<PAGE>
FILED UNDER RULE 424(b)(3)
Registration No. 333-05909
PROSPECTUS
[LOGO OF HOME BANCORP OF ELGIN]
(PROPOSED HOLDING COMPANY FOR HOME FEDERAL SAVINGS AND LOAN
ASSOCIATION OF ELGIN)
6,095,000 SHARES OF COMMON STOCK
$10.00 PER SHARE
Home Bancorp of Elgin, Inc. (the "Company"), a Delaware corporation, is
offering up to 6,095,000 shares of its common stock, par value of $.01 per share
(the "Common Stock"), in connection with the conversion of Home Federal Savings
and Loan Association of Elgin (the "Association") from a federally chartered
mutual savings and loan association to a federally chartered stock savings and
loan association pursuant to the Association's amended plan of conversion (the
"Plan" or "Plan of Conversion"). In certain circumstances, the Company may
increase the amount of Common Stock offered hereby to 7,009,250 shares. See
footnote 4 to the table below. The simultaneous conversion of the Association to
stock form, the issuance of the Association's stock to the Company and the offer
and sale of the Common Stock by the Company are referred to herein as the
"Conversion." Consummation of the Conversion is subject to, among other things,
(i) the approval of the Plan of Conversion by the members of the Association and
(ii) the receipt of subscription orders for at least 4,505,000 shares of the
Common Stock. See "The Conversion."
(continued on following page)
FOR INFORMATION ON HOW TO SUBSCRIBE FOR THE COMMON STOCK, CALL THE STOCK
INFORMATION CENTER AT (847) 289-3010.
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FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED BY EACH
PROSPECTIVE INVESTOR, SEE "RISK FACTORS" BEGINNING ON PAGE 23 OF THIS
PROSPECTUS.
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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.
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<TABLE>
<CAPTION>
ESTIMATED UNDERWRITING
COMMISSIONS AND OTHER ESTIMATED NET
PURCHASE PRICE(1) EXPENSES(2) PROCEEDS(3)
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Minimum Per Share $10.00 $0.34 $9.66
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Midpoint Per Share $10.00 $0.31 $9.69
- -------------------------------------------------------------------------------
Maximum Per Share $10.00 $0.29 $9.71
- -------------------------------------------------------------------------------
Total Minimum(1) $45,050,000 $1,521,000 $43,529,000
- -------------------------------------------------------------------------------
Total Midpoint(1) $53,000,000 $1,631,000 $51,369,000
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Total Maximum(1) $60,950,000 $1,741,000 $59,209,000
- -------------------------------------------------------------------------------
Total Maximum, as
adjusted(4) $70,092,500 $1,867,000 $68,225,500
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
</TABLE>
(1) Determined in accordance with an independent appraisal prepared by RP
Financial, LC. ("RP Financial") dated June 7, 1996 and updated July 19,
1996, which states that the aggregate estimated pro forma market value of
the Common Stock ranged from $45,050,000 to $60,950,000 with a midpoint of
$53,000,000 (the "Valuation Range"). RP Financial's independent 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 prices in the range of the
foregoing valuation. Based on the Valuation Range, the Board of Directors
of the Association (the "Board of Directors") established the estimated
price range of $45.1 million to $61.0 million (the "Estimated Price
Range"), or between 4,505,000 and 6,095,000 shares of Common Stock at the
$10.00 price per share (the "Purchase Price") to be paid for each share of
Common Stock subscribed for or purchased in the offerings. See "The
Conversion--Stock Pricing" and "--Number of Shares to be Issued."
(2) Consists of the estimated costs to the Association and the Company arising
from the Conversion, including estimated fixed expenses of approximately
$920,000 and marketing fees to be paid to Hovde Securities, Inc. ("Hovde")
in connection with the Subscription and Community Offerings (as defined
herein), which fees are estimated to be $601,000 and $821,000,
respectively, at the minimum and the maximum of the Estimated Price Range.
See "The Conversion--Marketing and Underwriting Arrangements." Such fees
may be deemed to be underwriting fees, and Hovde may be deemed to be an
underwriter. See "Pro Forma Data" for the assumptions used to arrive at
these estimates. 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 Employee
Stock Ownership Plan of Home Bancorp of Elgin, Inc. and related trust (the
"ESOP"), funded by a loan which the Company intends to make to the ESOP,
which initially will be deducted from the Company's stockholders' equity.
See "Use of Proceeds" and "Pro Forma Data."
(4) As adjusted to give effect to the sale of up to an additional 15% of the
shares which may be offered at the Purchase Price, without resolicitation
of subscribers or any right of cancellation, due to regulatory
considerations, changes in the market and 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."
THE SHARES OF COMMON STOCK OFFERED HEREBY ARE NOT SAVINGS ACCOUNTS OR
DEPOSITS AND ARE NOT INSURED OR GUARANTEED BY THE SAVINGS
ASSOCIATION INSURANCE FUND OR THE BANK INSURANCE FUND OF
THE FEDERAL DEPOSIT INSURANCE CORPORATION, OR BY
ANY OTHER GOVERNMENT AGENCY.
--------------
HOVDE SECURITIES, INC.
--------------
The date of this Prospectus is August 8, 1996.
<PAGE>
(continued from previous page)
NON-TRANSFERABLE RIGHTS TO SUBSCRIBE FOR THE COMMON STOCK HAVE BEEN GRANTED,
IN ORDER OF PRIORITY, TO EACH OF THE ASSOCIATION'S ELIGIBLE ACCOUNT HOLDERS,
TO THE ESOP, TO THE ASSOCIATION'S SUPPLEMENTAL ELIGIBLE ACCOUNT HOLDERS AND TO
CERTAIN OTHER MEMBERS (EACH AS DEFINED HEREIN) IN A SUBSCRIPTION OFFERING (THE
"SUBSCRIPTION OFFERING"). SUBSCRIPTION RIGHTS ARE NONTRANSFERABLE. PERSONS
FOUND TO BE TRANSFERRING OR ATTEMPTING TO TRANSFER SUBSCRIPTION RIGHTS WILL BE
SUBJECT TO THE FORFEITURE OF SUCH RIGHTS AND POSSIBLE FURTHER SANCTIONS AND
PENALTIES IMPOSED BY THE OFFICE OF THRIFT SUPERVISION (THE "OTS"). Subject to
the prior rights of holders of subscription rights, the Company expects to
offer any shares of Common Stock not subscribed for in the Subscription
Offering for sale in a community offering to certain members of the general
public, with preference given to natural persons residing in Kane, DuPage and
McHenry counties in Illinois, the counties in which the Association's offices
are located (the "Community Offering") (the Subscription Offering and the
Community Offering are referred to, together, as the "Subscription and
Community Offerings"). The Company and the Association have the option to
reserve up to 25% of the Common Stock offered in the Community Offering for
purchase by certain institutional investors, although no such institutional
investors have been selected. It is anticipated that any shares not subscribed
for in the Subscription and Community Offerings will be offered to members of
the general public in a syndicated community offering (the "Syndicated
Community Offering") (the Subscription and Community Offerings and the
Syndicated Community Offering are referred to, collectively, as the
"Offerings"). If shares of Common Stock are offered by the Company in a
Syndicated Community Offering, the Company will incur additional underwriting
commissions, in accordance with agreements to be entered into at the time of
such offering. See "The Conversion--Syndicated Community Offering."
The ESOP intends to subscribe for 8% of the total number of shares of Common
Stock issued in the Conversion. The subscription of the ESOP will be afforded
a second priority behind the subscription rights of Eligible Account Holders,
except that, in the event of an increase in the amount of Common Stock to be
issued as a result of an increase of up to 15% in the maximum of the Estimated
Price Range, the subscription of the ESOP will be afforded a first priority
with respect to such increase in shares to the extent necessary to fill the
ESOP's subscription. Except for the subscription of the ESOP, no other
person's or entity's subscription will have a priority as a result of such an
increase. It is anticipated that the subscription of the ESOP will be filled
in the Subscription and Community Offerings. Shares purchased by the ESOP in
the Subscription and Community Offerings are anticipated to be funded by a
loan from the Company to be repaid over a period of up to 10 years at an
interest rate of 8%. Although contributions to the ESOP will be discretionary,
the Company or the Association intends to make annual contributions to the
ESOP in an aggregate amount at least equal to the principal and interest
requirement on the debt. The ESOP may purchase additional shares of Common
Stock in the future, in the open market or otherwise, and may do so either on
a leveraged basis with borrowed funds or with cash dividends, periodic
employer contributions or other cash flow.
No Eligible Account Holder, Supplemental Eligible Account Holder or Other
Member may, in its capacity as such, subscribe in the Subscription Offering
for more than $200,000 of the 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 and the Syndicated Community
Offering more than $200,000 of the Common Stock offered in the Conversion;
and, except for the ESOP, no person, together with associates of and persons
acting in concert with such person, may purchase in the aggregate more than
the overall maximum purchase limitation of 1.0% of the total number of shares
of Common Stock offered in the Conversion; provided, however, that the overall
maximum purchase limitation may be increased and the amount that may be
subscribed for may be increased in the sole discretion of the Association or
the Company without further approval of the Association's members. Prior to
the consummation of the Conversion, if such amount is increased, subscribers
for the maximum amount will be, and certain other large subscribers in the
sole discretion of the Association may be, given the opportunity to increase
their subscriptions up to the then applicable limit. The minimum purchase is
25 shares. The Company and the Association reserve the right, in their
absolute discretion, to accept or reject, in whole or in part, any or all
subscriptions in the Community Offering and the Syndicated Community Offering,
either at the time of receipt of an order or as soon as practicable following
the termination of such Offerings. If an order is rejected, the funds
submitted with such order will be returned promptly with interest. If the
Company
2
<PAGE>
(continued from previous page)
rejects a subscription in part, the subscriber will not have the right to
cancel the remainder of his or her subscription. See "The Conversion--
Subscription Offering and Subscription Rights," "--Community Offering" and "--
Limitations on Common Stock Purchases." The Association has engaged Hovde to
consult with and advise the Company and the Association in the Offerings, and
Hovde has agreed to use its best efforts to assist the Company with the
solicitation of subscriptions and purchase orders for shares of Common Stock
in the Offerings. Hovde is not obligated to take or purchase any shares of
Common Stock in the Offerings. The Company and the Association have agreed to
indemnify Hovde against certain liabilities arising under the Securities Act
of 1933, as amended. See "The Conversion--Marketing and Underwriting
Arrangements."
THE SUBSCRIPTION OFFERING WILL TERMINATE AT 12:00 NOON, CENTRAL TIME, ON
SEPTEMBER 17, 1996 (THE "EXPIRATION DATE") UNLESS EXTENDED BY THE ASSOCIATION
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 Association and will earn interest at the Association's rate of
interest on passbook accounts from the date of receipt until completion or
termination of the Conversion. Payments authorized by withdrawal from deposit
accounts at the Association will continue to earn interest at the contractual
rate until the Conversion is completed or terminated; these funds otherwise
will be unavailable to the depositor until such time. Upon completion of the
Conversion, funds withdrawn from depositors' accounts will no longer be
insured by the Federal Deposit Insurance Corporation (the "FDIC"). 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 Offering, 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, 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 subscribers must notify the
Association of their intention to confirm, modify or rescind their
subscriptions. Such extensions may not go beyond September 19, 1998. A
resolicitation of subscribers will also be made 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. If an
affirmative response to any resolicitation is not received by the Association
and the Company from a subscriber, such subscriber's order will be rescinded
and all funds will be returned promptly with interest. See "The Conversion--
Subscription Offering and Subscription Rights" and "--Procedure for Purchasing
Shares in Subscription and Community Offerings."
The Company has received conditional approval from the National Association
of Securities Dealers, Inc. (the "NASD") to have its Common Stock quoted on
the National Market of The Nasdaq Stock Market (the "Nasdaq National Market")
under the symbol "HBEI" 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 and assist at least two market
makers to make a market in its Common Stock. Hovde will assist the Company in
such efforts but will not be a market maker in the Common Stock. 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 Recent Performance of
Conversion Offerings."
At a meeting of stockholders to be held no earlier than six months following
the completion of the Conversion (which meeting is anticipated to be held
during March 1997), the Company may seek stockholder approval of the Stock
Option and Incentive Plan for Employees and the Stock Option Plan for Outside
Directors (the "Stock Option Plans") and certain other stock-based
compensation plans (the "Stock Programs") for implementation prior to the
first anniversary of the Conversion. Assuming implementation, an amount of
shares of Common Stock equal to 10% of the Common Stock issued in the
Conversion is expected to be reserved for issuance under the Stock Option
Plans, and the Association expects to contribute funds to the Stock Programs
to enable their related trusts to acquire, in the open market or otherwise, an
aggregate of up to 4% (3% unless OTS approval is obtained) of the shares of
Common Stock issued in the Conversion. See "Management of the Association--
Benefits."
3
<PAGE>
[LOGO OF HOME FEDERAL SAVINGS AND LOAN ASSOCIATION OF ELGIN]
[MAP SHOWING BRANCH OFFICES IN ELGIN,
CRYSTAL LAKE, ROSELLE, BARTLETT AND
SOUTH ELGIN, ILLINOIS, INCLUDING
SIGNIFICANT INTERSTATES AND COUNTY LINES]
<PAGE>
SUMMARY
This summary is qualified in its entirety by the more detailed information
and Financial Statements of the Association and Notes thereto included
elsewhere in this Prospectus.
HOME BANCORP OF ELGIN, INC.
Home Bancorp of Elgin, Inc. (the "Company") is a Delaware corporation
recently organized by the Association for the purpose of acquiring all of the
capital stock of the Association to be issued in the Conversion. Immediately
following the Conversion, the only significant assets of the Company will be
the capital stock of the Association, the loan that the Company intends to make
to the ESOP and the net conversion proceeds retained by the Company. The
Company will purchase all of the capital stock of the Association to be issued
upon the Conversion in exchange for 50% of the net proceeds from the Offerings
with the remaining net proceeds to be retained by the Company. Funds retained
by the Company will be used for general business activities, including for the
loan that the Company intends to make to the ESOP. On an interim basis, the net
proceeds from the Offerings are expected to be invested in federal funds,
short-term, investment grade marketable securities and mortgage-backed
securities. See "Use of Proceeds." The business of the Company will initially
consist of the business of the Association. See "Business of the Association"
and "Regulation--Regulation of Savings Association Holding Companies."
HOME FEDERAL SAVINGS AND LOAN ASSOCIATION OF ELGIN
GENERAL
Home Federal Savings and Loan Association of Elgin (the "Association") was
originally founded in 1883 as an Illinois state-chartered mutual savings and
loan association. On October 7, 1969, the Association converted to a federally
chartered mutual savings and loan association. The Association has been, and
intends to continue to be, a community-oriented financial institution providing
a variety of financial services to meet the needs of the communities which it
serves. The Association maintains its headquarters in Elgin, Illinois, and
operates four other branch offices in Crystal Lake, Roselle, Bartlett and South
Elgin, Illinois. The Association gathers deposits in its market area primarily
from the communities and neighborhoods in close proximity to its branch
offices. The Association's delineated lending area is larger and includes
portions of Cook, Kane, Lake, McHenry, DuPage and DeKalb counties in Illinois.
Most of the Association's mortgage loans are secured by properties located in
its delineated lending area. See "Business of the Association--Market Area" and
"--Competition." At March 31, 1996, the Association had total assets of $306.7
million, total savings deposits of $264.5 million and equity of $37.2 million.
The Association's deposits are insured up to the maximum allowable amount by
the Savings Association Insurance Fund of the FDIC (the "SAIF").
BUSINESS STRATEGY
Beginning in 1993, the Association began to implement a business strategy
that was intended to improve the Association's profitability and capital
position. The business strategy includes, among other things, an aggressive
program to reduce general and administrative expenses, which resulted in the
sale of three branch offices (one during 1993 and two during 1994). The branch
sales also had the effect of increasing the Association's capital by a total of
$1.5 million. The Association's business strategy also provides for an
operating plan that, among other things: (i) emphasizes the origination of one-
to-four-family residential mortgage loans (secured by properties located in the
Association's delineated lending area), with a particular emphasis on the
origination of adjustable-rate mortgage loans; (ii) provides for the
origination of multifamily, commercial real estate, construction, land and
other loans (consisting primarily of passbook savings and consumer loans) in
the Association's delineated lending area; (iii) requires the Association to
maintain high asset quality by originating all loans in strict compliance with
its underwriting standards; and (iv) focuses on attracting transactional
deposit accounts (rather than certificates of deposit). The Association seeks
to attract and retain customers by providing a high level of personal service,
a variety of loan and deposit products and extended office hours, as well as 14
automated teller machines ("ATMs") at convenient locations throughout the
Association's market area.
5
<PAGE>
The Association's business strategy has focused on improving the
Association's profitability and capital position and increasing transactional
deposit accounts and loans made at market rates. Certain steps taken by
management to implement such strategy, including branch sales, have succeeded
in increasing the Association's capital level and reducing its operating
expenses, but have also had the effect of decreasing total assets and total
savings deposits. Such reductions in assets and savings deposits, when combined
with the Association's sensitivity to interest rates, also resulted in a
reduction in net income. See "--Financial Highlights." In addition, management
has determined that paying a rate higher than market rates to attract deposits
and originating loans at rates below market rates would not be prudent
strategies as they would not improve profitability and the associated asset
growth would have a much greater negative effect by diluting the Association's
capital level.
In particular, implementation of management's strategy to improve the
Association's profitability and capital position has had the following results:
Total assets decreased from $347.2 million at December 31, 1992 to $306.7
million at March 31, 1996. This reduction was primarily the result of branch
sales of $17.1 million and $19.4 million in 1993 and 1994, respectively, which
branch sales also resulted in increasing the Association's capital by $1.5
million and reducing general and administrative expenses. The Association's
gross loans declined from $305.6 million at December 31, 1993 to $274.2 at
December 31, 1994. The funds generated from the repayments of loans were
primarily used to fund branch sales. Gross loans declined from $274.2 million
at December 31, 1994 to $267.1 million at March 31, 1996. This decline was due
to competitive market conditions and the Association's decision not to offer
loan products at rates below market rates. The Association's savings deposits
declined from their five-year high of $319.0 million at December 31, 1992 to
$267.9 million at December 31, 1994, primarily due to the sale of branches in
1993 and 1994 with savings deposits totaling $39.9 million. The remainder of
the decline was due to competitive market conditions and the Association's
decision not to offer above-market rates on its savings deposits. Competitive
market conditions also account for the decrease in deposits from $267.9 million
at December 31, 1994 to $264.5 million at March 31, 1996. See "Risk Factors--
Potential Impact of Changes in Interest Rates." The Company intends to utilize
proceeds from the Conversion to implement its business strategy of increasing
the origination of high quality mortgage loans, coupled with increasing
transactional deposit accounts, which management believes could, although there
can be no assurance that it would, reverse the recent trend of decreasing total
asset size and reduced levels of net income.
FINANCIAL HIGHLIGHTS
Capital Position. At March 31, 1996, the Association had equity of $37.2
million. At that same date, the Association's tangible, core and total risk-
based capital ratios were 12.04%, 12.04% and 23.65%, respectively, which
exceeded all applicable regulatory capital requirements. See "Regulatory
Capital Compliance," "Capitalization" and "Pro Forma Data."
Residential Mortgage Lending. The Association's assets, which totaled $306.7
million at March 31, 1996, are primarily comprised of conventional first
mortgage loans. The Association's gross loans amounted to $267.1 million, or
87.1% of total assets. At March 31, 1996, the Association's total one- to four-
family residential mortgage loans amounted to $262.1 million (or 98.1% of gross
loans), approximately $201.0 million (or 75.2% of gross loans) of which
provided for fixed rates of interest. The remainder consisted of multifamily
mortgage loans, commercial real estate mortgage loans, construction and land
loans and other loans. See "Business of the Association--Lending Activities."
The Association's holdings of investment securities, representing 2.0% of total
assets at March 31, 1996, were comprised of mortgage-backed securities totaling
$173,000 and obligations of the U.S. Government and government agencies
totaling $6.0 million. See "Business of the Association-- Investment
Activities."
Net Income. The Association's net income was $2.4 million, $4.4 million, $4.3
million, $3.8 million and $2.4 million for the years ended December 31, 1995,
1994, 1993, 1992 and 1991, respectively, and $512,000 and $695,000 for the
three months ended March 31, 1996 and 1995, respectively. For the years ended
December 31, 1994 and 1993, net income included a gain on sale of branches of
$1.7 million and $822,000, respectively.
6
<PAGE>
The Association's return on average assets (net income expressed as a
percentage of average assets) for the years ended December 31, 1995, 1994,
1993, 1992 and 1991 and the three months ended March 31, 1996 and 1995 was
0.78%, 1.33%, 1.22%, 1.13%, 0.73%, 0.68% (annualized) and 0.91% (annualized),
respectively. Net income in 1994 and 1993 would have been $3.4 million and $3.8
million, respectively, had the gains on sale of branches not been recognized,
and return on average assets would have been 1.03% and 1.08%, respectively. The
gain on sale of branches in 1994 represented 22.5% of net income. The gain on
sale of branches in 1993 and the impact of the change in accounting for income
taxes represented 3.5% of net income. See "Selected Financial and Other Data of
the Association." See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Comparison of Operating Results for the
Three Months Ended March 31, 1996 and 1995," "--Comparison of Operating Results
for the Years Ended December 31, 1995 and 1994" and "--Comparison of Operating
Results for the Years Ended December 31, 1994 and 1993" for a discussion of the
changes in net income and net interest income for these periods.
Asset Quality. The Association has sought to maintain high asset quality by
utilizing strict loan underwriting standards and collection efforts and by
generally limiting its origination of mortgage loans to its delineated lending
area. The Association's ratio of non-performing loans to total loans at year
end ranged from 0.34% to 0.81% during the five-year period ended December 31,
1995 and was 0.41% at March 31, 1996. Non-performing assets to total assets
ranged from 0.46% to 0.86% during the five-year period ended December 31, 1995,
and was at 0.47% at March 31, 1996. The Association's allowance for loan losses
to non-performing loans ranged from 18.49% to 90.17% over the five years ended
December 31, 1995 and was 79.48% at March 31, 1996. See "Business of the
Association--Delinquencies and Non-Performing Assets."
Net Interest Margin. The Association's net interest margin (net interest
income divided by average interest-earning assets) ranged from 3.82% to 4.77%
for the five fiscal years ended December 31, 1995. The Association's net
interest margin for the year ended December 31, 1995 decreased to 4.19% from
4.53% for the year ended December 31, 1994, primarily because the yield on
interest-earning assets increased at a slower rate than the cost of interest-
bearing liabilities. For the three months ended March 31, 1996, the
Association's net interest margin on an annualized basis was 3.98%. See "Risk
Factors--Potential Impact of Changes in Interest Rates" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Management Strategy" and "--Analysis of Net Interest Income."
Savings Deposits. The Association's total savings deposits at March 31, 1996
were $264.5 million, of which $135.2 million, or 51.1%, were in transactional
accounts. Management of the Association considers its transactional accounts to
consist of noninterest bearing NOW accounts, NOW/Super NOW interest-bearing
accounts, passbook and money market accounts, which accounts management
believes are more resistant to interest rate changes than certificates of
deposit. At March 31, 1996, the Association's total cost of deposits was 4.14%.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations-- Liquidity and Capital Resources" and "Business of the
Association--Sources of Funds."
MARKET AREA AND DEMOGRAPHICS
Elgin is located in the Fox River Valley approximately 38 miles northwest of
downtown Chicago and 25 miles west of O'Hare International Airport. Neighboring
communities include Sleepy Hollow, West Dundee and East Dundee to the north,
Hoffman Estates and Streamwood to the east, Bartlett to the southeast and South
Elgin to the south. Elgin and its surrounding communities are in one of the
fastest growing areas in northeastern Illinois. Elgin's population based upon
the 1990 census was 77,010, an increase of approximately 21% from the
community's population recorded in the 1980 census. The Northeastern Illinois
Planning Commission estimates that Elgin's population will grow by
approximately 30% to 100,000 by the year 2010.
One of the major contributors to this population growth has been the
expansion of the boundaries of metropolitan Chicago. Elgin is located on U.S.
Interstate 90 (the Northwest Tollway), which provides easy access to the city
of Chicago and is a major corridor of suburban growth for Chicago. As the
Chicago suburbs have
7
<PAGE>
extended to the northwest, Elgin has experienced a considerable influx of
people and a number of new employers. As a result, a new service-oriented
business sector has developed to supplement Elgin's historical manufacturing
base. See "Business of the Association--Market Area" and "--Competition."
RECENT DEVELOPMENTS
For the three months ended June 30, 1996, the Association recorded a net loss
of $11,000 compared to net income of $618,000 for the three months ended June
30, 1995. For the six months ended June 30, 1996, net income was $501,000, as
compared to $1.3 million for the six months ended June 30, 1995. The reduced
net income for the three and six month periods ended June 30, 1996 resulted
primarily from the recognition during the three months ended June 30, 1996 of
an $837,000 expense related to the curtailment of pension benefits as a result
of the Association's termination of its pension plan. See "--Benefits to
Management and Directors--Termination of Pension Plan." Total assets decreased
from $304.5 million at December 31, 1995 to $300.4 million at June 30, 1996,
which resulted primarily from a decrease in borrowed funds of $4.0 million and
a decrease in savings deposits of $1.3 million. See "Recent Developments."
On July 19, 1996, RP Financial updated its appraisal of the aggregate
estimated pro forma market value of the Common Stock and reduced the Valuation
Range by approximately 7.8% from the appraisal dated June 7, 1996, after a
review of, among other factors, the Association's financial condition and
results of operations at and for the three and six month periods ended June 30,
1996, an updated comparison of the Association's financial condition and
operating results versus its peer group and a review of stock market conditions
since the date of the original appraisal. The reduction in value was primarily
attributable to less favorable market conditions for thrift stocks, including
the market performance of recently converted thrift institutions. See "The
Conversion--Stock Pricing."
THE CONVERSION AND THE SUBSCRIPTION AND COMMUNITY OFFERINGS
On April 18, 1996, the Board of Directors of the Association adopted the Plan
of Conversion (which was amended on June 6, 1996) pursuant to which the
Association is converting from a federally chartered mutual savings and loan
association to a federally chartered stock savings and loan association, and
all of the outstanding capital stock of the Association will be acquired by the
Company in exchange for 50% of the net proceeds from the Offerings. The
Conversion and the Offerings are subject to OTS approval, which was received on
July 25, 1996, and approval of the Association's members at a special meeting
to be held on September 19, 1996. See "The Conversion--General." The
Association is converting to increase its capital and to structure itself in a
form used by commercial banks and many other business entities and a growing
number of savings institutions. The Conversion will enhance the Association's
ability to access capital markets, expand its current operations, acquire other
financial institutions or branch offices, provide affordable home financing
opportunities to the communities it serves and diversify into other financial
services to the extent allowable by applicable law and regulation. The holding
company form of organization would provide additional flexibility to diversify
the Association'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, written or oral, 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. See "The Conversion--
Purposes of Conversion." The holding company form of organization also provides
certain anti-takeover protections. See "Risk Factors-- Certain Anti-Takeover
Provisions."
Common Stock will be offered in the Subscription Offering and, to the extent
shares are available, in the Community Offering. To the extent that shares are
available after the expiration of the Community Offering, such shares may be
offered in the Syndicated Community Offering. See "The Conversion--Syndicated
Community Offering." Common Stock offered in the Subscription Offering will be
offered in the following order of priority: (1) depositors whose deposits in
qualifying accounts in the Association totaled $50 or more on March 31, 1995
("Eligible Account Holders"); (2) the ESOP; (3) depositors whose deposits in
qualifying accounts in
8
<PAGE>
the Association totaled $50 or more on June 30, 1996, other than (i) those
depositors who would otherwise qualify as Eligible Account Holders or (ii)
directors or officers of the Association or their Associates (as defined herein
under "The Conversion--Limitations on Common Stock Purchases") ("Supplemental
Eligible Account Holders"); and (4) members of the Association, consisting of
depositors and borrowers of the Association as of July 31, 1996, the voting
record date (the "Voting Record Date") for the special meeting of members to
vote on the Conversion, other than those members who otherwise qualify as
Eligible Account Holders or Supplemental Eligible Account Holders ("Other
Members"). Subscription rights will expire if not exercised by, and the
Subscription Offering will terminate at, 12:00 Noon, Central Time, on the
Expiration Date, unless extended by the Association and the Company, with
approval of the OTS, if necessary. Subject to the prior rights of holders of
subscription rights, Common Stock not subscribed for in the Subscription
Offering will be subsequently offered in the Community Offering to certain
members of the general public, with preference given to natural persons
residing in Kane, DuPage and McHenry counties, the counties in which the
Association's offices are located. The Company and the Association have the
option to reserve up to 25% of the Common Stock offered in the Community
Offering for purchase by certain institutional investors, although no such
institutional investors have been selected. The Company and the Association
reserve the absolute right to reject or accept any orders in the Community
Offering, in whole or in part, either at the time of receipt of an order or as
soon as practicable following the expiration of the Community Offering. The
Community Offering will terminate no later than 45 days after the Expiration
Date. The Association and the Company have retained Hovde as consultant and
advisor in connection with the Offerings and to assist in soliciting
subscriptions and purchase orders in the Offerings. The Association and the
Company will pay a fee to Hovde which will be based on the aggregate Purchase
Price of the Common Stock sold in the Offerings. See "The Conversion--Marketing
and Underwriting Arrangements."
The Board of Directors of the Association received information about various
types of benefit plans typically utilized by public companies in general and
implemented by converting thrift institutions in particular. Management
reviewed the anticipated costs of establishing a customary program of benefits
and the anticipated positive effects of such programs on the Company.
Management determined that such benefit plans significantly enhance the ability
of a public company to retain and attract executives of the caliber needed to
run a successful public company, to maintain their dedication and loyalty in
change in control situations and to align their interests with those of the
Company's stockholders. Ultimately, the Board of Directors concluded that the
cost of establishing and maintaining these benefit plans, coupled with the
savings to be recognized in future periods as a result of the termination of
the Association's pension plan (see "Management of the Association--Benefits--
Pension Plan"), would be justified by the foregoing positive effects on the
Company.
In connection with the Conversion, the Company has established, and the
Association has adopted, the ESOP for eligible employees of the Association and
the Company. The ESOP intends to subscribe for 8% of the shares of Common Stock
issued in the Conversion. At a meeting of stockholders to be held no earlier
than six months following the completion of the Conversion (which meeting is
anticipated to be held during March 1997), the Company may seek stockholder
approval of the Stock Option Plans and the Stock Programs for implementation
prior to the first anniversary of the Conversion, which the Company intends to
establish as a method of providing officers, employees and non-employee
directors of the Association and the Company with a proprietary interest in the
Company in a manner designed to encourage such persons to remain with the
Association and the Company. For a more detailed discussion of the Stock Option
Plans and Stock Programs and the benefits expected to be received by officers,
employees and directors, see " --Benefits to Management and Directors," "Risk
Factors--Certain Anti-Takeover Provisions--Voting Control of Officers and
Directors" and "Management of the Association--Benefits."
PROSPECTUS DELIVERY AND PROCEDURE FOR PURCHASING SHARES OF COMMON STOCK
To ensure that each purchaser receives a prospectus at least 48 hours prior
to the respective expiration dates for the Offerings in accordance with Rule
15c2-8 of the Securities Exchange Act of 1934, as amended (the
9
<PAGE>
"Exchange Act"), no prospectus will be mailed any later than five days prior to
any such date or hand delivered any later than two days prior to any such date.
Execution of the stock order form will confirm receipt of delivery in
accordance with Rule 15c2-8. Each stock order form distributed will be
accompanied by a prospectus and certification form. The Company and the
Association are not obligated to accept or process orders which are submitted
on facsimiled or copied stock order forms. Stock order forms unaccompanied by
an executed original certification form will not be accepted. Payment by check,
money order, bank draft, cash or debit authorization to an existing account at
the Association must accompany the stock order form and certification form. No
wire transfers will be accepted. The Association is prohibited from lending
funds to any person or entity for the purpose of purchasing shares of Common
Stock in the Conversion. See "The Conversion--Procedure for Purchasing Shares
in Subscription and Community Offerings."
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 (March 31,
1995), Supplemental Eligibility Record Date (June 30, 1996) and/or the Voting
Record Date (July 31, 1996) must list all accounts on the stock order form,
giving all names on each account and the account numbers. Failure to list all
such account numbers may result in the inability of the Company or the
Association to fill all or part of a subscription order. See "The Conversion--
Procedure for Purchasing Shares in Subscription and Community Offerings."
RESTRICTIONS ON TRANSFER OF SUBSCRIPTION RIGHTS AND SHARES OF COMMON STOCK
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 any purchase of Common
Stock will be solely for the purchaser's own account and that there is no
agreement or understanding regarding the sale or transfer of any shares
purchased as a result of the exercise. The Company and the Association 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 of Common Stock."
PURCHASE LIMITATIONS
The minimum purchase in the Offerings is 25 shares. The ESOP intends to
subscribe for 8% of the shares of Common Stock issued in the Conversion
pursuant to the subscription rights granted under the Plan. The subscription of
the ESOP will be afforded a second priority behind the subscription rights of
Eligible Account Holders, except that, in the event of an increase in the
amount of Common Stock to be issued as a result of an increase of up to 15% in
the maximum of the Estimated Price Range, the subscription of the ESOP will be
afforded a first priority with respect to such increase in shares. 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
$200,000 of the Common Stock offered; no person, together with associates of or
persons acting in concert with such person, may purchase in the Community
Offering and the Syndicated Community Offering in the aggregate more than
$200,000 of the Common Stock offered; and, except for the ESOP, no person,
together with associates of or persons acting in concert with such person, may
purchase more than the overall maximum purchase limitation of 1.0% of the total
number of shares of Common Stock offered in the Offerings. At any time during
the Conversion and without further approval by the Association's members, the
Company and the Association may in their sole discretion increase the overall
maximum purchase limitation, and increase the amount that may be subscribed for
in the Offerings, to up to 5% of the shares offered or, if orders for Common
Stock that exceed 5% of the total offering of shares do not, in the aggregate,
exceed 10% of the total shares offered, to up to 9.99% of the total offering of
shares. It is currently anticipated that the overall maximum purchase
limitation may be increased if, after a Community Offering, the Company has not
received
10
<PAGE>
subscriptions for a minimum of 4,505,000 shares of Common Stock. Prior to
consummation of the Conversion, if such amount is increased, subscribers for
the maximum amount will be, and certain other large subscribers in the sole
discretion of the Association may be, given the opportunity to increase their
subscriptions up to the then applicable limit. See "The Conversion--Limitations
on Common Stock Purchases" and "The Conversion--Community Offering." In the
event of an increase in the total number of shares up to 15%, the additional
shares will be distributed and allocated to fill unfilled orders in the
Subscription and Community Offerings, with priority given to the subscription
of the ESOP, without any resolicitation of subscribers, as described in "The
Conversion--Subscription Offering and Subscription Rights" 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 following
the Conversion. RP Financial, an independent appraiser, has advised the
Association that in its opinion, dated June 7, 1996 and updated July 19, 1996,
the aggregate estimated pro forma market value of the Common Stock ranged from
$45,050,000 to $60,950,000, with a midpoint of $53,000,000. See "--Home Federal
Savings and Loan Association of Elgin--Recent Developments." RP Financial's
appraisal is included as an exhibit to the Company's Registration Statement, of
which this Prospectus is a part. See "Additional Information." The Board of
Directors of the Association has established the Estimated Price Range of $45.1
million to $61.0 million, assuming the issuance of between 4,505,000 and
6,095,000 shares of Common Stock at the Purchase Price of $10.00 per share. 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 AFTER THE COMPLETION OF THE
CONVERSION AT OR ABOVE THE PURCHASE PRICE.
All shares of Common Stock issued in the Conversion will be sold at the
Purchase Price, as determined by the Association and approved by the Company.
The actual number of shares to be issued in the Conversion will be determined
by the Company and the Association based upon the final updated valuation of
the estimated pro forma market value of the Common Stock, giving effect to the
Conversion, at the completion of the Offerings. The number of shares to be
issued is expected to range from a minimum of 4,505,000 shares to a maximum of
6,095,000 shares. Subject to approval of the OTS, the Estimated Price Range may
be increased or decreased to reflect market and economic conditions prior to
the completion of the Conversion, and under such circumstances the Company may
increase or decrease the number of shares of Common Stock to be issued in 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 to 7,009,250 shares due to regulatory considerations, changes in
the market and 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 "Pro Forma Data," "Risk Factors--
Possible Increase in Estimated Price Range and Number of Shares Issued" and
"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
$43.5 million and $59.2 million (or $68.2 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 use the net proceeds
from the sale of the Common Stock as follows:
1. The Company will purchase all of the capital stock of the Association
to be issued upon Conversion in exchange for 50% of the net proceeds.
2. The remaining net proceeds will be retained by the Company. Net
proceeds to be retained by the Company after the purchase of the capital
stock of the Association are estimated to be between $21.8
11
<PAGE>
million and $29.6 million (or $34.1 million if the Estimated Price Range is
increased by 15%). The net proceeds retained by the Company will initially
be invested primarily in federal funds, short-term investment grade
marketable securities and mortgage-backed securities.
3. The Company intends to use a portion of the retained net proceeds to
make a loan directly to the ESOP to enable the ESOP to purchase 8% of the
shares to be issued in the Conversion. The amount of the loan to the ESOP
is estimated to be between $3.6 million and $4.9 million (or $5.6 million
if the Estimated Price Range is increased by 15%) to be repaid over a
period of up to 10 years at an interest rate of 8%. See "Management of the
Association--Benefits--Employee Stock Ownership Plan and Trust."
The Company is subject to the terms of a certification made to the OTS in
connection with the application to the OTS for approval of the Conversion,
which certification prohibits the Company from taking any actions to further
any payments to its stockholders through a return of excess capital for a
period of one year following the Conversion without the prior written consent
of the OTS. The certification expressly does not apply to taxable dividend
payments made by the Company or to dividend payments made by the Association to
the Company. See "Dividend Policy."
The portion of the net proceeds not retained by the Company, estimated to be
between $21.8 million at the minimum of the Estimated Price Range and $29.6
million at the maximum of the Estimated Price Range, will be added to the
Association's general funds to be used for general corporate purposes,
including investment in one- to four-family residential mortgage loans and
other loans which will provide affordable home financing opportunities to the
community; investment in federal funds, short-term, investment grade marketable
securities and mortgage-backed securities; and to fund the Stock Programs. See
"Use of Proceeds."
DIVIDENDS
Upon completion of the Conversion, the Board of Directors of the Company will
have the authority to declare dividends on the Common Stock. The Board of
Directors does not presently intend to declare dividends on the Common Stock.
In the future, declarations of dividends, if any, by the Board of Directors
will depend upon a number of factors, including the amount of the net proceeds
from the Offerings retained by the Company, investment opportunities available
to the Company or the Association, capital requirements, regulatory
limitations, the Company's and the Association's financial condition and
results of operations, tax considerations, general economic conditions,
industry standards and other factors. As the principal asset of the Company,
the Association will provide the principal source of funds for payment of
dividends by the Company. Assuming the shares of Common Stock are sold at the
maximum of the Estimated Price Range, at March 31, 1996, after giving pro forma
effect to (i) the Conversion, (ii) the deduction from capital of the amount
expected to be borrowed by the ESOP and the cost of shares of Common Stock to
be acquired by the Stock Programs and (iii) the retention by the Association of
50% of the net proceeds of the Conversion, the Association would be permitted
to make capital distributions of up to approximately $8.8 million to the
Company without prior OTS approval. See "Dividend Policy."
BENEFITS TO MANAGEMENT AND DIRECTORS
Stock Option Plans. Following the Conversion, the Company intends to adopt
the Stock Option Plans. If implemented within one year following the
Conversion, the adoption of the Stock Option Plans will be subject to
stockholder approval obtained at a meeting of stockholders to be held no
earlier than six months after the completion of the Conversion. Assuming
implementation, an amount of shares of Common Stock equal to 10% of the Common
Stock issued in the Conversion (450,500 shares and 609,500 shares at the
minimum and maximum of the Estimated Price Range, having an aggregate fair
market value of $4.5 million and $6.1 million, respectively, based on a
Purchase Price of $10.00 per share) is expected to be reserved for issuance
under the Stock Option Plans. No determinations have been made by the Company
as to the specific terms of the Stock
12
<PAGE>
Option Plans or the amount of awards to be made thereunder. Current OTS
regulations provide that no individual employee may receive more than 25% of
the options granted, and non-employee directors may not receive more than 5%
individually or 30% in the aggregate of the options granted, under option plans
implemented within one year following the Conversion. See "Management of the
Association--Benefits--Stock Option Plans."
Stock Programs. Following the Conversion, the Company also intends to adopt
certain Stock Programs for the benefit of officers, employees and non-employee
directors of the Company and the Association. If implemented within one year
following the Conversion, the adoption of the Stock Programs will be subject to
stockholder approval obtained at a meeting of stockholders to be held no
earlier than six months after the completion of the Conversion. Assuming
implementation, the Association expects to contribute funds to the Stock
Programs to enable their related trusts to acquire, in the aggregate, up to 4%
(3% unless OTS approval is obtained) of the shares of Common Stock issued in
the Conversion, or 180,200 shares and 243,800 shares at the minimum and maximum
of the Estimated Price Range, respectively, having an aggregate fair market
value of $1.8 million and $2.4 million, respectively, based on a Purchase Price
of $10.00 per share. These shares will be acquired either through open market
purchases, subject to OTS approval, if necessary, or from authorized but
unissued Common Stock. See "Risk Factors--Possible Dilutive Effect of Stock
Options and Stock Programs." No determinations have been made by the Company as
to the specific terms of the Stock Programs or the amount of awards to be made
thereunder. Current OTS regulations provide that no individual employee may
receive more than 25% of the shares of any plan, and that non-employee
directors may not receive more than 5% of the shares individually or 30% in the
aggregate, in the case of plans implemented within one year following the
Conversion. Under the anticipated terms of the Stock Programs, recipients would
vote any shares allocated to them and an independent trustee would vote
unallocated shares in the same proportion as it receives instructions from
recipients with respect to allocated shares which have not been vested and
distributed. See "Management of the Association--Benefits--Stock Programs."
ESOP. The Association and the Company have established the ESOP for the
benefit of eligible employees, including officers. The ESOP intends to
subscribe for up to 8% of the Common Stock issued in the Conversion (7% unless
OTS approval is obtained) and to finance its subscription with funds
anticipated to be borrowed from the Company for a period of up to 10 years at
an interest rate of 8% per annum. The Association and the Company intend to
make cash contributions to the ESOP as required for debt service. The Common
Stock acquired by the ESOP will initially be held in a suspense account and
will be allocated to eligible employees as the loan is repaid. See "Management
of the Association--Benefits--Employee Stock Ownership Plan and Trust."
Termination of Pension Plan. In connection with the Conversion and the
implementation of the ESOP, the Association intends to terminate its tax-
qualified defined benefit pension plan on August 31, 1996. Plan benefits will
cease to accrue on June 30, 1996. Such termination will result in the vesting
of all benefits and will afford each participant the option of receiving an
immediate lump sum payment in settlement of all benefit entitlements. The
estimated cost of terminating the pension plan is $1.0 million. Termination of
the pension plan is expected to be completed by March 31, 1997. See "Recent
Developments" and "Management of the Association-- Benefits."
Employment Arrangements With Senior Management and Key Personnel. The
Association and the Company intend to enter into employment arrangements with
certain senior management and key employees that will provide for benefit and
cash payments to be made in the event of their termination of employment
following a change of control of the Association or the Company. The provisions
of these arrangements, described below, may have the effect of increasing the
cost of acquiring the Company, thereby discouraging future attempts to take
over the Company or the Association.
Based on current compensation and benefit costs, cash payments to be made in
the event of a change of control of the Association or the Company pursuant to
the terms of the Employment Agreements would be
13
<PAGE>
approximately $1,940,000 of which approximately $955,000 would be payable to
Mr. Perucco, $555,000 would be payable to Mr. Dolan and $430,000 would be
payable to Mr. Moran. However, the actual amount to be paid under the
Employment Agreements in the event of a change of control of the Association or
the Company cannot be estimated at this time because the actual amount is based
on the compensation and benefit costs applicable to these individuals and other
factors existing at the time of the change of control which cannot be
determined at this time. See "Management of the Association--Employment
Agreements."
The Association and the Company also intend to enter into employee retention
agreements ("Retention Agreements"), effective on the Conversion, with certain
other officers ("Contract Employee(s)"). Based on current compensation and
benefit costs applicable to the Contract Employees expected to be covered by
the Retention Agreements, cash payments to be made in the event of a change of
control of the Association or the Company would be approximately $530,000.
However, the actual amount to be paid under the Retention Agreements in the
event of a change of control of the Association or the Company cannot be
estimated at this time because it will be based on the compensation and benefit
costs applicable to the Contract Employees and other factors existing at the
time of the change of control which cannot be determined at this time. See
"Management of the Association--Employee Retention Agreements."
Other Change in Control Provisions. The Association's Employee Severance Pay
Plan provides for benefits and/or cash payments in the event of a change of
control of the Company or the Association. Certain anticipated provisions of
the Stock Option Plans and Stock Programs (which the Company intends to adopt
and which will only become effective prior to the first anniversary of the
Conversion upon stockholder approval obtained at a meeting of stockholders to
be held no earlier than six months after completion of the Conversion) provide
for cash payments and/or accelerated vesting in the event of a change of
control of the Company or the Association. The ESOP provides for accelerated
vesting in the event of a change of control. These provisions may have the
effect of increasing the cost of acquiring the Company, which could result in
stockholders receiving less for their shares of Common Stock than might
otherwise be available in the event of an acquisition of the Company. Based on
current salaries, cash payments to be paid in the event of a change of control
pursuant to the terms of the Employee Severance Pay Plan would be approximately
$570,000. However, the actual amount to be paid in the event of a change of
control of the Association or the Company cannot be estimated at this time,
because it will be based on the compensation and benefits, as applicable, for
each covered individual and other factors existing at the time of the change of
control which cannot be determined at this time. See "Restrictions on
Acquisition of the Company and the Association--Restrictions in the Company's
Certificate of Incorporation and Bylaws," "Management of the Association--
Employee Severance Compensation Plan," "--Benefits--Employee Stock Ownership
Plan and Trust," "--Benefits--Stock Option Plans," and "--Benefits--Stock
Programs."
Subscriptions by Executive Officers and Directors. The Association's
executive officers and directors propose to purchase in the Offerings an
aggregate of 136,500 (or 3.03%, based on the minimum of the Estimated Price
Range, or 2.24%, based on the maximum of the Estimated Price Range) of the
shares to be issued in the Offerings. See "Management of the Association--
Subscriptions by Executive Officers and Directors."
RISK FACTORS
See "Risk Factors" for a discussion of certain factors that should be
considered by prospective investors, including: Potential Impact of Changes in
Interest Rates; Impact of the Economy on Operations; Competition;
Recapitalization of the SAIF; SAIF Premiums and Possible Special Assessment;
Pending Tax Legislation Regarding Tax Bad Debt Reserves; Impact of
Technological Advances; Residential and Non-Residential Lending Risks; Certain
Anti-Takeover Provisions; Absence of Market for Common Stock and Recent
Performance of Conversion Offerings; Possible Increase in Estimated Price Range
and Number of Shares Issued; Possible Dilutive Effect of Stock Options and
Stock Programs; Possible Adverse Income Tax Consequences of the Distribution of
Subscription Rights; Financial Institution Regulation and Possible Legislation;
and Risk of Delayed Offering.
14
<PAGE>
SELECTED FINANCIAL AND OTHER DATA OF THE ASSOCIATION
The selected financial and other data of the Association set forth below is
derived in part from, and should be read in conjunction with, the Financial
Statements of the Association and Notes thereto presented elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
AT AT DECEMBER 31,
MARCH 31, --------------------------------------------
1996(1) 1995 1994 1993 1992 1991
--------- -------- -------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
SELECTED FINANCIAL
CONDITION DATA:
Total assets........... $306,688 $304,520 $306,956 $334,390 $347,173 $320,650
Loans receivable,
net(2)................ 264,082 267,153 271,040 301,676 289,186 267,481
Investment securities
held to maturity...... 5,955 5,948 5,918 -- 6,019 16,092
Savings deposits....... 264,485 259,972 267,938 293,932 318,971 296,212
Borrowed funds......... -- 4,000 -- 7,000 -- --
Retained earnings,
substantially
restricted............ 37,195 36,683 34,319 29,961 25,701 21,933
</TABLE>
<TABLE>
<CAPTION>
FOR THE THREE
MONTHS ENDED
MARCH 31, FOR THE YEAR ENDED DECEMBER 31,
--------------- ---------------------------------------
1996(1) 1995(1) 1995 1994 1993 1992 1991
------- ------- ------- ------- ------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
SELECTED OPERATING DATA:
Interest income........ $5,629 $5,748 $22,925 $24,669 $27,652 $28,639 $30,975
Interest expense on
savings deposits and
borrowed funds........ 2,773 2,548 10,850 10,484 11,791 14,068 19,071
------ ------ ------- ------- ------- ------- -------
Net interest income
before provision for
loan losses......... 2,856 3,200 12,075 14,185 15,861 14,571 11,904
Provision for loan
losses................ 30 45 180 240 240 256 232
------ ------ ------- ------- ------- ------- -------
Net interest income
after provision for
loan losses......... 2,826 3,155 11,895 13,945 15,621 14,315 11,672
Noninterest income,
excluding gain on sale
of branches........... 319 269 1,150 1,471 1,566 1,244 1,178
Gain on sale of
branches.............. -- -- -- 1,683 822 -- --
------ ------ ------- ------- ------- ------- -------
Noninterest expense.... 2,303 2,288 9,069 9,624 10,402 9,526 9,018
------ ------ ------- ------- ------- ------- -------
Income before income
tax expense and
cumulative effect of
change in accounting
principle............. 842 1,136 3,976 7,475 7,607 6,033 3,832
Income tax expense..... 330 441 1,612 3,117 2,998 2,265 1,441
------ ------ ------- ------- ------- ------- -------
Income before
cumulative effect of
change in accounting
principle............. 512 695 2,364 4,358 4,609 3,768 2,391
Cumulative effect of
change in accounting
for income taxes (3).. -- -- -- -- 348 -- --
------ ------ ------- ------- ------- ------- -------
Net income............ $ 512 $ 695 $ 2,364 $ 4,358 $ 4,261 $ 3,768 $ 2,391
====== ====== ======= ======= ======= ======= =======
</TABLE>
(Notes on following page)
15
<PAGE>
<TABLE>
<CAPTION>
AT OR FOR THE
THREE
MONTHS ENDED AT OR FOR THE YEAR ENDED DECEMBER
MARCH 31, 31,
---------------- ----------------------------------------
1996(1) 1995(1) 1995 1994(4) 1993(4) 1992 1991
------- ------- ------ ------- ------- ------ ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
SELECTED FINANCIAL
RATIOS(5):
PERFORMANCE RATIOS:
Return on average
assets(4)............. 0.68% 0.91% 0.78% 1.03% 1.08% 1.13% 0.73%
Return on average
equity(4)............. 5.53 7.87 6.53 10.42 13.48 15.89 11.51
Average interest rate
spread(6)............. 3.53 4.03 3.78 4.31 4.60 4.45 3.71
Net interest margin(7). 3.98 4.41 4.19 4.53 4.77 4.60 3.82
Average interest-
earning assets to
average interest-
bearing liabilities... 111.87 110.85 111.09 106.84 104.71 103.48 101.89
Noninterest expense to
average assets........ 3.04 3.01 2.99 2.93 2.98 2.86 2.73
CAPITAL RATIOS(5)(8):
Average equity to
average assets........ 12.23 11.61 11.93 9.84 7.99 7.12 6.30
Equity to total assets
at end of period...... 12.13 11.63 12.05 11.18 8.96 7.40 6.84
Tangible capital....... 12.04 11.56 11.96 11.18 8.95 7.40 6.82
Core capital........... 12.04 11.56 11.96 11.18 8.95 7.40 6.82
Total risk-based
capital............... 23.65 22.60 23.32 21.90 16.39 14.10 11.62
ASSET QUALITY RATIOS
AND OTHER DATA(5):
Total non-performing
loans(9).............. $1,077 $ 967 $ 916 $ 986 $1,642 $2,356 $1,920
Real estate owned, net. 377 455 496 514 433 629 198
Non-performing loans to
total loans........... 0.41% 0.36% 0.34% 0.36% 0.54% 0.81% 0.72%
Non-performing assets
to total assets....... 0.47 0.47 0.46 0.49 0.62 0.86 0.66
Allowance for loan
losses to:
Non-performing loans.. 79.48 71.77 90.17 65.82 24.91 23.26 18.49
Total loans(10)....... 0.32% 0.26% 0.31% 0.24% 0.14% 0.19% 0.13%
Full service offices... 5 5 5 5 7 8 8
</TABLE>
- --------
(1) The data presented at and for the three months ended March 31, 1996 and
1995 were derived from unaudited financial statements and reflect, in the
opinion of management, all adjustments (consisting only of normal
recurring adjustments) which are necessary to present fairly the results
for such interim periods. Interim results at and for the three months
ended March 31, 1996 are not necessarily indicative of the results that
may be expected for the year ending December 31, 1996.
(2) Loans receivable, net, represents gross loans less net deferred loan
fees, loans in process and allowance for loan losses.
(3) Pursuant to Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes" ("SFAS 109"), on January 1, 1993, the
Association changed prospectively from the deferred method to the
liability method of accounting for income taxes. The effect of the
adoption of this standard is reflected in the financial statements as the
cumulative effect of change in accounting principle.
(4) Excludes gain on sale of branches. Return on average assets including the
gain on sale of branches was 1.33% and 1.22% in 1994 and 1993,
respectively. Return on average equity including the gain on sale of
branches was 13.45% and 15.26% in 1994 and 1993, respectively.
(5) 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. Asset Quality Ratios and Capital Ratios are end-of-
period ratios.
(6) The 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) For definitions and further information relating to the Association's
regulatory capital requirements, see "Regulation--Regulation of Federal
Savings Associations--Capital Requirements." See "Regulatory Capital
Compliance" for the Association's pro forma capital levels as a result of
the Offerings.
(9) Non-performing loans consists of non-accrual loans; the Association did
not have any loans that were 90 days or more past due and still accruing
at any of the dates presented.
(10) Total loans represents gross loans less deferred loan fees and loans in
process.
16
<PAGE>
RECENT DEVELOPMENTS
SELECTED FINANCIAL AND OTHER DATA OF THE ASSOCIATION
The following tables set forth financial data of the Association at and for
the three and six month periods ended June 30, 1996 and 1995, which are
unaudited. The selected financial data of the Association set forth below is
derived in part from, and should be read in conjunction with, the financial
statements of the Association and notes thereto included elsewhere in this
Prospectus. In the opinion of management of the Association, all adjustments
for the three and six month periods ended June 30, 1996 and 1995,
respectively, consisting only of normal recurring accruals necessary for a
fair presentation, have been included. Operating results for the interim
periods are not necessarily indicative of the results of operations to be
expected for the remainder of the fiscal year.
<TABLE>
<CAPTION>
AT AT
JUNE 30, DECEMBER 31,
1996 1995
-------- ------------
(IN THOUSANDS)
<S> <C> <C>
SELECTED FINANCIAL CONDITION DATA:
Total assets............................................ $300,397 $304,520
Loans receivable, net(1)................................ 263,892 267,153
Investment securities held to maturity.................. 5,963 5,948
Savings deposits........................................ 258,622 259,972
Borrowed funds.......................................... -- 4,000
Retained earnings, substantially restricted............. 37,184 36,683
</TABLE>
<TABLE>
<CAPTION>
FOR THE FOR THE
THREE MONTHS SIX MONTHS
ENDED ENDED
JUNE 30, JUNE 30,
-------------- ---------------
1996 1995 1996 1995
------ ------ ------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
SELECTED OPERATING DATA:
Interest income............................... $5,578 $5,793 $11,207 $11,540
Interest expense on savings deposits and
borrowed funds............................... 2,713 2,701 5,486 5,249
------ ------ ------- -------
Net interest income before provision for
loan losses................................ 2,865 3,092 5,721 6,291
Provision for loan losses..................... 30 45 60 90
------ ------ ------- -------
Net interest income after provision for loan
losses..................................... 2,835 3,047 5,661 6,201
------ ------ ------- -------
Noninterest income............................ 308 273 627 542
Noninterest expense, excluding
curtailment of pension plan.................. 2,323 2,245 4,626 4,532
Curtailment of pension plan................... 837 -- 837 --
Income (loss) before income tax expense....... (17) 1,075 825 2,211
Income tax expense (benefit).................. (6) 457 324 898
------ ------ ------- -------
Net income (loss)........................... $ (11) $ 618 $ 501 $ 1,313
====== ====== ======= =======
</TABLE>
(Notes on following page)
17
<PAGE>
<TABLE>
<CAPTION>
AT OR FOR AT OR FOR
THE THREE THE SIX
MONTHS MONTHS
ENDED JUNE ENDED JUNE
30, 30,
--------------- --------------
1996 1995 1996 1995
------ ------ ------ ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
SELECTED FINANCIAL RATIOS(2):
PERFORMANCE RATIOS:
Return on average assets(3)............... (0.01)% 0.81% 0.33% 0.86%
Return on average equity(3)............... (0.11) 6.87 2.69 7.37
Average interest rate spread(4)........... 3.55 3.84 3.54 3.94
Net interest margin(5).................... 4.01 4.25 3.99 4.33
Average interest-earning assets to average
interest-bearing liabilities............. 111.93 110.88 111.90 110.86
Noninterest expense to average assets(3).. 4.18 2.93 3.61 2.97
CAPITAL RATIOS(2)(6):
Average equity to average assets.......... 12.34 11.74 12.29 11.67
Equity to total assets at end of period... 12.38 11.84 12.38 11.84
Tangible capital.......................... 12.38 11.74 12.38 11.74
Core capital.............................. 12.38 11.74 12.38 11.74
Total risk-based capital.................. 23.80 23.06 23.80 23.06
ASSET QUALITY RATIOS AND OTHER DATA(2):
Total non-performing loans(7)............. $1,127 $ 864 $1,127 $ 864
Real estate owned, net.................... 331 516 331 516
Non-performing loans to total loans....... 0.43% 0.32% 0.43% 0.32%
Non-performing assets to total assets..... 0.49 0.45 0.49 0.45
Allowance for loan losses to:
Non-performing loans..................... 78.62 85.58 78.62 85.58
Total loans(8)........................... 0.33% 0.27% 0.33% 0.27%
Full service offices...................... 5 5 5 5
</TABLE>
- --------
(1) Loans receivable, net, represents gross loans less net deferred loan fees,
loans in process and allowance for loan losses.
(2) 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. Asset Quality Ratios and Capital Ratios are end-of-
period ratios.
(3) Includes loss on curtailment of pension plan of $837,000 for the three and
six month periods ended June 30, 1996. Excluding the loss on curtailment,
the return on average assets and average equity would have been 0.64% and
5.16%, respectively, for the three months ended June 30, 1996 and 0.67%
and 5.42%, respectively, for the six months ended June 30, 1996, and
noninterest expense to average assets would have been 3.07% and 3.06%,
respectively, for the three months and six months ended June 30, 1996.
(4) The interest rate spread represents the difference between the weighted-
average yield on interest-earning assets and the weighted-average cost of
interest-bearing liabilities.
(5) The net interest margin represents net interest income as a percent of
average interest-earning assets.
(6) The definitions and further information relating to the Association's
regulatory capital requirements, see "Regulation--Regulation of Federal
Savings Associations--Capital Requirements." See "Regulatory Capital
Compliance" for the Association's pro forma capital levels as a result of
the Offerings.
(7) Non-performing loans consist of non-accrual loans; the Association did not
have any loans that were 90 days or more past due and still accruing at
any of the dates presented.
(8) Total loans represent gross loans less deferred loan fees and loans in
process.
18
<PAGE>
COMPARISON OF FINANCIAL CONDITION AT JUNE 30, 1996 AND DECEMBER 31, 1995
Total assets decreased $4.1 million or 1.4% from $304.5 million at December
31, 1995 to $300.4 million at June 30, 1996. The decrease in assets is due
primarily to a decrease in borrowed funds of $4.0 million and a decrease in
savings deposits of $1.3 million. These were offset by an increase of $626,000
in accrued interest payable and other liabilities and an increase of $501,000
in retained earnings for the six months ended June 30, 1996. The decrease in
savings deposits of $1.3 million represents a 0.5% decrease for the six months
ended June 30, 1996. Borrowed funds of $4.0 million were repaid in February,
1996. The increase of $626,000 in accrued interest payable and other
liabilities was primarily the result of the accrual for pension benefits
associated with the recognition of an $837,000 expense related to the
curtailment of pension benefits as a result of the Association's termination
of its pension plan. See "Management of the Association--Benefits--Pension
Plan." The $501,000 increase in retained earnings represents the net income
earned for the six months ended June 30, 1996.
The components of the Association's asset base also changed from December
31, 1995 to June 30, 1996. Interest earning deposits decreased $1.0 million
due primarily to the funds disbursed in connection with the decrease in
savings deposits of $1.3 million and repayment of borrowed funds of $4.0
million, which was offset by the funds received from the $3.3 million decrease
of loans receivable and $378,000 decrease in Federal Home Loan Bank of Chicago
(the "FHLB of Chicago") stock. The decrease in loans receivable of $3.3
million was a result of loan repayments exceeding loan originations. The
decrease in FHLB of Chicago stock was the result of stock redemption by the
FHLB of Chicago.
COMPARISON OF OPERATING RESULTS FOR THE THREE MONTHS ENDED JUNE 30, 1996 AND
1995
General. For the three months ended June 30, 1996, there was a net loss of
$11,000 compared to net income of $618,000 for the three months ended June 30,
1995. This was due primarily to the recognition of an $837,000 expense in 1996
related to the curtailment of pension benefits as a result of the
Association's termination of its pension plan. There was also a decrease of
$227,000 in net interest income before provision for loan losses. These were
offset by a decrease in income tax expense of $463,000.
Interest Income. Interest income decreased $215,000 or 3.7% from $5.8
million for the three months ended June 30, 1995 to $5.6 million for the
comparable period in 1996. The decrease was due to decreases in both the
average yield and the average balance of interest-earning assets. The average
yield on the Association's interest-earning assets decreased 16 basis points
from 7.96% for the three months ended June 30, 1995 to 7.80% for the three
months ended June 30, 1996. The average balance of interest-earning assets
decreased $5.1 million or 1.8% from $291.0 million for the three months ended
June 30, 1995 to $286.9 million for the three months ended June 30, 1996, as a
result of the Association's repayment of $4.0 million in borrowings,
competitive market conditions and the Association's decision not to offer loan
products at below market interest rates.
Interest Expense. Interest Expense increased $12,000 or 0.4% from $2.7
million for the three months ended June 30, 1995 to $2.71 million for the
comparable period in 1996. This increase was due to an increase in the cost of
average interest-bearing liabilities resulting primarily from new certificates
of deposit earning higher rates than the maturing certificates of deposit.
These increases were offset by lower average balances in total interest-
bearing liabilities. The average rate paid on interest-bearing liabilities
increased 13 basis points from 4.12% for the three months ended June 30, 1995
to 4.25% for the three months ended June 30, 1996. The average amount of
interest-bearing liabilities decreased $7.0 million or 2.7% to $255.5 million
for the three months ended June 30, 1996 from $262.5 million for the three
months ended June 30, 1995. The decrease in interest-bearing liabilities was
due to the Association's repayment of $4.0 million in borrowings, competitive
market conditions and the Association's decision not to offer above market
interest rates on its savings deposits.
Net Interest Income before Provision for Loan Losses. Net interest income
before provision for loan losses decreased $227,000 or 7.3% from $3.1 million
for the three months ended June 30, 1995 to $2.9 million for the comparable
period in 1996. This was due to the average interest rate spread decreasing 29
basis points from
19
<PAGE>
3.84% for the three months ended June 30, 1995 to 3.55% for the comparable
period in 1996 and the decrease in the average balance of interest-earning
assets of $5.1 million or 1.8%. These were offset by the decline in the
average amount of interest-bearing liabilities of $7.0 million or 2.7%.
Provision for Loan Losses. The provision for loan losses decreased by
$15,000 or 33.3% from $45,000 for the three months ended June 30, 1995 to
$30,000 for the comparable period in 1996. Management determined that
decreasing the provision for loan losses was appropriate in light of its
review of the Association's loan portfolio, asset quality, delinquent and non-
performing loans and the national and regional economies. The decrease in the
provision for loan losses was due primarily to a smaller loan portfolio at
June 30, 1996. The ratio of the allowance for loan losses to total loans was
0.33% and 0.27% at June 30, 1996 and 1995, respectively. At June 30, 1996 and
1995, the ratio of the allowances for loan losses to non-performing loans was
78.6% and 85.6%, respectively.
Noninterest Income. Noninterest income increased $35,000 or 13.2% from
$273,000 for the three months ended June 30, 1995 to $308,000 for the three
months ended June 30, 1996. This increase was due primarily to an increase in
service fee income of $32,000 from $268,000 for the three months ended June
30, 1995 to $300,000 for the comparable period in 1996, which was due
primarily to an increase in ATM fee income. Due to a change in ATM processors,
service fee income and expense are now accounted for on a gross basis as a
part of both noninterest income and noninterest expense.
Noninterest Expense. Noninterest expense increased $916,000 or 40.8% from
$2.2 million for the three months ended June 30, 1995 to $3.2 million for the
three months ended June 30, 1996. This was due primarily to an increase in
compensation and benefits expense of $897,000 or 96.9% from $925,000 for the
three months ended June 30, 1995 to $1.8 million for the comparable period in
1996. The increase in compensation and benefit expense was primarily
attributable to $837,000 of pension curtailment expense, and the remaining
$60,000 increase was attributable primarily to normal salary increases and
benefit costs. The Association terminated its defined benefit plan in June,
1996, which resulted in the curtailment loss. In addition, ATM expense
increased $36,000 or 50.7% from $71,000 for the three months ended June 30,
1995 to $107,000 for the comparable period in 1996. Due to a change in ATM
processors, service fee income and expenses are now accounted for on a gross
basis as a part of both noninterest income and noninterest expense.
Income Tax Expense (Benefit). Income tax expense decreased $464,000 from a
$457,000 tax expense for the three months ended June 30, 1995 to a $6,000 tax
benefit for the three months ended June 30, 1996. This is due to the decrease
in income before income taxes of $1.09 million from $1.08 million for the
three months ended June 30, 1995 to a loss of $17,000 before income taxes for
the comparable period in 1996. The effective tax rate was 41.2% for the three
month period ended June 30, 1996 compared to 42.5% for the three month period
ended June 30, 1995.
COMPARISON OF OPERATING RESULTS FOR THE SIX MONTHS ENDED JUNE 30, 1996 AND
1995
General. For the six months ended June 30, 1996, net income was $501,000, a
decrease of $812,000 or 61.8% from $1.3 million for the six months ended June
30, 1995. This was due primarily to the recognition of an $837,000 expense in
1996 related to the curtailment of pension benefits as a result of the
Association's termination of its pension plan. There was also a decrease of
$570,000 in net interest income before provision for loan losses, which was
offset by a decrease in income tax expense of $574,000.
Interest Income. Interest income decreased $333,000 or 2.9% from $11.5
million for the six months ended June 30, 1995 to $11.2 million for the six
months ended June 30, 1996. The reduction was due to decreases in both the
average yield and the average balance of interest-earning assets. The average
yield on the Association's interest-earning assets decreased 12 basis points
from 7.95% for the six months ended June 30, 1995 to 7.83% for the six months
ended June 30, 1996. The average balance of interest-earning assets decreased
$4.0 million or 1.4% from $290.4 million for the six months ended June 30,
1995 to $286.4 million for the comparable period in 1996, as a result of the
Association's repayment of $4.0 million in borrowings, competitive market
conditions and the Association's decision not to offer loan products at below-
market interest rates.
20
<PAGE>
Interest Expense. Interest expense increased $237,000 or 4.5% from $5.2
million for the six months ended June 30, 1995 to $5.5 million for the six
months ended June 30, 1996. This increase was due to an increase in the cost
of average interest-bearing liabilities resulting primarily from new
certificates of deposit earning higher rates than maturing certificates of
deposit. These increases were offset by lower average balances in total
interest-bearing liabilities. The average rate paid on interest-bearing
liabilities increased 28 basis points from 4.01% for the six months ended June
30, 1995 to 4.29% for the six months ended June 30, 1996. The average amount
of interest-bearing liabilities decreased $6.0 million or 2.3% from $262.0
million for the six months ended June 30, 1995 to $256.0 million for the
comparable period in 1996. The decrease in interest-bearing liabilities was
due to the Association's repayment of $4.0 million in borrowings, competitive
market conditions and the Association's decision not to offer above-market
interest rates on its savings deposits.
Net Interest Income before Provision for Loan Losses. Net interest income
before provision for loan losses decreased $570,000 or 9.1% from $6.3 million
for the six months ended June 30, 1995 to $5.7 million for the comparable
period in 1996. This was due to the average interest rate spread decreasing 40
basis points from 3.94% for the six months ended June 30, 1995 to 3.54% for
the six months ended June 30, 1996 and the decrease in the average balance of
interest-earning assets of $4.0 million or 1.4%. These were offset by the
decline in the average amount of interest-bearing liabilities of $6.0 million
or 2.3%. The reduction in the average interest rate spread was due to the
average yield on interest-earning assets decreasing 12 basis points and the
average rate paid on interest-bearing liabilities increasing 28 basis points.
Provision for Loan Losses. The provision for loan losses decreased by
$30,000 or 33.3% from $90,000 for the six months ended June 30, 1995 to
$60,000 for the comparable period in 1996. Management determined that
decreasing the provision for loan losses was appropriate in light of its
review of the Association's loan portfolio, asset quality, delinquent and non-
performing loans and the national and regional economies. The decrease in the
provision for loan losses was due primarily to a smaller loan portfolio at
June 30, 1996. The ratio of the allowance for loan losses to total loans was
0.33% and 0.27% at June 30, 1996 and 1995, respectively. At June 30, 1996 and
1995, the ratio of the allowance for loan losses to non-performing loans was
78.6% and 85.6%, respectively.
Noninterest Income. Noninterest income increased $85,000 or 15.7% from
$542,000 for the six months ended June 30, 1995 to $627,000 for the six months
ended June 30, 1996. This increase was due primarily to an increase in service
fee income of $61,000 from $533,000 for the six months ended June 30, 1995 to
$594,000 for the comparable period in 1996, which was due primarily to an
increase in ATM fee income. Due to a change in ATM processors, service fee
income and expense are now accounted for on a gross basis as a part of both
noninterest income and noninterest expense. There was also a gain of $21,000
on the sale of real estate owned during the six months ended June 30, 1996.
There was no gain in the comparable period in 1995.
Noninterest Expense. Noninterest expense increased $931,000 or 20.5% from
$4.5 million for the six months ended June 30, 1995 to $5.5 million for the
six months ended June 30, 1996. This was due primarily to an increase in
compensation and benefit expense of $939,000 or 50.9% from $1.8 million for
the six months ended June 30, 1995 to $2.8 million for the comparable period
in 1996. The increase in compensation and benefit expense was attributable
primarily to $837,000 of pension curtailment expense, and the remaining
$102,000 increase was primarily attributable to normal salary increases and
benefits expense. The Association terminated its defined benefit pension plan
in June, 1996, which resulted in the curtailment loss. In addition, ATM
expense increased $84,000 or 61.3% from $137,000 for the six months ended June
30, 1995 to $221,000 for the comparable period in 1996. Due to a change in ATM
processors, service fee income and expenses are now accounted for on a gross
basis as a part of both noninterest income and noninterest expense. This was
offset by decreases in occupancy expense, federal deposit insurance premium
and other expense of $28,000, $23,000, and $34,000, respectively. The decrease
in occupancy expense was due primarily to a decrease in office building
improvement depreciation of $44,000 or 43.6% from $101,000 for the six months
ended June 30, 1995 to $57,000 for the six months ended June 30, 1996. This
was the result of the building improvements to the leased South Elgin Office
fully depreciating in 1995 and no depreciation expense in 1996. The decrease
in federal
21
<PAGE>
deposit insurance premium of $23,000 from $362,000 for the six months ended
June 30, 1995 to $339,000 for the comparable period in 1996 was due to lower
deposit balances. The decrease in other noninterest expense of $34,000 or 4.6%
from $735,000 for the six months ended June 30, 1995 to $701,000 for the six
months ended June 30, 1996 was due primarily to a $19,000 decrease in real
estate owned expense and a $16,000 decrease in postage and express mail
expense.
Income Tax Expense. Income tax expense decreased $574,000 or 63.9% from
$898,000 for the six months ended June 30, 1995 to $324,000 for the six months
ended June 30, 1996. This is due primarily to the decrease in income before
income taxes of $1.4 million or 62.7% from $2.2 million for the six months
ended June 30, 1995 to $825,000 for the six months ended June 30, 1996. The
effective tax rate was 39.3% for the six months ended June 30, 1996 compared
to 40.6% for the six months ended June 30, 1995.
22
<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 Association'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 securities, and its interest expense on interest-bearing
liabilities, such as savings deposits and borrowed funds. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Analysis of Net Interest Income."
A substantial portion of the Association's assets consist of fixed-rate
residential mortgage loans with contractual maturities of up to 30 years. At
March 31, 1996, an aggregate of $202.9 million, or 75.9%, of gross loans were
invested in such assets. In addition, the Association generally accepts
savings deposits for considerably shorter terms than its fixed-rate mortgage
loans. As a result, at March 31, 1996, the Association's total interest-
bearing liabilities maturing or repricing within one year exceeded its net
total interest-earning assets maturing or repricing in the same time period by
$88.4 million, representing a one-year interest sensitivity gap as a
percentage of total assets of negative 28.8%. Management anticipates that
substantially all of the maturing or repricing liabilities will be retained by
the Association. As a result of the Association's negative gap position, the
yield on interest-earning assets of the Association will adjust to changes in
interest rates at a slower rate than the cost of the Association's interest-
bearing liabilities. As a consequence, any significant increase in interest
rates could have an adverse effect on the Association's results of operations.
The Association has experienced reduced levels of net income and net
interest income in 1994, 1995 and for the three months ended March 31, 1996 as
a result of, among other reasons, the Association's sensitivity to increases
in interest rates, as well as the Association's reduction in total asset size
during those periods. In addition, the Association experienced a reduced level
of net income and net interest income for the three and six months ended June
30, 1996. See "Summary--Home Federal Savings and Loan Association of Elgin,"
"Recent Developments" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations" for a discussion of these results. There
can be no assurance that the Association will not continue to experience
reduced levels of net income and net interest income during periods of
increasing interest rates or until the Association's sensitivity to increases
in interest rates is reduced.
Increases in the level of interest rates also may adversely affect the fair
value of the Association's securities and other interest-earning assets.
Generally, the fair 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 fair value of interest-earning assets which could
adversely affect the Association's results of operations if such interest-
earning assets are sold prior to maturity. As indicated in the second table
under "Management's Discussion and Analysis of Financial Condition and Results
of Operations--Management of Interest Rate Risk," at March 31, 1996, a 200
basis point increase in interest rates would cause more than a 2% decrease in
the ratio of the Association's net portfolio value (as defined therein) to the
economic value of the Association's assets. Accordingly, while such decrease
is within the target limits established by the Board of Directors, under OTS
regulations the Association is considered to have "above normal" interest rate
risk and, at March 31, 1996, would have had its risk-based capital requirement
increased by $816,000 had the interest rate risk component of the OTS risk-
based capital requirement been in effect at such date. See "Regulation--
Regulation of Federal Savings Associations--Capital Requirements." Increases
in interest rates also can affect the type (fixed-rate or adjustable-rate) and
amount of loans originated by the Association and the average life of loans
and securities, which can adversely impact the yields earned on the
Association's loan and securities portfolio. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Management of
Interest Rate Risk."
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Under interest rate scenarios other than that which existed on March 31,
1996, the gap ratio for the Association's assets and liabilities could differ
substantially based upon different assumptions about how deposit decay rates
and loan prepayments would change. For example, the Association's interest
rate risk management model assumes that in a rising rate scenario, by paying
competitive rates on non-transactional deposits, a large share of
transactional deposits will transfer to certificates of deposit and be
retained, although at a higher cost to the Association. Also, loan and
mortgage-backed security prepayment rates would be expected to slow, as
borrowers postpone property sales or loan refinancings until rates again
decline. However, there can be no assurance that the Association's results of
operations would not be adversely affected in a period of rising interest
rates. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations-- Management Strategy."
IMPACT OF THE ECONOMY ON OPERATIONS
Declines in the local economy, national economy or real estate market could
adversely affect the financial condition and results of operations of the
Association, including through decreased demand for loans or increased
competition for good loans, increased non-performing loans and loan losses and
resulting additional provisions for loan losses and for losses on real estate
owned. Although management of the Association believes that the current
allowance for loan losses is adequate in light of current economic conditions,
many factors may require additions to the allowance for loan losses in future
periods above those reasonably anticipated. These factors include: (i) adverse
changes in economic conditions and changes in interest rates that may affect
the ability of borrowers to make payments on loans, (ii) changes in the
financial capacity of individual borrowers, (iii) changes in the local real
estate market and the value of the Association's loan collateral and (iv)
future review and evaluation of the Association's loan portfolio, internally
or by regulators. The amount of the allowance for loan losses at any time
represents estimates made by management that are susceptible to significant
changes due to changes in values of collateral, national and regional economic
conditions, prevailing interest rates and other factors. Future adjustments to
the allowance also may be necessary if economic or other conditions differ
substantially from those underlying the assumptions used in making such
estimates.
COMPETITION
The Association faces intense and increasing competition both in making
loans and in attracting savings deposits. The Association's market area has a
high density of financial institutions, many of which have greater financial
resources, name recognition and market presence than the Association, and all
of which are competitors of the Association to varying degrees. Particularly
intense competition exists for savings deposits and the origination of all of
the loan products emphasized in the Association's business plan. The
Association's competition for loans comes principally from commercial banks,
savings banks, other savings and loan associations, mortgage banking
companies, finance companies and credit unions. The Association's most direct
competition for savings deposits historically has come from savings banks,
other savings and loan associations, commercial banks and credit unions. In
addition, the Association faces increasing competition for savings deposits
from non-bank institutions such as brokerage firms, insurance companies, money
market mutual funds, other mutual funds (such as corporate and government
securities funds) and annuities. Trends toward the consolidation of the
banking industry and the lifting of interstate banking and branching
restrictions may make it more difficult for smaller institutions, such as the
Association, to compete effectively with large national and regional banking
institutions. See "Business of the Association."
RECAPITALIZATION OF THE SAIF; SAIF PREMIUMS AND POSSIBLE SPECIAL ASSESSMENT
Under current law, SAIF-insured institutions pay deposit insurance
assessment rates of $0.23 to $0.31 per $100 of deposits. In contrast,
institutions that are insured by the FDIC's Bank Insurance Fund (the "BIF")
and that are well capitalized and without any significant supervisory concerns
pay the minimum annual assessment of $2,000, and all other BIF-insured
institutions pay deposit insurance assessment rates of $0.03 to $0.27 per $100
of deposits. See "Regulation--Regulation of Federal Savings Associations--
Insurance of Deposit Accounts."
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As a result of the BIF premium reduction, institutions that are required to
pay SAIF assessments, such as the Association, are likely to be subject to a
competitive disadvantage relative to BIF-insured institutions, subject to the
adoption of legislation to remedy the disparity. The FDIC has recognized that
the assessment disparity may have adverse consequences for SAIF-insured
institutions, including reduced earnings and an impaired ability to raise
funds in capital markets and to attract deposits.
The proposed Balanced Budget Act of 1995 (the "Budget Act"), which was
approved by the Congress but vetoed by the President, included provisions that
focused on a recapitalization of the SAIF. Under the provisions of the Budget
Act, all SAIF-member institutions would have paid a special assessment to
recapitalize the SAIF, and the assessment base for the payments on the bonds
(the "FICO bonds") issued in the late 1980s by the Financing Corporation to
recapitalize the now defunct Federal Savings and Loan Insurance Corporation
would have been expanded to include the deposits of both BIF- and SAIF-insured
institutions. The amount of the special assessment required to recapitalize
the SAIF was then estimated to be approximately 80 basis points of the SAIF-
assessable deposits. This estimate of the special assessment was less than the
special assessment of 85 to 90 basis points that had been previously
estimated. The special assessment would have been imposed as of the first
business day of January 1996 or on such other date prescribed by the FDIC not
later than 60 days after enactment of the Budget Act, based on the amount of
SAIF deposits on March 31, 1995. It is the view of the Treasury Department
that the special SAIF assessment is deductible in accordance with the
Association's tax method of accounting. If an 80 basis point assessment were
assessed against the Association's savings deposits as of March 31, 1995, the
Association's special assessment would be approximately $2.1 million, or $1.3
million on an after tax basis.
The Budget Act also provided for the merger of the BIF and SAIF on January
1, 1998, with such merger being conditioned upon the prior elimination of the
thrift charter. Congressional leaders had also agreed that Congress should
consider and act upon separate legislation to eliminate the thrift charter as
early as possible in 1996. If adopted, such legislation would require that the
Association, as a federal savings and loan association, convert to a bank
charter. See "--Financial Institution Regulation and Possible Legislation."
The veto of the Budget Act by the President was not based on the above
described provisions of the Budget Act, and the federal banking regulators
continue to seek a legislative solution for the recapitalization of the SAIF.
In February 1996, representatives of the FDIC, the OTS and the Treasury
Department stated to Congress that, unless Congress adopts legislation to
strengthen the SAIF, the SAIF's current problems could result in an erosion of
the SAIF deposit base, could cause a default on the FICO bonds that are paid
from SAIF assessments, and could leave the SAIF unable to meet its obligations
to insured depositors.
If enacted by Congress, legislation to recapitalize the SAIF as proposed in
the Budget Act would have the effect of reducing the capital of SAIF member
institutions by the after-tax cost of the special SAIF assessment, plus any
related additional tax liabilities. The legislation would also have the effect
of reducing any differential that may otherwise be required in the assessment
rates for the BIF and SAIF.
Management cannot predict whether the above legislation or any other
legislative proposal will be enacted as described above or, if enacted, the
amount of any special SAIF assessment, whether ongoing SAIF premiums will be
reduced to a level equal to that of BIF premiums or whether, if thrifts are
required to convert to a bank charter, there will be any relief from the
additional tax liabilities that would be incurred upon the recapture of their
bad debt reserves. It also cannot be predicted whether some other legislative
action will be taken to address the BIF/SAIF disparity and what consequences
such action could have for SAIF members. A significant increase in SAIF
insurance premiums, either absolutely or relative to BIF premiums or a
significant one-time fee to recapitalize the SAIF could have an adverse effect
on the operating expenses and results of operations of the Association.
PENDING TAX LEGISLATION REGARDING TAX BAD DEBT RESERVES
For federal income tax purposes, thrift institutions such as the
Association, which meet certain definitional tests primarily relating to their
assets and the nature of their business, are permitted to establish a tax
reserve for
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bad debts and to make annual additions thereto, which additions may, within
specified limitations, be deducted in arriving at their taxable income. The
Association's deduction with respect to "qualifying loans," which are
generally loans secured by certain interests in real property, may currently
be computed using an amount based on the Association's actual loss experience
(the "Experience Method"), or a percentage equal to 8.0% of the Association's
taxable income (the "PTI Method"), computed without regard to this deduction
and with additional modifications and reduced by the amount of any permitted
addition to the non-qualifying reserve. See "Federal and State Taxation--
Federal Taxation --Tax Bad Debt Reserves."
Under HR 3448 (the "Small Business Job Protection Act of 1996"), as passed
by the House and Senate, the PTI Method would be repealed and the Association
would be permitted to use only the Experience Method of computing additions to
its bad debt reserve. In addition, the Association would be required to
recapture (i.e., take into income) over a six-year period, beginning with the
Association's taxable year beginning January 1, 1996, the excess of the
balance of its bad debt reserves (other than the supplemental reserve) as of
December 31, 1995 over the greater of (a) the balance of such reserves as of
December 31, 1987 (or a lesser amount since the Association's loan portfolio
has decreased since December 31, 1987) or (b) an amount that would have been
the balance of such reserves as of December 31, 1995 had the Association
always computed the additions to its reserves using the six-year moving
average Experience Method. However, under the proposed legislation, such
recapture requirements would be suspended for each of two successive taxable
years beginning January 1, 1996 in which the Association originates a minimum
amount of certain residential loans based upon the average of the principal
amounts of such loans made by the Association during its six taxable years
preceding January 1, 1996. The enactment of such legislation, in its present
form, would result in an aggregate tax liability of $1.9 million associated
with such recapture. Since the Association has already provided a deferred
income tax liability of this amount for financial reporting purposes, the
enactment of such legislation will not adversely impact the Association's
financial condition or results of operations.
IMPACT OF TECHNOLOGICAL ADVANCES
The banking industry is undergoing rapid technological changes with frequent
introductions of new technology-driven products and services. In addition to
improving customer services, 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
its customers by using technology to provide products and services that will
satisfy customer demands for convenience as well as to create additional
efficiencies in the Association's operations. Many of the Association's
competitors have substantially greater resources than the Association to
invest in technological improvements. There can be no assurance that the
Association will be able to effectively implement new technology-driven
products and services or be successful in marketing such products and services
to its customers.
RESIDENTIAL AND NON-RESIDENTIAL LENDING RISKS
The Association has historically employed an operating strategy which
emphasized the origination of fixed-rate and adjustable-rate one- to four-
family residential mortgage loans in its delineated lending area. At March 31,
1996, 98.1% of the Association's gross loans were one- to four-family
residential mortgage loans secured by properties located in such area. See
"Business of the Association--Lending Activities." This lack of geographic
diversification could have an adverse impact on the Association and the
Association's profitability in the event that the Association's delineated
lending area were to suffer a substantial economic decline or a natural
disaster, such as a flood. In addition, the profitability of the Association's
one- to four-family residential lending business could be adversely impacted
by competitive market forces and technological advances of its competitors.
See""--Competition" and "--Impact of Technological Advances."
The Association also originates, to a significantly lesser extent,
multifamily, commercial real estate, construction and land and other loans in
its delineated lending area. Multifamily residential, commercial real estate,
construction and land and other loans are generally considered to involve a
higher degree of credit risk
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than one- to four-family residential mortgage loans. This greater risk is
attributable to several factors, including the higher concentration of
principal in a limited number of loans and borrowers, the effects of general
economic conditions on income-producing properties and the increased
difficulty of evaluating and monitoring these types of loans. Furthermore, the
repayment of loans secured by multifamily residential and commercial real
estate is typically dependent upon sufficient cash flow from the related real
estate project to cover operating expenses and debt service. If the cash flow
from the project is reduced (for example, if leases are not obtained or
renewed), the borrower's ability to repay the loan may be impaired.
Circumstances outside the borrower's control may adversely affect income from
the multifamily or commercial property as well as its market value. See
"Business of the Association--Lending Activities."
CERTAIN ANTI-TAKEOVER PROVISIONS
Provisions in the Company's and the Association's Governing Instruments.
Certain provisions of the Company's Certificate of Incorporation and Bylaws,
particularly a provision limiting voting rights, and the Association'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 boards of directors, noncumulative voting for directors,
limits on the calling of special meetings, certain uniform price provisions
for certain business combinations and limits on voting shares in excess of 10%
of the outstanding shares. Any person owning in excess of 10% of the
outstanding Common Stock will be limited to one one-hundredth (1/100) of a
vote for each share of the Common Stock owned in excess of the 10% limit. The
Association's Stock Charter also prohibits, for five years, the acquisition
of, or the offer to acquire, directly or indirectly, the beneficial ownership
of more than 10% of the Association's equity securities. In the event that
holders of revocable proxies for more than 10% of the shares of Common Stock
of the Company, acting as a group or in concert with other proxy holders,
attempt actions which could indirectly result in a change in control of the
Association, management of the Association may be able to assert this
provision of the Association's charter against such holders if it deems such
assertion to be in the best interests of the Association, the Company and its
stockholders. It is uncertain, however, if the Association would be successful
in asserting such provisions against such persons. These provisions in the
Association'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. See "Restrictions on Acquisition of
the Company and the Association."
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 outstanding 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, shall, in connection with the exercise of its judgment
in determining what is in the best interests of the Company 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 and its subsidiaries' customers, suppliers,
borrowers and employees, and on the communities in which the Company and its
subsidiaries operate or are located. 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 prevailing market price of any
equity security of the Company. See "Restrictions on Acquisition of the
Company and the Association."
Voting Control of Directors, Officers and Employees. Directors and executive
officers of the Association and the Company expect to purchase approximately
3.0% or 2.2% of the shares of Common Stock to be sold in the Conversion, based
upon the minimum and the maximum of the Estimated Price Range, respectively.
In addition, the ESOP intends to purchase 8% of the Common Stock. As a result,
assuming the Stock Programs and Stock Option Plans are approved by the
Company's stockholders, directors, executive officers and employees have the
potential to control the voting of approximately 23.1% of the Company's Common
Stock (based on the
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maximum of the Estimated Price Range), thereby enabling them to prevent the
approval of transactions and other corporate actions requiring 80% approval of
stockholders, such as certain business combinations, the removal by
stockholders of a director for cause and the amendment of certain charter
provisions. 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 Association--Restrictions in the Company's Certificate of
Incorporation and Bylaws."
Provisions in Management Contracts and Benefit Plans. Certain provisions
contained in the proposed Employment Agreements, Employee Retention
Agreements, Employee Severance Compensation Plan, the ESOP, the Stock Option
Plans and the Stock Programs that provide for cash payments or the vesting of
benefits upon a change of control of the Company or the Association may be
deemed to have an anti-takeover effect and could result in stockholders
receiving less for their shares of Common Stock than otherwise might be
available in the event of an acquisition of the Company. See "Management of
the Association--Employment Agreements," "--Employee Retention Agreements" and
"--Employee Severance Compensation Plan" and "Management of the Association--
Benefits--Employee Stock Ownership Plan and Trust," "--Stock Option Plans" and
"--Stock Programs."
ABSENCE OF MARKET FOR COMMON STOCK AND RECENT PERFORMANCE OF CONVERSION
OFFERINGS
The Company and the Association have not previously issued capital stock
(other than shares issued by the Company upon incorporation), and,
consequently, there is no established market for the Common Stock at this
time. The Company has received conditional approval from the NASD to have its
Common Stock approved for quotation on the Nasdaq National Market under the
symbol "HBEI" upon completion of the Conversion. One of the requirements for
continued quotation of the Common Stock on the Nasdaq National Market is that
at least two market makers be a market maker for the Common Stock. The Company
will seek to encourage and assist at least two market makers to make a market
in its Common Stock. Hovde will assist the Company in such efforts but will
not be a market maker in the Common Stock. While the Company anticipates that
there will be other broker-dealers to act as market maker for the Common
Stock, there can be no assurance that there will be two or more market makers
for the Common Stock.
Making a market in securities involves maintaining bid and asked quotations
and being able, as principal, to effect transactions in reasonable quantities
at those quoted prices, subject to various securities laws and other
regulatory requirements. The development of a public trading market depends
upon the existence of willing buyers and sellers, the presence of which is not
within the control of the Company, the Association or any market maker.
Accordingly, 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. In addition, the market
prices of the common stock issued in some recent conversions of financial
institutions from mutual to stock form have decreased below their initial
offering prices. 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% to reflect
changes in market and financial 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
7,009,250 shares of Common Stock at the Purchase Price for aggregate proceeds
of up to $70.1 million. An increase in the number of shares issued would
decrease a subscriber's pro forma net earnings per share and stockholders'
equity per share but would increase the Company's pro forma consolidated
stockholders' equity and net earnings. Such an increase would also increase
the Purchase Price as a percentage of pro forma stockholders' equity per share
and net earnings per share.
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POSSIBLE DILUTIVE EFFECT OF STOCK OPTIONS AND STOCK PROGRAMS
An amount equal to 10% of the Common Stock issued in the Conversion has been
reserved for issuance under the Stock Option Plans, the implementation of
which may be subject to the approval of the stockholders of the Company. 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 9.09%, and, assuming that all options were granted at the
Purchase Price, the effect on pro forma net earnings per share and
stockholders' equity per share would be as set forth under "Pro Forma Data."
Also, following the Conversion, the Stock Programs, if implemented, will
acquire up to 4% of the shares of Common Stock issued in the Conversion,
either through open market purchases, subject to OTS approval, if necessary,
or from the issuance of authorized but unissued shares. If the Stock Programs
are funded by the issuance of authorized but unissued shares, the interests of
existing stockholders would be diluted by approximately 3.85% (assuming no
exercise of any options). See "Pro Forma Data" for the effect on pro forma net
earnings per share and stockholders' equity per share. If the Stock Programs
are funded by open market purchases, the voting interests of existing
stockholders would not be diluted, and, assuming that the shares were acquired
at the Purchase Price, the effect on pro forma net earnings per share and
stockholders' equity per share would be as set forth under "Pro Forma Data."
POSSIBLE ADVERSE INCOME TAX CONSEQUENCES OF THE DISTRIBUTION OF SUBSCRIPTION
RIGHTS
The Association has received an opinion from RP Financial that subscription
rights granted to Eligible Account Holders, Supplemental Eligible Account
Holders and Other Members have no value. However, this opinion is not binding
on the Internal Revenue Service (the "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 Eligible Account
Holders, Supplemental Eligible Account Holders or Other Members could be taxed
upon the receipt or exercise of the subscription rights in an amount equal to
such value. Additionally, the Association 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 "--Effects of Conversion--Tax Aspects."
FINANCIAL INSTITUTION REGULATION AND POSSIBLE LEGISLATION
The Association is subject to extensive regulation and supervision as a
federally chartered savings and loan association. The regulatory authorities
have extensive discretion in connection with their supervision and enforcement
activities and their examination policies, including the imposition of
restrictions on the operation of a savings institution, the classification of
assets by an institution and the imposition of an increase in a savings
institution's allowance for loan losses. In addition, the Company, as a
savings association holding company, will be subject to extensive regulation
and supervision. 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 Association, its operations and the
Association's Conversion. See "Regulation."
Congress has considered various proposals to consolidate and reorganize the
regulatory functions of the four federal banking agencies: the OTS, the FDIC,
the Office of the Comptroller of the Currency (the "OCC") and the Board of
Governors of the Federal Reserve System. Legislation has also been introduced
that would limit the activities of unitary savings association holding
companies to those permitted to be engaged in by multiple savings association
holding companies. See "Regulation--Regulation of Savings Association Holding
Companies." The outcome of efforts to affect regulatory consolidation and
reorganization and to change the permitted activities of holding companies is
uncertain. Therefore, the Association is unable to determine the extent to
which such legislation, if enacted, would affect its business.
RISK OF DELAYED OFFERING
The successful consummation of the Offerings will depend, in part, upon
market conditions at the time of the Offerings, both generally and with
respect to the Common Stock, and upon the operating results of the
Association. In the event that following completion of the Subscription and
Community Offerings, various
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factors (including the market demand for the Common Stock as reflected by the
level of subscriptions received in such Offerings) result in the estimated pro
forma market value of the Common Stock (as determined by RP Financial) being
outside the Estimated Price Range, a resolicitation of subscribers likely
would be required, which would delay completion of the Conversion.
Developments other than market conditions could also delay the Conversion;
however, management is currently unaware of any such developments.
OTS regulations require the Conversion to be completed within 45 days after
the completion of the Subscription and Community Offerings. Such 45-day period
may be extended with the approval of the OTS for a period of up to 24 months
after the date of approval of the Plan of Conversion by the Association's
members. In the event that the Association and the Company determine that
economic conditions generally, the market for publicly traded thrift
institution stocks, the operating results of the Association or other factors
make a sale of the Common Stock undesirable, then the Conversion may be
delayed until such conditions improve, subject to any necessary OTS approval.
A material delay in the completion of the Conversion may result in a
significant increase in the costs of the Conversion. In addition, significant
changes in the operations and financial condition of the Association or the
Company, the aggregate market value of the shares to be issued in the
Conversion or general market conditions may occur during any such material
delay.
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HOME BANCORP OF ELGIN, INC.
The Company was recently organized at the direction of the Board of
Directors of the Association for the purpose of acquiring all of the capital
stock to be issued by the Association in the Conversion. The Company has
received approval from the OTS to become a savings association 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 association holding company.
See "Regulation-- Regulation of Savings Association Holding Companies." Upon
consummation of the Conversion, the Company's assets will consist of all of
the outstanding shares of the Association's capital stock issued to the
Company in the Conversion and approximately 50% of the net proceeds of the
Offerings. The Company intends to use part of the retained net proceeds to
make a loan directly to the ESOP to enable the ESOP to purchase 8% of the
Common Stock in the Conversion. The Company will have no significant
liabilities. See "Use of Proceeds." The management of the Company is set forth
under "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 Association. At the present time, the Company does not intend to employ
any persons other than officers but will utilize the support staff of the
Association 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 its business activities,
should it decide to do so, 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
proceeds retained by the Company and earnings thereon or, alternatively,
through dividends from the Association.
The Company's office is located at the main office of the Association at 16
North Spring Street, Elgin, Illinois 60120-5569. The Company's telephone
number is (847) 742-3800.
HOME FEDERAL SAVINGS AND LOAN ASSOCIATION OF ELGIN
Home Federal Savings and Loan Association of Elgin was originally founded in
1883 as an Illinois state-chartered mutual savings and loan association. On
October 7, 1969, the Association converted to a federally chartered mutual
savings and loan association. The Association has been, and intends to
continue to be, a community-oriented financial institution providing a variety
of financial services to meet the needs of the communities which it serves.
The Association maintains its headquarters in Elgin, Illinois, and operates
four other branch offices in Crystal Lake, Roselle, Bartlett and South Elgin,
Illinois. The Association gathers savings deposits primarily from the
communities and neighborhoods in close proximity to its branch offices. The
Association's delineated lending area is larger, and includes Cook, Kane,
Lake, McHenry, DuPage and DeKalb counties located in Illinois. Most of the
Association's mortgages are secured by properties located in its delineated
lending area. See "Business of the Association--Market Area" and "--
Competition."
The Association's principal business has been, and continues to be,
gathering savings deposits from customers within its market area, and
investing those savings deposits primarily in one- to four-family residential
mortgage loans. To a lesser extent, the Association makes multifamily,
commercial real estate, construction, land and consumer loans. The Association
also invests in mortgage-backed securities and obligations of the U.S.
Government and U.S. Government sponsored enterprises ("GSEs"). At March 31,
1996, the Association had total assets of $306.7 million, of which $264.1
million was comprised of loans receivable, total savings deposits of $264.5
million and equity of $37.2 million. The Association's savings deposits are
insured up to the maximum allowable amount by the SAIF. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
"Business of the Association."
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The Association is subject to extensive regulation, supervision and
examination by the OTS, its primary regulator, and the FDIC, which insures its
deposits. As of March 31, 1996, the Association exceeded all regulatory
capital requirements with tangible, core and risk-based capital ratios of
12.04%, 12.04% and 23.65%, respectively. Additionally, the Association's
regulatory capital was in excess of the amount necessary to be "well-
capitalized" under the Federal Deposit Insurance Corporation Improvement Act
of 1991 (the "FDICIA"). See "Regulation--Regulation of Federal Savings
Associations." The Association is a member of the FHLB of Chicago, which is
one of the 12 regional banks which comprise the Federal Home Loan Bank system.
The Association's main office is located at 16 North Spring Street, Elgin,
Illinois 60120-5569. The Association's telephone number is (847) 742-3800.
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 $43.5
million and $59.2 million (or $68.2 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 close of the
Offerings.
The Company will use the net proceeds from the sale of Common Stock as
follows:
1. The Company will purchase all of the capital stock of the Association
to be issued upon Conversion in exchange for 50% of the net proceeds.
2. The remaining net proceeds will be retained by the Company. Net
proceeds to be retained by the Company after the purchase of the capital
stock of the Association are estimated to be between $21.8 million and
$29.6 million (or $34.1 million if the Estimated Price Range is increased
by 15%). The net proceeds retained by the Company will initially be
invested primarily in federal funds, short-term investment grade marketable
securities and mortgage-backed securities.
3. The Company intends to use a portion of the retained net proceeds to
make a loan directly to the ESOP to enable the ESOP to purchase 8% of the
Common Stock in the Conversion. Based upon the issuance of 4,505,000 shares
or 6,095,000 shares at the minimum and maximum of the Estimated Price
Range, the amount of the loan to the ESOP (if the loan is made by the
Company and not a third party) would be $3.6 million or $4.9 million,
respectively, (or $5.6 million if the Estimated Price Range is increased by
15%) to be repaid over a period of up to 10 years at an interest rate of
8%. See "Management of the Association--Benefits--Employee Stock Ownership
Plan and Trust."
The portion of the net proceeds not retained by the Company, estimated to be
between $21.8 million at the minimum of the Estimated Price Range and $29.6
million at the maximum of the Estimated Price Range, will be added to the
Association's general funds to be used for general corporate purposes,
including investment in one- to four-family residential mortgage loans and
other loans which will provide affordable home financing opportunities to the
community; investment in federal funds, short-term, investment-grade
marketable securities and mortgage-backed securities; and to fund the Stock
Programs. The Association may also use such funds for the expansion of its
facilities, and to expand operations through acquisitions of other financial
institutions, branch offices or other financial services companies. The
Association has no current agreement, arrangement or understanding regarding
any such establishment or acquisition, or any other transaction related to the
possible expansion of its operations.
The net proceeds retained by the Company may also be used to support the
future expansion of the Association's operations through branch acquisitions
and the acquisition of other financial institutions or diversification into
other banking related businesses and for other business or investment
purposes, including possibly the payment of dividends and the repurchase of
the Company's Common Stock as permitted by the
32
<PAGE>
OTS. See "Dividend Policy" and "Regulation--Regulation of Federal Savings
Associations--Limitation on Capital Distributions." The Company has no current
arrangements, understandings or agreements, written or oral, regarding any
such transactions. The Company is subject to the terms of a certification made
to the OTS in connection with the application to the OTS for approval of the
Conversion, which certification prohibits the Company from taking any actions
to further any payments to its stockholders through a return of excess capital
for a period of one year following the Conversion without the prior written
consent of the OTS. The certification expressly does not apply to taxable
dividend payments made by the Company or to dividend payments made by the
Association to the Company. See "Dividend Policy." The Company, upon
completion of the Conversion, will be a unitary savings association holding
company, which under existing laws generally would not be restricted as to the
types of business activities in which it may engage, so long as the
Association continues to be a qualified thrift lender ("QTL"). See
"Regulation--Regulation of Savings Association Holding Companies" for a
description of certain regulations applicable to the Company. In determining
the amount of net proceeds to be used to purchase the capital stock of the
Association, consideration was given to such factors as the regulatory capital
position of the Association, both before and after giving effect to the
Conversion, and the rules and regulations and policies of the OTS governing
the amount of proceeds which may be retained by the Company.
Upon completion of the Conversion, the Board of Directors will have the
authority to adopt stock repurchase plans, subject to statutory and regulatory
requirements. Based upon facts and circumstances which may arise following the
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: (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 improvement
in the Company's return on equity; (ii) the avoidance of dilution to
stockholders by not having to issue additional shares to cover the exercise of
stock options or to fund employee stock benefit plans; and (iii) any other
circumstances in which repurchases would be in the best interests of the
Company and its stockholders. 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 Association 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 Association's current and projected results of operations and
asset/liability structure, the economic environment and tax and other
considerations. In addition, applicable OTS regulations generally prohibit the
Company from repurchasing its own stock for a period of one year following the
Conversion. Any stock repurchases by the Company during the two years
thereafter are subject to OTS approval and generally are required to be part
of an open market program not involving greater than 5% of the outstanding
Common Stock during any twelve-month period. However, the OTS Regional
Directors have the authority to approve stock repurchases during the first
three years after the Conversion that are in excess of these limits. See "The
Conversion--Certain Restrictions on Purchase or Transfer of Shares After
Conversion."
Upon completion of the Conversion, the Board of Directors of the Company
will have the authority to declare dividends on the Common Stock. The Board of
Directors does not presently intend to declare dividends on the Common Stock
but may do so in the future. No decision has been made as to the amount or
timing of such dividends, if any. 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 Association's "liquidation account."
See "Dividend Policy," "The Conversion--Certain Restrictions on Purchase or
Transfer of Shares After Conversion" and "--Effects of Conversion--Liquidation
Rights."
Neither the Association nor the Company has yet determined the approximate
amount of net proceeds to be used for each of the purposes mentioned above.
33
<PAGE>
DIVIDEND POLICY
Upon completion of the Conversion, the Board of Directors of the Company
will have the authority to declare dividends on the Common Stock. The Board of
Directors does not presently intend to declare dividends on the Common Stock.
In the future, declarations of dividends by the Board of Directors, if any,
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 Association, capital requirements, regulatory
limitations, the Company's and the Association's financial condition, results
of operations, tax considerations, general economic conditions, industry
standards and other factors. No assurances can be given, however, that any
dividends will be paid or, if payment is commenced, will continue to be paid.
As the principal asset of the Company, the Association will provide the
principal source of funds for payment of dividends by the Company. The
Association will not be permitted to pay dividends on its capital stock if,
among other things, its stockholders' equity would be reduced below the amount
required for the liquidation account. See "The Conversion--Effects of
Conversion--Liquidation Rights" and "Regulation." For information concerning
federal regulations which apply to the Association 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 "Regulation--Regulation of Federal
Savings Associations--Limitation on Capital Distributions" and "Federal and
State Taxation--Federal Taxation--Distributions." Assuming the shares of
Common Stock are sold at the maximum of the Estimated Price Range, at March
31, 1996, after giving pro forma effect to (i) the Conversion, (ii) the
deduction from capital of the amount expected to be borrowed by the ESOP and
the cost of shares of Common Stock to be acquired by the Stock Programs and
(iii) the retention by the Association of 50% of the net proceeds of the
Conversion, the Association would be permitted to make capital distributions
of up to approximately $8.8 million to the Company without prior OTS approval.
Unlike the Association, the Company is not subject to OTS regulatory
restrictions on the payment of dividends to its stockholders, although the
source of such dividends will be dependent on the net proceeds retained by the
Company and earnings thereon and may be dependent, in part, upon dividends
from the Association. 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, or if there is no such excess,
to its net profits for the current and/or immediately preceding fiscal year.
MARKET FOR THE COMMON STOCK
The Company and the Association have not previously issued capital stock
(other than shares issued by the Company upon incorporation) and,
consequently, there is currently no established market for the Common Stock.
The Company has received conditional approval from the NASD to have its Common
Stock quoted on the Nasdaq National Market under the symbol "HBEI" 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 and
assist at least two market makers to make a market in its Common Stock. Making
a market involves maintaining bid and asked quotations and being able, as
principal, to effect transactions in reasonable quantities at those quoted
prices, subject to various securities laws and other regulatory requirements.
Hovde will assist the Company in such efforts, but will not be a market maker
in the Common Stock. While the Company anticipates that there will be other
broker-dealers to act as market maker for the Common Stock, there can be no
assurance that there will be two or more market makers for the Common Stock.
Additionally, the development of a liquid public market depends on the
existence of willing buyers and sellers, the presence of which is not within
the control of the Company, the Association or any market maker. The number of
active buyers and sellers of the Common Stock at any particular time may be
limited. Under such circumstances, investors in the Common Stock could have
difficulty disposing of their shares on short notice and should not view the
Common Stock as a short-term investment. There can be no assurance that an
active and liquid trading market for the Common Stock will develop or that, if
developed, it will continue, nor is there any assurance that persons
purchasing shares 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.
34
<PAGE>
REGULATORY CAPITAL COMPLIANCE
At March 31, 1996, the Association exceeded all regulatory capital
requirements. See "Regulation--Regulation of Federal Savings Associations--
Capital Requirements." Set forth below is a summary of the Association's
compliance with regulatory capital standards as of March 31, 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 Association of 50% of net
conversion proceeds. 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 AT MARCH 31, 1996 BASED ON(1)
---------------------------------------------------------------------------
7,009,250 SHARES
4,505,000 SHARES 5,300,000 SHARES 6,095,000 SHARES (15% ABOVE
(MINIMUM OF (MIDPOINT OF (MAXIMUM OF MAXIMUM OF
HISTORICAL AT ESTIMATED ESTIMATED ESTIMATED ESTIMATED
MARCH 31, 1996 PRICE RANGE) PRICE RANGE) PRICE RANGE) PRICE RANGE)(2)
------------------ ------------------ ------------------ ------------------ ------------------
PERCENT OF PERCENT OF PERCENT OF PERCENT OF PERCENT OF
AMOUNT ASSETS(3) AMOUNT ASSETS(3) AMOUNT ASSETS(3) AMOUNT ASSETS(3) AMOUNT ASSETS(3)
------- ---------- ------- ---------- ------- ---------- ------- ---------- ------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
GAAP Capital............ $37,195 12.13% $53,554 16.58% $56,520 17.34% $59,576 18.10% $62,897 18.92%
======= ===== ======= ===== ======= ===== ======= ===== ======= =====
Tangible Capital(3):
Capital level.......... $37,195 12.04% $53,554 16.46% $56,520 17.22% $59,576 17.98% $62,897 18.80%
Requirement............ 4,634 1.50 4,879 1.50 4,924 1.50 4,970 1.50 5,020 1.50
------- ----- ------- ----- ------- ----- ------- ----- ------- -----
Excess................. $32,561 10.54% $48,675 14.96% $51,596 15.72% $54,606 16.48% $57,877 17.30%
======= ===== ======= ===== ======= ===== ======= ===== ======= =====
Core Capital(3):
Capital level.......... $37,195 12.04% $53,554 16.46% $56,520 17.22% $59,576 17.98% $62,897 18.80%
Requirement............ 9,268 3.00 9,759 3.00 9,848 3.00 9,940 3.00 10,039 3.00
------- ----- ------- ----- ------- ----- ------- ----- ------- -----
Excess................. $27,927 9.04% $43,795 13.46% $46,672 14.22% $49,636 14.98% $52,858 15.80%
======= ===== ======= ===== ======= ===== ======= ===== ======= =====
Risk-Based Capital(4):
Capital level.......... $38,051 23.65% $54,410 32.18% $57,376 33.64% $60,432 35.12% $63,753 36.69%
Requirement(5)......... 12,872 8.00 13,526 8.00 13,645 8.00 13,767 8.00 13,900 8.00
------- ----- ------- ----- ------- ----- ------- ----- ------- -----
Excess................. $25,179 15.65% $40,884 24.18% $43,731 25.64% $46,665 27.12% $49,853 28.69%
======= ===== ======= ===== ======= ===== ======= ===== ======= =====
</TABLE>
- --------
(1) Pro forma capital levels assume receipt by the Association of 50% of the
net proceeds of the Conversion as reduced by the anticipated purchase of
Common Stock at a price of $10.00 per share by the ESOP and Stock
Programs. The amount expected to be borrowed by the ESOP and the cost of
the shares of Common Stock to be purchased by the Stock Programs (assuming
a price of $10.00 per share) are deducted from pro forma capital to
illustrate the possible impact on the Association. No effect has been
given to the possible issuance of up to 10% of the issued Common stock at
the minimum, midpoint, maximum and 15% above the maximum of the range
pursuant to the Stock Option Plans, which are expected to be adopted by
the Company following the Conversion, and which, if implemented prior to
the first anniversary of the Conversion, will require approval at a
meeting of stockholders to be held no earlier than six months after the
completion of the Conversion.
(2) 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%
to reflect changes in market or general financial and economic conditions
following the commencement of the Subscription Offering.
(3) Tangible capital and core capital levels are shown as a percentage of
total tangible assets as defined by the OTS. Risk-based capital levels are
shown as a percentage of risk-weighted assets.
(4) Regulatory risk-based capital reflects the inclusion of the allowance for
loan losses. See "Regulation--Regulation of Federal Savings Associations--
Capital Requirements."
(5) The current OTS total risk-based capital requirement is 8.0% of risk-
weighted assets. Assumes net proceeds are invested in assets that carry a
50% risk-weighting, which approximates the historical combined risk-
weighting of the Association's assets at March 31, 1996.
35
<PAGE>
CAPITALIZATION
The following table presents the historical capitalization of the
Association at March 31, 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 CONSOLIDATED PRO FORMA CAPITALIZATION
BASED ON $10.00 PER SHARE
----------------------------------------------------
4,505,000 6,095,000 7,009,250
SHARES 5,300,000 SHARES SHARES
(MINIMUM OF SHARES (MAXIMUM OF (15% ABOVE
ESTIMATED (MIDPOINT OF ESTIMATED MAXIMUM OF
ASSOCIATION PRICE ESTIMATED PRICE ESTIMATED
HISTORICAL RANGE) PRICE RANGE) RANGE) PRICE RANGE)(1)
----------- ----------- ------------ ----------- ---------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Savings deposits (2).... $264,485 $264,485 $264,485 $264,485 $264,485
======== ======== ======== ======== ========
STOCKHOLDERS' EQUITY:
Preferred Stock, $.01
par value, 3,000,000
shares authorized;
none to be issued $ -- $ -- $ -- $ -- $ --
Common Stock, $.01 par
value, 12,000,000
shares authorized;
shares to be issued
as reflected.......... -- 45 53 61 70
Additional paid-in
capital (3)(4)........ -- 43,484 51,316 59,148 68,156
Retained earnings,
substantially
restricted (5)........ 37,195 37,195 37,195 37,195 37,195
LESS:
Common Stock acquired
by ESOP (6)........... -- (3,604) (4,240) (4,876) (5,607)
Common Stock acquired
by Stock
Programs (7).......... -- (1,802) (2,120) (2,438) (2,804)
-------- -------- -------- -------- --------
Total stockholders'
equity................. $ 37,195 $ 75,318 $ 82,204 $ 89,090 $ 97,010
======== ======== ======== ======== ========
</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%
to reflect changes in market or general financial and economic conditions
following the commencement of the Subscription Offering.
(2) Does not reflect withdrawals from savings deposit accounts for the
purchase of Common Stock in the Conversion. Such withdrawals would reduce
pro forma savings deposits by the amount withdrawn.
(3) No effect has been given to the issuance of additional shares of Common
Stock pursuant to the Company's Stock Option Plans which, if implemented
by the Company prior to the first anniversary of the Conversion, will be
presented for approval by stockholders at a meeting of stockholders to be
held no earlier than six months following the completion of the
Conversion. If implemented, 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
"Management of the Association--Benefits--Stock Option Plans."
(4) Amount shown net of expected conversion expenses of approximately $1.5
million, $1.6 million, $1.7 million, and $1.9 million, respectively,
corresponding to the issuance of 4,505,000 shares, 5,300,000 shares,
6,095,000 shares, and 7,009,250 shares.
(5) The retained earnings of the Association will continue to be substantially
restricted after the Conversion. See "The Conversion--Effects of
Conversion--Liquidation Rights" and "Regulation--Federal Savings
Associations--Limitation on Capital Distributions."
(6) 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 "Management of the
Association--Executive Compensation" and "--Benefits--Employee Stock
Ownership Plan and Trust."
(7) Assumes that an amount equal to 4% of the shares of the Common Stock
issued in the Conversion will be 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
stockholders' equity. Implementation of the Stock Programs prior to the
first anniversary of the Conversion will be subject to the approval of the
Company's stockholders to be obtained at a meeting of stockholders to be
held no earlier than six month's following the completion of the
Conversion. See "Management of the Association--Executive Compensation"
and "Pro Forma Data" regarding the dilutive effect of the Stock Programs.
36
<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 $43.5 million and $59.2 million (or $68.2
million in the event the Estimated Price Range is increased by 15%) based upon
the following assumptions: (i) 100% of the shares of Common Stock will be sold
in the Subscription and Community Offerings, as follows: (a) 8% will be sold
to the ESOP and 204,750 shares will be sold to directors, officers and
employees or members of such persons' immediate families; and (b) the
remainder will be sold to Eligible Account Holders, Supplemental Eligible
Account Holders and Other Members in the Subscription Offering and to other
persons in the Community Offering; (ii) Hovde will receive a fee equal to
1.50% of the aggregate actual purchase price of the shares sold to Eligible
Account Holders, Supplemental Eligible Account Holders, Other Members or in
the Community Offering, excluding shares purchased by directors, officers,
employees and their families and the ESOP for which there is no fee; (iii) no
shares are sold in the Syndicated Community Offering; and (iv) Conversion
expenses, excluding the fees paid to Hovde, will be approximately $920,000.
Pro forma net earnings have been calculated assuming the Common Stock had
been sold at the beginning of the periods and the net proceeds had been
invested at an average yield of 6.03% and 6.04% for the three months ended
March 31, 1996 and the year ended December 31, 1995, respectively, which is
the arithmetic average of the Association's average yield on its interest-
earning assets and the weighted average rate paid on its deposits during such
periods (as required by OTS regulations). The pro-forma after-tax yields are
assumed to be 3.67% and 3.59% for these respective periods, based on an
effective tax rate of 39.2% and 40.5%, respectively, for such periods. The
effect of withdrawals from savings deposit accounts for the purchase of Common
Stock has not been reflected. Historical and pro forma per share amounts have
been calculated by dividing historical and pro forma amounts by the indicated
number of shares of Common Stock, as adjusted (in the case of pro forma net
earnings per share) to give effect to the purchase of shares by the ESOP. Pro
forma stockholders' equity amounts have been calculated as if the Common Stock
had been sold on March 31, 1996 and December 31, 1995, respectively, and,
accordingly, no effect has been given to the assumed earnings effect of the
transactions.
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 Generally Accepted Accounting Principles
("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 Association and pro
forma data of the Company at or for the three month period ended March 31,
1996 and the fiscal year ended December 31, 1995 based on the assumptions set
forth above and in the tables and should not be used as a basis for
projections of market value of the Common Stock following the Conversion. No
effect has been given in the tables to the possible termination of the
Association's pension plan. The tables below give effect to the Stock
Programs, which are expected to be adopted by the Company following the
Conversion and which, if implemented prior to the first anniversary of the
Conversion, will be presented to stockholders for approval at a meeting of
stockholders to be held no earlier than six months after completion of the
Conversion. See footnote 2 to the tables. 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 to be adopted by the Board of
Directors of the Company, 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 and "The Conversion--Effects
of Conversion--Liquidation Rights" and "Management of the Association--
Benefits--Stock Option Plans."
37
<PAGE>
<TABLE>
<CAPTION>
AT OR FOR THE THREE MONTHS ENDED MARCH 31, 1996
-------------------------------------------------------------------
4,505,000 5,300,000 6,095,000 7,009,250
SHARES SOLD SHARES SOLD SHARES SOLD SHARES SOLD
AT $10.00 AT $10.00 AT $10.00 AT $10.00 PER
PER SHARE PER SHARE PER SHARE SHARE (15%
(MINIMUM (MIDPOINT (MAXIMUM ABOVE MAXIMUM
OF RANGE) OF RANGE) OF RANGE) OF RANGE) (1)
-------------- -------------- -------------- ----------------
(DOLLARS IN THOUSANDS, EXCEPT SHARES AND PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Gross proceeds.......... $ 45,050 $ 53,000 $ 60,950 $ 70,093
Less offering expenses
and commissions........ (1,521) (1,631) (1,741) (1,867)
-------------- -------------- -------------- --------------
Estimated net proceeds.. 43,529 51,369 59,209 68,226
Less: Common Stock
purchased by ESOP (2).. (3,604) (4,240) (4,876) (5,607)
Common Stock purchased
by Stock Programs
(3).................. (1,802) (2,120) (2,438) (2,804)
-------------- -------------- -------------- --------------
Estimated net proceeds,
as adjusted............ $ 38,123 $ 45,009 $ 51,895 $ 59,815
============== ============== ============== ==============
Net earnings:
Historical............. $ 512 $ 512 $ 512 $ 512
Pro forma net earnings
on net proceeds....... 350 413 476 549
Pro forma ESOP
adjustment (2)........ (78) (93) (106) (122)
Pro forma Stock
Programs adjustment
(3)................... (55) (64) (74) (85)
-------------- -------------- -------------- --------------
Pro forma net
earnings (4)........ $ 729 $ 768 $ 808 $ 854
============== ============== ============== ==============
Per share net earnings:
Historical............. $ 0.12 $ 0.11 $ 0.09 $ 0.08
Pro forma net earnings
on net proceeds....... 0.08 0.08 0.08 0.08
Pro forma ESOP
adjustment (2)........ (0.02) (0.02) (0.02) (0.02)
Pro forma Stock
Programs adjustment
(3)................... (0.01) (0.01) (0.01) (0.01)
-------------- -------------- -------------- --------------
Pro forma net earnings
per share (4)(5)...... $ 0.17 $ 0.16 $ 0.14 $ 0.13
============== ============== ============== ==============
Shares used in
calculation (2)....... 4,157,500 4,891,000 5,625,000 6,468,500
Stockholders' equity:
Historical............. $ 37,195 $ 37,195 $ 37,195 $ 37,195
Estimated net
proceeds.............. 43,529 51,369 59,209 68,226
Less: Common Stock
acquired by ESOP (2)... (3,604) (4,240) (4,876) (5,607)
Common Stock acquired
by Stock Programs
(2)................... (1,802) (2,120) (2,438) (2,804)
-------------- -------------- -------------- --------------
Pro forma
stockholders' equity
(2)(3)(4)(5)(6)....... $ 75,318 $ 82,204 $ 89,090 $ 97,010
============== ============== ============== ==============
Stockholders' equity per
share: (5)
Historical............. $ 8.26 $ 7.02 $ 6.10 $ 5.31
Estimated net
proceeds.............. 9.66 9.69 9.72 9.73
Less: Common Stock
acquired by ESOP (2)... (0.80) (0.80) (0.80) (0.80)
Common Stock acquired
by Stock Programs
(3).................. (0.40) (0.40) (0.40) (0.40)
-------------- -------------- -------------- --------------
Pro forma
stockholders' equity
per share
(2)(3)(4)(5)(6)....... $ 16.72 $ 15.51 $ 14.62 $ 13.84
============== ============== ============== ==============
Shares used in
calculation........... 4,505,000 5,300,000 6,095,000 7,009,250
Offering price as a
percentage of pro forma
stockholders' equity
per share.............. 59.81% 64.47% 68.40% 72.25%
============== ============== ============== ==============
Offering price to pro
forma net earnings
per share............. 14.71x 15.63x 17.86x 19.23x
============== ============== ============== ==============
</TABLE>
(Notes following tables)
38
<PAGE>
<TABLE>
<CAPTION>
AT OR FOR THE YEAR ENDED DECEMBER 31, 1995
----------------------------------------------------
4,505,000 5,300,000 6,095,000 7,009,250
SHARES SOLD SHARES SOLD SHARES SOLD SHARES SOLD
AT $10.00 AT $10.00 AT $10.00 AT $10.00 PER
PER SHARE PER SHARE PER SHARE SHARE (15%
(MINIMUM (MIDPOINT (MAXIMUM ABOVE MAXIMUM
OF RANGE) OF RANGE) OF RANGE) OF RANGE) (1)
----------- ----------- ----------- -------------
(DOLLARS IN THOUSANDS, EXCEPT SHARES AND PER
SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Gross proceeds............... $ 45,050 $ 53,000 $ 60,960 $ 70,093
Less offering expenses and
commissions................. (1,521) (1,631) (1,741) (1,867)
---------- ---------- ---------- ----------
Estimated net proceeds....... 43,529 51,369 59,209 68,226
Less: Common Stock purchased
by ESOP (2)................. (3,604) (4,240) (4,876) (5,607)
Common Stock purchased
by Stock Programs (3)....... (1,802) (2,120) (2,438) (2,804)
---------- ---------- ---------- ----------
Estimated net proceeds, as
adjusted.................... $ 38,123 $ 45,009 $ 51,895 $ 59,815
========== ========== ========== ==========
Net earnings:
Historical.................. $ 2,364 $ 2,364 $ 2,364 $ 2,364
Pro forma net earnings on
net proceeds............... 1,369 1,616 1,863 2,147
Pro forma ESOP adjustment
(2)........................ (306) (360) (414) (477)
Pro forma Stock Programs
adjustment (3)............. (214) (252) (290) (334)
---------- ---------- ---------- ----------
Pro forma net earnings
(4)...................... $ 3,213 $ 3,368 $ 3,523 $ 3,700
---------- ---------- ---------- ----------
Per share net earnings:
Historical.................. $ 0.56 $ 0.47 $ 0.41 $ 0.36
Pro forma net earnings on
net proceeds............... 0.33 0.33 0.33 0.33
Pro forma ESOP adjustment
(2)........................ (0.07) (0.07) (0.07) (0.07)
Pro forma Stock Programs
adjustment (3)............. (0.05) (0.05) (0.05) (0.05)
---------- ---------- ---------- ----------
Pro forma net earnings per
share (4)(5)............... $ 0.77 $ 0.68 $ 0.62 $ 0.57
========== ========== ========== ==========
Shares used in calculation
(2)........................ 4,196,000 4,936,500 5,677,000 6,528,500
Stockholders' equity:
Historical.................. $ 36,683 $ 36,683 $ 36,683 $ 36,683
Estimated net proceeds...... 43,529 51,369 59,209 68,226
Less: Common Stock acquired
by ESOP (2)................ (3,604) (4,240) (4,876) (5,607)
Common Stock acquired
by Stock Programs (3)...... (1,802) (2,120) (2,438) (2,804)
---------- ---------- ---------- ----------
Pro forma stockholders'
equity (2)(3)(4)(5)(6)..... $ 74,806 $ 81,692 $ 88,578 $ 96,498
========== ========== ========== ==========
Stockholders' equity per
share: (5)
Historical.................. $ 8.14 $ 6.92 $ 6.02 $ 5.24
Estimated net proceeds...... 9.66 9.69 9.71 9.73
Less: Common Stock acquired
by ESOP (2)................ (0.80) (0.80) (0.80) (0.80)
Common Stock acquired
by Stock Programs (3)...... (0.40) (0.40) (0.40) (0.40)
---------- ---------- ---------- ----------
Pro forma stockholders'
equity per share
(2)(3)(4)(5)(6)............ $ 16.60 $ 15.41 $ 14.53 $ 13.77
========== ========== ========== ==========
Shares used in calculation.. 4,505,000 5,300,000 6,095,000 7,009,250
Offering price as a
percentage of pro forma
stockholders' equity per
share....................... 60.24% 64.89% 68.82% 72.62%
========== ========== ========== ==========
Offering price to pro forma
net earnings per share...... 12.99x 14.71x 16.13x 17.54x
========== ========== ========== ==========
</TABLE>
(Notes on following page)
39
<PAGE>
(1) As adjusted to give effect to an increase of up to 15% in the number of
shares offered to reflect possible changes in market and financial
conditions following the commencement of the Subscription Offering.
(2) It is assumed that 8% of the shares of Common Stock offered in the
Conversion will be purchased by the ESOP. The funds used to acquire such
shares are expected to be borrowed by the ESOP from the net Conversion
proceeds retained by the Company. The Association intends to make
contributions to the ESOP in amounts at least equal to the principal and
interest requirement of the debt. The Association's payment of the ESOP
debt is based upon equal principal installments plus interest over a 7-
year period. Assuming the Company makes the ESOP loan, interest income
earned by the Company on the ESOP debt will offset the interest paid by
the Association. Accordingly, only the principal payments on the ESOP debt
are recorded as an expense (tax-effected) to the Company on a consolidated
basis. The amount of ESOP debt is reflected as a reduction to
stockholders' equity. In the event that the ESOP were to receive a loan
from an independent third party, both ESOP expense and earnings on the
proceeds retained by the Company would be expected to increase.
For purposes of these tables the purchase price of $10.00 was utilized to
calculate ESOP expense. The Association will account for the ESOP in
accordance with the American Institute of Certified Public Accountants
("AICPA") Accounting Standards Division's Statement of Position No. 93-6.
"Employers' Accounting for Employee Stock Ownership Plans" ("SOP No. 93-6").
Accordingly, the Association will recognize compensation expense equal to
the fair value of ESOP shares at the time they are committed to be released
to participants. As a result, to the extent the fair value of the Common
Stock appreciates over time, compensation expense related to the ESOP will
increase. SOP No. 93-6 also requires that, for the earnings per share
computations for leveraged ESOPs, outstanding shares include only such
shares as have been committed to be released to participants. The table at
or for the year ended December 31, 1995 assumes that the number of ESOP
shares are allocated on a straight-line basis over 7 years, and,
accordingly, 14.3% of the ESOP shares are assumed to be committed to be
released at the beginning of the first year following Conversion (3.6% of
ESOP shares in the table at or for the three months ended March 31, 1996).
See "Management's Discussion and Analysis of Financial Condition and Results
of Operations--Impact of Accounting Standards" and "Management of the
Association--Benefits--Employee Stock Ownership Plan and Trust."
(3) Gives effect to the Stock Programs expected to be adopted by the Company
following the Conversion and which, if implemented prior to this first
anniversary of the Conversion, will be presented for approval at a meeting
of stockholders to be held no earlier than six months after completion of
the Conversion. If implemented, 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 180,200, 212,000, 243,800 and 280,400 shares of Common
Stock respectively at the minimum, midpoint, maximum and 15% above the
maximum of the range, either through open market purchases, subject to OTS
approval, if necessary, 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 Association. 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 three months ended March 31, 1996 and the year ended
December 31, 1995 in open market purchases at the Purchase Price, and that
5% and 20% of the amount contributed was amortized to expense during the
three months ended March 31, 1996 and the year ended December 31, 1995,
respectively. 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 3.85% during the three months ended March 31, 1996 and the
year ended December 31, 1995, pro forma net earnings per share would be
$0.16, $0.15, $0.13 and $0.12 at the minimum, midpoint, maximum and 15%
above the maximum of the range, respectively, for the three months ended
March 31, 1996 and $0.74, $0.66, $0.60 and $0.55 at the minimum, midpoint,
maximum and 15% above the maximum of the range, respectively, for the year
ended December 31, 1995; pro forma stockholders' equity per share would be
$16.46, $15.30, $14.44 and $13.69 at the minimum, midpoint, maximum and
15% above the maximum of the range, respectively, for the three months
ended March 31, 1996 and $16.35, $15.21, $14.36 and $13.62 at the minimum,
midpoint, maximum and 15%
40
<PAGE>
above the maximum of the range, respectively, for the year ended December
31, 1995. There can be no assurance that stockholder approval of the Stock
Programs will be obtained, or the actual purchase price of the shares will
be equal to the Purchase Price. See "Management of the Association--
Benefits."
(4) Had the curtailment of pension plan occurred during the three months ended
March 31, 1996, pro forma net earnings, pro forma net earnings per share,
pro forma stockholders' equity and pro forma stockholders' equity per
share would have been $259,000, $0.05, $81,695,000 and $15.41,
respectively, at the midpoint of the Estimated Price Range. Had the
curtailment of pension plan occurred during the year ended December 31,
1995, pro forma net earnings, pro forma net earnings per share, pro forma
stockholders' equity and pro forma stockholders' equity per share would
have been $2,870,000, $0.58, $81,194,000 and $15.32, respectively, at the
midpoint of the Estimated Price Range.
(5) 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. If the Company implements the Stock
Option Plans prior to the first anniversary of this Conversion, it will
present the Stock Option Plans for approval at a meeting of stockholders
to be held no earlier than six months after the completion of the
Conversion. If the Stock Option Plans are approved by stockholders, an
amount equal to 10% of the Common Stock issued in the Conversion, or
450,500, 530,000, 609,500 and 700,925 shares at the minimum, midpoint,
maximum and 15% above the maximum of the 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 implementation of
the Stock Option Plans and the exercise of all options at the end of the
period at an exercise price of $10.00 per share, the pro forma net
earnings per share would be $0.15, $0.15, $0.13 and $0.12, respectively,
at the minimum, midpoint, maximum and 15% above the maximum of the range
for the three months ended March 31, 1996 and $0.70, $0.62, $0.56 and
$0.52 respectively, at the minimum, midpoint, maximum and 15% above the
maximum of the range for the year ended December 31, 1995; pro forma
stockholders' equity per share would be $16.11, $15.01, $14.20 and $13.49,
respectively, at the minimum, midpoint, maximum and 15% above the maximum
of the range for the three months ended March 31, 1996 and $16.00, $14.92,
$14.12 and $13.42, respectively, at the minimum, midpoint, maximum and 15%
above the maximum of the range for the year ended December 31, 1995. See
"Management of the Association--Benefits--Stock Option Plans."
(6) The retained earnings of the Association will continue to be substantially
restricted after the Conversion. See "Dividend Policy," "The Conversion--
Effects of Conversion--Liquidation Rights" and "Regulation--Regulation of
Federal Savings Associations--Limitation on Capital Distributions."
41
<PAGE>
HOME FEDERAL SAVINGS AND LOAN ASSOCIATION OF ELGIN
STATEMENTS OF EARNINGS
The following Statements of Earnings of the Association for each of the
years in the three year period ended December 31, 1995 have been audited by
KPMG Peat Marwick LLP, independent certified public accountants, whose report
thereon appears elsewhere herein. These statements should be read in
conjunction with the other financial statements and notes thereto included
elsewhere in this Prospectus. The Statements of Earnings for the three month
periods ended March 31, 1996 and 1995 are unaudited, but, in the opinion of
management, reflect all adjustments necessary for a fair presentation of the
results for such periods. All such adjustments are of a normal recurring
nature. The results for the three month period ended March 31, 1996 are not
necessarily indicative of the results of the Association that may be expected
for the entire year.
<TABLE>
<CAPTION>
FOR THE THREE MONTHS FOR THE YEAR ENDED
ENDED MARCH 31, DECEMBER 31,
--------------------- -----------------------------------
1996 1995 1995 1994 1993
---------- ---------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Interest income:
Loans secured by real
estate................ $5,311,628 $5,462,414 $21,719,506 $23,163,269 $26,407,715
Other loans............ 14,752 14,268 60,009 60,004 90,160
Mortgage-backed
securities held to
maturity.............. 3,276 3,989 15,131 17,948 24,488
Investment securities
held to maturity...... 90,000 90,000 360,000 263,689 279,279
Interest-earning
deposits.............. 160,962 130,405 568,537 977,355 632,560
FHLB of Chicago stock.. 48,736 46,385 201,817 186,586 217,942
---------- ---------- ----------- ----------- -----------
Total interest income. 5,629,354 5,747,461 22,925,000 24,668,851 27,652,144
Interest expense:
Savings deposits....... 2,735,951 2,547,846 10,773,428 10,444,459 11,660,777
Borrowed funds......... 37,261 -- 76,961 39,424 130,403
---------- ---------- ----------- ----------- -----------
Total interest
expense.............. 2,773,212 2,547,846 10,850,389 10,483,883 11,791,180
---------- ---------- ----------- ----------- -----------
Net interest income
before provision for
loan losses............ 2,856,142 3,199,615 12,074,611 14,184,968 15,860,964
Provision for loan
losses................. 30,000 45,000 180,000 240,000 240,000
---------- ---------- ----------- ----------- -----------
Net interest income
after provision for
loan losses.......... 2,826,142 3,154,615 11,894,611 13,944,968 15,620,964
Noninterest income:
Service fee income..... 294,642 265,339 1,129,082 1,361,371 1,363,789
Gain on sale of
branches.............. -- -- -- 1,683,298 822,381
Gain on sale of real
estate owned.......... 17,879 -- -- -- 10,071
Gain on sale of office
properties and
equipment............. 1,216 -- -- 47,699 --
Other income........... 5,057 3,806 21,073 61,135 192,105
---------- ---------- ----------- ----------- -----------
Total noninterest
income............... 318,794 269,145 1,150,155 3,153,503 2,388,346
Noninterest expense:
Compensation and
benefits.............. 963,495 922,033 3,691,859 4,143,962 4,507,814
Occupancy expense...... 379,274 377,041 1,607,595 1,682,715 1,722,084
Federal deposit
insurance premiums.... 168,832 180,918 709,346 766,734 688,889
Advertising and
promotion............. 81,300 83,518 371,421 334,289 329,579
Automated teller
machines.............. 113,766 65,946 313,886 321,269 332,860
Data processing........ 252,367 256,556 949,789 858,033 866,806
Other.................. 343,706 402,214 1,424,957 1,516,851 1,954,399
---------- ---------- ----------- ----------- -----------
Total noninterest
expense.............. 2,302,740 2,288,226 9,068,853 9,623,853 10,402,431
---------- ---------- ----------- ----------- -----------
Income before income
taxes and cumulative
effect of change in
accounting principle... 842,196 1,135,534 3,975,913 7,474,618 7,606,879
Income tax expense...... 330,264 440,587 1,611,896 3,116,871 2,997,585
---------- ---------- ----------- ----------- -----------
Income before cumulative
effect of change in
accounting principle... 511,932 694,947 2,364,017 4,357,747 4,609,294
Cumulative effect of
change in accounting
for income
taxes.................. -- -- -- -- 348,742
---------- ---------- ----------- ----------- -----------
Net income............ $ 511,932 $ 694,947 $ 2,364,017 $ 4,357,747 $ 4,260,552
========== ========== =========== =========== ===========
</TABLE>
See accompanying "Notes to Financial Statements" presented elsewhere in this
Prospectus.
42
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
The Company has only recently been formed and, accordingly, has no results
of operations. The Association's results of operations are dependent primarily
on net interest income, which is the difference between the interest income
earned on its interest-earning assets, such as loans and securities, and the
interest expense on its interest-bearing liabilities, such as savings
deposits. The Association also generates non-interest income such as service
charges and other fees. The Association's non-interest expenses primarily
consist of employee compensation and benefits, occupancy expenses, federal
deposit insurance premiums, net costs of real estate owned, data processing
fees and other operating expenses. The Association'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. During the years ended December 31, 1994 and
1993, the Association sold branches, which resulted in gains of $1.7 million
and $822,000, respectively. These non-recurring gains represented
approximately 22.5% of income before income tax expense in 1994 and 10.8% in
1993. The Association does not intend to sell any branches in the foreseeable
future. The Association exceeded all of its regulatory capital requirements at
March 31, 1996. See "Regulatory Capital Compliance" for a discussion of the
historical and pro forma capital of the Association and capital requirements.
See also "Regulation--Regulation of Federal Savings Associations--Capital
Requirements."
MANAGEMENT STRATEGY
Beginning in 1993, the Association began to implement a business strategy
that was intended to improve the Association's profitability and capital
position. The business strategy includes, among other things, an aggressive
program to reduce general and administrative expenses, which resulted in the
sale of three branch offices (one during 1993 and two during 1994). The branch
sales also had the effect of increasing the Association's capital by a total
of $1.5 million. The Association's business strategy also provides for an
operating plan that, among other things, (i) emphasizes the origination of
one-to-four-family residential mortgage loans (secured by properties located
in the Association's delineated lending area), with a particular emphasis on
the origination of adjustable-rate mortgage loans; (ii) provides for the
origination of multifamily, commercial real estate, construction, land and
other loans (consisting primarily of passbook savings and consumer loans) in
the Association's delineated lending area; (iii) requires the Association to
maintain high asset quality by originating all loans in strict compliance with
its underwriting standards; and (iv) focuses on attracting transactional
deposit accounts (rather than certificates of deposit). The Association seeks
to attract and retain customers by providing a high level of personal service,
a variety of loan and deposit products and extended office hours, as well as
14 ATMs at convenient locations throughout the Association's market area.
The Association's business strategy has focused on improving the
Association's profitability and capital position and increasing transactional
deposit accounts and loans made at market rates. Certain steps taken by
management to implement such strategy, including branch sales, have succeeded
in increasing the Association's capital level and reducing its operating
expenses, but have also had the effect of decreasing total assets and total
savings deposits. Such reductions in assets and savings deposits, when
combined with the Association's sensitivity to interest rates, also resulted
in a reduction in net income. See "--Financial Highlights." In addition,
management has determined that paying a rate higher than market rates to
attract deposits and originating loans at rates below market rates would not
be prudent strategies as they would not improve profitability and the
associated asset growth would have a much greater negative effect by diluting
the Association's capital level.
In particular, implementation of management's strategy to improve the
Association's profitability and capital position has had the following
results: Total assets decreased from $347.2 million at December 31, 1992 to
$306.7 million at March 31, 1996. This reduction was primarily the result of
branch sales of $17.1 million and $19.4 million in 1993 and 1994,
respectively, which branch sales also resulted in increasing the Association's
capital by $1.5 million and reducing general and administrative expenses. The
Association's gross loans declined from $305.6 million at December 31, 1993 to
$274.2 at December 31, 1994. The funds generated from the repayments of loans
were primarily used to fund branch sales. Gross loans declined from $274.2
million at
43
<PAGE>
December 31, 1994 to $267.1 million at March 31, 1996. This decline was due to
competitive market conditions and the Association's decision not to offer loan
products at rates below market rates. The Association's savings deposits
declined from their five-year high of $319.0 million at December 31, 1992 to
$267.9 million at December 31, 1994, primarily due to the sale of branches in
1993 and 1994 with savings deposits totaling $39.9 million. The remainder of
the decline was due to competitive market conditions and the Association's
decision not to offer above-market rates on its savings deposits. Competitive
market conditions also account for the decrease in deposits from $267.9
million at December 31, 1994 to $264.5 million at March 31, 1996. See "Risk
Factors--Potential Impact of Changes in Interest Rates." The Company intends
to utilize proceeds from the Conversion to implement its business strategy of
increasing the origination of high quality mortgage loans, coupled with
increasing transactional deposit accounts, which management believes could,
although there can be no assurance that it would, reverse the recent trend of
decreasing total asset size and reduced levels of net income.
MANAGEMENT OF INTEREST RATE RISK
The principal objectives of the Association's interest rate risk management
activities are to (i) evaluate the interest rate risk included in certain
balance sheet accounts, (ii) determine the appropriate level of risk given the
Association's business focus, operating environment, capital and liquidity
requirements and performance objectives, (iii) establish prudent asset
concentration guidelines and (iv) manage the risk consistent with guidelines
approved by the Board of Directors. Through such management, the Association
seeks to reduce the vulnerability of its operating results to changes in
interest rates and to manage the ratio of interest rate sensitive assets to
interest rate sensitive liabilities within specified maturities or repricing
dates. The Association closely monitors its interest rate risk as such risk
relates to its operating strategies through its Asset/Liability Management
Committee (the "ALCO Committee") which reports to the Association's Board of
Directors on at least a quarterly basis. The ALCO Committee is responsible for
reviewing and monitoring the interest rate risk position of the Association to
ensure compliance with the Association's business plan. The ALCO Committee is
also responsible for informing the Board of Directors of regulatory
developments affecting the Association's policy regarding asset and liability
management. The extent of the movement of interest rates, higher or lower, is
an uncertainty that could have a negative impact on the earnings of the
Association. See "Risk Factors--Potential Impact of Changes in Interest
Rates."
As a traditional thrift lender, the Association has a significant amount of
its interest-earning assets invested in fixed-rate mortgage loans with
contractual maturities of up to 30 years. At March 31, 1996, an aggregate of
$203.7 million, or 70.5%, of total interest-earning assets were invested in
such assets. Based upon the assumptions used in the following table, at March
31, 1996, the Association's total interest-bearing liabilities maturing or
repricing within one year exceeded its total interest-earning assets maturing
or repricing in the same time period by $88.4 million, representing a one-year
cumulative "gap," as defined below, as a percentage of total assets of
negative 28.8%. As a result, the Association is vulnerable to increases in
interest rates.
The Association has taken several actions designed to manage its level of
interest rate risk under various market conditions. These actions have
included: (i) increasing the interest rate sensitivity of the Association's
one- to four-family residential loan portfolio through the origination of
adjustable-rate mortgage loans and 15-year fixed rate mortgage loans, as
market conditions permit; (ii) increasing the proportion of liquid assets
invested in instruments with maturities of two years or less; and (iii)
undertaking an effort to lengthen the maturities of its certificates of
deposit. The Association does not currently engage in trading activities or
use derivative instruments to control interest rate risk. Even though such
activities may be permitted with the approval of the Board of Directors, the
Association does not intend to engage in such activities in the immediate
future. Management believes that maintaining a high level of capital also
serves to reduce the effects of the Association's exposure to interest rate
risk, and certain other techniques that reduce interest rate risk but give
rise to other forms of risk are not acceptable solutions.
Despite the efforts taken by the Association to seek to reduce its level of
interest rate risk, and the Association's intent to continue to seek to reduce
its exposure to interest rate risk, the Association has remained vulnerable to
increases in interest rates and has experienced reduced levels of net income
and net interest income in 1994, 1995 and for the three months ended March 31,
1996 as a result of the Association's level of interest
44
<PAGE>
rate risk, as well as the Association's reduction in total asset size during
those periods. There can be no assurance that the Association will not
continue to experience reduced levels of net income and net interest income
during periods of increasing interest rates, unless the Association's
sensitivity to increases in interest rates is reduced.
The matching of assets and liabilities may be analyzed by examining the
extent to which such assets and liabilities are "interest rate sensitive" and
by monitoring an institution's interest rate sensitivity "gap." An asset or
liability is said to be interest rate sensitive within a specific time period
if it will mature or reprice within that time period. The interest rate
sensitivity gap is defined as the difference between the amount of interest-
earning assets maturing or repricing within the same time period and the
amount of interest-bearing liabilities maturing or repricing within that time
period. A gap is considered positive when the amount of interest rate
sensitive assets exceeds the amount of interest rate sensitive liabilities. A
gap is considered negative when the amount of interest rate sensitive
liabilities exceeds the amount of interest rate sensitive assets. During a
period of rising interest rates, therefore, a negative gap theoretically would
tend to adversely affect net interest income. Conversely, during a period of
falling interest rates, a negative gap position would theoretically tend to
result in an increase in net interest income.
The following table sets forth the amounts of interest-earning assets and
interest-bearing liabilities outstanding at March 31, 1996, which are
anticipated by the Association, based upon certain assumptions, to reprice or
mature in each of the future time periods shown. Except as stated below, the
amount of assets and liabilities shown which reprice or mature during a
particular period were determined based on the earlier of term to repricing or
the term to repayment of the asset or liability. The table is intended to
provide an approximation of the projected repricing of assets and liabilities
at March 31, 1996 on the basis of contractual maturities, anticipated
prepayments and scheduled rate adjustments within a three-month period and
subsequent selected time intervals. For purposes of presentation in the
following table, the Association utilized the national deposit decay rate
assumptions published by the OTS as of December 31, 1995 (the latest
available), which, for NOW/Super NOW accounts, money market accounts and
passbook accounts in the one year or less category were 62%, 70% and 84%,
respectively. The loan amounts in the table reflect principal balances
expected to be redeployed and/or repriced as a result of contractual
amortization and anticipated early payoffs of adjustable-rate loans and fixed-
rate loans and as a result of contractual rate adjustments on adjustable-rate
loans. The amounts attributable to mortgage-backed securities reflect
principal balances expected to be redeployed and/or repriced as a result of
anticipated principal repayments.
<TABLE>
<CAPTION>
AT MARCH 31, 1996
-------------------------------------------------------------------------------
MORE THAN MORE THAN MORE THAN MORE THAN
3 MONTHS 3 MONTHS TO 6 MONTHS TO 1 YEAR TO 3 YEARS MORE THAN
OR LESS 6 MONTHS 1 YEAR 3 YEARS TO 5 YEARS 5 YEARS TOTAL
-------- ----------- ----------- --------- ---------- --------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS:
Loans receivable(1).... $ 15,055 $ 12,063 $ 36,760 $ 86,978 $ 38,094 $75,988 $264,938
Investment securities
held to maturity...... -- -- -- 5,955 -- -- 5,955
Mortgage-backed
securities held to
maturity.............. 12 10 17 58 40 36 173
Interest-earning
deposits.............. 15,161 -- -- -- -- -- 15,161
FHLB of Chicago stock.. 2,678 -- -- -- -- -- 2,678
-------- -------- -------- -------- -------- ------- --------
Total interest-earning
assets............... $ 32,906 $ 12,073 $ 36,777 $ 92,991 $ 38,134 $76,024 $288,905
======== ======== ======== ======== ======== ======= ========
INTEREST-BEARING
LIABILITIES:
NOW/Super NOW accounts. $ 8,754 $ 8,754 $ 10,864 $ 6,027 $ 3,982 $ 7,753 $ 46,134
Money market accounts.. 3,999 3,999 4,402 3,289 1,282 819 17,790
Passbook accounts...... 19,944 19,944 15,906 2,927 2,115 5,506 66,342
Certificates of
deposit............... 33,381 13,413 26,828 27,165 28,531 -- 129,318
-------- -------- -------- -------- -------- ------- --------
Total interest-bearing
liabilities.......... $ 66,078 $ 46,110 $ 58,000 $ 39,408 $ 35,910 $14,078 $259,584
======== ======== ======== ======== ======== ======= ========
Interest sensitivity gap
per period............. $(33,172) $(34,037) $(21,223) $ 53,583 $ 2,224 $61,946
Cumulative interest
sensitivity gap........ (33,172) (67,209) (88,432) (34,849) (32,625) 29,321
Cumulative interest
sensitivity gap as a
percent of total
assets................. (10.82)% (21.91)% (28.83)% (11.36)% (10.64)% 9.56%
Cumulative total
interest-earning assets
as a percent of
cumulative total
interest-bearing
liabilities............ 49.80% 40.09% 48.04% 83.37% 86.71% 111.30%
</TABLE>
- --------
(1) Loans receivable represents gross loans less net deferred loan fees and
loans in process.
45
<PAGE>
As its primary interest rate risk planning tool, the Association utilizes a
market value model prepared by the OTS (the "OTS NPV model"), which is
prepared quarterly, based on the Association's quarterly Thrift Financial
Reports filed with the OTS. The OTS NPV model measures the Association's
interest rate risk by approximating the Association's net portfolio value
("NPV"), which is the net present value of expected cash flows from assets,
liabilities and any off-balance sheet contracts, under a range of interest
rate scenarios, which range from a 400 basis point increase to a 400 basis
point decrease in market interest rates (measured in 100 basis point
increments). The Association's asset and liability structure results in a
decrease in NPV in a rising interest rate scenario and an increase in NPV in a
declining interest rate scenario. During periods of rising interest rates, the
value of monetary assets declines more rapidly than the value of monetary
liabilities rises. Conversely, during periods of falling interest rates, the
value of monetary assets rises more rapidly than the value of monetary
liabilities declines. However, the amount of change in value of specific
assets and liabilities due to changes in interest rates is not the same in a
rising rate environment as in a falling interest rate environment (i.e., the
amount of value increase under a specific rate decline may not equal the
amount of value decrease under an identical upward interest rate movement).
The following table sets forth the Association's NPV at March 31, 1996, as
calculated by the OTS, based on information provided by the Association to the
OTS.
<TABLE>
<CAPTION>
NPV AS % OF ECONOMIC
CHANGE IN NET PORTFOLIO VALUE VALUE OF ASSETS
INTEREST RATES ---------------------------------- -------------------------
IN BASIS POINTS $ % %
(RATE SHOCK) AMOUNT CHANGE CHANGE NPV RATIO CHANGE(1)
- --------------- ------ ------ ------ --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
400 $29,797 $(19,853) (40)% 10.11% (5.36)%
300 35,031 (14,619) (29) 11.62 (3.85)
200 40,340 (9,309) (19) 13.09 (2.39)
100 45,509 (4,141) (8) 14.44 (1.03)
Static 49,650 -- -- 15.47 --
(100) 52,298 2,648 +5 16.08 +0.61
(200) 52,604 2,954 +6 16.07 +0.59
(300) 51,813 2,163 +4 15.77 +0.29
(400) 52,535 2,885 +6 15.85 +0.38
</TABLE>
- --------
(1) Based on the economic value of the Association's assets assuming no change
in interest rates.
As shown by the table above, increases in interest rates will result in net
decreases in the Association's net portfolio value, while decreases in
interest rates will result in smaller net increases in the Association's net
portfolio value. See "Risk Factors--Potential Impact of Changes in Interest
Rates." Moreover, because a 200 basis point increase in interest rates would
cause more than a 2% decrease in the ratio of NPV to the economic value of the
Association's assets, the Association is considered by the OTS to have "above
normal" interest rate risk. The result of being characterized as having "above
normal" interest rate risk is that, upon the effectiveness of the interest
rate risk component of the OTS' risk-based capital requirements, the
Association would be required to hold additional capital with respect thereto.
At March 31, 1996, the Association would have had its risk-based capital
requirement increased by $816,000 had the interest rate risk component of the
OTS risk-based capital requirement been in effect at such date. See
"Regulation--Regulation of Federal Savings Associations--Capital
Requirements."
At March 31, 1996, the Association's Board of Directors had adopted interest
rate risk target limits which established maximum potential decreases in the
Association's NPV of 20%, 40%, 60% and 75% in the event of 1%, 2%, 3% and 4%
immediate and sustained increases in market interest rates, respectively. As
indicated in the table above, at March 31, 1996, the Association was within
such Board-approved limits. The Association's target limits are reviewed by
the Board of Directors regularly and are changed in light of market conditions
and other factors.
Certain shortcomings are inherent in the methods of analysis presented in
both the computation of NPV and in the analysis presented in the prior table
setting forth the maturing and repricing of interest-earning assets and
46
<PAGE>
interest-bearing liabilities. For example, although certain assets and
liabilities may have similar maturities or periods to repricing, they may
react in different degrees to changes in market interest rates. Also, the
interest rates on certain types of assets and liabilities may fluctuate in
advance of changes in market interest rates while interest rates on other
types of assets may lag behind changes in market rates. Additionally, certain
assets, such as adjustable-rate loans, have features which restrict changes in
interest rates both on a short-term basis and over the life of the asset.
Further, in the event of a change in interest rates, prepayment and early
withdrawal levels would likely deviate significantly from those assumed in
calculating the table. Finally, the ability of many borrowers to make
scheduled payments on their adjustable-rate loans may decrease in the event of
an interest rate increase. As a result, the actual effect of changing interest
rates may differ from that presented in the foregoing tables.
ANALYSIS OF NET INTEREST INCOME
Net interest income represents the difference between income on interest-
earning assets and expense on interest-bearing liabilities. Net interest
income depends upon the relative amounts of interest-earning assets and
interest-bearing liabilities and the interest rates earned or paid on them.
47
<PAGE>
The following tables set forth certain information relating to the
Association's statement of financial condition at March 31, 1996 and
statements of financial condition and the statements of operations for the
years ended December 31, 1995, 1994 and 1993 and the three months ended March
31, 1996 and 1995, and reflects the average yield on assets and average cost
of liabilities for the periods indicated. Such 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
monthly balances. The yields and costs include fees which are considered
adjustments to yields.
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED MARCH 31,
AT MARCH 31, ------------------------------------------------------
1996 1996 1995
------------------ -------------------------- --------------------------
WEIGHTED AVERAGE AVERAGE
AVERAGE AVERAGE YIELD/ AVERAGE YIELD/
BALANCE RATE(1) BALANCE INTEREST COST BALANCE INTEREST COST
-------- -------- -------- -------- ------- -------- -------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS:
Interest-earning
assets:
Real estate loans(2)... $264,373 7.68% $265,140 $5,311 8.01% $271,181 $5,463 8.06%
Other loans............ 565 9.29 623 15 9.63 665 14 8.42
Mortgage-backed
securities............ 173 6.99 177 3 6.78 234 4 6.84
Investment securities.. 5,955 6.05 5,953 90 6.05 5,923 90 6.08
Interest-earning
deposits.............. 15,161 5.15 12,140 161 5.30 8,891 131 5.89
FHLB of Chicago stock.. 2,678 6.50 2,930 49 6.69 3,010 46 6.11
-------- ------ -------- ------ ------ -------- ------ ------
Total interest-earning
assets............... 288,905 7.51% 286,963 $5,629 7.85% 289,904 $5,748 7.93%
-------- ------ -------- ------ ------ -------- ------ ------
Allowance for loan
losses................ (856) (846) (679)
Non-interest-earning
assets................ 18,639 16,644 14,980
-------- -------- --------
Total assets.......... $306,688 $302,761 $304,205
======== ======== ========
LIABILITIES AND EQUITY:
Interest-bearing
liabilities:
NOW/Super NOW accounts. $ 46,134 2.25% $ 43,066 $ 229 2.13% $ 43,105 $ 236 2.19%
Money market accounts.. 17,790 3.22 17,678 142 3.21 22,114 160 2.89
Passbook accounts...... 66,342 3.00 65,773 516 3.14 72,630 550 3.03
Certificates of
deposit............... 129,318 5.68 127,401 1,849 5.81 123,677 1,602 5.18
Borrowed funds......... -- -- 2,601 37 5.69 -- -- --
-------- ------ -------- ------ ------ -------- ------ ------
Total interest-bearing
liabilities.......... 259,584 4.22% 256,519 $2,773 4.32% 261,526 $2,548 3.90%
-------- ------ -------- ------ ------ -------- ------ ------
Non-interest-bearing
NOW accounts.......... 4,901 4,314 2,463
Other non-interest-
bearing liabilities... 5,008 4,904 4,897
-------- -------- --------
Total liabilities..... 269,493 265,737 268,886
Equity................. 37,195 37,024 35,319
-------- -------- --------
Total liabilities and
equity............... $306,688 $302,761 $304,205
======== ======== ========
Net interest income.... $2,856 $3,200
====== ======
Interest rate
spread(3)............. 3.29% 3.53% 4.03%
====== ====== ======
Net interest margin(4). 3.98% 4.41%
====== ======
Ratio of interest-
earning assets to
interest-bearing
liabilities........... 111.30% 111.87% 110.85%
====== ====== ======
</TABLE>
- --------
(1) The weighted average rate represents the coupon associated with each asset
and liability, weighted by the principal balance associated with each
asset and liability.
(2) In computing the average balance of loans, non-accrual loans have been
included.
(3) Interest rate spread represents the difference between the average rate on
interest-earning assets and the average cost of interest-bearing
liabilities.
(4) Net interest margin represents net interest income as a percentage of
average interest-earning assets.
48
<PAGE>
<TABLE>
<CAPTION>
FOR THE 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:
Real estate loans(1)... $269,323 $21,719 8.06% $281,240 $23,160 8.24% $302,977 $26,408 8.72%
Other loans............ 670 60 8.96 747 63 8.43 855 90 10.53
Mortgage-backed
securities............ 213 15 7.04 266 18 6.77 338 24 7.10
Investment securities.. 5,934 360 6.07 4,431 264 5.96 4,507 279 6.19
Interest-earning
deposits.............. 8,981 569 6.34 23,013 977 4.25 20,195 633 3.13
FHLB of Chicago stock.. 3,045 202 6.63 3,126 187 5.98 3,708 218 5.88
-------- ------- ------ -------- ------- ------ -------- ------- ------
Total interest-earning
assets............... 288,166 $22,925 7.96% 312,823 $24,669 7.89% 332,580 $27,652 8.31%
-------- ------- ------ -------- ------- ------ -------- ------- ------
Allowance for loan
losses................ (746) (572) (544)
Non-interest-earning
assets................ 15,769 16,628 17,306
-------- -------- --------
Total assets.......... $303,189 $328,879 $349,342
======== ======== ========
LIABILITIES AND EQUITY:
Interest-bearing
liabilities:
NOW/Super NOW accounts. $ 43,035 $ 980 2.28% $ 52,685 $ 1,066 2.02% $ 55,745 $ 1,151 2.06%
Money market accounts.. 19,927 565 2.84 27,517 767 2.79 34,271 1,001 2.92
Passbook accounts...... 69,362 2,137 3.08 86,062 2,627 3.05 87,397 2,718 3.11
Certificates of
deposit............... 125,820 7,091 5.64 125,946 5,985 4.75 136,618 6,791 4.97
Borrowed funds......... 1,250 77 6.16 583 39 6.69 3,583 130 3.63
-------- ------- ------ -------- ------- ------ -------- ------- ------
Total interest bearing
liabilities.......... 259,394 10,850 4.18% 292,793 10,484 3.58% 317,614 11,791 3.71%
-------- ------- ------ -------- ------- ------ -------- ------- ------
Non-interest-bearing
NOW accounts.......... 3,410 -- --
Other non-interest-
bearing liabilities... 4,208 3,715 3,804
-------- -------- --------
Total liabilities..... 267,012 296,508 321,418
-------- -------- --------
Equity................. 36,177 32,371 27,924
-------- -------- --------
Total liabilities and
equity............... $303,189 $328,879 $349,342
======== ======== ========
Net interest income.... $12,075 $14,185 $15,861
======= ======= =======
Interest rate
spread(2)............. 3.78% 4.31% 4.60%
====== ====== ======
Net interest margin(3). 4.19% 4.53% 4.77%
====== ====== ======
Ratio of interest-
earning assets to
interest-bearing
liabilities........... 111.09% 106.84% 104.71%
====== ====== ======
</TABLE>
- --------
(1) In computing the average balance of loans, non-accrual loans have been
included.
(2) Interest rate spread represents the difference between the average rate on
interest-earning assets and the average cost of interest-bearing
liabilities.
(3) Net interest margin on interest-earning assets represents net interest
income as a percentage of average interest-earning assets.
RATE/VOLUME ANALYSIS
Net interest income can also be analyzed in terms of the impact of changing
interest rates on interest-earning assets and interest-bearing liabilities and
the change in the volume or amount of these assets and liabilities. In
general, increases in the volume or amount of interest-bearing liabilities, as
well as increases in the interest rates paid on interest-bearing liabilities,
and decreases in the volume or amount of interest-earning assets, as well as
decreases in the yields earned on interest-earning assets, have the effect of
reducing the Associations's net interest income. Conversely, increases in the
volume or amount of the Association's interest-earning assets, as well as
increases in the yields earned on interest-earning assets, and decreases in
the volume or amount of interest-bearing liabilities, as well as decreases in
the rates paid on interest-bearing liabilities, have the effect of
49
<PAGE>
increasing the Association's net interest income. The following table
represents the extent to which changes in interest rates and changes in the
volume of interest-earning assets and interest-bearing liabilities have
affected the Association'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 (change 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. Changes attributable to
the combined impact of volume and rate have been allocated proportionately to
separately reflect the changes due to the volume and the changes due to rate.
<TABLE>
<CAPTION>
THREE MONTHS ENDED YEAR ENDED YEAR ENDED
MARCH 31, 1996 DECEMBER 31, 1995 DECEMBER 31, 1994
COMPARED TO COMPARED TO COMPARED TO
THREE MONTHS ENDED YEAR ENDED YEAR ENDED
MARCH 31, 1995 DECEMBER 31, 1994 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:
Real estate loans...... $ (119) $ (33) $(152) $ (968) $ (473) $(1,441) $ (1,821) $ (1,427) $(3,248)
Other loans............ (1) 2 1 (7) 4 (3) (10) (17) (27)
Mortgage-backed
securities............ (1) -- (1) (4) 1 (3) (5) (1) (6)
Investment securities.. -- -- -- 91 5 96 (5) (10) (15)
Interest-earning
deposits.............. 40 (10) 30 (2,119) 1,711 (408) 97 247 344
FHLB of Chicago stock.. (2) 5 3 (5) 20 15 (35) 4 (31)
--------- --------- ----- ---------- --------- ------- --------- --------- -------
Total.................. $ (83) $ (36) $(119) $ (3,012) $ 1,268 $(1,744) $ (1,779) $ (1,204) $(2,983)
========= ========= ===== ========== ========= ======= ========= ========= =======
Interest-bearing
liabilities:
NOW/Super NOW accounts. $ -- $ (7) $ (7) $ (273) $ 187 $ (86) $ (62) $ (23) $ (85)
Money market accounts.. (40) 22 (18) (215) 13 (202) (190) (44) (234)
Passbook accounts...... (55) 21 (34) (515) 25 (490) (41) (50) (91)
Certificates of
deposit............... 66 181 247 (6) 1,112 1,106 (516) (290) (806)
Borrowed funds......... 37 -- 37 41 (3) 38 (154) 63 (91)
--------- --------- ----- ---------- --------- ------- --------- --------- -------
Total.................. $ 8 $ 217 $ 225 $ (968) $ 1,334 $ 366 $ (963) $ (344) $(1,307)
========= ========= ===== ========== ========= ======= ========= ========= =======
Net change in net
interest income........ $ (91) $ (253) $(344) $ (2,044) $ (66) $(2,110) $ (816) $ (860) $(1,676)
========= ========= ===== ========== ========= ======= ========= ========= =======
</TABLE>
COMPARISON OF FINANCIAL CONDITION AT MARCH 31, 1996 AND DECEMBER 31, 1995
Total assets increased $2.2 million or 0.72% to $306.7 million at March 31,
1996 from $304.5 million at December 31, 1995. The increase in assets is
primarily due to the increase in funds generated by an increase in savings
deposits of $4.5 million, an increase of advance payments by borrowers for
taxes and insurance of $1.1 million and a $512,000 increase in retained
earnings for the three months ended March 31, 1996, which increases were
offset by the repayment of $4.0 million in advances from the FHLB of Chicago.
The savings deposit growth of $4.5 million is a 1.7% increase for the three
months ended March 31, 1996. The $1.1 million growth in advance payments by
borrowers for taxes and insurance represents payments made to escrow accounts
by borrowers for payments of real estate taxes and insurance.
The components of the Association's asset base also changed from December
31, 1995 to March 31, 1996. Interest-earning deposits increased $6.6 million
due primarily to a decrease in loans receivable of $3.1 million as a result of
loan repayments exceeding loan originations. The increase in savings deposits
and advance payments by borrowers for taxes and insurance in excess of the
repayment of advances from the FHLB of Chicago also increased interest-earning
deposits.
COMPARISON OF OPERATING RESULTS FOR THE THREE MONTHS ENDED MARCH 31, 1996 AND
1995
General. Net income for the three months ended March 31, 1996 was $512,000
compared to $695,000 for the three months ended March 31, 1995, a 26.3%
decrease. The $183,000 decrease was due primarily to a decrease of $344,000 in
net interest income before provision for loan losses offset by a decrease in
income tax expense of $111,000 and an increase in service fee income of
$30,000.
50
<PAGE>
Interest Income. Interest income decreased $119,000 or 2.1% from $5.7
million for the three months ended March 31, 1995 to $5.6 million for the
comparable period in 1996. The decrease was due to a decrease in the yield and
a decrease in the average balance of interest-earning assets. The average
yield on the Association's interest-earning assets decreased 8 basis points
from 7.93% for the three months ended March 31, 1995 to 7.85% for the three
months ended March 31, 1996. The average balance of interest-earning assets
decreased $2.9 million from $289.9 million for the three months ended March
31, 1995 to $287.0 million for the three months ended March 31, 1996.
Interest Expense. Interest expense increased $225,000 or 8.8% from $2.6
million for the three months ended March 31, 1995 to $2.8 million for the
three months ended March 31, 1996. This increase was due to an increase in the
cost of average interest-bearing liabilities resulting primarily from
increases in market rates of interest from the 1995 period and due to the
shift in the type of interest-bearing liabilities from lower rate passbook and
money market accounts to generally higher rate certificates of deposits. These
increases were offset by lower average balances in total interest-bearing
liabilities. The average amount of interest-bearing liabilities decreased $5.0
million or 1.9% to $256.5 million for the three months ended March 31, 1996
from $261.5 million for the three months ended March 31, 1995. The average
rate paid on average interest- bearing liabilities increased 42 basis points
from 3.90% for the three months ended March 31, 1995 to 4.32% for the same
period in 1996.
Net Interest Income before Provision for Loan Losses. Net interest income
before provision for loan losses decreased $344,000 or 10.8% from $3.2 million
for the three months ended March 31, 1995 to $2.9 million for the comparable
period in 1996. The average interest rate spread decreased 50 basis points
from 4.03% for the three months ended March 31, 1995 to 3.53% for the three
months ended March 31, 1996.
Provision for Loan Losses. The provision for loan losses decreased by
$15,000 or 33.3% from $45,000 for the three months ended March 31, 1995 to
$30,000 for the comparable period in 1996. Management determined that
decreasing the provision for loan losses was appropriate in light of its
review of the Association's loan portfolio, asset quality, trends in the
Association's delinquent and non-performing loans and the national and
regional economies. At March 31, 1996 and 1995, the ratio of the allowance for
loan losses to non-performing loans was 79.48% and 71.77%, respectively, and
the ratio of the allowance for loan losses to total loans was 0.32% and 0.26%,
respectively. Management believes that the provision for loan losses and the
allowance for loan losses are reasonable and adequate to cover any known
losses and any losses reasonably expected in the existing loan portfolio.
While management estimates loan losses using the best available information,
such as independent appraisals for significant collateral properties, no
assurance can be given that future additions to the allowance will not be
necessary based on changes in economic and real estate market conditions,
further information obtained regarding known problem loans, identification of
additional problem loans and other factors, both within and outside of
management's control. The directors of the Association and the Company have
reviewed the provision for loan losses and the allowance for loan losses and
the assumptions utilized by management as to their reasonableness and
adequacy. See "The Conversion--Stock Pricing" for a discussion of RP
Financial's slight downward adjustment in the pro forma market value of the
Common Stock as a result of the Association's relatively lower level of
reserves and a higher ratio of risk-weighted assets to assets as compared to
its peer group.
Noninterest Income. Noninterest income increased $50,000 or 18.6% from
$269,000 for the three months ended March 31, 1995 to $319,000 for the three
months ended March 31, 1996. This increase was due primarily to an increase in
service fee income of $30,000 from $265,000 for the three months ended March
31, 1995 to $295,000 for the three months ended March 31, 1996, which was due
primarily to an increase in ATM fee income. Due to a change in the
Association's ATM processors, service fee income and expenses are now
accounted for on a gross basis as a part of both noninterest income and
noninterest expense. There also was a gain on sale of real estate owned in the
amount of $18,000 in the three months ended March 31, 1996. There was no gain
in the comparable period in 1995.
Noninterest Expense. Noninterest expense for the three months ended March
31, 1996 increased $15,000 or 0.7% to $2,303,000 from $2,288,000 for the three
months ended March 31, 1995. Compensation and benefits
51
<PAGE>
increased $42,000 or 4.6% from $922,000 for the three months ended March 31,
1995 to $964,000 for the three months ended March 31, 1996. This was primarily
attributable to normal salary increases. Automated teller machine expense
increased $48,000 or 72.7% from $66,000 for the three months ended March 31,
1995 to $114,000 for the comparable period in 1996. Due to a change in ATM
processors, service fee income and expenses are now accounted for on a gross
basis as a part of both noninterest income and noninterest expense. These
increases were offset by a decrease in other noninterest expense of $58,000
from $402,000 for the three months ended March 31, 1995 to $344,000 for the
three months ended March 31, 1996. This was primarily due to a $28,000
decrease in real estate owned expense to $5,000 for the three months ended
March 31, 1996 from $33,000 for the comparable period in 1995. See "The
Conversion--Stock Pricing" for a discussion of RP Financial's slight downward
adjustment in the pro forma market value of the Common Stock due to the
Association's relatively higher level of operating expenses as compared to its
peer group.
Income Tax Expense. Income tax expense decreased $111,000 or 25.2% from
$441,000 for the three months ended March 31, 1995 to $330,000 for the three
months ended March 31, 1996 due to a decrease in income before income taxes of
$294,000. The effective tax rate of 39% for the three months ended March 31,
1996 was the same for the comparable period in 1995.
COMPARISON OF FINANCIAL CONDITION OF DECEMBER 31, 1995 AND DECEMBER 31, 1994
Total assets decreased $2.5 million to $304.5 million at December 31, 1995
from $307.0 million at December 31, 1994. This decrease in total assets was
primarily the result of a decrease in savings deposits of $8.0 million to
$260.0 million at December 31, 1995 from $268.0 million at December 31, 1994,
which was offset by an increase in advances from the FHLB of Chicago of $4.0
million and an increase in retained earnings of $2.4 million for 1995. The
increase in retained earnings was due to net income for the year ended
December 31, 1995. Loans receivable decreased by $3.8 million to $267.2
million at December 31, 1995 from $271.0 million at December 31, 1994, which
resulted from loan repayments exceeding loan originations. This was offset by
an increase in cash and due from banks of $365,000 to $10.0 million at
December 31, 1995 from $9.7 million at December 31, 1994 and an increase in
office properties and equipment of $743,000 to $6.8 million at December 31,
1995 from $6.1 million at December 31, 1994. The increase in office properties
and equipment was due to the building of a drive-up facility at the Bartlett
branch office.
COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1994
General. Net income for the year ended December 31, 1995 decreased $2.0
million or 45.5% from $4.4 million for the year ended December 31, 1994 to
$2.4 million. The $2.0 million decrease was due to a decrease of $2.1 million
in net interest income before provision for loan losses and a decrease of $2.0
million in noninterest income, which were offset by a decrease of $555,000 in
noninterest expense and a decrease in income tax expense of $1.5 million. The
decreases in net interest income before provision for loan losses and in
noninterest income resulted primarily from a gain on the sale of two branch
offices in 1994 of $1.7 million. No such gain occurred during 1995. Net income
before the gain on sale of branches in 1994 would have been $3.4 million. Net
income for the year ended December 31, 1995 decreased $1.0 million or 29.4%
from 1994 levels excluding the gain on sale of branches.
Interest Income. Interest income decreased $1.8 million or 7.3% from $24.7
million for the year ended December 31, 1994 to $22.9 million for the year
ended December 31, 1995. The decrease was due primarily to a decrease in the
average balance of interest-earning assets. The average balance of interest-
earning assets decreased $24.6 million or 7.9% from $312.8 million for the
year ended December 31, 1994 to $288.2 million for the year ended December 31,
1995. This decrease was due primarily to the sale of two branch offices in
December 1994, which reduced interest-earning assets by $19.4 million. The
remainder of the decrease in average interest-earning assets was due to
competitive market conditions and the Association's decision not to offer loan
products at below market interest rates. The average yield on the
Association's average interest-earning assets increased 7 basis points from
7.89% for the year ended December 31, 1994 to 7.96% for the year ended
December 31, 1995.
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Interest Expense. Interest expense increased $366,000 or 3.5% from $10.5
million for the year ended December 31, 1994 to $10.9 million for the year
ended December 31, 1995. This increase was due to an increase in the cost of
average interest-bearing liabilities resulting primarily from increases in
market rates of interest during the year. The average rate paid on average
interest-bearing liabilities increased 60 basis points from 3.58% for the year
ended December 31, 1994 to 4.18% for the year ended December 31, 1995. These
increases were offset by lower average balances in total interest-bearing
liabilities. The average balance of interest-bearing liabilities decreased
$33.4 million from $292.8 million for the year ended December 31, 1994 to
$259.4 million for the year ended December 31, 1995. This decline was due
primarily to the sale of two branch offices in December 1994, which resulted
in a decrease in savings deposit balances of $21.8 million. The remainder of
the decrease in average interest-bearing liabilities was due to competitive
market conditions and the Association's decision not to offer above market
interest rates on its savings deposits.
Net Interest Income before Provision for Loan Losses. Net interest income
before provision for loan losses decreased $2.1 million from $14.2 million for
the year ended December 31, 1994 to $12.1 million for the year ended December
31, 1995. This was due to the average interest rate spread decreasing 53 basis
points from 4.31% for the year ended December 31, 1994 to 3.78% for the year
ended December 31, 1995, which was offset by a decrease in average interest-
bearing liabilities of $8.8 million more than average interest earning assets
for the year ended December 31, 1995 compared to the year ended December 31,
1994.
Provision for Loan Losses. The provision for loan losses decreased by
$60,000 or 25.0% from $240,000 for the year ended December 31, 1994 to
$180,000 for the year ended December 31, 1995. Management determined that
decreasing the provision for loan losses was appropriate in light of its
review of the Association's loan portfolio, improving asset quality, a
slightly smaller loan portfolio, trends in the Association's delinquent and
non-performing loans and the national and regional economies. The ratio of the
allowance for loan losses to non-performing loans was 90.17% and 65.82% at
December 31, 1995 and 1994, respectively, and the ratio of the allowance for
loan losses to total loans was 0.31% and 0.24% at such respective dates.
Management believes that the provision for loan losses and the allowance for
loan losses are reasonable and adequate to cover any known losses and any
losses reasonably expected in the existing loan portfolio. While management
estimates loan losses using the best available information, such as
independent appraisals for significant collateral properties, no assurance can
be given that future additions to the allowance will not be necessary based on
changes in economic and real estate market conditions, further information
obtained regarding known problem loans, identification of additional problem
loans and other factors, both within and outside of management's control. The
directors of the Association and the Company have reviewed the provision for
loan losses and the allowance for loan losses and the assumptions utilized by
management as to their reasonableness and adequacy. See "The Conversion--Stock
Pricing" for a discussion of RP Financial's slight downward adjustment in the
pro forma market value of the Common Stock as a result of the Association's
relatively lower level of reserves and a higher ratio of risk weighted assets
to assets as compared to its peer group.
Noninterest Income. Noninterest income decreased $2.0 million or 63.5% from
$3.2 million for the year ended December 31, 1994 to $1.2 million for the year
ended December 31, 1995. In 1994, two branches were sold for a gain of $1.7
million. No branches were sold in 1995. Service fee income decreased $233,000
or 17.1% from $1.4 million for the year ended December 31, 1994 to $1.1
million for the year ended December 31, 1995. This decrease was due primarily
to a decrease in fees on savings accounts as a result of the branch sales.
Noninterest Expense. Noninterest expense decreased $555,000 or 5.8% from
$9.6 million for the year ended December 31, 1994 to $9.1 million for the year
ended December 31, 1995. Compensation and benefits expense decreased $452,000,
a 10.9% decrease from $4.1 million in the year ended December 31, 1994 to $3.7
million for the year ended December 31, 1995. This was primarily attributable
to the decrease in staff size that resulted from the sale of two branches,
which was offset by normal salary increases. Occupancy expense decreased
$75,000 for the year ended December 31, 1995 to $1.6 million from $1.7 million
for the year ended December 31, 1994. FDIC insurance premiums decreased
$58,000 or 7.6% from $767,000 for the year ended December 31, 1994 to $709,000
for the year ended December 31, 1995. Other noninterest expense decreased
$92,000 to $1.4 million for the year ended December 31, 1995 from $1.5 million
for the year ended December 31, 1994.
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The decreases in occupancy, FDIC insurance premiums and other noninterest
expense were due primarily to the sale of the two branch offices in December
1994. Data processing expense increased $92,000 or 10.7% to $950,000 for the
year ended December 31, 1995 from $858,000 for the year ended December 31,
1994. This increase was due to service bureau costs associated with increased
automation and improvements to the data processing system. See "The
Conversion--Stock Pricing" for a discussion of RP Financial's slight downward
adjustment in the pro forma market value of the Common Stock due to the
Association's relatively higher level of operating expenses as compared to its
peer group.
Income Tax Expense. Income tax expense decreased $1.5 million from $3.1
million for the year ended December 31, 1994 to $1.6 million for the year
ended December 31, 1995 due to a decrease in income before income taxes of
$3.5 million. The effective tax rate was 41% for the year ended December 31,
1995, which was comparable to the effective tax rate of 42% for 1994.
COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED DECEMBER 31, 1994 AND 1993
General. Net income increased $97,000 or 2.3% from $4.3 million for the year
ended December 31, 1993 to $4.4 million for the year ended December 31, 1994.
Net income for 1993 decreased by $348,000 due to a cumulative effect of change
in accounting for income taxes for the year ended December 31, 1993, which
resulted from the Association's adoption of SFAS 109 effective January 1, 1993
on a prospective basis. Net income before cumulative effect of change in
accounting principle for the year ended December 31, 1994 was $4.4 million
compared to $4.6 million for the year ended December 31, 1993. The $251,000
decrease was due to a decrease of $1.7 million in net interest income, which
was offset by an increase of $766,000 in noninterest income, a decrease of
$778,000 in noninterest expense and a decrease in income tax expense of
$119,000. Net income for the year ended December 31, 1994 excluding the gain
on sale of branches was $3.4 million. Net income for the year ended December
31, 1993 excluding the gain on sale of branches and the impact of change in
accounting for income taxes was $4.1 million, a decrease of $700,000, or
20.6%, as compared to the prior year.
Interest Income. Interest income decreased $3.0 million from $27.7 million
for the year ended December 31, 1993 to $24.7 million for the year ended
December 31, 1994. The decrease was due to a decrease in the yield and a
decrease in the average balance of interest-earning assets. The average yield
on the Association's interest-earning assets decreased 42 basis points from
8.31% for the year ended December 31, 1993 to 7.89% for the year ended
December 31, 1994. The average balance of interest-earning assets decreased
$19.8 million or 6.0% from $332.6 million for the year ended December 31, 1993
to $312.8 million for the year ended December 31, 1994, primarily as a result
of selling two branch offices in December 1994. The remainder of the decrease
in average interest-earning assets was due to competitive market conditions
and the Association's decision not to offer loan products at below market
interest rates.
Interest Expense. Interest expense decreased $1.3 million or 11% from $11.8
million for the year ended December 31, 1993 to $10.5 million for the year
ended December 31, 1994. The decrease in interest expense was due primarily to
a decrease for the year in the average balance of interest-bearing liabilities
of $24.8 million or 7.8% from $317.6 million for the year ended December 31,
1993 to $292.8 million for the year ended December 31, 1994, which resulted
primarily from the sale of two branch offices. In addition, the average cost
of interest-bearing liabilities decreased 13 basis points from 3.71% for the
year ended December 31, 1993 to 3.58% for the year ended December 31, 1994.
The remainder of the decrease in average interest-bearing liabilities was due
to competitive market conditions and the Association's decision not to offer
above market interest rates on its savings deposits.
Net Interest Income before Provision for Loan Losses. Net interest income
before provision for loan losses decreased $1.7 million from $15.9 million for
the year ended December 31, 1993 to $14.2 million for the year ended December
31, 1994. This was due to the average interest rate spread declining 29 basis
points from 4.60% for the year ended December 31, 1993 to 4.31% for the year
ended December 31, 1994, which was offset by average interest bearing
liabilities decreasing $5.0 million more than average interest-earning assets
for the year ended December 31, 1994 compared to the year ended December 31,
1993.
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Provision for Loan Losses. The provision for loan losses of $240,000
remained the same for the years ended December 31, 1993 and December 31, 1994.
Although asset quality improved slightly, uncertainty relative to the local
economy, including some softness in the single-family real estate market,
which experienced some declines in real estate values, required management to
provide for additional loan losses. The ratio of the allowance for loan losses
to non-performing loans was 65.82% and 24.91% at December 31, 1994 and 1993,
respectively, and the ratio of the allowance for loan losses to total loans
was 0.24% and 0.14% at such respective dates. Management believes that the
provision for loan losses and the allowance for loan losses are reasonable and
adequate to cover any known losses and any losses reasonably expected in the
existing loan portfolio. While management estimates loan losses using the best
available information, such as independent appraisals for significant
collateral properties, no assurance can be given that future additions to the
allowance will not be necessary based on changes in economic and real estate
market conditions, further information obtained regarding known problem loans,
identification of additional problem loans and other factors, both within and
outside of management's control. The directors of the Association and the
Company have reviewed the provision for loan losses and the allowance for loan
losses and the assumptions utilized by management as to their reasonableness
and adequacy.
Noninterest Income. Noninterest income increased $766,000 or 32.1% from $2.4
million for the year ended December 31, 1993 to $3.2 million for the year
ended December 31, 1994. This was primarily due to the increase in gain on
sale of branches of $861,000 from $822,000 for the year ended December 31,
1993 to $1.7 million for the year ended December 31, 1994. This was the result
of the Association's sale of two branches in 1994 compared to one branch in
1993. Other noninterest income decreased $131,000 from $192,000 for the year
ended December 31, 1993 to $61,000 for the year ended December 31, 1994. This
was primarily due to interest received on tax refunds in the amount of
$174,000 for the year ended December 31, 1993 compared to $33,000 for the year
ended December 31, 1994.
Noninterest Expense. Noninterest expense for the year ended December 31,
1994 decreased $778,000 from the year ended December 31, 1993. Compensation
and benefits expense decreased $364,000 or 8.1% from $4.5 million for the year
ended December 31, 1993 to $4.1 million for the year ended December 31, 1994.
This was primarily attributable to a decrease in staff size due to the sale of
branches, which was offset by normal salary increases. Other noninterest
expense decreased $437,000 from $2.0 million for the year ended December 31,
1993 to $1.5 million for the year ended December 31, 1994. For the year ended
December 31, 1993, $142,000 of other noninterest expense was incurred due to
costs related to the settlement of a lawsuit, and $60,000 of other noninterest
expense was due to higher real estate expense for 1993. The remainder of the
increase in other noninterest expense was attributable to having more offices
in 1993 and the normal operating expense of these offices.
Income Tax Expense. Income tax expense increased $119,000 from $3.0 million
for the year ended December 31, 1993 to $3.1 million for the year ended
December 31, 1994 due to an increase in the effective tax rate, which was
offset by a decrease in income before income tax expense and cumulative effect
of change in accounting principle of $132,000. The effective tax rate was 42%
for the year ended December 31, 1994 compared to 39% for the year ended
December 31, 1993.
LIQUIDITY AND CAPITAL RESOURCES
The Association's primary sources of funds are savings deposits and
principal and interest payments on loans and securities and, to a limited
extent, borrowings from the FHLB of Chicago. While maturities and scheduled
amortization of loans and securities provide an indication of the timing of
the receipt of funds, changes in interest rates, economic conditions, and
competition strongly influence mortgage prepayment rates and savings deposit
flows, reducing the predictability of the timing of sources of funds. Cash
flows from operating activities amounted to $600,000 and $400,000 for the
three months ended March 31, 1996 and 1995, respectively, and $1.7 million,
$4.5 million and $5.3 million for the years ended December 31, 1995, 1994 and
1993, respectively.
The Association is required to maintain an average daily balance of liquid
assets and short-term liquid assets as a percentage of net withdrawable
savings deposit accounts plus short-term borrowings as defined by the
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regulations of the OTS. The minimum required liquidity and short-term
liquidity ratios are currently 5.0% and 1.0%, respectively. At March 31, 1996
and December 31, 1995 and 1994, the Association's liquidity ratios were
11.49%, 8.24% and 9.56%, respectively, and its short-term liquidity ratios
were 8.00%, 5.97% and 7.50%, respectively. The levels of the Association's
short-term liquid assets are dependent on the Association's operating,
financing and investing activities during any given period. Management
believes it will have adequate resources to fund all commitments on a short
term and long term basis in accordance with its business strategy.
The primary investing activities of the Association are the origination of
mortgage and other loans and the purchase of U.S. government or U.S.
government agency securities. During the years ended December 31, 1995, 1994
and 1993, the Association's disbursements for loan originations totalled $34.0
million, $21.3 million and $87.6 million, respectively. These activities were
funded primarily by net savings deposit inflows and principal repayments on
loans and securities. The Association had borrowings at December 31, 1995 and
1993 of $4.0 million and $7.0 million, respectively. There were no borrowings
outstanding at March 31, 1996 or December 31, 1994. Cash flows provided by
investing activities amounted to $3.5 million for the three months ended March
31, 1996 and $2.8 million and $25.4 million for the years ended December 31,
1995 and 1994, respectively. Cash flows used in investing activities amounted
to $100,000 for the three months ended March 31, 1995, and $6.9 million for
the year ended December 31, 1993.
For the years ended December 31, 1995, 1994 and 1993, the Association
experienced net decreases in savings deposits (including the effect of
interest credited) of $8.0 million, $26.0 million and $25.0 million,
respectively. The decreases in 1994 and 1993 included the sales of three
branches, which decreased savings deposits $21.8 million and $18.1 million,
respectively. In addition, during 1993, 1994 and 1995, the Association
experienced decreases in savings deposits as a result of competitive market
conditions and management's decision not to offer above-market interest rates
on its savings deposits. Management does not expect savings deposits to
continue to decrease in the future other than the deposit decrease that may be
experienced as a result of depositors purchasing Common Stock of the Company
with the use of deposits. In fact, management expects some growth of deposits
in the future although no assurance can be given that such growth will occur.
Steps that management has taken to increase transaction accounts have included
the opening of additional drive-up lanes at the Bartlett branch office and
providing drive-up lanes for the first time at the new South Elgin branch
office, which is expected to open in the fall of 1996. The growth is expected
to have a positive effect on the financial condition, liquidity and operations
of the Association. See "Business of the Association--Sources of Funds--
Savings Deposits" for a discussion of the Association's level of certificate
of deposit accounts.
Cash flows provided by financing activities amounted to $1.6 million for the
three months ended March 31, 1996. Cash used in financing activities amounted
to $1.7 million for the three months ended March 31, 1995, and $4.2 million,
$31.3 million and $17.0 million for the years ended December 31, 1995, 1994
and 1993, respectively.
See the "Statements of Cash Flows" in the Financial Statements included in
this Prospectus for the sources and uses of cash flows for operating
activities, investing activities and financing activities for each of the
years ended December 31, 1995, 1994 and 1993 and for the three month periods
ended March 31, 1996 and 1995.
The Association has other sources of liquidity if a need for additional
funds arises, including the ability to obtain FHLB of Chicago advances of up
to $54 million based on the Association's current investment in FHLB of
Chicago stock.
At March 31, 1996, the Association had outstanding loan origination
commitments of $5.0 million, undisbursed loans in process of $364,000 and
unused lines of consumer credit of $302,000. The Association anticipates that
it will have sufficient funds available to meet its current origination and
other lending commitments. Certificates of deposit scheduled to mature in one
year or less from March 31, 1996 totalled $73.6 million. Based upon the
Association's most recent experience and pricing strategy, management believes
that a significant portion of such deposits will remain with the Association.
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At March 31, 1996, the Association exceeded all of its regulatory capital
requirements with a tangible capital level of $37.2 million, or 12.0% of total
adjusted assets, which is above the required level of $4.6 million or 1.5%;
core capital of $37.2 million, or 12.0% of total adjusted assets, which is
above the required level of $9.3 million or 3.0%; and total risk-based capital
of $38.1 million, or 23.6% of risk-weighted assets, which is above the
required level of $12.9 million, or 8.0%. See "Regulatory Capital Compliance"
and "Regulation--Regulation of Federal Savings Associations--Capital
Requirements" for a reconciliation of GAAP capital to regulatory capital.
IMPACT OF INFLATION AND CHANGING PRICES
The Association's Financial Statements and Notes thereto presented herein
have been prepared in accordance with GAAP, which generally require the
measurement of financial position and operating results in terms of historical
dollars without considering the changes in the relative purchasing power of
money over time due to inflation. The impact of inflation is reflected in the
increased cost of the Association's operations. Unlike industrial companies,
nearly all of the assets and liabilities of the Association are monetary in
nature. As a result, interest rates have a greater impact on the Association's
performance than do the effects of general 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 ACCOUNTING STANDARDS
The Association will be required to account for the ESOP under SOP 93-6. SOP
93-6 measures compensation expense recorded by employers for leveraged ESOPs
using the fair value of ESOP shares. 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 Association's ESOP shares differ from the cost of such
shares, this differential will be charged or credited to equity. Employers
with internally leveraged ESOPs will not report the loan receivable from the
ESOP as an asset and will not report the ESOP debt as a liability. See
"Management of the Association--Benefits--Employee Stock Ownership Plan and
Trust."
In March 1995, the Financial Accounting Standards Board (the "FASB") issued
Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of"
("SFAS 121"). Various assets are excluded from the scope of SFAS 121,
including financial instruments which constitute most of the Association's
assets. For assets included in the scope of SFAS 121, such as office property
and equipment, an impairment loss must be recognized when the estimate of
total undiscounted future cash flows attributable to the asset is less than
the asset's carrying value. Measurement of the impairment loss is based on the
fair value of the asset. SFAS 121 is effective for financial statements issued
for fiscal years beginning after December 15, 1995. The Association adopted
SFAS 121 on January 1, 1996, and it did not have a material impact on the
Association's results of operations or financial position.
In May 1995, the FASB issued Statement of Financial Accounting Standards No.
122, "Accounting for Mortgage Servicing Rights," ("SFAS 122"),which amends
Statement of Financial Accounting Standards No. 65, "Accounting for Certain
Mortgage Banking Activities" ("SFAS 65"). SFAS 122 is effective for fiscal
years beginning after December 15, 1995. SFAS 122 requires that entities
recognize, as separate assets, rights to service mortgage loans for others
regardless of how those servicing rights are acquired. Additionally, SFAS 122
requires that the capitalized mortgage servicing rights be assessed for
impairment based on the fair value of those rights and that the impairment be
recognized through a valuation allowance. These requirements will accelerate
the income recognition associated with mortgage banking activities, increase
future operating expense due to the amortization of servicing rights and will
also result in greater earnings volatility for those institutions involved in
mortgage banking activities. The implementation of SFAS 122 on January 1, 1996
did not have a material impact on the Association's financial condition or
results of operations, because the Association does not currently conduct
mortgage banking activities or purchase loan servicing rights.
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In November 1995, the FASB issued Statement of Financial Accounting
Standards No. 123, "Accounting for Stock Based Compensation" ("SFAS 123").
This statement establishes financial accounting standards for stock-based
employee compensation plans. SFAS 123 permits the Company to choose either the
new fair value based method, or the current accounting prescribed by
Accounting Principles Board ("APB") Opinion 25, using the intrinsic value
based method of accounting for its stock-based compensation arrangements. SFAS
123 requires pro forma disclosures of net earnings and earnings per share
computed as if the fair value based method had been applied in APB Opinion 25.
SFAS 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. SFAS 123 also applies to plans in
which the employer incurs liabilities to employees in amounts based on the
price of the employer's stock, (e.g. stock option plans, stock purchase plans,
restricted stock plans and stock appreciation rights). SFAS 123 also specifies
the accounting for transactions in which a company issues stock options or
other equity instruments for services provided by nonemployees or to acquire
goods or services from outside suppliers or vendors. The recognition
provisions of SFAS 123 for companies choosing to adopt the new fair value
based method of accounting for stock-based compensation arrangements may be
adopted immediately and will apply to all transactions entered into in fiscal
years that begin after December 15, 1995. The disclosure provisions of SFAS
123 are effective for fiscal years beginning after December 15, 1995, however,
disclosure of the pro forma net earnings and earnings per share, as if the
fair value method of accounting for stock-based compensation had been elected,
is required for all awards granted in fiscal years beginning after December
31, 1994. The Company expects to account for its stock-based compensation
arrangements as prescribed in APB Opinion 25 upon the consummation of the
Conversion.
In June 1996, the FASB issued Statement of Financial Accounting Standards
No. 125, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities" ("SFAS 125"), which supersedes FASB Statements
No. 76, "Extinguishments of Debt," and No. 77, "Reporting by Transferors for
Transfers of Receivables with Recourse." This statement amends FASB Statement
No. 115, "Accounting for Certain Investments in Debt and Equity Securities,"
and amends and extends to all servicing assets and liabilities, the accounting
standards for mortgage servicing rights now set forth in SFAS 65, and
supersedes SFAS 122. SFAS 125 provides accounting and reporting standards for
transfers and servicing of financial assets and extinguishments of
liabilities. After a transfer of financial assets, an entity recognizes the
financial and servicing assets it controls and the liabilities it has
incurred, derecognizes financial assets when control has been surrendered and
derecognizes liabilities when extinguished. SFAS 125 provides consistent
standards for distinguishing transfers of financial assets that are sales from
transfers that are secured borrowings. A transfer of financial assets in which
the transferor surrenders control over those assets is accounted for as a sale
to the extent that consideration other than beneficial interests in the
transferred assets is received in exchange.
SFAS 125 further requires that liabilities and derivatives incurred or
obtained by transferors as part of a transfer of financial assets be initially
measured at fair value, if practicable. It also requires that servicing assets
and other retained interests in the transferred assets be measured by
allocating the previous carrying amount between the assets sold, if any, and
retained interests, if any, based on their relative fair values on the date of
the transfer. SFAS 125 also requires that servicing assets and liabilities be
subsequently measured by (a) amortization in proportion to and over the period
of estimated net servicing income or loss and (b) assessment for asset
impairment or increased obligation based on their fair values. SFAS 125
requires that debtors reclassify financial assets pledged as collateral and
that secured parties recognize those assets and their obligation to return
them to certain circumstances in which the secured party has taken control of
those assets. SFAS 125 requires that a liability be derecognized if and only
if either (i) the debtor pays the creditor and is relieved of its obligation
for the liability or (ii) the debtor is legally released from being the
primary obligor under the liability either judicially or by the creditor.
Therefore, a liability is not considered extinguished by an in-substance
defeasance.
SFAS 125 is effective for transfers and servicing of financial assets and
extinguishments of liabilities occurring after December 31, 1996, and is to be
applied prospectively. Earlier or retroactive application is not permitted.
Management of the Association has not evaluated the impact, if any, of the
adoption of SFAS 125 on the Association's financial condition or results of
operations.
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BUSINESS OF THE COMPANY
GENERAL
The Company was organized as a Delaware corporation on June 3, 1996 at the
direction of the Board of Directors of the Association for the purpose of
becoming a holding company to own all of the outstanding capital stock of the
Association upon consummation of the Conversion. The Company filed an
application with, and received the approval of, the OTS to become a savings
association holding company and to acquire the Association. Upon completion of
the Conversion, the Company will be a unitary savings association holding
company and, as such, will be subject to the regulations of the OTS. See
"Regulation--Regulation of Savings Association Holding Companies."
BUSINESS
The Company is not an operating company. Following the Conversion, in
addition to directing, planning and coordinating the business activities of
the Association, the Company will initially invest primarily in U.S.
Government and federal agency securities and federal funds or in other debt
and equity securities which are permissible for a unitary savings association
holding company. In addition, the Company intends to fund the loan to the ESOP
to enable the ESOP to subscribe for up to 8% of the Common Stock in the
Conversion; however, a third party lender may be utilized to lend funds to the
ESOP. In the future, the Company may acquire or organize other operating
subsidiaries, including other financial institutions or it may merge with or
acquire other financial institutions and financial services related companies,
although there are no current arrangements, understandings or agreements,
written or oral, regarding any such expansion. See "Use of Proceeds."
Initially, the Company will neither own nor lease any property, but will
instead use the premises, equipment and furniture of the Association. At the
present time, the Company does not intend to employ any persons other than
certain officers of the Association who will not be separately compensated by
the Company. The Company may utilize the support staff of the Association from
time to time, if needed. Additional employees will be hired as appropriate to
the extent the Company expands its business in the future.
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BUSINESS OF THE ASSOCIATION
GENERAL
The Association's principal business is to operate a customer-oriented
savings and loan association. The Association attracts retail savings deposits
primarily from the general public in its market area and invests those funds
primarily in one- to four-family owner-occupied mortgage loans. To a lesser
extent, the Association invests in multifamily mortgage loans, construction
and land mortgage loans, commercial real estate mortgage loans and other
loans. The Association's revenues are derived principally from interest on
mortgage loans and interest and dividends on investments, mortgage-backed
securities and, to a much lesser extent, short-term investments and other fees
and service charges. The Association's primary source of funds is retail
savings deposits and, to a lesser extent, advances from the FHLB of Chicago.
The Association does not have any subsidiaries.
MARKET AREA
The Association has been, and intends to continue to be, a community-
oriented savings institution offering a variety of financial services to meet
the needs of the communities which it serves. The Association's market area is
composed of the areas surrounding its branch offices, while its lending area
is larger and includes portions of Cook, Kane, Lake, McHenry, DuPage and
DeKalb counties in Illinois. In addition to its administrative home office and
check processing center in Elgin, Illinois, the Association operates four
other branch offices. The branch offices are located in Crystal Lake, Roselle,
Bartlett and South Elgin, Illinois.
The Association's market area is largely suburban in nature and is located
primarily in the northwestern suburbs of Chicago. Management considers the
area's economy to be strong, and a major reason for such strength is a well
balanced economic base that is not dominated by a single industrial sector.
Major employers in and around the Association's market area include: Motorola,
Inc., Ameritech Corp., Sears, Roebuck and Co., Safety Kleen Corp. and an
affiliate of Panasonic Company. According to the U.S. Department of Commerce,
in 1992 the city of Elgin recorded retail sales and wholesale sales of $517.5
million and $1.9 billion, respectively. In 1992, annual receipts from the
service-related industries in Elgin totaled $359.6 million. The recent
introduction of riverboat gambling on the Fox River in Elgin has also
contributed to an increase in economic activity and growth in and around
Elgin.
The median household income for the city of Elgin, as reported from 1990
census data, was $41,190, or a 78% increase from the level reported in the
1980 census. Elgin's median household income in 1990 was 7% higher than the
Illinois median of $38,664. Elgin and its surrounding communities are in one
of the fastest growing areas in northeastern Illinois. Elgin's population,
based upon the 1990 census, was 77,010, an increase of approximately 21% from
the community's population recorded in the 1980 census. The Northeastern
Illinois Planning Commission estimates that Elgin's population will grow by
approximately 30% to 100,000 by the year 2010. New housing construction in the
Association's delineated lending area has increased in the past several years
and is expected to continue into the foreseeable future due to its proximity
to major employers and lower land costs. According to the City of Elgin, for
the five-year period from 1985 to 1989 single-family building permits totaled
2,094 with an aggregate value of $121.1 million. In the five-year period from
1990 to 1994, single-family building permits totaled 2,741 (a 31% increase
from the prior five-year period). Management believes that the Association's
success as a home lender has been due, in part, to the favorable income,
population and housing demographics in Elgin and in the Association's market
area. At the same time, the growth of the market area and delineated lending
area and their proximity to Chicago has resulted in a highly competitive
environment among the many financial institutions competing for deposits and
loans.
COMPETITION
The Association faces substantial competition for both the savings deposits
it accepts and the loans it makes. The Association's market area has a high
density of financial institutions, including branch offices of major
commercial banks, all of which compete with the Association to varying
degrees. The Association also encounters significant competition for savings
deposits from commercial banks, savings banks and savings and
60
<PAGE>
loan associations located in its market area, as well as competition for
savings deposits from non-bank institutions such as brokerage firms, insurance
companies, money market mutual funds, other mutual funds (such as corporate
and government securities funds) and annuities. The Association offers a more
limited product line than many competitors, with an emphasis on product
delivery and customer service instead. The Association competes for savings
deposits by offering a variety of customer services and savings deposit
accounts at generally competitive interest rates. The Association and its
competitors are significantly affected by general economic and competitive
conditions, particularly changes in market interest rates, real estate market
values, government policies and actions of regulatory authorities.
The Association's competition for loans comes principally from savings
banks, savings and loan associations, commercial banks, mortgage bankers,
brokers and other institutional lenders. The Association competes for loans
primarily by emphasizing the quality of its loan services and by charging loan
fees and interest rates that are generally competitive within its delineated
lending area. Changes in the demand for loans relative to the availability of
credit may affect the level of competition from financial institutions that
may be more willing than the Association or its competitors to make credit
available but which have not generally engaged in lending activities in the
Association's delineated lending area in the past. Competition may also
increase as a result of the lifting of restrictions on the interstate
operations of financial institutions.
Management considers the Association's reputation for customer service as
its major competitive advantage in attracting and retaining customers in its
market area and its delineated lending area. The Association also believes
that it benefits from its community orientation, as well as its established
deposit base and level of core deposits.
LENDING ACTIVITIES
Loan Portfolio Composition. The Association's loan portfolio consists
primarily of conventional first mortgage loans secured by one- to four-family
residences. At March 31, 1996, the Association had gross loans receivable
outstanding of $267.1 million of which $262.1 million, or 98.1%, were one- to
four-family, residential mortgage loans. The remainder consisted of $3.0
million of multifamily mortgage loans, or 1.14% of gross loans; $873,000 of
commercial real estate mortgage loans, or 0.33% of gross loans; $578,000 of
construction and land loans, or 0.22% of gross loans; and $565,000 of other
loans, or 0.21% of gross loans.
The loans that the Association may originate are subject to federal and
state laws and regulations. Interest rates charged by the Association on loans
are affected by the demand for such loans, 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, monetary policies
of the federal government, including the Board of Governors of the Federal
Reserve System (the "FRB"), and legislative tax policies.
61
<PAGE>
The following table sets forth the composition of the Association's mortgage
and other loan portfolios in dollar amounts and percentages at the dates
indicated.
<TABLE>
<CAPTION>
AT DECEMBER 31,
AT MARCH 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>
MORTGAGE LOANS:
One- to four-
family........... $262,056 98.10% $265,115 98.09% $267,727 97.63% $298,117 97.54% $284,549 96.92% $260,519 96.22%
Multifamily...... 3,056 1.14 3,106 1.15 4,118 1.50 4,587 1.50 5,165 1.76 5,247 1.94
Construction and
land............. 578 0.22 456 0.17 859 0.31 1,130 0.37 1,371 0.47 1,717 0.63
Commercial....... 873 0.33 891 0.33 862 0.31 1,039 0.34 1,568 0.53 2,294 0.85
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Total mortgage
loans........... 266,563 99.79 269,568 99.74 273,566 99.75 304,873 99.75 292,653 99.68 269,777 99.64
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------ -------- ------
OTHER LOANS:
Passbook savings
(secured by
savings and time
deposits)........ 483 0.18 627 0.23 576 0.21 631 0.21 798 0.27 775 0.29
Consumer
installment
loans............ 82 0.03 92 0.03 100 0.04 120 0.04 134 0.04 150 0.06
Home improvement
loans............ -- -- -- -- -- -- -- -- 17 0.01 58 0.01
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Total other
loans........... 565 0.21 719 0.26 676 0.25 751 0.25 949 0.32 983 0.36
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Gross loans..... $267,128 100.00% $270,287 100.00% $274,242 100.00% $305,624 100.00% $293,602 100.00% $270,760 100.00%
======== ====== ======== ====== ======== ====== ======== ====== ======== ====== ======== ======
LESS:
Loans in process. $ 364 $ 418 $ 150 $ 505 $ 876 $ 373
Deferred loan
fees............. 1,826 1,890 2,403 3,034 2,992 2,551
Allowance for
loan losses...... 856 826 649 409 548 355
-------- -------- -------- -------- -------- --------
Loans, net...... $264,082 $267,153 $271,040 $301,676 $289,186 $267,481
======== ======== ======== ======== ======== ========
</TABLE>
62
<PAGE>
Loan Maturity and Repricing. The following table shows the maturity or
period to repricing of the Association's loan portfolio at March 31, 1996.
Loans that have adjustable rates are shown as being due in the period during
which the interest rates are next subject to change. The table does not
include prepayments or scheduled principal amortization. Prepayments and
scheduled principal amortization on the Association's loan portfolio totaled
$11.7 million for the three months ended March 31, 1996.
<TABLE>
<CAPTION>
AT MARCH 31, 1996
----------------------------------------------------------
MORTGAGE LOANS
-------------------------------------------
ONE- TO
FOUR- MULTI- CONSTRUCTION OTHER TOTAL
FAMILY(1) FAMILY(1) AND LAND COMMERCIAL LOANS LOANS
--------- --------- ------------ ---------- ----- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
AMOUNT DUE:
One year or less....... $ 12,061 $ 715 $207 $-- $476 $ 13,459
-------- ------ ---- ---- ---- --------
AFTER ONE YEAR:
One to three years..... 42,969 687 103 98 83 43,940
More than three years
to five years......... 13,339 303 245 238 6 14,131
More than five years to
ten years............. 27,894 408 23 167 -- 28,492
More than ten years to
twenty years.......... 96,141 943 -- 370 -- 97,454
Over twenty years...... 69,652 -- -- -- -- 69,652
-------- ------ ---- ---- ---- --------
TOTAL DUE OR REPRICING
AFTER ONE YEAR......... 249,995 2,341 371 873 89 253,669
-------- ------ ---- ---- ---- --------
TOTAL AMOUNTS DUE OR
REPRICING, GROSS....... $262,056 $3,056 $578 $873 $565 $267,128
======== ====== ==== ==== ==== ========
</TABLE>
The following table sets forth the dollar amounts in each loan category at
March 31, 1996 that are due after March 31, 1997, and whether such loans have
fixed or adjustable interest rates.
<TABLE>
<CAPTION>
DUE AFTER MARCH 31, 1997
----------------------------
FIXED(1) ADJUSTABLE TOTAL
-------- ---------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
MORTGAGE LOANS:
One- to four-family (1).......................... $200,973 $49,022 $249,995
Multifamily (1).................................. 1,889 452 2,341
Construction and land............................ 268 103 371
Commercial....................................... 631 242 873
Other loans........................................ 89 -- 89
-------- ------- --------
Total loans.................................... $203,850 $49,819 $253,669
======== ======= ========
</TABLE>
- --------
(1) FHA/VA loans are included in one- to four-family loans and multifamily.
Originations, Purchases, Sale and Servicing of Loans. Loan originations are
developed from continuing business with depositors and borrowers, referrals
from real estate agents, builders, and walk-in customers. Loans are originated
by the Association's staff of salaried employees. While the Association
originates both fixed-rate and adjustable-rate loans, its ability to originate
loans is dependent upon demand for loans in its delineated lending area.
Demand is affected by the local economy and interest rate environment. The
Association retains all newly originated fixed-rate and adjustable-rate
mortgage loans in its portfolio. The Association does not normally sell
mortgage loans nor has it purchased mortgage loans. The Association sold two
loans in 1995 in the amount of $169,000 on a servicing-released basis to a
community housing group.
During the year ended December 31, 1995, the Association originated $34.0
million of loans, compared to $21.3 million and $87.6 million in 1994 and
1993, respectively. Management attributes the increase in originations during
1993 to the sustained low interest rate environment in 1993 which caused many
individuals to refinance their loans. Management attributes reduced levels of
loan originations for the years ended December 31, 1994 and December 31, 1995
to the decline in refinancing as a result of a generally rising interest rate
environment since mid-1994, competitive market conditions and management's
decision not to offer loan products at below market interest rates.
63
<PAGE>
In periods of economic uncertainty, the Association's ability to originate a
large dollar volume of mortgage loans with acceptable underwriting
characteristics may be substantially reduced or restricted with a resultant
decrease in operating earnings. While the Association generally does not sell
loans, and presently has no intention to do so, it may consider selling loans
in the future depending on market conditions and the asset/liability
management position of the Association. The Association does not service loans
for others and has no current plans to begin such servicing.
The following table sets forth the Association's loan originations, loan
sales and principal repayments by loan type for the periods indicated.
<TABLE>
<CAPTION>
FOR THE THREE
MONTHS FOR THE YEAR ENDED
ENDED MARCH 31, DECEMBER 31,
----------------- --------------------------
1996 1995 1995 1994 1993
-------- -------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
LOANS (GROSS):
At beginning of period.......... $270,287 $274,242 $274,242 $305,624 $293,602
MORTGAGE LOANS ORIGINATED:
One- to four-family............. 8,319 6,883 33,157 19,875 85,661
Multifamily..................... -- -- -- 227 783
Construction and land........... 160 -- 76 266 464
Commercial...................... -- 119 119 225 --
-------- -------- -------- -------- --------
Total mortgage loans
originated................... 8,479 7,002 33,352 20,593 86,908
Other loans originated............ 64 140 614 755 658
-------- -------- -------- -------- --------
Total loans originated........ 8,543 7,142 33,966 21,348 87,566
-------- -------- -------- -------- --------
Principal repayments............ 11,702 7,347 37,560 52,269 74,826
Loans sold...................... -- 169 169 -- --
Loans transferred to real estate
in judgement................... -- -- 192 461 718
-------- -------- -------- -------- --------
Loans (gross) at end of period.... $267,128 $273,868 $270,287 $274,242 $305,624
======== ======== ======== ======== ========
</TABLE>
One- to Four-Family Residential Real Estate Lending. The Association's
residential first mortgage loans consist of loans to purchase or refinance
one- to four-family, owner-occupied residences and, to a lesser extent,
secondary residences in the Association's lending area. At March 31, 1996,
$262.1 million, or 98.1%, of the Association's gross loans consisted of one-
to four-family residential first mortgage loans. Approximately 77% of the one-
to four-family residential first mortgage loans provided for fixed rates of
interest. The Association's one- to four-family loans typically provide for
repayment of principal over a fixed period not to exceed 30 years. One- to
four-family residential mortgage loans are priced competitively with the
market rates of interest. At March 31, 1996, the Association had residential
construction loans (included in one- to four-family residential mortgage
loans) with an aggregate principal balance of $1.4 million outstanding to
borrowers intending to live in the properties upon completion of construction,
at which time such loans would convert into permanent mortgage loans.
The Association currently offers adjustable rate mortgage loan programs with
interest rates which adjust either every three or five years. An adjustable-
rate mortgage loan may carry an initial interest rate that is less than the
fully-indexed rate for the loan. All adjustable-rate mortgage loans offered by
the Association have lifetime interest rate caps or ceilings. Generally,
adjustable-rate mortgage loans pose credit risks somewhat greater than the
credit risk inherent in fixed-rate loans primarily because, as interest rates
rise, the underlying payments of the borrowers rise, increasing the potential
for default. It is the Association's policy to underwrite its adjustable rate
mortgage loans based on the initial interest rate due to the relatively long
period of time prior to the first adjustment.
In underwriting one- to four-family residential first mortgage loans, the
Association evaluates both the borrower's credit history and ability to make
monthly payments, and the value of the property securing the loan.
64
<PAGE>
All properties are appraised by independent appraisers approved by the Board
of Directors. The Association requires borrowers to obtain title insurance,
fire and property insurance (including flood insurance, where appropriate)
naming the Association as an insured party in an amount not less than the
amount of the loan. The Association's one- to four-family mortgage loans do
not contain prepayment penalties and do not permit negative amortization of
principal. Real estate loans originated by the Association generally contain a
"due on sale" clause allowing the Association to declare the unpaid principal
balance due and payable upon the sale of the security property. The
Association may waive the due on sale clause on loans held in its portfolio
for assumption and real estate sale contracts when it is in the Association's
interest.
The Association adheres to its Board-approved underwriting guidelines for
loan origination, which, though prudent in approach to credit risk and
evaluation of collateral, allow management flexibility with respect to
documentation of certain matters and certain credit requirements. Although
such underwriting guidelines are less rigid than comparable Federal National
Mortgage Association ("FNMA") or Federal Home Loan Mortgage Corporation
("FHLMC") underwriting guidelines, the Association underwrites the substantial
majority of residential mortgage loans in accordance with FNMA's guidelines.
The Association does not currently originate residential mortgage loans if
the ratio of the loan amount to the value of the property securing the loan
(i.e., the "loan-to-value" ratio) exceeds 97%. If the loan-to-value ratio is
90% or greater, the Association requires that borrowers obtain private
mortgage insurance in amounts intended to reduce the Association's exposure to
80% or less of the lower of the appraised value or the purchase price of the
underlying real estate.
Multifamily Mortgage Lending. The Association originates multifamily
mortgage loans generally secured by five- to ten-unit apartment buildings
located in the Association's delineated lending area. In reaching its decision
on whether to make a multifamily loan, the Association considers the
qualifications of the borrower (including the financial resources and income
level of the borrower, the borrower's experience in owning or managing similar
properties and the Association's lending experience with the borrower) as well
as the underlying property. Some of the factors considered with respect to the
underlying property include: the net operating income of the mortgaged
premises before debt service and depreciation; the debt service ratio (the
ratio of the property's net cash flow to debt service requirements); and the
ratio of loan amount to appraised value. Pursuant to the Association's
underwriting policies, a multifamily mortgage loan may only be made in an
amount up to 75% of the appraised value of the underlying property. The
Association's multifamily mortgage loans are generally fixed-rate loans and
may be made with terms up to 15 years. Adjustable rate loans are offered with
3 or 5 year adjustments with 25 year terms. Properties securing a loan are
appraised by an independent appraiser approved by the Board of Directors.
Title and hazard insurance are required on all loans. At March 31, 1996, the
principal balance of the Association's multifamily mortgage loan portfolio was
approximately $3.0 million, or 1.14% of total gross loans outstanding. The
Association's largest multifamily mortgage loan at March 31, 1996 had an
outstanding balance of $327,000 and is secured by a 5-unit apartment building
and an adjacent 6-unit apartment building.
Mortgage loans secured by apartment buildings and other multifamily
residential properties are generally larger and involve a greater degree of
risk than one- to four-family residential mortgage loans. Because payments on
loans secured by multifamily properties are often dependent on the 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 Association 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 service ratio.
Commercial Real Estate Lending. The Association occasionally originates
mortgage loans secured by commercial real estate properties located in its
delineated lending area. The Association's commercial real estate portfolio
consists of loans secured by a variety of non-residential properties,
including six mortgage loans secured by buildings owned by local churches and
six loans secured by small office buildings. At March 31, 1996, the
Association had 12 commercial real estate loans with an aggregate outstanding
balance of $873,000,
65
<PAGE>
representing 0.33% of the Association's total loan portfolio. At that date,
all of such loans were current and performing in accordance with their terms.
At March 31, 1996, the Association's largest commercial real estate loan, the
borrower of which was a church, had an outstanding balance of $219,000.
Appraisals on properties securing commercial real estate loans originated by
the Association are performed by an independent appraiser approved by the
Board of Directors at the time the loan is made. In addition, the
Association's underwriting procedures generally require verification of the
borrower's credit history, income and financial statements, banking
relationships, references and income projections for the property. The
Association also requires title and hazard insurance for at least the
principal amount of the mortgage with a loss payable clause to the
Association.
Mortgage loans secured by commercial real estate properties, like
multifamily mortgage loans, generally present a higher level of risk than
loans secured by one- to four-family residences. This greater risk is
attributable to several factors, including the concentration of principal in a
limited number of loans and borrowers, the effects of general economic
conditions on income-producing properties and the increased difficulty of
evaluating and monitoring these types of loans. Furthermore, the repayment of
loans secured by multifamily residential and commercial real estate is
typically dependent upon the successful operation of the related real estate
project. If the cash flow from the project is reduced (for example, if leases
are not obtained or renewed), the borrower's ability to repay the loan may be
impaired. At March 31, 1996, the Association had no non-residential loans
which were 30 days or more delinquent.
Construction and Land Lending. As a result of the relatively high level of
construction activity in the Association's delineated lending area, the
Association makes construction loans to individuals for the construction of
their primary residences and to builders for residential construction.
Loans to individuals to finance the construction of their residences
typically have a term of up to 30 years. The borrower pays interest only
during the construction period. Residential construction loans are generally
underwritten pursuant to the same guidelines used for originating permanent
residential loans, with the loan converting to a permanent mortgage loan upon
completion and final payout. At March 31, 1996, the Association had
residential construction loans (included in one- to four-family residential
mortgage loans) with an aggregate principal balance of $1.4 million
outstanding to borrowers intending to live in the properties upon completion
of construction, at which time such loans would convert into permanent
mortgage loans. Subject to future market conditions, the Association intends
to continue its construction lending activities to persons intending to be
owner-occupants.
The Association originates construction loans to builders for the
construction of pre-sold one- to four-family residences in the association's
delineated lending area. Construction loans to builders of one- to four-family
residences generally carry terms of up to 18 months and generally do not
permit the payment of interest from loan proceeds. At March 31, 1996, the
Association had no construction loans outstanding to builders. While the
Association anticipates that it will continue to engage in this type of
lending from time to time in the future, the Association currently expects
that its total volume at any one time will be limited.
Construction loans are generally originated in amounts of up to a maximum
loan-to-value ratio of 80% of the appraised value of the property. Prior to
making a commitment to fund a construction loan, the Association requires an
independent appraisal of the property. The Association obtains personal
guarantees for all of its construction loans. Personal financial statements of
guarantors are also generally obtained as part of the Association's loan
underwriting. All of the Association's construction loans have been secured by
properties located in its delineated lending area.
The Association also originates land loans for individual building sites.
These loans are generally to individuals for eventual use as their primary
residence, and such mortgage loans are generally underwritten pursuant to the
same guidelines used for permanent residential loans. Terms of land loans
offered by the Association generally require a loan-to-value ratio of 80% of
the appraised value of the property and are 5-year
66
<PAGE>
balloon loans with higher interest rates than the comparable one- to four-
family residential mortgage loans. At March 31, 1996, the Association had 23
land mortgage loans with an aggregate outstanding balance of $578,000.
Construction lending generally affords the Association an opportunity to
receive interest at rates higher than those obtainable from residential
lending and to receive higher origination and other loan fees. Nevertheless,
construction lending to persons other than owner-occupants is generally
considered to involve a higher level of credit risk than one- to four-family
residential lending due to the concentration of principal in a limited number
of loans and borrowers and the effects of general economic conditions on
construction projects, real estate developers and managers. In addition, the
nature of these loans is such that they are more difficult to evaluate and
monitor. The Association's risk of loss on a construction loan is dependent
largely upon the accuracy of the initial estimate of the property's value upon
completion of the project and the estimated cost (including interest) of the
project. If the estimate of value proves to be inaccurate, the Association may
be confronted, at or prior to the maturity of the loan, with a project having
an insufficient value to assure full repayment and/or the possibility of
having to make substantial investments to complete and sell the project.
Because defaults in repayment may not occur during the construction period, it
may be difficult to identify problem loans at an early stage. When loan
payments become due, the cash flow from the property may not be adequate to
service the debt.
Consumer Lending. The Association also offers consumer loans secured by
savings deposit accounts. At March 31, 1996, loans totalled $483,000,
representing 0.18% of the Association's total loan portfolio. The Association
also offers unsecured overdraft protection loans to its qualifying customers.
At March 31, 1996, the total outstanding principal balance of such unsecured
loans was $82,000, representing 0.03% of the Association's total loan
portfolio.
Loan Approval Procedures and Authority. The Board of Directors establishes
the lending policies of the Association and reviews properties offered as
security. For all loans originated by the Association, upon receipt of a
completed loan application from a prospective borrower, a credit report is
ordered and certain other information is verified by an independent credit
agency, and, if necessary, additional financial information is required to be
submitted by the borrower. An appraisal of any real estate intended to secure
the proposed loan is required. Appraisals currently are performed by an
independent appraiser designated and approved by the Association. The Board of
Directors annually approves the independent appraisers used by the Association
and approves the Association's appraisal policy. It is the Association's
policy to obtain title and hazard insurance on all real estate loans.
Upon the approval of an application for a real estate mortgage loan by two
senior officers, the loan may be closed and the proceeds disbursed, provided
that the following requirements are satisfied: (i) loans with a principal
balance in excess of $250,000 but less than $400,000 must be approved by three
senior officers at the level of vice-president or higher, with ratification by
the Board of Directors at its next scheduled meeting; (ii) loans with a
principal balance of $400,000 or more must be approved by the Board of
Directors; and (iii) all loans with a principal balance of up to $250,000 must
be reviewed by the loan committee, which must report the results of its review
to the Board of Directors. Second mortgage loans are made by the Association
only if the first mortgage on the subject property is also held by the
Association. The total amount of the first and second mortgages on the
property may not exceed 80% of the property's appraised value, unless
otherwise approved by two senior officers of the Association. Applications for
passbook and consumer loans are approved at the level of branch or savings
supervisor. The foregoing lending limits are reviewed annually and revised, as
needed, by the Board of Directors.
DELINQUENCIES AND NON-PERFORMING ASSETS
Delinquency Procedures. When a borrower fails to make a required payment on
a loan, the Association attempts to cause the delinquency to be cured by
implementing collection procedures. With respect to residential mortgage loans
originated by the Association, late notices are mailed to borrowers who are
more than eight days late in their monthly payments. A five percent (5%) late
charge of the monthly principal and interest payment is assessed for loans
that are past due more than 15 days. If payments remain uncollected,
additional written and verbal contacts are made on a continuing basis with the
borrower between 18 and 90 days after the due date.
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<PAGE>
All loans 90 or more days delinquent are submitted to the Board of Directors
for its review. The Board of Directors determines the appropriate course of
action for those loans where collection efforts are unsuccessful. Its options
include modification of the loan, forbearance, deeds in lieu of foreclosure or
foreclosure.
The following tables set forth delinquencies of the Association's loan
portfolio by type of loan at the dates indicated:
<TABLE>
<CAPTION>
AT MARCH 31, 1996 AT DECEMBER 31, 1995
------------------------------------- -------------------------------------
60-89 DAYS 90 DAYS OR MORE 60-89 DAYS 90 DAYS OR MORE
------------------ ------------------ ------------------ ------------------
NUMBER PRINCIPAL NUMBER PRINCIPAL NUMBER PRINCIPAL NUMBER PRINCIPAL
OF LOANS BALANCE OF LOANS BALANCE OF LOANS BALANCE OF LOANS BALANCE
-------- --------- -------- --------- -------- --------- -------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
One- to four-family..... 20 $1,085 18 $1,077 24 $1,093 16 $ 915
Multifamily............. -- -- -- -- -- -- -- --
Construction and land... 1 36 -- -- 2 48 -- --
Commercial.............. -- -- -- -- -- -- -- --
Other................... -- -- -- -- -- -- 1 1
--- ------ --- ------ --- ------ --- ------
Total................ 21 $1,121 18 $1,077 26 $1,141 17 $ 916
=== ====== === ====== === ====== === ======
Delinquent loans to
total loans(1)......... 0.42% 0.41% 0.42% 0.34%
====== ====== ====== ======
<CAPTION>
AT DECEMBER 31, 1994 AT DECEMBER 31, 1993
------------------------------------- -------------------------------------
60-89 DAYS 90 DAYS OR MORE 60-89 DAYS 90 DAYS OR MORE
------------------ ------------------ ------------------ ------------------
NUMBER PRINCIPAL NUMBER PRINCIPAL NUMBER PRINCIPAL NUMBER PRINCIPAL
OF LOANS BALANCE OF LOANS BALANCE OF LOANS BALANCE OF LOANS BALANCE
-------- --------- -------- --------- -------- --------- -------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
One- to four-family..... 10 $ 516 18 $ 974 33 $1,412 26 $1,642
Multifamily............. -- -- -- -- 1 92 -- --
Construction and land... 2 53 1 12 1 40 -- --
Commercial.............. -- -- -- -- -- -- -- --
Other................... -- -- -- -- -- -- -- --
--- ------ --- ------ --- ------ --- ------
Total................ 12 $ 569 19 $ 986 35 $1,544 26 $1,642
=== ====== === ====== === ====== === ======
Delinquent loans to
total loans(1)......... 0.21% 0.36% 0.51% 0.54%
====== ====== ====== ======
</TABLE>
- --------
(1) Total loans represent gross loans less deferred loan fees and loans in
process.
Real Estate Owned. Property acquired by the Association as a result of
foreclosure or deed in lieu of foreclosure is classified as real estate owned
("REO"). When property is acquired, it is recorded at the lower of cost or
estimated fair value, less the estimated cost of disposition. After
acquisition, all costs incurred in maintaining the property are expensed.
Costs relating to the development and improvement of the property, however,
are capitalized to the extent of net realizable value. The Association obtains
an independent appraisal on an REO property as soon as practicable after it
takes possession of the property. There was a decrease in REO of $119,000 from
$496,000 at December 31, 1995 to $377,000 at March 31, 1996 due to the
disposition of two properties, which dispositions resulted in a net gain to
the Association of $18,000.
Non-Performing Assets. Loans 90 days or more delinquent are reviewed by the
Association's Asset Classification Committee quarterly, and any loan whose
collectibility is doubtful is placed on non-accrual status. The Asset
Classification Committee provides the Association's Board of Directors with a
quarterly assessment of asset quality. It is the Association's policy to place
loans on non-accrual status when either principal or interest is 90 days or
more past due, unless, in the judgment of management, the loan is well
collateralized and in the process of collection. Interest accrued and unpaid
at the time a loan is placed on non-accrual status is charged against interest
income. Subsequent payments are either applied to the outstanding principal
balance or recorded as interest income, depending on the assessment of the
ultimate collectibility of the loan. During the three months ended March 31,
1996 and 1995, the amounts of additional interest income that would have been
recorded on
68
<PAGE>
non-accrual loans, had they been current, totaled $20,000 and $20,000,
respectively, and for the years ended December 31, 1995, 1994, and 1993
totaled $36,000, $59,000 and $97,000, respectively. These amounts were not
included in interest income for the respective periods. For all periods
presented, the Association has had no troubled-debt restructurings (which
involved forgiving a portion of interest or principal on any loans or making
loans at a rate materially less than that of market rates). Other loans which
may be potential problems are designated by management as special mention, and
such loans totaled $701,000 at March 31, 1996. See "--Classified Assets."
The following table sets forth information regarding the Association's non-
performing assets at the dates indicated.
<TABLE>
<CAPTION>
AT AT DECEMBER 31,
MARCH 31, --------------------------------------
1996 1995 1994 1993 1992 1991
--------- ------ ------ ------ ------ ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Non-accrual mortgage loans:
One- to four-family........ $1,077 $ 915 $ 974 $1,642 $2,354 $1,775
Multifamily................ -- -- -- -- -- 144
Construction and land...... -- -- 12 -- -- --
Commercial................. -- -- -- -- -- --
Other loans................ -- 1 -- -- 2 1
------ ------ ------ ------ ------ ------
Total non-performing
loans................... 1,077 916 986 1,642 2,356 1,920
------ ------ ------ ------ ------ ------
Total real estate owned and
in judgment................. 377 496 514 433 629 198
------ ------ ------ ------ ------ ------
Total non-performing
assets.................. $1,454 $1,412 $1,500 $2,075 $2,985 $2,118
====== ====== ====== ====== ====== ======
Total non-performing loans to
total loans(1).............. 0.41% 0.34% 0.36% 0.54% 0.81% 0.72%
Total non-performing assets
to total assets............. 0.47% 0.46% 0.49% 0.62% 0.86% 0.66%
</TABLE>
- --------
(1) Total loans represent gross loans less deferred loan fees and loans in
process.
Classified Assets. Federal regulations and the Association's Classification
of Assets Policy require that the Association utilize an internal asset
classification system as a means of reporting problem and potential problem
assets. The Association has incorporated the OTS internal asset
classifications as a part of its credit monitoring system. The Association
currently classifies problem and potential problem assets as "special
mention," "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 Association 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 reserve is not warranted. Assets which do not
currently expose the Association to sufficient risk to warrant classification
in one of the aforementioned categories but possess weaknesses or unwarranted
financial risk that, if uncorrected, could weaken the asset and increase risk
in the future are required to be designated "special mention."
When a savings association classifies one or more assets, or portions
thereof, as substandard or doubtful, it is required to establish a general
valuation allowance for loan losses 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 risk associated
with lending activities, but which, unlike specific allowances, has not been
allocated to particular problem assets. When a savings association 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.
69
<PAGE>
The Association's Mortgage Servicing Manager reviews the Association's loans
on a monthly basis and provides delinquency reports to the Board of Directors.
The Association's Asset Classification Committee meets on a quarterly basis
and classifies assets in accordance with the management guidelines described
herein.
The following table sets forth at March 31, 1996, the Association's carrying
value of assets classified as "substandard," "doubtful" or "loss" or
designated as "special mention:"
<TABLE>
<CAPTION>
SPECIAL
MENTION SUBSTANDARD DOUBTFUL LOSS
------------- ------------- ------------- -------------
NUMBER AMOUNT NUMBER AMOUNT NUMBER AMOUNT NUMBER AMOUNT
------ ------ ------ ------ ------ ------ ------ ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Mortgage loans:
One- to four-family.... 7 $701 18 $1,077 -- $-- -- $--
--- ---- --- ------ --- ---- --- ----
Total mortgage loans.... 7 701 18 1,077 -- -- -- --
--- ---- --- ------ --- ---- --- ----
Real estate owned and in
judgement:
One- to four-family.... -- -- 3 338 -- -- -- --
Multifamily............ -- -- -- -- -- -- -- --
Construction and land.. -- -- 1 39 -- -- -- --
Commercial............. -- -- -- -- -- -- -- --
--- ---- --- ------ --- ---- --- ----
Total real estate owned
and in judgment........ -- -- 4 377 -- -- -- --
--- ---- --- ------ --- ---- --- ----
Total................... 7 $701 22 $1,454 -- $-- -- $--
=== ==== === ====== === ==== === ====
</TABLE>
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 based on information currently known to management. The Asset
Classification Committee reviews and approves the allowance for loan loss on a
quarterly basis. The allowance is based upon a number of factors, including
current regional and national economic conditions, actual loss experience and
industry trends. In addition, the OTS, as an integral part of its examination
process, periodically reviews the Association's allowance for loan losses. The
OTS may require the Association to make additional general or specific loan
loss allowances based upon judgments different from those of management. At
March 31, 1996, the Association's allowance for loan losses was 0.32% of total
loans as compared to 0.31% as of December 31, 1995. The Association had non-
accrual loans of $1.1 million and $916,000 at March 31, 1996 and December 31,
1995, respectively, representing 0.41% and 0.34% of total loans at such
respective dates. See "The Conversion--Stock Pricing" for a discussion of RP
Financial's slight downward adjustment in the pro forma market value of the
Common Stock as a result of the Association's relatively lower level of
reserves and a higher ratio of risk-weighted assets to assets as compared to
its peer group. The Association will continue to monitor and modify its
allowance for loan losses as conditions dictate.
The OTS, in conjunction with the other federal banking agencies, recently
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 in
determining the adequacy of general valuation guidelines. Generally, the
policy statement recommends that institutions have effective systems and
controls to identify, monitor and address asset quality problems; that
management analyzes all significant factors that affect the collectibility of
the portfolio in a reasonable manner; and that management establishes
acceptable allowance evaluation processes that meet the objectives set forth
in the policy statement. While the Association believes that it has
established an adequate allowance for loan losses, there can be no assurance
that regulators, in reviewing the Association's loan portfolio, will not
request the Association to materially increase its allowance for loan losses,
thereby negatively affecting the Association's financial condition and
earnings at that time. Management believes that the provision for loan losses
and the allowance for loan losses are reasonable and adequate to cover any
known losses and any losses reasonably expected in the existing loan
portfolio. While management estimates loan losses using the best available
information, such as independent appraisals for significant collateral
properties, no assurance can be given that future additions to the allowance
will not be necessary based on changes in economic and real estate market
conditions, further information obtained
70
<PAGE>
regarding known problem loans, identification of additional problem loans and
other factors, both within and outside of management's control. The directors
of the Association and the Company have reviewed the provision for loan losses
and the allowance for loan losses and the assumptions utilized by management
as to their reasonableness and adequacy.
The following table sets forth activity in the Association's allowance for
loan losses and other ratios at or for the dates indicated.
<TABLE>
<CAPTION>
AT OR FOR THE
THREE MONTHS
ENDED
MARCH 31, AT OR FOR THE YEAR ENDED DECEMBER 31,
------------------ ------------------------------------------------
1996 1995 1995 1994 1993 1992 1991
-------- -------- -------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Total loans outstanding
at end of period(1).... $264,938 $271,488 $267,979 $271,689 $302,085 $289,734 $267,836
-------- -------- -------- -------- -------- -------- --------
Balance at beginning of
year................... 826 649 649 409 548 355 127
Provision for loan
losses................. 30 45 180 240 240 256 232
Charge-offs:
One- to four-family.... -- -- -- -- -- -- --
Multifamily............ -- -- -- -- (141) -- --
Construction and land.. -- -- -- -- -- -- --
Commercial............. -- -- -- -- -- -- --
Other.................. -- -- (3) -- -- -- --
-------- -------- -------- -------- -------- -------- --------
Total charge-offs..... -- -- (3) -- (141) -- --
-------- -------- -------- -------- -------- -------- --------
Allocation to reserve
for uncollected
interest............... -- -- -- -- (238) (63) (4)
-------- -------- -------- -------- -------- -------- --------
Balance at end of year.. $ 856 $ 694 $ 826 $ 649 $ 409 $ 548 $ 355
======== ======== ======== ======== ======== ======== ========
Net charge-offs during
the period to average
loans outstanding
during the period...... -- % -- % -- % -- % 0.05% -- % -- %
Allowance for loan
losses to total loans
at end of period....... 0.32 0.26 0.31 0.24 0.14 0.19 0.13
Allowance for loan
losses to total non-
performing loans at end
of period.............. 79.48 71.77 90.17 65.82 24.91 23.26 18.49
</TABLE>
- --------
(1) Total loans represent gross loans less deferred loan fees and loans in
process.
The following table sets forth the Association's allowance for loan losses
allocated by loan category and the percent of loans in each category to total
loans at the dates indicated.
<TABLE>
<CAPTION>
AT DECEMBER 31,
-----------------------------------------------------------------
AT MARCH 31, 1996 1995 1994 1993
--------------------- --------------------- --------------------- ---------------------
PERCENT OF PERCENT OF PERCENT OF PERCENT OF
LOANS IN LOANS IN LOANS IN LOANS IN
EACH EACH EACH EACH
ALLOWANCE CATEGORY TO ALLOWANCE CATEGORY TO ALLOWANCE CATEGORY TO ALLOWANCE CATEGORY TO
AMOUNT GROSS LOANS AMOUNT GROSS LOANS AMOUNT GROSS LOANS AMOUNT GROSS LOANS
--------- ----------- --------- ----------- --------- ----------- --------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Mortgage loans:
One- to four-family.... $805 98.10% $779 98.09% $602 97.63% $378 97.54%
Multifamily............ 26 1.14 25 1.15 25 1.50 16 1.50
Construction and land.. 10 0.22 7 0.17 11 0.31 8 0.37
Commercial............. 15 0.33 15 0.33 11 0.31 7 0.34
Other.................. -- 0.21 -- 0.26 -- 0.25 -- 0.25
---- ------ ---- ------ ---- ------ ---- ------
Total................. $856 100.00% $826 100.00% $649 100.00% $409 100.00%
==== ====== ==== ====== ==== ====== ==== ======
</TABLE>
INVESTMENT ACTIVITIES
Investment Policy. The investment policy of the Association, which is
established by the Board of Directors, is based upon its asset/liability
management goals and emphasizes high credit quality and diversified
investments while seeking to optimize net interest income within acceptable
limits of safety and liquidity. The Association's investment goal has been to
invest available funds in short-term, highly liquid instruments that have
fixed rates.
71
<PAGE>
See "Management's Discussion and Analysis of Financial Condition and Results
of Operations--Management Strategy," "--Management of Interest Rate Risk" and
"--Liquidity and Capital Resources." The policy is designed to provide and
maintain liquidity to meet day-to-day, cyclical and long-term changes in the
Association's asset/liability structure.
The Association's investment policy permits it to invest in U.S. government
obligations; certain securities of various government-sponsored agencies,
including mortgage-backed securities issued/guaranteed by FNMA, FHLMC and the
Government National Mortgage Association ("GNMA"); certificates of deposit of
insured banks and savings associations; and federal funds. The Association's
investment policy prohibits investment in derivative securities.
Mortgage-Backed Securities. At March 31, 1996, the carrying value of
mortgage-backed securities totalled $173,000, or 0.06%, of total assets. The
fair value of these mortgage-backed securities totalled $173,000 at March 31,
1996. All mortgage-backed securities in the Association's portfolio were held-
to-maturity and carried at amortized cost.
At March 31, 1996, all securities in the Association's mortgage-backed
securities portfolio were directly insured or guaranteed by GNMA, thereby
providing the certificate holder a guarantee of timely payments of interest
and scheduled principal payments, whether or not they have been collected. The
Association's mortgage-backed securities portfolio had a weighted average rate
of 6.99% at March 31, 1996.
Mortgage-backed securities generally yield less than the loans that underlie
such securities because of the cost of payment guarantees or credit
enhancements that reduce credit risk. In addition, mortgage-backed securities
are more liquid than individual mortgage loans and may be used to
collateralize borrowings of the Association. In general, mortgage-backed
securities issued or guaranteed by GNMA, FNMA, and FHLMC and certain AAA-rated
mortgage-backed pass-through securities are weighted at no more than 20% for
risk-based capital purposes, compared to the 50% risk weighting assigned to
most non-securitized residential mortgage loans.
U.S. Treasury Securities. At March 31, 1996, the carrying value of U.S.
Treasury securities totalled $6.0 million, or 1.94% of total assets. All U.S.
Treasury securities in the Association's portfolio were held-to-maturity and
carried at amortized cost.
The following table sets forth activity in the Association's mortgage-backed
securities held to maturity portfolio for the periods indicated.
<TABLE>
<CAPTION>
FOR THE
THREE
MONTHS FOR THE YEAR
ENDED ENDED DECEMBER
MARCH 31, 31,
---------- ----------------
1996 1995 1995 1994 1993
---- ---- ---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Amortized cost at beginning of period............. $187 $243 $243 $296 $384
Purchases/sales (net)............................. -- -- -- -- --
Principal repayments.............................. (14) (13) (56) (52) (89)
Premium and discount amortization, net............ -- -- -- (1) 1
---- ---- ---- ---- ----
Amortized cost at end of period................... $173 $230 $187 $243 $296
==== ==== ==== ==== ====
</TABLE>
The following table sets forth the amortized cost and fair value of the
Association's mortgage-backed and investment securities held to maturity at
the dates indicated.
<TABLE>
<CAPTION>
AT DECEMBER 31,
-------------------------------------------------
AT MARCH 31,
1996 1995 1994 1993
---------------- ---------------- ---------------- ---------------
AMORTIZED FAIR AMORTIZED FAIR AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE COST VALUE COST VALUE
--------- ------ --------- ------ --------- ------ --------- -----
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Mortgage-backed
securities--GNMA....... $ 173 $ 173 $ 187 $ 193 $ 243 $ 233 $296 $306
====== ====== ====== ====== ====== ====== ==== ====
Other debt securities
--U.S. Treasury and
Agency................. $5,955 $5,985 $5,948 $6,030 $5,918 $5,663 $-- $--
====== ====== ====== ====== ====== ====== ==== ====
</TABLE>
72
<PAGE>
The following table sets forth certain information regarding the amortized
cost, fair value and weighted average rate of the Association's mortgage-
backed and investment securities held to maturity at March 31, 1996, by
remaining period to contractual maturity. With respect to mortgage-backed
securities, the entire amount is reflected in the maturity period that
includes the final security payment date, and, accordingly, no effect has been
given to periodic repayments or possible prepayments.
<TABLE>
<CAPTION>
AT MARCH 31, 1996
-------------------------
WEIGHTED
AMORTIZED FAIR AVERAGE
COST VALUE RATE
--------- ------ --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Mortgage-backed securities:
Due after 1 year but within 5 years................. $ 26 $ 27 7.70%
Due after 5 years but within 10 years............... 147 146 6.87
------ ------ ----
Total............................................. $ 173 $ 173 6.99%
====== ====== ====
U.S. Treasury and Agency:
Due after 1 year but within 5 years................. $5,955 $5,985 6.05%
====== ====== ====
Total:
Due after 1 year but within 5 years................. $5,981 $6,012 6.05%
Due after 5 years but within 10 years............... 147 146 6.87
------ ------ ----
Total............................................. $6,128 $6,158 6.07%
====== ====== ====
</TABLE>
SOURCES OF FUNDS
General. Savings deposits, loan and security repayments and prepayments and
cash flows generated from operations are the primary sources of the
Association's funds for use in lending, investing and for other general
purposes. To a significantly lesser extent, the Association also utilizes
funds borrowed from the FHLB of Chicago.
Savings Deposits. The Association offers a variety of savings deposit
accounts with a range of interest rates and terms. The Association's savings
deposits consist of passbook accounts, NOW/Super NOW accounts, money market
accounts, checking accounts and certificates of deposit. The Association
offers certificates of deposit with maturities of up to 60 months. The flow of
deposits is influenced significantly by general economic conditions, changes
in money market rates, prevailing interest rates and competition. The
Association's deposits are obtained predominantly from the areas in which its
branch offices are located. The Association 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 Association's ability to
attract and retain deposits. Certificate accounts in excess of $100,000 are
not actively solicited by the Association nor does the Association use brokers
to obtain deposits.
The following table presents the savings deposit activity of the Association
for the periods indicated.
<TABLE>
<CAPTION>
FOR THE THREE FOR THE YEAR ENDED DECEMBER
MONTHS ENDED 31,
MARCH 31, ------------------------------
1996 1995 1994 1993
------------- --------- --------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Deposits.......................... $ 190,083 $ 764,098 $ 876,134 $952,634
Withdrawals....................... (188,013) (781,552) (889,520) 969,871
--------- --------- --------- --------
Deposits in excess of (less than)
withdrawals...................... 2,070 (17,454) (13,386) (17,237)
Deposits of branches sold......... -- -- (21,822) (18,113)
Interest credited................. 2,443 9,488 9,214 10,311
--------- --------- --------- --------
Total increase (decrease) in
savings deposits............... $ 4,513 $ (7,966) $ (25,994) $(25,039)
========= ========= ========= ========
</TABLE>
73
<PAGE>
At March 31, 1996, the Association had $17.4 million in jumbo certificates
of deposit (accounts in amounts over $100,000) maturing as follows:
<TABLE>
<CAPTION>
WEIGHTED
AMOUNT AVERAGE RATE
------- ------------
(DOLLARS IN
THOUSANDS)
<S> <C> <C>
Maturity Period
Within three months...................................... $ 7,467 5.37%
After three but within six months........................ 1,585 5.25
After six but within 12 months........................... 1,569 5.59
After 12 months.......................................... 6,794 6.65
------- ----
Total.................................................. $17,415 5.88%
======= ====
</TABLE>
The following table sets forth the distribution of the Association's savings
deposits and the related weighted average interest rates at the dates
indicated.
<TABLE>
<CAPTION>
AT DECEMBER 31,
--------------------------------------------------------------------------------
AT MARCH 31, 1996 1995 1994 1993
-------------------------- -------------------------- -------------------------- --------------------------
PERCENT WEIGHTED PERCENT WEIGHTED PERCENT WEIGHTED PERCENT WEIGHTED
OF TOTAL AVERAGE OF TOTAL AVERAGE OF TOTAL AVERAGE OF TOTAL AVERAGE
AMOUNT DEPOSITS RATE AMOUNT DEPOSITS RATE AMOUNT DEPOSITS RATE AMOUNT DEPOSITS RATE
-------- -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
NOW/Super NOW
accounts........ $ 46,134 17.5% 2.25% $ 45,001 17.3% 2.25% $ 48,834 18.2% 2.25% $ 54,836 18.7% 2.25%
Money market
accounts........ 17,790 6.7 3.22 17,684 6.8 3.22 23,545 8.8 3.22 30,348 10.3 2.85
Passbook
accounts........ 66,342 25.1 3.00 65,261 25.1 3.04 74,524 27.8 3.00 85,690 29.1 3.00
Certificates of
deposit......... 129,318 48.9 5.68 126,847 48.8 5.89 121,035 45.2 4.46 123,058 41.9 4.73
Noninterest
bearing NOW
accounts........ 4,901 1.8 -- 5,179 2.0 -- -- -- -- -- -- --
-------- ------ ---- -------- ------ ---- -------- ------ ---- -------- ------ ----
Totals.......... $264,485 100.00% 4.14% $259,972 100.00% 4.25% $267,938 100.00% 3.83% $293,932 100.00% 3.58%
======== ====== ==== ======== ====== ==== ======== ====== ==== ======== ====== ====
</TABLE>
The following table presents, by interest rate ranges, the amount of
certificates of deposit outstanding at the dates indicated and the periods to
maturity of the certificates of deposit outstanding at March 31, 1996.
<TABLE>
<CAPTION>
PERIOD TO MATURITY AT MARCH 31,
1996 AT DECEMBER 31,
-------------------------------- AT --------------------------
LESS THAN ONE TO FOUR TO MARCH 31,
INTEREST RATE RANGE ONE YEAR THREE YEARS FIVE YEARS 1996 1995 1994 1993
- ------------------- --------- ----------- ---------- --------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Below 4.00%............. $ 16 $ -- $ -- $ 16 $ 16 $ 12,885 $ 53,848
4.00% to 4.99%.......... 10,845 427 10 11,282 7,548 48,001 21,146
5.00% to 5.99%.......... 49,482 17,756 2,034 69,272 69,542 31,067 19,001
6.00% to 6.99%.......... 9,958 8,949 9,240 28,147 27,216 13,689 10,723
7.00% and above......... 3,322 32 17,247 20,601 22,525 15,393 18,340
------- ------- ------- -------- -------- -------- --------
Total.................. $73,623 $27,164 $28,531 $129,318 $126,847 $121,035 $123,058
======= ======= ======= ======== ======== ======== ========
</TABLE>
Certificates of deposit have increased $8.3 million from $121.0 million or
45.2% of total savings deposits at December 31, 1994 to $129.3 million or
48.9% of total savings deposits at March 31, 1996. During this same period,
passbook accounts decreased $8.2 million from $74.5 million or 27.8% of total
savings deposits at December 31, 1994 to $66.3 million or 25.1% of total
savings deposits at March 31, 1996. This change was due primarily to the
increase in market interest rates of certificates of deposit and the migration
of funds from lower paying passbook accounts to higher paying certificates of
deposit in periods of rising interest rates. As part of the Association's
business strategy, management's goal is to increase the number and amount of
transaction accounts. Steps taken by management have included the opening of
additional drive-up lanes at the Bartlett branch office and providing drive-up
lanes for the first time at the new South Elgin branch office, which is
expected to open in the fall of 1996. Management believes these steps will
help attract additional transaction accounts.
74
<PAGE>
Borrowed Funds. The Association utilizes advances from the FHLB of Chicago
as an alternative to retail deposits to fund its operations and may do so in
the future as part of its operating strategy. The Association generally only
utilizes FHLB of Chicago borrowings as a source of liquidity. These FHLB of
Chicago advances are collateralized primarily by certain of the Association's
mortgage loans and mortgage-backed securities and secondarily by the
Association's investment in the stock of the FHLB of Chicago. FHLB of Chicago
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 of Chicago will advance to member institutions, including the
Association, fluctuates from time to time in accordance with the policies of
the OTS and the FHLB of Chicago. See "Regulation--Regulation of Federal
Savings Associations--Federal Home Loan Bank System." At March 31, 1996, the
maximum amount of FHLB of Chicago advances available to the Association was
$54 million, based on the Association's current investment in FHLB of Chicago
stock.
The following table sets forth certain information regarding the
Association's borrowed funds for the periods indicated.
<TABLE>
<CAPTION>
AT OR FOR
THE THREE
MONTHS
ENDED MARCH AT OR FOR THE YEAR
31, ENDED DECEMBER 31,
------------ -----------------------
1996 1995 1995 1994 1993
------ ---- ------ ------ -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
FHLB of Chicago advances:
Maximum amount outstanding at any
month-end during the period........... $4,000 -- $6,000 $9,000 $17,000
Average balance outstanding............ 2,601 -- 1,250 583 3,583
Balance outstanding at end of period... -- -- 4,000 -- 7,000
Weighted average interest rate during
the period............................ 5.69% -- 6.16% 6.69% 3.63%
Weighted average interest rate at end
of period............................. -- -- 5.31 -- 3.24
</TABLE>
PROPERTIES
The Association conducts its business through five offices set forth in the
table below. The Association's main office is located at 16 North Spring
Street, Elgin, Illinois. The Association believes that its current facilities
(including the new South Elgin office under construction) are adequate to meet
the present and immediately foreseeable needs of the Association and the
Company.
<TABLE>
<CAPTION>
DATE
LEASED OR LEASED OR NET BOOK VALUE AT
OWNED ACQUIRED MARCH 31,1996
--------- --------- -----------------
(IN THOUSANDS)
<S> <C> <C> <C>
Main Office:
16 North Spring St.
Elgin, IL....................... Owned 1923 $2,447
Branches:
180 Virginia St.
Crystal Lake, IL................ Owned 4/74 813
56 East Irving Park Road
Roselle, IL..................... Owned 7/75 323
310 North LaFox St.
South Elgin, IL(1).............. Leased 12/81 --
200 Bartlett Ave.
Bartlett, IL.................... Owned 9/79 923
Check Processing:
Mail and Record Retention
Facility (No Customer Service)
Annex
Fulton St., Elgin, IL........... Owned 2/86 437
</TABLE>
- --------
(1) This lease expires on September 30, 1996. Upon expiration, the Association
plans to move into a new branch office that the Association will own,
which office is presently under construction at 300 North McLean Street,
South Elgin at an estimated cost of $1.0 million.
75
<PAGE>
LEGAL PROCEEDINGS
The Association is not involved in any pending legal proceedings other than
routine legal proceedings occurring in the ordinary course of business. Such
routine legal proceedings in the aggregate are believed by management to be
immaterial to the Association's financial condition and results of operations.
PERSONNEL
As of March 31, 1996, the Association has 99 full-time employees and 54
part-time employees. The Association had experienced a low turnover rate among
its employees and, as of March 31, 1996, 67 of the Association's employees had
been with the Association for more than five years. The employees are not
represented by a collective bargaining unit and the Association considers its
relationship with its employees to be good. See "Management of the
Association--Benefits" for a description of certain compensation and benefit
programs offered to the Association's employees.
76
<PAGE>
FEDERAL AND STATE TAXATION
FEDERAL TAXATION
General. The following is a discussion of material tax matters and does not
purport to be a comprehensive description of the tax rules applicable to the
Association or the Company. The Association has not been audited by the IRS
during the last five years. For federal income tax purposes, after the
Conversion, the Company and the Association may file consolidated income tax
returns and 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 Association's tax reserve for bad debts, discussed below.
Tax Bad Debt Reserves. Savings institutions such as the Association which
meet certain definitional tests primarily relating to their assets and the
nature of their business ("qualifying thrifts") are permitted to establish a
tax 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 Association's deduction with respect to "qualifying
loans," which are generally loans secured by certain interests in real
property, may be computed using an amount based on the Association's actual
loss experience (the "Experience Method"), or a percentage equal to 8% of the
Association's taxable income (the "PTI Method"), computed without regard to
this deduction and with additional modifications and reduced by the amount of
any permitted addition to the non-qualifying reserve. Use of the PTI Method
has the effect of reducing the marginal rate of federal tax on the
Association's income to 31.3%, exclusive of any minimum or environmental tax,
as compared to the generally applicable maximum corporate federal income tax
rate of 34%. (The marginal rate of tax would be 32.2% if the Association's
taxable income exceeds $10,000,000 and is therefore subject to a maximum tax
rate of 35%). The Association's deduction with respect to non-qualifying loans
must be computed under the Experience Method which is based on the
Association's actual charge-offs. Each year the Association reviews the most
favorable way to calculate the deduction attributable to an addition to the
tax bad debt reserve. See "Risk Factors--Pending Legislation Regarding Bad
Debt Reserves."
The Association presently satisfies the qualifying thrift definitional
tests. If the Association failed to satisfy such tests in any taxable year, it
would be unable to use the PTI Method in computing additions to its tax bad
debt reserve and may be required to recapture (i.e., take into income) a
portion of its bad debt reserves over a six year period. Such bad debt reserve
recapture could cause the Association to incur substantial tax liability.
Among other things, the qualifying thrift definitional tests require the
Association 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 Association in the conduct of its banking business. The
Association's ratio of qualifying assets to total assets exceeded 60% through
the close of its last taxable year. Although there can be no assurance that
the Association will satisfy the 60% test in the future, management believes
that this level of qualifying assets can be maintained by the Association.
The amount of the addition to the reserve for losses on qualifying real
property loans under the PTI Method cannot exceed the amount necessary to
increase the balance of the reserve for losses on qualifying real property
loans at the close of the taxable year to 6 percent of the balance of the
qualifying real property loans outstanding at such time. As of the close of
its last taxable year, the Association's tax reserve for bad debts on
qualifying real property loans was less than 6 percent of its qualifying real
property loans outstanding. Also, if the Association uses the PTI Method, its
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 Association at the
close of the taxable year exceeds (ii) the sum of the Association's surplus,
undivided profits and reserves at the beginning of such year. As of the close
of its last taxable year, 12 percent of the Association's deposits and
withdrawable accounts was greater than its surplus, undivided profits and
reserves at the beginning of its taxable year.
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<PAGE>
Under HR 3448 (the "Small Business Job Protection Act of 1996"), as passed
by the House and Senate, the PTI Method would be repealed for thrifts and the
Association would be permitted to use only the Experience Method of computing
additions to its bad debt reserves. In addition, the Association would be
required to recapture (i.e., take into income) over a six year period the
excess of the balance of its bad debt reserves as of December 31, 1995 over
the greater of (a) the balance of such reserves as of December 31, 1987 (or a
lesser amount since the Association's loan portfolio has decreased since
December 31, 1987) or (b) an amount that would have been the balance of such
reserves as of December 31, 1995 had the Association always computed the
additions to its reserves using the bank six-year moving average Experience
Method. The Association's post-December 31, 1987 nonqualifying and qualifying
bad debt reserves at December 31, 1995 were approximately $4.5 million. If
that amount were recaptured, the Association would incur an additional tax
liability of approximately $1.9 million. See "Risk Factors--Pending
Legislation Regarding Bad Debt Reserves."
Distributions. To the extent that: (i) the Association's tax bad debt
reserve for losses on qualifying real property loans exceeds the amount that
would have been allowed under the Experience Method (the "Excess Bad Debt
Reserve") and the Association maintains a supplemental reserve for losses on
loans; and (ii) the Association makes "non-dividend distributions" to the
Company, such distributions will be considered to have been made from the
Excess Bad Debt Reserve or the supplemental reserve for losses on loans
("Excess Distributions"), and an amount based on the amount distributed will
be included in the Association's taxable income. Non-dividend distributions
include distributions in excess of the Association's current and accumulated
earnings and profits, as calculated for federal income tax purposes,
distributions in redemption of stock, and distributions in partial or complete
liquidation. However, dividends paid out of the Association's current or
accumulated earnings and profits will not be considered to result in a
distribution from the Association's Excess Bad Debt Reserve or supplemental
reserve.
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 Excess Distribution. Thus, if, after the
Conversion, the Association makes a "non-dividend distribution" that is an
Excess Distribution, approximately one and one-half times the amount so used
would be includable in gross income for federal income tax purposes, assuming
a 34% federal corporate income tax rate. See "Regulation" and "Dividend
Policy" for limits on the payment of dividends by the Association. The
Association does not intend to pay dividends that would result in a recapture
of any portion of its tax bad debt reserves.
Under pending legislative proposals, if the Association makes a non-dividend
distribution, as defined above, an amount, as computed above, will be included
in the Association's taxable income, but the maximum amount of reserves
subject to such inclusion will be the balance of the Association's bad debt
reserves as of December 31, 1987, or a lesser amount since the Association's
loan portfolio has decreased since December 31, 1987.
Corporate Alternative Minimum Tax. The Internal Revenue Code of 1986, as
amended (the "Code"), imposes a tax ("AMT") on alternative minimum taxable
income ("AMTI") at a rate of 20%. AMTI is increased by certain preference
items, including the excess of the tax bad debt reserve deduction using the
PTI Method over the deduction that would have been allowable under the
Experience Method. Only 90% of AMTI can be offset by net operating loss
carryovers of which the Association currently has none. AMTI is also adjusted
by determining the tax treatment of certain items in a manner that negates the
deferral of income resulting from the regular tax treatment of those items.
Thus, the Association's AMTI is increased by an amount equal to 75% of the
amount by which the Association's adjusted current earnings exceeds its AMTI
(determined without regard to this adjustment and prior to reduction for net
operating losses). In addition, for taxable years beginning after December 31,
1986 and before January 1, 1996, an environmental tax of 0.12% of the excess
of AMTI (with certain modifications) over $2 million is imposed on
corporations, including the Association, whether or not an AMT is paid. Under
pending legislative proposals, the environmental tax would be extended to
taxable years beginning before January 1, 2007. The Association does not
expect to be subject to the AMT, but may be subject to the environmental tax
liability.
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<PAGE>
Elimination of Dividends; Dividends Received Deduction. The Company may
exclude from its income 100% of dividends received from the Association as a
member of the same affiliated group of corporations. A 70% dividends received
deduction generally applies with respect to dividends received from domestic
corporations that are not members of such affiliated group, except that an 80%
dividends received deduction applies if the Company and the Association own
more than 20% of the stock of a corporation paying a dividend. Under pending
legislative proposals, the 70% dividends received deduction would be reduced
to 50% with respect to dividends paid after enactment of such legislation.
STATE AND LOCAL TAXATION
State of Illinois. The Association files a separate Illinois income tax
return. For Illinois income tax purposes, the Association is taxed at an
effective rate equal to 7.3% 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 obligations). The exclusion of income on United States Treasury
obligations has the effect of reducing the Illinois Taxable Income of the
Association.
As a Delaware holding company, the Company will register as a foreign
corporation authorized to transact business in Illinois. As such, it will file
an Illinois Foreign Corporation Annual Report and pay an annual franchise tax
to the State of Illinois.
State of Delaware. 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.
79
<PAGE>
REGULATION
GENERAL
The Association is subject to extensive regulation, examination, and
supervision by the OTS, as its chartering agency, and the FDIC, as its deposit
insurer. The Association's savings deposit accounts are insured up to
applicable limits by the SAIF administered by the FDIC, and the Association is
a member of the FHLB of Chicago. The Association must file reports with the
OTS and the FDIC concerning its activities and financial condition, and it
must obtain regulatory approvals prior to entering into certain transactions,
such as mergers with, or acquisitions of, other depository institutions. The
OTS and the FDIC conduct periodic examinations to assess the Association's
compliance with various regulatory requirements. This regulation and
supervision establishes a comprehensive framework of activities in which a
savings association can engage and is intended primarily for the protection of
the insurance fund and depositors. Assuming that the holding company form of
organization is utilized, the Company, as a savings association 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.
The OTS and the FDIC have significant 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 Association and the operations of both.
The following discussion is intended to be a summary of the material
statutes and regulations applicable to savings associations and their holding
companies, and it does not purport to be a comprehensive description of all
such statutes and regulations.
REGULATION OF FEDERAL SAVINGS ASSOCIATIONS
Business Activities. The Association derives its lending and investment
powers from the Home Owners' Loan Act, as amended (the "HOLA"), and the
regulations of the OTS thereunder. Under these laws and regulations, the
Association may invest in mortgage loans secured by residential and commercial
real estate, commercial and consumer loans, certain types of debt securities,
and certain other assets. The Association may also establish service
corporations that may engage in activities not otherwise permissible for the
Association, including certain real estate equity investments and securities
and insurance brokerage. These investment powers are subject to various
limitations, including (a) a prohibition against the acquisition of any
corporate debt security that is not rated in one of the four highest rating
categories; (b) a limit of 400% of an association's capital on the aggregate
amount of loans secured by non-residential real estate property; (c) a limit
of 10% of an association's assets on the aggregate amount of commercial loans;
(d) a limit of 35% of an association's assets on the aggregate amount of
consumer loans and acquisitions of certain debt securities; (e) a limit of 5%
of assets on non-conforming loans (loans in excess of the specific limitations
of the HOLA); and (f) a limit of the greater of 5% of assets or an
association's capital on certain construction loans made for the purpose of
financing what is or is expected to become residential property.
Loans to One Borrower. Under the HOLA, savings associations are generally
subject to the same limits on loans to one borrower as are imposed on national
banks. Generally, under these limits, a savings association may not make a
loan or extend credit to a single or related group of borrowers in excess of
15% of the association's unimpaired capital and surplus. Additional amounts
may be lent, not in excess of 10% of unimpaired capital and surplus, if such
loans or extensions of credit are fully secured by readily-marketable
collateral. Such collateral is defined to include certain debt and equity
securities and bullion, but generally does not include real estate. At March
31, 1996, the Association's regulatory limit on loans to one borrower was $5.6
million. However, the Association's lending policy limits loans to any one
borrower to an aggregate of $1 million. At March 31, 1996,
80
<PAGE>
the Association's largest aggregate amount of loans to one borrower was
$382,000, and the second largest borrower had an aggregate balance of
$366,000. The Association is in compliance with all applicable limitations on
loans to one borrower.
QTL Test. The HOLA requires a savings association to meet a qualified thrift
lender, or "QTL" test. Under the QTL test, a savings association is required
to maintain at least 65% of its "portfolio assets" in certain "qualified
thrift investments" in at least nine months of the most recent 12-month
period. "Portfolio assets" means, in general, an association's total assets
less the sum of (a) specified liquid assets up to 20% of total assets, (b)
certain intangibles, including goodwill and credit card and purchased mortgage
servicing rights, and (c) the value of property used to conduct the
association's business. "Qualified thrift investments" includes various types
of loans made for residential and housing purposes, investments related to
such purposes, including certain mortgage-backed and related securities, and
consumer loans up to 10% of the association's portfolio assets. At March 31,
1996, the Association maintained 98.3% of its portfolio assets in qualified
thrift investments. The Association had also met the QTL test in each of the
prior 12 months and was, therefore, a qualified thrift lender.
A savings association that fails the QTL test must either operate under
certain restrictions on its activities or convert to a bank charter. The
initial restrictions include prohibitions against (a) engaging in any new
activity not permissible for a national bank, (b) paying dividends not
permissible under national bank regulations, (c) obtaining new advances from
any Federal Home Loan Bank and (d) establishing any new branch office in a
location not permissible for a national bank in the association's home state.
In addition, within one year of the date that a savings association ceases to
meet the QTL test, any company controlling the association would have to
register under, and become subject to the requirements of, the Bank Holding
Company Act of 1956, as amended (the "BHC Act"). If the savings association
does not requalify under the QTL test within the three-year period after it
failed the QTL test, it would be required to terminate any activity and to
dispose of any investment not permissible for a national bank and would have
to repay as promptly as possible any outstanding advances from a Federal Home
Loan Bank. A savings association that has failed the QTL test may requalify
under the QTL test and be free of such limitations, but it may do so only
once.
Capital Requirements. The OTS regulations require savings associations to
meet three minimum capital standards: a tangible capital ratio requirement of
1.5% of total assets as adjusted under the OTS regulations, a leverage ratio
requirement of 3% of core capital to such adjusted total assets and a risk-
based capital ratio requirement of 8% of core and supplementary capital to
total risk-weighted assets. In determining compliance with the risk-based
capital requirement, a savings association must compute its risk-weighted
assets by multiplying its assets and certain off-balance sheet items by risk-
weights, which range from 0% for cash and obligations issued by the United
States Government or its agencies to 100% for consumer and commercial loans,
as assigned by the OTS capital regulation based on the risks OTS believes are
inherent in the type of asset.
Tangible capital is defined, generally, as common stockholders' equity
(including retained earnings), certain noncumulative perpetual preferred stock
and related earnings and minority interests in equity accounts of fully
consolidated subsidiaries, less intangibles (other than certain purchased
mortgage servicing rights) and investments in and loans to subsidiaries
engaged in activities not permissible for a national bank. Core capital is
defined similarly to tangible capital, but core capital also includes certain
qualifying supervisory goodwill and certain purchased credit card
relationships. Supplementary capital currently includes cumulative and other
perpetual preferred stock, mandatory convertible securities, subordinated debt
and intermediate preferred stock and the allowance for loan and lease losses.
The allowance for loan and lease losses includable in supplementary capital is
limited to a maximum of 1.25% of risk-weighted assets, and the amount of
supplementary capital that may be included as total capital cannot exceed the
amount of core capital.
The OTS has promulgated a regulation that requires a savings association
with "above normal" interest rate risk, when determining compliance with its
risk-based capital requirement, to hold additional capital to account for its
"above normal" interest rate risk. Pending the resolution of related
regulatory issues, the OTS has deferred enforcement of this regulation. 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
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<PAGE>
from assets, liabilities and off-balance sheet contracts) resulting from a
hypothetical 2% increase or decrease in market rates of interest, divided by
the estimated economic value of the association's assets, as calculated in
accordance with guidelines set forth by the OTS. At the times when the 3-month
Treasury bond equivalent yield falls below 4%, an association may compute its
interest rate risk on the basis of a decrease equal to one-half of that
Treasury rate rather than on the basis of 2%. A savings association whose
measured interest rate risk exposure exceeds 2% would be considered to have
"above normal" risk. The interest rate risk component is an amount equal to
one-half of the difference between the association'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. Any required
deduction for interest rate risk becomes effective on the last day of the
third quarter following the reporting date of the association's financial data
on which the interest rate risk was computed.
At March 31, 1996, the Association met each of its capital requirements. See
"Regulatory Capital Compliance" for a table that sets forth, in terms of
dollars and percentages, the OTS tangible, leverage, and risk-based capital
requirements and the Association's historical amounts and percentages at March
31, 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.
The table below presents the Association's regulatory capital as compared to
the OTS regulatory capital requirements at March 31, 1996:
<TABLE>
<CAPTION>
ASSOCIATION CAPITAL REQUIREMENTS EXCESS
--------------- ---------------------- ---------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
------- ------- ----------- ---------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Tangible capital......... $37,195 12.04% $ 4,634 1.50% $32,561 10.54%
Core capital............. 37,195 12.04 9,268 3.00 27,927 9.04
Risk-based capital....... 38,051 23.65 12,872 8.00 25,129 15.65
</TABLE>
A reconciliation between regulatory capital and GAAP capital at March 31,
1996 is presented below:
<TABLE>
<CAPTION>
TANGIBLE CAPITAL CORE CAPITAL RISK-BASED CAPITAL
---------------- ------------ ------------------
(IN THOUSANDS)
<S> <C> <C> <C>
GAAP capital.................. $37,195 $37,195 $37,195
Allowance for loan losses
includable in supplementary
capital...................... -- -- 856
------- ------- -------
Regulatory capital............ $37,195 $37,195 $38,051
======= ======= =======
</TABLE>
Limitation on Capital Distributions. OTS regulations currently impose
limitations upon capital distributions by a savings association, such as cash
dividends, payments to repurchase or otherwise acquire its shares, payments to
stockholders of another institution in a cash-out merger and other
distributions charged against capital. At least 30-days written notice must be
given to the OTS of a proposed capital distribution by a savings association,
and capital distributions in excess of specified earnings or by certain
institutions are subject to approval by the OTS. An association that has
capital in excess of all fully phased-in regulatory capital requirements
before and after a proposed capital distribution and that is not otherwise
restricted in making capital distributions, may, after prior notice but
without the approval of the OTS, make capital distributions during a calendar
year equal to the greater of (a) 100% of its net earnings to date during the
calendar year plus the amount that would reduce by one-half its "surplus
capital ratio" (the excess capital over its fully phased-in capital
requirements) at the beginning of the calendar year, or (b) 75% of its net
earnings for the previous four quarters. Any additional capital distributions
would require prior OTS approval. In addition, the OTS can prohibit a proposed
capital distribution, otherwise permissible under the regulation, if the OTS
has determined that the association is in need of more than normal supervision
or if it determines that a proposed distribution by an association would
constitute an unsafe or unsound practice. Furthermore, under the OTS prompt
corrective action regulations, the Association would be prohibited from making
any capital distribution if, after the distribution, the Association failed to
meet its minimum capital requirements, as described above. See "--Prompt
Corrective Regulatory Action."
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The OTS has proposed regulations that would simplify the existing procedures
governing capital distributions by savings associations. Under the proposed
regulations, the approval of the OTS would be required only for capital
distributions by an association that is deemed to be in troubled condition or
that is undercapitalized or would be undercapitalized after the capital
distribution. A savings association would be able to make a capital
distribution without notice to or approval of the OTS if it is not held by a
savings association holding company, is not deemed to be in troubled
condition, has received either of the two highest composite supervisory
ratings and would continue to be adequately capitalized after such
distribution. Notice would have to be given to the OTS by any association that
is held by a savings association holding company or that had received a
composite supervisory rating below the highest two composite supervisory
ratings. An association's capital rating would be determined under the prompt
corrective action regulations. See "--Prompt Corrective Regulatory Action."
Liquidity. The Association is required to maintain an average daily balance
of liquid assets (cash, certain time deposits, bankers' acceptances, specified
United States Government, state or federal agency obligations, shares of
certain mutual funds and certain corporate debt securities and commercial
paper) equal to a monthly average of not less than a specified percentage of
its net withdrawable deposit accounts plus short-term borrowings. This
liquidity requirement may be changed from time to time by the OTS to any
amount within the range of 4% to 10% depending upon economic conditions and
the savings flows of member institutions, and is currently 5%. OTS regulations
also require each savings association 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 Association's average liquidity ratio for the month ended
March 31, 1996 was 10.27% which exceeded the applicable requirements. The
Association has never been subject to monetary penalties for failure to meet
its liquidity requirements.
Assessments. Savings associations are required by OTS regulation to pay
assessments to the OTS to fund the operations of the OTS. The general
assessment, paid on a semi-annual basis, is computed upon the savings
association's total assets, including consolidated subsidiaries, as reported
in the association's latest quarterly Thrift Financial Report. During January
1996, the Association paid an assessment of $39,342.
Branching. Subject to certain limitations, the HOLA and the OTS regulations
permit federally chartered savings associations to establish branches in any
state of the United States. The authority to establish such branches is
available (a) in states that expressly authorize branches of savings
associations located in another state or (b) to an association that qualifies
as a "domestic building and loan association" under the Internal Revenue Code
of 1986, which imposes qualification requirements similar to those for a
"qualified thrift lender" under the HOLA. See "--QTL Test." The authority for
a federal savings association to establish an interstate branch network would
facilitate a geographic diversification of the association's activities. This
authority under the HOLA and the OTS regulations preempts any state law
purporting to regulate branching by federal savings associations.
Community Reinvestment. Under the Community Reinvestment Act (the "CRA"), as
implemented by OTS regulations, a savings association has a continuing and
affirmative obligation consistent with its safe and sound operation to help
meet the credit needs of its entire community, including low and moderate
income neighborhoods. The CRA does not establish specific lending requirements
or programs for financial institutions nor does it limit an institution's
discretion to develop the types of products and services that it believes are
best suited to its particular community, consistent with the CRA. The CRA
requires the OTS, in connection with its examination of a savings association,
to assess the association's record of meeting the credit needs of its
community and to take such record into account in its evaluation of certain
applications by such association. The CRA also requires all institutions to
make public disclosure of their CRA ratings. The Association received a
"Satisfactory" CRA rating in its most recent examination.
In April 1995, the OTS and the other federal banking agencies adopted
amendments revising their CRA regulations. Among other things, the amended CRA
regulations substitute for the prior process-based assessment
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<PAGE>
factors a new evaluation system that would rate an institution based on its
actual performance in meeting community needs. In particular, the proposed
system would focus on three tests: (a) a lending test, to evaluate the
institution's record of making loans in its assessment areas; (b) an
investment test, to evaluate the institution's record of investing in
community development projects, affordable housing, and programs benefiting
low or moderate income individuals and businesses; and (c) a service test, to
evaluate the institution's delivery of services through its branches, ATMs and
other offices. The amended CRA regulations also clarify how an institution's
CRA performance would be considered in the application process.
Transactions with Related Parties. The Association's authority to engage in
transactions with its "affiliates" is limited by the OTS regulations and by
Sections 23A and 23B of the Federal Reserve Act (the "FRA"). In general, an
affiliate of the Association is any company that controls the Association or
any other company that is controlled by a company that controls the
Association, excluding the Association's subsidiaries other than those that
are insured depository institutions. The OTS regulations prohibit a savings
association (a) from lending to any of its affiliates that is engaged in
activities that are not permissible for bank holding companies under Section
4(c) of the BHC Act and (b) from purchasing the securities of any affiliate
other than a subsidiary. Section 23A limits the aggregate amount of
transactions with any individual affiliate to 10% of the capital and surplus
of the savings association and also limits the aggregate amount of
transactions with all affiliates to 20% of the savings association's capital
and surplus. Extensions of credit to 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 provides 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 association as those prevailing at the time for comparable transactions
with nonaffiliated companies. In the absence of comparable transactions, such
transactions may only occur under terms and circumstances, including credit
standards, that in good faith would be offered to or would apply to
nonaffiliated companies.
The Association's authority to extend credit to its directors, executive
officers, and 10% shareholders, as well as to entities controlled by such
persons, is currently governed by the requirements of Sections 22(g) and 22(h)
of the FRA and Regulation O of the FRB thereunder. Among other things, these
provisions require that extensions of credit to insiders (a) be made on terms
that are substantially the same as, and follow credit underwriting procedures
that are not less stringent than, those prevailing for comparable transactions
with unaffiliated persons and that do not involve more than the normal risk of
repayment or present other unfavorable features and (b) not exceed certain
limitations on the amount of credit extended to such persons, individually and
in the aggregate, which limits are based, in part, on the amount of the
association's capital. In addition, extensions of credit in excess of certain
limits must be approved by the association's board of directors.
Enforcement. Under the Federal Deposit Insurance Act (the "FDI Act"), the
OTS has primary enforcement responsibility over savings associations and has
the authority to bring enforcement action against all "institution-affiliated
parties," including any controlling stockholder or any stockholder, attorney,
appraiser or accountant who knowingly or recklessly participates in any
violation of applicable law or regulation or breach of fiduciary duty or
certain other wrongful actions that causes or is likely to cause a more than a
minimal loss or other significant adverse effect on an insured savings
association. Civil penalties cover a wide range of violations and actions and
range from $5,000 for each day during which violations of law, regulations,
orders, and certain written agreements and conditions continue, up to $1
million per day for such violations if the person obtained a substantial
pecuniary gain as a result of such violation or knowingly or recklessly caused
a substantial loss to the institution. Criminal penalties for certain
financial institution crimes include fines of up to $1 million and
imprisonment for up to 30 years. In addition, regulators have substantial
discretion to take enforcement action against an institution that fails to
comply with its regulatory requirements, particularly with respect to its
capital requirements. Possible enforcement actions range from the imposition
of a capital plan and capital directive to receivership, conservatorship, or
the termination of deposit insurance. Under the FDI Act, the FDIC has the
authority to recommend to the Director of OTS that enforcement action be taken
with respect to a particular savings association. If action is not taken by
the Director of the OTS, the FDIC has authority to take such action under
certain circumstances.
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Standards for Safety and Soundness. The FDI Act, as amended by FDICIA and
the Riegle Community Development and Regulatory Improvement Act of 1994 (the
"Community Development Act"), requires the OTS, together with the other
federal bank regulatory agencies, to prescribe standards, by regulations or
guidelines, relating to internal controls, information systems and internal
audit systems, loan documentation, credit underwriting, interest rate risk
exposure, asset growth, asset quality, earnings, stock valuation, and
compensation, fees and benefits and such other operational and managerial
standards as the agencies deem appropriate. The OTS and the federal bank
regulatory agencies have adopted, effective August 9, 1995, a set of
guidelines prescribing safety and soundness standards pursuant to FDICIA, as
amended. The guidelines establish general standards relating to internal
controls and information systems, internal audit systems, loan documentation,
credit underwriting, interest rate exposure, asset growth, and compensation,
fees and benefits. In general, the guidelines require, among other things,
appropriate systems and practices to identify and manage the risks and
exposures specified in the guidelines. The guidelines prohibit excessive
compensation as an unsafe and unsound practice and describe compensation as
excessive when the amounts paid are unreasonable or disproportionate to the
services performed by an executive officer, employee, director or principal
stockholder. The OTS and the other agencies determined that stock valuation
standards were not appropriate. In addition, the OTS adopted regulations that
authorize, but do not require, the OTS to order an institution that has been
given notice by the OTS that it is not satisfying any of such safety and
soundness standards to submit a compliance plan. If, after being so notified,
an institution fails to submit an acceptable compliance plan or fails in any
material respect to implement an accepted compliance plan, the OTS must issue
an order directing action to correct the deficiency and may issue an order
directing other actions of the types to which an undercapitalized association
is subject under the "prompt corrective action" provisions of FDICIA. If an
institution fails to comply with such an order, the OTS may seek to enforce
such order in judicial proceedings and to impose civil money penalties. The
OTS and the federal bank regulatory agencies also proposed guidelines for
asset quality and earnings standards.
Real Estate Lending Standards. The OTS and the other federal banking
agencies adopted regulations to prescribe standards for extensions of credit
that (a) are secured by real estate or (b) are made for the purpose of
financing the construction of improvements on real estate. The OTS regulations
require each savings association to establish and maintain written internal
real estate lending standards that are consistent with safe and sound banking
practices and appropriate to the size of the association and the nature and
scope of its real estate lending activities. The standards also must be
consistent with accompanying OTS guidelines, which include loan-to-value
ratios for the different types of real estate loans. Associations are also
permitted to make a limited amount of loans that do not conform to the
proposed loan-to-value limitations so long as such exceptions are reviewed and
justified appropriately. The guidelines also list a number of lending
situations in which exceptions to the loan-to-value standards are justified.
Prompt Corrective Regulatory Action. Under the OTS prompt corrective action
regulations, the OTS is required to take certain, and is authorized to take
other, supervisory actions against undercapitalized savings associations. For
this purpose, a savings association would be placed in one of five categories
based on the association's capital. Generally, a savings association is
treated as "well capitalized" if its ratio of total capital to risk-weighted
assets is at least 10.0%, its ratio of core capital to risk-weighted assets is
at least 6.0%, its ratio of core capital to total assets is at least 5.0%, and
it is not subject to any order or directive by the OTS to meet a specific
capital level. A savings association will be treated as "adequately
capitalized" if its ratio of total capital to risk-weighted assets is at least
8.0%, its ratio of core capital to risk-weighted assets is at least 4.0%, and
its ratio of core capital to total assets is at least 4.0% (3.0% if the
association receives the highest rating on the CAMEL financial institutions
rating system). A savings association 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% (3.0% leverage ratio if the association receives the highest rating on
the CAMEL financial institutions rating system) is considered to be
"undercapitalized." A savings association that has a total risk-based capital
of less than 6.0% or a Tier 1 risk-based capital ratio or a leverage ratio of
less than 3.0% is considered to be "significantly undercapitalized." A savings
association that has a tangible capital to assets ratio equal to or less than
2% is deemed to be "critically undercapitalized." The elements of an
association's capital for purposes of the prompt corrective action
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regulations are defined generally as they are under the regulations for
minimum capital requirements. See "--Capital Requirements."
The severity of the action authorized or required to be taken under the
prompt corrective action regulations increases as an association's capital
deteriorates within the three undercapitalized categories. All associations
are prohibited from paying dividends or other capital distributions or paying
management fees to any controlling person if, following such distribution, the
association would be undercapitalized. An undercapitalized association is
required to file a capital restoration plan within 45 days of the date the
association receives notice that it is within any of the three
undercapitalized categories. The OTS is required to monitor closely the
condition of an undercapitalized association and to restrict the asset growth,
acquisitions, branching, and new lines of business of such an association.
Significantly undercapitalized associations are subject to restrictions on
compensation of senior executive officers; such an association may not,
without OTS consent, pay any bonus or provide compensation to any senior
executive officer at a rate exceeding the officer's average rate of
compensation (excluding bonuses, stock options and profit-sharing) during the
12 months preceding the month when the association became undercapitalized. A
significantly undercapitalized association may also be subject, among other
things, to forced changes in the composition of its board of directors or
senior management, additional restrictions on transactions with affiliates,
restrictions on acceptance of deposits from correspondent associations,
further restrictions on asset growth, restrictions on rates paid on deposits,
forced termination or reduction of activities deemed risky, and any further
operational restrictions deemed necessary by the OTS.
If one or more grounds exist for appointing a conservator or receiver for an
association, the OTS may require the association to issue additional debt or
stock, sell assets, be acquired by a depository association holding company or
combine with another depository association. The OTS and the FDIC have a broad
range of grounds under which they may appoint a receiver or conservator for an
insured depositary association. Under FDICIA, the OTS is required to appoint a
receiver (or with the concurrence of the FDIC, a conservator) for a critically
undercapitalized association within 90 days after the association becomes
critically undercapitalized or, with the concurrence of the FDIC, to take such
other action that would better achieve the purposes of the prompt corrective
action provisions. Such alternative action can be renewed for successive 90-
day periods. However, if the association continues to be critically
undercapitalized on average during the quarter that begins 270 days after it
first became critically undercapitalized, a receiver must be appointed, unless
the OTS makes certain findings with which the FDIC concurs and the Director of
the OTS and the Chairman of the FDIC certify that the association is viable.
In addition, an association that is critically undercapitalized is subject to
more severe restrictions on its activities, and is prohibited, without prior
approval of the FDIC from, among other things, entering into certain material
transactions or paying interest on new or renewed liabilities at a rate that
would significantly increase the association's weighted average cost of funds.
When appropriate, the OTS can require corrective action by a savings
association holding company under the "prompt corrective action" provisions of
FDICIA.
Insurance of Deposit Accounts. The Association is a member of the SAIF, and
the Association pays its deposit insurance assessments to the SAIF. The FDIC
also maintains another insurance fund, the Bank Insurance Fund (the "BIF"),
which primarily insures the deposits of banks and state chartered savings
banks.
Pursuant to FDICIA, the FDIC established a new risk-based assessment system
for determining the deposit insurance assessments to be paid by insured
depositary institutions. Under the new assessment system, which began in 1993,
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. The three capital categories
consist of (a) well capitalized, (b) adequately capitalized, or (c)
undercapitalized. The FDIC also assigns an institution to 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 that 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. Under the regulation, there are nine
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assessment risk classifications (i.e., combinations of capital groups and
supervisory subgroups) to which different assessment rates are applied.
Beginning in 1993, the assessment rates for both the BIF and the SAIF had
ranged from 0.23% of deposits for an institution in the highest category
(i.e., well-capitalized and financially sound, with no more than a few minor
weaknesses) to 0.31% of deposits for an institution in the lowest category
(i.e., undercapitalized and substantial supervisory concern).
The FDI Act requires that the BIF and the SAIF funds each be recapitalized
until reserves are at least 1.25% of the deposits insured by that fund. After
a fund reached the 1.25% reserve ratio, the assessment rates for that fund
could be reduced. The FDIC has reported that the BIF reached the required
reserve ratio during May 1995. As a result of the recapitalization of the BIF,
the FDIC reduced BIF assessment rates. The FDIC initially reduced the BIF
assessment rates, effective June 1, 1995, to a range of 0.04% to 0.27% of
deposits. Having subsequently determined that the BIF had sufficient reserves
in excess of the required 1.25% ratio, the FDIC reduced the BIF assessment
rate for "well capitalized" institutions without any significant supervisory
concerns to the statutory minimum of $2,000 annually beginning with the first
half of 1996, and the rates for other BIF-insured institutions will range from
0.03% to 0.27% of deposits.
The FDIC has reported that, under current law and reasonably optimistic
financial projections, the SAIF is not expected to be recapitalized until
2001. SAIF reserves have not grown as quickly as the BIF reserves due to a
number of factors, including the fact that a significant portion of SAIF
premiums have been and are currently being used to make payments on the FICO
bonds. Accordingly, the FDIC has determined that SAIF-insured institutions
should continue to pay assessments at the current SAIF assessment rates, which
range from 0.23% of deposits to 0.31% of deposits. The Association's
assessment rate for 1996 is 0.23% of deposits.
The resulting disparity in deposit insurance assessments rates between the
SAIF members and the BIF members is likely to provide institutions paying only
the BIF assessments with certain competitive advantages in the pricing of
loans and deposits, and in lowered operating costs, pending any legislative
action to remedy the disparity. Congress has considered proposed legislation
to address these issues. See "Risk Factors--Recapitalization of the SAIF; SAIF
Premiums and Possible Special Assessment."
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 Association does not know of any practice,
condition or violation that might lead to termination of deposit insurance.
Federal Home Loan Bank System. The Association is a member of the FHLB of
Chicago, which is one of the regional Federal Home Loan Banks composing the
Federal Home Loan Bank System. Each Federal Home Loan Bank provides a central
credit facility primarily for its member institutions. The Association, as a
member of the FHLB of Chicago, is required to acquire and hold shares of
capital stock in the FHLB of Chicago in an amount at least equal to the
greater of 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 of Chicago. The Association was in
compliance with this requirement with an investment in the capital stock of
the FHLB of Chicago at March 31, 1996, of $2.7 million. Any advances from a
Federal Home Loan Bank must be secured by specified types of collateral, and
all long-term advances may be obtained only for the purpose of providing funds
for residential housing finance.
The Federal Home Loan Banks 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 earnings that the Federal Home
Loan Banks can pay as dividends to their members and could also result in the
Federal Home Loan Banks imposing a higher rate of interest on advances to
their members. The FHLB of Chicago paid dividends on the capital stock of
$49,000 and $46,000 for the three months ended March 31, 1996 and 1995 and
$202,000, $187,000 and $217,000 during the years ended December 31, 1995, 1994
and 1993, respectively. If dividends were reduced, or interest on future
Federal Home Loan Bank advances increased, the Association's net interest
income would likely also be reduced.
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Federal Reserve System. The Association is subject to provisions of the FRA
and the FRB's regulations pursuant to which depositary institutions may be
required to maintain non-interest-earning reserves against their deposit
accounts and certain other liabilities. Currently, reserves must be maintained
against transaction accounts (primarily NOW and regular checking accounts).
The FRB regulations generally require that reserves be maintained in the
amount of 3% of the aggregate of transaction accounts up to $52.0 million. The
amount of aggregate transaction accounts in excess of $52.0 million are
currently subject to a reserve ratio of 10%, which ratio the FRB may adjust
between 8% and 12%. The FRB regulations currently exempt $4.3 million of
otherwise reservable balances from the reserve requirements, which exemption
is adjusted by the FRB at the end of each year. The Association is in
compliance with the foregoing reserve 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
FRB, the effect of this reserve requirement is to reduce the Association's
interest-earning assets. The balances maintained to meet the reserve
requirements imposed by the FRB may be used to satisfy liquidity requirements
imposed by the OTS. Federal Home Loan Bank System members are also authorized
to borrow from the Federal Reserve "discount window," but FRB regulations
require such institutions to exhaust all Federal Home Loan Bank sources before
borrowing from a Federal Reserve Bank.
REGULATION OF SAVINGS ASSOCIATION HOLDING COMPANIES
The Company, if utilized, will be a non-diversified unitary savings
association holding company within the meaning of the HOLA, as amended. As
such, the Company will be required to register with the OTS and will be
subject to OTS regulations, examinations, supervision and reporting
requirements. In addition, the OTS has enforcement authority over the Company
and its non-savings association subsidiaries, if any. Among other things, this
authority permits the OTS to restrict or prohibit activities that are
determined to be a serious risk to the financial safety, soundness, or
stability of a subsidiary savings association.
The HOLA prohibits a savings association holding company, directly or
indirectly, or through one or more subsidiaries, from acquiring another
savings association or holding company thereof, without prior written approval
of the OTS; acquiring or retaining, with certain exceptions, more than 5% of a
non-subsidiary savings association, 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 an application by a holding company to
acquire a savings association, the OTS must consider the financial and
managerial resources and future prospects of the company and savings
association involved, the effect of the acquisition on the risk to the
insurance funds, the convenience and needs of the community and competitive
factors.
As a unitary savings association 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 Association continues to satisfy the
QTL test. See "--Regulation of Federal Savings Associations--QTL Test" for a
discussion of the QTL requirements. Upon any non-supervisory acquisition by
the Company of another savings association or savings bank that meets the QTL
test and is deemed to be a savings association by the OTS and that will be
held as a separate subsidiary, the Company would become a multiple savings
association holding company and would be subject to limitations on the types
of business activities in which it could engage. The HOLA limits the
activities of a multiple savings association holding company and its non-
insured association 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.
The OTS is prohibited from approving any acquisition that would result in a
multiple savings association holding company controlling savings associations
in more than one state, subject to two exceptions: an acquisition of a savings
association in another state (a) in a supervisory transaction or (b) pursuant
to authority under the laws of the state of the association to be acquired
that specifically permit such acquisitions. The conditions imposed upon
interstate acquisitions by those states that have enacted authorizing
legislation vary. Some states impose conditions of reciprocity, which have the
effect of requiring that the laws of both the state in which the acquiring
holding company is located (as determined by the location of its subsidiary
savings
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association) and the state in which the association to be acquired is located,
have each enacted legislation allowing its savings associations to be acquired
by out-of-state holding companies on the condition that the laws of the other
state authorize such transactions on terms no more restrictive than those
imposed on the acquiror by the state of the target association. Some of these
states also impose regional limitations, which restrict such acquisitions to
states within a defined geographic region. Other states allow full nationwide
banking without any condition of reciprocity. Some states do not authorize
interstate acquisitions of savings associations.
Transactions between the Association and the Company and its other
subsidiaries would be subject to various conditions and limitations. See "--
Regulation of Federal Savings Associations--Transactions with Related
Parties." The Association would have to give 30-days written notice to the OTS
prior to any declaration of the payment of any dividends or other capital
distributions to the Company. See "--Regulation of Federal Savings
Associations--Limitation on Capital Distributions."
FEDERAL SECURITIES LAWS
The Company has filed with the SEC a registration statement under the
Securities Act of 1933, as amended (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 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 (a)
1% of the outstanding shares of the Company or (b) 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.
In the event that the holding company form of organization is not utilized,
the shares of the Association's common stock to be issued and sold in the
Conversion would be exempt from registration under Section 3(a)(5) of the
Securities Act. Prior to the sale of all shares of its common stock in such a
case, the Association would register its capital stock under Section 12(g) of
the Exchange Act. Upon such registration, the proxy rules, tender offer rules,
insider trading restrictions, annual and periodic reporting and other
requirements of the Exchange Act would also be applicable to the Association
but under the jurisdiction of the OTS. The Association would be required by
the OTS to maintain said registration for a period of at least three years
following Conversion. The Association will, however, register with and report
to the OTS and not to the SEC.
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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 Henry R. Hines, Thomas S. Rakow and Richard S. Scheflow, has a
term of office expiring at the first annual meeting of stockholders; a second
class, consisting of George L. Perucco, Lyle N. Dolan and Donald E. Laird, has
a term of office expiring at the second annual meeting of stockholders; and a
third class, consisting of Orval M. Graening and Leigh C. O'Connor, has a term
of office expiring at the third annual meeting of stockholders. Biographical
information with respect to each individual is set forth under "Management of
the Association--Biographical Information."
The following individuals are executive officers of the Company and hold the
offices set forth below opposite their names.
<TABLE>
<CAPTION>
NAME POSITION HELD WITH THE COMPANY
-------------------------- -----------------------------------------------
<S> <C>
George L. Perucco......... President and Chief Executive Officer
Lyle N. Dolan............. Executive Vice President and Treasurer
Kenneth L. Moran.......... Senior Vice President and Chief Lending Officer
David G. Towe............. Vice President, Loan Operations and Marketing
Raymond G. Bandemer....... Vice President
Kathleen A. Schroeder..... Vice President and Secretary
Pat A. Lenart............. Vice President
</TABLE>
The executive officers of the Company are elected annually and hold office
until their respective successors have been elected and qualified or until
death, resignation or removal by the Board of Directors.
Since the formation of the Company, none of the executive officers,
directors or other personnel has received remuneration from the Company. It is
currently expected that, unless and until the Company becomes actively
involved in business activities separate from those conducted by the
Association, no separate compensation will be paid to the directors and
employees of the Company. However, directors of the Company or the Association
who are not employees of the Company or the Association or any of their
subsidiaries ("Outside Directors") may be entitled to participate in certain
retirement and stock incentive plans established by the Company. See
"Management of the Association." The Company will also guarantee certain
obligations of the Association to the Association's executive officers,
employees and directors, as described below. Information concerning the
principal occupations, employment and compensation of the directors and
officers of the Company during the past five years is set forth under
"Management of the Association--Biographical Information."
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MANAGEMENT OF THE ASSOCIATION
DIRECTORS
The following table sets forth certain information regarding the Board of
Directors of the Association.
<TABLE>
<CAPTION>
POSITIONS HELD WITH THE DIRECTOR TERM
NAME AGE(1) ASSOCIATION SINCE EXPIRES
- ---- ------ ----------------------- -------- -------
<S> <C> <C> <C> <C>
George L. Perucco......... 69 President and Chief Executive 1965 1998
Officer, Director
Lyle N. Dolan............. 54 Executive Vice President 1984 1998
and Treasurer, Director
Orval M. Graening......... 85 Director 1967 1999
Thomas S. Rakow........... 53 Director 1980 1997
Henry R. Hines............ 76 Director 1975 1997
Donald E. Laird........... 64 Director 1985 1998
Leigh C. O'Connor......... 83 Director 1967 1999
Richard S. Scheflow....... 71 Director 1974 1997
</TABLE>
- --------
(1) At March 31, 1996.
EXECUTIVE OFFICERS
The executive officers of the Association are Mr. Perucco and Mr. Dolan, who
are directors of the Association, and Mr. Moran, Mr. Towe, Mr. Bandemer, Ms.
Schroeder and Ms. Lenart, who are not directors of the Association. See
"Management of the Company." Each of the executive officers of the Association
will retain his or her office in the converted Association until the annual
meeting of the Board of Directors of the Association held immediately after
the first annual meeting of stockholders of the Company 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.
BIOGRAPHICAL INFORMATION
Positions held by a director or officer have been held for at least the past
five years unless stated otherwise.
DIRECTORS
George L. Perucco has served as the President and Chief Executive Officer of
the Association since 1965. Mr. Perucco joined the Association in 1961 and has
also served as Assistant Secretary, Secretary and Executive Vice President of
the Association. Prior to joining the Association, Mr. Perucco was an
executive in the Accounting Division of the United States League of Savings
Associations.
Lyle N. Dolan has served as the Association's Executive Vice President and
Treasurer since 1986 and as a director of the Association since 1984. Prior to
that, Mr. Dolan served as Vice President and Treasurer of the Association
since 1974 and Treasurer of the Association since 1970.
Orval M. Graening has served as a director of the Association since 1967. He
is the former President of Woodruff & Edwards, Inc., a foundry company, and
retired in 1990.
Henry R. Hines has served as a director of the Association since 1975. He
retired from his position as Vice President of Williams Manufacturing Co., a
medical equipment manufacturer, in 1980.
Donald E. Laird has served as a director of the Association since 1985. He
is the President of Laird Funeral Home, PC.
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Leigh C. O'Connor has served as a director of the Association since 1967. He
retired from his position as Office Manager of Illinois Hydraulic Inc., a
construction company, in 1980.
Thomas S. Rakow has served as a director of the Association since 1980. He
is the President of IHC Group, Inc., a general contractor, the President of
Rakow Enterprises, Inc., an equipment leasing company and a partner in Harkow
Partnership, a real estate rental company.
Richard S. Scheflow has served as a director of the Association since 1974.
He is a partner with the law firm of Scheflow, Rydell, Travis & Scheflow,
located in Elgin, Illinois.
EXECUTIVE OFFICERS WHO ARE NOT DIRECTORS
Kenneth L. Moran, age 50, has served as the Association's Senior Vice
President and Chief Lending Officer since 1989. He has worked at the
Association in various capacities since 1970.
David G. Towe, age 43, has served as the Association's Vice President, Loan
Operations & Marketing since 1989. He has served the Association in various
capacities since 1973.
Raymond G. Bandemer, age 53, has served as Vice President of the Association
since 1989 and has served the Association since 1981. Prior to that, he was
employed at Tel-A-Data Corporation and was Assistant Vice President at Unity
Savings Association of Chicago.
Kathleen A. Schroeder, age 48, has served as Vice President and Secretary of
the Association since 1989. She has been employed by the Association since
1964.
Pat A. Lenart, age 55, has served as the Association's Vice President,
Personnel Director since 1989. She has worked at the Association in various
capacities since 1976.
COMMITTEES AND MEETINGS OF THE BOARD OF DIRECTORS OF THE COMPANY AND THE
ASSOCIATION
The Board of Directors of the Association meets on a monthly basis and may
have additional special meetings from time to time. During the fiscal year
ended December 31, 1995, the Board of Directors met 13 times. No current
director attended fewer than 75% of the total number of Board meetings and
committee meetings of which such director was a member.
The Company and the Association have established the following committees of
each of their respective Boards of Directors:
The Executive Committee of each of the Company and the Association consists
of Messrs. O'Connor (Chairman), Dolan, Graening, Rakow, Perucco, Hines,
Scheflow and Laird. Each such committee is authorized to exercise certain
powers of the respective board of directors in the interim period between
meetings of the Board. The Executive Committees will meet periodically to
review and monitor operating expenses with a particular emphasis on post-
conversion expense savings. The Executive Committees will also consider
longer-term strategic and industry issues.
The Audit Committee of each of the Company and the Association consists of
Messrs. Graening (Chairman), Rakow, Hines, Scheflow, Laird and O'Connor. The
Audit Committee of the Association meets periodically to arrange the
Association's annual financial statement audit through its independent
Certified Public Accountants and to review and evaluate recommendations made
during the annual audit. It is expected that the Audit Committee of the
Company will perform a similar function.
The Loan Committee of the Association consists of Messrs. Perucco, Graening,
Rakow, Hines, Scheflow, Laird and O'Connor. Rotating members of this committee
meet periodically with senior loan staff members to review and monitor each
loan commitment to confirm compliance with underwriting standards established
by the Board of Directors. This review process ensures high asset quality and
provides an opportunity for recommendations in connection with the
Association's underwriting standards.
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<PAGE>
In addition to the committees of the Boards of Directors of the Association
listed above, the Association also maintains an Asset/Liability Management
Committee, which consists of Messrs. Dolan, Moran and Towe and Ms. Schroeder
(see "Management's Discussion and Analysis of Financial Condition and Results
of Operations--Management of Interest Rate Risk") and an Asset Classification
Committee, which consists of Messers. Moran, Dolan and Towe (see "Business of
the Association--Delinquencies and Non-Performing Assets--Non-Performing
Assets" and "--Classified Assets").
DIRECTORS' COMPENSATION
Fee Arrangements. Currently, each director of the Association, other than
Messrs. Perucco and Dolan, receives an annual retainer of $26,460 for
attendance at board meetings. The aggregate amount of fees paid to such
directors by the Association for the year ended December 31, 1995 was
approximately $151,000. No additional fees are paid for attendance at board
committee meetings. Directors of the Company will not be separately
compensated for their services as such. It is anticipated that directors will
also be covered by the Stock Option Plans and Stock Programs expected to be
implemented by the Company. See "--Benefits--Stock Option Plans," and "--
Benefits--Stock Programs."
EXECUTIVE COMPENSATION
Compensation Decisions. Decisions regarding the Company's executive
compensation will be made by the Company's Board of Directors, exclusive of
those directors employed by the Company, acting as a compensation committee.
Under this structure, no interlocks exist between members of the compensation
committee and employees of the Company.
Cash Compensation. The following table sets forth the cash compensation paid
by the Association for services rendered in all capacities during the fiscal
year ended December 31, 1995, to the Chief Executive Officer and all executive
officers of the Association who received compensation in excess of $100,000
(the "Named Executive Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM COMPENSATION
---------------------------------------
ANNUAL COMPENSATION(1) AWARDS PAYOUTS
------------------------------- ------------------ -------
OTHER RESTRICTED
ANNUAL STOCK LTIP ALL OTHER
NAME AND PRINCIPAL COMPENSATION AWARDS OPTIONS PAYOUTS COMPENSATION
POSITIONS YEAR SALARY($) BONUS($) ($)(2) ($)(3) (#)(3) ($)(3) ($)(4)
------------------ ---- --------- -------- ------------ ---------- ------- ------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
George L. Perucco,
President and Chief
Executive Officer...... 1995 $204,433 -- $2,884 -- -- -- $ 734
Lyle N. Dolan, Executive
Vice
President and
Treasurer.............. 1995 $128,336 -- $4,635 -- -- -- $1,430
Kenneth L. Moran, Senior
Vice
President and Chief
Lending
Officer................ 1995 $104,040 -- $3,625 -- -- -- $1,145
</TABLE>
- --------
(1) Under Annual Compensation, the column titled "Salary" includes base
salary, director's fees and payroll deductions for health insurance under
the Association's health insurance plan.
(2) Represents amounts reimbursed for the payment of taxes. For 1995, there
were no: (a) perquisites with an aggregate value for any named individual
in excess of the lesser of $50,000 or 10% of the total of the individual's
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; or (d)
preferential discounts on stock. For 1995, the Association had no
restricted stock or stock related plans in existence.
(3) During the fiscal year ended December 31, 1995, neither the Association
nor the Company maintained any restricted stock, stock options or other
long-term incentive plans.
(4) Includes the dollar value of premiums, if any, paid by the Association
with respect to term life insurance (other than group term insurance
coverage under a plan available to substantially all salaried employees)
for the benefit of the executive officer.
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<PAGE>
EMPLOYMENT AGREEMENTS
Effective upon the Conversion, the Company and (subject to non-objection by
the OTS) the Association intend to enter into Employment Agreements with each
of Messrs. Perucco, Dolan and Moran (the "Senior Executives"). These
Employment Agreements establish the respective duties and compensation of the
Senior Executives and are intended to ensure that the Association and the
Company will be able to maintain a stable and competent management base after
the Conversion. The continued success of the Association and the Company
depends to a significant degree on the skills and competence of the Senior
Executives.
The Employment Agreements provide for a three-year term for Mr. Perucco and
two-year terms for Messrs. Dolan and Moran. The Association's Employment
Agreements provide that, commencing on the first anniversary date and
continuing each anniversary date thereafter, the Board of Directors may, with
the Senior Executive's concurrence, extend its Employment Agreements for an
additional year, so that the remaining terms shall be three years, after
conducting a performance evaluation of the Senior Executive. The Company's
Employment Agreements provide for automatic daily extensions such that the
remaining terms of the Employment Agreements shall be three years unless
written notice of non-renewal is given by the Board of Directors or the Senior
Executive. The Employment Agreements provide that the Senior Executive's base
salary will be reviewed annually. It is anticipated that this review will be
performed by non-employee members of the Board, and the Senior Executive's
base salary may be increased on the basis of his job performance and the
overall performance of the Association. The base salaries for Messrs. Perucco,
Dolan and Moran as of January 1, 1996 were $214,655, $134,753 and $109,242,
respectively. In addition to the base salary, the Employment Agreements
provide for, among other things, entitlement to participation in stock,
retirement and welfare benefit plans and eligibility for fringe benefits
applicable to executive personnel such as a company car and fees for club and
organization memberships deemed appropriate by the Association or Company and
the Senior Executive. The Employment Agreements provide for termination by the
Association or the Company at any time for cause as defined in the Employment
Agreements.
In the event of the termination of the Senior Executive's due to death or
disability, or in the event the Association or the Company chooses to
terminate the Senior Executive's employment for reasons other than for cause,
or in the event of the Senior Executive's resignation from the Association and
the Company for the reasons specified in the Employment Agreements, the Senior
Executive or, in the event of death, his beneficiary would be entitled to a
lump sum cash payment in an amount equal to the present value of the remaining
base salary and bonus payments due to the Senior Executive and the additional
contributions or benefits that would have been earned under any employee
benefit plans of the Association or the Company during the remaining terms of
the Employment Agreements and payments that would have been made under any
incentive compensation plan during the remaining terms of the Employment
Agreements. If permitted by applicable law, provision will also be made for
the cash out of stock options, appreciation rights or restricted stock as if
the Senior Executive was fully vested. The Association and the Company would
also continue the Senior Executive's life, health and disability insurance
coverage for the remaining terms of the Employment Agreements. Reasons
specified as grounds for resignation for purposes of the Employment Agreements
are: failure to elect or re-elect the Senior Executive to his offices; failure
to vest in him the functions, duties or authority associated with such
offices; any material breach of contract by the Association or the Company
which is not cured within 30 days after written notice thereof; and, following
a Change of Control (as defined in the Employment Agreements), include
demotion, loss of title, office or significant authority or responsibility,
any reduction in any element of compensation or benefits, any adverse change
on location of the principal place of employment or working conditions or
resignation for any other reason. In general, for purposes of the Employment
Agreements and the plans maintained by the Company or the Association, a
"change of control" will generally be deemed to occur when a person or group
of persons acting in concert acquires beneficial ownership of 25% or more of
any class of equity security of the Company or the Association, upon
stockholder approval of a merger or consolidation or a change of the majority
of the Board of Directors of the Company or the Association, or liquidation or
sale of substantially all the assets of the Company or the Association. Based
on current compensation and benefit costs, cash payments to be made in the
event of a change of control of the Association or the Company pursuant to the
terms of the Employment Agreements would be approximately $1,940,000 of which
approximately $955,000
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<PAGE>
would be payable to Mr. Perucco, $555,000 would be payable to Mr. Dolan and
$430,000 would be payable to Mr. Moran. However, the actual amount to be paid
under the Employment Agreements in the event of a change of control of the
Association or the Company cannot be estimated at this time because the actual
amount is based on the compensation and benefit costs applicable to these
individuals and other factors existing at the time of the change of control
which cannot be determined at this time.
Payments to the Senior Executives under the Association's Employment
Agreements will be guaranteed by the Company in the event that payments or
benefits are not paid by the Association. Payment under the Company's
Employment Agreements would be made by the Company. To the extent that
payments under the Company's Employment Agreements and the Association's
Employment Agreements are duplicative, payments due under the Company's
Employment Agreements would be offset by amounts actually paid by the
Association. Senior Executives would be entitled to reimbursement of certain
costs incurred in interpreting or enforcing the Employment Agreements.
Cash and benefits paid to a Senior Executive under the Employment Agreements
together with payments under other benefit plans following a "change of
control" of the Association or the Company may constitute an "excess
parachute" payment under Section 280G of the Code, resulting in the imposition
of a 20% excise tax on the recipient and the denial of the deduction for such
excess amounts to the Company and the Association. The Company's Employment
Agreements include a provision indemnifying each Senior Executive on an after-
tax basis for any "golden parachute" excise taxes.
EMPLOYEE RETENTION AGREEMENTS
Effective upon the Conversion, the Association (subject to the non-objection
of the OTS) and the Company intend to enter into Employee Retention Agreements
with the following four executive officers: Mr. Towe, Mr. Bandemer, Ms.
Schroeder and Ms. Lenart ("Contract Employee" or "Contract Employees"). The
purpose of the Retention Agreements is to secure the Contract Employees'
continued availability and attention to the Association's affairs, relieved of
distractions arising from the possibility of a corporate change of control.
The Retention Agreements do not impose an immediate obligation on the
Association to continue the Contract Employees' employment but provide for a
period of assured employment ("Assurance Period") following a change of
control of the Association or Company. The Retention Agreements provide for an
initial Assurance Period of one year commencing on the date of a change of
control. In general, the applicable Assurance Periods will be automatically
extended on a daily basis under the Retention Agreements until written notice
of non-extension is given by the Association or the Contract Employee, in
which case an Assurance Period would end on the first anniversary of the date
such notice is given.
If, upon a change of control, or within 12 months of, and in connection
with, a change of control, a Contract Employee is discharged without "cause"
(as defined in the Retention Agreements) or he voluntarily resigns within one
year following a material adverse change in his position, duties, salary or
due to a material breach of the Agreement by the Association or Company, the
Contract Employee (or, in the event of his death, his estate) would be
entitled to a lump sum cash payment equal to the present value of the
remaining base salary and bonus payments due during the Assurance Period plus
any additional contributions and benefits that the Contract Employee would
have earned under the Association or Company's employee benefit plans during
the Assurance Period. Each Contract Employee's life, health, and disability
coverage would also be continued during the Assurance Period. The total amount
of termination benefits payable to each Contract Employee under the Retention
Agreements is limited to three times the Contract Employee's average total
compensation for the prior five calendar years. Payments to the Contract
Employees under their respective Retention Agreements will be guaranteed by
the Company to the extent that the required payments are not made by the
Association. Based on current compensation and benefit costs applicable to the
Contract Employees expected to be covered by the Retention Agreements, cash
payments to be made in the event of a change of control of the Association or
the Company would be approximately $530,000. However, the actual amount to be
paid under the Retention Agreements in the event of a change of control of the
Association or the Company cannot be estimated at this time because it will be
based on the compensation and benefit costs applicable to the Contract
Employees and other factors existing at the time of the change of control
which cannot be determined at this time.
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<PAGE>
EMPLOYEE SEVERANCE COMPENSATION PLAN
The Association has adopted, subject to the non-objection of the OTS, an
Employee Severance Pay Plan (the "Severance Plan") which will provide eligible
employees of the Association with severance benefits in the event of a change
of control as defined in the Severance Plan. Conversion to stock form is not
considered a change in control under the Severance Plan. Management and other
personnel with Employment Agreements or Employee Retention Agreements will not
be eligible to participate in the Severance Plan. The purpose of the Severance
Plan is to recognize the valuable services and contributions of these
employees and the uncertainties relating to continuing employment, reduced
employee benefits, management changes and relocations in the event of a change
of control. The Association believes that the Severance Plan will assist it in
attracting and retaining highly qualified individuals and reduce the
distractions and other adverse effects on employees' performance in the event
of a change of control. Eligible salaried employees of the Association with
one year of service will automatically participate in the Severance Plan and
will have a contractual right to severance benefits if they are terminated
from or terminate their employment within one year (for reasons specified
under the Severance Plan) following a change of control of the Association or
the Company. A participating employee would be eligible to receive a severance
payment upon an employment termination equal to one week's pay for each year
of service up to 26 weeks of pay. A participating officer would be eligible
for a severance payment upon employment termination equal to two weeks of pay
for each year of service up to 39 weeks of pay. Payments under the Severance
Plan may increase the costs to be incurred in acquiring the Association or the
Company. Management cannot estimate the potential financial effect of the
Severance Plan in the event of a change of control. Based on current salaries,
cash payments to be paid in the event of a change of control pursuant to the
terms of the Employee Severance Pay Plan would be approximately $570,000.
However, the actual amount to be paid in the event of a change of control of
the Association or the Company cannot be estimated at this time, because it
will be based on the compensation and benefits, as applicable, for each
covered individual and other factors existing at the time of the change of
control which cannot be determined at this time. The Severance Plan may be
amended or terminated by the Board of Directors provided participants are
given six months' advance written notice of any adverse change to current or
prospective rights. Payments required to be made by the Association to
participants due under the Severance Plan may be guaranteed by the Company.
BENEFITS
Pension Plan. The Association maintains a non-contributory, tax-qualified
defined benefit pension plan (the "Pension Plan") for eligible employees. All
employees, except leased employees, who have attained age 21 and completed one
year of service are eligible to participate in the Pension Plan. The Pension
Plan provides for a benefit for each participant, including executive officers
named in the Summary Compensation Table above. The benefit is equal to the sum
of (a) a participant's accrued benefit as of March 31, 1989 adjusted for final
average compensation determined after March 31, 1989, plus (2) 1.9% times
final average compensation multiplied by benefit service earned after March
31, 1989, plus (3) 0.5936% times final average compensation in excess of
covered compensation multiplied by benefit service after March 31, 1989.
Benefit service after March 31, 1989 is limited to a maximum of 25 years and
all benefit service is limited to a maximum of 35 years. Final average
compensation is one-twelfth of the highest average of a Participant's
compensation during five (5) consecutive calendar years of employment out the
last ten (10) calendar years of employment. A participant is incrementally
vested in his or her pension after three (3) years of service and is 100%
vested in his or her pension benefit after seven (7) years of service. The
Pension Plan is funded by the Association on an actuarial basis and all assets
are held in trust by the Pension Plan trustee.
The Association currently intends to terminate the Pension Plan and
distribute to each participant or beneficiary his or her accrued benefits
thereunder on March 31, 1997. Plan benefits will cease to accrue on June 30,
1996. It is expected that the Pension Plan will be terminated on August 31,
1996, and, upon termination, all benefits will become 100% vested, and all
persons entitled to benefits will be eligible to request an immediate, lump
sum settlement of their benefit entitlement, valued using interest rate
assumptions prescribed by law. The estimated cost of terminating the Pension
Plan is $1.0 million.
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<PAGE>
The following table illustrates the annual benefit payable upon normal
retirement at age 65 in the normal form of benefit under the Pension Plan (a
10-year certain and life annuity) at various levels of compensation and years
of service under the Pension Plan:
<TABLE>
<CAPTION>
YEARS OF SERVICE AT RETIREMENT
--------------------------------------------
REMUNERATION 15 20 25 30 35
- ------------ -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
$125,000........................... $ 54,940 $ 62,155 $ 66,514 $ 69,329 $ 71,285
150,000(1)........................ 66,788 75,726 81,119 84,623 87,072
175,000(1)........................ 74,072 84,123 90,183 94,136 96,909
200,000(1)........................ 74,451 84,668 90,823 94,851 97,683
225,000(1)........................ 74,746 85,091 91,321 95,407 98,286
250,000(1)........................ 78,818 90,070 96,843 101,293 104,433
300,000(1)(2)..................... 90,017 103,719 111,963 114,276 114,276
400,000(1)(2)..................... 112,417 114,276 114,276 114,276 114,276
450,000(1)(2)..................... 114,276 114,276 114,276 114,276 114,276
500,000(1)(2)..................... 114,276 114,276 114,276 114,276 114,276
</TABLE>
- --------
(1) For the Pension Plan year ending March 31, 1996, the compensation for
calculating benefits may not exceed $150,000 (as adjusted for subsequent
years pursuant to Code provisions).
(2) For the Pension Plan year ending March 31, 1996, the maximum annual
benefit under the Pension Plan may not exceed $114,276 ($120,000 adjusted
for the normal form of payment). The maximum annual benefit will be
adjusted in subsequent years pursuant to Code provisions.
The following table sets forth the years of credited service and the Average
Annual Earnings (as defined above) determined as of March 31, 1996, the end of
the 1995 plan year, for each of the individuals named in the Executive
Compensation Table. The Average Annual Earnings includes the salary and bonus
columns of the Executive Compensation Table.
<TABLE>
<CAPTION>
YEARS OF
CREDITED
SERVICE AVERAGE
------------ ANNUAL
YEARS MONTHS EARNINGS
----- ------ --------
<S> <C> <C> <C>
Mr. Perucco.......................................... 33 6 $150,000
Mr. Dolan............................................ 25 0 128,000
Mr. Moran............................................ 25 0 105,000
</TABLE>
Employee Stock Ownership Plan and Trust. The Company has established, and
the Association has adopted, for the benefit of eligible employees, an ESOP
and related trust to become effective upon completion of the Conversion.
Substantially all employees of the Association or the Company who have
attained age 21 and have completed one year of service may be eligible to
become participants in the ESOP. The ESOP intends to purchase eight percent
(8%) (7% in the absence of OTS approval) 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 Association or the
Company expects to contribute to the ESOP sufficient funds to pay the par
value of the Common Stock to be purchased and the ESOP intends to borrow funds
from the Company equal to the balance of the aggregate purchase price of the
Common Stock. Although contributions to the ESOP will be discretionary, the
Company or the Association intends to make annual contributions to the ESOP in
an aggregate amount at least equal to the principal and interest requirement
on the debt. It is expected that this loan will be for a term of up to 10
years, will bear interest at the rate of 8% per annum and will call for level
annual payments of principal and interest designed to amortize the loan over
its term. It is anticipated that the loan will also permit optional pre-
payment. The Company and the Association may make additional annual
contributions to the ESOP to the maximum extent deductible for federal income
purposes.
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 in the ESOP 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
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<PAGE>
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. Benefits generally become vested at the rate of 10%
per year for the first two years of service and 20% per year for the next
three years, with 100% vesting after five years of service. Participants also
become immediately vested upon termination of employment due to death,
retirement at age 65 or older, permanent disability or upon the occurrence of
a change of control. Forfeitures will be reallocated among remaining
participating employees, in the same proportion as contributions. Vested
benefits may be paid in a single sum or installment payments and are payable
upon death, retirement at age 65 or older, disability or separation from
service.
In connection with the establishment of the ESOP, a Committee of the
Company's 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 will continue 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 as long as such vote is in
accordance with the provisions of the Employee Retirement Income Security Act
of 1974, as amended ("ERISA").
The ESOP may purchase additional shares of Common Stock in the future, in
the open market or otherwise, and may do so either on a leveraged basis with
borrowed funds or with cash dividends, periodic employer contributions or
other cash flow. Whether such purchases will be made and the terms and
conditions of any such purchases will be determined by the ESOP's fiduciaries
taking into account such factors as they consider relevant at the time,
including their judgment as to the attractiveness of the Common Stock as an
investment, the price at which Common Stock may be purchased and, in the case
of leveraged purchases, the terms and conditions on which borrowed funds are
available and the willingness of the Company or the Association to offer
purchase money financing or guarantee purchase money financing offered by
third parties.
Stock Option Plans. Following the Conversion, the Board of Directors of the
Company intends to adopt the Stock Option and Incentive Plan for Employees
(the "Employees' Option Plan") and the Stock Option Plan for Outside Directors
(the "Directors' Option Plan") (collectively, the "Stock Option Plans"). If
implemented prior to the first anniversary of the Conversion, OTS regulations
require that the adoption of the Stock Option Plans be subject to stockholder
approval obtained at a meeting of stockholders to be held no earlier than six
months after the completion of the Conversion (which meeting is currently
anticipated to be held during March 1997). An amount of shares of Common Stock
equal to 10% of the shares of Common Stock to be issued in the Conversion is
expected to be reserved for issuance under the Stock Option Plans. No
determinations have been made by the Board of Directors as to the specific
terms of the Stock Option Plans or the amount of awards thereunder. However,
OTS regulations provide that no individual officer or employee may receive
more than 25% of the options granted, and Outside Directors may not receive
more than 5% individually or more than 30% in the aggregate of the options
granted, under option plans implemented within one year after the Conversion.
The purpose of the anticipated adoption of the Employees' Option Plan will
be to attract and retain qualified personnel in key positions, provide
officers and key employees with a proprietary interest in the Company as an
incentive to contribute to the success of the Company and its subsidiaries and
reward officers and key employees for outstanding performance. Although the
terms of the Employees' Option Plan have not yet been determined, it is
expected that the Employees' Option 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 of control of the Association or the Company.
Unless sooner terminated, any Employees' Option Plan adopted will be in effect
for a period of ten years.
Any Employees' Option Plan will be administered by a Committee of the Board
of Directors (the "Stock Option Committee") and such committee will determine
which officers and employees will be granted options
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<PAGE>
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 any Employees' Option Plan will permit
options to be granted for terms of up to 10 years (5 years in the case of
Incentive Stock Options granted to employees who are 10% stockholders) and at
exercise prices no less than the fair market value at date of grant (110% of
fair market value in the case of Incentive Stock Options granted to employees
who are 10% stockholders).
The Stock Option Plans are expected to provide for the exercisability and
vesting of options granted thereunder in the manner specified by the Stock
Option Committee. OTS regulations generally require that options granted under
plans implemented within one year after the Conversion begin vesting no
earlier than one year from the date of stockholder approval of the plan and
thereafter vest at a rate of no more than 20% per year. It is also expected
that, in the event of death, grants would be 100% vested, and, 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.
It is anticipated that the Stock Option Plans, to the extent permitted by
OTS regulations, will also provide for Limited Rights which, upon a change of
control, will allow the holder to exercise such Limited Rights and thereby be
entitled to receive a lump sum cash payment 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. It is also
anticipated that these Limited Rights could be cancelled by an acquiror in the
contract for an acquisition if such acquiror commits to substitute other
consideration (including substitute options on the acquiror's stock) having
equivalent value to the options being cancelled.
An employee will not be deemed to have received taxable income upon grant or
exercise of any Incentive Stock Option; provided, that shares received through
the exercise of such option are not disposed of 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 may 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 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 may be a
deductible expense for tax purposes for the Company. In the case of Limited
Rights, upon exercise, the option holder would have to include the amount paid
to him or her upon exercise in his or her gross income for federal income tax
purposes in the year in which the payment is made and the Company may be
entitled to a deduction for federal income tax purposes of the amount paid.
Under the Directors' Option Plan, it is anticipated that the exercise price
per share of each option granted thereunder will be equal to the fair market
value of the shares of Common Stock on the date the option is granted.
Stock Programs. Following the Conversion, the Company also intends to
establish Stock Programs as a method of providing officers, employees and
Outside Directors of the Association and Company with a proprietary interest
in the Company in a manner designed to encourage such persons to remain with
the Association and the Company. It is anticipated that one Stock Program
would cover eligible officers and employees of the Association and the Company
and the other would cover eligible Outside Directors of the Association and
the Company. If implemented prior to the first anniversary of the Conversion,
OTS regulations require that the adoption of the Stock Programs and awards
thereunder be subject to stockholder approval obtained at a meeting of
stockholders held no earlier than six months after the completion of the
Conversion.
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Subject to stockholder approval, the Company expects to contribute funds to
the Stock Programs to enable the Stock Programs trusts to acquire, in the
aggregate, an amount up to 4% (3% unless OTS approval is obtained) of the
shares of Common Stock issued in the Conversion. Shares used to fund the Stock
Programs may be acquired through open market purchases, if permitted, or from
authorized but unissued shares. No determinations have been made as to the
specific terms of the Stock Programs or the amount of awards thereunder.
Although no specific award determinations have been made, the Company
anticipates that, if stockholder approval is obtained, it will provide awards
to eligible officers, employees and directors to the extent permitted by
applicable regulations. Current OTS regulations provide that no individual
employee may receive more than 25% of the shares of any plan, and that non-
employee directors may not receive more than 5% of the shares individually or
30% in the aggregate for all directors, in the case of plans implemented
within one year following the Conversion.
Any Stock Programs adopted shall be administered by a Committee of the Board
of Directors (the "Stock Programs Committee"). Any Stock Programs for the
benefit of Outside Directors are expected to be self-executing with respect to
grants or allocations made thereunder. Under the Stock Programs, awards are
expected to be granted in the form of shares of Common Stock held by the Stock
Programs. The Board intends to appoint an independent fiduciary to serve as
trustee of the trusts to be established pursuant to any Stock Programs. The
Stock Programs are expected to provide for the vesting of awards granted
thereunder in the manner specified by the Stock Programs Committee and
consistent with OTS conversion regulations, which currently require that
awards under plans implemented within one year following the Conversion begin
vesting no earlier than one year from the date of stockholder approval and
thereafter vest at a rate of no more than 20% per year. It is also expected
that in the event of death, grants would be 100% vested, and, 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.
When shares become vested in accordance with the Stock Programs, the
participants will recognize income equal to the fair market value of the
Common Stock at that time. The amount of income recognized by the participants
may be a deductible expense for tax purposes for the Company. When shares
become vested and are actually distributed in accordance with the Stock
Programs, the participants will also receive amounts equal to any accrued
dividends with respect thereto. Prior to vesting, recipients of grants may
direct the voting of the shares awarded to them. Shares not subject to grants
will be voted by the trustee of the Stock Programs in proportion to the
directions provided with respect to shares subject to grants. Vested shares
will be distributed to recipients as soon as practicable following the day on
which they are vested. Any awards to Outside Directors under the Stock
Programs and the material terms and conditions thereof, will be specified in a
plan document approved by stockholders.
In the event that additional authorized but unissued shares are acquired by
the Stock Programs after the Conversion, the interests of existing
stockholders will 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. The Association has
made loans or extended credit to executive officers and directors and also to
certain persons related to executive officers and directors. All such loans
were made by the Association in the ordinary course of business and were not
made with more favorable terms nor did they involve more than the normal risk
of collectibility or present unfavorable features. The outstanding principal
balance of such loans to officers, directors, executive officers and their
associates totaled $815,000 or 2.2% of the Association's retained earnings at
March 31, 1996 and 1.3% of the Association's pro forma stockholders' equity at
March 31, 1996, after giving effect to the Conversion, and assuming the sale
of Common Stock at the maximum of the Estimated Price Range.
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
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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.
Richard S. Scheflow, a director of the Association and the Company, is a
general partner in the law firm of Scheflow, Rydell, Travis & Scheflow, which
firm represents the Association on corporate matters and foreclosure
proceedings. In connection with such representation of the Association,
Scheflow, Rydell, Travis & Scheflow received fees of approximately $28,000 for
the year ended December 31, 1995.
Thomas S. Rakow, a director of the Association and the Company, is the
President of IHC Group, Inc., which is involved in general construction work.
IHC Group, Inc. is the subcontractor performing site utility work on the
construction of the Association's South Elgin branch. The maximum amount
payable to IHC Group, Inc. under such subcontract is $83,900.
SUBSCRIPTIONS BY EXECUTIVE OFFICERS AND DIRECTORS
The following table sets forth the number of shares of Common Stock the
Association's executive officers and directors propose to purchase in the
Offerings, 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 OF THE ESTIMATED
PRICE RANGE(1) PRICE RANGE(1)
-------------------- --------------------
NUMBER AS A PERCENT NUMBER AS A PERCENT
OF OF SHARES OF OF SHARES
NAME AMOUNT SHARES OFFERED SHARES OFFERED
- ---- ---------- ------- ------------ ------- ------------
<S> <C> <C> <C> <C> <C>
George L. Perucco......... $ 200,000 20,000 0.44% 20,000 0.33%
Lyle N. Dolan............. 100,000 10,000 0.22 10,000 0.16
Orval M. Graening......... 200,000 20,000 0.44 20,000 0.33
Thomas S. Rakow........... 200,000 20,000 0.44 20,000 0.33
Henry R. Hines............ 100,000 10,000 0.22 10,000 0.16
Donald G. Laird........... 50,000 5,000 0.12 5,000 0.09
Leigh C. O'Connor......... 75,000 7,500 0.17 7,500 0.12
Richard S. Scheflow....... 30,000 3,000 0.07 3,000 0.05
Kenneth L. Moran.......... 10,000 1,000 0.02 1,000 0.01
David G. Towe............. 100,000 10,000 0.22 10,000 0.16
Raymond G. Bandemer....... 150,000 15,000 0.33 15,000 0.25
Kathleen A. Schroeder..... 100,000 10,000 0.22 10,000 0.16
Pat A. Lenart............. 50,000 5,000 0.12 5,000 0.09
---------- ------- ---- ------- ----
All directors and
executive officers as a
group.................... $1,365,000 136,500 3.03% 136,500 2.24%
========== ======= ==== ======= ====
</TABLE>
- --------
(1) Includes proposed subscriptions, if any, by Associates (See "The
Conversion--Limitations on Common Stock Purchases"). Does not include
subscription orders by the ESOP. The ESOP is expected to purchase 8% (7%
if OTS approval is not obtained) of the shares issued in the Conversion.
See "--Executive Compensation."
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THE CONVERSION
THE BOARD OF DIRECTORS OF THE ASSOCIATION, AND THE OTS, HAVE APPROVED THE
PLAN OF CONVERSION, SUBJECT TO APPROVAL BY THE MEMBERS OF THE ASSOCIATION
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 April 18, 1996, the Association's Board of Directors unanimously adopted
the Plan of Conversion pursuant to which the Association will be converted
from a federally chartered mutual savings and loan association to a federally
chartered stock savings and loan association. The Plan was amended by the
Board of Directors on June 6, 1996. It is currently intended that all of the
outstanding capital stock issued by the Association pursuant to the Plan will
be held by the Company, which is incorporated under Delaware law. The Plan was
approved by the OTS, subject to, among other things, approval of the Plan by
the Association's members. A special meeting of members has been called for
this purpose to be held on September 19, 1996.
The Company has received approval from the OTS to become a savings
association holding company and to acquire all of the Common Stock of the
Association to be issued in the Conversion. The Company plans to retain up to
50% of the net proceeds from the sale of the Common Stock and to use the
remaining net proceeds to purchase all of the then to be issued and
outstanding capital stock of the Association. The Conversion will be effected
only upon completion of the sale of all of the shares of Common Stock of the
Company (or of the Association, if the holding company form of organization is
not utilized) to be issued pursuant to the Plan.
The Plan provides that the Board of Directors of the Association may, at any
time prior to the issuance of the Common Stock and for any reason, decide not
to use the holding company form of organization. Such reasons may include
possible delays resulting from overlapping regulatory processing or policies
which could adversely affect the Association's or the Company's ability to
consummate the Conversion and transact its business as contemplated herein and
in accordance with the Association's operating policies. In the event such a
decision is made, the Association 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 Association determines not to complete the
Conversion, if permitted by the OTS, the Association will issue and sell the
common stock of the Association and subscribers will be notified of the
elimination of a holding company and will be solicited (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 Association'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 Association 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 Association from the mutual to stock form of organization and the sale of
the Association's common stock.
The Plan provides generally that (i) the Association will convert from a
mutual savings and loan association to a capital stock savings and loan
association and (ii) the Company will offer shares of Common Stock for sale in
the Subscription Offering in the following order of priority: the
Association's Eligible Account Holders, the ESOP, the Association's
Supplemental Eligible Account Holders and the Association's Other Members. The
Plan also provides that shares not subscribed for in the Subscription Offering
may be offered in a Community Offering to certain members of the general
public, with a preference to be given, in the event of an oversubscription in
the Community Offering, to natural persons residing in Kane, DuPage, and
McHenry counties in Illinois, the counties in which the Association's offices
are located. The Company and the Association have an option to
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reserve 25% of the stock available in the Community Offering for sale to
certain institutional investors. It is anticipated that all shares not
subscribed for in the Subscription and Community Offerings will be offered for
sale by the Company to the general public in a Syndicated Community Offering.
The Company and the Association have reserved 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 or in the Syndicated Community Offering.
See "--Community Offering" and "--Syndicated Community Offering."
The aggregate price of the shares of Common Stock to be issued in the
Conversion within the Estimated Price Range, currently estimated to be between
$45.1 million and $61.0 million, will be determined based upon an independent
appraisal, prepared by RP Financial, a consulting firm experienced in the
valuation and appraisal of savings institutions, of the estimated pro forma
market value of the Common Stock of the Company. 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 Offerings. 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 the offices of the
Association and at the Central Region (Chicago, Illinois) 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 Association, as a federally chartered mutual savings and loan
association, does not have stockholders and has no authority to issue capital
stock. By converting to the capital stock form of organization, the
Association will be structured in the form used by commercial banks, many
other business entities and a growing number of savings institutions. The
Conversion will enhance the Association's ability to access capital markets,
expand its current operations, acquire other financial institutions or branch
offices, provide affordable home financing opportunities to the communities it
serves or diversify into other financial services to the extent allowable by
applicable law and regulation.
The Board of Directors of the Association received information about various
types of benefit plans typically utilized by public companies in general and
implemented by converting thrift institutions in particular. Management
reviewed the anticipated costs of establishing a customary program of benefits
and the anticipated positive effects of such programs on the Company.
Management determined that such benefit plans significantly enhance the
ability of a public company to retain and attract executives of the caliber
needed to run a successful public company, to maintain their dedication and
loyalty in change in control situations and to align their interests with
those of the Company's stockholders. Ultimately, the Board of Directors
concluded that the cost of establishing and maintaining these benefit plans,
coupled with the savings to be recognized in future periods as a result of the
termination of the Association's pension plan, would be justified by the
foregoing positive effects on the Company.
The holding company form of organization, if used, would provide additional
flexibility to diversify the Association's business activities through 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, written or oral, 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 Association's capital base
is significant. The Association had equity in accordance with GAAP of $37.2
million, or 12.13% of assets at March 31, 1996. Assuming that $59.2 million of
gross proceeds are realized from the sale of Common Stock (being the maximum
of the Estimated Price Range established by the Board of Directors based on
the Valuation Range which has been
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estimated by RP Financial to be from a minimum of $45,050,000 to a maximum of
$60,950,000 (see "Pro Forma Data" for the basis of this assumption) and
assuming that $29.6 million of the net proceeds are used by the Company to
purchase the capital stock of the Association, the Association's ratio of GAAP
capital to assets, on a pro forma basis, will increase to 18.10% after the
Conversion. In the event that the holding company form of organization is not
utilized and all of the net proceeds from the Offerings, at the maximum of the
Estimated Price Range, are retained by the Association, the Association's
ratios of tangible and core capital to adjusted assets, on a pro forma basis,
each will increase to 24.87% after Conversion. The investment of the net
proceeds from the sale of the Common Stock will provide the Association with
additional income to further enhance its capital position. The additional
capital may also assist the Association 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 regulatory approval 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 "Management of the
Association--Executive Compensation."
EFFECTS OF CONVERSION
General. Each depositor in a mutual savings and loan association has both a
deposit account in the institution and a pro rata ownership interest in the
equity of the institution based upon the balance in such depositor's 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 equity of the institution without any additional payment
beyond the amount of the deposit. A depositor who reduces or closes such
depositor's account receives the balance in the account but receives nothing
for such depositor's ownership interest in the equity of the institution,
which is lost to the extent that the balance in the account is reduced.
Consequently, mutual savings and loan association 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 and loan association
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 and loan association converts to stock form, permanent
non-withdrawable capital stock is created to represent the ownership of the
institution's equity and the former pro rata ownership of depositors is
thereafter represented by their liquidation rights. See "--Liquidation
Rights." Such common stock is separate and apart from deposit accounts and
cannot be and is not insured 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 account the seller may hold
in the institution.
Continuity. While the Conversion is being accomplished, and after the
consummation of the Conversion, the normal business of the Association of
accepting deposits and making loans will continue without interruption. The
Association will continue to be subject to regulation by the OTS and the FDIC.
The Directors serving the Association at the time of Conversion will serve
as Directors of the Association after the Conversion. The Directors of the
Company will consist of all of the individuals currently serving on the Board
of Directors of the Association. It is anticipated that all officers of the
Association at the time of Conversion will retain their positions after the
Conversion.
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Savings Deposit Accounts and Loans. Under the Plan, each depositor in the
Association at the time of Conversion will automatically continue as a
depositor after the Conversion, and each such deposit account will remain the
same with respect to deposit balance, interest rate and other terms, except to
the extent affected by withdrawals made to purchase Common Stock in the
Conversion. See "--Procedure for Purchasing Shares in Subscription and
Community Offerings." Each such account will be insured by the FDIC to the
same extent as before the Conversion (i.e., up to $100,000 per depositor).
Depositors will continue to hold their existing certificates, passbooks and
other evidences of their accounts.
Furthermore, no loan outstanding from the Association 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 of and
borrowers from the Association are members of, and have voting rights in, the
Association 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 Association. Upon Conversion, all voting
rights in the Association will be vested in the Company as the sole
shareholder of the Association. Exclusive voting rights with respect to the
Company will be vested in the holders of Common Stock. Depositors of and
borrowers from the Association 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.
Liquidation Rights. In the unlikely event of a complete liquidation of the
Association in its present mutual form, each depositor would receive such
depositor's pro rata share of any assets of the Association 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 such
depositor's deposit account was to the total value of all deposit accounts in
the Association 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 Association. However, except as described below, such
depositor's claim would be solely in the amount of the balance in such
depositor's deposit account plus accrued interest. Such depositor would not
have an interest in the value or assets of the Association 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 Association 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 such account holder were to continue to maintain such account
holder's deposit account at the Association, would be entitled, on a complete
liquidation of the Association after the Conversion, to an interest in the
liquidation account prior to any payment to the shareholders of the
Association. Each Eligible Account Holder and Supplemental Eligible Account
Holder would have an initial interest in such liquidation account for each
deposit account, including passbook accounts, transaction accounts such as
NOW/Super NOW accounts, money market deposit accounts and certificates of
deposit, with an aggregate balance of $50 or more held in the Association on
March 31, 1995 (with respect to an Eligible Account Holder) and June 30, 1996
(with respect to a Supplemental Eligible Account Holder) (each a "Qualifying
Deposit"). Each Eligible Account Holder and Supplemental Eligible Account
Holder will have a pro rata interest in the total liquidation account for such
account holder's deposit accounts based on the proportion that the aggregate
balance of such person's Qualifying Deposits on the Eligibility Record Date or
Supplemental Eligibility Record Date, respectively, bore to the total amount
of all Qualifying Deposits of all Eligible Account Holders and Supplemental
Eligible Account Holders in the Association. 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 each such record date.
If, however, on any annual closing date (i.e., the date that is one year
after the Eligibility Record Date) of the Association, commencing March 31,
1996, the amount in any deposit account is less than the amount in such
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deposit account on March 31, 1995 (with respect to an Eligible Account Holder)
and June 30, 1996 (with respect to a Supplemental Eligible Account Holder) 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 shareholder of the
Association.
Tax Aspects. Consummation of the Conversion is expressly conditioned upon
the receipt by the Association of either a favorable ruling from the IRS and
Illinois taxing authorities or opinions of counsel with respect to federal and
Illinois income taxation, to the effect that the Conversion will not be a
taxable transaction to the Company, the Association, Eligible Account Holders
or Supplemental Eligible Account Holders, except as noted below.
No private ruling will be received from the IRS with respect to the proposed
Conversion. Instead, the Association has received an opinion of its counsel,
Thacher Proffitt & Wood, that for federal income tax purposes, among other
matters: (i) the Association's change in form from mutual to stock ownership
will constitute a reorganization under section 368(a)(1)(F) of the Internal
Revenue Code and neither the Association nor the Company will recognize any
gain or loss as a result of the Conversion; (ii) no gain or loss will be
recognized by the Association or the Company upon the purchase of the
Association's capital stock by the Company or by 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 by Supplemental Eligible Account
Holders upon the issuance to them of deposit accounts in the Association in
its stock form plus their interests in the liquidation account in exchange for
their deposit accounts in the Association; (iv) the tax basis of the
depositors' deposit accounts in the Association 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 each 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 by Supplemental Eligible Account Holders upon the
distribution to them of nontransferable 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 pursuant to the subscription rights 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. The opinion of Thacher Proffitt & Wood has been filed as an exhibit
to the Registration Statement of which this Prospectus is a part.
KPMG Peat Marwick LLP has also opined, subject to the limitations and
qualifications in its opinion, that the Conversion will not be a taxable
transaction to the Company or to the Association for Illinois income tax
purposes or to Eligible Account Holders or to Supplemental Eligible Account
Holders for Illinois income tax purposes. The opinion of KPMG Peat Marwick LLP
has been filed as an exhibit to the Registration Statement of which this
Prospectus is a part.
Unlike private rulings, opinions of counsel are not binding on the IRS or
the Illinois taxing authorities and the IRS or the Illinois taxing authorities
could disagree with conclusions reached therein. In the event of such
disagreement, there can be no assurance that the IRS or the Illinois taxing
authorities would not prevail in a judicial or administrative proceeding.
Certain portions of both the federal and the state tax opinions are based
upon the opinion of RP Financial that subscription rights issued in connection
with the Conversion will have no value. In the opinion of RP Financial, which
opinion is not binding on the IRS or the Illinois taxing authorities, the
subscription rights do not have any value, based on the fact that such rights
are acquired by the recipients without cost, are nontransferable and of short
duration, and afford the recipients the right only to purchase 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.
If the subscription rights granted to Eligible Account Holders,
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Supplemental Eligible Account Holders or Other Members are deemed to have an
ascertainable value, such Eligible Account Holders, Supplemental Eligible
Account Holders or Other Members could be taxed upon the receipt or exercise
of the subscription rights in an amount equal to such value, and the
Association could recognize gain on such distribution. Eligible Account
Holders and Supplemental Eligible Account Holders are encouraged to consult
with their own tax advisors as to the tax consequences in the event that such
subscription rights are deemed to have an ascertainable value.
STOCK PRICING
The Plan of Conversion requires that the purchase price of the Common Stock
must be based on the appraised pro forma market value of the Common Stock, as
determined on the basis of an independent valuation. The Association and the
Company have retained RP Financial to make such valuation. For its services in
making such appraisal, RP Financial will receive a fee of $35,000, plus out-
of-pocket expenses. The Association and the Company have agreed to indemnify
RP Financial and its employees and affiliates against certain losses
(including any losses in connection with claims under the federal securities
laws) arising out of its services as appraiser, except where RP Financial's
liability results from its negligence or bad faith.
An appraisal has been made by RP Financial in reliance upon the information
contained in this Prospectus, including the financial statements. RP Financial
also considered the following factors, among others: the present and projected
operating results and financial condition of the Company and the Association,
and the economic and demographic conditions in the Association's existing
market area; certain historical, financial and other information relating to
the Association; a comparative evaluation of the operating and financial
statistics of the Association with those of other similarly situated publicly-
traded savings associations and savings institutions located in the
Association's market area and the State of Illinois; the aggregate size of the
offering of the Common Stock; the impact of Conversion on the Association's
equity and earnings potential; the proposed dividend policy of the Company and
the Association; and the trading market for securities of comparable
institutions and general conditions in the market for such securities. In
appraising the pro forma market value of the Common Stock, RP Financial
discounted the value of the Common Stock relative to the stock of the
institutions in the Association's comparative group (i.e., other publicly-
traded thrifts with assets between $150 million to $750 million located in
Illinois and neighboring states) as a result of the Association's (i)
relatively lower level of reserves and higher ratio of risk-weighted assets to
assets; (ii) relatively lower reported earnings attributable to a higher level
of operating expenses; and (iii) relatively lower level of core earnings.
On the basis of the foregoing, RP Financial has advised the Company and the
Association that, in its opinion, dated June 7 and updated July 19, 1996, the
estimated pro forma market value of the Common Stock ranged from a minimum of
$45,050,000 to a maximum of $60,950,000 with a midpoint of $53,000,000. On
June 6, 1996, the Board of Directors of the Association held a meeting to
review and discuss the appraisal report prepared by RP Financial. A
representative of RP Financial was present at the meeting to explain the
contents of the appraisal report. On July 19, 1996, RP Financial updated its
appraisal of the aggregate estimated pro forma market value of the Common
Stock and reduced the Valuation Range by approximately 7.8% from the appraisal
dated June 7, 1996 (which had established a Valuation Range from $48.9
million, at the minimum of the Valuation Range, to $66.1 million, at the
maximum of the Valuation Range), after a review of, among other factors, (i)
the Association's financial condition and results of operations at and for the
three and six month periods ended June 30, 1996, (ii) an updated comparison of
the Association's financial condition and operating results versus its peer
group and (iii) a review of stock market conditions since the date of the
original appraisal. The reduction in value was primarily attributable to less
favorable market conditions for thrift stocks, including the market
performance of recently converted thrift institutions. The Pricing Committee
of the Board of Directors (consisting of Messrs. Perucco and Dolan), pursuant
to delegated authority received from the Board of Directors, approved the
updated Valuation Range on July 24, 1996.
In connection with its review of the reasonableness and adequacy of such
appraisal consistent with OTS regulations and policies, the Board of Directors
reviewed the methodology that RP Financial employed to determine the pro forma
market value of the Common Stock and the appropriateness of the assumptions
that RP
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Financial used in determining this value. Based upon the Valuation Range and
the Purchase Price of $10.00 per share for the Common Stock established by the
Board of Directors, the Board of Directors has established the Estimated Price
Range of $45.1 million to $61.0 million, with a midpoint of $53.0 million, and
the Company expects to issue between 4,505,000 and 6,095,000 shares of Common
Stock. The Estimated Price Range may be amended with the approval of the OTS
(if required), if necessitated by subsequent developments in the financial
condition of the Company or the Association or market conditions generally.
THE VALUATION PREPARED BY RP FINANCIAL IS NOT INTENDED, AND MUST NOT BE
CONSTRUED, AS A RECOMMENDATION OF ANY KIND AS TO THE ADVISABILITY OF
PURCHASING SUCH SHARES. RP FINANCIAL DID NOT INDEPENDENTLY VERIFY THE
FINANCIAL STATEMENTS AND OTHER INFORMATION PROVIDED BY THE ASSOCIATION, NOR
DID RP FINANCIAL VALUE INDEPENDENTLY THE ASSETS OR LIABILITIES OF THE
ASSOCIATION. THE VALUATION CONSIDERS THE ASSOCIATION AS A GOING CONCERN AND
SHOULD NOT BE CONSIDERED AS AN INDICATION OF THE LIQUIDATION VALUE OF THE
ASSOCIATION. 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
SUCH 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
VALUATION OF THE PRO FORMA MARKET VALUE THEREOF.
Following commencement of the Subscription Offering, 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 7,009,250
shares due to regulatory considerations, changes in the market and general
financial and economic conditions, without the resolicitation of subscribers.
See "--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, RP Financial confirms to the Association and the OTS that, to
the best of its knowledge, nothing of a material nature has occurred which,
taking into account all relevant factors, would cause RP Financial 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 Offering and, if applicable, the Community
Offering.
If, based on RP Financial's estimate, the pro forma market value of the
Common Stock, as of the date that RP Financial so confirms to the Association
and the OTS, 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 7,009,250 shares or no less
than 4,505,000 shares, and (2) all shares purchased in the Subscription and
Community Offerings will be purchased for the Purchase 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 changes in
market or financial 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 up to its 8% subscription. 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 Association and the Company, after consulting with
the OTS, may terminate the Plan and return all funds promptly with interest at
the Association's passbook rate of interest on payments made by check, draft
or money order, extend or hold new Subscription and Community Offerings,
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 Offering
or, if applicable, the Community Offering would not exceed 45 days unless
further extended by the OTS for periods of up to 90 days not to extend beyond
September 19, 1998.
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If all shares of Common Stock are not sold through the Subscription Offering
or the Community Offering, then the Association and the Company expect to
offer the remaining shares in a Syndicated Community Offering, which would
occur as soon as practicable following the close of the Subscription Offering
or the Community Offering but may commence during the Subscription Offering or
the Community Offering subject to the prior rights of subscribers. All shares
of Common Stock will be sold at the same price per share in the Syndicated
Community Offering as in the Subscription and Community Offerings. See "--
Syndicated Community Offering."
No sale of shares of Common Stock may be consummated unless, prior to such
consummation, RP Financial confirms to the Association, the Company 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 cancellation of the Syndicated Community
Offering, would cause RP Financial to conclude that the aggregate value of the
Common Stock at the Purchase Price is incompatible with its estimate of the
pro forma market value of the Common Stock of the Company at the time of the
Syndicated Community Offering. Any change which would result in an aggregate
purchase price which is below, or more than 15% above, the Estimated Price
Range would be subject to OTS approval. If such confirmation is not received,
the Association may extend the Conversion, extend, reopen or commence new
Subscription and Community Offerings or a Syndicated Community Offering,
establish a new Estimated Price Range and commence a resolicitation of all
subscribers with the approval of the OTS or take such other actions as
permitted by the OTS in order to complete the Conversion, or terminate the
Plan and cancel the Subscription and Community Offerings and/or the Syndicated
Community Offering. 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,
and the Company and the Association determine to continue the Conversion,
subscribers will be resolicited (i.e., be permitted to continue their orders,
in which case they will need to affirmatively reconfirm their subscriptions
prior to the expiration of the resolicitation offering or their subscription
funds will be promptly refunded with interest at the Association's passbook
rate of interest, or be permitted to decrease or cancel their subscriptions).
Any change in the Estimated Price Range must be approved by the OTS. A
resolicitation, if any, following the conclusion of the Subscription Offering
or the Community Offering would not exceed 45 days, or if following the
Syndicated Community Offering, 90 days, unless further extended by the OTS for
periods up to 90 days not to extend beyond September 19, 1998. If such
resolicitation is not effected, the Association will return with interest all
funds promptly at the Association's passbook rate of interest on payments made
by check, savings and loan association draft or money order.
Copies of the appraisal report of RP Financial, 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 offices
of the Association 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 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 4,505,000 or greater than
6,095,000 (or 7,009,250 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 Association 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
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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 up to its 8% subscription. 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 the Company's pro forma net
earnings and stockholders' equity on a per share basis while increasing pro
forma net earnings and stockholders' equity on an aggregate basis. A decrease
in the number of shares to be issued in the Conversion would increase both a
subscriber's ownership interest and the Company's pro forma net earnings and
stockholders' equity on a per share basis while decreasing 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)
depositors whose deposits in qualifying accounts in the Association totaled
$50 or more as of March 31, 1995 ("Eligible Account Holders"), (2) the ESOP,
(3) depositors whose deposits in qualifying accounts in the Association
totaled $50 or more as of June 30, 1996, other than (i) those members who
would otherwise qualify as Eligible Account Holders or (ii) directors or
officers of the Association or their Associates (as defined under "--
Limitations on Common Stock Purchases") ("Supplemental Eligible Account
Holders") and (4) members of the Association, consisting of depositors and
borrowers of the Association as of July 31, 1996, the Voting Record Date,
other than Eligible Account Holders or 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, nontransferable
subscription rights to subscribe for in the Subscription Offering up to the
greater of (i) the amount permitted to be purchased in the Community Offering,
which amount is currently $200,000 of the Common Stock offered, (ii) one-tenth
of one percent (0.10%) of the total offering of shares of Common Stock or
(iii) 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 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 in excess of the total number of shares eligible for
subscription, the shares will be allocated so as to permit each subscribing
Eligible Account Holder to purchase a number of shares sufficient to make his
total allocation equal to the lesser of 100 shares or the number of shares
subscribed for. Thereafter, unallocated shares will be allocated among the
remaining subscribing Eligible Account Holders whose subscriptions remain
unfilled in the proportion that the amounts of their respective qualifying
deposits bear to the total amount of qualifying deposits of all remaining
Eligible Account Holders whose subscriptions remain unfilled, exclusive of any
increase in the shares issued pursuant to an increase in the Estimated Price
Range of up to 15%.
To ensure proper allocation of stock, each Eligible Account Holder must list
on his or her stock order form all accounts in which such Eligible Account
Holder has an ownership interest. Failure to list an account could result in
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 Association or their associates will be subordinated to the
subscription rights of other Eligible Account Holders to the extent
attributable to increased deposits in the one-year period preceding March 31,
1995.
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Priority 2: ESOP. 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, nontransferable
subscription rights or, in the event of 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, first priority with respect to such increase to the extent necessary to
fill the ESOP's subscription, nontransferable subscription rights to purchase
up to 8% of the Common Stock issued in the Conversion, subject to the purchase
limitations set forth in the Plan of Conversion and as described below under
"--Limitations on Common Stock Purchases." The ESOP intends to purchase 8% of
the shares to be issued in the Conversion, or 360,400 shares and 487,600
shares, based on the issuance of 4,505,000 shares and 6,095,000, 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 Association's directors, officers, employees or
associates thereof. See "Management of the Association--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, nontransferable subscription rights to subscribe for in the
Subscription Offering up to the greater of (i) the amount permitted to be
purchased in the Community Offering, is currently an $200,000 of the Common
Stock offered, (ii) one-tenth of one percent (0.10%) of the total offering of
shares of Common Stock or (iii) 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 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 in excess of the total number of
shares eligible for subscription, the shares will be allocated so as to permit
each subscribing Supplemental Eligible Account Holder, to the extent possible,
to purchase a number of shares sufficient to make his total allocation equal
to the lesser of 100 shares or the number of shares subscribed for.
Thereafter, unallocated shares will be allocated among the remaining
subscribing Supplemental Eligible Account Holders whose subscriptions remain
unfilled in the proportion that the amounts of their respective qualifying
deposits bear to the total amount of qualifying deposits of all remaining
Supplemental Eligible Account Holders whose subscriptions remain unfilled,
exclusive of any increase in the shares issued pursuant to an increase in the
Estimated Price Range of up to 15%.
To ensure proper allocation of stock, each Supplemental Eligible Account
Holder must list on his or her stock order form all accounts in which such
Supplemental Eligible Account Holder has an ownership interest. Failure to
list an account could result in fewer shares being allocated than if all
accounts had been disclosed. The subscription rights received by Eligible
Account Holders will be applied in partial satisfaction of 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 nontransferable
subscription rights to subscribe for Common Stock in the Subscription Offering
up to the (i) greater of the amount permitted to be purchased in the Community
Offering, which amount is currently $200,000 of the Common Stock offered, or
(ii) one-tenth of one percent (0.10%) of the total offering of shares of
Common Stock, subject to the overall purchase limitation and exclusive of an
increase in the 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 in excess of the total number of shares eligible for subscription, the
shares will be allocated so as to permit each subscribing Other
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Member, to the extent possible, to purchase a number of shares sufficient to
make his total allocation equal to the lesser of 100 shares or the number of
shares subscribed for. Thereafter, unallocated shares will be allocated among
the remaining subscribing Other Members whose subscriptions remain unfilled on
a pro rata basis in the same proportion as a subscribing Other Member's total
votes on the Voting Record Date for the Special Meeting bears to the total
votes of all subscribing Other Members on such date.
Expiration Date for the Subscription Offering. The Subscription Offering
will expire at 12:00 Noon, Central Time, on September 17, 1996, unless
extended for up to 45 days by the Association 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 Association 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 Subscription Expiration Date,
unless such period is extended with the consent of the OTS, all funds
delivered to the Association pursuant to the Subscription Offering will be
returned with interest promptly to the subscribers with interest and all
withdrawal authorizations will be cancelled. If an extension beyond the 45-day
period following the Subscription Expiration Date is granted, the Association
will notify subscribers of the extension of time and of any rights of
subscribers to modify or rescind their subscriptions. Such extensions may not
go beyond September 19, 1998.
COMMUNITY 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 Association has
determined to offer shares pursuant to the Plan to certain members of the
general public. Any excess of shares available will be available for purchase
by the general public, with natural persons residing in Kane, DuPage and
McHenry counties in Illinois (such natural persons referred to as "Preferred
Subscribers") having first priority, subject to the right of the Company and
the Association, to accept or reject any such orders, in whole or in part, in
its sole discretion. Such persons, together with associates of and persons
acting in concert with such persons, may purchase up to $200,000 of Common
Stock subject to the maximum purchase limitation. See "--Limitations on Common
Stock Purchases." This amount may be increased to up to a maximum of 5% or
decreased to less than $200,000 of Common Stock at the discretion of the
Company and the Association. THE OPPORTUNITY TO SUBSCRIBE FOR SHARES OF COMMON
STOCK IN THE COMMUNITY OFFERING CATEGORY IS SUBJECT TO THE RIGHT OF THE
ASSOCIATION AND THE COMPANY, IN THEIR 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 OF THE SUBSCRIPTION
OFFERING. IF THE COMPANY REJECTS A SUBSCRIPTION IN PART, THE SUBSCRIBER WILL
NOT HAVE THE RIGHT TO CANCEL THE REMAINDER OF HIS OR HER SUBSCRIPTION.
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 Association, 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 order remains
unsatisfied on a 100 shares per order basis until all such orders have been
filled or the remaining shares have been allocated. To the extent that there
are shares remaining after all subscriptions by Preferred Subscribers have
been filled, shares will be allocated, applying the same allocation as
described above for Preferred Subscribers, to natural persons maintaining an
office or a residence in the State of Illinois. Thereafter, 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.
In offering the unsubscribed-for shares to the public in the Community
Offering, a number of shares equal to the lesser of (i) 25% of the Common
Stock offered in the Conversion or (ii) the Common Stock not subscribed for in
the Subscription Offering, at the option of the Company and the Association,
may be initially reserved for certain institutional investors, although no
such institutional investors have been selected.
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Persons in Non-qualified States or Foreign Countries. The Company and the
Association 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 Association 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 the Company or the Association 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 Association or their officers, directors or trustees register as a
broker, dealer, salesperson 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 Association 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
salespersons.
MARKETING AND UNDERWRITING ARRANGEMENTS
The Association and the Company have engaged Hovde as a financial and
marketing advisor in connection with the offering of the Common Stock and
Hovde has agreed to use its best efforts to assist the Company with the
solicitation of subscriptions and purchase orders for shares of Common Stock
in the Offerings. Based upon negotiations between the Association and the
Company, Hovde has received a management fee of $37,500 and will receive a fee
for services provided in connection with the Offerings equal to 1.50% of the
aggregate Purchase Price of Common Stock sold in the Subscription Offering to
Eligible Account Holders and other current depositors of the Association in
the Community Offering and in the Syndicated Community Offering. No fees will
be paid to Hovde with respect to any shares of Common Stock purchased by any
director, executive officer or employee of the Association or the Company or
members of their immediate families or the ESOP. In the event of a Syndicated
Community Offering, Hovde will negotiate with the Company for the receipt of
an additional fee to be remitted to selected dealers under one or more
selected dealer agreements to be entered into by Hovde with certain dealers;
provided, however, that the aggregate fees payable to Hovde (which represent
the 1.5% fee referenced above and the fees to be remitted to selected dealers)
in connection with any Syndicated Community Offering will not exceed 7% of the
aggregate Purchase Price of the Common Stock sold in the Syndicated Community
Offering. Fees to Hovde and to any other broker-dealer may be deemed to be
underwriting fees and Hovde and such broker-dealers may be deemed to be
underwriters. Hovde will also be reimbursed for its reasonable out-of-pocket
expenses, including legal fees, in an amount not to exceed $60,000.
Notwithstanding the foregoing, in the event the Offerings are not consummated
or Hovde ceases, under certain circumstances after the subscription
solicitation activities are commenced, to provide assistance to the Company,
Hovde will be entitled to reimbursement for its reasonable out-of-pocket
expenses as described above. The Company and the Association have agreed to
indemnify Hovde for costs and expenses in connection with certain claims or
liabilities related to or arising out of the services to be provided by Hovde
pursuant to its engagement by the Association and the Company as financial
advisor in connection with the Conversion, including certain liabilities under
the Securities Act. Total marketing fees to Hovde are estimated to be $601,000
and $821,000 at the minimum and the maximum of the Estimated Price Range,
respectively. See "Pro Forma Data" for the assumptions used to arrive at these
estimates.
The Association also has engaged Crowe Chizek and Company, LLP ("Crowe
Chizek") as its conversion agent. Pursuant to such engagement, Crowe Chizek
will perform conversion and records management services for the Association in
the Conversion and will receive a fee for this service of $20,000, plus
reimbursement of reasonable out-of-pocket expenses, to be billed to the
Association, and indemnification against certain liabilities.
Directors and executive officers of the Company and Association may
participate in the solicitation of offers to purchase Common Stock. Questions
of prospective purchasers will be directed to executive officers or registered
representatives. Other employees of the Association may participate in the
Offerings in ministerial
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capacities or providing clerical work in effecting a sales transaction. 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 Association 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 prior
to the respective expiration dates for the Offerings, 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 will confirm receipt or delivery
in accordance with Rule 15c2-8. Stock order forms will only be distributed
with a Prospectus and a certification form requiring each prospective investor
to acknowledge, among other things, that the shares of Common Stock are not
insured by the Association, the FDIC or any other governmental agency and that
such prospective investor has received a copy of this Prospectus, which, among
other things, describes the risks involved in the investment of the Common
Stock.
To purchase shares in the Subscription and Community Offerings, an executed
order form with the required payment for each share subscribed for, or with
appropriate authorization for withdrawal from the Association's deposit
account (which may be given by completing the appropriate blanks in the stock
order form), must be received by the Association at its office by 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 Company and Association are not obligated to accept orders
submitted on photocopied or facsimiled order forms and will not accept order
forms unaccompanied by an executed certification form. The Company and the
Association 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 order form may not be modified, amended or rescinded
without the consent of the Association unless the Conversion has not been
completed within 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 (March 31,
1995) and/or the Supplemental Eligibility Record Date (June 30, 1996) and/or
the Voting Record Date (July 31, 1996) must list all accounts on the stock
order form giving all names in each account and the account numbers.
Payment for subscriptions may be made (i) in cash if delivered in person to
the office of the Association, (ii) by check, savings and loan association
draft or money order, or (iii) by authorization of withdrawal from deposit
accounts maintained with the Association. No wire transfers will be accepted.
Interest will be paid on payments made by cash, check, savings and loan
association draft or money order at the Association'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, but a hold will be placed on such funds,
thereby making them unavailable to the depositor until completion or
termination of the Conversion. Notwithstanding the foregoing, the Company
shall have the right, in its sole discretion, to permit institutional
investors to submit irrevocable orders together with a legally binding
commitment for payment and to thereafter pay for the shares of Common Stock
for which they subscribe in the Community Offering at any time prior to 48
hours before the completion of the Conversion.
If a subscriber authorizes the Association to withdraw the amount of the
purchase price from his deposit account, the Association will do so as of the
effective date of the Conversion. The Association will waive any
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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 passbook rate. Upon completion of the Conversion, funds
withdrawn from depositors' accounts will no longer be insured by the FDIC.
The ESOP will not be required to pay for the shares subscribed for at the
time it subscribes but, rather, may pay for such shares of Common Stock
subscribed for at the Purchase Price upon consummation of the Offerings;
provided, that there is in force from the time of its subscription until such
time, a loan commitment acceptable to the Company from an unrelated financial
institution or the Company to lend to the ESOP, at such time, the aggregate
Purchase Price of the shares for which it subscribed. The Company intends to
provide such a loan to the ESOP.
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
Association. Persons with self-directed IRAs maintained at the Association
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 stockholders 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
Association, or to such other address as may be specified in properly
completed 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 OF COMMON STOCK
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, 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 such person's 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 an intent to make an offer
to purchase such subscription rights or shares of Common Stock prior to the
completion of the Conversion.
THE ASSOCIATION AND THE 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.
SYNDICATED COMMUNITY OFFERING
As a final step in the Conversion, the Plan provides that, if feasible, all
shares of Common Stock not purchased in the Subscription Offering or the
Community Offering, if any, will be offered for sale to the general public in
a Syndicated Community Offering through a syndicate of registered broker-
dealers to be formed and managed by Hovde acting as agent of the Company.
There are no known agreements between Hovde and any broker-dealer in
connection with a possible Syndicated Community Offering. As an alternative to
a Syndicated Community Offering, the Company and the Association may instead
elect to offer for sale such remaining shares to or through underwriters in a
public offering, as described under "--Public Offering Alternative." The
Company and the Association have reserved the right to reject orders in whole
or in part in their sole discretion
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in the Syndicated Community Offering. If the Company or the Association
rejects an order in part, the subscriber will not have the right to cancel the
remainder of his subscription. Neither Hovde nor any registered broker-dealer
shall have any obligation to take or purchase any shares of the Common Stock
in the Syndicated Community Offering; however, Hovde has agreed to use its
best efforts in the sale of shares in the Syndicated Community Offering.
The price at which Common Stock is sold in the Syndicated Community Offering
will be determined as described above under "--Stock Pricing." Subject to
overall purchase limitations, no person, together with any associate or group
of persons acting in concert, will be permitted to subscribe in the Syndicated
Community Offering for more than $200,000 of the Common Stock offered in the
Conversion; provided, however, that shares of Common Stock purchased in the
Community Offering by any persons, together with associates of or persons
acting in concert with such persons, will be aggregated with purchases in the
Syndicated Community Offering and be subject to a maximum purchase limitation
of $200,000 of the Common Stock offered.
Payments made in the form of a check, savings and loan association draft,
money order or in cash will earn interest at the Association's passbook rate
of interest from the date such payment is actually received by the Association
until completion or termination of the Conversion.
In addition to the foregoing, if a syndicate of broker-dealers ("selected
dealers") is formed to assist in the Syndicated Community Offering, a
purchaser may pay for his shares with funds held by or deposited with a
selected dealer. If an order form is executed and forwarded to the selected
dealer or if the selected dealer is authorized to execute the order form on
behalf of a purchaser, the selected dealer is required to forward the order
form and funds to the Association for deposit in a segregated account on or
before noon of the business day following receipt of the order form or
execution of the order form by the selected dealer. Alternatively, selected
dealers may solicit indications of interest from their customers to place
orders for shares. Such selected dealers shall subsequently contact their
customers who indicated an interest and seek their confirmation as to their
intent to purchase. Those indicating an intent to purchase shall execute order
forms and forward them to their selected dealer or authorize the selected
dealer to execute such forms. The selected dealer will acknowledge receipt of
the order to its customer in writing on the following business day and will
debit such customer's account on the third business day after the customer has
confirmed his intent to purchase (the "debit date") and on or before noon of
the next business day following the debit date, will send order forms and
funds to the Association for deposit in a segregated account. Although
purchasers' funds are not required to be in their accounts with selected
dealers until the debit date, in the event that such alternative procedure is
employed once a confirmation of an intent to purchase has been received by the
selected dealer, the purchaser has no right to rescind his order.
Certificates representing shares of Common Stock purchased, together with
any refund due, will be mailed to purchasers at the address specified in the
order form, as soon as practicable following consummation of the sale of the
Common Stock. Any certificates returned as undeliverable will be disposed of
in accordance with applicable law.
The Syndicated Community Offering will terminate no more than 45 days
following the Subscription Expiration Date, unless extended by the Company
with the approval of the OTS. Such extensions may not be beyond September 19,
1998. See "--Stock Pricing" above for a discussion of rights of subscribers,
if any, in the event an extension is granted.
PUBLIC OFFERING ALTERNATIVE
The Company anticipates that the shares of Common Stock will be sold in the
Subscription Offering and, if necessary, in the Community Offering. However,
shares of Common Stock not sold in the Subscription Offering or the Community
Offering may, as an alternative to a Syndicated Community Offering as
described above, be offered for sale by the Company to or through underwriters
(the "Public Offering"). Certain provisions restricting the purchase and
transfer of Common Stock shall not be applicable to sales to underwriters for
purposes of such Public Offering. Any such underwriter shall agree to purchase
such shares from the Company
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with a view to reoffering them to the general public, use their best efforts
to sell, for the account of the Company, such shares to the general public or
a combination of the preceding two provisions, subject to certain terms and
conditions described in the Plan. If the Public Offering is utilized, then the
Company will amend the Registration Statement, of which this Prospectus is a
part, to reflect the specific terms of such Public Offering alternative,
including, without limitation, the terms of any underwriting agreements,
commission structure and plan of distribution.
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 subscription for fewer than 25 shares will be accepted;
(2) Each Eligible Account Holder may subscribe for and purchase Common
Stock in the Subscription Offering in an amount up to the greater of (a)
the amount permitted to be purchased in the Community Offering, currently
$200,000 of the Common Stock offered, (b) one-tenth of one percent (0.10%)
of the total offering of shares of Common Stock or (c) 15 times the product
(rounded down to the net whole number) obtained by multiplying the total
number of shares of Common Stock to be issued in the Conversion 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 limitation in (8) 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 and intends to purchase up to 8% 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 up to 15%;
(4) Each Supplemental Eligible Account Holder may subscribe for and
purchase in the Subscription Offering in an amount up to the greater of (a)
the amount permitted to be purchased in the Community Offering, currently
$200,000 of the Common Stock Offered, (b) one-tenth of one percent (0.10%)
of the total offering of shares of Common Stock or (c) 15 times the product
(rounded down to the net 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
limitation in (8) 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%;
provided, that the subscription rights received as an Eligible Account
Holder will be applied in partial satisfaction of the subscription rights
to be received as a Supplemental Eligible Account Holder;
(5) Each Other Member may subscribe for and purchase Common Stock in the
Subscription Offering in an amount up to the greater of the amount
permitted to be purchased in the Community Offering, currently $200,000 of
the Common Stock offered, or one-tenth of one percent (0.10%) of the total
offering of shares of Common Stock subject to the overall limitation in (8)
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%;
(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 Common Stock in the Community Offering in an
amount up to $200,000 of the Common Stock offered in the Conversion subject
to the overall limitation in (8) below;
(7) Persons purchasing shares of Common Stock in the Syndicated Community
Offering, or the Public Offering alternative (exclusive of underwriters),
together with associates of and persons acting in concert with such
persons, may purchase Common Stock in the Syndicated Offering in an amount
up to $200,000 of the shares of Common Stock offered in the Conversion
subject to the overall limitation in (8) below; provided, that shares of
Common Stock purchased in the Community Offering by any persons, together
with
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associates of and persons acting in concert with such persons, will be
aggregated with purchases by such persons in the Syndicated Community
Offering in applying $200,000 purchase limitation;
(8) Eligible Account Holders, Supplemental Eligible Account Holders,
Other Members and certain members of the general public may purchase stock
in the Community Offering and Syndicated Community Offering or Public
Offering Alternative subject to the purchase limitations described in (6)
and (7) above; provided, that, except for the ESOP, the maximum number of
shares of Common Stock subscribed for or purchased in all categories of the
Conversion by any person, together with associates of and groups of persons
acting in concert with such persons, shall not exceed 1.0% of the shares of
Common Stock offered in the Conversion; and
(9) The directors and officers of the Association and their associates in
the aggregate, excluding purchases by the ESOP, may purchase up to the
maximum number of shares offered for sale in the Conversion as provided by
Section 563b.3(c)(8) of the OTS Regulations. Based on the Association's
total assets of $306.7 million at March 31, 1996, such aggregate purchase
limitation is approximately 29.3% of the shares of Common Stock offered in
the Conversion.
Subject to any required regulatory approval and the requirements of
applicable laws and regulations, but without further approval of the members
of the Association, 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% of the shares offered in the Offering at the sole discretion of
the Company and the Association. It is currently anticipated that the overall
maximum purchase limitation may be increased if, after a Community Offering,
the Company has not received subscriptions for a minimum of 4,505,000 shares
of Common Stock. If such amount is increased, subscribers for the maximum
amount will be, and certain other large subscribers in the sole discretion of
the Company and the Association 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 Association may, in their sole discretion,
increase the maximum purchase limitation referred to above up to 9.99% of the
shares offered in the Offering; 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 in the Plan and described
herein.
The overall maximum purchase limitation may not be reduced to less than
1.0%, and the individual amount permitted to be subscribed for in the
Offerings may not be reduced by the Association to less than $200,000 of the
Common Stock offered. An individual Eligible Account Holder, Supplemental
Eligible Account Holder or Other Member may not purchase individually in the
Subscription Offering the overall maximum purchase limit 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 of the Conversion, subject to availability of shares and the
maximum overall purchase limit 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 or 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 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, with preference to
Preferred Subscribers.
The term "Associate" of a person is defined to mean: (i) any corporation or
organization (other than the Company, the Association or a majority-owned
subsidiary of the Association) of which such person is an officer,
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partner or is directly or indirectly, either alone or with one or more members
of his or her immediate family, the beneficial owner of 10% or more of any
class of equity securities; (ii) any trust or other estate in which such
person has a substantial beneficial interest or as to which such person serves
as trustee or in a similar fiduciary capacity, except that the term
"Associate" does not include any employee stock benefit plan maintained by the
Company or the Association in which a person has a substantial beneficial
interest or serves as a trustee or in a similar fiduciary capacity, and except
that, for purposes of aggregating total shares that may be acquired or held by
officers and directors and their Associates, the term "Associate" does not
include any tax-qualified employee stock benefit plan; and (iii) any relative
or spouse of such person, or any relative of such spouse, who has the same
home as such person or who is a director or officer of the Company or the
Association. Directors and officers are not treated as associates of each
other solely by virtue of holding such positions. For a further discussion of
limitations on purchases of a converting institution's stock at the time of
Conversion and subsequent to Conversion, see "--Certain Restrictions on
Purchase or Transfer of Shares After Conversion," "Management of the
Association--Subscriptions by Executive Officers and Directors" and
"Restrictions on Acquisition of the Company and the Association."
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 Association 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 Association 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 Association 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 1.0% of the Company's outstanding Common
Stock or to the purchase of stock pursuant to the Stock Option Plans to be
established after the Conversion.
Pursuant to OTS regulations, the Company 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, unless the Company receives the prior
approval of the OTS. Notwithstanding the foregoing, 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 Company 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. However, the OTS Regional Directors have the authority to approve
stock repurchases during the first three years after the Conversion that are
in excess of these limits.
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RESTRICTIONS ON ACQUISITION OF THE COMPANY
AND THE ASSOCIATION
GENERAL
The Association's Plan of Conversion provides for the Conversion of the
Association 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 Association. 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 Association. 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 plans and agreements 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 Association's Federal Stock Charter and Bylaws and
management remuneration plans and agreements 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 Association.
RESTRICTIONS IN THE COMPANY'S CERTIFICATE OF INCORPORATION AND BYLAWS
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, that might have a potential "anti-
takeover" effect. The Certificate of Incorporation and Bylaws of the Company
are filed as exhibits to the Registration Statement, of which this Prospectus
is a part, and the descriptions herein of such documents are qualified in
their entirety by reference to such documents. A number of provisions of the
Company's Certificate of Incorporation and Bylaws deal with matters of
corporate governance and certain rights of stockholders. These provisions
might have the effect of discouraging future takeover attempts which are not
approved by the Board of Directors but which individual Company stockholders
may deem to be in their best interests or in which stockholders may receive
substantial premiums for their shares over then current market prices. As a
result, stockholders who might desire to participate in such transactions 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.
Limitation on Voting Rights. The Certificate of Incorporation of the Company
provides that 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")
shall be entitled or permitted to only one one-hundredth ( 1/100) of a vote
with respect of each share held in excess of the Limit. Beneficial ownership
of shares includes shares beneficially owned by such person or any of his
affiliates, 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 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 further provides that this
provision limiting voting rights may only be amended upon (i) the approval of
the Board of Directors, and (ii) the affirmative vote of the holders of a
majority of the total votes eligible to be cast by the holders of all
outstanding shares of capital stock entitled to vote thereon and (iii) by the
affirmative vote of either (1) not less than a majority of the authorized
number of directors and, if one or more Interested Stockholders exist, by not
less than a majority of the Disinterested Directors (as defined in the
Certificate of Incorporation) or (2) the holders of not less than two-thirds
of the total votes eligible to be cast by the holders of all outstanding
shares of the capital stock of the Company entitled to vote thereon
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and, if the amendment is proposed by or on behalf of an Interested Stockholder
or a director who is an Affiliate or Associate of an Interested Stockholder,
by the affirmative vote of the holders of not less than a majority of the
total votes eligible to be cast by holders of all outstanding shares entitled
to vote thereon not beneficially owned by an Interested Stockholder or an
Affiliate or Associate thereof.
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 but
shall not be less than five nor more than 15. 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, shall 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 resolution of at least three-fourths of the Board of Directors
or by the President 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 fifteen million (15,000,000) shares of capital stock, consisting of twelve
million (12,000,000) shares of Common Stock and three million (3,000,000)
shares of preferred stock (the "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 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 Stock Option Plans, all of which, if
implemented prior to the first anniversary of the Conversion, will be
presented to stockholders for approval at a meeting of stockholders to be held
no earlier than six months after completion of the Conversion.
Stockholder Vote Required to Approve Business Combinations with Principal
Stockholders. The Certificate of Incorporation requires the approval of the
holders of at least 80% of the Company's outstanding shares of voting stock,
together with the affirmative vote of at least 50% of the Company's
outstanding shares of voting stock not beneficially owned by an Interested
Stockholder (as defined below) 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
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shares of Common Stock of the Company and any other affected class of stock.
Under the Certificate of Incorporation, at least 80% approval of stockholders
is required in connection with any transaction involving an Interested
Stockholder 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 stockholders 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 or any employee benefit plan maintained by
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, pledge, transfer, or other disposition to or with any Interested
Stockholder or Affiliate of 5% 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 other than on a pro rata basis to
all stockholders; (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; (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; and (vi) the acquisition by the
Company or its subsidiary of any securities of an Interested Stockholder or
its Affiliates or Associates.
The directors and executive officers of the Association are purchasing in
the aggregate approximately 2.2% 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, the
proposed Stock Programs and Stock Options Plans are implemented, 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 implemented, the 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.
Evaluation of Offers. The Certificate of Incorporation of the Company
further provides that the Board of Directors of the Company, when evaluating
any offer to the Company from another party to (i) make a tender or exchange
offer for any outstanding 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, shall, in connection with the exercise of its judgment in
determining what is in the best interest of the Company and the stockholders
of the Company, give due consideration to the extent permitted by law to all
relevant factors, including, without limitation, the financial and managerial
resources and future prospects of the other party, the possible effects on the
business of the Company and its subsidiaries and on the employees, customers,
suppliers and creditors of the Company and its subsidiaries, and the effects
on the communities in which the Company's and its subsidiaries' facilities are
located. 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 interests 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. The Certificate of
Incorporation provides that certain provisions of the Certificate of
Incorporation may not be altered, amended, repealed or rescinded without the
affirmative vote of either (1) not less than a majority of the authorized
number of directors and, if one or
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more Interested Stockholders exist, by not less than a majority of the
Disinterested Directors (as defined in the Certificate of Incorporation) or
(2) the holders of not less than two-thirds of the total votes eligible to be
cast by the holders of all outstanding shares of the capital stock of the
Company entitled to vote thereon and, if the alteration, amendment, repeal, or
rescission is proposed by or on behalf of an Interested Stockholder or a
director who is an Affiliate or Associate of an Interested Stockholder, by the
affirmative vote of the holders of not less than a majority of the total votes
eligible to be cast by holders of all outstanding shares entitled to vote
thereon not beneficially owned by an Interested Stockholder or an Affiliate or
Associate thereof. Amendment of the provision relating to business
combinations must also be approved by either (i) a majority of the
Disinterested Directors, or (ii) the affirmative vote of not less than eighty
percent (80%) of the total number of votes eligible to be cast by the holders
of all outstanding shares of the Voting Stock, voting together as a single
class, together with the affirmative vote of not less than fifty percent (50%)
of the total number of votes eligible to be cast by the holders of all
outstanding shares of the Voting Stock not beneficially owned by any
Interested Stockholder or Affiliate or Associate thereof, voting together as a
single class. Furthermore, the Company's Certificate of Incorporation provides
that provisions of the Bylaws that contain supermajority voting requirements
may not be altered, amended, repealed or rescinded without a vote of the Board
or holders of capital stock entitled to vote thereon that is not less than the
supermajority specified in such provision. Absent these provisions, the
Delaware General Corporation Law (the "DGCL") provides that a corporation's
certificate of incorporation and bylaws may be amended by the holders of a
majority of the corporation's outstanding capital stock. The Certificate of
Incorporation also provides that the Board of Directors is authorized to make,
alter, amend, rescind or repeal any of the Company's Bylaws in accordance with
the terms thereof, regardless of whether the Bylaw was initially adopted by
the stockholders. However, this authorization neither divests the stockholders
of their right, nor limits their power to adopt, amend, rescind or repeal any
Bylaw under the DGCL. These provisions could have the effect of discouraging a
tender offer or other takeover attempt where the ability to make fundamental
changes through Bylaw amendments is an important element of the takeover
strategy of the acquiror.
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
approximately 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 Stock Programs
and the Stock Option Plans to be established may also discourage takeover
attempts by increasing the costs to be incurred by the Association and the
Company in the event of a takeover. See "Management of the Association--
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 interests of the Company and its stockholders. An
unsolicited non-negotiated proposal can seriously disrupt the business and
management of a corporation and cause it great expense. Accordingly, the Board
of Directors believes it is in the best 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 interests of all
stockholders.
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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 DGCL ("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 (a
"DGCL 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 a DGCL 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 a DGCL Interested Stockholder, the Board of Directors approved either
the business combination or the transaction which resulted in the stockholder
becoming a DGCL 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 a DGCL 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 DGCL 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 requirement of the statute by adopting
an amendment to its Certificate of Incorporation or Bylaws electing not to be
governed by Section 203 of the DGCL. At the present time, the Board of
Directors does not intend to propose any such amendment.
RESTRICTIONS IN THE ASSOCIATION'S NEW CHARTER AND BYLAWS
Although the Board of Directors of the Association is not aware of any
effort that might be made to obtain control of the Association 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 Association and its shareholders from any hostile takeover.
Such provisions may, indirectly, inhibit a change in control of the Company,
as the Association's sole stockholder. See "Risk Factors--Certain Anti-
Takeover Provisions."
The Association'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
Association by any person (i.e., any individual, corporation, group acting in
concert, trust, partnership, joint stock company or similar organization),
either directly or indirectly, will be prohibited for a period of five years
following the date of completion of the Conversion. Any 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 Association forms a holding company without a
change in the respective beneficial ownership interests of its shareholders
other than pursuant to the exercise of any dissenter or appraisal rights, the
purchase of shares by underwriters in connection with a public offering or the
purchase of shares by a tax qualified employee stock benefit plan which is
exempt from certain approval requirements set forth in the OTS regulations. 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 Association, the Board of Directors of the
Association will be able to assert this provision of the Association's Federal
Stock Charter
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against such holders. Although the Board of Directors of the Association is
not currently able to determine when and if it would assert this provision of
the Association'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 Association, the Company and its shareholders. 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 Association indirectly through a change in control of the
Company. Finally, for five years, shareholders will not be permitted to call a
special meeting of shareholders relating to a change of control of the
Association or a charter amendment. 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 Association in the years immediately following the
Conversion.
Although the Association has no arrangements, understandings or plans at the
present time, the Board of Directors believes that the availability of
unissued shares of Preferred Stock will provide the Association 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 Association 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 interests of the Association and its then existing
shareholders.
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
Association or the Company; or (iii) offers which are not opposed by the Board
of Directors of the Association 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 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, directly or indirectly through control of 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 "control," as that
term is defined
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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 by the OTS 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 Association which have not received
prior regulatory approval.
DESCRIPTION OF CAPITAL STOCK OF THE COMPANY
GENERAL
The Company is authorized to issue twelve million (12,000,000) shares of
Common Stock having a par value of $.01 per share and three million
(3,000,000) shares of Preferred Stock having a par value of $.01 per share.
The Company currently expects to issue 6,095,000 shares of Common Stock (or
7,009,250 in the event of an increase of 15% in the Estimated Price Range) and
does not expect to issue any shares of Preferred Stock. Except as discussed
above in "Restrictions on Acquisition of the Company and the Association,"
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
nonassessable.
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
Association," 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% or two-
thirds stockholder vote. See "Restrictions on Acquisition of the Company and
the Association."
As a federal mutual savings and loan association, corporate powers and
control of the Association are vested in its Board of Directors, who elect the
officers of the Association 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
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owners of the shares of capital stock of the Association, which owner 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 Association.
Liquidation. In the event of any liquidation, dissolution or winding up of
the Association, the Company, as holder of the Association's capital stock,
would be entitled to receive, after payment or provision for payment of all
debts and liabilities of the Association (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--Effects of Conversion--Liquidation
Rights"), all assets of the Association 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 the
liquidation or dissolution of the Company.
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.
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 unsolicited takeover or attempted change in control.
DESCRIPTION OF CAPITAL STOCK OF THE ASSOCIATION
GENERAL
The Federal Stock Charter of the Association, to be effective upon the
Conversion, authorizes the issuance of capital stock consisting of 20,000,000
(twenty million) shares of common stock, par value $1.00 per share, and
5,000,000 (five million) 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 Association 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 Association's
shareholders, except to the extent that such approval is required by governing
law. All of the issued and outstanding common stock of the Association (which
is currently expected to be 1,000 shares) will be held by the Company as the
Association's sole shareholder. THE CAPITAL STOCK OF THE ASSOCIATION 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 Association'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 Association 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
Association's common stock will possess exclusive voting rights in the
Association. Each holder of shares of common stock will be entitled to one
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vote for each share held. 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 Association--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 Association, the holders of its common stock will be entitled to receive,
after payment of all debts and liabilities of the Association (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 Association 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.
Preemptive Rights and Redemption. Holders of the common stock of the
Association will not be entitled to preemptive rights with respect to any
shares of the Association which may be issued. The common stock will not be
subject to redemption. Upon receipt by the Association of the full specified
purchase price therefor, the common stock will be fully paid and
nonassessable.
PREFERRED STOCK
None of the shares of the Association'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 shareholder approval, issue preferred stock
with voting, dividend, liquidation and conversion rights.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Company's Common Stock is Harris
Trust and Savings Bank.
EXPERTS
The financial statements of the Association 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 KPMG Peat Marwick
LLP, independent certified public accountants, whose report is included herein
and upon such firm as experts in accounting and auditing.
RP Financial, LC. has consented to the publication herein of the summary of
its report to the Association and Company setting forth its opinion as to the
estimated pro forma market value of the Common Stock upon Conversion and its
opinion with respect to subscription rights.
LEGAL AND TAX OPINIONS
The legality of the Common Stock and the federal income tax of the
Conversion will be passed upon for the Association and the Company by Thacher
Proffitt & Wood, New York, New York, special counsel to the Association and
the Company. The Illinois State tax consequences of the Conversion will be
passed upon for the Association by KPMG Peat Marwick LLP, independent public
accountants. Certain legal matters will be passed upon for Hovde by Barack,
Ferrazzano, Kirschbaum & Perlman, Chicago, Illinois.
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ADDITIONAL INFORMATION
The Company has filed with the SEC the 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,
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. Such information is also available on the SEC's Electronic Data
Gathering Analysis and Retrieval ("EDGAR") System.
The Association 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.
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 of Conversion, 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 Association amends the Plan to
eliminate the concurrent formation of the Company as part of the Conversion,
the Association will register its stock with the OTS under Section 12(g) of
the Exchange Act and, upon such registration, the Association and the holders
of its stock will become subject to the same obligations and restrictions.
Copies of the Certificate of Incorporation and the Bylaws of the Company and
the Federal Stock Charter and Bylaws of the Association are available without
charge from the Association upon written or telephonic request.
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<PAGE>
INDEX TO FINANCIAL STATEMENTS
HOME FEDERAL SAVINGS AND LOAN ASSOCIATION OF ELGIN
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Independent Auditors' Report.............................................. F-2
Financial Statements:
Balance Sheets as of March 31, 1996 (unaudited) and December 31, 1995
and 1994............................................................... F-3
Statements of Earnings for the three months ended March 31, 1996 and
1995 (unaudited) and
for the years ended December 31, 1995, 1994 and 1993................... 42
Statements of Retained Earnings for the three months ended March 31,
1996 (unaudited) and
for the years ended December 31, 1995, 1994 and 1993................... F-4
Statements of Cash Flows for the three months ended March 31, 1996 and
1995 (unaudited) and
for the years ended December 31, 1995, 1994 and 1993................... F-5
Notes to Financial Statements........................................... F-6
</TABLE>
All schedules are omitted, because they are not required or applicable, or
the required information is shown in the financial statements or notes
thereto.
The financial statements of Home Bancorp of Elgin, Inc. have been omitted,
because Home Bancorp of Elgin, Inc. has not yet issued any stock, has no
assets and no liabilities and has not conducted any business other than of an
organizational nature.
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Home Federal Savings and
Loan Association of Elgin
Elgin, Illinois:
We have audited the accompanying balance sheets of Home Federal Savings and
Loan Association of Elgin (Association) as of December 31, 1995 and 1994, and
the related statements of earnings, retained earnings, and cash flows for each
of the years in the three-year period ended December 31, 1995. These financial
statements are the responsibility of the Association's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Home Federal Savings and
Loan Association of Elgin as of December 31, 1995 and 1994, and the results of
its operations and its cash flows for each of the years in the three-year
period ended December 31, 1995, in conformity with generally accepted
accounting principles.
As discussed in notes 1 and 9 to the financial statements, the Association
changed its method of accounting for income taxes to adopt the provisions of
the Financial Accounting Standards Board's SFAS No. 109, "Accounting for
Income Taxes," on January 1, 1993.
KPMG Peat Marwick LLP
Chicago, Illinois
March 8, 1996, except for note 14,
as to which the date is June 6, 1996
F-2
<PAGE>
HOME FEDERAL SAVINGS AND LOAN ASSOCIATION OF ELGIN
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
MARCH 31, -------------------------
ASSETS 1996 1995 1994
------ ------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C>
Cash and due from banks................ $ 9,077,630 $ 10,021,150 $ 9,656,033
Interest-earning deposits.............. 15,161,337 8,588,077 8,561,613
Investment securities held-to-maturity
(note 2).............................. 5,955,000 5,947,500 5,917,500
Loans receivable, net (note 3)......... 264,081,700 267,153,449 271,040,062
Government National Mortgage
Association mortgage-backed securities
held-to-maturity...................... 173,252 186,536 242,837
Accrued interest receivable (note 4)... 1,546,742 1,483,915 1,270,541
Real estate owned and in judgment, at
lower of cost or fair value (net of
allowance for losses of $20,000 at
March 31, 1996, December 31, 1995 and
1994)................................. 377,151 495,882 514,314
Federal Home Loan Bank of Chicago
stock, at cost........................ 2,678,000 3,056,200 3,009,900
Office properties and equipment, net
(note 5).............................. 6,799,792 6,817,288 6,073,934
Prepaid expenses and other assets...... 837,051 770,447 669,410
------------ ------------ ------------
Total assets....................... $306,687,655 $304,520,444 $306,956,144
============ ============ ============
<CAPTION>
LIABILITIES AND RETAINED EARNINGS
---------------------------------
<S> <C> <C> <C>
Savings deposits (note 6).............. $264,484,873 $259,971,796 $267,938,031
Borrowed funds (note 7)................ -- 4,000,000 --
Advance payments by borrowers for taxes
and insurance......................... 2,929,811 1,859,851 2,052,598
Accrued interest payable and other
liabilities........................... 2,078,043 2,005,801 2,646,536
------------ ------------ ------------
Total liabilities...................... 269,492,727 267,837,448 272,637,165
Retained earnings--substantially
restricted (notes 8 and 9)............ 37,194,928 36,682,996 34,318,979
Commitments and contingencies (notes 11
and 12)
------------ ------------ ------------
Total liabilities and retained
earnings.......................... $306,687,655 $304,520,444 $306,956,144
============ ============ ============
</TABLE>
See accompanying notes to financial statements.
F-3
<PAGE>
HOME FEDERAL SAVINGS AND LOAN ASSOCIATION OF ELGIN
STATEMENTS OF RETAINED EARNINGS
<TABLE>
<S> <C>
Balance at December 31, 1992....................................... $25,700,680
Net income......................................................... 4,260,552
-----------
Balance at December 31, 1993....................................... 29,961,232
Net income......................................................... 4,357,747
-----------
Balance at December 31, 1994....................................... 34,318,979
Net income......................................................... 2,364,017
-----------
Balance at December 31, 1995....................................... 36,682,996
Net income (unaudited)............................................. 511,932
-----------
Balance at March 31, 1996 (unaudited).............................. $37,194,928
===========
</TABLE>
See accompanying notes to financial statements.
F-4
<PAGE>
HOME FEDERAL SAVINGS AND LOAN ASSOCIATION OF ELGIN
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31, YEAR ENDED DECEMBER 31,
------------------------ -------------------------------------
1996 1995 1995 1994 1993
----------- ----------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from
operating activities:
Net income............ $ 511,932 $ 694,947 $ 2,364,017 $ 4,357,747 $ 4,260,552
Adjustments to
reconcile net income
to net cash provided
by operating
activities:
Depreciation and
amortization
expense.............. 159,762 164,667 740,415 701,679 590,616
Provision for
deferred income
taxes................ 54,707 70,528 169,984 524,351 764,066
Provision for loan
losses............... 30,000 45,000 180,000 240,000 240,000
Amortization
(accretion) of
premiums and
discounts............ (7,683) (7,400) (30,278) (21,860) 32,405
Increase (decrease)
in deferred loan
fees................. (64,244) 123,494 (513,104) (630,999) (56,696)
Gain on sale of real
estate owned......... (17,879) -- -- -- (10,071)
Gain on sale of
branches............. -- -- -- (1,683,298) (822,381)
Gain on sale of
office properties
and equipment........ (1,216) -- -- (47,699) --
Federal Home Loan
Bank of Chicago
stock dividend....... -- -- (46,300) -- (50,500)
Decrease (increase)
in accrued interest
receivable........... (62,827) (14,788) (213,374) 277,140 120,873
Decrease (increase)
in prepaid expenses
and other assets,
net.................. (66,604) (191,138) (101,037) 92,086 183,960
Increase (decrease)
in accrued interest
payable and other
liabilities, net..... 17,535 (447,134) (810,719) 661,237 62,446
----------- ----------- ----------- ----------- -----------
Net cash provided by
operating
activities......... 553,483 438,176 1,739,604 4,470,384 5,315,270
----------- ----------- ----------- ----------- -----------
Cash flows from
investing activities:
Net decrease
(increase) in loans
receivable........... 3,242,603 137,575 4,238,149 30,906,019 (12,297,023)
Repayment of mortgage-
backed securities
held-to-maturity..... 13,467 12,794 56,579 52,510 88,466
Purchase of investment
securities held-to-
maturity............. -- -- -- (5,895,000) --
Purchase of office
properties and
equipment............ (142,266) (217,499) (1,483,769) (570,859) (729,649)
Proceeds from the sale
of office properties
and equipment........ 1,216 -- -- 243,528 --
Maturity of investment
securities held-to-
maturity............. -- -- -- -- 6,000,000
Redemption of stock in
the Federal Home Loan
Bank of Chicago...... 378,200 -- -- 698,200 --
----------- ----------- ----------- ----------- -----------
Net cash provided by
(used in) investing
activities......... 3,493,220 (67,130) 2,810,959 25,434,398 (6,938,206)
----------- ----------- ----------- ----------- -----------
Cash flows from
financing activities:
Increase (decrease) in
borrowed funds....... (4,000,000) -- 4,000,000 (7,000,000) 7,000,000
Increase (decrease) in
savings deposits, net
of sale of branch
deposits............. 4,513,077 (2,653,956) (7,966,235) (4,902,273) (6,926,213)
Cash paid upon sale of
branch deposits...... -- -- -- (19,408,455) (17,290,354)
Net increase
(decrease) in advance
payments by borrowers
for taxes and
insurance............ 1,069,960 969,232 (192,747) 17,191 202,584
----------- ----------- ----------- ----------- -----------
Net cash provided by
(used in) financing
activities......... 1,583,037 (1,684,724) (4,158,982) (31,293,537) (17,013,983)
----------- ----------- ----------- ----------- -----------
Increase (decrease) in
cash and cash
equivalents........... 5,629,740 (1,313,678) 391,581 (1,388,755) (18,636,919)
Cash and cash
equivalents at
beginning of year..... 18,609,227 18,217,646 18,217,646 19,606,401 38,243,320
----------- ----------- ----------- ----------- -----------
Cash and cash
equivalents at end of
year.................. $24,238,967 $16,903,968 $18,609,227 $18,217,646 $19,606,401
=========== =========== =========== =========== ===========
Supplemental disclosure
of cash flow
information:
Cash paid during the
year for:
Interest.............. $ 2,801,644 $ 2,526,791 $10,810,205 $10,465,325 $11,705,122
Income taxes.......... 25,000 647,572 1,298,000 1,881,000 2,562,723
Noncash transfer of
loans receivable to
real estate owned and
in judgment, net..... -- -- 194,218 272,300 712,334
=========== =========== =========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
F-5
<PAGE>
HOME FEDERAL SAVINGS AND LOAN ASSOCIATION OF ELGIN
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 1996 AND 1995 (UNAUDITED) AND
DECEMBER 31, 1995, 1994, AND 1993
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Home Federal Savings and Loan Association of Elgin (Association) prepares
its financial statements on the basis of generally accepted accounting
principles. The following is a description of the more significant of those
policies which the Association follows in preparing and presenting its
financial statements.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from these estimates.
Investment Securities
Investments which the Association has the positive intent and ability to
hold to maturity are classified as held-to-maturity and recorded at amortized
cost. Investments purchased for the purpose of being sold are classified as
trading securities and recorded at fair value with any changes in fair value
included in earnings. All other investments that are not classified as held-
to-maturity or trading are classified as available for sale. Investments
available for sale are recorded at fair value with any changes in fair value
reflected as a separate component of retained earnings, net of related tax
effects. At March 31, 1996, December 31, 1995 and 1994, the Association
classified all investment securities as held-to-maturity. Gains and losses on
the sale of securities are determined using the specific identification
method.
Loans Receivable
Loans receivable are stated at unpaid principal balances less loans in
process, deferred loan fees, and allowance for loan losses.
The allowance for loan losses is increased by charges to operations and
decreased by charge-offs (net of recoveries). Management's periodic evaluation
of the adequacy of the allowance is based on the Association's past loan loss
experience, known and inherent risks in the portfolio, adverse situations that
may affect the borrower's ability to repay, estimated value of any underlying
collateral, and current and prospective economic conditions. In addition,
various regulatory agencies, as an integral part of their examination process,
periodically review the Association's allowance. Such agencies may require the
Association to recognize additions to the allowance based on their judgments
about information available to them at the time of their examination. In the
opinion of management, the allowance is adequate to absorb foreseeable losses.
Interest income is not recognized on loans which are 90 days or greater
delinquent and on loans which management believes the interest is
uncollectible.
Certain nonrefundable loan fees and direct costs of loan origination are
deferred at the time a loan is originated. Net deferred loan fees are
recognized as yield adjustments over the contractual life of the loan using
the interest method.
The Association adopted Statement of Financial Accounting Standards No. 114,
"Accounting by Creditors for Impairment of a Loan," (Statement 114) and
Statement 118, "Accounting by Creditors for Impairment of a Loan--Income
Recognition Disclosures," (Statement 118) effective January 1, 1995. Statement
114 requires that impaired loans be measured at 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
F-6
<PAGE>
HOME FEDERAL SAVINGS AND LOAN ASSOCIATION OF ELGIN
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
if the loan is collateral dependent. Statement 118 eliminates the provisions
in Statement 114 that describe how a creditor should report interest income on
an impaired loan and allows a creditor to use existing methods to recognize
and measure interest income on an impaired loan. Homogeneous loans that are
collectively evaluated for impairment, including real estate mortgage loans
and consumer loans, are excluded from the provisions of Statement 114.
Mortgage-backed Securities
Amortization of premiums and accretion of discounts are recognized in
interest income over the contractual life of the related securities using the
interest method. Mortgage-backed securities are classified as held-to-maturity
and are recorded at amortized cost. There were no sales of mortgage-backed
securities for the three months ended March 31, 1996 and 1995 (unaudited) or
in the years ended December 31, 1995, 1994, and 1993.
Depreciation and Amortization
Depreciation and amortization of office properties and equipment are
computed using the straight-line method over the estimated useful lives of the
related assets. Estimated useful lives used in calculating depreciation and
amortization expense range from 3 years to 50 years.
Income Taxes
Effective January 1, 1993, the Association adopted the provisions of
Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes," (Statement 109), on a prospective basis. The cumulative effect of the
change in method of accounting for income taxes decreased earnings by $348,742
and is reported separately in the statement of earnings for the year ended
December 31, 1993. Under Statement 109, deferred tax assets and liabilities
are recognized for the future tax consequences attributable to differences
between the financial statement carrying amounts of existing assets and
liabilities and their respective tax bases. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date.
Cash and Cash Equivalents
For purposes of reporting cash flows, cash and cash equivalents include cash
and due from banks and interest-earning deposits.
(2) INVESTMENT SECURITIES HELD-TO-MATURITY
The amortized cost and estimated fair value of investment securities held-
to-maturity are summarized as follows:
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSSES FAIR VALUE
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
March 31, 1996 (unaudited)--
United States Government and
agency obligations.............. $5,955,000 $30,000 $ -- $5,985,000
========== ======= ======== ==========
December 31, 1995--
United States Government and
agency obligations.............. $5,947,500 $82,500 $ -- $6,030,000
========== ======= ======== ==========
December 31, 1994--
United States Government and
agency obligations.............. $5,917,500 $ -- $250,000 $5,662,500
========== ======= ======== ==========
</TABLE>
F-7
<PAGE>
HOME FEDERAL SAVINGS AND LOAN ASSOCIATION OF ELGIN
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
The amortized cost and estimated fair value of investment securities held-
to-maturity at March 31, 1996 (unaudited) and December 31, 1995 by contractual
maturity are shown below. 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.
<TABLE>
<CAPTION>
MARCH 31, 1996 DECEMBER 31, 1995
--------------------- ---------------------
AMORTIZED ESTIMATED AMORTIZED ESTIMATED
COST FAIR VALUE COST FAIR VALUE
---------- ---------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Due in one year through five years. $5,955,000 $5,985,000 $5,947,500 $6,030,000
</TABLE>
There were no sales of investment securities held-to-maturity for the three
months ended March 31, 1996 and 1995 or for the years ended December 31, 1995,
1994, and 1993.
(3) LOANS RECEIVABLE
A comparative summary of loans receivable follows:
<TABLE>
<CAPTION>
DECEMBER 31,
MARCH 31, --------------------------
1996 1995 1994
------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C>
Mortgage loans:
One- to four-family................. $262,056,343 $265,116,190 $267,727,537
Multi-family........................ 3,055,864 3,105,626 4,118,036
Construction and land............... 577,616 456,295 858,798
Commercial.......................... 873,204 890,568 861,897
------------ ------------ ------------
Total mortgage loans.............. 266,563,027 269,568,679 273,566,268
------------ ------------ ------------
Other loans:
Passbook savings.................... 483,214 627,449 576,628
Consumer installment loans.......... 81,493 91,634 99,887
------------ ------------ ------------
Total other loans................. 564,707 719,083 676,515
------------ ------------ ------------
Gross loans receivable................ 267,127,734 270,287,762 274,242,783
Less:
Loans in process.................... (364,375) (418,468) (150,112)
Deferred loan fees.................. (1,825,890) (1,890,134) (2,403,252)
Allowance for loan losses........... (855,711) (825,711) (649,357)
------------ ------------ ------------
$264,081,700 $267,153,449 $271,040,062
============ ============ ============
</TABLE>
Activity in the allowance for loan losses is summarized as follows:
<TABLE>
<CAPTION>
THREE MONTHS
ENDED MARCH 31, YEAR ENDED DECEMBER 31,
----------------- ---------------------------
1996 1995 1995 1994 1993
-------- -------- -------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Balance at beginning of year.... $825,711 $649,357 $649,357 $409,357 $548,004
Provision for loan losses....... 30,000 45,000 180,000 240,000 240,000
Charge-offs..................... -- -- (3,646) -- (140,945)
Allocation to allowance for
uncollected interest........... -- -- -- -- (237,702)
-------- -------- -------- -------- --------
$855,711 $694,357 $825,711 $649,357 $409,357
======== ======== ======== ======== ========
</TABLE>
F-8
<PAGE>
HOME FEDERAL SAVINGS AND LOAN ASSOCIATION OF ELGIN
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Loans receivable delinquent three months or more are as follows:
<TABLE>
<CAPTION>
PERCENTAGE
NUMBER OF GROSS
OF LOANS
LOANS AMOUNT RECEIVABLE
------ ---------- ----------
<S> <C> <C> <C>
March 31, 1996 (unaudited)......................... 18 $1,077,316 .41
December 31, 1995.................................. 17 915,472 .34
December 31, 1994.................................. 19 985,856 .36
December 31, 1993.................................. 26 1,642,287 .54
</TABLE>
The Association discontinues recognizing interest on loans 90 days and
greater delinquent and on loans where collection of interest is doubtful. The
reduction in interest income associated with loans 90 days and greater
delinquent, based on their original contractual terms, was approximately
$20,000 and $20,000 for the three months ended March 31, 1996 and 1995
(unaudited), respectively, and $36,000, $59,000 and $97,000 for the years
ended December 31, 1995, 1994, and 1993, respectively.
The Association adopted Statement 114 and Statement 118 on January 1, 1995.
These statements establish procedures for determining the appropriate
allowance required for loans deemed impaired. The calculation of allowance
levels is based upon the discounted present value of expected future cash
flows received from the debtor or the fair value of the collateral if the loan
is collateral dependent. No loans were identified as impaired by the
Association at March 31, 1996 (unaudited) and December 31, 1995.
(4) ACCRUED INTEREST RECEIVABLE
Accrued interest receivable is summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
MARCH 31, ----------------------
1996 1995 1994
----------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C>
Loans receivable........................... $1,428,241 $1,443,745 $1,335,188
Mortgage-backed securities held-to-
maturity.................................. 1,090 1,167 1,524
Investment securities held-to-maturity..... 165,000 82,500 82,500
FHLB of Chicago stock...................... 48,736 53,923 49,313
Allowance for uncollected interest--loans
receivable................................ (96,325) (97,420) (197,984)
---------- ---------- ----------
$1,546,742 $1,483,915 $1,270,541
========== ========== ==========
</TABLE>
Activity in the allowance for uncollected interest is summarized as follows:
<TABLE>
<CAPTION>
THREE MONTHS
ENDED MARCH 31, YEAR ENDED DECEMBER 31,
----------------- ----------------------------
1996 1995 1995 1994 1993
------- -------- -------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Balance at beginning of year.... $97,420 $197,984 $197,984 $237,954 $ --
Change in allowance for
uncollected interest........... (1,095) -- (100,564) (39,970) 252
Allocation from allowance for
loan losses.................... -- -- -- -- 237,702
------- -------- -------- -------- --------
Balance at end of year.......... $96,325 $197,984 $ 97,420 $197,984 $237,954
======= ======== ======== ======== ========
</TABLE>
F-9
<PAGE>
HOME FEDERAL SAVINGS AND LOAN ASSOCIATION OF ELGIN
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(5) OFFICE PROPERTIES AND EQUIPMENT
A comparative summary of office properties and equipment follows:
<TABLE>
<CAPTION>
DECEMBER 31,
MARCH 31, -----------------------
1996 1995 1994
----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Land....................................... $ 1,582,241 $ 1,582,241 $ 1,825,079
Office buildings........................... 4,869,134 4,823,178 4,613,996
Office building improvements............... 1,688,413 1,688,413 1,649,081
Leasehold improvements..................... 230,656 230,656 230,656
Parking lot improvements................... 246,837 246,837 183,810
Furniture, fixtures, and equipment......... 5,452,319 5,383,454 5,032,536
Automobiles................................ 152,551 152,551 157,518
----------- ----------- -----------
14,222,152 14,107,330 12,692,676
Less accumulated depreciation and
amortization.............................. 7,422,359 7,290,042 6,618,742
----------- ----------- -----------
$ 6,799,792 $ 6,817,288 $ 6,073,934
=========== =========== ===========
</TABLE>
Depreciation and amortization expense was $159,762 and $164,667 for the
three months ended March 31, 1996 and 1995 (unaudited), respectively, and
$740,415, $701,679 and $590,616 for the years ended December 31, 1995, 1994,
and 1993, respectively.
(6) SAVINGS DEPOSITS
Savings deposits are summarized as follows:
<TABLE>
<CAPTION>
STATED OR WEIGHTED
AVERAGE INTEREST RATE DECEMBER 31,
-------------------------- -----------------------------------------
DECEMBER 31, MARCH 31, 1996 1995 1994
MARCH 31, ------------ -------------------- -------------------- --------------------
1996 1995 1994 AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
----------- ------ ------ ------------ ------- ------------ ------- ------------ -------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
NOW/Super NOW accounts.. 2.25% 2.25% 2.25% $ 46,134,119 17.5% $ 45,001,086 17.3% $ 48,834,207 18.2%
Money market accounts... 3.22 3.22 3.22 17,789,786 6.7 17,684,571 6.8 23,545,363 8.8
Passbook accounts....... 3.00 3.04 3.00 66,341,744 25.1 65,260,988 25.1 74,523,876 27.8
Noninterest-bearing NOW
accounts............... -- -- -- 4,901,430 1.8 5,178,954 2.0 -- --
---- ------ ------ ------------ ----- ------------ ----- ------------ -----
135,167,079 51.1 133,125,599 51.2 146,903,446 54.8
---- ------ ------ ------------ ----- ------------ ----- ------------ -----
Certificate accounts.... 5.68 5.89 4.46 129,317,794 48.9 126,846,197 48.8 121,034,585 45.2
---- ------ ------ ------------ ----- ------------ ----- ------------ -----
4.14% 4.25% 3.83% $264,484,873 100.0% $259,971,796 100.0% $267,938,031 100.0%
==== ====== ====== ============ ===== ============ ===== ============ =====
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------------------
MARCH 31, 1996 1995 1994
-------------------- -------------------- --------------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
------------ ------- ------------ ------- ------------ -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Contractual maturity of
certificate accounts:
Under 12 months....... $ 73,623,064 56.9% $ 73,924,892 58.3% $ 75,000,625 62.0%
12 months to 36
months............... 27,164,143 21.0 25,344,322 20.0 25,423,698 21.0
Over 36 months........ 28,530,587 22.1 27,576,983 21.7 20,610,262 17.0
------------ ----- ------------ ----- ------------ -----
$129,317,794 100.0% $126,846,197 100.0% $121,034,585 100.0%
============ ===== ============ ===== ============ =====
</TABLE>
F-10
<PAGE>
HOME FEDERAL SAVINGS AND LOAN ASSOCIATION OF ELGIN
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
The aggregate amount of savings deposits $100,000 and greater was
approximately $17,415,000 at March 31, 1996 (unaudited) and $17,068,000 and
$16,417,000 at December 31, 1995 and 1994, respectively. The deposits in
excess of $100,000 are not insured by the Federal Deposit Insurance
Corporation.
In December 1994, the Association sold branches in Woodstock and DeKalb,
Illinois. Included in these sales was the assumption of savings deposits by
the purchaser of approximately $21,800,000. The Association recorded gains on
the sale of branches of approximately $1,683,000. In December 1993, the
Association sold a branch in St. Charles, Illinois. Included in the sale was
the assumption of savings deposits by the purchaser of approximately
$18,100,000. The Association recorded a gain on the sale of the branch of
approximately $822,000.
Interest expense on savings deposits is summarized as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31, YEAR ENDED DECEMBER 31,
--------------------- -----------------------------------
1996 1995 1995 1994 1993
---------- ---------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
NOW/Super NOW accounts.. $ 229,088 $ 235,359 $ 979,694 $ 1,066,214 $ 1,150,927
Money market accounts... 142,066 160,314 565,157 766,400 1,001,038
Passbook accounts....... 516,003 549,974 2,137,021 2,626,526 2,717,518
Certificate accounts.... 1,848,794 1,602,199 7,091,556 5,985,319 6,791,294
---------- ---------- ----------- ----------- -----------
$2,735,951 $2,547,846 $10,773,428 $10,444,459 $11,660,777
========== ========== =========== =========== ===========
</TABLE>
(7) BORROWED FUNDS
At December 31, 1995, borrowed funds consisted of advances from the Federal
Home Loan Bank of Chicago of $4,000,000, which were due on demand under an
open line of credit. The interest rate on the advances at December 31, 1995
was 5.3%. The Association has a collateral pledge agreement whereby it agrees
to keep on hand, free of all other pledges, loans, and encumbrances,
performing loans with unpaid principal balances aggregating no less than 167%
of the outstanding secured advances. All stock in the Federal Home Loan Bank
of Chicago and all mortgage-backed securities are also pledged as additional
collateral for advances.
(8) REGULATORY CAPITAL
The Office of Thrift Supervision regulations require all savings
institutions to meet three capital requirements: a tangible capital to
adjusted total assets ratio of 1.5%, a core capital to adjusted total assets
ratio of 3.0%, and a risk-based capital to total risk weighted assets ratio of
8.0%. At March 31, 1996 (unaudited) and December 31, 1995 and 1994, the
Association was in compliance with each of these capital requirements.
F-11
<PAGE>
HOME FEDERAL SAVINGS AND LOAN ASSOCIATION OF ELGIN
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(9) INCOME TAXES
Income tax expense is summarized as follows:
<TABLE>
<CAPTION>
THREE MONTHS
ENDED MARCH 31, YEAR ENDED DECEMBER 31,
----------------- --------------------------------
1996 1995 1995 1994 1993
-------- -------- ---------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Current:
Federal.................... $231,115 $305,629 $1,131,782 $2,137,909 $1,915,455
State...................... 44,442 64,430 310,130 454,611 318,064
-------- -------- ---------- ---------- ----------
275,557 370,059 1,441,912 2,592,520 2,233,519
-------- -------- ---------- ---------- ----------
Deferred:
Federal.................... 44,564 57,017 138,478 427,152 649,330
State...................... 10,143 13,511 31,506 97,199 114,736
-------- -------- ---------- ---------- ----------
54,707 70,528 169,984 524,351 764,066
-------- -------- ---------- ---------- ----------
$330,264 $440,587 $1,611,896 $3,116,871 $2,997,585
======== ======== ========== ========== ==========
</TABLE>
The reasons for the difference between the effective tax rate and the
corporate Federal income tax rate are summarized as follows:
<TABLE>
<CAPTION>
THREE
MONTHS
ENDED YEAR ENDED
MARCH 31, DECEMBER 31,
------------ ----------------
1996 1995 1995 1994 1993
----- ----- ---- ---- ----
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Federal income tax rate........................ 34.0% 34.0% 34.0% 34.0% 34.0%
Items affecting Federal income tax rate:
State income taxes, net of Federal income tax
benefit..................................... 4.3 4.5 5.9 4.9 4.2
Tax expense on recomputed base year tax
reserve..................................... -- -- -- 2.4 3.4
Other, net................................... .9 .3 .6 .4 (2.2)
----- ----- ---- ---- ----
Effective income tax rate...................... 39.2% 38.8% 40.5% 41.7% 39.4%
===== ===== ==== ==== ====
</TABLE>
Effective January 1, 1993, the Association adopted the provisions of
Statement 109 on a prospective basis. The cumulative effect of the change in
method of accounting for income taxes decreased earnings by $348,742 for the
year ended December 31, 1993 and is reported separately in the statement of
earnings.
F-12
<PAGE>
HOME FEDERAL SAVINGS AND LOAN ASSOCIATION OF ELGIN
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities are presented
below (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
MARCH 31, -------------
1996 1995 1994
----------- ------ ------
(UNAUDITED)
<S> <C> <C> <C>
Deferred tax assets:
Deferred loan fees................................. $ 783 $ 824 $ 990
General allowance for losses on loans.............. 395 383 347
Future benefit state tax expense................... 46 58 47
Pension expense.................................... 46 46 5
------ ------ ------
Total gross deferred tax assets.................. 1,270 1,311 1,389
------ ------ ------
Deferred tax liabilities:
Excess of tax bad debt reserve over base year
amount............................................ 1,865 1,849 1,731
Dividends received in stock, not recognized for tax
purposes.......................................... 193 193 174
Depreciation....................................... 184 186 231
------ ------ ------
Total gross deferred tax liabilities............. 2,242 2,228 2,136
------ ------ ------
Net deferred tax liabilities..................... $ 972 $ 917 $ 747
====== ====== ======
</TABLE>
No valuation allowance for deferred tax assets at March 31, 1996
(unaudited), and December 31, 1995 and 1994 has been recorded as the
Association believes it is more likely than not that the deferred tax assets
will be realized in the future.
Retained earnings at March 31, 1996 (unaudited) and December 31, 1995 and
1994 include $4,798,000 for which no provision for Federal income tax has been
made. These amounts represent allocations of income to bad debt deductions for
tax purposes only. Reduction of amounts so allocated for purposes other than
tax bad debt losses will create income for tax purposes only, which will be
subject to the then current corporate income tax rate.
(10) PENSION PLAN
The Association has a noncontributory pension covering qualified employees.
The Association's pension plan financial data is shown below:
Funded Status
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1995 1994
---------- ----------
<S> <C> <C>
Actuarial present value of benefit obligations:
Accumulated benefit obligation, including vested
benefits of $1,193,042 and $695,123 at 1995 and
1994, respectively................................. $1,244,941 $ 733,068
========== ==========
Projected benefit obligation.......................... 2,308,703 1,598,650
Plan assets at fair value............................. 1,464,018 1,220,351
---------- ----------
Projected benefit obligation greater than plan assets. 844,685 378,299
Unrecognized net gain (loss) from past experience
different from that assumed and effects of changes in
assumptions.......................................... (562,635) 16,288
Unrecognized net asset at January 1, 1987 being
recognized over 14 years............................. 58,965 70,748
Unrecognized prior service cost....................... (75,935) (82,521)
---------- ----------
Accrued pension cost.................................. $ 265,080 $ 382,814
========== ==========
</TABLE>
F-13
<PAGE>
HOME FEDERAL SAVINGS AND LOAN ASSOCIATION OF ELGIN
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Net Periodic Pension Cost
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------
1995 1994 1993
-------- -------- --------
<S> <C> <C> <C>
Service cost...................................... $114,166 $202,076 $158,013
Interest cost on projected benefit obligation..... 129,277 149,784 194,631
Actual return on plan assets...................... (88,394) (223,275) (145,316)
Net amortization and deferral..................... (15,921) 190,295 14,154
-------- -------- --------
Net periodic pension cost......................... $139,128 $318,880 $221,482
======== ======== ========
</TABLE>
The rates used in the actuarial valuations are as follows:
<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Discount rate........................................... 7.25% 8.75% 7.25%
Long-term rate of return................................ 8.00 8.00 8.00
Salary progression...................................... 6.00 6.00 6.00
</TABLE>
Total pension expense was $69,315 and $42,727 for the three months ended
March 31, 1996 and 1995 (unaudited), respectively, and $170,907, $348,731, and
$674,726 for the years ended December 31, 1995, 1994 and 1993, respectively.
(11) COMMITMENTS AND CONTINGENCIES
At December 31, 1995 the Association was obligated under operating leases on
property used for branch operations and for certain equipment. Rental expense
under these leases were approximately $20,000 and $19,000 for the three months
ended March 31, 1996 and 1995 (unaudited), respectively, and $75,000,
$144,000, and $223,000 for the years ended December 31, 1995, 1994, and 1993,
respectively. The lease term expires in 1996. Future required minimum annual
rental payments under noncancelable lease agreements are as follows:
<TABLE>
<CAPTION>
AMOUNT
--------
<S> <C>
Year ended December 31:
1996........................................................... $ 60,000
1997........................................................... 28,000
1998........................................................... 27,000
1999........................................................... 27,000
2000........................................................... 27,000
--------
$169,000
========
</TABLE>
The Association is involved in various legal proceedings incidental to the
normal course of business. Although the outcome of such litigation cannot be
predicted with any certainty, management is of the opinion, based on the
advice of legal counsel, that final disposition of litigation, both
individually and in the aggregate, should not have a material effect on the
financial statements of the Association.
(12) CONCENTRATIONS OF CREDIT RISK AND FINANCIAL INSTRUMENTS WITH OFF-BALANCE
SHEET RISK
The Association is a party to financial instruments with off-balance sheet
risk in the normal course of its business. These instruments represent
commitments to originate first mortgage loans which the Association plans to
fund within the normal commitment period of 60 to 180 days.
F-14
<PAGE>
HOME FEDERAL SAVINGS AND LOAN ASSOCIATION OF ELGIN
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Substantially all of the Association's mortgage loans are secured by single-
family homes in the northwestern suburban area of Chicago. The Association
evaluated each customer's creditworthiness on a loan-by-loan basis, thus the
Association adequately controls its credit risk on these commitments, as it
does for loans recorded on the balance sheet. At December 31, 1995 the
Association had commitments to originate fixed and variable rate mortgage
loans of approximately $2,638,000 and $1,035,000, respectively, at rates
ranging between 6.625% and 7.875%. At March 31, 1996 (unaudited), the
Association had commitments to originate fixed and variable rate mortgage
loans of approximately $4,135,000 and $905,000, respectively, at rates ranging
between 6.25% and 7.75%.
(13) FAIR VALUES OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107, "Disclosures About Fair
Value of Financial Instruments" (Statement 107), requires the disclosure of
estimated fair values of all asset, liability, and off-balance sheet financial
instruments. Statement 107 defines fair value as the amount at which the
instrument could be exchanged in a current transaction between willing
parties. Fair value estimates, methods, and assumptions are set forth below
for the Association's financial instruments.
<TABLE>
<CAPTION>
MARCH 31, 1996 DECEMBER 31, 1995 DECEMBER 31, 1994
------------------------- ------------------------- -------------------------
CARRYING ESTIMATED CARRYING ESTIMATED CARRYING ESTIMATED
AMOUNT FAIR VALUE AMOUNT FAIR VALUE AMOUNT FAIR VALUE
------------ ------------ ------------ ------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Financial assets:
Cash and due from
banks................. $ 9,077,630 $ 9,077,630 $ 10,021,150 $ 10,021,150 $ 9,656,033 $ 9,656,033
Interest-earning
deposits.............. 15,161,337 15,161,337 8,588,077 8,588,077 8,561,613 8,561,613
Investment securities
held-to-maturity...... 5,955,000 5,985,000 5,947,500 6,030,000 5,917,500 5,662,500
Loans receivable....... 267,127,734 265,941,498 270,287,762 272,785,658 274,242,783 268,495,604
Mortgage-backed
securities held-to-
maturity.............. 173,252 172,702 186,536 192,829 242,837 233,310
Accrued interest
receivable............ 1,546,742 1,546,742 1,483,915 1,483,915 1,270,541 1,270,541
Federal Home Loan Bank
of Chicago stock...... 2,678,000 2,678,000 3,056,200 3,056,200 3,009,900 3,009,900
------------ ------------ ------------ ------------ ------------ ------------
Total financial
assets............... $301,719,695 $300,562,909 $299,571,140 $302,157,829 $302,901,207 $296,889,501
============ ============ ============ ============ ============ ============
Financial liabilities:
Nonmaturing savings
deposits.............. $135,167,079 135,167,079 133,125,599 133,125,599 146,903,446 146,903,446
Savings deposits with
stated maturities..... 129,317,794 131,026,832 126,846,197 128,376,571 121,034,585 120,058,544
Borrowed funds......... -- -- 4,000,000 4,000,000 -- --
Accrued interest
payable............... 111,343 111,343 160,262 160,262 120,078 120,078
------------ ------------ ------------ ------------ ------------ ------------
Total financial
liabilities.......... $246,596,216 $266,305,254 $264,132,058 $265,612,432 $268,058,109 $267,082,068
============ ============ ============ ============ ============ ============
</TABLE>
Cash and Due from Banks and Interest-earning Deposits
The carrying value of cash and due from banks and interest-earning deposits
approximates fair value due to the short period of time between origination of
the instruments and their expected realization.
Investment and Mortgage-backed Securities Held-to-maturity
The fair value of investment and mortgage-backed securities held-to-maturity
is estimated based on quoted market prices.
F-15
<PAGE>
HOME FEDERAL SAVINGS AND LOAN ASSOCIATION OF ELGIN
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Loans Receivable
Fair values are estimated for portfolios of loans with similar financial
characteristics. Loans are segregated by type and then further segmented into
fixed and variable rate interest terms and by performing and nonperforming
categories. The fair value of performing fixed rate loans is calculated by
discounting contractual cash flows adjusted for prepayment estimates using
discount rates based on new loan rates adjusted to reflect differences in
servicing and credit costs. For variable rate loans, fair value is estimated
to be book value as these loans reprice frequently or have a relatively short
term to maturity and there has been little or no change in credit quality
since origination. Fair value for nonperforming loans is calculated by
discounting estimated future cash flows using a C-rated bond yield with
principal and interest assumed paid in 18 months.
Accrued Interest Receivable
The carrying amount of accrued interest receivable approximates its fair
value due to the relatively short period of time between accrual and expected
realization.
Federal Home Loan Bank of Chicago Stock
The fair value of this stock is based on its redemption value.
Savings Deposits
Under Statement 107, the fair value of savings deposits with no stated
maturity, such as noninterest-bearing demand deposits, NOW/Super NOW accounts,
money market accounts, and passbook accounts, is equal to the amount payable
on demand as of March 31, 1996, December 31, 1995 and 1994. The fair value of
certificates of deposit is based on the discounted value of contractual cash
flows. The fair value estimates do not include the benefit that results from
the low-cost funding provided by the deposit liabilities compared to the cost
of borrowing funds in the market.
Borrowed Funds
The fair value of advances from the Federal Home Loan Bank of Chicago is
equal to the amount payable on demand as of December 31, 1995 due to the
variable interest rate on the debt.
Accrued Interest Payable
The carrying amount of accrued interest payable approximates its fair value
due to the relatively short period of time between accrual and expected
realization.
Limitations
The fair value estimates are made at a specific point in time based on
relevant market information and information about the financial instrument.
Because no market exists for a significant portion of the Association's
financial instruments, fair value estimates are subjective in nature and
involve uncertainties and matters of significant judgment and therefore cannot
be determined with precision. Changes in assumptions could significantly
affect the estimates.
In addition, the fair value estimates are based on existing on- and off-
balance sheet financial instruments without attempting to estimate the value
of anticipated future business and the value of assets and liabilities that
are not considered financial instruments. Significant assets and liabilities
that are not considered financial assets or liabilities include the mortgage
origination operation, deferred taxes, and property, plant, and equipment. In
addition, the tax ramifications related to the realization of unrealized gains
and losses can have a significant effect on fair value estimates and have not
been considered in any of the estimates.
F-16
<PAGE>
HOME FEDERAL SAVINGS AND LOAN ASSOCIATION OF ELGIN
NOTES TO FINANCIAL STATEMENTS--(CONCLUDED)
(14)CONVERSION TO STOCK FORM OF OWNERSHIP (UNAUDITED)
On April 18, 1996, the Board of Directors adopted a Plan of Conversion
(Plan) (which was amended on June 6, 1996) whereby the Association will
convert from a federally chartered mutual thrift to a federally chartered
stock savings and loan association. The Plan is subject to approval of
regulatory authorities and members at a special meeting. The stock of the
Association will be issued to a holding company formed in connection with the
conversion. Pursuant to the Plan, shares of capital stock of the holding
company are expected to be offered initially for subscription by eligible
members of the Association and certain other persons as of specified dates
subject to various subscription priorities as provided in the Plan. The
capital stock will be offered at a price to be determined by the Board of
Directors based upon an appraisal to be made by an independent appraisal firm.
The exact number of shares to be offered will be determined by the Board of
Directors in conjunction with the determination of the price at which the
shares will be sold. At least the minimum number of shares offered in the
conversion must be sold. Any stock not purchased in the subscription offering
will be sold in a community offering.
The Plan provides that when the conversion is completed, a "Liquidation
Account" will be established in an amount equal to the retained earnings of
the Association as of the date of the most recent financial statements
contained in the final conversion prospectus. The Liquidation Account is
established to provide a limited priority claim on the assets of the
Association to qualifying depositors (Eligible and Supplemental Eligible
Account Holders) who continue to maintain deposits in the Association after
conversion. In the unlikely event of a complete liquidation of the
Association, and only in such an event, each Eligible Account Holder would
then receive from the Liquidation Account a liquidation distribution based on
his proportionate share of the then total remaining qualifying deposits.
Current regulations allow the Association to pay dividends on its stock
after the conversion if its regulatory capital would not thereby be reduced
below the amount then required for the aforementioned Liquidation Account.
Also, capital distribution regulations limit the Association's ability to make
capital distributions which include dividends, stock redemptions or
repurchases, cash-out mergers, interest payments on certain convertible debt
and other transactions charged to the capital account based on their capital
level and supervisory condition. Federal regulations also preclude any
repurchase of the stock of the Association or its holding company for three
years after conversion except for repurchases of qualifying shares of a
director and repurchases pursuant to an offer made on a pro rata basis to all
stockholders and with prior approval of the Office of Thrift Supervision; or
pursuant to an open-market stock repurchase program that complies with certain
regulatory criteria. The Association has retained the services of both an
underwriting firm and legal counsel for the specific purpose of implementing
the Association's plan of conversion. At March 31, 1996 (unaudited), the
Association had incurred approximately $47,350 in costs relating to these
services. These costs have been deferred and, upon conversion, such costs and
any additional costs will be charged against the proceeds from the sale of
stock. If the conversion is not completed, these deferred costs will be
charged to operations.
F-17
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<PAGE>
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- --------------------------------------------------------------------------------
NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION OTHER THAN AS CONTAINED IN THIS
PROSPECTUS IN CONNECTION WITH THE OFFERING MADE HEREBY, AND, IF GIVEN OR MADE,
SUCH OTHER INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY HOME BANCORP OF ELGIN, INC., HOME FEDERAL SAVINGS AND LOAN
ASSOCIATION OF ELGIN OR HOVDE SECURITIES, INC. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY OF THE
SECURITIES OFFERED HEREBY TO ANY PERSON IN ANY JURISDICTION IN WHICH SUCH OFFER
OR SOLICITATION IS NOT AUTHORIZED OR IN WHICH THE PERSON MAKING SUCH OFFER OR
SOLICITATION IS NOT QUALIFIED TO DO SO, OR TO ANY PERSON TO WHOM IT IS UNLAWFUL
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 HOME BANCORP OF
ELGIN, INC. OR HOME FEDERAL SAVINGS AND LOAN ASSOCIATION OF ELGIN SINCE ANY OF
THE DATES AS OF WHICH INFORMATION IS FURNISHED HEREIN OR SINCE THE DATE HEREOF.
---------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Summary................................................................... 5
Selected Financial and Other Data of the Association...................... 15
Recent Developments....................................................... 17
Risk Factors.............................................................. 23
Home Bancorp of Elgin, Inc................................................ 31
Home Federal Savings and Loan Association of Elgin........................ 31
Use of Proceeds........................................................... 32
Dividend Policy........................................................... 34
Market for the Common Stock............................................... 34
Regulatory Capital Compliance............................................. 35
Capitalization............................................................ 36
Pro Forma Data............................................................ 37
Home Federal Savings and Loan Association of Elgin Statements of Earnings. 42
Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... 43
Business of the Company................................................... 59
Business of the Association............................................... 60
Federal and State Taxation................................................ 77
Regulation................................................................ 80
Management of the Company................................................. 90
Management of the Association............................................. 91
The Conversion............................................................ 102
Restrictions on Acquisition of the Company and the Association............ 120
Description of Capital Stock of the Company............................... 126
Description of Capital Stock of the Association........................... 127
Transfer Agent and Registrar.............................................. 128
Experts................................................................... 128
Legal and Tax Opinions.................................................... 128
Additional Information.................................................... 129
Index to Financial Statements............................................. F-1
</TABLE>
---------------
UNTIL THE LATER OF SEPTEMBER 10, 1996 OR 25 DAYS AFTER THE COMMENCEMENT OF THE
COMMUNITY OFFERING, IF ANY, ALL DEALERS EFFECTING TRANSACTIONS IN THE
REGISTERED SECURITIES, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY
BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATION OF
DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO
THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
6,095,000 SHARES
[LOGO OF HOME BANCORP OF ELGIN, INC.]
(PROPOSED HOLDING COMPANY FOR
HOME FEDERAL SAVINGS AND LOAN ASSOCIATION OF ELGIN)
COMMON STOCK
---------------
PROSPECTUS
---------------
HOVDE SECURITIES, INC.
AUGUST 8, 1996
- --------------------------------------------------------------------------------
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