<PAGE>
REGISTRATION NO. 333-05909
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------
PRE-EFFECTIVE AMENDMENT NO. 2 TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
--------------------------
HOME BANCORP OF ELGIN, INC.
(Exact name of registrant as specified in its charter)
--------------------------
<TABLE>
<S> <C> <C>
DELAWARE 6035 36-4090333
(State or other jurisdiction (Primary Standard (IRS Employer
of incorporation or organization) Classification Code No.) Identification No.)
</TABLE>
16 NORTH SPRING STREET
ELGIN, ILLINOIS 60120
(847) 742-3800
(Address, including zip code, and telephone number,
including area code, of registrant's principal executive offices)
--------------------------
GEORGE L. PERUCCO
PRESIDENT AND CHIEF EXECUTIVE OFFICER
HOME BANCORP OF ELGIN, INC.
16 NORTH SPRING STREET
ELGIN, ILLINOIS 60120
(847) 742-3800
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
--------------------------
WITH COPIES TO:
JOHN E. FREECHACK, ESQ.
V. GERARD COMIZIO, ESQ. BARACK, FERRAZZANO,
THACHER PROFFITT & WOOD KIRSCHBAUM & PERLMAN
1500 K STREET, N.W. 333 W. WACKER DRIVE
WASHINGTON, D.C. 20005 CHICAGO, ILLINOIS 60606
(202) 347-8400 (312) 984-3100
--------------------------
Approximate date of commencement of proposed sale to public: As soon as
practicable after this Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box [ ]
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, please check the following box and list
the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434, check
the following box. [ ]
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
==================================================================================================================================
Title of Securities to be Amount to be Registered(1) Proposed Maximum Proposed Maximum Aggregate Amount of
Registered Offering Price Per Offering Price (2) Registration Fee
Share(2)
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, par value $.01 7,604,375 $10.00 $76,043,750 (3)
per share shares
==================================================================================================================================
</TABLE>
(1) Includes the maximum number of shares that may be issued in connection with
this offering, based on various assumptions relating thereto.
(2) Estimated solely for the purpose of calculating the registration fee.
(3) A Registration fee of $26,222 was paid with the Registrant's filing of the
Form S-1 with the Commission on June 13, 1996.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE
SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SECTION 8(a), MAY
DETERMINE.
<PAGE>
HOME BANCORP OF ELGIN, INC.
---------------------------
Cross Reference Sheet showing location in the Prospectus of information required
by Items of Form S-1:
<TABLE>
<CAPTION>
REGISTRATION STATEMENT ITEM AND CAPTION LOCATION OR HEADINGS IN PROSPECTUS
- --------------------------------------- ----------------------------------
<S> <C>
1. Forepart of the Registration Statement Outside Front Cover Page
and Outside Front Cover Page of
Prospectus
2. Inside Front and Outside Back Cover Inside Front and Outside Back Cover Pages
Pages of Prospectus
3. Summary Information, Risk Factors and Summary; Risk Factors
Ratio of Earnings to Fixed Charges
4. Use of Proceeds Use of Proceeds
5. Determination of Offering Price The Conversion -- Stock Pricing; -- Number of Shares
to be Issued
6. Dilution Not Applicable
7. Selling Security Holders Not Applicable
8. Plan of Distribution Outside Front Cover Page; The Conversion --
Subscription Offering and Subscription Rights; --
Community Offering; -- Syndicated Community
Offering; -- Public Offering Alternative; -- Marketing
Arrangements and Underwriting; -- Procedure for
Purchasing Shares in Subscription and Community
Offerings
9. Description of Securities to be The Conversion -- Certain Restrictions on Purchase or
Registered Transfer of Shares After Conversion; Restrictions on
Acquisition of the Company and the Association;
Description of Capital Stock of the Company;
Description of Capital Stock of the Association
10. Interests of Named Experts and Counsel Not Applicable
11. Information with Respect to the Outside Front Cover Page; Recent Developments;
Registrant Selected Consolidated Financial and Other Data of the
Association; Home Bancorp of Elgin, Inc.; Home
Federal Savings and Loan Association of Elgin; Dividend
Policy; Market for the Common Stock; Management's
Discussion and Analysis of Financial Condition and
Results of Operations; Business of the Company;
Business of the Association; Regulation; Management of
the Company; Management of the Association; The
Conversion; Description of Capital Stock of the
Company; Description of Capital Stock of the
Association; Financial Statements
12. Disclosure of Commission Position on Not Applicable
Indemnification for Securities Act
Liabilities
</TABLE>
<PAGE>
[To be used in connection with the Syndicated Community Offering only]
PROSPECTUS SUPPLEMENT
HOME BANCORP OF ELGIN, INC.
(PROPOSED HOLDING COMPANY FOR
HOME FEDERAL SAVINGS AND LOAN ASSOCIATION OF ELGIN)
________ SHARES OF COMMON STOCK
FOR INFORMATION ON HOW TO SUBSCRIBE FOR THE COMMON STOCK, CALL THE STOCK
INFORMATION CENTER AT (847) 289-3010
FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED BY EACH
PROSPECTIVE INVESTOR, SEE "RISK FACTORS" BEGINNING ON PAGE ___ OF THE
PROSPECTUS.
Home Bancorp of Elgin, Inc. (the "Company"), a Delaware corporation, is
offering for sale in a syndicated community offering (the "Syndicated Community
Offering") ____________ shares of its common stock, par value $.01 per share
(the "Common Stock"), at a per share price of $10.00, to be issued upon 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 and the issuance of the
Association's outstanding common stock to the Company pursuant to a plan of
conversion (the "Plan of Conversion"). The remaining ____________ shares of the
Common Stock have been subscribed for in subscription and community offerings
(the "Subscription and Community Offerings") by (i) the Association's depositors
whose deposits in qualifying amounts totalled $50 or more on March 31, 1995 (the
"Eligible Account Holders"); (ii) the Employee Stock Ownership Plan of Home
Bancorp of Elgin, Inc. and related trust (the "ESOP"); (iii) the Association's
depositors whose deposits in qualifying amounts totalled $50 or more on June 30,
1996 (other than Eligible Account Holders or directors or officers of the
Association or their associates); (iv) certain other members of the Association,
consisting of depositors and borrowers of the Association as of _______ __,
1996; and (v) certain members of the general public. See "The Conversion --
General." Contained herein is the Prospectus in the form used in the
Subscription and Community Offerings. The purchase price for all shares
purchased in the Syndicated Community Offering will be the same as the price
paid by subscribers in the Subscription and Community Offerings (the "Purchase
Price"). The Purchase Price of $10.00 per share is the amount to be paid for
each share at the time a purchase order is submitted. See the cover page of the
Prospectus and the table below for information as to the method by which the
range within which the number of shares offered may vary and the method of
subscribing for shares of the Common Stock.
Funds submitted to the Association with purchase orders will earn interest at
the Association's passbook rate of interest from the date of receipt until
completion or termination of the Conversion. The Syndicated Community Offering
will expire no later than ____________, 1996, unless extended by the Association
and the Company with the approval of the Office of Thrift Supervision (the
"OTS"). Such extensions may not go beyond ____________, 1998. If an extension
of time has been granted, all subscribers will be notified of such extension,
and of their rights to confirm their subscriptions, or to modify or rescind
their subscriptions and have their funds returned promptly with interest, and of
the time period within which the subscriber must notify the Association of its
intention to confirm, modify or rescind such subscriber's
<PAGE>
subscription. 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. The
minimum number of shares that may be purchased is 25 shares. Except for the
ESOP, which intends to purchase up to 8% of the total number of shares of Common
Stock issued in the Conversion, no person, together with associates of and
persons acting in concert with such person, may purchase more than the total
number of shares offered in the Community Offering and the Syndicated Community
Offering that could be purchased for $200,000 (20,000 shares) at the Purchase
Price and no person, together with associates of and persons acting in concert
with such person, may purchase more than 1.0% of the total number of shares
issued in the Conversion. See "Plan of Conversion --Subscription Offering and
Subscription Rights" and "-- and Limitations on Common Stock Purchases." 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
Syndicated Community Offering.
The Company and the Association have engaged Hovde Securities, Inc. ("Hovde")
to assist them in the sale of the Common Stock in the Syndicated Community
Offering. It is anticipated that Hovde will use the services of other
registered broker-dealers ("Selected Dealers") and that fees to Hovde and such
Selected Dealers will be ________% of the aggregate Purchase Price of the shares
sold in the Syndicated Community Offering. Neither Hovde nor any Selected
Dealer shall have any obligation to take or purchase any shares of Common Stock
in the Syndicated Community Offering.
The Common Stock has been approved for quotation upon issuance on the Nasdaq
National Market of The Nasdaq Stock Market under the symbol "HBEI." 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. The absence or discontinuance of a market may have
an adverse impact on both the price and liquidity of the stock.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION, THE OFFICE OF THRIFT SUPERVISION, DEPARTMENT OF THE
TREASURY, OR ANY OTHER FEDERAL AGENCY OR ANY STATE SECURITIES COMMISSION, NOR
HAS SUCH COMMISSION, OFFICE, 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.
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.
<PAGE>
<TABLE>
<CAPTION>
ESTIMATED NET
ESTIMATED PROCEEDS OF
NET SUBSCRIPTION,
ESTIMATED PROCEEDS OF COMMUNITY AND
SYNDICATED UNDERWRITING SYNDICATED SYNDICATED
COMMUNITY COMMISSIONS AND COMMUNITY COMMUNITY
OFFERING PRICE OTHER EXPENSES(1) OFFERING OFFERINGS(2)(3)
<S> <C> <C> <C> <C>
Minimum Per Share $10.00 $ $ $
Midpoint Per Share $10.00 $ $ $
Maximum Per Share $10.00 $ $ $
Total Minimum(4) $ $ $ $
Total Midpoint $ $ $ $
Total Maximum(4) $ $ $ $
Total Maximum, As $ $ $ $
Adjusted(5)
==========================================================================================
</TABLE>
(1) Consists of a pro rata allocation of estimated expenses of the Association
and Company in connection with the Conversion (other than estimated fees to
be paid to Hovde for services in connection with the Subscription and
Community Offerings) and estimated compensation of Hovde and Selected
Dealers in connection with the sale of the remaining shares in the
Syndicated Community Offering, which fees are estimated to be $____________
million and $____________ million, respectively, at the minimum and the
maximum of the estimated price range and may be deemed to be underwriting
fees. The information under "Pro Forma Data" in the Prospectus was based on
the assumptions stated therein, which may differ from the estimates used for
this table. See "The Conversion -- Marketing and Underwriting Arrangements"
for a more detailed discussion of fee arrangements.
(2) The Company applied to retain up to 50% of the net conversion proceeds. The
balance of the net proceeds will be transferred to the Association in
exchange for all of the capital stock of the Association to be issued in
connection with the Conversion.
(3) The net proceeds of the Subscription and Community Offerings (based upon the
sale of the ____________ shares subscribed for at a price of $10.00 per
share and after allocation of a pro rata portion of the estimated relating
to the Conversion) are estimated to be $____________.
(4) Based on an estimated price range of $____________ to $____________ at
$10.00 per share (the "Estimated Price Range"). The Total Minimum reflects
the sale of ____________ shares at a per share price of $10.00, leaving a
total of ____________ shares to be sold in the Syndicated Community
Offering.
(5) Gives 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 and financial conditions following commencement of the offerings.
See "The Conversion -- Stock Pricing." For a discussion of the distribution
and allocation of the additional shares, see "The Conversion -- Subscription
Offering and Subscription Rights" and "-- Limitations on Common Stock
Purchases."
Hovde Securities, Inc.
____________________________________
The date of this Prospectus Supplement is ____________, 1996.
<PAGE>
PROSPECTUS
[Logo]
HOME BANCORP OF ELGIN, INC.
(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.
FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED BY EACH
PROSPECTIVE
INVESTOR, SEE "RISK FACTORS" BEGINNING ON PAGE 24 OF THIS PROSPECTUS.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION, THE OFFICE OF THRIFT SUPERVISION OR ANY OTHER
FEDERAL AGENCY OR ANY STATE SECURITIES COMMISSION, NOR HAS SUCH
COMMISSION, OFFICE OR OTHER AGENCY OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF
THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
PURCHASE PRICE(1) ESTIMATED UNDERWRITING ESTIMATED NET
COMMISSIONS AND OTHER PROCEEDS(3)
EXPENSES(2)
<S> <C> <C> <C>
Minimum Per Share............... $ 10.00 $ 0.34 $ 9.66
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
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."
1
<PAGE>
PROSPECTUS
(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
(as defined herein). 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 ___, 1996.
2
<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 their 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
3
<PAGE>
(continued from previous page)
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 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
[ , 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
[_________], 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
Nasdaq 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
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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."
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MAP
[MAP SHOWING BRANCH OFFICES IN ELGIN, CRYSTAL LAKE, ROSELLE, BARTLETT AND
SOUTH ELGIN, ILLINOIS TO BE PROVIDED]
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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
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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.
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, the effects of management's business strategy as noted above
include the following. 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. 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. The Association's 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
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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. 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
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<PAGE>
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 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 new issue market. 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
______ __, 1996, and approval of the Association's members at a special meeting
to be held on ______ __, 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
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qualifying accounts in 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
not 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."
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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 "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,
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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 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
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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 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
14
<PAGE>
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 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.
15
<PAGE>
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 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
16
<PAGE>
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.
17
<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>
<S> <C> <C> <C> <C> <C> <C> <C>
AT MARCH AT DECEMBER 31,
31, -------------------------------------------------------------
1996(1) 1995 1994 1993 1992 1991
----------- ----------- --------- --------- ---------- ----------
(IN THOUSANDS)
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
FOR THE THREE FOR THE YEAR ENDED DECEMBER 31,
MONTHS ENDED ---------------------------------------------------------
MARCH 31,
-----------------------
1996(1) 1995(1) 1995 1994 1993 1992 1991
-------- -------- -------- ------- ------- -------- --------
(IN THOUSANDS)
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 2,773 2,548 10,850 10,484 11,791 14,068 19,071
borrowed funds............................. -------- -------- -------- ------- ------- -------- --------
Net interest income before provision 2,856 3,200 12,075 14,185 15,861 14,571 11,904
for loan losses.......................
Provision for loan losses................... 30 45 180 240 240 256 232
-------- -------- -------- ------- ------- -------- --------
Net interest income after provision 2,826 3,155 11,895 13,945 15,621 14,315 11,672
for loan losses.......................
Noninterest income, excluding gain on sale 319 269 1,150 1,471 1,566 1,244 1,178
of branches................................
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 842 1,136 3,976 7,475 7,607 6,033 3,832
cumulative effect of change in accounting
principle.............................
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 -- -- -- -- 348 -- --
for income taxes (3)....................... -------- -------- -------- ------- ------- -------- --------
Net income............................. $ 512 $ 695 $ 2,364 $ 4,358 $ 4,261 $ 3,768 $ 2,391
======== ======== ======== ======= ======= ======== ========
</TABLE>
(Notes on following page)
18
<PAGE>
<TABLE>
<CAPTION>
AT OR FOR THE THREE AT OR FOR THE YEAR ENDED DECEMBER 31,
MONTHS ENDED ----------------------------------------------------
MARCH 31,
-------------------------
1996(1) 1995(1) 1995 1994(4) 1993(4) 1992 1991
------------ ----------- -------- ---------- ---------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
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.
19
<PAGE>
(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.
20
<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)
SELECTED FINANCIAL CONDITION DATA:
<S> <C> <C> <C> <C>
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
FOR THE FOR THE
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------- ---------
1996 1995 1996 1995
------ ------ -------- --------
(IN THOUSANDS)
SELECTED OPERATING DATA:
Interest income............................... $5,578 $5,793 $ 11,207 $ 11,540
Interest expense on savings deposits and 2,713 2,701 5,486 5,249
borrowed funds............................... ------ ------ -------- --------
Net interest income before 2,865 3,092 5,721 6,291
provision for loan losses...............
Provision for loan losses..................... 30 45 60 90
------ ------ -------- --------
Net interest income after provision for 2,835 3,047 5,661 6,201
loan losses............................. ------ ------ -------- --------
Noninterest income............................ 308 273 627 542
Noninterest expense, excluding 2,323 2,245 4,626 4,532
curtailment of pension plan..................
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)
21
<PAGE>
<TABLE>
<CAPTION>
AT OR FOR AT OR FOR
THE THREE MONTHS THE SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
------------------- ------------------
1996 1995 1996 1995
--------- -------- -------- --------
<S> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
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 111.93 110.88 111.90 110.86
interest-bearing liabilities................
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
22
<PAGE>
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.
23
<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.
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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 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
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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.
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 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,
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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 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.
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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
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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."
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")
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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."
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.
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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 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 the 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."
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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 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."
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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 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."
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<PAGE>
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.
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."
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<PAGE>
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
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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<PAGE>
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
36
<PAGE>
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."
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.
37
<PAGE>
USE OF PROCEEDS
Although the actual net proceeds from the sale of the Common Stock cannot be
determined until the Conversion is completed, it is presently anticipated that
the net proceeds from the sale of the Common Stock will be between $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 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
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<PAGE>
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.
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<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,
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<PAGE>
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.
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<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)
----------------------------------------------------------------------------------
4,505,000 SHARES 5,300,000 SHARES 6,095,000 SHARES 7,009,250 SHARES
HISTORICAL AT (MINIMUM OF (MIDPOINT OF (MAXIMUM OF (15% ABOVE
MARCH 31, 1996 ESTIMATED ESTIMATED ESTIMATED MAXIMUM OF
------------------- PRICE RANGE) PRICE RANGE) PRICE RANGE) ESTIMATED
------------------- ------------------- ------------------- PRICE RANGE) (2)
-------------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
--------- OF --------- OF --------- OF --------- OF --------- OF
ASSETS ASSETS ASSETS ASSETS ASSETS
(3) (3) (3) (3) (3)
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
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% $48,695 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 Plan, which is 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.
42
<PAGE>
(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.
43
<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
----------------------------------------------------------
<S> <C> <C> <C> <C> <C>
7,009,250
4,505,000 5,300,000 6,095,000 SHARES
ASSOCIATION SHARES SHARES SHARES (15% ABOVE
HISTORICAL (MINIMUM OF (MIDPOINT OF (MAXIMUM OF MAXIMUM OF
ESTIMATED ESTIMATED ESTIMATED ESTIMATED
PRICE RANGE RICE RANGE) PRICE RANGE) PRICE RANGE)(1)
------------ ---------- ---------- ----------- ---------------
(IN THOUSANDS)
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 37,195 37,195 37,195 37,195 37,195
restricted (5).............................
LESS:
Common Stock acquired by ESOP (6)........... -- (3,604) (4,240) (4,876) (5,607)
Common Stock acquired by Stock -- (1,802) (2,120) (2,438) (2,804)
Programs (7).............................. -------- --------- --------- --------- ---------
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 adopted 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
approved by the stockholders of the Company, an amount equal to 10% of the
shares of common stock issued in the Conversion will be reserved for
issuance upon the exercise of options to be granted under the Stock Option
Plans. See "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."
44
<PAGE>
(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.
45
<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."
46
<PAGE>
<TABLE>
<CAPTION>
AT OR FOR THE THREE MONTHS ENDED MARCH 31, 1996
--------------------------------------------------------------
<S> <C> <C> <C> <C>
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)
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
========== ========== ========== ==========
</TABLE>
47
<PAGE>
<TABLE>
<CAPTION>
AT OR FOR THE THREE MONTHS ENDED MARCH 31, 1996
--------------------------------------------------------------
<S> <C> <C> <C> <C>
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)
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)
48
<PAGE>
<TABLE>
<CAPTION>
AT OR FOR THE YEAR ENDED DECEMBER 31, 1995
--------------------------------------------------------------
<S> <C> <C> <C> <C>
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)
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
========== ========== ========== ==========
</TABLE>
49
<PAGE>
<TABLE>
<CAPTION>
AT OR FOR THE YEAR ENDED DECEMBER 31, 1995
--------------------------------------------------------------
<S> <C> <C> <C> <C>
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)
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)
50
<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 the 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
51
<PAGE>
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% 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 Plan expected to be adopted by the
Company following the Conversion. If the Company implements the Stock Option
Plan prior to the first anniversary of the Conversion, it will present the
Stock Option Plan 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 Plan is 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 Plan. The issuance
of Common Stock pursuant to the exercise of options under the Stock Option
Plan will result in the dilution of existing stockholders' interests.
Assuming implementation of the Stock Option Plan 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."
52
<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
----------- ----------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
(UNAUDITED)
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 842,196 1,135,534 3,975,913 7,474,618 7,606,879
effect of change in accounting principle..............
Income tax expense...................................... 330,264 440,587 1,611,896 3,116,871 2,997,585
---------- ---------- ----------- ----------- -----------
Income before cumulative effect of change in 511,932 694,947 2,364,017 4,357,747 4,609,294
accounting principle..................................
Cumulative effect of change in accounting for income -- -- -- -- 348,742
taxes................................................. ---------- ---------- ----------- ----------- -----------
Net income....................................... $ 511,932 $ 694,947 $ 2,364,017 $ 4,357,747 $ 4,260,552
========== ========== =========== =========== ===========
</TABLE>
53
<PAGE>
See accompanying "Notes to Financial Statements" presented elsewhere in this
Prospectus.
54
<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.
55
<PAGE>
In particular, the effects of management's business strategy as noted above
include the following. 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. 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. The Association's 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.
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
56
<PAGE>
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 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.
57
<PAGE>
<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
--------- ------------ ------------ ---------- ----------- ---------- -------
INTEREST-EARNING ASSETS: (DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
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 (10.82)% (21.91)% (28.83)% (11.36)% (10.64)% 9.56%
as a percent of total assets................
Cumulative total interest-earning assets 49.80% 40.09% 48.04% 83.37% 86.71% 111.30%
as a percent of cumulative total interest-
bearing liabilities.........................
- --------------------
</TABLE>
(1) Loans receivable represents gross loans less net deferred loan fees and
loans in process.
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.
58
<PAGE>
<TABLE>
<CAPTION>
NET PORTFOLIO VALUE NPV AS % OF ECONOMIC
VALUE OF ASSETS
CHANGE IN AMOUNT $ % NPV RATIO %
INTEREST RATES CHANGE CHANGE CHANGE (1)
IN BASIS POINTS
(RATE SHOCK)
- --------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
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 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
59
<PAGE>
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.
60
<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
----------------- -------------- ----------- -------- -------- ---------- ----------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
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 173 6.99 177 3 6.78 234 4 6.84
securities............
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 18,639 16,644 14,980
assets.................. -------- -------- --------
Total assets........ $ $ $
$306,688 $302,761 $304,205
LIABILITIES AND EQUITY: ======== ======== ========
Interest-bearing
liabilities:
NOW/Super Now accounts. $ 2.25% $ 43,066 $ 229 2.13% $ 43,105 $ 236 2.19%
$ 46,134 3.22 17,678 142 3.21 22,114 160 2.89
Money market accounts..
17,790 3.00 65,773 516 3.14 72,630 550 3.03
Passbook accounts......
66,342 5.68 127,401 1,849 5.81 123,677 1,602 5.18
Certificates of deposit 129,318 -- 2,601 37 5.69 -- -- --
Borrowed funds......... --
-------- ------ -------- ------ ------ -------- ------ ------
Total
interest-bearing
liabilities......... 259,584 4.22% 256,519 $2,773 4.32% 261,526 $2,548 3.90%
-------- ------ -------- ====== ------ -------- ====== ------
Non-interest-bearing NOW 4,901 4,314 2,463
accounts................
Other 5,008 4,904 4,897
non-interest-bearing -------- -------- --------
liabilities.............
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........
====== ======
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>
__________________
61
<PAGE>
(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.
62
<PAGE>
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
----------------------------------------------------------------------------------------------------
1995 1994 1993
-------------------------------- -------------------------------- --------------------------------
AVERAGE INTEREST AVERAGE AVERAGE INTEREST AVERAGE AVERAGE INTEREST AVERAGE
BALANCE --------- YIELD/ BALANCE --------- YIELD/ BALANCE --------- YIELD/
----------- COST ----------- COST ----------- COST
-------- -------- --------
(DOLLARS IN THOUSANDS)
ASSETS:
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
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 259,394 10,850 4.18% 292,793 10,484 3.58% 317,614 11,791 3.71%
liabilities........... -------- ------- ------ -------- ------- ------ -------- ------- ------
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.
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<PAGE>
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 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 DUE TO
--------------------------------------------------------------------------------------------
VOLUME RATE NET VOLUME RATE NET VOLUME RATE NET
------- --------- ------- --------- -------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
(IN THOUSANDS)
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) ( 53 ) $(344) $(2,044) $ (66) $(2,110) $ (816) $ (860) $(1,676)
===== ===== ===== ======= ====== ======= ======= ======= =======
</TABLE>
64
<PAGE>
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.
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
65
<PAGE>
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 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
66
<PAGE>
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.
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.
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<PAGE>
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. 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
68
<PAGE>
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.
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
69
<PAGE>
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 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.
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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.
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.
71
<PAGE>
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.
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
72
<PAGE>
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.
73
<PAGE>
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.
74
<PAGE>
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.
75
<PAGE>
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.
76
<PAGE>
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 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.
77
<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
--------------------------------------------------------------------------------------
PERCENT PERCENT PERCENT PERCENT
AMOUNT OF TOTAL AMOUNT OF TOTAL AMOUNT OF TOTAL AMOUNT OF TOTAL
---------- -------- ---------- -------- ---------- -------- ---------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
MORTGAGE LOANS:
One- to four-family...... $262,056 98.10% $265,115 98.09% $267,727 97.63% $298,117 97.54%
Multifamily.............. 3,056 1.14 3,106 1.15 4,118 1.50 4,587 1.50
Construction and land.... 578 0.22 456 0.17 859 0.31 1,130 0.37
Commercial............... 873 0.33 891 0.33 862 0.31 1,039 0.34
-------- ------ -------- ------ -------- ------ -------- ------
Total mortgage loans.. 266,563 99.79 269,568 99.74 273,566 99.75 304,873 99.75
-------- ------ -------- ------ -------- ------ -------- ------
OTHER LOANS:
Passbook savings (secured 483 0.18 627 0.23 576 0.21 631 0.21
by savings and time
deposits)..............
Consumer installment 82 0.03 92 0.03 100 0.04 120 0.04
loans...................
Home improvement loans... -- -- -- -- -- -- -- --
-------- ------ -------- ------ -------- ------ -------- ------
Total other loans..... 565 0.21 719 0.26 676 0.25 751 0.25
-------- ------ -------- ------ -------- ------ -------- ------
Gross loans...... $267,128 100.00% $270,287 100.00% $274,242 100.00% $305,624 100.00%
======== ====== ======== ====== ======== ====== ======== ======
LESS:
Loans in process......... $ 364 $ 418 $ 150 $ 505
Deferred loan fees....... 1,826 1,890 2,403 ...... 3,034
Allowance for loan losses 856 826 649 409
-------- -------- -------- --------
Loans, net....... $264,082 $267,153 $271,040 $301,676
======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
AT DECEMBER 31,
------------------------------------------
1992 1991
------------------------------------------
PERCENT PERCENT
AMOUNT OF TOTAL AMOUNT OF TOTAL
---------- -------- ---------- --------
<S> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
MORTGAGE LOANS:
One- to four-family...... $284,549 96.92% $260,519 96.22%
Multifamily.............. 5,165 1.76 5,247 1.94
Construction and land.... 1,371 0.47 1,717 0.63
Commercial............... 1,568 0.53 2,294 0.85
-------- ----- -------- ------
Total mortgage loans.. 292,653 99.68 269,777 99.64
-------- ----- -------- ------
OTHER LOANS:
Passbook savings (secured 798 0.27 775 0.29
by savings and time
deposits)..............
Consumer installment 134 0.04 150 0.06
loans...................
Home improvement loans... 17 0.01 58 0.01
-------- ----- -------- ------
Total other loans..... 949 0.32 983 0.36
-------- ----- -------- ------
Gross loans...... $293,602 100.00% $270,760 100.00%
======== ====== ======== ======
LESS:
Loans in process......... $ 876 $ 373
Deferred loan fees....... 2,992 2,551
Allowance for loan losses 548 355
-------- --------
Loans, net....... $289,186 $267,481
======== ========
</TABLE>
78
<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
------------ ---------- ------------ ---------- ----- ---------
<S> <C> <C> <C> <C> <C> <C>
(IN THOUSANDS)
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
------------ ---------- ---------
<S> <C> <C> <C>
(IN THOUSANDS)
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.
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<PAGE>
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.
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 DECEMBER 31,
ENDED MARCH 31, -------------------------------
--------------------
1996 1995 1995 1994 1993
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
(IN THOUSANDS)
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.
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<PAGE>
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. 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.
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<PAGE>
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,
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
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<PAGE>
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 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.
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<PAGE>
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.
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.
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<PAGE>
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
-------- ---------- -------- ---------- ---------- ----------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
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 0.42% 0.41% 0.42% 0.34%
total loans(1)....... ====== ====== ====== ======
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)
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 0.21% 0.36% 0.51% 0.54%
total loans(1)....... ====== ====== ====== ======
</TABLE>
(1) Total loans represent gross loans less deferred loan fees and loans in
process.
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<PAGE>
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
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
---------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
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>
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<PAGE>
- ------------
(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.
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.
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<PAGE>
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
------- ------ ------ ------- ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
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 -- -- 4 377 -- -- -- --
and in judgment............... ------- ------ -- ------ ------ ------ ------ ------
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
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<PAGE>
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 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.
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<PAGE>
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
---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
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.
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<PAGE>
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)
Mortgage loans:
<S> <C> <C> <C> <C> <C> <C> <C> <C>
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>
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<PAGE>
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. 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.
92
<PAGE>
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 ENDED FOR THE YEAR ENDED DECEMBER 31,
MARCH 31, ----------------------------------
----------------------------
1996 1995 1995 1994 1993
------------- ------------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
(IN THOUSANDS)
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
--------- ------- --------- ------- --------- ------- --------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
(IN THOUSANDS)
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>
93
<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
-----------------------------
AMORTIZED FAIR WEIGHTED
COST VALUE AVERAGE
--------- ------- RATE
---------
<S> <C> <C> <C>
(DOLLARS IN THOUSANDS)
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.
94
<PAGE>
The following table presents the savings deposit activity of the Association
for the periods indicated.
<TABLE>
<CAPTION>
FOR THE THREE MONTHS FOR THE YEAR ENDED DECEMBER 31,
----------------------------------
ENDED MARCH 31, 1996 1995 1994 1993
--------------------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
(IN THOUSANDS)
Deposits.................................. $ 190,083 $ 764,098 $ 876,134 $952,634
Withdrawals............................... (188,013) (781,552) (889,520) 969,871
--------- --------- --------- --------
Deposits in excess of (less than) 2,070 (17,454) (13,386) (17,237)
withdrawals.............................
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>
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
-------- -------------
<S> <C> <C>
(DOLLARS IN THOUSANDS)
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>
95
<PAGE>
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 MARCH 31, 1996
------------------------------
PERCENT
OF WEIGHTED
TOTAL AVERAGE
AMOUNT DEPOSITS RATE
-------- -------- --------
<S> <C> <C> <C>
(DOLLARS IN THOUSANDS)
NOW/Super NOW accounts..... $ 46,134 17.5% 2.25%
Money market accounts...... 17,790 6.7 3.22
Passbook accounts.......... 66,342 25.1 3.00
Certificates of deposit.... 129,318 48.9 5.68
Noninterest bearing 4,901 1.8 --
NOW accounts.............. -------- ------- ------
Totals................ $264,485 100.00% 4.14
======== ======= ======
</TABLE>
<TABLE>
<CAPTION>
AT DECEMBER 31,
---------------------------------------------------------------------------------------------------
1995 1994 1993
------------------------------ -------------------------------- -------------------------------
PERCENT PERCENT PERCENT
OF WEIGHTED OF WEIGHTED OF WEIGHTED
TOTAL AVERAGE TOTAL AVERAGE TOTAL AVERAGE
AMOUNT DEPOSITS RATE AMOUNT DEPOSITS RATE AMOUNT DEPOSITS RATE
---------- --------- --------- ---------- --------- --------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
NOW/Super NOW accounts..... $ 45,001 17.3% 2.25% $ 48,834 18.2% 2.25% $ 54,836 18.7% 2.25%
Money market accounts...... 17,684 6.8 3.22 23,545 8.8 3.22 30,348 10.3 2.85
Passbook accounts.......... 65,261 25.1 3.04 74,524 27.8 3.00 85,690 29.1 3.00
Certificates of deposit.... 126,847 48.8 5.89 121,035 45.2 4.46 123,058 41.9 4.73
Noninterest bearing 5,179 2.0 -- -- -- -- -- -- --
NOW accounts.............. -------- ------ ---- -------- ------ ---- -------- ------ ----
Totals................ $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 AT DECEMBER 31,
LESS THAN ONE TO FOUR TO MARCH 31, -------------------------------
INTEREST RATE RANGE ONE YEAR THREE YEARS FIVE YEARS 1996 1995 1994 1993
- -------------------- ---------- ------------ ---------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
(IN THOUSANDS)
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>
96
<PAGE>
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.
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 AT OR FOR THE
MONTHS YEAR ENDED DECEMBER 31,
ENDED MARCH 31, -----------------------------
--------------------
1996 1995 1995 1994 1993
----------- ------- -------- -------- ---------
<S> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
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>
97
<PAGE>
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
--------- --------- -----------------
<S> <C> <C> <C>
(IN THOUSANDS)
Main Office:
16 North Spring St.
Elgin, IL....................... Owned 1923 $2,447
Branches:
180 Virginia St.
Crystal Lake, IL................ Owned 4/01/74 813
56 E. Irving Park Road
Roselle, IL..................... Owned 7/28/75 323
310 N. LaFox St.
South Elgin, IL(1).............. Leased 12/81 --
200 Bartlett Ave.
Bartlett, IL.................... Owned 9/20/79 923
Check Processing:
Mail and Record Retention
Facility (No Customer Service)
Annex
Fulton St., Elgin, IL........... Owned 2/06/86 437
</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.
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
98
<PAGE>
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.
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.
99
<PAGE>
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.
Under HR 3448 (the "Small Business Job Protection Act of 1996"), as passed by
the House and the 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.
100
<PAGE>
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.
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.
101
<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
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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, 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
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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 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
--------- -------- ---------------- -------------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
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
A reconciliation between regulatory capital and
GAAP capital at March 31, 1996 is presented below:
TANGIBLE CAPITAL CORE CAPITAL RISK-BASED CAPITAL
---------------- ------------- ------------------
(IN THOUSANDS)
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>
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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."
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
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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 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
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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.
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.
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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 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
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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 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.
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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.
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
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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 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
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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.
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."
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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 TERM
NAME AGE(1) ASSOCIATION DIRECTOR SINCE EXPIRES
- --------------------- ------ ------------------------ -------------- -------
<S> <C> <C> <C> <C>
George L. Perucco.... 69 President and Chief 1965 1998
Executive Officer,
Director
Lyle N. Dolan........ 54 Executive Vice 1984 1998
President
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.
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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.
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
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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.
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."
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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.
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
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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 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
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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.
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
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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>
AVERAGE
YEARS OF CREDITED SERVICE ANNUAL EARNINGS
------------------------- ---------------
YEARS MONTHS
----------- ------------
<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%
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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 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.
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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 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
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<PAGE>
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.
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
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<PAGE>
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 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.
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<PAGE>
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)
------------------------ ------------------------
AS A PERCENT AS A PERCENT
NUMBER OF SHARES NUMBER OF SHARES
NAME AMOUNT OF SHARES OFFERED OF 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 [______ __, 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
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<PAGE>
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 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
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<PAGE>
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 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
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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.
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
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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 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.
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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, 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.
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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 new issue market. 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 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
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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 [ ], 1998.
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 [ ], 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.
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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 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."
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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.
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
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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 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 on [ , 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 [ ], 1998.
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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.
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, salesman or selling agent, under the securities laws of such state, or a
request to register or otherwise qualify the subscription rights or Common Stock
for sale or submit any filing with respect thereto in such state. Where the
number of persons eligible to subscribe for shares in one state is small, the
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 salesmen.
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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 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
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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
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waive any applicable penalties for early withdrawal from certificate accounts.
If the remaining balance in a certificate account is reduced below the
applicable minimum balance requirement at the time that the funds actually are
transferred under the authorization, the certificate will be cancelled at the
time of the withdrawal, without penalty, and the remaining balance will earn
interest at the 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 his
account. Each person exercising such subscription rights will be required to
certify that he is purchasing shares solely for his own account and that he has
no agreement or understanding regarding the sale or transfer of such shares. The
regulations also prohibit any person from offering or making an announcement of
an offer or 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
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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 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 [ ], 1998. See "--
Stock Pricing" above for a discussion of rights of subscribers, if any, in the
event an extension is granted.
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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 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;
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(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 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.
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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, 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.
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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
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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
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 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
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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 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
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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 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
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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.
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."
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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 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)
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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 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.
153
<PAGE>
THE COMMON STOCK OF THE COMPANY WILL REPRESENT NON-WITHDRAWABLE CAPITAL, WILL
NOT BE AN ACCOUNT OF AN INSURABLE TYPE, AND WILL NOT BE INSURED BY THE FDIC.
COMMON STOCK
Dividends. The Company can pay dividends out of statutory surplus or from
certain net profits if, as and when declared by its Board of Directors. The
payment of dividends by the Company is subject to
limitations which are imposed by law and applicable regulation. See "Dividend
Policy" and "Regulation." The holders of Common Stock of the Company will be
entitled to receive and share equally in such dividends as may be declared by
the Board of Directors of the Company out of funds legally available therefor.
If the Company issues Preferred Stock, the holders thereof may have a priority
over the holders of the Common Stock with respect to dividends.
Voting Rights. Upon Conversion, the holders of Common Stock of the Company
will possess exclusive voting rights in the Company. They will elect the
Company's Board of Directors and act on such other matters as are required to be
presented to them under Delaware law or the Company's Certificate of
Incorporation or as are otherwise presented to them by the Board of Directors.
Except as discussed in "Restrictions on Acquisition of the Company and the
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 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.
154
<PAGE>
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 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
155
<PAGE>
to time determine. The Board of Directors can, without shareholder approval,
issue preferred stock with voting, dividend, liquidation and conversion rights.
156
<PAGE>
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.
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.
157
<PAGE>
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.
158
<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 ........................................ 44
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 - F-21
</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>
[LETTERHEAD OF KPMG PEAT MARWICK LLP]
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.
/s/ KPMG Peat Marwick LLP
Chicago, Illinois
March 8, 1996, except for note 14,
as to which the date is June 6, 1996
F-2
(Continued)
<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
- ------------------------------------------------------------------------------------------
Liabilities and Retained Earnings
- ------------------------------------------------------------------------------------------
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.
(Continued)
F-3
<PAGE>
HOME FEDERAL SAVINGS AND
LOAN ASSOCIATION OF ELGIN
Statements of Retained Earnings
- ---------------------------------------------------------------------------
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
- ---------------------------------------------------------------------------
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.
(Continued)
F-6
<PAGE>
HOME FEDERAL SAVINGS AND
LOAN ASSOCIATION OF ELGIN
Notes to Financial Statements
- --------------------------------------------------------------------------------
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 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.
(Continued)
F-7
<PAGE>
HOME FEDERAL SAVINGS AND
LOAN ASSOCIATION OF ELGIN
Notes to Financial Statements
- --------------------------------------------------------------------------------
(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 Estimated
Amortized unrealized unrealized fair
cost gains losses 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>
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
---------------------- ----------------------
Estimated Estimated
Amortized fair Amortized fair
cost value cost 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.
(Continued)
F-8
<PAGE>
HOME FEDERAL SAVINGS AND
LOAN ASSOCIATION OF ELGIN
Notes to Financial Statements
- --------------------------------------------------------------------------------
(3) LOANS RECEIVABLE
A comparative summary of loans receivable follows:
<TABLE>
<CAPTION>
March 31, December 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>
(Continued)
F-9
<PAGE>
HOME FEDERAL SAVINGS AND
LOAN ASSOCIATION OF ELGIN
Notes to Financial Statements
- --------------------------------------------------------------------------------
Loans receivable delinquent three months or more are as follows:
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Percentage of
Number gross loans
of 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 (unaudited) and $20,000 (unaudited) for the three months ended March
31, 1996 and 1995, 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>
March 31, December 31,
1996 -----------------------
(unaudited) 1995 1994
- -------------------------------------------------------------------------------------
<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 (96,325) (97,420) (197,984)
- -------------------------------------------------------------------------------------
$1,546,742 $1,483,915 $1,270,541
=====================================================================================
</TABLE>
(Continued)
F-10
<PAGE>
HOME FEDERAL SAVINGS AND
LOAN ASSOCIATION OF ELGIN
Notes to Financial Statements
- ------------------------------------------------------------------------------
Activity in the allowance for uncollected interest is summarized as
follows:
- ------------------------------------------------------------------------------
Three month ended Year ended
March 31, December 31,
----------------- ----------------------------
1996 1995 1995 1994 1993
- ------------------------------------------------------------------------------
Balance at begining
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
- ------------------------------------------------------------------------------
(5) OFFICE PROPERTIES AND EQUIPMENT
A comparative summary of office properties and equipment follows:
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
March 31, December 31,
1996 -----------------------
(unaudited) 1995 1994
- ----------------------------------------------------------------------------------
<S> <C> <C> <C>
Land $ 1,582,241 $ 1,582,24 $ 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 (unaudited) and
$164,667 (unaudited) for the three months ended March 31, 1996 and 1995,
respectively, and $740,415, $701,679 and $590,616 for the years ended
December 31, 1995, 1994, and 1993, respectively.
F-11
<PAGE>
HOME FEDERAL SAVINGS AND
LOAN ASSOCIATION OF ELGIN
Notes to Financial Statements
- --------------------------------------------------------------------------------
(6) SAVINGS DEPOSITS
Savings deposits are summarized as follows:
<TABLE>
<CAPTION>
Stated or weighted average interest rate
------------------------------------------
March 31, March 31, 1996
1996 December 31, (unaudited)
------------ ---------------------------- ---------------------------
(unaudited) 1995 1994 Amount Percent
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NOW/Super NOW accounts 2.25% 2.25% 2.25% $ 46,134,119 17.5%
Money market accounts 3.22 3.22 3.22 17,789,786 6.7
Passbook accounts 3.00 3.04 3.00 66,341,744 25.1
Noninterest-bearing
NOW accounts - - - 4,901,430 1.8
- ---------------------------------------------------------------------------------------------------
135,167,079 51.1
- ---------------------------------------------------------------------------------------------------
Certificate accounts 5.68 5.89 4.46 129,317,794 48.9
- ---------------------------------------------------------------------------------------------------
4.14% 4.25% 3.83% $264,484,873 100.0%
===================================================================================================
<CAPTION>
December 31,
------------------------------------------------
1995 1994
---------------------- -----------------------
Amount Percent Amount Percent
- --------------------------------------------------------------------------
<S> <C> <C> <C> <C>
NOW/Super NOW accounts $ 45,001,086 17.3% $ 48,834,207 18.2%
Money market accounts 17,684,571 6.8 23,545,363 8.8
Passbook accounts 65,260,988 25.1 74,523,876 27.8
Noninterest-bearing
NOW accounts 5,178,954 2.0 - -
- --------------------------------------------------------------------------
133,125,599 51.2 146,903,446 54.8
- --------------------------------------------------------------------------
Certificate accounts 126,846,197 48.8 121,034,585 45.2
- --------------------------------------------------------------------------
$259,971,796 100.0% $267,938,031 100.0%
==========================================================================
</TABLE>
<TABLE>
<CAPTION>
December 31,
March 31, 1996 -------------------------------------------
(unaudited) 1995 1994
---------------------- -------------------- --------------------
Amount Percent Amount Percent Amount Percent
- ------------------------------------------------------------------------------------------------
<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>
(Continued)
F-12
<PAGE>
HOME FEDERAL SAVINGS AND
LOAN ASSOCIATION OF ELGIN
Notes to Financial Statements
- --------------------------------------------------------------------------------
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.
(Continued)
F-13
<PAGE>
HOME FEDERAL SAVINGS AND
LOAN ASSOCIATION OF ELGIN
Notes to Financial Statements
- --------------------------------------------------------------------------------
(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
March 31, Year ended 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>
(Continued)
F-14
<PAGE>
HOME FEDERAL SAVINGS AND
LOAN ASSOCIATION OF ELGIN
Notes to Financial Statements
- --------------------------------------------------------------------------------
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.
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), 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.
(Continued)
F-15
<PAGE>
HOME FEDERAL SAVINGS AND
LOAN ASSOCIATION OF ELGIN
Notes to Financial Statements
- --------------------------------------------------------------------------------
HOME FEDERAL SAVINGS AND
LOAN ASSOCIATION OF ELGIN
(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
- -------------------------------------------------------------------------------------------
NET PERIODIC PENSION COST
===========================================================================================
<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>
(Continued)
F-16
<PAGE>
HOME FEDERAL SAVINGS AND
LOAN ASSOCIATION OF ELGIN
Notes to Financial Statements
- --------------------------------------------------------------------------------
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 (unaudited) and $42,727 (unaudited) for
the three months ended March 31, 1996 and 1995, 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 (unaudited) and
$19,000 (unaudited) for the three months ended March 31, 1996 and 1995,
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:
- ---------------------------------------------------
Amount
- ---------------------------------------------------
Year ended December 31:
1996 $ 60,000
1997 28,000
1998 27,000
1999 27,000
2000 27,000
- ---------------------------------------------------
$169,000
===================================================
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.
(Continued)
F-17
<PAGE>
HOME FEDERAL SAVINGS AND
LOAN ASSOCIATION OF ELGIN
Notes to Financial Statements
- --------------------------------------------------------------------------------
(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.
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, the Association had commitments to originate fixed and variable rate
mortgage loans of approximately $4,135,000 (unaudited) and $905,000
(unaudited), 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, December 31,
(unaudited) 1995 1994
--------------------------- -------------------------- -------------------------
Carrying Estimated Carrying Estimated Carrying Estimated
amount fair value amount fair value amount fair value
- -------------------------------------------------------------------------------------------------------------------------------
<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>
(Continued)
F-18
<PAGE>
HOME FEDERAL SAVINGS AND
LOAN ASSOCIATION OF ELGIN
Notes to Financial Statements
- --------------------------------------------------------------------------------
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.
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.
(Continued)
F-19
<PAGE>
HOME FEDERAL SAVINGS AND
LOAN ASSOCIATION OF ELGIN
Notes to Financial Statements
- --------------------------------------------------------------------------------
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.
(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.
(Continued)
F-20
<PAGE>
HOME FEDERAL SAVINGS AND
LOAN ASSOCIATION OF ELGIN
Notes to Financial Statements
- --------------------------------------------------------------------------------
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, the Association had incurred approximately $47,350 (unaudited) 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.
(Continued)
F-21
<PAGE>
NO DEALER, SALESMAN OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION OTHER THAN AS CONTAINED IN THIS
PROSPECTUS IN CONNECTION WITH THE OFFERING MADE HEREBY, AND, IF GIVEN OR MADE,
SUCH OTHER INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY 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
------------------------------------------
PAGE
Summary............................................... 5
Selected Financial and Other Data of the Association.. 16
Recent Developments................................... 18
Risk Factors.......................................... 24
Home Bancorp of Elgin, Inc............................ 32
Home Federal Savings and Loan Association of Elgin.... 32
Use of Proceeds....................................... 34
Dividend Policy....................................... 35
Market for the Common Stock........................... 36
Regulatory Capital Compliance......................... 37
Capitalization........................................ 38
Pro Forma Data........................................ 39
Home Federal Savings and Loan Association of Elgin
Statements of Earnings.............................. 44
Management's Discussion and Analysis
of Financial Condition and Results of Operations.... 45
Business of the Company............................... 62
Business of the Association........................... 63
Federal and State Taxation............................ 85
Regulation............................................ 88
Management of the Company............................. 98
Management of the Association......................... 100
The Conversion........................................ 113
Restrictions on Acquisition of the Company
and the Association................................. 133
Description of Capital Stock of the Company........... 139
Description of Capital Stock of the Association....... 141
Transfer Agent and Registrar.......................... 142
Experts............................................... 142
Legal and Tax Opinions................................ 142
Additional Information................................ 142
Index to Financial Statements......................... F-1
- -----------------------------------------------------------
UNTIL _____________________________, 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
HOME BANCORP OF ELGIN, INC.
(PROPOSED HOLDING COMPANY FOR
HOME FEDERAL SAVINGS AND LOAN ASSOCIATION OF ELGIN)
COMMON STOCK
------------------------------------------
PROSPECTUS
------------------------------------------
HOVDE SECURITIES, INC.
AUGUST __, 1996
------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
<TABLE>
<CAPTION>
<S> <C>
OTS application fee(1)................................... $ 8,400
SEC registration fee(1).................................. 26,222
NASD filing fee(1)....................................... 8,104
Nasdaq National Market Listing Fee(1).................... 36,511
Printing, postage and mailing............................ 200,000
Legal fees and expenses.................................. 265,000
Financial advisor expenses............................... 60,000
Accounting fees and expenses............................. 120,000
Appraiser's fees and expenses (including business plan).. 55,000
Transfer agent and registrar fees and expenses........... 10,000
Conversion agent fees and expenses....................... 21,000
Certificate printing..................................... 7,500
Telephone, temporary help and other equipment............ 25,000
Blue Sky fees and expenses (including fees of counsel)... 15,000
Miscellaneous............................................ 62,263
--------
TOTAL.................................................... $920,000
========
- -----------------
</TABLE>
(1) Actual expenses based upon the registration of 7,604,375 shares at $10.00
per share. All other expenses are estimated.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 145 of the Delaware General Corporation Law ("DGCL"), inter alia,
empowers a Delaware corporation to indemnify any person who was or is a party or
is threatened to be made a party to any threatened, pending or completed action,
suit or proceeding (other than an action by or in the right of the corporation)
by reason of the fact that such person is or was a director, officer, employee
or agent of another corporation or other enterprise, against expenses (including
attorneys' fees), judgments, fines and amounts paid in settlement actually and
reasonably incurred by him in connection with such action, suit or proceeding if
he acted in good faith and in a manner he reasonably believed to be in or not
opposed to the best interest of the corporation, and, with respect to any
criminal action or proceeding, had no reasonable cause to believe his conduct
was unlawful. Similar indemnity is authorized for such person against expenses
(including attorneys' fees) actually and reasonably incurred in connection with
the defense or settlement of any such threatened, pending or completed action or
suit if such person acted in good faith and in a manner he reasonably believed
to be in or not opposed to the best interests of the corporation, and provided
further that (unless a court of competent jurisdiction otherwise provides) such
person shall not have been adjudged liable to the corporation. Any such
indemnification may be made only as authorized in each specific case upon a
determination by the stockholders or disinterested directors or by independent
legal counsel in a written opinion that indemnification is proper because the
indemnitee has met the applicable standard of conduct.
<PAGE>
Section 145 further authorizes a corporation to purchase and maintain
insurance on behalf of any person who is or was a director, officer, employee or
agent of the corporation, or is or was serving at the request of the corporation
as a director, officer, employee or agent of another corporation or enterprise,
against any liability asserted against him, and incurred by him in any such
capacity, or arising out of his status as such, whether or not the corporation
would otherwise have the power to indemnify him under Section 145.
Article IX of the Certificate of Incorporation of Home Bancorp of Elgin,
Inc. (the "Company") provides that a director shall not be personally liable to
the Company or its stockholders for damages for breach of his fiduciary duty as
a director, except to the extent such exemption from liability or limitation
thereof is expressly prohibited by the DGCL. Article X of the Company's
Certificate of Incorporation requires the Company, among other things, to
indemnify to the fullest extent permitted by the DGCL, any person who is or was
or has agreed to become a director or officer of the Company, who was or is made
a party to, or is threatened to be made a party to, or has become a witness in,
any threatened, pending or completed action, suit or proceeding, including
actions or suits by or in the right of the Company, by reason of such agreement
or service or the fact that such person is, was or has agreed to serve as a
director, officer, employee or agent of another corporation or organization at
the request of the Company.
Article X also empowers the Company to purchase and maintain insurance to
protect itself and its directors and officers, and those who were or have agreed
to become directors or officers, against any liability, regardless of whether or
not the Company would have the power to indemnify those persons against such
liability under the law or the provisions set forth in the Certificate of
Incorporation. The Company is also authorized by its Certificate of
Incorporation to enter into individual indemnification contracts with directors
and officers. Home Federal Savings and Loan Association of Elgin currently
maintains and the Company expects to purchase directors' and officers' liability
insurance consistent with the provisions of the Certificate of Incorporation as
soon as practicable.
The Company expects to enter into employment agreements with certain
executive officers, which agreements are expected to require that the Company
will obtain a directors' and officers' liability policy for the benefit of such
officers or that the Company will indemnify such officers to the fullest extent
provided by law.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
Not Applicable.
<PAGE>
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
The exhibits filed as a part of this Registration Statement are as follows:
(A). LIST OF EXHIBITS. (Filed herewith unless otherwise noted.)
EXHIBIT NO. DESCRIPTION
- ----------- -----------
1.1 Engagement Letter, dated March 22, 1996, between Home Federal
Savings and Loan Association of Elgin and Hovde Securities, Inc./*/
1.2 Form of Agency Agreement
2.1 Amended and Restated Plan of Conversion of Home Federal Savings
and Loan Association of Elgin/*/
3.1 Certificate of Incorporation of Home Bancorp of Elgin, Inc./*/
3.2 Bylaws of Home Bancorp of Elgin, Inc./*/
3.3 Federal Stock Charter and Bylaws of Home Federal Savings and Loan
Association of Elgin (See Exhibits I and II to Exhibit 2.1)
4.1 Certificate of Incorporation of Home Bancorp of Elgin, Inc. (See
Exhibit 3.1)
4.2 Bylaws of Home Bancorp of Elgin, Inc. (See Exhibit 3.2)
4.3 Form of Stock Certificate of Home Bancorp of Elgin, Inc./*/
5.1 Opinion of Thacher Proffitt & Wood regarding legality/*/
8.1 Opinion of Thacher Proffitt & Wood regarding federal taxation/*/
8.2 Opinion of KPMG Peat Marwick LLP regarding State of Illinois
taxation/*/
8.3 Opinion of RP Financial, LC. regarding Subscription Rights/*/
10.1 Employee Stock Ownership Plan of Home Bancorp of Elgin, Inc. and
ESOP Trust Agreement/*/
10.2 Form of ESOP Loan Commitment Letter and ESOP Loan Documents/*/
10.3 Form of Executive Employment Agreement between Home Bancorp of
Elgin, Inc. and certain executive officers/*/
10.4 Form of Employment Agreement between Home Federal Savings and
Loan Association of Elgin and certain executive officers/*/
10.5 Form of Employee Retention Agreement between Home Bancorp of
Elgin, Inc., Home Federal Savings and Loan Association of Elgin and
certain executive officers/*/
<PAGE>
EXHIBIT
NO. DESCRIPTION
- ------- -----------
10.6 Form of Severance Pay Plan between Home Federal Savings and Loan
Association of Elgin and certain executive officers/*/
10.7 Engagement Letter, dated March 25, 1996, between Home Federal
Savings and Loan Association of Elgin and RP Financial, LC. for
conversion appraisal services/*/
10.8 Engagement Letter, dated March 25, 1996, between Home Federal
Savings and Loan Association of Elgin and RP Financial, LC. for
services related to the preparation of a business plan/*/
10.9 Engagement Letter, dated May 9, 1996, between Home Federal
Savings and Loan Association of Elgin and Crowe Chizek and Company LLP
for conversion agent services/*/
10.10 Purchase and Assumption Agreement, dated July 18, 1994, between Home
Federal Savings and Loan Association of Elgin and First Bank North for
purchase and sale of DeKalb branch office/*/
10.11 Purchase and Assumption Agreement, dated June 29, 1994, between
Home Federal Savings and Loan Association of Elgin and Harris Bank
Woodstock for purchase and sale of Woodstock branch office/*/
10.12 Lease Agreement between Home Federal Savings and Loan
Association of Elgin and Pace, Holtz & Wood for South Elgin
branch/*/
10.13 Contract of Home Federal Savings and Loan Association of Elgin
and ATMI for construction of branch office in South Elgin,
Illinois/*/
21.1 Subsidiaries of the Registrant/*/
23.1 Consent of KPMG Peat Marwick LLP
23.2 Consent of Thacher Proffitt & Wood/*/
23.3 Consent of RP Financial, LC./*/
24.1 Powers of Attorney (Included in Signature Page of the
Registration Statement)/*/
27.1 Financial Data Schedule (Submitted only with filing in electronic
format)/*/
99.1 Appraisal Report of RP Financial, LC., dated June 7, 1996/*/
99.2 Form of Marketing Materials to be used in connection with the
Offerings/*/
99.3 Updated Appraisal Report of RP Financial, LC., dated July 19,
1996/*/
______________
/*/ Previously filed
<PAGE>
(b). FINANCIAL STATEMENT SCHEDULES.
All schedules have been omitted as not applicable or not required under the
rules of Regulation S-X.
ITEM 17. UNDERTAKINGS.
The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this Registration Statement:
(i) To include any Prospectus required by Section 10(a)(3) of
the Securities Act of 1933;
(ii) To reflect in the Prospectus any facts or events arising
after the effective date of the Registration Statement (or
the most recent post-effective amendment thereof) which,
individually or in the aggregate, represent a fundamental
change in the information set forth in the Registration
Statement. Notwithstanding the foregoing, any increase or
decrease in volume of securities offered (if the total
dollar value of securities offered would not exceed that
which was registered) and any deviation from the low or high
end of the estimated maximum offering range may be reflected
in the form of prospectus filed with the Commission pursuant
to Rule 424(b) if, in the aggregate, the changes in volume
and price represent no more than a 20% change in the maximum
aggregate offering price set forth in the "Calculation of
Registration Fee" table in the effective Registration
Statement;
(iii) To include any material information with respect to the
plan of distribution not previously disclosed in the
Registration Statement or any material change to such
information in the Registration Statement;
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall
be deemed to be a new Registration Statement relating to the
securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering
thereof.
(3) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain
unsold at the termination of the Offering.
The undersigned Registrant hereby undertakes to provide to the agent at the
closing specified in the Agency Agreement, certificates in such denominations
and registered in such names as required by the agent to permit prompt delivery
to each purchaser.
Insofar as indemnification by the Registrant for liabilities arising under
the Securities Act of 1933 may be permitted to directors, officers and
controlling persons of the Registrant pursuant to the foregoing provisions, or
otherwise, the Registrant has been advised that in the opinion of the Securities
and Exchange Commission such indemnification is against public policy as
expressed in the Securities Act and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other than the
payment by the Registrant of expenses incurred or paid by a director, officer or
controlling person of the Registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling
<PAGE>
person in connection with the securities being registered, the Registrant will,
unless in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities
Act of 1933, the information omitted from the form of prospectus
filed as part of this Registration Statement in reliance upon
Rule 430A and contained in a form of prospectus filed by the
Registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the
Securities Act shall be deemed to be part of this Registration
Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form
of prospectus shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of
such securities at that time shall be deemed to be the initial
bona fide offering thereof.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
registrant has duly caused this amendment to Registration Statement No.
333-05909 to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Elgin, State of Illinois, on August 6, 1996.
HOME BANCORP OF ELGIN, INC.
By: /s/ George L. Perucco
-----------------------
George L. Perucco
President and Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this
amendment to Registration Statement No. 333-05909 has been signed by the
following persons in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Name Title Date
- ----------------------- ------------------------------- --------------
<S> <C> <C>
/s/ George L. Perucco Director, President and Chief August 6, 1996
- ----------------------- Executive Officer
George L. Perucco (Principal executive officer)
/s/ Lyle N. Dolan Executive Vice President and August 6, 1996
- ----------------------- Treasurer (Principal financial
Lyle N. Dolan and accounting officer)
* Director August 6, 1996
- -----------------------
Orval M. Graening
* Director August 6, 1996
- -----------------------
Henry R. Hines
* Director August 6, 1996
- -----------------------
Donald E. Laird
* Director August 6, 1996
- -----------------------
Leigh O'Connor
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Name Title Date
- ----------------------- ------------------------------- --------------
<S> <C> <C>
* Director August 6, 1996
- -----------------------
Thomas S. Rakow
* Director August 6, 1996
- -----------------------
Richard S. Scheflow
</TABLE>
* By /s/ George L. Perucco (George L. Perucco) as attorney-in fact
---------------------
pursuant to Power of Attorney filed on June 13, 1996, included in Part II of the
Registration Statement.
<PAGE>
EXHIBIT 1.2
HOME BANCORP OF ELGIN, INC.
6,095,000 SHARES
(anticipated maximum)
(subject to increase to up to 7,009,250
shares in the event of an oversubscription)
COMMON STOCK
($.01 Par Value)
AGENCY AGREEMENT
----------------
______________, 1996
Hovde Securities, Inc.
1826 Jefferson Place, N..
Washington, D.C. 20036
Home Bancorp of Elgin, Inc., a Delaware corporation (the "Company"), and
Home Federal Savings and Loan Association of Elgin, a federally chartered mutual
savings association ( the "Association"), hereby confirm their agreement with
Hovde Securities, Inc. ("Hovde"), and Hovde hereby confirms its obligations with
respect to the sale of up to 6,095,000 shares (the "Shares") of common stock,
par value $.01 per share, of the Company (the "Common Stock"), as follows:
1. Introduction. On April 18, 1996 the Board of Directors of the
------------
Association adopted a plan of conversion (as amended and restated on June 6,
1996, the "Plan of Conversion"), which provides for the conversion of the
Association from a federal mutual savings association to a federal stock savings
association and the issuance of all of the Association's outstanding stock to
the Company (the "Conversion"). The Conversion will be accomplished through the
adoption by the Association of a new federal stock charter which authorizes the
issuance of capital stock. The Association will issue all of its outstanding
stock to the Company and will thereby become a wholly owned subsidiary of the
Company.
The Association has filed an application for conversion on Form AC,
including a proxy statement, prospectus, exhibits, and all amendments and
supplements required to be filed with respect thereto to the date hereof (as so
amended and supplemented, the "Form AC"), with the Office of Thrift Supervision
(the "OTS") for approval of the Conversion. The Form AC includes, among other
things, the Association's Plan of Conversion and the Association's proxy
statement for the Special Meeting of the Association's members to approve the
Plan of
<PAGE>
Conversion to be held on ____________, 1996 (the "Proxy Statement") and the
Prospectus (defined below). Pursuant to the terms and provisions of the Plan of
Conversion, non-transferable rights to subscribe ("Subscription Rights") for an
aggregate of up to 6,095,000 shares (subject to increase to up to 7,009,250
shares in the event of an oversubscription) of the Common Stock (the
"Subscription Offering") have been granted, in the following priority, to: (i)
the depositors of the Association with aggregate account balances of $50 or more
as of March 31, 1995 ("Eligible Account Holders" and "Eligibility Record Date",
respectively); (ii) the Employee Stock Ownership Plan of the Company (the
"ESOP"); (iii) the depositors of the Association with aggregate account balances
of $50 or more as of June 30, 1996 (other than depositors who otherwise qualify
as Eligible Account Holders or depositors who are directors or officers of the
Association or their Associates, as defined in the Prospectus (as hereinafter
defined)) ("Supplemental Eligible Account Holders" and "Supplemental Eligibility
Record Date," respectively); and (iv) depositors of the Association as of
____________________, 1996, other than Eligible Account Holders and Supplemental
Eligible Account Holders, and borrowers of the Association as of ____________,
1996 ("Other Members" and "Voting Record Date," respectively). Shares of Common
Stock not subscribed for in the Subscription Offering may be offered in a
direct community offering to members of the general public, with a first
preference to natural persons residing in Kane, DuPage and McHenry counties in
Illinois (the "Local Community") on the Voting Record Date (the "Community
Offering," and together with the Subscription Offering, as each may be extended
or reopened from time to time, the "Subscription and Community Offering"). Any
Shares not subscribed for in the Subscription and Community Offering may be
offered, subject to Section 3 hereof, to the general public in a syndicated
community offering (the "Syndicated Community Offering"). It is acknowledged
that the number of Shares to be sold in the Conversion may be increased or
decreased as described in the Prospectus (as hereinafter defined); that the
purchase of Shares in the Subscription and Community Offering is subject to
maximum and minimum purchase limitations as described in the Prospectus; and
that the Company and Association may reject, in whole or in part, any
subscription received in the Community Offering. If the number of Shares is
increased or decreased in accordance with the Plan of Conversion, the term
"Shares" shall mean such greater or lesser number where applicable.
Concurrently with the execution of this Agreement, the Company is
delivering to Hovde copies of the Prospectus dated ___________, 1996 of the
Company to be used in the Subscription Offering and Community Offering (if any),
and, if necessary, will deliver copies of the Prospectus or prospectus
supplement for use in a Syndicated Community Offering and/or Public Offering, as
defined in the Prospectus (as hereinafter defined).
2. Representations and Warranties of the Company and the Association. The
-----------------------------------------------------------------
Company and the Association hereby jointly and severally represent and warrant
to Hovde that:
(a) The Company has filed with the Securities and Exchange Commission (the
"Commission") a registration statement, including exhibits, and pre-effective
amendment[s] thereto, on Form S-1 (No. 333-05909), including a prospectus, for
the registration of the Shares under the Securities Act of 1933, as amended (the
"1933 Act"), in the form heretofore delivered to Hovde; such registration
statement has become effective under the 1933 Act; and no order has been issued
by the Commission or any applicable state regulatory authority preventing or
2
<PAGE>
suspending the use of the Prospectus with respect thereto and no proceedings
regarding same have been initiated or, to the best knowledge of the Company,
threatened. Except as the context may otherwise require, such registration
statement, as amended, on file with the Commission at the time the registration
statement became effective, including the prospectus, financial statements,
schedules, exhibits and all other documents filed as part thereof, is herein
called the "Registration Statement," and the prospectus on file with the
Commission at the time the Registration Statement became effective is herein
called the "Prospectus," except that if any prospectus filed by the Company with
the Commission in a post-effective amendment or pursuant to Rule 424(b) of the
rules and regulations of the Commission promulgated under the 1933 Act (the
"Regulations") differs from the prospectus on file at the time the Registration
Statement became effective, the term "Prospectus" shall refer to the Rule 424(b)
prospectus from and after the time it is filed with or mailed for filing to the
Commission and shall include any amendments or supplements thereto from and
after their dates of effectiveness or use, respectively. Following completion
of the Subscription and Community Offering, in the event of a Syndicated
Community Offering, the Company: (i) will promptly file with the Commission a
post-effective amendment to such Registration Statement relating to the results
of the Subscription and Community Offering, any additional information with
respect to the proposed plan of distribution and any revised pricing
information; or (ii) if no such post-effective amendment is required, will file
with, or mail for filing to, the Commission a prospectus or prospectus
supplement containing information relating to the results of the Subscription
and Community Offering and pricing information pursuant to Rule 424(c) of the
Regulations, in either case in a form acceptable to Hovde.
(b) The Company has filed with the OTS an application for approval of the
acquisition of the Association by the Company on Form H-(e)1-S (the "Holding
Company Application") promulgated under the savings and loan holding company
provisions of the Home Owners' Loan Act, as amended, and the regulations
promulgated thereunder by the OTS (the Home Owners' Loan Act, as amended,
together with the regulations promulgated thereunder by the OTS, shall
hereinafter be referred to as the "HOLA"). The Holding Company Application has
been approved by the OTS as of __________, 1996. The Prospectus has been
approved for use by the OTS as of ________________, 1996. No order has been
issued by the OTS preventing or suspending the use of the Prospectus and no
action by or before the OTS to revoke such approvals or authorizations is
pending or, to the best knowledge of the Company or Association, threatened.
(c) As of the date of the Prospectus and at all times subsequent thereto
through and including the Closing Date: (i) the Registration Statement and the
Prospectus (as amended or supplemented, if amended or supplemented) complied and
will comply in all material respects with the 1933 Act and the Regulations; (ii)
the Registration Statement (as amended or supplemented, if amended or
supplemented) did not and will not contain any untrue statement of a material
fact or omit to state a material fact required to be stated therein or necessary
to make the statements therein, in light of the circumstances under which they
were made, not misleading; (iii) the Prospectus (as amended or supplemented, if
amended or supplemented) did not and will not contain any untrue statement of a
material fact or omit to state any material fact required to be stated therein
or necessary to make the statements therein, in light of the circumstances under
which they were made, not misleading, provided, however, that none of
3
<PAGE>
the representations and warranties in this subsection shall apply to statements
in or omissions from the Prospectus, the Registration Statement or any amendment
or supplement thereto made in reliance upon and in conformity with written
information furnished to the Company or the Bank by Hovde expressly regarding
Hovde for use under the caption "The Conversion --Marketing and Underwriting
Arrangements;" and (iv) any Application (as defined in Section 8) (as amended or
supplemented, if amended or supplemented), other than the Holding Company
Application and the Form AC, did not and will not contain any untrue statement
of a material fact or omit to state a material fact required to be stated
therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading.
(d) At the date of the Holding Company Application and at all times
subsequent thereto through and including the Closing Date: (i) the Holding
Company Application (as amended or supplemented, if amended or supplemented)
complied and will comply in all material respects with the HOLA; and (ii) the
Holding Company Application (as amended or supplemented, if amended or
supplemented) did not and will not contain any untrue statement of a material
fact or omit to state a material fact required to be stated therein or necessary
to make the statements therein, in light of the circumstances under which they
were made, not misleading.
(e) The Association has filed the Form AC with the OTS in the form
heretofore delivered to Hovde. The Form AC has been approved by the OTS as of
__________, 1996. The Proxy Statement has been approved by the OTS as of
__________, 1996. The form of stock charter of the Association has been
approved by the OTS as part of the Form AC. No order has been issued by the
Federal Deposit Insurance Corporation (the "FDIC"), the OTS or any applicable
state regulatory authority preventing or suspending the use of the Proxy
Statement and no action by or before any such governmental entity to revoke any
approvals or authorizations is pending or, to the best knowledge of the Company
and the Association, threatened.
(f) As of the date of their approval by the OTS and at all times subsequent
thereto, through and including the Closing Date: (i) the Form AC and the Proxy
Statement complied and will comply in all material respects with Title 12, Part
563b of the Code of Federal Regulations (the "Conversion Regulations"); (ii) the
Form AC did not and will not contain any untrue statement of a material fact or
omit to state a material fact required to be stated therein or necessary to make
the statements therein, in light of the circumstances under which they were
made, not misleading; (iii) the Proxy Statement did not and will not contain any
untrue statement of a material fact or omit to state a material fact required to
be stated therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading; and (iv) as of the
date of the special meeting of the Association's members with respect to which
the Proxy Statement is being distributed, the Proxy Statement will not contain
any untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements therein, in
the light of the circumstances under which they are made, not misleading.
(g) Except as disclosed in the Registration Statement and the Prospectus,
there is no suit, proceeding, charge, investigation or action (including, but
not limited to, any action
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related to expressions of dissatisfaction with the Conversion by any member of
the Association) before or by any court, regulatory authority or governmental
agency or body pending or, to the best knowledge of the Association and the
Company, threatened against the Association or the Company which might
materially and adversely affect the Conversion, the performance by the
Association or the Company of this Agreement or the consummation of the
transactions contemplated by the Plan of Conversion or which might result in any
material adverse change in the condition (financial or otherwise), business,
properties or results of operations of the Association and the Company, taken as
a whole.
(h) The execution, delivery and performance of this Agreement and the
issuance and sale of the Shares and the consummation of the transactions
contemplated by this Agreement and the Plan of Conversion have been duly
authorized by all necessary action on the part of the Company and the
Association. The Plan of Conversion has been duly adopted by the Board of
Directors of the Association, and the consummation of the transactions
contemplated by the Plan of Conversion has been duly authorized by all necessary
action on the part of the Association. The Plan of Conversion has not been
amended since June 6, 1996, or terminated and remains in full force and effect.
This Agreement has been duly executed and delivered by the Company and the
Association and is the legal, valid and binding agreement of the Company and the
Association, enforceable in accordance with its terms, except as enforceability
thereof may be limited by bankruptcy, insolvency, moratorium, reorganization or
similar laws affecting the enforceability of creditors' rights generally or the
rights of creditors of federally chartered savings associations, the accounts of
which are insured by the FDIC, or by general equity principles regardless of
whether such enforceability is considered in a proceeding in equity or at law.
(i) The Company and the Association have all such power and authority as
may be required to enter into this Agreement and to carry out the provisions and
conditions hereof. All consents, approvals, authorizations or orders necessary
to permit the issuance and sale of the Shares as provided herein (other than
approvals under the securities or Blue Sky laws of certain states, as to which
no representation is made) contemplated by the Plan of Conversion and this
Agreement, including, but not limited to, the approval of the OTS required to be
received as of the date hereof, have been received, and all transactions
contemplated by the Plan of Conversion will, as of the Closing Date, have been
duly consummated in accordance with all material terms of the Plan of
Conversion, and all regulatory consents, approvals, authorizations and orders,
including, but not limited to, the approval of the OTS (except with respect to
the filing of certain post-sale, post-Conversion reports and documents in
compliance with the OTS's resolutions or letters of approval and approvals under
the securities or Blue Sky laws of certain states, as to which no representation
is made), and any and all applicable waiting periods have expired, or will have
expired by the Closing Date, and all such regulatory consents, approvals,
authorizations and orders, including, but not limited to, the approval of the
OTS, will, as of the Closing Date, be in full force and effect.
(j) The Company has been duly organized as a Delaware corporation, and the
Association has been duly organized as a federally chartered mutual savings
association, and each of them is validly existing and in good standing under the
laws of the jurisdiction of its organization with full corporate power and
authority to own its property and conduct its business
5
<PAGE>
as described in the Registration Statement and the Prospectus. Each of the
Company and the Association is duly qualified to transact business and is in
good standing in each other jurisdiction in which the failure to so qualify
would have a material adverse effect on the condition (financial or otherwise)
or the business, properties or results of operations of the Company or the
Association. The Association does not own equity securities of or an equity
interest in any other business enterprise except as described in the Prospectus.
The Company and the Association have obtained all material licenses, permits and
other governmental authorizations required for the conduct of their respective
businesses; all such licenses, permits and governmental authorizations are in
full force and effect, and the Company and the Association are in compliance in
all material respects with all laws, rules, regulations and orders applicable to
the operation of their respective businesses. On the Closing Date, upon
amendment of the Association's charter and bylaws as provided in the rules and
regulations of the OTS and completion of the sale by the Company of the Shares
as contemplated by the Prospectus: (i) the Association will be converted
pursuant to the Plan of Conversion to a federally chartered stock savings
association with full power and authority to own its property and conduct its
business as described in the Prospectus; (ii) all of the outstanding capital
stock of the Association will be owned of record and beneficially by the
Company; and (iii) the Company will have no direct subsidiaries other than the
Association. At the Closing Date, the Conversion will have been effected in
accordance with all applicable statutes, regulations, decisions and orders; and,
except with respect to the filing of certain post-sale, post-Conversion reports
and documents in compliance with the OTS's resolutions or letters of approval,
all of the terms, conditions, requirements and provisions of and to the
Conversion imposed on the Association by the OTS will have been complied with by
the Association in all material respects or appropriate waivers will have been
obtained.
(k) Each of the Company and the Association has good and marketable title
to, or valid and enforceable leasehold estates in, all items of real and
personal property which are stated in the Prospectus to be owned or leased by
them, in each case free and clear of all liens, encumbrances, claims, security
interests and defects, other than (i) the lien of the Federal Home Loan Bank of
Chicago (ii) those referred to in the Prospectus or (iii) those which
individually or in the aggregate would not have a material adverse effect upon
the operations of the Company or the Association, taken as a whole, and all of
the leases and subleases material to the business of the Company and Association
under which either of them hold properties, including those described in the
Prospectus, are valid, subsisting and enforceable leases.
(l) All contracts and other documents required to be filed as exhibits to
the Registration Statement, the Form AC or the Holding Company Application have
been filed with the Commission or the OTS, as the case may be.
(m) The financial statements and schedules which are included in the
Registration Statement and Prospectus present fairly the financial condition,
results of operations, retained earnings and cash flows of the Association at
the dates thereof and for the periods covered thereby and comply as to form in
all material respects with the applicable accounting requirements of the 1933
Act, the Regulations and the Conversion Regulations. Such financial statements
have been prepared in accordance with generally accepted accounting principles
consistently applied throughout the periods involved, and such financial
statements are consistent with the most
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<PAGE>
recent financial statements and other reports filed by the Company or the
Association with supervisory and regulatory authorities, except that the
accounting principles employed in such filings conform to the requirements of
such authorities and not necessarily to generally accepted accounting
principles. The tables and other financial, statistical, and pro forma
information and related notes included in the Prospectus that relate to the
Company or the Association or both of them present fairly in all material
respects the information purported to be shown thereby at the respective dates
thereof for the respective periods covered thereby.
(n) Subsequent to the respective dates as of which information is given in
the Prospectus, except as may otherwise be disclosed therein, there has not
been: (i) any material adverse change in, or any adverse development that
materially affects, and neither the Company nor the Association is aware of any
prospective change or development (other than prospective changes or
developments affecting the savings institution industry generally) which
reasonably could be expected to have a material adverse effect on, the condition
(financial or otherwise), business, properties, or results of operations of the
Company and the Association taken as a whole; (ii) any change in the capital
stock, or material increase in the long-term debt of the Company or the
Association; (iii) the issuance of any securities or incurrence of any liability
or obligation, direct or contingent, for borrowing other than in the ordinary
course of business by the Company or the Association; or (iv) any material
transactions entered into by the Company or the Association other than in the
ordinary course of business. The capitalization, liabilities, assets,
properties and business of the Association conform in all material respects to
the descriptions thereof contained in the Prospectus and the Registration
Statement. The Association has no material liability of any kind, contingent or
otherwise, except as set forth in the Prospectus.
(o) No default exists, and no event has occurred which with notice or
passage of time, or both, would constitute a default on the part of the Company
or the Association in the due performance and observance of any term, covenant
or condition of any contract, lease, indenture, mortgage, deed of trust, note,
loan or credit agreement or any other instrument or agreement to which the
Company or the Association is a party or by which either of them or any of their
respective properties may be bound or affected in any respect which, in any such
case, would have a material adverse effect on the condition (financial or
otherwise), business, properties or results of operations of the Company or the
Association; such agreements are in full force and effect; and no other party to
any such agreements has instituted or, to the best knowledge of the Company or
the Association, threatened, any action or proceeding wherein the Company or the
Association is alleged to be in default thereunder. As of the date hereof,
neither the Company nor the Association is, and as of the Closing Date, neither
the Company nor the Association will be: (i) in breach of any term or provision
of its respective certificate of incorporation or charter or bylaws (and the
Association will not be in violation of its charter or bylaws in stock form upon
consummation of the Conversion); (ii) in violation of any authorization,
approval, judgment, decree or order, or (iii) in violation of any statute, rule
or regulation that individually or in the aggregate would have a national
adverse effect on the Company or the Association, taken as a whole.
(p) The execution, delivery and performance of this Agreement and the Plan
of Conversion, the consummation of the transactions contemplated by this
Agreement and the Plan of Conversion, and compliance with the terms and
provisions hereof and thereof will not: (i) conflict with, or result in a
material breach of, any of the terms, provisions or conditions of,
7
<PAGE>
or constitute a default (or an event which with notice or passage of time, or
both, would constitute a default) under, the certificate of incorporation or
charter or bylaws of the Company or the Association; (ii) conflict with, or
result in a material breach of, any of the terms, provisions or conditions of or
constitute a default (or any event which with notice or passage of time, or
both, would constitute a default) under any material contract, lease, agreement,
indenture, mortgage, deed of trust, note or any other instrument or agreement to
which the Company or the Association is a party or by which either of them or
their respective properties is bound; (iii) violate any authorization, approval,
judgment, decree, order, statute, rule or regulation applicable to the Company
or the Association or any of their properties; or (iv) with the exception of the
liquidation account established in the Conversion, result in the creation of any
lien, charge or encumbrance upon any of the assets of the Company or the
Association.
(q) The Conversion, when consummated in accordance with the terms of the
Plan of Conversion, will conform in all material respects to the description
thereof contained in the Prospectus and the Proxy Statement. The issuance and
sale of the capital stock of the Association to the Company have been duly
authorized by all necessary action of the Association, the Company and
appropriate regulatory authorities and such capital stock, when issued and paid
for in accordance with the terms of the Plan of Conversion, will be fully paid
and non-assessable, will conform in all material respects to the description
thereof contained in the Prospectus and the Form AC and will not be subject to
any preemptive rights. There are no options, agreements, contracts or other
rights to purchase or acquire any shares of Common Stock or shares of the
Association's common stock (other than Subscription Rights, the purchase of the
Association common stock by the Company pursuant to the Conversion, rights to
purchase or acquire Common Stock pursuant to benefit plans of the Company as
expressly described in the Prospectus and any other rights expressly described
in the Plan of Conversion). The issuance and sale of the Shares by the Company
have been duly authorized: (i) by all necessary action of the Company; and (ii)
subject to the receipt of OTS approvals prior to the Closing Date, by the OTS.
The Shares, when issued and paid for in accordance with the terms of the Plan of
Conversion, will be duly and validly issued and fully paid and non-assessable,
will conform in all material respects to the description thereof contained in
the Prospectus and will not be subject to any preemptive rights. The purchasers
of the Shares from the Company, upon issuance thereof against payment therefor,
will acquire such Shares free and clear of all claims, encumbrances, security
interests and liens whatsoever created or suffered to be created by the Company.
The certificates representing the Shares will conform with the requirements of
applicable laws and regulations. Upon consummation of the Conversion, the
authorized, issued and outstanding equity capital of the Company will be within
the range that is set forth in the Prospectus under the caption
"Capitalization," based on the assumptions stated therein.
(r) No approval of any regulatory or supervisory or other public authority
is required in connection with the execution and delivery of this Agreement or
the issuance of the Shares, except for the declaration of effectiveness of the
Registration Statement and any required post-effective amendment to the
Registration Statement by the Commission, approval of the Form AC and Proxy
Statement and other marketing materials by the OTS, the issuance of the
Association's federal stock charter and bylaws by the OTS, the approval of the
Holding Company Application by the OTS and any necessary qualification or
registration under the
8
<PAGE>
securities or Blue Sky laws of the various states in which the Shares are to be
offered and as may be required under the regulations of The Nasdaq National
Market.
(s) KPMG Peat Marwick LLP, the firm which has certified the financial
statements of the Association included in the Prospectus, are independent
certified public accountants, as required by the 1933 Act, the Regulations and
the Conversion Regulations.
(t) RP Financial, L.C., which has prepared the Association's conversion
valuation appraisal report dated as of June 7, 1996 (the "Appraisal"), which
Appraisal (as amended or supplemented, if amended or supplemented) is referred
to in the Prospectus, is independent with respect to the Company and the
Association within the meaning of the Conversion Regulations and is believed by
the Company and the Association to be experienced and expert in rendering
corporate appraisals of thrift institutions.
(u) The Company and the Association have filed all federal income and state
and local franchise tax returns required to be filed (or have timely filed
extensions therefor) and have made timely payments of all taxes due and payable
in respect of such returns, and no deficiency has been asserted with respect
thereto by any taxing authority.
(v) Neither the Company nor the Association or, to the best knowledge of
the Company or the Association, any employee of the Company or the Association
has made any payment of funds of the Company or the Association which would be
prohibited by law, and no funds of the Company or the Association have been set
aside to be used for any payment so prohibited by law. Neither the Company nor
the Association, or, to the best knowledge of the Company and Association, any
employee of the Company or the Association has made any payment of funds of the
Company or the Association as a loan for the purchase of Shares. The Company
and the Association are in compliance with the applicable financial record-
keeping and reporting requirements of the Currency and Foreign Transaction
Reporting Act of 1970, as amended, and the regulations and rules thereunder.
(w) The Company has received approval, subject to notice of issuance, to
have the Shares quoted on The Nasdaq National Market effective on the Closing
Date.
(x) The Company is a savings and loan holding company duly registered with
the OTS. The deposit accounts of the Association are insured by the Savings
Association Insurance Fund of the FDIC up to the maximum amount allowed under
law, and no proceeding for the termination or revocation of such insurance is
pending or, to the best knowledge of the Company and the Association,
threatened. The Association is a member in good standing of the Federal Home
Loan Bank of Chicago. Neither the Company nor the Association is in violation
of any directive, order, agreement or understanding from the FDIC, the OTS or
any other agency to make any material change in the method of conducting its
business so as to comply in all material respects with all applicable statutes
and regulations (including, without limitation, regulations, decisions,
directives and orders of the FDIC and the OTS).
(y) Neither the Company nor the Association has relied upon Hovde or
Hovde's legal counsel for any legal, tax or accounting advice in connection with
the Conversion.
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<PAGE>
(z) Neither the Company nor the Association is required to be registered
under the Investment Company Act of 1940, as amended.
(aa) There are no contracts, agreements or understandings between the
Company or the Association and any person granting such person the right to
require the Company or the Association to file a registration statement under
the 1933 Act with respect to any securities of the Company or the Association
owned or to be owned by such person or to require the Company or the Association
to include such securities in the Registration Statement or in any other
registration statement filed by the Company or the Association under the 1933
Act.
(bb) Neither the Company nor the Association has: (i) issued any securities
within the last 18 months (except for notes to evidence other bank loans and
reverse repurchase agreements or other liabilities and the issuance of the
minimum number of shares of Common Stock by the Company necessary to qualify as
a foreign corporation in Illinois); (ii) had any material dealings with respect
to sales of its securities within the 12 months prior to the date hereof with
any member of the National Association of Securities Dealers, Inc. (the "NASD"),
or any person related to or associated with such member, other than discussions
and meetings with Hovde relating to the Conversion; (iii) entered into a
financial or management consulting agreement with any member of the NASD with
respect to its securities or any person related to or associated with such
member, except as contemplated hereunder and except in connection with the
Conversion as described in the Prospectus under the caption "The Conversion -
Marketing and Underwriting Arrangements"; or (iv) engaged any intermediary
between Hovde and the Company in connection with the offering of the Shares, and
no person is being compensated in any manner for such service.
3. Appointment of Hovde; Sale and Delivery of the Shares. Subject to the
-----------------------------------------------------
terms and conditions herein set forth, the Company and the Association hereby
appoint Hovde as their agent to consult with and advise the Company and the
Association, and to solicit subscriptions and purchase orders for Shares on
behalf of the Company and the Association on a best efforts basis, in connection
with the Company's sale of the Shares in the Subscription Offering, the
Community Offering, if any, and the Syndicated Community Offering, if any. On
the basis of the representations and warranties herein contained, and subject to
the terms and conditions herein set forth, Hovde accepts such appointment and
agrees to provide, consult with and advise the Company and the Association as to
the Conversion services set forth as Exhibit A to the letter agreement between
Hovde and the Association dated as of March 22, 1996, which Exhibit A is
incorporated by reference herein; provided, however, that Hovde shall not be
obligated to take any action which is inconsistent with any applicable laws,
regulations, decisions or orders and, provided further, that Hovde shall not be
responsible for obtaining subscriptions or purchase orders for any specific
number of Shares and shall not be required to purchase any Shares. The
appointment of Hovde hereunder shall terminate upon consummation of the
Conversion. Except where specifically incorporated by reference herein, this
Agreement supersedes all other letter agreements, engagement letters or other
agreements previously entered into between Hovde and the Company and/or the
Association.
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In connection with the solicitation of offers to buy Shares in the
Syndicated Community Offering, if any, Hovde may use the services of other
brokers or dealers ("Selected Dealers") acceptable to the Company in its
reasonable discretion and, in that connection, it may invite (if requested to do
so by the Company) any Selected Dealer to become a "Sponsoring Dealer," that is,
a Selected Dealer who will solicit offers which result in sales on behalf of the
Company of at least the number of Shares specified by Hovde. Each Selected
Dealer, including each Sponsoring Dealer, shall enter into a Selected Dealer
Agreement substantially in the form attached hereto as Exhibit A.
---------
In the event the Company is unable to sell all of the minimum number of
Shares within the period provided in the Plan of Conversion and the Conversion
Regulations, and as described in the Prospectus, this Agreement shall terminate
and the Company shall refund to any persons who have subscribed for any of the
Shares the full amount which it may have received from them, together with
interest as provided in the Prospectus, and no party to this Agreement shall
have any obligation to the others hereunder, except for payment by the Company
as set forth in Sections 6, 8(a) and 8(d) hereof and payment by Hovde as
provided in Sections 8(b) and 8(d). Appropriate arrangements for placing the
funds received from subscriptions for Shares or other offers to purchase Shares
in special interest-bearing accounts with the Association pending consummation
or termination of the Subscription Offering, Community Offering (if any) and
Syndicated Community Offering (if any) were made prior to the commencement of
the Subscription and Community Offering, with provision for refund to the
purchasers as set forth above, or for delivery to the Company if all of the
Shares are sold.
If all of the minimum number of Shares are sold and all other conditions
precedent to the consummation of the Conversion are satisfied, the Company
agrees to issue or have issued the Shares sold and to release for delivery
certificates for such Shares on the Closing Date against payment therefor by
release of funds from the special interest-bearing accounts referred to above
and from a special account which the Company agrees to establish prior to the
retention of any Selected Dealer. The closing shall be held at the offices of
Thacher Proffitt & Wood, Two World Trade Center, New York, New York 10048 at
9:00 a.m., local time, or at such other place and time as shall be agreed upon
by the parties hereto, on a business day to be agreed upon by the parties
hereto. The Company shall notify Hovde by telephone, confirmed in writing, when
funds shall have been received for all of the Shares. Certificates for Shares
shall be delivered directly to the purchasers thereof or in accordance with the
Company's directions. Notwithstanding the foregoing, certificates for Shares
purchased through Selected Dealers shall be made available to Hovde for checking
at least 24 hours prior to the Closing Date at such office as Hovde and the
Company shall mutually designate. The hour and date upon which the Company
shall release for delivery all of the Shares, in accordance with the terms
hereof, are herein called the "Closing Date."
The Company and the Association (or their respective agents) shall advise
Hovde, whenever an allocation of the Shares does not strictly correspond to all
subscriptions for Shares, as to the allocation of the Shares. Hovde shall have
no liability to any party for the records or other information provided by the
Company and the Association (or their respective agents) to Hovde for use in
allocating the Shares. The Company and the Association shall indemnify and hold
harmless Hovde for any liability arising out of the allocation of the Shares in
accordance
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<PAGE>
with the records or other information provided to Hovde by the Company and the
Association (or their respective agents).
The Company will pay any stock issue and transfer taxes which may be
payable with respect to the sale of the Shares.
In addition to the expenses specified in Section 6 hereof, Hovde has
received or will receive the following compensation from the Company for Hovde's
services hereunder:
(a) A management fee of $37,500 has been paid to Hovde.
(b) For services rendered by Hovde in connection with the sale of Shares in
the Subscription Offering, the Community Offering (if any) and the Syndicated
Community Offering (if any), a fee equal to one and one-half percent (1.50%) of
the aggregate purchase price of Shares sold in the Subscription Offering, the
Community Offering (if any), and the Syndicated Community Offering (if any),
excluding Shares sold to the Company's directors, officers and employees (or
members of their immediate families) and the ESOP, shall be paid to Hovde at
Closing.
(c) In connection with the solicitation of offers to buy Shares in the
Syndicated Community Offering (if any), Hovde and the Company agree to negotiate
an additional fee in an amount up to five and one-half percent (5.50%) of the
aggregate purchase price of Shares sold in the Syndicated Community Offering,
which fee shall be paid to Hovde at Closing for allocation by Hovde in
accordance with the Selected Dealers Agreement.
The fees specified in clauses (b) and (c) above shall be payable to Hovde
by wire transfer of immediately available funds or a check in next-day funds, as
agreed to by the parties hereto, at the time so indicated above.
Notwithstanding anything to the contrary contained in this Agreement (but
subject to Section 10 hereof) Hovde reserves the right to renegotiate the amount
of fees (but only in those circumstances where the conduct of the Company or the
Association triggers the need for renegotiation pursuant to this paragraph) and
expenses payable or reimbursable, as the case may be, by the Company and the
Association in the event that (i) the Company and/or the Association are
required to resolicit subscribers for Shares in the Subscription and Community
Offering, or (ii) the regulations governing the Conversion are changed in a
manner that materially affects the ability of Hovde to perform its duties as set
forth in this Agreement. Until any renegotiation called for by this paragraph is
completed, Hovde shall not accrue expenses relating to any resolution or change
in regulations in an amount that would cause the total expenses incurred by
Hovde, that are reimbursable by the Association pursuant to Section 6 hereof, to
be greater than $80,000, without the prior written consent of the Company or the
Association, which consent shall not be unreasonably withheld.
4. Offering. The Company is offering up to 6,095,000 Shares (which number
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may be increased to up to 7,009,250 shares in the event of an oversubscription
or decreased as described in the Prospectus) in the Subscription Offering and
Community Offering, if any, and, if any Shares remain unsubscribed at the
conclusion of the Subscription Offering and Community Offering, if any, in the
Syndicated Community Offering.
5. Covenants of the Company and the Association. The Company and the
--------------------------------------------
Association jointly and severally covenant and agree with Hovde that:
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(a) The Company shall immediately upon the receipt of any information
concerning the events listed below notify Hovde and promptly confirm the notice
in writing: (i) when any post-effective amendment to the Registration Statement
or any supplement to the Prospectus has been filed; (ii) of the issuance by the
Commission of any order or other action suspending the use of the Prospectus or
of the initiation or the threat of any such action; (iii) of the receipt of any
notice with respect to the suspension of the qualification of the Shares for
offering or sale in any jurisdiction; and (iv) of the receipt of any comments or
requests for additional information or any amendment or supplement from the
staff of the Commission relating to the Registration Statement. The Company
will use its reasonable, good faith and diligent efforts to prevent the issuance
by the Commission or any other governmental authority of any such order and, if
any such order shall at any time be issued, to obtain the lifting, termination
or withdrawal thereof at the earliest possible time.
(b) During the time when a prospectus is required to be delivered under the
1933 Act, the Company will comply with all requirements imposed upon it by the
1933 Act, as now in effect and hereafter amended, and by the Regulations, as
from time to time in force, so far as necessary to permit the continuance of
offers and sales of or dealings in the Shares in accordance with the provisions
hereof and the Prospectus. If, at any time when the Prospectus is required to
be delivered under the 1933 Act, any event shall have occurred as a result of
which, in the opinion of counsel for the Company or counsel for Hovde, the
Prospectus as then amended or supplemented includes an untrue statement of a
material fact or omits to state a material fact required to be stated therein or
necessary to make the statements therein, in the light of the circumstances
under which they were made, not misleading, or if it is necessary at any time to
amend or supplement the Prospectus to comply with the 1933 Act, the Company
shall promptly notify Hovde in writing and prepare and file with the Commission
an appropriate amendment or supplement. The Company shall provide Hovde and
Hovde's counsel notice of the Company's intention to file any amendment or
supplement to the Registration Statement or the Prospectus and shall not file or
use any amendment or supplement to the Registration Statement or the Prospectus
of which Hovde has not first been furnished a copy and given a reasonable amount
of time to review such copy or to which Hovde shall reasonably object. For the
purposes of and during the timeframe contemplated by this subsection (b), each
of the Company and the Association shall timely furnish such information with
respect to itself as Hovde may from time to time reasonably request. The
Association shall not amend, without Hovde's prior written consent (which
consent shall not be unreasonably withheld), the Plan of Conversion in any
manner that, in the reasonable opinion of Hovde, would materially and adversely
affect the sale of the Shares or the terms of this Agreement. Prior to the
Closing Date, neither the Company nor the Association shall issue any press
release or other public communication with respect to the Company or the
Association or the Conversion without first providing to Hovde a copy of such
release or other communication and allowing Hovde a reasonable amount of time to
review such copy. Except as otherwise required by law, neither the Company nor
the Association shall issue any release or other communication prior to the
Closing Date to which Hovde shall reasonably object.
(c) The Association shall not file any amendment or supplement to the Form
AC, including the Association's Proxy Statement and Prospectus contained
therein, without notifying Hovde and without providing Hovde and Hovde's counsel
an opportunity to review such amendment. The Association shall not file any
amendment or supplement to the Form AC
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to which Hovde shall reasonably object. Hovde shall have a reasonable amount of
time to review any amendment or supplement to the Form AC.
(d) The Company or the Association shall immediately upon receipt of any
information concerning the events listed below notify Hovde and promptly confirm
the notice in writing: (i) of the request by the OTS, or any other governmental
entity, for any amendment or supplement to the Form AC or for additional
information relating to the Form AC or the Holding Company Application; or (ii)
of the issuance by the OTS, or any other governmental entity, of any order or
other action suspending the use of the Prospectus, Proxy Statement or any other
filing of the Association under the HOLA or other applicable law or regulations,
or the initiation or threat of any such action. The Company and the Association
will each use its reasonable, good faith and diligent efforts to prevent the
issuance by the OTS, or any other governmental entity, of any such order and, if
any such order shall at any time be issued, to obtain the lifting, termination
or withdrawal thereof at the earliest possible time.
(e) During the time when the Proxy Statement is required to be delivered
under the Conversion Regulations, the Association will comply with all
requirements imposed upon it by the Conversion Regulations. If, at any time
prior to the date of the Special Meeting (as defined in the Prospectus) of the
Association's members with respect to which the Proxy Statement is delivered,
any event shall have occurred as a result of which, in the opinion of counsel
for the Association or counsel for Hovde, the Proxy Statement includes an untrue
statement of a material fact or omits to state a material fact required to be
stated therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading, or if it is necessary
at any time to amend or supplement the Proxy Statement to comply with the
Conversion Regulations, the Association shall notify Hovde in writing and
prepare and file with the OTS, at the Association's expense, an appropriate
amendment or supplement. The Association shall not file or use any amendment or
supplement to the Proxy Statement of which Hovde has not first been furnished a
copy or to which Hovde shall reasonably object. For the purpose of and during
the timeframe contemplated by this subsection (e), the Association shall timely
furnish such information with respect to itself as Hovde may from time to time
reasonably request.
(f) The Company and the Association shall deliver to Hovde, without charge,
such number of copies of the Registration Statement (including all exhibits),
the Holding Company Application (including all exhibits) and the Form AC
(including all exhibits) as originally filed and each amendment, including,
without limitation, any post-effective amendment, thereto as Hovde may
reasonably request. The Company will furnish to Hovde, from time to time during
such period as the Prospectus is required by law to be delivered in connection
with offers and sales of the Shares, such number of copies of the Prospectus (as
amended or supplemented, if amended or supplemented) as Hovde may reasonably
request. The Company authorizes Hovde, all members of any selling group which
may be formed in connection with the distribution of the Shares, and all dealers
to whom any of the Shares may be sold by members of the selling group, to use
the Prospectus (as amended or supplemented, if amended or supplemented) in
connection with the sale of the Shares.
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(g) The Company and the Association have taken or shall take all necessary
action, in cooperation with Hovde, to qualify or register the Shares for offer
and sale by the Company under the securities or "Blue Sky" laws of such
jurisdictions in which the Shares are required by the Conversion Regulations to
be offered or as Hovde and the Company shall reasonably agree to designate;
provided, however, that neither the Company nor the Association shall be
obligated to qualify as a foreign corporation to do business under the laws of
any such jurisdiction or to file any general consent to service of process.
(h) The Company shall make generally available to its security holders as
soon as practicable, but not later than the first day of the 15th full calendar
month following the effective date of the Registration Statement, an earnings
statement of the Company and its consolidated subsidiaries (which need not be
certified by independent certified public accountants unless required by the
1933 Act or the Regulations, but which shall satisfy the provisions of Rule 158
under the 1933 Act) covering a period of at least 12 months beginning after the
effective date of the Registration Statement.
(i) The Company shall file a registration statement for the Common Stock
under Section 12(g) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), prior to completion of the stock offering pursuant to the Plan
of Conversion and will request that such registration statement be effective
upon completion of the Conversion. The Company will maintain the effectiveness
of such registration for not less than three years. The Company will use its
reasonable, good faith and diligent efforts to obtain approval for and maintain
quotation of the Shares on The Nasdaq National Market effective on or prior to
the Closing Date. The Company will not sell or issue, contract to sell or
otherwise dispose of, for a period of 90 days after the Closing Date, without
Hovde's prior written consent, which consent shall not be unreasonably withheld,
any shares of Common Stock other than in connection with any plan or arrangement
described in the Prospectus (and the Company shall notify Hovde of any such
sale, issuance, contract or disposition pursuant to such plan or arrangement).
(j) During the period of three years hereafter, the Company shall furnish:
(i) to its security holders and to Hovde, as soon as practicable after the end
of each fiscal year of the Company, an audited balance sheet and statements of
operations, stockholders' equity and changes in financial position as at the end
of and for such year; (ii) to Hovde, as soon as practicable after the end of
each of the first three quarters of each fiscal year, a balance sheet and
statement of operations of the Company (which need not be audited) as at the end
of and for such quarter and the year to date and as at the end of and for the
corresponding periods of the preceding fiscal year; (iii) to Hovde, as soon as
available, a copy of each other report of the Company mailed to its stockholders
or filed with the Commission pursuant to the Exchange Act or otherwise
(including, without limitation, reports on Forms 10-K, 10-Q and 8-K, and all
proxy statements and annual reports to stockholders), or the OTS or any other
supervisory or regulatory authority or any national securities exchange or
system on which any class of securities of the Company is listed or quoted,
including, but not limited to, the Nasdaq National Market, other than on a
confidential basis; (iv) to Hovde, each press release and material news item and
article released by the Company or the Association; and (v) such additional
publicly available documents and information with respect to and issued or
prepared by the Company and the Association as Hovde may reasonably request.
During any period when the Company has
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an active subsidiary or subsidiaries, such financial statements will be on a
consolidated basis to the extent the accounts of the Company and its subsidiary
or subsidiaries are consolidated.
(k) The Company shall furnish to Hovde as early as practicable prior to the
Closing Date, but no later than two full business days prior thereto, a copy of
the latest available unaudited interim financial statements of the Association
which have been read by KMPG Peat Marwick LLP, as stated in their letters to be
furnished pursuant to subsections (g) and (h) of Section 7 hereof.
(l) The Company and the Association shall take such actions and furnish
such information as are reasonably requested by Hovde in order for Hovde to
ensure compliance with the NASD's "Interpretation Relating to Free-Riding and
Withholding."
(m) The Company shall not deliver the Shares until the Company and the
Association each have satisfied or caused to be satisfied each condition set
forth in Section 7 hereof unless such condition is waived. The Company and the
Association shall use their reasonable, good faith and diligent efforts to
comply with or cause to be complied with the conditions precedent to the
obligations of Hovde as specified in Section 7 hereof.
(n) Prior to the Closing Date, the Company and the Association shall
conduct their respective businesses in compliance with, in all material
respects, all applicable federal and state laws, rules, regulations, decisions,
directives and orders, including all decisions, directives and orders of the
FDIC and the OTS and consistent with prior business practices of the Company and
the Association.
(o) The Company and the Association shall comply with any and all terms,
conditions, requirements and provisions with respect to the Conversion and the
transactions contemplated thereby imposed by the OTS, the HOLA, the Commission,
the 1933 Act, the Regulations (including, without limitation, the filing of
reports on Form SR pursuant to Rule 463 of the Regulations or any successor
provision), the Exchange Act and the regulations promulgated by the Commission
pursuant to the Exchange Act to be complied with subsequent to the Closing Date.
The Company will comply with all provisions of all undertakings contained in the
Registration Statement. The liquidation account for the benefit of Eligible
Account Holders and Supplemental Eligible Account Holders (as defined in the
Prospectus) of the Association shall be duly established and maintained in
accordance with the requirements of the OTS.
(p) The Company shall apply the proceeds from the sale of the Shares in the
manner set forth in the Prospectus under the caption "Use of Proceeds."
6. Payment of Expenses. Whether or not the sale of the Shares by the
-------------------
Company is consummated, the Association shall pay all expenses incident to the
performance of the obligations of the Company and the Association under this
Agreement, including but not limited to the following: (a) the preparation,
printing, issuance and delivery of certificates for the Common Stock; (b) the
fees and disbursements of the Company's and the Association's counsel,
accountants and other advisors; (c) the printing and delivery to Hovde in such
quantities as
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Hovde shall reasonably request of copies of the Registration Statement, the
Prospectus, the Proxy Statement, the Form AC and the Holding Company Application
as originally filed and as amended or supplemented and all other documents in
connection with the Conversion and this Agreement; (d) the fees for listing the
Shares on The Nasdaq National Market; (e) fees and expenses relating to the
preparation of the independent appraisal and all updates thereof; (f) fees and
expenses relating to advertising expenses, temporary personnel expenses and
conversion center expenses, investor meeting expenses, and other miscellaneous
expenses relating to the marketing of the Common Stock; (g) the fees and charges
of any transfer agent, registrar and other agents; (h) the preparation,
printing, filing, delivery and shipping of the Prospectus (including the
financial statements contained therein), and any amendments or supplements
thereto, this Agreement and related agreements and communications and related
documents; (i) filing fees and expenses in connection with the qualification or
registration of the Shares for offer and sale by the Company under the
securities or "Blue Sky" laws, including reasonable fees and expenses of counsel
in connection with such qualification or registration and all "Blue Sky"
memoranda; and (j) filing fees paid or incurred by Hovde in connection with the
filings with the NASD. In the event Hovde incurs any of the fees or expenses
enumerated above in connection with the Subscription Offering, the Community
Offering or the Syndicated Community Offering, the Association will reimburse
Hovde for such fees and expenses; provided, however, that Hovde shall not incur
any substantial expenses on behalf of the Association or the Company without the
prior written consent of the Association or the Company. In addition, the
Association shall reimburse Hovde for out-of-pocket expenses incurred by Hovde
relating to the offering of the Shares (including, without limitation, legal
fees and out-of-pocket disbursements of Hovde's legal counsel); provided,
however, subject to Section 3 hereof, that such out-of-pocket expenses of Hovde
shall not exceed $60,000 without the prior written consent of the Company or the
Association.
7. Conditions of Obligations of Hovde. The Company, the Association and
----------------------------------
Hovde agree that all obligations of Hovde provided herein shall be subject to
the accuracy of the representations and warranties contained herein as of the
date hereof and as of the Closing Date, to the accuracy of the statements of
officers and directors of the Company and the Association made pursuant to the
provisions hereof, to the performance by each of the Company and the Association
of its obligations hereunder to be performed at or prior to the Closing Date,
and to the following conditions:
(a) At the Closing Date, Hovde shall receive the favorable opinion of
Thacher Proffitt & Wood, counsel for the Company and the Association, dated the
Closing Date, addressed to Hovde, in form and substance satisfactory to counsel
for Hovde and to the effect that:
(i) The Company has been duly incorporated and is validly existing as a
corporation in good standing under the laws of the State of Delaware and has
full corporate power and authority to own its properties and conduct its
business as described in the Prospectus; and the Company is duly qualified to
transact business and is in good standing in each other jurisdiction in which
the failure to so qualify would have a material adverse effect on the condition
(financial or otherwise), or the business, properties or results of operations
of the Company;
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(ii) The Association has, prior to the Closing Date, been duly organized
and is validly existing as a federally chartered mutual savings association
under the laws of the United States with full corporate power and authority to
own its properties and to conduct its business as described in the Prospectus
and, as of the Closing Date, the Association will become duly organized and
validly existing as a federally chartered capital stock savings association in
good standing under the laws of the United States with full corporate power and
authority to own its properties and to conduct its business as described in the
Prospectus; and the Association is duly qualified to transact business in each
jurisdiction in which the failure to so qualify would have a material adverse
effect on the condition (financial or otherwise), or the business, properties or
results of operations of the Association. The Association is a member of the
Federal Home Loan Bank of Chicago, and the deposit accounts of the Association
are insured by the Savings Association Insurance Fund of the FDIC up to the
maximum amount allowed under law;
(iii) The activities of the Association described in the Prospectus are
permitted under federal law (and not expressly prohibited under the Delaware
General Corporation Law) to subsidiaries of a savings association holding
company that is a Delaware business corporation. To the best of such counsel's
knowledge, each of the Company and the Association has obtained all licenses,
permits, and other governmental authorizations that are material for the conduct
of its business, and all such licenses, permits and other governmental
authorization are in full force and effect, and to the best of such counsel's
knowledge the Company and the Association are complying therewith in all
material respects;
(iv) The Plan of Conversion complies with, and to the best of such
counsel's knowledge the Conversion has been effected in accordance with, all
applicable laws, rules, regulations, decisions and orders; and to the best
of such counsel's knowledge of the terms, conditions, requirements and
provisions with respect to the Plan of Conversion and the Conversion (including
those with respect to the Subscription and Community Offering and the Syndicated
Community Offering) imposed by the OTS in writing or orally communicated to such
counsel, the Company or the Association have been complied with by the Company
and the Association in all material respects or appropriate waivers have been
obtained;
(v) As of the Closing Date, the Company has authorized Common Stock as set
forth in the Registration Statement and the Prospectus and the description of
such Common Stock in the Registration Statement and the Prospectus is accurate
and complete in all material respects. Other than as expressly disclosed in the
Prospectus or in the certificate of incorporation, charter, bylaws or minute
books of the Company, to the best of such counsel's knowledge, there is no
commitment, plan or arrangement to issue, and no outstanding option, warrant or
other right calling for the issuance or sale of, any shares of capital stock of
the Company or the Association or any security or other instrument which by its
terms is convertible into, exercisable for or exchangeable for capital stock of
the Company or of the Association. To the best of such counsel's knowledge,
there are no options, agreements, contracts or other rights in existence to
purchase or acquire from the Company any issued and outstanding shares of the
common stock of the Association;
(vi) The issuance and sale of the Shares have been duly and validly
authorized by all necessary action on the part of the Company and have received
all necessary regulatory approvals; the Shares, when issued and paid for in
accordance with the terms of the
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Plan of Conversion and this Agreement, will be duly and validly issued and fully
paid and non-assessable and not subject to any preemptive rights, and the
purchasers of the Shares from the Company, upon issuance thereof against payment
therefor, will acquire such Shares free and clear of all claims, encumbrances,
security interests and liens whatsoever created or suffered to be created by the
Company (other than encumbrances created by statute or regulation);
(vii) The issuance and sale of the capital stock of the Association to the
Company, the Plan of Conversion and the Conversion have been duly authorized by
all necessary action of the Association and have received the approval of the
OTS and such capital stock, when issued and paid for in accordance with the
terms of the Plan of Conversion, will be validly issued, fully paid and non-
assessable and owned beneficially and of record by the Company;
(viii) The certificates for the Shares comply with applicable requirements
of Delaware law;
(ix) The execution, delivery and performance of this Agreement and the
consummation of the transactions contemplated hereby have been duly and validly
authorized by all necessary action on the part of the Company and the
Association, and this Agreement constitutes the legal, valid and binding
agreement of the Company and the Association, enforceable in accordance with its
terms (except as the enforceability thereof may be limited by bankruptcy,
insolvency, moratorium, reorganization or similar laws affecting the
enforceability of creditors' rights generally or the rights of creditors of
federally chartered savings associations, the accounts of which are insured by
the FDIC or by general equity principles, regardless of whether such
enforceability is considered in a proceeding in equity or at law);
(x) Except as set forth in the Prospectus, there are no material legal or
governmental proceedings pending or, to the best of such counsel's knowledge,
threatened against, or involving the properties of, the Company or the
Association required to be disclosed in the Prospectus that have not been
disclosed therein; provided that for this purpose, any litigation or
governmental proceeding is not considered to be "threatened" unless the
potential litigant or governmental authority has manifested to the management of
the Company or the Association, or to such counsel, a present intention to
initiate such litigation or proceeding;
(xi) The statements in the Prospectus under the captions "Market for the
Common Stock," "Dividend Policy," "Regulation," "Restrictions on Acquisition of
the Company," "Description of Capital Stock of the Company" and "Description of
Capital Stock of the Association," insofar as they constitute statements of law
or legal conclusions, are correct in all material respects;
(xii) The Holding Company Application, the Form AC (including the
Prospectus, the Plan of Conversion and the Proxy Statement), the form of stock
charter and the Proxy Statement have been approved by the OTS; the stock charter
when issued to the Association will be in full force and effect; the
Registration Statement has been declared effective by the Commission; the OTS
has issued its order of approval under the savings and loan holding company
provisions of the HOLA, and, subject to the satisfaction of the conditions
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<PAGE>
of the OTS's approval of the Conversion, no further approval of any other
governmental authority is required for the Conversion and the issuance and sale
of the Shares except any necessary qualifications or registration under the
securities or "Blue Sky" laws of the various jurisdictions in which the Shares
are offered (as to which no opinion need be rendered) and any approvals of the
NASD and The Nasdaq National Market; and no action has been taken or is pending
or, to the best of such counsel's knowledge, threatened or contemplated, to
revoke such approvals or to suspend the use of the Prospectus or the Proxy
Statement;
(xiii) The execution, delivery and performance of this Agreement and the
issuance and sale of the Shares will not result, and the consummation of the
transactions contemplated by the Plan of Conversion has not resulted and will
not result, in a breach or violation of any of the terms and provisions of, or
constitute a default under or, with the exception of the liquidation account
established in the Conversion, as described in the Plan of Conversion and the
Prospectus, result in the creation or imposition of any lien, charge or other
encumbrance upon (A) any of the properties or assets of the Company or the
Association that individually or in the aggregate would have a material adverse
effect on the Company or the Association , taken as a whole, (B) the certificate
of incorporation, charter or bylaws of the Company or the Association (in mutual
or stock form), or (C) any order statute, rule, regulation of any governmental
agency or body or any court having jurisdiction over the Company or the
Association or any of their properties, except for violations of any such
statute, rule or regulation that do not, either individually or in the
aggregate, have a material adverse effect on the Company or the Association,
taken as a whole, or (D) any material agreement or instrument to which the
Company or the Association is a party or by which the Company or the Association
is bound or to which any of the properties of the Company or the Association are
subject;
(xiv) To the best of such counsel's knowledge, based upon the conferences
and other investigations referred to in subsection 7(b) below, the Company and
the Association have good and marketable title to, or valid and enforceable
leasehold estates in, the items of real and personal property stated in the
Prospectus to be owned or leased by them and are material to their business, in
each case free and clear of all liens, encumbrances, claims, security interests
and defects, other than (i) the lien of the Federal Home Loan Bank of Chicago,
(ii) those referred to in the Prospectus and (iii) those which individually or
in the aggregate would not have a material adverse effect upon the operations of
the Company or the Association, taken as a whole.
(xv) To the best of such counsel's knowledge, neither the Company nor the
Association is presently: (i) in breach of, or in default (nor has an event
occurred which with notice or passage of time or both would constitute a
material default) under, any material indenture, mortgage, deed of trust, note,
loan or credit agreement or any other instrument or agreement to which the
Company or the Association is a party or by which either of them or any of their
respective properties may be bound or affected, which contravention would be
material to the business of the Company or the Association taken as a whole; or
(ii) in violation of any term or provision of its certificate of incorporation,
charter or bylaws;
(xvi) The Registration Statement and the Prospectus (in each case as
amended or supplemented, if so amended or supplemented) comply as to form in all
material respects with the requirements of the 1933 Act and the rules,
regulations, and all written decisions and orders of the Commission (including,
without limitation, the Regulations) (except as to financial statements, notes
to financial statements, financial tables, the appraisal and other
20
<PAGE>
financial and statistical data included therein as to which no opinion need be
expressed) and the Form AC (including the Proxy Statement) (as amended or
supplemented, if so amended or supplemented) (except as to financial statements,
notes to financial statements, financial tables, the appraisal, business plan
and other financial and statistical data included therein as to which no opinion
need be expressed) complies as to form in all material respects with the
requirements of the Conversion Regulations and any other applicable federal laws
or regulations, decisions or orders of the OTS; and
(xvii) To the best of such counsel's knowledge, neither the Company nor
the Association is in violation of any directive, order, agreement or
understanding from or with the FDIC, the OTS or any applicable state regulatory
agency to make any material change in the method of conducting its business, and
to the best of such counsel's knowledge, the Company and the Association have
conducted and are conducting their businesses so as to comply in all material
respects with all applicable statutes and regulations (including, without
limitation, regulations, decisions, directives and orders of the OTS, the FDIC
and applicable state regulatory agencies).
In rendering such opinion, such counsel may rely as to matters of fact on
certificates of officers, trustees and directors of the Company and the
Association and certificates of public officials, and as to matters of law other
than federal law, on opinions of other counsel admitted to practice the
applicable law reasonably acceptable to counsel for Hovde; provided, however,
that such counsel shall provide a letter addressed to Hovde which states that
with respect to the opinion of such other counsel, nothing has come to such
counsel's attention that would lead it to believe that it and Hovde are not
reasonably justified in relying upon such opinion. Such counsel may assume that
any agreement is the valid and binding obligation of any party to such agreement
other than the Company or the Association.
(b) At the Closing Date, Hovde shall receive the letter of Thacher Proffitt
& Wood, counsel for the Company and the Association, addressed to Hovde, dated
the Closing Date, in form and substance satisfactory to Hovde's counsel to the
following effect: During the preparation of the Registration Statement and the
Prospectus and any amendments or supplements thereto, such counsel participated
in conferences with management of and the independent public accountants for the
Company and the Association. Based upon such conferences and a review of
corporate records of the Company and the Association as such counsel conducted
in connection with the preparation of the Registration Statement and the
Prospectus, such counsel has no knowledge that would lead them to believe that
the Registration Statement, as amended or supplemented, if amended or
supplemented (except as to financial statements, notes to financial statements,
financial tables and other financial and statistical data contained therein with
respect to which no opinion need be expressed), at the time it became effective
and at the time any post-effective amendment thereto became effective, contained
any untrue statement of a material fact or omitted to state a material fact
required to be stated therein or necessary to make the statements made therein,
in light of the circumstances under which they are made, not misleading, or that
the Prospectus, as amended or supplemented, if amended or supplemented (except
as to financial statements, notes to financial statements, financial tables, the
appraisal and other financial and statistical data included therein as to which
no opinion need be expressed), at the time the Registration Statement became
effective or at the time any
21
<PAGE>
amendment or supplement to the Prospectus was filed with the Commission or
transmitted to the Commission for filing or on such Closing Date, contained any
untrue statement of a material fact or omitted to state a material fact
necessary to make the statements therein, in light of the circumstances under
which they were made, not misleading.
(c) At the Closing Date, Hovde shall receive the letter of Thacher Proffitt
& Wood, counsel for the Company and the Association, addressed to Hovde, dated
the Closing Date, in form and substance satisfactory to Hovde's counsel to the
effect that: nothing has come to their attention that would lead them to
believe that the Form AC and the Proxy Statement, as amended or supplemented, if
amended or supplemented (except as to financial statements, notes to financial
statements, financial tables, the business plan and the appraisal and other
financial and statistical data contained therein with respect to which no
opinion need be expressed), at the time it was approved by the OTS, contained
any untrue statement of material fact or omitted to state a material fact
required to be stated therein or necessary to make the statements made therein,
in light of the circumstances under which they were made, not misleading, or
that the Form AC and the Proxy Statement, as amended or supplemented, if amended
or supplemented (except as to financial statements, notes to financial
statements, financial tables, the business plan and the appraisal and other
financial and statistical data included therein as to which no opinion need be
expressed), at the time the Form AC and the Proxy Statement was approved by the
OTS or at the time the Proxy Statement was distributed to the Association's
members, contained any untrue statement of a material fact or omitted to state a
material fact necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading.
(d) At the Closing Date, Hovde shall receive the favorable opinion of
Barack, Ferrazzano, Kirschbaum & Perlman, counsel for Hovde, dated the Closing
Date and addressed to Hovde, with respect to such matters as Hovde reasonably
may require. In rendering such opinion, such counsel may rely as to matters of
fact upon certificates of officers and directors of the Company and the
Association delivered pursuant hereto and as to matters of law relating to other
jurisdictions upon any opinion of local counsel.
(e) Prior to and at the Closing Date: (i) in the reasonable opinion of
Hovde, there shall have been no material adverse change in the condition
(financial or otherwise) or the business, properties or results of operations of
the Company or the Association, from the latest dates as of which such condition
is set forth in the Registration Statement and the Prospectus except as referred
to therein; (ii) there shall have been no material transaction entered into by
the Company or the Association without the prior written consent of Hovde (which
consent shall not be unreasonably withheld) from the latest date as of which the
financial condition of the Company or the Association is set forth in the
Registration Statement and Prospectus, other than transactions referred to or
contemplated therein or transactions in the ordinary course of business; (iii)
except as disclosed in the Registration Statement and the Prospectus, neither
the Company nor the Association shall have received from the OTS any direction
(oral or written) to make any material change in the method of conducting its
business with which it has not complied (which direction, if any, shall have
been disclosed to Hovde) or which materially and adversely would affect the
condition (financial or otherwise), or the business, properties or results of
operations of the Company or the Association; (iv) neither the Company nor the
Association shall have been in material default (nor shall an event have
occurred which, with
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notice or passage of time or both, would constitute a material default) under
any provision of any agreement or instrument relating to any outstanding
indebtedness; (v) no action, suit or proceeding, at law or in equity or before
or by any federal or state commission, board or other administrative agency,
shall be pending or, to the best knowledge of the Company or the Association,
threatened against the Company or the Association, or affecting any of their
properties wherein an unfavorable decision, ruling or finding would have a
material adverse effect on the condition (financial or otherwise), or the
business, properties or results of operations of the Company and the
Association, taken as a whole; (vi) the Shares shall have been qualified or
registered for offering and sale under the securities or "Blue Sky" laws of the
designated jurisdictions; (vii) there shall have been no suspension or
limitation in trading in securities generally on the Nasdaq National Market or
the New York Stock Exchange ("NYSE"), or the fixing of minimum or maximum prices
or the requiring of maximum ranges for prices for securities on or by the NYSE
or on or by The Nasdaq National Market; (viii) there shall have been no domestic
or international event, act or occurrence which has materially disrupted the
offering, sale or delivery of the Shares on the terms and in the manner
contemplated in the Registration Statement, the Form AC and the Prospectus; and
(ix) there shall have been no material decline in the price of equity or debt
securities traded on the NYSE or The Nasdaq National Market if the effect of
such a decline, in Hovde's good faith opinion, would make it impracticable or
inadvisable to proceed with the offering, sale or delivery of the Shares on the
terms and in the manner contemplated in the Registration Statement, the Form AC
and the Prospectus.
(f) At the Closing Date, Hovde shall receive a certificate of the chief
executive officer and of the principal financial or accounting officer of each
of the Company and the Association, dated the Closing Date, to the effect that:
(i) since the date as of which information is given in the Prospectus, the Proxy
Statement and the Registration Statement, there has been no material adverse
change in the condition (financial or otherwise), the business, properties or
results of operations of the Company or the Association, whether or not arising
in the ordinary course of business, except as disclosed in the Prospectus, the
Proxy Statement and the Registration Statement; (ii) the representations and
warranties of the Company and the Association in Section 2 hereof are true and
correct with the same force and effect as though expressly made at and as of the
Closing Date; (iii) the Company has complied in all material respects with all
agreements and satisfied all conditions on its part to be performed or satisfied
at or prior to the Closing Date under the Plan of Conversion; (iv) no order
revoking the approval of the Holding Company Application, the Form AC, the Proxy
Statement or the effectiveness of the Registration Statement or the Prospectus
has been initiated or threatened by the Commission, the OTS, the FDIC or any
applicable state authority; and (v) the conditions set forth in clauses (ii)
through (v) of subsection (e) of this Section 7 have been satisfied.
(g) Concurrently with the execution of this Agreement, Hovde shall receive
a letter form KPMG Peat Marwick LLP dated the date hereof and addressed to
Hovde: (i) confirming that KPMG Peat Marwick LLP is a firm of independent public
accountants within the meaning of the Code of Ethics of the American Institute
of Certified Public Accountants, the Regulations and the HOLA, and that no
information concerning its relationship with or interest in the Company or the
Association is required by Item 509 of Regulation S-K promulgated under the 1933
Act; (ii) stating in effect that in their opinion the financial statements of
the Company and
23
<PAGE>
the Association included in the Registration Statement and the Prospectus and
covered by their opinion included therein comply as to form in all material
respects with the applicable accounting requirements of the 1933 Act, the
Regulations and applicable OTS regulations; (iii) stating in effect that, on the
basis of certain agreed upon procedures (but not an audit in accordance with
generally accepted auditing standards) consisting of a reading of the latest
available unaudited interim financial statements of the Association prepared by
the Association and consultations with officers of the Company and the
Association responsible for financial and accounting matters, and any other
procedures which may be specified by such firm, nothing came to their attention
which caused them to believe that: (A) any unaudited financial statements
included in the Registration Statement or the Prospectus fail to comply as to
form in any material respect with the applicable requirements of the 1933 Act,
the Regulations or the HOLA; (B) such unaudited financial statements are not in
conformity with generally accepted accounting principles applied on a basis
substantially consistent with that of the audited financial statements included
in the Registration Statement and the Prospectus; (C) during the period from the
date of the latest audited financial statements (or unaudited financial
statements, if any later statements are included) included in the Registration
Statement or the Prospectus to a specified date not more than five business days
prior to the date of such letter, there was any material increase in borrowings
(other than as disclosed in the Prospectus or in the ordinary course of
business) by the Company or the Association; (D) at a specified date not more
than five business days prior to the date of such letter there was any decrease
in excess of 2% in consolidated net assets of the Company or the Association
as compared with amounts shown in the latest statement of condition (or
unaudited statement of condition if a later statement is included) included in
the Registration Statement or the Prospectus other than as disclosed in the
Prospectus; or (E) during the period from the date of the latest audited
statement of earnings (or unaudited statement of earnings if a later statement
is included) included in the Registration Statement or the Prospectus to a
specified date not more than five business days prior to the date of such letter
there was any decrease in net income or the Association as compared with the
comparable period in the prior year, except in all instances as set forth in or
contemplated by the Registration Statement and the Prospectus or in such letter;
and (iv) stating that, in addition to the examination referred to in their
opinion included in the Registration Statement and the Prospectus and the
performance of the procedures referred to in clause (iii) of this subsection
(g), they have compared with the general accounting records of the Company or
the Association which are subject to the internal controls of the accounting
system of the Company or the Association, as appropriate, and other data
prepared by the Company or the Association directly from such accounting
records, to the extent specified in such letter, such amounts and/or percentages
set forth in the Registration Statement and the Prospectus as Hovde may
reasonably request; and they have found such amounts and percentages to be in
agreement therewith (subject to rounding).
(h) At the Closing Date, Hovde shall receive a letter from KPMG Peat
Marwick LLP dated the Closing Date and addressed to Hovde confirming the
statements made by them in the letter delivered by them pursuant to subsection
(g) of this Section 7, the "specified date" referred to in clauses (iii)(C), (D)
and (E) thereof to be a date specified in such letter, which shall be not more
than five business days prior to the Closing Date.
(i) At the Closing Date, the Company and the Association will have
received favorable opinions of: Thacher Proffitt & Wood, counsel to the Company
and the Association,
24
<PAGE>
with respect to the federal tax consequences of the Conversion; and KPMG Peat
Marwick LLP with respect to the Illinois tax consequences of the Conversion.
(j) No order suspending the sale of the Shares in any designated
jurisdiction shall have been issued on or prior to the Closing Date, and no
proceedings for that purpose shall have been instituted or, to the knowledge of
Hovde or the Company, shall be contemplated.
All such opinions, certificates, letters and documents will be in
compliance with the provisions hereof only if they are reasonably satisfactory
in form and substance to Hovde and to counsel for Hovde. Any certificates
signed by an officer of the Company or the Association and delivered to Hovde or
to counsel for Hovde shall be deemed a representation and warranty by the
Company or the Association, as the case may be, to Hovde as to the statements
made therein. If any condition to Hovde's obligations hereunder to be fulfilled
prior to or at the Closing Date is not fulfilled, Hovde may terminate this
Agreement (provided that if this Agreement is so terminated but the sale of
Shares is nevertheless consummated, Hovde shall be entitled to the compensation
provided for in Section 3 hereof) or, if Hovde so elects, may waive any such
conditions which have not been fulfilled or may extend the time of their
fulfillment.
8. Indemnification and Contribution.
--------------------------------
(a) The Company and the Association jointly and severally agree to
indemnify and hold harmless Hovde, its affiliates, directors, officers, agents
and employees and each person, if any, who controls Hovde or any of its
affiliates within the meaning of Section 15 of the 1933 Act or Section 20(a) of
the Exchange Act against any and all losses, liabilities, claims, damages and
expenses (including, without limitation, reasonable attorneys' fees) whatsoever
and shall further promptly reimburse such persons for any legal or other
expenses reasonably incurred by each or any of them in investigating, preparing
to defend or defending against any such action, proceeding or claim (whether
commenced or threatened) arising out of or based upon (A) any untrue or alleged
untrue statement of a material fact or the omission or alleged omission of a
material fact required to be stated in or necessary to make not misleading any
statements contained in (i) the Registration Statement, the Prospectus, the
Proxy Statement or the Form AC (as from time to time amended and supplemented)
or (ii) any application to regulatory authorities or other document,
advertisement or communication (in this Section 8, collectively called
"Application") prepared or executed by or on behalf of the Company or the
Association with its consent or based upon information furnished by or on behalf
of the Company or the Association, whether or not filed in any jurisdiction in
order to qualify the Shares under the securities laws thereof or with the OTS or
the Commission, unless such statement or omission was made in reliance upon and
in conformity with written information furnished to the Company or the
Association with respect to Hovde by or on behalf of Hovde expressly for use in
the Registration Statement, the Prospectus, the Proxy Statement, the Form AC or
any amendment or supplement thereof or in any Application, as the case may be;
or (B) the participation by Hovde in the Conversion in accordance with the terms
of this Agreement. This indemnity shall be in addition to any liability the
Company or the Association may otherwise have to Hovde; provided, however, that,
with respect to the Association, such indemnification shall be to the full
extent permitted by the OTS, the FDIC and the Board of Governors of the Federal
Reserve System. If any action is brought against Hovde or any other
25
<PAGE>
person the Company and the Association are obligated hereby to indemnify (an
"Indemnified Party"), then such Indemnified Party shall promptly notify in
writing the party or parties against whom indemnification is to be sought of
such action. The Company and the Association agree to promptly notify Hovde of
the commencement of any litigation or proceeding against the Company or the
Association or any of their officers or directors in connection with sale of the
Shares or in connection with the Registration Statement, the Prospectus, the
Proxy Statement, the Form AC or any amendment or supplement thereto or any
Application. In any and each such instance, Hovde shall be entitled to counsel
of its own choice.
(b) Hovde agrees to indemnify and hold harmless the Company and the
Association and their directors, officers, agents and employees and each person,
if any, who controls the Company or the Association within the meaning of
Section 15 of the 1933 Act or Section 20(a) of the Exchange Act, to the same
extent as the foregoing indemnity from the Company and the Association to Hovde,
but only with respect to statements or omissions, if any, made in the
Registration Statement, the Prospectus, the Proxy Statement or any amendment or
supplement thereto or in any Application in reliance upon, and in conformity
with, written information furnished to the Company or the Association with
respect to Hovde by or on behalf of Hovde expressly for use in the Registration
Statement, the Prospectus, the Proxy Statement or any amendment or supplement
thereto or in any Application. In case any action shall be brought against the
Company or the Association or any person so indemnified based on the
Registration Statement, the Prospectus, the Proxy Statement or any amendment or
supplement thereto or in any Application, and in respect of which indemnity may
be sought against Hovde, Hovde shall have the rights and duties given to the
Company and the Association and each person so indemnified shall have the rights
and duties given to Hovde by the provisions of subsection (a) above.
(c) Promptly after receipt by an indemnified party under subsection (a) or
(b) above of notice of the commencement of any action, such indemnified party
shall, if a claim in respect thereof is to be made by the indemnified party
against the indemnifying party under such subsection, notify each party against
whom indemnification is to be sought in writing of the commencement thereof (but
the failure so to notify an indemnifying party shall not relieve it from any
liability which it may have under this Section 8). In case any such action is
brought against any indemnified party, and it notifies an indemnifying party of
the commencement thereof, the indemnifying party will be entitled to participate
therein, and to the extent it may elect by written notice delivered to the
indemnified party promptly after receiving the aforesaid notice from such
indemnified party, to assume the defense thereof with counsel satisfactory to
such indemnified party. Notwithstanding the foregoing, the indemnified party or
parties shall have the right to employ its or their own counsel in any such
case, but the fees and expenses of such counsel shall be at the expense of such
indemnified party or parties unless (i) the employment of such counsel shall
have been authorized in writing by one of the indemnifying parties in connection
with the defense of such action, (ii) the indemnifying parties shall not have
employed counsel to have charge of the defense of such action within a
reasonable time after notice of commencement of the action or (iii) such
indemnified party or parties shall have reasonably concluded that there may be
defenses available to it or them which are different from or additional to those
available to one or all of the indemnifying parties (in which case the
indemnifying parties shall not have the right to direct and defense of such
action on behalf of
26
<PAGE>
the indemnified party or parties), in any of which events such fees and expenses
shall be borne by the indemnifying parties. Anything in this subsection to the
contrary notwithstanding, an indemnifying party shall not be liable for any
settlement of any claim or action effected without its written consent;
provided, however, that such consent was not unreasonably withheld.
(d) If the indemnification provided for in subsection (a) or (b), as the
case may be, is unavailable or insufficient to hold harmless Hovde, an
Indemnified Party or the Company and the Association, as the case may be, in
respect of any losses, claims, damages or liabilities (or actions in respect
thereof) referred to therein, then the Company and the Association or Hovde, as
the case may be, in lieu of indemnifying such Indemnified Party thereunder,
shall contribute to the amount paid or payable for such loses, claims, damages
or liabilities (or actions in respect thereof): (i) in such proportion as is
appropriate to reflect the relative benefits received by the Company and the
Association on the one hand and Hovde on the other from the offering of the
Shares; or (ii) if the allocation provided by clause (i) above is not permitted
by applicable law, in such proportion as is appropriate to reflect not only the
relative benefits referred to in clause (i) above but also the relative fault of
the Company or the Association on the one hand and of Hovde on the other in
connection with the statements or omissions which resulted in such losses,
claims, damages or liabilities (or actions in respect thereof), as well as any
other relevant equitable considerations. The relative benefits received by the
Company and the Association on the one hand and Hovde on the other shall be
deemed to be in the same proportion as the total net proceeds from the offering
of the Shares (before deducting expenses) received by the Company and the
Association bear to the total compensation received by Hovde. The relative
fault of the Company and the Association on the one hand, and of Hovde on the
other shall be determined by reference to, among other things, whether the
untrue or alleged untrue statement of a material fact or the omission to state a
material fact relates to information supplied by the Company or the Association
on the one hand or by Hovde on the other and the parties' relative intent,
knowledge, access to information and opportunity to correct or prevent such
statement or omission.
The Company, the Association and Hovde agree that it would not be just and
equitable if contribution pursuant to this subsection (d) were determined by pro
rata allocation or by any other method of allocation which does not take account
of the equitable considerations referred to in the immediately preceding
paragraph. The amount paid or payable by an Indemnified Party or the Company
and the Association, as the case may be, as a result of the losses, claims,
damages and liabilities (or action in respect thereof) referred to in the
immediately preceding paragraph shall be deemed to include, subject to the
limitations set forth above, any legal or other expenses reasonably incurred by
such Indemnified Party or the Company and the Association, as the case may be,
in connection with investigating or defending any such action or claim.
Notwithstanding anything to the contrary contained in this Agreement, Hovde
shall not be required to contribute any amount in excess of the amount by which
the total compensation received by Hovde pursuant to this Agreement exceeds the
amount of any damages which Hovde has otherwise been required to pay by reason
of such untrue or alleged untrue statement or omission or alleged omission. No
person guilty of fraudulent misrepresentation (within the meaning of Section
11(f) of the 1933 Act) shall be entitled to contribution form any person who was
not guilty of such fraudulent misrepresentation.
27
<PAGE>
9. Survival of Agreements, Representations and Indemnities. The
-------------------------------------------------------
respective indemnities of the Company, the Association and Hovde and the
representations and warranties of the Company and the Association set forth in
or made pursuant to this Agreement shall remain in full force and effect,
regardless of any termination or cancellation of this Agreement or any
investigation made by or on behalf of Hovde, the Company and the Association or
any controlling person referred to in Section 8 hereof, and shall survive any
termination of this Agreement and/or issuance of the Shares, and any successor
or assign of Hovde, the Company, the Association or any such controlling person
or any legal representative of such controlling person shall be entitled to the
benefit of the respective indemnities, agreements, warranties and
representations.
10. Termination.
-----------
(a) Hovde shall have the right to terminate this Agreement at any time
prior to the Closing Date: (i) if the United States, having become involved in a
war or major hostilities, has materially disrupted or in Hovde's good faith
opinion will in the immediate future materially disrupt, or any domestic or
international event or act or occurrence has materially disrupted, or in Hovde's
good faith opinion will in the immediate future materially disrupt, the
offering, sale or delivery of the Shares on the terms and in the manner
contemplated in the Registration Statement and the Prospectus; (ii) if trading
in securities generally on the Nasdaq National Market or the NYSE shall have
been suspended, or minimum or maximum prices for trading shall have been fixed,
or maximum ranges of prices for securities shall have been required, on or by
the NYSE, on or by The Nasdaq National Market or by the order of the Commission
or any other governmental authority having jurisdiction; (iii) if a banking
moratorium has been declared by an Illinois, Delaware or federal authority or
any other state authority having an adverse impact on the national banking
community; (iv) if the Company or the Association shall have sustained a loss
material to the Company and the Association, taken as a whole, by fire, flood,
accident, hurricane, earthquake, theft, sabotage or other calamity or malicious
act, whether or not covered by insurance, which in Hovde's good faith opinion
would make it inadvisable to proceed with the offering, sale or delivery of the
Shares; (v) if there shall have been such material adverse change or any
development involving a prospective material adverse change, in the condition
(financial or otherwise), business, properties or results of operations of the
Company or the Association taken as a whole or the prospective market for the
Company's securities as in Hovde's good faith opinion would make it inadvisable
to proceed with the offering, sale or delivery of the Shares; (vi) if there is
material decline in the price of equity or debt securities traded on the NYSE or
the Nasdaq National Market if the effect of such a decline, in Hovde's good
faith judgement, makes it impracticable or inadvisable to proceed with the
offering, sale or delivery of the Shares on the terms and in the manner
contemplated in the Registration Statement, the Form AC and the Prospectus; and
(vii) if the Company fails to receive orders for all of the minimum number of
Shares within the period of time specified by, and in accordance with, the
provisions of the Plan of Conversion and the Conversion Regulations.
(b) If Hovde elects to terminate this Agreement as provided in this Section
10, the Company shall be notified promptly by Hovde by telephone or telegram,
confirmed by letter. A termination pursuant to this Section 10 shall not
prevent the sale or delivery of the Shares by
28
<PAGE>
the Company or the Conversion, but such sale, delivery or consummation of the
Conversion shall in no way limit Hovde's legal rights, if any, against the
Association or the Company hereunder.
(c) Notwithstanding anything contained herein to the contrary, if the
Conversion is not consummated as a result of the termination of this Agreement
pursuant to Section 10(a) hereof or because the Plan of Conversion is terminated
or the period prescribed by regulations (including all extensions) in which the
conversion must be completed expires prior to the completion of the Conversion,
Hovde shall be entitled to retain any fees paid to Hovde through the date of
termination, and thereafter the sole liability of the Company and the
Association to Hovde will be to reimburse Hovde pursuant to Section 6 and for
obligations assumed by the Company and the Association pursuant to subsections
(a) and (c) of Section 8 hereof. Upon demand and receipt of proper invoices for
expenses, the Company and the Association will pay Hovde the full amount so
owing. To the extent that Hovde has received any amounts in excess of those to
which it is entitled hereunder it shall repay them to the Company and the
Association.
11. Notices. All communications hereunder, except as herein otherwise
-------
specifically provided, shall be in writing and if sent to Hovde shall be mailed,
delivered or telegraphed and confirmed to Hovde Securities, Inc., 1826 Jefferson
Place, N.W., Washington, D.C. 20036, attention: Eugene S. Weil, Esq., General
Counsel (with a copy, in the case of communications under Section 8 hereof, to
Barack, Ferrazzano, Kirschbaum & Perlman, 333 West Wacker Drive, Suite 2700,
Chicago, Illinois 60606, Attention: John E. Freechack, Esq.); if sent to the
Company or the Association shall be mailed, delivered or telegraphed and
confirmed to Home Federal Savings and Loan Association of Elgin, 16 North Spring
Street, Elgin, Illinois 60120, attention: Mr. George L. Perucco, President
(with a copy in the case of communications under Section 8 hereof to Thacher
Proffitt & Wood, 1500 K Street, N.W., Suite 200, Washington, D.C. 20005,
attention: V. Gerard Comizio, Esq.).
12. Parties. This Agreement shall inure solely to the benefit of, and
-------
shall be binding upon, Hovde, the Company, the Association and their respective
successors, legal representatives and assigns, and no other person shall have or
be construed to have any legal or equitable right, remedy or claim under or in
respect of or by virtue of this Agreement or any provision herein contained.
13. Construction. This Agreement shall be construed in accordance with
------------
the laws of the State of Illinois.
14. Severability. In the event that any term, provision or covenant
------------
herein or the application thereof to any circumstance or situation shall be
invalid or unenforceable, in whole or in part, the remainder hereof and the
application of said term, provision or covenant to any other circumstance or
situation shall not be affected thereby, and each term, provision or covenant
herein shall be valid and enforceable to the full extent permitted by law.
29
<PAGE>
15. Counterparts. This Agreement may be executed in separate
------------
counterparts, each of which so executed and delivered shall be an original, but
all of which together shall constitute but one and the same instrument.
[SIGNATURE PAGE FOLLOWS IMMEDIATELY]
If the foregoing correctly sets forth the understanding between Hovde and
the Company and the Association, please so indicate in the space provided below
for the purpose, whereupon this letter shall constitute a binding agreement
between us.
Yours very truly,
HOME BANCORP OF ELGIN, INC.
By: ____________________________________
George L. Perucco
President
HOME FEDERAL SAVINGS AND LOAN
ASSOCIATION OF ELGIN
By: ____________________________________
George L. Perucco.
President
Accepted as of the date first
above written.
HOVDE SECURITIES, INC.
By: ____________________________________
Steven D. Hovde
Managing Director
30
<PAGE>
EXHIBIT 1.2(A)
HOME BANCORP OF ELGIN, INC.
6,095,000 SHARES
(anticipated maximum)
(subject to increase to up to 7,009,250
shares in the event of an oversubscription)
COMMON STOCK
(par Value $.01 Per Share)
SELECTED DEALER'S AGREEMENT
---------------------------
_______________, 1996
We have agreed to assist Home Bancorp of Elgin, Inc., a Delaware
corporation (the "Company"), in connection with the offer and sale of shares
(the "Shares") of Common Stock, par value $.01 per share, of the Company, to be
issued in connection with the conversion of Home Federal Savings and Loan
Association of Elgin, a federally chartered savings association (the
"Association"), from mutual to stock form. The Company, in connection with this
plan to effect such conversion, offered 6,095,000 Shares for subscription by
certain of the Association's depositors and borrowers in a subscription offering
and to certain members of the general public in a direct community offering.
The Shares which were not subscribed for pursuant to such subscription and
direct community offerings are being offered to the public in a syndicated
community offering ( the "Syndicated Community Offering") in accordance with the
rules of the Office of Thrift Supervision, Department of the Treasury. The
Shares, the bases on which the number of Shares to be issued may change, and
certain of the terms on which they are being offered are more fully described in
the enclosed Prospectus (the "Prospectus").
We are offering to Selected Dealers (of which you are one) the opportunity
to participate in the solicitation of offers to buy the Shares in the Syndicated
Community Offering and we will pay you a fee in the amount of ___________
percent (__%) of the dollar amount of the Shares sold on behalf of the Company
by you. The number of Shares sold by you shall be determined based on the
authorized designation of your firm on the order form or forms for such Shares
accompanying the funds transmitted for payment therefor (whether in the form of
a check payable to the Association or a withdrawal from an existing account at
the Association) to the special account established by the Company for the
purpose of holding such funds. It is understood, of course, that payment of
your fee will be made only out of compensation received by us for the Shares
sold on behalf of the Company by you, as evidenced in accordance with the
preceding sentence. The Company has requested us to invite you to become a
"Sponsoring Dealer," that is, a Selected Dealer who solicits offers which result
in the sale on behalf of the Company of at least __________ Shares. You may
become a Sponsoring Dealer (subject to your fulfillment of the requirement in
the preceding sentence) by checking the box on the confirmation at the end of
this letter. If you become a Sponsoring Dealer, you shall be entitled to an
additional fee in the amount of ________________ percent (____%) of the dollar
amount of the Shares sold on behalf of the Company by you as evidenced in the
manner set forth above.
<PAGE>
Each order form for the purchase of Shares must set forth the identity,
---- --------
address and tax identification number of each person ordering Shares regardless
- ------- -------------------------
of whether the Shares will be registered in a street name or in the purchaser's
name. Such order form should clearly identify your firm.
As soon as practicable after all the Shares are sold, we will remit to you,
out of our compensation as provided above, the fees to which you are entitled
hereunder, including your Sponsoring Dealer fee.
This offer is made subject to the terms and conditions herein set forth and
is made only to Selected Dealers which are: (i) members in good standing of the
National Association of Securities Dealers, Inc. (the "NASD") which agree to
comply with all applicable rules of the NASD, including, without limitation, the
Interpretation of the NASD Board of Governors with respect to "Free-Riding and
Withholding" (IM-2110-1) and Conduct Rule 2740 of the NASD's Conduct Rules; or
(ii) foreign dealers not eligible for membership in the NASD which agree (A)
not to sell any Shares within the United States, its territories or possessions
or to person who are citizens thereof or resident therein and (B) in making
other sales to comply with the above-mentioned NASD Interpretation, and Conduct
Rules 2730, 2740 and 2750 as if they were NASD members and Conduct Rule 2420 as
it applies to non-member brokers or dealers in a foreign country.
Orders for Shares will be strictly subject to confirmation and we, acting
on behalf of the Company, reserve the right in our absolute discretion to reject
any order in whole or in part, to accept or reject orders in the order of their
receipt or otherwise, and to allot. Neither you nor any other person is
authorized by the Company, the Association or us to give any information or make
any representations other than those contained in the Prospectus in connection
with the sale of any of the Shares. No Selected Dealer is authorized to act as
agent for us when soliciting offers to buy the Shares from the public or
otherwise. No Selected Dealer shall engage in any stabilizing (as defined in
Rule 10b-7 promulgated under the Securities Exchange Act of 1934, as amended
(the "Exchange Act")) with respect to the Company's Common Stock during the
offering.
We and each Selected Dealer assisting in selling Shares pursuant hereto
agree to comply with the applicable requirements of the Exchange Act and
applicable rules and regulations issued by the Office of Thrift Supervision. In
addition, we and each Selected Dealer confirm that the Securities and Exchange
Commission interprets Rule 15c2-8 promulgated under the Exchange Act as
requiring that a prospectus be supplied to each person who is expected to
receive a confirmation of sale 48 hours prior to delivery of such person's order
form.
We and each Selected Dealer further agree to the extent that our customers
desire to pay for Shares with funds held by or to be deposited with us, in
accordance with the interpretation of the Securities and Exchange Commission of
Rule 15c2-4 promulgated under the Exchange Act either: (a) upon receipt of an
executed order form or direction to execute an order form on behalf of a
customer, to forward the Syndicated Community Offering price for the Shares
ordered at or before 12:00 p.m. on the business day following receipt or
execution of any order form by us to the Association for deposit in a segregated
account; or (b) to solicit indications
2
<PAGE>
of interest in which event (i) we will subsequently contact any customer
indicating interest to confirm the interest and give instructions to execute and
return an order form or to receive authorization to execute an order form on
their behalf, (ii) we will mail acknowledgments of receipt of order to each
customer confirming interest on the business day following such confirmation,
(iii) we will debit accounts of such customers on the fifth business day (the
"debit date") following receipt of the confirmation referred to in clause (i)
above and (iv) we will forward completed order forms together with such funds to
the Association on or before 12:00 p.m. on the next business day following the
debit date for deposit in a segregated account. We acknowledge that if the
procedure in (b) is adopted, our customers' funds are not required to be in
their accounts until the debit date. We and each Selected Dealer further
acknowledge that, in order to use the foregoing "sweep arrangements," we comply
with the net capital requirements for broker/dealers under Rule 15c3-1(a)(1) of
the Exchange Act.
Unless earlier terminated by us, this Agreement shall terminate forty-five
(45) full business days after the date hereof, but may be extended by us for an
additional period or periods not exceeding thirty (30) full business days in the
aggregate. We may terminate this Agreement or any provisions hereof at any time
by written or telegraphic notice to you. The obligations hereunder are subject
to the successful completion of the offering, including the sale of all of the
Shares.
You agree that at any time or times prior to the termination of this
Agreement you will, upon our request, report to us the number of Shares sold on
behalf of the Company by you under this Agreement.
We shall have full authority to take such actions as we may deem advisable
in respect of all matters pertaining to the offering. We shall be under no
liability to you except for lack of good faith and for obligations expressly
assumed by us in this Agreement.
Upon application to us, we will inform you as to the states in which we
believe the Shares have been qualified for sale under, or are exempt from the
requirements of, the respective "Blue Sky"laws of such states, but we assume no
responsibility or obligation as to your rights to sell Shares in any state.
Additional copies of the Prospectus and any supplements thereto will be
supplied in reasonable quantities upon request.
Any notice from us to you shall be deemed to have been duly given if
mailed, telephoned or telegraphed to you at the address to which this Agreement
is mailed.
This Agreement shall be construed in accordance with the laws of the State
of Illinois.
Please confirm your agreement hereto by signing and returning the
confirmation accompanying this letter at once to us at Hovde Securities, Inc.,
1826 Jefferson Place, N.W., Washington, D.C. 20036. The enclosed duplicate copy
will evidence the agreement between us.
3
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Very truly yours,
HOVDE SECURITIES, INC.
By: ____________________________________
Steven D. Hovde
Managing Director
4
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Hovde Securities, Inc.
1826 Jefferson Place, N.W.
Washington, D.C. 20036
Re: Home Bancorp of Elgin, Inc.
---------------------------
We hereby confirm our agreement to all the terms and conditions stated in
the foregoing letter. We acknowledge receipt of the Prospectus relating to the
Shares and we further state that in agreeing thereto we have relied upon the
Prospectus and no other statement whatsoever, written or oral. We confirm that
we are (i) a member in good standing of the National Association of Securities
Dealers, Inc. (the "NASD"), which agrees to comply with all applicable rules of
the NASD, including, without limitation, the Interpretation of the NASD Board of
Governors with respect to "Free-Riding and Withholding" (IM 2110-1) and Conduct
Rule 2740 of the NASD's Conduct Rules, or (ii) a foreign dealer not eligible for
membership in the NASD which agrees (A) not to sell any Shares within the United
States, its territories or possessions or to person who are citizens thereof or
resident therein and (B) in making other sales to comply with the above
mentioned NASD Interpretation, and Conduct Rule 2730, 2740 and 2750 as if we
were NASD members and Conduct Rule 2420 as it applies to a non-member broker or
dealer in a foreign country.
_______ We wish to become a "Sponsoring Dealer."
---------------------------------------
(Please print or type name of firm)
---------------------------------------
(Authorized Representative)
Dated:________________
5
<PAGE>
CONSENT OF INDEPENDENT
CERTIFIED PUBLIC ACCOUNTANTS
----------------------------
The Board of Directors
Home Federal Savings and Loan Association of Elgin:
We consent to the use of our report included herein and to the reference to our
firm under the heading "Experts," "Effects of Conversion - Tax Aspects," and
"Legal and Tax Opinions" in the prospectus.
/s/ KPMG Peat Marwick LLP
Chicago, Illinois
August 6, 1996
