<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20552
FORM 10-KSB
ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
Mark One
[x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Fiscal Year Ended June 30, 1996
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________ to _______________.
ILLINOIS COMMUNITY BANCORP, INC.
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(Exact name of registrant as specified in its charter)
United States Applied for
- --------------------------------- -----------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
210 E. Fayette Avenue, Effingham, Illinois 62401-3613
- -------------------------------------------- -----------------
(Address of principal executive offices) Zip Code
Registrant's telephone number, including area code:
(217) 347-7127
-----------------
Securities registered pursuant to Section 12(b) of the Act:
None
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Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $1.00 per share
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(Title of Class)
Indicate by check mark whether the registrant (l) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES X NO (with Office of Thrift Supervision)
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Transitional small business disclosure format (check one): YES X NO
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Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-B is not contained herein. [ ]
State issuer's revenues for its most recent fiscal year (year ended
June 30, 1996): $3.0 million.
The registrant's voting stock is listed on the National Daily Quotation System
"Pink Sheets" published by the National Quotation Bureau, Inc. The aggregate
market value of the voting stock held by nonaffiliates of the registrant, based
on the $11.5 per share closing sales price of the registrant's common stock as
quoted on the "Pink Sheets" on September 24, 1996, was $4,607,774. For purposes
of this calculation, it is assumed that directors and officers of the registrant
are affiliates. As of September 20, 1996, the registrant had 502,550 shares of
common stock outstanding, of which 101,874 were held by affiliates.
DOCUMENTS INCORPORATED BY REFERENCE
1. Portions of Annual Report to Stockholders for the Fiscal Year Ended
June 30, 1996. (Parts I, II and IV)
2. Portions of Proxy Statement for the 1996 Annual Meeting of
Stockholders. (Part III)
Exhibit Index on Page 40
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PART I
Item 1. Description of Business
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General
The Company. Illinois Community Bancorp, Inc. (the "Company"), an
Illinois corporation, was organized by Illinois Guarantee Savings Bank, FSB
("Illinois Guarantee" or the "Bank") to be a savings institution holding
company. The Company was organized at the direction of the Bank in June 1996 to
acquire all of the capital stock of the Bank upon the consummation of the
reorganization of the Bank into the holding company form of ownership, (the
"Reorganization") which was completed on September 27, 1996, and the Company's
Common Stock became registered under the Securities Exchange Act of 1934 on
September 27, 1996. The Company has no significant assets other than capital
stock of the Bank and $100,000 retained by the Company following the
Reorganization. The Company is a unitary savings and loan holding company
subject to regulation by the OTS. The Company's principal business is the
business of the Bank and its subsidiary. For that reason, and because the
Reorganization was completed subsequent to the end of the 1996 fiscal year,
substantially all of the discussion in this Form 10-KSB relates to the
operations of the Bank and its subsidiary.
The executive offices of the Company are located at 210 E. Fayette Avenue,
Effingham, Illinois 62401-3613 and the telephone number is (217) 347-7127.
The Bank. Illinois Guarantee is a federally chartered stock savings bank
with its sole office in Effingham, Illinois. Illinois Guarantee was founded on
April 7, 1893 as an Illinois state-chartered savings and loan association, and
its deposits have been federally insured since 1959. Illinois Guarantee has been
a member of the Federal Home Loan Bank ("FHLB") of Chicago since 1949. In
February 1990, Illinois Guarantee converted from a state-chartered savings and
loan association to a federally chartered savings bank under its current name.
The Bank completed its conversion from a federally chartered mutual savings bank
to a federally chartered capital stock savings bank (the "Conversion") on
September 28, 1995 (the "Conversion Date") through the sale and issuance of
502,550 shares of Bank Common Stock at a price of $10.00 per share for gross
proceeds of $5,025,500 and proceeds, net of Conversion expenses, of $4,563,000.
Illinois Guarantee's office is located at 210 E. Fayette Avenue,
Effingham, Illinois 62401-3613, and its telephone number is (217) 347-7127.
Illinois Guarantee considers its primary market area to be its home county of
Effingham. Illinois Guarantee serves its market area through its sole office in
Effingham, Illinois. The Bank is planning to open a new branch office in
Effingham. See "New Business Strategies."
The business of Illinois Guarantee primarily consists of attracting
savings deposits from the general public and investing such deposits in loans
secured by single-family residential real estate, investment securities,
including U.S. Government and Agency securities, interest-earning deposits,
mortgage-backed securities and local municipal securities. Illinois Guarantee
also makes multi-family and commercial real estate loans, and consumer loans,
including automobile loans and savings account loans. Illinois Guarantee
emphasizes the origination of residential real estate mortgage loans with
adjustable interest rates and fixed-rate loans with shorter terms (15 years or
less) and makes other investments which are responsive to changes in interest
rates, and which allow Illinois Guarantee to more closely match the interest
rates and maturities of its assets and liabilities.
The Bank's deposits are insured by the Federal Deposit Insurance
Corporation ("FDIC") up to applicable limits for each depositor. Certain changes
have been made, and are being considered relating to the insurance assessment
paid by the Bank for the issuance of the Bank's deposits by the FDIC. For more
information, see "Regulation -- Deposit Insurance." The FHLB of Chicago, of
which Illinois Guarantee is a member, is one of the 12 district banks comprising
the FHLB System. The Bank is subject to comprehensive examination, supervision
and regulation by the Office of Thrift Supervision ("OTS") and the FDIC. Such
regulation is intended primarily for the protection of depositors.
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Changes in Key Management Personnel
Effective April 18, 1995, President and Chief Executive Officer Donald J.
Wente resigned from his positions of employment with the Bank, and was replaced
by Chairman of the Board Gerald E. Ludwig, who was also appointed to serve as
Chief Executive Officer of the Bank. On June 20, 1995, the Board promoted Vice
President of Lending Douglas A. Pike to the positions of President and Chief
Operating Officer of the Bank. On June 12, 1995, the Bank hired Ronald R.
Schettler as Senior Vice President in charge of administration and investments.
In May 1996, the Bank hired John H. Leonard as Senior Vice President and Chief
Credit Officer.
New Business Strategies
Since new management joined the Bank in mid 1995, the Bank has adopted
various new business strategies intended to increase its presence in its primary
market area of Effingham County, Illinois ("Primary Market Area"), thereby
increasing its lending activities and sources of income. These steps include (i)
hiring experienced banking personnel including a new chief credit officer (now
President Douglas Pike, who continues to engage in the Bank's lending
activities), a chief administrative officer and various other employees to
support the Bank's expanded operations; (ii) instituting a marketing program to
contact local realtors, builders, auto dealers and others in order to increase
the origination of one-to-four-family residential loans, construction loans and
permanent loans secured by multi-family and commercial real estate, and consumer
loans, including direct and indirect automobile loans, through arrangements with
local auto dealers; (iii) planning the opening of a new branch office (expected
to open in the fourth calendar quarter of 1996) in the northern section of its
Primary Market Area, an area of Effingham, Illinois which is experiencing growth
in commercial and retail activities, and is in close proximity to expanding
residential areas; (iv) installing automated teller machines ("ATMs") at its
main office and the new branch office, as well as other possible "stand alone"
locations; and (v) offering new products to its customers and potential
customers, including a credit and debit card program. The Company plans to form
two corporate subsidiaries to conduct leasing activities and financial services.
Market Area
Illinois Guarantee's office is located in the city of Effingham, Effingham
County, Illinois. The Bank considers its Primary Market Area to be its home
county of Effingham. The population of Effingham County is 31,704 (based on the
1990 Census). Effingham is located in central Illinois, at the "crossroads" of
I-57 (major North-South interstate) and I-70 (major East-West interstate), being
97 miles east from St. Louis, Missouri, 141 miles west of Indianapolis, Indiana,
and 211 miles south of Chicago, Illinois. Employment in Effingham County is
reliant on the local manufacturing and distribution industries, with agriculture
and agribusiness serving as important elements of the economy. The major
employers in the Effingham area are Fedders USA, with approximately 1,200
employees, Crossroads Press, with 919 employees, Petty Company, with 690
employees and St. Anthony's Memorial Hospital, with 679 employees. Other major
employers include Three Z Printing, Consolidated Communications and Stevens
Industries, Inc.
Lending Activities
General. Illinois Guarantee emphasizes the origination of adjustable rate
loans and short term (15 years or less) fixed rate loans, in order to manage the
interest rate sensitivity of its interest-earning assets. The principal lending
activity of Illinois Guarantee is the origination of adjustable rate mortgage
loans for the purpose of financing the construction and acquisition of single-
family residential properties. Illinois Guarantee also originates construction
and permanent loans on multi-family and commercial real estate, as well as
automobile loans, home improvement loans and other consumer loans. At June 30,
1996, loans with adjustable rates or terms of five years or less totaled $19.9
million, or 54.53% of Illinois Guarantee's total loans.
In February 1995, the Bank hired a new Vice President of Lending, Douglas
Pike, to expand and increase the Bank's lending activities. Mr. Pike was
appointed President of the Bank in June 1995, and continues to manage the Bank's
lending operations. Mr. Pike has been involved in commercial and consumer
lending, including automobile lending, since 1986 through his employment with
two commercial banks located in Effingham, Illinois. Mr. Pike has been active in
contacting local realtors, builders, auto dealers and others in order to
generate the origination of one-to-four-family residential loans, construction
loans and permanent loans on single-family, multi-
2
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family and commercial real estate, and consumer loans including automobile
lending on an indirect basis, through relationships established with five local
auto dealers. These activities have resulted in increased loan originations for
the Bank, particularly the origination of construction and permanent loans on
one- to four-family and multi-family residential real estate.
The Bank's five largest loans to one borrower, outstanding as of June 30,
1996, ranged from $790,000 to $468,000. See "Regulation -- Limits on Loans to
One Borrower."
Loan Portfolio. Set forth below is selected data relating to the
composition of Illinois Guarantee's loan portfolio by type of loan on the dates
indicated.
<TABLE>
<CAPTION>
At June 30,
----------------------------------
1996 1995
---------------- ----------------
Amount % Amount %
------- ------- ------- -------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Real estate loans --
One- to four-family residential...... $22,952 63.18% $16,982 76.64%
Multi-family residential............. 1,036 2.85 392 1.77
Agricultural......................... 1,839 5.06 600 2.71
Commercial........................... 3,604 9.92 2,182 9.85
Construction
One to four residential............ 1,015 2.79 40 0.18
Multi-family....................... 292 0.80 -- --
------- ------ ------- ------
30,738 84.60 20,196 91.15
------- ------ ------- ------
Commercial business.................... 1,181 3.26 180 0.81
Consumer loans --
Automobiles.......................... 3,800 10.46 1,427 6.44
Other................................ 610 1.68 354 1.60
------- ------ ------- ------
4,410 12.14 1,781 8.04
------- ------ ------- ------
Total.................................. 36,329 100.00% 22,157 100.00%
====== ======
Less:
Loans in process..................... 6 118
Deferred loan fees................... 27 18
Allowance for loan losses............ 227 175
------- -------
Total, net........................ $36,069 $21,846
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</TABLE>
During the year ended June 30, 1996, the Bank made seven loans in excess
of $250,000 for a total of $3.4 million. Three of these loans have adjustable
rates ranging from 8.25% to 9.50% with outstanding balances of $300,000 for a
multi-family dwelling and $1.2 million to commercial hotels. The remaining four
loans are fixed rate with terms of one year or less with an interest rate range
from 7.875% to 8.25% with outstanding balances of $1.3 million secured by land
and $563,000 of commercial construction loans.
One- to Four-Family Residential Real Estate Lending. The primary emphasis
of Illinois Guarantee's lending activity is the origination of conventional
mortgage loans on one- to four-family residential dwellings. Most loans are
originated in amounts up to $100,000 on single-family properties located in
Illinois Guarantee's primary market area of Effingham County. As of June 30,
1996, loans on one- to four-family residential properties accounted for 65.97%
of Illinois Guarantee's loan portfolio. Illinois Guarantee's mortgage loan
originations are for terms of from 10 years to up to 30 years, amortized on a
monthly basis with interest and principal due each month. Residential real
estate loans often remain outstanding for significantly shorter periods than
their contractual terms as borrowers may refinance or prepay loans at their
option, without penalty. Conventional residential mortgage loans granted by
Illinois Guarantee customarily contain "due-on-sale" clauses which permit
Illinois Guarantee to accelerate the indebtedness of the loan upon transfer of
ownership of the mortgaged property.
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Illinois Guarantee uses standard Federal Home Loan Mortgage Corporation
("FHLMC") documents, to allow for the sale of loans in the secondary mortgage
market. Illinois Guarantee's lending policies generally limit the maximum loan-
to-value ratio on mortgage loans secured by owner-occupied properties to 95% of
the lesser of the appraised value or purchase price of the property, with the
condition that private mortgage insurance is required on loans with a loan-to-
value ratio in excess of 80%. The majority of loans in Illinois Guarantee's loan
portfolio have loan-to-value ratios of 80% or less.
Illinois Guarantee offers adjustable-rate mortgage loans with terms of up
to 30 years. Adjustable rate loans offered by Illinois Guarantee include loans
which reprice annually or provide for an initial three year term, and then
reprice annually. Adjustable rate loans provide for an interest rate which is
2.5% above the interest rate paid on U.S. Treasury securities of a corresponding
term. Illinois Guarantee offers initial discounted interest rates, but borrowers
are qualified based on the loan status following the first interest rate
adjustment.
Illinois Guarantee retains all adjustable rate mortgages it originates,
which helps reduce Illinois Guarantee's exposure to changes in interest rates.
Illinois Guarantee's adjustable rate mortgages include caps on increases or
decreases of 2% per year, and 6% over the life of the loan. Illinois Guarantee's
adjustable rate mortgage loans contain on open-end provision which permits
Illinois Guarantee to lend additional amounts in later years, in the form of
home improvement loans, which are secured by the original first mortgage.
The Bank also originates second mortgage loans on owner-occupied, single
family and one- to four- family residential real estate. Such loans are subject
to the same loan-to-value ratios (when combined with existing loans), as any
other residential real estate loan, at adjustable rates, and over a term not to
exceed 15 years.
The primary purpose for offering adjustable rate loans is to increase the
interest rate sensitivity of Illinois Guarantee's loan portfolio. However,
because the interest income earned on adjustable rate loans varies with
prevailing interest rates, cash flows from such loans are not as predictable as
cash flows from fixed-rate loans. Further, the annual and lifetime adjustment
limits on the Bank's adjustable rate mortgage loans have the effect of limiting
the sensitivity of those loans to changes in market interest rates and this is
particularly true with respect to loans with initially discounted interest rates
in the event of increases in market rates. The Bank's policy of offering
initially discounted interest rates results in the Bank initially earning
reduced income from such loans. Additionally, there are unquantifiable credit
risks resulting from potential increased costs to the borrower as a result of
repricing of adjustable rate mortgage loans. It is possible that during periods
of rising interest rates, the risk of default on adjustable rate mortgage loans
may increase due to the upward adjustment of interest cost to the borrower.
During the year ended June 30, 1996, Illinois Guarantee originated $6.6
million, in adjustable rate mortgage loans and $4.3 million in fixed-rate
mortgage loans. Approximately 15.07% of all loan originations during the year
ended June 30, 1996 were refinancings of loans already in Illinois Guarantee's
loan portfolio. At June 30, 1996, Illinois Guarantee's loan portfolio included
$11.8 million in adjustable rate one-to four-family residential mortgage loans
or 32.62% of Illinois Guarantee's loan portfolio, and $11.2 million in fixed-
rate one- to four-family residential mortgage loans, or 30.56% of Illinois
Guarantee's loan portfolio.
Multi-Family and Commercial Real Estate Loans. At June 30, 1996, the
Bank's multi-family and commercial real estate loan portfolio consisted of $6.5
million, or 17.91% of total loans. The Bank originated $3.9 million in such
loans during the year ended June 30, 1996 and $363,000 in such loans during the
year ended June 30, 1995. The increase during the year ended June 30, 1996 was
due to business referrals to the Bank of borrowers known personally to members
of management of the Bank for the origination of five loans, all secured by real
estate, raw land or farm land in the Bank's primary market area. The Bank's
commercial real estate loans are secured by office buildings, small retail
establishments, small apartment buildings, raw land and farm land, all located
in Effingham County, Illinois. The Bank's largest loan had an outstanding
balance of $790,000 at June 30, 1996 and was secured by land.
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Multi-family and commercial real estate loans generally are originated in
amounts up to 80% of the appraised value of the property for terms of 10 to 20
years. Appraisals are performed by independent fee appraisers. The interest rate
on these loans generally is subject to adjustment on an annual bases and is
calculated by adding a 3.5% margin to the appropriate index (usually the weekly
average one-year U.S. Treasury Bill index).
Commercial and agricultural real estate lending, as well as multi-family
residential real estate lending entails significant additional risks compared
with one- to four-family residential lending. For example, commercial real
estate loans and multi-family residential real estate loans typically involve
large loan balances to single borrowers or groups of related borrowers, the
payment experience on such loans typically is dependent on the successful
operation of the real estate project, and these risks can be significantly
impacted by supply and demand conditions in the market for commercial office,
retail and warehouse space or multi-family residential units. Agricultural real
estate loans involve a greater degree of risk as payments on such loans depend,
to a larger degree, on the results of operations of the related farm. Consistent
with these increased risks, during the economic slowdown in the late 1980s and
early 1990s the Bank experienced increases in its non-performing commercial real
estate loans and real estate acquired in settlement of such loans. As of June
30, 1996, one of the Bank's commercial real estate loans was not performing.
This loan was for $19,000 with management anticipating no loss on this loan.
Construction Loans. Illinois Guarantee, from time to time has engaged in
construction lending to qualified borrowers for construction of one- to four-
family residential, multi-family residential, and commercial properties. Such
loans have converted to permanent financing upon completion of construction.
These properties are located in the Bank's Primary Market Area. At June 30,
1996, the Bank had 13 construction loans outstanding with balances ranging from
$64,000 to $295,000 at that date. Borrowers seeking construction loans must
satisfy all credit requirements which would apply to the Bank's permanent
mortgage loan financing for the subject property.
As part of the Bank's new business strategies, the Bank expects to be
active in the origination of both construction loans and the succeeding
permanent loans on single-family and multi-family residential real estate and
commercial real estate in the Bank's primary market area. The Bank's new
management has contacted various builders who have experience in constructing
and developing single-family and multi-family residential real estate (four to
eight unit apartment buildings) and commercial real estate in the Bank's Primary
Market Area.
Construction financing generally is considered to involve a higher degree
of risk of loss than long-term financing on improved, occupied real estate. Risk
of loss on a construction loan is dependent largely upon the accuracy of the
initial estimate of the property's value at completion of construction or
development and the estimated cost (including interest) of construction. During
the construction phase, a number of factors could result in delays and cost
overruns. If the estimate of construction costs proves to be inaccurate, the
Bank may be required to advance funds beyond the amount originally committed to
permit completion of the development. If the estimate of value proves to be
inaccurate, the Bank may be confronted, at or prior to the maturity of the loan,
with collateral having a value which is insufficient to assure full repayment.
The Bank has sought to minimize this risk by limiting construction lending to
qualified borrowers (i.e., borrowers who satisfy all credit requirements and
whose loans satisfy all other underwriting standards which would apply to the
Bank's permanent mortgage loan financing for the subject property) in the Bank's
Primary Market Area. In engaging in lending for the construction of multi-family
residential properties, the Bank would be subject to each of these risks, as
well as the risks noted above for multi-family real estate lending.
Commercial Business Loans. The Bank originates a limited number of
commercial business loans to local retail establishments and other businesses.
These loans are generally secured by equipment. Such loans totaled $1.2 million
at June 30, 1996 and were performing at that date.
Commercial business loans involve a greater degree of risk than other
types of lending as payments on such loans are often dependent on successful
operation of the business involved which may be subject to a greater extent to
adverse conditions in the economy. The Bank seeks to minimize this risk through
its underwriting guidelines,
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which require that the loan be supported by adequate cash flow of the borrower,
profitability of the business and collateral. The maximum loan to value ratio on
a commercial business loan is 75%.
Consumer Lending. The Bank's consumer loans consist of savings account
loans, home improvement loans, automobile loans and other consumer loans,
including (from time to time) unsecured lines of credit. At June 30, 1996, the
consumer loan portfolio totaled $4.4 million, or 12.15%, of total loans.
Consumer loans are generally offered for terms of up to five years at fixed
interest rates. Management expects to continue to promote consumer loans as part
of its strategy to provide a wide range of personal financial services to its
customers and as a means to increase the yield on the Bank's loan portfolio.
The Bank makes loans for automobiles, both new and used, directly to the
borrowers. The loans are generally limited to 80% of the purchase price or the
retail value listed by the National Automobile Dealers Association. The terms of
the loans are determined by the age and condition of the collateral. Collision
insurance policies are required on all these loans, unless the borrower has
substantial other assets and income. At June 30, 1996, the total amount of
automobile loans was $3.8 million. Automobile loans originated during the year
ended June 30, 1996 amounted to $3.9 million.
As part of the Bank's new business strategies, the Bank may engage in
indirect lending on automobiles through arrangements with five automobile
dealers in Effingham, Illinois. Such loans would be for the purchase of used
automobiles, would have loan to value ratios of up to 100%, and would provide
for terms of up to five years. It is unclear as to how much loan origination
volume these loan arrangements will generate, although the Bank has adopted a
policy of limiting automobile loans to no more than 10% of the Bank's total loan
portfolio. During the year ended June 30, 1996, the Bank originated $3.4 million
in indirect loans on automobiles.
The Bank also makes savings account loans up to 90% of the amount of the
depositor's savings account balance. The Bank makes other consumer loans, which
may or may not be secured. The term of the loans usually depends on the
collateral. Unsecured loans usually do not exceed $20,000, and have a term not
to exceed one year.
The Bank intends to continue the origination of consumer loans, and as
indicated above, may increase its origination of such loans. Consumer loans tend
to be originated at higher interest rates than mortgage loans and for shorter
terms. However, consumer loans generally involve more risk than one- to four-
family residential real estate loans. Repossessed collateral for a defaulted
loan (especially for automobile loans) may not provide an adequate source of
repayment of the outstanding loan balance as a result of damage, loss or
depreciation (especially for automobiles), and the remaining deficiency often
does not warrant further substantial collection efforts against the borrower. In
addition, loan collections are dependent on the borrower's continuing financial
stability, and thus are more likely to be adversely affected by job loss,
divorce, illness or personal bankruptcy. Further, the application of various
state and federal laws, including federal and state bankruptcy and insolvency
law, may limit the amount which may be recovered. In underwriting consumer
loans, the Bank considers the borrower's credit history, an analysis of the
borrower's income and ability to repay the loan, and the value of the
collateral. The Bank's risks associated with consumer loans have been further
limited by the modest amount of consumer loans made by the Bank. Despite the
risks noted above, the Bank's level of consumer loan delinquencies generally has
been low. No assurance can be given, however, that the Bank's delinquency rate
on consumer loans will continue to remain low in the future, or that the Bank
will not incur future losses on these activities.
Loan Commitments. The Bank makes a 90-day loan commitment to borrowers.
At June 30, 1996, the Bank had 15 variable rate loan commitments for $968,000
and 9 fixed rate loan commitments for $624,000 outstanding for the origination
of one-to four-family residential real estate loans.
Loan Solicitation and Processing. Loan originations are derived from a
number of sources, including the Bank's existing customers, referrals, realtors,
advertising and "walk-in" customers at the Bank's office. The Bank does not use
loan brokers.
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Upon receipt of a loan application from a prospective borrower, a credit
report and verifications are ordered to verify specific information relating to
the loan applicant's employment, income and credit standing. For all mortgage
loans, an appraisal of real estate intended to secure the proposed loan is
obtained from an independent fee appraiser who has been approved by the Bank's
Board of Directors, or one of the Bank's directors who performs appraisals. Fire
and casualty and earthquake insurance are required on all loans secured by
improved real estate. Insurance on other collateral is required unless waived by
the loan committee. The Board of Directors of the Bank has the responsibility
and authority for the general supervision over the loan policies of the Bank.
The Board has established written lending policies for the Bank.
Loan applications are accepted at the Bank's office. The Bank's President
may approve secured loans up to $150,000 and unsecured loans up to $50,000. The
Bank's Loan Committee, which is composed of two non-employee directors and the
Bank's President, may approve all types of loans up to 5% of withdrawable
capital for secured loans and 2% of withdrawable capital for unsecured loans,
provided such loans conform to the Bank's lending policies. All other loans must
be approved by the full Board of Directors. In addition, the full Board of
Directors reviews on a monthly basis, all loans originated by the Bank.
Interest Rates and Loan Fees. In addition to earning interest on loans,
Illinois Guarantee also receives income from, among other sources, loan
origination fees, charges on certain deposits and fees related to late payments,
loan modifications and miscellaneous services related to loans. These fees do
not constitute a significant portion of Illinois Guarantee's income from
operations. Interest rates charged by the Bank on all loans are primarily
determined by competitive loan rates offered in its market area. The Bank
charges a 1% loan origination fee on new fixed-rate mortgage loans, and a fee of
$250 for adjustable rate loans. The origination fees, net of direct origination
costs, are deferred and amortized into income over the life of the loan. At June
30, 1996, the amount of deferred loan origination fees was $27,000.
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Loan Maturity Schedule. The following table sets forth certain
information at June 30, 1996 regarding the dollar amount of loans maturing in
the Bank's portfolio based on their contractual terms to maturity. Demand loans,
loans having no stated schedule of repayments and no stated maturity, and
overdrafts are reported as due in one year or less.
<TABLE>
<CAPTION>
Due after
Due during Due After 5 years
the year 1 through after
ending 5 years after June 30,
June 30, 1997 June 30, 1996 1996 Total
------------- ------------- ------------ -------
(In thousands)
<S> <C> <C> <C> <C>
One- to four-family
residential.......... $ 212 $ 969 $ -- $ 1,181
Multi-family,
commercial real
estate and
agricultural....... 324 5,376 18,267 23,967
Commercial............ 1,518 2,473 2,780 6,771
Consumer and other.... 375 4,035 -- 4,410
------- ------- ------- -------
Total............. $ 2,429 $12,853 $21,047 $36,329
======= ======= ======= =======
</TABLE>
The next table sets forth at June 30, 1996, the dollar amount of all loans
due one year or more after June 30, 1996 which have predetermined interest rates
and have floating or adjustable interest rates.
<TABLE>
<CAPTION>
Predetermined Floating or
Rate Adjustable Rates
------------- ----------------
(In thousands)
<S> <C> <C>
One- to four-family residential... $ 738 $ 443
Multi-family, commercial real
estate and agricultural.......... 12,198 11,769
Commercial........................ 3,097 3,674
Consumer and other................ 4,410 --
------- -------
Total.......................... $ 20,443 $ 15,886
======= =======
</TABLE>
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Originations, Purchases and Sales of Loans. The following table sets forth
information with respect to originations and sales of loans during the periods
indicated.
<TABLE>
<CAPTION>
Year Ended June 30,
---------------------
1996 1995
---- ----
(In thousands)
<S> <C> <C>
Loans originated:
Real estate loans:
One- to four-family.............. $ 10,985 $ 3,249
Multi-family..................... 285 --
Commercial....................... 3,629 363
Commercial business................ 1,874 220
Consumer loans and other........... 3,948 2,059
--------- -------
Total loans originated........... $ 20,721 $ 5,891
========= =======
Loans purchased......................
--------- -------
Participation loan................. $ 500,000 $ --
========= =======
Loans sold:
Whole loans........................ $ -- $ 51
Participation loans................ -- --
--------- -------
Total loans sold................ $ -- $ 51
========= =======
</TABLE>
Historically, Illinois Guarantee has sold less than 10% of the loans it
has originated. In January 1995, the Bank sold $51,000 in education loans to the
Student Loan Marketing Association. The Bank may sell loans in whole or a
portion of the loan if it exceeds its legal lending limit. In recent years,
Illinois Guarantee has not purchased any whole loans and has no plans to do so
in the future. However, Illinois Guarantee may in the future, originate fixed-
rate residential mortgage loans and then sell such loans in the secondary
mortgage market to FHLMC.
Non-Performing Assets, Asset Classification and Allowances for Losses.
Loans are reviewed on a regular basis and are placed on a non-accrual status
when, in the opinion of management, the collection of principal and interest are
doubtful.
Real estate acquired by the Bank as a result of foreclosure is classified
as real estate owned until such time as it is sold. When such property is
acquired, it is recorded at the lower of the unpaid principal balance or its
fair value. Any required write-down of the loan to its fair value is charged to
the allowance for loan losses.
9
<PAGE>
The following table sets forth information with respect to Illinois
Guarantee's non-performing assets at the dates indicated. Illinois Guarantee did
not have any restructured loans within the meaning of SFAS No. 15 at the
indicated dates.
<TABLE>
<CAPTION>
At June 30,
--------------------
1996 1995
------ ------
(In thousands)
<S> <C> <C>
Loans accounted for on a non-accrual basis:(1)
Real Estate:
Residential....................................... $ 23 $ 42
Commercial........................................ 19 --
Consumer and other................................. -- --
----- -----
Total............................................ $ 42 $ 42
===== =====
Accruing loans which are contractually past
due 90 days or more: (1)
Real estate:
Residential....................................... $ 262 $ 29
Commercial........................................ 45 24
Consumer and other................................. 2 --
----- -----
Total............................................ $ 309 $ 53
===== =====
Total of non-accrual and 90 days past due loans.. $ 351 $ 95
===== =====
Percentage of total loans........................... 0.96% 0.43%
===== =====
Other non-performing assets (2)..................... $ 49 $ 49
===== =====
</TABLE>
----------------
(1) Non-accrual status denotes loans on which, in the opinion of
management, the collection of additional interest is unlikely.
Payments received on a non-accrual loan are applied to the
outstanding principal balance. The Bank reserves interest on all
loans 90 days past due, for which, in the opinion of management,
the collection of this interest is questionable. When payments are
received on these loans, the payments are applied to reserved
interest first with any excess applied to principal.
(2) Other non-performing assets represents property acquired by the
Bank through foreclosure or repossession or accounted for as a
foreclosure in substance. This property is carried at the lower of
its fair market value or the principal balances of the related
loan, is classified as real estate held for sale and is not
included in the Bank's capital calculations.
At June 30, 1996, the Bank had $42,000 in non-accrual loans, and $309,000
in accruing loans 90 days or more past due. Other non-performing assets at June
30, 1996 represents undeveloped lots held for sale, valued at a total of
$49,000, which the Bank held, pending improvement in the local real estate
market.
During the year ended June 30, 1996, gross interest income of $3,000 would
have been recorded on loans accounted for on a non-accrual basis if the loans
had been current throughout these periods.
At June 30, 1996, loans which were not classified as non-accrual, 90 days
past due or restructured but where known information about possible credit
problems of borrowers caused management to have serious concerns as to
10
<PAGE>
the ability of the borrowers to comply with present loan repayment terms and may
result in disclosure as non-accrual, 90 days past due or restructured amounted
to $338,000.
Federal regulations require each savings association to classify its asset
quality on a regular basis. In addition, in connection with examinations of such
savings associations, federal examiners have authority to identify problem
assets and, if appropriate, classify them. An asset is classified substandard if
it is determined to be inadequately protected by the current net worth and
paying capacity of the obligor or of the collateral pledged, if any. As a
general rule, the Bank will classify a loan as substandard if the Bank can no
longer rely on the borrower's income as the primary source for repayment of the
indebtedness and must look to secondary sources such as guarantors or
collateral. An asset is classified as doubtful if full collection is highly
questionable or improbable. An asset is classified as loss if it is considered
uncollectible, even if a partial recovery could be expected in the future. The
regulations also provide for a special mention designation, described as assets
which do not currently expose a savings association to a sufficient degree of
risk to warrant classification but do possess credit deficiencies or potential
weaknesses deserving management's close attention. Assets classified as
substandard or doubtful require a savings association to establish general
allowances for loan losses. If an asset or portion thereof is classified loss, a
savings association must either establish specific allowances for loan losses in
the amount of the portion of the asset classified as loss, or charge-off such
amount. Federal examiners may disagree with a savings association's
classifications and amounts reserved. If a savings association does not agree
with an examiner's classification of an asset, it may appeal this determination
to the OTS District Director. At June 30, 1996, the Bank had $99,000 in assets
classified as substandard, no assets classified as doubtful and $8,000 in assets
classified as loss.
Included in these totals at June 30, 1996 and classified as "substandard,"
all in the Bank's market area, were three loans on single-family residences
totaling $131,000, one loan on commercial properties totaling $19,000 classified
due to delinquency or past credit history, and no consumer loans. Also included
in this total and classified as "substandard," were the lots held by the Bank as
real estate held for sale at June 30, 1996 in the amount of $49,000. The Bank
determined to hold this property as "real estate owned", pending improvement in
the local real estate market. Management considered all of the above items in
calculating the Bank's allowance for loan losses. Assets classified as "loss"
consisted of one consumer loan.
In originating loans, Illinois Guarantee recognizes that credit losses
will occur and that the risk of loss will vary with, among other things, the
type of loan being made, the creditworthiness of the borrower over the term of
the loan, general economic conditions and, in the case of a secured loan, the
quality of the security for the loan. It is management's policy to maintain an
adequate general allowance for loan losses based on, among other things, the
Bank's and the industry's historical loan loss experience, evaluation of
economic conditions and regular reviews of delinquencies and loan portfolio
quality. Further, after properties are acquired following loan defaults,
additional losses may occur with respect to such properties while the Bank is
holding them for sale. The Bank increases its allowances for loan losses and
losses on real estate owned by charging provisions for possible losses against
the Bank's income. Specific reserves also are recognized against specific assets
when warranted. The Bank added additional provisions for loan losses of $81,000
and $50,000, respectively, during the years ended June 30, 1996 and 1995, due to
the new business strategies of multi-family, commercial real estate and consumer
lending being pursued by the Bank, which types of lending carry increased risks
for the Bank in comparison to one- to four-family residential lending.
As a result of the declines in regional real estate market values and the
significant losses experienced by many financial institutions, there has been a
greater level of scrutiny by regulatory authorities of the loan portfolios of
financial institutions undertaken as part of the examination of the institution
by federal or state regulators. Results of recent examinations indicate that
these regulators may be applying more conservative criteria in evaluating real
estate market values, requiring significantly increased provisions for potential
loan losses. While Illinois Guarantee believes it has established its existing
allowances for loan losses in accordance with generally accepted accounting
principles, there can be no assurance that regulators, in reviewing the Bank's
loan portfolio, will not request the Bank to significantly increase its
allowance for loan losses, thereby negatively affecting the Bank's financial
condition and earnings.
11
<PAGE>
The following table analyzes activity in Illinois Guarantee's allowance
for loan losses for the periods indicated.
<TABLE>
<CAPTION>
At June 30,
--------------------
1996 1995
------ ------
(In thousands)
<S> <C> <C>
Balance at beginning of period.......... $ 175 $ 125
------ ------
Loans charged-off:
Commercial - unsecured................. 19 --
Consumer.............................. 10 --
Loans charged-off....................... 29 --
------ ------
Provision for loan losses............... 81 50
------ ------
Balance at end of period................ $ 227 $ 175
====== ======
Ratio of net charge-offs to average
loans outstanding during the period.... 0.10% --%
====== ======
</TABLE>
Illinois Guarantee evaluates the allowance for loan losses on a regular
basis. At June 30, 1996, the allowance was 0.63% of total loans, compared to
0.79% of total loans at June 30, 1995. In lieu of the Bank's increased
originations of multi-family and commercial real estate loans, and consumer
loans, the Bank expects that its provisions for loan losses will increase in
future periods to account for the additional risks inherent in these types of
lending.
The following table sets forth a breakdown of the allowance for loan
losses by loan category at the dates indicated. Management believes that the
allowance can be allocated by category only on an approximate basis. These
allocations are not necessarily indicative of future losses and do not restrict
the use of the allowance to absorb losses in any loan category.
<TABLE>
<CAPTION>
June 30,
-----------------------------------------
1996 1995
-------------------- -------------------
Percent Percent
of Loans of Loans
in Category in Category
to Total to Total
Amount Loans Amount Loans
------ ------------ ------ -----------
<S> <C> <C> <C> <C>
Real estate - mortgage:
Residential..................... $ 44 66.00% $ 41 78.59%
Commercial...................... 22 15.00 12 12.56
Construction.................... -- 3.60 -- --
Commercial business............... 10 3.25 12 0.81
Consumer.......................... 20 12.15 40 8.04
Unallocated....................... 131 -- 70 --
---- ------ ---- ------
Total allowance for loan
losses...................... $227 100.00% $175 100.00%
==== ====== ==== ======
</TABLE>
12
<PAGE>
Investment Activities
General. Illinois Guarantee is required under federal regulations to
maintain a minimum amount of liquid assets equal to 5.0% of the net withdrawable
savings and current borrowings. It has generally been the Bank's policy to
maintain a liquidity portfolio in excess of regulatory requirements. At June 30,
1996, the Bank's liquidity ratio was 14.38%. Liquidity levels may be increased
or decreased depending upon the yields on investment alternatives, management's
judgment as to the attractiveness of the yields then available in relation to
other opportunities, management's expectations of the level of yield that will
be available in the future and management's projections as to the short-term
demand for funds to be used in Illinois Guarantee's loan origination and other
activities.
The general objectives of the Bank's investment policy are to assure the
safe and sound investment of the assets of the Bank, to provide sufficient
liquidity to meet operating and funding needs, and to comply with regulatory
liquidity requirements. All securities and investments are recorded on the books
of the Bank in accordance with generally accepted accounting principles. All
purchases of securities and investments conform to the Bank's interest rate risk
policy. The type of investments allowed under the investment policy are only
those which qualify as liquid investments under current regulations. The Bank's
mutual fund investment represents an interest in a money market fund and an
adjustable rate mortgage loan fund, neither of which are insured. Bank
investments also include the demand, overnight and certificate of deposit
accounts at the FHLB of Chicago. Investments may be made in certificates of
deposit and savings accounts in other financial institutions insured by the FDIC
so long as the total investment with accrued interest does not exceed the
$100,000 insurance limit per each institution. Other investments allowed consist
of direct U.S. Government obligations and other government agencies that have
the full faith and credit backing of the U.S. Government. At June 30, 1996, the
investments qualifying as liquid investments consisted of interest-earning
deposits in other financial institutions and stock in the FHLB of Chicago and
U.S. Government Agency securities and certain mortgage-backed securities.
Investments. The following table sets forth the carrying value of the
Bank's investment securities portfolio, short-term investments, and FHLB of
Chicago stock at the dates indicated.
<TABLE>
<CAPTION>
At June 30,
-------------------
1996 1995
------ ------
(In thousands)
<S> <C> <C>
AVAILABLE FOR SALE (1)
Investment securities:
U.S. Government and Agency securities............... $ 2,956 $ --
State and municipal obligations..................... 204 --
Mutual funds........................................ 2,477 1,584
Equities............................................ 257 206
FHLB stock............................................ 214 214
-------- --------
Total available for sale investments.............. $ 6,108 $ 2,004
======== ========
HELD TO MATURITY
Investment securities:
U.S. Government and Agency securities............... $ -- $5,232
State and municipal obligations..................... -- 513
Other............................................... 299 --
Interest-bearing deposits and certificates of
deposit.............................................. 140 3,155
------ ------
Total held to maturity investments................ $ 439 $8,900
====== ======
</TABLE>
----------------
(1) The Bank transferred securities to available for sale as of
December 31, 1995. For more discussion on this, see Notes A and B of
Notes to Consolidated Financial Statements.
13
<PAGE>
The following table sets forth the scheduled maturities, carrying values,
market values and average yields for the Bank's investment securities at June
30, 1996.
<TABLE>
<CAPTION> More than Ten
One Year or Less One to Five Years Five to Ten Years Years
------------------ ------------------ ------------------ ------------------
Carrying Average Carrying Average Carrying Average Carrying Average
Value Yield Value Yield Value Yield Value Yield
-------- -------- -------- -------- -------- -------- -------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Available for Sale (1, 2)
Investment securities:
U.S. Government and
Agency securities....... $ 2,576 6.24% $ 400 6.16% $ -- --% $ -- --%
State and municipal
obligations (2)......... 12 6.10 178 4.48 17 4.74 -- --
Mutual funds............. -- -- -- -- -- -- 2,489 5.59
Equities................. -- -- -- -- -- -- 226 8.27
-------- -------- -------- --------
Total................... $ 2,588 6.24% $ 578 5.64% $ 17 4.74% $ 2,715 5.81%
======== ======== ======== ========
<CAPTION>
Total Investment Portfolio
--------------------------
Carrying Market Average
Value Value Yield
-------- ------ --------
(Dollars in thousands)
<S> <C> <C> <C>
Available for Sale (1, 2)
Investment securities:
U.S. Government and
Agency securities....... $ 2,976 $ 2,956 6.23%
State and municipal
obligations (2)......... 207 204 4.59
Mutual funds............. 2,489 2,477 3.59
Equities................. 226 471 8.27
-------- --------
Total................... $ 5,898 $ 6,108 5.98%
======== ========
</TABLE>
- --------------------
(1) This schedule uses contractual maturity dates. Some of the securities
have call date options.
(2) For financial reporting these securities are valued at estimated fair
market value.
14
<PAGE>
The only investment classified as held to maturity as of June 30, 1996 is
an interest in a limited partnership, Boston Capital Corporation Tax Credit Fund
V. The Bank purchased a one unit investment in this Fund of Class A limited
partnership interests. The one unit cost was $788,000 with the first installment
paid with the purchase. The Bank paid $299,000 on February 1, 1996. The balance
is due as follows:
<TABLE>
<CAPTION>
Amount
(1,000's)
---------
<S> <C>
July 1, 1996 $ 99
October 1, 1996 130
April 1, 1997 165
October 1, 1997 95
-------
$ 489
=======
</TABLE>
It is the intent of the partnership to invest in qualified affordable
housing programs to generate Federal Housing Tax Credits. The Bank intends to
account for this investment using the amortized cost method. This method
requires amortizing the excess of the carrying value over its estimated residual
value at the close of the tax credit realization. Annual amortization is
proportional to the realization of the tax credits. The limited partnership
files a tax return on a calendar basis, therefore the Bank has not reflected any
effect in the income statement and has carried the investment at cost for the
year ended June 30, 1996.
The Bank had $140,000 in interest bearing deposits at June 30, 1996 at a
rate of 5.32%.
Mortgage-Backed Securities. Illinois Guarantee invests excess funds in
mortgage-backed securities, as well as other investments and may increase its
investment in this type of security in the future. At June 30, 1996, the total
investment in mortgage-backed securities was $1.8 million, with $392,000 in
adjustable rate securities, $1.4 million in fixed-rate securities and an average
yield of 7.59%. The Bank invests in mortgage-backed securities originated by the
Government National Mortgage Association ("GNMA"), the Federal National Mortgage
Association ("FNMA") and the FHLMC.
Prepayments in the Bank's mortgage-backed securities portfolio may be
affected by declining and rising interest rate environments. In a low and
falling interest rate environment, prepayments would be expected to increase. In
such an event, the Bank's fixed-rate securities subscribed for at a premium
price could result in actual yields to the Bank that are lower than anticipated
yields. The Bank's floating rate securities would be expected to generate lower
yields as a result of the effect of falling interest rates on the indexes for
determining payment of interest. Additionally, the increased principal payments
received may be subject to reinvestment at lower rates. Conversely, in a period
of rising rates, prepayments would be expected to decrease, which would make
less principal available for reinvestment at higher rates. In a rising rate
environment, floating rate instruments would generate higher yields to the
extent that the indexes for determining payment of interest did not exceed the
life-time interest rate caps on the Bank's mortgage-backed securities.
The Bank has historically invested in mortgage-backed securities as an
alternative investment to supplement its lending efforts and maintain compliance
with certain regulatory requirements. See "Regulation--Qualified Thrift Lender
Test." Further, under the OTS risk-based capital requirements, GNMA mortgage-
backed securities have a zero percent risk weight, and FNMA, FHLMC and AA-rated
private mortgage-backed securities have a risk weight of 20%, in contrast to the
50% risk weight carried by one- to four-family performing residential loans. See
"Regulation--Regulatory Capital Requirements." Mortgage-backed securities may
also be used as collateral for borrowings and through repayments, as a source of
liquidity. The Bank transferred all the mortgage-backed securities from held to
maturity to available for sale in December 1995.
The Bank purchases securities through any registered broker or dealer and
requires that the securities be delivered to the safekeeping agent of the
Savings & Community Bankers Trust Company before the funds are
15
<PAGE>
transferred to the broker or dealer. Illinois Guarantee purchases investment
securities pursuant to an investment policy established by the Board of
Directors pursuant to OTS Thrift Bulletin 52.
The following table sets forth the carrying value of the Bank's mortgage-
backed securities at the dates indicated.
<TABLE>
<CAPTION>
At June 30,
----------------
1996 1995
------ ------
(In thousands)
<S> <C> <C>
GNMA..................... $ 945 $ 1,053
FNMA..................... 252 260
FHLMC.................... 576 1,013
------- -------
$ 1,773 $ 2,326
======= =======
</TABLE>
16
<PAGE>
The following table sets forth the scheduled maturities, carrying values,
market values and average yields for the Bank's mortgage-backed securities at
June 30, 1996.
<TABLE>
<CAPTION>
One Year or Less One to Five Years Five to Ten Years More than Ten Years Total Investment Portfolio
------------------ ------------------ ------------------ -------------------- ---------------------------
Carrying Average Carrying Average Carrying Average Carrying Average Carrying Market Average
Value Yield Value Yield Value Yield Value Yield Value Value Yield
-------- -------- -------- -------- -------- -------- --------- --------- --------- ------ --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
GNMA........... $ 83 8.28% $ 282 8.31% $ 458 8.47% $ 110 8.85% $ 933 $ 945 8.45%
FNMA........... 8 7.15 27 7.15 46 7.15 168 7.15 249 252 7.15
FHLMC.......... 122 5.77 258 5.96 95 7.74 109 7.04 584 576 6.41
------ ------ ------ ------ ------- -------
Total...... $ 213 6.80% $ 567 7.19% $ 599 8.25% $ 387 7.60% $ 1,766 $ 1,773 7.59
====== ====== ====== ====== ======= =======
</TABLE>
17
<PAGE>
Deposit Activity and Other Sources of Funds
General. Deposits are the primary source of Illinois Guarantee's funds
for lending and other investment purposes. In addition to deposits, Illinois
Guarantee derives funds from principal repayments and interest payments on loans
and investments as well as other sources arising from operations in the
production of net earnings. Loan prepayments and interest payments are a
relatively stable source of funds, while deposit inflows and outflows are
significantly influenced by general interest rates and money market conditions.
Borrowings may be used on a short-term basis to compensate for reductions in the
availability of funds from other sources, or on a longer term basis for general
business purposes.
Deposits. Deposits are attracted principally from within Illinois
Guarantee's primary market area through the offering of a broad selection of
deposit instruments, including passbook savings, NOW accounts, money market
accounts and certificates of deposit. Deposit account terms vary, with the
principal differences being the minimum balance required, the time periods the
funds must remain on deposit and the interest rate.
The Bank's policies are designed primarily to attract deposits from local
residents rather than to solicit deposits from areas outside of its primary
market. The Bank does not accept deposits from brokers due to the volatility and
rate sensitivity of such deposits. Interest rates paid, maturity terms, service
fees and withdrawal penalties are established by the Bank on a periodic basis.
Determination of rates and terms are predicated upon funds acquisition and
liquidity requirements, rates paid by competitors, growth goals and federal
regulations.
For more information on the Bank's deposit accounts, see Note G of Notes
to Consolidated Financial Statements.
The following table sets forth the Bank's certificates of deposit accounts
classified by actual rates at the dates indicated.
<TABLE>
<CAPTION>
At June 30,
----------------
1996 1995
------- -------
(In thousands)
<S> <C> <C>
2 - 3.99%........................................ $ 8 $ 378
4 - 5.99%........................................ 24,599 17,516
6 - 7.99%........................................ 2,384 7,049
8 - 9.99%........................................ 42 152
------- -------
$27,033 $25,095
======= =======
</TABLE>
The following table sets forth the amount and maturities of certificates
of deposit accounts in actual rate categories at June 30, 1996.
<TABLE>
<CAPTION>
Amount Due
------------------------------------------------
Less Than After
Rate One Year 1-2 Years 2-3 Years 3 Years Total
- ---- --------- --------- --------- ------- -----
(In thousands)
<S> <C> <C> <C> <C> <C>
3 - 3.99%......... $ 8 $ -- $ -- $ -- $ 8
4 - 4.99%......... 4,579 12 -- -- 4,591
5 - 5.99%......... 14,141 4,522 1,172 173 20,008
6 - 6.99%......... 199 411 914 818 2,342
7 - 7.99%......... 42 -- -- -- 42
8 - 8.99%......... -- -- -- -- --
9 - 9.99%......... -- 42 -- -- 42
-------- -------- -------- ------- --------
$ 18,969 $ 4,987 $ 2,086 $ 991 $ 27,033
======== ======== ======== ======= ========
</TABLE>
18
<PAGE>
The following table indicates the amount of the Bank's certificates of
deposit of $100,000 or more by time remaining until maturity at June 30, 1996.
<TABLE>
<CAPTION>
Certificates
Maturity Period of Deposit
--------------- ------------
(In thousands)
<S> <C>
Three months or less................ $ 202
Over three through six months....... 685
Over six through twelve months...... 678
Over twelve months.................. 722
-------
Total.............................. $ 2,287
=======
</TABLE>
The following table sets forth the average balances and interest rates
based on monthly balances for transaction accounts and certificates of deposit
for the periods indicated.
<TABLE>
<CAPTION>
Year Ended June 30,
--------------------------------------------
1996 1995
-------------------- ---------------------
Interest- Interest-
Bearing Bearing
Demand Time Demand Time
Deposits Deposits Deposits Deposits
-------- -------- -------- ---------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Average balance........ $7,685 $25,679 $7,481 $24,214
Average rate........... 3.74% 5.35% 3.02% 4.91%
</TABLE>
The following table sets forth the change in dollar amount of interest-
bearing deposits in the various types of accounts offered by the Bank between
the dates indicated (in thousands).
<TABLE>
<CAPTION>
Increase
Balance at (Decrease) Balance at
June 30, % from June June 30, %
1996 Deposits 30, 1995 1995 Deposits
---------- -------- --------- ---------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
NOW, Super NOW and other
transaction accounts..... $ 1,300 3.64% $ 924 $ 376 1.17%
Money market deposit
accounts................. 2,431 6.81 166 2,265 7.03
Passbook savings.......... 4,911 13.77 472 4,439 13.79
Certificates:
6 months or less......... 7,740 21.70 (1,216) 8,956 27.81
6 months through 1 year.. 6,127 17.17 514 5,613 17.43
1 year through 3 years... 10,226 28.67 1,123 9,103 28.27
More than 3 years........ 2,940 8.24 1,492 1,448 4.50
--------- ------ --------- --------- ------
Total.................. $ 35,675 100.00 $ 3,475 $ 32,200 100.00%
========= ====== ========= ========= ======
</TABLE>
19
<PAGE>
The following table sets forth deposit activities of the Bank for the
years indicated.
<TABLE>
<CAPTION>
Year Ended June 30,
---------------------
1996 1995
------ ------
(In thousands)
<S> <C> <C>
Deposits............................................... $58,051 $30,447
Withdrawals (1)........................................ (55,541) (30,628)
------- -------
2,510 (181)
Interest credited...................................... 1,335 1,097
------- -------
Net increase (decrease) in savings deposits....... $ 3,845 $ 916
======= =======
</TABLE>
Management attributes the net increase in deposits for 1996 to increased
presence in the Bank's market area. The Bank has adopted new business strategies
to increase its presence which was also enhanced by the stock conversion in
September 1995. Included in gross deposits was $5.3 million in stock conversion
deposits. Management attributes the net decrease in deposits before interest
credited in the prior year primarily to the interest rates offered by the Bank
as compared to alternative investments.
Borrowings. Savings deposits historically have been the primary source of
funds for the Bank's lending and investment activities and for its general
business activities. The Bank is authorized, however, to use advances from the
FHLB of Chicago to supplement its supply of lendable funds and to meet deposit
withdrawal requirements. Advances from the FHLB are secured by the Bank's stock
in the FHLB and a portion of the Bank's mortgage loans. The Bank had $1.6
million in advances from the FHLB as of June 30, 1996, which consisted of a one
year fixed rate advance maturing April 29, 1997 at 5.93% rate of interest,
payable monthly, in the amount of $790,000, a one year fixed rate advance
maturing May 16, 1997 at 5.98% rate of interest, payable monthly, in the amount
of $468,000 and a daily advance of $350,000 at 5.50% rate of interest which
adjust daily.
The FHLB of Chicago functions as a central reserve bank providing credit
for savings institutions and certain other financial institutions. As a member,
Illinois Guarantee is required to own capital stock in the FHLB and is
authorized to apply for advances on the security of such stock and certain of
its home mortgages and other assets (principally, securities which are
obligations of, or guaranteed by the United States) provided certain standards
related to creditworthiness have been met.
Subsidiary Activities
As a federal savings institution, Illinois Guarantee is permitted to
invest an amount equal to 2.0% of its assets in subsidiaries with an additional
investment of 1.0% of assets where such investment serves primarily community,
inner-city and community development purposes. Under such limitations, as of
June 30, 1996, Illinois Guarantee was authorized to invest up to approximately
$1.1 million in the stock of or in loans to subsidiaries. In addition,
institutions meeting regulatory capital requirements and certain other tests may
invest up to 50% of their regulatory capital in conforming first mortgage loans
to subsidiaries.
Illinois Guarantee has one service corporation, IGSL Service Corporation.
The primary purpose of the corporation is to provide credit insurance products
to existing Bank borrowers. The Bank's investment in this service corporation
was $42,000 at June 30, 1996, with no commitments for further investment, and
the service corporation generated $5,000 in net income for the Bank during the
year ended June 30, 1996.
SAIF-insured savings institutions are required to give the FDIC and the
Director of the OTS 30 days' prior notice before establishing or acquiring a new
subsidiary, or commencing any new activity through an existing subsidiary. Both
the FDIC and the Director of the OTS have authority to order termination of
subsidiary activities determined to pose a risk to the safety or soundness of
the institution. In addition, capital requirements require
20
<PAGE>
savings institutions to deduct the amount of their investments in and extensions
of credit to subsidiaries engaged in activities not permissible to national
banks from capital in determining regulatory capital compliance. The activities
of IGSL Service Corporation are permissible for national banks. See "Regulation
- -- Regulatory Capital Requirements."
Competition
Illinois Guarantee experiences substantial competition both in attracting
and retaining savings deposits and in the making of mortgage and other loans.
Direct competition for savings deposits primarily comes from commercial banks
and other savings institutions located in or near the Bank's primary market
area. Additional significant competition for savings deposits comes from credit
unions, money market funds and brokerage firms. The primary factors in competing
for loans are interest rates and loan origination fees and the range of services
offered by the various financial institutions. Competition for origination of
real estate loans normally comes from commercial banks, other thrift
institutions, mortgage bankers, mortgage brokers and insurance companies.
Management considers Illinois Guarantee's competitors in its market area to
consist of six commercial banks and one savings institution located outside of
its market area. Overall, management believes that Illinois Guarantee is the
smallest of the financial institutions competing for deposits and loans in its
market area.
Illinois Guarantee is able to compete effectively in its primary market by
offering competitive interest rates and loan fees, providing a wide variety of
deposit products, and by emphasizing personal customer service. Management
believes that, as a result of the Bank's commitment to varied products and
personal service, the Bank has developed a solid base of core deposits and the
Bank's loan origination quality is among the leaders in the Bank's market area.
REGULATION
Regulation of the Bank
General. The Bank is a federally chartered savings institution, a member
of the FHLB of Chicago and its deposits are insured by the FDIC through the
SAIF. The lending activities and other investments of Illinois Guarantee must
comply with various federal regulatory requirements. As a federal savings
institution, the Bank is subject to regulation and supervision by the OTS and
the FDIC and to OTS regulations governing such matters as capital standards,
mergers, establishment of branch offices, subsidiary investments and activities
and general investment authority. The OTS periodically examines the Bank for
compliance with various regulatory requirements. The FDIC also has the authority
to conduct special examinations of the Bank because its deposits are insured by
the SAIF. The Bank must file reports with OTS describing its activities and
financial condition. The Bank is also subject to certain reserve requirements
promulgated by the Federal Reserve Board. This supervision and regulation is
intended primarily for the protection of depositors. Certain of these regulatory
requirements are referred to below or discussed elsewhere herein.
Supervisory Agreement. At June 30, 1996, the Bank exceeded all of its
regulatory capital requirements. On October 7, 1992, the Bank entered into a
Supervisory Agreement (the "Agreement") with the OTS. The Agreement required the
Bank to: (i) adopt and implement a written consumer compliance program designed
to ensure that the Bank operates in compliance with all applicable consumer
protection laws, rules and regulations; (ii) correct certain truth in lending
disclosure violations, making reimbursements where necessary to provide
restitution to borrowers who received incorrect truth in lending disclosures as
to the interest rates charged, or to be charged on adjustable rate mortgage
loans; (iii) review the interest rate adjustments made on certain adjustable
rate mortgage loans to determine if they were correct, and if necessary review
all adjustable rate mortgage loan interest rate adjustments, making restitution
to borrowers, where necessary; and (iv) correct certain other technical
violations of the Real Estate Settlement Procedures Act, the Electronic Funds
Transfer Act and the Expedited Funds Availability Act. The Bank complied with
the terms of the Agreement, and made restitution to certain borrowers totaling
$41,000 in fiscal 1993. Subsequent to the completion of an OTS examination in
August 1994, the Bank requested a release
21
<PAGE>
from the Agreement. Based upon continued compliance with its requirements, the
OTS terminated the Agreement on November 9, 1994.
Regulatory Capital Requirements. Under OTS regulations, savings
institutions must maintain "tangible" capital equal to 1.5% of adjusted total
assets, "core" capital equal to 3.0% of adjusted total assets and a combination
of core and "supplementary" capital equal to 8.0% of "risk-weighted" assets. In
addition, the OTS has recently adopted regulations which impose certain
restrictions on savings institutions that have a total risk-based capital ratio
that is less than 8.0%, a ratio of Tier 1 capital to risk-weighted assets of
less than 4.0% or a ratio of Tier 1 capital to adjusted total assets of less
than 4.0% (or 3.0% if the institution is rated Composite 1 under the OTS
examination rating system). See "-- Prompt Corrective Regulatory Action." For
purposes of these regulations, Tier 1 capital has the same definition as core
capital. Core capital is defined as common stockholders' equity (including
retained earnings), noncumulative perpetual preferred stock and related surplus,
minority interests in the equity accounts of fully consolidated subsidiaries,
certain nonwithdrawable accounts and pledged deposits and "qualifying
supervisory goodwill." Core capital is generally reduced by the amount of the
savings institution's intangible assets for which no market exists. Limited
exceptions to the rule requiring the deduction of intangible assets are provided
for mortgage servicing rights, purchased credit card relationships and
qualifying supervisory goodwill held by an eligible savings institution.
Tangible capital is given the same definition as core capital but does not
include qualifying supervisory goodwill and is reduced by the amount of all the
savings institution's intangible assets with only a limited exception for
subscribed for mortgage servicing rights and subscribed for credit card
relationships.
Both core and tangible capital are further reduced by an amount equal to a
gradually increasing percentage of the savings institution's debt and equity
investments in subsidiaries engaged in activities not permissible for national
banks, other than subsidiaries engaged in activities undertaken as agent for
customers or in mortgage banking activities and depository institutions or
holding companies therefor. At June 30, 1996, Illinois Guarantee had no such
investments.
Adjusted total assets for purposes of the core and tangible capital
requirements are a savings institution's total assets as determined under
generally accepted accounting principles, adjusted for certain goodwill amounts,
and increased by a pro rated portion of the assets of subsidiaries in which the
savings institution holds a minority interest and which are not engaged in
activities for which the capital rules require the savings institution to net
its debt and equity investments in such subsidiaries against capital, as well as
a pro rated portion of the assets of other subsidiaries for which netting is not
fully required under the phase-in rules. Adjusted total assets are reduced by
the amount of assets that have been deducted from capital, the portion of the
savings institution's investments in subsidiaries that must be netted against
capital under the capital rules and, for purposes of the core capital
requirement, qualifying supervisory goodwill. At June 30, 1996, Illinois
Guarantee's adjusted total assets for purposes of the core and tangible capital
requirements, were $46.2 million.
In determining compliance with the risk-based capital requirements, a
savings institution is allowed to include both core capital and supplementary
capital in its total capital, provided the amount of supplementary capital used
does not exceed the savings institution's core capital. Supplementary capital is
defined to include certain preferred stock issues, nonwithdrawable accounts and
pledged deposits that do not qualify as core capital, certain approved
subordinated debt, certain other capital instruments and a portion of the
savings institution's general loan and lease loss allowances. Total core and
supplementary capital are reduced by the amount of capital instruments held by
other depository institutions pursuant to reciprocal arrangements and by an
increasing percentage of the savings institution's high loan-to-value ratio land
loans and non-residential construction loans and equity investments other than
those deducted from core and tangible capital. As of June 30, 1996, Illinois
Guarantee had $49,000 in equity investments for which OTS regulations required a
phased deduction from total capital after July 1, 1990.
The risk-based capital requirement is measured against risk-weighted
assets, which equal the sum of each asset and the credit-equivalent amount of
each off-balance-sheet item after being multiplied by an assigned risk weight.
Under the OTS risk-weighting system, cash and U.S. government securities backed
by the full faith and credit of the U.S. Government (such as mortgage-backed
securities issued by GNMA) are given a 0% risk weight.
22
<PAGE>
Mortgage-backed securities issued, or fully guaranteed as to principal and
interest, by the FNMA or FHLMC are assigned a 20% risk weight. One- to
four-family first mortgages not more than 90 days past due with loan-to-
value ratios under 80% and average annual occupancy rates of at least 80%
and certain qualifying loans for the construction of one- to four-family
residences pre-sold to home purchasers are assigned a risk weight of 50%.
Consumer and residential construction loans are assigned a risk weight of
100%. As of June 30, 1996, Illinois Guarantee's risk-weighted assets were
approximately $28.9 million.
The table below provides information with respect to Illinois
Guarantee's compliance with its regulatory capital requirements at June 30,
1996.
<TABLE>
<CAPTION>
Percent
of
Amount Assets(2)
------ --------
(Dollars in thousands)
<S> <C> <C>
Tangible capital (1)................... $ 7,111 15.41%
Tangible capital requirement........... 692 1.50
------- -----
Excess............................... $ 6,419 13.91%
======= ========
Tier 1/Core capital.................... $ 7,111 15.41%
Tier 1/Core capital requirement (3).... 1,383 3.00
-------- -----
Excess............................... $ 5,728 12.41 %
======== ========
Tier 1 Risk-Based Capital.............. $ 7,111 24.61%
Tier 1 Risk-Based Capital Requirement.. 2,312 8.00
-------- -----
Excess............................... $ 4,799 16.61%
======== ========
Risk-based capital..................... $ 7,338 25.57%
Risk-based capital requirement (4)..... 2,312 8.00
-------- -----
Excess............................... $ 5,026 17.57%
======== ========
</TABLE>
_____________
(1) Reconciliation from GAAP capital to tangible capital:
(In thousands)
GAAP capital....................................... $7,302
Real estate held for investment.................... (49)
Unrealized gains on available-for-sale securities.. (142)
------
$7,111
(2) Based on adjusted total assets for purposes of the tangible capital
and core capital requirements, and risk-weighted assets for purpose
of the risk-based capital requirement.
(3) The core requirement applicable to the Bank may increase if the OTS
amends its capital regulations, as it has proposed, in response to
the more stringent leverage ratio recently adopted by the Office of
the Comptroller of the Currency for national banks.
(4) Represents the total capital required at June 30, 1996. Does not
reflect any additional capital requirement as a result of the
recently adopted OTS regulation regarding the interest rate risk
component of capital.
The OTS has proposed an amendment to its capital regulations
establishing a minimum core capital ratio of 3.0% for savings institutions
rated composite 1 under the OTS CAMEL examination rating system. For all
other savings institutions, the minimum core capital will be from 4.0% to
5.0%. In determining the amount of additional
23
<PAGE>
core capital, the OTS will assess both the quality of risk management
systems and the level of overall risk in each individual savings
institution through the supervisory process on a case-by-case basis.
The risk-based capital standards of the OTS require institutions with
more than a "normal" level of interest rate risk to maintain additional
total capital. A savings institution's interest rate risk is measured in
terms of the sensitivity of its "net portfolio value" to changes in
interest rates. Net portfolio value is defined, generally, as the present
value of expected cash inflows from existing assets and off-balance sheet
contracts less the present value of expected cash outflows from existing
liabilities. A savings institution is considered to have a "normal" level
of interest rate risk exposure if the decline in its net portfolio value
after an immediate 200 basis point increase or decrease in market interest
rates (whichever results in the greater decline) is less than 2.0% of the
current estimated economic value of its assets. A savings institution with
a greater than normal interest rate risk is required to deduct from total
capital, for purposes of calculating its risk-based capital requirement, an
amount (the "interest rate risk component") equal to one-half the
difference between the institution's measured interest rate risk and the
normal level of interest rate risk, multiplied by the economic value of its
total assets.
The OTS calculates the sensitivity of a savings institution's net
portfolio value based on data submitted by the institution in a schedule to
its quarterly Thrift Financial Report and using the interest rate risk
measurement model adopted by the OTS. The amount of the interest rate risk
component, if any, to be deducted from a savings institution's total
capital is based on the institution's Thrift Financial Report filed two
quarters earlier. Savings institutions with less than $300 million in
assets and a risk-based capital ratio above 12% are generally exempt from
filing the interest rate risk schedule with their Thrift Financial Reports.
However, the OTS requires any exempt savings institution that it determines
may have a high level of interest rate risk exposure to file such schedule
on a quarterly basis and may be subject to an additional capital
requirement based upon its level of interest rate risk as compared to its
peers. The Bank does not have more than a normal level of interest rate
risk under OTS rule and has not been required to increase its total capital
as a result of such rule.
In addition to requiring generally applicable capital standards for
savings associations, the Director of OTS is authorized to establish the
minimum level of capital for a savings institution at such amount or at
such ratio of capital-to-assets as the Director of the OTS determines to be
necessary or appropriate for such institution in light of the particular
circumstances of the institution. The Director of the OTS may treat the
failure of any savings institution to maintain capital at or above such
level as an unsafe or unsound practice and may issue a directive requiring
any savings institution which fails to maintain capital at or above the
minimum level required by the Director of the OTS to submit and adhere to a
plan for increasing capital. Such an order may be enforced in the same
manner as an order issued by the FDIC.
At June 30, 1996, Illinois Guarantee exceeded all regulatory minimum
capital requirements.
Liquidity Requirements. The Bank is required under OTS regulations to
maintain average daily balances of liquid assets (cash, deposits maintained
pursuant to Federal Reserve Board reserve requirements, time and savings
deposits in certain institutions, obligations of the United States and
states and political subdivisions thereof, shares in certain mutual funds
with certain restricted investment policies, highly rated corporate debt,
and mortgage loans and mortgage-related securities with less than one year
to maturity or subject to pre-arranged sale within one year) equal to the
monthly average of not less than a specified percentage (currently 5%) of
its net withdrawable savings deposits plus short-term borrowings. The Bank
is also required to maintain average daily balances of short-term liquid
assets at a specified percentage (currently 1%) of the total of its net
withdrawable savings accounts and borrowings payable in one year or less.
Monetary penalties may be imposed for failure to meet liquidity
requirements. The average regulatory liquidity ratio of the Bank for the
month of June 1996 was 14.38% with respect to liquid assets and 10.53% with
respect to short-term liquid assets.
Qualified Thrift Lender Test. A savings institution that does not
meet the Qualified Thrift Lender Test ("QTL Test") must either convert to a
bank charter or comply with the following restrictions on its operations:
(i) the institution may not engage in any new activity or make any new
investment, directly or indirectly, unless such
24
<PAGE>
activity or investment is permissible for a national bank; (ii) the
branching powers of the institution shall be restricted to those of a
national bank; (iii) the institution shall not be eligible to obtain any
advances from its FHLB; and (iv) payment of dividends by the institution
shall be subject to the rules regarding payment of dividends by a national
bank. Upon the expiration of three years from the date the institution
ceases to be a Qualified Thrift Lender, it must cease any activity, and not
retain any investment not permissible for a national bank and immediately
repay any outstanding FHLB advances (subject to safety and soundness
considerations).
To meet the QTL Test, an institution's "Qualified Thrift Investments"
must represent 65% of "portfolio assets." Under OTS regulations,
portfolio assets are defined as total assets less intangibles, property
used by a savings institution in its business and liquidity investments in
an amount not exceeding 20% of assets. Qualified Thrift Investments
consist of (i) loans, equity positions or securities related to domestic,
residential real estate or manufactured housing, and (ii) 50% of the dollar
amount of residential mortgage loans subject to sale under certain
conditions. In addition, subject to a 20% of portfolio assets limit,
savings institutions are able to treat as Qualified Thrift Investments 200%
of their investments in loans to finance "starter homes" and loans for
construction, development or improvement of housing and community service
facilities, or for financing small businesses in "credit-needy" areas. A
savings institution must maintain its status as a QTL on a monthly basis in
nine out of every 12 months. A savings institution that fails to maintain
Qualified Thrift Lender status is permitted to requalify once, and if it
fails the QTL Test a second time, it will become immediately subject to all
penalties as if all time limits on such penalties had expired. Failure to
qualify as a QTL results in a number of sanctions, including the imposition
of certain operating restrictions imposed on national banks and a
restriction on obtaining additional advances from the Federal Home Loan
Bank System. Upon failure to qualify as a QTL for two years, a savings
institution must convert to a commercial bank.
At June 30, 1996, Illinois Guarantee had in excess of 25.14% of assets
invested in Qualified Thrift Investments as then defined. It is expected
that the Bank will continue to qualify as a Qualified Thrift Lender,
although there can be no assurance that it will do so.
Dividend Restrictions. Under OTS regulations, the Bank may not pay
dividends on its capital stock if its regulatory capital would thereby be
reduced below the amount then required for the liquidation account
established for the benefit of certain depositors of the Bank at the time
of its conversion to stock form. In addition, Illinois Guarantee, as a
savings institution subsidiary of a savings and loan holding company, will
be required by OTS regulations to provide at least 30 days prior notice to
the OTS of any proposed declaration of dividends to the Company.
OTS regulations impose additional limitations on the payment of
dividends and other capital distributions (including stock repurchases and
cash mergers) by the Bank. Under these regulations, a savings institution
that, immediately prior to, and on a pro forma basis after giving effect
to, a proposed capital distribution, has total capital (as defined by OTS
regulations) that is equal to or greater than the amount of its fully
phased-in capital requirements (a "Tier 1 Association") is generally
permitted, without OTS approval after notice, to make capital distributions
during a calendar year in the amount equal to the greater of: (i) 75% of
its net income for the previous four quarters, or (ii) up to 100% of its
net income to date during the calendar year plus an amount that would
reduce by one-half the amount by which its capital-to-assets ratio exceeded
regulatory requirements at the beginning of the calendar year. A savings
institution with total capital in excess of current minimum capital
requirements but not in excess of the fully phased-in requirements (a "Tier
2 Association") is permitted, after notice, to make capital distributions
without OTS approval of up to 75% of its net income for the previous four
quarters, less dividends already paid for such period. A savings
institution that fails to meet current minimum capital requirements (a
"Tier 3 Association") is prohibited from making any capital distributions
without the prior approval of the OTS. Tier 1 Associations that have been
notified by the OTS that they are in need[ of more than normal supervision
will be treated as either a Tier 2 or Tier 3 Association. At June 30,
1996, the Bank qualified as a Tier 1 Association.
All savings institutions, including the Bank, are prohibited from
making any capital distributions if after making the distribution, they
would have: (i) a total risk-based capital ratio of less than 8.0%; (ii) a
Tier 1 risk-
25
<PAGE>
based capital ratio of less than 4.0%; or (iii) a leverage ratio of less
than 4.0%. See "--Prompt Corrective Regulatory Action." The OTS, after
consultation with the FDIC, however, may permit an otherwise prohibited
stock repurchase if made in connection with the issuance of additional
shares in an equivalent amount and the repurchase will reduce the
institution's financial obligations or otherwise improve the institution's
financial condition.
Deposit Insurance. The Bank is required to pay assessments based on a
percent of its insured deposits to the FDIC for insurance of its deposits
by the Savings Association Insurance Fund ("SAIF"). Through December 31,
1997, the assessment rate shall not be less than 0.23%. After December 31,
1997, the SAIF assessment rate will be a rate determined by the FDIC to be
appropriate to increase the reserve ratio of the SAIF to 1.25% of insured
deposits or such higher percentage of insured deposits that the FDIC
determines to be appropriate but not less than 0.15%.
Under the risk-based deposit insurance assessment system adopted by
the FDIC, the assessment rate for an insured depository institution depends
on the assessment risk classification assigned to the institution by the
FDIC, which is determined by the institution's capital level and
supervisory evaluations. Based on the data reported to regulators for the
date closest to the last day of the seventh month preceding the semi-annual
assessment period, institutions are assigned to one of three capital groups
-- well capitalized, adequately capitalized or undercapitalized -- using
the same percentage criteria as under the prompt corrective action
regulations. See " -- Prompt Corrective Regulatory Action." Within each
capital group, institutions are assigned to one of three subgroups on the
basis of supervisory evaluations by the institution's primary supervisory
authority and such other information as the FDIC determines to be relevant
to the institution's financial condition and the risk posed to the deposit
insurance fund. Subgroup A consists of financially sound institutions with
only a few minor weaknesses. Subgroup B consists of institutions that
demonstrate weaknesses which, if not corrected, could result in significant
deterioration of the institution and increased risk of loss to the deposit
insurance fund. Subgroup C consists of institutions that pose a
substantial probability of loss to the deposit insurance fund unless
effective corrective action is taken. The assessment rate for SAIF-insured
institutions ranges from 0.23% of deposits for well capitalized
institutions in Subgroup A to 0.31% of deposits for undercapitalized
institutions in Subgroup C.
The FDIC also administers the Bank Insurance Fund ("BIF") which has
the same designated reserve ratio as the SAIF (currently 1.25%). In 1995,
the FDIC amended the BIF risk-based assessment schedule and lowered the
deposit insurance assessment rate for most commercial banks and other
depository institutions with deposits insured by the BIF to a range of from
0.31% of insured deposits for undercapitalized BIF-insured institutions to
the statutory minimum of $2,000 for well-capitalized institutions, which
constitute over 90% of BIF-insured institutions. The FDIC has indicated
that the assessment rate for SAIF-insured institutions will not fall below
0.23% of insured deposits until approximately the year 2002. The decrease
in BIF assessments created a substantial disparity in the deposit insurance
premiums paid by BIF and SAIF members and could place SAIF-insured savings
institutions like the Bank, at a significant competitive disadvantage to
BIF-insured institutions.
To alleviate this disparity, one proposal being considered by the U.S.
Department of Treasury, the FDIC and the U.S. Congress provides a one-time
assessment of approximately 65 basis points be imposed on all SAIF-insured
deposits to cause the SAIF to reach its designated reserve ratio. Once
this occurs, the two funds would be merged into one fund. There can be no
assurance that this proposal or any other proposal will be implemented or
that premiums for either fund will not be adjusted in the future by the
FDIC or legislative action.
The payment of a special assessment would severely and negatively
impact the Bank's results of operations, resulting in a change of up to
$340,000, after adjusting for tax benefits. However, if such a special
assessment is imposed and the SAIF is recapitalized, it could have the
effect of reducing the Bank's insurance premiums in the future, thereby
creating equal competition between BIF-insured and SAIF-insured
institutions.
The Bank is prohibited under current federal law from converting from
SAIF to BIF insurance. Under federal statute, the prohibition on
conversion from SAIF to BIF insurance will continue until such time as the
SAIF's
26
<PAGE>
ratio of reserves to insured deposits equals 1.25%. Based on projections
published by the FDIC, absent a special assessment, the SAIF reserve ratio
is not expected to reach 1.25% for a number of years.
The FDIC has adopted a regulation which provides that any insured
depository institution with a ratio of Tier 1 capital to total assets of
less than 2% will be deemed to be operating in an unsafe or unsound
condition, which would constitute grounds for the initiation of termination
of deposit insurance proceedings. The FDIC, however, would not initiate
termination of insurance proceedings if the depository institution has
entered into and is in compliance with a written agreement with its primary
regulator, and the FDIC is a party to the agreement, to increase its Tier 1
capital to such level as the FDIC deems appropriate. Tier 1 capital is
defined as the sum of common stockholders' equity, noncumulative perpetual
preferred stock (including any related surplus) and minority interests in
consolidated subsidiaries, minus all intangible assets other than mortgage
servicing rights and qualifying supervisory goodwill eligible for inclusion
in core capital under OTS regulations and minus identified losses and
investments in certain securities subsidiaries. Insured depository
institutions with Tier 1 capital equal to or greater than 2% of total
assets may also be deemed to be operating in an unsafe or unsound condition
notwithstanding such capital level. The regulation further provides that
in considering applications that must be submitted to it by savings
institutions, the FDIC will take into account whether the savings
institution is meeting with the Tier 1 capital requirement for state non-
member banks of 4% of total assets for all but the most highly rated state
non-member banks.
Limits on Loans to One Borrower. Savings institutions generally are
subject to the lending limits applicable to national banks. With certain
limited exceptions, the maximum amount that a savings institution may lend
to any borrower (including certain related entities of the borrower) at one
time may not exceed 15% of the unimpaired capital and surplus of the
savings institution, plus an additional 10% of unimpaired capital and
surplus for loans fully secured by readily marketable collateral. Savings
institutions are additionally authorized to make loans to one borrower, for
any purpose, in an amount not to exceed $500,000 or, by order of the
Director of OTS, in an amount not to exceed the lesser of $30,000,000 or
30% of unimpaired capital and surplus, to develop residential housing,
provided: (i) the purchase price of each single-family dwelling in the
development does not exceed $500,000; (ii) the savings institution is in
compliance with its fully phased-in capital requirements; (iii) the loans
comply with applicable loan-to-value requirements; and (iv) the aggregate
amount of loans made under this authority does not exceed 150% of
unimpaired capital and surplus. The lending limits generally do not apply
to purchase money mortgage notes taken from the purchaser of real property
acquired by the institution in satisfaction of debts previously contracted
if no new funds are advanced to the borrower and the institution is not
placed in a more detrimental position as a result of the sale. Certain
types of loans are excepted from the lending limits, including loans
secured by savings deposits.
At June 30, 1996, the maximum amount that Illinois Guarantee could
have loaned to any one borrower without prior to OTS approval was $1.1
million. At such date, the largest aggregate amount of loans that Illinois
Guarantee had outstanding to any one borrower and their related interests
was $748,000.
Transactions with Affiliates. Transactions between a savings
institution and any affiliate are governed by Sections 23A and 23B of the
Federal Reserve Act. An affiliate of a savings institution is any company
or entity which controls, is controlled by or is under common control with
the savings institution. In a holding company context, the parent holding
company of a savings institution (such as the Company) and any companies
which are controlled by such parent holding company are affiliates of the
savings institution. Generally, Sections 23A and 23B (i) limit the extent
to which the savings institution or its subsidiaries may engage in "covered
transactions" with any one affiliate to an amount equal to 10% of such
institution's capital stock and surplus, and contain an aggregate limit on
all such transactions with all affiliates in an amount equal to 20% of such
capital stock and surplus and (ii) require that all such transactions be on
terms substantially the same, or at least as favorable, to the institution
or subsidiary as those provided to a non-affiliate. The term "covered
transaction" includes the making of loans, purchase of assets, issuance of
a guarantee and similar other types of transactions. In addition to the
restrictions imposed by Sections 23A and 23B, no savings institution may
(i) loan or otherwise extend credit to an affiliate, except for any
affiliate which engages only in activities which are permissible for bank
holding companies, or (ii) purchase or invest in any
27
<PAGE>
stocks, bonds, debentures, notes or similar obligations of an affiliate,
except for affiliates which are subsidiaries of the savings institution.
Savings institutions are also subject to the restrictions contained in
Section 22(h) of the Federal Reserve Act and the Federal Reserve's
Regulation O thereunder on loans to executive officers, directors and
principal stockholders. Under Section 22(h), loans to a director,
executive officer or greater than 10% stockholder of a savings institution
and certain affiliated interests of such persons, may not exceed, together
with all other outstanding loans to such person and affiliated interests,
the institution's loans-to-one-borrower limit (generally equal to 15% of
the institution's unimpaired capital and surplus) and all loans to such
persons may not exceed the institution's unimpaired capital and unimpaired
surplus. Section 22(h) also prohibits loans, above amounts prescribed by
the appropriate federal banking agency, to directors, executive officers
and greater than 10% stockholders of a savings institution, and their
respective affiliates, unless such loan is approved in advance by a
majority of the board of directors of the institution with any "interested"
director not participating in the voting. The Regulation O prescribes the
loan amount (which includes all other outstanding loans to such person), as
to which such prior board of director approval is required, as being the
greater of $25,000 or 5% of capital and surplus (up to $500,000). Further,
Section 22(h) requires that loans to directors, executive officers and
principal stockholders be made on terms substantially the same as offered
in comparable transactions to other persons. Section 22(h) also prohibits
a depository institution from paying the overdrafts of any of its executive
officers or directors.
Savings institutions are further subject to the requirements and
restrictions of Section 22(g) of the Federal Reserve Act on loans to
executive officers and the restrictions of 12 U.S.C. (S) 1972 on certain
tying arrangements and extensions of credit by correspondent banks. Section
22(g) of the Federal Reserve Act requires that loans to executive officers
of depository institutions not be made on terms more favorable than those
afforded to other borrowers, requires approval by the board of directors of
the institution for extension of credit to executive officers of the
institution, and imposes reporting requirements for and additional
restrictions on the type, amount and terms of credits to such officers.
Section 1972 (i) prohibits a depository institution from extending credit
to or offering any other services, or fixing or varying the consideration
for such extension of credit or service, on the condition that the customer
obtain some additional service from the institution or certain of its
affiliates or not obtain services of a competitor of the institution,
subject to certain exceptions, and (ii) prohibits extensions of credit to
executive officers, directors, and greater than 10% stockholders of a
depository institution by any other institution which has a correspondent
banking relationship with the institution, unless such extension of credit
is on substantially the same terms as those prevailing at the time for
comparable transactions with other persons and does not involve more than
the normal risk of repayment or present other unfavorable features.
Real Estate Lending Policies. Under OTS regulations, savings
associations must adopt and maintain written policies that establish
appropriate limits and standards for extensions of credit that are secured
by liens or interests in real estate or are made for the purpose of
financing permanent improvements to real estate. These policies must
establish loan portfolio diversification standards, prudent underwriting
standards, including loan-to-value limits, that are clear and measurable,
loan administration procedures and documentation, approval and reporting
requirements. The real estate lending policies of savings institutions
must reflect consideration of the Interagency Guidelines for Real Estate
Lending Policies (the "Interagency Guidelines") that have been adopted by
the federal banking agencies.
The Interagency Guidelines, among other things, call upon depository
institutions to establish internal loan-to-value limits for real estate
loans that are not in excess of the following supervisory limits: (i) for
loans secured by raw land, the supervisory loan-to-value limit is 65% of
the value of the collateral; (ii) for land development loans (i.e., loans
for the purpose of improving unimproved property prior to the erection of
structures), the supervisory limit is 75%; (iii) for loans for the
construction of commercial, multi-family or other nonresidential property,
the supervisory limit is 80%; (iv) for loans for the construction of one-to
four-family properties, the supervisory limit is 85%; and (v) for loans
secured by other improved property (e.g., farmland, completed commercial
property and other income-producing property including non-owner-occupied,
one- to four-family property), the limit is 85%. Although no supervisory
loan-to-value limit has been established for owner-occupied, one- to four-
family and home
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equity loans, the Interagency Guidelines state that for any such loan with
a loan-to-value ratio that equals or exceeds 90% at origination, an
institution should require appropriate credit enhancement in the form of
either mortgage insurance or readily marketable collateral.
The Interagency Guidelines state that it may be appropriate in
individual cases to originate or purchase loans with loan-to-value ratios
in excess of the supervisory loan-to-value limits, based on the support
provided by other credit factors. The aggregate amount of loans in excess
of the supervisory loan-to-value limits, however, should not exceed 100% of
total capital and the total of such loans secured by commercial,
agricultural, multifamily and other non-one-to-four family residential
properties should not exceed 30% of total capital. The supervisory loan-
to-value limits do not apply to certain categories of loans including loans
insured or guaranteed by the U.S. Government and its agencies or by
financially capable state, local or municipal governments or agencies,
loans backed by the full faith and credit of a state government, loans that
are to be sold promptly after origination without recourse to a financially
responsible party, loans that are renewed, refinanced or restructured
without the advancement of new funds, loans that are renewed, refinanced or
restructured in connection with a workout, loans to facilitate sales of
real estate acquired by the institution in the ordinary course of
collecting a debt previously contracted and loans where the real estate is
not the primary collateral.
The Bank believes that its current lending policies conform to the
Interagency Guidelines and does not anticipate that the Interagency
Guidelines will have a material effect on its lending activities.
Federal Home Loan Bank System. The Bank is a member of the FHLB
System, which consists of 12 district Federal Home Loan Banks subject to
supervision and regulation by the Federal Housing Finance Board ("FHFB").
The Federal Home Loan Banks provide a central credit facility primarily for
member institutions. As a member of the FHLB of Chicago, the Bank is
required to acquire and hold shares of capital stock in the FHLB of Chicago
in an amount at least equal to 1% of the aggregate unpaid principal of its
home mortgage loans, home purchase contracts, and similar obligations at
the end of each year, or 1/20 of its advances (borrowings) from the FHLB of
Chicago, whichever is greater. Illinois Guarantee was in compliance with
this requirement with investment in FHLB of Chicago stock at June 30, 1996,
of $214,000. The FHLB of Chicago serves as a reserve or central bank for
its member institutions within its assigned district. It is funded
primarily from proceeds derived from the sale of consolidated obligations
of the FHLB System. It offers advances to members in accordance with
policies and procedures established by the FHFB and the Board of Directors
of the FHLB of Chicago. Long-term advances may only be made for the
purpose of providing funds for residential housing finance. The Bank had
$1.6 million in advances outstanding from the FHLB of Chicago with $7,000
of accrued interest payable as of June 30, 1996. The advances consisted of
a one year fixed rate advance maturing April 29, 1997 at 5.93% rate of
interest, payable monthly, in the amount of $790,000, a one year fixed rate
advance maturing May 16, 1997 at 5.98% rate of interest, payable monthly,
in the amount of $468,000, and a daily advance of $350,000 at 5.50% rate of
interest which can adjust daily. The Bank received its first daily advance
on June 18, 1996 for $200,000 and had additional borrowing on June 24, 1996
for $350,000.
Federal Reserve System. Pursuant to regulations of the Federal
Reserve Board, all FDIC-insured depository institutions must maintain
average daily reserves against their net transaction accounts. This
percentage is subject to adjustment by the Federal Reserve Board. No
reserves are required to be maintained on the first $4.3 million of
transaction accounts, reserves equal to 3% must be maintained on the next
$52.0 million of transaction accounts, and a reserve of 10% must be
maintained against all remaining transaction accounts. These reserve
requirements are subject to adjustment by the Federal Reserve Board.
Because required reserves must be maintained in the form of vault cash or
in a noninterest bearing account at a Federal Reserve Bank, the effect of
the reserve requirement is to reduce the amount of the institution's
interest-earning assets. As of June 30, 1996, the Bank met its reserve
requirements.
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Prompt Corrective Regulatory Action
General. Under the Federal Deposit Insurance Corporation Improvement
Act of 1991 ("FDICIA") federal banking regulators are required to take
prompt corrective action if an insured depository institution fails to
satisfy certain minimum capital requirements, including a leverage limit, a
risk-based capital requirement, and any other measure of capital deemed
appropriate by the federal banking regulators for measuring the capital
adequacy of an insured depository institution. All institutions,
regardless of their capital levels, are restricted from making any capital
distribution or paying any management fees that would cause the institution
to fail to satisfy the minimum levels for any of its capital requirements.
An institution that fails to meet the minimum level for any relevant
capital measure (an "undercapitalized institution") may be: (i) subject to
increased monitoring by the appropriate federal banking regulator; (ii)
required to submit an acceptable capital restoration plan within 45 days;
(iii) subject to asset growth limits; and (iv) required to obtain prior
regulatory approval for acquisitions, branching and new lines of
businesses. The capital restoration plan must include a guarantee by the
institution's holding company that the institution will comply with the
plan until it has been adequately capitalized on average for four
consecutive quarters, under which the holding company would be liable up to
the lesser of 5% of the institution's total assets or the amount necessary
to bring the institution into capital compliance as of the date it failed
to comply with its capital restoration plan. A "significantly
undercapitalized" institution, as well as any undercapitalized institution
that does not submit an acceptable capital restoration plan, may be subject
to regulatory demands for recapitalization, broader application of
restrictions on transactions with affiliates, limitations on interest rates
paid on deposits, asset growth and other activities and possible
replacement of directors and officers, and restrictions on capital
distributions by any bank holding company controlling the institution. Any
company controlling the institution could also be required to divest the
institution or the institution could be required to divest subsidiaries.
The senior executive officers of a significantly undercapitalized
institution may not receive bonuses or increases in compensation without
prior approval and the institution is prohibited from making payments of
principal or interest on its subordinated debt. In their discretion, the
federal banking regulators may also impose the foregoing sanctions on an
undercapitalized institution if the regulators determine that such actions
are necessary to carry out the purposes of the prompt corrective action
provisions. If an institution's ratio of tangible capital to total assets
falls below a "critical capital level," the institution will be subject to
conservatorship or receivership within 90 days unless periodic
determinations are made that forbearance from such action would better
protect the deposit insurance fund. Unless appropriate findings and
certifications are made by the appropriate federal bank regulatory
agencies, a critically undercapitalized institution must be placed in
receivership if it remains critically undercapitalized on average during
the calendar quarter beginning 270 days after the date it became critically
undercapitalized.
The federal banking regulators have adopted regulations implementing
the prompt corrective action provisions of FDICIA. Under such regulations,
the federal banking regulators will generally measure a depository
institution's capital adequacy on the basis of its total risk-based capital
ratio (the ratio of its total capital to risk-weighted assets), Tier 1
risk-based capital ratio (the ratio of its core capital to risk-weighted
assets) and leverage ratio (the ratio of its core capital to adjusted total
assets). Under the regulations, a depository institution that is not
subject to an order or written directive by its primary federal regulator
to meet or maintain a specific capital level is deemed "well-capitalized"
if it also has: (i) a total risk-based capital ratio of 10% or greater;
(ii) a Tier 1 risk-based capital ratio of 6% or greater; and (iii) a
leverage ratio of 5% or greater. An "adequately capitalized" depository
institution is an institution that does not meet the definition of well-
capitalized and has: (i) a total risk-based capital ratio of 8% or greater;
(ii) a Tier 1 risk-based capital ratio of 4% or greater; and (iii) a
leverage ratio of 4% or greater (or 3% or greater if the institution has a
composite 1 CAMEL rating). An "undercapitalized institution" is a
depository institution that has (i) a total risk-based capital ratio less
than 8%; or (ii) a Tier 1 risk-based capital ratio of less than 4%; or
(iii) a leverage ratio of less than 4% (or 3% if the institution has a
composite 1 CAMEL rating). A "significantly undercapitalized" institution
is defined as a depository institution that has: (i) a total risk-based
capital ratio of less than 6%; or (ii) a Tier 1 risk-based capital ratio of
less than 3%; or (iii) a leverage ratio of less than 3%. A "critically
undercapitalized" depository institution is defined as a depository
institution that has a ratio of "tangible equity" to total assets that is
equal to or less than 2%. "Tangible equity" is defined as core capital
plus the institution's outstanding cumulative perpetual preferred stock
(and related surplus) less all intangibles other than qualifying
supervisory goodwill and certain mortgage servicing rights. The
appropriate federal banking agency may reclassify a well capitalized
depository institution as adequately capitalized and may require an
adequately capitalized
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or undercapitalized institution to comply with the supervisory actions
applicable to institutions in the next lower capital category (but may not
reclassify a significantly undercapitalized institution as critically
undercapitalized) if the OTS determines, after notice and an opportunity
for a hearing, that the depository institution is in an unsafe or unsound
condition or if the OTS determines that the institution has received and
not corrected a less-than-satisfactory rating for any CAMEL rating
category. As of June 30, 1996, the Bank was classified as "well-
capitalized" under the prompt corrective action regulations.
Safety and Soundness Guidelines. Under FDICIA, as amended by the
Riegle Community Development and Regulatory Improvement Act of 1994 (the
"CDRI Act"), each Federal banking agency is required to establish safety
and soundness standards for institutions under its authority. On July 10,
1995, the federal banking agencies, including the OTS and Federal Reserve
Board, released Interagency Guidelines Establishing Standards for Safety
and Soundness and published a final rule establishing deadlines for
submission and review of safety and soundness compliance plans. The final
rule and the guidelines went into effect on August 9, 1995. The guidelines
require depository institutions to maintain internal controls and
information systems and internal audit systems that are appropriate for the
size, nature and scope of the institution's business. The guidelines also
establish certain basic standards for loan documentation, credit
underwriting, interest rate risk exposure, and asset growth. The
guidelines further provide that depository institutions should maintain
safeguards to prevent the payment of compensation, fees and benefits that
are excessive or that could lead to material financial loss, and should
take into account factors such as comparable compensation practices at
comparable institutions. If the appropriate federal banking agency
determines that a depository institution is not in compliance with the
safety and soundness guidelines, it may require the institution to submit
an acceptable plan to achieve compliance with the guidelines. A depository
institution must submit an acceptable compliance plan to its primary
federal regulator within 30 days of receipt of a request for such a plan.
Failure to submit or implement a compliance plan may subject the
institution to regulatory sanctions. Management believes that the Bank
already meets substantially all the standards adopted in the interagency
guidelines, and therefore does not believe that implementation of these
regulatory standards will materially affect the Bank's operations.
Additionally under FDICIA, as amended by the CDRI Act, the federal
banking agencies are required to establish standards relating to the asset
quality and earnings that the agencies determine to be appropriate. On
July 10, 1995, the federal banking agencies, including the OTS and Federal
Reserve Board, issued proposed guidelines relating to asset quality and
earnings. Under the proposed guidelines, an FDIC insured depository
institution should maintain systems, commensurate with its size and the
nature and scope of its operations, to identify problem assets and prevent
deterioration in those assets as well as to evaluate and monitor earnings
and ensure that earnings are sufficient to maintain adequate capital and
reserves. Management believes that the asset quality and earnings
standards, in the form proposed by the banking agencies, would not have a
material effect on the Bank's operations.
Regulation of the Company
General. The Company is a unitary savings and loan holding company
within the meaning of the Home Owners' Loan Act. As such, the Company is
registered with the OTS and subject to OTS regulations, examinations,
supervision and reporting requirements. As a subsidiary of a savings and
loan holding company, the Bank is subject to certain restrictions in its
dealing with the Company and affiliates thereof. The Company is required
to file certain reports with, and otherwise comply with the rules and
regulations of, the Securities Exchange Commission ("SEC") under federal
securities laws.
Activities Restrictions. The Board of Directors of the Company
presently intends to operate the Company as a unitary savings and loan
holding company. There are generally no restrictions on the activities of
a unitary savings and loan holding company. However, if the Director of
OTS determines that there is reasonable cause to believe that the
continuation by a savings and loan holding company of an activity
constitutes a serious risk to the financial safety, soundness, or stability
of its subsidiary savings institution, the Director of OTS may impose such
restrictions as deemed necessary to address such risk and limiting: (i)
payment of dividends by the savings institution, (ii) transactions between
the savings institution and its affiliates, and (iii) any activities of the
savings institution that might create a serious risk that the liabilities
of the holding company and its affiliates may be imposed on the savings
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institution. Notwithstanding the above rules as to permissible business
activities of unitary savings and loan holding companies, if the savings
institution subsidiary of such a holding company fails to meet the QTL
Test, then such unitary holding company shall also presently become subject
to the activities restrictions applicable to multiple holding companies and
unless the savings institution requalifies as a Qualified Thrift Lender
within one year thereafter, register as, and become subject to, the
restrictions applicable to a bank holding company. See " --Qualified
Thrift Lender Test."
If the Company were to acquire control of another savings institution,
other than through merger or other business combination with the Bank, the
Company would thereupon become a multiple savings and loan holding company.
Except where such acquisition is pursuant to the authority to approve
emergency thrift acquisitions and where each subsidiary savings institution
meets the QTL Test, the activities of the Company and any of its
subsidiaries (other than the Bank or other subsidiary savings institutions)
would thereafter be subject to further restrictions. Among other things,
no multiple savings and loan holding company or subsidiary thereof which is
not a savings institution shall commence or continue for a limited period
of time after becoming a multiple savings and loan holding company or
subsidiary thereof, any business activity, upon prior notice to, and no
objection by, the OTS, other than: (i) furnishing or performing management
services for a subsidiary savings institution, (ii) conducting an insurance
agency or escrow business, (iii) holding, managing, or liquidating assets
owned by or acquired from a subsidiary savings institution, (iv) holding or
managing properties used or occupied by a subsidiary savings institution,
(v) acting as trustee under deeds of trust, (vi) those activities
authorized by regulation as of March 5, 1987 to be engaged in by multiple
holding companies, or (vii) those activities authorized by the Federal
Reserve Board as permissible for bank holding companies, unless the
Director of OTS by regulation prohibits or limits such activities for
savings and loan holding companies. Those activities described in (vii)
above must also be approved by the Director of OTS prior to being engaged
in by a multiple holding company.
Restrictions on Acquisitions. Savings and loan holding companies are
prohibited from acquiring, without prior approval of the Director of OTS,
(i) control of any other savings institution or savings and loan holding
company or substantially all the assets thereof, or (ii) more than 5% of
the voting shares of a savings institution or holding company thereof which
is not a subsidiary. Under certain circumstances, a registered savings and
loan holding company is permitted to acquire, with the approval of the
Director of OTS, up to 15% of the voting shares of an under-capitalized
savings institution pursuant to a "qualified stock issuance" without that
savings institution being deemed controlled by the holding company. In
order for the shares acquired to constitute a "qualified stock issuance,"
the shares must consist of previously unissued stock or treasury shares,
the shares must be acquired for cash, the savings and loan holding
company's other subsidiaries must have tangible capital of at least 6 1/2%
of total assets, there must not be more than one common director or officer
between the savings and loan holding company and the issuing savings
institution and transactions between the savings institution and the
savings and loan holding company and any of its affiliates must conform to
Sections 23A and 23B of the Federal Reserve Act. Except with the prior
approval of the Director of OTS, no director or officer of a savings and
loan holding company or person owning or controlling by proxy or otherwise
more than 25% of such company's stock, may also acquire control of any
savings institution, other than a subsidiary savings institution, or of any
other savings and loan holding company.
The Director of OTS may only approve acquisitions resulting in the
formation of a multiple savings and loan holding company which controls
savings institutions in more than one state if: (i) the multiple savings
and loan holding company involved controls a savings institution which
operated a home or branch office in the state of the institution to be
acquired as of March 5, 1987; (ii) the acquiror is authorized to acquire
control of the savings institution pursuant to the emergency acquisition
provisions of the Federal Deposit Insurance Act; or (iii) the statutes of
the state in which the institution to be acquired is located specifically
permit institutions to be acquired by state-chartered institutions or
savings and loan holding companies located in the state where the acquiring
entity is located (or by a holding company that controls such state-
chartered savings institutions).
The OTS has recently amended its regulations to permit federal savings
institutions to branch in any state or states of the United States and its
territories. Except in supervisory cases or when interstate branching is
otherwise permitted by state law or other statutory provision, a federal
savings institution may not establish an out-of-state branch unless (i) the
federal savings institution qualifies as a "domestic building and loan
institution" under
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(S)7701(a)(19) of the Internal Revenue Code and the total assets
attributable to all branches of the savings institution in the state would
qualify such branches taken as a whole for treatment as a domestic building
and loan association and (ii) such branch would not result in (a) formation
of a prohibited multi-state multiple savings and loan holding company or
(b) a violation of certain statutory restrictions on branching by savings
institution subsidiaries of banking holding companies. Federal savings
institutions generally may not establish new branches unless the savings
institution meets or exceeds minimum regulatory capital requirements. The
OTS will also consider the savings institution's record of compliance with
the Community Reinvestment Act of 1977 in connection with any branch
application.
The Bank Holding Company Act of 1956 authorizes the Federal Reserve
Board to approve an application by a bank holding company to acquire
control of any savings institution. Pursuant to rules promulgated by the
Federal Reserve Board, owning, controlling or operating a savings
institution is a permissible activity for bank holding companies, if the
savings institution engages only in deposit-taking activities and lending
and other activities that are permissible for bank holding companies. In
approving such an application, the Federal Reserve Board may not impose any
restriction on transactions between the savings institution and its holding
company affiliates except as required by Sections 23A and 23B of the
Federal Reserve Act.
A bank holding company that controls a savings institution may merge
or consolidate the assets and liabilities of the savings institution with,
or transfer assets and liabilities to, any subsidiary bank which is a
member of the BIF with the approval of the appropriate federal banking
agency and the Federal Reserve Board. The resulting bank will be required
to continue to pay assessments to the SAIF at the rates prescribed for SAIF
members on the deposits attributable to the merged savings institution plus
an annual deposit growth increment. In addition, the transaction must
comply with the restrictions on interstate acquisitions of commercial banks
under the Bank Holding Company Act.
TAXATION
General
The Company and its subsidiaries will file a consolidated federal
income tax return on a June 30 fiscal year basis. Consolidated returns
have the effect of eliminating intercompany distributions, including
dividends, from the computation of consolidated taxable income for the
taxable year in which the distributions occur.
Federal Taxation
Savings institutions are subject to the provisions of the Internal
Revenue Code of 1986, as amended (the "Code"), in the same general manner
as other corporations. However, institutions such as Illinois Guarantee
which meet certain definitional tests and other conditions prescribed by
the Code may benefit from certain favorable provisions regarding their
deductions from taxable income for annual additions to their bad debt
reserve. For purposes of the bad debt reserve deduction, loans are
separated into "qualifying real property loans," which generally are loans
secured by interests in certain real property, and nonqualifying loans,
which are all other loans. The bad debt reserve deduction with respect to
nonqualifying loans must be based on actual loss experience. The amount of
the bad debt reserve deduction with respect to qualifying real property
loans may be based upon actual loss experience (the "experience method") or
a percentage of taxable income determined without regard to such deduction
(the "percentage of taxable income method"). Illinois Guarantee has
elected to use the method which results in the greatest deduction for
federal income tax purposes which historically has been the percentage of
taxable income method.
Legislation that is effective for tax years beginning after December
31, 1995 would require savings associations to recapture into taxable
income the portion of the tax loan reserve that exceeds the 1987 tax loan
loss reserve. The Bank will no longer be allowed to use the reserve method
for tax loan loss provisions, but would be allowed to use either the
experience method or the specific charge-off method of accounting for bad
debts.
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Under the percentage of taxable income method, the bad debt reserve
deduction for qualifying real property loans was computed as a percentage,
which Congress had reduced from as much as 60% in prior years to 8.0% of
taxable income, with certain adjustments, for taxable years beginning after
1986. The allowable deduction under the percentage of taxable income
method (the "percentage bad debt deduction") for taxable years beginning
before 1987 was scaled downward in the event that less than 82% but more
than 60% of the total dollar amount of the assets of an institution
qualified within certain designated categories. The Tax Reform Act of 1986
(the "1986 Act") eliminated this scale down provision, and for all years
after 1986 an 8% percentage bad debt deduction could be taken as long as
not less than 60% of the total dollar amount of the assets of an
institution falls within such categories. In the event the percentage of
assets in the designated categories fell below 60%, the institution was
required to recapture, generally over a period of up to four years, its
existing bad debt reserve, although net operating loss carryforwards could
be used to offset such recapture.
The bad debt deduction under the percentage of taxable income method
was limited to the extent that (i) the amount accumulated in reserves for
qualifying real estate loans did not exceed 6.0% of such loans outstanding
at the end of the taxable year and (ii) the amount when added to the bad
debt reserve for losses on nonqualifying loans, equaled the amount by which
12.0% of total deposits or withdrawable accounts of depositors at year-end
exceeded the sum of surplus, undivided profits and reserves at the
beginning of the year. The percentage bad debt deduction under the
percentage of taxable income method was reduced by the deduction for losses
on nonqualifying loans.
Earnings appropriated to Illinois Guarantee's bad debt reserve and
claimed as a tax deduction are not available for the payment of cash
dividends or for distribution to shareholders (including distributions made
on dissolution or liquidation), unless Illinois Guarantee includes the
amount in taxable income, along with the amount deemed necessary to pay the
resulting federal income tax. As of June 30, 1996, Illinois Guarantee had
approximately $181,000 of accumulated earnings for which federal income
taxes have not been provided.
Illinois Guarantee's federal income tax returns have not been audited
in the last five years.
For additional information regarding federal income taxes, see Notes A
and J of Notes to Consolidated Financial Statements.
State Taxation
The State of Illinois has a corporate income tax which subjects the
Company's Illinois taxable income to a 4.8% tax and a Personal Property
Replacement tax of 2.5%. However, by virtue of statutory provisions
relative to a calculations of taxes assessed against corporations, such
corporations do not pay state income tax in years in which income on United
States Government securities exceeds taxable income.
For additional information regarding taxation, see Note J of Notes to
Consolidated Financial Statements.
EMPLOYEES
---------
At June 30, 1996, Illinois Guarantee had 17 full-time and three part-
time employees. The Company has no separate employees, except those of the
Bank. None of Illinois Guarantee's employees is represented by a
collective bargaining agreement. Illinois Guarantee believes that it
enjoys good relations with its personnel.
Executive Officers of the Company and the Bank
The Bank has made significant changes in its management personnel.
For more information, see "Changes in Key Management Personnel." The
current management of the Bank is described below.
John H. Leonard has been in the financial institutions industry for
more than 21 years and currently serves as Senior Vice President and Chief
Credit Officer, a position he has held since May 1996. Prior to that time,
Mr.
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Leonard was Assistant Vice-President/Commercial Loan Officer of Citizens
Bank of Illinois in Effingham, Illinois. He is a Director for the
Effingham Chamber of Commerce and a Director for the Effingham Family YMCA.
Gerald E. Ludwig is owner of Ludwig Medical, Inc., a manufacturer of
plastic disposable medical devices. Mr. Ludwig was elected Chairman of the
Board and Chief Executive Officer of the Bank on April 18, 1995. Mr.
Ludwig also serves as Chairman of the Company.
Douglas A. Pike has been in the financial institutions industry for
more than 11 years and joined the Bank in February 1995 as Vice President
of Lending. Mr Pike was appointed President and Chief Operating Officer of
the Bank on June 20, 1995. Prior to joining the Bank, he served as loan
officer of Effingham State Bank and, prior to that, as consumer loan
officer of First National Bank of Effingham, both in Effingham, Illinois.
Mr. Pike is a Commissioner for the Effingham City Council, and a Director
for the Effingham County Community Development Corporation. Mr. Pike also
serves as President of the Company.
Ronald R. Schettler has been in the financial institutions industry
for more than 28 years, and currently serves as Senior Vice President of
the Bank in charge of administration and investments, a position he has
held since joining the Bank in June 1995. Prior to that time, Mr.
Schettler was Vice President of Effingham State Bank in Effingham,
Illinois. He is a member of the United Methodist Church, the Scottish
Rite, the Effingham Chamber of Commerce and the Master Masons. Mr.
Schettler also serves as director of the Company.
Item 2. Description of Property
--------------------------------
The following table sets forth certain information at June 30, 1996
regarding Illinois Guarantee's office facility, which is owned by Illinois
Guarantee, and certain other information relating to this property at that
date. As noted below, Illinois Guarantee also holds title to property
adjoining the main office in Effingham, Illinois.
Year Completed Square Footage Net Book Value
-------------- -------------- --------------
Main Office:
210 E. Fayette Avenue
Effingham, Illinois 1970 2,940 $233,000
At June 30, 1996, the net book values of Illinois Guarantee's
computer equipment and other furniture, fixtures and equipment totalled
$284,000. For more information, see Note F of Notes to Consolidated
Financial Statements.
During 1995, the Bank also purchased, for $375,000, land on which
it would construct its new branch office. This office is expected to open
in the fourth calendar quarter of 1996. The total cost of the new branch
office is currently estimated to be $1.4 million. See "Item 1. --
Description of Business -- New Business Strategies."
Item 3. Legal Proceedings
--------------------------
Although Illinois Guarantee, from time to time, is involved in
various legal proceedings in the normal course of business, there are no
material legal proceedings to which Illinois Guarantee or its subsidiary is
a party or to which any of their property is subject.
Item 4. Submission of Matters to a Vote of Security-Holders
------------------------------------------------------------
No matters were submitted to a vote of security holders during
the fourth quarter of the fiscal year ended June 30, 1996.
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PART II
Item 5. Market for the Registrant's Common Stock and Related Stockholder
-------------------------------------------------------------------------
Matters
-------
The information contained under the section captioned "Market
Information" in the Annual Report to Stockholders for the Fiscal Year Ended
June 30, 1996 (the "Annual Report") is incorporated herein by reference.
For information regarding restrictions on the payment of dividends see Item
1. "Business -- Regulation -- Dividend Limitations."
Item 6. Management's Discussion and Analysis or Plan of Operation
------------------------------------------------------------------
The information contained in the section captioned "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
in the Annual Report is incorporated herein by reference.
Item 7. Financial Statements
-----------------------------
The consolidated financial statements contained in the Annual
Report which are listed under Item 14 herein are incorporated herein by
reference.
Item 8. Changes in and Disagreements with Accountants on Accounting and
------------------------------------------------------------------------
Financial Disclosure
--------------------
Not applicable.
PART III
Item 9. Directors and Executive Officers of the Registrant; Compliance
-----------------------------------------------------------------------
with Section 16(a) of the Exchange Act
--------------------------------------
The information contained under the section captioned "Proposal I
-- Election of Directors" in the Company's definitive proxy statement for
the 1996 Annual Meeting of Stockholders (the "Proxy Statement") is
incorporated herein by reference.
For information regarding delinquent filers and the disclosure
required pursuant to Item 405 of Regulation S-K, reference is made to
"Voting Securities and Principal Holders Thereof" in the Proxy Statement
which information is incorporated herein by reference. [To be revised, if
no delinquent filers.]
Item 10. Executive Compensation
--------------------------------
The information contained under the section captioned "Proposal
I--Election of Directors -- Executive Compensation the Proxy Statement is
incorporated herein by reference.
Item 11. Security Ownership of Certain Beneficial Owners and Management
------------------------------------------------------------------------
(a) and (b) The information required by this item is incorporated herein by
reference to the sections captioned "Proposal I - Election of
Directors" and "Voting Securities and Principal Holders
Thereof" of the Proxy Statement.
36
<PAGE>
(c) Management knows of no arrangements, including any pledge by any
person of securities of the Bank, the operation of which may at a
subsequent date result in a change in control of the registrant.
Item 12. Certain Relationships and Related Transactions
--------------------------------------------------------
The information required by this item is incorporated herein by
reference to the section captioned "Proposal I -- Election of Directors" of
the Proxy Statement.
PART IV
Item 13. Financial Statement Schedules, and Reports on Form 8-K
----------------------------------------------------------------
(a) 1. Independent Auditors' Report (incorporated by reference to the
Annual Report)
Consolidated Financial Statements (incorporated by reference to
the Annual Report)
(a) Consolidated Statements of Financial Condition at June 30,
1996 and 1995
(b) Consolidated Statements of Earnings for the Years Ended June
30, 1996 and 1995
(c) Consolidated Statements of Stockholders' Equity for the
Years Ended June 30, 1996 and 1995
(d) Consolidated Statements of Cash Flows for the Years Ended
June 30, 1996 and 1995
(e) Notes to Consolidated Financial Statements.
2. All schedules have been omitted as the required information is
either inapplicable or included in the Notes to Consolidated
Financial Statements.
3. Exhibits and Index to Exhibits
37
<PAGE>
(a) Exhibits
The following exhibits are either attached to or incorporated by
reference in this Annual Report on Form 10-KSB.
Page No.
in Sequentially
No. Description Numbered Copy
- --------------------------- ---------------------------------- -------------
(3a) Articles of Incorporation of *
Illinois Community Bancorp, Inc.
(3b) Bylaws of Illinois Community *
Bancorp, Inc.
(4) Common Stock Certificate of *
Illinois Community Bancorp, Inc.
(10a) Illinois Community Bancorp, Inc. *
Stock Option Plan
(10b) Illinois Community Bancorp, Inc.
Management
Recognition Plan *
(10c) Retirement Plan for Non-employee *
Directors
(10d) Profit Sharing Plan *
(10e) Employment Agreement between the *
Bank and Douglas A. Pike
dated January 16, 1996
(10f) Employment Agreement between the
Bank and Ronald R. Schettler
dated January 16, 1996 *
(10g) Employment Agreement between the
Bank and John H. Leonard
dated May 13, 1996
(13) Annual Report to Stockholders for
the Fiscal Year Ended June 30,
1996
(21) Subsidiaries of the Registrant
(27) Financial Data Schedule
- ----------------
* Incorporated by reference to the Corporation's Registration
Statement on Form S-4 (333-3322) filed with the Securities and
Exchange Commission on April 9, 1996.
(b) During the last quarter of the fiscal year ended June 30, 1996, the
Bank did not file any Current Reports on Form 8-K.
(c) All required exhibits are filed as attached.
(d) No financial statement schedules are required.
38
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
ILLINOIS COMMUNITY BANCORP, INC.
Date: September 30, 1996 By: /s/ Gerald E. Ludwig
-----------------------------------------
Gerald E. Ludwig
Chairman of the Board and Chief
Executive Officer
Duly Authorized Representative
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
By: /s/ Gerald E. Ludwig Date: September 30, 1996
-------------------------------------
Gerald E. Ludwig
Chairman of the Board and Chief
Executive Officer
(Principal Executive Officer)
By: /s/ Michael F. Sehy Date: September 30, 1996
-------------------------------------
Michael F. Sehy
Vice Chairman of the Board
By: /s/ Douglas A. Pike Date: September 30, 1996
-------------------------------------
Douglas A. Pike
Director and President (Principal
Financial and Accounting Officer)
By: /s/ Milton Hinkle Date: September 30,1996
-------------------------------------
Milton Hinkle
Director
By: /s/ Frederick C. Schaefer Date: September 30, 1996
-------------------------------------
Frederick C. Schaefer
Director
By: /s/ Ernest E. Garbe Date: September 30, 1996
-------------------------------------
Ernest E. Garbe
Director
By: /s/ Garrett M. Andes, II Date: September 30, 1996
-------------------------------------
Garrett M. Andes, II
Director
<PAGE>
INDEX TO EXHIBITS
(3a) Articles of Incorporation of Illinois Community Bancorp,
Inc.
(3b) Bylaws of Illinois Community Bancorp, Inc.
(4) Common Stock Certificate of Illinois Community Bancorp,
Inc.
(10a) Illinois Community Bancorp, Inc. Stock Option Plan
(10b) Illinois Community Bancorp, Inc. Management
Recognition Plan
(10c) Retirement Plan for Non-employee Directors
(10d) Profit Sharing Plan
(10e) Employment Agreement between the Bank and Douglas A. Pike
dated January 16, 1996
(10f) Employment Agreement between the Bank and Ronald R.
Schettler dated January 16, 1996
(10g) Employment Agreement between the Bank and John H. Leonard
dated May 13, 1996
(13) Annual Report to Stockholders for the Fiscal Year Ended
June 30, 1996
(21) Subsidiaries of the Registrant
(27) Financial Data Schedule
<PAGE>
EMPLOYMENT AGREEMENT
--------------------
THIS AGREEMENT entered into this 13th day of May, 1996, by and between
Illinois Guarantee Savings Bank, FSB (the "Bank") and John H. Leonard (the
"Employee"), effective on the date (the "Effective Date") of the Bank's
conversion from mutual to stock form.
WHEREAS, the Employee has heretofore been employed by the Bank as President
and is experienced in all phases of the business of the Bank; and
WHEREAS, the Board of Directors of the Bank believes it is in the best
interests of the Bank to enter into this Agreement with the Employee in order to
assure continuity of management of the Bank and to reinforce and encourage the
continued attention and dedication of the Employee to his assigned duties; and
WHEREAS, the parties desire by this writing to set forth the continuing
employment relationship of the Bank and the Employee.
NOW, THEREFORE, it is AGREED as follows:
1. Employment. The Employee is employed as the Senior Vice President
----------
and Chief Credit Officer of the Bank. The Employee shall render such
administrative and management services for the Bank as are currently rendered
and as are customarily performed by persons situated in a similar executive
capacity. The Employee shall also promote, by entertainment or otherwise, as
and to the extent permitted by law, the business of the Bank. The Employee's
other duties shall be such as the Board of Directors (the "Board") of the Bank
may from time to time reasonably direct, including normal duties as an officer
of the Bank.
2. Base Compensation. The Bank agrees to pay the Employee during the
-----------------
term of this Agreement a salary at the rate of $42m per annum, payable in cash
not less frequently than monthly. The Board shall review, not less often than
annually, the rate of the Employee's salary, and in its sole discretion may
decide to increase his salary.
3. Discretionary Bonuses. The Employee shall participate in an
---------------------
equitable manner with all other senior management employees of the Bank in
discretionary bonuses that the Board may award from time to time to the Bank's
senior management employees. No other compensation provided for in this
Agreement shall be deemed a substitute for the Employee's right to participate
in such discretionary bonuses.
4. (a) Participation in Retirement, Medical and Other Plans. During
----------------------------------------------------
the term of this Agreement, the Employee shall be eligible to participate in the
following benefit plans: group hospitalization, disability, health, dental,
sick leave, life
<PAGE>
insurance, travel and/or accident insurance, auto allowance/auto lease,
retirement, pension, and/or other present or future qualified plans provided by
the Bank, generally which benefits, taken as a whole, must be at least as
favorable as those in effect on the Effective Date.
(b) Employee Benefits; Expenses. The Employee shall be eligible to
---------------------------
participate in any fringe benefits which are or may become available to the
Bank's senior management employees, including for example: any stock option or
incentive compensation plans, and any other benefits which are commensurate with
the responsibilities and functions to be performed by the Employee under this
Agreement. The Employee shall be reimbursed for all reasonable out-of-pocket
business expenses which he shall incur in connection with his services under
this Agreement upon substantiation of such expenses in accordance with the
policies of the Bank.
5. Term. The Bank hereby employs the Employee, and the Employee hereby
----
accepts such employment under this Agreement, for the period commencing on the
Effective Date and ending thirty-six months thereafter (or such earlier date as
is determined in accordance with Section 9). Additionally, on each annual
anniversary date from the Effective Date, the Employee's term of employment
shall be extended for an additional one-year period beyond the then effective
expiration date provided the Board determines in a duly adopted resolution that
the performance of the Employee has met the Board's requirements and standards,
and that this Agreement shall be extended. Only those members of the Board of
Directors who have no personal interest in this Employment Agreement shall
discuss and vote on the approval and subsequent review of this Agreement.
6. Loyalty; Noncompetition.
-----------------------
(a) During the period of his employment hereunder and except for
illnesses, reasonable vacation periods, and reasonable leaves of absence, the
Employee shall devote all his full business time, attention, skill, and efforts
to the faithful performance of his duties hereunder; provided, however, from
time to time, Employee may serve on the boards of directors of, and hold any
other offices or positions in, companies or organizations, which will not
present any conflict of interest with the Bank or any of its subsidiaries or
affiliates, or unfavorably affect the performance of Employee's duties pursuant
to this Agreement, or will not violate any applicable statute or regulation.
"Full business time" is hereby defined as that amount of time usually devoted to
like companies by similarly situated executive officers. During the term of his
or her employment under this Agreement, the Employee shall not engage in any
business or activity contrary to the business affairs or interests of the Bank,
or be gainfully employed in any other position or job other than as provided
above.
-2-
<PAGE>
(b) Nothing contained in this Paragraph 6 shall be deemed to prevent
or limit the Employee's right to invest in the capital stock or other securities
of any business dissimilar from that of the Bank, or, solely as a passive or
minority investor, in any business.
7. Standards. The Employee shall perform his duties under this
---------
Agreement in accordance with such reasonable standards as the Board may
establish from time to time. The Bank will provide Employee with the working
facilities and staff customary for similar executives and necessary for him to
perform his duties.
8. Vacation and Sick Leave. At such reasonable times as the Board shall
-----------------------
in its discretion permit, the Employee shall be entitled, without loss of pay,
to absent himself voluntarily from the performance of his employment under this
Agreement, all such voluntary absences to count as vacation time; provided that:
(a) The Employee shall be entitled to an annual vacation in
accordance with the policies that the Board periodically establishes for senior
management employees of the Bank.
(b) The Employee shall not receive any additional compensation from
the Bank on account of his failure to take a vacation or sick leave, and the
Employee shall not accumulate unused vacation or sick leave from one fiscal year
to the next, except in either case to the extent authorized by the Board.
(c) In addition to the aforesaid paid vacations, the Employee shall
be entitled without loss of pay, to absent himself voluntarily from the
performance of his employment with the Bank for such additional periods of time
and for such valid and legitimate reasons as the Board may in its discretion
determine. Further, the Board may grant to the Employee a leave or leaves of
absence, with or without pay, at such time or times and upon such terms and
conditions as such Board in its discretion may determine.
(d) In addition, the Employee shall be entitled to an annual sick
leave benefit as established by the Board.
9. Termination and Termination Pay. Subject to Section 11 hereof, the
-------------------------------
Employee's employment hereunder may be terminated under the following
circumstances:
(a) Death. The Employee's employment under this Agreement shall
-----
terminate upon his death during the term of this Agreement, in which event the
Employee's designated beneficiary, or if none, the Employee's estate, shall be
entitled to receive the compensation due the Employee through the last day of
the calendar month in which his death occurred.
-3-
<PAGE>
(b) Disability. The Bank may terminate the Employee's employment
----------
after having established the Employee's Disability. For purposes of this
Agreement, "Disability" means a physical or mental infirmity which impairs the
Employee's ability to substantially perform his duties under this Agreement and
which results in the Employee becoming eligible for long-term disability
benefits under the Bank's long-term disability plan (or, if the Bank has no such
plan in effect, which impairs the Employee's ability to substantially perform
his duties under this Agreement for a period of one hundred eighty (180)
consecutive days). The Employee shall be entitled to the compensation and
benefits provided for under this Agreement for (i) any period during the term of
this Agreement and prior to the establishment of the Employee's Disability
during which the Employee is unable to work due to the physical or mental
infirmity, or (ii) any period of Disability which is prior to the Executive's
termination of employment pursuant to this Section 9(b); provided that any
benefits paid pursuant to the Bank's long term disability plan will continue as
provided in such plan.
(2) During any period that the Employee shall receive disability benefits
and to the extent that the Employee shall be physically and mentally able to do
so, he shall furnish such information, assistance and documents so as to assist
in the continued ongoing business of the Bank and, if able, shall make himself
available to the Bank to undertake reasonable assignments consistent with his
prior position and his physical and mental health. The Bank shall pay all
reasonable expenses incident to the performance of any assignment given to the
Employee during the disability period.
(c) Just Cause. The Board may, by written notice to the Employee,
----------
immediately terminate his employment at any time, for Just Cause. The Employee
shall have no right to receive compensation or other benefits for any period
after termination for Just Cause. Termination for "Just Cause" shall mean
termination because of, in the good faith determination of the Board, the
Employee's personal dishonesty, incompetence, willful misconduct, breach of
fiduciary duty involving personal profit, intentional failure to perform stated
duties, willful violation of any law, rule or regulation (other than traffic
violations or similar offenses) or final cease-and-desist order, or material
breach of any provision of this Agreement. No act, or failure to act, on the
Employee's part shall be considered "willful" unless he has acted, or failed to
act, with an absence of good faith and without a reasonable belief that his
action or failure to act was in the best interest of the Bank. Notwithstanding
the foregoing, (i) the Employee shall not be deemed to have been terminated for
Just Cause unless there shall have been delivered to the Employee a copy of a
resolution duly adopted by the affirmative vote of not less than a majority of
the entire membership of the Board at a meeting of the Board called and held for
that purpose (after reasonable notice to the Employee and an opportunity for the
Employee, together with the Employee's
-4-
<PAGE>
counsel, to be heard before the Board), finding that in the good faith opinion
of the Board the Employee was guilty of conduct set forth above in the second
sentence of this Subsection (c) and specifying the particulars thereof in
detail.
(d) Without Just Cause; Constructive Discharge. (1) The Board may,
------------------------------------------
by written notice to the Employee, immediately terminate his employment at any
time for a reason other than Just Cause, in which event the Employee shall be
entitled to receive the following compensation and benefits (unless such
termination occurs within the time period set forth in Section 11(b) hereof in
which event the benefits and compensation provided for in Section 11 shall
apply): (i) the salary provided pursuant to Section 2 hereof, up to the date of
termination of the term as provided in Section 5 hereof (including any renewal
term) of this Agreement (the "Expiration Date"), plus said salary for an
additional 12-month period, and (ii) at the Employee's election either (A) cash
in an amount equal to the cost to the Employee of obtaining all health, life,
disability and other benefits which the Employee would have been eligible to
participate in through the Expiration Date based upon the benefit levels
substantially equal to those that the Bank provided for the Employee at the date
of termination of employment or (B) continued participation under such Bank
benefit plans through the Expiration Date, but only to the extent the Employee
continues to qualify for participation therein. All amounts payable to the
Employee shall be paid, at the option of the Employee, either (I) in periodic
payments through the Expiration Date, or (II) in one lump sum within ten (10)
days of such termination.
(2) The Employee may voluntarily terminate his employment under this
Agreement, and the Employee shall thereupon be entitled to receive the
compensation and benefits payable under Section 9(d)(1) hereof, within ninety
(90) days following the occurrence of any of the following events, which has not
been consented to in advance by the Employee in writing (unless such voluntary
termination occurs within the time period set forth in Section 11(b) hereof in
which event the benefits and compensation provided for in Section 11 shall
apply): (i) the requirement that the Employee move his personal residence, or
perform his principal executive functions, more than thirty (30) miles from his
primary office; (ii) a material reduction in the Employee's base compensation;
(iii) the failure by the Bank to continue to provide the Employee with
compensation and benefits provided for under this Agreement, as the same may be
increased from time to time, or with benefits substantially similar to those
provided to him under any of the employee benefit plans in which the Employee
now or hereafter becomes a participant, or the taking of any action by the Bank
which would directly or indirectly reduce any of such benefits or deprive the
Employee of any material fringe benefit enjoyed by him; (iv) the assignment to
the Employee of duties and responsibilities materially different from those
normally
-5-
<PAGE>
associated with his position as referenced at Section 1; (v) a failure to elect
or reelect the Employee to the Board of Directors of the Bank, if the Employee
is serving on the Board on the Effective Date of this Agreement; (vi) a
material diminution or reduction in the Employee's responsibilities or authority
(including reporting responsibilities) in connection with his employment with
the Bank; or (vii) a material reduction in the secretarial or other
administrative support of the Employee.
(3) Notwithstanding the foregoing, but only to the extent required under
federal banking law, the amount payable under clause (d)(1)(i) hereof shall be
reduced to the extent that on the date of the Employee's termination of
employment, the present value of the benefits payable under clauses (d)(1)(i)
and (ii) hereof exceeds the limitation on severance benefits that is set forth
in Regulatory Bulletin 27a of the Office of Thrift Supervision, as in effect on
the Effective Date. In the event that Section 280G of the Internal Revenue Code
of 1986, as amended (the "Code") becomes applicable to payments made under this
Section 9(d), and the payments exceed the "Maximum Amount" as defined in Section
11(a)(1) hereof, the payments shall be reduced as provided by Section 11(a)(2)
of this Agreement.
(e) Termination or Suspension Under Federal Law. (1) If the Employee
-------------------------------------------
is removed and/or permanently prohibited from participating in the conduct of
the Bank's affairs by an order issued under Sections 8(e)(4) or 8(g)(1) of the
Federal Deposit Insurance Act ("FDIA") (12 U.S.C. 1818(e)(4) and (g)(1)), all
obligations of the Bank under this Agreement shall terminate, as of the
effective date of the order, but vested rights of the parties shall not be
affected.
(2) If the Bank is in default (as defined in Section 3(x)(1) of
FDIA), all obligations under this Agreement shall terminate as of the date of
default; however, this Paragraph shall not affect the vested rights of the
parties.
(3) All obligations under this Agreement shall terminate, except to
the extent that continuation of this Agreement is necessary for the continued
operation of the Bank: (i) by the Director of the Office of Thrift Supervision
("Director of OTS"), or his or her designee, at the time that the Federal
Deposit Insurance Corporation ("FDIC") or the Resolution Trust Corporation
enters into an agreement to provide assistance to or on behalf of the Bank under
the authority contained in Section 13(c) of FDIA; or (ii) by the Director of the
OTS, or his or her designee, at the time that the Director of the OTS, or his or
her designee approves a supervisory merger to resolve problems related to
operation of the Bank or when the Bank is determined by the Director of the OTS
to be in an unsafe or unsound condition. Such action shall not affect any
vested rights of the parties.
-6-
<PAGE>
(4) If a notice served under Section 8(e)(3) or (g)(1) of the FDIA
(12 U.S.C. 1818(e)(3) or (g)(1)) suspends and/or temporarily prohibits the
Employee from participating in the conduct of the Bank's affairs, the Bank's
obligations under this Agreement shall be suspended as of the date of such
service, unless stayed by appropriate proceedings. If the charges in the notice
are dismissed, the Bank may in its discretion (i) pay the Employee all or part
of the compensation withheld while its contract obligations were suspended, and
(ii) reinstate (in whole or in part) any of its obligations which were
suspended.
(f) Voluntary Termination by Employee. Subject to Section 11 hereof,
---------------------------------
the Employee may voluntarily terminate employment with the Bank during the term
of this Agreement, upon at least ninety (90) days' prior written notice to the
Board of Directors, in which case the Employee shall receive only his
compensation, vested rights and employee benefits up to the date of his
termination (unless such termination occurs pursuant to Section 9(d)(2) hereof
or within the time period set forth in Section 11(a) hereof in which event the
benefits and compensation provided for in Sections 9(d) or 11, as applicable,
shall apply.
10. No Mitigation. The Employee shall not be required to mitigate the
-------------
amount of any payment provided for in this Agreement by seeking other employment
or otherwise and no such payment shall be offset or reduced by the amount of any
compensation or benefits provided to the Employee in any subsequent employment.
11. Change in Control.
-----------------
(a) Change in Control; Involuntary Termination. (1) Notwithstanding
------------------------------------------
any provision herein to the contrary, if the Employee's employment under this
Agreement is terminated by the Bank, without the Employee's prior written
consent and for a reason other than Just Cause, in connection with or within
thirty-six (36) months after any change in control of the Bank or the Company,
the Employee shall, subject to paragraph (2) of this Section 11(a), be paid an
amount equal to the difference between (i) the product of 2.99 times his "base
amount" as defined in Section 280G(b)(3) of the Code and regulations promulgated
thereunder (the "Maximum Amount"), and (ii) the sum of any other parachute
payments (as defined under Section 280G(b)(2) of the Code) that the Employee
receives on account of the change in control. Said sum shall be paid in one
lump sum within ten (10) days of such termination.
(2) In the event that the Employee and the Bank jointly determine and
agree that the total parachute payments receivable under clauses (i) and (ii) of
Section 11(a)(1) hereof exceed the Maximum Amount, notwithstanding the payment
procedure set forth in Section 11(a)(1) hereof, the Employee shall determine
which and how much, if any, of the parachute payments to which he is entitled
-7-
<PAGE>
shall be eliminated or reduced so that the total parachute payments to be
received by the Employee do not exceed the Maximum Amount. If the Employee does
not make his determination within ten business days after receiving a written
request from the Bank, the Bank may make such determination, and shall notify
the Employee promptly thereof. Within five business days of the earlier of the
Bank's receipt of the Employee's determination pursuant to this paragraph or the
Bank's determination in lieu of a determination by the Employee, the Bank shall
pay to or distribute to or for the benefit of the Employee such amounts as are
then due the Employee under this Agreement.
(3) As a result of uncertainty in application of Section 280G of the Code
at the time of payment hereunder, it is possible that such payments will have
been made by the Bank which should not have been made ("Overpayment") or that
additional payments will not have been made by the Bank which should have been
made ("Underpayment"), in each case, consistent with the calculations required
to be made under Section 11(a)(1) hereof. In the event that the Employee, based
upon the assertion by the Internal Revenue Service against the Employee of a
deficiency which the Employee believes has a high probability of success,
determines that an Overpayment has been made, any such Overpayment paid or
distributed by the Bank to or for the benefit of Employee shall be treated for
all purposes as a loan ab initio which the Employee shall repay to the Bank
-- ------
together with interest at the applicable federal rate provided for in Section
7872(f)(2)(B) of the Code; provided, however, that no such loan shall be deemed
to have been made and no amount shall be payable by the Employee to the Bank if
and to the extent such deemed loan and payment would not either reduce the
amount on which the Employee is subject to tax under Section 1 and Section 4999
of the Code or generate a refund of such taxes. In the event that the Employee
and the Bank determine, based upon controlling precedent or other substantial
authority, that an Underpayment has occurred, any such Underpayment shall be
promptly paid by the Bank to or for the benefit of the Employee together with
interest at the applicable federal rate provided for in Section 7872(f)(2)(B) of
the Code.
(4)(a) The term "change in control" shall mean any one of the
following events: (1) the acquisition of ownership, holding or power to vote
more than 25% of the Bank's or the Company's voting stock, (2) the acquisition
of the ability to control the election of a majority of the Bank's or the
Company's directors, (3) the acquisition of a controlling influence over the
management or policies of the Bank or the Company by any person or by persons
acting as a "group" (within the meaning of Section 13(d) of the Securities
Exchange Act of 1934), (4) the acquisition of control of the Bank or the Company
within the meaning of 12 C.F.R. Part 574 or its applicable equivalent (except in
the case of (1), (2), (3) and (4) hereof, ownership or control of the Bank by
the Company itself shall not constitute a "change in control"), or (5) during
any period of two consecutive years, individuals who at the beginning of such
period constitute the Board of Directors of the Company or the Bank (the
"Existing Board") (the "Continuing Directors") cease for any reason to
constitute at least a majority thereof, provided that any individual whose
election or nomination for election as a member of the Existing Board was
approved by a vote of at least a majority of the Continuing Directors than in
office shall be considered a Continuing Director. For purposes of this
subparagraph only, the term "person" refers to an individual or a corporation,
partnership, trust, association, joint venture, pool, syndicate, sole
propriatorship, unincorporated organization or any other form of entity not
specifically listed herein.
Notwithstanding the foregoing, but only to the extent required under
federal banking law, the amount payable under Subsection (a) of this Section 11
shall be reduced to the extent that on the date of this Employee's termination
of employment, the amount payable under Subsection (a) of this Section 11
exceeds the limitation on severance benefits that is set forth is Regulatory
Bulletin 27a of the Office of Thrift Supervision, as in effect on the Effective
Date.
-8-
<PAGE>
(b) Change in Control; Voluntary Termination. Notwithstanding any
----------------------------------------
other provision of this Agreement to the contrary, but subject to Section
11(a)(2) hereof, the Employee may voluntarily terminate his employment under
this Agreement within thirty-six (36) months following a change in control of
the Bank or the Company, as defined in paragraph (a)(4) of this Section 11, and
the Employee shall thereupon be entitled to receive the payment described in
Section 11(a)(1) of this Agreement, within ninety (90) days following the
occurrence of any of the following events, which has not been consented to in
advance by the Employee in writing: (i) the requirement that the Employee move
his personal residence, or perform his principal executive functions, more than
thirty (30) miles from his primary office as of the date of the change in
control; (ii) a material reduction in the Employee's base compensation as in
effect on the date of the change in control or as the same may be increased from
time to time; (iii) the failure by the Bank to continue to provide the Employee
with compensation and benefits provided for under this Agreement, as the same
may be increased from time to time, or with benefits substantially similar to
those provided to him under any of the employee benefit plans in which the
Employee now or hereafter becomes a participant, or the taking of any action by
the Bank which would directly or indirectly reduce any of such benefits or
deprive the Employee of any material fringe benefit enjoyed by him at the time
of the change in control; (iv) the assignment to the Employee of duties and
responsibilities materially different from those normally associated with his
position as referenced at Section 1; (v) a failure to elect or reelect the
Employee to the Board of Directors of the Bank, if the Employee is serving on
the Board on the date of the change in control; or (vi) a material diminution or
reduction in the Employee's responsibilities or authority (including reporting
responsibilities) in connection with his employment with the Bank; or (vii) a
material reduction in the secretarial or other administrative support of the
Employee.
(c) Compliance with 12 U.S.C. Section 1828(k). Any payments made to
-----------------------------------------
the Employee pursuant to this Agreement, or otherwise, are subject to and
conditioned upon their compliance with 12 U.S.C. Section 1828(k) and any
regulations promulgated thereunder.
(d) Trust. (1) Within five business days before or after a change
-----
in control as defined in Section 11(a) of this Agreement, the Bank shall (i)
deposit, or cause to be deposited, in the grantor trust (the "Trust) that was
approved by the Board of Directors on ________________, 1994, an amount equal to
2.99 times the Employee's "base amount" as defined in Section 280G(b)(3) of the
Code, and (ii) provide the trustee of the Trust with a written direction to hold
said amount and any investment return thereon in a segregated account for the
benefit of the Employee, and to follow the procedures set forth in the next
paragraph as to the payment of such amounts from the Trust.
-9-
<PAGE>
(2) During the thirty-six (36) consecutive month period following the date
on which the Bank makes the deposit referred to in the preceding paragraph, the
Employee may provide the trustee of the Trust with a written notice requesting
that the trustee pay to the Employee an amount designated in the notice as being
payable pursuant to Section 11(a) or (b). Within three business days after
receiving said notice, the trustee of the Trust shall send a copy of the notice
to the Bank via overnight and registered mail return receipt requested. On the
tenth (10th) business day after mailing said notice to the Bank, the trustee of
the Trust shall pay the Employee the amount designated therein in immediately
available funds, unless prior thereto the Bank provides the trustee with a
written notice directing the trustee to withhold such payment. In the latter
event, the trustee shall submit the dispute to non-appealable binding
arbitration for a determination of the amount payable to the Employee pursuant
to Section 11(a) or (b) hereof, and the costs of such arbitration (including any
legal fees and expenses incurred by the Employee) shall be paid by the Bank.
The trustee shall choose the arbitrator to settle the dispute, and such
arbitrator shall be bound by the rules of the American Arbitration Bank in
making his determination. The parties and the trustee shall be bound by the
results of the arbitration and, within 3 days of the determination by the
arbitrator, the trustee shall pay from the Trust the amounts required to be paid
to the Employee and/or the Bank, and in no event shall the trustee be liable to
either party for making the payments as determined by the arbitrator.
(3) Upon the earlier of (i) any payment from the Trust to the Employee, or
(ii) the date thirty-six (36) months after the date on which the Bank makes the
deposit referred to in the first paragraph of this subsection (d)(1), the
trustee of the Trust shall pay to the Bank the entire balance remaining in the
segregated account maintained for the benefit of the Employee. The Employee
shall thereafter have no further interest in the Trust pursuant to this
Agreement.
(e) In the event that any dispute arises between the Employee and the
Bank as to the terms or interpretation of this Agreement, including this Section
11, whether instituted by formal legal proceedings or otherwise, including any
action that the Employee takes to enforce the terms of this Section 11 or to
defend against any action taken by the Bank, the Employee shall be reimbursed
for all costs and expenses, including reasonable attorneys' fees, arising from
such dispute, proceedings or actions, provided that the Employee shall obtain a
final judgement by a court of competent jurisdiction in favor of the Employee.
Such reimbursement shall be paid within ten (10) days of Employee's furnishing
to the Bank written evidence, which may be in the form, among other things, of a
cancelled check or receipt, of any costs or expenses incurred by the Employee.
-10-
<PAGE>
12. Federal Income Tax Withholding. The Bank may withhold all Federal
------------------------------
and State income or other taxes from any benefit payable under this Agreement as
shall be required pursuant to any law or government regulation or ruling.
13. Successors and Assigns.
----------------------
(a) Bank. This Agreement shall not be assignable by the Bank,
----
provided that this Agreement shall inure to the benefit of and be binding upon
any corporate or other successor of the Bank which shall acquire, directly or
indirectly, by merger, consolidation, purchase or otherwise, all or
substantially all of the assets or stock of the Bank.
(b) Employee. Since the Bank is contracting for the unique and
--------
personal skills of the Employee, the Employee shall be precluded from assigning
or delegating his rights or duties hereunder without first obtaining the written
consent of the Bank; provided, however, that nothing in this paragraph shall
preclude (i) the Employee from designating a beneficiary to receive any benefit
payable hereunder upon his death, or (ii) the executors, administrators, or
other legal representatives of the Employee or his estate from assigning any
rights hereunder to the person or persons entitled thereunto.
(c) Attachment. Except as required by law, no right to receive
----------
payments under this Agreement shall be subject to anticipation, commutation,
alienation, sale, assignment, encumbrance, charge, pledge, or hypothecation or
to exclusion, attachment, levy or similar process or assignment by operation of
law, and any attempt, voluntary or involuntary, to effect any such action shall
be null, void and of no effect.
14. Amendments. No amendments or additions to this Agreement shall be
----------
binding unless made in writing and signed by all of the parties, except as
herein otherwise specifically provided.
15. Applicable Law. Except to the extent preempted by Federal law, the
--------------
laws of the State of Illinois shall govern this Agreement in all respects,
whether as to its validity, construction, capacity, performance or otherwise.
16. Severability. The provisions of this Agreement shall be deemed
------------
severable and the invalidity or unenforceability of any provision shall not
affect the validity or enforceability of the other provisions hereof.
17. Entire Agreement. This Agreement, together with any understanding or
----------------
modifications thereof as agreed to in writing by the parties, shall constitute
the entire agreement between the parties hereto.
-11-
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement on the day and
year first hereinabove written.
ATTEST: ILLINOIS GUARANTEE SAVINGS BANK, FSB
By:
- -------------------------------- ----------------------------------
Secretary
Its:
------------------------------
WITNESS:
- -------------------------------- ------------------------------------
Employee
-12-
<PAGE>
ILLINOIS COMMUNITY BANCORP, INC.
1996
ANNUAL REPORT
<PAGE>
Dear Stockholder:
It is with great pleasure that we present Illinois Community Bancorp's Annual
Report to Shareholders for the fiscal year ended June 30, 1996. It has been an
extremely busy year as management, the directors of your Corporation, and its
Bank subsidiary adjusted to life as a public company, highlighted by the
completion of the Holding Company Reorganization in September 1996.
The completion of our initial public offering in September 1995 paved the way
for successful earnings performance in the current fiscal year. Net earnings
for fiscal year 1996 totaled $178,000, or $0.38 per share on pro-forma basis,
representing an increase of $117,000 over our fiscal 1995 earnings of $61,000.
The enhanced earnings were primarily attributable to a $367,000, or 38.11%,
increase in Net Interest Income. On June 30, 1996, Stockholders' Equity
represented 15.73% of Total Assets.
The overwhelming local public response to our initial stock offering has
presented a challenge to your Board and Senior Management. Specifically,
optimal deployment of capital has become one of our primary area's of strategic
focus. Toward this end, we undertook several significant initiatives during
fiscal year 1996.
First, we made every attempt to internally leverage the capital base through
growth in our loan portfolio with strong, safe and profitable loans. Loans
receivable increased during the year by $14.2 million, or 65.11%. The increase
in loans, representing the highest level of growth in our history, was
accomplished through expansion of our loan product line, added management
expertise in our lending staff, and aggressive direct marketing efforts in our
primary banking area. Concurrently, our overall marketing efforts resulted in
an increase of $3.8 million in new deposit accounts, or a 11.78% increase over
fiscal year end 1995.
Second, we remain committed to the local community bank concept and have made a
firm commitment to further establishing our presence and enhancing our
visibility in the community, and significantly improving the level of service to
our present and future customers. In April 1996, we broke ground on our new
Mid-America Banking Facility. Construction is progressing with completion and
full operation scheduled for December of 1996. The new 10,000 square foot
facility will provide customers a full range of banking services including
loans, drive-up banking and driveup ATM services. In June 1996, we completed an
upgrade to our internal data processing system. The improvements will provide
our customers better quality account information, as well as providing a higher
level of detailed information for management, and increased efficiency of bank
personnel.
In conclusion, the Directors, Officers and Staff wish to thank all of you for
your support of Illinois Community Bancorp over its first year of operations as
a public company. We will continue to adapt to change in our industry, continue
to promote employee involvement in the community, look forward to fiscal 1997
with cautious optimism, and remain ever-committed to maximizing the value of
your investment in our Corporation.
Respectfully,
ILLINOIS COMMUNITY BANCORP, INC.
Douglas A. Pike Gerald E. Ludwig
President Chairman of the Board
<PAGE>
GENERAL
Illinois Community Bancorp, Inc.
Illinois Community Bancorp, Inc. (the "Company"), an Illinois
corporation, was organized by Illinois Guarantee Savings Bank, FSB ("Illinois
Guarantee" or the "Bank") to be a savings institution holding company. The
Company was organized at the direction of the Bank in June 1996 to acquire all
of the capital stock of the Bank upon the consummation of the reorganization of
the Bank into the holding company form of ownership, (the "Reorganization")
which was completed on September 27, 1996, and the Company's Common Stock became
registered under the Securities Exchange Act of 1934, also on September 27,
1996. The Company has no significant assets other than capital stock of the
Bank and $100,000 retained by the Company following the Reorganization. The
Company is a unitary savings and loan holding company subject to regulation by
the OTS. The Company's principal business is the business of the Bank and its
subsidiary. For that reason, and because the Reorganization was completed
subsequent to the end of the 1996 fiscal year, substantially all of the
discussion in this Annual Report relates to the operations of the Bank and its
subsidiary.
Illinois Guarantee Savings Bank, FSB
Illinois Guarantee is a federally chartered stock savings bank with
its sole office in Effingham, Illinois. Illinois Guarantee was founded on April
7, 1893 as an Illinois state-chartered savings and loan association, and its
deposits have been federally insured since 1959. Illinois Guarantee has been a
member of the Federal Home Loan Bank ("FHLB") of Chicago since 1949. In
February 1990, Illinois Guarantee converted from a state-chartered savings and
loan association to a federally chartered savings bank under its current name.
The Bank completed its conversion from a federally chartered mutual savings bank
to a federally chartered capital stock savings bank (the "Conversion") on
September 28, 1995 (the "Conversion Date") through the sale and issuance of
502,550 shares of Bank common stock at a price of $10.00 per share for gross
proceeds of $5,025,500 and proceeds, net of conversion expenses, of $4,563,000.
Illinois Guarantee's office is located at 210 E. Fayette Avenue,
Effingham, Illinois 62401-3613, and its telephone number is (217) 347-7127.
Illinois Guarantee considers its primary market area to be its home county of
Effingham. Illinois Guarantee serves its market area through its sole office in
Effingham, Illinois. The Bank is in the process of opening a branch office in
Effingham. See "New Business Strategies" below.
The business of Illinois Guarantee primarily consists of attracting
savings deposits from the general public and investing such deposits in loans
secured by single-family residential real estate, investment securities,
including U.S. Government and Agency securities, interest-earning deposits,
mortgage-backed securities and local municipal securities. Illinois Guarantee
also makes multi-family and commercial real estate loans, and consumer loans,
including automobile loans and savings account loans. Illinois Guarantee
emphasizes the origination of residential real estate mortgage loans with
adjustable interest rates and fixed-rate loans with shorter terms (15 years or
less) and makes other investments which are responsive to changes in interest
rates, and which allow Illinois Guarantee to more closely match the interest
rates and maturities of its assets and liabilities.
As a federally chartered savings institution, Illinois Guarantee is
subject to regulation and supervision by the OTS and the Federal Deposit
Insurance Corporation ("FDIC"), and to OTS regulations governing such matters as
capital standards, mergers, establishment of branch offices, subsidiary
investments and activities and general investment authority. The OTS
periodically examines the Bank for compliance with various regulatory
requirements. The FDIC also has the authority to conduct special examinations
of the Bank because its deposits are insured by the SAIF. The Bank must file
reports with OTS describing its activities and financial condition. The Bank is
also subject to certain reserve requirements promulgated by the Federal Reserve
Board. This supervision and regulation is intended primarily for the protection
of depositors.
New Business Strategies
Since new management joined the Bank in mid 1995, the Bank has adopted
various new business strategies intended to increase its presence in its primary
market area of Effingham County, Illinois ("Primary Market Area"), thereby
increasing its lending activities and sources of income. These steps include
(i) hiring experienced banking personnel including a new chief credit officer
(now President Douglas Pike, who continues to engage in the Bank's
<PAGE>
lending activities), a chief administrative officer and various other employees
to support the Bank's expanded operations; (ii) instituting a marketing program
to contact local realtors, builders, auto dealers and others in order to
increase the origination of one-to-four-family residential loans, construction
loans and permanent loans secured by multi-family and commercial real estate,
and consumer loans, including direct and indirect automobile loans, through
arrangements with local auto dealers; (iii) planning the opening of a new branch
office (expected to open in the fourth quarter of 1996) in the northern section
of its Primary Market Area, an area of Effingham, Illinois which is experiencing
growth in commercial and retail activities, and is in close proximity to
expanding residential areas; (iv) installing automated teller machines ("ATMs")
at its main office and the new branch office, as well as other possible "stand
alone" locations; and (v) offering new products to its customers and potential
customers, including a credit and debit card program. The Company plans to form
two corporate subsidiaries to conduct leasing activities and financial services.
MARKET INFORMATION
At the present time, the Company's common stock is listed and traded
over-the-counter through the National Daily Quotation System "Pink Sheets"
published by the National Quotation Bureau. The high and low bid information
for the Company's common stock for the fiscal quarters since the Bank's initial
public offering was completed on September 28, 1995 is as follows:
<TABLE>
<CAPTION>
Bid Price(1)
--------------
For the Quarter Ended High Low
--------------------- ---- ---
<S> <C> <C>
December 31, 1995 $11.75 $10.00
March 31, 1996 11.50 11.50
June 30, 1996 11.50 12.50
September 30, 1996 (through 9/25/96) 12.00 11.50
</TABLE>
- --------------------
(1) Based on bids received by Trident Securities, Inc. The quotations reflect
inter-dealer prices without retail mark-up, mark-down, or commission, and
may not represent actual transactions. Represents trading in the Bank's
common stock, as became the Company's common stock was not outstanding
until September 27, 1996.
There is currently no active market for the Company's common stock and it
is not expected that an active market for the Company's common stock will
develop. There were approximately 145 stockholders of record at September 25,
1996. Through June 30, 1996, the Bank had declared and paid one cash dividend
of $0.15 per share, during the quarter ended June 30, 1996.
2
<PAGE>
SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA
The following summary of selected consolidated financial information and
other data does not purport to be complete and is qualified in its entirety by
reference to the detailed information and consolidated financial statements and
accompanying notes appearing elsewhere herein.
<TABLE>
<CAPTION>
Financial Condition Data:
At June 30,
--------------------------------------------
1996 1995 1994 1993 1992
------ ------ ------ ------ ------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Total amount of:
Assets............................ $46,421 $36,393 $35,195 $35,481 $37,340
Loans receivable, net............. 36,069 21,846 21,251 20,185 22,468
Cash and investment securities (1) 6,814 11,319 10,683 10,994 10,155
Mortgage-backed securities (2).... 1,773 2,326 2,696 3,741 4,069
Deposit and demand accounts....... 36,548 32,703 31,787 32,757 34,667
Advances - FHLB................... 1,608 0 0 0 0
Other borrowings.................. 356 0 0 0 0
Stockholders equity (3)........... 7,302 2,959 3,049 2,874 2,458
- --------------------------------------------------------------------------------
Number of:
Real estate loans................. 758 722 768 726 795
Deposit and demand accounts....... 5,847 4,564 4,485 3,992 4,306
Offices open...................... 1 1 1 1 1
- -------------
</TABLE>
(1) Includes available for sale securities (at estimated market values) of
$6,108,000 and $2,004,000 at June 30, 1996 and 1995.
(2) Includes available for sale mortgage-backed securities (at estimated market
values) of $1,773,000 at June 30, 1996.
(3) Includes unrealized gains on securities held as available for sale of
$142,000 and $121,000 at June 30, 1996 and 1995.
3
<PAGE>
<TABLE>
<CAPTION>
Summary of Operations
Year Ended June 30,
-------------------------------------------------
1996 1995 1994 1993 1992
------- ------- ------- ------- -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Interest income................... $ 3,017 $ 2,379 $ 2,177 $ 2,477 $ 2,994
Interest expense.................. (1,687) (1,416) (1,263) (1,575) (2,149)
------- ------- ------- ------- -------
Net interest income............... $ 1,330 $ 963 $ 914 $ 902 $ 845
Provision for loan losses......... (81) (50) -- -- (31)
------- ------- ------- ------- -------
Net interest income after
provision for loan losses........ 1,249 913 914 902 814
Non-interest income............... 59 38 119 54 81
Non-interest expense.............. (1,019) (883) (550) (591) (573)
------- ------- ------- ------- -------
Income before provision for
income tax....................... 289 68 483 365 322
Provision for income tax.......... 111 (7) (168) (116) (103)
------- ------- ------- ------- -------
Net income before effects of
change in accounting principle... 178 61 315 249 219
Cumulative effect of change in
accounting principle............. -- -- 4 -- --
------- ------- ------- ------- -------
Net income........................ $ 178 $ 61 $ 319 $ 249 $ 219
======= ======= ======= ======= =======
</TABLE>
4
<PAGE>
Key Ratios
<TABLE>
<CAPTION>
At or for the Year Ended June 30,
----------------------------------
1996 1995 1994
------ ------ ------
<S> <C> <C> <C>
Performance Ratios:
Return on assets (net income
divided by average
total assets)................... .43% 0.17% 0.91%
Return on equity (net income
divided by
average equity)................. 2.81% 2.07% 12.09%
Net yield on interest-earning
assets
(net income as a percentage of
average
interest-earning assets)........ 0.45% 0.18% 2.67%
Interest rate spread (combined
weighted average
interest rate earned less
combined weighted
average interest rate cost)..... 2.65% 2.40% 2.39%
Non-interest expense to average
total assets.................... 2.45% 2.49% 1.56%
Average daily liquidity ratio.... 17.99% 24.73% 23.53%
Asset quality ratios:
Nonperforming assets to total
assets at end of period......... 0.86% 0.29% 0.36%
Allowance for loan losses to
non-performing loans............ 64.67% 265.15% 158.23%
Allowance for loan losses to
total loans
receivable, net................. 0.63% 0.79% 0.58%
Capital ratios:
Retained earnings to total
assets at end of period......... 15.73% 8.13% 8.17%
Equity-to-Assets Ratio (average
equity divided
by average total assets)....... 15.21% 8.38% 7.51%
Average interest-earning assets
to average
interest-bearing liabilities... 116.64% 108.71% 106.41%
Per Share Data:
Net income (1)................... $ 0.30 -- --
Pro forma net income (2)......... 0.38 -- --
Book value (3)................... 14.53 -- --
- -------------
</TABLE>
(1) Net income is calculated using the period from October 1, 1995 through June
30, 1996. The Bank converted to a stock savings bank on September 28, 1995
and the earnings from the date of conversion to September 30, 1995 were
considered insignificant on the per share calculation.
(2) Pro forma amount does not reflect pro forma effects of the stock conversion
on September 28, 1995 since the beginning of the year.
(3) Book value includes the liquidation account of the mutual share holders as
of the date of conversion.
5
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General
The business of the Bank consists of attracting deposits from the general
public and using these funds to originate mortgage loans secured by one- to
four-family residences located primarily in Effingham, Illinois and surrounding
areas. To a lesser extent, the Bank invests in interest-bearing deposits, U.S.
Government and federal agency securities, mortgage-backed securities and local
municipal securities. Illinois Guarantee also originates multi-family and
commercial real estate loans, as well as automobile loans, home improvement
loans and other consumer loans. The Bank's profitability depends primarily on
its net interest income, which is the difference between the interest income it
earns on its loans, mortgage-backed securities and investment portfolio and its
cost of funds, which consists mainly of interest paid on deposits. Net interest
income is affected by the relative amounts of interest-earning assets and
interest-bearing liabilities and the interest rates earned or paid on these
balances. When interest-earning assets approximate or exceed interest-bearing
liabilities, any positive interest rate spread will generate net interest
income.
The Bank's profitability is also affected by the level of noninterest
income and expense. Noninterest income consists primarily of late charges and
other loan fees. Noninterest expense consists of salaries and benefits,
occupancy related expenses, deposit insurance premiums paid to the SAIF and
other operating expenses.
The operations of the Bank, and savings institutions in general, are
significantly influenced by general economic conditions and related monetary and
fiscal policies of financial institutions' regulatory agencies. Deposit flows
and the cost of funds are influenced by interest rates on competing investments
and general market rates of interest. Lending activities are affected by the
demand for financing real estate and other types of loans, which in turn is
affected by the interest rates at which such financing may be offered and other
factors affecting loan demand and the availability of funds.
Asset/Liability Management
The principal operating objective of the Bank is the achievement of a
positive interest rate spread that can be sustained during fluctuations in
prevailing interest rates. Since the Bank's principal interest-earning assets
have substantially longer terms to maturity than its primary source of funds,
i.e., deposit liabilities, increases in general interest rates will generally
result in an increase in the Bank's cost of funds before the yield on its asset
portfolio adjusts upwards. Savings institutions have generally sought to reduce
their exposure to adverse changes in interest rates by attempting to achieve a
closer match between the periods in which their interest-bearing liabilities and
interest-earning assets can be expected to reprice through the origination of
adjustable-rate mortgages and loans with shorter terms.
The term "interest rate sensitivity" refers to those assets and liabilities
which mature and reprice periodically in response to fluctuations in market
rates and yields. Thrift institutions have historically operated in a
mismatched position with interest-sensitive liabilities greatly exceeding
interest-sensitive assets in the short-term time periods. As noted above, one
of the principal goals of the Bank's asset/liability program is to more closely
match the interest rate sensitivity characteristics of the asset and liability
portfolios.
In order to properly manage interest rate risk, the Bank's management
monitors the difference between the Bank's maturing and repricing assets and
liabilities and develops and implements strategies to decrease the "negative
gap" between the two. Management assesses the Bank's asset/liability mix,
recommends strategies to the Board of Directors that will enhance income while
managing the Bank's vulnerability to changes in interest rates, and reports to
the Board of Directors the results of the strategies used.
6
<PAGE>
Since the early 1980's, the Bank has stressed the origination of adjustable
rate mortgage loans. At June 30, 1996, $11.8 million, or 51.30%, of the Bank's
total loans secured by real estate were adjustable rate mortgages. In addition,
the Bank had $392,000 in adjustable rate mortgage-backed securities at June 30,
1996.
In order to increase the interest rate sensitivity of its assets, the Bank
has also maintained a consistent level of short and intermediate-term investment
securities and other assets. At June 30, 1996, the Bank had $2.7 million of
investment securities and interest-bearing deposits maturing within one year and
$0.6 million of investment securities maturing within one to five years. At
June 30, 1996, the Bank also had $2.7 million in investment securities maturing
after ten years, of which $1.5 million represented the Bank's investment in an
asset management adjustable rate fund, which is an uninsured mutual fund, which
thereby carries greater risk than government insured investment securities.
In the future, in managing its interest rate sensitivity, the Bank intends
to continue to stress the origination of adjustable-rate mortgages and loans
with shorter maturities, the purchase of adjustable rate mortgage-backed
securities and the maintenance of a consistent level of short-term securities.
In addition, the Bank may increase its origination of fixed-rate mortgage loans,
and then sell such loans in the secondary mortgage market to FHLMC.
Interest Rate Sensitivity Analysis
The matching of assets and liabilities may be analyzed by examining the
extent to which such assets and liabilities are "interest rate sensitive" and by
monitoring an institution's interest rate sensitivity "gap." An asset or
liability is said to be interest rate sensitive within a specific period if it
will mature or reprice within that period. The interest rate sensitivity gap is
defined as the difference between the amount of interest-earning assets maturing
or repricing within a specific time period and the amount of interest-bearing
liabilities maturing or repricing within that time period. A gap is considered
positive when the amount of interest rate sensitive assets exceeds the amount of
interest rate sensitive liabilities, and is considered negative when the amount
of interest rate sensitive liabilities exceeds the amount of interest rate
sensitive assets. Generally, during a period of rising interest rates, a
negative gap would adversely affect net interest income while a positive gap
would result in an increase in net interest income, while conversely during a
period of falling interest rates, a negative gap would result in an increase in
net interest income and a positive gap would negatively affect net interest
income.
7
<PAGE>
The following table sets forth the amounts of interest-earning assets and
interest-bearing liabilities outstanding at June 30, 1996 which are expected to
mature or reprice in each of the time periods shown/(1)/.
<TABLE>
<CAPTION>
Over One
Through Over Five Over
One Year Five Through Ten
or Less Years Ten Years Years Total
--------- --------- --------- ------- --------
(In thousands)
<S> <C> <C> <C> <C> <C>
Interest-earning assets:
Mortgage loans, gross..... $15,782 $10,556 $ 2,407 $1,963 $30,738
Consumer and other loans,
gross.................... 587 5,004 -- -- 5,591
Investment securities
(2)(3)................... 5,217 578 17 525 6,337
Mortgage-backed securities 328 798 483 157 1,766
------- ------- -------- ------ -------
Total.................... 21,914 16,936 2,937 2,645 44,432
Interest-bearing
liabilities:
Deposits (1).............. 21,426 14,249 -- -- 35,675
Borrowings................ 1,648 161 155 0 1,964
------- ------- -------- ------ -------
Total.................... 23,074 14,410 155 0 37,639
Interest sensitivity gap... $(1,160) $ 2,526 $ 2,782 $2,645 $ 6,793
======= ======= ======== ====== =======
Cumulative interest
sensitivity gap........... $(1,160) $ 1,366 $ 4,148 $6,793 $ 6,793
======= ======= ======== ====== =======
Ratio of interest-earning
assets
to interest-bearing
liabilities.............. 94.97% 117.53% 1894.84% --% 118.05%
======= ======= ======== ====== =======
Ratio of cumulative gap to
total assets.............. (2.50)% 2.94% 8.94% 14.63% 14.52%
======= ======= ======== ====== =======
</TABLE>
____________________
(1) In calculating this table, the Bank has used the assumptions which
follow: be 20% per year and money market deposit accounts decay at a rate
of 50% for the first year and 25% per next two years; and (ii) prepayment
assumptions are as follows: mortgage loans -- 10.0% per year; consumer
and other loans -- 5.0% per year; mortgage-backed securities -- 7.5% per
year.
(2) Investment securities are at amortized cost.
(3) Investment securities include interest-bearing deposits and time
deposits. Call dates on various securities have not been considered.
Management believes the current one-year gap of (2.50)% presents a slight
risk to the net interest income margin should an increase occur in the current
level of interest rates. If interest rates increase, the Bank's negative one-
year gap should cause the net interest margin to decrease. A conservative rate-
gap policy provides a stable net interest income margin. Accordingly,
management emphasizes a structured balance of rates spread by term to maturity
and does not anticipate a change in such objectives over the next year.
The preceding table was prepared utilizing certain assumptions regarding
prepayment and decay rates which management of the Bank believes reflect
Illinois Guarantee's actual experience. While management does not believe that
these assumptions will be materially different from Illinois Guarantee's actual
experience, the actual interest rate sensitivity of the Bank's assets and
liabilities could vary significantly from the information set forth in the table
due to market and other factors.
Certain shortcomings are inherent in the method of analysis presented in the
table above. Although certain assets and liabilities may have similar maturity
or periods of repricing they may react in different degrees to changes in the
market interest rates. The interest rates on certain types of assets and
liabilities may fluctuate in advance of changes in market interest rates, while
rates on other types of assets and liabilities may lag behind changes in market
interest rates. Certain assets, such as adjustable-rate mortgages, generally
have features which restrict changes in interest rates on a short-term basis and
over the life of the asset. In the event of a change in interest rates,
prepayments and early withdrawal levels would likely deviate significantly from
those assumed in calculating the table. Additionally, an increased credit risk
may result as the ability of many borrowers to service their debt may decrease
in the event of an interest rate increase. Virtually all of the adjustable-rate
loans in the Bank's portfolio contain conditions which restrict the periodic
change in interest rate.
8
<PAGE>
Average Balances, Interest and Average Yields
The following table sets forth certain information relating to the Bank's
average balance sheet and reflects the average yield on assets and average cost
of liabilities for the periods indicated and the average yields earned and rates
paid at the periods indicated. Such yields and costs are derived by dividing
income or expense by the average monthly balance of assets or liabilities,
respectively, for the periods presented. Management does not believe that the
use of monthly balances instead of daily balances has caused any material
difference in the information presented. Interest earned on loan portfolios is
net of reserves for uncollected interest.
<TABLE>
<CAPTION>
Year Ended June 30,
---------------------------------------------------------
1996 1995
---------------------------- ---------------------------
Average Average
Yield/ Yield/
Balance Interest Cost Balance Interest Cost
-------- -------- -------- ------- -------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loan receivable, net....................... $28,603 $2,314 8.09% $21,273 $1,581 7.43%
Investment securities...................... 8,936 548 6.13 10,659 615 5.77
Mortgage-backed securities................. 2,046 155 7.58 2,524 183 7.25
------- ------ ------ ------- -------- -------
Total interest-earning assets............ 39,585 3,017 7.62 34,456 2,379 6.89
------ ------ --------
Non-interest-earning assets.................. 2,018 1,024
------- -------
Total assets............................ $41,603 $35,480
======= =======
Interest-bearing liabilities:
Deposits................................... $33,444 $1,652 4.93 $31,695 $1,416 4.49
Advances FHLB.............................. 205 12 5.83 -- --
Other...................................... 288 23 7.99 -- --
------- ------ ------
Total interest-bearing liabilities....... 33,937 1,687 4.97 31,695 1,416 4.49
------ ------ ------- -------- -------
Non-interest-bearing liabilities............. 1,337 830
------- -------
Total liabilities........................ 35,274 32,525
Common stock............................. 387 --
Paid-in capital.......................... 3,124 --
Retained earnings........................ 2,949 2,859
Valuation reserves....................... 157 96
ESOP plan shares......................... (288) --
------- -------
Total liabilities and retained
earnings............................. $41,603 $35,480
======= =======
Net interest income.......................... $1,330 $ 914
====== ========
Interest rate spread......................... 2.65% 2.40%
====== =======
Net yield on interest-earning assets......... 3.36% 2.79%
====== =======
Ratio of average interest-earning assets to
average interest-bearing liabilities....... 116.64% 108.71%
====== =======
</TABLE>
9
<PAGE>
Rate/Volume Analysis
The table below sets forth certain information regarding changes in interest
income and interest expense of the Bank for the periods indicated. For each
category of interest-earning asset and interest-bearing liability, information
is provided on changes attributable to: (i) changes in volume (changes in volume
multiplied by old rate), (ii) changes in rates (change in rate multiplied by old
volume), and (iii) total change. Changes in rate-volume (changes in rate
multiplied by changes in volume) are allocated proportionately between changes
in rate and changes in volume.
<TABLE>
<CAPTION>
Year Ended June 30,
-------------------------------
1996 vs. 1995
-------------------------------
Increase (Decrease)
Due to
-------------------------------
Rate/
Volume Rate Volume Total
------- ----- ------- ------
(In thousands)
<S> <C> <C> <C> <C>
Interest Income:
Loan portfolio, net.................... $ 545 $ 140 $ 48 $ 733
Mortgage-backed securities............. (99) 38 (6) (67)
Investment securities.................. (34) 8 (2) (28)
----- ---- ---- -----
Total interest-earning assets........ 412 186 40 638
----- ---- ---- -----
Interest expense:
Deposits............................... 79 139 18 236
Advances - FHLB..................... 12 0 0 12
Other............................... 23 0 0 23
Total interest-bearing liabilities.. 114 139 18 271
----- ---- --- -----
Change in net interest income............ $ 298 $ 47 $ 22 $ 367
===== ==== ==== =====
</TABLE>
Comparison of Financial Condition at June 30, 1996 and 1995
The Bank experienced growth during fiscal year 1996, as the Bank's assets
increased by $10.0 million, or a 27.55%, from $36.4 million at June 30, 1995 to
$46.4 million at June 30, 1996. This growth can be attributed to the proceeds
from the conversion of $4.6 million and the implementation of new business
strategies. The Bank expects growth over the next one to three years of
approximately 10% per year. This growth rate could be significantly influenced
by the new branch facility which is scheduled to be completed in December of
1996.
Loans receivable increased by $14.3 million, or 65.11%, during fiscal year
1996, from $21.8 million at June 30, 1995 to $36.1 million at June 30, 1996.
The significant increases in the Bank's loan portfolio were $6.0 million
increase in one to four family residential loans, $2.6 million increase in
commercial real estate loans, $1.3 million increase in residential mortgage
loans, $1.0 million in commercial loans, and a $2.4 million in automobile loans.
The increase in these lending activities was part of the Bank's new business
strategies. The Bank has hired an additional consumer loan officer and a senior
vice president/chief credit officer in conjunction with the loan growth. The
Bank is anticipating a decrease in the rate of growth during the next year.
Cash and investment securities decreased by $4.5 million, or 47.32%, during
fiscal year 1996 from $11.3 million at June 30, 1995 to $6.8 million at June 30,
1996. The decrease was due to the increased loan demand during 1996. The Bank
started borrowing from the FHLB in April of 1996 and continued for the through
the end of the year to maintain adequate liquidity.
Mortgaged-backed securities decreased by $550,000, or 23.78%, during fiscal
year 1996 from $2.3 million at June 30, 195 to $1.8 million at June 30, 1996.
The decrease was the result of the maturing of a balloon mortgage-
10
<PAGE>
backed security and the paydown on principal. Management does not intend to
purchase any additional mortgage-backed securities.
Premise and equipment has increased by $947,000, or 300.63%, during fiscal
year 1996 from $315,000 at June 30, 1995 to $1.3 million at June 30, 1996.
During the fiscal year 1996, the Bank spent approximately $155,000 to upgrade
their existing facility, equipment, and install an ATM. In addition, the Bank
purchased new computer equipment and data processing software in the amount of
$103,000. The Bank has incurred $744,000 of a $1.4 million contract on their
branch location. The Bank anticipates no substantial purchases during 1997
other than the completion of the branch location.
The Banks deposits have grown $3.8 million, or 11.76%, during the last fiscal
year from $32.7 million to $36.5 million for the fiscal years ended June 30,
1995 and 1996, respectively. This deposit growth is attributed to new deposits
and an increase in existing customer deposits. The Bank attributes this growth
to the increased community awareness of the Bank from the stock conversion and
increase lending activity. The Bank is anticipating a ten to fifteen percent
increase in deposits in the next year due to the community awareness and opening
of the new branch facility, however, there can be no assurance that such deposit
growth will be achieved. This growth will assist in providing liquidity for the
Bank's lending activities.
Comparison of Operating Results for the Years Ended June 30, 1996 and 1995
Net Income. The Bank's net income for year ended June 30, 1996 was $178,000
compared to $61,000 for the year ended June 30, 1995. The increase was
primarily due to an increase in net interest income of $367,000 and non-interest
income of $21,000 which was offset by an increase in the provision for loan
losses of $31,000, non-interest expense of $136,000 and provision for income
taxes of $117,000.
Net Interest Income. Net interest income for the year ended June 30, 1996 was
$1.3 million compared to $1.0 million for the year ended June 30, 1995. This
increase in net interest income was due to the increase in the ratio of
interest-earning assets to interest-bearing liabilities from 108.71% for the
year ended June 30, 1995 to 116.64% for the year ended June 30, 1996. The
improvement in the ratio was mainly from the investment of the proceeds from the
Conversion on September 28, 1995 and the investment of these funds into
interest-earning assets. With the improvement of this ratio, the interest rate
spread increased from 2.40% for the year ended June 30, 1995 to 2.65% for the
year ended June 30, 1996. The increase in the interest rate spread was a
combination of a significant increase in both dollar amount and interest rates
for interest-earning assets when compared to interest-bearing liabilities.
Interest Income. Interest income increased by $638,000, or 26.82%, from $2.4
million for the year ended June 30, 1995 to $3.0 million for the year ended June
30, 1996. This increase was the result of the $5.1 million, or 14.89%, increase
in average balance of interest-earning assets from $34.5 million in 1995 to
$39.6 million in 1996. In addition, average yield on interest-earning assets
increased by 0.73% from 6.89% for the year ended June 30, 1995 to 7.62% for the
year ended June 30, 1996. This increase was attributed to an increase of 10.52%
in the ratio of average loans receivable to average total earning assets, from
61.74% in fiscal 1995 to 72.26% in fiscal 1996. The Bank attributes this
improvement to increased market awareness and implementation of new lending
strategies.
Interest Expense. Interest expense increased $271,000, or 19.14%, from $1.4
million for the year ended June 30, 1995 to $1.7 million for the year ended June
30, 1996. This increase was attributed to an increase in the average cost of
deposits from 4.49% for 1995 to 4.93% for 1996 and an increase in average
balance of deposits outstanding from $31.7 million for 1995 to $33.4 million for
1996. The Bank had no significant shift in the deposit mix for 1996. In
addition, the growth in deposits was not sufficient to fund the loan
originations during 1996. In April of 1996, the Bank requested advances, for
the first time in recent years, from the FHLB. FHLB advances amounted to $1.6
million at June 30, 1996 with an average cost of advances of 5.83% with interest
expense for the year of $12,000. As part of the Conversion, the Bank borrowed
money from a local bank to purchase the shares
11
<PAGE>
for the ESOP. The ESOP loan, other borrowed money, amounted to $356,000 as of
June 30, 1996 with an average interest rate of 8.0% with interest expense for
the year of $23,000.
Provision for Loan Losses. The allowance for loan losses is established
through a provision for loan losses based on management's evaluation of the risk
inherent in its loan portfolio and the general economy. Such evaluation
considers numerous factors including general economic conditions, loan portfolio
composition, prior loan experience, the estimated fair value of the underlying
collateral and other factors that warrant recognition in providing for an
adequate loan loss allowance. During the years ended June 30, 1996 and 1995,
the Bank's provision for loan losses was $81,000 and $50,000, respectively.
This increase was due to an increase in the loan portfolio.
At June 30, 1996, the Bank's allowance for loan losses was $227,000. The
breakdown of general loss allowances and specific loss allowances is made for
regulatory accounting purposes only. General loan loss allowances are added
back to capital to the extent permitted in computing risk-based capital. At
June 30, 1996, approximately $227,000 of the general allowance was eligible to
be counted as risk-based capital. Both general and specific loss allowances are
charged to expense. The consolidated financial statements of the Bank are
prepared in accordance with GAAP and, accordingly, provisions for loan losses
are based on management's assessment of the factors set forth above. The Bank
regularly reviews its loan portfolio, including problem loans, to determine
whether any loans require classification and/or the establishment of appropriate
reserves. Management believes it has established its existing allowance for
loan losses in accordance with GAAP, however, future reserves may be necessary
if economic conditions or other circumstances differ substantially from the
assumptions used in making the initial determination. Additional loan loss
provisions may be necessary, as lending activities increase.
Noninterest income. Noninterest income increased $21,000, or 55.26%, from
$38,000 for the year ended June 30, 1995 to $59,000 for the year ended June 30,
1996. The increase in noninterest income was due to an $11,000 gain on the sale
of the Palestine, Illinois branch facility which was closed in 1991 and an
increase in fees charged on loans and deposit accounts which increased $16,000
from year ended June 30, 1995 to June 30, 1996. The increased fee income can be
attributed to an increase in loan and deposit accounts during fiscal 1996.
Noninterest Expense. Noninterest expense increased by $136,000, or 15.40%,
from $883,000 for the year ended June 30, 1995 to $1.0 million for the year
ended June 30, 1996. The increase can be attributed to increases in occupancy
and equipment expense, data processing expense, professional expense, and other
operating expenses. The increase in occupancy expense was primarily due to
increased depreciation expense and additional maintenance contracts on equipment
purchased in the last year. Data processing expense increased due to the
purchase of additional software applications and a general increase in loans and
deposits during 1996. Professional expense increased due to training and
reporting requirements of a publicly held bank. Other operating expenses
increased primarily due to additional expenditures required for a publicly held
bank, replacement of office supplies and purchases of larger quantities since
the Conversion, and business development expenses associated with new business
strategies and increased exposure in our market area. These increases were
partially offset by the decrease in compensation and employee benefits. The
Bank hired additional employees, incurred ESOP expense, and general salaries
increased during the current year. These costs of additional employees were
less than the severance agreement recorded in 1995 for the prior Chief Executive
Officer.
Nonperforming Assets. At June 30, 1996, the Bank had $400,000 in
nonperforming assets, compared with $144,000 in nonperforming assets at June 30,
1995. As of both dates, the Bank had $49,000 of real estate held for sale which
consisted of unimproved building lots. The significant increase in
nonperforming assets consisted of residential real estate loans which were 90
days or more past due and still accruing. With the increase in lending during
the current year, the Bank hired an additional senior vice president and chief
credit officer to provide increased effort in the area of delinquent loans and
additional staff for loan originations.
12
<PAGE>
Liquidity and Capital Resources
The Bank's primary sources of funds consist of deposits, repayment and
prepayment of loans and mortgage-backed securities, maturities of investments
and interest-bearing deposits, and funds provided from operations. While
scheduled repayments of loans and mortgage-backed securities and maturities of
investment securities are predictable sources of funds, deposit flows and loan
prepayments are greatly influenced by the general level of interest rates,
economic conditions and competition. The Bank uses its liquidity resources
principally to fund existing and future loan commitments, to fund maturing
certificates of deposit and demand deposit withdrawals, to invest in other
interest-earning assets, to maintain liquidity, and to meet operating expenses.
The Bank has met, and believes it will continue to meet its liquidity needs for
the 1996 and 1997 fiscal years.
The Bank is required to maintain minimum levels of liquid assets as defined by
OTS regulations. This requirement, which may be varied at the direction of the
OTS depending upon economic conditions and deposit flows, is based upon a
percentage of deposits and short-term borrowings. The required minimum ratio is
currently 5%. The Bank has historically maintained a level of liquid assets in
excess of regulatory requirements. The Bank's average regulatory liquidity
ratio at June 30, 1996 was 14.38%.
A portion of the Bank's liquidity consists of cash and cash equivalents, which
include investments in highly liquid deposits with original maturities of 3
years or less. The level of these assets is dependent on the Bank's operating,
investing, lending and financing activities during any given period. At June
30, 1996, cash and cash equivalents totaled $407,000.
The primary investing activity of the Bank is the origination of loans.
During the year ended June 30, 1996, purchases of investment securities totaled
$1.5 million while loan originations totaled $18.8 million. These investments
were funded primarily from loan and mortgage-backed security repayments of $4.4
million, investment security maturities of $5.3 million and conversion proceeds
of $4.6 million for the year ended June 30, 1996.
Liquidity management is both a daily and long-term function of business
management. If the Bank requires funds beyond its ability to generate them
internally, the Bank believes that it could borrow additional funds from the
FHLB. As of June 30, 1996, the Bank had $1.6 million in outstanding advances
from the FHLB.
At June 30, 1996, the Bank had $1.0 million in outstanding commitments to
originate adjustable rate mortgages and 0.6 million to originate fixed rate
loans. The Bank anticipates that it may not have sufficient funds available to
meet its current loan origination commitments and additional advances from FHLB
may be requested. Certificates of deposit which are scheduled to mature in one
year or less totaled $19.0 million at June 30, 1996. Based on historical
experience, management believes that a significant portion of such deposits will
remain with the Bank.
At June 30, 1996, the Bank exceeded all of its regulatory capital
requirements.
Impact of Inflation and Changing Prices
The consolidated financial statements of the Company and notes thereto,
presented elsewhere herein, have been prepared in accordance with generally
accepted accounting principles, which require the measurement of financial
position and operating results in terms of historical dollars without
considering the change in the relative purchasing power of money over time and
due to inflation. The impact of inflation is reflected in the increased cost of
the Company's operations. Unlike most industrial companies, nearly all the
assets and liabilities of the Company are monetary. As a result, interest rates
have a greater impact on the Company's performance than do the effects of
general levels of inflation. Interest rates do not necessarily move in the same
direction or to the same extent as the price of goods and services.
13
<PAGE>
Impact of Recent Accounting Pronouncements
Accounting for Impaired Loans. In September 1993, the FASB issued SFAS No.
114, "Accounting by Creditors for Impairment of a Loan." SFAS No. 114 specifies
that allowances for loan losses on impaired loans should be determined using the
present value of estimated future cash flows of the loan, discounted at the
loan's effective interest rate. A loan is impaired when it is probable that all
principal and interest amounts will not be collected according to the loan
contract. SFAS No. 114 is effective for fiscal years beginning after December
15, 1994, which for the Bank was the 1996 fiscal year. Management adopted SFAS
No. 114 on July 1, 1995, without material impact on consolidated financial
position or results of operations. In October 1994, the FASB amended certain of
the revenue recognition provisions of SFAS No. 114 by the issuance of SFAS No.
118. Such revisions similarly had no material effect on the consolidated
financial condition or results of operations.
Derivative Financial Instruments. In October 1994, the FASB issued SFAS No.
119, "Disclosure About Derivative Financial Instruments and Fair Value of
Financial Instruments." SFAS No. 119 requires financial statement disclosure of
certain derivative financial instruments, defined as futures, forwards, swaps,
option contracts, or other financial instruments with similar characteristics.
In the opinion of management, the disclosure requirements of SFAS No. 119 will
not have a material effect on the Company's consolidated financial condition or
results of operations, as the Company does not invest in derivative financial
instruments, as defined in SFAS No. 119. As a result, the applicability of SFAS
No. 119 relates solely to disclosure requirements pertaining to fixed-rate and
adjustable-rate loan commitments.
Accounting for ESOP. The Accounting Standards Executive Committee of the
American Institute of Certified Public Accountants ("AcSEC") has issued
Statement of Position ("SOP 93-6") on "Employers' Accounting for Employee Stock
Ownership Plans" ("ESOP"). SOP 93-6, among other things, changes the measure of
compensation expense recorded by employers from the cost of ESOP shares to the
fair value of ESOP shares. To the extent that fair value of the Company's ESOP
shares differs from the cost of such shares, compensation expense must be
recorded in the Company's financial statements for the fair value of ESOP shares
allocated to participants for a reporting period. SOP 93-6 was adopted by the
Company during fiscal 1995, without material financial statement effect.
Accounting for Mortgage Servicing. In May 1995, the FASB issued SFAS No. 122,
"Accounting for Mortgage Servicing Rights." SFAS No. 122 requires that the
Company recognizes as separate assets rights to service mortgage loans for
others, regardless of how those servicing rights were acquired. An institution
that acquires mortgage servicing rights through either the purchase or
origination of mortgage loans and sells those loans with servicing rights
retained would allocate some of the cost of the loans to the mortgage servicing
rights. SFAS No. 122 also requires that an enterprise allocate the cost of
purchasing or originating the mortgage loans between the mortgage servicing
rights and the loans when mortgage loans are securitized, if it is practicable
to estimate the fair value of mortgage servicing rights. Additionally, SFAS No.
122 requires that capitalized mortgage servicing rights and capitalized excess
servicing receivables be assessed for impairment. Impairment would be measured
based on fair value. SFAS No. 122 is to be applied prospectively to the
Company's fiscal year beginning July 1, 1996, to transactions in which an entity
acquires mortgage servicing rights and to impairment evaluations of all
capitalized mortgage servicing rights and capitalized excess servicing
receivables whenever acquired. Retroactive application is prohibited.
Management adopted SFAS No. 122 on July 1, 1996, as required, without material
effect on the Company's consolidated financial position or results of
operations.
Accounting for Stock-Based Compensation. In October 1994, the FASB issued
SFAS No. 123 entitled "Accounting for Stock Based Compensation." SFAS No. 123
establishes a fair value based method of accounting for stock-based compensation
paid to employees. SFAS No. 123 recognizes the fair value of an award of stock
or stock options on the grant date and is effective for transactions occurring
after December 1995. Companies are allowed to continue to measure compensation
cost for those plans using the intrinsic value based method of accounting, which
generally does not result in compensation expense recognition for most plans.
Companies that
14
<PAGE>
elect to remain with the existing accounting are required to disclose in a
footnote to the financial statements pro forma net earnings and, if presented,
earnings per share, as if SFAS No. 123 had been adopted. Management has
determined that the Company will continue to account for stock-based
compensation pursuant to Accounting Principles Board Opinion No. 25, and
therefore adoption of SFAS No. 123 will not have a material effect on the
Company's consolidated financial condition or results of operations.
Accounting for Transfers of Financial Assets. In June 1996, the FASB issued
SFAS No. 125, "Accounting for Transfers of Financial Assets, Servicing Rights,
and Extinguishment of Liabilities," that provides accounting guidance on
transfers of financial assets, servicing of financial assets, and extinguishment
of liabilities. SFAS No. 125 introduces an approach to accounting for transfers
of financial assets that provides a means of dealing with more complex
transactions in which the seller disposes of only a partial interest in the
assets, retains rights or obligations, makes use of special purpose entities in
the transaction, or otherwise has continuing involvement with the transferred
assets. The new accounting method, the financial components approach, provides
that the carrying amount of the financial assets transferred be allocated to
components of the transaction based on their relative fair values. SFAS No. 125
provides criteria for determining whether control of assets has been
relinquished and whether a sale has occurred. If the transfer does not qualify
as a sale, it is accounted for as a secured borrowing. Transactions subject to
the provisions of SFAS No. 125 include, among others, transfers involving
repurchase agreements, securitizations of financial assets, loan participations,
factoring arrangements, and transfers of receivables with recourse.
An entity that undertakes an obligation to service financial assets recognizes
either a servicing asset or liability for the servicing contract (unless related
to a securitization of assets, and all the securitized assets are retained and
classified as held-to-maturity). A servicing asset or liability that is
purchased or assumed is initially recognized at its fair value. Servicing
assets and liabilities are amortized in proportion to and over the period of
estimated net servicing income or net servicing loss and are subject to
subsequent assessments for impairment based on fair value.
SFAS No. 125 provides that a liability is removed from the balance sheet only
if the debtor either pays the creditor and is relieved of its obligation for the
liability or is legally released from being the primary obligor.
SFAS No. 125 is effective for transfers and servicing of financial assets and
extinguishment of liabilities occurring after December 31, 1996, and is to be
applied prospectively. Earlier or retroactive application is not permitted.
Management does not believe that adoption of SFAS No. 125 will have a material
adverse effect on the Company's consolidated financial position or results of
operations.
Other Developments -- BIF-SAIF Premium Disparity; Deposit Insurance Assessment
The Bank's savings deposits are insured by the Savings Association Insurance
Fund ("SAIF"), which is administered by the FDIC. The assessment rate currently
ranges from 0.23% of deposits for well capitalized institutions to 0.31% of
deposits for undercapitalized institutions.
The FDIC also administers the Bank Insurance Fund ("BIF"), which has the same
designated reserve ratio as the SAIF. The FDIC amended the BIF risk-based
assessment schedule which lowered the deposit insurance assessment rate for most
commercial banks and other depository institutions with deposits insured by the
BIF to a range of from 0.31% of insured deposits for undercapitalized BIF-
insured institutions to a statutory minimum of $2,000 annually for well-
capitalized institutions, which constitute over 90% of BIF-insured institutions.
These revisions to the BIF assessment rate schedule created a substantial
disparity in the deposit insurance premiums paid by BIF and SAIF members and
placed SAIF-insured savings institutions such as the Bank at a significant
competitive disadvantage to BIF-insured institutions.
To alleviate this disparity, one proposal being considered by the U.S.
Department of Treasury, the FDIC and the U.S. Congress provides a one-time
assessment of 65.7 basis points be imposed on all SAIF-insured deposits
15
<PAGE>
to cause the SAIF to reach its designated reserve ratio. Once this occurs, the
two funds would be merged into one fund. There can be no assurance that this
proposal or any other proposal will be implemented or that premiums for either
fund will not be adjusted in the future by the FDIC or legislative action.
The payment of a special assessment would severely and negatively impact the
Bank's results of operations, resulting in a change of up to $340,000, after
adjusting for tax benefits. However, if such a special assessment is imposed
and the SAIF is recapitalized, it could have the effect of reducing the Bank's
insurance premiums in the future, thereby creating equal competition between
BIF-insured and SAIF-insured institutions.
16
<PAGE>
Index to Consolidated Financial Statements and Auditors' Report
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
Independent Auditors' Report................................................. 18
Consolidated Financial Statements
Consolidated Statements of Financial Condition.............................. 19
Consolidated Statements of Income........................................... 21
Consolidated Statements of Stockholders' Equity............................. 22
Consolidated Statements of Cash Flows....................................... 23
Notes to Consolidated Financial Statements.................................. 25
</TABLE>
17
<PAGE>
Independent Auditors' Report
To the Board of Directors
Illinois Guarantee Savings Bank FSB
and Subsidiary
Effingham, Illinois
We have audited the accompanying consolidated statements of financial
condition of Illinois Guarantee Savings Bank, FSB and Subsidiary as of June
30, 1996 and 1995, and the related consolidated statements of income,
stockholders' equity, and cash flows for each of the years then ended June 30,
1996, 1995 and 1994. These consolidated financial statements are the
responsibility of the Bank's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the consolidated financial
statements are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the
consolidated financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as
well as evaluating the overall consolidated financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of Illinois Guarantee Savings Bank, FSB and Subsidiary as of June 30, 1996 and
1995 and the results of their operations and their cash flows for each of the
years then ended June 30, 1996, 1995 and 1994 in conformity with generally
accepted accounting principles.
As discussed in Note A to the consolidated financial statements, the Bank
changed its method of accounting for income taxes during the year ended June
30, 1994 to adopt the provisions of Statement of Financial Accounting
Standards No. 109, Accounting for Income Taxes. The Bank also changed its
method of accounting for certain investments in debt and equity securities
during the year ended June 30, 1994 to adopt the provisions of Statement of
Financial Accounting Standards No. 115, Accounting for Certain Investments in
Debt and Equity Securities.
July 23, 1996
18
<PAGE>
ILLINOIS GUARANTEE SAVINGS BANK, FSB AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
June 30, 1996 and 1995
<TABLE>
<CAPTION>
June 30,
------------------
1996 1995
------- ---------
ASSETS (1,000's)
------------------
<S> <C> <C>
Cash and Cash Equivalents:
Cash $ 267 $ 415
Interest bearing deposits 140 1,175
------- -------
Total Cash and Cash Equivalents 407 1,590
Time deposits 0 1,980
Securities available for sale, amortized cost
of $5,898 and $1,817 at June 30, 1996 and 1995,
respectively (Note B) 6,108 2,004
Securities held to maturity, estimated market value
of $299 and $5,736 at June 30, 1996 and 1995,
respectively (Note B) 299 5,745
Mortgage-backed securities available for sale, amortized
cost of $1,766 at June 30, 1996 (Note C) 1,773 0
Mortgage-backed securities held to maturity, estimated
market value of $2,379 at June 30, 1996
and 1995, respectively (Note C) 0 2,326
Loans receivable, net (Note D & N) 36,069 21,846
Accrued interest receivable (Note E) 309 263
Premises and equipment, net (Note F) 1,262 315
Real estate held for sale 49 49
Prepaid income taxes 0 71
Other assets 145 204
------- -------
Total Assets $46,421 $36,393
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits (Note G) $36,548 $32,703
Advances from Federal Home Loan Bank (Note H) 1,608 0
Other borrowings (Note P) 356 0
Advances from borrowers for taxes and insurance 91 289
Accrued interest payable 103 133
Accrued income taxes (Note J) 41 0
Deferred income taxes (Note J) 16 21
Other liabilities (Note Q) 356 288
------- -------
Total Liabilities 39,119 33,434
------- -------
</TABLE>
19
<PAGE>
ILLINOIS GUARANTEE SAVINGS BANK, FSB AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
June 30, 1996 and 1995
<TABLE>
<CAPTION>
June 30,
--------------------------
1996 1995
--------- ---------
(1,000's)
--------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Commitments and Contingencies (Note M)
<S> <C> <C>
Stockholders' Equity (Note O)
Serial preferred stock, $1.00 par value; authorized 1,000,000 shares
0 shares issued $ 0 $ 0
Common stock, $1.00 par value; authorized 1,000,000
shares
502,550 shares issued and outstanding 503 0
Paid-in capital 4,066 0
Retained earnings (Note I) 2,947 2,838
Unrealized gain on securities held available for sale 142 121
Unearned employee stock ownership plan (Note P) ( 356) 0
--------- ---------
Total Stockholders' Equity 7,302 2,959
--------- ---------
Total Liabilities and Stockholders' Equity $ 46,421 $ 36,393
========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
20
<PAGE>
ILLINOIS GUARANTEE SAVINGS BANK, FSB AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
For the Years Ended June 30, 1996, 1995 and 1994
<TABLE>
<CAPTION>
Year Ended June 30,
-------------------
1996 1995 1994
------ ------ ------
(1,000's)
----------------------
<S> <C> <C> <C>
Interest income:
Interest on loans $2,314 $1,581 $1,464
Interest and dividends on securities 703 798 713
------ ------ ------
Total interest income 3,017 2,379 2,177
------ ------ ------
Interest expense:
Interest on deposits (Note G) 1,652 1,416 1,263
Interest on Federal Home Loan Bank
advances 12 0 0
Interest on other borrowings 23 0 0
------ ------ ------
Total interest expense 1,687 1,416 1,263
------ ------ ------
Net interest income 1,330 963 914
Provision for loan losses (Note D) 81 50 0
------ ------ ------
Net interest income after provision for
loan losses 1,249 913 914
------ ------ ------
Non-interest income:
Net gain on sale of interest-earning
assets 2 0 81
Gain on sale of premises (Note F) 11 0 0
Other fees 38 22 21
Insurance commissions 5 8 7
Other 3 8 10
------ ------ ------
Total other income 59 38 119
------ ------ ------
Non-interest expense:
Compensation and employee benefits (Notes K and P) 513 554 234
Occupancy and equipment 109 63 56
Data processing 81 69 62
Audit, legal and other professional 51 26 21
SAIF deposit insurance 88 85 86
Advertising 39 30 34
Other 138 56 57
------ ------ ------
1,019 883 550
------ ------ ------
Income before income taxes and cumulative
effect of change in accounting
principle 289 68 483
Provision for income taxes (Note J) 111 7 168
------ ------ ------
Income before cumulative effect of change
in accounting principle 178 61 315
Cumulative effect of change in accounting
for income taxes 0 0 4
------ ------ ------
Net income $ 178 $ 61 $ 319
====== ====== ======
Earnings per share $0.30 N/A N/A
====== ====== ======
Pro-forma earnings per share $0.38 N/A N/A
====== ====== ======
</TABLE>
See accompanying notes to consolidated financial statements.
21
<PAGE>
ILLINOIS GUARANTEE SAVINGS BANK, FSB AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For the Years Ended June 30, 1996, 1995 and 1994
<TABLE>
<CAPTION>
Unrealized
Unearned Gain on
Employee Securities
Stock Available
Common Paid-in Retained Ownership For
Stock Capital Earnings Plan Sale Total
--------- --------- --------- --------- --------- ---------
(1,000's)
--------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance at June 30, 1993 $ 0 $ 0 $ 2,458 $ 0 $ 0 $ 2,458
Unrealized gain on securities
available for sale 0 0 0 0 73 73
Net income 0 0 319 0 0 319
Change in unrealized gain on
securities available for sale 0 0 0 0 24 24
--------- --------- --------- --------- --------- ---------
Balance at June 30, 1994 0 0 2,777 0 97 2,874
Net income 0 0 61 0 0 61
Change in unrealized gain
on securities available for sale 0 0 0 0 24 24
--------- --------- --------- --------- --------- ---------
Balance at June 30, 1995 0 0 2,838 0 121 2,959
Issuance of common
shares (Note O) 503 4,060 0 (402) 0 4,161
Cash dividends 0 0 (69) 0 0 (69)
Net income 0 0 178 0 0 178
Change in unrealized gain on
securities available for sale 0 0 0 0 21 21
ESOP shares earned 0 6 0 46 0 52
--------- --------- --------- --------- --------- ---------
Balance at June 30, 1996 $ 503 $ 4,066 $ 2,947 ($ 356) $ 142 $ 7,302
========= ========= ========= ========= ========= =========
</TABLE>
22
<PAGE>
ILLINOIS GUARANTEE SAVINGS BANK, FSB AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended June 30,
--------------------------------------
1996 1995 1994
---------- ---------- ----------
(1,000's)
--------------------------------------
<S> <C> <C> <C>
Operating activities:
---------- ---------- ----------
Net income $ 178 $ 61 $ 319
Adjustments to reconcile net income to net
cash provided by operating activities
Provision for depreciation 55 21 19
Provision for loan losses 81 50 0
Net amortization and accretion of securities 3 2 46
Increase in accrued interest receivable ( 46) ( 25) ( 8)
Decrease (increase) in other assets 59 ( 170) ( 5)
(Decrease) increase in accrued interest payable ( 30) 86 8
Increase (decrease) in accrued income taxes 112 ( 71) 45
Increase (decrease) in deferred income taxes ( 16) ( 65) 7
(Decrease) increase in other liabilities 68 228 ( 14)
Federal Home Loan Bank stock dividends 0 ( 3) 0
Stock dividends on securities ( 142) ( 91) ( 56)
Gain on sale of investments ( 2) 0 ( 81)
Gain on sale of facility ( 11) 0 0
ESOP benefit expense 12 0 0
---------- ---------- ----------
Net cash provided by operating activities 321 23 280
---------- ---------- ----------
Investing activities:
Sale of securities 0 0 87
Proceeds from securities held to maturity
and certificates of deposit 3,070 6,243 1,094
Proceeds from matured securities available for sale 1,686 0 0
Proceeds from sale of securities available for sale 502 0 0
Purchase of securities held to maturity
and certificates of deposit ( 379) ( 7,510) ( 2,457)
Purchase of securities available for sale ( 1,156) 0 0
Increase in loans receivable ( 13,804) ( 696) ( 1,466)
Purchase of mortgage loans ( 500) 0 0
Repayment of mortgage-backed securities 323 370 1,044
Sale of originated loans 0 51 400
Proceeds from sale of facility 13 0 0
Purchase of premises and equipment ( 1,002) ( 92) ( 10)
Redemption of Federal Home Loan Bank stock 0 0 115
---------- ---------- ----------
Net cash used in investing activities ( 11,247) ( 1,634) ( 1,193)
---------- ---------- ----------
</TABLE>
23
<PAGE>
ILLINOIS GUARANTEE SAVINGS BANK, FSB AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended June 30,
---------------------------------
1996 1995 1994
--------- ---------- ----------
(1,000's)
---------------------------------
<S> <C> <C> <C>
Financing activities:
Advances from Federal Home
Loan Bank $ 1,608 $ 0 $ 0
Net increase (decrease) in
deposits 3,845 916 ( 970)
Increase (decrease) in
advances from borrowers
for taxes and insurance ( 198) ( 4) 171
Proceeds from Employee
Stock Ownership Plan note 402 0 0
Repayment Employee Stock
Ownership Plan loan ( 46) 0 0
Proceeds from issuance of
common stock 4,563 0 0
Purchase of employee stock
ownership plan stock ( 402) 0 0
Allocated shares of ESOP
stock 46 0 0
Cash dividends ( 75) 0 0
-------- ------ ------
Net cash provided by (used in)
financing activities 9,743 912 ( 799)
-------- ------ ------
Decrease in cash and cash equivalents ( 1,183) ( 699) (1,712)
Cash and cash equivalents at beginning of period 1,590 2,289 4,001
--------- ------ ------
Cash and cash equivalents at end of period $ 407 $1,590 $2,289
======== ====== ======
Supplemental disclosures:
Additional cash flows information:
Cash paid for:
Interest on deposits, advances and other
borrowings $ 1,717 $1,330 $1,255
Income taxes $ 15 204 101
Schedule of noncash investing activities:
Stock dividends were distributed by the
Federal Home Loan Bank of Chicago $ 0 $ 3 $ 0
Investment and mortgage-backed securities
transfer to available for sale $ 6,364 $ 0 $1,870
Unrealized gain on securities available for
sale $ 30 $ 37 $ 150
</TABLE>
24
<PAGE>
ILLINOIS GUARANTEE SAVINGS BANK, FSB AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note A. Summary of Significant Accounting Policies
Description of the Business
Illinois Guarantee Savings Bank, FSB (the Bank) is a federal chartered stock
savings bank with offices located in Effingham County. The Bank's deposits
are insured by the Federal Deposit Insurance Corporation (FDIC) through the
Savings Association Insurance Fund (SAIF) up to $100,000. The Bank is subject
to the regulations of certain federal agencies and undergoes periodic
examinations by those agencies.
Basis of Financial Statement Presentation
The accounting and reporting policies of Illinois Guarantee Savings Bank, FSB
(the Bank) follow the accrual basis of accounting and conform to generally
accepted accounting principles and to general practice within the financial
institution industry. The consolidated financial statements include the
accounts of the Bank and its wholly owned subsidiary IGSL Service
Corporation, which was incorporated to provide insurance services. All
material intercompany transactions and accounts have been eliminated.
In preparing the consolidated financial statements, management is required to
make estimates and assumptions that affect the reported amounts of assets and
liabilities as of the date of the statement of consolidated financial
condition and revenues and expenses for the year. Actual results could differ
significantly from those estimates.
Material estimates that are particularly susceptible to significant change
relate to the determination of the allowance for losses on loans and the
valuation of real estate acquired in connection with foreclosures or in
satisfaction of loans. In connection with the determination of the allowances
for loan losses and foreclosed real estate, management obtains independent
appraisals for significant properties.
Management believes the allowance for loan losses and real estate owned is
adequate. Management uses available information to recognize losses on loans
and foreclosed real estate. Future additions to the allowances may be
necessary based on changes in local economic conditions. In addition,
regulatory agencies, as an integral part of their examination process,
periodically review the Bank's allowances for losses on loans and foreclosed
real estate. Such agencies may require the Bank to recognize additions to the
allowances based on their judgments about information available to them at
the time of their examination.
Cash Equivalents
Cash equivalents of $407,000, $1,590,000 and $2,289,000 at June 30, 1996,
1995 and 1994, respectively, consist of interest bearing deposits. For
purposes of the consolidated statements of cash flows, the Bank considers all
highly liquid debt instruments with original maturities of three months or
less to be cash equivalents.
25
<PAGE>
ILLINOIS GUARANTEE SAVINGS BANK, FSB AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note A. Summary of Significant Accounting Policies
Securities
In May 1993 the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (SFAS) No. 115, Accounting for Certain
Investments in Debt and Equity Securities. This statement addresses the
accounting and reporting for investments by classifying them into three
categories: securities held to maturity, trading securities, and securities
available for sale. The Bank adopted SFAS No. 115 as of July 1, 1993. Upon
implementation of SFAS No. 115, certain securities classified as securities
held to maturity at June 30, 1993 with a carrying amount aggregating
$1,870,000 and an approximate market value of $1,980,000 were transferred to
securities available for sale. The impact of the adoption on the Bank's
consolidated financial statements was an increase in retained earnings of
$73,000, net of tax.
Securities available for sale are carried at market value at June 30, 1996
and 1995. Net unrealized gains and losses, net of tax effect, are credited or
charged to retained earnings. Securities held to maturity are carried at
amortized cost. The Bank has adequate liquidity and capital, and it's
management's intention, to hold such assets to maturity. Gains and losses on
sales of securities are recognized at the time of sale and are calculated
based on the specific identification method. Premiums and discounts are
amortized using the interest method over the term of the securities.
Loans and Allowance for Loan Losses
Loans are considered a held to maturity asset and, accordingly, are carried
at historical cost. Loans are stated at the amount of unpaid principal,
reduced by unearned discounts, allowances for loan losses, loans in process,
loans participated to other financial institutions, and deferred loan
origination fees. Unearned discounts on nonmortgage installment loans are
recognized as income over the term of the loan by the interest method.
Interest on all other mortgage and nonmortgage loans is calculated by using
the simple interest method on the unpaid principal outstanding. An allowance
for loan losses has been established for loans through a provision for loan
losses charged to operations. Loans are charged against the allowance for
loan losses when management believes that the collectibility of the principal
is unlikely. The allowance is an amount that management believes will be
adequate to absorb probable losses on existing loans that may become
uncollectible, based on evaluations of the collectibility of loans and prior
loan loss experience. The evaluations take into consideration such factors as
changes in the nature and volume of the loan portfolio, overall portfolio
quality, review of specific problem loans, and current economic conditions
that may affect the borrowers' ability to pay.
Management believes that the allowance for loan losses is adequate. While
management uses available information to recognize losses on loans, future
additions to the allowance may be necessary based on changes in economic
conditions. In addition, various regulatory agencies, as an integral part of
their examination process, periodically review the Bank's allowance for loan
losses. Such agencies may require the Bank to recognize additions to the
allowance based on their judgments of information available to them at the
time of their examination. Allowances for impaired loans are generally
determined based on collateral values or the present value of estimated cash
flows. The allowance is increased by a provision for loan losses, which is
charged to expense, and reduced by charge-offs, net of recoveries. Changes in
the allowance relating to impaired loans are charged or credited to the
provision for loan losses.
26
<PAGE>
ILLINOIS GUARANTEE SAVINGS BANK, FSB AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note A. Summary of Significant Accounting Policies
Loans and Allowance for Loan Losses
Loans are placed on nonaccrual when a loan is specifically determined to be
impaired. Any unpaid interest previously accrued on those loans is reversed
from income. Interest income generally is not recognized on specific impaired
loans unless the likelihood of further loss is remote. Income is subsequently
recognized only to the extent that cash payments are received until, in
management's judgment, the borrower's ability to make periodic interest and
principal payments is back to normal, in which case the loan is returned to
accrual status.
Fees and Related Costs
Loan origination and commitment fees, as well as certain direct origination
costs, are deferred and amortized as a yield adjustment over the contractual
term of the related loans using the interest method. Amortization of deferred
loan fees is discontinued when a loan is placed on nonaccrual status.
Mortgage-Backed Securities
Mortgage-backed securities are stated at cost, adjusted for amortization of
premiums and accretion of discounts by the interest method. The Bank has
adequate liquidity and capital, and it is management's intention, to hold
such assets to maturity.
Real Estate Held for Investment and Foreclosed Real Estate
Direct investments in real estate properties held for investment are carried
at the lower of cost, including cost of improvements and amenities subsequent
to acquisition, or net realizable value. The real estate held for investment
as of June 30, 1996 and 1995 consists of undeveloped lots which, in
accordance with OTS regulations, are considered as a real estate equity
investment because of the holding period.
Foreclosed real estate held for sale is carried at the lower of cost or
estimated fair market value, net of estimated selling costs. Costs of holding
foreclosed property are charged to expense in the current period, except for
significant property improvements, which are capitalized to the extent that
carrying value does not exceed estimated fair market value.
Premises and Equipment
Land is carried at cost. Buildings and furniture, fixtures, and equipment are
carried at cost, less accumulated depreciation and amortization. Buildings
and furniture, fixtures, and equipment are depreciated using the straight-
line method over the estimated useful lives of the assets. The estimated
useful lives are seven to forty years for buildings and improvements and five
to twelve years for equipment.
27
<PAGE>
ILLINOIS GUARANTEE SAVINGS BANK, FSB AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note A. Summary of Significant Accounting Policies
Income Taxes
In February 1992, the Financial Accounting Standards Board issued SFAS
Statement No. 109, Accounting for Income Taxes, SFAS Statement No. 109
requires a change from the deferred method to the asset-and-liability method
of accounting for income taxes. Under the asset-and-liability method,
deferred income taxes are recognized for the tax consequences of "temporary
differences" by applying enacted statutory tax rates applicable to future
years to differences between the financial statement carrying amounts and the
tax bases of existing assets and liabilities. Under SFAS Statement No. 109,
the effect on deferred taxes of a change in tax rates is recognized in income
in the period that includes the enactment date. The Bank elected to adopt
SFAS Statement No. 109 effective July 1, 1993, and has reported the
cumulative effect of the change in the method of accounting for income taxes
as of July 1, 1993, in the consolidated statements of income for the year
ended June 30, 1994.
Earnings Per Share
The Bank converted from a mutual savings bank to a stock savings bank on
September 28, 1995. Earnings per share for 1996 were computed by dividing net
income of $140,000 from September 30, 1995 through June 30, 1996 by the
weighted average common stock shares outstanding of 464,377 for the period.
Earnings from September 28, 1995 through September 30, 1995 were considered
insignificant on the earnings per share calculation. Proforma earnings per
share were computed by dividing the net income of $178,000 for the year ended
June 30, 1996 by the average shares outstanding, since the conversion to
stock, of 464,377 for the period. The proforma earnings per shares
calculation does not reflect the pro forma effects of the stock offering
being received at the beginning of the year. Only ESOP shares committed to be
released or released are considered in the calculation of earnings per share.
Earnings per share amounts have not been presented for the years ended June
30, 1995 and 1994 which were prior to the stock conversion.
Off-Balance-Sheet Financial Instruments
In the ordinary course of business the Bank has entered into off-balance-
sheet financial instruments consisting of commitments to extend credit,
commitments under credit card arrangements, commercial letters of credit and
standby letters of credit. Such instruments are recorded in the consolidated
financial statements when they become payable.
Reclassifications
Amounts presented in prior year consolidated financial statements have been
reclassified to conform to the 1995 presentation.
Pending Accounting Standards
In March 1995, the FASB issued SFAS No. 121 "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." This
statement is effective for fiscal years beginning after December 15, 1995.
SFAS No. 121 establishes accounting standards for the impairment of long-
lived assets, certain identifiable intangibles and goodwill related to those
assets to be held and used, and for long-lived assets and certain
identifiable intangible assets to be disposed of. The Standard requires an
impairment loss to be recognized when the carrying amount of the asset
exceeds the fair value of the asset. Management does not anticipate the
implementation of this standard having a material adverse impact on the
financial statements.
28
<PAGE>
ILLINOIS GUARANTEE SAVINGS BANK, FSB AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note A. Summary of Significant Accounting Policies
Pending Accounting Standards, Concluded
In May 1995, the FASB issued SFAS No. 122 "Accounting for Mortgage Servicing
Rights," which amended SFAS No. 65 "Accounting for Certain Mortgage Banking
Activities." SFAS No. 122 requires a mortgage banking enterprise to recognize
as separate assets rights to service mortgage loans for others; however,
these servicing rights are acquired. This statement applies prospectively in
fiscal years beginning after December 15, 1995. The Bank is not required to
adopt the standard for the periods presented in these financial statements,
and as such, has not determined the impact on the consolidated financial
statements of adopting this standard.
In October 1995, the FASB issued SFAS No. 123 "Accounting for Stock-Based
Compensation." SFAS No. 123 establishes a fair value based method of
accounting for stock-based compensation plans. This statement is effective
for fiscal years beginning after December 15, 1995 and applies to all
transactions in which an entity grants shares of its common stock, stock
options, or other equity instruments to its employees, except for equity
instruments held by an employee stock ownership plan. The Bank is not
required to adopt the standard for the periods presented in these financial
statements, and as such, has not determined the impact on the consolidated
financial statements of adopting this standard.
Note B. Securities
Securities available-for-sale are summarized as follows:
<TABLE>
<CAPTION>
June 30, 1996
----------------------------------------------
Gross Gross Approximate
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
--------- ---------- ----------- -----------
(1,000's)
----------------------------------------------
<S> <C> <C> <C> <C>
U.S. Treasury $1,478 $ 2 $ 1 $1,479
Obligations of other U.S.
government agencies 1,498 0 21 1,477
State and municipal obligations 207 0 3 204
Asset Management Adjustable
Rate Fund 1,500 0 12 1,488
FHLMC stock 12 245 0 257
FHLB stock, at cost 214 0 0 214
Asset Management Short-Term Fund 989 0 0 989
------ ---- --- ------
$5,898 $247 $37 $6,108
====== ==== === ======
</TABLE>
29
<PAGE>
ILLINOIS GUARANTEE SAVINGS BANK, FSB AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note B. Securities, Continued
<TABLE>
<CAPTION>
June 30, 1995
----------------------------------------------
Gross Gross Approximate
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
--------- ---------- ----------- -----------
(1,000's)
----------------------------------------------
<S> <C> <C> <C> <C>
Asset Management Adjustable
Rate Fund $ 1,500 $ 0 $ 7 $ 1,493
FHLMC stock 12 194 0 206
FHLB stock, at cost 214 0 0 214
Asset Management Short-Term Fund 91 0 0 91
--------- --------- --------- ---------
$ 1,817 $ 194 $ 7 $ 2,004
========= ========= ========= =========
</TABLE>
The amortized cost and approximate market value of securities available for sale
at June 30, 1996 and 1995, by contractual maturity, are shown below. Expected
maturities may differ from contractual maturities because securities may have a
call provision.
<TABLE>
<CAPTION>
June 30, 1996 June 30, 1995
----------------------------- ---------------------
Approximate Approximate
Amortized Market Amortized Market
Cost Value Cost Value
------------- ------------- --------- -----------
(1,000's)
---------------------------------------------------
<S> <C> <C> <C> <C>
Due within one year $ 2,588 $ 2,569 $ 91 $ 91
Due after one year through
five years 578 575 0 0
Due after five years through
ten years 17 16 0 0
Due after ten years 2,715 2,948 1,726 1,913
------------ ------------- -------- --------
$ 5,898 $ 6,108 $ 1,817 $ 2,004
============ ============= ======== ========
</TABLE>
The Bank exercised a one-time option to transfer all of its securities from held
to maturity to available for sale. This transfer was done in December, 1995 and
the amortized cost and approximate market value at time of transfer was
$4,308,000 and $4,321,000, respectively, which reduced stockholders' equity by
$9,000, net of income tax.
The only investment classified as held to maturity as of June 30, 1996 is an
interest in a limited partnership, Boston Capital Corporation Tax Credit Fund V.
The Bank purchased a one unit investment in this Fund of Class A limited
partnership interest. The one unit cost was $788,000 with first installment
paid with the purchase. The Bank paid $299,000 on February 1, 1996. The
balance is due as follows:
Amount
(1,000's)
-----------
July 1, 1996 $ 99
October 1, 1996 130
April 1, 1997 165
October 1, 1997 95
-------
$ 489
=======
30
<PAGE>
ILLINOIS GUARANTEE SAVINGS BANK, FSB AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note B. Securities, Continued
It is the intent of the partnership to invest in qualified affordable housing
programs to generate Federal Housing Tax Credits. The Bank intends to account
for this investment using the amortized cost method. This method requires
amortizing the excess of the carrying value over its estimated residual value
at the close of the tax credit realization. Annual amortization is proportional
to the realization of the tax credits. The limited partnership files a tax
return on a calendar basis, therefore the Bank has not reflected any effect in
the income statement and has carried the investment at cost for the year ended
June 30, 1996.
Securities held-to-maturity are summarized as follows:
<TABLE>
<CAPTION>
June 30, 1995
----------------------------------------------
Gross Gross Approximate
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
--------- ---------- ---------- -----------
(1,000's)
----------------------------------------------
<S> <C> <C> <C> <C>
U.S. Treasury $ 3,737 $ 12 $ 2 $ 3,747
Obligations of other
U.S. government agencies 1,495 1 20 1,476
State and municipal obligations 513 0 0 513
--------- --------- -------- ---------
$ 5,745 $ 13 $ 22 $ 5,736
========= ========= ======== =========
</TABLE>
The amortized cost and approximate market value of securities held to maturity
at June 30, 1996 and 1995, by contractual maturity, are shown below. Expected
maturities may differ from contractual maturities because securities may have a
call provision.
<TABLE>
<CAPTION>
June 30, 1996 June 30, 1995
--------------------- -------------------------
Approximate Approximate
Amortized Market Amortized Market
Cost Value Cost Value
--------- -------- ---------- -------------
(1,000's)
-----------------------------------------------
<S> <C> <C> <C> <C>
Due within one year $ 0 $ 0 $ 2,489 $ 2,489
Due after one year
through five years 0 0 2,756 2,752
Due after five years
through ten years 0 0 0 0
Due after ten years 299 299 500 495
-------- ------ --------- ----------
$ 299 $ 299 $ 5,745 $ 5,736
======== ====== ========= ==========
</TABLE>
31
<PAGE>
ILLINOIS GUARANTEE SAVINGS BANK, FSB AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note B. Securities, Concluded
Proceeds from sales of securities, gross gains and gross losses from such sales
for the years ended June 30, 1996, 1995 and 1994 were as follows:
<TABLE>
<CAPTION>
Year Ended June 30,
-------------------
1996 1995 1994
----- ----- -----
<S> <C> <C> <C>
(1,000's)
-------------------
Proceeds from sales $ 502 $ 0 $ 87
===== ===== =====
Gross gains $ 2 $ 0 $ 81
Gross losses 0 0 0
----- ----- -----
$ 2 $ 0 $ 81
===== ===== =====
</TABLE>
In addition, FHLB stock was sold at amortized cost of $115,000 during the year
ended June 30, 1994.
Securities at June 30, 1996 and 1995, respectively, with carrying amounts of
$501,000 and $505,000, and approximate market values of $502,000 and $504,000
were pledged to secure public deposits and for other purposes as required or
permitted by law.
Note C. Mortgage-Backed Securities
The amortized cost and approximate market values of mortgage-backed securities
are summarized as follows:
<TABLE>
<CAPTION>
June 30, 1996
-----------------------------------------------
Gross Gross Gross Approximate
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
---------- ---------- ---------- -----------
(1,000's)
-----------------------------------------------
<S> <C> <C> <C> <C>
GNMA certificates $ 933 $ 17 $ 5 $ 945
FNMA certificates 249 3 0 252
FHLMC certificates 584 3 11 576
--------- --------- --------- ---------
$ 1,766 $ 23 $ 16 $ 1,773
========= ========= ========= =========
<CAPTION>
June 30, 1995
--------------------------------------------------
Gross Gross Approximate
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
----------- ------------ ------------ ------------
(1,000's)
--------------------------------------------------
<S> <C> <C> <C> <C>
GNMA certificates $ 1,053 $ 39 $ 0 $ 1,092
FNMA certificates 260 7 0 267
FHLMC certificates 1,013 15 8 1,020
-------- -------- ------- --------
$ 2,326 $ 61 $ 8 $ 2,379
======== ======== ======= ========
</TABLE>
The weighted average interest rates on mortgage-backed securities at June 30,
1996, 1995 and 1994 were 7.59%, 7.57% and 7.44%, respectively.
32
<PAGE>
ILLINOIS GUARANTEE SAVINGS BANK, FSB AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note C. Mortgage-Backed Securities, Concluded
The Bank had no gross realized gains and losses on mortgage-backed securities
for the years ended June 30, 1996, 1995, and 1994, respectively.
The Bank exercised a one-time option to transfer all of its mortgage-backed
securities from held to maturity to available for sale. This transfer was done
in December, 1995 and the amortized cost and approximate market value at time
of transfer was $2,056,000 and $2,103,000, respectively, which reduced
stockholders' equity by $31,000, net of income tax.
Note D. Loans Receivable
<TABLE>
<CAPTION>
Loans receivable consisted of the following:
June 30,
---------------------
1996 1995
---------- ----------
(1,000's)
---------------------
<S> <C> <C>
Real estate loans:
One to four family residential $ 22,952 $ 16,982
Multi-family residential 1,036 392
Agricultural 1,839 600
Commercial 3,604 2,182
Construction: One to four residential 1,015 40
Multi-family residential 292 0
--------- ---------
30,738 20,196
Other loans:
Commercial: Secured 1,044 65
Unsecured 137 115
Home equity loans 117 0
Automobile 3,800 1,427
Mobile home 37 36
Educational 23 34
Deposit accounts 85 102
Other 348 182
--------- ---------
36,329 22,157
Less:
Loans in process 6 118
Allowance for losses 227 175
Deferred loan fees 27 18
--------- ---------
$ 36,069 $ 21,846
========= =========
</TABLE>
In January 1995, the Bank sold $51,000 of educational loans to the Student Loan
Marketing Association.
The Bank participated 50% of a commercial real estate loan, original
participation amount of $400,000, during the year ended June 30, 1994. The
balance on this participation at June 30, 1996 and 1995 was $297,000 and
$340,000, respectively.
33
<PAGE>
ILLINOIS GUARANTEE SAVINGS BANK, FSB AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note D. Loans Receivable, Concluded
Changes in allowance for loan losses are as follows:
<TABLE>
<CAPTION>
June 30,
-------------------
1996 1995 1994
----- ----- -----
<S> <C> <C> <C>
Balance $ 175 $ 125 $ 125
Amount charged to provision 81 50 0
Recoveries 0 0 0
Loans charged off 29 0 0
----- ----- -----
Balance $ 227 $ 175 $ 125
===== ===== =====
</TABLE>
At June 30, 1996, impaired loans having a recorded investment of $42,000 have
been recognized in conformity with FASB Statement No. 114. The average recorded
investment in such impaired loans during 1996 was $42,000. There has been a
$8,000 provision for loan losses recorded for these loans. Interest income on
impaired loans of $0 was recognized in 1996.
Weighted average interest rates on loans consisted of the following:
<TABLE>
<CAPTION>
June 30,
---------------------
1996 1995 1994
------ ----- ------
<S> <C> <C> <C>
Mortgage loans 7.65% 7.79% 7.05%
Other loans 9.20% 8.78% 7.96%
Total loans 8.07% 7.99% 7.08%
</TABLE>
Note E. Accrued Interest Receivable
Accrued interest receivable consisted of the following:
<TABLE>
<CAPTION>
June 30,
--------------------
1996 1995
---------- --------
(1,000's)
--------------------
<S> <C> <C>
Mortgage loans $ 195 $ 124
Non-mortgage loans 45 17
Mortgage-backed securities 23 16
Securities 46 106
--------- -------
$ 309 $ 263
========= =======
</TABLE>
Note F. Premises and Equipment
Premises and equipment consisted of the following:
<TABLE>
<CAPTION>
June 30,
---------------------
1996 1995
---------- ----------
<S> <C> <C>
Construction project $ 369 $ 0
Land 445 70
Office building 312 296
Furniture and equipment 509 288
---------- ---------
1,635 654
Accumulated depreciation ( 373) ( 339)
---------- ---------
$ 1,262 $ 315
========== =========
</TABLE>
34
<PAGE>
ILLINOIS GUARANTEE SAVINGS BANK, FSB
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note F. Premises and Equipment, Concluded
Depreciation included in the consolidated statements of income amounted to
$55,000, $21,000 and $19,000 for the years ended June 30, 1996, 1995 and 1994,
respectively.
During the current year, the Bank remodeled their existing facility for
$59,000, upgraded and replaced existing furniture and equipment for $73,000,
and installed an ATM at their facility for $23,000. The Bank decided to
upgrade their current data processing and general ledger software $41,000 and
$62,000 in new computer and related equipment. Depreciation and amortization
expense on these items amounted to $23,000 for the year ended June 30, 1996
and anticipated at $40,000 for the next year.
On March 24, 1995, the Bank entered into a purchase option agreement for the
acquisition of land to construct a branch facility in Effingham. The option
amount was $1,000 and the option was exercised in June of 1995. Total purchase
price of the land is $375,000 and projected branch cost is an additional
$1,400,000. The branch is expected to be completed prior to December 31, 1996.
In November of 1995, the Bank sold their Palestine, Illinois facility. The
Palestine facility was closed in 1992. The Bank sold this facility for $13,000
and realized a gain on the sale of $11,000.
Note G. Deposit Analysis
Deposits and weighted average interest rates are summarized as follows:
<TABLE>
<CAPTION>
June 30,
-------------------------------------
1996 1995
------------------ ----------------
Weighted Weighted
Average Average
Amount Rate Amount Rate
--------- -------- -------- ---------
1,000's 1,000's
--------- --------
<S> <C> <C> <C> <C>
Non-interest bearing $ 873 .00% $ 503 .00%
NOW accounts 1,300 2.92% 376 2.75%
Money market 2,431 4.04% 2,265 4.26%
Passbook 4,911 3.56% 4,464 3.00%
Certificates 27,033 5.38% 25,095 5.42%
--------- --------
Totals $ 36,548 4.83% $ 32,703 4.89%
========= ========
</TABLE>
Certificates had the following remaining maturities:
<TABLE>
<CAPTION>
June 30, 1996
------------------------------------
One Two After
Less Than to Two to Three Three
Rate One Year Years Years Years Totals
---- --------- ------ -------- ----- --------
1,000's
--------------------------------------------
<S> <C> <C> <C> <C> <C>
2 - 3.99% $ 8 $ 0 $ 0 $ 0 $ 8
4 - 5.99% 18,720 4,534 1,172 173 24,599
6 - 7.99% 241 411 914 818 2,384
8 - 9.99% 0 42 0 0 42
------- ------ ------- ----- -------
$18,969 $4,987 $ 2,086 $ 991 $27,033
======= ====== ======= ===== =======
</TABLE>
35
<PAGE>
ILLINOIS GUARANTEE SAVINGS BANK, FSB AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note G. Deposit Analysis
<TABLE>
<CAPTION>
June 30, 1995
------------------------------------
One Two After
Less Than to Two to Three Three
Rate One Year Years Years Years Totals
---- --------- ------ -------- ----- --------
1,000's
--------------------------------------------
<S> <C> <C> <C> <C> <C>
2 - 3.99% $ 378 $ 0 $ 0 $ 0 $ 378
4 - 5.99% 13,669 2,012 1,242 593 17,516
6 - 7.99% 6,385 202 121 341 7,049
8 - 9.99% 110 0 42 0 152
------- ------ ------ ----- -------
$20,542 $2,214 $1,405 $ 934 $25,095
======= ====== ====== ===== =======
</TABLE>
Interest expense on deposits is summarized as follows:
<TABLE>
<CAPTION>
Years Ended June 30,
--------------------------
1996 1995 1994
------- -------- -------
(1,000's)
--------------------------
<S> <C> <C> <C>
Passbook $ 158 $ 152 $ 197
Demand deposits 130 74 68
Certificates 1,374 1,195 1,001
------- ------ ------
$ 1,662 $1,421 $1,266
======= ====== ======
</TABLE>
For financial statement purposes, the Bank records interest expense on deposits
net of early withdrawal penalty which amounted to $5,000, $5,000 and $3,000 for
the years ended June 30, 1996, 1995 and 1994, respectively During the current
year, the Bank capitalized $5,000 of interest expense on the new facility. This
amount has reduced interest expense in the current year.
At June 30, 1996 and 1995, the Bank had $2,287,000 and $1,527,000,
respectively, of deposit accounts with balances of $100,000 or more. The Bank
did not have brokered deposits at June 30, 1996 or 1995. Deposits in excess of
$100,000 are not federally insured.
The Bank has pledged mortgage-backed certificates and securities, when
requested by depositors, for deposits of $100,000 or more.
Note H. Federal Home Loan Bank Advances
The Bank entered into FHLB advance agreement on December 19, 1995. This
agreement covered terms for FHLB advances and collateral requirements. The
advances are secured by FHLB stock and a portion of qualified mortgage loans of
the Bank. The Bank had $1,608,000 in advances with $7,000 of accrued interest
payable as of June 30, 1996. The advances consisted of the following:
One year fixed rate advance maturing April 29, 1997 at 5.93% rate of
interest, payable monthly, in the amount of $790,000.
One year fixed rate advance maturing May 16, 1997 at 5.98% rate of interest,
payable monthly, in the amount of $468,000.
Daily advance of $350,000 at 5.50% rate of interest which can adjust daily.
The Bank received their first advance on June 18, 1996 for $200,000 and had
additional borrowing on June 24, 1996 to $350,000.
36
<PAGE>
ILLINOIS GUARANTEE SAVINGS BANK, FSB AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note I. Retained Earnings
The Bank as a member of the Federal Home Loan Bank System is required to hold a
specified number of shares of capital stock, which is carried at cost, in the
Federal Home Loan Bank of Chicago. In addition, the Bank is required to
maintain cash and liquid assets in an amount equal to 5% of its deposit
accounts and other obligations due within one year. The Bank has met these
requirements.
Federal savings banks are required to satisfy three capital requirements: (i) a
requirement that "tangible capital" equal or exceed 1.5% of adjusted total
assets, (ii) a requirement that "core-capital" equal or exceed 3% of adjusted
total assets, and (iii) a risk-based capital standard of 8% of "risk-adjusted"
assets. At June 30, 1996 and 1995 the Bank met each of the three capital
requirements.
The following table demonstrates, as of June 30, 1996, the extent to which the
Bank exceeds in dollars and in percent the three minimum capital requirements:
<TABLE>
<CAPTION>
Regulatory Capital
--------------------------------
Actual Requirement Excess
--------- ------------ -------
(1,000's)
--------------------------------
<S> <C> <C> <C>
Tangible capital:
Dollar amount $7,111 $ 692 $6,419
Percent of tangible assets 15.41% 1.50% 13.91%
Core capital:
Dollar amount $7,111 $1,383 $5,728
Percent of tangible assets 15.41% 3.00% 12.41%
Risk-based capital:
Dollar amount $7,338 $2,312 $5,026
Percent of risk-weighted assets 25.57% 8.00% 17.57%
</TABLE>
The Bank's total risk-weighted assets at June 30, 1996, were approximately
$28,894,000.
Failure to comply with applicable regulatory capital requirements can result in
capital directives from regulatory agencies, restrictions on growth, and other
limitations on a savings bank's operations.
In November of 1994, the OTS changed the determination of regulatory capital to
not include any unrealized gains or losses on securities available for sale. As
of June 30, 1996, Generally Accepted Accounting Principles (GAAP) capital was
increased by $142,000. In addition, for regulatory capital, real estate held
for sale, of $49,000, has been netted against GAAP capital.
Consistent with the increased capital requirements imposed by regulators of
national banks, the core capital requirement for most savings institutions,
including the Bank, is expected to rise to a level ranging from 3% to 5% of
adjusted total assets. A proposed regulation requiring such a change was issued
by the Office of Thrift Supervision (OTS) in April 1991.
37
<PAGE>
ILLINOIS GUARANTEE SAVINGS BANK, FSB AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note I. Retained Earnings
Retained earnings at June 30, 1996 includes approximately $181,000 for which
federal income tax has not been provided, which is adjusted annually. The Bank
is allowed a special bad debt deduction limited generally to 8 percent of
otherwise taxable income and subject to certain limitations based on aggregate
loans and savings account balances at the end of the year. If the amounts that
qualify as deductions for federal income tax purposes are later used for
purposes other than for bad debt losses, they will be subject to federal income
tax at the then current corporate rate. The unrecorded deferred tax liability
on the above amount is approximately $62,000.
The payment of cash dividends by the Bank is limited by regulations of the OTS.
Interest on savings accounts will be paid prior to payments of dividends on
Common Stock. The Bank may not declare or pay a cash dividend to the Company in
excess of 100% of its net income to date during the current calendar year plus
the amount that would reduce by one-half the Bank's capital ratio at the
beginning of the year without prior OTS approval. Additional limitation on
dividends declared or paid, or repurchases of the Bank stock are tied to the
Bank's level of compliance with its regulatory capital requirements.
Note J. Income Tax
The components of the provision for income taxes are summarized as follows:
<TABLE>
<CAPTION>
Years Ended June 30,
---------------------
1996 1995 1994
------ ------ -----
<S> <C> <C> <C>
(1,000's)
---------------------
Currently: Federal $ 96 $ 86 $ 141
State 0 0 16
Deferred: Federal 5 ( 73) 9
State 10 ( 6) 2
----- ---- -----
$ 111 $ 7 $ 168
===== ===== =====
</TABLE>
Income tax expense for the years ended June 30, 1996, 1995, and 1994 has been
provided at an effective rate of approximately 38.40%, 10.38% and 34.83%,
respectively. An analysis of such expense for the three years setting forth the
reasons for the variations from the federal statutory rates is as follows:
<TABLE>
<CAPTION>
Years Ended June 30,
--------------------
1996 1995 1994
----- ----- ------
(1,000's)
-------------------
<S> <C> <C> <C>
Computed tax at statutory rates $ 99 $ 12 $164
Increase (decrease) in tax expenseresulting from:
State income tax, net 1 0 12
Other 15 0 0
Tax exempt income - net ( 4) ( 5) ( 8)
----- ----- ----
Income tax expense $ 111 $ 7 $168
===== ===== ====
</TABLE>
38
<PAGE>
ILLINOIS GUARANTEE SAVINGS BANK, FSB AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note J. Income Tax
The tax effects of temporary differences that give rise to the deferred tax
assets and deferred tax liabilities at June 30, 1996, 1995 and 1994 are as
follows:
<TABLE>
<CAPTION>
June 30,
-------------------
1996 1995 1994
----- ----- -----
(1,000's)
-------------------
<S> <C> <C> <C>
Deferred tax assets:
Allowance for loan loss $ 6 $ 0 $ 0
Deferred loan fees 11 6 10
Severance agreement 80 79 0
Other 1 1 0
----- ----- -----
98 86 10
----- ----- -----
Deferred tax liabilities:
Unrealized gains on
securities available for sale 76 66 53
FHLB stock 17 14 14
Premises and equipment 18 13 7
Allowance for loan losses 0 8 20
Other 3 6 2
----- ----- -----
114 107 96
----- ----- -----
Net deferred tax liabilities $ 16 $ 21 $ 86
===== ===== =====
</TABLE>
No valuation allowance was required for deferred tax assets at June 30, 1996 or
1995.
Note K. Employee Benefit Plans
The Bank had a profit sharing plan and defined contribution pension plan that
covered substantially all employees. Contributions to the profit sharing plan
were at the discretion of the Board of Directors. Contributions to the defined
contribution pension plan are based on a percentage of eligible compensation.
Pension cost for both plans included current service costs, which were accrued
and funded on a current basis. Pension expense for both plans charged to
operations for the years ended June 30, 1995 and 1994 was $29,000 and $26,000,
respectively. These plans were terminated during 1996.
The Bank established a director retirement plan, which was effective January 1,
1995, that covers all non-employee directors. Under this plan, each director
will receive a retirement benefit ten years following retirement from the Board
based on the product the benefit percentage, vesting percentage, and $500. Each
participant will earn 5% benefit percentage per each year served. Vesting
percentage is 33 1/3% per year served after the date of conversion. Benefit and
vesting percentages will be accelerated to 100% for board members with 10 years
of service and who have reached age 70, death, disability, or change in
control. Upon death of a participant of this plan, a lump sum payment of 50% of
the present value of the plan benefit shall be paid to the surviving spouse or
estate.
During 1996, the Bank entered into three year employment contracts with three
members of management establishing a base compensation amount and benefits
available to all employees. These contracts include a provision for
termination, without just cause following, a change in control. If termination
occurs within twelve months following a change in control, the employee will
receive 2.99 times the base compensation.
39
<PAGE>
ILLINOIS GUARANTEE SAVINGS BANK, FSB AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note L. Economic Dependency
The Bank is a nondiscriminatory lender in their market area as defined by their
Community Reinvestment Act. The Bank is a full service bank in Effingham
County. The Bank has no economic dependency other than the general market area.
Concentration of credit risk has been disclosed in Note D concerning lending
portfolio.
Note M. Commitments and Contingencies
In the ordinary course of business, the Bank has various outstanding
commitments and contingent liabilities that are not reflected in the
accompanying consolidated financial statements. In addition, the Bank is a
defendant in certain claims and legal actions arising in the ordinary course of
business. In the opinion of management, after consultation with legal counsel,
the ultimate disposition of these matters is not expected to have a material
effect on the consolidated financial statements of the Bank.
The Bank had outstanding firm commitments to originate mortgage loans as
follows:
June 30,
---------------
Amounts Amounts
------- -------
(1,000's)
---------------
Fixed rate $ 624 $110
Adjustable rate 968 86
------ ----
$1,592 $196
====== ====
Interest rates for fixed rate loan commitments at June 30, 1996 ranged from
7.75% to 9.375% and at June 30, 1995 were 8.00%. Interest rate ranges for
variable rate loan commitments at June 30, 1996 and 1995 were 6.50% to 7.75%
and 6.75% to 7.25%, respectively. As of June 30, 1996 the Bank had one line of
credit of $8,000 at 9.25% rate of interest and one letter of credit of $25,000.
There were no outstanding commitments to purchase or sell securities at June
30, 1996 and 1995.
The Bank is a party to financial instruments with off-balance-sheet risk in the
normal course of business to meet the financing needs of its customers. These
financial instruments include commitments to extend credit. These instruments
involve, to varying degrees, elements of credit and interest rate risk in
excess of the amounts recognized in the consolidated statements of financial
condition.
The Bank's exposure to credit loss in the event of nonperformance by the other
party to the financial instruments for commitments to extend credit is
represented by the contractual notional amount of these instruments. The Bank
uses the same credit policies in making commitments and conditional obligations
as it does for on-balance-sheet instruments.
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. Since many of the commitments are expected to expire
without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. The Bank evaluates each customer's
creditworthiness on a case-by-case basis. The amount and type of collateral
obtained, if deemed necessary by the Bank upon extension of credit, varies and
is based on management's credit evaluation of the counterparty.
40
<PAGE>
ILLINOIS GUARANTEE SAVINGS BANK, FSB AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note M. Commitments and Contingencies, Concluded
Proposals are being considered to recapitalize the SAIF in order to eliminate
the insurance premium disparity. One proposal being considered provides for a
one time assessment of 65 basis points which would be imposed on all SAIF
insured deposits. The assessment base would be on deposits held as of March 31,
1995. If this assessment were required, it would result in a one time charge to
the Bank's operations of up to $340,000 on a pre-tax basis.
Note N. Related Parties
The Bank has entered into transactions with its directors, key management and
their affiliates (Related Parties). Such transactions were made in the ordinary
course of business on substantially the same terms and conditions, including
interest rates and collateral, as those prevailing at the same time for
comparable transactions with other customers, and did not, in the opinion of
management, involve more than normal credit risk or present other unfavorable
features. A summary of loans to related parties is as follows:
June 30,
---------------------
1996 1995
--------- ----------
(1,000's)
---------------------
Balance $ 160 $ 152
New loans 54 99
Repayment ( 43) (91)
--------- ---------
Balance $ 171 $ 160
========= =========
Note O. Stockholders' Equity
On April 7, 1994, the board of directors of the Bank adopted a plan of
conversion whereby the Bank would convert to a federal stock savings bank. The
conversion was completed on September 28, 1995 with the issuance of 502,550
shares of the Bank's common stock at a price of $10.00 per share. Total
proceeds from the conversion of $4,563,000, net of costs relating to the
conversion of $462,500, have been recorded as common stock and additional paid-
in capital.
The Bank's articles of incorporation authorizes the issuance of up to 1,000,000
shares of serial preferred stock, which may be issued with certain rights and
preferences. As of June 30, 1996, no preferred stock has been issued.
In order to grant a priority to eligible account holders in the event of future
liquidation, the Bank, at the time of conversion, established a liquidation
account equal to its regulatory capital as of September 30, 1995. In the event
of future liquidation of the Bank, an eligible account holder who continues to
maintain their deposit account shall be entitled to receive a distribution from
the liquidation account. The total amount of the liquidation account will be
decreased as the balance of eligible account holders are reduced subsequent to
the conversion, based on an annual determination of such balance.
Present regulations provide that the Bank may not declare or pay a cash
dividend on or repurchase any of its capital stock if the result thereof would
be to reduce the regulatory capital of the Bank below the amount required for
the liquidation account or the regulatory capital requirement. Further, any
dividend declared or paid on, or repurchase of, the Bank's capital stock shall
be in compliance with the rules and regulations of the OTS or other applicable
regulations.
41
<PAGE>
ILLINOIS GUARANTEE SAVINGS BANK, FSB AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note P. Employee Stock Ownership Plan (ESOP)
In connection with the conversion to the stock form of ownership, the Board of
Directors established an employee stock ownership plan (ESOP) for the exclusive
benefit of participating employees. Employees age 21 or older who have
completed one year of service are eligible to participate. Upon the issuance of
the common stock, the ESOP acquired 40,204 shares of $1 par value common stock
at the subscription price of $10.00 per share. The Bank makes contributions to
the ESOP equal to the ESOP's debt service less dividends received by the ESOP.
All dividends received by the ESOP are used to pay debt service. The ESOP
shares initially were pledged as collateral for its debt. As the debt is
repaid, shares are released from collateral and allocated to active employees,
based on the proportion of debt service paid in the year. The Bank accounts for
its ESOP in accordance with Statement of Position 93-6. Accordingly, the debt
of the ESOP is recorded as debt and the shares are released from collateral,
the Bank reports compensation expense equal to the current market price of the
shares, and the shares become outstanding for earnings-per-share calculations.
Dividends on allocated shares are recorded as a reduction of retained earnings;
dividends on unallocated ESOP shares are recorded as a reduction of debt or
accrued interest. ESOP compensation expense was $52,000 for the year ended June
30, 1996.
The ESOP shares at June 30, 1996 were as follows:
Allocated shares 4,623
Shares released for allocation 0
Unallocated shares 35,581
--------
Total ESOP shares 40,204
========
Fair value of unallocated shares $426,972
========
The ESOP plan shares were purchased by the Bank with the loan proceeds from the
Stewardson National Bank. This loan is secured by the ESOP plan shares with
quarterly principal payments of $10,000 and accrued interest. The note is for
ten years with current interest rate of 8% which will adjust quarterly, prime
plus 1%, after the first year.
Following are maturities of the long-term debt:
Amount
--------
1997 $ 40,000
1998 40,000
1999 40,000
2000 40,000
2001 40,000
After June 30, 2001 156,000
--------
$356,000
========
42
<PAGE>
ILLINOIS GUARANTEE SAVINGS BANK, FSB AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note Q. Severance Agreement
On June 16, 1995, the Bank and the past Chief Executive Officer (CEO) entered
into a separation agreement. This agreement included the CEO retaining the
company car, cash payments for the first three years of the agreement of
$64,000 and the next seven years of $14,000 on an annual basis. These payments
are to be made monthly, starting in July of 1995, except for the first year in
which $20,000 was paid in June of 1995. Health benefits included in the
agreement were that the Bank would pay the group health, medical, and life
insurance benefits for the CEO that are currently provided to the Bank's
employees. These benefits would cease when the CEO attains age 65. The Bank's
cost of this termination agreement amounted to a net present value of $226,000,
at an 8% discount rate, as of June 30, 1995. This amount is included in other
liabilities and in compensation expense at June 30, 1995. As of June 30, 1996,
this amount was $192,000.
Note R. Holding Company
On July 23, 1996, the stockholders of the Bank approved the reorganization of
the Bank to become a wholly owned subsidiary of Illinois Community Bancorp,
Inc. "the Company" which was incorporated on March 8, 1996 for this purpose.
The stockholders approved a Stock Option and Incentive Plan and Management
Recognition Plan at this meeting.
Illinois Community Bancorp, Inc.'s common stock will be exchanged, on a one to
one basis, for all the outstanding common stock of the Bank. The Company was
authorized 4,000,000 shares of common stock at $0.01 per share par value and
1,000,000 shares of serial preferred stock at $0.01 per share par value. The
Bank will purchase 100,000 shares of common stock of the Company for the
initial capitalization of the Company and expense in forming the Company at
$1.00 per share.
The Stock Option and Incentive Plan allows the Company to grant incentive or
non-qualified stock options to Directors and key employees for an aggregate of
50,225 shares of the Company's common stock, with an exercise price equal to
market value of the stock at the date of the award. The options to purchase
shares expires ten years after the grant. Effective with the approval of this
plan, options for 49,225 shares of common stock will be awarded to key
employees and Directors. The options vest at 20% per year with immediate
vesting in the case of death, disability, or change in control. At the
Company's sole discretion, they may from time to time grant Stock Appreciation
Rights "SARs" to employees either in conjunction with, or independently of, any
options granted under the plan. SARs granted in tandem with an ISO must have
similar terms and price as the ISO. Exercise of either the SARs or ISO will
cancel the other. SARs not in tandem with the ISO, is exercised, will entitle
the optionee to receive all or a percent of the difference between the market
value of the Company's shares at the time of exercise and market value of the
shares at the time of the grant. The exercise price as to the ISO and SARs may
not be less than market value on the date of the grant.
The Company approved the establishment of the Management Recognition Plan "MRP"
with the objectives to enable the Bank to attract and retain personnel of
experience and ability in key positions of responsibility. Those eligible to
receive benefits under the MRP will be on a discretionary basis and the MRP is
a non-qualified plan that will be managed through a separate trust. The Bank
will contribute sufficient funds to the MRP for the purchase of up to 20,102
shares of common stock. Automatic grants will be made to the non-employee
directors, with two years continuous service prior to the effective plan date,
of the lesser of 5% of the plan shares per Director or 30% of the plan shares
in the aggregate. For non-employee directors who join the Board within the two
year period before the effective date or after the effective date shall receive
up to 2% of the plan shares. These awards will vest 20% on each anniversary
date except in the case of participant's death or disability where all shares
awarded will vest immediately. The Bank intends to expense the MRP awards over
the years during which the shares are payable, based on the market value of the
common stock at the time of the grant.
43
<PAGE>
ILLINOIS GUARANTEE SAVINGS BANK, FSB AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note S. Disclosures about Fair Value of Financial Institutions
In December, 1991, the FASB issued SFAS No. 107, "Disclosures About Fair Value
of Financial Instruments." This statement extends the existing fair value
disclosure practices for some instruments by requiring all entities to disclose
the fair value of financial instruments (as defined), both assets and
liabilities recognized and not recognized in the statements of financial
condition, for which it is practicable to estimate fair value.
There are inherent limitations in determining fair value estimates, as they
relate only to specific data based on relevant information at that time. As a
significant percentage of the Bank's financial instruments do not have an
active trading market, fair value estimates are necessarily based on future
expected cash flows, credit losses, and other related factors. Such estimates
are accordingly, subjective in nature, judgmental and involve imprecision.
Future events will occur at levels different from that in the assumptions, and
such differences may significantly affect the estimates.
The statement excludes certain financial instruments and all nonfinancial
instruments from its disclosure requirements. Accordingly, the aggregate fair
value amounts presented do not represent the underlying value of the Bank.
Additionally, the tax impact of the unrealized gains or losses has not been
presented or included in the estimates of fair value.
The following methods and assumptions were used by the Bank in estimating its
fair value disclosures for financial instruments.
Cash and Cash Equivalents: The carrying amounts reported in the statement of
financial condition for cash and short-term instruments approximate those
assets' fair values.
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. No active market
exists for the Federal Home Loan Bank capital stock. The carrying value is
estimated to be fair value since if the Bank withdraws membership in the
Federal Home Loan Bank, the stock must be redeemed for face value.
Loans Receivable: The fair value of loans was estimated by discounting the
future cash flows using the current rates at which similar loans would be made
to borrowers with similar credit ratings and for the same remaining maturities.
Deposits: The fair value of savings deposits and certain money market deposits
is the amount payable on demand at the reporting date. The fair value of fixed-
maturity certificates of deposit is estimated using the rates currently offered
for deposits of similar remaining maturities.
Borrowings: The fair value of FHLB advances and other borrowings are estimated
using rates currently available for debt with similar terms and remaining
maturities.
44
<PAGE>
ILLINOIS GUARANTEE SAVINGS BANK, FSB AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note S. Disclosures about Fair Value of Financial Institutions
The estimated fair value of the Company's financial instruments at June 30,
1996 are as follows:
<TABLE>
<CAPTION>
1996
-------------------
Carrying Fair
Amount Value
--------- --------
1,000's
-------------------
<S> <C> <C>
ASSETS
Cash and interest bearing deposits $ 407 $ 407
Securities available for sale 6,108 6,108
Securities held to maturity 299 299
Mortgage-backed securities available for sale 36,069 36,266
Loans receivable, net 1,773 1,773
LIABILITIES
Deposits 36,548 36,545
FHLB advances 1,608 1,586
Other borrowings 356 365
</TABLE>
45
<PAGE>
BOARD OF DIRECTORS
Gerald E. Ludwig Milton Hinkle Ernest E. Garbe
Chairman of the Board and Retired Retired
Chief Executive Officer
Douglas A. Pike Frederick C. Schaefer Garrett M. Andes, II
President and Chief Ticket Agent for Greyhound Self-employed
Operating Officer
Michael F. Sehy
Self-employed
EXECUTIVE OFFICERS
Gerald E. Ludwig Ronald R. Schettler
Chairman of the Board and Senior Vice President and Secretary
Chief Executive Officer
Douglas A. Pike John H. Leonard
President and Chief Senior Vice President and Chief
Operating Officer Credit Officer
OFFICE LOCATIONS
210 E. Fayette Avenue
Effingham, Illinois 62401-3613
GENERAL INFORMATION
Independent Certified Annual Meeting Shareholder Inquiries
Public Accountants The Annual Meeting of and Availability of
Larsson Woodyard & Shareholders will be held 10-KSB Report A COPY
Henson LLP on November __, 1996 at OF THE COMPANY'S
702 E. Court Street __:__ _.m. at ____________ ANNUAL REPORT ON FORM
Paris, Illinois 61944 __________________________ 10-KSB FOR THE FISCAL
Effingham, Illinois YEAR ENDED JUNE 30,
1996 AS FILED WITH
Special Counsel Transfer Agent and Registrar THE SECURITIES AND
Housley Kantarian & Registrar and Transfer EXCHANGE COMMISSION
Bronstein, P.C. Company WILL BE FURNISHED
1220 19th Street, N.W. 10 Commerce Drive WITHOUT CHARGE TO
Suite 700 Cranford, New Jersey 07016 SHAREHOLDERS AS OF
Washington, D.C. 20036 (908) 272-8511 THE RECORD DATE FOR
THE 1996 ANNUAL
MEETING UPON WRITTEN
REQUEST TO INVESTOR
RELATIONS, ILLINOIS
COMMUNITY BANCORP,
INC., 210 E. FAYETTE
AVENUE, EFFINGHAM,
ILLINOIS 62401-3613
46
<PAGE>
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
Parent
------
Illinois Community Bancorp, Inc.
State or Other
Jurisdiction of Percentage
Subsidiaries Incorporation Ownership
------------ ------------- ------------
Illinois Guarantee Savings Bank, FSB United States 100%
Subsidiary of Illinois Guarantee Savings Bank, FSB
--------------------------------------------------
IGSL Service Corporation Illinois 100%
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1996
<PERIOD-START> JUL-01-1995
<PERIOD-END> JUN-30-1996
<CASH> 267
<INT-BEARING-DEPOSITS> 140
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 7,881
<INVESTMENTS-CARRYING> 299
<INVESTMENTS-MARKET> 299
<LOANS> 36,296
<ALLOWANCE> 227
<TOTAL-ASSETS> 46,421
<DEPOSITS> 36,548
<SHORT-TERM> 1,608
<LIABILITIES-OTHER> 607
<LONG-TERM> 356
0
0
<COMMON> 503
<OTHER-SE> 6,799
<TOTAL-LIABILITIES-AND-EQUITY> 46,421
<INTEREST-LOAN> 2,314
<INTEREST-INVEST> 703
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 3,017
<INTEREST-DEPOSIT> 1,652
<INTEREST-EXPENSE> 1,687
<INTEREST-INCOME-NET> 1,330
<LOAN-LOSSES> 81
<SECURITIES-GAINS> 2
<EXPENSE-OTHER> 1,019
<INCOME-PRETAX> 289
<INCOME-PRE-EXTRAORDINARY> 178
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 178
<EPS-PRIMARY> 0.30
<EPS-DILUTED> 0.30
<YIELD-ACTUAL> 0.45
<LOANS-NON> 42
<LOANS-PAST> 309
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 338
<ALLOWANCE-OPEN> 175
<CHARGE-OFFS> 29
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 227
<ALLOWANCE-DOMESTIC> 96
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 131
</TABLE>
