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PROSPECTUS SUPPLEMENT
Rule 424(b)(3)
Registration Number 333-4380
PARK BANCORP, INC.
PARK FEDERAL SAVINGS BANK 401 (k) PLAN
This Prospectus Supplement relates to the offer and sale to participants
(the "Participants") in the Park Federal Savings Bank 401(k) Plan and Trust (the
"Plan" or the "401(k) Plan") of participation interests and shares of Park
Bancorp, Inc. (the "Company") common stock, par value $.01 per share (the
"Common Stock"), as set forth herein. The 401(k) Plan was previously known as
the Park Federal Savings Bank Profit Sharing Plan.
In connection with the proposed conversion of Park Federal Savings Bank
(the "Bank" or "Employer") from a federally chartered mutual savings bank to a
federally chartered stock saving bank, a holding company, Park Bancorp, Inc. has
been formed. The simultaneous conversion of the Bank to the stock form, the
issuance of the Bank's common stock to the Company, and the offer and sale of
the Company's Common Stock to the public are herein referred to as the
"Conversion." The Board of Directors of the Bank previously maintained a tax
qualified defined contribution plan ("401(a) Plan") with assets invested at the
direction of the 401(a) Plan's Trustee which, as amended, permits the investment
of Plan assets in the Common Stock of Park Bancorp, Inc. and other investment
alternatives described herein. The Plan as amended is now intended to be tax
qualified under Section 401(k) of the Internal Revenue Code of 1986 as amended
(the "Code"). The Plan will permit Participants to direct the trustee of the
Plan to purchase Common Stock with amounts in the Plan attributable to such
Participants. This Prospectus Supplement relates to the initial election of a
Participant to direct the purchase of Common Stock in connection with the
Conversion and also to elections to purchase Common Stock after the Conversion.
The Prospectus dated June 26, 1996 of the Company (the "Prospectus"),
which is attached to this Prospectus Supplement, includes detailed
information with respect to the Conversion, the Common Stock and the
financial condition, results of operations and business of the Bank and the
Company. This Prospectus Supplement, which provides detailed information
with respect to the Plan, should be read only in conjunction with the
Prospectus. Terms not otherwise defined in this Prospectus Supplement are
defined in the Plan or the Prospectus.
A PARTICIPANT'S ELIGIBILITY TO PURCHASE COMMON STOCK IN THE CONVERSION
THROUGH THE PLAN IS SUBJECT TO THE PARTICIPANT'S GENERAL ELIGIBILITY TO PURCHASE
SHARES OF COMMON STOCK IN THE CONVERSION AND THE MAXIMUM AND MINIMUM PURCHASE
LIMITATIONS SET FORTH IN THE PLAN OF CONVERSION. SEE "THE CONVERSION" AND
"--LIMITATIONS ON COMMON STOCK PURCHASES" IN THE PROSPECTUS.
FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED BY EACH
PARTICIPANT, SEE "RISK FACTORS" IN THE PROSPECTUS.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION, THE OFFICE OF THRIFT SUPERVISION, THE FEDERAL DEPOSIT
INSURANCE CORPORATION OR ANY STATE SECURITIES COMMISSION, OR ANY OTHER AGENCY,
NOR HAS SUCH COMMISSION, DEPARTMENT, CORPORATION OR ANY STATE SECURITIES
COMMISSION OR OTHER AGENCY PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THE DATE OF THIS PROSPECTUS SUPPLEMENT IS JUNE 26, 1996.
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NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THE PROSPECTUS OR THIS PROSPECTUS
SUPPLEMENT IN CONNECTION WITH THE OFFERING MADE HEREBY, AND, IF GIVEN OR MADE,
SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY, THE BANK OR THE PLAN. THIS PROSPECTUS SUPPLEMENT
DOES NOT CONSTITUTE AN OFFER TO SELL OR SOLICITATION OF AN OFFER TO BUY ANY
SECURITIES IN ANY JURISDICTION TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH
OFFER OR SOLICITATION IN SUCH JURISDICTION. NEITHER THE DELIVERY OF THIS
PROSPECTUS SUPPLEMENT AND THE PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL UNDER
ANY CIRCUMSTANCES CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE
AFFAIRS OF THE BANK OR THE PLAN SINCE THE DATE HEREOF, OR THAT THE INFORMATION
HEREIN CONTAINED OR INCORPORATED BY REFERENCE IS CORRECT AS OF ANY TIME
SUBSEQUENT TO THE DATE HEREOF. THIS PROSPECTUS SUPPLEMENT SHOULD BE READ ONLY
IN CONJUNCTION WITH THE PROSPECTUS THAT IS ATTACHED HERETO AND SHOULD BE
RETAINED FOR FUTURE REFERENCE.
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TABLE OF CONTENTS
PAGE
The Offering.................................................... 1
Securities Offered........................................ 1
Election to Purchase Common Stock in the
Conversion............................................. 1
Value of Participation Interests.......................... 1
Method of Directing Transfer.............................. 1
Time for Directing Transfer............................... 2
Irrevocability of Transfer Direction...................... 2
Direction to Purchase Common Stock
After the Conversion................................... 2
Purchase Price of Common Stock............................ 2
Nature of a Participant's Interest in the
Common Stock........................................... 3
Voting and Tender Rights of Common Stock.................. 3
Description of the Plan......................................... 4
Introduction.............................................. 4
Eligibility and Participation............................. 5
Contributions under the Plan.............................. 5
Limitations on Contributions.............................. 6
Investment of Contributions............................... 9
Benefits Under the Plan................................... 12
Withdrawals and Distributions From the Plan............... 12
Administration of the Plan................................ 13
Reports to Plan Participants.............................. 14
Plan Administrator........................................ 14
Amendment and Termination................................. 14
Merger, Consolidation or Transfer......................... 15
Federal Income Tax Consequences........................... 15
ERISA and Other Qualifications............................ 17
Restrictions on Resale.................................... 18
SEC Reporting and Short-Swing Profit Liability............ 18
Legal Opinions.................................................. 19
Investment Form....................................... Attachment A
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THE OFFERING
SECURITIES OFFERED
The securities offered hereby are participation interests in the Plan and
up to 127,100 shares, at the actual purchase price of $10.00 per share, of
Common Stock which may be acquired by the Plan for the accounts of employees
participating in the Plan. The Company is the issuer of the Common Stock. Only
employees of the Bank may participate in the Plan. Information with regard to
the Plan is contained in this Prospectus Supplement and information with regard
to the Conversion and the financial condition, results of operations and
business of the Bank and the Company is contained in the attached Prospectus.
The address of the principal executive office of the Bank is 2740 West 55th
Street, Chicago, Illinois 60632. The Bank's telephone number is (312) 434-6040.
ELECTION TO PURCHASE COMMON STOCK IN THE CONVERSION
In connection with the Bank's Conversion, the Bank has amended the Park
Federal Savings Bank Profit Sharing Plan so that the Plan can now qualify each
Participant to direct the trustee of the Plan ("Trustee") to transfer all or
part of the funds which represent his or her beneficial interest in the assets
of the Plan to an employer stock fund ("Employer Stock Fund") and to use such
funds to purchase Common Stock issued in connection with the Conversion. The
Employer Stock Fund will consist of investments in the Common Stock made on or
after the effective date of the Conversion. Funds not transferred to the
Employer Stock Fund will remain in the other investment funds of the Plan as
directed by the Participant. A PARTICIPANT'S ABILITY TO TRANSFER FUNDS TO THE
EMPLOYER STOCK FUND IN THE CONVERSION IS SUBJECT TO THE PARTICIPANT'S GENERAL
ELIGIBILITY TO PURCHASE SHARES OF COMMON STOCK IN THE CONVERSION. FOR GENERAL
INFORMATION AS TO THE ABILITY OF PARTICIPANTS TO PURCHASE SHARES IN THE
CONVERSION, SEE "THE CONVERSION -- SUBSCRIPTION OFFERING AND SUBSCRIPTION
RIGHTS" IN THE ATTACHED PROSPECTUS.
VALUE OF PARTICIPATION INTERESTS
The assets of the Plan are valued on a daily basis and each Participant
can obtain the value of his or her beneficial interest in the Plan on a
continued basis via the phones response system at 1-800-767-5366. This value
represents the market value of past contributions to the Plan by the Bank and by
the Participants and earnings thereon, less previous withdrawals.
METHOD OF DIRECTING TRANSFER
The last page of this Prospectus Supplement is an investment form to
direct a transfer to the Employer Stock Fund (the "Investment Form"). If a
Participant wishes to transfer all or part of his or her beneficial interest in
the assets of the Plan to the Employer Stock Fund to purchase Common Stock
issued in connection with the Conversion, he or she should indicate that
decision in Part 2 of the Investment Form. Each Participant should complete
this form regardless of their intention to invest in the Employer Stock Fund.
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TIME FOR DIRECTING TRANSFER
The deadline for submitting a direction to transfer amounts to the
Employer Stock Fund in order to purchase Common Stock issued in connection
with the Conversion is July 24, 1996. The Investment Form should be returned
to Steven J. Pokrak by 12:00 Noon, on such date.
IRREVOCABILITY OF TRANSFER DIRECTION
A Participant's direction to transfer amounts credited to such
Participant's account in the Plan to the Employer Stock Fund in order to
purchase shares of Common Stock in connection with the Conversion shall be
irrevocable. Participants, however, will be able to direct the reinvestment of
their accounts ("Accounts") under the Plan as explained below.
DIRECTION TO PURCHASE COMMON STOCK AFTER THE CONVERSION
After the Conversion, a Participant will be able to direct that a certain
percentage of such Participant's interests in the trust assets ("Trust") be
transferred to the Employer Stock Fund and invested in Common Stock, or to the
other investment funds available under the Plan. Alternatively, a Participant
may direct that a portion, or all, of such Participant's interest in the
Employer Stock Fund be transferred from the Employer Stock Fund to the other
investment funds available under the Plan. Participants will be permitted to
direct that future contributions made to the Plan, by or on their behalf, be
invested in the Employer Stock Fund or in the other investment funds. Following
the initial election, the allocation of a Participant's interest in the Employer
Stock Fund may be changed by the Participant, with each change generally
becoming effective on the second or third business day following the day the
Plan Administrator receives a notice for such change. Special restrictions
apply to transfers directed by those Participants who are executive officers,
directors and principal shareholders of the Company who are subject to the
provisions of Section 16(b) of the Securities Exchange Act of 1934, as amended
(the "Exchange Act").
PURCHASE PRICE OF COMMON STOCK
The funds transferred to the Employer Stock Fund for the purchase of
Common Stock in connection with the Conversion will be used by the Trustee to
purchase shares of Common Stock. The price paid for such shares of Common Stock
will be the same price as is paid by all other persons who purchase shares of
Common Stock in the Conversion. After the Conversion the Trustee will purchase
additional shares, when cash is contributed to the Employer Stock Fund. To the
extent that an employee elects to invest in the Employer Stock Fund but is
unable to receive the full order filled in the Conversion or any time
thereafter, the Trustee will make such as available for purchase on the next
available day the market for the Common Stock is open.
Any shares of Common Stock purchased by the Trustee after the
Conversion will be acquired in open market transactions. The prices paid by
the Trustee for shares of Common Stock will not exceed "adequate
consideration" as defined in Section 3(18) of the Employee Retirement Income
Security Act of 1974, as amended ("ERISA").
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NATURE OF A PARTICIPANT'S INTEREST IN THE COMMON STOCK
The Common Stock will be held in the name of the Trustee for the Plan, as
trustee. Each Participant has an allocable interest in the investment funds of
the Plan but not in any particular assets of the Plan. Accordingly, a specific
number of shares of Common Stock will not be directly attributable to the
account of any Participant. Net earnings, e.g., gains and losses, are
allocated to the Account of a Participant based on the particular investment
designations of the Participants. Therefore, earnings with respect to a
Participant's Account should not be affected by the investment designations
(including investments in Common Stock) of other Participants.
VOTING AND TENDER RIGHTS OF COMMON STOCK
The Trustee generally will exercise voting and tender rights attributable
to all Common Stock held by the Trust as directed by Participants with interests
in the Employer Stock Fund. With respect to each matter as to which holders of
Common Stock have a right to vote, each Participant will be allocated a number
of voting instruction rights reflecting such Participant's proportionate
interest in the Employer Stock Fund. The percentage of shares of Common Stock
held in the Employer Stock Fund that are voted in the affirmative or negative on
each matter shall be the same percentage of the total number of voting
instruction rights that are exercised in either the affirmative or negative,
respectively. In the event of a tender offer for the Common Stock, the Plan
provides that each Participant will be allotted a number of tender instruction
rights reflecting such Participant's proportionate interest in the Employer
Stock Fund. The percentage of shares of Common Stock held in the Employer Stock
Fund that will be tendered will be the same as the percentage of the total
number of tender instruction rights that are exercised in favor of tendering.
The remaining shares of Common Stock held in the Employer Stock Fund will not be
tendered. The Plan makes provision for Participants to exercise their voting
instruction rights and tender instruction rights on a confidential basis.
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DESCRIPTION OF THE PLAN
INTRODUCTION
Effective as of May 14, 1996, the Bank amended the Plan, which restated
the 401(a) Plan as last amended by the Bank effective December 28, 1994.
The Plan was originally adopted January 1, 1989. The Plan is a cash or
deferred arrangement established in accordance with the requirements under
Section 401(a) of the Internal Revenue Code of 1986, as amended (the "Code").
The Bank intends that the Plan, in operation, will comply with the
requirements under Sections 401(a) and 401(k) of the Code. The Bank will adopt
any amendments to the Plan that may be necessary to ensure the qualified status
of the Plan under the Code and applicable Treasury Regulations. The Bank may
submit the Plan to the IRS for a determination that the Plan, as amended, is
qualified under Section 401(a) of the Code and that it satisfies the
requirements for a qualified cash or deferred arrangement under Section 401(k)
of the Code.
EMPLOYEE RETIREMENT INCOME SECURITY ACT. The Plan is an "individual
account plan" other than a "money purchase pension plan" within the meaning of
ERISA. As such, the Plan is subject to all of the provisions of Title I
(Protection of Employee Benefit Rights) and Title II (Amendments to the Internal
Revenue Code Relating to Retirement Plans) of ERISA, except the funding
requirements contained in Part 3 of Title I of ERISA which by their terms do not
apply to an individual account plan (other than a money purchase pension plan).
The Plan is not subject to Title IV (Plan Termination Insurance) of ERISA.
Neither the funding requirements contained in Part 3 of Title I of ERISA nor the
plan termination insurance provisions contained in Title IV of ERISA will be
extended to Participants or beneficiaries under the Plan.
APPLICABLE FEDERAL LAW REQUIRES THE PLAN TO IMPOSE SUBSTANTIAL
RESTRICTIONS ON THE RIGHT OF A PLAN PARTICIPANT TO WITHDRAW AMOUNTS HELD FOR HIS
BENEFIT UNDER THE PLAN PRIOR TO THE PARTICIPANT'S TERMINATION OF EMPLOYMENT WITH
THE BANK. A SUBSTANTIAL FEDERAL TAX PENALTY MAY ALSO BE IMPOSED ON WITHDRAWALS
MADE PRIOR TO THE PARTICIPANT'S ATTAINMENT OF AGE 59-1/2, UNLESS A PARTICIPANT
RETIRES AS PERMITTED UNDER THE PLAN REGARDLESS OF WHETHER SUCH A WITHDRAWAL
OCCURS DURING HIS EMPLOYMENT WITH THE BANK OR AFTER TERMINATION OF EMPLOYMENT.
REFERENCE TO FULL TEXT OF PLAN. The following statements are summaries
of certain provisions of the Plan. They are not complete and are qualified in
their entirety by the full text of the Plan, which is filed as an exhibit to the
registration statement filed with the Securities and Exchange Commission
("SEC"). Copies of the Plan are available to all employees by filing a request
with the Plan Administrator. Each employee is urged to read carefully the full
text of the Plan.
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ELIGIBILITY AND PARTICIPATION
Any employee of the Bank is eligible to participate and will become a
Participant in the Plan on the first day of the payroll period immediately
following completion of a minimum of 1,000 hours of service with the Bank within
a twelve month period of employment and attainment of 21 years of age. The Plan
fiscal year is the calendar year ("Plan Year"). Directors who are not employees
of the Bank are not eligible to participate in the Plan.
As of May 31, 1995, there were approximately 33 employees eligible to
participate in the Plan, and approximately 33 employees had elected to
contribute to the Plan.
CONTRIBUTIONS UNDER THE PLAN
PARTICIPANT CONTRIBUTIONS. Each Participant in the Plan is permitted to
elect to reduce such Participant's Compensation (as defined below) pursuant to a
salary reduction agreement by an amount not more than 15% and have that amount
contributed to the Plan on such Participant's behalf. Such amounts are credited
to the Participant's "401(k) Account." For purposes of the Plan, "Compensation"
means a Participant's total amount of earnings reportable as W-2 wages for
federal income tax withholding purposes but excluding overtime and fringe
benefits. In addition a Participant's elective deferrals pursuant to a salary
reduction agreement under the Plan or any elective deferrals to a Section 125
plan and contributions to the extent that base salary, wages and commissions do
not exceed $50,000, will be considered Compensation for Plan purposes. Due to
limitations in the Code, the annual Compensation of each Participant taken into
account under the Plan shall be limited to $150,000 (adjusted for cost of living
as permitted by the Code) and may be further limited for certain highly
compensated employees for purposes of meeting discrimination testing under the
Code. A Participant may elect to increase the amount contributed to the Plan
under such Participant's salary reduction agreement, which changes generally
become effective as soon as administratively feasible following receipt by the
Plan Administrator of such change. You may decrease the amount contributed to
the Plan as of the second full payroll period after notification is received by
the Plan Administrator. Deferred contributions are generally transferred by the
Bank to the Trustee of the Plan monthly.
EMPLOYER MATCHING CONTRIBUTIONS. The Bank will make an annual
contribution to the Plan of an amount equal to 50% of each eligible
Participant's annual contributions to his or her 401(k) Account, up to a maximum
of 6% of each Participant's annual compensation. Such amounts are credited to
the Participants' 401(k) Account. To be eligible for an Employer Matching
Contribution, a Participant must complete 1,000 or more Hours of Service during
the Plan Year and remain employed through the end of the Plan Year for which the
Employer Match is made. The amount of the Employer Matching Contribution is,
however, subject each year to approval by the Board of Directors of the Bank and
is not guaranteed for any period in the future.
WHEN AN EMPLOYER MATCHING CONTRIBUTION IS MADE, IT WILL BE MADE IN THE
FORM OF A CASH CONTRIBUTION INTO ALL OF THE INVESTMENT FUNDS IN WHICH THE
PARTICIPANT IS INVESTED, INCLUDING THE EMPLOYER STOCK FUND. Employer Matching
Contributions will be allocated among the investment funds on a pro rata basis
according to fund balances. Amounts attributable
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to the Employer Matching Contribution may be re-allocated to any of the other
investment alternatives by each Participant as could be done with the other
monies in the Plan.
PROFIT SHARING CONTRIBUTION. The Plan also allows for the Profit
Sharing Contributions to be made by the Bank. Such Profit Sharing Contributions
would be credited to the 401(k) Account of each Employee eligible to participate
in the Plan and who is credited with 1,000 hours of service during a given Plan
Year, regardless of whether that employee chooses to make a deferral of
Compensation. The Profit Sharing Contribution is designed to be made in an
amount determined by the Board and may be zero for a given year. Amounts
attributable to a Profit Sharing Contribution and earnings thereon are subject
to the vesting schedule set out herein. The Profit Sharing Contribution will be
allocated pro rata based on the amount of the then current balances of the
various investment funds, including the Employer Stock Fund, at the time the
Profit Sharing Contribution is initially made. Participants may then direct the
investment of the Profit Sharing Contribution in the same manner as any other
contribution.
ROLLOVER AMOUNT FROM OTHER PLANS. An employee eligible to participate
in the Plan, who has satisfied the service requirements, who, as a result of a
plan termination, termination of employment, disability, or attainment of age
59-1/2, has had distributed to such employee the entire interest in another plan
which meets the requirements of Section 401(a) of the Code (the "Other Plan")
may, in accordance with Section 402(a)(5) of the Code, and procedures approved
at the discretion of the Trustee, transfer the distribution received from the
Other Plan to the Trustee.
LIMITATIONS ON CONTRIBUTIONS
LIMITATIONS ON ANNUAL ADDITIONS AND BENEFITS. Pursuant to the
requirements of the Code, the Plan provides that the amount of contributions
allocated to each Participant's 401(k) Contribution Account during any Plan Year
may not exceed the lesser of 25% of the Participant's "Section 415 Compensation"
for the Plan Year or $30,000 (adjusted for increases in the cost of living as
permitted by the Code). A Participant's "Section 415 Compensation" is a
Participant's Compensation, excluding any amount contributed to the Plan under a
compensation reduction agreement or any employer contribution to the Plan or to
any other plan of deferred compensation or any distributions from a plan of
deferred compensation. In addition, annual additions shall be limited to the
extent necessary to prevent the limitations for the combined plans of the Bank
from being exceeded. To the extent that these limitations would be exceeded by
reason of excess annual additions to the Plan with respect to a Participant,
such excess will be disposed of as follows:
(i) Any excess amount in the Participant's Account will be used to
reduce the Bank's contributions for such Participant in the next
Limitation Year, which is the same as the plan year, and each
succeeding Limitation Year if necessary;
(ii) If an excess amount still exists, and the Participant is NOT
covered by the Plan at the end of the Limitation Year, the excess
amount will be held unallocated in a suspense account which will
then be applied to reduce future Bank contributions
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for all remaining Participants in the next Limitation Year, and each
succeeding Limitation Year if necessary;
(iii) If a suspense account is in existence at any time during the
Limitation Year, it will not participate in the allocation of
investment gains and losses.
However, if the annual addition limitations are exceeded with respect to a
Participant in both the Plan and the defined benefit pension plan maintained by
the Bank, the Participant's annual benefit under the pension plan will be
reduced.
$9,500 LIMITATION ON 401(k) PLAN CONTRIBUTIONS. The annual amount of
deferred compensation of a Participant (when aggregated with any elective
deferrals of the Participant under any other employer plan, a simplified
employee pension plan or a tax-deferred annuity) may not in 1996 exceed $9,500,
adjusted for increases in the cost of living as permitted by the Code.
Contributions in excess of this limitation ("excess deferrals") will be included
in the Participant's gross income for federal income tax purposes in the year
they are made. In addition, any such excess deferral will again be subject to
federal income tax when distributed by the Plan to the Participant, unless the
excess deferral (together with any income allocable thereto) is distributed to
the Participant not later than the first April 15th following the close of the
taxable year in which the excess deferral is made. Any income on the excess
deferral that is distributed not later than such date shall be treated, for
federal income tax purposes, as earned and received by the Participant in the
taxable year in which the excess deferral is made.
LIMITATION ON PLAN CONTRIBUTIONS FOR HIGHLY COMPENSATED EMPLOYEES.
Sections 401(k) and 401(m) of the Code limit the amount of deferred compensation
contributed to the Plan in any Plan Year on behalf of Highly Compensated
Employees (defined below) in relation to the amount of deferred compensation
contributed by or on behalf of all other employees eligible to participate in
the Plan. Specifically, the actual deferral percentage for a plan year (i.e.,
the average of the ratios, calculated separately for each eligible employee in
each group, by dividing the amount of Deferred Compensation credited to the
401(k) Account of such eligible employee by such eligible employee's
compensation for the Plan Year) of the Highly Compensated Employees may not
exceed the greater of (a) 125% of the actual deferral percentage of all other
eligible employees, or (b) the lesser of (i) 200% of the actual deferral
percentage of all other eligible employees, or (ii) the actual deferral
percentage of all other eligible employees plus two percentage points. In
addition, the actual contribution percentage for a Plan Year (i.e., the average
of the ratios calculated separately for each eligible employee in each group, by
dividing the amount of employer contributions credited to the Regular Account of
such eligible employee by such eligible employee's compensation for the Plan
Year) of the Highly Compensated Employees may not exceed the greater of (a) 125%
of the actual contribution percentage of all other eligible employees, or (b)
the lesser of (i) 200% of the actual contribution percentage of all other
eligible employees, or (ii) the actual contribution percentage of all other
eligible employees plus two percentage points.
In general, a Highly Compensated Employee includes any employee who,
during the Plan Year or the preceding Plan Year, (1) was at any time a 5% owner
(i.e., owns directly or
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indirectly more than 5% of the stock of the Employer, or stock possessing more
than 5% of the total combined voting power of all stock of the Employer), (2)
received compensation from the Employer in excess of $100,000 (3) received
compensation from the Employer in excess of $66,000 and was in the group
consisting of the top 20% of employees when ranked on the basis of compensation
paid during the Plan Year, or (4) was at any time an officer of the Employer and
received compensation in excess of $60,000 (a "Highly Compensated Employee").
The dollar amounts in the foregoing sentence are for 1995. Such amounts are
adjusted annually to reflect increases in the cost of living. If the Employer
does not have at least one officer whose annual compensation is in excess of
$60,000, then the highest paid officer of the Employer will be treated as a
Highly Compensated Employee.
In order to prevent the disqualification of the Plan, any amounts
contributed by Highly Compensated Employees that exceed the average deferral
limitation in any Plan Year ("excess contributions"), together with any income
allocable thereto, must be distributed to such Highly Compensated Employees
before the close of the following Plan Year. However, the Bank will be subject
to a 10% excise tax on any excess contributions unless such excess
contributions, together with any income allocable thereto, either are
recharacterized or are distributed before the close of the first 2-1/2 months
following the Plan Year to which such excess contributions relate. In addition,
in order to avoid disqualification of the Plan, any contributions by Highly
Compensated Employees that exceed the average contribution limitation in any
Plan Year ("excess aggregate contributions") together with any income allocable
thereto, must be distributed to such Highly Compensated Employees before the
close of the following Plan Year. However, the 10% excise tax will be imposed
on the Bank with respect to any excess aggregate contributions, unless such
amounts, plus any income allocable thereto, are distributed within 2-1/2 months
following the close of the Plan Year in which they arose.
TOP-HEAVY PLAN REQUIREMENTS. If for any Plan Year the Plan is a
Top-Heavy Plan (as defined below), then (i) the Bank may be required to make
certain minimum contributions to the Plan on behalf of non-key employees (as
defined below), and (ii) certain additional restrictions would apply with
respect to the combination of annual additions to the Plan and projected annual
benefits under any defined benefit plan maintained by the Bank.
In general, the Plan will be regarded as a "Top-Heavy Plan" for any Plan
Year if, as of the last day of the preceding Plan Year, the aggregate balance of
the Accounts of Participants who are Key Employees exceeds 60% of the aggregate
balance of the Accounts of all Participants. "Key Employees" generally include
any employee who, at any time during the Plan Year or any of the four preceding
Plan Years, is (1) an officer of the Bank having annual compensation in excess
of $60,000 who is in an administrative or policy-making capacity, (2) one of the
ten employees having annual compensation in excess of $30,000 and owning,
directly or indirectly, the largest interests in the employer, (3) a 5% owner of
the employer, (i.e., owns directly or indirectly more than 5% of the stock of
the employer, or stock possessing more than 5% of the total combined voting
power of all stock of the employer) or (4) a 1% owner of the employer having
annual compensation in excess of $150,000.
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INVESTMENT OF CONTRIBUTIONS
All amounts credited to Participants' Accounts under the Plan are held in
the Trust which is administered by the Trustee. The Trustee is appointed by the
Bank's Board of Directors. The Plan provides that a Participant may direct the
Trustee to invest all or a portion of his Account in various managed investment
portfolios, described below. The Plan is intended to constitute an ERISA
Section 404(c) plan and fiduciaries may be relieved of liability for losses
which are the result of Participant's investment decisions. A Participant may
elect to change his investment directions with respect to both past
contributions and for additional contributions to the Participant's accounts.
These elections generally become effective on the first or second day next
following the day the Plan Administrator receives the Participant's written
notice or phone response notice of the elections. Elections may be made at
least four times per year or more as administratively feasible. Any amounts
credited to a Participant's Accounts for which investment directions are not
given will be invested by the Trustee in Fund B.
Prior to the effective date of the Conversion, the Accounts of a
Participant held in the Trust have been invested by the Trustee. Effective upon
the Conversion, a Participant may invest all or a portion of his Accounts in the
portfolios A through F described below. BEFORE MAKING INVESTMENT DECISIONS,
PLEASE REVIEW THE PROSPECTUS AND INVESTMENT OPTION AND PERFORMANCE SUMMARIES FOR
EACH FUND.
INVESTMENT FUND A - FEDERATED GNMA TRUST INSTITUTIONAL SHARES
This fund has current income as an objective and an
investment concentration in GNMA securities. The fund is
designed for rather conservative investors who are willing
to accept some fluctuation in the value of their investment
as interest rates change, but who want relative credit
safety and monthly income.
INVESTMENT FUND B - DREYFUS SHORT-INTERMEDIATE GOVERNMENT FUND
The fund's investment objective is to provide you with as
high a level of current income as is consistent with the
preservation of capital. The fund invests primarily in
government backed securities.
INVESTMENT FUND C - FIDELITY ADVISOR OVERSEAS FUND
This fund seeks growth through carefully researched
investments outside of the United States, including the Far
East, the Pacific Basin, Europe, and Latin America. This
fund is designed for investors who are willing to ride out
stock market fluctuations in pursuit of potentially high
long-term returns. This fund vests for growth and does not
pursue income.
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<PAGE>
INVESTMENT FUND D - FIDELITY ADVISOR GROWTH OPPORTUNITIES FUND CLASS A
This fund pursues capital growth that exceeds market
performance through investments in growth, cyclical and
value stocks, and securities convertible to common stocks.
This is a fund for investors who want to be invested in the
stock market for its long-term growth potential. It is
designed for investors who are willing to ride out stock
market fluctuations in pursuit of potentially high
long-term returns.
INVESTMENT FUND E - FIDELITY ADVISOR EQUITY INCOME FUND CLASS A
This fund seeks to obtain reasonable income from a
portfolio consisting primarily of income-producing equity
securities, with a secondary emphasis on growth potential.
This fund is designed for those investors who seek a
combination of growth and income from equity and some bond
investments.
A Participant may elect, to have both past and future contributions and
additions to the Participant's Accounts invested either in the Employer Stock
Fund or in such other managed portfolios listed above. These elections will
generally be effective the second or third business day following the day of the
plan administrators' receipt of such investment directions. Any amounts
credited to a Participant's Accounts for which investment directions are not
given will be invested in the Dreyfus Short-Intermediate Government Fund.
Because investment allocations only are required to be made in increments of 1%,
Participants can invest their Accounts in each of the six available investment
funds. Lack of diversification with respect to the investment of a
Participant's Account is not a significant risk given the investment options
available to the Participants and the ability of Participants to make investment
designations regularly.
The net gain (or loss) in the Accounts from investments including the
Employer Stock Fund (including interest payments, dividends, realized and
unrealized gains and losses on securities, and expenses paid from the Trust) are
determined daily during the Plan Year. For purposes of such allocations, all
assets of the Trust are valued at their fair market value.
A. INVESTMENT FUNDS PERFORMANCE.
Prior to the Conversion, contributions under the Plan were invested by the
trustee. Going forward each Participant will make his or her own investment
decision. The funds, except for the Employer Stock Fund, all existed prior to
their inclusion in this Plan; however, no assets of the Plan were invested in
such funds. The annual percentage of returns on these funds, calculated prior
to any fees being charged to the portfolio for 1995 was:
10
<PAGE>
<TABLE>
<CAPTION>
1994 1993 1992
---------- ---------- ----------
<S> <C> <C> <C>
A. Federated GNMA Trust Institutional Shares 9.63% N/A N/A
B. Dreyfus Short-Intermediate Government Fund (.57) 8.29% 8.05%
C. Fidelity Advisor Overseas Fund Class A 8.91 44.13 (5.88)
D. Fidelity Advisor Growth Opportunities Fund Class A 8.71 28.11 12.09
E. Fidelity Advisor Equity Income Fund Class A 8.84 18.03 4.88
</TABLE>
B. THE EMPLOYER STOCK FUND.
The Employer Stock Fund will consist of investments in Common Stock made
on and after the effective date of the Conversion. In connection with the
Conversion, pursuant to the attached Investment Form, Participants will be able
to change their investments at a time other than the normal elective periods.
Any cash dividends paid on Common Stock held in the Employer Stock Fund will be
credited to a cash dividend subaccount for each Participant investing in the
Employer Stock Fund. The Trustee will, to the extent practicable, use all
amounts held by it in the Employer Stock Fund (except the amounts credited to
cash dividend subaccounts) to purchase shares of Common Stock. It is expected
that all purchases will be made at prevailing market prices. Under certain
circumstances, the Trustee may be required to limit the daily volume of shares
purchased. Pending investment in Common Stock, assets held in the Employer
Stock Fund will be placed in bank or thrift institution deposits including
deposits with the Bank and other short-term investments.
When Common Stock is purchased or sold, the cost or net proceeds are
charged or credited to the Accounts of Participants affected by the purchase or
sale. The Bank expects to pay any brokerage commissions, transfer fees and
other expenses incurred in the sale and purchase of Common Stock for the
Employer Stock Fund. A Participant's Account will be adjusted to reflect
changes in the value of shares of Common Stock resulting from stock dividends,
stock splits and similar changes.
To the extent dividends are not paid on Common Stock held in the Employer
Stock Fund, the return on any investment in the Employer Stock Fund will consist
only of the market value appreciation of the Common Stock subsequent to its
purchase. Following the Conversion, the Board of the Company may consider a
policy of paying dividends on the Common Stock, however, no decision has been
made by the Board of the Company regarding the amount or timing of dividends, if
any.
As of the date of this Prospectus Supplement, none of the shares of Common
Stock have been issued or are outstanding and there is no established market for
the Common Stock. Accordingly, there is no record of the historical performance
of the Employer Stock Fund.
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<PAGE>
INVESTMENTS IN THE EMPLOYER STOCK FUND MAY INVOLVE CERTAIN SPECIAL RISKS
ASSOCIATED WITH INVESTMENTS IN COMMON STOCK OF THE COMPANY. FOR A DISCUSSION OF
THESE RISK FACTORS, SEE "RISK FACTORS" IN THE PROSPECTUS.
BENEFITS UNDER THE PLAN
VESTING. A Participant, has at all times a fully vested, nonforfeitable
interest in all of his Contributions and the earnings thereon under the Plan. A
Participant is 100% vested in all of his Account after the completion of five
years of service under the Plan's five-year graded vesting schedule of
Nonforfeitable
Years of Service Percentage
---------------- ----------
Less than 3 .................20%
4............................40%
5............................60%
6........................... 80%
7 or more ..................100%
WITHDRAWALS AND DISTRIBUTIONS FROM THE PLAN
APPLICABLE FEDERAL LAW REQUIRES THE PLAN TO IMPOSE SUBSTANTIAL
RESTRICTIONS ON THE RIGHT OF A PLAN PARTICIPANT TO WITHDRAW AMOUNTS HELD FOR HIS
BENEFIT UNDER THE PLAN PRIOR TO THE PARTICIPANT'S ATTAINMENT OF AGE 59 1/2
UNLESS A PARTICIPANT RETIRES AS PERMITTED UNDER THE PLAN REGARDLESS OF WHETHER
SUCH A WITHDRAWAL OCCURS DURING HIS EMPLOYMENT WITH THE BANK
WITHDRAWALS PRIOR TO TERMINATION OF EMPLOYMENT. In certain
circumstances, a Participant may make a withdrawal from his Accounts under the
Plan pursuant to the hardship distribution rules under the Plan. These
requirements insure that Participants have a true financial need before a
withdrawal may be made. A Participant may make a withdrawal from his 401(k)
Contribution Account after the age of 59 1/2.
LOANS FROM THE PLAN. Loans are available to Participants from the Plan
on terms and conditions found in the Plan and in the Loan Policy and Procedure
Statement which is subject to amendment outside of the amendment of the Plan.
The Statement is available at the Human Resources Office of the Bank. Loans are
available on a reasonably equivalent basis. Loans are repaid through payroll
deductions, are subject to a reasonable rate of interest as set by the Plan
periodically, have terms of five years or less (except for loans on primary
dwellings which may be extended for a term of no more than 30 years), and the
amount of the loan may be no less than $1,000 but may not exceed (together with
any other loans from the Plan), 50% of the account balance of the Participant.
All loans will be secured by the account balance of the Participant in the Plan.
Each loan to a Participant will be considered an asset of the trust which
12
<PAGE>
is "earmarked" specifically for such Participant's account. The market value of
the loan and the income derived from it will be credited to such Participant's
account exclusively.
DISTRIBUTION UPON RETIREMENT, DISABILITY OR TERMINATION OF EMPLOYMENT.
Payment of benefits to a Participant who retires, incurs a disability, or
otherwise terminates employment generally shall be made in a lump sum cash
payment. At the request of the Participant, subject to the discretion of the
Administrator the distribution may be made in installments; however, no
distribution will be made in the form of an annuity. Benefit payments ordinarily
shall be made not later than 60 days following the end of the Plan Year in which
occurs the later of the Participant's: (i) termination of employment; (ii)
attainment of age 65; (iii) 10th anniversary of commencement of participation in
the Plan; but in no event later than the April 1 following the calendar year in
which the Participant attains age 70 1/2. However, if the vested portion of the
Participant's Account balances exceeds $3,500, no distribution shall be made
from the Plan prior to the Participant's attaining age 65 unless the Participant
consents to an earlier distribution. Special restrictions apply to the
distribution of Common Stock of the Company to those Participants who are
executive officers, directors and principal shareholders of the Company who are
subject to the provisions of Section 16(b) of the Exchange Act.
DISTRIBUTION UPON DEATH. A Participant who dies prior to the benefit
commencement date for retirement, disability or termination of employment, and
who has a surviving spouse, shall have his benefits paid to the surviving spouse
in a lump sum by the end of the Plan year following the date of his death, or if
the payment of his benefit had commenced before his death, in accordance with
the distribution method in effect at death. With respect to an unmarried
Participant, and in the case of a married Participant with spousal consent to
the designation of another beneficiary, payment of benefits to the beneficiary
of a deceased Participant shall be made in the form of a lump-sum payment in
cash or in Common Stock, or, if the payment of his benefit had commenced before
his death, in accordance with the distribution method in effect at death.
NONALIENATION OF BENEFITS. Except with respect to federal income tax
withholding and as provided with respect to a qualified domestic relations order
(as defined in the Code), benefits payable under the Plan shall not be subject
in any manner to anticipation, alienation, sale, transfer, assignment, pledge,
encumbrance, charge, garnishment, execution, or levy of any kind, either
voluntary or involuntary, and any attempt to anticipate, alienate, sell,
transfer, assign, pledge, encumber, charge or otherwise dispose of any rights to
benefits payable under the Plan shall be void.
ADMINISTRATION OF THE PLAN
TRUSTEES. The Trustee with respect to the Plan is the named fiduciary
of the Plan for purposes of Section 402 of ERISA. The trustee of the Plan is
the California Central Trust Bank Corporation.
Pursuant to the terms of the Plan, the Trustee receives and holds
contributions to the Plan in trust and has exclusive authority and discretion to
manage and control the assets of the Plan pursuant to the terms of the Plan and
to manage, invest and reinvest the Trust and income therefrom. The Trustee has
the authority to invest and reinvest the Trust and may sell or
13
<PAGE>
otherwise dispose of Trust investments at any time and may hold trust funds
uninvested. The Trustee has authority to invest the assets of the Trust in
"any type of property, investment or security" as defined under ERISA.
The Trustee has full power to vote any corporate securities in the Trust
in person or by proxy, provided, however, that the Plan Administrator shall
direct the Trustee as to voting and tendering of all Common Stock held in the
Employer Stock Fund.
The Trustee is entitled to reasonable compensation for its services and is
also entitled to reimbursement for expenses properly and actually incurred in
the administration of the Trust. The expenses of the Trustee and the
compensation of the persons so employed is paid out of the Trust except to the
extent such expenses and compensation are paid by the Bank.
The Trustee must render at least annual reports to the Bank and to the
Participants in such form and containing information that the Trustee deems
necessary.
REPORTS TO PLAN PARTICIPANTS
The Administrator will furnish to each Participant a statement at least
annually showing (i) the balance in the Participant's Account as of the end of
that period, (ii) the amount of contributions allocated to such Participant's
Account for that period, and (iii) the adjustments to such Participant's Account
to reflect earnings or losses (if any). Account balance information is updated
and available on a daily basis using the Phone Response System at
1-800-767-5366.
PLAN ADMINISTRATOR
Pursuant to the terms of the Plan, the Plan Administrator is the Bank. A
committee of the Bank has been designated by the Board of Directors of the Bank
to act on the Bank's behalf as the Plan Administrator. The name, address and
telephone number of the current Plan Administrator is Park Federal Savings Bank,
2740 West 55th Street, Chicago, Illinois 60632. The Bank's telephone number is
(312) 434-6040. The Administrator is responsible for the administration of the
Plan, interpretation of the provisions of the Plan, prescribing procedures for
filing applications for benefits, preparation and distribution of information
explaining the Plan, maintenance of plan records, books of account and all other
data necessary for the proper administration of the Plan, and preparation and
filing of all returns and reports relating to the Plan which are required to be
filed with the U.S. Department of Labor and the IRS, and for all disclosures
required to be made to Participants, beneficiaries and others under Sections 104
and 105 of ERISA.
AMENDMENT AND TERMINATION
The Bank may terminate the Plan at any time. If the Plan is terminated in
whole or in part, then regardless of other provisions in the Plan, each employee
who ceases to be a Participant shall have a fully vested interest in his
Account. The Bank reserves the right to make, from time to time, any amendment
or amendments to the Plan which do not cause any part of the Trust to be used
for, or diverted to, any purpose other than the exclusive benefit of the
Participants or their beneficiaries.
14
<PAGE>
MERGER, CONSOLIDATION OR TRANSFER
In the event of the merger or consolidation of the Plan with another plan,
or the transfer of the Trust to another plan, the Plan requires that each
Participant (if either the Plan or the other plan then terminated) receive a
benefit immediately after the merger, consolidation or transfer which is equal
to or greater than the benefit he would have been entitled to receive
immediately before the merger, consolidation or transfer (if the Plan had then
terminated).
FEDERAL INCOME TAX CONSEQUENCES
The following is only a brief summary of certain federal income tax
aspects of the Plan, which are of general application under the Code, and is not
intended to be a complete or definitive description of the federal income tax
consequences of participating in or receiving distributions from the Plan. The
summary is necessarily general in nature and does not purport to be complete.
Moreover, statutory provisions are subject to change, as are their
interpretations, and their application may vary in individual circumstances.
Finally, the consequences under applicable state and local income tax laws may
not be the same as under the federal income tax laws.
PARTICIPANTS ARE URGED TO CONSULT THEIR TAX ADVISORS WITH RESPECT TO ANY
DISTRIBUTION FROM THE PLAN AND TRANSACTIONS INVOLVING THE PLAN.
The Plan has been submitted to the IRS for a determination that it is
qualified under Section 401(a) and 401(k) of the Code, and that the related
Trust is exempt from tax under Section 501(a) of the Code. A plan that is
"qualified" under these sections of the Code is afforded special tax treatment
which include the following: (1) The sponsoring employer is allowed an
immediate tax deduction for the amount contributed to the Plan each year; (2)
Participants pay no current income tax on amounts contributed by the employer on
their behalf; and (3) Earnings of the plan are tax-exempt thereby permitting the
tax-free accumulation of income and gains on investments. The Plan will be
administered to comply in operation with the requirements of the Code as of the
applicable effective date of any change in the law. The Bank expects to timely
adopt any amendments to the Plan that may be necessary to maintain the qualified
status of the Plan under the Code. Following such an amendment, the Plan will
be submitted to the IRS for a determination that the Plan, as amended, continues
to qualify under Sections 401(a) and 501(a) of the Code and that it continues to
satisfy the requirements for a qualified cash or deferred arrangement under
Section 401(k) of the Code.
Assuming that the Plan is administered in accordance with the requirements
of the Code and that the IRS issues a favorable determination as described in
the preceding paragraph, participation in the Plan under existing federal income
tax laws will have the following effects:
(a) Amounts contributed to a Participant's 401(k) Account and the
investment earnings on this Account are not includable in a
Participant's federal taxable income until such contributions or
earnings are actually distributed or withdrawn from the Plan.
Special tax treatment may apply to the taxable portion of any
15
<PAGE>
distribution that includes Common Stock or qualifies as a Lump Sum
Distribution (as described below).
(b) Income earned on assets held by the Trust will not be taxable to the
Trust.
LUMP SUM DISTRIBUTION. A distribution from the Plan to a Participant or
the beneficiary of a Participant will qualify as a "Lump Sum Distribution" if it
is made: (i) within a single taxable year of the Participant or beneficiary;
(ii) on account of the Participant's death or separation from service, or after
the Participant attains age 59 1/2; and (iii) consists of the balance to the
credit of the Participant under the Plan and all other profit sharing plans, if
any, maintained by the Bank. The portion of any Lump Sum Distribution that is
required to be included in the Participant's or beneficiary's taxable income for
federal income tax purposes (the "total taxable amount") consists of the entire
amount of such Lump Sum Distribution less the amount of after-tax contributions,
if any, made by the Participant to any other profit sharing plans maintained by
the Bank which is included in such distribution.
AVERAGING RULES. The portion of the total taxable amount of a Lump Sum
Distribution (the "ordinary income portion") will be taxable generally as
ordinary income for federal income tax purposes. However, a Participant who has
completed at least five years of participation in the Plan before the taxable
year in which the distribution is made, or a beneficiary who receives a Lump Sum
Distribution on account of the Participant's death (regardless of the period of
the Participant's participation in the Plan or any other profit-sharing plan
maintained by the Employer), may elect to have the ordinary income portion of
such Lump Sum Distribution taxed according to a special averaging rule
("five-year averaging"). The election of the special averaging rules may apply
only to one Lump Sum Distribution received by the Participant or beneficiary,
provided such amount is received on or after the Participant turns 59-1/2 and
the recipient elects to have any other Lump Sum Distribution from a qualified
plan received in the same taxable year taxed under the special averaging rule.
Under a special grandfather rule, individuals who turned 50 by 1986 may elect to
have their Lump Sum Distribution taxed under either the five-year averaging rule
or under the prior law ten-year averaging rule.
COMMON STOCK INCLUDED IN LUMP SUM DISTRIBUTION. If a Lump Sum
Distribution includes Common Stock, the distribution generally will be taxed in
the manner described above, except that the total taxable amount will be reduced
by the amount of any net unrealized appreciation with respect to such Common
Stock, i.e., the excess of the value of such Common Stock at the time of the
distribution over its cost to the Plan. The tax basis of such Common Stock to
the Participant or beneficiary for purposes of computing gain or loss on its
subsequent sale will be the value of the Common Stock at the time of
distribution less the amount of net unrealized appreciation. Any gain on a
subsequent sale or other taxable disposition of such Common Stock, to the extent
of the amount of net unrealized appreciation at the time of distribution, will
be considered long-term capital gain regardless of the holding period of such
Common Stock. Any gain on a subsequent sale or other taxable disposition of the
Common Stock in excess of the amount of net unrealized appreciation at the time
of distribution will be considered either short-term capital gain or long-term
capital gain depending upon the length of the holding period of the Common
Stock. The recipient of a distribution may elect to include the amount of any
net unrealized appreciation in the total taxable amount of such distribution to
the extent allowed by the regulations to be issued by the IRS.
16
<PAGE>
DISTRIBUTIONS: ROLLOVERS AND DIRECT TRANSFERS TO ANOTHER QUALIFIED PLAN
OR TO AN IRA. Pursuant to a change in the law, effective January 1, 1993,
virtually all distributions from the Plan may be rolled over to another
qualified Plan or to an IRA without regard to whether the distribution is a Lump
Sum Distribution or a Partial Distribution. Effective January 1, 1993,
Participants have the right to elect to have the Trustee transfer all or any
portion of an "eligible rollover distribution" directly to another plan
qualified under Section 401(a) of the Code or to an IRA. If the Participant
does not elect to have an "eligible rollover distribution" transferred directly
to another qualified plan or to an IRA, the distribution will be subject to a
mandatory federal withholding tax equal to 20% of the taxable distribution. An
"eligible rollover distribution" means any amount distributed from the Plan
except: (1) a distribution that is (a) one of a series of substantially equal
periodic payments made (not less frequently than annually) over the
Participant's life or the joint life of the Participant and the Participant's
designated beneficiary, or (b) for a specified period of ten years or more; (2)
any amount that is required to be distributed under the minimum distribution
rules; and (3) any other distributions excepted under applicable federal law.
The tax law change described above did not modify the special tax treatment of
Lump Sum Distributions, that are not rolled over or transferred I.E., forward
averaging, capital gains tax treatment and the nonrecognition of net unrealized
appreciation, discussed earlier.
ADDITIONAL TAX ON EARLY DISTRIBUTIONS. A Participant who receives a
distribution from the Plan prior to attaining age 59-1/2 will be subject to an
additional income tax equal to 10% of the taxable amount of the distribution.
The 10% additional income tax will not apply, however, to the extent the
distribution is rolled over into an IRA or another qualified plan or the
distribution is (i) made to a beneficiary (or to the estate of a Participant) on
or after the death of the Participant, (ii) attributable to the Participant's
being disabled within the meaning of Section 72(m)(7) of the Code, (iii) part of
a series of substantially equal periodic payments (not less frequently than
annually) made for the life (or life expectancy) of the Participant or the joint
lives (or joint life expectancies) of the Participant and his beneficiary, (iv)
made to the Participant after separation from service on account of early
retirement under the Plan after attainment of age 55, (v) made to pay medical
expenses to the extent deductible for federal income tax purposes, (vi) pursuant
to a qualified domestic relations order, or (vii) made to effect the
distribution of excess contributions or excess deferrals.
ERISA AND OTHER QUALIFICATIONS
As noted above, the Plan is subject to certain provisions of ERISA and has
received from the IRS a determination that it is qualified under Section 401(a)
of the Code.
THE FOREGOING IS ONLY A BRIEF SUMMARY OF CERTAIN FEDERAL INCOME TAX
ASPECTS OF THE PLAN WHICH ARE OF GENERAL APPLICATION UNDER THE CODE AND IS NOT
INTENDED TO BE A COMPLETE OR DEFINITIVE DESCRIPTION OF THE FEDERAL INCOME TAX
CONSEQUENCES OF PARTICIPATING IN OR RECEIVING DISTRIBUTIONS FROM THE PLAN.
ACCORDINGLY, EACH PARTICIPANT IS URGED TO CONSULT A TAX ADVISOR CONCERNING THE
FEDERAL, STATE AND LOCAL TAX CONSEQUENCES OF PARTICIPATING IN AND RECEIVING
DISTRIBUTIONS FROM THE PLAN.
17
<PAGE>
RESTRICTIONS ON RESALE
Any person receiving shares of Common Stock under the Plan who is an
"affiliate" of the Company as the term "affiliate" is used in Rules 144 and 405
under the Securities Act of 1933, as amended ("Securities Act") (e.g.,
directors, officers and substantial shareholders of the Company) may reoffer or
resell such shares only pursuant to a registration statement filed under the
Securities Act or, assuming the availability thereof, pursuant to Rule 144 or
some other exemption of the registration requirements of the Securities Act.
Any person who may be an "affiliate" of the Company may wish to consult with
counsel before transferring any Company Stock owned by him. In addition,
Participants are advised to consult with counsel as to the applicability of
Section 16 of the Exchange Act which may restrict the sale of Common Stock where
acquired under the Plan, or other sales of Common Stock.
Persons who are NOT deemed to be "affiliates" of the Company at the time
of resale will be free to resell any shares of Common Stock distributed to them
under the Plan, either publicly or privately, without regard to the registration
and prospectus delivery requirements of the Securities Act or compliance with
the restrictions and conditions contained in the exemptive rules thereunder. An
"affiliate" of the Company is someone who directly or indirectly, through one or
more intermediaries, controls, is controlled by, or is under common control,
with the Company. Normally, a director, principal officer or major shareholder
of a corporation may be deemed to be an "affiliate" of that corporation. A
person who may be deemed an "affiliate" of the Company at the time of a proposed
resale will be permitted to make public resales of the Company's Common Stock
only pursuant to a "reoffer" Prospectus or in accordance with the restrictions
and conditions contained in Rule 144 under the Securities Act or some other
exemption from registration, and will not be permitted to use this Prospectus in
connection with any such resale. In general, the amount of the Company's Common
Stock which any such affiliate may publicly resell pursuant to Rule 144 in any
three-month period may not exceed the greater of one percent of the Company's
Common Stock then outstanding or the average weekly trading volume reported on
the National Association of Securities Dealers Automated Quotation System during
the four calendar weeks prior to the sale. Such sales may be made only through
brokers without solicitation and only at a time when the Company is current in
filing the reports required of it under the Exchange Act.
SEC REPORTING AND SHORT-SWING PROFIT LIABILITY
Section 16 of the Exchange Act imposes reporting and liability
requirements on executive officers, directors and persons beneficially owning
more than ten percent of public companies such as the Company. Section 16(a) of
the Act requires the filing of reports of beneficial ownership. Within ten days
of becoming a person subject to the reporting requirements of Section 16(a), a
Form 3 reporting initial beneficial ownership must be filed with the SEC.
Certain changes in beneficial ownership, such as purchases, sales, gifts and
participation in savings and retirement plans must be reported periodically,
either on a Form 4 within ten days after the end of the month in which a change
occurs, or annually on a Form 5 within 45 days after the close of the Company's
fiscal year. Participation in the Employer Stock Fund of the Plan by executive
officers, directors and persons beneficially owning more than ten percent of
Common Stock of the Company must be reported to the SEC annually on a Form 5 by
such individuals.
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<PAGE>
In addition to the reporting requirements described above, Section 16(b)
of the Exchange Act provides for the recovery by the Company of profits realized
by any officer, director or any person beneficially owning more than ten percent
of the Company's Common Stock ("Section 16(b) Persons") resulting from the
purchase and sale or sale and purchase of the Company's Common Stock within any
six-month period.
The SEC has adopted rules that provide exemption from the profit recovery
provisions of Section 16(b) for Participant-directed employer security
transactions within an employee benefit plan, such as the Plan, provided certain
requirements are met. These requirements generally involve restrictions upon
the timing of elections to acquire or dispose of employer securities for the
accounts of Section 16(b) Persons.
The Plan, as amended, only permits Section 16(b) Persons to make transfers
to or from the Employer Stock Fund in accordance with the terms of the Plan, and
only during the period beginning on the third business day following the date of
release of the Company's quarterly and annual statements of earnings and ending
on the 12th business day following that date. Section 16(b) Persons also are
prohibited under the Plan from making a transfer into or out of the Employer
Stock Fund within six months of the next preceding transfer into or out of the
Employer Stock Fund.
Except for distributions of Common Stock due to death, disability,
retirement, termination of employment or under a qualified domestic relations
order under the Plan, Section 16(b) Persons are required to hold shares of
Common Stock distributed from the Plan for six months following such
distribution and are prohibited from directing additional purchases of units
within the Employer Stock Fund for six months after receiving such a
distribution. Finally, the Plan provides that Section 16(b) Persons who
terminate their participation in the Plan may not rejoin the Plan for six months
following the date of their termination. These Plan restrictions conform with
the rules issued by the SEC to exempt the Plan from the profit-recovery rules of
Section 16(b) of the Exchange Act.
LEGAL OPINIONS
The validity of the issuance of the Common Stock will be passed upon by
Muldoon, Murphy & Faucette, Washington, D.C., which firm is acting as special
counsel for the Company in connection with the Bank's Conversion from a mutual
savings association to a stock savings association and the concurrent formation
of the Company.
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<PAGE>
PARK FEDERAL SAVINGS BANK
PARK FEDERAL SAVINGS BANK
INVESTMENT FORM
Name of Plan Participant: _____________________________________________________
Social Security Number: _____________________________________________________
1. INSTRUCTIONS. In connection with the proposed Conversion of Park
Federal Savings Bank from a federally chartered mutual savings bank to a
federally chartered stock savings bank (the "Conversion"), the Park
Federal Savings Bank 401(k) Plan (the "401(k) Plan") has been amended to
permit Participants to direct a portion of their account balances as of
the Conversion into a new fund: the Employer Stock Fund. The percentage
of a Participant's account transferred at the direction of the Participant
into the Employer Stock Fund will be used to purchase shares of common
stock of Park Bancorp, Inc. (the "Common Stock").
To direct a transfer of all or a part of the funds credited to your
accounts to the Employer Stock Fund, you should complete and file this
form with Steven J. Pokrak no later than Wednesday, July 24, 1996. A
representative for the Plan Administrator will retain a copy of this
form and return a copy to you. If you need any assistance in
completing this form, please contact Steven J. Pokrak. If you do not
complete and return this form to Steven J. Pokrak by July 24, 1996, the
funds credited to your accounts under the 401(k) Plan will continue to be
invested in accordance with your prior investment direction, or in
accordance with the terms of the 401(k) Plan if no investment direction
had been provided.
2. TRANSFER DIRECTIONS. I hereby direct the Plan Administrator to reinvest
the following percentage (in multiples of not less than 1%) of my total
account balance in the:
A. Federated GNMA Trust Institutional Shares _____%
B. Dreyfus Short-Intermediate Government Fund _____%
C. Fidelity Advisor Overseas Class Fund A _____%
D. Fidelity Advisor Growth Opportunities Fund Class A _____%
E. Fidelity Advisor Equity Income Fund Class A _____%
F. Employer Stock Fund _____%
NOTE: THE TOTAL PERCENTAGE STATED ABOVE SHOULD EQUAL 100%. YOUR ABILITY TO
TRANSFER FUNDS TO THE EMPLOYER STOCK FUND IN THE CONVERSION IS SUBJECT
TO YOUR GENERAL ELIGIBILITY TO PURCHASE SHARES OF COMMON STOCK IN THE
CONVERSION AND THE MAXIMUM AND MINIMUM PURCHASE LIMITATIONS SET FORTH
IN THE PLAN OF CONVERSION. FOR GENERAL INFORMATION AS TO YOUR
ELIGIBILITY TO PURCHASE SHARES OF COMMON STOCK AND THE MINIMUM AND
MAXIMUM AMOUNTS THAT MAY BE PURCHASED IN THE CONVERSION, SEE "THE
CONVERSION--SUBSCRIPTION OFFERING AND SUBSCRIPTION RIGHTS" AND
"LIMITATION ON COMMON STOCK PURCHASES" IN THE PROSPECTUS.
3. ACKNOWLEDGEMENT OF PARTICIPANT. I UNDERSTAND THAT THIS INVESTMENT FORM
SHALL BE SUBJECT TO ALL OF THE TERMS AND CONDITIONS OF THE 401(k) PLAN.
I ACKNOWLEDGE THAT I HAVE RECEIVED A COPY OF THE PROSPECTUS AND THE
PROSPECTUS SUPPLEMENT.
________________________________ ______________________________
Signature of Participant Date
ACKNOWLEDGMENT OF RECEIPT BY ADMINISTRATOR. This Investment Form was received
by the Plan Administrator and will become effective on the date noted below.
________________________________ ______________________________
Plan Administrator Date
20
<PAGE>
SUBSCRIPTION AND COMMUNITY OFFERING PROSPECTUS
PARK BANCORP, INC.
(Proposed Holding Company for Park Federal Savings Bank)
Up to 2,760,000 Shares of Common Stock
$10.00 Purchase Price Per Share
Park Bancorp, Inc. (the "Company" or "Park Bancorp"), a Delaware
corporation, is offering up to 2,760,000 shares of its common stock, par
value $.01 per share (the "Common Stock"), in connection with the conversion
of Park Federal Savings Bank (the "Bank" or "Park Federal") from a federally
chartered mutual savings bank to a federally chartered stock savings bank
pursuant to the Bank's plan of conversion (the "Plan" or "Plan of
Conversion"). The simultaneous conversion of the Bank to stock form, the
issuance of the Bank's stock to the Company and the offer and sale of the
Common Stock by the Company are herein referred to as the "Conversion." In
certain circumstances, the Company may increase the amount of Common Stock
offered hereby to 3,174,000 shares. See Footnote 5 to the table below.
For more information, call the Conversion Center at (708) 969-3192.
(continued on following page)
FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED BY EACH
PROSPECTIVE INVESTOR, SEE "RISK FACTORS" BEGINNING ON PAGE 11.
THE SHARES OF COMMON STOCK OFFERED HEREBY ARE NOT ACCOUNTS OR DEPOSITS AND
ARE NOT FEDERALLY INSURED OR GUARANTEED.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION, THE OFFICE OF THRIFT SUPERVISION, OR ANY OTHER
FEDERAL AGENCY OR ANY STATE SECURITIES COMMISSION, NOR HAS SUCH
COMMISSION, OFFICE OR OTHER AGENCY OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF
THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
SUBSCRIPTION ESTIMATED UNDERWRITING
PRICE(1) AND OTHER FEES AND ESTIMATED
EXPENSES(2) NET PROCEEDS(3)
- ------------------------ ------------- ----------------------- ---------------
<S> <C> <C> <C>
Per Share(4). . . . . . $10.00 $0.30 $9.70
- ------------------------ ------------- ----------------------- ---------------
Total Minimum(1). . . . $20,400,000 $658,000 $19,742,000
- ------------------------ ------------- ----------------------- ---------------
Total Midpoint(1) . . . $24,000,000 $719,000 $23,281,000
- ------------------------ ------------- ----------------------- ---------------
Total Maximum(1). . . . $27,600,000 $780,000 $26,820,000
- ------------------------ ------------- ----------------------- ---------------
Total Maximum,
as adjusted(5). . . . . $31,740,000 $780,000 $30,960,000
- ------------------------ ------------- ----------------------- ---------------
</TABLE>
(1) Determined in accordance with an independent appraisal prepared by
Keller & Company, Inc. ("Keller") dated April 12, 1996, which states
that the estimated aggregate pro forma market value of the Common
Stock ranged from $20.4 million to $27.6 million, with a midpoint of
$24.0 million (the "Valuation Range"). Based on the Valuation Range,
the Boards of Directors of the Company and the Bank established the
estimated price range of $20.4 million to $27.6 million (the
"Estimated Price Range"), or between 2,040,000 and 2,760,000 shares of
Common Stock at a price of $10.00 per share (the "Purchase Price") to
be paid for each share of Common Stock subscribed for or purchased in
the offerings. Keller's appraisal is based upon estimates and
projections that are subject to change, and the valuation must not be
construed as a recommendation as to the advisability of purchasing
such shares nor that a purchaser will thereafter be able to sell such
shares at or above the Purchase Price. See "The Conversion - Stock
Pricing" and "- Number of Shares to be Issued."
(2) Consists of the estimated costs to the Bank and the Company arising
from the Conversion, including estimated fixed expenses and marketing
fees to be paid to Robert W. Baird & Co. Incorporated ("Baird") in
connection with the Subscription and Community Offerings as hereafter
defined, which fees are estimated to be $325,000 and $447,000 at the
minimum and the maximum of the Estimated Price Range, respectively.
See "The Conversion - Marketing and Underwriting Arrangements." Baird
may be deemed to be an underwriter, and certain amounts to be paid to
Baird may be deemed to be underwriting fees for purposes of the
Securities Act of 1933, as amended (the "Securities Act"). See "Pro
Forma Data" for the assumptions used to arrive at these estimates.
The actual fees and expenses may vary from the estimates.
(3) Actual net proceeds may vary substantially from estimated amounts
depending on the number of shares sold in each of the offerings and
other factors. Includes the purchase of shares of Common Stock by the
Park Federal Savings Bank Employee Stock Ownership Plan and related
trust (the "ESOP") funded by a loan from the Company to the ESOP,
which will initially be deducted from the Company's stockholders'
equity. See "Use of Proceeds," "Pro Forma Data" and "The Conversion -
Stock Pricing."
(4) Based on the midpoint of the Valuation Range. The estimated net
proceeds per share at the minimum, maximum and maximum, as adjusted,
are expected to be $9.68, $9.72 and $9.75, respectively.
(5) As adjusted to reflect the sale of up to an additional 15% of the
Common Stock which may be offered at the Purchase Price, without
resolicitation of subscribers or any right of cancellation, due to
regulatory considerations, changes in market conditions or general
financial and economic conditions. See "Pro Forma Data" and "The
Conversion - Stock Pricing." For a discussion of the distribution and
allocation of the additional shares, if any, see "The Conversion -
Subscription Offering and Subscription Rights," "- Community Offering"
and "- Limitations on Common Stock Purchases."
ROBERT W. BAIRD & CO.
INCORPORATED
THE DATE OF THIS PROSPECTUS IS JUNE 26, 1996.
<PAGE>
(continued from previous page)
NON-TRANSFERABLE RIGHTS TO SUBSCRIBE FOR THE COMMON STOCK IN A SUBSCRIPTION
OFFERING (THE "SUBSCRIPTION OFFERING") HAVE BEEN GRANTED, IN ORDER OF PRIORITY,
TO EACH OF THE BANK'S ELIGIBLE ACCOUNT HOLDERS, THE ESOP, THE BANK'S
SUPPLEMENTAL ELIGIBLE ACCOUNT HOLDERS, AND CERTAIN OTHER MEMBERS, (EACH AS
DEFINED IN THE PLAN OF CONVERSION). SUBSCRIPTION RIGHTS ARE
NON-TRANSFERABLE. PERSONS FOUND TO BE TRANSFERRING SUBSCRIPTION RIGHTS WILL BE
SUBJECT TO THE FORFEITURE OF SUCH RIGHTS AND POSSIBLE FURTHER SANCTIONS AND
PENALTIES IMPOSED BY THE OFFICE OF THRIFT SUPERVISION ("OTS"). Concurrently,
and subject to the prior rights of holders of subscription rights, the Company
is offering the shares of Common Stock not subscribed for in the Subscription
Offering for sale in a community offering (the "Community Offering") to certain
members of the general public, with preference given to natural persons residing
in Cook and DuPage counties in the State of Illinois (the Subscription Offering
and Community Offering are referred to collectively as the "Subscription and
Community Offerings"). Depending on market conditions, the shares may be
offered for sale in the Community Offering by a selling group of brokers to be
managed by Baird in a broker assist program (the "Broker Assist Program") (the
Subscription and Community Offerings, including any Broker Assist Program, are
referred to collectively as the "Offerings"). See "The Conversion -
Subscription Offering and Subscription Rights," "- Community Offering," "-
Restrictions on Transfer of Subscription Rights and Shares" and "- Limitations
on Common Stock Purchases."
Except for the ESOP, which intends to subscribe for 8% of the total number
of shares of Common Stock issued in the Conversion, no Eligible Account Holder,
Supplemental Eligible Account Holder or Other Member may, in their capacity as
such, subscribe in the Subscription Offering for more than 0.5% (13,800 shares
based on the issuance of 2,760,000 shares) of the total number of shares of
Common Stock offered in the Conversion; no person, together with associates of
and persons acting in concert with such person, may purchase in the Community
Offering more than 0.5% (13,800 shares based on the issuance of 2,760,000
shares) of the total number of shares of Common Stock offered in the Conversion;
and no person, together with associates of and persons acting in concert with
such person, may purchase in the Offerings more than the overall maximum
purchase limitation of 1.0% (27,600 shares based on the issuance of 2,760,000
shares) of the total number of shares of Common Stock to be issued in the
Conversion, in each case, exclusive of any shares issued pursuant to an increase
in the Estimated Price Range of up to 15%; provided, however, that the overall
maximum purchase limitation may be increased and the amount that may be
subscribed for may be increased or decreased in the sole discretion of the Bank
or the Company without further approval of the Bank's members. See "The
Conversion - Subscription Offering and Subscription Rights," - "Community
Offering" and "- Limitations on Common Stock Purchases." The minimum purchase
is 25 shares. THE COMPANY AND THE BANK RESERVE THE RIGHT, IN THEIR ABSOLUTE
DISCRETION, TO ACCEPT OR REJECT, IN WHOLE OR IN PART, ANY OR ALL SUBSCRIPTIONS
IN THE COMMUNITY OFFERING, EITHER AT THE TIME OF RECEIPT OF AN ORDER OR AS SOON
AS PRACTICABLE FOLLOWING THE TERMINATION OF THE OFFERINGS.
The Bank has engaged Baird to consult with and advise the Company and the
Bank with respect to the Offerings and Baird has agreed to assist the Company
with the solicitation of subscriptions and purchase orders for shares of Common
Stock in the Offerings. Neither Baird nor any other registered broker-dealer is
obligated to take or purchase any shares of Common Stock in the Offerings. The
Bank and the Company will pay a fee to Baird which will be based on the
aggregate Purchase Price of the Common Stock sold in the Offerings. The Company
and the Bank have agreed to indemnify Baird against certain liabilities arising
under the Securities Act. See "The Conversion - Marketing and Underwriting
Arrangements."
THE SUBSCRIPTION AND COMMUNITY OFFERINGS WILL TERMINATE AT 12:00 NOON,
CENTRAL TIME, ON JULY 30, 1996 (THE "EXPIRATION DATE") UNLESS EXTENDED BY THE
BANK AND THE COMPANY, WITH APPROVAL OF THE OTS, IF NECESSARY. Subscriptions
paid by cash, check, bank draft or money order will be placed in a segregated
account at the Bank and will earn interest at the Bank's passbook rate of
interest from the date of receipt until completion or termination of the
Conversion. Payments authorized by withdrawal from deposit accounts at the Bank
will continue to earn interest at the contractual rate until the Conversion is
completed or terminated; these funds will be otherwise unavailable to the
depositor until such time. Orders submitted are irrevocable until the
completion of the Conversion; provided that, if the Conversion is not completed
within 45 days after the close of the Subscription and Community Offerings,
unless such period has been extended with the consent of the OTS, if necessary,
all subscribers will have their funds returned promptly with interest, and all
withdrawal authorizations will be cancelled. If an extension of time has been
granted, all subscribers will be notified of such extension, and of any rights
to confirm their subscriptions, or to modify or rescind their subscriptions and
have their funds returned promptly with interest, and of the time period within
which the subscriber must notify the Bank of his intention to confirm, modify or
rescind his subscription. A resolicitation of subscribers will also be made if
the pro forma market value of the Common Stock is either more then 15% above the
maximum of the Estimated Price Range or less than the minimum of the Estimated
Price Range. If an affirmative response to any resolicitation is not received
by the Company from a subscriber, such order will be rescinded and all funds
will be returned promptly with interest. Such extensions may not go beyond
July 30, 1998. See "The Conversion - Subscription Offering and Subscription
Rights," "- Community Offering" and "- Procedure for Purchasing Shares in
Subscription and Community Offerings."
The Company has received conditional approval from to the National
Association of Securities Dealers, Inc. ("NASD") to have its Common Stock quoted
on the Nasdaq National Market under the symbol "PFED" upon completion of the
Conversion. Prior to this offering there has not been a public market for the
Common Stock, and there can be no assurance that an active and liquid trading
market for the Common Stock will develop or that the Common Stock will trade at
or above the Purchase Price. The absence or discontinuance of a market may have
an adverse impact on both the price and liquidity of the Common Stock. See
"Risk Factors - Absence of Market for Common Stock" and "Market for the Common
Stock." Baird has advised the Company that upon completion of the Conversion,
it intends to act as a market maker in the Common Stock, depending on the volume
of trading and subject to compliance with applicable laws and regulatory
requirements. Baird also will assist the Company in obtaining additional market
makers.
2
<PAGE>
[MAP PRESENTING THE LOCATIONS OF
THE BRANCHES OF PARK FEDERAL SAVINGS BANK
IN CHICAGO AND WESTMONT, ILLINOIS APPEARS
ON THIS PAGE.]
3
<PAGE>
SUMMARY
THIS SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED INFORMATION
AND CONSOLIDATED FINANCIAL STATEMENTS OF THE BANK AND NOTES THERETO APPEARING
ELSEWHERE IN THIS PROSPECTUS.
PARK BANCORP, INC.
Park Bancorp, Inc. is a Delaware corporation recently organized by the Bank
for the purpose of acquiring all of the capital stock of the Bank to be issued
in the Conversion. Immediately following the Conversion, the only significant
assets of the Company will be the capital stock of the Bank, the Company's
loan to the ESOP, and the net proceeds of the Offerings retained by the Company.
The Company will purchase all of the capital stock of the Bank to be issued upon
the Conversion in exchange for 50% of the net proceeds with the remaining net
proceeds to be retained by the Company. Net proceeds retained by the Company
will be used for general business activities, including a loan by the Company
directly to the ESOP to enable the ESOP to purchase 8.0% of the Common Stock
issued in the Conversion. On an interim basis, the net proceeds are expected to
be invested in short to intermediate-term investment securities and
mortgage-backed securities. See "Use of Proceeds." See "Business of the Bank"
and "Regulation - Holding Company Regulation."
The Company's executive offices are located at the home office of the Bank
at 2740 W. 55th Street, Chicago, Illinois 60632. The Company's telephone
number is (312) 434-6040.
PARK FEDERAL SAVINGS BANK
The Bank conducts business from its home office in Chicago, Illinois and
its two other branches located in southwestern Chicago and Westmont, Illinois.
At February 29, 1996, the Bank had total assets of $149.4 million, loans
receivable of $58.9 million, total deposits of $129.3 million, and equity of
$17.7 million. The Bank's deposits are insured up to the maximum allowable
amount by the Savings Association Insurance Fund ("SAIF") of the Federal Deposit
Insurance Corporation ("FDIC").
The Bank is a community-oriented savings institution and, as such, its
primary business consists of accepting deposits from customers within its market
area and making mortgage loans secured by one -to four-family residences within
its market area. At February 29, 1996, 79.3% of Park Federal's total gross
loan portfolio consisted of one- to four-family mortgage loans. To a
significantly lesser extent, the Bank invests in multi-family, commercial real
estate, construction and land (primarily residential construction), and consumer
loans. In addition to its lending activities, Park Federal also invests in
mortgage-backed and investment securities, primarily those insured or guaranteed
by governmental agencies. At February 29, 1996, mortgage-backed and other
securities totalled $76.0 million or 50.9% of total assets and total loans
totalled $58.9 million or 39.5% of total assets. Park Federal's primary source
of funds is deposit accounts, which totalled $129.3 million, or 98.2% of total
liabilities at February 29, 1996. Certificate accounts represented 64.8% of the
Bank's total deposits. The Bank also engages in real estate development
activities through a wholly-owned subsidiary. The Bank's investment in real
estate held for development totalled $1.6 million, or 1.1% of total assets at
February 29, 1996. During 1995, the Bank substantially completed its primary
development project, Rose Hill Farm, and began work on a new, but smaller
project. During the years ended December 31, 1995, 1994 and 1993, the Bank
recorded income of $523,000, $1.1 million and $856,000, respectively, related to
real estate development. Management anticipates lower levels of income
from these activities in 1996, as the new project begins development. See
"Business of the Bank - Subsidiary Activities" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Management
Strategy."
4
<PAGE>
THE CONVERSION AND THE SUBSCRIPTION AND COMMUNITY OFFERINGS
On March 21, 1996, the Board of Directors of the Bank adopted the Plan of
Conversion. Pursuant to the Plan, the Bank is converting from a federally
chartered mutual savings bank to a federally chartered stock savings bank.
The Common Stock of the Company will be offered and sold hereby and all of
the outstanding capital stock of the Bank will be acquired by the Company in
exchange for 50% of the net proceeds of the Offering. The Conversion and the
Offerings are subject to OTS approval, which was received on June 26, 1996,
and approval of the Bank's members at a special meeting to be held on August 2,
1996 (the "Special Meeting"). See "The Conversion - General." The Bank
is converting to the stock form to increase its capital and structure itself
in a form used by banks, a growing number of savings institutions and other
business entities. The Conversion will enhance the Bank's ability to access
capital markets, expand its current operations, acquire other financial
institutions or branch offices or diversify into other financial services, to
the extent allowable by applicable law and regulation. See "The Conversion -
Purposes of Conversion." The holding company form of organization will
provide additional flexibility to diversify the Bank's business activities
through existing or newly formed subsidiaries, or through acquisitions of or
mergers with other financial institutions, or other companies. Although
there are no current arrangements, understandings or agreements regarding any
such opportunities, the Company will be better positioned after the
Conversion, subject to regulatory limitations and the Company's financial
position, to take advantage of any such opportunities that may arise. The
holding company form of organization also provides certain anti-takeover
protection. See "Risk Factors - Certain Anti-Takeover Provisions." The Plan
provides that the Board of Directors of the Bank may, at any time prior to
the issuance of the Common Stock and for any reason, decide not to use a
holding company form. See "The Conversion - General".
Common Stock offered in the Subscription Offering will be offered in the
following order of priority: (1) depositors whose accounts with the Bank
totalled $50 or more on December 31, 1994 ("Eligible Account Holders"); (2) the
ESOP; (3) depositors whose accounts with the Bank totalled $50 or more on
March 31, 1996 ("Supplemental Eligible Account Holders"); and (4) other members
of the Bank, consisting of depositors of the Bank as of June 14, 1996, the
voting record date ("Voting Record Date"), for the Special Meeting and
borrowers with loans outstanding as of December 20, 1994 which continue to be
outstanding as of the Voting Record Date, other than those members who
otherwise qualify as Eligible Account Holders or Supplemental Eligible
Account Holders ("Other Members"). Subject to the prior rights of holders of
subscription rights, Common Stock not subscribed for in the Subscription
Offering is being concurrently offered in the Community Offering to certain
members of the general public, with preference given to natural persons
residing in Cook and DuPage counties in the State of Illinois. The Company
and Baird may also agree to utilize a Broker Assist Program in connection
with the sale of shares of Common Stock in the Community Offering. The
Company and the Bank reserve the right, in their absolute discretion, to
reject or accept, in whole or in part, any orders in the Community Offering,
either at the time of receipt of an order or as soon as practicable following
the Expiration Date. If an order is rejected, the funds submitted with such
order will be returned promptly. Subscription rights will expire if not
exercised by 12:00 Noon, Central Time, on July 30, 1996, unless extended by
the Bank and the Company. See "The Conversion - Subscription Offering and
Subscription Rights," "- Community Offering" and "- Marketing and
Underwriting Arrangements."
PROSPECTUS DELIVERY AND PROCEDURE FOR PURCHASING SHARES
To ensure that each purchaser receives a Prospectus at least 48 hours prior
to the Expiration Date in accordance with Rule 15c2-8 of the Securities Exchange
Act of 1934, as amended (the "Exchange Act"), no Prospectus will be mailed any
later than five days prior to the Expiration Date or hand delivered
5
<PAGE>
any later than two days prior to such date. Order forms will only be
distributed with a Prospectus.
Execution of the order form will confirm receipt of the Prospectus in accordance
with Rule 15c2-8. The Bank and the Company are not obligated to accept orders
not submitted on original order forms. Order forms unaccompanied by an executed
acknowledgment form will not be accepted. Payment by check, money order, bank
draft, cash or debit authorization to an existing account at the Bank must
accompany the order and acknowledgment forms. No wire transfers will be
accepted. The Bank is prohibited from lending funds to any person or entity for
the purpose of purchasing shares of Common Stock in the Conversion.
In order to ensure that Eligible Account Holders, Supplemental Eligible
Account Holders and Other Members are properly identified as to their stock
purchase priorities, such depositors and borrowers must list all deposit and/or
loan accounts on the order form, giving all names on each account and the
account numbers. Failure to properly list all account numbers may result in the
inability of the Company or the Bank to fill all or part of a subscription
order. In addition, registration of shares in a name or title different
from the names or titles listed on the account may adversely affect such
subscriber's purchase priority. See "The Conversion - Procedure for Purchasing
Shares in Subscription and Community Offerings."
RESTRICTIONS ON TRANSFER OF SUBSCRIPTION RIGHTS AND SHARES
Prior to the completion of the Conversion, no person may transfer or enter
into any agreement or understanding to transfer the legal or beneficial
ownership of the subscription rights issued under the Plan or the shares of
Common Stock to be issued upon their exercise. Each person exercising
subscription rights will be required to certify that a purchase of Common Stock
is solely for the purchaser's own account and that there is no agreement or
understanding regarding the sale or transfer of such shares. The Company and
the Bank will pursue any and all legal and equitable remedies in the event they
become aware of the transfer of subscription rights and will not honor orders
known by them to involve the transfer of such rights. See "The Conversion -
Restrictions on Transfer of Subscription Rights and Shares."
Following the Conversion there generally will be no restrictions on the
transfer or sale of shares by purchasers other than affiliates of the Company
and the Bank. See "Regulation - Federal Securities Laws" and "The Conversion -
Certain Restrictions on Purchase or Transfer of Shares After Conversion."
PURCHASE LIMITATIONS
The minimum purchase in the Subscription and Community Offerings is 25
shares. The ESOP intends to subscribe for 8.0% of the shares of Common Stock
issued in the Conversion pursuant to the subscription rights granted under the
Plan. No Eligible Account Holder, Supplemental Eligible Account Holder or Other
Member, in their capacity as such, may subscribe in the Subscription Offering
for more than 0.5% (13,800 shares based on the issuance of 2,760,000 shares) of
the Common Stock to be issued; no person, together with associates of or persons
acting in concert with such person, may purchase in the Community Offering in
the aggregate more than 0.5% (13,800 shares based on the issuance of 2,760,000
shares) of the Common Stock issued; and no person, together with associates of
or persons acting in concert with such person, may purchase in the Offerings
more than the overall maximum purchase limitation of 1% (27,600 shares based on
the issuance of 2,760,000 shares) of the total number of shares of Common Stock
to be issued in the Conversion, in each case, exclusive of any shares issued
pursuant to an increase in the Estimated Price Range of up to 15%. At any time
during the Conversion and without further approval by the Bank's members, the
Company and the Bank may in their sole discretion decrease the maximum purchase
limitation below 0.5% (13,800 shares based on the issuance of 2,760,000 shares)
6
<PAGE>
of the Common Stock to be issued in the Subscription and Community Offerings.
Additionally, at any time during the Conversion and without further approval
by the Bank's members or the resolicitation of subscribers, the Company and
the Bank may in their sole discretion increase the overall maximum purchase
limitation and/or increase the amount that may be subscribed for in the
Subscription and Community Offerings up to 5% of the shares to be issued in
the Conversion. Prior to consummation of the Conversion, if the maximum
purchase limitation is increased, subscribers for the maximum amount will be,
and certain other large subscribers in the sole discretion of the Bank may
be, given the opportunity to increase their subscriptions up to the then
applicable limit. See "The Conversion -Limitations on Common Stock
Purchases." In the Community Offering, a preference will be given to natural
persons residing in Cook and DuPage counties in the State of Illinois. See
"The Conversion - Community Offering." In the event of an increase in the
Estimated Price Range, the additional shares will be distributed and
allocated to fill unfilled orders in the Subscription and Community
Offerings, with priority given to the ESOP, without any resolicitation of
subscribers, as described in "The Conversion - Subscription Offering and
Subscription Rights," "- Community Offering" and "- Limitations on Common
Stock Purchases."
STOCK PRICING AND NUMBER OF SHARES TO BE ISSUED IN THE CONVERSION
Federal regulations require that the aggregate purchase price of the Common
Stock to be issued in the Conversion be consistent with an independent appraisal
of the estimated pro forma market value of the Common Stock giving effect to the
Conversion. Keller & Company, Inc., an independent appraiser, has advised the
Bank that in its opinion, dated April 12, 1996, the estimated aggregate pro
forma market value of the Common Stock ranged from $20.4 million and $27.6
million, with a midpoint of $24.0 million. THE APPRAISAL OF THE COMMON STOCK
IS NOT INTENDED AND SHOULD NOT BE CONSTRUED AS A RECOMMENDATION OF ANY KIND AS
TO THE ADVISABILITY OF PURCHASING SUCH STOCK NOR CAN ANY ASSURANCE BE GIVEN THAT
PURCHASERS OF THE COMMON STOCK IN THE CONVERSION WILL BE ABLE TO SELL SUCH
SHARES AT OR ABOVE THE PURCHASE PRICE AFTER THE COMPLETION OF THE CONVERSION.
Based upon the above Valuation Range, the Board of Directors of the Bank
has established the Estimated Price Range of $20.4 million to $27.6 million, or
between 2,040,000 and 2,760,000 shares of Common Stock at the Purchase Price of
$10.00 per share. All shares of Common Stock issued in the Conversion will be
sold at the Purchase Price of $10.00 per share, as determined by the Bank and
approved by the Company. The actual number of shares to be issued in the
Conversion will be determined by the Company and the Bank based upon the final
updated estimate at the completion of the Offerings of the aggregate pro forma
market value of the Common Stock giving effect to the Conversion. The maximum
of the Estimated Price Range may be increased by up to 15% and the number of
shares of Common Stock to be issued in the Conversion may be increased up to
3,174,000 shares due to regulatory considerations, changes in market conditions
or general financial and economic conditions. No resolicitation of subscribers
will be made and subscribers will not be permitted to modify or cancel their
subscriptions unless the gross proceeds from the sale of the Common Stock are
less than the minimum or more than 15% above the maximum of the current
Estimated Price Range. See "Risk Factors - Possible Increase in Estimated Price
Range and Number of Shares Issued," "Pro Forma Data," "The Conversion - Stock
Pricing" and "- Number of Shares to be Issued."
USE OF PROCEEDS
Net proceeds from the sale of the Common Stock are estimated to be between
$19.7 million and $26.8 million (or $31.0 million if the Estimated Price Range
is increased by 15%) depending on the number of shares sold and the expenses of
the Conversion. See "Pro Forma Data." The Company will purchase all of the
outstanding capital stock of the Bank to be issued upon Conversion in exchange
for
7
<PAGE>
50% of the net proceeds with the remaining net proceeds to be retained by the
Company. In determining the amount of net proceeds to be used for the
purchase of the capital stock of the Bank, consideration was given to such
factors as the regulatory capital position of the Bank (both before and after
giving effect to the Conversion) and the rules and regulations of the OTS
governing the amount of proceeds which may be retained by the Company. Net
proceeds to be retained by the Company after the purchase of the capital
stock of the Bank, and including the loan to the ESOP, are estimated to be
between $9.9 million and $13.4 million (or $15.5 million if the Estimated
Price Range is increased by 15%). The Company will be unable to utilize any
of the net proceeds until the consummation of the Conversion.
Net proceeds retained by the Company will be used for general business
purposes, including a loan by the Company directly to the ESOP and, subject to
applicable limitations, may be used for the possible payment of dividends and
repurchases of Common Stock. The Board of Directors of the Company does not
intend to initially pay dividends on the Common Stock. The Board of Directors
may consider a policy of paying dividends on the Common Stock in the future. No
decision has been made as to the amount or timing of any such dividends, if any.
See "Dividend Policy." Assuming the acquisition by the ESOP of 8.0% of the
shares to be issued in the Conversion, the amount of the loan to the ESOP is
estimated to be between $1.6 million and $2.2 million (or $2.5 million if the
Estimated Price Range is increased by 15%) to be repaid over a 12 year period at
an interest rate of 9.25%. See "The Board of Directors and Management of the
Bank - Benefits - Employee Stock Ownership Plan and Trust." The Company may
also use a portion of the net proceeds it retains for real estate development
activities. Funds received by the Bank from the Company's purchase of its
capital stock will be used for general business purposes, including real estate
development activities. See "Business of the Bank." The Company and the Bank
may also use such funds to expand operations through the acquisition or
establishment of branch offices and the acquisition of other financial
institutions. Neither the Company nor the Bank has any pending agreements or
understandings regarding acquisitions of any specific financial institutions or
branch offices. On an interim basis, the net proceeds are expected to be
invested primarily in short to intermediate-term investment securities and
mortgage-backed securities. See "Use of Proceeds."
DIVIDEND POLICY
The Board of Directors of the Company does not intend to initially pay
dividends on the Common Stock. However, the Board of Directors may consider a
policy of paying dividends on the Common Stock in the future. No decision has
been made as to the amount or timing of such dividends, if any. See "Dividend
Policy."
RISK FACTORS
See "Risk Factors" for a discussion of certain factors that should be
considered by prospective investors. The factors discussed therein include:
Potential Impact of Changes in Interest Rates, Effect of Real Estate
Development Activities on Noninterest Income, Competition, Concentration in
Real Estate Lending, Benefits to Management and Directors, Possible Dilutive
Effect of Stock Programs and Stock Options, Certain Anti-Takeover Provisions,
Absence of Market for Common Stock, Possible Increase in Estimated Price
Range and Number of Shares Issued, Financial Institution Regulation and
Possible Legislation, Recapitalization of SAIF and Its Impact on SAIF
Premiums, Possible Adverse Income Tax Consequences of the Distribution of
Subscription Rights, Risk of Delayed Offering and Technological Changes.
8
<PAGE>
SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA OF THE BANK
The selected consolidated financial and other data of the Bank set forth
below is derived in part from, and should be read in conjunction with, the
Consolidated Financial Statements of the Bank and Notes thereto presented
elsewhere in this Prospectus.
<TABLE>
<CAPTION>
AT DECEMBER 31,
--------------------------------------------------------
AT FEBRUARY 29,
1996(1) 1995 1994 1993 1992 1991
--------------- -------- --------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
SELECTED BALANCE SHEET DATA:
Total assets. . . . . . . . . . $149,387 $158,939 $144,788 $136,422 $136,003 $131,214
Cash and cash equivalents . . . 8,163 12,790 2,573 13,252 8,278 8,981
Securities available-
for-sale(2). . . . . . . . . . 36,972 37,134 14,958 - - -
Securities held-to-
maturity(2). . . . . . . . . . 39,068 42,494 65,896 58,528 50,837 34,058
Loans receivable, net(3). . . . 58,944 60,538 56,558 56,696 67,984 77,554
Deposits. . . . . . . . . . . . 129,309 130,503 118,521 119,679 121,154 118,545
FHLB advances . . . . . . . . . - 9,000 8,000 - - -
Equity. . . . . . . . . . . . . 17,677 17,533 16,413 14,770 13,034 10,713
</TABLE>
<TABLE>
<CAPTION>
FOR THE TWO MONTHS ENDED FOR THE YEAR ENDED
--------------------------- -------------------------------------------
FEBRUARY 29, FEBRUARY 28, DECEMBER 31,
------------ ------------ -------------------------------------------
1996(1) 1995(1) 1995 1994 1993 1992 1991
------------ ------------ ------ ------ ------ ------ ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
SELECTED OPERATING DATA:
Interest income. . . . . . . . . . $1,796 $1,587 $9,755 $8,861 $9,254 $11,066 $10,940
Interest expense . . . . . . . . . 1,024 887 5,706 4,643 4,890 6,356 7,743
------ ------ ------- ------- ------- ------- -------
Net interest income before
provision for loan losses . . . 772 700 4,049 4,218 4,364 4,710 3,197
Provision for loan losses. . . . . - 10 298 48 140 100 74
------ ------ ------- ------- ------- ------- -------
Net interest income after
provision for loan losses . . . 772 690 3,751 4,170 4,224 4,610 3,123
Gain on sales of real estate
held for development . . . . . . 11 - 523 1,114 856 875 315
Other noninterest income . . . . . 31 31 171 170 367 529 269
Noninterest expense. . . . . . . . 521 502 3,096 2,822 2,598 2,426 2,312
------ ------ ------- ------- ------- ------- -------
Income before income taxes . . . . 293 219 1,349 2,632 2,849 3,588 1,395
Income taxes . . . . . . . . . . . 103 55 413 881 1,113(4) 1,268 393
------ ------ ------- ------- ------- ------- -------
Net income . . . . . . . . . . . . $ 190 $ 164 $ 936 $ 1,751 $ 1,736 $ 2,320 $ 1,002
------ ------ ------- ------- ------- ------- -------
------ ------ ------- ------- ------- ------- -------
</TABLE>
9
<PAGE>
<TABLE>
<CAPTION>
AT OR FOR
THE TWO MONTHS ENDED AT OR FOR THE YEAR ENDED
--------------------------- -------------------------------------------
FEBRUARY 29, FEBRUARY 28, DECEMBER 31,
------------ ------------ -------------------------------------------
1996(1) 1995(1) 1995 1994 1993 1992 1991
------------ ------------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C>
SELECTED FINANCIAL RATIOS AND
OTHER DATA(5):
PERFORMANCE RATIOS:
Return on average assets . . . . . . 0.75% 0.69% 0.65% 1.25% 1.27% 1.72% 0.80%
Return on average equity . . . . . . 6.47 5.97 5.49 11.15 12.52 19.61 9.87
Average equity to average assets . . 11.55 11.55 11.82 11.26 10.16 8.78 8.06
Equity to total assets at end
of period . . . . . . . . . . . . 11.83 12.08 11.03 11.34 10.83 9.58 8.16
Average interest rate spread(6) . . 2.76 2.62 2.38 2.80 3.22 3.69 2.75
Net interest margin(7) . . . . . . . 3.24 3.05 2.90 3.15 3.44 3.81 2.80
Average interest-earning assets to
average interest-bearing
liabilities . . . . . . . . . . . 111.12 111.00 112.63 110.09 105.40 102.51 100.77
Efficiency ratio(8) . . . . . . . . 64.00 68.67 65.28 51.28 46.50 39.68 61.15
Noninterest expense to
average assets . . . . . . . . . . 2.05 2.11 2.15 2.02 1.90 1.80 1.84
REGULATORY CAPITAL RATIOS:(9)
Tangible capital . . . . . . . . . . 10.90% 11.50% 10.20% 10.80% 9.20% 8.60% 6.00%
Core capital . . . . . . . . . . . . 10.90 11.50 10.20 10.80 9.20 8.60 6.00
Risk-based capital . . . . . . . . . 39.40 42.00 36.00 43.20 26.70 25.60 14.00
ASSET QUALITY RATIOS:
Non-performing loans as a percent
of gross loans receivable(10)(11). 0.13% 1.31% 1.46% 1.17% 0.54% 0.31% -%
Non-performing assets as a percent
of total assets(11) . . . . . . . 0.27 0.60 0.61 0.51 0.35 0.16 0.05
Allowance for loan losses as a
percent of gross loans
receivable(10) . . . . . . . . . . 0.82 0.49 0.91 0.47 0.42 0.25 0.09
Allowance for loan losses as a
percent of non-performing
loans(11) . . . . . . . . . . . . 625.00 37.01 62.49 39.97 77.88 79.55 -
NUMBER OF FULL-SERVICE CUSTOMER
FACILITIES . . . . . . . . . . . . 3 3 3 3 3 3 3
</TABLE>
- ---------------------
(1) Financial information at February 29, 1996 and for the two month periods
ended February 29, 1996 and February 28, 1995 is derived from unaudited
financial data, but in the opinion of management, reflects all adjustments
(consisting only of normal recurring adjustments) which are necessary to
present fairly the results for such interim periods. Interim results at
and for the two months ended February 29, 1996 are not necessarily
indicative of the results that may be expected for the year ending
December 31, 1996.
(2) The Bank adopted Statement of Financial Accounting Standards ("SFAS") No.
115, "Accounting for Certain Investments in Debt and Equity Securities,"
effective as of January 1, 1994. Prior to the adoption of SFAS No. 115,
investment securities and mortgage-backed securities held for sale were
carried at the lower of amortized cost or market value, as adjusted for
amortization of premiums and accretion of discounts over the remaining
terms of the securities from the dates of purchase.
(3) The allowance for loan losses at February 29, 1996 and at December 31,
1995, 1994, 1993, 1992 and 1991 was $500,000, $573,000, $275,000, $250,000,
$175,000 and $75,000, respectively.
(4) Income taxes for the year ended December 31, 1993 includes a $104,000
charge due to the cumulative effect of a change in accounting for income
taxes.
(5) Asset Quality Ratios and Regulatory Capital Ratios are end of period
ratios. With the exception of end of period ratios, all ratios are based
on average monthly balances during the indicated periods and are annualized
where appropriate.
(6) The average interest rate spread represents the difference between the
weighted average yield on interest-earning assets and the weighted average
cost of interest-bearing liabilities.
(7) The net interest margin represents net interest income as a percent of
average interest-earning assets.
(8) The efficiency ratio represents noninterest expense as a percent of net
interest income and noninterest income before provision for loan losses.
(9) For definitions and further information relating to the Bank's regulatory
capital requirements, see "Regulation - Federal Savings Institution
Regulation - Capital Requirements." See "Regulatory Capital Compliance"
for the Bank's pro forma capital levels as a result of the Offerings.
(10) Gross loans receivable are stated at unpaid principal balances.
(11) Non-performing assets consist of non-performing loans and REO.
Non-performing assets do not include loans which have been restructured and
are presently accruing interest in accordance with their restructured
terms. Non-performing loans consist of all loans 90 days or more past due
and all other non-accrual loans. It is the Bank's policy to cease accruing
interest on loans 90 days or more past due. See "Business of the Bank -
Lending Activities - Non-Accrual and Past Due Loans" and "- Real Estate."
10
<PAGE>
RISK FACTORS
The following risk factors, in addition to those discussed elsewhere in this
Prospectus, should be considered by investors in deciding whether to purchase
the Common Stock offered hereby.
POTENTIAL IMPACT OF CHANGES IN INTEREST RATES
The Bank's profitability, like that of most financial institutions, is
dependent to a large extent upon its net interest income, which is the
difference between its interest income on interest-earning assets, such as
loans and investments, and its interest expense on interest-bearing liabilities,
such as deposits and borrowings. A significant portion of the Bank's assets
consist of fixed-rate residential mortgage loans. At February 29, 1996, the
Bank had $54.2 million of fixed-rate mortgage loans, or 89.0% of the Bank's
total loan portfolio, with average weighted maturities of 15.3 years. The Bank
emphasizes fixed-rate mortgage loans because such loans generally carry interest
rates higher than adjustable-rate mortgage loans and due to the consumer
preference for fixed-rate mortgage loans in the Bank's market area. In addition,
the Bank generally has accepted deposits for considerably shorter terms than its
fixed-rate mortgage loans. At February 29, 1996, the Bank had $44.0 million of
certificate accounts maturing in less than twelve months. Management anticipates
that substantially all of the Bank's liabilities which mature or reprice within
one year will be retained by the Bank. Consequently, management expects that the
yield on interest-earning assets of the Bank will adjust to changes in interest
rates at a slower rate than the cost of the Bank's interest-bearing liabilities,
and that any significant increase in interest rates will have an adverse effect
on the Bank's results of operations. The Bank attempts to offset the risks
associated with its predominantly fixed-rate loan portfolio by investing in
adjustable-rate mortgage-backed securities and other securities and by
maintaining a high level of liquidity.
Increases in the level of interest rates also may adversely affect the amount
of loans originated by the Bank, as well as the value of the Bank's securities
and other interest-earning assets and the resultant ability to realize gains on
the sale of such assets. The value of fixed-rate instruments fluctuates
inversely with changes in interest rates. As a result, increases in interest
rates could result in decreases in the carrying value of interest-earning assets
which could adversely affect the Company's and Bank's results of operations
if such assets were sold. In the case of interest-earning assets classified as
available for sale, increases in interest rates which result in decreases in the
carrying value of such assets could adversely affect the Company's and Bank's
recorded equity. Increases in interest rates also can adversely affect the type
(fixed-rate or adjustable-rate) of loans originated by the Bank and the average
life of loans and securities, which can adversely impact the yields earned on
the Bank's loan and securities portfolio. In periods of decreasing interest
rates, the average life of loans held by the Bank may be shortened to the extent
increased prepayment activity occurs during such periods which may result in the
Bank investing funds from such prepayments in lower yielding assets.
Accordingly, the Bank's results of operations and financial condition are
largely dependent on movements in market interest rates and its ability to
manage its assets and liabilities in response to such movements. In addition,
fluctuations in interest rates may also result in disintermediation, which is
the flow of funds away from depository institutions into direct investments
which pay a higher rate of return, and may adversely affect the value of the
Bank's investment securities and other interest-earning assets. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Management of Interest Rate Risk" and "Regulation - Federal
Savings Institution Regulation - Capital Requirements."
EFFECT OF REAL ESTATE DEVELOPMENT ACTIVITIES ON NONINTEREST INCOME
Through its wholly-owned subsidiary, GPS Development Corp., the Bank is
engaged in real estate development activities. The Bank has undertaken two
joint venture projects located in Naperville, Illinois.
11
<PAGE>
For a discussion of the specific projects see "Business of the Bank -
Subsidiary Activities". The gain on sales of real estate held for
development was $11,000 for the two months ended February 29, 1996 and
$523,000, $1.1 million and $856,000, or 75.3%, 86.8% and 70.0% of noninterest
income, and 38.8%, 42.3% and 30.0% of income before income taxes for the
years ended December 31, 1995, 1994 and 1993, respectively. The noninterest
income earned by the Bank fluctuates, depending upon the stage of development
of the Bank's real estate projects. The Rose Hill Venture has been the
primary provider of income from real estate development for the last four
years. The Rose Hill Venture is in its final stages and substantially all
lots have been sold to date. The Bank is currently in the preliminary stages
of developing the Prairie Ridge Venture and has loaned funds to the venture
for the purchase of land. Until such time as the Bank begins the sale of
lots in the Prairie Ridge Venture, the Bank will incur costs related to the
development of the project and the improvement of the land without
recognizing any earnings from the project. Accordingly, management
anticipates lower levels of income from these activities in 1996. In
addition, the smaller size of the Prairie Ridge Venture may result in lower
gains from the sale of real estate held for development in future years. As
with all such projects, gains are dependent upon, among other factors, the
demand for developed lots and the control of development costs. Although no
arrangements or understandings or specific determinations have been made, the
Bank may use a portion of the net proceeds to continue its real estate
development activities.
Real estate development activities involve risks that could result in a
material adverse effect on the profitability of the Bank. The Bank, through the
joint venture, generally incurs substantial costs to acquire land, design
projects, install site improvements and engage in marketing activities prior
to commencement of sales. In general, the Bank's profit potential on any given
venture may cease when and if cost overruns are experienced, the venture is not
completed, or the underlying value of the venture or the general market area
declines. In addition, the Bank's profit potential may cease if the venture is
not sold or is sold over a longer period of time than initially contemplated or
a combination of any of these factors occurs. There can be no assurance that
the Bank will continue to generate income from real estate development or that
such developments will continue to be a source of construction and other lending
for the Bank. See "Business of the Bank - Subsidiary Activities" and
"Regulation."
COMPETITION
The Bank faces significant competition in its market area both in attracting
deposits and in originating loans. The Bank's primary market area is a highly
competitive market for financial services. The Bank faces direct competition
from a number of financial institutions, many with a state-wide or regional
presence, and, in some cases, a national presence. This competition arises
from other savings institutions, commercial banks, credit unions and other
providers of financial services, many of which are significantly larger than the
Bank and therefore have greater financial and marketing resources than the Bank.
See "Business of the Bank - Market Area and Competition."
CONCENTRATION IN REAL ESTATE LENDING
At February 29, 1996, all of the Bank's loan portfolio was secured by real
estate located in the Chicago metropolitan area. Of the total gross loan
portfolio, 79.3% consisted of one- to four-family residential mortgage loans,
9.1% consisted of multi-family loans, 7.5% consisted of construction and land
loans and 2.6% consisted of commercial real estate loans.
At February 29, 1996, $5.6 million of the Bank's total gross loan portfolio
was secured by multi-family loans and $1.6 million was secured by commercial
real estate loans. Multi-family and commercial real estate loans are generally
considered to involve a higher degree of credit risk, to be more vulnerable to
deteriorating economic conditions than one- to four-family residential mortgage
loans and typically
12
<PAGE>
involve higher loan principal amounts. Income producing property values are
also subject to greater volatility than owner-occupied residential property
values. Repayment of multi-family and commercial real estate loans generally
is dependent, in large part, on sufficient income from the property to cover
operating expenses and debt service. The Bank currently originates loans
secured by multi-family and commercial real estate properties on a limited
basis. The Bank attempts to offset the risks associated with multi-family
and commercial real estate lending by primarily lending to individuals who
will be actively involved in the management of the property and who have
proven management experience, and by making such loans with lower
loan-to-value ratios than one- to four-family loans. Economic events and
government regulations, which are outside the control of the borrower or
lender, could impact the value of the security for such loans or the future
cash flow of the affected properties.
At February 29, 1996, $4.6 million, or 7.5%, of the Bank's total gross loan
portfolio was secured by construction and land loans. The Bank makes
construction and land loans in connection with its real estate development
activities or to other builders and developers. Construction and land loans
involve similar risks as multi-family and commercial real estate loans, as
discussed above. Additionally, changes in circumstances could adversely affect
income from the property as well as its market value. There are uncertainties
inherent in estimating construction and land development costs as well as the
market value of the completed project and the effects of government regulation
of real property. The Company and the Bank may utilize a portion of the net
proceeds to expand real estate development and construction lending activities.
BENEFITS TO MANAGEMENT AND DIRECTORS
STOCK PROGRAMS. The Company intends to seek stockholder approval of a
performance-based stock program or programs (the "Stock Programs") for the
benefit of directors, officers and employees of the Company and the Bank at a
meeting of stockholders following the Conversion, which, under current OTS
regulations, may be held no earlier than six months after completion of the
Conversion. Assuming the receipt of stockholder approval, a trustee is
expected to acquire Common Stock on behalf of the Stock Programs in an amount
equal to 4.0% of the Common Stock issued in the Conversion, or 81,600 shares
and 110,400 shares at the minimum and maximum of the Estimated Price Range,
respectively. These shares will be acquired either through open market
purchases, if permissible, or from authorized but unissued Common Stock.
See "- Possible Dilutive Effect of Stock Programs and Stock Options."
Although no specific award determinations have been made, the Company
anticipates that, if stockholder approval is obtained, it will provide
awards to its directors, officers and key employees to the extent permitted
by applicable regulations. Current OTS regulations provide that no individual
may receive more than 25% of the shares of any plan and non-employee directors
may not receive more than 5% individually, or 30% in the aggregate, of the
shares awarded under any plan. These shares will be awarded at no cost to the
recipients. Under the terms of the Stock Programs, the trustee will vote
unallocated shares in the same proportion as it receives instructions from
recipients with respect to allocated shares which have not been earned and
distributed. The trustee will not vote allocated shares which have not been
distributed if it does not receive instructions from the recipient. See "The
Board of Directors and Management of the Bank - Benefits - Stock Programs."
STOCK OPTION PLANS. The Company also intends to seek stockholder approval of
a benefit plan or plans which would provide options to purchase Common Stock to
non-employee directors, officers and employees (the "Stock Option Plans") at a
meeting of stockholders following the Conversion, which under current OTS
regulations may be held no earlier than six months after completion of the
Conversion. Although no specific determinations have been made, assuming the
receipt of stockholder approval, the Company expects that directors, officers
and key employees will be granted options to purchase an amount of authorized
but unissued Common Stock or treasury stock, if any, equal to 10% of the Common
Stock
13
<PAGE>
issued in the Conversion, or 204,000 shares and 276,000 shares at the minimum
and maximum of the Estimated Price Range. Under the Stock Option Plans, the
exercise price will be equal to the fair market value of the underlying
Common Stock on the date of grant. Such options will permit such officers
and directors to benefit from any increase in the market value of the shares
in excess of the exercise price at the time of exercise. Officers and
directors receiving such options will not be required to pay for the shares
until the date of exercise. See "The Board of Directors and Management of
the Bank - Benefits - Stock Option Plans."
CHANGE IN CONTROL PROVISIONS. Upon completion of the Conversion, and subject
to the approval of the OTS, the Company and the Bank intend to enter into
employment agreements with certain members of management and to implement a
severance plan for other employees of the Bank. See "The Board of Directors
and Management of the Bank - Employment Agreements" and "- Employee Severance
Compensation Plan." Such employment or severance agreements provide for
benefits and cash payments in the event of a change in control of the Company or
the Bank. These provisions may have the effect of increasing the cost of
acquiring the Company, thereby discouraging future attempts to take over the
Company or the Bank. Based on current salaries, cash payments to be paid in the
event of a change in control pursuant to the employment agreements and the
proposed employee severance plan would be approximately $1.4 million. However,
the actual amount to be paid in the event of a change in control of the Bank or
the Company cannot be estimated at this time because the actual amount is based
on the average salary of the employee and other factors existing at the time of
the change in control which cannot be determined at this time. See "Restrictions
on Acquisition of the Company and the Bank - Restrictions in the Company's
Certificate of Incorporation and Bylaws,"The Board of Directors and Management
of the Bank - Employment Agreements," "- Employee Severance Compensation Plan,"
"- Benefits - Stock Option Plans" and "- Benefits - Stock Programs."
POSSIBLE DILUTIVE EFFECT OF STOCK PROGRAMS AND STOCK OPTIONS
Following the Conversion, the Stock Programs, if approved by the stockholders
of the Company, will acquire an amount of shares equal to 4% of the shares of
Common Stock issued in the Conversion, either through open market purchases, if
permissible, or the issuance of authorized but unissued shares of Common Stock
from the Company. If the Stock Programs are funded by the issuance of
authorized but unissued shares, the voting interests of existing shareholders
will be diluted by approximately 3.8%. Also following the Conversion,
directors, officers and employees will be granted options, if the Stock Option
Plans are approved by the stockholders of the Company. Although no specific
determinations have been made, the Company expects that executive officers and
directors will be granted options to purchase authorized but unissued shares in
an amount equal to 10% of the Common Stock issued in the Conversion. Under
certain circumstances, such options may be exercised and sold on the same day,
thereby eliminating any risk to officers and directors in exercising options in
the event that the market price exceeds the exercise price. If all of the
options were to be exercised using authorized but unissued Common Stock, the
voting interests of existing stockholders would be diluted by approximately
9.1%.
CERTAIN ANTI-TAKEOVER PROVISIONS
PROVISIONS IN THE COMPANY'S AND THE BANK'S GOVERNING INSTRUMENTS. Certain
provisions of the Company's Certificate of Incorporation and Bylaws,
particularly a provision limiting voting rights, and the Bank's Stock Charter
and Bylaws, as well as certain federal regulations, assist the Company in
maintaining its status as an independent publicly owned corporation. These
provisions provide for, among other things, supermajority voting on certain
matters, staggered terms for directors, non-cumulative voting for directors,
limits on the calling of special meetings, limits on voting shares in excess of
10% of the outstanding shares, and certain uniform price provisions for certain
business combinations. The Bank's
14
<PAGE>
Stock Charter also prohibits, for five years, the acquisition or offer to
acquire, directly or indirectly, the beneficial ownership of more than 10% of
the Bank's equity securities. Any person violating this restriction may not
vote the Bank's securities in excess of 10%. These provisions in the Bank's
and the Company's governing instruments may discourage potential proxy
contests and other potential takeover attempts, particularly those which have
not been negotiated with the Board of Directors, and thus, generally may
serve to perpetuate current management. For a more detailed discussion of
these provisions, see "Restrictions on Acquisition of the Company and the
Bank."
VOTING CONTROL OF OFFICERS AND DIRECTORS. Directors and executive officers
of the Bank and the Company expect to purchase between approximately 4.66% and
3.45% of the shares of Common Stock to be issued in the Conversion, based upon
the minimum and the maximum of the Estimated Price Range, respectively,
exclusive of shares that may be attributable to directors and officers through
the Stock Programs, the Stock Options Plans and the ESOP. See "Risk Factors -
Benefits to Management and Directors," "The Board of Directors and Management
of the Bank - Benefits - Stock Option Plans," "- Benefits - Stock Programs" and
"- Benefits - Employee Stock Ownership Plan and Trust." Management's potential
voting control could, together with additional stockholder support, defeat
stockholder proposals requiring 80% approval of stockholders. As a result, this
potential voting control may preclude takeover attempts that certain
stockholders deem to be in their best interest and may tend to perpetuate
existing management. See "Restrictions on Acquisition of the Company and the
Bank - Restrictions in the Company's Certificate of Incorporation and Bylaws."
ABSENCE OF MARKET FOR COMMON STOCK
The Company and the Bank have never issued capital stock. The Company has
received conditional approval from the NASD to have its Common Stock quoted on
the Nasdaq National Market under the symbol "PFED" upon completion of the
Conversion. However, there can be no assurance that an active and liquid
trading market for the Common Stock will develop, or, once developed, will
continue, nor can there be any assurances that purchasers of the Common Stock
will be able to sell their shares at or above the Purchase Price. The absence
or discontinuance of a market for the Common Stock may have an adverse impact
on both the price and liquidity of the Common Stock. See "Market for the Common
Stock."
POSSIBLE INCREASE IN ESTIMATED PRICE RANGE AND NUMBER OF SHARES ISSUED
The number of shares to be sold in the Conversion may be increased as a
result of an increase in the Estimated Price Range of up to 15% due to
regulatory considerations, changes in market conditions or general financial
and economic conditions following the commencement of the Subscription and
Community Offerings. In the event that the Estimated Price Range is so
increased, it is expected that the Company will issue up to 3,174,000 shares
of Common Stock at the Purchase Price for an aggregate price of up to
$31,740,000. An increase in the number of shares issued will decrease a
subscriber's pro forma net earnings per share and stockholders' equity per
share and will increase the Company's pro forma consolidated stockholders'
equity and net earnings. Such an increase will also increase the Purchase
Price as a percentage of pro forma stockholders' equity per share and as a
multiple of pro forma net earnings per share.
FINANCIAL INSTITUTION REGULATION AND POSSIBLE LEGISLATION
The Bank is subject to extensive regulation and supervision as a federal
savings bank. In addition, the Company, as a savings association holding
company, is subject to extensive regulation and supervision. Such regulations,
which affect the Bank on a daily basis, may be changed at any time, and the
15
<PAGE>
interpretation of the relevant law and regulations is also subject to change by
the authorities who examine the Bank and interpret those laws and regulations.
Any change in the regulatory structure or the applicable statutes or
regulations, whether by the OTS, the FDIC or the Congress, could have a material
impact on the Company, the Bank, its operations or the Bank's Conversion. See
"Regulation."
Congress currently has under consideration various proposals to eliminate the
federal thrift charter and abolish the OTS. Several of the bills presently
pending in Congress would require that all federal savings associations convert
to national or state banks by no later than January 1, 1998 and would treat all
state savings associations as state banks as of that date. All savings and loan
holding companies would become bank holding companies under the pending
legislative proposals and would be subject to the activities restrictions
applicable to bank holding companies. Under the pending bills, any lawful
activity in which a savings association was engaged on September 13, 1995 would
be grandfathered for up to 5 years following the effective date of its
conversion to a bank charter and existing thrift intrastate and interstate
branches which were operated as branches on September 13, 1995 would also be
grandfathered. The legislative proposals would also abolish the OTS and
transfer its functions to the Office of the Comptroller of the Currency with
respect to the regulation of federal savings associations, and to the Board of
Governors of the Federal Reserve Board with respect to the regulation of savings
and loan holding companies. All state savings and loan associations would be
regulated as state banks by the FDIC. Certain provisions of another pending
bill would eliminate the bad debt reserve deduction for financial institutions,
and would require savings associations to recapture any post-1987 deductions for
bad debt reserves. See "Federal and State Taxation - Federal Taxation - Bad
Debt Reserve." The outcome of any pending legislation and the effect of such
legislation on the bad debt reserve deduction of thrift institutions such as the
Bank is uncertain. Therefore, the Bank is unable to determine the extent to
which such legislation, if enacted, would affect its business or require the
recapture of the bad debt reserve.
RECAPITALIZATION OF SAIF AND ITS IMPACT ON SAIF PREMIUMS
Deposits of the Bank are presently insured by the SAIF. Both the SAIF and
the Bank Insurance Fund ("BIF"), the deposit insurance fund that covers most
commercial bank deposits, are statutorily required to be recapitalized to a
1.25% of insured reserve deposits ratio. A portion of the insurance
assessment paid by SAIF members is required by statute to be used to make
payments on bonds issued by the Financing Corporation ("FICO") which were
issued in the late 1980's to recapitalize the predecessor to the SAIF.
Until recently, members of the SAIF and BIF were paying deposit insurance
premiums of between 23 and 31 basis points. In 1995, the FDIC adopted a new
assessment rate schedule of 0 to 27 basis points for BIF members. Under that
schedule, approximately 92% of BIF members would be required to pay only
$2,000 per year, the legal minimum, in insurance premiums. With respect to
SAIF member institutions, the existing assessment rate schedule applicable to
SAIF member institutions of 23 to 31 basis points were retained.
Consequently, there is a significant differential in the insurance premiums
paid BIF and SAIF members. As long as the premium differential continues, it
may place SAIF members, such as the Bank, at a substantial competitive
disadvantage to BIF members with respect to pricing of loans and deposits and
the ability to achieve lower operating costs.
Several bills have been introduced in Congress to mitigate the effect of the
BIF/SAIF premium disparity. Among other things, these bills would impose a one-
time special assessment on SAIF-member institutions, including the Bank, to
recapitalize the SAIF fund and would spread the FICO payments across all BIF and
SAIF members. It is presently estimated that the amount of the one-time fee
would range from 79 to 85 basis points on the amount of deposits held by SAIF-
members institutions as of March 31,
16
<PAGE>
1995. The pending legislation would also require the BIF and the SAIF to be
merged by January 1, 1998 provided that subsequent legislation is adopted to
eliminate the federal thrift charter. The payment of the one-time fee would
have the effect of immediately reducing the capital of SAIF-member
institutions by the amount of the fee, net of any tax effect. See
"Regulatory Capital Compliance" and "Regulation - Insurance of Deposit
Accounts." Management cannot predict whether legislation imposing such a fee
will be enacted, or, if enacted, the amount of any one-time fee, whether such
fee will be calculated based on the amount of deposits held by the
institution on March 31, 1995 or whether ongoing SAIF premiums will be
reduced to a level equal to that of BIF premiums.
The Bank's assessment rate for 1995 was 23 basis points and the premiums paid
for this period were $316,000. A significant increase in SAIF insurance
premiums or a significant one-time fee to recapitalize the SAIF would have an
adverse effect on the operating expenses and results of operations of the Bank.
Based on the Bank's deposit insurance assessment base as of December 31, 1995, a
79 to 85 basis point fee to recapitalize the SAIF would result in a $1.0 million
to $1.1 million payment on a pre-tax basis. If the Bank had been required to
pay the special assessment of 85 basis points on December 31, 1995, the Bank's
after-tax income would have been reduced by $680,000 to $256,000 for the year
ended December 31, 1995.
POSSIBLE ADVERSE INCOME TAX CONSEQUENCES OF THE DISTRIBUTION OF SUBSCRIPTION
RIGHTS
The Bank has received a letter from Keller & Company, Inc. which states that,
pursuant to Keller's valuation, subscription rights granted to Eligible Account
Holders, Supplemental Eligible Account Holders and Other Members have no value.
However, such valuation is not binding on the Internal Revenue Service ("IRS").
If the subscription rights granted to Eligible Account Holders, Supplemental
Eligible Account Holders and Other Members are deemed to have an ascertainable
value, such rights may be taxable as ordinary income or capital gain to those
Eligible Account Holders, Supplemental Eligible Account Holders or Other Members
who receive and/or exercise the subscription rights in an amount equal to such
value. Additionally, the Bank could recognize a gain for tax purposes on such
distribution. Whether subscription rights are considered to have ascertainable
value is an inherently factual determination. See "The Conversion - Effects of
Conversion" and "- Tax Aspects."
RISK OF DELAYED OFFERING
The Company and the Bank expect to complete the Conversion within the time
periods indicated in this Prospectus. Nevertheless, it is possible, although
not anticipated, that adverse market, economic or regulatory conditions, or
other factors could significantly delay the completion of the Conversion and
result in increased Conversion costs or in changes in the Conversion
valuation. The Subscription and Community Offerings could be extended to
September 14, 1996 before subscribers would have the right to confirm, modify
or rescind their subscriptions. If the Subscription and Community Offerings
are extended beyond September 14, 1996, all subscribers will have the right
to confirm, modify or rescind their subscriptions and to have their
subscription funds returned promptly, with interest at a rate equal to the
Bank's interest rate paid on passbook accounts, or to have their withdrawal
authorization terminated. See "The Conversion."
TECHNOLOGICAL CHANGES
The banking industry is undergoing rapid technological changes with frequent
introductions of new technology-driven products and services. In addition to
better serving customers, the effective use of technology increases efficiency
and enables financial institutions to reduce costs. The Company's future
success will depend in part on its ability to address the needs of the Bank's
customers by using technology
17
<PAGE>
to provide products and services that will satisfy
customer demands for convenience as well as to create additional efficiencies in
the Bank's operations. Many of the Bank's competitors have substantially
greater resources to invest in technological improvements. The Bank is
currently in the process of implementing new technology-driven products and
services. However, there can be no assurance that the Bank will be able to
effectively implement such products and services or be successful in marketing
such products and services to its customers.
18
<PAGE>
RECENT DEVELOPMENTS
The consolidated condensed operating data presented below for the one-month
periods ended March 31, 1996 and 1995 are derived from unaudited financial data,
but, in the opinion of management reflects all adjustments (consisting only of
normal recurring adjustments) which are necessary to present fairly the results
for such interim periods. The results of operations for the month ended March
31, 1996 are not necessarily indicative of the results of operations that may
be expected for the year ended December 31, 1996.
<TABLE>
<CAPTION>
AT AT
MARCH 31, 1996 FEBRUARY 29, 1996
-------------- -----------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
SELECTED BALANCE SHEET DATA:
Total assets $150,871 $149,387
Cash and cash equivalents 7,563 8,163
Securities available-for-sale 49,002 36,972
Securities held-to-maturity 29,027 39,068
Loans receivable, net (1) 59,289 58,944
Deposits 131,431 129,309
FHLB advances - -
Equity 17,554 17,677
MONTH ENDED
--------------------------------------------
MARCH 31, 1996 MARCH 31, 1995
-------------- --------------
(DOLLARS IN THOUSANDS)
SELECTED OPERATING DATA:
Interest income $848 $779
Interest expense 530 443
---- ----
Net interest income before
provision for loan losses 318 336
Provision for loan losses - 5
---- ----
Net interest income after
provision for loan losses 318 331
Gain on sales of real estate
held for development 14 255
Other noninterest income 21 22
Noninterest expense 262 253
---- ----
Income before income taxes 91 355
Income taxes 27 145
---- ----
Net income $ 64 $210
---- ----
---- ----
</TABLE>
19
<PAGE>
<TABLE>
<CAPTION>
AT OR FOR THE MONTH ENDED
-------------------------------------
MARCH 31, 1996 MARCH 31, 1995
-------------- --------------
<S> <C> <C>
SELECTED FINANCIAL RATIOS AND OTHER
DATA(2):
PERFORMANCE RATIOS:
Return on average assets 0.51% 1.83%
Return on average equity 4.34 14.98
Average equity to average assets 11.75 12.25
Equity to total assets at end of period 11.64 12.27
Average interest rate spread (3) 2.16 2.50
Net interest margin (4) 2.64 3.02
Average interest-earning assets to
average interest-bearing liabilities 110.83 113.01
Efficiency ratio (5) 74.22 41.27
Noninterest expense to average assets 2.09 2.21
REGULATORY CAPITAL RATIOS(6):
Tangible capital 10.63% 12.27%
Core capital 10.63 12.27
Risk-based capital 38.40 44.65
ASSET QUALITY RATIOS:
Non-performing loans as a percent of
gross loans receivable(7)(8) 0.13% 1.22%
Non-performing assets as a percent of
total assets(8) 0.09 0.55
Allowance for loan losses as a percent
of gross loans receivable(7) 0.83 0.50
Allowance for loan losses as a percent
of non-performing loans(8) 625.00 40.90
NUMBER OF FULL-SERVICE CUSTOMER FACILITIES 3 3
</TABLE>
- ----------------
(1) The allowance for loan losses at March 31, 1996 and 1995 was $500,000 and
$290,000, respectively.
(2) Asset Quality Ratios and Regulatory Capital Ratios are end of period ratios.
With the exception of end of period ratios, all ratios are based on average
daily balances during the indicated periods and are annualized where
appropriate.
(3) The average interest rate spread represents the difference between the
weighted average yield on interest-earning assets and the weighted average
costs of interest-bearing liabilities.
(4) The net interest margin represents net interest income as a percent of
average interest-earning assets.
(5) The efficiency ratio represents noninterest expense as a percent of net
interest income and noninterest income before provision for loan losses.
(6) For definitions and further information relating to the Bank's regulatory
capital requirements, see "Regulation - Federal Savings Institution
Regulation - Capital Requirements."
(7) Gross loan receivables are stated at unpaid principal balances.
(8) Non-performing assets consist of non-performing loans and REO.
Non-performing assets do not include loans which have been restructured and
are presently accruing interest in accordance with their restructured terms.
Non-performing loans consist of all loans 90 days or more past due and all
other non-accrual loans. It is the Bank's policy to cease accruing interest
on loans 90 days or more past due. See "Business of the Bank - Lending
Activities - Nonaccrual and Past Due Loans" and "- Real Estate."
20
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RECENT DEVELOPMENTS
COMPARISON OF FINANCIAL CONDITION AT MARCH 31, 1996 AND FEBRUARY 29, 1996
Total assets at March 31, 1996 were $150.9 million compared to $149.4
million at February 29, 1996, an increase of $1.5 million. The Bank
increased the amount of net loans receivable by $0.3 million from $58.9
million at February 29, 1996 to $59.3 million at March 31, 1996 and decreased
cash and cash equivalents by $0.6 million from $8.2 million at February 29,
1996 to $7.6 million at March 31, 1996.
Total liabilities at March 31, 1996 were $133.3 million compared to $131.7
million at February 29, 1996, an increase of $1.6 million. Total deposit
accounts of the Bank increased by $2.1 million from $129.3 million at
February 29, 1996 to $131.4 million at March 31, 1996 due principally to an
increase in certificate and savings accounts.
Equity at March 31, 1996 was $17.6 million compared to $17.7 million at
February 29, 1996, a decrease of $123,000, or 0.7%, due primarily to an
$187,000 increase in the loss on securities available-for-sale in March.
Unrealized losses on the Bank's portfolio of held-to-maturity securities
increased to $278,000 at March 31, 1996 from $212,000 at February 29, 1996, or
$66,000, primarily due to an increase in the level of general market interest
rates during March.
COMPARISON OF OPERATING RESULTS FOR THE MONTH ENDED MARCH 31, 1996 AND
MARCH 31, 1995
GENERAL
Net earnings for the month ended March 31, 1996 were $64,000, a decrease
of $146,000, or 69.5%, from net earnings of $210,000 for the month ended
March 31, 1995. The decrease in net earnings resulted primarily from a
$242,000, or 87.4%, decrease in noninterest income which included a $241,000
decrease in gain on sales of real estate held for development. The Bank's
average net interest margin decreased from 3.02% for the month ended March
31, 1995 to 2.64% for the month ended March 31, 1996, resulting in a $18,000
decrease in net interest income. Operating results for the month ended March
31, 1996 were impacted by a $118,000 decrease in income tax expense from the
same period in 1995. The Bank's return on average assets decreased from
1.83% for the month ended March 31, 1995 to 0.51% for the month ended March
31, 1996.
INTEREST INCOME
Interest income for the month ended March 31, 1996 was $848,000 compared to
$779,000 for the month ended March 31, 1995, an increase of $69,000 or 8.9%.
The increase in interest income was the result of an increase in average
interest-earning assets from $133.6 million for the month ended March 31,
1995 to $144.5 million for the month ended March 31, 1996 primarily due to an
increase in the average balance of interest-earning deposits and other
investments.
INTEREST EXPENSE
Interest expense for the month ended March 31, 1996 was $530,000
compared to $443,000 for the month ended March 31, 1995, an increase of
$87,000, or 19.6%. The increase of interest expense was due in part to the
increase of $12.1 million in the average balance of interest-bearing
liabilities from $118.3 million for the month ended March 31, 1995 to $130.4
million for the month ended March 31, 1996. The increase in interest expense
also reflects the higher interest rate environment, as the average cost of
interest-bearing liabilities increased 38 basis points from 4.50% for the
month ended March 31,
21
<PAGE>
1995 to 4.88% for the month ended March 31, 1996. The increase in average
interest-bearing liabilities was primarily due to the $13.7 million increase
in the average balance of savings and certificate accounts from $105.5
million for the month ended March 31, 1995 to $119.2 million for the month
ended March 31, 1996. The increase in the average balance of certificate
accounts reflects the increased customer demand arising from higher interest
rates paid by the Bank on these accounts in response to higher market rates.
The average cost of funds for savings and certificate accounts increased 56
basis points from 4.57% for the month ended March 31, 1995 to 5.13% for the
month ended March 31, 1996, resulting in an increase in the overall average
cost of funds.
PROVISION FOR LOAN LOSSES
The Bank's provision for loan losses for the month ended March 31, 1996
was zero compared to $5,000 for the month ended March 31, 1995. The amount
of the provision and allowance for estimated losses on loans is influenced by
current economic conditions, including declining real estate values, in the
Bank's market area. In addition, various regulatory agencies, as an integral
part of their examination process, periodically review the Bank's allowance
for estimated losses on loans. Such agencies may require the Bank to provide
additions to the allowance based upon judgments which differ from those of
management. Although management uses the best information available, future
adjustments to the allowance may be necessary due to economic, operating,
regulatory and other conditions that may be beyond the Bank's control. See
"Business of the Bank - Lending Activities - Delinquencies and Classified
Assets" and "- Lending Activities - Allowance for Estimated Losses on Loans."
NONINTEREST INCOME
Noninterest income for the month ended March 31, 1996 was $35,000 compared
to $277,000 for the month ended March 31, 1995, a decrease of $242,000, or
87.4%. Deposit fees and charges for the month ended March 31, 1996 decreased
to $16,000, or 20.0%, from $20,000 for the month ended March 31, 1995. Gains
on the sale of real estate held for development decreased $241,000 during the
month ended March 31, 1996 due to the substantial completion of the Rose Hill
Venture in the latter half of 1995 and the start-up of the Prairie Ridge
Venture in late 1995 and early 1996. Gains on sales of real estate held for
development are reported net of all related costs, except for certain
insignificant general and administrative costs incurred by the Bank.
NONINTEREST EXPENSE
Noninterest expense was $262,000 for the month ended March 31, 1996
compared to $253,000 for the month ended March 31, 1995, a $9,000 or 3.6%
increase. Compensation and benefits expense was $134,000 for the month ended
March 31, 1996 compared to $139,000 for the month ended March 31, 1995, a
$5,000, or 3.6%, decrease. The ratio of noninterest expense to average
assets was 2.09% for the month ended March 31, 1996 compared to 2.21% for the
month ended March 31, 1995.
INCOME TAXES
Income taxes were $27,000 for the month ended March 31, 1996 compared to
$145,000 for the month ended March 31, 1995, a decrease of $118,000, or
81.4%. This decrease was primarily the result of the $264,000, or 74.4%,
decrease in earnings before income taxes from $355,000 for the month ended
March 31, 1995 to $91,000 for the month ended March 31, 1996.
22
<PAGE>
NON-ACCRUAL AND PAST-DUE LOANS. The following table sets forth
information regarding non-accrual loans, troubled-debt restructurings and REO
for the periods set forth in the table.
<TABLE>
<CAPTION>
AT MARCH 31, AT FEBRUARY 29, AT MARCH 31,
1996 1996 1995
------------ --------------- ------------
<S> <C> <C> <C>
Non-accrual loans:
Residential real estate:
One- to four-family....................... $ 80 $ 78 $ 511
Multi-family.............................. - 67
Commercial.................................. - 131
Construction and land....................... -
Consumer.................................... - 2
------ ------ -----
Total non-performing loans................ 80 80 709
REO........................................... 50 319 50
------ ------ -----
Total non-performing assets............... $ 130 $ 399 $ 759
====== ====== =====
Allowance for loan losses as a
percent of gross loans receivable........... 0.83% 0.82% 0.50%
Allowance for loan loses as a percent of total
non-performing loans(1)..................... 625.00 625.00 40.90
Non-performing loans as a percent of gross
loans receivable(1)........................ 0.13 0.13 1.22
Non-performing assets as a percent of total
assets(1).................................. 0.09 0.27 0.55
</TABLE>
- -------------------
(1) Non-performing assets consist of non-performing loans and REO.
Non-performing loans consist of all loans 90 days or more past due and
all other non-accrual loans.
The following table sets forth activity in the Bank's allowance for loan
losses for the periods set forth in the table.
<TABLE>
<CAPTION>
AT OR FOR THE
MONTH ENDED
------------------------
MARCH 31, MARCH 31,
1996 1995
--------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Balance at beginning of period.............. $ 500,000 $ 285,000
Provision for loan losses................... - 5,000
Charge-offs:
Real Estate:
One- to four-family..................... - -
Multi-family............................ - -
Construction and land................... - -
Consumer.................................. - -
--------- ---------
Total................................. - -
Recoveries.................................. - -
--------- ---------
Balance at end of period.................... $ 500,000 $ 290,000
========= =========
</TABLE>
23
<PAGE>
PARK BANCORP, INC.
The Company was recently organized at the direction of the Board of
Directors of the Bank for the purpose of acquiring all of the capital stock
to be issued by the Bank. The Company has applied to the OTS to become a
savings and loan holding company, and, as such, will be subject to regulation
by the OTS. See "The Conversion - General." After completion of the
Conversion, the Company will conduct business initially as a unitary savings
and loan holding company. See "Regulation - Holding Company Regulation."
Upon consummation of the Conversion, the Company's assets will consist of all
of the outstanding shares of the Bank's capital stock issued to the Company
in the Conversion and that portion of the net proceeds of the Offerings
retained by the Company. The Company intends to use part of the net proceeds
it retains to make a loan directly to the ESOP to enable the ESOP to purchase
8% of the Common Stock in the Conversion. See "Use of Proceeds." The
Company will have no significant liabilities. The management of the Company
is set forth under "The Board of Directors and Management of the Company."
Initially, the Company will neither own nor lease any property, but will
instead use the premises, equipment and furniture of the Bank. At the
present time, the Company does not intend to employ any persons other than
officers, but will utilize the support staff of the Bank from time to time.
Additional employees will be hired as appropriate to the extent the Company
expands its business in the future.
Management believes that the holding company structure will provide the
Company with additional flexibility to diversify, should it decide to do so,
its business activities through existing or newly-formed subsidiaries, or
through acquisitions of other financial institutions and financial services
related companies. Although there are no current arrangements,
understandings or agreements, written or oral, regarding any such
opportunities or transactions, the Company will be in a position after the
Conversion, subject to regulatory limitations and the Company's financial
position, to take advantage of any such acquisition and expansion
opportunities that may arise. The initial activities of the Company are
anticipated to be funded by the net proceeds retained by the Company and
earnings thereon or, alternatively, through dividends from the Bank.
The Company's executive offices are located at the home office of the Bank
at 2740 West 55th Street, Chicago, Illinois 60632. The Company's telephone
number is (312) 434-6040.
PARK FEDERAL SAVINGS BANK
The Bank has operated for over seventy-five years as a community-oriented
savings institution. The Bank's primary market area consists of the areas in
and surrounding the city of Chicago and includes the counties of Cook and
DuPage in the state of Illinois. The Bank conducts its business from its
home office located in Chicago and its two other branches located in
southwestern Chicago and Westmont, Illinois.
The Bank is a community-oriented financial institution whose business has
been and continues to be attracting deposits from the general public in its
primary market area and investing such deposits and other funds, generated
from operations and borrowings, primarily in mortgage loans secured by one-
to four-family residences. At February 29, 1996, $48.3 million, or 79.3%, of
the Bank's gross loans consisted of one- to four-family mortgage loans. To a
significantly lesser extent, the Bank invests in multi-family, commercial
real estate, construction (primarily residential construction) and land, and
consumer loans. In addition to its lending activities, the Bank also invests
in mortgage-backed securities, primarily those guaranteed by governmental
agencies such as the Federal National Mortgage Association ("FNMA") and the
Federal Home Loan Mortgage Corporation ("FHLMC") and investment securities.
The
24
<PAGE>
Bank also engages in real estate development activities through a
subsidiary, GPS Development Corp. and in limited insurance activities through
GPS Corporation. The Bank's investment in real estate held for development
totalled $1.6 million, or 1.1% of total assets at February 29, 1996. During
1995, the Bank substantially completed its primary development project, Rose
Hill Farm, and began work on a new, but smaller project. During the years
ended December 31, 1995, 1994 and 1993, the Bank recorded income of $523,000,
$1.1 million and $856,000, respectively, related to real estate development.
Management anticipates lower levels of income from these activities in 1996,
as the new project begins development. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and "Business of
the Bank."
The Bank is subject to extensive regulation, supervision and examination by
the OTS, its primary regulator, and the FDIC, which insures its deposits. As
of February 29, 1996, the Bank exceeded all regulatory capital requirements
with tangible, core and risk-based capital of $16.1 million, $16.1 million
and $16.6 million, respectively. Additionally, the Bank's regulatory capital
was in excess of the amount necessary to be "well-capitalized" under the
Federal Deposit Insurance Corporation Improvement Act of 1992 ("FDICIA").
See "Regulatory Capital Compliance" and "Regulation." The Bank is a member
of the Federal Home Loan Bank of Chicago ("FHLB - Chicago") which is one of
the twelve regional banks which comprise the FHLB system.
The Bank's executive offices are located at its home office at 2740 West
55th Street, Chicago, Illinois 60632. The Bank's telephone number is (312)
434-6040.
25
<PAGE>
REGULATORY CAPITAL COMPLIANCE
At February 29, 1996, the Bank exceeded all regulatory capital
requirements. See "Regulation - Federal Savings Institution Regulation -
Capital Requirements." Set forth below is a summary of the Bank's compliance
with regulatory capital standards as of February 29, 1996, on a historical
and pro forma basis assuming that the indicated number of shares were sold as
of such date and receipt by the Bank of 50% of the net proceeds and that such
net proceeds are invested in assets that carry a 20% risk-weighting, such as
short-term interest-bearing deposits. For purposes of the table below, the
amount expected to be borrowed by the ESOP and the cost of the shares
expected to be acquired by the Stock Programs are deducted from pro forma
regulatory capital.
<TABLE>
<CAPTION>
PRO FORMA BASED UPON SALE AT $10.00 PER SHARE
---------------------------------------------
2,040,000 SHARES 2,400,000 SHARES
(MINIMUM OF (MIDPOINT OF
ESTIMATED ESTIMATED
HISTORICAL PRICE RANGE) PRICE RANGE)
--------------------- --------------------- ---------------------
PERCENT PERCENT PERCENT
OF OF OF
AMOUNT ASSETS(2) AMOUNT ASSETS(2) AMOUNT ASSETS(2)
--------- ---------- --------- ---------- --------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
GAAP Capital . . . . . . . . . $17,677 12.0% $25,100 16.2% $26,437 16.9%
------- ----- ------- ----- ------- -----
------- ----- ------- ----- ------- -----
Tangible Capital:
Capital Level(3) . . . . . $16,072 10.9% $23,495 15.1% $24,832 15.9%
Requirement. . . . . . . . 2,217 1.5 2,328 1.5 2,348 1.5
------- ----- ------- ----- ------- -----
Excess . . . . . . . . . . $13,855 9.4% $21,167 13.6% $22,484 14.4%
------- ----- ------- ----- ------- -----
------- ----- ------- ----- ------- -----
Core Capital:
Capital Level(3) . . . . . $16,072 10.9% $23,495 15.1% $24,832 15.9%
Requirement(4) . . . . . . 4,433 3.0 4,656 3.0 4,696 3.0
------- ----- ------- ----- ------- -----
Excess . . . . . . . . . . $11,639 7.9% $18,839 12.1% $20,136 12.9%
------- ----- ------- ----- ------- -----
------- ----- ------- ----- ------- -----
Total Risk-Based Capital:
Capital Level(3) . . . . . $16,572 39.4% $23,995 55.1% $25,332 57.8%
Requirement. . . . . . . . 3,368 8.0 3,484 8.0 3,505 8.0
------- ----- ------- ----- ------- -----
Excess . . . . . . . . . . $13,204 31.4% $20,511 47.1% $21,827 49.8%
------- ----- ------- ----- ------- -----
------- ----- ------- ----- ------- -----
<CAPTION>
PRO FORMA BASED UPON SALE AT $10.00 PER SHARE
----------------------------------------------
3,174,000 SHARES
2,760,000 SHARES (15% ABOVE
(MAXIMUM OF MAXIMUM
ESTIMATED OF ESTIMATED
PRICE RANGE) PRICE RANGE)(1)
--------------------- ---------------------
PERCENT PERCENT
OF OF
AMOUNT ASSETS(2) AMOUNT ASSETS(2)
--------- ---------- --------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
GAAP Capital . . . . . . . . . $27,775 17.6% $29,348 18.4%
------- ----- ------- -----
------- ----- ------- -----
Tangible Capital:
Capital Level(3) . . . . . $26,170 16.6% $27,743 17.4%
Requirement. . . . . . . . 2,368 1.5 2,392 1.5
------- ----- ------- -----
Excess . . . . . . . . . . $23,802 15.1% $25,351 15.9%
------- ----- ------- -----
------- ----- ------- -----
Core Capital:
Capital Level(3) . . . . . $26,170 16.6% $27,743 17.4%
Requirement(4) . . . . . . 4,736 3.0 4,784 3.0
------- ----- ------- -----
Excess . . . . . . . . . . $21,434 13.6% $22,959 14.4%
------- ----- ------- -----
------- ----- ------- -----
Total Risk-Based Capital:
Capital Level(3) . . . . . $26,670 60.5% $28,243 63.6%
Requirement. . . . . . . . 3,526 8.0 3,552 8.0
------- ----- ------- -----
Excess . . . . . . . . . . $23,144 52.5% $24,691 55.6%
------- ----- ------- -----
------- ----- ------- -----
</TABLE>
- ----------------------------------------
(1) As adjusted to give effect to an increase in the number of shares which
could occur due to an increase in the Estimated Price Range of up to 15%
as a result of regulatory considerations, changes in market conditions or
general financial and economic conditions following the commencement of
the Subscription and Community Offerings.
(2) Tangible capital levels are shown as a percentage of tangible assets.
Core capital levels are shown as a percentage of total adjusted assets.
Risk-based capital levels are shown as a percentage of risk-weighted assets.
(3) Certain deductions and additions are made to equity as calculated under
generally accepted accounting principles ("GAAP") to determine regulatory
capital. At February 29, 1996, the additions to (reductions from) GAAP
capital to determine regulatory tangible and core capital are non-includable
investment in subsidiaries of ($1.6 million) and unrealized gain on
securities available-for-sale, net of tax, of $30,000. The general
valuation allowance of $500,000 is added to GAAP capital to arrive at total
risk-based capital.
(4) The current OTS core capital requirement for savings associations is 3% of
total adjusted assets. The OTS has proposed core capital requirements which
would require a core capital ratio of 3% of total adjusted assets for
thrifts that receive the highest supervisory rating for safety and soundness
and a 4% to 5% core capital ratio requirement for all other thrifts. See
"Regulation - Federal Savings Institution Regulation - Capital
Requirements."
26
<PAGE>
USE OF PROCEEDS
Although the actual net proceeds from the sale of the Common Stock cannot
be determined until the Conversion is completed, it is presently anticipated
that the net proceeds from the sale of the Common Stock will be between $19.7
million and $26.8 million (or $31.0 million if the Estimated Price Range is
increased by 15%). See "Pro Forma Data" and "The Conversion - Stock Pricing" as
to the assumptions used to arrive at such amounts. The Company will be unable
to utilize any of the net proceeds of the Offerings until the consummation of
the Conversion.
The Company will purchase all of the outstanding capital stock of the Bank
to be issued upon Conversion in exchange for 50% of the net proceeds of the
Offering. Such proceeds will be added to the Bank's general funds to be used
for general corporate purposes, including investment in one- to four-family
residential mortgage loans and other loans, investment in short- to
intermediate-term securities and mortgage-backed securities, and real estate
development activities. The Bank may also use such funds to upgrade its data
processing capabilities in order to provide new technology-based products and
services to its customers or the expansion of its facilities, to expand
operations through acquisitions of other financial institutions, branch offices
or other financial services companies. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Liquidity and
Capital Resources." The Bank has no current arrangements, understandings or
agreements regarding any such transactions.
Net proceeds to be retained by the Company after the purchase of the
capital stock of the Bank, and including the loan to the ESOP, are estimated to
be between $9.9 million and $13.4 million (or $15.5 million if the Estimated
Price Range is increased by 15%). The net proceeds retained by the Company will
initially be invested primarily in short- to intermediate-term securities and
mortgage-backed securities. The Company intends to use a portion of the net
proceeds to make a loan directly to the ESOP to enable the ESOP to purchase 8%
of the Common Stock issued in the Conversion. Based upon the issuance of
2,040,000 shares and 2,760,000 shares at the minimum and maximum of the
Estimated Price Range, the amount of the loan to the ESOP would be $1.6 million
or $2.2 million, respectively (or $2.5 million if the Estimated Price Range is
increased by 15%) to be repaid over a 12 year period at an interest rate of
9.25%. See "The Board of Directors and Management of the Bank - Benefits -
Employee Stock Ownership Plan and Trust."
The net proceeds retained by the Company may also be used to support the
future expansion of operations through the acquisition of other savings
associations and commercial banks or diversification into other banking related
businesses. The Company may use a portion of the net proceeds to fund the Stock
Programs. The Company may also use a portion of the net proceeds to engage in
real estate development activities. The Company has no current arrangements,
understandings or agreements regarding any such transactions. The Company, upon
the Conversion, will be a unitary savings and loan holding company, which under
existing laws would generally not be restricted as to the types of business
activities in which it may engage, provided that the Bank continues to be a
qualified thrift lender ("QTL"). See "Regulation - Holding Company Regulation"
for a description of certain regulations and proposed regulations applicable to
the Company.
Upon completion of the Conversion, the Board of Directors of the Company
will have the authority to adopt stock repurchase plans, subject to statutory
and regulatory requirements. Unless approved by the OTS, the Company, pursuant
to OTS regulations, will be prohibited from repurchasing any shares of the
Common Stock for three years except (i) for an offer to all stockholders on a
pro rata basis, or (ii) for the repurchase of qualifying shares of a director.
Notwithstanding the foregoing and except as provided below, beginning one
year following completion of the Conversion, the Company may repurchase its
Common Stock so long as (i) the repurchases within the following two years
are part of
27
<PAGE>
an open-market program not involving greater than 5% of its outstanding
capital stock during a twelve-month period; (ii) the repurchases do not cause
the Bank to become "undercapitalized" within the meaning of the OTS prompt
corrective action regulation; and (iii) the Company provides to the Regional
Director of the OTS no later than 10 days prior to the commencement of a
repurchase program written notice containing a full description of the
program to be undertaken and such program is not disapproved by the Regional
Director. See "Regulation - Prompt Corrective Regulatory Action." In
addition, under current OTS policies, repurchases may be allowed in the first
year following Conversion and in amounts greater than 5% in the second and
third years following Conversion provided there are valid and compelling
business reasons for such repurchases and the OTS does not object to such
repurchases.
Based upon facts and circumstances following Conversion and subject to
applicable regulatory requirements, the Board of Directors may determine to
repurchase stock in the future. Such facts and circumstances may include but
not be limited to: (i) market and economic factors such as the price at which
the stock is trading in the market, the volume of trading, the attractiveness of
other investment alternatives in terms of the rate of return and risk involved
in the investment, the ability to increase the book value and/or earnings per
share of the remaining outstanding shares, and the opportunity to improve the
Company's return on equity; (ii) the avoidance of dilution to stockholders by
not having to issue additional shares to cover the exercise of stock options or
to fund employee stock benefit plans; and (iii) any other circumstances in which
repurchases would be in the best interests of the Company and its shareholders.
In the event the Company determines to repurchase stock, such repurchases may be
made at market prices which may be in excess of the Purchase Price in the
Conversion.
Any stock repurchases will be subject to the determination of the Board of
Directors that both the Company and the Bank will be capitalized in excess of
all applicable regulatory requirements after any such repurchases and that such
capital will be adequate, taking into account, among other things, the level of
non-performing and other risk assets, the Company's and the Bank's current and
projected results of operations and asset/liability structure, the economic
environment and tax and other considerations. See "The Conversion - Certain
Restrictions on Purchase or Transfer of Shares after Conversion."
While the Company's Board of Directors may consider a policy of paying
dividends in the future, the Board does not initially intend to pay dividends
and has no present plans with respect to the payment of dividends. The payment
of dividends or repurchase of stock, however, would be prohibited if
stockholders' equity would be reduced below the amount required to maintain the
Bank's liquidation account. See "Dividend Policy" and "The Conversion -
Liquidation Rights" and "- Certain Restrictions on Purchase or Transfer of
Shares After Conversion."
DIVIDEND POLICY
Upon Conversion, the Board of Directors of the Company will have the
authority to declare dividends on the Common Stock, subject to statutory and
regulatory requirements. The Company is newly formed and has conducted no
operations to date. The Board of Directors does not intend to initially pay
dividends on the Common Stock. The Board of Directors may consider a policy of
paying dividends on the Common Stock in the future. No decision has been made
as to the amount or timing of such dividends, if any. Declarations of dividends
by the Board of Directors will depend upon a number of factors, including the
amount of net proceeds retained by the Company in the Conversion, investment
opportunities available to the Company or the Bank, capital requirements,
regulatory limitations, the Company's and the Bank's financial condition and
results of operations, tax considerations and general economic conditions. No
assurances can be given, however, that any dividends will be paid or, if
commenced, will continue to be paid.
28
<PAGE>
The Bank will not be permitted to pay dividends on its capital stock if its
stockholders' equity would be reduced below the amount required for the
liquidation account. See "The Conversion - Liquidation Rights." For
information concerning federal regulations which apply to the Bank in
determining the amount of proceeds which may be retained by the Company and
regarding a savings institution's ability to make capital distributions
including payment of dividends to its holding company, see "Federal and State
Taxation - Federal Taxation - Distributions" and "Regulation - Federal Savings
Institution Regulation - Limitation on Capital Distributions."
Unlike the Bank, the Company is not subject to OTS regulatory restrictions
on the payment of dividends to its stockholders. The Company is subject,
however, to the requirements of Delaware law, which generally limit dividends to
an amount equal to the excess of the net assets of the Company (the amount by
which total assets exceed total liabilities) over its statutory capital,
(generally defined as the aggregate par value of the outstanding shares of the
Company's capital stock having a par value plus the amount of the consideration
paid for shares of the Company's capital stock without par value) or, if there
is no such excess, to its net profits for the current and/or immediately
preceding fiscal year. Since the Company initially will have no significant
source of income other than dividends from the Bank and earnings from the net
proceeds retained by the Company, the payment of dividends by the Company may be
dependent, in part, upon dividends from the Bank which is subject to various tax
and regulatory restrictions on the payment of dividends.
MARKET FOR THE COMMON STOCK
The Company and Bank have not previously issued capital stock, and,
consequently, there is no established market for the Common Stock. The Company
has received conditional approval from the Nasdaq National Market to have its
Common Stock quoted on the Nasdaq National Market under the symbol "PFED" upon
completion of the Conversion. One of the requirements for continued quotation
of the Common Stock on the Nasdaq National Market is that there be at least two
market makers for the Common Stock. The Company will seek to encourage at least
two market makers to make a market in its Common Stock. Making a market
involves maintaining bid and ask quotations and being able, as principal, to
effect transactions in reasonable quantities at those quoted prices, subject to
various securities laws and other regulatory requirements. Baird has advised
the Company that upon completion of the Conversion, it intends to act as a
market maker in the Common Stock, depending on the volume of trading and subject
to compliance with applicable laws and regulatory requirements. Baird also will
assist the Company in obtaining additional market makers. The development of a
public market having the desirable characteristics of depth, liquidity and
orderliness, however, depends on the presence in the marketplace of a sufficient
number of willing buyers and sellers at any given time, over which the Company,
the Bank nor any market maker has any control. Accordingly, there can be no
assurance that an established and liquid trading market for the Common Stock
will develop or that, if developed, it will continue. Furthermore, there can be
no assurance that persons purchasing shares will be able to sell them at or
above the Purchase Price or that quotations will be available on the Nasdaq
National Market as contemplated. The absence or discontinuance of a market for
the Common Stock may have an adverse impact on both the price and the liquidity
of the Common Stock. The Company and the Bank will make reasonable efforts to
comply with the securities law of all states in the United States in which
persons entitled to subscribe for stock pursuant to the Plan reside; however,
the Company and the Bank are not required to offer stock in the Subscription
Offering to any person who resides in a state of the United States with respect
to which the Company or the Bank determine that compliance with the securities
laws of such state would be impracticable for reasons of cost or otherwise.
29
<PAGE>
CAPITALIZATION
The following table presents the unaudited historical consolidated
capitalization of the Bank at February 29, 1996, and the pro forma consolidated
capitalization of the Company after giving effect to the Conversion, based upon
the sale of the number of shares indicated in the table and the other
assumptions set forth under "Pro Forma Data."
<TABLE>
<CAPTION>
COMPANY PRO FORMA BASED UPON SALE AT $10.00 PER SHARE
------------------------------------------------------------------------------------
3,174,000
2,040,000 2,400,000 2,760,000 SHARES
SHARES SHARES SHARES (15% ABOVE
(MINIMUM OF (MIDPOINT OF (MAXIMUM OF MAXIMUM OF
BANK ESTIMATED ESTIMATED ESTIMATED ESTIMATED
HISTORICAL PRICE RANGE) PRICE RANGE) PRICE RANGE) PRICE RANGE)(1)
------------ ------------- ------------- ------------- ----------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Total deposits (2) . . . . . . . . . . . . . $129,309 $129,309 $129,309 $129,309 $129,309
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
Stockholders' equity:
Preferred Stock, $.01 par value,
1,000,000 shares authorized;
none to be issued. . . . . . . . . . . . $- $- $- $- $-
Common Stock, $.01 par value,
9,000,000 shares authorized;
shares to be issued as reflected . . . . - 20 24 28 32
Additional paid-in capital(3). . . . . . . - 19,722 23,257 26,792 30,928
Retained earnings(4) . . . . . . . . . . . 17,647 17,647 17,647 17,647 17,647
Unrealized gain on securities
available for sale . . . . . . . . . . . 30 30 30 30 30
Common Stock acquired by the
ESOP(5). . . . . . . . . . . . . . . . . - (1,632) (1,920) (2,208) (2,539)
Common Stock acquired by the
Stock Programs(6). . . . . . . . . . . . - (816) (960) (1,140) (1,270)
-------- -------- -------- -------- --------
Total stockholders' equity . . . . . . . . $17,677 $34,971 $38,078 $41,185 $44,828
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
</TABLE>
30
<PAGE>
- -------------------
(1) As adjusted to give effect to an increase in the number of shares which
could occur due to an increase in the Estimated Price Range of up to 15% as
a result of regulatory considerations, or changes in market conditions or
general financial and economic conditions following the commencement of the
Subscription and Community Offerings.
(2) Does not reflect withdrawals from deposit accounts for the purchase of
Common Stock in the Conversion. Such withdrawals would reduce pro forma
deposits by the amount of such withdrawals.
(3) No effect has been given to the issuance of additional shares of Common
Stock pursuant to the Stock Option Plans intended to be adopted by the
Company and presented for approval of stockholders at a meeting of
stockholders following the Conversion. If approved by the stockholders of
the Company, an amount equal to 10% of the shares of Common Stock issued in
the Conversion will be reserved for issuance upon the exercise of options
to be granted under the Stock Option Plans. See "Risk Factors - Possible
Dilutive Effect of Stock Programs and Stock Options," Footnote 3 to the
tables under "Pro Forma Data" and "The Board of Directors and Management of
the Bank - Benefits - Stock Option Plans."
(4) The retained earnings of the Bank will be substantially restricted after
the Conversion. See "The Conversion - Liquidation Rights" and "Regulation
- Federal Savings Institution Regulation - Limitations on Capital
Distributions." Does not reflect the payment of any possible future
dividends. See "Dividend Policy."
(5) Assumes that 8% of the shares offered for sale in the Conversion will be
purchased by the ESOP and that the funds used to acquire such shares will
be borrowed from the Company. The Common Stock acquired by the ESOP is
reflected as a reduction of stockholders' equity. See "The Board of
Directors and Management of the Bank - Benefits - Employee Stock Ownership
Plan and Trust."
(6) Assumes that an amount equal to 4% of the shares of Common Stock issued in
the Conversion is purchased by the Stock Programs subsequent to the
Conversion through open market purchases. The Common Stock purchased by
the Stock Programs is reflected as a reduction of stockholder's equity.
Implementation of the Stock Programs is subject to the approval of the
Company's stockholders at a meeting following the Conversion. See "Risk
Factors - Possible Dilutive Effect of Stock Programs and Stock Options,"
Footnote 2 to the tables under "Pro Forma Data" and "The Board of Directors
and Management of the Bank - Benefits - Stock Programs."
31
<PAGE>
PRO FORMA DATA
The actual net proceeds from the sale of the Common Stock cannot be
determined until the Conversion is completed. However, net proceeds are
currently estimated to be between $19.7 million and $26.8 million (or $31.0
million in the event the Estimated Price Range is increased by 15.0%) based upon
the following assumptions: (i) all of the shares of Common Stock will be sold
in the Subscription and Community Offerings; (ii) directors, officers and
employees of the Bank and members of their immediate families (collectively,
"Affiliates") will purchase an aggregate of 109,000 shares of Common Stock;
(iii) Baird will receive a fee equal to 1.84% of the aggregate Purchase Price of
the shares sold in the Subscription and Community Offerings up to the maximum of
the Estimated Price Range, excluding shares purchased by Affiliates and the ESOP
for which there is no fee; and (iv) Conversion expenses, excluding the marketing
fees paid to Baird, will be approximately $333,000. Actual Conversion expenses
may vary from those estimated.
Pro forma consolidated net earnings of the Company for the two months ended
February 29, 1996, and for the year ended December 31, 1995, have been
calculated as if the Common Stock had been sold at the beginning of the
respective periods and the net proceeds had been invested at 5.45% and 5.16%,
respectively, the arithmetic average of the weighted average yield earned by the
Bank on its interest-earning assets and the weighted average rate paid on its
deposits during such periods (as required by OTS regulations). The tables below
do not reflect the effect of withdrawals from deposit accounts for the purchase
of Common Stock or the effect of any possible use of the net conversion
proceeds. The pro forma after-tax yields for the Company and the Bank are
assumed to be 3.77% for the two months ended February 29, 1996, based on an
effective tax rate of 38.74%, and 3.55% for the year ended December 31, 1995,
based on an effective tax rate of 38.74%. Historical and pro forma net earnings
per share amounts have been calculated by dividing historical and pro forma
amounts by the indicated number of shares of Common Stock issued, as adjusted to
give effect to the purchase of shares by the ESOP. Historical and pro forma
stockholders' equity per share amounts have been calculated by dividing
historical and pro forma amounts by the indicated number of shares of Common
Stock issued. No effect has been given in the pro forma stockholders' equity
calculations for the assumed earnings on the net proceeds.
The following pro forma information may not be representative of the
financial effects of the foregoing transactions at the dates on which such
transactions actually occur and should not be taken as indicative of future
results of operations. Pro forma consolidated stockholders' equity represents
the difference between the stated amount of assets and liabilities of the
Company computed in accordance with GAAP. The pro forma stockholders' equity is
not intended to represent the fair market value of the Common Stock and may be
greater than amounts that would be available for distribution to stockholders in
the event of liquidation.
The following tables summarize historical data of the Bank and pro forma
data of the Company at or for the two months ended February 29, 1996, and at or
for the year ended December 31, 1995, based on the assumptions set forth above
and in the table and should not be used as a basis for projections of market
value of the Common Stock following the Conversion. The tables below give
effect to the Stock Programs, which are expected to be adopted by the Company
following the Conversion and presented to stockholders for approval at a meeting
of stockholders. See Footnote 2 to the tables and "The Board of Directors and
Management of the Bank - Benefits - Stock Programs." No effect has been given
in the tables to the possible issuance of additional shares reserved for future
issuance pursuant to the Stock Option Plans which are expected to be adopted by
the Board of Directors of the Company and presented to stockholders for approval
at a meeting of stockholders, nor does book value give any effect to the
liquidation account to be established for the benefit of Eligible Account
Holders and Supplemental Eligible Account Holders or the bad debt reserve in
liquidation. See Footnote 3 to the tables below, "The Conversion - Liquidation
Rights" and "The Board of Directors and Management of the Bank - Benefits -
Stock Option Plans."
32
<PAGE>
<TABLE>
<CAPTION>
AT OR FOR THE TWO MONTHS ENDED FEBRUARY 29, 1996
------------------------------------------------------------------
2,040,000 2,400,000 2,760,000 3,174,000
SHARES SOLD SHARES SOLD SHARES SOLD SHARES SOLD
AT $10.00 AT $10.00 AT $10.00 AT $10.00
PER SHARE PER SHARE PER SHARE PER SHARE (15%
(MINIMUM (MIDPOINT (MAXIMUM ABOVE MAXIMUM
OF ESTIMATED OF ESTIMATED OF ESTIMATED OF ESTIMATED
PRICE RANGE) PRICE RANGE) PRICE RANGE) PRICE RANGE)(5)
------------ ------------ ------------ ---------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Gross proceeds. . . . . . . . . . . . . . . . $20,400 $24,000 $27,600 $31,740
Less: Offering expenses and
commissions. . . . . . . . . . . . . . . . (658) (719) (780) (780)
------ ------ ------ ------
Estimated net proceeds. . . . . . . . . . . . 19,742 23,281 26,820 30,960
Less: Common Stock acquired by
ESOP . . . . . . . . . . . . . . . . (1,632) (1,920) (2,208) (2,539)
Common Stock acquired by
Stock Programs . . . . . . . . . . . (816) (960) (1,104) (1,270)
------ ------ ------ ------
Estimated net proceeds, as adjusted. . . . $17,294 $20,401 $23,508 $27,151
------- ------- ------- -------
------- ------- ------- -------
Consolidated net earnings:
Historical . . . . . . . . . . . . . . . . $190 $190 $190 $190
Pro forma adjustments:
Net income from proceeds . . . . . . 109 128 148 171
ESOP . . . . . . . . . . . . . . . . (29) (34) (40) (46)
Stock programs . . . . . . . . . . . (17) (20) (23) (26)
------ ------ ------ ------
Pro forma net income . . . . . . . $253 $264 $275 $289
------ ------ ------ ------
------ ------ ------ ------
Net income per share:
Historical . . . . . . . . . . . . . . . . $0.10 $0.09 $0.07 $0.06
Pro forma adjustments:
Net income from proceeds . . . . . . 0.06 0.06 0.06 0.06
ESOP . . . . . . . . . . . . . . . . (0.02) (0.02) (0.02) (0.02)
Stock programs . . . . . . . . . . . (0.01) (0.01) (0.01) (0.01)
------ ------ ------ ------
Pro forma net income . . . . . . . $0.13 $0.12 $0.10 $0.09
------ ------ ------ ------
------ ------ ------ ------
Stockholders' equity:
Historical. . . . . . . . . . . . . . . . . $17,677 $17,677 $17,677 $17,677
Estimated net conversion proceeds . . . . . 19,742 23,281 26,820 30,960
Less: Common Stock acquired
by ESOP(1) . . . . . . . . . . . . (1,632) (1,920) (2,208) (2,539)
Common Stock acquired
by Stock Programs(2) . . . . . . . (816) (960) (1,104) (1,270)
------ ------ ------ ------
Pro forma stockholders'
equity(2)(3)(4). . . . . . . . . . . $34,971 $38,078 $41,185 $44,828
------- ------- ------- -------
------- ------- ------- -------
Stockholders' equity per share:
Historical. . . . . . . . . . . . . . . . . $8.67 $7.37 $6.40 $5.57
Estimated net conversion proceeds . . . . . 9.68 9.70 9.72 9.75
Less: Common Stock acquired
by ESOP(1) . . . . . . . . . . . . (0.80) (0.80) (0.80) (0.80)
Common Stock acquired
by Stock Programs(2) . . . . . . . (0.40) (0.40) (0.40) (0.40)
------ ------ ------ ------
Pro forma stockholders' equity
per share(2)(3)(4). . . . . . . . . . $17.15 $15.87 $14.92 $14.12
------ ------ ------ ------
------ ------ ------ ------
Purchase price as a percentage of
pro forma stockholders' equity
per share . . . . . . . . . . . . . . 58.31% 63.01% 67.02% 70.82%
Purchase price to pro forma net
earnings per share. . . . . . . . . . . . 12.82x 13.89x 16.67x 18.52x
</TABLE>
(FOOTNOTES ON FOLLOWING PAGE)
33
<PAGE>
- ----------------------
(1) It is assumed that 8% of the shares of Common Stock offered in the
Conversion will be purchased by the ESOP. For purposes of this table, the
funds used to acquire such shares are assumed to have been borrowed by the
ESOP from the Company. The amount borrowed is reflected as a reduction of
stockholders' equity. The Bank intends to make annual contributions to the
ESOP in an amount at least equal to the principal and interest requirement
of the debt. The Bank's total annual payment of the ESOP debt is based
upon twelve equal annual installments of principal and interest with an
assumed annual interest rate of 9.25%. The pro forma net earnings assumes:
(i) that the Bank's contribution to the ESOP is equivalent to the debt
service requirement for the two months ended February 29, 1996, and was
made at the end of the period; (ii) that 2,267, 2,267, 3,067 and 3,527
shares at the minimum, midpoint, maximum and 15% above the maximum of the
range, respectively, were committed to be released during the two months
ended February 29, 1996, at an average fair value of $10.00 per share in
accordance with Statement of Position ("SOP") 93-6; and (iii) only the ESOP
shares committed to be released were considered outstanding for purposes of
the net earnings per share calculations. See "The Board of Directors and
Management of the Bank - Benefits - Employee Stock Ownership Plan and
Trust." Under SOP 93-6, the Company will recognize compensation cost equal
to the fair value of the ESOP shares during the periods in which they
become committed to be released. To the extent that the fair value of the
Bank's ESOP shares differs from the cost of such shares, this differential
will be charged or credited to equity.
(2) Gives effect to the Stock Programs expected to be adopted by the Company
following the Conversion and presented for approval at a meeting of
stockholders. If the Stock Programs are approved by stockholders, the
Stock Programs intend to acquire an amount of Common Stock equal to 4% of
the shares of Common Stock issued in the Conversion, or 81,600, 96,000,
110,400 and 126,960 shares of Common Stock at the minimum, midpoint,
maximum and 15% above the maximum of the Estimated Price Range,
respectively, either through open market purchases, if permissible, or from
authorized but unissued shares of Common Stock or treasury stock of the
Company, if any. Funds used by the Stock Programs to purchase the shares
will be contributed to the Stock Programs by the Bank. In calculating the
pro forma effect of the Stock Programs, it is assumed that the required
stockholder approval has been received, that the shares were acquired by
the Stock Programs at the beginning of the period presented in open market
purchases at the Purchase Price and that 10% of the amount contributed was
an amortized expense during such period. The issuance of authorized but
unissued shares of the Company's Common Stock to the Stock Programs instead
of open market purchases would dilute the voting interests of existing
stockholders by approximately 3.8% and pro forma net earnings per share
would be $0.13, $0.11, $0.10 and $0.09 at the minimum, midpoint, maximum
and 15% above the maximum of the range, respectively, and pro forma
stockholders' equity per share would be $16.87, $15.64, $14.73 and $13.96
at the minimum, midpoint, maximum and 15% above the maximum of the range,
respectively. There can be no assurance that stockholder approval of the
Stock Programs will be obtained, or that the actual purchase price of the
shares will be equal to the Purchase Price. See "The Board of Directors
and Management of the Bank - Benefits - Stock Programs."
(3) No effect has been given to the issuance of additional shares of Common
Stock pursuant to the Stock Option Plans expected to be adopted by the
Company following the Conversion. The Company expects to present the Stock
Option Plans for approval at a meeting of stockholders. If the Stock
Option Plans are approved by stockholders, an amount equal to 10% of the
Common Stock issued in the Conversion, or 204,000, 240,000, 276,000 and
317,400 shares at the minimum, midpoint, maximum and 15% above the maximum
of the Estimated Price Range, respectively, will be reserved for future
issuance upon the exercise of options to be granted under the Stock Option
Plans. The issuance of Common Stock pursuant to the exercise of options
under the Stock Option Plans will result in the dilution of existing
stockholders' interests. Assuming stockholder approval of the Stock Option
Plans and all options were exercised at the end of the period at an
exercise price of $10.00 per share, the pro forma net earnings per share
would be $0.12, $0.11, $0.10 and $0.09, respectively, and the pro forma
stockholders' equity per share would be $16.49, $15.33, $14.47 and $13.74,
respectively. See "The Board of Directors and Management of the Bank -
Benefits - Stock Option Plans."
(4) The retained earnings of the Bank will continue to be substantially
restricted after the Conversion. See "Dividend Policy," "The Conversion -
Liquidation Rights" and "Regulation - Federal Savings Institution
Regulation - Limitation on Capital Distributions."
(5) As adjusted to give effect to an increase in the number of shares which
could occur due to an increase in the Estimated Price Range of up to 15% as
a result of regulatory considerations, changes in market conditions or
general financial and economic conditions following the commencement of the
Subscription and Community Offerings.
34
<PAGE>
<TABLE>
<CAPTION>
AT OR FOR THE YEAR ENDED DECEMBER 31, 1996
------------------------------------------------------------------
2,040,000 2,400,000 2,760,000 3,174,000
SHARES SOLD SHARES SOLD SHARES SOLD SHARES SOLD
AT $10.00 AT $10.00 AT $10.00 AT $10.00
PER SHARE PER SHARE PER SHARE PER SHARE (15%
(MINIMUM (MIDPOINT (MAXIMUM ABOVE MAXIMUM
OF ESTIMATED OF ESTIMATED OF ESTIMATED OF ESTIMATED
PRICE RANGE) PRICE RANGE) PRICE RANGE) PRICE RANGE)(5)
------------ ------------ ------------ ---------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Gross proceeds . . . . . . . . . . . . . . . . $20,400 $24,000 $27,600 $31,740
Less:Offering expenses and
commission . . . . . . . . . . . . . . (658) (719) (780) (780)
------ ------ ------ ------
Estimated net proceeds . . . . . . . . . . . . 19,742 23,281 26,820 30,960
Less: Common Stock acquired by
ESOP . . . . . . . . . . . . . . . . . (1,632) (1,920) (2,208) (2,539)
Common Stock acquired by
Stock Programs . . . . . . . . . . . . (816) (960) (1,104) (1,270)
------ ------ ------ ------
Estimated net proceeds, as adjusted. . . . . $17,294 $20,401 $23,508 $27,151
------- ------- ------- -------
------- ------- ------- -------
Consolidated net earnings:
Historical . . . . . . . . . . . . . . . . . $936 $936 $936 $936
Pro forma adjustments:
Net income from proceeds . . . . . . . . 614 724 835 964
ESOP . . . . . . . . . . . . . . . . . . (176) (207) (238) (274)
Stock programs . . . . . . . . . . . . . (100) (118) (135) (156)
------- ------- ------- -------
Pro forma net income . . . . . . . . . . $ 1,274 $1,335 $1,398 $1,470
------- ------- ------- -------
------- ------- ------- -------
Net earnings per share:
Historical . . . . . . . . . . . . . . . . . $0.50 $0.42 $0.37 $0.32
Pro forma adjustments:
Net income from proceeds . . . . . . . . 0.32 0.32 0.32 0.32
ESOP . . . . . . . . . . . . . . . . . . (0.09) (0.09) (0.09) (0.09)
Stock programs . . . . . . . . . . . . . (0.05) (0.05) (0.05) (0.05)
------- ------- ------- -------
Pro forma net income . . . . . . . . . . $0.68 $0.60 $0.55 $0.50
------- ------- ------- -------
------- ------- ------- -------
Stockholders' equity:
Historical . . . . . . . . . . . . . . . . . $17,533 $17,533 $17,533 $17,533
Estimated net conversion proceeds. . . . . . 19,742 23,281 26,820 30,960
Less: Common Stock acquired
by ESOP(1). . . . . . . . . . . . . (1,632) (1,920) (2,208) (2,539)
Common Stock acquired
by Stock Programs(2). . . . . . . . (816) (960) (1,104) (1,270)
------- ------- ------- -------
Pro forma stockholders'
equity(2)(3)(4) . . . . . . . . . . . $34,827 $37,934 $41,041 $44,684
------- ------- ------- -------
------- ------- ------- -------
Stockholders' equity per share:
Historical . . . . . . . . . . . . . . . . . $8.59 $7.31 $6.35 $5.52
Estimated net conversion proceeds . . . . . 9.68 9.70 9.72 9.75
Less: Common Stock acquired
by ESOP(1). . . . . . . . . . . . . (0.80) (0.80) (0.80) (0.80)
Common Stock acquired
by Stock Programs(2). . . . . . . . (0.40) (0.40) (0.40) (0.40)
------- ------- ------- -------
Pro forma stockholders' equity
per share(2)(3)(4). . . . . . . . . $ 17.07 $15.81 $14.87 $14.07
------- ------- ------- -------
------- ------- ------- -------
Purchase price as a percentage of
pro forma stockholders' equity
per share. . . . . . . . . . . . . . . . 58.58% 63.25% 67.25% 71.07%
Purchase price to pro forma
net earnings per share . . . . . . . . . . . 14.71x 16.67x 18.18x 20.00x
</TABLE>
(FOOTNOTES ON FOLLOWING PAGE)
35
<PAGE>
- ------------------------
(1) It is assumed that 8% of the shares of Common Stock offered in the
Conversion will be purchased by the ESOP. For purposes of this table, the
funds used to acquire such shares are assumed to have been borrowed by the
ESOP from the Company. The amount borrowed is reflected as a reduction of
stockholders' equity. The Bank intends to make annual contributions to the
ESOP in an amount at least equal to the principal and interest requirement
of the debt. The Bank's total annual payment of the ESOP debt is based
upon twelve equal annual installments of principal and interest, with an
assumed annual interest rate of 9.25%. The pro forma net earnings assumes:
(i) that the Bank's contribution to the ESOP is equivalent to the debt
service requirement for the year ended December 31, 1995, and was made at
the end of the period; (ii) that 13,600, 16,000, 18,400 and 21,160 shares
at the minimum, midpoint, maximum and 15% above the maximum of the range,
respectively, were committed to be released during the year ended December
31, 1995, at an average fair value of $10.00 per share in accordance with
Statement of Position ("SOP") 93-6; and (iii) only the ESOP shares
committed to be released were considered outstanding for purposes of the
net earnings per share calculations. See "The Board of Directors and
Management of the Bank - Benefits - Employee Stock Ownership Plan and
Trust." Under SOP 93-6, the Company will recognize compensation cost equal
to the fair value of the ESOP shares during the periods in which they
become committed to be released. To the extent that the fair value of the
Bank's ESOP shares differs from the cost of such shares, this differential
will be charged or credited to equity.
(2) Gives effect to the Stock Programs expected to be adopted by the Company
following the Conversion and presented for approval at a meeting of
stockholders. If the Stock Programs are approved by stockholders, the
Stock Programs intend to acquire an amount of Common Stock equal to 4% of
the shares of Common Stock issued in the Conversion, or 81,600, 96,000,
110,400 and 126,960 shares of Common Stock at the minimum, midpoint,
maximum and 15% above the maximum of the Estimated Price Range,
respectively, either through open market purchases, if permissible, or from
authorized but unissued shares of Common Stock or treasury stock of the
Company, if any. Funds used by the Stock Programs to purchase the shares
will be contributed to the Stock Programs by the Bank. In calculating the
pro forma effect of the Stock Programs, it is assumed that the required
stockholder approval has been received, that the shares were acquired by
the Stock Programs at the beginning of the period presented in open market
purchases at the Purchase Price and that 20% of the amount contributed was
an amortized expense during such period. The issuance of authorized but
unissued shares of the Company's Common Stock to the Stock Programs instead
of open market purchases would dilute the voting interests of existing
stockholders by approximately 3.8% and pro forma net earnings per share
would be $0.67, $0.59, $0.54 and $0.50 at the minimum, midpoint, maximum
and 15% above the maximum of the range, respectively, and pro forma
stockholders' equity per share would be $16.80, $15.58, $14.68 and $13.92
at the minimum, midpoint, maximum and 15% above the maximum of the range,
respectively. There can be no assurance that stockholder approval of the
Stock Programs will be obtained, or that the actual purchase price of the
shares will be equal to the Purchase Price. See "The Board of Directors
and Management of the Bank - Benefits - Stock Programs."
(3) No effect has been given to the issuance of additional shares of Common
Stock pursuant to the Stock Option Plans expected to be adopted by the
Company following the Conversion. The Company expects to present the Stock
Option Plans for approval at a meeting of stockholders. If the Stock
Option Plans are approved by stockholders, an amount equal to 10% of the
Common Stock issued in the Conversion, or 204,000, 240,000, 276,000 and
317,400 shares at the minimum, midpoint, maximum and 15% above the maximum
of the Estimated Price Range, respectively, will be reserved for future
issuance upon the exercise of options to be granted under the Stock Option
Plans. The issuance of Common Stock pursuant to the exercise of options
under the Stock Option Plans will result in the dilution of existing
stockholders' interests. Assuming stockholder approval of the Stock Option
Plans and all options were exercised at the end of the period at an
exercise price of $10.00 per share, the pro forma net earnings per share
would be $0.61, $0.54, $0.50, and $0.45, respectively, and the pro forma
stockholders' equity per share would be $16.43, $15.28, $14.43 and $13.71,
respectively. See "The Board of Directors and Management of the Bank -
Benefits - Stock Option Plans."
(4) The retained earnings of the Bank will continue to be substantially
restricted after the Conversion. See "Dividend Policy," "The Conversion -
Liquidation Rights" and "Regulation - Federal Savings Institution
Regulation - Limitation on Capital Distributions."
(5) As adjusted to give effect to an increase in the number of shares which
could occur due to an increase in the Estimated Price Range of up to 15% as
a result of regulatory considerations, changes in market conditions or
general financial and economic conditions following the commencement of the
Subscription and Community Offerings.
36
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The consolidated condensed operating data presented below is derived in
part from, and should be read in conjunction with, the Consolidated Financial
Statements and related notes of Park Federal Savings Bank presented elsewhere
in the prospectus. The consolidated condensed operating data for the
two-month periods ended February 29, 1996 and February 28, 1995 are derived
from unaudited financial data, but, in the opinion of management reflects all
adjustments (consisting of only normal recurring adjustments) which are
necessary to present fairly the results for such interim periods. The
results of operations for the two months ended February 29, 1996 are not
necessarily indicative of the results of operations that may be expected for
the year ended December 31, 1996.
<TABLE>
<CAPTION>
TWO MONTHS ENDED
--------------------------- YEAR ENDED DECEMBER 31,
FEBRUARY 29, FEBRUARY 28, -------------------------
1996 1995 1995 1994 1993
------------ ------------ ------ ------ ------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Interest income:
Loans receivable........................... $ 955 $ 809 $5,090 $4,889 $6,177
Securities................................. 841 778 4,665 3,972 3,077
------------ ------------ ------ ------ ------
Total interest income.................... 1,796 1,587 9,755 8,861 9,254
Interest expense:
Deposits................................... 1,023 812 5,604 4,531 4,890
Federal Home Loan Bank advances............ 1 75 102 112 --
------------ ------------ ------ ------ ------
Total interest expense................... 1,024 887 5,706 4,643 4,890
------------ ------------ ------ ------ ------
Net interest income.......................... 772 700 4,049 4,218 4,364
Provision for loan losses.................... -- 10 298 48 140
------------ ------------ ------ ------ ------
Net interest income after provision for loan
losses...................................... 772 690 3,751 4,170 4,224
------------ ------------ ------ ------ ------
Noninterest income:
Gain on sale of securities................. -- 14 14 -- 138
Gain on sale of real estate held for
development............................... 11 -- 523 1,114 856
Other operating income..................... 31 17 157 170 229
------------ ------------ ------ ------ ------
Total noninterest income................. 42 31 694 1,284 1,223
Noninterest expense:
Compensation and benefits.................. 302 282 1,782 1,635 1,485
Occupancy and equipment.................... 74 69 361 363 371
Federal deposit insurance premiums......... 55 55 316 317 287
Data processing services................... 23 20 115 104 111
Other operating expense.................... 67 76 522 403 344
------------ ------------ ------ ------ ------
Total noninterest expense................ 521 502 3,096 2,822 2,598
------------ ------------ ------ ------ ------
Income before income taxes................... 293 219 1,349 2,632 2,849
Income taxes................................. 103 55 413 881 1,113(1)
------------ ------------ ------ ------ ------
Net income................................... $ 190 $ 164 $ 936 $1,751 $1,736
------------ ------------ ------ ------ ------
------------ ------------ ------ ------ ------
</TABLE>
- ------------------------
(1) Income taxes for the year ended December 31, 1993 includes a $104,000 charge
due to the cumulative effect of a change in accounting for income taxes.
37
<PAGE>
GENERAL
The Company has only recently been formed and, accordingly, has no results
of operations. The Bank's results of operations are dependent primarily on
net interest income, which is the difference between the interest income
earned on the Bank's interest-earning assets, such as loans and investments,
and the interest expense on its interest-bearing liabilities, such as
deposits and borrowings. The Bank also generates noninterest income such as
income from real estate development activities and other fees. The Bank's
noninterest expenses primarily consist of employee compensation and benefits,
occupancy and equipment expenses, federal deposit insurance premiums and
other operating expenses. The Bank's results of operations are also
significantly affected by general economic and competitive conditions,
particularly changes in market interest rates, government policies and
actions of regulatory agencies. The Bank exceeded all of its regulatory
capital requirements at February 29, 1996. See "Regulatory Capital
Compliance" for a discussion of the historical and pro forma capital of the
Bank and capital requirements. See also "Regulation - Federal Savings
Institution Regulation - Capital Requirements."
MANAGEMENT STRATEGY
Management's primary goal has been to improve profitability and its
capital position, so that the Bank can have greater flexibility in providing
the products and services desired by the customers in the communities it
serves. To accomplish this, the Bank has employed an operating strategy
which has: (1) emphasized the origination of fixed-rate one- to four-family
residential mortgage loans secured by properties located in its primary
market area; (2) sought to enhance net income and manage interest rate risk
by maintaining high liquidity through the purchase of adjustable-rate
mortgage-backed securities and other short- and intermediate-term securities;
(3) concentrated on its asset quality by limiting its commercial real estate
and multi-family lending; (4) enhanced net income by increasing noninterest
income primarily through real estate development; and (5) sought to control
asset growth to a level sustainable by its capital position. The Bank
intends to continue this operating strategy to enhance its long-term
profitability while managing the level of interest rate risk. In addition,
the Bank is attempting to increase the level of the Bank's core and
longer-term deposits through marketing efforts and by expanding its deposit
products and services. As part of its marketing strategy and its attempt to
increase its deposit base, the Bank has added two ATMs and has plans to
install a third ATM. The Bank may also consider opening additional branches
in its primary market area. See "Use of Proceeds."
MANAGEMENT OF INTEREST RATE RISK
The principal objective of the Bank's interest rate risk management
function is to evaluate the interest rate risk included in certain balance
sheet accounts, determine the level of risk appropriate given the Bank's
business focus, operating environment, capital and liquidity requirements and
performance objectives, and manage the risk consistent with Board approved
guidelines. Through such management, the Bank seeks to reduce the
vulnerability of its operations to changes in interest rates. The Bank
monitors its interest rate risk as such risk relates to its operating
strategies. The Bank's executive committee meets regularly and reviews the
Bank's interest rate risk position and makes recommendations for adjusting
such position. In addition, the Bank's Board of Directors reviews on a
quarterly basis the Bank's asset/liability position, including simulations of
the effect on the Bank's capital of various interest rate scenarios.
Historically, the Bank has emphasized the origination of fixed-rate
residential mortgage loans as a result of market conditions and consumer
preference for such loans in its primary market area. At February 29, 1996,
fixed-rate mortgage loans totalled $54.2 million, or 89.0% of total gross
loans. Management believes that investing in fixed-rate mortgage loans
results in a higher net interest margin
38
<PAGE>
than investment in adjustable-rate mortgage loans. However, investment in
fixed-rate mortgage loans generally results in increased interest rate risk
as such loans generally do not reprice as quickly as adjustable-rate mortgage
loans during periods of rising interest rates. Management of the Bank seeks
to limit interest rate risk by maintaining high liquidity through the
purchase of adjustable-rate mortgage-backed securities and other short and
intermediate-term securities. At February 29, 1996, adjustable-rate
mortgage-backed securities and other securities totalled $76.0 million or
50.9% of total assets.
NET PORTFOLIO VALUE. The Bank's interest rate sensitivity is monitored
by management through the use of a model which estimates the change in net
portfolio value ("NPV") over a range of interest rate scenarios. NPV is the
present value of expected cash flows from assets, liabilities and off-balance
sheet contracts. An NPV Ratio, in any interest rate scenario, is defined as
the NPV in that scenario divided by the market value of assets in the same
scenario. The Sensitivity Measure is the decline in the NPV Ratio, in basis
points, caused by a 2% increase or decrease in rates, whichever produces a
larger decline. The higher an institution's Sensitivity Measure is, the
greater its exposure to interest rate risk is considered to be. The Bank
utilizes a market value model prepared by the OTS (the "OTS NPV model"),
which is prepared quarterly, based on the Bank's quarterly Thrift Financial
Reports filed with the OTS. The OTS NPV model measures the Bank's interest
rate risk by approximating the Bank's NPV, which is the net present value of
expected cash flows from assets, liabilities and any off-balance sheet
contracts, under various market interest rate scenarios which range from a
400 basis point increase to a 400 basis point decrease in market interest
rates. The interest rate risk policy of the Bank provides that the maximum
permissible change at a 400 basis point increase or decrease in market
interest rates is a 90% change in the net portfolio value. The OTS has
incorporated an interest rate risk component into its regulatory capital
rule. Under the rule, an institution whose sensitivity measure exceeds 2%
would be required to deduct an interest rate risk component in calculating
its total capital for purpose of the risk-based capital requirement. See
"Regulation - Federal Savings Institution Regulation." As of December 31,
1995, the most recent date for which the relevant data is available, the
Bank's sensitivity measure, as measured by the OTS, resulting from a 200
basis point increase in interest rates was (.71)% and would result in a $1.5
million reduction in the NPV of the Bank. Accordingly, increases in interest
rates would be expected to have a negative impact on the Bank's operating
results and decreases in interest rates would be expected to have a positive
impact on the Bank's operating results. The NPV Ratio sensitivity measure is
below the threshold at which the Bank could be required to hold additional
risk-based capital under OTS regulations. See "Regulation - Federal Savings
Institution Regulation."
Certain shortcomings are inherent in the methodology used in the above
interest rate risk measurements. Modeling changes in NPV requires the making
of certain assumptions that may tend to oversimplify the manner in which
actual yields and costs respond to changes in market interest rates. First,
the models assume that the composition of the Bank's interest sensitive
assets and liabilities existing at the beginning of a period remains constant
over the period being measured. Second, the models assume that a particular
change in interest rates is reflected uniformly across the yield curve
regardless of the duration to maturity or repricing of specific assets and
liabilities. Third, the model does not take into account the impact of the
Bank's business or strategic plans on the structure of interest-earning
assets and interest-bearing liabilities. Accordingly, although the NPV
measurement provides an indication of the Bank's interest rate risk exposure
at a particular point in time, such measurement is not intended to and does
not provide a precise forecast of the effect of changes in market interest
rates on the Bank's net interest income and will differ from actual results.
The results of this modeling are monitored by management and presented to the
Board of Directors, quarterly.
39
<PAGE>
The following table shows the NPV and projected change in the NPV of the
Bank at December 31, 1995 assuming an instantaneous and sustained change in
market interest rates of 100, 200, 300 and 400 basis points.
INTEREST RATE SENSITIVITY OF NET PORTFOLIO VALUE (NPV)
<TABLE>
<CAPTION>
NET PORTFOLIO VALUE NPV AS % OF PV OF ASSETS
---------------------------------- ------------------------
CHANGE IN RATES $ AMOUNT $ CHANGE % CHANGE NPV RATIO CHANGE
- --------------- -------- -------- -------- --------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
+ 400 bp $16,462 $(3,859) (19)% 10.58% - 189 bp
+ 300 bp 17,647 (2,674) (13) 11.20 - 127 bp
+ 200 bp 18,775 (1,546) (8) 11.76 - 71 bp
+ 100 bp 19,714 (607) (3) 12.21 - 26 bp
0 bp 20,321 - - 12.47 0 bp
- 100 bp 20,845 523 3 12.68 + 21 bp
- 200 bp 21,163 841 4 12.77 + 30 bp
- 300 bp 21,734 1,413 7 12.99 + 52 bp
- 400 bp 22,648 2,327 11 13.38 + 91 bp
</TABLE>
40
<PAGE>
AVERAGE BALANCE SHEETS. The following table sets forth certain
information relating to the Bank at February 29, 1996, and for the two months
ended February 29, 1996 and February 28, 1995 and the years ended December
31, 1995, 1994 and 1993. The yields and costs are derived by dividing income
or expense by the average balance of assets or liabilities, respectively, for
the periods shown. Average balances are derived from average month-end
balances. Management does not believe that the use of average monthly
balances instead of average daily balances has caused any material
differences in the information presented. Average balances of loans
receivable include loans on which the Bank has discontinued accruing
interest. The yields and costs include fees which are considered adjustments
to yields.
<TABLE>
<CAPTION> TWO MONTHS ENDED
-----------------------------------------------------------
AT FEBRUARY 29,
1996 FEBRUARY 29, 1996 FEBRUARY 28, 1995
---------------- ---------------------------- ----------------------------
AVERAGE AVERAGE
YIELD/ AVERAGE YIELD/ AVERAGE YIELD/
BALANCE COST BALANCE INTEREST COST BALANCE INTEREST COST
-------- ------ -------- -------- ------- -------- -------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS:
Interest-earning assets:
Interest-earning deposits and other
investments.................................. $ 7,987 5.78% $ 5,507 $ 39 4.25% $ 1,576 $ 12 4.57%
Securities, net(1)............................ 55,093 5.97 56,669 569 6.02 60,851 592 5.84
Loans receivable, net(2)...................... 58,944 8.21 59,511 955 9.63 56,876 809 8.53
Mortgage-backed securities, net(1)............ 20,946 6.62 21,437 233 6.52 18,502 174 5.64
-------- -------- -------- -------- --------
Total interest-earning assets............... 142,970 6.98 143,124 1,796 7.53 137,805 1,587 6.91
-------- --------
Non-interest-earning assets................... 6,417 9,434 4,981
-------- -------- --------
Total assets $149,387 $152,558 $142,786
-------- -------- --------
-------- -------- --------
LIABILITIES AND EQUITY:
Interest-bearing liabilities:
Passbook savings accounts..................... $ 34,573 2.78 $ 34,586 157 2.72 $ 38,569 193 3.00
Money market accounts......................... 4,168 3.35 4,114 23 3.35 3,818 22 3.46
NOW accounts.................................. 6,758 2.02 5,709 17 1.79 5,177 16 1.85
Certificate accounts.......................... 83,810 5.86 84,238 826 5.88 69,255 581 5.03
-------- -------- -------- -------- --------
Total....................................... 129,309 4.78 128,647 1,023 4.77 116,819 812 4.17
FHLB advances................................. -- -- 150 1 4.00 7,333 75 6.14
-------- -------- -------- -------- --------
Total interest-bearing liabilities.......... 129,309 4.78 128,797 1,024 4.77 124,152 887 4.29
-------- --------
Non-interest-bearing liabilities................ 2,401 6,141 2,143
-------- -------- -------
Total liabilities........................... 131,710 134,938 126,295
Equity.......................................... 17,677 17,620 16,491
-------- -------- -------
Total liabilities
and equity................................. $149,387 $152,558 $142,786
-------- -------- --------
-------- -------- --------
Net interest income before provision for loan
losses........................................... $ 772 $ 700
-------- --------
-------- --------
Net interest rate spread(3)....................... 2.76% 2.62%
----- -----
----- -----
Net interest margin(4)............................ 3.24% 3.05%
----- -----
----- -----
Ratio of interest-earning assets to
interest-bearing liabilities..................... 110.56% 111.12% 111.00%
------- ------- -------
------- ------- -------
</TABLE>
- ------------------------
(1) Includes related assets available-for-sale and unamortized discounts and
premiums and certificates of deposit.
(2) Amount is net of deferred loan origination fees, undisbursed loan funds,
unamortized discounts and allowance for estimated loan losses and includes
loans held for sale and non-performing loans. See "Business of the Bank -
Lending Activities."
(3) Net interest rate spread represents the difference between the yield on
interest-earning assets and the cost of interest-bearing liabilities.
(4) Net interest margin represents net interest income divided by average
interest-earning assets.
41
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------------------------------------------------
1995 1994 1993
---------------------------- ---------------------------- ----------------------------
AVERAGE AVERAGE AVERAGE
AVERAGE YIELD/ AVERAGE YIELD/ AVERAGE YIELD/
BALANCE INTEREST COST BALANCE INTEREST COST BALANCE INTEREST COST
-------- -------- ------- -------- -------- ------- -------- -------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS:
Interest-earning assets:
Interest-earning deposits and other
investments....................... $ 6,971 $ 361 5.18% $ 5,210 $ 178 3.42% $ 8,257 $ 245 2.97%
Securities, net(1)................. 55,390 3,175 5.73 56,100 2,964 5.28 38,840 2,020 5.20
Loans receivable,(2)............... 58,830 5,090 8.65 55,166 4,889 8.86 63,405 6,177 9.74
Mortgage-backed securities,
net(1)............................ 18,560 1,129 6.08 17,410 830 4.77 16,536 812 4.91
-------- -------- -------- -------- -------- --------
Total interest-earning assets.... 139,751 9,755 6.98 133,886 8,861 6.62 127,038 9,254 7.28
-------- -------- --------
Non-interest-earning assets.......... 4,418 5,650 9,435
-------- -------- -------
Total assets..................... $144,169 $139,536 $136,473
-------- -------- -------
-------- -------- -------
LIABILITIES AND EQUITY:
Interest-bearing liabilities:
Passbook accounts.................. $ 36,761 1,059 2.88% $ 40,787 1,124 2.76% $ 40,835 1,211 2.97%
Money market savings accounts...... 3,656 120 3.28 4,569 127 2.78 5,046 149 2.95
NOW accounts....................... 5,336 103 1.93 5,536 103 1.86 4,998 100 2.00
Certificate accounts............... 75,640 4,322 5.71 68,186 3,177 4.66 69,646 3,430 4.92
-------- -------- -------- -------- -------- --------
Total............................ 121,393 5,604 4.62 119,078 4,531 3.81 120,525 4,890 4.06
FHLB advances...................... 2,692 102 3.79 2,539 112 4.41 - - -
-------- -------- -------- -------- -------- --------
Total interest-
bearing liabilities............. 124,085 5,706 4.60 121,617 4,643 3.82 120,525 4,890 4.06
-------- -------- --------
-------- -------- --------
Non-interest-bearing liabilities... 3,038 2,213 2,085
-------- -------- -------
Total liabilities................ 127,123 123,830 122,610
Equity............................... 17,046 15,706 13,863
-------- -------- -------
Total liabilities and equity..... $144,169 $139,536 $136,473
-------- -------- -------
-------- -------- -------
Net interest income before provision
for estimated loan losses........... $ 4,049 $ 4,218 $ 4,364
-------- ------- --------
-------- ------- --------
Net interest rate spread(3).......... 2.38% 2.80% 3.22%
----- ----- -----
----- ----- -----
Net interest margin(4)............... 2.90 3.15 3.44
----- ----- -----
----- ----- -----
Ratio of interest-earning assets to
interest-bearing liabilities........ 112.63% 110.09% 105.40%
------- -------- -------
------- -------- -------
</TABLE>
- ------------------------
(1) Includes related assets available for sale and unamortized discounts and
premiums and certificates of deposit.
(2) Amount is net of deferred loan origination fees, undisbursed loan funds,
unamortized discounts and allowance for estimated loan losses and includes
loans held for sale and non-performing loans. See "Business of the Bank -
Lending Activities."
(3) Net interest rate spread represents the difference between the yield on
interest-earning assets and the cost of interest-bearing liabilities.
(4) Net interest margin represents net interest income divided by average
interest-earning assets.
42
<PAGE>
RATE/VOLUME ANALYSIS. The following table presents the extent to which
changes in interest rates and changes in the volume of interest-earning
assets and interest-bearing liabilities have affected the Bank's interest
income and interest expense during the periods indicated. Information is
provided in each category with respect to: (i) changes attributable to
changes in volume (changes in volume multiplied by prior rate); (ii) changes
attributable to changes in rate (changes in rate multiplied by prior volume);
and (iii) the net change. The changes attributable to the combined impact of
volume and rate have been allocated proportionately to the changes due to
volume and the changes due to rate.
<TABLE>
<CAPTION>
TWO MONTHS ENDED
FEBRUARY 29, 1996
COMPARED TO YEAR ENDED DECEMBER 31, 1995 YEAR ENDED DECEMBER 31, 1994
TWO MONTHS ENDED COMPARED TO COMPARED TO
FEBRUARY 28, 1995 YEAR ENDED DECEMBER 31, 1994 YEAR ENDED DECEMBER 31, 1993
--------------------------- ---------------------------- ----------------------------
INCREASE (DECREASE) INCREASE (DECREASE) INCREASE (DECREASE)
DUE TO DUE TO DUE TO
------------------- ------------------- -------------------
VOLUME RATE NET VOLUME RATE NET VOLUME RATE NET
-------- ------ ----- -------- ------ ------ -------- ------ ------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS:
Interest-earning deposits and
other investments . . . . . . . . . . $ 33 $ (6) $ 27 $ 72 $ 111 $ 183 $(100) $ 33 $ (67)
Securities, net(1) . . . . . . . . . . (42) 19 (23) (38) 249 211 911 33 944
Loans receivable, net . . . . . . . . . 39 107 146 319 (118) 201 (760) (528) (1,288)
Mortgage-backed securities, net(1). . . 30 29 59 58 241 299 42 (24) 18
---- ---- ---- ----- ----- ------ ----- ----- ------
Total interest-earning assets . . . . 60 149 209 411 483 894 93 (486) (393)
---- ---- ---- ----- ----- ------ ----- ----- ------
Interest-bearing liabilities:
Passbook savings accounts . . . . . . . (19) (17) (36) (114) 49 (65) (1) (86) (87)
Money market accounts . . . . . . . . . 2 (1) 1 (28) 21 (7) (14) (8) (22)
NOW accounts. . . . . . . . . . . . . . 2 (1) 1 (4) 4 -- 10 (7) 3
Certificate accounts. . . . . . . . . . 138 107 245 373 772 1,145 (71) (182) (253)
FHLB advances . . . . . . . . . . . . . (55) (19) (74) 6 (16) (10) 112 -- 112
---- ---- ---- ----- ----- ------ ----- ----- ------
Total interest-bearing liabilities. . 68 69 137 233 830 1,063 36 (283) (247)
---- ---- ---- ----- ----- ------ ----- ----- ------
Change in net interest income. . . . . . . $ (8) $ 80 $ 72 $ 178 $(347) $ (169) $ 57 $(203) $(146)
---- ---- ---- ----- ----- ------ ----- ----- ------
---- ---- ---- ----- ----- ------ ----- ----- ------
</TABLE>
- -----------------
(1) Includes assets available-for-sale.
43
<PAGE>
COMPARISON OF OPERATING RESULTS FOR THE TWO MONTHS ENDED FEBRUARY 29, 1996
AND FEBRUARY 28, 1995
GENERAL
Net earnings for the two months ended February 29, 1996 were $190,000, an
increase of $26,000, or 15.9%, from net earnings of $164,000 for the two
months ended February 28, 1995. The increase in net earnings resulted
primarily from a $209,000, or 13.2%, increase in interest income. The Bank's
average net interest margin increased from 3.05% for the two months ended
February 28, 1995 to 3.24% for the two months ended February 29, 1996,
resulting in a $72,000 increase in net interest income. The increase in net
interest income was partially offset by a $19,000 increase in noninterest
expense from $502,000 for the two months ended February 28, 1995 to $521,000
for the two months ended February 29, 1996. Operating results for the two
months ended February 29, 1996 were impacted by a $48,000 increase in income
tax expense from the same period in 1995. The Bank's return on average
assets increased from .69% for the two months ended February 28, 1995 to .75%
for the two months ended February 29, 1996.
INTEREST INCOME
Interest income for the two months ended February 29, 1996 was $1.8
million compared to $1.6 million for the two months ended February 28, 1995,
an increase of $209,000, or 13.2%. The increase in interest income was the
result of an increase in average interest-earning assets from $137.8 million
for the two months ended February 28, 1995 to $143.1 million for the two
months ended February 29, 1996. The increase in average interest-earning
assets was the result of a $6.8 million increase in the average balance of
interest-earning deposits and other investments coupled with a $3.9 million
increase in the average balance of loans receivable. These increases reflect
the Bank's investment of proceeds received from an increase in the average
balance of interest bearing liabilities, as discussed below, and the
repayment of maturing securities. During the two months ended February 29,
1996, the average yield on loans receivable increased 110 basis points from
8.53% for the two months ended February 28, 1995 to 9.63% for the two months
ended February 29, 1996. The increase in yield was due in large measure to
the return of several non-accrual loans to accrual status in early 1996 as
they were brought current as to principal and interest by the borrowers. The
average yield on the investment and mortgage-backed securities portfolio
increased 37 basis points from 5.79% for the two months ended February 28,
1995 to 6.16% for the two months ended February 29, 1996. The increase in
yield on securities was due to the repricing of adjustable-rate
mortgage-backed securities, the purchase of higher yielding securities in
1995 and 1996, and the paydown of older, lower yielding securities.
INTEREST EXPENSE
Interest expense for the two months ended February 29, 1996 was $1.0
million compared to $887,000 for the two months ended February 28, 1995, an
increase of $137,000, or 15.4%. The increase in interest expense was due in
part to the increase of $4.6 million in the average balance of
interest-bearing liabilities from $124.2 million for the two months ended
February 28, 1995 to $128.8 million for the two months ended February 29,
1996. The increase in interest expense also reflects the higher interest
rate environment, as the average cost of interest-bearing liabilities
increased 48 basis points from 4.29% for the two months ended February 28,
1995 to 4.77% for the two months ended February 29, 1996. The increase in
average interest-bearing liabilities was primarily due to the $14.9 million
increase in the average balance of certificate accounts from $69.3 million
for the two months ended February 28, 1995 to $84.2 million for the two
months ended February 29, 1996. The increase in the average balance of
certificate accounts reflects the increased customer demand arising from
higher interest rates paid by the
44
<PAGE>
Bank on these accounts, in response to higher market rates. The average
cost of funds for certificate accounts increased 85 basis points from 5.03%
for the two months ended February 28, 1995 to 5.88% for the two months ended
February 29, 1996, resulting in an increase in the overall average cost of
funds.
PROVISION FOR LOAN LOSSES
The Bank's provision for loan losses on loans for the two months ended
February 29, 1996 was zero compared to $10,000 for the two months ended
February 28, 1995. The decrease in the provision for losses on loans was due
to a decline in past due and problem loans. The amount of the provision and
allowance for estimated losses on loans is influenced by current economic
conditions, actual loss experience, industry trends and other factors, such
as the adverse economic conditions, including declining real estate values,
in the Bank's market area. In addition, various regulatory agencies, as an
integral part of their examination process, periodically review the Bank's
allowance for estimated losses on loans. Such agencies may require the Bank
to provide additions to the allowance based upon judgments which differ from
those of management. Although management uses the best information
available, future adjustments to the allowance may be necessary due to
economic, operating, regulatory and other conditions that may be beyond the
Bank's control. See "Business of the Bank -- Lending Activities --
Delinquencies and Classified Assets" and "-- Lending Activities -- Allowance
for Estimated Losses on Loans."
NONINTEREST INCOME
Noninterest income for the two months ended February 29, 1996 was
$42,000 compared to $31,000 for the two months ended February 28, 1995, an
increase of $11,000, or 35.5%. Deposit fees and charges for the two months
ended February 29, 1996 increased to $22,000 or 144.4%, from $9,000 for the
two months ended February 28, 1995 due to the increased level of deposits in
1996. Gains on the sale of real estate held for development increased
$11,000 during the two months ended February 29, 1996. During the two months
ended February 29, 1996, the Bank sold one lot of the remaining Rose Hill
lots, leaving 8 lots (out of a total of 259 single family and 125 townhouse
lots) unsold at February 29, 1996. In addition, the Bank continued its
development activities at the Prairie Ridge Venture, with sales anticipated
to begin in the third quarter of 1996. It is planned that the Prairie Ridge
Venture will consist of 88 single family lots, to be developed and sold over
three years, beginning in 1996. Management anticipates lower levels of real
estate gains in 1996 due to the development period and smaller size of the
Prairie Ridge project. Gains on sales of real estate held for development are
reported net of all related costs, except for certain insignificant general
and administrative costs incurred by the Bank.
NONINTEREST EXPENSE
Noninterest expense was $521,000 for the two months ended February 29,
1996 compared to $502,000 for the two months ended February 28, 1995, a
$19,000, or 3.8%, increase. Compensation and benefits expense was $302,000
for the two months ended February 29, 1996 compared to $282,000 for the two
months ended February 28, 1995, a $20,000, or 7.1%, increase. The ratio of
noninterest expense to average assets was 2.05% for the two months ended
February 29, 1996 compared to 2.11% for the two months ended February 28,
1995.
INCOME TAXES
Income taxes were $103,000 for the two months ended February 29, 1996
compared to $55,000 for the two months ended February 28, 1995, an increase
of $48,000, or 87.3%. This increase was primarily the result of the $73,000,
or 33.2%, increase in earnings before income taxes from $220,000 for the two
months ended February 28, 1995 to $293,000 for the two months ended February
29, 1996 and
45
<PAGE>
the realization of state income tax refunds in 1995. See Note 11 of the
Notes to the Consolidated Financial Statements for additional information on
the Bank's income taxes.
COMPARISON OF FINANCIAL CONDITION AT FEBRUARY 29, 1996 AND DECEMBER 31, 1995
Total assets at February 29, 1996 were $149.4 million compared to $158.9
million at December 31, 1995, a decrease of $9.5 million. The Bank decreased
the amount of net loans receivable by $1.6 million from $60.5 million at
December 31, 1995 to $58.9 million at February 29, 1996 and cash and cash
equivalents by $4.6 million from $12.8 million at December 31, 1995 to $8.2
million at February 29, 1996, primarily due to the repayment of Federal Home
Loan Bank advances.
Total liabilities at February 29, 1996 were $131.7 million compared to
$141.4 million at December 31, 1995, a decrease of $9.7 million. Total
deposit accounts of the Bank decreased by $1.2 million from $130.5 million at
December 31, 1995 to $129.3 million at February 29, 1996 due principally to a
decrease in certificate accounts. Federal Home Loan Bank advances of $9
million at December 31, 1995 were repaid during the two months ended February
29, 1996.
Equity at February 29, 1996 was $17.7 million compared to $17.5 million
at December 31, 1995, an increase of $144,000 or .82%.
COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED DECEMBER 31, 1995 AND
DECEMBER 31, 1994
GENERAL
Net income for the year ended December 31, 1995 was $936,000 compared to
$1.8 million for the year ended December 31, 1994. The operating results
were primarily affected by the decrease in the average interest rate spread
from 2.80% for the year ended December 31, 1994 to 2.38% for the year ended
December 31, 1995 resulting from the differing impact of the change in the
interest rate environment on the Bank's assets and liabilities coupled with
changes in the composition of the Bank's deposits. Gains on the sale of real
estate held for development declined to $523,000 for the year ended December
31, 1995 compared to $1.1 million for the same period in 1994 as the Bank's
Rose Hill Venture neared completion. Net interest income was $4.0 million
for the year ended December 31, 1995 compared to $4.2 million for the year
ended December 31, 1994. The reduction in net interest income was
accompanied by a $250,000 increase in the provision for loan losses on loans
from $48,000 for the year ended December 31, 1994 to $298,000 for the year
ended December 31, 1995. The provision for losses on loans for the year
ended December 31, 1995 reflects an increase in non-accrual loans in 1995 and
other factors.
INTEREST INCOME
Interest income for the year ended December 31, 1995 was $9.8 million
compared to $8.9 million for the year ended December 31, 1994, an increase of
$894,000 or 10.0%. The increase in interest income was primarily due to a 36
basis point increase in the average yield on interest-earning assets from
6.62% for the year ended December 31, 1994 to 6.98% for the year ended
December 31, 1995. A contributing factor in the increase in interest income
was a $5.9 million increase in average interest-earning assets. The increase
in average interest-earning assets during the year ended December 31, 1995
was primarily due to a $3.6 million increase in the average balance of loans
receivable from $55.2 million for the year ended December 31, 1994 to $58.8
million for the year ended December 31, 1995. Although average loans
receivable increased in 1995, which was the result of planned growth of the
loan portfolio, the average yield on loans declined by 21 basis points from
8.86% for the year ended December 31, 1994 to
46
<PAGE>
8.65% for the year ended December 31, 1995. This decrease in average yield
was primarily due to the general decline in mortgage rates in 1995 as
compared to 1994. See "Business of the Bank -- Lending Activities."
Non-performing assets increased from $738,000 at December 31, 1994 to
$967,000 at December 31, 1995 reflecting an increase in non-performing
commercial real estate loans. Investment and mortgage-backed securities
income increased by $510,000 due primarily to a 66 basis point increase in
the average yield from 5.16% to 5.82% for the year ended December 31, 1995
resulting from the repricing of mortgage-backed securities and the purchase
of higher-yielding securities.
INTEREST EXPENSE
Interest expense for the year ended December 31, 1995 was $5.7 million
compared to $4.6 million for the year ended December 31, 1994, an increase of
$1.1 million or 23.9%. The increase in interest expense was due primarily to
an increase in the average cost of interest-bearing liabilities from 3.82%
for the year ended December 31, 1994 to 4.60% for the year ended December 31,
1995 due to a change in the composition of the Bank's deposit accounts. Due
to the change in the interest rate environment and the change in the
composition of deposit accounts, the average cost of funds for deposit
accounts increased from 3.81% for the year ended December 31, 1994 to 4.62%
for the year ended December 31, 1995.
PROVISION FOR LOAN LOSSES
During the year ended December 31, 1995, the Bank's provision for losses
on loans was $298,000, compared to $48,000 for the year ended December 31,
1994. The provision for losses on loans reflects an increase in
non-performing assets in 1995 and management's evaluation of the credit risk
inherent in the loan portfolio. As a result, during the year ended December
31, 1995, the allowance for estimated losses on loans increased from $275,000
at December 31, 1994 to $573,000 at December 31, 1995. See "Business of the
Bank -- Lending Activities -- Delinquencies and Classified Assets" and "--
Lending Activities -- Allowance for Estimated Losses on Loans."
NONINTEREST INCOME
Noninterest income for the year ended December 31, 1995 was $694,000
compared to $1.3 million for the year ended December 31, 1994, a decrease of
$606,000 or 46.6%. The decrease was primarily due to a $591,000 decline in
gains from the sale of real estate held for development from $1.1 million for
1994 to $523,000 in 1995 as the Bank's Rose Hill Venture neared completion.
During 1995, 10 single family and 60 townhouse lots in the Rose Hill Venture
were sold, as compared to a total of 72 single family and 65 townhouse lot
sales in 1994. Gains on sales of real estate held for development are
reported net of all related costs, except for certain insignificant general
and administrative costs incurred by the Bank.
NONINTEREST EXPENSE
Noninterest expense for the year ended December 31, 1995 was $3.1
million compared to $2.8 million for the year ended December 31, 1994, an
increase of $274,000 or 9.8%. This increase was primarily due to a $147,000
increase in compensation expense resulting from normal pay increases and a
$93,000 increase in advertising expense related to the Bank's name change in
1995.
INCOME TAXES
Income tax expense was $413,000 for the year ended December 31, 1995
compared to $881,000 for the year ended December 31, 1994. The decrease in
income tax expense was primarily the result of
47
<PAGE>
the decrease in income before income taxes from $2.6 million for the year
ended December 31, 1994 to $1.3 million for the year ended December 31, 1995,
and the realization of a state income tax refund in 1995. See Note 11 of the
Notes to the Consolidated Financial Statements for additional information on
the Bank's income taxes.
COMPARISON OF FINANCIAL CONDITION AT DECEMBER 31, 1995 AND DECEMBER 31, 1994
Total assets at December 31, 1995 were $158.9 million compared to $144.8
million at December 31, 1994, an increase of $14.1 million or 9.7%. The Bank
increased the amount of net loans receivable by $3.9 million, from $56.6
million at December 31, 1994 to $60.5 million at December 31, 1995, primarily
due to lower levels of mortgage interest rates in 1995, which spurred
increased customer demand. The Bank also increased the amount of cash and
cash equivalents from $2.6 million at December 31, 1994 to $12.8 million at
December 31, 1995.
Total liabilities at December 31, 1995 were $141.4 million compared to
$128.4 million at December 31, 1994, an increase of $13.0 million. Total
deposit accounts of the Bank increased by $12.0 million from $118.5 million
at December 31, 1994 to $130.5 million at December 31, 1995 due to higher
rates paid to meet rates offered by competitors.
Equity at December 31, 1995 was $17.5 million compared to $16.4 million
at December 31, 1994, an increase of $1.1 million, or 6.7%, reflecting income
of $936,000 for the year ended December 31, 1995 and a change of $184,000 in
unrealized gains on investment securities available for sale, pursuant to the
provisions of SFAS No. 115.
COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED DECEMBER 31, 1994 AND
DECEMBER 31, 1993
GENERAL
The Bank reported net income for the year ended December 31, 1994 of
$1.8 million compared to net income of $1.7 million for the year ended
December 31, 1993. The fiscal 1994 operating results were influenced by a
decrease in net interest income offset by a lower provision for loan losses
and the impact of adopting SFAS No. 109 in 1993. Operating results for the
year ended December 31, 1994 were also negatively influenced by a more rapid
decline in the average yield on interest-earning assets than in the average
cost of interest-bearing liabilities, which produced an average net interest
rate spread during the year ended December 31, 1994 of 2.80% compared to
3.22% for the year ended December 31, 1993. Net interest income was $4.2
million for the year ended December 31, 1994, a $145,000 decrease from $4.4
million for the year ended December 31, 1993.
INTEREST INCOME
Interest income for the year ended December 31, 1994 was $8.9 million
compared to $9.3 million for the year ended December 31, 1993, a decrease of
$393,000 or 4.2%. The decrease in interest income was caused primarily by a
66 basis point decline in the average yield on interest-earning assets from
7.28% for the year ended December 31, 1993 to 6.62% for the year ended
December 31, 1994. Partially mitigating the decrease in interest income from
lower rates was a $6.9 million increase in average interest-earning assets
from $127.0 million for the year ended December 31, 1993 to $133.9 million
for the year ended December 31, 1994. The increase in average
interest-earning assets in fiscal 1994 was primarily due to a $18.1 million
increase in the average balance of investment and mortgage-backed securities
from $55.4 million for the year ended December 31, 1993 to $73.5 million for
the year ended December 31, 1994, partially offset by a $8.2 million decrease
in the average balance of loans receivable from $63.4
48
<PAGE>
million for the year ended December 31, 1993 to $55.2 million for the year
ended December 31, 1994. The increase in the average balance of securities
resulted from the investment of cash and cash equivalents in higher yielding
instruments, as well as investment of funds resulting from a decline in the
average balance of loans outstanding. The decline in the average balance of
loans reflected the continued high level of loan repayments in 1994. The
average yield on loans receivable decreased from 9.74% for the year ended
December 31, 1993 to 8.86% for the year ended December 31, 1994, due
primarily to higher yielding loans being prepaid and replaced by loans
originated at lower prevailing rates. The average yield on investment and
mortgage-backed securities increased from 5.11% for the year ended December
31, 1993 to 5.16% for the year ended December 31, 1994 reflecting higher
prevailing market rates in 1994.
INTEREST EXPENSE
Interest expense for the year ended December 31, 1994 was $4.6 million
compared to $4.9 million for the year ended December 31, 1993, a decrease of
$247,000 or 5.1%. The decrease in interest expense was due to a 24 basis
point decline in the average rate paid on interest-bearing liabilities from
4.06% for the year ended December 31, 1993 to 3.82% for the year ended
December 31, 1994. Partially mitigating the decrease in interest expense
from lower rates was a $1.1 million increase in average interest-bearing
liabilities from $120.5 million for the year ended December 31, 1993 to
$121.6 million for the year ended December 31, 1994. Due to the change in
the interest rate environment, the average cost of funds for deposit accounts
decreased from 4.06% for the year ended December 31, 1993 to 3.81% for the
year ended December 31, 1994.
PROVISION FOR LOAN LOSSES
The Bank's provision for losses on loans for the year ended December 31,
1994 was $48,000 compared to $140,000 for the year ended December 31, 1993, a
decrease of $92,000. The provision for losses on loans decreased from the
year ended December 31, 1993 to December 31, 1994 primarily to reflect the
reduced risk associated with a smaller loan portfolio as well as a lower
level of charge-offs in 1994. See "Business of the Bank --Lending Activities
- -- Delinquencies and Classified Assets" and "-- Lending Activities --
Allowance for Losses on Loans."
NONINTEREST INCOME
Noninterest income for the year ended December 31, 1994 was $1.3 million
compared to $1.2 million for the year ended December 31, 1993, an increase of
$61,000 or 5.1%. The increase was due principally to an increase in gains on
the sale of real estate held for development as the Rose Hill Venture reached
its most active stage. A total of 72 single family and 65 townhouse lots in
the Rose Hill Venture were sold in 1994, as compared to 65 single family lots
in 1993. Accordingly, gains from the sale of real estate held for
development totalled $1.1 million in 1994 as compared to $856,000 in 1993.
Gains on sales of real estate held for development are reported net of all
related costs, except for certain insignificant general and administrative
costs incurred by the Bank.
NONINTEREST EXPENSE
Noninterest expense for the year ended December 31, 1994 was $2.8
million compared to $2.6 million for the year ended December 31, 1993, an
increase of $224,000 or 8.6%. The increase was principally due to a $150,000
increase in compensation and benefits expense from $1.5 million for the year
ended December 31, 1993 to $1.6 million for the year ended December 31, 1994
due to normal pay increases.
49
<PAGE>
INCOME TAXES
Income tax expense was $881,000 for the year ended December 31, 1994
compared to $1.0 million for the year ended December 31, 1993. The change in
income taxes was primarily the result of a decline in income before income
taxes in 1994. See Note 11 to the Consolidated Financial Statements for
additional information on the Bank's income taxes. In addition, in 1993 the
Bank recorded the cumulative effect of adopting SFAS No. 109, which reduced
1993 earnings by $104,000.
LIQUIDITY AND CAPITAL RESOURCES
The Bank's primary sources of funds are deposits, principal and interest
payments on loans and securities, and proceeds from the maturation of
securities. While maturities and scheduled amortization of loans and
securities are predictable sources of funds, deposit flows and mortgage
prepayments are greatly influenced by general interest rates, economic
conditions and competition. The Bank maintains a liquidity ratio
substantially above the regulatory requirement. 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 ratio is currently 5%. The Bank's average
regulatory liquidity ratios were 52.72%, 52.07%, 40.11%, 26.37% and 26.96%
for the years ended December 31, 1995, 1994, 1993, 1992 and 1991, and 51.76%
and 53.69% for the two months ended February 29, 1996 and February 28, 1995,
respectively.
The Bank's cash flows are comprised of three primary classifications:
cash flows from operating activities, investing activities and financing
activities. Cash flows provided by operating activities were $938,000 and
$705,000 for the two months ended February 29, 1996 and February 28, 1995,
respectively, and were $863,000, $511,000 and $1.1 million for the years
ended December 31, 1995, 1994 and 1993, respectively. Net cash from
investing activities consisted primarily of disbursements for loan
originations and the purchase of investments and mortgage-backed securities,
offset by principal collections on loans, proceeds from maturation of
investments and paydowns on mortgage-backed securities, and the investment in
and proceeds from the sale of real estate held for development. Net cash
from financing activities consisted primarily of activity in deposit
accounts. The net increase (decrease) in deposits was $(1.2) million and
$(4.1) million for the two months ended February 29, 1996 and February 28,
1995, respectively, and $12.0 million, $(1.2) million and $(1.5) million for
the years ended December 31, 1995, 1994 and 1993, respectively.
At February 29, 1996, the Bank exceeded all of its regulatory capital
requirements with a tangible capital level of $16.1 million or 10.9% of
adjusted total assets, which is above the required level of $2.2 million or
1.5%; core capital of $16.1 million or 10.9% of adjusted total assets, which
is above the required level of $4.4 million or 3.0%; and risk-based capital
of $16.6 million or 39.4% of risk-weighted assets, which is above the
required level of $3.4 million or 8.0%. See "Regulatory Capital Compliance."
The Bank's most liquid assets are cash and short-term investments. The
levels of these assets are dependent on the Bank's operating, financing,
lending and investing activities during any given period. At February 29,
1996, cash and short-term investments totalled $8.2 million. The Bank has
other sources of liquidity if a need for additional funds arises, including
securities maturing within one year and the repayment of loans. The Bank may
also utilize FHLB advances or the sale of securities available-for-sale as a
source of funds. At February 29, 1996, the Bank had no advances outstanding
from the FHLB.
The Bank currently has no contractual obligations or commitments for
capital expenditures; however, the Board of Directors has approved
expenditures for 1996 estimated to be $650,000 for the upgrade of data
processing systems in order to provide new technology based products and
services to its
50
<PAGE>
customers, installation of an ATM, additional parking facilities and office
improvements. The installation of the ATM and parking facility are being
undertaken to increase the access and convenience of the Bank's facilities by
the Bank's customers by provided 24 hour access to funds and other financial
transactions and a more accessible branch facility. In addition, management
anticipates that the improvements to the Bank's office space will enable it
to more efficiently deliver services to customers. As a result, management
believes that the Bank will be better positioned to continue to serve its
customers. At February 29, 1996, the Bank had outstanding commitments to
originate mortgage loans of $1.3 million compared to $699,000 at December 31,
1995. The Bank anticipates that it will have sufficient funds available to
meet its current loan origination commitments. See "Business of the Bank --
General." Certificate accounts which are scheduled to mature in less than
one year from February 29, 1996 totalled $44.0 million. The Bank expects
that a substantial portion of the maturing certificate accounts will be
retained by the Bank at maturity. However, if a substantial portion of these
deposits are not retained, the Bank may utilize Federal Home Loan Bank
advances, or raise interest rates on deposits to attract new accounts, which
may result in higher levels of interest expense.
IMPACT OF INFLATION AND CHANGING PRICES
The Consolidated Financial Statements and Notes thereto presented herein
have been prepared in accordance with GAAP, which require the measurement of
financial position and operating results in terms of historical dollar
amounts without considering the changes in the relative purchasing power of
money over time due to inflation. The impact of inflation is reflected in
the increased cost of the Bank's operations. Unlike industrial companies,
nearly all of the assets and liabilities of the Bank are monetary in nature.
As a result, interest rates have a greater impact on the Bank's performance
than do the effects of general levels of inflation. Interest rates do not
necessarily move in the same direction or to the same extent as the price of
goods and services.
IMPACT OF NEW ACCOUNTING STANDARDS
In May 1993, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 114, "Accounting by Creditors for Impairment of a Loan" ("SFAS No.
114"), which has been amended by SFAS No. 118. Under the provisions of SFAS
No. 114, as amended, a loan is considered impaired when, based on current
information and events, it is probable that a creditor will be unable to
collect all amounts due according to the contractual terms of the loan
agreement. SFAS No. 114 requires creditors to measure impairment of a loan
based on the present value of expected future cash flows discounted at the
loan's effective interest rate or, as a practical expedient, at the loan's
observable market price or the fair value of the collateral if the loan is
collateral dependent. If the measure of the impaired loan is less than the
recorded investment in the loan, a creditor shall recognize an impairment by
recording a valuation allowance with a corresponding charge to the provision
for loan losses. The Bank adopted the provisions of SFAS No. 114 and SFAS
No. 118 effective in 1995. The adoption of SFAS No. 114 and SFAS No. 118 did
not have a material impact on the results of operations or financial
condition of the Bank.
In March 1995, the FASB issued Statement of Financial Accounting
Standards No. 121 ("SFAS No. 121"), "Accounting for the Impairment of Long
Lived Assets and for Long Lived Assets to be Disposed Of." SFAS No. 121
requires that long lived assets and certain identifiable intangibles be
reviewed for impairment whenever events or circumstances indicate that the
carrying amount of an asset may not be recoverable. However, SFAS No. 121
does not apply to financial instruments, core deposit intangibles, mortgage
and other servicing rights or deferred tax assets. The adoption of SFAS No.
121 in 1996 did not have a material effect on the Bank's income or financial
condition.
51
<PAGE>
In May 1995, the FASB issued Statement of Financial Accounting Standards
No. 122 ("SFAS No. 122"), "Accounting for Mortgage Servicing Rights." SFAS
No. 122 requires an institution that purchases or originates mortgage loans
and sells or securitizes those loans with servicing rights retained to
allocate the total cost of the mortgage loans to the mortgage servicing
rights and the loans (without the mortgage servicing rights) based on their
relative fair values. In addition, institutions are required to assess
impairment of the capitalized mortgage servicing portfolio based on the fair
value of those rights. SFAS No. 122 is effective for fiscal years beginning
after December 15, 1995. Adoption of this statement did not have a material
impact on the Bank's earnings or financial condition.
In November 1995, the FASB issued Statement of Financial Accounting
Standards No. 123, "Accounting for Stock Based Compensation," ("SFAS No.
123"). This statement establishes financial accounting standards for
stock-based employee compensation plans. SFAS No. 123 permits the Bank to
choose either a new fair value based method or the current APB Opinion 25
intrinsic value based method of accounting for its stock-based compensation
arrangements. SFAS No. 123 requires pro forma disclosures of net earnings
and earnings per share computed as if the fair value based method had been
applied in financial statements of companies that continue to follow current
practice in accounting for such arrangements under Opinion 25. The
disclosure provisions of SFAS No. 123 are effective for fiscal years
beginning after December 15, 1995. Any effect that this statement will have
on the Bank will be applicable upon the consummation of the Conversion.
BUSINESS OF THE BANK
GENERAL
The Bank's principal business is to operate a community oriented savings
bank. The Bank attracts retail deposits from the general public in the area
surrounding its branch offices and invests those deposits, together with
funds generated from operations, primarily in fixed-rate one- to four-family
residential mortgage loans and investment and mortgage-backed securities.
The Bank invests, on a limited basis, in multi-family mortgage, commercial
real estate, construction, land and consumer loans. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Management Strategy." The Bank's revenues are derived principally from
interest on its mortgage loans, and interest and dividends on its investment
and mortgage-backed securities. The Bank's primary sources of funds are
deposits and principal and interest payments on loans and securities. The
Bank also engages in real estate development activities through its
subsidiary. The Bank's investment in real estate held for development
totalled $1.6 million, or 1.1% of total assets at February 29, 1996. During
1995, the Bank substantially completed its primary development project, Rose
Hill Farm, and began work on a new, but smaller project. During the years
ended December 31, 1995, 1994 and 1993, the Bank recorded income of $523,000,
$1.1 million and $856,000, respectively, related to real estate development.
Management anticipates lower levels of income from these activities in 1996,
as the new project begins development. See "- Subsidiary Activities."
MARKET AREA AND COMPETITION
The Bank has been, and continues to be, a community-oriented savings
bank. The Bank's primary deposit gathering area is concentrated in the
communities surrounding its offices, while its lending activities primarily
include areas throughout Cook, DuPage and Will counties.
The Bank's market area is both an urban and suburban area with the
manufacturing industry as the major industrial group, followed by the
services sector and then the wholesale/retail sector. The Bank's Chicago
offices are located in diverse communities which have a high percentage of
customers
52
<PAGE>
of various ethnic background. Management of the Bank believes that its urban
communities are stable, residential neighborhoods of predominantly one- to
four-family residences and low to middle income families. The Bank's
Westmont office is located in suburban DuPage county which consists
predominantly of middle to upper income families.
The Chicago banking market (Cook and DuPage counties) has experienced
below average growth in population and households in the 1990's. The market
area is characterized by lower unemployment levels than state or national
averages and a median household income level above levels in Illinois and the
United States. The period from 1990 to 1995 was characterized by 5.7% growth
in the national population and 3.4% in the population of Illinois, while the
population of the market area grew by 2.0%. The market area had a higher per
capita income than either Illinois or the United States during the period
from 1990 to 1995. During such period, the per capita income level in the
market area was $20,362 compared to $17,047 for Illinois and $16,405 for the
nation. The median household income level for the market area was $44,288 in
1995, compared to $35,865 and $33,610 in Illinois and the United States,
respectively. Of the housing in the market area, 65.0% is owner-occupied,
compared to 64.2% in Illinois and the United States. The median housing
value in the market area in 1990 was $119,603, while the value in the State
of Illinois was $80,873 and in the nation, $79,098.
Another key economic indicator is the rate of unemployment.
Unemployment has declined by 25.8% in the market area since 1991, from 6.2%
to 4.6%, compared to declines of 19.7% in Illinois and 13.4% in the United
States to 5.7% and 3.8%, respectively. The source of the statistics
disclosed in this and the preceding paragraph is the 1996 Sourcebook of
Demographics, produced by CACI, Inc.
The Bank is one of many financial institutions based in the market area
which had total deposits of $123.8 billion at June 30, 1995, with Park
Federal's market share at 0.10%. The Bank does not formally track real
estate values or construction starts in its primary market area; however, the
officers and directors of the Bank maintain relationships with area
contractors and real estate agents which enable them to continually monitor
the trends in housing construction and real estate sales in its primary
market area. In addition, the Bank obtains information on real estate sales
on a weekly basis through the publication of public records. Management is
not aware of any material adverse trends in real estate values in its market
area.
The Bank's primary market area is a highly competitive market for
financial services and the Bank faces significant competition both in making
loans and in attracting deposits. The Bank faces direct competition from a
significant number of financial institutions operating in its market area,
many with a state-wide or regional presence, and in some cases, a national
presence. Many of these financial institutions are significantly larger and
have greater financial resources than the Bank. The Bank's competition for
loans comes principally from savings banks, mortgage banking companies,
commercial banks, credit unions and insurance companies. Its most direct
competition for deposits has historically come from savings institutions and
commercial banks. In addition, the Bank faces increasing competition for
deposits and other financial products from non-bank institutions such as
brokerage firms and insurance companies in such areas as short-term money
market funds, corporate and government securities funds, mutual funds and
annuities. Competition may also increase as a result of the lifting of
restrictions on the interstate operations of financial institutions.
53
<PAGE>
LENDING ACTIVITIES
LOAN PORTFOLIO COMPOSITION. The Bank's loan portfolio consists
primarily of conventional first mortgage loans secured by one- to four-family
residences. At February 29, 1996, the Bank had total gross loans outstanding
of $60.9 million, of which $48.3 million were one- to four-family,
residential mortgage loans, or 79.3% of the Bank's total gross loans. The
remainder of the portfolio consists of $5.6 million of multi-family mortgage
loans, or 9.1% of total gross loans; $1.6 million of commercial real estate
loans, or 2.6% of total gross loans; $4.6 million of construction and land
loans, or 7.5% of total gross loans; and consumer loans of $870,000, or 1.4%
of total gross loans. As a result of market opportunities, the Bank
originated a greater amount of construction and land loans during the year
ended December 31, 1993 and 1994 as compared to one- to four-family loans.
During these periods the Bank originated $7.2 million and $9.1 million
construction and land loans as compared to $6.1 million and $7.0 million one-
to four-family loans, respectively. This was largely a result of the
activity in the Rose Hill joint venture which was active during 1993 and 1994
and was winding down during 1995. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations." The composition of the
loan portfolio with regard to one- to four-family and construction and land
loans has been relatively consistent since 1993. At February 29, 1996, 90.4%
of the Bank's loan portfolio had fixed interest rates. The Bank had no loans
held for sale at February 29, 1996.
The types of loans that the Bank may originate are subject to federal
and state law and regulations. Interest rates charged by the Bank on loans
are affected by the demand for such loans and the supply of money available
for lending purposes and the rates offered by competitors. These factors
are, in turn, affected by, among other things, economic conditions, fiscal
policies of the federal government, the monetary policies of the Federal
Reserve Board, and legislative tax policies.
54
<PAGE>
The following table sets forth the composition of the Bank's loan
portfolio in dollar amounts and as a percentage of the portfolio at the dates
indicated.
<TABLE>
<CAPTION>
AT FEBRUARY 29, AT DECEMBER 31,
--------------- ------------------------------------------------------------------------------------
1996 1995 1994 1993 1992 1991
--------------- --------------- --------------- --------------- --------------- ----------------
PERCENT PERCENT PERCENT PERCENT PERCENT PERCENT
OF OF OF OF OF OF
AMOUNT TOTAL AMOUNT TOTAL AMOUNT TOTAL AMOUNT TOTAL AMOUNT TOTAL AMOUNT TOTAL
------ ------- ------ ------- ------ ------- ------ ------- ------ ------- ------ -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Real estate:
Residential:
One- to four-family.... $48,291 79.31% $48,894 77.93% $44,655 75.88% $45,786 77.34% $52,968 74.82% $59,816 74.14%
Multi-family........... 5,563 9.14 6,163 9.82 5,907 10.04 7,483 12.64 12,109 17.11 13,586 16.84
Commercial............... 1,601 2.63 1,750 2.79 1,426 2.42 774 1.31 909 1.28 705 0.87
Construction and land.... 4,565 7.50 5,133 8.18 6,038 10.26 4,213 7.12 3,599 5.08 5,042 6.25
Consumer.................. 870 1.42 802 1.28 825 1.40 942 1.59 1,205 1.71 1,526 1.90
------- ----- ------- ----- ------- ----- ------- ----- ------- ----- ------- -----
Total loans, gross.... 60,890 100.0% 62,742 100.0% 58,851 100.0% 59,198 100.0% 70,790 100.0% 80,675 100.0%
----- ----- ----- ----- ----- -----
----- ----- ----- ----- ----- -----
Undisbursed loan funds... (984) (1,148) (1,493) (1,633) (1,711) (1,780)
Unamortized discounts,
net.................... (21) (23) (51) (86) (166) (277)
Deferred loan
origination fees....... (441) (460) (474) (533) (754) (989)
Allowance for
estimated loan losses.. (500) (573) (275) (250) (175) (75)
------- ------- ------- ------- ------- -------
Loans receivable,
net................. $58,944 $60,538 $56,558 $56,696 $67,984 $77,554
------- ------- ------- ------- ------- -------
------- ------- ------- ------- ------- -------
</TABLE>
55
<PAGE>
LOAN MATURITY. The following table shows the contractual maturity of
the Bank's gross loans at February 29, 1996. There were no loans held for
sale at February 29, 1996. The table does not include principal prepayments.
<TABLE>
<CAPTION>
AT FEBRUARY 29, 1996
----------------------------------------------------------------------------------
ONE- TO TOTAL
FOUR- MULTI- CONSTRUCTION LOANS
FAMILY FAMILY COMMERCIAL AND LAND CONSUMER RECEIVABLE
-------- -------- ------------ -------------- ---------- ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Amounts due:
One year or less................... $ 40 $ - $ - $2,876 $ 90 $3,006
After one year:
More than one year to three years 115 - - 1,458 322 1,895
More than three years to
five years..................... 498 134 - 36 122 790
More than five years to 10 years. 6,872 534 321 - 283 8,010
More than 10 years to 20 years... 15,778 3,564 543 - 53 19,938
More than 20 years............... 24,988 1,331 737 195 - 27,251
------- ------ ------ ------ ---- ------
Total due after
February 28, 1997.............. 48,251 5,563 1,601 1,689 780 57,884
------- ------ ------ ------ ---- ------
Gross loans receivable....... $48,291 $5,563 $1,601 $4,565 $870 $60,890
------- ------ ------ ------ ---- ------
------- ------ ------ ------ ---- ------
</TABLE>
The following table sets forth at February 29, 1996, the dollar amount
of total gross loans receivable contractually due after February 28, 1997,
and whether such loans have fixed interest rates or adjustable interest rates.
<TABLE>
<CAPTION>
DUE AFTER FEBRUARY 28, 1997
------------------------------
FIXED ADJUSTABLE TOTAL
----- ---------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Real estate loans:
Residential:
One- to four-family........................ $42,452 $5,799 $48,251
Multi-family............................... 5,563 - 5,563
Commercial real estate....................... 1,541 60 1,601
Construction and land........................ 1,689 - 1,689
Consumer....................................... 780 - 780
------- ------ -------
Total gross loans receivable............ $52,025 $5,859 $57,884
------- ------ -------
------- ------ -------
</TABLE>
ORIGINATION AND PURCHASE OF LOANS. The Bank's mortgage lending
activities are conducted through its home office and two branch offices.
Although the Bank may originate both adjustable-rate and fixed-rate mortgage
loans, the substantial majority of the Bank's loan originations have been
fixed-rate
56
<PAGE>
mortgage loans. The Bank's ability to originate loans is dependent upon the
relative customer demand for fixed-rate or adjustable-rate mortgage loans,
which is affected by the current and expected future level of interest rates.
The Bank has not emphasized the origination of adjustable-rate mortgage
loans due to the relatively low demand for such loans in the Bank's primary
market area and aggressive pricing by competitors offering such loans. While
the Bank retains for its portfolio all of the mortgage loans that it
originates, the Bank may, in the future, sell mortgage loans that it
originates depending on market conditions and the financial condition of the
Bank. At February 29, 1996, there were no loans categorized as held for
sale. In addition, the Bank also emphasizes the origination of construction
loans. From time to time the Bank has purchased loans or participated in
loans originated by other institutions based upon the Bank's investment needs
and market opportunities.
The following tables set forth the Bank's loan originations, purchases
and principal repayments for the periods indicated:
<TABLE>
<CAPTION>
FOR THE TWO MONTHS ENDED FOR THE YEAR ENDED DECEMBER 31,
----------------------------------- -------------------------------------
FEBRUARY 29, FEBRUARY 28,
1996 1995 1995 1994 1993
--------------- -------------- ------------ ---------- ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Gross loans:
Beginning balance........................ $62,742 $58,851 $58,851 $59,198 $70,790
Loans originated:
One- to four-family.................. 845 1,265 11,571 6,960 6,149
Multi-family......................... - 344 1,104 1,146 805
Commercial........................... 225 - 1,767 2,817 915
Construction and land................ 418 88 5,484 9,085 7,204
Consumer............................. 90 266 674 648 894
------- ------- ------- ------- -------
Total loans originated............. 1,578 1,963 20,600 20,656 15,967
Loans purchased........................ 26 - 182 - -
------- ------- ------- ------- -------
Total.............................. 1,604 1,963 20,782 20,656 15,967
Principal prepayments.................. (5,272) (4,155) (18,937) (23,349) (29,823)
Transfer to REO........................ (367) - - - (232)
Change in undisbursed loan funds....... 164 345 140 78 69
Change in allowance for estimated
loan losses.......................... 73 (10) (298) (25) (75)
------- ------- ------- ------- -------
Ending balance, net...................... $58,944 $56,994 $60,538 $56,558 $56,696
------- ------- ------- ------- -------
------- ------- ------- ------- -------
</TABLE>
57
<PAGE>
ONE- TO FOUR-FAMILY MORTGAGE LENDING. The Bank offers mortgage loans
primarily secured by one- to four-family residences located in the Bank's
primary market area. Loan originations are obtained from the Bank's loan
representatives and their contacts with the local real estate industry,
existing or past customers, and members of the local communities. The Bank
primarily originates fixed-rate loans, but also offers adjustable-rate
mortgage ("ARM") loans. At February 29, 1996, one- to four-family mortgage
loans totalled $48.3 million, or 79.3% of total loans at such date. Of the
Bank's mortgage loans secured by one- to four-family residences, $42.4
million, or 87.9%, were fixed-rate loans.
The Bank from time to time purchases one- to four-family mortgage loans
and loan participations from other financial institutions in its primary
market area. At February 29, 1996, the Bank had $363,000 in purchased
mortgage loans and loan participations serviced by others, totalling 0.6% of
the total loan portfolio at that date, primarily secured by one- to
four-family residences. The Bank may purchase loans to supplement reduced
loan demand as needed. Loans purchased by the Bank generally must meet the
same underwriting criteria as loans originated by the Bank.
The Bank's policy is to originate one- to four-family residential
mortgage loans in amounts up to 80% of the lower of the appraised value or
the selling price of the property securing the loan and up to 95% of the
appraised value or selling price if private mortgage insurance is obtained.
The Bank's one- to four-family residential mortgage loans do not provide for
negative amortization. Mortgage loans originated by the Bank generally
include due-on-sale clauses which provide the Bank with the contractual right
to deem the loan immediately due and payable in the event the borrower
transfers ownership of the property without the Bank's consent. Due-on-sale
clauses are an important means of adjusting the rates on the Bank's
fixed-rate mortgage loan portfolio and the Bank exercises its rights under
these clauses. The residential mortgage loans originated by the Bank are
generally for terms up to maturity of up to 30 years. The maximum one- to
four-family loan amount is $350,000, unless otherwise approved by the Board
of Directors.
The volume and types of ARM loans originated by the Bank have been
affected by such market factors as the level of interest rates, competition,
consumer preferences and the availability of funds. In recent years, demand
for ARM loans in the Bank's primary market area has been weak due to the low
interest rate environment and consumer preference for fixed-rate loans. In
addition, management's strategy has been to emphasize fixed-rate loans.
Consequently, in recent years the Bank has not originated a significant
amount of ARM loans as compared to its originations of fixed-rate loans. The
Bank's ARM loans are indexed to the one-year Treasury bill. The Bank
currently offers ARM loans with interest rates with initial adjustment
periods of one, three, five and seven years. The ARM loans have a maximum
rate adjustment of 2.0% at each adjustment period and a 6.0% maximum
adjustment over the life of the loan with payment based on up to a 30 year
loan term. These loans may pose a risk to the Bank because during a period
of rising interest rates, the adjustment rate caps may result in interest
rates lagging behind the Bank's funding costs. In addition, ARM loans
generally pose credit risks different from the risks inherent in fixed rate
loans, primarily because as interest rates rise, the underlying payments of
the borrower rise, thereby increasing the potential for default. The
ARM loans offered by the Bank do not provide for initial deep discount
interest rates. Although the Bank will continue to offer ARM loans, there
can be no assurance that in the future the Bank will be able to originate a
sufficient volume of ARM loans to constitute a significant portion of the
Bank's loan portfolio.
MULTI-FAMILY LENDING. The Bank originates multi-family mortgage loans
generally secured by properties located in the Bank's primary market area.
The amount of multi-family loans originated by the Bank depends upon market
conditions.
58
<PAGE>
In reaching its decision on whether to make a multi-family loan, the
Bank considers a number of factors including: the net operating income of
the mortgaged premises before debt service and depreciation; the debt service
ratio (the ratio of net operating income to debt service); and the ratio of
loan amount to appraised value. Pursuant to the Bank's current underwriting
policies, a multi-family mortgage loan may be made in an amount up to 80% of
the appraised value of the underlying property. In addition, the Bank
generally requires a debt service ratio of 120%. Properties securing a
multi-family loan are appraised by an appraiser and title insurance is
required on all multi-family loans.
When evaluating a multi-family loan, the Bank also considers the
financial resources and income level of the borrower, the borrower's
experience in owning or managing similar property, and the Bank's lending
experience with the borrower. The Bank's underwriting policies require that
the borrower be able to demonstrate strong management skills and the ability
to maintain the property from current rental income. The borrower is
required to present evidence of the ability to repay the mortgage and a
satisfactory credit history. In making its assessment of the
creditworthiness of the borrower, the Bank generally reviews the financial
statements, employment and credit history of the borrower, as well as other
related documentation.
Loans secured by multi-family residential properties generally involve a
greater degree of risk than one- to four-family residential mortgage loans.
Because payments on loans secured by multi-family properties are often
dependent on successful operation or management of the properties, repayment
of such loans may be subject to a greater extent to adverse conditions in the
real estate market or the economy. The Bank seeks to minimize these risks
through its underwriting policies, which require such loans to be qualified
at origination on the basis of the property's income and debt coverage ratio.
The Bank's multi-family loan portfolio at February 29, 1996 totalled
$5.6 million or 9.1% of total gross loans. The Bank's largest multi-family
loan at February 29, 1996, had an outstanding balance of $340,000 and is
secured by an eleven-unit building which is current as to the repayment of
principal and interest.
COMMERCIAL REAL ESTATE LENDING. On a limited basis, the Bank originates
commercial real estate loans that are generally secured by properties used
for business purposes such as small office buildings or retail facilities
located in its primary market area. The Bank's underwriting procedures
provide that commercial real estate loans may be made in amounts up to the
lesser of 75% of the appraised value of the property or the sales price. The
Bank's underwriting standards and procedures are similar to those applicable
to its multi-family loans, whereby the Bank considers the net operating
income of the property and the borrower's expertise, credit history and
profitability. The Bank has generally required that the properties securing
commercial real estate loans have debt service coverage ratios of at least
120%. The largest commercial real estate loan in the Bank's portfolio at
February 29, 1996 was $483,000 and is secured by commercial retail property.
The loan was current and performing in accordance with its contractual terms
at February 29, 1996. At February 29, 1996 the Bank's commercial real estate
loan portfolio was $1.6 million, or 2.6% of total gross loans.
Loans secured by commercial real estate properties, like multi-family
loans, are generally larger and involve a greater degree of risk than one- to
four-family residential mortgage loans. Because payments on loans secured by
commercial real estate properties are often dependent on successful operation
or management of the properties, repayment of such loans may be subject to a
great extent to adverse conditions in the real estate market or the economy.
The Bank seeks to minimize these risks through its underwriting standards,
which require such loans to be qualified on the basis of the property's
income and debt service ratio.
59
<PAGE>
CONSTRUCTION AND LAND LENDING. The Bank generally originates
construction and land development loans to contractors and individuals in its
primary market area. The Bank's construction loans primarily are made to
finance real estate development and the construction of one- to four-family
residential properties. These loans are primarily fixed-rate loans with
maturities of three years or less. The Bank's policies provide that
construction loans may be made in amounts up to 80% of the appraised value of
the property for construction of one- to four-family residences. The Bank
requires an independent appraisal of the property. Loan proceeds are
disbursed in increments as construction progresses and as inspections
warrant. The Bank requires regular inspections to monitor the progress of
construction. Land loans are determined on an individual basis, but
generally they do not exceed 75% of the actual cost or current appraised
value of the property, whichever is less. The largest construction and land
loan in the Bank's portfolio at February 29, 1996 had a balance of $868,000
and is secured by improved residential building sites. This loan is
currently performing in accordance with its terms. At February 29, 1996, the
Bank had $4.6 million of construction and land loans (excluding the Bank's
joint venture loans related to real estate held for development) totalling
7.5% of the Bank's total gross loans. Although the amount may vary,
typically the Bank finances construction loans to builders purchasing lots.
These loans require a 25% down payment and typically are repaid in less than
120 days or a period not to exceed one year. The joint venture loans are
reflected under the caption "Real estate held for development" in the Bank's
Statements of Financial Condition.
Construction and land financing is considered to involve a higher degree
of credit risk than long-term financing on improved, owner-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 compared to the estimated cost (including
interest) of construction. If the estimate of value proves to be inaccurate,
the Bank may be confronted with a project, when completed, having a value
which is insufficient to assure full repayment.
CONSUMER AND OTHER LENDING. The Bank's originated consumer loans
generally consist of automobile loans, second mortgage loans and loans
secured by deposits. At February 29, 1996, the Bank's consumer loan
portfolio was $870,000 or 1.4% of total gross loans.
LOAN APPROVAL PROCEDURES AND AUTHORITY. The Board of Directors
establishes the lending policies of the Bank and delegates lending authority
and responsibility to the Executive Committee, a management committee of the
Bank. All real estate loans must be approved by the Executive Committee or
the Board of Directors. Loans of $350,000 or more must have Board
ratification prior to commitment. Pursuant to OTS regulations, loans to one
borrower cannot exceed 15% of the Bank's unimpaired capital and surplus. The
Bank will not make loans to one borrower that are in excess of regulatory
limits.
DELINQUENCIES AND CLASSIFIED ASSETS. The Board of Directors performs a
monthly review of all delinquent loans sixty days or more past due. In
addition, Management reviews on an ongoing basis all loans thirty or more
days delinquent. The procedures taken by the Bank with respect to
delinquencies vary depending on the nature of the loan and period of
delinquency. When a borrower fails to make a required payment on a loan, the
Bank takes a number of steps to have the borrower cure the delinquency and
restore the loan to current status. The Bank sends the borrower a written
notice of non-payment after the loan is first past due. In the event payment
is not then received, additional letters and phone calls generally are made.
If the loan is still not brought current and it becomes necessary for the
Bank to take legal action, which typically occurs after a loan is delinquent
at least 60 days or more, the Bank will commence foreclosure proceedings
against any real property that secures the loan. If a foreclosure action is
instituted and the loan is not brought current, paid in full, or refinanced
before the foreclosure sale, the real property securing the loan is
foreclosed upon and sold at sheriff's sale.
60
<PAGE>
Federal regulations and the Bank's Classification of Assets Policy
require that the Bank utilize an internal asset classification system as a
means of reporting problem and potential problem assets. The Bank has
incorporated the OTS internal asset classifications as a part of its credit
monitoring system. The Bank currently classifies problem and potential
problem assets as "Substandard," "Doubtful" or "Loss" assets. An asset is
considered "Substandard" if it is inadequately protected by the current net
worth and paying capacity of the obligor or of the collateral pledged, if
any. "Substandard" assets include those characterized by the "distinct
possibility" that the insured institution will sustain "some loss" if the
deficiencies are not corrected. Assets classified as "Doubtful" have all of
the weaknesses inherent in those classified "Substandard" with the added
characteristic that the weaknesses present make "collection or liquidation in
full," on the basis of currently existing facts, conditions, and values,
"highly questionable and improbable." Assets classified as "Loss" are those
considered "uncollectible" and of such little value that their continuance as
assets without the establishment of a specific loss allowance is not
warranted. Assets which do not currently expose the insured institution to
sufficient risk to warrant classification in one of the aforementioned
categories but possess weaknesses are required to be designated "Special
Mention."
When an insured institution classifies one or more assets, or portions
thereof, as Substandard or Doubtful, under current OTS policy the Bank is
required to consider establishing a general valuation allowance in an amount
deemed prudent by management. The general valuation allowance, which is a
regulatory term, represents a loss allowance which has been established to
recognize the inherent credit risk associated with lending and investing
activities, but which, unlike specific allowances, has not been allocated to
particular problem assets. When an insured institution classifies one or
more assets, or portions thereof, as "Loss," it is required either to
establish a specific allowance for losses equal to 100% of the amount of the
asset so classified or to charge off such amount.
A savings institution's determination as to the classification of its
assets and the amount of its valuation allowances is subject to review by the
OTS which can order the establishment of additional general or specific loss
allowances. The OTS, in conjunction with the other federal banking agencies,
has adopted an interagency policy statement on the allowance for loan and
lease losses. The policy statement provides guidance for financial
institutions on both the responsibilities of management for the assessment
and establishment of adequate allowances and guidance for banking agency
examiners to use in determining the adequacy of general valuation allowances.
Generally, the policy statement recommends that institutions have effective
systems and controls to identify, monitor and address asset quality problems;
that management has analyzed all significant factors that affect the
collectibility of the portfolio in a reasonable manner; and that management
has established acceptable allowance evaluation processes that meet the
objectives set forth in the policy statement. As a result of the declines in
local and 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 institutions by the OTS
and the FDIC. While the Bank believes that it has established an adequate
allowance for estimated loan losses, there can be no assurance that
regulators, in reviewing the Bank's loan portfolio, will not request the Bank
to materially increase its allowance for loan losses, thereby negatively
affecting the Bank's financial condition and earnings. Although management
believes that an adequate allowance for loan losses has been established,
actual losses are dependent upon future events and, as such, further
additions to the level of allowances for estimated loan losses may become
necessary.
The Bank's Executive Committee reviews and classifies the Bank's assets
monthly and reports the results of its review to the Board of Directors. The
Bank classifies assets in accordance with the management guidelines described
above. REO is classified as Substandard. At February 29, 1996, the
61
<PAGE>
Bank had $196,000 of assets classified as Special Mention, $363,000 of
assets classified as Substandard, and no assets classified as Doubtful or
Loss.
NON-ACCRUAL AND PAST-DUE LOANS. The following table sets forth
information regarding non-accrual loans, troubled-debt restructurings and
REO. It is the policy of the Bank to cease accruing interest on loans 90
days or more past due. For the two months ended February 29, 1996 and
February 28, 1995 and the years ended December 31, 1995, 1994, 1993, 1992 and
1991, respectively, the amount of interest income that would have been
recognized on nonaccrual loans if such loans had continued to perform in
accordance with their contractual terms was $9,000, $47,000, $83,000,
$33,000, $16,000, $24,000, and $0, none of which was recognized. Non-accrual
commercial loans at December 31, 1995 consisted of two delinquent loans
secured by commercial real estate. Both of these loans were returned to
accrual status by February 29, 1996. During the two months ended February
29, 1996, the Bank's non-performing loans dropped from $917,000 to $80,000.
During that period, the Bank foreclosed on a $269,000 loan and charged-off a
$71,000 multi-family loan. The remaining loans were brought current by the
borrowers.
<TABLE>
<CAPTION>
AT AT
FEBRUARY FEBRUARY
29, 28, AT DECEMBER 31,
-------------------- -------------------------------------------------
1996 1995 1995 1994 1993 1992 1991
-------- -------- -------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Non-accrual loans:
Residential real estate:
One- to four-family...................... $78 $556 $416 $603 $303 $ - $ -
Multi-family............................. - 67 71 67 - - -
Commercial................................. - 131 430 - - - -
Construction and land...................... - - - - - 189 -
Consumer................................... 2 16 - 18 18 31 -
---- ---- ---- ---- ---- ----- -----
Total non-performing loans.............. 80 770 917 688 321 220 -
REO.......................................... 319 50 50 50 157 - 66
---- ---- ---- ---- ---- ----- -----
Total non-performing
assets................................ $399 $820 $967 $738 $478 $220 $66
---- ---- ---- ---- ---- ----- -----
---- ---- ---- ---- ---- ----- -----
Allowance for loan losses as a
percent of gross loans receivable.......... 0.82% 0.49% 0.91% 0.47% 0.42% 0.25% 0.09%
Allowance for loan losses
as a percent of total non-performing
loans(1)................................... 625.00 37.01 62.49 39.97 77.88 79.55 -
Non-performing loans
as a percent of gross loans
receivable(1).............................. 0.13 1.31 1.46 1.17 0.54 0.31 -
Non-performing assets
as a percent of total
assets(1).................................. 0.27 0.60 0.61 0.51 0.35 0.16 0.05
</TABLE>
- -----------------------
(1) Non-performing assets consist of non-performing loans and REO.
Non-performing loans consist of all loans 90 days or more past due and all
other non-accrual loans.
62
<PAGE>
ALLOWANCE FOR LOAN LOSSES. The allowance for loan losses is established
through a provision for loan losses based on management's evaluation of the
risks inherent in its loan portfolio and the general economy. The allowance
for loan losses is maintained at an amount management considers adequate to
cover estimated losses in loans receivable which are deemed probable and
estimable. The allowance is based upon a number of factors, including
current economic conditions, actual loss experience and industry trends. 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 make additional provisions for
loan losses based upon information available at the time of the review. As
of February 29, 1996, the Bank's allowance for loan losses was 0.82% of gross
loans as compared to 0.91% as of December 31, 1995. The Bank had non-accrual
loans of $80,000 and $770,000 at February 29, 1996 and December 31, 1995,
respectively. The increase in the 1995 provision for loan losses resulted
largely from a $434,000 increase in multi-family and commercial non-accrual
loans. As a result of this increased provision, the Bank's ratio of
allowance for loan losses to total non-performing loans was 62.49% at
December 31, 1995 compared to an average of 65.80% for the three preceding
years. The Bank will continue to monitor and modify its allowances for loan
losses as conditions dictate.
The following table sets forth activity in the Bank's allowance for loan
losses for the periods set forth in the table.
<TABLE>
<CAPTION>
AT OR FOR THE TWO
MONTHS ENDED AT OR FOR THE YEAR ENDED DECEMBER 31,
--------------------------- -------------------------------------
FEBRUARY 29, FEBRUARY 28,
1996 1995 1995 1994 1993 1992 1991
------------ ------------ ----- ----- ----- ---- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at beginning of
period . . . . . . . . . . . $573 $275 $275 $250 $175 $ 75 $ 20
Provision for loan losses . . -- 10 298 48 140 100 74
Charge-offs:
Real Estate:
One- to four-family . . -- -- -- (23) -- -- --
Multi-family . . . . . . (73) -- -- -- -- -- --
Construction and land . -- -- -- -- (65) -- --
Consumer . . . . . . . . . -- -- -- -- -- -- (19)
----- ---- ---- ---- ---- ---- ----
Total . . . . . . . . (73) -- -- (23) (65) -- (19)
----- ---- ---- ---- ---- ---- ----
Recoveries . . . . . . . . . . -- -- -- -- -- -- --
----- ---- ---- ---- ---- ---- ----
Balance at end of period . . . $500 $285 $573 $275 $250 $175 $ 75
----- ---- ---- ---- ---- ---- ----
----- ---- ---- ---- ---- ---- ----
Net charge-offs to average
gross loans outstanding . . 0.12% -- -- 0.04% 0.11% -- 0.03%
</TABLE>
63
<PAGE>
The following table sets forth delinquencies in the Bank's loan
portfolio as of the dates indicated:
<TABLE>
<CAPTION>
AT FEBRUARY 29, 1996 AT DECEMBER 31, 1995
----------------------------------------------- -----------------------------------------------
60-89 DAYS 90 DAYS OR MORE(1) 60-89 DAYS 90 DAYS OR MORE
--------------------- --------------------- --------------------- ---------------------
PRINCIPAL PRINCIPAL PRINCIPAL PRINCIPAL
NUMBER BALANCE NUMBER BALANCE NUMBER BALANCE NUMBER BALANCE
OF LOANS OF LOANS OF LOANS OF LOANS OF LOANS OF LOANS OF LOANS OF LOANS
-------- --------- -------- --------- -------- --------- -------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
One- to four-family . . . 3 $217 2 $78 3 $391 5 $416
Multi-family . . . . . . -- -- -- -- -- -- 1 71
Commercial . . . . . . . -- -- -- -- -- -- 2 430
Construction and land . . -- -- -- -- -- -- -- --
Consumer . . . . . . . . -- -- 1 2 2 9 -- --
--- ---- --- --- --- ---- --- ----
Total . . . . . . . . . . 3 $217 3 $80 5 $400 8 $917
--- ---- --- --- --- ---- --- ----
--- ---- --- --- --- ---- --- ----
Delinquent loans to total
gross loans . . . . . . 0.36% 0.13% 0.64% 1.46%
----- ----- ----- -----
----- ----- ----- -----
</TABLE>
<TABLE>
<CAPTION>
AT DECEMBER 31, 1994 AT DECEMBER 31, 1993
----------------------------------------------- -----------------------------------------------
60-89 DAYS 90 DAYS OR MORE 60-89 DAYS 90 DAYS OR MORE
--------------------- --------------------- --------------------- ---------------------
PRINCIPAL PRINCIPAL PRINCIPAL PRINCIPAL
NUMBER BALANCE NUMBER BALANCE NUMBER BALANCE NUMBER BALANCE
OF LOANS OF LOANS OF LOANS OF LOANS OF LOANS OF LOANS OF LOANS OF LOANS
-------- --------- -------- --------- -------- --------- -------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
One- to four-family . . . 4 $214 6 $603 6 $102 7 $303
Multi-family . . . . . . -- -- 1 67 -- -- -- --
Commercial . . . . . . . -- -- -- -- -- -- --
Construction and land . . -- -- -- -- -- -- -- --
Consumer loans . . . . . -- -- 2 18 2 14 2 18
--- ---- --- ---- --- ---- --- ----
Total . . . . . . . . . . 4 $214 9 $688 8 $116 9 $321
--- ---- --- ---- --- ---- --- ----
--- ---- --- ---- --- ---- --- ----
Delinquent loans to
total gross loans . . . 0.36% 1.17% 0.20% 0.54%
----- ----- ----- -----
----- ----- ----- -----
</TABLE>
- ------------------
(1) Loans 90 days or more past due are included in non-accrual loans. See
"Non-Accrual and Past Due Loans."
64
<PAGE>
The following tables set forth the amount of the Bank's allowance for
loan losses, the percent of allowance for loan losses to total allowance and
the percent of gross loans to total gross loans in each of the categories
listed at the dates indicated.
<TABLE>
<CAPTION>
AT FEBRUARY 29, 1996 AT FEBRUARY 28, 1995
--------------------------------- -----------------------------------
PERCENT OF PERCENT OF
GROSS LOANS GROSS LOANS
IN IN
PERCENT OF EACH PERCENT OF EACH
ALLOWANCE CATEGORY TO ALLOWANCE CATEGORY
TO TOTAL TOTAL TO TOTAL TO TOTAL GROSS
AMOUNT ALLOWANCE GROSS LOANS AMOUNT ALLOWANCE LOANS
------ ---------- ----------- ------ --------- --------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
One- to four-family . . . . . . . . . . . $242 48.40% 79.31% $113 39.65% 76.41%
Multi-family . . . . . . . . . . . . . . 56 11.20 9.14 31 10.88 10.32
Commercial . . . . . . . . . . . . . . . 33 6.60 2.63 15 5.26 2.42
Construction and Land . . . . . . . . . . 92 18.40 7.50 55 19.30 9.31
Consumer . . . . . . . . . . . . . . . . 18 3.60 1.42 19 6.66 1.54
Unallocated . . . . . . . . . . . . . . . 59 11.80 -- 52 18.25 --
---- ------ ------ ---- ------ ------
Total allowance for loan losses . . . $500 100.00% 100.00% $285 100.00% 100.00%
---- ------ ------ ---- ------ ------
---- ------ ------ ---- ------ ------
</TABLE>
<TABLE>
<CAPTION>
AT DECEMBER 31,
--------------------------------------------------------------------------------------------------
1995 1994 1993
------------------------------- ------------------------------- --------------------------------
PERCENT OF PERCENT OF PERCENT OF
GROSS LOANS GROSS LOANS GROSS LOANS
PERCENT OF IN EACH PERCENT OF IN EACH PERCENT OF IN EACH
ALLOWANCE CATEGORY ALLOWANCE CATEGORY ALLOWANCE CATEGORY
TO TOTAL TO TOTAL TO TOTAL TO TOTAL TO TOTAL TO TOTAL
AMOUNT ALLOWANCE GROSS LOANS AMOUNT ALLOWANCE GROSS LOANS AMOUNT ALLOWANCE GROSS LOANS
------ --------- ------------ ------ --------- ------------ ------ --------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
One- to four-
family . . . . . . . . . . . $245 42.76% 77.93% $112 40.73% 75.88% $115 46.00% 77.34%
Multi-family . . . . . . . . . 135 23.56 9.82 30 10.91 10.04 38 15.20 12.64
Commercial . . . . . . . . . . 35 6.11 2.79 15 5.45 2.42 8 3.20 1.31
Construction
and land . . . . . . . . . 103 17.98 8.18 61 22.18 10.26 43 17.20 7.12
Consumer . . . . . . . . . . 17 2.96 1.28 17 6.18 1.40 19 7.60 1.59
Unallocated . . . . . . . . . 38 6.63 -- 40 14.55 -- 27 10.80 --
---- ------- ------- ---- ------- ------- ---- ------- -------
Total allowance
for loan losses . . . . . . $573 100.00% 100.00% $275 100.00% 100.00% $250 100.00% 100.00%
---- ------- ------- ---- ------- ------- ---- ------- -------
---- ------- ------- ---- ------- ------- ---- ------- -------
<CAPTION>
AT DECEMBER 31,
----------------------------------------------------------------
1992 1991
------------------------------- -------------------------------
PERCENT OF PERCENT OF
GROSS LOANS GROSS LOANS
PERCENT OF IN EACH PERCENT OF IN EACH
ALLOWANCE CATEGORY ALLOWANCE CATEGORY
TO TOTAL TO TOTAL TO TOTAL TO TOTAL
AMOUNT ALLOWANCE GROSS LOANS AMOUNT ALLOWANCE GROSS LOANS
------ --------- ------------ ------ --------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
One- to four-
family . . . . . . . . . . . $ 53 30.29% 74.82% $30 40.00% 74.14%
Multi-family . . . . . . . . . 31 17.71 17.11 14 18.67 16.84
Commercial . . . . . . . . . . 10 5.71 1.28 4 5.33 0.87
Construction
and land . . . . . . . . . 36 20.57 5.08 24 32.00 6.25
Consumer . . . . . . . . . . 25 14.29 1.71 3 4.00 1.90
Unallocated . . . . . . . . . 20 11.43 -- -- -- --
---- ------- ------- ---- ------- -------
Total allowance
for loan losses . . . . . . $175 100.00% 100.00% $75 100.00% 100.00%
---- ------- ------- ---- ------- -------
---- ------- ------- ---- ------- -------
</TABLE>
65
<PAGE>
REAL ESTATE
At February 29, 1996, the Bank had $319,000 of REO. This consisted of a
single family residence valued at $269,000 which was sold at a loss of $4,000
during March 1996 and a single family lot valued at $50,000, which was
appraised at $59,000 in 1994. If the Bank acquires any REO, it is initially
recorded at fair value less costs to sell and thereafter REO is recorded at
the lower of the recorded investment in the loan or the fair value of the
related assets at the date of foreclosure, less costs to sell. Thereafter,
REO is valued at the lower of the recorded investment or the fair value of
the property less costs to sell. If there is a further deterioration in
value, the Bank provides for a specific valuation allowance. The Bank relies
on appraisals or market valuations in the disposition of all REO. The Bank
has also acquired land for real estate development and land for a possible
future branch site.
INVESTMENT ACTIVITIES
Federally chartered savings institutions have the authority to invest in
various types of liquid assets, including United States Treasury obligations,
securities of various federal agencies, certificates of deposit of insured
banks and savings institutions, bankers' acceptances and federal funds.
Subject to various restrictions, federally chartered savings institutions may
also invest their assets in commercial paper, investment-grade corporate debt
securities and mutual funds whose assets conform to the investments that a
federally chartered savings institution is otherwise authorized to make
directly. Additionally, the Bank must maintain minimum levels of investments
that qualify as liquid assets under OTS regulations. See "Regulation -
Federal Savings Institution Regulation - Liquidity." Historically, the Bank
has maintained liquid assets above the minimum OTS requirements and at a
level considered to be more than adequate to meet its normal daily activities.
The investment policy of the Bank as established by the Board of
Directors attempts to provide and maintain liquidity, generate a favorable
return on investments without incurring undue interest rate and credit risk,
and complement the Bank's lending activities. The Bank's policies generally
limit investments to government and federal agency securities. The Bank's
policies provide the authority to invest in U.S. Treasury and federal agency
securities meeting the Bank's guidelines and in mortgage-backed securities
guaranteed by the U.S. government and agencies thereof. At February 29,
1996, the Bank had securities and mortgage-backed securities in the aggregate
amount of $76.0 million with a market value of $75.8 million.
At February 29, 1996, the Bank had $55.1 million in government agency
securities. At February 29, 1996, all of the Bank's mortgage-backed
securities were insured or guaranteed by either the FNMA or FHLMC.
Investments in mortgage-backed securities involve a risk that actual
prepayments will be greater than estimated prepayments over the life of the
security which may require adjustments to the amortization of any premium or
accretion of any discount relating to such instruments thereby reducing or
increasing, respectively, the net yield on such securities. There is also
reinvestment risk associated with the cash flows from such securities. In
addition, the market value of such securities may be adversely affected by
changes in interest rates.
66
<PAGE>
The following table sets forth certain information regarding the carrying
and fair values of the Bank's securities at the dates indicated:
<TABLE>
<CAPTION>
AT DECEMBER 31,
--------------------------------------------------------------------
AT FEBRUARY 29,
1996 1995 1994 1993
-------------------- -------------------- --------------------- --------------------
CARRYING FAIR CARRYING FAIR CARRYING FAIR CARRYING FAIR
VALUE VALUE VALUE VALUE VALUE VALUE VALUE VALUE
-------- ------- -------- ------- -------- ------- -------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Securities:
Available-for-sale:
U.S. Treasury bills and notes . . $ 4,552 $ 4,552 $ 4,547 $ 4,547 $ 3,951 $ 3,951 $ - $ -
U.S. government agency notes 28,306 28,306 28,358 28,358 10,871 10,871 - -
FNMA . . . . . . . . . . . . . . 1,273 1,273 1,335 1,335 - - - -
FHLMC . . . . . . . . . . . . . . 2,841 2,841 2,894 2,894 - - - -
CMOs . . . . . . . . . . . . . . - - - - 136 136 - -
-------- ------- -------- ------- -------- ------- -------- -------
Total available-for-sale . . . $ 36,972 $36,972 $ 37,134 $37,134 $ 14,958 $14,958 $ - $ -
-------- ------- -------- ------- -------- ------- -------- -------
-------- ------- -------- ------- -------- ------- -------- -------
Held-to-maturity:
U.S. Treasury bills and notes . . $ - $ - $ - $ - $ 2,505 $ 2,482 $ 4,516 $ 4,726
U.S. government agency notes . . 22,235 22,132 24,635 24,521 44,675 42,489 38,558 33,812
FNMA . . . . . . . . . . . . . . 7,278 7,207 7,497 7,431 5,601 5,520 7,607 7,665
FHLMC . . . . . . . . . . . . . . 9,555 9,517 10,274 10,249 13,115 12,682 7,606 7,580
CMOs . . . . . . . . . . . . . . - - 88 92 - - 174 186
REMICs . . . . . . . . . . . . . - - - - - - 67 67
-------- ------- -------- ------- -------- ------- -------- -------
Total held-to-maturity . . . . $ 39,068 $38,856 $ 42,494 $42,293 $ 65,896 $63,173 $ 58,528 $54,036
-------- ------- -------- ------- -------- ------- -------- -------
-------- ------- -------- ------- -------- ------- -------- -------
</TABLE>
67
<PAGE>
The table below sets forth certain information regarding the carrying
value, weighted average yields and contractual maturities of the Bank's
securities and mortgage-backed securities as of February 29, 1996.
<TABLE>
<CAPTION>
AT FEBRUARY 29, 1996
--------------------------------------------------------------------------------------------------
MORE THAN ONE MORE THAN FIVE
ONE YEAR OR LESS YEAR TO FIVE YEARS YEARS TO TEN YEARS MORE THAN TEN YEARS TOTAL
------------------ ------------------ ------------------ ------------------ ------------------
WEIGHTED WEIGHTED WEIGHTED WEIGHTED WEIGHTED
CARRYING AVERAGE CARRYING AVERAGE CARRYING AVERAGE CARRYING AVERAGE CARRYING AVERAGE
VALUE YIELD VALUE YIELD VALUE YIELD VALUE YIELD VALUE YIELD
-------- -------- -------- ------- -------- ------- -------- -------- -------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Securities:
Available-for-sale:
U.S. Treasury bills and notes $3,012 5.88% $ 1,540 7.53% $ - -% $ - -% $ 4,552 6.43%
U.S. government agency notes . 12,064 5.73 11,244 6.22 4,998 6.83 - - 28,306 6.12
------ ------- ----- ------ -------
Total available-for-sale . . 15,076 5.76 12,784 6.37 4,998 6.83 - - 32,858 6.16
Held-to-maturity:
U.S. government agency notes . - - 18,235 5.59 4,000 6.16 - - 22,235 5.70
------ ------- ----- ------ -------
Total securities . . . . . . $15,076 5.76% $31,019 5.92% $8,998 6.53% $ - -% $55,093 5.97%
------ ------- ----- ------ -------
------ ------- ----- ------ -------
Mortgage-backed securities:
Available-for-sale:
FNMA . . . . . . . . . . . . $ - -% $ 132 9.75% $ - -% $1,141 7.04% $1,273 7.31%
FHLMC . . . . . . . . . . . . - - 2,841 6.03 - - - - 2,841 6.03
------ ------- ----- ------ -------
Total available-for-sale . - - 2,973 6.19 - - 1,141 7.04 4,114 6.42
Held-to-maturity:
FNMA . . . . . . . . . . . . - - - - - - 7,278 6.91 7,278 6.91
FHLMC . . . . . . . . . . . . - - - - - - 9,555 6.49 9,555 6.49
------ ------- ----- ------ -------
Total held-to-maturity . . . - - - - - - 16,833 6.67 16,833 6.67
------ ------- ----- ------ -------
Total mortgage-backed
securities . . . . . . . $ - - $2,973 6.19% $ - - $17,974 6.69% $20,947 6.62%
------ ------- ----- ------ -------
------ ------- ----- ------ -------
</TABLE>
68
<PAGE>
Sources of Funds
GENERAL. Deposits, loan repayments and prepayments, cash flows generated
from operations and, to a significantly lesser extent, FHLB advances, are the
primary sources of the Bank's funds for use in lending, investing and for other
general purposes.
DEPOSITS. The Bank offers a variety of deposit accounts with a range of
interest rates and terms. The Bank's deposits consist of passbook savings, NOW
accounts, money market accounts and certificates of deposit. For the two months
ended February 29, 1996, certificates of deposit constituted 65.5% of total
average deposits. The term of the certificates of deposit offered by the Bank
vary from six months to seven years and the offering rates are established by
the Bank on a weekly basis. Once an account is established, no additional
amounts are permitted to be deposited in that account. Specific terms of an
individual account vary according to the type of account, the minimum balance
required, the time period funds must remain on deposit and the interest rate,
among other factors. The flow of deposits is influenced significantly by
general economic conditions, changes in money market rates, prevailing interest
rates and competition. At February 29, 1996, the Bank had $44.0 million of
certificate accounts maturing in less than one year. The Bank's deposits are
obtained predominantly from the areas in which its banking offices are located.
As part of its marketing strategy and its attempt to increase its deposit base,
the Bank has added two ATMs and has plans to install a third ATM. The Bank may
also consider opening additional branches in its primary market area. See "Use
of Proceeds." The Bank relies primarily on customer service and long-standing
relationships with customers to attract and retain these deposits; however,
market interest rates and rates offered by competing financial institutions
significantly affect the Bank's ability to attract and retain deposits. See Note
7 to the Consolidated Financial Statements for a discussion of the types of
deposit accounts offered by the Bank.
The following table presents the deposit activity of the Bank for the
periods indicated:
<TABLE>
<CAPTION>
FOR THE TWO MONTHS FOR THE YEAR ENDED DECEMBER 31,
---------------------------- ---------------------------------
FEBRUARY 29, FEBRUARY 28,
1996 1995 1995 1994 1993
------------ ------------ ------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Net deposits (withdrawals) . . . . . . $(1,418) $(4,252) $7,200 $(5,160) $(5,891)
Interest credited on deposit accounts 224 150 4,782 4,002 4,416
------ ------ ------- ------- -------
Total increase (decrease) in deposit
accounts . . . . . . . . . . . . . . $(1,194) $(4,102) $11,982 $(1,158) $(1,475)
------- ------- ------- ------- -------
------- ------- ------- ------- -------
</TABLE>
At February 29, 1996, the Bank had approximately $8.0 million in certificate
accounts in amounts of $100,000 or more maturing as follows:
<TABLE>
<CAPTION>
WEIGHTED
MATURITY PERIOD AMOUNT AVERAGE RATE
- ------------------------------------------ ------ ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Three months or less . . . . . . . . . . . $1,489 5.53%
Over three through six months . . . . . . 1,917 5.82
Over six through 12 months . . . . . . . . 791 6.18
Over 12 months . . . . . . . . . . . . . . 3,776 6.56
------
Total. . . . . . . . . . . . . . . . . . . $7,973 6.15
------
------
</TABLE>
69
<PAGE>
The following table sets forth the distribution of the Bank's deposit
accounts for the periods indicated.
<TABLE>
<CAPTION>
FOR THE TWO MONTHS ENDED FOR THE YEAR ENDED DECEMBER 31,
------------------------ -------------------------------------------------------------------
FEBRUARY 29, 1996 1995 1994 1993
------------------------ --------------------- --------------------- --------------------
PERCENT PERCENT PERCENT PERCENT
AMOUNT OF TOTAL AMOUNT OF TOTAL AMOUNT OF TOTAL AMOUNT OF TOTAL
--------- ------------- --------- ---------- --------- ---------- -------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Passbook accounts . . . . . . . . . . $34,573 26.74% $34,798 26.66% $39,087 32.98% $41,006 34.26%
Money market savings accounts . . . . 4,168 3.22 4,014 3.08 3,913 3.30 5,135 4.29
NOW accounts . . . . . . . . . . . . 5,388 4.17 5,630 4.31 5,358 4.52 5,013 4.19
Noninterest bearing accounts . . . . 1,370 1.06 1,352 1.04 342 0.29 257 0.21
-------- ------ -------- ------ -------- ------ -------- ------
Total . . . . . . . . . . . . . . . 45,499 35.19 45,794 35.09 48,700 41.09 51,411 42.95
Certificate accounts:
3.00% to 3.99% . . . . . . . . . . - - - - 13,983 11.80 37,891 31.66
4.00% to 4.99% . . . . . . . . . . 4,524 3.50 5,513 4.22 24,166 20.39 8,181 6.84
5.00% to 5.99% . . . . . . . . . . 47,370 36.63 42,123 32.28 21,279 17.95 8,893 7.43
6.00% to 6.99% . . . . . . . . . . 29,765 23.02 34,436 26.39 4,751 4.01 5,214 4.36
7.00% to 7.99% . . . . . . . . . . 934 0.72 1,270 0.97 1,866 1.57 2,541 2.12
8.00% to 8.99% . . . . . . . . . . 958 0.74 1,108 0.85 3,519 2.97 5,283 4.42
9.00% and over . . . . . . . . . . 259 0.20 259 0.20 257 0.22 265 0.22
-------- ------ -------- ------ -------- ------ -------- ------
Total certificate accounts . . . . . 83,810 64.81 84,709 64.91 69,821 58.91 68,268 57.05
-------- ------ -------- ------ -------- ------ -------- ------
Total deposits . . . . . . . . . . .$129,309 100.00% $130,503 100.00% $118,521 100.00% $119,679 100.00%
-------- ------ -------- ------ -------- ------ -------- ------
-------- ------ -------- ------ -------- ------ -------- ------
</TABLE>
70
<PAGE>
The following table presents, by various rate categories, the amount of
certificate accounts outstanding at the dates indicated and the periods
to maturity of the certificate accounts outstanding at February 29, 1996.
<TABLE>
<CAPTION>
PERIOD TO MATURITY FROM FEBRUARY 29, 1996
---------------------------------------------------------------------
LESS THAN ONE TO TWO TO THREE TO FOUR TO MORE THAN
ONE YEAR TWO YEARS THREE YEARS FOUR YEARS FIVE YEARS FIVE YEARS
--------- --------- ----------- ---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Certificate accounts:
0 to 3.99% . . . . . . . . . . . . $ - $ - $ - $ - $ - $ -
4.00 to 4.99%. . . . . . . . . . . 4,387 137 - - - -
5.00 to 5.99%. . . . . . . . . . . 31,813 9,381 3,646 1,021 1,323 186
6.00 to 6.99%. . . . . . . . . . . 6,333 19,077 635 2,763 309 648
7.00 to 7.99%. . . . . . . . . . . 555 91 288 - - -
8.00 to 8.99%. . . . . . . . . . . 699 259 - - - -
9.00% and over . . . . . . . . . . 259 - - - - -
------- ------- ------ ------ ------ -----
Total. . . . . . . . . . . . . . . $44,046 $28,945 $4,569 $3,784 $1,632 $ 834
------- ------- ------ ------ ------ -----
------- ------- ------ ------ ------ -----
<CAPTION>
AT
FEBRUARY 29, AT DECEMBER 31,
------------ ----------------------------------
1996 1995 1994 1993
------------ ---------- ---------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
0 to 3.99% . . . . . . . . . . . . $ - $ - $13,983 $37,891
4.00 to 4.99%. . . . . . . . . . . 4,524 5,513 24,166 8,181
5.00 to 5.99%. . . . . . . . . . . 47,370 42,123 21,279 8,893
6.00 to 6.99%. . . . . . . . . . . 29,765 34,436 4,751 5,214
7.00 to 7.99%. . . . . . . . . . . 934 1,270 1,866 2,541
8.00 to 8.99%. . . . . . . . . . . 958 1,108 3,519 5,283
9.00% and over . . . . . . . . . . 259 259 257 265
------- ------- ------- -------
Total. . . . . . . . . . . . . . . $83,810 $84,709 $69,821 $68,268
------- ------- ------- -------
------- ------- ------- -------
</TABLE>
71
<PAGE>
BORROWINGS. Periodically the Bank has obtained advances from the
FHLB-Chicago as an alternative to retail deposit funds and may do so in the
future as part of its operating strategy. FHLB advances may also be used to
acquire certain other assets as may be deemed appropriate for investment
purposes. These advances are collateralized primarily by certain of the Bank's
mortgage loans and mortgage-backed securities and secondarily by the Bank's
investment in capital stock of the FHLB. See "Regulation - Federal Home Loan
Bank System." Such advances are made pursuant to several different credit
programs, each of which has its own interest rate and range of maturities. The
maximum amount that the FHLB will advance to member institutions, including the
Bank, fluctuates in accordance with the policies of the OTS and the FHLB.
The following table sets forth certain information regarding the Bank's
borrowed funds at or for the periods ended on the dates indicated:
<TABLE>
<CAPTION>
AT OR FOR THE AT OR FOR THE YEAR
TWO MONTHS ENDED ENDED DECEMBER 31,
--------------------- ------------------------------
FEBRUARY FEBRUARY
29, 1996 28, 1995 1995 1994 1993
-------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
FHLB advances:
Average balance outstanding. . . . $150 $7,333 $2,692 $2,539 $ -
Maximum amount outstanding at any
month-end during the period. . . - 10,000 10,000 8,000 -
Balance outstanding at end of
period . . . . . . . . . . . . . - 4,000 9,000 8,000 -
Weighted average interest rate
during the period. . . . . . . . 4.00% 6.14% 3.79% 4.41% -%
</TABLE>
SUBSIDIARY ACTIVITIES
The Bank has two wholly-owned subsidiaries. GPS Development Corp. is an
Illinois corporation which participates in residential real estate development
projects. GPS Corporation is an Illinois corporation previously engaged in the
sale of retail insurance products. In December 1994, the Bank sold the
insurance policies to an unaffiliated insurance agency. Presently the
activities of GPS Corporation are limited to recordkeeping and receipt of
certain fees relating to the sold policies.
GPS DEVELOPMENT CORP. The Bank engages in the business of purchasing
unimproved land for development into residential subdivisions of primarily
single family lots through its wholly-owned subsidiary, GPS Development Corp.,
which was incorporated in 1993. The Bank and its subsidiary have been engaged
in this activity since 1985, and since that time has developed and sold over 440
lots in 4 different subdivisions in the western suburbs of Chicago. Currently,
GPS Development Corp. acts as joint venture partner in its developments. For
those joint ventures it is engaged in, GPS Development Corp. has historically
provided essentially all of the capital for a joint venture and receives in
exchange an ownership interest which entitles it to a percentage of the profit
or loss generated by the venture. GPS Development Corp. only invests in real
estate development projects which it believes it can monitor effectively. GPS
Development Corp. has a percentage interest in the net profit of each joint
venture, generally 50%, with the exact percentage based upon a number of
factors, including characteristics of the venture, the perceived risks involved
and the time to completion. The net profits are generally defined in the joint
venture agreement as the gross profits of the joint venture from sales, less all
expenses, loan repayments, capital contributions and an agreed upon rate of
return on such capital contribution.
72
<PAGE>
At February 29, 1996, GPS Development Corp. was involved in two real estate
development projects. The Rose Hill Venture, located in Naperville, Illinois,
consisted of 259 single family residential lots, 132 townhouse lots and a
commercial parcel. As of February 29, 1996, only eight single family lots
remained for sale. In addition, the Bank expects to begin sales in mid-1996 in
the Prairie Ridge Venture, located in Naperville, Illinois. It is expected that
this project will consist of 88 single family residential lots.
Real estate development activities involve risks that could have an adverse
effect on the profitability of the Bank. GPS Development incurs substantial
costs to acquire, improve and market the land, prior to commencement of
construction. There are negative cash flows in the early stages of the project
because it does not recoup such costs until sales of the lots are closed.
During the construction phase, a number of factors could result in cost
overruns, which could decrease or possibly eliminate the potential profit from
the project. In addition, the profit potential on any given project may cease
if the project is not completed, the underlying value of the project or the
general market area declines, the project is not sold or is sold over a longer
period of time than initially contemplated or a combination of these factors
occurs. Additionally, the ability to generate income from such projects is
dependent, in part, on the economy of the metropolitan Chicago area. Although
the economy in such area has been stable in recent years, there can be no
assurance that such economy will continue to be favorable. For the two months
ended February 29, 1996 and February 28, 1995, and the years ended December 31,
1995, 1994 and 1993, gain on the sale of real estate held for development
totalled $11,000, $0, $523,000, $1,114,000 and $856,000, respectively.
PROPERTIES
The Bank conducts its business through three banking offices. The Company
believes that the current facilities are adequate to meet the present and
immediately foreseeable needs of the Bank and the Company. In addition, the
Bank currently holds two properties for future ATM sites and parking facilities
with a net book value of $161,816 and a property for a possible future branch
office with a net book value of $145,515.
The following table sets forth certain information regarding the Bank's
three banking offices, all of which are owned by the Bank.
<TABLE>
<CAPTION>
NET BOOK VALUE
DATE OF PROPERTY AT
LOCATION ACQUIRED FEBRUARY 29, 1996
- ---------------------------- ---------------- -----------------------
<S> <C> <C>
HOME OFFICE: 1954 $20,054
2740 West 55th Street
Chicago, Illinois 60632
BRANCH OFFICES: 1985 943,410
5400 South Pulaski Road
Chicago, Illinois 60632
21 East Ogden Avenue 1975 684,437
Westmont, Illinois 60559
</TABLE>
73
<PAGE>
LEGAL PROCEEDINGS
The Bank is not involved in any pending legal proceedings other than the
legal proceedings occurring in the ordinary course of business. Such legal
proceedings in the aggregate are believed by management to be immaterial to
the Company's financial condition or results of operations.
PERSONNEL
As of February 29, 1996, the Bank had 34 full-time employees and 16
part-time employees. The employees are not represented by a collective
bargaining unit and the Bank considers its relationship with its employees to be
good. See "The Board of Directors and Management of the Bank - Benefits" for a
description of certain compensation and benefit programs offered to the Bank's
employees.
FEDERAL AND STATE TAXATION
FEDERAL TAXATION
GENERAL. The Company and the Bank will report their income on a calendar
year basis using the accrual method of accounting and will be subject to federal
income taxation in the same manner as other corporations with some exceptions,
including particularly the Bank's reserve for bad debts discussed below. The
following discussion of tax matters is intended only as a summary and does not
purport to be a comprehensive description of the tax rules applicable to the
Bank or the Company. The statute of limitations has closed all years for both
Federal and Illinois purposes through the 1992 tax year.
BAD DEBT RESERVE. Savings institutions such as the Bank which meet certain
definitional tests primarily relating to their assets and the nature of their
business ("qualifying thrifts") are permitted to establish a reserve for bad
debts and to make annual additions thereto, which additions may, within
specified formula limits, be deducted in arriving at their taxable income. The
Bank's deduction with respect to "qualifying real property loans," which are
generally loans secured by certain interests in real property, may be computed
using an amount based on the Bank's actual loss experience, or a percentage
equal to 8% of the Bank's taxable income, computed with certain modifications
and reduced by the amount of any permitted addition to the non-qualifying
reserve. The Bank's deduction with respect to non-qualifying loans must be
computed under the experience method which allows a deduction based on the
Bank's actual loss experience over a period of several years.
The Bank presently satisfies the qualifying thrift definitional tests. If
the Bank failed to satisfy such tests in any taxable year, it would be unable to
make additions to its bad debt reserve. Instead, the Bank would be required to
deduct bad debts as they occur and would additionally be required to recapture
its bad debt reserve deductions ratably over a multi-year period. Among other
things, the qualifying thrift definitional tests require the Bank to hold at
least 60% of its assets as "qualifying assets." Qualifying assets generally
include cash, obligations of the United States or any agency or instrumentality
thereof, certain obligations of a state or political subdivision thereof, loans
secured by interests in improved residential real property or by savings
accounts, student loans and property used by the Bank in the conduct of its
banking business. The Bank's ratio of qualifying assets to total assets
exceeded 60% through February 29, 1996. Although there can be no assurance that
the Bank will satisfy the 60% test in the future, management believes that this
level of qualifying assets can be maintained by the Bank.
The amount of the addition to the reserve for losses on qualifying real
property loans under the percentage of taxable income method cannot exceed the
amount necessary to increase the balance of the
74
<PAGE>
reserve for losses on qualifying real property loans at the close of the taxable
year to 6 percent of the balance of the qualifying real property loans
outstanding at the end of the taxable year. Currently, the Bank's total reserve
for bad debts on qualifying real property loans is approximately $3.6 million,
less than 4.3 percent of its qualifying real property loans outstanding. Also,
if the qualifying thrift uses the percentage of taxable income method, then the
qualifying thrift's aggregate addition to its reserve for losses on qualifying
real property loans cannot, when added to the addition to the reserve for losses
on non-qualifying loans, exceed the amount by which: (i) 12 percent of the
amount that the total deposits or withdrawable accounts of depositors of the
qualifying thrift at the close of the taxable year exceeds (ii) the sum of the
qualifying thrift's surplus, undivided profits and reserves at the beginning of
such year. As of December 31, 1995, this overall limitation would not have
restricted the Bank's deduction for additions to its bad debt reserve. At
February 29, 1996, the Bank's bad debt reserve for tax purposes was $4.5
million.
Legislation is pending before Congress that would generally repeal,
effective for taxable years beginning after 1995, the above-described bad debt
deduction rules available to thrift institutions such as the Bank, but would
retain the experience method for thrift institutions having assets with average
adjusted bases of $500 million or less. The proposed tax legislation would not
require the recapture of bad debt reserve deductions taken prior to 1988, but
would require the recapture of at least some of the bad debt reserve deductions
taken by an affected thrift institution after 1987. The balance of pre-1988 bad
debt reserves would continue to be subject to provisions of present law referred
to below that require recapture in the case of certain excess distributions to
shareholders. Bad debt reserve deductions required to be recaptured would
generally be taken into account ratably over the six taxable years beginning
with the first taxable year beginning after December 31, 1995. However, if an
institution maintains its residential loans at a level equal to the average
level of such loans for a period preceding 1995, the institution would be
permitted to defer recapture of its reserves until 1998. The Bank is not able
to predict whether or in what form the proposed tax legislation will be enacted
or the effect that such enactment would have on the Bank's federal income tax
liability. In addition, there may be an impact on state income tax liability as
a result of the enactment of the proposed legislation.
DISTRIBUTIONS. To the extent that the Bank makes "non-dividend
distributions" to the Company that are considered as made (i) from the reserve
for losses on qualifying real property loans, to the extent the reserve for such
losses exceeds the amount that would have been allowed under the experience
method, or (ii) from the supplemental reserve for losses on loans ("Excess
Distributions"), then an amount based on the amount distributed will be included
in the Bank's taxable income. Non-dividend distributions include distributions
in excess of the Bank's current and accumulated earnings and profits,
distributions in redemption of stock, and distributions in partial or complete
liquidation. However, dividends paid out of the Bank's current or accumulated
earnings and profits, as calculated for federal income tax purposes, will not be
considered to result in a distribution from the Bank's bad debt reserve. Thus,
any dividends to the Company that would reduce amounts appropriated to the
Bank's bad debt reserve and deducted for federal income tax purposes would
create a tax liability for the Bank. The amount of additional taxable income
created from an Excess Distribution is an amount that, when reduced by the tax
attributable to the income, is equal to the amount of the distribution. Thus,
if, after the Conversion, the Bank makes a "non-dividend distribution," then
approximately one and one-half times the amount so used would be includable in
gross income for federal income tax purposes, assuming a 34% corporate income
tax rate (exclusive of state and local taxes). See "Regulation" and "Dividend
Policy" for limits on the payment of dividends of the Bank. The Bank does not
intend to pay dividends that would result in a recapture of any portion of its
bad debt reserve.
CORPORATE ALTERNATIVE MINIMUM TAX. The Internal Revenue Code of 1986, as
amended (the "Code") imposes a tax on alternative minimum taxable income
("AMTI") at a rate of 20%. The excess
75
<PAGE>
of the bad debt reserve deduction using the percentage of taxable income method
over the deduction that would have been allowable under the experience method is
treated as a preference item for purposes of computing the AMTI. Only 90% of
AMTI can be offset by net operating loss carryovers of which the Bank currently
has none. AMTI is increased by an amount equal to 75% of the amount by which
the Bank's adjusted current earnings exceeds its AMTI (determined without regard
to this preference and prior to reduction for net operating losses). The Bank
does not expect to be subject to the AMT.
DIVIDENDS RECEIVED DEDUCTION AND OTHER MATTERS. The Company may exclude
from its income 100% of dividends received from the Bank as a member of the same
affiliated group of corporations. The corporate dividends received deduction is
generally 70% in the case of dividends received from unaffiliated corporations
with which the Company and the Bank will not file a consolidated tax return,
except that if the Company or the Bank own more than 20% of the stock of a
corporation distributing a dividend then 80% of any dividends received may be
deducted.
STATE AND LOCAL TAXATION
STATE OF ILLINOIS. The Company and the Bank will file a combined Illinois
income tax return. For Illinois income tax purposes, they are taxed at an
effective rate equal to 7.18% of Illinois Taxable Income. For these purposes,
"Illinois Taxable Income" generally means federal taxable income, subject to
certain adjustments (including the addition of interest income on state and
municipal obligations and the exclusion of interest income on United States
Treasury and agency obligations). The exclusion of income on United States
Treasury and agency obligations has the effect of reducing Illinois taxable
income. The Company is also required to file an annual report with and pay an
annual franchise tax to the State of Illinois.
DELAWARE TAXATION. As a Delaware holding company not earning income in
Delaware, the Company is exempted from Delaware corporate income tax but is
required to file an annual report with and pay an annual franchise tax to the
State of Delaware.
REGULATION
GENERAL
The Bank is subject to extensive regulation, examination and supervision by
the OTS, as its chartering agency, and the FDIC, as the deposit insurer. The
Bank is a member of the FHLB System. The Bank's deposit accounts are insured up
to applicable limits by the SAIF managed by the FDIC. The Bank must file
reports with the OTS and the FDIC concerning its activities and financial
condition in addition to obtaining regulatory approvals prior to entering into
certain transactions such as mergers with, or acquisitions of, other financial
institutions. There are periodic examinations by the OTS and the FDIC to test
the Bank's compliance with various regulatory requirements. This regulation and
supervision establishes a comprehensive framework of activities in which an
institution can engage and is intended primarily for the protection of the
insurance fund and depositors. The regulatory structure also gives the
regulatory authorities extensive discretion in connection with their supervisory
and enforcement activities and examination policies, including policies with
respect to the classification of assets and the establishment of adequate loan
loss reserves for regulatory purposes. Any change in such policies, whether by
the OTS, the FDIC or the Congress, could have a material adverse impact on the
Company, the Bank and their operations. Assuming that the holding company form
of organization is utilized, the Company, as a savings and loan holding company,
will also be required to file certain reports with, and otherwise comply with
the rules and regulations of the OTS and of the Securities and Exchange
Commission (the "SEC") under the federal securities laws.
76
<PAGE>
Any change in the regulatory structure or the applicable statutes or
regulations, whether by the OTS, the FDIC or the Congress, could have a material
impact on the Company, the Bank, its operations or the Bank's Conversion.
Congress currently has under consideration various proposals to eliminate the
federal thrift charter and abolish the OTS. The outcome of such legislation is
uncertain. Therefore, the Bank is unable to determine the extent to which
legislation, if enacted, would affect its business. See "Risk Factors -
Financial Institution Regulation and Possible Legislation."
Certain of the regulatory requirements applicable to the Bank and to the
Company are referred to below or elsewhere herein. The description of statutory
provisions and regulations applicable to savings associations set forth in this
Prospectus do not purport to be complete descriptions of such statutes and
regulations and their effects on the Bank and the Company and is qualified in
its entirety by reference to such statutes and regulations.
FEDERAL SAVINGS INSTITUTION REGULATION
BUSINESS ACTIVITIES. The activities of federal savings institutions are
governed by the Home Owners' Loan Act, as amended (the "HOLA") and, in certain
respects, the Federal Deposit Insurance Act ("FDI Act") and the regulations
issued by the agencies to implement these statutes. These laws and regulations
delineate the nature and extent of the activities in which federal associations
may engage. In particular, many types of lending authority for federal
associations, e.g., commercial, non-residential real property loans and consumer
loans, are limited to a specified percentage of the institutions's capital or
assets.
LOANS-TO-ONE BORROWER. Under the HOLA, savings institutions are generally
subject to the national bank limit on loans-to-one borrower. Generally, this
limit is 15% of the Bank's unimpaired capital and surplus, plus an additional
10% of unimpaired capital and surplus, if such loan is secured by
readily-marketable collateral, which is defined to include certain financial
instruments and bullion. At February 29, 1996, the Bank's limit on loans-to-one
borrower was $2.7 million. At February 29, 1996, the Bank's largest aggregate
amount of loans-to-one borrower consisted of $871,000.
QTL TEST. The HOLA requires savings institutions to meet a QTL test.
Under the QTL test, a savings association is required to maintain at least 65%
of its "portfolio assets" (total assets less: (i) specified liquid assets up to
20% of total assets; (ii) intangibles, including goodwill; and (iii) the value
of property used to conduct business) in certain "qualified thrift investments"
(primarily residential mortgages and related investments, including certain
mortgage-backed and related securities) in at least 9 months out of each 12
month period. A savings association that fails the QTL test must either convert
to a bank charter or operate under certain restrictions. As of February 29,
1996, the Bank maintained 69.44% of its portfolio assets in qualified thrift
investments and, therefore, met the QTL test. For a discussion of the impact of
the proposed legislation, "See Risk Factors -- Financial Institution Regulation
and Possible Legislation."
LIMITATION ON CAPITAL DISTRIBUTION. OTS regulations impose limitations
upon all capital distributions by savings institutions, such as cash dividends,
payments to repurchase or otherwise acquire its shares, payments to shareholders
of another institution in a cash-out merger and other distributions charged
against capital. The rule establishes three tiers of institutions, which are
based primarily on an institution's capital level. An institution that exceeds
all fully phased-in regulatory capital requirements before and after a proposed
capital distribution ("Tier 1 Bank") and has not been advised by the OTS that it
is in need of more than normal supervision, could, after prior notice to, but
without the approval of the OTS, make capital distributions during a calendar
year equal to the greater of: (i) 100% of its net earnings to date during the
calendar year plus the amount that would reduce by one-half its "surplus
77
<PAGE>
capital ratio" (the excess capital over its fully phased-in capital
requirements) at the beginning of the calendar year; or (ii) 75% of its net
earnings for the previous four quarters. Any additional capital
distributions would require prior OTS approval. In the event the Bank's
capital fell below its capital requirements or the OTS notified it that it
was in need of more than normal supervision, the Bank's ability to make
capital distributions could be restricted. In addition, the OTS could
prohibit a proposed capital distribution by any institution, which would
otherwise be permitted by the regulation, if the OTS determines that such
distribution would constitute an unsafe or unsound practice.
LIQUIDITY. The Bank is required to maintain an average daily balance of
specified liquid assets equal to a monthly average of not less than a specified
percentage (currently 5%) of its net withdrawable deposit accounts plus
short-term borrowings. OTS regulations also require each savings institution to
maintain an average daily balance of short-term liquid assets at a specified
percentage (currently 1%) of the total of its net withdrawable deposit accounts
and borrowings payable in one year or less. Monetary penalties may be imposed
for failure to meet these liquidity requirements. The Bank's average liquidity
ratio for the two months ended February 29, 1996 was 51.76%, which exceeded the
applicable requirements. The Bank has never been subject to monetary penalties
for failure to meet its liquidity requirements. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations - Liquidity and
Capital Reserves."
ASSESSMENTS. Savings institutions are required by regulation to pay
assessments to the OTS to fund the agency's operations. The general assessment,
paid on a semi-annual basis, is computed upon the savings institution's total
assets, including consolidated subsidiaries, as reported in the Bank's latest
quarterly Thrift Financial Report. The assessments paid by the Bank for the
year ended December 31, 1995 totalled $42,000.
BRANCHING. OTS regulations permit federally chartered savings associations
to branch nationwide under certain conditions. Generally, federal savings
associations may establish interstate networks and geographically diversify
their loan portfolios and lines of business. The OTS authority preempts any
state law purporting to regulate branching by federal savings associations. For
a discussion of the impact of proposed legislation, see "Risk Factors -
Financial Institution Regulation and Possible Legislation."
TRANSACTIONS WITH RELATED PARTIES. The Bank's authority to engage in
transactions with related parties or "affiliates" (i.e., any company that
controls or is under common control with an institution, including the Company
and its non-savings institution subsidiaries) is limited by Sections 23A and 23B
of the Federal Reserve Act ("FRA"). Section 23A limits the aggregate amount of
covered transactions with any individual affiliate to 10% of the capital and
surplus of the savings institution and also limits the aggregate amount of
transactions with all affiliates to 20% of the savings institution's capital and
surplus. Certain transactions with affiliates are required to be secured by
collateral in an amount and of a type described in Section 23A and the purchase
of low quality assets from affiliates is generally prohibited. Section 23B
generally requires that certain transactions with affiliates, including loans
and asset purchases, must be on terms and under circumstances, including credit
standards, that are substantially the same or at least as favorable to the
institution as those prevailing at the time for comparable transactions with
non-affiliated companies.
ENFORCEMENT. Under the FDI Act, the OTS has primary enforcement
responsibility over savings institutions and has the authority to bring action
against all "institution-affiliated parties," including stockholders, and any
attorneys, appraisers and accountants who knowingly or recklessly participate in
wrongful action likely to have an adverse effect on an insured institution.
Formal enforcement action may
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<PAGE>
range from the issuance of a capital directive or cease and desist order to
removal of officers or directors, receivership, conservatorship or termination
of deposit insurance. Civil penalties cover a wide range of violations and can
amount to $25,000 per day, or $1 million per day in especially egregious cases.
Under the FDI Act, the FDIC has the authority to recommend to the Director of
the OTS that enforcement action be taken with respect to a particular savings
institution. If action is not taken by the Director, the FDIC has authority to
take such action under certain circumstances. Federal law also establishes
criminal penalties for certain violations.
CAPITAL REQUIREMENTS. The OTS capital regulations require savings
institutions to meet three capital standards: a 1.5% tangible capital standard,
a 3% leverage (core capital) ratio and an 8% risk based capital standard. Core
capital is defined as common stockholder's equity (including retained earnings),
certain non-cumulative perpetual preferred stock and related surplus, minority
interests in equity accounts of consolidated subsidiaries less intangibles other
than certain mortgage servicing rights ("MSRs") and credit card relationships.
The OTS regulations require that, in meeting the leverage ratio, tangible and
risk-based capital standards institutions generally must deduct investments in
and loans to subsidiaries engaged in activities not permissible for a national
bank. In addition, the OTS prompt corrective action regulation provides that a
savings institution that has a leverage capital ratio of less than 4% (3% for
institutions receiving the highest CAMEL examination rating) will be deemed to
be "undercapitalized" and may be subject to certain restrictions. See "- Prompt
Corrective Regulatory Action."
The risk-based capital standard for savings institutions requires the
maintenance of total capital (which is defined as core capital and supplementary
capital) to risk-weighted assets of 8%. In determining the amount of
risk-weighted assets, all assets, including certain off-balance sheet assets,
are multiplied by a risk-weight of 0% to 100%, as assigned by the OTS capital
regulation based on the risks OTS believes are inherent in the type of asset.
The components of core capital are equivalent to those discussed earlier under
the 3% leverage standard. The components of supplementary capital currently
include cumulative preferred stock, long-term perpetual preferred stock,
mandatory convertible securities, subordinated debt and intermediate preferred
stock and, within specified limits, the allowance for loan and lease losses.
Overall, the amount of supplementary capital included as part of total capital
cannot exceed 100% of core capital.
The OTS has incorporated an interest rate risk component into its
regulatory capital rule. The final interest rate risk rule also adjusts the
risk-weighting for certain mortgage derivative securities. Under the rule,
savings associations with "above normal" interest rate risk exposure would be
subject to a deduction from total capital for purposes of calculating their
risk-based capital requirements. A savings association's interest rate risk is
measured by the decline in the net portfolio value of its assets (i.e., the
difference between incoming and outgoing discounted cash flows from assets,
liabilities and off-balance sheet contracts) that would result from a
hypothetical 200-basis point increase or decrease in market interest rates
divided by the estimated economic value of the association's assets, as
calculated in accordance with guidelines set forth by the OTS. A savings
association whose measured interest rate risk exposure exceeds 2% must deduct an
interest rate component in calculating its total capital under the risk-based
capital rule. The interest rate risk component is an amount equal to one-half
of the difference between the institution's measured interest rate risk and 2%,
multiplied by the estimated economic value of the association's assets. That
dollar amount is deducted from an association's total capital in calculating
compliance with its risk-based capital requirement. Under the rule, there is a
two quarter lag between the reporting date of an institution's financial data
and the effective date for the new capital requirement based on that data. A
savings association with assets of less than $300 million and risk-based capital
ratios in excess of 12% is not subject to the interest rate risk component,
unless the OTS
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determines otherwise. The rule also provides that the Director of the OTS may
waive or defer an association's interest rate risk component on a case-by-case
basis. The OTS has postponed the date that the component will first be deducted
from an institution's total capital to provide it with an opportunity to review
the interest rate risk proposals recently issued by the other federal banking
agencies.
At February 29, 1996, the Bank met each of its capital requirements, in
each case on a fully phased-in basis. See "Regulatory Capital Compliance" for a
table which sets forth in terms of dollars and percentages the OTS tangible,
leverage and risk-based capital requirements, the Bank's historical amounts and
percentages at February 29, 1996, and pro forma amounts and percentages based
upon the issuance of the shares within the Estimated Price Range and assuming
that a portion of the net proceeds are retained by the Company.
PROMPT CORRECTIVE REGULATORY ACTION
Under the OTS prompt corrective action regulations, the OTS is required to
take certain supervisory actions against undercapitalized institutions, the
severity of which depends upon the institution's degree of capitalization.
Generally, a savings institution that has a total risk-based capital of less
than 8.0% or a leverage ratio or a Tier 1 capital ratio that is less than 4.0%
is considered to be undercapitalized. A savings institution that has a total
risk-based capital less than 6.0%, a Tier 1 risk-based capital ratio of less
than 3% or a leverage ratio that is less than 3.0% is considered to be
"significantly undercapitalized" and a savings institution that has a tangible
capital to assets ratio equal to or less than 2% is deemed to be "critically
undercapitalized." Subject to a narrow exception, the banking regulator is
required to appoint a receiver or conservator for an institution that is
critically undercapitalized. The regulation also provides that a capital
restoration plan must be filed with the OTS within 45 days of the date an
association receives notice that it is "undercapitalized," "significantly
undercapitalized" or "critically undercapitalized." Compliance with the plan
must be guaranteed by any parent holding company. In addition, numerous
mandatory supervisory actions may become immediately applicable to the
institution depending upon its category, including, but not limited to,
increased monitoring by regulators, restrictions on growth, and capital
distributions and limitations on expansion. The OTS could also take any one of
a number of discretionary supervisory actions, including the issuance of a
capital directive and the replacement of senior executive officers and
directors.
INSURANCE OF DEPOSIT ACCOUNTS
The FDIC has adopted a risk-based insurance assessment system. The FDIC
assigns an institution to one of three capital categories based on the
institution's financial information, as of the reporting period ending seven
months before the assessment period, consisting of (1) well capitalized, (2)
adequately capitalized or (3) undercapitalized, and one of three supervisory
subcategories within each capital group. The supervisory subgroup to which an
institution is assigned is based on a supervisory evaluation provided to the
FDIC by the institution's primary federal regulator and information which the
FDIC determines to be relevant to the institution's financial condition and the
risk posed to the deposit insurance funds. An institution's assessment rate
depends on the capital category and supervisory category to which it is
assigned. Assessment rates for SAIF member institutions currently range from 23
basis points to 31 basis points. The FDIC is authorized to raise the assessment
rates in certain circumstances. The FDIC has exercised this authority several
times in the past and may raise insurance premiums in the future. If such
action is taken by the FDIC, it could have an adverse effect on the earnings of
the Bank. The Bank's assessment rate for the years ended December 31, 1995,
1994 and 1993 was .23% of assessable deposits. See "Risk Factors -
Recapitalization of SAIF and Its Impact on SAIF Premiums."
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Under the FDI Act, insurance of deposits may be terminated by the FDIC upon
a finding that the institution has engaged in unsafe or unsound practices, is in
an unsafe or unsound condition to continue operations or has violated any
applicable law, regulation, rule, order or condition imposed by the FDIC or the
OTS. The management of the Bank does not know of any practice, condition or
violation that might lead to termination of deposit insurance.
FEDERAL HOME LOAN BANK SYSTEM
The Bank is a member of the FHLB System, which consists of 12 regional
FHLBs. The FHLB provides a central credit facility primarily for member
institutions. The Bank, as a member of the FHLB, is required to acquire and
hold shares of capital stock in the FHLB in an amount at least equal to 1% of
the aggregate principal amount of its unpaid residential mortgage loans and
similar obligations at the beginning of each year, or 1/20 of its advances
(borrowings) from the FHLB, whichever is greater. The Bank was in compliance
with this requirement with an investment in FHLB stock at February 29, 1996, of
$676,000. FHLB advances must be secured by specified types of collateral and
all long-term advances may only be obtained for the purpose of providing funds
for residential housing finance.
The FHLBs are required to provide funds for the resolution of insolvent
thrifts and to contribute funds for affordable housing programs. These
requirements could reduce the amount of dividends that the FHLBs pay to their
members and could also result in the FHLBs imposing a higher rate of interest on
advances to their members. For the years ended December 31, 1995, 1994 and
1993, dividends from the FHLB to the Bank amounted to $45,000, $43,000 and
$55,000, respectively. If dividends were reduced, the Bank's net interest
income would likely also be reduced. Further, there can be no assurance that
the impact of recent legislation on the FHLBs will not also cause a decrease in
the value of the FHLB stock held by the Bank.
FEDERAL RESERVE SYSTEM
The Federal Reserve Board regulations require savings institutions to
maintain non-interest-earning reserves against their transaction accounts
(primarily NOW and regular checking accounts). The Federal Reserve Board
regulations generally require that reserves be maintained against aggregate
transaction accounts as follows: for accounts aggregating $52.0 million or less
(subject to adjustment by the Federal Reserve Board) the reserve requirement is
3%; and for accounts greater than $52.0 million, the reserve requirement is $1.6
million plus 10% (subject to adjustment by the Federal Reserve Board between 8%
and 14%) against that portion of total transaction accounts in excess of $52.0
million. The first $4.3 million of otherwise reservable balances (subject to
adjustments by the Federal Reserve Board) are exempted from the reserve
requirements. The Bank is in compliance with the foregoing requirements.
Because required reserves must be maintained in the form of either vault cash, a
non-interest-bearing account at a Federal Reserve Bank or a pass-through account
as defined by the Federal Reserve Board, the effect of this reserve requirement
is to reduce the Bank's interest-earning assets. FHLB System members are also
authorized to borrow from the Federal Reserve "discount window," but Federal
Reserve Board regulations require institutions to exhaust all FHLB sources
before borrowing from a Federal Reserve Bank.
HOLDING COMPANY REGULATION
The Company, if utilized, will be a non-diversified unitary savings and
loan holding company within the meaning of the HOLA. As such, the Company
will be required to register with the OTS and
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will be subject to OTS regulations, examinations, supervision and reporting
requirements. In addition, the OTS has enforcement authority over the
Company and its non-savings institution subsidiaries. Among other things,
this authority permits the OTS to restrict or prohibit activities that are
determined to be a serious risk to the subsidiary savings institution. The
Bank must notify the OTS 30 days before declaring any dividend to the Company.
As a unitary savings and loan holding company, the Company generally
will not be restricted under existing laws as to the types of business
activities in which it may engage, provided that the Bank continues to be a
QTL. See "- Federal Savings Institution Regulation - QTL Test" for a
discussion of the QTL requirements. Upon any non-supervisory acquisition by
the Company of another savings association, the Company would become a
multiple savings and loan holding company (if the acquired institution is
held as a separate subsidiary) and would be subject to extensive limitations
on the types of business activities in which it could engage. The HOLA
limits the activities of a multiple savings and loan holding company and its
non-insured institution subsidiaries primarily to activities permissible for
bank holding companies under Section 4(c)(8) of the BHC Act, subject to the
prior approval of the OTS, and to other activities authorized by OTS
regulation. Recently proposed legislation would treat all savings and loan
holding companies as bank holding companies and limit the activities of such
companies to those permissible for bank holding companies. See "Risk
Factors - Financial Institution Regulation and Possible Legislation."
The HOLA prohibits a savings and loan holding company, directly or
indirectly, or through one or more subsidiaries, from acquiring more than 5%
of the voting stock of another savings institution, or holding company
thereof, without prior written approval of the OTS; and from acquiring or
retaining, with certain exceptions, more than 5% of a non-subsidiary holding
company, or a non-subsidiary company engaged in activities other than those
permitted by the HOLA; or acquiring or retaining control of a depository
institution that is not insured by the FDIC. In evaluating applications by
holding companies to acquire savings institutions, the OTS must consider the
financial and managerial resources and future prospects of the company and
institution involved, the effect of the acquisition on the risk to the
insurance funds, the convenience and needs of the community and competitive
factors.
The OTS is prohibited from approving any acquisition that would result
in a multiple savings and loan holding company controlling savings
institutions in more than one state, except: (i) the approval of interstate
supervisory acquisitions by savings and loan holding companies, and (ii) the
acquisition of a savings institution in another state if the laws of the
state of the target savings institution specifically permit such
acquisitions. The states vary in the extent to which they permit interstate
savings and loan holding company acquisitions.
FEDERAL SECURITIES LAWS
The Company has filed with the SEC a registration statement under the
Securities Act for the registration of the Common Stock to be issued pursuant
to the Conversion. Upon completion of the Conversion, the Company's Common
Stock will be registered with the SEC under the Exchange Act. The Company
will then be subject to the information, proxy solicitation, insider trading
restrictions and other requirements under the Exchange Act.
The registration under the Securities Act of shares of the Common Stock
to be issued in the Conversion does not cover the resale of such shares.
Shares of the Common Stock purchased by persons who are not affiliates of the
Company may be resold without registration. Shares purchased by an affiliate
of the Company will be subject to the resale restrictions of Rule 144 under
the Securities Act. If the
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Company meets the current public information requirements of Rule 144 under
the Securities Act, each affiliate of the Company who complies with the other
conditions of Rule 144 (including those that require the affiliate's sale to
be aggregated with those of certain other persons) would be able to sell in
the public market, without registration, a number of shares not to exceed, in
any three-month period, the greater of (i) 1% of the outstanding shares of
the Company or (ii) the average weekly volume of trading in such shares
during the preceding four calendar weeks. Provision may be made in the
future by the Company to permit affiliates to have their shares registered
for sale under the Securities Act under certain circumstances.
THE BOARD OF DIRECTORS AND
MANAGEMENT OF THE COMPANY
The Board of Directors of the Company is divided into three classes,
each of which contains approximately one-third of the Board. The directors
shall be elected by the stockholders of the Company for staggered three year
terms, or until their successors are elected and qualified. One class of
directors, consisting of Messrs. David A. Remijas and Glenn Zajicek, has a
term of office expiring at the first annual meeting of stockholders; a second
class, consisting of Messrs. Richard J. Remijas, Jr. and Paul Shukis, has a
term of office expiring at the second annual meeting of stockholders; and a
third class, consisting of Messrs. Joseph M. Judickas, Jr. and Charles
Paprocki, has a term of office expiring at the third annual meeting of
stockholders. Their names and biographical information are set forth under
"The Board of Directors and Management of the Bank - Directors."
The following individuals are officers of the Company and hold the
offices set forth below opposite their names.
NAME POSITION HELD WITH COMPANY
----------------------- -----------------------------------------
David A. Remijas President, Chief Executive Officer and
Chairman of the Board
Richard J. Remijas, Jr. Executive Vice President, Chief Operating
Officer, Corporate Secretary and Director
Steven J. Pokrak Treasurer and Chief Financial Officer
Sandra L. Remijas Assistant Vice President - Lending
The officers of the Company are elected annually and hold office until
their respective successors have been elected and qualified or until death,
resignation or removal by the Board of Directors. Since the formation of the
Company, none of the executive officers, directors or other personnel has
received remuneration from the Company. Information concerning the principal
occupations, employment and compensation of the directors and officers of the
Company during the past five years is set forth under "The Board of Directors
and Management of the Bank - Biographical Information."
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THE BOARD OF DIRECTORS AND
MANAGEMENT OF THE BANK
DIRECTORS
The following table sets forth certain information regarding the Board
of Directors of the Bank.
<TABLE>
<CAPTION>
POSITION(S) HELD WITH THE DIRECTOR TERM
NAME AGE(1) BANK(2) SINCE EXPIRES
- ----------------------- ------ ---------------------------------- -------- -------
<S> <C> <C> <C> <C>
David A. Remijas 43 President, Chief Executive Officer 1993 1997
and Chairman of the Board
Richard J. Remijas, Jr. 46 Executive Vice President, Chief 1977 1998
Operating Officer, Corporate
Secretary and Director
Joseph M. Judickas, Jr. 65 Director 1973 1999
Charles Paprocki 74 Director 1974 1999
Paul Shukis 44 Director 1993 1998
Glenn Zajicek 65 Director 1981 1997
</TABLE>
- -------------------------
(1) As of February 29, 1996.
(2) All directors are also directors of Park Bancorp, Inc., GPS Development
Corp. and GPS Corporation.
EXECUTIVE OFFICERS WHO ARE NOT DIRECTORS
The following table sets forth certain information regarding the
executive officers of the Bank who are not also directors.
NAME AGE(1) POSITION HELD WITH THE BANK(2)
------------------- ------- -------------------------------------
Steven J. Pokrak 36 Treasurer and Chief Financial Officer
Sandra L. Remijas 34 Assistant Vice President - Lending
- -------------------------
(1) As of February 29, 1996.
(2) All officers are also officers of GPS Development Corp. and GPS
Corporation.
Each of the executive officers of the Bank will retain their office in
the converted Bank until the annual meeting of the Board of Directors of the
Bank, held immediately after the first annual meeting of stockholders
subsequent to Conversion, and until their successors are elected and
qualified or until they are removed or replaced. Officers are re-elected by
the Board of Directors annually.
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BIOGRAPHICAL INFORMATION
DIRECTORS
DAVID A. REMIJAS has served as a Director and Chairman of the Board of
the Bank since 1993. Mr. Remijas has been with the Bank for over 22 years
and has held various positions during that time. Mr. Remijas currently
serves as the President and Chief Executive Officer of the Bank. Mr. Remijas
is the brother of Richard J. Remijas, Jr. and the husband of Sandra L.
Remijas. Mr. Remijas is a member of the Executive, Asset and Liability,
Community Reinvestment Act ("CRA") Review and the Nominating Committees.
RICHARD J. REMIJAS, JR. has served as a Director of the Bank since 1977
and a member of the Executive Committee since 1986. Mr. Remijas served as
Executive Vice President, Chief Operating Officer and Corporate Secretary,
since 1993. Mr. Remijas was a principal in Merrion-Remijas, Realtors, Inc.
from 1986 to 1995. Mr. Remijas is the brother of David A. Remijas and the
son of Richard J. Remijas, D.D.S. Mr. Remijas is a member of the Executive,
Nominating, CRA Review and Asset and Liability Committees.
JOSEPH M. JUDICKAS, JR. has served as a Director of the Bank since 1973.
Prior to his retirement in 1993, Mr. Judickas served as Secretary, Treasurer
and Chief Operating Officer of the Bank, when it operated under the name of
Gage Park Savings and Loan Association. Mr. Judickas is a member of the CRA
Review and Audit Committees.
CHARLES PAPROCKI has served as a Director since 1973. Prior to his
retirement, Mr. Paprocki was a wholesale meat distributor in the Chicago area
for over 34 years. Mr. Paprocki is a member of the Nominating and Audit
Committees.
PAUL SHUKIS has served as a Director of the Bank since 1993. Mr. Shukis
is the President of Shukis Development Co., a real estate development and
construction firm. Mr. Shukis is a member of the CRA Review, Compensation
and Building Committees.
GLENN ZAJICEK has served as a Director of the Bank since 1980. Mr.
Zajicek was an owner of Mudrak and Zajicek, Inc., a contracting company and
is currently a Construction Manager with Azco, Inc. Mr. Zajicek is a member
of the Compensation, Building and Audit Committees.
CHAIRMAN EMERITUS
RICHARD J. REMIJAS, D.D.S., is a retired dentist and has served as
Chairman Emeritus since 1993. He had been a director of the Bank since 1970.
Prior to his retirement from the Bank, he served the Bank as Chairman,
President and Chief Executive Officer since 1972, when it operated under the
name of Gage Park Savings and Loan Association. Richard J. Remijas, D.D.S.
currently serves under a continuing services contract and is a member of the
Marketing and Building Committees. In connection with the Conversion, the
Company anticipates entering into a consulting agreement with Richard J.
Remijas, D.D.S. He is the father of David A. Remijas and Richard J. Remijas,
Jr.
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EXECUTIVE OFFICERS WHO ARE NOT DIRECTORS
STEVEN J. POKRAK joined the Bank in 1985 as the Controller and has
served as Treasurer and Chief Financial Officer since 1993. Prior to joining
the Bank, Mr. Pokrak had four years of public accounting experience. Mr.
Pokrak is a member of the Executive and Asset and Liability Committee.
SANDRA L. REMIJAS joined the Bank in 1986 as a loan processor. Mrs.
Remijas has held various positions with the Bank and currently serves as
Assistant Vice President - Lending. Mrs. Remijas is the wife of David A.
Remijas.
COMMITTEES AND MEETINGS OF THE BOARD OF DIRECTORS OF THE BANK AND COMPANY
The Board of Directors meets on a monthly basis and may have additional
special meetings upon the request of the Chairman of the Board. During the
year ended December 31, 1995, the Board of Directors met twelve times. No
director attended fewer than 90% of the total number of Board meetings held
during this period.
The Board of Directors of the Bank has established the following Board
and management committees:
The Audit Committee consists of Messrs. Judickas, Paprocki and Zajicek.
The purpose of this committee is to review the audit function and management
actions regarding the implementation of audit findings. The committee meets
at least four times a year.
The Asset and Liability Committee consists of Messrs. David A. Remijas,
Richard J. Remijas, Jr. and Steven J. Pokrak. The purpose of this committee
is to manage the Bank's interest rate risk. The committee meets on a
quarterly basis and reports to the Board of Directors on a quarterly basis.
The Executive Committee is a management committee which consists of
Messrs. David A. Remijas, Richard J. Remijas, Jr. and Steven J. Pokrak. This
committee has been authorized by the Board to conduct the business of the
Bank, including the approval or rejection of loans up to $350,000. This
committee also reviews the workout solutions of any problem loans, and
approves the classification of assets and the establishment of adequate
valuation allowances. This committee meets weekly.
In addition to the committees described above, the Bank has also
established the CRA Review, Nominating, Marketing and Building Committees,
which consist of members of the Board and certain officers and employees of
the Bank.
The Company has also established an Audit Committee consisting of the
same directors as the Bank's Audit Committee and a Compensation Committee
consisting of Messrs. Shukis and Zajicek. The Company has also established a
Pricing Committee consisting of Messrs. Richard J. Remijas, Jr. and David A.
Remijas.
DIRECTORS' COMPENSATION
FEE ARRANGEMENTS. Currently, all outside directors of the Bank receive
a fee of $1,000 for each regular monthly meeting attended. Each director
also receives a fee of $475 for each special Board meeting attended. No
committee meeting fees are paid.
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EXECUTIVE COMPENSATION
CASH COMPENSATION. The following table sets forth the cash compensation
paid by the Bank for services rendered in all capacities during the year
ended December 31, 1995, to the Chief Executive Officer and the highest paid
executive officers of the Bank who received compensation in excess of
$100,000.
<TABLE>
<CAPTION>
LONG-TERM COMPENSATION
---------------------------------
ANNUAL COMPENSATION AWARDS PAYOUTS
------------------------------------ ------------------------ -------
OTHER SECURITIES
ANNUAL RESTRICTED UNDERLYING LTIP ALL OTHER
NAME AND PRINCIPAL COMPENSATION STOCK AWARDS OPTIONS PAYOUTS COMPENSATION
POSITIONS YEAR SALARY($)(1) BONUS($) ($)(2) ($)(3) (#)(4) ($)(5) ($)(6)
- ------------------------------------ ---- ------------ -------- ------------ ------------ ---------- ------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
David A. Remijas 1995 $138,100 $33,250 -- -- -- -- $18,915
Chairman of the Board, President
and Chief Executive Officer
Richard J. Remijas, Jr. 1995 101,190 25,700 -- -- -- -- 13,377
Director, Executive Vice President,
Chief Operating Officer and
Corporate Secretary
</TABLE>
- -------------------------
(1) Under Annual Compensation, the column titled "Salary" includes fees
received as a Director of the Bank.
(2) For 1995, there were no (a) perquisites over the lesser of $50,000 or 10%
of the individual's total salary and bonus for the year; (b) payments of
above-market preferential earnings on deferred compensation; (c) payments of
earnings with respect to long-term incentive plans prior to settlement or
maturation; (d) tax payment reimbursements; or (e) preferential discounts on
stock.
(3) Does not include awards pursuant to the Stock Programs, which may be
granted in conjunction with a meeting of stockholders of the Company, as
such awards were not earned, vested or granted in fiscal 1995. For a
discussion of the terms of the Stock Programs, see "- Benefits - Stock
Programs." For 1995, the Bank had no restricted stock plans in existence.
(4) Does not include options, which may be granted in conjunction with a
meeting of stockholders of the Company, as such options were not earned or
granted in 1995. For a discussion of the terms of the grants and vesting of
options, see "- Benefits - Stock Option Plans."
(5) For 1995, there were no long-term incentive plans in existence.
(6) Includes amounts paid pursuant to the Bank's Employee Profit Sharing Plan.
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EMPLOYMENT AGREEMENTS
Upon completion of the Conversion, the Bank and the Company intend to enter
into employment agreements with Messrs. David A. Remijas, Richard J. Remijas,
Jr., and Steven J. Pokrak and Mrs. Sandra L. Remijas (each, an "Executive").
These agreements are subject to the review and approval of the Company, the Bank
and the OTS and may be amended as a result of such OTS review. These employment
agreements are intended to ensure that the Bank and the Company will be able to
maintain a stable and competent management base after the Conversion. The
continued success of the Bank and the Company depends to a significant degree on
the skills and competence of Messrs. David A. Remijas, Richard J. Remijas, Jr.,
and Steven J. Pokrak and Mrs. Sandra L. Remijas.
The proposed employment agreements are expected to provide for a three-year
term. It is expected that the Bank employment agreements would provide that,
commencing on the first anniversary date and continuing each anniversary date
thereafter, the Board of Directors would review the agreements and the
Executive's performance for purposes of determining whether to extend the
agreements for an additional year so that the remaining term shall be three
years, unless written notice of non-renewal is given by the Board of Directors
after conducting a performance evaluation of the Executive. The terms of the
Company employment agreements shall be extended on a daily basis unless written
notice of non-renewal is given by the Board of the Company. The agreements
provide that the Executive's base salary will be reviewed annually. The current
base salaries for Messrs. David A. Remijas, Richard J. Remijas, Jr., and Steven
J. Pokrak and Mrs. Sandra L. Remijas are $139,360, $108,160, $78,000, and
$54,080, respectively. In addition to the base salary, the agreements provide
for, among other things, participation in stock benefits plans and other fringe
benefits applicable to executive personnel. The agreements would provide for
termination by the Bank or the Company for cause as would be defined in the
agreements, at any time. In the event the Bank or the Company would choose to
terminate the Executive's employment for reasons other than for cause, or in the
event of the Executive's resignation from the Bank and the Company upon:
(i) failure to re-elect the Executive to his current offices; (ii) a material
change in the Executive's functions, duties or responsibilities; (iii) a
relocation of the Executive's principal place of employment by more than 25
miles; (iv) liquidation or dissolution of the Bank or the Company; or (v) a
breach of the agreement by the Bank or the Company, the Executive or, in the
event of death his beneficiary, would be entitled to receive an amount equal
to the remaining base salary payments due to the Executive and the contributions
that would have been made on the Executive's behalf to any employee benefit
plans of the Bank or the Company during the remaining term of the agreement.
The Bank and the Company would also continue and pay for the Executive's life,
health and disability coverage for the remaining term of the Agreement.
Under the proposed agreements, if voluntary or involuntary termination
follows a change in control of the Bank or the Company as defined in the
proposed employment agreements, it is expected that, the Executive or, in the
event of the Executive's death, his beneficiary, would be entitled to a
severance payment equal to the greater of: (i) the payments due for the
remaining terms of the agreement; or (ii) three times the average of the five
preceding taxable years' compensation (except that the Company agreement uses
a three year average in this formula.) It is expected that the Bank and the
Company would also continue the Executive's life, health, and disability
coverage for thirty-six months. Notwithstanding that both agreements would
provide for a severance payment in the event of a change in control, the
Executive would only be entitled to receive a severance payment under one
agreement.
Payments to the Executive under the Bank's proposed agreements are expected
to be guaranteed by the Company in the event that payments or benefits are not
paid by the Bank. Payment under the Company's agreement would be made by the
Company. All reasonable costs and legal fees paid or incurred by the Executive
pursuant to any dispute or question of interpretation relating to the Agreements
would be paid by the Bank or Company, respectively, if the Executive is
successful on the merits pursuant
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to a legal judgment, arbitration or settlement. It is also expected that the
employment agreements will provide that the Bank and Company shall indemnify
the Executive to the fullest extent allowable under federal and Delaware law,
respectively. In the event of a change in control of the Bank or the
Company, the total amount of payments due under the employment agreements,
based solely on cash compensation paid to Messrs. David A. Remijas, Richard
J. Remijas, Jr., and Steven J. Pokrak and Mrs. Sandra L. Remijas over the
past three taxable years and excluding any benefits under any employee
benefit plan which may be payable, would be approximately $1.1 million.
CONSULTATION AGREEMENT
The Company had entered into continuing services contracts with Richard J.
Remijas, D.D.S. and Mr. Joseph M. Judickas, Jr. These contracts have expired
and have not been renewed. The Company intends to enter into Consultation
Agreements with Dr. Remijas and Mr. Judickas. The Consultation Agreements
are for a term of 12 months. Under the Consultation Agreement, Dr. Remijas
and Mr. Judickas will receive compensation in the amount of $2,333.34 and
$1,000 per month, respectively. The Agreements provide each person with
medical insurance during the term of the Consultation Agreement. The
Consultation Agreement may be cancelled by either party on 10 days' written
notice. Pursuant to the Consultation Agreement, Dr. Remijas and Mr. Judickas
will be available each month to provide advisory and consulting services and
will give the Company and the Bank the benefit of their special knowledge,
skills, contacts and business experience in the savings and loan industry.
EMPLOYEE SEVERANCE COMPENSATION PLAN
It is anticipated that the Bank's Board of Directors will, subsequent to the
Conversion, establish the Park Federal Savings Bank Employee Severance
Compensation Plan ("Severance Plan") which would provide eligible employees
with severance pay benefits in the event of a change in control of the Bank or
the Company following Conversion. Management personnel with employment
agreements would not be eligible to participate in the Severance Plan.
Generally, employees would be eligible to participate in the Severance Plan if
they have completed at least one year of service with the Bank. It is
anticipated that the Severance Plan would vest upon a change in control in
each participant a contractual right to the benefits such participant is
entitled to thereunder. It is anticipated that under the Severance Plan, in the
event of a change in control of the Bank or the Company, eligible employees who
are terminated from or terminate their employment within one year (for reasons
specified under the Severance Plan), would be entitled to receive a severance
payment. A participant, whose employment has terminated, would be entitled to
a cash severance payment equal to two weeks salary for each year of service up
to a maximum of 26 years of service. The minimum payment under the Severance
Plan would be 25% of an employee's salary. Such payments may tend to discourage
takeover attempts by increasing costs to be incurred by the Bank in the event of
a takeover.
INSURANCE PLANS
All full-time employees, after three months of employment with the Bank, are
covered as a group for comprehensive hospitalization, including major medical,
long-term disability, accidental death and dismemberment insurance and group
term life insurance.
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BENEFITS
RETIREMENT PLAN. The Bank offers to its employees the Park Federal Savings
Bank Employee Pension Plan and Trust ("Retirement Plan") which is a defined
benefit pension plan. In addition, the Retirement Plan is a qualified plan and
received a determination letter to that effect on June 30, 1995 from the
Internal Revenue Service ("IRS"). An employee is eligible to participate in the
Retirement Plan following the completion of one year of service and attainment
of the age 21 years. Participants are 100% vested in their accrued benefits
upon entry into the Retirement Plan. The Retirement Plan is funded solely
through contributions made by the Bank and earnings on those contributions.
The benefit provided to a participant at normal retirement age (generally 65
years) is the product of (i) 50% of the participant's Average Monthly
Compensation (base wages only) and (ii) the fraction of which the numerator is
the lesser of his actual years of service or 25 years and the denominator of
which is 25 years. Average Monthly Compensation is calculated using the five-
year consecutive period which, when averaged, produces the highest such annual
average. The benefit is not offset against anticipated Social Security
benefits. The normal form of benefit is a life annuity. Early retirement
alternative benefits are available. However, benefits are reduced by a 1/15th
for the first five years, 1/30th for the second five years or and an actuarial
factor for each additional year, for each year of age less than the Normal
Retirement Date at which the early retirement occurs. Early or normal
retirement benefits may be paid out in a lump sum at the request of the
participant. The Retirement Plan also provides for death benefits. The Bank
intends to modify the Retirement Plan to freeze the participation in and
benefits payable under the Retirement Plan as of May 31, 1996 and will continue
to make contributions as required on an actuarial basis thereafter to fund the
obligations of the frozen Retirement Plan. Alternately, the Bank may consider
terminating the Retirement Plan.
The following table sets forth, as of January 1, 1996, estimated annual
pension benefits for individuals at age 65 payable under the Retirement Plan
with various contributions of compensation and years of service. The figures
are based on the assumption that the Retirement Plan continues in its current
form.
<TABLE>
<CAPTION>
Park Federal Savings Bank Employee Pension Plan
------------------------------------------------------------
Final Average Years of Service
Compensation 15 20 25 30 35
- ------------- ---------- ---------- -------- -------- ----------
<S> <C> <C> <C> <C> <C>
$25,000 $ 7,500 $10,000 $12,500 $12,500 $12,500
50,000 15,000 20,000 25,000 25,000 25,000
75,000 22,500 30,000 37,500 37,500 37,500
100,000 30,000 40,000 50,000 50,000 50,000
125,000 37,500 50,000 62,500 62,500 62,500
150,000 45,000 60,000 75,000 75,000 75,000
175,000(1) 45,000 60,000 75,000 75,000 75,000
200,000(1) 45,000 60,000 75,000 75,000 75,000
225,000(1) 45,000 60,000 75,000 75,000 75,000
</TABLE>
- --------------------
(1) The maximum amount of annual compensation which can be considered in
computing benefits under Section 401(a)(17) of the Internal Revenue Code is
$150,000.
Compensation under the Retirement Plan includes base salary. The benefit
amounts listed above were computed on a single life annuity basis, which is the
normal form under the plan.
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The approximate years of service, as of February 29, 1996 for the named
executive officers are as follows:
<TABLE>
<CAPTION>
SERVICE
--------------------
NAME YEARS MONTHS
---- ----- ------
<S> <C> <C>
David A. Remijas 22 2
Richard J. Remijas, Jr. 3 1
</TABLE>
PROFIT SHARING PLAN. The Bank offers the Park Federal Savings Bank Profit
Sharing Plan ("Profit Sharing Plan"). The Profit Sharing Plan is a tax-
qualified, defined contribution plan which received a determination letter from
the IRS to that effect on June 23, 1995. An employee would be eligible to
participate in the Profit Sharing Plan following attainment of the age of 21 and
the completion of one (1) year of service with the Bank (1,000 hours within a
twelve-month period). The Profit Sharing Plan has no set contribution formula,
contributions are determined annually by the Board in its discretion. The
annual contribution is allocated among participants on a pro rated basis
according to total base wage compensation subject to the maximum limitations of
Section 415 of the Code. There are no employee contributions required or
allowed in the Profit Sharing Plan. A participant attains a vested interest in
his or her benefits under the Profit Sharing Plan at a rate of 20% per year
beginning after three years of service. After seven years of service, a
participating employee's benefits are 100% vested. All plan assets are held in
trust and are invested at the discretion of the trustee. In connection with,
but prior to the conversion, it is anticipated that the Profit Sharing Plan
will be amended to become a cash or deferred arrangement ("CODA") qualified
under section 401(k) of the Code ("401(k) Plan"). At the effective time of the
amendment, participants' accounts would be valued and such value would be the
opening account balance in the 401(k) Plan. The anticipated 401(k) Plan is
described immediately below. As set out below in greater detail, the 401(k)
Plan will allow for investment, directed by each participant, in one or more of
several alternatives (including the Common Stock of the Company both in the
conversion and thereafter.)
401(K) PLAN. In connection with the Bank's intention to freeze the
Retirement Plan and amend the Profit Sharing Plan, the Bank intends to adopt the
401(k) Plan which is designed to be qualified under Section 401(k) of the Code.
An employee would be eligible to participate in the 401(k) Plan following
attainment of the age of 21 and the completion of one (1) year of service with
the Bank (1,000 hours within a twelve-month period). Under the 401(k) Plan,
subject to the limitations imposed under Section 401(k) and Section 415 of the
Code, a participant will be able to elect to defer not more than 15% of his or
her contribution by directing the Bank to contribute such amount to the 401(k)
Plan on such employee's behalf. The Bank may elect to make matching
contributions applicable to its 401(k) Plan equal to a portion of the
participating employee's contribution, subject to a maximum matching
contribution of no more than 6% of the participant's salary.
Under the 401(k) Plan, a separate account would be established for each
employee. Participants would be 100% vested in the contributions and in the
earnings thereon and in the employer's contributions. The 401(k) Plan would
also provide for in-service hardship distributions of elective deferrals and of
employer contributions if a participant has been a participant in the 401(k)
Plan for at least five years and the employer contributions have been invested
in the 401(k) Plan for at least two years. Distributions from the 401(k) Plan
would be made upon termination of service, disability or death in a lump sum or
in annual installments.
The 401(k) Plan may also include a number of investment options which would
be provided to participants by including a fund consisting of Common Stock of
the Company ("Company Stock Fund").
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Account balances carried over from the Profit Sharing Plan would be invested,
subject to the discretion of the participant on such investment options,
including the Company Stock Fund. The 401(k) Plan would permit participants
to direct that all or a portion of their account be invested in such fund.
Each participant who directs the trustee to invest all or part of his account
in the Employee Stock Fund would have assets credited to his account applied
to the purchase of shares of the Common Stock. The Company Stock Fund
investment will be available at the time of the Conversion, to participants
otherwise eligible to make such an investment in the Common Stock of the
Company in the Conversion.
SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN. The Bank intends to adopt a non-
qualified Supplemental Executive Retirement Plan ("SERP") to provide certain
officers and highly compensated employees with additional retirement benefits.
The benefits provided under the SERP will provide the difference between
(i) those benefits that would have inured to SERP participants under the ESOP
and the 401(k) Plan without operation of limitations of the Code regarding
benefit levels and eligible compensation and (ii) the benefits actually
received. The SERP will provide no benefit relating to the Pension Plan.
The Company intends to establish an irrevocable grantor's trust ("Rabbi
Trust") with an independent corporate trustee in connection with the SERP. This
Rabbi Trust would be funded with proportional contributions from the Company
and the Bank for the purpose of providing the benefits promised under the
terms of the SERP. The SERP participants have only the rights of unsecured
creditors with respect to the Rabbi Trust's assets, and will not recognize
income with respect to benefits provided by the SERP until such benefits are
received by the participants. The assets of the Rabbi Trust are considered
part of the general assets of the Company and are subject to the claims of
the Company's creditors in the event of the Company's insolvency. Earnings
on the Rabbi Trust's assets are taxable to the Company. The trustee of the
Rabbi Trust may invest the Rabbi Trust's assets in the Company's stock.
EMPLOYEE STOCK OWNERSHIP PLAN AND TRUST. The Bank has established for
eligible employees an ESOP and related trust to become effective upon
Conversion. The trustee for the ESOP trust will be independent of the Bank
and the Company. Full-time employees employed with the Bank as of January 1,
1996 and full-time employees of the Company or the Bank employed after such
date, who have attained the age of 21 and have completed one (1) year of
service with the Bank (1,000 hours within a twelve-month period) will become
participants. The ESOP intends to purchase 8% of the Common Stock issued in the
Conversion. As part of the Conversion and in order to fund the ESOP's purchase
of the Common Stock to be issued in the Conversion, the ESOP intends to borrow
funds from the Company equal to 100% of the aggregate purchase price of the
Common Stock. The loan will be repaid principally from the Company's or the
Bank's contribution's to the ESOP over a period of 12 years and the collateral
for the loan will be the Common Stock purchased by the ESOP. Subject to
receipt of any necessary regulatory approvals or opinions, the Bank may make
contributions to the ESOP for repayment of the loan since the participants are
all employees of the Bank, or to reimburse the Company for contributions made by
it. Contributions to the ESOP will be discretionary; however, the Company or
the Bank intend to make annual contributions to the ESOP in an aggregate amount
at least equal to the principal and interest requirement on the debt. The
interest rate for the loan is expected to be 9.25%.
Shares purchased by the ESOP will initially be pledged as collateral for the
loan, and will be held in a suspense account until released for allocation among
participants as the loan is repaid. The pledged shares will be released
annually from the suspense account in an amount proportional to the repayment of
the ESOP loan for each plan year. The released shares will be allocated among
the accounts of participants on the basis of the participant's compensation for
the year of allocation. Participants generally become 100% vested in their ESOP
account after five years of credited service or if their service was
terminated due to death, retirement, permanent disability or a change in
control. Prior to the completion of five years of credited service, a
participant who terminates employment for reasons other than death,
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retirement, disability, or change in control of the Bank or Company will not
receive any benefit. Forfeitures will be reallocated among remaining
participating employees, in the same proportion as contributions. Benefits
may be payable upon death, retirement, early retirement, disability or
separation from service.
In connection with the establishment of the ESOP, a Committee of the Board of
Directors was appointed to administer the ESOP (the "ESOP Committee"). An
unrelated corporate trustee for the ESOP will be appointed prior to the
Conversion and continuing thereafter. The ESOP Committee may instruct the
trustee regarding investment of funds contributed to the ESOP. The ESOP
trustee, subject to its fiduciary duty, must vote all allocated shares held in
the ESOP in accordance with the instructions of the participating employees.
Under the ESOP, unallocated shares will be voted in a manner calculated to most
accurately reflect the instructions it has received from participants regarding
the allocated stock provided that such vote is in accordance with the provisions
of the Employee Retirement Income Security Act of 1974, as amended ("ERISA").
STOCK OPTION PLANS. Following the conversion, the Board of Directors of the
Company intends to adopt stock-based benefit plans which would provide for the
granting of stock options to eligible officers, key employees and non-employee
directors of the Company and the Bank. Stock options are intended to be
granted under either a separate stock option plan for officers and employees
(the "Incentive Option Plan") and a separate option plan for non-employee
directors (the "Directors' Option Plan") (collectively, the "Option Plans") or
under a single Master Stock-Based Benefit Plan which would incorporate the
benefits and features of the Incentive Option Plan and Directors Option Plan.
At a meeting of stockholders of the Company following the Conversion, which
under applicable OTS regulations, may be held no earlier than six months after
the completion of the Conversion, the Board of Directors intends to present the
Option Plans or the Master Stock-Based Benefit Plan to stockholders for approval
and has reserved an amount equal to 10% of the shares of Common Stock issued in
the Conversion or 276,000 shares (based upon the issuance of 2,760,000 shares),
for issuance under the Option Plans or the Master Stock-Based Benefit Plan.
OTS regulations provide that no individual officer or employee of the Bank may
receive more than 25% of the options granted under the Option Plans or Master
Stock-Based Benefit Plan and non-employee directors may not receive more than 5%
individually, or 30% in the aggregate of the options granted under the Option
Plans or the Master Stock-Based Benefit Plan.
The stock option benefits provided under the Incentive Option Plan or Master
Stock-Based Benefit Plan will be designed to attract and retain qualified
personnel in key positions, provide officers and key employees with a propriety
interest in the Company as an incentive to contribute to the success of the
Company and reward such employees for outstanding performance. All employees of
the Company and its subsidiaries will be eligible to participate in such plans.
The Incentive Option Plan or Master Stock-Based Benefit Plan will provide for
the grant of: (i) options to purchase the Company's Common Stock intended to
qualify as incentive stock options under Section 422 of the Code ("Incentive
Stock Options"); (ii) options that do not so qualify ("Non-Statutory Stock
Options"); and (iii) Limited Rights (discussed below) which will be exercisable
only upon a change in control of the Bank or the Company. Unless sooner
terminated, the Incentive Option Plan or Master Stock-Based Benefit Plan will be
in effect for a period of ten years from the earlier of adoption by the Board of
Directors or approval by the Company's Stockholders. Subject to stockholder
approval, the Company intends to grant options with Limited Rights under the
Incentive Option Plan or Master Stock-Based Benefit Plan at an exercise price
equal to the fair
market value of the underlying Common Stock on the date of grant. Upon
exercise of "Limited Rights" in the event of a change in control, the employee
will be entitled to receive a lump sum cash payment
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equal to the difference between the exercise price of the related option and
the fair market value of the shares of common stock subject to the option on
the date of exercise of the right in lieu of purchasing the stock underlying
the option. In addition, the Company intends to provide a dividend
equalization benefit which will provide option holders a payment equal to the
product of (i) the number of shares upon which options are held, and (ii) the
per share amounts of any extraordinary dividends declared by the Board of
Directors. It is anticipated that all options granted to officers and
employees contemporaneously with stockholder approval of such plans will be
intended to be Incentive Stock Options to the extent permitted under Section
422 of the Code.
Under the Incentive Option Plan, or Master Stock-Based Benefit Plan, it is
expected that the Compensation Committee will determine which officers and
employees will be granted options and Limited Rights, whether such options will
be incentive or non-statutory stock options, the number of shares subject
to each option, the exercise price of each non-statutory stock option, whether
such options may be exercised by delivering other shares of Common Stock and
when such options become exercisable. It is expected that the per share
exercise price of an incentive stock option will be required to be at least
equal to the fair market value of a share of Common Stock on the date the option
is granted.
If the Incentive Option Plan or Master Stock-Based Benefit Plan is adopted
in the form described above, an employee will not be deemed to have received
taxable income upon grant or exercise of any Incentive Stock Option, provided
that such shares received through the exercise of such option are not
disposed of by the employee for at least one year after the date the stock is
received in connection with the option exercise and two years after the date
of grant of the option. No compensation deduction would be able to be taken
by the Company as a result of the grant or exercise of Incentive Stock
Options, provided such shares are not disposed of before the expiration of
the period described above (a "disqualifying disposition"). In the case of a
Non-Statutory Stock Option and in the case of a disqualifying disposition of
an Incentive Stock Option, an employee will be deemed to receive ordinary
income upon exercise of the stock option in an amount equal to the amount by
which the exercise price is exceeded by the fair market value of the Common
Stock purchased by exercising the option on the date of exercise. The amount
of any ordinary income deemed to be received by an optionee upon the exercise
of a Non-Statutory Stock Option or due to a disqualifying disposition of an
Incentive Stock Option would be a deductible expense for tax purposes for the
Company. In the case of Limited Rights, upon exercise or upon the payment of
a dividend equalization benefit, the option holder would have to include the
amount paid to him or her upon exercise in his gross income for federal
income tax purposes in the year in which the payment is made and the Company
would be entitled to a deduction for federal income tax purposes of the amount
paid.
If the Incentive Option Plan or Master Stock-Based Benefit Plan is adopted in
the form described above, stock options would become vested and exercisable in
the manner specified by the Company, subject to applicable OTS regulations,
which require that options begin vesting no earlier than one year from the
date of shareholder approval of the Incentive Option Plan or Master Stock-Based
Benefit Plan and thereafter vest at a rate of no more than 20% per year.
Options granted in connection with the Incentive Option Plan or Master Stock-
Based Benefit Plan could be exercisable for three months following the date
on which the employee ceases to perform services for the Bank or the Company,
except that in the event of death or disability, options accelerate and become
fully vested and may be exercisable for up to one year thereafter or such longer
period as determined by the Company. However, any Incentive Stock Options
exercised more than three months following the date the employee ceases to
perform services as an employee shall be treated as a Non-Statutory Stock
Option as described above. In the event of retirement, any unvested stock
options shall be terminated and remain unearned unless the optionee
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continues to perform services on behalf of the Bank, the Company or an
affiliate, in which case unvested options would continue to vest in
accordance with their original vesting schedule. If the Incentive Option
Plan or Master Stock-Based and Benefit Plan is adopted in the form described
above, in the event of death, disability or normal retirement, the Company,
if requested by the optionee, could elect, in exchange for vested options, to
pay the optionee, or beneficiary in the event of death, the amount by which
the fair market value of the Common Stock exceeds the exercise price of the
options on the date of the employee's termination of employment.
Under the Directors' Option Plan or Master Stock-Based Benefit Plan
contemplated, the exercise price per share of each option granted could be equal
to the fair market value of the shares of Common Stock on the date the option is
granted. All Options granted to outside directors under the Directors' Option
Plan would be Non-Statutory Stock Options and, pursuant to applicable OTS
regulations, would vest and become exercisable commencing one year after the
date of shareholder approval of the Directors Option Plan at the rate of 20% per
year, and would expire upon the earlier of ten years following the date of grant
or one year following the date the optionee ceases to be a director or
consulting director. In the event of the death or disability of a participant,
all previously granted options would immediately vest and become fully
exercisable.
Applicable OTS regulations currently do not permit accelerated vesting in the
event of a change in control of stock options granted under a plan adopted
within one year after conversion. If permitted by OTS regulations in effect at
the time a change in control occurs, the Incentive Option Plan and the Directors
Option Plan or Master Stock-Based Benefit Plan described above would provide for
accelerated vesting of previously granted options in the event of a change in
control of the Company or the Bank. A change in control would be defined in the
contemplated Incentive Option Plan, Master Stock-Based Benefit Plan or the
Directors' Option Plan generally to occur when a person or group of persons
acting in concert acquires beneficial ownership of 20% or more of any class of
equity security of the Company or the Bank or in the event of a tender or
exchange offer, merger or other form of business combination, sale of all or
substantially all of the assets of the Company or the Bank or contested election
of directors which results in the replacement of a majority of the Board of
Directors by persons not nominated by the directors in office prior to the
contested election.
STOCK PROGRAMS. Following the Conversion, the Company or the Bank intends to
establish performance based Stock Programs as a method of providing non-employee
directors, officers and key employees of the Bank and Company with a proprietary
interest in the Company in a manner designed to encourage such persons to remain
with the Bank or the Company. The benefits intended to be granted under the
Stock Programs may be provided for under either a separate plan for officers and
employees and a separate plan for outside directors or under the Master Stock-
Based Benefit Plan which would incorporate the benefits and features of such
separate Stock Program plans and the previously discussed Stock Option Plans.
The Company intends to present the Stock Programs or Master Stock-Based Benefit
Plan for stockholder approval at a meeting of stockholders, which pursuant to
applicable OTS regulations, may be held no earlier than six months after the
completion of the Conversion.
Subject to stockholder approval, the Bank or the Company expects to
contribute funds to the Stock Programs or Master Stock-Based Benefit Plan to
enable such plans to acquire, in the aggregate, an amount equal to 4% of the
shares of common Stock issued in the Conversion, or 110,400 shares (based upon
the issuance of 2,760,000 shares). These shares would be acquired through open
market purchases by a trustee for the plan or from authorized but unissued
shares. Although no specific award determinations have been made, the
Company anticipates that, if stockholder approval is obtained, it would
provide awards to its directors and employees to the extent permitted by
applicable regulations. OTS regulations
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provide that no individual employee may receive more than 25% of the shares
of any plan and non-employee directors may not receive more than 5% of any
plan individually or 30% in the aggregate for all directors.
The Compensation Committee of the Bank's Board of Directors would administer
the Stock Programs or Master Stock-Based Benefit Plan described above. The
Stock Programs or Master Stock-Based Benefit Plan are expected to be self-
administered for grants or allocations made to non-employee directors, which
would not be performance-based. Under the Stock Programs or Master Stock-Based
Benefit Plan, awards would be granted in the form of shares of Common Stock held
by such plans. Awards will be non-transferable and non-assignable. Allocations
and grants to officers and employees under the Stock Programs or Master Stock-
Based Benefit Plan may be made in the form of base grants and allocations based
on performance goals established by the Compensation Committee. In establishing
such goals, the Committee may utilize the annual financial results of the
Company and the Bank, actual performance of the Company and the Bank as compared
to targeted goals such as the ratio of the Company and the Bank's net worth to
total assets, the Company's and the Bank's return on average assets, or such
other performance standard as determined by the Committee with the approval of
the Board of Directors. Performance allocations would be granted upon the
achievement of performance goals and base grants and performance allocations
would vest in annual installments established by the Committee. Pursuant to
applicable OTS regulations, base grants and allocations will commence vesting
one year after the date of shareholder approval of the plan and thereafter at
the rate of 20% per year.
In the event of death, grants would be 100% vested. In the event of
disability, grants would be 100% vested upon termination of employment of an
officer or employee, or upon termination of service as a director. In the
event of retirement, the participant continues to perform services on behalf
of the Bank, the Company or an affiliate or, in the case of a retiring director,
continues to perform services, as a consulting director, unvested grants would
continue to vest in accordance with their original vesting schedule until the
recipient ceases to perform such services at which time any unvested grants
would lapse.
Applicable OTS regulations currently do not permit accelerated vesting in the
event of a change in control of shares granted under the Stock Programs or
Master Stock-Based Benefit Plan described above. If permitted by OTS
regulations at the time a change in control occurs, the Stock Programs or
Master Stock-Based Benefit Plan would provide for accelerated vesting in the
event of a change in control of shares granted under the Stock Programs or
Master Stock-Based Benefit Plan. A change in control is expected to be defined
in the Stock Programs or Master Stock-Based Benefit Plan generally to occur when
a person or group of persons acting in concert acquires beneficial ownership of
20% or more of a class of equity securities of the Company or the Bank or in the
event of a tender or exchange offer, merger or other form of business
combination, sale of all or substantially all of the assets of the Company or
the Bank or contested election of directors which results in the replacement of
a majority of the Board of Directors by persons not nominated by the directors
in office prior to the contested election.
When shares become vested in accordance with the Stock Programs or Master
Stock-Based Benefit Plan described above, the Participants would recognize
income equal to the fair market value of the Common Stock at that time. The
amount of income recognized by the participants would be a deductible expense
for tax purposes for the Bank and the Company. When shares become vested and
are actually distributed in accordance with the Stock Programs or Master Stock-
Based Benefit Plan, the participants would receive amounts equal to any accrued
dividends with respect thereto. Prior to vesting, recipients of grants could
direct the voting of the shares awarded to them. Shares not subject to grants
and shares allocated subject to the achievement of performance and high
performance goals will be voted by the trustee of the Stock Programs or
Master Stock-Based Benefit Plan in proportion to the directions provided
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with respect to shares subject to grants. Vested shares are distributed to
recipients as soon as practicable following the day on which they are vested.
In the event that additional authorized but unissued shares are acquired by
the Stock Programs or Master Stock-Based Benefit Plan after the Conversion, the
interests of existing shareholders would be diluted. See "Pro Forma Data."
TRANSACTIONS WITH CERTAIN RELATED PERSONS
The Financial Institutions Reform, Recovery, and Enforcement Act of 1989
("FIRREA") requires that all loans or extensions of credit to executive officers
and directors must be made on substantially the same terms, including interest
rates and collateral, as those prevailing at the time for comparable
transactions with the general public and must not involve more than the normal
risk of repayment or present other unfavorable features. In addition, loans
made to a director or executive officer in excess of the greater of $25,000 or
5% of the Bank's capital and surplus (up to a maximum of $500,000) must be
approved in advance by a majority of the disinterested members of the Board of
Directors.
The Bank currently makes loans to employees, executive officers and directors
on the same terms and conditions offered to the general public. The Bank's
policy provides that all loans made by the Bank to its executive officers and
directors be made in the ordinary course of business, on substantially the same
terms, including collateral, as those prevailing at the time for comparable
transactions with other persons and may not involve more than the normal risk of
collectibility or present other unfavorable features. Any loan made to an
executive officer or director must be approved by the Board of Directors prior
to its being committed. As of February 29, 1996, two of the Bank's executive
officers or directors had a total of three loans outstanding, totalling $395,000
in the aggregate. Of the three loans currently outstanding to executive
officers or directors, two loans are secured by the borrower's principal
residence and one is secured by an investment property.
The Company intends that all transactions in the future between the Company
and its executive officers, directors, holders of 10% or more of the shares of
any class of its common stock and affiliates thereof, will contain terms no
less favorable to the Company than could have been obtained by it in arm's-
length negotiations with unaffiliated persons and will be approved by a majority
of independent outside directors of the Company not having any interest in the
transaction.
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SUBSCRIPTIONS BY EXECUTIVE OFFICERS AND DIRECTORS
The following table sets forth the number of shares of Common Stock the
Bank's executive officers and directors propose to purchase, assuming shares
of Common Stock are issued at the minimum and maximum of the Estimated Price
Range and that sufficient shares will be available to satisfy their
subscriptions. The table also sets forth the total expected beneficial
ownership of Common Stock as to all directors and executive officers as a group.
<TABLE>
<CAPTION>
AT THE MINIMUM AT THE MAXIMUM
OF THE ESTIMATED PRICE OF THE ESTIMATED PRICE
RANGE(1) RANGE(1)
------------------------- ----------------------
AS A PERCENT AS A PERCENT
NUMBER OF SHARES NUMBER OF SHARES
NAME AMOUNT(2) OF SHARES OFFERED OF SHARES OFFERED
- ----------------- -------- --------- ------------ --------- ------------
<S> <C> <C> <C> <C> <C>
David A. Remijas(3) $138,000 13,800 0.68% 13,800 0.50%
Richard J. Remijas, Jr. 138,000 13,800 0.68 13,800 0.50
Joseph M. Judickas, Jr. 138,000 13,800 0.68 13,800 0.50
Charles Paprocki 100,000 10,000 0.49 10,000 0.36
Paul Shukis 150,000 15,000 0.73 15,000 0.54
Glenn Zajicek 150,000 15,000 0.73 15,000 0.54
Steven J. Pokrak 138,000 13,800 0.68 13,800 0.50
-------- ------ ---- ------ ----
All Directors and
Executive Officers
as a group
(8 persons) $952,000 95,200 4.66% 95,200 3.45%
-------- ------ ---- ------ ----
-------- ------ ---- ------ ----
</TABLE>
- ----------------------
(1) Includes proposed subscriptions, if any, by associates. Also includes funds
from the Bank's 401(k) plan which may be used to purchase shares of Common
Stock under such plan's new employer stock fund investment option. See
"- Benefits - Profit Sharing and 401(k) Plan." Does not include
subscription orders by the ESOP. Intended purchases by the ESOP are
expected to be 8.0% of the shares issued in the Conversion. See
"- Directors' Compensation" and "- Executive Compensation."
(2) Amount of proposed subscriptions assumes an offering at or above the maximum
of the Estimated Price Range.
(3) Includes purchases by Sandra L. Remijas.
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THE CONVERSION
THE BOARD OF DIRECTORS OF THE BANK AND THE OTS HAVE APPROVED THE PLAN OF
CONVERSION, SUBJECT TO APPROVAL BY THE MEMBERS OF THE BANK ENTITLED TO VOTE
ON THE MATTER AND THE SATISFACTION OF CERTAIN OTHER CONDITIONS. SUCH OTS
APPROVAL, HOWEVER, DOES NOT CONSTITUTE A RECOMMENDATION OR ENDORSEMENT OF THE
PLAN BY SUCH AGENCY.
GENERAL
On March 21, 1996, the Bank's Board of Directors unanimously adopted,
subject to approval by the OTS, the Plan pursuant to which the Bank will be
converted from a federally chartered mutual savings bank to a federally
chartered stock savings bank. It is currently intended that all of the
outstanding capital stock of the Bank will be held by the Company, which is
incorporated under Delaware law. The Plan has been approved by the OTS,
subject to, among other things, approval of the Plan by the Bank's members.
A special meeting of members has been called for this purpose to be held on
August 2, 1996.
The Company filed an application with the OTS to become a savings and
loan holding company and to acquire all of the Common Stock of the Bank to be
issued in the Conversion. The Company plans to use 50% of the net proceeds
from the sale of the Common Stock to purchase all of the then to be issued
and outstanding capital stock of the Bank. The Conversion will be effected
only upon completion of the sale of all of the shares of Common Stock of the
Company to be issued pursuant to the Plan.
The Plan provides that the Board of Directors of the Bank may, at any
time prior to the issuance of the Common Stock and for any reason, decide not
to use a holding company form. In the event such a decision is made, the
Bank will withdraw the Company's registration statement from the SEC and take
steps necessary to complete the Conversion without the Company, including
filing any necessary documents with the OTS. In such event, and provided
there is no regulatory action, directive or other consideration upon which
basis the Bank determines not to complete the Conversion, if permitted by the
OTS, the Bank will issue and sell the common stock of the Bank and
subscribers will be notified of the elimination of a holding company and
resolicited (I.E., be permitted to affirm their orders, in which case they
will need to affirmatively reconfirm their subscriptions prior to the
expiration of the resolicitation offering or their funds will be promptly
refunded with interest at the Bank's passbook rate of interest; or be
permitted to modify or rescind their subscriptions), and notified of the time
period within which the subscriber must affirmatively notify the Bank of his
intention to affirm, modify or rescind his subscription. The following
description of the Plan assumes that a holding company form of organization
will be used in the Conversion. In the event that a holding company form of
organization is not used, all other pertinent terms of the Plan as described
below will apply to the conversion of the Bank from the mutual to stock form
of organization and the sale of the Bank's common stock.
The Plan provides generally that (i) the Bank will convert from a mutual
savings bank to a capital stock savings bank and (ii) the Company will offer
shares of Common Stock for sale in the Subscription Offering to the Bank's
Eligible Account Holders, the ESOP, Supplemental Eligible Account Holders,
and Other Members. Concurrently, shares will be offered in a Community
Offering with a preference to be given to natural persons residing in Cook
and DuPage counties in the State of Illinois to whom a copy of the Prospectus
and an order form have been delivered, subject to the prior rights of holders
of subscription rights. The Bank has the right to accept or reject, in whole
or in part, any orders to purchase shares of the Common Stock received in the
Community Offering. See "- Community Offering."
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The aggregate price of the shares of Common Stock to be issued in the
Conversion, currently estimated to be between $20.4 million and $27.6
million, will be determined based upon an independent appraisal of the
estimated pro forma market value of the Common Stock of the Company given
effect to the Conversion. All shares of Common Stock to be issued and sold
in the Conversion will be sold at the same price. The independent appraisal
will be affirmed or, if necessary, updated at the completion of the
Subscription and Community Offerings, if all shares are subscribed for. The
appraisal has been performed by Keller, a consulting firm experienced in the
valuation and appraisal of savings institutions. See "- Stock Pricing" for
additional information as to the determination of the estimated pro forma
market value of the Common Stock.
The following is a brief summary of pertinent aspects of the Conversion.
The summary is qualified in its entirety by reference to the provisions of
the Plan. A copy of the Plan is available for inspection at each branch of
the Bank and at the Central Region and Washington, D.C. offices of the OTS.
The Plan is also filed as an Exhibit to the Registration Statement of which
this Prospectus is a part, copies of which may be obtained from the SEC. See
"Additional Information."
PURPOSES OF CONVERSION
The Bank, as a federally chartered mutual savings bank, does not have
shareholders and has no authority to issue capital stock. By converting to
the capital stock form of organization, the Bank will be structured in the
form used by commercial banks, other business entities and a growing number
of savings institutions. The Conversion will enhance the Bank's ability to
expand its current operations, acquire other financial institutions or branch
offices, provide affordable home financing opportunities to the communities
it serves, access capital markets, or diversify into other financial services
to the extent allowable by applicable law and regulation.
In particular, the increase in the Bank's capital as a result of the
Conversion will enhance the ability of the Bank to meet the needs of the
communities it serves by, among other things, permitting the Bank to increase
its one- to four-family residential mortgage lending, subject to the demand
for such loans, competitive considerations and other relevant factors. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Management Strategy" and "Business of the Bank - Market Area and
Competition." As discussed above, the net proceeds from the sale of the
Common Stock will also permit the Bank to increase its presence in the
communities it serves through the acquisition or establishment of branch
offices or the acquisition of smaller financial institutions, although the
Bank has no current understandings or agreements for the acquisition of any
specific financial institutions or the acquisition or establishment of any
branch offices.
The holding company form of organization will provide additional
flexibility to diversify the Bank's business activities through existing or
newly formed subsidiaries, or through acquisitions of or mergers with both
mutual and stock institutions, as well as other companies. Although there
are no current arrangements, understandings or agreements regarding any such
opportunities, the Company will be in a position after the Conversion,
subject to regulatory limitations and the Company's financial position, to
take advantage of any such opportunities that may arise.
The potential impact of the Conversion upon the Bank's capital base is
significant. The Bank had GAAP capital of $17.7 million, or 12.0% of assets
at February 29, 1996. Assuming that $27.6 million (based on the maximum of
the estimated pro forma market value of the Common Stock) of gross proceeds
are realized from the sale of Common Stock (see "Pro Forma Data" for the
basis of this assumption) and assuming that 50% of the net proceeds are used
by the Company to purchase the capital stock of the Bank, the Bank's GAAP
capital would increase to $27.8 million or a ratio of GAAP capital to total
assets, on
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a pro forma basis, of 17.6% after the Conversion. The investment of the net
proceeds from the sale of the Common Stock will provide the Bank with
additional income to further increase its capital position. The additional
capital may also assist the Bank in offering new programs and expanded
services to its customers.
After completion of the Conversion, the unissued common and preferred
stock authorized by the Company's Certificate of Incorporation will permit
the Company, subject to market conditions and any required regulatory
approvals of an offering, to raise additional equity capital through further
sales of securities, and to issue securities in connection with possible
acquisitions. At the present time, the Company has no plans with respect to
additional offerings of securities, other than the issuance of additional
shares upon exercise of stock options or the possible issuance of authorized
but unissued shares to the Stock Programs. Following the Conversion, the
Company will also be able to use stock-related incentive programs to attract
and retain executive and other personnel for itself and its subsidiaries.
See "The Board of Directors and Management of the Bank - Benefits."
EFFECTS OF CONVERSION
GENERAL. Each depositor in a mutual savings institution has both a
deposit account in the institution and a pro rata ownership interest in the
net worth of the institution based upon the balance in his account, which
interest may only be realized in the event of a liquidation of the
institution. However, this ownership interest is tied to the depositor's
account and has no tangible market value separate from such deposit account.
Any depositor who opens a deposit account obtains a pro rata ownership
interest in the net worth of the institution without any additional payment
beyond the amount of the deposit. A depositor who reduces or closes his
account receives a portion or all of the balance in the account but nothing
for his ownership interest in the net worth of the institution, which is lost
to the extent that the balance in the account is reduced. Consequently,
mutual savings institution depositors normally have no way to realize the
value of their ownership interest, which has realizable value only in the
unlikely event that the mutual savings institution is liquidated. In such
event, the depositors of record at that time, as owners, would share pro rata
in any residual surplus and reserves after other claims, including claims of
depositors to the amounts of their deposits, are paid.
When a mutual savings institution converts to stock form, permanent
non-withdrawable capital stock is created to represent the ownership of the
institution's net worth. THE COMMON STOCK IS SEPARATE AND APART FROM DEPOSIT
ACCOUNTS AND CANNOT BE AND IS NOT INSURED OR GUARANTEED BY THE FDIC OR ANY
OTHER GOVERNMENTAL AGENCY. Certificates are issued to evidence ownership of
the capital stock. The stock certificates are transferable, and therefore
the stock may be sold or traded if a purchaser is available with no effect on
any deposit account the seller may hold in the institution.
CONTINUITY. While the Conversion is being accomplished, the normal
business of the Bank of accepting deposits and making loans will continue
without interruption. The Bank will continue to be subject to regulation by
the OTS and the FDIC. After the Conversion, the Bank will continue to
provide services for depositors and borrowers under current policies by its
present management and staff.
The Directors serving the Bank at the time of Conversion will serve as
Directors of the Bank after the Conversion. The Directors of the Company
will consist of individuals currently serving on the Board of Directors of
the Bank. All officers of the Bank at the time of Conversion will retain
their positions after Conversion.
EFFECT ON DEPOSIT ACCOUNTS. Under the Plan, each depositor in the Bank
at the time of Conversion will automatically continue as a depositor after
the Conversion, and each such deposit account will remain
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the same with respect to deposit balance, interest rate and other terms.
Each such account will continue to be insured by the FDIC to the same extent
as before the Conversion. Depositors will continue to hold their existing
certificates, passbooks and other evidences of their accounts.
EFFECT ON LOANS. No loan outstanding from the Bank will be affected by
the Conversion, and the amount, interest rate, maturity and security for each
loan will remain as they were contractually fixed prior to the Conversion.
EFFECT ON VOTING RIGHTS OF MEMBERS. At present, all depositors and
certain borrowers of the Bank are members of, and have voting rights in, the
Bank as to all matters requiring membership action. Upon Conversion,
depositors and borrowers will cease to be members and will no longer be
entitled to vote at meetings of the Bank. Upon Conversion, all voting rights
in the Bank will be vested in the Company as the sole stockholder of the
Bank. Exclusive voting rights with respect to the Company will be vested in
the holders of Common Stock. Depositors of and borrowers from the Bank will
not have voting rights after the Conversion except to the extent that they
become stockholders of the Company through the purchase of Common Stock.
TAX EFFECTS. The Bank has received an opinion of counsel with regard to
federal income taxation and an opinion from Crowe, Chizek and Company LLP
with regard to Illinois taxation which indicate that the adoption and
implementation of the Plan of Conversion set forth herein will not be taxable
for federal or Illinois tax purposes to the Bank, its Eligible Account
Holders, or its Supplemental Eligible Account Holders or the Company, except
as discussed below. See "- Tax Aspects."
EFFECT ON LIQUIDATION RIGHTS. If a mutual savings institution were to
liquidate, all claims of creditors (including those of depositors, to the
extent of deposit balances) would be paid first. Thereafter, if there were
any assets remaining, depositors would be entitled to such remaining assets,
pro rata, based upon the deposit balances in their deposit accounts
immediately prior to liquidation. In the unlikely event that the Bank were
to liquidate after Conversion, all claims of creditors (including those of
depositors, to the extent of their deposit balances) would also be paid
first, followed by distribution of the "liquidation account" to certain
depositors (see "- Liquidation Rights"), with any assets remaining thereafter
distributed to the Company as the holder of the Bank's capital stock.
Pursuant to the rules and regulations of the OTS, a post-Conversion merger,
consolidation, sale of bulk assets or similar combination or transaction with
another insured savings institution would not be considered a liquidation
and, in such a transaction, the liquidation account would be assumed by the
surviving institution.
STOCK PRICING
The Plan of Conversion requires that the purchase price of the Common
Stock must be based on the pro forma market value of the Common Stock giving
effect to the Conversion, as determined on the basis of an independent
valuation. The Bank and the Company have retained Keller to make such
valuation. For its services in making such appraisal, Keller will receive a
fee of $23,000, including expenses. The Bank and the Company have agreed to
indemnify Keller and its employees and affiliates against certain losses
arising out of its services as appraiser, except where Keller's liability
results from its negligence or fault.
An appraisal has been made by Keller in reliance upon the information
contained in this Prospectus, including the Consolidated Financial
Statements. Keller also considered the following factors, among others: the
present and projected operating results and financial condition of the
Company and the Bank and the economic and demographic conditions in the
Bank's existing marketing area; certain historical, financial and other
information relating to the Bank; a comparative evaluation of the operating
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and financial statistics of the Bank with those of other similarly situated
publicly-traded savings institutions; the aggregate size of the offering of
the Common Stock; the impact of Conversion on the Bank's net worth and
earnings potential; the proposed dividend policy of the Company and the Bank;
and the trading market for securities of comparable institutions and general
conditions in the market for such securities.
On the basis of the foregoing, Keller has advised the Company and the
Bank that, in its opinion, dated April 12, 1996, the estimated pro forma
market value of the Common Stock ranged from a minimum of $20.4 million to a
maximum of $27.6 million with a midpoint of $24.0 million. Based upon the
Valuation Range, the Board of Directors has established the Estimated Price
Range of $20.4 million to $27.6 million, with a midpoint of $24.0 million,
and the Company expects to issue between 2,040,000 and 2,760,000 shares of
Common Stock at the Purchase Price of $10.00 per share. The Board of
Directors of the Company and the Bank have reviewed the appraisal of Keller
and in determining the reasonableness and adequacy of such appraisal
consistent with OTS regulations and policies, have reviewed the methodology
and reasonableness of the assumptions utilized by Keller in the preparation
of such appraisal.
SUCH VALUATION, HOWEVER, IS NOT INTENDED, AND MUST NOT BE CONSTRUED, AS
A RECOMMENDATION OF ANY KIND AS TO THE ADVISABILITY OF PURCHASING SUCH
SHARES. KELLER DID NOT INDEPENDENTLY VERIFY THE CONSOLIDATED FINANCIAL
STATEMENTS AND OTHER INFORMATION PROVIDED BY THE BANK, NOR DID KELLER VALUE
INDEPENDENTLY THE ASSETS OR LIABILITIES OF THE BANK. THE VALUATION CONSIDERS
THE BANK AS A GOING CONCERN AND SHOULD NOT BE CONSIDERED AS AN INDICATION OF
THE LIQUIDATION VALUE OF THE BANK. MOREOVER, BECAUSE SUCH VALUATION IS
NECESSARILY BASED UPON ESTIMATES AND PROJECTIONS OF A NUMBER OF MATTERS, ALL
OF WHICH ARE SUBJECT TO CHANGE FROM TIME TO TIME, NO ASSURANCE CAN BE GIVEN
THAT PERSONS PURCHASING SHARES IN THE CONVERSION WILL THEREAFTER BE ABLE TO
SELL SUCH SHARES AT PRICES AT OR ABOVE THE PURCHASE PRICE OR IN THE RANGE OF
THE FOREGOING EVALUATION OF THE PRO FORMA MARKET VALUE THEREOF. SEE "RISK
FACTORS -- ABSENCE OF MARKET FOR COMMON STOCK"
Following commencement of the Subscription and Community Offerings, the
maximum of the Estimated Price Range may be increased up to 15% and the
number of shares of Common Stock to be issued in the Conversion may be
increased to 3,174,000 shares due to regulatory considerations, changes in
market conditions or general financial and economic conditions, without the
resolicitation of subscribers. See "- Subscription Offering and Subscription
Rights," "- Community Offering" and "- Limitations on Common Stock Purchases"
as to the method of distribution and allocation of additional shares that may
be issued in the event of an increase in the Estimated Price Range to fill
unfilled orders in the Subscription and Community Offerings.
No sale of shares of Common Stock may be consummated unless, prior to
such consummation, Keller confirms to the Bank and the OTS that, to the best
of its knowledge, nothing of a material nature has occurred which, taking
into account all relevant factors including those which would be involved in
a change in the maximum subscription price, would cause Keller to conclude
that the value of the Common Stock at the price so determined is incompatible
with its estimate of the pro forma market value of the Common Stock at the
conclusion of the Subscription and Community Offerings.
If, based on Keller's estimate, the pro forma market value of the Common
Stock as of such date is not more than 15% above the maximum and not less
than the minimum of the Estimated Price Range, then (1) with the approval of
the OTS, the number of shares of Common Stock to be issued in the Conversion
may be increased or decreased, pro rata to the increase or decrease in value,
without resolicitation of subscriptions, to no more than 3,174,000 shares or
no less than 2,040,000 shares; and (2) all shares purchased in the
Subscription and Community Offerings will be purchased for the Purchase
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Price of $10.00 per share. If the number of shares issued in the Conversion
is increased due to an increase of up to 15% in the Estimated Price Range to
reflect regulatory considerations, changes in market conditions or general
financial and economic conditions, persons who subscribed for the maximum
number of shares will not be given the opportunity to subscribe for an
adjusted maximum number of shares, except for the ESOP which will be able to
subscribe for such adjusted amount. See "- Limitations on Common Stock
Purchases."
If the pro forma market value of the Common Stock is either more than
15% above the maximum of the Estimated Price Range or less than the minimum
of the Estimated Price Range, the Bank and the Company, after consulting with
the OTS, may terminate the Plan and return all funds promptly with interest
at the Bank's passbook rate of interest on payments made by cash, check, bank
draft or money order, cancel withdrawal authorizations, extend or hold a new
Subscription and Community Offering, establish a new Estimated Price Range,
commence a resolicitation of subscribers or take such other actions as
permitted by the OTS in order to complete the Conversion. In the event that
a resolicitation is commenced, unless an affirmative response is received
within a reasonable period of time, all funds will be promptly returned to
investors as described above. A resolicitation, if any, following the
conclusion of the Subscription and Community Offerings would not exceed 45
days unless further extended by the OTS for periods of up to 90 days not to
extend beyond July 30, 1998.
Copies of the appraisal report of Keller, including any amendments
thereto, and the detailed memorandum of the appraiser setting forth the
method and assumptions for such appraisal are available for inspection at the
main office of the Bank and the other locations specified under "Additional
Information."
NUMBER OF SHARES TO BE ISSUED
Depending upon market or financial conditions following the commencement
of the Subscription and Community Offerings, the total number of shares to be
issued in the Conversion may be increased or decreased without a
resolicitation of subscribers, provided that the product of the total number
of shares times the Purchase Price per share is not below the minimum or more
than 15% above the maximum of the Estimated Price Range, and the total number
of shares to be issued in the Conversion is not less than 2,040,000 or
greater than 2,760,000 (or 3,174,000 if the Estimated Price Range is
increased by 15%).
In the event market or financial conditions change so as to cause the
aggregate purchase price of the shares to be below the minimum of the
Estimated Price Range or more than 15% above the maximum of such range, if
the Plan is not terminated by the Company and the Bank after consultation
with the OTS, purchasers will be resolicited (I.E., permitted to continue
their orders, in which case they will need to affirmatively reconfirm their
subscriptions prior to the expiration of the resolicitation offering or their
subscription funds will be promptly refunded, or be permitted to modify or
rescind their subscriptions). Any change in the Estimated Price Range must
be approved by the OTS. If the number of shares issued in the Conversion is
increased due to an increase of up to 15% in the Estimated Price Range to
reflect changes in market or financial condition, persons who subscribed for
the maximum number of shares will not be given the opportunity to subscribe
for an adjusted maximum number of shares, except for the ESOP which will be
able to subscribe for such adjusted amount. See "- Limitations on Common
Stock Purchases."
An increase in the number of shares to be issued in the Conversion as a
result of an increase in the estimated pro forma market value would decrease
both a subscriber's ownership interest and pro forma net earnings and
stockholders' equity on a per share basis while increasing the Company's pro
forma net earnings and stockholders' equity on an aggregate basis. A
decrease in the number of
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shares to be issued in the Conversion would increase both a subscriber's
ownership interest and pro forma net earnings and stockholders' equity on a
per share basis while decreasing the Company's pro forma net earnings and
stockholder's equity on an aggregate basis. For a presentation of the
effects of such changes, see "Pro Forma Data."
SUBSCRIPTION OFFERING AND SUBSCRIPTION RIGHTS
In accordance with the Plan of Conversion, rights to subscribe for the
purchase of Common Stock have been granted under the Plan of Conversion to
the following persons in the following order of descending priority: (1)
holders of deposit accounts with a balance of $50 or more as of December 31,
1994 ("Eligible Account Holders"); (2) the ESOP; (3) holders of deposit
accounts with a balance of $50 or more as of March 31, 1996 ("Supplemental
Eligible Account Holders"); and (4) members of the Bank, consisting of
depositors of the Bank as of June 14, 1996, the Voting Record Date, and
borrowers with loans outstanding as of December 20, 1994 which continue to be
outstanding as of the Voting Record Date other than those members which
qualify as Eligible Account Holders and Supplemental Eligible Account Holders
("Other Members"). All subscriptions received will be subject to the
availability of Common Stock after satisfaction of all subscriptions of all
persons having prior rights in the Subscription Offering and to the maximum
and minimum purchase limitations set forth in the Plan of Conversion and as
described below under "- Limitations on Common Stock Purchases."
PRIORITY 1: ELIGIBLE ACCOUNT HOLDERS. Each Eligible Account Holder
will receive, without payment therefor, first priority, non-transferable
subscription rights to subscribe in the Subscription Offering for up to the
greater of the amount permitted to be purchased in the Community Offering,
currently 0.5% (13,800 shares based on the issuance of 2,760,000 shares) of
the Common Stock offered, one-tenth of one percent (.10%) of the total
offering of shares of Common Stock or fifteen times the product (rounded down
to the next whole number) obtained by multiplying the total number of shares
of Common Stock to be issued by a fraction of which the numerator is the
amount of the Eligible Account Holder's qualifying deposit and the
denominator is the total amount of qualifying deposits of all Eligible
Account Holders, in each case on the Eligibility Record Date, subject to the
overall maximum purchase limitation and exclusive of an increase in the
shares issued pursuant to an increase in the Estimated Price Range of up to
15%. See "- Limitations on Common Stock Purchases."
In the event that Eligible Account Holders exercise subscription rights
for a number of shares of Common Stock in excess of the total number of such
shares eligible for subscription, the shares of Common Stock shall be
allocated among the subscribing Eligible Account Holders so as to permit each
subscribing Eligible Account Holder, to the extent possible, to purchase a
number of shares sufficient to make his or her total allocation of Common
Stock equal to the lesser of 100 shares or the number of shares subscribed
for by the Eligible Account Holder. Any shares remaining after that
allocation will be allocated among the subscribing Eligible Account Holders
whose subscriptions remain unsatisfied in the proportion that the amount of
the qualifying deposit of each Eligible Account Holder whose subscription
remains unsatisfied bears to the total amount of the qualifying deposits of
all Eligible Account Holders whose subscriptions remain unsatisfied exclusive
of any increase in the shares issued pursuant to an increase in the Estimated
Price Range of up to 15%. If the amount so allocated exceeds the amount
subscribed for by any one or more remaining Eligible Account Holders, the
excess shall be reallocated (one or more times as necessary) among those
remaining Eligible Account Holders whose subscriptions are still not fully
satisfied on the same principle until all available shares have been
allocated or all subscriptions satisfied.
To ensure proper allocation of stock, each Eligible Account Holder must
list on his subscription order form all accounts in which he has an ownership
interest. Failure to list an account could result in
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fewer shares being allocated than if all accounts had been disclosed. The
subscription rights of Eligible Account Holders who are also directors or
officers of the Bank or their associates will be subordinated to the
subscription rights of other Eligible Account Holders to the extent
attributable to increased deposits in the year preceding December 31, 1994.
PRIORITY 2: EMPLOYEE STOCK OWNERSHIP PLAN. To the extent that there
are sufficient shares remaining after satisfaction of the subscriptions by
Eligible Account Holders, the ESOP will receive, without payment therefor,
second priority, non-transferable subscription rights to purchase, in the
aggregate, up to 10% of Common Stock issued in the Conversion, including any
increase in the number of shares of Common Stock to be issued in the
Conversion after the date hereof as a result of an increase of up to 15% in
the maximum of the Estimated Price Range and provided further that any such
increase in the number of shares to be issued in the Conversion will first be
allocated to satisfy the ESOP's subscriptions of 8.0% of the total number of
shares to be issued. See "- Limitations on Common Stock Purchases." The
ESOP intends to purchase 8% of the shares to be issued in the Conversion, or
163,200 shares and 220,800 shares, based on the issuance of 2,040,000 shares
and 2,760,000 shares, respectively. Subscriptions by the ESOP will not be
aggregated with shares of Common Stock purchased directly by or which are
otherwise attributable to any other participants in the Subscription and
Community Offerings, including subscriptions of any of the Bank's directors,
officers, employees or associates thereof. See "The Board of Directors and
Management of the Bank - Benefits - Employee Stock Ownership Plan and Trust."
PRIORITY 3: SUPPLEMENTAL ELIGIBLE ACCOUNT HOLDERS. Each Supplemental
Eligible Account Holder will receive, without payment therefor, third
priority, non-transferable subscription rights to subscribe for in the
Subscription Offering up to the greater of the amount permitted to be
purchased in the Community Offering, currently 0.5% (13,800 shares based on
the issuance of 2,760,000 shares) of the Common Stock offered, one-tenth of
one percent (.10%) of the total offering of shares of Common Stock or fifteen
times the product (rounded down to the next whole number) obtained by
multiplying the total number of shares of Common Stock to be issued by a
fraction of which the numerator is the amount of the Supplemental Eligible
Account Holder's qualifying deposit and the denominator is the total amount
of qualifying deposits of all Supplemental Eligible Account Holders, in each
case on the Supplemental Eligibility Record Date, subject to the overall
maximum purchase limitation and exclusive of an increase in the shares issued
pursuant to an increase in the Estimated Price Range of up to 15%. See "-
Limitations on Common Stock Purchases."
In the event that Supplemental Eligible Account Holders exercise
subscription rights for a number of shares of Common Stock in excess of the
total number of such shares eligible for subscription, the shares of Common
Stock shall be allocated among the subscribing Supplemental Eligible Account
Holders so as to permit each subscribing Supplemental Eligible Account
Holder, to the extent possible, to purchase a number of shares sufficient to
make his or her total allocation of Common Stock equal to the lesser of 100
shares or the number of shares subscribed for by the Supplemental Eligible
Account Holder. Any shares remaining after that allocation will be allocated
among the subscribing Supplemental Eligible Account Holders whose
subscriptions remain unsatisfied in the proportion that the amount of the
qualifying deposit of each Supplemental Eligible Account Holder whose
subscription remains unsatisfied bears to the total amount of the qualifying
deposits of all Supplemental Eligible Account Holders whose subscriptions
remain unsatisfied exclusive of any increase in the shares issued pursuant to
an increase in the Estimated Price Range of up to 15%. If the amount so
allocated exceeds the amount subscribed for by any one or more remaining
Supplemental Eligible Account Holders, the excess shall be reallocated (one
or more times as necessary) among those remaining Supplemental Eligible
Account Holders whose subscriptions are still not satisfied on the same
principle until all available shares have been allocated or all subscriptions
satisfied.
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To ensure proper allocation of stock, each Supplemental Eligible Account
Holder must list on his subscription order form all accounts in which he has
an ownership interest. Failure to list an account could result in less
shares being allocated than if all accounts had been disclosed. The
subscription rights received by Eligible Account Holders will be applied in
partial satisfaction to the subscription rights to be received as a
Supplemental Eligible Account Holder.
PRIORITY 4: OTHER MEMBERS. To the extent that there are sufficient
shares remaining after satisfaction of subscriptions by the Eligible Account
Holders, the ESOP and the Supplemental Eligible Account Holders, each Other
Member will receive, without payment therefor, fourth priority
non-transferable subscription rights to subscribe for Common Stock in the
Subscription Offering up to the greater of the amount permitted to be
purchased in the Community Offering, currently 0.5% (13,800 shares based on
the issuance of 2,760,000 shares) of the Common Stock offered, or one-tenth
of one percent (.10%) of the total offering of shares of Common Stock,
subject to the overall maximum purchase limitation and exclusive of an
increase in shares issued pursuant to an increase in the Estimated Price
Range of up to 15%.
In the event that Other Members exercise subscription rights for a
number of shares of Common Stock which, when added to the shares of Common
Stock subscribed for by the Eligible Account Holders, the ESOP and the
Supplemental Eligible Account Holders is in excess of the total number of
such shares being issued, the subscriptions of such Other Members will be
allocated among the subscribing Other Members so as to permit each
subscribing Other Member, to the extent possible, to purchase a number of
shares sufficient to make his or her total allocation of Common Stock equal
to the lesser of 100 shares or the number of shares subscribed for by the
Other Member. Any shares remaining after that allocation will be allocated
among the subscribing Other Members whose subscriptions remain unsatisfied
pro rata in the same proportion that the number of votes of a subscribing
Other Member on the Voting Record Date bears to the total votes on the Voting
Record Date of all subscribing Other Members whose subscriptions remain
unsatisfied. If the amount so allocated exceeds the amount subscribed for by
any one or more remaining Other Members, the excess shall be reallocated (one
or more times as necessary) among those remaining Other Members whose
subscriptions are still not fully satisfied on the same principle until all
available shares have been allocated or all subscriptions satisfied.
EXPIRATION DATE FOR THE SUBSCRIPTION OFFERING. The Subscription
Offering will expire at 12:00 Noon on July 30, 1996, unless extended for up
to 45 days by the Bank or such additional periods with the approval of the
OTS. Subscription rights which have not been exercised prior to the
Expiration Date will become void.
The Bank will not execute orders until all shares of Common Stock have
been subscribed for or otherwise sold. If all shares have not been
subscribed for or sold within 45 days after the Expiration Date, unless such
period is extended with the consent of the OTS, all funds delivered to the
Bank pursuant to the Subscription Offering will be returned promptly to the
subscribers with interest and all withdrawal authorizations will be
cancelled. If an extension beyond the 45-day period following the Expiration
Date is granted, the Bank will resolicit subscribers by notifying subscribers
of the extension of time and of any rights of subscribers to modify or
rescind their subscriptions and, unless an affirmative response is received,
have their funds returned promptly with interest. Such extensions may not go
beyond July 30, 1998.
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COMMUNITY OFFERING
Concurrent with the Subscription Offering, to the extent that shares
remain available for purchase after satisfaction of all subscriptions of the
Eligible Account Holders, the ESOP, the Supplemental Eligible Account Holders
and Other Members, the Bank has determined to offer shares pursuant to the
Plan to certain members of the general public. Any such shares available
will be available for purchase by the general public, with preference given
to natural persons (such natural persons referred to as "Preferred
Subscribers") residing in Cook and DuPage counties in the State of Illinois
to whom a Prospectus and order form have been delivered. Such persons,
together with associates of and persons acting in concert with such persons,
may purchase up to 0.5% (13,800 shares based on the issuance of 2,760,000
shares) of the Common Stock offered, subject to the maximum purchase
limitation and exclusive of shares issued pursuant to an increase in the
Estimated Price Range by up to 15%. See "- Limitations on Common Stock
Purchases." This amount may be increased to up to a maximum of 5% or
decreased to less than 0.5% at the sole discretion of the Company and the
Bank. THE OPPORTUNITY TO SUBSCRIBE FOR SHARES OF COMMON STOCK IN THE
COMMUNITY OFFERING CATEGORY IS SUBJECT TO THE RIGHT OF THE BANK AND THE
COMPANY, IN ITS SOLE DISCRETION, TO ACCEPT OR REJECT ANY SUCH ORDERS IN WHOLE
OR IN PART EITHER AT THE TIME OF RECEIPT OF AN ORDER OR AS SOON AS
PRACTICABLE FOLLOWING THE EXPIRATION DATE.
Subject to the foregoing, if the amount of stock remaining is
insufficient to fill the orders of Preferred Subscribers after completion of
the Subscription and Community Offerings, such stock will be allocated first
to each Preferred Subscriber whose order is accepted by the Bank, in an
amount equal to the lesser of 100 shares or the number of shares subscribed
for by each such Preferred Subscriber, if possible. Thereafter, unallocated
shares will be allocated among the Preferred Subscribers whose orders remain
unsatisfied on a 100 shares per order basis until all such orders have been
filled or the remaining shares have been allocated. If there are any shares
remaining, shares will be allocated to other persons of the general public
who purchase in the Community Offering applying the same allocation described
above for Preferred Subscribers.
Depending upon market conditions, the shares of Common Stock may be
offered for sale in the Community Offering by a selling group of brokers to
be managed by Baird in a Broker Assist Program. The Company and the Bank
have the right to accept or reject orders, in whole or in part in their sole
discretion in the Community Offering. Neither Baird nor any registered
broker-dealer shall have any obligation to take or purchase any shares of the
Common Stock in the Broker Assist Program. See "- Marketing and Underwriting
Arrangements."
PERSONS IN NON-QUALIFIED STATES OR FOREIGN COUNTRIES. The Company and
the Bank will make reasonable efforts to comply with the securities laws of
all states in the United States in which persons entitled to subscribe for
stock pursuant to the Plan reside. However, the Bank and the Company are not
required to offer stock in the Subscription Offering to any person who
resides in a foreign country or resides in a state of the United States with
respect to which (i) a small number of persons otherwise eligible to
subscribe for shares of Common Stock reside; or (ii) the Company or the Bank
determines that compliance with the securities laws of such state would be
impracticable for reasons of cost or otherwise, including but not limited to
a request that the Company and the Bank or their officers, directors or
trustees register as a broker, dealer, salesman or selling agent, under the
securities laws of such state, or a request to register or otherwise qualify
the subscription rights or Common Stock for sale or submit any filing with
respect thereto in such state. Where the number of persons eligible to
subscribe for shares in one state is small, the Bank and the Company will
base their decision as to whether or not to offer the Common Stock in such
state on a number of factors, including the size of accounts held by account
holders in the state, the cost of registering or qualifying the shares or the
need to register the Company, its officers, directors or employees as
brokers, dealers or salesmen.
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MARKETING AND UNDERWRITING ARRANGEMENTS
The Bank and the Company have engaged Baird as underwriter and financial
and marketing advisor to assist the Company and the Bank with respect to the
Subscription and Community Offerings. Baird is a registered broker-dealer
and is a member of the NASD. Baird is headquartered in Milwaukee, Wisconsin
and its telephone number is (414) 765-3500. Baird will assist the Company
and the Bank in the Conversion by, among other things, (i) developing
marketing materials; (ii) targeting potential investors in the Subscription
Offering and other investors eligible to participate in the Community
Offering; (iii) soliciting potential investors by phone or in person; (iv)
developing and managing a Broker Assist Program to more fully involve local
and regional brokerage firms; (v) training management and staff to perform
tasks in connection with the Conversion; (vi) managing and setting up the
Conversion Center; (vii) managing the subscription campaign; (viii)
soliciting proxies; and (ix) acting as standby underwriter for the
distribution of shares which are not sold in the Subscription and Community
Offering. In addition, Baird/Mark Capital Group, an affiliate of Baird, will
perform certain records management services for the Bank and the Company in
the conversion process.
The Bank has paid Baird a financial advisory and proxy solicitation fee
equal to $50,000. Baird will also receive a marketing assistance fee equal
to 1.84% of the dollar value of all stock sold in the Subscription and
Community Offerings, less the financial advisory and proxy solicitation fee.
Such amount is exclusive of any shares issued pursuant to an increase in the
Estimated Price Range of up to 15%, and shares sold to the ESOP, directors
and officers and their associates and employees. Such fees will be paid upon
completion of the Conversion. Baird shall be reimbursed for its expenses,
including its legal fees, up to $50,000. Baird has not prepared any report
or opinion constituting a recommendation or advice to the Company or the Bank
or to persons who subscribe in the Offerings, nor has it prepared an opinion
as to the fairness to the Company or the Bank of the Purchase Price or the
terms of the Offerings. Baird expresses no opinion as to the prices at which
Common Stock to be issued in the Offerings may trade. The Bank has agreed to
indemnify Baird against certain liabilities including certain liabilities,
which may result from material misstatements or omissions by the Company or
the Bank and certain misrepresentations or breaches by the Company or the
Bank relating to the agreement with Baird.
The Bank and Baird may agree to utilize a Broker Assist Program in
connection with the sale of shares of Common Stock in the Community Offering.
Subject to the limitations discussed below, in the event a Broker Assist
Program is utilized in connection with the Community Offering, the Bank has
agreed to pay sales commissions to selected dealers pursuant to selected
dealer agreements and a management fee of 1.0% to Baird for all shares sold
under the Broker Assist Program. It is not anticipated that total fees under
the Broker Assist Program would exceed 5.0% of the aggregate Purchase Price
of the shares sold pursuant to a Broker Assist Program, including Baird's
management fee. Assuming all shares are sold in the Subscription Offering,
the estimated marketing fees will be approximately $325,000 and $447,000 at
the minimum and maximum of the Estimated Price Range, respectively. See "Pro
Forma Data."
In addition to the foregoing, if a Broker Assist Program is used in the
Community Offering, a purchaser may pay for his or her shares with funds held
by or deposited with a "selected dealer." If a stock order form is executed
and forwarded to the selected dealer or if the selected dealer is authorized
to execute the stock order form on behalf of a purchaser, the selected dealer
is required to forward the stock order form and funds to the Bank in the form
of a check made payable to the Bank for deposit in a segregated account on or
before noon of the business day following receipt of the stock order form or
execution of the stock order form by the selected dealer.
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If the shares of Common Stock which are sold in the Subscription and
Community Offerings are insufficient to reach the lower end of the Valuation
Range (as determined by Keller), Baird intends that any unsold shares of the
Common Stock would be offered to the public pursuant to a firm commitment
underwritten public offering ("Public Offering") by Baird as sole managing
underwriter. If a Public Offering occurs, Baird will be paid an
underwriter's discount (gross spread) of 7.0% of the aggregate Actual
Purchase Price of all shares sold in the Public Offering.
Crowe, Chizek and Company LLP will perform conversion and records
management services for the Bank in the Conversion and will receive a fee for
this service of $9,500, plus reimbursement of reasonable out-of-pocket
expenses not to exceed $1,000.
Directors and executive officers of the Company and Bank may participate
in the solicitation of offers to purchase Common Stock. Other employees of
the Bank may participate in the Offering in ministerial capacities or
providing clerical work in effecting a sales transaction. Other questions of
prospective purchasers will be directed to executive officers or registered
representatives. Such other employees have been instructed not to solicit
offers to purchase Common Stock or provide advice regarding the purchase of
Common Stock. The Company will rely on Rule 3a4-1 under the Exchange Act,
and sales of Common Stock will be conducted within the requirements of Rule
3a4-1, so as to permit officers, directors and employees to participate in
the sale of Common Stock. No officer, director or employee of the Company or
the Bank will be compensated in connection with his participation by the
payment of commissions or other remuneration based either directly or
indirectly on the transactions in the Common Stock.
PROCEDURE FOR PURCHASING SHARES IN SUBSCRIPTION AND COMMUNITY OFFERINGS
To ensure that each purchaser receives a Prospectus at least 48 hours
before the Expiration Date in accordance with Rule 15c2-8 of the Exchange
Act, no Prospectus will be mailed any later than five days prior to such date
or hand delivered any later than two days prior to such date. Execution of
the stock order form and acknowledgement form will confirm receipt or
delivery in accordance with Rule 15c2-8. Stock order forms and
acknowledgement forms will only be distributed with a Prospectus.
To purchase shares in the Subscription and Community Offerings, an
executed stock order form and acknowledgement form with the required payment
for each share subscribed for or appropriate authorization for withdrawal
from a deposit account maintained at the Bank (which may be given by
completing the appropriate blanks in the stock order form), must be received
by the Bank at any of its offices by July 30, 1996 at 12:00 Noon, Central
Time, on the Expiration Date. Stock order forms which are not received by
such time or are executed defectively or are received without full payment
(or appropriate withdrawal instructions) are not required to be accepted. In
addition, the Bank is not obligated to accept orders submitted on photocopied
or facsimilied stock order forms and will not accept stock order forms
unaccompanied by an executed acknowledgement form. The Company and the Bank
have the right to waive or permit the correction of incomplete or improperly
executed forms, but do not represent that they will do so. Once received, an
executed stock order form may not be modified, amended or rescinded without
the consent of the Bank unless the Conversion has not been completed by
September 14, 1996, 45 days after the end of the Subscription and Community
Offerings, unless such period has been extended.
In order to ensure that Eligible Account Holders, Supplemental Eligible
Account Holders and Other Members are properly identified as to their stock
purchase priorities, depositors as of the Eligibility Record Date (December
31, 1994) and/or the Supplemental Eligibility Record Date (March 31, 1996)
and/or the Voting Record Date (June 14, 1996) must list all accounts on the
stock order form giving all names on each account and the account number.
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Payment for subscriptions may be made (i) in cash if delivered in person
at any branch office of the Bank; (ii) by check, bank draft or money order;
or (iii) by authorization of withdrawal from deposit accounts maintained with
the Bank. No wire transfers will be accepted. Interest will be paid on
payments made by cash, check, bank draft or money order at the Bank's
passbook rate of interest from the date payment is received until the
completion or termination of the Conversion. If payment is made by
authorization of withdrawal from deposit accounts, the funds authorized to be
withdrawn from a deposit account will continue to accrue interest at the
contractual rates until completion or termination of the Conversion. Such
funds will be otherwise unavailable to the depositor until completion or
termination of the Conversion.
If a subscriber authorizes the Bank to withdraw the amount of the
purchase price from his certificate account, the Bank will do so as of the
effective date of the Conversion. The Bank will waive any applicable
penalties for early withdrawal from certificate accounts. If the remaining
balance in a certificate account is reduced below the applicable minimum
balance requirement at the time that the funds actually are transferred under
the authorization, the certificate will be cancelled at the time of the
withdrawal, without penalty, and the remaining balance will earn interest at
the Bank's passbook rate.
The ESOP and other employee plans will not be required to pay for the
shares subscribed for at the time it subscribes, but rather, may pay for such
shares of Common Stock subscribed for at the Purchase Price upon consummation
of the Conversion.
Owners of self-directed Individual Retirement Accounts ("IRAs") may use
the assets of such IRAs to purchase shares of Common Stock in the
Subscription and Community Offerings, provided that such IRAs are not
maintained at the Bank. Persons with self-directed IRAs maintained at the
Bank must have their accounts transferred to an unaffiliated institution or
broker to purchase shares of Common Stock in the Subscription and Community
Offerings. In addition, the provisions of ERISA and IRS regulations require
that officers, directors and ten percent shareholders who use self-directed
IRA funds to purchase shares of Common Stock in the Subscription and
Community Offerings make such purchases for the exclusive benefit of the IRAs.
Certificates representing shares of Common Stock purchased will be
mailed to purchasers at the last address of such persons appearing on the
records of the Bank, or to such other address as may be specified in properly
completed stock order forms, as soon as practicable following consummation of
the sale of all shares of Common Stock. Any certificates returned as
undeliverable will be disposed of in accordance with applicable law.
RESTRICTIONS ON TRANSFER OF SUBSCRIPTION RIGHTS AND SHARES
Prior to the completion of the Conversion, the OTS conversion
regulations prohibit any person with subscription rights, including the
Eligible Account Holders, the ESOP, the Supplemental Eligible Account Holders
and Other Members of the Bank, from transferring or entering into any
agreement or understanding to transfer the legal or beneficial ownership of
the subscription rights issued under the Plan or the shares of Common Stock
to be issued upon their exercise. Such rights may be exercised only by the
person to whom they are granted and only for his account. Each person
exercising such subscription rights will be required to certify that he is
purchasing shares solely for his own account and that he has no agreement or
understanding regarding the sale or transfer of such shares. The regulations
also prohibit any person from offering or making an announcement of an offer
or intent to make an offer to purchase such subscription rights or shares of
Common Stock prior to the completion of the Conversion.
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THE BANK AND THE COMPANY WILL PURSUE ANY AND ALL LEGAL AND EQUITABLE
REMEDIES (INCLUDING FORFEITURE) IN THE EVENT THEY BECOME AWARE OF THE
TRANSFER OF SUBSCRIPTION RIGHTS AND WILL NOT HONOR ORDERS KNOWN BY THEM TO
INVOLVE THE TRANSFER OF SUCH RIGHTS.
LIMITATIONS ON COMMON STOCK PURCHASES
The Plan includes the following limitations on the number of shares of
Common Stock which may be purchased during the Conversion:
(1) No less than 25 shares;
(2) Each Eligible Account Holder may subscribe for and purchase in the
Subscription Offering up to the greater of the amount permitted to
be purchased in the Community Offering, currently 0.5% (13,800
shares based on the issuance of 2,760,000 shares) of the Common
Stock offered, one-tenth of one percent (.10%) of the total
offering of shares of Common Stock, or fifteen times the product
(rounded down to the next whole number) obtained by multiplying the
total number of shares of Common Stock to be issued by a fraction
of which the numerator is the amount of the qualifying deposit of
the Eligible Account Holder and the denominator is the total amount
of qualifying deposits of all Eligible Account Holders in each case
on the Eligibility Record Date subject to the overall maximum
purchase limitation described in (7) below and exclusive of an
increase in the total number of shares issued due to an increase in
the Estimated Price Range of up to 15%;
(3) The ESOP is permitted to purchase in the aggregate up to 10% of the
shares of Common Stock issued in the Conversion, including shares
issued in the event of an increase in the Estimated Price Range of
15%, and intends to purchase 8% of the shares of Common Stock
issued in the Conversion;
(4) Each Supplemental Eligible Account Holder may subscribe for and
purchase in the Subscription Offering up to the greater of the
amount permitted to be purchased in the Community Offering,
currently 0.5% (13,800 shares based on the issuance of 2,760,000
shares) of the Common Stock offered, one-tenth of one percent
(.10%) of the total offering of shares of Common Stock, or fifteen
times the product (rounded down to the next whole number) obtained
by multiplying the total number of shares of Common Stock to be
issued by a fraction of which the numerator is the amount of the
qualifying deposit of the Supplemental Eligible Account Holder and
the denominator is the total amount of qualifying deposits of all
Supplemental Eligible Account Holders, in each case on the
Supplemental Eligibility Record Date, subject to the overall
maximum purchase limitation described in (7) below and exclusive of
an increase in the total number of shares issued due to an increase
in the Estimated Price Range of up to 15%;
(5) Each Other Member may subscribe for and purchase in the Subscription
Offering up to the greater of the amount permitted to be purchased
in the Community Offering, currently 0.5% (13,800 shares based on
the issuance of 2,760,000 shares) of the Common Stock offered, or
one-tenth of one percent (.10%) of the total offering of shares of
Common Stock subject to the overall maximum purchase limitation
described in (7) below and exclusive of an increase in the total
number of shares issued due to an increase in the Estimated Price
Range of up to 15%;
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(6) Persons purchasing shares of Common Stock in the Community Offering,
together with associates of and groups of persons acting in concert
with such persons, may purchase in the Community Offering up to
0.5% (13,800 shares based on the issuance of 2,760,000 shares) of
the Common Stock offered in the Conversion, subject to the overall
maximum purchase limitation described in (7) below and exclusive of
an increase in the total number of shares issued due to an increase
in the Estimated Price Range of up to 15%;
(7) Eligible Account Holders, Supplemental Eligible Account Holders and
Other Members may purchase stock in the Community Offering subject
to the purchase limitations described in (6) above, provided that,
except for the ESOP, the maximum number of shares of Common Stock
subscribed for or purchased in all categories by any person,
together with associates of and groups of persons acting in concert
with such persons, shall not exceed the overall maximum purchase
limitation of 1.0% (27,600 shares based on the issuance of
2,760,000 shares) of the shares of Common Stock offered in the
Conversion, exclusive of an increase in the total number of shares
issued due to an increase in the Estimated Price Range of up to
15%; and
(8) No more than 32% of the total number of shares offered for sale in
the Conversion may be purchased by directors and officers of the
Bank and their associates in the aggregate, excluding purchases by
the ESOP.
Subject to any required regulatory approval and the requirements of
applicable laws and regulations, but without further approval of the members
of the Bank, both the individual amount permitted to be subscribed for and
the overall maximum purchase limitation may be increased to up to a maximum
of 5% at the sole discretion of the Company and the Bank. If such amount is
increased, subscribers for the maximum amount will be, and certain other
large subscribers in the sole discretion of the Bank may be, given the
opportunity to increase their subscriptions up to the then applicable limit.
In addition, the Boards of Directors of the Company and the Bank may, in
their sole discretion, increase the overall maximum purchase limitation
referred to above up to 9.99%, provided that orders for shares exceeding 5%
of the shares being offered in the Subscription and Community Offerings shall
not exceed, in the aggregate, 10% of the shares being offered in the
Subscription and Community Offerings. Requests to purchase additional shares
of Common Stock under this provision will be determined by the Boards of
Directors and, if approved, allocated on a pro rata basis giving priority in
accordance with the priority rights set forth herein.
The overall maximum purchase limitation may not be reduced to less than
1% but the individual amount permitted to be subscribed for may be reduced by
the Bank to less than 0.5%, subject to paragraphs (2), (4) and (5) above
without the further approval of members or resolicitation of subscribers. An
individual Eligible Account Holder, Supplemental Eligible Account Holder or
Other Member may not purchase individually in the Subscription Offering the
overall maximum purchase limitation of 1.0% of the shares offered, but may
make such purchase, together with associates of and persons acting in concert
with such person, by also purchasing in other available categories, subject
to availability of shares and the maximum overall purchase limitation for
purchases in the Conversion.
In the event of an increase in the total number of shares offered in the
Conversion due to an increase in the Estimated Price Range of up to 15% (the
"Adjusted Maximum"), the additional shares will be allocated in the following
order of priority in accordance with the Plan: (i) to fill the ESOP's
subscription of 8% of the Adjusted Maximum number of shares; (ii) in the
event that there is an oversubscription by Eligible Account Holders, to fill
unfulfilled subscriptions of Eligible Account Holders exclusive of the
Adjusted Maximum; (iii) in the event that there is an oversubscription by
Supplemental
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Eligible Account Holders, to fill unfulfilled subscriptions of Supplemental
Eligible Account Holders, exclusive of the Adjusted Maximum; (iv) in the
event that there is an oversubscription by Other Members, to fill unfulfilled
subscriptions of Other Members exclusive of the Adjusted Maximum; and (v) to
fill unfulfilled subscriptions in the Community Offering to the extent
possible exclusive of the Adjusted Maximum and with preference to Preferred
Subscribers.
The term "associate" of a person is defined to mean: (i) any
corporation (other than the Bank or a majority-owned subsidiary of the Bank)
of which such person is an officer, partner or 10% stockholder; (ii) any
trust or other estate in which such person has a substantial beneficial
interest or serves as a trustee or in a similar fiduciary capacity; provided,
however, such term shall not include any employee stock benefit plan of the
Bank in which such person has a substantial beneficial interest or serves as
a trustee or in a similar fiduciary capacity; and (iii) any relative or
spouse of such person, or any relative of such spouse, who either has the
same home as such person or who is a director or officer of the Bank.
Directors are not treated as associates of each other solely because of their
Board membership. For a further discussion of limitations on purchases of a
converting institution's stock at the time of Conversion and subsequent to
Conversion, see "The Board of Directors and Management of the Bank -
Subscriptions by Executive Officers and Directors," "The Conversion - Certain
Restrictions on Purchase or Transfer of Shares After Conversion" and "-
Restrictions on Acquisition of the Company and the Bank."
LIQUIDATION RIGHTS
In the unlikely event of a complete liquidation of the Bank in its
present mutual form, each depositor would receive his pro rata share of any
assets of the Bank remaining after payment of claims of all creditors
(including the claims of all depositors to the withdrawal value of their
accounts). Each depositor's pro rata share of such remaining assets would be
in the same proportion as the value of his deposit account was to the total
value of all deposit accounts in the Bank at the time of liquidation. After
the Conversion, each depositor, in the event of a complete liquidation, would
have a claim as a creditor of the same general priority as the claims of all
other general creditors of the Bank. However, except as described below, his
claim would be solely in the amount of the balance in his deposit account
plus accrued interest. He would not have an interest in the value or assets
of the Bank above that amount.
The Plan provides for the establishment, upon the completion of the
Conversion, of a special "liquidation account" for the benefit of Eligible
Account Holders and Supplemental Eligible Account Holders in an amount equal
to the surplus and reserves of the Bank as of the date of its latest balance
sheet contained in the final Prospectus used in connection with the
Conversion. Each Eligible Account Holder and Supplemental Eligible Account
Holder, if he were to continue to maintain his deposit account at the Bank,
would be entitled, on a complete liquidation of the Bank after the
Conversion, to an interest in the liquidation account prior to any payment to
the stockholders of the Bank. Each Eligible Account Holder and Supplemental
Eligible Account Holder would have an initial interest in such liquidation
account for each deposit account, including regular accounts, transaction
accounts such as NOW accounts, money market deposit accounts, and
certificates of deposit, with a balance of $50 or more held in the Bank on
December 31, 1994 and March 31, 1996, respectively ("Qualifying Deposit").
Each Eligible Account Holder and Supplemental Eligible Account Holder will
have a pro rata interest in the total liquidation account for each of his
deposit accounts based on the proportion that the balance of each such
deposit account on the Eligibility Record Date or Supplemental Eligibility
Record Date, respectively, bore to the total amount of all deposit accounts
of all Eligible Account Holders and Supplemental Eligible Account Holders in
the Bank. For deposit accounts in existence at both dates separate
subaccounts shall be determined on the basis of the Qualifying Deposits in
such deposit accounts on such record date.
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If, however, on any annual closing date of the Bank, commencing after
December 31, 1994, and March 31, 1996, the amount in any deposit account is
less than the amount in such deposit account on December 31, 1994 and
March 31, 1996 or any other annual closing date, then the interest in the
liquidation account relating to such deposit account would be reduced from
time to time by the proportion of any such reduction, and such interest will
cease to exist if such deposit account is closed. In addition, no interest
in the liquidation account would ever be increased despite any subsequent
increase in the related deposit account. Any assets remaining after the
above liquidation rights of Eligible Account Holders and Supplemental
Eligible Account Holders are satisfied would be distributed to the Company as
the sole stockholder of the Bank.
TAX ASPECTS
Consummation of the Conversion is expressly conditioned upon the receipt
by the Bank of either a favorable ruling from the IRS or an opinion of
counsel with respect to federal income taxation, and an opinion of an
independent accountant with respect to Illinois income and franchise
taxation, to the effect that the Conversion will not be a taxable transaction
to the Company, the Bank, Eligible Account Holders, Supplemental Eligible
Account Holders or Other Members except as noted below.
No private ruling will be received from the IRS with respect to the
proposed Conversion. Instead, the Bank has received an opinion of its
counsel, Muldoon, Murphy & Faucette, to the effect that for federal income
tax purposes, among other matters: (i) the Bank's change in form from mutual
to stock ownership will constitute a reorganization under section
368(a)(1)(F) of the Code and neither the Bank nor the Company will recognize
any gain or loss as a result of the Conversion; (ii) no gain or loss will be
recognized to the Bank or the Company upon the purchase of the Bank's capital
stock by the Company or to the Company upon the purchase of its Common Stock
in the Conversion; (iii) no gain or loss will be recognized by Eligible
Account Holders or Supplemental Eligible Account Holders upon the issuance to
them of deposit accounts in the Bank in its stock form and their interests in
the liquidation account in exchange for their deposit accounts in the Bank;
(iv) the tax basis of the depositors' deposit accounts in the Bank
immediately after the Conversion will be the same as the basis of their
deposit accounts immediately prior to the Conversion; (v) the tax basis of
each Eligible Account Holder's and Supplemental Eligible Account Holder's
interest in the liquidation account will be zero; (vi) no gain or loss will
be recognized by Eligible Account Holders or Supplemental Eligible Account
Holders upon the distribution to them of non-transferable subscription rights
to purchase shares of the Common Stock, provided that the amount to be paid
for the Common Stock is equal to the fair market value of such stock; and
(vii) the tax basis to the stockholders of the Common Stock of the Company
purchased in the Conversion will be the amount paid therefore and the holding
period for the shares of Common Stock purchased by such persons will begin on
the date on which their subscription rights are exercised. Crowe, Chizek and
Company LLP has opined that the Conversion will not be a taxable transaction
to the Company, the Bank, Eligible Account Holders or Supplemental Eligible
Account Holders for Illinois income and/or franchise tax purposes. Certain
portions of both the federal and the state and local tax opinions are based
upon the assumption that the subscription rights issued in connection with
the Conversion will have no value. The Company and the Bank have received a
letter issued by Keller stating that pursuant to Keller's valuation, Keller
is of the belief that subscription rights issued in connection with the
Conversion will have no value. The letter of Keller and the federal and
state tax opinions, respectively, referred to herein are filed as exhibits to
the Registration Statement. See "Additional Information".
Unlike private rulings, an opinion of counsel or an opinion of an
independent accountant is not binding on the IRS and the IRS could disagree
with conclusions reached therein. Keller has stated in its letter that,
pursuant to its valuation, Keller is of the belief that the subscription
rights do not have any value, based on the fact that such rights are acquired
by the recipients without cost, are non-transferable
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and of short duration, and afford the recipients the right only to purchase
the Common Stock at a price equal to its estimated fair market value, which
will be the same price as the Purchase Price for the unsubscribed shares of
Common Stock. Such valuation is not binding on the IRS or Illinois taxing
authorities. If the subscription rights granted to Eligible Account Holders
or Supplemental Eligible Account Holders are deemed to have an ascertainable
value, receipt of such rights could be taxable to those Eligible Account
Holders or Supplemental Eligible Account Holders who receive and/or exercise
the subscription rights in an amount equal to such value and the Bank could
recognize gain on such distribution. Eligible Account Holders and
Supplemental Eligible Account Holders are encouraged to consult with their
own tax advisor as to the tax consequences in the event that such
subscription rights are deemed to have an ascertainable value.
INTERPRETATION AND AMENDMENT OF THE PLAN OF CONVERSION
To the extent permitted by law, all interpretations of the Plan by the
Bank will be final. The Plan provides that the Bank's Board of Directors
shall have the discretion to interpret and apply the provisions of the Plan
to particular circumstances and that such interpretation or application shall
be final. Any and all interpretations, applications and determinations will
be made by the Board of Directors on the basis of such information and
assistance as was then reasonably available for such purpose.
The Plan provides that, if deemed necessary or desirable by the Board of
Directors, the Plan may be substantively amended at any time by a two-thirds
vote of the Bank's Board of Directors prior to solicitation of proxies from
members to vote on the Plan. After submission of the proxy materials to the
members, the Plan may be amended by a two-thirds vote of the Board of
Directors at any time prior to the Special Meeting with the concurrence of
the OTS. The Plan may be amended at any time after the approval of members
with the approval of the OTS and no further approval of the members will be
necessary unless otherwise required by the OTS. By adoption of the Plan, the
Bank's members will be deemed to have authorized amendment of the Plan under
the circumstances described above.
CERTAIN RESTRICTIONS ON PURCHASE OR TRANSFER OF SHARES AFTER CONVERSION
All shares of Common Stock purchased in connection with the Conversion
by a director or an executive officer of the Bank will be subject to a
restriction that the shares not be sold for a period of one year following
the Conversion, except in the event of the death of such director or
executive officer. Each certificate for restricted shares will bear a legend
giving notice of this restriction on transfer, and instructions will be
issued to the effect that any transfer within such time period of any
certificate or record ownership of such shares other than as provided above
is a violation of the restriction. Any shares of Common Stock issued at a
later date as a stock dividend, stock split, or otherwise, with respect to
such restricted stock will be subject to the same restrictions. The
directors and executive officers of the Bank will also be subject to the
insider trading rules promulgated pursuant to the Exchange Act and any other
applicable requirements of the federal securities laws.
Purchases of outstanding shares of Common Stock of the Company by
directors, executive officers (or any person who was an executive officer or
director of the Bank after adoption of the Plan of Conversion) and their
associates during the three-year period following Conversion may be made only
through a broker or dealer registered with the SEC, except with the prior
written approval of the OTS. This restriction does not apply, however, to
negotiated transactions involving more than 1% of the Company's outstanding
Common Stock or to the purchase of stock pursuant to the Incentive Stock
Option Plan, the Stock Option Plan for Outside Directors or the Master
Stock-Based Benefit Plan to be established after the Conversion.
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Unless approved by the OTS, the Company, pursuant to OTS regulations,
will be prohibited from repurchasing any shares of the Common Stock for three
years except (i) for an offer to all stockholders on a pro rata basis; or
(ii) for the repurchase of qualifying shares of a director. Notwithstanding
the foregoing, and except as provided below, beginning one year following
completion of the Conversion, the Company may repurchase its Common Stock so
long as (i) the repurchases within the following two years are part of an
open-market program not involving greater than 5% of its outstanding capital
stock during a twelve-month period; (ii) the repurchases do not cause the
Bank to become undercapitalized; and (iii) the Company provides to the
Regional Director of the OTS no later than 10 days prior to the commencement
of a repurchase program written notice containing a full description of the
program to be undertaken and such program is not disapproved by the Regional
Director. Under current OTS policies, repurchases may be allowed in the
first year following Conversion and in amounts greater than 5% in the second
and third years following Conversion provided there are valid and compelling
business reasons for such repurchases and the OTS does not object to such
repurchases.
RESTRICTIONS ON ACQUISITION OF THE COMPANY
AND THE BANK
GENERAL
The Bank's Plan of Conversion provides for the Conversion of the Bank
from the mutual to the stock form of organization and, in connection
therewith, a new Federal Stock Charter and Bylaws to be adopted by members of
the Bank. The Plan also provides for the concurrent formation of a holding
company, which form of organization may or may not be utilized at the option
of the Board of Directors of the Bank. See "The Conversion - General." In
the event that the holding company form of organization is utilized, as
described below, certain provisions in the Company's Certificate of
Incorporation and Bylaws and in its management remuneration entered into in
connection with the Conversion, together with provisions of Delaware
corporate law, may have anti-takeover effects. In the event that the holding
company form of organization is not utilized, the Bank's Stock Charter and
Bylaws and management remuneration entered into in connection with the
Conversion may have anti-takeover effects as described below. In addition,
regulatory restrictions may make it difficult for persons or companies to
acquire control of either the Company or the Bank.
RESTRICTIONS IN THE COMPANY'S CERTIFICATE OF INCORPORATION AND BYLAWS
A number of provisions of the Company's Certificate of Incorporation and
Bylaws deal with matters of corporate governance and certain rights of
stockholders. The following discussion is a general summary of certain
provisions of the Company's Certificate of Incorporation and Bylaws and
certain other statutory and regulatory provisions relating to stock ownership
and transfers, the Board of Directors and business combinations, which might
be deemed to have a potential "anti-takeover" effect. These provisions may
have the effect of discouraging a future takeover attempt which is not
approved by the Board of Directors but which individual Company stockholders
may deem to be in their best interests or in which shareholders may receive a
substantial premium for their shares over then current market prices. As a
result, stockholders who might desire to participate in such a transaction
may not have an opportunity to do so. Such provisions will also render the
removal of the current Board of Directors or management of the Company more
difficult. The following description of certain of the provisions of the
Certificate of Incorporation and Bylaws of the Company is necessarily general
and reference should be made in each case to such Certificate of
Incorporation and Bylaws, which are incorporated herein by reference. See
"Additional Information" as to how to obtain a copy of these documents.
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LIMITATION ON VOTING RIGHTS. The Certificate of Incorporation of the
Company provides that in no event shall any record owner of any outstanding
Common Stock which is beneficially owned, directly or indirectly, by a person
who beneficially owns in excess of 10% of the then outstanding shares of
Common Stock (the "Limit") be entitled or permitted to any vote in respect of
the shares held in excess of the Limit. Beneficial ownership is determined
pursuant to Rule 13d-3 of the General Rules and Regulations promulgated
pursuant to the Exchange Act, and includes shares beneficially owned by such
person or any of his affiliates (as defined in the Certificate of
Incorporation), shares which such person or his affiliates have the right to
acquire upon the exercise of conversion rights or options and shares as to
which such person and his affiliates have or share investment or voting
power, but shall not include shares beneficially owned by the ESOP or
directors, officers and employees of the Bank or Company or shares that are
subject to a revocable proxy and that are not otherwise beneficially owned,
or deemed by the Company to be beneficially owned, by such person and his
affiliates. The Certificate of Incorporation of the Company further provides
that this provision limiting voting rights may only be amended upon the vote
of 80% of the outstanding shares of voting stock (after giving effect to the
limitation on voting rights).
BOARD OF DIRECTORS. The Board of Directors of the Company is divided
into three classes, each of which shall contain approximately one-third of
the whole number of members of the Board. Each class shall serve a staggered
term, with approximately one-third of the total number of directors being
elected each year. The Company's Certificate of Incorporation and Bylaws
provide that the size of the Board shall be determined by a majority of the
directors. The Certificate of Incorporation and the Bylaws provide that any
vacancy occurring in the Board, including a vacancy created by an increase in
the number of directors or resulting from death, resignation, retirement,
disqualification, removal from office or other cause, may be filled for the
remainder of the unexpired term exclusively by a majority vote of the
directors then in office. The classified Board is intended to provide for
continuity of the Board of Directors and to make it more difficult and time
consuming for a stockholder group to fully use its voting power to gain
control of the Board of Directors without the consent of the incumbent Board
of Directors of the Company. The Certificate of Incorporation of the Company
provides that a director may be removed from the Board of Directors prior to
the expiration of his term only for cause, upon the vote of 80% of the
outstanding shares of voting stock.
In the absence of these provisions, the vote of the holders of a
majority of the shares could remove the entire Board, with or without cause,
and replace it with persons of such holders' choice.
CUMULATIVE VOTING, SPECIAL MEETINGS AND ACTION BY WRITTEN CONSENT. The
Certificate of Incorporation does not provide for cumulative voting for any
purpose. Moreover, special meetings of stockholders of the Company may be
called only by the Board of Directors of the Company. The Certificate of
Incorporation also provides that any action required or permitted to be taken
by the stockholders of the Company may be taken only at an annual or special
meeting and prohibits stockholder action by written consent in lieu of a
meeting.
AUTHORIZED SHARES. The Certificate of Incorporation authorizes the
issuance of 9,000,000 shares of Common Stock and 1,000,000 shares of
Preferred Stock. The shares of Common Stock and Preferred Stock were
authorized in an amount greater than that to be issued in the Conversion to
provide the Company's Board of Directors with as much flexibility as possible
to effect, among other transactions, financings, acquisitions, stock
dividends, stock splits and employee stock options. However, these
additional authorized shares may also be used by the Board of Directors
consistent with its fiduciary duty to deter future attempts to gain control
of the Company. The Board of Directors also has sole authority to determine
the terms of any one or more series of Preferred Stock, including voting
rights, conversion rates, and liquidation preferences. As a result of the
ability to fix voting rights for a series of Preferred
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Stock, the Board has the power, to the extent consistent with its
fiduciary duty, to issue a series of Preferred Stock to persons friendly to
management in order to attempt to block a post-tender offer merger or other
transaction by which a third party seeks control, and thereby assist
management to retain its position. The Company's Board of Directors
currently has no plans for the issuance of additional shares, other than the
issuance of additional shares pursuant to the terms of the Stock Programs and
upon exercise of stock options to be issued pursuant to the terms of the
Incentive Stock Option Plan and the Stock Option Plan for Outside Directors,
all of which are to be established and presented to stockholders at the first
annual meeting after the Conversion.
STOCKHOLDER VOTE REQUIRED TO APPROVE BUSINESS COMBINATIONS WITH
PRINCIPAL STOCKHOLDERS. The Certificate of Incorporation requires the
approval of the holders of 80% of the Company's outstanding shares of voting
stock to approve certain "Business Combinations," as defined therein, and
related transactions. Under Delaware law, absent this provision, Business
Combinations, including mergers, consolidations and sales of all or
substantially all of the assets of a corporation must, subject to certain
exceptions, be approved by the vote of the holders of only a majority of the
outstanding shares of Common Stock of the Company and any other affected
class of stock. Under the Certificate of Incorporation, 80% approval of
shareholders is required in connection with any transaction involving an
Interested Stockholder (as defined below) except (i) in cases where the
proposed transaction has been approved in advance by a majority of those
members of the Company's Board of Directors who are unaffiliated with the
Interested Stockholder and were directors prior to the time when the
Interested Stockholder became an Interested Stockholder or (ii) if the
proposed transaction meets certain conditions set forth therein which are
designed to afford the shareholders a fair price in consideration for their
shares in which case, if a stockholder vote is required, approval of only a
majority of the outstanding shares of voting stock would be sufficient. The
term "Interested Stockholder" is defined to include any individual,
corporation, partnership or other entity (other than the Company or its
subsidiary) which owns beneficially or controls, directly or indirectly, 10%
or more of the outstanding shares of voting stock of the Company. This
provision of the Certificate of Incorporation applies to any "Business
Combination," which is defined to include (i) any merger or consolidation of
the Company or any of its subsidiaries with or into any Interested
Stockholder or Affiliate (as defined in the Certificate of Incorporation) of
an Interested Stockholder; (ii) any sale, lease, exchange, mortgage,
transfer, or other disposition to or with any Interested Stockholder or
Affiliate of 25% or more of the assets of the Company or combined assets of
the Company and its subsidiary; (iii) the issuance or transfer to any
Interested Stockholder or its Affiliate by the Company (or any subsidiary) of
any securities of the Company in exchange for any assets, cash or securities
the value of which equals or exceeds 25% of the fair market value of the
Common Stock of the Company; (iv) the adoption of any plan for the
liquidation or dissolution of the Company proposed by or on behalf of any
Interested Stockholder or Affiliate thereof; and (v) any reclassification of
securities, recapitalization, merger or consolidation of the Company which
has the effect of increasing the proportionate share of Common Stock or any
class of equity or convertible securities of the Company owned directly or
indirectly by an Interested Stockholder or Affiliate thereof. The directors
and executive officers of the Bank are purchasing in the aggregate
approximately 3.45% of the shares of the Common Stock at the maximum of the
Estimated Price Range. In addition, the ESOP intends to purchase 8% of the
Common Stock sold in the Conversion. Additionally, if at a meeting of
stockholders following the Conversion stockholder approval of the proposed
Stock Programs and Stock Options Plans is received, the Company expects to
acquire 4% of the Common Stock issued in the Conversion on behalf of the
Stock Programs and expects to issue an amount equal to 10% of the Common
Stock issued in the Conversion under the Stock Option Plans to directors and
executive officers. As a result, assuming the Stock Programs and Stock
Option Plans are approved by Stockholders, directors, executive officers and
employees have the potential to control the voting of approximately 23.1% of
the Company's Common Stock, thereby enabling them to prevent the approval of
the transactions requiring the approval of at least 80% of the Company's
outstanding shares of voting stock described hereinabove.
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EVALUATION OF OFFERS. The Certificate of Incorporation of the Company
further provides that the Board of Directors of the Company, when evaluating
any offer of another "Person" (as defined therein) to (i) make a tender or
exchange offer for any equity security of the Company; (ii) merge or
consolidate the Company with another corporation or entity; or (iii) purchase
or otherwise acquire all or substantially all of the properties and assets of
the Company, may, in connection with the exercise of its judgment in
determining what is in the best interest of the Company, the Bank and the
stockholders of the Company, give due consideration to all relevant factors,
including, without limitation, the social and economic effects of acceptance
of such offer on the Company's customers and the Bank's present and future
account holders, borrowers and employees; on the communities in which the
Company and the Bank operate or are located; and on the ability of the
Company to fulfill its corporate objectives as a savings and loan holding
company and on the ability of the Bank to fulfill the objectives of a
federally chartered stock savings association under applicable statutes and
regulations. By having these standards in the Certificate of Incorporation
of the Company, the Board of Directors may be in a stronger position to
oppose such a transaction if the Board concludes that the transaction would
not be in the best interest of the Company, even if the price offered is
significantly greater than the then market price of any equity security of
the Company.
AMENDMENT OF CERTIFICATE OF INCORPORATION AND BYLAWS. Amendments to the
Company's Certificate of Incorporation must be approved by a majority vote of
its Board of Directors and also by a majority of the outstanding shares of
its voting stock; provided, however, that an affirmative vote of at least 80%
of the outstanding voting stock entitled to vote (after giving effect to the
provision limiting voting rights) is required to amend or repeal certain
provisions of the Certificate of Incorporation, including the provision
limiting voting rights, the provisions relating to approval of certain
business combinations, calling special meetings, the number and
classification of directors, director and officer indemnification by the
Company and amendment of the Company's Bylaws and Certificate of
Incorporation. The Company's Bylaws may be amended by its Board of
Directors, or by a vote of 80% of the total votes eligible to be voted at a
duly constituted meeting of stockholders.
CERTAIN BYLAW PROVISIONS. The Bylaws of the Company also require a
stockholder who intends to nominate a candidate for election to the Board of
Directors, or to raise new business at a stockholder meeting to give at least
90 days advance notice to the Secretary of the Company. The notice provision
requires a stockholder who desires to raise new business to provide certain
information to the Company concerning the nature of the new business, the
stockholder and the stockholder's interest in the business matter.
Similarly, a stockholder wishing to nominate any person for election as a
director must provide the Company with certain information concerning the
nominee and the proposing stockholder.
ANTI-TAKEOVER EFFECTS OF THE COMPANY'S CERTIFICATE OF INCORPORATION AND
BYLAWS AND MANAGEMENT REMUNERATION ADOPTED IN CONVERSION
The provisions described above are intended to reduce the Company's
vulnerability to takeover attempts and certain other transactions which have
not been negotiated with and approved by members of its Board of Directors.
The provisions of the employment agreements with officers, the Severance
Plan, the Stock Programs, the Incentive Stock Option Plan and the Stock
Option Plan for Outside Directors or the Master Stock-Based Benefit Plan to
be established may also discourage takeover attempts by increasing the costs
to be incurred by the Bank and the Company in the event of a takeover. See
"The Board of Directors and Management of the Bank - Employment Agreements"
and "- Benefits - Stock Option Plans."
The Company's Board of Directors believes that the provisions of the
Certificate of Incorporation, Bylaws and management remuneration plans to be
established are in the best interest of the Company and its stockholders. An
unsolicited non-negotiated proposal can seriously disrupt the business and
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management of a corporation and cause it great expense. Accordingly, the
Board of Directors believes it is in the best interests of the Company and
its stockholders to encourage potential acquirors to negotiate directly with
management and that these provisions will encourage such negotiations and
discourage non-negotiated takeover attempts. It is also the Board of
Directors' view that these provisions should not discourage persons from
proposing a merger or other transaction at a price that reflects the true
value of the Company and that otherwise is in the best interest of all
stockholders.
DELAWARE CORPORATE LAW
The state of Delaware has a statute designed to provide Delaware
corporations with additional protection against hostile takeovers. The
takeover statute, which is codified in Section 203 of the Delaware General
Corporate Law ("Section 203"), is intended to discourage certain takeover
practices by impeding the ability of a hostile acquiror to engage in certain
transactions with the target company.
In general, Section 203 provides that a "Person" (as defined therein)
who owns 15% or more of the outstanding voting stock of a Delaware
corporation (an "Interested Stockholder") may not consummate a merger or
other business combination transaction with such corporation at any time
during the three-year period following the date such "Person" became an
Interested Stockholder. The term "business combination" is defined broadly
to cover a wide range of corporate transactions including mergers, sales of
assets, issuances of stock, transactions with subsidiaries and the receipt of
disproportionate financial benefits.
The statute exempts the following transactions from the requirements of
Section 203: (i) any business combination if, prior to the date a person
became an Interested Stockholder, the Board of Directors approved either the
business combination or the transaction which resulted in the stockholder
becoming an Interested Stockholder; (ii) any business combination involving a
person who acquired at least 85% of the outstanding voting stock in the
transaction in which he became an Interested Stockholder, with the number of
shares outstanding calculated without regard to those shares owned by the
corporation's directors who are also officers and by certain employee stock
plans; (iii) any business combination with an Interested Stockholder that is
approved by the Board of Directors and by a two-thirds vote of the
outstanding voting stock not owned by the Interested Stockholder; and (iv)
certain business combinations that are proposed after the corporation had
received other acquisition proposals and which are approved or not opposed by
a majority of certain continuing members of the Board of Directors. A
corporation may exempt itself from the requirements of the statute by
adopting an amendment to its Certificate of Incorporation or Bylaws electing
not to be governed by Section 203. At the present time, the Board of
Directors does not intend to propose any such amendment.
RESTRICTIONS IN THE BANK'S NEW CHARTER AND BYLAWS
Although the Board of Directors of the Bank is not aware of any effort
that might be made to obtain control of the Bank after the Conversion, the
Board of Directors believes that it is appropriate to adopt certain
provisions permitted by federal regulations to protect the interests of the
converted Bank and its stockholders from any hostile takeover. Such
provisions may, indirectly, inhibit a change in control of the Company, as
the Bank's sole stockholder. See "Risk Factors - Certain Anti-Takeover
Provisions."
The Bank's Federal Stock Charter will contain a provision whereby the
acquisition of or offer to acquire beneficial ownership of more than 10% of
the issued and outstanding shares of any class of equity securities of the
Bank by any person (I.E., any individual, corporation, group acting in
concert, trust, partnership, joint stock company or similar organization),
either directly or through an affiliate thereof, will be prohibited for a
period of five years following the date of completion of the Conversion. Any
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stock in excess of 10% acquired in violation of the Federal Stock Charter
provision will not be counted as outstanding for voting purposes. This
limitation shall not apply to any transaction in which the Bank forms a
holding company without a change in the respective beneficial ownership
interests of its stockholders other than pursuant to the exercise of any
dissenter or appraisal rights. In the event that holders of revocable
proxies for more than 10% of the shares of the Common Stock of the Company
seek, among other things, to elect one-third or more of the Company's Board
of Directors, to cause the Company's stockholders to approve the acquisition
or corporate reorganization of the Company or to exert a continuing influence
on a material aspect of the business operations of the Company, which actions
could indirectly result in a change in control of the Bank, the Board of
Directors of the Bank will be able to assert this provision of the Bank's
Federal Stock Charter against such holders. Although the Board of Directors
of the Bank is not currently able to determine when and if it would assert
this provision of the Bank's Federal Stock Charter, the Board of Directors,
in exercising its fiduciary duty, may assert this provision if it were deemed
to be in the best interests of the Bank, the Company and its stockholders.
It is unclear, however, whether this provision, if asserted, would be
successful against such persons in a proxy contest which could result in a
change in control of the Bank indirectly through a change in control of the
Company. Finally, for five years, stockholders will not be permitted to call
a special meeting of stockholders relating to a change of control of the Bank
or a charter amendment or to cumulate their votes in the election of
directors. Furthermore, the staggered terms of the Board of Directors could
have an anti-takeover effect by making it more difficult for a majority of
shares to force an immediate change in the Board of Directors since only
one-third of the Board is elected each year. The purpose of these provisions
is to assure stability and continuity of management of the Bank in the years
immediately following the Conversion.
Although the Bank has no arrangements, understandings or plans at the
present time, except as described in "Description of Capital Stock -
Preferred Stock," for the issuance or use of the shares of undesignated
preferred stock (the "Preferred Stock") proposed to be authorized, the Board
of Directors believes that the availability of such shares will provide the
Bank with increased flexibility in structuring possible future financings and
acquisitions and in meeting other corporate needs which may arise. In the
event of a proposed merger, tender offer or other attempt to gain control of
the Bank of which management does not approve, it might be possible for the
Board of Directors to authorize the issuance of one or more series of
Preferred Stock with rights and preferences which could impede the completion
of such a transaction. An effect of the possible issuance of such Preferred
Stock, therefore, may be to deter a future takeover attempt. The Board of
Directors does not intend to issue any Preferred Stock except on terms which
the Board deems to be in the best interest of the Bank and its then existing
stockholders.
REGULATORY RESTRICTIONS
The Plan of Conversion prohibits any person, prior to the completion of
the Conversion, from transferring, or from entering into any agreement or
understanding to transfer, to the account of another, legal or beneficial
ownership of the subscription rights issued under the Plan or the Common
Stock to be issued upon their exercise. The Plan also prohibits any person,
prior to the completion of the Conversion, from offering, or making an
announcement of an offer or intent to make an offer, to purchase such
subscription rights or Common Stock.
For three years following the Conversion, OTS regulations prohibit any
person from acquiring or making an offer to acquire more than 10% of the
stock of any converted savings institution, except for: (i) offers that, if
consummated, would not result in the acquisition by such person during the
preceding 12-month period of more than 1% of such stock; (ii) offers for up
to 25% in the aggregate by the ESOP or other tax qualified plans of the Bank
or the Company; or (iii) offers which are not opposed by the
122
<PAGE>
Board of Directors of the Bank and which receive the prior approval of the
OTS. Such prohibition is also applicable to the acquisition of the stock of
the Company. Such acquisition may be disapproved by the OTS if it is found,
among other things, that the proposed acquisition (a) would frustrate the
purposes of the provisions of the regulations regarding conversions; (b)
would be manipulative or deceptive; (c) would subvert the fairness of the
conversion; (d) would be likely to result in injury to the savings
institution; (e) would not be consistent with economical home financing; (f)
would otherwise violate law or regulation; or (g) would not contribute to the
prudent deployment of the savings institution's conversion proceeds. In the
event that any person, directly or indirectly, violates this regulation, the
securities beneficially owned by such person in excess of 10% shall not be
counted as shares entitled to vote and shall not be voted by any person or
counted as voting shares in connection with any matters submitted to a vote
of stockholders. The definition of beneficial ownership for this regulation
extends to persons holding revocable or irrevocable proxies for the Company's
stock under circumstances that give rise to a conclusive or rebuttable
determination of control under the OTS regulations.
In addition, any proposal to acquire 10% of any class of equity security
of the Company generally would be subject to approval by the OTS under the
Change in Bank Control Act. The OTS requires all persons seeking control of
a savings institution, and, therefore, indirectly its holding company, to
obtain regulatory approval prior to offering to obtain control. Federal law
generally provides that no "person," acting directly or indirectly or through
or in concert with one or more other persons, may acquire directly or
indirectly "control," as that term is defined in OTS regulations, of a
federally-insured savings institution without giving at least 60 days'
written notice to the OTS and providing the OTS an opportunity to disapprove
the proposed acquisition. Such acquisitions of control may be disapproved if
it is determined, among other things, that (i) the acquisition would
substantially lessen competition; (ii) the financial condition of the
acquiring person might jeopardize the financial stability of the savings
institution or prejudice the interests of its depositors; or (iii) the
competency, experience or integrity of the acquiring person or the proposed
management personnel indicates that it would not be in the interest of the
depositors or the public to permit the acquisition of control by such person.
Such change in control restrictions on the acquisition of holding company
stock are not limited to three years after conversion but will apply for as
long as the regulations are in effect. Persons holding revocable or
irrevocable proxies may be deemed to be beneficial owners of such securities
under OTS regulations and therefore prohibited from voting all or the portion
of such proxies in excess of the 10% aggregate beneficial ownership limit.
Such regulatory restrictions may prevent or inhibit proxy contests for
control of the Company or the Bank which have not received prior regulatory
approval.
DESCRIPTION OF CAPITAL STOCK OF THE COMPANY
GENERAL
The Company is authorized to issue 9,000,000 shares of Common Stock
having a par value of $.01 per share and 1,000,000 shares of preferred stock
having a par value of $.01 per share (the "Preferred Stock"). The Company
currently expects to issue 2,760,000 shares of Common Stock (or 3,174,000 in
the event of an increase of 15% in the Estimated Price Range) and no shares
of Preferred Stock in the Conversion. Except as discussed above in
"Restriction on Acquisition of the Company and the Bank," each share of the
Company's Common Stock will have the same relative rights as, and will be
identical in all respects with, each other share of Common Stock. Upon
payment of the Purchase Price for the Common Stock, in accordance with the
Plan, all such stock will be duly authorized, fully paid and non-assessable.
123
<PAGE>
THE COMMON STOCK OF THE COMPANY WILL REPRESENT NON-WITHDRAWABLE CAPITAL,
WILL NOT BE AN ACCOUNT OF AN INSURABLE TYPE, AND WILL NOT BE INSURED BY THE
FDIC.
COMMON STOCK
DIVIDENDS. The Company can pay dividends out of statutory surplus or
from certain net profits if, as and when declared by its Board of Directors.
The payment of dividends by the Company is subject to limitations which are
imposed by law and applicable regulation. See "Dividend Policy" and
"Regulation." The holders of Common Stock of the Company will be entitled to
receive and share equally in such dividends as may be declared by the Board
of Directors of the Company out of funds legally available therefor. If the
Company issues Preferred Stock, the holders thereof may have a priority over
the holders of the Common Stock with respect to dividends.
VOTING RIGHTS. Upon Conversion, the holders of Common Stock of the
Company will possess exclusive voting rights in the Company. They will elect
the Company's Board of Directors and act on such other matters as are
required to be presented to them under Delaware law or the Company's
Certificate of Incorporation or as are otherwise presented to them by the
Board of Directors. Except as discussed in "Restrictions on Acquisition of
the Company and the Bank," each holder of Common Stock will be entitled to
one vote per share and will not have any right to cumulate votes in the
election of directors. If the Company issues Preferred Stock, holders of the
Preferred Stock may also possess voting rights. Certain matters require an
80% shareholder vote. See "Restrictions on Acquisition of the Company and
the Bank."
As a federal mutual savings association, corporate powers and control of
the Bank are vested in its Board of Directors, who elect the officers of the
Bank and who fill any vacancies on the Board of Directors as it exists upon
Conversion. Subsequent to Conversion, voting rights will be vested
exclusively in the owners of the shares of capital stock of the Bank, which
will be the Company, and voted at the direction of the Company's Board of
Directors. Consequently, the holders of the Common Stock will not have
direct control of the Bank.
LIQUIDATION. In the event of any liquidation, dissolution or winding up
of the Bank, the Company, as holder of the Bank's capital stock, would be
entitled to receive, after payment or provision for payment of all debts and
liabilities of the Bank (including all deposit accounts and accrued interest
thereon) and after distribution of the balance in the special liquidation
account to Eligible Account Holders and Supplemental Eligible Account Holders
(see "The Conversion - Liquidation Rights"), all assets of the Bank available
for distribution. In the event of liquidation, dissolution or winding up of
the Company, the holders of its Common Stock would be entitled to receive,
after payment or provision for payment of all its debts and liabilities, all
of the assets of the Company available for distribution. If Preferred Stock
is issued, the holders thereof may have a priority over the holders of the
Common Stock in the event of liquidation or dissolution.
PREEMPTIVE RIGHTS. Holders of the Common Stock of the Company will not
be entitled to preemptive rights with respect to any shares which may be
issued. The Common Stock is not subject to redemption.
124
<PAGE>
PREFERRED STOCK
None of the shares of the Company's authorized Preferred Stock will be
issued in the Conversion. Such stock may be issued with such preferences and
designations as the Board of Directors may from time to time determine. The
Board of Directors can, without stockholder approval, issue preferred stock
with voting, dividend, liquidation and conversion rights which could dilute
the voting strength of the holders of the Common Stock and may assist
management in impeding an unfriendly takeover or attempted change in control.
DESCRIPTION OF CAPITAL STOCK OF THE BANK
GENERAL
The Federal Stock Charter of the Bank, to be effective upon the
Conversion, authorizes the issuance of capital stock consisting of 9,000,000
shares of common stock, par value $1.00 per share, and 1,000,000 shares of
preferred stock, par value $1.00 per share, which preferred stock may be
issued in series and classes having such rights, preferences, privileges and
restrictions as the Board of Directors may determine. Each share of Common
Stock of the Bank will have the same relative rights as, and will be
identical in all respects with, each other share of common stock. After the
Conversion, the Board of Directors will be authorized to approve the issuance
of Common Stock up to the amount authorized by the Federal Stock Charter
without the approval of the Bank's stockholders. Assuming that the holding
company form of organization is utilized, all of the issued and outstanding
common stock of the Bank will be held by the Company as the Bank's sole
stockholder. THE CAPITAL STOCK OF THE BANK WILL REPRESENT NON-WITHDRAWABLE
CAPITAL, WILL NOT BE AN ACCOUNT OF AN INSURABLE TYPE, AND WILL NOT BE INSURED
BY THE FDIC.
COMMON STOCK
DIVIDENDS. The holders of the Bank's common stock will be entitled to
receive and to share equally in such dividends as may be declared by the
Board of Directors of the Bank out of funds legally available therefor. See
"Dividend Policy" for certain restrictions on the payment of dividends and
"Federal and State Taxation - Federal Taxation" for a discussion of the
consequences of the payment of cash dividends from income appropriated to bad
debt reserves.
VOTING RIGHTS. Immediately after the Conversion, the holders of the
Bank's common stock will possess exclusive voting rights in the Bank. Each
holder of shares of common stock will be entitled to one vote for each share
held, subject to the right of shareholders to cumulate their votes for the
election of directors. During the five-year period after the effective date
of the Conversion, cumulation of votes will not be permitted. See
"Restrictions on Acquisition of the Company and the Bank - Anti-Takeover
Effects of the Company's Certificate of Incorporation and Bylaws and
Management Remuneration Adopted in Conversion."
LIQUIDATION. In the event of any liquidation, dissolution, or winding
up of the Bank, the holders of common stock will be entitled to receive,
after payment of all debts and liabilities of the Bank (including all deposit
accounts and accrued interest thereon), and distribution of the balance in
the special liquidation account to Eligible Account Holders and Supplemental
Eligible Account Holders, all assets of the Bank available for distribution
in cash or in kind. If additional preferred stock is issued subsequent to
the Conversion, the holders thereof may also have priority over the holders
of common stock in the event of liquidation or dissolution.
125
<PAGE>
PREEMPTIVE RIGHTS; REDEMPTION. Holders of the common stock of the Bank
will not be entitled to preemptive rights with respect to any shares of the
Bank which may be issued. The common stock will not be subject to
redemption. Upon receipt by the Bank of the full specified purchase price
therefor, the common stock will be fully paid and non-assessable.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Stock is Harris Trust
and Savings Bank.
EXPERTS
The consolidated financial statements of the Bank and its subsidiaries
as of December 31, 1995 and 1994 and for each of the years in the three-year
period ended December 31, 1995, have been included herein in reliance upon
the report of Crowe, Chizek and Company LLP, independent certified public
accountants, appearing elsewhere herein, and upon the authority of said firm
as experts in accounting and auditing.
Keller & Company, Inc. has consented to the publication herein of the
summary of its report to the Bank and Company setting forth its opinion as to
the estimated pro forma market value of the Common Stock upon Conversion and
its valuation with respect to subscription rights.
LEGAL AND TAX OPINIONS
The legality of the Common Stock and the federal income tax consequences
of the Conversion will be passed upon for the Bank and the Company by
Muldoon, Murphy & Faucette, Washington, D.C., special counsel to the Bank and
the Company. Muldoon, Murphy & Faucette will rely as to certain matters of
Delaware law on the opinion of Morris, Nichols, Arsht & Tunnell. The State
of Illinois tax consequences of the Conversion will be passed upon for the
Bank and the Company by Crowe, Chizek and Company LLP. Certain legal matters
will be passed upon for Robert W. Baird & Co. Incorporated by Vedder, Price,
Kaufman & Kammholz, Chicago, Illinois.
ADDITIONAL INFORMATION
The Company has filed with the SEC a registration statement under the
Securities Act with respect to the Common Stock offered hereby. As permitted
by the rules and regulations of the SEC, this Prospectus does not contain all
the information set forth in the registration statement. Such information
and all exhibits to the Registration Statement, including the Conversion
Valuation Appraisal Report which is an exhibit to the Registration Statement,
can be examined without charge at the public reference facilities of the SEC
located at 450 Fifth Street, N.W., Washington, D.C. 20549, and copies of such
material can be obtained from the SEC at prescribed rates. The statements
contained in this Prospectus as to the contents of any contract or other
document field as an exhibit to the registration statement are, of necessity,
brief descriptions thereof and are not necessarily complete; each such
statement is qualified by reference to such contract or document.
The Bank has filed an application for conversion with the OTS with
respect to the Conversion. Pursuant to the rules and regulations of the OTS,
this Prospectus omits certain information contained in that application. The
application may be examined at the principal office of the OTS, 1700 G
Street, N.W., Washington, D.C. 20552 and at the Office of the Regional
Director of the OTS located at 200 West Madison Street, Suite 1300, Chicago,
Illinois 60606.
126
<PAGE>
In connection with the Conversion, the Company will register its Common
Stock with the SEC under Section 12(g) of the Exchange Act, and, upon such
registration, the Company and the holders of its stock will become subject to
the proxy solicitation rules, reporting requirements and restrictions on
stock purchases and sales by directors, officers and greater than 10%
stockholders, the annual and periodic reporting and certain other
requirements of the Exchange Act. Under the Plan, the Company has undertaken
that it will not terminate such registration for a period of at least three
years following the Conversion. In the event that the Bank amends the Plan
to eliminate the concurrent formation of the Company as part of the
Conversion, the Bank will register its stock with the OTS under Section 12(g)
of the Exchange Act and, upon such registration, the Bank and the holders of
its stock will become subject to the same obligations and restrictions.
A copy of the Certificate of Incorporation and the Bylaws of the Company
and the Federal Stock Charter and Bylaws of the Bank are available without
charge from the Bank.
127
<PAGE>
PARK FEDERAL SAVINGS BANK AND SUBSIDIARIES
Chicago, Illinois
CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1995 and 1994
February 29, 1996 and February 28, 1995 (Unaudited)
CONTENTS
REPORT OF INDEPENDENT AUDITORS............................................ F-1a
FINANCIAL STATEMENTS
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION......................... F-2
CONSOLIDATED STATEMENTS OF INCOME...................................... F-3
CONSOLIDATED STATEMENT OF EQUITY....................................... F-4
CONSOLIDATED STATEMENTS OF CASH FLOWS.................................. F-5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS............................. F-8
All schedules are omitted because the required information
is not applicable or is included in the Consolidated
Financial Statements and related notes.
Financial Statements of the Holding Company have not
been provided because Park Bancorp, Inc. has not
conducted any operations to date and
has not been capitalized.
F-1
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors
Park Federal Savings Bank
Chicago, Illinois
We have audited the accompanying consolidated statements of financial
condition of Park Federal Savings Bank and Subsidiaries as of December 31,
1995 and 1994, and the related consolidated statements of income, equity and
cash flows for each of the three years in the period ended December 31, 1995.
These financial statements are the responsibility of the Bank's management.
Our responsibility is to express an opinion on these financial statements
based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Park
Federal Savings Bank and Subsidiaries as of December 31, 1995 and 1994, and
the results of their operations and their cash flows for each of the three
years in the period ended December 31, 1995 in conformity with generally
accepted accounting principles.
As discussed in Note 2 to the consolidated financial statements, the Bank
changed its method of accounting for securities in 1994 to conform with the
provisions of Statement of Financial Accounting Standards No. 115. Also, as
discussed in Note 1 to the consolidated financial statements, the Bank
changed its method of accounting for income taxes in 1993 to conform with the
provisions of Statement of Financial Accounting Standards No. 109.
/s/ Crowe, Chizek and Company LLP
Oak Brook, Illinois
January 19, 1996
F-1a
<PAGE>
PARK FEDERAL SAVINGS BANK AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
December 31, 1995 and 1994
February 29, 1996 (Unaudited)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
(Unaudited) December 31,
February 29, ----------------------------
1996 1995 1994
------------- ------------ ------------
<S> <C> <C> <C>
ASSETS
Cash and due from banks $ 850,977 $ 1,022,730 $ 939,392
Interest-bearing deposit accounts in other
financial institutions 7,311,728 11,767,256 1,633,840
------------ ------------ ------------
Total cash and cash equivalents 8,162,705 12,789,986 2,573,232
Securities available-for-sale (Note 2) 36,971,690 37,134,427 14,957,794
Securities held-to-maturity (Note 2)
(estimated fair value: February 29, 1996 -
$38,856,000 (unaudited); December 31, 1995 -
$42,294,000; December 31, 1994 - $63,173,000) 39,067,917 42,493,838 65,895,832
Loans receivable, net (Note 3) 58,944,167 60,538,247 56,557,753
Federal Home Loan Bank stock 675,700 675,700 665,500
Real estate held for development (Note 4) 1,575,412 1,624,809 1,001,829
Premises and equipment, net (Note 5) 2,074,667 2,088,311 1,910,754
Accrued interest receivable (Note 6) 1,221,332 1,189,922 1,060,474
Foreclosed real estate 318,565 49,801 49,801
Other assets 375,024 354,298 115,343
------------ ------------ ------------
Total assets $149,387,179 $158,939,339 $144,788,312
------------ ------------ ------------
------------ ------------ ------------
LIABILITIES AND EQUITY
Liabilities
Deposits (Note 7) $129,308,788 $130,502,992 $118,521,163
Advances from borrowers for taxes and
insurance 831,049 1,117,384 1,242,254
Federal Home Loan Bank advances (Note 8) - 9,000,000 8,000,000
Accrued interest payable 875,874 183,867 83,245
Other liabilities 694,837 601,798 528,228
------------ ------------ ------------
Total liabilities 131,710,548 141,406,041 128,374,890
Commitments (Note 12)
Equity
Retained earnings, substantially restricted
(Notes 9 and 11) 17,646,264 17,456,619 16,520,573
Unrealized gain (loss) on securities
available-for-sale, net of income taxes
(Note 2) 30,367 76,679 (107,151)
------------ ------------ ------------
Total equity 17,676,631 17,533,298 16,413,422
------------ ------------ ------------
Total liabilities and equity $149,387,179 $158,939,339 $144,788,312
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
- -------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
F-2
<PAGE>
PARK FEDERAL SAVINGS BANK AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Years ended December 31, 1995, 1994 and 1993
Two months ended February 29, 1996 and February 28, 1995 (Unaudited)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
(Unaudited)
-------------------------- December 31,
February 29, February 28, ------------------------------------
1996 1995 1995 1994 1993
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Interest income
Loans receivable $ 954,707 $ 808,635 $ 5,090,146 $ 4,889,649 $ 6,176,762
Securities 840,929 778,529 4,664,689 3,971,720 3,077,474
---------- ---------- ----------- ----------- -----------
1,795,636 1,587,164 9,754,835 8,861,369 9,254,236
Interest expense
Deposits (Note 7) 1,022,327 811,647 5,603,503 4,530,599 4,889,889
Federal Home Loan Bank
advances 1,328 74,943 102,340 111,996 -
---------- ---------- ----------- ----------- -----------
1,023,655 886,590 5,705,843 4,642,595 4,889,889
---------- ---------- ----------- ----------- -----------
NET INTEREST INCOME 771,981 700,574 4,048,992 4,218,774 4,364,347
Provision for loan losses (Note 3) - 10,000 298,057 48,514 140,000
---------- ---------- ----------- ----------- -----------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 771,981 690,574 3,750,935 4,170,260 4,224,347
Noninterest income
Gain on sale of securities - 14,264 14,264 - 138,283
Gain on sale of real estate held for
development 11,100 - 522,746 1,114,267 856,119
Service fee income 22,146 9,417 102,177 123,055 159,900
Other operating income 8,731 6,981 55,314 47,083 68,640
---------- ---------- ----------- ----------- -----------
41,977 30,662 694,501 1,284,405 1,222,942
Noninterest expense
Compensation and benefits 302,358 281,970 1,781,861 1,634,769 1,484,782
Occupancy and equipment
expense 73,567 68,469 360,817 362,933 370,949
Federal deposit insurance premiums 55,253 54,471 316,136 317,206 287,001
Data processing services 22,582 20,401 115,332 104,103 111,445
Advertising 7,350 15,020 133,735 40,522 13,390
Stationery, printing and supplies 25,455 19,905 103,507 74,252 52,091
(Gain) loss on sale of foreclosed
real estate (823) - - 9,769 (31,000)
Other operating expense 35,295 41,487 285,085 279,105 309,179
---------- ---------- ----------- ----------- -----------
521,037 501,723 3,096,473 2,822,659 2,597,837
---------- ---------- ----------- ----------- -----------
INCOME BEFORE INCOME TAXES 292,921 219,513 1,348,963 2,632,006 2,849,452
Income tax expense (Note 11) 103,276 55,341 412,917 881,311 1,009,203
---------- ---------- ----------- ----------- -----------
INCOME BEFORE CUMULATIVE
EFFECT OF A CHANGE IN ACCOUNTING
FOR INCOME TAXES 189,645 164,172 936,046 1,750,695 1,840,249
Cumulative effect of a change in
accounting for income taxes
(Note 1) - - - - 104,000
---------- ---------- ----------- ----------- -----------
NET INCOME $ 189,645 $ 164,172 $ 936,046 $ 1,750,695 $ 1,736,249
---------- ---------- ----------- ----------- -----------
---------- ---------- ----------- ----------- -----------
</TABLE>
- -------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
PARK FEDERAL SAVINGS BANK AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF EQUITY
Years ended December 31, 1995, 1994 and 1993
Two months ended February 29, 1996 (Unaudited)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Unrealized
Retained Gain (Loss)
Earnings- on Securities
Substantially Available- Total
Restricted for-Sale Equity
------------- -------------- ------------
<S> <C> <C> <C>
Balance at January 1, 1993 $ 13,033,629 $ - $ 13,033,629
Net income 1,736,249 - 1,736,249
------------ ----------- ------------
Balance at December 31, 1993 14,769,878 - 14,769,878
Effect of adopting Statement of
Financial Accounting Standards
No. 115, net of income taxes of
$57,432 as of January 1, 1994
(Note 2) - 90,818 90,818
Net income 1,750,695 - 1,750,695
Decrease in fair value of securities
classified as available-for-sale, net
of income taxes of $125,193 - (197,969) (197,969)
------------ ----------- ------------
Balance at December 31, 1994 16,520,573 (107,151) 16,413,422
Net income 936,046 - 936,046
Effect of transfer to available-for-sale
at December 12, 1995, net of income
taxes of $87,750 (Note 2) - 138,758 138,758
Increase in fair value of securities
classified as available-for-sale, net of
income taxes of $28,502 - 45,072 45,072
------------ ----------- ------------
Balance at December 31, 1995 17,456,619 76,679 17,533,298
Net income 189,645 - 189,645
Decrease in fair value of securities
classified as available-for-sale, net of
income taxes of $29,287 - (46,312) (46,312)
------------ ----------- ------------
Balance at February 29, 1996 $ 17,646,264 $ 30,367 $ 17,676,631
------------ ----------- ------------
------------ ----------- ------------
</TABLE>
- -------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
PARK FEDERAL SAVINGS BANK AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 1995, 1994 and 1993
Two months ended February 29, 1996 and February 28, 1995 (Unaudited)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
(Unaudited)
---------------------------- December 31,
February 29, February 28, -------------------------------------------
1996 1995 1995 1994 1993
------------ ------------ ---------- ------------- -------------
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES
Net income $ 189,645 $ 164,172 $ 936,046 $ 1,750,695 $ 1,736,249
Adjustments to reconcile net
income to net cash from
operating activities
Net premium (discount)
amortization (10,144) (1,817) 41,677 27,645 76,740
(Gain) loss on sale of
other real estate (823) - - 9,769 (31,000)
Gain on sale of available-
for-sale securities - (14,264) (14,264) - (138,283)
Depreciation 28,000 22,000 102,294 86,067 85,040
Deferred income tax
expense (benefit) 15,623 (871) (68,589) 56,391 138,415
Cumulative effect of
change in accounting
for income taxes - - - - 104,000
Deferred loan fees (19,477) (5,068) 14,214 58,308 (221,415)
Provision for loan losses - 10,000 298,057 48,514 140,000
Increase in accrued
interest receivable (31,410) (30,416) (129,448) (313,688) (65,309)
(Increase) decrease in
other assets (20,726) (14,865) 79,575 (12,926) (86,615)
Increase (decrease) in
accrued interest payable 692,007 572,463 100,622 12,269 (27,606)
Increase (decrease) in
other liabilities 106,703 3,916 25,907 (97,940) 228,508
Gain on sale of real estate
held for development (11,100) - (522,746) (1,114,267) (856,119)
----------- ----------- ---------- ------------- -----------
Net cash from
operating activities 938,298 705,250 863,345 510,837 1,082,605
CASH FLOWS FROM INVESTING
ACTIVITIES
Net (increase) decrease
in loans 1,274,120 (435,611) (4,111,239) 31,147 11,138,567
Proceeds from maturities of
available-for-sale securities 2,000,000 - 11,001,705 - -
Proceeds from maturities of
held-to-maturity securities 4,400,000 - 6,001,542 7,500,000 24,613,100
Purchase of available-for-
sale securities (2,000,000) (2,000,000) (27,337,335) (5,998,750) -
Purchase of held-to-maturity
securities (2,000,000) - - (28,004,511) (34,587,657)
Proceeds from sale of
available-for-sale securities - 8,013,125 8,013,125 - -
Principal repayments on
mortgage-backed securities
held-to-maturity 1,016,096 616,661 3,686,821 3,864,175 -
Principal repayments on
mortgage-backed securities
available-for-sale 105,157 11,288 132,172 110,780 -
Purchase of mortgage loans (25,624) - (181,526) - -
</TABLE>
- -------------------------------------------------------------------------------
(Continued)
F-5
<PAGE>
PARK FEDERAL SAVINGS BANK AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 1995, 1994 and 1993
Two months ended February 29, 1996 and February 28, 1995 (Unaudited)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
(Unaudited)
---------------------------- December 31,
February 29, February 28, -------------------------------------------
1996 1995 1995 1994 1993
------------ ------------ ------------ ------------- -------------
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM INVESTING
ACTIVITIES (Continued)
Proceeds from sales of
mortgage-backed
securities $ - $ - $ - $ - $ 2,345,865
(Purchase) redemption of
Federal Home Loan Bank
stock - - (10,200) 276,000 -
Proceeds from sales of real
estate held for
development 61,050 22,500 2,172,004 5,197,843 4,022,051
Investment in real estate
held for development (553) (6,397) (1,896,504) (180,679) (1,558,933)
Payments to participants in
real estate held for
development - - (375,734) (620,562) (437,236)
Proceeds from sale of
foreclosed real estate 99,070 - - - 304,318
Expenditures for premises
and equipment (14,356) (6,300) (279,851) (182,228) (70,672)
Acquisition of land held
for sale - - (318,530) - -
Expenditures on foreclosed
real estate - - - (2,254) (199,042)
------------ ------------ ------------ ------------ -----------
Net cash from (used in)
investing activities 4,914,960 6,215,266 (3,503,550) (18,009,039) 5,570,361
CASH FLOWS FROM FINANCING
ACTIVITIES
Net increase (decrease)
in deposits (1,194,204) (4,102,448) 11,981,829 (1,157,689) (1,475,093)
Net decrease in advances
from borrowers for
taxes and insurance (286,335) (279,473) (124,870) (22,792) (204,300)
Federal Home Loan Bank
advances - 3,000,000 12,000,000 16,000,000 -
Payment on Federal Home
Loan Bank advances (9,000,000) (7,000,000) (11,000,000) (8,000,000) -
------------ ------------ ------------ ------------ -----------
Net cash from (used
in) financing activities (10,480,539) (8,381,921) 12,856,959 6,819,519 (1,679,393)
------------ ------------ ------------ ------------ -----------
Increase (decrease) in cash
and cash equivalents (4,627,281) (1,461,405) 10,216,754 (10,678,683) 4,973,573
Cash and cash equivalents
at beginning of period 12,789,986 2,573,232 2,573,232 13,251,915 8,278,342
------------ ------------ ------------ ------------ -----------
CASH AND CASH EQUIVALENTS
AT END OF PERIOD $ 8,162,705 $ 1,111,827 $ 12,789,986 $ 2,573,232 $13,251,915
------------ ------------ ------------ ------------ -----------
------------ ------------ ------------ ------------ -----------
</TABLE>
- -------------------------------------------------------------------------------
(Continued)
F-6
<PAGE>
PARK FEDERAL SAVINGS BANK AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 1995, 1994 and 1993
Two months ended February 29, 1996 and February 28, 1995 (Unaudited)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
(Unaudited)
---------------------------- December 31,
February 29, February 28, -------------------------------------------
1996 1995 1995 1994 1993
------------ ------------ ------------ ------------- -------------
<S> <C> <C> <C> <C> <C>
Supplemental disclosures
of cash flow information
Cash paid during the
period for
Interest $331,648 $314,127 $ 5,605,221 $ 4,630,326 $4,917,495
Income taxes - - 426,628 918,162 919,000
Supplemental disclosures of
noncash investing activities
Real estate acquired
through foreclosure 367,011 - - - 231,592
Foreclosed real estate
transferred to premises
and equipment - - - 100,000 -
Transfer of debt securities
on January 1, 1994 to
Held-to-maturity - - - 49,284,117 -
Available-for-sale - - - 9,243,760 -
Transfer of debt securities
on December 12, 1995 to
available-for-sale from
held-to-maturity - - 13,904,209 - -
</TABLE>
- -------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements
F-7
<PAGE>
PARK FEDERAL SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1995 and 1994
February 29, 1996 and February 28, 1995 (Unaudited)
- --------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS: During 1994, Gage Park Savings and Loan Association
converted to a federally-chartered mutual savings institution and
concurrently changed its name to Park Federal Savings Bank ("Bank"). The
Bank's revenues primarily arise from interest income from retail lending
activities and investments and revenue derived from real estate through the
development and sales of residential lots to home builders. Approximately
98% of its gross revenues come from these activities.
PRINCIPLES OF CONSOLIDATION: The consolidated financial statements include
the accounts of Park Federal Savings Bank and its wholly-owned subsidiaries,
G.P.S. Corporation, which conducts limited insurance activities, and G.P.S.
Development Corp., which conducts real estate development activities. All
significant intercompany balances and transactions have been eliminated. The
consolidated financial statements for the two-month periods ended February
29, 1996 and February 28, 1995 are unaudited, but in the opinion of
management, reflect all necessary adjustments, consisting only of normal
recurring items necessary for fair presentation.
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS: The preparation
of financial statements in conformity with generally accepted accounting
principles requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements and the
reported amounts of income and expenses during the reporting period. Actual
results could differ from those estimates.
SECURITIES: Securities are classified as held-to-maturity when the Bank's
management has the positive intent and the Bank has the ability to hold those
securities to maturity. Accordingly, they are stated at cost, adjusted for
amortization of premiums and accretion of discounts. Securities are
classified as available-for-sale when management may decide to sell those
securities in response to changes in market interest rates, liquidity needs,
changes in yields on alternative investments and for other reasons. They are
carried at fair value. Unrealized gains and losses on securities
available-for-sale are charged or credited to a valuation allowance and
included as a separate component of equity, net of income taxes. Realized
gains and losses on disposition are based on the net proceeds and the
adjusted carrying amount of the securities sold, using the specific
identification method.
LOANS RECEIVABLE: Loans receivable are stated at unpaid principal balances,
less the allowance for loan losses, deferred loan origination fees, and
discounts.
ALLOWANCE FOR LOAN LOSSES: Because some loans may not be repaid in full, an
allowance for loan losses is maintained. Increases to the allowance are
recorded by a provision for loan losses charged to expense. Estimating the
risk of the loss and the amount of loss on any loan is
- --------------------------------------------------------------------------------
(Continued)
F-8
<PAGE>
PARK FEDERAL SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1995 and 1994
February 29, 1996 and February 28, 1995 (Unaudited)
- --------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
necessarily subjective. Accordingly, the allowance is maintained by
management at a level considered adequate to cover possible losses that are
currently anticipated based on past loss experience, general economic
conditions, information about specific borrower situations including their
financial position and collateral values, and other factors and estimates
which are subject to change over time. While management may periodically
allocate portions of the allowance for specific problem loan situations,
including impaired loans discussed below, the whole allowance is available
for any charge-offs that occur. Loans are charged off in whole or in part
when management's estimate of the undiscounted cash flows from the loan are
less than the recorded investment in the loan, although collection efforts
continue and future recoveries may occur.
In May 1993, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards No. 114, "Accounting by Creditors for
Impairment of a Loan" (SFAS No. 114). SFAS No. 114 (as modified by No. 118),
effective for the Bank beginning January 1, 1995, requires the measurement of
impaired loans, based on the present value of expected cash flows discounted
at the loan's effective interest rate or, as a practical expedient, at the
loan's observable market price or the fair value of collateral if the loan is
collateral dependent. Under this standard, loans considered to be impaired
are reduced to the present value of expected future cash flows or to the fair
value of collateral, by allocating a portion of the allowance for loan losses
to such loans. If these allocations cause the allowance for loan losses to
require increase, such increase is reported as a provision for loan losses.
The effect of adopting the Statement was not material to the Bank's
consolidated financial position or results of operations during 1995.
Smaller balance homogeneous loans are defined as residential first mortgage
loans secured by one-to-four family residences, residential construction
loans, student loans, home equity and second mortgage loans, and automobile
loans and are evaluated collectively for impairment. Commercial real estate
loans and other commercial loans are evaluated individually for impairment.
Normal loan evaluation procedures, as described in the second preceding
paragraph, are used to identify loans which must be evaluated for impairment.
In general, loans classified as doubtful or loss are considered impaired
while loans classified as substandard are individually evaluated for
impairment. Depending on the relative size of the credit relationship, late
or insufficient payments of 30 to 90 days will cause management to reevaluate
the credit under its normal loan evaluation procedures. While the factors
which identify a credit for consideration for measurement of impairment, or
nonaccrual, are similar, the measurement considerations differ. A loan is
impaired when the economic value estimated to be received is less than the
value implied in the original credit agreement. A loan is placed in
nonaccrual when payments are more than 90 days past due unless the loan is
adequately collateralized and in the process of collection. Although
impaired loan and nonaccrual loan balances are measured differently, impaired
loan disclosures under SFAS Nos. 114 and 118 are not expected to differ
significantly from nonaccrual and renegotiated loan disclosures.
- --------------------------------------------------------------------------------
(Continued)
F-9
<PAGE>
PARK FEDERAL SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1995 and 1994
February 29, 1996 and February 28, 1995 (Unaudited)
- --------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
INTEREST INCOME: Interest on loans is accrued over the term of the loans
based upon the principal outstanding. Management reviews loans delinquent 90
days or more to determine if the interest accrual should be discontinued.
Under SFAS No. 114 as amended by SFAS No. 118, the carrying values of
impaired loans are periodically adjusted to reflect cash payments, revised
estimates of future cash flows, and increases in the present value of
expected cash flows due to the passage of time. Cash payments representing
interest income are reported as such. Other cash payments are reported as
reductions in carrying value, while increases or decreases due to changes in
estimates of future payments and due to the passage of time are reported as
adjustments to the provision for loan losses.
LOAN ORIGINATION FEES: Loan origination fees, net of certain direct loan
origination costs, are deferred and recognized over the contractual life of
the loan as a yield adjustment.
REAL ESTATE HELD FOR DEVELOPMENT: The Bank, through its GPS Development
Corp. subsidiary, engages in the development of residential real estate lots
in partnership with local developers. Since the Bank provides substantially
all of the financing for these projects, they have been reflected as
wholly-owned investments in real estate held for development. Land
inventories and real estate projects under development are valued at lower of
acquisition cost plus development costs (including construction period
interest and taxes incurred to date), or net realizable value. The cost of
each unit sold includes a proportionate share of the total projected
development cost. Holding costs associated with undeveloped land,
completed units, and suspended construction activities are expensed. General
and administrative costs related to the real estate development projects are
expensed when incurred.
INCOME RECOGNITION ON REAL ESTATE: Gains on real estate sales, including
those financed by the Bank, are recorded in the period that sales contracts
are executed. Loans made by the Bank to builders purchasing developed lots
require a 25% down payment and mature in one year or less. Gains on sales are
reported net of all related costs, except for certain insignificant general
and administrative expenses borne by the Bank.
PREMISES AND EQUIPMENT: Premises and equipment are stated at cost less
accumulated depreciation. Depreciation is computed using the straight-line
method over the estimated useful lives of the assets, which range from 5 to
40 years.
FORECLOSED REAL ESTATE: Real estate acquired through foreclosure and similar
proceedings is carried at cost (fair value at the date of foreclosure) or at
fair value less estimated costs to sell. Losses on disposition, including
expenses incurred in connection with the disposition, are charged to
operations.
INCOME TAXES: Effective January 1, 1993, the Bank adopted Statement of
Financial Accounting Standards No. 109 ("SFAS No. 109"), "Accounting for
Income Taxes". The adoption of SFAS No. 109 changes the Bank's method of
accounting for income taxes from the deferred method to an asset and
liability approach. The asset and liability approach requires the Bank to
record income tax expense based on the amount of taxes due on its tax return
plus deferred taxes computed on the expected future tax consequences of
temporary differences between the carrying amounts and tax bases of assets
and liabilities, using enacted tax rates.
- --------------------------------------------------------------------------------
(Continued)
F-10
<PAGE>
PARK FEDERAL SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1995 and 1994
February 29, 1996 and February 28, 1995 (Unaudited)
- --------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
The effect of adopting SFAS No. 109 is shown as a cumulative effect of a
change in accounting principle in the 1993 consolidated statement of income
with an effect on prior years totaling $104,000.
RETIREMENT PLANS: The Bank sponsors noncontributory defined benefit pension
and defined contribution profit sharing plans covering substantially all of
its employees. Benefits from the pension plan are based on years of service
and the employee's compensation. The Bank's funding policy is to fund the
actuarially determined amount which can be deducted for income tax purposes.
Profit sharing plan contributions are charged to expense annually.
STATEMENT OF CASH FLOWS: For the purpose of this statement, cash and cash
equivalents are defined to include the Bank's cash on hand, demand balances,
and interest-bearing deposits with financial institutions, and investments in
certificates of deposit with maturities of less than three months.
IMPACT OF NEW ACCOUNTING STANDARDS: In March 1995, the FASB issued Statement
of Financial Accounting Standards No. 121 ("SFAS No. 121"), "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of". SFAS No. 121 requires that long-lived assets and certain identifiable
intangibles be reviewed for impairment whenever events or circumstances
indicate that the carrying amount of an asset may not be recoverable.
However, SFAS No. 121 does not apply to financial instruments, core deposit
intangibles, mortgage and other servicing rights, or deferred tax assets.
The adoption of SFAS No. 121 had no material effect on the Bank's income or
financial condition.
In May 1995, the FASB issued Statement of Financial Accounting Standards No.
122 ("SFAS No. 122"), "Accounting for Mortgage Servicing Rights". SFAS No.
122 requires an institution that purchases or originates mortgage loans and
sells or securitizes those loans with servicing rights retained to allocate
the total cost of the mortgage loans to the mortgage servicing rights and the
loans (without the mortgage servicing rights) based on their relative fair
values. In addition, institutions are required to assess impairment of the
capitalized mortgage servicing portfolio based on the fair value of those
rights. SFAS No. 122 is effective for fiscal years beginning after December
15, 1995. The adoption of this statement had no material impact on the
Bank's earnings or financial condition.
In November 1995, the FASB issued Statement of Financial Accounting Standards
No. 123, "Accounting for Stock Based Compensation", ("SFAS No. 123"). This
statement establishes financial accounting standards for stock-based employee
compensation plans. SFAS No. 123 permits the Bank to choose either a new
fair value based method or the current APB Opinion 25 intrinsic value based
method of accounting for its stock-based compensation arrangements. SFAS No.
123 requires pro forma disclosures of net earnings and per share computed as
if the
- --------------------------------------------------------------------------------
(Continued)
F-11
<PAGE>
PARK FEDERAL SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1995 and 1994
February 29, 1996 and February 28, 1995 (Unaudited)
- --------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
fair value based method had been applied in financial statements of companies
that continue to follow current practice in accounting for such arrangements
under Opinion 25. SFAS No. 123 applies to all stock-based employee
compensation plans in which an employer grants shares of its stock or other
equity instruments to employees except for employee stock ownership plans.
Any effect that this statement will have on the Bank will be applicable upon
the consummation of the Conversion (see Note 14).
NOTE 2 - SECURITIES
Effective January 1, 1994, the Bank adopted the provisions of Statement of
Financial Accounting Standards No. 115 ("SFAS No. 115"), "Accounting for
Certain Investments in Debt and Equity Securities". SFAS No. 115 requires
financial institutions to classify securities as either held-to-maturity,
trading, or available-for-sale. The cumulative effect on equity at January
1, 1994, of adopting SFAS No. 115, was included as a separate component of
equity in the balance sheet, net of income taxes, in the amount of $90,818.
Prior to the adoption of SFAS No. 115, securities were carried at cost and
adjusted for premiums and discounts, based on management's intent and the
Bank's ability to hold such investments to maturity.
Securities are summarized as follows:
<TABLE>
<CAPTION>
(Unaudited)
February 29, 1996
------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Securities Available-for-Sale Cost Gains Losses Value
- ----------------------------- ----------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
U.S. Treasury bills and notes $ 4,499,966 $ 51,882 $ -- $ 4,551,848
U.S. government agency notes 28,343,114 26,961 (63,629) 28,306,446
----------- -------- -------- -----------
32,843,080 78,843 (63,629) 32,858,294
Mortgage-backed securities:
FNMA 1,238,089 34,705 -- 1,272,794
FHLMC 2,840,950 10,006 (10,354) 2,840,602
----------- -------- -------- -----------
4,079,039 44,711 (10,354) 4,113,396
----------- -------- -------- -----------
$36,922,119 $123,554 $(73,983) $36,971,690
----------- -------- -------- -----------
----------- -------- -------- -----------
</TABLE>
- --------------------------------------------------------------------------------
(Continued)
F-12
<PAGE>
PARK FEDERAL SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1995 and 1994
February 29, 1996 and February 28, 1995 (Unaudited)
- --------------------------------------------------------------------------------
NOTE 2 - SECURITIES (Continued)
<TABLE>
<CAPTION>
(Unaudited)
February 29, 1996
-------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Securities Held-to-Maturity Cost Gains Losses Value
- --------------------------- ----------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
U.S. government agency notes $22,235,000 $ 2,185 $ (105,400) $22,131,785
Mortgage-backed securities:
FNMA 7,277,506 1,187 (71,458) 7,207,235
FHLMC 9,555,411 21,415 (59,929) 9,516,897
----------- -------- ----------- -----------
16,832,917 22,602 (131,387) 16,724,132
----------- -------- ----------- -----------
$39,067,917 $ 24,787 $ (236,787) $38,855,917
----------- -------- ----------- -----------
----------- -------- ----------- -----------
<CAPTION>
December 31, 1995
-------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Securities Available-for-Sale Cost Gains Losses Value
- ----------------------------- ----------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
U.S. Treasury bills and notes $ 4,482,950 $ 63,725 $ -- $ 4,546,675
U.S. government agency notes 28,342,860 50,982 (35,992) 28,357,850
----------- -------- ----------- -----------
32,825,810 114,707 (35,992) 32,904,525
Mortgage-backed securities:
FNMA 1,298,444 37,116 -- 1,335,560
FHLMC 2,885,003 9,339 -- 2,894,342
----------- -------- ----------- -----------
4,183,447 46,455 -- 4,229,902
----------- -------- ----------- -----------
$37,009,257 $161,162 $ (35,992) $37,134,427
----------- -------- ----------- -----------
----------- -------- ----------- -----------
<CAPTION>
Securities Held-to-Maturity
- ---------------------------
<S> <C> <C> <C> <C>
U.S. government agency notes $24,634,636 $ 4,535 $ (117,698) $24,521,473
Collateralized mortgage obligations 88,256 3,899 -- 92,155
Mortgage-backed securities:
FNMA 7,496,860 -- (66,224) 7,430,636
FHLMC 10,274,086 -- (24,599) 10,249,487
----------- -------- ----------- -----------
17,859,202 3,899 (90,823) 17,772,278
----------- -------- ----------- -----------
$42,493,838 $ 8,434 $ (208,521) $42,293,751
----------- -------- ----------- -----------
----------- -------- ----------- -----------
</TABLE>
- --------------------------------------------------------------------------------
(Continued)
F-13
<PAGE>
PARK FEDERAL SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1995 and 1994
February 29, 1996 and February 28, 1995 (Unaudited)
- --------------------------------------------------------------------------------
NOTE 2 - SECURITIES (Continued)
<TABLE>
<CAPTION>
December 31, 1994
-------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Securities Available-for-Sale Cost Gains Losses Value
- ----------------------------- ----------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
U.S. Treasury bills and notes $ 3,998,827 $ -- $ (47,567) $ 3,951,260
U.S. government agency notes 11,001,704 -- (130,755) 10,870,949
----------- -------- ----------- -----------
15,000,531 -- (178,322) 14,822,209
Collateralized mortgage obligations 132,174 3,477 (66) 135,585
----------- -------- ----------- -----------
$15,132,705 $ 3,477 $ (178,388) $14,957,794
----------- -------- ----------- -----------
----------- -------- ----------- -----------
<CAPTION>
December 31, 1994
-------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Securities Held-to-Maturity Cost Gains Losses Value
- --------------------------- ----------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
U.S. Treasury bills and notes $ 2,505,246 $ 10,320 $ (33,221) $ 2,482,345
U.S. government agency notes 44,674,941 -- (2,185,988) 42,488,953
----------- -------- ----------- -----------
47,180,187 10,320 (2,219,209) 44,971,298
Mortgage-backed securities:
FNMA 5,601,099 1,701 (82,895) 5,519,905
FHLMC 13,114,546 -- (432,824) 12,681,722
----------- -------- ----------- -----------
18,715,645 1,701 (515,719) 18,201,627
----------- -------- ----------- -----------
$65,895,832 $ 12,021 $(2,734,928) $63,172,925
----------- -------- ----------- -----------
----------- -------- ----------- -----------
</TABLE>
The amortized cost of mortgage-backed securities and collateralized mortgage
obligations represents the principal balance outstanding adjusted for
unamortized premiums and discounts of $221,657 and $21,515, respectively, as
of February 29, 1996 (unaudited); $235,768 and $26,187, respectively, as of
December 31, 1995; and $246,722 and $23,674, respectively, as of December 31,
1994.
Sales of securities are summarized as follows:
<TABLE>
<CAPTION>
(Unaudited)
------------------------ For the year ended
For the two months ended December 31,
February 29, February 28, -----------------------------
1996 1995 1995 1994 1993
------------ ------------ ---------- ------ ----------
<S> <C> <C> <C> <C> <C>
Proceeds from sales $ -- $8,013,125 $8,013,125 $ -- $2,345,865
Gross realized gains -- 14,264 14,264 -- 138,283
</TABLE>
The amortized cost and fair value of debt securities, by contractual
maturity, are shown below by available-for-sale and held-to-maturity
portfolios. Expected maturities will differ from contractual maturities
because borrowers may have the right to call or prepay obligations with or
without call or prepayment penalties.
- --------------------------------------------------------------------------------
(Continued)
F-14
<PAGE>
PARK FEDERAL SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1995 and 1994
February 29, 1996 and February 28, 1995 (Unaudited)
- --------------------------------------------------------------------------------
NOTE 2 - SECURITIES (Continued)
<TABLE>
<CAPTION>
(Unaudited)
February 29, 1996 December 31, 1995
Amortized Fair Amortized Fair
Available-for-Sale Cost Value Cost Value
- ------------------ ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Due in one year or less $15,052,360 $15,076,345 $12,034,735 $12,044,960
Due after one year through five years 12,790,883 12,783,919 15,791,446 15,847,145
Due after five years through ten years 4,999,837 4,998,030 4,999,629 5,012,420
----------- ----------- ----------- -----------
32,843,080 32,858,294 32,825,810 32,904,525
Mortgage-backed securities 4,079,039 4,113,396 4,183,447 4,229,902
----------- ----------- ----------- -----------
$36,922,119 $36,971,690 $37,009,257 $37,134,427
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Held-to-Maturity
- ----------------
Due after one year through five years $18,235,000 $18,131,165 $22,634,636 $22,518,973
Due after five years through ten years 4,000,000 4,000,620 2,000,000 2,002,500
----------- ----------- ----------- -----------
22,235,000 22,131,785 24,634,636 24,521,473
Mortgage-backed securities 16,832,917 16,724,132 17,859,202 17,772,278
----------- ----------- ----------- -----------
$39,067,917 $38,855,917 $42,493,838 $42,293,751
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
</TABLE>
Pursuant to new guidance issued by the Financial Accounting Standards Board
in November 1995, the Bank transferred securities on December 12, 1995 with
an amortized cost of $13,677,701 and an unrealized gain of $226,508 from the
held-to-maturity to the available-for-sale classification. The cumulative
effect of the transfer was to increase retained earnings, net of taxes of
$87,750, by $138,758. There were no gains or losses realized on the transfer.
- --------------------------------------------------------------------------------
(Continued)
F-15
<PAGE>
PARK FEDERAL SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1995 and 1994
February 29, 1996 and February 28, 1995 (Unaudited)
- -------------------------------------------------------------------------------
NOTE 3 - LOANS RECEIVABLE
Loans receivable are summarized as follows at:
<TABLE>
<CAPTION>
(Unaudited) December 31,
February 29, ----------------------------
1996 1995 1994
----------- ------------ -----------
<S> <C> <C> <C>
First mortgage loans
Principal balances
Secured by one-to-four family residences $48,291,217 $48,893,853 $44,654,591
Secured by other properties 5,563,439 6,163,035 5,907,084
Commercial, construction and land 6,166,089 6,883,450 7,463,886
----------- ----------- -----------
60,020,745 61,940,338 58,025,561
Undistributed portion of construction loans (983,670) (1,148,424) (1,493,472)
Net deferred loan origination fees (440,769) (460,246) (474,460)
----------- ----------- -----------
Total first mortgage loans 58,596,306 60,331,668 56,057,629
Consumer loans 869,267 802,992 825,650
Unearned discounts (21,406) (23,356) (50,526)
----------- ----------- -----------
Total consumer loans 847,861 779,636 775,124
Allowance for loan losses (500,000) (573,057) (275,000)
----------- ----------- -----------
$58,944,167 $60,538,247 $56,557,753
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
Loans on nonaccrual status at February 29, 1996, and February 28, 1995
amounted to $80,354 and $770,442, respectively, with interest foregone of
$9,404 and $46,889, respectively. Loans on nonaccrual status amounted to
$917,632, $688,243, and $320,991 at December 31, 1995, 1994, and 1993,
respectively, with interest forgone of $82,742, $33,400, and $15,571,
respectively.
The Bank had no impaired loans at February 29, 1996 (unaudited). At
December 31, 1995, impaired loans totaled $501,000. The average balance of
impaired loans was approximately $223,000 for the two months ended February
29, 1996 (unaudited) and approximately $143,000 for the year ended December
31, 1995. No portion of the allowance for loan losses was allocated to
impaired loans at February 29, 1996 (unaudited) or December 31, 1995.
Interest income recognized on impaired loans was approximately $24,000 for
the two months ended February 29, 1996 (unaudited) and $24,000 for the year
ended December 31, 1995, which included cash basis income of approximately
$24,000 (unaudited) and $24,000, respectively.
- -------------------------------------------------------------------------------
(Continued)
F-16
<PAGE>
PARK FEDERAL SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1995 and 1994
February 29, 1996 and February 28, 1995 (Unaudited)
- -------------------------------------------------------------------------------
NOTE 3 - LOANS RECEIVABLE (Continued)
Activity in the allowance for loan losses is as follows:
<TABLE>
<CAPTION>
(Unaudited)
------------------------ For the years ended
For the two months ended December 31,
February 29, February 28, ---------------------------------
1996 1995 1995 1994 1993
------------ ------------ -------- --------- ---------
<S> <C> <C> <C> <C> <C>
Balance at beginning of period $573,057 $275,000 $275,000 $250,000 $ 175,000
Provision for loan losses - 10,000 298,057 48,514 140,000
Charge-offs (73,057) - - (23,514) (65,000)
Recoveries - - - - -
-------- -------- -------- -------- ---------
Balance at end of period $500,000 $285,000 $573,057 $275,000 $ 250,000
-------- -------- -------- -------- ---------
-------- -------- -------- -------- ---------
</TABLE>
NOTE 4 - REAL ESTATE HELD FOR DEVELOPMENT
The Bank, through its subsidiary, GPS Development Corp., participates with
local real estate developers in developing residential lots located primarily
in Naperville, Illinois.
The following summarizes the Bank's real estate development activities:
<TABLE>
<CAPTION>
(Unaudited) Years ended
Two months December 31,
ended ---------------------------------------
February 29, 1996 1995 1994 1993
----------------- ----------- ---------- -----------
<S> <C> <C> <C> <C>
Proceeds from sales of real
estate held for development $61,050 $2,172,014 $5,197,843 $4,022,051
Gains on sales of real estate
held for development 11,100 522,746 1,114,267 856,119
</TABLE>
During 1995, the Bank's primary project, Rose Hill Farm, was substantially
completed. On December 22, 1995, the Bank purchased an additional parcel of
land known as Prairie Ridge, also located in Naperville. It is the Bank's
intention to develop this property in much the same manner as Rose Hill Farm.
The Bank's investment in the projects at February 29, 1996 is $1,575,412
(unaudited) and $1,624,809 and $1,001,829 at December 31, 1995 and 1994,
respectively.
During 1995, the Bank acquired a parcel of land for $436,544 from the Rose
Hill Farm project as a possible future branch site. Land totaling $291,000,
not required for the branch, will be sold for commercial development. The
portion of the land to be sold is included with other assets on the February
29, 1996 (unaudited) and December 31, 1995 Statements of Financial Condition.
- -------------------------------------------------------------------------------
(Continued)
F-17
<PAGE>
PARK FEDERAL SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1995 and 1994
February 29, 1996 and February 28, 1995 (Unaudited)
- -------------------------------------------------------------------------------
NOTE 5 - PREMISES AND EQUIPMENT
Premises and equipment consist of the following at:
<TABLE>
<CAPTION>
(Unaudited) December 31,
February 29, --------------------------
1996 1995 1994
------------- ---------- ----------
<S> <C> <C> <C>
Cost
Land $ 849,956 $ 849,956 $ 731,942
Buildings and improvements 1,776,544 1,776,544 1,709,383
Furniture and fixtures 407,186 392,830 361,995
---------- ---------- ----------
Total cost 3,033,686 3,019,330 2,803,320
Less accumulated depreciation (959,019) (931,019) (892,566)
---------- ---------- ----------
$2,074,667 $2,088,311 $1,910,754
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
NOTE 6 - ACCRUED INTEREST RECEIVABLE
Accrued interest receivable is summarized as follows at:
<TABLE>
<CAPTION>
(Unaudited) December 31,
February 29, --------------------------
1996 1995 1994
------------ ---------- -----------
<S> <C> <C> <C>
Securities $ 965,232 $ 936,635 $ 887,429
Loans receivable 256,100 253,287 173,045
---------- ---------- ----------
$1,221,332 $1,189,922 $1,060,474
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
- -------------------------------------------------------------------------------
(Continued)
F-18
<PAGE>
PARK FEDERAL SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1995 and 1994
February 29, 1996 and February 28, 1995 (Unaudited)
- -------------------------------------------------------------------------------
NOTE 7 - DEPOSITS
Deposits are summarized as follows at:
<TABLE>
<CAPTION>
Weighted
Average
Rate at (Unaudited) December 31,
February 29, February 29, --------------------------------------
1996 1996 1995 1994
------------ ------------------- ----------------- ------------------
Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ --------
<S> <C> <C> <C> <C> <C> <C> <C>
Demand and NOW accounts,
including noninterest-bearing
deposits of $1,369,641 at
February 29, 1996 (unaudited),
$1,351,539 and $341,988
at December 31, 1995
and 1994 2.02% $ 6,757,769 5.23% $ 6,981,422 5.35% $ 5,700,144 4.81%
Money market 3.35 4,167,703 3.22 4,014,151 3.08 3,913,033 3.30
Passbook savings 2.78 34,572,854 26.74 34,798,181 26.66 39,086,671 32.98
----------- ----- ----------- ----- ----------- -----
45,498,326 35.19 45,793,754 35.09 48,699,848 41.09
Certificates of deposit
3.00% to 3.99% - - - - - 13,983,328 11.80
4.00% to 4.99% 4.39 4,524,177 3.50 5,513,184 4.22 24,165,930 20.39
5.00% to 5.99% 5.58 47,369,768 36.63 42,122,305 32.28 21,278,941 17.95
6.00% to 6.99% 6.37 29,765,009 23.02 34,436,228 26.39 4,751,158 4.01
7.00% to 7.99% 7.21 934,027 .72 1,270,022 .97 1,866,346 1.57
8.00% to 8.99% 8.40 958,247 .74 1,108,265 .85 3,518,754 2.97
9.00% and over 9.00 259,234 .20 259,234 .20 256,858 .22
----------- ------- ----------- ------ ----------- ------
5.86 83,810,462 64.81 84,709,238 64.91 69,821,315 58.91
----------- ------- ----------- ------ ----------- ------
4.78% $129,308,788 100.00% $130,502,992 100.00% $118,521,163 100.00%
---- ----------- ------ ----------- ------ ----------- -----
---- ----------- ------ ----------- ------ ----------- -----
</TABLE>
Deposit accounts with balances greater than $100,000 totaled $10,073,695 at
February 29, 1996 (unaudited) and $10,410,368 and $11,181,539 at December 31,
1995 and 1994, respectively. Deposits greater than $100,000 are not insured.
At February 29, 1996 (unaudited), scheduled maturities of certificates of
deposit are as follows:
<TABLE>
<CAPTION>
Less than One to Two to Three to Four to
One Year Two Years Three Years Four Years Five Years Thereafter Total
--------- --------- ----------- ---------- ---------- ---------- -----
<S> <C> <C> <C> <C> <C> <C> <C>
4.00% to 4.99% $ 4,387,387 $ 136,790 $ - $ - $ - $ - $ 4,524,177
5.00% to 5.99% 31,812,940 9,381,210 3,646,308 1,020,744 1,322,989 185,577 47,369,768
6.00% to 6.99% 6,332,729 19,077,557 634,693 2,763,038 308,889 648,103 29,765,009
7.00% to 7.99% 555,237 91,265 287,525 - - - 934,027
8.00% to 8.99% 698,898 259,349 - - - - 958,247
9.00% and over 259,234 - - - - - 259,234
----------- ---------- --------- --------- ---------- -------- ------------
$44,046,425 $28,946,171 $4,568,526 $3,783,782 $1,631,878 $833,680 $83,810,462
----------- ---------- --------- --------- ---------- -------- ------------
----------- ---------- --------- --------- ---------- -------- ------------
</TABLE>
- -------------------------------------------------------------------------------
(Continued)
F-19
<PAGE>
PARK FEDERAL SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1995 and 1994
February 29, 1996 and February 28, 1995 (Unaudited)
- -------------------------------------------------------------------------------
NOTE 7 - DEPOSITS (Continued)
At December 31, 1995, scheduled maturities of certificates of deposit are
as follows:
<TABLE>
<CAPTION>
Less than One to Two to Three to Four to
One Year Two Years Three Years Four Years Five Years Thereafter Total
--------- --------- ----------- ---------- ---------- ---------- -----
<S> <C> <C> <C> <C> <C> <C> <C>
4.00% to 4.99% $ 4,947,171 $ 566,013 $ - $ - $ - $ - $ 5,513,184
5.00% to 5.99% 26,914,311 9,345,056 3,284,627 1,358,258 902,139 317,914 42,122,305
6.00% to 6.99% 9,357,502 20,487,987 583,407 2,448,636 915,593 648,103 34,436,228
7.00% to 7.99% 876,910 54,329 338,783 - - - 1,270,022
8.00% to 8.99% 680,363 427,902 - - - - 1,108,265
9.00% and over 259,234 - - - - - 259,234
----------- ---------- --------- --------- ---------- -------- ------------
$43,035,491 $30,876,287 $4,206,817 $3,806,894 $1,817,732 $966,017 $84,709,238
----------- ---------- --------- --------- ---------- -------- ------------
----------- ---------- --------- --------- ---------- -------- ------------
</TABLE>
Interest expense on deposits is summarized as follows:
<TABLE>
<CAPTION>
(Unaudited)
------------------------ For the years ended
For the two months ended December 31,
February 29, February 28, -------------------------------------
1996 1995 1995 1994 1993
------------- ----------- ----------- ---------- -----------
<S> <C> <C> <C> <C> <C>
Money market $ 22,942 $ 22,120 $ 119,354 $ 127,046 $ 148,791
Passbook savings 156,909 192,860 1,058,780 1,123,632 1,211,422
NOW 16,957 16,088 103,346 103,112 100,167
Certificates of deposit 825,519 580,579 4,322,023 3,176,809 3,429,509
---------- -------- ---------- ---------- ----------
$1,022,327 $811,647 $5,603,503 $4,530,599 $4,889,889
---------- -------- ---------- ---------- ----------
---------- -------- ---------- ---------- ----------
</TABLE>
NOTE 8 - ADVANCES FROM FEDERAL HOME LOAN BANK
At February 29, 1996 (unaudited), the Bank had no advances from the Federal
Home Loan Bank of Chicago ("FHLB"). At December 31, 1995 and 1994, FHLB
advances consist of an open line of credit and bear an interest rate which
adjusts daily. The interest rate was 5.91% and 6.35% as of December 31, 1995
and 1994, respectively.
The Bank maintains a collateral pledge agreement covering secured advances
whereby the Bank has agreed to at all times keep on hand, free of all other
pledges, liens, and encumbrances, fully disbursed, whole first mortgages on
improved residential property not more than 90 days delinquent, aggregating
no less than 167% of the outstanding secured advances from the FHLB.
- -------------------------------------------------------------------------------
(Continued)
F-20
<PAGE>
PARK FEDERAL SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1995 and 1994
February 29, 1996 and February 28, 1995 (Unaudited)
- -------------------------------------------------------------------------------
NOTE 9 - REGULATORY CAPITAL
Regulations require savings institutions to have minimum regulatory tangible
capital equal to 1.5% of total assets, a core capital ratio of 3%, and a
risk-based capital ratio equal to 8% of risk-adjusted assets as defined by
regulation.
The following is a reconciliation of capital under generally accepted
accounting principles ("GAAP") to regulatory capital at February 29, 1996
(unaudited):
<TABLE>
<CAPTION>
% to % to
% to Adjusted Risk- Risk
Tangible Tangible Core Tangible Based Adjusted
Capital Assets Capital Assets Capital Assets
-------- -------- ------- -------- --------- ---------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
GAAP capital $17,677 12.0% $17,677 12.0% $17,677 42.0%
Real estate investments (1,575) (1.1) (1,575) (1.1) (1,575) (3.7)
General valuation
allowances - - - - 500 1.2
Unrealized gain on securities
available-for-sale (30) - (30) - (30) (.1)
------- ----- ------- ----- -------- -----
Regulatory capital -
computed 16,072 10.9 16,072 10.9 16,572 39.4
Minimum capital
requirement 2,217 1.5 4,433 3.0 3,368 8.0
------- ----- ------- ----- -------- -----
Regulatory capital -
excess $13,855 9.4% $11,639 7.9% $13,204 31.4%
------- ----- ------- ----- -------- -----
------- ----- ------- ----- -------- -----
</TABLE>
The following is a reconciliation of capital under generally accepted
accounting principles ("GAAP") to regulatory capital at December 31, 1995:
<TABLE>
<CAPTION>
% to % to
% to Adjusted Risk- Risk
Tangible Tangible Core Tangible Based Adjusted
Capital Assets Capital Assets Capital Assets
-------- -------- ------- -------- --------- ---------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
GAAP capital $17,533 11.2% $17,533 11.2% $17,533 38.5%
Real estate investments (1,625) (1.0) (1,625) (1.0) (1,625) (3.6)
General valuation
allowances - - - - 573 1.3
Unrealized gain on securities
available-for-sale (77) - (77) - (77) (.2)
------- ----- ------- ----- -------- -----
Regulatory capital -
computed 15,831 10.2 15,831 10.2 16,404 36.0
Minimum capital
requirement 2,359 1.5 4,717 3.0 3,640 8.0
------- ----- ------- ----- -------- -----
Regulatory capital -
excess $13,472 8.7% $11,114 7.7% $12,764 28.0%
------- ----- ------- ----- -------- -----
------- ----- ------- ----- -------- -----
</TABLE>
- -------------------------------------------------------------------------------
(Continued)
F-21
<PAGE>
PARK FEDERAL SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1995 and 1994
February 29, 1996 and February 28, 1995 (Unaudited)
- -------------------------------------------------------------------------------
NOTE 9 - REGULATORY CAPITAL (Continued)
Accordingly, management considers the capital requirements to have been met.
Federal regulations include restrictions on loans to one borrower, certain
types of investments and loans, loans to officers and directors, brokered
deposits, and transactions with affiliates. Management has determined that
the Bank is in compliance with these restrictions.
Federal regulations require the Qualified Thrift Lender (QTL) test, which
mandates that approximately 65% of assets be maintained in housing-related
finance and other specified areas. If the QTL test is not met, limits are
placed on growth, branching, new investments, and Federal Home Loan Bank
advances, or the Bank must convert to a commercial bank charter. The Bank
meets the requirements of the QTL test at February 29, 1996 (unaudited) and
December 31, 1995.
NOTE 10 - RETIREMENT PLANS
The following table sets forth the pension plan's funded status and amounts
actuarially determined at December 31, 1995 and 1994:
<TABLE>
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
Actuarial present value of benefit obligations
Accumulated benefit obligation, all vested $(222,041) $(140,382)
--------- ---------
--------- ---------
Projected benefit obligation for service
rendered to date $(685,728) $(431,248)
Plan assets at estimated fair market value,
consisting primarily of interest-bearing
deposits and marketable securities 316,820 279,087
--------- ---------
Projected benefit obligation in excess of plan assets (368,908) (152,161)
Unrecognized net loss from past experience
different from that assumed and effects of
changes in assumptions 179,064 20,563
Unrecognized transition amount, being
recognized over 31 years 44,823 46,690
--------- ---------
Net pension liability $(145,021) $(84,908)
--------- ---------
--------- ---------
</TABLE>
- -------------------------------------------------------------------------------
(Continued)
F-22
<PAGE>
PARK FEDERAL SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1995 and 1994
February 29, 1996 and February 28, 1995 (Unaudited)
- -------------------------------------------------------------------------------
NOTE 10 - RETIREMENT PLANS (Continued)
<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Net pension cost included the following components
Service cost - benefits earned during the year $ 42,074 $ 43,890 $ 51,308
Interest cost on projected benefit obligation 38,577 35,700 50,944
Actual return on plan assets (44,879) (17,044) (28,883)
Net amortization and deferral 24,341 1,238 (9,383)
-------- -------- --------
Net pension cost $ 60,113 $ 63,784 $ 63,986
-------- -------- --------
-------- -------- --------
Assumptions used by the actuaries for the defined
benefit plan were
Discount rate
Pre-retirement 7.25% 8.5% 7.0%
Post-retirement 6.0% 6.0% 6.0%
Rate of increase in compensation levels 5.0% 5.0% 5.0%
Expected long-term rate of return on assets 8.0% 8.0% 8.0%
</TABLE>
There were no contributions to the plan in 1995 or 1994. Contributions to
the pension plan were $70,352 in 1993.
The Bank maintains a profit sharing plan which covers substantially all
employees. Contributions to the profit sharing plan are made at the
discretion of the Board of Directors and charged to expense annually. Plan
contributions for 1995, 1994 and 1993 were $141,451, $118,882, and $97,667,
respectively.
NOTE 11 - INCOME TAXES
Income tax expense consists of the following:
<TABLE>
<CAPTION>
(Unaudited)
------------------------- For the years ended
For the two months ended December 31,
February 29, February 28, ---------------------------------
1996 1995 1995 1994 1993
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Currently payable (refundable)
tax
Federal $ 87,653 $ 80,161 $551,949 $845,920 $ 835,343
State - (23,949) (70,443) (21,000) 35,445
Deferred tax expense (benefit) 15,623 (871) (68,589) 56,391 138,415
-------- -------- -------- -------- ----------
Provision for income tax $103,276 $ 55,341 $412,917 $881,311 $1,009,203
-------- -------- -------- -------- ----------
-------- -------- -------- -------- ----------
</TABLE>
- -------------------------------------------------------------------------------
(Continued)
F-23
<PAGE>
PARK FEDERAL SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1995 and 1994
February 29, 1996 and February 28, 1995 (Unaudited)
- -------------------------------------------------------------------------------
NOTE 11 - INCOME TAXES (Continued)
The federal income tax expense differs from the amounts determined by
applying the statutory federal income tax rate to income before income taxes
as a result of the following items:
<TABLE>
<CAPTION>
(Unaudited)
-----------------------------------------------
February 29, February 28,
1996 1995
---------------------- -----------------------
Percentage Percentage
of Income of Income
Before Before
Income Income
Amount Taxes Amount Taxes
-------- ---------- -------- ----------
<S> <C> <C> <C> <C>
Income tax computed at the
statutory rate (34%) $ 99,593 34.0% $ 74,633 34.0%
State income tax expense
(benefit) net of federal tax 1,624 .6 (15,921) (7.3)
Other items, net 2,059 .7 (3,371) (1.5)
-------- ---------- -------- ----------
$103,276 35.3% $55,341 25.2%
-------- ---------- -------- ----------
-------- ---------- -------- ----------
<CAPTION>
December 31,
--------------------------------------------------------------------------
1995 1994 1993
---------------------- ----------------------- -------------------------
Percentage Percentage Percentage
of Income of Income of Income
Before Before Before
Income Income Income
Amount Taxes Amount Taxes Amount Taxes
-------- ---------- -------- ---------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
Income tax computed at
the statutory rate (34%) $458,647 34.0% $894,882 34.0% $ 968,814 34.0%
State income tax
expense (benefit) net of
federal tax (45,353) (3.4) (6,507) (.2) 25,823 .9
Other items, net (377) - (7,064) (.3) 14,566 .5
-------- ------ -------- ------ ---------- -----
$412,917 30.6% $881,311 33.5% $1,009,203 35.4%
-------- ------ -------- ------ ---------- -----
-------- ------ -------- ------ ---------- -----
</TABLE>
The Bank has qualified under provisions of the Internal Revenue Code which
permit it to deduct from taxable income a provision for bad debts which
differs from the provision charged to income in the financial statements.
Retained earnings at February 29, 1996 (unaudited) include approximately
$3,298,000 for which no deferred federal income tax liability has been
recorded. These amounts represent an allocation of income to bad-debt
deductions for tax purposes alone. Reduction of amounts so allocated for
purposes other than tax bad-debt losses or adjustments from carryback of net
operating losses would create income for tax purposes only, which would be
subject to current tax. The unrecorded deferred tax liability on the above
amounts at February 29, 1996 (unaudited) was approximately $1,278,000.
- -------------------------------------------------------------------------------
(Continued)
F-24
<PAGE>
PARK FEDERAL SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1995 and 1994
February 29, 1996 and February 28, 1995 (Unaudited)
- -------------------------------------------------------------------------------
NOTE 11 - INCOME TAXES (Continued)
Deferred tax assets (liabilities) are comprised of the following at:
<TABLE>
<CAPTION>
(Unaudited) December 31,
February 29, ----------------------
1996 1995 1994
------------ ---------- -----------
<S> <C> <C> <C>
Deferred loan fees $ 170,754 $ 178,299 $ 183,806
Pension expense 60,822 56,181 32,893
Unrealized loss on securities available-for-sale - - 67,761
--------- --------- ---------
231,576 234,480 284,460
Federal Home Loan Bank stock dividend (40,020) (36,921) (32,970)
Depreciation (116,912) (116,329) (108,040)
Bad debt deduction (257,989) (248,952) (312,000)
Unrealized gain on securities available-for-sale (19,204) (48,491) -
--------- --------- ---------
(434,125) (450,693) (453,010)
--------- --------- ---------
Net deferred tax liability $(202,549) $(216,213) $(168,550)
--------- --------- ---------
--------- --------- ---------
</TABLE>
NOTE 12 - COMMITMENTS, FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET
RISK AND CONCENTRATIONS OF CREDIT RISK
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 consist of standby letters of credit and
commitments to make loans and fund loans in process. The Bank's exposure to
credit loss in the event of nonperformance by the other party to these
financial instruments is represented by the contractual amount of these
instruments. The Bank follows the same credit policy to make such
commitments as is followed for those loans recorded on the statement of
financial condition.
These financial instruments are summarized as follows at:
<TABLE>
<CAPTION>
Contract Amount
------------------------------------
(Unaudited) December 31,
February 29, -----------------------
1996 1995 1994
------------ ----------- ---------
<S> <C> <C> <C>
Financial instruments whose contract
amounts represent credit risk
Commitments to make loans (all
fixed rate) $1,315,000 $ 699,000 $1,218,000
Standby letters of credit 584,000 597,000 1,482,000
Loans in process 984,000 1,148,000 1,493,000
</TABLE>
- -------------------------------------------------------------------------------
(Continued)
F-25
<PAGE>
PARK FEDERAL SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1995 and 1994
February 29, 1996 and February 28, 1995 (Unaudited)
- -------------------------------------------------------------------------------
NOTE 12 - COMMITMENTS, FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET
RISK AND CONCENTRATIONS OF CREDIT RISK (Continued)
The fixed rate loan commitments at February 29, 1996 have terms of 45 to 92
days and rates in the range of 6.75% to 9.00% (unaudited). Fixed rate loan
commitments at December 31, 1995 have terms of 45 to 152 days and rates in
the range of 7.00% to 8.50%.
Since certain commitments to make loans and fund loans in process expire
without being used, the amounts above do not necessarily represent future
cash commitments. No losses are anticipated as a result of these
transactions.
Interest-bearing deposit accounts in other financial institutions potentially
subject the Bank to concentrations of credit risk. At February 29, 1996, the
Bank had a deposit account at the Federal Home Loan Bank of Chicago with a
balance of $7,312,000 (unaudited). At December 31, 1995 and December 31,
1994, the balance was $11,767,000 and $1,634,000, respectively. The Bank
grants mortgages and installment loans to, and obtains deposits from,
customers primarily in Cook, DuPage, and Will counties, Illinois.
Substantially all loans are secured by specific items of collateral,
primarily residential real estate and consumer assets. The Bank also
develops residential housing lots in DuPage and Will counties for sale to
local home builders.
The deposits of savings associations, such as the Bank, are presently insured
by the Savings Association Insurance Fund (SAIF), which, along with the Bank
Insurance Fund (BIF), is one of the two insurance funds administered by the
Federal Deposit Insurance Corporation (FDIC). It is not anticipated that
SAIF will be adequately recapitalized until 2002, absent a substantial
increase in premium rates or the imposition of special assessments or other
significant developments, such as a merger of the SAIF and the BIF. A
recapitalization plan under consideration by the Treasury Department, the
FDIC, the Office of Thrift Supervision (OTS) and the Congress provides for a
special assessment of .85% to .90% to be imposed on all SAIF insured
deposits. No assurance can be given, however, as to whether the
recapitalization plan will be implemented. If the Bank had been required to
pay the special assessment of .85% on December 31, 1995, the Bank's net
income would have been reduced by approximately $680,000.
- -------------------------------------------------------------------------------
(Continued)
F-26
<PAGE>
PARK FEDERAL SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1995 and 1994
February 29, 1996 and February 28, 1995 (Unaudited)
- -------------------------------------------------------------------------------
NOTE 13 - FAIR VALUES OF FINANCIAL INSTRUMENTS
The approximate carrying amount and estimated fair value of financial
instruments is as follows:
<TABLE>
<CAPTION>
(Unaudited)
February 29, 1996 December 31, 1995
----------------------- -----------------------
Approximate Approximate
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
----------- ---------- ------------ ----------
(in thousands)
<S> <C> <C> <C> <C>
ASSETS
Cash and cash equivalents $ 8,163 $ 8,163 $ 12,790 $ 12,790
Securities available-for-sale 36,972 36,972 37,134 37,134
Securities held-to-maturity 39,068 38,856 42,494 42,294
Loans receivable, net 58,944 60,010 60,538 61,587
FHLB stock 676 676 676 676
Accrued interest receivable 1,221 1,221 1,190 1,190
LIABILITIES
Demand and NOW (6,758) (6,758) (6,981) (6,981)
Money market (4,168) (4,168) (4,014) (4,014)
Passbook savings (34,573) (34,573) (34,798) (34,798)
Certificates of deposit (83,810) (84,725) (84,709) (85,410)
FHLB advances - - (9,000) (9,000)
Accrued interest payable (876) (876) (184) (184)
</TABLE>
For purposes of the above, the following assumptions were used:
CASH AND CASH EQUIVALENTS: The estimated fair values for cash and cash
equivalents are based on their carrying value due to the short-term nature of
these assets.
SECURITIES: The fair values of securities are based on the quoted market
value for the individual security or its equivalent.
LOANS: The estimated fair value for loans has been determined by calculating
the present value of future cash flows based on the current rate the Bank
would charge for similar loans with similar maturities, applied for an
estimated time period until the loan is assumed to be repriced or repaid.
DEPOSITS: The estimated fair value for time deposits has been determined by
calculating the present value of future cash flows based on estimates of
rates the Bank would pay on such deposits, applied for the time period until
maturity. The estimated fair values of demand and NOW, money market, and
passbook savings deposits are assumed to approximate their carrying values as
management establishes rates on these deposits at a level that approximates
the local market area. Additionally, these deposits can be withdrawn on
demand.
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(Continued)
F-27
<PAGE>
PARK FEDERAL SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1995 and 1994
February 29, 1996 and February 28, 1995 (Unaudited)
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NOTE 13 - FAIR VALUES OF FINANCIAL INSTRUMENTS (Continued)
FHLB ADVANCES: The advances are at current market rates. Accordingly, fair
value is assumed to equal carrying value.
ACCRUED INTEREST: The fair values of accrued interest receivable and payable
are assumed to equal their carrying value.
OFF-BALANCE-SHEET INSTRUMENTS: Off-balance-sheet items consist principally
of unfunded loan commitments and standby letters of credit. The fair value
of these items is not material.
Other assets and liabilities of the Bank not defined as financial
instruments, such as property and equipment, are not included in the above
disclosures. Also not included are nonfinancial instruments typically not
recognized in financial statements such as the value of core deposits, loan
servicing rights, customer goodwill, and similar items.
While the above estimates are based on management's judgment of the most
appropriate factors, there is no assurance that if the Bank disposed of these
items on February 29, 1996 or December 31, 1995, the fair values would have
been achieved, because the market value may differ depending on the
circumstances. The estimated fair values at February 29, 1996 and December
31, 1995 should not necessarily be considered to apply at subsequent dates.
NOTE 14 - ADOPTION OF PLAN OF CONVERSION (UNAUDITED)
On March 21, 1996, the Board of Directors of the Bank, subject to regulatory
approval and approval by the members of the Bank, adopted a Plan of
Conversion to convert from a federal mutual savings bank to a federal stock
savings bank with the concurrent formation of a holding company. The
conversion is expected to be accomplished through the amendment of the Bank's
charter and the sale of the holding company's common stock in an amount equal
to the consolidated pro forma market value of the holding company and the
Bank after giving effect to the conversion. A subscription offering of the
shares of common stock will be offered initially to the Bank's eligible
deposit account holders, then to other members of the Bank. Any shares of
the holding company's common stock not sold in the subscription offering will
be offered for sale to the general public, giving preference to the Bank's
market area.
The Board of Directors of the Bank or the holding company intend to adopt an
Employee Stock Ownership Plan and various stock option and incentive plans,
subject to ratification by the stockholders of the holding company after
conversion, if such stockholder approval is required by any regulatory body
having jurisdiction to require such approval. In addition, the Board of
Directors is authorized to enter into employment contracts with key employees.
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(Continued)
F-28
<PAGE>
PARK FEDERAL SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1995 and 1994
February 29, 1996 and February 28, 1995 (Unaudited)
- -------------------------------------------------------------------------------
NOTE 14 - ADOPTION OF PLAN OF CONVERSION (UNAUDITED) (Continued)
At the time of conversion, the Bank will establish a liquidation account in
an amount equal to its total net worth as of the latest statement of
financial condition appearing in the final prospectus. The liquidation
account will be maintained for the benefit of eligible depositors who
continue to maintain their accounts at the Bank after the conversion. The
liquidation account will be reduced annually to the extent that eligible
depositors have reduced their qualifying deposits. Subsequent increases will
not restore an eligible account holder's interest in the liquidation account.
In the event of a complete liquidation, each eligible depositor will be
entitled to receive a distribution from the liquidation account in an amount
proportionate to the current adjusted qualifying balances for accounts then
held. The liquidation account balance is not available for payment of
dividends.
Subsequent to the conversion, the Bank may not declare or pay cash dividends
on or repurchase any of its shares of common stock, if the effect would cause
stockholder's equity to be reduced below applicable regulatory capital
maintenance requirements or if such declaration and payment would otherwise
violate regulatory requirements.
Conversion costs will be deferred and deducted from the proceeds of the
shares sold in the conversion. If the conversion is not completed, all costs
will be charged to expense. At February 29, 1996, no costs have been
deferred.
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(Continued)
F-29
<PAGE>
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NO DEALER, SALESMAN OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION OTHER THAN AS CONTAINED IN THIS
PROSPECTUS IN CONNECTION WITH THE OFFERING MADE HEREBY, AND, IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATION SHALL NOT BE RELIED UPON AS HAVING
BEEN AUTHORIZED BY THE COMPANY, THE BANK OR ROBERT W. BAIRD & CO.
INCORPORATED. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A
SOLICITATION OF AN OFFER TO BUY ANY OF THE SECURITIES OFFERED HEREBY TO ANY
PERSON IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS NOT
AUTHORIZED OR IN WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT
QUALIFIED TO DO SO, OR TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH
OFFER OR SOLICITATION IN SUCH JURISDICTION. NEITHER THE DELIVERY OF THIS
PROSPECTUS NOR ANY SALE HEREUNDER SHALL UNDER ANY CIRCUMSTANCES CREATE ANY
IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY OR
THE BANK SINCE ANY OF THE DATES AS OF WHICH INFORMATION IS FURNISHED HEREIN
OR SINCE THE DATE HEREOF.
______________________________
TABLE OF CONTENTS
Page
----
Summary....................................................... 4
Selected Consolidated Financial and
Other Data of the Bank..................................... 9
Risk Factors.................................................. 11
Recent Developments........................................... 19
Park Bancorp, Inc............................................. 24
Park Federal Savings Bank..................................... 24
Regulatory Capital Compliance................................. 26
Use of Proceeds............................................... 27
Dividend Policy............................................... 28
Market for the Common Stock................................... 29
Capitalization................................................ 30
Pro Forma Data................................................ 32
Management's Discussion and Analysis of Financial
Condition and Results of Operations........................ 37
Business of the Bank.......................................... 52
Federal and State Taxation.................................... 74
Regulation.................................................... 76
The Board of Directors and
Management of the Company.................................. 83
The Board of Directors and
Management of the Bank..................................... 84
The Conversion................................................ 99
Restrictions on Acquisition of the Company
and the Bank............................................... 117
Description of Capital Stock of the Company................... 123
Description of Capital Stock of the Bank...................... 125
Transfer Agent and Registrar.................................. 126
Experts....................................................... 126
Legal and Tax Opinions........................................ 126
Additional Information........................................ 126
Index of Consolidated Financial Statements.................... F-1
______________________________
UNTIL AUGUST 6, 1996 ALL DEALERS EFFECTING TRANSACTIONS IN THE
REGISTERED SECURITIES, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY
BE REQUIRED TO DELIVER PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATION OF
DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT
TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
2,760,000 Shares
[LOGO]
PARK BANCORP, INC.
(Proposed Holding Company for
Park Federal Savings Bank)
COMMON STOCK
__________
PROSPECTUS
__________
ROBERT W. BAIRD & CO.
INCORPORATED
June 26, 1996
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