<PAGE>
PROSPECTUS
FILED UNDER RULE 424(b)(3)
REGISTRATION NO. 333-12083
[LOGO]
(PROPOSED HOLDING COMPANY FOR FAIRFIELD SAVINGS BANK, F.S.B.)
2,185,000 SHARES OF COMMON STOCK
$10.00 PER SHARE
Big Foot Financial Corp. (the "Company"), an Illinois corporation, is
offering up to 2,185,000 shares of its common stock, par value of $.01 per share
(the "Common Stock"), in connection with the conversion of Fairfield Savings
Bank, F.S.B. (the "Bank") from a federally chartered mutual savings bank to a
federally chartered stock savings bank pursuant to the Bank's amended plan of
conversion (the "Plan" or "Plan of Conversion"). In certain circumstances, the
Company may increase the amount of Common Stock offered hereby to 2,512,750
shares. See footnote 4 to the table below. The simultaneous conversion of the
Bank to stock form, the issuance of the Bank's stock to the Company and the
offer and sale of the Common Stock by the Company are referred to herein as the
"Conversion." Consummation of the Conversion is subject to, among other things,
(i) the approval of the Plan of Conversion by members of the Bank and (ii) the
receipt of subscription orders for an aggregate amount equal to at least the
minimum of the Estimated Price Range (as herein defined). See "The
Conversion." (CONTINUED ON FOLLOWING PAGE)
FOR INFORMATION ON HOW TO SUBSCRIBE FOR THE COMMON STOCK,
CALL THE STOCK INFORMATION CENTER AT (847) 821-7444.
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FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED BY EACH
PROSPECTIVE INVESTOR,
SEE "RISK FACTORS" BEGINNING ON PAGE 17 OF THIS PROSPECTUS.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION, THE OFFICE OF THRIFT SUPERVISION OR ANY OTHER FEDERAL
AGENCY OR ANY STATE SECURITIES COMMISSION, NOR HAS SUCH COMMISSION,
OFFICE OR OTHER AGENCY OR ANY STATE SECURITIES COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
ESTIMATED UNDERWRITING
COMMISSIONS AND OTHER
PURCHASE PRICE(1) EXPENSES(2)
<S> <C> <C>
Minimum Per Share $10.00 $0.60
Midpoint Per Share $10.00 $0.54
Maximum Per Share $10.00 $0.49
Total Minimum(1) $16,150,000 $971,000
Total Midpoint(1) $19,000,000 $1,017,000
Total Maximum(1) $21,850,000 $1,063,000
Total Maximum, as adjusted(4) $25,127,500 $1,116,000
<CAPTION>
ESTIMATED NET
PROCEEDS(3)
<S> <C>
Minimum Per Share $9.40
Midpoint Per Share $9.46
Maximum Per Share $9.51
Total Minimum(1) $15,179,000
Total Midpoint(1) $17,983,000
Total Maximum(1) $20,787,000
Total Maximum, as adjusted(4) $24,011,500
</TABLE>
(1) Determined in accordance with an independent appraisal prepared by Capital
Resources Group, Inc. ("Capital Resources"), dated September 6, 1996 and
updated October 23, 1996, which states that the aggregate estimated pro
forma market value of the Common Stock ranged from $16,150,000 to
$21,850,000 with a midpoint of $19,000,000 (the "Valuation Range"). Capital
Resources' independent appraisal is based upon estimates and projections
that are subject to change, and the valuation must not be construed as a
recommendation as to the advisability of purchasing such shares nor that a
purchaser will thereafter be able to sell such shares at prices in the range
of the foregoing valuation. Based on the Valuation Range, the Board of
Directors of the Bank established the estimated price range of $16,150,000
to $21,850,000 (the "Estimated Price Range"), or between 1,615,000 and
2,185,000 shares of Common Stock at the $10.00 price per share (the
"Purchase Price") to be paid for each share of Common Stock subscribed for
or purchased in the offerings. See "The Conversion--Stock Pricing" and
"--Number of Shares to be Issued."
(2) Consists of the estimated costs to the Bank and the Company arising from the
Conversion, including estimated fixed expenses of approximately $750,000 and
marketing fees to be paid to Hovde Securities, Inc. ("Hovde") in connection
with the Subscription and Community Offerings (as defined herein), which
fees are estimated to be $221,000 and $313,000, respectively, at the minimum
and the maximum of the Estimated Price Range. See "The Conversion--
Marketing and Underwriting Arrangements." Such fees may be deemed to be
underwriting fees, and Hovde may be deemed to be an underwriter. See "Pro
Forma Data" for the assumptions used to arrive at these estimates. Actual
fees and expenses may vary from the estimates.
(3) Actual net proceeds may vary substantially from estimated amounts depending
on the number of shares sold in each of the offerings and other factors.
Includes the purchase of shares of Common Stock by the Employee Stock
Ownership Plan of Big Foot Financial Corp. and related trust (the "ESOP"),
funded by a loan which the Company intends to make to the ESOP, which
initially will be deducted from the Company's stockholders' equity. See "Use
of Proceeds" and "Pro Forma Data."
(4) As adjusted to give effect to the sale of up to an additional 15% of the
shares which may be offered at the Purchase Price, without resolicitation of
subscribers or any right of cancellation, due to regulatory considerations,
changes in the market and general financial and economic conditions. See
"Pro Forma Data" and "The Conversion--Stock Pricing." For a discussion of
the distribution and allocation of the additional shares, if any, see "The
Conversion--Subscription Offering and Subscription Rights," "--Community
Offering" and "--Limitations on Common Stock Purchases."
THE SHARES OF COMMON STOCK OFFERED HEREBY ARE NOT SAVINGS ACCOUNTS OR
DEPOSITS AND ARE NOT INSURED OR GUARANTEED BY THE SAVINGS ASSOCIATION
INSURANCE FUND OR THE BANK INSURANCE FUND OF THE FEDERAL DEPOSIT
INSURANCE CORPORATION, OR BY ANY OTHER GOVERNMENT AGENCY.
------------------------
HOVDE SECURITIES, INC.
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The date of this Prospectus is November 8, 1996.
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(CONTINUED FROM PREVIOUS PAGE)
NON-TRANSFERABLE RIGHTS TO SUBSCRIBE FOR THE COMMON STOCK HAVE BEEN GRANTED,
IN ORDER OF PRIORITY, TO EACH OF THE BANK'S ELIGIBLE ACCOUNT HOLDERS, TO THE
BANK'S TAX-QUALIFIED STOCK EMPLOYEE BENEFIT PLANS (THE "EMPLOYEE PLANS"), TO THE
BANK'S SUPPLEMENTAL ELIGIBLE ACCOUNT HOLDERS, TO THE BANK'S OTHER MEMBERS AND TO
BANK EMPLOYEES (EACH AS DEFINED HEREIN) IN A SUBSCRIPTION OFFERING (THE
"SUBSCRIPTION OFFERING"). SUBSCRIPTION RIGHTS ARE NONTRANSFERABLE. PERSONS FOUND
TO BE TRANSFERRING OR ATTEMPTING TO TRANSFER SUBSCRIPTION RIGHTS WILL BE SUBJECT
TO THE FORFEITURE OF SUCH RIGHTS AND POSSIBLE FURTHER SANCTIONS AND PENALTIES
IMPOSED BY THE OFFICE OF THRIFT SUPERVISION (THE "OTS"). Subject to the prior
rights of holders of subscription rights, the Company expects to offer any
shares of Common Stock not subscribed for in the Subscription Offering for sale
in a community offering (the "Community Offering") to certain members of the
general public, with preference given to natural persons residing in Cook and
Lake counties in Illinois, the counties in which the Bank's offices are located.
The Subscription Offering and the Community Offering are referred to, together,
as the "Subscription and Community Offerings." The Company and the Bank have the
option to reserve up to 25% of the Common Stock offered in the Community
Offering for purchase by certain institutional investors, although no such
institutional investors have been selected. It is anticipated that any shares
not subscribed for in the Subscription and Community Offerings will be offered
to members of the general public in a syndicated community offering (the
"Syndicated Community Offering") (the Subscription and Community Offerings and
the Syndicated Community Offering are referred to, collectively, as the
"Offerings"). If shares of Common Stock are offered by the Company in a
Syndicated Community Offering, the Company will incur additional underwriting
commissions, in accordance with agreements to be entered into at the time of
such offering. See "The Conversion--Syndicated Community Offering."
The ESOP, which is an Employee Plan, intends to subscribe for 8% of the
total number of shares of Common Stock issued in the Conversion. The
subscription of the Employee Plans, including the ESOP, will be afforded a
second priority behind the subscription rights of Eligible Account Holders,
except that, in the event of an increase in the amount of Common Stock to be
issued as a result of an increase of up to 15% in the maximum of the Estimated
Price Range, the subscription of the Employee Plans, including the ESOP, will be
afforded a first priority with respect to such increase in shares to the extent
necessary to fill the subscription of the Employee Plans. Except for the
subscription of the Employee Plans, including the ESOP, no other person's or
entity's subscription will have a priority as a result of such an increase. It
is anticipated that the subscription of the Employee Plans, including the ESOP,
will be filled in the Subscription and Community Offerings. Shares purchased by
the ESOP in the Subscription and Community Offerings are anticipated to be
funded by a loan from the Company to be repaid over a period of up to 10 years
at an interest rate of 8%. Although contributions to the ESOP will be
discretionary, the Company and the Bank intend to make annual contributions to
the ESOP in an aggregate amount at least equal to the principal and interest
requirement on the debt. The ESOP may purchase additional shares of Common Stock
in the future, in the open market or otherwise, and may do so either on a
leveraged basis with borrowed funds or with cash dividends, periodic employer
contributions or other cash flow.
No Eligible Account Holder, Supplemental Eligible Account Holder, Other
Member or Bank Employee may, in their capacity as such, subscribe in the
Subscription Offering for more than $150,000 of the Common Stock offered in the
Conversion; no person, together with associates of and persons acting in concert
with such person, may purchase in the Community Offering and the Syndicated
Community Offering more than $150,000 of the Common Stock offered in the
Conversion; and, except for the Employee Plans, no person, together with
associates of and persons acting in concert with such person, may purchase in
the aggregate more than the overall maximum purchase limitation of 1.0% of the
total number of shares of Common Stock offered in the Conversion; PROVIDED,
HOWEVER, that the overall maximum purchase limitation may be increased and the
amount that may be subscribed for may be increased in the sole discretion of the
Bank or the Company without further approval of the Bank's members. Prior to the
consummation of the Conversion, if such amount is increased, subscribers for the
maximum amount will be, and certain other large subscribers in the sole
discretion of the Bank may be, given the opportunity to increase their
subscriptions up to the then applicable limit. The minimum purchase is 25
shares. THE COMPANY AND THE BANK RESERVE THE RIGHT, IN THEIR ABSOLUTE
DISCRETION, TO ACCEPT OR REJECT, IN WHOLE OR IN PART, ANY OR ALL SUBSCRIPTIONS
IN THE COMMUNITY OFFERING AND THE SYNDICATED COMMUNITY OFFERING, EITHER AT THE
TIME OF RECEIPT OF AN ORDER OR AS SOON AS PRACTICABLE FOLLOWING THE TERMINATION
OF SUCH OFFERINGS. If an order is rejected, the funds submitted with such order
will be returned
2
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(CONTINUED FROM PREVIOUS PAGE)
promptly with interest. If the Company rejects a subscription in part, the
subscriber will not have the right to cancel the remainder of his or her
subscription. See "The Conversion--Subscription Offering and Subscription
Rights," "--Community Offering" and "--Limitations on Common Stock Purchases."
The Bank has engaged Hovde to consult with and advise the Company and the
Bank in the Offerings, and Hovde has agreed to use its best efforts to assist
the Company with the solicitation of subscriptions and purchase orders for
shares of Common Stock in the Offerings. Hovde is not obligated to take or
purchase any shares of Common Stock in the Offerings. The Company and the Bank
have agreed to indemnify Hovde against certain liabilities arising under the
Securities Act of 1933, as amended. See "The Conversion--Marketing and
Underwriting Arrangements."
THE SUBSCRIPTION OFFERING WILL TERMINATE AT 12:00 NOON, CENTRAL TIME, ON
DECEMBER 12, 1996 (THE "EXPIRATION DATE") UNLESS EXTENDED BY THE BANK AND THE
COMPANY, WITH APPROVAL OF THE OTS, IF NECESSARY. Subscriptions paid by cash,
check, bank draft or money order will be placed in a segregated account at the
Bank and will earn interest at the Bank's rate of interest on passbook accounts
from the date of receipt until completion or termination of the Conversion.
Payments authorized by withdrawal from deposit accounts at the Bank will
continue to earn interest at the contractual rate until the Conversion is
completed or terminated; these funds otherwise will be unavailable to the
depositor until such time. Upon completion of the Conversion, funds withdrawn
from depositors' accounts for stock purchases will no longer be insured by the
Federal Deposit Insurance Corporation (the "FDIC"). ORDERS SUBMITTED ARE
IRREVOCABLE UNTIL THE COMPLETION OF THE CONVERSION; PROVIDED, that, if the
Conversion is not completed within 45 days after the close of the Subscription
Offering, unless such period has been extended with the consent of the OTS, if
necessary, all subscribers will have their funds returned promptly with
interest, and all withdrawal authorizations will be cancelled. If an extension
of time has been granted, all subscribers will be notified of such extension, of
any rights to confirm their subscriptions or to modify or rescind their
subscriptions and have their funds returned promptly with interest and of the
time period within which the subscribers must notify the Bank of their intention
to confirm, modify or rescind their subscriptions. Such extensions may not go
beyond December 17, 1998. A resolicitation of subscribers will also be made if
the pro forma market value of the Common Stock is either more than 15% above the
maximum of the Estimated Price Range or less than the minimum of the Estimated
Price Range. If an affirmative response to any resolicitation is not received by
the Bank and the Company from a subscriber, such subscriber's order will be
rescinded, and all funds will be returned promptly with interest. See "The
Conversion-- Subscription Offering and Subscription Rights" and "--Procedure for
Purchasing Shares in Subscription and Community Offerings."
The Company has received conditional approval from The Nasdaq Stock Market,
Inc. to have its Common Stock quoted on the Nasdaq National Market of The Nasdaq
Stock Market, Inc. (the "Nasdaq National Market") under the symbol "BFFC" upon
completion of the Conversion. One of the requirements for continued quotation of
the Common Stock on the Nasdaq National Market is that there be at least two
market makers for the Common Stock. The Company will seek to encourage and
assist at least two market makers to make a market in its Common Stock. Hovde
will assist the Company in such efforts but will not be a market maker in the
Common Stock. Prior to this offering there has not been a public market for the
Common Stock, and there can be no assurance that an active and liquid trading
market for the Common Stock will develop or that the Common Stock will trade at
or above the Purchase Price. The absence or discontinuance of a market may have
an adverse impact on both the price and liquidity of the Common Stock. See "Risk
Factors--Absence of Market for Common Stock and Performance of Conversion
Offerings."
At a meeting of shareholders to be held no earlier than six months following
the completion of the conversion (which meeting is anticipated to be held during
July, 1997), the Company may seek shareholder approval of the Stock Option and
Incentive Plan for Employees and the Stock Option Plan for Outside Directors
(the "Stock Option Plans") and certain other stock-based compensation plans (the
"Stock Programs") for implementation prior to the first anniversary of the
Conversion. Assuming such implementation, an amount of shares of Common Stock
equal to 10% of the Common Stock issued in the Conversion is expected be to be
reserved for issuance under the Stock Option Plans, and the Bank expects to
contribute funds to the Stock Programs to enable their related trusts to
acquire, in the aggregate, up to 4% (3% unless OTS approval is obtained) of the
shares of Common Stock issued in the Conversion. See "Management of the
Bank--Benefits."
3
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[MAP]
[MAP SHOWING OFFICE LOCATIONS OF
FAIRFIELD SAVINGS BANK, F.S.B. AND COUNTY LINES]
4
<PAGE>
SUMMARY
THIS SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED INFORMATION
AND FINANCIAL STATEMENTS OF THE BANK AND NOTES THERETO INCLUDED ELSEWHERE IN
THIS PROSPECTUS.
BIG FOOT FINANCIAL CORP.
The Company is an Illinois corporation recently organized by the Bank for
the purpose of acquiring all of the capital stock of the Bank to be issued in
the Conversion. Immediately following the Conversion, the only significant
assets of the Company will be the capital stock of the Bank, the loan that the
Company intends to make to the ESOP and the net conversion proceeds retained by
the Company. The Company will purchase all of the capital stock of the Bank to
be issued upon the Conversion in exchange for 50% of the net proceeds from the
Offerings with the remaining net proceeds to be retained by the Company. Funds
retained by the Company will be used for general business activities, including
the loan that the Company intends to make to the ESOP. The net proceeds from the
Offerings are expected to be invested in federal funds, government and federal
agency mortgage-backed securities, other debt securities, high-grade short-term
marketable securities, deposits of or loans to the Bank or a combination
thereof. See "Use of Proceeds." The business of the Company will initially
consist of overseeing its investment in the Bank. See "Business of the Company,"
"Business of the Bank" and "Regulation--Regulation of Savings Association
Holding Companies."
FAIRFIELD SAVINGS BANK, F.S.B.
GENERAL
The Bank was originally founded in 1901 as an Illinois state chartered
mutual savings and loan association. On July 1, 1991, the Bank converted to a
federally chartered savings bank. The Bank is subject to extensive regulation,
supervision and examination by the OTS, its primary regulator, and the FDIC,
which insures its deposits. The Bank is a community-oriented financial
institution providing a variety of financial services to meet the needs of the
communities which it serves. The Bank conducts business from its headquarters in
Long Grove, Illinois and its two branches in Chicago and Norridge, Illinois. The
Bank gathers savings deposits primarily from the communities and neighborhoods
in close proximity to its offices. The Bank's lending area is larger and
includes Cook, DuPage and Lake counties located in Illinois. The majority of the
Bank's mortgage loans are secured by properties located in its lending area. See
"Business of the Bank--Market Area" and "--Competition."
The Bank's principal business consists of gathering savings deposits from
the general public within its market area and investing those savings deposits
primarily in one- to four-family residential mortgage loans, mortgage-backed
securities and obligations of the U.S. Government. To a lesser extent, the Bank
makes multifamily residential loans, commercial real estate loans, land,
construction and development loans, consumer loans (including loans secured by
savings deposits and home improvement loans) and commercial lines of credit.
At July 31, 1996, the Bank had total assets of $194.6 million, of which
$79.1 million was comprised of loans receivable and $102.4 million was comprised
of mortgage-backed securities. At such date, total savings deposits were $137.2
million, borrowings were $39.9 million and retained earnings were $13.6 million.
At that same date, the Bank's tangible, core and total risk-based capital ratios
were 7.35%, 7.35% and 21.59%, respectively, which exceeded all applicable
regulatory capital requirements. Additionally, the Bank's regulatory capital was
in excess of the amount necessary to be "well-capitalized" under the Federal
Deposit Insurance Corporation Improvement Act of 1991 (the "FDICIA"). See
"Regulatory Capital Compliance," "Capitalization," "Pro Forma Data" and
"Regulation--Regulation of Federal Savings Associations." The Bank's savings
deposits are insured up to the maximum allowable amount by the Savings
Association Insurance Fund (the "SAIF") of the FDIC.
5
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The Bank's net income was $226,000, $982,000 and $2.1 million for the fiscal
years ended July 31, 1996, 1995 and 1994, respectively. Each of these years
included certain non-recurring gains and settlements which are not expected to
continue in the future. For the 1994 fiscal year, net income included an
aggregate of $1.2 million ($775,000 net of tax) in gains on sale of investment
securities available-for-sale and gains on sale of real estate held for sale and
development; for the 1995 fiscal year, net income included a $557,000 gain
($385,000 net of tax) on real estate held for sale and development; and for the
1996 fiscal year, net income included $184,000 in income ($121,000 net of tax)
related to settlements of litigation. Legal fees relating to these settlements
also were incurred in 1996. See "Selected Financial and Other Data of the Bank,"
"Risk Factors--Recent Declines in Net Income," "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and "Business of the
Bank."
The Bank is a member of the Federal Home Loan Bank of Chicago (the "FHLB of
Chicago"), which is one of the 12 regional banks which comprise the Federal Home
Loan Bank system.
BUSINESS STRATEGY
HOME LENDING AND ASSET QUALITY. The Bank's strategy has been to maintain
its focus as a traditional consumer-oriented institution serving the markets in
which its offices are located. Historically, the Bank's interest income has been
derived primarily from one- to four-family residential mortgage loans and
mortgage-backed securities. To a lesser extent, the Bank derives interest income
from multifamily residential loans, commercial real estate loans, land,
construction and development loans, consumer loans (including loans secured by
savings deposits, and home improvement loans) and commercial lines of credit.
The Bank has emphasized, and intends to continue to emphasize, the
origination of one- to four-family residential mortgage loans in its lending
area, which is defined generally as Cook, DuPage and Lake counties. At July 31,
1996, one- to four-family residential mortgage loans totaled $76.3 million or
95.6% of gross loans, approximately $72.4 million (or 90.6% of gross loans) of
which provided for fixed rates of interest. The remaining 4.4% of gross loans
consisted of multifamily residential loans, land, construction and development
loans, home equity loans and other loans. For the year ended July 31, 1996, the
Bank originated $19.7 million of mortgage loans. See "Business of the
Bank--Lending Activities." The Bank also invests in mortgage-backed securities.
The Bank's holdings of mortgage-backed securities totaled $102.4 million at July
31, 1996, representing 52.6% of total assets. See "Business of the
Bank--Investment Activities."
The Bank pays particular attention to both the value estimates applied to
the collateral securing loans as well as to the creditworthiness of its
prospective borrowers and employs rigorous underwriting standards to minimize
risk of loss. As a result of this strategy, historically the Bank has had only
minimal loss experience in its lending operations. The Bank's ratio of
non-performing loans to total loans at year end ranged from 0.15% to 5.58%
during the five-year period ended July 31, 1996 and was 0.15% at July 31, 1996.
Non-performing assets to total assets ranged from 0.06% to 2.92% during the
five-year period ended July 31, 1996, and was at 0.06% at July 31, 1996. The
Bank's ratio of allowance for loan losses to non-performing loans ranged from
11.08% to 254.24% over the five years ended July 31, 1996 and was 254.24% at
July 31, 1996. In 1992, at the direction of the Bank's primary federal
regulator, the Bank adversely classified a $4.2 million loan and placed reserves
against it. Subsequently, the Bank reversed such reserves and classification
when it became apparent that the loan would be repaid in full. For the past five
fiscal years, the Bank's ratio of non-performing loans to total loans averaged
0.69% and the ratio of non-performing assets to total assets averaged 0.33%,
without giving effect to the reserves that were initially placed against the
$4.2 million loan but were subsequently reversed. See "Selected Financial and
Other Data of the Bank" and "Business of the Bank--Delinquencies and
Non-Performing Assets."
SAVINGS DEPOSITS AND BORROWED MONEY. The Bank's interest expense consists
of the interest paid on savings deposits and borrowed money. The Bank's savings
deposits are derived principally from its primary market area. The Bank's
strategy has been to maintain a high level of stable savings deposits by
providing
6
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quality service to its customers without significantly increasing its cost of
funds. The Bank's low-cost deposit base, consisting of passbook accounts,
non-interest-bearing demand accounts, NOW accounts and money market demand
accounts, totaled $65.8 million or 48% of total savings deposits and had a
weighted average effective rate of 2.41% at July 31, 1996. For the past three
years, these accounts have consistently accounted for more than 47% of total
savings deposits and had a weighted average effective rate of not more than
2.45% throughout this period. At July 31, 1996, money market demand accounts
totaled $13.0 million or 9.5% of total savings deposits and had a weighted
average effective rate of 3.12%. The Bank has consistently maintained an overall
cost of funds lower than the National Median Cost of Funds Rate as determined by
the OTS. At July 31, 1996, the Bank's cost of deposits was 4.01% and its cost of
funds (including FHLB borrowings) of 4.74% was 13 basis points below the
National Median Cost of Funds Rate. The Bank has not and does not intend to use
brokered deposits as a source of funds. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Liquidity and Capital
Resources" and "Business of the Bank--Sources of Funds."
MARKET AREA
The Bank serves three distinct geographic markets: the Chicago branch at
1601 North Milwaukee Avenue serves the near northwest side of the City of
Chicago, the Norridge branch at 8301 West Lawrence serves Chicago's near
northwestern suburbs and the Long Grove branch at Old McHenry Road and Route 83
serves northern Cook and southern Lake counties. The Bank's customer base may be
categorized by branch location. In the Chicago branch, the customer base is
largely blue collar workers and young white collar technicians and
professionals. The Chicago market is experiencing new construction and a
refurbishing of its existing aged housing stock and is becoming an active
mortgage as well as a savings market. The Norridge branch serves a customer base
split between blue and white collar workers where the market is mature. The
Norridge market has modest prospects for growth; however, it provides the Bank
with a stable source of deposits. The Long Grove office is situated in an
affluent, high-growth, white collar market. This is a dynamic market which
provides the Bank with significant loan demand and potential for growth
opportunities in savings and lending activities. See "Business of the
Bank--Market Area." Substantially all loans originated by the Bank are secured
by real estate located in Cook, DuPage and Lake counties in Illinois.
RECENT LEGISLATION; SAIF ASSESSMENT
On September 30, 1996, Congress enacted legislation to recapitalize the
SAIF. Under this legislation, depository institutions such as the Bank were
assessed a one-time charge at a rate of 65.7 basis points per $100 of
SAIF-assessable deposits held at March 31, 1995. The assessment is payable on
November 27, 1996. The impact on operations, net of related tax effects, will
reduce reported earnings by $617,000 for the quarter ended October 31, 1996.
Management, however, anticipates, although there can be no assurance, that the
Bank will pay substantially lower regular deposit insurance assessments compared
to those paid by the Bank in recent years. See "Risk Factors--Recapitalization
of the SAIF; SAIF Assessments; and Special Assessment," "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and
"Regulation--Regulation of Federal Savings Associations--Insurance of Deposit
Accounts."
THE CONVERSION AND THE SUBSCRIPTION AND COMMUNITY OFFERINGS
On May 21, 1996, the Board of Directors of the Bank adopted the Plan of
Conversion (which was amended as of September 17, 1996) pursuant to which the
Bank is converting from a federally chartered mutual savings bank to a federally
chartered stock savings bank, and all of the outstanding capital stock of the
Bank will be acquired by the Company in exchange for 50% of the net proceeds
from the Offerings. The Conversion and the Offerings are subject to OTS
approval, which was received on October 24, 1996, and approval of the Bank's
members at a special meeting to be held on December 17, 1996. See "The
7
<PAGE>
Conversion--General." The Bank is converting to increase its capital and to
structure itself in a form used by commercial banks and many other business
entities and a growing number of savings institutions. The Conversion will
enhance the Bank's ability to access capital markets, expand its current
operations, acquire other financial institutions or branch offices, provide
affordable home financing opportunities to the communities it serves and
diversify into other financial services to the extent allowable by applicable
law and regulation. The holding company form of organization would provide
additional flexibility to diversify the Bank's business activities through
newly-formed subsidiaries or through acquisitions of or mergers with both mutual
and stock institutions, as well as other companies. Although there are no
current arrangements, understandings or agreements, written or oral, regarding
any such opportunities, the Company will be in a position after the Conversion,
subject to regulatory limitations and the Company's financial position, to take
advantage of any such opportunities that may arise. See "The
Conversion--Purposes of Conversion." The holding company form of organization
also provides certain anti-takeover protections. See "Risk Factors--Certain
Anti-Takeover Provisions."
Common Stock will be offered in the Subscription Offering and, to the extent
shares are available, in the Community Offering. To the extent that shares are
available after the expiration of the Community Offering, such shares may be
offered in the Syndicated Community Offering. See "The Conversion-- Syndicated
Community Offering." Common Stock offered in the Subscription Offering will be
offered in the following order of priority: (1) depositors whose deposits in
qualifying accounts in the Bank totaled $50 or more on December 31, 1994
("Eligible Account Holders"); (2) the Employee Plans, including the ESOP; (3)
depositors whose deposits in qualifying accounts in the Bank totaled $50 or more
on September 30, 1996, other than (i) those depositors who would otherwise
qualify as Eligible Account Holders or (ii) directors or officers of the Bank or
their Associates (as defined herein under "The Conversion--Limitations on Common
Stock Purchases") ("Supplemental Eligible Account Holders"); (4) members of the
Bank, consisting of depositors of the Bank as of October 31, 1996, the voting
record date (the "Voting Record Date") for the special meeting of members to
vote on the Conversion, and borrowers from the Bank as of July 1, 1991 whose
loans continue to be outstanding as of the Voting Record Date, other than those
members who otherwise qualify as Eligible Account Holders or Supplemental
Eligible Account Holders ("Other Members"); and (5) employees and officers of
the Bank, other than those employees and officers who otherwise qualify as
Eligible Account Holders, Supplemental Eligible Account Holders or Other Members
("Bank Employees"). Subscription rights will expire if not exercised by, and the
Subscription Offering will terminate at, 12:00 Noon, Central Time, on the
Expiration Date, unless extended by the Bank and the Company, with approval of
the OTS, if necessary. Subject to the prior rights of holders of subscription
rights, Common Stock not subscribed for in the Subscription Offering will be
subsequently offered in the Community Offering to certain members of the general
public, with preference given to natural persons residing in Cook and Lake
counties, the counties in which the Bank's offices are located. The Company and
the Bank have the option to reserve up to 25% of the Common Stock offered in the
Community Offering for purchase by certain institutional investors, although no
such institutional investors have been selected. The Company and the Bank
reserve the absolute right to reject or accept any orders in the Community
Offering, in whole or in part, either at the time of receipt of an order or as
soon as practicable following the expiration of the Community Offering. The
Community Offering will terminate not later than 45 days after the Expiration
Date. The Bank and the Company have retained Hovde as consultant and advisor in
connection with the Offerings and to assist in soliciting subscriptions and
purchase orders in the Offerings. The Bank and the Company will pay a fee to
Hovde which will be based on the aggregate Purchase Price of the Common Stock
sold in the Offerings. See "The Conversion--Marketing and Underwriting
Arrangements."
In connection with the Conversion, the Company has established, and the Bank
has adopted, the ESOP for eligible employees of the Bank and the Company. The
ESOP intends to subscribe for 8% of the shares of Common Stock issued in the
Conversion. At a meeting of shareholders to be held no earlier than six months
following the completion of the Conversion (which meeting is anticipated to be
held during July, 1997), the Company may seek shareholder approval of the Stock
Option Plans and the Stock
8
<PAGE>
Programs for implementation prior to the first anniversary of the Conversion,
which the Company intends to establish as a method of providing officers,
employees and non-employee directors of the Bank and the Company with a
proprietary interest in the Company in a manner designed to encourage such
persons to remain with the Bank and the Company. For a more detailed discussion
of the Stock Option Plans and Stock Programs and the benefits expected to be
received by officers, employees and directors, see "--Benefits to Management and
Directors," "Risk Factors--Certain Anti-Takeover Provisions--Voting Control of
Officers and Directors" and "Management of the Bank--Benefits."
PROSPECTUS DELIVERY AND PROCEDURE FOR PURCHASING SHARES OF COMMON STOCK
To ensure that each purchaser receives a prospectus at least 48 hours prior
to the respective expiration dates for the Offerings in accordance with Rule
15c2-8 of the Securities Exchange Act of 1934, as amended (the "Exchange Act"),
no prospectus will be mailed any later than five days prior to any such date or
hand delivered any later than two days prior to any such date. Execution of the
stock order form will confirm receipt of delivery in accordance with Rule
15c2-8. Each stock order form distributed will be accompanied by a prospectus
and certification form. The Company and the Bank are not obligated to accept or
process orders which are submitted on facsimiled or copied stock order forms.
Stock order forms unaccompanied by an executed original certification form will
not be accepted. Payment by check, money order, bank draft, cash or debit
authorization to an existing account at the Bank must accompany the stock order
form and certification form. No wire transfers will be accepted. The Bank is
prohibited from lending funds to any person or entity for the purpose of
purchasing shares of Common Stock in the Conversion. See "The
Conversion--Procedure for Purchasing Shares in Subscription and Community
Offerings."
In order to ensure that Eligible Account Holders, Supplemental Eligible
Account Holders and Other Members are properly identified as to their stock
purchase priorities, depositors as of the Eligibility Record Date (December 31,
1994), Supplemental Eligibility Record Date (September 30, 1996) and/or the
Voting Record Date (October 31, 1996) and borrowers as of the Voting Record Date
(whose loans have been outstanding since July 1, 1991) must list all accounts on
the stock order form, giving all names on each account and the account numbers.
Failure to list all such account numbers may result in the inability of the
Company or the Bank to fill all or part of a subscription order. See "The
Conversion--Procedure for Purchasing Shares in Subscription and Community
Offerings."
RESTRICTIONS ON TRANSFER OF SUBSCRIPTION RIGHTS AND SHARES OF COMMON STOCK
Prior to the completion of the Conversion, no person may transfer or enter
into any agreement or understanding to transfer the legal or beneficial
ownership of the subscription rights issued under the Plan or the shares of
Common Stock to be issued upon their exercise. Each person exercising
subscription rights will be required to certify that any purchase of Common
Stock will be solely for the purchaser's own account and that there is no
agreement or understanding regarding the sale or transfer of any shares
purchased as a result of the exercise. The Company and the Bank will pursue any
and all legal and equitable remedies in the event they become aware of the
transfer of subscription rights and will not honor orders known by them to
involve the transfer of such rights. See "The Conversion--Restrictions on
Transfer of Subscription Rights and Shares of Common Stock."
PURCHASE LIMITATIONS
The minimum purchase in the Offerings is 25 shares. The ESOP intends to
subscribe for 8% of the shares of Common Stock issued in the Conversion pursuant
to the subscription rights granted under the Plan. The subscription of the ESOP
will be afforded a second priority behind the subscription rights of Eligible
Account Holders, except that, in the event of an increase in the amount of
Common Stock to be issued as a result of an increase of up to 15% in the maximum
of the Estimated Price Range, the subscriptions of the Employee Plans, including
the ESOP, will be afforded a first priority with respect to such increase in
shares to the extent necessary to fill the subscriptions of the Employee Plans.
No Eligible
9
<PAGE>
Account Holder, Supplemental Eligible Account Holder, Other Member or Bank
Employee, in their capacity as such, may subscribe in the Subscription Offering
for more than $150,000 of the Common Stock offered; no person, together with
associates of or persons acting in concert with such person, may purchase in the
Community Offering and the Syndicated Community Offering in the aggregate more
than $150,000 of the Common Stock offered; and, except for the Employee Plans,
no person, together with associates of or persons acting in concert with such
person, may purchase more than the overall maximum purchase limitation of 1.0%
of the total number of shares of Common Stock offered in the Offerings. At any
time during the Conversion and without further approval by the Bank's members,
the Company and the Bank may in their sole discretion increase the overall
maximum purchase limitation, and increase the amount that may be subscribed for
in the Offerings, to up to 5% of the shares offered or, if orders for Common
Stock that exceed 5% of the total offering of shares do not, in the aggregate,
exceed 10% of the total shares offered, to up to 9.99% of the total offering of
shares. It is currently anticipated that the overall maximum purchase limitation
may be increased if, after a Community Offering, the Company has not received
subscriptions for an aggregate amount equal to at least the minimum of the
Estimated Price Range. Prior to consummation of the Conversion, if such amount
is increased, subscribers for the maximum amount will be, and certain other
large subscribers in the sole discretion of the Bank may be, given the
opportunity to increase their subscriptions up to the then applicable limit. See
"The Conversion--Limitations on Common Stock Purchases" and "--Community
Offering." In the event of an increase in the total number of shares up to 15%,
the additional shares will be distributed and allocated to fill unfilled orders
in the Subscription and Community Offerings, with priority given to the
subscription of the Employee Plans, including the ESOP, without any
resolicitation of subscribers, as described in "The Conversion--Subscription
Offering and Subscription Rights" and "--Limitations on Common Stock Purchases."
STOCK PRICING AND NUMBER OF SHARES TO BE ISSUED IN THE CONVERSION
Federal regulations require that the aggregate purchase price of the Common
Stock to be issued in the Conversion be consistent with an independent appraisal
of the estimated pro forma market value of the Common Stock following the
Conversion. Capital Resources, an independent appraiser, has advised the Bank
that in its opinion, dated September 6, 1996 and updated October 23, 1996, the
aggregate estimated pro forma market value of the Common Stock ranged from
$16,150,000 to $21,850,000, with a midpoint of $19,000,000. On October 23, 1996,
Capital Resources updated its appraisal of the aggregate estimated pro forma
market value of the Common Stock and increased the Valuation Range by
approximately 8.57% from the appraisal dated September 6, 1996. The increase in
value was primarily attributable to more favorable market conditions for thrift
stocks, including the market performance of recently converted thrift
institutions. See "The Conversion--Stock Pricing." Capital Resources' appraisal
reports are included as exhibits to the Company's Registration Statement, of
which this Prospectus is a part. See "Additional Information." Based upon
Capital Resources' appraisal, the Board of Directors of the Bank has established
the Estimated Price Range of $16,150,000 to $21,850,000, assuming the issuance
of between 1,615,000 and 2,185,000 shares of Common Stock at the Purchase Price
of $10.00 per share. THE APPRAISAL OF THE COMMON STOCK IS NOT INTENDED AND
SHOULD NOT BE CONSTRUED AS A RECOMMENDATION OF ANY KIND AS TO THE ADVISABILITY
OF PURCHASING SUCH STOCK NOR CAN ANY ASSURANCE BE GIVEN THAT PURCHASERS OF THE
COMMON STOCK IN THE CONVERSION WILL BE ABLE TO SELL SUCH SHARES AFTER THE
COMPLETION OF THE CONVERSION AT OR ABOVE THE PURCHASE PRICE.
All shares of Common Stock issued in the Conversion will be sold at the
Purchase Price, as determined by the Bank and approved by the Company. The
actual number of shares to be issued in the Conversion will be determined by the
Company and the Bank based upon the final updated valuation of the estimated pro
forma market value of the Common Stock, giving effect to the Conversion, at the
completion of the Offerings. The number of shares to be issued is expected to
range from a minimum of 1,615,000 shares to a maximum of 2,185,000 shares.
Subject to approval of the OTS, the Estimated Price Range may be increased or
decreased to reflect market and economic conditions prior to the completion
10
<PAGE>
of the Conversion, and under such circumstances the Company may increase or
decrease the number of shares of Common Stock to be issued in the Conversion.
The maximum of the Estimated Price Range may be increased by up to 15% and the
number of shares of Common Stock to be issued in the Conversion may be increased
to 2,512,750 shares due to regulatory considerations, changes in the market and
general financial and economic conditions. No resolicitation of subscribers will
be made and subscribers will not be permitted to modify or cancel their
subscriptions unless the gross proceeds from the sale of the Common Stock are
less than the minimum or more than 15% above the maximum of the current
Estimated Price Range. See "Pro Forma Data," "Risk Factors--Possible Increase in
Estimated Price Range and Number of Shares Issued" and "The Conversion--Stock
Pricing" and "--Number of Shares to be Issued."
USE OF PROCEEDS
Net proceeds from the sale of the Common Stock are estimated to be between
$15.2 million and $20.8 million, with a midpoint of $18.0 million depending on
the number of shares sold and the expenses of the Conversion. In the event that
the Estimated Price Range is increased by 15%, the net proceeds from the sale of
the Common Stock are estimated to be $24.0 million. See "Pro Forma Data." The
Company will use the net proceeds from the sale of the Common Stock as follows:
1. The Company will purchase all of the capital stock of the Bank to be
issued upon Conversion in exchange for 50% of the net proceeds.
2. The remaining net proceeds will be retained by the Company. Net proceeds
to be retained by the Company after the purchase of the capital stock of the
Bank are estimated to be between $7.6 million and $10.4 million, with a midpoint
of $9.0 million. In the event that the Estimated Price Range is increased by
15%, the net proceeds retained by the Company are estimated to be $12.0 million.
Such net proceeds will be used for general business activities. The net proceeds
retained by the Company will be invested primarily in federal funds, government
and federal agency mortgage-backed securities, other debt securities, high-grade
short-term marketable securities, deposits of or loans to the Bank, or a
combination thereof. In addition, the Company intends to purchase for
approximately $262,000 a certain commercial parcel of land from the Bank. See
"Business of the Bank--Real Estate Investment."
3. The Company intends to use a portion of the retained net proceeds to make
a loan directly to the ESOP to enable the ESOP to purchase 8% of the shares to
be issued in the Conversion. The amount of the loan to the ESOP is estimated to
be between $1.3 million and $1.7 million (or $2.0 million if the Estimated Price
Range is increased by 15%) to be repaid over a period of up to 10 years at an
interest rate of 8%. See "Management of the Bank--Benefits--Employee Stock
Ownership Plan and Trust."
Upon completion of the Conversion, the Board of Directors will have the
authority to adopt stock repurchase plans, subject to statutory and regulatory
requirements. The Company is subject to the terms of a certification made to and
required by the OTS in connection with the application to the OTS for approval
of the Conversion, which certification prohibits the Company from taking any
actions to further any payments to its shareholders 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 Bank to the Company.
The portion of the net proceeds received by the Bank from the Company's
purchase of the Bank's capital stock, estimated to be between $7.6 million at
the minimum of the Estimated Price Range and $10.4 million at the maximum of the
Estimated Price Range, will be added to the Bank's general funds to be used for
general corporate purposes, including investment in one- to four-family
residential mortgage loans and other loans which will provide affordable home
financing opportunities to the community; investment in federal funds,
short-term, investment grade marketable securities and mortgage-backed
securities; and to fund the Stock Programs. See "Use of Proceeds."
11
<PAGE>
DIVIDENDS
Upon completion of the Conversion, the Board of Directors of the Company
will have the authority to declare dividends on the Common Stock. The Board of
Directors does not presently intend to declare dividends on the Common Stock. In
the future, declarations of dividends, if any, by the Board of Directors will
depend upon a number of factors, including the amount of the net proceeds from
the Offerings retained by the Company, investment opportunities available to the
Company or the Bank, capital requirements, regulatory limitations, the Company's
and the Bank's financial condition and results of operations, tax
considerations, general economic conditions, industry standards and other
factors. As the principal asset of the Company, the Bank will provide the
principal source of funds for payment of dividends by the Company. Assuming the
shares of Common Stock are sold at the maximum of the Estimated Price Range, at
July 31, 1996, after giving pro forma effect to (i) the Conversion and related
expenses, (ii) the deduction from capital of the amount expected to be borrowed
by the ESOP and the cost of shares of Common Stock to be acquired by the Stock
Programs and (iii) the retention by the Bank of 50% of the net proceeds of the
Conversion, the Bank would be permitted to make capital distributions of up to
approximately $8.4 million to the Company without prior OTS approval. See
"Dividend Policy."
BENEFITS TO MANAGEMENT AND DIRECTORS
The Board of Directors of the Bank received information about various types
of benefit plans typically utilized by public companies in general and
converting thrift institutions in particular. Management reviewed the
anticipated costs of establishing a customary program of benefits and the
anticipated benefits to the Company. Management determined that the benefit
plans helped significantly in providing the ability of a public company to
retain and attract executives of the caliber needed to run a successful public
company, to maintain their attention and loyalty in change of control situations
and to align their interests with those of the Company's shareholders. Finally,
the Board of Directors concluded that the cost of establishing and maintaining
these benefit plans would be justified by these benefits to the Company.
STOCK OPTION PLANS. Following the Conversion, the Company intends to adopt
the Stock Option Plans. If implemented within one year following the Conversion,
the adoption of the Stock Option Plans will be subject to shareholder approval
obtained at a meeting of shareholders to be held no earlier than six months
after the completion of the Conversion. Assuming such implementation, an amount
of shares of Common Stock equal to 10% of the Common Stock issued in the
Conversion (161,500 shares and 218,500 shares at the minimum and maximum of the
Estimated Price Range, having an aggregate fair market value of $1.6 million and
$2.2 million, respectively, based on a Purchase Price of $10.00 per share) is
expected to be reserved for issuance under the Stock Option Plans. These shares
will be acquired either through open market purchases, subject to OTS approval,
if necessary, or from authorized but unissued Common Stock. See "Risk
Factors--Possible Dilutive Effect of Stock Options and Stock Programs." No
conversion stock will be used to fund the Stock Option Plans. No determinations
have been made by the Company as to the specific terms of the Stock Option Plans
or the amount of awards to be made thereunder. Current OTS regulations provide
that no individual employee may receive more than 25% of the options granted,
and that non-employee directors may not receive more than 5% individually or 30%
in the aggregate of the options granted, under option plans implemented within
one year following the Conversion. See "Management of the Bank--Benefits--Stock
Option Plans."
STOCK PROGRAMS. Following the Conversion, the Company also intends to adopt
certain Stock Programs for the benefit of officers, employees and non-employee
directors of the Company and the Bank. If implemented within one year following
the Conversion, the adoption of the Stock Programs will be subject to
shareholder approval obtained at a meeting of shareholders to be held no earlier
than six months after the completion of the Conversion. Assuming such
implementation, the Bank expects to contribute funds to the Stock Programs to
enable their related trusts to acquire, in the aggregate, up to 4% (3% unless
OTS approval is obtained) of the shares of Common Stock issued in the
Conversion, or 64,600 shares and 87,400 shares at the minimum and maximum of the
Estimated Price Range, respectively, having
12
<PAGE>
an aggregate fair market value of $646,000 and $874,000, respectively, based on
a Purchase Price of $10.00 per share. These shares will be acquired either
through open market purchases, subject to OTS approval, if necessary, or from
authorized but unissued Common Stock. See "Risk Factors--Possible Dilutive
Effect of Stock Options and Stock Programs." No determinations have been made by
the Company as to the specific terms of the Stock Programs or the amount of
awards to be made thereunder. Current OTS regulations provide that no individual
employee may receive more than 25% of the shares of any plan, and that non-
employee directors may not receive more than 5% of the shares individually or
30% in the aggregate, in the case of plans implemented within one year following
the Conversion. Under the anticipated terms of the Stock Programs, recipients
would receive shares without any cost and would vote any shares allocated to
them, and an independent trustee would vote unallocated shares in the same
proportion as it receives instructions from recipients with respect to allocated
shares which have not been vested and distributed. See "Management of the
Bank--Benefits--Stock Programs."
ESOP. The Bank and the Company have established the ESOP for the benefit of
eligible employees, including officers. The ESOP intends to subscribe for up to
8% of the Common Stock issued in the Conversion (7% unless OTS approval is
obtained) and to finance its subscription with funds anticipated to be borrowed
from the Company for a period of up to 10 years at an interest rate of 8% per
annum. The Bank and the Company intend to make cash contributions to the ESOP as
required for debt service. The Common Stock acquired by the ESOP will initially
be held in a suspense account and will be allocated to eligible employees as the
loan is repaid. See "Management of the Bank--Benefits--Employee Stock Ownership
Plan and Trust."
PROFIT SHARING AND SAVINGS PLAN. The Bank has amended its existing Profit
Sharing and Savings Plan to permit participating employees, including officers,
to invest all or any portion of their account balances in Common Stock.
Initially, such Common Stock may be purchased in the Conversion. Subsequent to
the Conversion, purchases may be made in the open market or in private
transactions, or from treasury stock or authorized but unissued shares in
transactions with the Company. See "Management of the Bank-- Benefits--Profit
Sharing and Savings Plan."
EMPLOYMENT ARRANGEMENTS WITH SENIOR MANAGEMENT AND KEY PERSONNEL. The Bank
and the Company intend to enter into employment arrangements ("Employment
Agreements") with certain senior management and key employees that will provide
for, among other benefits, benefit and cash payments to be made in the event of
their termination of employment following a change of control of the Bank or the
Company. The provisions of these arrangements, described below, may have the
effect of increasing the cost of acquiring the Company, thereby discouraging
future attempts to take over the Company or the Bank.
Based on current compensation and benefit costs, cash payments to be made in
the event of a change of control of the Bank or the Company pursuant to the
terms of the Employment Agreements would be approximately $3,980,000, of which
approximately $1,245,000 would be payable to Mr. Briody, $1,180,000 would be
payable to Mr. Opelka, $630,000 would be payable to Mr. McCue, $500,000 would be
payable to Mr. Cahill and $425,000 would be payable to Mr. Jones. However, the
actual amount to be paid under the Employment Agreements in the event of a
change of control of the Bank or the Company cannot be estimated at this time,
because the actual amount is based on the compensation and benefit costs
applicable to these individuals and other factors existing at the time of the
change of control which cannot be determined at this time. See "Management of
the Bank--Employment Agreements."
The Bank and the Company also intend to enter into employee retention
agreements ("Retention Agreements"), effective on the Conversion, with certain
other employees ("Contract Employee(s)"). Based on current compensation and
benefit costs applicable to the Contract Employees expected to be covered by the
Retention Agreements, cash payments to be made in the event of a change of
control of the Bank or the Company would be approximately $530,000. However, the
actual amount to be paid under the Retention Agreements in the event of a change
of control of the Bank or the Company cannot be
13
<PAGE>
estimated at this time, because it will be based on the compensation and benefit
costs applicable to the Contract Employees and other factors existing at the
time of the change of control which cannot be determined at this time. See
"Management of the Bank--Employee Retention Agreements."
OTHER CHANGE OF CONTROL PROVISIONS. The Bank's Employee Severance Pay Plan
provides for benefits and/or cash payments in the event of a change of control
of the Company or the Bank. Based on current salaries, cash payments to be paid
in the event of a change of control (and assuming termination of all
participating employees) pursuant to the terms of the Employee Severance Pay
Plan would be approximately $396,500. However, the actual amount to be paid in
the event of a change of control of the Bank or the Company cannot be estimated
at this time, because it will be based on the compensation and benefits, as
applicable, for each covered individual and other factors existing at the time
of the change of control which cannot be determined at this time. Certain
anticipated provisions of the Stock Option Plans and Stock Programs (which the
Company intends to adopt and which will only become effective prior to the first
anniversary of the Conversion upon shareholder approval obtained at a meeting of
shareholders to be held no earlier than six months after completion of the
Conversion) provide for cash payments and/or accelerated vesting in the event of
a change of control of the Company or the Bank (in the case of plans established
or implemented on or after the first anniversary of the Conversion). The ESOP
provides for accelerated vesting in the event of a change of control. These
provisions may also have the effect of increasing the cost of acquiring the
Company. In addition, the existence of the provisions could result in
shareholders receiving less for their shares of Common Stock than might
otherwise be available in the event of an acquisition of the Company. See
"Restrictions on Acquisition of the Company and the Bank-- Anti-Takeover Effects
of the Company's Articles of Incorporation and Bylaws and Management
Remuneration Plans Adopted in Conversion," "Management of the Bank--Employee
Severance Compensation Plan," "--Benefits--Employee Stock Ownership Plan and
Trust," "--Benefits--Stock Option Plans," and "--Benefits--Stock Programs."
SUBSCRIPTIONS BY EXECUTIVE OFFICERS AND DIRECTORS. The Bank's executive
officers and directors propose to purchase Common Stock in the Offerings in an
aggregate amount equal to $1,251,000 or 7.6% (based on the minimum of the
Estimated Price Range) or $1,479,000 or 6.8% (based on the maximum of the
Estimated Price Range) of the shares to be issued in the Offerings. See
"Management of the Bank-- Subscriptions by Executive Officers and Directors."
RISK FACTORS
See "Risk Factors" for a discussion of certain factors that should be
considered by prospective investors, including: Potential Impact of Changes in
Interest Rates; Impact of the Economy on Operations; Competition;
Recapitalization of the SAIF; SAIF Assessments; and Special Assessment; Recent
Tax Legislation Regarding Tax Bad Debt Reserves; Concentration in
Mortgage-backed Securities; Recent Declines in Net Income; Impact of
Technological Advances; Residential and Non-Residential Lending Risks; Certain
Anti-Takeover Provisions; Absence of Market for Common Stock and Performance of
Conversion Offerings; Possible Increase in Estimated Price Range and Number of
Shares Issued; Possible Dilutive Effect of Stock Options and Stock Programs;
Possible Adverse Income Tax Consequences of the Distribution of Subscription
Rights; Financial Institution Regulation and Possible Legislation; and Risk of
Delayed Offering.
14
<PAGE>
SELECTED FINANCIAL AND OTHER DATA OF THE BANK
The selected financial and other data of the Bank set forth below is derived
in part from, and should be read in conjunction with, the Financial Statements
of the Bank and Notes thereto presented elsewhere in this Prospectus.
<TABLE>
<CAPTION>
AT JULY 31,
----------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1996 1995 1994 1993 1992
---------- ---------- ---------- ---------- ----------
<CAPTION>
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
SELECTED FINANCIAL CONDITION DATA:
Total assets....................................... $ 194,624 $ 200,251 $ 195,207 $ 186,997 $ 188,739
Loans receivable, net(1)........................... 79,144 70,984 68,426 80,346 96,030
Mortgage-backed securities(2)...................... 102,411 111,283 111,987 47,524 46,197
Investment securities(2)........................... -- -- -- 14,893 26,512
Interest earning deposits.......................... 2,040 6,956 2,011 30,556 5,902
Investment in real estate held for sale and
development...................................... 262 262 919 1,599 2,051
Savings deposits................................... 137,177 148,350 141,830 131,504 135,857
Borrowed money..................................... 39,900 32,300 34,300 36,600 36,600
Retained earnings, substantially restricted........ 13,579 14,423 13,441 11,851 9,317
</TABLE>
<TABLE>
<CAPTION>
FOR THE YEAR ENDED JULY 31,
----------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1996 1995 1994 1993 1992
---------- ---------- ---------- ---------- ----------
<CAPTION>
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
SELECTED OPERATING DATA:
Interest income.................................... $ 13,154 $ 12,674 $ 13,052 $ 13,995 $ 14,338
Interest expense................................... 8,450 7,333 6,923 7,454 9,198
---------- ---------- ---------- ---------- ----------
Net interest income................................ 4,704 5,341 6,129 6,541 5,140
Provision (credit) for loan losses................. 138 -- (18) (392) 397
---------- ---------- ---------- ---------- ----------
Net interest income after provision (credit) for
loan losses...................................... 4,566 5,341 6,147 6,933 4,743
Noninterest income................................. 485 846 1,515 741 3,164
Noninterest expense................................ 4,708 4,766 5,097 4,683 5,242
---------- ---------- ---------- ---------- ----------
Income before income tax expense and cumulative
effect of change in accounting principle and
extraordinary item............................... 343 1,421 2,565 2,991 2,665
Income tax expense................................. 117 439 894 978 975
---------- ---------- ---------- ---------- ----------
Income before cumulative effect of change in
accounting principle and extraordinary item...... 226 982 1,671 2,013 1,690
Cumulative effect of change in accounting for
income taxes(3).................................. -- -- 439 -- --
Extraordinary item-reduction of income taxes
arising from utilization of net operating loss
carryforwards.................................... -- -- -- -- 626
---------- ---------- ---------- ---------- ----------
Net income..................................... $ 226 $ 982 $ 2,110 $ 2,013 $ 2,316
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
</TABLE>
(NOTES ON FOLLOWING PAGE)
15
<PAGE>
<TABLE>
<CAPTION>
AT OR FOR THE YEAR ENDED JULY 31,
----------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1996 1995 1994 1993 1992
---------- ---------- ---------- ---------- ----------
<CAPTION>
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
SELECTED FINANCIAL RATIOS(4):
PERFORMANCE RATIOS:
Return on average assets......................... 0.11% 0.51% 1.09% 1.08% 1.26%
Return on average equity......................... 1.58 6.98 16.93 19.61 25.83
Average interest rate spread(5).................. 2.11 2.59 3.10 3.52 2.83
Net interest margin(6)........................... 2.47 2.89 3.35 3.73 3.00
Average interest- earning assets to average
interest-bearing liabilities................... 108.23 107.77 106.33 105.12 103.34
Noninterest expense to average assets............ 2.36 2.45 2.63 2.51 2.86
CAPITAL RATIOS(7):
Average equity to average assets................. 7.18 7.25 6.43 5.51 4.89
Tangible capital................................. 7.35 7.05 6.50 6.34 4.94
Core capital..................................... 7.35 7.05 6.50 6.34 4.94
Total risk-based capital......................... 21.59 21.28 19.63 16.38 11.79
ASSET QUALITY RATIOS AND OTHER DATA(4):
Non-performing loans(8).......................... $ 118 $ 193 $ 511 $ 912 $ 5,390
Real estate owned, net........................... -- 168 -- -- 118
Non-performing loans to total loans(9)........... 0.15% 0.27% 0.74% 1.13% 5.58%
Non-performing assets to total assets............ 0.06 0.18 0.26 0.49 2.92
Net charge-offs to average loans outstanding..... 0.01 -- -- 0.02 --
Allowance for loan losses to:
Non-performing loans........................... 254.24 86.01 32.49 20.18 11.08
Total loans(9)................................. 0.38 0.23 0.24 0.23 0.62
Full service offices............................. 3 3 3 3 3
</TABLE>
- ------------------------
(1) Loans receivable, net, represents gross loans less deferred loan fees,
allowance for loan losses, loans in process and capitalized interest
reserve.
(2) The Bank has classified its securities as "held-to-maturity" or
"available-for-sale" since July 31, 1993 when it adopted Statement of
Financial Accounting Standards No. 115, "Accounting for Certain Investments
in Debt and Equity Securities" ("SFAS No. 115").
(3) Pursuant to Statement of Financial Accounting Standards No. 109, "Accounting
for Income Taxes" ("SFAS No. 109"), on August 1, 1993 the Bank 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 adopting a change in
accounting principle.
(4) With the exception of end of period ratios, all ratios are based on average
monthly balances during the indicated periods and Regulatory Capital Ratios
and Asset Quality Ratios are end of period ratios.
(5) The interest rate spread represents the difference between the
weighted-average yield on interest-earning assets and the weighted-average
cost of interest-bearing liabilities.
(6) The net interest margin represents net interest income as a percent of
average interest-earning assets.
(7) For definitions and further information relating to the Bank's regulatory
capital requirements, see "Regulation--Regulation of Federal Savings
Associations--Capital Requirements." See "Regulatory Capital Compliance" for
the Bank's pro forma capital levels as a result of the Offering.
(8) Non-performing loans consists of all non-accrual loans as well as any loans
that were 90 days or more past due and still accruing interest at any of the
dates presented.
(9) Total loans represents loans, net, plus the allowance for loan losses.
16
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RISK FACTORS
THE FOLLOWING RISK FACTORS SHOULD BE CONSIDERED BY PROSPECTIVE INVESTORS IN
DECIDING WHETHER TO PURCHASE THE COMMON STOCK OFFERED HEREBY.
POTENTIAL IMPACT OF CHANGES IN INTEREST RATES
The Bank's profitability, like that of most financial institutions, is
dependent to a large extent upon its net interest income, which is the
difference between its interest income on interest-earning assets, such as loans
and securities, and its interest expense on interest-bearing liabilities, such
as savings deposits and borrowed money. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Analysis of Net
Interest Income."
A substantial portion of the Bank's assets consist of fixed-rate one- to
four-family mortgage loans. At July 31, 1996, an aggregate of $72.4 million, or
90.6%, of gross loans were invested in such assets. In addition, at July 31,
1996, the Bank had an aggregate of $102.4 million in mortgage-backed securities,
all of which provided for fixed rates of interest. The Bank generally accepts
savings deposits for considerably shorter terms than its fixed-rate mortgage
loans. As a consequence of the Bank's interest rate sensitivity, any significant
increase in interest rates could have an adverse effect on the Bank's results of
operations. The Bank has experienced reduced levels of net income and net
interest income in fiscal years ended 1994, 1995 and 1996 as a result of, among
other reasons, the Bank's sensitivity to increases in interest rates. See
"--Recent Declines in Net Income" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations" for a discussion of these
results. Management has adopted a business strategy which, among other things,
is intended to reduce the Bank's sensitivity to increases in interest rates.
Pursuant to this strategy, the Bank (i) emphasizes the origination of mortgage
loans with terms of 15-years, instead of 30-year terms, (ii) seeks to attract
passbook accounts, which are considered by management to be more resistant to
increases in interest rates and (iii) purchases mortgage-backed securities with
maturities of five and seven years. The Company intends to utilize proceeds from
the Offerings to continue to implement such strategies, which management
believes could, although there can be no assurance, reduce the Bank's exposure
to increases in interest rates. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Management Strategy" and
"--Asset/Liability Management." There can be no assurance that the Bank's
strategy will be successful or that the Bank will not continue to experience
reduced levels of net income and net interest income during periods of
increasing interest rates or until the Bank's sensitivity to increases in
interest rates is reduced.
As indicated in the table under "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Asset/Liability Management," at
June 30, 1996, a 200 basis point increase in interest rates would cause more
than a 2% decrease in the ratio of the Bank's net portfolio value (as defined
therein) to the economic value of the Bank's assets. Accordingly, while this
level of interest rate risk is within the Bank's current guidelines for
tolerated interest rate risk, the Bank is considered under OTS regulations to
have "above normal" interest rate risk. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Asset/Liability
Management." The Bank performs its interest rate sensitivity analysis, in part,
based upon interest rate sensitivity schedules prepared by the OTS for the Bank
as of the end of each calendar quarter. Management does not believe that there
is a material difference between the Bank's interest rate risk position as of
July 31, 1996 compared with June 30, 1996.
Under interest rate scenarios other than that which existed on July 31,
1996, the NPV analysis for the Bank's assets and liabilities could differ
substantially based upon different assumptions then existing. However, there can
be no assurance that the Bank's results of operations would not be adversely
affected in a period of rising interest rates. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Management Strategy."
Increases in the level of interest rates also may adversely affect the fair
value of the Bank's securities and other interest-earning assets. Generally, the
fair value of fixed-rate instruments fluctuates inversely
17
<PAGE>
with changes in interest rates. As a result, increases in interest rates could
result in decreases in the fair value of interest-earning assets which could
adversely affect the Bank's results of operations if such interest-earning
assets are sold prior to maturity. At July 31, 1996, the Bank had a $1.1 million
unrealized loss on mortgage-backed securities available-for-sale, net of tax.
Increases in interest rates also can affect the type (fixed-rate or
adjustable-rate) and amount of loans originated by the Bank and the average life
of loans and securities, which can adversely impact the yields earned on the
Bank's loan and securities portfolio.
IMPACT OF THE ECONOMY ON OPERATIONS
Declines in the local economy, national economy or real estate market could
adversely affect the financial condition and results of operations of the Bank,
including decreased demand for loans or increased competition for good loans,
increased non-performing loans and loan losses and resulting additional
provisions for loan losses and for losses on real estate owned. Although
management of the Bank believes that the current allowance for loan losses is
adequate in light of current economic conditions, many factors may require
additions to the allowance for loan losses in future periods above those
reasonably anticipated. These factors include: (i) adverse changes in economic
conditions and changes in interest rates that may affect the ability of
borrowers to make payments on loans, (ii) changes in the financial capacity of
individual borrowers, (iii) changes in the local real estate market and the
value of the Bank's loan collateral and (iv) future review and evaluation of the
Bank's loan portfolio, internally or by regulators. The amount of the allowance
for loan losses at any time represents estimates made by management that are
susceptible to significant changes due to changes in values of collateral,
national and regional economic conditions, prevailing interest rates and other
factors. Future adjustments to the allowance also may be necessary if economic
or other conditions differ substantially from those underlying the assumptions
used in making such estimates.
COMPETITION
The Bank faces intense and increasing competition both in making loans and
in attracting savings deposits. The Bank's market area has a high density of
financial institutions, many of which have greater financial resources, name
recognition and market presence than the Bank, and all of which are competitors
of the Bank to varying degrees. Particularly intense competition exists for
savings deposits and the origination of all of the loan products emphasized in
the Bank's business plan. The Bank's competition for loans comes principally
from commercial banks, other savings banks, savings and loan associations,
mortgage banking companies, finance companies and credit unions. The Bank's most
direct competition for savings deposits historically has come from other savings
banks, savings and loan associations, commercial banks and credit unions. In
addition, the Bank faces increasing competition for savings deposits from
non-bank institutions such as brokerage firms, insurance companies, money market
mutual funds, other mutual funds (such as corporate and government securities
funds) and annuities. Trends toward the consolidation of the banking industry
and the lifting of interstate banking and branching restrictions may make it
more difficult for smaller institutions, such as the Bank, to compete
effectively with large national and regional banking institutions. See "Business
of the Bank."
RECAPITALIZATION OF THE SAIF; SAIF ASSESSMENTS; AND SPECIAL ASSESSMENT
For the first three quarters of 1996, SAIF-insured institutions paid deposit
insurance assessment rates of $0.23 to $0.31 per $100 of deposits. In contrast,
institutions insured by the FDIC's Bank Insurance Fund (the "BIF") that were
well capitalized and without any significant supervisory concerns paid the
minimum annual assessment of $2,000, and all other BIF-insured institutions paid
deposit insurance assessment rates of $0.03 to $0.27 per $100 of deposits. See
"Regulation--Regulation of Federal Savings Associations-- Insurance of Deposit
Accounts."
18
<PAGE>
In response to the SAIF/BIF assessment disparity, the Deposit Funds
Insurance Act of 1996 (the "1996 Act") was enacted into law on September 30,
1996. The 1996 Act amended the Federal Deposit Insurance Act (the "FDIA") in
several ways to recapitalize the SAIF and reduce the disparity in the assessment
rates for the BIF and the SAIF. The 1996 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,
institutions with SAIF-assessable deposits will pay a special assessment,
subject to adjustment, of 65.7 basis points per $100 of the institution's
SAIF-assessable deposits, and the special assessment will be paid on November
27, 1996. The special assessment is based on the amount of SAIF-assessable
deposits held on March 31, 1995. The 1996 Act provides that the amount of the
special assessment will be deductible for federal income tax purposes for the
taxable year in which the special assessment is paid. Based on the foregoing,
the Bank recorded an accrual for the special assessment of $936,000 at September
30, 1996. The impact on operations, net of related tax effects, will reduce
reported earnings by $617,000 for the quarter ended October 31, 1996.
In view of the recapitalization of the SAIF, the FDIC proposed on October 8,
1996, to reduce the assessment rate for SAIF-assessable deposits for periods
beginning on October 1, 1996. As would be effective for the SAIF-assessable
deposits of SAIF-insured savings associations, such as the Bank, the proposed
assessment rates would range from 18 to 27 basis points for the last quarter of
1996 and would range from 0 to 27 basis points for the following assessment
periods.
In addition, the 1996 Act expanded the assessment base for the payments on
the bonds (the "FICO bonds") issued in the late 1980s by the Financing
Corporation to recapitalize the now defunct Federal Savings and Loan Insurance
Corporation to include the deposits of both BIF- and SAIF-insured institutions
beginning January 1, 1997. 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 will be one-fifth of the rate imposed on SAIF-assessable
deposits. It has been estimated that the rates of assessment for the payment of
interest on the FICO bonds will be approximately 1.3 basis points for
BIF-assessable deposits and approximately 6.4 basis points for SAIF-assessable
deposits.
The 1996 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 Bank has not been so classified by the FDIC or the OTS.
Accordingly, assuming that the designated reserve ratio is maintained by the
SAIF after the collection of the special SAIF assessment, the Bank, as long as
it maintains its regulatory status, will have to pay substantially lower regular
SAIF and FICO assessments compared to those paid by the Bank in recent years.
The 1996 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
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.
RECENT DECLINES IN NET INCOME
The Bank's net income was $226,000, $982,000 and $2.1 million for the fiscal
years ended July 31, 1996, 1995 and 1994, respectively. Each of these years
included certain non-recurring gains and settlements which are not expected to
continue in the future. See "Summary--Fairfield Savings Bank, F.S.B.-- General,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Business of the Bank." Net income declined in fiscal year 1996
from fiscal year 1995 due also to a decrease in net interest income before
provision for loan losses, an increase in the provision for loan losses and a
decrease in noninterest income, which were partially offset by a decrease in
income tax expense. See
19
<PAGE>
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Comparison of Operating Results for Fiscal Years Ended July 31, 1996
and 1995." Net income declined in fiscal year 1995 from fiscal year 1994 due
also to a decrease in net interest income after provision for loan losses, which
was partially offset by reductions in noninterest expense and in income tax
expense. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Comparison of Operating Results for Fiscal Years Ended
July 31, 1995 and 1994."
The Bank has experienced a decline in net interest income for each of its
last three fiscal years. These decreases are due, in part, to the Bank's
sensitivity to increases in interest rates. Management has adopted a business
strategy which, among other things, is intended to reduce the Bank's interest
rate sensitivity, although there can be no assurance that the strategy will be
successful. See "--Potential Impact of Changes in Interest Rates" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Management Strategy."
On September 30, 1996, Congress enacted the 1996 Act, which resulted in the
Bank recording an accrual for the SAIF special assessment of $936,000 at
September 30, 1996. The impact on operations, net of related tax effects, will
reduce reported earnings by $617,000 for the quarter ended October 31, 1996.
Management expects, however, although there can be no assurance, that the Bank
will incur substantially lower deposit insurance premiums in future periods. See
"--Recapitalization of the SAIF; SAIF Assessments; and Special Assessment" and
"Regulation--Regulation of Federal Savings Associations--Insurance of Deposit
Accounts."
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 "1996 Tax Act"), for federal income tax purposes,
thrift institutions such as the Bank, 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 Bank'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 Bank's actual loss experience (the "Experience Method"), or a
percentage equal to 8.0% of the Bank's taxable income (the "PTI Method"),
computed without regard to this deduction and with additional modifications and
reduced by the amount of any permitted addition to the non-qualifying reserve.
See "Federal and State Taxation--Federal Taxation--Tax Bad Debt Reserves."
Under the 1996 Tax Act, the PTI Method was repealed and the Bank will be
required to use the Experience Method of computing additions to its bad debt
reserve for taxable years beginning with the Bank's taxable year beginning
August 1, 1996. In addition, the Bank will be required to recapture (I.E., take
into income) over a six-year period, beginning with the Bank's taxable year
beginning August 1, 1996, the excess of the balance of its bad debt reserves
(other than the supplemental reserve) as of July 31, 1996 over the greater of
(a) the balance of such reserves as of July 31, 1988 or (b) an amount that would
have been the balance of such reserves as of July 31, 1996 had the Bank always
computed the additions to its reserves using the six-year moving average
Experience Method. However, under the 1996 Tax Act, such recapture requirements
will be suspended for each of the two successive taxable years beginning August
1, 1996 in which the Bank 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 Bank during its six taxable years preceding
August 1, 1996. This legislation will result in the Bank's recapture of reserves
with the aggregate tax liability of $236,000. Since the Bank has already
provided a deferred income tax liability of this amount for financial reporting
purposes, there will be no adverse impact to the Bank's financial condition or
results of operations from the enactment of this legislation.
20
<PAGE>
CONCENTRATION IN MORTGAGE-BACKED SECURITIES
Historically, the Bank has invested a significant amount of its assets in
mortgage-backed securities. These consist of securities that management intends
to hold for the foreseeable future or to maturity and also securities
available-for-sale. The Bank's mortgage-backed securities totaled $102.4
million, $111.3 million and $112.0 million at July 31, 1996, 1995 and 1994,
respectively. These amounts represented 52.6%, 55.6% and 57.4% of total assets,
respectively, at those dates. As a result of the Bank's level of mortgage-backed
securities, interest income from mortgage-backed securities totaled $6.8
million, $6.5 million and $6.0 million, respectively, for the fiscal years ended
July 31, 1996, 1995 and 1994. These amounts represented 52.0%, 51.2% and 46.1%,
respectively, of total interest income for those periods. As a result of the
Bank's level of mortgage-backed securities, the Bank's net interest income and
net interest margin have been adversely affected as the average yield on the
Bank's average balance of mortgage-backed securities has been lower than the
average yield on the average balance of its mortgage loans. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Analysis of Net Interest Income." The Bank expects to invest a
portion of the net Conversion proceeds in mortgage-backed securities. In
addition, the Bank expects that income from mortgage-backed securities will
initially represent an even greater percentage of total interest income after
the Conversion than in prior periods. It is expected that such mortgage-backed
securities will earn interest at rates lower than the interest rates that would
generally be earned on loans. As a result, the Bank intends to begin investing
the net Conversion proceeds in mortgage loans and consumer loans as soon as
practicable after consummation of the Conversion. However, there can be no
assurance that the economy of the counties in the Bank's market area will
continue to grow at a rate that will generate sufficient loan demand or that,
even if sufficient loan demand exists in such market area, the Bank will have
the competitive position to gain an increasing share of the loan demand
permitting the redeployment of the net Conversion proceeds in loan products that
meet the Bank's credit quality standards.
IMPACT OF TECHNOLOGICAL ADVANCES
The banking industry is undergoing rapid technological changes with frequent
introductions of new technology-driven products and services. In addition to
improving customer services, the effective use of technology increases
efficiency and enables financial institutions to reduce costs. The Company's
future success will depend, in part, on its ability to address the needs of its
customers by using technology to provide products and services that will satisfy
customer demands for convenience as well as to create additional efficiencies in
the Bank's operations. Many of the Bank's competitors have substantially greater
resources than the Bank to invest in technological improvements. There can be no
assurance that the Bank will be able to effectively implement new
technology-driven products and services or be successful in marketing such
products and services to the public.
RESIDENTIAL AND NON-RESIDENTIAL LENDING RISKS
The Bank has historically employed an operating strategy which emphasized
the origination of fixed-rate and, to a lesser extent, adjustable-rate one- to
four-family residential mortgage loans in the Chicago metropolitan area. At July
31, 1996, 95.6% of the Bank's gross loans were one- to four-family residential
mortgage loans secured by properties located in such area. See "Business of the
Bank--Lending Activities." This lack of geographic diversification could have an
adverse impact on the Bank and the Bank's profitability in the event that the
Bank's lending area were to suffer a substantial economic decline or a natural
disaster, such as a flood. In addition, the profitability of the Bank's one- to
four-family residential lending business could be adversely impacted by
competitive market forces and technological advances of its competitors. See
"--Competition" and "--Impact of Technological Advances."
The Bank also originates, to a significantly lesser extent, multifamily
residential loans, commercial real estate loans, construction, land, and
development and other loans in its lending area. These loans are generally
considered to involve a higher degree of credit risk than one- to four-family
residential mortgage
21
<PAGE>
loans. This greater risk is attributable to several factors, including the
higher concentration of principal in a limited number of loans and borrowers,
the effects of general economic conditions on income-producing properties and
the increased difficulty of evaluating and monitoring these types of loans.
Furthermore, the repayment of loans secured by multifamily residential and
commercial real estate is typically dependent upon sufficient cash flow from the
related real estate project to cover operating expenses and debt service. If the
cash flow from the project is reduced (for example, if leases are not obtained
or renewed), the borrower's ability to repay the loan may be impaired.
Circumstances outside the borrower's control may adversely affect income from
the multifamily or commercial property as well as its market value. See
"Business of the Bank--Lending Activities."
CERTAIN ANTI-TAKEOVER PROVISIONS
PROVISIONS IN THE COMPANY'S AND THE BANK'S GOVERNING INSTRUMENTS. Certain
provisions of the Company's Articles of Incorporation and Bylaws, particularly a
provision limiting voting rights, and the Bank's Stock Charter and Bylaws, as
well as certain federal regulations, assist the Company in maintaining its
status as an independent publicly owned corporation. These provisions provide
for, among other things, supermajority voting on certain matters, staggered
boards of directors, noncumulative voting for directors, limits on the calling
of special meetings, certain uniform price provisions for certain business
combinations and limits on voting shares in excess of 10% of the outstanding
shares. Any person owning in excess of 10% of the outstanding shares of voting
stock will be limited to one one-hundredth (1/100) of a vote for each share of
the voting stock owned in excess of the 10% limit. The Bank's Stock Charter also
prohibits, for five years, the acquisition of, or the offer to acquire, directly
or indirectly, the beneficial ownership of more than 10% of the Bank's equity
securities. In the event that holders of revocable proxies for more than 10% of
the shares of Common Stock of the Company, acting as a group or in concert with
other proxy holders, attempt actions which could indirectly result in a change
in control of the Bank, management of the Bank may be able to assert this
provision of the Bank's Charter against such holders if it deems such assertion
to be in the best interests of the Bank, the Company and its shareholders. It is
uncertain, however, if the Bank would be successful in asserting such provisions
against such persons. These provisions in the Bank's and the Company's governing
instruments may discourage potential proxy contests and other potential takeover
attempts, particularly those which have not been negotiated with the Board of
Directors and, thus, generally may serve to perpetuate current management. See
"Restrictions on Acquisition of the Company and the Bank" and "Management of the
Bank--Employee Severance Compensation Plan."
REGULATORY RESTRICTIONS. For three years following the Conversion, OTS
regulations will prohibit any person from acquiring or making an offer to
acquire more than 10% of the stock of the Bank or the Company, subject to
certain exceptions. In the event that any person, directly or indirectly,
violates these regulations, the securities beneficially owned by such person in
excess of 10% shall not be counted as shares entitled to vote by any person or
counted as voting shares in connection with any matters submitted to a vote of
shareholders. See "Restrictions on Acquisition of the Company and the
Bank--Regulatory Restrictions."
EVALUATION OF OFFERS. As permitted by Section 8.85 of the Illinois Business
Corporation Act ("IBCA"), the Articles of Incorporation of the Company further
provides that the Board of Directors of the Company, when evaluating any offer
of another "Person" (as defined therein) to (i) make a tender or exchange offer
for any outstanding equity security of the Company, (ii) merge or consolidate
the Company with another corporation or entity or (iii) purchase or otherwise
acquire all or substantially all of the properties and assets of the Company,
shall, in connection with the exercise of its judgment in determining what is in
the best interests of the Company and the shareholders of the Company, give due
consideration to all relevant factors, including, without limitation, the
possible effects of acceptance of such offer on the Company's and its
subsidiaries' customers, suppliers, borrowers and employees, and on the
communities in which the Company and its subsidiaries are located. By having
these standards in the Articles of
22
<PAGE>
Incorporation of the Company, the Board of Directors may be in a stronger
position to oppose such a transaction if the Board concludes that the
transaction would not be in the best interest of the Company, even if the price
offered is significantly greater than the prevailing market price of any equity
security of the Company. See "Restrictions on Acquisition of the Company and the
Bank."
VOTING CONTROL OF OFFICERS AND DIRECTORS. Directors and executive officers
of the Bank and the Company expect to purchase approximately 7.6% or 6.8% of the
shares of Common Stock to be sold in the Conversion, based upon the minimum and
the maximum of the Estimated Price Range, respectively. In addition, the ESOP
intends to purchase 8% of the Common Stock. As a result, assuming the Stock
Programs and Stock Option Plans are implemented, directors, executive officers
and employees have the potential to control the voting of approximately 28.8% of
the Company's Common Stock (based on the maximum of the Estimated Price Range),
thereby enabling them to prevent or render more difficult the approval of
transactions and other corporate actions requiring a super-majority vote of
shareholders, such as certain business combinations and the amendment of certain
charter provisions. As a result, this potential voting control may preclude
takeover attempts that certain shareholders deem to be in their best interest
and may tend to perpetuate existing management. See "Restrictions on Acquisition
of the Company and the Bank--Restrictions in the Company's Articles of
Incorporation and Bylaws."
PROVISIONS IN MANAGEMENT CONTRACTS AND BENEFIT PLANS. Certain provisions
contained in the proposed Employment Agreements, Retention Agreements, Employee
Severance Pay Plan, the ESOP, the Stock Option Plans and the Stock Programs that
provide for cash payments or the vesting of benefits upon a change of control of
the Company or the Bank may be deemed to have an anti-takeover effect and could
result in shareholders receiving less for their shares of Common Stock than
otherwise might be available in the event of an acquisition of the Company. See
"Management of the Bank--Employment Agreements," "--Employee Retention
Agreements" and "--Employee Severance Compensation Plan" and "Management of the
Bank--Benefits--Employee Stock Ownership Plan and Trust," "--Stock Option Plans"
and "--Stock Programs."
ABSENCE OF MARKET FOR COMMON STOCK AND PERFORMANCE OF CONVERSION OFFERINGS
The Company and the Bank have not previously issued capital stock (other
than shares issued by the Company upon incorporation), and, consequently, there
is no established market for the Common Stock at this time. The Company has
received conditional approval from the Nasdaq Stock Market to have its Common
Stock approved for quotation on the Nasdaq National Market under the symbol
"BFFC" upon completion of the Conversion. One of the requirements for continued
quotation of the Common Stock on the Nasdaq National Market is that at least two
market makers be a market maker for the Common Stock. The Company will seek to
encourage and assist at least two market makers to make a market in its Common
Stock. Hovde will assist the Company in such efforts but will not be a market
maker in the Common Stock. While the Company anticipates that there will be
other broker-dealers to act as market maker for the Common Stock, there can be
no assurance that there will be two or more market makers for the Common Stock.
Making a market in securities involves maintaining bid and asked quotations
and being able, as principal, to effect transactions in reasonable quantities at
those quoted prices, subject to various securities laws and other regulatory
requirements. The development of a public trading market depends upon the
existence of willing buyers and sellers, the presence of which is not within the
control of the Company, the Bank or any market maker. Accordingly, there can be
no assurance that an active and liquid trading market for the Common Stock will
develop, or, once developed, will continue, nor can there be any assurances that
purchasers of the Common Stock will be able to sell their shares at or above the
Purchase Price. The absence or discontinuance of a market for the Common Stock
may have an adverse impact on both the price and liquidity of the Common Stock.
In addition, the market prices of the common stock issued in some conversions of
financial institutions from mutual to stock form have decreased below their
initial offering prices. See "Market for the Common Stock."
23
<PAGE>
POSSIBLE INCREASE IN ESTIMATED PRICE RANGE AND NUMBER OF SHARES ISSUED
The number of shares to be sold in the Conversion may be increased as a
result of an increase in the Estimated Price Range of up to 15% to reflect
changes in market and financial conditions following the commencement of the
Subscription and Community Offerings. In the event that the Estimated Price
Range is so increased, it is expected that the Company will issue up to
2,512,750 shares of Common Stock at the Purchase Price for aggregate proceeds of
up to $25,127,500. An increase in the number of shares issued would decrease a
subscriber's pro forma net earnings per share and shareholders' equity per share
but would increase the Company's pro forma consolidated shareholders' equity and
net earnings. Such an increase would also increase the Purchase Price as a
percentage of pro forma stockholders' equity per share and net earnings per
share.
POSSIBLE DILUTIVE EFFECT OF STOCK OPTIONS AND STOCK PROGRAMS
An amount equal to 10% of the Common Stock issued in the Conversion has been
reserved for issuance under the Stock Option Plans, the implementation of which
may be subject to the approval of the shareholders of the Company. If all of the
options were to be exercised using authorized but unissued shares of Common
Stock, the voting interests of existing shareholders would be diluted by
approximately 9.09%, and, assuming that all options were granted at the Purchase
Price, the effect on pro forma net earnings per share and stockholders' equity
per share would be as set forth under "Pro Forma Data." Also, following the
Conversion, the Stock Programs, if implemented, will acquire up to 4% of the
shares of Common Stock issued in the Conversion, either through open market
purchases, subject to OTS approval, if necessary, or from the issuance of
authorized but unissued shares. If the Stock Programs are funded by the issuance
of authorized but unissued shares, the interests of existing shareholders would
be diluted by approximately 3.85% (assuming no exercise of any options). See
"Pro Forma Data" for the effect on pro forma net earnings per share and
stockholders' equity per share. If the Stock Programs are funded by open market
purchases, the voting interests of existing shareholders would not be diluted,
and, assuming that the shares were acquired at the Purchase Price, the effect on
pro forma net earnings per share and holders' equity per share would be as set
forth under "Pro Forma Data."
POSSIBLE ADVERSE INCOME TAX CONSEQUENCES OF THE DISTRIBUTION OF SUBSCRIPTION
RIGHTS
The Bank has received an opinion from Capital Resources that subscription
rights granted to Eligible Account Holders, Supplemental Eligible Account
Holders, Other Members and Bank Employees have no value. However, this opinion
is not binding on the Internal Revenue Service (the "IRS"). If the subscription
rights granted to Eligible Account Holders, Supplemental Eligible Account
Holders, Other Members or Bank Employees are deemed to have an ascertainable
value, such Eligible Account Holders, Supplemental Eligible Account Holders,
Other Members or Bank Employees could be taxed upon the receipt or exercise of
the subscription rights in an amount equal to such value. Additionally, the Bank
could recognize a gain for tax purposes on such distribution. Whether
subscription rights are considered to have ascertainable value is an inherently
factual determination. See "The Conversion--Effects of Conversion" and
"--Effects of Conversion--Tax Aspects."
FINANCIAL INSTITUTION REGULATION AND POSSIBLE LEGISLATION
The Bank is subject to extensive regulation and supervision as a federally
chartered savings bank. The regulatory authorities have extensive discretion in
connection with their supervision and enforcement activities and their
examination policies, including the imposition of restrictions on the operation
of a savings institution, the classification of assets by an institution and the
imposition of an increase in a savings institution's allowance for loan losses.
In addition, the Company, as a savings association holding company, will be
subject to extensive regulation and supervision. Any change in the regulatory
structure or the applicable statutes or regulations, whether by the OTS, the
FDIC or the Congress, could have a material impact on the Company, the Bank, its
operations and the Bank's Conversion. See "Regulation."
24
<PAGE>
Congress has considered various proposals to consolidate and reorganize the
regulatory functions of the four federal banking agencies: the OTS, the FDIC,
the Office of the Comptroller of the Currency (the "OCC") and the Board of
Governors of the Federal Reserve System. Legislation has also been introduced
that would limit the activities of unitary savings association holding companies
to those permitted to be engaged in by multiple savings association holding
companies. See "Regulation--Regulation of Savings Association Holding
Companies." The outcome of efforts to effect regulatory consolidation and
reorganization and to change the permitted activities of holding companies is
uncertain. Therefore, the Bank is unable to determine the extent to which such
legislation, if enacted, would affect its business.
The 1996 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
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.
RISK OF DELAYED OFFERING
The successful consummation of the Offerings will depend, in part, upon
market conditions at the time of the Offerings, both generally and with respect
to the Common Stock, and upon the operating results of the Bank. In the event
that following completion of the Subscription and Community Offerings, various
factors (including the market demand for the Common Stock as reflected by the
level of subscriptions received in such Offerings) result in the estimated pro
forma market value of the Common Stock (as determined by Capital Resources)
being outside the Estimated Price Range, a resolicitation of subscribers would
likely be required, which would delay completion of the Conversion. Developments
other than market conditions could also delay the Conversion; however,
management is currently unaware of any such developments.
OTS regulations require the Conversion to be completed within 45 days after
the completion of the Subscription and Community Offerings. Such 45-day period
may be extended with the approval of the OTS for a period of up to 24 months
after the date of approval of the Plan of Conversion by the Bank's members. In
the event that the Bank and the Company determine that economic conditions
generally, the market for publicly traded thrift institution stocks, the
operating results of the Bank or other factors make a sale of the Common Stock
undesirable, then the Conversion may be delayed until such conditions improve,
subject to any necessary OTS approval. A material delay in the completion of the
Conversion may result in a significant increase in the costs of the Conversion.
In addition, significant changes in the operations and financial condition of
the Bank or the Company, the aggregate market value of the shares to be issued
in the Conversion or general market conditions may occur during any such
material delay.
25
<PAGE>
BIG FOOT FINANCIAL CORP.
The Company was recently organized at the direction of the Board of
Directors of the Bank for the purpose of acquiring all of the capital stock to
be issued by the Bank in the Conversion. The Company has received approval from
the OTS to become a savings association holding company and, as such, will be
subject to regulation by the OTS. See "The Conversion--General." After
completion of the Conversion, the Company will conduct business initially as a
unitary savings association holding company. See "Regulation--Regulation of
Savings Association Holding Companies." Upon consummation of the Conversion, the
Company's assets will consist of all of the outstanding shares of the Bank's
capital stock issued to the Company in the Conversion and 50% of the net
proceeds of the Offerings. The Company intends to use part of the retained net
proceeds to make a loan directly to the ESOP to enable the ESOP to purchase 8%
of the Common Stock in the Conversion. The Company will have no significant
liabilities. See "Use of Proceeds." The management of the Company is set forth
under "Management of the Company." Initially, with the exception of a commercial
parcel to be acquired from the Bank (see "Business of the Bank--Real Estate
Investment"), the Company will neither own nor lease any property but will
instead use the premises and equipment of the Bank. At the present time, the
Company does not intend to employ any persons other than officers but will
utilize the support staff of the Bank from time to time. Additional employees
will be hired as appropriate to the extent the Company expands its business in
the future. See "Business of the Company."
Management believes that the holding company structure will provide the
Company with additional flexibility to diversify its business activities, should
it decide to do so, through existing or newly-formed subsidiaries, or through
acquisitions of other financial institutions and financial services related
companies. Although there are no current arrangements, understandings or
agreements, written or oral, regarding any such opportunities or transactions,
the Company will be in a position after the Conversion, subject to regulatory
limitations and the Company's financial position, to take advantage of any such
acquisition and expansion opportunities that may arise. The initial activities
of the Company are anticipated to be funded by the Conversion proceeds retained
by the Company and earnings thereon or, alternatively, through dividends from
the Bank.
The Company's office is located at the main office of the Bank at 1190 RFD
(the intersection of Old McHenry Road and Route 83), Long Grove, Illinois
60047-7304. The Company's telephone number is (847) 634-2100.
26
<PAGE>
FAIRFIELD SAVINGS BANK, F.S.B.
The Bank was originally founded in 1901 as an Illinois state chartered
mutual savings and loan association. On July 1, 1991, the Bank converted to a
federally chartered savings bank. The Bank is a community-oriented financial
institution providing a variety of financial services to meet the needs of the
communities which it serves. The Bank conducts business from its headquarters in
Long Grove, Illinois and its two branches in Chicago and Norridge, Illinois. The
Bank gathers savings deposits primarily from the communities and neighborhoods
in close proximity to its offices. The Bank's lending area is larger, and
includes Cook, DuPage and Lake counties located in Illinois. The majority of the
Bank's mortgages are secured by properties located in its lending area. See
"Business of the Bank--Market Area" and "--Competition."
The Bank's principal business consists of gathering savings deposits from
the general public within its market area and investing those savings deposits
primarily in one- to four-family residential mortgage loans, mortgage-backed
securities and obligations of the U.S. Government. To a lesser extent, the Bank
makes multifamily residential loans, commercial real estate loans, land,
construction and development loans, consumer loans (including loans secured by
savings deposits and home improvement loans) and commercial lines of credit. At
July 31, 1996, the Bank had total assets of $194.6 million, of which $79.1
million was comprised of loans receivable and $102.4 million was comprised of
mortgage-backed securities. At such date, total savings deposits were $137.2
million, borrowings were $39.9 million and retained earnings were $13.6 million.
The Bank's savings deposits are insured up to the maximum allowable amount by
the SAIF. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and "Business of the Bank."
The Bank is subject to extensive regulation, supervision and examination by
the OTS, its primary regulator, and the FDIC, which insures its savings
deposits. At July 31, 1996, the Bank exceeded all regulatory capital
requirements with tangible, core and risk-based capital ratios of 7.35%, 7.35%
and 21.59%, respectively. Additionally, the Bank's regulatory capital was in
excess of the amount necessary to be "well-capitalized" under FDICIA. See
"Regulation--Regulation of Federal Savings Associations." The Bank is a member
of the FHLB of Chicago, which is one of the 12 regional banks which comprise the
Federal Home Loan Bank system.
The Bank's main office is located at 1190 RFD (the intersection of Old
McHenry Road and Route 83), Long Grove, Illinois 60047-7304. The Bank's
telephone number is (847) 634-2100.
27
<PAGE>
USE OF PROCEEDS
Although the actual net proceeds from the sale of the Common Stock cannot be
determined until the Conversion is completed, it is presently anticipated that
the net proceeds from the sale of the Common Stock will be between $15.2 million
and $20.8 million, with a midpoint of $18.0 million. In the event that the
Estimated Price Range is increased by 15%, the net proceeds from the sale of the
Common Stock are estimated to be $24.0 million. See "Pro Forma Data" and "The
Conversion--Stock Pricing" as to the assumptions used to arrive at such amounts.
The Company will be unable to utilize any of the net proceeds of the Offerings
until the close of the Offerings.
The Company will use the net proceeds from the sale of Common Stock as
follows:
1. The Company will purchase all of the capital stock of the Bank to be
issued upon Conversion in exchange for 50% of the net proceeds.
2. The remaining net proceeds will be retained by the Company. Net proceeds
to be retained by the Company after the purchase of the capital stock of the
Bank are estimated to be between $7.6 million and $10.4 million, with a midpoint
of $9.0 million. In the event that the Estimated Price Range is increased by
15%, the net proceeds retained by the Company are estimated to be $12.0 million.
The net proceeds retained by the Company will initially be invested primarily in
federal funds, government and federal agency mortgage-backed securities, other
debt securities, high-grade short-term marketable securities, deposits of or
loans to the Bank, or a combination thereof, and will be used for general
business activities. In addition, the Company intends to purchase for
approximately $262,000 a certain commercial parcel of land from the Bank. See
"Business of the Bank--Real Estate Investment."
3. The Company intends to use a portion of the retained net proceeds to make
a loan directly to the ESOP to enable the ESOP to purchase 8% of the Common
Stock in the Conversion. Based upon the issuance of 1,615,000 shares or
2,185,000 shares at the minimum and maximum of the Estimated Price Range, the
amount of the loan to the ESOP (if the loan is made by the Company and not a
third party) would be $1.3 million or $1.7 million, respectively (or $2.0
million if the Estimated Price Range is increased by 15%), to be repaid over a
period of up to 10 years at an interest rate of 8%. See "Management of the
Bank--Benefits--Employee Stock Ownership Plan and Trust."
The portion of the net proceeds received by the Bank from the Company's
purchase of the capital stock of the Bank, estimated to be between $7.6 million
at the minimum of the Estimated Price Range and $10.4 million at the maximum of
the Estimated Price Range, will be added to the Bank's general funds to be used
for general corporate purposes, including investment in one- to four-family
residential mortgage loans and other loans which will provide affordable home
financing opportunities to the community; investment in federal funds,
short-term, investment grade marketable securities and mortgage-backed
securities; and to fund the Stock Programs. The Bank may also use such funds for
the expansion of its facilities, and to expand operations through acquisitions
of other financial institutions, branch offices or other financial services
companies. The Bank has no current agreements, arrangements or understandings
regarding any such establishment or acquisition, or any other transaction
related to the possible expansion of its operations. The Bank's regulatory
capital, on a pro forma basis after giving effect to the Conversion, will be
reduced by 8.0% of the shares of Common Stock to be purchased by the ESOP and
4.0% of the shares of Common Stock to be purchased by the Stock Programs. See
"Regulatory Capital Compliance."
The net proceeds retained by the Company may also be used to support the
future expansion of the Bank's operations through branch acquisitions and the
acquisition of other financial institutions or diversification into other
banking related businesses and for other business or investment purposes,
including possibly the payment of dividends and the repurchase of the Company's
Common Stock as permitted by the OTS. See "Dividend Policy" and
"Regulation--Regulation of Federal Savings Associations--Limitation on Capital
Distributions." The Company has no current arrangements, understandings or
agreements, written or oral, regarding any such transactions. The Company is
subject to the terms of a
28
<PAGE>
certification made to and required by the OTS in connection with the application
to the OTS for approval of the Conversion, which certification prohibits the
Company from taking any actions to further any payments to its shareholders
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 Bank to the Company. See "Dividend Policy." The
Company, upon completion of the Conversion, will be a unitary savings
association holding company, which under existing laws generally would not be
restricted as to the types of business activities in which it may engage, so
long as the Bank continues to be a qualified thrift lender ("QTL"). See
"Regulation--Regulation of Savings Association Holding Companies" for a
description of certain regulations applicable to the Company. In determining the
amount of net proceeds to be used to purchase the capital stock of the Bank,
consideration was given to such factors as the regulatory capital position of
the Bank, both before and after giving effect to the Conversion, and the rules
and regulations and policies of the OTS governing the amount of proceeds which
may be retained by the Company.
Upon completion of the Conversion, the Company's Board of Directors will
have the authority to adopt stock repurchase plans, subject to statutory and
regulatory requirements. Based upon facts and circumstances which may arise
following the Conversion and subject to applicable regulatory requirements, the
Company's Board of Directors may determine to repurchase stock in the future.
Such facts and circumstances may include: (i) market and economic factors such
as the price at which the stock is trading in the market, the volume of trading,
the attractiveness of other investment alternatives in terms of the rate of
return and risk involved in the investment, the ability to increase the book
value and/or earnings per share of the remaining outstanding shares and
improvement in the Company's return on equity; (ii) the avoidance of dilution to
shareholders by not having to issue additional shares to cover the exercise of
stock options or to fund employee stock benefit plans; and (iii) any other
circumstances in which repurchases would be in the best interests of the Company
and its shareholders. In the event the Company determines to repurchase stock,
such repurchases may be made at market prices which may be in excess of the
Purchase Price in the Conversion.
Any stock repurchases will be subject to the determination of the Company's
Board of Directors that both the Company and the Bank will be capitalized in
excess of all applicable regulatory requirements after any such repurchases and
that such capital will be adequate, taking into account, among other things, the
level of non-performing and other risk assets, the Company's and the Bank's
current and projected results of operations and asset/liability structure, the
economic environment and tax and other considerations. In addition, applicable
OTS regulations generally prohibit the Company from repurchasing its own stock
for a period of one year following the Conversion. Any stock repurchases by the
Company during the two years thereafter are subject to OTS approval and
generally are required to be part of an open market program not involving
greater than 5% of the outstanding Common Stock during any twelve-month period.
However, the OTS Regional Directors have the authority to approve stock
repurchases during the first three years after the Conversion that are in excess
of these limits. See "The Conversion--Certain Restrictions on Purchase or
Transfer of Shares After Conversion."
Upon completion of the Conversion, the Company's Board of Directors of the
Company will have the authority to declare dividends on the Common Stock. The
Board of Directors does not presently intend to declare dividends on the Common
Stock but may do so in the future. The payment of dividends or repurchase of
stock, however, would be prohibited if stockholders' equity would be reduced
below the amount required to maintain the Bank's "liquidation account." See
"Dividend Policy," "The Conversion-- Certain Restrictions on Purchase or
Transfer of Shares After Conversion" and " --Effects of Conversion-- Liquidation
Rights."
Neither the Bank nor the Company has yet determined the approximate amount
of net proceeds to be used for each of the purposes mentioned above.
29
<PAGE>
DIVIDEND POLICY
Upon completion of the Conversion, the Board of Directors of the Company
will have the authority to declare dividends on the Common Stock. The Board of
Directors does not presently intend to declare dividends on the Common Stock. In
the future, declarations of dividends by the Board of Directors, if any, will
depend upon a number of factors, including the amount of net proceeds retained
by the Company in the Conversion, investment opportunities available to the
Company or the Bank, capital requirements, regulatory limitations, the Company's
and the Bank'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 Bank will provide the principal
source of funds for payment of dividends by the Company. The Bank will not be
permitted to pay dividends on its capital stock if, among other things, its
holders' equity would be reduced below the amount required for the liquidation
account. See "The Conversion--Effects of Conversion--Liquidation Rights" and
"Regulation." For information concerning federal regulations which apply to the
Bank in determining the amount of proceeds which may be retained by the Company
and regarding a savings institution's ability to make capital distributions
including payment of dividends to its holding company, see "Regulation
- --Regulation of Federal Savings Associations--Limitation on Capital
Distributions" and "Federal and State Taxation-- Federal Taxation
- --Distributions." Assuming the shares of Common Stock are sold at the maximum of
the Estimated Price Range, at July 31, 1996, after giving pro forma effect to
(i) the Conversion and related expenses, (ii) the deduction from capital of the
amount expected to be borrowed by the ESOP and the cost of shares of Common
Stock to be acquired by the Stock Programs and (iii) the retention by the Bank
of 50% of the net proceeds of the Conversion, the Bank would be permitted to
make capital distributions of up to approximately $8.4 million to the Company
without prior OTS approval.
Unlike the Bank, the Company is not subject to OTS regulatory restrictions
on the payment of dividends to its shareholders, although the source of such
dividends will be dependent on the net proceeds retained by the Company and
earnings thereon and may be dependent, in part, upon dividends from the Bank.
The Company is subject, however, to the requirements of Illinois law, which
generally prohibits dividends that would cause the net assets of the Company
(the amount by which total assets exceed total liabilities) to be less than zero
or less than the maximum amount payable at the time of the dividend to
shareholders having preferential rights in liquidation if the corporation were
then to be liquidated.
30
<PAGE>
MARKET FOR THE COMMON STOCK
The Company and the Bank have not previously issued capital stock (other
than shares issued by the Company upon incorporation), and, consequently, there
is currently no established market for the Common Stock. The Company has
received conditional approval from the Nasdaq National Market to have its Common
Stock quoted under the symbol "BFFC" upon completion of the Conversion. One of
the requirements for continued quotation of the Common Stock on the Nasdaq
National Market is that there be at least two market makers for the Common
Stock. The Company will seek to encourage and assist at least two market makers
to make a market in its Common Stock. Making a market involves maintaining bid
and asked quotations and being able, as principal, to effect transactions in
reasonable quantities at those quoted prices, subject to various securities laws
and other regulatory requirements. Hovde will assist the Company in such efforts
but will not be a market maker in the Common Stock. While the Company
anticipates that there will be other broker-dealers to act as market maker for
the Common Stock, there can be no assurance that there will be two or more
market makers for the Common Stock. Additionally, the development of a liquid
public market depends on the existence of willing buyers and sellers, the
presence of which is not within the control of the Company, the Bank or any
market maker. The number of active buyers and sellers of the Common Stock at any
particular time may be limited. Under such circumstances, investors in the
Common Stock could have difficulty disposing of their shares on short notice and
should not view the Common Stock as a short-term investment. There can be no
assurance that an active and liquid trading market for the Common Stock will
develop or that, if developed, it will continue, nor is there any assurance that
persons purchasing shares will be able to sell them at or above the Purchase
Price or that quotations will be available on the Nasdaq National Market as
contemplated.
31
<PAGE>
REGULATORY CAPITAL COMPLIANCE
At July 31, 1996, the Bank exceeded all regulatory capital requirements. See
"Regulation--Regulation of Federal Savings Associations--Capital Requirements."
Set forth below is a summary of the Bank's compliance with regulatory capital
standards at July 31, 1996, on a historical and pro forma basis assuming that
the indicated number of shares were sold as of such date and receipt by the Bank
of 50% of net conversion proceeds. For purposes of the table below, the amount
expected to be borrowed by the ESOP and the cost of the shares expected to be
acquired by the Stock Programs are deducted from pro forma regulatory capital.
<TABLE>
<CAPTION>
PRO FORMA AT JULY 31, 1996 BASED ON(1)
---------------------------------------------------------------
1,615,000 SHARES 1,900,000 SHARES
(MINIMUM OF (MIDPOINT OF
HISTORICAL AT ESTIMATED ESTIMATED
JULY 31, 1996 PRICE RANGE) PRICE RANGE)
------------------- ------------------- -------------------
PERCENT OF PERCENT OF PERCENT OF
AMOUNT ASSETS(3) AMOUNT ASSETS(3) AMOUNT ASSETS(3)
------- ---------- ------- ---------- ------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
GAAP Capital(4)....... $13,579 6.98% $19,231 9.60% $20,291 10.08%
------- ----- ------- ----- ------- -----
------- ----- ------- ----- ------- -----
Tangible Capital(4):
Capital level....... $14,386 7.35% $20,038 9.97% $21,098 10.44%
Requirement......... 2,931 1.50 3,016 1.50 3,032 1.50
------- ----- ------- ----- ------- -----
Excess.............. $11,455 5.85% $17,022 8.47% $18,066 8.94%
------- ----- ------- ----- ------- -----
------- ----- ------- ----- ------- -----
Core Capital(4):
Capital level....... $14,386 7.35% $20,038 9.97% $21,098 10.44%
Requirement......... 5,863 3.00 6,032 3.00 6,064 3.00
------- ----- ------- ----- ------- -----
Excess.............. 8,523 4.35% 14,006 6.97% $15,034 7.44%
------- ----- ------- ----- ------- -----
------- ----- ------- ----- ------- -----
Risk-Based Capital(4):
Capital level....... $14,686 21.59% $20,338 28.71% $21,398 29.98%
Requirement(5)...... 5,441 8.00 5,667 8.00 5,709 8.00
------- ----- ------- ----- ------- -----
Excess.............. $ 9,245 13.59% $14,671 20.71% $15,689 21.98%
------- ----- ------- ----- ------- -----
------- ----- ------- ----- ------- -----
<CAPTION>
2,512,750 SHARES
2,185,000 SHARES (15% ABOVE
(MAXIMUM OF MAXIMUM OF
ESTIMATED ESTIMATED
PRICE RANGE) PRICE RANGE)(2)
------------------- -------------------
PERCENT OF PERCENT OF
AMOUNT ASSETS(3) AMOUNT ASSETS(3)
------- ---------- ------- ----------
<S> <C> <C> <C> <C>
GAAP Capital(4)....... $21,351 10.55% $22,570 11.08%
------- ----- ------- -----
------- ----- ------- -----
Tangible Capital(4):
Capital level....... $22,158 10.90% $23,377 11.44%
Requirement......... 3,048 1.50 3,066 1.50%
------- ----- ------- -----
Excess.............. 19,110 9.40% $20,311 9.94%
------- ----- ------- -----
------- ----- ------- -----
Core Capital(4):
Capital level....... $22,158 10.90% $23,377 11.44%
Requirement......... 6,096 3.00 6,133 3.00
------- ----- ------- -----
Excess.............. $16,062 7.90% $17,244 8.44%
------- ----- ------- -----
------- ----- ------- -----
Risk-Based Capital(4):
Capital level....... $22,458 31.24% $23,677 32.65%
Requirement(5)...... 5,752 8.00 5,801 8.00
------- ----- ------- -----
Excess.............. $16,706 23.24% $17,876 24.65%
------- ----- ------- -----
------- ----- ------- -----
</TABLE>
- ------------------------------
(1) Pro forma capital levels assume receipt by the Bank of 50% of the net
proceeds of the Conversion at the minimum, midpoint, maximum and 15% above
the maximum of the Estimated Price Range. These levels also assume funding
by the Bank of the Stock Programs, the ESOP purchase and repayment of the
Company's loan to the ESOP at the minimum, midpoint, maximum and 15% above
the maximum of the range. No effect has been given to the possible issuance
of up to 10% of the issued Common Stock at the minimum, midpoint, maximum
and 15% above the maximum of the range pursuant to the Stock Option Plans,
which are expected to be adopted by the Company following the Conversion,
and which, if implemented prior to the first anniversary of the Conversion,
will require approval at a meeting of shareholders to be held no earlier
than six months after the completion of the Conversion.
(2) As adjusted to give effect to an increase in the number of shares which
could occur due to an increase in the Estimated Price Range of up to 15% to
reflect changes in market or general financial and economic conditions
following the commencement of the Subscription and Community Offerings.
(3) Tangible capital and core capital levels are shown as a percentage of total
tangible assets. Risk-based capital levels are shown as a percentage of
risk-weighted assets.
(4) The difference between capital under generally accepted accounting
principles ("GAAP") and regulatory tangible and core capital is an
adjustment to GAAP capital by the amount of the net unrealized gain/loss, if
any, on available-for-sale securities recognized only for GAAP purposes, as
well as adjustments related to certain real estate investments. Regulatory
risk-based capital reflects these adjustments plus the inclusion of the
allowance for loan losses. See "Regulation--Regulation of Federal Savings
Associations--Capital Requirements." Additionally, capital amounts are
reduced by 8.0% of the shares of Common Stock to be purchased by the ESOP
and 4.0% of the shares of Common Stock to be purchased by the Stock
Programs, as described under "Pro Forma Data."
(5) The current OTS total risk-based capital requirement is 8.0% of
risk-weighted assets. Assumes net proceeds are invested in assets that carry
a 50% risk-weighting.
32
<PAGE>
CAPITALIZATION
The following table presents the historical capitalization of the Bank at
July 31, 1996, and the pro forma consolidated capitalization of the Company
after giving effect to the Conversion, based upon the sale of the number of
shares indicated in the table and the other assumptions set forth under "Pro
Forma Data."
<TABLE>
<CAPTION>
COMPANY CONSOLIDATED PRO FORMA
CAPITALIZATION BASED ON $10.00 PER SHARE
---------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
2,512,750
SHARES
1,615,00 1,900,000 2,185,000 (15% ABOVE
SHARES SHARES SHARES MAXIMUM OF
(MINIMUM OF (MIDPOINT OF (MAXIMUM OF ESTIMATED
BANK ESTIMATED ESTIMATED ESTIMATED PRICE
HISTORICAL PRICE RANGE) PRICE RANGE) PRICE RANGE) RANGE)(1)
----------- ------------ ------------ ------------ --------------
Savings deposits(2)....................................... $ 137,177 $ 137,177 $ 137,177 $ 137,177 $ 137,177
Borrowed money............................................ 39,900 39,900 39,900 39,900 39,900
----------- ------------ ------------ ------------ --------------
Total savings deposits and borrowed money................. $ 177,077 $ 177,077 $ 177,077 $ 177,077 $ 177,077
----------- ------------ ------------ ------------ --------------
----------- ------------ ------------ ------------ --------------
STOCKHOLDERS' EQUITY:
Preferred Stock, $.01 par value, 2,000,000 shares
authorized; none to be issued......................... $ -- $ -- $ -- $ -- $ --
Common Stock, $.01 par value, 8,000,000 shares
authorized; shares to be issued as reflected.......... -- 16 19 22 25
Excess Common Stock, $.01 par value, 7,200,000 shares
authorized; none to be issued......................... -- -- -- -- --
Additional paid-in capital(3)(4)........................ -- 15,163 17,964 20,765 23,987
Retained earnings, substantially restricted(5).......... 14,648 14,648 14,648 14,648 14,648
Unrealized loss on securities available-for-sale, net of
tax................................................... (1,069) (1,069) (1,069) (1,069) (1,069)
LESS:
Common Stock acquired by the ESOP(6).................... -- (1,292) (1,520) (1,748) (2,010)
Common Stock acquired by the Stock Programs(7).......... -- (646) (760) (874) (1,005)
----------- ------------ ------------ ------------ --------------
Total stockholders' equity................................ $ 13,579 $ 26,820 $ 29,282 $ 31,744 $ 34,576
----------- ------------ ------------ ------------ --------------
----------- ------------ ------------ ------------ --------------
</TABLE>
- ------------------------
(1) As adjusted to give effect to an increase in the number of shares which
could occur due to an increase in the Estimated Price Range of up to 15% to
reflect changes in market and financial and economic conditions following
the commencement of the Subscription and Community Offerings.
(2) Does not reflect withdrawals from savings deposit accounts for the purchase
of Common Stock in the Conversion. Such withdrawals would reduce pro forma
savings deposits by the amount withdrawn.
(3) No effect has been given to the issuance of additional shares of Common
Stock pursuant to the Company's Stock Option Plans which, if implemented by
the Company prior to the first anniversary of the Conversion, will be
presented for approval by shareholders at a meeting of shareholders to be
held no earlier than six months following the completion of the Conversion.
If implemented, an amount equal to 10% of the shares of Common Stock issued
in the Conversion will be reserved for issuance upon the exercise of options
to be granted under the Stock Option Plans. See "Management of the
Bank--Benefits--Stock Option Plans."
(4) Amount shown net of expected conversion expenses of approximately $971,000,
$1,017,000, $1,063,000, and $1,116,000, respectively, under the issuance of
1,615,000 shares, 1,900,000 shares, 2,185,000 shares and 2,512,750 shares.
(5) The retained earnings of the Bank will continue to be substantially
restricted after the Conversion. See "The Conversion--Effects of
Conversion--Liquidation Rights" and "Regulation--Regulation of Federal
Savings Associations--Limitation on Capital Distributions."
(6) Assumes that 8% of the shares offered for sale in the Conversion will be
purchased by the ESOP and that the funds used to acquire such shares will be
borrowed from the Company. The Common Stock acquired by the ESOP is
reflected as a reduction of stockholders' equity. See "Management of the
Bank--Executive Compensation" and "--Benefits-- Employee Stock Ownership
Plan and Trust."
(7) Assumes that an amount equal to 4% of the shares of the Common Stock issued
in the Conversion will be purchased by the Stock Programs subsequent to the
Conversion through open market purchases. The Common Stock purchased by the
Stock Programs is reflected as a reduction of stockholders' equity.
Implementation of the Stock Programs prior to the first anniversary of the
Conversion would be subject to the approval of the Company's shareholders to
be obtained at a meeting of shareholders to be held no earlier than six
months following the completion of the Conversion. See "Management of the
Bank--Benefits--Stock Programs" and "Pro Forma Data" regarding the dilutive
effect of the Stock Programs.
33
<PAGE>
PRO FORMA DATA
The actual net proceeds from the sale of the Common Stock cannot be
determined until the Conversion is completed. However, net proceeds are
currently estimated to be between $15.2 million and $20.8 million (or $24.0
million in the event the Estimated Price Range is increased by 15%) based upon
the following assumptions: (i) 100% of the shares of Common Stock will be sold
in the Subscription Offering, as follows: (a) 8% will be sold to the ESOP and
220,500 shares will be sold to directors, officers and employees or members of
such persons' immediate families; and (b) the remainder will be sold to Eligible
Account Holders, Supplemental Eligible Account Holders, Other Members and Bank
Employees in the Subscription Offering; (ii) Hovde will receive a fee equal to
1.75% of the aggregate actual purchase price of the shares sold to Eligible
Account Holders, Supplemental Eligible Account Holders and Other Members in the
Subscription Offering, excluding shares purchased by directors, officers,
employees and their families and the ESOP for which there is no fee; (iii) no
shares are sold in the Community Offering or the Syndicated Community Offering;
and (iv) Conversion expenses, excluding the fees paid to Hovde, will be
approximately $750,000. Actual Conversion expenses may vary from these
estimates.
Pro forma net earnings have been calculated assuming the Common Stock had
been sold at the beginning of the periods and the net proceeds had been invested
at an average yield of 5.80% for the year ended July 31, 1996, the one year U.S.
Treasury bill rate in effect in July, 1996. The one year U.S. Treasury bill
rate, rather than an arithmetic average of the average yield on interest-earning
assets and average rate paid on interest-bearing liabilities, has been used to
estimate income on net proceeds, because management believes that the one year
U.S. Treasury bill rate provides a more accurate estimate of the rate that would
be obtained on an initial investment of the net proceeds from the Offering. The
pro-forma after-tax yield is assumed to be 3.82% for this period, based on an
effective tax rate of 34.1% for such period. The effect of withdrawals from
savings deposit accounts for the purchase of Common Stock has not been
reflected. Historical and pro forma per share amounts have been calculated by
dividing historical and pro forma amounts by the indicated number of shares of
Common Stock, as adjusted (in the case of pro forma net earnings per share) to
give effect to the purchase of shares by the ESOP. Pro forma stockholders'
equity amounts have been calculated as if the Common Stock had been sold on July
31, 1996, and, accordingly, no effect has been given to the assumed earnings
effect of the transactions.
The following pro forma information may not be representative of the
financial effects of the foregoing transactions at the dates on which such
transactions actually occur and should not be taken as indicative of future
results of operations. Pro forma consolidated stockholders' equity represents
the difference between the projected amount of assets and liabilities of the
Company computed in accordance with GAAP. The pro forma stockholders' equity is
not intended to represent the fair market value of the Common Stock and may be
greater than amounts that would be available for distribution to shareholders in
the event of liquidation.
The following tables summarize historical data of the Bank and pro forma
data of the Company at or for the fiscal year ended July 31, 1996 based on the
assumptions set forth above and in the tables and should not be used as a basis
for projections of market value of the Common Stock following the Conversion.
The tables below give effect to the Stock Programs, which are expected to be
adopted by the Company following the Conversion and which, if implemented prior
to the first anniversary of the Conversion, will be presented to shareholders
for approval at a meeting of shareholders to be held no earlier than six months
after completion of the Conversion. See footnote 3 to the tables. No effect has
been given in the tables to the possible issuance of additional shares reserved
for future issuance pursuant to the Stock Option Plans to be adopted by the
Board of Directors of the Company, nor does book value give any effect to the
liquidation account to be established for the benefit of Eligible Account
Holders and Supplemental Eligible Account Holders or the bad debt reserve in
liquidation. See footnote 4 to the tables below and "The Conversion--Effects of
Conversion--Liquidation Rights" and "Management of the Bank--Benefits--Stock
Option Plans."
34
<PAGE>
<TABLE>
<CAPTION>
AT OR FOR THE YEAR ENDED JULY 31, 1996
---------------------------------------------------------
<S> <C> <C> <C> <C>
1,615,000 1,900,000 2,185,000 2,512,750
SHARES SOLD SHARES SOLD SHARES SOLD SHARES SOLD
AT $10.00 AT $10.00 AT $10.00 AT $10.00 PER
PER SHARE PER SHARE PER SHARE SHARE (15%
(MINIMUM (MIDPOINT (MAXIMUM ABOVE MAXIMUM
OF RANGE) OF RANGE) OF RANGE) OF RANGE)(1)
------------ ------------ ------------ ---------------
<CAPTION>
(IN THOUSANDS, EXCEPT SHARES AND PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Gross proceeds........................................ $ 16,150 $ 19,000 $ 21,850 $ 25,128
Less: Offering expenses and commissions............... (971) (1,017) (1,063) (1,116)
------------ ------------ ------------ ---------------
Estimated net proceeds................................ 15,179 17,983 20,787 24,012
Less: Common Stock purchased by ESOP (2).............. (1,292) (1,520) (1,748) (2,010)
Common Stock purchased by Stock Programs (3)... (646) (760) (874) (1,005)
------------ ------------ ------------ ---------------
Estimated net proceeds, as adjusted................... $ 13,241 $ 15,703 $ 18,165 $ 20,997
------------ ------------ ------------ ---------------
Net earnings:
Historical.......................................... $ 226 $ 226 $ 226 $ 226
Pro forma net earnings on net proceeds.............. 505 600 694 802
Pro forma ESOP adjustment (2)....................... (85) (100) (115) (132)
Pro forma Stock Programs adjustment (3)............. (85) (100) (115) (132)
------------ ------------ ------------ ---------------
Pro forma net earnings.............................. $ 561 $ 626 $ 690 $ 764
------------ ------------ ------------ ---------------
Per share net earnings:
Historical.......................................... $ 0.15 $ 0.13 $ 0.11 $ 0.10
Pro forma net earnings on net proceeds.............. 0.34 0.34 0.34 0.34
Pro forma ESOP adjustment (2)....................... (0.06) (0.06) (0.06) (0.06)
Pro forma Stock Programs adjustment (3)............. (0.06) (0.06) (0.06) (0.06)
------------ ------------ ------------ ---------------
Pro forma net earnings per share (4)................ $ 0.37 $ 0.35 $ 0.33 $ 0.32
------------ ------------ ------------ ---------------
------------ ------------ ------------ ---------------
Shares used in calculation (2)...................... 1,499,000 1,763,000 2,028,000 2,332,000
Stockholders' equity:
Historical.......................................... $ 13,579 $ 13,579 $ 13,579 $ 13,579
Estimated net proceeds.............................. 15,179 17,983 20,787 24,012
Less: Common Stock acquired by ESOP (2)............. (1,292) (1,520) (1,748) (2,010)
Common Stock acquired by Stock Programs
(3)........................................... (646) (760) (874) (1,005)
------------ ------------ ------------ ---------------
Pro forma stockholders' equity (2)(3)(4)(5)......... $ 26,820 $ 29,282 $ 31,744 $ 34,576
------------ ------------ ------------ ---------------
------------ ------------ ------------ ---------------
Stockholders' equity per share: (3)
Historical.......................................... $ 8.41 $ 7.15 $ 6.21 $ 5.40
Estimated net proceeds.............................. 9.40 9.46 9.51 9.56
Less: Common Stock acquired by ESOP (1)............. (0.80) (0.80) (0.80) (0.80)
Common Stock acquired by Stock Programs
(3)........................................... (0.40) (0.40) (0.40) (0.40)
------------ ------------ ------------ ---------------
Pro forma stockholders' equity per share
(2)(3)(4)......................................... $ 16.61 $ 15.41 $ 14.52 $ 13.76
------------ ------------ ------------ ---------------
------------ ------------ ------------ ---------------
Shares used in calculation (2)........................ 1,615,000 1,900,000 2,185,000 2,512,750
Offering price as percentage of pro forma
stockholders' equity per share...................... 60.20% 64.89% 68.87% 72.67%
------------ ------------ ------------ ---------------
------------ ------------ ------------ ---------------
Offering price to pro forma net earnings per share.... 27.03x 28.57x 30.30x 31.25x
------------ ------------ ------------ ---------------
------------ ------------ ------------ ---------------
</TABLE>
(NOTES ON FOLLOWING PAGE)
35
<PAGE>
(1) As adjusted to give effect to an increase of up to 15% in the number of
shares offered to reflect possible changes in market and financial
conditions following the commencement of the Subscription Offering.
(2) It is assumed that 8% of the shares of Common Stock offered in the
Conversion will be purchased by the ESOP. The funds used to acquire such
shares are expected to be borrowed by the ESOP from the net Conversion
proceeds retained by the Company. The Bank intends to make contributions to
the ESOP in amounts at least equal to the principal and interest requirement
of the debt. The Bank's payment of the ESOP debt is based upon equal
principal installments plus interest over a 10-year period. Assuming the
Company makes the ESOP loan, interest income earned by the Company on the
ESOP debt will offset the interest paid by the Bank. Accordingly, only the
principal payments on the ESOP debt are recorded as an expense
(tax-effected) to the Company on a consolidated basis. The amount of ESOP
debt is reflected as a reduction to stockholders' equity. In the event that
the ESOP were to receive a loan from an independent third party, both ESOP
expense and earnings on the proceeds retained by the Company would be
expected to increase.
For purposes of these tables the purchase price of $10.00 was utilized to
calculate ESOP expense. The Bank will account for the ESOP in accordance
with the American Institute of Certified Public Accountants ("AICPA")
Accounting Standards Division's Statement of Position No. 93-6. "Employers'
Accounting for Employee Stock Ownership Plans" ("SOP No. 93-6").
Accordingly, the Bank will recognize compensation expense equal to the fair
value of ESOP shares at the time they are committed to be released to
participants. As a result, to the extent the fair value of the Common Stock
appreciates over time, compensation expense related to the ESOP will
increase. SOP No. 93-6 also requires that, for the earnings per share
computations for leveraged ESOPs, outstanding shares include only such
shares as have been committed to be released to participants. The table at
or for the year ended July 31, 1996 assumes that the number of ESOP shares
are allocated on a straight-line basis over 10 years, and, accordingly, 10%
of the ESOP shares are assumed to be committed to be released at the
beginning of the first year following Conversion. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Impact of New Accounting Standards" and "Management of the
Bank--Benefits--Employee Stock Ownership Plan and Trust."
(3) Gives effect to the Stock Programs expected to be adopted by the Company
following the Conversion and which, if implemented prior to the first
anniversary of the Conversion, will be presented for approval at a meeting
of shareholders to be held no earlier than six months after completion of
the Conversion. If implemented, the Stock Programs intend to acquire an
amount of Common Stock equal to 4% of the shares of Common Stock issued in
the Conversion, or 64,600, 76,000, 87,400 and 100,510 shares of Common Stock
(respectively) at the minimum, midpoint, maximum and 15% above the maximum
of the range, either through open market purchases, subject to OTS approval,
if necessary, or from authorized but unissued shares of Common Stock or
treasury stock of the Company, if any. Funds used by the Stock Programs to
purchase the shares will be contributed to the Stock Programs by the Bank.
In calculating the pro forma effect of the Stock Programs, it is assumed
that any required shareholder approval has been received, that the shares
were acquired by the Stock Programs at the year ended July 31, 1996 in open
market purchases at the Purchase Price, and that 20% of the amount
contributed was amortized to expense during the year ended July 31, 1996.
Current OTS regulations provide that management or employee stock benefit
plans established or implemented within one year after the conversion of a
savings institution shall not vest at a rate in excess of 20% a year and
shall not provide for accelerated vesting except in the case of disability
or death. The issuance of authorized but unissued shares of the Company's
Common Stock to the Stock Programs instead of open market purchases would
dilute the voting interests of existing shareholders by approximately 3.85%
during the year ended July 31, 1996, pro forma net earnings per share would
be $0.36, $0.34, $0.33 and $0.31 at the minimum, midpoint, maximum and 15%
above the maximum of the Estimated Price Range, respectively, for the year
ended July 31, 1996; pro forma stockholders' equity per share would be
$16.35, $15.20, $14.35 and $13.62 at the minimum, midpoint, maximum and 15%
above the maximum of the Estimated Price Range, respectively, for the year
ended July 31, 1996. There can be no assurance that the Stock Programs will
be implemented or that the actual purchase price of the shares will be equal
to the Purchase Price. In addition, if implemented, there can be no
assurance that the Stock Programs will acquire 4% of the shares of Common
Stock issued in the
36
<PAGE>
Conversion or that the Bank will contribute funds to the Stock Programs to
purchase any shares. See "Management of the Bank--Benefits."
(4) No effect has been given to the issuance of additional shares of Common
Stock pursuant to the Stock Option Plan expected to be adopted by the
Company following the Conversion. If the Company intends to implement the
Stock Option Plan prior to the first anniversary of the Conversion, it will
present the Stock Option Plan for approval at a meeting of shareholders to
be held no earlier than six months after the completion of the Conversion.
If the Stock Option Plan is approved by shareholders, an amount equal to 10%
of the Common Stock issued in the Conversion, or 161,500, 190,000, 218,500
and 251,275 shares at the minimum, midpoint, maximum and 15% above the
maximum of the Estimated Price Range, respectively, will be reserved for
future issuance upon the exercise of options to be granted under the Stock
Option Plan. The issuance of Common Stock pursuant to the exercise of
options under the Stock Option Plan will result in the dilution of existing
stockholders' interests. Assuming implementation of the Stock Option Plan
and the exercise of all options at the end of the period at an exercise
price of $10.00 per share, the pro forma net earnings per share would be
$0.34, $0.32, $0.31 and $0.30, respectively, at the minimum, midpoint,
maximum and 15% above the maximum of the Estimated Price Range for the year
ended July 31, 1996; pro forma stockholders' equity per share would be
$16.01, $14.92, $14.12 and $13.42, respectively, at the minimum, midpoint,
maximum and 15% above the maximum of the range for the year ended July 31,
1996. See "Management of the Bank--Benefits--Stock Option Plans."
(5) The retained earnings of the Bank will continue to be substantially
restricted after the Conversion. See "Dividend Policy," "The
Conversion--Effects of Conversion--Liquidation Rights" and
"Regulation--Regulation of Federal Savings Associations--Limitation on
Capital Distributions."
37
<PAGE>
FAIRFIELD SAVINGS BANK, F.S.B.
STATEMENTS OF EARNINGS
The following Statements of Earnings of the Bank for each of the years in
the three year period ended July 31, 1996 have been audited by KPMG Peat Marwick
LLP, independent certified public accountants, whose report thereon appears
elsewhere herein. These statements should be read in conjunction with the other
financial statements and notes thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
FOR THE YEAR ENDED JULY 31,
----------------------------------------
<S> <C> <C> <C>
1996 1995 1994
------------ ------------ ------------
Interest income:
Mortgage-backed securities held-to-maturity........................... $ 2,755,626 $ 6,493,643 $ 6,020,746
Mortgage-backed securities available-for-sale......................... 4,088,066 -- --
Loans receivable...................................................... 6,026,328 5,663,087 6,086,876
Interest-earning deposits............................................. 136,222 296,037 332,361
FHLB of Chicago stock................................................. 147,302 142,609 128,645
Investment securities available....................................... -- 78,691 482,897
------------ ------------ ------------
Total interest income............................................. 13,153,544 12,674,067 13,051,525
------------ ------------ ------------
Interest expense:
Savings deposits...................................................... 5,924,074 5,063,988 4,493,680
Borrowed money........................................................ 2,525,598 2,268,816 2,429,480
------------ ------------ ------------
Total interest expense............................................ 8,449,672 7,332,804 6,923,160
------------ ------------ ------------
Net interest income before provision (credit) for loan losses........... 4,703,872 5,341,263 6,128,365
Provision (credit) for loan losses...................................... 137,558 -- (18,000)
------------ ------------ ------------
Net interest income after provision (credit) for loan losses...... 4,566,314 5,341,263 6,146,365
------------ ------------ ------------
Noninterest income:
Gain on sale of investment securities available-for-sale.............. -- -- 615,588
Gain on sale of real estate held for sale and development............. -- 556,880 574,183
Service fees.......................................................... 212,109 225,733 193,781
Litigation settlements................................................ 184,415 51,671 --
Other................................................................. 88,448 11,449 131,526
------------ ------------ ------------
Total noninterest income.......................................... 484,972 845,733 1,515,078
------------ ------------ ------------
Noninterest expense:
Compensation and benefits............................................. 2,226,288 2,455,579 2,449,494
Office occupancy...................................................... 1,032,676 951,018 922,842
Federal deposit insurance premiums.................................... 337,220 325,463 330,878
Real estate held for development...................................... 139,847 237,148 510,549
Professional services................................................. 359,217 197,151 229,579
Other................................................................. 613,042 600,082 653,703
------------ ------------ ------------
Total noninterest expense......................................... 4,708,290 4,766,441 5,097,045
------------ ------------ ------------
Income before income taxes and cumulative effect of change in accounting
principle............................................................. 342,996 1,420,555 2,564,398
Income tax expense...................................................... 117,000 438,400 894,100
------------ ------------ ------------
Income before cumulative effect of change in accounting principle....... 225,996 982,155 1,670,298
Cumulative effect of change in accounting for income taxes.............. -- -- 439,470
------------ ------------ ------------
Net income........................................................ $ 225,996 $ 982,155 $ 2,109,768
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
See accompanying "Notes to Financial Statements" presented elsewhere in this
Prospectus.
38
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
The Company has only recently been formed and, accordingly, has no results
of operations. The business of the Bank is that of a financial intermediary
engaged primarily in attracting savings deposits from the general public and
using such deposits to originate one- to four-family residential mortgage and,
to a lesser extent, multifamily residential loans, commercial real estate loans,
land, construction and development loans and consumer loans primarily in its
market area. The Bank maintains an investment portfolio consisting primarily of
mortgage-backed securities. The operations of the Bank are influenced
significantly by general economic conditions and by policies of financial
institution regulatory agencies, including the OTS and the FDIC. The Bank's cost
of funds is influenced by interest rates on competing investments and general
market interest rates. Lending activities are affected by the demand for
financing of real estate and other types of loans, which in turn is affected by
the interest rates at which such financings may be offered.
The Bank's earnings are primarily dependent on its net interest income,
which is determined by the difference (the "spread") between the yields earned
on its interest-earning assets, such as loans and investments and the rates paid
on its interest-bearing liabilities, primarily savings deposits and borrowings.
Results of operations are also dependent upon the level of the Bank's
noninterest income, including fee income and service charges, and affected by
the level of its noninterest expenses, including its general and administrative
expenses.
RECENT LEGISLATION; SAIF ASSESSMENT
On September 30, 1996, Congress enacted legislation to recapitalize the
SAIF. Under this legislation, depository institutions such as the Bank were
assessed a one-time charge at a rate of 65.7 basis points per $100 of
SAIF-assessable deposits held at March 31, 1995. The assessment is payable on
November 27, 1996. The impact on operations, net of related tax effects, will
reduce reported earnings by $617,000 for the quarter ended October 31, 1996.
Management, however, anticipates, although there can be no assurance, that the
Bank will pay substantially lower regular deposit insurance assessments compared
to those paid by the Bank in recent years. See "Risk Factors--Recapitalization
of the SAIF; SAIF Assessments; and Special Assessment," and
"Regulation--Regulation of Federal Savings Associations--Insurance of Deposit
Accounts."
MANAGEMENT STRATEGY
HOME LENDING AND ASSET QUALITY. The Bank's strategy has been to maintain
its focus as a traditional consumer-oriented institution serving the markets in
which its branches are located. Historically, the Bank's interest income has
been derived primarily from one- to four-family residential mortgage loans and
mortgage-backed securities. To a lesser extent, the Bank derives interest income
from multifamily residential loans, commercial real estate loans, land,
construction and development loans, consumer loans and commercial lines of
credit.
The Bank has emphasized, and intends to continue to emphasize, the
origination of one- to four-family residential mortgage loans in its lending
area, which is defined generally as Cook, DuPage and Lake Counties. At July 31,
1996, one- to four-family residential mortgage loans totaled $76.3 million or
95.6% of gross loans, approximately $72.4 million (or 90.6% of gross loans) of
which provided for fixed rates of interest. The remaining 4.4% of gross loans
consisted of multifamily mortgage loans, land, construction and development
loans, home equity and other loans. For the year ended July 31, 1996, the Bank
originated $19.7 million of mortgage loans. See "Business of the Bank--Lending
Activities." The Bank also invests in mortgage-backed securities. The Bank's
holdings of mortgage-backed securities totaled $102.4 million at July 31, 1996,
representing 52.6% of total assets. See "Business of the Bank--Investment
Activities."
39
<PAGE>
The Bank pays particular attention to both the value estimates applied to
the collateral securing loans as well as to the creditworthiness of its
prospective borrowers and employs rigorous underwriting standards to minimize
risk of loss. As a result of this strategy, historically the Bank has had only
minimal loss experience in its lending operations. The Bank's ratio of
non-performing loans to total loans at year end ranged from 0.15% to 5.58%
during the five-year period ended July 31, 1996 and was 0.15% at July 31, 1996.
Non-performing assets to total assets ranged from 0.06% to 2.92% during the
five-year period ended July 31, 1996, and was at 0.06% at July 31, 1996. The
Bank's ratio of allowance for loan losses to non-performing loans ranged from
11.08% to 254.24% over the five years ended July 31, 1996 and was 254.24% at
July 31, 1996. In 1992, at the direction of the Bank's primary federal
regulator, the Bank adversely classified a $4.2 million loan and placed reserves
against it. Subsequently, the Bank reversed such reserves and classification
when it became apparent that the loan would be repaid in full. For the past five
fiscal years, the Bank's ratio of non-performing loans to total loans averaged
0.69% and the ratio of non-performing assets to total assets averaged 0.33%,
without giving effect to the reserves that were initially placed against the
$4.2 million loan but were subsequently reversed. See "Selected Financial and
Other Data of the Bank" and "Business of the Bank--Delinquencies and
Non-Performing Assets."
SAVINGS DEPOSITS AND BORROWED MONEY. The Bank's interest expense consists
of the interest paid on savings deposits and borrowed money. The Bank's savings
deposits are derived principally from its primary market area. The Bank's
strategy has been to maintain a high level of stable savings deposits by
providing quality service to its customers without significantly increasing its
cost of funds. The Bank's low-cost deposit base, consisting of passbook
accounts, non-interest-bearing demand accounts, NOW accounts and money market
demand accounts, totaled $65.8 million or 48% of total savings deposits and had
a weighted average effective rate of 2.41% at July 31, 1996. For the past three
years, these accounts have consistently accounted for more than 47% of total
savings deposits and had a weighted average effective rate of not more than
2.45% throughout this period. At July 31, 1996, money market demand accounts
totaled $13.0 million or 9.5% of total savings deposits and had a weighted
average effective rate of 3.12%. The Bank has consistently maintained an overall
cost of funds lower than the National Median Cost of Funds Rate as determined by
the OTS. At July 31, 1996, the Bank's cost of deposits was 4.01% and its cost of
funds (including FHLB borrowings) of 4.74% was 13 basis points below the
National Median Cost of Funds Rate. The Bank has not and does not intend to use
brokered deposits as a source of funds. See "--Liquidity and Capital Resources"
and "Business of the Bank--Sources of Funds."
MANAGEMENT OF INTEREST RATE RISK. The Bank's business strategy also seeks
to reduce the Bank's vulnerability to increases in interest rates. See "Risk
Factors--Potential Impact of Changes in Interest Rates" and "--Recent Declines
in Net Income." Pursuant to this strategy, the Bank (i) emphasizes the
origination of mortgage loans with terms of 15-years, instead of 30-year terms,
(ii) seeks to attract passbook accounts, which are considered by management to
be more resistant to increases in interest rates and (iii) purchases
mortgage-backed securities with maturities of five and seven years. The Company
intends to utilize proceeds from the Offerings to continue to implement such
strategies, which management believes could, although there can be no assurance,
reduce the Bank's exposure to increases in interest rates. See
"--Asset/Liability Management."
ASSET/LIABILITY MANAGEMENT
The principal objectives of the Bank's interest rate risk management
activities are to: (i) evaluate the interest rate risk included in certain
balance sheet accounts; (ii) determine the level of risk appropriate given the
Bank's business focus, operating environment, capital and liquidity requirements
and performance objectives; and (iii) manage the risk consistent with Board
approved guidelines. Through such management, the Bank seeks to reduce the
vulnerability of its operating results to changes in interest rates and to
manage the ratio of interest rate sensitive assets to interest rate sensitive
liabilities within specified maturities or repricing dates. The Bank closely
monitors its interest rate risk as such risk relates to its operating
strategies. 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 Bank. The
Bank's Chief Financial Officer is charged
40
<PAGE>
with the responsibility of developing and implementing an interest rate risk
management and reporting system that will measure the Bank's exposure to
interest rate risk and generate the appropriate quarterly reports to management
and the Board of Directors to ensure compliance with the limits and controls of
the policy.
To the extent consistent with its interest rate spread objectives and market
conditions, the Bank attempts to manage its interest rate risk and has taken
several steps in this regard. First, a majority of the Bank's mortgage-backed
and related securities acquisitions since 1993 have been of securities having a
balloon maturity of five or seven years. At July 31, 1996, the Bank had $102.4
million of mortgage-backed securities, approximately $75.8 million of which
mature in seven years or less. The Bank's portfolio of securities
available-for-sale is marked-to-market monthly and is carried on the books of
the Bank at fair value. Any sale of such securities may result in a gain or loss
to the Bank to the extent the market value at the time of sale exceeds or is
less than the amortized cost.
Second, a portion of the Bank's deposits consists of passbook accounts,
which are considered by management to be somewhat more resistant to interest
rate changes than most other types of accounts. At July 31, 1996, the Bank had
$41.3 million of passbook accounts. See "Business of the Bank--Sources of
Funds--Savings Deposits." Finally, although the Bank makes minimal
adjustable-rate loans due to competitive factors, the Bank's fixed-rate lending
program is focused on loans with terms of 15 years or less. At July 31, 1996,
the Bank had $26.1 million or 32.8% of mortgage loans with original terms of 15
years or less.
Despite the efforts taken by the Bank to seek to reduce its level of
interest rate risk, and the Bank's intent to continue to seek to reduce its
exposure to interest rate risk, the Bank has remained vulnerable to increases in
interest rates and has experienced reduced levels of net income and net interest
income in the fiscal years ended 1994, 1995 and 1996 as a result of, among other
things, the Bank's level of interest rate risk. There can be no assurance that
the Bank will not continue to experience reduced levels of net income and net
interest income during periods of increasing interest rates, unless the Bank's
sensitivity to increases in interest rates is reduced.
Net Portfolio Value ("NPV") analysis provides a quantification of interest
rate risk. In essence, this approach calculates the difference between the
present value of liabilities, expected cash flows from assets and cash flows
from off balance sheet contracts. Under OTS regulations, an institution's
"normal" level of interest rate risk in the event of an immediate and sustained
200 basis point change in interest rates is a decrease in the institution's NPV
in an amount not exceeding 2% of the present value of its assets. Most thrift
institutions with greater than "normal" interest rate exposure must take a
deduction from their total capital available to meet their risk-based capital
requirement. The amount of that deduction is one-half of the difference between
(a) the institution's actual calculated exposure to the 200 basis point interest
rate increase or decrease (whichever results in the greater pro forma decrease
in NPV) and (b) its "normal" level of exposure which is 2% of the present value
of its assets. Savings institutions, however, with less than $300 million in
assets and risk-based capital ratios in excess of 12%, will be exempt from this
requirement unless the OTS determines otherwise. The OTS has postponed the date
that the component will first be deducted from an institution's total capital to
provide it with an opportunity to review the interest rate risk proposals
recently issued by the other federal banking agencies.
Presented below, at June 30, 1996, is an analysis of the Bank's estimated
interest rate risk as measured by changes in NPV for instantaneous and sustained
parallel shifts in interest rates, up and down 400 basis points in 100 point
increments. The NPV is prepared for the Bank by the OTS as of the end of each
calendar quarter. The regulatory focus of A/L Management allows institutions to
perform an in-house estimate of risk as the basis for measuring risk based
capital. The Bank has demonstrated through its past pricing action that passbook
accounts function as relatively fixed rate deposits, and as such, the passbook
accounts are not rate sensitive deposits. Based upon the Bank's historical
experience of its passbook account, the Bank calculates the Core Deposit
Intangible value for that account. This calculation is substituted for the OTS
calculation and then a new set of ratios are computed. Management does not
believe that there is a material difference in the Bank's NPV performance as of
July 31, 1996 as compared
41
<PAGE>
with June 30, 1996. The Bank's asset and liability structure results in a
decrease in NPV in a rising interest rate scenario and an increase in NPV in a
declining interest rate scenario. During periods of rising interest rates, the
value of monetary assets declines more rapidly than the value of monetary
liabilities rises. Conversely, during periods of falling interest rates, the
value of monetary assets rises more rapidly than the value of monetary
liabilities declines. However, the amount of change in value of specific assets
and liabilities due to changes in interest rates is not the same in a rising
rate environment as in a falling interest rate environment (i.e., the amount of
value increase under a specific rate decline may not equal the amount of value
decrease under an identical upward interest rate movement).
<TABLE>
<CAPTION>
NPV AS % OF ECONOMIC
CHANGE IN NET PORTFOLIO VALUE VALUE OF ASSETS
INTEREST RATES ---------------------------------- ------------------------
IN BASIS POINTS $ % %
(RATE SHOCK) AMOUNT CHANGE CHANGE NPV RATIO CHANGE
- ----------------- --------- ---------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
400 $ 12,110 $ (12,928) (52)% 6.28% (5.74 )%
300 15,474 (9,564) (38 ) 7.87 (4.16 )
200 18,842 (6,196) (25 ) 9.39 (2.64 )
100 22,124 (2,914) (12 ) 10.81 (1.21 )
Static(1) 25,038 -- -- 12.02 --
(100) 26,956 1,918 +8 12.78 +0.76
(200) 26,390 1,352 +5 12.50 +0.48
(300) 26,175 1,137 +5 12.37 +0.35
(400) 24,208 (830) (3 ) 11.51 (0.52 )
</TABLE>
- ------------------------
(1) Based on the economic value of the Bank's assets assuming no change in
interest rates.
At June 30, 1996, 2.0% of the present value of the Bank's assets was
approximately $4.2 million, which was less than $7.5 million, the decrease in
NPV resulting from a 200 basis point change in interest rates. As a result, if
the rule were in effect and were applicable to the Bank, the Bank would have
been required to make a $1.7 million deduction from total capital in calculating
its risk-based capital requirement, although the Bank's capital would have
remained far in excess of regulatory minimums. See "Regulation-- Regulation of
Federal Savings Associations--Capital Requirements."
As noted above, the market value of the Bank's net assets would be
anticipated to decline significantly in the event of certain designated
increases in interest rates. For instance, in the event of a 200 basis point
increase in interest rates, NPV is anticipated to fall by $6.2 million or 25%.
On the other hand, a decrease in interest rates is anticipated to cause an
increase in NPV. The level of interest rate risk in the NPV table set forth
above at June 30, 1996, is within the Bank's current guidelines for tolerated
interest rate risk. See "Risk Factors--Potential Impact of Changes in Interest
Rates."
Certain assumptions utilized by the OTS in assessing the interest rate risk
of thrift institutions were employed in preparing the previous table. These
assumptions related to interest rates, loan prepayment rates and the market
value of certain assets under the various interest rate scenarios. However, the
Bank uses its internal assumptions for passbook decay rates based on the Bank's
historical experience. It was also assumed that delinquency rates will not
change as a result of changes in interest rates although there can be no
assurance that this will be the case. In the event that interest rates do not
change in the designated amounts, there can be no assurance that the Bank's
assets and liabilities would perform as set forth above. In addition, a change
in Treasury rates in the designated amounts accompanied by a change in the shape
of the Treasury yield curve would cause significantly different changes to the
NPV than indicated above.
Certain shortcomings are inherent in the methods of analysis presented in
the computation of NPV. 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
42
<PAGE>
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 borrowers to
make scheduled payments on their adjustable-rate loans may decrease in the event
of an interest rate increase. As a result, the actual effect of changing
interest rates may differ from that presented in the foregoing 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 Bank's
average balance sheet and reflects the average yield on assets and average cost
of liabilities for the periods indicated and the average yields and rates. Such
yields and costs are derived by dividing income or expense by the average
monthly balance of assets and liabilities, respectively, for the periods
presented. Average balances are derived from month-end balances. Management does
not believe that the use of month-end balances instead of daily balances has
caused any material difference in the information presented. The yields and
costs include fees, which are considered adjustments to yields.
<TABLE>
<CAPTION>
FOR THE YEAR ENDED JULY 31,
-----------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
AT JULY 31, 1996 1996 1995
------------------------ ----------------------------------- ----------------------
WEIGHTED AVERAGE
AVERAGE AVERAGE YIELD/ AVERAGE
BALANCE RATE(1) BALANCE INTEREST COST BALANCE INTEREST
--------- ------------- --------- ----------- ----------- --------- -----------
<CAPTION>
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
ASSETS:
Interest-earning assets:
Mortgage-backed securities(2)............ $ 102,411 6.32% $ 110,734 $ 6,844 6.18% $ 107,009 $ 6,494
Loans receivable(3)...................... 79,444 7.67 75,264 6,027 8.01 69,280 5,663
Investment securities(2)................. -- -- -- -- -- 769 78
Interest-earning deposits................ 2,040 5.19 2,601 136 5.23 5,309 296
Stock in FHLB of Chicago................. 2,045 6.75 2,157 147 6.82 2,241 143
--------- --- --------- ----------- --- --------- -----------
Total interest-earning assets........ 185,940 6.89% 190,756 $ 13,154 6.90% 184,608 $ 12,674
--------- --- --------- ----------- --- --------- -----------
Allowance for loan losses................ (300) (187) (166)
Noninterest-earning assets............... 8,984 9,064 9,760
--------- --------- ---------
Total assets......................... $ 194,624 $ 199,633 $ 194,202
--------- --------- ---------
--------- --------- ---------
LIABILITIES AND EQUITY:
Interest-bearing liabilities:
NOW accounts............................. $ 7,310 2.02% $ 7,263 $ 146 2.01% $ 7,681 $ 155
Money market demand accounts............. 13,035 3.12 14,031 437 3.11 15,858 467
Passbook/statement savings accounts...... 41,324 2.50 42,094 1,054 2.50 45,213 1,130
Certificates of deposit.................. 71,343 5.48 75,064 4,287 5.71 68,858 3,312
Borrowed money........................... 39,900 6.75 37,800 2,526 6.68 33,685 2,269
--------- --- --------- ----------- --- --------- -----------
Total interest-bearing liabilities... 172,912 4.74% 176,252 8,450 4.79% 171,295 7,333
--------- --- --------- ----------- --- --------- -----------
Noninterest-bearing NOW accounts......... 4,165 4,115 3,820
Other noninterest-bearing liabilities.... 3,968 4,942 5,012
--------- --------- ---------
Total liabilities.................... 181,045 185,309 180,127
Equity................................... 13,579 14,324 14,075
--------- --------- ---------
Total liabilities and equity......... $ 194,624 $ 199,633 $ 194,202
--------- --------- ---------
--------- --------- ---------
Net interest income.......................... $ 4,704 $ 5,341
----------- -----------
----------- -----------
Interest rate spread(4)...................... 2.15% 2.11%
--- ---
--- ---
Net interest-earning assets.................. $ 13,028 $ 14,504 $ 13,313
--------- --------- ---------
--------- --------- ---------
Net interest margin(5)....................... 2.47%
---
---
Ratio of interest-earning assets to interest-
bearing liabilities........................ 107.53% 108.23% 107.77%
--------- --------- ---------
--------- --------- ---------
<CAPTION>
<S> <C>
AVERAGE
YIELD/
COST
-----------
<S> <C>
ASSETS:
Interest-earning assets:
Mortgage-backed securities(2)............ 6.07%
Loans receivable(3)...................... 8.17
Investment securities(2)................. 10.14
Interest-earning deposits................ 5.58
Stock in FHLB of Chicago................. 6.38
-----
Total interest-earning assets........ 6.87%
-----
Allowance for loan losses................
Noninterest-earning assets...............
Total assets.........................
LIABILITIES AND EQUITY:
Interest-bearing liabilities:
NOW accounts............................. 2.02%
Money market demand accounts............. 2.94
Passbook/statement savings accounts...... 2.50
Certificates of deposit.................. 4.81
Borrowed money........................... 6.74
-----
Total interest-bearing liabilities... 4.28%
-----
Noninterest-bearing NOW accounts.........
Other noninterest-bearing liabilities....
Total liabilities....................
Equity...................................
Total liabilities and equity.........
Net interest income..........................
Interest rate spread(4)...................... 2.59%
-----
-----
Net interest-earning assets..................
Net interest margin(5)....................... 2.89%
-----
-----
Ratio of interest-earning assets to interest-
bearing liabilities........................
</TABLE>
(NOTES ON FOLLOWING PAGE)
43
<PAGE>
<TABLE>
<CAPTION>
FOR THE YEAR ENDED JULY 31,
------------------------------------------------------------------------------------------
1994 1993 1992
--------------------------------- --------------------------------- --------------------
AVERAGE AVERAGE
AVERAGE YIELD/ AVERAGE YIELD/ AVERAGE
BALANCE INTEREST COST BALANCE INTEREST COST BALANCE INTEREST
--------- --------- ----------- --------- --------- ----------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
ASSETS:
Interest-earning assets:
Mortgage-backed
securities(2)............... $ 92,717 $ 6,021 6.49% $ 48,212 $ 3,505 7.27% $ 30,315 $ 2,306
Loans receivable(3)........... 72,042 6,087 8.45 89,296 8,647 9.68 102,097 9,577
Investment securities(2)...... 5,728 483 8.43 24,654 1,437 5.83 28,044 1,959
Interest-earning deposits..... 10,564 332 3.14 11,165 302 2.70 8,939 393
Stock in FHLB of Chicago...... 2,163 129 5.96 1,912 104 5.44 1,735 103
--------- --------- --- --------- --------- --- --------- ---------
Total interest-earning
assets................. $ 183,214 $ 13,052 7.12% 175,239 13,995 7.99% 171,130 $ 14,338
--------- --------- --- --------- --------- --- --------- ---------
Allowance for loan losses..... (181) (443) (390)
Noninterest-earning assets.... 10,845 11,642 12,682
--------- --------- ---------
Total assets.............. $ 193,878 $ 186,438 $ 183,422
--------- --------- ---------
--------- --------- ---------
LIABILITIES AND EQUITY:
Interest-bearing liabilities:
NOW accounts.................. $ 8,438 $ 184 2.18% $ 8,626 $ 240 2.78% $ 8,098 $ 355
Money market demand
accounts.................... 19,560 520 2.66 21,076 675 3.20 20,290 927
Passbook/statement savings
accounts.................... 48,209 1,280 2.66 47,959 1,555 3.24 44,264 2,103
Certificates of deposit....... 60,169 2,510 4.17 52,444 2,530 4.82 58,511 3,683
Borrowed money................ 35,938 2,429 6.76 36,600 2,454 6.70 34,440 2,130
--------- --------- --- --------- --------- --- --------- ---------
Total interest-bearing
liabilities............ 172,314 6,923 4.02% 166,705 7,454 4.47% 165,603 9,198
--------- --------- --- --------- --------- --- --------- ---------
Noninterest-bearing NOW
accounts........................ 3,384 2,950 2,628
Other noninterest-bearing
liabilities..................... 5,715 6,517 6,223
--------- --------- ---------
Total liabilities......... 181,413 176,172 174,454
Equity............................ 12,465 10,266 8,968
--------- --------- ---------
Total liabilities and
equity................. $ 193,878 $ 186,438 $ 183,422
--------- --------- ---------
--------- --------- ---------
Net interest income............... $ 6,129 $ 6,541 $ 5,140
--------- --------- ---------
--------- --------- ---------
Interest rate spread(4)........... 3.10% 3.52%
--- ---
--- ---
Net interest-earning assets....... $ 10,900 $ 8,534 $ 5,527
--------- --------- ---------
--------- --------- ---------
Net interest margin(5)............ 3.35% 3.73%
--- ---
--- ---
Ratio of interest-earning assets
to interest-bearing
liabilities..................... 106.33% 105.12% 103.34%
--------- --------- ---------
--------- --------- ---------
<CAPTION>
AVERAGE
YIELD/
COST
-----------
<S> <C>
ASSETS:
Interest-earning assets:
Mortgage-backed
securities(2)............... 7.61%
Loans receivable(3)........... 9.38
Investment securities(2)...... 6.99
Interest-earning deposits..... 4.40
Stock in FHLB of Chicago...... 5.94
---
Total interest-earning
assets................. 8.38%
---
Allowance for loan losses.....
Noninterest-earning assets....
Total assets..............
LIABILITIES AND EQUITY:
Interest-bearing liabilities:
NOW accounts.................. 4.38%
Money market demand
accounts.................... 4.57
Passbook/statement savings
accounts.................... 4.75
Certificates of deposit....... 6.29
Borrowed money................ 6.18
---
Total interest-bearing
liabilities............ 5.55%
---
Noninterest-bearing NOW
accounts........................
Other noninterest-bearing
liabilities.....................
Total liabilities.........
Equity............................
Total liabilities and
equity.................
Net interest income...............
Interest rate spread(4)........... 2.83%
---
---
Net interest-earning assets.......
Net interest margin(5)............ 3.00%
---
---
Ratio of interest-earning assets
to interest-bearing
liabilities.....................
</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) Includes securities classified as "available-for-sale."
(3) In computing the average balance of loans receivable, non-accrual loans have
been included.
(4) Average interest rate spread represents the difference between the average
rate earned on interest-earning assets and the average rate paid on
interest-bearing liabilities.
(5) Net interest margin represents net interest income as a percentage of
average interest-earning assets.
44
<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 Bank's net interest income. Conversely, increases in the volume or
amount of the Bank'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 Bank's net
interest income. The following table sets forth certain information regarding
changes in interest income and interest expense for the periods indicated. For
each category of interest-earning assets and interest-bearing liabilities,
information is provided on changes attributable to changes in volume (changes in
volume multiplied by old rate), changes in rates (changes in rates multiplied by
old volume) and changes in rate-volume (changes in rates multiplied by changes
in volume). Changes attributable to the combined impact of volume and rate have
been allocated proportionately to the changes due to volume and the changes due
to rate.
<TABLE>
<CAPTION>
YEAR
ENDED
JULY 31,
1994
COMPARED
YEAR ENDED YEAR ENDED TO
JULY 31, 1996 JULY 31, 1995 YEAR
COMPARED TO COMPARED TO ENDED
YEAR ENDED YEAR ENDED JULY 31,
JULY 31, 1995 JULY 31, 1994 1993
--------------------------------- --------------------------------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
INCREASE/ INCREASE/ INCREASE/
(DECREASE) (DECREASE) (DECREASE)
DUE TO DUE TO DUE TO
---------------------- ---------------------- ---------
<CAPTION>
VOLUME RATE NET VOLUME RATE NET VOLUME
----------- --------- --------- ----------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS:
Mortgage-backed securities.................. $ 230 $ 120 $ 350 $ 814 $ (341) $ 473 $ 2,847
Loans receivable............................ 471 (107) 364 (227) (197) (424) (1,545)
Investment securities....................... (39) (39) (78) (529) 124 (405) (2,278)
Interest-earning deposits................... (142) (18) (160) 64 (100) (36) (15)
Stock in FHLB of Chicago.................... (4) 8 4 5 9 14 15
----- --------- --------- ----- --------- --------- ---------
Total................................... $ 516 $ (36) $ 480 $ 127 $ (505) $ (378) $ (976)
----- --------- --------- ----- --------- --------- ---------
----- --------- --------- ----- --------- --------- ---------
INTEREST-BEARING LIABILITIES:
NOW accounts................................ $ (8) $ (1) $ (9) $ (16) $ (13) $ (29) $ (5)
Money market demand accounts................ (60) 30 (30) (121) 68 (53) (47)
Passbook/statement savings accounts......... (76) -- (76) (76) (74) (150) 8
Certificates of deposit..................... 317 658 975 389 413 802 (240)
Borrowed money.............................. 277 (20) 257 (153) (7) (160) (50)
----- --------- --------- ----- --------- --------- ---------
Total................................... $ 450 $ 667 $ 1,117 $ 23 $ 387 $ 410 $ (334)
----- --------- --------- ----- --------- --------- ---------
Net change in net interest
income.................................... $ 66 $ (703) $ (637) $ 104 $ (892) $ (788) $ (642)
----- --------- --------- ----- --------- --------- ---------
----- --------- --------- ----- --------- --------- ---------
<CAPTION>
<S> <C> <C>
RATE NET
--------- ---------
<S> <C> <C>
INTEREST-EARNING ASSETS:
Mortgage-backed securities.................. $ (331) $ 2,516
Loans receivable............................ (1,015) (2,560)
Investment securities....................... 1,324 (954)
Interest-earning deposits................... 45 30
Stock in FHLB of Chicago.................... 10 25
--------- ---------
Total................................... $ 33 $ (943)
--------- ---------
--------- ---------
INTEREST-BEARING LIABILITIES:
NOW accounts................................ $ (51) $ (56)
Money market demand accounts................ (108) (155)
Passbook/statement savings accounts......... (283) (275)
Certificates of deposit..................... 220 (20)
Borrowed money.............................. 25 (25)
--------- ---------
Total................................... $ (197) $ (531)
--------- ---------
Net change in net interest
income.................................... $ 230 $ (412)
--------- ---------
--------- ---------
</TABLE>
45
<PAGE>
COMPARISON OF FINANCIAL CONDITION AT JULY 31, 1996 AND 1995
Total assets decreased $5.7 million to $194.6 million at July 31, 1996 from
$200.3 million at July 31, 1995. Total liabilities also declined $4.8 million to
$181.0 million at July 31, 1996 from $185.8 million at July 31, 1995.
Mortgage-backed securities (including both held-to-maturity and
available-for-sale) decreased $8.9 million to $102.4 million at July 31, 1996
from $111.3 million at July 31, 1995. This decrease is due primarily to the
amount of amortization and prepayments during the 1996 fiscal year for the
mortgage-backed securities exceeding purchases of mortgage-backed securities in
the first quarter of the year and the reinvestment of such proceeds in one- to
four-family mortgage loans meeting the Bank's underwriting criteria. Loans
receivable increased $8.1 to $79.1 million at July 31, 1996 from $71.0 million
at July 31, 1995 due to increased loan demand and the origination of new loans
for the Bank's portfolio exceeding loan repayments. Interest earning deposits
were $2.0 million and $7.0 million at July 31, 1996 and 1995, respectively, a
decrease of $5.0 million. The Bank reduced its level of interest earning
deposits primarily to fund the outflow of savings deposits experienced during
the fiscal year.
Total savings deposits decreased $11.1 million to $137.2 million at July 31,
1996 from $148.3 million at July 31, 1995. This decrease was due primarily to a
decrease in certificates of deposit that matured in fiscal year 1996. The Bank
attracted these funds by offering above-market rates of interest in prior fiscal
years. Upon maturity, the Bank sought to retain these funds by offering market
rates of interest, and, while a portion of such funds were so retained, the Bank
experienced a $7.0 million decrease in such funds. In addition, management
believes that the reduction in deposits resulted, in part, from
disintermediation, the flow of funds away from savings institutions into direct
investments, such as corporate securities, mutual funds and other investment
vehicles, which direct investments, because of the absence of federal deposit
insurance premiums and reserve requirements, among other reasons, may pay higher
rates of return than savings institutions. FHLB of Chicago advances increased
$7.6 million to $39.9 million at July 31, 1996 from $32.3 million at July 31,
1995 due primarily to management's decision to increase the Bank's level of
short-term borrowings to fund mortgage loan originations and offset the net
outflow of savings deposits. Total retained earnings decreased $800,000 to $13.6
million at July 31, 1996 from $14.4 million at July 31, 1995 due to net income
of $226,000, which was offset by an adjustment of securities available for sale
to fair value, net of tax effect, totaling $1.1 million. Prepaid expenses and
other assets increased more than $80,000 to $389,000 at July 31, 1996. This
increase is due primarily to a $133,000 increase in deferred conversion expenses
and $168,000 in improvements to land and buildings during the fiscal year, which
were offset, in part, by decreases in depreciation of fixed assets.
COMPARISON OF OPERATING RESULTS FOR FISCAL YEARS ENDED JULY 31, 1996 AND 1995
GENERAL. Net income for the fiscal year ended July 31, 1996 was $226,000
compared to $982,000 for the fiscal year ended July 31, 1995. The $756,000, or
77.0%, decrease was primarily attributable to a one-time gain of $557,000 on the
sale of real estate held for development in 1995, with no comparable gain
recorded in 1996. Net income in 1996 was also lower due to a $637,000 decrease
in net interest income before provision for loan losses, which was partially
offset by a $321,000 decrease in income tax expense.
NET INTEREST INCOME. Net interest income before provision for loan losses
decreased $637,000 to $4.7 million for the fiscal year ended July 31, 1996, from
$5.3 million for the fiscal year ended July 31, 1995. Interest income increased
$479,000 to $13.2 million for the fiscal year ended July 31, 1996 from $12.7
million for the fiscal year ended July 31, 1995 due to an increase of $6.1
million, from $184.6 million to $190.8 million, in the average balance of
interest-earning assets. Interest expense increased $1.1 million to $8.4 million
for the fiscal year ended July 31, 1996 from $7.3 million for the fiscal year
ended July 31, 1995. This increase was the result of an increase in the average
balance of interest-bearing liabilities of $5.0 million, from $171.3 million to
$176.3 million, as well as an increase in the average cost of funds of 51 basis
points from 4.28% to 4.79%.
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INTEREST INCOME. Interest income totaled $13.2 million for the fiscal year
ended July 31, 1996, compared to $12.7 million for the fiscal year ended July
31, 1995. This increase reflects a $6.1 million increase in total average
interest-earning assets in the 1996 fiscal year compared to the 1995 fiscal
year, while the average yield on such assets increased 3 basis points from 6.87%
to 6.90% over the same period. Interest income on loans receivable increased
$363,000 to $6.0 million for the 1996 fiscal year. Higher loan demand increased
the Bank's average balance of loans by $6.0 million. Generally, yields earned on
new mortgage loan originations were lower than rates earned on loan repayments,
which caused a 16 basis point decrease in the average yield on loans to 8.01%
from 8.17%. Interest income on mortgage-backed securities increased $350,000 to
$6.8 million for the 1996 fiscal year from $6.5 million for the 1995 fiscal
year. The increase is due primarily to a $3.7 million increase in the average
balance of mortgage-backed securities to $110.7 million from $107.0 million and
an 11 basis point increase in the average yield to 6.18% from 6.07%. The average
balance of mortgage-backed securities increased in 1996 due to purchases of such
securities in the first quarter of 1996. Interest income on interest-earning
deposits decreased $160,000 to $136,000 for the 1996 fiscal year, due to a $2.7
million decrease in average balance and a 35 basis point decrease in average
yield from 5.58% to 5.23%. These funds are generally deposited as Federal Funds,
which earn interest at the Federal Reserve Bank's discount rate, which rate
decreased by 25 basis points in fiscal year 1996.
INTEREST EXPENSE. Interest expense increased $1.1 million to $8.4 million
for the fiscal year ended July 31, 1996, compared to $7.3 million for the fiscal
year ended July 31, 1995. This increase reflects both an increase in average
interest-bearing liabilities of $5.0 million during the 1996 fiscal year and an
increase in the average rate paid on such liabilities of 51 basis points over
the same period. The increase in average interest-bearing liabilities is
primarily attributable to an increase in the average balance of certificates of
deposit to $75.1 million for the 1996 fiscal year from $68.8 million for the
1995 fiscal year. The average balance of certificates of deposit increased due
to the inflow of funds which resulted from an above-market interest rate
promotion in mid-1995 with such funds remaining on deposit during 1996. The
average cost of certificates of deposit increased 90 basis points due to the
higher cost of the above market interest rate certificates of deposit originated
in the prior fiscal year. The net effect was an increase of $975,000 in interest
expense on certificates of deposit, which resulted in the average rate paid on
savings deposits increasing 60 basis points to 4.28%. Interest expense on
borrowed money increased $257,000 as the average balance of borrowings from the
FHLB of Chicago increased $4.1 million to $37.8 million for the fiscal year
ended July 31, 1996 from $33.7 million for the fiscal year ended July 31, 1995,
and the average cost of such borrowings decreased to 6.68% from 6.74%.
PROVISION FOR LOAN LOSSES. For the fiscal year ended July 31, 1996,
$138,000 was allocated to provision for loan losses. For the fiscal year ended
July 31, 1995, the provision was $0. The 1996 provision increased the allowance
for loan losses from $166,000 at July 31, 1995 to $300,000 at July 31, 1996. At
July 31, 1996, the ratios of the allowance for loan losses to non-performing
loans and to total loans were 254.24% and 0.38%, respectively, which were well
below the Bank's peer group average. 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 loan portfolio
and have been determined in accordance with GAAP. While management estimates
loan losses using the best available information, no assurance can be made that
future additions to the allowance will not be necessary. Management calculates a
range for the allowance for loan losses and the provision for loan losses based
upon each asset group, asset classifications, loan to value ratios, loan types
and any impairments. This range of values is then compared to actual losses,
peer group comparisons, economic conditions and real estate market conditions.
Management considered it appropriate to increase the allowance for loan losses
in 1996 to the upper range of the formula employed by the Bank because of an
increase in loan volume during the year and so as to bring the level of the
Bank's allowance for loan losses closer to that of its peers. The directors of
the Bank have reviewed and approved the provision for loan losses and the
allowance for loan losses and the assumptions utilized by management as to their
reasonableness and adequacy.
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NONINTEREST INCOME. Noninterest income for the fiscal year ended July 31,
1996 decreased $361,000 to $485,000 from $846,000 for the fiscal year ended July
31, 1995. For the fiscal year ended July 31, 1995, the Bank had gains on the
sale of real estate held for sale and development in the amount of $557,000.
These gains relate to a subdivision called Trails of Olympia Fields. The final
residential lots were sold in fiscal year 1995 in addition to a portion of the
adjoining "Commercial property." There were no sales of these properties in
fiscal year 1996. Noninterest income was also affected by an increase in other
noninterest income of $77,000 for the 1996 fiscal year compared to the 1995
fiscal year. Litigation settlements increased from $51,671 for the fiscal year
ended July 31, 1995 to $184,415 for the fiscal year ended July 31, 1996 due to
the settlement of two claims in connection with the development of the Trails of
Olympia Fields.
NONINTEREST EXPENSE. Noninterest expense decreased $58,000 to $4.7 million
for the fiscal year ended July 31, 1996 from $4.8 million for the fiscal year
ended July 31, 1995. The Bank's ratio of noninterest expenses to average assets
decreased to 2.36% in the 1996 fiscal year from 2.45% in the 1995 fiscal year.
Compensation related expenses decreased $229,000. The Senior Management Officer
Bonus program ("SMO") long term award was terminated in 1996, and no annual
award was made in 1996, which resulted in a $144,000 decline in compensation
expense in fiscal year 1996. Real estate held for sale and development expenses
were $140,000 and $237,000 in the fiscal year 1996 and 1995, respectively, or a
decline of $97,000. No expense for the carrying cost of such real estate was
recorded in 1996 due to the sale of the properties in fiscal year 1995.
Occupancy expenses increased $82,000 or 8.6% during the fiscal year ended July
31, 1996 due primarily to an increase in utility and depreciation expenses.
Professional services expenses increased $162,000 or 82.2% during the fiscal
year ended July 31, 1996 as a result of increased legal fees incurred in
connection with claims against a municipality and certain parties involved in
the development of the Trails of Olympia Fields. On September 30, 1996, Congress
enacted the 1996 Act to recapitalize the SAIF. See "--Recent Legislation; SAIF
Assessment." Management anticipates, although there can be no assurance, that
the Bank will pay lower regular deposit insurance assessments in future periods
compared to those paid by the Bank in recent years. See "Summary" and
"Regulation-- Regulation of Federal Savings Associations--Insurance of Deposit
Accounts."
INCOME TAX EXPENSE. Income tax expense decreased $321,000 or 73.3%, to
$117,000 for the fiscal year ended July 31, 1996 from $439,000 for the fiscal
year ended July 31, 1995. This decrease was due to the decrease of $1.1 million
or 75.9% in pre-tax income.
COMPARISON OF FINANCIAL CONDITION AT JULY 31, 1995 AND JULY 31, 1994
Total assets increased $5.1 million to $200.3 million at July 31, 1995, from
$195.2 million at July 31, 1994. The asset growth was funded through deposit
inflows. Savings deposits increased $6.5 million to $148.3 million at July 31,
1995 from $141.8 million at July 31, 1994, due primarily to an increase in
certificates of deposit with original maturities of 13 and 19 months, which were
offered by the Bank at above-market interest rates. Asset growth was
concentrated in loans, which increased $2.6 million to $71.0 million at July 31,
1995, from $68.4 million at July 31,1994. Loan originations totaled $12.3
million for the year ended July 31, 1995, compared to $11.3 million for the year
ended July 31, 1994, representing an increase of $1.0 million. The increase was
due primarily to an increase in the origination of one- to four-family
residential mortgage loans reflecting increased loan demand experienced by the
Bank. Total mortgage-backed securities remained relatively stable at $111.3
million at July 31, 1995, compared to $111.9 million at July 31, 1994, as
prepayments and amortizations received during the year were reinvested in
mortgage-backed securities. All securities were held-to-maturity in 1995 and
1994. Real estate owned, net, increased to $168,000 in 1995. There was no real
estate owned at July 31, 1994. This increase was the result of a foreclosure of
one single-family residential property.
The Bank's retained earnings was $14.4 million at July 31, 1995 and $13.4
million at July 31, 1994. The increase was due to net income for the fiscal year
ended July 31, 1995 of $982,000.
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COMPARISON OF OPERATING RESULTS FOR FISCAL YEARS ENDED JULY 31, 1995 AND 1994
GENERAL. Net income for the fiscal year ended July 31, 1995 was $982,000
compared to $2.1 million for the fiscal year ended July 31, 1994. This decrease
of $1.1 million or 53% was due to a reduction in net interest income after
provision for loan losses of $805,000 for the 1995 fiscal year, as compared to
the 1994 fiscal year, as well as gains on sales of investment securities held
for sale of $616,000 for the 1994 fiscal year, as compared to none in the 1995
fiscal year. These reductions in income were offset, in part, by a reduction in
noninterest expense of $331,000.
NET INTEREST INCOME. Net interest income before provision for loan loss for
the fiscal year ended July 31, 1995 decreased $788,000 or 13% to $5.3 million.
The Bank's average yield earned on interest-earning assets decreased from 7.12%
for the 1994 fiscal year to 6.87% for the 1995 fiscal year, and the Bank's
average rate paid on interest-bearing liabilities increased from 4.02% for the
1994 fiscal year to 4.28% for the 1995 fiscal year. These changes in yields
earned and rates paid resulted in the Bank's average interest rate spread
decreasing by 0.51 basis points to 2.59% and the Bank's net interest margin
decreasing by 46 basis points to 2.89% for the 1995 fiscal year, as compared to
3.10% and 3.35%, respectively, for the 1994 fiscal year.
Market interest rates were higher in the 1995 fiscal year across the entire
U.S. Treasury yield curve than in the 1994 fiscal year. However, the Bank
generally realized lower yields on its average interest-earning assets (other
than federal funds sold) as a result of the impact of asset repricings that
occurred during the declining interest rate environment in the 1994 fiscal year.
Generally, the Bank's assets have repriced less quickly in the rising interest
rate environment of the 1995 fiscal year than in the declining interest rate
environment of the 1994 fiscal year. During the 1995 fiscal year, the Bank's
interest-bearing liabilities, particularly certificate accounts which had
increasing average balances, repriced more quickly than the Bank's
interest-earning assets. This had a negative impact on the Bank's average
interest rate spread and net interest margin in the 1995 fiscal year compared to
the 1994 fiscal year.
INTEREST INCOME. Interest income totaled $12.7 million for the fiscal year
ended July 31, 1995, compared to $13.1 million for the fiscal year ended July
31, 1994. This decrease reflects a $1.4 million increase in total average
interest-earning assets in the 1995 fiscal year compared to the 1994 fiscal
year, while the average yield on such assets declined 25 basis points over the
same period. Interest income on loans receivable declined $424,000 to $5.7
million for the 1995 fiscal year, reflecting a $2.8 million decrease in the
average balance of loans and the effect of a 28 basis point decrease in the
average yield to 8.17%. Interest income on mortgage-backed securities increased
$473,000 to $6.5 million for the 1995 fiscal year from $6.0 million for the 1994
fiscal year. The increase is due primarily to a $14.3 million increase in the
average balance to $107 million, resulting from purchases of such securities
during the early part of 1995, which was partially offset by a 42 basis point
decline in the average yield to 6.07%. The Bank experienced an increase in
repayments and amortization of higher rate loans and mortgage-backed securities
during this period, which proceeds were generally reinvested at lower market
rates. Interest income on interest-earning deposits decreased from $332,000 to
$296,000 for the 1995 fiscal year, reflecting a $5.3 million decrease in the
average balance, which was offset by a 244 basis point increase in the average
yield.
INTEREST EXPENSE. Interest expense on savings deposits increased $570,000
to $5.1 million for the fiscal year ended July 31, 1995, compared to $4.5
million for the fiscal year ended July 31, 1994. This increase reflects both an
increase in average savings deposits of $1.2 million during the 1995 fiscal year
and an increase in the average rate paid on such liabilities of 39 basis points
over the same period. The decrease of $1.0 million in average interest-bearing
liabilities is primarily attributable to a decrease in the average balance of
$9.7 million for all categories of interest bearing liabilities except for an
increase of $8.7 million in the average balance of certificates of deposit to
$68.9 million for the 1995 fiscal year from $60.2 million for the 1994 fiscal
year, which increase occurred during a generally higher interest rate
environment resulting in the average rate paid on such savings deposits
increasing 64 basis points to 4.81%. The net
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effect was an increase of $802,000 in interest expense on certificates of
deposit. The increase in certificates of deposit reflects the Bank's general
strategy of funding asset growth with deposit liabilities.
PROVISION FOR LOAN LOSSES. The provision for loan losses was $0 and an
$18,000 credit for the fiscal years ending July 31, 1995 and July 31, 1994,
respectively. At July 31, 1995, the percentage of the allowance for loan losses
to non-performing loans (consisting primarily of loans 90 days or more past due
and accruing interest) was 86.01%. As a percentage of total loans, the allowance
for loan losses was 0.23% at July 31, 1995. The percentage of non-performing
loans to total loans decreased to 0.27% at July 31, 1995, from 0.74% at July 31,
1994. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Management Strategy--Home Lending and Asset Quality."
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 loan portfolio and have been determined in accordance
with GAAP. While management estimates loan losses using the best available
information, no assurance can be made that future additions to the allowance
will not be necessary. Management calculates a range for the allowance for loan
losses and the provision for loan losses based upon each asset group, asset
classifications, loan to value ratios, loan types and any impairments. This
range of values is then compared to actual losses, peer group comparisons,
economic conditions and real estate market conditions. The directors of the Bank
have reviewed and approved 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 for the fiscal year ended July 31,
1995 decreased $669,000 to $846,000 from $1.5 million for the fiscal year ended
July 31, 1994. This decrease was primarily attributable to a net gain of
$616,000 on sales of held-for-sale securities sold in the 1994 fiscal year
compared to no gain on sales of securities for the 1995 fiscal year. The
securities sold in the 1994 fiscal year were limited to held-for-sale
securities. Noninterest income was also affected by a decline in gain on sale of
real estate held for sale and development of $17,000 for the 1995 fiscal year
compared to the 1994 fiscal year, and an increase of $32,000 in service charges
and other fees reflecting decreased loan servicing fee income. Litigation
settlements increased by $52,000 in 1994 due to the settlement of a lawsuit
relating to development of the Trails of Olympia Fields.
NONINTEREST EXPENSE. Noninterest expense decreased $331,000 to $4.8 million
for the fiscal year ended July 31, 1995 from $5.1 million for the fiscal year
ended July 31, 1994. The Bank's ratio of noninterest expense to average assets
decreased to 2.45% in the 1995 fiscal year from 2.63% in the 1994 fiscal year.
Compensation and benefits expense increased nominally to $2.5 million for the
1995 fiscal year compared to the same amount for the 1994 fiscal year. Real
estate held for sale and development decreased $274,000 from $511,000 to
$237,000; professional services expenses decreased from $230,000 to $197,000.
Other noninterest expense decreased $54,000 to $600,000 for the 1995 fiscal year
compared to $654,000 for the 1994 fiscal year. On September 30, 1996, Congress
enacted the 1996 Act to recapitalize the SAIF. See "--Recent Legislation; SAIF
Assessment." Management anticipates, although there can be no assurance, that
the Bank will pay lower regular deposit insurance assessments in future periods
compared to those paid by the Bank in recent years. See "Summary" and
"Regulation--Regulation of Federal Savings Associations-- Insurance of Deposit
Accounts."
INCOME TAX EXPENSE. Income tax expense decreased $455,000, or 51%, to
$439,000 for the fiscal year ended July 31, 1995 from $894,000 for the fiscal
year ended July 31, 1994. This decrease was due to the decrease of $1.1 million
in pre-tax income.
LIQUIDITY AND CAPITAL RESOURCES
The term "liquidity" as used by a savings bank refers to the ability of the
institution to produce sufficient cash to meet withdrawals, fund loan
commitments and pay operating expenses. Cash needed to
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fund these requirements is generated by savings deposits, loan repayments,
securities sales, FHLB advances, and other sources of income.
The Bank's primary sources of funds are savings deposits, principal and
interest payments on loans and securities and borrowings from the FHLB of
Chicago. While maturities and scheduled amortization of loans and securities
provide an indication of the timing of the receipt of funds, changes in interest
rates, economic conditions and competition strongly influence mortgage
prepayment rates and savings deposit flows, reducing the predictability of the
timing of sources of funds. Cash flows from operating activities amounted to
$165,000, $908,000 and $322,000 for the years ended July 31, 1996, 1995 and
1994, respectively.
The Bank is required to maintain an average daily balance of liquid assets
and short-term liquid assets as a percentage of net withdrawable 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 July 31, 1996, 1995 and 1994, the Bank's
liquidity ratios were 42.4%, 27.1% and 22.1%, respectively, and its short-term
liquidity ratios were 2.7%, 10.8% and 3.5%, respectively. The levels of the
Bank's short-term assets are dependent on the Bank'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 Bank are the origination of mortgage
and other loans and the purchase of mortgage-backed and other securities. During
the years ended July 31, 1996, 1995 and 1994, the Bank's disbursements for loan
originations totaled $19.9 million, $12.4 million and $11.4 million,
respectively. These activities were funded primarily by net deposit inflows and
principal repayments on loans, securities and FHLB advances. Net cash flows used
in investing activities amounted to $510,000, $1.6 million and $37.0 million for
the years ended July 31, 1996, 1995 and 1994, respectively.
For the fiscal years ended July 31, 1995 and 1994 the Bank experienced net
increases in deposits of $6.5 million and $10.3 million, respectively. For the
fiscal year ended July 31, 1996, the Bank experienced net decreases in deposits
(including the effect of interest credited) of $11.2 million. The decrease in
deposits in 1996 was due primarily to a decrease in certificates of deposit that
matured in fiscal year 1996. The Bank attracted these funds by offering
above-market rates of interest in prior fiscal years. Upon maturity, the Bank
sought to retain these funds by offering market rates of interest, and, while a
portion of such funds were so retained, the Bank experienced a $7.0 million
decrease in such funds. In addition, management believes that the reduction in
deposits resulted, in part, from disintermediation, the flow of funds away from
savings institutions into direct investments, such as corporate securities,
mutual funds and other investment vehicles, which direct investments, because of
the absence of federal deposit insurance premiums and reserve requirements,
among other reasons, may pay higher rates of return than savings institutions.
The increase in the 1995 fiscal year reflects the general increase in market
interest rates which made deposit products (particularly shorter term
certificates of deposit) a more attractive investment alternative for the Bank's
customers. The increase in savings deposits for the 1994 fiscal year reflects a
marketing campaign by the Bank to attract two- to four-year certificates of
deposit. See "Selected Financial and Other Data of the Bank."
The Bank's most liquid assets are cash and cash equivalents, which consist
of short-term highly liquid investments with original maturities of less than
three months that are readily convertible to known amounts of cash and
interest-bearing savings deposits. The level of these assets is dependent on the
Bank's operating, financing and investing activities during any given period. At
July 31, 1996 and 1995, cash and cash equivalents totaled $4.6 and $9.0 million,
respectively.
Net cash flows provided by financing activities amounted to $4.5 million and
$7.6 million for the years ended July 31, 1995, and 1994, respectively. Net cash
flows used in financing activities amounted to $4.1 million for the year ended
July 31, 1996.
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See the "Statements of Cash Flows" in the Financial Statements included in
this Prospectus for the sources and uses of cash flows for operating activities,
investing activities and financing activities for each of the years ended July
31, 1996, 1995 and 1994.
The Bank has other sources of liquidity if a need for additional funds
arises, including the ability to obtain FHLB of Chicago advances of up to $45
million based on the Bank's current investment in FHLB of Chicago stock. At July
31, 1996, the Bank had outstanding $39.9 million in FHLB of Chicago advances.
The Bank utilizes borrowings primarily to offset outflows in deposits at times
when the Bank does not believe that it can replace such funds with lower costing
deposit products. In addition, the Bank has at times used a portion of the
borrowed funds to fund the purchase of mortgage-backed securities at a time when
the spread between the rate paid on the borrowed funds and the yield earned on
such securities was favorable.
At July 31, 1996, the Bank had outstanding mortgage loan origination
commitments of $851,000 and unused lines of consumer credit of $614,000. The
Bank anticipates that it will have sufficient funds available to meet its
current origination and other lending commitments. Certificates of deposit
scheduled to mature in less than one year from July 31, 1996 totalled $53.3
million. Based upon the Bank's most recent experience and pricing strategy,
management believes that a significant portion of such deposits will remain with
the Bank.
At July 31, 1996, the Bank exceeded all of its regulatory capital
requirements with tangible capital of $14.4 million, or 7.35% of total adjusted
assets, which is above the required level of $2.9 million or 1.5%; core capital
of $14.4 million, or 7.35% of total adjusted assets, which is above the required
level of $5.9 million or 3.0%; and total risk-based capital of $14.7 million, or
21.59% of risk-weighted assets, which is above the required level of $5.4
million, or 8%. See "Regulatory Capital Compliance" and "Regulation-- Regulation
of Federal Savings Associations--Capital Requirements" for a reconciliation of
GAAP capital to regulatory capital.
IMPACT OF INFLATION AND CHANGING PRICES
The Bank's Financial Statements and Notes thereto presented herein have been
prepared in accordance with GAAP, which generally require the measurement of
financial position and operating results in terms of historical dollars without
considering the changes in the relative purchasing power of money over time due
to inflation. The impact of inflation is reflected in the increased cost of the
Bank's operations. Unlike industrial companies, nearly all of the assets and
liabilities of the Bank are monetary in nature. As a result, interest rates have
a greater impact on the Bank's performance than do the effects of general levels
of inflation. Interest rates do not necessarily move in the same direction or to
the same extent as the price of goods and services.
IMPACT OF NEW ACCOUNTING STANDARDS
The Bank will be required to account for the ESOP under Statement of
Position 93-6, "Employers' Accounting for Employee Stock ownership Plans" ("SOP
93-6"). SOP 93-6 measures compensation expense recorded by employers for
leveraged ESOPs using the fair value of ESOP shares. Under SOP 93-6, the Company
will recognize compensation cost equal to the fair value of the ESOP shares
during the periods in which they become committed to be released. To the extent
that the fair value of the Bank's ESOP shares differs from the cost of such
shares, this differential will be charged or credited to equity. Employers with
internally leveraged ESOPs will not report the loan receivable from the ESOP as
an asset and will not report the ESOP debt as a liability. See "Management of
the Bank-- Benefits--Employee Stock Ownership Plan and Trust."
In March 1995, the Financial Accounting Standards Board the ("FASB") issued
Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of"
("SFAS 121"). Various assets are excluded from the scope of SFAS
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121, including financial instruments which constitute most of the Bank'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 Bank adopted SFAS 121 on
August 1, 1996, and it did not have a material impact on the Bank'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 122 is effective for fiscal years beginning
after December 15, 1995. SFAS 122 requires that entities recognize, as separate
assets, rights to service mortgage loans for others regardless of how those
servicing rights are acquired. Additionally, SFAS 122 requires that the
capitalized mortgage servicing rights be assesses 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 August 1, 1996 did not have a
material impact on the Bank's financial condition or results of operations,
because the Bank does not currently conduct any material 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 established financial accounting standards for stock-based employee
compensation plans. SFAS 123 permits the Bank to choose either the new fair
value based method, or the current accounting prescribed by Accounting
Principles Board ("APB") Opinion 25, using the intrinsic value based method of
accounting for its stock-based compensation arrangements. SFAS 123 requires pro
forma disclosures of net earnings and earnings per share computed as if the fair
value based method had been applied in APB Opinion 25. SFAS 123 applies to all
stock-based employee compensation plans in which an employer grants shares of
its stock or other equity instruments to employees except for employee stock
ownership plans. SFAS 123 also applies to plans in which the employer incurs
liabilities to employees in amounts based on the price of the employer's stock,
(E.G. stock option plans, stock purchase plans, restricted stock plans and stock
appreciation rights). SFAS 123 also specifies the accounting for transactions in
which a company issues stock options or other equity instruments for services
provided by nonemployees or to acquire goods or services from outside suppliers
or vendors. The recognition provisions of SFAS 123 for companies choosing to
adopt the new fair value based method of accounting for stock-based compensation
arrangements may be adopted immediately and will apply to all transactions
entered into in fiscal years that begin after December 15, 1995. The disclosure
provisions of SFAS 123 are effective for fiscal years beginning after December
15, 1995, however, disclosure of the pro forma net earnings and earnings per
share, as if the fair value method of accounting for stock-based compensation
had been elected, is required for all awards granted in fiscal years beginning
after December 31, 1994. The Company expects to account for its stock-based
compensation arrangements as prescribed in APB Opinion 25 upon the consummation
of the Conversion.
In June 1996, the FASB issued Statement of Financial Accounting Standards
No. 125, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities" ("SFAS 125"), which supersedes FASB Statements
No. 76, "Extinguishments of Debt," and No. 77, "Reporting by Transferors for
Transfers of Receivables with Recourse." This statement amends FASB Statement
No. 115, "Accounting for Certain Investments in Debt and Equity Securities," and
amends and extends to all servicing assets and liabilities, the accounting
standards for mortgage servicing rights now set forth in SFAS 65, and supersedes
SFAS 122. SFAS 125 provides accounting and reporting standards for transfers and
servicing of financial assets and extinguishments of liabilities. After a
transfer of financial assets, an entity recognizes
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<PAGE>
the financial and servicing assets it controls and the liabilities it has
incurred, derecognizes financial assets when control has been surrendered and
derecognizes liabilities when extinguished. SFAS 125 provides consistent
standards for distinguishing transfers of financial assets that are sales from
transfers that are secured borrowings. A transfer of financial assets in which
the transferor surrenders control over those assets is accounted for as a sale
to the extent that consideration other than beneficial interests in the
transferred assets is received in exchange.
SFAS 125 further requires that liabilities and derivatives incurred or
obtained by transferors as part of a transfer of financial assets be initially
measured at fair value, if practicable. It also requires that servicing assets
and other retained interests in the transferred assets be measured by allocating
the previous carrying amount between the assets sold, if any, and retained
interests, if any, based on their relative fair values on the date of the
transfer. SFAS 125 also requires that servicing assets and liabilities be
subsequently measured by (a) amortization in proportion to and over the period
of estimated net servicing income or loss and (b) assessment for asset
impairment or increased obligation based on their fair values. SFAS 125 requires
that debtors reclassify financial assets pledged as collateral and that secured
parties recognize those assets and their obligation to return them to certain
circumstances in which the secured party has taken control of those assets. SFAS
125 requires that a liability be derecognized if and only if either (i) the
debtor pays the creditor and is relieved of its obligation for the liability or
(ii) the debtor is legally released from being the primary obligor under the
liability either judicially or by the creditor. Therefore, a liability is not
considered extinguished by an in-substance defeasance.
SFAS 125 is effective for transfers and servicing of financial assets and
extinguishments of liabilities occurring after December 31, 1996, and is to be
applied prospectively. Earlier or retroactive application is not permitted.
Management of the Bank has not evaluated the impact, if any, of the adoption of
SFAS 125 on the Bank's financial condition or results of operations.
54
<PAGE>
BUSINESS OF THE COMPANY
GENERAL
The Company was organized as an Illinois corporation on September 10, 1996
at the direction of the Board of Directors of the Bank for the purpose of
becoming a holding company to own all of the outstanding capital stock of the
Bank upon consummation of the Conversion. The Company filed an application with,
and received the approval of, the OTS to become a savings association holding
company and to acquire the Bank. Upon completion of the Conversion, the Company
will be a unitary savings association holding company and, as such, will be
subject to the regulations of the OTS. See "Regulation-- Regulation of Savings
Association Holding Companies."
BUSINESS
The Company is not an operating company. Following the Conversion, in
addition to directing, planning and coordinating the business activities of the
Bank, the Company will initially invest primarily in federal funds, government
and federal agency mortgage-backed securities, other debt securities, high-grade
short-term marketable securities, deposits of or loans to the Bank, or a
combination thereof. In addition, the Company intends to fund the loan to the
ESOP to enable the ESOP to subscribe for up to 8% of the Common Stock in the
Conversion. In the future, the Company may acquire or organize other operating
subsidiaries, including other financial institutions, or it may merge with or
acquire other financial institutions and financial services related companies,
although there are no current arrangements, understandings or agreements,
written or oral, regarding any such expansion. See "Use of Proceeds." Initially,
with the exception of a commercial parcel to be acquired from the Bank (see
"Business of the Bank--Real Estate Investment"), the Company will neither own
nor lease any property but will instead use the premises, equipment and
furniture of the Bank. At the present time, the Company does not intend to
employ any persons other than certain officers of the Bank who will not be
separately compensated by the Company. The Company may utilize the support staff
of the Bank from time to time, if needed. Additional employees will be hired as
appropriate to the extent the Company expands its business in the future.
BUSINESS OF THE BANK
GENERAL
The Bank's principal business consists of gathering savings deposits from
the general public within its market area and investing those savings deposits
primarily in one- to four-family residential mortgage loans, mortgage-backed
securities and obligations of the U.S. Government. To a lesser extent, the Bank
makes multifamily residential loans, commercial real estate loans, land,
construction and development loans, consumer loans and commercial lines of
credit. The Bank's revenues are derived principally from interest on mortgage
loans and mortgage-backed securities. The Bank's primary sources of funds are
savings deposits, proceeds from principal and interest payments on loans,
mortgage-backed and investment securities and FHLB advances.
MARKET AREA
The Bank serves three distinct geographic markets: the Chicago branch at
1601 North Milwaukee Avenue serves the near northwest side of the City of
Chicago, the Norridge branch at 8301 West Lawrence serves Chicago's near
northwestern suburbs and the Long Grove branch at Old McHenry Road and Route 83
serves northern Cook and southern Lake counties. The Bank's customer base may be
categorized by branch location. In the Chicago branch, the customer base is
largely comprised of blue collar workers and young white collar technicians and
professionals. The Chicago market is experiencing new construction and a
refurbishing of its existing aged housing stock and is becoming an active
mortgage as well as a savings market. The Norridge branch serves a customer base
split between blue and white collar workers where the market is mature. The
Norridge market has modest prospects for growth; however, it provides the Bank
55
<PAGE>
with a stable source of deposits. The Long Grove office is situated in an
affluent, high-growth, white collar market. This is a dynamic market which
provides the Bank with significant loan demand and potential for growth
opportunities in savings and lending activities. Substantially all loans
originated by the Bank are secured by real estate located in Cook, DuPage and
Lake counties in Illinois.
COMPETITION
The Bank is a community-oriented financial institution serving its market
area with a wide selection of residential loans, consumer loans, deposit
products and retail financial services. Management considers the Bank's retail
branch network and reputation for financial strength and quality customer
service as its major competitive advantage in attracting and retaining customers
in its market area. However, the deregulation of the financial services industry
has led to increased competition among savings banks and other financial
institutions for a significant portion of the funds acquisition and lending
activity which had traditionally been the arena of savings banks and savings and
loan associations. The Bank competes for savings deposits with other savings
banks, savings and loan associations, commercial banks, credit unions, money
market mutual funds, insurance companies, brokerage firms and other financial
institutions, many of which are substantially larger in size than the Bank. The
Bank's competition for loans comes principally from savings banks, savings and
loan associations, commercial banks, mortgage bankers, finance companies and
other institutional lenders. The Bank's principal methods of competition include
loan and deposit pricing, advertising and marketing programs and the types of
services provided.
While the Bank is subject to competition from other financial institutions
which may have much greater financial and marketing resources, the Bank believes
it benefits by its community bank orientation as well as its relatively high
core deposit base. Management believes that the variety, depth and stability of
the communities in which the Bank is located support the service and lending
activities conducted by the Bank. The relative economic stability of the Bank's
lending area is reflected in the small number of mortgage delinquencies
experienced by the Bank.
LENDING ACTIVITIES
LOAN PORTFOLIO COMPOSITION. The Bank's loan portfolio consists primarily of
conventional first mortgage loans secured by one- to four-family residences. At
July 31, 1996, the Bank had gross loans receivable outstanding of $79.9 million,
of which $76.3 million, or 95.6%, were one- to four-family residential mortgage
loans. The remainder consisted of $1.0 million of multifamily mortgage loans, or
1.2% of gross loans; $411,000 of commercial real estate mortgage loans, or 0.5%
of gross loans; $404,000 of land, construction and development loans, or 0.5% of
gross loans; $1.4 million of home equity loans, or 1.8% of gross loans; and
$342,000 of other loans, or 0.4% of gross loans.
The loans that the Bank may originate are subject to federal and state laws
and regulations. Interest rates charged by the Bank 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.
56
<PAGE>
The following table sets forth the composition of the Bank's mortgage and
other loan portfolios in dollar amounts and in percentages at the dates
indicated.
<TABLE>
<CAPTION>
AT JULY 31,
---------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
1996 1995 1994 1993
---------------------- ---------------------- ---------------------- ---------
<CAPTION>
PERCENT PERCENT PERCENT
AMOUNT OF TOTAL AMOUNT OF TOTAL AMOUNT OF TOTAL AMOUNT
--------- ----------- --------- ----------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
<CAPTION>
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
MORTGAGE LOANS:
One- to four-family..................... $ 76,325 95.6% $ 68,080 94.9% $ 66,318 94.6% $ 75,456
Multifamily(1).......................... 979 1.2 1,035 1.4 1,335 1.9 1,415
Commercial real estate.................. 411 0.5 441 0.6 475 0.7 793
Land, construction and development...... 404 0.5 166 0.2 146 0.2 1,558
Home equity............................. 1,421 1.8 1,691 2.4 1,679 2.4 2,280
--------- ----------- --------- ----------- --------- ----------- ---------
Total mortgage loans................ 79,540 99.6 71,413 99.5 69,953 99.8 81,502
--------- ----------- --------- ----------- --------- ----------- ---------
OTHER LOANS:
Home improvement......................... -- -- 15....... -- 15....... -- --.......
Commercial credit lines................. 150 0.2 131 0.2 --....... -- --.......
Loans on savings deposits............... 192 0.2 212 0.3 135 0.2 177
--------- ----------- --------- ----------- --------- ----------- ---------
Total other loans................... 342 0.4 358 0.5 150 0.2 177
--------- ----------- --------- ----------- --------- ----------- ---------
Loans receivable, gross........... $ 79,882 100.00% $ 71,771 100.00% $ 70,103 100.00% $ 81,679
--------- ----------- --------- ----------- --------- ----------- ---------
--------- ----------- --------- ----------- --------- ----------- ---------
LESS:
Loans in process......................... $ -- $ 111 $ 892 $ 263
Deferred loan fees...................... 438 510 573 816
Allowance for loan losses............... 300 166 166 184
Capitalized interest reserve............ -- -- 46 70
--------- --------- --------- ---------
--------- --------- --------- ---------
Loans receivable, net............. $ 79,144 $ 70,984 $ 68,426 $ 80,346
--------- --------- --------- ---------
--------- --------- --------- ---------
<CAPTION>
<S> <C> <C> <C>
1992
----------------------
PERCENT PERCENT
OF TOTAL AMOUNT OF TOTAL
----------- --------- -----------
<S> <C> <C> <C>
<S> <C> <C> <C>
MORTGAGE LOANS:
One- to four-family..................... 92.4% $ 89,785 89.9%
Multifamily(1).......................... 1.7 1,643 1.7
Commercial real estate.................. 1.0 697 0.7
Land, construction and development...... 1.9 4,804 4.8
Home equity............................. 2.8 2,726 2.7
----------- --------- -----------
Total mortgage loans................ 99.8 99,655 99.8
----------- --------- -----------
OTHER LOANS:
Home improvement......................... -- 21....... --
Commercial credit lines................. -- --....... --
Loans on savings deposits............... 0.2 175 0.2
----------- --------- -----------
Total other loans................... 0.2 196 0.2
----------- --------- -----------
Loans receivable, gross........... 100.00% $ 99,851 100.00%
----------- --------- -----------
----------- --------- -----------
LESS:
Loans in process......................... $ 1,695
Deferred loan fees...................... 1,145
Allowance for loan losses............... 597
Capitalized interest reserve............ 384
---------
---------
Loans receivable, net............. $ 96,030
---------
---------
</TABLE>
- ------------------------
(1) Multifamily includes participations in Community Investment Corporation
("CIC") of $381,000 at July 31, 1996, $321,000 at July 31, 1995 and $202,000
at July 31, 1994. CIC is a not-for-profit tax-exempt corporation whose
purpose is to focus the resources and expertise of the financial community
to revitalize certain neighborhoods in Chicago.
MORTGAGE LOANS. At July 31, 1996, over 95% of the Bank's $79.5 million
mortgage loan portfolio consisted of mortgage loans secured by one- to
four-family residential real estate. While the Bank offers adjustable rate
mortgage products, the Bank's customer base has historically favored fixed-rate
mortgage loans, which are generally priced off the Federal National Mortgage
Association ("FNMA") delivery rate with adjustments relating to local
competition and the availability of funds. At July 31, 1996, approximately 92.6%
of the Bank's mortgage portfolio was comprised of fixed-rate loans. The balance
of the mortgage loan portfolio is comprised of adjustable rate loans, including
approximately $3.9 million of one- to four-family residential mortgages, the
majority of which are tied to the National Cost of Funds Index and adjust
annually to rates from 2.5% to 2.75% over the Index. These loans carry annual
caps and life-of-the-loan ceilings to protect borrowers against sudden rate
volatility. 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 Bank's policy to underwrite its
adjustable-rate mortgage loans based on the fully-indexed rate. The Bank
currently has no mortgage loans that are subject to negative amortization. After
the Conversion, management intends to continue to emphasize loans secured by
single family owner-occupied units with 15 year terms. The Bank also makes home
equity loans. At July 31, 1996, the Bank had an aggregate balance of $1.4
million in home equity loans.
LAND, CONSTRUCTION AND DEVELOPMENT LOANS. The Bank offers a residential
construction loan program for custom home buyers and builders, who typically
have a longstanding business relationship with the Bank. The Bank has
established additional guidelines and progress payout procedures for these loans
57
<PAGE>
in recognition of the higher degree of risk involved in making such loans. The
Bank's loss experience in construction lending on single family and multifamily
residences has been extremely favorable. See "-- Delinquencies and
Non-Performing Assets --Allowance for Loan Losses."
In addition to financing custom construction of homes, the Bank finances
detached residential subdivision and condominium land acquisition and
development projects. For these loans, the Bank requires feasibility studies and
economic analyses which address a property's proposed gross sale or rental
income, market absorption rate, occupancy estimate and marketing and operating
expenses in order to ascertain the discounted net sales or capitalized rental
value projections. As a general guideline, actual or projected net cash flows
from these types of lending activities should equal or exceed 120% of the debt
service (excluding condominium properties). A builder or developer's experience
in constructing and marketing properties is also evaluated by the Bank. Each
borrower must demonstrate that it has the financial capacity to fund a project's
deficit debt service.
Multifamily residential and commercial real estate and land loans are
generally considered to involve a higher degree of credit risk than one- to
four-family residential mortgage loans. This greater risk is attributable to
several factors, including the higher concentration of principal in a limited
number of loans and borrowers, the effects of general economic conditions on
income-producing properties and the increased difficulty of evaluating and
monitoring these types of loans. Furthermore, the repayment of loans secured by
multifamily residential and commercial real estate is typically dependent upon
sufficient cash flow from the related real estate project to cover operating
expenses and debt service. If the cash flow from the project is reduced (for
example, if leases are not obtained or renewed), the borrower's ability to repay
the loan may be impaired. Circumstances outside the borrower's control may
adversely affect income from the multifamily or commercial property as well as
its market value. See "Risk Factors--Residential and Non-Residential Lending
Risks."
OTHER LOANS. The Bank also makes short-term fixed-rate and adjustable-rate
other loans, such as loans secured by savings accounts and commercial lines of
credit. These loans generally have an average life of less than two years. The
shorter terms to maturity and the short-term repricing periods are helpful in
managing the Bank's interest rate risk.
ORIGINATION OF LOANS. Loan originations come from a number of sources.
Residential loan originations can be attributed to depositors, retail customers,
telephone inquiries, loan officers, and referrals from other borrowers, real
estate brokers and builders.
All of the Bank's lending is subject to its written, nondiscriminatory
underwriting standards and to loan origination procedures prescribed by the
Bank's Board of Directors that conform to the FNMA standards. Property
valuations by a member of the Bank's appraisal staff or independent appraisers
approved by the Board of Directors are required. Detailed loan applications are
obtained to determine the borrower's ability to repay, and the more significant
items on these applications are verified through the use of credit reports,
financial statements and confirmations. Generally, the Bank will lend against
the appraised value of property up to a maximum loan-to-value ratio of 95%.
Private mortgage insurance is required on all loans with loan-to-value ratios
greater than 80%. All loans are approved by the full Board of Directors.
Mortgage loans originated by the Bank generally include due-on-sale clauses
which provide the Bank with the contractual right to deem the loan immediately
due and payable in the event the borrower transfers ownership of the property
without the Bank's consent. Due-on-sale clauses are an important means of
adjusting the rates of the Bank's fixed-rate mortgage loan portfolio, and the
Bank has generally exercised its rights under these clauses.
It is the Bank's policy to require title insurance policies certifying or
insuring that the Bank has a valid first lien on the mortgaged real estate.
Borrowers must also obtain hazard insurance policies prior to closing and, where
necessary, flood insurance policies. Borrowers are required to maintain a
non-interest-bearing escrow account or a pledged passbook savings account with
the Bank to cover charges for real estate taxes, hazard insurance premiums and
assessments.
58
<PAGE>
Under the Financial Institutions Reform, Recovery and Enforcement Act of
1989 ("FIRREA"), the aggregate amount of loans that the Bank is permitted to
make to any one borrower is generally limited to 15% of unimpaired capital and
surplus (25% if the security for such loan has a "readily ascertainable" value
or 30% for certain residential development loans). At July 31, 1996, based on
the above, the Bank's regulatory loans-to-one-borrower limit was approximately
$2.0 million. On the same date, the Bank had no borrowers with outstanding
balances in excess of this amount. At July 31, 1996, the two largest dollar
amounts outstanding to one borrower or group of related borrowers were
approximately $299,000 and $297,000. Both of these loans are secured by one- to
four-family properties located in the Bank's market area and, at July 31, 1996,
were performing in accordance with their terms.
The following table sets forth the Bank's loan originations, loan sales and
principal repayments for the periods indicated.
<TABLE>
<CAPTION>
FOR THE YEAR ENDED JULY 31,
-------------------------------
<S> <C> <C> <C>
1996 1995 1994
--------- --------- ---------
<CAPTION>
(IN THOUSANDS)
<S> <C> <C> <C>
LOANS (GROSS):
At beginning of period......................................................... $ 71,771 $ 70,103 $ 81,679
--------- --------- ---------
MORTGAGE LOANS ORIGINATED:
One- to four-family............................................................ 19,617 11,472 10,797
Multifamily (1)................................................................ 86 158 203
Land, construction and development............................................. 38 290 116
--------- --------- ---------
Total mortgage loans originiated........................................... 19,741 11,920 11,116
OTHER LOANS ORIGINATED:
Other loans.................................................................... 202 461 248
--------- --------- ---------
Total loans originated..................................................... 19,943 12,381 11,364
--------- --------- ---------
Additional draws--open-end home equity loans................................... 549 803 365
Principal repayments............................................................. (12,377) (11,348) (22,863)
Loans sold....................................................................... -- -- (299)
Loans transferred to real estate owned........................................... -- (168) (143)
Charge-off--CIC participation.................................................... (4) -- --
--------- --------- ---------
Loan balances at end of period............................................. $ 79,882 $ 71,771 $ 70,103
--------- --------- ---------
--------- --------- ---------
</TABLE>
- ------------------------
(1) Includes participations in CIC. See "Business of the Bank -- Lending
Activities -- Loan Portfolio Composition."
INCOME FROM LENDING ACTIVITIES. The Bank realizes interest income and
servicing fee income from its lending activities. For the most part, interest
rates charged by the Bank on loans are determined by local competition, although
they also reflect general interest rates, demand for loans and availability of
funds.
The Bank charges service fees, late payment and other miscellaneous service
fees. During the fiscal years ended July 31, 1996, 1995 and 1994, the Bank
earned an aggregate of such fees equal to $20,000, $30,000 and $36,700,
respectively.
59
<PAGE>
LOAN MATURITY. The following table shows the contractual maturity of the
Bank's loan portfolio at July 31, 1996. Loans are shown as due based on their
contractual terms to maturity. The table does not include prepayments or
scheduled principal amortization.
<TABLE>
<CAPTION>
AT JULY 31, 1996
------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
MORTGAGE LOANS
-----------------------------------------------------------------------
<CAPTION>
LAND,
ONE- TO CONSTRUCTION
FOUR- MULTI- COMMERCIAL AND HOME OTHER
FAMILY (1) FAMILY(1) REAL ESTATE DEVELOPMENT EQUITY LOANS
----------- ----------- --------------- --------------- ----------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
AMOUNT DUE:
One year or less......................... $ 58 $ -- $ -- $ -- $ 69 $ 183
AFTER ONE YEAR:
One to three years....................... 562 22 -- 404 209 159
More than three years to five years...... 1,163 117 -- -- 631 --
More than five years to 10 years......... 6,906 181 146 -- 497 --
More than 10 years to 15 years........... 25,010 82 106 -- 15 --
More than 15 years to 20 years........... 2,170 473 159 -- -- --
Over 20 years............................ 40,456 104 -- -- -- --
----------- ----- ----- ----- ----------- -----
TOTAL DUE AFTER ONE YEAR................... 76,267 979 411 404 1,352 159
----------- ----- ----- ----- ----------- -----
TOTAL AMOUNTS DUE GROSS.................... $ 76,325 $ 979 $ 411 $ 404 $ 1,421 $ 342
----------- ----- ----- ----- ----------- -----
----------- ----- ----- ----- ----------- -----
<CAPTION>
<S> <C>
TOTAL
LOANS
---------
<S> <C>
AMOUNT DUE:
One year or less......................... $ 310
AFTER ONE YEAR:
One to three years....................... 1,356
More than three years to five years...... 1,911
More than five years to 10 years......... 7,730
More than 10 years to 15 years........... 25,213
More than 15 years to 20 years........... 2,802
Over 20 years............................ 40,560
---------
TOTAL DUE AFTER ONE YEAR................... 79,572
---------
TOTAL AMOUNTS DUE GROSS.................... $ 79,882
---------
---------
</TABLE>
The following table sets forth at July 31, 1996, the dollar amount of loans
due after July 31, 1997, and whether such loans have fixed interest rates or
adjustable interest rates.
<TABLE>
<CAPTION>
DUE AFTER JULY 31, 1997
-----------------------------------
<S> <C> <C> <C>
FIXED(1) ADJUSTABLE TOTAL
----------- ----------- ---------
<CAPTION>
(IN THOUSANDS)
<S> <C> <C> <C>
MORTGAGE LOANS:
One- to four-family............................................................. $ 72,388 $ 3,879 $ 76,267
Multifamily(2).................................................................. 933 46 979
Commercial real estate.......................................................... 202 209 411
Land, construction and development.............................................. -- 404 404
Home equity..................................................................... -- 1,352 1,352
----------- ----------- ---------
Total mortgage loans.............................................................. 73,523 5,890 79,413
----------- ----------- ---------
Other loans....................................................................... 159 -- 159
----------- ----------- ---------
Total loans................................................................... $ 73,682 $ 5,890 $ 79,572
----------- ----------- ---------
----------- ----------- ---------
</TABLE>
- ------------------------
(1) FHA/VA loans are included in one- to four-family loans.
(2) Including participations in CIC. See "Business of the Bank--Lending
Activities--Loan Portfolio Composition."
DELINQUENCIES AND NON-PERFORMING ASSETS
DELINQUENCY PROCEDURES. When a borrower fails to make a required payment on
a loan, the Bank attempts to cause the deficiency to be cured by contacting the
borrower. Contacts are made after a payment is more than 15 days past due and a
late charge is assessed at that time. In most cases, deficiencies are cured
promptly. If the deficiency exceeds 90 days and is not cured through the Bank's
normal collection procedures, the Bank may institute measures to remedy the
default, including commencing a foreclosure action or accepting from the
mortgagor a voluntary deed of the secured property in lieu of foreclosure. If a
foreclosure action is instituted and the loan is not reinstated, paid in full or
refinanced, the property is sold at a judicial sale. If the Bank acquires the
property at judicial sale or accepts a voluntary deed of the secured property in
lieu of foreclosure, the acquired property is then listed in the Bank's Real
Estate Owned ("REO") account until it is sold. At July 31, 1996, the Bank had no
REO. The Bank is
60
<PAGE>
permitted to finance sales from its REO account by "loans to facilitate," which
involve a lower down payment or a longer repayment term or other more favorable
features than generally would be granted under the Bank's underwriting
guidelines. Currently, the Bank has no such "loans to facilitate."
The following table sets forth information with respect to the Bank's
non-performing assets (which includes loans that are delinquent for 90 days or
more and real estate owned) at the dates indicated. At July 31, 1996, there were
no loans other than those included in the table below with regard to which
management had information about possible credit problems of the borrower that
caused management to seriously doubt the ability of the borrower to comply with
present loan repayment terms.
<TABLE>
<CAPTION>
AT JULY 31,
-----------------------------------------------------
<S> <C> <C> <C> <C> <C>
1996 1995 1994 1993 1992
--------- --------- --------- --------- ---------
<CAPTION>
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
NON-PERFORMING LOANS:
Mortgage loans:
One- to four-family................................................. $ 69 $ 193 $ 511 $ 828 $ 1,055
Multifamily......................................................... -- -- -- 84 19
Commercial real estate.............................................. -- -- -- -- --
Land, construction and development.................................. -- -- -- -- 4,296
Home equity......................................................... 49 -- -- -- --
Other loans........................................................... -- -- -- -- 20
--------- --------- --------- --------- ---------
Total non-performing loans........................................ 118 193 511 912 5,390
--------- --------- --------- --------- ---------
Real estate owned..................................................... -- 168 -- -- 118
--------- --------- --------- --------- ---------
Total non-performing assets....................................... $ 118 $ 361 $ 511 $ 912 $ 5,508
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Total non-performing loans to total loans............................. 0.15% 0.27% 0.74% 1.13% 5.58%
Total non-performing assets to total assets........................... 0.06% 0.18% 0.26% 0.49% 2.92%
</TABLE>
A loan is placed on non-accrual status when it becomes 90 days or more
delinquent and when the collection of principal and/or interest becomes
doubtful. At July 31, 1996 and 1995, the Bank had no non-accruing loans. For the
years ended July 31, 1996, 1995 and 1994, the amount of interest income that
would have been recorded on non-accrual loans was $0, $1,000 and $47,000,
respectively. Interest earned on loans 90 days or more delinquent and still
accruing interest amounted to $67,000, $54,000 and $64,000 for the years ended
July 31, 1996, 1995 and 1994, respectively.
The Bank's non-performing assets at July 31, 1996, consisted of two one-
tofour-family residential loans, with an aggregate outstanding principal balance
of $118,303. Both of the properties underlying non-performing loans are located
in the Chicago metropolitan area.
CLASSIFIED ASSETS. OTS regulations require that each savings association
classify its assets on a regular basis and establish prudent valuation
allowances based on such classifications. In addition, in connection with
examinations of savings associations, OTS examiners have authority to identify
problem assets and, if appropriate, require them to be classified. OTS
regulations provide for three adverse classifications for problem assets:
Substandard, Doubtful and Loss. Substandard assets have one or more defined
weaknesses and are characterized by the distinct possibility that the savings
association will sustain some loss if the deficiencies are not corrected.
Doubtful assets have the weaknesses of Substandard assets, with the additional
characteristics that the weaknesses make collection or liquidation in full on
the basis of currently existing facts, conditions and values questionable, and
there is a high probability of loss. An asset classified Loss is considered
uncollectible and of such little value that its continuance as an asset of the
institution is not warranted. The regulations have also created a Special
Mention category, consisting of assets which do not currently expose a savings
association to a sufficient degree of risk to warrant classifications, but do
possess credit deficiencies or potential weaknesses deserving management's close
61
<PAGE>
attention. Assets classified as Substandard or Doubtful require the Bank to
establish prudent valuation allowances. If an asset or portion thereof is
classified as Loss, the association must either establish specific allowances
for loan losses in the amount of 100% of the portion of the asset classified
Loss or charge off such amount. If an association does not agree with an
examiner's classification of an asset, it may appeal this determination to the
District Director of the OTS. On the basis of management's review of its loans
at July 31, 1996, the Bank had no classified assets and no potential problem
loans, which would have been classified by management as "Special Mention."
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 the Bank's loan portfolio and the general economy. The
allowance for loan losses is maintained at an amount management considers
adequate to cover loan losses which are deemed probable and estimable. The
allowance is based upon a number of factors, including asset classifications,
economic trends, industry experience and trends, industry and geographic
concentrations, estimated collateral values, management's assessment of the
credit risk inherent in the portfolio, historical loan loss experience and the
Bank's underwriting policies. The allowance for loan losses is maintained at an
amount considered adequate to provide for potential losses. Although management
believes it uses the best information available to make determinations with
respect to the allowance for loan losses, future adjustments may be necessary if
economic conditions and the Bank's actual experience differ substantially from
the conditions and experience used in the assumptions upon which the initial
determinations are based. 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 analyzes all significant factors that affect the collectibility of
the portfolio in a reasonable manner; and that management establishes acceptable
allowance evaluation processes that meet the objectives set forth in the policy
statement.
While the Bank believes that it has established an adequate allowance for
loan losses, there can be no assurance that regulators, in reviewing the Bank's
loan portfolio as part of a future regulatory examination, will not request the
Bank to materially increase its allowance for loan losses, thereby negatively
affecting the Bank's financial condition and earnings at that time. Moreover, no
assurance can be made 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 Bank 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.
Specific valuation reserves are provided for individual loans which are
contractually past due (including loans classified Substandard or Doubtful) when
ultimate collection is considered questionable by management after reviewing the
current status of such loans and considering the net realizable value of the
security for the loan.
62
<PAGE>
The following table analyzes activity in the Bank's allowance for loan
losses during the fiscal years indicated.
<TABLE>
<CAPTION>
AT OR FOR THE YEAR ENDED JULY 31,
-----------------------------------------------------
<S> <C> <C> <C> <C> <C>
1996 1995 1994 1993 1992
--------- --------- --------- --------- ---------
<CAPTION>
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Balance at beginning of year............................ $ 166 $ 166 $ 184 $ 597 $ 200
Provision (credit) for loan losses...................... 138 -- (18) (392) 397
Charge-offs:
Mortgage loans:
One- to four-family................................... -- -- -- -- --
Multifamily........................................... (4) -- -- (21) --
Commercial real estate................................ -- -- -- -- --
Land, construction and development.................... -- -- -- -- --
Home equity........................................... -- -- -- -- --
Other loans............................................. -- -- -- -- --
--------- --------- --------- --------- ---------
Total charge-offs................................... (4) -- -- (21) --
--------- --------- --------- --------- ---------
Recoveries.............................................. -- -- -- -- --
--------- --------- --------- --------- ---------
Balance at end of year.................................. $ 300 $ 166 $ 166 $ 184 $ 597
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Allowance for loan losses to total gross loans at end of
period(1)............................................. 0.38% 0.23% 0.24% 0.23% 0.60%
Allowance for loan losses to total non-performing loans
at end of period...................................... 254.24 86.01 32.49 20.18 11.08
Allowance for loan losses to total non-performing assets
at end of period...................................... 254.24 45.98 32.49 20.18 10.84
Net charge-offs to average loans outstanding............ 0.01 -- -- 0.02 --
</TABLE>
- ------------------------
(1) Total loans represent loans, net, plus the allowance for loan losses.
The following table sets forth the breakdown of the allowance for loan
losses by loan category at the dates indicated. The allocation of the allowance
to each category is not necessarily indicative of future losses and does not
restrict the use of the allowance to absorb losses in any category.
<TABLE>
<CAPTION>
AT JULY 31,
--------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1996 1995
--------------------------------------------- ---------------------------------------------
<CAPTION>
PERCENT OF PERCENT OF
LOANS IN EACH LOANS IN EACH
ALLOWANCE PERCENT OF CATEGORY TO ALLOWANCE PERCENT OF CATEGORY TO
AMOUNT ALLOWANCE GROSS LOANS AMOUNT ALLOWANCE GROSS LOANS
------------- ------------- --------------- ------------- ------------- ---------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Mortgage loans:
One- to four-family............... $ 85 28.3% 95.6% $ 79 47.6% 94.9%
Multifamily....................... 5 1.7 1.2 6 3.6 1.4
Commercial real estate............ 4 1.3 0.5 4 2.4 0.6
Land, construction and
development..................... 2 0.7 0.5 2 1.2 0.2
Home equity....................... 4 1.3 1.8 5 3.0 2.4
Other loans......................... -- -- 0.4 -- -- 0.5
Unallocated......................... 200 66.7 -- 70 42.2 --
----- ----- ----- ----- ----- -----
Total allowance for loan losses... $ 300 100.0% 100.0% $ 166 100.0% 100.0%
----- ----- ----- ----- ----- -----
----- ----- ----- ----- ----- -----
<CAPTION>
<S> <C> <C> <C>
1994
---------------------------------------------
PERCENT OF
LOANS IN EACH
ALLOWANCE PERCENT OF CATEGORY TO
AMOUNT ALLOWANCE GROSS LOANS
------------- ------------- ---------------
<S> <C> <C> <C>
Mortgage loans:
One- to four-family............... $ 83 50.0% 94.6%
Multifamily....................... 6 3.6 1.9
Commercial real estate............ 5 3.0 0.7
Land, construction and
development..................... 1 0.6 0.2
Home equity....................... 4 2.4 2.4
Other loans......................... -- -- 0.2
Unallocated......................... 67 40.4 --
----- ----- -----
Total allowance for loan losses... $ 166 100.0% 100.0%
----- ----- -----
----- ----- -----
</TABLE>
63
<PAGE>
INVESTMENT ACTIVITIES
GENERAL. The investment policy of the Bank, which is approved by the Board
of Directors, is based upon its asset/liability management goals and is designed
primarily to provide and maintain adequate liquidity, maintain a balance of high
quality, diversified investments, minimize risks to the Bank and complement the
Bank's lending activities. The investment policy is implemented by the Chief
Financial Officer and the President. The policy designates the Chief Financial
Officer as the investment manager authorized to oversee the daily operations of
the investment portfolio. Historically, the Bank has maintained liquid assets at
levels above the minimum requirements imposed by the OTS regulations and above
levels believed adequate to meet the requirements of normal operations,
including potential deposit outflows. At July 31, 1996, the Bank's liquidity
ratio for regulatory purposes was 42.35%. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Liquidity and Capital
Resources."
As required by SFAS 115, securities are classified into three categories:
trading, held-to-maturity and available-for-sale. Securities that are bought and
held principally for the purpose of selling them in the near term are classified
as trading securities and are reported at fair value with unrealized gains and
losses included in trading account activities in the statement of earnings.
Securities that the Bank has the positive intent and ability to hold to maturity
are classified as held-to-maturity and reported at amortized cost. All other
securities not classified as held-to-maturity are classified as
available-for-sale. At July 31, 1996, the Bank had no securities which were
classified as trading. Available-for-sale securities are reported at fair value
with unrealized gains and losses included, on an after-tax basis, as a separate
component of retained earnings. At July 31, 1996, $58.3 million of
mortgage-backed securities were classified as available-for-sale. At July 31,
1996, mortgage-backed securities held-to-maturity totaled $44.1 million and had
a fair value of $42.2 million. In 1995, the FASB issued a special report
allowing the transfer of securities from held-to-maturity to the
available-for-sale classification during the period from November 15, 1995 to
December 31, 1995, with no recognition of any related unrealized gain or loss in
current earnings. On December 31, 1995, the Bank transferred mortgage-backed
securities held-to-maturity with an amortized cost of approximately $56.4
million to the available-for-sale classification. The gross unrealized gain
related to the transferred securities was approximately $609,000.
MORTGAGE-BACKED SECURITIES. The Bank invests in mortgage-backed securities
and uses such investments to complement its mortgage lending activities and
supplement such activities at times of low mortgage loan demand.
At July 31, 1996, all securities in the Bank's mortgage-backed securities
portfolio were directly insured or guaranteed by FNMA or FHLMC, thereby
providing the certificate holder a guarantee of timely payments of interest and
scheduled principal payments, whether or not they are collected. The Bank's
mortgage-backed securities portfolio had a weighted average yield of 6.32% at
July 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 Bank. 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 weighing assigned to most non-securitized residential mortgage loans.
While mortgage-backed securities carry a reduced credit risk as compared to
whole loans, such securities remain subject to the risk that a fluctuating
interest rate environment, along with other factors such as the geographic
distribution of the underlying mortgage loans, may alter the prepayment rate of
such mortgage loans and so affect both the prepayment speed, and value, of such
securities. See "Risk Factors--Potential Impact of Changes in Interest Rates"
and "--Concentration in Mortgage-backed Securities."
64
<PAGE>
The following table sets forth activity in the Bank's mortgage-backed
securities portfolio for the periods indicated.
<TABLE>
<CAPTION>
FOR THE YEAR ENDED JULY 31,
----------------------------------
<S> <C> <C> <C>
1996 1995 1994
---------- ---------- ----------
<CAPTION>
(IN THOUSANDS)
<S> <C> <C> <C>
HELD-TO-MATURITY:
Amortized cost at beginning of period...................................... $ 111,283 $ 111,987 $ 47,524
Purchases/sales, net....................................................... -- 10,305 83,244
Transfer (to) from available-for-sale...................................... (56,447) -- --
Principal repayments....................................................... (10,484) (10,817) (18,828)
Premium and discount amortization, net..................................... (219) (192) 47
---------- ---------- ----------
Amortized cost at end of period............................................ $ 44,133 $ 111,283 $ 111,987
---------- ---------- ----------
---------- ---------- ----------
AVAILABLE-FOR-SALE:
Amortized cost at beginning of period...................................... $ -- $ -- $ --
Purchases/sales, net....................................................... 10,081 -- --
Transfer (to) from held-to-maturity........................................ 56,447 -- --
Principal repayments....................................................... (6,622) -- --
Premium and discount amortization, net..................................... (8) -- --
---------- ---------- ----------
Amortized cost at end of period............................................ $ 59,898 $ -- $ --
---------- ---------- ----------
---------- ---------- ----------
Total mortgage-backed securities............................................. $ 104,031 $ 111,283 $ 111,987
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
The following table sets forth certain information regarding the amortized
cost and fair value of the Bank's mortgage-backed securities at the dates
indicated.
<TABLE>
<CAPTION>
AT JULY 31,
----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1996 1995 1994
---------------------- ---------------------- ----------------------
<CAPTION>
AMORTIZED FAIR AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE COST VALUE
---------- ---------- ---------- ---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
HELD-TO-MATURITY:
FNMA........................................... $ 39,135 $ 37,195 $ 78,831 $ 77,117 $ 81,203 $ 77,926
FHLMC.......................................... 4,998 4,960 32,452 32,000 30,784 29,931
---------- ---------- ---------- ---------- ---------- ----------
Total held-to-maturity....................... $ 44,133 $ 42,155 $ 111,283 $ 109,117 $ 111,987 $ 107,857
---------- ---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ---------- ----------
AVAILABLES-FOR-SALE:
FNMA........................................... $ 37,454 $ 36,596 $ -- $ -- $ -- $ --
FHLMC.......................................... 22,444 21,682 -- -- -- --
---------- ---------- ---------- ---------- ---------- ----------
Total available-for-sale..................... $ 59,898 $ 58,278 $ -- $ -- $ -- $ --
---------- ---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ---------- ----------
Total mortgage-backed securities............. $ 104,031 $ 100,433 $ 111,283 $ 109,117 $ 111,987 $ 107,857
---------- ---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ---------- ----------
</TABLE>
65
<PAGE>
The table below sets forth certain information regarding the amortized cost,
fair value, weighted average yields and stated maturity of the Bank's
mortgage-backed securities at July 31, 1996. No effect has been given to
prepayments or amortization of loans. There were no mortgage-backed securities
(exclusive of obligations of the U.S. Government and any federal agencies)
issued by any one entity with a total carrying value in excess of 10% of
retained earnings at July 31, 1996.
<TABLE>
<CAPTION>
AT JULY 31, 1996
------------------------------------
<S> <C> <C> <C>
WEIGHTED
AMORTIZED FAIR AVERAGE
COST VALUE COUPON
---------- ----------- -----------
<CAPTION>
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
HELD-TO-MATURITY:
Due within 1 year............................................................. $ 1,129 $ 1,129 7.00%
Due after 1 year but within 5 years........................................... 43,004 41,026 6.32
Due after 5 years but within 10 years......................................... -- -- --
Due after 10 years............................................................ -- -- --
---------- ----------- ---
Total held-to-maturity.................................................... $ 44,133 $ 42,155 6.34%
---------- ----------- ---
---------- ----------- ---
AVAILABLE-FOR-SALE:
Due within 1 year............................................................. $ -- $ -- -- %
Due after 1 year but within 5 years........................................... 22,701 21,767 5.67
Due after 5 years but within 10 years......................................... 9,098 8,959 7.07
Due after 10 years............................................................ 28,099 27,552 7.09
---------- ----------- ---
Total available-for-sale.................................................. $ 59,898 $ 58,278 6.55%
---------- ----------- ---
---------- ----------- ---
TOTAL:
Due within 1 year............................................................. $ 1,129 $ 1,129 7.00%
Due after 1 year but within 5 years........................................... 65,705 62,793 6.10
Due after 5 years but within 10 years......................................... 9,098 8,959 7.07
Due after 10 years............................................................ 28,099 27,552 7.09
---------- ----------- ---
Total mortgage-backed securities.......................................... $ 104,031 $ 100,433 6.46%
---------- ----------- ---
---------- ----------- ---
</TABLE>
INVESTMENT SECURITIES. Federal savings associations have the authority to
invest in various types of liquid assets, including United States Treasury
obligations, securities of various federal agencies, certain certificates of
deposit of insured banks and savings institutions, certain bankers' acceptances,
repurchase agreements and federal funds. Subject to various restrictions,
federal savings associations may also invest their assets in commercial paper,
investment grade corporate debt securities and mutual funds whose assets conform
to the investments that a federal savings association is otherwise authorized to
make directly. The Bank, from time to time, has used investment securities to
supplement loan volume and to provide short- and intermediate-term assets for
asset/liability management purposes. From time to time, the Bank has invested in
high-quality investment securities with various terms to maturity. At July 31,
1996, the Bank had no investments in investment securities.
REAL ESTATE INVESTMENT
The investment in real estate held for sale and development originally
consisted of 158 single family detached home sites and a 15-acre commercial
parcel in a Planned Unit Development named the Trails of Olympia Fields.
However, the Bank has nearly liquidated this investment through sales. At July
31, 1996, only one five acre commercial parcel with a book value of $262,000
remained unsold. Upon consummation of the Conversion, the Company will acquire
this parcel from the Bank. For the fiscal years ended July 31, 1996, 1995, 1994,
1993 and 1992, the investment in the Trails of Olympia Fields was $262,000,
$262,000, $919,000, $1.6 million, and $2.1 million, respectively. Sales during
the three fiscal years ended July 31,
66
<PAGE>
1996, 1995, and 1994 resulted in gross profits of $0, $557,000, and $574,000,
respectively. These gross profits were offset by development costs of $140,000,
$237,000, and $511,000 in the fiscal years ended July 31, 1996, 1995, and 1994,
respectively.
The Bank is currently the plaintiff in litigation against the Village of
Olympia Field, its trustees, The Home Owners Association of the Trails of
Olympia Fields and individual members of its Home Owners Association over
matters that impeded the orderly development of the Trails of Olympia Field.
SOURCES OF FUNDS
GENERAL. Savings deposits are the primary source of the Bank's funds for
use in lending and for other general business purposes. In addition to savings
deposits, the Bank derives funds from loan and security repayments and
prepayments, from advances from the FHLB of Chicago, from other borrowings, net
revenues from operations and to a lesser extent from loan sales. Loan and
mortgage-backed and investment securities repayments are a relatively stable
source of funds, while savings inflows and outflows and loan and mortgage-backed
and investment securities prepayments are significantly influenced by general
interest rates and money market conditions. Borrowings, primarily from the FHLB
of Chicago, may be used on a short-term basis to compensate for reductions in
normal sources of funds at less than projected levels. They may also be used on
a longer term basis to support expanded activities.
SAVINGS DEPOSITS. The Bank offers several types of savings programs to
attract short-term and long-term savings deposits, including passbook, various
NOW accounts, money market deposit accounts and a variety of fixed-rate, money
market certificates. Deposit account terms vary according to the minimum balance
required, the time periods the funds must remain on deposit and the interest
rate, among other factors. The Bank's savings deposits are obtained
predominantly from the areas near its office locations. The Bank relies
primarily on customer service and long-standing relationships with customers to
attract and retain these savings deposits; however, market interest rates and
rates offered by competing financial institutions significantly affect the
Bank's ability to attract and retain savings deposits. Certificate accounts in
excess of $100,000 are not actively solicited by the Bank nor does the Bank use
brokers to obtain savings deposits. At July 31, 1996, the Bank had approximately
$137.2 million outstanding in savings deposits.
The competitive rates paid on insured savings deposits has allowed the Bank
to be more aggressive in obtaining funds and has given it more flexibility to
minimize net deposit outflows. However, competitive interest rates have also
resulted in a more volatile cost of funds.
The following table sets forth the distribution of the Bank's deposit
accounts at the dates indicated and the weighted average interest rates on each
category of savings deposits presented. Management does not believe that the use
of year end balances instead of average monthly balances would result in any
material difference in the information presented.
<TABLE>
<CAPTION>
AT JULY 31,
----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1996 1995 1994
------------------------------------- ------------------------------------- ----------------------
<CAPTION>
PERCENT OF WEIGHTED PERCENT OF WEIGHTED PERCENT OF
TOTAL AVERAGE TOTAL AVERAGE TOTAL
AMOUNT DEPOSITS RATE AMOUNT DEPOSITS RATE AMOUNT DEPOSITS
--------- ----------- ------------- --------- ----------- ------------- --------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Noninterest-bearing NOW
accounts................. $ 4,165 3.0% -- % $ 3,799 2.6% -- % $ 3,559 2.5%
Interest-bearing NOW
accounts................. 7,310 5.3 2.02 7,295 4.9 2.02 8,236 5.8
Money market demand
accounts................. 13,035 9.5 3.12 14,717 9.9 3.16 18,039 12.7
Passbook accounts.......... 41,324 30.2 2.50 44,241 29.8 2.50 47,349 33.4
Certificates of deposit.... 71,343 52.0 5.48 78,298 52.8 5.52 64,647 45.6
--------- ----- --- --------- ----- --- --------- -----
Totals................. $ 137,177 100.0% 4.01% $ 148,350 100.0% 4.07% $ 141,830 100.0%
--------- ----- --- --------- ----- --- --------- -----
--------- ----- --- --------- ----- --- --------- -----
<CAPTION>
<S> <C>
WEIGHTED
AVERAGE
RATE
-------------
<S> <C>
Noninterest-bearing NOW
accounts................. -- %
Interest-bearing NOW
accounts................. 2.02
Money market demand
accounts................. 2.65
Passbook accounts.......... 2.50
Certificates of deposit.... 4.13
---
Totals................. 3.13%
---
---
</TABLE>
67
<PAGE>
The following table presents the savings deposit activity of the Bank for
the periods indicated.
<TABLE>
<CAPTION>
FOR THE YEAR ENDED JULY 31,
-------------------------------------
<S> <C> <C> <C>
1996 1995 1994
----------- ----------- -----------
<CAPTION>
(IN THOUSANDS)
<S> <C> <C> <C>
Deposits................................................................... $ 266,028 $ 265,702 $ 246,545
Withdrawals................................................................ (282,429) (263,875) (240,427)
----------- ----------- -----------
Deposits in excess of (less than) withdrawals.............................. (16,401) 1,827 6,118
Interest credited.......................................................... 5,228 4,693 4,208
----------- ----------- -----------
Total increase (decrease) in savings deposits.......................... $ (11,173) $ 6,520 $ 10,326
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
At July 31, 1996, the Bank had $6.1 million in certificate accounts with a
balance of $100,000 or greater maturing as follows:
<TABLE>
<CAPTION>
WEIGHTED
AMOUNT AVERAGE RATE
--------- ---------------
<S> <C> <C>
(DOLLARS IN THOUSANDS)
MATURITY PERIOD
- ----------------------------------------------------------------------
Within three months................................................... $ 2,245 5.84%
After three but within six months..................................... 1,267 5.28
After six but within 12 months........................................ 879 5.33
After 12 months....................................................... 1,752 5.14
--------- ---
Total............................................................. $ 6,143 5.45%
--------- ---
--------- ---
</TABLE>
The following table sets forth the amount of certificates of deposit
outstanding at the dates indicated and the remaining period to maturity of the
certificates of deposit outstanding at July 31, 1996.
<TABLE>
<CAPTION>
PERIOD TO MATURITY AT JULY 31, 1996
---------------------------------------
MORE THAN TOTAL AT JULY 31,
LESS THAN ONE TO THREE TO -------------------------------
INTEREST RATE RANGE ONE YEAR THREE YEARS FIVE YEARS 1996 1995 1994
- ----------------------------------------------------- ----------- ----------- ------------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
(IN THOUSANDS)
4.00% and below...................................... $ 949 $ 19 $ -- $ 968 $ 2,439 $ 29,898
4.01% to 5.00%....................................... 16,417 1,809 -- 18,226 21,235 21,245
5.01% to 6.00%....................................... 20,322 13,269 924 34,515 28,081 12,572
6.01% to 7.00%....................................... 15,608 2,013 13 17,634 26,502 413
7.01% and above...................................... -- -- -- -- 41 519
----------- ----------- ----- --------- --------- ---------
Total............................................ $ 53,296 $ 17,110 $ 937 $ 71,343 $ 78,298 $ 64,647
----------- ----------- ----- --------- --------- ---------
----------- ----------- ----- --------- --------- ---------
</TABLE>
BORROWINGS. Although savings deposits are the primary source of funds for
the Bank's lending and investment activities and for its general business
purposes, the Bank has in the past relied upon advances from the FHLB of Chicago
and, to a lesser extent, reverse repurchase agreements, to supplement its supply
of funds and to meet deposit withdrawal requirements. The Bank may obtain
advances from the FHLB of Chicago on the security of the capital stock of the
FHLB of Chicago it owns and certain of its home mortgage loans and/or
mortgage-backed and investment securities provided certain standards related to
creditworthiness have been met. See "Regulation--Regulation of Federal Savings
Associations--Federal Home Loan Bank System." Such advances are made pursuant to
several different credit programs. Each credit program has its own interest rate
and range of maturities, and the FHLB of Chicago prescribes acceptable uses to
which the advances pursuant to each program may be used as well as limitations
on the size of such advances. Depending on the program, such limitations are
based either on a
68
<PAGE>
fixed percentage of assets or the Bank's creditworthiness. The FHLB is required
to review its credit limitations and standards at least once every six months.
FHLB advances have from time to time been used to meet liquidity needs. At July
31, 1996, the Bank had $39.9 million in FHLB of Chicago borrowings and the
capability to borrow additional funds upon complying with the FHLB of Chicago's
collateral requirements. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations-- Liquidity and Capital Resources" and
"Regulation--Regulation of Federal Savings Associations--Federal Home Loan Bank
System."
The Bank at times sells securities under agreements to repurchase, which
transactions are treated as financings, and the obligation to repurchase the
securities sold is reflected as a liability in the statements of financial
condition. The dollar amount of securities underlying the agreements remains in
the asset account and are held in safekeeping. During 1994, there was an
agreement for securities sold under agreements to repurchase in the amount of
approximately $20.6 million at a rate of 5.50%. There were no securities sold
under the agreements to repurchase outstanding at July 31, 1996, 1995 and 1994.
The following table sets forth certain information regarding borrowings at
the dates and for the fiscal years indicated:
<TABLE>
<CAPTION>
AT OR FOR THE
YEAR ENDED JULY 31,
-------------------------------
<S> <C> <C> <C>
1996 1995 1994
--------- --------- ---------
<CAPTION>
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
FHLB of Chicago advances:
Maximum amount outstanding at any month-end during the period.................. $ 43,000 $ 35,300 $ 39,600
Average balance outstanding.................................................... 37,800 33,685 35,938
Balance outstanding at end of period........................................... 39,900 32,300 34,300
Weighted average interest rate during the period............................... 6.68% 6.74% 6.76%
Weighted average interest rate at end of period................................ 6.75% 6.83% 6.50%
Repurchase agreements:
Maximum amount outstanding at any month-end during the period.................. $ -- $ -- $ 20,611
Average balance outstanding.................................................... -- -- 1,581
Balance outstanding at end of period........................................... -- -- --
</TABLE>
SUBSIDIARY ACTIVITIES
As a federally chartered savings bank, the Bank is permitted to invest an
amount equal to 2% of its assets in subsidiaries with an additional investment
of 1% of assets where such investment serves primarily community, inner city and
community development. In addition to investments in service corporations,
federal institutions are permitted to invest an unlimited amount in operating
subsidiaries engaged solely in activities which a federal savings bank may
engage in directly. The Bank maintained a wholly-owned subsidiary, Fairfield
Service Corporation ("FSC"), as a service corporation for the purpose of owning
the Bank's office building in Norridge. FSC was dissolved in the fiscal year
ended July 31, 1996.
69
<PAGE>
PROPERTIES
The Bank conducts its business through its corporate office and two branch
locations, as set forth in the following table.
<TABLE>
<CAPTION>
DATE LEASE NET BOOK
LEASED LEASED OR EXPIRATION VALUE AT
OR OWNED ACQUIRED DATE JULY 31, 1996
----------- ----------- ----------- ---------------
<S> <C> <C> <C> <C>
(IN THOUSANDS)
Main Office:
Old McHenry Road
Long Grove, Illinois 60047...................................... Owned 1980 -- $ 3,676
Branches:
1601 North Milwaukee Avenue
Chicago, Illinois 60647......................................... Owned 1941 -- 513
8301 West Lawrence
Norridge, Illinois 60656........................................ (1) 1976 4/2006(2) 16
</TABLE>
- ------------------------
(1) Land leased, building owned by the Bank.
(2) The Bank has two five-year renewal options.
PERSONNEL
At July 31, 1996, the Bank employed 48 full-time and 17 part-time employees.
At July 31, 1996, 45% of the Bank's employees had been with the Bank for more
than ten years. The employees are not represented by a collective bargaining
unit, and the Bank considers its relationship with its employees to be good. The
Bank seeks to compensate its personnel at a level competitive with its savings
institution peers in order to retain highly qualified employees. See "Management
of the Bank--Benefits" for a description of certain compensation and benefit
programs offered to the Bank's employees.
LEGAL PROCEEDINGS
In the ordinary course of its operations, the Bank is a party to routine
litigation involving claims incidental to the savings bank business. Management
believes that no current litigation, threatened or pending, to which the Bank or
its assets is or may become a party poses a substantial likelihood of potential
loss or exposure which would have a material adverse effect on the financial
position of the Bank.
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FEDERAL AND STATE TAXATION
FEDERAL TAXATION
GENERAL. The following is a discussion of material federal income tax
matters and does not purport to be a comprehensive description of the federal
income tax rules applicable to the Bank or the Company. The Bank has not been
audited by the IRS during the last five years. For federal income tax purposes,
after the Conversion, the Company and the Bank may file consolidated income tax
returns and report their income on a fiscal year basis using the accrual method
of accounting and will be subject to federal income taxation in the same manner
as other corporations with some exceptions, including particularly the Bank's
tax reserve for bad debts, discussed below.
TAX BAD DEBT RESERVES. The 1996 Tax Act, which was enacted on August 20,
1996, made significant changes to provisions of the Internal Revenue Code of
1986 (the "Code") relating to a savings institution's use of bad debt reserves
for federal income tax purposes and requires such institutions to recapture
(I.E.,take into income) certain portions of their accumulated bad debt reserves.
The effect of the 1996 Tax Act on the Bank is discussed below. Prior to the
enactment of the 1996 Tax Act, the Bank was permitted to establish tax reserves
for bad debts and to make annual additions thereto, which additions, within
specified formula limits, were deducted in arriving at the Bank's taxable
income. The Bank's deduction with respect to "qualifying loans," which are
generally loans secured by certain interests in real property, was permitted to
be computed using an amount based on a six-year moving average of the Bank's
charge-offs for actual losses (the "Experience Method"), or a percentage equal
to 8% of the Bank'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. The Bank's deduction with
respect to non-qualifying loans was required to be computed under the Experience
Method. Each year the Bank reviewed the most favorable way to calculate the
deduction attributable to an addition to the tax bad debt reserves.
THE 1996 TAX ACT. Under the 1996 Tax Act, the PTI Method was repealed for
thrifts and the Bank will be required to use only the Experience Method of
computing additions to its bad debt reserves for the tax year beginning August
1, 1996. In addition, the Bank will be required to recapture (I.E., take into
income) over a six year period the excess of the balance of its bad debt
reserves for losses on nonqualifying and qualifying loans as of July 31, 1996
over the greater of (a) the balance of such reserves as of July 31, 1988 or (b)
an amount that would have been the balance of such reserves as of July 31, 1996
had the Bank always computed the additions to its reserves using the Experience
Method. The Bank's post-July 31, 1988 nonqualifying and qualifying bad debt
reserves at July 31, 1996 was approximately $574,000 which will require the Bank
to report an additional tax liability of approximately $236,000. As of July 31,
1996, this liability has already been provided and will not require an adverse
impact to the Bank's financial condition or results of operations.
DISTRIBUTIONS. Under the 1996 Tax Act, if the Bank makes "non-dividend
distributions" to the Company, such distributions will be considered to have
been made from the Bank's unrecaptured tax bad debt reserves (including the
balance of its reserves as of July 31, 1988) and then from the Bank's
supplemental reserve for losses on loans, to the extent thereof, and an amount
based on the amount distributed (but not in excess of the amount of such
reserves) will be included in the Bank's income. Non-dividend distributions
include distributions in excess of the Bank's current and accumulated earnings
and profits, as calculated for federal income tax purposes, distributions in
redemption of stock, and distributions in partial or complete liquidation.
Dividends paid out of the Bank's current or accumulated earnings and profits
will not be so included in the Bank's income.
The amount of additional taxable income created from a non-dividend
distribution is an amount that, when reduced by the tax attributable to the
income, is equal to the amount of the distribution. Thus, if,
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after the Conversion, the Bank makes a non-dividend distribution to the Company,
approximately one and one-half times the amount of such distribution (but not in
excess of the amount of such reserves) would be includable in income for federal
income tax purposes, assuming a 34% federal corporate income tax rate. See
"Regulation" and "Dividend Policy" for limits on the payment of dividends by the
Bank. The Bank does not intend to pay dividends that would result in a recapture
of any portion of its tax bad debt reserves.
CORPORATE ALTERNATIVE MINIMUM TAX. 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 Bank 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 Bank's AMTI is increased by an amount equal
to 75% of the amount by which the Bank's adjusted current earnings exceeds its
AMTI (determined without regard to this 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 Bank, 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 Bank 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 Bank 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 Bank 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
The Bank currently files a separate Illinois income tax return. It may file
a combined Illinois income tax return with the Company. For Illinois income tax
purposes, the Bank 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 Bank. As of July 31, 1996, the Bank has approximately $11
million of Illinois' net loss deduction carryforward that can be utilized to
reduce Illinois taxable income.
As an Illinois holding company, the Company will pay an annual franchise tax
to the State of Illinois.
The Company may file a separate Illinois income tax return or it may file a
combined Illinois income tax return with the Bank. The Company will be taxed at
an effective rate equal to 7.3% of Illinois taxable income as defined above.
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REGULATION
GENERAL
The Bank is subject to extensive regulation, examination, and supervision by
the OTS, as its chartering agency, and the FDIC, as its deposit insurer. The
Bank's deposit accounts are insured up to applicable limits by the SAIF
administered by the FDIC, and the Bank is a member of the FHLB of Chicago. The
Bank 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 Bank's compliance with various regulatory requirements. This
regulation and supervision establishes a comprehensive framework of activities
in which a savings association can engage and is intended primarily for the
protection of the insurance fund and depositors. Assuming that the holding
company form of organization is utilized, the Company, as a savings association
holding company, will also be required to file certain reports with, and
otherwise comply with, the rules and regulations of the OTS and of the
Securities and Exchange Commission (the "SEC") under the federal securities
laws.
The OTS and the FDIC have significant discretion in connection with their
supervisory and enforcement activities and examination policies, including
policies with respect to the classification of assets and the establishment of
adequate loan loss reserves for regulatory purposes. Any change in such
policies, whether by the OTS, the FDIC or the Congress, could have a material
adverse impact on the Company, the Bank 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 Bank 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 Bank 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
Bank may also establish service corporations that may engage in activities not
otherwise permissible for the Bank, 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 July 31, 1996, the Bank's
regulatory limit on loans to one borrower was $2.0 million. At July 31, 1996,
the Bank's largest aggregate amount of loans to one borrower was $299,328, and
the second largest borrower had an aggregate balance of $297,166. The Bank is in
compliance with all applicable limitations on loans to one borrower.
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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 July 31, 1996, the
Bank maintained 98% of its portfolio assets in qualified thrift investments. The
Bank 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 total risk-based capital to total
risk-weighted assets. In determining compliance with the risk-based capital
requirement, a savings association must compute its risk-weighted assets by
multiplying its assets and certain off-balance sheet items by risk-weights,
which range from 0% for cash and obligations issued by the United States
Government or its agencies to 100% for consumer and commercial loans, as
assigned by the OTS capital regulation based on the risks OTS believes are
inherent in the type of asset.
Tangible capital is defined, generally, as common stockholders' equity
(including retained earnings), certain noncumulative perpetual preferred stock
and related earnings and minority interests in equity accounts of fully
consolidated subsidiaries, less intangibles (other than certain purchased
mortgage servicing rights) and investments in and loans to subsidiaries engaged
in activities not permissible for a national bank. Core capital is defined
similarly to tangible capital, but core capital also includes certain qualifying
supervisory goodwill and certain purchased credit card relationships.
Supplementary capital currently includes cumulative and other perpetual
preferred stock, mandatory convertible securities, subordinated debt and
intermediate preferred stock and the allowance for loan and lease losses. The
allowance for loan and lease losses includable in supplementary capital is
limited to a maximum of 1.25% of risk-weighted assets, and the amount of
supplementary capital that may be included as total capital cannot exceed the
amount of core capital.
The OTS has promulgated a regulation that requires a savings association
with "above normal" interest rate risk, when determining compliance with its
risk-based capital requirements, to hold additional capital to account for its
"above normal" interest rate risk. Pending resolution of related regulatory
issues, the OTS has deferred enforcement of this regulation. A savings
association's interest rate risk is measured by the decline in the net portfolio
value of its assets (I.E., the difference between incoming and outgoing
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discounted cash flows from assets, liabilities and off-balance sheet contracts)
resulting from a hypothetical 2% increase or decrease in market rates of
interest, divided by the estimated economic value of the association's assets,
as calculated in accordance with guidelines set forth by the OTS. At the times
when the 3-month Treasury bond equivalent yield falls below 4%, an association
may compute its interest rate risk on the basis of a decrease equal to one-half
of that Treasury rate rather than on the basis of 2%. A savings association
whose measured interest rate risk exposure exceeds 2% would be considered to
have "above normal" risk. The interest rate risk component is an amount equal to
one-half of the difference between the association's measured interest rate risk
and 2%, multiplied by the estimated economic value of the association's assets.
That dollar amount is deducted from an association's total capital in
calculating compliance with its risk-based capital requirement. Any required
deduction for interest rate risk becomes effective on the last day of the third
quarter following the reporting date of the association's financial data on
which the interest rate risk was computed.
At July 31, 1996, the Bank met each of its capital requirements. See
"Regulatory Capital Compliance" for a table that sets forth, in terms of dollars
and percentages, the OTS tangible, leverage and risk-based capital requirements
and the Bank's historical amounts and percentages at July 31, 1996, and pro
forma amounts and percentages based upon the issuance of the shares of Common
Stock within the Estimated Price Range and assuming that 50% of the net proceeds
are retained by the Company.
The table below presents the Bank's regulatory capital as compared to the
OTS regulatory capital requirements at July 31, 1996.
<TABLE>
<CAPTION>
CAPITAL
BANK REQUIREMENTS EXCESS
---------------------- ---------------------- ----------------------
<S> <C> <C> <C> <C> <C> <C>
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
--------- ----------- --------- ----------- --------- -----------
<CAPTION>
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Tangible capital......................................... $ 14,386 7.35% $ 2,931 1.50% $ 11,455 5.86%
Core capital............................................. 14,386 7.35 5,863 3.00 8,523 4.36
Risk-based capital....................................... 14,686 21.59 5,441 8.00 9,245 13.59
</TABLE>
A reconciliation between regulatory capital and GAAP capital at July 31,
1996 is presented below.
<TABLE>
<CAPTION>
TANGIBLE CORE RISK-BASED
CAPITAL CAPITAL CAPITAL
--------- --------- -----------
<S> <C> <C> <C>
(IN THOUSANDS)
GAAP capital.................................................................... $ 13,579 $ 13,579 $ 13,579
Unrealized loss on mortgage-backed securities available-for-sale,
net of tax.................................................................... 1,069 1,069 1,069
Investment in real estate held for sale and development......................... (262) (262) (262)
Allowance for loan loss......................................................... -- -- 300
--------- --------- -----------
Regulatory capital.............................................................. $ 14,386 $ 14,386 $ 14,686
--------- --------- -----------
--------- --------- -----------
</TABLE>
LIMITATION ON CAPITAL DISTRIBUTIONS. OTS regulations currently impose
limitations upon capital distributions by savings associations, such as cash
dividends, payments to repurchase or otherwise acquire its shares, payments to
shareholders of another institution in a cash-out merger and other distributions
charged against capital. 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
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(b) 75% of its net earnings for the previous four quarters. Any additional
capital distributions would require prior OTS approval. In addition, the OTS can
prohibit a proposed capital distribution, otherwise permissible under the
regulation, if the OTS has determined that the association is in need of more
than normal supervision or if it determines that a proposed distribution by an
association would constitute an unsafe or unsound practice. Furthermore, under
the OTS prompt corrective action regulations, the Bank would be prohibited from
making any capital distribution if, after the distribution, the Bank 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 Bank 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 Bank's average liquidity ratio for the month ended
July 31, 1996 was 42.9% which exceeded the applicable requirements. The Bank 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 July 1996,
the Bank paid the semiannual assessment of $29,555.
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
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for financial institutions nor does it limit an institution's discretion to
develop the types of products and services that it believes are best suited to
its particular community, consistent with the CRA. The CRA requires the OTS, in
connection with its examination of a savings association, to assess the
association's record of meeting the credit needs of its community and to take
such record into account in its evaluation of certain applications by such
association. The CRA also requires all institutions to make public disclosure of
their CRA ratings. The Bank 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 Bank'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 Bank is any company that controls the Bank or any other company
that is controlled by a company that controls the Bank, excluding the Bank's
subsidiaries other than those that are insured depository institutions. The OTS
regulations prohibit a savings association (a) from lending to any of its
affiliates that is engaged in activities that are not permissible for bank
holding companies under Section 4(c) of the BHC Act and (b) from purchasing the
securities of any affiliate other than a subsidiary. Section 23A limits the
aggregate amount of transactions with any individual affiliate to 10% of the
capital and surplus of the savings association and also limits the aggregate
amount of transactions with all affiliates to 20% of the savings association's
capital and surplus. Extensions of credit to affiliates are required to be
secured by collateral in an amount and of a type described in Section 23A, and
the purchase of low quality assets from affiliates is generally prohibited.
Section 23B provides that certain transactions with affiliates, including loans
and asset purchases, must be on terms and under circumstances, including credit
standards, that are substantially the same or at least as favorable to the
association as those prevailing at the time for comparable transactions with
nonaffiliated companies. In the absence of comparable transactions, such
transactions may only occur under terms and circumstances, including credit
standards, that in good faith would be offered to or would apply to
nonaffiliated companies.
The Bank'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 more than a minimal
loss or other significant adverse effect on an insured savings association.
Civil
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penalties cover a wide range of violations and actions and range from $5,000 for
each day during which violations of law, regulations, orders, and certain
written agreements and conditions continue, up to $1 million per day for such
violations if the person obtained a substantial pecuniary gain as a result of
such violation or knowingly or recklessly caused a substantial loss to the
institution. Criminal penalties for certain financial institution crimes include
fines of up to $1 million and imprisonment for up to 30 years. In addition,
regulators have substantial discretion to take enforcement action against an
institution that fails to comply with its regulatory requirements, particularly
with respect to its capital requirements. Possible enforcement actions range
from the imposition of a capital plan and capital directive to receivership,
conservatorship, or the termination of deposit insurance. Under the FDI Act, the
FDIC has the authority to recommend to the Director of OTS that enforcement
action be taken with respect to a particular savings association. If action is
not taken by the Director of the OTS, the FDIC has authority to take such action
under certain circumstances.
STANDARDS FOR SAFETY AND SOUNDNESS. The FDI Act, as amended by FDICIA and
the Riegle Community Development and Regulatory Improvement Act of 1994 (the
"Community Development Act"), requires the OTS, together with the other federal
bank regulatory agencies, to prescribe standards, by regulations or guidelines,
relating to internal controls, information systems and internal audit systems,
loan documentation, credit underwriting, interest rate risk exposure, asset
growth, asset quality, earnings, stock valuation, and compensation, fees and
benefits and such other operational and managerial standards as the agencies
deem appropriate. The OTS and the federal bank regulatory agencies have adopted,
effective August 9, 1995, a set of guidelines prescribing safety and soundness
standards pursuant to FDICIA, as amended. The guidelines establish general
standards relating to internal controls and information systems, internal audit
systems, loan documentation, credit underwriting, interest rate exposure, asset
growth, and compensation, fees and benefits. In general, the guidelines require,
among other things, appropriate systems and practices to identify and manage the
risks and exposures specified in the guidelines. The guidelines prohibit
excessive compensation as an unsafe and unsound practice and describe
compensation as excessive when the amounts paid are unreasonable or
disproportionate to the services performed by an executive officer, employee,
director or principal stockholder. The OTS and the other agencies determined
that stock valuation standards were not appropriate. In addition, the OTS
adopted regulations that authorize, but do not require, the OTS to order an
institution that has been given notice by the OTS that it is not satisfying any
of such safety and soundness standards to submit a compliance plan. If, after
being so notified, an institution fails to submit an acceptable compliance plan
or fails in any material respect to implement an accepted compliance plan, the
OTS must issue an order directing action to correct the deficiency and may issue
an order directing other actions of the types to which an undercapitalized
association is subject under the "prompt corrective action" provisions of
FDICIA. If an institution fails to comply with such an order, the OTS may seek
to enforce such order in judicial proceedings and to impose civil money
penalties. The OTS and the federal bank regulatory agencies also proposed
guidelines for asset quality and earnings standards.
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.
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PROMPT CORRECTIVE REGULATORY ACTION. Under the OTS prompt corrective action
regulations, the OTS is required to take certain, and is authorized to take
other, supervisory actions against undercapitalized savings associations. For
this purpose, a savings association would be placed in one of five categories
based on the association's capital. Generally, a savings association is treated
as "well capitalized" if its ratio of total capital to risk-weighted assets is
at least 10.0%, its ratio of core capital to risk-weighted assets is at least
6.0%, its ratio of core capital to total assets is at least 5.0%, and it is not
subject to any order or directive by the OTS to meet a specific capital level. A
savings association will be treated as "adequately capitalized" if its ratio of
total capital to risk-weighted assets is at least 8.0%, its ratio of core
capital to risk-weighted assets is at least 4.0%, and its ratio of core capital
to total assets is at least 4.0% (3.0% if the association receives the highest
rating on the CAMEL financial institutions rating system). A savings association
that has a total risk-based capital of less than 8.0% or a leverage ratio or a
Tier 1 capital ratio that is less than 4.0% (3.0% leverage ratio if the
association receives the highest rating on the CAMEL financial institutions
rating system) is considered to be "undercapitalized." A savings association
that has a total risk-based capital of less than 6.0% or a Tier 1 risk-based
capital ratio or a leverage ratio of less than 3.0% is considered to be
"significantly undercapitalized." A savings association that has a tangible
capital to assets ratio equal to or less than 2% is deemed to be "critically
undercapitalized." The elements of an association's capital for purposes of the
prompt corrective action regulations are defined generally as they are under the
regulations for minimum capital requirements. See "--Capital Requirements."
The severity of the action authorized or required to be taken under the
prompt corrective action regulations increases as an association's capital
deteriorates within the three undercapitalized categories. All associations are
prohibited from paying dividends or other capital distributions or paying
management fees to any controlling person if, following such distribution, the
association would be undercapitalized. An undercapitalized association is
required to file a capital restoration plan within 45 days of the date the
association receives notice that it is within any of the three undercapitalized
categories. The OTS is required to monitor closely the condition of an
undercapitalized association and to restrict the asset growth, acquisitions,
branching, and new lines of business of such an association. Significantly
undercapitalized associations are subject to restrictions on compensation of
senior executive officers; such an association may not, without OTS consent, pay
any bonus or provide compensation to any senior executive officer at a rate
exceeding the officer's average rate of compensation (excluding bonuses, stock
options and profit-sharing) during the 12 months preceding the month when the
association became undercapitalized. A significantly undercapitalized
association may also be subject, among other things, to forced changes in the
composition of its board of directors or senior management, additional
restrictions on transactions with affiliates, restrictions on acceptance of
deposits from correspondent associations, further restrictions on asset growth,
restrictions on rates paid on deposits, forced termination or reduction of
activities deemed risky, and any further operational restrictions deemed
necessary by the OTS.
If one or more grounds exist for appointing a conservator or receiver for an
association, the OTS may require the association to issue additional debt or
stock, sell assets, be acquired by a depository association holding company or
combine with another depository association. The OTS and the FDIC have a broad
range 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
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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 Bank is a member of the SAIF, and the
Bank pays its deposit insurance assessments to the SAIF. The FDIC also maintains
another insurance fund, the BIF, which primarily insures the deposits of banks
and state chartered savings banks.
Pursuant to FDICIA, the FDIC established a risk-based assessment system for
determining the deposit insurance assessments to be paid by insured depositary
institutions. Under the assessment system, the FDIC assigns an institution to
one of three capital categories based on the institution's financial information
as of the reporting period ending seven months before the assessment period. The
three capital categories consist of (a) well capitalized, (b) adequately
capitalized or (c) undercapitalized. The FDIC also assigns an institution to one
of three supervisory subcategories within each capital group. The supervisory
subgroup to which an institution is assigned is based on a supervisory
evaluation provided to the FDIC by the institution's primary federal regulator
and information that the FDIC determines to be relevant to the institution's
financial condition and the risk posed to the deposit insurance funds. An
institution's assessment rate depends on the capital category and supervisory
category to which it is assigned. Under the regulation, there are nine
assessment risk classifications (I.E., combinations of capital groups and
supervisory subgroups) to which different assessment rates are applied.
Following FDICIA, the assessment rates for both the BIF and the SAIF 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 its reserves are at least 1.25% of the deposits insured by that fund.
After a fund reached the 1.25% reserve ratio, the assessment rates for that fund
could be reduced. The FDIC has reported that the BIF reached the required
reserve ratio during May 1995. As a result of the recapitalization of the BIF,
the FDIC reduced BIF assessment rates. The FDIC reduced the BIF assessment rate
for "well capitalized" institutions without any significant supervisory concerns
to the statutory minimum of $2,000 annually beginning with the first half of
1996, and the rates for other BIF-insured institutions will range from zero to
0.27% of deposits.
In response to the SAIF/BIF assessment disparity, the 1996 Act was enacted
into law on September 30, 1996. The 1996 Act amended the FDIA in several ways to
recapitalize the SAIF and reduce the disparity in the assessment rates for the
BIF and the SAIF. The 1996 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, institutions
with SAIF-assessable deposits will pay a special assessment, subject to
adjustment, of 65.7 basis points per $100 of the institution's SAIF-assessable
deposits, and the special assessment will be paid on November 27, 1996. The
special assessment is based on the amount of SAIF-assessable deposits held on
March 31, 1995. The 1996 Act provides the amount of the special assessment will
be deductible for federal income tax purposes for the taxable year in which the
special assessment is paid. Based on the foregoing, the Bank recorded an accrual
for the special assessment of $936,000 at September 30, 1996. The impact of
operations, net of related tax effects, will reduce reported earnings by
$617,000 for the quarter ended October 31, 1996.
In view of the recapitalization of the SAIF, the FDIC proposed on October 8,
1996, to reduce the assessment rate for SAIF-assessable deposits for periods
beginning on October 1, 1996. As would be effective for the SAIF-assessable
deposits of SAIF-insured savings associations, such as the Bank, the proposed
assessment rates would range from 18 to 27 basis points for the last quarter of
1996 and would range from 0 to 27 basis points for the following assessment
periods.
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In addition, the 1996 Act expanded the assessment base for the payments on
the bonds (the "FICO bonds") issued in the late 1980s by the Financing
Corporation to recapitalize the now defunct Federal Savings and Loan Insurance
Corporation to include the deposits of both BIF- and SAIF-insured institutions
beginning January 1, 1997. 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 will be one-fifth of the rate imposed on SAIF-assessable
deposits. It has been estimated that the rates of assessment for the payment of
interest on the FICO bonds will be approximately 1.3 basis points for
BIF-assessable deposits and approximately 6.4 basis points for SAIF-assessable
deposits.
The 1996 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 Bank has not been so classified by the FDIC or the OTS.
Accordingly, assuming that the designated reserve ratio is maintained by the BIF
and by the SAIF after the collection of the special SAIF assessment, the Bank,
as long as it maintains its regulatory status, will have to pay substantially
lower regular SAIF and FICO assessments compared to those paid by the Bank in
recent years.
The 1996 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
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.
Under the FDI Act, insurance of deposits may be terminated by the FDIC upon
a finding that the institution has engaged in unsafe or unsound practices, is in
an unsafe or unsound condition to continue operations or has violated any
applicable law, regulation, rule, order or condition imposed by the FDIC or the
OTS. The management of the Bank does not know of any practice, condition or
violation that might lead to termination of deposit insurance.
FEDERAL HOME LOAN BANK SYSTEM. The Bank is a member of the FHLB 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 Bank, 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 Bank was in compliance with this requirement with
an investment in the capital stock of the FHLB of Chicago at July 31, 1996, of
$2.0 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 Bank earned dividends on the FHLB of Chicago capital stock in
amounts equal to $148,000, $143,000 and $129,000 during the years ended July 31,
1996, 1995 and 1994, respectively. If dividends were reduced, or interest on
future Federal Home Loan Bank advances increased, the Bank's net interest income
would likely also be reduced. Further, there can be no assurance that the impact
of FDICIA and FIRREA on the Federal Home Loan Banks will not also cause a
decrease in the value of the FHLB of Chicago stock held by the Bank.
FEDERAL RESERVE SYSTEM. The Bank 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
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against their deposit accounts and certain other liabilities. Currently,
reserves must be maintained against transaction accounts (primarily NOW and
regular checking accounts). The FRB regulations generally require that reserves
be maintained in the amount of 3% of the aggregate of transaction accounts up to
$52.0 million. The amount of aggregate transaction accounts in excess of $52.0
million are currently subject to a reserve ratio of 10%, which ratio the FRB may
adjust between 8% and 12%. The FRB regulations currently exempt $4.3 million of
otherwise reservable balances from the reserve requirements, which exemption is
adjusted by the FRB at the end of each year. The Bank 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 Bank's interest-earning assets. The
balances maintained to meet the reserve requirements imposed by the FRB may be
used to satisfy liquidity requirements imposed by the OTS. Federal Home Loan
Bank System members are also authorized to borrow from the Federal Reserve
"discount window," but FRB regulations require such institutions to exhaust all
Federal Home Loan Bank sources before borrowing from a Federal Reserve Bank.
REGULATION OF SAVINGS ASSOCIATION HOLDING COMPANIES
The Company, if utilized, will be a non-diversified unitary savings
association holding company within the meaning of the HOLA, as amended. As such,
the Company will be required to register with the OTS and will be subject to OTS
regulations, examinations, supervision and reporting requirements. In addition,
the OTS has enforcement authority over the Company and its non-savings
association subsidiaries, if any. Among other things, this authority permits the
OTS to restrict or prohibit activities that are determined to be a serious risk
to the financial safety, soundness, or stability of a subsidiary savings
association.
The HOLA prohibits a savings association holding company, directly or
indirectly, or through one or more subsidiaries, from acquiring another savings
association or holding company thereof, without prior written approval of the
OTS; acquiring or retaining, with certain exceptions, more than 5% of a non-
subsidiary savings association, a non-subsidiary holding company, or a
non-subsidiary company engaged in activities other than those permitted by the
HOLA; or acquiring or retaining control of a depository institution that is not
insured by the FDIC. In evaluating an application by a holding company to
acquire a savings association, the OTS must consider the financial and
managerial resources and future prospects of the company and savings association
involved, the effect of the acquisition on the risk to the insurance funds, the
convenience and needs of the community and competitive factors.
As a unitary savings association holding company, the Company generally will
not be restricted under existing laws as to the types of business activities in
which it may engage, provided that the Bank continues to satisfy the QTL test.
See "--Regulation of Federal Savings Associations--QTL Test" for a discussion of
the QTL requirements. Upon any non-supervisory acquisition by the Company of
another savings association or savings bank that meets the QTL test and is
deemed to be a savings association by the OTS and that will be held as a
separate subsidiary, the Company would become a multiple savings association
holding company and would be subject to limitations on the types of business
activities in which it could engage. The HOLA limits the activities of a
multiple savings association holding company and its non-insured association
subsidiaries primarily to activities permissible for bank holding companies
under Section 4(c)(8) of the BHC Act, subject to the prior approval of the OTS,
and to other activities authorized by OTS regulation.
The OTS is prohibited from approving any acquisition that would result in a
multiple savings association holding company controlling savings associations in
more than one state, subject to two exceptions: an acquisition of a savings
association in another state (a) in a supervisory transaction or (b) pursuant to
authority under the laws of the state of the association to be acquired that
specifically permit such acquisitions. The conditions imposed upon interstate
acquisitions by those states that have enacted authorizing legislation vary.
Some states impose conditions of reciprocity, which have the effect of requiring
that the laws of both the state in which the acquiring holding company is
located (as determined
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by the location of its subsidiary savings association) and the state in which
the association to be acquired is located, have each enacted legislation
allowing its savings associations to be acquired by out-of-state holding
companies on the condition that the laws of the other state authorize such
transactions on terms no more restrictive than those imposed on the acquiror by
the state of the target association. Some of these states also impose regional
limitations, which restrict such acquisitions to states within a defined
geographic region. Other states allow full nationwide banking without any
condition of reciprocity. Some states do not authorize interstate acquisitions
of savings associations.
Transactions between the Bank and the Company and its other subsidiaries
would be subject to various conditions and limitations. See "--Regulation of
Federal Savings Associations--Transactions with Related Parties." The Bank would
have to give 30-days written notice to the OTS prior to any declaration of the
payment of any dividends or other capital distributions to the Company. See
"--Regulation of Federal Savings Associations--Limitation on Capital
Distributions."
FEDERAL SECURITIES LAWS
The Company has filed with the SEC a registration statement under the
Securities Act of 1933, as amended (the "Securities Act"), for the registration
of the Common Stock to be issued pursuant to the Conversion. Upon completion of
the Conversion, the Company's Common Stock will be registered with the SEC under
the Exchange Act. The Company will then be subject to the information, proxy
solicitation, insider trading restrictions and other requirements under the
Exchange Act.
Shares of the Common Stock purchased by persons who are not affiliates of
the Company may be resold without registration. Shares purchased by an affiliate
of the Company will be subject to the resale restrictions of Rule 144 under the
Securities Act. If the Company meets the current public information requirements
of Rule 144 under the Securities Act, each affiliate of the Company who complies
with the other conditions of Rule 144 (including those that require the
affiliate's sale to be aggregated with those of certain other persons) would be
able to sell in the public market, without registration, a number of shares not
to exceed, in any three-month period, the greater of (a) 1% of the outstanding
shares of the Company or (b) the average weekly volume of trading in such shares
during the preceding four calendar weeks. Provision may be made in the future by
the Company to permit affiliates to have their shares registered for sale under
the Securities Act under certain circumstances.
In the event that the holding company form of organization is not utilized,
the shares of the Bank's common stock to be issued and sold in the Conversion
would be exempt from registration under Section 3(a)(5) of the Securities Act.
Prior to the sale of all shares of its common stock in such a case, the Bank
would register its capital stock under Section 12(g) of the Exchange Act. Upon
such registration, the proxy rules, tender offer rules, insider trading
restrictions, annual and periodic reporting and other requirements of the
Exchange Act would also be applicable to the Bank but under the jurisdiction of
the OTS. The Bank would be required by the OTS to maintain said registration for
a period of at least three years following Conversion. The Bank will, however,
register with and report to the OTS and not to the SEC.
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MANAGEMENT OF THE COMPANY
The Board of Directors of the Company is divided into three classes, each of
which contains approximately one-third of the Board. The directors shall be
elected by the shareholders of the Company for staggered three-year terms, or
until their successors are elected and qualified. One class of directors,
consisting of George M. Briody, F. Gregory Opelka and Joseph J. Nimrod, has a
term of office expiring at the first annual meeting of shareholders; a second
class, consisting of Eugene W. Pilawski and Walter E. Powers, M.D. has a term of
office expiring at the second annual meeting of shareholders; and a third class,
consisting of Maurice F. Leahy and William B. O'Connell, has a term of office
expiring at the third annual meeting of shareholders. Biographical information
with respect to each individual is set forth under "Management of the
Bank--Biographical Information."
The following individuals are executive officers of the Company and hold the
offices set forth below opposite their names.
<TABLE>
<CAPTION>
NAME POSITION HELD WITH THE COMPANY
- --------------------------------------------- -----------------------------------------------
<S> <C>
George M. Briody............................. President
F. Gregory Opelka............................ Executive Vice President
Timothy L. McCue............................. Vice President and Chief Financial Officer
Robert Jones................................. Vice President
Michael Cahill............................... Vice President
</TABLE>
The executive officers of the Company are elected annually and hold office
until their respective successors have been elected and qualified or until
death, resignation or removal by the Board of Directors.
Since the formation of the Company, none of the executive officers,
directors or other personnel has received remuneration from the Company. It is
currently expected that, unless and until the Company becomes actively involved
in business activities separate from those conducted by the Bank, no separate
compensation will be paid to the directors and employees of the Company.
However, directors of the Company or the Bank who are not employees of the
Company or the Bank or any of their subsidiaries ("Outside Directors") may be
entitled to participate in stock incentive plans established by the Company. See
"Management of the Bank." The Company will also guarantee certain obligations of
the Bank to the Bank's executive officers, employees and directors, as described
below. Information concerning the principal occupations, employment and
compensation of the directors and officers of the Company during the past five
years is set forth under "Management of the Bank--Biographical Information."
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MANAGEMENT OF THE BANK
DIRECTORS
The following table sets forth certain information regarding the Board of
Directors of the Bank.
<TABLE>
<CAPTION>
DIRECTOR TERM
NAME AGE(1) POSITIONS HELD WITH THE BANK SINCE EXPIRES
- --------------------------------------------- ----------- -------------------------------------- ----------- -----------
<S> <C> <C> <C> <C>
George M. Briody............................. 69 President, Director 1951 1997
F. Gregory Opelka............................ 68 Executive Vice President, Director 1972 1997
Maurice F. Leahy............................. 66 Director 1978 1999
Eugene W. Pilawski........................... 73 Director 1990 1998
Joseph J. Nimrod............................. 67 Director 1978 1997
Walter E. Powers, M.D........................ 68 Director 1977 1998
William B. O'Connell......................... 73 Director 1989 1999
</TABLE>
- ------------------------
(1) At July 31, 1996.
EXECUTIVE OFFICERS
The executive officers of the Bank are Mr. Briody and Mr. Opelka, who are
directors of the Bank, and Mr. McCue, Mr. Cahill and Mr. Jones, who are not
directors of the Bank. See "Management of the Company." Each of the executive
officers of the Bank will retain his office in the converted Bank until the
annual meeting of the Board of Directors of the Bank held immediately after the
first annual meeting of shareholders of the Company subsequent to Conversion and
until their successors are elected and qualified or until they are removed or
replaced. Officers are re-elected by the Board of Directors annually.
BIOGRAPHICAL INFORMATION
Positions held by a director or executive officers have been held for at
least the past five years unless stated otherwise.
DIRECTORS
GEORGE M. BRIODY serves as the President and a director of the Bank. Mr.
Briody has been involved in the financial institutions industry for more than 40
years and has served as President of the Bank since 1966 and as a director since
1951. He also has served as a director of the Chicago Area Council, the Illinois
Savings and Loan League, the FHLB of Chicago, the U.S. League of Savings
Institutions, Inc. and Electronic Funds Transfer Corporations I and II. Mr.
Briody is currently a member of the Central Savings and Loan Group. He is also a
member of the Illinois and Chicago Bar Associations. He is a past president of
the Central Savings and Loan Group and the Illinois Savings and Loan League. Mr.
Briody and Mr. Opelka are brothers-in-law.
F. GREGORY OPELKA serves as the Executive Vice President and a director of
the Bank. Mr. Opelka joined the Bank in 1954 and has served as a director since
1972. He is a member of the Appraisal Institute and holds Member, Senior Real
Estate Analyst, and Senior Residential Appraiser designations. He is currently a
director of the Market Data Center and an appraisal consultant authoring
"Appraisal Report," a quarterly article for the America's Community Banker's
member magazine. Mr. Opelka and Mr. Briody are brothers-in-law.
MAURICE F. LEAHY has been a director of the Bank since 1978. Now retired,
he was an account executive for P.M.P. Sales, Inc., a meat and poultry broker.
Previously he owned and operated a meat and poultry retail business for more
than 25 years.
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EUGENE W. PILAWSKI joined the Bank in 1949. Now retired, he had served as
Senior Vice President of the Bank from 1987 to 1992. Prior to this promotion, he
served as Vice President and Senior Loan Officer. He was elected to the Board of
Directors in September, 1990. Mr. Pilawski is a member of the Chicago Bar
Association. Mr. Pilawski and Dr. Powers are brothers.
JOSEPH J. NIMROD has been a director of the Bank since 1978. Mr. Nimrod is
the owner of Joseph Nimrod Decorating Inc., a painting and paperhanging
business. He also serves as an officer and a director of the Painters and
Decorators Contractors Association and is Chairman of the Washburn Apprentice
School of Painting.
WALTER E. POWERS, M.D. has served as a director of the Bank since 1977. Dr.
Powers, now retired, was a radiologist-flight surgeon for United Airlines, Inc.
from 1973 to 1985. He is a member of the American Medical Association, Illinois
State Medical Society, Chicago Medical Society, American College of Radiology,
Radiology Society of North America and Illinois Radiology Society. Dr. Powers
and Mr. Pilawski are brothers.
WILLIAM B. O'CONNELL has served as a director of the Bank since November,
1989. Immediately prior thereto, Mr. O'Connell served as a Chairman of U.S.
League Management Services, Inc., a coordinating organization for the special
service projects of the U.S. League of Savings Institutions, Inc. He served as
President of the League from 1980 to 1988.
EXECUTIVE OFFICERS WHO ARE NOT DIRECTORS
TIMOTHY L. MCCUE, age 51, has served as the Bank's Vice President, Chief
Financial Officer since December 1984. He is a member of the American Institute
of Certified Public Accountants and the Illinois CPA Society. Mr. McCue is the
Regional District Director for Financial Managers Society.
ROBERT JONES, age 53, has served as the Bank's Vice President, Chief
Savings Officer since April 1987.
MICHAEL CAHILL, age 42, has served as Vice President, Controller of the
Bank since 1986.
SIGNIFICANT EMPLOYEE
JEROME A. MAHER, is currently employed by the Bank and works in the area of
loan origination. Mr. Maher served as Vice President and director of Covenant
Mortgage Corporation from March 1994 to September 1996 and as a Senior Vice
President of Hanover Capital Mortgage Corporation from July 1993 to February
1994. Prior to that, Mr. Maher was an Executive Vice President and director of
Labe Federal Savings and Loan Association. In the future, the Bank's Board of
Directors may consider Mr. Maher for the position of chief lending officer.
COMMITTEES AND MEETINGS OF THE BOARD OF DIRECTORS OF THE COMPANY AND THE BANK
The Board of Directors of the Bank meets on a monthly basis and may have
additional special meetings from time to time. During the fiscal year ended July
31, 1996, the Board of Directors met 12 times. No current director attended
fewer than 75% of the total number of Board meetings and committee meetings of
which such director was a member.
The Company and the Bank have established the following committees of each
of their respective Boards of Directors:
The MANAGEMENT SALARY COMPENSATION COMMITTEE of both the Company and the
Bank consists of Messrs. Powers, Leahy and Nimrod. Each such committee reviews
and makes recommendations to the Board regarding the compensation for the
Executive Officers.
The AUDIT COMMITTEE of both the Company and the Bank consists of Messrs.
Nimrod, Powers and O'Connell. The Audit Committee of the Bank meets periodically
with its independent Certified Public
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Accountants to arrange the Bank's annual financial statement audit and to review
and evaluate recommendations made during the annual audit. The Audit Committee
also reviews the regulatory reports of examination. It is expected that the
Audit Committee of the Company will perform a similar function.
DIRECTORS' COMPENSATION
FEE ARRANGEMENTS. Currently, each director of the Bank receives a monthly
fee of $900. The aggregate amount of fees paid to such directors by the Bank for
the year ended July 31, 1996 was approximately $75,600. No additional fees are
paid for attendance at board committee meetings. Directors of the Company will
not be separately compensated for their services as such. It is anticipated that
directors will also be covered by the Stock Option Plans and Stock Programs
expected to be implemented by the Company. See "--Benefits--Stock Option Plans"
and "--Stock Programs."
EXECUTIVE COMPENSATION
COMPENSATION DECISIONS. Decisions regarding the Company's executive
compensation will be made by the Company's Board of Directors, exclusive of
those directors employed by the Company, acting as a compensation committee,
upon the recommendations made by the Management Salary Compensation Committee.
Under this structure, no interlocks exist between members of the compensation
committee and employees of the Company.
CASH COMPENSATION. The following table sets forth the cash compensation
paid by the Bank for services rendered in all capacities during the fiscal year
ended July 31, 1996, to the Chief Executive Officer and all executive officers
of the Bank who received compensation in excess of $100,000 (the "Named
Executive Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM COMPENSATION
---------------------------------------------
ANNUAL COMPENSATION(1) AWARDS
----------------------------------------- ------------------------------ PAYOUTS
OTHER RESTRICTED -------------
ANNUAL STOCK LTIP
COMPENSATION AWARDS OPTIONS PAYOUTS
NAME AND PRINCIPAL POSITIONS YEAR SALARY($) BONUS($) ($)(2) ($)(3) ($)(3) ($)(3)
- ------------------------------- --------- ---------- ---------- ----------------- --------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
George M. Briody,
President.................... 1996 $ 157,180 $ 14,550 -- -- -- --
F. Gregory Opelka, Executive
Vice President............... 1996 $ 103,145 $ 9,240 -- -- -- --
<CAPTION>
ALL OTHER
COMPENSATION
NAME AND PRINCIPAL POSITIONS ($)
- ------------------------------- -----------------
<S> <C>
George M. Briody,
President.................... --
F. Gregory Opelka, Executive
Vice President............... --
</TABLE>
- ------------------------
(1) Under Annual Compensation, the column titled "Salary" includes base salary,
director's fees and payroll deductions for health insurance under the Bank's
health insurance plan.
(2) For 1996, there were no: (a) perquisites with an aggregate value for any
named individual in excess of the lesser of $50,000 or 10% of the total of
the individual's salary and bonus for the year; (b) payments of above-market
preferential earnings on deferred compensation; (c) payments of earnings
with respect to long-term incentive plans prior to settlement or maturation;
or (d) preferential discounts on stock. For 1996, the Bank had no restricted
stock or stock related plans in existence.
(3) During the fiscal year ended July 31, 1996, the Bank did not maintain any
restricted stock, stock options or other long-term incentive plans.
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<PAGE>
EMPLOYMENT AGREEMENTS
Effective upon the Conversion (subject to non-objection by the OTS), the
Company and the Bank intend to enter into Employment Agreements with each of
Messrs. Briody, Opelka, McCue, Jones and Cahill (the "Senior Executives"). These
Employment Agreements establish the respective duties and compensation of the
Senior Executives and are intended to ensure that the Bank and the Company will
be able to maintain a stable and competent management base after the Conversion.
The continued success of the Bank and the Company depends to a significant
degree on the skills and competence of the Senior Executives.
The Employment Agreements provide for three-year terms. The Bank's
Employment Agreements provide that, commencing on the first anniversary date and
continuing each anniversary date thereafter, the Board of Directors may, with
the Senior Executive's concurrence, extend its Employment Agreements for an
additional year, so that the remaining terms shall be three years, after
conducting a performance evaluation of the Senior Executive. The Company's
Employment Agreements provide for automatic daily extensions such that the
remaining terms of the Employment Agreements shall be three years unless written
notice of non-renewal is given by the Board of Directors or the Senior
Executive. The Employment Agreements provide that the Senior Executive's base
salary will be reviewed annually. It is anticipated that this review will be
performed by the Management Salary Compensation Committee and approved by non-
employee members of the Board, and the Senior Executive's base salary may be
increased on the basis of such officer's job performance and the overall
performance of the Bank. The base salaries for Messrs. Briody, Opelka, McCue,
Jones and Cahill as of August 1, 1996 were $150,480, $95,945, $84,410, $53,305
and $54,527 respectively. The Employment Agreements also provide for, among
other things, entitlement to participation in stock, retirement and welfare
benefit plans and eligibility for fringe benefits applicable to executive
personnel such as a company car and fees for club and organization memberships
deemed appropriate by the Bank or Company and the Senior Executive. The
Employment Agreements provide for termination by the Bank or the Company at any
time for cause as defined in the Employment Agreements.
In the event the Bank or the Company chooses to terminate the Senior
Executive's employment for reasons other than for cause, or in the event of the
Senior Executive's resignation from the Bank and the Company for the reasons
specified in the Employment Agreements, the Senior Executive would be entitled
to a lump sum cash payment in an amount equal to the present value of the
remaining cash compensation due to the Senior Executive and the additional
contributions or benefits that would have been earned under any employee benefit
plans of the Bank or the Company during the remaining terms of the Employment
Agreements and payments that would have been made under any incentive
compensation plan during the remaining terms of the Employment Agreements. If
permitted by applicable law, provision will also be made for the cash out of
stock options, appreciation rights or restricted stock as if the Senior
Executive was fully vested. The Bank and the Company would also continue the
Senior Executive's life, health and any disability insurance or other benefit
plan coverage for specified periods. Reasons specified as grounds for
resignation for purposes of the Employment Agreements are: failure to elect or
re-elect the Senior Executive to such officer's offices; failure to vest in the
Senior Executive the functions, duties or authority associated with such
offices; any material breach of contract by the Bank or the Company which is not
cured within 30 days after written notice thereof; and, following a Change of
Control (as defined in the Employment Agreements), include demotion, loss of
title, office or significant authority or responsibility, any reduction in any
element of compensation or benefits, any adverse change of location of the
principal place of employment or working conditions or resignation for any other
reason. In general, for purposes of the Employment Agreements and the plans
maintained by the Company or the Bank, a "change of control" will generally be
deemed to occur when a person or group of persons acting in concert acquires
beneficial ownership of 25% or more of any class of equity security of the
Company or the Bank, upon shareholder approval of a merger or consolidation or a
change of the majority of the Board of Directors of the Company or the Bank or
upon liquidation or sale of substantially all the assets of the
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<PAGE>
Company or the Bank. Based on current compensation and benefit costs, cash
payments to be made in the event of a change of control of the Bank or the
Company pursuant to the terms of the Employment Agreements would be
approximately $3,980,000 (including an estimate of any applicable tax
indemnification payments described below), of which approximately $1,245,000
would be payable to Mr. Briody, $1,180,000 would be payable to Mr. Opelka,
$630,000 would be payable to Mr. McCue, $425,000 would be payable to Mr. Jones
and $500,000 would be payable to Mr. Cahill. However, the actual amount to be
paid under the Employment Agreements in the event of a change of control of the
Bank or the Company cannot be estimated at this time, because the actual amount
is based on the compensation and benefit costs applicable to these individuals
and other factors existing at the time of the change of control which cannot be
determined at this time.
Payments to the Senior Executives under the Bank's Employment Agreements
will be guaranteed by the Company in the event that payments or benefits are not
paid by the Bank. Payment under the Company's Employment Agreements would be
made by the Company. To the extent that payments under the Company's Employment
Agreements and the Bank's Employment Agreements are duplicative, payments due
under the Company's Employment Agreements would be offset by amounts actually
paid by the Bank. Senior Executives would be entitled to reimbursement of
certain costs incurred in interpreting or enforcing the Employment Agreements.
Cash and benefits paid to a Senior Executive under the Employment Agreements
together with payments under other benefit plans following a "change of control"
of the Bank or the Company may constitute an "excess parachute" payment under
Section 280G of the Code, resulting in the imposition of a 20% excise tax on the
recipient and the denial of the deduction for such excess amounts to the Company
and the Bank. The Company's Employment Agreements include a provision
indemnifying each Senior Executive on an after-tax basis for any "golden
parachute" excise taxes.
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<PAGE>
EMPLOYEE RETENTION AGREEMENTS
Effective upon the Conversion, the Bank (subject to the non-objection of the
OTS) and the Company intend to enter into Retention Agreements with the
following four employees: Barbara J. Urban, Judy Miller, Bonnie Symon and Jan
Birkeland ("Contract Employee" or "Contract Employees"). The purpose of the
Retention Agreements is to secure the Contract Employees' continued availability
and attention to the Bank's affairs, relieved of distractions arising from the
possibility of a corporate change of control. The Retention Agreements do not
impose an immediate obligation on the Bank to continue the Contract Employees'
employment but provide for a period of assured employment ("Assurance Period")
following a change of control of the Bank or Company. The Retention Agreements
provide for an initial Assurance Period of two years commencing on the date of a
change of control. In general, the applicable Assurance Periods will be
automatically extended on a daily basis under the Retention Agreements until
written notice of non-extension is given by the Bank or the Contract Employee,
in which case an Assurance Period would end on the second anniversary of the
date such notice is given.
If, upon a change of control, or within 12 months of, and in connection
with, a change of control, a Contract Employee is discharged without "cause" (as
defined in the Retention Agreements) or the Contract Employee voluntarily
resigns within one year following a material adverse change in such employee's
position, duties, salary or due to a material breach of the Retention Agreement
by the Bank or Company, the Contract Employee (or, in the event of such
employee's death, such employee's estate) would be entitled to a lump sum cash
payment equal to the present value of the remaining base salary and bonus
payments due during the Assurance Period plus any additional contributions and
benefits that the Contract Employee would have earned under the Bank's or
Company's employee benefit plans during the Assurance Period. Each Contract
Employee's life, health and disability coverage would also be continued during
the Assurance Period. The total amount of termination benefits payable to each
Contract Employee under the Retention Agreements is limited to three times the
Contract Employee's average total compensation for the prior five calendar
years. Payments to the Contract Employees under their respective Retention
Agreements will be guaranteed by the Company to the extent that the required
payments are not made by the Bank. Based on current compensation and benefit
costs applicable to the Contract Employees expected to be covered by the
Retention Agreements, cash payments to be made in the event of a change of
control of the Bank or the Company would be approximately $530,000. However, the
actual amount to be paid under the Retention Agreements in the event of a change
of control of the Bank or the Company cannot be estimated at this time because
it will be based on the compensation and benefit costs applicable to the
Contract Employees and other factors existing at the time of the change of
control which cannot be determined at this time.
EMPLOYEE SEVERANCE COMPENSATION PLAN
The Bank has adopted, subject to the non-objection of the OTS, an Employee
Severance Pay Plan (the "Severance Plan") which will provide eligible employees
of the Bank with severance benefits in the event of a change of control as
defined in the Severance Plan. Conversion to stock form is not considered a
change of control under the Severance Plan. Management and other personnel with
Employment Agreements or Retention Agreements will not be eligible to
participate in the Severance Plan. The purpose of the Severance Plan is to
recognize the valuable services and contributions of these employees and the
uncertainties relating to continuing employment, reduced employee benefits,
management changes and relocations in the event of a change of control. The Bank
believes that the Severance Plan will assist it in attracting and retaining
highly qualified individuals and reduce the distractions and other adverse
effects on employees' performance in the event of a change of control. Eligible
employees of the Bank with one year of service will automatically participate in
the Severance Plan and will have a contractual right to severance benefits if
they are terminated from or terminate their employment within one year (for
reasons specified under the Severance Plan) following a change of control of the
Bank or the Company. A participating employee who is an officer of the Bank
would be eligible to receive a severance payment
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<PAGE>
upon termination equal to three weeks' pay for each year of service, up to a
maximum of 52 weeks' pay. A participating employee who is not an officer would
be eligible to receive a severance payment upon an employment termination equal
to one weeks' pay for each of the first five years of service, two additional
weeks' pay for each of the next four years of service and three additional
weeks' pay for each year of service in excess of nine years, with a minimum
severance benefit of four weeks' pay and a maximum severance benefit of 52
weeks' pay. Payments under the Severance Plan may increase the costs to be
incurred in acquiring the Bank or the Company. Based on current salaries, cash
payments to be paid in the event of a change of control (and assuming
termination of all participating employees) pursuant to the terms of the
Employee Severance Pay Plan would be approximately $396,500. However, the actual
amount to be paid in the event of a change of control of the Bank or the Company
cannot be estimated at this time, because it will be based on the compensation
and benefits, as applicable, for each covered individual and other factors
existing at the time of the change of control which cannot be determined at this
time. The Severance Plan may be amended or terminated by the Board of Directors
provided participants are given six months advance written notice of any adverse
change to current or prospective rights. Payments required to be made by the
Bank to participants due under the Severance Plan may be guaranteed by the
Company.
BENEFITS
MANAGEMENT BONUS PROGRAM FOR THE SENIOR MANAGEMENT OFFICERS. In fiscal year
1995, the Board of Directors of the Bank adopted a nonqualifying bonus program
comprised of an annual and long-term bonus payable to senior management officers
(the "SMO"). The intent of the SMO was to reward management for the
accomplishment of goals and financial performance and to make the compensation
commensurate with peer group financial institutions that were able to offer
stock option programs that the Bank, as a mutual savings institution, was unable
to offer. Amounts awarded as the annual bonus under the SMO are determined at
the discretion of the Compensation Committee of the Board considering such
factors as completion of specific goals or projects, financial performance
compared to a peer group, amount and type of classified assets and a comparison
of the officer's compensation to peer group officers. The minimum guidelines for
Bank financial performance necessary to trigger an award is a return on assets
in excess of a designated amount for each applicable fiscal year. The SMO had a
total payout for fiscal year 1995 of approximately $68,000. The long-term
program was terminated in 1996, and no annual award was made for fiscal year
1996.
PENSION PLAN. The Bank maintains the Fairfield Savings Bank Retirement
Plan, a non-contributory, tax-qualified defined benefit pension plan (the
"Pension Plan") for eligible employees. All employees with more than 1,000 hours
of service per year, except leased employees, who have attained age 21 and
completed one year of service are eligible to participate in the Pension Plan.
The Pension Plan provides a benefit for each participant, including executive
officers named in the Summary Compensation Table above. The benefit is equal to
an amount (A) minus (B) where (A) is an amount equal to (i) 2% of the
participant's final average compensation multiplied by the participant's
projected benefit service, reduced by (ii) the participant's social security
offset allowance, and such result multiplied by (iii) a fraction, the numerator
of which equals the participant's benefit service and the denominator of which
is the participant's projected benefit service, and (B) is the amount to which
the participant is entitled under the Fairfield Savings and Loan Association
Pension Plan (the predecessor of the Pension Plan). A participant's social
security offset allowance shall equal 0.6% multiplied by the participant's years
of projected benefit service not in excess of 35 years, multiplied by the lesser
of the participant's (i) final average offset compensation or (ii) covered
compensation, divided by twelve.
Final average compensation is the monthly average of a Participant's
compensation over sixty (60) consecutive months of employment out of the
Participant's last 120 month period of employment during which the Participant's
compensation is the highest. A participant is fully vested in his or her pension
after five years of service. The Pension Plan is funded by the Bank on an
actuarial basis, and all assets are held in
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<PAGE>
trust by the Pension Plan trustee. The following table illustrates the annual
benefit payable upon normal retirement at age 65 in the normal form of benefit
under the Pension Plan (a straight life annuity) at various levels of annual
compensation (12 times Final Average Compensation) and years of service under
the Pension Plan. The amounts in the table are subject to a social security
benefit offset allowance and further reduction by the amount to which a
participant is entitled under the Fairfield Savings and Loan Association Pension
Plan.
<TABLE>
<CAPTION>
YEARS OF SERVICE AT RETIREMENT
ANNUAL AVERAGE --------------------------------------------------------
COMPENSATION 15 20 25 30 35
- ---------------------------------------------------- --------- --------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
$125,000............................................ $ 37,500 $ 50,000 $ 62,500 $ 75,000 $ 87,500
150,000(1)......................................... 45,000 60,000 75,000 90,000 105,000
175,000(1)......................................... 52,500 70,000 87,500 105,000 122,500(2)
200,000(1)......................................... 60,000 80,000 100,000 120,000(2) 140,000(2)
</TABLE>
- ------------------------
(1) For the Pension Plan year ending July 31, 1996, the annual compensation for
calculating benefits may not exceed $150,000 (as adjusted for subsequent
years pursuant to Code provisions).
(2) For the Pension Plan year ending July 31, 1996, the maximum annual benefit
under the Pension Plan may not exceed $120,000. The maximum annual benefit
will be adjusted in subsequent years pursuant to Code provisions.
The following table sets forth the years of credited service and the final
average compensation (as defined above) determined as of July 31, 1996, the end
of the 1996 plan year, for each of the individuals named in the Summary
Compensation Table. The Average Annual Earnings includes the base salary
component of the figures shown in the salary column of the Summary Compensation
Table.
<TABLE>
<CAPTION>
YEARS OF
CREDITED SERVICE
-------------------------- FINAL AVERAGE
YEARS MONTHS COMPENSATION
----- ------------- -------------
<S> <C> <C> <C>
Mr. Briody..................................................................... 46 1 $ 128,620
Mr. Opelka..................................................................... 41 8 84,990
</TABLE>
PROFIT SHARING AND SAVINGS PLAN. The Bank maintains a Profit Sharing and
Savings Plan. The profit sharing portion of the Plan requires the Bank to
contribute annually an amount equal to 2% of the base annual salary of
participants, and provides for additional discretionary contributions as the
Bank may determine. The savings portion of the Plan permits salaried employees
with at least one year of service to make pretax salary deferrals and after tax
contributions under section 401(k) of the Code. Salary deferrals are made by
election and are limited to 15% of compensation up to $150,000 (for 1996), or to
a limit imposed under the Code ($9,500 for 1996). The Bank makes matching
contributions equal to 25% of the amount of salary contributions, up to 6% of
salary. Employees are fully vested in their salary deferrals and after tax
contributions, and become incrementally vested in the Bank's contribution after
one year and fully vested in the Bank's contributions after seven years.
The Bank has amended the Profit Sharing and Savings Plan in connection with
the Conversion to provide for the investment of Plan assets in Common Stock of
the Company. In addition, participating employees may elect to invest all or any
part of their account balances in the Company's Common Stock. Common Stock held
by the Profit Sharing and Savings Plan may be newly issued or treasury shares
acquired from the Company or outstanding shares purchased in the open market or
in privately negotiated transactions. All Common Stock held by the Profit
Sharing and Savings Plan will be held by an independent trustee and allocated to
the accounts of individual participants. Participants will control the exercise
of voting and tender rights relating to the Common Stock held in their accounts.
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<PAGE>
EMPLOYEE STOCK OWNERSHIP PLAN AND TRUST. The Company has established, and
the Bank has adopted, for the benefit of eligible employees, an ESOP and related
trust to become effective upon completion of the Conversion. Substantially all
employees of the Bank or the Company who have attained age 21 and have completed
one year of service may be eligible to become participants in the ESOP. The ESOP
intends to purchase eight percent (8%) (7% in the absence of OTS approval) of
the Common Stock issued in the Conversion. As part of the Conversion and in
order to fund the ESOP's purchase of the Common Stock to be issued in the
Conversion, the Bank or the Company expects to contribute to the ESOP sufficient
funds to pay the par value of the Common Stock to be purchased, and the ESOP
intends to borrow funds from the Company equal to the balance of the aggregate
purchase price of the Common Stock. Although contributions to the ESOP will be
discretionary, the Company and the Bank intend to make annual contributions to
the ESOP in an aggregate amount at least equal to the principal and interest
requirement on the debt. It is expected that this loan will be for a term of up
to 10 years, will bear interest at the rate of 8% per annum and will call for
level annual payments of principal and interest designed to amortize the loan
over its term. It is anticipated that the loan will also permit optional
pre-payment. The Company and the Bank may make additional annual contributions
to the ESOP to the maximum extent deductible for federal income tax purposes.
Shares purchased by the ESOP will initially be pledged as collateral for the
loan and will be held in a suspense account until released for allocation among
participants in the ESOP as the loan is repaid. The pledged shares will be
released annually from the suspense account in an amount proportional to the
repayment of the ESOP loan for each plan year. The released shares will be
allocated among the accounts of participants on the basis of the participants'
total taxable compensation for the year of allocation. Benefits generally become
vested at the rate of 20% per year beginning on a participant's third year of
service with 100% vesting after seven years of service (including past service).
Participants also become immediately vested upon termination of employment due
to death, retirement at age 65 or older, permanent disability or upon the
occurrence of a change of control. Forfeitures will be reallocated among
remaining participating employees, in the same proportion as contributions.
Vested benefits may be paid in a single sum or installment payments and are
payable upon death, retirement at age 65 or older, disability or separation from
service.
In connection with the establishment of the ESOP, a Plan Administrator was
appointed to administer the ESOP (the "Plan Administrator"). An unrelated
corporate trustee for the ESOP will be appointed prior to the Conversion and
will continue thereafter. The Plan Administrator may instruct the trustee
regarding investment of funds contributed to the ESOP. The ESOP trustee, subject
to its fiduciary duty, must vote all allocated shares held in the ESOP in
accordance with the instructions of the participating employees. Under the ESOP,
unallocated shares will be voted in a manner calculated to most accurately
reflect the instructions received from participants regarding the allocated
stock as long as such vote is in accordance with the provisions of the Employee
Retirement Income Security Act of 1974, as amended ("ERISA").
The ESOP may purchase additional shares of Common Stock in the future, in
the open market or otherwise, and may do so either on a leveraged basis with
borrowed funds or with cash dividends, periodic employer contributions or other
cash flow. Whether such purchases will be made and the terms and conditions of
any such purchases will be determined by the ESOP's fiduciaries taking into
account such factors as they consider relevant at the time, including their
judgment as to the attractiveness of the Common Stock as an investment, the
price at which Common Stock may be purchased and, in the case of leveraged
purchases, the terms and conditions on which borrowed funds are available and
the willingness of the Company or the Bank to offer purchase money financing or
guarantee purchase money financing offered by third parties.
STOCK OPTION PLANS. Following the Conversion, the Board of Directors of the
Company intends to adopt the Stock Option and Incentive Plan for Employees (the
"Employees' Option Plan") and the Stock Option Plan for Outside Directors (the
"Directors' Option Plan") (collectively, the "Stock Option Plans").
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If implemented prior to the first anniversary of the Conversion, OTS regulations
require that the adoption of the Stock Option Plans be subject to shareholder
approval obtained at a meeting of shareholders to be held no earlier than six
months after the completion of the Conversion (which meeting is currently
anticipated to be held during July, 1997). An amount of shares of Common Stock
equal to 10% of the shares of Common Stock to be issued in the Conversion is
expected to be reserved for issuance under the Stock Option Plans. No
determinations have been made by the Board of Directors as to the specific terms
of the Stock Option Plans or the amount of awards thereunder. However, OTS
regulations provide that no individual officer or employee may receive more than
25% of the options granted and that Outside Directors may not receive more than
5% individually or more than 30% in the aggregate of the options granted, under
option plans implemented within one year after the Conversion.
The purpose of the anticipated adoption of the Employees' Option Plan will
be to attract and retain qualified personnel in key positions, provide officers
and key employees with a proprietary interest in the Company as an incentive to
contribute to the success of the Company and its subsidiaries and reward
officers and key employees for outstanding performance. Although the terms of
the Employees' Option Plan have not yet been determined, it is expected that the
Employees' Option Plan will provide for the grant of: (i) options to purchase
the Company's Common Stock intended to qualify as incentive stock options under
Section 422 of the Code ("Incentive Stock Options"); (ii) options that do not so
qualify ("Non-Statutory Stock Options"); and (iii) Limited Rights (discussed
below) which will be exercisable only upon a change of control of the Bank or
the Company. Unless sooner terminated, any Employees' Option Plan adopted will
be in effect for a period of 10 years.
Any Employees' Option Plan will be administered by a Committee of the Board
of Directors (the "Stock Option Committee"), and such committee will determine
which officers and employees will be granted options and Limited Rights, whether
such options will be Incentive Stock Options or Non-Statutory Stock Options, the
number of shares subject to each option, the exercise price of each Non-
Statutory Stock Option, whether such options may be exercised by delivering
other shares of Common Stock and when such options become exercisable. It is
expected that any Employees' Option Plan will permit options to be granted for
terms of up to 10 years (5 years in the case of Incentive Stock Options granted
to employees who are 10% shareholders) and at exercise prices no less than the
fair market value at date of grant (110% of fair market value in the case of
Incentive Stock Options granted to employees who are 10% shareholders).
The Stock Option Plans are expected to provide for the exercisability and
vesting of options granted thereunder in the manner specified by the Stock
Option Committee. OTS regulations generally require that options granted under
plans implemented within one year after the Conversion begin vesting no earlier
than one year from the date of shareholder approval of the plan and thereafter
vest at a rate of no more than 20% per year. It is also expected that, in the
event of death or disability, grants would be 100% vested upon termination of
employment of an officer or employee, or upon termination of service as a
director.
It is anticipated that the Stock Option Plans, to the extent permitted by
OTS regulations, will also provide for Limited Rights which, upon a change of
control, will allow the holder to exercise such Limited Rights and thereby be
entitled to receive a lump sum cash payment equal to the difference between the
exercise price of the related option and the fair market value of the shares of
Common Stock subject to the option on the date of exercise of the right in lieu
of purchasing the stock underlying the option. It is also anticipated that these
Limited Rights could be cancelled by an acquiror in the contract for an
acquisition if such acquiror commits to substitute other consideration
(including substitute options on the acquiror's stock) having equivalent value
to the options being cancelled.
An employee will not be deemed to have received taxable income upon grant or
exercise of any Incentive Stock Option; PROVIDED, that shares received through
the exercise of such option are not disposed of for at least one year after the
date the stock is received in connection with the option exercise and two
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<PAGE>
years after the date of grant of the option. No compensation deduction may be
taken by the Company as a result of the grant or exercise of Incentive Stock
Options, provided such shares are not disposed of before the expiration of the
period described above (a "disqualifying disposition"). In the case of a
Non-Statutory Stock Option and in the case of a disqualifying disposition of an
Incentive Stock Option, an employee will be deemed to receive ordinary income
upon exercise of the stock option in an amount equal to the amount by which the
exercise price is exceeded by the fair market value of the Common Stock
purchased on the date of exercise. The amount of any ordinary income deemed to
be received by an optionee upon the exercise of a Non-Statutory Stock Option or
due to a disqualifying disposition of an Incentive Stock Option may be a
deductible expense for tax purposes for the Company. In the case of Limited
Rights, upon exercise, the option holder would have to include the amount paid
to him or her upon exercise in his or her gross income for federal income tax
purposes in the year in which the payment is made and the Company may be
entitled to a deduction for federal income tax purposes of the amount paid.
Under the Directors' Option Plan, it is anticipated that the exercise price
per share of each option granted thereunder will be equal to the fair market
value of the shares of Common Stock on the date the option is granted.
STOCK PROGRAMS. Following the Conversion, the Company also intends to
establish Stock Programs as a method of providing officers, employees and
Outside Directors of the Bank and Company with a proprietary interest in the
Company in a manner designed to encourage such persons to remain with the Bank
and the Company at no cost to the recipients of such awards. It is anticipated
that one Stock Program would cover eligible officers and employees of the Bank
and the Company, and the other would cover eligible Outside Directors of the
Bank and the Company. If implemented prior to the first anniversary of the
Conversion, OTS regulations require that the adoption of the Stock Programs and
awards thereunder be subject to shareholder approval obtained at a meeting of
shareholders held no earlier than six months after the completion of the
Conversion.
If the Stock Programs are implemented, the Company expects to contribute
funds to the Stock Programs to enable the Stock Programs trusts to acquire, in
the aggregate, an amount up to 4% (3% unless OTS approval is obtained) of the
shares of Common Stock issued in the Conversion. Shares used to fund the Stock
Programs may be acquired through open market purchases, if permitted, or from
authorized but unissued shares. No determinations have been made as to the
specific terms of the Stock Programs or the amount of awards thereunder.
Although no specific award determinations have been made, the Company
anticipates that, if the Stock Programs are implemented, the Company will
provide awards to eligible officers, employees and directors to the extent
permitted by applicable regulations. Current OTS regulations provide that no
individual employee may receive more than 25% of the shares of any plan and that
non-employee directors may not receive more than 5% of the shares individually
or 30% in the aggregate for all directors,in the case of plans implemented
within one year following the Conversion.
Any Stock Programs adopted shall be administered by a Committee of the Board
of Directors (the "Stock Programs Committee"). Any Stock Programs for the
benefit of Outside Directors are expected to be self-executing with respect to
grants or allocations made thereunder. Under the Stock Programs, awards are
expected to be granted in the form of shares of Common Stock held by the Stock
Programs. The Board intends to appoint an independent fiduciary to serve as
trustee of the trusts to be established pursuant to any Stock Programs. The
Stock Programs are expected to provide for the vesting of awards granted
thereunder in the manner specified by the Stock Programs Committee and
consistent with OTS conversion regulations, which currently require that awards
under plans implemented within one year following the Conversion begin vesting
no earlier than one year from the date of shareholder approval and thereafter
vest at a rate of no more than 20% per year. It is also expected that, in the
event of death or disability, grants would be 100% vested upon termination of
employment of an officer or employee, or upon termination of service as a
director.
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When shares become vested in accordance with the Stock Programs, the
participants will recognize income equal to the fair market value of the Common
Stock at that time. The amount of income recognized by the participants may be a
deductible expense for tax purposes for the Company. When shares become vested
and are actually distributed in accordance with the Stock Programs, the
participants will also receive amounts equal to any accrued dividends with
respect thereto. Prior to vesting, recipients of grants may direct the voting of
the shares awarded to them. Shares not subject to grants will be voted by the
trustee of the Stock Programs in proportion to the directions provided with
respect to shares subject to grants. Vested shares will be distributed to
recipients as soon as practicable following the day on which they are vested.
Any awards to Outside Directors under the Stock Programs implemented prior to
the first anniversary of the Conversion and the material terms and conditions
thereof, will be specified in a plan document approved by shareholders.
In the event that additional authorized but unissued shares are acquired by
the Stock Programs after the Conversion, the interests of existing shareholders
will be diluted. See "Pro Forma Data."
TRANSACTIONS WITH CERTAIN RELATED PERSONS
The FIRREA requires that all loans or extensions of credit to executive
officers and directors must be made on substantially the same terms, including
interest rates and collateral, as those prevailing at the time for comparable
transactions with the general public and must not involve more than the normal
risk of repayment or present other unfavorable features. The Bank has made loans
or extended credit to executive officers and directors and also to certain
persons related to executive officers and directors. All such loans were made by
the Bank in the ordinary course of business and were not made with more
favorable terms nor did they involve more than the normal risk of collectibility
or present unfavorable features. The outstanding principal balance of such loans
to directors, executive officers and their associates totaled $619,480 or 4.56%
of the Bank's retained earnings at July 31, 1996 and 1.95% of the Bank's pro
forma stockholders' equity at July 31, 1996, after giving effect to the
Conversion, and assuming the sale of Common Stock at the maximum of the
Estimated Price Range.
The Company intends that all transactions in the future between the Company
and its executive officers, directors, holders of 10% or more of the shares of
any class of its common stock and affiliates thereof, will contain terms no less
favorable to the Company than could have been obtained by it in arm's-length
negotiations with unaffiliated persons and will be approved by a majority of
independent outside directors of the Company not having any interest in the
transaction.
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SUBSCRIPTIONS BY EXECUTIVE OFFICERS AND DIRECTORS
The following table sets forth the number of shares of Common Stock the
Bank's executive officers and directors propose to purchase in the Offerings,
assuming shares of Common Stock are issued at the minimum and maximum of the
Estimated Price Range and that sufficient shares will be available to satisfy
their subscriptions. The table also sets forth the total expected beneficial
ownership of Common Stock as to all directors and executive officers as a group.
<TABLE>
<CAPTION>
AT THE MINIMUM AT THE MAXIMUM
OF THE ESTIMATED OF THE ESTIMATED
PRICE RANGE(1) PRICE RANGE(1)
------------------------ ------------------------
<S> <C> <C> <C> <C> <C>
AS A AS A
NUMBER PERCENT NUMBER PERCENT
OF OF SHARES OF OF SHARES
NAME AMOUNT SHARES OFFERED SHARES OFFERED
- ------------------------------------------------------- ------------ --------- ------------- --------- -------------
George M. Briody....................................... $ 218,500 16,150 1.0% 21,850 1.0%
F. Gregory Opelka...................................... 218,500 16,150 1.0 21,850 1.0
Timothy L. McCue....................................... 150,000 15,000 0.9 15,000 0.7
Robert Jones........................................... 100,000 10,000 0.6 10,000 0.5
Michael Cahill......................................... 35,000 3,500 0.2 3,500 0.2
Maurice F. Leahy....................................... 50,000 5,000 0.3 5,000 0.2
Eugene W. Pilawski..................................... 218,500 16,150 1.0 21,850 1.0
Joseph J. Nimrod....................................... 218,500 16,150 1.0 21,850 1.0
Walter E. Powers, M.D.................................. 120,000 12,000 0.7 12,000 0.5
William B. O'Connell................................... 150,000 15,000 0.9 15,000 0.7
-- --
------------ --------- ---------
All directors and executive officers as a group........ $ 1,479,000 125,100 7.6% 147,900 6.8%
-- --
-- --
------------ --------- ---------
------------ --------- ---------
</TABLE>
- ------------------------
(1) The individual maximum purchase limitation is equal to $150,000. The above
table, however, includes proposed subscriptions by Associates See "The
Conversion--Limitations on Common Stock Purchases". Does not include
subscription orders by the ESOP. The ESOP is expected to purchase 8% (7% if
OTS approval is not obtained) of the shares issued in the Conversion. See
"--Benefits-- Employee Stock Ownership Plan and Trust."
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THE CONVERSION
THE BOARD OF DIRECTORS OF THE BANK AND THE OTS HAVE APPROVED THE PLAN OF
CONVERSION, SUBJECT TO APPROVAL BY THE MEMBERS OF THE BANK ENTITLED TO VOTE ON
THE MATTER AND THE SATISFACTION OF CERTAIN OTHER CONDITIONS. SUCH OTS APPROVAL,
HOWEVER, DOES NOT CONSTITUTE A RECOMMENDATION OR ENDORSEMENT OF THE PLAN BY SUCH
AGENCY.
GENERAL
On May 21, 1996, the Bank's Board of Directors unanimously adopted the Plan
of Conversion pursuant to which the Bank will be converted from a federally
chartered mutual savings bank to a federally chartered stock savings bank. The
Plan was amended by the Board of Directors as of September 17, 1996. It is
currently intended that all of the outstanding capital stock issued by the Bank
pursuant to the Plan will be held by the Company, which is incorporated under
Illinois law. The Plan was approved by the OTS, subject to, among other things,
approval of the Plan by the Bank's members. A special meeting of members has
been called for this purpose to be held on December 17, 1996.
The Company has received approval from the OTS to become a savings
association holding company and to acquire all of the Common Stock of the Bank
to be issued in the Conversion. The Company plans to retain 50% of the net
proceeds from the sale of the Common Stock and to use the remaining net proceeds
to purchase all of the then to be issued and outstanding capital stock of the
Bank. The Conversion will be effected only upon completion of the sale of all of
the shares of Common Stock of the Company (or of the Bank, if the holding
company form of organization is not utilized) to be issued pursuant to the Plan.
The Plan provides that the Board of Directors of the Bank may, at any time
prior to the issuance of the Common Stock and for any reason, decide not to use
the holding company form of organization. Such reasons may include possible
delays resulting from overlapping regulatory processing or policies which could
adversely affect the Bank's or the Company's ability to consummate the
Conversion and transact its business as contemplated herein and in accordance
with the Bank's operating policies. In the event such a decision is made, the
Bank will withdraw the Company's registration statement from the SEC and take
steps necessary to complete the Conversion without the Company, including filing
any necessary documents with the OTS. In such event, and provided there is no
regulatory action, directive or other consideration upon which basis the Bank
determines not to complete the Conversion, if permitted by the OTS, the Bank
will issue and sell the common stock of the Bank and subscribers will be
notified of the elimination of a holding company and will be solicited (I.E., be
permitted to affirm their orders, in which case they will need to affirmatively
reconfirm their subscriptions prior to the expiration of the resolicitation
offering or their funds will be promptly refunded with interest at the Bank's
passbook rate of interest; or be permitted to modify or rescind their
subscriptions), and notified of the time period within which the subscriber must
affirmatively notify the Bank of such subscriber's intention to affirm, modify
or rescind such subscriber's subscription. The following description of the Plan
assumes that a holding company form of organization will be used in the
Conversion. In the event that a holding company form of organization is not
used, all other pertinent terms of the Plan as described below will apply to the
conversion of the Bank from the mutual to stock form of organization and the
sale of the Bank's common stock.
The Plan provides generally that (i) the Bank will convert from a mutual
savings bank to a capital stock savings bank and (ii) the Company will offer
shares of Common Stock for sale in the Subscription Offering in the following
order of priority: the Bank's Eligible Account Holders, the Employee Plans, the
Bank's Supplemental Eligible Account Holders, the Bank's Other Members and Bank
Employees. The Plan also provides that shares not subscribed for in the
Subscription Offering may be offered in a Community Offering to certain members
of the general public, with a preference to be given, in the event of an
oversubscription in the Community Offering, to natural persons residing in Cook
and Lake counties in Illinois, the counties in which the Bank's offices are
located. The Company and the Bank have an option
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to reserve 25% of the stock available in the Community Offering for sale to
certain institutional investors. It is anticipated that all shares not
subscribed for in the Subscription and Community Offerings will be offered for
sale by the Company to the general public in a Syndicated Community Offering.
The Company and the Bank have reserved the right to accept or reject, in whole
or in part, any orders to purchase shares of the Common Stock received in the
Community Offering or in the Syndicated Community Offering. See "--Community
Offering" and "--Syndicated Community Offering."
The aggregate price of the shares of Common Stock to be issued in the
Conversion within the Estimated Price Range, currently estimated to be between
$16,150,000 and $21,850,000, is based upon an independent appraisal, prepared by
Capital Resources, a consulting firm experienced in the valuation and appraisal
of savings institutions, of the estimated pro forma market value of the Common
Stock of the Company. All shares of Common Stock to be issued and sold in the
Conversion will be sold at the same price. The independent appraisal will be
affirmed or, if necessary, updated at the completion of the Offerings. See
"--Stock Pricing" for additional information as to the determination of the
estimated pro forma market value of the Common Stock.
The following is a brief summary of pertinent aspects of the Conversion. The
summary is qualified in its entirety by reference to the provisions of the Plan.
A copy of the Plan is available for inspection at the offices of the Bank and at
the Central Region (Chicago, Illinois) and Washington, D.C. offices of the OTS.
The Plan is also filed as an Exhibit to the Registration Statement of which this
Prospectus is a part, copies of which may be obtained from the SEC. See
"Additional Information."
PURPOSES OF CONVERSION
The Bank, as a federally chartered mutual savings bank, does not have
shareholders and has no authority to issue capital stock. By converting to the
capital stock form of organization, the Bank will be structured in the form used
by commercial banks, many other business entities and a growing number of
savings institutions. The Conversion will enhance the Bank's ability to access
capital markets, expand its current operations, acquire other financial
institutions or branch offices, provide affordable home financing opportunities
to the communities it serves or diversify into other financial services to the
extent allowable by applicable law and regulation.
The Board of Directors of the Bank received information about various types
of benefit plans typically utilized by public companies in general and
converting thrift institutions in particular. Management reviewed the
anticipated costs of establishing a customary program of benefits and the
anticipated benefits to the Company. Management determined that the benefit
plans helped significantly in providing the ability of a public company to
retain and attract executives of the caliber needed to run a successful public
company, to maintain their attention and loyalty in change in control situations
and to align their interests with those of the Company's shareholders. Finally,
the Board of Directors concluded that the cost of establishing and maintaining
these benefit plans would be justified by these benefits to the Company. See
"Management of the Bank."
The holding company form of organization, if used, would provide additional
flexibility to diversify the Bank's business activities through newly-formed
subsidiaries, or through acquisitions of or mergers with both mutual and stock
institutions, as well as other companies. Although there are no current
arrangements, understandings or agreements, written or oral, regarding any such
opportunities, the Company will be in a position after the Conversion, subject
to regulatory limitations and the Company's financial position, to take
advantage of any such opportunities that may arise.
The potential impact of the Conversion upon the Bank's capital base is
significant. The Bank had equity in accordance with GAAP of $13.6 million, or
6.98% of assets at July 31, 1996. Assuming that $20.8 million of net proceeds
are realized from the sale of Common Stock, the maximum of the Estimated Price
Range established by the Board of Directors based on the Valuation Range which
has been estimated by Capital Resources to be from a minimum of $16,150,000 to a
maximum of $21,850,000 (see "Pro Forma
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Data" for the basis of this assumption), and assuming that $10.4 million of the
net proceeds are used by the Company to purchase the capital stock of the Bank,
the Bank's ratio of GAAP capital to assets, on a pro forma basis, will increase
to 10.55% after the Conversion. In the event that the holding company form of
organization is not utilized and all of the net proceeds from the Offerings, at
the maximum of the Estimated Price Range, are retained by the Bank, the Bank's
ratios of tangible and core capital to adjusted assets, on a pro forma basis,
each will increase to 16.66% after Conversion. The investment of the net
proceeds from the sale of the Common Stock will provide the Bank with additional
income to further enhance its capital position. The additional capital may also
assist the Bank in offering new programs and expanded services to its customers.
After completion of the Conversion, the unissued common and preferred stock
authorized by the Company's Articles of Incorporation will permit the Company,
subject to market conditions and regulatory approval of an offering, to raise
additional equity capital through further sales of securities and to issue
securities in connection with possible acquisitions. At the present time, the
Company has no plans with respect to additional offerings of securities, other
than the issuance of additional shares upon exercise of stock options or the
possible issuance of authorized but unissued shares to the Stock Programs.
Following the Conversion, the Company will also be able to use stock-related
incentive programs to attract and retain executive and other personnel for
itself and its subsidiaries. See "Management of the Bank--Executive
Compensation."
EFFECTS OF CONVERSION
GENERAL. Each depositor in a mutual savings bank has both a deposit account
in the institution and a pro rata ownership interest in the equity of the
institution based upon the balance in such depositor's account, which interest
may only be realized in the event of a liquidation of the institution. However,
this ownership interest is tied to the depositor's account and has no tangible
market value separate from such deposit account. Any depositor who opens a
deposit account obtains a pro rata ownership interest in the equity of the
institution without any additional payment beyond the amount of the deposit. A
depositor who reduces or closes such depositor's account receives the balance in
the account but receives nothing for such depositor's ownership interest in the
equity of the institution, which is lost to the extent that the balance in the
account is reduced.
Consequently, mutual savings bank depositors normally have no way to realize
the value of their ownership interest, which has realizable value only in the
unlikely event that the mutual savings bank is liquidated. In such event, the
depositors of record at that time, as owners, would share PRO RATA in any
residual surplus and reserves after other claims, including claims of depositors
to the amounts of their deposits, are paid.
When a mutual savings bank converts to stock form, permanent
non-withdrawable capital stock is created to represent the ownership of the
institution's equity and the former pro rata ownership of depositors is
thereafter represented by their liquidation rights. See "--Liquidation Rights."
Such common stock is separate and apart from deposit accounts and cannot be and
is not insured by the FDIC or any other governmental agency. Certificates are
issued to evidence ownership of the capital stock. The stock certificates are
transferable, and, therefore, the stock may be sold or traded if a purchaser is
available with no effect on any account the seller may hold in the institution.
CONTINUITY. While the Conversion is being accomplished, and after the
consummation of the Conversion, the normal business of the Bank of accepting
deposits and making loans will continue without interruption. The Bank will
continue to be subject to regulation by the OTS and the FDIC.
The Directors serving the Bank at the time of Conversion will serve as
Directors of the Bank after the Conversion. The Directors of the Company will
consist of all of the individuals currently serving on the
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Board of Directors of the Bank. It is anticipated that all officers of the Bank
at the time of Conversion will retain their positions after the Conversion.
DEPOSIT ACCOUNTS AND LOANS. Under the Plan, each depositor in the Bank at
the time of Conversion will automatically continue as a depositor after the
Conversion, and each such deposit account will remain the same with respect to
deposit balance, interest rate and other terms, except to the extent affected by
withdrawals made to purchase Common Stock in the Conversion. See "--Procedure
for Purchasing Shares in Subscription and Community Offerings." Each such
account will be insured by the FDIC to the same extent as before the Conversion
(I.E.,up to $100,000 per depositor). Depositors will continue to hold their
existing certificates, passbooks and other evidences of their accounts.
Furthermore, no loan outstanding from the Bank will be affected by the
Conversion, and the amount, interest rate, maturity and security for each loan
will remain as they were contractually fixed prior to the Conversion.
EFFECT ON VOTING RIGHTS OF MEMBERS. At present, all depositors of and
certain borrowers from the Bank are members of, and have voting rights in, the
Bank as to all matters requiring membership action. Upon Conversion, depositors
and such borrowers will cease to be members and will no longer be entitled to
vote at meetings of the Bank. Upon Conversion, all voting rights in the Bank
will be vested in the Company as the sole shareholder of the Bank. Exclusive
voting rights with respect to the Company will be vested in the holders of
Common Stock. Depositors of and borrowers from the Bank will not have voting
rights after the Conversion except to the extent that they become shareholders
of the Company through the purchase of Common Stock.
LIQUIDATION RIGHTS. In the unlikely event of a complete liquidation of the
Bank in its present mutual form, each depositor would receive such depositor's
pro rata share of any assets of the Bank remaining after payment of claims of
all creditors (including the claims of all depositors to the withdrawal value of
their accounts). Each depositor's PRO RATA share of such remaining assets would
be in the same proportion as the value of such depositor's deposit account was
to the total value of all deposit accounts in the Bank at the time of
liquidation. After the Conversion, each depositor, in the event of a complete
liquidation, would have a claim as a creditor of the same general priority as
the claims of all other general creditors of the Bank. However, except as
described below, such depositor's claim would be solely in the amount of the
balance in such depositor's deposit account plus accrued interest. Such
depositor would not have an interest in the value or assets of the Bank above
that amount.
The Plan provides for the establishment, upon the completion of the
Conversion, of a special "liquidation account" for the benefit of Eligible
Account Holders and Supplemental Eligible Account Holders in an amount equal to
the surplus and reserves of the Bank as of the date of its latest balance sheet
contained in the final Prospectus used in connection with the Conversion. Each
Eligible Account Holder and Supplemental Eligible Account Holder, if such
account holder were to continue to maintain such account holder's deposit
account at the Bank, would be entitled, on a complete liquidation of the Bank
after the Conversion, to an interest in the liquidation account prior to any
payment to the shareholders of the Bank. Each Eligible Account Holder and
Supplemental Eligible Account Holder would have an initial interest in such
liquidation account for each deposit account, including passbook accounts,
transaction accounts such as NOW/Super NOW accounts, money market deposit
accounts and certificates of deposit, with an aggregate balance of $50 or more
held in the Bank on December 31, 1994 (with respect to an Eligible Account
Holder) and September 30, 1996 (with respect to a Supplemental Eligible Account
Holder) (each a "Qualifying Deposit"). Each Eligible Account Holder and
Supplemental Eligible Account Holder will have a PRO RATA interest in the total
liquidation account for such account holder's deposit accounts based on the
proportion that the aggregate balance of such person's Qualifying Deposits on
the Eligibility Record Date or Supplemental Eligibility Record Date,
respectively, bore to the total amount of all Qualifying Deposits of all
Eligible Account Holders and Supplemental Eligible Account
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Holders in the Bank. For deposit accounts in existence at both dates, separate
subaccounts shall be determined on the basis of the Qualifying Deposits in such
deposit accounts on each such record date.
If, however, on any annual closing date (I.E.,the anniversary of the
Eligibility Record Date or the Supplemental Eligibility Record Date, as
applicable) of the Bank, commencing on or after the effective date of the
Conversion, the amount in any deposit account is less than the amount in such
deposit account on December 31, 1994 (with respect to an Eligible Account
Holder), or September 30, 1996 (with respect to a Supplemental Eligible Account
Holder) or any other annual closing date, then the interest in the liquidation
account relating to such deposit account would be reduced from time to time by
the proportion of any such reduction, and such interest will cease to exist if
such deposit account is closed. In addition, no interest in the liquidation
account would ever be increased despite any subsequent increase in the related
deposit account. Any assets remaining after the above liquidation rights of
Eligible Account Holders and Supplemental Eligible Account Holders are satisfied
would be distributed to the Company as the sole shareholder of the Bank.
TAX ASPECTS. Consummation of the Conversion is expressly conditioned upon
the receipt by the Bank of either a favorable ruling from the IRS and Illinois
taxing authorities or opinions of counsel with respect to federal and Illinois
income taxation, to the effect that the Conversion will not be a taxable
transaction to the Company, the Bank, Eligible Account Holders or Supplemental
Eligible Account Holders, except as noted below.
No private ruling will be received from the IRS with respect to the proposed
Conversion. Instead, the Bank has received an opinion of its counsel, Thacher
Proffitt & Wood, that for federal income tax purposes, among other matters: (i)
the Bank's change in form from mutual to stock ownership will constitute a
reorganization under section 368(a)(1)(F) of the Internal Revenue Code and
neither the Bank nor the Company will recognize any gain or loss as a result of
the Conversion; (ii) no gain or loss will be recognized by the Bank or the
Company upon the purchase of the Bank's capital stock by the Company or by the
Company upon the purchase of its Common Stock in the Conversion; (iii) no gain
or loss will be recognized by Eligible Account Holders or by Supplemental
Eligible Account Holders upon the issuance to them of deposit accounts in the
Bank in its stock form plus their interests in the liquidation account in
exchange for their deposit accounts in the Bank; (iv) the tax basis of the
depositors' deposit accounts in the Bank immediately after the Conversion will
be the same as the basis of their deposit accounts immediately prior to the
Conversion; (v) the tax basis of each Eligible Account Holder's and each
Supplemental Eligible Account Holder's interest in the liquidation account will
be zero; (vi) no gain or loss will be recognized by Eligible Account Holders or
by Supplemental Eligible Account Holders upon the distribution to them of
nontransferable subscription rights to purchase shares of the Common Stock,
PROVIDED,that the amount to be paid for the Common Stock is equal to the fair
market value of such stock; and (vii) the tax basis to the shareholders of the
Common Stock of the Company purchased in the Conversion pursuant to the
subscription rights will be the amount paid therefore and the holding period for
the shares of Common Stock purchased by such persons will begin on the date on
which their subscription rights are exercised. The opinion of Thacher Proffitt &
Wood has been filed as an exhibit to the Registration Statement of which this
Prospectus is a part.
KPMG Peat Marwick LLP has also opined, subject to the limitations and
qualifications in its opinion, that the Conversion will not be a taxable
transaction to the Company or to the Bank for Illinois income tax purposes or to
Eligible Account Holders or to Supplemental Eligible Account Holders for
Illinois income tax purposes. The opinion of KPMG Peat Marwick LLP has been
filed as an exhibit to the Registration Statement of which this Prospectus is a
part.
Unlike private rulings, opinions of counsel are not binding on the IRS or
the Illinois taxing authorities and the IRS or the Illinois taxing authorities
could disagree with conclusions reached therein. In the event of such
disagreement, there can be no assurance that the IRS or the Illinois taxing
authorities would not prevail in a judicial or administrative proceeding.
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Certain portions of both the federal and the state tax opinions are based
upon the opinion of Capital Resources that subscription rights issued in
connection with the Conversion will have no value. In the opinion of Capital
Resources, which opinion is not binding on the IRS or the Illinois taxing
authorities, the subscription rights do not have any value, based on the fact
that such rights are acquired by the recipients without cost, are
nontransferable and of short duration, and afford the recipients the right only
to purchase the Common Stock at a price equal to its estimated fair market
value, which will be the same price as the Purchase Price for the unsubscribed
shares of Common Stock. If the subscription rights granted to Eligible Account
Holders, Supplemental Eligible Account Holders, Other Members or Bank Employees
are deemed to have an ascertainable value, such Eligible Account Holders,
Supplemental Eligible Account Holders, Other Members or Bank Employees could be
taxed upon the receipt or exercise of the subscription rights in an amount equal
to such value, and the Bank could recognize gain on such distribution. Eligible
Account Holders, Supplemental Eligible Account Holders, Other Members and Bank
Employees are encouraged to consult with their own tax advisors as to the tax
consequences in the event that such subscription rights are deemed to have an
ascertainable value.
STOCK PRICING
The Plan of Conversion requires that the purchase price of the Common Stock
must be based on the appraised pro forma market value of the Common Stock, as
determined on the basis of an independent valuation. The Bank and the Company
have retained Capital Resources to make such valuation. For its services in
making such appraisal, Capital Resources will receive a fee of $22,500, plus
out-of-pocket expenses. The Bank and the Company have agreed to indemnify
Capital Resources and its employees and affiliates against certain losses
(including any losses in connection with claims under the federal securities
laws) arising out of its services as appraiser, except where Capital Resources's
liability results from its negligence or bad faith.
An appraisal has been made by Capital Resources in reliance upon the
information contained in this Prospectus, including the financial statements.
Capital Resources also considered the following factors, among others: the
present and projected operating results and financial condition of the Company
and the Bank, and the economic and demographic conditions in the Bank's existing
market area; certain historical, financial and other information relating to the
Bank; a comparative evaluation of the operating and financial statistics of the
Bank with those of other similarly situated publicly-traded savings associations
and savings institutions located in the Bank's market area and the State of
Illinois; the aggregate size of the offering of the Common Stock; the impact of
Conversion on the Bank's equity and earnings potential; the proposed dividend
policy of the Company and the Bank; and the trading market for securities of
comparable institutions and general conditions in the market for such
securities.
On the basis of the foregoing, Capital Resources has advised the Company and
the Bank that, in its opinion, dated September 6, 1996 and updated October 23,
1996, the estimated pro forma market value of the Common Stock ranged from a
minimum of $16,150,000 to a maximum of $21,850,000 with a midpoint of
$19,000,000. The Board of Directors of the Bank held a meeting to review and
discuss the original appraisal report prepared by Capital Resources. A
representative of Capital Resources participated in the meeting to explain the
contents of the appraisal report. In connection with its review of the
reasonableness and adequacy of such appraisal consistent with OTS regulations
and policies, the Board of Directors reviewed the methodology that Capital
Resources employed to determine the pro forma market value of the Common Stock
and the appropriateness of the assumptions that Capital Resources used in
determining this value. On October 23, 1996 Capital Resources updated its
appraisal of the aggregate estimated pro forma market value of the Common Stock
and increased the Valuation Range by approximately 8.57% from the appraisal
dated September 6, 1996 (which had established a Valuation Range from
$14,875,000, at the minimum of the Valuation Range, to $20,125,000, at the
maximum of the Valuation Range). The increase in value was primarily
attributable to more favorable market conditions for thrift stocks, including
the market performance of recently converted thrift institutions. The Pricing
Committee of the Board of
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Directors (consisting of Messrs. Briody and Opelka) pursuant to delegated
authority received from the Board of Directors approved the updated Valuation
Range on October 24, 1996.
Based upon the Valuation Range and the Purchase Price of $10.00 per share
for the Common Stock established by the Board of Directors, the Board of
Directors, ratifying the actions of the Pricing Committee, has established the
Estimated Price Range of $16,150,000 to $21,850,000, with a midpoint of
$19,000,000, and the Company expects to issue between 1,615,000 and 2,185,000
shares of Common Stock. The Estimated Price Range may be amended with the
approval of the OTS (if required), if necessitated by subsequent developments in
the financial condition of the Company or the Bank or market conditions
generally.
THE VALUATION PREPARED BY CAPITAL RESOURCES IS NOT INTENDED, AND MUST NOT BE
CONSTRUED, AS A RECOMMENDATION OF ANY KIND AS TO THE ADVISABILITY OF PURCHASING
SUCH SHARES. CAPITAL RESOURCES DID NOT INDEPENDENTLY VERIFY THE FINANCIAL
STATEMENTS AND OTHER INFORMATION PROVIDED BY THE BANK, NOR DID CAPITAL RESOURCES
VALUE INDEPENDENTLY THE ASSETS OR LIABILITIES OF THE BANK. THE VALUATION
CONSIDERS THE BANK AS A GOING CONCERN AND SHOULD NOT BE CONSIDERED AS AN
INDICATION OF THE LIQUIDATION VALUE OF THE BANK. MOREOVER, BECAUSE SUCH
VALUATION IS NECESSARILY BASED UPON ESTIMATES AND PROJECTIONS OF A NUMBER OF
MATTERS, ALL OF WHICH ARE SUBJECT TO CHANGE FROM TIME TO TIME, NO ASSURANCE CAN
BE GIVEN THAT PERSONS PURCHASING SUCH SHARES IN THE CONVERSION WILL THEREAFTER
BE ABLE TO SELL SUCH SHARES AT PRICES AT OR ABOVE THE PURCHASE PRICE OR IN THE
RANGE OF THE FOREGOING VALUATION OF THE PRO FORMA MARKET VALUE THEREOF.
Following commencement of the Subscription Offering, the maximum of the
Estimated Price Range may be increased up to 15% and the number of shares of
Common Stock to be issued in the Conversion may be increased to 2,512,750 shares
due to regulatory considerations, changes in the market and general financial
and economic conditions, without the resolicitation of subscribers. See
"--Limitations on Common Stock Purchases" as to the method of distribution and
allocation of additional shares that may be issued in the event of an increase
in the Estimated Price Range to fill unfilled orders in the Subscription and
Community Offerings.
No sale of shares of Common Stock may be consummated unless, prior to such
consummation, Capital Resources confirms to the Bank and the OTS that, to the
best of its knowledge, nothing of a material nature has occurred which, taking
into account all relevant factors, would cause Capital Resources to conclude
that the value of the Common Stock at the price so determined is incompatible
with its estimate of the pro forma market value of the Common Stock at the
conclusion of the Subscription Offering and, if applicable, the Community
Offering.
If, based on Capital Resources' estimate, the pro forma market value of the
Common Stock, as of the date that Capital Resources so confirms to the Bank and
the OTS, is not more than 15% above the maximum and not less than the minimum of
the Estimated Price Range then, (1) with the approval of the OTS, the number of
shares of Common Stock to be issued in the Conversion may be increased or
decreased, PRO RATA to the increase or decrease in value, without resolicitation
of subscriptions, to no more than 2,512,750 shares or no less than 1,615,000
shares, and (2) all shares purchased in the Subscription and Community Offerings
will be purchased for the Purchase Price of $10.00 per share. If the number of
shares issued in the Conversion is increased due to an increase of up to 15% in
the Estimated Price Range to reflect changes in market or financial conditions,
persons who subscribed for the maximum number of shares will not be given the
opportunity to subscribe for an adjusted maximum number of shares, except for
the Employee Plans which will be able to subscribe for such adjusted amount up
to their 10% subscription. See "--Limitations on Common Stock Purchases."
If the pro forma market value of the Common Stock is either more than 15%
above the maximum of the Estimated Price Range or less than the minimum of the
Estimated Price Range, the Bank and the Company, after consulting with the OTS,
may terminate the Plan and return all funds promptly with interest at the Bank's
passbook rate of interest on payments made by check, draft or money order,
extend or hold new Subscription and Community Offerings, establish a new
Estimated Price Range, commence a
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resolicitation of subscribers or take such other actions as permitted by the OTS
in order to complete the Conversion. In the event that a resolicitation is
commenced, unless an affirmative response is received within a reasonable period
of time, all funds will be promptly returned to investors as described above. A
resolicitation, if any, following the conclusion of the Subscription Offering
or, if applicable, the Community Offering would not exceed 45 days unless
further extended by the OTS for periods of up to 90 days not to extend beyond
December 17, 1998.
If all shares of Common Stock are not sold through the Subscription Offering
or the Community Offering, then the Bank and the Company expect to offer the
remaining shares in a Syndicated Community Offering, which would occur as soon
as practicable following the close of the Subscription Offering or the Community
Offering but may commence during the Subscription Offering or the Community
Offering subject to the prior rights of subscribers. All shares of Common Stock
will be sold at the same price per share in the Syndicated Community Offering as
in the Subscription and Community Offerings. See "--Syndicated Community
Offering."
No sale of shares of Common Stock may be consummated unless, prior to such
consummation, Capital Resources confirms to the Bank, the Company and the OTS
that, to the best of its knowledge, nothing of a material nature has occurred
which, taking into account all relevant factors, including those which would be
involved in a cancellation of the Syndicated Community Offering, would cause
Capital Resources to conclude that the aggregate value of the Common Stock at
the Purchase Price is incompatible with its estimate of the pro forma market
value of the Common Stock of the Company at the time of the Syndicated Community
Offering. Any change which would result in an aggregate purchase price which is
below, or more than 15% above, the Estimated Price Range would be subject to OTS
approval. If such confirmation is not received, the Bank may extend the
Conversion, extend, reopen or commence new Subscription and Community Offerings
or a Syndicated Community Offering, establish a new Estimated Price Range and
commence a resolicitation of all subscribers with the approval of the OTS or
take such other actions as permitted by the OTS in order to complete the
Conversion, or terminate the Plan and cancel the Subscription and Community
Offerings and/or the Syndicated Community Offering. In the event market or
financial conditions change so as to cause the aggregate purchase price of the
shares to be below the minimum of the Estimated Price Range or more than 15%
above the maximum of such range, and the Company and the Bank determine to
continue the Conversion, subscribers will be resolicited (I.E., be permitted to
continue their orders, in which case they will need to affirmatively reconfirm
their subscriptions prior to the expiration of the resolicitation offering or
their subscription funds will be promptly refunded with interest at the Bank's
passbook rate of interest, or be permitted to decrease or cancel their
subscriptions). Any change in the Estimated Price Range must be approved by the
OTS. A resolicitation, if any, following the conclusion of the Subscription
Offering or the Community Offering would not exceed 45 days, or if following the
Syndicated Community Offering, 90 days, unless further extended by the OTS for
periods up to 90 days not to extend beyond December 17, 1998. If such
resolicitation is not effected, the Bank will return with interest all funds
promptly at the Bank's passbook rate of interest on payments made by check,
savings bank draft or money order.
Copies of the appraisal report of Capital Resources, including any
amendments thereto, and the detailed memorandum of the appraiser setting forth
the method and assumptions for such appraisal are available for inspection at
the offices of the Bank and the other locations specified under "Additional
Information."
NUMBER OF SHARES TO BE ISSUED
Depending upon market or financial conditions following the commencement of
the Subscription and Community Offerings, the total number of shares to be
issued in the Conversion may be increased or decreased without a resolicitation
of subscribers; PROVIDED,that the product of the total number of shares times
the price per share is not below the minimum or more than 15% above the maximum
of the
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Estimated Price Range, and the total number of shares to be issued in the
Conversion is not less than 1,615,000 or greater than 2,185,000 (or 2,512,750 if
the Estimated Price Range is increased by 15%).
In the event market or financial conditions change so as to cause the
aggregate purchase price of the shares to be below the minimum of the Estimated
Price Range or more than 15% above the maximum of such range, if the Plan is not
terminated by the Company and the Bank after consultation with the OTS,
purchasers will be resolicited (I.E., permitted to continue their orders, in
which case they will need to affirmatively reconfirm their subscriptions prior
to the expiration of the resolicitation offering or their subscription funds
will be promptly refunded, or be permitted to modify or rescind their
subscriptions). Any change in the Estimated Price Range must be approved by the
OTS. If the number of shares issued in the Conversion is increased due to an
increase of up to 15% in the Estimated Price Range to reflect changes in market
or financial condition, persons who subscribed for the maximum number of shares
will not be given the opportunity to subscribe for an adjusted maximum number of
shares, except for the Employee Plans, which will be able to subscribe for such
adjusted amount up to its 10% subscription. See "--Limitations on Common Stock
Purchases."
An increase in the number of shares to be issued in the Conversion as a
result of an increase in the estimated pro forma market value would decrease
both a subscriber's ownership interest and the Company's pro forma net earnings
and stockholders' equity on a per share basis while increasing pro forma net
earnings and stockholders' equity on an aggregate basis. A decrease in the
number of shares to be issued in the Conversion would increase both a
subscriber's ownership interest and the Company's pro forma net earnings and
stockholders' equity on a per share basis while decreasing pro forma net
earnings and stockholder's equity on an aggregate basis. For a presentation of
the effects of such changes see "Pro Forma Data."
SUBSCRIPTION OFFERING AND SUBSCRIPTION RIGHTS
In accordance with the Plan of Conversion, rights to subscribe for the
purchase of Common Stock have been granted under the Plan of Conversion to the
following persons in the following order of descending priority: (1) depositors
whose deposits in qualifying accounts in the Bank totaled $50 or more as of
December 31, 1994 ("Eligible Account Holders"), (2) the Employee Plans, (3)
depositors whose deposits in qualifying accounts in the Bank totaled $50 or more
as of September 30, 1996, other than (i) those members who would otherwise
qualify as Eligible Account Holders or (ii) directors or officers of the Bank or
their Associates (as defined under "--Limitations on Common Stock Purchases")
("Supplemental Eligible Account Holders"), (4) members of the Bank, consisting
of depositors of the Bank as of October 31, 1996, the Voting Record Date, and
borrowers from the Bank as of July 1, 1991 whose loans continue to be
outstanding as of the Voting Record Date, other than Eligible Account Holders or
Supplemental Eligible Account Holders ("Other Members"), and (5) employees and
officers of the Bank, other than Eligible Account Holders, Supplemental Eligible
Account Holders and Other Members, ("Bank Employees"). All subscriptions
received will be subject to the availability of Common Stock after satisfaction
of all subscriptions of all persons having prior rights in the Subscription
Offering and to the maximum and minimum purchase limitations set forth in the
Plan of Conversion and as described below under "--Limitations on Common Stock
Purchases."
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PRIORITY 1: ELIGIBLE ACCOUNT HOLDERS. Each Eligible Account Holder will
receive, without payment therefor, first priority, nontransferable subscription
rights to subscribe for in the Subscription Offering up to the greater of (i)
the amount permitted to be purchased in the Community Offering, which amount is
currently $150,000 of the Common Stock offered, (ii) one-tenth of one percent
(0.10%) of the total offering of shares of Common Stock or (iii) fifteen times
the product (rounded down to the next whole number) obtained by multiplying the
total number of shares of Common Stock to be issued by a fraction of which the
numerator is the amount of the Eligible Account Holder's qualifying deposit and
the denominator is the total amount of qualifying deposits of all Eligible
Account Holders, in each case on the Eligibility Record Date, subject to the
overall maximum and minimum purchase limitations and exclusive of an increase in
the number of shares issued pursuant to an increase in the Estimated Price Range
of up to 15%. See "--Limitations on Common Stock Purchases."
In the event that Eligible Account Holders exercise subscription rights for
a number of shares in excess of the total number of shares eligible for
subscription, the shares will be allocated so as to permit each subscribing
Eligible Account Holder to purchase a number of shares sufficient to make such
Eligible Account Holder's total allocation equal to the lesser of 100 shares or
the number of shares subscribed for. Thereafter, unallocated shares will be
allocated among the remaining subscribing Eligible Account Holders whose
subscriptions remain unfilled in the proportion that the amounts of their
respective qualifying deposits bear to the total amount of qualifying deposits
of all remaining Eligible Account Holders whose subscriptions remain unfilled,
exclusive of any increase in the shares issued pursuant to an increase in the
Estimated Price Range of up to 15%.
To ensure proper allocation of stock, each Eligible Account Holder must list
on his or her stock order form all accounts in which such Eligible Account
Holder has an ownership interest. Failure to list an account could result in
fewer shares being allocated than if all accounts had been disclosed. The
subscription rights of Eligible Account Holders who are also directors or
executive officers of the Bank or their associates will be subordinated to the
subscription rights of other Eligible Account Holders to the extent attributable
to increased deposits in the one-year period preceding the Eligibility Record
Date.
PRIORITY 2: THE EMPLOYEE PLANS. To the extent that there are sufficient
shares remaining after satisfaction of the subscriptions by Eligible Account
Holders, the Employee Plans, including the ESOP, will receive, without payment
therefor, second priority, nontransferable subscription rights or, in the event
of any increase in the number of shares of Common Stock to be issued in the
Conversion after the date hereof as a result of any increase of up to 15% in the
maximum of the Estimated Price Range, first priority with respect to such
increase to the extent necessary to fill the subscription of the Employee Plans,
nontransferable subscription rights to purchase up to 10% of the Common Stock
issued in the Conversion, subject to the purchase limitations set forth in the
Plan of Conversion and as described below under " -- Limitations on Common Stock
Purchases." As an Employee Plan, the ESOP intends to purchase 8% of the shares
to be issued in the Conversion, or 129,200 shares and 174,800 shares, based on
the issuance of 1,615,000 shares and 2,185,000, respectively. Subscriptions by
the ESOP will not be aggregated with shares of Common Stock purchased directly
by or which are otherwise attributable to any other participants in the
Subscription and Community Offerings, including subscriptions of any of the
Bank's directors, officers, employees or associates thereof. See "Management of
the Bank--Benefits--Employee Stock Ownership Plan and Trust."
PRIORITY 3: SUPPLEMENTAL ELIGIBLE ACCOUNT HOLDERS. Each Supplemental
Eligible Account Holder will receive, without payment therefor, third priority,
nontransferable subscription rights to subscribe for in the Subscription
Offering up to the greater of (i) the amount permitted to be purchased in the
Community Offering, which amount is currently $150,000 of the Common Stock
offered, (ii) one-tenth of one percent (0.10%) of the total offering of shares
of Common Stock or (iii) fifteen times the product (rounded down to the next
whole number) obtained by multiplying the total number of shares of Common Stock
to be issued by a fraction of which the numerator is the amount of the
Supplemental Eligible Account Holder's qualifying deposit and the denominator is
the total amount of qualifying deposits of all Supplemental
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Eligible Account Holders, in each case on the Supplemental Eligibility Record
Date, subject to the overall purchase limitation and exclusive of any increase
in the shares issued pursuant to an increase in the Estimated Price Range of up
to 15%. See "--Limitations on Common Stock Purchases."
In the event that Supplemental Eligible Account Holders exercise
subscription rights for a number of shares in excess of the total number of
shares eligible for subscription, the shares will be allocated so as to permit
each subscribing Supplemental Eligible Account Holder, to the extent possible,
to purchase a number of shares sufficient to make such Supplemental Eligible
Account Holder's total allocation equal to the lesser of 100 shares or the
number of shares subscribed for. Thereafter, unallocated shares will be
allocated among the remaining subscribing Supplemental Eligible Account Holders
whose subscriptions remain unfilled in the proportion that the amounts of their
respective qualifying deposits bear to the total amount of qualifying deposits
of all remaining Supplemental Eligible Account Holders whose subscriptions
remain unfilled, exclusive of any increase in the shares issued pursuant to an
increase in the Estimated Price Range of up to 15%.
To ensure proper allocation of stock, each Supplemental Eligible Account
Holder must list on his or her stock order form all accounts in which such
Supplemental Eligible Account Holder has an ownership interest. Failure to list
an account could result in fewer shares being allocated than if all accounts had
been disclosed. The subscription rights received by Eligible Account Holders
will be applied in partial satisfaction of the subscription rights to be
received as a Supplemental Eligible Account Holder.
PRIORITY 4: OTHER MEMBERS. To the extent that there are sufficient shares
remaining after satisfaction of subscriptions by the Eligible Account Holders,
the Employee Plans and the Supplemental Eligible Account Holders, each Other
Member will receive, without payment therefor, fourth priority nontransferable
subscription rights to subscribe for Common Stock in the Subscription Offering
up to (i) the greater of the amount permitted to be purchased in the Community
Offering, which amount is currently $150,000 of the Common Stock offered, or
(ii) one-tenth of one percent (0.10%) of the total offering of shares of Common
Stock, subject to the overall purchase limitation and exclusive of any increase
in the shares issued pursuant to an increase in the Estimated Price Range of up
to 15%.
In the event that Other Members exercise subscription rights for a number of
shares in excess of the total number of shares eligible for subscription, the
shares will be allocated so as to permit each subscribing Other Member, to the
extent possible, to purchase a number of shares sufficient to make such Other
Members' total allocation equal to the lesser of 100 shares or the number of
shares subscribed for. Thereafter, unallocated shares will be allocated among
the remaining subscribing Other Members whose subscriptions remain unfilled on a
100 share per order basis until all such orders have been filled or the
remaining shares have been allocated.
PRIORITY 5: BANK EMPLOYEES. To the extent that there are sufficient shares
remaining after satisfaction of subscriptions by the Eligible Account Holders,
the Employee Plans, the Supplemental Eligible Account Holders and Other Members,
each Bank Employee will receive, without payment therefor, fifth priority
nontransferable subscription rights to subscribe for Common Stock in the
Subscription Offering up to (i) the greater of the amount permitted to be
purchased in the Community Offering, which amount is currently $150,000 of the
Common Stock offered, or (ii) one-tenth of one percent (0.10%) of the total
offering of shares of Common Stock, subject to the overall purchase limitation
and exclusive of any increase in the shares issued pursuant to an increase in
the Estimated Price Range of up to 15%.
In the event that Bank Employees exercise subscription rights for a number
of shares in excess of the total number of shares eligible for subscription, the
shares will be allocated so as to permit each subscribing Bank Employee, to the
extent possible, to purchase a number of shares sufficient to make such Bank
Employee's total allocation equal to the lesser of 100 shares or the number of
shares subscribed for. Thereafter, unallocated shares will be allocated among
the remaining subscribing Bank Employees whose subscriptions remain unfilled on
a 100 share per order basis until all such orders have been filled or the
remaining shares have been allocated.
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EXPIRATION DATE FOR THE SUBSCRIPTION OFFERING. The Subscription Offering
will expire at 12:00 Noon, Central Time, on December 12, 1996, unless extended
for up to 45 days by the Bank or such additional periods with the approval of
the OTS. Subscription rights which have not been exercised prior to the
Expiration Date will become void.
The Bank will not execute orders until all shares of Common Stock have been
subscribed for or otherwise sold. If all shares have not been subscribed for or
sold within 45 days after the Subscription Expiration Date, unless such period
is extended with the consent of the OTS, all funds delivered to the Bank
pursuant to the Subscription Offering will be returned with interest promptly to
the subscribers and all withdrawal authorizations will be cancelled. If an
extension beyond the 45-day period following the Subscription Expiration Date is
granted, the Bank will notify subscribers of the extension of time and of any
rights of subscribers to modify or rescind their subscriptions. Such extensions
may not go beyond December 17, 1998.
COMMUNITY OFFERING
To the extent that shares remain available for purchase after satisfaction
of all subscriptions of the Eligible Account Holders, the Employee Plans, the
Supplemental Eligible Account Holders, Other Members, and Bank Employees, the
Bank has determined to offer shares pursuant to the Plan to certain members of
the general public. Any excess of shares available will be available for
purchase by the general public, with natural persons residing in Cook and Lake
counties in Illinois (such natural persons referred to as "Preferred
Subscribers") having first priority, subject to the right of the Company and the
Bank, to accept or reject any such orders, in whole or in part, in its sole
discretion. Such persons, together with associates of and persons acting in
concert with such persons, may purchase up to $150,000 of Common Stock subject
to the maximum purchase limitation. See "--Limitations on Common Stock
Purchases." This amount may be increased to up to a maximum of 5% or decreased
to less than $150,000 of Common Stock at the discretion of the Company and the
Bank. THE OPPORTUNITY TO SUBSCRIBE FOR SHARES OF COMMON STOCK IN THE COMMUNITY
OFFERING CATEGORY IS SUBJECT TO THE RIGHT OF THE BANK AND THE COMPANY, IN THEIR
DISCRETION, TO ACCEPT OR REJECT ANY SUCH ORDERS IN WHOLE OR IN PART EITHER AT
THE TIME OF RECEIPT OF AN ORDER OR AS SOON AS PRACTICABLE FOLLOWING THE
EXPIRATION DATE OF THE SUBSCRIPTION OFFERING. IF THE COMPANY REJECTS A
SUBSCRIPTION IN PART, THE SUBSCRIBER WILL NOT HAVE THE RIGHT TO CANCEL THE
REMAINDER OF HIS OR HER SUBSCRIPTION.
Subject to the foregoing, if the amount of stock remaining is insufficient
to fill the orders of Preferred Subscribers after completion of the Subscription
and Community Offerings, such stock will be allocated first to each Preferred
Subscriber whose order is accepted by the Bank, in an amount equal to the lesser
of 100 shares or the number of shares subscribed for by each such Preferred
Subscriber, if possible. Thereafter, unallocated shares will be allocated among
the Preferred Subscribers whose order remains unsatisfied on a 100 shares per
order basis until all such orders have been filled or the remaining shares have
been allocated. To the extent that there are shares remaining after all
subscriptions by Preferred Subscribers have been filled, shares will be
allocated, applying the same allocation as described above for Preferred
Subscribers, to natural persons maintaining an office or a residence in the
State of Illinois. Thereafter, if there are any shares remaining, shares will be
allocated to other persons of the general public who purchase in the Community
Offering applying the same allocation described above for Preferred Subscribers.
In offering the unsubscribed-for shares to the public in the Community
Offering, a number of shares equal to the lesser of (i) 25% of the Common Stock
offered in the Conversion or (ii) the Common Stock not subscribed for in the
Subscription Offering, at the option of the Company and the Bank, may be
initially reserved for certain institutional investors, although no such
institutional investors have been selected.
PERSONS IN NON-QUALIFIED STATES OR FOREIGN COUNTRIES. The Company and the
Bank will make reasonable efforts to comply with the securities laws of all
states in the United States in which persons entitled to
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subscribe for stock pursuant to the Plan reside. However, the Bank and the
Company are not required to offer stock in the Subscription Offering to any
person who resides in a foreign country or resides in a state of the United
States with respect to which the Company or the Bank determines that compliance
with the securities laws of such state would be impracticable for reasons of
cost or otherwise, including but not limited to, a request that the Company and
the Bank or their officers, directors or trustees register as a broker, dealer,
salesman or selling agent, under the securities laws of such state, or a request
to register or otherwise qualify the subscription rights or Common Stock for
sale or submit any filing with respect thereto in such state. Where the number
of persons eligible to subscribe for shares in one state is small, the Bank and
the Company will base their decision as to whether or not to offer the Common
Stock in such state on a number of factors, including the size of accounts held
by account holders in the state, the cost of registering or qualifying the
shares or the need to register the Company, its officers, directors or employees
as brokers, dealers or salesmen.
MARKETING AND UNDERWRITING ARRANGEMENTS
The Bank and the Company have engaged Hovde as a financial and marketing
advisor in connection with the offering of the Common Stock and Hovde has agreed
to use its best efforts to assist the Company with the solicitation of
subscriptions and purchase orders for shares of Common Stock in the Offerings.
Based upon negotiations between the Bank and the Company, Hovde has received a
management fee of $37,500 and will receive a fee for services provided in
connection with the Offerings equal to 1.75% of the aggregate Purchase Price of
Common Stock sold in the Subscription Offering to Eligible Account Holders and
other current depositors of the Bank and 3.00% of the aggregate Purchase Price
of the Common Stock sold in the Community Offering and in the Syndicated
Community Offering. No fees will be paid to Hovde with respect to any shares of
Common Stock purchased by any director, executive officer or employee of the
Bank or the Company or members of their immediate families or the ESOP. In the
event of a Syndicated Community Offering, Hovde will negotiate with the Company
for the receipt of an additional fee to be remitted to selected dealers under
one or more selected dealer agreements to be entered into by Hovde with certain
dealers; PROVIDED, HOWEVER, that the aggregate fees payable to Hovde and any
selected dealers in connection with any Syndicated Community Offering will not
exceed 7% of the aggregate Purchase Price of the Common Stock sold in the
Syndicated Community Offering. Fees to Hovde and to any other broker-dealer may
be deemed to be underwriting fees and Hovde and such broker-dealers may be
deemed to be underwriters. Hovde will also be reimbursed for its reasonable
out-of-pocket expenses, including legal fees, in an amount not to exceed
$45,000. Notwithstanding the foregoing, in the event the Offerings are not
consummated or Hovde ceases, under certain circumstances after the subscription
solicitation activities are commenced, to provide assistance to the Company,
Hovde will be entitled to reimbursement for its reasonable out-of-pocket
expenses as described above. The Company and the Bank have agreed to indemnify
Hovde for costs and expenses in connection with certain claims or liabilities
related to or arising out of the services to be provided by Hovde pursuant to
its engagement by the Bank and the Company as financial advisor in connection
with the Conversion, including certain liabilities under the Securities Act.
Total marketing fees to Hovde are estimated to be $221,000 and $313,000 at the
minimum and the maximum of the Estimated Price Range, respectively. See "Pro
Forma Data" for the assumptions used to arrive at these estimates.
The Bank also has engaged Crowe Chizek and Company, LLP ("Crowe Chizek") as
its conversion agent. Pursuant to such engagement, Crowe Chizek will perform
conversion and records management services for the Bank in the Conversion and
will receive a fee for this service of $12,500, plus reimbursement of reasonable
out-of-pocket expenses, to be billed to the Bank, and indemnification against
certain liabilities.
Directors and executive officers of the Company and the Bank may participate
in the solicitation of offers to purchase Common Stock. Questions of prospective
purchasers will be directed to executive officers or registered representatives.
Other employees of the Bank may participate in the Offerings in
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ministerial capacities or providing clerical work in effecting a sales
transaction. Such other employees have been instructed not to solicit offers to
purchase Common Stock or provide advice regarding the purchase of Common Stock.
The Company will rely on Rule 3a4-1 under the Exchange Act, and sales of Common
Stock will be conducted within the requirements of Rule 3a4-1, so as to permit
officers, directors and employees to participate in the sale of Common Stock. No
officer, director or employee of the Company or the Bank will be compensated in
connection with his or her participation by the payment of commissions or other
remuneration based either directly or indirectly on the transactions in the
Common Stock.
PROCEDURE FOR PURCHASING SHARES IN SUBSCRIPTION AND COMMUNITY OFFERINGS
To ensure that each purchaser receives a Prospectus at least 48 hours prior
to the respective expiration dates for the Offerings, in accordance with Rule
15c2-8 of the Exchange Act, no Prospectus will be mailed any later than five
days prior to such date or hand delivered any later than two days prior to such
date. Execution of the stock order form will confirm receipt or delivery in
accordance with Rule 15c2-8. Stock order forms will only be distributed with a
Prospectus and a certification form requiring each prospective investor to
acknowledge, among other things, that the shares of Common Stock are not insured
by the Bank, the FDIC or any other governmental agency and that such prospective
investor has received a copy of this Prospectus, which, among other things,
describes the risks involved in the investment of the Common Stock.
To purchase shares in the Subscription and Community Offerings, an executed
order form with the required payment for each share subscribed for, or with
appropriate authorization for withdrawal from the Bank's deposit account (which
may be given by completing the appropriate blanks in the stock order form), must
be received by the Bank at its office by 12:00 Noon, Central Time, on the
Expiration Date. Stock order forms which are not received by such time or are
executed defectively or are received without full payment (or appropriate
withdrawal instructions) are not required to be accepted. In addition, the
Company and Bank are not obligated to accept orders submitted on photocopied or
facsimiled order forms and will not accept order forms unaccompanied by an
executed certification form. The Company and the Bank have the right to waive or
permit the correction of incomplete or improperly executed forms, but do not
represent that they will do so. Once received, an executed order form may not be
modified, amended or rescinded without the consent of the Bank unless the
Conversion has not been completed within 45 days after the end of the
Subscription and Community Offerings, unless such period has been extended.
In order to ensure that Eligible Account Holders, Supplemental Eligible
Account Holders and Other Members are properly identified as to their stock
purchase priorities, depositors as of the Eligibility Record Date (December 31,
1994) and/or the Supplemental Eligibility Record Date (September 30, 1996)
and/or the Voting Record Date (October 31, 1996) and borrowers as of the Voting
Record Date whose loans have been outstanding since July 1, 1991 must list all
accounts on the stock order form giving all names in each account and the
account numbers.
Payment for subscriptions may be made (i) in cash if delivered in person to
the office of the Bank, (ii) by check, bank draft or money order, or (iii) by
authorization of withdrawal from deposit accounts maintained with the Bank. No
wire transfers will be accepted. Interest will be paid on payments made by cash,
check, savings bank draft or money order at the Bank's passbook rate of interest
from the date payment is received until the completion or termination of the
Conversion. If payment is made by authorization of withdrawal from deposit
accounts, the funds authorized to be withdrawn from a deposit account will
continue to accrue interest at the contractual rates until completion or
termination of the Conversion, but a hold will be placed on such funds, thereby
making them unavailable to the depositor until completion or termination of the
Conversion. Notwithstanding the foregoing, the Company shall have the right, in
its sole discretion, to permit institutional investors to submit irrevocable
orders together with a legally binding commitment for payment and to thereafter
pay for the shares of Common Stock for which they subscribe in the Community
Offering at any time prior to 48 hours before the completion of the Conversion.
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If a subscriber authorizes the Bank to withdraw the amount of the purchase
price from such subscriber's deposit account, the Bank will do so as of the
effective date of the Conversion. The Bank will waive any applicable penalties
for early withdrawal from certificate accounts. If the remaining balance in a
certificate account is reduced below the applicable minimum balance requirement
at the time that the funds actually are transferred under the authorization, the
certificate will be cancelled at the time of the withdrawal, without penalty,
and the remaining balance will be converted into a passbook account and will
earn interest at the passbook rate. Upon completion of the Conversion, funds
withdrawn from depositors' accounts for stock purchases will no longer be
insured by the FDIC.
The ESOP will not be required to pay for the shares subscribed for at the
time it subscribes but, rather, may pay for such shares of Common Stock
subscribed for at the Purchase Price upon consummation of the Offerings;
PROVIDED, that there is in force from the time of its subscription until such
time, a loan commitment acceptable to the Company from an unrelated financial
institution or the Company to lend to the ESOP, at such time, the aggregate
Purchase Price of the shares for which it subscribed. The Company intends to
provide such a loan to the ESOP.
Owners of self-directed Individual Retirement Accounts ("IRAs") may use the
assets of such IRAs to purchase shares of Common Stock in the Subscription and
Community Offerings, provided that such IRAs are not maintained at the Bank.
Persons with IRAs maintained at the Bank must have their accounts transferred to
an unaffiliated institution or broker to purchase shares of Common Stock in the
Subscription and Community Offerings. In addition, the provisions of ERISA and
IRS regulations require that officers, directors and ten percent shareholders
who use self-directed IRA funds to purchase shares of Common Stock in the
Subscription and Community Offerings make such purchases for the exclusive
benefit of the IRAs.
Certificates representing shares of Common Stock purchased will be mailed to
purchasers at the last address of such persons appearing on the records of the
Bank, or to such other address as may be specified in properly completed order
forms, as soon as practicable following consummation of the sale of all shares
of Common Stock. Any certificates returned as undeliverable will be disposed of
in accordance with applicable law.
RESTRICTIONS ON TRANSFER OF SUBSCRIPTION RIGHTS AND SHARES OF COMMON STOCK
Prior to the completion of the Conversion, the OTS conversion regulations
prohibit any person with subscription rights, including the Eligible Account
Holders, the Employee Plans, the Supplemental Eligible Account Holders, Other
Members and Bank Employees, from transferring or entering into any agreement or
understanding to transfer the legal or beneficial ownership of the subscription
rights issued under the Plan or the shares of Common Stock to be issued upon
their exercise. Such rights may be exercised only by the person to whom they are
granted and only for such person's account. Each person exercising such
subscription rights will be required to certify that such person is purchasing
shares solely for such person's own account and that such person has no
agreement or understanding regarding the sale or transfer of such shares. The
regulations also prohibit any person from offering or making an announcement of
an offer or an intent to make an offer to purchase such subscription rights or
shares of Common Stock prior to the completion of the Conversion.
THE BANK AND THE COMPANY WILL PURSUE ANY AND ALL LEGAL AND EQUITABLE
REMEDIES (INCLUDING FORFEITURE) IN THE EVENT THEY BECOME AWARE OF THE TRANSFER
OF SUBSCRIPTION RIGHTS AND WILL NOT HONOR ORDERS KNOWN BY THEM TO INVOLVE THE
TRANSFER OF SUCH RIGHTS.
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SYNDICATED COMMUNITY OFFERING
As a final step in the Conversion, the Plan provides that, if feasible, all
shares of Common Stock not purchased in the Subscription Offering or the
Community Offering, if any, will be offered for sale to the general public in a
Syndicated Community Offering through a syndicate of registered broker-dealers
to be formed and managed by Hovde acting as agent of the Company. There are no
known agreements between Hovde and any broker-dealer in connection with a
possible Syndicated Community Offering. As an alternative to a Syndicated
Community Offering, the Company and the Bank may instead elect to offer for sale
such remaining shares to or through underwriters in a public offering, as
described under "--Public Offering Alternative." The Company and the Bank have
reserved the right to reject orders in whole or in part in their sole discretion
in the Syndicated Community Offering. If the Company or the Bank rejects an
order in part, the subscriber will not have the right to cancel the remainder of
his or her subscription. Neither Hovde nor any registered broker-dealer shall
have any obligation to take or purchase any shares of the Common Stock in the
Syndicated Community Offering; however, Hovde has agreed to use its best efforts
in the sale of shares in the Syndicated Community Offering.
The price at which Common Stock is sold in the Syndicated Community Offering
will be determined as described above under "--Stock Pricing." Subject to
overall purchase limitations, no person, together with any associate or group of
persons acting in concert, will be permitted to subscribe in the Syndicated
Community Offering for more than $150,000 of the Common Stock offered in the
Conversion; PROVIDED, HOWEVER, that shares of Common Stock purchased in the
Community Offering by any persons, together with associates of or persons acting
in concert with such persons, will be aggregated with purchases in the
Syndicated Community Offering and be subject to a maximum purchase limitation of
$150,000 of the Common Stock offered.
Payments made in the form of a check, bank draft, money order or in cash
will earn interest at the Bank's passbook rate of interest from the date such
payment is actually received by the Bank until completion or termination of the
Conversion.
In addition to the foregoing, if a syndicate of broker-dealers ("selected
dealers") is formed to assist in the Syndicated Community Offering, a purchaser
may pay for his or her shares with funds held by or deposited with a selected
dealer. If an order form is executed and forwarded to the selected dealer or if
the selected dealer is authorized to execute the order form on behalf of a
purchaser, the selected dealer is required to forward the order form and funds
to the Bank for deposit in a segregated account on or before noon of the
business day following receipt of the order form or execution of the order form
by the selected dealer. Alternatively, selected dealers may solicit indications
of interest from their customers to place orders for shares. Such selected
dealers shall subsequently contact their customers who indicated an interest and
seek their confirmation as to their intent to purchase. Those indicating an
intent to purchase shall execute order forms and forward them to their selected
dealer or authorize the selected dealer to execute such forms. The selected
dealer will acknowledge receipt of the order to its customer in writing on the
following business day and will debit such customer's account on the third
business day after the customer has confirmed his or her intent to purchase (the
"debit date") and on or before noon of the next business day following the debit
date, will send order forms and funds to the Bank for deposit in a segregated
account. Although purchasers' funds are not required to be in their accounts
with selected dealers until the debit date, in the event that such alternative
procedure is employed once a confirmation of an intent to purchase has been
received by the selected dealer, the purchaser has no right to rescind his or
her order.
Certificates representing shares of Common Stock purchased, together with
any refund due, will be mailed to purchasers at the address specified in the
order form, as soon as practicable following consummation of the sale of the
Common Stock. Any certificates returned as undeliverable will be disposed of in
accordance with applicable law.
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The Syndicated Community Offering will terminate no more than 45 days
following the Subscription Expiration Date, unless extended by the Company with
the approval of the OTS. Such extensions may not be beyond December 17, 1998.
See "--Stock Pricing" above for a discussion of rights of subscribers, if any,
in the event an extension is granted.
PUBLIC OFFERING ALTERNATIVE
The Company anticipates that the shares of Common Stock will be sold in the
Subscription Offering and, if necessary, in the Community Offering. However,
shares of Common Stock not sold in the Subscription Offering or the Community
Offering may, as an alternative to a Syndicated Community Offering as described
above, be offered for sale by the Company to or through underwriters (the
"Public Offering"). Certain provisions restricting the purchase and transfer of
Common Stock shall not be applicable to sales to underwriters for purposes of
such Public Offering. Any such underwriter shall agree to purchase such shares
from the Company with a view to reoffering them to the general public, use their
best efforts to sell, for the account of the Company, such shares to the general
public or a combination of the preceding two provisions, subject to certain
terms and conditions described in the Plan. If the Public Offering is utilized,
then the Company will amend the Registration Statement, of which this Prospectus
is a part, to reflect the specific terms of such Public Offering alternative,
including, without limitation, the terms of any underwriting agreements,
commission structure and plan of distribution.
LIMITATIONS ON COMMON STOCK PURCHASES
The Plan includes the following limitations on the number of shares of
Common Stock which may be purchased during the Conversion:
(1) No subscription for fewer than 25 shares will be accepted;
(2) Each Eligible Account Holder may subscribe for and purchase Common
Stock in the Subscription Offering in an amount up to the greater of (a) the
amount permitted to be purchased in the Community Offering, currently
$150,000 of the Common Stock offered, (b) one-tenth of one percent (0.10%)
of the total offering of shares of Common Stock or (c) 15 times the product
(rounded down to the net whole number) obtained by multiplying the total
number of shares of Common Stock to be issued in the Conversion by a
fraction of which the numerator is the amount of the qualifying deposit of
the Eligible Account Holder and the denominator is the total amount of
qualifying deposits of all Eligible Account Holders in each case on the
Eligibility Record Date subject to the overall limitation in (9) below and
exclusive of an increase in the total number of shares issued due to an
increase in the Estimated Price Range of up to 15%;
(3) The Employee Plans are permitted to purchase up to 10% of the shares
of Common Stock issued in the Conversion, including shares issued in the
event of an increase in the Estimated Price Range of up to 15% and as an
Employee Plan, the ESOP intends to purchase 8% of the shares of Common Stock
issued in the Conversion;
(4) Each Supplemental Eligible Account Holder may subscribe for and
purchase in the Subscription Offering in an amount up to the greater of (a)
the amount permitted to be purchased in the Community Offering, currently
$150,000 of the Common Stock Offered, (b) one-tenth of one percent (0.10%)
of the total offering of shares of Common Stock or (c) 15 times the product
(rounded down to the net whole number) obtained by multiplying the total
number of shares of Common Stock to be issued by a fraction of which the
numerator is the amount of the qualifying deposit of the Supplemental
Eligible Account Holder and the denominator is the total amount of
qualifying deposits of all Supplemental Eligible Account Holders in each
case on the Supplemental Eligibility Record Date subject to the overall
limitation in (9) below and exclusive of an increase in the total number of
shares issued due to an increase in the Estimated Price Range of up to 15%;
PROVIDED, that the subscription
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rights received as an Eligible Account Holder will be applied in partial
satisfaction of the subscription rights to be received as a Supplemental
Eligible Account Holder;
(5) Each Other Member may subscribe for and purchase Common Stock in the
Subscription Offering in an amount up to the greater of the amount permitted
to be purchased in the Community Offering, currently $150,000 of the Common
Stock offered, or one-tenth of one percent (0.10%) of the total offering of
shares of Common Stock subject to the overall limitation in (9) below and
exclusive of an increase in the total number of shares issued due to an
increase in the Estimated Price Range of up to 15%;
(6) Each Bank Employee may subscribe for and purchase Common Stock in
the Subscription Offering in an amount up to the greater of the amount
permitted to be purchased in the Community Offering, currently $150,000 of
the Common Stock offered, or one-tenth of one percent (0.10%) of the total
offering of shares of Common Stock subject to the overall limitation in (9)
below and exclusive of an increase in the total number of shares issued due
to an increase in the Estimated Price Range of up to 15%;
(7) Persons purchasing shares of Common Stock in the Community Offering,
together with associates of and groups of persons acting in concert with
such persons, may purchase Common Stock in the Community Offering in an
amount up to $150,000 of the Common Stock offered in the Conversion subject
to the overall limitation in (9) below;
(8) Persons purchasing shares of Common Stock in the Syndicated
Community Offering, or the Public Offering alternative (exclusive of
underwriters), together with associates of and persons acting in concert
with such persons, may purchase Common Stock in the Syndicated Offering in
an amount up to $150,000 of the shares of Common Stock offered in the
Conversion subject to the overall limitation in (9) below; PROVIDED, that
shares of Common Stock purchased in the Community Offering by any persons,
together with associates of and persons acting in concert with such persons,
will be aggregated with purchases by such persons in the Syndicated
Community Offering in applying $150,000 purchase limitation;
(9) Eligible Account Holders, Supplemental Eligible Account Holders,
Other Members, Bank Employees and certain members of the general public may
purchase stock in the Community Offering and Syndicated Community Offering
or Public Offering alternative subject to the purchase limitations described
in (7) and (8) above; PROVIDED, that, except for the Employee Plans, the
maximum number of shares of Common Stock subscribed for or purchased in all
categories of the Conversion by any person, together with associates of and
groups of persons acting in concert with such persons, shall not exceed 1.0%
of the shares of Common Stock offered in the Conversion; and
(10) The directors and officers of the Bank and their associates in the
aggregate, excluding purchases by the Employee Plans, may purchase up to the
maximum number of shares offered for sale in the Conversion as provided by
Section 563b.3(c)(8) of the OTS Regulations. Based on the Bank's total
assets of $194.6 million at July 31, 1996, such aggregate purchase
limitation is approximately 31.8% of the shares of Common Stock offered in
the Conversion.
Subject to any required regulatory approval and the requirements of
applicable laws and regulations, but without further approval of the members of
the Bank, both the individual amount permitted to be subscribed for and the
overall maximum purchase limitation may be increased to up to a maximum of 5% of
the shares offered in the Offering at the sole discretion of the Company and the
Bank. It is currently anticipated that the overall maximum purchase limitation
may be increased if, after a Community Offering, the Company has not received
subscriptions for an aggregate amount equal to at least the minimum of the
Estimated Price Range. If such amount is increased, subscribers for the maximum
amount will be, and certain other large subscribers in the sole discretion of
the Company and the Bank may be, given the opportunity to increase their
subscriptions up to the then applicable limit. In addition, the Boards of
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Directors of the Company and the Bank may, in their sole discretion, increase
the maximum purchase limitation referred to above up to 9.99% of the shares
offered in the Offering; PROVIDED, that, orders for shares exceeding 5% of the
shares being offered in the Subscription and Community Offerings shall not
exceed, in the aggregate, 10% of the shares being offered in the Subscription
and Community Offerings. Requests to purchase additional shares of Common Stock
under this provision will be determined by the Boards of Directors and, if
approved, allocated on a pro rata basis giving priority in accordance with the
priority rights set forth in the Plan and described herein.
The overall maximum purchase limitation may not be reduced to less than
1.0%, and the individual amount permitted to be subscribed for in the Offerings
may not be reduced by the Bank to less than $150,000 of the Common Stock
offered. An individual Eligible Account Holder, Supplemental Eligible Account
Holder, Other Member or Bank Employee may not purchase individually in the
Subscription Offering the overall maximum purchase limit of 1.0% of the shares
offered, but may make such purchase, together with associates of and persons
acting in concert with such person, by also purchasing in other available
categories of the Conversion, subject to availability of shares and the maximum
overall purchase limit for purchases in the Conversion.
In the event of an increase in the total number of shares offered in the
Conversion due to an increase in the Estimated Price Range of up to 15% (the
"Adjusted Maximum"), the additional shares will be allocated in the following
order or priority in accordance with the Plan: (i) to fill the Employee Plans'
subscription of up to 10% of the Adjusted Maximum number of shares; (ii) in the
event that there is an oversubscription by Eligible Account Holders, to fill
unfulfilled subscriptions of Eligible Account Holders exclusive of the Adjusted
Maximum; (iii) in the event that there is an oversubscription by Supplemental
Eligible Account Holders, to fill unfulfilled subscriptions of Supplemental
Eligible Account Holders, exclusive of the Adjusted Maximum; (iv) in the event
that there is an oversubscription by Other Members, to fill unfulfilled
subscriptions of Other Members exclusive of the Adjusted Maximum; (v) in the
event that there is an oversubscription by Bank Employees, to fill unfulfilled
subscriptions of Bank Employees, exclusive of the Adjusted Maximum; and (vi) to
fill unfulfilled subscriptions in the Community Offering to the extent possible,
exclusive of the Adjusted Maximum, with preference to Preferred Subscribers.
The term "Associate" of a person is defined to mean: (i) any corporation or
organization (other than the Company, the Bank or a majority-owned subsidiary of
the Bank) of which such person is an officer, partner or is directly or
indirectly, either alone or with one or more members of his or her immediate
family, the beneficial owner of 10% or more of any class of equity securities;
(ii) any trust or other estate in which such person has a substantial beneficial
interest or as to which such person serves as trustee or in a similar fiduciary
capacity, except that the term "Associate" does not include any employee stock
benefit plan maintained by the Company or the Bank in which a person has a
substantial beneficial interest or serves as a trustee or in a similar fiduciary
capacity, and except that, for purposes of aggregating total shares that may be
acquired or held by officers and directors and their Associates, the term
"Associate" does not include any tax-qualified employee stock benefit plan; and
(iii) any relative or spouse of such person, or any relative of such spouse, who
has the same home as such person or who is a director or officer of the Company
or the Bank. Directors and officers are not treated as associates of each other
solely by virtue of holding such positions. For a further discussion of
limitations on purchases of a converting institution's stock at the time of
Conversion and subsequent to Conversion, see "--Certain Restrictions on Purchase
or Transfer of Shares After Conversion," "Management of the Bank--Subscriptions
by Executive Officers and Directors" and "Restrictions on Acquisition of the
Company and the Bank."
CERTAIN RESTRICTIONS ON PURCHASE OR TRANSFER OF SHARES AFTER CONVERSION
All shares of Common Stock purchased in connection with the Conversion by a
director or an executive officer of the Bank will be subject to a restriction
that the shares not be sold for a period of one year following the Conversion,
except in the event of the death of such director or executive officer. Each
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certificate for restricted shares will bear a legend giving notice of this
restriction on transfer, and instructions will be issued to the effect that any
transfer within such time period of any certificate or record ownership of such
shares other than as provided above is a violation of the restriction. Any
shares of Common Stock issued at a later date as a stock dividend, stock split,
or otherwise, with respect to such restricted stock will be subject to the same
restrictions. The directors and executive officers of the Bank will also be
subject to the insider trading rules promulgated pursuant to the Exchange Act
and any other applicable requirements of the federal securities laws.
Purchases of outstanding shares of Common Stock of the Company by directors,
executive officers (or any person who was an executive officer or director of
the Bank after adoption of the Plan of Conversion) and their associates during
the three-year period following Conversion may be made only through a broker or
dealer registered with the SEC, except with the prior written approval of the
OTS. This restriction does not apply, however, to negotiated transactions
involving more than 1.0% of the Company's outstanding Common Stock or to the
purchase of stock pursuant to the Stock Option Plans to be established after the
Conversion.
Pursuant to OTS regulations, the Company will be prohibited from
repurchasing any shares of the Common Stock for three years except (i) for an
offer to all shareholders on a PRO RATA basis or (ii) for the repurchase of
qualifying shares of a director, unless the Company receives the prior approval
of the OTS. Notwithstanding the foregoing, beginning one year following
completion of the Conversion the Company may repurchase its Common Stock so long
as (i) the repurchases within the following two years are part of an open-market
program not involving greater than 5% of its outstanding capital stock during a
twelve-month period; (ii) the repurchases do not cause the Company to become
undercapitalized; and (iii) the Company provides to the Regional Director of the
OTS no later than 10 days prior to the commencement of a repurchase program
written notice containing a full description of the program to be undertaken and
such program is not disapproved by the Regional Director. However, the OTS
Regional Directors have the authority to approve stock repurchases during the
first three years after the Conversion that are in excess of these limits.
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RESTRICTIONS ON ACQUISITION OF THE COMPANY
AND THE BANK
GENERAL
The Bank's Plan of Conversion provides for the Conversion of the Bank from
the mutual to the stock form of organization and, in connection therewith, a new
Federal Stock Charter and Bylaws to be adopted by members of the Bank. The Plan
also provides for the concurrent formation of a holding company, which form of
organization may or may not be utilized at the option of the Board of Directors
of the Bank. See "The Conversion--General." In the event that the holding
company form of organization is utilized, as described below, certain provisions
in the Company's Articles of Incorporation and Bylaws and in its management
remuneration plans and agreements entered into in connection with the
Conversion, together with provisions of Illinois corporate law, may have
anti-takeover effects. In the event that the holding company form of
organization is not utilized, the Bank's Federal Stock Charter and Bylaws and
management remuneration plans and agreements entered into in connection with the
Conversion may have anti-takeover effects as described below. In addition,
regulatory restrictions may make it difficult for persons or companies to
acquire control of either the Company or the Bank.
RESTRICTIONS IN THE COMPANY'S ARTICLES OF INCORPORATION AND BYLAWS
The following discussion is a general summary of certain provisions of the
Company's Articles of Incorporation and Bylaws and certain other statutory and
regulatory provisions relating to stock ownership and transfers, the Board of
Directors and business combinations, that might have a potential "anti-takeover"
effect. The Articles of Incorporation and Bylaws of the Company are filed as
exhibits to the Registration Statement, of which this Prospectus is a part, and
the descriptions herein of such documents are qualified in their entirety by
reference to such documents. A number of provisions of the Company's Articles of
Incorporation and Bylaws deal with matters of corporate governance and certain
rights of shareholders. These provisions might have the effect of discouraging
future takeover attempts which are not approved by the Board of Directors but
which individual Company shareholders may deem to be in their best interests or
in which shareholders may receive substantial premiums for their shares over
then current market prices. As a result, shareholders who might desire to
participate in such transactions may not have an opportunity to do so. Such
provisions will also render the removal of the current Board of Directors or
management of the Company more difficult. The following description of certain
of the provisions of the Articles of Incorporation and Bylaws of the Company is
necessarily general and reference should be made in each case to such Articles
of Incorporation and Bylaws, which are incorporated herein by reference. See
"Additional Information" as to how to obtain a copy of these documents.
LIMITATION ON VOTING RIGHTS. The Articles of Incorporation of the Company
provides that shares of Common Stock that are beneficially owned, directly or
indirectly, by a person who beneficially owns in excess of 10% of the then
outstanding shares of Common Stock (the "Limit") shall be automatically
converted into shares of Excess Common Stock. Shares of Excess Common Stock are
identical to shares of Common Stock except that they are permitted only one
one-hundredth (1/100) of a vote per share. Beneficial ownership of shares
includes shares beneficially owned by such person or any of his or her
affiliates, shares which such person or his or her affiliates have the right to
acquire upon the exercise of conversion rights or options and shares as to which
such person and his or her affiliates have or share investment or voting power,
but shall not include shares beneficially owned by the ESOP or shares that are
subject to a revocable proxy and that are not otherwise beneficially owned or
deemed by the Company to be beneficially owned by such person and his or her
affiliates. The Articles of Incorporation further provides that this provision
may only be amended upon the approval of the Board of Directors or the vote of
two-thirds of the votes eligible to be cast by holders of all outstanding shares
of voting stock (after giving effect to the limitation on voting rights).
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BOARD OF DIRECTORS. The Board of Directors of the Company is divided into
three classes, each of which shall contain approximately one-third of the whole
number of members of the Board. Each class shall serve a staggered term, with
approximately one-third of the total number of directors being elected each
year. The Company's Articles of Incorporation and Bylaws provide that the size
of the Board shall be determined by a majority of the directors but shall not be
less than five nor more than 15. The Bylaws provide that any vacancy occurring
in the Board, including a vacancy created by an increase in the number of
directors or resulting from death, resignation, retirement, disqualification,
removal from office or other cause, shall be filled until the next meeting of
shareholders by a majority vote of the directors then in office. The classified
Board is intended to provide for continuity of the Board of Directors and to
make it more difficult and time consuming for a shareholder group to fully use
its voting power to gain control of the Board of Directors without the consent
of the incumbent Board of Directors of the Company. The Articles of
Incorporation of the Company provides that a director may be removed from the
Board of Directors prior to the expiration of such director's term only for
cause, upon the vote of a majority of the outstanding shares of voting stock. In
the absence of these provisions, the vote of the holders of a majority of the
shares could remove the entire Board, with or without cause, and replace it with
persons of such holders' choice.
CUMULATIVE VOTING, SPECIAL MEETINGS AND ACTION BY WRITTEN CONSENT. The
Articles of Incorporation does not provide for cumulative voting for directors.
Moreover, special meetings of shareholders of the Company may be called only by
at least three-fourths of the Board of Directors, the Chairman of the Board or
by the President of the Company. The Articles of Incorporation also provides
that any action required or permitted to be taken by the shareholders of the
Company may be taken only at an annual or special meeting and prohibits
shareholder action by written consent in lieu of a meeting.
AUTHORIZED SHARES. The Articles of Incorporation authorizes the issuance of
seventeen million two hundred thousand (17,200,000) shares of capital stock,
consisting of eight million (8,000,000) shares of Common Stock, two million
(2,000,000) shares of preferred stock (the "Preferred Stock") and seven million
two hundred thousand (7,200,000) shares of Excess Common Stock. The shares of
Common Stock and Preferred Stock were authorized in an amount greater than that
to be issued in the Conversion to provide the Company's Board of Directors with
as much flexibility as possible to effect, among other transactions, financings,
acquisitions, stock dividends, stock splits and employee stock options. However,
these additional authorized shares may also be used by the Board of Directors
consistent with its fiduciary duty to deter future attempts to gain control of
the Company. The Board of Directors also has sole authority to determine the
terms of any one or more series of Preferred Stock, including voting rights,
conversion rates, and liquidation preferences. As a result of the ability to fix
voting rights for a series of Preferred Stock, the Board has the power, to the
extent consistent with its fiduciary duty, to issue a series of Preferred Stock
to persons friendly to management in order to attempt to block a post-tender
offer merger or other transaction by which a third party seeks control, and
thereby assist management to retain its position. The Company's Board of
Directors currently has no plans for the issuance of additional shares, other
than the issuance of additional shares pursuant to the terms of the Stock
Programs and upon exercise of stock options to be issued pursuant to the terms
of the Stock Option Plans, all of which, if implemented prior to the first
anniversary of the Conversion, will be presented to shareholders for approval at
a meeting of shareholders to be held no earlier than six months after completion
of the Conversion.
SHAREHOLDER VOTE REQUIRED TO APPROVE BUSINESS COMBINATIONS WITH PRINCIPAL
SHAREHOLDERS. The Articles of Incorporation requires the approval of the
holders of at least 80% of the Company's outstanding shares of voting stock,
together with the affirmative vote of at least 50% of the Company's outstanding
shares of voting stock not beneficially owned by an Interested Shareholder (as
defined below) to approve certain "Business Combinations," as defined therein,
and related transactions. Under Illinois law, absent this provision, Business
Combinations, including mergers, consolidations and sales of all or
substantially all of the assets of a corporation must, subject to certain
exceptions, be approved by the vote of the holders of only two-thirds of the
outstanding shares of Common Stock of the Company and any other affected class
of
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stock. Under the Articles of Incorporation, at least 80% approval of
shareholders is required in connection with any transaction involving an
Interested Shareholder except (i) in cases where the proposed transaction has
been approved in advance by a majority of those members of the Company's Board
of Directors who are unaffiliated with the Interested Shareholder and were
directors prior to the time when the Interested Shareholder became an Interested
Shareholder or (ii) if the proposed transaction meets certain conditions set
forth therein which are designed to afford the shareholders a fair price in
consideration for their shares in which case, if a shareholder vote is required,
approval of only a majority of the outstanding shares of voting stock would be
sufficient. The term "Interested Shareholder" is defined to include any
individual, corporation, partnership or other entity (other than the Company or
its subsidiary or any employee benefit plan maintained by the Company or its
subsidiary) which owns beneficially or controls, directly or indirectly, 10% or
more of the outstanding shares of voting stock of the Company. This provision of
the Articles of Incorporation applies to any "Business Combination," which is
defined to include (i) any merger or consolidation of the Company or any of its
subsidiaries with or into any Interested Shareholder or Affiliate (as defined in
the Articles of Incorporation) of an Interested Shareholder; (ii) any sale,
lease, exchange, mortgage, pledge, transfer, or other disposition to or with any
Interested Shareholder or Affiliate of 5% or more of the assets of the Company
or combined assets of the Company and its subsidiary; (iii) the issuance or
transfer to any Interested Shareholder or its Affiliate by the Company (or any
subsidiary) of any securities of the Company other than on a pro rata basis to
all shareholders; (iv) the adoption of any plan for the liquidation or
dissolution of the Company proposed by or on behalf of any Interested
Shareholder or Affiliate thereof; (v) any reclassification of securities,
recapitalization, merger or consolidation of the Company which has the effect of
increasing the proportionate share of Common Stock or any class of equity or
convertible securities of the Company owned directly or indirectly by an
Interested Shareholder or Affiliate thereof; and (vi) the acquisition by the
Company or its subsidiary of any securities of an Interested Shareholder or its
Affiliates or Associates.
The directors and executive officers of the Bank are purchasing in the
aggregate approximately 6.8% of the shares of the Common Stock at the maximum of
the Estimated Price Range. In addition, the ESOP intends to purchase 8% of the
Common Stock sold in the Conversion. Additionally, if the proposed Stock
Programs and Stock Options Plans are implemented, the Company expects to acquire
4% of the Common Stock issued in the Conversion on behalf of the Stock Programs
and expects to issue an amount equal to 10% of the Common Stock issued in the
Conversion under the Stock Option Plans to directors and executive officers. As
a result, assuming the Stock Programs and Stock Option Plans are implemented,
the directors, executive officers and employees have the potential to control
the voting of approximately 28.8% of the Company's Common Stock, thereby
enabling them to prevent the approval of the transactions requiring the approval
of at least 80% of the Company's outstanding shares of voting stock described
hereinabove.
EVALUATION OF OFFERS. As permitted by Section 8.85 of the IBCA, the
Articles of Incorporation of the Company further provides that the Board of
Directors of the Company, when evaluating any offer to the Company from another
party to (i) make a tender or exchange offer for any outstanding equity security
of the Company, (ii) merge or consolidate the Company with another corporation
or entity or (iii) purchase or otherwise acquire all or substantially all of the
properties and assets of the Company, shall, in connection with the exercise of
its judgment in determining what is in the best interest of the Company and the
shareholders of the Company, give due consideration to the extent permitted by
law to all relevant factors, including, without limitation, the financial and
managerial resources and future prospects of the other party, the possible
effects on the business of the Company and its subsidiaries and on the
employees, customers, suppliers and creditors of the Company and its
subsidiaries, and the effects on the communities in which the Company's and its
subsidiaries' facilities are located. By having these standards in the Articles
of Incorporation of the Company, the Board of Directors may be in a stronger
position to oppose such a transaction if the Board concludes that the
transaction would not be in the best interests of the Company, even if the price
or other consideration offered is significantly greater than the then market
price of any equity security of the Company.
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AMENDMENT OF ARTICLES OF INCORPORATION AND BYLAWS. The Articles of
Incorporation provides that certain provisions of the Articles of Incorporation
may not be altered, amended, repealed or rescinded without the affirmative vote
of either (1) not less than a majority of the authorized number of directors
and, if one or more Interested Shareholders exist, by not less than a majority
of the Disinterested Directors (as defined in the Articles of Incorporation) or
(2) the holders of not less than two-thirds of the total votes eligible to be
cast by the holders of all outstanding shares of the capital stock of the
Company entitled to vote thereon and, if the alteration, amendment, repeal, or
rescission is proposed by or on behalf of an Interested Shareholder or a
director who is an Affiliate or Associate of an Interested Shareholder, by the
affirmative vote of the holders of not less than a majority of the total votes
eligible to be cast by holders of all outstanding shares entitled to vote
thereon not beneficially owned by an Interested Shareholder or an Affiliate or
Associate thereof. Amendment of the provision relating to business combinations
must also be approved by either (i) a majority of the Disinterested Directors,
or (ii) the affirmative vote of not less than two-thirds of the total number of
votes eligible to be cast by the holders of all outstanding shares of the Voting
Stock, voting together as a single class, if the change is proposed by or on
behalf of an Interested Shareholder or a director who is an affiliate of an
Interested Shareholder, by the affirmative vote of not less than fifty percent
(50%) of the total number of votes eligible to be cast by the holders of all
outstanding shares of the Voting Stock entitled to vote thereon not beneficially
owned by an Interested Shareholder or Affiliate or Associate thereof, voting
together as a single class. Furthermore, the Company's Articles of Incorporation
provides that provisions of the Bylaws that contain supermajority voting
requirements may not be altered, amended, repealed or rescinded without a vote
of the Board or holders of capital stock entitled to vote thereon that is not
less than the supermajority specified in such provision. Absent these
provisions, the IBCA provides that a corporation's articles of incorporation may
be amended by the holders of two-thirds of the corporation's outstanding capital
stock. The Articles of Incorporation also provides that the Board of Directors
is authorized to make, alter, amend, rescind or repeal any of the Company's
Bylaws in accordance with the terms thereof, regardless of whether the Bylaw was
initially adopted by the shareholders. However, this authorization neither
divests the shareholders of their right, nor limits their power to adopt, amend,
rescind or repeal any Bylaw under the IBCA. These provisions could have the
effect of discouraging a tender offer or other takeover attempt where the
ability to make fundamental changes through Bylaw amendments is an important
element of the takeover strategy of the acquiror.
CERTAIN BYLAW PROVISIONS. The Bylaws of the Company also require a
shareholder who intends to nominate a candidate for election to the Board of
Directors, or to raise new business at a shareholder meeting to give
approximately 60 days advance notice to the Secretary of the Company. The notice
provision requires a shareholder who desires to raise new business to provide
certain information to the Company concerning the nature of the new business,
the shareholder and the shareholder's interest in the business matter.
Similarly, a shareholder wishing to nominate any person for election as a
director must provide the Company with certain information concerning the
nominee and the proposing shareholder.
ANTI-TAKEOVER EFFECTS OF THE COMPANY'S ARTICLES OF INCORPORATION AND BYLAWS AND
MANAGEMENT REMUNERATION PLANS ADOPTED IN CONVERSION
The provisions described above are intended to reduce the Company's
vulnerability to takeover attempts and certain other transactions which have not
been negotiated with and approved by members of its Board of Directors. The
provisions of the employment agreements with officers, the Stock Programs and
the Stock Option Plans to be established may also discourage takeover attempts
by increasing the costs to be incurred by the Bank and the Company in the event
of a takeover. See "Management of the Bank-- Employment Agreements," and
"--Benefits--Stock Option Plans."
The Company's Board of Directors believes that the provisions of the
Articles of Incorporation, Bylaws and management remuneration plans to be
established are in the best interests of the Company and its shareholders. An
unsolicited non-negotiated proposal can seriously disrupt the business and
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management of a corporation and cause it great expense. Accordingly, the Board
of Directors believes it is in the best interests of the Company and its
shareholders to encourage potential acquirors to negotiate directly with
management and that these provisions will encourage such negotiations and
discourage non-negotiated takeover attempts. It is also the Board of Directors'
view that these provisions should not discourage persons from proposing a merger
or other transaction at a price that reflects the true value of the Company and
that otherwise is in the best interests of all shareholders.
ILLINOIS CORPORATE LAW
The State of Illinois has a statute designed to provide Illinois
corporations with additional protection against hostile takeovers. The takeover
statute, which is codified in Section 11.75 of the IBCA ("Section 11.75"), is
intended to discourage certain takeover practices by impeding the ability of a
hostile acquiror to engage in certain transactions with the target company.
In general, Section 11.75 provides that a "Person" (as defined therein) who
owns 15% or more of the outstanding voting stock of a Illinois corporation (an
"IBCA Interested Shareholder") may not consummate a merger or other business
combination transaction with such corporation at any time during the three-year
period following the date such "Person" became an IBCA Interested Shareholder.
The term "business combination" is defined broadly to cover a wide range of
corporate transactions including mergers, sales of assets, issuances of stock,
transactions with subsidiaries and the receipt of disproportionate financial
benefits.
The statute exempts the following transactions from the requirements of
Section 11.75: (i) any business combination if, prior to the date a person
became an IBCA Interested Shareholder, the board of directors approved either
the business combination or the transaction which resulted in the shareholder
becoming an IBCA Interested Shareholder; (ii) any business combination involving
a person who acquired at least 85% of the outstanding voting stock in the
transaction in which he became an IBCA Interested Shareholder, with the number
of shares outstanding calculated without regard to those shares owned by the
corporation's directors who are also officers and by certain employee stock
plans; and (iii) any business combination with an IBCA Interested Shareholder
that is approved by the board of directors and by a two-thirds vote of the
outstanding voting stock not owned by the IBCA Interested Shareholder. A
corporation may exempt itself from the requirement of the statute by adopting an
amendment to its Articles of Incorporation or Bylaws electing not to be governed
by Section 11.75 of the IBCA. At the present time, the Board of Directors does
not intend to propose any such amendment.
RESTRICTIONS IN THE BANK'S NEW CHARTER AND BYLAWS
Although the Board of Directors of the Bank is not aware of any effort that
might be made to obtain control of the Bank after the Conversion, the Board of
Directors believes that it is appropriate to adopt certain provisions permitted
by federal regulations to protect the interests of the converted Bank and its
shareholders from any hostile takeover. Such provisions may, indirectly, inhibit
a change in control of the Company, as the Bank's sole stockholder. See "Risk
Factors--Certain Anti-Takeover Provisions."
The Bank's Federal Stock Charter will contain a provision whereby the
acquisition of or offer to acquire beneficial ownership of more than 10% of the
issued and outstanding shares of any class of equity securities of the Bank by
any person (I.E., any individual, corporation, group acting in concert, trust,
partnership, joint stock company or similar organization), either directly or
indirectly, will be prohibited for a period of five years following the date of
completion of the Conversion. Any stock in excess of 10% acquired in violation
of the Federal Stock Charter provision will not be counted as outstanding for
voting purposes. This limitation shall not apply to any transaction in which the
Bank forms a holding company without a change in the respective beneficial
ownership interests of its shareholders other than pursuant to the exercise of
any dissenter or appraisal rights, the purchase of shares by underwriters in
connection with a public offering or the purchase of shares by a tax qualified
employee stock benefit plan which is exempt
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from certain approval requirements set forth in the OTS regulations. In the
event that holders of revocable proxies for more than 10% of the shares of the
Common Stock of the Company seek, among other things, to elect one-third or more
of the Company's Board of Directors, to cause the Company's shareholders to
approve the acquisition or corporate reorganization of the Company or to exert a
continuing influence on a material aspect of the business operations of the
Company, which actions could indirectly result in a change in control of the
Bank, the Board of Directors of the Bank will be able to assert this provision
of the Bank's Federal Stock Charter against such holders. Although the Board of
Directors of the Bank is not currently able to determine when and if it would
assert this provision of the Bank's Federal Stock Charter, the Board of
Directors, in exercising its fiduciary duty, may assert this provision if it
were deemed to be in the best interests of the Bank, the Company and its
shareholders. It is unclear, however, whether this provision, if asserted, would
be successful against such persons in a proxy contest which could result in a
change in control of the Bank indirectly through a change in control of the
Company. Finally, for five years, shareholders will not be permitted to call a
special meeting of shareholders relating to a change of control of the Bank or a
charter amendment. Furthermore, the staggered terms of the Board of Directors
could have an anti-takeover effect by making it more difficult for a majority of
shares to force an immediate change in the Board of Directors since only
one-third of the Board is elected each year. The purpose of these provisions is
to assure stability and continuity of management of the Bank in the years
immediately following the Conversion.
Although the Bank has no arrangements, understandings or plans at the
present time, the Board of Directors believes that the availability of unissued
shares of Preferred Stock will provide the Bank with increased flexibility in
structuring possible future financings and acquisitions and in meeting other
corporate needs which may arise. In the event of a proposed merger, tender offer
or other attempt to gain control of the Bank of which management does not
approve, it might be possible for the Board of Directors to authorize the
issuance of one or more series of Preferred Stock with rights and preferences
which could impede the completion of such a transaction. An effect of the
possible issuance of such Preferred Stock, therefore, may be to deter a future
takeover attempt. The Board of Directors does not intend to issue any Preferred
Stock except on terms which the Board deems to be in the best interests of the
Bank and its then existing shareholders.
REGULATORY RESTRICTIONS
The Plan of Conversion prohibits any person, prior to the completion of the
Conversion, from transferring, or from entering into any agreement or
understanding to transfer, to the account of another, legal or beneficial
ownership of the subscription rights issued under the Plan or the Common Stock
to be issued upon their exercise. The Plan also prohibits any person, prior to
the completion of the Conversion, from offering, or making an announcement of an
offer or intent to make an offer, to purchase such subscription rights or Common
Stock.
For three years following the Conversion, OTS regulations prohibit any
person from acquiring or making an offer to acquire more than 10% of the stock
of any converted savings institution, except for: (i) offers that, if
consummated, would not result in the acquisition by such person during the
preceding 12-month period of more than 1% of such stock; (ii) offers for up to
25% in the aggregate by the ESOP or other tax qualified plans of the Bank or the
Company; or (iii) offers which are not opposed by the Board of Directors of the
Bank and which receive the prior approval of the OTS. Such prohibition is also
applicable to the acquisition of the stock of the Company. Such acquisition may
be disapproved by OTS if it is found, among other things, that the proposed
acquisition (a) would frustrate the purposes of the provisions of the
regulations regarding conversions, (b) would be manipulative or deceptive, (c)
would subvert the fairness of the conversion, (d) would be likely to result in
injury to the savings institution, (e) would not be consistent with economical
home financing, (f) would otherwise violate law or regulation, or (g) would not
contribute to the prudent deployment of the savings institution's conversion
proceeds. In the event that any person, directly or indirectly, violates this
regulation, the securities beneficially owned by such person in
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excess of 10% shall not be counted as shares entitled to vote and shall not be
voted by any person or counted as voting shares in connection with any matters
submitted to a vote of shareholders. The definition of beneficial ownership for
this regulation extends to persons holding revocable or irrevocable proxies for
the Company's stock under circumstances that give rise to a conclusive or
rebuttable determination of control under the OTS regulations.
In addition, any proposal to acquire 10% of any class of equity security of
the Company generally would be subject to approval by the OTS under the Change
in Bank Control Act. The OTS requires all persons seeking control of a savings
institution, directly or indirectly through control of its holding company, to
obtain regulatory approval prior to offering to obtain control. Federal law
generally provides that no "person," acting directly or indirectly or through or
in concert with one or more other persons, may acquire "control," as that term
is defined in OTS regulations, of a federally-insured savings institution
without giving at least 60 days written notice to the OTS and providing the OTS
an opportunity to disapprove the proposed acquisition. Such acquisitions of
control may be disapproved by the OTS if it is determined, among other things,
that (i) the acquisition would substantially lessen competition; (ii) the
financial condition of the acquiring person might jeopardize the financial
stability of the savings institution or prejudice the interests of its
depositors; or (iii) the competency, experience or integrity of the acquiring
person or the proposed management personnel indicates that it would not be in
the interest of the depositors or the public to permit the acquisition of
control by such person. Such change in control restrictions on the acquisition
of holding company stock are not limited to three years after conversion but
will apply for as long as the regulations are in effect. Persons holding
revocable or irrevocable proxies may be deemed to be beneficial owners of such
securities under OTS regulations and therefore prohibited from voting all or the
portion of such proxies in excess of the 10% aggregate beneficial ownership
limit. Such regulatory restrictions may prevent or inhibit proxy contests for
control of the Company or the Bank which have not received prior regulatory
approval.
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DESCRIPTION OF CAPITAL STOCK OF THE COMPANY
GENERAL
The Company is authorized to issue eight million (8,000,000) shares of
Common Stock having a par value of $.01 per share, two million (2,000,000)
shares of Preferred Stock having a par value of $.01 per share and seven million
two hundred thousand (7,200,000) shares of Excess Common Stock having a par
value of $.01 per share. The Company currently expects to issue 2,185,000 shares
of Common Stock (or 2,512,750 in the event of an increase of 15% in the
Estimated Price Range) and does not expect to issue any shares of Preferred
Stock. Except as discussed above in "Restrictions on Acquisition of the Company
and the Bank," each share of the Company's Common Stock will have the same
relative rights as, and will be identical in all respects with, each other share
of Common Stock. Upon payment of the Purchase Price for the common stock, in
accordance with the Plan, all such stock will be duly authorized, fully paid and
nonassessable. The Common Stock of the Company will represent non-withdrawable
capital, will not be an account of an insurable type, and will not be insured by
the FDIC.
COMMON STOCK
DIVIDENDS. The Company can pay dividends out of statutory surplus or from
certain net profits if, as and when declared by its Board of Directors. The
payment of dividends by the Company is subject to limitations which are imposed
by law and applicable regulation. See "Dividend Policy" and "Regulation." The
holders of Common Stock of the Company will be entitled to receive and share
equally in such dividends as may be declared by the Board of Directors of the
Company out of funds legally available therefor. If the Company issues Preferred
Stock, the holders thereof may have a priority over the holders of the Common
Stock with respect to dividends.
VOTING RIGHTS. Upon Conversion, the holders of Common Stock of the Company
will possess exclusive voting rights in the Company. They will elect the
Company's Board of Directors and act on such other matters as are required to be
presented to them under Illinois law or the Company's Articles of Incorporation
or as are otherwise presented to them by the Board of Directors. Except as
discussed in "Restrictions on Acquisition of the Company and the Bank," each
holder of Common Stock will be entitled to one vote per share and will not have
any right to cumulate votes in the election of directors. If the Company issues
Preferred Stock, holders of the Preferred Stock may also possess voting rights.
Certain matters require an 80% or two-thirds shareholder vote. See "Restrictions
on Acquisition of the Company and the Bank."
As a federal mutual savings bank, corporate powers and control of the Bank
are vested in its Board of Directors, who elect the officers of the Bank and who
fill any vacancies on the Board of Directors as it exists upon Conversion.
Subsequent to Conversion, voting rights will be vested exclusively in the owners
of the shares of capital stock of the Bank, which owner will be the Company, and
voted at the direction of the Company's Board of Directors. Consequently, the
holders of the Common Stock will not have direct control of the Bank.
LIQUIDATION. In the event of any liquidation, dissolution or winding up of
the Bank, the Company, as holder of the Bank's capital stock, would be entitled
to receive, after payment or provision for payment of all debts and liabilities
of the Bank (including all deposit accounts and accrued interest thereon) and
after distribution of the balance in the special liquidation account to Eligible
Account Holders and Supplemental Eligible Account Holders (see "The Conversion
- --Effects of Conversion -- Liquidation Rights"), all assets of the Bank
available for distribution. In the event of liquidation, dissolution or winding
up of the Company, the holders of its Common Stock would be entitled to receive,
after payment or provision for payment of all its debts and liabilities, all of
the assets of the Company available for distribution. If Preferred Stock is
issued, the holders thereof may have a priority over the holders of the Common
Stock in the event of the liquidation or dissolution of the Company.
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PREEMPTIVE RIGHTS. Holders of the Common Stock of the Company will not be
entitled to preemptive rights with respect to any shares which may be issued.
The Common Stock is not subject to redemption.
PREFERRED STOCK
None of the shares of the Company's authorized Preferred Stock will be
issued in the Conversion. Such stock may be issued with such preferences and
designations as the Board of Directors may from time to time determine. The
Board of Directors can, without shareholder approval, issue preferred stock with
voting, dividend, liquidation and conversion rights which could dilute the
voting strength of the holders of the Common Stock and may assist management in
impeding an unsolicited takeover or attempted change in control.
EXCESS COMMON STOCK
The shares of Excess Common Stock are identical in all respects to the
shares of Common Stock, except that they are permitted only one one-hundredth
(1/100) of a vote per share.
DESCRIPTION OF CAPITAL STOCK OF THE BANK
GENERAL
The Federal Stock Charter of the Bank, to be effective upon the Conversion,
authorizes the issuance of capital stock consisting of 20,000,000 (twenty
million) shares of common stock, par value $1.00 per share, and 5,000,000 (five
million) shares of preferred stock, par value $1.00 per share, which Preferred
Stock may be issued in series and classes having such rights, preferences,
privileges and restrictions as the Board of Directors may determine. Each share
of common stock of the Bank will have the same relative rights as, and will be
identical in all respects with, each other share of common stock. After the
Conversion, the Board of Directors will be authorized to approve the issuance of
Common Stock up to the amount authorized by the Federal Stock Charter without
the approval of the Bank's shareholders, except to the extent that such approval
is required by governing law. All of the issued and outstanding common stock of
the Bank (which is currently expected to be 1,000 shares) will be held by the
Company as the Bank's sole shareholder. The capital stock of the Bank will
represent non-withdrawable capital, will not be an account of an insurable type,
and will not be insured by the FDIC.
COMMON STOCK
DIVIDENDS. The holders of the Bank's common stock will be entitled to
receive and to share equally in such dividends as may be declared by the Board
of Directors of the Bank out of funds legally available therefor. See "Dividend
Policy" for certain restrictions on the payment of dividends and "Federal and
State Taxation -- Federal Taxation" for a discussion of the consequences of the
payment of cash dividends from income appropriated to bad debt reserves.
VOTING RIGHTS. Immediately after the Conversion, the holders of the Bank's
common stock will possess exclusive voting rights in the Bank. Each holder of
shares of common stock will be entitled to one vote for each share held.
Cumulation of votes will not be permitted. See "Restrictions on Acquisition of
the Company and the Bank -- Anti-Takeover Effects of the Company's Articles of
Incorporation and Bylaws and Management Remuneration Plans Adopted in
Conversion."
LIQUIDATION. In the event of any liquidation, dissolution, or winding up of
the Bank, the holders of its common stock will be entitled to receive, after
payment of all debts and liabilities of the Bank (including all deposit accounts
and accrued interest thereon), and distribution of the balance in the special
liquidation account to Eligible Account Holders and Supplemental Eligible
Account Holders, all assets of the Bank available for distribution in cash or in
kind. If additional preferred stock is issued subsequent to the
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Conversion, the holders thereof may also have priority over the holders of
common stock in the event of liquidation or dissolution.
PREEMPTIVE RIGHTS AND REDEMPTION. Holders of the common stock of the Bank
will not be entitled to preemptive rights with respect to any shares of the Bank
which may be issued. The common stock will not be subject to redemption. Upon
receipt by the Bank of the full specified purchase price therefor, the common
stock will be fully paid and nonassessable.
PREFERRED STOCK
None of the shares of the Bank's authorized preferred stock will be issued
in the Conversion. Such stock may be issued with such preferences and
designations as the Board of Directors may from time to time determine. The
Board of Directors can, without shareholder approval, issue preferred stock with
voting, dividend, liquidation and conversion rights.
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TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Company's Common Stock is Harris
Trust and Savings Bank.
EXPERTS
The financial statements of the Bank as of July 31, 1996 and 1995 and for
each of the years in the three-year period ended July 31, 1996, have been
included herein in reliance upon the report of KPMG Peat Marwick LLP,
independent certified public accountants, whose report is included herein and
upon such firm as experts in accounting and auditing.
Capital Resources Group, Inc., has consented to the publication herein of
the summary of its report to the Bank and Company setting forth its opinion as
to the estimated pro forma market value of the Common Stock upon Conversion and
its opinion with respect to subscription rights.
LEGAL AND TAX OPINIONS
The legality of the Common Stock and the federal income tax of the
Conversion will be passed upon for the Bank and the Company by Thacher Proffitt
& Wood, New York, New York, special counsel to the Bank and the Company. Thacher
Proffitt & Wood will rely as to certain matters of Illinois law on the opinion
of Gomberg, Sharfman, Gold and Ostler, P.C., Chicago, Illinois. The Illinois
State tax consequences of the Conversion will be passed upon for the Bank by
KPMG Peat Marwick LLP, independent public accountants. Certain legal matters
will be passed upon for Hovde by Vedder, Price, Kaufman & Kammholz, Chicago,
Illinois.
ADDITIONAL INFORMATION
The Company has filed with the SEC the Registration Statement under the
Securities Act with respect to the Common Stock offered hereby. As permitted by
the rules and regulations of the SEC, this Prospectus does not contain all the
information set forth in the Registration Statement. Such information, including
the Conversion Valuation Appraisal Report which is an exhibit to the
Registration Statement, can be examined without charge at the public reference
facilities of the SEC located at 450 Fifth Street, N.W., Washington, D.C. 20549,
at the Chicago Regional Office located at 500 West Madison Street, Chicago,
Illinois 60661, and at the New York Regional Office located at Five World Trade
Center, New York, New York 10048. Copies of such material can be obtained from
the Public Reference Section of the SEC, 450 Fifth Street, N.W., Washington,
D.C. 20549 at prescribed rates. The SEC also maintains a Web site at
http://www.sec.gov that contains reports, proxy and information statements and
other information regarding registrants that file electronically with the SEC on
the SEC's Electronic Data Gathering Analysis and Retrieval ("EDGAR") System.
Upon completion of the Conversion, the Company's Common Stock will be quoted on
the Nasdaq National Market under the symbol "BFFC." Reports, proxy material and
other information concerning the Company may also be inspected at the offices of
the National Association of Securities Dealers, Inc., 1735 K Street, N.W.,
Washington, D.C. 20006-1500.
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The Bank has filed an application for conversion with the OTS with respect
to the Conversion. Pursuant to the rules and regulations of the OTS, this
Prospectus omits certain information contained in that application. The
application may be examined at the principal office of the OTS, 1700 G Street,
N.W., Washington, D.C. 20552 and at the Office of the Regional Director of the
OTS located at 200 West Madison Street, Suite 1300, Chicago, Illinois 60606.
In connection with the Conversion, the Company will register its Common
Stock with the SEC under Section 12(g) of the Exchange Act, and, upon such
registration, the Company and the holders of its stock will become subject to
the proxy solicitation rules, reporting requirements and restrictions on stock
purchases and sales by directors, officers and greater than 10% shareholders,
the annual and periodic reporting and certain other requirements of the Exchange
Act. Under the Plan of Conversion, the Company has undertaken that it will not
terminate such registration for a period of at least three years following the
Conversion. In the event that the Bank amends the Plan to eliminate the
concurrent formation of the Company as part of the Conversion, the Bank will
register its stock with the OTS under Section 12(g) of the Exchange Act and,
upon such registration, the Bank and the holders of its stock will become
subject to the same obligations and restrictions.
Copies of the Articles of Incorporation and the Bylaws of the Company and
the Federal Stock Charter and Bylaws of the Bank are available without charge
from the Bank upon written or oral request.
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INDEX TO FINANCIAL STATEMENTS
FAIRFIELD SAVINGS BANK, F.S.B.
<TABLE>
<CAPTION>
PAGE
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<S> <C>
Independent Auditors' Report.............................................................................. F-2
Financial Statements:
Balance Sheets as of July 31, 1996 and 1995............................................................. F-3
Statements of Earnings for the years ended July 31, 1996, 1995 and 1994................................. 38
Statements of Retained Earnings for the years ended July 31, 1996, 1995 and 1994........................ F-4
Statements of Cash Flows for the years ended July 31, 1996, 1995 and 1994............................... F-5
Notes to Financial Statements............................................................................. F-6
</TABLE>
All schedules are omitted, because they are not required or applicable, or
the required information is shown in the financial statements or notes thereto.
The financial statements of Big Foot Financial Corp. have been omitted,
because Big Foot Financial Corp. has not yet issued any stock, has no assets and
no liabilities and has not conducted any business other than of an
organizational nature.
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Fairfield Savings Bank, F.S.B.
Long Grove, Illinois:
We have audited the accompanying statements of financial condition of
Fairfield Savings Bank, F.S.B. (Savings Bank) as of July 31, 1996 and 1995, and
the related statements of earnings, retained earnings, and cash flows for each
of the years in the three-year period ended July 31, 1996. These financial
statements are the responsibility of the Savings Bank's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
As discussed in notes 1 and 8 to the financial statements, the Savings Bank
adopted the provisions of the Financial Accounting Standards Board's Statement
of Financial Accounting Standards No. 109, "Accounting for Income Taxes," in
1994.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Fairfield Savings Bank,
F.S.B. as of July 31, 1996 and 1995, and the results of its operations and its
cash flows for each of the years in the three-year period ended July 31, 1996,
in conformity with generally accepted accounting principles.
KPMG PEAT MARWICK LLP
August 16, 1996
Chicago, Illinois
F-2
<PAGE>
FAIRFIELD SAVINGS BANK, F.S.B.
STATEMENT OF FINANCIAL CONDITION
JULY 31, 1996 AND 1995
<TABLE>
<CAPTION>
1996 1995
-------------- -------------
<S> <C> <C>
ASSETS
Cash and due from banks........................................................... $ 2,568,612 2,088,202
Interest-earning deposits......................................................... 2,040,308 6,956,242
Mortgage-backed securities held-to-maturity (note 2).............................. 44,133,079 111,282,775
Mortgage-backed securities available-for-sale, at fair value (note 2)............. 58,277,886 --
Loans receivable, net (note 3).................................................... 79,143,572 70,984,459
Accrued interest receivable (note 4).............................................. 963,823 943,126
Investment in real estate held for sale and development........................... 262,259 262,259
Real estate owned................................................................. -- 167,802
Stock in Federal Home Loan Bank of Chicago, at cost............................... 2,045,000 2,264,300
Office properties and equipment, net (note 5)..................................... 4,801,007 4,993,182
Prepaid expenses and other assets................................................. 388,891 308,757
-------------- -------------
Total assets...................................................................... $ 194,624,437 200,251,104
-------------- -------------
-------------- -------------
LIABILITIES AND RETAINED EARNINGS
Savings deposits (note 6)......................................................... $ 137,176,770 148,349,978
Borrowed money (note 7)........................................................... 39,900,000 32,300,000
Advance payments by borrowers for taxes and insurance............................. 1,800,216 2,317,015
Accrued interest payable and other liabilities.................................... 2,167,964 2,861,318
-------------- -------------
Total liabilities................................................................. 181,044,950 185,828,311
Retained earnings--substantially restricted....................................... 14,648,789 14,422,793
Unrealized loss on mortgage-backed securities available-for-sale, net of tax...... (1,069,302) --
-------------- -------------
Total retained earnings........................................................... 13,579,487 14,422,793
-------------- -------------
Total liabilities and retained earnings........................................... $ 194,624,437 200,251,104
-------------- -------------
-------------- -------------
</TABLE>
See accompanying notes to financial statements.
F-3
<PAGE>
FAIRFIELD SAVINGS BANK, F.S.B.
STATEMENTS OF RETAINED EARNINGS
YEARS ENDED JULY 31, 1996, 1995, AND 1994
<TABLE>
<CAPTION>
UNREALIZED GAIN
(LOSS)
ON SECURITIES
RETAINED AVAILABLE-FOR-SALE,
EARNINGS NET OF TAX TOTAL
------------- -------------------- ------------
<S> <C> <C> <C>
Balance at July 31, 1993...................................... $ 11,330,870 519,957 11,850,827
Net income.................................................... 2,109,768 -- 2,109,768
Change in unrealized loss on securities available-for-sale,
net of tax of $233,600...................................... -- (519,957) (519,957)
------------- ---------- ------------
Balance at July 31, 1994...................................... 13,440,638 -- 13,440,638
Net income.................................................... 982,155 -- 982,155
------------- ---------- ------------
Balance at July 31, 1995...................................... 14,422,793 -- 14,422,793
Net income.................................................... 225,996 -- 225,996
Change in unrealized loss on securities available-for-sale,
net of tax of $550,819...................................... -- (1,069,302) (1,069,302)
------------- ---------- ------------
Balance at July 31, 1996...................................... $ 14,648,789 (1,069,302) 13,579,487
------------- ---------- ------------
------------- ---------- ------------
</TABLE>
See accompanying notes to financial statements.
F-4
<PAGE>
FAIRFIELD SAVINGS BANK, F.S.B.
STATEMENTS OF CASH FLOWS
YEARS ENDED JULY 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income................................................................ $ 225,996 982,155 2,109,768
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation............................................................ 404,019 407,599 388,916
(Benefit) provision for deferred income taxes........................... (65,595) 90,263 (126,784)
Gain on sale of real estate held for sale and development............... -- (556,880) (574,183)
Gain on sale of investment securities available-for-sale................ -- -- (615,588)
Gain on sale of real estate owned....................................... (35,448) -- (8,491)
Net amortization of deferred loan fees.................................. (1,705) (116,429) (359,407)
Net amortization of discounts and premiums.............................. 228,490 195,038 331,338
Provision (credit) for loan losses...................................... 137,558 -- (18,000)
(Increase) decrease in prepaid expenses and other assets................ (80,134) 411,417 22,746
(Increase) decrease in accrued interest receivable...................... (20,697) 90,339 278,904
Decrease in accrued interest payable and other liabilities.............. (627,759) (595,430) (1,106,838)
----------- ----------- -----------
Net cash provided by operating activities................................... 164,725 908,072 322,381
----------- ----------- -----------
Cash flows from investing activities:
Net (increase) decrease in loans receivable, net.......................... (8,296,671) (2,866,170) 12,241,669
Purchases of mortgage-backed securities held-to-maturity.................. -- (10,305,299) (83,244,345)
Purchases of mortgage-backed securities available-for-sale................ (10,081,249) -- --
Principal repayments on mortgage-backed securities held-to-maturity....... 10,482,665 10,817,987 18,827,663
Principal repayments on mortgage-backed securities available-for-sale..... 7,174,307 -- --
Proceeds from sales of investment securities available-for-sale........... -- -- 14,371,004
Proceeds from sale of real estate owned................................... 203,250 -- 151,000
Purchase of stock in Federal Home Loan Bank of Chicago.................... (100,000) (34,300) (300,100)
Proceeds from sale of stock in Federal Home Loan Bank of Chicago.......... 319,300 -- --
Proceeds from sales of investment in real estate held for sale and
development............................................................. -- 1,213,570 1,254,225
Purchase of office properties and equipment............................... (211,844) (467,537) (344,434)
----------- ----------- -----------
Net cash used in investing activities....................................... (510,242) (1,641,749) (37,043,318)
----------- ----------- -----------
Cash flows from financing activities:
Net increase (decrease) in savings deposits............................... (11,173,208) 6,520,009 10,326,113
Net increase (decrease) in borrowed money................................. 7,600,000 (2,000,000) (2,300,000)
Increase (decrease) in advance payments by borrowers for taxes and
insurance............................................................... (516,799) 1,752 (412,936)
----------- ----------- -----------
Net cash provided by (used in) financing activities......................... (4,090,007) 4,521,761 7,613,177
----------- ----------- -----------
Net increase (decrease) in cash and cash equivalents........................ (4,435,524) 3,788,084 (29,107,760)
Cash and cash equivalents at beginning of year.............................. 9,044,444 5,256,360 34,364,120
----------- ----------- -----------
Cash and cash equivalents at end of year.................................... $ 4,608,920 9,044,444 5,256,360
----------- ----------- -----------
----------- ----------- -----------
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest................................................................ $ 8,391,152 7,352,599 6,852,178
Income taxes............................................................ 133,000 485,000 911,877
Noncash investing activities -
Transfer of loans to real estate owned.................................. -- 167,802 142,509
Transfer of securities to available-for-sale............................ 56,446,621 -- --
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
See accompanying notes to financial statements.
F-5
<PAGE>
FAIRFIELD SAVINGS BANK, F.S.B.
NOTES TO FINANCIAL STATEMENTS
JULY 31, 1996, 1995, AND 1994
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Fairfield Savings Bank, F.S.B. (Savings Bank) 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
Savings Bank follows in preparing and presenting its financial statements.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from these estimates.
DISSOLUTION OF SUBSIDIARY
Effective July 31, 1996, Fairfield Service Corporation was dissolved and its
operations were transferred to the Savings Bank.
MORTGAGE-BACKED SECURITIES
Mortgage-backed securities which the Savings Bank has the positive intent
and ability to hold to maturity are carried at amortized cost. All other
mortgage-backed securities are designated as available-for-sale, and are carried
at fair value. The difference between amortized cost and fair value is reflected
as a separate component of retained earnings, net of related tax effects.
Unearned premiums and discounts are amortized over the estimated life of the
security using the interest method. Gains and losses on the sale of
mortgage-backed securities are determined using the specific identification
method.
INVESTMENT SECURITIES AVAILABLE-FOR-SALE
Investment securities available-for-sale are securities which management may
sell in the future. Investment securities available-for-sale are recorded at
fair value. The difference between amortized cost and fair value is reflected as
a separate component of retained earnings, net of related tax effects. Gains and
losses on the sale of securities available-for-sale are determined using the
specific identification method.
LOANS RECEIVABLE
Loans receivable are stated at unpaid principal balances less loans in
process, deferred loan fees and allowance for loan losses. The Savings Bank
defers all loan origination fees and certain direct costs associated with loan
originations. Net deferred fees are amortized as yield adjustments over the
contractual life of the related loans using the interest method.
It is the policy of the Savings Bank to provide valuation allowances for
estimated losses on loans when any significant and permanent decline in value is
identified. Periodic reviews are made to identify potential problems. In
addition to specific allowances, the Savings Bank maintains a general allowance
for losses on loans. Additions to the allowance for losses on loans are charged
to operations. Also, various regulatory agencies, as an integral part of their
examination process, periodically review the Savings Bank's allowance for losses
on loans. Such agencies may require the Savings Bank to recognize additions to
the allowance based on their judgments using information available to them at
the time of their examination. In the opinion of management, the allowance, when
taken as a whole, is adequate to absorb foreseeable losses.
F-6
<PAGE>
FAIRFIELD SAVINGS BANK, F.S.B.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
JULY 31, 1996, 1995, AND 1994
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The accrual of interest income is suspended and previously accrued interest
income is reversed when a loan is contractually delinquent for 90 days or more
and where collection of interest is doubtful. Accrual is resumed when the loan
becomes less than 90 days contractually delinquent and collection of interest is
probable.
The Savings Bank adopted Statement of Financial Accounting Standards No.
114, "Accounting By Creditors for Impairment of a Loan," (Statement 114) and No.
118, "Accounting by Creditors for Impairment of a Loan--Income Recognition
Disclosures," (Statement 118), effective August 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 loans and
consumer loans, are excluded from the provisions of Statement 114.
DEPRECIATION AND AMORTIZATION
Depreciation of office properties and equipment and amortization of
leasehold improvements are recorded using the straight-line method over the
estimated useful lives of the related assets. Estimated useful lives range
between 3 and 40 years.
DEFERRED INCOME TAXES
The Savings Bank adopted Statement of Financial Accounting Standards No.
109, "Accounting for Income Taxes" (Statement 109), effective August 1, 1993 on
a prospective basis. The effect of adopting Statement 109 increased earnings by
$439,470 and is presented as the cumulative effect of change in accounting for
income taxes in the 1994 statement of earnings. The adoption of Statement 109
required a change from the deferred method under Accounting Principles Board
Opinion 11 (APB 11) to the asset and liability method of accounting for income
taxes. Under the asset and liability method of Statement 109, deferred income
taxes 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 the
years in which those temporary differences are expected to be recovered or
settled. Under Statement 109, the effect on deferred taxes of a change in tax
rates is recognized in income in the period that includes the enactment date.
CASH AND CASH EQUIVALENTS
For purposes of reporting cash flows, the Savings Bank considers all highly
liquid debt instruments with an original maturity of three months or less to be
cash equivalents. Cash and cash equivalents also include cash on hand and due
from banks.
F-7
<PAGE>
FAIRFIELD SAVINGS BANK, F.S.B.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
JULY 31, 1996, 1995, AND 1994
(2) MORTGAGE-BACKED SECURITIES
The amortized cost and estimated fair value of mortgage-backed securities
held-to-maturity and available-for-sale at July 31 are summarized as follows:
<TABLE>
<CAPTION>
1996
--------------------------------------------------------
<S> <C> <C> <C> <C>
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
DESCRIPTION COST GAINS LOSSES VALUE
- ------------------------------------------------------ -------------- ---------- ------------ --------------
Held-to-maturity:
Federal National Mortgage Association............... $ 39,135,520 -- 1,940,789 37,194,731
Federal Home Loan Mortgage Corporation.............. 4,997,559 48 37,641 4,959,966
-------------- ---------- ------------ --------------
Total held-to-maturity................................ $ 44,133,079 48 1,978,430 42,154,697
-------------- ---------- ------------ --------------
-------------- ---------- ------------ --------------
Available-for-sale:
Federal National Mortgage Association............... $ 37,454,501 7,504 865,986 36,596,019
Federal Home Loan Mortgage Corporation.............. 22,443,506 2,788 764,427 21,681,867
-------------- ---------- ------------ --------------
Total available-for-sale.............................. $ 59,898,007 10,292 1,630,413 58,277,886
-------------- ---------- ------------ --------------
-------------- ---------- ------------ --------------
<CAPTION>
1995
--------------------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
DESCRIPTION COST GAINS LOSSES VALUE
- ------------------------------------------------------ -------------- ---------- ------------ --------------
<S> <C> <C> <C> <C>
Held-to-maturity:
Federal National Mortgage Association............... $ 78,831,004 309,275 2,023,108 77,117,171
Federal Home Loan Mortgage Corporation.............. 32,451,771 39,955 491,959 31,999,767
-------------- ---------- ------------ --------------
$ 111,282,775 349,230 2,515,067 109,116,938
-------------- ---------- ------------ --------------
-------------- ---------- ------------ --------------
</TABLE>
There were no sales of mortgage-backed securities during 1996, 1995, and
1994.
In 1995, the Financial Accounting Standards Board (FASB) issued a special
report allowing the transfer of securities from held-to-maturity to the
available-for-sale classification during the period from November 15, 1995 to
December 31, 1995, with no recognition of any related unrealized gain or loss in
current earnings. On December 31, 1995 mortgage-backed securities held to
maturity with an amortized cost of approximately $56,447,000 were transferred to
the available-for-sale classification. The gross unrealized gain related to the
transferred securities was approximately $609,000.
Mortgage-backed securities with an amortized cost of approximately $423,000
and $640,000, have been pledged to secure certain savings deposits of local
municipal agencies as of July 31, 1996 and 1995, respectively.
F-8
<PAGE>
FAIRFIELD SAVINGS BANK, F.S.B.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
JULY 31, 1996, 1995, AND 1994
(3) LOANS RECEIVABLE
Loans receivable at July 31 are summarized as follows:
<TABLE>
<CAPTION>
1996 1995
------------- ------------
<S> <C> <C>
Real estate loans:
Mortgage loans:
One to four family residential............................... $ 76,324,314 68,080,553
Multi-family................................................. 978,572 1,034,773
Commercial................................................... 410,951 440,825
Land, construction, and development loans.................... 403,743 166,000
Home equity.................................................. 1,271,114 1,560,285
------------- ------------
79,388,694 71,282,436
Commercial credit lines.......................................... 150,356 131,261
Consumer loans................................................... 342,563 357,944
------------- ------------
Gross loans receivable........................................... 79,881,613 71,771,641
Less:
Loans in process............................................... -- (110,936)
Deferred loan fees............................................. (438,041) (510,246)
Allowance for loan losses...................................... (300,000) (166,000)
------------- ------------
$ 79,143,572 70,984,459
------------- ------------
------------- ------------
</TABLE>
Activity in the allowance for loan losses is summarized as follows for the
years ended July 31:
<TABLE>
<CAPTION>
1996 1995 1994
---------- --------- ---------
<S> <C> <C> <C>
Balance at beginning of year.................................................... $ 166,000 166,000 184,000
Provision (credit) for loan losses.............................................. 137,558 (18,000)
Charge-offs..................................................................... (3,588) -- --
---------- --------- ---------
Balance at end of year.......................................................... $ 300,000 166,000 166,000
---------- --------- ---------
---------- --------- ---------
</TABLE>
Loans receivable delinquent three months or more at July 31 are as follows:
<TABLE>
<CAPTION>
NUMBER PERCENTAGE
OF OF GROSS
LOANS AMOUNT LOANS RECEIVABLE
------------- ---------- -------------------
<S> <C> <C> <C>
1996....................................................................... 2 $ 118,303 .15%
1995....................................................................... 1 193,209 .27
1994....................................................................... 4 510,872 .74
- --
- --
----------
----------
</TABLE>
The Savings Bank discontinues recognizing interest on loans 90 days and
greater delinquent where collection of interest is doubtful. The reduction in
interest income associated with loans 90 days and greater delinquent where
collection of interest is doubtful was approximately $1,000 and $47,000 for the
years ended July 31, 1995 and 1994, respectively. There was no reduction in
interest income associated with loans 90 days and greater delinquent where
collection of interest is doubtful for the year ended July 31, 1996. Both loans
90 days and greater delinquent at July 31, 1996 continue to accrue interest.
F-9
<PAGE>
FAIRFIELD SAVINGS BANK, F.S.B.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
JULY 31, 1996, 1995, AND 1994
(3) LOANS RECEIVABLE (CONTINUED)
The Savings Bank adopted Statement 114 and Statement 118 on August 1, 1995.
These statements establish procedures for determining the appropriate allowance
required for loans deemed impaired. The calculation of allowance levels is based
upon the discounted present value of expected future cash flows received from
the debtor or the fair value of the collateral if the loan is collateral
dependent. No loans were identified as impaired by the Savings Bank at July 31,
1996. Additionally, no loans were considered impaired during the year ended July
31, 1996.
The Savings Bank serviced loans for others with principal balances
approximating $2,021,000, $2,556,000, and $3,452,000 at July 31, 1996, 1995, and
1994, respectively. As part of the loan sale agreements to the Federal National
Mortgage Association, the Savings Bank is required to repurchase loans which
become contractually delinquent. The Savings Bank was not required to repurchase
loans during 1996, 1995, and 1994.
Real estate mortgage loans, aggregating approximately $4,538,000,
$6,043,000, and $3,837,000 at July 31, 1996, 1995, and 1994, respectively, have
interest rates which adjust based on the movement of various economic indices.
(4) ACCRUED INTEREST RECEIVABLE
Accrued interest receivable at July 31 is summarized as follows:
<TABLE>
<CAPTION>
1996 1995
---------- ---------
<S> <C> <C>
Loans receivable........................................................................... $ 555,626 341,612
Mortgage-backed securities................................................................. 396,569 589,824
Federal Home Loan Bank of Chicago stock.................................................... 11,628 11,690
---------- ---------
$ 963,823 943,126
---------- ---------
---------- ---------
</TABLE>
(5) OFFICE PROPERTIES AND EQUIPMENT
A comparative summary of office properties and equipment at July 31 at cost,
less accumulated depreciation and amortization, is as follows:
<TABLE>
<CAPTION>
1996 1995
------------- ------------
<S> <C> <C>
Land............................................................. $ 888,394 810,806
Buildings........................................................ 5,975,757 5,884,990
Furniture, fixtures, and equipment............................... 4,369,816 4,338,289
------------- ------------
11,233,967 11,034,085
Less accumulated depreciation and amortization................... 6,432,960 6,040,903
------------- ------------
$ 4,801,007 4,993,182
------------- ------------
------------- ------------
</TABLE>
Depreciation and amortization expense was $404,019, $407,599, and $388,916
for the years ended July 31, 1996, 1995, and 1994, respectively.
F-10
<PAGE>
FAIRFIELD SAVINGS BANK, F.S.B.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
JULY 31, 1996, 1995, AND 1994
(6) SAVINGS DEPOSITS
Savings deposits at July 31 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>
Noninterest-bearing NOW accounts.................... --% --% $ 4,165,325 3.0% $ 3,799,372 2.6%
NOW accounts........................................ 2.02 2.02 7,310,099 5.3 7,294,210 4.9
Money market demand accounts........................ 3.12 3.16 13,034,800 9.5 14,717,201 9.9
Passbook accounts................................... 2.50 2.50 41,323,998 30.2 44,241,199 29.8
--- --- -------------- ----- -------------- -----
65,834,222 48.0 70,051,982 47.2
--- --- -------------- ----- -------------- -----
Certificate accounts................................ 5.48 5.52 71,342,548 52.0 78,297,996 52.8
--- --- -------------- ----- -------------- -----
4.01% 4.07% $ 137,176,770 100.0% $ 148,349,978 100.0%
--- --- -------------- ----- -------------- -----
--- --- -------------- ----- -------------- -----
</TABLE>
<TABLE>
<CAPTION>
1996 1995
-------------------------- --------------------------
<S> <C> <C> <C> <C>
AMOUNT PERCENT AMOUNT PERCENT
------------- ----------- ------------- -----------
Contractual maturity of certificate accounts:
Under 12 months............................................... $ 53,295,390 74.7% $ 47,545,652 60.7%
12 to 36 months............................................... 17,110,166 24.0 28,897,616 36.9
Over 36 months................................................ 936,992 1.3 1,854,728 2.4
------------- ----- ------------- -----
$ 71,342,548 100.0% $ 78,297,996 100.0%
------------- ----- ------------- -----
------------- ----- ------------- -----
</TABLE>
The aggregate amount of certificate accounts with a balance of $100,000 or
greater was approximately $6,143,000 and $6,401,000 at July 31, 1996 and 1995,
respectively. Savings deposits in excess of $100,000 are not insured by the
Federal Deposit Insurance Corporation.
Interest expense on savings deposits is summarized as follows for the years
ended July 31:
<TABLE>
<CAPTION>
1996 1995 1994
------------ ---------- ----------
<S> <C> <C> <C>
NOW accounts.............................................................. $ 146,390 155,549 183,614
Money market demand accounts.............................................. 437,098 467,172 519,951
Passbook accounts......................................................... 1,054,003 1,129,942 1,279,945
Certificate accounts...................................................... 4,286,583 3,311,325 2,510,170
------------ ---------- ----------
$ 5,924,074 5,063,988 4,493,680
------------ ---------- ----------
------------ ---------- ----------
</TABLE>
F-11
<PAGE>
FAIRFIELD SAVINGS BANK, F.S.B.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
JULY 31, 1996, 1995, AND 1994
(7) BORROWED MONEY
Borrowed money at July 31 consisted of the following:
<TABLE>
<CAPTION>
INTEREST
RATE AT
DUE DATE JULY 31 1996 1995
--------- ----------- ------------- ------------
<S> <C> <C> <C> <C>
Advances from the Federal Home Loan Bank of Chicago:
-- 6.70% $ 12,600,000 --
7/31/96 6.60 -- 3,000,000
1/16/96 6.50 -- 2,000,000
2/20/96 6.85 -- 3,000,000
7/26/96 4.96 -- 1,000,000
8/20/96 7.05 1,300,000 1,300,000
10/25/96 6.79 4,300,000 4,300,000
11/20/96 5.65 4,000,000 --
2/20/97 7.15 7,000,000 7,000,000
7/26/97 5.38 1,000,000 1,000,000
2/20/98 7.30 7,700,000 7,700,000
7/26/98 5.63 1,000,000 1,000,000
7/19/99 6.64 1,000,000 1,000,000
------------- ------------
$ 39,900,000 32,300,000
------------- ------------
------------- ------------
Weighted average interest rate................................. 6.75% 6.83%
------------- ------------
------------- ------------
</TABLE>
The $12,600,000 represents borrowings on an open line of credit which has a
floating rate of interest, and for which there is no stated due date. The unused
portion on the open line of credit was approximately $6,015,000 at July 31,
1996.
The Savings Bank has a collateral pledge agreement whereby the Savings Bank
has agreed to keep on hand at all times, free of all other pledges, liens, and
encumbrances, home mortgages with unpaid principal balances aggregating no less
than 167% of the outstanding advances from the Federal Home Loan Bank of
Chicago. At July 31, 1996 and 1995, all stock in the Federal Home Loan Bank of
Chicago was also pledged as collateral for advances from that bank.
The Savings Bank at times sells securities under agreements to repurchase
which are treated as financings, and the obligation to repurchase securities
sold is reflected as a liability in the statements of financial condition. The
dollar amount of securities underlying the agreements remains in the asset
account and are held in safekeeping. During 1994 there was an agreement for
securities sold under agreements to repurchase in the amount of approximately
$20,600,000 at a rate of 5.50%. There were no securities sold under agreements
to repurchase outstanding at July 31, 1996 and 1995.
F-12
<PAGE>
FAIRFIELD SAVINGS BANK, F.S.B.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
JULY 31, 1996, 1995, AND 1994
(8) INCOME TAXES
Income tax expense (benefit) is summarized as follows for the years ended
July 31:
<TABLE>
<CAPTION>
1996 1995 1994
---------- --------- ----------
<S> <C> <C> <C>
Current:
Federal..................................................................... $ 182,595 393,137 1,020,884
State....................................................................... -- (45,000) --
---------- --------- ----------
182,595 348,137 1,020,884
---------- --------- ----------
Deferred:
Federal..................................................................... (65,595) 90,263 (126,784)
State....................................................................... -- -- --
---------- --------- ----------
(65,595) 90,263 (126,784)
---------- --------- ----------
Total income tax expense...................................................... $ 117,000 438,400 894,100
---------- --------- ----------
---------- --------- ----------
</TABLE>
Income tax expense amounted to $117,000, $438,400 and $894,100 in 1996,
1995, and 1994, an effective tax rate of 34.1%, 30.9%, and 34.9%, respectively.
The reasons for the difference between the effective income tax rate and the
corporate Federal income tax rate of 34% are as follows:
<TABLE>
<CAPTION>
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
Federal income tax rate of 34%.............................................................. 34.0% 34.0 34.0
Other....................................................................................... .1 (3.1) .9
Effective income tax rate................................................................... 34.1% 30.9 34.9
--- --- ---
--- --- ---
</TABLE>
Effective August 1, 1993 the Savings Bank adopted the provisions of
Statement 109 prospectively. The cumulative effect of the change in method of
accounting for income taxes increased earnings by $439,470 for the year ended
July 31, 1994, and is reported separately in the 1994 statement of earnings.
F-13
<PAGE>
FAIRFIELD SAVINGS BANK, F.S.B.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
JULY 31, 1996, 1995, AND 1994
(8) INCOME TAXES (CONTINUED)
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at July 31,
1996 and 1995 are presented below:
<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
Deferred tax assets:
Depreciation.......................................................................... $ 20,172 45,888
General loan loss allowance........................................................... 138,159 68,359
Accrued bonus......................................................................... -- 15,662
Deferred loss on intercompany sales of real estate.................................... 143,822 153,151
Capitalized interest.................................................................. 19,174 19,174
Illinois net operating loss carryforwards............................................. 810,960 888,313
Unrealized loss on securities available-for-sale...................................... 550,819 --
Other................................................................................. -- 4,991
---------- ----------
1,683,106 1,195,538
Less valuation allowance.............................................................. 747,228 810,757
---------- ----------
Total deferred tax assets, net of valuation allowance................................... 935,878 384,781
---------- ----------
Deferred tax liabilities:
Excess of tax bad debt reserve over base year amount.................................. 236,361 189,578
Federal Home Loan Bank stock dividends not currently taxable.......................... 115,227 134,143
Deferred loan fees.................................................................... 329,102 422,020
Other................................................................................. 6,035 6,301
---------- ----------
Total gross deferred tax liabilities.................................................... 686,725 752,042
---------- ----------
Net deferred tax asset (liability)...................................................... $ 249,153 (367,261)
---------- ----------
---------- ----------
</TABLE>
The Savings Bank has Illinois net operating loss carryforwards in the amount
of $11,295,000, which will expire in varying amounts beginning July 31, 1997
through July 31, 2011.
The valuation allowance for deferred tax assets was $747,228 and $810,757 as
of July 31, 1996 and 1995, respectively, resulting in a decrease of $63,529 for
the year ended July 31, 1996. The valuation allowance relates to state net
operating loss carryforwards and certain deductible temporary differences which
may not generate future state tax benefits.
Retained earnings at July 31, 1996 and 1995 include $6,149,000 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 federal
and state corporate income tax rates.
(9) EMPLOYEE BENEFIT PLANS
The Savings Bank has a qualified noncontributory pension plan covering
substantially all of its full-time employees over 21 years of age, including
part-time employees working over 1,000 hours per year. The Savings Bank's policy
is to fund pension costs accrued.
F-14
<PAGE>
FAIRFIELD SAVINGS BANK, F.S.B.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
JULY 31, 1996, 1995, AND 1994
(9) EMPLOYEE BENEFIT PLANS (CONTINUED)
The following table sets forth the plan's funded status at July 31, 1996 and
1995:
<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
Actuarial present value of accumulated benefit obligations, including vested benefits of
$482,990 in 1996 and $391,206 in 1995................................................... $ 533,599 432,893
---------- ----------
---------- ----------
Plan assets at fair value (consisting primarily of common stock).......................... 611,916 478,061
Less projected benefit obligation for services rendered to date........................... 644,879 530,610
---------- ----------
Projected benefit obligation in excess of plan assets..................................... (32,963) (52,549)
Unrecognized net transition asset at August 1, 1991 being recognized over 11.65 years..... (109,340) (126,425)
Unrecognized net loss..................................................................... 80,972 70,750
---------- ----------
Accrued pension cost...................................................................... $ (61,331) (108,224)
---------- ----------
---------- ----------
</TABLE>
Net pension expense for the year ended July 31, 1996, 1995, and 1994
includes the following:
<TABLE>
<CAPTION>
1996 1995 1994
---------- --------- ---------
<S> <C> <C> <C>
Service cost-benefits earned during the period................................... $ 48,802 43,201 38,289
Interest cost on projected benefit obligation.................................... 41,757 34,046 27,576
Actuarial return on plan assets.................................................. (54,552) (67,827) (10,100)
Net amortization and deferral.................................................... 1,294 29,759 (25,248)
---------- --------- ---------
Net periodic pension expense..................................................... $ 37,301 39,179 30,517
---------- --------- ---------
---------- --------- ---------
</TABLE>
The rate of increase in future compensation levels used is determined by the
age of the participants. The discount rate used in determining the actuarial
present value of the projected benefit obligation was 7.50% at July 31, 1996,
1995, and 1994. The expected long-term rate of return was 8.00% at July 31,
1996, 1995, and 1994.
The Savings Bank also has a contributory profit-sharing plan covering
substantially all full-time employees. The Savings Bank makes annual
contributions to the plan equal to a percentage of each participant's
compensation for the plan year. The contribution was 15% in 1996, 1995, and
1994. Profit-sharing expense was approximately $110,000, $114,000 and $124,000
for the years ended July 31, 1996, 1995, and 1994, respectively.
(10) MANAGEMENT BONUS PROGRAM
The Board of Directors of the Savings Bank adopted an annual and a long-term
management bonus program for Senior Management Officers (SMO) during 1995 on a
retrospective basis. The individual amounts to be awarded under both the annual
and long-term bonus programs were based on the Savings Bank attaining a minimum
return on average assets for that year. The retrospective award of approximately
$253,000 was accrued for at July 31, 1994 and was distributed during 1995. The
accrual for the annual and long-term bonus as of July 31, 1995 was approximately
$106,000. During 1996, the long-term SMO was terminated. No accrual was made for
the annual bonus at July 31, 1996 as the minimum benchmarks established were not
achieved.
F-15
<PAGE>
FAIRFIELD SAVINGS BANK, F.S.B.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
JULY 31, 1996, 1995, AND 1994
(11) REGULATORY CAPITAL COMPLIANCE
The Savings Bank is subject to regulatory capital requirements administered
by Federal regulatory 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
Savings Bank's financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Savings Bank must meet
specific capital guidelines that involve quantitative measures of the Savings
Bank's assets, liabilities and certain off-balance sheet items as calculated
under regulatory accounting practices. The Savings Bank'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 adequacy require
the Savings Bank to maintain minimum amounts and ratios as set forth below.
Management believes, as of July 31, 1996, that the Savings Bank meets all
capital adequacy requirements to which it is subject.
As of July 31, 1996, the most recent notification from the Office of Thrift
Supervision categorized the Savings Bank as well capitalized under the
regulatory framework for prompt corrective action. There are no conditions or
events since that notification that management believes have changed the
institution's category.
The Savings Bank's actual capital amounts and ratios are as follows as of
July 31, 1996:
<TABLE>
<CAPTION>
FOR CAPITAL ADEQUACY
ACTUAL
------------------------ -------------------------
AMOUNT RATIO AMOUNT RATIO
------------- --------- ------------ -----
<S> <C> <C> <C> <C>
Tangible capital.................................................... $ 14,386,000 7.35% $ 2,936,000 1.50%
Core capital........................................................ 14,386,000 7.35 5,872,000 3.00
Risk-based capital.................................................. 14,686,000 21.59 5,441,000 8.00
</TABLE>
(12) CREDIT CONCENTRATION AND FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
The Savings Bank is a party to financial instruments with off-balance sheet
risk in the normal course of its business. These instruments are commitments to
originate loans and involve credit and interest rate risk in excess of the
amount recognized in the statements of financial condition.
The majority of the Savings Bank's loans are secured by residential real
estate in the Chicago metropolitan area. Management believes the Savings Bank
has a diversified loan portfolio and the concentration of lending activities in
these local communities does not result in an acute dependency upon economic
conditions of the lending region.
Commitments to originate fixed and variable rate mortgage loans were
$751,000 and $100,000, respectively, at rates ranging between 7.625% and 8.125%.
Commitments to fund available home equity lines of credit of approximately
$614,000 at July 31, 1996 represent amounts which the Savings Bank has committed
to fund if requested by the borrower within the normal commitment period.
Because the creditworthiness of each customer is reviewed prior to extension of
credit, the Savings Bank adequately controls its credit risk on these
commitments as it does for loans recorded on the statements of financial
condition.
F-16
<PAGE>
FAIRFIELD SAVINGS BANK, F.S.B.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
JULY 31, 1996, 1995, AND 1994
(13) COMMITMENTS AND CONTINGENCIES
The Savings Bank 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 Savings Bank.
In connection with the development of the Trails of Olympia Fields (a
planned unit development of homesites and commercial land developed by Fairfield
and its subsidiary in prior years), the Bank initiated action against a
municipality and certain parties involved in the development and for the years
ended July 31, 1996 and 1995, the Bank settled two of these claims and received
$184,415 and $51,671, respectively.
(14) FAIR VALUES OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107, "Disclosure 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
Savings Bank's financial instruments at July 31.
<TABLE>
<CAPTION>
1996 1995
----------------------------- ----------------------------
<S> <C> <C> <C> <C>
CARRYING ESTIMATED CARRYING ESTIMATED
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
-------------- ------------- ------------- -------------
Financial assets:
Cash and due from banks.......................... $ 2,568,612 2,568,612 2,088,202 2,088,202
Interest-earning deposits........................ 2,040,308 2,040,308 6,956,242 6,956,242
Mortgage-backed securities....................... 102,410,965 100,432,583 111,872,599 109,706,762
Loans receivable, net............................ 79,143,572 78,182,029 70,984,459 71,499,742
Accrued interest receivable...................... 963,823 963,823 943,126 943,126
Federal Home Loan Bank of Chicago
stock.......................................... 2,045,000 2,045,000 2,264,300 2,264,300
-------------- ------------- ------------- -------------
Total financial assets............................. $ 189,172,280 186,232,355 195,450,540 193,458,374
-------------- ------------- ------------- -------------
-------------- ------------- ------------- -------------
</TABLE>
<TABLE>
<CAPTION>
1996 1995
----------------------------- ----------------------------
<S> <C> <C> <C> <C>
CARRYING ESTIMATED CARRYING ESTIMATED
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
-------------- ------------- ------------- -------------
Financial liabilities:
Nonmaturing savings deposits..................... $ 65,834,222 65,834,222 70,051,982 70,051,982
Savings deposits with stated maturities.......... 71,342,548 71,306,373 78,297,996 78,409,575
Borrowed money................................... 39,900,000 40,065,320 32,300,000 32,300,000
Accrued interest payable......................... 351,693 351,693 193,161 193,161
-------------- ------------- ------------- -------------
Total financial liabilities........................ $ 177,428,463 177,557,608 180,843,139 180,954,718
-------------- ------------- ------------- -------------
-------------- ------------- ------------- -------------
</TABLE>
F-17
<PAGE>
FAIRFIELD SAVINGS BANK, F.S.B.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
JULY 31, 1996, 1995, AND 1994
(14) FAIR VALUES OF FINANCIAL INSTRUMENTS (CONTINUED)
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.
MORTGAGE-BACKED SECURITIES
The fair value of mortgage-backed securities 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 accounts, money
market accounts, and passbook accounts, is equal to the amount payable on demand
as of July 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 MONEY
The fair value of advances from the Federal Home Loan Bank of Chicago is
equal to the amount payable on demand as of July 31, 1996 and 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.
F-18
<PAGE>
FAIRFIELD SAVINGS BANK, F.S.B.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
JULY 31, 1996, 1995, AND 1994
(14) FAIR VALUES OF FINANCIAL INSTRUMENTS (CONTINUED)
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 Savings Bank'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) CONVERSION TO STOCK FORM OF OWNERSHIP
On May 21, 1996, the Board of Directors adopted a Plan of Conversion (Plan)
whereby the Savings Bank will convert from a federally chartered mutual savings
bank to a federally chartered stock savings bank. The Plan is subject to
approval of regulatory authorities and members at a special meeting. The stock
of the Savings Bank will be issued to a holding company formed in connection
with the conversion. Pursuant to the Plan, shares of capital stock of the
holding company are expected to be offered initially for subscription by
eligible members of the Savings Bank and certain other persons as of specified
dates subject to various subscription priorities as provided in the Plan. The
capital stock will be offered at a price to be determined by the Board of
Directors based upon an appraisal to be made by an independent appraisal firm.
The exact number of shares to be offered will be determined by the Board of
Directors in conjunction with the determination of the price at which the shares
will be sold. At least the minimum number of shares offered in the conversion
must be sold. Any stock not purchased in the subscription offering will be sold
in a community offering.
The Plan provides that when the conversion is completed, a "Liquidation
Account" will be established in an amount equal to the retained earnings of the
Savings Bank as of the date of the most recent financial statements contained in
the final conversion prospectus. The Liquidation Account is established to
provide a limited priority claim on the assets of the Savings Bank to qualifying
depositors (Eligible Account Holders) who continue to maintain deposits in the
Savings Bank after conversion. In the unlikely event of a complete liquidation
of the Savings Bank, and only in such an event, each Eligible Account Holder
would receive from the Liquidation Account a liquidation distribution based on
his proportionate share of the then total remaining qualifying deposits.
Current regulations allow the Savings Bank to pay dividends on its stock
after the conversion if its regulatory capital would not thereby be reduced
below the amount then required for the aforementioned Liquidation Account. Also,
capital distribution regulations limit the Savings Bank's ability to make
capital distributions which include dividends, stock redemptions or repurchases,
cash-out mergers, interest payments on certain convertible debt and other
transactions charged to the capital account based on their capital level and
supervisory condition. Federal regulations also preclude any repurchase of the
stock of
F-19
<PAGE>
FAIRFIELD SAVINGS BANK, F.S.B.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
JULY 31, 1996, 1995, AND 1994
(15) CONVERSION TO STOCK FORM OF OWNERSHIP (CONTINUED)
the Savings Bank or its holding company for three years after conversion except
for repurchases of qualifying shares of a director and repurchases pursuant to
an offer made on a PRO RATA basis to all stockholders and with prior approval of
the Office of Thrift Supervision; or pursuant to an open-market stock repurchase
program that complies with certain regulatory criteria. The Savings Bank has
retained the services of both an underwriting firm and legal counsel for the
specific purpose of implementing the Savings Bank's plan of conversion. At July
31, 1996, the Savings Bank had incurred approximately $113,000 in costs relating
to these services. These costs have been deferred and, upon conversion, such
costs and any additional costs will be charged against the proceeds from the
sale of stock. If the conversion is not completed, these deferred costs will be
charged to operations.
F-20
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION OTHER THAN AS CONTAINED IN THIS
PROSPECTUS IN CONNECTION WITH THE OFFERING MADE HEREBY, AND, IF GIVEN OR MADE,
SUCH OTHER INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY BIG FOOT FINANCIAL CORP., FAIRFIELD SAVINGS BANK, F.S.B. OR HOVDE
SECURITIES, INC. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A
SOLICITATION OF AN OFFER TO BUY ANY OF THE SECURITIES OFFERED HEREBY TO ANY
PERSON IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED
OR IN WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO
SO, OR TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION
IN SUCH JURISDICTION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE
HEREUNDER SHALL UNDER ANY CIRCUMSTANCES CREATE ANY IMPLICATION THAT THERE HAS
BEEN NO CHANGE IN THE AFFAIRS OF BIG FOOT FINANCIAL CORP. OR FAIRFIELD SAVINGS
BANK, F.S.B. SINCE ANY OF THE DATES AS OF WHICH INFORMATION IS FURNISHED HEREIN
OR SINCE THE DATE HEREOF.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Summary................................................................... 5
Selected Financial and Other Data of the Bank............................. 15
Risk Factors.............................................................. 17
Big Foot Financial Corp. ................................................. 26
Fairfield Savings Bank, F.S.B. ........................................... 27
Use of Proceeds........................................................... 28
Dividend Policy........................................................... 30
Market for the Common Stock............................................... 31
Regulatory Capital Compliance............................................. 32
Capitalization............................................................ 33
Pro Forma Data............................................................ 34
Fairfield Savings Bank, F.S.B. Statements of Earnings..................... 38
Management's Discussion and Analysis of Financial Condition and Results of
Operations.............................................................. 39
Business of the Company................................................... 55
Business of the Bank...................................................... 55
Federal and State Taxation................................................ 71
Regulation................................................................ 73
Management of the Company................................................. 84
Management of the Bank.................................................... 85
The Conversion............................................................ 98
Restrictions on Acquisition of the Company and the Bank................... 118
Description of Capital Stock of the Company............................... 125
Description of Capital Stock of the Bank.................................. 126
Transfer Agent and Registrar.............................................. 128
Experts................................................................... 128
Legal and Tax Opinions.................................................... 128
Additional Information.................................................... 128
Index to Financial Statements............................................. F-1
</TABLE>
------------------------
UNTIL THE LATER OF DECEMBER 10, 1996, OR 25 DAYS AFTER THE COMMENCEMENT OF
THE COMMUNITY OFFERING, IF ANY, ALL DEALERS EFFECTING TRANSACTIONS IN THE
REGISTERED SECURITIES, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE
REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATION OF
DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO
THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
2,185,000 SHARES
[LOGO]
(PROPOSED HOLDING COMPANY FOR
FAIRFIELD SAVINGS BANK, F.S.B.)
COMMON STOCK
-----------------
P R O S P E C T U S
-----------------
HOVDE SECURITIES, INC.
NOVEMBER 8, 1996
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
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