchased by directors, officers or
employees of the Association or the Holding Company individually or as a group.
The ESOP and MRP participants, officers and trustees will not be deemed to be
associated or affiliated with other participants or a group acting in concert
solely as a result of their participation in such plan or service as an officer
or trustee, nor will a trustee of the ESOP or an MRP be deemed to hold shares
held by the ESOP or the MRP, respectively, for purposes of determining the
number of shares which such trustee may purchase in his or her individual
capacity.
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RESTRICTIONS ON TRANSFER OF SUBSCRIPTION RIGHTS AND SHARES
Prior to the completion of the Conversion, the OTS's regulations prohibit
any person with Subscription Rights, including Eligible Account Holders, the
ESOP, Supplemental Eligible Account Holders and Other Members, from transferring
or entering into any agreement or understanding to transfer the legal or
beneficial ownership of the Subscription Rights issued under the Plan or the
shares of Common Stock to be issued upon their exercise. Such rights may be
exercised only by the person to whom they are granted and only for his or her
account. Each person exercising such Subscription Rights will be required to
certify that he is purchasing shares solely for his own account and that he has
no agreement or understanding regarding the sale or transfer of such shares.
The regulations also prohibit any person from offering or making an announcement
of an offer or intent to make an offer to purchase such Subscription Rights or
shares of Common Stock prior to the completion of the Conversion.
The Association and the Holding Company 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 of such rights.
Certain purchasers of Common Stock in the Conversion will be subject to
restrictions on the ability to transfer their shares. Members of the NASD,
persons associated with an NASD member, a member of the immediate family of any
such person to whose support such person contributes, directly or indirectly, or
the holder of an account in which an NASD member or person associated with an
NASD member has a beneficial interest may not sell, transfer or hypothecate
shares of Common Stock purchased in the Conversion for a period of 90 days
following the issuance of the Common Stock. Shares purchased by directors,
executive officers or their associates in the Conversion will be subject to the
restriction that such shares may not be sold during the period of one year
following the date of purchase, except in the event of the death of the
stockholder. Accordingly, stock certificates issued by the Holding Company to
directors, executive officers and their associates will bear a legend giving
appropriate notice of such restriction and, in addition, the Association and the
Holding Company will give appropriate instructions to the transfer agent for the
Common Stock with respect to the applicable restriction upon transfer of any
restricted shares. Any shares issued at a later date as a stock dividend, stock
split or otherwise, to holders of restricted stock, shall be subject to the same
restrictions that may apply to such restricted stock.
Shares of Common Stock purchased by any "affiliate" of the Holding Company
(as that term is defined under the rules and regulations issued under the
Securities Act) may also be sold only pursuant to an effective registration
statement covering such resales or in compliance with Rule 144 under the
Securities Act or another applicable exemption from the registration
requirements of the Securities Act. In general, Rule 144, as currently in
effect, permits an affiliate of the Holding Company (or persons whose sales of
Common Stock are aggregated with the sales of such affiliate) to sell within any
three-month period, beginning 90 days after the consummation of the Offerings, a
number of shares of common stock of the Holding Company equal to the greater of:
(i) 1% of the shares of common stock outstanding, or (ii) the average weekly
trading volume of such common stock during the four calendar weeks immediately
preceding such sale. Sales under Rule 144 are also subject to certain
restrictions on the manner of sale, notice requirements and the continued
availability of current public information about the Holding Company. Apart
from the foregoing restrictions, shares of Common Stock purchased in the
Conversion will be freely transferable.
RESTRICTIONS ON REPURCHASES OF COMMON STOCK
The Association may not repurchase any of its capital stock if the effect
thereof would cause its regulatory capital to be reduced below (i) the amount
required for the liquidation account or (ii) the capital
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requirements imposed by the OTS. In addition, unless approved by the OTS, the
Holding Company, pursuant to OTS regulations, will be prohibited from
repurchasing any shares of Common Stock for three years following the Conversion
except for (i) an offer to all stockholders on a pro rata basis; (ii) the
repurchase of qualifying shares of a director, if any; or (iii) purchases 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. Notwithstanding the
foregoing, the Holding Company may repurchase its Common Stock so long as (i)
the purchases are part of an open-market program not involving greater than 5%
of its outstanding capital stock during a twelve-month period with OTS approval;
(ii) the repurchases do not reduce the Holding Company's ratio of regulatory
capital to total liabilities below 6%; and (iii) the Holding Company provides to
the OTS no later than 10 days prior to the commencement of a repurchase program
written notice containing a full description of the program to be undertaken and
such program is not disapproved by the OTS. In addition, no repurchases may be
made within one year of Conversion, except with OTS approval under "exceptional
circumstances," and repurchases may exceed the 5% annual limit in the second and
third year following Conversion with OTS approval and subject to demonstration
by the Holding Company, to the satisfaction of the OTS, of "exceptional
circumstances." See "SUPERVISION AND REGULATION--Limitations on Dividends and
Other Capital Distributions."
APPROVAL, AMENDMENT AND TERMINATION
Under the Plan or the letter of the OTS giving approval thereto,
consummation of the Conversion is subject to satisfaction of the following
conditions: (i) approval of the Plan by the affirmative vote of members of the
Association holding a majority of the outstanding votes; (ii) sale of all the
shares of Common Stock within a prescribed range; and (iii) receipt by the
Holding Company and the Association of favorable opinions of counsel or other
tax advisors as to the federal and state tax consequences of the Conversion.
Consummation of the Conversion is also subject to receipt of all regulatory
approvals, and satisfaction of all conditions with respect to such approvals,
required for consummation of the Conversion in accordance with applicable laws
and regulations. As of the date of this Prospectus, all required approvals have
been received, except for OTS approval of the Holding Company's request to
acquire 100% of the Association's outstanding common stock. The Association
must receive this final OTS approval prior to completing the Conversion, and
anticipates receipt of such approval prior to the Subscription Expiration Date.
The Plan may be substantively amended by the Association at any time prior
to the Special Meeting, and at any time thereafter with the concurrence of the
OTS. If the Association determines upon the advice of counsel and after
consultation with the OTS that any such amendment is material, subscribers will
be given the opportunity to increase, decrease or cancel their subscriptions.
As required by the regulations of the OTS, the Conversion may be terminated
by the Board of Directors of the Association at any time prior to the Special
Meeting and may be terminated by the Board of Directors of the Association at
any time after the Special Meeting, but prior to the completion of the
Conversion, with the concurrence of the OTS, notwithstanding approval of the
Plan by the members of the Association at the Special Meeting. If the
Conversion is terminated, no shares of Common Stock would be issued by the
Holding Company, the Association will remain a federally-chartered mutual
savings association, all funds delivered to the Association or withdrawn from
deposit accounts in payment for Common Stock will be promptly returned, and all
holds on funds authorized for withdrawal, but not withdrawn, from deposit
accounts will be cancelled.
RESTRICTIONS ON ACQUISITION OF THE HOLDING COMPANY
RESTRICTIONS IN CERTIFICATE OF INCORPORATION AND BYLAWS
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GENERAL. The Holding Company has implemented certain measures designed to
enhance the ability of the Board of Directors to protect stockholders against,
among other things, unsolicited attempts to acquire a significant interest in
the Holding Company or to influence the Holding Company's management (whether
through open market purchases, tender offers or otherwise) that do not offer an
adequate price to all stockholders or that the Board of Directors otherwise
considers not in the best interests of the Holding Company and its stockholders.
Certain provisions in the certificate of incorporation and bylaws of the
Holding Company may impact significantly the stockholders' ability to change the
composition of the incumbent Board of Directors or the ability of a substantial
holder of the Common Stock to acquire control of, or to remove, the incumbent
Board of Directors, and might discourage certain types of transactions that
involve an actual or threatened change of control of the Holding Company.
The provisions of the certificate of incorporation and bylaws are intended
to encourage persons seeking to acquire control of the Holding Company to
initiate such an acquisition through arm's-length negotiations with the Holding
Company's management and Board of Directors. Management of the Holding Company
does not have the power to waive any of these provisions. These provisions
could have the effect of discouraging a third party from making a tender offer
to or otherwise attempting to obtain control of the Holding Company, even though
certain stockholders of the Holding Company might deem such an attempt to be in
the best interests of the Holding Company and its stockholders or in which
stockholders may receive a substantial premium for their shares over then
current market prices. At the same time, these provisions ensure that the Board
of Directors, if confronted by an unsolicited proposal from a third party who
has recently acquired a block of Common Stock, will have sufficient time to
review the proposal and alternatives to it and to seek better proposals or
negotiate better terms for the Holding Company's stockholders, employees,
suppliers, customers and others. 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 "AVAILABLE INFORMATION" as to how to obtain a copy of these
documents.
AUTHORIZED SHARES. The Holding Company's certificate of incorporation
authorizes the issuance of 5,000,000 shares of Common Stock and up to 100,000
shares of Preferred Stock. The Board of Directors has determined to issue no
Preferred Stock and up to 1,667,500 shares of Common Stock in the Conversion.
The Holding Company's certificate of incorporation authorized the additional
shares of Common Stock to provide the Board of Directors with as much
flexibility as possible to effect, among other transactions, financings,
acquisitions, stock dividends, stock splits and employee stock options.
However, these additional authorized shares of Common Stock may also be used by
the Board of Directors, to the extent consistent with its fiduciary duties to
the stockholders of the Holding Company, to deter future attempts to gain
control of the Holding Company. With regard to the authorized but unissued
Preferred Stock, the Board of Directors has sole authority to determine the
terms of any one or more series of such Preferred Stock, including voting
rights, conversion rates, and liquidation preferences. See "DESCRIPTION OF
CAPITAL STOCK--Preferred Stock." As a result of the ability to fix voting
rights for a series of Preferred Stock, the Board of Directors has the power, to
the extent consistent with its fiduciary duties to the stockholders of the
Holding Company, to issue a series of Preferred Stock to persons friendly to
management in order to attempt to block a post-tender offer merger or other
transaction by which a third party seeks control, and thereby to assist
management to retain its position. The Holding Company's Board of Directors
currently has no plans for the issuance of any Preferred Stock or of any
additional shares of Common Stock, other than the issuance of additional shares
of Common Stock pursuant to the terms of the employee benefit plans.
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BOARD OF DIRECTORS. The Holding Company's certificate of incorporation
provides that the Board of Directors of the Holding Company shall be divided
into three classes of directors serving staggered three-year terms, and the
certificate of incorporation and the bylaws provide that directors may be
removed from office only for cause and only upon the vote of the holders of at
least 80% of the outstanding shares of all classes of capital stock of the
Holding Company. Moreover, the certificate of incorporation does not provide
for cumulative voting by the stockholders in the election of directors. The
classification of directors, the removal requirements and the absence of
cumulative voting have the effect of making it more difficult for stockholders
to change the composition of the Board of Directors in a relatively short period
of time.
VOTING RESTRICTIONS ON CERTAIN BUSINESS COMBINATIONS; FAIR PRICE PROVISION.
The adoption or approval of certain business transactions, including mergers,
consolidations, asset and securities sales, plans of liquidation or dissolution
and certain reclassifications involving any "Interested Party" (as
defined below) and certain affiliates of any such Interested Party, requires an
affirmative vote of the holders of at least that number of voting shares which
equals the sum of (i) the number of voting shares beneficially owned by all
Interested Parties with respect to the proposed business transaction plus (ii)
80% of the remaining number of voting shares that are not beneficially owned by
any such Interested Party. An "Interested Party" is defined in the Holding
Company certificate of incorporation to mean generally the beneficial owner of
10% or more of the voting stock of the Holding Company.
The 80% affirmative voting requirement is not applicable to business
transactions (i) approved by a resolution adopted by a majority of the Board of
Directors holding office at the time such resolution is adopted, provided that
such resolution approving the business transaction is adopted prior to the time
all Interested Parties with respect to the business transaction become
Interested Parties, or (ii) approved by a resolution adopted by 66 2/3% of the
directors holding offices at the time such resolution is adopted who are not
themselves Interested Parties or affiliates of an Interested Party.
The 80% affirmative voting requirement also is not applicable to any
business transaction and such business transaction need only be approved by a
simple majority vote of the stockholders (if such a vote is required under
applicable Delaware law) if all of the following conditions have been met: (i)
the per share consideration to be received by holders of Common Stock in such
business transaction is not less than the greater of (A) the highest per share
price paid by the Interested Party in acquiring its holdings of Common Stock
during the immediately preceding five years, (B) the per share book value of the
Common Stock at the end of the fiscal quarter immediately preceding such
business transaction or (C) the highest market price per share of Common Stock
during the two-year period ending immediately prior to the first public
announcement of such business transaction; (ii) the consideration to be received
by holders of Common Stock is in cash or in the same form as the consideration
paid by the Interested Party to acquire the largest number of shares of Common
Stock acquired by the Interested Party from a non-Interested Party; (iii) as of
the record date for the determination of stockholders entitled to vote on the
proposed business transaction, there is at least one director of the Holding
Company who is not an Interested Party or an affiliate of an Interested Party;
and (iv) holders of voting shares as of the record date for the determination of
stockholders entitled to vote on the business transaction shall have received a
proxy or information statement complying with the rules and regulations under
the Exchange Act, which proxy or information statement includes, among other
things, an opinion of an investment banking firm as to the fairness from a
financial point of view of the consideration to be received by the stockholders
in the proposed business transaction.
NO ACTION BY STOCKHOLDER CONSENT; SPECIAL STOCKHOLDERS' MEETINGS. The
Holding Company's certificate of incorporation and bylaws prohibit action that
is required or permitted to be taken at any annual or special meeting of
stockholders of the Holding Company from being taken by the written consent of
the stockholders without a meeting. The certificate of incorporation and bylaws
allow only the chairman of the Board of Directors, the president or a majority
of the Board of Directors to call a special stockholders' meeting.
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<PAGE>
Stockholders do not have the right to call such a meeting. These provisions may
have the effect of delaying consideration of a stockholder proposal until the
next annual meeting of stockholders.
ADVANCE NOTIFICATION. The Holding Company's certificate of incorporation
requires advance notification to the secretary of the Holding Company of
nominations of persons for election to the Board of Directors by a stockholder.
The notice must be received not later than the date corresponding to 40 days
before the first anniversary date of the immediately preceding annual meeting of
stockholders. The notice by a stockholder must comply with certain information
requirements specified in the certificate of incorporation.
Advance written notification is also required by the Holding Company's
bylaws before a stockholder may bring any item of business before the annual
meeting of stockholders. The notice must be received by the secretary of the
Holding Company not later than the date corresponding to 60 days before the
first anniversary date of the immediately preceding annual meeting of
stockholders. The notice by a stockholder must comply with certain information
requirements specified in the bylaws.
The purpose of such advance notice requirements is to insure the orderly
conduct of business at annual meetings of stockholders and to afford the board
of directors a meaningful opportunity to consider the qualifications of proposed
nominees and to inform themselves, and where appropriate, to inform the
stockholders in advance of the meeting of any business proposed to be conducted
at the meeting. Such procedures may, however, have the effect of precluding the
nomination of a director, or a slate of directors, or the consideration of
business at a particular meeting if the proper procedures have not been followed
prior to the meeting.
BYLAW AMENDMENTS. Amendments to the bylaws of the Holding Company may be
made only upon (i) the affirmative vote of a majority of the members of the
Board of Directors, or (ii) the affirmative vote of the holders of at least 80%
of the outstanding shares of voting stock entitled to vote in the election of
directors.
LIMITATIONS ON BENEFICIAL OWNERSHIP. The certificate of incorporation of
the Holding Company provides that for a period of five years following the
Conversion, no person (including any individual, company or group acting in
concert) shall acquire beneficial ownership of more than 10% of any class of
equity security of the Holding Company. This limitation does not apply to the
purchase of shares by underwriters in connection with a public offering or to
the purchase of shares by a tax qualified employee stock benefit plan. The
certificate of incorporation further provides that, where any person directly or
indirectly acquires beneficial ownership of more than 10% of any class of equity
security of the Holding Company during such five-year period, the securities
beneficially owned in excess of 10% shall not be counted as shares entitled to
vote, shall not be voted by any person or counted as voting shares in connection
with any matter submitted to the stockholders for a vote and shall not be
counted as shares outstanding for purposes of determining a quorum or the
affirmative vote necessary to approve any matter submitted to the stockholders
for a vote. The certificates evidencing the shares of Common Stock sold in the
Conversation will bear a legend reflecting such restrictions. Such restrictions
on the acquisition and voting of equity securities of the Holding Company do not
apply if the acquisition of such securities has been approved by a majority of
disinterested directors of the Holding Company, provided that such disinterested
directors shall have the power and discretion to construe and apply the
provisions of the certificate of incorporation and to make any and all
determinations with respect to such proposed acquisition of the Holding
Company's shares, and any such construction, application or determination made
by the disinterested directors in good faith and on the basis of such
information and assistance as was then reasonably available for such purpose
shall be conclusive and binding upon the Holding Company and is stockholders.
The OTS's regulations also include, subject to certain exceptions, provisions
prohibiting any direct or indirect acquisition of 10% or more of the capital
stock of a converted savings and loan association for a period of three years
following a conversion without the prior written approval of the OTS. See
"--Regulatory Restrictions."
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NON-STOCKHOLDER CONSTITUENCIES. The Holding Company's certificate of
incorporation provides that in evaluating certain transactions which could
effect a change in control of the Holding Company, it is proper for the Board of
Directors to consider the effects of such transactions on the employees,
suppliers and customers of the Holding Company and the communities in which the
principal offices of the Holding Company are located.
SUPERMAJORITY VOTING. The classified board, fair price, special meeting,
stockholder consent, advance notice, bylaw amendment and non-stockholder
constituency provisions of the certificate of incorporation may be altered,
amended, or repealed only if the holders of at least 80% of the outstanding
shares of voting stock entitled to vote in the election of directors vote in
favor of such action.
PROVISIONS OF THE EMPLOYMENT AGREEMENTS
The provisions described above are intended to reduce the Holding Company's
vulnerability to takeover attempts and certain other transactions which have not
been negotiated with and approved by members of the Board of Directors. The
provisions of the proposed employment agreement with Mr. Fernandes and the
proposed Employment Security Agreements may also discourage takeover attempts by
increasing the costs to be incurred by the Association and the Holding Company
in the event of a takeover. See "MANAGEMENT OF THE HOLDING COMPANY AND
ASSOCIATION."
The Holding Company's Board of Directors believes that the provisions of
the certificate of incorporation, the bylaws, the proposed employment agreement
with Mr. Fernandes and the proposed Employment Security Agreements are in the
best interest of the Holding Company and its stockholders. An unsolicited, non-
negotiated proposal can seriously disrupt the business and management of a
corporation and cause it great expense. Accordingly, the Board of Directors
believes it is in the best interest of the Holding Company and its stockholders
to encourage potential acquirors to negotiate directly with management and that
these provisions will encourage such negotiations and discourage non-negotiated
takeover attempts. It is also the Board of Directors' view that these
provisions should not discourage persons from proposing a merger or other
transaction at a price that reflects the true value of the Holding Company and
that otherwise is in the best interest of all stockholders.
REGULATORY RESTRICTIONS
The OTS regulations prohibit any person, prior to the completion of the
Conversion, from transferring, or from entering into any agreement or
understanding to transfer, to the account of another, legal or beneficial
ownership of the subscription rights issued under the Plan of Conversion or of
the Common Stock to be issued upon the exercise of such rights. The OTS
regulations also prohibit any person, prior to the completion of the Conversion,
from offering, or making an announcement of an offer or intent to make an offer,
to purchase such subscription rights or Common Stock.
For three years following the Conversion, OTS regulations prohibit any
person from acquiring or making an offer to acquire more than 10% of the stock
of the Holding Company without the prior written consent of the OTS except for:
(i) offers that, if consummated, would not result in the acquisition by such
person during the preceding twelve-month period of more than 1% of such stock;
(ii) offers for up to 25% of the stock in the aggregate by the ESOP or other
tax-qualified plans of the Association or the Holding Company; or (iii) offers
made exclusively to the Holding Company by underwriters or members of a selling
group acting on the Holding Company's behalf for resale to the general public.
Such acquisition may be disapproved by the OTS if it is found, among other
things, that the proposed acquisition: (a) would frustrate the purposes of the
provisions of the regulations regarding conversions; (b) would be manipulative
or deceptive; (c) would subvert the fairness of the Conversion; (d) would be
likely to result in injury to the
144
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Association; (e) would not be consistent with economical home financing; (f)
would otherwise violate some law or regulation; or (g) would not contribute to
the prudent deployment of the Association's conversion proceeds. In the event
that any person, directly or indirectly, violates this regulation, the
securities 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 matters submitted to a vote of
stockholders. The definition of beneficial ownership for these regulations
extends to persons holding revocable or irrevocable proxies for the Holding
Company's stock under circumstances that give rise to a conclusive or rebuttable
determination of control under the OTS regulations, as described below.
In addition, federal laws and regulations contain a number of provisions
which affect the acquisition of insured institutions such as the Association,
and a savings institution holding company such as the Holding Company. The
Change in Bank Control Act provides that no person, acting directly or
indirectly or through or in concert with on or more persons, may acquire control
of a savings association unless the OTS has been given 60 days' prior written
notice and the OTS does not issue a notice disapproving the proposed
acquisition. Moreover, certain provisions of the HOLA provide that no company
may acquire control of a savings and loan association without the prior approval
of the OTS. Any company that acquires such control becomes a "savings
institution holding company" subject to registration, examination and regulation
by the OTS. Such change in control restrictions on the acquisition of Holding
Company stock are not limited to three years after the Conversion, but will
apply as long as such regulations are in effect.
Pursuant to applicable regulations, control of a savings institution or its
holding company is conclusively deemed to have been acquired by, among other
things, the acquisition of more than 25% of any class of voting stock of a
savings association or the ability to control the election of a majority of the
directors of such an institution. Alternatively, control is presumed to have
been acquired, subject to rebuttal, upon the acquisition of more than 10% of any
class of voting stock, or more than 25% of any class of stock, of a savings
association, where one or more enumerated "control factors" are also present in
the acquisition. The OTS may prohibit an acquisition of control of the Holding
Company 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
Association or (iii) the competence, experience, or integrity of the acquiring
person indicates that it would not be in the interest of the depositors or the
public to permit the acquisition of control by such person. The foregoing
restrictions do not apply to the acquisition of the Holding Company's capital
stock by one or more tax-qualified employee stock benefit plans, provided that
the plan or plans do not have beneficial ownership in the aggregate of more than
25% of any class of equity security.
DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of the Holding Company consists of 5,000,000
shares of Common Stock, par value $0.01 per share, and 100,000 shares of
Preferred Stock, par value $0.01 per share. The Holding Company currently
expects to issue 1,450,000 shares of Common Stock at the midpoint of the
Estimated Valuation Range 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 Per Share Purchase Price for the Common
Stock, in accordance with the Plan of Conversion, all such shares of Common
Stock will be duly authorized, fully paid and nonassessable. Series of
Preferred Stock may be issued by the Board of Directors, from time to time, on
terms set by the board without further authorization from the stockholders.
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 GOVERNMENTAL AGENCY.
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COMMON STOCK
GENERAL. The holders of shares of Common Stock are entitled to share pro
rata in distributions to stockholders upon liquidation, dissolution,
distribution of assets, or winding up of the Holding Company, subject to the
prior rights of any holders of Preferred Stock. No holders of shares of Common
Stock have any preemptive right to subscribe for or purchase any additional
issue of capital stock or securities convertible into capital stock of the
Holding Company.
DIVIDEND RIGHTS. Subject to the preferential dividend rights of any
outstanding Preferred Stock, the holders of Common Stock are entitled to such
dividends, ratably in proportion to the number of shares of Common Stock held by
them respectively, as the Board of Directors, in its discretion, may declare out
of funds legally available for the payment of such dividends. Funds for the
payment of dividends and expenses of the Holding Company will be obtained
primarily from dividends received from the Association.
VOTING RIGHTS. Except as may otherwise be required by law or the
certificate of incorporation of the Holding Company, each holder of Common Stock
is entitled to one vote for each share held with respect to all matters voted
upon by the stockholders.
STOCK REPURCHASES. For information regarding restrictions on the Holding
Company's ability to repurchase its stock, see "THE CONVERSION--Restrictions on
Repurchase of Stock."
PREFERRED STOCK
Under the Holding Company's certificate of incorporation, the Board of
Directors of the Holding Company may, from time to time, authorize the issuance
of up to 100,000 shares of Preferred Stock, in one or more series, with such
provisions as to voting rights, dividend rates and preferences, redemption,
sinking funds, and convertability, and such preferences, privileges and powers,
and relative, participating, optional or other special rights, and
qualifications, limitations or restrictions of such series of Preferred Stock,
as shall be stated in the resolution of the Board of Directors providing for the
issuance of the Preferred Stock. No Preferred Stock is currently outstanding
nor will any be issued in the Conversion.
REGISTRATION REQUIREMENTS
The Holding Company will register the Common Stock with the SEC pursuant to
Section 12(g) of the Exchange Act prior to 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 and tender
offer rules, insider trading reporting and restrictions, annual and periodic
reporting and other requirements of the Exchange Act will be applicable.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Stock is Registrar and
Transfer Company, 10 Commerce Drive, Cranford, New Jersey 07016.
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LEGAL OPINIONS
The legality of the Common Stock will be passed upon for the Holding
Company by Schiff Hardin & Waite, Chicago, Illinois. The Federal and Illinois
income tax consequences of the Conversion will also be passed upon for the
Association by Schiff Hardin & Waite. Schiff Hardin & Waite has consented to
the references herein to its opinion. The opinion is filed as an exhibit to the
Registration Statement. See "AVAILABLE INFORMATION." Housley Kantarian &
Bronstein, P.C., Washington, D.C. has acted as counsel to Trident.
EXPERTS
The consolidated financial statements of the Association at December 31,
1995 and 1994 and for each of the three years in the period ended December 31,
1995 appearing in this Prospectus and the Registration Statement have been
audited by Ernst & Young LLP, independent auditors, as set forth in their report
thereon appearing elsewhere herein, and are included in reliance upon such
report given upon the authority of such firm as experts in accounting and
auditing.
RP Financial has consented to the inclusion herein of the summary of its
appraisal report as to the estimated pro forma market value of the Common Stock
and to the use of its name and all statements with respect to it appearing
herein.
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FIRST FEDERAL SAVINGS AND LOAN ASSOCIATION OF BLOOMINGTON
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Auditors............................................ F-2
Consolidated Statements of Condition as
of December 31, 1995 and 1994............................................. F-3
Consolidated Statements of Operations
for the years ended December 31, 1995
1994 and 1993............................................................. 40
Consolidated Statements of Equity for
the years ended December 31, 1995,
1994 and 1993............................................................. F-4
Consolidated Statements of Cash Flows for
the years ended December 31, 1995,
1994 and 1993............................................................. F-5
Notes to Consolidated Financial Statements................................ F-6
All schedules are omitted as the required information is either not
applicable or the required information is included in the Consolidated Financial
Statements or related notes.
Separate financial statements of the Holding Company have not been included
because it will not engage in material transactions until after the Conversion.
The Holding Company, which has been inactive to date, has no significant assets,
liabilities, revenues, expenses or contingent liabilities.
F-1
<PAGE>
Report of Independent Auditors
Board of Directors
First Federal Savings and Loan
Association of Bloomington
We have audited the accompanying consolidated statements of condition of First
Federal Savings and Loan Association of Bloomington and subsidiaries as of
December 31, 1995 and 1994, and the related consolidated statements of
operations, equity and cash flows for each of the three years in the period
ended December 31, 1995. These financial statements are the responsibility of
the Association's management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of First Federal
Savings and Loan Association of Bloomington and subsidiaries at December 31,
1995 and 1994, and the consolidated results of their operations and their cash
flows for each of the three years in the period ended December 31, 1995, in
conformity with generally accepted accounting principles.
As discussed in Note 2 of the Notes to Consolidated Financial Statements, in
1994 the Association changed its method of accounting for certain investments in
debt and equity securities as a result of adopting a new accounting standard.
Ernst & Young LLP
February 16, 1996
F-2
<PAGE>
First Federal Savings and Loan Association of Bloomington
Consolidated Statements of Condition
<TABLE>
<CAPTION>
DECEMBER 31
1995 1994
----------------------------
<S> <C> <C>
ASSETS
Cash on hand and in other institutions $ 1,046,696 $ 1,091,656
Federal funds sold and overnight deposits 2,853,120 1,611,365
Investment securities - available-for-sale (Note 2) 11,809,678 10,088,814
Mortgage-backed securities - available-for-sale (Note 2) 41,376,216 32,591,469
Loans receivable, net (Note 3) 88,785,785 83,588,763
Real estate owned 643,937 6,413,105
Premises and equipment (Note 4) 3,112,091 3,329,147
Other assets 1,346,590 2,217,598
----------------------------
Total assets $150,974,113 $140,931,917
============================
LIABILITIES AND EQUITY
Deposits (Note 5) $138,395,997 $122,387,855
FHLB advance -- 5,000,000
Other borrowings (Note 6) -- 2,936,250
Other liabilities 1,062,941 1,106,612
----------------------------
Total liabilities 139,458,938 131,430,717
Commitments and contingencies -- --
Equity:
Retained earnings - substantially restricted (Note 8) 11,677,175 11,750,200
Unrealized losses on investments - net of tax (Note 2) (162,000) (2,249,000)
11,515,175 9,501,200
----------------------------
Total liabilities and equity $150,974,113 $140,931,917
============================
</TABLE>
See accompanying notes.
F-3
<PAGE>
First Federal Savings and Loan Association of Bloomington
Consolidated Statements of Equity
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1995 1994 1993
--------------------------------------------
<S> <C> <C> <C>
Balance at beginning of year $ 9,501,200 $11,319,898 $10,189,719
Net income (loss) (73,025) 430,302 1,130,179
Change in accounting for investments
(Note 2) -- 133,000 --
Change in unrealized holding loss 2,087,000 (2,382,000) --
--------------------------------------------
Balance at end of year $11,515,175 $ 9,501,200 $11,319,898
============================================
</TABLE>
F-4
<PAGE>
First Federal Savings and Loan Association of Bloomington
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1995 1994 1993
--------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net (loss) income $ (73,025) $ 430,302 $ 1,130,179
Adjustments to reconcile net (loss)
income to net cash provided by
operating activities
Provision for loan loss 100,000 (31,691) (3,506)
Provision for depreciation 451,630 396,245 188,078
Deferred income taxes 103,000 75,000 84,000
Amortization of premiums and
discounts on investment securities 28,956 27,103 32,346
Net gains on sales of investment
securities-- -- (6,326) (30)
Sale (purchase) of FHLB stock (44,300) 334,100 --
Proceeds from sale of mortgage loans
originated-for-sale 7,039,393 2,316,756 --
Loans receivable originated-for-sale (6,988,127) (2,291,136) --
Increase in accrued interest
receivable (84,131) (94,453) (48,354)
(Decrease) increase in accrued
interest payable (19,175) 27,043 (19,000)
Interest in other assets (194,632) (242,340) (380,644)
(Decrease) increase in other
liabilities (18,795) (140,752) 322,970
--------------------------------------------
Net cash provided by operating
activities 300,794 799,851 1,306,039
INVESTING ACTIVITIES
Proceeds from sale of mortgage loans -- -- 44,757,296
Proceeds from sale of investment
securities 1,034,634 2,076,391 1,244,787
Purchases of investment securities (1,997,500) (4,444,110) (6,139,206)
Purchases of mortgage-backed
securities (9,892,197) (6,713,529) (54,130,005)
Proceeds from sale of mortgage-backed
securities -- 9,926,938 24,200,403
Principal collected on mortgage-backed
securities 3,456,791 3,318,136 15,026,071
Principal collected on loans
receivable 22,455,701 21,058,566 32,694,451
Loans receivable originated (27,756,854) (36,739,175) (52,305,012)
Purchases of premises and equipment (90,576) (1,753,005) (284,655)
Net sales (purchases) of real estate (5,619,810) 186,343 (319,890)
------------ ------------ ------------
Net cash (used) provided by
investing activities (7,170,191) (13,083,445) 4,744,240
FINANCING ACTIVITIES
Net increase (decrease) in savings
accounts, demand deposits and
NOW accounts 605,132 (2,981,544) 2,588,675
Net increase in certificate accounts 15,397,310 211,511 (9,678,964)
(Decrease) increase in short-term
borrowings (7,936,250) 7,936,250 --
------------ ------------ ------------
Net cash provided (used) in financing
activities 8,066,192 5,166,217 (7,090,289)
------------ ------------ ------------
Net increase (decrease) in cash and
cash equivalents 1,196,795 (7,117,377) (1,040,010)
Cash and cash equivalents at beginning
of the year 2,703,021 9,820,398 10,860,408
------------ ------------ ------------
Cash and cash equivalents at end of
the year $ 3,899,816 $ 2,703,021 $ 9,820,398
============ ============ ============
</TABLE>
See accompanying notes.
F-5
<PAGE>
First Federal Savings and Loan Association of Bloomington
Notes to Consolidated Financial Statements
December 31, 1995
1. SIGNIFICANT ACCOUNTING POLICIES
BUSINESS AND PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of First Federal
Savings and Loan Association ("Association") and its wholly-owned subsidiary,
FFS Investment Services, Inc. at December 31, 1995. The Association operates as
a traditional thrift institution in McLean and surrounding counties of Central
Illinois. FFS Investment Services, Inc. sells investment products, including
annuities, to customers of the Association. All significant intercompany
accounts and transactions have been eliminated in consolidation.
CASH EQUIVALENTS
Cash equivalents include federal funds sold and overnight deposits. Generally,
federal funds are sold for one-day periods.
INVESTMENTS
Management determines the appropriate classification of debt securities at the
time of purchase. Debt securities are classified as held-to-maturity when the
Association has the positive intent and ability to hold the securities to
maturity. Held-to-maturity securities are stated at amortized cost. Debt
securities not classified as held-to-maturity are classified as available-for-
sale and are carried at fair value, with unrealized gains and losses, net of
tax, reported in a separate category of equity. At December 31, 1995 and 1994
all debt securities are classified as available for sale.
The carrying value of debt securities classified as held-to-maturity or
available-for-sale is adjusted for amortization of premiums and accretion of
discounts to maturity, computed using a method which approximates the level-
yield method. Such amortization is included in interest income. Realized gains
and losses and declines in value judged to be other than temporary on available-
for-sale securities are included in other income. The cost of securities sold is
based on the specific identification method.
Stock in the Federal Home Loan Bank of Chicago is stated at cost and the amount
of stock the Association is required to own is determined by regulation.
F-6
<PAGE>
First Federal Savings and Loan Association of Bloomington
Notes to Consolidated Financial Statements
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
LOANS RECEIVABLE
The Association has a mortgage lien on all property on which mortgage,
participation or purchased loans are made. Loans secured by deposits are secured
by equal or greater deposit account balances. In general, the Association
originates all long-term fixed rate mortgage loans for sale in the secondary
market. Other fixed rate loans and all adjustable rate loans are held for long-
term investment unless designated as held for sale at the time of origination.
During 1993, the Association departed from this general practice and sold a
portion of its intermediate-term fixed rate loan portfolio. The Association
took this action to minimize the impact of anticipated loan prepayments and
reduce interest rate risk. Loans designated as held for sale (not material at
December 31, 1995 and 1994) are carried at the lower of cost or market value
with changes in the valuation allowance reflected in income.
ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses is established through provisions for loan losses
charged against income. Loans deemed to be uncollectible are charged against the
allowance for loan losses, and subsequent recoveries, if any, are credited to
the allowance. Beginning in 1995, the Association adopted Financial Accounting
Standards Board Statement No. 114, "Accounting by Creditors for Impairment of a
Loan," as amended by Statement No. 118, "Accounting by Creditors for Impairment
of a Loan-Income Recognition and Disclosures". Under the new standard, the 1995
allowance for loan losses related to troubled loans that are identified for
evaluation in accordance with Statement 114 is based on estimated discounted
cash flows using the loan's initial effective interest rate or the fair value of
the collateral for certain collateral dependent loans. The Association
collectively evaluates consumer loans and one-to-four family residential loans
for impairment as homogeneous loan groups which are outside the scope of the
Standard. This Standard did not have a significant effect on the Association's
results of operations in 1995.
The allowance for loan losses is maintained at a level believed adequate by
management to absorb losses in the loan portfolio. Management's determination of
the adequacy of the allowance is based on an evaluation of the portfolio
including consideration of past loan experience, current economic conditions,
volume, growth and composition of the loan portfolio, and other relevant
factors. This evaluation is inherently subjective as it requires material
estimates including the amounts and timing of future cash flows expected to be
received on impaired loans that may be susceptible to significant change.
F-7
<PAGE>
First Federal Savings and Loan Association of Bloomington
Notes to Consolidated Financial Statements
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INTEREST ON LOANS, MORTGAGE LOAN FEES AND DISCOUNTS
Interest income on loans is computed monthly based upon the principal amount of
the loans outstanding. Allowances are established for uncollected interest on
mortgage loans on which any payments are more than 90 days past due.
Loan origination and commitment fees and certain direct loan origination costs
are deferred and the net amount is amortized as an adjustment to yield over the
contractual life of the related loans for loans originated after December 31,
1987. For loans originated prior to that date, such fees were generally
recognized in income in the year the loan was made.
REAL ESTATE OWNED
Real estate owned includes land acquired for investment and properties arising
from loan foreclosure or deed in lieu of foreclosure. All real estate owned is
carried at the lower of cost (the unpaid balance at the date of acquisition plus
foreclosure and other related costs) or fair value, less estimated selling
costs. Costs of improvements made to facilitate sale are capitalized; costs of
holding the property, including depreciation, are charged to expense.
(Substantially all real estate owned was sold for cash in 1995.)
PREMISES AND EQUIPMENT
Premises and equipment is stated at cost less accumulated depreciation.
Provisions for depreciation of premises and equipment are computed using
straight-line and accelerated methods over the estimated useful lives of the
related assets.
The Association recognizes impairment losses on long-lived assets used in
operations when indicators of impairment are present and the undiscounted cash
flows estimated to be generated by those assets are less than the assets'
carrying amount. Assets to be disposed of are recorded at the lower of their
carrying amount or fair value less cost to sell.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
F-8
<PAGE>
First Federal Savings and Loan Association of Bloomington
Notes to Consolidated Financial Statements
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
RECLASSIFICATIONS
Certain elements of the 1994 and 1993 consolidated financial statements have
been reclassified to conform with the presentation herein.
2. INVESTMENTS
Effective January 1, 1994, the Association adopted the provisions of Statement
of Financial Standards No. 115, "Accounting for Certain Investments in Debt and
Equity Securities." To implement this standard, the carrying value of
investment securities at January 1, 1994 was increased by $199,615 to reflect
the net unrealized holding gains on securities classified as available-for-sale
(previously carried at amortized cost). The after-tax effect of $133,000 was
recognized as an addition to equity. These additions represent non-cash
adjustments of carrying value. Investments are summarized as follows:
<TABLE>
<CAPTION>
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
------------------------------------------------
<S> <C> <C> <C> <C>
DECEMBER 31, 1995
Investment securities
U.S. Treasury and agencies $10,663,536 $ 27,341 $ 57,133 $10,633,744
Stock in Federal Home
Loan Bank of Chicago 693,900 -- -- 693,900
Other debt securities 482,034 -- -- 482,034
------------------------------------------------
11,839,470 27,341 57,133 11,809,678
Mortgage-backed
Collateralized mortgage
obligations 21,305,535 25,286 358,418 20,972,403
Other mortgage-backed
securities 20,285,889 181,508 63,584 20,403,813
------------------------------------------------
41,591,424 206,794 422,002 41,376,216
------------------------------------------------
Total Investments $53,430,894 $234,135 $479,135 $53,185,894
================================================
</TABLE>
F-9
<PAGE>
First Federal Savings and Loan Association of Bloomington
Notes to Consolidated Financial Statements
2. INVESTMENTS (CONTINUED)
<TABLE>
<CAPTION>
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
------------------------------------------------
<S> <C> <C> <C> <C>
DECEMBER 31, 1994
Investment securities
U.S. Treasury and
agencies $ 9,683,701 $ -- $ 765,902 $ 8,917,799
Stock in Federal Home
Loan Bank of Chicago 649,600 -- -- 649,600
Other debt securities 521,415 -- -- 521,415
------------------------------------------------
10,854,716 -- 765,902 10,088,814
Mortgage-backed
Collateralized mortgage
obligations 19,974,138 -- 1,954,692 18,019,446
Other mortgage-backed
securities 15,151,429 -- 579,406 14,572,023
------------------------------------------------
35,125,567 -- 2,534,098 32,591,469
------------------------------------------------
Total Investments $45,980,283 $ -- $3,300,000 $42,680,283
================================================
</TABLE>
The amortized cost and market value of investment and mortgage-backed securities
at December 31, 1995, by contractual maturity, are as follows:
<TABLE>
<CAPTION>
AMORTIZED MARKET
COST VALUE
--------------------------
<S> <C> <C>
Due in one year or less $ 3,300,640 $ 3,300,034
Due after one year through five years 11,292,031 11,255,294
Due in more than five years 38,838,223 38,630,566
-------------------------
$53,430,894 $53,185,894
=========================
</TABLE>
At December 31, 1995, $37.6 million of the Association's mortgage-backed and
related securities were guaranteed or insured by quasi-governmental agencies
(e.g. GNMA, FNMA, FHLMC). $3.8 million of such securities were not guaranteed
by those Agencies.
Accrued interest receivable on investment and mortgage-backed securities totaled
$388,578 and $351,582 at December 31, 1995 and 1994, respectively. No gains or
losses were realized in 1995. Gross realized gains on sales of investments were
$58,882 and $39,345 in 1994 and 1993, respectively. Gross realized losses on
sales of investments were $52,507 and $23,453 in 1994 and 1993, respectively.
F-10
<PAGE>
First Federal Savings and Loan Association of Bloomington
Notes to Consolidated Financial Statements
3. LOANS RECEIVABLE
Loans receivable consist of the following at December 31:
<TABLE>
<CAPTION>
1995 1994
--------------------------
<S> <C> <C>
Residential mortgage loans:
One-to-four family $53,294,235 $53,849,904
Multi-family and construction 2,492,186 1,953,907
Commercial real estate loans 4,484,098 4,902,596
Consumer loans 28,719,903 23,027,935
Commercial installment loans 540,732 496,047
Accrued interest receivable 489,305 431,588
--------------------------
90,020,459 84,661,977
Less
Deferred loan fees 36,011 14,935
Allowance for uncollected interest 45,266 34,687
Allowance for loan losses 907,087 873,200
Allowance for loss on loans held for sale -- 100,000
Undisbursed portion of loan proceeds 246,310 50,392
--------------------------
$88,785,785 $83,588,763
==========================
Weighted average interest rate 8.02% 7.72%
==========================
</TABLE>
The Association had a loan servicing portfolio as of December 31, 1995 and 1994
of approximately $32,913,000 and $30,650,000, respectively. In May 1995, the
Financial Accounting Standards Board issued Statement No. 122, "Accounting for
Mortgage Servicing Rights." The Standard is effective for fiscal years
beginning after December 15, 1995 and requires the Association to recognize, as
separate assets, rights to service mortgage loans for others, regardless of how
those servicing rights were acquired. The Standard requires that the
capitalized mortgage servicing rights be assessed for impairment based on the
fair value of those rights, and the impairment be recognized through a valuation
allowance. The impact of this Standard on the Association will depend on the
level of loans sold and servicing rights retained by the Association and,
accordingly, the impact is unknown at this time.
The Association sold funded fixed-rate loans totaling $7,039,393, $2,316,756 and
$44,757,296 resulting in gains of $51,266, $25,620 and $1,052,920 in 1995, 1994
and 1993, respectively (see Note 1).
F-11
<PAGE>
First Federal Savings and Loan Association of Bloomington
Notes to Consolidated Financial Statements
3. LOANS RECEIVABLE (CONTINUED)
The Association's lending activities are concentrated within a 50-mile radius of
Bloomington, Illinois. Open consumer lines of credit totaled $2,480,000 and
$2,260,000 at December 31, 1995 and 1994, respectively.
Changes in the allowance for loan losses are as follows:
<TABLE>
<CAPTION>
1995 1994 1993
------------------------------------
<S> <C> <C> <C>
Balance at beginning of year $873,200 $946,000 $948,000
Provision for losses 100,000 (31,691) (3,506)
Net (charge-offs) recoveries (66,113) (41,109) 1,506
------------------------------------
Balance at end of year $907,087 $873,200 $946,000
====================================
</TABLE>
4. PREMISES AND EQUIPMENT
Premises and equipment is summarized as follows at December 31:
<TABLE>
<CAPTION>
1995 1994
------------------------
<S> <C> <C>
Land $ 774,814 $ 772,115
Buildings 2,899,903 2,872,813
Furniture and equipment 2,069,025 2,008,238
------------------------
5,743,742 5,653,166
Less allowance for depreciation 2,631,651 2,324,019
------------------------
$3,112,091 $3,329,147
========================
</TABLE>
F-12
<PAGE>
First Federal Savings and Loan Association of Bloomington
Notes to Consolidated Financial Statements
5. DEPOSITS
Deposits at December 31 are summarized as follows:
<TABLE>
<CAPTION>
1995 1994
----------------------------------------------------------------------------------------
WEIGHTED AVERAGE WEIGHTED AVERAGE
INTEREST RATE AMOUNT INTEREST RATE AMOUNT
----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Passbook accounts 3.622% $ 14,700,118 3.528% $ 13,759,194
NOW accounts 2.083 8,678,259 2.208 9,014,051
Other certificates 7.068 5,093,715 7.050 1,808,895
Certificate accounts
(original term):
91 day 4.386 653,694 3.811 711,256
6 month 5.286 9,159,944 3.762 10,649,673
9 month 5.750 5,603,482 4.961 4,257,408
1 year 6.195 22,979,646 3.914 17,604,196
2 year 6.181 12,853,603 4.571 9,237,471
2-1/2 year 5.943 16,900,941 5.536 16,944,125
3 year 5.357 7,800,285 4.964 7,328,045
5 year 6.053 3,606,045 6.649 4,464,906
6 year 6.678 9,839,678 6.649 9,716,355
Jumbo (over $100,000) 6.637 7,764,323 5.888 6,298,333
IRA 6.391 12,743,350 5.457 10,580,733
------------ ------------
138,377,083 122,374,641
Accrued interest 18,914 13,214
------------ ------------
5.603% $138,395,997 4.703% $122,387,855
============ ============
</TABLE>
The Association paid interest on deposits and other borrowings of $7,394,774 and
$5,368,399 and $5,857,060 in 1995, 1994 and 1993, respectively. Investments
with a book value of approximately $4,300,000 are pledged to secure deposits in
excess of $100,000. Deposits over $100,000 are not federally insured.
Certificates of deposit at December 31, 1995, have contractual maturities as
follows (in thousands): 1996- $57,768; 1997- $28,102; 1998- $8,315; 1999-
$10,678; 2000- $9,745 and thereafter $410.
F-13
<PAGE>
First Federal Savings and Loan Association of Bloomington
Notes to Consolidated Financial Statements
6. OTHER BORROWINGS
During 1995 and 1994, the Association entered into repurchase arrangements with
Prudential Securities under which it borrowed funds and pledged investment
securities, which were kept at Prudential as collateral. As of December 31,
1995, no agreements were in effect and no securities were pledged. As of
December 31, 1994, the pledged securities had a par value of $3,000,000 and a
book value of approximately $2,941,188, which approximated market value.
<TABLE>
<CAPTION>
DESCRIPTION AMOUNT
BORROWED RATE MATURITY
----------------------------------------------------
1994:
<S> <C> <C> <C>
FNMA $1,027,500 6.25 1-20-95
FHLB medium term note 991,250 6.25 1-20-95
US Treasury note 917,500 6.25 1-20-95
----------
$2,936,250
==========
</TABLE>
There were no outstanding agreements at any month end during 1995. The maximum
amount of outstanding agreements at a month end during 1994 was five. The
average balance of outstanding agreements for 1995 and 1994 was approximately
$171,000 and $1,202,000, respectively.
7. INCOME TAXES
The provision for taxes for the year ended December 31 consists of the
following:
<TABLE>
<CAPTION>
1995 1994 1993
--------------------------------
<S> <C> <C> <C>
Current expense (credit) $(144,500) $150,000 $486,000
Deferred expense 115,000 71,500 84,000
---------------------------------
$ (29,500) $221,500 $570,000
================================
</TABLE>
F-14
<PAGE>
First Federal Savings and Loan Association of Bloomington
Notes to Consolidated Financial Statements
7. INCOME TAXES (CONTINUED)
A reconciliation of the statutory federal income tax rate to the effective
income tax rate for the year ended December 31 follows:
<TABLE>
<CAPTION>
1995 1994 1993
--------------------------------
<S> <C> <C> <C>
Statutory rate 34.0% 34.0% 34.0%
Recoveries on sales of real estate owned (4.5) -- --
Municipal bond interest and other (0.7) -- (0.5)
-------------------------------
28.8% 34.0% 33.5%
===============================
</TABLE>
The components of the Association's net deferred tax asset (liability) at
December 31 are as follows:
<TABLE>
<CAPTION>
1995 1994
-----------------------
<S> <C> <C>
Deferred tax liabilities:
Depreciation $(288,000) $ (280,000)
Percentage bad debt deduction -- (310,000)
Other (45,000) (45,000)
Deferred tax assets:
Provision for holding losses on investment
securities and mortgage-backed securities 80,000 1,051,000
Allowance for loan and real estate losses 334,000 725,000
Deferred compensation 70,000 70,000
Other 114,000 125,000
=======================
Net deferred tax asset $ 265,000 $1,336,000
=======================
</TABLE>
The Association made income tax payments of $10,000, $280,000 and $567,500
during 1995, 1994 and 1993, respectively.
F-15
<PAGE>
First Federal Savings and Loan Association of Bloomington
Notes to Consolidated Financial Statements
8. EQUITY
Pursuant to the Financial Institutions Reform, Recovery and Enforcement Act of
1989 ("FIRREA"), as implemented by a rule promulgated by the Office of Thrift
Supervision ("OTS"), savings institutions must meet three separate minimum
capital-to-assets requirements: (i) a risk based capital requirement of 8% of
risk-weighted assets, (ii) a leverage ratio of 3% core capital to adjusted
tangible assets and (iii) a tangible capital requirement of 1 1/2% tangible core
capital to tangible assets. The following table summarizes, as of December 31,
1995, the Association's capital requirements under FIRREA and its actual capital
and capital ratios at that date.
<TABLE>
<CAPTION>
CAPITAL REQUIREMENTS ACTUAL CAPITAL EXCESS
------------------------------------------------------
% $ % $ $
------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Risk-based 8.0% $6,330,000 15.78% $12,487,000 $6,187,000
Leverage 3.0 4,534,000 7.73 11,677,000 7,143,000
Tangible 1.5 2,267,000 7.73 11,677,000 9,410,000
</TABLE>
At December 31, 1995, equity is reconciled to Actual Capital in the above table
as follows (in thousands):
Equity-per statement of condition $11,515
Unrealized investment holding losses 162
--------
Leverage and tangible capital 11,677
General allowance for loan losses 810
-------
Risk-based capital $12,487
=======
The Association has qualified under provisions of the Internal Revenue Code
which permit it to deduct from taxable income a provision for bad debts which
differs from the provision for such losses charged to income. Accordingly,
retained earnings at December 31, 1995 includes approximately $3,563,000 for
which no provision for federal income taxes has been made. If, in the future,
this portion of retained earnings is used for any purpose other than to absorb
loan losses, federal income taxes may be imposed at the then applicable rates.
F-16
<PAGE>
First Federal Savings and Loan Association of Bloomington
Notes to Consolidated Financial Statements
9. PENSION PLAN
The Association has a defined benefit pension plan covering substantially all of
its employees. The benefits are based on years of service and the employee's
compensation during the last five years of employment. The Association's policy
is to contribute annually the maximum amount that can be deducted for federal
income tax purposes. Contributions are intended to provide not only for the
benefits attributed to service to date but also for those expected to be earned
in the future.
The following table sets forth the plan's funded status and amounts recognized
in the Association's statement of financial condition at December 31.
<TABLE>
<CAPTION>
1995 1994
-----------------------
<S> <C> <C>
Actuarial present value of benefit obligations:
Accumulated benefit obligation, including vested
benefits of $392,588 in 1995 and $579,438 in 1994 $ 401,738 $591,861
=====================
Projected benefit obligation for service rendered to date $ 656,704 $798,581
Plan assets at fair value (common trust fund) 446,428 462,178
---------------------
Plan assets in excess of (less than)
projected benefit obligation (210,276) (336,403)
Unrecognized net loss from past experience different from
that assumed and effects of changes in assumptions 189,084 286,067
Prior service cost not yet recognized in net periodic
pension cost 26,461 27,752
Unrecognized net asset at December 31 (20,345) (21,416)
---------------------
Prepaid (accrued) pension cost $ (15,076) $(44,000)
=====================
</TABLE>
The decline in benefit obligation amounts from December 31, 1994 to December 31,
1995 relates principally to the termination of one employee and his withdrawal
from the plan during the year.
F-17
<PAGE>
First Federal Savings and Loan Association of Bloomington
Notes to Consolidated Financial Statements
9. PENSION PLAN (CONTINUED)
Net pension cost for the year ended December 31 included the following
components:
<TABLE>
<CAPTION>
1995 1994 1993
------------------------------
<S> <C> <C> <C>
Service costs--benefits earned
during the period $ 63,525 $ 47,642 $ 46,212
Interest cost on projected
benefit obligation 55,049 54,323 76,662
Actual return on plan assets (60,972) 16,734 (14,087)
Net amortization and deferral 28,474 (50,061) (36,590)
------------------------------
Net periodic pension cost $ 86,076 $ 68,638 $ 72,197
==============================
</TABLE>
An interest rate of 7 1/2% was assumed in determining the projected benefit
obligation and the long-term rate of return on plan assets at December 31, 1995
and 1994. Annual compensation increases of 3% per annum are considered in the
December 31, 1995 and 1994 obligation.
In connection with the planned stock conversion (see Note 12), the Association
is considering freezing benefit accruals under the Plan and adopting a new
defined contribution retirement plan. It is expected that any curtailment of the
defined benefit plan will not have a material effect on the Association's
financial condition or results of operations.
10. LOANS TO RELATED PARTIES
Certain directors and officers of the Association were loan customers in the
ordinary course of business during 1995 and 1994. The aggregate dollar amount of
these loans was approximately $616,500 and $654,000 at December 31, 1995 and
1994, respectively. During 1995, approximately $126,000 of new loans were made
and repayments totaled approximately $163,500. All of the loans were made on
substantially the same terms, including interest rate and collateral, as those
prevailing at the time for comparable transactions with unrelated parties.
F-18
<PAGE>
First Federal Savings and Loan Association of Bloomington
Notes to Consolidated Financial Statements
11. FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement No. 107, "Disclosures About Fair Value of Financial Instruments,"
requires disclosure of fair value information about financial instruments,
whether or not recognized in the balance sheet, for which it is practicable to
estimate that value. In cases where quoted market prices are not available, fair
values are based on estimates using present value or other valuation techniques.
Those techniques are significantly affected by the assumptions used, including
the discount rate and estimates of future cash flows. In that regard, the
derived fair value estimates cannot be substantiated by comparison to
independent markets and, in many cases, could not be realized in immediate
settlement of the instrument. Statement No. 107 excludes certain financial
instruments and all nonfinancial instruments from its disclosure requirements.
Accordingly, the aggregate fair value amounts presented do not represent the
underlying value of the Association.
The following methods and assumptions were used by the Association in estimating
its fair value disclosures for financial instruments:
Cash and short-term investments: The carrying amounts reported in the balance
sheet for cash and short-term investments approximate their fair values.
Investment securities (including mortgage-backed securities): Fair values for
investment securities are based on quoted market prices, where available. If
quoted market prices are not available, fair values are based on quoted
market prices of comparable instruments.
Loans receivable: For variable-rate loans that reprice frequently and with no
significant change in credit risk, fair values are based on carrying values.
The fair values for all other loans are estimated using discounted cash flow
analyses, using interest rates currently being offered for loans with similar
terms to borrowers of similar credit quality. The carrying amount of accrued
interest approximates its fair value.
Deposit liabilities: The fair values disclosed for demand deposits, including
interest-bearing and noninterest-bearing accounts, passbook savings, and
certain types of money market accounts are, by definition, equal to the
amount payable on demand at the reporting date (i.e., their carrying
amounts). Fair values for fixed-rate certificates of deposit are estimated
using a discounted cash flow calculation that applies interest rates
currently being offered on certificates to a schedule of aggregated expected
monthly maturities on time deposits.
F-19
<PAGE>
First Federal Savings and Loan Association of Bloomington
Notes to Consolidated Financial Statements
11. FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
Off-balance-sheet instruments: Fair values of the Association's off-balance-
sheet instruments (loan commitments) are based on quoted rates and fees
currently charged to enter into similar agreements, taking into account the
counterparties' credit standing. The terms of loan commitments outstanding
at December 31, 1995 are comparable to terms available for new commitments
at that date.
The estimated fair values of the Association's financial instruments at December
31, 1995 are as follows:
<TABLE>
<CAPTION>
CARRYING FAIR
AMOUNT VALUE
-------------------------
(In thousands)
<S> <C> <C>
ASSETS:
Cash on hand and in other institutions $ 1,047 $ 1,047
Federal funds sold and overnight deposits 2,853 2,853
Investment securities 53,186 53,186
Net loans 88,786 89,021
LIABILITIES:
Deposits 138,396 141,001
</TABLE>
12. PLAN OF CONVERSION
On November 21, 1995, the Board of Directors adopted a Plan of Conversion
("Plan"), which was amended and restated on February 13, 1996, whereby the
Association will convert from a federally-chartered mutual savings association
to a federally-chartered capital stock savings association. The Plan is subject
to approval of regulatory authorities and members at a special meeting. Pursuant
to the Plan, non-transferable subscription rights to purchase shares of stock of
the savings association will be offered first to eligible account holders of the
Association, then to the ESOP to be formed, then to supplemental eligible
account holders of the Association, and then to the extent that stock is
available, to certain other members as of specified dates subject to various
subscription preferences as provided in the Plan. The capital stock will be
offered at $10.00 per share. The exact number of shares to be offered will be
determined by the Board of Directors based upon an appraisal to be made by an
independent appraisal firm. At least the minimum number of shares offered in the
conversion must be sold. Any stock not purchased in the subscription offering
will be sold in a community offering to be commenced concurrently with the
subscription offering.
F-20
<PAGE>
First Federal Savings and Loan Association of Bloomington
Notes to Consolidated Financial Statements
12. PLAN OF CONVERSION (CONTINUED)
The plan provides that when the conversion is completed, a "liquidation account"
will be established in an amount equal to the regulatory capital of the
Association as of the latest practicable date prior to consummation of the
conversion. The liquidation account is established to provide a limited
priority claim to the assets of the Association to qualifying depositors
("eligible and supplemental eligible account holders") who continue to maintain
deposits in the Association after conversion. In the unlikely event of a
complete liquidation of the Association, and only in such event, eligible and
supplemental eligible account holders would receive from the liquidation
account, a liquidation distribution based on their proportionate share of the
total remaining qualifying deposits.
The Association may pay dividends on its stock after the conversion if its
regulatory capital would not thereby be reduced below the amount then required
for the aforementioned liquidation account and if such dividends are otherwise
permitted under applicable regulations. In general, regulations permit
dividends within guidelines based on current levels of net income and capital.
Further, the savings and loan association's capital surplus may not be otherwise
reduced at any time without the consent of the Office of Thrift Supervision
(OTS).
The OTS also has authority to prohibit an institution from paying dividends if,
in its opinion, the payment of dividends would constitute an unsafe or unsound
practice in light of the financial condition of the institution.
Costs of conversion will be deducted from the proceeds of sale of common stock
and recorded as a reduction of additional paid in capital. If the conversion is
not completed, such costs will be charged to expense. No conversion costs had
been incurred at December 31, 1995.
13. CONTINGENCY
Proposals are currently under consideration in the U.S. Congress to recapitalize
the Savings Association Insurance Fund of the FDIC through a one-time special
assessment. If adopted, the special assessment is presently estimated to be
between 0.75% and 0.85% per $100 of insurable deposits. If the assessment were
imposed at the 0.85% level, based on the Association's deposit base at March 31,
1995, the amount of the assessment would be approximately $1,200,000.
F-21
<PAGE>
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NO DEALER, SALESMAN OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY IN-
FORMATION OR TO MAKE ANY REPRESENTATION OTHER THAN AS CONTAINED IN THIS PRO-
SPECTUS 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 ASSOCIATION OR TRIDENT. THIS PRO-
SPECTUS 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 JURISDIC-
TION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE HEREUNDER SHALL UN-
DER ANY CIRCUMSTANCES CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN
THE AFFAIRS OF THE ASSOCIATION SINCE ANY OF THE DATES AS OF THIS INFORMATION
IS FURNISHED HEREIN OR SINCE THE DATE HEREOF.
---------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Subscription and Community Offering
Prospectus Summary....................................................... 1
Recent Developments....................................................... 10
Risk Factors.............................................................. 14
Eagle BancGroup, Inc...................................................... 24
First Federal Savings and Loan Association of Bloomington................. 24
Use of Proceeds........................................................... 29
Dividend Policy........................................................... 30
Market for Common Stock................................................... 31
Capitalization............................................................ 32
Historical and Pro Forma Capital Compliance............................... 33
Pro Forma Data............................................................ 35
Consolidated Statements of Operations..................................... 40
Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... 41
Business of the Holding Company........................................... 55
Business of the Association............................................... 55
Management of the Holding Company and Association......................... 88
Supervision and Regulation................................................ 111
Federal and State Taxation................................................ 119
The Conversion............................................................ 122
Restrictions on Acquisition of the Holding Company........................ 143
Description of Capital Stock.............................................. 148
Registration Requirements................................................. 149
Transfer Agent and Registrar.............................................. 149
Legal Opinions............................................................ 150
Experts................................................................... 150
Index to Consolidated Financial Statements................................ F-1
</TABLE>
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UNTIL THE LATER OF AUGUST 11, 1996 OR 90 DAYS AFTER COMMENCEMENT OF THE OF-
FERING OF COMMON STOCK, 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 UN-
SOLD ALLOTMENTS OR SUBSCRIPTIONS.
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LOGO
UP TO 1,667,500 SHARES OF
COMMON STOCK
$10.00 PURCHASE PRICE
PER SHARE
---------------
SUBSCRIPTION AND COMMUNITY
OFFERING PROSPECTUS
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TRIDENT SECURITIES, INC.
MAY 13, 1996
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