<PAGE>
Registration No. 333-12083
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------
PRE-EFFECTIVE AMENDMENT NO. 1
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
--------------------------
BIG FOOT FINANCIAL CORP.
(Exact name of registrant as specified in its charter)
--------------------------
Illinois 6035 36-4108480
(State or other jurisdiction (Primary Standard (IRS Employer
of incorporation or organization) Classification Code No.) Identification No.)
1190 RFD
Long Grove, Illinois 60047
(847) 634-2100
(Address, including zip code, and telephone number,
including area code, of registrant's principal executive offices)
----------------------
George M. Briody
President
Big Foot Financial Corp.
1190 RFD
Long Grove, Illinois 60047
(847) 634-2100
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
----------------------
With copies to:
Daniel C. McKay, II
V. Gerard Comizio, Esq. Vedder, Price,
Thacher Proffitt & Wood Kaufman & Kammholz
1500 K Street, N.W. 222 North LaSalle Street
Washington, D.C. 20005 Chicago, Illinois 60601
(202) 347-8400 (312) 609-7500
----------------------
Approximate date of commencement of proposed sale to public: As soon as
practicable after this Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box |_|
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, please check the following box and list
the Securities Act registration statement number of the earlier effective
registration statement for the same offering. |_|
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. |_|
If delivery of the prospectus is expected to be made pursuant to Rule 434, check
the following box. |_|
<TABLE>
<CAPTION>
CALCULATION OF REGISTRATION FEE
=================================================================================================================================
Title of Securities to be Amount to be Registered(1) Proposed Maximum Offering Proposed Maximum Amount of
Registered Price Per Share(2) Aggregate Offering Price(2) Registration Fee
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, par value 2,512,750 $10.00 $25,127,500 $602(3)
$.01 per share shares
=================================================================================================================================
</TABLE>
(1) Includes the maximum number of shares that may be issued in connection with
this offering, based on various assumptions relating thereto.
(2) Estimated solely for the purpose of calculating the registration fee.
(3) The total registration fee is $8583, of which $7981 (calculated at 1/29 of
one percent of the aggregate offering amount) was previously paid with the
Registrant's filing of the Form S-1 on September 16, 1996. The additional
$602 represents the registration fee for 198,375 additional shares,
calculated at 1/33 of one percent of the additional aggregate offering
price.
The Registrant hereby amends this Registration Statement on such date or dates
as may be necessary to delay its effective date until the Registrant shall file
a further amendment which specifically states that this Registration Statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to Section 8(a), may
determine.
================================================================================
<PAGE>
[To be used in connection with the Syndicated Community Offering only]
PROSPECTUS SUPPLEMENT
BIG FOOT FINANCIAL CORP.
(PROPOSED HOLDING COMPANY FOR
FAIRFIELD SAVINGS BANK, F.S.B.)
________ SHARES OF COMMON STOCK
FOR INFORMATION ON HOW TO SUBSCRIBE FOR THE COMMON STOCK, CALL THE STOCK
INFORMATION CENTER AT (847) XXX-XXXX
FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED BY EACH
PROSPECTIVE INVESTOR, SEE "RISK FACTORS" BEGINNING ON PAGE ___ OF THE
PROSPECTUS.
Big Foot Financial Corp. (the "Company"), an Illinois corporation, is
offering for sale in a syndicated community offering (the "Syndicated Community
Offering") ____________ shares of its common stock, par value $.01 per share
(the "Common Stock"), at a per share price of $10.00, to be issued upon the
conversion of Fairfield Savings Bank, F.S.B. (the "Bank") from a federally
chartered mutual savings bank to a federally chartered stock savings bank and
the issuance of the Bank's outstanding common stock to the Company pursuant to
an amended and restated plan of conversion (the "Plan of Conversion"). The
remaining ____________ shares of the Common Stock have been subscribed for in
subscription and community offerings (the "Subscription and Community
Offerings") by (1) the Bank's depositors whose deposits in qualifying accounts
totalled $50 or more on December 31, 1994 ("Eligible Account Holders"); (2) the
Bank's tax-qualified stock employee benefit plans ("Employee Plans"), including
the Employee Stock Ownership Plan of Big Foot Financial Corp. and related trust
(the "ESOP"); (3) the Bank's depositors whose deposits in qualifying accounts
totalled $50 or more on September 30, 1996 (other than Eligible Account Holders
or directors or officers of the Bank or their associates); (4) certain other
members of the Bank, consisting of depositors of the Bank as of ____________ __,
1996 and borrowers of the Bank with loans outstanding as of July 1, 1991 which
continue to be outstanding as of _______ __, 1996 ("Other Members"); (5)
employees and officers of the Bank other than those employees and officers who
would otherwise qualify as Eligible Account Holders, Supplemental Eligible
Account Holders or Other Members; and (6) certain members of the general public.
See "The Conversion -- General." Contained herein is the Prospectus in the form
used in the Subscription and Community Offerings. The purchase price for all
shares purchased in the Syndicated Community Offering will be the same as the
price paid by subscribers in the Subscription and Community Offerings (the
"Purchase Price"). The Purchase Price of $10.00 per share is the amount to be
paid for each share at the time a purchase order is submitted. See the cover
page of the Prospectus and the table below for information as to the method by
which the range within which the number of shares offered may vary and the
method of subscribing for shares of the Common Stock.
Funds submitted to the Bank with purchase orders will earn interest at the
contractual rate of interest from the date of receipt until completion or
termination of the Conversion. The Syndicated Community Offering will expire no
later than ____________, 1996, unless extended by the Bank and the Company with
the approval of the Office of Thrift Supervision (the "OTS"). Such extensions
may not go beyond ____________, 1998. If an extension of time has been granted,
all subscribers will be notified of such
<PAGE>
extension, and of their rights to confirm their subscriptions, or to modify or
rescind their subscriptions and have their funds returned promptly with
interest, and of the time period within which the subscriber must notify the
Bank of its intention to confirm, modify or rescind such subscriber's
subscription. 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. The minimum
number of shares that may be purchased is 25 shares. Except for the Employee
Plans, including the ESOP, which intends to purchase up to 8% of the total
number of shares of Common Stock issued in the Conversion, no person, together
with associates of and persons acting in concert with such person, may purchase
more than the total number of shares offered in the Community Offering and the
Syndicated Community Offering that could be purchased for $150,000 (15,000
shares) at the Purchase Price and no person, together with associates of and
persons acting in concert with such person, may purchase more than 1.0% of the
total number of shares issued in the Conversion. See "The Conversion --
Subscription Offering and Subscription Rights" and "-- Limitations on Common
Stock Purchases." 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 Syndicated Community Offering.
The Company and the Bank have engaged Hovde Securities, Inc. ("Hovde") to
assist them in the sale of the Common Stock in the Syndicated Community
Offering. It is anticipated that Hovde will use the services of other
registered broker-dealers ("Selected Dealers") and that fees to Hovde and such
Selected Dealers will be ________% of the aggregate Purchase Price of the shares
sold in the Syndicated Community Offering. Neither Hovde nor any Selected
Dealer shall have any obligation to take or purchase any shares of Common Stock
in the Syndicated Community Offering.
The Common Stock has been approved for quotation upon issuance on the
Nasdaq National Market of The Nasdaq Stock Market under the symbol "BFFC."
Prior to this offering, there has not been a public market for the Common Stock,
and there can be no assurance that an active and liquid trading market for the
Common Stock will develop. The absence or discontinuance of a market may have
an adverse impact on both the price and liquidity of the stock.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION, THE OFFICE OF THRIFT SUPERVISION, DEPARTMENT OF THE
TREASURY, OR ANY OTHER FEDERAL AGENCY OR ANY STATE SECURITIES COMMISSION, NOR
HAS SUCH COMMISSION, OFFICE, OTHER AGENCY OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
THE SHARES OF COMMON STOCK OFFERED HEREBY ARE NOT SAVINGS ACCOUNTS OR DEPOSITS
AND ARE NOT INSURED OR GUARANTEED BY THE SAVINGS ASSOCIATION INSURANCE FUND OR
THE BANK INSURANCE FUND OF THE FEDERAL DEPOSIT INSURANCE CORPORATION, OR BY ANY
OTHER GOVERNMENT AGENCY.
<PAGE>
<TABLE>
<CAPTION>
ESTIMATED NET
PROCEEDS OF
ESTIMATED NET SUBSCRIPTION,
ESTIMATED PROCEEDS OF COMMUNITY AND
SYNDICATED UNDERWRITING SYNDICATED SYNDICATED
COMMUNITY COMMISSIONS AND COMMUNITY COMMUNITY
OFFERING PRICE OTHER EXPENSES(1) OFFERING OFFERINGS(2)(3)
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Minimum Per Share $10.00 $ $ $
Midpoint Per Share $10.00 $ $ $
Maximum Per Share $10.00 $ $ $
Total Minimum(4) $ $ $ $
Total Midpoint $ $ $ $
Total Maximum(4) $ $ $ $
Total Maximum, As Adjusted(5)
</TABLE>
- --------------------------
(1) Consists of a pro rata allocation of estimated expenses of the Bank and
Company in connection with the Conversion (other than estimated fees to be
paid to Hovde for services in connection with the Subscription and
Community Offerings) and estimated compensation of Hovde and Selected
Dealers in connection with the sale of the remaining shares in the
Syndicated Community Offering, which fees are estimated to be $____________
million and $____________ million, respectively, at the minimum and the
maximum of the estimated price range and may be deemed to be underwriting
fees. The information under "Pro Forma Data" in the Prospectus was based
on the assumptions stated therein, which may differ from the estimates used
for this table. See "The Conversion -- Marketing and Underwriting
Arrangements" for a more detailed discussion of fee arrangements.
(2) The Company applied to retain up to 50% of the net conversion proceeds.
The balance of the net proceeds will be transferred to the Bank in exchange
for all of the capital stock of the Bank to be issued in connection with
the Conversion.
(3) The net proceeds of the Subscription and Community Offerings (based upon
the sale of the ____________ shares subscribed for at a price of $10.00 per
share and after allocation of a pro rata portion of the estimated relating
to the Conversion) are estimated to be $____________.
(4) Based on an estimated price range of $____________ to $____________ at
$10.00 per share (the "Estimated Price Range"). The Total Minimum reflects
the sale of ____________ shares at a per share price of $10.00, leaving a
total of ____________ shares to be sold in the Syndicated Community
Offering.
(5) Gives effect to an increase in the number of shares which could occur due
to an increase in the Estimated Price Range of up to 15% to reflect changes
in market and financial conditions following commencement of the offerings.
See "The Conversion -- Stock Pricing." For a discussion of the
distribution and allocation of the additional shares, see "The Conversion -
- Subscription Offering and Subscription Rights" and "-- Limitations on
Common Stock Purchases."
HOVDE SECURITIES, INC.
____________________________________
The date of this Prospectus Supplement is ____________, 1996.
<PAGE>
PROSPECTUS
[Logo] BIG FOOT FINANCIAL CORP.
(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) 821-4444.
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>
- ---------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Estimated Underwriting
Commissions and Other Estimated Net
Purchase Price(1) Expenses(2) Proceeds(3)
- ---------------------------------------------------------------------------------------------
Minimum Per Share $10.00 $0.60 $9.40
- ---------------------------------------------------------------------------------------------
Midpoint Per Share $10.00 $0.54 $9.46
- ---------------------------------------------------------------------------------------------
Maximum Per Share $10.00 $0.49 $9.51
- ---------------------------------------------------------------------------------------------
Total Minimum(1) $16,150,000 $971,000 $15,179,000
- ---------------------------------------------------------------------------------------------
Total Midpoint(1) $19,000,000 $1,017,000 $17,983,000
- ---------------------------------------------------------------------------------------------
Total Maximum(1) $21,850,000 $1,063,000 $20,787,000
- ---------------------------------------------------------------------------------------------
Total Maximum, as adjusted(4) $25,127,500 $1,116,000 $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's independent appraisal is based
upon estimates and projections that are subject to change, and the
valuation must not be construed as a recommendation as to the
advisability of purchasing such shares nor that a purchaser will
thereafter be able to sell such shares at prices in the range of the
foregoing valuation. Based on the Valuation Range, the Board of
Directors of the 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.
MARKED TO SHOW CHANGES FROM UNUSUAL FORMATTING DUE TO
PROSPECTUS FILED ON SEPTEMBER 16, 1996 COMPUTER BLACKLINING
<PAGE>
(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.
--------------
The date of this Prospectus is November __, 1996.
<PAGE>
(CONTINUED FROM PREVIOUS PAGE)
NON-TRANSFERABLE RIGHTS TO SUBSCRIBE FOR THE COMMON STOCK HAVE BEEN
GRANTED, IN ORDER OF PRIORITY, TO EACH OF THE 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 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 --
3
<PAGE>
(CONTINUED FROM PREVIOUS PAGE)
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 __, 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 __, 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."
4
<PAGE>
MAP
[MAP SHOWING OFFICE LOCATIONS OF
FAIRFIELD SAVINGS BANK, F.S.B. AND COUNTY LINES]
5
<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.
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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 quality service to its
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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 __, 1996. See "The
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
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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 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
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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 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
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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 "The
Conversion -- Community Offering." In the event of an increase in the total
number of shares up to 15%, the additional shares will be distributed and
allocated to fill unfilled orders in the Subscription and Community Offerings,
with priority given to the subscription of the 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 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
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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-
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term, investment grade marketable securities and mortgage-backed securities; and
to fund the Stock Programs. See "Use of Proceeds."
DIVIDENDS
Upon completion of the Conversion, the Board of Directors of the Company
will have the authority to declare dividends on the Common Stock. The Board of
Directors does not presently intend to declare dividends on the Common Stock. In
the future, declarations of dividends, if any, by the Board of Directors will
depend upon a number of factors, including the amount of the net proceeds from
the Offerings retained by the Company, investment opportunities available to
the Company or the 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
13
<PAGE>
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 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
14
<PAGE>
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. 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.
15
<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,
----------------------------------------------------
1996 1995 1994 1993 1992
-------- -------- --------- -------- --------
(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
<CAPTION>
FOR THE YEAR ENDED JULY 31,
----------------------------------------------------
1996 1995 1994 1993 1992
-------- -------- -------- -------- --------
(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)
16
<PAGE>
<TABLE>
<CAPTION>
AT OR FOR THE YEAR ENDED JULY 31,
-------------------------------------------------
1996 1995 1994 1993 1992
----- ----- ----- ----- -----
(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 . . . . . . . . . . . . . . . . . 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.
17
<PAGE>
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."
18
<PAGE>
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 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."
19
<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.
20
<PAGE>
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 "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."
21
<PAGE>
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 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 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 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.
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
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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 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."
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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 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
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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."
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
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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."
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
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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.
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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.
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,
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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.
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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 understanding 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
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diversification into other banking related businesses and for other business
or investment purposes, including possibly the payment of dividends and the
repurchase of the Company's Common Stock as permitted by the OTS. See
"Dividend Policy" and "Regulation --Regulation of Federal Savings
Associations -- Limitation on Capital Distributions." The Company has no
current arrangements, understandings or agreements, written or oral,
regarding any such transactions. The Company is subject to the terms of a
certification made to 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
31
<PAGE>
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.
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.
32
<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.
33
<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)
--------------------------------------------------------------------------------------------------------------
2,512,750 SHARES
1,615,000 SHARES 1,900,000 SHARES 2,185,000 SHARES (15% ABOVE
HISTORICAL AT (MINIMUM OF ESTIMATED (MIDPOINT OF ESTIMATED (MAXIMUM OF ESTIMATED MAXIMUM OF ESTIMATED
JULY 31, 1996 PRICE RANGE) PRICE RANGE) PRICE RANGE) PRICE RANGE)(2)
------------------- --------------------- ---------------------- --------------------- ---------------------
PERCENT OF PERCENT OF PERCENT OF PERCENT OF PERCENT OF
AMOUNT ASSETS (3) AMOUNT ASSETS (3) AMOUNT ASSETS (3) AMOUNT ASSETS (3) AMOUNT ASSETS (3)
-------- ---------- -------- ------------ -------- ------------ -------- ------------ -------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
GAAP CAPITAL (4). . $13,579 6.98% $19,231 9.60% $20,291 10.08% $21,351 10.55% $22,570 11.08%
------- ----- ------- ----- ------- ----- ------- ----- ------- -----
------- ----- ------- ----- ------- ----- ------- ----- ------- -----
TANGIBLE CAPITAL (4):
Capital level. . $14,386 7.35% $20,038 9.97% $21,098 10.44% $22,158 10.90% $23,377 11.44%
Requirement. . . 2,931 1.50 3,016 1.50 3,032 1.50 3,048 1.50 3,066 1.50
------- ----- ------- ----- ------- ----- ------- ----- ------- -----
Excess . . . . . $11,455 5.85% $17,022 8.47% $18,066 8.94% $19,110 9.40% $20,311 9.94%
------- ----- ------- ----- ------- ----- ------- ----- ------- -----
------- ----- ------- ----- ------- ----- ------- ----- ------- -----
CORE CAPITAL(4):
Capital level. . $14,386 7.35% 20,038 9.97% 21,098 10.44% 22,158 10.90% $23,377 11.44%
Requirement. . . 5,863 3.00 6,032 3.00 6,064 3.00 6,096 3.00 6,133 3.00
------- ----- ------- ----- ------- ----- ------- ----- ------- -----
Excess . . . . . $ 8,523 4.35% $14,006 6.97% $15,034 7.44% $16,062 7.90% $17,244 8.44%
------- ----- ------- ----- ------- ----- ------- ----- ------- -----
------- ----- ------- ----- ------- ----- ------- ----- ------- -----
RISK-BASED CAPITAL(4):
Capital level. . $14,686 21.59% $20,338 28.71% $21,398 29.98% $22,458 31.24% $23,677 32.65%
Requirement(5) . 5,441 8.00 5,667 8.00 5,709 8.00 5,752 8.00 5,801 8.00
------- ----- ------- ----- ------- ----- ------- ----- ------- -----
Excess . . . . . $ 9,245 13.59% $14,671 20.71% $15,689 21.98% $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,
34
<PAGE>
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.
35
<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
-----------------------------------------------------------
2,512,750
1,615,000 1,900,000 2,185,000 SHARES
SHARES SHARES SHARES (15% ABOVE
(MINIMUM OF (MIDPOINT OF (MAXIMUM OF (MAXIMUM OF
BANK ESTIMATED ESTIMATED ESTIMATED ESTIMATED
HISTORICAL PRICE RANGE) PRICE RANGE) PRICE RANGE) PRICE RANGE)(1)
----------- ------------ ------------ ------------ ---------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
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'
36
<PAGE>
equity. See "Management of the Bank -- Executive Compensation" and
"Management of the Bank -- 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.
37
<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 --
38
<PAGE>
Effects of Conversion -- Liquidation Rights" and "Management of the Bank --
Benefits -- Stock Option Plans."
39
<PAGE>
<TABLE>
<CAPTION>
At or For the Year Ended July 31,1996
-----------------------------------------------------
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%)
(Minimun (Midpoint (Maximum above Maximum
of Range) of Range) of Range) of Range)(1)
-----------------------------------------------------
(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
40
<PAGE>
<CAPTION>
At or For the Year Ended July 31,1996
-----------------------------------------------------
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%)
(Minimun (Midpoint (Maximum above Maximum
of Range) of Range) of Range) of Range)(1)
-----------------------------------------------------
(In thousands, except shares and per share amounts)
<S> <C> <C> <C> <C>
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 (1)(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)
41
<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
42
<PAGE>
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
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."
43
<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,
1996 1995 1994
----------- ----------- ------------
<S> <C> <C> <C>
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-for-sale and repurchase agreements . . -- 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.
44
<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,"
"Management's Discussion of Analysis of Financial Condition Results of
Operations" 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
45
<PAGE>
$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 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
46
<PAGE>
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 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
47
<PAGE>
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 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>
Net Portfolio Value NPV as % of Economic
Value of Assets
---------------------- -----------------------
Change in
Interest Rates
In Basis Points $ % %
(Rate Shock) Amount Change Change NPV Ratio Change
- ---------------- ---------- ------------ ---------- ----------- ----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
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."
48
<PAGE>
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 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.
49
<PAGE>
<TABLE>
<CAPTION>
FOR THE YEAR ENDED JULY 31,
-------------------------------------------------------------
AT JULY 31, 1996 1996 1995
------------------ ------------------------------- ----------------------------
WEIGHTED AVERAGE AVERAGE
AVERAGE AVERAGE YIELD/ AVERAGE YIELD/
BALANCE RATE(1) BALANCE INTEREST COST BALANCE INTEREST COST
--------- -------- ------- -------- ------- ------- -------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS:
Interest-earning assets:
Mortgage-backed securities(2). . . . . . $102,411 6.32% $110,734 $ 6,844 6.18% $107,009 $ 6,494 6.07%
Loans receivable(3). . . . . . . . . . . 79,444 7.67 75,264 6,027 8.01 69,280 5,663 8.17
Investment securities(2) . . . . . . . . -- -- -- -- -- 769 78 10.14
Interest-earning deposits. . . . . . . . 2,040 5.19 2,601 136 5.23 5,309 296 5.58
Stock in FHLB of Chicago . . . . . . . . 2,045 6.75 2,157 147 6.82 2,241 143 6.38
-------- ---- -------- ------- ---- -------- ------- -----
Total interest-earning assets. . . . . 185,940 6.89% 190,756 $13,154 6.90% 184,608 $12,674 6.87%
-------- ---- -------- ------- ---- -------- ------- -----
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 2.02%
Money market demand accounts . . . . . . 13,035 3.12 14,031 437 3.11 15,858 467 2.94
Passbook/statement savings accounts. . . 41,324 2.50 42,094 1,054 2.50 45,213 1,130 2.50
Certificates of deposit. . . . . . . . . 71,343 5.48 75,064 4,287 5.71 68,858 3,312 4.81
Borrowed money . . . . . . . . . . . . . 39,900 6.75 37,800 2,526 6.68 33,685 2,269 6.74
-------- ---- -------- ------- ---- -------- ------- -----
Total interest-bearing liabilities . . 172,912 4.74% 176,252 8,450 4.79% 171,295 7,333 4.28%
-------- ---- -------- ------- ---- -------- ------- -----
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% 2.59%
---- ----- ----
---- ----- ----
Net interest-earning assets. . . . . . . . . $ 13,028 $ 14,504 $ 13,313
-------- -------- --------
-------- -------- --------
Net interest margin(5) . . . . . . . . . . . 2.47% 2.89%
---- -----
---- -----
Ratio of interest-earning assets to
interest-bearing liabilities . . . . . . . 107.53% 108.23% 107.77%
-------- -------- --------
-------- -------- --------
</TABLE>
(NOTES ON FOLLOWING PAGE)
50
<PAGE>
<TABLE>
<CAPTION>
FOR THE YEAR ENDED JULY 31,
-----------------------------------------------------------------------------------------
1994 1993 1992
--------------------------- --------------------------- ----------------------------
AVERAGE AVERAGE AVERAGE
AVERAGE YIELD/ AVERAGE YIELD/ AVERAGE YIELD/
BALANCE INTEREST COST BALANCE INTEREST COST BALANCE INTEREST COST
------- -------- ------- ------- -------- ------- ------- -------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS:
Interest-earning assets:
Mortgage-backed securities(2). . . . $ 92,717 $ 6,021 6.49% $ 48,212 $ 3,505 7.27% $ 30,315 $ 2,306 7.61%
Loans receivable(3). . . . . . . . . 72,042 6,087 8.45 89,296 8,647 9.68 102,097 9,577 9.38
Investment securities(2) . . . . . . 5,728 483 8.43 24,654 1,437 5.83 28,044 1,959 6.99
Interest-earning deposits. . . . . . 10,564 332 3.14 11,165 302 2.70 8,939 393 4.40
Stock in FHLB of Chicago . . . . . . 2,163 129 5.96 1,912 104 5.44 1,735 103 5.94
-------- ------- ---- -------- ------- ---- -------- ------- ----
Total interest-earning assets. . . 183,214 $13,052 7.12% 175,239 $13,995 7.99% 171,130 $14,338 8.38%
-------- ------- ---- -------- ------- ---- -------- ------- ----
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 4.38%
Money market demand accounts . . . . 19,560 520 2.66 21,076 675 3.20 20,290 927 4.57
Passbook/statement savings accounts. 48,209 1,280 2.66 47,959 1,555 3.24 44,264 2,103 4.75
Certificates of deposit. . . . . . . 60,169 2,510 4.17 52,444 2,530 4.82 58,511 3,683 6.29
Borrowed money . . . . . . . . . . . 35,938 2,429 6.76 36,600 2,454 6.70 34,440 2,130 6.18
-------- ------- ---- -------- ------- ---- -------- ------- ----
Total interest-bearing liabilities 172,314 6,923 4.02% 166,705 7,454 4.47% 165,603 9,198 5.55%
-------- ------- ---- -------- ------- ---- -------- ------- ----
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% 2.83%
---- ---- ----
---- ---- ----
Net interest-earning assets. . . . . . . $ 10,900 $ 8,534 $ 5,527
-------- -------- --------
-------- -------- --------
Net interest margin(5) . . . . . . . . . 3.35% 3.73% 3.00%
---- ---- ----
---- ---- ----
Ratio of interest-earning assets to
interest-bearing liabilities . . . . . 106.33% 105.12% 103.34%
-------- -------- --------
-------- -------- --------
</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.
51
<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, 1996 YEAR ENDED JULY 31, 1995 YEAR ENDED JULY 31, 1994
COMPARED TO YEAR ENDED COMPARED TO YEAR ENDED COMPARED TO YEAR ENDED
JULY 31, 1995 JULY 31, 1994 JULY 31, 1993
-------------------------- -------------------------- ----------------------------
INCREASE/(DECREASE) INCREASE/(DECREASE) INCREASE/(DECREASE)
DUE TO DUE TO DUE TO
------------------ ------------------- -------------------
VOLUME RATE NET VOLUME RATE NET VOLUME RATE NET
-------- ------- ------ -------- -------- ------ -------- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS:
Mortgage-backed securities. . . . . . $ 230 $ 120 $ 350 $ 814 $(341) $ 473 $ 2,847 $ (331) $ 2,516
Loans receivable. . . . . . . . . . . 471 (107) 364 (227) (197) (424) (1,545) (1,015) (2,560)
Investment securities . . . . . . . . (39) (39) (78) (529) 124 (405) (2,278) 1,324 (954)
Interest-earning deposits . . . . . . (142) (18) (160) 64 (100) (36) (15) 45 30
Stock in FHLB of Chicago. . . . . . . (4) 8 4 5 9 14 15 10 25
----- ----- ------ ----- ----- ----- ------- ------- -------
Total. . . . . . . . . . . . . $ 516 $ (36) $ 480 $ 127 $(505) $(378) $ (976) $ 33 $ (943)
----- ----- ------ ----- ----- ----- ------- ------- -------
----- ----- ------ ----- ----- ----- ------- ------- -------
INTEREST-BEARING LIABILITIES:
NOW accounts . . . . . . . . . . . . $ (8) $ (1) $ (9) $ (16) $ (13) $ (29) $ (5) $ (51) $ (56)
Money market demand accounts . . . . (60) 30 (30) (121) 68 (53) (47) (108) (155)
Passbook/statement savings accounts. (76) -- (76) (76) (74) (150) 8 (283) (275)
Certificates of deposit. . . . . . . 317 658 975 389 413 802 (240) 220 (20)
Borrowed money . . . . . . . . . . . 277 (20) 257 (153) (7) (160) (50) 25 (25)
----- ----- ------ ----- ----- ----- ------- ------- -------
Total. . . . . . . . . . . . . $ 450 $ 667 $1,117 $ 23 $ 387 $ 410 $ (334) $ (197) $ (531)
----- ----- ------ ----- ----- ----- ------- ------- -------
Net change in net interest income. . . . $ 66 $(703) $ (637) $ 104 $(892) $(788) $ (642) $ 230 $ (412)
----- ----- ------ ----- ----- ----- ------- ------- -------
----- ----- ------ ----- ----- ----- ------- ------- -------
</TABLE>
52
<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
53
<PAGE>
$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%.
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%.
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 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.
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
54
<PAGE>
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.
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 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.
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
55
<PAGE>
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.
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, 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-
56
<PAGE>
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 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. 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
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$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 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 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
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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.
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.
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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 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
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arrangements. SFAS 123 requires pro forma disclosures of net earnings and
earnings per share computed as if the fair value based method had been applied
in APB Opinion 25. SFAS 123 applies to all stock-based employee compensation
plans in which an employer grants shares of its stock or other equity
instruments to employees except for employee stock ownership plans. SFAS 123
also applies to plans in which the employer incurs liabilities to employees in
amounts based on the price of the employer's stock, (E.G. stock option plans,
stock purchase plans, restricted stock plans and stock appreciation rights).
SFAS 123 also specifies the accounting for transactions in which a company
issues stock options or other equity instruments for services provided by
nonemployees or to acquire goods or services from outside suppliers or vendors.
The recognition provisions of SFAS 123 for companies choosing to adopt the new
fair value based method of accounting for stock-based compensation arrangements
may be adopted immediately and will apply to all transactions entered into in
fiscal years that begin after December 15, 1995. The disclosure provisions of
SFAS 123 are effective for fiscal years beginning after December 15, 1995,
however, disclosure of the pro forma net earnings and earnings per share, as if
the fair value method of accounting for stock-based compensation had been
elected, is required for all awards granted in fiscal years beginning after
December 31, 1994. The Company expects to account for its stock-based
compensation arrangements as prescribed in APB Opinion 25 upon the consummation
of the Conversion.
In June 1996, the FASB issued Statement of Financial Accounting Standards
No. 125, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities" ("SFAS 125"), which supersedes FASB Statements
No. 76, "Extinguishments of Debt," and No. 77, "Reporting by Transferors for
Transfers of Receivables with Recourse." This statement amends FASB Statement
No. 115, "Accounting for Certain Investments in Debt and Equity Securities," and
amends and extends to all servicing assets and liabilities, the accounting
standards for mortgage servicing rights now set forth in SFAS 65, and supersedes
SFAS 122. SFAS 125 provides accounting and reporting standards for transfers
and servicing of financial assets and extinguishments of liabilities. After a
transfer of financial assets, an entity recognizes the financial and servicing
assets it controls and the liabilities it has incurred, derecognizes financial
assets when control has been surrendered and derecognizes liabilities when
extinguished. SFAS 125 provides consistent standards for distinguishing
transfers of financial assets that are sales from transfers that are secured
borrowings. A transfer of financial assets in which the transferor surrenders
control over those assets is accounted for as a sale to the extent that
consideration other than beneficial interests in the transferred assets is
received in exchange.
SFAS 125 further requires that liabilities and derivatives incurred or
obtained by transferors as part of a transfer of financial assets be initially
measured at fair value, if practicable. It also requires that servicing assets
and other retained interests in the transferred assets be measured by allocating
the previous carrying amount between the assets sold, if any, and retained
interests, if any, based on their relative fair values on the date of the
transfer. SFAS 125 also requires that servicing assets and liabilities be
subsequently measured by (a) amortization in proportion to and over the period
of estimated net servicing income or loss and (b) assessment for asset
impairment or increased obligation based on their fair values. SFAS 125
requires that debtors reclassify financial assets pledged as collateral and that
secured parties recognize those assets and their obligation to return them to
certain circumstances in which the secured party has taken control of those
assets. SFAS 125 requires that a liability be derecognized if and only if
either (i) the debtor pays the creditor and is relieved of its obligation for
the liability or (ii) the debtor is legally released from being the primary
obligor under the liability either judicially or by the creditor. Therefore, a
liability is not considered extinguished by an in-substance defeasance.
SFAS 125 is effective for transfers and servicing of financial assets and
extinguishments of liabilities occurring after December 31, 1996, and is to be
applied prospectively. Earlier or retroactive application is not permitted.
Management of the Bank has not evaluated the impact, if any, of the adoption of
SFAS 125 on the Bank's financial condition or results of operations.
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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.
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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 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.
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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.
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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,
--------------------------------------------------------------------------------------
1996 1995 1994 1993 1992
----------------- ----------------- ----------------- ---------------- ---------------
Percent Percent Percent Percent Percent
of of of of of
Amount Total Amount Total Amount Total Amount Total Amount Total
------- --------- --------- ------- --------- -------- -------- ------ -------- ------
(Dollars in thousands)
<S> <C> <C> <C> <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 92.4% $89,785 89.9%
Multifamily(1). . . . . . . . . . . . . . 979 1.2 1,035 1.4 1,335 1.9 1,415 1.7 1,643 1.7
Commercial real estate . . . . . . . . . 411 0.5 441 0.6 475 0.7 793 1.0 697 0.7
Land, construction and
development . . . . . . . . . . . . . . 404 0.5 166 0.2 146 0.2 1,558 1.9 4,804 4.8
Home equity . . . . . . . . . . . . . . . 1,421 1.8 1,691 2.4 1,679 2.4 2,280 2.8 2,726 2.7
------- ------ ------- ------ ------- ------ ------- ------ ------- ------
Total mortgage loans. . . . . . . . . . 79,540 99.6 71,413 99.5 69,953 99.8 81,502 99.8 99,655 99.8
------- ------ ------- ------ ------- ------ ------- ------ ------- ------
Other loans:
Home improvement. . . . . . . . . . . . . -- -- 15 -- 15 -- -- -- 21 --
Commercial credit lines . . . . . . . . . 150 0.2 131 0.2 -- -- -- -- -- --
Loans on savings deposits . . . . . . . . 192 0.2 212 0.3 135 0.2 177 0.2 175 0.2
------- ------ ------- ------ ------- ------ ------- ------ ------- ------
Total other loans . . . . . . . . . . . 342 0.4 358 0.5 150 0.2 177 0.2 196 0.2%
------- ------ ------- ------ ------- ------ ------- ------ ------- ------
Loans receivable, gross. . . . . . . . $79,882 100.00% $71,771 100.00% $70,103 100.00% $81,679 100.00% $99,851 100.00%
------- ------ ------- ------ ------- ------ ------- ------ ------- ------
------- ------ ------- ------ ------- ------ ------- ------ ------- ------
Less:
Loans in process$ . . . . . . . . . . . . -- $111 $892 $263 $1,695
Deferred loan fees. . . . . . . . . . . . 438 510 573 816 1,145
Allowance for loan losses . . . . . . . . 300 166 166 184 597
Capitalized interest reserve. . . . . . . -- -- 46 70 384
------- ------- ------- ------- -------
Loans receivable, net. . . . . . . . . $79,144 $70,984 $68,426 $80,346 $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.
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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
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.
66
<PAGE>
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.
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.
67
<PAGE>
The following table sets forth the Bank's loan originations, loan sales and
principal repayments for the periods indicated.
FOR THE YEAR ENDED JULY 31,
---------------------------------------
1996 1995 1994
------------ ------------- ------------
(IN THOUSANDS)
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 originated . . 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
------- ------- -------
------- ------- -------
- ----------------
(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.
68
<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
----------------------------------------------------------------------------------
MORTGAGE LOANS
----------------------------------------------------------
LAND,
ONE- TO COMMERCIAL CONSTRUCTION
FOUR- MULTI- REAL AND HOME OTHER TOTAL
FAMILY(1) FAMILY(1) ESTATE DEVELOPMENT EQUITY LOANS LOANS
--------- ----------- --------- ----------- ---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
AMOUNT DUE:
One year or less . . . . . . . . . . $ 58 $ -- $ -- $ -- $ 69 $ 183 $ 310
AFTER ONE YEAR:
One to three years . . . . . . . . . 562 22 -- 404 209 159 1,356
More than three years to five years. 1,163 117 -- -- 631 -- 1,911
More than five years to 10 years . . 6,906 181 146 -- 497 -- 7,730
More than 10 years to 15 years . . . 25,010 82 106 -- 15 -- 25,213
More than 15 years to 20 years . . . 2,170 473 159 -- -- -- 2,802
Over 20 years. . . . . . . . . . . . 40,456 104 -- -- -- -- 40,560
------- ----- ----- ----- ------ ----- -------
TOTAL DUE AFTER ONE YEAR . . . . . . . 76,267 979 411 404 1,352 159 79,572
------- ----- ----- ----- ------ ----- -------
TOTAL AMOUNTS DUE GROSS. . . . . . . . $76,325 $ 979 $ 411 $ 404 $1,421 $ 342 $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.
DUE AFTER JULY 31, 1997
---------------------------------------
FIXED(1) ADJUSTABLE TOTAL
----------- --------------- -----------
(IN THOUSANDS)
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
-------- -------- ---------
-------- -------- ---------
- --------------------
(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
69
<PAGE>
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 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,
-------------------------------------------------
1996 1995 1994 1993 1992
--------- --------- --------- --------- ---------
(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- to
four- 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
70
<PAGE>
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 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.
71
<PAGE>
<TABLE>
The following table analyzes activity in the Bank's allowance for loan
losses during the fiscal years indicated.
AT OR FOR THE YEAR ENDED JULY 31,
-----------------------------------------------------------------
1996 1995 1994 1993 1992
----------- ----------- --------- ----------- ----------
(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 --
____________________
(1) Total loans represent loans, net, plus the allowance for loan losses.
</TABLE>
72
<PAGE>
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>
AT JULY 31,
-------------------------------------------------------------------------------------------------------
1996 1995 1994
--------------------------------- ----------------------------------- ---------------------------------
PERCENT OF PERCENT OF
LOANS IN PERCENT OF LOANS IN
EACH LOANS IN EACH EACH
ALLOWANCE PERCENT OF CATEGORY TO ALLOWANCE PERCENT OF CATEGORY TO ALLOWANCE PERCENT OF CATEGORY TO
AMOUNT ALLOWANCE GROSS LOANS AMOUNT ALLOWANCE GROSS LOANS AMOUNT ALLOWANCE GROSS LOANS
--------- ---------- ----------- --------- ---------- ------------- --------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Mortgage loans:
One- to four-family . $ 85 28.3% 95.6% $ 79 47.6% 94.9% $ 83 50.0% 94.6%
Multifamily . . . . . . 5 1.7 1.2 6 3.6 1.4 6 3.6 1.9
Commercial real estate 4 1.3 0.5 4 2.4 0.6 5 3.0 0.7
Land, construction and
development . . . . . . 2 0.7 0.5 2 1.2 0.2 1 0.6 0.2
Home equity . . . . . . 4 1.3 1.8 5 3.0 2.4 4 2.4 2.4
Other loans . . . . . . . -- -- 0.4 -- -- 0.5 -- -- 0.2
Unallocated . . . . . . . 200 66.7 -- 70 42.2 -- 67 40.4 --
----- ----- ----- ----- ----- ----- ----- ----- ------
Total allowance for
loan losses . . . $ 300 100.0% 100.0% $ 166 100.0% 100.0% $ 166 100.0% 100.0%
----- ----- ----- ----- ----- ----- ----- ----- ------
----- ----- ----- ----- ----- ----- ----- ----- ------
</TABLE>
73
<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
74
<PAGE>
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."
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,
---------------------------------------
1996 1995 1994
----------- ---------- ---------
<S> <C> <C> <C>
HELD-TO-MATURITY: (IN THOUSANDS)
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,
----------------------------------------------------------------------------------------------------
1996 1995 1994
------------------------------------- --------------------------------- -----------------------
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:
FHMA . . . . . . . . . . $ 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>
75
<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
-------------------------------
WEIGHTED
AMORTIZED FAIR AVERAGE
COST VALUE COUPON
---------- --------- ---------
(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,
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$919,000, $1.6 million, and $2.1 million, respectively. Sales during the
three fiscal years ended July 31, 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,
----------------------------------------------------------------------------------------------------
1996 1995 1994
------------------------------- ---------------------------------- --------------------------------
PERCENT OF WEIGHTED PERCENT OF WEIGHTED PERCENT OF WEIGHTED
TOTAL AVERAGE TOTAL AVERAGE TOTAL AVERAGE
AMOUNT DEPOSITS RATE AMOUNT DEPOSITS RATE AMOUNT DEPOSITS RATE
--------- ---------- ---------- ---------- ------------ ----------- ---------- ------------ --------
(DOLLARS IN THOUSANDS)
<S> <C> <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 2.02
Money market demand accounts 13,035 9.5 3.12 14,717 9.9 3.16 18,039 12.7 2.65
Passbook accounts . . . . . . 41,324 30.2 2.50 44,241 29.8 2.50 47,349 33.4 2.50
Certificates of deposit . . . 71,343 52.0 5.48 78,298 52.8 5.52 64,647 45.6 4.13
--------- ---------- ---------- ---------- ------------ ----------- ---------- ------------ --------
</TABLE>
77
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Totals . . . . . . . . . $137,177 100.0% 4.01% $148,350 100.0% 4.07% 0 100.0% 3.13%
--------- ---------- ---------- ---------- ------------ ----------- ---------- ------------ --------
--------- ---------- ---------- ---------- ------------ ----------- ---------- ------------ --------
</TABLE>
The following table presents the savings deposit activity of the Bank for
the periods indicated.
<TABLE>
<CAPTION>
FOR THE YEAR ENDED JULY 31,
------------------------------------------------
1996 1995 1994
----------- ---------- ----------
<S> <C> <C> <C>
(IN THOUSANDS)
Deposits . . . . . . . . . . . . . . . . . . . $ 266,028 $265,7023 $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
----------------------------------------------- TOTAL AT JULY 31,
LESS THAN ONE TO MORE THAN 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."
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<PAGE>
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 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,
---------------------------------
1996 1995 1994
-------- ---------- ----------
<S> <C> <C> <C>
(DOLLARS IN THOUSANDS)
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>
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<PAGE>
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.
PROPERTIES
The Bank conducts its business through its corporate office and two branch
locations, as set forth in the following table.
DATE NET BOOK
LEASED LEASE VALUE AT
LEASED OR OR EXPIRATION JULY 31,
OWNED ACQUIRED DATE 1996
--------- -------- ---------- ---------
(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
___________________
(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.
80
<PAGE>
81
<PAGE>
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 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 Act on the Bank is discussed below. Prior to the enactment of the 1996
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 ACT. Under the 1996 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 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, after the
Conversion, the Bank makes a non-dividend distribution to the Company,
approximately one and one-half
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<PAGE>
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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<PAGE>
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
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<PAGE>
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.
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.
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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
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>
BANK CAPITAL REQUIREMENTS EXCESS
------------------- -------------------- -------------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
-------- --------- -------- --------- -------- ---------
(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 CAPITAL CORE CAPITAL RISK-BASED CAPITAL
---------------- ---------------- ------------------
(IN THOUSANDS)
<S> <C> <C> <C>
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>
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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 (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
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establish such branches is available (a) in states that expressly authorize
branches of savings associations located in another state or (b) to an
association that qualifies as a "domestic building and loan association"
under the Internal Revenue Code of 1986, which imposes qualification
requirements similar to those for a "qualified thrift lender" under the HOLA.
See "-- QTL Test." The authority for a federal savings association to
establish an interstate branch network would facilitate a geographic
diversification of the association's activities. This authority under the
HOLA and the OTS regulations preempts any state law purporting to regulate
branching by federal savings associations.
COMMUNITY REINVESTMENT. Under the Community Reinvestment Act (the
"CRA"), as implemented by OTS regulations, a savings association has a
continuing and affirmative obligation consistent with its safe and sound
operation to help meet the credit needs of its entire community, including
low and moderate income neighborhoods. The CRA does not establish specific
lending requirements or programs for financial institutions nor does it limit
an institution's discretion to develop the types of products and services
that it believes are best suited to its particular community, consistent with
the CRA. The CRA requires the OTS, in connection with its examination of a
savings association, to assess the association's record of meeting the credit
needs of its community and to take such record into account in its evaluation
of certain applications by such association. The CRA also requires all
institutions to make public disclosure of their CRA ratings. The 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
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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 penalties cover a wide range of
violations and actions and range from $5,000 for each day during which
violations of law, regulations, orders, and certain written agreements and
conditions continue, up to $1 million per day for such violations if the
person obtained a substantial pecuniary gain as a result of such violation or
knowingly or recklessly caused a substantial loss to the institution.
Criminal penalties for certain financial institution crimes include fines of
up to $1 million and imprisonment for up to 30 years. In addition,
regulators have substantial discretion to take enforcement action against an
institution that fails to comply with its regulatory requirements,
particularly with respect to its capital requirements. Possible enforcement
actions range from the imposition of a capital plan and capital directive to
receivership, conservatorship, or the termination of deposit insurance.
Under the FDI Act, the FDIC has the authority to recommend to the Director of
OTS that enforcement action be taken with respect to a particular savings
association. If action is not taken by the Director of the OTS, the FDIC has
authority to take such action under certain circumstances.
STANDARDS FOR SAFETY AND SOUNDNESS. The FDI Act, as amended by FDICIA
and the Riegle Community Development and Regulatory Improvement Act of 1994
(the "Community Development Act"), requires the OTS, together with the other
federal bank regulatory agencies, to prescribe standards, by regulations or
guidelines, relating to internal controls, information systems and internal
audit systems, loan documentation, credit underwriting, interest rate risk
exposure, asset growth, asset quality, earnings, stock valuation, and
compensation, fees and benefits and such other operational and managerial
standards as the agencies deem appropriate. The OTS and the federal bank
regulatory agencies have adopted, effective August 9, 1995, a set of
guidelines prescribing safety and soundness standards pursuant to FDICIA, as
amended. The guidelines establish general standards relating to internal
controls and information systems, internal audit systems, loan documentation,
credit underwriting, interest rate exposure, asset growth, and compensation,
fees and benefits. In general, the guidelines require, among other things,
appropriate systems and practices to identify and manage the risks and
exposures specified in the guidelines. The guidelines prohibit excessive
compensation as an unsafe and unsound practice and describe compensation as
excessive when the amounts paid are unreasonable or disproportionate to the
services performed by an executive officer, employee, director or principal
stockholder. The OTS and the other agencies determined that stock valuation
standards were not appropriate. In addition, the OTS adopted regulations
that authorize, but do not require, the OTS to order an institution that has
been given notice by the OTS that it is not satisfying any of such safety and
soundness standards to submit a compliance plan. If, after being so
notified, an institution fails to submit an acceptable compliance plan or
fails in any material respect to implement an accepted compliance plan, the
OTS must issue an order directing action to correct the deficiency and may
issue an order directing other actions of the types to which an
undercapitalized association is subject under the "prompt corrective action"
provisions of FDICIA. If an institution fails to comply with such an order,
the OTS may seek to enforce such order in judicial proceedings and to impose
civil money penalties. The OTS and the federal bank regulatory agencies also
proposed guidelines for asset quality and earnings standards.
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REAL ESTATE LENDING STANDARDS. The OTS and the other federal banking
agencies adopted regulations to prescribe standards for extensions of credit
that (a) are secured by real estate or (b) are made for the purpose of
financing the construction of improvements on real estate. The OTS
regulations require each savings association to establish and maintain
written internal real estate lending standards that are consistent with safe
and sound banking practices and appropriate to the size of the association
and the nature and scope of its real estate lending activities. The
standards also must be consistent with accompanying OTS guidelines, which
include loan-to-value ratios for the different types of real estate loans.
Associations are also permitted to make a limited amount of loans that do not
conform to the proposed loan-to-value limitations so long as such exceptions
are reviewed and justified appropriately. The guidelines also list a number
of lending situations in which exceptions to the loan-to-value standards are
justified.
PROMPT CORRECTIVE REGULATORY ACTION. Under the OTS prompt corrective
action regulations, the OTS is required to take certain, and is authorized to
take other, supervisory actions against undercapitalized savings
associations. For this purpose, a savings association would be placed in one
of five categories based on the association's capital. Generally, a savings
association is treated as "well capitalized" if its ratio of total capital to
risk-weighted assets is at least 10.0%, its ratio of core capital to
risk-weighted assets is at least 6.0%, its ratio of core capital to total
assets is at least 5.0%, and it is not subject to any order or directive by
the OTS to meet a specific capital level. A savings association will be
treated as "adequately capitalized" if its ratio of total capital to
risk-weighted assets is at least 8.0%, its ratio of core capital to
risk-weighted assets is at least 4.0%, and its ratio of core capital to total
assets is at least 4.0% (3.0% if the association receives the highest rating
on the CAMEL financial institutions rating system). A savings association
that has a total risk-based capital of less than 8.0% or a leverage ratio or
a Tier 1 capital ratio that is less than 4.0% (3.0% leverage ratio if the
association receives the highest rating on the CAMEL financial institutions
rating system) is considered to be "undercapitalized." A savings association
that has a total risk-based capital of less than 6.0% or a Tier 1 risk-based
capital ratio or a leverage ratio of less than 3.0% is considered to be
"significantly undercapitalized." A savings association that has a tangible
capital to assets ratio equal to or less than 2% is deemed to be "critically
undercapitalized." The elements of an association's capital for purposes of
the prompt corrective action regulations are defined generally as they are
under the regulations for minimum capital requirements. See "-- Capital
Requirements."
The severity of the action authorized or required to be taken under the
prompt corrective action regulations increases as an association's capital
deteriorates within the three undercapitalized categories. All associations
are prohibited from paying dividends or other capital distributions or paying
management fees to any controlling person if, following such distribution,
the association would be undercapitalized. An undercapitalized association
is required to file a capital restoration plan within 45 days of the date the
association receives notice that it is within any of the three
undercapitalized categories. The OTS is required to monitor closely the
condition of an undercapitalized association and to restrict the asset
growth, acquisitions, branching, and new lines of business of such an
association. Significantly undercapitalized associations are subject to
restrictions on compensation of senior executive officers; such an
association may not, without OTS consent, pay any bonus or provide
compensation to any senior executive officer at a rate exceeding the
officer's average rate of compensation (excluding bonuses, stock options and
profit-sharing) during the 12 months preceding the month when the association
became undercapitalized. A significantly undercapitalized association may
also be subject, among other things, to forced changes in the composition of
its board of directors or senior management, additional restrictions on
transactions with affiliates, restrictions on acceptance of deposits from
correspondent associations, further restrictions on asset growth,
restrictions on rates paid on deposits, forced termination or reduction of
activities deemed risky, and any further operational restrictions deemed
necessary by the OTS.
If one or more grounds exist for appointing a conservator or receiver
for an association, the OTS may require the association to issue additional
debt or stock, sell assets, be acquired by a depository association holding
company or combine with another depository association. The OTS and the FDIC
have a broad range
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of grounds under which they may appoint a receiver or conservator for an
insured depositary association. Under FDICIA, the OTS is required to appoint
a receiver (or with the concurrence of the FDIC, a conservator) for a
critically undercapitalized association within 90 days after the association
becomes critically undercapitalized or, with the concurrence of the FDIC, to
take such other action that would better achieve the purposes of the prompt
corrective action provisions. Such alternative action can be renewed for
successive 90-day periods. However, if the association continues to be
critically undercapitalized on average during the quarter that begins 270
days after it first became critically undercapitalized, a receiver must be
appointed, unless the OTS makes certain findings with which the FDIC concurs
and the Director of the OTS and the Chairman of the FDIC certify that the
association is viable. In addition, an association that is critically
undercapitalized is subject to more severe restrictions on its activities,
and is prohibited, without prior approval of the FDIC from, among other
things, entering into certain material transactions or paying interest on new
or renewed liabilities at a rate that would significantly increase the
association's weighted average cost of funds.
When appropriate, the OTS can require corrective action by a savings
association holding company under the "prompt corrective action" provisions
of FDICIA.
INSURANCE OF DEPOSIT ACCOUNTS. The 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
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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.
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.
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Under the FDI Act, insurance of deposits may be terminated by the FDIC upon
a finding that the institution has engaged in unsafe or unsound practices, is in
an unsafe or unsound condition to continue operations or has violated any
applicable law, regulation, rule, order or condition imposed by the FDIC or the
OTS. The management of the Bank does not know of any practice, condition or
violation that might lead to termination of deposit insurance.
FEDERAL HOME LOAN BANK SYSTEM. The Bank is a member of the FHLB 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 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,
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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 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
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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.
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.
NAME POSITION HELD WITH THE COMPANY
- ---- ------------------------------
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
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
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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.
POSITIONS HELD WITH DIRECTOR TERM
NAME AGE(1) THE BANK SINCE EXPIRES
- ---- ------ ------------------- ----- -------
George M. Briody . . . . 69 President, Director 1951 1997
F. Gregory Opelka. . . . 68 Executive Vice 1972 1997
President, Director
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
- ------------------------
(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
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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.
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. (the "League"), 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.
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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 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."
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EXECUTIVE COMPENSATION
COMPENSATION DECISIONS. Decisions regarding the Company's executive
compensation will be made by the Company's Board of Directors, exclusive of
those directors employed by the Company, acting as a compensation committee,
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 $100,000 (the "Named
Executive Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM COMPENSATION
----------------------------------------------
ANNUAL COMPENSATION(1) AWARDS PAYOUTS
---------------------------------- ---------------------- ---------
OTHER RESTRICTED
ANNUAL STOCK LTIP ALL OTHER
NAME AND PRINCIPAL COMPENSATION AWARDS OPTIONS PAYOUTS COMPENSATION
POSITIONS YEAR SALARY($) BONUS($) ($)(2) ($)(3) (#)(3) ($)(3) ($)
- ----------------------------------- ---- --------- -------- ------------ ---------- ------- ------- ---------
<S> <C> <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 -- -- -- -- --
</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.
EMPLOYMENT AGREEMENTS
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Effective upon the Conversion, the Company and (subject to non-objection by
the OTS) 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 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,
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$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.
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 two 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,
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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 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 "MBP"). The intent of the MBP 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 MBP 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
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necessary to trigger an award is a return on assets in excess of a designated
amount for each applicable fiscal year. The MBP 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 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 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.
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<PAGE>
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.
YEARS OF CREDITED SERVICE
-------------------------- FINAL AVERAGE
YEARS MONTHS COMPENSATION
----- ------ -------------
Mr. Briody . . . . . . 46 1 $ 128,620
Mr. Opelka . . . . . . . 41 8 84,990
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.
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
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<PAGE>
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"). 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
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<PAGE>
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 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
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<PAGE>
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.
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
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<PAGE>
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.
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)
-------------------------------- ------------------------
AS A PERCENT AS A PERCENT
NUMBER OF SHARES NUMBER OF SHARES
NAME AMOUNT OF SHARES OFFERED OF SHARES OFFERED
---- --------- --------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C>
George 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>
<PAGE>
- ----------------
(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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<PAGE>
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 __, 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
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<PAGE>
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 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.
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<PAGE>
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 (being 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 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.
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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 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
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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 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
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purposes or to Eligible Account Holders or to Supplemental Eligible Account
Holders for Illinois income tax purposes. The opinion of KPMG Peat Marwick
LLP has been filed as an exhibit to the Registration Statement of which this
Prospectus is a part.
Unlike private rulings, opinions of counsel are not binding on the IRS
or the Illinois taxing authorities and the IRS or the Illinois taxing
authorities could disagree with conclusions reached therein. In the event of
such disagreement, there can be no assurance that the IRS or the Illinois
taxing authorities would not prevail in a judicial or administrative
proceeding.
Certain portions of both the federal and the state tax opinions are
based upon the opinion of 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
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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 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 million, 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's 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
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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 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 __, 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
__, 1998.
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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 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
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("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."
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."
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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 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
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$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.
EXPIRATION DATE FOR THE SUBSCRIPTION OFFERING. The Subscription
Offering will expire at 12:00 noon, Central Time, on December __, 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 __, 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.
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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 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
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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 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.
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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.
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
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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.
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,
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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.
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 __, 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
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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 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
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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
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,
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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
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 stock.
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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
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consideration offered is significantly greater than the then market price of any
equity security of the Company.
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."
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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
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
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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 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
135
<PAGE>
conversion, (d) would be likely to result in injury to the savings
institution, (e) would not be consistent with economical home financing, (f)
would otherwise violate law or regulation, or (g) would not contribute to the
prudent deployment of the savings institution's conversion proceeds. In the
event that any person, directly or indirectly, violates this regulation, the
securities beneficially owned by such person in excess of 10% shall not be
counted as shares entitled to vote and shall not be voted by any person or
counted as voting shares in connection with any matters submitted to a vote
of 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.
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
136
<PAGE>
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.
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.
137
<PAGE>
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
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.
138
<PAGE>
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Company's Common Stock is
Harris Trust and Savings Bank.
EXPERTS
The financial statements of the 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, LC. 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, and copies of such material can be obtained from the
SEC at prescribed rates. Such information is also available on the SEC's
Electronic Data Gathering Analysis and Retrieval ("EDGAR") System.
The 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
139
<PAGE>
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.
140
<PAGE>
INDEX TO FINANCIAL STATEMENTS
FAIRFIELD SAVINGS BANK, F.S.B.
PAGE
----
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
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>
[Letterhead of KPMG Peat Marwick LLP]
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.
/s/ 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
================================================================================
Assets 1996 1995
- --------------------------------------------------------------------------------
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
================================================================================
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
(Continued)
F-6
<PAGE>
FAIRFIELD SAVINGS BANK, F.S.B.
Notes to Financial Statements
================================================================================
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.
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.
(Continued)
F-7
<PAGE>
FAIRFIELD SAVINGS BANK, F.S.B.
Notes to Financial Statements
================================================================================
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.
(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
--------------------------------------------------
Gross Gross Estimated
Amortized unrealized unrealized fair
Description cost gains losses value
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
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.
(Continued)
F-8
<PAGE>
FAIRFIELD SAVINGS BANK, F.S.B.
Notes to Financial Statements
================================================================================
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.
(3) Loans Receivable
Loans receivable at July 31 are summarized as follows:
================================================================================
1996 1995
- --------------------------------------------------------------------------------
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
================================================================================
(Continued)
F-9
<PAGE>
FAIRFIELD SAVINGS BANK, F.S.B.
Notes to Financial Statements
================================================================================
Activity in the allowance for loan losses is summarized as follows for the
years ended July 31:
================================================================================
1996 1995 1994
- --------------------------------------------------------------------------------
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
================================================================================
Loans receivable delinquent three months or more at July 31 are as follows:
================================================================================
Number Percentage
of of gross
loans Amount loans receivable
- --------------------------------------------------------------------------------
1996 2 $ 118,303 .15%
1995 1 193,209 .27
1994 4 510,872 .74
================================================================================
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.
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.
(Continued)
F-10
<PAGE>
FAIRFIELD SAVINGS BANK, F.S.B.
Notes to Financial Statements
================================================================================
(4) Accrued Interest Receivable
Accrued interest receivable at July 31 is summarized as follows:
================================================================================
1996 1995
- --------------------------------------------------------------------------------
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
================================================================================
(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:
================================================================================
1996 1995
- --------------------------------------------------------------------------------
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
================================================================================
Depreciation and amortization expense was $404,019, $407,599, and $388,916
for the years ended July 31, 1996, 1995, and 1994, respectively.
(Continued)
F-11
<PAGE>
FAIRFIELD SAVINGS BANK, F.S.B.
Notes to Financial Statements
================================================================================
(6) Savings Deposits
Savings deposits at July 31 are summarized as follows:
<TABLE>
<CAPTION>
==================================================================================================
1996 1995
Stated or weighted ------------------ ------------------
average interest rate Amount Percent Amount Percent
===================================================================================================
1996 1995
---- ----
<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%
===================================================================================================
<CAPTION>
1996 1995
------------------ ------------------
Amount Percent Amount Percent
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
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%
===================================================================================================
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:
<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>
(Continued)
F-12
<PAGE>
FAIRFIELD SAVINGS BANK, F.S.B.
Notes to Financial Statements
================================================================================
(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.
(Continued)
F-13
<PAGE>
FAIRFIELD SAVINGS BANK, F.S.B.
Notes to Financial Statements
================================================================================
(8) Income Taxes
Income tax expense (benefit) is summarized as follows for the years ended
July 31:
================================================================================
1996 1995 1994
- --------------------------------------------------------------------------------
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
================================================================================
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:
================================================================================
1996 1995 1994
- --------------------------------------------------------------------------------
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
================================================================================
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.
(Continued)
F-14
<PAGE>
FAIRFIELD SAVINGS BANK, F.S.B.
Notes to Financial Statements
================================================================================
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:
================================================================================
1996 1995
- --------------------------------------------------------------------------------
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)
================================================================================
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.
(Continued)
F-15
<PAGE>
FAIRFIELD SAVINGS BANK, F.S.B.
Notes to Financial Statements
================================================================================
(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.
The following table sets forth the plan's funded status at July 31, 1996
and 1995:
================================================================================
1996 1995
- --------------------------------------------------------------------------------
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)
================================================================================
Net pension expense for the year ended July 31, 1996, 1995, and 1994
includes the following:
================================================================================
1996 1995 1994
- --------------------------------------------------------------------------------
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
================================================================================
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.
(Continued)
F-16
<PAGE>
FAIRFIELD SAVINGS BANK, F.S.B.
Notes to Financial Statements
================================================================================
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.
(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.
(Continued)
F-17
<PAGE>
FAIRFIELD SAVINGS BANK, F.S.B.
Notes to Financial Statements
================================================================================
The Savings Bank's actual capital amounts and ratios are as follows as of
July 31, 1996:
================================================================================
Actual For Capital Adequacy
------------------ --------------------
Amount Ratio Amount Ratio
- --------------------------------------------------------------------------------
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
================================================================================
(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.
(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.
(Continued)
F-18
<PAGE>
FAIRFIELD SAVINGS BANK, F.S.B.
Notes to Financial Statements
================================================================================
(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
----------------------- -----------------------
Carrying Estimated Carrying Estimated
amount fair value amount fair value
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
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
==========================================================================================
<CAPTION>
1996 1995
----------------------- -----------------------
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>
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.
(Continued)
F-19
<PAGE>
FAIRFIELD SAVINGS BANK, F.S.B.
Notes to Financial Statements
================================================================================
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.
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.
(Continued)
F-20
<PAGE>
FAIRFIELD SAVINGS BANK, F.S.B.
Notes to Financial Statements
================================================================================
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 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
(Continued)
F-21
<PAGE>
FAIRFIELD SAVINGS BANK, F.S.B.
Notes to Financial Statements
================================================================================
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-22
<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
-----------------------
PAGE
----
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. . . . . . . . . . . . . . . . . . . . . . . . 26
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. . . . . . . . . . . . . . . . . . . . . . . . . . . 56
Business of the Bank . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57
Federal and State Taxation . . . . . . . . . . . . . . . . . . . . . . . . . 75
Regulation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 77
Management of the Company. . . . . . . . . . . . . . . . . . . . . . . . . . 88
Management of the Bank . . . . . . . . . . . . . . . . . . . . . . . . . . . 89
The Conversion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 102
Restrictions on Acquisition of the Company and the Bank. . . . . . . . . . . 122
Description of Capital Stock of the Company. . . . . . . . . . . . . . . . . 128
Description of Capital Stock of the Bank . . . . . . . . . . . . . . . . . . 129
Transfer Agent and Registrar . . . . . . . . . . . . . . . . . . . . . . . . 130
Experts. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 130
Legal and Tax Opinions . . . . . . . . . . . . . . . . . . . . . . . . . . . 131
Additional Information . . . . . . . . . . . . . . . . . . . . . . . . . . . 131
Index to Financial Statements. . . . . . . . . . . . . . . . . . . . . . . . F-1
-----------------------
UNTIL THE LATER OF DECEMBER __, 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]
BIG FOOT FINANCIAL CORP.
(PROPOSED HOLDING COMPANY FOR
FAIRFIELD SAVINGS BANK, F.S.B.)
COMMON STOCK
-----------------------
PROSPECTUS
-----------------------
HOVDE SECURITIES, INC.
NOVEMBER __, 1996
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
OTS application fee........................................... $ 8,400
SEC registration fee(1)....................................... 8,583
NASD filing fee(1)............................................ 3,012
Nasdaq National Market Listing Fee(1)......................... 17,564
Printing, postage and mailing................................. 200,000
Legal fees and expenses....................................... 165,000
Financial advisor management fee and expenses................. 82,500
Accounting fees and expenses.................................. 105,000
Appraiser's fees and expenses (including business plan)....... 37,500
Transfer agent and registrar fees and expenses................ 7,500
Conversion agent fees and expenses............................ 12,500
Certificate printing.......................................... 7,500
Telephone, temporary help and other equipment................. 25,000
Blue Sky fees and expenses (including fees of counsel)........ 15,000
Miscellaneous................................................. 54,941
-------
TOTAL......................................................... $ 750,000
-------
-------
- -------
(1) Actual expenses based upon the registration of 2,512,750 shares at $10.00
per share. All other expenses are estimated.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 8.75(a) of the Illinois Business Corporation Act ("IBCA") empowers
an Illinois corporation to indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending or completed action,
suit or proceeding (other than an action by or in the right of the corporation)
by reason of the fact that such person is or was a director, officer, employee,
or agent of the corporation or is serving at the request of the corporation as a
director, officer, employee or agent of another partnership, joint venture,
trust or other enterprise against expenses (including attorneys' fees),
judgments, fines and amounts paid in settlement actually and reasonably incurred
by such person in connection with such action, suit or proceeding if such person
acted in good faith and in a manner he or she reasonably believed to be in, or
not opposed to, the best interest of the corporation, and, with respect to any
criminal action or proceeding, had no reasonable cause to believe his or her
conduct was unlawful.
Similar indemnity is authorized under Section 8.75(b) of the IBCA for such
persons against expenses (including attorneys' fees) actually and reasonably
incurred in connection with the defense or settlement of any such threatened,
pending or completed action or suit by or in the right of the corporation if
such person acted in good faith and in a manner he or she reasonably believed to
be in, or not opposed to, the best interests of the corporation, and provided
further that (unless a court of competent jurisdiction otherwise provides) such
person shall not have been adjudged liable to the corporation.
II-1
<PAGE>
Whether or not the proceeding is by or in the right of the corporation, to
the extent that a director, officer, employee or agent of a corporation has been
successful, on the merits or otherwise, in the defense of any action, suit or
proceeding, such person shall be indemnified against expenses (including
attorneys' fees) actually and reasonably incurred by such person in connection
therewith. Any indemnification described above (unless ordered by a court) may
be made only as authorized in each specific case upon a determination by the
stockholders or disinterested directors or by independent legal counsel in a
written opinion that indemnification is proper because the indemnitee has met
the applicable standard of conduct.
Section 8.75(g) of the IBCA authorizes a corporation to purchase and
maintain insurance on behalf of any person who is or was a director, officer,
employee or agent of the corporation, or is or was serving at the request of the
corporation as a director, officer, employee or agent of another corporation or
enterprise, against any liability asserted against him or her, and incurred by
him or her in any such capacity, or arising out of his or her status as such,
whether or not the corporation would otherwise have the power to indemnify such
person under Section 8.75.
The IBCA also provides that expenses incurred in defending a civil or
criminal action, suit or proceeding may be paid in advance of the final
disposition of the proceeding if the director, officer, employee or agent
provides the corporation with an undertaking to repay the advance if it is
ultimately determined that he or she is not entitled to indemnification.
Additionally, the indemnification statute provides that advances of expenses and
indemnification under Section 8.75 are not exclusive of any other rights to
which those seeking indemnification may be entitled under any by-law, agreement,
vote of shareholders or disinterested directors, or otherwise.
Article IX of the Articles of Incorporation of Big Foot Financial Corp.
(the "Company") provides that a director shall not be personally liable to the
Company or its stockholders for damages for breach of his or her fiduciary duty
as a director, except to the extent such exemption from liability or limitation
thereof is expressly prohibited by the IBCA. The affirmative vote of the
holders of not less than eighty percent (80%) of the total number of votes
eligible to be cast by the holders of all outstanding shares of capital stock
are required to amend, alter, rescind or repeal any provision of Article IX.
Article X of the Company's Articles of Incorporation requires the Company,
among other things, to indemnify to the fullest extent permitted by the IBCA,
any person who is or was or has agreed to become a director or officer of the
Company, who was or is made a party to, or is threatened to be made a party to,
or has become a witness in, any threatened, pending or completed action, suit or
proceeding, including actions or suits by or in the right of the Company, by
reason of such agreement or service or the fact that such person is, was or has
agreed to serve as a director, officer, employee or agent of another corporation
or organization at the request of the Company. The Articles of Incorporation
apply the same standards of good faith and reasonableness to persons seeking
indemnification as IBCA Section 8.75. With respect to suits brought by or in
the right of the Company, the Articles of Incorporation apply the same rule as
IBCA Section 8.75 that the party seeking indemnification not have been adjudged
to be liable to the Company. Additionally, under the Articles of Incorporation,
the Company is not obligated to indemnify any director or officer in connection
with an action, suit or proceeding initiated by such person against the Company
unless such suit or proceeding was authorized or consented to by the Board of
Directors.
Article X empowers the Company to purchase and maintain insurance to
protect itself and its directors and officers, and those who were or have agreed
to become directors or officers, against any liability, regardless of whether or
not the Company would have the power to indemnify those persons against such
liability under the law or the provisions set forth in the Articles of
Incorporation. The Company is also authorized by its Articles of Incorporation
to enter into individual indemnification contracts with directors and officers.
Like IBCA Section 8.75, Article X of the Articles of Incorporation requires
that any indemnification (unless ordered by a court) be approved by
stockholders, disinterested directors or independent legal counsel
II-2
<PAGE>
in a written opinion. Also, the Articles of Incorporation grant persons seeking
indemnity from the Company a right, as in IBCA Section 8.75, to receive advance
payments for their expenses in exchange for a repayment undertaking.
Article X sets forth a procedure for persons seeking indemnification
whereby the director, officer, employee or agent makes a written request for
indemnification, and a determination is made within sixty (60) days (except
determination by shareholders, in which case the determination is made at the
next annual meeting of shareholders). If no disposition is reached within the
allotted time period, the person seeking indemnification can pursue his or her
rights in a court of competent jurisdiction in the State of Illinois. To the
extent that such person is successful in establishing his or her right to
indemnification, the costs incurred in establishing those rights are also
indemnified by the Company.
With regard to settlement offers, Article X provides that the Company shall
not be obligated to reimburse any costs, charges or expenses of any settlement
to which it has not agreed. Also, where the person to be indemnified
unreasonably fails to enter into a settlement offer, the indemnification
obligation of the Company is limited by the total amount of the settlement offer
and the expenses incurred by the indemnitee prior to the time such settlement
could reasonably have been effected.
Article X also provides that if the IBCA is amended to expand further the
indemnification permitted to directors and officers of the Company, then the
Company shall indemnify such persons to the fullest extent permitted by the
IBCA.
The Company and Fairfield Savings Bank, F.S.B. (the "Bank") expect to
purchase, directors' and officers' liability insurance consistent with the
provisions of the Company's Articles of Incorporation and the Bank's Stock
Charter as soon as practicable.
The Company and the Bank expect to enter into employment agreements with
certain executive officers, which agreements are expected to require that the
Company will obtain a directors' and officers' liability policy for the benefits
of such officers or that the Company will indemnify such officers to the fullest
extent provided by law.
The Articles of Incorporation of the Company are filed as Exhibit 3.1.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
Not Applicable.
II-3
<PAGE>
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
The exhibits filed as a part of this Registration Statement are as follows:
(a). LIST OF EXHIBITS. (Filed herewith unless otherwise noted.)
EXHIBIT NO. DESCRIPTION
- ----------- -----------
1.1 Engagement Letter, dated February 15, 1996, between Fairfield
Savings Bank, F.S.B and Hovde Securities, Inc.*
1.2 Form of Agency Agreement between Fairfield Savings Bank, F.S.B.,
Big Foot Financial Corp. and Hovde Securities, Inc.
2.1 Amended and Restated Plan of Conversion of Fairfield Savings
Bank, F.S.B.
3.1 Articles of Incorporation of Big Foot Financial Corp.*
3.2 Bylaws of Big Foot Financial Corp.*
3.3 Federal Stock Charter and Bylaws of Fairfield Savings Bank,
F.S.B. (See Exhibits I and II to Exhibit 2.1)
4.1 Articles of Incorporation of Big Foot Financial Corp. (See
Exhibit 3.1)
4.2 Bylaws of Big Foot Financial Corp. (See Exhibit 3.2)
4.3 Form of Stock Certificate of Big Foot Financial Corp.
5.1 Opinion of Thacher Proffitt & Wood regarding legality
5.2 Opinion of Gomberg, Sharfman, Gold & Ostler, P.C. regarding Illinois
law (see attachment to Exhibit 5.1)
8.1 Opinion of Thacher Proffitt & Wood regarding federal taxation
8.2 Opinion of KPMG Peat Marwick LLP regarding State of Illinois
taxation*
8.3 Opinion of Capital Resources Group, Inc. regarding Subscription
Rights*
10.1 Big Foot Financial Corp. Employee Stock Ownership Plan and ESOP
Trust Agreement*
10.2 Form of ESOP Loan Documents*
10.3 Form of Executive Employment Agreement between Big Foot Financial
Corp. and certain executive officers*
10.4 Form of Employment Agreement between Fairfield Savings Bank,
F.S.B. and certain executive officers*
II-4
<PAGE>
EXHIBIT NO. DESCRIPTION
- ----------- -----------
10.5 Form of Employee Retention Agreement between Big Foot Financial
Corp., Fairfield Savings Bank, F.S.B. and certain employees*
10.6 Severance Pay Plan of Fairfield Savings Bank, F.S.B.*
10.7 Amended Fairfield Savings Bank, F.S.B. Profit Sharing and Savings
Plan
10.8 Engagement Letter, dated March 27, 1996, between Fairfield
Savings Bank, F.S.B. and Capital Resources Group, Inc. for
conversion appraisal services and for services related to the
preparation of the business plan*
10.9 Engagement Letter, dated June 17, 1996, between Fairfield Savings
Bank, F.S.B. and Crowe Chizek and Company LLP for conversion
agent services*
10.10 Lease Agreement between Fairfield Savings Bank, F.S.B. for
Norridge branch office, dated April 29, 1976
21.1 Subsidiaries of the Registrant*
23.1 Consent of KPMG Peat Marwick LLP
23.2 Consent of Thacher Proffitt & Wood (included in Exhibit 5.1)
23.3 Consent of Gomberg, Sharfman, Gold & Ostler, P.C.
23.4 Consent of Capital Resources Group, Inc.*
24.1 Powers of Attorney (Included in Signature Page of the
Registration Statement)*
27.1 Financial Data Schedule (Submitted only with filing in electronic
format)
99.1(a) Appraisal Report of Capital Resources Group, Inc., dated
September 6, 1996 (Certain exhibits submitted only in paper
format pursuant to SEC exemption dated October 15, 1996)
99.1(b) Updated Appraisal Report of Capital Resources Group, Inc. dated
October 23, 1996 (Certain exhibits submitted only in paper format
pursuant to SEC exemption dated October 15, 1996)
99.2 Form of Marketing Materials to be used in connection with the
Offerings
- -------------
* Previously filed
(b). FINANCIAL STATEMENT SCHEDULES.
All schedules have been omitted as not applicable or not required under the
rules of Regulation S-X.
ITEM 17. UNDERTAKINGS.
The undersigned Registrant hereby undertakes:
II-5
<PAGE>
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this Registration Statement:
(i) To include any Prospectus required by Section 10(a)(3) of
the Securities Act of 1933;
(ii) To reflect in the Prospectus any facts or events arising
after the effective date of the Registration Statement (or
the most recent post-effective amendment thereof) which,
individually or in the aggregate, represent a fundamental
change in the information set forth in the Registration
Statement. Notwithstanding the foregoing, any increase or
decrease in volume of securities offered (if the total
dollar value of securities offered would not exceed that
which was registered) and any deviation from the low or high
end of the estimated maximum offering range may be reflected
in the form of prospectus filed with the Commission pursuant
to Rule 424(b) if, in the aggregate, the changes in volume
and price represent no more than a 20% change in the maximum
aggregate offering price set forth in the "Calculation of
Registration Fee" table in the effective Registration
Statement;
(iii) To include any material information with respect to the plan
of distribution not previously disclosed in the Registration
Statement or any material change to such information in the
Registration Statement;
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall
be deemed to be a new Registration Statement relating to the
securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering
thereof.
(3) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain
unsold at the termination of the Offering.
The undersigned Registrant hereby undertakes to provide to the agent at the
closing specified in the Agency Agreement, certificates in such denominations
and registered in such names as required by the agent to permit prompt delivery
to each purchaser.
Insofar as indemnification by the Registrant for liabilities arising under
the Securities Act of 1933 may be permitted to directors, officers and
controlling persons of the Registrant pursuant to the foregoing provisions, or
otherwise, the Registrant has been advised that in the opinion of the Securities
and Exchange Commission such indemnification is against public policy as
expressed in the Securities Act and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other than the
payment by the Registrant of expenses incurred or paid by a director, officer or
controlling person of the Registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered, the Registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities
Act of 1933, the information omitted from the form of prospectus
filed as part of this Registration
II-6
<PAGE>
Statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the Registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part
of this Registration Statement as of the time it was declared
effective.
(2) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form
of prospectus shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of
such securities at that time shall be deemed to be the initial
bona fide offering thereof.
II-7
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused Amendment No.1 to Registration Statement No. 333-12083 to be
signed on its behalf by the undersigned, thereunto duly authorized, in the
County of Lake, State of Illinois on October 30, 1996.
BIG FOOT FINANCIAL CORP.
By: /s/ George M. Briody
--------------------
George M. Briody
President
Pursuant to the requirements of the Securities Act of 1933, this amendment
to Registration Statement No. 333-12083 has been signed by the following persons
in the capacities and on the dates indicated.
Name Title Date
---- ----- ----
/s/ George M. Briody Director and President October 30, 1996
- ----------------------- (Principal executive officer)
George M. Briody
/s/ Timothy L. McCue Vice President and Chief October 30, 1996
- ----------------------- Financial Officer
Timothy L. McCue (Principal financial officer)
* Director and Executive October 30, 1996
- ---------------------- Vice President
F. Gregory Opelka
* Director October 30, 1996
- ----------------------
Maurice F. Leahy
* Director October 30, 1996
- ----------------------
Eugene W. Pilawski
* Director October 30, 1996
- ----------------------
Joseph J. Nimrod
* Director October 30, 1996
- ----------------------
Walter E. Powers, M.D.
* Director October 30, 1996
- ----------------------
William B. O'Connell
* By /s/ Timothy L. McCue (Timothy L. McCue) as attorney-in fact pursuant to
Power of Attorney filed on September 16, 1996, included in Part II of the
Registration Statement.
<PAGE>
TABLE OF EXHIBITS
1.1 Engagement Letter, dated February 15, 1996, between Fairfield Savings
Bank, F.S.B and Hovde Securities, Inc.*
1.2 Form of Agency Agreement between Fairfield Savings Bank, F.S.B., Big
Foot Financial Corp. and Hovde Securities, Inc.
2.1 Amended and Restated Plan of Conversion of Fairfield Savings Bank,
F.S.B.
3.1 Articles of Incorporation of Big Foot Financial Corp.*
3.2 Bylaws of Big Foot Financial Corp.*
3.3 Federal Stock Charter and Bylaws of Fairfield Savings Bank, F.S.B.
(See Exhibits I and II to Exhibit 2.1)
4.1 Articles of Incorporation of Big Foot Financial Corp. (See Exhibit
3.1)
4.2 Bylaws of Big Foot Financial Corp. (See Exhibit 3.2)
4.3 Form of Stock Certificate of Big Foot Financial Corp.
5.1 Opinion of Thacher Proffitt & Wood regarding legality
5.2 Opinion of Gomberg, Sharfman, Gold & Ostler, P.C. regarding Illinois
law (see attachment to Exhibit 5.1)
8.1 Opinion of Thacher Proffitt & Wood regarding federal taxation
8.2 Opinion of KPMG Peat Marwick LLP regarding State of Illinois taxation*
8.3 Opinion of Capital Resources Group, Inc. regarding Subscription Rights*
10.1 Big Foot Financial Corp. Employee Stock Ownership Plan and ESOP Trust
Agreement*
10.2 Form of ESOP Loan Documents*
10.3 Form of Executive Employment Agreement between Big Foot Financial
Corp. and certain executive officers*
<PAGE>
10.4 Form of Employment Agreement between Fairfield Savings Bank, F.S.B.
and certain executive officers*
10.5 Form of Employee Retention Agreement between Big Foot Financial Corp.,
Fairfield Savings Bank, F.S.B. and certain employees*
10.6 Severance Pay Plan of Fairfield Savings Bank, F.S.B.*
10.7 Amended Fairfield Savings Bank, F.S.B. Profit Sharing and Savings Plan
10.8 Engagement Letter, dated March 27, 1996, between Fairfield Savings
Bank, F.S.B. and Capital Resources Group, Inc. for conversion
appraisal services and for services related to the preparation of the
business plan*
10.9 Engagement Letter, dated June 17, 1996, between Fairfield Savings
Bank, F.S.B. and Crowe Chizek and Company LLP for conversion agent
services*
10.10 Lease Agreement between Fairfield Savings Bank, F.S.B. for
Norridge branch office, dated April 29, 1976
21.1 Subsidiaries of the Registrant*
23.1 Consent of KPMG Peat Marwick LLP
23.2 Consent of Thacher Proffitt & Wood (included in Exhibit 5.1)
23.3 Consent of Gomberg, Sharfman, Gold & Ostler, P.C.
23.4 Consent of Capital Resources Group, Inc.*
24.1 Powers of Attorney (Included in Signature Page of the Registration
Statement)*
27.1 Financial Data Schedule (Submitted only with filing in electronic
format)
99.1(a) Appraisal Report of Capital Resources Group, Inc., dated
September 6, 1996 (Certain exhibits submitted only in paper
format pursuant to SEC exemption dated October 15, 1996)
99.1(b) Updated Appraisal Report of Capital Resources Group, Inc. dated
October 23, 1996 (Certain exhibits submitted only in paper format
pursuant to SEC exemption dated October 15, 1996)
<PAGE>
99.2 Form of Marketing Materials to be used in connection with the
Offerings
______________
* Previously filed
<PAGE>
EX-1.2
BIG FOOT FINANCIAL CORP.
2,185,000 SHARES
(anticipated maximum)
(subject to increase to up to 2,512,750
shares in the event of an oversubscription)
COMMON STOCK
($.01 Par Value)
AGENCY AGREEMENT
November __, 1996
Hovde Securities, Inc.
1826 Jefferson Place, N.
Washington, D.C. 20036
Big Foot Financial Corp., an Illinois corporation (the "Company"), and
Fairfield Savings Bank, F.S.B., a federally chartered mutual savings bank (the
"Bank"), hereby confirm their agreement with Hovde Securities, Inc. ("Hovde"),
and Hovde hereby confirms its obligations with respect to the sale of up to
2,185,000 shares (the "Shares") of common stock, par value $.01 per share, of
the Company (the "Common Stock"), as follows:
1. Introduction. On May 21, 1996 the Board of Directors of the Bank adopted
a plan of conversion (as amended and restated on September 17, 1996, the "Plan
of Conversion"), which provides for the conversion of the Bank from a federal
mutual savings bank to a federal stock savings bank and the issuance of all of
the Bank's outstanding stock to the Company (the "Conversion"). The Conversion
will be accomplished through the adoption by the Bank of a new federal stock
charter which authorizes the issuance of capital stock. The Bank will issue all
of its outstanding stock to the Company and will thereby become a wholly owned
subsidiary of the Company.
The Bank has filed an application for conversion on Form AC, including a
proxy statement, prospectus, exhibits, and all amendments and supplements
required to be filed with respect thereto to the date hereof (as so amended and
supplemented, the "Form AC"), with the Office of Thrift Supervision (the "OTS")
for approval of the Conversion. The Form AC includes, among other things, the
Bank's Plan of Conversion and the Bank's proxy statement for the Special Meeting
of the Bank's members to approve the Plan of Conversion to be held on December
__, 1996 (the "Proxy Statement") and the Prospectus (defined below). Pursuant to
<PAGE>
the terms and provisions of the Plan of Conversion, nontransferable rights to
subscribe ("Subscription Rights") for an aggregate of up to 2,185,000 shares
(subject to increase to up to 2,512,750 shares in the event of an
oversubscription) of the Common Stock (the "Subscription Offering") have been
granted, in the following priority, to: (i) the depositors of the Bank with
aggregate account balances of $50 or more as of December 31, 1994 ("Eligible
Account Holders" and "Eligibility Record Date", respectively); (ii) the
tax-qualified stock employee benefit plans of the Company (the "Employer
Plans"), including the Employee Stock Ownership Plan of the Company (the
"ESOP"); (iii) the depositors of the Bank with aggregate account balances of $50
or more as of September 30, 1996 (other than depositors who otherwise qualify as
Eligible Account Holders or depositors who are directors or officers of the Bank
or their Associates, as defined in the Prospectus (as hereinafter defined))
("Supplemental Eligible Account Holders" and "Supplemental Eligibility Record
Date," respectively); (iv) members of the Bank, consisting of depositors of the
Bank as of October 31, 1996 ("Voting Record Date"), and borrowers of the Bank as
of July 1, 1991, other than Eligible Account Holders and Supplemental Eligible
Account Holders ("Other Members") and (v) bank employees ("Bank Employees").
Shares of Common Stock not subscribed for in the Subscription Offering may be
offered in a direct community offering to members of the general public, with a
first preference to natural persons residing in Cook and Lake counties in
Illinois (the "Local Community") on the Voting Record Date (the "Community
Offering," and together with the Subscription Offering, as each may be extended
or reopened from time to time, the "Subscription and Community Offering"). Any
Shares not subscribed for in the Subscription and Community Offering may be
offered, subject to Section 3 hereof, to the general public in a syndicated
community offering (the "Syndicated Community Offering"). It is acknowledged
that the number of Shares to be sold in the Conversion may be increased or
decreased as described in the Prospectus (as hereinafter defined); that the
purchase of Shares in the Subscription and Community Offering is subject to
maximum and minimum purchase limitations as described in the Prospectus; and
that the Company and Bank may reject, in whole or in part, any subscription
received in the Community Offering. If the number of Shares is increased or
decreased in accordance with the Plan of Conversion, the term "Shares" shall
mean such greater or lesser number where applicable.
Concurrently with the execution of this Agreement, the Company is
delivering to Hovde copies of the Prospectus dated November __, 1996 of the
Company to be used in the Subscription Offering and Community Offering (if any),
and, if necessary, will deliver copies of the Prospectus or prospectus
supplement for use in a Syndicated Community Offering and/or Public Offering, as
defined in the Prospectus (as hereinafter defined).
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2. Representations and Warranties of the Company and the Bank. The Company
and the Bank hereby jointly and severally represent and warrant to Hovde that:
(a) The Company has filed with the Securities and Exchange Commission
(the "Commission") a registration statement, including exhibits, and
pre-effective amendments thereto, on Form S-1 (No. 333-12083), including a
prospectus, for the registration of the Shares under the Securities Act of 1933,
as amended (the "1933 Act"), in the form heretofore delivered to Hovde; such
registration statement has become effective under the 1933 Act; and no order has
been issued by the Commission or any applicable state regulatory authority
preventing or suspending the use of the Prospectus with respect thereto and no
proceedings regarding same have been initiated or, to the best knowledge of the
Company, threatened. Except as the context may otherwise require, such
registration statement, as amended, on file with the Commission at the time the
registration statement became effective, including the prospectus, financial
statements, schedules, exhibits and all other documents filed as part thereof,
is herein called the "Registration Statement," and the prospectus on file with
the Commission at the time the Registration Statement became effective is herein
called the "Prospectus," except that if any prospectus filed by the Company with
the Commission in a post-effective amendment or pursuant to Rule 424(b) of the
rules and regulations of the Commission promulgated under the 1933 Act (the
"Regulations") differs from the prospectus on file at the time the Registration
Statement became effective, the term "Prospectus" shall refer to the Rule 424(b)
prospectus from and after the time it is filed with or mailed for filing to the
Commission and shall include any amendments or supplements thereto from and
after their dates of effectiveness or use, respectively. Following completion of
the Subscription and Community Offering, in the event of a Syndicated Community
Offering, the Company: (i) will promptly file with the Commission a
post-effective amendment to such Registration Statement relating to the results
of the Subscription and Community Offering, any additional information with
respect to the proposed plan of distribution and any revised pricing
information; or (ii) if no such post-effective amendment is required, will file
with, or mail for filing to, the Commission a prospectus or prospectus
supplement containing information relating to the results of the Subscription
and Community Offering and pricing information pursuant to Rule 424(c) of the
Regulations, in either case in a form acceptable to Hovde.
(b) The Company has filed with the OTS an application for approval of
the acquisition of the Bank by the Company on Form H-(e)1-S (the "Holding
Company Application") promulgated under the savings and loan holding company
provisions of the Home Owners' Loan Act, as amended, and the regulations
promulgated thereunder by the OTS (the Home Owners' Loan Act, as amended,
together with the regulations promulgated thereunder by the OTS, shall
hereinafter be referred to as the "HOLA"). The Holding Company Application has
been approved by the OTS as of November __, 1996. The Prospectus has been
approved for use by the OTS as of November __, 1996. No order has been issued by
the OTS preventing or suspending the use of the Prospectus and no action by or
before the OTS to revoke such approvals or authorizations is pending or, to the
best knowledge of the Company or Bank, threatened.
3
<PAGE>
(c) As of the date of the Prospectus and at all times subsequent
thereto through and including the Closing Date: (i) the Registration Statement
and the Prospectus (as amended or supplemented, if amended or supplemented)
complied and will comply in all material respects with the 1933 Act and the
Regulations; (ii) the Registration Statement (as amended or supplemented, if
amended or supplemented) did not and will not contain any untrue statement of a
material fact or omit to state a material fact required to be stated therein or
necessary to make the statements therein, in light of the circumstances under
which they were made, not misleading; (iii) the Prospectus (as amended or
supplemented, if amended or supplemented) did not and will not contain any
untrue statement of a material fact or omit to state any material fact required
to be stated therein or necessary to make the statements therein, in light of
the circumstances under which they were made, not misleading, provided, however,
that none of the representations and warranties in this subsection shall apply
to statements in or omissions from the Prospectus, the Registration Statement or
any amendment or supplement thereto made in reliance upon and in conformity with
written information furnished to the Company or the Bank by Hovde expressly
regarding Hovde for use under the caption "The Conversion -- Marketing and
Underwriting Arrangements"; and (iv) any Application (as defined in Section 8)
(as amended or supplemented, if amended or supplemented), other than the Holding
Company Application and the Form AC, did not and will not contain any untrue
statement of a material fact or omit to state a material fact required to be
stated therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading.
(d) At the date of the Holding Company Application and at all times
subsequent thereto through and including the Closing Date: (i) the Holding
Company Application (as amended or supplemented, if amended or supplemented)
complied and will comply in all material respects with the HOLA; and (ii) the
Holding Company Application (as amended or supplemented, if amended or
supplemented) did not and will not contain any untrue statement of a material
fact or omit to state a material fact required to be stated therein or necessary
to make the statements therein, in light of the circumstances under which they
were made, not misleading.
(e) The Bank has filed the Form AC with the OTS in the form heretofore
delivered to Hovde. The Form AC has been approved by the OTS as of November __,
1996. The Proxy Statement has been approved by the OTS as of November __, 1996.
The form of stock charter of the Bank has been approved by the OTS as part of
the Form AC. No order has been issued by the Federal Deposit Insurance
Corporation (the "FDIC"), the OTS or any applicable state regulatory authority
preventing or suspending the use of the Proxy Statement and no action by or
before any such governmental entity to revoke any approvals or authorizations is
pending or, to the best knowledge of the Company and the Bank, threatened.
(f) As of the date of their approval by the OTS and at all times
subsequent thereto, through and including the Closing Date: (i) the Form AC and
the Proxy Statement complied and will comply in all material respects with Title
12, Part 563b of the Code of Federal Regulations (the "Conversion Regulations");
(ii) the Form AC did not and will not contain any untrue statement of a material
fact or omit to state a material fact required to be
4
<PAGE>
stated therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading; (iii) the Proxy
Statement did not and will not contain any untrue statement of a material fact
or omit to state a material fact required to be stated therein or necessary to
make the statements therein, in light of the circumstances under which they were
made, not misleading; and (iv) as of the date of the special meeting of the
Bank's members with respect to which the Proxy Statement is being distributed,
the Proxy Statement will not contain any untrue statement of a material fact or
omit to state a material fact required to be stated therein or necessary to make
the statements therein, in the light of the circumstances under which they are
made, not misleading.
(g) Except as disclosed in the Registration Statement and the
Prospectus, there is no suit, proceeding, charge, investigation or action
(including, but not limited to, any action related to expressions of
dissatisfaction with the Conversion by any member of the Bank) before or by any
court, regulatory authority or governmental agency or body pending or, to the
best knowledge of the Bank and the Company, threatened against the Bank or the
Company which might materially and adversely affect the Conversion, the
performance by the Bank or the Company of this Agreement or the consummation of
the transactions contemplated by the Plan of Conversion or which might result in
any material adverse change in the condition (financial or otherwise), business,
properties or results of operations of the Bank and the Company, taken as a
whole.
(h) The execution, delivery and performance of this Agreement and the
issuance and sale of the Shares and the consummation of the transactions
contemplated by this Agreement and the Plan of Conversion have been duly
authorized by all necessary action on the part of the Company and the Bank. The
Plan of Conversion has been duly adopted by the Board of Directors of the Bank,
and the consummation of the transactions contemplated by the Plan of Conversion
has been duly authorized by all necessary action on the part of the Bank. The
Plan of Conversion has not been amended since September 17, 1996, or terminated
and remains in full force and effect. This Agreement has been duly executed and
delivered by the Company and the Bank and is the legal, valid and binding
agreement of the Company and the Bank, enforceable in accordance with its terms,
except as enforceability thereof may be limited by bankruptcy, insolvency,
moratorium, reorganization or similar laws affecting the enforceability of
creditors' rights generally or the rights of creditors of federally chartered
savings banks, the accounts of which are insured by the FDIC, or by general
equity principles regardless of whether such enforceability is considered in a
proceeding in equity or at law.
(i) The Company and the Bank have all such power and authority as may
be required to enter into this Agreement and to carry out the provisions and
conditions hereof. All consents, approvals, authorizations or orders necessary
to permit the issuance and sale of the Shares as provided herein (other than
approvals under the securities or Blue Sky laws of certain states, as to which
no representation is made) contemplated by the Plan of Conversion and this
Agreement, including, but not limited to, the approval of the OTS required to be
received as of the date hereof, have been received, and all transactions
contemplated by the Plan of Conversion will, as of the Closing Date, have been
duly consummated in accordance with all material terms
5
<PAGE>
of the Plan of Conversion, and all regulatory consents, approvals,
authorizations and orders, including, but not limited to, the approval of the
OTS (except with respect to the filing of certain post-sale, post-Conversion
reports and documents in compliance with the OTS's resolutions or letters of
approval and approvals under the securities or Blue Sky laws of certain states,
as to which no representation is made), and any and all applicable waiting
periods have expired, or will have expired by the Closing Date, and all such
regulatory consents, approvals, authorizations and orders, including, but not
limited to, the approval of the OTS, will, as of the Closing Date, be in full
force and effect.
(j) The Company has been duly organized as a an Illinois corporation,
and the Bank has been duly organized as a federally chartered mutual savings
bank, and each of them is validly existing and in good standing under the laws
of the jurisdiction of its organization with full corporate power and authority
to own its property and conduct its business as described in the Registration
Statement and the Prospectus. Each of the Company and the Bank is duly qualified
to transact business and is in good standing in each other jurisdiction in which
the failure to so qualify would have a material adverse effect on the condition
(financial or otherwise) or the business, properties or results of operations of
the Company or the Bank. The Bank does not own equity securities of or an equity
interest in any other business enterprise except as described in the Prospectus.
The Company and the Bank have obtained all material licenses, permits and other
governmental authorizations required for the conduct of their respective
businesses; all such licenses, permits and governmental authorizations are in
full force and effect, and the Company and the Bank are in compliance in all
material respects with all laws, rules, regulations and orders applicable to the
operation of their respective businesses. On the Closing Date, upon amendment of
the Bank's charter and bylaws as provided in the rules and regulations of the
OTS and completion of the sale by the Company of the Shares as contemplated by
the Prospectus: (i) the Bank will be converted pursuant to the Plan of
Conversion to a federally chartered stock savings bank with full power and
authority to own its property and conduct its business as described in the
Prospectus; (ii) all of the outstanding capital stock of the Bank will be owned
of record and beneficially by the Company; and (iii) the Company will have no
direct subsidiaries other than the Bank. At the Closing Date, the Conversion
will have been effected in accordance with all applicable statutes, regulations,
decisions and orders; and, except with respect to the filing of certain
post-sale, post-Conversion reports and documents in compliance with the OTS's
resolutions or letters of approval, all of the terms, conditions, requirements
and provisions of and to the Conversion imposed on the Bank by the OTS will have
been complied with by the Bank in all material respects or appropriate waivers
will have been obtained.
(k) Each of the Company and the Bank has good and marketable title to,
or valid and enforceable leasehold estates in, all items of real and personal
property which are stated in the Prospectus to be owned or leased by them, in
each case free and clear of all liens, encumbrances, claims, security interests
and defects, other than (i) the lien of the Federal Home Loan Bank of Chicago;
(ii) those referred to in the Prospectus; or (iii) those which individually or
in the aggregate would not have a material adverse effect upon the operations of
the Company and the Bank, taken as a whole, and all of the leases and subleases
material to the business
6
<PAGE>
of the Company and Bank under which either of them hold properties, including
those described in the Prospectus, are valid, subsisting and enforceable leases.
(l) All contracts and other documents required to be filed as exhibits
to the Registration Statement, the Form AC or the Holding Company Application
have been filed with the Commission or the OTS, as the case may be.
(m) The financial statements and schedules which are included in the
Registration Statement and Prospectus present fairly the financial condition,
results of operations, retained earnings and cash flows of the Bank at the dates
thereof and for the periods covered thereby and comply as to form in all
material respects with the applicable accounting requirements of the 1933 Act,
the Regulations and the Conversion Regulations. Such financial statements have
been prepared in accordance with generally accepted accounting principles
consistently applied throughout the periods involved, and such financial
statements are consistent with the most recent financial statements and other
reports filed by the Company or the Bank with supervisory and regulatory
authorities, except that the accounting principles employed in such filings
conform to the requirements of such authorities and not necessarily to generally
accepted accounting principles. The tables and other financial, statistical, and
pro forma information and related notes included in the Prospectus that relate
to the Company or the Bank or both of them present fairly in all material
respects the information purported to be shown thereby at the respective dates
thereof for the respective periods covered thereby.
(n) Subsequent to the respective dates as of which information is
given in the Prospectus, except as may otherwise be disclosed therein, there has
not been: (i) any material adverse change in, or any adverse development that
materially affects, and neither the Company nor the Bank is aware of any
prospective change or development (other than prospective changes or
developments affecting the savings institution industry generally) which
reasonably could be expected to have a material adverse effect on, the condition
(financial or otherwise), business, properties, or results of operations of the
Company and the Bank taken as a whole; (ii) any change in the capital stock, or
material increase in the long-term debt of the Company or the Bank; (iii) the
issuance of any securities or incurrence of any liability or obligation, direct
or contingent, for borrowing other than in the ordinary course of business by
the Company or the Bank; or (iv) any material transactions entered into by the
Company or the Bank other than in the ordinary course of business. The
capitalization, liabilities, assets, properties and business of the Bank conform
in all material respects to the descriptions thereof contained in the Prospectus
and the Registration Statement. The Bank has no material liability of any kind,
contingent or otherwise, except as set forth in the Prospectus.
(o) No default exists, and no event has occurred which with notice or
passage of time, or both, would constitute a default on the part of the Company
or the Bank in the due performance and observance of any term, covenant or
condition of any contract, lease, indenture, mortgage, deed of trust, note, loan
or credit agreement or any other instrument or agreement to which the Company or
the Bank is a party or by which either of them or any of their respective
properties may be bound or affected in any respect which, in any such case,
7
<PAGE>
would have a material adverse effect on the condition (financial or otherwise),
business, properties or results of operations of the Company or the Bank; such
agreements are in full force and effect; and no other party to any such
agreements has instituted or, to the best knowledge of the Company or the Bank,
threatened, any action or proceeding wherein the Company or the Bank is alleged
to be in default thereunder. As of the date hereof, neither the Company nor the
Bank is, and as of the Closing Date, neither the Company nor the Bank will be:
(i) in breach of any term or provision of its respective articles of
incorporation or charter or bylaws (and the Bank will not be in violation of its
charter or bylaws in stock from upon consummation of the Conversion); (ii) in
violation of any authorization, approval, judgment, decree or order; or (iii) in
violation of any statute, rule or regulation that individually or in the
aggregate would have a material adverse effect on the Company and the Bank,
taken as a whole.
(p) The execution, delivery and performance of this Agreement and the
Plan of Conversion, the consummation of the transactions contemplated by this
Agreement and the Plan of Conversion, and compliance with the terms and
provisions hereof and thereof will not: (i) conflict with, or result in a
material breach of, any of the terms, provisions or conditions of, or constitute
a default (or an event which with notice or passage of time, or both, would
constitute a default) under, the certificate of incorporation or charter or
bylaws of the Company or the Bank; (ii) conflict with, or result in a material
breach of, any of the terms, provisions or conditions of or constitute a default
(or any event which with notice or passage of time, or both, would constitute a
default) under any material contract, lease, agreement, indenture, mortgage,
deed of trust, note or any other instrument or agreement to which the Company or
the Bank is a party or by which either of them or their respective properties is
bound; (iii) violate any authorization, approval, judgment, decree, order,
statute, rule or regulation applicable to the Company or the Bank or any of
their properties; or (iv) with the exception of the liquidation account
established in the Conversion, result in the creation of any lien, charge or
encumbrance upon any of the assets of the Company or the Bank.
(q) The Conversion, when consummated in accordance with the terms of
the Plan of Conversion, will conform in all material respects to the description
thereof contained in the Prospectus and the Proxy Statement. The issuance and
sale of the capital stock of the Bank to the Company have been duly authorized
by all necessary action of the Bank, the Company and appropriate regulatory
authorities and such capital stock, when issued and paid for in accordance with
the terms of the Plan of Conversion, will be fully paid and non-assessable, will
conform in all material respects to the description thereof contained in the
Prospectus and the Form AC and will not be subject to any preemptive rights.
There are no options, agreements, contracts or other rights to purchase or
acquire any shares of Common Stock or shares of the Bank's common stock (other
than Subscription Rights, the purchase of the Bank common stock by the Company
pursuant to the Conversion, rights to purchase or acquire Common Stock pursuant
to benefit plans of the Company as expressly described in the Prospectus and any
other rights expressly described in the Plan of Conversion). The issuance and
sale of the Shares by the Company have been duly authorized: (i) by all
necessary action of the Company; and (ii) subject to the receipt of OTS
approvals prior to the Closing Date, by the OTS. The Shares, when issued and
paid for in accordance with the terms of the Plan of Conversion, will be duly
8
<PAGE>
and validly issued and fully paid and non-assessable, will conform in all
material respects to the description thereof contained in the Prospectus and
will not be subject to any preemptive rights. The purchasers of the Shares from
the Company, upon issuance thereof against payment therefor, will acquire such
Shares free and clear of all claims, encumbrances, security interests and liens
whatsoever created or suffered to be created by the Company. The certificates
representing the Shares will conform with the requirements of applicable laws
and regulations. Upon consummation of the Conversion, the authorized, issued and
outstanding equity capital of the Company will be within the range that is set
forth in the Prospectus under the caption "Capitalization," based on the
assumptions stated therein.
(r) No approval of any regulatory or supervisory or other public
authority is required in connection with the execution and delivery of this
Agreement or the issuance of the Shares, except for the declaration of
effectiveness of the Registration Statement and any required post-effective
amendment to the Registration Statement by the Commission, approval of the Form
AC and Proxy Statement and other marketing materials by the OTS, the issuance of
the Bank's federal stock charter and bylaws by the OTS, the approval of the
holding Company Application by the OTS and any necessary qualification or
registration under the securities or Blue Sky laws of the various states in
which the Shares are to be offered and as may be required under the regulations
of The Nasdaq National Market.
(s) KPMG Peat Marwick LLP, the firm which has certified the financial
statements of the Bank included in the Prospectus, are independent certified
public accountants, as required by the 1933 Act, the Regulations and the
Conversion Regulations.
(t) Capital Resources Group, Inc., which has prepared the Bank's
conversion valuation appraisal report dated as of September 6, 1996 and updated
as of October __, 1996 (the "Appraisal"), which Appraisal (as amended or
supplemented, if amended or supplemented) is referred to in the Prospectus, is
independent with respect to the Company and the Bank within the meaning of the
Conversion Regulations and is believed by the Company and the Bank to be
experienced and expert in rendering corporate appraisals of thrift institutions.
(u) The Company and the Bank have filed all federal income and state
and local franchise tax returns required to be filed (or have timely filed
extensions therefor) and have made timely payments of all taxes due and payable
in respect of such returns, and no deficiency has been asserted with respect
thereto by any taxing authority.
(v) Neither the Company nor the Bank or, to the best knowledge of the
Company or the Bank, any employee of the Company or the Bank has made any
payment of funds of the Company or the Bank which would be prohibited by law,
and no funds of the Company or the Bank have been set aside to be used for any
payment so prohibited by law. Neither the Company nor the Bank, or, to the best
knowledge of the Company and Bank, any employee of the Company or the Bank has
made any payment of funds of the Company or the Bank as a loan for the purchase
of Shares. The Company and the Bank are in compliance with
9
<PAGE>
the applicable financial record-keeping and reporting requirements of the
Currency and Foreign Transaction Reporting Act of 1970, as amended, and the
regulations and rules thereunder.
(w) The Company has received approval, subject to notice of issuance,
to have the Shares quoted on The Nasdaq National Market effective on the Closing
Date.
(x) Upon consummation of the Conversion, the Company will be a savings
and loan holding company. The deposit accounts of the Bank are insured by the
Savings Association Insurance Fund of the FDIC up to the maximum amount allowed
under law, and no proceeding for the termination or revocation of such insurance
is pending or, to the best knowledge of the Company and the Bank, threatened.
The Bank is a member in good standing of the Federal Home Loan Bank of Chicago.
Neither the Company nor the Bank is in violation of any directive, order,
agreement or understanding from the FDIC, the OTS or any other agency to make
any material change in the method of conducting its business so as to comply in
all material respects with all applicable statutes and regulations (including,
without limitation, regulations, decisions, directives and orders of the FDIC
and the OTS).
(y) Neither the Company nor the Bank has relied upon Hovde or Hovde's
legal counsel for any legal, tax or accounting advice in connection with the
Conversion.
(z) Neither the Company nor the Bank is required to be registered
under the Investment Company Act of 1940, as amended.
(aa) There are no contracts, agreements or understandings between the
Company or the Bank and any person granting such person the right to require the
Company or the Bank to file a registration statement under the 1933 Act with
respect to any securities of the Company or the Bank owned or to be owned by
such person or to require the Company or the Bank to include such securities in
the Registration Statement or in any other registration statement filed by the
Company or the Bank under the 1933 Act.
(ab) Neither the Company nor the Bank has: (i) issued any securities
within the last 18 months (except for notes to evidence other bank loans and
reverse repurchase agreements or other liabilities and the issuance of the
minimum number of shares of Common Stock by the Company necessary to conduct
business as a corporation in Illinois); (ii) had any material dealings with
respect to sales of its securities within the 12 months prior to the date hereof
with any member of the National Association of Securities Dealers, Inc. (the
"NASD"), or any person related to or associated with such member, other than
discussions and meetings with Hovde relating to the Conversion; (iii) entered
into a financial or management consulting agreement with any member of the NASD
with respect to its securities or any person related to or associated with such
member, except as contemplated hereunder and except in connection with the
Conversion as described in the Prospectus under the caption "The
Conversion--Marketing and Underwriting Arrangements"; or (iv) engaged any
intermediary between Hovde and the
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Company in connection with the offering of the Shares, and no person is being
compensated in any manner for such service.
3. Appointment of Hovde; Sale and Delivery of the Shares. Subject to the
terms and conditions herein set forth, the Company and the Bank hereby appoint
Hovde as their agent to consult with and advise the Company and the Bank, and to
solicit subscriptions and purchase orders for Shares on behalf of the Company
and the Bank on a best efforts basis, in connection with the Company's sale of
the Shares in the Subscription Offering, the Community Offering, if any, and the
Syndicated Community Offering, if any. On the basis of the representations and
warranties herein contained, and subject to the terms and conditions herein set
forth, Hovde accepts such appointment and agrees to provide, consult with and
advise the Company and the Bank as to the Conversion services set forth as
Exhibit A to the letter agreement between Hovde and the Bank dated as of
February 15, 1996, which Exhibit A is incorporated by reference herein;
provided, however, that Hovde shall not be obligated to take any action which is
inconsistent with any applicable laws, regulations, decisions or orders and,
provided further, that Hovde shall not be responsible for obtaining
subscriptions or purchase orders for any specific number of Shares and shall not
be required to purchase any Shares. The appointment of Hovde hereunder shall
terminate upon consummation of the Conversion. Except where specifically
incorporated by reference herein, this Agreement supersedes all other letter
agreements, engagement letters or other agreements previously entered into
between Hovde and the Company and/or the Bank.
In connection with the solicitation of offers to buy Shares in the
Syndicated Community Offering, if any, Hovde may use the services of other
brokers or dealers ("Selected Dealers") acceptable to the Company in its
reasonable discretion and, in that connection, it may invite (if requested to do
so by the Company) any Selected Dealer to become a "Sponsoring Dealer," that is,
a Selected Dealer who will solicit offers which result in sales on behalf of the
Company of at least the number of Shares specified by Hovde. Each Selected
Dealer, including each Sponsoring Dealer, shall enter into a Selected Dealer
Agreement substantially in the form attached hereto as Exhibit A.
In the event the Company is unable to sell all of the minimum number of
Shares within the period provided in the Plan of Conversion and the Conversion
Regulations, and as described in the Prospectus, this Agreement shall terminate
and the Company shall refund to any persons who have subscribed for any of the
Shares the full amount which it may have received from them, together with
interest as provided in the Prospectus, and no party to this Agreement shall
have any obligation to the others hereunder, except for payment by the Company
as set forth in Sections 6, 8(a) and 8(d) hereof and payment by Hovde as
provided in Sections 8(b) and 8(d). Appropriate arrangements for placing the
funds received from subscriptions for Shares or other offers to purchase Shares
in special interest-bearing accounts with the Bank pending consummation or
termination of the Subscription Offering, Community Offering (if any) and
Syndicated Community Offering (if any) were made prior to the commencement of
the Subscription and Community Offering, with provision for refund to the
purchasers as set forth above, or for delivery to the Company if all of the
Shares are sold.
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If all of the minimum number of Shares are sold and all other conditions
precedent to the consummation of the Conversion are satisfied, the Company
agrees to issue or have issued the Shares sold and to release for delivery
certificates for such Shares on the Closing Date against payment therefor by
release of funds from the special interest-bearing accounts referred to above
and from a special account which the Company agrees to establish prior to the
retention of any Selected Dealer. The closing shall be held at the offices of
Thacher Proffitt & Wood, Two World Trade Center, New York, New York 10048 at
9:00 a.m., local time, or at such other place and time as shall be agreed upon
by the parties hereto, on a business day to be agreed upon by the parties
hereto. The Company shall notify Hovde by telephone, confirmed in writing, when
funds shall have been received for all of the Shares. Certificates for Shares
shall be delivered directly to the purchasers thereof or in accordance with the
Company's directions. Notwithstanding the foregoing, certificates for Shares
purchased through Selected Dealers shall be made available to Hovde for checking
at least 24 hours prior to the Closing Date at such office as Hovde and the
Company shall mutually designate. The hour and date upon which the Company shall
release for delivery all of the Shares, in accordance with the terms hereof, are
herein called the "Closing Date."
The Company and the Bank (or their respective agents) shall advise Hovde,
whenever an allocation of the Shares does not strictly correspond to all
subscriptions for Shares, as to the allocation of the Shares. Hovde shall have
no liability to any party for the records or other information provided by the
Company and the Bank (or their respective agents) to Hovde for use in allocating
the Shares. The Company and the Bank shall indemnify and hold harmless Hovde for
any liability arising out of the allocation of the Shares in accordance with the
Plan of Conversion generally and the records or other information provided to
Hovde by the Company and the Bank (or their respective agents).
The Company will pay any stock issue and transfer taxes which may be
payable with respect to the sale of the Shares.
In addition to the expenses specified in Section 6 hereof, Hovde has
received or will receive the following compensation from the Company for Hovde's
services hereunder:
(a) A management fee of $37,500 has been paid to Hovde.
(b) For services rendered by Hovde in connection with the sale of
Shares in the Subscription Offering, the Community Offering (if any) and the
Syndicated Community Offering (if any), a fee equal to one and three quarters
percent (1.75%) of the aggregate purchase price of Shares sold in the
Subscription Offering, excluding Shares sold to the Company's directors,
officers and employees (or members of their immediate families) and the ESOP,
and three percent (3%) of the aggregate purchase price of shares sold in the
Direct Community Offering. The sales commissions due Hovde shall be paid to
Hovde at Closing.
(c) In connection with the solicitation of offers to buy Shares in the
Syndicated Community Offering (if any), Hovde and the Company agree to negotiate
a fee in
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an amount up to seven percent (7%) of the aggregate purchase price of Shares
sold in the Syndicated Community Offering, which fee shall be paid to Hovde at
Closing for allocation by Hovde in accordance with the Selected Dealers
Agreement.
The fees specified in clauses (b) and (c) above shall be payable to Hovde
by wire transfer of immediately available funds or a check in next-day funds, as
agreed to by the parties hereto, at the time so indicated above.
Notwithstanding anything to the contrary contained in this Agreement (but
subject to Section 10 hereof) Hovde reserves the right to renegotiate the amount
of fees (but only in those circumstances where the conduct of the Company or the
Bank triggers the need for renegotiation pursuant to this paragraph) and
expenses payable or reimbursable, as the case may be, by the Company and the
Bank in the event that (i) the Company and/or the Bank are required to resolicit
subscribers for Shares in the Subscription and Community Offering, or (ii) the
regulations governing the Conversion are changed in a manner that materially
affects the ability of Hovde to perform its duties as set forth in this
Agreement. Until any renegotiation called for by this paragraph is completed,
Hovde shall not accrue expenses relating to any resolicitation or change in
regulations in an amount that would cause the total expenses incurred by Hovde,
that are reimbursable by the Bank pursuant to Section 6 hereof, to be greater
than $60,000, without the prior written consent of the Company or the Bank,
which consent shall not be unreasonably withheld.
4. Offering. The Company is offering up to 2,185,000 Shares (which number
may be increased to up to 2,512,750 shares in the event of an oversubscription
or decreased as described in the Prospectus) in the Subscription Offering and
Community Offering, if any, and, if any Shares remain unsubscribed at the
conclusion of the Subscription Offering and Community Offering, if any, in the
Syndicated Community Offering.
5. Covenants of the Company and the Bank. The Company and the Bank jointly
and severally covenant and agree with Hovde that:
(a) The Company shall immediately upon the receipt of any information
concerning the events listed below notify Hovde and promptly confirm the notice
in writing: (i) when any post-effective amendment to the Registration Statement
or any supplement to the Prospectus has been filed; (ii) of the issuance by the
Commission of any order or other action suspending the use of the Prospectus or
of the initiation or the threat of any such action; (iii) of the receipt of any
notice with respect to the suspension of the qualification of the Shares for
offering or sale in any jurisdiction; and (iv) of the receipt of any comments or
requests for additional information or any amendment or supplement from the
staff of the Commission relating to the Registration Statement. The Company will
use its reasonable, good faith and diligent efforts to prevent the issuance by
the Commission or any other governmental authority of any such order and, if any
such order shall at any time be issued, to obtain the lifting, termination or
withdrawal thereof at the earliest possible time.
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(b) During the time when a prospectus is required to be delivered
under the 1933 Act, the Company will comply with all requirements imposed upon
it by the 1933 Act, as now in effect and hereafter amended, and by the
Regulations, as from time to time in force, so far as necessary to permit the
continuance of offers and sales of or dealings in the Shares in accordance with
the provisions hereof and the Prospectus. If, at any time when the Prospectus is
required to be delivered under the 1933 Act, any event shall have occurred as a
result of which, in the opinion of counsel for the Company or counsel for Hovde,
the Prospectus as then amended or supplemented includes an untrue statement of a
material fact or omits to state a material fact required to be stated therein or
necessary to make the statements therein, in the light of the circumstances
under which they were made, not misleading, or if it is necessary at any time to
amend or supplement the Prospectus to comply with the 1933 Act, the Company
shall promptly notify Hovde in writing and prepare and file with the Commission
an appropriate amendment or supplement. The Company shall provide Hovde and
Hovde's counsel notice of the Company's intention to file any amendment or
supplement to the Registration Statement or the Prospectus and shall not file or
use any amendment or supplement to the Registration Statement or the Prospectus
of which Hovde has not first been furnished a copy and given a reasonable amount
of time to review such copy or to which Hovde shall reasonably object. For the
purposes of and during the time frame contemplated by this subsection (b), each
of the Company and the Bank shall timely furnish such information with respect
to itself as Hovde may from time to time reasonably request. The Bank shall not
amend, without Hovde's prior written consent (which consent shall not be
unreasonably withheld), the Plan of Conversion in any manner that, in the
reasonable opinion of Hovde, would materially and adversely affect the sale of
the Shares or the terms of this Agreement. Prior to the Closing Date, neither
the Company nor the Bank shall issue any press release or other public
communication with respect to the Company or the Bank or the Conversion without
first providing to Hovde a copy of such release or other communication and
allowing Hovde a reasonable amount of time to review such copy. Except as
otherwise required by law, neither the Company nor the Bank shall issue any
release or other communication prior to the Closing Date to which Hovde shall
reasonably object.
(c) The Bank shall not file any amendment or supplement to the Form
AC, including the Bank's Proxy Statement and Prospectus contained therein,
without notifying Hovde and without providing Hovde and Hovde's counsel an
opportunity to review such amendment. The Bank shall not file any amendment or
supplement to the Form AC to which Hovde shall reasonably object. Hovde shall
have a reasonable amount of time to review any amendment or supplement to the
Form AC.
(d) The Company or the Bank shall immediately upon receipt of any
information concerning the events listed below notify Hovde and promptly confirm
the notice in writing: (i) of the request by the OTS, or any other governmental
entity, for any amendment or supplement to the Form AC or for additional
information relating to the Form AC or the holding Company Application; or (ii)
of the issuance by the OTS, or any other governmental entity, of any order or
other action suspending the use of the Prospectus, Proxy Statement or any other
filing of the Bank under the HOLA or other applicable law or regulations, or the
initiation or threat of any such action. The Company and the Bank will each use
its reasonable,
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good faith and diligent efforts to prevent the issuance by the OTS, or any other
governmental entity, of any such order and, if any such order shall at any time
be issued, to obtain the lifting, termination or withdrawal thereof at the
earliest possible time.
(e) During the time when the Proxy Statement is required to be
delivered under the Conversion Regulations, the Bank will comply with all
requirements imposed upon it by the Conversion Regulations. If, at any time
prior to the date of the Special Meeting (as defined in the Prospectus) of the
Bank's members with respect to which the Proxy Statement is delivered, any event
shall have occurred as a result of which, in the opinion of counsel for the Bank
or counsel for Hovde, the Proxy Statement includes an untrue statement of a
material fact or omits to state a material fact required to be stated therein or
necessary to make the statements therein, in light of the circumstances under
which they were made, not misleading, or if it is necessary at any time to amend
or supplement the Proxy Statement to comply with the Conversion Regulations, the
Bank shall notify Hovde in writing and prepare and file with the OTS, at the
Bank's expense, an appropriate amendment or supplement. The Bank shall not file
or use any amendment or supplement to the Proxy Statement of which Hovde has not
first been furnished a copy or to which Hovde shall reasonably object. For the
purpose of and during the time frame contemplated by this subsection (e), the
Bank shall timely furnish such information with respect to itself as Hovde may
from time to time reasonably request.
(f) The Company and the Bank shall deliver to Hovde, without charge,
such number of copies of the Registration Statement (including all exhibits),
the Holding Company Application (including all exhibits) and the Form AC
(including all exhibits) as originally filed and each amendment, including,
without limitation, any post-effective amendment, thereto as Hovde may
reasonably request. The Company will furnish to Hovde, from time to time during
such period as the Prospectus is required by law to be delivered in connection
with offers and sales of the Shares, such number of copies of the Prospectus (as
amended or supplemented, if amended or supplemented) as Hovde may reasonably
request. The Company authorizes Hovde, all members of any selling group which
may be formed in connection with the distribution of the Shares, and all dealers
to whom any of the Shares may be sold by members of the selling group, to use
the Prospectus (as amended or supplemented, if amended or supplemented) in
connection with the sale of the Shares.
(g) The Company and the Bank have taken or shall take all necessary
action, in cooperation with Hovde, to qualify or register the Shares for offer
and sale by the Company under the securities or "Blue Sky" laws of such
jurisdictions in which the Shares are required by the Conversion Regulations to
be offered or as Hovde and the Company shall reasonably agree to designate;
provided, however, that neither the Company nor the Bank shall be obligated to
qualify as a foreign corporation to do business under the laws of any such
jurisdiction or to file any general consent to service of process.
(h) The Company shall make generally available to its security holders
as soon as practicable, but not later than the first day of the 15th full
calendar month following the effective date of the Registration Statement, an
earnings statement of the Company and its
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consolidated subsidiaries (which need not be certified by independent certified
public accountants unless required by the 1933 Act or the Regulations, but which
shall satisfy the provisions of Rule 158 under the 1933 Act) covering a period
of at least 12 months beginning after the effective date of the Registration
Statement.
(i) Title Company shall file a registration statement for the Common
Stock under Section 12(g) of the Securities Exchange Act of 1934, as amended
(the "Exchange Act"), prior to completion of the stock offering pursuant to the
Plan of Conversion and will request that such registration statement be
effective upon completion of the Conversion. The Company will maintain the
effectiveness of such registration for not less than three years. The Company
will use its reasonable, good faith and diligent efforts to obtain approval for
and maintain quotation of the Shares on The Nasdaq National Market effective on
or prior to the Closing Date. The Company will not sell or issue, contract to
sell or otherwise dispose of, for a period of 90 days after the Closing Date,
without Hovde's prior written consent, which consent shall not be unreasonably
withheld, any shares of Common Stock other than in connection with any plan or
arrangement described in the Prospectus (and the Company shall notify Hovde of
any such sale, issuance, contract or disposition pursuant to such plan or
arrangement).
(j) During the period of three years hereafter, the Company shall
furnish: (i) to its security holders and to Hovde, as soon as practicable after
the end of each fiscal year of the Company, an audited balance sheet and
statements of operations, stockholders' equity and changes in financial position
as at the end of and for such year; (ii) to Hovde, as soon as practicable after
the end of each of the first three quarters of each fiscal year, a balance sheet
and statement of operations of the Company (which need not be audited) as at the
end of and for such quarter and the year to date and as at the end of and for
the corresponding periods of the preceding fiscal year; (iii) to Hovde, as soon
as available, a copy of each other report of the Company mailed to its
stockholders or filed with the Commission pursuant to the Exchange Act or
otherwise (including, without limitation, reports on Forms 10-K, 10-Q and 8-K,
and all proxy statements and annual reports to stockholders), or the OTS or any
other supervisory or regulatory authority or any national securities exchange or
system on which any class of securities of the Company is listed or quoted,
including, but not limited to, the Nasdaq National Market, other than on a
confidential basis; (iv) to Hovde, each press release and material news item and
article released by the Company or the Bank; and (v) such additional publicly
available documents and information with respect to and issued or prepared by
the Company and the Bank as Hovde may reasonably request. During any period when
the Company has an active subsidiary or subsidiaries, such financial statements
will be on a consolidated basis to the extent the accounts of the Company and
its subsidiary or subsidiaries are consolidated.
(k) The Company shall furnish to Hovde as early as practicable prior
to the Closing Date, but no later than two full business days prior thereto, a
copy of the latest available unaudited interim financial statements of the Bank
which have been read by KPMG Peat Marwick LLP, as stated in their letters to be
furnished pursuant to subsections (g) and (h) of Section 7 hereof.
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(l) The Company and the Bank shall take such actions and furnish such
information as are reasonably requested by Hovde in order for Hovde to ensure
compliance with the NASD's "Interpretation Relating to Free-Riding and
Withholding."
(m) The Company shall not deliver the Shares until the Company and the
Bank each have satisfied or caused to be satisfied each condition set forth in
Section 7 hereof unless such condition is waived. The Company and the Bank shall
use their reasonable, good faith and diligent efforts to comply with or cause to
be complied with the conditions precedent to the obligations of Hovde as
specified in Section 7 hereof.
(n) Prior to the Closing Date, the Company and the Bank shall conduct
their respective businesses in compliance with, in all material respects, all
applicable federal and state laws, rules, regulations, decisions, directives and
orders, including all decisions, directives and orders of the FDIC and the OTS
and consistent with prior business practices of the Company and the Bank.
(o) The Company and the Bank shall comply with any and all terms,
conditions, requirements and provisions with respect to the Conversion and the
transactions contemplated thereby imposed by the OTS, the HOLA, the Commission,
the 1933 Act, the Regulations (including, without limitation, the filing of
reports on Form SR pursuant to Rule 463 of the Regulations or any successor
provision), the Exchange Act and the regulations promulgated by the Commission
pursuant to the Exchange Act to be complied with subsequent to the Closing Date.
The Company will comply with all provisions of all undertakings contained in the
Registration Statement. The liquidation account for the benefit of Eligible
Account Holders and Supplemental Eligible Account Holders (as defined in the
Prospectus) of the Bank shall be duly established and maintained in accordance
with the requirements of the OTS.
(p) The Company shall apply the proceeds from the sale of the Shares
in the manner set forth in the Prospectus under the caption "Use of Proceeds."
6. Payment of Expenses. Whether or not the sale of the Shares by the
Company is consummated, the Bank shall pay all expenses incident to the
performance of the obligations of the Company and the Bank under this Agreement,
including but not limited to the following: (a) the preparation, printing,
issuance and delivery of certificates for the Common Stock; (b) the fees and
disbursements of the Company's and the Bank's counsel, accountants and other
advisors; (c) the printing and delivery to Hovde in such quantities as Hovde
shall reasonably request of copies of the Registration Statement, the
Prospectus, the Proxy Statement, the Form AC and the Holding Company Application
as originally filed and as amended or supplemented and all other documents in
connection with the Conversion and this Agreement; (d) the fees for listing the
Shares on The Nasdaq National Market; (e) fees and expenses relating to the
preparation of the independent appraisal and all updates thereof; (f) fees and
expenses relating to advertising expenses, temporary personnel expenses and
conversion center expenses, investor meeting expenses, and other miscellaneous
expenses relating to the marketing of the Common Stock; (g) the fees and charges
of any transfer agent, registrar and other agents; (h) the
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preparation, printing, filing, delivery and shipping of the Prospectus
(including the financial statements contained therein), and any amendments or
supplements thereto, this Agreement and related agreements and communications
and related documents; (i) filing fees and expenses in connection with the
qualification or registration of the Shares for offer and sale by the Company
under the securities or "Blue Sky" laws, including reasonable fees and expenses
of counsel in connection with such qualification or registration and all "Blue
Sky" memoranda; and (j) filing fees paid or incurred by Hovde in connection with
the filings with the NASD. In the event Hovde incurs any of the fees or expenses
enumerated above in connection with the Subscription Offering, the Community
Offering or the Syndicated Community Offering, the Bank will reimburse Hovde for
such fees and expenses; provided, however, that Hovde shall not incur any
substantial expenses on behalf of the Bank or the Company without the prior
written consent of the Bank or the Company. In addition, the Bank shall
reimburse Hovde for out-of-pocket expenses incurred by Hovde relating to the
offering of the Shares (including, without limitation, legal fees and
out-of-pocket disbursements of Hovde's legal counsel); provided, however,
subject to Section 3 hereof, that such out-of-pocket expenses of Hovde shall not
exceed $45,000 without the prior written consent of the Company or the Bank.
7. Conditions of Obligations of Hovde. The Company, the Bank and Hovde
agree that all obligations of Hovde provided herein shall be subject to the
accuracy of the representations and warranties contained herein as of the date
hereof and as of the Closing Date, to the accuracy of the statements of officers
and directors of the Company and the Bank made pursuant to the provisions
hereof, to the performance by each of the Company and the Bank of its
obligations hereunder to be performed at or prior to the Closing Date, and to
the following conditions:
(a) At the Closing Date, Hovde shall receive the favorable opinion of
Thacher Proffitt & Wood, counsel for the Company and the Bank, dated the Closing
Date, addressed to Hovde, in form and substance satisfactory to counsel for
Hovde and to the effect that:
(i) The Company has been duly incorporated and is validly
existing as a corporation in good standing under the laws of the State of
Illinois and has full corporate power and authority to own its properties
and conduct its business as described in the Prospectus; and the Company is
duly qualified to transact business and is in good standing in each other
jurisdiction in which the failure to so qualify would have a material
adverse effect on the condition (financial or otherwise), or the business,
properties or results of operations of the Company;
(ii) The Bank has, prior to the Closing Date, been validly
existing as a federally chartered mutual savings bank under the laws of the
United States with full corporate power and authority to own its properties
and to conduct its business as described in the Prospectus and, as of the
Closing Date, the Bank will become duly organized and validly existing as a
federally chartered capital stock savings bank in good standing under the
laws of the United States with full corporate power and
18
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authority to own its properties and to conduct its business as described in
the Prospectus; and the Bank is duly qualified to transact business in each
jurisdiction in which the failure to so qualify with have a material
adverse effect on the condition (financial or otherwise), or the business,
properties or results of operations of the Bank. The Bank is a member of
the Federal Home Loan Bank of Chicago, and the deposit accounts of the Bank
are insured by the Savings Association Insurance Fund of the FDIC up to the
maximum amount allowed under law;
(iii) The activities of the Bank described in the Prospectus are
permitted under federal law (and not expressly prohibited under the
Illinois Business Corporation Act) to subsidiaries of a savings bank
holding company that is a Illinois business corporation. To the best of
such counsel's knowledge, each of the Company and the Bank has obtained all
licenses, permits, and other governmental authorizations that are material
for the conduct of its business, and all such licenses, permits and other
governmental authorization are in full force and effect, and to the best of
such counsel's knowledge the Company and the Bank are complying therewith
in all material respects;
(iv) The Plan of Conversion complies with, and to the best of
such counsel's knowledge the Conversion has been effected in all material
respects in accordance with, all applicable laws, rules, regulations,
decisions and orders; and to the best of such counsel's knowledge all of
the terms, conditions, requirements and provisions with respect to the Plan
of Conversion and the Conversion (including those with respect to the
Subscription and Community Offering and the Syndicated Community Offering)
imposed by the OTS in writing or orally communicated to such counsel, the
Company or the Bank have been complied with by the Company and the Bank in
all material respects or appropriate waivers have been obtained;
(v) As of the Closing Date, the Company has authorized Common
Stock as set forth in the Registration Statement and the Prospectus and the
description of such Common Stock in the Registration Statement and the
Prospectus is accurate and complete in all material respects. Other than as
expressly disclosed in the Prospectus or in the certificate of
incorporation, charter, bylaws or minute books of the Company or the Bank,
to the best of such counsel's knowledge, there is no commitment, plan or
arrangement to issue, and no outstanding option, warrant or other right
calling for the issuance or sale of, any shares of capital stock of the
Company or the Bank or any security or other instrument which by its terms
is convertible into, exercisable for or exchangeable for capital stock of
the Company or of the Bank. To the best of such counsel's knowledge, there
are no options, agreements, contracts or other rights in existence to
purchase or acquire from the Company any issued and outstanding shares of
the common stock of the Bank;
(vi) The issuance and sale of the Shares have been duly and
validly authorized by all necessary action on the part of the Company and
have received all necessary regulatory approvals; the Shares, when issued
and paid for in accordance with
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the terms of the Plan of Conversion and this Agreement, will be duly and
validly issued and fully paid and nonassessable and not subject to any
preemptive rights, and the purchasers of the Shares from the Company, upon
issuance thereof against payment therefor, will acquire such Shares free
and clear of all claims, encumbrances, security interests and liens
whatsoever created or suffered to be created by the Company (other than
encumbrances created by statute or regulation);
(vii) The issuance and sale of the capital stock of the Bank to
the Company, the Plan of Conversion and the Conversion have been duly
authorized by all necessary action of the Bank and have received the
approval of the OTS and such capital stock, when issued and paid for in
accordance with the terms of the Plan of Conversion, will be validly
issued, fully paid and non-assessable and owned beneficially and of record
by the Company;
(viii) The certificates for the Shares comply with applicable
requirements of Illinois law;
(ix) The execution, delivery and performance of this Agreement
and the consummation of the transactions contemplated hereby have been duly
and validly authorized by all necessary action on the part of the Company
and the Bank, and this Agreement constitutes the legal, valid and binding
agreement of the Company and the Bank, enforceable in accordance with its
terms except as rights to indemnity and contribution thereunder may be
limited under applicable law, subject to the qualification that (i)
enforcement thereof may be limited by bankruptcy, insolvency, moratorium,
reorganization or other laws (including the laws of fraudulent conveyance)
or judicial decisions affecting the enforceability of creditors' rights
generally, the rights of creditors of federally chartered savings
associations, the accounts of which are insured by the FDIC, or the
reorganization of financial institutions and (ii) enforcement thereof is
subject to general equity principles (regardless of whether such
enforceability is considered in a proceeding in equity or at law) and to
the effect of certain laws and judicial decisions upon the availability of
injunctive relief and enforceability of equitable remedies, including the
remedies of specific performance and self-help;
(x) Except as set forth in the Prospectus, there are no material
legal or governmental proceedings pending or, to the best of such counsel's
knowledge, threatened against, or involving the properties of, the Company
or the Bank required to be disclosed in the Prospectus that have not been
disclosed therein; provided that for this purpose, any litigation or
governmental proceeding is not considered to be "threatened" unless the
potential litigant or governmental authority has manifested to the
management of the Company or the Bank, or to such counsel, a present
intention to initiate such litigation or proceeding;
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(xi) The statements in the Prospectus under the captions "Market
for the Common Stock," "Dividend Policy," "Regulation," "Restrictions on
Acquisition of the Company and the Bank," "Description of Capital Stock of
the Company" and "Description of Capital Stock of the Bank," insofar as
they constitute statements of law or legal conclusions, are correct in all
material respects;
(xii) The Holding Company Application, the Form AC (including the
Prospectus, the Plan of Conversion and the Proxy Statement), the form of
stock charter and the Proxy Statement have been approved by the OTS; the
stock charter when issued to the Bank will be in full force and effect; the
Registration Statement has been declared effective by the Commission; the
OTS has issued its order of approval under the savings and loan holding
company provisions of the HOLA, and, subject to the satisfaction of the
conditions of the OTS's approval of the Conversion, no further approval of
any other governmental authority is required for the Conversion and the
issuance and sale of the Shares except any necessary qualifications or
registration under the securities or "Blue Sky" laws of the various
jurisdictions in which the Shares are offered (as to which no opinion need
be rendered) and any approvals of the NASD and The Nasdaq National Market;
and no action has been taken or is pending or, to the best of such
counsel's knowledge, threatened or contemplated, to revoke such approvals
or to suspend the use of the Prospectus or the Proxy Statement;
(xiii) The execution, delivery and performance of this Agreement
and the issuance and sale of the Shares will not result, and the
consummation of the transactions contemplated by the Plan of Conversion has
not resulted and will not result, in a breach or violation of any of the
terms and provisions of, or constitute a default under or, with exception
of the liquidation account established in the Conversion, as described in
the Plan of Conversion and the Prospectus, result in the creation or
imposition of any lien, charge or other encumbrance upon (A) any of the
properties or assets of the Company or the Bank that individually or in the
aggregate would have a material adverse effect on the Company and the Bank,
taken as a whole, (B) the certificate of incorporation, charter or bylaws
of the Company and the Bank (in mutual or stock form), or (C) any order,
statute, rule, regulation of any governmental agency or body or any court
having jurisdiction over the Company or the Bank or any of their
properties, that individually or in the aggregate would have a material
adverse effect on the Company and the Bank, taken as a whole, or (D) any
material agreement or instrument to which the Company or the Bank is a
party or by which the Company or the Bank is bound or to which any of the
properties of the Company or the Bank is subject;
(xiv) To the best of such counsel's knowledge, based upon the
conferences and other investigations referred to in subsection 7(b) below,
the Company and the Bank have good and marketable title to, or valid and
enforceable leasehold estates in, the items of real and personal property
stated in the Prospectus to be owned or leased by them and are material to
their business, in each case free and clear of all
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liens, encumbrances, claims, security interests and defects, other than (i)
the lien of the Federal Home Loan Bank of Chicago, (ii) those referred to
in the Prospectus and (iii) those which individually or in the aggregate
would not have a material effect upon the operations of the Company and the
Bank, taken as a whole.
(xv) To the best of such counsel's knowledge, neither the Company
nor the Bank is presently: (i) in breach of, or in default (nor has an
event occurred which with notice or passage of time or both would
constitute a material default) under, any material indenture, mortgage,
deed of trust, note, loan or credit agreement or any other instrument or
agreement to which the Company or the Bank is party or by which either of
them or any of their respective properties may be bound or affected, which
contravention would be material to the business of the Company and the Bank
taken as a whole; or (ii) in violation of any term or provision of its
articles of incorporation, charter or bylaws;
(xvi) The Registration Statement and the Prospectus (in each case
as amended or supplemented, if so amended or supplemented) comply as to
form in all material respects with the requirements of the 1933 Act and the
rules, regulations, and all written decisions and orders of the Commission
(including, without limitation, the Regulations) (except as to financial
statements, notes to financial statements, financial tables, the appraisal
and other financial and statistical data included therein as to which no
opinion need be expressed) and the Form AC (including the Proxy Statement)
(as amended or supplemented, if so amended or supplemented) (except as to
financial statements, notes to financial statements, financial tables, the
appraisal, business plan and other financial and statistical data included
therein as to which no opinion need be expressed) complies as to form in
all material respects with the requirements of the Conversion Regulations
and any other applicable federal laws or regulations, decisions or orders
of the OTS; and
(xvii) To the best of such counsel's knowledge, neither the
Company nor the Bank is in violation of any directive, order, agreement or
understanding from or with the FDIC, the OTS or any applicable state
regulatory agency to make any material change in he method of conducting
its business.
In rendering such opinion, such counsel may rely as to matters of fact on
certificates of officers, trustees and directors of the Company and the Bank and
certificates of public officials, and as to matters of law other than federal
law, on opinions of other counsel admitted to practice the applicable law
reasonably acceptable to counsel for Hovde; provided, however, that such counsel
shall provide a letter addressed to Hovde which states that with respect to the
opinion of such other counsel, nothing has come to such counsel's attention that
would lead it to believe that it and Hovde are not reasonably justified in
relying upon such opinion. In addition, such other counsel shall address its
opinion letter to Hovde or expressly state in its opinion letter or in a
separate letter addressed to Hovde that Hovde and Hovde's counsel are entitled
to rely upon
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<PAGE>
such opinion. Such counsel may assume that any agreement is the valid and
binding obligation of any party to such agreement other than the Company or the
Bank.
(b) At the Closing Date, Hovde shall receive the letter of Thacher
Proffitt & Wood, counsel for the Company and the Bank, addressed to Hovde, dated
the Closing Date, in form and substance satisfactory to Hovde's counsel to the
following effect: During the preparation of the Registration Statement and the
Prospectus and any amendments or supplements thereto, such counsel participated
in conferences with management of and the independent public accountants for the
Company and the Bank. Based upon such conferences and a review of corporate
records of the Company and the Bank as such counsel conducted in connection with
the preparation of the Registration Statement and the Prospectus, such counsel
has no knowledge that would lead them to believe that the Registration
Statement, as amended or supplemented, if amended or supplemented (except as to
financial statements, notes to financial statements, financial tables and other
financial and statistical data contained therein with respect to which no
opinion need be expressed), at the time it became effective and at the time any
post-effective amendment thereto became effective, contained any untrue
statement of a material fact or omitted to state a material fact required to be
stated therein or necessary to make the statements made therein, in light of the
circumstances under which they are made, not misleading, or that the Prospectus,
as amended or supplemented, if amended or supplemented (except as to financial
statements, notes to financial statements, financial tables, the appraisal and
other financial and statistical data included therein as to which no opinion
need be expressed), at the time the Registration Statement became effective or
at the time any amendment or supplement to the Prospectus was filed with the
Commission or transmitted to the Commission for filing or on such Closing Date,
contained any untrue statement of a material fact or omitted to state a material
fact necessary to make the statements therein, in light of the circumstances
under which they were made, not misleading.
(c) At the Closing Date, Hovde shall receive the letter of Thacher
Proffitt & Wood, counsel for the Company and the Bank, addressed to Hovde, dated
the Closing Date, in form and substance satisfactory to Hovde's counsel to the
effect that: nothing has come to their attention that would lead them to believe
that the Form AC and the Proxy Statement, as amended or supplemented, if amended
or supplemented (except as to financial statements, notes to financial
statements, financial tables, the business plan and the appraisal and other
financial and statistical data contained therein with respect to which no
opinion need be expressed), at the time it was approved by the OTS, contained
any untrue statement of material fact or omitted to state a material fact
required to be stated therein or necessary to make the statements made therein,
23
<PAGE>
in light of the circumstances under which they were made, not misleading, or
that the Form AC and the Proxy Statement, as amended or supplemented, if amended
or supplemented (except as to financial statements, notes to financial
statements, financial tables, the business plan and the appraisal and other
financial and statistical data included therein as to which no opinion need be
expressed), at the time the form AC and the Proxy Statement was approved by the
OTS or at the time the Proxy Statement was distributed to the Bank's members,
contained any untrue statement of a material fact or omitted to state a material
fact necessary to make the statements therein, in light of the circumstances
under which they were made, not misleading.
(d) At the Closing Date, Hovde shall receive the favorable opinion of
Vedder, Price, Kaufman & Kammholz, counsel for Hovde, dated the Closing Date and
addressed to Hovde, with respect to such matters as Hovde reasonably may
require. In rendering such opinion, such counsel may rely as to matters of fact
upon certificates of officers and directors of the Company and the Bank
delivered pursuant hereto and as to matters of law relating to other
jurisdictions upon any opinion of local counsel.
(e) Prior to and at the closing Date: (i) in the reasonable opinion of
Hovde, there shall have been no material adverse change in the condition
(financial or otherwise) or the business, properties or results of operations of
the Company or the Bank, from the latest dates as of which such condition is set
forth in the Registration Statement and the Prospectus except as referred to
therein; (ii) there shall have been no material transaction entered into by the
company or the Bank without the prior written consent of Hovde (which consent
shall not be unreasonably withheld) from the latest date as of which the
financial condition of the Company or the Bank is set forth in the Registration
Statement and Prospectus, other than transactions referred to or contemplated
therein or transactions in the ordinary course of business; (iii) except as
disclosed in the Registration Statement and the Prospectus, neither the Company
nor the Bank shall have received from the OTS any direction (oral or written) to
make any material change in the method of conducting its business with which it
has not complied (which direction, if any, shall have been disclosed to Hovde)
or which materially and adversely would affect the condition (financial or
otherwise), or the business, properties or results of operations of the Company
or the Bank; (iv) neither the company nor the Bank shall have been in material
default (nor shall an event have occurred which, with notice or passage of time
or both, would constitute a material default) under any provision of any
agreement or instrument relating to any outstanding indebtedness; (v) no action,
suit or proceeding, at law or in equity or before or by any federal or state
commission, board or other administrative agency, shall be pending or, to the
best knowledge of the Company or the Bank, threatened against the Company or the
Bank, or affecting any of their properties wherein an unfavorable decision,
ruling or finding would have a material adverse effect on the condition
(financial or otherwise), or the business, properties or results of operations
of the Company and the Bank, taken as a whole; (vi) the shares shall have been
qualified or registered for offering and sale under the securities or "Blue Sky"
laws of the designated jurisdictions; (vii) there shall have been no suspension
or limitation in trading in securities generally on the Nasdaq National Market
or the New York Stock Exchange ("NYSE"), or the fixing of minimum or maximum
prices or the requiring of maximum ranges for prices for securities on or by the
NYSE or on or by The Nasdaq National
24
<PAGE>
Market; (viii) there shall have been no domestic or international event, act or
occurrence which has materially disrupted the offering, sale or delivery of the
shares on the terms and in the manner contemplated in the Registration
Statement, the Form AC and the Prospectus; and (ix) there shall have been no
material decline in the price of equity or debt securities traded on the NYSE or
The Nasdaq National Market if the effect of such a decline, in Hovde's good
faith opinion, would make it impracticable or inadvisable to proceed with the
offering, sale or delivery of the shares on the terms and in the manner
contemplated in the Registration Statement, the Form AC and the Prospectus.
(f) At the Closing Date, Hovde shall receive a certificate of the
chief executive officer and of the principal financial or accounting officer of
each of the Company and the Bank, dated the Closing Date, to the effect that:
(i) since the date as of which information is given in the Prospectus, the Proxy
Statement and the Registration Statement, there has been no material adverse
change in the condition (financial or otherwise), the business, properties or
results of operations of the Company or the Bank, whether or not arising in the
ordinary course of business, except as disclosed in the Prospectus, the Proxy
Statement and the Registration Statement; (ii) the representations and
warranties of the Company and the Bank in Section 2 hereof are true and correct
with the same force and effect as though expressly made at and as of the Closing
Date; (iii) the Company has complied in all material respects with all
agreements and satisfied all conditions on its part to be performed or satisfied
at or prior to the Closing Date under the Plan of Conversion; (iv) no order
revoking the approval of the Holding Company Application, the Form AC, the Proxy
Statement or the effectiveness of the Registration Statement or the Prospectus
has been initiated or threatened by the Commission, the OTS, the FDIC or any
applicable state authority; and (v) the conditions set Forth in clauses (ii)
through (v) of subsection (e) of this Section 7 have been satisfied.
(g) Concurrently with the execution of this Agreement, Hovde shall
receive a letter from KPMG Peat Marwick LLP dated the date hereof and addressed
to Hovde: (i) confirming that KPMG Peat Marwick LLP is a firm of independent
public accountants within the meaning of the code of Ethics of the American
Institute of Certified Public Accountants, the Regulations and the HOLA, and
that no information concerning its relationship with or interest in the Company
or the Bank is required by Item 509 of Regulation S-K promulgated under the 1993
Act; (ii) stating in effect that in their opinion the financial statements of
the Company and the Bank included in the Registration Statement and the
Prospectus and covered by their opinion included therein comply as to form in
all material respects with the applicable accounting requirements of the 1933
Act, the Regulations and applicable OTS regulations; (iii) stating in effect
that, on the basis of certain agreed upon procedures (but not an audit in
accordance with generally accepted auditing standards) consisting of a reading
of the latest available unaudited interim financial statements of the Bank
prepared by the Bank and consultations with officers of the Company and the Bank
responsible for financial and accounting matters, and any other procedures which
may be specified by such firm, nothing came to their attention which caused them
to believe that: (A) any unaudited financial statements included in the
Registration Statement or the Prospectus fail to comply as to form in any
material respect with the applicable requirements of the 1933 Act, the
Regulations or the HOLA; (B) such unaudited financial
25
<PAGE>
statements are not in conformity with generally accepted accounting principles
applied on a basis substantially consistent with that of the audited financial
statements included in the Registration Statement and the Prospectus; (C) during
the period from the date of the latest audited financial statements (or
unaudited financial statements, if any later statements are included) included
in the Registration Statement or the Prospectus to a specified date not more
than three business days prior to the date of such letter, there was any
material increase in borrowings (other than as disclosed in the Prospectus or in
the ordinary course of business) by the Company or the Bank; (D) at a specified
date not more than three business days prior to the date of such letter there
was any decrease in excess of 2% in consolidated net assets of the Company or
the Bank as compared with amounts shown in the latest statement of condition (or
unaudited statement of condition if a later statement is included) included in
the Registration Statement of the Prospectus other than as disclosed in the
Prospectus; or (E) during the period from the date of the latest audited
statement of earnings (or unaudited statement of earnings if a later statement
is included) included in the Registration Statement or the Prospectus to a
specified date not more than three business days prior to the date of such
letter there was any decrease in net income of the Bank as compared with the
comparable period in the prior year, except in all instances as set forth in or
contemplated by the Registration Statement and the Prospectus or in such letter;
and (iv) stating that, in addition to the examination referred to in their
opinion included in the Registration Statement and the Prospectus and the
performance of the procedures referred to in clause (iii) of this subsection
(g), they have compared with the general accounting records of the Company or
the Bank which are subject to the internal controls of the accounting system of
the Company or the Bank, as appropriate, and other data prepared by the Company
or the Bank directly from such accounting records, to the extent specified in
such letter, such amounts and/or percentages set forth in the Registration
Statement and the Prospectus as Hovde may reasonably request; and they have
found such amounts and percentages to be in agreement therewith (subject to
rounding).
(h) At the Closing Date, Hovde shall receive a letter from KPMG Peat
Marwick LLP dated the closing Date and addressed to Hovde confirming the
statements made by them in the letter delivered by them pursuant to subsection
(g) of this Section 7, the "specified date" referred to in clauses (iii)(C), (D)
and (E) thereof to be a date specified in such letter, which shall be not more
than five business days prior to the Closing Date.
(i) At the Closing Date, the Company and the Bank will have received
favorable opinions of: Thacher Proffitt & Wood, counsel to the Company and the
Bank, with respect to the federal tax consequences of the Conversion; and KPMG
Peat Marwick LLP with respect to the Illinois tax consequences of the
Conversion.
(j) No order suspending the sale to the Shares in any designated
jurisdiction shall have been issued on or prior to the Closing Date, and no
proceedings for that purpose shall have been instituted or, to the knowledge of
Hovde or the Company, shall be contemplated.
All such opinions, certificates, letters and documents will be in
compliance with the provisions hereof only if they are reasonably satisfactory
in form and substance to Hovde
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<PAGE>
and of counsel for Hovde. Any certificates signed by an officer of the Company
or the Bank and delivered to Hovde or to counsel for Hovde shall be deemed a
representation and warranty by the Company or the Bank, as the case may be, to
Hovde as to the statements made herein. If any condition to Hovde's obligations
hereunder to be fulfilled prior to or at the Closing Date is not fulfilled,
Hovde may terminate this Agreement (provided that if this Agreement is so
terminated but the sale of Shares is nevertheless consummated, Hovde shall be
entitled to the compensation provided for in Section 3 hereof) or, if Hovde so
elects, may waive any such conditions which have not been fulfilled or may
extend the time of their fulfillment.
8. Indemnification and Contribution.
(a) The Company and the Bank jointly and severally agree to indemnify
and hold harmless Hovde, its affiliates, directors, officers, agents and
employees and each person, if any, who controls Hovde or any of its affiliates
within the meaning of Section 15 of the 1933 Act or Section 20(a) of the
Exchange Act against any and all losses, liabilities, claims, damages and
expenses (including, without limitation, reasonable attorneys' fees) whatsoever
and shall further promptly reimburse such persons for any legal or other
expenses reasonably incurred by each or any of them in investigating, preparing
to defend or defending against any such action, proceeding or claim (whether
commenced or threatened) arising out of or based upon (A) any untrue or alleged
untrue statement of a material fact or the omission or alleged omission of a
material fact required to be stated in or necessary to make not misleading any
statements contained in (i) the Registration Statement, the Prospectus, the
Proxy Statement or the Form AC (as from time to time amended and supplemented)
or (ii) any application to regulatory authorities or other document,
advertisement or communication (in this Section 8, collectively called
"Application") prepared or executed by or on behalf of the Company or the Bank
with its consent or based upon information furnished by or on behalf of the
Company or the Bank, whether or not filed in any jurisdiction in order to
qualify the Shares under the securities laws thereof or with the OTS or the
Commission, unless such statement or omission was made in reliance upon and in
conformity with written information furnished to the Company or the Bank with
respect to Hovde by or on behalf of Hovde expressly for use in the Registration
Statement, the Prospectus, the Proxy Statement, the Form AC or any amendment or
supplement thereof or in any Application, as the case may be; or (B) the
participation by Hovde in the Conversion in accordance with the terms of this
Agreement. This indemnity shall be in addition to any liability the Company or
the Bank may otherwise have to Hovde; provided, however, that, with respect to
the Bank, such indemnification shall be to the full extent permitted by the OTS,
the FDIC and the Board of Governors of the Federal Reserve System. If any action
is brought against Hovde or any other person the Company and the Bank are
obligated hereby to indemnify (an "Indemnified Party"), then such Indemnified
Party shall promptly notify in writing the party or parties against whom
indemnification is to be sought of such action. The Company and the Bank agree
to promptly notify Hovde of the commencement of any litigation or proceeding
against the Company or the Bank or any of their officers or directors in
connection with sale of the Shares or in connection with the Registration
Statement, the Prospectus, the Proxy Statement, the Form AC or any amendment or
supplement thereto or any Application. In any and each such instance, Hovde
shall be entitled to counsel of its own choice.
27
<PAGE>
(b) Hovde agrees to indemnify and hold harmless the Company and the
Bank and their directors, officers, agents and employees and each person, if
any, who controls the Company or the Bank within the meaning of Section 15 of
the 1933 Act or Section 20(a) of the Exchange Act, to the same extent as the
foregoing indemnity from the Company and the Bank to Hovde, but only with
respect to statements or omissions, if any, made in the Registration Statement,
the Prospectus, the Proxy Statement or any amendment or supplement thereto or in
any Application in reliance upon, and in conformity with, written information
furnished to the Company or the Bank with respect to Hovde by or on behalf of
Hovde expressly for use in the Registration Statement, the Prospectus, the Proxy
Statement or any amendment or supplement thereto or in any Application. In case
any action shall be brought against the Company or the Bank or any person so
indemnified based on the Registration Statement, the Prospectus, the Proxy
Statement or any amendment or supplement thereto or in any Application, and in
respect of which indemnity may be sought against Hovde, Hovde shall have the
rights and duties given to the Company and the Bank and each person so
indemnified shall have the rights and duties given to Hovde by the provisions of
subsection (a) above.
(c) Promptly after receipt by an indemnified party under subsection
(a) or (b) above of notice of the commencement of any action, such indemnified
party shall, if a claim in respect thereof is to be made by the indemnified
party against the indemnifying party under such subsection, notify each party
against whom indemnification is to be sought in writing of the commencement
thereof (but the failure so to notify an indemnifying party shall not relieve it
From any liability which it may have under this Section 8). In case any such
action is brought against any indemnified party, and it notifies an indemnifying
party of the commencement thereof, the indemnifying party will be entitled to
participate therein, and to the extent it may elect by written notice delivered
to the indemnified party promptly after receiving the aforesaid notice from such
indemnified party, to assume the defense thereof with counsel satisfactory to
such indemnified party. Notwithstanding the foregoing, the indemnified party or
parties shall have the right to employ its or their own counsel in any such
case, but the fees and expenses of such counsel shall be at the expense of such
indemnified party or parties unless (i) the employment of such counsel shall
have been authorized in writing by one of the indemnifying parties in connection
with the defense of such action, (ii) the indemnifying parties shall not have
employed counsel to have charge of the defense of such action within a
reasonable time after notice of commencement of the action or (iii) such
indemnified party or parties shall have reasonably concluded that there may be
defenses available to it or them which are different from or additional to those
available to one or all of the indemnifying parties (in which case the
indemnifying parties shall not have the right to direct and defense of such
action on behalf of the indemnified party or parties), in any of which events
such fees and expenses shall be borne by the indemnifying parties. Anything in
this subsection to the contrary notwithstanding, an indemnifying party shall not
be liable for any settlement of any claim or action effected without its written
consent; provided, however, that such consent was not unreasonably withheld.
(d) If the indemnification provided for in subsection (a) or (b), as
the case may be, is unavailable or insufficient to hold harmless Hovde, an
Indemnified Party or the Company and the Bank, as the case may be, in respect of
any losses, claims, damages or liabilities or
28
<PAGE>
actions in respect thereof) referred to therein, then the Company and the Bank
or Hovde, as the case may be, in lieu of indemnifying such Indemnified Party
thereunder, shall contribute to the amount paid or payable for such losses,
claims, damages or liabilities (or actions in respect thereof): (i) in such
proportion as is appropriate to reflect the relative benefits received by the
Company and the Bank on the one hand and Hovde on the other from the offering of
the Shares; or (ii) if the allocation provided by clause (i) above is not
permitted by applicable law, in such proportion as is appropriate to reflect not
only the relative benefits referred to in clause (i) above but also the relative
fault of the Company or the Bank on the one hand and of Hovde on the other in
connection with the statements or omissions which resulted in such losses,
claims, damages or liabilities (or actions in respect thereof), as well as any
other relevant equitable considerations. The relative benefits received by the
Company and the Bank on the one hand and Hovde on the other shall be deemed to
be in the same proportion as the total net proceeds from the offering of the
Shares (before deducting expenses) received by the Company and the Bank bear to
the total compensation received by Hovde. The relative fault of the Company and
the Bank on the one hand, and of Hovde on the other shall be determined by
reference to, among other things, whether the untrue or alleged untrue statement
of a material fact or the omission to state a material fact relates to
information supplied by the Company or the Bank on the one hand or by Hovde on
the other and the parties' relative intent, knowledge, access to information and
opportunity to correct or prevent such statement or omission.
The Company, the Bank and Hovde agree that it would not be just and
equitable if contribution pursuant to this subsection (d) were determined by pro
rata allocation or by any other method of allocation which does not take account
of the equitable considerations referred to in the immediately preceding
paragraph. The amount paid or payable by an Indemnified Party or the Company and
the Bank, as the case may be, as a result of the losses, claims, damages and
liabilities (or action in respect thereof) referred to in the immediately
preceding paragraph shall be deemed to include, subject to the limitations set
forth above, any legal or other expenses reasonably incurred by such Indemnified
Party or the Company and the Bank, as the case may be, in connection with
investigating or defending any such action or claim. Notwithstanding anything to
the contrary contained in this Agreement, Hovde shall not be required to
contribute any amount in excess of the amount by which the total compensation
received by Hovde pursuant to this Agreement exceeds the amount of any damages
which Hovde has otherwise been required to pay by reason of such untrue or
alleged untrue statement or omission or alleged omission. No person guilty of
fraudulent misrepresentation (within the meaning of Section 11(f) of the 1933
Act) shall be entitled to contribution from any person who was not guilty of
such fraudulent misrepresentation.
9. Survival of Agreements, Representations and Indemnities. The respective
indemnities of the company, the Bank and Hovde and the representations and
warranties of the Company and the Bank set forth in or made pursuant to this
Agreement shall remain in full force and effect, regardless of any termination
or cancellation of this Agreement or any investigation made by or on behalf of
Hovde, the Company and the Bank or any controlling person referred to in Section
8 hereof, and shall survive any termination of this Agreement and/or issuance of
the Shares, and any successor or assign of Hovde, the Company, the Bank or any
such
29
<PAGE>
controlling person or any legal representative of such controlling person shall
be entitled to the benefit of the respective indemnities, agreements, warranties
and representations.
10. Termination.
(a) Hovde shall have the right to terminate this Agreement at any time
prior to the Closing Date: (i) if the United States, having become involved in a
war or major hostilities, has materially disrupted or in Hovde's good faith
opinion will in the immediate future materially disrupt, or any domestic or
international event or act or occurrence has materially disrupted, or in Hovde's
good faith opinion will in the immediate future materially disrupt, the
offering, sale or delivery to the Shares on the terms and in the manner
contemplated in the Registration Statement and the Prospectus; (ii) if trading
in securities generally on the Nasdaq National Market or the NYSE shall have
been suspended, or minimum or maximum prices for trading shall have been fixed,
or maximum ranges of prices for securities shall have been required, on or by
the NYSE, on or by The Nasdaq National Market or by the order of the Commission
or any other governmental authority having jurisdiction; (iii) if a banking
moratorium has been declared by an Illinois, or federal authority or any other
state authority having an adverse impact on the national banking community; (iv)
if the Company or the Bank shall have sustained a loss material to the Company
and the Bank, taken as a whole, by fire, flood, accident, hurricane, earthquake,
theft, sabotage or other calamity or malicious act, whether or not covered by
insurance, which in Hovde's good faith opinion would make it inadvisable to
proceed with the offering, sale or delivery of the Shares; (v) if there shall
have been such material adverse change or any development involving a
prospective material adverse change, in the condition (financial or otherwise),
business, properties or results of operations of the Company or the Bank taken
as a whole or the prospective market for the Company's securities as in Hovde's
good faith opinion would make it inadvisable to proceed with the offering, sale
or delivery of the Shares; (vi) if there is material decline in the price of
equity or debt securities traded on the NYSE or the Nasdaq National Market if
the effect of such decline, in Hovde's good faith judgement, makes it
impracticable or inadvisable to proceed with the offering, sale or delivery of
the Shares on the terms and in the manner contemplated in the Registration
Statement, the Form AC and the Prospectus; and (vii) if the Company fails to
receive orders for all of the minimum number of Shares within the period of time
specified by, and in accordance with, the provisions of the Plan of Conversion
and the Conversion Regulations.
(b) If Hovde elects to terminate this Agreement as provided in this
Section 10, the Company shall be notified promptly by Hovde by telephone or
telegram, confirmed by letter. A termination pursuant to this Section 10 shall
not prevent the sale or delivery of the Shares by the Company or the Conversion,
but such sale, delivery or consummation of the Conversion shall in no way limit
Hovde's legal rights, if any, against the Bank or the Company hereunder.
(c) Notwithstanding anything contained herein to the contrary, if the
Conversion is not consummated as a result of the termination of this Agreement
pursuant to
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Section 10(a) hereof or because the Plan of Conversion is terminated or the
period prescribed by regulations (including all extensions) in which the
Conversion must be completed expires prior to the completion of the Conversion,
Hovde shall be entitled to retain any fees paid to Hovde through the date of
termination, and thereafter the sole liability of the Company and the Bank to
Hovde will be to reimburse Hovde pursuant to Section 6 and for obligations
assumed by the Company and the Bank pursuant to subsections (a) and (c) of
Section 8 hereof. Upon demand and receipt of proper invoices for expenses, the
Company and the Bank will pay Hovde the full amount so owing. To the extent that
Hovde has received any amounts in excess of those to which it is entitled
hereunder it shall repay them to the Company and the Bank.
11. Notices. All communications hereunder, except as herein otherwise
specifically provided, shall be in writing and if sent to Hovde shall be mailed,
delivered or telegraphed and confirmed to Hovde Securities, Inc., 1826 Jefferson
Place, N.W., Washington, D.C. 20036, attention: Eugene S. Weil, Esq., General
Counsel (with a copy, in the case of communications under Section 8 hereof, to
Vedder, Price, Kaufman & Kammholz, 222 North LaSalle Street, Suite 2600,
Chicago, Illinois 60601, Attention: Daniel C. McKay II, Esq.); if sent to the
Company or the Bank shall be mailed, delivered or telegraphed and confirmed to
Fairfield Savings Bank, F.S.B., 1190 FRD, Long Grove, Illinois 60047-7304,
attention: Mr. George M. Briody, President (with a copy in the case of
communications under Section 8 hereof to Thacher Proffitt & Wood, 1500 K Street,
N.W., Suite 200, Washington, D.C. 20005, attention: V. Gerard Comizio, Esq.).
12. Parties. This Agreement shall inure solely to the benefit of, and shall
be binding upon, Hovde, the Company, the Bank and their respective successors,
legal representatives and assigns, and no other person shall have or be
construed to have any legal or equitable right, remedy or claim under or in
respect of or by virtue of this Agreement or any provision herein contained.
13. Construction. This Agreement shall be construed in accordance with the
laws of the State of Illinois.
14. Severability. ln the event that any term, provision or covenant herein
or the application thereof to any circumstance or situation shall be invalid or
unenforceable, in whole or in part, the remainder hereof and the application of
said term, provision or covenant to any other circumstance or situation shall
not be affected thereby, and each term, provision or covenant herein shall be
valid and enforceable to the full extent permitted by law.
15. Counterparts. This Agreement may be executed in separate counterparts,
each of which so executed and delivered shall be an original, but all of which
together shall constitute but one and the same instrument.
[SIGNATURE PAGE FOLLOWS IMMEDIATELY]
31
<PAGE>
If the foregoing correctly sets forth the understanding between Hovde and
the Company and the Bank, please so indicate in the space provided below for the
purpose, whereupon this letter shall constitute a binding agreement between us.
Yours very truly,
BIG FOOT FINANCIAL CORP.
By: _____________________________________
George M. Briody
President
FAIRFIELD SAVINGS BANK, F.S.B.
By: _____________________________________
George M. Briody
President
Accepted as of the date first
above written.
HOVDE SECURITIES, INC.
By: _____________________________
Stephen E. Nelson
Associate
32
<PAGE>
EXHIBIT A
BIG FOOT FINANCIAL CORP.
2,185,000 SHARES
(anticipated maximum)
(subject to increase to up to 2,512,750
shares in the event of an oversubscription)
COMMON STOCK
(par Value $.01 Per Share)
SELECTED DEALER'S AGREEMENT
_______________, 1996
We have agreed to assist Big Foot Financial Corp., an Illinois corporation
(the "Company") in connection with the offer and sale of shares (the "Shares")
of Common Stock par value $.01 per share of the Company to be issued in
connection with the conversion of Fairfield Savings Bank, F.S.B., a federally
chartered savings bank (the "Bank") from mutual to stock form. The Company in
connection with this plan to effect such conversion offered 2,185,000 Shares for
subscription by certain of the Bank's depositors and borrowers in a subscription
offering and to certain members of the general public in a direct community
offering. The Shares which were not subscribed for pursuant to such subscription
and direct community offerings are being offered to the public in a syndicated
community offering (the "Syndicated Community Offering") in accordance with the
rules of the Office of Thrift Supervision Department of the Treasury. The
Shares, the bases on which the number of Shares to be issued may change and
certain of the terms on which they are being offered are more fully described in
the enclosed Prospectus (the "Prospectus").
We are offering to Selected Dealers (of which you are one) the opportunity
to participate in the solicitation of offers to buy the Shares in the Syndicated
Community Offering and we will pay you a fee in the amount of _________ percent
(___%) of the dollar amount of the Shares sold on behalf of the Company by you.
The number of Shares sold by you shall be determined based on the authorized
designation of your firm on the order form or forms for such Shares accompanying
the funds transmitted for payment therefor (whether in the form of a check
payable to the Bank or a withdrawal from an existing account at the Bank) to the
special account established by the Company for the purpose of holding such
funds. It is understood, of course, that payment of your fee will be made only
out of compensation received by us for the Shares sold on behalf of the Company
by you as evidenced in accordance with the preceding sentence. The Company has
requested us to invite you to become a "Sponsoring Dealer," that is a Selected
Dealer who solicits offers which result in the sale on behalf of the Company of
at least___________
<PAGE>
____________ Shares. You may become a Sponsoring Dealer (subject to your
fulfillment of the requirement in the preceding sentence) by checking the box on
the confirmation at the end of this letter. If you become a Sponsoring Dealer
you shall be entitled to an additional fee in the amount of ________ percent
(___%) of the dollar amount of the Shares sold on behalf of the Company by you
as evidenced in the manner set forth above.
Each order form for the purchase of Shares must set forth the identity,
address and tax identification number of each person ordering Shares regardless
of whether the Shares will be registered in a street name or in the purchaser's
name. Such order form should clearly identify your firm.
As soon as practicable after all the Shares are sold, we will remit to you,
out of our compensation as provided above, the fees to which you are entitled
hereunder, including your Sponsoring Dealer fee.
This offer is made subject to the terms and conditions herein set forth and
is made only to Selected Dealers which are: (i) members in good standing of the
National Association of Securities Dealers, Inc. (the "NASD") which agree to
comply with all applicable rules of the NASD, including, without limitation, the
Interpretation of the NASD Board of Governors with respect to "Free-Riding and
Withholding" (IM-2110-1) and Conduct Rule 2740 of the NASD's Conduct Rules; or
(ii) foreign dealers not eligible for membership in the NASD which agree (A) not
to sell any Shares within the United States, its territories or possessions or
to person who are citizens thereof or resident therein and (B) in making other
sales to comply with the above mentioned NASD Interpretation and Conduct Rules
2730, 2740 and 2750 as if they were NASD members and Conduct Rule 2420 as it
applies to non-member brokers or dealers in a foreign country.
Orders for Shares will be strictly subject to confirmation and we, acting
on behalf to the Company, reserve the right in our absolute discretion to reject
any order in whole or in part, to accept or reject orders in the order of their
receipt or otherwise, and to allot. Neither you or any other person is
authorized by the Company, the Bank or us to give any formation or make any
representations other than those contained in the Prospectus in connection with
the sale of any of the Shares. No Selected Dealer is authorized to act as agent
for us when soliciting offers to buy the Shares from the public or otherwise. No
Selected Dealer shall engage in any stabilizing (as defined in Rule 10b-7
promulgated under the Securities Exchange Act of 1934, as amended (the "Exchange
Act")) with respect to the Company's Common Stock during the offering.
We and each Selected Dealer assisting in selling Shares pursuant hereto
agree to comply with the applicable requirements of the Exchange Act and
applicable rules and regulations issued by the Office of Thrift Supervision. In
addition, we and each Selected Dealer confirm that the Securities and Exchange
Commission interprets Rule 15c2-8 promulgated under the Exchange Act as
requiring that a prospectus be supplied to each person who is expected to
receive a confirmation of sale 48 hours prior to delivery of such person's order
form.
2
<PAGE>
We and each Selected Dealer further agree to the extent that our customers
desire to pay for Shares with funds held by or to be deposited with us, in
accordance with the interpretation of the Securities and Exchange Commission of
Rule 15c2-4 promulgated under the Exchange Act either: (a) upon receipt of an
executed order form or direction to execute an order form on behalf of a
customer, to forward the Syndicated Community Offering price for the Shares
ordered or before 12:00 p.m. on the business day following receipt or execution
of any order form by us to the Bank for deposit in a segregated account; or (b)
to solicit indications of interest in which event (i) we will subsequently
contact any customer indicating interest to confirm the interest and give
instructions to execute and return an order form or to receive authorization to
execute an order form on their behalf, (ii) we will mail acknowledgement of
receipt of order to each customer confirming interest on the business day
following such confirmation, (iii) we will debit accounts of such customers on
the fifth business day (the "debit late") following receipt of the confirmation
referred to in clause (i) above, and (iv) we will forward completed order forms
together with such funds to the Bank on or before 12:00 p.m. on the next
business day following the debit date for deposit in a segregated account. We
acknowledge that if the procedure in (b) is adopted, our customers' funds are
not required to be in their accounts until the debit date. We and each Selected
Dealer further acknowledge that, in order to use the foregoing "sweep
arrangements," we comply with the net capital requirements for broker/dealers
under Rule 15c3-1(a)(1) of the Exchange Act.
Unless earlier terminated by us, this Agreement shall terminate forty-five
(45) full business days after the date hereof, but may be extended by us for an
additional period or periods not exceeding thirty (30) full business days in the
aggregate. We may terminate this Agreement or any provisions hereof at any time
by written or telegraphic notice to you. The obligations hereunder are subject
to the successful completion of the offering, including the sale of all of the
Shares.
You agree that at any time or times prior to the termination of this
Agreement you will, upon our request, report to us the number of Shares sold on
behalf of the Company by you under this Agreement.
We shall have full authority to take such actions as we may deem advisable
in respect of all matters pertaining to the offering. We shall be under no
liability to you except for lack of good faith and for obligations expressly
assumed by us in this Agreement.
Upon application to us, we will inform you as to the states in which we
believe the Shares have been qualified for sale under, or are exempt from the
requirements of, the respective "Blue Sky" laws of such states, but we assume no
responsibility or obligation as to your rights to sell Shares in any state.
Additional copies of the Prospectus and any supplements thereto will be
supplied in reasonable quantities upon request.
3
<PAGE>
Any notice from us to you shall be deemed to have been duly given if
mailed, telephoned or telegraphed to you at the address to which this Agreement
is mailed.
This Agreement shall be construed in accordance with the laws of the State
of Illinois.
Please confirm your agreement hereto by signing and returning the
confirmation accompanying this letter at once to us at Hovde Securities, Inc.,
1826 Jefferson Place, N.W. Washington, D.C. 20036. The enclosed duplicate copy
will evidence the agreement between us.
Very truly yours,
HOVDE SECURITIES, INC.
By: _________________________________
Steven D. Hovde
Managing Director
4
<PAGE>
Hovde Securities, Inc.
1826 Jefferson Place, N.W.
Washington, D.C. 20036
Re: Big Foot Financial Corp.
We hereby confirm our agreement to all the terms and conditions stated in
the foregoing letter. We acknowledge receipt of the Prospectus relating to the
Shares and we further state that in agreeing thereto we have relied upon the
Prospectus and no other statement whatsoever, written or oral. We confirm that
we are (i) a member in good standing of the National Association of Securities
Dealers, Inc. (the "NASD"), which agrees to comply with all applicable rules of
the NASD, including, without limitation, the Interpretation of the NASD Board of
Governors with respect to "Free-Riding and Withholding" (IM-2110-1) and Conduct
Rule 2740 of the NASD's Conduct Rules, or (ii) a foreign dealer not eligible for
membership in the NASD which agrees (A) not to sell any Shares within the United
States, its territories or possessions or to person who are citizens thereof or
resident therein and (B) in making other sales to comply with the
above-mentioned NASD Interpretation and Conduct Rule 2730, 2740 and 2750 as if
we were NASD members and Conduct Rules 2420 as it applies to a non-member broker
or dealer in a foreign country.
_______________ We wish to become a "Sponsoring Dealer."
_________________________________________
(Please print or type name of firm)
_________________________________________
(Authorized Representative)
Dated:___________________
5
<PAGE>
EX-2.1
Plan Of Conversion
================================================================================
PLAN OF CONVERSION
OF
FAIRFIELD SAVINGS BANK, F.S.B.
As Adopted by the Board of Directors on May 21, 1996 and
Amended and Restated as of September 17, 1996
================================================================================
<PAGE>
Page
----
ARTICLE I
DEFINITIONS
ARTICLE II
PROCEDURE FOR APPROVAL OF CONVERSION
Section 2.01 Application and Notice........................................ 7
Section 2.02 Approval of Plan by Members; the Special Meeting.............. 8
ARTICLE III
SALE OF COMMON STOCK
Section 3.01 In General.................................................... 8
Section 3.02 Reorganization as Subsidiary of Holding Company............... 9
Section 3.03 Pricing and Number of Shares of Common Stock;
the Independent Appraiser................................... 10
Section 3.04 Subscription Rights........................................... 12
Section 3.05 Community Offering............................................ 16
Section 3.06 Subscription Offering and Community
Offering Procedures; Order Forms............................ 18
Section 3.07 Payment for Common Stock...................................... 19
Section 3.08 Syndicated Community Offering................................. 21
Section 3.09 Public Offering Alternative................................... 22
Section 3.10 Restrictions on Purchase and Transfer of Common Stock......... 23
Section 3.11 Time Limits for Sale of Shares; Effect of Inability to Sell... 24
Section 3.12 Enforcement of Terms and Conditions........................... 24
ARTICLE IV
CERTAIN RESTRICTIONS
Section 4.01 Sale of Shares Purchased by Directors or Officers............. 25
Section 4.02 Subsequent Purchases of Shares by Officers and Directors...... 26
Section 4.03 Acquisition of Control........................................ 26
-i-
<PAGE>
Page
----
ARTICLE V
EFFECT OF CONVERSION; CERTAIN COVENANTS AND AGREEMENTS
Section 5.01 Restated Charter and Adoption of New Bylaws;
Name of Converted Bank...................................... 27
Section 5.02 Effect of Conversion and Reorganization....................... 28
Section 5.03 Liquidation Account........................................... 28
Section 5.04 Voting Rights................................................. 29
Section 5.05 Issuance of Stock............................................. 29
Section 5.06 Directors of Converted Bank................................... 30
Section 5.07 Employment Agreements......................................... 30
Section 5.08 Market for the Common Stock................................... 30
Section 5.09 Payment of Dividends and Repurchase of Stock.................. 30
ARTICLE VI
CONDITIONS TO CONVERSION; AMENDMENT AND TERMINATION;
MISCELLANEOUS
Section 6.01 Conditions to Conversion...................................... 31
Section 6.02 Termination of Reorganization................................. 31
Section 6.03 Amendment or Termination of the Plan.......................... 31
Section 6.04 Completion Date............................................... 32
Section 6.05 Expenses of the Conversion.................................... 32
Section 6.06 Interpretation................................................ 32
Section 6.07 Severability.................................................. 32
Section 6.08 Miscellaneous................................................. 32
-ii-
<PAGE>
PLAN OF CONVERSION
OF
FAIRFIELD SAVINGS BANK, F.S.B.
INTRODUCTORY STATEMENT
This Plan of Conversion (the "Plan") provides for the conversion of
Fairfield Savings Bank, F.S.B., Long Grove, Illinois (the "Bank") into a federal
capital stock savings bank. The Bank is currently a mutual savings bank duly
organized and validly existing under the laws of the United States. The
principal office of the Bank is located at 1190 RFD, Long Grove, State of
Illinois.
The purpose of this conversion is to increase the Bank's equity capital
base and facilitate future access to capital markets. The conversion also will
provide a more flexible operating structure, which will enable the Bank to
compete more effectively with other financial institutions. The larger capital
base resulting from the conversion will enhance the Bank's ability to pursue
lending and investment opportunities as well as opportunities for growth and
expansion.
The Board of Directors of the Bank currently contemplates that all of the
stock of the Bank shall be held by a business corporation (the "Holding
Company") organized under the laws of the State of Illinois and that the Holding
Company will issue and sell its capital stock pursuant to this Plan. The use of
the Holding Company, if so utilized, would provide greater organizational
flexibility.
This Plan has been unanimously approved by the Board of Directors of the
Bank. This Plan must also be approved by the affirmative vote of a majority of
the total number of votes entitled to be cast by Voting Members of the Bank at a
special meeting to be called for that purpose. Prior to the submission of this
Plan to the Voting Members for consideration, the Plan must be approved by the
Office of Thrift Supervision (the "OTS").
Upon conversion, each Person having a Savings Account at the Bank prior to
the conversion will continue to have a Savings Account, without payment
therefor, in the same amount and subject to the same terms and conditions
(except for voting and liquidation rights) as in effect prior to conversion.
After conversion, the Bank will succeed to all the rights, interests, duties and
obligations of the Bank before conversion, including, but not limited to, all
rights and interests of the Bank in and to its assets and properties, whether
real, personal or mixed. The Bank will continue to be a member of the Federal
Home Loan Bank System, and all of its insured Savings Accounts will continue to
be insured by the Savings Association Insurance Fund of the Federal Deposit
Insurance Corporation to the extent provided by applicable law.
<PAGE>
-2-
ARTICLE I
DEFINITIONS
As used in this Plan of Conversion, the following terms shall have the
following meanings, unless the context indicates otherwise:
"Account Holder" shall mean any Person holding a Savings Account in the
Bank.
"Acting in Concert" shall mean (i) knowing participation in a joint
activity or interdependent conscious parallel action towards a common goal
whether or not pursuant to an express agreement or understanding; or (ii) a
combination or pooling of voting or other interests in the securities of an
issuer for a common purpose pursuant to any contract, understanding,
relationship, agreement or other arrangement, whether written or otherwise. A
Person or company which acts in concert with another Person ("other party")
shall also be deemed to be acting in concert with any Person who is also acting
in concert with that other party, except that any Tax-Qualified Employee Stock
Benefit Plan will not be deemed to be acting in concert with its trustee or a
Person who serves in a similar capacity solely for the purpose of determining
whether stock held by the trustee and stock held by the plan will be aggregated,
and participants or beneficiaries of any such Tax-Qualified Employee Stock
Benefit Plan will not be deemed to be acting in concert solely as a result of
their common interests as participants or beneficiaries.
"Actual Subscription Price" shall mean the price per share at which the
Common Stock is ultimately sold in accordance with the terms hereof.
"Affiliate" shall mean a Person who, directly or indirectly, through one or
more intermediaries, controls or is controlled by or is under common control
with the Person specified.
"Associate," when used to indicate a relationship with any Person, shall
mean (a) any corporation or organization (other than the Holding Company, the
Bank or a majority-owned subsidiary of the Bank) of which such Person is an
officer or 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; (b) 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 for the purposes of
Sections 3.04(a) and 3.10, the term "Associate" does not include any
Tax-Qualified Employee Stock Benefit Plan or any Non-Tax-Qualified Employee
Stock Benefit Plan 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 (c) any relative or spouse of
such Person, or any relative of such spouse, who has the
<PAGE>
-3-
same home as such Person or who is a Director or Officer of the Holding Company,
the Bank or any of the Bank's subsidiaries.
"Bank" shall mean Fairfield Savings Bank, F.S.B., in its mutual form, or
Fairfield Savings Bank, F.S.B., in its stock form, as the context of the
reference requires.
"Bank Employee" shall mean any employee or officer of the Bank, other than
one who otherwise qualifies as an Eligible Account Holder, a Supplemental
Eligible Account Holder or an Other Member.
"Benefit Plan" shall mean any Tax-Qualified Employee Stock Benefit Plan or
any Non-Tax-Qualified Employee Stock Benefit Plan.
"Common Stock" shall mean all of the shares of common stock, par value $.01
per share, offered and issued pursuant to this Plan by the Holding Company or of
the common stock, par value $1.00 per share, offered and issued pursuant to this
Plan by the Bank if the Holding Company is not utilized. The Common Stock will
not be insured by the Federal Deposit Insurance Corporation.
"Community Offering" shall mean the offering for sale to certain members of
the general public directly by the Bank or the Holding Company, if utilized, of
any shares of the Common Stock not subscribed for in the Subscription Offering
in accordance with Section 3.05.
"Control" (including the terms "controlling," "controlled by" and "under
common control with") with respect to a Person shall mean the possession, direct
or indirect, of the power to direct or cause the direction of the management and
policies of such Person, whether by contract, through the ownership of voting
securities of such Person, through the ownership of voting securities of any
company that possesses such power, or otherwise.
"Conversion" shall mean (a) the restatement of the Bank's charter to
authorize the issuance of capital stock in accordance with the Conversion
Regulations and to otherwise conform to the requirements applicable to a federal
stock savings bank and (b) the issuance and sale of the common stock of the Bank
in accordance with this Plan.
"Conversion Regulations" shall mean Part 563b of the Rules and Regulations
of the OTS.
"Director" shall mean a member of the Board of Directors of the Bank or of
the Holding Company.
"Effective Date" shall mean the effective date of the Conversion and shall
be the date on which all of the Common Stock is issued and sold.
<PAGE>
-4-
"Eligible Account Holder" shall mean any depositor of the Bank who held a
Qualifying Deposit in one or more deposit accounts with the Bank on the
Eligibility Record Date.
"Eligibility Record Date" shall mean the date established by the Board of
Directors of the Bank as the date for determining Eligible Account Holders. The
Eligibility Record Date has been established as December 31, 1994.
"Estimated Price Range" shall mean the range of the minimum and maximum
aggregate values determined by the Board of Directors of the Bank within which
the aggregate offering price of Common Stock sold in the Conversion will fall.
The Estimated Price Range will be within the estimated aggregate pro forma
market value of the Common Stock, as determined by the Independent Appraiser in
accordance with Section 3.04.
"Holders of Subscription Rights" shall mean the Tax-Qualified Employee
Stock Benefit Plans, Eligible Account Holders, Supplemental Eligible Account
Holders, Other Members and Bank Employees who have Subscription Rights under
Section 3.04.
"Holding Company" shall mean, a corporation to be organized under the laws
of the State of Illinois.
"Independent Appraiser" shall mean the independent Person retained by the
Bank to prepare an appraisal of the estimated pro forma market value of the
Common Stock. Such Person shall be experienced and expert in the area of
corporate appraisal and acceptable to the OTS.
"Maximum Subscription Price" shall mean the price per share to be remitted
by subscribers for shares of Common Stock in the Subscription Offering and the
Community Offering.
"Member" shall mean any Person who qualifies as a member of the Bank
pursuant to the Bank's charter and bylaws.
"Minimum Subscription Price" shall mean the minimum price per share
established in accordance with the Estimated Price Range.
"Non-Tax-Qualified Employee Stock Benefit Plan" shall mean any stock
option, bonus stock or restricted stock plan or other employee benefit plan that
is not a "Tax-Qualified Employee Stock Benefit Plan" and that is maintained by
the Holding Company or the Bank for the benefit of officers, employees or
directors of the Holding Company, the Bank or any Affiliate of either of them
and that, by its terms, is authorized or required to purchase Common Stock.
<PAGE>
-5-
"Officer" shall mean an executive officer of the Bank, which includes the
chairman of the board, chief executive officer, president, any vice president in
charge of a principal business function or functions or who otherwise has a
policy-making function, secretary, treasurer or principal financial officer,
controller or principal accounting officer, and any person performing functions
similar to those performed by the foregoing persons with respect to any
incorporated or unincorporated organization.
"Order Form" shall mean the form provided by the Holding Company or the
Bank that subscribers must use to order Common Stock in the Subscription
Offering and Community Offering.
"Other Member" shall mean any Person, including any Benefit Plan, who is a
Member as of the Voting Record Date and who is either (i) a holder of a Savings
Account at the Bank or (ii) a borrower from the Bank with one or more loans
outstanding as of July 1, 1991 that continue to be outstanding as of the Voting
Record Date, but is not an Eligible Account Holder or Supplemental Eligible
Account Holder.
"OTS" shall mean the Office of Thrift Supervision of the Department of the
Treasury.
"Overallotment Option" shall mean the option, which may be granted to the
Underwriters in any Public Offering, to purchase, on the same terms as other
shares are purchased in the Public Offering, up to an additional 15% of the
shares of the Common Stock offered in the Subscription Offering.
"Oversubscription Provision" shall mean the increase in the number of
shares of Common Stock that may be offered to subscribers in the Subscription
Offering and Community Offering pursuant to Section 3.03(b) or in the Syndicated
Community Offering pursuant to Section 3.08.
"Person" shall mean a natural person, a corporation, a partnership, an
association, a trust (including trusts or custodial arrangements under an
Individual Retirement Account or a qualified retirement plan), an unincorporated
organization, a joint-stock company, a government or political subdivision
thereof, or any other entity.
"Plan" shall mean this Plan of Conversion as it exists on the date hereof
and as it may be hereafter amended pursuant to Section 6.03.
"Proxy Statement" shall mean the document to be used to solicit proxies
from Members to vote at the Special Meeting.
"Public Offering" shall mean the offering, if any, of certain shares of
Common Stock in accordance with Section 3.09.
<PAGE>
-6-
"Public Offering Price" shall mean the price at which the shares of Common
Stock are offered in any Public Offering.
"Qualifying Deposit" shall mean the Savings Accounts of a Person in the
Bank at the close of business on the Eligibility Record Date having an aggregate
balance of at least fifty dollars ($50). If the aggregate balance of a Persons's
Savings Accounts in the Bank is less than fifty dollars ($50), the Savings
Accounts shall not constitute a Qualifying Deposit.
"Reorganization" shall mean the issuance and sale of the Common Stock and
the purchase by the Holding Company of all of the capital stock to be issued by
the Bank in connection with the Conversion.
"Savings Account" shall have the same meaning as in Section 561.42 of the
Rules and Regulations of the OTS, and it shall include time deposits and
certificates of deposit.
"Special Meeting" shall mean the Special Meeting of Members, and any
adjournments thereof, to be called and held for the purpose of submitting the
Plan to the Members for their approval.
"Subaccount Balance" shall mean, with respect to each Eligible Account
Holder and Supplemental Eligible Account Holder, the portion of the liquidation
account that such Eligible Account Holder or Supplemental Eligible Account
Holder would be entitled to receive pursuant to the Conversion Regulations in
the event of a complete liquidation of the Bank subsequent to the Conversion.
The initial Subaccount Balance of each Eligible Account Holder and Supplemental
Eligible Account Holder shall be determined in accordance with Section 563b.3(f)
of the Conversion Regulations.
"Subscription Offering" shall mean the offering of the Common Stock to the
Holders of Subscription Rights in accordance with Section 3.04.
"Subscription Prospectus" shall mean the Subscription Prospectus to be used
in offering the Common Stock in the Subscription Offering, the Community
Offering and any Syndicated Community Offering or Public Offering.
"Subscription Rights" shall mean the rights described in Section 3.04.
"Supplemental Eligibility Record Date" shall mean the supplemental record
date for determining Supplemental Eligible Account Holders. The Supplemental
Eligibility Record Date shall be the last day of the calendar quarter preceding
the OTS's approval of the Application for Conversion.
"Supplemental Eligible Account Holder" shall mean any person (other than an
Eligible Account Holder) holding a Qualifying Deposit, except Officers,
Directors and their Associates, as of the Supplemental Eligibility Record Date.
<PAGE>
-7-
"Syndicated Community Offering" shall mean the offering of Common Stock
following the Subscription and Community Offerings through a syndicate of
broker-dealers.
"Syndicated Community Offering Price" shall mean the per share price
submitted with orders for shares of Common Stock in the Syndicated Community
Offering.
"Tax-Qualified Employee Stock Benefit Plan" shall mean any defined benefit
plan or defined contribution plan, such as an employee stock ownership plan,
stock bonus plan, profit-sharing plan or other plan, that is maintained by the
Holding Company or the Bank for the benefit of the officers or employees of the
Holding Company, the Bank, or any Affiliate of either of them; that, by its
terms, is authorized or required to purchase Common Stock; and that, with its
related trust, meets the requirements to be "qualified" under Section 401 of the
Internal Revenue Code. The Bank may make scheduled discretionary contributions
to a tax-qualified employee stock benefit plan provided, among other things,
such contributions do not cause the Bank to fail to meet its regulatory capital
requirements.
"Underwriter" shall mean any investment banking firm or firms purchasing or
distributing the Common Stock to be offered in a Public Offering, if any.
"Underwriting Agreement" shall mean the agreement between the Holding
Company and an Underwriter pursuant to which the Underwriter agrees to purchase
or distribute certain shares of the Common Stock for offering in any Public
Offering.
"Voting Members" shall mean those Persons qualifying as voting members of
the Bank pursuant to its charter and bylaws.
"Voting Record Date" shall mean the date fixed by the Directors in
accordance with the OTS regulations for determining eligibility to vote at the
Special Meeting.
ARTICLE II
PROCEDURE FOR APPROVAL OF CONVERSION
Section 2.01 Application and Notice. This Plan, having been duly adopted by
the Board of Directors of the Bank and the Board of Directors of the Holding
Company, will be submitted, together with an Application for Conversion in the
form required by the Conversion Regulations, to the OTS for approval. The Bank
will cause notice of the adoption of the Plan and of its intention to convert to
stock form and to reorganize into holding company form to be given by
publication in a newspaper having general circulation in each community in which
an office of the Bank is located. Copies of the Plan will be made available at
each office of the Bank for inspection by the Members. Upon the filing of the
Application for Conversion, the Bank will cause notice of the adoption of the
Plan to be conspicuously posted
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at its offices. The Bank also will cause to be published a notice of the filing
with the OTS of an application to convert in accordance with the provisions of
the Plan and OTS regulations. The Bank may issue a press release containing all
material terms of the proposed Conversion and Reorganization.
Section 2.02 Approval of Plan by Members; the Special Meeting. Following
approval by the OTS of the Bank's Application for Conversion, the Bank shall
submit the Plan for approval of the Bank's Members at the Special Meeting. The
Bank shall mail to each Member, at the Member's last known address appearing on
the records of the Bank, a Notice of Special Meeting and a Proxy Statement. The
Notice of Special Meeting will be conspicuously posted at each office of the
Bank. The Proxy Statement will contain a detailed description of the Conversion
and the Reorganization and information relating to the Subscription Offering, in
the form required by the Conversion Regulations. Each Member will also be given
the opportunity to request a copy of the Plan and the proposed Charter of the
Bank and proposed Bylaws of the Bank. The Special Meeting shall be held upon
written notice given not less than 20 days nor more than 45 days from the last
date on which such notice is mailed to Members. At the Special Meeting, each
Voting Member who qualifies as such by virtue of being a depositor shall be
entitled to cast one vote in person or by proxy for every one hundred dollars
($100), or fraction thereof, such Voting Member had on deposit with the Bank as
of the Voting Record Date, and each Voting Member who qualifies as such by
virtue of being a borrower from the Bank as of July 1, 1991 whose loan(s)
continued to be outstanding as of the Voting Record Date shall be entitled to
cast one vote in person or by proxy in addition to any vote such Voting Member
is entitled to cast as a depositor; provided however, that no Voting Member may
cast more than one thousand votes under any circumstance.
The OTS shall be notified of the results of the Special Meeting within five
days after the conclusion of the Special Meeting. If the Plan is approved by the
affirmative vote of at least a majority of the total outstanding votes of the
Voting Members, the Bank will take all other necessary steps to effect the
Conversion subject to the terms and conditions of this Plan. If the Plan is not
so approved upon conclusion of the Special Meeting and any adjournment or
adjournments thereof, the Plan shall not be implemented without further vote,
all funds submitted in the Subscription Offering and Community Offering will be
returned to subscribers, with interest as provided herein, and all withdrawal
authorizations will be canceled.
ARTICLE III
SALE OF COMMON STOCK
Section 3.01 In General. As soon as practicable, the Holding Company shall
register the offering of the Common Stock under the Securities Act of 1933, as
amended, and any applicable state laws. After registration of the Common Stock
and receipt of all required regulatory approvals, the Common Stock will be
offered for sale in a Subscription Offering to
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the Holders of Subscription Rights in the respective priorities set forth in
Section 3.04. No offer for sale of the Common Stock shall be made prior to the
mailing to Members of the Proxy Statement for the Special Meeting. The
Subscription Offering may be commenced as early as the mailing of the Proxy
Statement for the Special Meeting of Members and must be commenced in time to
complete the Conversion within the time period specified in Section 6.04.
Any shares of Common Stock not subscribed for in the Subscription Offering
will be offered for sale in a Community Offering. Any Common Stock remaining
unsold upon completion of the Subscription Offering and Community Offering may
be offered for sale in a Syndicated Community Offering or a Public Offering or
in some other manner as determined by the Board of Directors of the Bank and the
Board of Directors of the Holding Company with the approval of the OTS. Any such
Syndicated Community or Public Offering shall be conducted in a manner that is
intended to achieve the widest distribution of the Common Stock.
The Community Offering may be commenced concurrently with the Subscription
Offering. In such case, any orders received in the Community Offering shall be
subject to availability of shares upon conclusion of the Subscription Offering.
The offer and sale of Common Stock prior to the Special Meeting of Members
shall, however, be conditioned upon approval of the Plan by the Voting Members.
The sale of all Common Stock subscribed for in the Subscription and Community
Offerings will be consummated simultaneously on the date the sale of Common
Stock in any Syndicated Community or Public Offering is consummated and only if
all Common Stock is sold.
The sales price per share of the Common Stock shall be a uniform price
determined in accordance with the Conversion Regulations and Section 3.03,
except that the price to be paid by or through the Underwriters in connection
with a Public Offering may be less a negotiated Underwriters' commission or
discount. The Bank may also elect to offer to pay fees on a per share basis to
qualifying brokers, as determined by the Bank in its sole discretion, who assist
Persons in determining to purchase shares in the Subscription and Community
Offerings.
Section 3.02 Reorganization as Subsidiary of Holding Company. The Board of
Directors of the Bank intends to take all necessary steps to form the Holding
Company. The Bank will be a wholly-owned subsidiary of the Holding Company
unless the Holding Company is eliminated in the Conversion.
If the Holding Company is utilized, upon Conversion the Bank will issue its
capital stock to the Holding Company, and the Holding Company will issue and
sell the Common Stock in accordance with this Plan. The Holding Company will
make timely applications for any requisite regulatory approvals, including an
Application to be filed with the OTS on Form H-(e)1 or on Form H-(e)1-S, if
available to the Holding Company, and a Registration Statement on Form S-1 to be
filed with the SEC.
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Upon the issuance of the Common Stock, the Holding Company will purchase
from the Bank all of the capital stock of the Bank to be issued by the Bank in
the Conversion in exchange for the Conversion proceeds that are not permitted to
be retained by the Holding Company. The Holding Company will apply to the OTS to
retain 50% of the net proceeds of the sale of the Common Stock. A lesser
percentage may be retained in the discretion of the Boards of Directors of the
Bank and the Holding Company. The Bank believes that the Conversion proceeds
will provide economic strength to the Holding Company and the Bank for the
future in a highly competitive and regulated environment and would facilitate
possible expansion through acquisitions of financial service organizations,
possible diversification into other related businesses and for other business
and investment purposes, including the possible payment of dividends and
possible future repurchases of the Common Stock as permitted by the OTS. The
above activities may also be engaged in by the Bank if the Holding Company is
eliminated.
The Board of Directors of the Bank may determine for any reason at any time
prior to the issuance of the Common Stock not to utilize a holding company form
of organization in the Conversion. If the Board of Directors of the Bank
determines not to complete the Conversion utilizing a holding company form of
organization, the capital stock of the Bank will be issued and sold in
accordance with the Plan. In such case, the Holding Company's registration
statement on Form S-l will be withdrawn from the SEC, the Bank will take all
steps necessary to complete the Conversion from the mutual to the stock form of
organization, including filing any necessary documents with the OTS, and will
issue and sell the Common Stock in accordance with this Plan. In such event, any
subscriptions or orders received for Common Stock of the Holding Company shall
be deemed to be subscriptions or orders for Common Stock of the Bank, and the
Bank shall take such steps as permitted or required by the OTS or the SEC.
Any reference to the Holding Company in this Plan shall mean the Bank if
the Holding Company is eliminated in the Conversion.
Section 3.03 Pricing and Number of Shares of Common Stock;
the Independent Appraiser.
(a) All shares sold in the Conversion will be sold at a uniform price per
share. The aggregate price at which the Common Stock shall be sold shall not be
inconsistent with the estimated pro forma market value of such Common Stock,
based upon an independent valuation as provided for in this Section 3.03. The
Bank shall cause the Independent Appraiser to prepare a pro forma valuation of
the aggregate market value of the Common Stock, which shall be submitted to the
OTS as part of the Bank's Application for Conversion. The valuation shall be
prepared in accordance with Section 563b.7 of the Conversion Regulations. Prior
to the commencement of the Subscription and Community Offering, the Estimated
Price Range will be established, the maximum of which shall be no more than 15%
above the average of the minimum and maximum of such price range and the minimum
of which shall be no more than 15% below such average. From time to time, as
appropriate or as required by the Conversion
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Regulations or the OTS, the Bank shall cause the Independent Appraiser to review
developments subsequent to its valuation to determine whether the Estimated
Price Range should be revised.
(b) Based on the valuation by the Independent Appraiser pursuant to this
Section 3.04(a), the Board of Directors of the Bank and the Board of Directors
of the Holding Company shall fix the Maximum Subscription Price and the number
of shares of Common Stock to be offered. The total number of shares of Common
Stock offered and the purchase price per share shall be subject to increase or
decrease at any time prior to any Syndicated Community Offering or Public
Offering or other method of sale to reflect changes in market and financial
conditions. In the event that the aggregate purchase price of the Common Stock
is below the minimum of the Estimated Price Range, or materially above the
maximum of the Estimated Price Range, resolicitation of purchasers may be
required; provided, that up to a 15% increase above the maximum of the Estimated
Price Range will not be deemed material so as to require a resolicitation. Up to
a 15% increase in the number of shares to be issued which is supported by an
appropriate change in the estimated pro forma market value of the Common Stock
will not be deemed to be material so as to require a resolicitation of
subscriptions. In the event that the aggregate purchase price of the Common
Stock is below the minimum of the Estimated Price Range or in excess of 15%
above the maximum of the Estimated Price Range, and a resolicitation is
required, such resolicitation shall be effected in such manner and within such
time as the Holding Company or the Bank shall establish, with the approval of
the OTS, if required. The total number of shares of Common Stock offered will
also be subject to increase in connection with the exercise of any Overallotment
Option; provided, that any additional number of shares of Common Stock issued
for this purpose shall not exceed 15% of the total number of shares of the
Common Stock offered in the Subscription and Community Offerings.
If the number of shares of Common Stock to be sold in the Conversion,
excluding any number of shares to be issued in connection with any Overallotment
Option or the Oversubscription Provision, is increased after commencement of the
Subscription Offering, any Person who subscribed for the maximum number of
shares of Common Stock shall be permitted to subscribe for an additional number
of shares such that such Person shall be permitted to subscribe for the then
maximum number of shares permitted to be subscribed for by such Person as
adjusted taking into account the increase in the number of shares to be sold,
subject to the rights and preferences of any Person who has priority
Subscription Rights. If either the individual purchase limitations set forth in
Sections 3.04, 3.05 and 3.10 hereof or the number of shares of Common Stock,
excluding any number of shares to be issued in connection with any Overallotment
Option or the Oversubscription Provision, is decreased after commencement of the
Subscription Offering, the order of any Person who subscribed for the maximum
number of shares of Common Stock shall be decreased by the minimum amount
necessary so that such Person shall be in compliance with the then maximum
number of shares permitted to be subscribed for by such Person. The Holding
Company shall not otherwise be required to offer subscribers the right to modify
or rescind their subscriptions as a result of any increase or decrease in the
number of shares of Common Stock offered, unless otherwise required by this
Plan, by the OTS or by applicable law.
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(c) If all of the shares of Common Stock are subscribed for in the
Subscription Offering and the Community Offering, or are sold in some manner
other than a Public Offering, the Board of Directors of the Bank and the Board
of Directors of the Holding Company, in consultation with the Independent
Appraiser, shall determine the Actual Subscription Price, subject to approval by
the OTS. If all shares of the Common Stock are not subscribed for and there is a
Public Offering, the Board of Directors of the Bank and the Board of Directors
of the Holding Company, in consultation with the Underwriters and the
Independent Appraiser, shall determine the Public Offering Price, subject to the
approval of the OTS. If there is a Public Offering, the Public Offering Price
will determine the Actual Subscription Price. Except for the purchase price of
shares sold upon the exercise of any Overallotment Option or the
Oversubscription Provision, the aggregate purchase price of the Common Stock
shall be within the Estimated Price Range, unless subscribers are offered the
right to modify or rescind their subscriptions.
(d) The Holding Company shall not consummate any sale unless the
Independent Appraiser shall have confirmed to the Holding Company, the Bank, and
the OTS that nothing of a material nature shall have occurred that would cause
the Independent Appraiser to conclude that the aggregate purchase price of the
shares of Common Stock sold in the Conversion, exclusive of the aggregate
purchase price of shares sold upon the exercise of the Overallotment Option or
the Oversubscription Provision, is incompatible with its estimate of the pro
forma market value of the Bank at the time of such sale. If the Independent
Appraiser is unable to so confirm, the offering may be canceled or the Bank and
the Holding Company may extend the Conversion, establish a new Estimated Price
Range, Maximum Subscription Price or Actual Subscription Price, extend, reopen
or hold a new Subscription Offering and Community Offering, Syndicated Community
Offering or Public Offering or take such other action as the Board of Directors
of the Bank and the Board of Directors of the Holding Company shall determine
and the OTS shall approve.
(e) The Common Stock to be issued pursuant to this Plan shall upon issuance
be fully paid and nonassessable.
Section 3.04 Subscription Rights.
(a) Each Eligible Account Holder shall receive, as first priority and
without payment, nontransferable subscription rights to subscribe for shares of
Common Stock equal to an amount up to the greater of (i) the amount permitted to
be subscribed for in the Community Offering, which amount is currently equal to
$150,000 of the Common Stock offered in connection with the Conversion, as
specified in Section 3.05(e), and may be increased to 5% of the Common Stock
offered in the Conversion or decreased to less than $150,000, (ii) one-tenth of
one percent 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 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
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Date. Such subscription is subject to the maximum purchase limitation specified
in Section 3.10(a) and the minimum purchase limitation in Section 3.10(c) 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%.
If Eligible Account Holders subscribe for a number of shares of Common
Stock that exceeds the total number of shares of Common Stock being issued, the
Common Stock shall be allocated among subscribing Eligible Account Holders as
follows:
(i) first, to the extent possible, each Eligible Account Holder shall
be entitled to subscribe for the entire amount of his or her order, up to
100 shares;
(ii) second, each Eligible Account Holder subscribing for in excess of
100 shares shall be entitled, with respect to such excess, to subscribe for
the same percentage of the total remaining shares to be issued as the value
of his or her Qualifying Deposits represents to the aggregate value of the
Qualifying Deposits of all remaining Eligible Account Holders whose
subscriptions remain unsatisfied; provided, however, that no fractional
shares shall be issued; and
(iii) third, any shares then remaining shall be reallocated (one or
more times if necessary) among those Eligible Account Holders whose
subscriptions are not filled pursuant to subparagraphs (i) or (ii) above,
on the basis otherwise set forth in (ii) above until all available shares
have been allocated or all subscriptions satisfied.
Subscription Rights to purchase Common Stock received by Directors and
Officers of the Bank, and their Associates, as Eligible Account Holders that are
based on their increased Savings Accounts in the Bank in the one year period
preceding the Eligibility Record Date shall be subordinated to the Subscription
Rights of all other Eligible Account Holders granted pursuant to the Conversion
Regulations and this Plan.
(b) The Tax-Qualified Employee Stock Benefit Plans shall receive, without
payment, as a second priority after the filling of subscriptions of Eligible
Account Holders, non-transferable Subscription Rights to purchase Common Stock
up to a maximum of ten percent (10.0%) of the Common Stock. If, after the
filling of subscriptions of Eligible Account Holders, a sufficient number of
shares is not available to fill the subscriptions by such plan, the subscription
by such plan shall be filled to the maximum extent possible; provided, however,
that in the event of an increase in the total number of shares issued due to an
increase in the Estimated Price Range of up to 15%, the additional shares may be
sold to the Tax-Qualified Employee Stock Benefit Plans, subject to the purchase
limitations set forth above and in Section 3.10(a). A Tax-Qualified Employee
Stock Benefit Plan shall not be deemed to be an Associate or Affiliate of, or a
Person Acting in Concert with, any Director or Officer of the Holding Company or
the Bank. Notwithstanding any provision contained herein to the contrary, the
Bank may make scheduled discretionary contributions to a Tax-Qualified Employee
Stock Benefit Plan; provided, among other things, that such contributions do not
cause the Bank to fail to meet its regulatory capital requirements.
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(c) Each Supplemental Eligible Account Holder shall receive, as third
priority and without payment, nontransferable subscription rights to subscribe
for shares of Common Stock equal to an amount up to the greater of (i) the
amount permitted to be subscribed for in the Community Offering, which amount is
currently equal to $150,000 of the Common Stock offered in the Conversion, as
specified in Section 3.05(e), and may be increased to 5% of the Common Stock
offered in the Conversion or decreased to less than $150,000 (ii) one-tenth of
one percent 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 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. Such subscription is subject to the
maximum purchase limitation specified in Section 3.10(a) and the minimum
purchase limitation in Section 3.10(c) 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%.
If Supplemental Eligible Account Holders subscribe for a number of shares
of Common Stock that exceeds the total number of shares of Common Stock being
issued and available after purchases by Eligible Account Holders and
Tax-Qualified Employee Stock Benefit Plans, the Common Stock shall be allocated
among subscribing Supplemental Eligible Account Holders as follows:
(i) first, to the extent possible, each Supplemental Eligible Account
Holder shall be entitled to subscribe for the entire amount of his or her
order, up to 100 shares;
(ii) second, each Supplemental Eligible Account Holder subscribing for
in excess of 100 shares shall be entitled, with respect to such excess, to
subscribe for the same percentage of the total remaining shares to be
issued as the value of his or her Qualifying Deposits represents to the
aggregate value of the Qualifying Deposits of all remaining Supplemental
Eligible Account Holders whose subscriptions remain unsatisfied; provided,
however, that no fractional shares shall be issued; and
(iii) third, any shares then remaining shall be reallocated (one or
more times if necessary) among those Supplemental Eligible Account Holders
whose subscriptions are not filled pursuant to subparagraphs (i) or (ii)
above, on the basis otherwise set forth in (ii) above until all available
shares have been allocated or all subscriptions satisfied.
Subscription Rights received by an Eligible Account Holder pursuant to
Section 3.04(a) shall be applied in partial satisfaction of the Subscription
Rights received as a Supplemental Eligible Account Holder pursuant to this
Section 3.04(c).
(d) Each Other Member shall receive, as a fourth priority without payment,
nontransferable Subscription Rights to subscribe for shares of Common Stock
equal to an amount up to the greater of (i) the amount permitted to be
subscribed for in the Community Offering,
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which amount is currently equal to $150,000 of the Common Stock offered in the
Conversion, as specified in Section 3.05(e), and may be increased to 5% of the
Common Stock offered in the Conversion or decreased to less than $150,000, or
(ii) one-tenth of one percent of the total offering of shares of Common Stock,
subject to the maximum purchase limitation specified in Section 3.10(a) and the
minimum purchase limitation specified in Section 3.10(c) 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%.
If such Other Members subscribe for a number of shares of Common Stock
that, when added to the shares of Common Stock subscribed for by the Eligible
Account Holders, the Tax-Qualified Employee Stock Benefit Plans and the
Supplemental Eligible Account Holders, exceeds the total number of shares of
Common Stock being issued, the subscriptions of such Other Members will be
allocated as follows:
(i) first, to the extent possible, each Other Member shall be entitled
to subscribe for the entire amount of his or her order, up to 100 shares;
and
(ii) second, remaining shares will be allocated to each Other Member
whose subscription remains unsatisfied on a 100 share per order basis until
all such orders have been filled or the remaining shares have been
allocated.
(d-1) Each Bank Employee shall receive, as a fifth priority without
payment, nontransferable Subscription Rights to subscribe for shares of Common
Stock equal to an amount up to the greater of (i) the amount permitted to be
subscribed for in the Community Offering, which amount is currently equal to
$150,000 of the Common Stock offered in the Conversion, as specified in Section
3.05(e), and may be increased to 5% of the Common Stock offered in the
Conversion or decreased to less than $150,000, or (ii) one-tenth of one percent
of the total offering of shares of Common Stock, subject to the maximum purchase
limitation specified in Section 3.10(a) and the minimum purchase limitation
specified in Section 3.10(c) 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%.
If such Bank Employees subscribe for a number of shares of Common Stock
that, when added to the shares of Common Stock subscribed for by the Eligible
Account Holders, the Tax-Qualified Employee Stock Benefit Plans, the
Supplemental Eligible Account Holders and the Other Members, exceeds the total
number of shares of Common Stock being issued, the subscriptions of such Bank
Employees will be allocated as follows:
(i) first, to the extent possible, each Bank Employee shall be
entitled to subscribe for the entire amount of his or her order, up to 100
shares; and
(ii) second, remaining shares will be allocated to each Bank Employee
whose subscription remains unsatisfied 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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(e) Subscription Rights are non-transferable and may not be exercised by or
on behalf of any Person other than the Holder of Subscription Rights. Prior to
the Effective Date, no Person shall offer to transfer, enter into any agreement
or understanding to transfer, or transfer the legal or beneficial ownership of
any shares of Common Stock, except pursuant to or as contemplated by this Plan.
(f) Notwithstanding the foregoing, no Person will be offered or sold any
Common Stock in the Subscription Offering if such Person resides either in a
foreign jurisdiction or in a state or other jurisdiction of the United States
with respect to which both of the following apply:
(i) a small number of Persons otherwise eligible to subscribe for
shares of Common Stock under the Plan reside in such jurisdiction; and
(ii) the granting of the Subscription Rights or the offer or sale of
shares of Common Stock to such Persons would require the Bank, the Holding
Company or their employees, officers or directors to register under the
securities laws or other laws of similar import of such jurisdiction as a
broker, dealer, salesman or selling agent (as defined in the laws or
regulations of such jurisdiction) or to register or otherwise qualify the
Common Stock for sale in such jurisdiction, and such registration or
qualification would be impracticable in the judgment of the Bank or the
Holding Company for reasons of cost or otherwise.
No payment will be made in lieu of the granting of Subscription Rights to any
such Person.
(g) In the Subscription Offering, preference may be given to Eligible
Account Holders, Supplemental Eligible Account Holders and Other Members
residing in the counties in which the Bank has offices.
Section 3.05 Community Offering. Shares of Common Stock not subscribed for
in the Subscription Offering may be offered in a Community Offering, commencing
concurrently with or subsequent to the commencement of the Subscription
Offering, subject to the following terms and conditions:
(a) The Community Offering shall be made to the following:
(i) customers, employees, officers, and directors of the Bank and
their immediate families;
(ii) Persons whose primary residence is in the State of Illinois;
(iii) a trust or custodial arrangement forming part of an Individual
Retirement Account established pursuant to Section 408 of the Internal
Revenue Code of 1986, or
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part of a qualified retirement plan established pursuant to Section 401(a)
of the Internal Revenue Code of 1986 and maintained for the benefit of a
natural person described in subparagraphs (ii) or (iii) above;
(iv) certain other Persons to whom the Subscription Prospectus may be
delivered by the Holding Company; and
(v) certain institutional investors.
(b) The Community Offering shall be completed no later than 45 days
following the termination of the Subscription Offering, unless extended with the
approval of the OTS.
(c) The Community Offering shall be by means of a direct marketing program.
The Bank or the Holding Company may, if the Board of Directors of the Bank and
the Board of Directors of the Holding Company deem it advisable, engage the
services of a registered broker-dealer, consultant or investment banking firm,
experienced and expert in the sale of savings institution securities, to assist
the Holding Company in the direct marketing program. The Holding Company and the
Bank shall make distribution of the Common Stock to be sold in the Community
Offering in such a manner as to promote the widest distribution of Common Stock.
(d) In offering the unsubscribed for shares to the public in the Community
Offering, a number of shares equal to the lesser of 25% of the Common Stock
offered in the Conversion or the Common Stock not subscribed for in the
Subscription Offering, at the option of the Bank and the Holding Company, may be
initially reserved for institutional investors who need not be residents of the
counties in which the Bank has offices.
(e) Any Person subscribing for Common Stock pursuant to the provisions of
this Section 3.05 shall be required to purchase a minimum of 25 shares to the
extent such shares are available for purchase. The maximum amount that any
Person, together with any Associate or group of Persons Acting in Concert, may
subscribe for in the Community Offering shall be $150,000 of the Common Stock
offered in the Conversion; provided, however, that the amount permitted to be
purchased in the Community Offering may be increased to 5% of the Common Stock
offered in the Conversion or decreased to less than $150,000 without the further
approval of members or resolicitation of subscribers. If there are not
sufficient shares available to fill all subscription requests, the total number
of shares available in the Community Offering shall be allocated as follows:
(i) first, to each subscriber whose order is accepted and who is a
natural person maintaining his or her primary residence in a county in
which the Bank has an office (or a trust maintained for the benefit of such
person), the shares available to them will be allocated in the manner which
permits each such person, to the extent possible, to purchase the number of
shares necessary to make his total allocation of Common Stock
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equal to the lesser of 100 shares or the number of shares subscribed for by
such persons, thereafter, unallocated shares will be allocated among such
persons whose subscriptions remain unsatisfied on a 100 shares per order
basis until all such orders have been filled or the remaining shares have
been allocated;
(ii) second, to the extent that there are shares remaining after all
subscriptions by Persons described in (i) above, to each subscriber whose
order is accepted and who is a natural person maintaining an office or a
residence in the State of Illinois (or a trust maintained for the benefit
of such person), the shares available to them will be allocated in the same
manner as set forth in (i) above; and
(iii) third, to the extent that there are shares remaining after all
subscriptions by persons described in (i) and (ii) above, to each other
subscriber whose order is accepted, the shares available to them will be
allocated in the same manner as set forth in (i) above.
(f) Notwithstanding the foregoing:
(i) no Person will be offered or sold any shares of Common Stock in
the Community Offering if such Person resides either in a foreign
jurisdiction or in a state or other jurisdiction of the United States in
which the offer or sale of shares of Common Stock would require the Holding
Company or the Bank or their employees, officers or directors to register
under the securities laws or other laws of similar import of such
jurisdiction as a broker, dealer, salesman or selling agent (as defined in
the laws of such jurisdiction) or to register or otherwise qualify the
Common Stock for sale in such jurisdiction and such registration or
qualification would be impracticable in the judgment of the Holding Company
or the Bank for reasons of cost or otherwise; and
(ii) the Holding Company reserves the absolute right to accept or
reject any or all orders in the Community Offering in whole or in part.
Section 3.06 Subscription Offering and Community Offering Procedures; Order
Forms.
(a) After the registration statement for the Common Stock has been declared
effective and all other required regulatory approvals have been obtained, the
Holding Company shall distribute or make available the Subscription Prospectus,
together with Order Forms for the purchase of Common Stock, to the Holders of
Subscription Rights for the purpose of enabling them to exercise their
respective Subscription Rights. Notwithstanding the foregoing, the Holding
Company may elect to send Order Forms only to those persons who request them
after such notice has been given as is approved by the OTS and is adequate to
apprise all Holders of Subscription Rights of the pendency of the Subscription
Offering. Such notice may be included with the Proxy Statement for the Special
Meeting and may also be included in a notice of the pendency of the Conversion
and the Special Meeting sent to all Eligible Account
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Holders and Supplemental Eligible Account Holders in accordance with the
regulations of the OTS. Each Order Form must be preceded or accompanied by the
Subscription Prospectus describing the Holding Company, the Bank, the Common
Stock and the Subscription Offering and the Community Offering. Each Order Form
will contain such information as may be required by the Rules and Regulations of
the OTS.
(b) The Holders of Subscription Rights shall have a period of time within
which to complete and deliver an Order Form to the Holding Company. The exact
date and time by which completed Order Forms must be received by the Holding
Company shall be set forth on the Order Form; provided, that if the Holders of
Subscription Rights are required to return a postage-paid request card to
receive a Subscription Prospectus and Order Form, the Subscription Offering
shall not terminate until the expiration of 30 days from such mailing of the
postage-paid communication, unless a shorter period of time is approved by the
OTS. Failure of any Holder of Subscription Rights to deliver a properly executed
Order Form to the Holding Company, together with full payment (or authorization
for payment by withdrawal from a time or savings account with the Bank) for the
shares of Common Stock subscribed for, within the time limits prescribed shall
be deemed a waiver and release by such Person of any Subscription Rights.
(c) The Holding Company shall also distribute or make available the
Subscription Prospectus, together with Order Forms for the purchase of Common
Stock, to certain other Persons, as described in Section 3.05. A subscriber in
the Community Offering shall have a period of time within which to complete and
deliver an Order Form to the Holding Company, which period of time shall end at
the same time that the Subscription Offering terminates, unless extended
pursuant to Section 3.05(b). The exact date and time by which completed Order
Forms must be received by the Holding Company shall be set forth on the Order
Form.
(d) The Holding Company may, subject to the provisions of this Plan and any
required approval of the OTS, extend the period during which an Order Form must
be completed and delivered to the Holding Company. Any such extension shall be
for a period that the Board of Directors of the Bank and the Board of Directors
of the Holding Company determine is appropriate. The Holding Company may, but
will not be required to, waive any irregularity on any Order Form, or require
the submission of corrected Order Forms or the remittance of full payment for
subscribed shares of Common Stock by such date as the Holding Company may
specify. The interpretation by the Holding Company of the terms and conditions
of the Order Forms will be final and binding on all subscribers.
Section 3.07 Payment for Common Stock.
(a) Payment for shares of Common Stock subscribed for in the Subscription
Offering and in any Community, Syndicated Community, or Public Offerings shall
be equal to the Maximum Subscription Price multiplied by the number of shares
that are being subscribed
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for. Such payment must, in general, be made at the time the Order Form is
delivered to the Holding Company and may be made:
(i) in cash, if delivered in person, or by check, bank draft, or money
order,
or
(ii) if the subscriber has a Savings Account in the Bank, the
subscriber may authorize the Bank to withdraw from such Savings Account an
amount equal to the aggregate Maximum Subscription Price of the shares for
which the Person subscribed.
If the subscriber is a Benefit Plan, the subscribing Benefit Plan may pay for
the shares of Common Stock at the Actual Subscription Price on or prior to the
Effective Date. If the subscribing Benefit Plan is an employee stock ownership
plan, it may pay on or prior to the Effective Date only if it has received a
loan commitment from the Holding Company or a source of funding acceptable to
the Holding Company, committing to advance to the Benefit Plan on or before the
Effective Date the aggregated Maximum Subscription Price of the shares for which
the Benefit Plan subscribed.
Notwithstanding the foregoing, the Bank and the Holding Company shall have
the right, in their sole discretion, to permit institutional investors to submit
contractually irrevocable orders in the Community Offering and to thereafter
submit payment for the Common Stock for which they are subscribing in the
Community Offering at any time prior to 48 hours before the completion of the
Conversion, unless such 48 hour period is waived by the Bank and the Holding
Company, in their sole discretion.
(b) If the Actual Subscription Price is less than the Maximum Subscription
Price, the difference will either be promptly refunded to all subscribers (or
withdrawal authorizations from time or savings accounts shall be reduced) or, if
the subscriber has so elected on a space that may be provided on the Order Form,
the difference (excluding accrued interest) will be applied to the purchase of
additional whole shares of Common Stock to the extent available, and any
remaining difference will be promptly refunded to all subscribers (or withdrawal
authorizations from time or savings accounts shall be reduced).
(c) If a subscriber authorizes a withdrawal of the amount of the Maximum
Subscription Price from a time or savings account with the Bank as payment for
the shares subscribed for, the Bank will have the right upon receipt of the
Order Form by the Holding Company to make such withdrawal immediately or to
place a hold on such account equal to the aggregate Maximum Subscription Price.
The Bank will allow withdrawal from certificates of deposit for such payment
without the assessment of penalties; however, if the withdrawal results in the
certificate failing to meet any applicable minimum balance requirement, the
certificate evidencing the account may be canceled and the remaining balance
transferred to a statement savings account that will earn interest at the
regular passbook rate. Where any applicable required minimum balance is
maintained in such certificate account, the rate of return on the balance of the
certificate account will remain the same as prior to such early withdrawal. If
the
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Bank withdraws funds from a subscriber's time account, or places a hold on such
account, in accordance with this Section 3.06, and the time account matures
prior to the date the Conversion is completed or terminated, the funds so
withdrawn or placed under a hold shall be transferred upon maturity of the time
account to a statement savings account that will earn interest at the regular
passbook rate.
(d) The Bank will pay interest, at not less than the passbook rate, for all
amounts paid in cash, by check, bank draft, or money order to purchase shares of
the Common Stock in the Subscription Offering or Community Offering from the
date payment is received until the date the Conversion is completed or
terminated. If any withdrawal from a time or savings account made pursuant to
paragraph (c) above is made at any time prior to the date the Conversion is
completed or terminated, the Bank shall pay interest to the Eligible Account
Holder on the amount withdrawn as if such amount had remained in the account
from which it was withdrawn until the date the Conversion is completed or
terminated.
(e) The Bank will not knowingly loan funds or otherwise extend credit to
any Person for the purpose of purchasing shares of the Common Stock.
Section 3.08 Syndicated Community Offering.
(a) Shares of Common Stock not sold in the Subscription Offering or the
Community Offering may be offered for sale in a Syndicated Community Offering,
subject to such terms, conditions, and procedures as may be determined by the
Bank, in a manner that is intended to achieve the widest distribution of the
Common Stock subject to the right of the Bank to accept or reject in whole or in
part all subscriptions in the Syndicated Community Offering.
(b) In the Syndicated Community Offering, any Person together with any
Associate or group of Persons Acting in Concert may purchase up to an amount
equal to $150,000 of the Common Stock offered in the Conversion subject to the
maximum purchase limitation specified in Section 3.10(a) and the minimum
purchase limitation specified in Section 3.10(c) 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%. However, the shares purchased in the Community Offering by
any Person together with an Associate or group of Persons Acting in Concert
pursuant to Section 3.06 shall be counted toward meeting the maximum purchase
limitation found in this Section 3.08.
(c) Provided that the Subscription Offering has commenced, the Bank may
commence the Syndicated Community Offering at any time after the mailing to the
Members of the Proxy Statement to be used in connection with the Special Meeting
of Members, provided that the completion of the offer and sale of the Common
Stock shall be conditioned upon the approval of this Plan by the Voting Members.
If the Syndicated Community Offering is not sooner commenced pursuant to the
provisions of the preceding sentence, the Syndicated Community Offering will be
commenced as soon as practicable following the date upon which the Subscription
and Community Offerings terminate.
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Section 3.09 Public Offering Alternative.
(a) Shares of Common Stock not sold in the Subscription Offering or the
Community Offering may, as an alternative to a Syndicated Community Offering
pursuant to Section 3.08, be offered for sale by the Holding Company to or
through Underwriters. The provisions of Section 3.10 shall not be applicable to
sales to underwriters for purposes of such a Public Offering. Any such
Underwriter shall agree to (a) purchase such shares from the Holding Company
with a view to reoffering them to the general public; (b) use their best efforts
to sell, for the account of the Holding Company, such shares to the general
public; or (c) a combination of (a) and (b), subject to the following terms and
conditions:
(b) Any Underwriting Agreement shall provide that the Underwriters shall
agree to purchase all shares of the Common Stock not sold in the Subscription
Offering or the Community Offering, if any such shares are purchased.
(c) The price paid to the Holding Company by or through the Underwriters
for the Common Stock shall be the aggregate Public Offering Price for the shares
of Common Stock so offered, less discounts and commissions as negotiated between
the Bank, the Holding Company, and the Underwriters and approved by the OTS and
the National Association of Securities Dealers, Inc.
(d) The Underwriting Agreement shall be subject to the following conditions
and such other conditions as may be acceptable to the Bank, the Holding Company
and the OTS:
(i) purchases in the Public Offering shall be subject to the
limitations of Section 3.10; and
(ii) the Holding Company and its Underwriters shall use reasonable
efforts to assure that the stock to be offered and sold in the Public
Offering shall be offered and sold in a manner that, to the extent
practicable, will achieve the widest distribution of such stock.
(e) If for any reason a Syndicated Community Offering or a Public Offering
of shares of Common Stock not sold in the Subscription and Community Offerings
cannot be effected, or if any insignificant residue of shares of Common Stock is
not sold in the Subscription and Community Offerings or in the Syndicated
Community or Public Offering, other arrangements will be made for the
disposition of unsubscribed shares by the Bank, if possible. Such other purchase
arrangements will be subject to the approval of the OTS.
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Section 3.10 Restrictions on Purchase and Transfer of Common Stock. The
following limitations shall apply to all purchases of Common Stock:
(a) No Person, acting alone, acting together with any other Person, or
Acting in Concert with any group of Persons, shall be entitled to purchase more
than 1.0% of the Common Stock offered, except for certain Eligible Account
Holders and Supplemental Eligible Account Holders which may subscribe for or
purchase shares in accordance with Section 3.04(a) and (c), respectively;
provided, however, that in the event the maximum purchase limitations set forth
in this Section 3.10(a) is increased pursuant to Section 3.10(e) below to more
than 1.0% of the shares of Common Stock offered, orders for Common Stock in the
Community Offering and in the Syndicated Community Offering (or the Public
Offering), if any, shall, as determined by the Bank and the Holding Company,
first be filled to a maximum of 1.0% of the total number of shares of Common
Stock offered and thereafter remaining shares shall be allocated on an equal
number of shares per order basis until all orders have been filled. For purposes
of applying this purchase limitation, the purchases of any Tax-Qualified
Employee Stock Benefit Plan shall not be subject to such purchase limitation,
and the purchases of any Benefit Plan shall not be aggregated with those of any
other Benefit Plan or other Person; provided, however, that any one or more
Tax-Qualified Employee Stock Benefit Plans may subscribe for up to and including
10% of the Common Stock issued.
(b) The Officers and Directors of the Bank and the Holding Company and
their Associates, collectively, shall be entitled to purchase the maximum number
of shares of Common Stock issued in connection with the Conversion as permitted
by Section 563b.3(c)(8) of the Conversion Regulations. In applying this
limitation, Common Stock purchased by any one or more Tax-Qualified Employee
Stock Benefit Plan shall not be counted.
(c) Any Person exercising subscription rights to purchase Common Stock
shall be required to purchase a minimum of 25 shares to the extent such shares
are available for purchase. However, in the event the minimum number of shares
of Common Stock that must be purchased times the price per share exceeds five
hundred dollars ($500), then the minimum purchase requirement shall be reduced
to such number of shares that, when multiplied by the price per share, the
aggregate price for any such minimum purchase of shares of Common Stock shall
not exceed five hundred dollars ($500).
(d) Shares of Common Stock subscribed for in the Subscription Offering, the
Community Offering, and any Syndicated or Public Offering or purchased in some
other manner shall be aggregated for purposes of determining if the limitations
of this Section 3.10(a) and (b) have been violated.
(e) Depending upon market or financial conditions, the Board of Directors
of the Bank and the Holding Company, without further approval of the Members,
may decrease or increase the purchase limitations in this Plan, provided that
the maximum purchase limitations may not be increased to a percentage in excess
of 5%. Notwithstanding the foregoing, the maximum purchase limitation set forth
in Section 3.10(a) above may be increased up to 9.99%
<PAGE>
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provided that orders for Common Stock exceeding 5% of the shares being offered
shall not exceed, in the aggregate, 10% of the total offering. If the Bank and
the Holding Company increase the maximum purchase limitations, the Bank and the
Holding Company are only required to resolicit Persons who subscribed for the
maximum purchase amount and may, in the sole discretion of the Bank and the
Holding Company, resolicit certain other large subscribers.
In the event shares of Common Stock are sold in excess of the maximum of
the Estimated Price Range (the "Adjusted Maximum"), such shares will be
allocated in the following order of priority: (i) to fill the Tax-Qualified
Employee Stock Benefit Plans' subscription to the Adjusted Maximum; (ii) in the
event that there is an oversubscription at the Eligible Account Holder level, to
fill unfulfilled subscriptions of Eligible Account Holders exclusive of the
Adjusted Maximum in accordance with Section 3.04(a); (iii) in the event there is
an oversubscription at the Supplemental Eligible Account Holder level, to fill
unfulfilled subscriptions of Supplemental Eligible Account Holders exclusive of
the Adjusted Maximum in accordance with Section 3.04(c); (iv) in the event that
there is an oversubscription at the Other Member level, to fill unfulfilled
subscriptions of Other Members exclusive of the Adjusted Maximum in accordance
with Section 3.04(d); (v) in the event that there is an oversubscription at the
Bank Employee level, to fill unfulfilled subscriptions of Bank Employees
exclusive of the Adjusted Maximum in accordance with Section 3.04(d-1); and (vi)
to fill unfulfilled Subscriptions in the Community Offering exclusive of the
Adjusted Maximum in accordance with Section 3.05.
Each Person purchasing Common Stock in the Conversion shall be deemed to
confirm that such purchase does not conflict with the purchase limitations set
forth in this Plan.
(f) As used in this Section 3.10, the Officers and Directors of both the
Bank and the Holding Company shall not be deemed to be Associates or a group
affiliated with each other or otherwise Acting in Concert solely as a result of
their being Officers or Directors of the Bank or the Holding Company.
Section 3.11 Time Limits for Sale of Shares; Effect of Inability to Sell.
All shares of Common Stock not subscribed for at the completion of the
Subscription Offering shall be sold within 45 days after completion of the
Subscription Offering, or such longer period as the OTS may approve. If all
shares are not sold as provided for herein, the Bank and the Holding Company
will consult with the OTS to determine an alternative method of sale. In such
event and if required by the OTS or the Securities and Exchange Commission, a
resolicitation of those Persons who have subscribed for shares will be made. If
such an alternative method is not agreed upon, the Conversion and the
Reorganization will not be effected, the Bank will remain in mutual form, all
funds submitted to the Bank and the Holding Company as payment for shares of the
Common Stock will be returned to subscribers, with interest as provided herein,
and all withdrawal authorizations will be canceled.
Section 3.12 Enforcement of Terms and Conditions. The Bank and the Holding
Company shall have the right to take all such action as they may, in their sole
discretion, deem
<PAGE>
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necessary, appropriate, or advisable in order to monitor and enforce the terms,
conditions, limitations, and restrictions contained in this Article III and
elsewhere in this Plan and the terms, conditions, and representations contained
in the Order Forms, including, but not limited to, the right to require any
subscriber or purchaser to provide evidence, in a form satisfactory to the Bank,
of such Person's eligibility to subscribe for or purchase shares of the Common
Stock under the terms of this Plan and the absolute right (subject only to any
necessary regulatory approvals or concurrence) to reject, limit, or revoke
acceptance of any subscription or order and to delay, terminate, or refuse to
consummate any sale of Common Stock that they believe might violate, or is
designed to, or is any part of a plan to evade or circumvent such terms,
conditions, limitations, restrictions, and representations. Any such action
shall be final, conclusive, and binding on all Persons, and the Bank and the
Holding Company and their respective Boards of Directors shall be free from any
liability to any Person on account of any such action.
ARTICLE IV
CERTAIN RESTRICTIONS
Section 4.01 Sale of Shares Purchased by Directors or Officers. All shares
of the Common Stock purchased or acquired (either directly or indirectly) by the
Directors or Officers of the Bank or of the Holding Company on original issue in
the Conversion either directly from the Holding Company (by subscription or
otherwise) or from the Underwriters (or otherwise beneficially owned by such
Directors or Officers immediately after such original issuance) shall be subject
to the restriction that the shares shall not be sold for a period of one year
following the date of purchase. Such restriction shall not apply to the shares
of any such Director or Officer in the event of the death of such Person. In
addition, such restriction shall not apply to shares held by any Tax-Qualified
Employee Stock Benefit Plan. In connection with the shares of the Common Stock
that are subject to this restriction on resale:
(a) Each certificate for such shares shall bear a legend giving
appropriate notice of such restriction.
(b) Appropriate instructions shall be issued to the transfer agent for
the Common Stock with respect to applicable restrictions on transfer of any
such restricted stock.
(c) Any shares issued as a stock dividend, stock split, or otherwise
with respect to any such restricted stock shall be subject to the same
restrictions as applicable to such originally restricted stock until the
restrictions respecting such originally restricted stock are terminated,
and any certificate for such shares shall bear a legend advising of such
restrictions.
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Section 4.02 Subsequent Purchases of Shares by Officers and Directors. For
a period of three years following the Effective Date, no Officer or Director of
the Bank or the Holding Company (or any person who was an Officer or Director of
the Bank or the Holding Company at any time after the date on which the Board of
Directors of the Bank adopts this Plan), or Associate of any of them, shall,
without the prior written approval of the OTS, purchase or acquire direct or
indirect beneficial ownership of any shares of the capital stock of the Holding
Company, except through a registered broker or dealer. This restriction shall
not apply to any purchase or acquisition effected pursuant to any Benefit Plan,
nor to negotiated transactions involving more than one percent (1%) of the
outstanding shares of common stock of the Holding Company. As used herein, the
term "negotiated transaction" means a transaction in which the securities are
offered and the terms and arrangements relating to any sale are arrived at
through direct communications between the seller or any person acting on its
behalf and the purchaser or his investment representative (a professional
investment advisor acting as agent for the purchaser and independent of the
seller and not acting on behalf of the seller in connection with the
transaction).
Section 4.03 Acquisition of Control.
(a) In accordance with OTS regulations, for a period of not less than three
years (or such longer period as may be subsequently authorized under the
Conversion Regulations for savings associations converting to stock form)
following the Effective Date, no Person or group of Persons Acting in Concert
shall, directly or indirectly, offer to acquire or acquire the beneficial
ownership of more than ten percent (10%) of any class of any equity security of
the Holding Company or the Bank without the prior consent of the OTS. For
purposes of this Section 4.03, the term "Person" shall not include the Holding
Company or any majority-owned subsidiary thereof, or any Tax-Qualified Employee
Stock Benefit Plan or any trust or custodial arrangement established in
connection with any such plan; provided, that the plan or plans do not have
beneficial ownership in the aggregate of more than twenty-five percent (25%) of
any class of equity security of the Bank or the Holding Company.
(b) The charter of the Bank will contain a provision stipulating that, for
a period of five years following the Effective Date, no Person or group of
Persons Acting in Concert, except the Holding Company (if a holding company form
of organization is utilized), shall directly or indirectly offer to acquire or
acquire the beneficial ownership of more than ten percent (10%) of any class of
an equity security of the Bank, without the prior written approval of the OTS.
In addition, such charter may also provide that for a period of five years
following conversion shares beneficially owned in violation of the
above-described charter provision shall not be entitled to vote and shall not be
voted by any Person or counted as voting stock in connection with any matter
submitted to stockholders for a vote. In addition, the charter will contain
provisions providing that special meetings of the stockholders relating to
changes in control or amendment of the charter may only be called by the Board
of Directors and that shareholders shall not be permitted to cumulate their
votes for the election of directors.
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(c) The Articles of Incorporation of the Holding Company contains a
provision that 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 voting stock of the Holding Company shall automatically be converted into
shares of excess common stock of the Holding Company. Shares of excess common
stock are identical to shares of common stock except that they are limited to
one one-hundredth (1/100) of one vote per share. In addition, the Articles of
Incorporation and Bylaws of the Holding Company contain provisions for staggered
terms of the directors, noncumulative voting for directors, limitations on the
calling of special meetings, a fair price provision for certain business
combinations and certain notice requirements.
(d) For the purposes of this Section 4.03:
(i) The term "Person" includes an individual, a group Acting in
Concert, a corporation, a partnership, an association, a joint stock
company, a trust, an unincorporated organization or similar company, a
syndicate, or any other group formed for the purpose of acquiring, holding,
or disposing of securities of an insured institution;
(ii) The term "offer" includes every offer to buy or acquire,
solicitation of an offer to sell, tender offer for, or request or
invitation for tenders of, a security or interest in a security for value;
(iii) The term "acquire" includes every type of acquisition, whether
effected by purchase, exchange, operation of law, or otherwise; and
(iv) The term "security" includes non-transferable subscription rights
issued pursuant to a plan of conversion as well as a "security" as defined
in 15 U.S.C. ss.8c(a)(10).
ARTICLE V
EFFECT OF CONVERSION; CERTAIN COVENANTS AND AGREEMENTS
Section 5.01 Restated Charter and Adoption of New Bylaws; Name of Converted
Bank. The Bank shall take all appropriate steps to amend and restate its Charter
to read in the form of a charter for a federal stock savings bank as specified
in the Rules and Regulations of the OTS and approved by the Board of Directors
of the Bank. The Bank shall also take all appropriate steps to adopt Bylaws
sufficient for a federal stock savings bank. The name of the converted Bank
shall be Fairfield Savings Bank, F.S.B. By voting to adopt this Plan, Members of
the Bank will be voting to adopt a Federal Stock Charter and Bylaws for a
Federal Stock Savings Bank attached as Exhibits I and II to this Plan. The
effective date of the Bank's stock charter and bylaws shall be the Effective
Date.
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Section 5.02 Effect of Conversion and Reorganization. On the Effective
Date, the Bank shall cease to be a mutual institution and shall simultaneously
become a stock institution. All of the property, rights, powers, franchises,
debts, liabilities, obligations, and duties of the mutual institution shall
continue as such in the stock institution, and all deposits in the mutual
institution shall remain as deposits of equal character and value in the stock
institution. The corporate existence of the Bank shall not terminate, and the
converted Bank shall be a continuation of the mutual institution that existed
immediately before the filing of the Federal Stock Charter. The Holding Company
shall purchase the common stock of the Bank with such amount from the net
proceeds received by the Holding Company from the sale of the Common Stock as
shall be determined by the Board of Directors of the Bank and the Board of
Directors of the Holding Company and as shall be approved by the OTS, with the
result that the Bank will become a wholly-owned subsidiary of the Holding
Company.
Section 5.03 Liquidation Account. The Bank shall establish at the time of
the Conversion a liquidation account (the "Liquidation Account") for the benefit
of Eligible Account Holders and Supplemental Eligible Account Holders who
continue to maintain a Savings Account in the Bank. Each Eligible Account Holder
and Supplemental Eligible Account Holder shall, with respect to his or her
Savings Account, hold a related inchoate interest in a portion of the
liquidation account balance, in relation to his or her Savings Account balance
at the Eligibility Record Date or Supplemental Eligibility Record Date, as
applicable, or to such balance as it may be subsequently reduced, as hereinafter
provided.
The initial Liquidation Account balance shall be equal to the net worth of
the Bank (adjusted to reflect generally accepted accounting principles) as of
the latest practicable date prior to the Conversion. The initial Liquidation
Account balance shall not be increased, and shall be subject to downward
adjustment to the extent of any downward adjustment to the Subaccount Balance of
any Eligible Account Holder or Supplemental Eligible Account Holder in
accordance with Section 563b.3(f)(5) of the Conversion Regulations.
The initial Subaccount Balance for a Savings Account held by an Eligible
Account Holder or Supplemental Eligible Account Holder shall be determined by
multiplying the opening balance in the Liquidation Account by a fraction, the
numerator of which is the amount of such Eligible Account Holder's or
Supplemental Eligible Account Holder's Qualifying Deposit and the denominator of
which is the total amount of all Qualifying Deposits of all Eligible Account
Holders and Supplemental Eligible Account Holders in the Bank.
Such initial Subaccount Balance shall not be increased, but shall be
subject to downward adjustment as follows. If, at the close of business on any
annual closing date, commencing on or after the Effective Date, the deposit
balance in the Savings Account of an Eligible Account Holder or Supplemental
Eligible Account Holder is less than the lesser of (i) the balance in the
Savings Account at the close of business on any other annual closing date
subsequent to the Eligibility Record Date or Supplemental Eligibility Record
Date, as applicable, or (ii) the amount of the Qualifying Deposit in such
Savings Account, the Subaccount Balance for such Savings Account shall be
adjusted by reducing such Subaccount Balance in an amount
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proportionate to the reduction in such deposit balance. In the event of such
downward adjustment, the Subaccount Balance shall not be subsequently increased,
notwithstanding any subsequent increase in the deposit balance of the related
Savings Account. If any such Savings Account is closed, the related Subaccount
shall be reduced to zero.
A distribution of each Subaccount Balance may be made only in the event of
a complete liquidation of the Bank. Following all payments to creditors
(including those to Account Holders to the extent of their Savings Accounts),
each Eligible Account Holder and Supplemental Eligible Account Holder shall be
entitled to receive a liquidating distribution from the Liquidation Account in
the amount of the then adjusted Subaccount Balance for his or her Savings
Account then held. Liquidating distributions will be made to such Eligible
Account Holders and Supplemental Eligible Account Holders before any liquidation
distribution may be made to any holders of the Bank's capital stock. No merger,
consolidation, purchase of bulk assets with assumption of Savings Accounts and
other liabilities, or similar transactions with an FDIC-insured institution, in
which the Bank is not the surviving institution, shall be deemed to be a
complete liquidation for this purpose. In such a transaction, the liquidation
account shall be assumed by the surviving institution.
The Bank shall not be required to set aside funds for the purpose of
establishing the liquidation account and, except as provided in this Section
5.03, the existence of such account shall not operate to restrict the use or
application of any of the net worth or shareholders' equity accounts of the Bank
subsequent to the Conversion.
Section 5.04 Voting Rights. Except as may be provided in the Federal Stock
Charter of the Bank pursuant to any amendment thereto subsequent to the
Effective Date, the holders of the common stock of the Bank shall have exclusive
voting rights upon the Effective Date. Except as may be provided in the Articles
of Incorporation of the Holding Company pursuant to any amendment thereto
subsequent to the Effective Date, the holders of the common stock and excess
common stock of the Holding Company shall have exclusive voting rights upon the
Effective Date.
Section 5.05 Issuance of Stock. Subsequent to the Effective Date, the Board
of Directors of the Bank, subject to the provisions of the Federal Stock Charter
and the Bylaws of the Bank, shall have the authority to issue any of the
authorized, unissued, and unreserved shares of common and preferred stock and to
fix the relative rights, preferences, and limitations of such preferred stock.
Except as may be required by the Conversion Regulations or otherwise, the Board
of Directors of the Bank shall have sole discretion in the decision to issue
such shares, and no shareholder approval will be required for the issuance of
such shares.
Subsequent to the Effective Date, the Board of Directors of the Holding
Company, subject to the provisions of the Articles of Incorporation and the
Bylaws of the Holding Company, shall have the authority to issue any of the
authorized, unissued, and unreserved shares of common and preferred stock and to
fix the relative designations, powers, preferences, rights, qualifications,
limitations, and restrictions of such preferred stock. Except as may be
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required by the Illinois Business Corporation Act of 1983 or otherwise, the
Board of Directors of the Holding Company shall have sole discretion in the
decision to issue such shares, and no shareholder approval will be required for
the issuance of such shares.
Section 5.06 Directors of Converted Bank. Following the Conversion, the
business and affairs of the Bank shall be managed by a Board of Directors. Upon
the Effective Date, the Board of Directors of the Bank shall be divided into
three classes with respect to term of office, each class to contain, as near as
may be possible, one-third of the entire Board of Directors of the Bank. Each
person serving as a Director of the Bank on the Effective Date shall be
appointed by the Board of Directors to one of the three classes and shall serve
as a director until the expiration of his or her term and until his or her
successor is elected and qualified. One class of directors shall have a term of
office expiring at the first annual meeting of shareholders, the second class
shall have a term of office expiring at the second annual meeting of
shareholders, and the third class shall have a term of office expiring at the
third annual meeting of shareholders. Directors elected at each annual meeting
of shareholders (other than directors elected to fill vacancies) shall be
elected to serve for a term of three years and until their successors are
elected and qualified.
Section 5.07 Employment Agreements. The Bank and the Holding Company may
enter into employment agreements with such officers and employees and upon such
terms and conditions as the Board of Directors of the Bank and the Board of
Directors of the Holding Company shall determine.
Section 5.08 Market for the Common Stock. Upon the Effective Date, or as
soon thereafter as practicable within the time period required by applicable
laws and regulations, the Common Stock shall be registered pursuant to the
Securities Exchange Act of 1934, as amended, and shall not be deregistered for a
period of three years following the Effective Date. The requirement of
maintenance of registration for three years may be fulfilled by any successor to
the Bank or any holding company of the Bank. In addition, the Holding Company
shall use its best efforts to list the Common Stock on a national or regional
securities exchange or on the National Association of Securities Dealers
Automated Quotation System and to encourage and assist one or more market makers
to establish and maintain a market for the Common Stock.
Section 5.09 Payment of Dividends and Repurchase of Stock. The Bank shall
not declare or pay a cash dividend on, or repurchase any of, its capital stock
if the effect thereof would cause its regulatory capital to be reduced below (i)
the amount required for the Liquidation Account or (ii) the federal regulatory
capital requirement in Section 567.2 of the Rules and Regulations of the OTS.
Otherwise, the Bank may declare dividends, make capital distributions or
repurchase its stock in accordance with applicable law and regulations.
<PAGE>
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ARTICLE VI
CONDITIONS TO CONVERSION; AMENDMENT AND TERMINATION;
MISCELLANEOUS
Section 6.01 Conditions to Conversion. The conversion of the Bank pursuant
to this Plan is expressly conditioned upon the following:
(a) Prior receipt by the Bank of rulings of the United States Internal
Revenue Service and the State of Illinois taxing authorities, or opinions
of counsel, substantially to the effect that the Conversion will not result
in any adverse federal or state tax consequences to Eligible Account
Holders or to the Bank and the Holding Company before or after the
Conversion;
(b) The sale of all of the Common Stock offered in the Conversion; and
(c) The completion of the Conversion within the time period specified
in Section 6.04.
Section 6.02 Termination of Reorganization. If the proposed Reorganization
may result in tax consequences which, in the judgment of the Board of Directors
of the Bank, are materially adverse to the Holding Company, the Bank, or the
Members, or, if for any other reason, the Board of Directors determines that the
Reorganization is not in the best interests of the Bank or its members, then the
Board of Directors of the Bank may, in its discretion, elect not to proceed with
the Reorganization and substitute the common stock of the Bank for the Common
Stock; in such event, all subscriptions received in the Subscription Offering,
the Community Offering, and any Public Offering will be deemed to be
subscriptions to purchase the common stock of the Bank, all of the provisions of
this Plan relating to the Common Stock will be deemed to pertain to the common
stock of the Bank on the same terms and conditions that such provisions pertain
to the Common Stock, and all of the references in this Plan to the Holding
Company shall be deemed to refer to the Bank or shall have no effect, as the
context of the reference requires.
Section 6.03 Amendment or Termination of the Plan. If deemed necessary or
desirable by the Board of Directors of the Bank and the Board of Directors of
the Holding Company, this Plan may be substantively amended as a result of
comments from regulatory authorities, as a result of any provision contained in
this Plan being held invalid, void or unenforceable by a court or regulatory
authority of competent jurisdiction, or for any other reason, at any time prior
to solicitation of proxies from Members to vote on the Plan and at any time
thereafter with the concurrence of the OTS. Any amendment to this Plan made
after approval by the Members with the approval of the OTS shall not necessitate
further approval by the Members unless otherwise required by the OTS. This Plan
may be terminated by the Board
<PAGE>
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of Directors of the Bank at any time prior to the Special Meeting and at any
time thereafter with the concurrence of the OTS.
By adoption of the Plan, the Members of the Bank authorize the Board of
Directors to amend or terminate the Plan under the circumstances set forth in
this Section.
Section 6.04 Completion Date. The Conversion must be completed within 24
months of the approval of the Plan by the Voting Members, unless a longer time
period is permitted by governing laws and regulations. The Conversion shall be
deemed to take place and be effective upon the completion of all requisite
organizational procedures for obtaining a Federal Stock Savings Bank Charter for
the Bank and sale of all Common Stock.
Section 6.05 Expenses of the Conversion. The Bank shall use its best
efforts to assure that expenses incurred by it in connection with the Conversion
shall be reasonable.
Section 6.06 Interpretation. Subject to applicable law as set forth in
Section 6.08, all interpretations of this Plan and all applications of the
provisions of this Plan to particular circumstances by a majority of the Board
of Directors of the Bank shall be final, subject to the authority of the OTS.
Section 6.07 Severability. If any term, provision, covenant or restriction
contained in this Plan is held by a court or a federal or state regulatory
agency of competent jurisdiction to be invalid, void or unenforceable, the
remainder of the terms, provisions, covenants and restrictions contained in this
Plan shall remain in full force and effect, and shall in no way be affected,
impaired or invalidated.
Section 6.08 Miscellaneous. This Plan is to be governed by and construed in
accordance with the laws of the United States and of the State of Illinois. None
of the cover page, the table of contents, or the article or section headings are
to be considered a part of this Plan, but are included solely for convenience of
reference and shall in no way define, limit, extend, or describe the scope or
intent of any of the provisions hereof. Words in the singular include the
plural, and words in the plural include the singular. Except for such rights as
are set forth herein for Members, this Plan shall create no rights in any
Person.
<PAGE>
EXHIBIT I
STOCK CHARTER
OF
FAIRFIELD SAVINGS BANK, F.S.B.
SECTION 1. CORPORATE TITLE. The full corporate title of the savings
bank is Fairfield Savings Bank, F.S.B. (the "Savings Bank").
SECTION 2. OFFICE. The home office of the Savings Bank shall be
located in Long Grove, Illinois.
SECTION 3. DURATION. The duration of the Savings Bank is perpetual.
SECTION 4. PURPOSE AND POWERS. The purpose of the Savings Bank is to
pursue any or all of the lawful objectives of a Federal savings bank chartered
under Section 5 of the Home Owners' Loan Act and to exercise all of the express,
implied, and incidental powers conferred thereby and by all acts amendatory
thereof and supplemental thereto, subject to the Constitution and laws of the
United States as they are now in effect, or as they may hereafter be amended,
and subject to all lawful and applicable rules, regulations, and orders of the
Office of Thrift Supervision (the "Office").
SECTION 5. CAPITAL STOCK. The total number of shares of all classes
of the capital stock which the Savings Bank has the authority to issue is
twenty-five million (25,000,000), of which twenty million (20,000,000) shall be
common stock of par value of one dollar ($1.00) per share and of which five
million (5,000,000) shall be preferred stock, par value of one dollar ($1.00)
per share. The shares may be issued from time to time as authorized by the
board of directors without the approval of the Savings Bank's shareholders,
except as otherwise provided in this Section 5 or to the extent that such
approval is required by governing law, rule, or regulation. The consideration
for the issuance of the shares shall be paid in full before their issuance and
shall not be less than the par value. Neither promissory notes nor future
services shall constitute payment or part payment for the issuance of shares of
the Savings Bank. The consideration for the shares shall be cash, tangible or
intangible property (to the extent direct investment in such property would be
permitted to the Savings Bank), labor or services actually performed for the
Savings Bank, or any combination of the foregoing. In the absence of actual
fraud in the transaction, the value of such property, labor or services, as
determined by the board of directors of the Savings Bank, shall be conclusive.
Upon payment of such consideration, such shares shall be deemed to be fully paid
and nonassessable. In the case of a stock dividend, that part of the surplus of
the Savings Bank which is transferred to stated capital upon the issuance of
shares as a share dividend shall be deemed to be the consideration for their
issuance.
Except for shares issuable in connection with the conversion of the
Savings Bank from the mutual to stock form of capitalization, no shares of
capital stock (including shares issuable upon conversion, exchange, or exercise
of other securities) shall be issued, directly or
<PAGE>
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indirectly, to officers, directors, or controlling persons of the Savings Bank
other than as part of a general public offering or as qualifying shares to a
director, unless the issuance or the plan under which they would be issued has
been approved by a majority of the total votes eligible to be cast at a legal
meeting.
Nothing contained in this Section 5 (or in any supplementary sections
hereto) shall entitle the holders of any class or series of capital stock to
vote as a separate class or series or to more than one vote per share; PROVIDED,
that this restriction on voting separately by class or series shall not apply:
(i) To any provision which would authorize the holders of preferred
stock, voting as a class or series, to elect some members of the
board of directors, less than a majority thereof, in the event of
default in the payment of dividends on any class or series of
preferred stock;
(ii) To any provision which would require the holders of preferred
stock, voting as a class or series, to approve the merger or
consolidation of the Savings Bank with another corporation or the
sale, lease, or conveyance (other than by mortgage or pledge) of
properties or business in exchange for securities of a
corporation other than the Savings Bank if the preferred stock is
exchanged for securities of such other corporation; PROVIDED,
that no provision may require such approval for transactions
undertaken with the assistance or pursuant to the direction of
the Office or the Federal Deposit Insurance Corporation;
(iii) To any amendment which would adversely change the specific
terms of any class or series of capital stock as set forth
in this Section 5 (or in any supplementary sections hereto),
including any amendment which would create or enlarge any
class or series ranking prior thereto in rights and
preferences. An amendment which increases the number of
authorized shares of any class or series of capital stock,
or substitutes the surviving association in a merger or
consolidation for the Savings Bank, shall not be considered
to be such an adverse change.
A description of the different classes and series (if any) of the
Savings Bank's capital stock and a statement of the designations, and the
relative rights, preferences, and limitations of the shares of each class of and
series (if any) of capital stock are as follows:
A. COMMON STOCK. Except as provided in this Section 5 (or in any
supplementary sections thereto) the holders of the common stock
shall exclusively possess all voting power. Each holder of
shares of common stock shall be entitled to one vote for each
share held by such holder.
Whenever there shall have been paid, or declared and set aside
for payment, to the holders of the outstanding shares of any
class of stock having preference over the common stock as to the
payment of dividends, the full amount of dividends and of sinking
fund, retirement fund, or other retirement payments, if any, to
which such holders are respectively entitled in preference to the
common stock, then dividends may be paid
<PAGE>
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on the common stock and on any class or series of stock entitled
to participate therewith as to dividends out of any assets
legally available for the payment of dividends.
In the event of any liquidation, dissolution, or winding up of
the Savings Bank, the holders of the common stock (and the
holders of any class or series of stock entitled to participate
with the common stock in the distribution of assets) shall be
entitled to receive, in cash or in kind, the assets of the
Savings Bank available for distribution remaining after: (i)
payment or provision for payment of the Savings Bank's debts and
liabilities; (ii) distributions or provision for distributions in
settlement of its liquidation account; and (iii) distributions or
provision for distributions to holders of any class or series of
stock having preference over the common stock in the liquidation,
dissolution, or winding up of the Savings Bank. Each share of
common stock shall have the same relative rights as and be
identical in all respects with all the other shares of common
stock.
B. PREFERRED STOCK. The Savings Bank may provide in supplementary
sections to its charter for one or more classes of preferred
stock, which shall be separately identified. The shares of any
class may be divided into and issued in series, with each series
separately designated so as to distinguish the shares thereof
from the shares of all other series and classes. The terms of
each series shall be set forth in a supplementary section to the
charter. All shares of the same class shall be identical except
as to the following relative rights and preferences, as to which
there may be variations between different series:
(a) the distinctive serial designation and the number of shares
constituting such series;
(b) The dividend rate or the amount of dividends to be paid on
the shares of such series, whether dividends shall be
cumulative and, if so, from which date(s), the payment
date(s) for dividends, and the participating or other
special rights, if any, with respect to dividends;
(c) The voting powers, full or limited, if any, of the shares of
such series;
(d) Whether the shares of such series shall be redeemable and,
if so, the price(s) at which, and the terms and conditions
on which, such shares may be redeemed;
(e) The amount(s) payable upon the shares of such series in the
event of voluntary or involuntary liquidation, dissolution,
or winding up of the Savings Bank;
<PAGE>
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(f) Whether the shares of such series shall be entitled to the
benefit of a sinking or retirement fund to be applied to the
purchase or redemption of such shares, and, if so entitled,
the amount of such fund and the manner of its application,
including the price(s) at which such shares may be redeemed
or purchased through the application of such fund;
(g) Whether the shares of such series shall be convertible into,
or exchangeable for, shares of any other class or classes of
stock of the Savings Bank and, if so, the conversion
price(s) or the rate(s) of exchange, and the adjustments
thereof, if any, at which such conversion or exchange may be
made, and any other terms and conditions of such conversion
or exchange;
(h) The price or other consideration for which the shares of
such series shall be issued; and
(i) Whether the shares of such series which are redeemed or
converted shall have the status of authorized but unissued
shares of serial preferred stock and whether such shares may
be reissued as shares of the same or any other series of
serial preferred stock.
Each share of each series of serial preferred stock shall have the
same relative rights as and be identical in all respects with all the other
shares of the same series.
The board of directors shall have authority to divide, by the adoption
of supplementary charter sections, any authorized class of preferred stock into
series, and, within the limitations set forth in this section and the remainder
of this charter, fix and determine the relative rights and preferences of the
shares of any series so established.
Prior to the issuance of any preferred shares of a series established
by a supplementary charter section adopted by the board of directors, the
Savings Bank shall file with the Secretary to the Office a dated copy of that
supplementary section of this charter establishing and designating the series
and fixing and determining the relative rights and preferences thereof.
SECTION 6. PREEMPTIVE RIGHTS. Holders of the capital stock of the
Savings Bank shall not be entitled to preemptive rights with respect to any
shares of the Savings Bank which may be issued.
SECTION 7. DIRECTORS. The Savings Bank shall be under the direction
of a board of directors. The authorized number of directors, as stated in the
Savings Bank's bylaws, shall not be fewer than five nor more than 15 except when
a greater number is approved by the Director of the Office.
SECTION 8. CERTAIN PROVISIONS APPLICABLE FOR FIVE YEARS.
Notwithstanding anything contained in the Saving Bank's charter or bylaws to the
contrary, for a period of five
<PAGE>
-5-
years from the date of completion of the conversion of the Savings Bank from
mutual to stock form, the following provisions shall apply:
A. BENEFICIAL OWNERSHIP LIMITATION. No person shall directly or
indirectly offer to acquire or acquire the beneficial ownership
of more than 10% of any class of an equity security of the
Savings Bank. This limitation shall not apply to a transaction
in which the Savings Bank forms a holding company without change
in the respective beneficial ownership interests of its
shareholders other than pursuant to the exercise of any dissenter
and appraisal rights, the purchase of shares by underwriters in
connection with a public offering, or the purchase of shares by a
tax-qualified employee stock benefit plan which is exempt from
the approval requirements under Section 574.3(c)(1)(vi) of the
Office's regulations.
In the event shares are acquired in violation of this Section 8,
all shares beneficially owned by any person in excess of 10%
shall be considered "excess shares" and 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 the shareholders for a vote.
For purposes of this Section 8, the following definitions apply:
(1) The term "PERSON" includes an individual, a group acting in
concert, a corporation, a partnership, an association, a
joint stock company, a trust, an unincorporated organization
or similar company, a syndicate or any other group formed
for the purpose of acquiring, holding or disposing of the
equity securities of the Savings Bank.
(2) The term "OFFER" includes every offer to buy or otherwise
acquire, solicitation of an offer to sell, tender offer for,
or request or invitation for tenders of, a security or
interest in a security for value.
(3) The term "ACQUIRE" includes every type of acquisition,
whether effected by purchase, exchange, operation of law or
otherwise.
(4) The term "ACTING IN CONCERT" means (a) knowing participation
in a joint activity or conscious parallel action towards a
common goal whether or not pursuant to an express agreement,
or (b) a combination or pooling of voting or other interests
in the securities of an issuer for a common purpose pursuant
to any contract, understanding, relationship, agreement or
other arrangements, whether written or otherwise.
B. CALL FOR SPECIAL MEETINGS. Special meetings of shareholders
relating to changes in control of the Savings Bank or amendments
to its charter shall
<PAGE>
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be called only upon direction of the board of directors.
SECTION 9. NO CUMULATIVE VOTING. Shareholders shall not be permitted
to cumulate their votes for election of directors.
SECTION 10. AMENDMENT OF CHARTER. Except as provided in Section 5, no
amendment, addition, alteration, change or repeal of this charter shall be made,
unless such is first proposed by the board of directors of the Savings Bank,
then preliminarily approved by the Office, which preliminary approval may be
granted by the Office pursuant to regulations specifying preapproved charter
amendments, and thereafter approved by the shareholders by a majority of the
total votes eligible to be cast at a legal meeting. Any amendment, addition,
alteration, change or repeal so acted upon shall be effective upon filing with
the Office in accordance with regulatory procedures or on such other date as the
Office may specify in its preliminary approval.
SECTION 11. LIQUIDATION ACCOUNT. Pursuant to the requirements of
(the Office's regulations (12 CFR Section 563b) the Savings Bank shall
establish and maintain a liquidation account for the benefit of its savings
account holders as of December 31, 1994 and September 30, 1996, as
applicable, depending on whether such savings account holders qualify as
Eligible Account Holders or Supplemental Eligible Account Holders, as defined
in the Plan of Conversion, adopted by the Board of Directors of the Savings
Bank as of May 21, 1996 and amended and restated as of September 17, 1996
("eligible savers"). In the event of a complete liquidation of the Savings
Bank, it shall comply with such regulations with respect to the amount and
the priorities on liquidation of each of the Savings Bank's eligible savers'
inchoate interest in the liquidation account, to the extent it is still in
existence; PROVIDED, that an eligible saver's inchoate interest in the
liquidation account shall not entitle such eligible saver to any voting
rights at meetings of the Savings Bank's shareholders.
<PAGE>
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FAIRFIELD SAVINGS BANK, FSB
By:
----------------------------------------
President and Chief Executive Officer
of the Savings Bank
Attest:
---------------------------------
Secretary of the Savings Bank
OFFICE OF THRIFT SUPERVISION
By:
----------------------------------
Attest:
---------------------------------
Thrift Supervision
Effective Date:
<PAGE>
EXHIBIT II
BYLAWS
OF
FAIRFIELD SAVINGS BANK, F.S.B.
ARTICLE I
HOME OFFICE
The home office of Fairfield Savings Bank, F.S.B. (the "Savings Bank")
shall be at 1190 RFD, Long Grove, in the State of Illinois.
ARTICLE II
SHAREHOLDERS
SECTION 1. PLACE OF MEETINGS. All annual and special meetings of
shareholders shall be held at the home office of the Savings Bank or at such
other place in the State in which the principal place of business of the Savings
Bank is located as the board of directors (the "Board") may determine.
SECTION 2. ANNUAL MEETING. A meeting of the shareholders of the
Savings Bank for the election of directors and for the transaction of any other
business of the Savings Bank shall be held annually within 120 days after the
end of the Savings Bank's fiscal year at such date and time within such 120-day
period as the Board may determine.
SECTION 3. SPECIAL MEETINGS. For a period of five years from the
date of the completion of the conversion of the Savings Bank from mutual to
stock form, special meetings of the shareholders relating to a change in control
of the Savings Bank or to an amendment of the charter of the Savings Bank may be
called only by the Board. Subject to the immediately preceding sentence,
special meetings of the shareholders for any purpose or purposes, unless
otherwise prescribed by the regulations of the Office of Thrift Supervision (the
"Office"), may be called at any time by the Chairman of the Board, the President
or a resolution of at least three-fourths of the entire Board, and shall be
called by the Chairman of the Board, the President or the Secretary upon the
written request of the holders of not less than 10% of all of the outstanding
capital stock of the Savings Bank entitled to vote at the meeting. Such written
request shall state the purpose or purposes of the meeting and shall be
delivered to the home office of the Savings Bank addressed to the Chairman of
the Board, the President or the Secretary. Special meetings shall be held on
the date and at the time and place as may be designated by the Board. At a
special meeting, no business shall be transacted and no corporate action shall
be taken other than that stated in the notice of meeting.
SECTION 4. CONDUCT OF MEETINGS. The Chairman of the Board shall
serve as chairman at all meetings of the shareholders or, if the Chairman of the
Board is absent or otherwise unable to so serve, the President shall serve as
chairman. If both the Chairman of the
<PAGE>
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Board and the President are absent or otherwise unable to so serve, such other
person as shall be appointed by a majority of the entire Board of Directors
shall serve as chairman at any meeting of shareholders held in such absence.
The Secretary or, in his or her absence, such other person as the chairman of
the meeting shall appoint, shall serve as secretary of the meeting. The
chairman of the meeting shall conduct all meetings of the shareholders in
accordance with the best interests of the Savings Bank and shall have the
authority and discretion to establish reasonable procedural rules for the
conduct of such meetings, including such regulation of the manner of voting and
the conduct of discussion as he or she shall deem appropriate.
SECTION 5. NOTICE OF MEETINGS. Written notice stating the place,
day and hour of the meeting and the purpose(s) for which the meeting is called
shall be delivered not fewer than 20 nor more than 50 days before the date of
the meeting, either personally or by mail, by or at the direction of the
Chairman of the Board, the President, the Secretary or the directors calling the
meeting, to each shareholder of record entitled to vote at such meeting. If
mailed, such notice shall be deemed to be delivered when deposited in the mail
addressed to the shareholder at the address as it appears on the stock transfer
books or records of the Savings Bank as of the record date prescribed in Section
6 of this Article II with postage prepaid. When any shareholders' meeting,
either annual or special, is adjourned for 30 days or more, notice of the
adjourned meeting shall be given as in the case of an original meeting. It
shall not be necessary to give any notice of the time and place of any meeting
adjourned for less than 30 days or of the business to be transacted at the
meeting, other than an announcement at the meeting at which such adjournment is
taken.
SECTION 6. FIXING OF RECORD DATE. For the purpose of determining
shareholders entitled to notice of or to vote at any meeting of shareholders or
any adjournment, or shareholders entitled to receive payment of any dividend, or
in order to make a determination of shareholders for any other proper purpose,
the Board shall fix in advance a date as the record date for any such
determination of shareholders. Such date in any case shall be not more than 60
days and, in case of a meeting of shareholders, not fewer than 10 days prior to
the date on which the particular action, requiring such determination of
shareholders, is to be taken. When a determination of shareholders entitled to
vote at any meeting of shareholders has been made as provided in this Section,
such determination shall apply to any adjournment.
SECTION 7. VOTING LISTS. At least 20 days before each meeting of
the shareholders, the officer or agent having charge of the stock transfer books
for shares of the Savings Bank shall make a complete list of the shareholders
entitled to vote at such meeting, or any adjournment, arranged in alphabetical
order, with the address and the number of shares held by each. This list of
shareholders shall be kept on file at the home office of the Savings Bank and
shall be subject to inspection by any shareholder at any time during usual
business hours for a period of 20 days prior to such meeting. Such list shall
also be produced and kept open at the time and place of the meeting and shall be
subject to inspection by any shareholder during the entire time of the meeting.
The original stock transfer books shall constitute PRIMA FACIE evidence of the
shareholders entitled to examine such list or transfer books or to vote at any
meeting of shareholders.
<PAGE>
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In lieu of making the shareholder list available for inspection by
shareholders as provided in the preceding paragraph, the Board may elect to
follow the procedures prescribed in Section 552.6(d) of the Office's regulations
as now or hereafter in effect.
SECTION 8. QUORUM. A majority of the outstanding shares of the
Savings Bank entitled to vote, represented in person or by proxy, shall
constitute a quorum at a meeting of shareholders. If less than a majority of
the outstanding shares is represented at a meeting, a majority of the shares so
represented may adjourn the meeting from time to time without further notice.
At such adjourned meeting at which a quorum shall be present or represented, any
business may be transacted that might have been transacted at the meeting as
originally notified. The shareholders present at a duly organized meeting may
continue to transact business until adjournment, notwithstanding the withdrawal
of enough shareholders to constitute less than a quorum.
SECTION 9. PROXIES. At all meetings of shareholders, a
shareholder may vote by proxy executed in writing by the shareholder or by his
or her duly authorized attorney in fact and filed with the Secretary of the
Savings Bank before being voted. Proxies solicited on behalf of the management
shall be voted as directed by the shareholder or, in the absence of such
direction, as determined by a majority of the Board. No proxy shall be valid
more than eleven months from the date of its execution except for a proxy
coupled with an interest. The Savings Bank may treat any duly executed proxy as
not revoked and in full force and effect until it receives a duly executed
instrument revoking it, or a duly executed proxy bearing a later date.
SECTION 10. VOTING OF SHARES IN THE NAME OF TWO OR MORE PERSONS.
When ownership stands in the name of two or more persons, in the absence of
written directions to the Savings Bank to the contrary, at any meeting of the
shareholders of the Savings Bank any one or more of such shareholders may
cast, in person or by proxy, all votes to which such ownership is entitled.
In the event an attempt is made to cast conflicting votes, in person or by
proxy, by the several persons in whose names shares of stock stand, the vote
or votes to which those persons are entitled shall be cast as directed by a
majority of those holding such stock and present in person or by proxy at
such meeting, but no votes shall be cast for such stock if a majority cannot
agree.
SECTION 11. VOTING OF SHARES BY CERTAIN HOLDERS. Shares standing
in the name of another corporation may be voted by any officer, agent or proxy
as the bylaws of such corporation may prescribe, or, in the absence of such
provision, as the board of directors of such corporation may determine. Shares
held by an administrator, executor, guardian or conservator may be voted by him
or her, either in person or by proxy, without a transfer of such shares into his
or her name. Shares standing in the name of a trustee may be voted by him or
her, either in person or by proxy, but no trustee shall be entitled to vote
shares held by him or her without a transfer of such shares into his or her
name. Shares standing in the name of a receiver may be voted by such receiver,
and shares held by or under the control of a receiver may be voted by such
receiver without the transfer into his or her name if authority to do so is
contained in an appropriate order of the court or other public authority by
which such receiver was appointed.
<PAGE>
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A shareholder whose shares are pledged shall be entitled to vote such
shares until the shares have been transferred into the name of the pledgee, and
thereafter the pledgee shall be entitled to vote the shares so transferred.
Neither treasury shares of its own stock held by the Savings Bank nor
shares held by another corporation, if a majority of the shares entitled to vote
for the election of directors of such other corporation are held by the Savings
Bank, shall be voted at any meeting or counted in determining the total number
of outstanding shares at any given time for purposes of any meeting.
SECTION 12. NO CUMULATIVE VOTING. Shareholders shall not be
permitted to cumulate their votes for the election of directors.
SECTION 13. INSPECTORS OF ELECTION. In advance of any meeting of
shareholders, the Board may appoint any persons other than nominees for office
as inspectors of election to act at such meeting or any adjournment. The number
of inspectors shall be either one or three. Any such appointment shall not be
altered at the meeting. If inspectors of election are not so appointed, the
Chairman of the Board, or the President may, or on the request of not fewer than
10% of the votes represented at the meeting shall, make such appointment
at the meeting. If appointed at the meeting, the majority of the votes present
shall determine whether one or three inspectors are to be appointed. In case
any person appointed as inspector fails to appear or fails or refuses to act,
the vacancy may be filled by appointment by the Board in advance of the meeting
or at the meeting by the Chairman of the Board or the President.
Unless otherwise prescribed by regulations of the Office, the duties
of such inspectors shall include: determining the number of shares and the
voting power of each share, the shares represented at the meeting, the existence
of a quorum and the authenticity, validity and effect of proxies; receiving
votes, ballots or consents; hearing and determining all challenges and questions
in any way arising in connection with the rights to vote; counting and
tabulating all votes or consents; determining the result; and such acts as may
be proper to conduct the election or vote with fairness to all shareholders.
SECTION 14. NOMINATING COMMITTEE. The Nominating Committee of the
Board shall select the management nominees for election as directors. Except in
the case of a nominee substituted as a result of the withdrawal, death or other
incapacity of a management nominee, the Nominating Committee shall deliver
written nominations to the Secretary at least 20 days prior to the date of the
annual meeting. Upon delivery, such nominations shall be posted in a
conspicuous place in each office of the Savings Bank. No nominations for
directors except those made by the Nominating Committee shall be voted upon at
the annual meeting unless other nominations by shareholders are made in writing
and delivered to the Secretary of the Savings Bank at least five days prior to
the date of the annual meeting. In the event that a person is validly
designated as a nominee in accordance with this Section 14 and shall thereafter
become unwilling or unable to stand for election to the Board, the Board may
designate a substitute nominee upon delivery, not fewer than five days prior to
the date of the meeting for the election of such nominee, of a written notice to
the Secretary of the Savings Bank. Upon delivery, any such nomination by the
shareholders or by the Board shall be posted in a conspicuous place in each
office of the Savings Bank. Ballots bearing the names of all persons nominated
by the
<PAGE>
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Nominating Committee and by shareholders shall be provided for use at the annual
meeting. However, if the Nominating Committee shall fail or refuse to act at
least 20 days prior to the annual meeting, nominations for directors may be made
at the annual meeting by any shareholder entitled to vote and shall be voted
upon.
SECTION 15. NEW BUSINESS. Any new business to be taken up at the
annual meeting shall be stated in writing and filed with the Secretary of the
Savings Bank at least five days before the date of the annual meeting, and all
business so stated, proposed and filed shall be considered at the annual
meeting; but no other proposal shall be acted upon at the annual meeting. Any
shareholder may make any other proposal at the annual meeting and the same may
be discussed and considered, but unless stated in writing and filed with the
Secretary at least five days before the meeting, such proposal shall be laid
over for action at an adjourned, special or annual meeting of the shareholders
taking place 30 days or more thereafter. This provision shall not prevent the
consideration and approval or disapproval at the annual meeting of reports of
officers, directors and committees; but in connection with such reports no new
business shall be acted upon at such annual meeting unless stated and filed as
herein provided.
SECTION 16. INFORMAL ACTION BY SHAREHOLDERS. Any action required
to be taken at a meeting of the shareholders, or any other action that may be
taken at a meeting of shareholders, may be taken without a meeting if consent in
writing, setting forth the action so taken, shall be given by all of the
shareholders entitled to vote with respect to the subject matter.
ARTICLE III
BOARD OF DIRECTORS
SECTION 1. GENERAL POWERS. The business and affairs of the
Savings Bank shall be under the direction of its Board.
SECTION 2. NUMBER AND TERM. The Board shall consist of seven (7)
members and shall be divided into three classes as nearly equal in number as
possible. The members of each class shall be elected for a term of three years
and until their successors are elected and qualified, except when a nominee is
elected (a) for a shorter term to equalize the size of the classes or (b) by the
Board to fill a vacancy on the Board, in which case a director so elected shall
serve until the next election of directors by the shareholders. One class shall
be elected by ballot annually. The Board may by a two-thirds vote of the full
Board increase or decrease the number of directors of the Savings Bank to not
fewer than five nor more than 15, except when a greater number is approved by
the Director of the Office.
SECTION 3. REGULAR MEETINGS. A regular meeting of the Board shall
be held without other notice than this bylaw immediately after, and at the same
place as, the annual meeting of shareholders. The Board may provide, by
resolution, the time and place, within the Savings Bank's normal lending
territory, for the holding of additional regular meetings without other notice
than such resolution.
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SECTION 4. QUALIFICATION. Each director shall at all times be the
beneficial owner of not less than 100 shares of capital stock of the Savings
Bank unless the Savings Bank is a wholly owned subsidiary of a holding company.
SECTION 5. SPECIAL MEETINGS. Special meetings of the Board may be
called by or at the request of the Chairman of the Board, the President or at
least sixty percent (60%) of the directors then in office. The persons
authorized to call special meetings of the Board may fix any place, within the
Savings Bank's normal lending territory, as the place for holding any special
meeting of the Board called by such persons.
SECTION 6. NOTICE. Written notice of any special meeting shall
be given to each director at least twenty-four (24) hours prior thereto when
delivered personally or by overnight courier, telegram, electronic
transmission or fax or at least five days prior thereto when delivered by
mail. Such notice shall be sent to the address at which the director is most
likely to be reached. Such notice shall be deemed to be delivered when
deposited in the mail so addressed with postage prepaid if mailed, when
delivered to the telegraph company if sent by telegram, when transmission is
made if sent by electronic transmission or by fax or when delivered to the
recipient if sent by overnight courier. Any director may waive notice of any
meeting by a writing filed with the Secretary. The attendance of a director
at a meeting shall constitute a waiver of notice of such meeting, except
where a director attends a meeting for the express purpose of objecting to
the transaction of any business because the meeting is not lawfully called or
convened. Neither the business to be transacted at, nor the purpose of, any
meeting of the Board need be specified in the notice or waiver of notice of
such meeting.
SECTION 7. QUORUM. A majority of the number of directors fixed by
Section 2 of this Article III shall constitute a quorum for the transaction of
business at any meeting of the Board; but if less than such majority is present
at a meeting, a majority of the directors present may adjourn the meeting from
time to time. Notice of any adjourned meeting shall be given in the same manner
as prescribed by Section 6 of this Article III.
SECTION 8. MANNER OF ACTING. The act of the majority of the Board
present at a meeting at which a quorum is present shall be the act of the Board,
unless a greater number is prescribed by regulation of the Office or by these
bylaws.
SECTION 9. CONDUCT OF MEETINGS; ATTENDANCE AT MEETINGS BY
CONFERENCE TELEPHONE. Meetings of the Board shall be presided over by the
Chairman of the Board or such other director or officer as the Chairman of the
Board shall designate, and in the absence or incapacity of the Chairman of the
Board, by the President or such other director or officer as the President shall
designate. If both the Chairman of the Board and the President are absent from
any meeting of the Board, the presiding officer shall be the then senior member
of the Board in terms of length of service on the Board (which length of service
shall include length of service on the Board of Directors of any predecessors to
the Savings Bank). The Secretary or, in his or her absence, a person appointed
by the Chairman of the Board (or other presiding person), shall act as secretary
of the meeting. The Chairman of the Board (or other person presiding) shall
conduct all meetings of the Board in accordance with the best interests of the
Savings Bank and shall establish reasonable procedural rules for the conduct of
Board meetings, which procedural rules shall be written and made available to
shareholders upon proper request and for a proper purpose. Any one or more
directors may participate in a meeting of
<PAGE>
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the Board or a committee of the Board by means of a conference telephone or
similar communications equipment allowing all persons participating in the
meeting to hear each other at the same time. Participation by such means shall
constitute presence in person at any such meeting.
SECTION 10. ACTION WITHOUT A MEETING. Any action required or
permitted to be taken by the Board, or by any committee thereof, at a meeting
may be taken without a meeting if a consent in writing, setting forth the action
so taken, shall be signed by all of the members of the Board or of the
committee, as the case may be.
SECTION 11. RESIGNATION. Any director may resign at any time by
sending a written notice of such resignation to the home office of the Savings
Bank addressed to the Chairman of the Board, the President or the Secretary.
Unless otherwise specified, such resignation shall take effect upon receipt by
the Chairman of the Board, the President or the Secretary. More than three
consecutive absences from regular meetings of the Board, unless excused by
resolution of the Board, shall automatically constitute a resignation, effective
when such resignation is accepted by the Board.
SECTION 12. VACANCIES. Any vacancy occurring on the Board may be
filled by the affirmative vote of a majority of the remaining directors although
less than a quorum of the Board. A director elected to fill a vacancy shall be
elected to serve until the next election of directors by the shareholders. Any
directorship to be filled by reason of an increase in the number of directors
may be filled by election by the Board for a term of office continuing only
until the next election of directors by the shareholders.
SECTION 13. COMPENSATION. Directors, as such, may receive a stated
salary for their services. By resolution of the Board, a reasonable fixed sum,
and reasonable expenses of attendance, if any, may be allowed for actual
attendance at each regular or special meeting of the Board. Members of either
standing or special committees may be allowed such compensation for actual
attendance at committee meetings as the Board may determine.
SECTION 14. PRESUMPTION OF ASSENT. A director of the Savings Bank
who is present at a meeting of the Board at which action on any bank matter is
taken shall be presumed to have assented to the action taken unless his or her
dissent or abstention shall be entered in the minutes of the meeting or unless
he or she shall file a written dissent to such action with the person acting as
the secretary of the meeting before the adjournment thereof or shall forward
such dissent by registered mail to the Secretary of the Savings Bank within five
days after the date a copy of the minutes of the meeting is received. Such right
to dissent shall not apply to a director who voted in favor of such action.
SECTION 15. REMOVAL OF DIRECTORS. At a meeting of shareholders
called expressly for that purpose, any director may be removed for cause by a
vote of the holders of a majority of the shares then entitled to vote at an
election of directors. Whenever the holders of the shares of any class are
entitled to elect one or more directors by the provisions of the Savings Bank's
charter or supplemental sections thereto, the provisions of this Section shall
apply, in respect to the removal of a director or directors so elected, to the
vote of the holders of the outstanding shares of that class and not to the vote
of the outstanding shares as a whole.
<PAGE>
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SECTION 16. DIRECTOR EMERITUS. Each director who has served as a
member of the Board who voluntarily resigns or retires as a director shall be
eligible to be elected to the honorary position of director emeritus by vote of
the Board at any meeting and will be privileged to attend all meetings of the
Board but shall not be eligible to vote on any matter.
ARTICLE IV
EXECUTIVE AND OTHER COMMITTEES
SECTION 1. APPOINTMENT. The Board, by resolution adopted by a
majority of the full Board, may designate the Chief Executive Officer and two
or more of the other directors to constitute an executive committee. The
designation of any committee pursuant to this Article IV and the delegation
of authority shall not operate to relieve the Board, or any director, of any
responsibility imposed by law or regulation.
SECTION 2. AUTHORITY. The executive committee, when the Board
is not in session, shall have and may exercise all of the authority of the
board of directors except to the extent, if any, that such authority shall
be limited by the resolution appointing the executive committee; and except also
that the executive committee shall not have the authority of the board of
directors with reference to: the declaration of dividends; the amendment of the
charter or bylaws of the Savings Bank or recommending to the stockholders a plan
of merger, consolidation, or conversion; the sale, lease, or other disposition
of all or substantially all of the property and assets of the Savings Bank
otherwise than in the usual and regular course of its business; a voluntary
dissolution of the Savings Bank; a revocation of any of the foregoing; or the
approval of a transaction in which any member of the executive committee,
directly or indirectly, has any material beneficial interest.
SECTION 3. TENURE. Subject to the provisions of Section 8 of this
Article IV, each member of the executive committee shall hold office until the
next regular annual meeting of the board of directors following his or her
designation and until a successor is designated as a member of the executive
committee.
SECTION 4. MEETINGS. Regular meetings of the executive committee
may be held without notice at such times and places as the executive committee
may fix from time to time by resolution. Special meetings of the executive
committee may be called by any member thereof upon not less than one day's
notice stating the place, date, and hour of the meeting, which notice may be
written or oral. Any member of the executive committee may waive notice of any
meeting and no notice of any meeting need be given to any member thereof who
attends in person. The notice of a meeting of the executive committee need not
state the business proposed to be transacted at the meeting.
SECTION 5. QUORUM. A majority of the members of the executive
committee shall constitute a quorum for the transaction of business at any
meeting thereof, and action of the executive committee must be authorized by the
affirmative vote of a majority of the members present at a meeting at which a
quorum is present.
<PAGE>
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SECTION 6. ACTION WITHOUT A MEETING. Any action required or
permitted to be taken by the executive committee at a meeting may be taken
without a meeting if a consent in writing, setting forth the action so taken,
shall be signed by all of the members of the executive committee.
SECTION 7. VACANCIES. Any vacancy in the executive committee may
be filled by a resolution adopted by a majority of the full Board.
SECTION 8. RESIGNATIONS AND REMOVAL. Any member of the executive
committee may be removed at any time with or without cause by resolution adopted
by a majority of the full board of directors. Any member of the executive
committee may resign from the executive committee at any time by giving written
notice to the president or secretary of the Savings Bank. Unless otherwise
specified, such resignation shall take effect upon its receipt; the acceptance
of such resignation shall not be necessary to make it effective.
SECTION 9. PROCEDURE. The executive committee shall elect a
presiding officer from its members and may fix its own rules of procedure which
shall not be inconsistent with these bylaws. It shall keep regular minutes of
its proceedings and report the same to the Board for its information at the
meeting held next after the proceedings shall have occurred.
SECTION 10. OTHER COMMITTEES. The Board may by resolution establish
an audit, loan, or other committee composed of directors as it may determine
to be necessary or appropriate for the conduct of the business of the Savings
Bank and may prescribe the duties, constitution, and procedures thereof.
ARTICLE V
OFFICERS
SECTION 1. POSITIONS. The officers of the Savings Bank shall be
a President, one or more Vice Presidents, a Secretary and a Treasurer, each
of whom shall be elected by the Board. The Board may also designate the
Chairman of the Board as an officer. The President shall be the chief
executive officer, unless the Board designates the Chairman of the Board as
chief executive officer. The President shall be a director of the Savings
Bank. The offices of the Secretary and Treasurer may be held by the same
person, and a Vice President may also be either the Secretary or the
Treasurer. The Board may designate one or more Vice Presidents as executive
vice president or senior vice president. The Board may also elect or
authorize the appointment of such other officers as the business of the
Savings Bank may require. The officers shall have such authority and perform
such duties as the Board may from time to time authorize or determine. In the
absence of action by the Board, the officers shall have such powers and
duties as generally pertain to their respective offices.
SECTION 2. ELECTION AND TERM OF OFFICE. The officers of the
Savings Bank shall be elected annually at the first meeting of the board of
directors held after each annual meeting of the stockholders. If the election of
officers is not held at such meeting, such election
<PAGE>
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shall be held as soon thereafter as possible. Each officer shall hold office
until a successor has been duly elected and qualified or until the officer's
death, resignation, or removal in the manner hereinafter provided. Election or
appointment of an officer, employee, or agent shall not of itself create
contractual rights. The board of directors may authorize the Savings Bank to
enter into an employment contract with any officer in accordance with
regulations of the Office; but no such contract shall impair the right of the
board of directors to remove any officer at any time in accordance with Section
3 of this Article V.
SECTION 3. REMOVAL. Any officer may be removed by the Board
whenever in its judgment the best interests of the Savings Bank will
be served thereby, but such removal, other than for cause, shall be without
prejudice to the contractual rights, if any, of the person so removed.
SECTION 4. VACANCIES. A vacancy in any office because of death,
resignation, removal, disqualification, or otherwise may be filled by the Board
for the unexpired portion of the term.
SECTION 5. REMUNERATION. The remuneration of the officers shall be
fixed from time to time by the Board.
ARTICLE VI
CONTRACTS, LOANS, CHECKS AND DEPOSITS
SECTION 1. CONTRACTS. To the extent permitted by regulations of
the Office, and except as otherwise prescribed by these bylaws with respect to
certificates for shares, the Board may authorize any officer, employee or agent
of the Savings Bank to enter into any contract or execute and deliver any
instrument in the name of and on behalf of the Savings Bank. Such authority may
be general or confined to specific instances.
SECTION 2. LOANS. No loans shall be contracted on behalf of the
Savings Bank and no evidence of indebtedness shall be issued in its name unless
authorized by the Board. Such authority may be general or confined to specific
instances.
SECTION 3. CHECKS, DRAFTS, ETC. All checks, drafts or other
orders for the payment of money, notes or other evidences of indebtedness issued
in the name of the Savings Bank shall be signed by one or more officers,
employees or agents of the Savings Bank in such manner as shall from time to
time be determined by the Board.
SECTION 4. DEPOSITS. All funds of the Savings Bank not otherwise
employed shall be deposited from time to time to the credit of the Savings Bank
in any duly authorized depositories as the Board may select.
<PAGE>
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ARTICLE VII
CERTIFICATES FOR SHARES AND THEIR TRANSFER
SECTION 1. CERTIFICATES FOR SHARES. Certificates representing
shares of capital stock of the Savings Bank shall be in such form as shall be
determined by the Board and approved by the Office. Such certificates shall be
signed by the chief executive officer or by any other officer of the Savings
Bank authorized by the Board, attested by the Secretary or an assistant
secretary and sealed with the corporate seal or a facsimile thereof. The
signatures of such officers upon a certificate may be facsimiles if the
certificate is manually signed on behalf of a transfer agent or a registrar
other than the Savings Bank itself or one of its employees. Each certificate
for shares of capital stock shall be consecutively numbered or otherwise
identified. The name and address of the person to whom the shares are issued,
with the number of shares and date of issue shall be entered on the stock
transfer books of the Savings Bank. All certificates surrendered to the Savings
Bank for transfer shall be canceled, and no new certificate shall be issued
until the former certificate for a like number of shares has been surrendered
and canceled, except that in the case of a lost or destroyed certificate, a new
certificate may be issued upon such terms and indemnity to the Savings Bank as
the Board may prescribe.
SECTION 2. TRANSFER OF SHARES. Transfer of shares of capital
stock of the Savings Bank shall be made only on its stock transfer books.
Authority for such transfer shall be given only by the holder of record or by
his or her legal representative, who shall furnish proper evidence of such
authority, or by his or her attorney authorized by a duly executed power of
attorney and filed with the Savings Bank. Such transfer shall be made only on
surrender for cancellation of the certificate for such shares. The person in
whose name shares of capital stock stand on the books of the Savings Bank shall
be deemed by the Savings Bank to be the owner for all purposes.
ARTICLE VIII
FISCAL YEAR; ANNUAL AUDIT
The fiscal year of the Savings Bank shall end on the 30th day of June
of each year. The Savings Bank shall be subject to an annual audit as of the
end of its fiscal year by independent public accountants appointed by and
responsible to the Board. The appointment of such accountants shall be subject
to annual ratification by the shareholders.
ARTICLE IX
DIVIDENDS
Subject to the terms of the Savings Bank's charter and the regulations
and orders of the Office, the Board may, from time to time, declare, and the
Savings Bank may pay, dividends on its outstanding shares of capital stock.
<PAGE>
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ARTICLE X
CORPORATE SEAL
The Board shall provide a corporate seal for the Savings Bank, which
shall be two concentric circles between which shall be the name of the Savings
Bank. The year of incorporation or an emblem may appear in the center.
ARTICLE XI
AMENDMENTS
These bylaws may be amended in a manner consistent with regulations of
the Office at any time by a majority vote of the full Board or by a majority
vote of the votes cast by the shareholders of the Savings Bank at any legal
meeting.
ARTICLE XII
INDEMNIFICATION AND INSURANCE
The Savings Bank shall indemnify its directors, officers and employees
in accordance with the following requirements:
SECTION 1. DEFINITIONS AND RULES OF CONSTRUCTION. (a) The
following definitions apply for purposes of this Article XII:
(i) ACTION. The term "action" means any judicial or administrative
proceeding, or threatened proceeding, whether civil, criminal or otherwise,
including any appeal or other proceeding for review;
(ii) COURT. The term "court" includes, without limitation, any court
to which or in which any appeal or any proceeding for review is brought.
(iii) FINAL JUDGMENT. The term "final judgment" means a judgment,
decree or order that is not appealable or as to which the period for appeal
has expired with no appeal taken.
(iv) SETTLEMENT. The term "settlement" includes entry of a judgment
by consent or confession or a plea of guilty or NOLO CONTENDERE.
(b) References in this Article XII to any individual or other person,
including any savings bank, shall include legal representatives, successors and
assigns thereof.
SECTION 2. INDEMNIFICATION. Subject to Sections 3 and 7 of this
Article XII, the Savings Bank shall indemnify any person against whom an action
is brought or threatened because that person is or was a director, officer or
employee of the Savings Bank for:
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(a) Any amount for which that person becomes liable under a judgment
in such action; and
(b) Reasonable costs and expenses, including reasonable attorney's
fees, actually paid or incurred by that person in defending or settling
such action, or in enforcing his or her rights under this Article XII if he
or she attains a favorable judgment in such action.
SECTION 3. REQUIREMENTS FOR INDEMNIFICATION. Indemnification
shall be made to such person under Section 2 of this Article XII only if:
(a) Final judgment on the merits is in his or her favor; or
(b) In case of:
(i) settlement;
(ii) final judgment against him or her; or
(iii) final judgment in his or her favor, other than on the
merits,
if a majority of the disinterested directors of the Savings Bank
determines that he or she was acting in good faith within the scope of
his or her employment or authority as he or she could have reasonably
perceived it under the circumstances and for a purpose he or she could
reasonably have believed under the circumstances was in the best
interests of the Savings Bank or its shareholders.
However, no indemnification shall be made unless the Savings Bank gives the
Office at least 60 days notice of its intention to make such indemnification.
Such notice shall state the facts on which the action arose, the terms of any
settlement and any disposition of the matter by a court. Such notice, a copy
thereof and a certified copy of the resolution containing the required
determination by the Board shall be sent to the Regional Director of the Office,
who shall promptly acknowledge receipt thereof. The notice period shall run
from the date of such receipt. No such indemnification shall be made if the
Director of the Office advises the Savings Bank in writing, within such notice
period, of his or her objection thereto.
SECTION 4. INSURANCE. The Savings Bank may obtain insurance to
protect it and its directors, officers and employees from potential losses
arising from claims against any of them for alleged wrongful acts, or wrongful
acts committed in their capacity as directors, officers or employees. However,
the Savings Bank may not obtain insurance that provides for payment of losses of
any person incurred as a consequence of his or her willful or criminal
misconduct.
SECTION 5. PAYMENT OF EXPENSES. If a majority of the directors of
the Savings Bank concludes that, in connection with an action, any person
ultimately may become entitled to indemnification under this Article XII, the
directors may authorize payment of reasonable costs and expenses, including
reasonable attorneys' fees, arising from the defense or settlement of such
action. Nothing in this Section 5 shall prevent the directors of the Savings
Bank from
<PAGE>
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imposing such conditions on a payment of expenses as they deem warranted and in
the interests of the Savings Bank. Before making advance payment of expenses
under this Section 5, the Savings Bank shall obtain an agreement that the
Savings Bank will be repaid if the person on whose behalf payment is made is
later determined not to be entitled to such indemnification.
SECTION 6. EXCLUSIVENESS OF PROVISIONS. The Savings Bank shall
not indemnify any person referred to in Section 2 of this Article XII or obtain
insurance referred to in Section 4 of this Article XII other than in accordance
with this Article XII.
SECTION 7. STATUTORY LIMITATION. The indemnification provided for
in Section 2 of this Article XII is subject to and qualified by 12 U.S.C.
Section 1821(k).
SECTION 8. SUBSEQUENT LEGISLATION OR REGULATION. If law and
regulations thereunder applicable to federal stock savings banks are amended to
expand the indemnification permitted to directors and officers of the Savings
Bank, then the Savings Bank shall indemnify such persons to the extent permitted
by such applicable law and regulations, as so amended.
<PAGE>
EX-4.3
BIG FOOT FINANCIAL CORP.
INCORPORATED UNDER THE LAWS OF THE STATE OF ILLINOIS
THIS CERTIFIES THAT
is the owner of
FULLY PAID AND NONASSESSABLE SHARES OF
COMMON STOCK, $.01 PAR VALUE PER SHARE, OF
BIG FOOT FINANCIAL CORP.
(the "Corporation"), a corporation formed under the laws of the State of
Illinois. The shares represented by this certificate are transferable only on
the stock transfer books of the Corporation by the holder of record hereof, or
by his duly authorized attorney or legal representative, upon the surrender of
this certificate properly endorsed. This certificate is not valid until
countersigned and registered by the Corporation's transfer agent and registrar.
The shares represented by this certificate are not insured by the Federal
Deposit Insurance Corporation or any other government agency.
IN WITNESS WHEREOF, the Corporation has caused this certificate to be
executed by the facsimile signature of its duly authorized officers and has
caused a facsimile of its corporate seal to be hereunto affixed.
Dated:
By: By:
Secretary President
<PAGE>
BIG FOOT FINANCIAL CORP.
The shares represented by this certificate are issued subject to all the
provisions of the Articles of Incorporation and Bylaws of Big Foot Financial
Corp. (the "Corporation"), as from time to time amended (copies of which are on
file at the principal office of the Corporation), to all of which the holder by
acceptance hereof assents. The following description constitutes a summary of
certain provisions of, and is qualified in its entirety by reference to, the
Articles of Incorporation.
The Articles of Incorporation of the Corporation contain certain
provisions, applicable upon the effective date of 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 under the name Fairfield Savings
Bank, F.S.B. and the concurrent acquisition by the Corporation of all of the
outstanding capital stock of the Bank, that restrict persons from directly or
indirectly acquiring or holding, or attempting to acquire or hold, the
beneficial ownership of in excess of 10% of the outstanding shares of capital
stock of the Corporation entitled to vote generally in the election of directors
("Voting Stock"). The Articles of Incorporation provide that if shares of Common
Stock are beneficially owned, directly or indirectly, by a person who
beneficially owns in excess of 10% of the Voting Stock of the Corporation, the
number of shares in excess of 10%, shall automatically, and without any action
on the part of the holder thereof, be converted into shares of Excess Common
Stock of the Corporation. Shares of Excess Common Stock are identical to shares
of Common Stock except that they are limited to one one-hundredth (1/100) of one
vote per share. In addition, the Corporation is authorized to refuse to
recognize a transfer or attempted transfer of any shares of Voting Stock to any
person who beneficially owns, or who the Corporation believes would become by
virtue of such transfer the beneficial owner of, in excess of 10% of the Voting
Stock. These restrictions are not applicable to underwriters in connection with
a public offering of the common stock, certain reorganization transactions
described in the Articles of Incorporation or to acquisitions of Voting Stock by
the Corporation, any majority-owned subsidiary of the Corporation or any
pension, profit-sharing, stock bonus or other compensation plan maintained by
the Corporation or by a member of a controlled group of corporations or trades
or businesses of which the Corporation is a member for the benefit of the
employees of the Corporation and for any subsidiary, or any trust or custodial
arrangement established in connection with any such plan.
The Articles of Incorporation of the Corporation contain provisions
providing that the affirmative vote of the holders of at least 80% of the Voting
Stock of the Corporation may be required to approve certain business
combinations and other transactions with persons who directly or indirectly
acquire or hold the beneficial ownership of in excess of 10% of the Voting Stock
of the Corporation.
The Corporation will furnish to any shareholder upon written request and
without charge, a statement of the powers, designations, preferences and
relative, participating, optional or other special rights of each class of stock
or series thereof and the qualifications, limitations or restrictions of such
preferences and/or rights. Such request may be made to the Corporation or to its
transfer agent and registrar.
--------------
The following abbreviations when used in the inscription on the face of
this certificate shall be construed as though they were written out in full
according to applicable laws or regulations:
TEN COM - as tenants in common
TEN ENT - as tenants by the entireties
JT TEN - as joint tenants with right of survivorship and
not as tenants in common
UNIF GIFT MIN ACT...................Custodian...................................
(Cust) (Minor)
under Uniform Gifts to Minors Act...............................................
(State)
Additional abbreviations may also be used though not in the above list
For value received, ________________________________________ hereby sell,
assign and transfer unto ___________________________________ shares of Common
Stock evidenced by this Certificate, and do hereby irrevocably constitute and
appoint ___________________________________ as Attorney, to transfer the said
shares on the books of the herein named Corporation, with full power of
substitution.
Date:______________ ______________________________________________________
Signature
______________________________________________________
Signature
NOTICE: The signature to this assignment must
correspond with the name as written upon the
face of the Certificate, in every particular,
without alteration or enlargement, or any
change whatsoever.
-------------
35
<PAGE>
RESTRICTION
[Note: to be used only on certain shares]
The shares, or any interest therein, represented by this certificate may
not be sold or otherwise disposed of, directly or indirectly, by the registered
holder hereof for a period of one year from the date of issuance hereof, except
in the event of the death or judicial declaration of incompetency of the
registered holder.
<PAGE>
THACHER PROFFITT & WOOD
2 WORLD TRADE CENTER
NEW YORK, NEW YORK 10048
October 28, 1996
Big Foot Financial Corp.
1190 RFD
Long Grove, Illinois 60047
Ladies and Gentlemen:
We have acted as special counsel to Big Foot Financial Corp., an Illinois
corporation (the "Corporation"), in connection with the registration under the
Securities Act of 1933, as amended, by the Corporation of an aggregate of
2,512,750 shares of Common Stock, par value $.01 per share (the "Shares"), of
the Corporation, and the related preparation and filing by the Corporation with
the Securities and Exchange Commission of a Registration Statement on Form S-1
(the "Registration Statement"). In rendering the opinions set forth below, we
do not express any opinion concerning law other than the federal law of the
United States and the corporate law of the State of Illinois. In rendering the
opinions hereinafter set forth, as to matters governed by the laws of the State
of Illinois, we have relied, without independent investigation, upon the opinion
of Gomberg, Sharfman, Gold & Ostler, P.C., dated October 28, 1996, a copy of
which is annexed hereto. To the extent that we have relied on the foregoing
opinion, our opinions are subject to the same qualifications, limitations,
assumptions and exceptions set forth therein.
We have examined originals or copies, certified or otherwise identified to
our satisfaction, of such documents, corporate records and other instruments,
and have examined such matters of law, as we have deemed necessary or advisable
for purposes of rendering the opinions set forth below. As to matters of fact,
we have examined and relied upon the representations of the Corporation
contained in the Registration Statement and, where we have deemed appropriate,
representations or certificates of officers of the Corporation or public
officials. We have assumed
<PAGE>
Big Foot Financial Corp.
October 28, 1996
Page 2
the authenticity of all documents submitted to us as originals, the genuineness
of all signatures, the legal capacity of natural persons and the conformity to
the originals of all documents submitted to us as copies. In making our
examination of any documents, we have assumed that all parties, other than the
Corporation, had the corporate power and authority to enter into and perform all
obligations thereunder, and, as to such parties, we have also assumed the due
authorization by all requisite action, the due execution and delivery of such
documents and the validity and binding effect and enforceability thereof.
Based on the foregoing, we are of the opinion that the Shares to be issued
and sold by the Corporation have been duly authorized and, when issued and sold
as contemplated in the Registration Statement and the Plan of Conversion of
Fairfield Savings Bank, F.S.B. (the "Bank"), will be validly issued and
outstanding, fully paid and non-assessable.
In rendering the opinions set forth above, we have not passed upon and do
not purport to pass upon the application of securities or "blue-sky" laws of any
jurisdiction (except federal securities laws).
This opinion is given solely for the benefit of the Corporation and
investors who purchase Shares pursuant to the Registration Statement and may not
be relied upon by any other person or entity, nor quoted in whole or in part, or
otherwise referred to in any document without our express written consent.
We consent to the filing of this opinion as an Exhibit to the Corporation's
Registration Statement and to the Bank's Application for Conversion on Form AC
(the "Form AC") and to the reference to our firm under the headings "The
Conversion--Effects of Conversion--Tax Aspects" and "Legal Matters" in the
prospectus which is part of such Registration Statement and to the reference to
our firm in the Form AC.
Very truly yours,
THACHER PROFFITT & WOOD
By /s/ Robert C. Azarow
Robert C. Azarow
<PAGE>
[LETTERHEAD OF GOMBERG, SHARFMAN, GOLD AND OSTLER, P.C.]
October 28, 1996
Thacher Proffitt & Wood
1500 K Street, N.W.
Washington, D.C. 20005
RE: Big Foot Financial Corp., an Illinois Corporation
Gentlemen:
We have acted as special counsel to Big Foot Financial Corp., an Illinois
corporation (the "Corporation"), in connection with the incorporation in the
State of Illinois of the Corporation. Your firm is acting as special counsel for
the Corporation in connection with the registration under the Securities Act of
1933, as amended, by the Corporation of an aggregate of 2,512,750 shares of
Common Stock, par value $.01 per share (the "Shares"), of the Corporation, and
the related preparation and filing by the Corporation with the Securities and
Exchange Commission of a Registration Statement on Form S-1 (the "Registration
Statement"). In rendering the opinions set forth below, we do not express any
opinion concerning law other than the corporate law of the State of Illinois.
We have examined originals or copies, certified or otherwise identified to
our satisfaction, of such documents, corporate records and other instruments,
and have examined such matters of law, as we have deemed necessary or advisable
for purposes of rendering the opinions set forth below. As to matters of fact,
we have examined and relied upon the representations of the Corporation
contained in the Registration Statement and, where we have deemed appropriate,
representations or certificates of officers of the Corporation or public
officials. We have assumed the authenticity of all documents submitted to us as
originals, the genuineness of all signatures, the legal capacity of natural
persons and the conformity to the originals of all documents submitted to us as
copies. In making our examination of any documents, we have assumed that all
parties, other than the Corporation, had the corporate power and authority to
enter into and perform all obligations thereunder, and, as to such parties, we
have also assumed the due authorization by all requisite action, the due
execution and delivery of such documents and the validity and binding effect and
enforceability thereof.
Based on the foregoing, we are of the opinion that the Shares to be issued
and sold by the Corporation have been duly authorized and, when issued and sold
as contemplated in the Registration Statement and the Amended and Restated Plan
of Conversion of Fairfield Savings Bank, F.S.B. (the "Bank"), will be validly
issued and outstanding, fully paid and non-assessable.
<PAGE>
Thacher, Proffitt & Wood
October 28, 1996
Page 2
In rendering the opinion set forth above, we have not passed upon and do
not purport to pass upon the application of securities or "blue-sky" laws of any
jurisdiction or any federal securities law.
This opinion is given solely for the benefit of the Corporation and
investors who purchase Shares pursuant to the Registration Statement and may not
be relied upon by any other person or entity, nor quoted in whole or in part, or
otherwise referred to in any document without our express written consent.
However, this opinion may be relied upon by Thacher Proffitt & Wood in regard to
the effect of Illinois Corporate law on the transaction described above.
We consent to the filing of this opinion as an Exhibit to the Corporation's
Registration Statement and to the Bank's Application for Conversion on Form AC
(the "Form AC") and to the reference to our firm under the heading "Legal
Matters" in the prospectus which is part of such Registration Statement and to
the reference to our firm in the Form AC.
In the event that you have any questions in regard to this letter, please
do not hesitate to contact the undersigned.
Very truly yours,
GOMBERG, SHARFMAN, GOLD AND OSTLER, P.C.
/s/ Gomberg, Sharfman, Gold and Ostler, P.C.
<PAGE>
EX-8.1
Opinion of Thacher Proffitt & Wood
(212) 912-7633
October 28, 1996
Fairfield Savings Bank F.S.B.
1190 RFD
Long Grove, Illinois 60047-7304
Dear Sirs:
You have requested our opinion regarding certain federal income tax
consequences of the proposed conversion of Fairfield Savings Bank, F.S.B. (the
"Bank") from a federally chartered mutual savings bank to a federally chartered
stock savings bank (the "Conversion"), the sale of all of the outstanding
capital stock of the Bank to Big Foot Financial Corp., an Illinois corporation
(the "Company"), and the sale by the Company of up to 2,512,750 shares of its
common stock, par value of $.01 per share (the "Common Stock") to the Bank's
Eligible Account Holders, Employee Plans, Supplemental Eligible Account Holders,
Other Members and Bank Employees, and to certain other parties, pursuant to the
Plan of Conversion of Fairfield Savings Bank, F.S.B., adopted by the Board of
Directors of the Bank on May 21, 1996, as amended (the "Plan"). These and
related transactions are described in the Plan and in the prospectus included in
the Company's Registration Statement filed on Form S-1 with the Securities and
Exchange Commission in connection with the Conversion (the "Prospectus"). We are
rendering this opinion pursuant to Article VI of the Plan. All capitalized terms
used but not defined in this letter shall have the meanings set forth in the
Plan or Prospectus.
In connection with the opinions expressed below, we have examined and
relied upon originals, or copies certified or otherwise identified to our
satisfaction, of the Plan and the Prospectus and of such corporate records of
the Bank and the Company as we have deemed appropriate. We have also relied,
without independent verification, upon the October 28, 1996 letter of the Bank
and the Company to Thacher Proffitt & Wood containing certain representations.
We have assumed that the Bank, the Company and other parties will act in
accordance with the Plan, and that the representations made by the Bank and the
Company in the foregoing letter are true. In addition, we have made such
investigations of law as we have deemed appropriate to form a basis for the
opinions expressed below.
<PAGE>
Fairfield Savings Bank, F.S.B.
October 28, 1996 Page 2.
Based on and subject to the foregoing, it is our opinion that, for federal
income tax purposes, under current law:
1. 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 of
1986, and neither the Bank nor the Company will recognize any gain or loss as a
result of the Conversion.
2. 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 in the Conversion, or by the
Company upon the purchase of shares of Common Stock pursuant to the Plan.
3. 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, and interests in the liquidation account of, the Bank in its stock
form in exchange for their deposit accounts in the Bank in its mutual form.
4. The tax basis of the depositors' deposit accounts in the Bank in its
stock form immediately after the Conversion will be the same as the basis of
their deposit accounts in the Bank in its mutual form immediately prior to the
Conversion.
5. The tax basis of each Eligible Account Holder's and each Supplemental
Eligible Account Holder's interest in the liquidation account of the Bank will
be zero.
6. 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 pursuant to such
subscription rights is equal to the fair market value of such stock.
7. The tax basis to the stockholders of the shares of Common Stock
purchased in the Conversion pursuant to the subscription rights will be the
amount paid therefor, and the holding period for such shares of Common Stock
will begin on the date on which such subscription rights are exercised.
In rendering opinion 6, above, and our opinion regarding the tax basis of
shares of Common Stock in 7, above, we have relied, without independent
verification, on the opinion of Capital Resources Group, Inc. that the
nontransferable subscription rights have no value.
Except as set forth above, we express no opinion to any party as to the tax
consequences, whether federal, state, local or foreign, of the Conversion or of
any transaction related thereto or contemplated by the Plan. This opinion is
given solely for the benefit of the parties to the Plan and Eligible Account
Holders, Supplemental Eligible Account Holders and other investors who purchase
shares pursuant to the Company's Registration Statement on Form S-1 (the
"Registration Statement"), and may not be relied upon by any other party or
entity or referred to in any document without our
<PAGE>
Fairfield Savings Bank, F.S.B.
October 28, 1996 Page 3.
express written consent. We consent to the filing of this opinion as an exhibit
to the Registration Statement and to the Application for Conversion on Form AC
of the Bank.
Very truly yours,
THACHER PROFFITT & WOOD
By: s/ Albert J. Cardinali
Albert J. Cardinali
AJC:ajc
<PAGE>
EX-10.7
FAIRFIELD SAVINGS BANK
PROFIT SHARING AND SAVINGS PLAN
(As amended and restated effective August 1, 1989)
Kirkland & Ellis
Chicago
<PAGE>
CERTIFICATE
I, Barbara J. Urban, Secretary of Fairfield Savings Bank, hereby certify
that the attached document is a correct copy of Fairfield Savings Bank Profit
Sharing and Savings Plan, as amended and restated effective August 1, 1989, and
as in effect on the date hereof.
Dated this 2nd day of March, 1993.
By________________________________
Secretary as Aforesaid
(Corporate Seal)
<PAGE>
FAIRFIELD SAVINGS BANK
PROFIT SHARING AND SAVINGS PLAN
(As amended and restated effective August 1, 1989)
Table of Contents
PAGE
----
ARTICLE 1.................................................................. 1
Introduction......................................................... 1
Purpose of the Plan, Effective Date............................ 1
Plan Administrator, Plan Year.................................. 1
The Trust...................................................... 1
The Employers.................................................. 2
Supplements.................................................... 3
Plan Benefits For Participants Who Terminated Employment
Prior to August 1, 1989...................................... 3
ARTICLE 2.................................................................. 3
Plan Participation................................................... 3
Eligibility.................................................... 3
Eligibility Service............................................ 4
Hours of Service............................................... 4
Leave of Absence............................................... 6
Notice of Participation........................................ 6
ARTICLE 3.................................................................. 6
Participant Contributions............................................ 6
Salary Deferral Contributions.................................. 6
Voluntary Contributions........................................ 7
Form of Participant Contributions.............................. 8
Variation, Discontinuance and Resumption of Participant
Contributions ............................................... 8
Earnings....................................................... 9
Rollover Contributions......................................... 10
Transferred Benefits........................................... 11
Restricted Participation with Respect to Rollover Contributions
and Transferred Benefits..................................... 11
ARTICLE 4.................................................................. 12
Employers' Contributions............................................. 12
Employers' Contributions....................................... 12
<PAGE>
Payment of Employers' Contributions............................ 12
Verification of Employers' Contributions....................... 13
ARTICLE 5.................................................................. 13
Plan Accounting and Investment Funds................................. 13
Participant Account Balances................................... 13
Investment or Account Balances................................. 14
Investment Funds............................................... 15
Investment Directions.......................................... 16
Manner of Making Investment Directions......................... 16
Directed Investment Election at Age 60......................... 16
Plan Expenses.................................................. 18
Accounting Dates............................................... 18
Date of Crediting Contributions and Forfeitures................ 18
Allocation of Employer Contributions and Forfeitures........... 19
Adjustment of Participants' Accounts........................... 20
Statement of Accounts.......................................... 21
ARTICLE 6.................................................................. 21
Top-Heavy Plan Rules................................................. 21
Key Employees.................................................. 21
Top-Heavy Plan................................................. 22
Aggregation Groups............................................. 23
Special Top-Heavy Vesting Schedule............................. 24
Minimum Contributions and Benefits............................. 25
ARTICLE 7.................................................................. 25
Distribution of Account Balances..................................... 25
Retirement, Death or Disability................................ 25
Resignation or Dismissal....................................... 26
Forfeitures.................................................... 28
Methods of Benefit Payment..................................... 28
Selection of Time and Manner of Benefit Payment................ 29
Limitations on Time of Benefit Payment......................... 30
Designated Beneficiaries....................................... 31
Payment to Substitute Beneficiaries............................ 31
Payment With Respect to Incapacitated Participants or
Beneficiaries ............................................... 33
Final Court Orders............................................. 33
ARTICLE 8.................................................................. 33
Withdrawals and Loans During Employment.............................. 33
Withdrawals From Voluntary Contribution Account, Rollover
Account, and Employer Contribution Account................... 33
ii
<PAGE>
Hardship Withdrawals........................................... 34
Withdrawals After Age 59-1/2 or Permanent Disability........... 35
Complete Withdrawal of Participant's Account After Age 60...... 35
Loans to Participants.......................................... 36
No Representation Regarding Tax Effect of Withdrawals or Loans. 38
ARTICLE 9.................................................................. 38
Reemployment......................................................... 38
Rehired Employee or Participant................................ 38
Reinstatement of Forfeitures................................... 39
ARTICLE 10................................................................. 40
Maximum Contributions................................................ 40
Contribution Limitations....................................... 40
Participant Covered by Defined Contribution Plan............... 41
Participant Covered by Defined Contribution Plan and Defined
Benefit Plan................................................. 42
Distribution of Excess Deferrals............................... 44
Highly Compensated Employee.................................... 44
Limitations on Elective Contributions.......................... 46
Limitation on Employee and Matching Contributions.............. 49
Multiple Use Limitation........................................ 53
ARTICLE 11................................................................. 54
Plan Administrator................................................... 54
Plan Administrator's Duties.................................... 54
Action by Plan Administrator................................... 55
Information Required for Plan Administration................... 55
Decision of Plan Administrator Final........................... 56
Review of Benefit Determinations............................... 56
Uniform Rules.................................................. 57
Plan Administrator's Expenses.................................. 57
Interested Plan Administrator.................................. 57
Resignation or Removal of Plan Administrative Committee Members 57
Indemnification................................................ 58
ARTICLE 12................................................................. 58
Relating to the Employers............................................ 58
Action by Employers............................................ 58
Additional Employers........................................... 58
Restrictions on Reversions..................................... 59
ARTICLE 13................................................................. 59
Amendment, Termination or Plan Merger................................ 59
iii
<PAGE>
Amendment...................................................... 59
Termination.................................................... 60
Plan Merger.................................................... 61
Continuation by a Successor or Purchaser....................... 61
Notice to Participants of Amendments, Terminations or Plan
Mergers ..................................................... 62
Vesting and Distribution on Termination........................ 62
ARTICLE 14................................................................. 62
General Provisions................................................... 62
Examination of Plan Documents.................................. 62
Notices........................................................ 62
Nonalienation of Plan Benefits................................. 63
No Employment Guarantee........................................ 63
Participant Litigation......................................... 63
Successors..................................................... 64
Adequacy of Evidence........................................... 64
Gender and Number.............................................. 65
Waiver of Notice............................................... 65
Applicable Law................................................. 65
Severability................................................... 65
Fiduciary Responsibilities..................................... 65
iv
<PAGE>
FAIRFIELD SAVINGS BANK
PROFIT SHARING AND SAVINGS PLAN
(As amended and restated effective August 1, 1989)
ARTICLE 1
Introduction
1.1 Purpose of the Plan, Effective Date. The Fairfield Savings Bank Profit
Sharing and Savings Plan (the "plan") as maintained by the Fairfield Savings
Bank (the "Bank") constitutes an amendment, restatement and continuation of such
plan, effective as of August 1, 1989 (the "effective date"). The name of the
plan prior to the effective date was the Fairfield Savings and Loan Association
Thrift Incentive and Profit Sharing Plan. The plan is maintained by the Bank and
other related companies which adopt the plan with the Bank's consent in order to
stimulate interest, initiative, and increased efficiency among plan
participants; to encourage plan participants to set aside funds for retirement;
to share with plan participants the economic benefits produced by their efforts;
and to assist in providing plan participants with retirement benefits.
1.2 Plan Administrator, Plan Year. The plan is administered by a plan
committee (the "plan administrator") whose members shall be appointed by the
Board of Directors of the Bank. Article 11 describes certain powers, duties and
responsibilities of the plan administrator with respect to the administration of
the plan. The plan is administered on the basis of a plan year which begins each
year on August 1 and ends on the next following July 31.
1.3 The Trust. The assets of the plan are held and invested by one or more
trustees (the "trustee") and may be held and invested by one or more investment
managers or insurance institutions acting and appointed for such purposes in
accordance with one or more trust agreements
1
<PAGE>
(the "trust") which implement and form a part of the plan. Reference to the
trust fund shall include all assets including any insurance policies held by the
trustee, investment managers, and insurance institutions in accordance with the
trust and this plan.
1.4 The Employers. With the consent of the Bank, the plan may be adopted in
accordance with the provisions of section 12.2 by any subsidiary of the Bank or
any related company for the benefit of its eligible employees. For this purpose,
a "subsidiary" means any corporation more than 50 percent of the voting stock of
which is directly or indirectly owned by the Bank and a "related company" means
any corporation (other than the Bank and its subsidiaries) more than 50 percent
of the voting stock of which is directly or indirectly owned by any corporation
or any person or group of persons who directly or indirectly own more than 50
percent of the voting stock of the Bank. The Bank and its subsidiaries and
related companies that adopt the plan are referred to herein collectively as the
"employers" and individually as an "employer". The term "Fairfield Companies"
includes the employers and all subsidiaries and related companies that have not
adopted the plan (and each such corporation is sometimes referred to herein
individually as a "Fairfield Company"). Any corporation which is not an employer
under the plan and which does not qualify as a subsidiary or related company,
but is a member of a controlled group of corporations (within the meaning of
Section 1563(a) of the Internal Revenue Code of 1986, as amended (the "Code"),
determined without regard to Sections 1563(a)(4) and 1563(e)(3)(C) thereof)
which contains an employer under the plan or a member of an affiliated service
group (as defined in Section 414(m) of the Code) which contains an employer
under the plan shall, for purposes of the plan, be considered as a subsidiary or
related company that has not adopted the plan.
2
<PAGE>
1.5 Supplements. From time to time supplements may by amendment be attached
to and form a part of this plan and shall be given the same effect that such
provision would have if it was incorporated within the basic text or the plan.
Such supplements may modify or supplement the provisions of the plan as they
apply to particular groups of employees or groups of participants, shall specify
the persons affected by such supplements and shall supersede the other
provisions of the plan to the extent necessary to eliminate inconsistencies
between the plan provisions and the provisions of such supplements.
1.6 Plan Benefits For Participants Who Terminated Employment Prior to
August 1, 1989. To the extent permitted by law, the benefits provided hereunder
with respect to any participant who retired or whose employment terminated prior
to August 1, 1989, will, except as otherwise specifically provided herein, be
governed in all respects by the terms of the plan as in effect on the date of
the participant's retirement or other termination of employment.
ARTICLE 2
Plan Participation
2.1 Eligibility. Each employee of an employer who was a participant in the
plan immediately prior to the effective date shall continue to participate in
the plan on and after the effective date in accordance with the terms of the
plan until such employee's participation ceases in accordance with the plan.
Each other employee of an employer will become a participant in the plan as of
the later of the effective date, or the August 1 or February l coincident with
or next following date he meets both of the following requirements:
(a) He is a "covered employee" (that is, he is a member of a group of
employees of an employer to which the plan has been and continues to be
extended by his employer either unilaterally or by collective bargaining);
and
3
<PAGE>
(b) He has completed one year or eligibility service (as defined in
section 2.2).
2.2 Eligibility Service. An employee of an employer shall be credited with
one year of eligibility service if he completes 1,000 or more hours of service
(as defined in section 2.3) in the twelve consecutive month period commencing on
the date his last period of employment with the Fairfield Companies commenced or
an anniversary of such date.
2.3 Hours of Service. An "hour of service" as used in the plan means:
(a) Each hour for which an employee is directly or indirectly
compensated or entitled to be compensated for his performance of duties for
any Fairfield Company as an employee (with each overtime hour being taken
into account as if it were a normal work hour);
(b) Each hour for which an employee is directly or indirectly
compensated or entitled to be compensated by a Fairfield Company with
respect to a period of time during which no duties are performed
(irrespective of whether the employment relationship has terminated) due to
vacation, holiday, illness, incapacitation (including disability), layoff,
military duty or leave of absence (as defined in section 2.4); provided,
however, that not more than 501 hours of service shall be credited to an
employee on account of any single continuous period during which he
performs no duties and an employee shall not be credited with hours of
service under this subsection for any period during which he performs no
duties (i) if such employee's compensation for such period is in the form
of payments made or due under a plan maintained solely for the purpose of
complying with applicable worker's compensation, unemployment compensation
or state disability insurance laws, (ii) if such employee's compensation
for such period constitutes reimbursement for medical or medically related
expenses incurred by the employee, or (iii) if such employee's compensation
for such period is paid to the employee while on maternity or paternity
leave of absence (as described in section 2.4(b) below), provided credit
for such period is granted in accordance with subsection (c) below; and
(c) Each other hour required by federal law to be counted as an "hour
of service," including (i) each such hour for which back pay, irrespective
of mitigation of damages, is either awarded or agreed to by a Fairfield
Company, and (ii) each such hour for which an employee is on maternity or
paternity leave of absence, but only for purposes of preventing the
employees from incurring a one-year break-in-service; provided, however,
that not more than 501 hours of service shall be credited for payments of
back pay, to the extent that such back pay is awarded for a period of time
4
<PAGE>
during which the employee did not or would not have performed duties as an
employee, and not more than 501 hours of service shall be credited by
reason of a maternity or paternity leave of absence.
Compensated hours described in subsection (b) above shall be determined by
multiplying the number of scheduled work days during the applicable period for
which the employee is compensated by the number of hours in the average
scheduled work day (based on the scheduled work week for his job classification
then in effect, provided, however, that in the case of an employee without a
regular work schedule, such hours shall be computed on the basis of a 40 hour
work week). Hours described in subsection (c) above for employees on maternity
or paternity leave of absence shall be determined in the same manner as
compensated hours. In determining hours of service, hours shall be credited for
the period in which such duties were performed (regardless of when payment is
due) or for which such compensation was paid and for this purpose the rules for
crediting hours of service set forth in Section 2530.200b-2 of the Department of
Labor regulations are hereby incorporated by reference; provided that hours of
service credited under subsection (c) above for a maternity or paternity leave
of absence shall be credited to the year in which such maternity or paternity
leave begins if such hours are required to prevent a break in service from
occurring in such year, or if not so required in that year, such hours shall be
credited in the immediately following year. In construing the foregoing
provisions of this section, ambiguities shall be resolved in favor of crediting
employees with hours of service.
2.4 Leave of Absence. A "leave or absence" as used in the plan means:
(a) A leave of absence required by law or granted by a Fairfield
Company on account of service in military or governmental branches
described in any applicable statute granting reemployment rights to
employees who enter such branches, or any other military or governmental
branch designated by a Fairfield Company;
5
<PAGE>
(b) A leave or absence for any period the employee is absent from work
by reason of the employee's pregnancy, the birth of the child of the
employee, the placement of a child with the employee in connection with the
adoption of the child by the employee or the caring for the child for a
period beginning immediately after such birth or placement; and
(c) Any other absence from active employment with a Fairfield Company
that is approved by such Fairfield Company and not treated by it as a
termination of employment.
Leaves of absence granted by a Fairfield Company will be governed by rules
uniformly applied to all employees of that Fairfield Company similarly situated.
2.5 Notice of Participation. Each employee will be notified of the date he
becomes a plan participant, and each participant and other person receiving
benefits under the plan will be furnished with a copy of a summary plan
description.
ARTICLE 3
Participant Contributions
3.1 Salary Deferral Contributions. Subject to the conditions and
limitations of this Article 3 and Article 10, for each plan year each active
participant may elect to defer receipt of his compensation in an amount equal to
not less than one percent nor more than fifteen percent (or such lower maximum
percentage as determined by the plan administrator for any plan year), of his
earnings for such plan year and his employer shall, in accordance with
subsection 4.1(b), contribute the amount of such salary deferral to the plan as
a salary deferral contribution. Notwithstanding any provision contained herein
to the contrary a participant's aggregate salary deferral contributions to this
plan and to any other plan maintained by a Fairfield Company in which such
participant participates may not exceed $7,000 (or such other maximum amount as
may be permitted from time to time by the Secretary of the Treasury or the
Secretary's delegate or by law) in any calendar year. Salary deferral
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contributions elected and made on behalf of a participant for a plan year which
are not less than one percent or in excess of six percent of his earnings for
such plan year shall be considered his "basic salary deferral contributions"
which are eligible for the employer matching contributions under subsection
4.1(a); provided, however, that if the participant elects to make a voluntary
contribution pursuant to section 3.2, his basic salary deferral contribution and
voluntary contribution that will be subject to the employer matching
contribution shall not exceed six percent of his earnings for such plan year.
The salary deferral contributions made on behalf of a participant and the
earnings thereon shall be fully vested and nonforfeitable at all times. Each
participant shall initially elect a rate of salary deferral contributions by
filing a written election with the plan administrator on such forms, in such
manner and at such times a plan administrator shall require. Completion of such
election form shall evidence the participant's authorization of his employer to
reduce his compensation and accordingly his agreement (until subsequently
modified by such participant as permitted by section 3.4) to have salary
deferral contributions made on his behalf at his chosen rate.
3.2 Voluntary Contributions. In addition to, or in lieu of, the salary
deferral contributions permitted under section 3.1, any participant may elect to
make voluntary contribu- tions in an amount of not less than one percent nor
more than sixteen percent of the participant's earnings for such plan year;
provided, however, no participant may make contributions equal to or in excess
of the amount which will cause the limitation of Article 10 to be exceeded. The
employer matching contribution (as set forth in subsection 4.1(a) will only be
applied to basic salary deferral contributions and voluntary contributions that
in the aggregate do not exceed six percent of the participant's earnings for
such plan year.
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3.3 Form of Participant Contributions. All participant salary deferral
contributions and voluntary contributions shall be made by payroll deduction (or
periodically corresponding to payroll deduction) or by any other method approved
by the plan administrator. The plan administrator may adopt appropriate
regulations, procedures or forms pertaining to participant contributions.
Participant contributions shall be paid to the trust as soon as practicable
after the date made or deducted.
3.4 Variation, Discontinuance and Resumption of Participant Contributions.
Effective as of any payroll period which commences at least 30 days (or such
other time period as specified by the plan administrator) following receipt by
the plan administrator of an election form satisfactory to the plan
administrator for this purpose, a participant eligible to make salary deferral
contributions and voluntary contributions may revise the rate that such
contributions are made by payroll deduction. A participant may elect to
discontinue making all such contributions as of any regularly scheduled payday
of his employer by filing an election form with the plan administrator at least
ten regularly scheduled work days of his employer prior to such payday. A
participant who has discontinued making some or all contributions hereunder may
resume making such contributions by filing an election form with the plan
administrator at least 30 days (or such other time period as specified by the
plan administrator) prior to the payroll period as of which date such
contributions shall resume. Any elections made in accordance with this section
shall be made on a form provided by the plan administrator for such purposes and
shall be signed by the participant.
3.5 Earnings. For purposes of the plan, a participant's "earnings" means
such participant's compensation for services rendered to the employers as a
covered employee, but excluding bonuses and overtime pay and the following:
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(a) Any amounts contributed by the employers for the participant's
benefit to this plan or any other profit sharing, pension, stock bonus or
other retirement or benefit plan maintained by the employers; provided,
however, any amounts contributed under a salary reduction arrangement under
Sections 125 or 401(k) of the Code shall be considered as earnings;
(b) Any reimbursements for travel expenses, relocation allowances,
educational assistance allowances and awards or other special allowances,
and any amounts included in taxable income under any group insurance
program;
(c) Any severance pay paid as a result of the participant's
termination of employment;
(d) Any compensation paid or payable to the participant, or to any
governmental body or agency on account of the participant, under the terms
of any state, federal or foreign law requiring the payment of such
compensation because of the participant's voluntary or involuntary
termination of employment with any Fairfield Company; and
(e) Any compensation pale or payable to the participant which is in
excess of $200,000 (or such other amount as may be determined from time to
time by the Secretary of Treasury or his delegate or by law). In
determining a participant's earnings for purposes of the foregoing
limitation in any plan year, the family aggregation rules under Section
414(q)(6) of the Code shall apply, except that in applying such rules, the
term "family" shall include only the spouse of the participant and any
lineal descendants of the participant who have not attained age 19 before
the end of the plan year for which earnings are being determined. If, as a
result of the application of such rules the adjusted $200,000 limitation is
exceeded, then the limitation shall be prorated among the affected
individuals in proportion to each such individual's compensation as
determined under this section prior to the application of this limitation.
Unless otherwise provided, for purposes or the limitations set forth in Article
10, a participant's compensation shall mean the remuneration (both cash and non
cash) for which the employer is required to report to the participant for the
plan year ("Box 10 Compensation"), plus amounts contributed pursuant to a salary
reduction agreement under Sections 125 or 401(k) of the Code.
3.6 Rollover Contributions. The plan administrator may, in its discretion
permit
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any covered employee to make a qualifying rollover contribution to the plan. A
"qualifying rollover contribution" means the contribution to the plan by an
employee of:
(i) A portion or all of a qualifying total distribution (as defined in
Section 402(a)(5)(E)(i) of the Code); provided, however, that the portion,
if any, of a qualifying total distribution consisting of nondeductible
employee contributions may not be contributed to the plan; or
(ii) a rollover contribution (as defined in Section 408(d)(3) of the
Code).
A qualifying rollover contribution to be made by a covered employee must be
made to the trust, in care of the plan administrator, by not later than the
sixtieth day following the day upon which the employee received the qualifying
total distribution or rollover contribution with respect to which the qualifying
rollover contribution is to be made. The plan administrator shall refuse to
permit the contribution to the plan of property other than money (and shall
require instead that the property be sold and the proceeds contributed). If an
employee makes a qualifying rollover contribution on a date other than an
accounting date (as defined in section 5.8), a segregated account shall be
established on such date on his behalf until the next accounting date under the
plan to reflect the income, losses, appreciation and depreciation attributable
thereto until such accounting date. A participant's qualifying rollover
contribution shall be credited to the participant's rollover account (as defined
in subsection 5.1(f)) as of the accounting date coincident with or next
following the date the contribution is made.
3.7 Transferred Benefits. If a covered employee had previously participated
in any other qualified pension, profit sharing, stock bonus or other retirement
or employee benefit plan and such other plan permits the transfer to this plan
of the vested portion of the covered employee's benefits under such other plan,
and if so directed by the plan administrator in its discretion, the trustee
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shall accept a transfer of cash to this plan equal to the vested benefits of
such employee under such other plan which are being transferred to this plan. No
amounts shall be transferred to this plan from any other plan if the accrued
benefit payable to the employee under such other plan must be provided in the
form of a qualified joint and survivor annuity or if a qualified preretirement
survivor annuity must be provided to the surviving spouse of such employee with
respect to such accrued benefit. If the date on which such transfer is received
by the trustee is not an accounting date, a segregated account shall be
established on such date on behalf of the covered employee until the next
accounting date under the plan to reflect the income, losses, appreciation and
depreciation attributable thereto until such accounting date. The participants
transferred benefits (as adjusted to reflect the investment experience of a
segregated account, if initially credited to a segregated account) shall be
credited to his rollover account as of the accounting date coincident with or
next following the date the transfer is made.
3.8 Restricted Participation with Respect to Rollover Contributions and
Transferred Benefits. For purposes of the plan, a participant with respect to
whom a qualifying rollover contribution or a transfer of benefits is made in
accordance with section 3.6 or 3.7, respectively, shall not be eligible to make
salary deferral contributions or voluntary contributions or have matching
employer contributions made on his behalf before becoming a participant for all
purposes of the plan in accordance with sections 2.1.
ARTICLE 4
Employers' Contributions
4.1 Employers' Contributions. Each plan year beginning on or after the
effective date and subject to the conditions and limitations of this Article 4
and Article 10, each employer will
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make a contribution under the plan for each active participant employed by it
during that plan year in an amount equal to the sum of the following:
(a) Employer Matching Contributions. With respect to each participant
who elects to make basic salary deferral contributions or voluntary
contributions, or both, to the plan, the employers shall make a matching
contribution, on behalf of each such participant equal to 25 percent of the
amount of basic salary deferral contributions and voluntary contributions
which such participant has made up to a maximum matching contribution of
1.50 percent of a participant's compensation (i.e., aggregate contributions
not in excess of six percent of the participant's earnings). The employer
matching contribution shall first be applied to the basic salary deferral
contribution and then to the voluntary contribution to the extent such
basic salary deferral contribution does not exceed six percent of the
participant's earnings for such plan year.
(b) Salary Deferral Contributions. 100 percent of the salary deferral
contribution (as defined in section 3.1, including the participant's basic
salary deferral contribution) elected by the participant for that plan
year.
(c) Basic Profit Sharing Contribution. An amount equal to two percent
of each participant's earnings for that plan year.
(d) Discretionary Profit Sharing Contribution. An amount as the Bank
shall determine, if any.
4.2 Payment of Employers' Contributions. Each employers' contribution under
the plan to be made in accordance with section 4.1 above for any plan year shall
be paid to the trust (as described in section 1.3) implementing the plan,
without interest, no later than the time for filing the employer's federal
income tax return, (including any extensions) for the taxable year in which such
plan year ends.
4.3 Verification of Employers' Contributions. The certificate of an
independent accountant selected by the Bank as to the correctness of any amounts
or calculations relating to the employers' contributions under the plan for any
plan year shall be conclusive on all persons.
ARTICLE 5
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Plan Accounting and Investment Funds
5.1 Participant Account Balances. The plan administrator will establish and
maintain the following separate accounts with respect to plan participants:
(a) Salary Deferral Contribution Account. A "salary deferral
contribution account" shall be maintained on behalf of each participant.
With respect to any plan participant, this account shall represent the
amount of salary deferral contributions made on the participant's behalf
and the earnings, expenses, appreciation and depreciation attributable to
such contributions under the plan.
(b) Employer Matching Contribution Account. An "employer contribution
account" shall be maintained on behalf of each participant. With respect to
any plan participant, this account shall represent the portion of an
employer's matching contributions and any forfeitures which are allocated
for his benefit and the earnings, expenses, appreciation and depreciation
attributable to such contributions under the plan.
(c) Discretionary Profit Sharing Contribution Account. A
"discretionary profit sharing contribution account" shall be maintained and
behalf of each participant. With respect to any plan participant, this
account shall represent the portion of the discretionary profit sharing
contributions and any forfeitures which are allocated for his benefit and
the earnings, expenses, appreciation and depreciation attributable to such
contributions under the plan.
(d) Basic Profit Sharing Contribution Account. A "basic profit sharing
contribution account" shall be maintained on behalf of each participant.
With respect to any plan participant, this account shall represent the
portion of the basic profit sharing contributions and any forfeitures which
are allocated for his benefit and the earnings, expenses, appreciation and
depreciation attributable to such contributions under the plan.
(e) Voluntary Contribution Account. A "voluntary contribution account"
shall be maintained on behalf of each participant. With respect to any plan
participant, this account shall represent the amount of such participant's
voluntary contributions and the earnings, expenses, appreciation and
depreciation attributable to such contributions under the plan. This
account shall also include all amounts held under the Thrift Contribution
Account as provided under the plan prior to the effective date.
(f) Rollover Account. A "rollover account" shall be maintained on
behalf of a plan participant whose prior benefits under another plan
described in Section 401(a) of the Code are transferred to the trustee for
the subsequent payment of such
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amounts in accordance with this plan. The trustee may accept such rollover
amounts on behalf of a participant only with the authorization of the plan
administrator.
The maintenance of separate account balances shall not require physical
segregation of plan assets with respect to each account balance. The accounts
maintained hereunder represent the participants' interests in the plan and trust
and are intended as bookkeeping account records to assist the plan administrator
and the trustee in the administration of this plan. The plan administrator may
maintain such other accounts in the name of participants as it considers
desirable. Any reference to a participant's "accounts" or "account balances"
shall refer to all of the accounts maintained in the participant's name under
the plan. Participants shall at all times have 100 percent vested and
nonforfeitable interests in their salary deferral contribution account,
voluntary contribution account and rollover account and shall have vested and
nonforfeitable interests in the employer matching contribution account,
discretionary profit sharing account and basic profit sharing contribution
account only as provided in the plan.
5.2 Investment or Account Balances. The trustee, the investment manager and
any insurance institution responsible for investment of trust assets shall be
permitted to commingle the assets of the trust for purposes of investment with
the assets of other plans or trusts which are intended to qualify for a federal
tax exemption under Sections 401(a) and 501(a) of the Code. Any documents which
are required to be incorporated in the plan and the trust to permit such
commingled investments are hereby so incorporated. Except to the extent required
by section 5.3, segregated investment of plan and trust assets shall not be
required with respect to any one or more plan participants. Each account
invested in a particular investment fund shall represent an undivided interest
in such investment fund which corresponds to the balance of such account.
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5.3 Investment Funds. From time to time the Bank may cause the trustee or
an investment manager to establish one or more investment funds for the
investment and reinvestment of plan assets. The continued availability of any
investment fund is necessarily conditioned upon the terms and conditions of
investment management agreements and other investment arrangements. While the
Bank may arrange with the trustee and investment managers for the establishment
of investment funds, the continued availability of these funds cannot be
assured, nor is it possible to assure that the arrangements or the investment
funds managed by a particular investment manager or by the trustee will continue
to be available on the same or similar terms. The Bank may, in its discretion,
direct the establishment of additional investment funds or may terminate any
investment fund as it deems appropriate and in the best interest of plan
participants. Participant loans shall constitute aggregated investments on
behalf of the participant to whom such loans are made and shall not be reflected
in any investment fund. Except as provided in this section and sections 5.4, 5.5
and 5.6 participants' accounts shall be invested in any one or more investment
funds as determined by the trustee.
5.4 Investment Directions. Each participant, in accordance with rules
promulgated by the plan administrator and uniformly applied to all participants,
may, but need not, direct the investment of a portion or all of his accounts in
any of the investment funds as provided by the Bank by completing an investment
direction in the manner required by the plan administrator. In the investment
direction, the participant shall instruct the trustee to invest a specified
percentage of the portions of the participant's accounts which are subject to
such directions. It shall be the responsibility
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of the plan administrator to accumulate, aggregate and transmit to the trustee
all such investment directions.
5.5 Manner of Making Investment Directions. All investment directions shall
be in writing on forms prescribed by the plan administrator. The forms shall be
signed by the participant making the direction and shall be delivered to the
plan administrator. All investment directions shall continue in force until
changed or revoked by the participant issuing the direction. Investment
directions shall be made, changed or revoked at such times as may be permitted
by the plan administrator and shall be implemented as soon as practicable. If a
participant fails to file a timely direction with respect to the investment of
all or part of the portion of his account that is subject to his investment
directions (determined in accordance with section 5.4), the portion over which
the participant has not directed the investment shall be invested in such manner
as may be directed by the trustee.
5.6 Directed Investment Election at Age 60. Any participant who has
attained age 60 may elect to have all or any portion of his accounts converted
to cash based upon the fair market value of his accounts as determined by the
trustee and to have such cash amount invested in one or more of the following
directed investments:
(a) A savings account or accounts at one or more banks or savings and
loan associations, including the banking department of a bank acting as
trustee, as selected by the Bank.
(b) A fund invested in obligations of the federal government and debt
securities rated A or better by Moody's or Standard & Poor's Investor's
Service as selected by the Bank.
(c) A fund invested in commercial paper, certificates of deposit
(including those issued by a bank acting as trustee) or any common,
collective or commingled
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trust fund or pooled investment fund maintained by a bank or trust company
(including a bank or trust company acting as Trustee), as selected by the
Bank.
The plan administrator may, in its discretion, direct the establishment of
additional investment funds or may terminate any investment fund as it deems
appropriate and in the best interest of participants. Each participant's account
invested in a particular investment fund described in (b) or (c) above shall
represent an undivided interest in such investment fund which corresponds to the
balance of such account. Directed investment elections shall be made by eligible
participants in accordance with rules promulgated by the plan administrator and
uniformly applied to all participants and shall become effective as of the first
day of the calendar quarter which is at least 30 days following the date the
election is filed in writing with the plan administrator. All investment
directions shall continue in force until changed or revoked by the participant
issuing the direction. Directed investment elections may be made, changed or
revoked at such times as may be permitted by the plan administrator except that
no other directed investment change may be made until twelve full calendar
months have elapsed in which no directed investment change has been made by such
participant and amounts subject to a directed investment election shall be
appropriately adjusted to reflect each such accounts respective share of
interest in the savings accounts or other directed investment fund described
above based on the portion of each such account invested in such savings account
or other directed investment fund and the period or periods since the last
accounting date during which the account was so invested.
5.7 Plan Expenses. All costs and expenses incurred in connection with the
general administration of the plan and trust shall, to the extent not paid by
the Bank, be allocated among the investment funds in the proportion in which the
amount invested in each such fund bears to the
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amount invested in all funds as of the accounting date preceding the day of
allocation, provided that all costs and expenses directly identifiable to one
fund shall be allocated to that fund.
5.8 Accounting Dates. The last day of each fiscal quarter ending with the
months of October, January, April and July shall be an "accounting date" as of
which all account balances shall be adjusted in accordance with section 5.11.
The date of any termination or partial termination of the plan, the date of any
merger or consolidation of this plan with any other plan, and any other date
selected by the plan administrator or the trustee for such purposes shall be
designated as an "interim accounting date" as of which all account balances
shall be adjusted in accordance with section 5.11. The three-month period (or
shorter period in the event of an interim accounting date) ending on each
accounting date is sometimes referred to herein as an "accounting period".
5.9 Date of Crediting Contributions and Forfeitures. All employer
contributions and participant contributions made for any plan year will be
considered to have been made in cash and will be credited to the proper
participants' accounts on the accounting date which coincides with the end of
the plan year, regardless of when such contributions are actually paid to the
trust; provided, that if the trustee or an investment manager with respect to an
investment fund maintains participants' accounts and credits contributions
received more frequently than monthly, contributions invested in that investment
fund will be considered made and will be credited as provided in accordance with
the accounting rules in effect with respect to that investment fund. Each
forfeiture arising in any plan year (as described in section 7.3) shall be
allocated to reinstate the forfeitures of any reemployed participant (as
described in section 9.2). To the extent there are any amounts in excess of the
amount necessary for reinstating the forfeitures of reemployed participants for
any plan year, such excess forfeitures shall be allocated to participant
accounts in accordance with section 5.10.
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5.10 Allocation of Employer Contributions and Forfeitures. Employer
contributions and forfeitures shall be allocated as of the end of each plan year
among the employer matching contribution account, discretionary profit sharing
contribution account and basic profit sharing contribution account of plan
participants who (a) are employed by the employer on such date and has completed
at least 1000 hours of service during such plan year or (b) were employed during
that plan year but who, prior to the end of the plan year, died, retired or
became permanently disabled, (as defined in section 7.1). The employer matching
contributions, discretionary profit sharing contributions, basic profit sharing
contributions, and forfeitures shall be allocated to each such participant
account, for all participants entitled to share in employer matching
contributions, discretionary profit sharing contributions and basic profit
sharing contributions under the first sentence of this section, pro rata in the
proportion which each such participant's earnings for the plan year bears to the
total earnings for such year of all such participants.
5.11 Adjustment of Participants' Accounts. As of each accounting date
(including any interim accounting date), the plan administrator shall adjust the
account balances of plan participants to reflect payments and withdrawals of
benefits, adjustments in the values of the trust fund and of the investment
funds, if any, and employers' and participants' contributions, as follows:
(a) First, all payments, withdrawals and transfers of benefits made
since the last preceding accounting date that have not been charged
previously shall be charged to the proper accounts;
(b) Next, the accounts of each participant shall be credited with his
pro rata share of any increase, or charged with his pro rata share of any
decrease, since the next preceding accounting date in the value of the
adjusted net worth (as defined below) of the trust or each investment fund
(excluding the value of a participant's directed investment under section
5.6), if any, in the trust in which he has an interest as of that date
(after taking into account any charges in accordance with subsection (a)
next above);
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(c) Next, the employers' matching contributions, discretionary profit
sharing contributions, basic profit sharing contributions, forfeitures,
salary deferral contributions, participant contributions (including
rollover contributions and transferred benefits), if any, and any loan
repayment made by the participant that are to be credited as of that date
shall be credited to the proper participants' accounts;
(d) Finally, the accounts of each participant, who have made a
directed investment election in accordance with section 5.6, shall be
credited with his pro rata share of any increase, or charged with his pro
rata share of any decrease, since the next preceding accounting date of the
value of each directed investment fund, if any, in the trust in which he
has an interest as of that date.
The "adjusted net worth" of the trust or an investment fund as of any date means
the then net worth of the trust fund or the investment fund as determined by the
trustee or the investment manager or insurance company with custody of that
investment fund in accordance with the provisions of the applicable agreement
with the trustee or the investment manager or insurance company, less an amount
equal to the sum of any employers' contributions and participants'
contributions (including rollover contributions and transferred benefits) held
in that fund but not yet credited to the accounts of participants.
5.12 Statement of Accounts. As soon as practicable after the last day of
each plan year, and at such other times as the plan administrator considers
desirable, each participant will be furnished with a statement reflecting the
condition of his accounts as of that date. No participant, except a member of
the plan administrative committee, shall have the right to inspect the records
reflecting the accounts of any other participant.
ARTICLE 6
Top-Heavy Plan Rules
6.1 Key Employees. An employee or former employee shall be a "key employee"
for any plan year if during such plan year or during any of the four preceding
plan years the employee is:
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(a) An officer of an employer having an annual compensation greater
than 150 percent of the amount in effect under Section 415(c)(1)(A) of the
Code for any such plan year;
(b) One of the ten employees of an employer having annual compensation
from an employer of more than the limitation in effect under Section
415(c)(1)(A) of the Code and owning (or considered as owning within the
meaning of Section 318 of the Code) both more than 1/2 percent interest and
the largest interests in the employer;
(c) Any person who owns (or is considered as owning within the meaning
of Section 318 of the Code) more than five percent of the outstanding stock
of the employer or stock possessing more than five percent of the total
combined voting power of all the employer's stock; or
(d) Any person having annual compensation in excess of $150,000 who
owns (or is considered as owning within the meaning of Section 318 of the
Code) more than one percent of the outstanding stock of the employer or
stock possessing more than one percent of the total combined voting power
of all the employer's stock.
For purposes of subsection (a) above, if the number of officers exceeds 50, only
the 50 officers with the highest compensation shall be considered key employees
and if the number of officers is less than 50, the number of officers considered
key employees shall not exceed the greater of three such officers or ten percent
of all employees. For purposes or subsections (c) and (d) above, Section
318(a)(2)(C) of the Code shall be applied by substituting "five percent" for the
reference to "50 percent" therein and the rules of Section 414(b), (c) and (m)
of the Code shall not apply for determining ownership in the employer. The term
"employer" includes all corporations which are members of a controlled group of
corporations which includes the company under Section 414(b) of the Code, all
trades or businesses (whether or not incorporated) which are under common
control with the company under Section 414(c) of the Code and any service or
other organization which is a member of an affiliated service group with the
company under Section 414(m) of the Code. The beneficiary of a key employee
shall be considered a key employee.
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6.2 Top-Heavy Plan. The plan will be considered a "top-heavy plan" for any
plan year if, as of the last day of the preceding plan year (the last day of the
initial plan year, in the case of that year) (the "determination date"), the sum
of (i) the aggregate of the accounts of all key employees under the plan and all
other defined contribution plans in an aggregation group of plans (as described
in section 6.3 below), and (ii) the present value of the aggregate cumulative
accrued benefits for key employees under all defined benefit plans in an
aggregation group of plans, exceeds 60 percent of such sum determined for all
participants under all such plans, excluding participants who are former key
employees. For purposes of making the determination described above, accounts in
a defined contribution plan and benefits under a defined benefit plan shall be
valued as of the accounting date coincident with the determination date. There
shall be included in the determination of a participant's accounts and accrued
benefit under such plans any amounts distributed to such participant during the
preceding five-year period. Notwithstanding the foregoing, if any individual has
not performed services for the Fairfield Companies at any time during the
five-year period ending on the determination date, any account of such
individual (and the accrued benefit for such individual) shall not be included
for purposes of this section. Furthermore, a rollover contribution initiated by
a participant and made to any plan in an aggregation group of plans shall not be
taken into account for purposes of determining whether the plan is a top-heavy
plan.
6.3 Aggregation Groups. All employer plans in a required aggregation group
of plans shall be considered to be top-heavy plans if either the required or
permissive aggregation group of plans is determined to be top-heavy under
section 6.2 above. If the required or permissive aggregation group of plans is
not a top-heavy group, no employer plans in the group shall be considered to be
top-heavy plans. A "required aggregation group of plans" shall include each
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employer plan (whether or not terminated) in which a key employee participates
and any other employer plan which enables any plan in which a key employee
participates to meet the coverage and nondiscrimination requirements of Sections
401(a)(4) or 410 of the Code. A "permissive aggregation group of plans" shall
include all plans in the required aggregation group plus any other employer
plans which satisfy the requirements of Sections 401(a)(4) and 410 of the Code
when considered together with the required aggregation group of plans.
6.4 Special Top-Heavy Vesting Schedule. Notwithstanding the provisions of
section 6.2, for purposes of determining a participant's vested and
nonforfeitable interest, if any, in his or her employer contribution accounts
when the plan is considered a top-heavy plan, a participant shall vest in
accordance with the following table based on years of vesting service (as
defined in section 7.2):
If the Participant's
Number of Full Years His Vested and
of Vesting Service Nonforfeitable
Equals: Interest Shall Be:
-------------------- ------------------
Less than 1 0%
1 10%
2 20%
3 40%
4 60%
5 80%
6 or more 100%
In the event the vesting schedule provided in section 7.2 is amended, or changed
on account of the plan becoming or ceasing to be a top-heavy plan, any
participant who has completed at least three years of service may elect to have
his or her vested and nonforfeitable interest in his or her employer
contribution account computed under the plan without regard to such amendment or
change by
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notifying the plan administrator in writing within the election period
hereinafter described. The election period shall begin on the date such
amendment is adopted or the date such change is effective, as the case may be,
and shall end no earlier than the latest of the following dates: (i) the date
which is 60 days after the day such amendment is adopted; (ii) the date which is
60 days after the day such amendment or change becomes effective; or (iii) the
date which is 60 days after the day the participant is given written notice of
such amendment or change by the plan administrator. Any election made pursuant
to this section 9.4 shall be irrevocable.
6.5 Minimum Contributions and Benefits. Notwithstanding the provisions of
section 4.1 above, for each plan year for which the plan is considered a
top-heavy plan, the amount contributed by an employer in accordance with section
4.1 (except for 4.1(b)) for each participant (whether active or inactive) shall
not be less than the lesser of (i) three percent of the participant's total
earnings for that year, or (ii) the highest percentage of earnings (disregarding
earnings in excess of $200,000 or such other maximum amount as may be permitted
from time to time by the Secretary of the Treasury or the Secretary's delegate
or by law) contributed by such employer for such plan year on behalf of a key
employee; provided, however, that in the case of an employee covered under this
plan and a defined benefit plan maintained by the Fairfield Companies, for each
plan year for which this plan and such defined benefit plans are considered
top-heavy plans, if such employee receives the top-heavy minimum contribution
specified in such defined benefit plan, such employee need not receive the
minimum contribution specified in this section.
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ARTICLE 7
Distribution of Account Balances
7.1 Retirement, Death or Disability. If a participant's employment with the
Fairfield Companies is terminated by reason of his death, retirement after he
has attained 65 years of age, retirement after he has attained age 55 years and
completed 7 years of service ("early retirement"), or permanent disability (as
determined by a physician selected by his employer), the balance in his accounts
as at the accounting date coincident with or next following his termination date
(after all adjustments required under the plan as of that date have been made,
but subject to any further adjustments required under the plan prior to complete
distribution of his accounts) along with any contributions made previously by or
on behalf of such participant but not credited to his accounts, shall be fully
vested and nonforfeitable and shall be distributable to the participant or, in
the event of the participant's death, to his beneficiary, in accordance with
section 7.6. "Permanent disability" means a disability caused by bodily injury,
disease, or mental condition which prevents the participant from engaging in any
occupation for remuneration or profit which, in the opinion of the plan
administrator, is likely to persist for the balance of the participant's life;
provided, however, that if the participant is entitled to receive disability
insurance benefits under the Social Security Act, the participant shall be
deemed permanently disabled.
7.2 Resignation or Dismissal. If a participant resigns or is dismissed from
the employ of the Fairfield Companies before his attainment of age 65, before he
elects early retirement and before his death or permanent disability, the
balances of his salary deferral contribution account, voluntary contribution
account, rollover account, if any, and his vested and nonforfeitable interest in
his employer matching contribution account, discretionary profit sharing
account, and basic profit
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sharing account, as of the accounting date coincident with or next following the
date of his termination of employment (after all adjustments required under the
plan as of that date have been made, but subject to any further adjustments
required under the plan prior to complete distribution of his accounts), along
with any contributions made by him previously, but not credited to his
participant contribution accounts or rollover account, shall be distributable to
him in accordance with section 7.4. A participant's vested and nonforfeitable
interest in his employer matching contribution account, his discretionary profit
sharing account, and his basic profit sharing account shall be the product of
the balance of those accounts and the vested percentage determined in accordance
with the following table based upon the participant's years of vesting service:
If the Participant's
Number of Full Years His Vested and
of Vesting Service Nonforfeitable
Equals: Interest Shall Be:
-------------------- ------------------
Less than 1 0%
1 0%
2 0%
3 20%
4 40%
5 60%
6 80%
7 or more 100%
Notwithstanding the foregoing, the vested interest of a participant who was a
participant as of August 1, 1991 shall be determined based on the following
table:
If the Participant's
Number of Full Years His Vested and
of Vesting Service Nonforfeitable
Equals: Interest Shall Be:
-------------------- ------------------
Less than 1 0%
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1 55%
2 60%
3 65%
4 70%
5 75%
6 80%
7 or more 100%
For purposes of this Article, an employee shall be credited with a "year of
vesting service" for every plan year in which he has completed 1000 or more
hours of service (as defined in section 2.3) with the Fairfield Companies;
provided, however, if a participant is not credited with 1000 hours of service
in the plan year he meets the eligibility requirements he will be credited with
one year of vesting service for such plan year.
7.3 Forfeitures. If a participant resigns or is dismissed from the employ
of the Fairfield Companies before he completes seven years of vesting service
(and before attaining age 65, becoming permanently disabled or dying), his
employer matching contribution account, discretionary profit sharing
contribution account and basic profit sharing contribution account to the extent
they are not vested shall be a "forfeiture". A forfeiture shall be treated the
same as other participants' accounts (subject to adjustment under section 5.11
above) until the last day of the plan year in which the participant with respect
to whom the forfeiture arose terminated his employment. As of that day, the
forfeiture shall be used to reinstate the forfeitures of reemployed participants
as described in section 9.2 and to the extent there are any forfeitures in
excess of the amounts necessary to fully reinstate forfeitures for that plan
year, the excess forfeitures shall be allocated among and credited to the
accounts of other participants in accordance with section 5.10. If the
participant with respect
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to whom a forfeiture arose is reemployed by a Fairfield Company before he incurs
five consecutive one-year breaks in service, the forfeiture shall be reinstated
as provided in section 9.2. A "one-year break in service" shall occur on the
last day of any plan year in which a terminated employee or participant does not
complete more than 500 hours of service.
7.4 Methods of Benefit Payment. A participant's account balances which are
distributable under sections 7.1 and 7.2 shall be paid to or for the benefit of
the participant in one of the following methods:
(a) Single Sum Payment. A participant's account balances may be paid
to or for the benefit of the participant in a single sum.
(b) Installments. A participant's account balances may be paid in the
form of substantially equal annual or more frequent installment payments,
provided that such installment payments shall not be payable over a period
of time in excess of the maximum installment period described below.
(c) Other. A participant's account balances may be paid in a
combination of a single sum and installments.
A "maximum installment period" shall equal the longer of the participant's life
expectancy or the joint and last survivor life expectancy of the participant and
his designated beneficiary, if greater. The installment form of benefit payment
shall be designed so that the present value of the amount to be paid over the
participant's life expectancy is at least 50 percent of the value of the
participant's account balances on the date of benefit commencement unless the
participant's designated beneficiary is his spouse. Notwithstanding the
preceding sentence, the account balances of a participant who dies prior to his
date of benefit commencement will be distributed to the participant's
beneficiary within five years of the participant's date of death, or, if
distributions commence within one year following the date of the participant's
death, over a period not longer than the life expectancy of the participant's
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designated beneficiary. Benefits may be distributed in cash or in kind, as
determined by the trustee, provided that property distributed in kind must be
distributed at fair market value as determined by the trustee. The plan
administrator may establish a minimum amount of any installments under
subsection (b) above.
7.5 Selection of Time and Manner of Benefit Payment. A participant shall be
entitled to select the manner in which the account balances to his credit at the
time of benefit commencement, or at the time of his death, will be
distributable. If a participant fails to select a manner of payment of his
benefits during the participant's lifetime within 60 days after receiving
notification from the plan administrator of the participant's rights to select a
method of payment under this section, then the plan administrator may select the
method of distribution of the participant's benefits during the participant's
lifetime. If the participant fails to select a method of payment of his account
balances remaining to be distributed as of his death to the participant's
beneficiary, then such beneficiary shall receive such benefits in a single sum
unless the beneficiary elects to receive such benefits in installments within 60
days following the later of the death of the participant or the date the plan
administrator determines the identity of such beneficiary. An election made in
accordance with this section may be revoked or superseded by a new section made
by the participant or the beneficiary, as the case may be, provided that any
revocation or modification of a prior election shall be subject to approval by
the plan administrator. Elections in accordance with this section regarding
benefit payments shall be completed and filed with the plan administrator on
such forms, in such manner, and at such times as the plan administrator shall
require. The plan administrator shall notify the trustee of the time and manner
of payment of a participant's benefits hereunder.
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7.6 Limitations on Time of Benefit Payment. Notwithstanding anything
contained in this Article 7 to the contrary,
(a) Payment of a participant's benefits under the plan shall commence
not later than 60 days after the end of the plan year in which occurs the
latest following events occurs (i) the participant's attainment of age 65
years, (ii) the fifth anniversary of the date when the participant last
began to participate in the plan or (iii) the participant's termination of
employment with an employer;
(b) In no event shall payment of a participant's account balances
commence later than April 1 of the calendar year following the calendar
year in which the participant attained age 70-1/2;
(c) It a participant's vested account balances exceed $3,500 no amount
shall be distributable to the participant prior to the date the participant
attains age 65 without the participant's written consent; and
(d) It distribution of a participant's accounts has not commenced
prior to such participant's death, then the participant's accounts shall be
distributed within five years of the date of death.
7.7 Designated Beneficiaries. A participant may from time to time designate
a beneficiary or beneficiaries to whom the participant's benefits will be
distributed in the event of the participant's death prior to complete payment of
his benefits under the plan. A participant may designate contingent or
successive beneficiaries and may name individuals, legal persons or entities,
trusts, estates, trustees or other legal representatives as beneficiaries. A
beneficiary designation properly completed and filed will cancel all such
designations filed earlier. Notwithstanding the foregoing or any beneficiary
designation filed by a participant, if a participant is married at the date of
his death, the participant's surviving spouse will be his designated beneficiary
for all purposes of the plan unless the surviving spouse consents in writing to
the participant's designation of another beneficiary. Beneficiary designations
must be completed and filed with the plan administrator during the participant's
lifetime, however, his surviving spouse may consent to a designation after his
death.
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The consent of a surviving spouse to the participant's designation of another
beneficiary must be a writing, must acknowledge the effect of such designation,
and must be witnessed by a plan representative or a notary public.
7.8 Payment to Substitute Beneficiaries. If benefits remain to be paid with
respect to a plan participant at a time when the plan administrator is unable to
locate the participant, or his beneficiary or beneficiaries designated in
accordance with section 6.7, or following the death of the participant and such
beneficiaries, and if the participant failed to designate one or more other
beneficiaries in the manner described in section 7.7, then the plan
administrator shall cause the benefits for such participant to be distributed or
paid to the person or persons who can be located and agree to accept such
amounts within the applicable priority classification set forth below.
Participants and designated beneficiaries are required to maintain a current
post office address on file with the plan administrator by notifying the plan
administrator of such address in care of the employer. A substitute beneficiary
will not be determined under this section with respect to a missing participant
or missing designated beneficiary unless the participant or designated
beneficiaries, as the case may be, have failed to claim the participant's
account balances or notify the plan administrator of their whereabouts within
three years after the plan administrator notifies such participant or
beneficiaries at their last post office addresses filed with the plan
administrator. Such notice shall describe the amounts to which the participant
or the beneficiaries are entitled and shall describe the substitution procedures
of this section. In disposing of a participant's benefits in accordance with
this section, the plan administrator shall cause the participant's benefits to
be distributed in accordance with the following priority classifications:
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<PAGE>
(a) First Priority. A participant's benefits, in the case of a missing
plan participant, will first be distributed to the participant's designated
beneficiary or beneficiaries.
(b) Second Priority. A participant's benefits will next be distributed
or paid to the participant's spouse if the whereabouts of such spouse is
known.
(c) Third Priority. The participant's benefits will next be applied by
the payment of the participant's account balances to one or more of the
participant's relatives by blood, marriage or adoption in such proportions
as the plan administrator decides.
(d) Fourth Priority. After unsuccessful attempts have been made by the
plan administrator to locate persons described in the priority categories
set forth above, the benefits of the participant or of any beneficiary will
be disposed of in any manner permitted by law which the plan administrator
considers to be fair and equitable.
7.9 Payment With Respect to Incapacitated Participants or Beneficiaries. If
any person entitled to benefits under the plan is under a legal disability or in
the plan administrator's opinion is incapacitated in any way so as to be unable
to manage his financial affairs, the plan administrator may direct the payment
of such benefits to such person's legal representative or to a relative or
friend of such person for such person's benefit, or the plan administrator may
direct the application of such benefits to the benefit of such person. Payments
made in accordance with this section shall discharge all liabilities for such
payments under the plan.
7.10 Final Court Orders. Notwithstanding the other provisions of this
Article 7, if the trustee is required by a final court order to distribute the
benefits of a participant other than in the manner required under the plan, then
the trustee shall cause the participant's benefits to be distributed in a manner
consistent with such final court order. The trustee shall not be required to
comply with the requirements of a final court order in an action in which the
trustee, the plan administrator, the
32
<PAGE>
plan or the trust was not a party, except to the extent such order is a
qualified domestic relations order (as defined in Section 414(p) of the Code).
ARTICLE 8
Withdrawals and Loans During Employment
8.1 Withdrawals From Voluntary Contribution Account, Rollover Account, and
Employer Contribution Account. Effective as of the last day of any plan year
quarter which commences at least 60 days (or such other time period as specified
by the plan administrator) following receipt by the plan administrator of an
election form satisfactory to the plan administrator for this purpose, a
participant may elect to withdraw all or any portion of his voluntary
contribution account, rollover account or the vested portion of his employer
contribution account. Payment of each withdrawal shall be made following the end
of a reasonable period of time for processing such withdrawal.
8.2 Hardship Withdrawals. Effective as of the last day of any plan year
quarter which commences at least 60 days (or such other time period as specified
by the plan administrator) following receipt by the plan administrator of an
election form satisfactory to the plan administrator for this purpose and except
as provided in section 8.3, a participant, other than a former employee, who is
experiencing a financial hardship may request a withdrawal of all or any portion
of the lesser of his salary deferral contributions account or his salary
deferral contributions (but not earnings thereon). The plan administrator will
have discretion to grant or deny any such requests for hardship withdrawals,
subject to the following:
(i) Each request for financial hardship must describe the hardship for
which the withdrawal is requested.
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<PAGE>
(ii) A withdrawal shall be considered on account of financial hardship
if it is necessary in light of the participant's immediate and heavy
financial need as describe in (A) below and it is necessary to satisfy such
financial need, as described in (B) below.
(A) A withdrawal will be on account of immediate and heavy
financial need only if it is on account of (I) medical expenses
incurred by the participant or the participant's spouse or dependents;
(II) purchase (excluding mortgage payments) of a principal residence
for the participant; (III) payment of tuition of the next twelve
months of post-secondary education for the participant or the
participant's spouse, children or dependents; (IV) the need to prevent
the eviction of the participant from the participant's principal
residence or the foreclosure on the mortgage of the participant's
principal residence; (V) such other purpose deemed by the plan
administrator to constitute immediate and heavy financial need; or
(VI) such other purpose deemed by the Commissioner of the Internal
Revenue Service to constitute immediate and heavy financial need.
(B) A withdrawal will be necessary to satisfy the financial need
described in (A) above only if (I) the withdrawal does not exceed the
amount necessary to meet such financial needs; and (II) the
participant has obtained all distributions, other than hardship
withdrawals, under all plans maintained by the Fairfield Companies.
(iii) In the event that the plan administrator grants a participant's
request for a hardship withdrawal from any of his accounts other than his
rollover account, such participant shall not be permitted to make salary
deferral contributions under the plan until the first day of the first
payroll period following twelve months from the date of withdrawal.
(iv) Notwithstanding the provisions of section 3.1, the aggregate
salary deferral contributions to the plan and to any other plan maintained
by the Fairfield Companies for the calendar year immediately following the
calendar year in which the participant receives the hardship withdrawal
from any of his accounts other than his rollover account shall not exceed
the excess of (A) the maximum amount specified in section 3.1 for such year
over (B) the amount of such participant's salary deferral contributions to
this plan and to any other plan maintained by the Fairfield Companies in
the calendar year in which the participant receives the hardship
withdrawal.
8.3 Withdrawals After Age 59-1/2 or Permanent Disability. A participant who
is still employed by or considered employed by the Fairfield Companies and who
has attained age 59-1/2
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or has incurred a permanent disability (as defined in section 7.1) may request a
withdrawal of all or any portion of his salary deferral contribution account for
any reasons by filing a written request with the plan administrator pursuant to
section 8.2. Such request must be made on the appropriate form and according to
procedures adopted by the plan administrator. Such withdrawals shall be made at
the discretion of the plan administrator.
8.4 Complete Withdrawal of Participant's Account After Age 60. A
participant who is still employed by or considered employed by the Fairfield
Companies and who has elected to have his entire account segregated into a
separate directed investment account in accordance with section 5.6 may request
a one-time withdrawal of the entire balance to the credit of his account (as
such phrase is defined for purposes of Section 402(e) of the Code) for any
reason by filing a written request with the plan administrator at least 30 days
prior to such withdrawal. Contributions attributable to services performed
before the withdrawal date and earnings on the withdrawal which are credited to
the participant's account after the withdrawal date may, at the election of the
participant, be distributed once determined. A withdrawal pursuant to this
section shall not limit the participant's participation under the plan or his
right to any employer contributions.
8.5 Loans to Participants. While it is the primary purpose of the plan to
provide funds for participants when they leave the Fairfield Companies, it is
recognized under some circumstances it would be in the best interests of
participants to permit loans to be made to them. Accordingly, effective as of
the date that the plan administrator determines, the plan administrator may
direct that a loan be made to a participant, other than a former employee, as of
an accounting date, subject to the following:
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<PAGE>
(a) Each request for a loan under this section must be by written
application to the plan administrator at least 30 days in advance (or by
such other date as the plan administrator may require) on such form as the
plan administrator may require.
(b) Each loan must be evidenced by a note in a form furnished by the
plan administrator and must be secured by a pledge of 50 percent of the
participant's vested account balances as of the accounting date immediately
preceding the date as of which the loan is made.
(c) The principal amount of each loan, when added to any other
outstanding loan balances of a participant under the plan and all other
plans of the Fairfield Companies, may not exceed the lesser of $50,000
(reduced by the highest outstanding balance of loans from the plan during
the one-year period ending on the day before the date the new loan is made)
or 50 percent of the participant's vested account balances as of the
accounting date immediately preceding the date as of which the loan is
made.
(d) Each loan will be for a term not exceeding five years; provided
that the term of a loan may be for more than a period of five years where
the loan is used to acquire any dwelling unit which within a reasonable
time is to be used as a principal residence of the participant.
(e) Each loan will bear interest at a reasonable rate (commensurate
with the prevailing rate charged by persons in the business of making loans
under similar circumstances) established by the plan administrator in a
uniform and nondiscriminatory manner (but not less than five percent nor
greater than the maximum rate permitted by law), and must be amortized in
level payments, made through regular payroll deductions (or by any other
method permitted by the plan administrator), made not less frequently than
quarterly, over the life of the loan.
(f) Each note evidencing a loan to a participant shall be held on the
participant's behalf and shall be considered an investment of such
participant's accounts. Accordingly, principal and interest payments on the
note shall be credited to such accounts on the participant's behalf.
(g) Upon default, the plan may foreclose on the loan at the earliest
opportunity permitted by law and the loan will be treated as a taxable
distribution at such time. During the period, if any, between the date of
the event constituting default and the date of foreclosure, interest on the
loan will continue to accrue and shall be charged to the participant's
account. The distribution of a participant's canceled note to him (or to
his beneficiary in the event of his death) shall be considered as a payment
for purposes of the plan. The following events will constitute default on a
loan:
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(i) the failure to make an installment payment on the payday on
which it becomes due;
(ii) any other person (other than the plan trustee) acquires an
interest in the participant's account except as otherwise required by
law;
(iii) the participant dies or becomes legally incompetent;
(iv) bankruptcy or insolvency proceedings are instituted by or
against the participant; or
(v) the participant's employment with the Fairfield Companies is
terminated for any reason, including retirement, disability,
resignation or discharge.
In the event of (iii) or (v) above, there shall be no default if,
immediately upon the occurrence of (iii) or (v), the participant (or his
estate or legal representative, as the case may be) pays the remaining
balance of the loan together with accrued interest thereon. Notwithstanding
anything in this section 8.5 to the contrary, in the event of (v) above
there shall be no default if the participant continues to be a party in
interest (as defined in Section 3(14) of the Employee Retirement Income
Security Act of 1974, as amended ("ERISA")) following his termination of
employment.
(h) The plan administrator may establish such other rules and
regulations (which shall be uniformly applicable to all participants
similarly situated) as it may deem necessary regarding the granting of
loans, including loan fees (which may be charged directly to the
participant or to the participant's account).
8.6 No Representation Regarding Tax Effect of Withdrawals or Loans. Neither
an employer, the plan administrator, the trustee, nor any other person shall be
construed as representing the tax effects of any withdrawals or loans in
accordance with this Article 8. It shall be the responsibility of participants
requesting withdrawals or loans to consider the tax effects of such withdrawals
or loans requested by such participant.
ARTICLE 9
Reemployment
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9.1 Rehired Employee or Participant. If an employee or participant
terminates his employment with the Fairfield Companies and is subsequently
rehired before incurring a one-year break in service, his prior years of vesting
service shall be reinstated for purposes of sections 6.4 and 7.2. If an employee
or a participant terminates his employment with the Fairfield Companies and is
subsequently reemployed by a Fairfield Company, his prior years of vesting
service for purposes of sections 6.4 and 7.2 shall be reinstated after he has
completed one year of vesting service. However, in no event shall years of
service occurring after a participant incurs five consecutive one-year breaks in
service (as defined in section 7.3) be used to determine the vested and
nonforfeitable interest of a participant in his employer matching contribution
account, discretionary profit sharing contribution account and basic profit
sharing contribution account as of his prior termination of employment which has
become a forfeiture. With respect to any employee whose initial severance from
service date is on or after January 1, 1991, if such employee incurs a
break-in-service and is subsequently reemployed by the Fairfield Companies, and
if the number of his or her consecutive one-year breaks-in-service (as defined
in Section 7.3) equals or exceeds the greater of five or the number of his or
her years of service prior to his or her initial severance from service date,
such employee's service prior to his or her initial severance from service date
shall be disregarded for purposes of determining his or her years of service. A
rehired employee shall become a participant as of the date he meets the
requirements of sections 2.1 and 2.5. A rehired participant shall again become a
participant as of his date of rehire and shall again become eligible to make
salary deferral contributions and voluntary contributions as of the pay period
next following his date of rehire.
9.2 Reinstatement of Forfeitures. If a participant whose employment had
terminated because of resignation or dismissal is reemployed by a Fairfield
Company so that he does
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not incur five consecutive one-year breaks in service (as defined in section
7.3), the amount of any forfeiture which resulted from his prior resignation or
dismissal shall be reinstated out of forfeitures arising in the year of the
participant's reemployment or, if such forfeitures are insufficient for this
purpose, out of a special employer contribution to his basic profit sharing
contribution account as of the accounting date coincident with or next following
his date of rehire. If such participant subsequently resigns or is dismissed
from the employ of the Fairfield Companies and the participant is not entitled
to the full balance in his basic profit sharing contribution account, the amount
to be distributed in accordance with Article 7 will be determined in accordance
with the following, notwithstanding the provisions of section 7.2:
(a) First, the amount of the distribution, if any, previously received
by the participant from his basic profit sharing contribution account
because of his prior resignation or dismissal shall be added to the balance
in his basic profit sharing contribution account as of the accounting date
coincident with or next following the date of his subsequent termination of
employment.
(b) Next, the amount determined under subsection (a) above shall be
multiplied by the applicable vesting percentage applicable to the
participant at his subsequent termination of employment under section 7.2.
(c) Finally, the amount determined under subsection (b) above shall be
reduced by the amount of the distribution previously received by the
participant from his employer contribution accounts because of his prior
resignation or dismissal.
ARTICLE 10
Maximum Contributions
10.1 Contribution Limitations. Section 415 of the Code imposes certain
limitations on the amount of contributions that may be allocated to a
participant under a defined contribution plan (as defined in Section 414(i) of
the Code) maintained by his employer. If a participant in a defined contribution
plan maintained by his employer also is a participant in a defined benefit plan
(as
39
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defined in Section 414(j) of the Code) maintained by such employer, Section 415
of the Code imposes certain combined limitations as to the aggregate amount of
contributions and benefits that may be provided for the participant under both
types of plans. This plan is a defined contribution plan and, therefore, each
participant in the plan shall be subject to the maximum contribution and benefit
limitations set forth in section 10.2 or section 10.3, if applicable,
irrespective of any other provisions of the plan. For purposes of Section 415 of
the Code and this Article 10, the "limitation year" with respect to this plan is
the plan year, and a participant's "total compensation" means, with respect to
any plan year, the total compensation paid to the participant during that year
for services rendered to the Fairfield Companies as an employee that is subject
to withholding for federal income tax purposes (before taking into account any
withholding exemptions), but excluding any noncash compensation and any
compensation deferred beyond the participant's termination of employment. In
applying the limitations set forth in sections 10.2 and 10.3, reference to the
plan shall mean the plan and all other defined contribution plans (whether or
not terminated) maintained by the Fairfield Companies and reference to a defined
benefit plan maintained by the Fairfield Companies shall mean that plan and all
other defined benefit plans (whether or not terminated) maintained by the
Fairfield Companies.
10.2 Participant Covered by Defined Contribution Plan. If a participant in
the plan is not covered by a defined benefit plan maintained by the Fairfield
Companies, the annual addition (as defined below) which is allocated to his
accounts under this plan and under any related defined contribution plans
maintained by the Fairfield Companies shall not exceed the lesser of $30,000
(or, if greater, one-fourth of the defined benefit dollar limitation set forth
in Section 415(b)(1) of the Code, as adjusted pursuant to Section 415(d) thereof
for such year), (the "defined contribution dollar
40
<PAGE>
limitation") or 25 percent of the participant's local compensation for such
limitation year. In applying the preceding limitation, the annual addition to a
participant's accounts under any such related defined contribution plan will be
limited before the annual addition to his account under this plan is limited.
Any excess contributions resulting from the allocation of forfeitures, a
reasonable error in estimating a participant's annual earnings or such other
limited facts and circumstances as the Commissioner of the Internal Revenue
Service may prescribe and not allocable to a participant's accounts under the
plan by reason of the limitations on additions under Section 415 of the Code
shall be disposed of as follows:
(a) Any nondeductible voluntary contributions or elective deferrals
(including earnings thereon) to the extent they would reduce the excess
amount shall be returned to the participant;
(b) If after the application of subsection (a) above an excess amount
still exists, and if the participant is covered by the plan at the end of
the limitation year, the excess amount shall be used to reduce employer
contributions for such participant in the next limitation year, and each
succeeding year if necessary; and
(c) It after the application of subsection (a) above an excess amount
still exists and the participant is not covered by the plan at the end of
the limitation year, the excess amount shall be held unallocated in a
suspense account and the suspense account shall be applied to reduce future
employer contributions for all remaining participants in the next
limitation year, and each succeeding limitation year if necessary.
A participant's "annual addition" for any plan year means the sum for that
year of the following:
(i) Employer Contributions. Employer contributions (including salary
deferral contributions) credited to the participant's accounts under this
plan and under any related defined contribution plans;
(ii) Forfeitures. Forfeitures credited to the participant's accounts
under this plan or under any related defined contribution plans; and
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(iii) Participant Voluntary Contributions. The amount of the
participant's voluntary contributions to any related defined contribution
or defined benefit plan (determined without regard to rollover
contributions, if any).
(iv) Certain Medical Expenses for Key Employees. The amounts
attributable to medical benefits allocated to an account of a key employee,
as described in section 419A(d) of the Code.
10.3 Participant Covered by Defined Contribution Plan and Defined Benefit
Plan. If a participant in the plan also is a participant in a defined benefit
plan maintained by the Fairfield Companies, the contributions made on behalf of
the participant and the benefits payable
to the participant shall be determined in a manner consistent with Section 415
of the Code, as follows:
(a) Defined Contribution Fraction. A fraction shall be determined, the
numerator of which shall be the participant's annual additions under all
related defined contribution plans for each limitation year (determined in
accordance with the plan provisions as in effect for such year), and the
denominator of which shall be the aggregate of the "defined contribution
limitation amounts" in effect for each year of the participant's employment
by the employers. The "defined contribution limitation amount" for any
limitation year shall be the lesser of (i) 1.25 multiplied by the dollar
limitation in effect under Section 415(c)(1)(A) of the Code for such year,
provided that in any year in which the plan would be a top-heavy plan if 90
percent were substituted for 60 percent in section 6.2, 1.0 shall be
substituted for 1.25, or (ii) 1.4 multiplied by 25 percent of the
participant's total compensation for such year. The numerator of this
fraction shall be adjusted in accordance with applicable regulations to
preserve the participant's benefits accrued as of the close of the last
limitation year beginning before December 31, 1986.
(b) Defined Benefit Fraction. A fraction shall also be determined, the
numerator of which shall be the benefits accrued or payable to or for such
participant under the related defined benefit plans as of the end of the
limitation year, and the denominator of which shall be the "defined benefit
limitation amount" in effect for that year. The "defined benefit limitation
amount" for any limitation year shall be the lesser of (i) 1.25 multiplied
by the dollar limitation in effect under section 415(b) (1) (A) of the Code
for such year, provided that in any year in which the plan would be a
top-heavy plan if 90 percent were substituted for 60 percent in section
6.2, 1.0 shall be substituted for 1.25, or (ii) 1.4 multiplied by 100
percent of the participant's average annual total compensation for the
three consecutive plan years during which the participant actively
participated in such a plan and in which the participant's
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aggregate total compensation was the greatest; provided that such amount
shall be appropriately adjusted if necessary as provided in section 415(b)
of the Code.
(c) Combined Limitation. The contributions under this plan and under
any related defined contribution plans and the benefits under all related
defined benefit plans will be adjusted to the extent necessary (by first
adjusting the benefits and contributions under such other plans) so that
the sum of the fractions determined with respect to any participant in
accordance with subsections (a) and (b) above will not exceed 1.0 (or such
other applicable maximum amount permitted by law).
10.4 Distribution of Excess Deferrals. If, not later than the March 1 next
following the end of a calendar year, a participant notifies the plan
administrator that the participant has made salary deferral contributions to
this plan and one or more other plans (whether maintained by a Fairfield Company
or an unrelated company) in excess of $7,000 (or such other maximum amount as
may be permitted by law for such calendar year) during such calendar year, and
further notifies the plan administrator of the amount of such excess allocated
to this plan, such excess amount shall be paid to such participant (along with
any income or loss allocable thereto) as soon as practicable following such
notification, but in any event by the April 15 following the calendar year with
respect to which such excess deferrals were made. A participant is deemed to
notify the plan administrator of such excess that arises by taking into account
only those elective contributions made to this plan and any other plans of the
Bank.
10.5 Highly Compensated Employee. The term highly compensated employee
includes highly compensated active employees and highly compensated former
employees. A highly compensated active employee includes any employee who
performs service for the employer during the determination year and who, during
the look-back year (i) received compensation from the employer in excess of
$75,000 (as adjusted pursuant to Section 415(d) of the Code), (ii) received
compensation from the employer in excess of $50,000 (as adjusted pursuant to
Section 415(d) of the Code) and was a member of the top-paid group for such
year, or (iii) was an officer of the employer and received compensation during
such year that is greater than 50 percent of the dollar limitation in effect
under Section 415(b)(1)(A) of the
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Code. The term highly compensated employee also includes (A) employees who are
both described in the preceding sentence if the term "determination year" is
substituted for the term "look-back year" and the employee is one of the 100
employees who received the most compensation from the employer during the
determination year, and (B) employees who are 5 percent owners at any time
during the look-back year or determination year. If no officer has satisfied the
compensation requirement of (iii) above during either a determination year or
look-back year, the highest paid officer for such year shall be treated as a
highly compensated employee. For this purpose, the determination year shall be
the plan year. The look-back year shall be the twelve-month period immediately
preceding the determination year. A highly compensated former employee includes
any employee who separated from service (or was deemed to have separated) prior
to the determination year, performs no service for the employer during the
determination year, and was a highly compensated active employee for either the
separation year or any determination year ending on or after the employee's 55th
birthday. If an employee is, during a determination year or look-back year, a
family member of either a 5 percent owner who is an active or former employee or
a highly compensated employee who is one of the 10 most highly compensated
employees ranked on the basis of compensation paid by the employer during such
year, then the family member and the 5 percent owner or top-ten highly
compensated employee shall be aggregated (the "family group"). In such case, the
family member and 5 percent owner or top-ten highly compensated employee shall
be treated as a single employee receiving compensation and plan contributions or
benefits equal to the sum of such compensation and contributions or benefits of
the
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family member and 5 percent owner or top-ten highly compensated employee. For
purposes of this section, family member includes the spouse, lineal ascendants
and descendants of the employee or former employee and the spouses of such
lineal ascendants and descendants. The determination of who is a highly
compensated employee, including the determinations of the number and identity of
employees in the top-paid group, the top 100 employees, the number of employees
treated as officers and the compensation that is considered, will be made in
accordance with Section 414(q) of the Code and the regulations thereunder.
10.6 Limitations on Elective Contributions. Elective contributions shall be
subject to the following nondiscrimination standards and shall be adjusted, as
provided below, to the extent necessary to comply with the limitations set forth
in Section 401(k) of the Code and the regulations thereunder. For purposes of
this section, the term "elective contribution" shall mean any employer
contribution made to the plan that (i) is subject to a cash or deferred
arrangement (as defined in Section 1.401(k)-l(a)(3) of the Treasury regulations)
and (ii) is immediately nonforfeitable. The salary deferral contributions made
pursuant to section 3.1 are elective contributions for purposes of this section.
The employer shall maintain records demonstrating compliance with this section.
(a) Actual Deferral Percentage Limitation. In any plan year, the
actual deferral percentage for the group of participants who are highly
compensated employees may not exceed the greater of the following:
(i) the actual deferral percentage or the group of participants who
are not highly compensated employees (the "non-highly compensated group")
multiplied by 1.25, or
(ii) the lesser of the actual deferral percentage for the non-highly
compensated group multiplied by two or the actual deferral percentage of
the non-highly compensated group plus two percentage points.
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(b) Actual Deferral Percentage. The actual deferral percentage for a
specified group of participants for any plan year shall be the average of
the ratios (computed, to the nearest one-hundredth of one percent,
separately for each participant in such group) of the elective
contributions, and amounts treated as elective contributions, for such
participant for such year to the participant's compensation (as defined at
Section 414(s) of the Code, as modified by Section 414(s)(2) thereof) taken
into account for such plan year during which the participant was an
eligible employee. For purposes of this section the following additional
rules shall apply:
(i) An elective contribution shall be taken into account only if it
relates to compensation that either (A) would have been received by the
participant in the plan year but for the deferral election or (B) is
attributable to services performed by the participant in the plan year and
would have been received by the participant within 2 1/2 months after the
close of the plan year but for the deferral election. An elective
contribution that does not meet the foregoing requirements will not be
tested under Section 403(k) of the Code but must separately satisfy Section
401(a)(4) of the Code for the plan year of allocation as if it was the only
nonelective employer contribution for the year.
(ii) As provided in applicable Treasury regulations, for purposes of
determining the actual deferral percentage of a family group (as defined in
section 10.5), the family group shall be treated as one highly compensated
employee and the actual deferral percentage for the family group shall be
determined by combining the compensation and elective contributions of all
eligible family members.
(iii) In the event this plan satisfies the requirement of Sections
401(k), 401(a)(4) or 410(b) of the Code only if aggregated with one or more
other plans, or if one or more other plans satisfy the requirements of such
sections of the Code only if aggregated with this plan, then this section
shall be applied by determining the actual deferral percentage of employees
as if all such plans were a single plan. In accordance with applicable
Treasury regulations, plans of the employers may be aggregated in order to
satisfy Section 401(k) of the Code but only if such plans as aggregated
satisfy the requirement of Section 410(b) of the Code and provided that
each plan has the same plan year.
(iv) Except as provided in applicable Treasury regulations, the actual
deferral percentage of a highly compensated employee will be determined by
treating all cash or deferred arrangements of the employer (or an entity
that is required to be aggregated with the employer under Sections 414(b),
(c), (m) or (o) of the Code) under which the highly compensated employee is
eligible as a single arrangement. If the cash or deferral arrangements have
different plan years, all such arrangements ending with or within the same
calendar year will be treated as a single arrangement.
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(v) At the discretion of the plan administrator, and in accordance
with applicable Treasury regulations, any employer contributions or
matching contributions credited on a participant's behalf in the plan year
which meet the withdrawal restrictions and vesting requirements of Sections
401(k)(2)(B) and (C) of the Code ("qualified nonelective contributions" and
"qualified matching contributions," respectively) may be added to the
participant's elective contributions in computing the participant's actual
deferral percentage; provided, that the employer contributions and matching
contributions made to the plan for such year satisfy the requirements of
Section 401(a)(4) of the Code with and without the inclusion of the
qualified nonelective contributions and qualified matching contributions
used to satisfy this section. Qualified nonelective contributions and
qualified matching contributions which are used to satisfy this section
cannot be taken into account to satisfy the requirement of section 10.7.
(vi) Elective contributions treated as matching contributions under
section 10.7 shall not be included in the determination of a participant's
actual deferral percentage.
(c) Excess Contributions. If in any plan year the actual deferral
percentage for the highly compensated group does not satisfy one of the
tests in subsection (a) above, the plan administrator shall reduce the
elective contributions of some or all of the participants in the highly
compensated group until one of the tests is satisfied. Such reduction shall
be made in accordance with Section 1.401-l(f)(2) of the Treasury
regulations by reducing the actual deferral percentage for the highly
compensated employee with the highest percentage to the extent required to
enable the plan to satisfy the actual deferral percentage test or cause
such highly compensated employee's actual deferral percentage to equal the
percentage for the highly compensated employee with the next highest actual
deferral percentage. This procedure shall be repeated until the plan
satisfies the actual deferral percentage test set forth herein. The portion
of any participant's elective contribution which is reduced pursuant to
this procedure shall be referred to as the "excess contributions." Excess
contributions shall be allocated among the family group (as defined in
section 10.5) members in proportion to the elective contribution of each
family member that is combined in determining the actual deferral
percentage.
(d) Distribution of Excess Contributions. If in any plan year the
elective contributions of one or more of the participants who are highly
compensated employees must be reduced in accordance with subsection (c)
above, the plan administrator shall distribute the amount of the excess
contributions, plus the income allocable thereto, as soon as practicable
following the determination of such excess but in any event by the last day
of the plan year following the end of the plan year in which the excess
contributions were made. Under Section 4979 of the Code a ten percent tax
is imposed on the employer for any such excess contributions which are
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distributed more than 2 1/2 months after the last day of the plan year in
which the excess contributions were made. A distribution of the excess
contributions may be made without regard to any notice or consent otherwise
required under the plan. The income or loss allocable to such excess
contributions shall be determined by multiplying the income or loss
allocable to the elective contributions (and, if applicable, amounts
treated as elective contributions for purposes of the participant's
deferral percentage) for the plan year by a fraction. The numerator of the
fraction is the excess contributions for the plan year. The denominator is
equal to (i) the total account balance of the participant attributable to
elective contributions (and amounts treated as such for purposes of the
actual deferral percentage) as of the beginning of the plan year, plus (ii)
the participant's elective contributions (and amounts treated as such for
purposes of the actual deferral percentage) for the plan year. The amount
of excess contributions distributed under this subsection for a plan year
shall be reduced by any excess deferrals previously distributed for the
employee's taxable year ending with or within the plan year. Excess
contributions shall be treated as annual additions for purposes of Section
415 of the Code.
10.7 Limitation on Employee and Matching Contributions. Employee and
matching contributions shall be subject to the following nondiscrimination
standards and such amounts shall be adjusted, as provided below, to the extent
necessary to comply with the limitations set forth in Section 401(m) of the Code
and the regulations thereunder. The term "employee contributions" shall include
any mandatory or voluntary contribution to the plan that is treated as an
after-tax employee contribution and is allocated to a separate account to which
earnings and losses are allocated. The voluntary contributions set forth in
section 3.2 are employee contributions for purposes of this section. The term
"matching contributions" means any employer contribution made to the plan on
account of an elective contribution or employee contribution, and any
forfeitures that are allocated to the participant on the basis of employee
contributions, matching contributions or elective contributions. The employer
matching contributions set forth in section 4.1(a) are matching contributions
for purposes of this section. The employer shall maintain records demonstrating
compliance with this section.
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(a) Contribution Percentage Limitations. In any plan year, the
contribution percentage for the group of participants who are highly
compensated employees may not exceed the greater of the following:
(i) the actual contribution percentage of the group of participants
who are not highly compensated employees (the "non-highly compensated
group") multiplied by 1.25, or
(ii) the lesser of the contribution percentage for the non-highly
compensated group multiplied by two or the contribution percentage of the
non-highly compensated group plus two percentage points.
(b) Contribution Percentage. The contribution percentage of a
specified group of participants shall be the average of the contribution
percentages (computed separately, to the nearest one-hundredth of one
percent) for each participant in the group. The contribution percentage for
each participant shall equal the sum of the employee and matching
contributions allocated to the participant's account for the plan year
(excluding qualified matching contributions which are used to satisfy the
actual deferral percentage limitation in accordance with section 10.6) and
the qualified non-elective and elective contributions treated as matching
contributions for the plan year, divided by the participants' compensation
(as defined in Section 414(s) of the Code, as modified by Section 414(s)(2)
thereof) taken into account for such plan year during which the participant
was an eligible employee. For purposes of this section, the following
additional rules shall apply:
(i) A matching contribution will be taken into account for purposes of
this section for a given plan year only if (A) it is made on account of the
participant's elective or employee contributions for that plan year, (B) it
is allocated to the participant's account during that plan year and (C) it
is paid to the trust by the end of the twelfth month following the close of
that plan year. A matching contribution that does not meet the foregoing
requirements will not be tested under Section 401(m) of the Code but must
separately satisfy Section 401(a)(4) of the Code for the plan year of
allocation as if it were the only employer allocation for that plan year.
An employee contribution will be taken into account for purposes of this
section only if such contribution is paid to the trust during the plan year
or paid to an agent of the plan and transmitted to the trust within a
reasonable period after the end of the plan year.
(ii) As provided in applicable Treasury regulations, for purposes of
determining the contribution percentage of the family group (as defined in
section 10.5), the family group shall be treated as one highly compensated
employee and the contribution percentage for the family group shall be
determined by combining the compensation, employee contributions and
matching contributions (and amounts treated as matching contributions) of
all eligible family members.
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(iii) In the event this plan satisfies the requirement of Sections
401(m), 401(a)(4) or 410(b) of the Code only if aggregated with one or more
other plans, or if one or more other plans satisfy the requirements of such
sections of the Code only if aggregated with this plan, then this section
shall be applied by determining the contribution percentage of employees as
if all such plans were a single plan. In accordance with applicable
Treasury regulations, plans of the employers may be aggregated in order to
satisfy Section 401(m) of the Code but only if such plans as aggregated
satisfy the requirement of Section 410(b) of the Code and provided that
each plan has the same plan year.
(iv) Except as provided in applicable Treasury regulations, the
contribution percentage of a highly compensated employee who is eligible to
participate in more than one plan of the employer in which employee or
matching contributions are made will be determined by treating all the
plans of the employer (or an entity that is required to be aggregated with
the employer under Sections 414(b), (c), (m) or (o) of the Code) in which
the highly compensated employee is eligible as a single plan. If the highly
compensated employee participates in two or more plans that have different
plan years, all such plans ending with or within the same calendar year
will be treated as a single plan.
(v) At the discretion of the plan administrator, and in accordance
with applicable Treasury regulations, any qualified nonelective
contributions (as defined in Section 1.401(k)-l(g)(13)(ii)) of the Treasury
regulations and elective contributions made for such plan year may be taken
into account in computing the participant's contribution percentage;
provided, that the qualified nonelective contributions satisfy the
requirements of Section 401(a)(4) of the Code both with and without
inclusion of such contributions used to satisfy the requirements of this
section, and provided further, that the elective contributions satisfy the
requirements of section 401(k)(3) of the code both with and without the
inclusion of contributions used to satisfy the requirements of this
section. Elective contributions and qualified nonelective contributions
which are used to satisfy this section cannot be taken into account to
satisfy the requirement of section 10.6.
(vi) Matching contributions treated as elective contributions under
section 10.6 shall not be included in the determination of a participant's
contribution percentage.
(c) Excess Aggregate Contributions. If in any plan year the
contribution percentage for the highly compensated group does not satisfy
one of the tests in subsection (a) above, the plan administrator shall
reduce the employee contributions and matching contributions of some or all
of the participants in the highly compensated group until one of the tests
is satisfied. Such reductions shall be made in accordance with Section
1.401(m)-l(e)(2) of the Treasury regulations by reducing
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the contribution percentage for the highly compensated employee with the
highest percentage to the extent required to enable this plan to satisfy
the contribution percentage test or cause such highly compensated
employees' contribution percentage to equal the percentage for the highly
compensated employee with the next highest contribution percentage. This
procedure shall be repeated until the plan satisfies the contribution
percentage test set forth herein. The amounts so reduced shall be referred
to as the "excess aggregate contributions". (If there are employee and
matching contributions, the employee contributions shall be reduced first
to the level of such contributions which are matched. If the test is not
satisfied by reducing the employee contributions, then the matching
contributions and any unreduced employee contributions shall be reduced in
tandem.) The determination of excess aggregate contributions will be made
after first determining the excess deferral amount and the excess
contribution amount. Excess aggregate contributions shall be allocated
among the family group (as defined in section 10.5) members in proportion
to the employee and matching contributions of each family member that is
combined in determining the contribution percentage.
(d) Distribution of Excess Aggregate Contributions. Except as provided
below, if in any plan year the employee or matching contributions of one or
more of the participants in the highly compensated group must be reduced in
accordance with subsection (c) above, the plan administrator shall
distribute the amount of the excess aggregate contributions, plus the
income allocable thereto, as soon as practicable following the
determination of such excess but in any event by the last day of the plan
year following the end of the plan year for which such contributions were
made. Under Section 4979 of the Code a ten percent tax is imposed on the
employer for any such excess aggregate contribution which are distributed
after more than 2 1/2 months after the last day of the plan year for which
such contributions were made. In the event the participant is not fully
vested in the excess aggregate contribution, the non-vested portion of such
excess aggregate contribution shall be forfeited by the participant and
shall be allocated among the participants who had matching contributions
credited on their behalf during the plan year and whose matching
contributions were not reduced. Such allocation shall be in accordance with
the ratio each such participant's matching contributions for the plan year
bears to the total amount of matching contributions made by all the
participants whose matching contributions were not reduced. A distribution
of the excess aggregate contribution may be made without regard to any
notice or consent otherwise required by the plan. Excess aggregate
contributions, including forfeited matching contributions, are treated as
employer contributions for purposes of Sections 404 and 415 of the Code.
The income or loss allocable to such excess aggregate contributions shall
be determined by multiplying the income or loss allocable to the
participant's employee and matching contributions (and amounts, if any,
treated as such for purposes of the contribution percentage, but excluding
such matching contributions used in the actual deferral percentage test for
the plan year) by a fraction. The numerator of the fraction is the
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excess aggregate contributions for the plan year. The denominator is equal
to (i) the total account balance of the participant attributed to employee
and matching contributions as of the beginning of the plan year, plus (ii)
the employee and matching contributions (and amounts, if any, treated as
such for purposes of the contribution percentage, but excluding such
matching contributions used in the actual deferral percentage test for the
plan year).
10.8. Multiple Use Limitation. Notwithstanding the limitations required by
sections 10.6 and 10.7, a participant's elective contributions, employee
contributions and matching contributions may be limited under this section in
order to prevent "multiple use" under Sections 401(k) and 401(m) of the Code, as
set forth below. The multiple use limitation shall apply if the sum of the
actual deferral percentage and contribution percentage for the group of highly
compensated employees exceeds the "aggregate limit". The aggregate limit shall
be the greater of (i) and (ii) below:
(i) the sum of (A) 1.25 times the greater of the actual deferral
percentage or the contribution percentage for non-highly compensated
employees and (B) two percentage points plus the lesser of the actual
deferral percentage or the contribution percentage for non-highly
compensated employees (which amount shall not exceed twice the lesser of
such percentages),
(ii) the sum of (A) 1.25 times the lesser of the actual deferral
percentage or the contribution percentage for non-highly compensated
employees and (B) two percentage points plus the greater of the actual
deferral percentage or the contribution percentage for non-highly
compensated employees (which amount shall not exceed twice the greater of
such percentages).
The application of the multiple use limitation shall be made in accordance
with Section 1.401(m)-2 of the Treasury regulations. If the multiple use
limitation applies, then the actual deferral percentage or contribution
percentage of the highly compensated employees shall be reduced (in the manner
described in sections 10.6 or 10.7) until such limit shall be satisfied.
Alternatively, the employer may satisfy the multiple use limitation by making
qualified nonelective contributions to plan participants in accordance with
applicable Treasury regulations.
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ARTICLE 11
Plan Administrator
11.1 Plan Administrator's Duties. As provided in section 1.2, a committee
appointed by the Bank is responsible for the administration of the plan. Except
as otherwise specifically provided and in addition to the powers, rights and
duties specifically given to the plan administrator elsewhere in the plan, the
plan administrator shall have the following powers, rights and duties:
(a) To construe and interpret the plan, to decide all questions of
plan eligibility, to determine the amount, manner and time of payment of
any benefits under the plan, and to remedy ambiguities, inconsistencies or
omissions.
(b) To adopt such rules of procedure as may be necessary for the
efficient administration of the plan and as are consistent with its terms
and such rules.
(c) To make determinations as to the right of any person to a benefit,
to afford any person dissatisfied with such determination the right to a
hearing thereon, and to direct payments or distributions from the trust in
accordance with the provisions of the plan.
(d) To furnish the employers with such information as may be required
by them for tax or other purposes in connection with the plan.
(e) To enroll participants in the plan, to distribute and receive plan
administration forms, and to comply with all applicable governmental
reporting and disclosure requirements.
(f) To employ agents, attorneys, accountants, actuaries or other
persons (who also may be employed by the employers, the trustee, or any
investment manager or managers) and to allocate or delegate to them such
powers, rights and duties as the plan administrator considers necessary or
advisable to properly carry out the administration of the plan, provided
that any such allocation or delegation and the acceptance thereof must be
in writing.
(g) To report to the directors or the Bank or to such person or
persons as the directors of the Bank designate as to the administration of
the plan, any significant problems which have developed in connection with
the administration of the plan and any recommendations which the plan
administrator may have as to the amendment of the plan or the modification
of plan administration. 54
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11.2 Action by Plan Administrator. During a period in which two or more
plan administrative committee members are acting, any action by the plan
administrator will be subject to the following provisions:
(a) The committee may act by meeting (including a meeting from
different locations by telephone conference) or by document signed without
meeting, and documents may be signed through the use of a single document
or concurrent documents.
(b) A committee member by writing may delegate part or all of his
rights, powers, duties and discretion to any other committee member, with
such other committee member's consent.
(c) The committee shall act by a majority decision, which action shall
be as effective as if such action had been taken by all members of the
committee; provided that by majority action one or more committee members
or other persons may be authorized to act with respect to particular
matters on behalf of all committee members.
(d) If there is an equal division among the committee members with
respect to any questions, a disinterested party may be selected by a
majority vote to decide the matter. Any decision by such disinterested
party will be binding.
(e) The certificate of the secretary of the committee or the majority
of the committee members that the committee has taken or authorized any
action shall be conclusive in favor or any person relying on such
certificate.
(f) Except as required by law, no member of the committee shall be
liable or responsible for an act or omission of other committee members in
which the former has not concurred.
11.3 Information Required for Plan Administration. The employers shall
furnish the plan administrator with such data and information as the plan
administrator considers necessary or desirable to perform its duties with
respect to plan administration. The records of an employer as to an employee's
or participant's period or periods of employment, termination
of employment and the reason therefor, leaves of absence, reemployment, and
compensation will be conclusive on all persons
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unless determined to the plan administrator's satisfaction to be incorrect.
Participants and other persons entitled to benefits under the plan also shall
furnish the plan administrator with such evidence, data or information as the
plan administrator considers necessary or desirable for the plan administrator
to perform his duties with respect to plan administration.
11.4 Decision of Plan Administrator Final. Subject to applicable law and
the provision of section 11.5, any interpretation of the provisions of the plan
and any decision on any matter within the discretion of the plan administrator
made by the plan administrator in good faith shall be binding on all persons. A
misstatement or other mistake or fact shall be corrected when it becomes known,
and the plan administrator shall make such adjustment on account thereof as the
plan administrator considers equitable and practicable.
11.5 Review of Benefit Determinations. If a claim for benefits made by a
participant or his beneficiary is denied, the plan administrator shall, within
90 days (or 180 days if special circumstances require an extension of time)
after the claim is made, furnish the person making the claim with a written
notice specifying the reasons for the denial. Such notice shall also refer to
the pertinent plan provisions on which the denial is based, describe any
additional material or information necessary for properly completing the claim
and explain why such material or information is necessary, and explain the
plan's claim review procedures. If requested in writing, the plan administrator
shall afford each claimant whose claim has been denied a full and fair review of
the plan administrator's decision and, within 60 days (120 days if special
circumstances require additional time) of the request for reconsideration of the
denied claim, the plan administrator shall notify the claimant in writing of the
plan administrator's final decision.
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11.6 Uniform Rules. The plan administrator shall perform his duties with
respect to plan administration on a reasonable and nondiscriminatory basis and
shall apply uniform rules to all participants similarly situated.
11.7 Plan Administrator's Expenses. All costs, charges and expenses
reasonably incurred by the plan administrator which are not paid by the trust
fund will be paid by the employers in such portions as the Bank shall direct;
provided no compensation will be paid to a committee member as such.
11.8 Interested Plan Administrator. If a member of the plan committee is
also a participant in the plan, he may not decide or determine any matter or
question concerning his benefits unless such decision or determination could be
made by him under the plan if he were not a committee member.
11.9 Resignation or Removal of Plan Administrative Committee Members. A
member of the committee may be removed by the Bank at any time by ten days'
prior notice to him and the other members of the committee. A member of the
committee may resign at any time by giving ten days' prior written notice to the
Bank and the other members of the committee. The Bank may fill any vacancy in
the membership of the committee; provided, however, that if a vacancy reduces
the membership of the committee to less than three, such vacancy shall be filled
as soon as practicable. The Bank shall give prompt written notice thereof to the
other members of the committee. Until any such vacancy is filled, the remaining
members may exercise all of the powers, rights and duties conferred on the plan
administrator.
11.10 Indemnification. To the extent permitted by law, no person (including
a trustee, any present or former plan administrative committee member, and any
present or former director,
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officer or employee of any employer) shall be personally liable for any act done
or omitted to be done in good faith in the administration of the plan or the
investment of the trust fund. To the extent permitted by law, each present or
former director, officer or employee of any employer to whom the plan
administrator or an employer has delegated any portion of its responsibilities
under the plan and each present or former plan administrative committee member
shall be indemnified and saved harmless by the employers (to the extent not
indemnified or saved harmless under any liability insurance or other
indemnification arrangement with respect to the plan) from and against any and
all claims of liability to which they are subjected by reason of any act done or
omitted to be done in good faith in connection with the administration of the
plan or the investment of the trust fund, including all expenses reasonably
incurred in their defense if the employers fail to provide such defense.
ARTICLE 12
Relating to the Employers
12.1 Action by Employers. Any action required or permitted of an employer
under the plan shall be by resolution of its Board of Directors or by a duly
authorized committee of its Board of Directors, or by a person or persons
authorized by resolution of its Board of Directors or such committee.
12.2 Additional Employers. Any subsidiary or other related company that is
not an employer may adopt the plan and become an employer thereunder by filing
with the trustee and the plan administrator a certified copy of a resolution of
the Board of Directors of the subsidiary or other related company providing for
its adoption of the plan and a certified copy of a resolution of the directors
of the Bank consenting to such adoption.
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12.3 Restrictions on Reversions. The employers shall have no tight, title
or interest in the assets of the plan, nor will any part of the assets of the
plan at any time revert or be repaid to an employer, directly or indirectly,
except as follows:
(a) If the Internal Revenue Service initially determines that the
plan, as applied to any employer, does not meet the requirements of a
"qualified plan" under Section 401(a) of the Code, the assets of the plan
attributable to contributions made by that employer under the plan shall be
returned to that employer within one year of the date of denial of
qualification of the plan as applied to that employer.
(b) If a contribution or a portion of a contribution is made by an
employer as a result of a mistake of fact, such contribution or portion of
a contribution shall not be considered to have been contributed under the
plan by that employer and, after having been reduced by any losses of the
trust fund allocable thereto, shall be returned to that employer within one
year of the date the amount is contributed under the plan.
(c) Each contribution made by an employer is conditioned upon the
continued qualification of the plan and the deductibility of such
contribution as an expense for federal income tax purposes and, therefore,
to the extent that a contribution is made by an employer under the plan for
a period for which the plan is not a qualified plan or the deduction for a
contribution made by the employer is disallowed, then such contribution or
portion of a contribution, after having been reduced by any losses of the
trust fund allocable thereto, shall be returned to that employer within one
year of the date of determination of the nonqualified status of the plan or
the date of disallowance of the deduction.
ARTICLE 13
Amendment, Termination or Plan Merger
13.1 Amendment. While the employers expect and intend to continue the plan,
the Bank must necessarily reserve and hereby does reserve the right, subject to
section 12.3, to amend the plan from time to time, except as follows:
(a) The duties and liabilities of the plan administrator cannot be
changed substantially without its consent; and
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(b) No amendment shall reduce the value of a participant's benefits to
less than the amount he would be entitled to receive if he had resigned
from the employ of all of the Fairfield Companies on the day of the
amendment.
The foregoing provisions of this section shall be subject to any applicable
collective bargaining agreements, provided that the Bank may amend the plan at
any time to the extent necessary in order that the plan shall meet the
requirements of a "qualified plan" under Section 401(a) of the Code and any
other requirements of applicable law.
13.2 Termination. The plan will terminate as to all employers on any
date specified by the Bank if advance written notice of the termination is given
to the plan administrator and any other employers. The plan will terminate as to
an individual employer on the first to occur of the following:
(a) The date it is terminated by that employer, if ten days' advance
written notice of the termination is given to the company, the plan
administrator and the other employers.
(b) The date that employer is judicially declared bankrupt or
insolvent.
(c) The dissolution, merger, consolidation or reorganization of that
employer, or the sale by that employer of all or substantially all of its
assets, except that:
(i) In any such event arrangements may be made with the consent
of the Bank whereby the plan will be continued by any successor to that
employer or any purchaser of all or substantially all of its assets without
a termination thereof, in which case the successor or purchaser will be
substituted for that employer under the plan; and
(ii) If any employer is merged, dissolved or in any way
reorganized into, or consolidated with, any other employer, the plan as
applied to the former employer will automatically continue in effect
without a termination thereof.
Notwithstanding the foregoing, if any of the events described above should occur
but some or all of the participants employed by an employer are transferred to
employment with one or more of the
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other employers coincident with or immediately after the occurrence of such
event, the plan as applied to those participants will automatically continue in
effect without a termination thereof. The foregoing provisions of this section
shall be subject to any applicable collective bargaining agreements.
13.3 Plan Merger. In no event shall there be any merger or consolidation of
the plan with, or transfer of assets or liabilities to, any other plan unless
each participant in the plan would (if the plan then terminated) received a
benefit immediately after the merger, consolidation or transfer which is equal
to or greater than the benefit the participant would have been entitled to
receive immediately before the merger, consolidation or transfer (if the plan
had then terminated).
13.4 Continuation by a Successor or Purchaser. Notwithstanding section
13.2, the plan and the trust shall not terminate in the event of dissolution,
merger, consolidation or reorganization of an employer or sale by an employer of
its entire assets or substantially all of its assets if arrangements are made in
writing between the employer and any successor to the employer or purchaser of
all or substantially all of its assets whereby such successor or purchaser will
continue the plan and the trust. If such arrangements are made, then such
successor or purchaser shall be substituted for the employer under the plan and
the trust agreement.
13.5 Notice to Participants of Amendments, Terminations or Plan Mergers.
Participants affected thereby shall be notified by the Bank within a reasonable
time following any amendment, termination, plan merger, or consolidation.
13.6 Vesting and Distribution on Termination. The date of any termination
or partial termination as respects all employers (and, at the discretion of the
Bank, on a termination or partial termination of the plan as respects any
employer that does not result in the termination or partial termination of the
plan as respects all employers), will be an "interim accounting date", and
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the benefits of each participant affected by such termination or partial
termination will be fully vested and will be payable to such participant in a
lump sum as soon as practicable unless other arrangements are previously made
pursuant to the provisions of Article 7.
ARTICLE 14
General Provisions
14.1 Examination of Plan Documents. Copies of the plan and any amendments
thereto will be on file at the principal office of each employer where they may
be examined by any participant or any other person entitled to benefits under
the plan.
14.2 Notices. A notice mailed to a participant or beneficiary at his last
address filed with the plan administrator in care of the Bank will be binding on
the participant or beneficiary for all purposes of the plan. Any notice or
document relating to the plan required to be given to or filed with the plan
administrator or any employer shall be considered as given or filed if delivered
or mailed by registered or certified mail, postage prepaid, to the plan
administrator, in care of the Bank, at Old McHenry Road, Box 1190 RFD, Long
Grove, Illinois, 60047.
14.3 Nonalienation of Plan Benefits. The rights or interests of any
participant or any participant's beneficiaries to any benefits or future
payments hereunder shall not be subject to attachment or garnishment or other
legal process by any creditor of any such participant or beneficiary, nor shall
any such participant or beneficiary have any right to alienate, anticipate,
commute, pledge, encumber or assign any of the benefits or rights which he may
expect to receive, contingently or otherwise under this plan except as may be
required by the tax withholding provisions of the Internal Revenue Code or of a
state's income tax act or pursuant to a qualified domestic relations order, as
defined in Section 414(p) of the Internal Revenue Code.
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14.4 No Employment Guarantee. None or the establishment of the plan,
modification thereof, the creation of any fund or account, or the payment of any
benefits shall be construed as giving to any participant or other person any
legal or equitable right against the employers, the plan administrator or
trustee, except as herein provided. Under no circumstances shall the terms of
employment of any participant be modified or in any way affected hereby. The
maintenance of this plan shall not constitute a contract of employment, and
participation in the plan will not give any participant a right to be retained
in the employ of the employers. None of the employers, the plan administrator or
the trustee in any way guarantees any assets of the plan from loss or
depreciation or any payment to any person. The liability of the plan
administrator or any employer as to any payment or distribution of benefits
under the plan is limited to the available assets of the trust fund.
14.5 Participant Litigation. In any action or proceeding regarding the plan
assets or any property constituting a portion or all thereof or regarding the
administration of the plan, employees or former employees of the employers or
their beneficiaries or any other persons having or claiming to have an interest
in this plan shall not be necessary parties and shall not be entitled to any
notice or process. Any final judgment which is not appealed or appealable and
may be entered in any such action or proceeding shall be binding and conclusive
on the parties hereto and all persons having or claiming to have any interest in
this plan. To the extent permitted by law, if a legal action is begun against
the employers, the plan administrator or the trustee by or on behalf of any
person, and such action results adversely to such person, or if a legal action
arises because of conflicting claims to a participant's or other person's
benefits, the costs to the employers, the plan administrator or the trustee of
defending the action will be charged to the sums, if any, which were involved in
the
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action or were payable to the participant or other person concerned. To the
extent permitted by applicable law, acceptance of participation in this plan
shall constitute a release of the employers, the plan administrator and the
trustee and their agents from any and all liability and obligation not involving
willful misconduct or gross neglect.
14.6 Successors. The plan and the trust will be binding on all persons
entitled to benefits hereunder and their respective heirs and legal
representatives, and on the plan administrator and the trustee and their
successors.
14.7 Adequacy of Evidence. Evidence which is required of anyone under the
plan shall be executed or presented by the proper individuals or parties and may
be in the form of certificates, affidavits, documents or other information which
the plan administrator, the trustee, the employers or other persons acting on
such evidence considers pertinent and reliable.
14.8 Gender and Number. Words denoting the masculine gender shall include
the feminine and neuter genders and the singular shall include the plural and
the plural shall include the singular wherever required by the context.
14.9 Waiver of Notice. Any notice required under the plan may be waived by
the person entitled to notice.
14.10 Applicable Law. The plan and the trust shall be construed in
accordance with the provisions of ERISA and other applicable federal laws. To
the extent not inconsistent with such laws, this plan shall be construed in
accordance with the laws of the state of Illinois.
14.11 Severability. If any provision of the plan shall be held illegal or
invalid for any reason, such illegal or invalid provision shall not affect the
remaining provisions of the plan, and the
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plan shall be construed and enforced as if such illegal or invalid provisions
had never been contained in the plan.
14.12 Fiduciary Responsibilities. It is specifically intended that all
provisions of the plan shall be applied so that all fiduciaries with respect to
the plan shall be required to meet the prudence and other requirements and
responsibilities of applicable law to the extent such requirements of
responsibilities apply to them. No provisions of the plan are intended to
relieve a fiduciary from any responsibility, obligation, duty or liability
imposed by applicable law. In general, a fiduciary shall discharge his duties
with respect to the plan solely in the interests of participants and other
persons entitled to benefits under the plan and with the care, skill, prudence,
and diligence under the circumstances then prevailing that a prudent man acting
in a like capacity and familiar with such matters would use in the conduct of an
enterprise of like character and with like aims.
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FIRST AMENDMENT
TO THE
FAIRFIELD SAVINGS BANK
PROFIT SHARING AND SAVINGS PLAN
WHEREAS, Fairfield Savings Bank (the "Bank") maintains the Fairfield
Savings Bank Profit Sharing and Savings Plan (the "plan"); and
WHEREAS, amendment of the plan is now considered desirable to add the
direct rollover language that is now required by law.
NOW, THEREFORE, by virtue and in exercise of the power reserved to the Bank
under the plan, and pursuant to the authority delegated to the undersigned by
the Board of Directors of the Bank, the plan be and hereby is amended effective
as of January 1, 1993 by adding the following section 7.11 to the plan.
"7.11 Direct Rollover of Eligible Rollover Distributions. This Section
applies to distributions made on or after January 1, 1993. Notwithstanding
any provision of the plan to the contrary that would otherwise limit a
distributee's election under this Section, a distributee may elect, at the
time and in the manner prescribed by the plan administrator, to have any
portion of an eligible rollover distribution paid directly to an eligible
retirement plan specified by the distributee in a direct rollover.
An 'eligible rollover distribution' is any distribution of all or any
portion of the balance to the credit of the distributee, except that an
eligible rollover distribution does not include: any distribution that is
one of a series of substantially equal periodic payments (not less
frequently than annually) made for the life (or life expectancy) of the
distributee or the joint lives (or joint life expectancies) of the
distributee and the distributee's designated beneficiary, or for a
specified period of ten years or more; any distribution to the extent such
distribution is required under section 401(a)(9) of the Code; and the
portion of any distribution that is not includible in gross income
(determined without regard to the exclusion for net unrealized appreciation
with respect to employer securities).
An 'eligible retirement plan' is an individual retirement account
described in section 408(a) of the Code, an individual retirement annuity
described in section 408(b) of the Code, an annuity plan described in
section 403(a) of the Code, or a qualified trust described in section
401(a) of the Code, that accepts the distributee's eligible
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rollover distribution. However, in the case of an eligible rollover
distribution to the surviving spouse, an eligible retirement plan is an
individual retirement account or individual retirement annuity.
A 'distributee' includes an employee or former employee. In addition,
the employee's or former employee's surviving spouse and the employee's or
former employee's spouse or former spouse who is the alternate payee under
a qualified domestic relations order, as defined in section 414(p) of the
Code, are distributees with regard to the interest of the spouse or former
spouse.
A 'direct rollover' is a payment by the plan to the eligible
retirement plan specified by the distributee."
IN WITNESS WHEREOF, Fairfield Savings Bank has caused this amendment to be
executed on its behalf by its duly authorized officer this ____ day of
_____________, 1993.
FAIRFIELD SAVINGS BANK
By____________________________________
Its___________________________________
ATTEST:
By__________________________
Its_________________________
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SECOND AMENDMENT OF
FAIRFIELD SAVINGS BANK
PROFIT SHARING AND SAVINGS PLAN
(As Amended and Restated Effective August 1, 1989)
WHEREAS, Fairfield Savings Bank (the "company") maintains the Fairfield
Savings Bank Profit Sharing and Savings Plan (the "plan"); and
WHEREAS, effective August 1, 1994, amendment to the plan is now considered
desirable to allow participants who have attained age 55 to elect to direct
investment under paragraph 5.6 in increments of 25% of the value of the
participants account; and
WHEREAS, effective January 1, 1994, amendment to the plan is now considered
desirable to reflect recent changes in compensation limitations now required by
law; and
WHEREAS, amendment to the plan is now considered desirable to clarify that
commissions are included in the meaning of earnings under the plan;
NOW, THEREFORE, by virtue and in exercise of the power reserved to the
company by Section 13.1 of the plan and pursuant to the authority delegated to
the undersigned officer of the company by its Board of Directors, the plan be
and hereby is amended in the following particulars:
1. By replacing the first sentence of Section 5.6 with the following,
effective as of August 1, 1994:
"5.6 Directed Investment Election at age 55. Any participant who has
attained age 55 may elect to have all or a portion, specified in multiples
of 25 percent, of his accounts converted to cash based upon the fair market
value of his accounts as determined by the trustee and to have such cash
amount invested in one or more of the following directed investments:"
2. By substituting "$150,000" for "$200,000" where it appears in Section
3.5(e) and Section 6.5, effective as of January 1, 1994.
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3. By adding the phrase ", including commissions," after the word
compensation in the first sentence of Section 3.5.
IN WITNESS WHEREOF, Fairfield Savings Bank has caused this amendment to be
executed on its behalf by its duly authorized officer this ____ day of
__________, 1994.
FAIRFIELD SAVINGS BANK
By:__________________________________
Its:_________________________________
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AMENDMENT NUMBER THREE
TO
THE FAIRFIELD SAVINGS BANK PROFIT SHARING AND SAVINGS PLAN
Pursuant to Section 13.1 of The Fairfield Savings Bank Profit Sharing and
Savings Plan ("Plan"), the Plan is amended as follows, effective as of
___________________________, 1996:
1. ARTICLE 4 - Section 4.1 of the Plan shall be amended in its entirety to
read as follows:
4.1 Employers' Contributions. (a) Salary Deferral Contributions. As
soon as practicable after each payroll period, but in any event within the
time prescribed by law or regulation, each employer shall deliver to the
trustee 100 percent of the salary deferral contributions (as defined in
section 3.1, including the participant's basic salary deferral
contribution) elected by the participant for that payroll period
(b) Each plan year beginning on or after the effective date and
subject to the conditions and limitations of this Article 4 and Article 10,
each employer will make a contribution under the plan for each active
participant employed by it during that plan year in an amount equal to the
sum of the following:
(i) Employer Matching Contributions. With respect to each participant
who elects to make basic salary deferral contributions or voluntary
contributions, or
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both, to the plan, the employers shall make a matching contribution, on
behalf of each such participant equal to 25 percent of the amount of
basic salary deferral contributions and voluntary contributions which
such participant has made up to a maximum matching contribution of 1.50
percent of a participant's compensation (i.e., aggregate contributions
not in excess of six percent of the participant's earnings). The employer
matching contribution shall first be applied to the basic salary deferral
contribution and then to the voluntary contribution to the extent such
basic salary deferral contribution does not exceed six percent of the
participant's earnings for such plan year.
(ii) Basic Profit Sharing Contribution. For Plan Years beginning
before August 1, 1996, an amount equal to two percent of each
participant's earnings for that plan year; for the Plan Year beginning
August 1, 1996, an amount equal to 2% of each participant's earnings for
the period beginning August 1, 1996 and ending December 31, 1996; and for
the period beginning January 1, 1997 and ending July 31, 1997 and for
Plan Years beginning after August 1, 1996, none.
(iii) Discretionary Profit Sharing Contribution. An amount as the Bank
shall determine, if any.
2. ARTICLE 5 - Section 5.3 of the Plan shall be amended in its entirety to
read as follows:
5.3 Investment Funds. (a) From time to time the Bank may cause the
trustee or an investment manager to establish one or more investment funds
for the investment and reinvestment of plan assets. The continued
availability of any investment fund is necessarily conditioned upon the
terms and conditions of investment management agreements and other
investment arrangements. While the Bank may arrange with the trustee and
investment managers for the establishment of investment funds, the
continued availability of these funds cannot be assured, nor is it possible
to assure that the arrangements or the investment funds managed by a
particular investment manager or by the trustee will continue to be
available on the same or similar terms. The Bank may, in its discretion,
direct the establishment of additional investment funds or may terminate
any investment fund as it deems appropriate and in the best interest of
plan participants. Participant loans shall constitute aggregated
investments on behalf of the participant to whom such loans are made and
shall not be reflected in any investment fund. Except as provided in this
section and sections 5.4, 5.5 and 5.6 participants' accounts shall be
invested in any one or more investment funds as determined by the trustee.
(b) Share Investment Account. Effective as of __________________, the
Bank shall make available for investment of plan assets a Employer Stock
Fund, which shall be an investment fund comprised primarily of Shares and
fractional Shares. "Shares" for all purposes of the Plan means shares and
any fraction thereof of common stock of Big Foot Financial Corp.
3. ARTICLE 5 - Article 5 shall be amended by adding new Sections 5.13, 5.14,
5.15, 5.16 and 5.17 to read as follows:
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5.13 Investment of Matching Contributions
Notwithstanding anything in this Plan to the contrary, commencing ,
1996, the Bank may, in its discretion, make all or part of the Employer
Matching Contributions in the form of Shares provided such determination is
made by resolution of its Board of Directors in advance of the period to
which the contribution relates. In the event that all or a portion of the
Employer Matching Contribution is made in the form of Shares, such Shares
shall be invested in the Employer Stock Fund. Each employer may, in its
sole and absolute discretion by resolution of its board of directors,
direct that the portion of the Employer Matching Contribution made in the
form of cash be one hundred percent (100%) invested in the Employer Stock
Fund applied to purchase Shares.
5.14 Voting Rights
Each person with an interest in the Employer Stock Fund on the
applicable record date shall have the right to participate in the decision
as to how to exercise the voting rights appurtenant to the Shares held in
the Employer Stock Fund by completing and filing a written direction with
an independent third party ("Tabulator") on a timely basis. The Tabulator
shall direct the trustee to cast affirmative votes equal to the product of
(a) the total number of Shares held in the Employer Stock Fund multiplied
by (b) a fraction, the numerator of which is the aggregate value of the
interests in the Employer Stock Fund of all persons directing that an
affirmative vote be cast, and the denominator of which is the aggregate
value of the interests in the Employer Stock Fund of all persons directing
that an affirmative vote or a negative vote be cast. Negative votes shall
be cast with respect to the remaining Shares held in the Employer Stock
Fund.
5.15 Tender Rights
Each person with an interest in the Employer Stock Fund on the
applicable record date shall have the right to participate in the decision
as to how to respond to a tender offer for Shares by completing and filing
a written direction with the Tabulator on a timely basis. The Tabulator
shall direct the trustee to tender a number of Shares equal to the product
of (a) the total number of Shares held in the Employer Stock Fund
multiplied by (b) fraction, the numerator of which is the aggregate value
of the interests in the Employer Stock Fund of all persons directing that
such Shares be delivered in response to such tender offer, and the
denominator of which is the aggregate value of the interests in the
Employer Stock Fund of all persons directing that such Shares be delivered
or that the delivery of such Shares be withheld. Delivery of the remaining
Shares held in the Employer Stock Fund shall be withheld.
5.16 Dissenters' Rights
Each person with an interest in the Employer Stock Fund on the
applicable record date shall have the right to participate in the decision
as to whether to exercise the dissenters' rights appurtenant to Shares held
in the Employer Stock Fund by completing and filing a written direction
with the Tabulator on a timely basis. The Tabulator shall direct the
trustee to exercise dissenters' rights with respect to a number of Shares
equal to the product of (a)
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the total number of Shares held in the Employer Stock Fund multiplied by
(b) a fraction, the numerator of which is the aggregate value of the
interests in the Employer Stock Fund of all persons directing that the
dissenters' rights appurtenant to which Shares be exercised, and the
denominator of which is the aggregate value of all of the interests in the
Employer Stock Fund. Dissenters' rights shall not be exercised with respect
to the remaining Shares held in the Employer Stock Fund.
5.17 Dividend Reinvestment
Dividends paid with respect to Shares held in the Employer Stock Fund
shall be reinvested in the Employer Stock Fund.
4. ARTICLE 7 - Article 7 shall be amended by adding a new Section 7.11 to read
in its entirety as follows:
7.11 Manner of Payment of Withdrawals and Distributions from the Employer
Stock Fund
Withdrawals from the Employer Stock Fund shall be made to Participants
in cash.
Distributions from the Employer Stock Fund shall be made to
participants and beneficiaries in cash, unless the participant or
beneficiary elects that such distributions may be made wholly or partially
in Shares. If the participant or beneficiary elects that such distributions
may be made wholly or partially in Shares, subject to such terms and
conditions as may be established from time to time, the number of Shares to
be distributed shall be equal to the maximum number of whole Shares that
may be acquired with the amount to be distributed in Shares, based upon the
fair market value of a Share determined as of the date of payment. An
amount of money equal to any remaining amount of the payment that is less
than the fair market value of a whole Share shall be distributed in cash.
For purposes of this Section 7.11, the fair market value of a Share shall
be determined on a uniform and nondiscriminatory basis in such manner as
the Committee may, in its discretion, prescribe.
5. ARTICLE 10 - Section 10.2 shall be amended by adding the following new
language at the end thereof:
A participant's "annual addition" also includes any employer contributions
for such limitation year to a qualified employee stock ownership plan
maintained by the employer and allocated to the participant's individual
account under such plan, plus such participant's allocable portion of any
employer contribution for such limitation year to a qualified employee
stock ownership plan maintained by the employer and applied to the payment
of principal and interest on a securities acquisition loan obtained by
such plan. Notwithstanding the foregoing, if, for any limitation year, the
aggregate amount of employer contributions to such an employee stock
ownership plan allocable to individuals who are highly compensated
employees for such limitation year does not exceed one-third of the total
of all employer contributions to such plan for such limitation year, then
that portion, if any, of any employer
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contributions that is applied to the payment of interest on a securities
acquisition loan shall not be included as an annual addition. In
determining whether more than one-third of the employer contributions for a
limitation year would be allocable to the highly compensated employees, any
amount allocable to a family member (within the meaning of Section
414(q)(6)(B) of the Code) of a highly compensated employee who is either a
five percent owner or one of the ten highly compensated employees with the
highest total compensation, shall be treated as an allocation to such
highly compensated employee. In no event shall the value of any securities
purchased under a qualified employee stock ownership plan with a securities
acquisition loan, any dividends or other earnings thereon, any proceeds
from the sale thereof or any portion of the value of the foregoing be
included as an annual addition.
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L E A S E
LEASE made as of the 29th day of April, 1976 between JOSEPH C. SANFILIPPO
and GRACE ANN SANFILIPPO (hereinafter called "Landlord") and FAIRFIELD SAVINGS
AND LOAN ASSOCIATION (hereinafter called "Tenant").
ARTICLE I
THE DEMISE
1.1 Landlord hereby demises and leases to Tenant the real property
located in Cook County, Illinois known and described as follows:
That part of the Northwest quarter of the Northeast quarter of Section
14, Township 40 North, Range 12 East of the Third Principal Meridian,
described as follows: Commencing at a point on the North line of said
Northeast quarter, said point being 427.35 feet (as measured along
said North line) East of the Northwest corner of said Northeast
quarter; thence South along a line drawn perpendicularly to said North
line, 50.00 feet to the point of intersection with the South line of
Lawrence Avenue as condemned per Court Case No. 63512848 and recorded
as Document No. 20426204, said point of intersection being the point
of beginning of the herein described parcel of land; thence continuing
along said perpendicular line, South 96.00 feet; thence East along a
line drawn parallel with the North line of said Northeast quarter, a
distance of 329.009 feet to the Westerly line of Thatcher Avenue,
being a line 33.00 feet Westerly of and parallel with the center line
thereof; thence North 2 degrees 37 minutes 30 seconds West, along said
Westerly line, 96.10 feet to the aforesaid South line of Lawrence
Avenue, being a line 50.00 feet South of and parallel with the North
line of said Northeast quarter; thence West, along said South line,
324.608 feet to the hereinabove designated point of beginning, all in
Cook County, Illinois.
Together with Landlord's right, title and interest in and to all
easements, rights and appurtenances pertaining or related thereto.
(hereinafter referred to as the "Leased Land").
It is the intention of the parties that the above described parcel
will extend to and be bounded on the west by the easterly line of the driveway
presently existing giving access to Lawrence
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Avenue. In the event a survey would disclose that the above description for any
reason does not extend to such driveway, the Leased Land shall be deemed to
extend to the said driveway.
TO HAVE AND TO HOLD the Leased Land for a term of ten (10) years
commencing on May 6, 1976 and ending on the 5th day of May, 1986.
1.2 Rights as to Buildings. The term "Building" as used in this Lease
shall mean any structure or structures or improvements, including all supports
and foundations, hereafter located on the Leased Land. There shall also be
included as part of the Building all apparatus and equipment necessary for the
complete and comfortable use, occupancy, enjoyment and operation of any building
or buildings at any time on the Leased Land (including, without limiting the
generality of the foregoing, all fittings, appliances, machinery, garage
equipment, heating, lighting, cooling, air conditioning and ventilating
equipment, wiring, plumbing, furnishings, refrigerating, hot water heating and
all other equipment excepting only in each case articles of personal property
and trade fixtures as may be owned by Tenant and installed in the Building or on
the Leased Land. Items such as vaults, counters, electronic teller equipment,
money machines, etc. shall be deemed to be trade fixtures and not a part of the
Building regardless of how the same are installed). The term "Building" shall
mean one or more buildings and the use of the singular shall not imply any
limitation on the number of structures which may be built.
1.3 So long as this Lease remains in force, any Building constructed
by Tenant on the Land shall be owned in fee simple by Tenant, but upon the
termination of this Lease, whether by passage of time or otherwise, Tenant shall
within sixty (60) days after the termination of the term of this Lease either
remove or demolish the Building, and Landlord hereby grants to Tenant, its agent
and other persons designated by Tenant, a license to enter upon the Leased Land
for a period of sixty days after the termination of this Lease for the purpose
of such removal or demolition provided that
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until such time as Tenant shall remove or demolish such Building during such
sixty (60) day period, Tenant shall pay for such license a monthly sum equal to
the monthly rent payable immediately prior to the time such license commenced.
At least one hundred eighty (180) days prior to the termination of the term of
this Lease, Tenant may offer in writing to sell the Building to Landlord at a
price to be determined by Tenant which shall be set forth in the offer. Landlord
shall have thirty (30) days to accept or reject such offer after receipt
thereof. If Landlord accepts the offer, Tenant shall convey the Building to
Landlord by quitclaim deed and Landlord shall, at the time of the conveyance,
pay to Tenant the purchase price for the Building. Notwithstanding whether or
not Landlord purchases the Building, Tenant shall have the right to remove all
items of personal property and trade fixtures installed or owned by Tenant and,
if Landlord purchases the Building, Tenant shall repair any damage caused by
such removal. If Landlord does not purchase the Building and if Tenant fails to
remove or demolish the Building within sixty (60) days after the termination of
the Lease, Landlord may cause the Building to be demolished or removed and
Tenant shall reimburse Landlord for the cost of such demolition or removal.
Tenant shall not remove any site improvement such as curbs and driveway asphalt
and title to such improvements shall vest with Landlord upon the termination of
this Lease.
1.4 If Landlord does not purchase the Building and if Tenant fails to
remove or demolish the Building within 60 days after the termination of the
Lease, Landlord may elect to allow the Building to remain on the Leased Land,
and Tenant shall by duly executed and acknowledged quitclaim deed assign all its
right, title and interest to the Building to Landlord. Upon the execution and
delivery of said quitclaim deed, Landlord shall pay to Tenant the sum of Ten
Dollars in consideration thereof.
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ARTICLE II
CONDITION OF TITLE
2.1 The title of the Leasehold Estate created by this Lease is subject
only to: Current taxes not due or payable, Easements of record.
ARTICLE III
RENT
3.1 Tenant covenants and agrees to pay to Landlord as annual rental
for each of the first five (5) years of the term hereof the sum of $20,000.00
which sum shall be paid in equal monthly installments of $1,666.66 each due on
the first of every month during the term of this Lease beginning May, 1976 and
including May 1, 1981. Commencing at the start of the sixth year and continuing
until the end of the initial ten (10) year term, Tenant covenants and agrees to
pay as rental for each of the last five (5) years, the sum of $22,500.00 in
equal monthly installments of $1,875.00 on the first day of each month during
such period. Tenant has paid to Landlord rent for the period from the date
hereof to May 11, 1976 and, on the first day of May, 1986, will pay a pro rata
rental payment for the period from May 1, 1986 to the last day of the term
unless Tenant has exercised its first option to renew.
3.2 Tenant shall pay all such rent to Landlord in lawful money of the
United States of America at such place in Chicago, Illinois as Landlord shall
from time to time designate by written notice to Tenant and in absence of such
designation then at 1777 Hamilton Avenue, 101, San Jose, California.
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ARTICLE IV
PAYMENT OF TAXES AND OTHER IMPOSITIONS
4.1 This Lease is and shall be construed as a "net-net" Lease and
Landlord shall receive all rents and all other payments to be made by Tenant
under the terms of this Lease free from any charges, assessments, impositions,
expenses or deductions of any nature whatsoever levied during the term hereof.
Tenant shall pay, as additional rent, all real estate taxes, special assessments
or other ad valorem taxes, water charges, and other governmental charges,
general and special, ordinary and extraordinary, of any kind and nature
whatsoever levied or assessed against or upon the Leased Land or upon the
Building or any other improvements on the Leased Land, or any of them during the
term of this Lease. Real estate taxes for 1975 and 1976 (payable in 1976 and
1977 respectively), and the last year of the term, shall be prorated between
Landlord and Tenant on the basis of the actual tax bill for such year when
issued and the period of time prior to the commencement of the term or, in the
case of the end of the term, the period of time after the end of the term.
Tenant shall pay all such taxes or other impositions before the same become
delinquent or before any penalty attaches for non-payment thereof. Landlord
agrees to file for a tax division if necessary, to divide the Leased Land from
other property which may be included in a tax bill. Prior to such division, or
in the event for any reason such division is not accomplished, the taxes shall
be equitably adjusted between the Leased Land and such other property based on
the respective fair market values thereof and Landlord agrees to pay all taxes
for such other property before the same become delinquent. If Landlord fails to
pay such taxes on such other land, Tenant may pay them and deduct the amount
paid from rent due to Landlord.
4.2 If, by law, any tax or imposition is payable or may be paid in
installments (whether or not the interest shall accrue on the unpaid balance of
such assessment for local
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improvements and betterments payable by Tenant hereunder), Tenant may pay the
same (and any accrued interest on the unpaid balance of such imposition) in
installments and in such event shall pay each such installment as may become due
during the term of this Lease before the date when such installment would become
delinquent, but shall have no obligation to pay installments due after or before
the commencement or termination of the term of this Lease.
4.3 Tenant may contest the validity or amount of any tax or other
imposition and shall give Landlord written notice such fact. Tenant shall not be
in default hereunder for nonpayment of such tax or imposition as long as Tenant
is contesting the same in good faith and provided that the same is paid prior to
the time any action is taken to declare a forfeiture for nonpayment thereof. Any
such contest may be made in Landlord's name and Landlord agrees to reasonably
cooperate therein, but without expense to Landlord. Tenant shall be entitled to
any refund of any taxes or other impositions which have been paid by or on
behalf of Tenant under this Lease.
4.4 Nothing herein shall be construed to require Tenant to pay any
franchise, capital stock, inheritance, transfer tax or income tax assessed or
levied against Landlord or against the rentals payable under this Lease or
against the partners constituting Landlord.
4.5 Landlord agrees to pay all taxes and other impositions assessed or
levied against the Leased Land for any period prior to the commencement of the
term of this Lease.
ARTICLE V
INSURANCE
5.1 Tenant, at its own expense, shall maintain the following insurance
for the benefit of Landlord and Tenant:
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(a) Comprehensive general public liability and property damage
insurance, including but not limited to elevator and contractual liability
insurance, protecting and indemnifying Landlord and Tenant against any and
all claims (including all costs and expenses of defending against same) for
bodily injury, disease or death or for damage or injury to or destruction
of property (including loss of the use thereof) arising out of the
ownership, maintenance or use of the Leased Land or the Building or any
other improvements thereon, the limits of which insurance shall be not less
than $500,000 in respect of bodily injury, sickness, disease or death of
any one person resulting from any occurrence, $1,000,000 in respect of
bodily injury, sickness, disease or death resulting from any one occurrence
and $300,000 in respect of damage or injury to or destruction of property
from any one occurrence.
(b) Workmen's compensation insurance and employer's liability
insurance (with a minimum limit of $100,000) covering all liability imposed
under the provisions of any workmen's compensation law, employer's
liability act or similar laws of the State of Illinois that may at any time
or from time to time be enacted.
(c) Fire and extended coverage in an amount equal to at least eighty
percent (80%) of the full insurable value of the Building.
5.2 Any of the insurance required by this Article may be included in
blanket policies taken out by Tenant, provided Tenant delivers to Landlord a
certificate from the insurer specifically stating that the blanket policies
include the specific coverage required under this Lease.
5.3 All public liability, workmen's compensation, fire and extended
coverage and employee's liability insurance policies shall be retained by
Tenant. Certificates of such insurance shall be delivered to Landlord. All
policies of insurance required herein shall provide that they shall not
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be amended or cancelled on less than ten (10) days' notice to Landlord and all
insureds and beneficiaries of such policies and shall further provide that any
losses shall be payable notwithstanding any act or negligence of Landlord,
Tenant or other insureds.
5.4 Upon execution and delivery of this Lease and thereafter not less
than thirty (30) days prior to the expiration date of any policy required to be
carried pursuant to this Article, Tenant shall deliver to Landlord certificates
indicating renewal of such policies.
5.5 All policies of insurance shall be written by companies of
recognized responsibility reasonably acceptable to Landlord and authorized to do
business in the State of Illinois.
5.6 To the extent available Landlord and Tenant agree to obtain
waivers of subrogation from the insurers under the above insurance policies.
5.7 Tenant hereby indemnifies and agrees to hold Landlord harmless
from any claims asserted against Landlord on account of any accident or injury
or damage occurring on the Leased Land or in any improvement thereon provided
that such indemnity shall not extend to persons using the driveway on the Leased
Land for access to property other than the Leased Land, unless said accident,
injury or damage is caused by Tenant.
ARTICLE VI
MAINTENANCE OF LEASED LAND AND BUILDING
6.1 Tenant assumes the sole responsibility for the condition,
operation and maintenance of the Leased Land and the Building and all other
improvements. Tenant shall, at its sole expense, promptly comply with the
requirements of every applicable statute, law, ordinance, regulation or order of
any governmental authority having jurisdiction over the Leased Land and the
Building and all other improvements thereon and shall take all actions necessary
to comply with such
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requirements. Tenant shall have the right, however, at its sole expense, to
contest the validity of any statute, law, ordinance, regulation, order or
governmental requirement provided such contest shall be diligently prosecuted,
and Tenant shall not be in default hereunder so long as Tenant is diligently
contesting such governmental requirements. Tenant hereby indemnifies Landlord
against the cost of any such proceeding and any loss, damage or expense
resulting from or incurred in connection with such contest or noncompliance.
6.2 Tenant shall maintain the Leased Land and the Building and all
other improvements thereon in good condition and repair. Tenant shall promptly
make all necessary repairs, renewals and replacements, interior and exterior,
structural and nonstructural, whether made necessary or caused by fire or other
cause, provided that in the event of a fire or other casualty or occurrence or
destruction or damage to any improvements or the Building, the provisions of
Section 9.1 shall apply.
6.3 In the event Tenant elects to rebuild or restore the Building,
Tenant shall promptly commence restoration or rebuilding of the Building and
proceed to complete the same diligently. Tenant shall deliver copies of plans
and specifications to Landlord. Such plans and specifications shall be subject
to approval of Landlord, which approval shall not be unreasonably withheld
provided that Landlord shall not disapprove any plans and specifications which
in substance rebuild or restore the Building and other improvements as they
existed prior to the damage or destruction.
6.4 If Landlord elects to allow the Building to remain pursuant to
Paragraph 1.4, Tenant shall surrender and quitclaim the Building in the same
condition as constructed, ordinary wear and tear and fixture removal excepted.
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ARTICLE VII
DEMOLITION OF EXISTING IMPROVEMENTS
AND CONSTRUCTION OF NEW BUILDING
7.1 Subject to the provisions of this Article VII, Tenant may, at
any time, remove any improvements or Building on the Leased Land and/or erect
and construct thereon a new one-story Building and other one-story improvements
or make alterations or additions to any Building or other improvements. Any
Building constructed by Tenant shall be limited to one story in height and shall
be used as a savings and loan association and related parking facilities,
offices and other uses related to the savings and loan business, including, but
not limited to, parking and drive-in facilities, as deemed necessary or
desirable by Tenant. Any such Building shall be the property of Tenant and
unless Landlord elects pursuant to Paragraph 1.4 title thereto shall not pass to
Landlord until and unless Landlord purchases the Building pursuant to Paragraph
1.3 hereof, and Tenant shall have the sole right to depreciate such Building
under the provisions of the Internal Revenue Code as it may from time to time be
amended or any similar enactment of any governmental authority having
jurisdiction thereof.
7.2 Tenant agrees to commence construction within 12 months of the
date hereof of a one-story Building containing no more than 4,000 square feet
and improvements situated substantially as shown in the plot plan attached
hereto as Exhibit A (the "Initial Building"). Following completion of the
Initial Building, if Tenant wishes to substantially alter, remodel or add to the
Initial Building, Tenant shall submit plans and specifications for such
alterations, remodeling or additions to Landlord for Landlord's approval, which
approval shall not be unreasonably withheld. Landlord acknowledges that its
approval of plans and specifications is limited solely to the location of the
Building on the Leased Land as it relates to surrounding properties and that
Landlord has no right to disapprove any interior changes desired by Tenant.
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7.3 No alteration, demolition or construction of a Building including
the Initial Building, shall be undertaken if the cost thereof shall exceed
$100,000, unless Tenant shall have delivered to Landlord one of the following
three alternative items:
(a) Copies of contracts for demolition or construction and evidence
that the general contractor has obtained a performance bond with a surety
company or companies reasonably acceptable to Landlord in an amount equal
to one hundred percent (100%) of the amount representing the cost of the
work; or
(b) Copies of contracts for demolition or construction which contracts
shall contain "no-lien" provisions pursuant to which the contractor agrees
to waive its right to file a lien; or
(c) Establishment by Tenant of a construction loan escrow at a title
insurance company and delivery to Landlord of evidence that the title
company has committed to guarantee the Tenant's interest in an amount equal
to the sum of all construction payouts free and clear of claims for
mechanic's liens to the date of such payout and within sixty (60) days
after completion of any demolition, construction or alterations, an ALTA
title insurance policy (either Owner's or Lessee's) insuring the Leasehold
Estate of Tenant or Landlord's fee interest free and clean of all
mechanic's liens which policy shall be in the amount of the cost of the
improvements or demolition.
Prior to making any improvements, demolition or construction for which
a permit is required, Tenant shall deliver to Landlord a copy of the
permit.
7.4 Following completion of the Initial Building, Tenant may
thereafter make additions or alterations to any such Buildings as Tenant deems
desirable provided Tenant complies with the provisions of Sections 7.2 and 7.3
above.
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7.5 Tenant may install on the Leased Land and in the Building and,
after installation, replace, remove and modify, any items of personal property
and trade fixtures deemed desirable by Tenant and all such items however
installed shall be deemed personal property owned by Tenant and not part of the
Building.
ARTICLE VIII
LIENS
8.1 Tenant shall neither suffer nor permit any mechanic's liens to be
filed against the title to the Leased Land nor against Tenant's title to the
Leasehold Estate hereby created by reason of work, labor, services or materials
supplied or claimed to have been supplied to Tenant or anyone having a right to
possession of such property or Building or any part thereof as a result of an
agreement with or the assent of Tenant. If any such mechanic's lien shall at any
time be filed, Tenant shall either (i) cause the same to be discharged of record
within ninety (90) days after the date Tenant has actual knowledge of such
filing or (ii) provide Landlord with surety in form or amount reasonably
satisfactory to Landlord or (iii) proceed to contest the same as hereafter
provided. If Tenant shall fail to discharge such mechanic's lien within such
period or take the other steps referred to above, then in addition to any other
right or remedy of Landlord, Landlord may, but shall not be obligated to,
discharge the same either by paying the amount claimed to be due or by procuring
the discharge of such lien by deposit in court or bonding, and in any such event
Landlord shall be entitled, if it so elects, to compel the prosecution of an
action for the foreclosure of such mechanic's lien by the lienor and to pay the
amount of the judgment, if any, in favor of the lienor with interest, costs and
allowances. In such event Tenant shall reimburse Landlord for all sums so
expended within ten (10) days after demand has been made therefor. However,
Tenant shall not be required to pay or
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discharge any such mechanic's lien and Landlord shall not be entitled to pursue
any remedies hereunder, and no default shall be created so long as Tenant shall
in good faith proceed to contest the same by appropriate proceedings; provided,
however, that Tenant shall give notice in writing to Landlord of its intention
to contest the validity of such lien and shall indemnify Landlord against any
loss, cost or expense in connection with such contest.
8.2 Tenant hereby indemnifies and agrees to hold Landlord harmless
from and against all loss, cost or expense arising from any mechanic's lien
claims which may be filed against the Leased Land or any Building or improvement
thereon arising from acts of Tenant.
ARTICLE IX
DAMAGE TO IMPROVEMENTS
9.1 In the event of damage by fire or otherwise to any Building on the
Leased Land, Tenant may repair and restore the same or, if Tenant so elects,
demolish all or any portion of the Building instead of repairing and restoring
the Building. All insurance money recovered by the Tenant may be used for
repairing, restoration or demolition and any insurance proceeds not used for
such purpose shall be paid to Tenant.
9.2 No damage or destruction to the Building or any other improvements
on the Leased Land shall reduce or abate the rental due and payable under this
Lease by Tenant or cause a termination of this Lease or Tenant's obligations
hereunder.
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ARTICLE X
PUBLIC UTILITY CHARGES
10.1 Payment of Public Utility Charges. Tenant shall pay or cause to
be paid all charges for gas, electricity, light, heat or power, telephone or
other communication service used, rendered or supplied upon or in connection
with the Leased Land and any building thereon and also any charges or expenses
in connection with any alterations, additions, installations or changes required
or desired in connection with the supplying or using of such utilities or
services or substitutes therefor throughout the term of this Lease, and to
indemnify Landlord and save it harmless against any liability or damages on such
account.
ARTICLE XI
QUIET ENJOYMENT
11.1 If and so long as the Tenant shall pay the net rent reserved by
this Lease, and shall perform and observe all the covenants, agreements and
conditions herein contained on the part of the Tenant to be performed and
observed, the Tenant shall quietly enjoy the Leased Land without hindrance or
molestation by the Landlord, or any person or persons claiming under Landlord,
subject, however, to the covenants, agreements and conditions of this Lease and
Landlord represents that it has good right to make this Lease for the full term
hereby granted, subject only to the matters in Paragraph 2.1.
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ARTICLE XII
CONDEMNATION
12.1 In the event that all or any part of the Leased Land or any
Buildings thereon or any interest therein shall be taken or damaged by the
exercise of the power of eminent domain (including any temporary taking for
governmental occupancy which extends beyond the term of this Lease), then
(whether or not this Lease shall terminate by operation of law upon such
exercise of the power of eminent domain):
(a) The amount of damages resulting to Landlord and Tenant,
respectively, and to the respective interests of Landlord and Tenant in and
to the Leased Land and in, to and in connection with this Lease or any
Building on the Leased Land, by reason of such exercise of the power of
eminent domain, shall be separately determined and computed by the court
having jurisdiction and separate awards and judgments with respect to such
damages to Landlord and Tenant respectively, and to each of such respective
interest shall be made and entered.
(b) In the event that such court or jury shall make a single award
without separately determining the respective interests of Landlord and
Tenant, and if Landlord and Tenant shall not agree in writing as to their
respective portions of such award within twenty (20) days after the date of
the final determination by such court or jury of the amount thereof,
Landlord and Tenant agree to submit the matter to such court on stipulation
for the purpose of a judgement determinative of their respective shares.
(c) If for any reason the trial judge refuses to permit adjudication
of the respective interests of Landlord and Tenant, then such respective
interests shall be determined in a
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separate action instituted by Landlord or Tenant to determine the amount to
which each is entitled.
(d) Notwithstanding any other provision of this Article, it is agreed
between Landlord and Tenant that Tenant shall be entitled to all portions
of the award allocable to the Building and other improvements and all
portions of the award allocated to the Leased Land shall be divided between
Landlord and Tenant as their interests may appear. If, for any reason,
Landlord receives or is awarded the entire award for such Building or other
improvements or a share not based on a prior agreement between Landlord and
Tenant as to their respective amounts or not based on a judicial
determination of the respective shares based on the provisions of this
Lease, Landlord shall immediately upon receipt of such award deposit the
same in an escrow with a financial institution as escrowee under an escrow
agreement containing provisions consistent with the relevant provisions of
this Lease, and upon adjudication of the property shares of Landlord and
Tenant pursuant to this lease, the escrowee shall pay to Tenant the amount
to which it is entitled.
12.2 In the event that all the Leased Land, or such portion thereof as
shall make the balance of the Leased Land not, in Tenant's opinion, which
opinion shall be exercised in good faith by Tenant based on reasonably prudent
business judgment under the circumstances then existing, reasonably capable of
restoration to an economically sound unit (taking into consideration the rent
payable under this Lease), shall be taken by the exercise of the power of
eminent domain or by agreement between Landlord, Tenant and those authorized to
exercise such power, or if this Lease is terminated by operation of law as a
result of the exercise of such power of eminent domain, all rent, and additional
rent and other sums or sums of money and other charges provided to be paid by
Tenant shall be apportioned and paid to the date of such taking and this Lease
shall terminate as of
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such date. If the foregoing sentence is not applicable to any taking pursuant to
the exercise of the power of eminent domain:
(a) Rent (but not any other charges provided to be paid by Tenant,
which shall continue without change) shall be apportioned and paid to the
date of such taking.
(b) After the date of taking, this Lease shall continue in full force
and effect without any modification, except that the monthly rental payable
by Tenant shall be equitably reduced in the proportion that the portion of
the area of Leased Land taken bears to the total area of the Leased Land
prior to the taking.
12.3 In the event that all or any part of the Leased Land or any
Building thereon shall be taken by the exercise of the right of eminent domain
for governmental occupancy for a temporary period:
(a) This Lease shall not terminate and Tenant shall continue to
perform and observe all of its obligations hereunder as though such
temporary taking had not occurred except only to the extent that it may be
prevented from so doing by the terms of the order of the authority which
made the taking.
(b) In the event such taking for governmental occupancy is for a
period entirely within the term of this Lease, then any award made shall be
paid to Tenant.
(c) If the period of governmental occupancy extends beyond the
termination of the term of this Lease, then any award shall be apportioned
between Landlord and Tenant as of the date of such termination.
12.4 The provisions of this Article XII shall survive the termination
of this Lease and shall constitute a separate contract between Landlord and
Tenant in regard to their respective rights in and to the proceeds of any
condemnation award.
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ARTICLE XIII
EVENTS OF DEFAULT
13.1 The following events are hereby defined as "Events of Default":
13.2 The failure of Tenant to pay any installment of rent, additional
rent, or any other payments as herein provided or required, when due and the
continuance of such failure for a period of ten (10) days after notice thereof
in writing.
13.3 The failure of Tenant to perform any of the other covenants,
conditions and agreements of this Lease on the part of Tenant to be performed,
and the continuance of such failure for a period of twenty (20) days after
notice in writing thereof (which notice shall specify the respects in which
Landlord contends that Tenant has failed to perform any of such covenants,
conditions and agreements) from Landlord to Tenant unless, with respect to any
default which cannot be cured within twenty (20) days, Tenant, or any person
holding by, through or under Tenant in good faith, promptly after receipt of
such written notice, shall have commenced and thereafter shall continue
diligently to prosecute all action necessary to cure such default.
13.4 (a) The filing of an application by Tenant for a consent to the
appointment of a receiver, trustee or liquidator of itself or of all of its
assets, (b) the filing by Tenant of a voluntary petition in bankruptcy or the
filing of a pleading in any court of record admitting in writing its inability
to pay its debts as they come due, (c) the making by Tenant of a general
assignment for the benefit of creditors, (d) the filing by Tenant of an answer
admitting the material allegations of, or its consenting to, or defaulting in
answering, a petition filed against it in any bankruptcy or receivership
proceeding.
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13.5 The entry of an order, judgment or decree by any court of
competent jurisdiction, adjudicating Tenant a bankrupt, or appointing a
receiver, trustee or liquidator of it or of all its assets, and such order,
judgment or decree continuing unstayed and in effect for any period of ninety
(90) consecutive days.
ARTICLE XIV
LANDLORD'S REMEDIES
14.1 Landlord may treat, at its option, any one or more of the Events
of Default as a breach of this Lease and thereupon by serving written notice to
Tenant Landlord shall have, in addition to all other remedies provided by law,
one or more of the following remedies:
14.2 Landlord may terminate Tenant's right of possession and may
repossess the Leased Land by forcible entry and detainer suit or otherwise,
without demand or notice of any kind to Tenant (except for such notice expressly
provided for in this Lease) and without terminating this Lease, in which event
Landlord may, but shall be under no obligation to do so, relet all or any part
of such Leased Land for such rent and upon such terms as shall be satisfactory
to Landlord. If the Leased Land is not relet, or if the Leased Land is relet and
a sufficient sum shall not be realized from such reletting after paying all of
the costs and expenses of such reletting and the collection of the rent accruing
therefrom, to satisfy the rent above provided to be paid, then Tenant shall pay
to Landlord as damages a sum equal to the then value as discounted of the rent
reserved in this Lease for such period or periods, or, if the Leased Land has
been relet, Tenant shall satisfy and pay any such deficiency upon demand
therefor from time to time; and Landlord may file suit to recover any sums
falling due under the terms of this Paragraph 14.2 from time to time. Any suit
or recovery of any
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portion less than the entire amount due Landlord hereunder shall be no defense
to any subsequent action brought for any amount not theretofore reduced to
judgment in favor of Landlord.
14.3 In the event of any breach or threatened breach by Tenant of any
of the terms, covenants, agreements, provisions or conditions contained in this
Lease, Landlord shall be entitled to enjoin such breach or threatened breach and
shall have the right to invoke any right and remedy allowed at law or in equity
or by statute or otherwise as though re-entry, summary proceedings, and other
remedies were not provided for in this Lease.
14.4 Upon the termination of this Lease due to an Event of Default
which is not remedied or upon the termination of Tenant's right of possession
due to a default, Tenant will at once surrender possession of the Leased Land to
Landlord and remove all effects therefrom and may remove all Buildings in
accordance with Paragraph 1.2 hereof; and if such possession is not immediately
surrendered, Landlord may forthwith re-enter the Leased Land and repossess
itself thereof as of its former estate and remove all persons and their effects,
using such force as may be necessary without being deemed guilty of any manner
of trespass or forcible entry or detainer.
14.5 Tenant covenants and agrees that if it shall fail to pay any
taxes or other governmental impositions, or fail to obtain and maintain in
effect the insurance herein required or fails to make any other payment or
fulfill any other covenant herein contained Landlord may, but shall not be
obligated to, make such payment or fulfill such covenant and upon demand Tenant
shall reimburse Landlord for all sums so expended together with interest at the
rate of eight percent (8%) per annum.
14.6 Notwithstanding the grace periods during defaults set forth in
Article XIII, interest shall accrue on any late payment from the date due at the
rate of eight percent (8%) per annum until paid.
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14.7 If Tenant holds over after the exemption of the term of this
Lease, Tenant shall be deemed to be tenant from month to month and the rental
payable by Tenant during the period of holding over shall be $2,759.00 per
month.
ARTICLE XV
NO WAIVER
15.1 The receipt of rent by Landlord, with knowledge of any breach of
this Lease by Tenant or of any default on the part of Tenant in the observance
or performance of any of the conditions, agreements or covenants of this Lease,
shall not be deemed to be a waiver of any provision of this Lease. No failure on
the part of Landlord to enforce any covenant or provision herein contained, nor
any waiver of any right thereunder by Landlord, unless in writing, shall
discharge or invalidate such covenant or provision or affect the right of
Landlord to enforce the same in the event of any subsequent breach or default.
No covenant or condition of this Lease shall be deemed to have been waived by
Landlord unless such waiver be in writing, signed by Landlord or Landlord's
agent duly authorized in writing. Consent of Landlord to any act or matter must
be in writing and shall apply only with respect to the particular act or matter
to which such consent is given and shall not relieve Tenant from the
obligations, wherever required under this Lease, to obtain the consent of
Landlord to any other act or matter. The receipt by Landlord of any rent or any
other sum of money or any other consideration hereunder paid by Tenant after the
termination, in any manner, of the term demised, shall not reinstate, continue
or extend the term herein demised, unless so agreed to in writing and signed by
Landlord.
21
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ARTICLE XVI
ESTOPPEL CERTIFICATES
16.1 The Landlord, within thirty (30) days after written request of
the Tenant, will furnish a written statement, duly acknowledged, of the
following items: (a) the amount of the rent due, if any; (b) whether or not the
insurance required by Article V above has been supplied in compliance therewith;
(c) whether or not this Lease is unmodified and in full force and effect (or, if
there have been modifications, that the same are in full force and effect as
modified and stating the modifications); and (d) whether or not Tenant is in
default.
16.2 The Tenant, within thirty (30) days after written request of
Landlord, will furnish a written statement, duly acknowledged, as to (a) whether
this Lease is unmodified and in full force and effect; (b) whether this Lease
has been modified or amended in any respect and submitting copies of such
modifications, if any; and (c) whether there are any defaults thereunder to the
knowledge of the Tenant and specifying the nature of such defaults, if any.
16.3 It is intended that any statement delivered pursuant to this
Article may be relied upon by any prospective purchaser of Landlord's interest
in the Leased Land, by any assignee of Tenant's leasehold estate or Tenant's
interest in any Building or by a sublease of all or any part of the Leased Land
or Building or by any supervisory agency having jurisdiction over the affairs of
Tenant, but such statement shall have no effect, as an estoppel or otherwise,
with respect to any other party. Upon the failure of the Landlord or the Tenant,
as the case may be, to furnish such statement within the said thirty (30) day
period, it shall be conclusively presumed that said Lease is in full force and
effect and that there are no defaults thereunder. Upon the failure of the
Landlord or the Tenant, as the case may be, to furnish such statements within
the said thirty (30) day period, the party requesting
22
<PAGE>
such statement shall have the right to prepare such statement and to execute it
as the other party's attorney-in-fact.
ARTICLE XVII
ASSIGNMENT OR SUBLETTING
17.1 Tenant may not assign or sublet its interest in this Lease or all
or any portion of the Leased Land or Building or other improvements without
Landlord's prior written consent, which consent shall not be unreasonably
withheld provided that Tenant may assign the Lease to any corporation owned by
Tenant or to any corporation which acquires substantially all the assets of
Tenant and Tenant may sublet portions of the Building to entities which may
conduct business related to savings and loan business such as safe deposit
business and insurance business.
17.2 Tenant shall have no right to encumber Landlord's fee estate in
the Leased Land.
ARTICLE XVIII
OPINION TO REVIEW
18.1 Tenant is hereby granted an option to renew the term of this
Lease for two additional periods of five (5) years each commencing upon the
termination of the initial ten (10) year term. Tenant may exercise each option
by written notice mailed to Landlord at any time prior to one hundred eighty
(180) days before the termination of the initial ten (10) year term in the case
of the first such option, or the end of the prior five (5) year option period in
the case of subsequent option periods, provided that if Tenant fails to serve
such notice prior to one hundred eighty (180) days before the end of such term,
Landlord shall notify Tenant that Tenant has not elected to renew the
23
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terms and Tenant shall have an additional five business days after receipt of
such notice to elect to renew the term of the Lease. If tenant elects to renew
the term of the Lease for the first five (5) year renewal period, the annual
rental for such renewal term shall be $25,000.00 payable in monthly installments
of $2,083.34 on the first day of each month of the first renewal term with
appropriate adjustments for any monthly payment for partial months at the
commencement and end of the renewal term. If Tenant elects to renew the term of
the Lease for the second five (5) year renewal period, the annual rental for
such renewal term shall be $27,500.00 payable in monthly installments of
$2,291.67 on the first day of each month. Except as otherwise provided in this
Paragraph 18.1, all of the terms and provisions of this Lease shall apply to
each renewal term.
ARTICLE XIX
DRIVEWAYS AND EASEMENTS
19.1 Adjoining the Lease Land to the south and west are driveways
which provide access to the Leased Land as well as the existing National Tea
store located southwest of the Leased Land. Landlord hereby granted to Tenant,
its successors, assigns, employees, guests, agents and invitees, an easements of
ingress and egress for vehicular and foot traffic for the benefit of the Leased
Land over and across each of said existing driveways each being approximately 25
feet in width. Landlord agrees to maintain said driveways and to keep the same
free from ice and snow and open for ingress and egress. Landlord and Tenant
agree to cooperate in planning vehicular flow so as to accommodate traffic, but
Landlord agrees not to change traffic plans without Tenant's consent, which
consent shall not be reasonably withheld.
Tenant acknowledges that Landlord has agreed with National Tea Company
to place a driveway across the Leased Land from Lawrence Avenue to the driveway
adjoining the Leased
24
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Land on the south which driveway shall be approximately 25 feet, more or less,
west of the easterly line of the Leased Land. Tenant consents to the
construction and use of such driveway by customers and invitees of the National
Tea store which use shall be in common with Tenant and its successors, assigns,
employees, agents, guests and invitees. Landlord shall bear eighty percent (80%)
of the initial cost of installing and paving such driveway and Tenant shall pay
twenty percent (20%) of the cost. Thereafter, Tenant agrees to maintain the
portion of such driveway as is located on the Leased Land and agrees to pay all
real estate taxes on such portion of the driveway as are assessed during the
term of this lease. The traffic flow on such driveway shall be subject to
Tenant's approval, which approval shall not be unreasonably withheld.
Tenant's acknowledges that the use of the two driveways adjoining the
Leased Land and the driveway crossing the Leased Land may be expanded to include
use for the now vacant area south of the Leased Land provided that the said
driveways are at all times open to permit unobstructed ingress and egress to the
Leased Land.
Landlord may relocate, at its option, the driveway to the south of the
Leased Land not more than sixty feet to the south of its present location,
provided the easement of Tenant pursuant to Paragraph 19.1 shall be extended to
include the driveway as relocated and Tenant shall be granted an easement of
ingress and egress of approximately 25 feet in width from the Leased Land to the
relocated driveway.
ARTICLE XX
SIGNS
20.1 Tenant shall have the right to install such sign or signs on the
Leased Land and Building as Tenant may desire, subject only to applicable
building and zoning regulations of the
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Village of Norridge and the approval of the Landlord which approval shall not be
unreasonably withheld. Landlord shall have the right to install a sign on a ten
foot by ten foot area acceptable to Landlord and Tenant on the northeast corner
of the Leased Land pertaining to uses located on property owned by Landlord
south of the Leased Land, subject to the reasonable approval of Tenant as to
size and content of said sign with respect to those normally used in Chicago,
Illinois for commercial development.
ARTICLE XXI
NOTICES
21.1 In every case where under any of the provisions of this Lease or
in the opinion of either Landlord or Tenant, or otherwise, it shall or may
become necessary or desirable to make or give any declaration or notice of any
kind, it shall be sufficient if a copy of any such declaration or notice is sent
by registered or certified mail, postage prepaid, properly addressed to Landlord
or Tenant at such address as the one party or parties may have theretofore
furnished to the other party in writing for the purpose of receiving notices; of
if no such address shall have been theretofore furnished to such party for such
purpose, then properly addressed to the party as follows:
If intended for Tenant:
Fairfield Savings and Loan Associates
1601 North Milwaukee
Chicago, Illinois 60647
Attention: President
If intended for Landlord:
c/o Joseph C. Sanfillipo
1777 Hamilton Avenue
San Jose, California 95125
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21.2 Whenever a notice is required by this Lease to be given by either
party hereto to the other party, the notice shall be considered as having been
given on the day on which the notice was placed in the mail as provided by this
Article XXI.
ARTICLE XXII
MISCELLANEOUS
22.1 This Lease contains the entire agreement between the parties and
shall not be modified in any manner except by an instrument in writing executed
by the parties or their respective successors or assigns in interest.
22.2 Any word contained in the text of this Lease shall be read as the
singular or the plural and as the masculine, feminine or neuter gender as may be
applicable in the particular context.
22.3 The captions of this Lease are for convenience and reference only
and in no way define, limit or describe the scope or intent of this Lease, nor
in any way affect this Lease.
22.4 All the provisions of this Lease shall be deemed and construed to
be "conditions" as well as "covenants", as though the words specifically
expressing or importing covenants and conditions were used in each separate
provision hereof and that all the covenants herein shall be deemed to be
covenants running with the land and binding on or inuring successors and assigns
of Landlord and Tenant.
22.5 Time is of the essence as to the covenants in this Lease.
22.6 This Lease shall be construed and enforced in accordance with the
laws of the State of Illinois.
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22.7 In the event of any litigation between Landlord and Tenant
arising on account of the Lease, the prevailing party shall be entitled to
recover its reasonable attorneys fees from the other party.
ARTICLE XXIII
LANDLORD'S COVENANT
23.1 In consideration for the agreement herein contained and in
particular the agreement by Tenant to permit a driveway across the Leased Land
to serve other premises and to permit a sign to advertise other business,
Landlord covenants and agrees that as long as this Lease is in effect it will
not permit any tenant of any other portion of the shopping center property owned
or controlled by Landlord as shown on Exhibit B attached hereto to establish a
bank or savings and loan association or any facility, such as a drive-in window
or machine for accepting deposits, owned or controlled by a bank or savings and
loan association and Landlord agrees not to sell any portion of such property to
a financial institution for such use. Nothing herein, however, shall apply to
installation of such facilities within the existing National Tea store shown on
Exhibit B.
ARTICLE XXIV
MEMORANDUM OF LEASE
24.1 The parties shall prepare, execute and cause to be recorded a
short form Memorandum of Lease in the form attached hereto as Exhibit C.
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ARTICLE XXV
In the event any provision of this Lease is held to be unenforceable,
such provision shall be separable from the remaining provisions and the
remaining provisions shall not be affected thereby.
IN WITNESS WHEREOF, the parties hereto have caused this Lease to be
executed this 29th day of April, 1976.
FAIRFIELD SAVINGS AND LOAN
SSOCIATION
By ______________________________ __________________________________
JOSEPH C. SANFILIPPO
ATTEST:
__________________________________
GRACE ANN SANFILIPPO
_____________________________
29
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ARTICLE XXV
In the event any provision of this lease is held to be unenforceable, such
provision shall be separable from the remaining provisions and the remaining
provisions shall not be affected thereby.
IN WITNESS WHEREOF, the parties hereto have caused this Lease to be
executed this _____ day of ___________, 1976.
FAIRFIELD SAVINGS AND LOAN LAWRENCE-CUMBERLAND
ASSOCIATION SHOPPING CENTER,
a California Partnership
By /s/George M. Briody, Jr. By /s/Joseph Sanfilippo
----------------------------- ----------------------------------
Joseph C. Sanfilippo
ATTEST:
By /s/Grace A. Sanfilippo
----------------------------------
Grace Ann Sanfilippo
/s/June Hamilton
-----------------------------
30
<PAGE>
AMENDMENT TO LEASE
Agreement made this 29th day of April, 1976 by and between Joseph C.
Sanfilippo and Grace Ann Sanfilippo ("Landlord") and Fairfield Savings and Loan
Association ("Tenant")
Whereas, Landlord and Tenant have entered into a lease dated as of April
29, 1976 for certain premises located on the southease corner of Thatcher and
Lawrence in Chicago, Illinois (the "Lease") and
Whereas, the parties desire to amend Article XVII of the Lease.
Now, Therefore, Article XVII of the Lease is hereby amended by adding
thereto the following:
Tenant may also sublet to another financial institution. If Tenant
requests permission to sublease for some use other than a financial
institution, which request shall only be made if Tenant is unable to use
the leased premises for its own use, Landlord shall not unreasonably
withhold its consent provided (i) the proposed use is not inconsistent with
other uses now within the area depicted on Exhibit B to the lease and (ii)
Landlord may request a reasonable charge or fee or reasonably adjust the
rental for consenting to the sublease it being intended that Tenant may
sublease for such other uses if Landlord's ability to develop its shopping
center is not adversely affected thereby or Landlord is compensated for any
such adverse effect.
IN WITNESS WHEREOF, Landlord and Tenant have signed this amendment as of
April 29, 1976.
FAIRFIELD SAVINGS AND LOAN
ASSOCIATION
By /s/George M. Briody, Jr. By /s/Joseph Sanfilippo
----------------------------- ----------------------------------
Joseph C. Sanfilippo
ATTEST:
/s/June Hamilton By /s/Grace A. Sanfilippo
----------------------------- ----------------------------------
Grace Ann Sanfilippo
31
<PAGE>
FIRST AMENDMENT TO LEASE
THIS FIRST AMENDMENT TO LEASE (the "Agreement") is made and entered into this
29th day of December 1995, by and between the Estate of Joseph C. Sanfilippo and
Grace Ann Sanfilippo, doing business as Lawrence & Cumberland Shopping Center
("Landlord"), and Fairfield Savings Bank, F.S.B., successor in interest to
Fairfield Savings and Loan Association ("Tenant").
WITNESSETH:
WHEREAS, Landlord's predecessor in interest and Tenant's predecessor in interest
have previously entered into a lease agreement dated April 29, 1976 (the
"Lease"), for the use and occupancy of certain land by Tenant (the "Leased
Land") as more particularly described in the Lease, located at 8301 West
Lawrence Avenue, Norridge, Illinois; and
WHEREAS, Landlord and Tenant do hereby intend to amend and modify the Lease as
hereinafter set forth.
NOW, THEREFORE, in consideration of the mutual covenants and conditions
contained herein, the receipt and sufficiency of which is hereby acknowledged,
the parties hereto agree as follows:
1. Extended Term. The Term of the Lease shall be extended for a term of ten
(10) years (the "Extended Term") commencing upon May 1, 1996 (the "Extended
Term Commencement Date") and continuing through April 30, 2006.
2. Rental. The annual rental for the Leased Land is hereby increased to
Forty-Three Thousand and No/100 Dollars ($43,000.00), payable in advance in
equal monthly installments of $3,583.33, for a term commencing May 1, 1996
and terminating April 30, 2001 and an annual rental of Fifth Thousand and
No/100 Dollars ($50,000.00) payable in advance in equal monthly
installments of $4,166.67 commencing on May 1, 2001 and terminating April
30, 2006. Additionally, the annual rental for years six (6) through ten
(10) of the Extended Term shall be adjusted, commencing on May 1, 2001, by
the "CPI" index as provided hereinafter.
The May 1, 2001 adjustment shall be based on the percentage difference
between the Price Index (as defined hereinafter) for the month of March,
2001 and the Price Index for the Base Year, which for the purposes of this
Agreement is defined as October, 1995. The annual rental shall be adjusted
as set forth hereinabove by adding to the annual rental the sum resulting
from multiplying the annual rental payable for years six (6) through ten
(10) by the percentage described in this paragraph. The "Price Index" shall
be the Consumer Price Index ("CPI") now known as the "U.S. Department of
Labor, Bureau of Labor Statistics Consumer Price Index, Average for Labor
Wage Earners and Clerical Workers, all items (1982-84 = 100)".
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The resulting new annual rental, which in each instance shall in no event
be less than Fifty Thousand Dollars ($50,000.00), shall be payable in equal
monthly installments as set forth hereinabove.
In the event the CPI is discontinued, comparable statistics on the
purchasing power of the consumer dollar, as published at the time of said
discontinuance, by a responsible financial periodical of recognized
authority, shall be used for making such computation.
3. Option to Renew. So long as the Lease is in full force and effect and
Tenant either at the time of exercising the Option to Renew described in
this Paragraph or at the time of the commencement of the following
described Option Period is not in default under the Lease either at the
time of the exercise of the Option to Renew described in this Paragraph or
at the time of the commencement of each of the following described Option
Periods:
Tenant is hereby granted an option to renew the Lease (the "Option to
Renew") for two (2) successive renewal terms (the "Option Periods"), each
commencing upon the day next following the expiration of the then current
Lease Term. The Option Periods shall each be for a term of five (5) years.
The terms of the Lease during the Option Period shall be the same as during
the current Lease period except as provided below. The Option to Renew must
be exercised no less than one hundred eighty (180) days prior to the
expiration of the Lease by written notice to Landlord sent by registered or
certified mail, return receipt requested. In the event Tenant fails to
notify Landlord, in the manner herein specified, this Option to Renew shall
be of no further force and effect.
The annual rental for the Option Periods shall be Fifth Thousand and No/100
Dollars ($50,000.00) adjusted by the CPI, in accordance with the terms of
Section 2 of this Agreement. The annual rental shall be adjusted on May 1,
2006 and May 1, 2011, and such adjustments shall be based on the percentage
difference between the Price Index for the months of March, 2006 and March,
2011, respectively, and the Price Index for the Base Year. In no event
shall the annual rental during any Option period decrease below Fifty
Thousand and No/100 Dollars ($50,000.00).
4. Notice. As of the date hereof, the notice address for Landlord, as
referenced in Sections 3.2 and 21.1 of the Lease, shall be changed to:
Lawrence & Cumberland Shopping Center
c/o Lorna Stuart
18809 Cox Avenue, Suite 200
Saratoga, California 95070
with a copy to:
Stephen R. Chesler
Schwartz & Freeman
401 N. Michigan Avenue, Suite 1900
Chicago, Illinois 60611
33
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5. Default Rate. As of the date hereof, the reference to "eight percent (8%)"
in Sections 14.5 and 14.6 of the Lease shall be deleted, and "the prime
rate of interest as announced from time to time by First National Bank of
Chicago, Chicago, Illinois, plus two percent (2%)" shall be substituted in
lieu thereof.
6. Holdover Rent. As of the date hereof, the reference in Section 14.7 of the
Lease to $2,750.00 per month" shall be deleted, and "one hundred fifty
percent (150%) of the monthly rental payable for the immediately preceding
month of the terms of the Lease" shall be substituted in lieu thereof.
7. Conflict of Terms. Except as expressly amended herein, all terms and
conditions in the Lease shall remain unchanged and in full force and
effect, and all capitalized terms not otherwise defined herein shall have
the meaning set forth in the Lease. In the event of any conflict between
the terms and conditions of the Lease and the terms and conditions of this
Agreement, the terms and conditions of this Agreement shall control.
LANDLORD: TENANT:
FAIRFIELD SAVINGS BANK, F.S.B.
By: /s/Delora J.W. Sanfilippo By: /s/George M. Briody
------------------------------ ----------------------------------
Delora J.W. Sanfilippo, Its: President
Administrator of the Estate of ----------------------------------
Joseph C. Sanfilippo
Witness: /s/Loma Stuart Witness: /s/F. Gregory Opelka
--------------------------- ------------------------------
Date: Date: 5/23/96
------------------------------ --------------------------------
By: /s/Grace Ann Sanfilippo
-------------------------------
Grace Ann Sanfilippo
Witness: /s/(illegible signature) Witness: /s/Barbara J. Urban
--------------------------- ------------------------------
Date: Date: 5/23/96
------------------------------ --------------------------------
34
<PAGE>
EX-23.1
Consent of Ind. Cert. Pub. Accts.
Consent of Independent
Certified Public Accountants
The Board of Directors
Fairfield Savings Bank, F.S.B:
We consent to the use of our report included herein and to the reference to our
firm under the headings "Effects of Conversion - Tax Aspects," "Legal and Tax
Opinions," and "Experts" in the prospectus.
/s/ KPMG Peat Marwick LLP
Chicago, Illinois
October 29, 1996
<PAGE>
[LETTERHEAD OF GOMBERG, SHARFMAN, GOLD & OSTLER, P.C.]
CONSENT OF GOMBERG, SHARFMAN, GOLD & OSTLER, P.C.
We hereby consent to the reference to our firm under the heading "Legal
Matters" in the prospectus which is a part of (i) the Registration Statement on
Form S-1 of Big Foot Financial Corp., filed with the Securities and Exchange
Commission and (ii) the Application for Conversion on Form AC of Fairfield
Savings Bank, F.S.B. filed with the Office of Thrift Supervision.
Very truly yours,
GOMBERG, SHARFMAN, GOLD AND OSTLER, P.C.
October 28, 1996
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
FAIRFIELD SAVINGS BANK, F.S.B.
Long Grove, Illinois
CONVERSION VALUATION
APPRAISAL REPORT
AS OF:
SEPTEMBER 6, 1996
PREPARED BY:
CAPITAL RESOURCES GROUP, INC.
1211 CONNECTICUT AVENUE, NW
SUITE 200
WASHINGTON, D.C. 20036
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
[LETTERHEAD]
September 6, 1996
Board of Directors
Fairfield Savings Bank, F.S. B.
1190 RFD
Long Grove, Illinois 60047-7304
Dear Board Members:
At your request, we hereby provide an independent appraisal of the
estimated pro forma market value of the common stock of Big Foot Financial Corp.
("Holding Company") to be issued upon conversion of Fairfield Savings Bank, F.S.
B. ("Fairfield" or the "Bank") from a mutual to stock form and upon the issuance
of the Bank's common stock to the Holding Company, a newly formed corporation
which is a unitary savings and loan holding company. It is anticipated that,
initially, the sole subsidiary of the Holding Company will be the Bank. This
appraisal is furnished pursuant to the requirements of Regulation 563b.7 and the
"Guidelines for Appraisal Reports for the Valuation of Savings Institutions
Converting from Mutual to Stock Form of Organization" of the Office of Thrift
Supervision ("OTS").
Capital Resources Group, Inc. ("CRG") is an investment banking and
financial consulting firm that specializes in financial valuations and analyses
of business enterprises and securities. The background and experience of CRG is
detailed in Exhibit V-1. We believe that, except for the fee we will receive
for our appraisal, we are independent of the Bank.
In preparing our appraisal, we have reviewed Fairfield's Application for
Approval of Conversion, including the Proxy Statement, as filed with the OTS.
We have conducted an analysis of the Bank that has included discussions with the
Bank's management, with KPMG Peat Marwick LLP, the Bank's independent auditor,
and with the firm of Thacher Proffitt & Wood, the Bank's conversion counsel. In
addition, where appropriate, we have considered information based on other
available published sources that we believe are reliable; however, we cannot
guarantee the accuracy and completeness of such information.
We investigated the competitive environment within which Fairfield operates
and have assessed the Bank's relative strengths and weaknesses. Our analysis
included an examination of the potential effects of conversion on Fairfield's
operating characteristics and financial performance as they related to the pro
forma market value of the Holding Company. We also have reviewed, among other
things, the economy in Fairfield's primary market area and have compared the
Bank's financial performance and condition with that of companies in Illinois,
nationally and with that of a selected group of publicly-traded companies. We
have reviewed conditions in the securities markets in
<PAGE>
CAPITAL RESOURCES GROUP, INC.
Board of Directors
September 6, 1996
Page 2
general and in the market for thrift stock in particular. We also have
considered the expected market for the Holding Company's common stock after
conversion.
In preparing our appraisal, we have relied upon and assumed the accuracy
and completeness of financial and statistical information provided by the Bank
and the Bank's independent auditors. We did not independently verify the
financial statements or other information provided by the Bank. Our appraisal is
based on the Bank's representation that the information contained in the
Prospectus and Proxy Statement and additional evidence furnished to us by the
Bank are truthful, accurate and complete.
It is our opinion that, as of September 6, 1996, the estimated pro forma
market value of the Holding Company's (and, therefore, the Bank's)
to-be-outstanding common stock was $17,500,000, or 1,750,000 shares at $10.00
per share. The resultant range of value was $14,875,000, or 1,487,500 shares at
$10.00 per share, to $20,125,000, or 2,012,500 shares at $10.00 per share.
Our valuation is not intended, and must not be construed, as a
recommendation of any kind as to the advisability of purchasing shares of the
common stock. Moreover, because such valuation is necessarily based upon
estimates and projections to a number of matters, all of which are subject to
change from time to time, no assurance can be given that persons who purchase
shares of common stock in the conversion will thereafter be able to sell such
shares at prices related to the foregoing valuation of the pro forma market
value thereof.
The valuation will be updated as provided for in the OTS conversion
regulations and guidelines. Any updates will consider, among other things, any
developments or changes in the Bank's financial performance and condition,
management policies and current conditions in the equity markets for thrift
shares. Should any such new developments or changes be material, in our
opinion, to the valuation of the shares, appropriate adjustments to the
estimated pro forma market value will be made. The reasons for any such
adjustments will be explained in detail at that time.
Respectfully submitted,
CAPITAL RESOURCES GROUP, INC.
/s/ Michael B. Seiler
------------------------------
Michael B. Seiler
Senior Vice President
MBS/cct
Enclosure
<PAGE>
CAPITAL RESOURCES GROUP, INC.
TABLE OF CONTENTS
PAGE
CHAPTER DESCRIPTION NUMBER
- ------- ----------- ------
I. DESCRIPTION OF FAIRFIELD SAVINGS BANK, F.S.B. 1.1
Overview of Fairfield Savings Bank, F.S.B. 1.1
Balance Sheet Trends 1.3
Loan Portfolio 1.7
One-to-Four Family Residential Loans 1.7
Land, Construction and Development Loans 1.9
Home Equity Loans 1.10
Commercial and Multifamily Loans 1.10
Other Loans 1.11
Asset Quality 1.11
Real Estate Investment 1.12
Asset/Liability Management 1.13
Income and Expense Trends 1.14
Subsidiary Activity 1.18
Properties 1.18
Legal Proceedings and Miscellaneous 1.19
II. MARKET AREA ANALYSIS 2.1
III. COMPARISONS WITH PUBLICLY-HELD THRIFTS 3.1
Chapter Overview 3.1
Introduction 3.2
Selection Criteria 3.2
Selection Procedure 3.5
Review of Comparative Group Thrifts 3.7
Financial Comparisons 3.11
IV. MARKET VALUE DETERMINATION 4.1
Introduction 4.1
Quality and Predictability of Earnings/Earnings
Growth Potential 4.1
Financial Strength 4.4
Capital Levels 4.4
Asset/Liability Position 4.4
Asset Quality 4.6
Market Area 4.6
Dividend Payments 4.8
Management and Employee Staffing 4.8
Liquidity of the Issue 4.9
Subscription/Community Interest 4.10
Stock Market Environment 4.12
Valuation Approach 4.15
Valuation Conclusion 4.20
<PAGE>
CAPITAL RESOURCES GROUP, INC.
LIST OF TABLES
TABLE PAGE
NUMBER DESCRIPTION NUMBER
- ------ ----------- ------
CHAPTER I
1.1 Selected Balance Sheet Items 1.4
1.2 Non-Performing Assets 1.12
1.3 Investment and Mortgage-Backed Securities Portfolio 1.15
1.4 Office Locations 1.19
CHAPTER III
3.1 Comparative Group Selection Criteria 3.6
3.2 Earning Asset Composition 3.8
3.3 Key Financial Indicators 3.12
CHAPTER IV
4.1 Thrift Stock Index 4.13
4.2 Comparative Pricing Analysis 4.19
4.3 Pro Forma Comparison 4.21
<PAGE>
CAPITAL RESOURCES GROUP, INC.
I. DESCRIPTION OF FAIRFIELD SAVINGS BANK, F.S.B.
OVERVIEW OF FAIRFIELD SAVINGS BANK, F.S.B.
Fairfield Savings Bank, F.S.B. ("Fairfield" or the "Bank") is a federally
chartered mutual savings bank located in Long Grove, Illinois. The Bank was
organized in 1901 as an Illinois-chartered mutual savings and loan association.
Fairfield is a member of the Federal Home Loan Bank ("FHLB") System and its
deposits are insured up to the applicable limits by the Savings Association
Insurance Fund ("SAIF") of the Federal Deposit Insurance Corporation ("FDIC").
At July 31, 1996, the Bank had total assets of $194.6 million and equity, as
calculated under generally accepted accounting principles ("GAAP"), of $13.6
million or 7.0 percent of total assets.
The Bank conducts its business through three offices located in three
distinct markets in the Chicago metropolitan area. The Bank's original office
is in the City of Chicago and serves an older, ethnic blue-collar customer base.
This customer base serves as a strong source for core savings accounts, notably
passbook deposits. The Bank's largest office is located in Norridge in Cook
County, adjacent to O'Hare International Airport. This suburb is a generally
well developed mature market and features savers that seek convenient, basic
banking services. The main office in Long Grove which is approximately 35 miles
from downtown Chicago, serves, on average, a more affluent customer base. This
market is still developing and management believes it offers greater lending
opportunities than the Bank's two other primary market areas. The Bank is
primarily engaged in attracting deposits from the general public and uses such
deposits to originate loans secured primarily by one-to-four family residences
located in portions of Cook, Lake and DuPage Counties.
Fairfield is committed to meeting the residential mortgage and deposit
needs of its customers, emphasizing the origination of conventional mortgage
loans for the purpose of purchasing or
<PAGE>
1.2
refinancing owner-occupied, one-to-four family residential properties in the
Bank's primary market areas. To a lesser extent, the Bank also originates home
equity and other types of secured consumer, multifamily, commercial real estate,
construction and commercial business loans. At July 31, 1996, Fairfield's net
loans receivable totaled $79.1 million (40.7 percent of total assets), and the
Bank's one-to-four family residential mortgage loan portfolio at such date
totaled $76.3 million (excludes home equity loans) or 95.6 percent of total
loans. At such date, approximately 95 percent of the residential loan portfolio
was comprised of fixed rate product.
Reflecting intense competition from other financial institutions in the
Chicago metropolitan area for loan originations and in order to meet liquidity
and other investment objectives of the Bank, Fairfield has supplemented its
locally originated loan production in recent years primarily with purchases of
mortgage-backed securities (or "MBS"). At July 31, 1996, MBS equaled
$102.4 million or 52.6 percent of total assets.
After generating losses for the fiscal year ended July 31, 1991, Fairfield
has reported positive earning streams since fiscal 1991. However after peaking
in fiscal 1992 when the Bank reported net income of $2.316 million or a return
on assets ("ROA") of 125 basis points, Fairfield's reported net income has
followed a generally downward pattern. It should be noted that Fairfield's net
income results have been impacted by the following items:
- Large gains on the sale of securities in fiscal year 1992 and 1994 and
securities losses in fiscal 1991.
- Large net gains on sale of real estate (Trails of Olympia Fields) in
fiscal 1994 and 1995.
- Large extraordinary gains in fiscal 1992 and 1994.
- Gains associated with a litigation settlement in fiscal 1996.
<PAGE>
1.3
For the fiscal year 1996, Fairfield's net income declined to $226,000 or an ROA
of 11 basis points. After peaking in fiscal 1993, Fairfield's interest rate
spreads and net interest margins have consistently declined during the last
three fiscal years.
BALANCE SHEET TRENDS
Table 1.1 highlights Fairfield's balance sheet trends during the past six
years. As shown in the table, Fairfield's total assets increased from $180.4
million at July 31, 1991 to $200.3 million at July 31, 1995, before declining to
$194.6 million at July 31, 1996. Asset growth between July 31, 1991 and July
31, 1995 was funded through the expansion of Fairfield's deposit base and
through the utilization of FHLB borrowings.
The Bank's deposit balances remained relatively flat overall during the
period from July 31, 1991 to July 31, 1993. Reduced deposit balances between
fiscal 1992 and 1993 can be attributed to low interest rates on certificates of
deposits (or "CDs") and customers moving funds to other alternative investments
in search of higher returns. However, between July 31 1993 and 1995, deposit
balances increased by $16.8 million. During fiscal year 1995, the Bank
increased 13 and 19 month certificate of deposits by approximately $15 million
to fund the growth in five-year balloon mortgage-backed securities. The Bank
paid above market interest rates to attract CDs during fiscal 1995. Deposit
balances decreased $11.1 million to $137.2 million at July 31, 1996 due
primarily to an outflow of "hot" money which flowed into the Bank in fiscal
1995, after the Bank reduced its rates on time deposits resulting in a decrease
of CDs of $7.0 million. At July 31, 1996, time deposit accounts constituted 52.0
percent of total deposits. Fairfield has successfully attracted a large base
<PAGE>
TABLE 1.1
FAIRFIELD SAVINGS BANK
SELECTED BALANCE SHEET ITEMS
(Dollars in Thousands)
<TABLE>
<CAPTION>
----------------------------------------------------------------------------
At July 31,
----------------------------------------------------------------------------
1991 % Assets 1992 % Assets 1993 % Assets
----------------------------------------------------------------------------
----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Total Assets $180,414 100.00% $188,739 100.00% $186,997 100.00%
Cash and Cash Equivalents 6,844 3.79% 8,866 4.70% 34,364 18.38%
Investment Securities 38,020 21.07% 26,512 14.05% 14,893 7.96%
FHLB Stock 1,603 0.89% 1,879 1.00% 1,930 1.03%
Mortgage-backed Securities (1) 18,056 10.01% 46,197 24.48% 47,524 25.41%
Loans Receivable, net 107,147 59.39% 96,030 50.88% 80,346 42.97%
Real Estate Owned 0 0.00% 118 0.06% 0 0.00%
Real estate held for sale & development 2,361 1.31% 2,051 1.09% 1,599 0.86%
Deposits 131,664 72.98% 135,857 71.98% 131,504 70.32%
Borrowings 35,254 19.54% 36,600 19.39% 36,600 19.57%
Retained Earnings 7,002 3.88% 9,317 4.94% 11,851 6.34%
----------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
----------------------------------------------------------------------------
At July 31,
----------------------------------------------------------------------------
1994 % Assets 1995 % Assets 1996 % Assets
----------------------------------------------------------------------------
----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Total Assets $195,207 100.00% $200,251 100.00% $194,624 100.00%
Cash and Cash Equivalents 5,256 2.69% 9,044 4.52% 4,609 2.37%
Investment Securities 0 0.00% 0 0.00% 0 0.00%
FHLB Stock 2,230 1.14% 2,264 1.13% 2,045 1.05%
Mortgage-backed Securities (1) 111,987 57.37% 111,283 55.57% 102,411 52.62%
Loans Receivable, net 68,426 35.05% 70,984 35.45% 79,144 40.67%
Real Estate Owned 0 0.00% 168 0.08% 0 0.00%
Real estate held for sale & development 919 0.47% 262 0.13% 262 0.13%
Deposits 141,830 72.66% 148,350 74.08% 137,177 70.48%
Borrowings 34,300 17.57% 32,300 16.13% 39,900 20.50%
Retained Earnings 13,441 6.89% 14,423 7.20% 13,579 6.98%
----------------------------------------------------------------------------
</TABLE>
(1) $58.3 million of mortgage backed securities were classified as "available
for sale" at July 31, 1996
Source: Fairfield Savings Bank's audited financial statements
<PAGE>
1.5
of lower costing and less interest rate sensitive non-certificate accounts
including passbooks, money market demand accounts, interest-bearing NOW accounts
and non-interest bearing demand accounts. While passbook account balances have
moderately declined during the past few years, these deposit accounts equaled
just over 30 percent of total deposits at July 31, 1996. Fairfield has also
utilized wholesale funding sources for its asset growth. These wholesale
funding sources have included reverse repurchase agreements and FHLB of Chicago
advances. During fiscal year 1992 all reverse repurchase agreements were
repaid. The Bank then borrowed funds from the FHLB of Chicago with maturities
ranging from six months to seven years. At July 31, 1996, FHLB advances totaled
$39.9 million.
Mortgage-backed securities increased from $18.1 million (10.0 percent of
assets) at July 31, 1991 to $47.5 million (25.4 percent of assets) at July 31,
1993. The level of investment in MBS increased significantly to $112.0 million
at July 31, 1994. At July 31, 1996, the MBS portfolio equaled $102.4 million or
52.6 percent of assets. The investment securities portfolio (not including FHLB
stock and interest earning deposits) decreased from $38.0 million at July 31,
1991 to $0 at July 31, 1996. The changes in Fairfield's asset composition since
the early 1990s reflected managements efforts to restructure the portfolio and
reduce interest rate risk on the Bank's balance sheet. The initial
restructuring occurred when the Bank reclassified its long-term U.S. Government
securities from "held to maturity" to securities "held for sale" in fiscal 1991.
This resulted in a mark to market write-down of $7.6 million. This write-down
included approximately $3.0 million in deferred hedging losses. For the fiscal
year ended July 31, 1991, the net writedown on the securities
<PAGE>
1.6
portfolio was approximately $6.1 million. During fiscal 1992, the held for sale
portfolio was sold for a cumulative profit of $2.3 million. The proceeds were
used to purchase MBS with fifteen year maturities.
At July 31, 1996, the MBS portfolio was directly insured or guaranteed by
FNMA or FHLMC and had a weighted average yield of 6.32 percent. The entire MBS
portfolio is fixed rate but a majority of the portfolio is comprised of 5 and 7
year balloon maturities. Approximately, $75.8 million of the MBS mature in
seven years or less. At July 31, 1996, $58.3 million of MBS were classified as
"available for sale". The Bank's portfolio of securities available for sale is
marked to market monthly and is carried on the books of the Bank at market.
Also, at July 31, 1996, the "held-to-maturity" portion of the MBS portfolio had
a carrying value of $44.1 million but an estimated fair value of $42.2 million.
At July 31, 1996, Fairfield held $2.0 million of FHLB stock and $4.6
million of cash and cash equivalents including interest earning deposits. Such
cash and cash equivalents equaled 2.4 percent of total assets.
Another significant development highlights the Bank's asset trends - the
Bank's holdings in real estate held for sale and development, TRAILS OF OLYMPIA
FIELDS. The Bank has shown a steady balance decline through lot sales for the
prior six years. Also, approximately one-half of the remaining commercial
parcel was sold in fiscal year 1995. Currently, there is only one commercial
parcel remaining in the Bank's real estate development in Olympia Fields. It
was recorded at a carrying value of $262,000 at July 31, 1996.
<PAGE>
1.7
Fairfield's loan portfolio decreased from $107.1 million at July 31, 1991
to $71.0 million at July 31, 1995, before increasing to $79.1 million at July
31, 1996. During this six year period, the relative composition of the Bank's
loan portfolio has changed modestly. One-to-four family residential loans have
decreased by $23 million since July 31, 1992, to $76.3 million at July 31, 1996,
but increased to 95.6 percent of total loans. Land, construction and
development loans have experienced the largest percentage decrease since July
31, 1992, decreasing by $4.4 million to equal 0.5 percent of the total loan
portfolio at July 31, 1996.
By July 31, 1991, the Bank's capital was reduced to $7.0 million, or 3.9
percent of assets. The reduction in capital was primarily attributable to the
aforementioned $6.1 million write-down for fiscal 1991 that was part of the
Bank's restructuring and, secondarily, to annual operating losses. Since that
time period, Fairfield's level of retained earnings steadily improved to $14.4
million or 7.2 percent of assets at July 31, 1995. However, Fairfield's GAAP
capital declined to $13.6 million or just under 7 percent of assets at July 31,
1996 due to a $1.1 million change in unrealized loss on securities available for
sale (net of tax impact) during fiscal 1996. At July 31, 1996, the Bank's
capital level was substantially in excess of all three of the minimum regulatory
capital requirements.
LOAN PORTFOLIO
ONE-TO-FOUR FAMILY RESIDENTIAL LOANS
The Bank's primary lending activity consists of the origination of
permanent one-to-four family residential mortgage loans secured by property
located in the Bank's primary market areas. The Bank generally originates
owner-occupied one-to-four family residential mortgage loans in
<PAGE>
1.8
amounts up to 80% of the lesser of the appraised value or selling price of the
mortgaged property without requiring mortgage insurance. The Bank will
originate a mortgage loan in an amount up to 95% of the lesser of the appraised
value or selling price of a mortgaged property. The Bank, on a very limited
basis, also originates construction permanent loans on one-to-four family
residences. In the past, the Bank has sold loans into the secondary market with
servicing retained and has the capacity and the underwriting standards to
continue this practice when necessary. Currently, the Bank retains all
mortgage loans that it originates. At July 31, 1996, 95.6 percent of the Bank's
$79.9 million gross loan portfolio consisted of permanent mortgages on one-to-
four family residential real estate, with original maturity terms of 15 or 30
years. While the Bank offers adjustable rate mortgage products, the Bank's
customer base has historically favored fixed-rate mortgages which are generally
priced off the FNMA delivery rate with adjustments relating to local competition
and the availability of funds.
At July 31, 1996, approximately 95 percent of the Bank's residential
mortgage portfolio was comprised of fixed-rate loans. The balance of the
residential mortgage portfolio is comprised of adjustable rate loans, the
majority of which are tied to the National Cost of Funds Index and adjust
annually to rates from 2.5 percent to 2.75 percent over the Index. These loans
carry 2 percent annual and 13 percent life-of-the-loan caps to protect borrowers
against sudden rate volatility. The Bank also offers an ARM loan which is fixed
for the first five years and then reprices every year and is indexed to the one-
year U.S. Treasury. 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
<PAGE>
1.9
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. Permanent one-to-four family residential mortgage
loan origination volume for fiscal 1994, 1995 and 1996, equaled $10.8 million,
$11.5 million and $19.6 million respectively. This type of lending constituted
between 93 and 98 percent of annual total loan volume in each of these last
three years.
At July 31, 1996, the two largest dollar amounts of loans 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 Fairfield's market area and, at July 31, 1996, were performing in
accordance with their terms.
LAND, CONSTRUCTION AND DEVELOPMENT LOANS
Land, construction and development loan balances declined from $4.8 million
or 4.8 percent of total loans at July 31, 1992 to $404,000 or 0.5 percent at
July 31, 1996. The Bank offers a residential construction loan program for
customer 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 in recognition of the higher degree
of risk involved in making such loans.
In addition to financing customer 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
<PAGE>
1.10
projections. As a general guideline, actual or projected net cash flows from
these types of lending activities should equal or exceed 120 percent 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.
HOME EQUITY LOANS
Fairfield originates home equity loans secured by first and second
mortgages on one-to-four family owner occupied residences. These loans are
divided into two categories. The equity line of credit loan allows the customer
to make periodic draws up to the loan's credit limit. The loan reprices monthly
based on the prime rate. The closed equity loan is for a fixed single disbursed
amount and is repriced quarterly based on the prime rate. In light of the
recent surge in mortgage loan refinancing in the local and national markets,
management believes that this type of financing may be very attractive.
Borrowers can obtain funds at a lower rate and better tax benefits than a
personal, auto or credit card loan. At July 31, 1996, the Bank had $1.4 million
(1.8 percent of total loans) of such home equity loans outstanding.
COMMERCIAL AND MULTIFAMILY LOANS
The Bank originates a limited amount of commercial real estate loans
including multifamily loans collateralized by small apartment buildings.
Commercial real estate loans totaled $411,000 or 0.5 percent of the loan
portfolio and multifamily loans totaled $979,000 or 1.2 percent at July 31,
1996. These loans are tied to the prime rate with actual pricing based on
market conditions.
<PAGE>
1.11
OTHER LOANS
The Bank also makes short-term fixed-rate and adjustable-rate consumer
loans, such as loans secured by savings accounts and home improvement loans.
The shorter terms to maturity and the short-term repricing periods are helpful
in managing the Bank's interest rate risk. At July 31, 1996, these loans
totaled only $192,000 and are not expected to comprise a significant portion of
the Bank's loan portfolio. In addition, the Bank had $150,000 of loans
outstanding under commercial credit lines.
ASSET QUALITY
Fairfield's level of non-performing assets (non-accrual loans, accruing
loans delinquent more than 90 days and foreclosed assets) has decreased overall
between July 31 1992 and 1996 (see Table 1.2). At July 31, 1996, non-performing
assets equaled $118,000 or 0.06 percent of total assets, versus $5.508 million
or 2.92 percent of assets at July 31, 1992. In 1992, at the direction of
Fairfield's primary regulator, the Bank was required to adversely classify a
$4.2 million large loan and establish reserves for it. Subsequently, the Bank
reversed such classification and reserves when it became apparent that the loan
would repay in full.
The Bank's non-performing assets consisted of two one-to-four family
residential loans. At July 31, 1996, Fairfield had no classified assets and no
potential problem loans based on management's review. As of such date, the
Bank's allowance for loan losses equaled $300,000 or 0.38 percent of total
loans.
<PAGE>
1.12
TABLE 1.2
FAIRFIELD SAVINGS BANK
NON-PERFORMING ASSETS
<TABLE>
<CAPTION>
AT JULY 31,
--------------------------------------------
1992 1993 1994 1995 1996
---- ---- ---- ---- ----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
NON-PERFORMING LOANS:
Mortgage loans:
One-to-four family $1,055 $ 828 $ 511 $ 193 $ 69
Multifamily 19 84 -- -- --
Commercial real estate -- -- -- -- --
Land, construction & development 4,296 -- -- -- --
Home equity -- -- -- -- 49
Other loans 20 -- -- -- --
------ ------ ------ ------ ------
Total non-performing loans 5,390 912 511 193 118
------ ------ ------ ------ ------
Real estate owned 118 -- -- 168 --
------ ------ ------ ------ ------
Total non-performing assets $5,508 $ 912 $ 511 $ 361 $ 118
====== ====== ====== ====== ======
Total non-performing loans
to total loans 5.58% 1.13% 0.74% 0.27% 0.15%
Total non-performing assets
to total assets 2.92% 0.49% 0.26% 0.18% 0.06%
</TABLE>
Source: Fairfield's Prospectus.
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, one five acre commercial parcel with a book value of $262,000 remained
unsold. Upon consummation of the Conversion, the Holding Company will acquire
this parcel from the Bank. At July 31, 1992, 1993, 1994, 1995 and 1996, the
investment in the Trails of Olympia Fields
<PAGE>
1.13
was $2.1 million, $1.6 million, $919,000, $262,000 and $262,000 respectively.
Sales during the three fiscal years ended July 31, 1994, 1995 and 1996 resulted
in gross profits of $574,000, $557,000 and $0 respectively. These gross profits
were offset by development costs of $511,000, $237,000 and $140,000 in the
fiscal years ended July 31, 1994, 1995 and 1996 respectively.
The Bank is currently the plaintiff in litigation against the Village of
Olympia Fields, its trustees, The Home Owners Association of the Trails of
Olympia Fields and individual members of The Home Owners Association over
matters that impeded the orderly development of the Trails of Olympia Fields
(see "Income and Expense Trends").
ASSET/LIABILITY MANAGEMENT
In an effort to reduce interest rate risk and protect itself from the
negative effects of rapid or prolonged changes in interest rates, Fairfield has
instituted certain asset and liability management measures to maintain "natural"
hedges within its balance sheet which includes the following:
- Purchase for portfolio a large base of mortgage-backed-securities having
balloon maturities of five or seven years. At July 31, 1996, the Bank had
$102.4 million of MBS, of which $75.8 million mature in seven years or
less. Also, liquidity is enhanced by the fact that 57 percent of
Fairfield's MBS portfolio is classified available for sale and is carried
on the books at estimated fair value.
- Originate for portfolio fixed-rate loans with terms of fifteen years or
less. Due to competitive factors the Bank makes a minimal level of
adjustable rate loans. At July 31, 1996, the Bank had $26.1 million or
32.8 percent of mortgage loans with terms of 15 years or less.
- Maintain a high proportion of lower-costing and less rate sensitive non-
certificate accounts in the Bank's deposit portfolio. At July 31, 1996,
the Bank had $41.3 million of passbook accounts or 30.2 percent of total
deposits.
<PAGE>
1.14
Despite the efforts taken by the Bank to seek to reduce its level of
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.
Based on a net portfolio value ("NPV") analysis prepared by the OTS, and as
revised by Fairfield, at June 30, 1996, a 400 basis point interest rate shock
increase would result in a 52 percent NPV decrease for the Bank while a 400
basis point interest rate decrease would result in a 3 percent NPV decrease.
Smaller interest rate decreases (of 100, 200 and 300 basis points) would result
in modest NPV increases of between 5 and 8 percent.
INCOME AND EXPENSE TRENDS
After generating losses for the fiscal years ended July 31, 1989, 1990 and
1991, Fairfield has reported positive earnings streams since fiscal 1991.
However, after peaking in fiscal 1992, the Bank's reported net income has
followed a generally downward pattern. It should be noted that the high level
of net income reported in fiscal 1992 included $2.6 million of gains on sale of
securities. The Bank's reported net income equaled $2.316 million in fiscal
1992 or an ROA of 125 basis points.
<PAGE>
TABLE 1.3
FAIRFIELD SAVINGS BANK
INCOME AND EXPENSE TRENDS
(Dollars in Thousands)
<TABLE>
<CAPTION>
----------------------------------------------------------------------------
For the Fiscal Year Ended July 31,
----------------------------------------------------------------------------
1991 1992 1993
($000) (%) ($000) (%) ($000) (%)
----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Average Assets 183,704 184,577 187,868
Interest Income 15,595 8.49% 14,338 7.77% 13,995 7.45%
Interest Expense (11,313) 6.16% (9,198) 4.99% (7,454) 3.97%
-------- ------- ------- ----- ------- ------
Net Interest Income 4,282 2.33% 5,140 2.78% 6,541 3.48%
Loan Loss Provision (Credit) 193 0.10% 397 0.21% (392) (0.21%)
------- ------- ------ ----- ------- ------
Net Interest Inc. after Prov. 4,089 2.23% 4,743 2.57% 6,933 3.69%
Gain (Loss) on Sale of Securities (6,087) (3.31%) 2,616 1.42% 0 0.00%
Gain (Loss) on real estate held for sale (115) (0.06%) 308 0.17% 307 0.16%
Other Non-Interest Income (1) 4,278 2.32% 240 0.13% 434 0.23%
------- ------- ------ ----- ------- ------
Total Non-Interest Income (1,924) (1.05%) 3,164 1.71% 741 0.39%
Total Non-Interest Operating Exp 4,372 2.38% 5,242 2.84% 4,683 2.49%
------- ------- ------ ----- ------- ------
Income (Loss) before Taxes & Ext. Items (2,207) (1.20%) 2,665 1.44% 2,991 1.59%
Provision for Income Taxes 100 0.06% 975 0.52% 978 0.52%
Income (Loss) bef Extraordinary Items (2,307) (1.26%) 1,690 0.92% 2,013 1.07%
Extraordinary Items (2)(3) 0 0.00% 626 0.33% 0 0.00%
------- ------- ------ ----- ------- ------
Net Income (Loss) ($2,307) (1.26%) $2,316 1.25% $2,013 1.07%
------- ------- ------ ----- ------- ------
------- ------- ------ ----- ------- ------
----------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
----------------------------------------------------------------------------
For the Fiscal Year Ended July 31,
----------------------------------------------------------------------------
1994 1995 1996
($000) (%) ($000) (%) ($000) (%)
----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Average Assets 191,102 197,729 197,438
Interest Income 13,052 6.83% 12,674 6.41% 13,154 6.66%
Interest Expense (6,923) 3.62% (7,333) 3.71% (8,450) 4.28%
-------- ----- ------- ----- ------- -----
Net Interest Income 6,129 3.21% 5,341 2.70% 4,704 2.38%
Loan Loss Provision (Credit) (18) (0.01%) 0 0.00% 138 0.07%
Net Interest Inc. after Prov. 6,147 3.22% 5,341 2.70% 4,566 2.31%
Gain (Loss) on Sale of Securities 616 0.32% 0 0.00% 0 0.00%
Gain (Loss) on real estate held for sale 574 0.30% 557 0.28% 0 0.00%
Other Non-Interest Income (1) 325 0.17% 289 0.15% 485 0.25%
-------- ----- ------- ----- ------- -----
Total Non-Interest Income 1,515 0.79% 846 0.43% 485 0.25%
Total Non-Interest Operating Exp 5,097 2.67% 4,766 2.41% 4,708 2.38%
-------- ----- ------- ----- ------- -----
Income (Loss) before Taxes & Ext. Items 2,565 1.34% 1,421 0.72% 343 0.17%
Provision for Income Taxes 894 0.47% 439 0.22% 117 0.06%
Income (Loss) bef Extraordinary Items 1,671 0.87% 982 0.50% 226 0.11%
Extraordinary Items (2)(3) 439 0.23% 0 0.00% 0 0.00%
Net Income (Loss) $2,110 1.10% $982 0.50% $226 0.11%
-------- ----- ------- ----- ------- -----
-------- ----- ------- ----- ------- -----
----------------------------------------------------------------------------
</TABLE>
(1) For the fiscal year ended July 31, 1991, non-interest income includes a
$4.05 million gain on termination of pension plan; and for fiscal year
ended July 31, 1996, $184,000 of gains associated with litigation
settlement related to Trails of Olympia Fields
(2) For the fiscal year ended July 31, 1992, net operating loss carryforwards
caused an extraordinary reduction of income taxes by $625,600
(3) For the fiscal year ended July 31, 1994, includes cumulative effect of
change in accounting for income taxes.
Source: Fairfield Savings Bank's audited financial statements
<PAGE>
1.16
During the past six years, Fairfield's reported net income has been
significantly impacted by securities losses in fiscal 1991 and gains on sale
of securities in fiscal 1992 and 1994. The Bank recorded sizeable gains on
sale of real estate related to Trails of Olympia Fields in fiscal 1994 and
1995. Also, Fairfield recorded large extraordinary gains in fiscal 1992 and
1994.
In the fiscal year ended July 31, 1991, the Bank began the process of
restructuring its balance sheet by, as noted previously, electing to designate a
portion of its long-term U.S. Government securities portfolio as held for sale.
The subsequent mark to market resulted in a net write-down of $6.1 million for
the year. Partially offsetting those losses was a gain of $4.05 million on the
termination of the Bank's pension plan.
It should be noted that during fiscal 1991, lower interest rates resulted
in significant net interest margin improvements. The Bank's net interest margin
rose to 2.33 percent of average assets during fiscal 1991. Net interest margin
continued to improve during fiscal year 1992 to 278 basis points, and further
to 348 basis points during fiscal 1993. Also, during fiscal year ended July 31,
1992, net operating loss carry forwards caused an extraordinary reduction of
income taxes of $625,600.
In fiscal year 1994, net interest margin decreased to 321 basis points as
the level of higher earning loan balances was reduced and replaced with
mortgage-backed securities. However, offsetting the narrower net interest
margin, the Bank realized $616,000 of gains on sale of securities and $574,000
of gains on real estate held for sale. Fiscal 1994 results were impacted by a
significant increase in the Bank's operating expense ratio, which partially
reflected high real estate operating costs. Fiscal 1994 results were also
heavily impacted by a $439,000 cumulative effect stemming from the change in
accounting for income taxes.
<PAGE>
1.17
In fiscal year 1995, the Bank's net interest margin decreased to 270 basis
points and lower levels of non-interest income led to the Bank reporting net
income of $982,000 or an ROA of 50 basis points, versus $2.110 million or an ROA
of 110 basis points in fiscal 1994. In fiscal 1996, Fairfield's net income
declined to $226,000 or an ROA of 11 basis points. Net income results for this
latest fiscal year reflected a lower net interest margin and the absence of any
gains on securities or real estate. The Bank also recorded $138,000 of loan
loss provisions in fiscal 1996. No provisions were recorded in 1995. However,
in fiscal 1996, the Bank did record $184,000 (9 basis points as a percent of
average assets) of gains stemming from litigation settlements of two claims in
connection with development of the Trails of Olympia Fields.
In fiscal 1996, the net interest margin further decreased to 238 basis
points as interest expenses increased at a higher rate than interest income as
the average yield on interest earning assets remained constant whereas cost of
funds increased by 51 basis points. It should be noted that between fiscal 1993
and 1996, the Bank's interest rate spread declined from 352 to 211 basis points.
As a result of Fairfield's higher level of MBS since 1993, the Banks's net
interest margin has been adversely affected as the yield on MBS is lower than
the yield on mortgage loans.
Fairfield has not traditionally generated high levels of non-interest
operating income, which excludes gains on securities and real estate. The
Bank's non-interest operating income (excluding 9 basis points of litigation
settlement income) totaled $301,000 or 15 basis points in fiscal 1996. Such
operating income has included loan fees, loan servicing fees and deposit service
charges.
The Bank's operating expenses have fluctuated since fiscal year 1991.
Operating expenses increased from $4.4 million (238 basis points) during the
fiscal year ended July 31, 1991 to
<PAGE>
1.18
$5.2 million (284 basis points) during the fiscal year ended July 31, 1992. The
Bank's operating expense ratio has fluctuated since fiscal 1992 but has
decreased overall. Between the fiscal year ended July 31, 1995 and 1996,
operating expenses decreased modestly, to $4.7 million (238 basis points). It
is important to note that past operating expenses include substantial costs
related to the Bank's Trails of Olympia Fields development. Excluding the
impact of non-operating costs related to real estate activities, Fairfield has
successfully limited any increase in normal operating expenses during the last
five years. The decline in fiscal 1996 operating expenses reflected lower
compensation expenses, largely due to the elimination of an officer long-term
bonus program in 1996, and lower real estate expenses.
SUBSIDIARY ACTIVITY
The Bank had historically 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.
PROPERTIES
The Bank's headquarters is located at the intersection of Illinois 83 and
Old McHenry Road in Long Grove, Illinois. This facility serves as a full-scale
retail banking office as well as headquarters for the Bank's lending and savings
operations. Senior management also is headquar-tered in this facility. The
Bank also owns a parcel of unimproved land adjacent to this facility. The Bank
has no current plans to develop this parcel and believes that its existing
corporate offices and
<PAGE>
1.19
retail banking facilities are adequate to meet the needs of its customer base.
The Bank's two branch offices are located in Chicago and Norridge.
TABLE 1.4
FAIRFIELD SAVINGS BANK
OFFICE LOCATIONS
LEASED/ NET BOOK VALUE AT
LOCATION OWNED JULY 31, 1996
-------- ----- -------------
(In thousands)
MAIN OFFICE:
Old McHenry Road Owned $3,676
Long Grove, Illinois
BRANCH OFFICES:
8301 West Lawrence Avenue (1) Leased 16
Norridge, Illinois
1601 N. Milwaukee Avenue Owned 513
Chicago, Illinois
(1) Land Leased, building owned by Bank
LEGAL PROCEEDINGS AND MISCELLANEOUS
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. Also, management believes that, while the outcome is
uncertain, the pending litigation related to the Trails of Olympia Fields
development will not have a material impact on Fairfield's financial position.
<PAGE>
1.20
At July 31, 1996, the Bank employed 48 full-time and 17 part-time
employees. At July 31, 1996, 45 percent of the Bank's employees had been with
the Bank for more than ten years.
<PAGE>
II. MARKET AREA ANALYSIS
MARKET AREA REVIEW
Fairfield conducts business from its main office in Long Grove (Lake
County), approximately 35 miles northwest of downtown Chicago. The Bank's other
two offices are located in Chicago and Norridge (Cook County). Approximately 75
percent of Fairfield's deposit base is generated from its branch offices in Cook
County. Based on Fairfield's branch locations and deposit activity, the Bank's
primary market areas encompass the northern portions of Chicago and the
northwest suburbs.
The Bank's deposit and lending base is concentrated in Cook County.
However, since the Bank's customer base for loans and deposits are drawn from
portions of Lake and DuPage Counties as well, this section also provides
economic and demographic data on these two counties.
The Chicago metropolitan area is among the nation's most economically
diverse communities. For this reason, the region is relatively insulated from
the economic cycles of any one industrial or commercial sector. The service
sector is the largest sector of the local economy (in Cook, Lake and DuPage
Counties). Manufacturing, trade and government related industries comprise the
other major components of the Bank's primary market economy.
The Bank serves three distinct markets within its northwest focus. The
inner city Chicago markets are surrounded by generally older ethnic communities
offering limited lending oppurtunities. This market is comprised of blue collar
savers who either rent or own small houses and apartments. These customers are
excellent sources of core savings accounts, notably passbook accounts, and seek
convenient settings in which to conduct banking services. Their emphasis is on
basic banking products. The loans originated are generally low credit risk,
profitable loans on one-
<PAGE>
2.2
to-four family residential properties. In addition to these loans, the Bank has
modest amounts of small apartment loans and commercial real estate loans in this
area.
The second market, Norridge, is a middle class Chicago suburb. Like the
inner city neighborhoods, this suburb is generally well-developed and features
customers that seek basic banking services. Customers banking at this branch
are rate sensitive and this is reflected in the higher level of certificates of
deposits.
The Bank's Long Grove market is an affluent northwest suburb that is still
developing. This market has considerable lending opportunities as well as
affluent savers seeking the yield advantages of certificates of deposits.
Overall, the population of DuPage and Lake Counties has increased during
the 1990's at a faster rate than the population growth of Illinois and the U.S.,
while Cook County experienced a smaller population increase. Between 1990 and
1996, DuPage County (population count 867,774) and Lake County (population count
575,848) experienced a 11.0 percent and 11.5 percent population increase,
respectively. Over the same period, Cook County experienced a smaller population
increase from 5,105,067 in 1990 to 5,153,261 in 1996. The U.S. and State of
Illinois growth rate was 4.1 percent and 3.9 percent, respectively. Population
projections for the five year period between 1996 and 2001 indicate that Lake,
DuPage'and Cook Counties will experience a growth of 8.2 percent, 8.0 percent
and 0.5 percent respectively.
The per capita income in Cook, DuPage and Lake Counties grew at a faster
rate than the per capita growth experienced by Illinois and U.S. In 1996 the
per capita income for Lake, DuPage and Cook counties was $30,724, $27,391 and
20,342 respectively. The per capita income of Lake,
<PAGE>
2.3
DuPage and Cook Counties has grown by approximately, 41 percent, 30 percent and
30 percent respectively in the last six years. Per capita income levels in the
Bank's primary market areas are well above the national and state averages of
$20,302 and $19,705 respectively.
In 1994 (latest available data), industries which accounted for the largest
percentage of earnings in Cook County were the service sector (29.9 percent)
followed by the manufacturing sector (18.2 percent). Government and the
wholesale and retail trade also accounted for a noteworthy percentage of
earnings in Cook County. Of the industries that accounted for at least 5
percent of earnings in 1993, the slowest growing between 1990 and 1994 was
transportation and public utilities, which increased by 12.0 percent; the
fastest growing was service sector, which increased by 24.4 percent. Cook
County serves as headquarters for several national corporations and most large
retail stores are represented.
In 1994, industries which accounted for the largest percentage of earnings
in DuPage County were the service sector (33.2 percent) followed by the
wholesale and retail trade sector (22.5 percent). Of the industries that
accounted for at least 5 percent of earnings in 1994, the slowest growing
between 1990 and 1994 was construction, which increased by 18.6 percent; the
fastest growing were the government sector, which increased by 42.6 percent.
In 1994, industries which accounted for the largest percentage of earnings
in Lake County were the manufacturing industry (27.1 percent) followed by the
service (23.5 percent). Of the industries that accounted for at least 5 percent
of earnings in 1993, the slowest growing between 1990 and 1994 was Government
and government enterprises, which increased by 12.8 percent; the fastest growing
was transportation and public utilities sector, which increased by 69.7 percent.
<PAGE>
2.4
Set forth is a list of Chicago area's top 25 employers:
EMPLOYER # OF EMPLOYEES
-------- --------------
U.S. Government 74,155
Chicago Public Schools 43,404
City of Chicago 40,257
Cook County 26,809
Jewel Food Stores 24,637
Ameritech Corp. 22,222
State of Illinois 22,147
Motorola, Inc. 20,000
Dominicks's Finer foods, Inc. 18,000
AT&T Corp. 16,600
UAL Corp. 15,679
First Chicago Corp. 15,632
Abbott Laboratories 15,304
Sears, Roebuck and Company 14,350
Commonwealth Edison 13,310
AMR Corp. (American Airlines) 12,000
University of Illinois at Chicago 11,733
EHS Health Care 11,300
Walgreen Co. 10,515
Allstate Corp. 9,200
Loyola University Chicago 9,000
Rush-Presbyterian St. Luke's Medical Center 8,364
Montgomery Ward & Co. 8,123
Arthur Anderson & Co. S.C. 7,947
Baxter International, Inc. 7,300
Source: CRAIN'S CHICAGO BUSINESS, November 1994.
The unemployment rate for Cook County at June 1996 (most recent available
data) was 5.6 percent. DuPage and Lake County's unemployment rates were 3.6
percent and 4.0 percent, respectively, at June 1996. These figures compare to
the state and U.S. unemployment rates of 5.5 and 5.5 percent at June 1996,
respectively.
<PAGE>
2.5
Fairfield competes with many larger financial institutions for originating
loans and attracting deposits in Cook, Lake and DuPage County. There were 1255
other thrift, savings bank, commercial bank and credit union offices in Cook
County at June 30, 1995, 167 in Lake County and 280 in DuPage County.
Historically, thrifts and savings banks in Cook County have held a smaller
percentage of deposits than commercial banks. However, between June 30, 1993
and June 30, 1995, total deposits held by thrifts and savings banks in Cook
County increased by approximately $530 million or 2.76 percent. At June 30,
1995, the Bank held 0.58 percent of all thrift and savings banks deposits in
Cook County where its two offices are located, up slightly from 0.54 percent at
June 30, 1993. Like Cook County, thrift and savings banks in both Lake and
DuPage Counties have held a smaller percentage of deposits than commercial
banks. At June 30, 1995, the Bank's estimated market share of total thrift and
savings bank deposits in Lake County was 4.43 percent. Fairfield's estimated
share of total deposits in Lake County was 0.48 percent.
<PAGE>
III. COMPARISONS WITH PUBLICLY-HELD THRIFTS
CHAPTER OVERVIEW
An important aspect in our fair market valuation of Fairfield involves a
financial comparison of the Bank with a selected group of publicly-traded peer
thrifts. Significant differences between Fairfield and a selected comparative
group of ten thrift institutions (the selection process is detailed in the
following sections) are summarized below:
- Fairfield reported a lower net income level over the most recent twelve
month period (ROA of 11 basis points) versus the comparative group (ROA of
70 basis points) and all publicly traded group (ROA of 88 basis points).
Fairfield's lower earnings relative to the comparative group reflects a
lower net interest margin level, lower level of other operating income,
which was partially offset by a modestly lower level of non-interest
operating expenses and loan loss provisions.
- For the most recent twelve month period, Fairfield's net interest margin
was 2.38 percent of average assets versus 3.22 percent for the comparative
group and 3.22 percent for the all publicly traded SAIF-insured group. The
Bank's lower net interest margin versus the comparative group reflects a
lower interest rate spread ("yield/cost spread") (2.11 percent for the Bank
versus 2.74 for the peer group) and a substantially lower net earning asset
position (4.40 percent for the Bank versus 12.79 percent for the peer
group). The Bank's net earning asset position on a post-conversion basis
will approach that of the peer group.
- Fairfield's non-interest operating income of 25 basis points was lower than
that of the peer group (33 basis points) and moderately lower than that of
the all publicly-traded group (44 basis points). The Bank's non-interest
income in fiscal 1996 consisted of service charges on deposit accounts,
loans fees, litigation settlement and other miscellaneous income.
- The Bank recorded a modestly lower level of overhead expenses compared to
the peer group. For the most recent twelve months, the Bank's non-interest
expenses to average assets was 2.38 percent compared to 2.44 percent for
the comparative group.
- Fairfield's net worth (equity) ratio of 7.0 percent was well below the peer
group's tangible capital ratio of 14.7 percent. After conversion,
Fairfield will (on a consolidated basis) have a net worth ratio which will
approach that of the comparative group.
<PAGE>
3.2
- In recent years, Fairfield has experienced relatively low levels of
non-performing assets ("NPA"). The Bank's NPAs to assets ratio of 0.06
percent was lower than the peer group's ratio of 0.73 percent and the all
publicly traded group's ratio of 0.89 percent.
INTRODUCTION
The ideal approach to estimating the fair market value of Fairfield entails
a comparison of the Bank's operating characteristics to those of actively-traded
stock thrifts possessing similar characteristics, to the extent that such can be
identified. While we feel that prices of a properly selected peer group are
useful in determining the pro forma market value, considerable adjustments will
still be required in pricing Fairfield's common stock in terms of its fair
market value, owing to differences in asset size, market area, financial
strength, earnings potential, operating strategies, the anticipated offering
size, the market for conversion offerings and secondary market liquidity of the
issue.
The remainder of this chapter will consist of the selection of an
appropriate group of similar thrift institutions and a comparative financial
analysis of this peer group with the Bank. The following chapter will then
detail the process by which the Bank's appropriate fair market value has been
determined and will demonstrate the estimated pro forma effects of the
conversion on Fairfield and its related pricing ratios at the determined market
price.
SELECTION CRITERIA
We have limited our analysis to thrift companies listed on the major stock
exchanges (New York and American) and those companies listed on NASDAQ (National
Association of Securities Dealers Automated Quotation System) due to the
relative liquidity of their common stock. This
<PAGE>
3.3
limitation is necessary, in our opinion, since published market data for
companies not qualifying for such listing may not accurately reflect their true
market values due to their limited trading volume, often coupled with
considerable time elapsing between trades (which may be executed at widely
varying prices) and the correspondingly large bid-ask spreads often associated
with such issues. Comparison to thinly-traded stocks could thus be especially
misleading with regard to current market conditions. We have, therefore,
excluded these companies from comparative group consideration. The Bank has
applied to have its common stock approved for quotation on the NASDAQ National
Market. Therefore, it is very useful to compare the Bank to publicly-traded
thrifts in order to determine its market value relative to prevailing market
conditions.
An important factor bearing on the likely reception of Fairfield's initial
stock offering is the initial pricing and market price performance of recently
converted thrifts, especially if these companies possess similar characteristics
as Fairfield. Hence, we have examined other recently completed conversion
offerings for other thrift institutions in order to assess the general market
reception of new thrift offerings. Based on these findings, we can make any
adjustments deemed necessary to Fairfield's estimated pro forma fair market
value.
We have excluded from consideration companies whose prices appear to be
materially influenced by announced or rumored acquisitions. In order to avoid
potential distortion to market pricing data, we have also eliminated from the
comparative group companies that are experiencing unusual market and/or
operating conditions.
Recognizing that operating environments for thrifts vary greatly from state
to state, as well as from region to region, due to different economic, legal,
regulatory and investment characteristics,
<PAGE>
3.4
we have attempted to select comparative companies operating in regions similar
to that in which Fairfield is located. We have, therefore, selected a group of
thrifts located within the Midwest region which we believe are comparable to the
Bank and which have experienced similar economic conditions in their market
areas.
Institution size and operating strategy are also major factors in assessing
institution comparability since they both affect expected rates of return and
investors' general perception of the quality, risk and attractiveness of a given
institution. Due to significantly increased interest rate volatility and
expanded asset and liability powers for thrift institutions, operating
strategies have become increasingly diverse and this may dramatically impact a
company's profitability and market value. Five distinct operating strategies
have been identified from the data base we maintain on approximately 399
publicly-traded thrifts: mortgage banker, diversified thrift, real estate
orientation (construction lending and development), retail banker (commercial
banking services, heavy consumer and commercial business lending) and
traditional thrift (traditional role without specializing in non-traditional
activities). We were sensitive to the operating strategy of Fairfield, which we
identified as a traditional thrift and have given this factor considerable
weight in selecting an appropriate comparative group. Furthermore, to the
extent feasible, we have attempted to select companies with small to moderate
asset sizes (subject to market area and financial characteristic
considerations), below average earnings levels and, for the most part, moderate
capital levels in order to encompass companies which have a similar amount of
resources and available opportunities.
While it is not possible to select a public company group exactly
comparable to Fairfield, we believe that the group selected is comprised of a
representative group of companies which provides
<PAGE>
3.5
a good illustration of current industry market values based on three measures:
price/book value, price/earnings and price/assets. We will discuss these
valuation approaches in considerable detail in Chapter IV. Individually and in
the aggregate, the comparative group of thrifts share common characteristics to
Fairfield.
SELECTION PROCEDURE
Using the criteria discussed above, we have identified ten companies from
Exhibit III-1 ("General Characteristics -- Publicly-Traded Thrifts")
demonstrating characteristics similar to those of Fairfield. In Table 3.1, we
have listed the comparative group companies. In terms of location, all ten of
the comparative group companies are located in the Midwest region. Seven of the
comparative group companies are located in the state of Illinois, with four of
the companies operating in or around the City of Chicago. Subject to certain
asset size restrictions, we attempted to identify thrifts which share similar
financial characteristics and operate in markets demonstrating similar
characteristics as that in which Fairfield operates.
Given limitations of including institutions with similar financial
characteristics, market areas, comparable business strategies and sufficient
trading volumes, the overall mean and median asset size of the ten thrifts in
the comparative group is $325 million and $330 million, respectively. The ten
comparative institutions all pursue a traditional operating strategy and most,
like Fairfield, have a below average asset size.
<PAGE>
TABLE 3.1
FAIRFIELD SAVINGS BANK
COMPARATIVE GROUP SELECTION CRITERIA
<TABLE>
<CAPTION>
Total Market Number
Date Assets Value (1) of Operating Ticker
Institution State Converted ($Mil) ($Mil) Offices Strategy(2) Exchange Symbol
- ----------- ----- --------- ------ ------ ------- ----------- -------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Fairfield Savings Bank IL --- 195 --- 3 Traditional --- ---
Avondale Financial Corp. IL 04/07/95 593 50.0 6 Traditional OTC AVND
Calumet Bancorp, Inc. IL 02/20/92 501 68.1 5 Traditional OTC CBCI
Damen Financial Corp. IL 10/02/95 237 43.1 3 Traditional OTC DFIN
First Mutual Bancorp, Inc. IL 07/05/95 302 54.7 8 Traditional OTC FMBD
Glenway Financial Corp. OH 11/30/90 274 23.2 6 Traditional OTC GFCO
Great American Bancorp IL 06/30/95 120 23.6 3 Traditional OTC GTPS
Horizon Financial Svcs Corp. IA 06/30/94 73 6.3 3 Traditional OTC HZFS
Kankakee Bancorp, Inc. IL 01/06/93 359 29.8 10 Traditional AMEX KNK
Permanent Bancorp, Inc. IN 04/04/94 411 34.7 11 Traditional OTC PERM
SuburbFed Financial Corp. IL 03/04/92 378 21.7 12 Traditional OTC SFSB
</TABLE>
(1) Market Value as of September 6, 1996
(2) From CRG's database maintained on 399 publicly-traded thrifts which has
identified five distinct operating strategies
Source: Fairfield Savings Bank's financial statements, SNL Securities, corporate
reports and offering circulars for publicly-traded companies
<PAGE>
3.7
REVIEW OF COMPARATIVE GROUP THRIFTS
Exhibits III-2 through III-4 highlight the key financial ratios for each of
the ten comparative group thrifts. Also, Table 3.2 highlights each
institution's relative earning asset composition. The following provides a
description of each member of the comparative group:
- AVONDALE FINANCIAL CORP. is located in Chicago, Illinois and operates
through six offices in Chicago (Cook County), Niles (Cook County) and Lake
Forest (Lake County). The population of Cook County was 5,153,261 and the
population of Lake County was 575,848 respectively, as of June, 1996. The
latest per capita income available for Cook and Lake Counties was $20,342
and $30,724, respectively. The unemployment rates for Cook and Lake
Counties were 5.6 and 4.0 percent respectively, as of June 1996. Avondale
Financial Corp. was included in the peer group due to its proximity to
Fairfield, its similar levels of net loans (44.2 percent of assets versus
40.7 percent for Fairfield), above average mortgage-backed securities (21.6
percent of assets), above average levels of borrowings (33.6 percent of
assets) and similar non-operating expenses (2.31 percent of assets versus
2.38 percent for Fairfield)
- CALUMET BANCORP, INC., is located in Dolton, Illinois and operates through
a network of five offices in Cook County. Calumet Bancorp is located
approximately 15 miles south of Chicago. Calumet Bancorp was included in
the peer group given the location of its offices in the Chicago
metropolitan area, its similar level of deposits (73.8 percent of assets
versus 70.5 percent for Fairfield) and similar levels of non-interest
income (23 basis points versus 25 basis points for Fairfield). However,
Calumet Bancorp has placed a greater emphasis on lending. Loans comprise
73.3 percent of Calumet Bancorp's asset base versus 40.7 percent for
Fairfield.
- DAMEN FINANCIAL CORP., is located in Schaumburg, Illinois, a suburb of
Chicago and operates three offices in Cook County. Damen Fin. Corp was
included in the peer group due to its proximity to Fairfield, similar size
branch network, similar level of net loans (38.3 percent of assets compared
to 40.7 percent for Fairfield), similar level of borrowings (22.8 percent
of assets compared to 20.5 percent for Fairfield), below average net
interest margin (273 basis points), similar level of one-to-four
residential loans (35.3 percent of assets compared to 39.2 percent for
Fairfield) and below average yield/cost spread (168 basis points).
- FIRST MUTUAL BANCORP, INC. is located in Decatur, Illinois and operates
through eight offices in four counties of Macon County (population
115,862), Shelby County (population 22,555), DeWitt County (population
17,058), and Champaign County (population 165,055). The latest per capita
income available for Macon, Shelby, DeWitt and Champaign Counties was
$17,655, $13,678, $17,211 and $16,666 respectively. The unemployment rates
for Macon, Shelby,
<PAGE>
TABLE 3.2
EARNING ASSET COMPOSITION *
<TABLE>
<CAPTION>
Cash & Total ----Construction---- --------Permanent-------- --Non Mortgage--
Ticker Name Invest. MBS Mortgages 1-4 mtg >5 mtg NonRes 1-4 mtg >5 mtg NonRes Land Commcl Consumer
- ------ ---- ------- --- --------- ------- ------ ------ ------- ------ ------ ---- ------ --------
(%) (%) (%) (%) (%) (%) (%) (%) (%) (%) (%) (%)
(As a percent of total assets)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
-Fairfield 3.4 52.6 40.1 0.1 0.0 0.0 39.2 0.5 0.2 0.1 0.1 0.8
-Comparative Group (10) 21.5 13.4 56.1 1.4 0.3 0.2 43.6 4.9 5.3 0.4 2.0 5.1
-All SAIF-Insured (316) 19.4 12.7 60.8 2.8 0.2 0.3 47.7 4.1 5.0 0.8 1.3 4.8
AVND AvondaleFinCorp-IL 31.1 21.6 34.0 0.2 0.5 0.0 28.5 4.9 0.1 0.0 0.0 6.4
CBCI CalumetBancorp-IL 17.8 3.7 81.4 4.2 2.4 0.5 42.9 10.7 17.9 2.9 0.5 0.2
DFIN DamenFinCorp-IL 39.6 19.7 41.7 0.0 0.0 0.0 35.3 6.0 0.4 0.0 0.0 0.1
FMBD FirstMutualBanc-IL 14.9 0.0 81.3 1.0 0.0 0.0 69.1 8.8 2.5 0.0 1.8 3.3
GFCO GlenwayFinCrp-OH 7.7 10.3 79.3 3.1 0.0 0.0 65.8 5.8 4.6 0.0 0.0 0.3
GTPS GreatAmrcnBncrp-IL 21.0 4.9 52.5 0.9 0.0 0.0 35.5 3.0 12.2 1.0 7.6 8.2
HZFS HorizonFinSvcs-IA 30.1 0.0 53.0 1.7 0.0 0.0 45.0 1.2 5.2 0.1 6.5 10.4
KNK KankakeeBancorp-IL 22.3 9.1 54.7 0.6 0.3 1.0 41.8 3.6 7.5 0.0 2.6 7.5
PERM PermanentBncrp-IN 24.8 20.9 41.9 0.4 0.2 0.0 37.0 3.0 1.2 0.0 0.0 11.1
SFSB SuburbFedFinCrp-IL 5.4 43.5 40.9 1.7 0.0 0.0 35.3 2.4 1.3 0.1 0.5 3.9
</TABLE>
*Per Regulatory Call Report detail as of 03/31/96; Cash, Investments
and MBS are derived from audited and unaudited numbers as per SNL
Securities and public reports.
(Call Report source data may have timing and classification differences
and may exclude certain consolidating entries. Loan percentages
are based on gross balances.)
<PAGE>
3.9
DeWitt and Champaign Counties were 8.7, 5.5, 5.6, and 3.3 percent,
respectively, as of June 1996. First Mutual Bancorp's primary market areas
provides major employment opportunities in the agriculture, agriculture-
related industries, construction equipment, auto-motive, manufacturing and
service businesses. Major employers in the Bank's primary market areas
include Caterpillar Tractor Co.. Inc., A.E. Staley Co., Inc., The Archer
Daniels Midland Company, The University of Illinois, Firestone Tire &
Rubber Company, and Illinois Power Company. First Mutual Bancorp was
included in the peer group due to its location in Illinois, similar level
of deposits (66.7 percent of assets), below average yield/cost spread (2.55
percent versus 2.11 percent for Fairfield), similar non-interest operating
expenses (239 basis points versus 238 basis points for Fairfield), below
average non-performing assets (0.20 percent of assets versus 0.06 percent
for Fairfield), and similar loan allowances (36 basis points versus 38
basis points for Fairfield).
- GLENWAY FINANCIAL CORP., is located in Cincinnati, Ohio and operates
through a network of six offices in Cincinnati in Hamilton County
(population 866,155). Hamilton County's latest per capita income level was
$20,703. The unemployment rate for Hamilton County, as of June 1996, was
4.5 percent. Glenway Financial Corp., was included in the peer group as it
operates in a similar diversified economic market area, below average
levels of cash and investments (7.7 percent of assets), below average net
income (56 basis points), below average net interest margin (291 basis
points), and similar levels of non-interest operating income (29 basis
points versus 25 basis points for Fairfield) and non-interest operating
expenses (223 basis points versus 238 basis points for Fairfield)
- GREAT AMERICAN BANCORP is located in Champaign, Illinois and operates a
network of three offices located in Champaign County (population 165,055).
Champaign is located approximately 100 miles south of Chicago. Champaign
County's latest available per capita income was $16,666. The unemployment
rate for Champaign was 3.3 percent as of June 1996. The economy in the
Champaign-Urbana metropolitan area has historically benefitted from the
presence of the University of Illinois, two medical centers, a food
processing operation and the Chanute Air Force Base, which was closed in
1990. Great American Bancorp. was selected as a peer due to its moderately
small asset size ($119.7 million), similar size branch network, similar
level of permanent one-to-four family residential mortgages (35.5 percent
of assets versus 39.2 percent for Fairfield), below average levels of non-
performing assets (0.19 percent of total assets) and below average reserves
to loans (30 basis points).
- HORIZON FINANCIAL SERVICES, CORP., operates through a network of 3 offices
in Oskaloosa and Knoxville in Mahaska County (population 21,849) in Iowa.
Oskaloosa is approximately 75 miles southeast of Des Moines. Mahaska
County's per capita income as of June 1996 was $13,028. The economy in
Mahaska County is considered agricultural with small retail and light
industrial base. Horizon Financial Services was included in the peer group
due to its small asset size and similarly sized office network, below
average earnings level (ROA of 53 basis points) as well as the company's
midwest location.
<PAGE>
3.10
- KANKAKEE BANCORP, INC. is located in Kankakee, Illinois which is
approximately 35 miles south of the metropolitan Chicago area. The company
operates eight offices in the Kankakee County (population 98,600) and has a
single office in Champaign, Illinois (approximately 75 miles south of
Kankakee) and an office in Carlyle, Illinois (approximately 50 miles east
of the St. Louis metropolitan area). Kankakee County has a mixed
agricultural and industrial economy. Champaign is the location of the
University of Illinois, several major medical centers and agricultural and
industrial businesses. The economy of the Carlyle area includes a mix of
recreational, agricultural and manufacturing businesses. The unemployment
rate for Kankakee County was 5.7 percent as of June 1996. Kankakee Bancorp
was included in the peer group due to its below average earnings level (56
basis points).
- PERMANENT BANCORP, INC., is located in Evansville, Indiana and operates
through a network of 11 offices in the Counties of Vanderburgh (population
168,250), Warrick (population 50,193), Gibson (population 32,246) and
Dubois (population 38,775). The latest per capita income available for
Vanderburgh, Warrick, Gibson and Dubois Counties was $17,960, $18,020,
$14,850 and $16,999 respectively. The unemployment rates for Vanderburgh,
Warrick, Gibson and Dubois Counties was 4.6, 4.3, 5.7 and 2.9 percent
respectively. Seven of the Bank's offices are located in Vanderburgh
County. Evansville has a diversified economy consisting of retail,
manufacturing and service enterprises serving the Evansville area. Major
employees include Whirlpool Corp., ALCOA Corp., Bristol-Myers Squibb, St.
Mary's Medical Center, and Evansville-Vanderburgh SD. Permanent Bancorp
was included in the peer group because it operates in a similarly
diversified economy as Fairfield, although the population and industrial
base of Evansville is smaller than Chicago. Permanent Bancorp has a
similar concentration of permanent one-to-four family residential mortgage
loans (37.0 percent of assets versus 39.2 percent for Fairfield).
Permanent Bancorp, like Fairfield, has generated only modest earnings
levels (ROA of 38 basis points). Permanent Bancorp shows a similar earning
composition, with a below average net interest margin (260 basis points),
similar non-interest operating expenses (229 basis points versus 238 basis
points for Fairfield), below average yield/cost spread (228 basis points
versus 211 basis points for Fairfield), and below average net interest
margin to operating expense ratio (114 percent versus 100 percent for
Fairfield).
- SUBURBFED FINANCIAL CORP., is located in Flossmoor, Illinois and operates
through a network of 12 offices encompassing the south and southwest
Chicago metropolitan areas in Cook County, Will County (population
415,745), DuPage County (population 867,774) and Lake County, Indiana
(population 483,145). The latest per capita income available for Cook,
DuPage, Will and Lake Counties was $20,342, $27,391, $18,972 and $16,054
respectively. The unemployment rate for Cook, DuPage, Will and Lake
Counties was 5.6, 3.6, 4.8 and 5.8 percent respectively. SuburbFed
Financial Corp., was included as a peer due to its proximity to Fairfield,
below average level of cash and investments (5.4 percent of assets versus
3.4 percent for Fairfield), above average MBS (43.5 percent of assets
versus 52.6 percent for Fairfield), below average net interest margin (282
basis points), below average
<PAGE>
3.11
level of profitability (ROA of 50 basis points) and similar emphasis on
one-to-four permanent mortgages (35.3 percent of assets versus 39.2 percent
for Fairfield).
We also reviewed the characteristics of other thrifts for inclusion in the
peer group. The company shown below is a company that has some close
similarities to Fairfield but was excluded from the comparative group for the
reasons noted.
- STANDARD FINANCIAL ,INC., is headquartered in Chicago, Illinois, and
operates in Cook and Lake Counties. The company operates a network of 13
branch offices, has total assets of approximately $2.3 billion, and
generated an ROA of 81 basis points. Although the company is
geographically close to Fairfield, we excluded it from the comparative
group based on its significantly greater asset size and branch office
network.
FINANCIAL COMPARISONS
Table 3.3 presents a comparison of Fairfield's recent operating results and
current financial condition to those of the comparative group and the universe
of all publicly-traded SAIF-insured thrifts for the most recent twelve-month
period. A detailed comparison can be found in Exhibits III-2 through III-4.
Significant differences between Fairfield and the comparative aggregates can be
observed through an analysis of the figures presented in the table.
(1) Fairfield's reported earnings over the most recent twelve month period
were lower than that of the comparative group and the all publicly traded group.
The Bank's reported ROA of 11 basis points compared to 70 basis points for the
comparative group and 88 basis points for the all publicly traded group.
Fairfield's lower earnings relative to the comparative group reflected a
substantially lower net interest margin level and a lower level of non-interest
operating income, partially offset
<PAGE>
TABLE 3.3
FAIRFIELD SAVINGS BANK
KEY FINANCIAL INDICATORS
FOR THE MOST RECENT TWELVE MONTHS (1)
ALL
FAIRFIELD COMP. PUBLICLY TRADED
PROFITABILITY: SAVINGS BANK GROUP THRIFTS
- -------------- ------------ ----- -------
(% OF AVERAGE ASSETS)
Net Income 0.11 0.70 0.88
Interest Income 6.66 7.28 7.42
Interest Expense 4.28 4.06 4.20
----- ----- -----
Net Interest Margin 2.38 3.22 3.22
Other Operating Income 0.25 0.33 0.44
Non-Interest Expense 2.38 2.44 2.27
Net Non-Operating Income(Loss)(2) (0.07) (0.05) 0.02
Extraordinary Items 0.00 0.00 0.00
Adjusted Net Income(3) 0.25 1.11 1.39
SELECTED SPREADS AND MARGINS:
Yield on Earning Assets 6.90 7.61 7.72
Cost of Funds 4.79 4.87 4.92
----- ----- -----
Yield-Cost Spread 2.11 2.74 2.80
Net Earning Asset Position (4) 4.40 12.79 10.85
NIM/G&A Expenses 100.0 133.7 150.1
FINANCIAL CONDITION:
(% OF ASSETS)
Cash and Investments 3.4 21.5 19.4
Loans and MBS 93.3 75.4 77.9
Deposits 70.5 70.4 71.8
Borrowings 20.5 13.6 13.7
Net Worth 7.0 14.8 13.1
Tangible Net Worth 7.0 14.7 12.7
RISK MEASUREMENTS:
NPA/Assets 0.06 0.73 0.89
NPA/Equity 0.87 6.35 10.09
Reserves/Loans 0.38 0.80 0.86
(1) COMPARATIVE GROUP FIGURES REPRESENT THE MOST RECENTLY REPORTED TRAILING
TWELVE MONTHS ENDED JUNE 30, 1996 RESULTS; FAIRFIELDS' FIGURES COVER THE
FISCAL YEAR ENDED JULY 31, 1996.
(2) INCLUDES NET GAINS (LOSSES) ON SALE OF LOANS AND OTHER ASSETS MINUS LOSS
PROVISIONS ON LOANS AND OTHER ASSETS PLUS NON-RECURRING ITEMS (PRE-TAX
BASIS).
(3) INCLUDES NET INTEREST MARGIN PLUS OTHER OPERATING INCOME LESS OPERATING
EXPENSES, ON A PRE-TAX BASIS.
(4) TOTAL INTEREST-EARNING ASSETS LESS TOTAL INTEREST-BEARING LIABILITIES, AS A
PERCENT OF ASSETS.
Source: Audited and unaudited financial statements. SNL Securities, corporate
reports and offering circulars for publicly-traded companies.
<PAGE>
3.13
by a modestly lower level of non-interest operating expenses and loan loss
provisions. The comparative group also generated modest levels of non-operating
gains (7 basis points).
(2) Fairfield's "adjusted net income," which for purposes of this analysis
includes net interest income plus other non-interest operating income minus non-
interest expenses, on a pre-tax basis, was significantly lower than that of the
comparative peer group and the all publicly traded thrift group. The Bank's
adjusted net income of 25 basis points compared to 111 basis points for the
comparative group and 139 basis points for the all publicly traded group.
(3) Fairfield's net interest margin was 238 basis points versus 322 basis
points for the comparative group and for the all publicly traded group. The
Bank's lower net interest margin reflected a lower yield/cost spread (211 basis
points for Fairfield versus 274 basis points for the comparative group and 280
basis points for the all publicly traded group). The Bank's lower net interest
margin also reflected its substantially lower net earning asset position
relative to the comparative group's (4.40 percent for the Bank versus 12.79
percent for the peer group). After conversion, the Bank's net earning asset
position will increase, and approach that of the comparative group. Fairfield's
lower yield/cost spread relative to the comparative group reflects the Bank's
significantly lower yield on earning assets which more than offset its lower
cost of funds. The Bank has 52.6 percent of assets concentrated in lower
yielding mortgage backed securities and only 40.7 percent of assets concentrated
in loans. The comparative group had 62.0 percent of assets concentrated in
loans.
<PAGE>
3.14
(4) Fairfield generated 25 basis points of non-interest operating income
compared to 33 and 44 basis points of non-interest operating income for the
comparative group and all publicly traded group, respectively. The Bank and the
comparative group have not been as successful in diversifying and expanding
their revenue streams as the all publicly traded group. The Bank generates non-
interest income from service charges, loan fees and other miscellaneous revenue
sources. The Bank does not generate revenue from service corporation
operations. Also, for the twelve months ended July 31, 1996, the Bank generated
gains of 9 basis points related to litigation settlements on the Trails of
Olympia Fields development.
(5) Fairfield's operating expense ratio was modestly below that of the
comparative group and industry average. The Bank's non-interest expense ratio
of 238 basis points compared to the comparative group's ratio of 244 basis
points and the all publicly traded group's ratio of 227 basis points. After
conversion, with the establishment of the proposed ESOP and Stock Programs,
additional expenses incident to being a public company, the Bank's overhead
expense ratio will likely modestly increase.
(6) Fairfield maintained a lower level of liquidity at July 31, 1996 when
compared to its peers. Cash, cash equivalents and investment securities equaled
3.4 percent of assets for Fairfield versus 21.5 percent for the comparative
group and 19.4 percent for the all publicly traded group. It is noted, however,
that the Bank had 74 percent of MBS which were due to mature within seven years.
Due to high levels of competition in the Bank's market area, the Bank had a
lower percentage of earning assets concentrated in generally higher yielding
loans. MBS and loans were 93.3 percent of total assets for Fairfield. This
compared to the comparative and all publicly traded group's loan balances
<PAGE>
3.15
(including MBS) which equaled 75.4 percent and 77.9 percent of assets,
respectively. However, Fairfield's lower yielding MBS portfolio equaled 52.6
percent of assets versus 13.4 percent for the comparative group. Also, the
Bank's mortgage loans (excluding home equity loans) as a percent of assets (40.1
percent) was much smaller compared to that of the comparative group and all
publicly traded group (56.1 and 60.8 percent, respectively).
(7) Fairfield's tangible equity ratio of 7.0 percent of assets was well
below the 14.7 percent tangible net worth ratio of the comparative group and the
12.7 percent ratio for the all publicly traded group. Fairfield will have a net
worth ratio after conversion which will approximate that of the comparative
group. However, Fairfield's ratio (on a consolidated basis) will be modestly
higher than the industry average. The Bank's high MBS levels which partially
reflect the limited lending opportunities due to higher competition, can be
expected to result in limited earnings growth potential, which will likely
translate into a lower return on equity ("ROE") relative to the comparative
group.
(8) Fairfield's level of non-performing assets has declined during the
last four years. The Bank's ratio of non-performing assets ("NPA") as a
percentage of assets and equity at July 31, 1996, was 0.06 and 0.87 percent,
respectively, while the comparative group's NPAs as a percent of assets and
equity were 0.73 and 6.35 percent, respectively. Fairfield maintained a
reserves-to-loans ratio (0.38 percent) which was below that of the comparative
group (0.80 percent) and the industry average (0.86 percent).
<PAGE>
IV. MARKET VALUE DETERMINATION
INTRODUCTION
As discussed earlier, certain adjustments might be required to Fairfield's
estimated market value relative to the comparative group to reflect the
differences between the Bank and the members of the comparative group. The
market value adjustments made are based upon certain financial and other
criteria, including: quality and predictability of earnings, earnings growth
potential, financial strength, market area, management, dividend payments, stock
liquidity, thrift equity market conditions, and the actual marketing of the
issue.
The final section of this chapter identifies the estimated pro forma market
value of the to-be-issued common shares and compares the resulting market value
of the Bank with members of the comparative group and all publicly-traded
companies as of the pricing date.
The pro forma market value determined herein is a preliminary value for the
Bank's common stock. Throughout the conversion process, any changes in
Fairfield's financial performance will be reviewed. Also, any changes in the
Bank's fundamental financial characteristics relative to the comparative group
will be analyzed. Future updates, if deemed necessary before or at the time of
the offering, will also consider current developments in the market for thrift
stocks. In addition, the results of the Bank's conversion offering plus the
results of pending conversion offerings in Fairfield's general region of the
U.S. will be closely monitored.
QUALITY AND PREDICTABILITY OF EARNINGS/EARNINGS GROWTH POTENTIAL
Market value adjustments to Fairfield's estimated pro forma market value
must reflect both the sustainability of the Bank's earnings stream and earnings
growth potential relative to the
<PAGE>
4.2
comparative group. We believe that investors look at both factors in
determining an appropriate valuation of a company's stock.
During the fiscal year ended July 31, 1991, Fairfield implemented a major
restructuring of its securities portfolio. As a result of such restructuring
which resulted in a net writedown on the securities portfolio of approximately
$6.1 million, the Bank reported a large net loss in fiscal 1991. However, since
fiscal 1991, Fairfield has been successful in generating a positive, albeit
variable, net earnings stream. The Bank reported moderately high earnings
results in fiscal years 1992 through 1994, as a result of improved net interest
margins and gains on sale of real estate associated with Olympia Fields as well
as gains on sale of securities (in fiscal 1992 and 1994). Fairfield's reported
ROA ranged between 107 and 125 basis points during this three year time period.
It should be noted that Fairfield's investment in real estate has declined in
the last few years as the Bank has sold off most of the parcels of property in
the Olympia Fields project. As a result, real estate related non-interest
expenses have declined. Also, the extent of any future real estate gains is
uncertain.
Since fiscal 1993 Fairfield's core earnings levels have declined. In fact,
reported net income declined to $982,000 or an ROA of 50 basis points in fiscal
1995 and $226,000 or an ROA of 11 basis points in the latest fiscal year ended
July 31, 1996. After peaking at $6.541 million, or a net interest margin of 348
basis points in fiscal 1993, the Bank's net interest income has steadily
declined to $4.704 million, or a net interest margin of 238 basis points in
fiscal 1996. During this time period, Fairfield's interest rate spread has
declined 141 basis points.
The decline in Fairfield's net interest spreads and margins to below
average levels, particularly over the last two years, reflects the
characteristics of the Bank's earning asset portfolio:
<PAGE>
4.3
- Approximately 91 percent of the Bank's loan portfolio is comprised of
fixed-rate one-to-four family residential mortgages versus generally higher
yielding loan types.
- Largely as a result of intense competition for loan originations, Fairfield
has supplemented its lending activities with investments in mortgage-backed
securities. The Bank maintains a high concentration of fixed-rate
mortgage-backed securities, including MBS with balloon maturities. At July
31, 1996, MBS equaled $102.4 million or almost 53 percent of total assets.
The high concentration of lower yielding MBS has served to reduce
Fairfield's earnings asset yield potential and interest rate spreads, as
the yield on the securities falls well below the yields on loans.
- Given the fixed rate nature of Fairfield's loan and MBS portfolios, the
Bank faces significant interest rate risk. The current rising interest
rate environment has resulted in the erosion of the Bank's interest rate
spreads and margins.
Both Fairfield's and the comparative group's profitability levels fall
below the thrift industry average. The comparative group's ROA of 70 basis
points compared to Fairfield's ROA of 11 basis points. The Bank's lower ROA
primarily reflected its lower net interest margin of 238 basis points (versus
322 basis points for the comparative group), but the Bank also reported a lower
level of non-interest income. However, Fairfield did generate a modestly lower
operating expense ratio. It is important to note that, while certain members of
the comparative group have also maintained high levels of mortgage-backed or
other investment securities in relation to loans, the comparative group, on the
whole, has been able to generate a notably higher net interest margin level.
In summary, notwithstanding Fairfield's strategy to increase loan balances
after conversion, given the existing balance sheet structure of the Bank and
competitive lending conditions in and around the Bank's primary market areas in
Cook and Lake Counties, net interest margin and overall earnings growth
potential will remain limited, at least over the near term. Therefore, based on
the
<PAGE>
4.4
factors noted above, we believe a moderate discount to Fairfield's estimated pro
forma market value relative to the comparative group is appropriate.
FINANCIAL STRENGTH
CAPITAL LEVELS
Fairfield's pre-conversion equity to assets ratio of 7.0 percent is below
that of the comparative group and the all publicly traded thrifts. The
additional capital raised through conversion is expected to increase the Bank's
ratio (on a consolidated basis) to modestly above the industry average and
similar to that of the comparative group. With a post-conversion equity ratio
of between 13 and 14 percent, this will result in a company with a substantial
capital cushion and financial flexibility. However, as previously noted, it is
uncertain whether Fairfield will be able to effectively leverage its capital
position to enhance investor (shareholder) returns.
ASSET/LIABILITY POSITION
Fairfield has taken a number of steps to restructure its assets and
liabilities in order to mitigate interest rate risk. In recent years, the Bank
has attempted to invest in mortgage-backed securities having balloon maturities
of five or seven years. However, Fairfield currently maintains no adjustable-
rate MBS. Fairfield also maintains significant levels of available for sale
securities which serves to enhance the overall liquidity of the Bank's
securities portfolio. At July 31, 1996, approximately 95 percent of the Bank's
residential mortgage loan portfolio contained fixed-rate product. While the
Bank's fixed-rate lending program tries to focus on loans with terms of 15 years
or less, a substantial majority of existing loans have original maturities of 30
years. In summary,
<PAGE>
4.5
given the heavy fixed-rate nature of Fairfield's loan and MBS portfolios, the
Bank has remained vulnerable to increases in interest rates.
Partially offsetting the interest rate risk of Fairfield's earnings asset
portfolio, Fairfield's deposit portfolio includes a relatively large percentage
of lower costing core deposits which can be more resistant to interest rate
changes than certificate accounts. At July 31, 1996, $65.8 million or 48.0
percent of the Bank's total deposits consisted of passbook savings, transaction
or other non-certificate accounts. However, as is the case with most of the
comparative group thrifts, the Bank's base of passbook savings and other lower
costing accounts has been replaced by higher balances of time deposit accounts
during the last two years. Fairfield has also relied heavily on wholesale
borrowings with various maturity structures to fund asset growth. At July 31,
1996, FHLB borrowings equaled 20.5 percent of assets.
Certain of the comparative group thrifts have also maintained a heavy base
of investment and mortgage-backed securities. Four of the comparative group
institutions in particular, SuburbFed, Avondale, Damen and Permanent, have
maintained heavy balances of MBS or other securities to supplement their lending
activities. However, on average, the comparative group maintains a greater
concentration of its assets in higher yielding loans versus securities. Also,
the comparative group, while also emphasizing one-to-four family residential
lending, has sought greater loan diversification. However, like Fairfield, the
comparative group thrifts' efforts to improve asset/liability mismatches have
also been limited due to the generally short-term nature of their deposit and
borrowing bases.
<PAGE>
4.6
ASSET QUALITY
Fairfield has achieved low non-performing asset levels over the last four
years. The Bank's high asset quality is due to conservative loan underwriting
policies which is reflected by a loan portfolio dominated by local, one-to-four
family mortgage loans. At July 31, 1996, the Bank's non-performing assets
equaled 0.06 percent of total assets. This compared to a non-performing asset
ratio of 0.73 percent for the comparative group. At July 31, 1996, Fairfield's
allowance for loan losses equaled 0.38 percent of loans, which percentage is
below both the thrift industry average of 0.86 percent and the comparative group
average of 0.80 percent. However, management believes Fairfield's low ratio
reflects the Bank's strong asset quality.
On balance, based on all the factors discussed in this section, we believe
that no specific adjustment to Fairfield's estimated pro forma market value
relative to the comparative group is warranted.
MARKET AREA
Fairfield's three offices include its two largest deposit offices in
Chicago and another branch office in Norridge, both in Cook County, plus its
main office in Lake County. Based on Fairfield's branch locations and deposit
and lending activities, the Bank's primary market areas encompass the northern
portions of Chicago and the northwest suburbs. The Chicago metropolitan area is
among the nation's most economically and ethnically diverse communities.
Approximately 75 percent of Fairfield's deposit base is generated from its
branch offices in Cook County.
The Bank's branch offices in Cook County, particularly the Chicago office,
are surrounded by generally older ethnic communities offering limited lending
opportunities while the Long Grove
<PAGE>
4.7
office in Lake County is surrounded by market areas that are experiencing
greater population and economic growth as well as greater lending potential.
The Bank's branch office network has expanded into the western portions of the
Chicago metropolitan area which has benefited from in influx of new industries
and workers into the area. While slowing over the last few years, Lake, DuPage
and some of the other counties west of Chicago have experienced active
residential development. The Bank's branch offices face competition from over
1,250 thrift, savings bank, commercial bank and credit union offices in Cook
County and almost 170 offices within Lake County. While Fairfield has
successfully established a strong core deposit base within its limited market
area within Cook County, it has only a very small percentage of the total
deposit base within Cook and Lake Counties, well below one percent. The Bank
will continue to face increasing competition from financial institutions in
Chicago and those institutions moving into the Lake County market area and the
other counties west and northwest of Chicago.
In general, the comparative group thrifts operate within market areas with
similar economic bases (although with varying degrees of economic and population
growth, with four of the comparative thrifts also operating in or close to the
Chicago marketplace and most of the other comparatives operating in large
metropolitan or suburban areas), although, on the whole, their surrounding
market areas have not experienced the same strong growth that portions of the
western suburbs in Chicago have. The comparative group thrifts also face strong
competition in their local markets. However, certain of the thrifts operate
over larger geographic bases due to larger branch office networks and also enjoy
strong core deposit bases.
Based on the above, we have made no adjustment to Fairfield's pro forma
market value for the factors discussed in this section.
<PAGE>
4.8
DIVIDEND PAYMENTS
While there is no specific plan to pay cash dividends immediately after
conversion, Fairfield may consider a policy of paying cash dividends on the
common stock in the future. However, no determination has been made at this
time as to the amount or timing of such dividends. Any payment of dividends
would be considered relative to management's intention to retain earnings for
future growth and to assure compliance with the increased capital requirements
mandated by The Financial Institutions Reform, Recovery and Enforcement Act of
1989 ("FIRREA"). Fairfield's post-conversion capital ratio, however, should
facilitate the payment of any future dividends.
Eight of the ten comparative group members are currently paying cash
dividends with dividend yields ranging from 1.9 percent to 3.2 percent.
Approximately 75 percent of all publicly-traded thrifts are paying dividends.
We believe that investors are more sensitive to dividend paying capacity and
look forward to at least a minimal cash dividend shortly after conversion,
especially given future price increases remains an unknown and investors are
seeking tangible returns on investments. However, it is also reasonable to
expect that investors will look favorably upon earnings retention policies in
light of increased capital requirements and need for capital to support growth
and revenue diversification strategies. Therefore, given the number of thrifts
(including the number of comparative group thrifts) currently paying cash
dividends, we have made a slight downward adjustment to Fairfield's pro forma
market value for this factor.
MANAGEMENT AND EMPLOYEE STAFFING
Fairfield's executive management team is concentrated in six individuals
who are responsible for the lending, finance and operations areas of the Bank.
These individuals have had a varying
<PAGE>
4.9
number of years of experience in the thrift industry. The organization chart
and vesting of responsibility is typical of a moderately small savings
institution. However, the relatively small size of Fairfield requires that
multiple line responsibilities be concentrated in a small handful of people.
The management team is part of a total staff of 48 full-time and 17 part-time
employees (as of July 31, 1996). Fairfield's management appears to have
established a favorable reputation for the Bank in the communities in which it
operates. With the recent hiring, in September 1996, of a new Chief Lending
Officer, the Bank has no specific plans for staff increases after conversion.
However, any expansion or diversification of operating activities would likely
require that the size and experience of management and staff be expanded.
The comparative savings institutions, to varying degrees, have undertaken
expansion of their management teams and support staff as part of their expansion
and diversification strategies, many of which have had these strategies in place
for some time. Most savings institutions have been confronted with the need to
expand and restructure their management team in response to significant changes
in financial, regulatory and operational challenges.
On balance, we believe that no specific adjustment to Fairfield's pro forma
market value relative to that of the comparative group is warranted for
managerial factors.
LIQUIDITY OF THE ISSUE
The comparative group contains nine companies that trade on the NASDAQ
system and one on the American Stock Exchange. The Holding Company has applied
and expects to have the common stock quoted on the NASDAQ National Market.
Given the size of the offering and the level of market capitalization of
Fairfield's stock after conversion, it can be expected that the
<PAGE>
4.10
Holding Company's common stock will have a moderate degree of trading activity
and liquidity. The comparative group of savings institutions has experienced
varying degrees of activity and, therefore, liquidity in their stocks. The
market capitalization of the comparative group can be expected to be only
modestly higher than that of Fairfield. Therefore, the Holding Company's stock
can be expected to have a roughly similar level of liquidity. Based on the
foregoing, we believe that no specific adjustment to the pro forma market value
of Fairfield relative to that of the comparative group is warranted.
SUBSCRIPTION/COMMUNITY INTEREST
In accordance with the Bank's Plan of Conversion, it is currently planned
that the shares of Fairfield's stock will be offered to certain priority groups,
in a Subscription Offering, in the following order: (i) Eligible Account
Holders; (ii) Tax-Qualified Employee Plans; (iii) Supplemental Eligible Account
Holders; (iv) Other Members; and, (v) Bank Employees. If any shares are
available at the conclusion of the Subscription Offering, Fairfield plans to
offers share in a Community Offering. Fairfield has retained Hovde Securities,
Inc., to consult with and advise the Bank in the stock offering and assist in
the distribution of shares, on a best efforts basis.
After an extended period of declining numbers of conversions during the end
of 1989 and into 1990, new conversion offerings increased during 1991 and 1992
as interest rates declined and thrift profitability improved, and a core group
of surviving and healthy thrifts emerged from the thrift industry's unfavorable
financial plight. New thrift equity offerings have generated mixed results.
Investors appear to be most interested in thrifts with: (1) strong capital
positions, (2) strong earnings levels, and (3) good asset quality. The more
marginal thrifts are experiencing less interest by
<PAGE>
4.11
investors. Through the first quarter of 1996, new thrift issues also generated
increased interest due to the performance of stock prices of selected recently
converted thrifts. These thrift stock prices benefitted from (1) earnings and
earnings per share improvements as a result of lower interest rates and (2) the
repurchase of stock by several of the recently converted thrifts, which has
generally fueled stock price appreciation. Also, speculative interest, as a
result of the high level of merger and acquisition activities in the banking and
thrift industries, generated renewed demand for many of the recent conversion
offerings.
Notwithstanding a slow economic recovery and continued weak real estate
markets, investor demand for thrift conversion offerings remained generally
favorable in 1993 and the first eight months of 1994. In particular, during
this time frame, there was a notable increase in the number of successfully
completed conversion offerings by the better performing thrift institutions.
However, between November 1994 and January 1995, conversion offerings met
considerable resistance from the investment community as financial institution
stocks fell out of favor with many investors. At least 15 conversion offerings
were forced into resolicitations in late 1994 and early 1995. However, during
the second half of 1995 and first quarter of 1996, the interest in thrift
conversion offerings increased. However, during the second quarter of 1996,
interest rates increased and thrift stock prices remained essentially flat
overall. While thrift prices began to move up again during August and early
September, the number of and level of investor interest in conversion offerings
has not matched the number and level generated through the first quarter of
1996.
Also, the after-market price performance of recently converted thrifts has
not matched the price performance experienced by thrifts which converted prior
to 1996. The average and median price
<PAGE>
4.12
increases for the 34 publicly traded thrifts which converted since the end of
March 1996 are 17.5 and 14.4 percent, respectively.
The recent uncertain environment for new thrift offerings has been factored
into our determination of the estimated pro forma market value of Fairfield.
STOCK MARKET ENVIRONMENT
In an attempt to define and monitor the market for publicly-traded thrift
institutions, we have utilized the SNL Index, which measures the relative price
movements of all publicly-traded thrifts and is compiled by SNL Securities.
Table 4.1 details the performance of the index since 1989, which reflects market
forces such as the supply of and demand for thrift stocks, expected inflation
levels, interest rate changes, thrift industry regulatory changes, and the
overall economic strength in the U.S. With minor exception, for an 18-month
period beginning with the second half of 1989, thrift prices followed a
generally downward trend reflecting investor concerns over the new capital
regulations stemming from FIRREA and the downturn in the real estate markets in
many portions of the country. At the beginning of 1990, thrift prices appeared
to have also been adversely impacted by a rise in long-term interest rates and
uncertainty regarding the continued financial viability of the thrift industry.
As a result, over the first few months of 1990, the number of conversion
offerings remained low. In the wake of continued negative press on the state of
the real estate markets across the country and the financial difficulties of
both commercial banks and thrifts, financial institution stock prices suffered
significant price erosion through 1990. Also, overall, thrift conversion
activity remained weak through most of 1990.
<PAGE>
TABLE 4.1
THRIFT STOCK INDEX
RELATIVE TO LONG AND SHORT-TERM RATES
3-MONTH 12-MONTH LONG-TERM
PRIME T-BILL T-BILL T-SECUR. THRIFT
WEEK OF RATE (1) RATE (1) RATE (1) RATE (1) INDEX (2)
- --------------------------------------------------------------------------------
(LAST DAY OF QUARTER)
03/31/89 11.50 9.00 8.94 9.31 170.7
06/29/89 11.00 8.03 7.35 8.23 231.6
09/29/89 10.50 7.84 7.78 8.41 210.0
12/29/89 10.50 7.68 7.30 8.09 162.5
03/30/90 10.00 7.85 7.75 8.68 149.6
06/29/90 10.00 7.77 7.33 8.63 144.4
09/28/90 10.00 7.29 7.25 9.14 96.2
12/28/90 10.00 6.48 6.37 8.35 96.6
03/29/91 9.00 5.82 5.94 8.35 127.6
06/28/91 8.50 5.56 5.96 8.53 130.8
09/27/91 8.00 5.16 5.20 7.86 142.0
12/27/91 9.50 3.81 3.97 7.38 140.0
03/27/92 9.00 4.03 4.40 7.91 155.2
06/26/92 8.50 3.64 3.94 7.65 168.2
09/25/92 8.00 2.69 3.38 7.11 165.3
12/31/92 6.50 3.18 3.49 7.19 201.1
03/26/93 6.50 2.93 3.16 6.60 227.8
06/25/93 6.00 3.09 3.37 6.44 216.7
09/24/93 6.00 2.93 3.26 5.99 252.1
12/31/93 6.00 3.02 3.45 6.22 252.5
(LAST WEEK OF MONTH)
01/28/94 6.00 2.93 3.35 6.16 257.2
02/25/94 6.00 3.34 4.08 6.54 248.0
03/25/94 6.25 3.31 4.15 6.90 249.4
04/29/94 6.75 3.59 4.72 7.24 248.3
05/27/94 7.25 4.18 5.00 7.44 262.6
06/24/94 7.25 4.17 5.00 7.47 267.5
07/29/94 7.25 4.42 5.22 7.57 276.7
08/26/94 7.68 4.55 5.31 7.58 285.9
09/30/94 7.68 4.68 5.58 7.58 279.7
10/28/94 7.68 5.01 5.86 8.08 262.0
11/25/94 8.50 5.31 6.22 8.10 240.5
12/30/94 8.50 5.52 6.74 7.93 244.7
01/27/95 8.50 5.78 6.56 7.98 256.5
02/24/95 9.00 5.72 6.15 7.61 278.7
03/31/95 9.00 5.68 5.94 7.43 278.4
04/28/95 9.00 5.65 5.82 7.32 295.44
05/25/95 9.00 5.69 5.59 6.81 306.43
06/30/95 9.00 5.43 5.33 6.53 313.45
07/28/95 8.75 5.45 5.39 6.82 328.68
08/25/96 8.75 5.41 5.37 6.62 362.29
09/29/95 8.75 5.26 5.37 6.62 362.29
10/27/95 8.75 5.24 5.29 6.34 355.46
11/24/95 8.75 5.35 5.14 6.26 368.62
12/29/95 8.50 4.89 4.94 5.97 365.18
01/16/96 8.25 4.97 4.79 6.00 365.10
02/23/96 8.25 4.82 4.78 6.35 376.23
03/29/96 8.25 5.00 5.13 6.70 382.13
(LAST DAY OF WEEK)
04/05/96 8.25 5.01 5.18 6.74 385.81
04/12/96 8.25 4.97 5.31 6.96 375.63
04/19/96 8.25 4.85 5.21 6.88 379.42
04/26/96 8.25 4.96 5.21 6.88 379.52
05/03/96 8.25 5.00 5.33 7.04 371.87
05/10/96 8.25 5.00 5.35 7.11 373.88
05/17/96 8.25 5.01 5.28 6.96 381.81
05/24/96 8.25 5.04 5.27 6.93 383.49
05/31/96 8.25 5.04 5.39 7.02 382.99
06/07/96 8.25 5.09 5.46 7.08 384.37
06/14/96 8.25 5.11 5.52 7.23 384.80
06/21/96 8.25 5.07 5.46 7.17 384.28
07/05/96 8.25 5.12 5.44 6.98 383.90
07/12/96 8.25 5.17 5.60 7.20 375.57
07/19/96 8.25 5.13 5.47 7.08 378.92
07/26/96 8.25 5.16 5.54 7.05 385.12
08/02/96 8.25 5.20 5.55 7.07 397.65
08/09/96 8.25 5.05 5.30 6.77 400.08
08/16/96 8.25 5.12 5.29 6.79 406.37
08/23/96 8.25 5.03 5.33 6.85 408.39
08/30/96 8.25 5.06 5.45 7.03 408.34
09/06/96 8.25 5.18 5.61 7.15 410.76
(1) U.S. Financial Data, The Federal Reserve of St. Louis
(2) SNL Securities - Thrift Stock Indexes
<PAGE>
4.14
Beginning in January 1991, stock prices, in general, moved higher
reflecting a sharp rally in the financial markets. Financial institution stocks
led this rally which reflected lowering interest rates and market euphoria over
the successes in the Persian Gulf War. However, the financial markets continued
to experience notable instability reflecting the prevailing recessionary
conditions including depressed real estate markets. This adversely impacted the
operating results of certain financial institutions and simply served as a
destabilizing influence for the stock market. However, while thrift stock
prices experienced a limited level of variability, such prices generally moved
upward during much of 1992. The declining interest rate environment and
improving net interest margins resulted in generally favorably earnings reports
for financial institutions. In particular, reports of record earnings for the
thrift industry for 1992 and 1993 fueled moderate stock price appreciation
through much of 1993.
In the early portion of 1994, thrift stock prices remained relatively flat
as the general direction of interest rates was uncertain. However, any negative
impact caused by the rise in interest rates in the spring of 1994 was offset
apparently due to the announcement of interstate banking legislation. This
legislation has created speculation that thrifts will be more easily acquired
and the thrift industry will consolidate. While the market for thrift stocks
faltered in March and April of 1994, stock prices resumed their upward trend
until October 1994, when the rise in interest rates led to speculation that
financial institutions would generate less earnings in future periods. The
decline in thrift stock prices in the last quarter of 1994 was dramatic.
However, overall, thrift prices advanced during most of 1995, as the yield curve
flattened and long-term interest rates declined. Also, heavy merger and
acquisition activity in both the bank and thrift industries fueled speculative
<PAGE>
4.15
trading in many thrift stocks during 1995 and early 1996. However, between the
first quarter of 1996 and end of July, thrift stocks did not experience any
upward pricing momentum and prices remained relatively flat overall. Thrift
stocks appeared to be adversely impacted by the rise in interest rates,
particularly during late spring and early summer. More recently, with the
relative stabilization of long-term interest rates in August and the
announcement of record earnings for the thrift industry during the first part of
1996, thrift prices have resumed their upward movement.
Chart 1 reflects the performance of the stock market since the passage of
the FIRREA legislation. As noted, the overall favorable performance of
financial institution stock prices during 1991 through the third quarter of 1994
reflects the recapture of losses sustained during 1989 and 1990. However, the
chart reflects a significant downturn in financial related stocks in the last
quarter of 1994, followed by a recovery during 1995. These factors, both
positive and negative, have been factored into our valuation considerations.
VALUATION APPROACH
Three approaches have been considered appropriate to determine the pro
forma market value estimate of a converting savings institution: (1)
price/earnings, (2) price/book value, and (3) price/assets. We believe that
investors place their primary emphasis on making purchase decisions based on
the recent earnings results and expected profitability of savings institutions.
Therefore, we believe it is appropriate to place considerable emphasis on the
pro forma price/earnings valuation approach in deriving a fair market value
for a converting savings institution. However, price/earnings ratios for
some savings institutions have become less meaningful over the last few years
as a result of the variability of reported earnings. Also, as in the case of
Fairfield, when an institu-
<PAGE>
[CHART 1]
HOW FINANCIAL SERVICE COMPANIES HAVE FARED
RELATIVE TO THE MARKET
Line graph indicating the performance of the Dow Jones Industrial, NYSE
Financial, NASDAQ Banks and S&L Index from September 1989 to September 1996.
<PAGE>
4.17
tion generates a very low earnings level, an over emphasis on the use of the pro
forma price/earnings approach will not result in a totally meaningful estimated
market value. Therefore, we also generally give considerable weight to the pro
forma price/book value approach. This valuation method also is closely analyzed
by investors in making investment decisions. However, it is important to note
that the "book value" of a company is an accounting derived concept that
represents the historically accumulated retained earnings of such entity. Such
book value does not necessarily take into consideration the current earnings
power of the company. Obviously, a converting thrift institution has a base of
capital in place prior to the time of conversion. To attempt to value such
converting institution at a pro forma book/value ratio equal to or even close to
the price/book value ratios of publicly traded stock institutions will result,
in most instances, in an unrealistic valuation that is unacceptable in the
marketplace. Thus, a disproportionate reliance on a price/book value approach
may result in unrealistic estimated pro forma market value for the Bank. This
is particularly true since investors will be seeking a certain minimum, and thus
reasonable, return on equity ("ROE"). Therefore, we believe that in determining
an appropriate value for a converting institution such as Fairfield, the pro
forma price/book value ratio must be balanced against the pro forma
price/earnings ratio plus the pro forma price/assets ratio.
One other valuation method, the pro forma price/assets ratio, is most
applicable for valuing savings institutions with low net worth and/or very low
operating income or losses. Since Fairfield has generated declining earnings
levels in recent years and reported a very low earnings level for the latest
twelve months ended July 31, 1996, we have also looked closely at the
price/assets valuation approach.
<PAGE>
4.18
In analyzing the appropriate pro forma pricing ratios and the resulting
estimated fair market value for the to-be-issued shares of common stock of
Fairfield, we have considered the following strengths and weaknesses of the
Bank:
- Fairfield's core earnings levels have declined since fiscal 1993. The Bank
reported a significantly lower level of profitability for the latest twelve
months ended July 31, 1996, relative to that of the comparative group. The
Bank's ROA of 11 basis points compared to an ROA of 70 basis points for the
comparative group. Fairfield's lower profitability primarily reflects a
lower interest rate spread and net interest margin.
- Given the fixed rate nature of Fairfield's loan and MBS portfolios, the
Bank faces significant interest rate risk. The current rising interest
rate environment has resulted in the erosion of the Bank's interest rate
spreads and margins. Also, the heavy concentration of lower yielding MBS
has served to reduce Fairfield's earning asset yield potential and interest
rate spreads. After conversion, Fairfield plans to gradually increase the
level of loan balances relative to MBS levels.
- Fairfield has achieved low non-performing asset levels over the last four
years and the Bank's asset quality level is favorable relative to the
comparative group.
- The infusion of capital through conversion will result in a strong equity
position for the Bank. The Bank's post-conversion consolidated equity
ratio of between 13 and 14 percent is expected to be modestly above the
average for all publicly traded thrifts and approximate the comparative
group average.
Based on Fairfield's fundamental financial and other characteristics
relative to the comparative group as discussed in this chapter, on balance, we
believe that a moderate valuation discount for the Bank is appropriate. Such
valuation adjustment reflects the Bank's lower core earnings level. Also, we
believe that, as a converting institution, a new issue discount is appropriate
for Fairfield.
Based on the above factors and the pricing ratios of the ten comparative
group thrifts, we believe that the following pro forma pricing ratios and
discounts (on a price/book value and price/assets basis) are appropriate for
Fairfield:
<PAGE>
4.19
TABLE 4.2
COMPARATIVE PRICING ANALYSIS
FAIRFIELD SAVINGS BANK
DISCOUNT (PREMIUM) TO THE
PRICING RATIO COMPARATIVE GROUP
- ------------- -----------------
Price/Book Value 62.53% Mean 24.0%
Median 24.9%
Price/Earnings 25.39x(1) Mean (48.0%)
Median (53.1%)
Price/Assets 8.29 % Mean 30.8%
Median 2.9%
(1) Based on reported earnings of $226,000 for the twelve months ended July 31,
1996; assumes 1,750,000 shares outstanding (total shares issued in the
conversion at the midpoint value). Under SOP No. 93-6 there would be
1,624,000 shares outstanding for the earnings per share calculation,
resulting in a pro forma price/earnings ratio of 23.81x.
We believe that Fairfield's pro forma price/book value ratio, when analyzed
in conjunction with the Bank's pro forma price/earnings and price/assets ratios,
results in an appropriate estimated pro forma market value. We believe that
Fairfield's pricing ratios are appropriate for a newly converting thrift
institution, particularly based on the pricing characteristics of two Chicago
area institutions which either recently converted or is in the process of
converting, as shown below:
<PAGE>
4.20
CONVERSION PRICING
<TABLE>
<CAPTION>
PRICING
AT TIME OF CONVERSION AT MIDPOINT
------------------------------------ -------------------------------------
PRICE/BOOK PRICE/
EQUITY/ 12 MONTH OFFERING VALUE EARNINGS
INSTITUTION ASSETS ASSETS ROA AMOUNT RATIO RATIO
- ----------- ------ ------ --- ------ ----- -----
($000s) ($000s)
<S> <C> <C> <C> <C> <C> <C>
Park Federal
Savings Bank $149,387 11.8% 0.65% $24,000 63.0% 17.6x
Chicago, IL
Home Federal
of Elgin $306,688 12.1% 0.72% $53,000 64.5% 16.6x
Elgin, IL
</TABLE>
Home Federal's conversion is currently in process. Park Federal converted on
August 12, 1996. Park Federal converted at $10.00 per share with a conversion
P/B ratio of 66.6 percent. Park Federal's stock was trading at $10.31 per share
on September 6, 1996, or a 3.1 percent increase over its IPO price.
VALUATION CONCLUSION
It is therefore our opinion that, as of September 6, 1996, the estimated
pro forma fair market value of Fairfield was $17,500,000, based on 1,750,000
shares at $10.00 per share. The resulting range of value was $14,875,000 or
1,487,500 shares, to $20,125,000 or 2,012,500 shares, both based on $10.00 per
share. Pro forma calculations which include the impact of an eight percent
purchase by Fairfield's Employee Stock Ownership Plan ("ESOP") and a four
percent purchase by the Stock Programs subsequent to conversion are shown in
Table 4.3 and in Exhibits IV-2 through IV-7. Subject to market conditions at
the time of the offering, an overallotment provision up to 15 percent above the
maximum value, or $23,143,750 could be made available.
<PAGE>
TABLE 4.3
PRO FORMA COMPARISON
CONVERTING INSTITUTION VERSUS THE COMPARATIVE GROUP
<TABLE>
<CAPTION>
FAIRFIELD SAVINGS BANK
As of September 6, 1996
Ticker Name & State Price(1) Mk Value P/E (3,4) P/Book P/TBook P/Assets DivYld
- ------- ------------ -------- -------- --------- ------ ------- -------- ------
($) ($Mil) (x) (%) (%) (%) (%)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
FAIRFIELD SAVINGS BANK (2)
--------------------------
Before Conversion 10.00 N/A N/A N/A N/A N/A N/A
Pro Forma SuperMaximum 10.00 23.14 27.27 70.43 70.43 10.68 0.00
Pro Forma Maximum 10.00 20.13 26.36 66.52 66.52 9.42 0.00
Pro Forma Midpoint 10.00 17.50 25.39 62.53 62.53 8.29 0.00
Pro Forma Minimum 10.00 14.88 24.18 57.84 57.84 7.13 0.00
COMPARATIVE GROUP (10)
-----------------------
Averages 16.89 35.52 17.16 82.27 83.28 11.98 1.83
Medians 15.19 32.23 16.58 83.25 84.19 8.54 2.01
ALL SAIF-INSURED THRIFTS (329)
-------------------------------
Averages 17.33 125.39 14.22 108.99 112.11 13.74 1.99
Medians 15.50 37.77 13.33 100.85 103.12 11.85 2.05
COMPARATIVE GROUP
-----------------
AVND AvondaleFinCorp-IL 13.875 50.0 14.92 85.0 85.0 8.43 0.00
CBCI Calumet Bancorp-IL 28.125 68.1 12.02 84.6 84.6 13.61 0.00
DFIN DamenFinCorp-IL 11.500 43.1 22.55 83.0 83.0 19.23 2.09
FMBD FirstMutualBanc-IL 13.250 54.7 20.07 78.7 78.7 18.12 2.11
GFCO GlenwayFinCp-OH 20.250 23.2 15.00 87.6 89.7 8.47 3.20
GTPS GreatAmrcnBncrp-IL 13.500 23.6 NA 75.0 75.0 20.88 2.96
HZFS HorizonFinSvcs-IA 14.125 6.3 16.82 75.4 75.4 8.61 2.27
KNK KankakeeBancorp-IL 20.750 29.8 16.34 83.8 90.2 8.28 1.93
PERM PermanentBancp-IN 16.250 34.7 23.90 86.3 87.5 8.46 1.85
SFSB SuburbFedFinCp-IL 17.250 21.7 12.87 83.3 83.7 5.73 1.86
</TABLE>
<TABLE>
<CAPTION>
Ticker Name & State Ttl Assets Eq/Asst TgEq/A EPS(3) ROAA(3) ROAE(3)
- ------- ------------ ---------- ------- ------ ------ ------- -------
($000) (%) (%) ($) (%) (%)
<S> <C> <C> <C> <C> <C> <C> <C>
FAIRFIELD SAVINGS BANK (2)
--------------------------
Before Conversion 194,624 6.98 6.98 N/A 0.12 1.68
Pro Forma SuperMaximum 216,684 15.17 15.17 0.37 0.41 2.62
Pro Forma Maximum 213,714 14.16 14.16 0.38 0.37 2.56
Pro Forma Midpoint 211,131 13.26 13.26 0.39 0.34 2.49
Pro Forma Minimum 208,548 12.33 12.33 0.41 0.31 2.42
COMPARATIVE GROUP (10)
-----------------------
Averages 324,836 14.77 14.67 1.04 0.70 5.01
Medians 330,431 10.68 10.68 0.89 0.59 4.88
ALL SAIF-INSURED THRIFTS (329)
-------------------------------
Averages 1,316,246 13.08 12.75 1.34 0.88 8.03
Medians 317,315 10.33 10.25 1.24 0.89 7.36
COMPARATIVE GROUP
-----------------
AVND AvondaleFinCorp-IL 592,771 9.93 9.93 0.93 0.62 5.82
CBCI Calumet Bancorp-IL 500,814 16.08 16.08 2.34 1.31 7.85
DFIN DamenFinCorp-IL 237,296 23.16 23.16 0.51 0.89 4.28
FMBD FirstMutualBanc-IL 301,690 23.02 23.02 0.66 0.98 3.80
GFCO GlenwayFinCp-OH 273,890 9.67 9.46 1.35 0.56 5.82
GTPS GreatAmrcnBncrp-IL 119,662 27.85 27.85 0.43 0.70 2.44
HZFS HorizonFinSvcs-IA 73,464 11.42 11.42 0.84 0.53 4.38
KNK KankakeeBancorp-IL 359,171 9.88 9.25 1.27 0.56 5.37
PERM PermanentBancp-IN 411,213 9.78 9.67 0.68 0.38 3.47
SFSB SuburbFedFinCp-IL 378,388 6.88 6.85 1.34 0.50 6.91
</TABLE>
(1) Closing or Last Trade.
(2) Based on $10.00 per share.
(3) Excludes extraordinary items.
(4) Market average P/E ratios exclude firms with P/E ratios in excess of 30
times earnings.
Sources: Audited and unaudited financial statements for Fairfield Savings Bank
SNL Securities and the publicly traded companies' reported stock
prices.
<PAGE>
CAPITAL RESOURCES GROUP, INC.
LIST OF EXHIBITS
FAIRFIELD SAVINGS BANK, F.S.B.
EXHIBIT
NUMBER DESCRIPTION
I-1 Map of Office Locations
I-2 Audited Financial Statements
I-3 Loan Portfolio
I-4 Loan Originations and Sales
I-5 Loan Maturities
I-6 Allowance for Loan Losses
I-7 Mortgage-Backed Securities Portfolio
I-8 Deposit Portfolio
I-9 Borrowings
I-10 Yield-Cost Spreads
I-11 Board of Directors and Management Biographical Information
I-12 Pending and Completed Thrift Acquisitions in Illinois
II-1 Economic and Demographic Data
II-2 Earnings By Industry
II-3 Economic and Demographic Projections
II-4 Deposit Summary
II-5 Construction Authorized By Building Permits
III-1 General Characteristics of Publicly-Traded Thrifts
III-2 Financial Condition
III-3 Income and Expense Trends
III-4 Selected Spreads and Risk Margins
IV-1 Market Value Characteristics of Publicly-Traded Thrifts
IV-2 Pro Forma Effect of Conversion Proceeds - At the Minimum
IV-3 Pro Forma Effect of Conversion Proceeds - At the Midpoint
IV-4 Pro Forma Effect of Conversion Proceeds - At the Maximum
IV-5 Pro Forma Effect of Conversion Proceeds - At the Supermax
IV-6 Pro Forma Analysis Sheet
IV-7 Pro Forma Calculation
V-1 Firm Qualifications Statement
<PAGE>
Exhibit I-1
MAP OF OFFICE LOCATIONS
[MAP SHOWING OFFICE LOCATIONS OF
FAIRFIELD SAVINGS BANK, F.S.B. AND COUNTY LINES]
4
<PAGE>
Exhibit I-2
Audited Financial Statements
Source: Fairfield's Prospectus
<PAGE>
[Letterhead of KPMG Peat Marwick LLP]
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
================================================================================
Assets 1996 1995
- --------------------------------------------------------------------------------
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
================================================================================
See accompanying notes to financial statements.
F-3
<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,
-------------------------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
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-for-sale and repurchase agreements -- 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.
37
<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
(Continued)
F-6
<PAGE>
FAIRFIELD SAVINGS BANK, F.S.B.
Notes to Financial Statements
================================================================================
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.
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.
(Continued)
F-7
<PAGE>
FAIRFIELD SAVINGS BANK, F.S.B.
Notes to Financial Statements
================================================================================
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.
(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
--------------------------------------------------
Gross Gross Estimated
Amortized unrealized unrealized fair
Description cost gains losses value
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
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.
(Continued)
F-8
<PAGE>
FAIRFIELD SAVINGS BANK, F.S.B.
Notes to Financial Statements
================================================================================
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.
(3) Loans Receivable
Loans receivable at July 31 are summarized as follows:
================================================================================
1996 1995
- --------------------------------------------------------------------------------
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
================================================================================
(Continued)
F-9
<PAGE>
FAIRFIELD SAVINGS BANK, F.S.B.
Notes to Financial Statements
================================================================================
Activity in the allowance for loan losses is summarized as follows for the
years ended July 31:
================================================================================
1996 1995 1994
- --------------------------------------------------------------------------------
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
================================================================================
Loans receivable delinquent three months or more at July 31 are as follows:
================================================================================
Number Percentage
of of gross
loans Amount loans receivable
- --------------------------------------------------------------------------------
1996 2 $ 118,303 .15%
1995 1 193,209 .27
1994 4 510,872 .74
================================================================================
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.
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.
(Continued)
F-10
<PAGE>
FAIRFIELD SAVINGS BANK, F.S.B.
Notes to Financial Statements
================================================================================
(4) Accrued Interest Receivable
Accrued interest receivable at July 31 is summarized as follows:
================================================================================
1996 1995
- --------------------------------------------------------------------------------
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
================================================================================
(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:
================================================================================
1996 1995
- --------------------------------------------------------------------------------
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
================================================================================
Depreciation and amortization expense was $404,019, $407,599, and $388,916
for the years ended July 31, 1996, 1995, and 1994, respectively.
(Continued)
F-11
<PAGE>
FAIRFIELD SAVINGS BANK, F.S.B.
Notes to Financial Statements
================================================================================
(6) Savings Deposits
Savings deposits at July 31 are summarized as follows:
<TABLE>
<CAPTION>
==================================================================================================
1996 1995
Stated or weighted ------------------ ------------------
average interest rate Amount Percent Amount Percent
===================================================================================================
1996 1995
---- ----
<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%
===================================================================================================
<CAPTION>
1996 1995
------------------ ------------------
Amount Percent Amount Percent
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
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%
===================================================================================================
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.
Interest expense on savings deposits is summarized as follows for the years
ended July 31:
<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>
(Continued)
F-12
<PAGE>
FAIRFIELD SAVINGS BANK, F.S.B.
Notes to Financial Statements
================================================================================
(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.
(Continued)
F-13
<PAGE>
FAIRFIELD SAVINGS BANK, F.S.B.
Notes to Financial Statements
================================================================================
(8) Income Taxes
Income tax expense (benefit) is summarized as follows for the years ended
July 31:
================================================================================
1996 1995 1994
- --------------------------------------------------------------------------------
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
================================================================================
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:
================================================================================
1996 1995 1994
- --------------------------------------------------------------------------------
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
================================================================================
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.
(Continued)
F-14
<PAGE>
FAIRFIELD SAVINGS BANK, F.S.B.
Notes to Financial Statements
================================================================================
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:
================================================================================
1996 1995
- --------------------------------------------------------------------------------
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)
================================================================================
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.
(Continued)
F-15
<PAGE>
FAIRFIELD SAVINGS BANK, F.S.B.
Notes to Financial Statements
================================================================================
(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.
The following table sets forth the plan's funded status at July 31, 1996
and 1995:
================================================================================
1996 1995
- --------------------------------------------------------------------------------
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)
================================================================================
Net pension expense for the year ended July 31, 1996, 1995, and 1994
includes the following:
================================================================================
1996 1995 1994
- --------------------------------------------------------------------------------
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
================================================================================
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.
(Continued)
F-16
<PAGE>
FAIRFIELD SAVINGS BANK, F.S.B.
Notes to Financial Statements
================================================================================
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's 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.
(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.
(Continued)
F-17
<PAGE>
FAIRFIELD SAVINGS BANK, F.S.B.
Notes to Financial Statements
================================================================================
The Savings Bank's actual capital amounts and ratios are as follows as of
July 31, 1996:
================================================================================
Actual For Capital Adequacy
------------------ --------------------
Amount Ratio Amount Ratio
- --------------------------------------------------------------------------------
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
================================================================================
(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 mortgage loans of approximately $851,000 at July
31, 1996 represent amounts which the Savings Bank plans to fund within the
normal commitment period. 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.
(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.
(Continued)
F-18
<PAGE>
FAIRFIELD SAVINGS BANK, F.S.B.
Notes to Financial Statements
================================================================================
(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
----------------------- -----------------------
Carrying Estimated Carrying Estimated
amount fair value amount fair value
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
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
==========================================================================================
<CAPTION>
1996 1995
----------------------- -----------------------
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>
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.
(Continued)
F-19
<PAGE>
FAIRFIELD SAVINGS BANK, F.S.B.
Notes to Financial Statements
================================================================================
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.
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.
(Continued)
F-20
<PAGE>
FAIRFIELD SAVINGS BANK, F.S.B.
Notes to Financial Statements
================================================================================
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 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
(Continued)
F-21
<PAGE>
FAIRFIELD SAVINGS BANK, F.S.B.
Notes to Financial Statements
================================================================================
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-22
<PAGE>
Exhibits I-3 through I-10
and Exhibit I-12
Filed in paper format under cover of Form SE pursuant to SEC exemption
dated October 15, 1996.
<PAGE>
Exhibit I-11
Board of Directors and
Management Biographical
Information
The following table sets forth certain information regarding the Board of
Directors of the Bank.
Positions Held With Director Term
Name Age(1) the Bank Since Expires
- ---- ------ ---------------------- -------- -------
George M. Briody....... 69 President, Director 1951 1997
F. Gregory Opelka...... 68 Executive Vice 1972 1997
President, Director
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
- ----------
(1) At July 31, 1996.
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.
<PAGE>
Exhibit I-11
Board of Directors and
Management Biographical
Information - continued
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.
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. (the "League"), 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.
Jerome A. Maher, age 61, became the Bank's Vice President and Chief Lending
Officer in September 1996. He served as a Vice President and director of
Covenant Mortgage Corporation from March 1994 to September 1996 and as 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.
<PAGE>
Exhibits II-1 through II-5
Filed in paper format under cover of Form SE pursuant to SEC exemption
dated October 15, 1996.
<PAGE>
Exhibits III-1 through III-4
Filed in paper format under cover of Form SE pursuant to SEC exemption
dated October 15, 1996.
<PAGE>
Exhibits IV-1 through IV-7
Filed in paper format under cover of Form SE pursuant to SEC exemption
dated October 15, 1996.
<PAGE>
Exhibit V-1
Firm Qualifications Statement
[LETTERHEAD OF CAPITAL RESOURCES GROUP, INC.]
FIRM QUALIFICATIONS STATEMENT
[caad 214]
THE CAPITAL RESOURCES COMPANIES combine investment banking and diversified
financial and management consulting with securities trading and brokerage.
CAPITAL RESOURCES GROUP provides a wide variety of consulting and investment
banking services to clients throughout the U.S., designed to raise capital and
enhance profitability in a highly-competitive, deregulated financial and
economic environment. CAPITAL RESOURCES INC. is an NASD member broker-dealer
that specializes in initial public offerings through sales of stock to members
of organization and others in the community. Capital Resources International
focuses on investments in emerging markets. The firm is headquartered in
Washington, D.C. with an office in New York City.
SECURITIES ACTIVITIES:
CAPITAL RESOURCES, INC. serves firms, primarily financial institutions,
nationally in raising capital in initial public offerings and secondary
offerings. The primary areas in which services are provided are as follows:
SUBSCRIPTION AND COMMUNITY STOCK OFFERINGS
CAPITAL RESOURCES' expertise in subscription and community offerings of
securities provide a cost effective way for companies to raise capital while
promoting future business and cementing customer loyalties. Each offering is
specially designed to spark community interest. All sales efforts are managed
on-site by Capital Resources' registered principals and representatives.
Offerings may include local and regional brokerage firms in a syndicate as well.
STOCK CENTER MANAGEMENT AND STAFF TRAINING
CAPITAL RESOURCES trains your staff and manages all detailed and technical back
office operations required for a stock offering. The latest technology is
incorporated into our proprietary data processing applications to provide you
complete control and information on the offering. Coupled with our
comprehensive, personalized training techniques with notebooks and visual
presentations, your board of directors, management and employees are fully
prepared to deal with the company's customers and their questions during the
offering.
MARKET-MAKING
CAPITAL RESOURCES also has an active trading desk that makes markets in NASDAQ
stocks, primarily financial institutions. Capital Resources acts as principal
in trading activities, and clears transactions through National Financial
Services Corporation.
INVESTMENTS
CAPR INVESTMENTS, INC. is a general partner in a variety of limited partnerships
designed to invest in financial institutions with high growth and earnings
potential.
<PAGE>
CORPORATE FINANCE SERVICES:
CAPITAL RESOURCES GROUP, INC. provides services in a number of major areas
involving financial strategy and evaluation, including:
STRATEGIC AND FINANCIAL PLANNING
Our consultants work with your management team to develop, evaluate and assist
in the implementation of strategic plans; analyze new business lines; perform
profitability analysis; prepare financial forecasts for quantitative analysis of
business plans; provide computer analysis of operating strategies with different
economic scenarios; perform "what if" scenarios; provide pre-offering and
post-offering planning assistance.
VALUATION APPRAISALS
Serve as qualified appraisers for mutual institutions converting to stock form
of organization; experienced in public underwritings, community offerings and
private placements. Serve as qualified appraisers for financial service
companies, including mortgage banking companies, insurance agencies, title
agencies, real estate brokerage firms, investment advisory firms, commercial
banks, and other business enterprises. Perform core deposit valuations and
servicing rights appraisals for purchased loan servicing. Capital Resources has
performed over 150 appraisals of successful stock conversions.
MERGERS AND ACQUISITIONS
Provide comprehensive merger and acquisition assistance for voluntary mergers,
merger-conversions, voluntary supervisory conversions and RTC-assisted
mergers/acquisitions; identify and evaluate potential merger/acquisition
candidates; perform computerized financial analysis and make appropriate
strategic recommendations; prepare regulatory applications and business plans;
structure and negotiate bids for financially assisted cases and provide fairness
opinions for stock companies. We have been involved in over 200 merger and
acquisition cases.
EQUITY RESEARCH
Perform equity research on publicly-traded thrifts and thrift holding
companies. Provide analysis of potential company operating performance and
project likely stock price trend. Identify under- and/or over-valued
situations. Research reports provided to clients on regular basis.
LITIGATION AND SPECIAL STUDIES
Capital Resources' expertise in the field of financial services provides an
experienced resource for developing testimony and serving as expert witness.
Also, Capital Resources' staff is able to draw upon its unique blend of talents
to address broad or narrow issues in the financial services industry in
preparing special studies.
ASSET/LIABILITY MANAGEMENT
Perform analysis on market value of portfolio equity and design strategies to
improve interest rate risk posture associated with earning assets and costing
liabilities; develop and implement plans to restructure loan portfolio.
BRANCH SALE/PURCHASE TRANSACTIONS
Perform analysis for financial institutions to identify offices for
sale/purchase; structure financial terms of transaction and perform analysis on
impact of sale on both seller and buyer as required by regulators; prepare
materials for regulatory application and core deposit valuation.
<PAGE>
SENIOR PERSONNEL: CORPORATE FINANCE
DAVID P. ROCHESTER is co-founder, Chairman and Managing Director of the Capital
Resources Companies. He leads Capital Resources' strategic planning and
corporate finance activities and is a frequent speaker on industry programs in
these areas. He has been actively involved in several hundred merger and
acquisition situations and initial public offerings. He serves as advisor to
boards of directors and senior management. Prior experience includes private
consulting with financial institutions and other companies, serving as Visiting
Scholar at the Federal Home Loan Bank Board, Senior Economist at the Federal
Savings and Loan Insurance Corporation and serving on the faculties of banking
and finance graduate programs at several major universities. Dr. Rochester
holds a Ph.D. in Banking and Finance from the University of Georgia.
CATHERINE K. ROCHESTER is co-founder and President of the Capital Resources
Companies. She oversees the securities trading and marketing activities of
Capital Resources, Inc. and holds a principal's designation securities license.
Mrs. Rochester has been actively involved in raising capital for the financial
institutions industry for the past ten years. Prior to founding Capital
Resources, she was Senior Vice President and Chief Financial Officer for a
billion dollar plus interstate institution in New York. Her previous experience
includes serving as a consultant to the thrift industry. She holds a M.S. in
Finance from American University in Washington, D.C.
EDWARD T. LUTZ is Managing Director and heads the firm's activities in the
Northeast in our New York City office. His vast experience includes serving as
financial and regulatory advisor to financial institutions, boards of directors
and senior management in strategic planning, mergers and acquisitions and
capital raising activities, including stock conversions. He was formerly New
York Regional Director of Supervision of the FDIC. Mr. Lutz holds an M.B.A in
Finance from American University in Washington, D.C.
THOMAS J. PARLIMENT is Managing Director and leads the firm's activities in the
Midwest from Chicago. He is also owner of Parliment Consulting, which
specializes in asset/liability management consulting for thrift institutions.
Dr. Parliment is noted throughout the industry for his speeches and articles
concerning a wide range of financial and economic issues. He currently serves
the faculties of various national and state banking schools. He earned his Ph.D.
in Economics at the State University of New York.
MICHAEL B. SEILER is Senior Vice President and heads the firm's appraisal and
business planning activities. He was formerly employed with Equitable Bank in
Baltimore, Maryland, in the areas of financial planning and analysis. Prior
experience also includes service with the Securities and Exchange Commission
where Mr. Seiler specialized in the areas of thrift and commercial banking. At
the SEC, he had responsibilities for public offering prospectuses and Form 10-K
Reports as well as other periodic reports. Mr. Seiler is a Certified Public
Accountant and holds an M.B.A. in Finance from the State University of New York
at Albany.
RICHARD C. WALLACE, Senior Vice President, is responsible for new business
development in the financial institutions sector, primarily thrift
mutual-to-stock conversions, mergers and acquisitions, public offerings and
private placements. Prior to Capital Resources, Mr. Wallace held executive
marketing positions in the financial industry with Everen Securities and GEAC
for over ten years, with a focus on savings institutions. Mr. Wallace holds a
B.A. in Business Economics from the University of California.
<PAGE>
JAMES L. FORD is Vice President and has a broad background with more than 20
years of thrift industry experience including thrift and mortgage banking
operations. He was formerly a senior officer of a large mortgage banking
company, where he oversaw all areas of the company's operations with special
emphasis on finance and loan administration. He also has held senior management
positions at a large savings institution. Mr. Ford holds a B.S. in Mathematics
from Michigan State University.
CHARLES J. ANTONUCCI, SR. is a Consultant with Capital Resources and has a broad
background of experience with financial institutions serving in senior
management positions and as a consultant to the industry. He is also President
of Bedford Consulting in New York which specializes in real estate and loan
consulting services. He holds a B.S. in Business Management from St. John's
University.
J. KEVIN MCAULIFFE is Vice President, involved in underwritings, heads
institutional brokerage and equity research. Prior experience includes mergers
and acquisitions, appraisals, and business plans for thrifts, and employment by
a Fortune 500 company as cost analyst for feasibility studies. Mr. McAuliffe
holds a B.B.A. in Finance from the University of Kentucky and is a registered
general securities principal.
ANGELINA A. BILLON is a Securities Analyst, primarily involved with equity
research for the financial institutions industry. Previous experience includes
research for the financial institutions division of a prominent Washington, D.C.
law firm. She worked at the IFC/World Bank prior to attending Columbia Business
School where she earned an M.B.A. in Finance. She received a B.S. in Finance
from the University of Delaware.
LOIS P. HANKINS is Senior Associate responsible for corporate marketing,
securities compliance and thrift conversion administration. She has over 14
years experience in the financial industry during which time she served as a
financial consultant for Merrill Lynch, Shearson Lehman Brother's and Dean
Witter Reynolds. Additionally, she has served as the Regional Marketing Manager
for a major California banking institution.
HARINDER S. SAWHNEY is Senior Financial Analyst involved in underwritings and
securities research. Prior experience includes work as financial consultant,
international trade consultant and stockbroker. Harry holds an M.B.A. in
Finance from The George Washington University.
ROLAND M. CALVERT is Senior Financial Analyst involved in developing business
plans and valuation appraisals and providing financial analysis with the support
of financial projection models. He graduated from James Madison University with
a B.B.A. degree in Finance and Economics.
SECURITIES DIVISION
J. Kevin McAuliffe Julian M. Flores Michael Godby
Vice President Senior NASDAQ Trader Senior Associate
Angelina A. Billon Tony H. Pai Jacqueline A. Sprague
Securities Analyst NASDAQ Trader Assistant to Traders
ASSOCIATES
Noel G. Metcalfe Timothy M. Nealis
Elizabeth L. Mulcahy Maria J. Chaloux
Chistopher P. Spagna
<PAGE>
================================================================================
FAIRFIELD SAVINGS BANK, F.S.B.
Long Grove, Illinois
CONVERSION VALUATION
APPRAISAL UPDATE REPORT
As Of:
October 23, 1996
Prepared By:
CAPITAL RESOURCES GROUP, INC.
1211 Connecticut Avenue, NW
Suite 200
Washington, D.C. 20036
================================================================================
<PAGE>
October 23, 1996
Board of Directors
Fairfield Savings Bank, F.S.B.
1190 RFD
Long Grove, Illinois 60047-7304
Dear Board Members:
In connection with the mutual to stock conversion of Fairfield Savings
Bank, F.S.B. ("Fairfield" or the "Bank"), we hereby provide an independent
appraisal, as updated, of the estimated pro forma market value of the common
stock of Big Foot Financial Corp. ("Holding Company"), which will be a unitary
savings and loan holding company. Our original appraisal dated September 6,
1996, is incorporated herein by reference. This current update reflects more
recent pricing ratios for the comparative group and all publicly traded
SAIF-insured thrifts as well as recent developments and trends in the financial
markets and, specifically, the thrift conversion market. We have also discussed
the Bank with management and conversion counsel.
Our original appraisal contained a detailed business review and financial
analysis of Fairfield and a comparative financial analysis with the comparative
group, based on the Bank's financial results through July 31, 1996. Such review
and analysis are incorporated by reference into this current update.
The Thrift Equity Market
Since the date of our original appraisal of September 6, 1996, thrift
prices have continued their upward movement. Both short- and long-term interest
rates have declined since the beginning of September, with long-term rates
decreasing by approximately 30 basis points. The SNL Index, which measures the
relative price movements of all publicly traded thrifts and is compiled by SNL
Securities, increased by 8.6 percent between September 6 and October 23. The ten
thrift comparative group, which was utilized in our original appraisal,
experienced an average and median stock price increase of 4.3 and 4.6 percent,
respectively (see Table 1).
In our original appraisal, we indicated that the after-market price
performance of recently converted thrifts had not matched the price performance
experienced by thrifts which converted prior to 1996. The average and median
price increases for the 34 publicly traded thrifts which converted
<PAGE>
CAPITAL RESOURCES GROUP, INC.
Board of Directors
October 23, 1996
Page 2
Table 1
Price Changes in Fairfield's Comparative
Group and SNL Index
(09/06/96) (10/23/96)
Stock Stock Percent
Company Price Price Change
- ------- ----- ----- ------
AvondaleFin. Corp. $13.88 $14.50 4.50%
Calumet Bancorp $28.13 $27.75 -1.33%
Damen Fin. Corp. $11.50 $12.38 7.61%
First Mutual Bancorp $13.25 $13.63 2.83%
Glenway Fin. Corp $20.25 $18.25 -9.88%
Great American Bancorp $13.50 $14.25 5.56%
Horizon Fin. Services $14.13 $14.75 4.42%
Kankakee Bancorp $20.75 $22.25 7.23%
Permanent Bancorp $16.25 $17.00 4.62%
SuburbFed Fin. Corp. $17.25 $20.25 17.39%
------
Average: 4.29%
Median: 4.56%
SNL Index (09/06/96) 410.76
SNL Index (10/23/96) 446.14
% Change 8.61%
----------
since the end of March 1996 were 17.5 and 14.4 percent, respectively. However,
during the latest six weeks ended October 23, the after-market price performance
of recently converted thrifts has notably improved. The average and median price
increases for the 42 publicly traded thrifts which converted since the end of
March 1995 are 27.4 and 25.6 percent, respectively.
Also, in our original appraisal we analyzed the pricing characteristics of
two Chicago institutions, Park Federal Savings Bank and Home Federal Savings and
Loan Association of Elgin. Park Federal had just recently converted in August
and was trading at a 3.1 percent increase over its IPO price, and Home Federal
was in the process of converting. As of October 23, Park Federal is now trading
at a 16.3 percent increase over its IPO price and Home Federal's stock price has
increased 23.8 percent since conversion. Also, Home Federal's conversion
offering, like that of other conversions completed during the last few weeks,
attracted strong investor interest.
<PAGE>
CAPITAL RESOURCES GROUP, INC.
Board of Directors
October 23, 1996
Page 3
Finally, it is important to note that, on September 30, 1996, legislation
was signed into law which recapitalized the Savings Association Insurance Fund
("SAIF"). The passage of this legislation in late September finally eliminated a
major issue of uncertainty for the thrift industry and also assured the industry
that future deposit insurance premium levels will decline (insurance premiums
will drop from approximately 23 to 6 basis points for most thrifts). This
prospect of a positive earnings impact beginning in 1997 has appeared to also
favorably impact thrift prices.
Valuation Determination
As noted in our original appraisal, Fairfield generated a very low earning
level during the fiscal year ended July 31, 1996. Therefore, an over emphasis on
the use of the pro forma price/earnings approach will not result in a totally
meaningful estimated market value. Also, since Fairfield has generated declining
earnings levels in recent years, we have looked closely at the pro forma
price/book value and price/assets assets valuation approaches as well.
Based on the more favorable market conditions for thrift stocks, including
the improved market performance of recently converted thrift institutions, we
believe that a moderate increase in Fairfield's estimated pro forma fair market
valuation range is supportable. Therefore, an increase in Fairfield's midpoint
value from $17,500,000 to $19,000,000, is appropriate.
As in our original appraisal, in analyzing the appropriate pro forma
pricing ratios and the resulting estimated fair market value for the
to-be-issued shares of common stock of Fairfield, we have considered the
following strengths and weaknesses of the Bank:
o Fairfield's core earnings levels have declined since fiscal 1993. The Bank
reported a significantly lower level of profitability for the latest twelve
months ended July 31, 1996, relative to that of the comparative group. The
Bank's ROA of 11 basis points compared to an ROA of 62 basis points for the
comparative group. Fairfield's lower profitability primarily reflects a
lower interest rate spread and net interest margin.
o Given the fixed rate nature of Fairfield's loan and mortgage-backed
securities ("MBS") portfolios, the Bank faces significant interest rate
risk. The rising interest rate environment which existed through much of
1996 resulted in the erosion of the Bank's interest rate spreads and
margins. Also, the heavy concentration of lower yielding MBS has served to
reduce Fairfield's earning asset yield potential and interest rate spreads.
After conversion, Fairfield plans to gradually increase the level of loan
balances relative to MBS levels.
<PAGE>
CAPITAL RESOURCES GROUP, INC.
Board of Directors
October 23, 1996
Page 4
o Fairfield has achieved low non-performing asset levels over the last four
years and the Bank's asset quality level is favorable relative to the
comparative group.
o The infusion of capital through conversion will result in a strong equity
position for the Bank. The Bank's post-conversion consolidated equity ratio
of between 13 and 15 percent is expected to be modestly above the average
for all publicly traded thrifts and approximate the comparative group
average.
Based on Fairfield's fundamental financial and other characteristics
relative to the comparative group as discussed in our original appraisal, on
balance, we believe that a moderate valuation discount for the Bank is
appropriate. Such valuation adjustment reflects the Bank's lower core earnings
level. Also, we believe that, as a converting institution, a new issue discount
is appropriate for Fairfield.
Based on the above factors and the pricing ratios of the ten comparative
group thrifts, we believe that the following pro forma pricing ratios and
discounts (on a price/book value and price/assets basis) are appropriate for
Fairfield:
Comparative Pricing Analysis
Fairfield Savings Bank
Discount (Premium) to the
Pricing Ratio Comparative Group
- ---------------- -------------------------
Price/Book Value 64.89% Mean 24.3%
Median 24.5%
Price/Earnings 25.97x(1) Mean (42.2%)
Median (48.2%)
Price/Assets 8.94 % Mean 26.9%
Median 0.0%
(1) Based on reported earnings of $226,000 for the twelve months ended July 31,
1996; assumes 1,900,000 shares outstanding (total shares issued in the
conversion at the midpoint value). Under SOP No. 93-6 there would be
1,763,200 shares outstanding for the earnings per share calculation,
resulting in a pro forma price/earnings ratio of 24.10x.
<PAGE>
CAPITAL RESOURCES GROUP, INC.
Board of Directors
October 23, 1996
Page 5
We believe that Fairfield's pro forma price/book value ratio, when analyzed
in conjunction with the Bank's pro forma price/earnings and price/assets ratios,
results in an appropriate estimated pro forma market value.
Valuation Conclusion
It is therefore our opinion that, as of October 23, 1996, an 8.6 percent
increase in Fairfield's estimated midpoint value is appropriate. Therefore, the
estimated pro forma fair market value of Fairfield was $19,000,000, based on
1,900,000 shares at $10.00 per share. The resulting range of value was
$16,150,000 or 1,615,000 shares, to $21,850,000 or 2,185,000 shares, both based
on $10.00 per share. Pro forma calculations which include the impact of an eight
percent purchase by Fairfield's Employee Stock Ownership Plan ("ESOP") and a
four percent purchase by the Stock Programs subsequent to conversion are shown
in Table 2 and in Exhibits 2 through 7. Subject to market conditions at the time
of the offering, an overallotment provision up to 15 percent above the maximum
value, or $25,127,500, could be made available.
Respectfully submitted,
CAPITAL RESOURCES GROUP, INC.
/s/ Michael B. Seiler
Michael B. Seiler
Senior Vice President
<PAGE>
Table 2
Pro Forma Comparison
Converting Institution Versus the Comparative Group
<TABLE>
<CAPTION>
Fairfield Savings Bank
As of October 23, 1996
Ticker Name & State Price(1) Mk Value P/E
(3,4) P/Book P/TBook
<S> <C> <C> <C> <C>
<C> <C>
($) ($Mil) (x)
(%) (%)
Fairfield Savings Bank (2)
Before Conversion 10.00 N/A N/A
N/A N/A
Pro Forma SuperMaximum 10.00 25.13 27.78
72.67 72.67
Pro Forma Maximum 10.00 21.85 26.91
68.83 68.83
Pro Forma Midpoint 10.00 19.00 25.97
64.89 64.89
Pro Forma Minimum 10.00 16.15 24.80
60.22 60.22
Comparative Group (10)
Averages 17.50 36.19 18.26
85.68 86.71
Medians 15.88 33.89 17.52
85.94 85.94
All SAIF-Insured Thrifts (331)
Averages 17.93 133.13 15.34
114.07 117.13
Medians 16.00 39.44 14.77
104.56 106.70
Comparative Group
AVND AvondaleFinCorp-IL 14.500 52.2 15.59
88.79 88.79
CBCI Calumet Bancorp-IL 27.750 66.0 15.50
82.89 82.89
DFIN DamenFinCorp-IL 12.375 46.4 24.26
89.35 89.35
FMBD FirstMutualBanc-IL 13.625 52.4 20.64
83.08 83.08
GFCO GlenwayFinCp-OH 18.250 20.6 13.13
77.07 78.77
GTPS GreatAmrcnBncrp-IL 14.250 24.9 NA
79.12 79.12
HZFS HorizonFinSvcs-IA 14.750 6.3 17.56
78.75 78.75
KNK KankakeeBancorp-IL 22.250 31.5 17.52
89.86 96.70
PERM PermanentBancp-IN 17.000 36.3 25.00
90.14 91.30
SFSB SuburbFedFinCp-IL 20.250 25.4 15.11
97.73 98.30
<CAPTION>
P/Assets DivYld Ttl Assets
Eq/Asst TgEq/A EPS(3) ROAA(3) ROAE(3)
Ticker Name & State (%) (%) ($000)
(%) (%) ($) (%) (%)
<S> <C> <C> <C> <C> <C>
<C> <C> <C> <C>
Fairfield Savings Bank (2)
Before Conversion N/A N/A 194,624
6.98 6.98 N/A 0.12 1.68
Pro Forma SuperMaximum 11.49 0.00 218,636
15.81 15.81 0.36 0.44 2.65
Pro Forma Maximum 10.14 0.00 215,411
14.74 14.74 0.37 0.40 2.59
Pro Forma Midpoint 8.94 0.00 212,607
13.77 13.77 0.39 0.36 2.53
Pro Forma Minimum 7.70 0.00 209,803
12.78 12.78 0.40 0.32 2.46
Comparative Group (10)
Averages 12.23 1.80 325,993
14.46 14.36 0.98 0.62 4.65
Medians 8.94 1.87 337,776
10.68 10.68 0.89 0.56 4.88
All SAIF-Insured Thrifts (331)
Averages 14.14 2.00 1,319,807
13.03 12.80 1.22 0.84 7.54
Medians 12.39 2.01 313,759
10.38 10.36 1.10 0.85 6.71
Comparative Group
AVND AvondaleFinCorp-IL 8.81 0.00 592,771
9.93 9.93 0.93 0.62 5.82
CBCI Calumet Bancorp-IL 13.39 0.00 492,779
16.15 16.15 1.79 0.99 5.97
DFIN DamenFinCorp-IL 20.69 1.94 237,296
23.16 23.16 0.51 0.89 4.28
FMBD FirstMutualBanc-IL 16.56 2.35 316,381
19.93 19.93 0.66 0.46 1.90
GFCO GlenwayFinCp-OH 7.40 3.55 278,809
9.61 9.42 1.39 0.56 5.91
GTPS GreatAmrcnBncrp-IL 22.03 2.81 119,662
27.85 27.85 0.43 0.70 2.44
HZFS HorizonFinSvcs-IA 8.99 2.17 73,464
11.42 11.42 0.84 0.53 4.38
KNK KankakeeBancorp-IL 8.88 1.80 359,171
9.88 9.25 1.27 0.56 5.37
PERM PermanentBancp-IN 8.83 1.77 411,213
9.79 9.68 0.68 0.38 3.47
SFSB SuburbFedFinCp-IL 6.73 1.58 378,388
6.88 6.85 1.34 0.50 6.91
</TABLE>
(1) Closing or Last Trade.
(2) Based on $10.00 per share.
(3) Excludes extraordinary items.
(4) Market average P/E ratios exclude firms with P/E ratios in excess of 30
times earnings.
Sources: Audited and unaudited financial statements for Fairfield Savings Bank
SNL Securities and the publicly traded companies' reported stock
prices.
<PAGE>
EXHIBITS
<PAGE>
EXHIBIT 1
Selected Financial and Market
Pricing Characteristics
for Publicly Traded Thrifts
Filed in paper format under cover of Form SE pursuant to SEC exemption dated
October 15, 1996.
<PAGE>
EXHIBITS 2 THROUGH 7
Pro Forma Effect of Conversion Proceeds
(Based on Fairfield's Reported
Net Income of $226,000)
Filed in paper format under cover of Form SE pursuant to SEC exemption dated
October 15, 1996.
<PAGE>
EXHIBIT 8
Firm Qualifications Statement
<PAGE>
Capital Resources
1211 Connecticut Avenue, NW, Suite 200 o Washington, DC 20036 o Telephone
(202) 466-5685 o Fax (202) 466-5695
Firm Qualifications Statement
THE CAPITAL RESOURCES COMPANIES combine investment banking and diversified
financial and management consulting with securities trading and brokerage.
Capital Resources Group provides a wide variety of consulting and investment
banking services to financial institutions throughout the U.S., specializing in
raising capital, profitability strategies and mergers and acquisitions. Capital
Resources, Inc. is an NASD member broker-dealer that specializes in thrift stock
conversions and thrift securities. The firm's office in downtown Washington,
D.C. is only a few blocks from key regulatory agencies, such as the Office of
Thrift Supervision, Securities and Exchange Commission, Federal Deposit
Insurance Corporation, and the Federal Reserve Board.
Securities Activities:
Capital Resources, Inc. serves financial institutions in raising capital in
initial public offerings, primarily in stock conversions of mutual institutions,
and secondary offerings. The primary areas in which services are provided are as
follows:
Subscription and Community Stock Offerings
Capital Resources' expertise in subscription and community offerings of
securities provide a cost effective way for financial institutions to raise
capital while promoting future business and cementing customer loyalties. Each
offering is specially designed to spark community interest. All sales efforts
are managed on-site by Capital Resources' registered principals and
representatives. Offerings may include local and regional brokerage firms in a
syndicate as well.
Conversion Management and Staff Training
Capital Resources trains your staff and manages all detailed and technical back
office operations required for a stock offering. The latest technology is
incorporated into our proprietary data processing applications to provide you
complete control and information on the offering. Coupled with our
comprehensive, personalized training techniques with notebooks and visual
presentations, your board of directors, management and employees are fully
prepared to deal with the institution's customers and their questions during the
conversion.
Market-Making
Capital Resources also has an active trading desk that makes markets in NASDAQ
thrift stocks. Capital Resources acts as principal in trading activities, and
clears transactions through National Financial Services Corporation.
Third Party Marketing
Capital Resources assists banks and thrift institutions to become a "one stop
financial center". Third party marketing is selling other financial products
through a third party. With an established relationship with commercial banks
and thrifts, Capital Resources' SEC registered financial consultant occupies
space in the bank's offices and offers stocks, bonds, mutual funds and annuities
to its customers. Third party marketing maintains customer relationships while
generating additional income for the bank. Coupled with the bank's own deposit
products, bank customers now have a "one-stop financial center" to meet their
needs.
<PAGE>
Capital Resources Firm Qualifications Statement Page 11
Corporate Finance Services:
Capital Resources Group, Inc. provides services in a number of major areas
involving financial strategy and evaluation, including:
Strategic and Financial Planning
Our consultants work with your management team to develop, evaluate and assist
in the implementation of strategic plans; analyze new business lines; perform
profitability analysis; prepare financial forecasts for quantitative analysis of
business plans; provide computer analysis of operating strategies with different
economic scenarios; perform "what if" scenarios; provide pre-offering and
post-offering planning assistance.
Valuation Appraisals
Serve as qualified appraisers for mutual institutions converting to stock form
of organization; experienced in public underwritings, community offerings and
private placements. Serve as qualified appraisers for financial service
companies, including mortgage banking companies, insurance agencies, title
agencies, real estate brokerage firms, investment advisory firms, commercial
banks, and other business enterprises. Perform core deposit valuations and
servicing rights appraisals for purchased loan servicing. Capital Resources has
performed over 150 appraisals of successful stock conversions.
Mergers and Acquisitions
Provide comprehensive merger and acquisition assistance for voluntary mergers,
merger-conversions, voluntary supervisory conversions and RTC-assisted
mergers/acquisitions; identify and evaluate potential merger/acquisition
candidates; perform computerized financial analysis and make appropriate
strategic recommendations; prepare regulatory applications and business plans;
structure and negotiate bids for financially assisted cases and provide fairness
opinions for stock companies. We have been involved in over 200 merger and
acquisition cases.
Equity Research
Perform equity research on publicly-traded thrifts and thrift holding companies.
Provide analysis of potential company operating performance and project likely
stock price trend. Identify under- and/or over-valued situations. Research
reports provided to clients on regular basis.
Litigation and Special Studies
Capital Resources' expertise in the field of financial services provides an
experienced resource for developing testimony and serving as expert witness.
Also, Capital Resources' staff is able to draw upon its unique blend of talents
to address broad or narrow issues in the financial services industry in
preparing special studies.
Asset/Liability Management
Perform analysis on market value of portfolio equity and design strategies to
improve interest rate risk posture associated with earning assets and costing
liabilities; develop and implement plans to restructure loan portfolio.
Branch Sale/Purchase Transactions
Perform analysis for financial institutions to identify offices for
sale/purchase; structure financial terms of transaction and perform analysis on
impact of sale on both seller and buyer as required by regulators; prepare
materials for regulatory application and core deposit valuation.
<PAGE>
Capital Resources Firm Qualifications Statement Page 12
Senior Personnel: Corporate Finance
David P. Rochester is co-founder, Chairman and Managing Director of the Capital
Resources Companies. He leads Capital Resources' strategic planning and
corporate finance activities and is a frequent speaker on industry programs in
these areas. He has been actively involved in several hundred merger and
acquisition situations and initial public offerings. He serves as advisor to
boards of directors and senior management. Prior experience includes private
consulting with financial institutions and other companies, serving as Visiting
Scholar at the Federal Home Loan Bank Board, Senior Economist at the Federal
Savings and Loan Insurance Corporation and serving on the faculties of banking
and finance graduate programs at several major universities. Dr. Rochester holds
a Ph.D. in Banking and Finance from the University of Georgia.
Catherine K. Rochester is co-founder and President of the Capital Resources
Companies. She oversees the securities trading and marketing activities of
Capital Resources, Inc. and holds a principal's designation securities license.
Mrs. Rochester has been actively involved in raising capital for the financial
institutions industry for the past ten years. Prior to founding Capital
Resources, she was Senior Vice President and Chief Financial Officer for a
billion dollar plus interstate institution in New York. Her previous experience
includes serving as a consultant to the thrift industry. She holds a M.S. in
Finance from American University in Washington, D.C.
Edward T. Lutz is Managing Director and heads the firm's activities in the
Northeast in our New York City office. His vast experience includes serving as
financial and regulatory advisor to financial institutions, boards of directors
and senior management in strategic planning, mergers and acquisitions and
capital raising activities, including stock conversions. He was formerly New
York Regional Director of Supervision of the FDIC. Mr. Lutz holds an M.B.A in
Finance from American University in Washington, D.C.
Thomas J. Parliment is Managing Director and leads the firm's activities in the
Midwest from Chicago. He is also owner of Parliment Consulting, which
specializes in asset/liability management consulting for thrift institutions.
Dr. Parliment is noted throughout the industry for his speeches and articles
concerning a wide range of financial and economic issues. He currently serves
the faculties of various national and state banking schools. He earned his Ph.D.
in Economics at the State University of New York.
Michael B. Seiler is Senior Vice President and heads the firm's appraisal and
business planning activities. He was formerly employed with Equitable Bank in
Baltimore, Maryland, in the areas of financial planning and analysis. Prior
experience also includes service with the Securities and Exchange Commission
where Mr. Seiler specialized in the areas of thrift and commercial banking. At
the SEC, he had responsibilities for public offering prospectuses and Form 10-K
Reports as well as other periodic reports. Mr. Seiler is a Certified Public
Accountant and holds an M.B.A. in Finance from the State University of New York
at Albany.
Richard C. Wallace, Senior Vice President, is responsible for new business
development in the financial institutions sector, primarily thrift
mutual-to-stock conversions, mergers and acquisitions, public offerings and
private placements. Prior to Capital Resources, Mr. Wallace held executive
marketing positions in the financial industry with Everen Securities and GEAC
for over ten years, with a focus on savings institutions. Mr. Wallace holds a
B.A. in Business Economics from the University of California.
James L. Ford is Vice President and has a broad background with more than 20
years of thrift industry experience including thrift and mortgage banking
operations. He was formerly a senior officer of a large mortgage banking
company, where he oversaw all areas of the company's operations with special
emphasis on finance and loan administration. He also has held senior management
positions at a large savings institution. Mr. Ford holds a B.S. in Mathematics
from Michigan State University.
<PAGE>
Capital Resources Firm Qualifications Statement Page 13
Charles J. Antonucci, Sr. is a Consultant with Capital Resources and has a broad
background of experience with financial institutions serving in senior
management positions and as a consultant to the industry. He is also President
of Bedford Consulting in New York which specializes in real estate and loan
consulting services. He holds a B.S. in Business Management from St. John's
University.
J. Kevin McAuliffe is Vice President, involved in underwritings, heads
institutional brokerage and equity research. Prior experience includes mergers
and acquisitions, appraisals, and business plans for thrifts, and employment by
a Fortune 500 company as cost analyst for feasibility studies. Mr. McAuliffe
holds a B.B.A. in Finance from the University of Kentucky and is a registered
general securities principal.
Angelina A. Billon is a Securities Analyst, primarily involved with equity
research for the financial institutions industry. Previous experience includes
research for the financial institutions division of a prominent Washington, D.C.
law firm. She worked at the IFC/World Bank prior to attending Columbia Business
School where she earned an M.B.A. in Finance. She received a B.S. in Finance
from the University of Delaware.
Christopher P. Spagna is Vice President, Banking Services, responsible for
establishing and managing on-site securities brokerage for banks and savings
institutions. Prior experience includes a management position in a west coast
bank and sales consultant for a national brokerage firm. Mr. Spagna holds a B.S.
in Economics from Willamette University.
Lois P. Hankins is Senior Associate responsible for corporate marketing,
securities compliance and thrift conversion administration. She has over 14
years experience in the financial industry during which time she served as a
financial consultant for Merrill Lynch, Shearson Lehman Brother's and Dean
Witter Reynolds. Additionally, she has served as the Regional Marketing Manager
for a major California banking institution.
Harinder S. Sawhney is Senior Financial Analyst involved in underwritings and
securities research. Prior experience includes work as financial consultant,
international trade consultant and stockbroker. Harry holds an M.B.A. in Finance
from The George Washington University.
Roland M. Calvert is Senior Financial Analyst involved in developing business
plans and valuation appraisals and providing financial analysis with the support
of financial projection models. He graduated from James Madison University with
a B.B.A. degree in Finance and Economics.
Securities Division
J. Kevin McAuliffe Julian M. Flores Michael Godby
Vice President Senior NASDAQ Trader Senior Associate
Christopher P. Spagna Tony H. Pai Angelina A. Billon
Vice President, Banking Services NASDAQ Trader Securities Analyst
Timothy M. Nealis Jacqueline A. Sprague Joshua A. Olds
Associate Assistant to Traders Research Assistant
Maria J. Chaloux Dante M. Bramblett Noel G. Metcalfe
Associate Associate Associate
<PAGE>
A PROPERLY COMPLETED ORIGINAL STOCK
ORDER FORM
BIG FOOT FINANCIAL CORP.
AND ORIGINAL CERTIFICATION FORM MUST BE
USED TO PURCHASE COMMON STOCK. THE
ASSOCIATION IS NOT
Subscription and Community Offering
(Stock Order Form)
REQUIRED TO ACCEPT COPIES OF THESE
FORMS.
- --------------------------------------------------------------------------------
DEADLINE
The Subscription Offering ends at 12:00 Noon, Central Time, on December ,
1996. Your Stock Order Form and Certification Form, properly executed and with
the correct payment, must be received at the address on the bottom of this form
or hand-delivered to any office of Fairfield Savings Bank, F.S.B. (the "Bank")
by this deadline, or it will be considered void. Please read the Stock Ownership
Guide and Order Form Instructions as you complete this Form.
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C> <C>
(1) Number of Shares Subscription Price
X $10.00 =
<CAPTION>
(1) Number of Shares (2) Total Payment Due
<S> <C>
$
</TABLE>
The minimum number of shares that may be subscribed for is 25 and the
maximum number that may be subscribed for by each Eligible Account Holder,
Supplemental Eligible Account Holder or Other Member in the Subscription
Offering, or by any person, together with associates and persons acting in
concert with such person, in the Community Offering, is $150,000 (15,000
shares). However, no person, together with associates or persons acting in
concert with such person, may purchase in the aggregate more than 1.0% of
the shares offered.
(3) / / Check here if you are a director, officer or employee of Fairfield
Savings Bank, F.S.B. or a member of such person's immediate family.
METHOD OF PAYMENT
(6)a / / Check here if you are an Eligible
Account Holder with a deposit
account(s) totaling
(4) / / Enclosed is a check, bank draft
or money order payable to $50.00 or more as of December 31, 1994. LIST
ACCOUNT(S) BELOW.
Fairfield Savings Bank, F.S.B.
<TABLE>
<S> <C>
(6)b / / Check here if you
are a Supplemental
Eligible Account
Holder with a
deposit
$ Cash can be used only if presented
inaccount(s) totaling $50.00
or more as of September 30,
1996. LIST ACCOUNT(S) person
at a branch office of FairfieldBELOW.
Savings Bank, F.S.B. No wire transfers
</TABLE>
(6)c / / Check here if you are an Other
Member with a deposit account(s) as
<TABLE>
<S> <C>
will be accepted.
</TABLE>
1996 or a borrower from the Bank as of July
1, 1991 whose loan continues to be
(5) / / The undersigned authorizes
withdrawal from the following
account(s) outstanding as of October 31, 1996. LIST ACCOUNT(S) BELOW.
at Fairfield Savings Bank, F.S.B.
INDIVIDUAL RETIREMENT ACCOUNTS
(6)d / / Check here if you are a Bank
Employee.
AND QUALIFIED PLANS MAINTAINED AT
FAIRFIELD
SAVINGS
BANK,
F.S.B.
<TABLE>
<S> <C>
Account Title [Names on Accounts] Account Number(s)
</TABLE>
CANNOT BE USED.
<TABLE>
<S> <C>
Account Number(s) Amount
.......................................... ............................
$
.......................................... ............................
$
$
TOTAL WITHDRAWAL AMOUNT $
</TABLE>
<TABLE>
<S> <C> <C>
There is no penalty for early withdrawals used for this payment.
PLEASE NOTE: FAILURE TO LIST ALL YOUR
ACCOUNTS MAY RESULT IN THE LOSS OF PART OR
ALL OF YOUR SUBSCRIPTION RIGHTS. IF
ADDITIONAL SPACE IS NEEDED, PLEASE UTILIZE
THE BACK OF THIS ORDER FORM.
STOCK REGISTRATION
(7) Form of Stock Ownership:
..................................... ............................... / / Uniform Transfer to Minors
..................................... ...............................
/ / Individual / / Joint Tenants
/ / Corporation or Partnership / / Tenants in Common / / Uniform Gifts to Minors
<CAPTION>
..................................... / / IRA/Qualified Plan
.....................................
/ / Corporation or Partnership / / Fiduciary/Trust
(under Agreement Dated )
</TABLE>
<TABLE>
<S> <C> <C>
Social Security
(8) Name(s) in which stock is to be registered (Please print clearly) No. or Tax ID No.
Social Security
Name(s), continued No. or Tax ID No.
Street Address City State Zip Code
<CAPTION>
(8) Name(s) in which stock is to be registered (Please print clearly)
Name(s), continued
Street Address City State County of Residence
</TABLE>
<TABLE>
<S> <C> <C>
(9) Telephone Information Daytime Phone Evening Phone
( ) ( )
</TABLE>
NASD AFFILIATION
(10) / / Check here if you are a member of the National Association of
Securities Dealers, Inc. ("NASD"), a person associated with an NASD member, a
member of the immediate family of any such person to whose support such person
contributes, directly or indirectly, or the holder of an account in which an
NASD member or person associated with an NASD member has a beneficial interest.
To comply with conditions under which an exemption from the NASD's
Interpretation With Respect to Free-Riding and Withholding is available, you
agree, if you have checked the NASD Affiliation box, (i) not to sell, transfer
or hypothecate the stock for a period of three months following issuance, and
(ii) to report this subscription in writing to the applicable NASD member within
one day of payment therefor.
ASSOCIATES/ACTING IN CONCERT
(11) / / Check here, and complete the reverse side of this Form, if you or any
associates (as defined on the reverse side of this Form) or persons acting in
concert with you have submitted other orders for shares in the Subscription
and/or Community Offerings.
ACKNOWLEDGEMENT
(12) To be effective, this Stock Order Form and accompanying Certification Form
must be properly completed and actually received by Fairfield Savings Bank,
F.S.B. not later than 12:00 noon, Central Time, on December , 1996, unless
extended; otherwise this Stock Order Form and all subscription rights will be
void. It is understood that this Stock Order Form will be accepted in accordance
with, and subject to, the terms and conditions of the Plan of Conversion of the
Bank described in the accompanying Prospectus. The undersigned hereby
acknowledges receipt of the Prospectus at least 48 hours prior to delivery of
this Stock Order Form to the Bank. The undersigned agrees that after receipt by
Fairfield Savings Bank, F.S.B., this Stock Order Form may not be modified,
withdrawn or cancelled without the Bank's consent and if authorization to
withdraw from savings deposit accounts at the Bank has been given as payment for
shares, the amount authorized for withdrawal shall not otherwise be available
for withdrawal by the undersigned. If the Plan of Conversion is not approved by
the voting members of the Bank at a Special Meeting to be held on December ,
1996, or at any adjournment or postponement thereof, all orders will be
cancelled and funds received as payment, with accrued interest, (if any), will
be returned promptly.
UNDER PENALTY OF PERJURY, I certify that the Social Security or Tax ID Number
and the information provided on this Stock Order Form are true, correct and
complete, that I am not subject to back-up withholding, that I am purchasing
solely for my own account and that there is no agreement or understanding
regarding the sale or transfer of such shares or my right to subscribe for
shares herewith.
FEDERAL REGULATIONS PROHIBIT ANY PERSON FROM TRANSFERRING, OR ENTERING INTO ANY
AGREEMENT DIRECTLY OR INDIRECTLY TO TRANSFER, THE LEGAL OR BENEFICIAL OWNERSHIP
OF SUBSCRIPTION RIGHTS OR THE UNDERLYING SECURITIES TO THE ACCOUNT OF ANOTHER.
FAIRFIELD SAVINGS BANK, F.S.B. AND BIG FOOT FINANCIAL CORP., 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 SUCH
TRANSFER.
<TABLE>
<S> <C>
(13) Signature Date Signature Date
</TABLE>
(ALL ORDER FORMS MUST BE ACCOMPANIED BY A SIGNED CERTIFICATION FORM)
<TABLE>
<S> <C> <C>
STOCK INFORMATION CENTER
OFFICE USE Date Rec'd // Order # Batch #
</TABLE>
Fairfield Savings Bank, F.S.B.
1190 RFD
<TABLE>
<S> <C> <C>
Check # Category
</TABLE>
Long Grove, Illinois 60047
(847) 821-4444
<TABLE>
<S> <C> <C>
Amount $ Initials
</TABLE>
<PAGE>
Item (6)a, (6)b, (6)c (continued)
<TABLE>
<CAPTION>
ACCOUNT TITLE [NAMES ON ACCOUNTS] ACCOUNT NUMBER(S)
<S> <C>
............................................... ................................................
............................................... ................................................
............................................... ................................................
............................................... ................................................
............................................... ................................................
............................................... ................................................
</TABLE>
Item (11) (continued)
List below all other orders submitted by you or Associates (as defined below) or
by persons acting in concert with you.
<TABLE>
<CAPTION>
NAME(S) LISTED ON OTHER STOCK ORDER FORMS NUMBER OF SHARES ORDERED
<S> <C>
............................................... ................................................
............................................... ................................................
............................................... ................................................
............................................... ................................................
............................................... ................................................
............................................... ................................................
............................................... ................................................
............................................... ................................................
</TABLE>
"Associate" is defined as: (i) any corporation or organization (other than Big
Foot Financial Corp., Fairfield Savings Bank, F.S.B. or a majority-owned
subsidiary of Fairfield Savings Bank, F.S.B.) of which such person is a
director, officer or 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 a trustee or in a similar fiduciary capacity, except that the
term "Associate" does not include Big Foot Financial Corp.'s or Fairfield
Savings Bank, F.S.B.'s employee stock benefit plans in which such 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
either has the same home as such person or who is a director or officer of Big
Foot Financial Corp. or Fairfield Savings Bank, F.S.B. or any subsidiaries
thereof. Directors and officers of Big Foot Financial Corp. or Fairfield Savings
Bank, F.S.B. are not treated as associates solely by virtue of holding such
positions.
<PAGE>
YOU MUST SIGN THE FOLLOWING CERTIFICATION IN ORDER TO PURCHASE STOCK
CERTIFICATION FORM
I ACKNOWLEDGE THAT THIS SECURITY IS NOT A DEPOSIT OR ACCOUNT AND IS NOT
FEDERALLY INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION (FDIC), AND IS
NOT GUARANTEED BY BIG FOOT FINANCIAL CORP., FAIRFIED SAVINGS BANK, F.S.B., THE
FEDERAL GOVERNMENT OR BY ANY GOVERNMENT AGENCY.
If anyone asserts that this security is federally insured or guaranteed, or
is as safe as an insured deposit, I should call the Office of Thrift
Supervision, Regional Director, at the Central Regional Office at (312)
917-5000.
I further certify that, before purchasing the common stock, par value $.01
per share, of Big Foot Financial Corp. (the "Company"), the proposed holding
company for Fairfield Savings Bank, F.S.B., I received a Prospectus of the
Company dated November , 1996 relating to such offer of common stock.
The Prospectus that I received contains disclosure concerning the nature of
the common stock being offered by the Company and describes the risks involved
in the investment in this common stock, including but not limited to the:
<TABLE>
<CAPTION>
1. Potential Impact of Changes in Interest Rates (page)
<C> <S> <C>
2. Impact of the Economy on Operations (page)
3. Competition (page)
4. Recapitalization of the SAIF; SAIF Assessments; and Special Assessment (page)
5. Recent Declines in Net Income
6. Recent Tax Legislation Regarding Tax Bad Debt Reserves (page)
7. Concentration in Mortgage-backed Securities (page)
8. Impact of Technological Advances (page)
9. Residential and Non-Residential Lending Risks (page)
10. Certain Anti-Takeover Provisions (page)
11. Absence of Market for Common Stock and Performance of Conversion Offerings (page)
12. Possible Increase in Estimated Price Range and Number of Shares Issued (page)
13. Possible Dilutive Effect of Stock Options and Stock Programs (page)
14. Possible Adverse Income Tax Consequences of the Distribution of Subscription Rights (page)
15. Financial Institution Regulation and Possible Legislation (page)
16. Risk of Delayed Offering (page)
</TABLE>
<TABLE>
<S> <C> <C>
Signature Date Signature
Name (please print) Name (please print)
<CAPTION>
Signature Date
Name (please print)
</TABLE>
<PAGE>
BIG FOOT FINANCIAL CORP.
STOCK OWNERSHIP GUIDE AND
ORDER FORM INSTRUCTIONS
------------------------------------------------
- ----------------------------
STOCK OWNERSHIP GUIDE
- --------------------------
INDIVIDUAL
Include the first name, middle initial and last name of the shareholder. Avoid
the use of two initials. Please omit words that do not affect ownership rights,
such as "Mrs.", "Mr.", "Dr.", "special account", "single person", etc.
JOINT TENANTS
Joint tenants with right of survivorship may be specified to identify two or
more owners. When stock is held by joint tenants with right of survivorship,
ownership is intended to pass automatically to the surviving joint tenant(s)
upon the death of any joint tenant. All parties must agree to the transfer or
sale of shares held by joint tenants.
TENANTS IN COMMON
Tenants in common may also be specified to identify two or more owners. When
stock is held by tenants in common, upon the death of one co-tenant, ownership
of the stock will be held by the surviving co-tenant(s) and by the heirs of the
deceased co-tenant. All parties must agree to the transfer or sale of shares
held by tenants in common.
UNIFORM TRANSFER TO MINORS OR UNIFORM GIFTS TO MINORS
For Illinois residents and residents of most other states, stock may be held in
the name of the custodian for the benefit of a minor under the Uniform Transfer
to Minors Act. For residents of many other states, stock may be held in a
similar type of ownership under the Uniform Gifts to Minors Act. For either
ownership, the minor is the actual owner of the stock with the adult custodian
being responsible for the investment until the minor reaches legal age. There
may be only one custodian and one minor designated on a stock certificate. The
standard abbreviation for Custodian is "CUST," while the Uniform Transfer to
Minors Act is "Unif Tran Min Act" and the Uniform Gifts to Minors Act is "Unif
Gift Min Act." Standard U.S. Postal Service state abbreviations should be used
to describe the appropriate state. For example, stock held by John Doe as
custodian for Susan Doe under the Illinois Uniform Transfer to Minors Act will
be abbreviated John Doe, CUST Susan Doe Unif Tran Min Act, IL (use minor's
social security number).
FIDUCIARY/TRUST
Information provided with respect to stock to be held in a fiduciary capacity
must contain the following:
- - The name(s) of the fiduciary. If an individual, list the first name, middle
initial and last name. If a corporation, list the full corporate title (name).
If an individual and a corporation, list the corporation's title before the
individual.
- - The fiduciary capacity, such as administrator, executor, personal
representative, conservator, trustee, committee, etc.
- - A description of the document governing the fiduciary relationship, such as a
trust agreement or court order. Documentation establishing a fiduciary
relationship may be required to register your stock in a fiduciary capacity.
- - The date of the document governing the relationship, except that the date of a
trust created by a will need not be included in the description.
- - The name of the maker, donor or testator and the name of the beneficiary.
An example of fiduciary ownership of stock in the case of a trust is: John Doe,
Trustee Under Agreement Dated 10-1-87 for Susan Doe.
- --------------------------------------------------------------------
You may mail your completed Stock Order Form and Certification Form in the
envelope that has been provided, or you may deliver your Stock Order Form and
Certification Form to any branch of Fairfield Savings Bank, F.S.B. Your Stock
Order Form and Certification Form, property completed, and payment in full (or
withdrawal authorization) at the subscription price must be actually received by
Fairfield Savings Bank, F.S.B. no later than 12:00 noon, Central Time, on
December , 1996 or it will become void. If you have any remaining
questions, or if you would like assistance in completing your Stock Order Form
and Certification Form, you may call our Stock Information Center during the
regular business hours of the Bank's office located at 1190 RFD, Long Grove,
Illinois, no later than 12:00 noon, Central Time, on December , 1996.
- -----------------------------------------
INSTRUCTIONS
- --------------------------
ITEMS 1 AND 2--
Fill in the number of shares that you wish to purchase and the total payment
due. The amount due is determined by multiplying the number of shares by the
subscription price of $10.00 per share. The minimum purchase in the Subscription
and Community Offerings is 25 shares. In the Subscription Offering, the maximum
purchase by each Eligible Account Holder, Supplemental Eligible Account Holder
or Other Member is $150,000 (15,000 shares), and the maximum purchase in the
Community Offering by any person, together with associates or persons acting in
concert, is $150,000 (15,000 shares). However, no person, together with
associates and persons acting in concert with such person, may purchase in the
aggregate more than 1% of the shares offered. Based on the offering of 2,185,000
shares, 1% of the shares offered amounts to 21,850 shares. Eligible Account
Holders, Supplemental Eligible Account Holders, Other Members and Bank
Employees, desiring to purchase shares in the Community Offering, if any, must
do so by obtaining from the Stock Information Center an additional Stock Order
Form and submitting a completed additional Stock Order Form which indicates the
number of shares to be purchased in the Community Offering. Fairfield Savings
Bank, F.S.B. and Big Foot Financial Corp. have reserved the right to reject the
subscription of any order received in the Community Offering, in whole or in
part.
ITEM 3--
Please check this box to indicate whether you are a director, officer or
employee of Fairfield Savings Bank, F.S.B. or a member of such person's
immediate family.
ITEM 4--
Payment for shares may be made in cash (only if delivered by you in person) or
by check, bank draft or money order payable to Fairfield Savings Bank, F.S.B. No
wire transfers will be accepted. Your funds will earn interest at the Bank's
[passbook] rate of interest from the date of receipt until the Conversion is
completed or terminated. DO NOT MAIL CASH TO PURCHASE STOCK! Please check this
box if your method of payment is by check, bank draft or money order.
ITEM 5--
If you pay for your stock by a withdrawal from Fairfield Savings Bank, F.S.B.
deposit account, insert the account number(s) and the amount of your withdrawal
authorization for each account. The total amount withdrawn should equal the
amount of your stock purchase. There will be no penalty assessed for early
withdrawals from certificate accounts used for stock purchases. This form of
payment may not be used if your account is an Individual Retirement Account or
Qualified Plan.
ITEM 6--
a. Please check this box if you are an Eligible Account Holder, that is you had
a savings deposit account(s) totalling $50.00 or more on December 31, 1994.
b. Please check this box if you are a Supplemental Eligible Account Holder, that
is you had a deposit account(s) totaling $50.00 or more on September 30, 1996.
c. Please check this box if you are an Other Member, that is you had a deposit
account(s) as of October 31, 1996 or a borrower from Bank as of July 1, 1991
whose loan continues to be outstanding as of October 31, 1996.
d. Please check this box if you are a Bank Employee
Please list all names on the account(s) and all account number(s) of accounts
you had at these dates in order to insure proper identification of your purchase
rights. Please note: Failure to list your accounts may result in the loss of
part or all of your subscription rights.
ITEM 7, 8 AND 9--
The stock transfer industry has developed a uniform system of shareholder
registrations that we will use in the issuance of your Big Foot Financial Corp.
Common Stock. Please complete items 7, 8 and 9 as fully and accurately as
possible, and be certain to supply your social security or Tax I.D. number and
your daytime and evening telephone number(s). We will need to call you if we
cannot execute your order as given. If you have any questions regarding the
registration of your stock, please consult your legal advisor. Stock ownership
must be registered in one of the ways described above under the caption "Stock
Ownership Guide."
ITEM 10--
Please check this box if you are a member of the NASD or if this item otherwise
applies to you.
ITEM 11--
Please check this box if you or any associate (as defined on the reverse side of
the Stock Order Form) or person acting in concert with you has submitted another
order for shares and complete the reverse side of the Stock Order Form.
ITEMS 12 AND 13--
Please sign and date the Stock Order Form and Certification Form where
indicated. Before you sign, review the Stock Order Form, including the
acknowledgement, and the Certification Form. Normally, one signature is
required. An additional signature is required only when payment is to be made by
withdrawal from a deposit account that requires multiple signatures to withdraw
funds.
<PAGE>
EX-99.2
Logo
Fairfield Savings Bank, F.S.B.
November __, 1996
Dear Valued Customer,
The Board of Directors of Fairfield Savings Bank, F.S.B. (the "Bank") has voted
unanimously in favor of a plan to convert the Bank from a federally chartered
mutual savings bank to a federally chartered stock savings bank (the
"Conversion"). As a stock company, the Bank will be structured under the same
form of ownership used by most businesses and banks. This Conversion to stock
ownership will increase the Bank's capital which will enable the Bank to support
future banking activities. The Conversion will not affect your deposit accounts
or loans with the Bank or existing FDIC insurance coverage for your deposit
accounts.
As part of the Conversion, the Bank has formed a holding company, Big Foot
Financial Corp. (the "Company"), which will own all of the common stock of the
Bank. The Company is offering up to 2,185,000 shares of its common stock to
certain customers of the Bank at a subscription price of $10.00 per share. As a
depositor on either December 31, 1994, September 30, 1996, or October 31, 1996,
or a borrower on October 31, 1996, whose loans have been outstanding since July
1, 1991, you have a preferential right to subscribe to purchase the common stock
of the Company during the Subscription Offering without paying a fee or
commission. For your convenience, the enclosed packet contains the following
materials:
o PROXY STATEMENT, which includes a PROSPECTUS: These will provide you with
information about your right to vote on the Conversion, an overview of the
Bank's operations and details on the proposed stock offering, including the
risks associated with an investment in the Company's common stock. Please
read them carefully.
o PROXY QUESTIONS AND ANSWERS: This brochure highlights key information found
in the Proxy Statement. It also gives instructions for completing your
proxy card.
o PROXY CARD: Please sign, date, and return the proxy card in the enclosed
[color of envelope] postage-paid envelope. Your family may have received
more than one card. All cards should be signed and returned.
o STOCK QUESTIONS AND ANSWERS: This brochure answers key questions about the
Conversion.
o STOCK ORDER FORM and CERTIFICATION FORM to be completed in order to
purchase shares of the Company stock. Payment by check or written
authorization to withdraw from a specified Bank account must accompany each
stock order form and certification. This order must be received by the
Company no later than 12:00 Noon, Central Time, on ____________, 1996.
On behalf of the Board, we ask that you help the Bank take this important step
by signing the enclosed proxy card(s) and casting your vote in favor of the Plan
of Conversion. Your vote is very important! Please mail your proxy card(s) today
in the enclosed [color of envelope] postage-paid return envelope.
If you would like to purchase the Company stock in your IRA account, using IRA
funds, we may be able to accommodate you. Please contact the Stock Information
Center as soon as possible at (847) 821-7444.
We believe it is in the best interests of the Bank to have our customers as our
stockholders. We encourage you to review this investment opportunity carefully.
If you have any questions, please call the Stock Information Center at (847)
821-7444.
Sincerely,
George M. Briody
President
Enclosures
M
<PAGE>
Logo
Fairfield Savings Bank, F.S.B.
November __, 1996
Dear Friend,
The Board of Directors of Fairfield Savings Bank, F.S.B. (the "Bank") has voted
unanimously in favor of a plan to convert the Bank from a federally chartered
mutual savings bank to a federally chartered stock savings bank (the
"Conversion"). As a stock company, the Bank will be structured under the same
form of ownership used by most businesses and banks. This Conversion to stock
ownership will increase the Bank's capital which will enable the Bank to support
future banking activities.
As part of the Conversion, the Bank has formed a holding company, Big Foot
Financial Corp. (the "Company"), which will own all of the common stock of the
Bank. The Company is offering up to 2,185,000 shares of its common stock to
certain customers of the Bank at a subscription price of $10.00 per share. As a
former depositor of the Bank on either December 31, 1994, September 30, 1996, or
October 31, 1996, or a borrower on October 31, 1996 whose loans have been
outstanding since July 1, 1991, you have a preferential right to subscribe to
purchase the common stock of the Company during the Subscription Offering
without paying a fee or commission. For your convenience, the enclosed packet
contains the following materials:
o PROSPECTUS: This document provides detailed information about the Bank's
operations and the proposed stock offering, including the risks associated
with an investment in the Company's common stock. Please read it carefully.
o STOCK QUESTIONS AND ANSWERS: This brochure answers key questions about the
Conversion.
o STOCK ORDER FORM and CERTIFICATION FORM to be completed in order to
purchase shares of the Company common stock. Payment by check or money
order must accompany each stock order form and certification form. This
order must be received by the Company no later than 12:00 Noon, Central
Time, on ____________, 1996.
If you would like to purchase the Company's stock for your IRA account, using
IRA funds, we may be able to accommodate you. Please contact the Stock
Information Center as soon as possible at (847) 821-7444.
We believe it is in the best interests of the Bank to have our customers as our
stockholders. We encourage you to review this investment opportunity carefully.
If you have any questions, please call the Stock Information Center at (847)
821-7444.
Sincerely,
George M. Briody
President
Enclosures
F
This letter is neither an offer to sell nor a solicitation of an offer to
buy the common stock. The offer is made only by the Prospectus, copies of which
may be obtained by contacting the Stock Information Center.
The shares of common stock offered in the conversion are not savings
accounts or deposits and are not insured by the Federal Deposit Insurance
Corporation (FDIC) or any other government agency.
<PAGE>
Logo
Fairfield Savings Bank, F.S.B.
November __, 1996
Dear Valued Customer,
The Board of Directors of Fairfield Savings Bank, F.S.B. (the "Bank") has voted
unanimously in favor of a plan to convert the Bank from a federally chartered
mutual savings bank to a federally chartered stock savings bank (the
"Conversion"). As a stock company, the Bank will be structured under the same
form of ownership used by most businesses and banks. This Conversion to stock
ownership will increase the Bank's capital which will enable the Bank to support
future banking activities. The Conversion will not affect your deposit accounts
or loans with the Bank or existing FDIC insurance coverage for your deposit
accounts.
If you are a current depositor of the Bank, you will find enclosed a proxy
statement and proxy card(s). On behalf of the Board, we ask that you help the
Bank take this important step by signing the enclosed proxy card(s) and casting
your vote in favor of the Plan of Conversion. Your vote is very important!
Please mail your proxy card(s) today in the enclosed postage-paid [color of
envelope] return envelope. For your convenience, the enclosed packet contains
the following materials:
o PROXY STATEMENT: This gives detailed information about your right to vote
on the Conversion. Please read it carefully.
o PROXY QUESTIONS AND ANSWERS: This brochure highlights key information found
in the Proxy Statement. It also gives instructions for completing your
proxy card.
o PROXY CARD: Please sign, date, and return the proxy card in the enclosed
[color of envelope] postage-paid envelope. Your family may have received
more than one card. All cards should be signed and returned.
Big Foot Financial Corp., the proposed holding company for the Bank, is making
an initial public offering of its common stock in connection with the
Conversion. However, we regret to inform you that we are unable to offer shares
of common stock in the offering to members of the Bank residing outside of the
United States. If you have any questions, please call the Stock Information
Center at (847) 821-7444.
Sincerely,
George M. Briody
President
Enclosures
FOR
This letter is neither an offer to sell nor a solicitation of an offer to
buy the common stock. The offer is made only by the Prospectus.
The shares of common stock offered in the conversion are not savings
accounts or deposits and are not insured by the Federal Deposit Insurance
Corporation (FDIC) or any other government agency.
<PAGE>
Logo
Fairfield Savings Bank, F.S.B.
November __, 1996
Dear Valued Customer,
The Board of Directors of Fairfield Savings Bank, F.S.B. (the "Bank") has voted
unanimously in favor of a plan to convert the Bank from a federally chartered
mutual savings bank to a federally chartered stock savings bank (the
"Conversion"). As a stock company, the Bank will be structured under the same
form of ownership used by most businesses and banks. This Conversion to stock
ownership will increase the Bank's capital which will enable the Bank to support
future banking activities. The Conversion will not affect your deposit accounts
or loans with the Bank or existing FDIC insurance coverage for your deposit
accounts.
If you are a current depositor of the Bank, you will find enclosed a proxy
statement and proxy card(s). On behalf of the Board, we ask that you help the
Bank take this important step by signing the enclosed proxy card(s) and casting
your vote in favor of the Plan of Conversion. Your vote is very important!
Please mail your proxy card(s) today in the enclosed postage-paid [color of
envelope] return envelope. For your convenience, the enclosed packet contains
the following materials:
o PROXY STATEMENT: This gives detailed information about your right to vote
on the Conversion. Please read it carefully.
o PROXY QUESTIONS AND ANSWERS: This brochure highlights key information found
in the Proxy Statement. It also gives instructions for completing your
proxy card.
o PROXY CARD: Please sign, date and return the proxy card in the enclosed
[color of envelope] postage-paid envelope. Your family may have received
more than one card. All cards should be signed and returned.
Big Foot Financial Corp., the proposed holding company for the Bank, is making
an initial public offering of its common stock in connection with the
Conversion. However, the laws of your state would require us to register (1) Big
Foot Financial Corp. common stock to be issued in the offering or (2) an agent
of Big Foot Financial Corp. to solicit the sale of such stock. Because the
number of eligible subscribers in your state is not sufficiently large to
justify the expenses of such registration, we are unable to offer you shares of
common stock in the offering. If you have any questions, please call the Stock
Information Center at (847) 821-7444.
Sincerely,
George M. Briody
President
Enclosures
DAR
This letter is neither an offer to sell nor a solicitation of an offer to
buy the common stock. The offer is made only by the Prospectus.
The shares of common stock offered in the conversion are not savings
accounts or deposits and are not insured by the Federal Deposit Insurance
Corporation (FDIC) or any other government agency.
<PAGE>
Logo
Fairfield Savings Bank, F.S.B.
November __, 1996
Dear Interested Investor,
The Board of Directors of Fairfield Savings Bank, F.S.B. (the "Bank") has voted
unanimously in favor of a plan to convert the Bank from a federally chartered
mutual savings bank to a federally chartered stock savings bank (the
"Conversion"). As a stock company, the Bank will be structured under the same
form of ownership used by most businesses and banks. This Conversion to stock
ownership will increase the Bank's capital and will enable the Bank to support
future banking activities.
As part of the Conversion, the Bank has formed a holding company, Big Foot
Financial Corp. (the "Company"), which will own all of the common stock of the
Bank. The Company is offering up to 2,185,000 shares of its common stock to
certain customers of the Bank at a subscription price of $10.00 per share. As an
interested investor in the common stock of the Company, you have requested some
information regarding the Bank and the Conversion. For your convenience, the
enclosed packet contains the following materials:
o PROSPECTUS: This document provides detailed information about the Bank's
operations and the proposed stock offering, including the risks associated
with an investment in the Company's common stock. Please read it carefully.
o STOCK QUESTIONS AND ANSWERS: This brochure answers key questions about the
Conversion.
We believe it is in the best interests of the Bank to have our customers as our
stockholders; therefore, we are not accepting orders from the local community or
general public until the conclusion of the subscription offering to customers
and members of the Bank, which is expected to occur on at 12:00 Noon, Central
Time, on ____________, 1996. If you have any questions, please call the Stock
Information Center at (847) 821-7444.
Sincerely,
George M. Briody
President
Enclosures
I
This letter is neither an offer to sell nor a solicitation of an offer to
buy the common stock. The offer is made only by the Prospectus, copies of which
may be obtained by contacting the Stock Information Center.
The shares of common stock offered in the conversion are not savings
accounts or deposits and are not insured by the Federal Deposit Insurance
Corporation (FDIC) or any other government agency.
<PAGE>
Big Foot Financial Corp.
November __, 1996
Dear Friend,
The Board of Directors of Fairfield Savings Bank, F.S.B. (the "Bank") has voted
unanimously in favor of a plan to convert the Bank from a federally chartered
mutual savings bank to a federally chartered stock savings bank (the
"Conversion"). As a stock company, the Bank will be structured under the same
form of ownership used by most businesses and banks. This Conversion to stock
ownership will increase the Bank's capital which will enable the Bank to support
future banking activities.
As part of the Conversion, the Bank has formed a holding company, Big Foot
Financial Corp. (the "Company"), which will own all of the common stock of the
Bank. The Company is offering up to 2,185,000 shares of its common stock to
certain customers of the Bank at a subscription price of $10.00 per share. As a
former depositor of the Bank on either December 31, 1994, September 30, 1996, or
_________, 1996, or a borrower on ______________, 1996 whose loans have been
outstanding since July 1, 1991, you have a preferential right to subscribe to
purchase the common stock of the Company during the Subscription Offering
without paying a fee or commission. For your convenience, the enclosed packet
contains the following materials:
o PROSPECTUS: This document provides detailed information about the Bank's
operations and the proposed stock offering, including the risks associated
with an investment in the Company's common stock. Please read it carefully.
o STOCK QUESTIONS AND ANSWERS: This brochure answers key questions about the
Conversion.
o STOCK ORDER FORM and CERTIFICATION FORM to be completed in order to
purchase shares of the Company common stock. Payment by check or money
order must accompany each stock order form and certification form. This
order must be received by the Company no later than 12:00 Noon, Central
Time, on ____________, 1996.
If you would like to purchase the Company's stock for your IRA account, using
IRA funds, we may be able to accommodate you. Please contact the Stock
Information Center as soon as possible at (847) _____.
We believe it is in the best interests of the Bank to have our customers as our
stockholders. We encourage you to review this investment opportunity carefully.
If you have any questions, please call the Stock Information Center at (847)
_____.
Sincerely,
George M. Briody
President
Enclosures
FA
This letter is neither an offer to sell nor a solicitation of an offer to
buy the common stock. The offer is made only by the Prospectus, copies of which
may be obtained by contacting the Stock Information Center.
The shares of common stock offered in the conversion are not savings
accounts or deposits and are not insured by the Federal Deposit Insurance
Corporation (FDIC) or any other government agency.
<PAGE>
Big Foot Financial Corp.
November __, 1996
Dear Valued Customer,
The Board of Directors of Fairfield Savings Bank, F.S.B. (the "Bank") has voted
unanimously in favor of a plan to convert the Bank from a federally chartered
mutual savings bank to a federally chartered stock savings bank (the
"Conversion"). As a stock company, the Bank will be structured under the same
form of ownership used by most businesses and banks. This Conversion to stock
ownership will increase the Bank's capital which will enable the Bank to support
future banking activities. The Conversion will not affect your deposit accounts
or loans with the Bank or existing FDIC insurance coverage for your deposit
accounts.
As part of the Conversion, the Bank has formed a holding company, Big Foot
Financial Corp. (the "Company"), which will own all of the common stock of the
Bank. The Company is offering up to 2,185,000 shares of its common stock to
certain customers of the Bank at a subscription price of $10.00 per share. As a
depositor on either December 31, 1994, September 30, 1996, or October 31, 1996,
or a borrower on October 31, 1996 whose loans have been outstanding since July
1, 1991,you have a preferential right to subscribe to purchase the common stock
of the Company during the Subscription Offering without paying a fee or
commission. For your convenience, the enclosed packet contains the following
materials:
o PROXY STATEMENT, which includes a PROSPECTUS: These will provide you with
information about your right to vote on the Conversion, an overview of the
Bank's operations and details on the proposed stock offering, including the
risks associated with an investment in the Company's common stock. Please
read them carefully.
o PROXY QUESTIONS AND ANSWERS: This brochure highlights key information found
in the Proxy Statement. It also gives instructions for completing your
proxy card.
o PROXY CARD: Please sign, date, and return the proxy card in the enclosed
[color of envelope] postage-paid envelope. Your family may have received
more than one card. All cards should be signed and returned.
o STOCK QUESTIONS AND ANSWERS: This brochure answers key questions about the
Conversion.
o STOCK ORDER FORM and CERTIFICATION FORM to be completed in order to
purchase shares of the Company's stock. Payment by check or written
authorization to withdraw from a specified Bank account must accompany each
stock order form and certification. This order must be received by the
Company no later than 12:00 Noon, Central Time, on ____________, 1996.
On behalf of the Board, we ask that you help the Bank take this important step
by signing the enclosed proxy card(s) and casting your vote in favor of the Plan
of Conversion. Your vote is very important! Please mail your proxy card(s) today
in the enclosed [color of envelope] postage-paid return envelope.
If you would like to purchase the Company's stock in your IRA account, using IRA
funds, we may be able to accommodate you. Please contact the Stock Information
Center as soon as possible at (847) 821-7444.
We believe it is in the best interests of the Bank to have our customers as our
stockholders. We encourage you to review this investment opportunity carefully.
If you have any questions, please call the Stock Information Center at (847)
821-7444.
Sincerely,
George M. Briody
President
Enclosures
MA
This letter is neither an offer to sell nor a solicitation of an offer to
buy the common stock. The offer is made only by the Prospectus, copies of which
may be obtained by contacting the Stock Information Center.
The shares of common stock offered in the conversion are not savings
accounts or deposits and are not insured by the Federal Deposit Insurance
Corporation (FDIC) or any other government agency.
<PAGE>
Hovde Securities, Inc.
INVESTMENT BANKERS & FINANCIAL ADVISORS
[Letterhead]
November __, 1996
Dear Members and Friends of Fairfield Savings Bank, F.S.B.,
At the request of Big Foot Financial Corp. (the "Company"), and Fairfield
Savings Bank, F.S.B. (the "Bank"), we have enclosed certain materials regarding
the offering of shares of Common Stock of the Company in connection with the
conversion of the Bank from a federally chartered mutual savings bank to a
federally chartered stock savings bank. The materials include a Prospectus, as
well as a stock order form and certification form, which offer you the
opportunity to subscribe for shares of Common Stock.
It is urged that you study these materials carefully. If you decide to subscribe
for shares, you must return the properly completed stock order form and signed
certification form along with full payment for the shares (or appropriate
instructions authorizing withdrawal from a deposit account at the Bank) no later
than 12:00 Noon, Central Time, on ____________, 1996 in the enclosed
postage-paid envelope or deliver it to any office of the Bank. If you have any
questions after reading the enclosed materials, please call the Stock
Information Center at (847) 821-7444. The Stock Information Center is open
during the regular business hours of the Bank's office located in Long Grove,
Illinois.
We have been asked to supply these documents to you in view of certain
requirements of the securities laws of your jurisdiction. We should not be
understood as recommending or soliciting in any way any action by you with
regard to the enclosed materials.
Sincerely,
HOVDE SECURITIES, INC.
BS
This letter is neither an offer to sell nor a solicitation of an offer to
buy the common stock. The offer is made only by the Prospectus, copies of which
may be obtained by contacting the Stock Information Center.
The shares of common stock offered in the conversion are not savings
accounts or deposits and are not insured by the Federal Deposit Insurance
Corporation (FDIC) or any other government agency.
<PAGE>
Logo
Fairfield Savings Bank, F.S.B.
December __, 1996
Dear Subscriber,
I want to thank you for your interest in Big Foot Financial Corp.'s common
stock. We are extremely proud of the support we received from our customers and
the community as we successfully completed the sale of xxx,xxx shares of common
stock.
As you purchased your stock with a check or cash, we are enclosing a check for
payment of the interest on those funds. Your stock certificate(s) are being
mailed directly to you from our Transfer Agent, XXXXXXXX.
If you continue to be interested in acquiring common shares of Big Foot
Financial Corp., the stock should begin trading on the Nasdaq National Market on
or about ____________, 1996 under the symbol "BFFC."
Again, thank you for your interest. If you have any questions, please do not
hesitate to contact me.
Sincerely,
George M. Briody
President
<PAGE>
Logo
Fairfield Savings Bank, F.S.B.
December __, 1996
Dear Subscriber:
I want to thank you for your interest in Big Foot Financial Corp. common stock.
We are extremely proud of the support we received from our customers and the
community as we successfully completed the sale of xxx,xxx shares of common
stock.
However, due to the oversubscription of our common stock during the Subscription
Offering, we regret we were unable to fill a portion of your order. Enclosed is
a refund check for the amount of your order we were unable to fill plus
interest. The stock certificates for the balance of your order are being sent to
you directly from our transfer agent, XXXXXXX.
If you continue to be interested in acquiring common shares of Big Foot
Financial Corp., the stock should begin trading on the Nasdaq National Market on
or about ____________, 1996 under the symbol "BFFC."
Again, thank you for your interest. If you have any questions, please do not
hesitate to contact me.
Sincerely,
George M. Briody
President
<PAGE>
Big Foot Financial Corp.
December __, 1996
Welcome Shareholder:
We are pleased to enclose the stock certificate that represents your share of
ownership in Big Foot Financial Corp. As a shareholder, you have our commitment
to keep you informed of the Company's financial performance and condition.
Please examine your stock certificates to be certain that it is properly
registered and that it represents the correct number of shares that you have
purchased. If you have any questions or concerns about your certificate, you
should contact the Transfer Agent immediately at the following address:
(TRANSFER AGENT)
(Address & Telephone #)
Please remember that your certificate is a negotiable security which should be
kept in a secure place, such as a safe deposit box or on deposit with your
stockbroker.
If you continue to be interested in acquiring common shares of Big Foot
Financial Corp., the stock should begin trading on the Nasdaq National Market on
or about ____________, 1996 under the symbol "BFFC."
On behalf of the Board of Directors and the employees of Big Foot Financial
Corp. and Fairfield Savings Bank, F.S.B., we would like to thank you for
supporting our offering.
Sincerely,
George M. Briody
President
The shares of Common Stock offered in the conversion are not savings accounts or
deposits and are not insured by the FDIC or any other government agency.
<PAGE>
- -------------------------------------------------------------------------------
PROXYGRAM
{FAIRFIELD SAVINGS BANK, F.S.B. LETTERHEAD}
- -------------------------------------------------------------------------------
DEAR CUSTOMER:
OUR RECORDS INDICATE THAT YOUR VOTE ON FAIRFIELD SAVINGS BANK, F.S.B.'S PLAN OF
CONVERSION HAS NOT YET BEEN RECEIVED.
YOUR VOTE IS VERY IMPORTANT TO US. PLEASE ACT PROMPTLY! SIGN AND DATE ALL PROXY
CARDS YOU HAVE RECEIVED, INCLUDING THOSE YOU RECEIVED WITH THIS LETTER, AND MAIL
THEM IN THE ENCLOSED POSTAGE- PAID ENVELOPE OR DELIVER THEM TO ANY FAIRFIELD
OFFICE. YOUR PROPERLY EXECUTED PROXY CARD(S) MUST BE RECEIVED BY THE BANK NO
LATER THAN _____ P.M., CENTRAL TIME, ____________, 1996, THE DATE OF THE BANK'S
SPECIAL MEETING OF MEMBERS.
YOUR BOARD OF DIRECTORS HAS UNANIMOUSLY APPROVED THE PLAN OF CONVERSION AND
URGES YOU TO VOTE "FOR" THE PLAN.
REMEMBER, VOTING FOR THE PLAN OF CONVERSION DOES NOT OBLIGATE YOU TO BUY ANY
STOCK.
THE BALANCE, MATURITY AND WITHDRAWABILITY OF YOUR DEPOSITS WITH FAIRFIELD
SAVINGS BANK, F.S.B. WILL NOT CHANGE (UNLESS YOU ELECT TO PURCHASE STOCK IN THE
CONVERSION AND PAY FOR THE STOCK BY AUTHORIZING A WITHDRAWAL FROM A FAIRFIELD
DEPOSIT). DEPOSITS WILL REMAIN INSURED BY THE FDIC TO THE MAXIMUM EXTENT
PROVIDED BY LAW.
SHOULD YOU NEED FURTHER INFORMATION OR ASSISTANCE, PLEASE CALL OUR STOCK
INFORMATION CENTER AT (847) 821-7444.
THANK YOU!
THE BOARD OF DIRECTORS
OF
FAIRFIELD SAVINGS BANK, F.S.B.
This does not constitute an offer to sell or a solicitation of an offer to
buy any shares of Big Foot Financial Corp. Common Stock offered in connection
with the conversion. Offers to sell and solicitations of offers to buy shares of
Big Foot Financial Corp. Common Stock in connection with the conversion are made
by means of the Prospectus. A prospectus may be obtained by calling the Stock
Information Center at (847) 821-7444.
The shares of Big Foot Financial Corp. Common Stock offered in the
conversion are not savings accounts or deposits and are not insured by the FDIC
or any other government agency.
<PAGE>
- -------------------------------------------------------------------------------
STOCK GRAM
{FAIRFIELD SAVINGS BANK, F.S.B. LETTERHEAD}
- -------------------------------------------------------------------------------
DEAR CUSTOMER:
WE ARE PLEASED TO ANNOUNCE THAT BIG FOOT FINANCIAL CORP. IS OFFERING UP TO
_________ SHARES OF ITS COMMON STOCK IN CONNECTION WITH THE CONVERSION OF
FAIRFIELD SAVINGS BANK, F.S.B. ("FAIRFIELD") FROM A FEDERALLY CHARTERED MUTUAL
SAVINGS BANK TO A
FEDERALLY CHARTERED STOCK SAVINGS BANK.
FAIRFIELD 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. WE PREVIOUSLY MAILED YOU A SUBSCRIPTION AND
COMMUNITY OFFERING PROSPECTUS PROVIDING YOU DETAILED INFORMATION ABOUT FAIRFIELD
AND THE PROPOSED STOCK OFFERING, INCLUDING THE RISKS ASSOCIATED WITH AN
INVESTMENT IN THE COMPANY'S COMMON STOCK. WE ASK YOU TO PLEASE READ THESE
MATERIALS.
WE INVITE OUR LOYAL CUSTOMERS TO BECOME CHARTER SHAREHOLDERS OF BIG FOOT
FINANCIAL CORP. IF YOU ARE INTERESTED IN PURCHASING SHARES OF COMMON STOCK, YOU
MUST SUBMIT YOUR STOCK ORDER FORM, CERTIFICATION FORM AND PAYMENT PRIOR TO 12:00
P.M., _______________, 1996.
IF YOU HAVE ANY QUESTIONS REGARDING THE STOCK OFFERING PLEASE CALL THE STOCK
INFORMATION CENTER AT (847) 821-7444 OR STOP BY OUR OFFICE LOCATED AT
____________________________, ILLINOIS.
THANK YOU!
THE BOARD OF DIRECTORS
OF
FAIRFIELD SAVINGS BANK, F.S.B.
This does not constitute an offer to sell or the solicitation of an offer
to buy any shares of Big Foot Financial Corp. Common Stock offered in connection
with the Conversion. Offers to sell and solicitations of offers to buy shares of
Big Foot Financial Corp. Common Stock in connection with the Conversion are made
only by means of the Prospectus. A Prospectus may be obtained by calling the
Stock Information Center at (847) 821-7444.
The shares of Common Stock offered in the Conversion are not savings
accounts or deposits and are not insured by the FDIC or any other government
agency.
<PAGE>
STOCK
QUESTIONS
&
ANSWERS
Big Foot Financial Corp.
[Logo]
<PAGE>
QUESTIONS AND ANSWERS
ABOUT INVESTING
You can be one of the charter shareholders of Big Foot Financial Corp. (the
"Company"), the proposed holding company of Fairfield Savings Bank, F.S.B. (the
"Bank"). The Company is "going public" as part of the Bank's conversion to a
federally chartered stock savings bank (the "Conversion"). Now you have the
opportunity to become an owner of your bank. This brochure answers some of the
most frequently asked questions about the conversion to stock ownership and
about your opportunity to invest in the Company.
Investment in common stock involves certain risks. For a discussion of these
risks and other factors, investors are urged to read the accompanying
Prospectus.
ABOUT THE TRANSACTION
What is a conversion?
The Bank presently operates as a federally chartered mutual savings bank. It has
no shareholders, and its directors are elected by our member savers and certain
borrowers. After the Conversion, we will be a federally chartered stock savings
bank owned by a holding company. This holding company, Big Foot Financial Corp.,
will be owned by shareholders who will have voting rights with respect to
certain key business matters. The Company is offering shares of its common stock
to the Bank's members and the Company's stock benefit plans, including an
employee stock ownership plan, which is being established in connection with the
Conversion. Any shares that remain unsold may then be offered to members of the
general public.
What is Big Foot Financial Corp. and why is it being formed?
The Company is a newly organized Illinois holding company created by the Bank
specifically to purchase 100% ownership of the Bank upon its conversion to stock
form. The holding company is offering shares of its Common Stock for sale to the
Bank's members and, if shares are available, to the general public. All of the
common stock to be issued by the Bank will be owned by the Company. The
additional capital provided through the offering of the Company's stock will
support future lending activities and local expansion of the financial services
currently offered through the Bank.
What are the benefits of conversion?
The Conversion and sale of stock will increase the Bank's capital and enable it
to:
o Enhance its ability to access capital markets;
o Expand its current operations;
o Acquire other financial institutions or branch offices;
o Provide affordable home financing opportunities to the communities it
serves; and
o Diversify into other financial services to the extent allowable by
applicable law.
Stock - 2
<PAGE>
Will the Conversion have any effect on my savings or loan accounts?
No. The Conversion will not affect the amount, interest rate or withdrawal
rights of your deposit accounts (unless you elect to purchase stock in the
Conversion and pay for your stock by authorizing a withdrawal from an account at
the Bank). Deposit accounts at the Bank will continue to be insured by the
Federal Deposit Insurance Corporation (the "FDIC") to the maximum legal limit.
Your deposit accounts are not being converted to stock. The rights and
obligations of borrowers under their loan agreements also will not be affected.
How do I benefit from the Conversion?
The Conversion is expected, among other things, to enable the Bank to provide
the customers and communities it serves with a higher level of service and
access to a broader variety of financial products and services. Also, while you
are not obligated to become a shareholder of the Company, you will have the
opportunity to purchase shares at the initial public offering price and at no
commission cost to you.
ABOUT INVESTING
Who may purchase stock?
The Company is currently conducting a Subscription Offering. All of the persons
listed below may subscribe to purchase common stock during the Subscription
Offering.
o Eligible Account Holders. Persons who had deposits totaling $50 or
more at the Bank on the Eligibility Record Date, December 31, 1994;
o Employee Stock Ownership Plan of the Company;
o Supplemental Eligible Account Holders. Persons who had deposits
totaling $50 or more at the Bank on the Supplemental Eligibility
Record Date, September 30, 1996, but not as of December 31, 1994 (and
not including directors, officers or their associates);
o Other Members. Depositors and certain borrowers (those whose loans
were outstanding on July 1, 1991) on the Voting Record Date, October
31, 1996, other than Other Members who would otherwise qualify as
Eligible Account Holders or Supplemental Eligible Account Holders; and
o Bank Employees. Employees and officers of the Bank, other than those
employees and officers who would otherwise qualify as Eligible Account
Holders, Supplemental Eligible Account Holders or Other Members.
The Company may also conduct a direct Community Offering after the Subscription
Offering, with a first preference given in the direct Community Offering to
natural persons residing in the counties in which the Bank has offices.
What is the price per share and how many shares are being offered?
The aggregate value of the Company's stock has been determined by Capital
Resources Group, Inc., an independent, nationally recognized appraisal firm. The
Subscription Price per share is $10.00. Up to 2,185,000 shares or, under certain
circumstances, up to 2,512,750 shares are being offered for sale.
Stock - 3
<PAGE>
Will everyone pay the same price for the stock?
Yes. All the subscribers, including the Board of Directors and management, pay
the same price during the Subscription Offering.
Are depositors obligated to buy stock?
No. But our members receive a priority subscription right to purchase the common
stock.
How much common stock may I purchase?
The minimum purchase is 25 shares, or $250. The maximum amount which an
individual (or individuals exercising subscription rights through a single
account at the Bank) may purchase in the Subscription Offering is $150,000. The
maximum that an individual may purchase in the Community Offering is also
$150,000. No individual, together with associates and persons acting in concert,
may purchase in the Offering more than 1% of the stock sold.
The Prospectus sections entitled "The Conversion--Subscription Offering and
Subscription Rights" and "--Community Offering" more fully describe the purchase
limits and the stock allocation procedures in case of oversubscription.
Is the stock insured by the FDIC?
No. Like any other common stock, the Company's stock will not be insured by the
FDIC or any other government agency. However, your deposit accounts will
continue to be insured up to the maximum amount allowed by the FDIC.
Are there risks associated with investing in the Common Stock?
Yes. As with any investment, there are certain risks inherent in the purchase of
the Company's common stock. For a discussion of certain factors that should be
considered by each prospective investor, see the section of the Prospectus
entitled "Risk Factors."
How do I order stock, and what methods can be used for payment of my stock
purchases?
Complete the stock order form and certification form as instructed. Make sure to
indicate the number of shares you wish to purchase and the total amount remitted
(multiply the number of shares subscribed for by $10.00 per share). Total
payment must accompany the order form and certification form and be received by
the Bank prior to 12:00 Noon, Central Time, on ____________, 1996. The payment
options for stock purchases are as follows:
o Check or money order sent or delivered to any of the Bank's offices or
the Stock Information Center. If payment is made by check or money
order, interest will be earned at the rate of interest paid by the
Bank on passbook accounts from the date of receipt until the
Conversion is completed or terminated.
o Withdrawal of funds from an existing account at the Bank in an amount
equal to the purchase price for all shares subscribed for. Once
authorization for withdrawal of funds has been made, the subscriber
may not withdraw the designated amount unless the Plan of Conversion
is terminated or as otherwise required by regulatory authorities. All
funds maintained in deposit accounts will continue to be insured by
the FDIC up to legally applicable limits and will earn interest until
closing of the Conversion. There will not be a penalty for early
withdrawal of certificate accounts for stock purchases in the
Subscription Offering.
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<PAGE>
o IRA purchases. If you wish to purchase shares of the Company's stock
for an IRA account, either at the Bank or elsewhere, we may be able to
accommodate you. Please contact the Stock Information Center at (847)
821-7444 so that we may assist you with the appropriate procedures for
such a purchase. Transfer of such funds takes time, so please make
arrangements as soon as possible.
In the future, how may I purchase more shares or sell my shares?
The Company has applied to have its common stock quoted on The Nasdaq National
Market under the symbol "BFFC." If the common stock is quoted on The Nasdaq
National Market, most brokers should be able to assist you with future purchases
and sales. However, the marketability of the common stock will depend upon the
presence in the marketplace of both willing buyers and willing sellers at a
given time, and no assurance can be given that an active trading market will
develop.
When will I receive my stock certificate(s)?
Stock certificates will be mailed by the Company's transfer agent as soon as
practicable after the Conversion is completed. Please be aware that you may not
be able to sell the shares that you purchased until you receive your
certificate(s).
Will there be any dividends?
The Board of Directors of the Company initially does not intend to pay a cash
dividend. Any future dividend policy will be determined by the Board of
Directors and will take into account various regulatory restrictions, earnings
and market conditions, among other factors.
May I change my mind?
The stock order form you execute cannot be canceled or withdrawn. However, you
may order additional shares by completing another stock order form.
Are my subscription rights transferable?
No. No person may transfer or enter into any agreement to transfer the
subscription rights issued under the Plan of Conversion, or the shares to be
issued upon their exercise. Persons violating such prohibition may lose their
right to purchase stock in the Conversion.
How may I get more information?
We hope that these questions and answers will help you to better understand the
Conversion and the stock offering. If you desire further information, please
contact our Stock Information Center at (847) 821-7444.
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<PAGE>
Big Foot Financial Corp.
[Logo]
STOCK INFORMATION CENTER
1190 RFD
Long Grove, Illinois 60047
This does not constitute an offer to sell or the solicitation of an offer to buy
any shares of Common Stock of the Company offered in connection with the
Conversion, nor does it constitute the solicitation of a proxy in connection
with the Conversion. Offers to sell and solicitations of offers to buy shares of
the Company Common Stock in connection with the Conversion are made only by
means of the Prospectus. Solicitations of proxies in connection with the
Conversion are made only by means of the Proxy Statement. There shall be no sale
of the Company Common Stock in any state or jurisdiction in which any offer,
solicitation of an offer or sale of the Company Common Stock would be unlawful
prior to the registration or qualification of such shares under the securities
laws of any such state or jurisdiction. A Prospectus and a Proxy Statement may
be obtained by calling the Bank's Stock Information Center at (847) 821-7444.
THE SHARES OF THE COMPANY'S COMMON STOCK OFFERED IN THE CONVERSION ARE NOT
SAVINGS ACCOUNTS OR DEPOSITS AND ARE NOT INSURED BY THE FEDERAL DEPOSIT
INSURANCE CORPORATION (FDIC) OR ANY OTHER GOVERNMENT AGENCY.
Stock - 6
<PAGE>
PROXY
QUESTIONS
&
ANSWERS
Fairfield Savings Bank, F.S.B.
[Logo]
<PAGE>
QUESTIONS AND ANSWERS
ABOUT VOTING
ABOUT THE TRANSACTION
What is a conversion?
Fairfield Savings Bank, F.S.B. (the "Bank") presently operates as a federally
chartered mutual savings bank. It has no shareholders and its directors are
elected by our member savers and certain borrowers. After the Conversion, we
will be a federally chartered stock savings bank owned by a holding company.
This holding company, Big Foot Financial Corp. (the "Company"), will be owned by
shareholders who will have voting rights with respect to certain key business
matters. The Company is offering shares of its common stock to the Bank's
members and the Company's employee stock benefit plans, including an employee
stock ownership plan, which is being established in connection with the
Conversion. Any shares that remain unsold may then be offered to members of the
general public.
What is the Company and why is it being formed?
The Company is a newly organized holding company created by the Bank
specifically to purchase 100% ownership of the Bank upon its conversion to stock
form. The Company is offering shares of its Common Stock for sale to the Bank's
members and, if shares are available, to the general public. All of the common
stock to be issued by the Bank will be owned by the Company. The additional
capital provided through the offering of the Company stock will support future
lending activities and local expansion of the financial services currently
offered through the Bank.
What are the benefits of conversion?
The Conversion and sale of stock will increase the Bank's capital and enable it
to:
o Enhance its ability to access capital markets:
o Expand its current operations;
o Acquire other financial institutions or branch offices;
o Provide affordable home financing opportunities to the communities it
serves; and
o Diversify into other financial services to the extent allowable by
applicable law.
Will the Conversion have any effect on my savings or loan account?
No. The Conversion will not affect the amount, interest rate or withdrawal
rights of your deposit account (unless you purchase stock in the Conversion and
pay for your stock by authorizing a withdrawal from an account at the Bank).
Deposit accounts at the Bank will continue to be insured by the Federal Deposit
Insurance Corporation (the "FDIC" ) to the maximum legal limit. Your deposit
accounts are not being converted to stock. The rights and obligations of
borrowers under their loan agreements also will not be affected.
How do I benefit from the Conversion?
The Conversion is expected, among other things, to enable the Bank to provide
the customers and communities it serves with a higher level of service and
access to a broader variety of financial products and services. Also, while you
are not obligated to become a shareholder of the Company, you will have the
opportunity to purchase shares at the initial public offering price and at no
commission cost to you.
Proxy - 1
<PAGE>
ABOUT MEMBERS' VOTING RIGHTS
Who is eligible to vote on the Plan of Conversion?
Depositors on the Voting Record Date, which is October 31, 1996, as well as
certain borrowers (those whose loans were outstanding on July 1, 1991) as of the
Voting Record Date, who will continue as such through the date of the Special
Meeting.
How was my number of votes determined?
Each deposit account holder is entitled to cast one vote for each $100, or
fraction thereof, of the aggregate withdrawal value of all such account holder's
savings accounts on the Voting Record Date. Each borrower member is entitled to
one vote as a borrower in addition to any votes he or she is entitled to as a
saver. The maximum number of votes per member is 1,000.
If I vote for the Plan of Conversion on the proxy will I be obligated to
purchase stock?
No. Signing the proxy card and voting for the Conversion in no way obligates you
to purchase stock. However, all members are urged to vote for the Conversion.
THE BOARD OF DIRECTORS HAS
UNANIMOUSLY APPROVED THE PLAN OF CONVERSION AND RECOMMENDS MEMBERS VOTE "FOR"
APPROVAL OF THE PLAN OF CONVERSION.
Am I required to vote?
No. However, failure to vote is the same as voting against the Conversion.
Therefore, all members are urged to vote for the Conversion.
May I come to the Special Meeting and vote?
Yes. However, we encourage you to send a proxy card even if you plan to attend
the meeting. The proxy card is revocable and can be changed by voting a later
dated proxy or ballot at the meeting.
Why did I receive several proxy cards?
If you have more than one account, you could receive more than one proxy card,
depending on the ownership structure of your accounts. PLEASE VOTE, SIGN AND
RETURN ALL PROXY CARDS!
Must both parties on a joint savings account sign the proxy card?
No. Only one signature is required, but both parties should sign if possible.
If I don't buy stock may I still vote at the Bank's annual meetings?
After Conversion, all of the outstanding capital stock of the Bank will be owned
and voted by the Company. Only shareholders of the Company will have voting
rights at the Company's annual meetings and as to certain business decisions
affecting the Company. However, the operations of the Bank and the general terms
and balances of your deposit accounts and loans remain unchanged.
Proxy - 2
<PAGE>
How may I get more information?
We hope that these questions and answers will help you to better understand the
Conversion. If you desire further information, please contact our Stock
Information Center at (847) 821-7444.
VOTE YES FOR CONVERSION
YOUR VOTE COUNTS!
The Board of Directors of the Bank has unanimously adopted a plan to convert the
Bank from a mutual savings bank to a stock savings bank. The Board of Directors
concluded that the Conversion would be in the best interests of the Bank, its
depositors, borrowers and the communities served by the Bank. As a member of the
Bank, you have the right to vote on the Bank's plan to convert to the stock form
of organization. Further details on the Conversion, including the background and
reasons for the Conversion, are contained in the Proxy Statement. Please read it
carefully.
HOW TO COMPLETE THE PROXY CARD
1. Check the appropriate box. Your Board of Directors unanimously recommends
voting "FOR" the Conversion.
2. Enter the date on the Proxy Card.
3. Sign the Proxy Card.
4. Return your completed Proxy Card in the postage-paid [color of envelope]
envelope provided, or bring it to the Bank office most convenient for you.
5. Please complete and return all Proxy Cards you receive.
Proxy - 3
<PAGE>
Fairfield Savings Bank, F.S.B.
[Logo]
STOCK INFORMATION CENTER
1190 RFD
Long Grove, Illinois 60047
This does not constitute an offer to sell or the solicitation of an offer to buy
any shares of Common Stock of Big Foot Financial Corp. offered in connection
with the Conversion, nor does it constitute the solicitation of a proxy in
connection with the Conversion. Offers to sell and solicitations of offers to
buy shares of Big Foot Financial Corp. Common Stock in connection with the
Conversion are made only by means of the Prospectus. Solicitations of proxies in
connection with the Conversion are made only by means of the Proxy Statement.
There shall be no sale of Big Foot Financial Corp. Common Stock in any state or
jurisdiction in which any offer, solicitation of an offer or sale of Big Foot
Financial Corp. Common Stock would be unlawful prior to the registration or
qualification of such shares under the securities laws of any such state or
jurisdiction. A Prospectus and a Proxy Statement may be obtained by calling the
Bank's Stock Information Center at (847) 821-7444.
THE SHARES OF BIG FOOT FINANCIAL CORP. COMMON STOCK OFFERED IN THE CONVERSION
ARE NOT SAVINGS ACCOUNTS OR DEPOSITS AND ARE NOT INSURED BY THE FEDERAL DEPOSIT
INSURANCE CORPORATION (FDIC) OR ANY OTHER GOVERNMENT AGENCY.
Proxy - 4
