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FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
/ X / Annual Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the fiscal year ended December 31, 1996
/ / Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the transition period from ____________ to ____________
COMMISSION FILE NUMBER 0-28696
HOME BANCORP OF ELGIN, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 36-409033
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
16 NORTH SPRING STREET, ELGIN, ILLINOIS 60120
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICE-ZIP CODE)
TELEPHONE (847) 742-3800
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, PAR VALUE $.01 PER SHARE
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding twelve months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No .
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this form 10-K. [ X ]
As of March 1, 1997, the aggregate market value of the voting stock
held by non-affiliates of the Registrant was approximately $94,319,00.
As of March 1, 1997, 7,009,250 shares of Registrant's common stock were
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE:
PORTIONS OF THE REGISTRANT'S 1996 ANNUAL REPORT TO STOCKHOLDERS ARE
INCORPORATED BY REFERENCE IN PART II.
PORTIONS OF THE REGISTRANT'S PROXY STATEMENT FOR ITS 1997 ANNUAL
MEETING OF STOCKHOLDERS ARE INCORPORATED BY REFERENCE IN PART III.
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<PAGE>
HOME BANCORP OF ELGIN, INC.
ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED
DECEMBER 31, 1996
TABLE OF CONTENTS
PART I
ITEM 1. BUSINESS........................................................... 1
ITEM 2. PROPERTIES......................................................... 33
ITEM 3. LEGAL PROCEEDINGS.................................................. 33
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS................ 33
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY
AND RELATED STOCKHOLDER MATTERS.................................... 34
ITEM 6. SELECTED FINANCIAL DATA............................................ 34
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS...................... 34
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA........................ 34
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE........................................... 34
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT................. 35
ITEM 11. EXECUTIVE COMPENSATION............................................. 35
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT.............................................. 35
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS..................... 35
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS
ON FORM 8-K........................................................ 35
(i)
<PAGE>
PART I
ITEM 1. BUSINESS
BUSINESS
GENERAL
On September 26, 1996, Home Federal Savings and Loan Association of
Elgin ("Home Federal" or the "Association") completed its conversion from mutual
to stock form and became a wholly-owned subsidiary of Home Bancorp of Elgin,
Inc. ("Home Bancorp" or the "Company"). On such date, the Company sold 7,009,250
shares of its common stock, par value $0.01 per share (the "Common Stock"), to
the public, at a per share price of $10.00. The conversion of the Association
from mutual to stock form, the formation of the Company as the holding company
for the Association and the issuance and sale of the Common Stock are herein
referred to collectively as the "Conversion." The Conversion raised $62.4
million in net proceeds, of which 50% was retained by the Company and 50% was
used by the Company to purchase all of the outstanding capital stock of the
Association. The Company used $5.6 million of retained net proceeds to fund a
loan to its Employee Stock Ownership Plan ("ESOP") to purchase 8% of the Common
Stock issued in the Conversion.
The Company's principal business activity consists of the ownership of
the Association. The Company also invests in short-term investment grade
marketable securities and other liquid investments. The Company has no
significant liabilities (other than those of the Association). The Company
neither owns nor leases any property but instead uses the premises and equipment
of the Association. At the present time, the Company does not employ any persons
other than certain officers of the Association who do not receive any extra
compensation as officers of the Company. The Company utilizes the support staff
of the Association from time to time, as needed. Additional employees may be
hired as deemed appropriate by the management of the Company. Unless otherwise
disclosed, the information presented in this Annual Report on Form 10-K
represents the activity of the Association for the period prior to September 26,
1996 and the activity of Home Bancorp and subsidiary consolidated thereafter.
The Association's principal business consists of attracting deposits
from the public and investing those deposits, along with funds generated from
operations, primarily in loans secured by mortgages on one- to four-family
residences. 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. The Association exceeded all of its regulatory capital
requirements at December 31, 1996.
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.
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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. The
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.
Management believes that the Association's success as a home lender has
been due, in part, to the favorable income, population and housing demographics
in Elgin and in the Association's market area. At the same time, the growth of
the market area and delineated lending area and their proximity to Chicago has
resulted in a highly competitive environment among the many financial
institutions competing for deposits and loans.
COMPETITION
The Association faces substantial competition for both the savings
deposits it accepts and the loans it makes. The Association's market area has a
high density of financial institutions, including branch offices of major
commercial banks, all of which compete with the Association to varying degrees.
The Association also encounters significant competition for savings deposits
from commercial banks, savings banks and savings and 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 of
its 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 December 31, 1996, the Association had gross loans receivable
outstanding of $264.6 million of which $259.8 million, or 98.17%, were one- to
four-family, residential mortgage loans. The remainder consisted of $2.6 million
of multifamily mortgage loans, or 0.99% of gross loans; $815,000 of commercial
real estate mortgage loans, or 0.31% of gross loans; $750,000 of construction
and land loans, or 0.28% of gross loans; and $661,000 of other loans, or 0.25%
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.
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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,
----------------------------------------------------------------------
1996 1995 1994
---------------------- -------------------- --------------------
PERCENT PERCENT PERCENT
AMOUNT OF TOTAL AMOUNT OF TOTAL AMOUNT OF TOTAL
-------- -------- ------ -------- ------ --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
MORTGAGE LOANS:
One- to four-family ....... $259,785 98.17% $265,115 98.09% $267,727 97.63%
Multifamily ............... 2,628 0.99 3,106 1.15 4,118 1.50
Construction and land ..... 750 0.28 456 0.17 859 0.31
Commercial ................ 815 0.31 891 0.33 862 0.31
-------- ------- -------- ------- -------- -------
Total mortgage loans ... 263,978 99.75 269,568 99.74 273,566 99.75
-------- ------- -------- ------- -------- -------
OTHER LOANS:
Passbook savings (secured
by savings and time
deposits) ............... 573 0.23 627 0.23 576 0.21
Consumer installment loans. 88 0.03 92 0.03 100 0.04
Home improvement loans .... -- -- -- -- -- --
-------- ------- -------- ------- -------- -------
Total other loans ...... 661 0.25 719 0.26 676 0.25
-------- ------- -------- ------- -------- -------
Gross loans ......... $264,639 100.00% $270,287 100.00% $274,242 100.00%
======== ======= ======== ======= ======== =======
LESS:
Loans in process........... $ 872 $ 418 $ 150
Deferred loan fees......... 1,516 1,890 2,403
Allowance for loan losses.. 945 826 649
-------- -------- --------
Loans, net......... $261,306 $267,153 $271,040
======== ======== ========
<CAPTION>
AT DECEMBER 31,
----------------------------------------------
1993 1992
---------------------- --------------------
PERCENT PERCENT
AMOUNT OF TOTAL AMOUNT OF TOTAL
-------- -------- ------ --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
MORTGAGE LOANS:
One- to four-family ....... $298,117 97.54% $284,549 96.92%
Multifamily ............... 4,587 1.50 5,165 1.76
Construction and land ..... 1,130 0.37 1,371 0.47
Commercial ................ 1,039 0.34 1,568 0.53
-------- ------- -------- -------
Total mortgage loans ... 304,873 99.75 292,653 99.68
-------- ------- -------- -------
OTHER LOANS:
Passbook savings (secured
by savings and time
deposits) ............... 631 0.21 798 0.27
Consumer installment loans. 120 0.04 134 0.04
Home improvement loans .... -- -- 17 0.01
-------- ------- -------- -------
Total other loans ...... 751 0.25 949 0.32
-------- ------- -------- -------
Gross loans ......... $305,624 100.00% $293,602 100.00%
======== ======= ======== =======
LESS:
Loans in process........... $ 505 $ 876
Deferred loan fees......... 3,034 2,992
Allowance for loan losses.. 409 548
-------- --------
Loans, net......... $301,676 $289,186
======== ========
</TABLE>
3
<PAGE>
LOAN MATURITY AND REPRICING. The following table shows the maturity or
period to repricing of the Association's loan portfolio at December 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 $41.7 million
for the year ended December 31, 1996.
<TABLE>
<CAPTION>
AT DECEMBER 31, 1996
-----------------------------------------------------------------------
MORTGAGE LOANS
----------------------------------------------
ONE- TO
FOUR- MULTI- CONSTRUCTION OTHER TOTAL
FAMILY(1) FAMILY(1) AND LAND COMMERCIAL LOANS LOANS
--------- --------- ------------ ---------- ----- -----
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
AMOUNT DUE:
One year or less ..................... $ 10,810 $ 454 $ 205 $ -- $ 558 $ 12,027
-------- ------ -------- -------- -------- --------
AFTER ONE YEAR:
One to three years ................... 45,021 835 10 288 98 46,252
More than three years to five years .. 18,491 383 518 29 5 19,426
More than five years to ten years .... 24,727 257 17 58 -- 25,059
More than ten years to twenty years .. 84,693 699 -- 440 -- 85,832
Over twenty years .................... 76,043 -- -- -- -- 76,043
-------- ------ -------- -------- -------- --------
TOTAL DUE OR REPRICING AFTER ONE YEAR ... 248,975 2,174 545 815 103 252,612
-------- ------ -------- -------- -------- --------
TOTAL AMOUNTS DUE OR REPRICING, GROSS ... $259,785 $2,628 $ 750 $ 815 $ 661 $264,639
======== ====== ======== ======== ======== ========
</TABLE>
The following table sets forth the dollar amounts in each loan category
at December 31, 1996 that are due after December 31, 1997, and whether such
loans have fixed or adjustable interest rates.
DUE AFTER DECEMBER 31, 1997
-------------------------------------
FIXED ADJUSTABLE TOTAL
--------- ---------- ---------
(IN THOUSANDS)
MORTGAGE LOANS:
One- to four-family (1)........ $ 194,968 $ 54,007 $ 248,975
Multifamily (1)................ 1,539 635 2,174
Construction and land.......... 545 -- 545
Commercial..................... 577 238 815
OTHER LOANS...................... 103 -- 103
--------- --------- ---------
TOTAL LOANS................. $ 197,732 $ 54,880 $ 252,612
========= ========= =========
- --------------------
(1) FHA/VA loans are included in one- to four-family and multifamily loans.
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 generally sell mortgage loans nor has it
purchased mortgage loans. The Association sold two loans in 1995 in the amount
of $169,000 on a servicing-released basis to a community housing group.
During the year ended December 31, 1996, the Association originated
$36.3 million of loans, compared to $34.0 million and $21.3 million in 1995 and
1994, respectively. Loan repayments exceeded loan originations during this three
year period as a result of a generally rising interest rate environment since
mid-
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<PAGE>
1994, competitive market conditions and management's decision not to offer loan
products at rates below market.
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 YEAR ENDED DECEMBER 31,
-------------------------------------------------------
1996 1995 1994
----------- ----------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
LOANS (GROSS):
At beginning of period.......................... $ 270,287 $ 274,242 $ 305,624
MORTGAGE LOANS ORIGINATED:
One- to four-family............................. 35,177 33,157 19,875
Multifamily..................................... -- -- 227
Construction and land .......................... 623 76 266
Commercial ..................................... -- 119 225
----------- ----------- -----------
TOTAL MORTGAGE LOANS ORIGINATED............ 35,800 33,352 20,593
OTHER LOANS ORIGINATED............................... 478 614 755
----------- ----------- -----------
TOTAL LOANS ORIGINATED..................... 36,278 33,966 21,348
----------- ----------- -----------
Principal repayments............................ 41,705 37,558 52,458
Loans sold...................................... -- 169 --
Loans transferred to real estate owned and
in judgment................................... 221 194 272
----------- ----------- -----------
LOANS (GROSS) AT END OF PERIOD....................... $ 264,639 $ 270,287 $ 274,242
=========== =========== ===========
</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 December 31, 1996, $259.8
million, or 98.2%, of the Association's gross loans consisted of one- to
four-family residential first mortgage loans. Approximately 75% 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. The
Association competitively prices one- to four-family residential mortgage loans.
At December 31, 1996, the Association had residential construction loans
(included in one- to four-family residential mortgage loans) with an aggregate
principal balance of $1.1 million outstanding to borrowers intending to live in
the properties upon completion of construction, at which time such loans convert
into permanent mortgage loans.
The Association currently offers adjustable-rate mortgage loan programs with
interest rates that 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. 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.
5
<PAGE>
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, as well as the value of the property securing 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 property securing the loan. 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 best interest.
The Association adheres to its Board-approved underwriting guidelines for
loan originations, 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 borrowers'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 the
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 and 25
year terms. At December 31, 1996, the principal balance of the Association's
multifamily mortgage loan portfolio was approximately $2.6 million, or 0.99% of
total gross loans outstanding. The Association's largest multifamily mortgage
loan at December 31, 1996 had an outstanding balance of $325,000 and is secured
by a 5-unit apartment building and an adjacent 6-unit apartment building.
Mortgage loans secured by apartment buildings and other multifamily
residential properties are generally larger and involve a greater degree of risk
than one- to four-family residential mortgage loans. Because payment 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 December 31, 1996, the Association had 11
commercial real estate loans with an aggregate outstanding balance of $815,000,
representing 0.31% of the Association's gross loan portfolio. At that date, all
of such
6
<PAGE>
loans were current and performing in accordance with their terms. At December
31, 1996, the Association's largest commercial real estate loan, the borrower of
which was a church, had an outstanding balance of $217,000.
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 loan 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 December
31, 1996, the Association had no non-residential loans that 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 only interest 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 December 31, 1996, the Association had
residential construction loans (included in one- to four-family residential
mortgage loans) with an aggregate principal balance of $1.1 million outstanding
to borrowers intending to live in the properties upon completion of
construction, at which time such loans convert into permanent mortgage loans.
The Association has in the past originated construction loans to builders
for the construction of pre-sold one- to four-family residences in the
Association's delineated lending area. Such loans generally carry terms of up to
18 months and generally do not permit the payment of interest from loan
proceeds. At December 31, 1996, the Association had no construction loans
outstanding to builders. While the Association anticipates that it will 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 no more
than 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
7
<PAGE>
mortgage loans. At December 31, 1996, the Association had 25 land mortgage loans
with an aggregate outstanding balance of $750,000 or 0.28% of the Association's
gross loan portfolio.
Construction lending generally affords the Association an opportunity to
receive interest at rates higher than those obtainable from permanent
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 December 31, 1996, such loans totalled $573,000
representing 0.23% of the Association's gross loan portfolio. The Association
also offers unsecured overdraft protection loans to its qualifying customers. At
December 31, 1996, the total outstanding principal balance of such unsecured
loans was $88,000, representing 0.03% of the Association's gross 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, 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 for all
real estate loans title and hazard insurance naming the Association as an
insured party in an amount not less than the amount of the loan.
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 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; (ii) 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; and (iii)
loans with a principal balance equal to or greater than $400,000 are reviewed
and approved by the full 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
8
<PAGE>
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.
9
<PAGE>
The following tables set forth delinquencies in the Association's loan
portfolio by type of loan at the dates indicated.
<TABLE>
<CAPTION>
AT DECEMBER 31, 1996 AT DECEMBER 31, 1995
------------------------------------------------- -------------------------------------------------
60-89 DAYS 90 DAYS OR MORE 60-89 DAYS 90 DAYS OR MORE
------------------------ ------------------------ ------------------------ -----------------------
NUMBER PRINCIPAL NUMBER PRINCIPAL NUMBER PRINCIPAL NUMBER PRINCIPAL
OF LOANS BALANCE OF LOANS BALANCE OF LOANS BALANCE OF LOANS BALANCE
----------- ------------ ----------- ------------ ----------- ----------- ---------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
One- to four-family........ 20 $ 869 14 $ 937 24 $1,093 16 $ 915
Multifamily................ -- -- -- -- -- -- -- --
Construction and land...... -- -- -- -- 2 48 -- --
Commercial................. -- -- -- -- -- -- -- --
Other...................... -- -- -- -- -- -- 1 1
----- ----- ----- ----- ----- ----- ----- -----
Total.................. 20 $ 869 14 $ 937 26 $1,141 17 $ 916
===== ====== ===== ====== ===== ====== ===== ======
Delinquent loans to
total loans (1)........... 0.33% 0.36% 0.42% 0.34%
===== ===== ===== =====
<CAPTION>
AT DECEMBER 31, 1994
------------------------------------------------
60-89 DAYS 90 DAYS OR MORE
------------------------ ----------------------
NUMBER PRINCIPAL NUMBER PRINCIPAL
OF LOANS BALANCE OF LOANS BALANCE
----------- ----------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
One- to four-family........ 10 $ 516 18 $ 974
Multifamily................ -- -- -- --
Construction and land...... 2 53 1 12
Commercial................. -- -- -- --
Other...................... -- -- -- --
----- ----- ----- -----
Total.................. 12 $ 569 19 $ 986
===== ====== ===== ======
Delinquent loans to
total loans (1)........... 0.21% 0.36%
===== =====
</TABLE>
<TABLE>
<CAPTION>
AT DECEMBER 31, 1993
---------------------------------------------------------------------------
60-89 DAYS 90 DAYS OR MORE
----------------------------------- ------------------------------------
NUMBER PRINCIPAL NUMBER PRINCIPAL
OF LOANS BALANCE OF LOANS BALANCE
--------------- ---------------- --------------- -----------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
One- to four-family......... 33 $1,412 26 $1,642
Multifamily................. 1 92 -- --
Construction and land....... 1 40 -- --
Commercial.................. -- -- -- --
Other....................... -- -- -- --
----- ----- ----- -----
Total................... 35 $1,544 26 $1,642
===== ====== ===== ======
Delinquent loans to
total loans (1)............ 0.51% 0.54%
===== =====
</TABLE>
<TABLE>
<CAPTION>
AT DECEMBER 31, 1992
------------------------------------------------------------------
60-89 DAYS 90 DAYS OR MORE
----------------------------------- ---------------------------
NUMBER PRINCIPAL NUMBER PRINCIPAL
OF LOANS BALANCE OF LOANS BALANCE
--------------- ---------------- ------------ -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
One- to four-family......... 44 $2,334 45 $2,354
Multifamily................. -- -- -- --
Construction and land....... -- -- -- --
Commercial.................. -- -- -- --
Other....................... -- -- 3 2
----- ----- ----- -----
Total................... 44 $2,334 48 $2,356
===== ====== ===== ======
Delinquent loans to
total loans (1)............ 0.81% 0.81%
===== =====
</TABLE>
- ----------
(1) Total loans represent gross loans less deferred loan fees and loans in
process.
10
<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 expenses. 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. REO increased $54,000 from $496,000 at December 31, 1995 to $550,000
at December 31, 1996. The $54,000 net increase was the result of two new REO
properties, which was partially offset by the disposition of three properties,
which dispositions resulted in a net gain to the Association of $21,000.
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, depending on
the assessment of the ultimate collectibility of the loan. During the years
1996, 1995 and 1994, the amounts of additional interest income that would have
been recorded on non-accrual loans, had they been current, totalled $68,000,
$36,000 and $59,000, respectively. These amounts were not included in interest
income for the respective periods. For all periods presented, the Association
had no troubled-debt restructurings (which involve forgiving a portion of
interest or principal on 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 $434,000 at
December 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 DECEMBER 31,
------------------------------------------------------
1996 1995 1994 1993 1992
------ ------ ------ ------ ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Non-accrual loans:
One- to four-family ................... $ 937 $ 915 $ 974 $1,642 $2,354
Multifamily ........................... -- -- -- -- --
Construction and land ................. -- -- 12 -- --
Commercial ............................ -- -- -- -- --
Other loans ........................... -- 1 -- -- 2
------ ------ ------ ------ ------
Total non-performing loans .......... 937 916 986 1,642 2,356
------ ------ ------ ------ ------
Total real estate owned and in judgment . 550 496 514 433 629
------ ------ ------ ------ ------
Total non-performing assets ............. $1,487 $1,412 $1,500 $2,075 $2,985
====== ====== ====== ====== ======
Total non-performing loans to
total loans(1) ........................ 0.36% 0.34% 0.36% 0.54% 0.81%
Total non-performing assets to
total assets .......................... 0.42% 0.46% 0.49% 0.62% 0.86%
</TABLE>
- ----------
(1) Total loans represent gross loans less deferred loan fees and loans in
process.
CLASSIFIED ASSETS. Federal regulations and the Association's
Classification of Assets Policy require that the Association utilize an internal
asset classification system as a means of reporting problem and potential
problem assets. The Association has incorporated the Office of Thrift
Supervision ("OTS") internal asset classifications as a part of its credit
monitoring system. The Association currently classifies problem and
11
<PAGE>
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.
The following table sets forth at December 31, 1996, the Association's
carrying value of assets classified as "substandard," "doubtful" or "loss" or
designated as "special mention:"
<TABLE>
<CAPTION>
SPECIAL MENTION SUBSTANDARD DOUBTFUL LOSS
------------------- ------------------ ------------------ -------------------
NUMBER AMOUNT NUMBER AMOUNT NUMBER AMOUNT NUMBER AMOUNT
------ ------ ------ ------ ------ ------ ------ ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Mortgage loans:
One- to four-family........ 4 $ 434 14 $ 937 -- $ -- -- $ --
------- ------- -------- ------- ------- ------- -------- -------
Total mortgage loans.......... 4 434 14 937 -- -- -- --
------- ------- -------- ------- ------- ------- -------- -------
Real estate owned and in
judgement:
One- to four-family........ -- -- 4 511 -- -- -- --
Multifamily................ -- -- -- -- -- -- -- --
Construction and land...... -- -- 1 39 -- -- -- --
Commercial................. -- -- -- -- -- -- -- --
------- ------- ------- ------- ------- ------- ------- -------
Total real estate owned
and in judgment............. -- -- 5 550 -- -- -- --
------- ------- ------- ------- ------- ------- ------- -------
Total......................... 4 $ 434 19 $ 1,487 -- $ -- -- $ --
======= ======= ======= ======= ======= ======= ======= =======
</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
12
<PAGE>
different from those of management. At December 31, 1996, the Association's
allowance for loan losses was 0.36% of total loans as compared to 0.31% as of
December 31, 1995. The Association had non-accrual loans of $937,000 and
$916,000 at December 31, 1996 and December 31, 1995, respectively, representing
0.36% and 0.34% of total loans at such respective dates. 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, has
adopted an interagency policy statement on the allowance for loan and lease
losses. The policy statement provides guidance for financial institutions on
both the responsibilities of management for the assessment and establishment of
adequate allowances and guidance for banking agency examiners 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 analyze all
significant factors that affect the collectibility of the portfolio in a
reasonable manner; and that management establish acceptable allowance evaluation
processes that meet the objectives set forth in the policy statement. While the
Association believes that it has established an adequate allowance for loan
losses, there can be no assurance that regulators, in reviewing the
Association's loan portfolio, will not request the Association to materially
increase its allowance for loan losses, thereby negatively affecting the
Association's financial condition and earnings at that time. Management believes
that the provision for loan losses and the allowance for loan losses are
reasonable and adequate to cover any known losses and any loses 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.
13
<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 YEAR ENDED DECEMBER 31,
-------------------------------------------------------------------------
1996 1995 1994 1993 1992
-------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Total loans outstanding at end of period(1)... $262,251 $267,979 $271,689 $302,085 $289,734
-------- -------- -------- -------- --------
Balance at beginning of year.................. 826 649 409 548 355
Provision for loan losses..................... 120 180 240 240 256
Charge-offs:
One- to four-family......................... -- -- -- -- --
Multifamily................................. -- -- -- (141) --
Construction and land....................... -- -- -- -- --
Commercial.................................. -- -- -- -- --
Other....................................... (1) (3) -- -- --
-------- -------- -------- -------- --------
Total charge-offs........................ (1) (3) -- (141) --
-------- -------- -------- -------- --------
Allocation to reserve for uncollected
interest.................................... -- -- -- (238) (63)
-------- -------- -------- -------- --------
Balance at end of year........................ $ 945 $ 826 $ 649 $ 409 $ 548
======== ======== ======== ======== ========
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................................ 0.36 0.31 0.24 0.14 0.19
Allowance for loan losses to total
non-performing loans at end of period........ 100.85 90.17 65.82 24.91 23.26
</TABLE>
- ----------
(1) Total loans represent gross loans less deferred loan fees and loans in
process.
14
<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
gross loans at the dates indicated.
<TABLE>
<CAPTION>
AT DECEMBER 31,
-----------------------------------------------------------------------------------------
1996 1995 1994
------------------------ ------------------------- -----------------------
PERCENT OF PERCENT OF PERCENT OF
LOANS IN LOANS IN LOANS IN
EACH EACH EACH
ALLOWANCE CATEGORY TO ALLOWANCE CATEGORY TO ALLOWANCE CATEGORY TO
AMOUNT GROSS LOANS AMOUNT GROSS LOANS AMOUNT GROSS LOANS
--------- ----------- --------- ----------- --------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Mortgage loans:
One- to four-family .... $ 890 98.17% $ 779 98.09% $ 602 97.63%
Multifamily ............ 25 0.99 25 1.15 25 1.50
Construction and land... 14 0.28 7 0.17 11 0.31
Commercial.............. 16 0.31 15 0.33 11 0.31
Other..................... -- 0.25 -- 0.26 -- 0.25
----- ------ ----- ------ ----- ------
Total................ $ 945 100.00% $ 826 100.00% $ 649 100.00%
===== ====== ===== ====== ===== ======
</TABLE>
<TABLE>
<CAPTION>
AT DECEMBER 31,
-----------------------------------------------------------------------------------
1993 1992
------------------------------------------ --------------------------------------
PERCENT OF PERCENT OF
LOANS IN LOANS IN
EACH EACH
ALLOWANCE CATEGORY TO ALLOWANCE CATEGORY TO
AMOUNT GROSS LOANS AMOUNT GROSS LOANS
----------------- ---------------------- ------------------ -----------------
(DOLLARS IN THOUSANDS)
Mortgage loans:
<S> <C> <C> <C> <C>
One- to four-family ............ $ 378 97.54% $ 384 96.92%
Multifamily .................... 16 1.50 150 1.76
Construction and land........... 8 0.37 7 0.47
Commercial...................... 7 0.34 7 0.53
Other............................. -- 0.25 -- 0.32
----- ----- ----- -----
Total........................ $ 409 100.00% $ 548 100.00%
===== ====== ===== ======
</TABLE>
INVESTMENT ACTIVITIES
INVESTMENT POLICY. The investment policy of the Company, 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 Company'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" in Part II, Item 7 of this Report. The
policy is designed to provide and maintain liquidity to meet day-to-day,
cyclical and long-term changes in the Company's asset/liability structure.
The 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 investment policy
prohibits investment in derivative securities.
MORTGAGE-BACKED AND U.S. TREASURY SECURITIES. At December 31, 1996, the
carrying value of mortgage-backed securities totalled $142,000 or 0.04%, of
total assets. The fair value of these mortgage-
15
<PAGE>
backed securities totalled $143,000 at December 31, 1996. All mortgage-backed
securities in the Association's portfolio were held to maturity and carried at
amortized cost.
At December 31, 1996, all securities in the Association's
mortgage-backed securities portfolio were directly insured or guaranteed by
GNMA, which provides 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 6.97% at December 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. See "Regulation --Regulation of Federal Savings
Associations--Capital Requirements."
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 YEAR ENDED DECEMBER 31,
--------------------------------------------------
1996 1995 1994
--------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Amortized cost at beginning of period........................... $ 187 $ 243 $ 296
Purchases/sales (net)........................................... -- -- --
Principal repayments............................................ (45) (56) (52)
Premium and discount amortization, net.......................... -- -- (1)
--------- --------- ---------
Amortized cost at end of period................................. $ 142 $ 187 $ 243
========= ========= =========
</TABLE>
At December 31, 1996, the carrying value of U.S. Treasury securities
totalled $53.8 million, or 15.09% of total assets. All U.S. Treasury securities
in the Company's portfolio were held to maturity.
The following table sets forth the amortized cost and fair value of the
Company's mortgage-backed and investment securities held to maturity at the
dates indicated.
<TABLE>
<CAPTION>
AT DECEMBER 31,
-----------------------------------------------------------------------
1996 1995 1994
--------------------- --------------------- ---------------------
AMORTIZED FAIR AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE COST VALUE
--------- --------- --------- --------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Mortgage-backed securities
--GNMA................................ $ 142 $ 143 $ 187 $ 193 $ 243 $ 233
========= ========= ========= ========= ========= =========
Other debt securities
--U.S. Treasury and Agency............ $ 53,786 $ 53,797 $ 5,948 $ 6,030 $ 5,918 $ 5,663
========= ========= ========= ========= ========= =========
</TABLE>
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 December 31, 1996,
by remaining period to contractual maturity. With respect to mortgage-backed
securities,
16
<PAGE>
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 DECEMBER 31, 1996
-----------------------------------------------
WEIGHTED
AMORTIZED FAIR AVERAGE
COST VALUE RATE
--------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Mortgage-backed securities:
Due after 1 year but within 5 years................. $ 70 $ 72 7.45%
Due after 5 years but within 10 years............... 72 71 6.50
--------- --------- ---------
Total ........................................... $ 142 $ 143 6.97%
========= ========= =========
U.S. Treasury and Agency:
Due in 1 year or less............................... $ 53,786 $ 53,797 5.41%
========= ========= =========
Total:
Due in 1 year or less............................... $ 53,786 $ 53,797 5.41%
Due after 1 year but within 5 years................. 70 72 7.45
Due after 5 years but within 10 years............... 72 71 6.50
--------- --------- ---------
Total........................................... $ 53,928 $ 53,940 5.42%
========= ========= =========
</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.
17
<PAGE>
The following table presents the savings deposit activity of the
Association for the periods indicated.
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
----------------------------------------------------------
1996 1995 1994
----------- ----------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Deposits................................. $ 886,737 $ 764,098 $ 876,134
Withdrawals.............................. (904,475) (781,552) (889,520)
----------- ----------- -----------
Withdrawals in excess of deposits........ (17,738) (17,454) (13,386)
Deposits of branches sold................ -- -- (21,822)
Interest credited........................ 9,561 9,488 9,214
----------- ----------- -----------
Total decrease in savings
deposits......................... $ (8,177) $ (7,966) $ (25,994)
============ =========== ===========
</TABLE>
At December 31, 1996, the Association had $17.3 million in jumbo
certificates of deposit (accounts in amounts over $100,000) maturing as follows.
WEIGHTED
MATURITY PERIOD AMOUNT AVERAGE RATE
--------- ------------
(DOLLARS IN THOUSANDS)
Within three months...................... $ 4,500 5.160%
After three but within six months........ 3,232 5.569
After six but within 12 months........... 2,418 5.545
After 12 months.......................... 7,123 6.640
--------- ---------
Total.................................. $ 17,273 5.951%
========= =========
18
<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 DECEMBER 31,
----------------------------------------------------------------------------------------------
1996 1995
-------------------------------------------- --------------------------------------------
PERCENT OF WEIGHTED PERCENT OF WEIGHTED
TOTAL AVERAGE TOTAL AVERAGE
AMOUNT DEPOSITS RATE AMOUNT DEPOSITS RATE
--------- ---------- -------- --------- ---------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
NOW/Super NOW accounts............. $ 42,800 17.0% 2.25% $ 45,001 17.3% 2.25%
Money market accounts.............. 16,763 6.7 3.22 17,684 6.8 3.22
Passbook accounts.................. 62,171 24.7 3.00 65,261 25.1 3.04
Certificates of deposit............ 125,192 49.7 5.79 126,847 48.8 5.89
Non-interest bearing NOW accounts.. 4,869 1.9 -- 5,179 2.0 --
--------- ------ ------ --------- ------ ------
Totals........................ $ 251,795 100.00% 4.22% $ 259,972 100.00% 4.29%
========= ====== ====== ========= ====== ======
<CAPTION>
AT DECEMBER 31,
-----------------------------------------
1994
-----------------------------------------
PERCENT OF WEIGHTED
TOTAL AVERAGE
AMOUNT DEPOSITS RATE
--------- ---------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
NOW/Super NOW accounts............. $ 48,834 18.2% 2.25%
Money market accounts.............. 23,545 8.8 3.22
Passbook accounts.................. 74,524 27.8 3.00
Certificates of deposit............ 121,035 45.2 4.46
Noninterest bearing NOW accounts... -- -- --
--------- ------ ------
Totals........................ $ 267,938 100.00% 3.83%
========= ====== ======
</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 December 31, 1996.
<TABLE>
<CAPTION>
PERIOD TO MATURITY AT DECEMBER 31, 1996
----------------------------------------------------------------------
INTEREST RATE RANGE LESS THAN ONE YEAR ONE TO THREE YEARS FOUR TO FIVE YEARS
- ---------------------------- ---------------------- ---------------------- ---------------------
(IN THOUSANDS)
<S> <C> <C> <C>
Below 4.00% ................ $ -- $ -- $ --
4.00% to 4.99%.............. 12,498 -- 10
5.00% to 5.99%.............. 52,235 18,399 4,222
6.00% to 6.99%.............. 8,344 5,404 7,131
7.00% and above............. 34 4,362 12,553
------- ------- -------
Total.................. $73,111 $28,165 $23,916
======= ======= =======
<CAPTION>
AT DECEMBER 31,
-------------------------------------------------------
INTEREST RATE RANGE 1996 1995 1994
- ---------------------------- ---------------- ----------------- ----------------
(IN THOUSANDS)
<S> <C> <C> <C>
Below 4.00% ................ $ -- $ 16 $ 12,885
4.00% to 4.99%.............. 12,508 7,548 48,001
5.00% to 5.99%.............. 74,856 69,542 31,067
6.00% to 6.99%.............. 20,879 27,216 13,689
7.00% and above............. 16,949 22,525 15,393
-------- -------- --------
Total.................. $125,192 $126,847 $121,035
======== ======== ========
</TABLE>
19
<PAGE>
Savings deposits decreased $8.2 million or 3.1% from $260.0 million at
December 31, 1995 to $251.8 million at December 31, 1996. Savings deposits
decreased $4.7 million as a result of withdrawals directed by depositors for
purchase of stock in the Conversion and $3.5 million as a result of market
conditions and the purchase of stock in the Conversion by account holders that
paid with a check drawn on the Association. In an effort to address the
contraction of deposits, the Association has taken steps to increase core
non-interest bearing transactional deposit accounts and related services. These
include the relocation of the South Elgin Office along with the addition of five
drive-up lanes in the heart of the commercial and residential growth area.
Convenient access to deposit accounts is also being improved with the addition
of a debit card program and home banking via personal computer and phone in
1997.
BORROWED FUNDS. The Association utilizes advances from the FHLB of
Chicago as an alternative to retail deposits to fund its operations and may
continue 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 December 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
YEAR ENDED DECEMBER 31,
-------------------------------------------------
1996 1995 1994
--------------- -------------- --------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
FHLB of Chicago advances:
Maximum amount outstanding at any
month-end during the period....................................... $ 4,000 $ 6,000 $ 9,000
Average balance outstanding......................................... 667 1,250 583
Balance outstanding at end of period................................ -- 4,000 --
Weighted average interest rate during the period.................... 5.55% 6.16% 6.69%
Weighted average interest rate at end of period..................... -- 5.31 --
</TABLE>
20
<PAGE>
PERSONNEL
At December 31, 1996, the Association had 101 full-time employees and
45 part-time employees. The Association has experienced a low turnover rate
among its employees, and, as of December 31, 1996, 64 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.
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.
RECENT TAX LEGISLATION REGARDING TAX BAD DEBT RESERVES
Prior to the enactment on August 20, 1996 of the Small Business Job
Protection Act of 1996 (the "Small Business Act"), for federal income tax
purposes, thrift institutions such as the Association, which met certain
definitional tests primarily relating to their assets and the nature of their
business, were permitted to establish tax reserves for bad debts and to make
annual additions thereto, which additions could, 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, could be computed using an amount based on a
six-year moving average of 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.
Under the Small Business Act, the PTI Method was repealed and the
Association will be required to use the Experience Method of computing additions
to its bad debt reserve for taxable years beginning with the Association's
taxable year beginning January 1, 1996. In addition, the Association will be
required to recapture (i.e., take into taxable 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) its "base year
reserve," I.E., the balance of such reserves as of 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
Experience Method. However, under the Small Business Act such recapture
requirements will be suspended for each of the two successive taxable years
beginning January 1, 1996 in which the Association originates a minimum amount
of certain residential loans during such years that is not less than the average
of the principal amounts of such loans made by the Association during its six
taxable years preceding January 1, 1996. Since the Association has already
provided a deferred tax liability equal to the amount of its bad debt recapture
for financial reporting purposes, the enactment of the Small Business Act will
not adversely impact the Association's financial condition or results of
operation.
DISTRIBUTIONS. To the extent that the Association makes "non-dividend
distributions" to shareholders, such distributions will be considered to result
in distributions from the Association's base year reserve to the extent thereof
and then from its supplemental reserve for losses on loans, and an amount based
on the amount
21
<PAGE>
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, distributions in redemption of stock and
distributions in partial or complete liquidation. However, dividends paid out of
the Association's current or accumulated earnings and profits, as calculated for
federal income tax purposes, will not constitute non-dividend distributions and,
therefore, will not be included in the Association's income.
The amount of additional taxable income created from a non-dividend
distribution is equal to the lesser of the Association's base year reserve and
supplemental reserve for losses on loans; or an amount that, when reduced by the
tax attributable to the income, is equal to the amount of the distribution.
Thus, in certain situations approximately one and one-half times the
non-dividend distribution would be includable in gross income for federal income
tax purposes, assuming a 34% federal corporate income tax rate.
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%. 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 has registered 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 has paid an annual franchise tax to
the State of Delaware.
22
<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. The Company, as a savings association holding company, is also
required to file certain reports with, and otherwise comply with, the rules and
regulations of the OTS and of the Securities and Exchange Commission (the "SEC")
under the federal securities laws.
The OTS and the FDIC have significant discretion in connection with
their supervisory and enforcement activities and examination policies, including
policies with respect to the classification of assets and the establishment of
adequate loan loss reserves for regulatory purposes. Any change in such
policies, whether by the OTS, the FDIC or the Congress, could have a material
adverse impact on the Company, the Association and the operations of both.
The following discussion is intended to be a summary of the material
statutes and regulations applicable to savings associations and their holding
companies, and it does not purport to be a comprehensive description of all such
statutes and regulations.
REGULATION OF FEDERAL SAVINGS ASSOCIATIONS
BUSINESS ACTIVITIES. The Association derives its lending and investment
powers from the Home Owners' Loan Act, as amended (the "HOLA"), and the
regulations of the OTS thereunder. Under these laws and regulations, the
Association may invest in mortgage loans secured by residential and commercial
real estate, commercial and consumer loans, certain types of debt securities and
certain other assets. The Association may also establish service corporations
that may engage in activities not otherwise permissible for the Association,
including certain real estate equity investments and securities and insurance
brokerage. These investment powers are subject to various limitations, including
(a) a prohibition against the acquisition of any corporate debt security that is
not rated in one of the four highest rating categories; (b) a limit of 400% of
an association's capital on the aggregate amount of loans secured by
non-residential real estate property; (c) a limit of 10% of an association's
assets on the aggregate amount of commercial loans; (d) a limit of 35% of an
association's assets on the aggregate amount of consumer loans and acquisitions
of certain debt securities; (e) a limit of 5% of assets on non-conforming loans
(loans in excess of the specific limitations of the HOLA); and (f) a limit of
the greater of 5% of assets or an association's capital on certain construction
loans made for the purpose of financing what is or is expected to become
residential property.
LOANS TO ONE BORROWER. Under the HOLA, savings associations are
generally subject to the same limits on loans to one borrower as are imposed on
national banks. Generally, under these limits, a savings association may not
make a loan or extend credit to a single or related group of borrowers in excess
of 15% of the association's unimpaired capital and surplus. Additional amounts
may be lent, not in excess of 10% of unimpaired capital and surplus, if such
loans or extensions of credit are fully secured by readily-marketable
collateral. Such collateral is defined to include certain debt and equity
securities and bullion, but generally does not include real estate. At December
31, 1996, the Association's regulatory limit on loans to one borrower was $9.8
million. However, the Association's lending policy limits loans to any one
borrower to an aggregate of $1 million. At December 31, 1996, the Association's
largest aggregate amount of loans to
23
<PAGE>
one borrower was $364,000, and the second largest borrower had an aggregate
balance of $348,000. 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 December 31, 1996, the
Association maintained 99.11% 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 non-cumulative perpetual preferred stock
and related earnings and minority interests in equity accounts of fully
consolidated subsidiaries, less intangibles (other than certain purchased
mortgage servicing rights) and investments in and loans to subsidiaries engaged
in activities not permissible for a national bank. Core capital is defined
similarly to tangible capital, but core capital also includes certain qualifying
supervisory goodwill and certain purchased credit card relationships.
Supplementary capital currently includes cumulative and other perpetual
preferred stock, mandatory convertible securities, subordinated debt and
intermediate preferred stock and the allowance for loan and lease losses. The
allowance for loan and lease losses includable in supplementary capital is
limited to a maximum of 1.25% of risk-weighted assets, and the amount of
supplementary capital that may be included as total capital cannot exceed the
amount of core capital.
The OTS has promulgated a regulation that requires a savings
association with "above normal" interest rate risk, when determining compliance
with its risk-based capital requirement, to hold additional capital to account
for its "above normal" interest rate risk. Pending the resolution of related
regulatory issues,
24
<PAGE>
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. The regulations authorize the Director of the
OTS to waive or defer an association's interest rate risk component on a
case-by-case basis. The OTS has not yet implemented the regulatory requirement
for associations to deduct an interest-rate-risk component in calculating their
risk-based capital. At December 31, 1996, the Association was not required to
maintain any additional risk-based capital under this rule.
At December 31, 1996, the Association met each of its capital
requirements.
The table below presents the Association's regulatory capital as
compared to the OTS regulatory capital requirements at December 31, 1996.
<TABLE>
<CAPTION>
ASSOCIATION CAPITAL REQUIREMENTS EXCESS
------------------------ ------------------------ -----------------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
------ ------- ------ ------- ------ -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Tangible capital.............. $ 65,641 20.05% $ 4,912 1.50% $ 60,729 18.55%
Core capital.................. 65,641 20.05 9,824 3.00 55,817 17.05
Risk-based capital............ 66,586 41.09 12,964 8.00 53,622 33.09
</TABLE>
A reconciliation between the Association's regulatory capital and GAAP
capital at December 31, 1996 is presented below.
<TABLE>
<CAPTION>
TANGIBLE CAPITAL CORE CAPITAL RISK-BASED CAPITAL
---------------- ------------ ------------------
(IN THOUSANDS)
<S> <C> <C> <C>
GAAP capital.............................. $ 65,641 $ 65,641 $ 65,641
Allowance for loan losses includable
in supplementary capital................ -- -- 945
Regulatory capital........................ $ 65,641 $ 65,641 $ 66,586
</TABLE>
LIMITATION ON CAPITAL DISTRIBUTIONS. OTS regulations currently impose
limitations upon capital distributions by a savings association, such as cash
dividends, payments to repurchase or otherwise acquire its shares, payments to
stockholders of another institution in a cash-out merger and other distributions
charged against capital. At least 30-days written notice must be given to the
OTS of a proposed capital distribution by a savings association, and capital
distributions in excess of specified earnings or by certain institutions are
subject to approval by the OTS. An association that has capital in excess of all
fully phased-in regulatory capital requirements before and after a proposed
capital distribution and that is not otherwise restricted in making capital
distributions, may, after prior notice but without the approval of the OTS, make
capital distributions during a calendar year equal to the greater of (a) 100% of
its net earnings to date during the calendar year plus the amount that would
reduce by one-half its "surplus capital ratio" (the excess capital over its
fully phased-in capital requirements) at the beginning of the calendar year, or
(b) 75% of its net earnings for the previous four quarters. Any additional
capital distributions would require prior OTS approval. In addition, the OTS can
prohibit a proposed capital distribution, otherwise permissible under the
regulation, if the OTS has determined that the association is in need of more
than normal supervision or if it determines that
25
<PAGE>
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
December 31, 1996 was 20.67% 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 $79,000.
BRANCHING. Subject to certain limitations, the HOLA and the OTS
regulations permit federally chartered savings associations to establish
branches in any state of the United States. The authority to establish such
branches is available (a) in states that expressly authorize branches of savings
associations located in another state or (b) to an association that qualifies as
a "domestic building and loan association" under the Internal Revenue Code of
1986, which imposes qualification requirements similar to those for a "qualified
thrift lender" under the HOLA. See "-- QTL Test." The authority for a federal
savings association to establish an interstate branch network would facilitate a
geographic diversification of the association's activities. This authority under
the HOLA and the OTS regulations preempts any state law purporting to regulate
branching by federal savings associations.
COMMUNITY REINVESTMENT. Under the Community Reinvestment Act (the
"CRA"), as implemented by OTS regulations, a savings association has a
continuing and affirmative obligation consistent with its safe and sound
operation to help meet the credit needs of its entire community, including low
and moderate income neighborhoods. The CRA does not establish specific lending
requirements or programs for financial institutions nor does it limit an
institution's discretion to develop the types of products and services that it
believes are best suited to its particular community, consistent with the CRA.
The CRA requires the OTS, in connection with its examination of a savings
association, to assess the association's record of meeting the credit needs of
its community and to take such record into account in its evaluation of certain
applications by
26
<PAGE>
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 non-affiliated 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 non-affiliated companies.
The Association's authority to extend credit to its directors,
executive officers, and 10% shareholders, as well as to entities controlled by
such persons, is currently governed by the requirements of Sections 22(g) and
22(h) of the FRA and Regulation O of the FRB thereunder. Among other things,
these provisions require that extensions of credit to insiders (a) be made on
terms that are substantially the same as, and follow credit underwriting
procedures that are not less stringent than, those prevailing for comparable
transactions with unaffiliated persons and that do not involve more than the
normal risk of repayment or present other unfavorable features and (b) not
exceed certain limitations on the amount of credit extended to such persons,
individually and in the aggregate, which limits are based, in part, on the
amount of the association's capital. In addition, extensions of credit in excess
of certain limits must be approved by the association's board of directors.
ENFORCEMENT. Under the Federal Deposit Insurance Act (the "FDI Act"),
the OTS has primary enforcement responsibility over savings associations and has
the authority to bring enforcement action against all "institution-affiliated
parties," including any controlling stockholder or any stockholder, attorney,
appraiser or accountant who knowingly or recklessly participates in any
violation of applicable law or regulation or breach of fiduciary duty or certain
other wrongful actions that causes or is likely to cause a more than a minimal
loss or other significant adverse effect on an insured savings association.
Civil penalties cover a wide range of violations and actions and range from
$5,000 for each day during which violations of law, regulations, orders, and
certain written agreements and conditions continue, up to $1 million per day for
such violations if the person obtained a substantial pecuniary gain as a result
of such violation or knowingly or recklessly caused a substantial loss to the
institution. Criminal penalties for certain financial institution crimes include
fines of up to $1 million and imprisonment for up to 30 years. In addition,
regulators have substantial
27
<PAGE>
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. Pursuant to the FDI Act, as amended
by FDICIA and the Riegle Community Development and Regulatory Improvement Act of
1994 (the "Community Development Act"), 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, asset quality, earnings, 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. In addition,
the OTS adopted regulations that authorize, but do not require, the OTS to order
an institution that has been given notice by the OTS that it is not satisfying
any of such safety and soundness standards to submit a compliance plan. If,
after being so notified, an institution fails to submit an acceptable compliance
plan or fails in any material respect to implement an accepted compliance plan,
the OTS must issue an order directing action to correct the deficiency and may
issue an order directing other actions of the types to which an undercapitalized
association is subject under the "prompt corrective action" provisions of
FDICIA. If an institution fails to comply with such an order, the OTS may seek
to enforce such order in judicial proceedings and to impose civil money
penalties. The OTS and the federal bank regulatory agencies also proposed
guidelines for asset quality and earnings standards.
REAL ESTATE LENDING STANDARDS. The OTS and the other federal banking
agencies adopted regulations to prescribe standards for extensions of credit
that (a) are secured by real estate or (b) are made for the purpose of financing
the construction of improvements on real estate. The OTS regulations require
each savings association to establish and maintain written internal real estate
lending standards that are consistent with safe and sound banking practices and
appropriate to the size of the association and the nature and scope of its real
estate lending activities. The standards also must be consistent with
accompanying OTS guidelines, which include loan-to-value ratios for the
different types of real estate loans. Associations are also permitted to make a
limited amount of loans that do not conform to the proposed loan-to-value
limitations so long as such exceptions are reviewed and justified appropriately.
The guidelines also list a number of lending situations in which exceptions to
the loan-to-value standards are justified.
PROMPT CORRECTIVE REGULATORY ACTION. Under the OTS prompt corrective
action regulations, the OTS is required to take certain, and is authorized to
take other, supervisory actions against undercapitalized savings associations.
For this purpose, a savings association would be placed in one of five
categories based on the association's capital. Generally, a savings association
is treated as "well capitalized" if its ratio of total capital to risk-weighted
assets is at least 10.0%, its ratio of core capital to risk-weighted assets is
at least 6.0%, its ratio of core capital to total assets is at least 5.0%, and
it is not subject to any order or directive by the OTS to meet a specific
capital level. A savings association will be treated as "adequately capitalized"
if its ratio of total capital to risk-weighted assets is at least 8.0%, its
ratio of core capital to risk-weighted assets is at least 4.0%, and its ratio of
core capital to total assets is at least 4.0% (3.0% if the association receives
the highest rating on the CAMEL financial institutions rating system). A savings
association that has a total risk-based capital of less than 8.0% or a leverage
ratio or a Tier 1 capital ratio that is less than 4.0% (3.0% leverage ratio if
the association receives the highest rating on the CAMEL financial institutions
rating system) is considered to be "undercapitalized." A savings association
that has a total risk-based capital of less than 6.0% or a Tier 1 risk-based
capital ratio or a leverage ratio of less than 3.0% is considered to be
"significantly undercapitalized." A savings association that has a tangible
capital to assets ratio equal to or
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<PAGE>
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 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
29
<PAGE>
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. During 1995, the BIF reached the required reserve
ratio, and the FDIC reduced the BIF assessment rates. Effective January 1, 1996,
the BIF assessment rate for "well capitalized" institutions without any
significant supervisory concerns was set at the statutory minimum of $2,000
annually, and the rates for other BIF-insured institutions ranged from 0.03% to
0.27% of deposits. The SAIF remained undercapitalized, and it was not then
expected to be recapitalized until 2001. SAIF reserves had not grown as quickly
as the BIF reserves due to a number of factors, including the fact that a
significant portion of SAIF assessments had been used to make payments on bonds
(the "FICO bonds") issued in the late 1980s by the Financing Corporation to
recapitalize the now defunct Federal Savings and Loan Insurance Corporation.
Accordingly, SAIF-insured institutions continued to pay assessments at rates
that ranged from 0.23% of deposits to 0.31% of deposits. The Association's
assessment rate for the first three quarters of 1996 was 0.23% of deposits.
On September 30, 1996, the Deposit Insurance Funds Act of 1996
(the "Funds Act") was enacted into law. The Funds Act amended the Federal
Deposit Insurance Act in several ways to recapitalize the SAIF and reduce the
disparity in the assessment rates for BIF and the SAIF. The Funds Act authorized
the FDIC to impose a special assessment on all institutions with SAIF-assessable
deposits in the amount necessary to recapitalize the SAIF. As implemented by the
FDIC, the special assessment was fixed, subject to adjustment, at 0.657% of an
institution's SAIF-assessable deposits, and the special assessment was paid on
November 27, 1996. The special assessment was based on the amount of
SAIF-assessable deposits held at March 31, 1995, as adjusted under the Funds
Act. For the Association, the special assessment on the deposits held on March
31, 1995, was $1.8 million (before giving effect to any tax benefits).
The Funds Act also provides that the FDIC cannot assess
regular insurance assessments for an insurance fund unless required to maintain
or to achieve the designated reserve ratio of 1.25%, except on those of its
member institutions that are not classified as "well capitalized" or that have
been found to have "moderately severe" or "unsatisfactory" financial,
operational or compliance weaknesses. The Association has not been so classified
by the FDIC or the OTS. As a result of the Funds Act and the recapitalization of
the SAIF in the last quarter of 1996, the FDIC reduced the assessment rates for
the SAIF. For the semi-annual period beginning January 1, 1997, the SAIF
assessment rates range from 0 to 27 basis points, which is the same as the
schedule of assessment rates for the BIF.
In addition, the Funds Act expanded the assessment base for
the payments on the FICO bonds. Beginning January 1, 1997, the deposits of both
BIF- and SAIF-insured institutions were assessed for the payments on the FICO
bonds. Until December 31, 1999, or such earlier date on which the last savings
association ceases to exist, the rate of assessment for BIF-assessable deposits
shall be one-fifth of the rate imposed on SAIF-assessable deposits. The annual
rate of assessments for the payments on the FICO bonds for the semi-annual
period beginning on January 1, 1997 was set at 0.0130% for BIF-assessable
deposits and 0.0648% for SAIF-assessable deposits.
The Funds Act also provides for the merger of the BIF and SAIF
on January 1, 1999, with such merger being conditioned upon the prior
elimination of the thrift charter. The Secretary of the Treasury is required to
conduct a study of relevant factors with respect to the development of a common
charter for all
30
<PAGE>
insured depository institutions and abolition of separate charters for banks and
thrifts and to report the Secretary's conclusions and findings to the Congress
on or before March 31, 1997. Two bills have been introduced in Congress to
eliminate the federal thrift charter, with one requiring the federal thrift to
convert to a bank charter and the other giving the federal thrift the option to
convert to a national or state chartered bank or to a state savings and loan
association.
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 December 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 $187,000, $202,000 and $187,000 during the years ended December 31,
1996, 1995 and 1994, 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 $49.3 million. The amount of
aggregate transaction accounts in excess of $49.3 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 $4.4 million of otherwise reservable
balances from the reserve requirements, which exemption is adjusted by the FRB
at the end of each year. The Association is in compliance with the foregoing
reserve requirements. Because required reserves must be maintained in the form
of either vault cash, a non-interest-bearing account at a Federal Reserve Bank,
or a pass-through account as defined by the FRB, the effect of this reserve
requirement is to reduce the Association's interest-earning assets. The balances
maintained to meet the reserve requirements imposed by the FRB may be used to
satisfy liquidity requirements imposed by the OTS. Federal Home Loan Bank System
members are also authorized to borrow from the Federal Reserve "discount
window," but FRB regulations require such institutions to exhaust all Federal
Home Loan Bank sources before borrowing from a Federal Reserve Bank.
REGULATION OF SAVINGS ASSOCIATION HOLDING COMPANIES
The Company is a non-diversified unitary savings association holding
company within the meaning of the HOLA, as amended. As such, the Company has
registered with the OTS and is subject to OTS regulations, examinations,
supervision and reporting requirements. In addition, the OTS has enforcement
31
<PAGE>
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.
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.
Transactions between the Association and the Company and its other
subsidiaries are subject to various conditions and limitations. See "--
Regulation of Federal Savings Associations -- Transactions with Related
Parties." The Association is required 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's Common Stock is registered with the SEC under Section
12(g) of the Securities Exchange Act of 1934, as amended (the "Exchange Act").
Accordingly, the Company is subject to the information, proxy solicitation,
insider trading restrictions and other requirements of the Exchange Act.
32
<PAGE>
ITEM 2. PROPERTIES
The Association conducts its business through its main office and four
branch offices set forth in the table below. The Company conducts its business
through the Association's main office located at 16 North Spring Street, Elgin,
Illinois. The Association believes that its current facilities 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 DECEMBER 31, 1996
--------- --------- -----------------
(IN THOUSANDS)
<S> <C> <C> <C>
MAIN OFFICE:
16 North Spring St.
Elgin, IL .................................. Owned 1923 $2,377
BRANCHES:
180 Virginia St.
Crystal Lake, IL............................ Owned 4/74 784
56 East Irving Park Road
Roselle, IL................................. Owned 7/75 315
300 North McLean Blvd.
South Elgin, IL............................. Owned 11/96 1,433
200 Bartlett Ave.
Bartlett, IL................................ Owned 9/79 895
CHECK PROCESSING:
Mail and Record Retention
Facility (No Customer Service) Annex
Fulton St., Elgin, IL....................... Owned 2/86 408
</TABLE>
ITEM 3. LEGAL PROCEEDINGS
The Company 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 Company's financial condition and results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
33
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The information required by this Item is incorporated herein by
reference to page 22 of the Company's 1996 Annual Report to Stockholders
under the caption "Market for the Company's Common Stock and Related Stockholder
Matters," which section is included in Exhibit 13.1 to this Report.
ITEM 6. SELECTED FINANCIAL DATA
The information required by this Item is incorporated herein by
reference to pages 4 and 5 of the Company's 1996 Annual Report to Stockholders
under the caption "Selected Financial and Other Data of the Company," which
section is included in Exhibit 13.1 to this Report.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The information required by this Item is incorporated herein by
reference to pages 6 through 21 of the Company's 1996 Annual Report to
Stockholders under the caption "Management's Discussion and Analysis of
Financial Condition and Results of Operations," which section is included in
Exhibit 13.1 to this Report.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this Item is incorporated herein by
reference to pages 23 through 45 of the Company's 1996 Annual Report to
Stockholders under the captions "Independent Auditors' Report," "Consolidated
Financial Statements" and "Notes to Consolidated Financial Statements," which
sections are included in Exhibit 13.1 to this Report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
34
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following information included on pages 5 through 8, 12 and 17 of
the Company's Proxy Statement for the 1997 Annual Meeting of Stockholders (the
"Proxy Statement") is incorporated herein by reference: "Election of Directors"
and "Compensation of Directors and Executive Officers--Executive Compensation"
and " - Section 16(a) Beneficial Ownership Reporting Compliance."
ITEM 11. EXECUTIVE COMPENSATION
The following information included on pages 12 through 16 of the Proxy
Statement is incorporated herein by reference: "Compensation of Directors and
Executive Officers--Directors' Compensation", "--Executive Compensation,"
"--Employment Agreements," "--Employee Retention Agreement" and "--Benefits."
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following information included on pages 3 and 4 of the Proxy
Statement is incorporated herein by reference: "Security Ownership of Certain
Beneficial Owners and Management--Principal Stockholders of the Company" and
"--Stock Ownership of Management."
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The following information included on pages 16 and 17 of the Proxy
Statement is incorporated herein by reference: "Compensation of Directors and
Executive Officers--Transactions with Certain Related Persons."
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Listed below are all financial statements and exhibits filed
as part of this report:
(1) The consolidated balance sheets of Home Bancorp of Elgin, Inc.
and subsidiary as of December 31, 1996 and 1995 and the related
consolidated statements of operations, changes in stockholders'
equity and cash flows for each of the years in the three-year
period ended December 31, 1996, together with the related notes
and the independent auditors' report of KPMG Peat Marwick LLP,
independent certified public accountants.
(2) Schedules omitted as they are not applicable.
(3) Exhibits
EXHIBIT NO. DESCRIPTION
- ----------- -----------
3.1 Certificate of Incorporation of Home Bancorp of Elgin, Inc.*
3.2 Bylaws of Home Bancorp of Elgin, Inc.*
35
<PAGE>
EXHIBIT NO. DESCRIPTION
- ----------- -----------
4.3 Specimen of Stock Certificate of Home Bancorp of Elgin, Inc.*
10.1 Employee Stock Ownership Plan of Home Bancorp of Elgin, Inc. and
ESOP Trust Agreement*
10.2 Loan Agreement by and between Home Bancorp of Elgin, Inc. Employee
Stock Ownership Plan Trust and Home Bancorp of Elgin, Inc. Made and
Entered Into as of September 26, 1996
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*
10.6 Form of Severance Pay Plan between Home Federal Savings and Loan
Association of Elgin and certain executive officers*
13.1 Portions of the Company's 1996 Annual Report to Stockholders
21.1 Subsidiaries of the Registrant*
27.1 Financial Data Schedule (Submitted only with filing in electronic
format)
99.1 Proxy Statement for the 1997 Annual Meeting of Stockholders of Home
Bancorp of Elgin, Inc. previously filed with the Securities and
Exchange Commission on March 13, 1997
- --------------
* Incorporated herein by reference to Registration Statement No. 333-05909 on
Form S-1 of Home Bancorp of Elgin, Inc. filed with the Securities and
Exchange Commission on June 13, 1996, as amended.
(b) The Company filed no reports on Form 8-K during the fourth quarter of 1996.
36
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant certifies that it has duly caused this
report to be signed on its behalf by the undersigned, thereunto duly authorized,
in the City of Elgin, State of Illinois, on March 20, 1997.
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 Exchange Act of 1934, as
amended, this report has been signed by the following persons in the capacities
and on the dates indicated.
NAME TITLE DATE
---- ----- ----
/s/ George L. Perucco Director, President March 20, 1997
- --------------------------- and Chief Executive Officer
George L. Perucco (Principal executive officer)
/s/ Lyle N. Dolan Executive Vice President and March 20, 1997
- --------------------------- Treasurer (Principal financial
Lyle N. Dolan and accounting officer)
/s/Orval M. Graening Director March 20, 1997
- ---------------------------
Orval M. Graening
/s/ Henry R. Hines Director March 20, 1997
- ---------------------------
Henry R. Hines
/s/ Donald E. Laird Director March 20, 1997
- ---------------------------
Donald E. Laird
/s/ Leigh O'Connor Director March 20, 1997
- ---------------------------
Leigh O'Connor
/s/ Thomas S. Rakow Director March 20, 1997
- ---------------------------
Thomas S. Rakow
/s/ Richard S. Scheflow Director March 20, 1997
- ---------------------------
Richard S. Scheflow
37
<PAGE>
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------------
EXHIBITS
TO
FORM 10-K
SEC File No. 0-28696
--------------------------
HOME BANCORP OF ELGIN, INC.
ELGIN, ILLINOIS
================================================================================
<PAGE>
DESIGNATION DESCRIPTION PAGE
- ----------- ----------- ----
3.1 Certificate of Incorporation of Home Bancorp of
Elgin, Inc. (Incorporated by reference to Exhibit
3.1 to the Registration Statement on Form S-1, No.
333-05909 filed with the Securities and Exchange
Commission on June 13, 1996, as amended (the
"Registration Statement"))
3.2 Bylaws of Home Bancorp of Elgin, Inc.
(Incorporated by reference to Exhibit 3.2 to the
Registration Statement)
4.3 Specimen of Stock Certificate of Home Bancorp of
Elgin, Inc. (Incorporated by reference to Exhibit
4.3 to the Registration Statement)
10.1 Employee Stock Ownership Plan of Home Bancorp
of Elgin, Inc. and ESOP Trust Agreement
(Incorporated by reference to Exhibit 10.1 to the
Registration Statement)
10.2 Loan Agreement by and between Home Bancorp of
Elgin, Inc. Employee Stock Ownership Plan Trust
and Home Bancorp of Elgin, Inc. made and Entered
Into as of September 26, 1996
10.3 Form of Executive Employment Agreement between
Home Bancorp of Elgin, Inc. and certain executive
officers (Incorporated by reference to Exhibit 10.3
to the Registration Statement)
10.4 Form of Employment Agreement between Home Federal
Savings and Loan Association of Elgin and certain
executive officers (Incorporated by reference to
Exhibit 10.4 to the Registration Statement)
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 (Incorporated by reference to
Exhibit 10.5 to the Registration Statement)
<PAGE>
DESIGNATION DESCRIPTION PAGE
- ----------- ----------- ----
10.6 Form of Severance Pay Plan between Home Federal
Savings and Loan Association of Elgin and certain
executive officers (Incorporated by reference to
Exhibit 10.6 to the Registration Statement)
13.1 Portions of the Company's 1996 Annual Report to
Stockholders
21.1 Subsidiaries of the Registrant (Incorporated by
reference to Exhibit 21.1 to the Registration
Statement)
27.1 Financial Data Schedule (Submitted only with filing
in electronic format)
99.1 Proxy Statement for the 1997 Annual Meeting of
Stockholders of Home Bancorp of Elgin, Inc.
previously filed with the Securities and Exchange
Commission on March 13, 1997
EXHIBIT 10.2
------------
Loan Agreement by and between Home Bancorp of Elgin, Inc. Employee Stock
Ownership Plan Trust and Home Bancorp of Elgin, Inc. made and Entered
Into as of September 26, 1996
<PAGE>
LOAN AGREEMENT
BY AND BETWEEN
HOME BANCORP OF ELGIN, INC.
EMPLOYEE STOCK OWNERSHIP PLAN TRUST
AND
HOME BANCORP OF ELGIN, INC.
MADE AND ENTERED INTO AS OF
SEPTEMBER 26, 1996
<PAGE>
TABLE OF CONTENTS
Page
----
ARTICLE I
DEFINITIONS
SECTION 1.1 BUSINESS DAY.............................................. 1
SECTION 1.2 CODE...................................................... 1
SECTION 1.3 DEFAULT................................................... 2
SECTION 1.4 ERISA..................................................... 2
SECTION 1.5 EVENT OF DEFAULT.......................................... 2
SECTION 1.6 FISCAL YEAR............................................... 2
SECTION 1.7 INDEPENDENT COUNSEL....................................... 2
SECTION 1.8 LOAN...................................................... 2
SECTION 1.9 LOAN DOCUMENTS............................................ 2
SECTION 1.10 PLEDGE AGREEMENT.......................................... 2
SECTION 1.11 PRINCIPAL AMOUNT.......................................... 2
SECTION 1.12 PROMISSORY NOTE........................................... 2
SECTION 1.13 REGISTER.................................................. 2
ARTICLE II
THE LOAN; PRINCIPAL AMOUNT;
INTEREST; SECURITY; INDEMNIFICATION
SECTION 2.1 THE LOAN; PRINCIPAL AMOUNT................................ 2
SECTION 2.2 INTEREST.................................................. 3
SECTION 2.3 PROMISSORY NOTE........................................... 4
SECTION 2.4 PAYMENT OF TRUST LOAN..................................... 4
SECTION 2.5 PREPAYMENT................................................ 5
SECTION 2.6 METHOD OF PAYMENTS........................................ 5
SECTION 2.7 USE OF PROCEEDS OF LOAN................................... 6
SECTION 2.9 REGISTRATION OF THE PROMISSORY NOTE....................... 6
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF THE BORROWER
SECTION 3.1 POWER, AUTHORITY, CONSENTS................................ 7
SECTION 3.2 DUE EXECUTION, VALIDITY, ENFORCEABILITY................... 7
SECTION 3.3 PROPERTIES, PRIORITY OF LIENS............................. 7
SECTION 3.4 NO DEFAULTS, COMPLIANCE WITH LAWS......................... 7
SECTION 3.5 PURCHASES OF COMMON STOCK................................. 8
(i)
<PAGE>
Page
----
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF THE LENDER
SECTION 4.1 POWER, AUTHORITY, CONSENTS................................ 8
SECTION 4.2 DUE EXECUTION, VALIDITY, ENFORCEABILITY................... 8
SECTION 4.3 ESOP; CONTRIBUTIONS....................................... 9
SECTION 4.4 TRUSTEE; COMMITTEE........................................ 9
SECTION 4.5 COMPLIANCE WITH LAWS; ACTIONS............................. 9
ARTICLE V
EVENTS OF DEFAULT
SECTION 5.1 EVENTS OF DEFAULT UNDER LOAN AGREEMENT.................... 9
SECTION 5.2 LENDER'S RIGHTS UPON EVENT OF DEFAULT..................... 10
ARTICLE VI
MISCELLANEOUS PROVISIONS
SECTION 6.1 PAYMENTS DUE TO THE LENDER................................ 10
SECTION 6.2 PAYMENTS.................................................. 10
SECTION 6.3 SURVIVAL.................................................. 11
SECTION 6.4 MODIFICATIONS, CONSENTS AND WAIVERS; ENTIRE AGREEMENT..... 11
SECTION 6.5 REMEDIES CUMULATIVE....................................... 11
SECTION 6.6 FURTHER ASSURANCES; COMPLIANCE WITH COVENANTS............. 11
SECTION 6.7 NOTICES................................................... 12
SECTION 6.8 COUNTERPARTS.............................................. 13
SECTION 6.9 CONSTRUCTION; GOVERNING LAW............................... 13
SECTION 6.10 SEVERABILITY.............................................. 13
SECTION 6.11 BINDING EFFECT; NO ASSIGNMENT OR DELEGATION............... 13
EXHIBIT A FORM OF PROMISSORY NOTE...........................................A-1
EXHIBIT B FORM OF PLEDGE AGREEMENT..........................................B-1
EXHIBIT C FORM OF ASSIGNMENT................................................C-1
EXHIBIT D FORM OF IRREVOCABLE PROXY.........................................D-1
(ii)
<PAGE>
LOAN AGREEMENT
--------------
This LOAN AGREEMENT ("Loan Agreement") is made and entered
into as of the 26th day of September, 1996, by and between the HOME BANCORP OF
ELGIN, INC. EMPLOYEE STOCK OWNERSHIP PLAN TRUST ("Borrower"), a trust forming
part of the Home Bancorp of Elgin, Inc. Employee Stock Ownership Plan ("ESOP"),
acting through and by its Trustee, HARRIS BANK BARRINGTON, N.A. ("Trustee"), a
banking corporation organized under the laws of the United States and having an
office at 201 South Grove Avenue, Barrington, Illinois 60010; and HOME BANCORP
OF ELGIN, INC. ("Lender"), a corporation organized and existing under the laws
of the state of Illinois, having an office at 16 North Spring Street, Elgin,
Illinois 60120-5569.
W I T N E S S E T H :
- - - - - - - - - -
WHEREAS, the Board of Directors of the Lender ("Board") has
authorized the Borrower to purchase shares of common stock of Home Bancorp of
Elgin, Inc. ("Common Stock"), either directly from Home Bancorp of Elgin, Inc.
or in open market purchases, in an amount not to exceed 560,740 shares of Common
Stock or, if less, shares of Common Stock having an aggregate purchase price of
Five Million Six Hundred Seven Thousand Four Hundred Dollars ($5,607,400.00);
and
WHEREAS, the Board has further authorized the Borrower to
borrow funds from the Lender for the purpose of financing authorized purchases
of Common Stock; and
WHEREAS, the Lender is willing to make a loan to the Borrower
for such purpose;
NOW, THEREFORE, the parties hereto agree as follows:
ARTICLE I
---------
DEFINITIONS
-----------
The following definitions shall apply for purposes of this
Loan Agreement, except to the extent that a different meaning is plainly
indicated by the context:
SECTION 1.1 BUSINESS DAY means any day other than a Saturday,
Sunday or other day on which banks are authorized or required to close under
federal law or the laws of the State of Illinois.
SECTION 1.2 CODE means the Internal Revenue Code of 1986
(including the corresponding provisions of any succeeding law).
<PAGE>
-2-
SECTION 1.3 DEFAULT means an event or condition which would
constitute an Event of Default. The determination as to whether an event or
condition would constitute an Event of Default shall be determined without
regard to any applicable requirement of notice or lapse of time.
SECTION 1.4 ERISA means the Employee Retirement Income
Security Act of 1974, as amended (including the corresponding provisions of any
succeeding law).
SECTION 1.5 EVENT OF DEFAULT means an event or condition
described in Article 5.
SECTION 1.6 FISCAL YEAR means the fiscal year of Home Bancorp
of Elgin, Inc.
SECTION 1.7 INDEPENDENT COUNSEL means Thacher Proffitt & Wood
or other counsel mutually satisfactory to both the Lender and the Borrower.
SECTION 1.8 LOAN means the loan described in section 2.1.
SECTION 1.9 LOAN DOCUMENTS means, collectively, this Loan
Agreement, the Promissory Note and the Pledge Agreement and all other documents
now or hereafter executed and delivered in connection with such documents,
including all amendments, modifications and supplements of or to all such
documents.
SECTION 1.10 PLEDGE AGREEMENT means the agreement described in
section 2.8(a).
SECTION 1.11 PRINCIPAL AMOUNT means the face amount of the
Promissory Note, determined as set forth in section 2.1(c).
SECTION 1.12 PROMISSORY NOTE means the promissory note
described in section 2.3.
SECTION 1.13 REGISTER means the register described in section
2.9.
ARTICLE II
----------
THE LOAN; PRINCIPAL AMOUNT;
INTEREST; SECURITY; INDEMNIFICATION
-----------------------------------
SECTION 2.1 THE LOAN; PRINCIPAL AMOUNT.
(a) The Lender hereby agrees to lend to the Borrower such
amounts, and at such times, as shall be determined under this section 2.1;
PROVIDED, HOWEVER, that in no event shall the aggregate amount lent under this
Loan Agreement from time to time exceed the lesser
<PAGE>
-3-
of (i) Five Million Six Hundred Seven Thousand Four Hundred Dollars
($5,607,400.00) or (ii) the aggregate amount paid by the Borrower, exclusive of
commissions, fees and other charges, to purchase 560,740 shares of Common Stock.
(b) Subject to the limitations of section 2.1(a), the Borrower
shall determine the amounts borrowed under this Agreement, and the times at
which such borrowings are effected. Each such determination shall be evidenced
in a writing which shall set forth the amount to be borrowed and the date on
which the Lender shall disburse such amount, and such writing shall be furnished
to the Lender by notice from the Borrower. The Lender shall disburse to the
Borrower the amount specified in each such notice on the date specified therein
or, if later, as promptly as practicable following the Lender's receipt of such
notice; PROVIDED, HOWEVER, that the Lender shall have no obligation to disburse
funds pursuant to this Agreement following the occurrence of a Default or an
Event of Default until such time as such Default or Event of Default shall have
been cured.
(c) For all purposes of this Loan Agreement, the
Principal Amount on any date shall be equal to the excess, if any, of:
(i) the aggregate amount disbursed by the Lender pursuant
to section 2.1(b) on or before such date; over
(ii) the aggregate amount of any repayments of such
amounts made before such date.
The Lender shall maintain on the Register a record of, and shall record on the
Promissory Note, the Principal Amount, any changes in the Principal Amount and
the effective date of any changes in the Principal Amount.
SECTION 2.2 INTEREST.
(a) The Borrower shall pay to the Lender interest on the
Principal Amount, for the period commencing on the date of this Loan Agreement
and continuing until the Principal Amount shall be paid in full, the rate of
eight percent (8%) per annum. Interest payable under this Agreement shall be
computed on the basis of a year of 365 days and actual days elapsed (including
the first day but excluding the last) occurring in the period to which the
computation relates.
(b) Except as otherwise provided in this section 2.2(b),
accrued interest on the Principal Amount shall be payable by the Borrower
annually in arrears commencing on the last Business Day of the first calendar
year to end following the date of this Agreement and continuing on the last
Business Day of each calendar year thereafter and upon the payment or prepayment
of such Loan. All interest on the Principal Amount shall be paid by the Borrower
in immediately available funds. The Lender shall remit to the Borrower, at least
three (3) Business Days before the end of each calendar year, a statement of the
interest payment due under section 2.2(a) for such year; PROVIDED, HOWEVER, that
a delay or failure by the Lender in providing the Borrower with such statement
shall not alter the Borrower's obligation to make such payment.
<PAGE>
-4-
(c) Anything in this Loan Agreement or the Promissory Note to
the contrary notwithstanding, the obligation of the Borrower to make payments of
interest shall be subject to the limitation that payments of interest shall not
be required to be made to the Lender to the extent that the Lender's receipt
thereof would not be permissible under the law or laws applicable to the Lender
limiting rates of interest which may be charged or collected by the Lender. Any
such payment referred to in the preceding sentence shall be made by the Borrower
to the Lender on the earliest interest payment date or dates on which the
receipt thereof would be permissible under the laws applicable to the Lender
limiting rates of interest which may be charged or collected by the Lender. Such
deferred interest shall not bear interest.
SECTION 2.3 PROMISSORY NOTE.
The Loan shall be evidenced by a Promissory Note of the
Borrower in substantially the form of Exhibit A attached hereto, dated the date
hereof, payable to the order of the Lender in the Principal Amount and otherwise
duly completed.
SECTION 2.4 PAYMENT OF TRUST LOAN.
(a) The Principal Amount of the Loan shall be repaid in annual
installments payable on the last Business Day of each Fiscal Year ending after
the date of this Agreement. The amount of each such annual installment shall be
equal to a fraction of the Principal Amount on the due date of such installment,
determined in accordance with the following schedule:
INSTALLMENT DUE ON FRACTION OF OUTSTANDING
LAST BUSINESS DAY OF PRINCIPAL AMOUNT
-------------------- ----------------
FISCAL YEAR ENDING
------------------
IN
--
1996 1/40
1997 1/10
1998 1/10
1999 1/10
2000 1/10
2001 1/10
2002 1/10
2003 1/10
2004 1/10
2005 1/10
10th anniversary of loan entire outstanding
Principal Amount
; PROVIDED, HOWEVER, that the Borrower shall not be required to make any payment
of principal due to be made in any Fiscal Year to the extent that (i) following
such payment, the consolidated return on average assets of Home Bancorp of
Elgin, Inc. for such Fiscal Year would be less than one-half of one percent
(0.5%) or the consolidated return on average equity for such Fiscal Year
<PAGE>
-5-
would be less than four percent (4%) or (ii) such payment would not be
deductible for federal income tax purposes for such Fiscal Year under section
404 of the Code.
(b) Any payment not required to made pursuant to the clause (i) of the
proviso in section 2.4(a) shall be deferred to and be payable on the earlier of
the twentieth (20th) anniversary of the loan origination date or the last
Business Day of the first Fiscal Year in which such proviso would not apply to
alleviate a requirement of payment; and payment not required to be made pursuant
to clause (ii) of section 2.4(a) shall be deferred to and be payable on the last
day of the first Fiscal Year in which such payment may be made on a tax
deductible basis.
SECTION 2.5 PREPAYMENT.
The Borrower shall be entitled to prepay the Loan in whole or
in part, at any time and from time to time; PROVIDED, HOWEVER, that the Borrower
shall give notice to the Lender of any such prepayment; and PROVIDED, FURTHER,
that any partial prepayment of the Loan shall be in an amount not less than TEN
THOUSAND DOLLARS ($10,000.00). Any such prepayment shall be: (a) permanent and
irrevocable: (b) accompanied by all accrued interest through the date of such
prepayment; (c) made without premium or penalty; and (d) applied in the inverse
order of the maturity of the installments thereof unless the Lender and the
Borrower agree to apply such prepayments in some other order.
SECTION 2.6 METHOD OF PAYMENTS.
(a) All payments of principal, interest, other charges
(including indemnities) and other amounts payable by the Borrower hereunder
shall be made in lawful money of the United States, in immediately available
funds, to the Lender at the address specified in or pursuant to this Loan
Agreement for notices to the Lender, not later than 3:00 P.M., Chicago time, on
the date on which such payment shall become due. Any such payment made on such
date but after such time shall, if the amount paid bears interest, and except as
expressly provided to the contrary herein, be deemed to have been made on, and
interest shall continue to accrue and be payable thereon until, the next
succeeding Business Day. If any payment of principal or interest becomes due on
a day other than a Business Day, such payment may be made on the next succeeding
Business Day, and when paid, such payment shall include interest to the day on
which such payment is in fact made.
(b) Notwithstanding anything to the contrary contained in this
Loan Agreement or the Promissory Note, neither the Borrower nor the Trustee
shall be obligated to make any payment, repayment or prepayment on the
Promissory Note or take or refrain from taking any other action hereunder or
under the Promissory Note if doing so would cause the ESOP to cease to be an
employee stock ownership plan within the meaning of section 4975(e)(7) of the
Code or qualified under section 401(a) of the Code or cause the Borrower to
cease to be a tax exempt trust under section 501(a) of the Code or if such act
or failure to act would cause the Borrower or the Trustee to engage in any
"prohibited transaction" as such term is defined in section 4975(c) of the Code
and the regulations promulgated thereunder which is not exempted by section
4975(c)(2) or (d) of the Code and the regulations promulgated thereunder or in
section 406 of ERISA and the regulations promulgated thereunder which is not
exempted by section 408(b) of ERISA and the regulations promulgated thereunder;
PROVIDED, HOWEVER, that in each
<PAGE>
-6-
case, the Borrower or the Trustee or both, as the case may be, may act or
refrain from acting pursuant to this section 2.6(b) on the basis of an opinion
of Independent Counsel. The Borrower and the Trustee may consult with
Independent Counsel, and any opinion of such Independent Counsel shall be full
and complete authorization and protection in respect of any action taken or
suffered or omitted by it hereunder in good faith and in accordance with such
opinion of Independent Counsel. Nothing contained in this section 2.6(b) shall
be construed as imposing a duty on either the Borrower or the Trustee to consult
with Independent Counsel. Any obligation of the Borrower or the Trustee to make
any payment, repayment or prepayment on the Promissory Note or to take or
refrain from taking any other act hereunder or under the Promissory Note which
is excused pursuant to this section 2.6(b) shall be considered a binding
obligation of the Borrower or the Trustee, or both, as the case may be, for the
purposes of determining whether a Default or Event of Default has occurred
hereunder or under the Promissory Note and nothing in this section 2.6(b) shall
be construed as providing a defense to any remedies otherwise available upon a
Default or an Event of Default hereunder (other than the remedy of specific
performance).
SECTION 2.7 USE OF PROCEEDS OF LOAN.
The entire proceeds of the Loan shall be used solely for
acquiring shares of Common Stock, and for no other purpose whatsoever.
SECTION 2.8 SECURITY.
(a) In order to secure the due payment and performance by the
Borrower of all of its obligations under this Loan Agreement, simultaneously
with the execution and delivery of this Loan Agreement by the Borrower, the
Borrower shall:
(i) pledge to the Lender as Collateral (as defined in the
Pledge Agreement), and grant to the Lender a first priority lien on and
security interest in, the Common Stock purchased with the Principal
Amount, by the execution and delivery to the Lender of a Pledge
Agreement in the form attached hereto as Exhibit B; and
(ii) execute and deliver, or cause to be executed and
delivered, such other agreements, instruments and documents as the
Lender may reasonably require in order to effect the purposes of the
Pledge Agreement and this Loan Agreement.
(b) The Lender shall release from encumbrance under the Pledge
Agreement and transfer to the Borrower, as of the date on which any payment or
prepayment of the Principal Amount is made, a number of shares of Common Stock
held as Collateral pursuant to section 6.4 of the ESOP.
SECTION 2.9 REGISTRATION OF THE PROMISSORY NOTE.
(a) The Lender shall maintain a Register providing for the
registration of the Principal Amount and any stated interest and of transfer and
exchange of the Promissory Note.
<PAGE>
-7-
Transfer of the Promissory Note may be effected only by the surrender of the old
instrument and either the reissuance by the Borrower of the old instrument to
the new holder or the issuance by the Borrower of a new instrument to the new
holder. The old Promissory Note so surrendered shall be cancelled by the Lender
and returned to the Borrower after such cancellation.
(b) Any new Promissory Note issued pursuant to section 2.9(a)
shall carry the same rights to interest (unpaid and to accrue) carried by the
Promissory Note so transferred or exchanged so that there will not be any loss
or gain of interest on the note surrendered. Such new Promissory Note shall be
subject to all of the provisions and entitled to all of the benefits of this
Agreement. Prior to due presentment for registration or transfer, the Borrower
may deem and treat the registered holder of any Promissory Note as the holder
thereof for purposes of payment and all other purposes. A notation shall be made
on each new Promissory Note of the amount of all payments of principal and
interest theretofore paid.
ARTICLE III
-----------
REPRESENTATIONS AND WARRANTIES OF THE BORROWER
----------------------------------------------
The Borrower hereby represents and warrants to the Lender as
follows:
SECTION 3.1 POWER, AUTHORITY, CONSENTS.
The Borrower has the power to execute, deliver and perform
this Loan Agreement, the Promissory Note and the Pledge Agreement, all of which
have been duly authorized by all necessary and proper corporate or other action.
SECTION 3.2 DUE EXECUTION, VALIDITY, ENFORCEABILITY.
Each of the Loan Documents, including, without limitation,
this Loan Agreement, the Promissory Note and the Pledge Agreement, have been
duly executed and delivered by the Borrower; and each constitutes the valid and
legally binding obligation of the Borrower, enforceable in accordance with its
terms.
SECTION 3.3 PROPERTIES, PRIORITY OF LIENS.
The liens which have been created and granted by the Pledge
Agreement constitute valid, first liens on the properties and assets covered by
the Pledge Agreement, subject to no prior or equal lien.
SECTION 3.4 NO DEFAULTS, COMPLIANCE WITH LAWS.
The Borrower is not in default in any material respect under
any agreement, ordinance, resolution, decree, bond, note, indenture, order or
judgment to which it is a party
<PAGE>
-8-
or by which it is bound, or any other agreement or other instrument by which any
of the properties or assets owned by it is materially affected.
SECTION 3.5 PURCHASES OF COMMON STOCK.
Upon consummation of any purchase of Common Stock by the
Borrower with the proceeds of the Loan, the Borrower shall acquire valid, legal
and marketable title to all of the Common Stock so purchased, free and clear of
any liens, other than a pledge to the Lender of the Common Stock so purchased
pursuant to the Pledge Agreement. Neither the execution and delivery of the Loan
Documents nor the performance of any obligation thereunder violates any
provision of law or conflicts with or results in a breach of or creates (with or
without the giving of notice or lapse of time, or both) a default under any
agreement to which the Borrower is a party or by which it is bound or any of its
properties is affected. No consent of any federal, state or local governmental
authority, agency or other regulatory body, the absence of which could have a
materially adverse effect on the Borrower or the Trustee, is or was required to
be obtained in connection with the execution, delivery or performance of the
Loan Documents and the transactions contemplated therein or in connection
therewith, including, without limitation, with respect to the transfer of the
shares of Common Stock purchased with the proceeds of the Loan pursuant thereto.
ARTICLE IV
----------
REPRESENTATIONS AND WARRANTIES OF THE LENDER
--------------------------------------------
The Lender hereby represents and warrants to the Borrower as
follows:
SECTION 4.1 POWER, AUTHORITY, CONSENTS.
The Lender has the power to execute, deliver and perform this
Loan Agreement, the Pledge Agreement and all documents executed by the Lender in
connection with the Loan, all of which have been duly authorized by all
necessary and proper corporate or other action. No consent, authorization or
approval or other action by any governmental authority or regulatory body, and
no notice by the Lender to, or filing by the Lender with, any governmental
authority or regulatory body is required for the due execution, delivery and
performance of this Loan Agreement.
SECTION 4.2 DUE EXECUTION, VALIDITY, ENFORCEABILITY.
This Loan Agreement and the Pledge Agreement have been duly
executed and delivered by the Lender; and each constitutes a valid and legally
binding obligation of the Lender, enforceable in accordance with its terms.
<PAGE>
-9-
SECTION 4.3 ESOP; CONTRIBUTIONS.
The ESOP and the Borrower have been duly created, organized
and maintained by the Lender in compliance with all applicable laws, regulations
and rulings. The ESOP qualifies as an "employee stock ownership plan" as defined
in section 4975(e) (7) the Code. The ESOP provides that the Lender may make
contributions to the ESOP in an amount necessary to enable the Trustee to
amortize the Loan in accordance with the terms of the Promissory Note and this
Loan Agreement, and the Lender will make such contributions; PROVIDED, HOWEVER,
that no such contributions shall be required if they would adversely affect the
qualification of the ESOP under section 401(a) of the Code.
SECTION 4.4 TRUSTEE; COMMITTEE.
The Lender has taken such action as is required to be taken by
it to duly appoint the Trustee and the members of the Board. The Lender
expressly acknowledges and agrees that this Loan Agreement, the Promissory Note
and the Pledge Agreement are being executed by the Trustee not in its individual
capacity but solely as trustee of and on behalf of the Borrower.
SECTION 4.5 COMPLIANCE WITH LAWS; ACTIONS.
Neither the execution and delivery by the Lender of this Loan
Agreement or any instruments required thereby, nor compliance with the terms and
provisions of any such documents by the Lender, constitutes a violation of any
provision of any law or any regulation, order, writ, injunction or decree or any
court or governmental instrumentality, or an event of default under any
agreement, to which the Lender is a party or by which the Lender is bound or to
which the Lender is subject, which violation or event of default would have a
material adverse effect on the Lender. There is no action or proceeding pending
or threatened against either of the ESOP or the Borrower before any court or
administrative agency.
ARTICLE V
---------
EVENTS OF DEFAULT
-----------------
SECTION 5.1 EVENTS OF DEFAULT UNDER LOAN AGREEMENT.
Each of the following events shall constitute an "Event of
Default" hereunder:
(a) Failure to make any payment or mandatory prepayment of
principal of the Promissory Note when due, or failure to make any payment of
interest on the Promissory Note not later than five (5) Business Days after the
date when due.
(b) Failure by the Borrower to perform or observe any term,
condition or covenant of this Loan Agreement or of any of the other Loan
Documents, including, without limitation, the Promissory Note and the Pledge
Agreement.
<PAGE>
-10-
(c) Any representation or warranty made in writing to the
Lender in any of the Loan Documents or any certificate, statement or report made
or delivered in compliance with this Loan Agreement, shall have been false or
misleading in any material respect when made or delivered.
SECTION 5.2 LENDER'S RIGHTS UPON EVENT OF DEFAULT.
If an Event of Default under this Loan Agreement shall occur
and be continuing, the Lender shall have no rights to assets of the Borrower
other than: (a) contributions (other than contributions of Common Stock) that
are made by the Lender to enable the Borrower to meet its obligations pursuant
to this Loan Agreement and earnings attributable to the investment of such
contributions and (b) "Eligible Collateral" (as defined in the Pledge
Agreement); PROVIDED, HOWEVER, that: (i) the value of the Borrower's assets
transferred to the Lender following an Event of Default in satisfaction of the
due and unpaid amount of the Loan shall not exceed the amount in default
(without regard to amounts owing solely as a result of any acceleration of the
Loan); (ii) the Borrower's assets shall be transferred to the Lender following
an Event of Default only to the extent of the failure of the Borrower to meet
the payment schedule of the Loan; and (iii) all rights of the Lender to the
Common Stock purchased with the proceeds of the Loan covered by the Pledge
Agreement following an Event of Default shall be governed by the terms of the
Pledge Agreement.
ARTICLE VI
----------
MISCELLANEOUS PROVISIONS
------------------------
SECTION 6.1 PAYMENTS DUE TO THE LENDER.
If any amount is payable by the Borrower to the Lender
pursuant to any indemnity obligation contained herein, then the Borrower shall
pay, at the time or times provided therefor, any such amount and shall indemnify
the Lender against and hold it harmless from any loss or damage resulting from
or arising out of the nonpayment or delay in payment of any such amount. If any
amounts as to which the Borrower has so indemnified the Lender hereunder shall
be assessed or levied against the Lender, the Lender may notify the Borrower and
make immediate payment thereof, together with interest or penalties in
connection therewith, and shall thereupon be entitled to and shall receive
immediate reimbursement therefor from the Borrower, together with interest on
each such amount as provided in section 2.2(c). Notwithstanding any other
provision contained in this Loan Agreement, the covenants and agreements of the
Borrower contained in this section 6.1 shall survive: (a) payment of the
Promissory Note and (b) termination of this Loan Agreement.
SECTION 6.2 PAYMENTS.
All payments hereunder and under the Promissory Note shall be
made without set-off or counterclaim and in such amounts as may be necessary in
order that all such payments
<PAGE>
-11-
shall not be less than the amounts otherwise specified to be paid under this
Loan Agreement and the Promissory Note, subject to any applicable tax
withholding requirements. Upon payment in full of the Promissory Note, the
Lender shall mark such Promissory Note "Paid" and return it to the Borrower.
SECTION 6.3 SURVIVAL.
All agreements, representations and warranties made herein
shall survive the delivery of this Loan Agreement and the Promissory Note.
SECTION 6.4 MODIFICATIONS, CONSENTS AND WAIVERS; ENTIRE
AGREEMENT.
No modification, amendment or waiver of or with respect to any
provision of this Loan Agreement, the Promissory Note, the Pledge Agreement, or
any of the other Loan Documents, nor consent to any departure from any of the
terms or conditions thereof, shall in any event be effective unless it shall be
in writing and signed by the party against whom enforcement thereof is sought.
Any such waiver or consent shall be effective only in the specific instance and
for the purpose for which given. No consent to or demand on a party in any case
shall, of itself, entitle it to any other or further notice or demand in similar
or other circumstances. This Loan Agreement embodies the entire agreement and
understanding between the Lender and the Borrower and supersedes all prior
agreements and understandings relating to the subject matter hereof.
SECTION 6.5 REMEDIES CUMULATIVE.
Each and every right granted to the Lender hereunder or under
any other document delivered hereunder or in connection herewith, or allowed it
by law or equity, shall be cumulative and may be exercised from time to time. No
failure on the part of the Lender or the holder of the Promissory Note to
exercise, and no delay in exercising, any right shall operate as a waiver
thereof, nor shall any single or partial exercise of any right preclude any
other or future exercise thereof or the exercise of any other right. The due
payment and performance of the obligations under the Loan Documents shall be
without regard to any counterclaim, right of offset or any other claim
whatsoever which the Borrower may have against the Lender and without regard to
any other obligation of any nature whatsoever which the Lender may have to the
Borrower, and no such counterclaim or offset shall be asserted by the Borrower
in any action, suit or proceeding instituted by the Lender for payment or
performance of such obligations.
SECTION 6.6 FURTHER ASSURANCES; COMPLIANCE WITH
COVENANTS.
At any time and from time to time, upon the request of the
Lender, the Borrower shall execute, deliver and acknowledge or cause to be
executed, delivered and acknowledged, such further documents and instruments and
do such other acts and things as the Lender may reasonably request in order to
fully effect the terms of this Loan Agreement, the Promissory Note, the Pledge
Agreement, the other Loan Documents and any other agreements, instruments and
documents delivered pursuant hereto or in connection with the Loan.
<PAGE>
-12-
SECTION 6.7 NOTICES.
Except as otherwise specifically provided for herein, all
notices, requests, reports and other communications pursuant to this Loan
Agreement shall be in writing, either by letter (delivered by hand or commercial
messenger service or sent by registered or certified mail, return receipt
requested, except for routine reports delivered in compliance with Article VI
hereof which may be sent by ordinary first-class mail) or telex or facsimile,
addressed as follows:
(a) If to the Borrower:
Home Bancorp of Elgin, Inc.
Employee Stock Ownership Plan Trust
c/o Home Bancorp of Elgin, Inc.
16 North Spring Street
Elgin, Illinois 60120-5569
Attention: Mr. George L. Perucco
Chief Executive Officer
-----------------------
with copies to:
Harris Bank Barrington, N.A.
201 South Grove Avenue
Barrington, Illinois 60010
Attention: Ms. Barbara Shereda
-------------------
Thacher Proffitt & Wood
Two World Trade Center, 39th Floor
New York New York 10048
Attention: W. Edward Bright, Esq.
----------------------
(b) If to the Lender:
Home Bancorp of Elgin, Inc.
16 North Spring Street
Elgin, Illinois 60120-5569
Attention: Mr. George L. Perucco
Chief Executive Officer
-----------------------
with a copy to:
Thacher Proffitt & Wood
Two World Trade Center, 39th Floor
New York New York 10048
Attention: W. Edward Bright, Esq.
----------------------
<PAGE>
-13-
Any notice, request or communication hereunder shall be deemed to have been
given on the day on which it is delivered by hand or by commercial messenger
service, or sent by telex or facsimile, to such party at its address specified
above, or, if sent by mail, on the third Business Day after the day deposited in
the mail, postage prepaid, addressed as aforesaid. Any party may change the
person or address to whom or which notices are to be given hereunder, by notice
duly given hereunder; PROVIDED, HOWEVER, that any such notice shall be deemed to
have been given only when actually received by the party to whom it is
addressed.
SECTION 6.8 COUNTERPARTS.
This Loan Agreement may be signed in any number of
counterparts which, when taken together, shall constitute one and the same
document.
SECTION 6.9 CONSTRUCTION; GOVERNING LAW.
The headings used in the table of contents and in this Loan
Agreement are for convenience only and shall not be deemed to constitute a part
hereof. All uses herein of any gender or of singular or plural terms shall be
deemed to include uses of the other genders or plural or singular terms, as the
context may require. All references in this Loan Agreement to an Article or
section shall be to an Article or section of this Loan Agreement, unless
otherwise specified. This Loan Agreement, the Promissory Note, the Pledge
Agreement and the other Loan Documents shall be governed by, and construed and
interpreted in accordance with, the laws of the State of Illinois.
SECTION 6.10 SEVERABILITY.
Wherever possible, each provision of this Loan Agreement shall
be interpreted in such manner as to be effective and valid under applicable law;
however, the provisions of this Loan Agreement are severable, and if any clause
or provision hereof shall be held invalid or unenforceable in whole or in part
in any jurisdiction, then such invalidity or unenforceability shall affect only
such clause or provision, or part thereof, in such jurisdiction and shall not in
any manner affect such clause or provision in any other jurisdiction, or any
other clause or provision in this Loan Agreement in any jurisdiction. Each of
the covenants, agreements and conditions contained in this Loan Agreement is
independent, and compliance by a party with any of them shall not excuse
non-compliance by such party with any other. The Borrower shall not take any
action the effect of which shall constitute a breach or violation of any
provision of this Loan Agreement.
SECTION 6.11 BINDING EFFECT; NO ASSIGNMENT OR DELEGATION.
This Loan Agreement shall be binding upon and inure to the
benefit of the Borrower and its successors and the Lender and its successors and
assigns. The rights and obligations of the Borrower under this Agreement shall
not be assigned or delegated without the prior written consent of the Lender,
and any purported assignment or delegation without such consent shall be void.
<PAGE>
-14-
IN WITNESS WHEREOF, the parties hereto have caused this Loan
Agreement to be duly executed as of the date first above written.
HOME BANCORP OF ELGIN, INC.
EMPLOYEE STOCK OWNERSHIP PLAN TRUST
By: HARRIS BANK BARRINGTON, N.A., AS
TRUSTEE AND NOT IN ANY OTHER CAPACITY
By: /s/ James D. Bruns
------------------------
Title: Vice President
------------------------
HOME BANCORP OF ELGIN, INC.
By: /s/ George L. Perucco
------------------------
Title: President
------------------------
<PAGE>
EXHIBIT A
TO LOAN AGREEMENT
BY AND BETWEEN
HOME BANCORP OF ELGIN, INC.
EMPLOYEE STOCK OWNERSHIP PLAN TRUST
AND
HOME BANCORP OF ELGIN, INC.
---------------------------
FORM OF PROMISSORY NOTE
-----------------------
$5,607,400 Elgin, Illinois
PRINCIPAL AMOUNT September 26, 1996
FOR VALUE RECEIVED, the undersigned, Home Bancorp of Elgin,
Inc. Employee Stock Ownership Plan Trust ("Borrower"), acting by and through its
Trustee, Harris Bank Barrington, N.A. ("Trustee"), hereby promises to pay to the
order of Home Bancorp of Elgin, Inc. ("Lender") FIVE MILLION, SIX HUNDRED SEVEN
THOUSAND FOUR HUNDRED DOLLARS ($5,607,400.00) payable in accordance with the
Loan Agreement made and entered into between the Borrower and the Lender as of
September 26, 1996 ("Loan Agreement") pursuant to which this Promissory Note is
issued, in one annual installment of ONE HUNDRED FORTY THOUSAND ONE HUNDRED
EIGHTY-SIX DOLLARS ($140,186), payable on December 31, 1996 and nine annual
installments of FIVE HUNDRED SIXTY THOUSAND SEVEN HUNDRED FORTY ($560,740),
commencing on the last Business Day of December, 1997 and continuing on the last
Business Day of December of each calendar year until the last Business Day of
December, 2005, and one annual installment payable on September 26, 2006, at
which time the entire Principal Amount then outstanding and all accrued interest
shall become due and payable; PROVIDED, HOWEVER, that the Borrower shall not be
required to make any payment of principal due to be made in any Fiscal Year to
the extent that (i) following such payment, the consolidated return on average
assets of Home Bancorp of Elgin, Inc. for such Fiscal Year would be less than
one-half of one percent (0.5%) or the consolidated return on average equity for
such Fiscal Year would be less than four percent (4%) or (ii) such payment would
not be deductible for federal income tax purposes for such Fiscal Year under
section 404 of the Code. Any payment not required to made pursuant to the clause
(i) of the above proviso shall be deferred to and be payable on the earlier of
the tenth (10th) anniversary of the loan origination date or the last day of the
first Fiscal Year in which such proviso would not apply to alleviate a
requirement of payment; and payment not required to be made pursuant to clause
(ii) of the above proviso shall be deferred to and be payable on the last day of
the first Fiscal Year in which such payment may be made on a tax deductible
basis.
This Promissory Note shall bear interest at the rate per annum
set forth or established under the Loan Agreement, such interest to be payable
annually in arrears, commencing on December 31, 1996 and thereafter on the last
Business Day of each calendar year and upon payment or prepayment of this
Promissory Note.
Anything herein to the contrary notwithstanding, the
obligation of the Borrower to make payments of interest shall be subject to the
limitation that payments of interest shall not
<PAGE>
be required to be made to the Lender to the extent that the Lender's receipt
thereof would not be permissible under the law or laws applicable to the Lender
limiting rates of interest which may be charged or collected by the Lender. Any
such payments of interest which are not made as a result of the limitation
referred to in the preceding sentence shall be made by the Borrower to the
Lender on the earliest interest payment date or dates on which the receipt
thereof would be permissible under the laws applicable to the Lender limiting
rates of interest which may be charged or collected by the Lender. Such deferred
interest shall not bear interest.
Payments of both principal and interest on this Promissory
Note are to be made at the principal office of the Lender at 16 North Spring
Street, Elgin, Illinois 60120-5569, or such other place as the holder hereof
shall designate to the Borrower in writing, in lawful money of the United States
of America in immediately available funds.
Failure to make any payment of principal on this Promissory
Note when due, or failure to make any payment of interest on this Promissory
Note not later than five (5) Business Days after the date when due, shall
constitute a default hereunder, whereupon the principal amount of and accrued
interest on this Promissory Note shall immediately become due and payable in
accordance with the terms of the Loan Agreement.
This Promissory Note is secured by a Pledge Agreement between
the Borrower and the Lender of even date herewith and is entitled to the
benefits thereof.
HOME BANCORP OF ELGIN, INC.
EMPLOYEE STOCK OWNERSHIP PLAN TRUST
BY: HARRIS BANK BARRINGTON, N.A., AS
TRUSTEE AND NOT IN ANY OTHER CAPACITY
By: ___________________________________
Title: ________________________________
-2-
<PAGE>
EXHIBIT B
TO LOAN AGREEMENT
BY AND BETWEEN
HOME BANCORP OF ELGIN, INC.
EMPLOYEE STOCK OWNERSHIP PLAN TRUST
AND
HOME BANCORP OF ELGIN, INC.
---------------------------
FORM OF PLEDGE AGREEMENT
------------------------
This PLEDGE AGREEMENT ("Pledge Agreement") is made as of the
26th day of September, 1996, by and between the HOME BANCORP OF ELGIN, INC.
EMPLOYEE STOCK OWNERSHIP PLAN TRUST, acting by and through its Trustee, HARRIS
BANK BARRINGTON, N.A., a banking corporation organized under the laws of the
United States and having an office at 201 South Grove Avenue, Barrington,
Illinois 60010 ("Pledgor"), and Home Bancorp of Elgin, Inc., a corporation
organized and existing under the laws of the State of Illinois, having an office
at 16 North Spring Street, Elgin, Illinois 60120-5569 ("Pledgee").
W I T N E S S E T H:
- - - - - - - - - -
WHEREAS, this Pledge Agreement is being executed and delivered
to the Pledgee pursuant to the terms of a Loan Agreement of even date herewith
("Loan Agreement"), by and between the Pledgor and the Pledgee;
NOW, THEREFORE, in consideration of the mutual agreements
contained herein and in the Loan Agreement, the parties hereto do hereby
covenant and agree as follows:
SECTION 1. DEFINITIONS. The following definitions shall apply
for purposes of this Pledge Agreement, except to the extent that a different
meaning is plainly indicated by the context; all capitalized terms used but not
defined herein shall have the respective meanings assigned to them in the Loan
Agreement:
(a) COLLATERAL shall mean the Pledged Shares and, subject to
section 5 hereof, and to the extent permitted by applicable law, all rights with
respect thereto, and all proceeds of such Pledged Shares and rights.
(b) EVENT OF DEFAULT shall mean an event so defined in the
Loan Agreement.
(c) LIABILITIES shall mean all the obligations of the Pledgor
to the Pledgee, howsoever created, arising or evidenced, whether direct or
indirect, absolute or contingent, now or hereafter existing, or due or to become
due, under the Loan Agreement and the Promissory Note.
(d) PLEDGED SHARES shall mean all the shares of Common Stock
of Home Bancorp of Elgin, Inc. purchased by the Pledgor with the proceeds of the
loan made by the
<PAGE>
Pledgee to the Pledgor pursuant to the Loan Agreement, but excluding any such
shares previously released pursuant to section 4.
SECTION 2. PLEDGE. To secure the payment of and performance
of all the Liabilities, the Pledgor hereby pledges to the Pledgee, and grants to
the Pledgee a security interest in and lien upon, the Collateral.
SECTION 3. REPRESENTATIONS AND WARRANTIES OF THE PLEDGOR. The
Pledgor represents, warrants, and covenants to the Pledgee as follows:
(a) the execution, delivery and performance of this Pledge
Agreement and the pledging of the Collateral hereunder do not and will not
conflict with, result in a violation of, or constitute a default under any
agreement binding upon the Pledgor;
(b) the Pledged Shares are and will continue to be owned by
the Pledgor free and clear of any liens or rights of any other person except the
lien hereunder and under the Loan Agreement in favor of the Pledgee, and the
security interest of the Pledgee in the Pledged Shares and the proceeds thereof
is and will continue to be prior to and senior to the rights of all others;
(c) this Pledge Agreement is the legal, valid, binding and
enforceable obligation of the Pledgor in accordance with its terms;
(d) the Pledgor shall, from time to time, upon request of the
Pledgee, promptly deliver to the Pledgee such stock powers, proxies, and similar
documents, satisfactory in form and substance to the Pledgee, with respect to
the Collateral as the Pledgee may reasonably request; and
(e) subject to the first sentence of section 4(b), the Pledgor
shall not, so long as any Liabilities are outstanding, sell, assign, exchange,
pledge or otherwise transfer or encumber any of its rights in and to any of the
Collateral.
SECTION 4. ELIGIBLE COLLATERAL.
(a) As used herein the term "Eligible Collateral" shall mean
that amount of Collateral which has an aggregate fair market value equal to the
amount by which the Pledgor is in default (without regard to any amounts owing
solely as the result of an acceleration of the Loan Agreement) or such lesser
amount of Collateral as may be required pursuant to section 13 of this Pledge
Agreement.
(b) The Pledged Shares shall be released from this Pledge
Agreement in a manner conforming to the requirements of Treasury Regulations
Section 54.4975-7(b)(8), as the same may be from time to time amended or
supplemented, and section 6.4(b) of the ESOP. Subject to such Regulations, the
Pledgee may from time to time, after any Default or Event of Default, and
without prior notice to the Pledgor, transfer all or any part of the Eligible
Collateral into the name of the Pledgee or its nominee, with or without
disclosing that such Eligible Collateral is subject to any rights of the Pledgor
and may from time to time, whether before or
-2-
<PAGE>
after any of the Liabilities shall become due and payable, without notice to the
Pledgor, take all or any of the following actions: (i) notify the parties
obligated on any of the Eligible Collateral to make payment to the Pledgee of
any amounts due or to become due thereunder, (ii) release or exchange all or any
part of the Eligible Collateral, or compromise or extend or renew for any period
(whether or not longer than the original period) any obligations of any nature
of any party with respect thereto, and (iii) take control of any proceeds of the
Eligible Collateral.
SECTION 5. DELIVERY.
(a) The Pledgor shall deliver to the Pledgee upon execution of
this Pledge Agreement (i) an assignment by the Pledgor of all the Pledgor's
rights to and interest in the Pledged Shares and (ii) an irrevocable proxy, in
form and substance satisfactory to the Pledgee, signed by the Pledgor with
respect to the Pledged Shares.
(b) So long as no Default or Event of Default shall have
occurred and be continuing, (i) the Pledgor shall be entitled to exercise any
and all voting and other rights pertaining to the Collateral or any part thereof
for any purpose not inconsistent with the terms of this Pledge Agreement, and
(ii) the Pledgor shall be entitled to receive any and all cash dividends or
other distributions paid in respect of the Collateral.
SECTION 6. EVENTS OF DEFAULT.
(a) If a Default or an Event of Default shall be existing, in
addition to the rights it may have under the Loan Agreement, the Promissory
Note, and this Pledge Agreement, or by virtue of any other instrument, (i) the
Pledgee may exercise, with respect to the Eligible Collateral, from time to time
any rights and remedies available to it under the Uniform Commercial Code as in
effect from time to time in the State of Illinois or otherwise available to it
and (ii) the Pledgee shall have the right, for and in the name, place and stead
of the Pledgor, to execute endorsements, assignments, stock powers and other
instruments of conveyance or transfer with respect to all or any of the Eligible
Collateral. Written notification of intended disposition of any of the Eligible
Collateral shall be given by the Pledgee to the Pledgor at least three (3)
Business Days before such disposition. Subject to section 13 below, any proceeds
of any disposition of Eligible Collateral may be applied by the Pledgee to the
payment of expenses in connection with the Eligible Collateral, including,
without limitation, reasonable attorneys' fees and legal expenses, and any
balance of such proceeds may be applied by the Pledgee toward the payment of
such of the Liabilities as are in Default, and in such order of application, as
the Pledgee may from time to time elect. No action of the Pledgee permitted
hereunder shall impair or affect its rights in and to the Eligible Collateral.
All rights and remedies of the Pledgee expressed hereunder are in addition to
all other rights and remedies possessed by it, including, without limitation,
those contained in the documents referred to in the definition of Liabilities in
section 1 hereof.
(b) In any sale of any of the Eligible Collateral after a
Default or an Event of Default shall have occurred, the Pledgee is hereby
authorized to comply with any limitation or restriction in connection with such
sale as it may be advised by counsel is necessary in order to avoid any
violation of applicable law (including, without limitation, compliance with such
-3-
<PAGE>
procedures as may restrict the number of prospective bidders and purchasers or
further restrict such prospective bidders or purchasers to persons who will
represent and agree that they are purchasing for their own account for
investment and not with a view to the distribution or resale of such Eligible
Collateral), or in order to obtain such required approval of the sale or of the
purchase by any governmental regulatory authority or official, and the Pledgor
further agrees that such compliance shall not result in such sale's being
considered or deemed not to have been made in a commercially reasonable manner,
nor shall the Pledgee be liable or accountable to the Pledgor for any discount
allowed by reason of the fact that such Eligible Collateral is sold in
compliance with any such limitation or restriction.
SECTION 7. PAYMENT IN FULL. Upon the payment in full of all
outstanding Liabilities, this Pledge Agreement shall terminate and the Pledgee
shall forthwith assign, transfer and deliver to the Pledgor, against receipt and
without recourse to the Pledgee, all Collateral then held by the Pledgee
pursuant to this Pledge Agreement.
SECTION 8. NO WAIVER. No failure or delay on the part of the
Pledgee in exercising any right or remedy hereunder or under any other document
which confers or grants any rights in the Pledgee in respect of the Liabilities
shall operate as a waiver thereof nor shall any single or partial exercise of
any such right or remedy preclude any other or further exercise thereof or the
exercise of any other right or remedy of the Pledgee.
SECTION 9. BINDING EFFECT; NO ASSIGNMENT OR DELEGATION. This
Pledge Agreement shall be binding upon and inure to the benefit of the Pledgor,
the Pledgee and their respective successors and assigns, except that the Pledgor
may not assign or transfer its rights hereunder without the prior written
consent of the Pledgee (which consent shall not unreasonably be withheld). Each
duty or obligation of the Pledgor to the Pledgee pursuant to the provisions of
this Pledge Agreement shall be performed in favor of any person or entity
designated by the Pledgee, and any duty or obligation of the Pledgee to the
Pledgor may be performed by any other person or entity designated by the
Pledgee.
SECTION 10. GOVERNING LAW. This Pledge Agreement shall be
governed by and construed in accordance with the laws of the State of Illinois
applicable to agreements to be performed wholly within the State of Illinois.
SECTION 11. NOTICES. All notices, requests, instructions or
documents hereunder shall be in writing and delivered personally or sent by
United States mail, registered or certified, return receipt requested, with
proper postage prepaid, as follows:
(a) If to the Pledgee:
Home Bancorp of Elgin, Inc.
16 North Spring Street
Elgin, Illinois 60120-5569
Attention: Mr. George L. Perucco
Chief Executive Officer
-----------------------
-4-
<PAGE>
with a copy to:
Thacher Proffitt & Wood
Two World Trade Center, 39th Floor
New York, New York 10048
Attention: W. Edward Bright, Esq.
-----------------------
(b) If to the Pledgor:
Home Bancorp of Elgin, Inc.
Employee Stock Ownership Plan Trust
% Home Bancorp of Elgin, Inc.
16 North Spring Street
Elgin, Illinois 60120-5569
Attention: Mr. George L. Perucco
Chief Executive Officer
-----------------------
with copies to:
Harris Bank Barrington, N.A.
201 South Grove Avenue
Barrington, Illinois 60010
Attention: Ms. Barbara Shereda
-----------------------
Thacher Proffitt & Wood
Two World Trade Center, 39th Floor
New York, New York 10048
Attention: W. Edward Bright. Esq.
-----------------------
or at such other address as either of the parties may designate by written
notice to the other party. If delivered personally, the date on which a notice,
request, instruction or document is delivered shall be the date on which such
delivery is made, and, if delivered by mail, the date on which such notice,
request, instruction or document is deposited in the mail shall be the date of
delivery. Each notice, request, instruction or document shall bear the date on
which it is delivered.
SECTION 12. INTERPRETATION. Wherever possible each provision
of this Pledge Agreement shall be interpreted in such manner as to be effective
and valid under applicable law, but if any provision hereof shall be prohibited
by or invalid under such law, such provisions shall be ineffective to the extent
of such prohibition or invalidity, without invalidating the remainder of such
provision or the remaining provisions hereof.
SECTION 13. CONSTRUCTION. All provisions hereof shall be
construed so as to maintain (a) the ESOP as a qualified leveraged employee stock
ownership plan under section 401(a) and 4975(e)(7) of the Internal Revenue Code
of 1986 (the "Code"), (b) the Trust as exempt from taxation under section 501(a)
of the Code and (c) the Trust Loan as an exempt loan
-5-
<PAGE>
under section 54.4975-7(b) of the Treasury Regulations and as described in
Department of Labor Regulation section 2550.408b-3.
IN WITNESS WHEREOF, this Pledge Agreement has been duly
executed by the parties hereto as of the day and year first above Written.
HOME BANCORP OF ELGIN, INC.
EMPLOYEE STOCK OWNERSHIP PLAN TRUST
BY: HARRIS BANK BARRINGTON, N.A., AS
TRUSTEE AND NOT IN ANY OTHER CAPACITY
By:______________________________________
Title:___________________________________
HOME BANCORP OF ELGIN, INC.
By:______________________________________
Title:___________________________________
-6-
<PAGE>
EXHIBIT C
TO LOAN AGREEMENT
BY AND BETWEEN
HOME BANCORP OF ELGIN, INC.
EMPLOYEE STOCK OWNERSHIP PLAN TRUST
AND
HOME BANCORP OF ELGIN, INC.
---------------------------
FORM OF ASSIGNMENT
------------------
In consideration of the loan made by Home Bancorp of Elgin,
Inc. ("Lender") to the Home Bancorp of Elgin, Inc. Employee Stock Ownership Plan
Trust ("Borrower") pursuant to the Loan Agreement of even date herewith between
the Lender and the Borrower ("Loan Agreement") and pursuant to the Pledge
Agreement between the Lender and the Borrower of even date herewith pertaining
thereto, the undersigned Borrower hereby transfers, assigns and conveys to
Lender all its right, title and interest in and to those certain shares of
common stock of the Lender which it shall purchase with the proceeds of the loan
made pursuant to the Loan Agreement, and agrees to transfer and endorse to
Lender the certificates representing such shares as and when required pursuant
to the Loan Agreement or Pledge Agreement.
HOME BANCORP OF ELGIN, INC.
EMPLOYEE STOCK OWNERSHIP PLAN TRUST
BY: HARRIS BANK BARRINGTON, N.A., AS
TRUSTEE AND NOT IN ANY OTHER CAPACITY
By:______________________________________
Title:___________________________________
September 26, 1996
<PAGE>
EXHIBIT D
TO LOAN AGREEMENT
BY AND BETWEEN
HOME BANCORP OF ELGIN, INC.
EMPLOYEE STOCK OWNERSHIP PLAN TRUST
AND
HOME BANCORP OF ELGIN, INC.
-----------------------------------
FORM OF IRREVOCABLE PROXY
-------------------------
In consideration of the loan made by Home Bancorp of Elgin,
Inc. ("Lender") to the Home Bancorp of Elgin, Inc. Employee Stock Ownership Plan
Trust ("Borrower") pursuant to the Loan Agreement of even date herewith between
the Lender and the Borrower ("Loan Agreement") and the Pledge Agreement between
the Lender and the Borrower of even date herewith pertaining thereto, the
undersigned Borrower hereby appoints the Lender as its proxy, with power of
substitution, to represent and to vote those certain shares of common stock of
the Lender which it shall purchase with the proceeds of the loan made pursuant
to the Loan Agreement. This proxy, when properly executed, shall be irrevocable
and shall give the Lender full power and authority to vote on any and all
matters for which other holders of shares of common stock of the Lender are
entitled to vote.
HOME BANCORP OF ELGIN, INC.
EMPLOYEE STOCK OWNERSHIP PLAN TRUST
BY: HARRIS BANK BARRINGTON, N.A., AS
TRUSTEE AND NOT IN ANY OTHER CAPACITY
By:______________________________________
Title:___________________________________
September 26, 1996
<PAGE>
FORM OF PROMISSORY NOTE
-----------------------
$5,607,400 Elgin, Illinois
PRINCIPAL AMOUNT September 26, 1996
FOR VALUE RECEIVED, the undersigned, Home Bancorp of Elgin,
Inc. Employee Stock Ownership Plan Trust ("Borrower"), acting by and through its
Trustee, Harris Bank Barrington, N.A. ("Trustee"), hereby promises to pay to the
order of Home Bancorp of Elgin, Inc. ("Lender") FIVE MILLION, SIX HUNDRED SEVEN
THOUSAND FOUR HUNDRED DOLLARS ($5,607,400.00) payable in accordance with the
Loan Agreement made and entered into between the Borrower and the Lender as of
September 26, 1996 ("Loan Agreement") pursuant to which this Promissory Note is
issued, in one annual installment of ONE HUNDRED FORTY THOUSAND ONE HUNDRED
EIGHTY-SIX DOLLARS ($140,186), payable on December 31, 1996 and nine annual
installments of FIVE HUNDRED SIXTY THOUSAND SEVEN HUNDRED FORTY ($560,740),
commencing on the last Business Day of December, 1997 and continuing on the last
Business Day of December of each calendar year until the last Business Day of
December, 2005, and one annual installment payable on September 26, 2006, at
which time the entire Principal Amount then outstanding and all accrued interest
shall become due and payable; PROVIDED, HOWEVER, that the Borrower shall not be
required to make any payment of principal due to be made in any Fiscal Year to
the extent that (i) following such payment, the consolidated return on average
assets of Home Bancorp of Elgin, Inc. for such Fiscal Year would be less than
one-half of one percent (0.5%) or the consolidated return on average equity for
such Fiscal Year would be less than four percent (4%) or (ii) such payment would
not be deductible for federal income tax purposes for such Fiscal Year under
section 404 of the Code. Any payment not required to made pursuant to the clause
(i) of the above proviso shall be deferred to and be payable on the earlier of
the tenth (10th) anniversary of the loan origination date or the last day of the
first Fiscal Year in which such proviso would not apply to alleviate a
requirement of payment; and payment not required to be made pursuant to clause
(ii) of the above proviso shall be deferred to and be payable on the last day of
the first Fiscal Year in which such payment may be made on a tax deductible
basis.
This Promissory Note shall bear interest at the rate per annum
set forth or established under the Loan Agreement, such interest to be payable
annually in arrears, commencing on December 31, 1996 and thereafter on the last
Business Day of each calendar year and upon payment or prepayment of this
Promissory Note.
Anything herein to the contrary notwithstanding, the
obligation of the Borrower to make payments of interest shall be subject to the
limitation that payments of interest shall not be required to be made to the
Lender to the extent that the Lender's receipt thereof would not be permissible
under the law or laws applicable to the Lender limiting rates of interest which
may be charged or collected by the Lender. Any such payments of interest which
are not made as a result of the limitation referred to in the preceding sentence
shall be made by the Borrower to the Lender on the earliest interest payment
date or dates on which the receipt thereof would
<PAGE>
be permissible under the laws applicable to the Lender limiting rates of
interest which may be charged or collected by the Lender. Such deferred interest
shall not bear interest.
Payments of both principal and interest on this Promissory
Note are to be made at the principal office of the Lender at 16 North Spring
Street, Elgin, Illinois 60120-5569, or such other place as the holder hereof
shall designate to the Borrower in writing, in lawful money of the United States
of America in immediately available funds.
Failure to make any payment of principal on this Promissory
Note when due, or failure to make any payment of interest on this Promissory
Note not later than five (5) Business Days after the date when due, shall
constitute a default hereunder, whereupon the principal amount of and accrued
interest on this Promissory Note shall immediately become due and payable in
accordance with the terms of the Loan Agreement.
This Promissory Note is secured by a Pledge Agreement between
the Borrower and the Lender of even date herewith and is entitled to the
benefits thereof.
HOME BANCORP OF ELGIN, INC.
EMPLOYEE STOCK OWNERSHIP PLAN TRUST
BY: HARRIS BANK BARRINGTON, N.A., AS
TRUSTEE AND NOT IN ANY OTHER CAPACITY
By: /s/ James D. Bruns
___________________________________
Title: Vice President
________________________________
-2-
<PAGE>
FORM OF PLEDGE AGREEMENT
------------------------
This PLEDGE AGREEMENT ("Pledge Agreement") is made as of the
26th day of September, 1996, by and between the HOME BANCORP OF ELGIN, INC.
EMPLOYEE STOCK OWNERSHIP PLAN TRUST, acting by and through its Trustee, HARRIS
BANK BARRINGTON, N.A., a banking corporation organized under the laws of the
United States and having an office at 201 South Grove Avenue, Barrington,
Illinois 60010 ("Pledgor"), and Home Bancorp of Elgin, Inc., a corporation
organized and existing under the laws of the State of Illinois, having an office
at 16 North Spring Street, Elgin, Illinois 60120-5569 ("Pledgee").
W I T N E S S E T H:
- - - - - - - - - -
WHEREAS, this Pledge Agreement is being executed and delivered
to the Pledgee pursuant to the terms of a Loan Agreement of even date herewith
("Loan Agreement"), by and between the Pledgor and the Pledgee;
NOW, THEREFORE, in consideration of the mutual agreements
contained herein and in the Loan Agreement, the parties hereto do hereby
covenant and agree as follows:
SECTION 1. DEFINITIONS. The following definitions shall apply
for purposes of this Pledge Agreement, except to the extent that a different
meaning is plainly indicated by the context; all capitalized terms used but not
defined herein shall have the respective meanings assigned to them in the Loan
Agreement:
(a) COLLATERAL shall mean the Pledged Shares and, subject to
section 5 hereof, and to the extent permitted by applicable law, all rights with
respect thereto, and all proceeds of such Pledged Shares and rights.
(b) EVENT OF DEFAULT shall mean an event so defined in
the Loan Agreement.
(c) LIABILITIES shall mean all the obligations of the Pledgor
to the Pledgee, howsoever created, arising or evidenced, whether direct or
indirect, absolute or contingent, now or hereafter existing, or due or to become
due, under the Loan Agreement and the Promissory Note.
(d) PLEDGED SHARES shall mean all the shares of Common Stock
of Home Bancorp of Elgin, Inc. purchased by the Pledgor with the proceeds of the
loan made by the Pledgee to the Pledgor pursuant to the Loan Agreement, but
excluding any such shares previously released pursuant to section 4.
SECTION 2. PLEDGE. To secure the payment of and performance
of all the Liabilities, the Pledgor hereby pledges to the Pledgee, and grants to
the Pledgee a security interest in and lien upon, the Collateral.
<PAGE>
SECTION 3. REPRESENTATIONS AND WARRANTIES OF THE PLEDGOR. The
Pledgor represents, warrants, and covenants to the Pledgee as follows:
(a) the execution, delivery and performance of this Pledge
Agreement and the pledging of the Collateral hereunder do not and will not
conflict with, result in a violation of, or constitute a default under any
agreement binding upon the Pledgor;
(b) the Pledged Shares are and will continue to be owned by
the Pledgor free and clear of any liens or rights of any other person except the
lien hereunder and under the Loan Agreement in favor of the Pledgee, and the
security interest of the Pledgee in the Pledged Shares and the proceeds thereof
is and will continue to be prior to and senior to the rights of all others;
(c) this Pledge Agreement is the legal, valid, binding
and enforceable obligation of the Pledgor in accordance with its terms;
(d) the Pledgor shall, from time to time, upon request of the
Pledgee, promptly deliver to the Pledgee such stock powers, proxies, and similar
documents, satisfactory in form and substance to the Pledgee, with respect to
the Collateral as the Pledgee may reasonably request; and
(e) subject to the first sentence of section 4(b), the Pledgor
shall not, so long as any Liabilities are outstanding, sell, assign, exchange,
pledge or otherwise transfer or encumber any of its rights in and to any of the
Collateral.
SECTION 4. ELIGIBLE COLLATERAL.
(a) As used herein the term "Eligible Collateral" shall mean
that amount of Collateral which has an aggregate fair market value equal to the
amount by which the Pledgor is in default (without regard to any amounts owing
solely as the result of an acceleration of the Loan Agreement) or such lesser
amount of Collateral as may be required pursuant to section 13 of this Pledge
Agreement.
(b) The Pledged Shares shall be released from this Pledge
Agreement in a manner conforming to the requirements of Treasury Regulations
Section 54.4975-7(b)(8), as the same may be from time to time amended or
supplemented, and section 6.4(b) of the ESOP. Subject to such Regulations, the
Pledgee may from time to time, after any Default or Event of Default, and
without prior notice to the Pledgor, transfer all or any part of the Eligible
Collateral into the name of the Pledgee or its nominee, with or without
disclosing that such Eligible Collateral is subject to any rights of the Pledgor
and may from time to time, whether before or after any of the Liabilities shall
become due and payable, without notice to the Pledgor, take all or any of the
following actions: (i) notify the parties obligated on any of the Eligible
Collateral to make payment to the Pledgee of any amounts due or to become due
thereunder, (ii) release or exchange all or any part of the Eligible Collateral,
or compromise or extend or renew for any period (whether or not longer than the
original period) any obligations of any nature of any party with respect
thereto, and (iii) take control of any proceeds of the Eligible Collateral.
-2-
<PAGE>
SECTION 5. DELIVERY.
(a) The Pledgor shall deliver to the Pledgee upon execution of
this Pledge Agreement (i) an assignment by the Pledgor of all the Pledgor's
rights to and interest in the Pledged Shares and (ii) an irrevocable proxy, in
form and substance satisfactory to the Pledgee, signed by the Pledgor with
respect to the Pledged Shares.
(b) So long as no Default or Event of Default shall have
occurred and be continuing, (i) the Pledgor shall be entitled to exercise any
and all voting and other rights pertaining to the Collateral or any part thereof
for any purpose not inconsistent with the terms of this Pledge Agreement, and
(ii) the Pledgor shall be entitled to receive any and all cash dividends or
other distributions paid in respect of the Collateral.
SECTION 6. EVENTS OF DEFAULT.
(a) If a Default or an Event of Default shall be existing, in
addition to the rights it may have under the Loan Agreement, the Promissory
Note, and this Pledge Agreement, or by virtue of any other instrument, (i) the
Pledgee may exercise, with respect to the Eligible Collateral, from time to time
any rights and remedies available to it under the Uniform Commercial Code as in
effect from time to time in the State of Illinois or otherwise available to it
and (ii) the Pledgee shall have the right, for and in the name, place and stead
of the Pledgor, to execute endorsements, assignments, stock powers and other
instruments of conveyance or transfer with respect to all or any of the Eligible
Collateral. Written notification of intended disposition of any of the Eligible
Collateral shall be given by the Pledgee to the Pledgor at least three (3)
Business Days before such disposition. Subject to section 13 below, any proceeds
of any disposition of Eligible Collateral may be applied by the Pledgee to the
payment of expenses in connection with the Eligible Collateral, including,
without limitation, reasonable attorneys' fees and legal expenses, and any
balance of such proceeds may be applied by the Pledgee toward the payment of
such of the Liabilities as are in Default, and in such order of application, as
the Pledgee may from time to time elect. No action of the Pledgee permitted
hereunder shall impair or affect its rights in and to the Eligible Collateral.
All rights and remedies of the Pledgee expressed hereunder are in addition to
all other rights and remedies possessed by it, including, without limitation,
those contained in the documents referred to in the definition of Liabilities in
section 1 hereof.
(b) In any sale of any of the Eligible Collateral after a
Default or an Event of Default shall have occurred, the Pledgee is hereby
authorized to comply with any limitation or restriction in connection with such
sale as it may be advised by counsel is necessary in order to avoid any
violation of applicable law (including, without limitation, compliance with such
procedures as may restrict the number of prospective bidders and purchasers or
further restrict such prospective bidders or purchasers to persons who will
represent and agree that they are purchasing for their own account for
investment and not with a view to the distribution or resale of such Eligible
Collateral), or in order to obtain such required approval of the sale or of the
purchase by any governmental regulatory authority or official, and the Pledgor
further agrees that such compliance shall not result in such sale's being
considered or deemed not to have been made in a commercially reasonable manner,
nor shall the Pledgee be liable or accountable to the
-3-
<PAGE>
Pledgor for any discount allowed by reason of the fact that such Eligible
Collateral is sold in compliance with any such limitation or restriction.
SECTION 7. PAYMENT IN FULL. Upon the payment in full of all
outstanding Liabilities, this Pledge Agreement shall terminate and the Pledgee
shall forthwith assign, transfer and deliver to the Pledgor, against receipt and
without recourse to the Pledgee, all Collateral then held by the Pledgee
pursuant to this Pledge Agreement.
SECTION 8. NO WAIVER. No failure or delay on the part of the
Pledgee in exercising any right or remedy hereunder or under any other document
which confers or grants any rights in the Pledgee in respect of the Liabilities
shall operate as a waiver thereof nor shall any single or partial exercise of
any such right or remedy preclude any other or further exercise thereof or the
exercise of any other right or remedy of the Pledgee.
SECTION 9. BINDING EFFECT; NO ASSIGNMENT OR DELEGATION. This
Pledge Agreement shall be binding upon and inure to the benefit of the Pledgor,
the Pledgee and their respective successors and assigns, except that the Pledgor
may not assign or transfer its rights hereunder without the prior written
consent of the Pledgee (which consent shall not unreasonably be withheld). Each
duty or obligation of the Pledgor to the Pledgee pursuant to the provisions of
this Pledge Agreement shall be performed in favor of any person or entity
designated by the Pledgee, and any duty or obligation of the Pledgee to the
Pledgor may be performed by any other person or entity designated by the
Pledgee.
SECTION 10. GOVERNING LAW. This Pledge Agreement shall be
governed by and construed in accordance with the laws of the State of Illinois
applicable to agreements to be performed wholly within the State of Illinois.
SECTION 11. NOTICES. All notices, requests, instructions or
documents hereunder shall be in writing and delivered personally or sent by
United States mail, registered or certified, return receipt requested, with
proper postage prepaid, as follows:
(a) If to the Pledgee:
Home Bancorp of Elgin, Inc.
16 North Spring Street
Elgin, Illinois 60120-5569
Attention: Mr. George L. Perucco
Chief Executive Officer
_______________________
with a copy to:
Thacher Proffitt & Wood
Two World Trade Center, 39th Floor
New York, New York 10048
Attention: W. Edward Bright, Esq.
______________________
-4-
<PAGE>
(b) If to the Pledgor:
Home Bancorp of Elgin, Inc.
Employee Stock Ownership Plan Trust
% Home Bancorp of Elgin, Inc.
16 North Spring Street
Elgin, Illinois 60120-5569
Attention: Mr. George L. Perucco
Chief Executive Officer
-----------------------
with copies to:
Harris Bank Barrington, N.A.
201 South Grove Avenue
Barrington, Illinois 60010
Attention: Ms. Barbara Shereda
-------------------
Thacher Proffitt & Wood
Two World Trade Center, 39th Floor
New York, New York 10048
Attention: W. Edward Bright. Esq.
---------------------
or at such other address as either of the parties may designate by written
notice to the other party. If delivered personally, the date on which a notice,
request, instruction or document is delivered shall be the date on which such
delivery is made, and, if delivered by mail, the date on which such notice,
request, instruction or document is deposited in the mail shall be the date of
delivery. Each notice, request, instruction or document shall bear the date on
which it is delivered.
SECTION 12. INTERPRETATION. Wherever possible each provision
of this Pledge Agreement shall be interpreted in such manner as to be effective
and valid under applicable law, but if any provision hereof shall be prohibited
by or invalid under such law, such provisions shall be ineffective to the extent
of such prohibition or invalidity, without invalidating the remainder of such
provision or the remaining provisions hereof.
SECTION 13. CONSTRUCTION. All provisions hereof shall be
construed so as to maintain (a) the ESOP as a qualified leveraged employee stock
ownership plan under section 401(a) and 4975(e)(7) of the Internal Revenue Code
of 1986 (the "Code"), (b) the Trust as exempt from taxation under section 501(a)
of the Code and (c) the Trust Loan as an exempt loan under section 54.4975-7(b)
of the Treasury Regulations and as described in Department of Labor Regulation
section 2550.408b-3.
-5-
<PAGE>
IN WITNESS WHEREOF, this Pledge Agreement has been duly
executed by the parties hereto as of the day and year first above Written.
HOME BANCORP OF ELGIN, INC.
EMPLOYEE STOCK OWNERSHIP PLAN TRUST
BY: HARRIS BANK BARRINGTON, N.A., AS
TRUSTEE AND NOT IN ANY OTHER CAPACITY
By: /s/ James D. Bruns
___________________________________
Title: Vice President
________________________________
HOME BANCORP OF ELGIN, INC.
By: /s/ George L. Perucco
___________________________________
Title: President
________________________________
-6-
<PAGE>
FORM OF ASSIGNMENT
------------------
In consideration of the loan made by Home Bancorp of Elgin,
Inc. ("Lender") to the Home Bancorp of Elgin, Inc. Employee Stock Ownership Plan
Trust ("Borrower") pursuant to the Loan Agreement of even date herewith between
the Lender and the Borrower ("Loan Agreement") and pursuant to the Pledge
Agreement between the Lender and the Borrower of even date herewith pertaining
thereto, the undersigned Borrower hereby transfers, assigns and conveys to
Lender all its right, title and interest in and to those certain shares of
common stock of the Lender which it shall purchase with the proceeds of the loan
made pursuant to the Loan Agreement, and agrees to transfer and endorse to
Lender the certificates representing such shares as and when required pursuant
to the Loan Agreement or Pledge Agreement.
HOME BANCORP OF ELGIN, INC.
EMPLOYEE STOCK OWNERSHIP PLAN TRUST
BY: HARRIS BANK BARRINGTON, N.A., AS
TRUSTEE AND NOT IN ANY OTHER CAPACITY
By: /s/ James D. Bruns
___________________________________
Title: Vice President
________________________________
September 26, 1996
<PAGE>
FORM OF IRREVOCABLE PROXY
-------------------------
In consideration of the loan made by Home Bancorp of Elgin,
Inc. ("Lender") to the Home Bancorp of Elgin, Inc. Employee Stock Ownership Plan
Trust ("Borrower") pursuant to the Loan Agreement of even date herewith between
the Lender and the Borrower ("Loan Agreement") and the Pledge Agreement between
the Lender and the Borrower of even date herewith pertaining thereto, the
undersigned Borrower hereby appoints the Lender as its proxy, with power of
substitution, to represent and to vote those certain shares of common stock of
the Lender which it shall purchase with the proceeds of the loan made pursuant
to the Loan Agreement. This proxy, when properly executed, shall be irrevocable
and shall give the Lender full power and authority to vote on any and all
matters for which other holders of shares of common stock of the Lender are
entitled to vote.
HOME BANCORP OF ELGIN, INC.
EMPLOYEE STOCK OWNERSHIP PLAN TRUST
BY: HARRIS BANK BARRINGTON, N.A., AS
TRUSTEE AND NOT IN ANY OTHER CAPACITY
By: /s/ James D. Bruns
_________________________________
Title: Vice President
_______________________________
September 26, 1996
EXHIBIT 13.1
------------
Portions of the Company's 1996 Annual Report to Stockholders
<PAGE>
SELECTED FINANCIAL AND OTHER DATA OF THE COMPANY
The selected financial and other data of the Company set forth below is
derived in part from, and should be read in conjunction with, the Financial
Statements of the Company and Notes thereto presented elsewhere in this Annual
Report.
<TABLE>
<CAPTION>
At Or For The Year Ended December 31,
-------------------------------------
1996 1995 1994 1993 1992
--------- --------- --------- -------- ------
(Dollars in thousands, except per share amounts)
SELECTED FINANCIAL CONDITION DATA:
<S> <C> <C> <C> <C> <C>
Total assets......................................... $ 356,335 $ 304,520 $ 306,956 $ 334,390 $ 347,173
Loans receivable, net (1)............................ 261,306 267,153 271,040 301,676 289,186
Investment securities held to maturity............... 53,786 5,948 5,918 -- 6,019
Savings deposits..................................... 251,795 259,972 267,938 293,932 318,971
Borrowed funds....................................... -- 4,000 -- 7,000 --
Stockholders' equity................................. 99,881 36,683 34,319 29,961 25,701
SELECTED OPERATING DATA:
Interest income...................................... $ 23,059 $ 22,925 $ 24,669 $ 27,652 $ 28,639
Interest expense on savings deposits and
borrowed funds..................................... 10,881 10,850 10,484 11,791 14,068
------- ------- ------- ------- -------
Net interest income before provision for
loan losses...................................... 12,178 12,075 14,185 15,861 14,571
Provision for loan losses............................ 120 180 240 240 256
------- ------- ------- ------- -------
Net interest income after provision for
loan losses..................................... 12,058 11,895 13,945 15,621 14,315
Noninterest income, excluding gain on sale
of branches...................................... 1,221 1,150 1,471 1,566 1,244
Gain on sale of branches............................. -- -- 1,683 822 --
------- ------ ------ ------- ------
Noninterest income................................... 1,221 1,150 3,154 2,388 1,244
Noninterest expense.................................. 12,220 9,069 9,624 10,402 9,526
------ ------ ------ ------ ------
Income before income tax expense and
cumulative effect of change in accounting
principle........................................ 1,059 3,976 7,475 7,607 6,033
Income tax expense................................... 417 1,612 3,117 2,998 2,265
------ ------ ------ ------ ------
Income before cumulative effect of change
in accounting principle.......................... 642 2,364 4,358 4,609 3,768
Cumulative effect of change in accounting
for income taxes (2)............................. -- -- -- 348 --
------ -------- -------- -------- --------
Net income........................................... $ 642 $ 2,364 $ 4,358 $ 4,261 $ 3,768
======== ========= ========= ========= =========
Earnings per share (10) (11)......................... $ 0.10 NA NA NA NA
======== == == == ==
</TABLE>
(Notes on following page)
1
<PAGE>
<TABLE>
<CAPTION>
SELECTED FINANCIAL AND OTHER DATA OF THE COMPANY
At Or For the Year Ended December 31,
----------------------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
(Dollars in thousands, except shares and per share amounts)
SELECTED FINANCIAL RATIOS(3):
PERFORMANCE RATIOS:
<S> <C> <C> <C> <C> <C>
Return on average assets(4)(5) ........... 0.20% 0.78% 1.33% 1.22% 1.13%
Return on average equity(4)(5) ........... 1.11 6.53 13.45 15.26 15.89
Average interest rate spread(6) .......... 3.28 3.78 4.31 4.60 4.45
Net interest margin(7) ................... 4.02 4.19 4.53 4.77 4.60
Average interest-earning assets to average
interest-bearing liabilities .......... 120.29 111.09 106.84 104.71 103.48
Noninterest expense to average assets(4) . 3.81 2.99 2.93 2.98 2.86
CAPITAL RATIOS(3):
Average equity to average assets ......... 18.07 11.93 9.84 7.99 7.12
Equity to total assets at end of period .. 28.03 12.05 11.18 8.96 7.40
Consolidated tangible capital ............ 28.03 11.96 11.18 8.95 7.40
Consolidated core capital ................ 28.03 11.96 11.18 8.95 7.40
Consolidated total risk-based capital .... 61.90 23.32 21.90 16.39 14.10
ASSET QUALITY RATIOS AND OTHER DATA(3):
Total non-performing loans(8) ............ $ 937 $ 9l6 $ 986 $ 1,642 $ 2,356
Real Estate owned, net ................... 550 496 514 433 629
Non-performing loans to total loans ...... 0.36% 0.34% 0.36% 0.54% 0.81%
Non-performing assets to total assets .... 0.42 0.46 0.49 0.62 0.86
Allowance for loan losses to:
Non-performing loans .................. 100.85 90.17 65.82 24.91 23.26
Total loans(9) ........................ 0.36 0.31 0.24 0.14 0.19
Number of shares outstanding (11) .............. 7,009,250 NA NA NA NA
Book value per share (11) ...................... $14.25 NA NA NA NA
Full service offices ........................... 5 5 5 7 8
</TABLE>
(1) Loans receivable, net, represents gross loans less net deferred loan fees,
loans in process and allowance for loan losses.
(2) 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.
(3) 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.
(4) Includes one-time charge of $1,759,000 ($1,077,000 net of tax
effects) associated with the recapitalization of the Savings
Association Insurance Fund (the "SAIF") and a loss on curtailment
of pension plan of $837,000 ($512,000 net of tax effects) for the
year ended December 31, 1996. Excluding the SAIF recapitalization
charge and the loss on curtailment of the pension plan, the return on
average assets and average equity would have been 0.70% and
3.85%, respectively, for the year ended December 31, 1996.
Likewise, the ratio of noninterest expense to average assets would
have been 3.00% for the year ended December 31, 1996.
(5) Includes gain on sale of branches. Return on average assets excluding the
gain on sale of branches would have been 1.03% and 1.08% in 1994 and 1993,
respectively. Return on average equity excluding the gain on sale of
branches would have been 10.42% and 13.48% in 1994 and 1993, respectively.
(6) The average interest rate spread represents the difference between the
weighted average yield on interest-earning assets and the weighted average
cost of interest-bearing liabilities.
(7) The net interest margin represents net interest income as a percent of
average interest-earning assets.
(8) Non-performing loans consist of non-accrual loans; the Company did not have
any loans that were 90 days or more past due and still accruing at any of
the dates presented.
(9) Total loans represents gross loans less deferred loan fees and loans in
process.
(10) For the year ended December 31, 1996, earnings per share was calculated as
if the Company's initial public offering had taken place on January 1,
1996.
(11) Per share information for the years ended December 31, 1995, 1994, 1993 and
1992 cannot be computed, because the Company did not issue stock until
September 26, 1996.
2
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
GENERAL
On September 26, 1996, Home Federal Savings and Loan Association of Elgin ("Home
Federal" or the "Association") completed its conversion from mutual to stock
form and became a wholly-owned subsidiary of Home Bancorp of Elgin, Inc. ("Home
Bancorp" or the "Company"). On such date, the Company sold 7,009,250 shares of
it's common stock, par value $.01 per share to the public, at a per share price
of $10.00. The conversion and offering raised $62.4 million in net proceeds. The
Company's sole business activity consists of the ownership of the Association.
The Company also invests in short-term investment grade marketable securities
and other liquid investments. The financial data presented in this Annual Report
represents the activity of the Association for the period prior to September 26,
1996 and the activity of Home Bancorp and subsidiary consolidated thereafter.
The Association's principal business consists of attracting deposits from the
public and investing those deposits, along with funds generated from operations,
primarily in loans secured by mortgages on one- to four-family residences. 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 noninterest income such as service charges and other fees. The
Association's noninterest 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 year
ended December 31, 1994 the Association sold branches, which resulted in a gain
of $1.7 million. These non-recurring gains represented approximately 22.5% of
income before income tax expense in 1994. The Association does not intend to
sell any branches in the foreseeable future. The Association exceeded all of its
regulatory capital requirements at December 31, 1996.
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 portions of Cook,
Kane, Lake, McHenry, DuPage and DeKalb counties in Illinois, 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
3
<PAGE>
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 prior to the conversion in 1996, 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. However, in an effort to address the contraction of
deposits, the Association has taken steps to increase core non-interest bearing
transactional deposit accounts and related services. These include the
relocation of the South Elgin Office along with the addition of five drive-up
lanes in the heart of the commercial and residential growth area. Convenient
access to deposit accounts is also being improved with the addition of a debit
card program scheduled for March 1997 and home banking via personal computer and
phone in May 1997. In an effort to increase loan originations in 1997, the
Association intends to embark on a campaign to improve realtor and builder
relations through improved communications. Regular contact with real estate
professionals is scheduled, including direct mail, faxes, and personal visits.
Proven high volume realtors in particular are being targeted. The Association's
market is experiencing steady growth, however the market is highly fragmented
among local financial institutions and branches of the major Chicago area banks.
Management is committed to getting its message to the community, but has
determined that paying higher than market rates to attract deposits and
originating loans at rates below market or with higher credit risk would not be
prudent strategies as they would not improve profitability.
In particular, the effects of management's business strategy as noted above
include the following. Total assets increased $9.2 million from $347.2 million
at December 31, 1992 to $356.4 million at December 31, 1996. The increase was
primarily due to the net proceeds of $62.4 million from the conversion. The
increase was offset by branch sales of $17.1 million and $19.4 million in 1993
and 1994, respectively, and a $16.7 million decrease as the result of
competitive market conditions and the Association's decision not to pay rates
higher than market on deposits and not to originate loans at rates below market.
The branch sales increased the Association's capital by $1.5 million and reduced
general and administrative expenses. The Association's gross loans decreased
$29.0 million from $293.6 million at December 31, 1992 to $264.6 million at
December 31, 1996. This decline was due to competitive market conditions and the
Association's decision not to offer loans at rates below market. The funds
generated from the repayments of loans in 1993 and 1994 were primarily used to
fund branch sales. The Association's savings deposits decreased $67.2 million
from $319.0 million at December 31, 1992 to $251.8 million at December 31, 1996.
The decrease was primarily due to the sale of branches in 1993 and 1994 with
savings deposits totaling $39.9 million and $4.7 million as a result of
withdrawals directed by depositors for purchase of stock in the Offering. The
remainder of the decrease was due to competitive market conditions and the
Association's decision not to pay rates higher than the market to attract
deposits.
MANAGEMENT OF INTEREST RATE RISK
The principal objectives of the Company's and 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 Company'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. The Association seeks to reduce the
vulnerability of its operating results to
4
<PAGE>
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 and the
Company.
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 December 31, 1996, an aggregate of $198.3
million, or 63.5%, of total interest-earning assets were invested in such
assets.
The Association has taken several actions designed to manage its level of
interest rate risk under various market conditions. These actions have included:
(i) increasing the interest rate sensitivity of the Association's one- to
four-family residential loan portfolio through the origination of
adjustable-rate mortgage loans and 15-year fixed rate mortgage loans, as market
conditions permit; (ii) increasing the proportion of liquid assets invested in
instruments with maturities of two years or less; and (iii) undertaking an
effort to lengthen the maturities of its certificates of deposit. Neither the
Company nor the Association engages 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 Company and the
Association do 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.
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 a company'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. Based
upon the assumptions used in the following table, at December 31, 1996, the
Company'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 $22.1 million, representing a one-year cumulative "gap," as
a percentage of total assets of negative 6.21%. As a result, the Company has
limited vulnerability to increases in interest rates.
The following table sets forth the amounts of interest-earning assets and
interest-bearing liabilities outstanding at December 31, 1996, which are
anticipated by the Company, based upon certain assumptions, to reprice or mature
in each of the future time periods shown. Except as stated below,
5
<PAGE>
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
December 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 Company utilized the national deposit decay rate
assumptions published by the OTS as of December 31, 1996 which, for NOW/Super
NOW accounts, money market accounts and passbook accounts in the one year or
less category were 58%, 69% and 72%, respectively. The loan amounts in the table
reflect principal balances expected to be redeployed and/or repriced as a result
of contractual amortization and anticipated early payoffs of adjustable-rate
loans and fixed-rate loans and as a result of contractual rate adjustments on
adjustable-rate loans. The amounts attributable to mortgage-backed securities
reflect principal balances expected to be redeployed and/or repriced as a result
of anticipated principal repayments.
<TABLE>
<CAPTION>
AT DECEMBER 31, 1996
MORE THAN MORE THAN MORE THAN MORE THAN
3 MONTHS 3 MONTHS 6 MONTHS 1 YEAR 3 YEARS MORE THAN
OR LESS TO 6 MONTHS TO 1 YEAR TO 3 YEARS TO 5 YEARS 5 YEARS TOTAL
-------------- ----------- ----------- ------------ ------------ ----------- --------
(DOLLARS IN THOUSANDS)
INTEREST-EARNING ASSETS:
<S> <C> <C> <C> <C> <C> <C> <C>
Loans receivable(1)..................... $ 14,305 $13,444 $ 25,887 $81,328 $ 33,701 $ 93,586 $ 262,251
Investment securities held to maturity.. 24,777 -- 29,009 -- -- -- 53,786
Mortgage-backed securities held to maturity 6 6 14 56 39 21 142
Interest-earning deposits............... 22,341 -- -- -- -- -- 22,341
FHLB of Chicago stock................... 2,678 -- -- -- -- -- 2,678
-------- ------- -------- ------- -------- -------- --------
Total interest-earning assets....... $ 64,107 $13,450 $ 54,910 $81,384 $ 33,740 $ 93,607 $ 341,198
======== ======= ======== ======= ======== ======== =========
INTEREST-BEARING LIABILITIES:
NOW/Super NOW accounts................ $ 7,614 $ 7,614 $ 9,818 $ 6,042 $ 3,992 $ 7,720 $42,800
Money market accounts................. 3,714 3,714 4,136 3,171 1,236 792 16,763
Passbook accounts..................... 14,688 14,688 15,496 4,801 3,469 9,029 62,171
Certificates of deposit............... 26,139 15,657 31,314 28,164 23,918 -- 125,192
------- ------- ------- ------- ------- ------- -------
Total interest-bearing liabilities. $52,155 $41,673 $60,764 $42,178 $32,615 $17,541 $246,926
======= ======= ======= ======= ======= ======= =========
Interest sensitivity gap per period..... $11,952 $(28,223) $ (5,854) $39,206 $ 1,125 $76,066
Cumulative interest sensitivity gap..... 11,952 (16,271) (22,125) 17,081 18,206 94,272
Cumulative interest sensitivity gap
as a percent of total assets.......... 3.35% (4.57)% (6.21)% 4.79% 5.11% 26.46%
Cumulative total interest-earning assets
as a percent of cumulative total inter-
est-bearing liabilities............... 122.92% 82.66% 85.69% 108.68% 107.94% 138.18%
</TABLE>
- --------------------
(1) Loans receivable represents gross loans less net deferred loan fees and
loans in process.
Certain shortcomings are inherent in the methods of analysis presented in the
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
6
<PAGE>
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 table.
ANALYSIS OF NET INTEREST INCOME
Net interest income represents the difference between income on interest-earning
assets and expense on interest-bearing liabilities. Net interest income depends
upon the relative amounts of interest-earning assets and interest-bearing
liabilities and the interest rates earned or paid on them.
The following table sets forth certain information relating to the Company's
statements of financial condition and the statements of operations at and for
the years ended December 31, 1996, 1995 and 1994 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>
AT DECEMBER 31, FOR THE YEAR ENDED DECEMBER 31,
1996 1996 1995
------------------------ ---------------------------------- ----------------------------------
WEIGHTED AVERAGE AVERAGE
AVERAGE AVERAGE YIELD/ AVERAGE YIELD/
BALANCE RATE (1) BALANCE INTEREST COST BALANCE INTEREST COST
------- ---------- ---------- --------- --------- ---------- --------- ----------
(DOLLARS IN THOUSANDS)
ASSETS:
INTEREST-EARNING ASSETS:
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Real estate loans(2).... $261,590 7.65% $264,219 $20,936 7.92% $269,323 $21,719 8.06%
Other loans............. 661 9.10 603 56 9.29 670 60 8.96
Mortgage-backed securities 142 6.97 160 11 6.88 213 15 7.04
Investment securities... 53,786 5.41 14,385 780 5.42 5,934 360 6.07
Interest-earning deposits 22,341 6.39 21,187 1,089 5.14 8,981 569 6.34
FHLB of Chicago stock... 2,678 7.00 2,741 187 6.82 3,045 202 6.63
--------- ----- -------- -------- ----- --------- -------- -------
Total interest-earning
assets................ 341,198 7.21% 303,295 $23,059 7.60% 288,166 $22,925 7.96%
------- ----- ------- ======= ----- -------- ======= ------
Allowance for loan losses (945) (890) (746)
Non-interest-earning assets 16,082 18,349 15,769
-------- -------- ---------
Total assets.......... $356,335 $320,754 $303,189
======== ======== ========
LIABILITIES AND EQUITY:
INTEREST-BEARING LIABILITIES:
NOW/Super Now accounts.. $42,800 2.25% $42,544 $906 2.13% $43,035 $980 2.28%
Money market accounts... 16,763 3.22 17,111 556 3.25 19,927 565 2.84
Passbook accounts....... 62,171 3.00 64,523 2,017 3.13 69,362 2,137 3.08
Certificates of deposit. 125,192 5.79 127,286 7,365 5.79 125,820 7,091 5.64
Borrowed funds.......... - - 667 37 5.55 1,250 77 6.16
--------- -------- --------- ------- ------ -------- ------- -------
Total interest bearing
liabilities......... 246,926 4.30% 252,131 10,881 4.32% 259,394 10,850 4.18%
-------- ----- -------- ------ ----- ------- ------ ------
Non-interest-bearing NOW
accounts.............. 4,869 6,132 3,410
Other non-interest-bearing
liabilities........... 4,659 4,531 4,208
--------- --------- --------
Total liabilities..... 256,454 262,794 267,012
Equity.................... 99,881 57,960 36,177
--------- -------- ---------
Total liabilities and
equity................ $356,335 $320,754 $303,189
======== ======== ========
Net interest income......... $12,178 $12,075
======= =======
Interest rate spread(3)..... 2.91% 3.28% 3.78%
===== ===== =======
Net interest margin(4)...... 4.02% 4.19%
===== =======
Ratio of interest-earning assets to
interest-bearing liabilities 138.18% 120.29% 111.09%
====== ====== ======
</TABLE>
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
1994
-----------------------------------
AVERAGE
AVERAGE YIELD/
BALANCE INTEREST COST
--------- --------- ------
(DOLLARS IN THOUSANDS)
ASSETS:
INTEREST-EARNING ASSETS:
<S> <C> <C> <C>
Real estate loans(2).... $281,240 $23,160 8.24%
Other loans............. 747 63 8.43
Mortgage-backed securities 266 18 6.77
Investment securities... 4,431 264 5.96
Interest-earning deposits 23,013 977 4.25
FHLB of Chicago stock... 3,126 187 5.98
-------- -------- ------
Total interest-earning
assets................ 312,823 $24,669 7.89%
-------- ======= -------
Allowance for loan losses (572)
Non-interest-earning assets 16,628
--------
Total assets.......... $328,879
========
LIABILITIES AND EQUITY:
INTEREST-BEARING LIABILITIES:
NOW/Super Now accounts.. $52,685 $1,066 2.02%
Money market accounts... 27,517 767 2.79
Passbook accounts....... 86,062 2,627 3.05
Certificates of deposit. 125,946 5,985 4.75
Borrowed funds.......... 583 39 6.69
-------- ------- -------
Total interest bearing
liabilities......... 292,793 10,484 3.58%
-------- ------ -------
Non-interest-bearing NOW
accounts.............. --
Other non-interest-bearing
liabilities........... 3,715
--------
Total liabilities..... 296,508
Equity.................... 32,371
---------
Total liabilities and
equity................ $328,879
========
Net interest income......... $14,185
=======
Interest rate spread(3)..... 4.31%
======
Net interest margin(4)...... 4.53%
======
Ratio of interest-earning assets to
interest-bearing liabilities 106.84%
======
</TABLE>
- ------------------
(1) The weighted average rate represents the coupon associated with each asset
and liability, weighted by the principal balance associated with each asset
and liability.
(2) In computing the average balance of loans, non-accrual loans have been
included.
(3) Interest rate spread represents the difference between the
average rate on interest-earning assets and the average cost of
interest-bearing liabilities.
(4) Net interest margin on interest-earning assets represents net interest
income as a percentage of average interest-earning assets.
7
<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 Company's net interest income. Conversely, increases in the volume
or amount of the Company'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 Company'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 Company'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>
YEAR ENDED YEAR ENDED
DECEMBER 31, 1996 DECEMBER 31, 1995
COMPARED TO COMPARED TO
YEAR ENDED YEAR ENDED
DECEMBER 31, 1995 DECEMBER 31, 1994
----------------- -----------------
INCREASE/(DECREASE) DUE TO INCREASE/(DECREASE) DUE TO
-------------------------- --------------------------
VOLUME RATE NET VOLUME RATE NET
------ ---- --- ------ ---- ---
(IN THOUSANDS)
INTEREST-EARNING ASSETS:
<S> <C> <C> <C> <C> <C> <C>
Real estate loans..................... $ (408) $ (375) $ (783) $ (968) $ (473) $ (1,441)
Other loans........................... (6) 2 (4) (7) 4 (3)
Mortgage-backed securities............ (4) -- (4) (4) 1 (3)
Investment securities................. 454 (34) 420 91 5 96
Interest-earning deposits............. 604 (84) 520 (2,119) 1,711 (408)
FHLB of Chicago stock................. (21) 6 (15) (5) 20 15
-------- -------- -------- -------- -------- --------
Total............................ $ 619 $ (485) $ 134 $ (3,012) $ 1,268 $ (1,744)
======== ======== ======== ======== ======== ========
INTEREST-BEARING LIABILITIES:
NOW/Super Now accounts............... $ (11) $ (63) $ (74) $ (273) $ 187 $ (86)
Money market accounts................ (86) 77 (9) (215) 13 (202)
Passbook accounts.................... (152) 32 (120) (515) 25 (490)
Certificates of deposit.............. 83 191 274 (6) 1,112 1,106
Borrowed funds....................... (33) (7) (40) 41 (3) 38
-------- -------- -------- -------- -------- --------
Total........................... $ (199) $ 230 $ 31 $ (968) $ 1,334 $ 366
======== ======== ======== ========= ======== ========
Net change in net interest income........ $ 818 $ (715) $ 103 $ (2,044) $ (66) $ (2,110)
======== ======== ======== ======== ======== ========
</TABLE>
COMPARISON OF FINANCIAL CONDITION AT DECEMBER 31, 1996 AND DECEMBER 31, 1995
Total assets increased $51.8 million or 17.0% from $304.5 million at December
31, 1995 to $356.3 million at December 31, 1996. The increase in total assets
was primarily due to net proceeds from the initial public offering (the
"Offering") of $62.4 million which was partially offset by the repayment of $4.0
million of borrowed funds and disbursement of funds resulting from the decrease
in savings deposits of $8.2 million.
Cash and due from banks decreased $4.3 million or 43.5% from $10.0 million at
December 31, 1995 to $5.7 million at December 31, 1996. The decrease was
primarily due to funds disbursed to
8
<PAGE>
repay borrowed funds of $4.0 million, disbursements for withdrawals of $8.2
million in savings deposits and disbursements of $1.4 million for office
properties and equipment. These decreases were offset by the funds received from
the decrease in loans receivable of $5.8 million, the $378,000 decrease in
Federal Home Loan Bank ("FHLB") of Chicago stock, $1.1 million transferred from
interest-earning deposits, and $1.5 million of net cash provided by operating
activities.
Interest-earning deposits increased $13.7 million or 160.1% from $8.6 million at
December 31, 1995 to $22.3 million at December 31, 1996. The increase was
primarily due to receipt of $14.8 million, a part of the proceeds from the
Offering. This was offset by a $1.1 million transfer of funds to cash and due
from banks.
Investment securities increased $47.9 million or 804.3% from $5.9 million at
December 31, 1995 to $53.8 million at December 31, 1996. The increase was
primarily due to the $47.6 million purchase of investment securities using
proceeds from the Offering.
Loans receivable decreased $5.9 million or 2.2% from $267.2 million at December
31, 1995 to $261.3 million at December 31, 1996. The decrease was primarily due
to loan repayments exceeding loan originations.
Office properties and equipment increased $747,000 or 11.0% from $6,817,000 at
December 31, 1995 to $7,564,000 at December 31, 1996. The increase was primarily
due to the cost for the new South Elgin branch office.
Savings deposits decreased $8.2 million or 3.1% from $260.0 million at December
31, 1995 to $251.8 million at December 31, 1996. Savings deposits decreased $4.7
million as a result of withdrawals directed by depositors for purchase of stock
in the Offering and $3.5 million as a result of market conditions and the
purchase of stock in the Offering by account holders that paid with a check
drawn on the Association.
Borrowed funds decreased $4.0 million from December 31, 1995 as a result of all
borrowed funds being repaid in 1996.
Stockholders' equity increased $63.2 million or 172.3% from $36.7 million at
December 31, 1995 to $99.9 million at December 31, 1996. The increase is
primarily due to net proceeds from the conversion of $62.4 million. The
remainder of the increase was from operations for 1996. The book value is $14.25
per share at December 31, 1996.
COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
GENERAL
Net income for the year ended December 31, 1996 decreased $1.7 million or 72.8%
from $2.4 million for the year ended December 31, 1995 to $642,000 or $0.10 per
share. The $1.7 million decrease was primarily due to an increase of $3.1
million in noninterest expense, which was offset, in part, by an increase of
$104,000 in net interest income before provision for loan losses, a decrease of
$60,000 in provision for loan losses, an increase of $71,000 in noninterest
income and a decrease of $1.2 million in income tax expense. The $3.1 million
increase in noninterest expense was primarily due to an increase of $1.2 million
in compensation and benefits expense and an increase of $1.7 million in federal
deposit insurance premiums. The $1.2 million increase in compensation and
benefits expense was primarily due to pension curtailment expense of $837,000
resulting from
9
<PAGE>
the termination of the Association's pension plan in connection with the
conversion, expense of $189,000 as a result of the adoption of the Employee
Stock Ownership Plan (the "ESOP"), and normal salary increases. The $1.7 million
increase in federal deposit insurance premiums was due to the one-time charge of
$1.8 million resulting from the recently enacted assessment to recapitalize the
Savings Association Insurance Fund (the "SAIF"). The decrease in income tax
expense of $1.2 million was attributable to lower taxable income. Home Bancorp's
net income for the year ended December 31, 1996, excluding the one-time
after-tax charge of $1,077,000 for the recapitalization of the SAIF and
excluding the one-time after-tax charge $512,000 for the curtailment of the
Association's pension plan, would have been $2,231,000 or $0.35 per share as
compared to net income of $2,364,000 for the year ended December 31, 1995.
INTEREST INCOME
Interest income increased $134,000 or 0.6% from $22.9 million for the year ended
December 31, 1995 to $23.1 million for the year ended December 31, 1996. The
increase was due primarily to an increase in the average balance of
interest-earning assets of $15.1 million or 5.3% from $288.2 million for the
year ended December 31, 1995 to $303.3 million for the year ended December 31,
1996. This increase was partially offset by a decrease in the average yield on
interest-earning assets of 36 basis points from 7.96% for the year ended
December 31, 1995 to 7.60% for the year ended December 31, 1996 and the $5.1
million or 1.9% decrease in the average balance of real estate loans from $269.3
million for the year ended December 31, 1995 to $264.2 million for the year
ended December 31, 1996. The increase in the average balance of interest-earning
assets was primarily due to receipt of the net proceeds from the Offering which
was partially offset by the decrease in the average balance of interest-earning
assets due to market conditions. The average rate on interest-earning assets
decreased primarily as a result of the rates on new loan originations being
lower than the rates on loans repaid, and lower average rates on
interest-earning deposits and investment securities for the year ended December
31, 1996 compared to the year ended December 31, 1995. The decrease in the
average real estate loans was the result of competitive market conditions and
the decision by management not to offer loans at rates below market.
INTEREST EXPENSE
Interest expense increased $31,000 or 0.3% from $10,850,000 for the year ended
December 31, 1995 to $10,881,000 for the year ended December 31, 1996. This
increase was primarily due to the increase in the average rate paid on
interest-bearing liabilities of 14 basis points from 4.18% for the year ended
December 31, 1995 to 4.32% for the year ended December 31, 1996. This is due
primarily to new certificates of deposit earning higher rates of interest than
maturing deposits. This increase was offset, in part, by a decrease in the
average balance of interest-bearing liabilities of $7.3 million or 2.8% from
$259.4 million for the year ended December 31, 1995 to $252.1 million for the
year ended December 31, 1996. 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 increased $104,000 or 0.9%
from $12.1 million for the year ended December 31, 1995 to $12.2 million for the
year ended December 31, 1996. This was primarily due to the 9.2% increase in the
ratio of average interest-earning assets to average interest-bearing liabilities
from 111.09% for the year ended December 31, 1995 to 120.29% for the year ended
December 31, 1996. This increase was offset, in part, by the 50 basis point
decrease in
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the average interest rate spread from 3.78% for the year ended December 31, 1995
to 3.28% for the year ended December 31, 1996.
PROVISION FOR LOAN LOSSES
The provision for loan losses decreased $60,000 or 33.3% from $180,000 for the
year ended December 31, 1995 to $120,000 for the year ended December 31, 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, the historically low loan loss
experience and the national and regional economies. Management also considered
the fact that the Association had a slightly smaller loan portfolio in the year
ended December 31, 1996 as compared to the year ended December 31, 1995. The
ratio of the allowance for loan losses to non-performing loans was 100.85% and
90.17% at December 31, 1996 and December 31, 1995, respectively, and the ratio
of the allowance for loan losses to total loans was 0.36% and 0.31% at such
respective dates. Management believes that the provision for loan losses and the
allowance for loan losses are reasonable and adequate to cover any known losses
and any losses reasonably expected in the existing loan portfolio. While
management estimates loan losses using the best available information, such as
independent appraisals for significant collateral properties, no assurance can
be given that future additions to the allowance will not be necessary based on
changes in economic and real estate market conditions, further information
obtained regarding known problem loans, identification of additional problem
loans and other factors, both within and outside of management's control. The
directors of the Association and the Company have reviewed the provision for
loan losses and the allowance for loan losses and the assumptions utilized by
management as to their reasonableness and adequacy.
NONINTEREST INCOME
Noninterest income increased $71,000 or 6.2% from $1,150,000 for the year ended
December 31, 1995 to $1,221,000 for the year ended December 31, 1996. The
increase was primarily due to an increase in service fee income of $47,000 from
$1,129,000 for the year ended December 31, 1995 to $1,176,000 for the year ended
December 31, 1996. The increase in service fee income is due primarily to a
change in the Association's ATM processors, which resulted in service fee income
and expenses being accounted for on a gross basis as a part of both noninterest
income and noninterest expense. In addition, in 1996 the Association sold real
estate owned and realized a gain of $20,600. There were no gains on sale of real
estate owned in 1995.
NONINTEREST EXPENSE
Noninterest expense increased $3.1 million or 34.7% from $9.1 million for the
year ended December 31, 1995 to $12.2 million for the year ended December 31,
1996. The increase was primarily due to increases in compensation and benefits
expense, federal deposit insurance premium expense, advertising and promotion
expense, automated teller machine expense and other expense. Compensation and
benefits expense increased $1.3 million or 31.2% from $3.9 million for the year
ended December 31, 1995 to $5.2 million for the year ended December 31, 1996.
The $1.3 million increase was primarily due to a one-time pension curtailment
expense of $837,000 resulting from the termination of the Association's pension
plan in connection with the conversion, additional expense of $189,000 as a
result of the adoption of the ESOP, and normal salary increases. The $1.7
million or 244.3% increase in federal deposit insurance premiums was due to the
one-time charge of $1.8 million resulting from the recently enacted assessment
to recapitalize the SAIF. Advertising and promotion expense increased $69,000 or
18.6% from $371,000 for the year ended December 31,
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1995 to $440,000 for the year ended December 31, 1996. The increase in
advertising and promotion expense was primarily due to the promotion expense
associated with the grand opening of the newly relocated South Elgin office.
Automated teller machine expense increased $102,000 or 32.5% from $314,000 for
the year ended December 31, 1995 to $416,000 for the year ended December 31,
1996. The increase was primarily due to a change in the Association's ATM
processors, which resulted in service fee income and expenses being accounted
for on a gross basis as a part of both noninterest income and noninterest
expense. Other expense increased $77,000 or 6.6% from $1,186,000 for the year
ended December 31, 1995 to $1,263,000 for the year ended December 31, 1996. This
increase was primarily due to increases in stationary, printing and office
supplies, as a result of the relocation of the South Elgin office and the
conversion, a one-time increase in insurance expense for additional coverage
required in connection with the conversion and increased real estate expense for
repair of real estate owned.
INCOME TAX EXPENSE
Income tax expense decreased $1.2 million or 74.1% from $1.6 million for the
year ended December 31, 1995 to $417,000 for the year ended December 31, 1996.
This was attributable to a decrease in income before income taxes of $2.9
million. The effective tax rate for the year ended December 31, 1996 was 39.4%
which was comparable to 40.5% for the year ended December 31, 1995.
COMPARISON OF FINANCIAL CONDITION AT DECEMBER 31, 1995 AND 1994
Total assets decreased $2.5 million to $304.5 million at December 31, 1995 from
$307.0 million at December 31, 1994. This decrease in total assets was primarily
the result of a decrease in savings deposits of $8.0 million to $260.0 million
at December 31, 1995 from $268.0 million at December 31, 1994, which was offset
by an increase in advances from the FHLB of Chicago of $4.0 million and an
increase in retained earnings of $2.4 million for 1995. The increase in retained
earnings was due to net income for the year ended December 31, 1995. Loans
receivable decreased by $3.8 million to $267.2 million at December 31, 1995 from
$271.0 million at December 31, 1994, which resulted from loan repayments
exceeding loan originations. This was offset by an increase in cash and due from
banks of $365,000 to $10.0 million at December 31, 1995 from $9.7 million at
December 31, 1994 and an increase in office properties and equipment of $743,000
to $6.8 million at December 31, 1995 from $6.1 million at December 31, 1994. The
increase in office properties and equipment was due to the building of a
drive-up facility at the Bartlett branch office.
COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1994
GENERAL
Net income for the year ended December 31, 1995 decreased $2.0 million or 45.5%
from $4.4 million for the year ended December 31, 1994 to $2.4 million. The $2.0
million decrease was due to a decrease of $2.1 million in net interest income
before provision for loan losses and a decrease of $2.0 million in noninterest
income, which were offset by a decrease of $555,000 in noninterest expense and a
decrease in income tax expense of $1.5 million. The decreases in net interest
income before provision for loan losses and in noninterest income resulted
primarily from a gain on the sale of two branch offices in 1994 of $1.7 million.
No such gain occurred during 1995. Net income before the gain on sale of
branches in 1994 would have been $3.4 million. Net income for the year ended
December 31, 1995 decreased $1.0 million or 29.4% from 1994 levels excluding the
gain on sale of branches.
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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.
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
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using the best available information, such as independent appraisals for
significant collateral properties, no assurance can be given that future
additions to the allowance will not be necessary based on changes in economic
and real estate market conditions, further information obtained regarding known
problem loans, identification of additional problem loans and other factors,
both within and outside of management's control. The directors of the
Association and the Company have reviewed the provision for loan losses and the
allowance for loan losses and the assumptions utilized by management as to their
reasonableness and adequacy.
NONINTEREST INCOME
Noninterest income 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 $463,000, a 10.5% decrease from $4.4
million in the year ended December 31, 1994 to $3.9 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 $81,000 to $1.2 million for the year ended
December 31, 1995 from $1.3 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.
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.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of funds are the Association's 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 the
Company's operating activities amounted to
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$1.5 million, $1.7 million and $4.5 million for the years ended December 31,
1996, 1995 and 1994, 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 December 31, 1996, 1995 and 1994, the
Association's liquidity ratios were 20.67%, 8.24% and 9.56%, respectively, and
its short-term liquidity ratios were 20.67%, 5.97% and 7.50%, respectively. The
increase in the liquidity and short term liquidity ratios for 1996 were
primarily attributable to the investment of the Offering proceeds in short term
liquid investments. The levels of the Association's short-term liquid assets are
dependent on the Association's operating, financing and investing activities
during any given period. Management believes it will have adequate resources to
fund all commitments on a short-term and long-term basis in accordance with its
business strategy.
The primary investing activities of the Association are the origination of
mortgage and other loans and the purchase of U.S. government or U.S. government
agency securities. During the years ended December 31, 1996, 1995 and 1994, the
Association's disbursements for loan originations totalled $36.3 million, $34.0
million and $21.3 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 of $4.0 million. There were
no borrowings outstanding at December 31, 1996. Cash flows used in investing
activities of the Company amounted to $42.4 million for the year ended December
31, 1996. Cash flows provided by investing activities amounted to $2.8 million
and $25.4 million for the years ended December 31, 1995 and 1994, respectively.
For the years ended December 31, 1996, 1995 and 1994, the Association
experienced net decreases in savings deposits (including the effect of interest
credited) of $8.2 million, $8.0 million and $26.7 million, respectively. The
decrease in 1994 included the sales of two branches, which decreased savings
deposits $21.8 million. In addition, during 1996, 1995 and 1994, 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. 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
providing drive-up lanes for the first time at the newly relocated South Elgin
branch office which opened in November 1996. Access to deposit accounts is being
enhanced by the scheduled addition of a debit card program in March 1997 and
home banking via personal computer or phone in May 1997. It is anticipated the
added convenience of these services will have a positive impact on deposit
flows. The growth is expected to have a positive effect on the financial
condition, liquidity and operations of the Association.
Cash flows provided by financing activities of the Company amounted to $50.3
million for the year ended December 31, 1996. This was primarily from net
proceeds of $62.4 million from the Offering. Cash flows used in financing
activities amounted to $4.2 million and $31.3 million for the years ended
December 31, 1995 and 1994, respectively.
See the "Consolidated Statements of Cash Flows" in the Financial Statements
included in this Annual Report for the sources and uses of cash flows for
operating activities, investing activities and financing activities for each of
the years ended December 31, 1996, 1995 and 1994.
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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 December 31, 1996, the Association had outstanding loan origination
commitments of $2.7 million, undisbursed loans in process of $872,000 and unused
lines of consumer credit of $266,000. 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 December 31, 1996 totalled $73.1 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 December 31, 1996, the Association exceeded all of its regulatory capital
requirements with a tangible capital level of $65.6 million, or 20.05% of total
adjusted assets, which is above the required level of $4.9 million or 1.50%;
core capital of $65.6 million, or 20.05% of total adjusted assets, which is
above the required level of $9.8 million or 3.00%; and total risk-based capital
of $66.6 million, or 41.1% of risk-weighted assets, which is above the required
level of $13.0 million, or 8.00%.
IMPACT OF INFLATION AND CHANGING PRICES
The Company's Financial Statements and Notes thereto presented herein have been
prepared in accordance with Generally Accepted Accounting Principles ("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 Company's operations. Unlike
industrial companies, nearly all of the assets and liabilities of the Company
are monetary in nature. As a result, interest rates have a greater impact on the
Company's performance than do the effects of general levels of inflation.
Interest rates do not necessarily move in the same direction or to the same
extent as the price of goods and services.
IMPACT OF NEW ACCOUNTING STANDARDS
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 Company'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
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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 Company'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 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 approval of a
stock option plan and a recognition and retention plan by the stockholders.
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
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servicing assets and other retained interests in the transferred assets be
measured by allocating the previous carrying amount between the assets sold, if
any, and retained interests, if any, based on their relative fair values on the
date of the transfer. SFAS 125 also requires that servicing assets and
liabilities be subsequently measured by (a) amortization in proportion to and
over the period of estimated net servicing income or loss and (b) assessment for
asset impairment or increased obligation based on their fair values. SFAS 125
requires that debtors reclassify financial assets pledged as collateral and that
secured parties recognize those assets and their obligation to return them to
certain circumstances in which the secured party has taken control of those
assets. SFAS 125 requires that a liability be derecognized if and only if either
(i) the debtor pays the creditor and is relieved of its obligation for the
liability or (ii) the debtor is legally released from being the primary obligor
under the liability either judicially or by the creditor. Therefore, a liability
is not considered extinguished by an in-substance defeasance.
SFAS 125 is effective for transfers and servicing of financial assets and
extinguishments of liabilities occurring after December 31, 1996, and is to be
applied prospectively. Earlier or retroactive application is not permitted.
Management of the Company does not expect the impact of SFAS 125 to have a
material impact on the Company's financial statements.
MARKET FOR THE COMPANY'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
Home Bancorp of Elgin, Inc.'s common stock is traded on the Nasdaq National
Market and is listed under the symbol "HBEI." As of December 31, 1996, there
were 7,009,250 shares of common stock outstanding, which were held by
approximately 1,090 stockholders of record. On December 31, 1996, the last
trading date of the 1996 fiscal year, the Company's common stock closed at
$13.50 per share. The price range of the common stock from the date the stock
began trading on September 27, 1996 to December 31, 1996 was as follows:
HIGH LOW
$13.50 $11.875
The Board of Directors did not declare dividends on the Common Stock during the
fiscal year ended December 31, 1996. In the future, declarations of dividends by
the Board of Directors, if any, will depend upon a number of factors, including,
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. Regulations of the Office of Thrift
Supervision may limit the Association's ability to make capital distributions
including payment of dividends to the Company.
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 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.
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The Company is also subject to the terms of a certification made to the OTS in
connection with the applications 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.
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[Letterhead of KPMG Peat Marwick LLP]
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Home Bancorp of Elgin, Inc.
Elgin, Illinois:
We have audited the accompanying consolidated balance sheets of Home
Bancorp of Elgin, Inc. and subsidiary (the Company) as of December 31, 1996
and 1995, and the related consolidated statements of earnings,
stockholders' equity, and cash flows for each of the years in the
three-year period ended December 31, 1996. These financial statements are
the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Home
Bancorp of Elgin, Inc. and subsidiary as of December 31, 1996 and 1995, and
the results of their operations and their cash flows for each of the years
in the three-year period ended December 31, 1996, in conformity with
generally accepted accounting principles.
/s/ KPMG Peat Marwick LLP
Chicago, Illinois
January 24, 1997
20
<PAGE>
HOME BANCORP OF ELGIN, INC.
<TABLE>
Consolidated Balance Sheets
December 31, 1996 and 1995
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------
ASSETS 1996 1995
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash and due from banks $ 5,661,507 10,021,150
Interest-earning deposits 22,341,178 8,588,077
Investment securities held to maturity (note 2) 53,785,506 5,947,500
Loans receivable, net (note 3) 261,305,887 267,153,449
Government National Mortgage Association
mortgage-backed securities held to maturity 142,028 186,536
Accrued interest receivable (note 4) 1,701,337 1,483,915
Real estate owned and in judgment, at lower of cost or fair value (net of
allowance for losses of $20,000 at
December 31, 1996 and 1995) 549,550 495,882
Federal Home Loan Bank of Chicago stock, at cost 2,678,000 3,056,200
Office properties and equipment, net (note 5) 7,564,243 6,817,288
Prepaid expenses and other assets 605,752 770,447
- ----------------------------------------------------------------------------------------------------------------------------
$ 356,334,988 304,520,444
- ----------------------------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
- ----------------------------------------------------------------------------------------------------------------------------
Savings deposits (note 6) 251,794,846 259,971,796
Advances from the Federal Home Loan
Bank of Chicago (note 7) - 4,000,000
Advance payments by borrowers for taxes and
insurance 2,012,440 1,859,851
Accrued interest payable and other liabilities 2,646,853 2,005,801
- ----------------------------------------------------------------------------------------------------------------------------
Total liabilities 256,454,139 267,837,448
Stockholders' equity:
Preferred stock, $.01 par value, 3,000,000 shares
authorized; none outstanding - -
Common stock, $.01 par value; 12,000,000 shares
authorized, 7,009,250 shares issued and outstanding at
December 31, 1996 70,093 -
Additional paid-in capital 67,953,355 -
Retained earnings, substantially restricted 37,324,616 36,682,996
Unearned ESOP compensation (5,467,215) -
- ----------------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 99,880,849 36,682,996
- ----------------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 356,334,988 304,520,444
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
21
<PAGE>
<TABLE>
HOME BANCORP OF ELGIN, INC.
Consolidated Statements of Earnings
Years ended December 31, 1996, 1995 and 1994
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
1996 1995 1994
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest income:
Loans secured by real estate $ 20,935,854 21,719,506 23,163,269
Other loans 55,990 60,009 60,004
Mortgage-backed securities held to maturity 11,323 15,131 17,948
Investment securities held to maturity 780,480 360,000 263,689
Interest-earning deposits 1,089,273 568,537 977,355
Federal Home Loan Bank of Chicago stock 186,538 201,817 186,586
- ---------------------------------------------------------------------------------------------------------------------------
23,059,458 22,925,000 24,668,851
- ---------------------------------------------------------------------------------------------------------------------------
Interest expense:
Savings deposits 10,843,847 10,773,428 10,444,459
Borrowed funds 37,261 76,961 39,424
- ---------------------------------------------------------------------------------------------------------------------------
10,881,108 10,850,389 10,483,883
- ---------------------------------------------------------------------------------------------------------------------------
Net interest income before provision for loan losses 12,178,350 12,074,611 14,184,968
Provision for loan losses 120,000 180,000 240,000
- ---------------------------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 12,058,350 11,894,611 13,944,968
- ---------------------------------------------------------------------------------------------------------------------------
Noninterest income:
Service fee income 1,176,021 1,129,082 1,361,371
Gain on sale of branches - - 1,683,298
Gain on sale of real estate owned 20,647 - -
Gain on sale of office properties and equipment 1,216 - 47,699
Other income 23,228 21,073 61,135
- ---------------------------------------------------------------------------------------------------------------------------
1,221,112 1,150,155 3,153,503
- ---------------------------------------------------------------------------------------------------------------------------
Noninterest expense:
Compensation and benefits 5,156,608 3,931,277 4,394,161
Occupancy expense 1,556,536 1,607,595 1,682,715
Federal deposit insurance premiums 2,441,413 709,346 766,734
Advertising and promotion 440,496 371,421 334,289
Automatic teller machine 416,257 313,886 321,269
Data processing 945,888 949,789 858,033
Other 1,263,478 1,185,539 1,266,652
- ---------------------------------------------------------------------------------------------------------------------------
12,220,676 9,068,853 9,623,853
- ---------------------------------------------------------------------------------------------------------------------------
Income before income taxes 1,058,786 3,975,913 7,474,618
Income tax expense 417,166 1,611,896 3,116,871
- ---------------------------------------------------------------------------------------------------------------------------
Net income $ 641,620 2,364,017 4,357,747
- ---------------------------------------------------------------------------------------------------------------------------
Earnings per share $ 0.10 - -
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
22
<PAGE>
HOME BANCORP OF ELGIN, INC.
Consolidated Statements of Stockholders' Equity
Years ended December 31, 1996, 1995 and 1994
<TABLE>
<CAPTION>
=========================================================================================================================
Common
Additional stock
Preferred Common paid-in Retained acquired
stock stock capital earnings by ESOP Total
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1993 $ - - - 29,961,232 - 29,961,232
Net income - - - 4,357,747 - 4,357,747
- -------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1994 - - - 34,318,979 - 34,318,979
Net income - - - 2,364,017 - 2,364,017
- -------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1995 - - - 36,682,996 - 36,682,996
Net income - - - 641,620 - 641,620
Net proceeds of common
stock issued - 70,093 67,904,289 - (5,607,400) 62,366,982
Cost of ESOP shares released - - - - 140,185 140,185
Market adjustment for
committed ESOP shares - - 49,066 - - 49,066
- -------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1996 $ - 70,093 67,953,355 37,324,616 (5,467,215) 99,880,849
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
23
<PAGE>
<TABLE>
HOME BANCORP OF ELGIN, INC.
Consolidated Statements of Cash Flows
Years ended December 31, 1996, 1995 and 1994
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------
1996 1995 1994
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 641,620 2,364,017 4,357,747
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization 609,529 740,415 701,679
Provision for deferred income taxes 119,014 169,984 524,351
Provision for possible loan losses 120,000 180,000 240,000
Accretion of discounts, net (265,324) (30,278) (21,860)
Market adjustment for committed ESOP shares 49,066 - -
Cost of ESOP shares released 140,185 - -
Decrease in deferred loan fees (373,787) (513,104) (630,999)
Gain on sale of real estate owned (20,647) - -
Gain on sale of branches - - (1,683,298)
Gain on sale of office properties and equipment (1,216) - (47,699)
Federal Home Loan Bank of Chicago stock dividend - (46,300) -
Decrease (increase) in accrued interest receivable (217,422) (213,374) 277,140
Decrease (increase) in prepaid expenses and other assets, net 164,695 (101,037) 92,086
Increase (decrease) in accrued interest payable
and other liabilities, net 522,038 (810,719) 661,237
- ----------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 1,487,751 1,739,604 4,470,384
- ----------------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Net decrease in loans receivable 6,068,328 4,238,149 30,906,019
Repayment of mortgage-backed securities held to maturity 44,261 56,579 52,510
Purchase of investment securities held to maturity (47,572,435) - (5,895,000)
Purchase of office properties and equipment (1,356,484) (1,483,769) (570,859)
Proceeds from the sale of office properties and equipment 1,216 - 243,528
Redemption of stock in the Federal Home
Loan Bank of Chicago 378,200 - 698,200
- ----------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) investing activities (42,436,914) 2,810,959 25,434,398
- ----------------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Increase (decrease) in Federal Home Loan Bank of Chicago advances (4,000,000) 4,000,000 (7,000,000)
Net proceeds from sale of stock 62,366,982 - -
Decrease in savings deposits, net of sale of branch deposits in 1994 (8,176,950) (7,966,235) (4,902,273)
Cash paid upon sale of branch deposits - - (19,408,455)
Net increase (decrease) in advance payments by borrowers
for taxes and insurance 152,589 (192,747) 17,191
- ----------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities 50,342,621 (4,158,982) (31,293,537)
- ----------------------------------------------------------------------------------------------------------------------------
Increase (decrease) in cash and cash equivalents 9,393,458 391,581 (1,388,755)
Cash and cash equivalents at beginning of year 18,609,227 18,217,646 19,606,401
- ----------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 28,002,685 18,609,227 18,217,646
- ----------------------------------------------------------------------------------------------------------------------------
Cash paid during the year for:
Interest $ 10,922,792 10,810,205 10,465,325
Income taxes 550,000 1,298,000 1,881,000
Noncash transfer of loans receivable to real estate owned and in
judgment, net 220,652 194,218 272,300
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
24
<PAGE>
HOME BANCORP OF ELGIN, INC.
Notes to Consolidated Financial Statements
December 31, 1996, 1995 and 1994
================================================================================
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Home Bancorp of Elgin, Inc. and subsidiary (the Company) 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 Company follows in preparing and presenting its
financial statements.
REORGANIZATION TO A STOCK CORPORATION
On April 18, 1996, the Board of Directors of Home Federal Savings and
Loan Association of Elgin (the Association) adopted a plan of conversion
(which was amended on June 6, 1996) pursuant to which the Association
converted from a federally chartered mutual savings and loan association
to a federally chartered stock savings and loan association with the
concurrent formation of the Company. On September 26, 1996, the Company
sold 7,009,250 shares of common stock at $10.00 per share during the
subscription offering. Total net proceeds, after reflecting conversion
expenses of approximately $2,100,000 and including the sale of common
stock to the ESOP, were approximately $68,000,000 and are reflected as
common stock and additional paid-in capital on the accompanying
consolidated balance sheet. The Company utilized $28,300,000 of the net
proceeds to acquire all of the issued and outstanding capital stock of
the Association.
As part of the conversion, the Association established a liquidation
account for the benefit of eligible depositors as of the eligibility
date, who continue to maintain deposits in the Association following the
conversion. The balance in this account decreases each year in which
deposit balances of eligible account holders decline. In the unlikely
event of a complete liquidation of the Association, each eligible
depositor who has continued to maintain deposits in the Association
following the conversion will be entitled to receive a liquidation
distribution from the liquidation account, based on such depositor's
proportionate share of the then total remaining qualifying deposits,
prior to any distribution to Home Bancorp of Elgin, Inc. as the sole
shareholder of the Association. Dividends cannot be paid from retained
earnings allocated to the liquidation account.
Prior to the stock conversion, the Company had not issued any stock, had
no assets or liabilities, and had not engaged in any business activities
other than of an organizational nature. Accordingly, operating
activities prior to September 26, 1996 reflect the operations of the
Association only.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Home
Bancorp of Elgin, Inc. and its wholly owned subsidiary, Home Federal
Savings and Loan Association of Elgin. All significant intercompany
balances have been eliminated in consolidation.
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.
NEW ACCOUNTING STANDARDS
Statement of Financial Accounting Standard No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of," (Statement 121) effective for fiscal years ending after December
15, 1995, provides separate guidelines for establishing carrying values
of long-lived assets and certain identifiable intangible assets based on
intent to either hold and use an asset or dispose of an asset. Statement
121 had no material effect on the Company's financial condition or
results of operations.
(Continued)
25
<PAGE>
HOME BANCORP OF ELGIN, INC.
Notes to Consolidated Financial Statements
================================================================================
Statement of Financial Accounting Standard No. 123 "Accounting for Stock
Based Compensation," (Statement 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. The Company
expects to account for its stock-based compensation arrangements as
prescribed in APB 25 upon the approval of the stock option plan and the
Recognition and Retention Program by the stockholders.
Statement of Financial Accounting Standard No. 125, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities," (Statement 125) requires an entity to recognize the
financial and servicing assets it controls and the liabilities it has
incurred and to derecognize financial assets when control has been
surrendered in accordance with the criteria provided in the Statement.
The Company will apply the new rules prospectively to transactions
beginning in the first quarter of 1997. Based on current circumstances,
the Company believes the application of the new rules will not have a
material impact on the financial statements.
INVESTMENT SECURITIES
Investment securities which the Company 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 stockholders' equity, net of related tax effects.
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. Interest
income is accrued as earned based upon the principal balance
outstanding.
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 Company'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 Company's allowance. Such agencies may require the Company 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 or 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)
26
<PAGE>
HOME BANCORP OF ELGIN, INC.
Notes to Consolidated Financial Statements
================================================================================
The Company 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 in 1996, 1995 and 1994. Gross unrealized
gains on mortgage-backed securities were $494 and $6,293 at December 31,
1996 and 1995, respectively.
EMPLOYEE STOCK OWNERSHIP PLAN (ESOP)
Compensation expense under the ESOP is equal to the fair value of common
shares released or committed to be released annually to participants in
the ESOP. Common stock purchased by the ESOP and not committed to be
released to participants is included in the consolidated balance sheet
at cost as a reduction of stockholders' equity.
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
Under the asset and liability method, 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.
EARNINGS PER SHARE
Earnings per share of common stock for the year ended December 31, 1996
has been determined by dividing net income for the year by 6,448,655,
the weighted average number of primary shares of common stock and common
stock equivalents outstanding, determined as if the Company's initial
public offering took place on January 1, 1996. In this computation, net
income was not adjusted for the additional income which could have been
earned had the net proceeds from the offering been available for
investment as of January 1, 1996. ESOP shares are only considered
outstanding for earnings per share calculations when they are committed
to be released. Earnings per share information for the prior years
cannot be computed because the Company did not issue stock until
September 26, 1996.
(Continued)
27
<PAGE>
HOME BANCORP OF ELGIN, INC.
Notes to Consolidated Financial Statements
================================================================================
CASH AND CASH EQUIVALENTS
For purposes of reporting cash flows, cash and cash equivalents include
cash and due from banks and interest-earning deposits.
(2) INVESTMENT SECURITIES HELD TO MATURITY
The amortized cost and estimated fair value of investment securities
held to maturity are summarized as follows:
<TABLE>
<CAPTION>
===========================================================================================================================
Gross Gross Estimated
Amortized unrealized unrealized fair
cost gains losses value
- ---------------------------------------------------------------------------------------------------------------------------
1996 -
United States Government and
<S> <C> <C> <C> <C>
agency obligations $ 53,785,506 11,564 - 53,797,070
- ---------------------------------------------------------------------------------------------------------------------------
1995 -
United States Government and
agency obligations $ 5,947,500 82,500 - 6,030,000
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
The amortized cost and estimated fair value of investment securities
held to maturity at December 31, 1996 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>
===========================================================================================================================
Estimated
Amortized fair
cost value
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Due in one year or less $ 53,785,506 53,797,070
===========================================================================================================================
</TABLE>
There were no sales of investment securities held to maturity in 1996,
1995 or 1994.
(Continued)
28
<PAGE>
HOME BANCORP OF ELGIN, INC.
Notes to Consolidated Financial Statements
<TABLE>
<CAPTION>
=============================================================================================================================
(3) LOANS RECEIVABLE
A comparative summary of loans receivable follows:
=============================================================================================================================
1996 1995
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Mortgage loans:
One to four-family $ 259,784,613 265,116,190
Multi-family 2,628,060 3,105,626
Construction and land 750,011 456,295
Commercial 815,027 890,568
- ---------------------------------------------------------------------------------------------------------------------------
Total mortgage loans 263,977,711 269,568,679
- ---------------------------------------------------------------------------------------------------------------------------
Other loans:
Passbook savings 573,450 627,449
Consumer installment loans 87,790 91,634
- ---------------------------------------------------------------------------------------------------------------------------
Total other loans 661,240 719,083
- ---------------------------------------------------------------------------------------------------------------------------
Gross loans receivable 264,638,951 270,287,762
Less:
Loans in process (871,918) (418,468)
Deferred loan fees (1,516,347) (1,890,134)
Allowance for loan losses (944,799) (825,711)
- ---------------------------------------------------------------------------------------------------------------------------
$ 261,305,887 267,153,449
===========================================================================================================================
</TABLE>
Activity in the allowance for loan losses is summarized as follows for
the years ended December 31:
<TABLE>
===========================================================================================================================
1996 1995 1994
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance at beginning of year $ 825,711 649,357 409,357
Provision for loan losses 120,000 180,000 240,000
Charge-offs (912) (3,646) -
- ---------------------------------------------------------------------------------------------------------------------------
$ 944,799 825,711 649,357
===========================================================================================================================
</TABLE>
(Continued)
29
<PAGE>
HOME BANCORP OF ELGIN, INC.
Notes to Consolidated Financial Statements
<TABLE>
<CAPTION>
=============================================================================================================================
Loans receivable delinquent three months or more at December 31 are as
follows:
===========================================================================================================================
Percentage of
Number gross loans
of loans Amount receivable
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
1996 14 $ 936,842 0.36
1995 17 915,472 0.34
1994 19 985,856 0.36
===========================================================================================================================
</TABLE>
The Company 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 $68,000, $36,000 and $59,000 for the years ended December
31, 1996, 1995 and 1994, respectively.
No loans were identified as impaired under the provisions of Statement
114 by the Company at December 31, 1996 and 1995.
(4) ACCRUED INTEREST RECEIVABLE
Accrued interest receivable is summarized as follows:
<TABLE>
<CAPTION>
===========================================================================================================================
1996 1995
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Loans receivable $ 1,310,132 1,443,745
Mortgage-backed securities held to maturity 881 1,167
Investment securities held to maturity 435,149 82,500
FHLB of Chicago stock 47,121 53,923
Reserve for uncollected interest (91,946) (97,420)
- ---------------------------------------------------------------------------------------------------------------------------
$ 1,701,337 1,483,915
===========================================================================================================================
</TABLE>
(Continued)
30
<PAGE>
HOME BANCORP OF ELGIN, INC.
Notes to Consolidated Financial Statements
<TABLE>
<CAPTION>
=============================================================================================================================
(5) OFFICE PROPERTIES AND EQUIPMENT
A comparative summary of office properties and equipment follows:
=============================================================================================================================
1996 1995
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Land $ 1,667,515 1,582,241
Office buildings 5,646,704 4,823,178
Office building improvements 1,689,753 1,688,413
Leasehold improvements - 230,656
Parking lot improvements 364,921 246,837
Furniture, fixtures and equipment 5,693,385 5,383,454
Automobiles 152,551 152,551
- ---------------------------------------------------------------------------------------------------------------------------
15,214,829 14,107,330
Less accumulated depreciation and amortization 7,650,586 7,290,042
- ---------------------------------------------------------------------------------------------------------------------------
$ 7,564,243 6,817,288
===========================================================================================================================
</TABLE>
Depreciation and amortization expense was $609,529, $740,415 and
$701,679 for the years ended December 31, 1996, 1995 and 1994,
respectively.
(6) SAVINGS DEPOSITS
Savings deposits are summarized as follows:
<TABLE>
<CAPTION>
=============================================================================================================================
Stated or weighted
average interest rate 1996 1995
--------------------- ---------------------- ------------------------
1996 1995 Amount Percent Amount Percent
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
NOW/Super NOW accounts 2.25% 2.25 $ 42,800,521 17.0% $ 45,001,086 17.3%
Money market accounts 3.22 3.22 16,762,715 6.7 17,684,571 6.8
Passbook accounts 3.00 3.04 62,170,750 24.7 65,260,988 25.1
Non-interest bearing
NOW accounts - - 4,868,813 1.9 5,178,954 2.0
- ---------------------------------------------------------------------------------------------------------------------------
126,602,799 50.3 133,125,599 51.2
- ---------------------------------------------------------------------------------------------------------------------------
Certificate accounts 5.79 5.89 125,192,047 49.7 126,846,197 48.8
- ---------------------------------------------------------------------------------------------------------------------------
4.22% 4.29 $ 251,794,846 100.0% $ 259,971,796 100.0%
===========================================================================================================================
</TABLE>
(Continued)
31
<PAGE>
HOME BANCORP OF ELGIN, INC.
Notes to Consolidated Financial Statements
<TABLE>
<CAPTION>
=============================================================================================================================
1996 1995
---------------------- -----------------------
Amount Percent Amount Percent
- ----------------------------------------------------------------------------------------------------------------------------
Contractual maturity of certificate accounts:
<S> <C> <C> <C> <C>
Under 12 months $ 73,110,643 58.4% $ 73,924,892 58.3%
12 months to 36 months 28,164,669 22.5 25,344,322 20.0
Over 36 months 23,916,735 19.1 27,576,983 21.7
- ---------------------------------------------------------------------------------------------------------------------------
$ 125,192,047 100.0% $ 126,846,197 100.0%
===========================================================================================================================
</TABLE>
The aggregate amount of savings deposits greater than $100,000 was
approximately $21,284,000 and $17,068,000 at December 31, 1996 and 1995,
respectively.
In December 1994, the Company 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 Company recorded
gains on the sale of branches of approximately $1,683,000.
Interest expense on savings deposits is summarized as follows:
<TABLE>
<CAPTION>
===========================================================================================================================
1996 1995 1994
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
NOW/Super NOW accounts $ 905,686 979,694 1,066,214
Money market accounts 556,368 565,157 766,400
Passbook accounts 2,016,972 2,137,021 2,626,526
Certificate accounts 7,364,821 7,091,556 5,985,319
- ---------------------------------------------------------------------------------------------------------------------------
$ 10,843,847 10,773,428 10,444,459
- ---------------------------------------------------------------------------------------------------------------------------
</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 Company 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. There
were no borrowed funds at December 31, 1996.
(Continued)
32
<PAGE>
HOME BANCORP OF ELGIN, INC.
Notes to Consolidated Financial Statements
================================================================================
(8) REGULATORY MATTERS
The Association is subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet minimum
capital requirements can initiate certain mandatory and possibly
additional discretionary actions by regulators that, if undertaken,
could have a direct material effect on the Company's financial
statements. Under capital adequacy guidelines and the regulatory
framework for prompt corrective action, the Association must meet
specific capital guidelines that involve quantitative measures of the
entity's assets, liabilities, and certain off-balance sheet items as
calculated under regulatory accounting practices. The Association's
capital amounts and classification are also subject to qualitative
judgments by the regulators about components, risk weightings, and other
factors.
Quantitative measures established by regulation to ensure capital
adequacy require the Association to maintain minimum amounts and ratios
(set forth in the table below) of total and Tier 1 capital (as defined
in the regulations) to risk-weighted assets (as defined), and of Tier 1
capital (as defined) to average assets (as defined) and of tangible
capital (as defined) to average assets (as defined). As of December 31,
1996, the Association met capital ratios required to be categorized as
well capitalized under the regulatory framework. There are no conditions
or events since year end that management believes would effect the
Association's category.
The following table summarizes the Company's and the Association's
actual capital and the Association's required capital at December 31,
1996 (dollars in thousands):
<TABLE>
<CAPTION>
============================================================================================================================
To be well
For capital capitalized under
adequacy prompt corrective
Actual purposes action
----------------- --------------- -----------------
Amount Ratio Amount Ratio Amount Ratio
- ---------------------------------------------------------------------------------------------------------------------------
Total capital (to risk weighted assets):
<S> <C> <C> <C> <C> <C> <C>
Consolidated $ 100,826 61.90% $ N/A N/A $ N/A N/A
Home Federal Savings and Loan
Association 66,586 41.09 12,964 8.00 16,205 10.00
- ---------------------------------------------------------------------------------------------------------------------------
Tier 1 capital (to risk weighted assets):
Consolidated 99,881 61.32 N/A N/A N/A N/A
Home Federal Savings and Loan
Association 65,641 40.51 N/A N/A 9,722 6.00
- ---------------------------------------------------------------------------------------------------------------------------
Tier 1 capital (to average assets):
Consolidated 99,881 28.03 N/A N/A N/A N/A
Home Federal Savings and Loan
Association 65,641 20.05 9,824 3.00 16,373 5.00
- ---------------------------------------------------------------------------------------------------------------------------
Tangible capital:
Consolidated 99,881 28.03 N/A N/A N/A N/A
Home Federal Savings and Loan
Association 65,641 20.05 4,912 1.50 N/A N/A
===========================================================================================================================
</TABLE>
(Continued)
33
<PAGE>
HOME BANCORP OF ELGIN, INC.
Notes to Consolidated Financial Statements
<TABLE>
<CAPTION>
=============================================================================================================================
(9) INCOME TAXES
Income tax expense is summarized as follows for the years ended December 31:
===========================================================================================================================
1996 1995 1994
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Current:
Federal $ 264,908 1,131,782 2,137,909
State 33,244 310,130 454,611
- ---------------------------------------------------------------------------------------------------------------------------
298,152 1,441,912 2,592,520
- ---------------------------------------------------------------------------------------------------------------------------
Deferred:
Federal 96,956 138,478 427,152
State 22,058 31,506 97,199
- ---------------------------------------------------------------------------------------------------------------------------
119,014 169,984 524,351
- ---------------------------------------------------------------------------------------------------------------------------
$ 417,166 1,611,896 3,116,871
===========================================================================================================================
</TABLE>
The reasons for the difference between the effective tax rate and the
corporate Federal income tax rate are summarized as follows:
<TABLE>
<CAPTION>
===========================================================================================================================
1996 1995 1994
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Federal income tax rate 34.0% 34.0 34.0
Items affecting Federal income tax rate:
State income taxes, net of Federal income tax benefit 3.4 5.9 4.9
Tax expense on recomputed base year tax reserve - - 2.4
Other, net 2.0 0.6 0.4
- ---------------------------------------------------------------------------------------------------------------------------
Effective income tax rate 39.4% 40.5 41.7
===========================================================================================================================
</TABLE>
(Continued)
34
<PAGE>
HOME BANCORP OF ELGIN, INC.
Notes to Consolidated Financial Statements
<TABLE>
=============================================================================================================================
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities are
presented below.
=============================================================================================================================
1996 1995
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Deferred tax assets:
Deferred loan fees $ 659,771 824,714
General allowance for losses on loans 430,246 383,084
Future benefit state tax expense 65,322 57,822
Pension expense - 44,745
- ---------------------------------------------------------------------------------------------------------------------------
Total gross deferred tax assets 1,155,339 1,310,365
- ---------------------------------------------------------------------------------------------------------------------------
Deferred tax liabilities:
Excess of tax bad debt reserve over base year amount 1,847,791 1,849,031
Dividends received in stock, not recognized for tax purposes 168,959 192,819
Depreciation 175,171 186,081
- ---------------------------------------------------------------------------------------------------------------------------
Total gross deferred tax liabilities 2,191,921 2,227,931
- ---------------------------------------------------------------------------------------------------------------------------
Net deferred tax liabilities $ 1,036,582 917,566
===========================================================================================================================
</TABLE>
No valuation allowance for deferred tax assets at December 31, 1996 and
1995 has been recorded, as the Company believes it is more likely than
not that the deferred tax assets will be realized in the future.
Retained earnings at December 31, 1996 and 1995 include $4,798,000 for
which no provision for Federal income tax has been made. These amounts
represent allocations of income to bad debt deductions for tax purposes
only. Reduction of amounts so allocated for purposes other than tax bad
debt losses will create income for tax purposes only, which will be
subject to the then current corporate income tax rate.
(10) OFFICER, DIRECTOR AND EMPLOYEE BENEFIT PLANS
EMPLOYEE STOCK OWNERSHIP PLAN (ESOP)
In conjunction with the Association's conversion, the Association formed
an ESOP. The ESOP covers substantially all employees that are age 21 or
over and with at least 1,000 hours of service. The ESOP borrowed
$5,607,400 from the Company and purchased 560,740 common shares issued
in the conversion. The Association has committed to make discretionary
contributions to the ESOP sufficient to service the requirements of the
loan over a period of ten years. During the year ended December 31,
1996, 14,018 shares were allocated. ESOP expense recognized for the year
ended December 31, 1996 was $189,000.
(Continued)
35
<PAGE>
HOME BANCORP OF ELGIN, INC.
Notes to Consolidated Financial Statements
================================================================================
PENSION PLAN
On June 6, 1996, the Board of Directors of the Association terminated
it's noncontributory pension plan effective August 31, 1996. Plan
benefits ceased to accrue on June 30, 1996. Upon termination, all
benefits became 100% vested, and all persons entitled to benefits were
eligible to request an immediate lump-sum settlement of the benefit
entitlement. The Association recorded a pension curtailment expense of
$837,000 in 1996 in conjunction with the termination of the pension
plan. The pension plan was liquidated in January, 1997.
The Association's pension plan financial data at December 31, 1996 and
1995 is shown below:
FUNDED STATUS
<TABLE>
===========================================================================================================================
1996 1995
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Actuarial present value of benefit obligations:
Accumulated benefit obligation, including
vested benefits of $2,891,088 and $1,193,042
at 1996 and 1995, respectively $ 2,891,088 1,244,941
- ---------------------------------------------------------------------------------------------------------------------------
Projected benefit obligation 2,891,088 2,308,703
Plan assets at fair value 1,420,829 1,464,018
- ---------------------------------------------------------------------------------------------------------------------------
Projected benefit obligation greater than plan assets 1,470,259 844,685
Unrecognized net loss from past experience different
from that assumed and effects of changes in assumptions (288,678) (562,635)
Unrecognized net asset at January 1, 1987 being recognized
over 14 years 47,181 58,965
Unrecognized prior service cost - (75,935)
- ---------------------------------------------------------------------------------------------------------------------------
Accrued pension cost before additional minimum liability 1,228,762 265,080
Additional minimum liability 241,497 -
- ---------------------------------------------------------------------------------------------------------------------------
Accrued pension cost after additional minimum liability $ 1,470,259 265,080
===========================================================================================================================
</TABLE>
NET PERIODIC PENSION COST
<TABLE>
<CAPTION>
===========================================================================================================================
1996 1995 1994
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Service cost $ 81,946 114,166 202,076
Interest cost on projected benefit obligation 139,956 129,277 149,784
Actual return on plan assets (96,484) (88,394) (223,275)
Net amortization and deferral (17,399) (15,921) 190,295
- ---------------------------------------------------------------------------------------------------------------------------
Net periodic pension cost $ 108,019 139,128 318,880
============================================================================================================================
</TABLE>
(Continued)
36
<PAGE>
HOME BANCORP OF ELGIN, INC.
Notes to Consolidated Financial Statements
================================================================================
The rates used in the actuarial valuations are as follows:
<TABLE>
<CAPTION>
===========================================================================================================================
1996 1995 1994
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Discount rate 4.75% 7.25 8.75
Long-term rate of return 8.00 8.00 8.00
Salary progression - 6.00 6.00
===========================================================================================================================
</TABLE>
(11) COMMITMENTS AND CONTINGENCIES
At December 31, 1996, the Company was obligated under operating leases
on property used for branch operations and for certain equipment. Rental
expense under these leases for 1996, 1995 and 1994 was $62,000, $75,000
and $144,000, respectively. Future required minimum annual rental
payments under noncancelable lease agreements are as follows:
<TABLE>
<CAPTION>
===========================================================================================================================
Year ended
December 31, Amount
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C>
1997 $ 28,000
1998 27,000
1999 27,000
2000 27,000
2001 27,000
- ---------------------------------------------------------------------------------------------------------------------------
$ 136,000
===========================================================================================================================
</TABLE>
The Company 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 any
litigation should not have a material effect on the financial statements
of the Company.
(12) CONCENTRATIONS OF CREDIT RISK AND FINANCIAL
INSTRUMENTS WITH OFF-BALANCE SHEET RISK
The Company 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 Company plans to
fund within the normal commitment period of 60 to 180 days.
Substantially all of the Company's mortgage loans are secured by
single-family homes in the northwestern suburban area of Chicago. The
Company evaluated each customer's creditworthiness on a loan-by-loan
basis thus the Company adequately controls its credit risk on these
commitments, as it does for loans recorded on the balance sheet. At
December 31, 1996, the Company had commitments to originate fixed and
variable rate mortgage loans of approximately $2,305,000 and $400,000,
respectively, at rates ranging between 6.75% and 8.50%.
(Continued)
37
<PAGE>
HOME BANCORP OF ELGIN, INC.
Notes to Consolidated Financial Statements
================================================================================
(13) DIVIDEND RESTRICTIONS
The OTS imposes limitations upon all capital distributions by savings
institutions, including cash dividends. An institution that exceeds all
fully phased-in capital requirements before and after a proposed capital
distribution (Tier 1 Association) and has not been advised by the OTS
that it is in need of more than normal supervision, could, after prior
notice but without the approval of the OTS, make capital distributions
during a calendar year up to the higher of (i) 100% of its net income 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 (ii) 75% of its net income over the most recent four quarter period.
Any additional capital distributions would require prior regulatory
approval.
(14) 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 Company's financial
instruments.
<TABLE>
<CAPTION>
===========================================================================================================================
1996 1995
-------------------------------- --------------------------------
Carrying Estimated Carrying Estimated
amount fair value amount fair value
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Financial assets:
Cash and due from banks $ 5,661,507 5,661,507 10,021,150 10,021,150
Interest-earning deposits 22,341,178 22,341,178 8,588,077 8,588,077
Investment securities
held to maturity 53,785,506 53,797,070 5,947,500 6,030,000
Loans receivable 264,638,951 266,294,948 270,287,762 272,785,658
Mortgage-backed securities
held to maturity 142,028 142,522 186,536 192,829
Accrued interest receivable 1,701,337 1,701,337 1,483,915 1,483,915
Federal Home Loan Bank
of Chicago stock 2,678,000 2,678,000 3,056,200 3,056,200
- ---------------------------------------------------------------------------------------------------------------------------
Total financial assets $ 350,948,507 352,616,562 299,571,140 302,157,829
===========================================================================================================================
Financial liabilities:
Nonmaturing savings deposits 126,602,799 126,602,799 133,125,599 133,125,599
Savings deposits with
stated maturities 125,192,047 126,276,699 126,846,197 128,326,571
Borrowed funds - - 4,000,000 4,000,000
Accrued interest payable 118,578 118,578 160,262 160,262
- ---------------------------------------------------------------------------------------------------------------------------
Total financial liabilities $ 251,913,424 252,998,076 264,132,058 265,612,432
===========================================================================================================================
</TABLE>
(Continued)
38
<PAGE>
HOME BANCORP OF ELGIN, INC.
Notes to Consolidated 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 December 31, 1996 and 1995. The fair
value of certificates of deposit is based on the discounted value of
contractual cash flows. The fair value estimates do not include the
benefit that results from the low-cost funding provided by the deposit
liabilities compared to the cost of borrowing funds in the market.
BORROWED FUNDS
The fair value of advances from the Federal Home Loan Bank of Chicago is
equal to the amount payable on demand as of December 31, 1995 due to the
variable interest rate on the debt.
ACCRUED INTEREST PAYABLE
The carrying amount of accrued interest payable approximates its fair
value due to the relatively short period of time between accrual and
expected realization.
(Continued)
39
<PAGE>
HOME BANCORP OF ELGIN, INC.
Notes to Consolidated Financial Statements
================================================================================
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
Company'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.
(15) CONDENSED PARENT COMPANY ONLY FINANCIAL INFORMATION
The following condensed statement of financial condition as of December
31, 1996 and statement of earnings and cash flows for the period from
September 26, 1996 (date of commencement of operations) to December 31,
1996 for Home Bancorp of Elgin, Inc. should be read in conjunction with
the consolidated financial statements and the notes thereto.
<TABLE>
STATEMENT OF FINANCIAL CONDITION
<CAPTION>
===========================================================================================================================
December 31, 1996
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C>
Assets:
Cash and cash equivalents $ 4,155,239
Investment securities held to maturity 24,776,445
Equity investment in the Association 65,592,033
Loan receivable from Association 5,467,215
Other assets 1,993
- ---------------------------------------------------------------------------------------------------------------------------
$ 99,992,925
===========================================================================================================================
Liabilities:
Other liabilities 161,142
- ---------------------------------------------------------------------------------------------------------------------------
Stockholders' equity:
Common stock 70,093
Additional paid-in capital 67,904,289
Retained earnings 37,324,616
Unearned ESOP compensation (5,467,215)
- ---------------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 99,831,783
- ---------------------------------------------------------------------------------------------------------------------------
$ 99,992,925
===========================================================================================================================
</TABLE>
(Continued)
40
<PAGE>
HOME BANCORP OF ELGIN, INC.
Notes to Consolidated Financial Statements
<TABLE>
===========================================================================================================================
STATEMENT OF EARNINGS
<CAPTION>
===========================================================================================================================
Period from
September 26, 1996 to
December 31, 1996
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C>
Equity in undistributed earnings of the Association $ 494,550
Interest income 511,270
Noninterest expense (98,549)
- ---------------------------------------------------------------------------------------------------------------------------
Income before income taxes 907,271
Income tax expense 160,162
- ---------------------------------------------------------------------------------------------------------------------------
Net income $ 747,109
===========================================================================================================================
</TABLE>
<TABLE>
STATEMENT OF CASH FLOWS
<CAPTION>
===========================================================================================================================
Period from
September 26, 1996 to
December 31, 1996
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C>
Operating activities:
Net income $ 747,109
Equity in undistributed earnings of the Association (494,550)
Accretion of discounts (237,526)
Increase in other assets (1,993)
Increase in other liabilities 161,142
- ---------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 174,182
- ---------------------------------------------------------------------------------------------------------------------------
Investing activities:
Purchase of capital stock of the Association (28,379,791)
Origination of loan receivable (5,607,400)
Payments on loan receivable 140,185
Purchase of investment securities held to maturity (24,538,919)
- ---------------------------------------------------------------------------------------------------------------------------
Net cash provided by investing activities (58,385,925)
- ---------------------------------------------------------------------------------------------------------------------------
Financing activities:
Net proceeds from sale of common stock 62,366,982
- ---------------------------------------------------------------------------------------------------------------------------
Net increase in cash and cash equivalents 4,155,239
Cash and cash equivalents at beginning of period -
- ---------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 4,155,239
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
(Continued)
41
<PAGE>
HOME BANCORP OF ELGIN, INC.
Notes to Consolidated Financial Statements
<TABLE>
===========================================================================================================================
(16) QUARTERLY RESULTS OF OPERATIONS
The following table sets forth certain unaudited income and expense and
per share data on a quarterly basis for the three month periods
indicated:
<CAPTION>
============================================================================================================================
YEAR ENDED DECEMBER 31, 1996 YEAR ENDED DECEMBER 31, 1995
--------------------------------------------------------------------------------
1st qtr. 2nd qtr. 3rd qtr. 4th qtr. 1st qtr. 2nd qtr. 3rd qtr. 4th qtr.
- ----------------------------------------------------------------------------------------------------------------------------
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest income $ 5,629 5,578 5,655 6,197 5,748 5,793 5,730 5,654
Interest expense 2,773 2,713 2,773 2,622 2,548 2,701 2,790 2,811
- --------------------------------------------------------------------------------------------------------------------------
Net interest income before
provision for loan losses 2,856 2,865 2,882 3,575 3,200 3,092 2,940 2,843
- --------------------------------------------------------------------------------------------------------------------------
Provision for loan losses 30 30 30 30 45 45 45 45
Net interest income after
provision for loan losses 2,826 2,835 2,852 3,545 3,155 3,047 2,895 2,798
- --------------------------------------------------------------------------------------------------------------------------
Other income 319 308 305 289 269 273 297 311
Noninterest expense (1) 2,303 2,323 4,123 2,635 2,288 2,245 2,243 2,293
Curtailment of pension plan - 837 - - - - - -
- --------------------------------------------------------------------------------------------------------------------------
Income before income tax
expense (benefit) 842 (17) (966) 1,199 1,136 1,075 949 816
Income tax expense
(benefit) 330 (7) (375) 468 441 457 398 316
- --------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 512 (10) (591) 731 695 618 551 500
==========================================================================================================================
Earnings (loss) per
share (2)(3) $ 0.08 - (0.09) 0.11 N/A N/A N/A N/A
==========================================================================================================================
Cash dividends declared
per share $ - - - - - - - -
==========================================================================================================================
</TABLE>
(1) Third quarter noninterest expense for 1996 includes a one-time special
assessment charge resulting from legislation passed on September 30,
1996, regarding the Savings Association Insurance Fund (SAIF). To cover
the special assessment called for by the legislation, the Company
recorded a pre-tax charge of $1.8 million.
(2) For the quarters ended March 31, 1996 and June 30, 1996, earnings per
share were computed as if the Company's initial public offering (which
occurred on September 26, 1996) had taken place on January 1, 1996. In
this computation, net income was not adjusted for the additional income
which could have been earned had the net proceeds from the offering been
available for investment as of January 1, 1996.
(3) Earnings per share information for 1995 cannot be computed because the
Company did not issue stock until September 26, 1996.
42
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
This schedule contains summary financial information extracted from the
consolidated balance sheets and the statements of income of Home Bancorp of
Elgin, Inc. and Subsidiary and is qualified in its entirety by reference to such
financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 5,661,507
<INT-BEARING-DEPOSITS> 22,341,178
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 0
<INVESTMENTS-CARRYING> 53,927,534
<INVESTMENTS-MARKET> 53,939,592
<LOANS> 264,638,951
<ALLOWANCE> 944,799
<TOTAL-ASSETS> 356,334,988
<DEPOSITS> 251,794,846
<SHORT-TERM> 0
<LIABILITIES-OTHER> 4,659,293
<LONG-TERM> 0
0
0
<COMMON> 70,093
<OTHER-SE> 99,810,756
<TOTAL-LIABILITIES-AND-EQUITY> 356,334,988
<INTEREST-LOAN> 20,991,844
<INTEREST-INVEST> 2,067,614
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 23,059,458
<INTEREST-DEPOSIT> 10,843,847
<INTEREST-EXPENSE> 10,881,108
<INTEREST-INCOME-NET> 12,178,350
<LOAN-LOSSES> 120,000
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 12,220,676
<INCOME-PRETAX> 1,058,786
<INCOME-PRE-EXTRAORDINARY> 641,620
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 641,620
<EPS-PRIMARY> .10
<EPS-DILUTED> .10
<YIELD-ACTUAL> 4.02
<LOANS-NON> 936,842
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 433,847
<ALLOWANCE-OPEN> 825,711
<CHARGE-OFFS> 912
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 944,799
<ALLOWANCE-DOMESTIC> 944,799
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
