<PAGE>
As filed with the Securities and Exchange Commission on February 3, 1997
Registration No.333-17227
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------------
AMENDMENT NO. 2 ON FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
VOLUME I
------------
VERMILION BANCORP, INC.
(Exact name of registrant as specified in its articles of incorporation)
------------
Delaware 6711 37-1363755
(State or other (Primary Standard (I.R.S. Employer
jurisdiction of Industrial Classification Identification No.)
incorporation or Code Number)
organization)
------------
714 North Vermilion Street
Danville, Illinois 61832
(217) 442-0270
(Address, including zip code, and telephone number, including area code,
of registrant's principal executive offices)
------------
Merrill G. Norton
President and Chief Executive Officer
Vermilion Bancorp, Inc.
714 North Vermilion Street
Danville, Illinois 61832
(217) 442-0270
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
Copy to:
John P. Soukenik, Esq.
Stephen M. Ege, Esq.
Elias, Matz, Tiernan & Herrick L.L.P.
734 15th Street, N.W.
12th Floor
Washington, D.C. 20005
---------------------
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. [ X ]
================================================================================
Title of each Amount Purchase
Class of Securities to be Price Aggregate Registration
to be Registered Registered Per Share Offering Price(1) Fee
- --------------------------------------------------------------------------------
Common Stock,
$.01 par value
per share 396,750 shares(2) $10.00 $3,967,500 $1,202.27
Interests of 336,000 shares(3) $ 336,000 $ --
participants in
the American
Savings Bank of
Danville 401(K)
Plan
================================================================================
(1) Estimated solely for the purpose of calculating the registration fee.
(2) Includes shares that may be issued in the event of a 15% increase in the
maximum size of the offering.
(3) The $336,000 of participations being registered is based on the assets
of the 401(K) Plan at _____________ __, 199_ which are available to
purchase Common Stock in the Offering. Pursuant to Rule 457(h)(2), no
additional fee is required with respect to the interests of the parti-
cipants in the 401(K) Plan.
The Registrant hereby amends this Registration Statement on such date as
may be necessary to delay its effective date until the Registrant shall file a
further amendment which specifically states that the 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 said section 8(a)
may determine.
================================================================================
<PAGE>
VERMILION BANCORP, INC.
Cross Reference Sheet Showing Location in the Prospectus of Information
Required by Items of Form S-1
Registration Statement Item and Caption Prospectus Headings
- ----------------------------------------------- ------------------------
1. Forepart of the Registration Statement and Front Cover Page
Outside Front Cover Page of Prospectus
2. Inside Front and Outside Back Cover Page of Inside Front and Outside
Prospectus Back Cover Pages
3. Summary Information, Risk Factors and Ratio Summary; Risk Factors
of Earnings to Fixed Charges
4. Use of Proceeds Use of Proceeds
5. Determination of Offering Price The Conversion -- Stock
Pricing and Number of
Shares to be Issued
6. Dilution Not applicable
7. Selling Security Holders Not applicable
8. Plan of Distribution Front Cover Page; The
Conversion -- Subscription
Offering; -- Community
Offering; -- Syndicated
Community Offering
9. Description of Securities to be Restrictions on
Registered Acquisition of the
Company and the Bank;
Description of
Capital Stock of the
Company; Description
of Capital Stock of
the Bank.
10. Interests of Named Experts and Not applicable
Counsel
<PAGE>
11. Information with Respect to the Front Cover Page;
Registrant Vermilion Bancorp,
Inc., American
Savings Bank;
Dividend Policy;
American Savings Bank
Statements of Operations;
Management's Discussion
and Analysis of Financial
Condition and Results
of Operations; Business
of the Bank; Regulation;
Management of the Company;
Management of the Bank;
The Conversion;
Description of Capital
Stock of the Company;
Financial Statements
12. Disclosure of Commission Position Not applicable
on Indemnification for Securities Act
Liabilities
<PAGE>
PROSPECTUS
VERMILION BANCORP, INC.
(Proposed Holding Company for American Savings Bank of Danville)
345,000 Shares of Common Stock (Anticipated Maximum)
$10.00 Per Share
Vermilion Bancorp, Inc. (the "Company"), a Delaware corporation, is
offering up to 345,000 shares of its common stock, par value $0.01 per share
(the "Common Stock"), in connection with the conversion of American Savings Bank
of Danville from an Illinois-chartered mutual savings bank to an
Illinois-chartered stock savings bank (in its mutual or stock form, as
applicable, "American" or the "Bank") pursuant to the Bank's plan of conversion
(the "Plan" or "Plan of Conversion"). Under certain circumstances, the Company
may increase the amount of Common Stock offered hereby to 396,750 shares. See
Note 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."
Nontransferable rights to subscribe for the Common Stock have been
granted, in descending order of priority, to (i) depositors of the Bank as of
July 31, 1995 ("Eligible Account Holders"), (ii) the Company's and the Bank's
Employee Stock Ownership Plan (the "ESOP"), (iii) depositors of the Bank as of
December 31, 1996 ("Supplemental Eligible Account Holders") and (iv) depositors
of the Bank as of February __, 1997 ("Other Voting Members"), all subject to the
limitations and restrictions described herein (the "Subscription Offering").
Subscription rights are not transferable. Subject to the other limitations
described herein, the Company also may offer the shares of Common Stock not
subscribed for in the Subscription Offering, if any, for sale in a community
offering ("Community Offering") and, if necessary, in a syndicated community
offering ("Syndicated Community Offering") (the Subscription Offering, Community
Offering and Syndicated Community Offering are referred to herein collectively
as the "Offerings"). All shares issued and sold in the Conversion will be sold
at the same price. Shares purchased by the ESOP will be financed from a loan
made to the ESOP by the Company, which loan will have a repayment term of [ten]
years and an interest rate of ___%.
For a discussion of certain factors that should be considered by each
prospective investor, see "Risk Factors" on page 18.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION, THE FEDERAL DEPOSIT INSURANCE CORPORATION ("FDIC") THE
OFFICE OF BANKS AND REAL ESTATE OF THE STATE OF ILLINOIS (THE
"COMMISSIONER"), OR ANY OTHER FEDERAL AGENCY OR STATE SECURITIES
COMMISSION, NOR HAS SUCH COMMISSION, OFFICE OR OTHER
AGENCY OR COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
The Subscription Offering will terminate at __________, Central Time, on
March __, 1997 (the "Subscription Expiration Date") unless extended by the Bank
and the Company, [with regulatory approval.] The Community Offering or any
Syndicated Community Offering must be completed within 45 days after the close
of the Subscription Offering, or _________ __, 1997, unless extended by the Bank
and the Company [with regulatory approval.] No single extension can exceed [90]
days. Orders submitted are irrevocable until the completion of the Conversion;
provided that, if the Conversion is not completed within the 45-day period
referred to above, unless such period has been extended, all subscribers will
have their funds returned promptly with interest, and all withdrawal
authorizations will be cancelled. Any extension of the Offerings will be
conducted in accordance with the terms described herein. See "The Conversion -
Subscription Offering and Subscription Rights." The Plan sets forth various
purchase limitations which are applicable in the Offering. See "The Conversion -
Subscription Offering and Subscription Rights," "-Community Offering" and "-
Limitations on Common Stock Purchases."
<PAGE>
THE SHARES OF COMMON STOCK OFFERED HEREBY ARE NOT SAVINGS ACCOUNTS OR
DEPOSITS AND ARE NOT INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY
OTHER GOVERNMENT AGENCY. THESE SECURITIES ARE NOT GUARANTEED BY THE COMPANY OR
THE BANK OR ANY OTHER ENTITY AND NO REPRESENTATION AS TO THE FUTURE VALUE OF THE
SHARES IS MADE.
The Company intends to apply to have the Common Stock listed on the
National Daily Quotation Service "pink sheets" published by the National
Quotation Bureau, Inc. Prior to the Offerings, there has not been a public
market for the Common Stock. Moreover, because of the limited size of the
Offerings and the anticipated concentrated ownership of the Common Stock, it is
unlikely that an active and liquid trading market for the Common Stock will
develop and there can be no assurance that the Common Stock will trade at or
above the purchase price in the Offerings. See "Risk Factors - Absence of Market
For Common Stock."
For additional information on how to subscribe for Common Stock, please
call the stock conversion center at (217) ________.
<TABLE>
<CAPTION>
===============================================================================================
Estimated Fees and Other
Expenses, Including Estimated
Subscription Underwriting Net
Price(1) Commissions(2) Proceeds(3)
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Minimum Per Share $10.00 $1.04 $8.96
- -----------------------------------------------------------------------------------------------
Midpoint Per Share $10.00 $0.90 $9.10
- -----------------------------------------------------------------------------------------------
Maximum Per Share $10.00 $0.81 $9.19
- -----------------------------------------------------------------------------------------------
Maximum, as adjusted, Per Share $10.00 $0.72 $9.28
- -----------------------------------------------------------------------------------------------
Total Minimum(1) $2,550,000 $264,000 $2,286,000
- -----------------------------------------------------------------------------------------------
Total Midpoint(1) $3,000,000 $271,000 $2,729,000
- -----------------------------------------------------------------------------------------------
Total Maximum(1) $3,450,000 $278,000 $3,172,000
- -----------------------------------------------------------------------------------------------
Total Maximum, as adjusted(4) $3,967,500 $287,000 $3,680,500
===============================================================================================
</TABLE>
- ----------
(1) Determined in accordance with an independent appraisal prepared by RP
Financial, LC. ("RP Financial"), dated November 15, 1996, which states
that the estimated pro forma market value of the Common Stock ranged from
$2,550,000 to $3,450,000 (the "Estimated Price Range"), or between 255,000
and 345,000 shares of Common Stock at a fixed price of $10.00 per share
("Purchase Price"). Upon conclusion of the Offerings, RP Financial will
issue an updated appraisal which will determine the final valuation of the
Common Stock and the number of shares to be issued. In the event the
aggregate Purchase Price of the shares of Common Stock is below the
minimum of the Estimated Price Range or more than 15% above the maximum of
such range, purchasers may be resolicited subject to approval of any
change in the Estimated Price Range by the Commissioner and, if required,
the FDIC. 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 expected fixed expenses of $234,000 and fees to
be paid to Trident Securities, Inc. ("Trident" or the "Agent") in
connection with the Subscription and Community Offerings. Trident is not
obligated to purchase any shares of Common Stock in the Offerings. Such
fees paid to the Agent may be deemed to be underwriting fees. See "The
Conversion - Marketing Arrangements." The actual fees and expenses may
vary from the estimates. See "Pro Forma Data."
(3) Actual net proceeds may vary substantially from estimated amounts
depending on the number of shares sold in the Offerings and other factors.
Includes the purchase of shares of Common Stock by the ESOP, which will be
funded by a loan from the Company to the ESOP and, which initially will be
deducted from the Company's stockholders' equity. For the effects of such
purchase, see "Capitalization" and "Pro Forma Data."
(4) Gives effect to a 15% increase in the Estimated Price Range. See "The
Conversion - Stock Pricing and Number of Shares to be Issued" and "-
Limitations on Common Stock Purchases."
-------------------------------------
TRIDENT SECURITIES, INC.
-------------------------------------
The date of this Prospectus is February __, 1997
<PAGE>
[MAP]
<PAGE>
SUMMARY OVERVIEW
The following is a summary of certain information contained in the
Prospectus and is qualified in its entirety by the more detailed information and
Consolidated Financial Statements and related Notes appearing elsewhere herein.
The Bank: American Savings Bank of Danville is an
Illinois-chartered mutual savings bank.
The Company: Vermilion Bancorp, Inc. is a Delaware
corporation and a proposed one-bank
holding company.
Plan of Conversion: Pursuant to the Plan of Conversion, the
Bank will convert to an
Illinois-chartered stock form savings
bank and become a subsidiary of the
Company. See "The Conversion."
The Offerings: The Company is offering a minimum of
255,000 shares and a maximum of 345,000
shares of Common Stock. The maximum
number of shares sold in the Offerings
may be increased to up to 396,750
shares without a resolicitation of
subscribers. The Subscription Offering
is expected to terminate at __________,
Central Time, on March __, 1997. See
"The Conversion - Subscription Offering
and Subscription Rights." The Community
Offering or any Syndicated Community
Offering may be commenced at any time
during the Subscription Offering and,
if commenced, must be completed within
45 days after the close of the
Subscription Offering, or ________ __,
1997, unless extended by the Bank and
the Company with regulatory approval.
Purchase Price: The shares of Common Stock are being
offered at a purchase price of $10.00
per share.
Plan of Distribution: Subject to the limitations and
restrictions described herein, shares
of Common Stock are being offered in
the Subscription Offering in descending
order of priority to (i) Eligible
Account Holders; (ii) the ESOP; (iii)
Supplemental Eligible Account Holders;
and (iv) Other Voting Members. The
Company also may offer shares of Common
Stock not subscribed for in the
Subscription Offering, if any, for sale
in a Community Offering and, if
necessary, in the Syndicated Community
Offering.
Purchase Limitations: The Plan sets forth various purchase
limitations. Generally, each Eligible
Account Holder, Supplemental Eligible
Account Holder or Other Voting Member
(or persons exercising Subscription
Rights through a single account) may
purchase up
-4-
<PAGE>
to $50,000 of Common Stock in the
Subscription Offering, provided,
however, that no person, together with
associates or persons acting in concert
with such person, may purchase in the
aggregate more than $150,000 of the
Common Stock. The minimum purchase is
25 shares. See "The Conversion
Subscription Offering and Subscription
Rights," "- Community Offering" and "-
Limitations on Common Stock Purchases."
Independent Valuation: The shares of Common Stock to be issued
in the Offering will be issued at an
aggregate Purchase Price which is
determined in accordance with an
independent appraisal prepared by RP
Financial. See "The Conversion - Stock
Pricing and Number of Shares to be
Issued."
Use of Proceeds: The Company will purchase capital stock
of the Bank in exchange for 75% of the
net proceeds. The Company intends to
use a portion of the net proceeds
retained by it to make a loan directly
to the ESOP to enable the ESOP to
purchase Common Stock. The remaining
net proceeds retained by the Company
will initially be invested primarily in
short-term deposits and investment
grade, short- to intermediate-term
marketable securities. Funds received
by the Bank from the Company's purchase
of its capital stock will be used for
general business purposes. See "Use of
Proceeds."
Market for Common Stock: Upon completion of the Offerings, the
Company intends to apply to have the
Common Stock listed on the National
Daily Quotation Service "pink sheets"
published by the National Quotation
Bureau, Inc. See "Market for the Common
Stock."
Benefits of Conversion to Management: The Company's directors and executive
officers will receive certain
additional benefits as a result of the
Conversion. See "Management -
Employment Agreements," "- Benefits -
Employee Stock Ownership Plan and
Trust," "- Stock Option Plan" and "-
Recognition and Retention Plan."
Risk Factors: See "Risk Factors" for a discussion of
certain factors that should be
considered by prospective investors.
Board of Directors' The Board of Directors unanimously
Recommendation: recommends that depositors entitled to
vote on the Plan vote "FOR" the Plan.
The Board makes no recommendations
regarding the suitability of an
investment in the Common Stock.
-5-
<PAGE>
SELECTED CONSOLIDATED FINANCIAL INFORMATION
The following selected consolidated financial and other data of the Bank
does not purport to be complete and should be read in conjunction with, and is
qualified in its entirety by, the more detailed financial information, including
the Consolidated Financial Statements of the Bank and Notes thereto, contained
elsewhere herein.
<TABLE>
<CAPTION>
At September 30,
-------------------------------------------
1996 1995 1994 1993 1992
------- ------ ------ ------ -------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Selected Financial Condition Data:
Total assets ................................... $35,459 $33,977 $33,198 $33,591 $33,904
Cash and cash equivalents ...................... 789 571 699 1,288 2,234
Interest-bearing time deposits ................. 99 99 694 1,181 2,168
Securities:(1)
Available for sale ........................... 2,222 1,486
Held to maturity ............................. 861 2,556 4,354 7,183 8,911
Mortgage-backed securities held to maturity .... 3,476 4,260 4,851 5,899 3,668
Loans, net ..................................... 26,936 23,954 21,627 18,235 18,056
Premises and equipment ......................... 467 495 468 483 500
Federal Home Loan Bank of Chicago stock,
at cost ...................................... 269 255 236 236 230
Deposits ....................................... 30,724 31,331 30,698 31,158 31,640
Federal Home Loan Bank advances ................ 2,000 -- -- -- --
Total equity capital ........................... 2,355 2,442 2,341 2,185 2,012
Full Service offices ........................... 1 1 1 1 1
<CAPTION>
Year Ended September 30,
-------------------------------------------
1996 1995 1994 1993 1992
------- ------ ------ ------ -------
(In Thousands)
<S> <C> <C> <C> <C> <C>
Selected Operating Data:
Total interest income .......................... $ 2,634 $ 2,375 $ 2,279 $ 2,390 $ 2,724
Total interest expense ......................... 1,778 1,588 1,355 1,521 1,999
------- ------- ------- ------- -------
Net interest income .......................... 856 787 924 869 725
Provision for losses on loans .................. 80 13 105 8 49
------- ------- ------- ------- -------
Net interest income after provision
for losses on loans .......................... 776 774 819 861 676
Non-interest income ............................ 45 51 49 82 99
Non-interest expenses .......................... 889(2) 710 700 763 677
------- ------- ------- ------- -------
Income (loss) before taxes ..................... (68) 115 168 180 98
Provision for income taxes ..................... 3 15 13 59 21
------- ------- ------- ------- -------
Net income (loss) .............................. $ (71) $ 100 $ 155 $ 121 $ 77
======= ======= ======= ======= =======
</TABLE>
- ----------
(1) The Bank adopted the provisions set forth in SFAS No. 115 on October 1,
1994, which requires entities to carry securities that are available for
sale at their market value while continuing to carry securities that are
held to maturity at their amortized cost. See Note 1 to the Consolidated
Financial Statements.
(2) Includes a special assessment of $206,000 to recapitalize the SAIF.
-6-
<PAGE>
<TABLE>
<CAPTION>
At or For the Year Ended September 30,
---------------------------------------------------
1996 1995 1994 1993 1992
-------- -------- -------- -------- -------
<S> <C> <C> <C> <C> <C>
Other Data:
Profitability:
Return on average assets ..................... (0.20)%(5) 0.29% 0.46% 0.36% 0.23%
Return on average equity ..................... (2.89)(5) 4.18 6.86 5.78 3.95
Interest rate spread for period(1) ........... 2.17 2.11 2.59 2.42 1.91
Net interest margin(2) ....................... 2.48 2.39 2.83 2.64 2.16
Non-interest expenses to average assets ...... 2.49 2.08 2.13 2.26 2.00
Average interest-earning assets to
average interest-bearing liabilities ....... 106.05 104.04 104.78 104.81 104.12
Capital Ratios:
Average equity to average assets ............. 6.90 7.02 6.76 6.22 5.79
Total risk-based capital to risk-
weighted assets .......................... 15.33 15.03 16.44 17.14 15.44
Tier 1 risk based capital to risk-weighted
assets .................................. 14.45 14.59 15.98 16.32 14.73
Asset Quality:
Non-performing assets to total
assets(4) .................................. 0.93 0.64 0.26 1.64 0.54
Net chargeoffs (recoveries) to average loans . 0.04 0.03 0.76 (0.01) 0.07
Allowance for loan losses to total
loans ...................................... 0.53 0.31 0.29 0.60 0.55
Allowance for loan losses to non-
performing loans ........................... 43.60 34.26 73.26 19.78 54.40
</TABLE>
- ----------
(1) The interest rate spread represents the difference between the average
yield on interest-earning assets and the average rate paid on
interest-bearing liabilities.
(2) The net interest margin represents net interest income divided by average
interest-earning assets.
(3) The efficiency ratio is non-interest expense divided by the sum of net
interest income plus non-interest income.
(4) Non-performing assets include non-accrual loans, accruing loans delinquent
90 days or more and real estate owned.
(5) When calculated without the special SAIF assessment, the return on average
assets and the return on average equity would have been 0.24% and 3.01%,
respectively.
-7-
<PAGE>
RECENT DEVELOPMENTS
The following table sets forth certain summary historical financial
information concerning the financial position of the Bank for the periods and at
the dates indicated. The financial data is derived in part from, and should be
read in conjunction with, the Consolidated Financial Statements and Notes
thereto presented elsewhere in this Prospectus. The results of operations and
ratios and other data at or for the three months ended December 31, 1996 and
1995 are derived from unaudited financial statements. and reflect, in the
opinion of management, all adjustments (consisting only of normal recurring
adjustments) which are necessary to present fairly the results for such
periods.
At December 31,
------------------
1996(1) 1995(1)
------- -------
(In thousands)
(Unaudited)
Selected Financial Condition Data:
Total assets ......................................... $36,044 $35,501
Cash and cash equivalents ............................ 1,278 1,968
Interest-bearing time deposits ....................... 99 99
Securities:
Available for sale ................................. 2,117 2,649
Held to maturity ................................... 361 931
Mortgage-backed securities held to maturity .......... 3,349 4,042
Loans, net ........................................... 27,678 24,825
Premises and equipment ............................... 464 491
Federal Home Loan Bank of Chicago stock, at cost ..... 269 255
Deposits ............................................. 31,494 30,882
Federal Home Loan Bank advances ...................... 2,000 2,000
Total equity capital ................................. 2,391 2,450
Full Service offices ................................. 1 1
For the Three Months Ended
December 31,
--------------------------
1996(1) 1995(1)
----------- -----------
(In thousands)
(Unaudited)
Selected Operating Data:
Total interest income ................................ $674 $642
Total interest expense ............................... 452 444
---- ----
Net interest income ................................ 222 198
Provision for losses on loans ........................ -- --
---- ----
Net interest income after provision for
losses on loans .................................... 222 198
Non-interest income .................................. 6 10
Non-interest expenses ................................ 185 194
---- ----
Income before taxes .................................. 43 14
Provision for income taxes ........................... 6 2
---- ----
Net income ........................................... $37 $12
---- ----
---- ----
-8-
<PAGE>
At or For the
Three Months Ended
December 31,
--------------------------
1996(1) 1995(1)
----------- -----------
Other Data:(2)
Profitability:
Return on average assets ........................... 0.43% 0.14%
Return on average equity ........................... 6.40 1.98
Interest rate spread for period (3) ................ 2.33 2.11
Net interest margin(4) ............................. 2.57 2.36
Non-interest expenses to average assets ............ 2.07 2.23
Average interest-earning assets to average
interest-bearing liabilities ...................... 104.58 104.68
Capital Ratios:
Average equity to average assets ................... 6.64 7.04
Total risk-based capital to risk-weighted assets ... 14.07 15.05
Tier one capital to risk-weighted assets ........... 13.31 14.61
Asset Quality:
Non-performing assets to total assets(5) ........... 0.97 1.23
Net chargeoffs (recoveries) to average loans ...... 0.09 (0.02)
Allowances for loan losses to total loans .......... 0.49 0.30
Allowance for loan losses to non-performing loans .. 39.28 17.25
- ----------
(1) The data presented for the three months ended December 31, 1996 and 1995
were derived from unaudited consolidated financial statements and reflect,
in the opinion of management, all adjustments necessary to present fairly
the results for such interim periods. Interim results at and for the three
months ended December 31, 1996 are not necessarily indicative of the
results that may be expected for the year ending September 30, 1997.
(2) Asset Quality Ratios and Capital Ratios are end of period ratios. With the
exception of end of period ratios, all ratios are based on average monthly
balances during the indicated periods and are annualized where
appropriate.
(3) The interest rate spread represents the difference between the average
yield on interst-earning assets and the average rate paid on
interest-bearing liabilities.
(4) The net interest margin represents net interest income divded by average
interest-earning assets.
(5) Non-performing assets include non-accrual loans, accruing loans delinquent
90 days or more and real estate owned.
-9-
<PAGE>
Changes in Financial Condition
General. Total assets of the Bank increased by $500,000 or 1.41%, to $36.0
million at December 31, 1996, from $35.5 million at December 31, 1995. The
increase in total assets was due primarily to a $2.9 million increase in loans
which was partially offset by a $690,000 decrease in cash and cash equivalents
and $1.8 million decrease in investment and mortgage-backed securities.
Cash and Cash Equivalents. Cash and cash equivalents, which consist of
interest-bearing demand deposits at other institutions, decreased by $690,000 or
35.1% to $1,278,000 at December 31, 1996 compared to $1,968,000 at December 31,
1995. The decrease in cash and cash equivalents is the result of its use to fund
deposit withdrawals, as a source of funds for new loan originations and for the
purchase of investment or mortgage-backed securities.
Loans. The Bank's loans, net amounted to $27.7 million at December 31,
1996, a $2.9 million or 11.7%, increase over loans, net, at December 31, 1995.
Such increase was due primarily to new originations of residential mortgage
loans and increased originations of consumer loans.
Investment Securities. The Bank's investment securities amount to $5.8
million at December 31, 1996 compared to $7.6 million at December 31, 1996. The
decrease in investment securities was due to maturities and repayments of
investment securities, the proceeds of which were used to fund growth in the
Bank's loan portfolio.
Deposits. The Bank's total deposits amounted to $31.5 million at December
31, 1996 compared to $30.9 million at December 31, 1995.
Federal Home Loan Bank Advances. The Bank's total advances from the FHLB
of Chicago amounted to $2.0 million at December 31, 1996 and at December 31,
1995. The proceeds from these advances were used to fund growth in the Bank's
loan portfolio.
Results of Operations
The Bank reported a net income of $38,000 during the quarter ended
December 31, 1996 and net income of $12,000 during the quarter ended December
31, 1995.
Net Interest Income. Net interest income increased by $25,000, or 12.63%
during the quarter ended December 31, 1996.
Interest income was $674,000 for the quarter ended December 31, 1996
compared to $642,000 for the quarter ended December 31, 1995. The 4.98% increase
in interest income was attributable to a $1.0 million or 3.02% increase in
average earning assets from the quarter ended December 31, 1995 to the same
quarter ended 1996 coupled with a 15 basis point (with 100 basis points being
equal to 1.0%) increase in the yield earned on average earning assets when
comparing the quarter ended December 31, 1995 to the same quarter ended in 1996.
Interest Expense. The primary component of interest expense for both
periods is interest on deposits. Total interest expense increased by $8,000, or
1.80%, during the quarter ended December 31, 1996 compared to the quarter ended
December 31, 1995. The increase was due entirely to a $30,000 interest expense
on FHLB advances outstanding during the quarter ended December 31, 1996 compared
to a $18,000 interest expense in FHLB advances during the quarter ended December
31, 1995. This increase was somewhat offset by a $4,000 decrease in interest
expense on deposits in the quarter ended December 31, 1996 compared to the
quarter ended December 31, 1995.
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Provisions for Losses on Loans. Management reviewed the Bank's loan
portfolio at the end of each quarter and determined that the Bank's allowance
for loan losses was adequate. Accordingly, the Bank made no provisions for
loan losses in either the quarter ended December 31, 1996, or the quarter
ended December 31, 1995. At December 31, 1996, the Bank's allowance for loan
losses amounted to 39.28% of total non-performing loans and 0.49% of gross
loans receivable.
Non-interest Income. Non-interest income decreased $4,000 for the quarter
ended December 31, 1996 compared to the quarter ended December 31, 1995.
Non-interest Expenses. Total non-interest expenses were $185,000 in the
quarter ended December 31, 1996 which amounted to a $9,000, or 4.64% decrease
compared to the quarter ended December 31, 1995. The primary reason for the
decrease was a decline in deposit insurance expense from $18,000 for the quarter
ended December 31, 1995 to no such expense for the quarter ended December 31,
1996. This decline is the result of a change in the rate charged by the FDIC to
insure deposits that went into effect on September 30, 1996. The decline in
deposit insurance expense was somewhat offset by a general increase in other
non-interest expense items. Future non-interest expense may be effected by
litigation and compensation expenses. See "Risk Factors - Pending Litigation
Against Bank" and - "ESOP and Recognition Plan Expense."
Income Taxes. The Bank's income tax expense for the quarter ended December
31, 1996 was $6,000 for an effective tax rate of 13.64% compared to income tax
expense of $2,000 which represented an effective tax rate of 14.17% in the
quarter ended December 31, 1995.
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SUMMARY
This summary is qualified in its entirety by the more detailed information
and the Consolidated Financial Statements of the Bank and Notes thereto
appearing elsewhere in this Prospectus.
Vermilion Bancorp, Inc.: The Company is a Delaware corporation organized
for the purpose of becoming the holding company
for the Bank. Immediately following the
Conversion, the only significant assets of the
Company will be the capital stock of the Bank and
the net Conversion proceeds retained by the
Company. See "Business of the Bank" and
"Regulation - The Company."
American Savings Bank of The Bank is an Illinois-chartered mutual savings
Danville: bank headquartered in Danville, Illinois. At
September 30, 1996, the Bank had $35.5 million of
total assets, $30.7 million of total deposits and
$2.4 million of equity. The Bank reported a net
loss of $71,000 during the year ended September
30, 1996, due to a $155,000, net of tax, increase
in deposit insurance expense resulting from a
special one-time assessment to recapitalize the
Savings Association Insurance Fund ("SAIF"). The
Bank reported net income of $100,000 and $155,000
during the years ended September 30, 1995 and
1994, respectively. At September 30, 1996, the
Bank exceeded all regulatory capital
requirements.
Operating characteristics of the Bank in recent
years include the following:
Profitability. For the years ended September 30,
1996 and 1995, the Bank had net income (loss) of
($71,000) and $100,000, respectively. However, if
the non-interest expense of $206,000 associated
with the special SAIF assessment is excluded, the
Bank's net income for fiscal 1996 would have been
$84,000. The Bank's net income is primarily
dependent on its net interest income, the
difference between interest income on
interest-earning assets and interest expense
noninterest- bearing liabilities. Net interest
income after provision for loan losses totalled
$776,000 and $774,000 for the years ended
September 30, 1996 and 1995, respectively. The
interest rate spreads for the years ended
September 30, 1996 and 1995 were 2.17% and 2.11%,
respectively. The Bank's return on assets has
been relatively stable during the periods
presented, amounting on an annualized basis to
(0.20)% (0.24% excluding the affect of the
special SAIF assessment) and 0.29% for the years
ended September 30, 1996 and 1995, respectively.
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<PAGE>
Noninterest Expense. The Bank's profitability has
been enhanced by management's emphasis on
operating efficiency. The Bank's ratio of
noninterest expense (excluding the special SAIF
assessment) to average the total assets amounted
to 1.92% for the year ended September 30, 1996
and averaged 2.10% for the two years ended
September 30, 1996.
Asset Quality. Management of the Bank believes
that good asset quality is the key to long-term
financial strength and, as a result, the Bank's
loan portfolio is intended to maintain asset
quality and control credit risk. In accordance
with this approach, the Bank has predominantly
emphasized single-family residential real estate
loans, which comprised 79.1% of total loans, net
at September 30, 1996. As of such date, total
non-performing assets constituted $328,000 or
0.93% of total assets.
Strong Capital Position. At September 30, 1996,
the Bank had total retained earnings of $2.4
million and exceeded all of its regulatory
capital requirements, with tier I leverage
capital, tier I risk-based capital and total
risk-based capital ratios of 6.69%, 14.45% and
15.33%, respectively, as compared to the minimum
requirements of 4.0%, 4.0% and 8.0%,
respectively. Assuming that 345,000 shares of
Common Stock are sold in the Offerings and that
the Company retains 25% of the net proceeds after
reduction to reflect the Company's funding
obligations under the ESOP, the Bank's pro forma
tier I leverage, tier I risk-based and total
risk-based capital ratios at September 30, 1996
would be 7.50%, 20.74% and 17.56%, respectively.
See "Regulatory Capital Requirements."
Interest Rate Risk. The Bank's management
measures interest rate risk using gap and net
portfolio value analyses. As of September 30,
1996, the Bank's interest-earning assets less
interest-bearing liabilities maturing or
repricing within one year as a percentage of
total interest-earning assets was a negative
29.41%. At September 30, 1996, the Bank had a
three-year cumulative negative gap of 37.14%. As
a result, a significant increase in market
interest rates would affect the Bank's results of
operations adversely. As of September 30, 1996,
$2.8 million of the Bank's $27.1 million in loans
outstanding were to mature or reprice within one
year or less. See "Risk Factors -- Potential
Effects of Changes in Interest Rates" and
"Management's Discussion and Analysis of
Financial Condition and Operating Results --
Asset and Liability Management".
Community Orientation. The Bank historically has
been committed to meeting the financial needs of
its community. Management believes the Bank can
provide a range of personal and business
financial services, and yet at the same time
provide such services on a personalized and
efficient basis.
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<PAGE>
The Bank's deposits are insured by the SAIF,
which is administered by the FDIC, to the maximum
extent permitted by law. The Bank is subject to
examination and comprehensive regulation by the
Commissioner. The Commissioner is the Bank's
chartering authority and primary regulator. In
addition, the Bank is subject to examination and
regulation by the FDIC. The Bank is a member of
the Federal Home Loan Bank ("FHLB") of Chicago.
Dividends and Return Subject to regulatory and other considerations,
of Excess Capital: the Company intends to establish an annual cash
dividend policy following the Conversion.
Although the Board of Directors of the Company
has not made any decision as to the amount of
cash dividends it will pay, it anticipates that
the first dividend will be paid during the first
quarter of fiscal 1998. However, declarations of
dividends by the Board of Directors will depend
upon a number of factors, including 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 and general economic
conditions. No assurance can be given that
dividends will in fact be paid on the Common
Stock or that, if paid, such dividends will not
be reduced or eliminated in future periods. See
"Dividend Policy and Return of Excess of
Capital." As required by the FDIC as a condition
of its nonobjection to the Conversion, the
Company has agreed not to return any excess
capital to its stockholders (which does not
include dividends) for a period of one year from
the consummation of the Conversion.
The Conversion and the The Board of Directors of the Bank has
Subscription and unanimously adopted the Plan of Conversion,
Community Offerings: pursuant to which the Bank is converting from an
Illinois-chartered mutual savings bank to an
Illinois-chartered stock savings bank, all the
common stock of which will be acquired by the
Company in exchange for 75% of the net Conversion
proceeds. The Commissioner has approved the Plan
of Conversion and the FDIC has issued its
conditional non-objection thereto, in each case
subject to approval of the Bank's members at a
special meeting ("Special Meeting") to be called
for this purpose on March __, 1997. See "The
Conversion - General." In addition, the Company
has applied to the Board of Governors of the
Federal Reserve System ("Federal Reserve Board"
or "FRB") to become a bank holding company. The
Conversion will enhance the Bank's ability to
access the capital markets, its ability to engage
in acquisitions, facilitate the Bank's
traditional business as a thrift lender and
enhance its ability to increase originations of
commercial business loans and consumer loans. See
"The Conversion - Purposes of Conversion."
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<PAGE>
No Recommendation by The Board of Directors of the Bank is not making
Bank's Board of Directors: any recommendation in connection with the
purchase of the shares of Common Stock offered
hereby. Any decision made with respect to an
investment in the Common Stock should be made
only after a careful review of this Prospectus.
Common Stock is first being offered in the
Subscription Offering with nontransferable
subscription rights being granted, in the
following order of priority, to: (i) depositors
of the Bank with account balances of $50.00 or
more as of July 31, 1995 (Eligible Account
Holders); (ii) the ESOP; (iii) depositors of the
Bank with account balances of $50.00 or more as
of December 31, 1996 (Supplemental Eligible
Account Holders); and (iv) depositors of the Bank
as of March __, 1997 (Other Voting Members).
Subscription rights will expire if not exercised
by __________, Central Time, on March __, 1997,
unless extended. Subject to the prior rights of
holders of subscription rights, Common Stock not
subscribed for in the Subscription Offering also
may be offered in a Community Offering. The
Community Offering may be commenced at any time
during the Subscription Offering or subsequent
thereto. It is anticipated that any shares not
subscribed for in the Subscription and Community
Offerings will be offered in a Syndicated
Community Offering. The Company reserves the
absolute right to reject or accept any orders in
the Community Offering or the Syndicated
Community Offering, in whole or in part. See "The
Conversion - Subscription Offering and
Subscription Rights" and "- Community Offering."
The Bank has engaged Trident as a financial
advisor and marketing agent, and Trident has
agreed to use its best efforts to solicit
subscriptions and purchase orders for Common
Stock in the Offerings.
Restrictions on Transfer Prior to the completion of the Conversion, no
of Subscription Rights person may transfer or enter into any agreement
and Shares: 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 a purchase of Common
Stock is solely for the purchaser's own account
and that there is no agreement or understanding
regarding the sale or transfer of such shares.
The Company and the Bank will pursue any and all
legal and equitable remedies in the event 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."
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<PAGE>
Purchase Limitations: The minimum purchase is 25 shares. In general,
with the exception of the ESOP, each Eligible
Account Holder, Supplemental Eligible Account
Holder or Other Voting Member (or persons
exercising Subscription Rights through a single
account) may purchase in his capacity as such in
the Subscription Offering up to $50,000 of Common
Stock, and no person, together with associates of
and persons acting in concert with such person,
may purchase in the Conversion, in the aggregate,
more than $150,000 of Common Stock. 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 purchase
limitation may be increased to up to a maximum of
5% of the shares sold in the Offerings at the
sole discretion of the Company and the Bank. See
"The Conversion - Limitations on Common Stock
Purchases." In the event of an oversubscription,
shares will be allocated in accordance with the
Plan. See "The Conversion - Subscription Offering
and Subscription Rights" and "- Community
Offering."
Stock Pricing and The aggregate purchase price of the Common Stock
Number of Shares to be to be issued in the Conversion is required to be
Issued in the Conversion: consistent with an independent appraisal of the
estimated pro forma market value of the Common
Stock following Conversion. RP Financial, an
independent appraiser, has advised the Bank that
in its opinion, dated as of November 15, 1996,
the Estimated Price Range ranged from $2,550,000
to $3,450,000 with a midpoint of $3,000,000. This
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
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 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 255,000
shares to a maximum of 345,000 shares. To the
extent that the number of shares of Common Stock
issued in the Offerings exceeds the minimum
number of shares, pro forma stockholders' equity
per share will be reduced. See "Pro Forma Data."
Subject to approval of the Commissioner and the
FDIC, 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
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<PAGE>
Stock to be issued in the Conversion. 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," and "The Conversion - Stock
Pricing and Number of Shares to be Issued."
Benefits of Conversion to General. In connection with the Conversion, the
Management: Company's directors and executive officers as a
group (including purchases by any associates of
or groups acting in concert with such persons and
purchases by such directors and executive
officers through the Bank's 401(k) profit sharing
plan ("401(k) Plan")) (5 persons) have indicated
that they intend to purchase 65,000 shares of
Common Stock, or 18.8% of the Common Stock at the
maximum of the Estimated Price Range.
The ESOP. The ESOP intends to purchase an
aggregate of 8.0% of the shares of Common Stock
offered in the Conversion ($204,000 and $276,000
of Common Stock, respectively, based on the
issuance of the minimum of 255,000 shares and the
maximum of 345,000 shares or $317,400 based on
the issuance of 396,750 shares, at 15% above the
maximum of the Estimated Price Range). For
additional information, see "Management -
Benefits - Employee Stock Ownership Plan and
Trust."
Employment Agreement. An employment agreement
with the Bank's chief executive officer provides
for benefits and cash payments in the event of a
change in control of the Company or the Bank.
These provisions may have the effect of
increasing the cost of acquiring the Company,
thereby discouraging future attempts to acquire
the Company or the Bank. See "Management -
Employment Agreement."
Stock Option Plan. Following consummation of the
Conversion, the Company intends to submit for
stockholder consideration a stock option plan for
the benefit of the directors, officers and key
employees of the Company and the Bank (the "Stock
Option Plan"), pursuant to which the Company
intends to reserve a number of authorized but
unissued shares of Common Stock equal to an
aggregate of 10% of the Common Stock issued in
the Conversion (34,500 shares at the maximum of
the Estimated Price Range, 39,675 shares at 15%
above the maximum of the Estimated Price Range)
for issuance pursuant to stock options and stock
appreciation rights. The Company currently
intends to submit the
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<PAGE>
Stock Option Plan to stockholders at a meeting to
be held not earlier than six months after the
Conversion. While no consideration has been given
to the number of shares granted to any employee
or director under the Stock Option Plan, any
allocation will be consistent with applicable
Federal regulations. Under current Federal
regulations, any plan approved by stockholders
within one year of the consummation of the
Conversion is required to limit grants (i) to any
employee to 25% or less of the shares available
under the Stock Option Plan and (ii) to any
non-employee director individually to 5% or less
and to all such non-employee directors to 30% in
the aggregate of the shares available under the
Stock Option Plan. The value of any options
granted under the Stock Option Plan will be
determined based on the increase, if any, in the
market value of the Common Stock compared over
the exercise price of the options. The exercise
price of any options granted under the Stock
Option Plan will be not less than fair market
value on the date of grant. See "Management -
Benefits - Stock Option Plan."
Recognition and Retention Plan. Following
consummation of the Conversion, the Company
intends to submit for stockholder consideration a
Recognition and Retention Plan for the benefit of
the directors and officers of the Company and the
Bank (the "Recognition Plan"). It is expected
that the Recognition Plan will be submitted to
stockholders for approval at the same time as the
Stock Option Plan.
Upon the receipt of such approval, the
Recognition Plan is expected to purchase a number
of shares of Common Stock either from the Company
or in the open market equal to an aggregate of 4%
of the Common Stock issued in the Conversion
(13,800 shares at the maximum of the Estimated
Price Range). While no consideration has been
given to the number of shares to be awarded to
any employee or director under the Recognition
Plan, any allocation will be consistent with
applicable Federal regulations. Under current
Federal regulations, any such plan approved by
stockholders within one year of the consummation
of the Conversion is required to limit grants (i)
to any employee to 25% or less of the shares
available under the Recognition Plan and (ii) to
any non-employee director individually to 5% or
less and to all such non-employee directors to
30% in the aggregate of the shares available
under the Recognition Plan.
Assuming that the Purchase Price is the value of
shares awarded under the Recognition Plan, the
maximum value of awards to an employee would be
$25,500, $30,000, $34,500 and $39,675,
respectively, assuming the issuance of shares at
the minimum, midpoint, maximum and 15% above the
maximum of the Estimated Price Range and the
maximum
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<PAGE>
value of awards to a non-employee director would
be $5,100, $6,000, $6,900 and $7,935,
respectively, at the minimum, midpoint, maximum
and 15% above the maximum of the Estimated Price
Range. The actual value of any awards made under
the Recognition Plan will depend upon, among
other factors, the market value of the Common
Stock at the time of award and upon payment. All
awards under the Recognition Plan shall vest over
a period of time, but generally not in excess of
20% per year. See "Management - Benefits -
Recognition and Retention Plan."
Federal and State Income The Company has received an opinion from its
Tax Consequences of special counsel, Elias, Matz, Tiernan & Herrick
Conversion: L.L.P., Washington, D.C., to the effect that the
Conversion will qualify as a reorganization
within the meaning of Section 368(a)(1)(F) of the
Internal Revenue Code of 1986, as amended (the
"Code"). The Company has also received an opinion
from Geo. S. Olive & Co. LLC, to the effect that
the Conversion will be tax-free to the Company,
the Bank, Eligible Account Holders and
Supplemental Eligible Account Holders for
Illinois tax purposes. See "The Conversion - Tax
Aspects."
Use of Proceeds: Net proceeds from the sale of the Common Stock
are estimated to be between $2.3 million and $3.2
million, depending on the number of shares sold
and the expenses of the Conversion. See "Pro
Forma Data." The Company will purchase all of the
capital stock of the Bank to be issued upon
Conversion in exchange for 75% of the net
proceeds. The Company intends to use a portion of
the net proceeds retained by it to make a loan
directly to the ESOP to enable the ESOP to
purchase up to 8.0% of the Common Stock in the
Conversion. See "Management - Benefits - Employee
Stock Ownership Plan and Trust." The remaining
net proceeds retained by the Company will
initially be invested primarily in short-term
deposits and investment grade, short- to
intermediate-term marketable securities. Funds
received by the Bank from the Company's purchase
of its capital stock will be used for general
business purposes, including the funding of
Loans. See "Use of Proceeds."
Risk Factors: See "Risk Factors" for a discussion of certain
factors that should be considered by prospective
investors.
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<PAGE>
RISK FACTORS
The following factors, in addition to those discussed elsewhere in this
Prospectus, should be considered by investors in deciding whether to purchase
the Common Stock offered hereby.
Dependence on Local Market Area and Economy
To date, substantially all of the Bank's lending and deposit activities
have been concentrated in the Danville, Illinois area including Vermilion
County, Illinois. The Vermilion County market has experienced stable population
over the first-half of the decade after experiencing a steady decline in its
population over the previous two decades. Vermilion County's building permits
have also increased over a similar period, averaging $27.1 million from
1990-1995 after averaging only $11.9 million annually from 1985-1989. [Income
levels in Vermilion County are lower than in Illinois and the United States,
generally, with per capita income growth less over the first five years of the
decade than Illinois or the United States and median household income declining
during such period compared to growth in Illinois and the nation.] The market is
dominated by the manufacturing industry and government, which accounts for
approximately ________ of all jobs in Vermilion County; however, unemployment
levels in Vermilion County, although stable, have exceeded state and national
levels during the 1990s. The Vermilion County market area also had a much lower
median rent level and a much lower median housing value than the rest of the
state and country.
Vermilion County has a very competitive financial institution market
dominated by commercial banks. As of June 30, 1996, the Bank's market area
included 15 commercial banks with 33 offices, [three] thrift institutions with
[four] offices and [18] credit unions with [18] offices which compete with the
Bank for deposits and loans. The Bank had a [3.2%] share of the total financial
institution deposits for Vermilion County as of [June 30, 1995.] Many of the
Bank's competitors have substantially greater resources and lending limits than
the Bank and may offer certain services that the Bank does not or cannot
provide. The profitability of the Bank depends upon its continued ability to
compete successfully in its market area. See "Business of the Bank Competition."
Potential Low Return on Equity Following Conversion; Uncertainty as to Future
Growth Opportunities.
For the years ended September 30, 1996 and 1995, the Bank's ratio of
equity to assets was 6.9% and 7.0%, respectively. The Company's equity position
will be significantly increased as a result of the Conversion. On a pro forma
basis as of September 30, 1996, assuming the sale of Common Stock at the
midpoint of the Estimated Price Range, the Company's ratio of equity to assets
would be 12.5%. The Company's ability to leverage this capital will be
significantly affected by industry competition for loans and deposits. The
Company currently anticipates that it will take time to prudently deploy such
capital. As a result, the Company's return on equity initially is expected to be
below the industry average after the Conversion, and no assurance can be given
that the Company's return on equity will achieve the industry average level at
any time in the future.
Potential Effects of Changes in Interest Rates
The operations of the Bank are substantially dependent on its net interest
income, which is the difference between the interest income earned on its
interest-earning assets and the interest expense paid on its interest-bearing
liabilities. Like most savings institutions, the Bank's earnings are affected by
changes in market interest rates and other economic factors beyond its control.
If an institution's interest-earning assets have longer effective maturities
than its interest-bearing liabilities, the yield on the institution's
interest-earning assets generally will adjust more slowly than the cost of its
interest-bearing liabilities and, as a result, the institution's net interest
income generally would be adversely affected by material and prolonged increases
in interest rates and positively affected by comparable declines in interest
rates. The Bank has sought to reduce the vulnerability of its operations to
changes in interest rates by managing the nature and composition of its interest
rate sensitive assets and liabilities. However, at September 30, 1996, the
Bank's total interest-bearing liabilities which were
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<PAGE>
estimated to mature or reprice within one year exceeded the Bank's total
interest-earning assets with the same characteristics by $10.4 million, or
29.4%, of the Bank's total assets. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Asset and Liability Management,"
"- Results of Operations Interest Expense."
The Bank's deposits have included a relatively high amount of certificates
of deposit ("certificate"), which are generally higher costing and more
interest-rate sensitive than "core" deposits. At September 30, 1996, $23.8
million, or 77.3% of the Bank's total deposits were comprised of certificates
and $17.0 million, or 55.4% of the Banks total deposits consisted of
certificates which are scheduled to mature within one year. Certificates
generally are costlier and a more volatile source of funds than transaction
accounts. In addition, certificates are more likely to be invested in other
instruments than are transaction accounts. Notwithstanding the foregoing,
management believes that most of its certificates will remain at the Bank upon
maturity. The Bank does not accept brokered deposits. See "Business of the Bank
- - Sources of Funds - Deposits."
In addition to affecting interest income and expense, changes in interest
rates also can affect the value of the Bank's interest-earning assets, which are
comprised of fixed and adjustable-rate instruments, and the ability to realize
gains from the sale of such assets. Generally, the value of fixed-rate
instruments fluctuates inversely with changes in interest rates. As of September
30, 1996, $15.8 million or 45.8% of the Bank's interest-earning assets were
one-to-four family fixed-rate residential mortgage loans.
Changes in interest rates also can affect the average life of loans and
mortgage-backed securities. Decreases in interest rates generally result in
increased prepayments of loans and mortgage-backed securities as borrowers
refinance to reduce borrowing costs, which may subject the Bank to reinvestment
risk to the extent that it is not able to reinvest such prepayments at rates
which are comparable to the rates on the maturing loans or securities. See
generally "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Asset and Liability Management."
Pending Litigation Against Bank
On December 30, 1992, Rosemary Frobose, a former officer of the Bank,
filed a lawsuit against the Bank in the United States District Court, Southern
District of Illinois, (subsequently transferred to the Central District of
Illinois, Peoria Division) alleging that she was the victim of a retaliatory
discharge based on common law rights and the federal "whistleblower statute," 12
USC ss. 1831j(a). The plaintiff seeks compensatory and punitive damages against
the Bank based upon her loss of income and employment for at least a ten-year
period. She has not sought a specific dollar amount in her complaint but at one
point made a demand of $900,000. Recently, the Court entered a summary judgment
in favor of the Bank on each count except one which was subsequently dismissed
by the Court. The Bank anticipates an appeal of the court's order against the
plaintiff. The Bank plans to continue to vigorously contest this lawsuit. In the
judgment of the Bank's litigation counsel, the likelihood that the plaintiff
will prevail in this case is remote. However, should the case be revised on
appeal and a verdict ultimately directed against the Bank by the trial court,
the Bank's litigation counsel believes that the range of potential loss is
$250,000 to $1 million. In the unlikely event of a verdict within that range
the resulting loss would have a material adverse effect on the bank.
Importance of Senior Management
The president and chief executive officer of the Bank is, and the
president and chief executive officer of the Company will be Merrill G. Norton.
Mr. Norton has served in that capacity at the Bank since 1992 and has had and,
after the consummation of the Conversion, will continue to have a significant
role in the development and management of the Bank. The loss of his services
could have an adverse effect on the Bank.
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<PAGE>
Certain Anti-Takeover Provisions
Provisions in the Company's Governing Instruments and Delaware Law.
Certain provisions of the Company's Certificate of Incorporation and Bylaws, as
well as certain provisions in Delaware law, will assist the Company in
maintaining its status as an independent publicly owned corporation. Provisions
in the Company's Certificate of Incorporation and Bylaws provide for, among
other things, supermajority voting on certain matters, a staggered board of
directors, noncumulative voting for directors, limits on the calling of special
meetings and, for a period of five years following the Conversion, limits on
acquiring voting shares in excess of 10% of the outstanding Common Stock. The
above provisions 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." In
addition, such provisions may result in the Company being deemed to be less
attractive to a potential acquirer and/or might result in stockholders receiving
a lesser amount of consideration for their shares of Common Stock than otherwise
could have been available.
Voting Control of Directors and Officers. Directors and executive officers
of the Company expect to purchase approximately 65,000 shares or 18.8% of the
shares of Common Stock outstanding based upon the maximum of the Estimated Price
Range. Three of the Company's directors will act as trustees of the ESOP and in
such capacity are also expected to immediately control the voting of the shares
of Common Stock issued in the Conversion through the ESOP, at least until an
allocation has been made under the ESOP. At the maximum of the Estimated Price
Range, the trustees of the ESOP would initially control the voting of 27,600
shares, or 8.0%, of Common Stock issued in the Conversion. Under the terms of
the ESOP, after an allocation has been made, the unallocated shares will be
voted by the trustees in the same proportion as the allocated shares are voted
by the ESOP participants. Assuming that 345,000 shares of Common Stock are
issued in the Offerings, that directors and executive officers of the Company
purchase 65,000 shares of Common Stock in the Offerings, that 27,600 unallocated
shares are held by the ESOP, that 13,800 shares of Common Stock have been
acquired by the Recognition Plan in the open market and that directors and
executive officers of the Company acquire 34,500 shares of Common Stock out of
authorized but unissued shares upon the exercise of options under the Stock
Option Plan, directors and executive officers would control 140,900 shares of
Common Stock or 37.1% of the then-outstanding shares. Management's potential
voting control could, together with additional stockholder support, preclude or
make more difficult takeover attempts that certain stockholders deem to be in
their best interest and may tend to perpetuate existing management.
Provisions of Employment Agreement. In connection with the Conversion, the
Company and the Bank plan to enter into an employment agreement with Mr. Norton
which will provide for benefits and cash payments in the event of a change in
control of the Company or the Bank and under certain other circumstances. These
provisions 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
upon compensation levels at September 30, 1996, in the event of a termination of
employment following a change in control of the Company or the Bank, Mr. Norton
would receive $149,200 in cash severance. See "Management - Employment
Agreement."
Absence of Market For Common Stock
The Company and the Bank have never issued capital stock. The Company
intends to apply to have the Common Stock listed on the National Daily Quotation
Service "pink sheets" published by the National Quotation Bureau, Inc. 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 or the Bank. Because there can be no assurance that buyers and sellers
of the Company's Common Stock can be readily matched, investors may wish to
consider the potential illiquid and long-term nature of an investment in the
Common Stock. Because of the limited size of the Offerings and the anticipated
concentrated ownership of the Common Stock, it is unlikely that an active and
liquid trading market for the Common Stock will develop, or once developed,
-22-
<PAGE>
will continue, and there can be no assurance that purchasers of the Common Stock
will be able to sell their shares at or above the Purchase Price. The absence of
a liquid and active trading market, or the discontinuance thereof, may have an
adverse effect on both the price and the liquidity of the Common Stock. See
"Market for the Common Stock."
Increased Emphasis on Consumer and Commercial Business Lending
During fiscal 1995, the Bank implemented a policy under which it began to
increase its origination of consumer and commercial business loans. Such loans
generally have shorter terms and higher interest rates than traditional mortgage
loans. However, such lending generally involves more credit risk than
traditional single-family residential lending because of the type and nature of
the collateral. As of September 30, 1996 consumer and commercial business loans
amounted to $2.6 million or 9.5% and $334,000 or 1.23%, respectively of the
Bank's total net loan portfolio. As of September 30, 1996, $49,000 or 1.9% of
the Bank's consumer loans were non-performing and none of its commercial
business loans was non-performing. See "Business of the Bank - Lending
Activities - Consumer Loans," "-Commercial Loans" and "-Asset Quality."
Regulatory Oversight and Possible Legislation
The Bank is subject to extensive regulation, supervision and examination
by the Commissioner, as its chartering authority and by the FDIC, which is its
primary federal regulator and which insures its deposits up to applicable
limits. The Bank is a member of the FHLB System and is also subject to certain
limited regulations promulgated by the Board of Governors of the Federal Reserve
System ("Federal Reserve"). As the holding company of the Bank, the Company also
will be subject to regulation and oversight by the Federal Reserve. Such
regulation and supervision govern the activities in which an institution can
engage and are intended primarily for the protection of the insurance fund and
depositors. Regulatory authorities have been granted extensive discretion in
connection with their supervisory and enforcement activities which are intended
to strengthen the financial condition of the banking and thrift industries,
including the imposition of restrictions on the operation of an institution, the
classification of assets by the institution and the adequacy of an institution's
allowance for loan losses. Any change in such regulation and oversight, whether
by the Commissioner, the FDIC, the Federal Reserve or Congress, could have a
material impact on the Company, the Bank and their respective operations. See
"REGULATION."
On September 30, 1996, the Deposit Insurance Funds Act of 1996 ("Insurance
Act") was enacted into law. Among other things, the Insurance Act authorizes the
FDIC to impose a special assessment on each depository institution with
SAIF-assessable deposits so that the SAIF may achieve its designated reserve
ratio. The Bank's assessment was $206,000 on a pre-tax basis, and was accrued
during the quarter ended September 30, 1996. In addition, the Insurance Act
provides for the merger of the BIF and the SAIF into the Deposit Insurance Fund
on January 1, 1999, but only if no insured depository institution is a savings
association on that date. As a result of the enactment of the Insurance Act,
beginning January 1, 1997 the deposit insurance premium applicable to most
savings associations was reduced from $2.30 per $1,000 of deposits to $0.645 per
$1,000.
Legislation is proposed periodically providing for a comprehensive reform
of the banking and thrift industries. It is uncertain when or if any of this
type of legislation will be passed, and, if passed, in what form the legislation
would be passed. As a result, management cannot accurately predict the possible
impact of such legislation on the Bank.
ESOP and Recognition Plan Expense
In November 1993, the American Institute of Certified Public Accountants
("AICPA") issued Statement of Position ("SOP") 93-6 entitled "Employers'
Accounting for Employee Stock Ownership Plans" ("SOP 93-6"). SOP 93-6, among
other things, changes the measure of compensation expense recorded by employers
for
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<PAGE>
leveraged ESOPs from the cost of ESOP shares to 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 Common Stock appreciates, the
Company will recognize increased compensation expense as the ESOP shares are
committed for release. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Recent Accounting Pronouncements." In
addition, it is anticipated that the Recognition Plan will purchase shares of
Common Stock equal to 4.0% of the shares issued in the Conversion. Both the ESOP
and the Recognition Plan will increase employee compensation expense in the
future. See "Pro Forma Data" and "Management - Benefits."
Possible Dilutive Effect of Issuance of Additional Shares
If the Recognition Plan is approved by stockholders of the Company, the
Recognition Plan intends to acquire an amount of Common Stock equal to 4.0% of
the shares of Common Stock issued in the Conversion. Such shares of Common Stock
may be acquired in the open market with funds provided by the Company or from
authorized but unissued shares of Common Stock. In the event that the
Recognition Plan acquires authorized but unissued shares of Common Stock from
the Company, the interests of existing stockholders will be diluted. The
issuance of authorized but unissued shares of Common Stock to such plan in an
amount equal to 4.0% of the Common Stock issued in the Conversion would dilute
the voting interests of existing stockholders by approximately 3.9%, and net
income per share and stockholders' equity per share would be decreased by a
corresponding amount. See "Pro Forma Data" and "Management - Benefits -
Recognition and Retention Plan."
If the Stock Option Plan is approved by stockholders of the Company, the
Company intends to reserve for future issuance pursuant to such plan a number of
authorized shares of Common Stock equal to an aggregate of 10.0% of the Common
Stock issued in the Conversion (34,500 shares, based on the issuance of the
maximum 345,000 shares). Shares issued under such plan could dilute the
interests of existing stockholders. The issuance of the total number of shares
available under such plan would dilute the voting interests of existing
stockholders by approximately 9.1%, and net income per share and stockholders'
equity per share would be decreased by a corresponding amount. See "Pro Forma
Data" and "Management - Benefits - Stock Option Plan."
VERMILION BANCORP, INC.
The Company is a Delaware corporation 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 applied for
the approval of the Federal Reserve Board and the Commissioner, to be the
holding company for the Bank. Upon consummation of the Conversion, the Company's
business will consist of being the holding company for the Bank and the Company
will have no significant assets other than the shares of the Bank's common stock
acquired in the Conversion and 25% of the net proceeds of the Conversion
retained by the Company, a portion of which will be used to fund the loan to the
ESOP, and will have no significant liabilities. See "Use of Proceeds." The
management of the Company is set forth under "Management of the
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<PAGE>
Company." Initially, 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
officers who are also officers of the Bank 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 or changes its business in the future.
Management believes that the holding company structure will provide the
Company with additional flexibility to diversify its business activities, should
it decide to do so, through existing or newly formed subsidiaries, or through
acquisitions of or mergers with other financial institutions or 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 better position after the Conversion,
subject to regulatory limitations and the Company's financial position, to take
advantage of any such opportunities that may arise. The initial activities of
the Company are anticipated to be funded by the proceeds to be retained by the
Company and earnings thereon or, alternatively, through dividends from the Bank.
See "Dividend Policy."
The Company's executive office is located at the home office of the Bank
at 714 North Vermilion Street, Danville, Illinois 61832, and its telephone
number is (217) 442-0270.
AMERICAN SAVINGS BANK
The Bank is an Illinois-chartered, SAIF-insured mutual savings bank
conducting business from a single office located in Danville, Illinois. At
September 30, 1996, the Bank had total assets of $35.5 million, total deposits
of $30.7 million and equity of $2.4 million.
The Bank's principal business has been, and continues to be, attracting
deposits from its customers and investing such funds in residential real estate
loans and other loans. At September 30, 1996, the Bank's net loan portfolio
totalled $26.9 million, or 75.8% of the Bank's assets. In addition to its
lending activities, the Bank also has a securities portfolio consisting of
mortgage-backed securities and other investment securities. The Bank's
mortgage-backed securities portfolio totalled $3.5 million, or 9.9% of the
Bank's total assets at September 30, 1996, and its other investment securities
portfolio amounted to $3.1 million, or 8.7% of total assets at such date.
Traditionally, the Bank's principal source of funds has come from deposits. At
September 30, 1996, the Bank had total deposits of $30.7 million, of which $7.0
million or 22.8% consisted of core deposits which include savings and retirement
accounts, NOW accounts and money market investment accounts ("MMIA").
The Bank and its predecessor have been serving Danville, Illinois since
1888. In 1994, the Bank converted to an Illinois-chartered savings bank from an
Illinois- chartered savings and loan association. The Bank is a
community-oriented financial institution which offers a variety of financial
services to meet the needs of its community. The existing management of the Bank
believes that it is in the best interests of the Bank as well as the Company and
its stockholders for the Bank to remain an independent financial institution.
The Bank is subject to examination and comprehensive regulation by the
Commissioner, which is the Bank's chartering authority and primary regulator.
The Bank is also subject to regulation by the FDIC, as the administrator of the
SAIF, and to certain reserve requirements established by the FRB. The Bank is a
member of the FHLB of Chicago, which is one of the 12 regional banks comprising
the FHLB System, and is subject to regulations applicable to members of the FHLB
of Chicago.
The Bank's executive office is located at 714 North Vermilion Street,
Danville, Illinois 61832 and its telephone number is (217) 442-0270.
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<PAGE>
USE OF PROCEEDS
Although the actual net proceeds from the sale of the Common Stock cannot
be determined until the Conversion is completed, it is presently anticipated
that the net proceeds from the sale of the Common Stock will be between $2.3
million and $3.2 million ($3.7 million in the event of an increase in the
Estimated Price Range by 15%). See "Pro Forma Data" and "The Conversion - Stock
Pricing and Number of Shares to be Issued" as to the assumptions used to arrive
at such amounts. None of the assets of the Company or the Bank will be
distributed in order to effect the Conversion other than to pay expenses
incident thereto.
The Company will purchase all of the capital stock of the Bank to be
issued upon Conversion in exchange for 75% of the net proceeds. Based upon the
Estimated Price Range, between $1.7 million and $2.4 million ($2.8 million in
the event of an increase in the Estimated Price Range by 15%) will be received
by the Bank from the net proceeds of the Conversion in exchange for capital
stock of the Bank. The Company intends to use a portion of the net proceeds it
retains to make a loan directly to the ESOP to enable the ESOP to purchase up to
8.0% of the Common Stock in the Conversion. Based upon the issuance of 255,000
shares and 345,000 shares at the minimum and maximum of the Estimated Price
Range, respectively, the loan to the ESOP would be $204,000 and $276,000,
respectively, and $317,400 in the event of an increase in the Estimated Price
Range by 15%. See "Management - Benefits - Employee Stock Ownership Plan and
Trust." The balance of the net proceeds retained by the Company will be
initially invested primarily in short-term deposits and investment grade,
short-term marketable securities. Giving effect to the anticipated purchase of
capital stock of the Bank and the loan to the ESOP, the balance of the net
proceeds retained by the Company would be between $367,500 and $517,000
($602,850 in the event of an increase in the Estimated Price Range by 15%). Net
proceeds retained by the Company may facilitate the Company's ability to pay
dividends in the future. See "Dividend Policy."
Funds received by the Bank from the Company's purchase of its capital
stock will be used for general business purposes, including the funding of
loans. Neither the Company nor the Bank has any pending agreements or
understandings, written or oral, regarding acquisitions of any specific
financial services institutions or companies nor have criteria been established
to identify potential candidates for acquisition.
DIVIDEND POLICY AND RETURN OF EXCESS CAPITAL
Upon Conversion, the Board of Directors of the Company will have the
authority to declare dividends on the Common Stock, subject to statutory and
regulatory requirements. Declarations of dividends by the Board of Directors, if
any, will depend upon a number of factors, including investment opportunities
available to the Company or the Bank, capital requirements, regulatory
limitations, the Company's and the Bank's financial condition and results of
operations, tax considerations and general economic conditions. Subject to
regulatory and other considerations, the Company intends to establish an annual
cash dividend policy. Although the Board of Directors of the Company has not
made any decision as to the amount of cash dividends it will pay, it anticipates
that the first dividend will be paid during the first quarter of fiscal 1998.
However, no assurances can be given that any dividends will be paid or, once
commenced, will continue to be paid at the same rate.
The Company is subject to the requirements of Delaware law, which
generally permits the payment of dividends out of surplus, except when (1) the
corporation is insolvent or would thereby be made insolvent, or (2) the
declaration or payment thereof would be contrary to any restrictions contained
in the articles of incorporation. Upon consummation of the Conversion, the
Company's surplus is expected to be between $367,500 and $517,000, depending on
the number of shares issued in the Offerings. See "Capitalization." If there is
no surplus available for dividends, a Delaware corporation may pay dividends out
of its net profits for the then current or the preceding fiscal year or both,
except that no dividend may be paid if the corporation's assets are exceeded by
its liabilities or if its net assets are less than the amount which would be
needed, under certain circumstances, to satisfy any preferential rights of
stockholders.
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<PAGE>
Dividends from the Company may depend in part upon receipt of dividends
from the Bank because the Company initially will have no source of income other
than dividends from the Bank, earnings from the investment of proceeds from the
sale of Common Stock retained by the Company and interest payments with respect
to the Company's loan to the ESOP. The Bank will not be permitted to pay
dividends to the Company if its capital would be reduced below the amount
required for the liquidation account of the Bank. See "The Conversion -
Liquidation Rights." Under Illinois law, a savings bank is required to maintain
at all times total capital of not less than 3% of total assets. Prior approval
of the Commissioner is required before any dividends on capital stock that
exceed 50% of a savings bank's net profits that year may be declared in that
calendar year. Moreover, as a condition to the Commissioner's approval, the
Company is subject to a net worth maintenance agreement which requires it to
infuse equity capital into the Bank as needed to maintain the core capital of
the Bank at a level of no less than 6% of total assets. See "Regulations - The
Bank - Capital Requirements." Section 38 of the Federal Deposit Insurance Act
("FDIA") also would prohibit the Bank from making a dividend if it were
"undercapitalized" or if such dividend would result in the institution becoming
"undercapitalized."
In addition, as required by the FDIC as a condition to its nonobjection to
the Conversion, the Company has agreed not to return any excess capital to its
stockholders (which does not include dividends) for a period of one year from
the consummation of the Conversion.
MARKET FOR THE COMMON STOCK
The Company and the Bank have never issued capital stock, and,
consequently, there is no established market for the Common Stock at this time.
The Company intends to apply to have the Common Stock listed on the National
Daily Quotation Service "pink sheets" published by the National Quotations
Bureau, Inc. 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 or the Bank. While the Company will use its best efforts to
encourage and assist a professional market maker in establishing and maintaining
a market for the Common Stock, the number of active buyers and sellers of the
Common Stock at any particular time may be limited, especially in view of the
limited size of the Offerings and the anticipated concentrated ownership of the
Common Stock. Under such circumstances, investors in the Common Stock could have
difficulty disposing of their shares and should not view the Common Stock as a
short-term investment. Investors should consider that it is unlikely that an
active and liquid trading market for the Common Stock will develop or that, if
developed, it will continue, and there can be no assurance that persons
purchasing shares of Common Stock will be able to sell them at or above the
Purchase Price.
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<PAGE>
CAPITALIZATION
The following table presents the historical consolidated capitalization of
the Bank at September 30, 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 shown below and the other assumptions set forth under "Pro
Forma Data."
<TABLE>
<CAPTION>
Company - Pro Forma
Based Upon Sale at $10.00 Per Share
-----------------------------------------------------
396,750
255,000 300,000 345,000 Shares(1)
The Bank - Shares Shares Shares (15% above
Historical (Minimum of (Midpoint of (Maximum of Maximum of
Capitalization Range) Range) Range) Range)
-------------- ----------- ------------ ----------- ----------
(In Thousands)
<S> <C> <C> <C> <C> <C>
FHLB advances $ 2,000 $ 2,000 $ 2,000 $ 2,000 $ 2,000
Deposits(2) 30,724 30,724 30,724 30,724 30,724
-------- -------- -------- -------- --------
Total deposits and
borrowings $ 32,724 $ 32,724 $ 32,724 $ 32,724 $ 32,724
======== ======== ======== ======== ========
Stockholders' equity:
Preferred Stock, $0.01
par value, 400,000
shares authorized; none
to be issued $ -- $ -- $ -- $ -- $ --
Common Stock, $0.01 par
value, 1,600,000 shares
authorized; shares to be
issued as reflected(3) -- 3 3 3 4
Additional paid-in
capital(3) -- 2,283 2,726 3,169 3,677
Retained earnings(4) 2,370 2,370 2,370 2,370 2,370
Net unrealized loss on
securities available for
sale (15) (15) (15) (15) (15)
Less:
Common Stock acquired
by the ESOP(5) -- (204) (240) (276) (317)
Common Stock acquired
by the Recognition
Plan(6) -- (102) (120) (138) (159)
-------- -------- -------- -------- --------
Total stockholders'
equity (equity at
September 30, 1996) $ 2,355 $ 4,335 $ 4,724 $ 5,113 $ 5,560
======== ======== ======== ======== ========
</TABLE>
(Footnotes on following page)
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<PAGE>
- ----------
(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 conditions following the
commencement of the Subscription and Community Offerings.
(2) Does not reflect withdrawals from deposit accounts for the purchase of
Common Stock in the Conversion. Such withdrawals would reduce pro forma
deposits by the amount of such withdrawals. Total deposits and borrowings
do not reflect the anticipated loan from the Company to the ESOP, which
loan will not be reflected as a liability on the Company's consolidated
statements of financial condition.
(3) The sum of par value and additional paid-in capital accounts equals the
net Conversion proceeds. 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 and presented for stockholder
approval at a special meeting of stockholders to be held not earlier than
six months following the Conversion. If the plan is approved by
stockholders, 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 Plan. See "Pro Forma Data"
and "Management - Benefits - 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 by
approximately 9.1%.
(4) The retained earnings of the Bank will be substantially restricted after
the Conversion. See "The Conversion - Liquidation Rights."
(5) Assumes that 8% of the shares offered for sale in the Conversion will be
purchased by the ESOP. The Common Stock acquired by the ESOP is reflected
as a reduction of stockholders' equity. Assumes the funds used to acquire
the ESOP shares will be borrowed from the Company. See "Management -
Benefits - Employee Stock Ownership Plan and Trust."
(6) Gives effect to the Recognition Plan which is expected to be adopted by
the Company and presented to stockholders for approval at a special
meeting of stockholders to be held not earlier than six months following
the Conversion. No shares will be purchased by the Recognition Plan in the
Conversion. If the Recognition Plan is approved by stockholders, the
Recognition Plan intends to acquire an amount of Common Stock equal to 4%
of the shares of Common Stock issued in the Conversion, or 10,200, 12,000,
13,800 and 15,870 shares at the minimum, midpoint, maximum and 15% above
the maximum of the Estimated Price Range, respectively. The table assumes
that stockholder approval has been obtained and that such shares are
purchased on the open market by the Company at the Purchase Price. The
Common Stock so acquired by the Recognition Plan is reflected as a
reduction in stockholders' equity. If the shares are purchased at prices
higher or lower than the Purchase Price, such purchases would have a
greater or lesser impact, respectively, on stockholders' equity. If the
Recognition Plan purchases authorized but unissued shares from the
Company, such issuance would dilute the voting interests of existing
stockholders by approximately 3.9%. See "Pro Forma Data" and "Management -
Benefits - Recognition and Retention Plan."
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<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 $2.3 million and $3.2 million (or $3.7 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 and Community Offering; (ii) fixed Conversion expenses
will be approximately $234,000 and (iii) Trident will be paid a variable expense
based on the number of shares sold of $29,700, $37,000, $44,200 and $52,500 at
the minimum, midpoint, maximum and maximum, as adjusted, of the Estimated Price
Range, respectively. Actual Conversion expenses may vary from those estimated.
See "The Conversion - Marketing Arrangements."
Pro forma net income and stockholders' equity have been calculated for the
year ended September 30, 1996 as if the Common Stock to be issued in the
Offerings had been sold at the beginning of the year and the net proceeds had
been invested at 5.69%, which represents the yield on one-year U.S. Government
securities at September 30, 1996. The use of this interest rate is viewed to be
more relevant in the current rate environment than the use of an arithmetic
average of the weighted average yield earned by the Bank on its interest-earning
assets and the weighted average rate paid on its deposits during such periods
(as required by Federal regulations). The effect of withdrawals from deposit
accounts for the purchase of Common Stock has not been reflected. A combined
effective Federal and state income tax rate of 34% has been assumed for the
year, resulting in an after-tax yield of 3.76% during the year ended September
30, 1996. 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 to give effect to the shares committed to be released
during the period by the ESOP, with respect to the net income per share
calculations. See footnotes 4 and 6 to the Pro Forma Data tables. No effect has
been given in the pro forma stockholders' equity calculations for the assumed
earnings on the net proceeds. As discussed under "Use of Proceeds," the Company
intends to retain 25% of the net Conversion proceeds and will use a portion of
such retained proceeds to make a loan directly to the ESOP to enable the ESOP to
purchase up to 8.0% of the Common Stock in the Conversion.
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 stockholders' equity represents the difference
between the stated amount of assets and liabilities of the Company computed in
accordance with generally accepted accounting principles ("GAAP"). The pro forma
stockholders' equity is not intended to represent the fair market value of the
Common Stock and may be different than amounts that would be available for
distribution to stockholders in the event of liquidation. No effect has been
given in the tables to the possible issuance of additional shares equal to 10%
of the Common Stock to be reserved for future issuance pursuant to the Stock
Option Plan 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
to the bad debt reserve. See "Management - Benefits - Stock Option Plan" and
"The Conversion - Liquidation Rights" and "Federal and State Taxation - Federal
Taxation." The tables below give effect to the Recognition Plan, which is
expected to be presented (together with the Stock Option Plan) to stockholders
for approval at a meeting of stockholders which is expected to be held not
earlier than six months following completion of the Conversion. If the
Recognition Plan is approved by stockholders, the Recognition Plan intends to
acquire an amount of Common Stock equal to 4% of the shares of Common Stock
issued in the Conversion, either through open market purchases or from
authorized but unissued shares of Common Stock. The tables below assume that
stockholder approval has been obtained and that the shares acquired by the
Recognition Plan are purchased in the open market at $10.00 per share. There can
be no assurance that stockholder approval of the Recognition Plan will be
obtained, that the shares will be purchased in the open market, or that the
purchase price will be $10.00 per share.
The following tables summarize historical consolidated data of the Bank
and pro forma data of the Company at the year ended September 30, 1996 based on
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.
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<PAGE>
<TABLE>
<CAPTION>
At or For the Year Ended September 30, 1996
--------------------------------------------------------
255,000 300,000 345,000 396,750
Shares Sold Shares Sold Shares Sold Shares Sold
at $10.00 at $10.00 at $10.00 at $10.00
Per Share Per Share Per Share Per Share (15%
(Minimum (Midpoint (Maximum above Maximum
of Range) of Range) of Range) of Range)(9)
----------- ----------- ----------- --------------
(Dollars in Thousands, Except Per Share Amounts)
<S> <C> <C> <C> <C>
Gross proceeds $ 2,550 $ 3,000 $ 3,450 $ 3,968
Less offering expenses 264 271 278 287
--------- --------- --------- ---------
Estimated net Conversion proceeds 2,286 2,729 3,172 3,681
Less: Common Stock acquired
by ESOP (204) (240) (276) (317)
Common Stock to be acquired
by the Recognition Plan (102) (120) (138) (159)
--------- --------- --------- ---------
Estimated adjusted net proceeds(1) 1,980 2,369 2,758 3,205
========= ========= ========= =========
Net income (loss):
Historical $ (71)(8) $ (71)(8) $ (71)(8) $ (71)(8)
Pro forma adjustments:
Income on adjusted net proceeds(1) 74 89 104 121
ESOP(2) (13) (16) (18) (21)
Recognition Plan(3) (13) (16) (18) (21)
--------- --------- --------- ---------
Pro forma net income (loss) $ (23) $ (14) $ (3) $ 8
========= ========= ========= =========
Net income (loss) per share(4):
Historical $ (0.30) $ (0.26) $ (0.22) $ (0.19)
Pro forma adjustments:
Income on adjusted net proceeds(1) $ 0.31 $ 0.32 $ 0.32 $ 0.33
ESOP(2) (0.05) (0.06) (0.06) (0.06)
Recognition Plan(3) (0.05) (0.06) (0.06) (0.06)
--------- --------- --------- ---------
Pro forma net income (loss) per share $ (0.09) $ (0.06) $ (0.02) $ 0.02
========= ========= ========= =========
Pro forma price/earnings ratio(9) NM NM NM 500.0x
Number of shares used in net income per
share calculations(4) 236,640 278,400 320,160 368,184
Stockholders' equity:
Historical $ 2,355 $ 2,355 $ 2,355 $ 2,355
Estimated net Conversion proceeds 2,286 2,729 3,172 3,681
Less: Common Stock acquired
by ESOP(2) (204) (240) (276) (317)
Common Stock to be acquired
by the Recognition Plan(3) (102) (120) (138) (159)
--------- --------- --------- ---------
Pro forma stockholders' equity(6) $ 4,335 $ 4,724 $ 5,113 $ 5,560
========= ========= ========= =========
Stockholders' equity per share(7):
Historical $ 9.24 $ 7.85 $ 6.83 $ 5.94
Estimated net Conversion proceeds 8.96 9.10 9.19 9.28
Less: Common Stock acquired
by ESOP(2) (0.80) (0.80) (0.80) (0.80)
Common Stock to be acquired
by the Recognition Plan(3) (0.40) (0.40) (0.40) (0.40)
--------- --------- --------- ---------
Pro forma stockholders' equity
per share(3)(5)(6) $ 17.00 $ 15.75 $ 14.82 $ 14.02
========= ========= ========= =========
Pro forma price to book ratio(7) 58.82% 63.49% 67.48% 71.33%
========= ========= ========= =========
</TABLE>
(Footnotes on following page)
-31-
<PAGE>
- ----------
(1) Estimated adjusted net proceeds consist of the estimated net Conversion
proceeds, minus (i) the proceeds attributable to the purchase by the ESOP
and (ii) the value of the shares to be purchased by the Recognition Plan,
subject to stockholder approval, after the Conversion at an assumed price
of $10.00 per share.
(2) It is assumed that 8% of the shares of Common Stock issued in the
Conversion will be purchased by the ESOP. For purposes of this table, the
funds used to acquire such shares are assumed to have been borrowed by the
ESOP from the Company. The Company intends to make quarterly contributions
to the ESOP over a ten-year period in an amount at least equal to the
principal and interest requirement (which interest rate shall be ____%) of
the debt. The pro forma net income assumes (i) that the ESOP expense for
each respective period is equivalent to the principal payment for the
respective period and was made at the end of each respective period; (ii)
that 2,040, 2,400, 2,760 and 3,174 shares were committed to be released
with respect to the year ended September 30, 1996, at the minimum,
midpoint, maximum and 15% above the maximum of the Estimated Price Range,
respectively; and (iii) in accordance with SOP 93-6, only the ESOP shares
committed to be released during the respective period were considered
outstanding for purposes of the net income per share calculations. See
"Management's Discussion and Analysis of Financial Condition and Results
of Operations -Recent Accounting Pronouncements" and "Management -
Benefits - Employee Stock Ownership Plan and Trust."
(3) The adjustment is based upon the assumed purchases by the Recognition Plan
of 10,200, 12,000, 13,800 and 15,870 shares at the minimum, midpoint,
maximum and 15% above the maximum of the Estimated Price Range, assuming
that: (i) stockholder approval of the Recognition Plan has been received;
(ii) the shares were acquired by the Recognition Plan at the beginning of
the period in open market purchases at the Purchase Price; and (iii) the
amortized expense for the year ended September 30, 1996 was 20% of the
amount contributed. If the Recognition Plan purchases authorized but
unissued shares instead of making open market purchases, the voting
interests of existing stockholders would be diluted by approximately 3.9%
and pro forma net income (loss) per share for the year ended September 30,
1996 would be $(0.08), $(0.03), $0.01 and $0.03, and pro forma
stockholders' equity per share at September 30, 1996 would be $16.73,
$15.53, $14.63 and $13.86, at the minimum, midpoint, maximum and 15% above
the maximum of the Estimated Price Range, respectively. See "Management -
Benefits - Recognition and Retention Plan."
(4) Net income per share computations are determined by taking the number of
shares assumed to be sold in the Conversion and, in accordance with SOP
93-6, subtracting the ESOP shares which have not been committed for
release during the respective period. See Note 2 above.
(5) No effect has been given to the issuance of additional shares of Common
Stock pursuant to the Stock Option Plan. If the Stock Option Plan is
approved by stockholders, an amount equal to 10% of the Common Stock
issued in the Conversion, or 25,500, 30,000, 34,500 and 39,675 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 such
plan will result in the dilution of existing stockholders' interests.
Assuming stockholder approval of the Stock Option Plan, that all the
options were exercised at the end of the period at an exercise price of
$10.00 per share, and that the Recognition Plan purchases shares in the
open market at the Purchase Price, pro forma net income (loss) per share
for the year ended September 30, 1996 would be $(0.09), $(0.05), $(0.01)
and $0.02, and pro forma stockholders' equity per share at September 30,
1996 would be $16.36, $15.22, $14.38 and $13.65, in each case, at the
minimum, midpoint, maximum and 15% above the maximum of the Estimated
Price Range, respectively.
-32-
<PAGE>
(6) The retained earnings of the Bank will be substantially restricted after
the Conversion. See "Dividend Policy" and "The Conversion - Liquidation
Rights."
(7) Based on the number of shares sold in the Conversion.
(8) Except for the special SAIF assessment, the Bank's net income for the year
ended September 30, 1996 would have been $84,000. If the Bank's net income
for the year ended had been $84,000, pro forma net income for the year
ended September 30, 1996 would have been $132,000, $141,000, $152,000 and
$162,000 and pro forma net income per share would have been $0.56, $0.51,
$0.47 and $0.44 at the minimum, midpoint, maximum and 15% above the
maximum of the Estimated Price Range, respectively. See "Management's
Discussion and Analysis of Financial Condition and Results of Operation -
Results of Operation."
(9) The ratio is not meaningful ("NM") when there is a pro forma loss per
share.
REGULATORY CAPITAL REQUIREMENTS
Under FDIC regulations, depository institutions such as the Bank are
required to maintain a minimum ratio of qualifying total capital to total assets
and off-balance sheet instruments, as adjusted to reflect their relative credit
risks, of 8.0%. At least one-half of total capital is to be comprised of common
equity, retained earnings, non-cumulative perpetual preferred stock and a
limited amount of cumulative perpetual preferred stock, less goodwill and other
intangibles ("Tier 1 capital"). The remainder of total capital may consist of a
limited amount of subordinated debt, other preferred stock, certain other
instruments and a limited amount of general reserves for loan losses ("Tier 2
capital").
The FDIC also has established an additional capital adequacy guideline
referred to as the Tier 1 leverage capital ratio, which measures the ratio of
Tier 1 capital to total assets less goodwill. Although the most highly- rated
depository institutions will be required to maintain a minimum Tier 1 leverage
capital ratio of 3.0%, most depository institutions will be required to maintain
Tier 1 leverage capital ratios of 4.0% to 5.0% or more. The actual required
ratio will be based on the FDIC's assessment of the individual depository
institution's asset quality, earnings performance, interest-rate risk and
liquidity. Although the FDIC has not advised the Bank of a specific Tier 1
leverage capital ratio requirement, management of the Bank believes that for
purposes of complying with applicable federal regulations, the required Tier 1
leverage capital ratio for the Bank will be 4.0%, based upon published
regulatory criteria for establishing such minimum. There can be no assurance
that the Bank will not be required by the FDIC to maintain a higher Tier 1
leverage capital ratio.
The Federal Reserve Board has established guidelines regarding the capital
adequacy of bank holding companies, such as the Company. These requirements are
substantially similar to those adopted by the FDIC for depository institutions,
as set forth above. See generally "Regulation - The Company - Capital
Requirements" and "- The Bank - Capital Requirements."
Set forth below is a summary of the Bank's compliance with the applicable
capital standards as of September 30, 1996 on a historical basis and the
Company's and the Bank's compliance with applicable capital standards on a pro
forma basis assuming that the indicated number of shares were sold by the
Company as of such date and receipt by the Bank of 75% of net Conversion
proceeds. Proceeds have been assumed to be invested in interest-earning assets
which have a 50% risk-weighting.
-33-
<PAGE>
<TABLE>
<CAPTION>
Pro Forma at September 30, 1996 Based on
----------------------------------------------------------------------------------
Historical at 255,000 Shares 300,000 Shares 345,000 Shares 396,750 Shares
September 30, 1996 (Minimum of Range) (Midpoint of Range) (Maximum of Range) (Maximum As Adjusted)
------------------ ------------------ ------------------- ------------------ ---------------------
Percent Percent Percent Percent Percent
Amount of Assets(1) Amount of Assets(1) Amount of Assets(1) Amount of Assets(1) Amount of Assets(1)
------ ------------ ------ ------------ ------ ------------ ------ ------------ ------ ------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
The Company:
Tier 1 risk-weighted level -- --% $4,351 25.01% $4,740 26.95% $5,129 28.84% $5,576 30.98%
Requirement ............ -- -- 696 4.00% 704 4.00% 711 4.00% 720 4.00%
------ ------ ------ ------ ------ ------ ------ ------
Excess ................. -- -- $3,655 21.01% $4,036 22.95% $4,418 24.84% $4,856 26.98%
====== ====== ====== ====== ====== ====== ====== ======
Tier 1 adjusted total level -- -- $4,351 11.63% $4,730 12.53% $5,129 13.42% $5,576 14.42%
Requirement ............ -- -- 1,123 3.00% 1,134 3.00% 1,146 3.00% 1,160 3.00%
------ ------ ------ ------ ------ ------ ------ ------
Excess ................. -- -- $3,228 8.63% $3,606 9.53% $3,983 10.42% $4,416 11.42%
====== ====== ====== ====== ====== ====== ====== ======
Total risk-based level .... -- -- $4,494 25.84% $4,883 27.76% $5,272 29.65% $5,718 31.76%
Requirement ............ -- -- 1,392 8.00% 1,407 8.00% 1,423 8.00% 1,440 8.00%
------ ------ ------ ------ ------ ------ ------ ------
Excess ................. -- -- $3,102 17.84% $3,476 19.76% $3,849 21.65% $4,278 23.76%
====== ====== ====== ====== ====== ====== ====== ======
The Bank:
Tier 1 risk-weighted level $2,371 14.45% $3,780 21.96% $4,058 23.36% $4,336 24.74% $4,655 26.29%
Requirement ............ 656 4.00% 688 4.00% 695 4.00% 701 4.00% 708 4.00%
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Excess ................. $1,715 10.45% $3,092 17.96% $3,363 19.36% $3,635 20.74% $3,947 22.29%
====== ====== ====== ====== ====== ====== ====== ====== ====== ======
Tier 1 adjusted total level $2,371 6.69% $3,780 10.20% $4,058 10.86% $4,336 11.50% $4,655 12.24%
Requirement(2) ......... 1,418 4.00% 1,482 4.00% 1,495 4.00% 1,508 4.00% 1,522 4.00%
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Excess ................. $ 953 2.69% $2,298 6.20% $2,563 6.86% $2,828 7.50% $3,133 8.24%
====== ====== ====== ====== ====== ====== ====== ====== ====== ======
Total risk-based level .... $2,514 15.33% $3,923 22.79% $4,201 24.19% $4,479 25.56% $4,798 27.10%
Requirement ............ 1,312 8.00% 1,377 8.00% 1,389 8.00% 1,402 8.00% 1,416 8.00%
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Excess ................. $1,202 7.33% $2,546 14.79% $2,812 16.19% $3,077 17.56% $3,382 19.10%
====== ====== ====== ====== ====== ====== ====== ====== ====== ======
</TABLE>
- ----------
(1) Average or risk-weighted assets, as appropriate.
(2) Reflects the minimum FDIC requirements. The FDIC could require the Bank to
hold a Tier 1 leverage ratio of up to 5.0%.
-34-
<PAGE>
SUBSCRIPTIONS BY DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth the number of shares of Common Stock of the
Company proposed to be purchased by the Company's directors and by all directors
and executive officers as a group (including purchases by any associates of or
groups acting in concert with such persons), assuming shares of Common Stock are
issued at the maximum of the Estimated Price Range and that sufficient shares
will be available to satisfy their subscriptions.
At the Maximum
of the Estimated Price Range(1)
----------------------------------------------
As a Percent
Number of Shares
Name Amount of Shares Offered
- --------------------------- -------- --------- ------------
Thomas B. Meyer $ 50,000 5,000 1.4%
Merrill G. Norton 150,000 15,000 4.3
Carl W. Busby 150,000 15,000 4.3
Robert L. Ewbank 150,000 15,000 4.3
William T. Ingram 150,000 15,000 4.3
All directors and executive
officers as a group
(5 persons) $650,000(2) 65,000 18.6%
- ----------
(1) Includes proposed subscriptions, if any, by associates. The ESOP intends
to acquire up to 8.0% of the Common Stock in the Conversion, or 27,600
shares at the maximum of the Estimated Price Range, which shares are not
reflected in the amounts to be purchased by the Company's directors and
officers in the table above. In addition, this does not include awards
pursuant to the Stock Option Plan or the Recognition Plan, which will be
submitted for approval to stockholders at a meeting of stockholders
expected to be held not earlier than six months following the completion
of the Conversion. See "- Benefits - Employee Stock Ownership Plan and
Trust."
(2) Includes purchases to be made by executive officers through the 401(k)
Plan.
-35-
<PAGE>
AMERICAN SAVINGS BANK OF DANVILLE AND SUBSIDIARY
CONSOLIDATED STATEMENT OF INCOME
The following Consolidated Statement of Income of the Bank for each of the
years in the two-year period ended September 30, 1996 have been audited by Geo.
S. Olive & Co. LLC, independent certified public accountants, whose report
thereon appears elsewhere herein. This Consolidated Statement of Income should
be read in conjunction with the Consolidated Financial Statements and related
notes included elsewhere herein.
Year Ended September 30,
--------------------------
1996 1995
---- ----
(In Thousands)
Interest income:
Loans receivable $ 2,118 $ 1,757
Investment securities 449 538
Deposits with financial institutions 67 80
------- -------
Total interest income 2,634 2,375
------- -------
Interest expense:
Deposits 1,671 1,588
FHLB advance 107 0
------- -------
Total interest expense 1,778 1,588
------- -------
Net interest income 856 787
Provision for losses on loans 80 13
------- -------
Net interest income after provisions for
for losses on loans 776 774
------- -------
Non-interest income:
Loan fees 12 11
Net realized gains on sales of securities
available for sale -- 1
Other income 33 39
------- -------
Total non-interest income 45 51
------- -------
Non-interest expenses:
Salaries and employee benefits 276 297
Net occupancy expenses 97 95
Data processing fees 40 39
Deposit insurance expense 277 71
Printing and office supplies 16 17
Legal and professional fees 36 43
Advertising and promotion 29 28
Director fees 41 41
Other expenses 77 79
------- -------
Total non-interest expenses 889 710
------- -------
Income (Loss) Before Income Tax (68) 115
Income tax expense 3 15
------- -------
Net income (loss) $ (71) $ 100
======= =======
See accompanying notes to Consolidated Financial Statements.
-36-
<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 operating results of the Bank depend primarily upon its net
interest income, which is determined by the difference between interest income
on interest-earning assets, which consist principally of loans, investment
securities and other investments, and interest expense on interest-bearing
liabilities, which consist principally of deposits. The Bank's net income also
is affected by its provision for loan losses, as well as the level of its
non-interest income, including loan fees and other income and its non-interest
expenses, including salaries and employee benefits, occupancy expense, federal
deposit insurance premiums, director fees, data processing fees, legal and
professional fees, and other expenses.
Asset and Liability Management
The ability to maximize net interest income is largely dependent upon the
achievement of a positive interest rate spread that can be sustained during
fluctuations in prevailing interest rates. Interest rate sensitivity is a
measure of the difference between amounts of interest-earning assets and
interest-bearing liabilities which either reprice or mature within a given
period of time. The difference, or the interest rate repricing "gap," provides
an indication of the extent to which an institution's interest rate spread will
be affected by changes in interest rates. A gap is considered positive when the
amount of interest-rate sensitive assets exceeds the amount of interest-rate
sensitive liabilities, and is considered negative when the amount of
interest-rate sensitive liabilities exceeds the amount of interest-rate
sensitive assets during a given time period. Generally, during a period of
rising interest rates, a negative gap within shorter maturities would adversely
affect net interest income, while a positive gap within shorter maturities would
result in an increase in net interest income, and during a period of falling
interest rates, a negative gap within shorter maturities would result in an
increase in net interest income while a positive gap within shorter maturities
would have the opposite effect. As of September 30, 1996, the amount of the
Bank's interest-bearing liabilities which were estimated to mature or reprice
within one year exceeded the Bank's interest-earning assets with the same
characteristics by $10.4 million or 29.4% of the Bank's total assets.
The Bank's actions with respect to interest rate risk and its
asset/liability gap management are reviewed periodically by the Bank's Board of
Directors. As part of the Board's review, it sets interest rate risk targets and
reviews the Bank's current composition of assets and liabilities in light of the
prevailing interest rate environment.
The Bank has historically emphasized the origination of fixed-rate
long-term residential real estate loans for retention in its portfolio. At
September 30, 1996, $15.8 million or 56.8% of the Bank's total loan portfolio
consisted of one-to-four-family fixed-rate long-term residential mortgage loans.
Although the Bank anticipates that a substantial portion of its loan portfolio
will continue to consist of fixed-rate long-term loans, the Bank has limited the
term of such loans originated since 1983 to no more than 20 years with a
substantial majority of such loans having a term of 15 years or less. The Bank
has also attempted to mitigate the interest rate risk of holding a significant
portion of fixed-rate loans in its portfolio through the origination of
one-to-four family fixed-rate balloon loans with terms of one or three years. At
the end of a balloon loan's term, the entire balance is due. The borrower has
the option of repaying the loan on the due date or, subject to satisfying the
Bank's underwriting criteria, accepting the modified loan rate which is then
offered by the Bank for such loans. In the latter case, the renewed loan is a
new balloon loan with the same term as the initial balloon loan. The Bank has
generally offered rates on such renewed loans at 1/4 of 1% to 1/2 of 1% higher
than rates then offered on its new balloon residential real estate loans.
Renewed balloon loans are amortized over the remaining life of the original
amortization period. At September 30, 1996, $5.6 million or 20.7% of the Bank's
total loan portfolio consisted of one-to-four family fixed-rate balloon loans.
-37-
<PAGE>
In addition, in 1995 the Bank increased its originations of consumer loans
and commercial business loans due to their generally shorter terms and higher
yields than residential mortgage loans. At September 30, 1996, such loans
totalled $2.9 million or 10.8% of the Bank's total loan portfolio. The Bank has
also invested new funds or reinvested funds from maturing securities into
shorter-term securities and variable-rate mortgage-backed securities in order to
increase the interest-rate sensitivity of its assets. As of September 30, 1996,
the Bank had $1.7 million of variable-rate mortgage-backed securities and had
$2.7 million of investments in various and federal agency government securities
with terms to maturity of less than five years. As of September 30, 1996, $2.2
million of the Bank's investment securities portfolio were classified as
available for sale, which will permit the Bank to sell such securities if deemed
appropriate in response to, among other things, changes in interest rates.
The Bank's deposits have included a relatively high amount of
certificates, which are generally higher costing and more interest-rate
sensitive than "core" deposits. At September 30, 1996, $23.8 million, or 77.3%
of the Bank's total deposits were comprised of certificates and $17.0 million,
or 55.4% of the Banks total deposits consisted of certificates which are
scheduled to mature within one year. Certificates generally are costlier and a
more volatile source of funds than transaction accounts. In addition,
certificates are more likely to be invested in other instruments than are
transaction accounts. Notwithstanding the foregoing, management believes that
most of its certificates will remain at the Bank upon maturity. The Bank does
not accept brokered deposits. See "Business of the Bank - Sources of Funds -
Deposits."
The Bank believes that its current interest-rate pricing gap is within
a range acceptable to the Commissioner and consistent with the Bank's
internal guidelines. However as the general interest rate environment and the
condition in the Bank's Market change, the Bank will continue to monitor the
interest-rate sensitivity of its assets and liabilities. In order to continue
to improve the Bank's interest-rate gap position, it plans to continue to
focus on increasing consumer and commercial business lending and investing in
shorter-term and variable-rate securities. Moreover, the Bank believes that
the additional capital it will raise as a result of the sale of the Common
Stock will enhance its flexibility to operate within a wider range of
interest-rate gap scenarios.
-38-
<PAGE>
The following table sets forth the amounts of interest-earning assets
and interest-bearing liabilities outstanding at September 30, 1996, which are
anticipated by the Bank, based upon certain assumptions, to reprice or mature
in each of the future time periods shown (the "GAP Table"). Except as
stated below, the amount of assets and liabilities shown which reprice or
mature during a particular period were determined in accordance with the
earlier of term to repricing or the contractual maturity of the asset or
liability. The table sets forth an approximation of the projected repricing
of assets and liabilities at September 30, 1996, on the basis of contractual
maturities, anticipated prepayments, and scheduled rate adjustments within a
six month period and subsequent selected time intervals.
<TABLE>
<CAPTION>
More Than
Six to More Than Three Years
Within Six Twelve One Year to to Five Over Five
Months Months Three Years Years Years Total
---------- ------ ----------- ----------- --------- -------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Securities(1)(2) $ 894 $ 303 $ 743 $ 782 $ 630 $ 3,352
Loans, net(3) 1,989 1,955 6,215 5,666 11,242 27,067
Interest-bearing deposits(4) 429 99 528
Mortgage-backed securities 835 1,228 846 391 176 3,476
-------- -------- -------- -------- -------- --------
Total interest-earning assets $ 4,147 $ 3,486 $ 7,903 $ 6,839 $ 12,048 $ 34,423
======== ======== ======== ======== ======== ========
Interest-bearing liabilities:
Deposits(5):
NOW accounts 102 103 206 -- -- 411
Money market investment accounts 260 261 522 -- -- 1,043
Savings accounts 232 233 930 932 -- 2,327
Retirement accounts 152 152 604 604 1,511 3,023
Certificates 10,051 6,527 6,385 791 -- 23,754
-------- -------- -------- -------- -------- --------
Total interest-bearing deposits 10,797 7,276 8,647 2,327 1,511 30,558
-------- -------- -------- -------- -------- --------
Advances from FHLB -- -- 2,000 -- -- 2,000
-------- -------- -------- -------- -------- --------
Total interest-bearing liabilities $ 10,797 $ 7,276 $ 10,647 $ 2,327 $ 1,511 $ 32,558
======== ======== ======== ======== ======== ========
Excess (deficiency) of interest-earning
assets over interest-bearing liabilities $ (6,650) $ (3,790) $ (2,744) $ 4,512 $ 10,537 $ 1,865
Cumulative excess (deficiency) of
interest-earning assets over interest-
bearing liabilities $ (6,650) $(10,440) $(13,184) $ (8,672) $ 1,865
Cumulative excess (deficiency) of
interest-earning assets over interest-
bearing liabilities as a percent of
total assets (18.75)% (29.44)% (37.18)% (24.46)% 5.26%
</TABLE>
- ----------
(1) Reflects repricing, contractual maturity or anticipated call date.
(2) Includes securities available for sale and held to maturity and FHLB of
Chicago stock. Excludes mortgage-backed securities.
(3) Fixed-rate loans, including balloon loans, are included in the periods in
which they are scheduled to be repaid, based on scheduled amortization,
adjusted to take into account estimated prepayments. Therefore, for
purposes of the table, all of the Bank's balloon loans are deemed to have
a term equal to the initial amortization period. Annual prepayment
rates for adjustable-rate and fixed-rate residential loans are assumed
to be 5%.
(4) Includes interest-bearing demand and interest-bearing time deposits.
(5) Deposit accounts are assumed to have the following annual decay rates:
NOW accounts--50%; money market investment accounts--50%; savings
accounts--20%; and retirement accounts--10%.
-39-
<PAGE>
Certain assumptions based on regional, state and local data for
savings associations in the state of Illinois and on the Bank's historical
experience are contained in the above table which affect the presentation
therein. Although certain assets and liabilities may have similar maturities
or periods of repricing, they may react in different degrees to changes in
market interest rates. The interest rates on certain types of assets and
liabilities may fluctuate in advance of changes in market interest rates,
while interest rates of other types of assets and liabilities lag behind
changes in market interest rates. Certain assets, such as adjustable-rate
loans, have features which restrict changes in interest rates on a short-term
basis and over the life of the asset. 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.
Net Portfolio Value. Although interest rate sensitivity gap is a useful
measurement and contributes toward effective asset and liability management, it
is difficult to predict the effect of changing interest rates based solely on
that measure. Therefore, the Bank's Board of Directors also monitors its
interest rate sensitivity through the use of the net portfolio value model
produced by the Commissioner which generates estimates of the change in the
Bank's net portfolio value ("NPV") over a range of interest rate scenarios. NPV
is the present value of expected cash flows from assets, liabilities, and
off-balance sheet contracts. The NPV ratio, under any interest rate scenario, is
defined as the NPV in that scenario divided by the market value of assets in the
same scenario. The Commissioner produces such estimates utilizing its own model,
based upon data submitted on the Bank's Call Reports on a quarterly basis. The
Commissioner's model assumes estimated loan prepayment rates, reinvestment rates
and deposit decay rates. See "Regulation - The Savings Bank." The following
table sets forth the Bank's NPV as of September 30, 1996 (the latest available
analysis produced by the Commissioner) as calculated by the Commissioner.
NPV as % of Portfolio
Net Portfolio Value Value of Assets
------------------------------ ---------------------
Change (In Basis Points) NPV
in Interest Rates(1) Amount $ Change % Change Ratio Change (1)
- ------------------------ ------ -------- -------- ----- ----------
(Dollars in Thousands)
+ 400 $1,221 $(1,702) (58)% 3.77 (448)
+ 300 1,615 (1,308) (45) 4.88 (337)
+ 200 2,054 (869) (30) 6.06 (219)
+ 100 2,498 (425) (15) 7.21 (104)
0 2,923 -- -- 8.25 --
- 100 2,722 (201) (7) 7.54 (71)
- 200 3,115 192 7 8.48 23
- 300 2,839 (84) (3) 7.73 (52)
- 400 3,018 95 3 8.11 (14)
- ----------
(1) Assumes an instantaneous and permanent uniform change in interest rates at
all maturities.
Management of the Bank believes that the assumptions used by it to
evaluate the vulnerability of the Bank's operations to changes in interest rates
approximate actual experience and considers them reasonable; however, the
interest rate sensitivity of the Bank's assets and liabilities and the estimated
effects of changes in interest rates on the Bank's net interest income and NPV
indicated in the above tables could vary substantially if different assumptions
were used or actual experience differs from the historical experience on which
they are based. In addition, the interest rate characteristics of certain of the
Bank's assets and liabilities impact the results of the above table.
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<PAGE>
Changes in Financial Condition
General. Total assets of the Bank increased by $1.5 million, or 4.4%, to
$35.5 million at September 30, 1996 from $34.0 million at September 30, 1995.
The increase in total assets during 1996 was due primarily to a $3.0 million
increase in loans which was partially offset by a $1.7 million decrease in
investment securities.
Cash and Cash Equivalents. Cash and cash equivalents, which consist of
interest-bearing demand deposits at other institutions, increased by $218,000,
or 38.2%, to $789,000 at September 30, 1996 compared to $571,000 at September
30, 1995. The increase in cash and cash equivalents during fiscal 1996 was
primarily the result of maturities and repayments of investment securities. At
September 30, 1996, cash and cash equivalents amounted to 2.2% of the Bank's
total assets. Cash and cash equivalents may be utilized to fund deposit
withdrawals or as a source of funds for new loan originations or for the
purchase of investment or mortgage-backed securities.
Loans, Net. The Bank's loans, net, amounted to $26.9 million at September
30, 1996, a $3.0 million, or 12.5%, increase over loans, net, at September 30,
1995. Such increase was due primarily to new originations of residential
mortgage loans and increased originations of consumer loans.
Investment Securities. The Bank's investment securities amounted to $6.6
million at September 30, 1996 compared to $8.3 million at September 30, 1995.
The decrease in investment securities during fiscal 1996 was due to maturities
and repayments of investment securities.
Deposits. The Bank's total deposits amounted to $30.7 million at September
30, 1996 compared to $31.3 million at September 30, 1995. During 1996, before
interest credited, the Bank's total deposits decreased by $1.9 million.
Federal Home Loan Bank Advances. The Bank's total advances from the FHLB
of Chicago amounted to $2.0 million at September 30, 1996. The proceeds from
these advances were used to fund growth in the Bank's loan portfolio during
1996. The Bank had no such advances at September 30, 1995.
Results of Operations
The Bank reported a net loss of $71,000 during the year ended September
30, 1996 and net income of $100,000 during the year ended September 30, 1995.
The primary reason for the net loss reported in fiscal 1996 was the increase in
deposit insurance expense from $71,000 in fiscal 1995 to $277,000 in fiscal 1996
due to a special assessment of $206,000. See Risk Factors - Regulatory Oversight
and Possible Legislation. Excluding the special assessment, the Bank would have
had net income of $84,000 tax effected, a decrease of $16,000 or 16.00% compared
to net income for fiscal 1995. The primary reason for that decrease was an
increase of $67,000 in provisions for losses on loans coupled with an $18,000
charge to the Bank's income tax expense due to a change in the rate applied to
deferred income tax items. These increases were partially offset by a $69,000
increase in the Bank's net interest income.
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<PAGE>
Average Balances, Net Interest Income and Yields Earned and Rates Paid.
The following table presents for the periods indicated the total dollar amount
of interest income from average interest-earning assets and the resultant
yields, as well as the total dollar amount of interest expense on average
interest-bearing liabilities and the resultant rates, and the net interest
margin. The table does not reflect any effect of income taxes. All average
balances are based on average monthly balances during the periods.
<TABLE>
<CAPTION>
Year Ended September 30,
At September 30,------------------------------------------------------------------
1996 1996 1995
--------------- ----------------------------- ---------------------------------
Yield/ Average Yield/ Average Yield/
Rate Balance Interest Rate Balance Interest Rate
------ ------- -------- ------ ------- -------- ------
<S> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans, net(1) 8.17% $25,869 $ 2,118 8.19% $22,399 $1,757 7.84%
Interest-bearing deposits with financial
institutions 5.77 1,330 67 5.04 1,381 80 5.80
Securities(2) 5.53 3,531 204 5.78 4,670 256 5.48
Mortgage-backed securities 6.99 3,811 245 6.43 4,510 282 6.25
------- ------- ------- ------
Total interest-earning assets 7.72 34,541 2,634 7.63 32,960 2,375 7.21
------- ------
Non-interest-earning assets 1,117 1,112
------- -------
Total assets $35,658 $34,072
======= =======
Interest-bearing liabilities:
Deposits:
NOW accounts 1.42% $ 469 $ 10 2.13 $ 516 $ 13 2.52
Money market investment accounts 2,75 1,355 38 2.80 1,685 55 3.26
Savings and retirement accounts 4.58 5,161 236 4.57 5,124 234 4.57
Certificates 5.81 23,672 1,387 5.86 23,842 1,286 5.39
------- ------- ------- ------
Total deposits 5.41 30,657 1,671 5.45 31,167 1,588 5.10
FHLB advances 5.83 1,917 107 5.58 -- -- --
------- ------- ------- ------
Total interest-bearing liabilities 5.43 32,574 1,778 5.46 31,167 1,588 5.10
------- ------
Non-interest bearing liabilities 624 513
------- -------
Total liabilities 33,198 31,680
Equity capital 2,460 2,392
------- -------
Total liabilities and equity capital $35,658 $34,072
======= =======
Net interest income; interest rate spread(3) 2.29% $ 856 2.17% $ 787 2.11%
==== ======= ==== ======= ====
Net interest margin(4) 2.48% 2.39%
==== ====
Ratio of interest-earning assets to
average interest-bearing liabilities 105.67 106.05% 104.04%
====== ====== ======
</TABLE>
- ----------
(1) Includes loans on which the Bank has discontinued accruing interest.
(2) Includes securities available for sale and held to maturity and excludes
mortgage-backed securities.
(3) Interest rate spread represents the difference between the weighted
average yield on interest-earning assets and the weighted average rate on
interest-bearing liabilities.
(4) Net interest margin is net interest income divided by average
interest-earning assets.
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<PAGE>
Rate/Volume Analysis. The following table describes the extent to which
changes in interest rates and changes in volume of interest-related assets and
liabilities have affected the Bank's interest income and interest expense during
the periods indicated. For each category of interest-earning assets and
interest-bearing liabilities, information is provided on changes attributable to
(i) changes in volume (change in volume multiplied by prior year rate), (ii)
changes in rate (change in rate multiplied by prior year volume), and (iii)
total change in rate and volume. The combined effect of changes in both rate and
volume has been allocated proportionately to the change due to rate and the
change due to volume.
Year Ended September 30,
-----------------------------
1996 vs. 1995
-----------------------------
Increase
(Decrease)
Due To Total
---------------- Increase
Rate Volume (Decrease)
----- ------ ----------
(In Thousands)
Interest-earning assets:
Interest-bearing deposits with financial
institutions $ (10) $ (3) $ (13)
Loans, net 80 281 361
Securities(1) 13 (65) (52)
Mortgage-backed securities 8 (45) (37)
----- ----- -----
Total change in interest income 91 168 259
----- ----- -----
Interest-bearing liabilities:
Deposits:
NOW accounts (2) (1) (3)
Money market investment accounts (7) (10) (17)
Savings and retirement accounts -- 2 2
Certificates 110 (9) 101
FHLB advances -- 107 107
----- ----- -----
Total change in interest expense 101 89 190
----- ----- -----
Net change in net interest income $ (10) $ 79 $ 69
===== ===== =====
- ----------
(1) Includes securities available for sale and held to maturity. Does not
include mortgage-backed securities.
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<PAGE>
Net Interest Income. Net interest income is determined by interest rate
spread (i.e., the difference between the yields earned on its interest-earning
assets and the rates paid on its interest-bearing liabilities) and the relative
amounts of interest-earning assets and interest-bearing liabilities. The Bank's
average interest-rate spread was 2.17% and 2.11% during the years ended
September 30, 1996 and 1995, respectively. The Bank's interest-rate spread was
2.29% at September 30, 1996. The Bank's net interest margin (i.e., net interest
income as a percentage of average interest-earning assets) was 2.48% and 2.39%
during the years ended September 30, 1996 and 1995 respectively.
Net interest income increased by $68,000, or 8.6%, during the year ended
September 30, 1996 to $856,000 compared to $788,000 for the year ended September
30, 1995. The reason for such increase in net interest income in fiscal 1996 was
a $259,000 increase in interest income which more than offset a $190,000
increase in interest expense.
Interest Income. Total interest income increased by $259,000 or 10.9% in
the year ended September 30, 1996. Interest income on loans amounted to $2.1
million in fiscal 1996 compared to $1.8 million in fiscal 1995. The average
balance of the Bank's total loans increased by $3.5 million, or 15.5%, in fiscal
1996 compared to fiscal 1995 and the average yield earned on loans increased by
35 basis points (with 100 basis points being equal to 1.0%). Interest income on
mortgage-backed securities decreased by $37,000 or 13.1% in fiscal 1996 compared
to fiscal 1995 due primarily to an $699,000 or 15.5% decrease in the average
balance of the mortgage-backed securities portfolio. Interest income on
securities and interest-bearing deposits decreased by $65,000, or 19.3%, in
fiscal 1996 compared to fiscal 1995 due to a $1.2 million, or 19.7%, decrease in
the average balance of the securities and interest-bearing deposits portfolio
which was slightly offset by a 2 basis point increase in the average yield
earned.
Interest Expense. The primary component of interest expense during all
periods presented is interest on deposits. Total interest expense increased by
$190,000, or 12.0%, during the year ended September 30, 1996 compared to the
year ended September 30, 1995. The increase was due primarily to a $107,000
interest expense on FHLB advances outstanding during fiscal 1996 compared to no
such expense during fiscal 1995 and a $101,000 increase in interest expense on
certificates in fiscal 1996 compared to fiscal 1995, which more than offset a
$20,000 aggregate decrease in interest expense on NOW accounts and money market
investment accounts. Certificates constituted 77.3% of the Bank's total deposits
at September 30, 1996 compared to 77.6% at September 30, 1995. The average
balance of the Bank's certificates remained relatively stable during fiscal
years 1996 and 1995, while the average cost of certificates increased by 47
basis points in fiscal 1996.
Provisions for Losses on Loans. Provisions for losses on loans are charged
to earnings to bring the total allowance for loan losses to a level considered
appropriate by management based on a methodology implemented by the Bank which
is designed to assess, among other things, experience, the volume and type of
lending conducted by the Bank, overall portfolio mix, the amount of the Bank's
classified assets (see "Business of the Bank - Asset Quality"), the status of
past due principal and interest payments, loan-to-value ratios of loans in the
Bank's loan portfolio, general economic conditions, particularly as they relate
to the Bank's market area, and other factors related to the collectibility of
the Bank's loan portfolio. Management of the Bank assesses the allowance for
loan losses on a monthly basis and will make provisions for loan losses as
deemed appropriate by management in order to maintain the adequacy of the
allowance for loan losses.
The Bank's provisions for loan losses increased to $80,000 in fiscal 1996,
compared to $13,000 in fiscal 1995. At September 30, 1996, the Bank's allowance
for loan losses amounted to 43.6% of total non-performing loans and to 0.5% of
[total] loans receivable. The $67,000 increase in provisions from fiscal 1995 to
fiscal 1996 was the result of the Bank's review of its overall loan portfolio
with particular focus on the Bank's increase in consumer and commercial business
lending in recent years.
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<PAGE>
Non-interest Income. Non-interest income decreased $6,000 or 11.6% for the
year ended September 30, 1996 compared to the year ended September 30, 1995.
Non-interest income was negatively affected in fiscal 1996 by a $6,000 decrease
in insurance commissions. Such decreases were partially offset by a $1,000
increase in loan fees in fiscal 1996 compared to fiscal 1995.
Non-interest Expenses. Total non-interest expenses were $889,000 in the
year ended September 30, 1996 which amounted to a $180,000 or 25.3% increase
compared to the year ended September 30, 1995. The primary reason for the
increase was the $206,000 increase in deposit insurance expense, due to a
special assessment required by federal law to recapitalize the SAIF. See "Risk
Factors - Regulatory Oversight and Possible Legislation." Excluding this
assessment, the Bank's non-interest expenses would have decreased by $27,000 or
3.8%. The only other significant changes in the Bank's non-interest expenses for
fiscal 1996 were a $21,000 or 7.0% decrease in salaries and employee benefits
and a $7,000 or 15.6% decrease in legal and professional fees. Future
non-interest expense may be effected by litigation and compensation expenses.
See "Risk Factors - Pending Litigation Against Bank" and "- ESOP and Recognition
Plan Expense."
Income Taxes. In the year ended September 30, 1996, the Bank recognized a
$3,000 tax expense even though it recognized a net loss during the year. This
was primarily attributable to a change in the income tax rate applied to the
Bank's net deferred tax assets. Under generally accepted accounting principles,
the Bank is required to apply the tax rate to its deferred income tax items at
which it expects to be paying when those temporary differences reverse. This
change had the effect of reducing the Bank's net deferred income tax asset by
approximately $18,000 and increasing income tax expense by the same amount.
Accordingly, prior to making this change, the Bank's income tax benefit for the
year ended September 30, 1996 would have been $15,000 compared to income tax
expense of $15,000 in the year ended September 30, 1995.
Liquidity and Capital Resources
The Bank's liquidity, represented by cash and cash equivalents, is a
product of its operating, investing and financing activities. The Bank's primary
sources of funds are deposits, amortization, prepayments and maturities of
outstanding loans and mortgage-backed securities, maturities of investment
securities and other short-term investments and funds provided from operations.
While scheduled payments from the amortization of loans and mortgage-backed
securities and maturing investment securities and short-term investments are
relatively predictable sources of funds, deposit flows and loan prepayments are
greatly influenced by general interest rates, economic conditions and
competition. In addition, the Bank invests excess funds in overnight deposits
and other short-term interest-earning assets which provide liquidity to meet
lending requirements. The Bank has been able to generate sufficient cash through
its deposits and has had a limited use of borrowings as a source of funds during
the past five years. As loan originations and deposits remained stable, the Bank
used cash from maturing securities in its investment portfolio to fund loan
originations. In addition, in fiscal 1996 the Bank borrowed $2.0 million from
the FHLB of Chicago to serve as another source of funding for loans. As of
September 30, 1996, the Bank had the ability to borrow up to $17.0 million from
the FHLB.
Liquidity management is both a daily and long-term function of business
management. Excess liquidity is generally invested in short-term investments
such as overnight deposits. On a longer-term basis, the Bank maintains a
strategy of investing in various lending products as described in greater detail
under "Business of the Bank - Lending Activities." The Bank uses its sources of
funds primarily to meet its ongoing commitments, to pay maturing savings
certificates and savings withdrawals, fund loan commitments and maintain a
portfolio of mortgage-backed and investment securities. At September 30, 1996
the total approved loan commitments outstanding amounted to $1.2 million. At the
same date, the Bank had commitments of $23,000 under unused letters of credit.
Certificates scheduled to mature in one year or less at September 30, 1996
totalled $17.0 million. Management believes that a significant portion of
maturing deposits will remain with the Bank. The Bank anticipates that even with
interest rates at lower levels than have been experienced in recent years, which
has caused a disintermediation of funds, it will continue to have sufficient
funds together with borrowings, to
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<PAGE>
meet its current commitments. The mixture of deposit liabilities and borrowings
will depend on the relevant cost of each of these sources of funds. Moreover,
the Bank anticipates that the primary use of the proceeds from the stock sale to
the Company will be the funding of loans.
Federally-insured state-chartered banks are required to maintain minimum
levels of regulatory capital. Under current FDIC regulations, insured
state-chartered banks generally must maintain (i) a ratio of Tier 1 leverage
capital to total assets of at least 3.0% (4.0% to 5.0% for all but the most
highly rated banks) and (ii) a ratio of Tier 1 capital to risk weighted assets
of at least 4.0% and a ratio of total capital risk weighted assets of at least
8.0%. At September 30, 1996, the Bank was in compliance with applicable
regulatory capital requirements.
The following reflects the Bank's actual levels of regulatory capital and
applicable regulatory capital requirements at September 30, 1996.
<TABLE>
<CAPTION>
Required Actual Excess
----------------- ------------------- ------------------
Percent Amount Percent Amount Percent Amount
------- ------ ------- ------ ------- ------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Tier 1 leverage capital ratio 4.0% $1,418 6.69% $2,371 2.69% $ 953
Risk-based capital ratios:
Tier 1 4.0 656 14.45 2,371 10.45 1,715
Total 8.0 1,312 15.33 2,514 7.33 1,202
</TABLE>
The Company, as a separately incorporated holding company, will have no
significant operations other than serving as sole stockholder of the Bank. On an
unconsolidated basis, the Company initially will have no paid employees. The
Company's assets will consist of its investment in the Bank, the Company's loan
to the Bank's ESOP and 25% of the net proceeds retained from the Conversion, and
its sources of income will consist primarily of earnings from the investment of
such funds as well as any dividends from the Bank. The only expenses expected to
be incurred initially by the Company will relate to its reporting obligations
under the Securities Exchange Act of 1934, as amended ("Exchange Act"), and
related expenses as a publicly traded company. The Company will be directly
reimbursed by the Bank for all such expenses. Upon consummation of the
Conversion, management believes that the Company will have adequate liquidity
available to respond to liquidity demands.
Impact of New Accounting Standards
Accounting for impairment of Loans. In 1993 the Financial Accounting
Standards Board ("FASB") issued SFAS No. 114 ("SFAS 114") entitled "Accounting
by Creditors for Impairment of a Loan." The purpose of SFAS 114 is to eliminate
inconsistencies in the accounting among different types of creditors for loans
with similar collection problems by requiring a single method of measuring
impaired loans. Formally restructured loans and loans evaluated as groups or
pools of homogeneous loans (e.g., single family residences) are excluded from
SFAS 114. In October, 1994, FASB issued SFAS No. 118 ("SFAS 118"), "Accounting
by Creditors for Impairment of a Loan - Income Recognition and Disclosures."
SFAS 118 amends the disclosure requirements in SFAS 114 to require information
about the recorded investment in certain impaired loans and about how a creditor
recognizes interest income related to those impaired loans. The Bank adopted
SFAS 114 and 118 as of October 1, 1995. Management does not anticipate such
adoption will have a material impact on the earnings or financial condition of
the Bank.
Disclosure About Fair Value of Financial Statements. In 1991, FASB issued
SFAS No. 107 ("SFAS 107") entitled "Disclosures About Fair Value of Financial
Statements." This statement requires disclosure of fair value information about
financial instruments, whether or not recognized on the balance sheet, for which
it is
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<PAGE>
practicable to estimate that value. SFAS 107 excludes certain financial
instruments and all nonfinancial instruments from its disclosure requirements.
The Bank adopted SFAS 107 for the year ended September 30, 1995.
Accounting for Certain Securities. In 1993, FASB issued SFAS No. 115
("SFAS 115"), "Accounting for Certain Investments in Debt and Equity
Securities." SFAS 115 generally requires that debt and equity securities that
have readily determinable fair values be carried at fair value unless they are
classified as held to maturity. Securities can be classified as held to maturity
and carried at amortized cost only if the reporting entity has a positive intent
and ability to hold those securities to maturity. If not classified as held to
maturity, such securities must be classified as trading securities or securities
available for sale and are carried at their market value. The unrealized gains
and losses on securities available for sale are to be excluded from earnings and
reported as a net amount as a separate component of stockholders' equity.
Unrealized gains and losses on trading securities are to be included in
earnings. The statement became effective for fiscal years beginning after
December 15, 1993. SFAS 115 was adopted by the Bank on October 1, 1994. At that
date, investment securities with carrying value of $1.8 million were
reclassified as available for sale. This reclassification resulted in a net
decrease in equity of $12,000.
On November 28, 1994, the FDIC changed its policy relating to the
treatment of unrealized gains and losses on securities available for sale in
accordance with SFAS 115. Under the new policy, unrealized gains and losses are
excluded for purposes of calculating regulatory capital. The change in FDIC
policy resulted in an increase in regulatory capital of approximately $15,000 at
September 30, 1996 and a decrease in regulatory capital of $1,000 at September
30, 1995.
On November 15, 1995, the FASB issued its Special Report for SFAS No. 115,
"A Guide to Implementation of Statement 115 on Accounting for Certain
Investments in Debt and Equity Securities." The Special Report provides that,
concurrent with the initial adoption of this implementation guidance but no
later than December 31, 1995, an enterprise may reassess the appropriateness of
the classification of all securities held at that time and account for any
resulting reclassifications at fair value. Reclassification from the held to
maturity category that result from this one-time reassessment (which must be
made on a single date) will not call into question the intent of an enterprise
to hold debt securities to maturity in the future. In accordance with such
Special Report, on December 31, 1995, the Bank transferred certain securities
included in its held to maturity portfolio which, at the date of transfer, had a
carrying value and fair value of $1.6 million to its available for sale
portfolio.
Accounting for Contributions Made. In 1993, the FASB also issued SFAS No.
116 ("SFAS 116") entitled "Accounting for Contributions Received and
Contributions Made." Generally, contributions made, including unconditional
pledges, are recognized as expense in the period made, at the fair value. The
fair value of an unconditional promise to give cash shall be measured on a
discounted cash flow basis. This provision of SFAS 116 became effective for the
Bank beginning October 1, 1995 and did not have a material impact on earnings or
financial condition of the Bank as a result of adoption.
Disclosures about Financial Instruments. In 1994, the FASB issued SFAS No.
119, "Disclosure about Derivative Financial Instruments and Fair Value of
Financial Instruments." This Statement defines derivative financial instruments
as futures, swaps, option contracts or other financial instruments with similar
characteristics and is effective for the Bank's September 30, 1995 financial
statements. The Bank has not entered into these types of contracts and,
accordingly, management believes that the adoption of this Statement will not
have a material impact on the financial statements of the Company.
Accounting for Long Lived Assets. In 1995, the FASB issued SFAS No. 121,
"Accounting for Impairment of Long-Lived Assets and for Long-Lived Assets to be
Disposed of." This Statement establishes accounting standards for the impairment
of long-lived assets, certain identifiable intangibles, and goodwill related to
those
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<PAGE>
aspects to be held and used and for long-lived assets and certain identifiable
intangibles to be disposed of. This Statement is effective for the Bank on
October 1, 1996. Management believes that the adoption of this Statement will
not have a material impact on the earnings or financial statements of the
Company.
Accounting for Mortgage Servicing Rights. In 1995, the FASB also issued
SFAS No. 122, "Accounting for Mortgage Servicing Rights." This Statement amends
SFAS No. 65, "Accounting for Certain Mortgage Banking Activities," to require
that a mortgage banking enterprise recognize as separate assets rights to
service mortgage loans for others, however those services are acquired. This
statement became effective for the Company on October 1, 1996. Management
believes that adoption of this Statement will not have a material impact on the
earnings of the Company.
Accounting for Stock-Based Compensation. In October 1995, the FASB issued
SFAS No. 123, Accounting for Stock-Based Compensation, establishing financial
accounting and reporting standards for stock-based employee compensatin plans.
This statement encourages all entities to adopt a new method of accounting to
measure compensation cost of all employee stock compensation plans based on the
estimated fair value of the award at the date it is granted. Companies are,
however, allowed to continue to measure compensation cost for those plans using
the intrinsic value based method of accounting, which generally does not result
in compensation expense recognition for most plans. Companies that elect to
remain with the existing accounting are required to disclose in a footnote to
the financial statements pro forma net income and, if presented, earnings per
share, as if this Statement had been adopted. The accounting requirements of
this Statement are effective for transactions entered into in fiscal years that
begin after December 15, 1995; however, companies are required to disclose
information for awards granted in their first fiscal year beginning after
December 15, 1994. For the Bank, accounting requirements will begin to apply for
transaction entered into on or after October 1, 1996. In 1994, the FASB issued
an Exposure Draft ("ED") of a proposed SFAS, "Accounting for Stock-Based
Compensation." The FASB decided to require expanded disclosures rather than
recognition of compensation cost for fixed, at the money, options rather than
recognition of compensation expense as was originally proposed in the ED. The
FASB will develop an approach to accounting for employee stock options and other
equity instruments issued to employers based on the estimated fair value of
instruments at the date they are granted. The FASB will encourage employers to
adopt that method. However, employers would be permitted to continue to follow
APB No. 25 and would be required to disclose in notes to financial statements
the pro forma effects on their net income and earnings per share of the new
accounting method.
Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities. SFAS No. 125 supersedes SFAS No. 122 and will be
effective for all transfers and servicing of financial assets and
extinguishments of liabilities occurring after December 31, 1996. This statement
provides accounting and reporting standards for transfers and servicing of
financial assets and extinguishments of liabilities based on consistent
application of a financial-components approach that focuses on control. It
distinguished transfers of financial assets that are sales from transfers that
are secured borrowings. Under the financial-components approach, after a
transfer of financial assets, an entity recognizes all financial assets it no
longer controls and liabilities that have been extinguished. The
financial-components approach focuses on the assets and liabilities that exist
after the transfer. Many of these assets and liabilities are components of
financial assets that existed prior to the transfer. If a transfer does not meet
the criteria for a sale, the transfer is accounted for as a secured borrowing
with a pledge of collateral. Management does not anticipate that the adoption of
this Statement will have a material impact on the earnings or the financial
statements of the Company.
In November 1993, the Accounting Standards Executive Committee of the
American Institute of Certified Public Accountants ("AcSEC") issued SOP 93-6,
"Employers' Accounting for Employee Stock Ownership Plans," which is effective
for fiscal years beginning after December 15, 1993. SOP 93-6 will apply to the
Bank for its fiscal year ending [September 30, 1997. SOP 93-6 requires the
application of its guidance for shares acquired by ESOPs after December 31,
1992, but not yet committed to be released as of the beginning of the year SOP
93-6 is adopted. SOP 93-6 will, among other things, change the measure of
compensation expense recorded by
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<PAGE>
employers for leveraged ESOPs from the cost of ESOP shares to 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 differ from the cost of such shares, this differential will be charged or
credited to equity. Employers with internally leveraged ESOPs will not report
the loan receivable from the ESOP as an asset and will not report the ESOP debt
as a liability. See "Management of the Bank - Benefit Plans - Employee Stock
Ownership Plan and Trust."
Disclosure of Certain Significant Risks and Uncertainties. AcSEC has
issued SOP 94-6, "Disclosure of Certain Significant Risks and Uncertainties."
The SOP requires reporting entities to include in their financial statements
disclosures about the nature of their operations and the use of estimates in the
preparation of financial statements. In addition, if specified disclosure
criteria are met, it requires entities to make disclosure about: (i) amounts
reported in the financial statements or in the notes that are particularly
sensitive to change in the near term (for example, inventory subject to rapid
technological obsolescence, valuation allowances for commercial and real estate
loans and amounts reported for long-term contracts); and (ii) concentrations in
the volume of business transacted with a particular customer, supplier, lender,
grantor or contributor; in revenue from particular products, services or
fund-raising events; in the available sources of supply materials, labor or
services, or of licenses or other rights in the entity's operations; or in the
market of geographic area in which an entity conducts its operations. The SOP
became effective for the Company for the fiscal year ending September 30, 1996.
Impact of Inflation and Changing Prices
The Financial Statements of the Bank and related notes presented herein
have been prepared in accordance with generally accepted accounting principles
("GAAP") which require the measurement of financial position and operating
results in terms of historical dollars, without considering changes in the
relative purchasing power of money over time due to inflation.
Unlike most industrial companies, substantially all of the assets and
liabilities of a financial institution are monetary in nature. As a result,
interest rates have a more significant impact on a financial institution's
performance than the effects of general levels of inflation. Interest rates do
not necessarily move in the same direction or in the same magnitude as the
prices of goods and services, since such prices are affected by inflation to a
larger extent than interest rates. In the current interest rate environment,
liquidity and the maturity structure of the Bank's assets and liabilities are
critical to the maintenance of acceptable performance levels. [Over the three
most recent fiscal years, interest rates have been relatively low and stable and
such environment has generally had a positive impact on the Bank's revenues and
income.]
BUSINESS OF THE BANK
General
American is a traditional, community oriented Illinois savings bank. The
Bank is primarily engaged in attracting deposits from the general public and
using those funds to originate loans. The Bank's primary lending emphasis has
been, and continues to be, loans secured by first and second liens on
single-family (one-to-four units) residences located in the Bank's primary
market area which consists of the area within a fifty mile radius of Danville,
Illinois. The Bank also originates consumer loans (including home improvement
and vehicle loans), loans for the construction of single-family homes, loans
secured by commercial real estate and multi-family (over four units) residential
properties and commercial business loans. Residential mortgage loans originated
by the Bank since 1984 have generally been retained in its portfolio. The Bank
also originates FHA-insured home improvement loans. In 1995, the Bank began
making smaller non-FHA-insured home improvement loans, increased its
originations of consumer loans (primarily vehicle loans) and commercial business
loans, due to their generally shorter terms and higher yields than residential
mortgage loans.
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<PAGE>
In addition to its deposit gathering and lending activities, the Bank
invests in mortgage-backed securities, all of which are issued or guaranteed by
U.S. Government agencies and government sponsored enterprises, as well as U.S.
Treasury and federal government agency obligations and other investment
securities. At September 30, 1996, the Bank's mortgage-backed securities
amounted to $3.5 million, or 9.9% of total assets, all of which are designated
as held to maturity. As of that same date, its other investment securities
portfolio amounted to $3.1 million, or 8.7% of total assets, with $861,000 of
such securities classified as held to maturity and the remaining $2.2 million
classified as available for sale.
Lending Activities
Loan Portfolio Composition. The following table sets forth the composition
of the Bank's loan portfolio by type of loan at the dates indicated:
<TABLE>
<CAPTION>
At September 30,
-----------------------------------------------
1996 1995
--------------------- ----------------------
Percent of Percent of
Balance Total Balance Total
------- ---------- ------- ----------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Type of Loan:
Real estate mortgage loans:
One-to-four family............... $21,419 79.13% 19,181 79.53%
Multi-family..................... 1,236 4.57 1,157 4.80
Commercial real estate........... 781 2.89 669 2.77
Real estate sold on contract...... 374 1.38 415 1.72
Real estate construction loans..... 342 1.26 163 0.68
Commercial business loans.......... 334 1.23 242 1.00
Consumer loans..................... 2,581 9.54 2,291 9.50
------- ------ ------- ------
Total loans........................... 27,067 100.00% 24,118 100.00%
------- ====== ------- ======
Plus:
Deferred loan costs................ 38 --
Less:
Undisbursed portion of loans....... 26 89
Allowance for loan losses.......... 143 74
Unearned interest.................. -- 1
------- -------
Total loans, net...................... $26,936 $23,954
======= =======
</TABLE>
Contractual Principal Repayments and Interest Rates. The following table
sets forth certain information at September 30, 1996 regarding the dollar amount
of loans maturing in the Bank's total loan portfolio, based on the contractual
terms to maturity, before giving effect to net items. Loans having no stated
schedule of repayments and no stated maturity are reported as due in one year or
less.
<TABLE>
<CAPTION>
Over One
One Year Through Five Over Five
or Less Years Years Total
-------- ------------ --------- -----
(In Thousands)
<S> <C> <C> <C> <C>
Real estate mortgage loans:
One-to-four family mortgage loans..... $1,475 $6,226 $13,718 $21,419
Multi-family ......................... 84 392 760 1,236
Commercial real estate................ 155 229 397 781
Real estate sold on contract............ 104 43 227 374
Real estate construction loans.......... 342 -- -- 342
Commercial business loans............... 45 248 41 334
Consumer Loans.......................... 738 1,043 800 2,581
------ ------ ------- -------
Total loans......................... $2,943 $8,181 $15,943 $27,067
====== ====== ======= =======
</TABLE>
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<PAGE>
The following table sets forth the dollar amount of all loans,
before net items, due one year or more after September 30, 1996 which have
fixed interest rates or which have floating or adjustable interest rates. For
purposes of the table, all of the Bank's balloon loans were deemed to have
floating or adjustable rates.
Floating or
Fixed Rates Adjustable Rates Total
----------- ---------------- -----
(In Thousands)
Real estate mortgage loans:
One-to-four family $14,420 $5,524 $19,944
Multi-family 1,001 151 1,152
Commercial real estate 516 110 626
Real estate sold on contract 270 -- 270
Real estate construction loans -- -- --
Commercial business loans 289 -- 289
Consumer loans 1,843 -- 1,843
------- ------ -------
Total loans $18,339 $5,785 $24,124
======= ====== =======
Scheduled contractual amortization of loans does not reflect the expected
term of the Bank's loan portfolio. The average life of loans is substantially
less than their contractual terms because of prepayments and due-on-sale
clauses, which give the Bank the right to declare a conventional loan
immediately due and payable in the event, among other things, that the borrower
sells the real property subject to the mortgage and the loan is not repaid. The
average life of mortgage loans tends to increase when current mortgage loan
rates are higher than rates on existing mortgage loans and, conversely, decrease
when rates on existing mortgage loans are lower than current mortgage loan rates
(due to refinancings of adjustable-rate and fixed-rate loans at lower rates).
Under the latter circumstances, the weighted average yield on loans decreases as
higher-yielding loans are repaid or refinanced at lower rates.
Loan Origination. The following table shows total loans originated and
repaid during the periods indicated. During the periods indicated, no loans were
purchased or sold.
Years Ended September 30,
-------------------------
1996 1995
------ ------
(In Thousands)
Net loans, beginning balance................ $23,954 $21,626
Loan originations:
Real estate mortgage loans:
One-to-four family........................ 5,293 3,667
Multi-family.............................. 235 68
Commercial real estate 155 262
Real estate construction loans.............. 801 344
Commercial business loans................... 71 263
Consumer loans.............................. 2,180 1,558
------- -------
Total loan originations................. 8,735 6,162
Loan principal reductions................... 5,785 3,803
Increase (decrease) due to other items,
net(1).................................... 32 (31)
------- -------
Net increase in loan portfolio.............. 2,982 2,328
------- -------
Loans receivable, net end of period......... $26,936 $23,954
======= =======
(Footnotes on following page)
-51-
<PAGE>
- ----------
(1) Includes changes in undisbursed portion of loans, allowance for loan
losses, deferred loan fees and unearned interest.
The lending activities of the Bank are subject to written underwriting
standards and loan origination procedures established by the Bank's Board of
Directors and management. Applications for residential mortgage loans are taken
by one of the Bank's officers at the Bank's office or submitted to the Bank by
mail. The process of underwriting loans and obtaining appropriate documentation,
such as credit reports, appraisals, employment verification and other
documentation is undertaken by the Bank's loan department. The Bank generally
requires that a property appraisal be obtained in connection with all new
mortgage loans. Property appraisals generally are performed by an independent
appraiser from a list approved by the Bank's Board of Directors. American
requires that title insurance (or receipt of an abstract opinion) and hazard
insurance be maintained on all security properties and that flood insurance be
maintained if the property is within a designated flood plain.
Residential mortgage loan applications are primarily developed from
advertising, referrals from real estate brokers and builders, existing customers
and walk-in customers. Commercial real estate and commercial business loan
applications are obtained primarily from previous borrowers, direct
solicitations by Bank personnel, as well as referrals. Consumer loans originated
by the Bank are obtained primarily through existing customers. In addition, the
Bank uses a small group of pre-approved dealers to assist it in the generation
of home improvement loans.
Most loan approvals are considered by the Bank's loan committee (the "Loan
Committee"), consisting of the Bank's president, assistant vice president and
each of the outside members of the Bank's board of directors. Generally, real
estate mortgage loans of $100,000 or less may be reviewed and approved by at
least two members of the Loan Committee. All other real estate loans require the
approval of a majority of the Bank's Board of Directors. Any non-real estate
loan in an amount up to $10,000 may be approved by one Loan Committee member and
any one loan officer or assistant loan officer. Share loans may be approved by
any elected Bank officer, loan officer or Loan Committee member and all other
loans within the Loan Committee lending limits must be approved by at least two
Loan Committee members. Loans exceeding the Loan Committee limitations must be
reviewed and approved by the full Board of Directors of the Bank. The Bank also
has established aggregate loan limitations which generally apply to larger loans
and groups of loans made to one borrower. No loan or group of loans to any one
borrower may (1) exceed $500,000 or (2) excluding first mortgage and share
loans, exceed $100,000 (with such loans in excess of $20,000 required to be
secured).
Single-Family Residential Loans. Substantially all of the Bank's
one-to-four family residential mortgage loans consist of conventional loans.
Conventional loans are loans that are neither insured by the Federal Housing
Administration ("FHA") or partially guaranteed by the Department of Veterans
Affairs ("VA"). Virtually all of the Bank's one-to-four family residential
mortgage loans are secured by properties and are originated under terms and
documentation which permit their sale to the Federal Home Loan Mortgage
Corporation ("FHLMC"), or the Federal National Mortgage Association ("FNMA").
Sales of residential mortgage loans have been insignificant to date. As of
September 30, 1996, $21.4 million, or 79.1%, of the Bank's total loans consisted
of one-to-four family residential mortgage loans.
The Bank's residential mortgage loans are generally either fixed-rate
loans or shorter-term balloon loans. The Bank does not offer adjustable-rate
one-to-four family residential mortgage loans. Fixed-rate loans generally have
maturities ranging from 10 to 20 years and are fully amortizing with monthly
loan payments sufficient to repay the total amount of the loan with interest by
the end of the loan term. At September 30, 1996, $15.8 million, or 69.9%, of the
Bank's one-to-four family residential mortgage loans were fixed-rate loans with
terms of from 10 to 30 years. At September 30, 1996, the weighted average
remaining term to maturity of the Bank's fixed-rate, single-family residential
mortgage loans was approximately 10.5 years. Substantially all of the Bank's
fixed-rate, one-to-four family residential mortgage loans contain due-on-sale
clauses, which permit the Bank to declare the unpaid balance to be due and
payable upon the sale or transfer of any interest in the property
-52-
<PAGE>
securing the loan. The Bank generally enforces such due-on-sale clauses, but may
waive the clause in certain circumstances.
The balloon loans currently offered by the Bank have terms of one or three
years, but an amortization schedule of up to 30 years. At the end of a balloon
loan's term, the entire balance of the loan is due. The borrower has the option
of repaying the loan on the due date or, subject to satisfying the Bank's
underwriting criteria, accepting the renewed loan rate which is then offered by
the Bank for such loans. In the latter case, the renewed loan is a new balloon
loan with the same term as the initial balloon loan. The Bank has generally
offered rates on such renewed loans at 1/4 of 1% to 1/2 of 1% higher than rates
then offered on its new balloon residential real estate loans. Modified loans
are amortized over the remaining life of the original amortization period. At
September 30, 1996, $5.6 million or 26.1% of the Bank's one-to-four family
residential mortgage loans were balloon loans.
Balloon loans decrease the risks associated with changes in interest rates
but involve other risks. If a borrower renews the loan at a higher interest
rate, the loan payment by the borrower increases, thereby increasing the
potential for default. As with fixed-rate loans, as interest rates increase, the
marketability of the underlying collateral property may be adversely affected by
higher interest rates. The Bank believes the ability to adjust the rates of
these loans to reflect either a rising or falling interest rate environment more
than compensates for risks associated with changing customer payments.
For one-to-four family residential first mortgage loans the Bank's maximum
LTV ratio generally is 80%, and is based on the lesser of sales price or
appraised value. On such loans with a LTV ratio of over 85%, private mortgage
insurance ("PMI") is required on the amount of the loan in excess of 80% of
value. The amount of an owner-occupied residential first mortgage loan is
limited to $300,000 and the amount of an investment residential first mortgage
loan is $250,000.
The Bank offers home equity loans secured by second mortgages. These
second mortgage loans have been made to borrowers who have first mortgages held
by the Bank or customers with substantial other business with the Bank. The Bank
placed second mortgages on many properties to comply with FHA insurance
requirements which currently require such a lien for loans of over $7,500. For
most of the Bank's second mortgage loans, the Bank either holds the first
mortgage or the second mortgage is FHA insured. The Bank holds the first
mortgage on approximately 90% of the properties securing its second mortgage
portfolio which are not FHA-insured loans. A second mortgage loan generally has
a fixed rate of interest and a term of six months.
Multi-Family Residential and Commercial Real Estate Loans. At September
30, 1996, the Bank had $2.0 million in outstanding loans secured by multi-family
residences or commercial real estate. Such loans comprised 7.5% of the Bank's
total loan portfolio at September 30, 1996 and all have either fixed rates of
interest or are balloon loans. Generally, fees of 50 basis points to 1% of the
principal loan balances are charged to the borrower upon closing. The Bank also
obtains personal guarantees of the principals as additional security for any
multi-family residential or commercial real estate loan.
At September 30, 1996, the Bank had $1.2 million in outstanding loans
secured by multi-family residences, all of which were apartment buildings. The
Bank's underwriting standards generally provide for terms of up to 20 years with
amortization of principal over the term of the loan and LTV ratios of not more
than 75%. At September 30, 1996, the Bank had 17 loans secured by multi-family
residences with an average balance of $72,700. As of that date none of the
multi-family loans was non-performing loans.
At September 30, 1996, the Bank had $781,000 in outstanding loans secured
by commercial real estate, primarily retail office and farmland. The Bank's
underwriting standards generally provide for terms of up to ten years with
amortization of principal over the term of the loans and LTV ratios of not more
than 70%. At September 30, 1996, the Bank had 14 loans secured by commercial
real estate with an average balance of $55,800. As of that date, two of the
Bank's commercial real estate loans totaling $93,000 or 27.8% were
non-performing loans.
-53-
<PAGE>
The Bank evaluates various aspects of multi-family residential and
commercial real estate loan transactions in an effort to mitigate risk to the
extent possible. In underwriting these loans, consideration is given to the
stability of the property's cash flow history, future operating projections,
current and projected occupancy, position in the market, location and physical
condition. The underwriting analysis also includes credit checks and a review of
the financial condition of the borrower and guarantor, if applicable. An
appraisal report is prepared by a state-licensed or certified appraiser
commissioned by the Bank to substantiate property values for every multi-family
and commercial real estate loan transaction. All appraisal reports are reviewed
by the Bank prior to the closing of the loan.
Multi-family residential and commercial real estate lending entails
different and significant risks when compared to one-to-four family residential
lending because such loans often involve large loan balances to single borrowers
and because the payment experience on such loans is typically dependent on the
successful operation of the rental units or business. These risks can also be
significantly affected by supply and demand conditions in the local market for
apartments, offices or other commercial space. The Bank attempts to minimize its
risk exposure by limiting such lending to experienced businessmen, only
considering properties with existing operating performance which can be
analyzed, requiring conservative debt coverage ratios and periodically
monitoring the operation and physical condition of the collateral. In most cases
commercial real estate loans are made to business people who are also operating
the tenant businesses.
Construction Loans. As of September 30, 1996, the Bank's construction
loans amounted to $342,000, or 1.3% of the Bank's total loan portfolio. The Bank
originated $801,000 of single-family construction loans to individuals during
the year ended September 30, 1996. A substantial majority of the Bank's
construction loans have consisted of loans to construct single-family residences
although the Bank will also consider construction loans for small apartment
buildings.
The Bank makes construction loans to individuals and, on rare occasions,
to developers for one-to-four family residences. Normally these loans are
construction/permanent loans which require no payments of principal during the
construction period. Interest on the construction loan is normally paid during
or at the close of construction period. Following the construction period (which
is typically no longer than 6 months), the loan converts to a permanent loan
with monthly amortization of principal and interest. Construction loans to
individuals for single-family residential properties generally have the same LTV
ratio requirements as applicable to loans for one-to-four family residences.
Loans to developers are limited to no more than two active projects.
Disbursements of funds during construction are conditioned upon the completion
of a specified percentage of construction.
Construction financing is generally considered to involve a higher degree
of risk of loss than long-term financing on improved, owner-occupied real
estate. Risk of loss on a construction loan is dependent largely upon the
accuracy of the initial estimate of the property's value at completion of
construction or development and the estimated cost (including interest) of
construction. During the construction phase, a number of factors could result in
delays and cost overruns. If the estimate of value proves to be inaccurate, the
Bank may be confronted, at or prior to the maturity of the loan, with a project,
when completed, having a value which is insufficient to assure full repayment.
Loans on lots may run the risk of adverse zoning changes, environmental or other
restrictions on future use. As of September 30, 1996, none of the Bank's
construction loans was considered non-performing.
Consumer Loans. The Bank offers consumer loans in order to provide a full
range of retail financial services to its customers. However, substantially all
of such loans are either home improvement, automobile or share loans. At
September 30, 1996 $2.6 million, or 9.5%, of the Bank's total loan portfolio was
comprised of consumer loans. The Bank originates substantially all of such loans
in its primary market area. Originations of consumer loans by the Bank amounted
to $2.3 million in 1996 compared to $1.6 million and $868,000 in 1995 and 1994,
respectively. The primary reason for the increase in consumer loan originations
in 1995 and 1996 was the Bank's determination to increase its portfolio of
automobile and other vehicle loans due to their generally
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<PAGE>
higher yields and shorter terms to maturity compared to mortgage loans. Loans
secured by vehicles are made directly to customers and the Bank has no direct
relationship with dealers.
For loans secured by vehicles either new or less than two model years old,
the Bank's maximum LTV ratio is the lower of 90% of the purchase price or 100%
of the balance due after trade-in allowances and the maximum loan amount is
$30,000. For loans secured by vehicles at least two but less than six model
years old, the amount of the loan may not exceed the lowest of 75% of the
purchase price, 100% of the maximum NADA Official Used Car Guide value or 100%
of the balance due after trade-in and allowances. However, loans on such
vehicles may not in any case exceed $20,000. The Board has granted management
the authority to exceed LTV ratios and other terms on vehicle loans if they are
noted in subsequent monthly reports to the Board. As of September 30, 1996, the
Bank had $435,000 of loans secured by vehicles.
Share loans are secured by the balance in the borrower's account with the
Bank. These loans generally have interest rates 2% above the rate paid on the
account balance and the principal of the loan may not exceed 90% of the account
balance. As of September 30, 1996, the Bank had $202,000 of share loans.
A substantial portion of the Bank's consumer loans outstanding totaling
$1.2 million at September 30, 1996 are FHA-insured home improvement loans. These
loans are 90% insured by the FHA subject to the limitations of the Bank's FHA
Title I insurance coverage reserve account. The available balance at September
30, 1996 was $349,000.
Consumer finance loans generally involve more credit risk than mortgage
loans because of the type and nature of the collateral and, in certain cases,
the absence of collateral. In addition, consumer lending collections are
dependent on the borrower's continuing financial stability, and thus are more
likely to be adversely affected by job loss, divorce, illness and personal
bankruptcy. In many cases, any repossessed collateral for a defaulted consumer
financial loan will not provide an adequate source of repayment of the
outstanding loan balance because of improper repair and maintenance or
depreciation of the underlying security. The remaining deficiency often does not
warrant further substantial collection efforts against the borrower. As of
September 30, 1996, $49,000 or [1.9%] of the Bank's consumer loans were
considered non-performing. See "Risk Factors - Increased Emphasis on Consumer
Lending."
Commercial Business Loans. The Bank began offering commercial business
loans in March 1995. At September 30, 1996, the Bank's commercial business loans
amounted to $334,000 or 1.2% of the Bank's total loan portfolio. The Bank's
commercial business loans are generally made to its current customers on a
secured or unsecured basis and involve a wide range of business purposes. These
loans generally have terms of between six months to one year. Notes either
require a single payment at the end of their term or have amortizing payments of
principal and interest for periods of up to five years. Any two loan committee
members may approve a loan of this type in an amount up to $20,000. Any
unsecured loan in excess of $20,000 must be approved by the Board of Directors.
The Bank generally obtains personal guarantees from the principals of the
borrower with respect to all commercial loans. The Bank had nine commercial
business loans as of September 30, 1996 with an average loan balance on that
date of $37,000. As of September 30, 1996, none of the Bank's commercial
business loans was non-performing.
Commercial business lending generally entails significantly greater risk
than the risks involved with more traditional real estate lending. The repayment
of commercial business loans typically is dependent on the successful operation
and income stream of the borrower. Such risks can be significantly affected by
economic conditions.
Loans-to-One Borrower Limitations. The Illinois Savings Bank Act imposes
limitations on the aggregate amount of loans that an Illinois chartered savings
bank can make to any one borrower. Under the Illinois Savings Bank Act the
permissible amount of loans-to-one borrower is the greater of $500,000 (for a
savings bank meeting its minimum capital requirements) or 20% of a savings
bank's total capital plus general loan loss reserves. In addition, a savings
bank may make loans in an amount equal to an additional 10% of the savings
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<PAGE>
bank's capital plus general loan loss reserves if the loans are 100% secured by
readily marketable collateral. Under Illinois law, a savings bank's capital
consists of capital stock and noncumulative perpetual preferred stock, related
paid-in capital, retained earnings and other forms of capital deemed to be
qualifying capital by the FDIC. At September 30, 1996, the Bank's limit on
loans-to-one borrower under the Illinois Savings Bank Act was $500,000. At
September 30, 1996, the Bank's five largest groups of loans-to-one borrower
ranged from $459,000 to $235,000, with largest single loan in such groups being
a $229,000 loan secured by a ten-unit apartment building. Each of the five
largest groups of borrowers has several loans from the Bank generally a
combination of loans secured by investment properties and a residence as well as
smaller secured and unsecured personal loans. A substantial portion of each
large group of loans is secured by real estate. At September 30, 1996, all of
such loans were performing in accordance with their terms.
Asset Quality
General. As a part of the Bank's efforts to improve its asset quality, it
has developed and implemented an asset classification system. All of the Bank's
assets are subject to periodic review under the classification system and assets
with classifications of above normal risk of collection are reported to and
reviewed by the Board monthly. Quarterly reports to the Board classify the
totals of all loan assets by risk classification.
When a borrower fails to make a required payment on a loan, the Bank
attempts to cure the deficiency by contacting the borrower and seeking payment.
Contacts are generally made by mail within ten days after a payment is due. In
most cases, deficiencies are cured promptly. If a delinquency continues, late
charges are assessed and additional efforts are made to collect the loan. While
the Bank generally prefers to work with borrowers to resolve such problems, when
the account becomes 120 days delinquent, the Bank institutes foreclosure or
other proceedings, as necessary, to minimize any potential loss.
As a matter of policy the Bank evaluates individual loans past due 90 days
or more to determine if current payments being collected or underlying
collateral security justifies the accrual of additional interest. See Note 1 of
the Notes to Consolidated Financial Statements.
Real estate acquired by the Bank as a result of foreclosure or by
deed-in-lieu of foreclosure and loans deemed to be in-substance foreclosed under
GAAP are classified as real estate owned until sold. Pursuant to SOP 92-3 issued
by the AICPA in April 1992, which provides guidance on determining the balance
sheet treatment of foreclosed assets in annual financial statements for periods
ending on or after December 15, 1992, there is a rebuttable presumption that
foreclosed assets are held for sale and such assets are recommended to be
carried at the lower of fair value minus estimated costs to sell the property,
or cost (generally the balance of the loan on the property at the date of
acquisition). After the date of acquisition, all costs incurred in maintaining
the property are expensed and costs incurred for the improvement or development
of such property are capitalized up to the extent of their net realizable value.
Although, as of September 30, 1996, the Bank had no real estate owned, it is its
policy to comply with the guidance set forth in SOP 92-3.
Under GAAP, the Bank is required to account for certain loan modifications
or restructurings as "troubled debt restructurings." In general, the
modification or restructuring of a debt constitutes a troubled debt
restructuring if the Bank for economic or legal reasons related to the
borrower's financial difficulties grants a concession to the borrower that the
Bank would not otherwise consider under current market conditions. Debt
restructurings or loan modifications for a borrower do not necessarily always
constitute troubled debt restructurings, however, and troubled debt
restructurings do not necessarily result in non-accrual loans. As of September
30, 1996, the Bank had no loans deemed to be troubled debt restructurings. See
the table below under "- Non-Performing Assets and Troubled Debt
Restructurings."
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<PAGE>
Delinquent Loans. The following table sets forth information concerning
delinquent loans at the dates indicated in dollar amounts and as a percentage of
each category of the Bank's loan portfolio. The amounts presented represent the
total outstanding principal balances of the related loans, rather than the
actual payment amounts which are past due.
September 30, 1996
-------------------------------------------------
30-89 Days 90 Days or more
---------------------- -----------------------
Percent of Percent of
Amount Loan Category Amount Loan Category
------ ------------- ------ -------------
(Dollars in thousands)
Real estate mortgage loans:
One-to-four family $287 1.3% $186 0.9%
Multi-family -- -- -- --
Commercial real estate -- -- 93 8.3
Construction -- -- -- --
Commercial business loans -- -- -- --
Consumer loans 18 0.7 49 1.9
---- ----
Total $305 $328
==== ====
September 30, 1995
-------------------------------------------------
30-89 Days 90 Days or more
---------------------- -----------------------
Percent of Percent of
Amount Loan Category Amount Loan Category
------ ------------- ------ -------------
(Dollars in thousands)
Real estate mortgage loans:
One-to-four family $308 1.6% $210 1.1%
Multi-family -- -- -- --
Commercial real estate 97 10.7 -- --
Construction -- -- -- --
Commercial business loans -- -- -- --
Consumer loans 17 0.7 6 0.3
---- ----
Total $422 $216
==== ====
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Non-Performing Assets. The following table sets forth the amounts and
categories of the Bank's non-performing assets at the dates indicated. The Bank
did not have any troubled debt restructuring at any of the dates presented.
At September 30,
----------------
1996 1995
---- -----
(Dollars in Thousands)
Non accruing loans:
Real estate mortgage loans:
One-to-four family $ 74 $ 70
Multi-family -- --
Commercial real estate -- --
Real estate construction loans -- --
Commercial business loans -- --
Consumer loans -- --
---- ----
Total non-accruing loans $ 74 $ 70
---- ----
Accruing loans greater than 90 days delinquent:
Real estate mortgage loans:
One-to-four family 112 140
Multi-family -- --
Commercial real estate 93 --
Real estate construction loans -- --
Commercial business loans -- --
Consumer loans 49 6
---- ----
Total accruing loans greater than 90 days
delinquent 254 146
---- ----
Total non-performing loans 328 216
Real estate owned -- --
---- ----
Total non-performing assets $328 $216
==== ====
Total non-performing loans as a percentage
of total loans 1.21% 0.90%
==== ====
Total non-performing assets as a percentage
of total assets 0.93% 0.64%
==== ====
-58-
<PAGE>
For the year ended September 30, 1996, approximately $5,400 in gross
interest income would have been recorded on loans accounted for on a non-accrual
basis if such loans had been current in accordance with their original terms and
had been outstanding throughout the year or since origination if held for part
of the year. For the year ended September 30, 1996, $5,000 was included in net
income for these loans.
Other Classified Assets. Federal regulations require that the Bank
classify its assets on a regular basis. In addition, in connection with
examinations of insured institutions, federal examiners have authority to
identify problem assets and, if appropriate, classify them in their reports of
examination. There are three 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 insured institution
will sustain some loss if the deficiencies are not corrected. Doubtful assets
have the weaknesses of substandard assets with the additional characteristic
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 possibility of loss. An asset classified loss is considered uncollectible
and of such little value that continuance as an asset of the institution is not
warranted.
At September 30, 1996, the Bank had $288,000 of assets classified
substandard, $37,000 of assets classified doubtful and $15,000 classified as
loss. At such date, the aggregate of the Bank's classified assets amounted to
1.0% of total assets.
Allowance for Loan Losses. The Bank's policy is to establish reserves to
absorb losses on loans based on management's continuing review and evaluation of
the portfolio and its judgment as to the impact of economic conditions on the
portfolio. The allowance for losses on loans is maintained at a level believed
adequate by management to absorb potential losses in the portfolio. Management's
determination of the adequacy of the allowance is based on an evaluation of the
past loss experience, changes in the composition of the portfolio and the
current conditions and amount of loans outstanding. The allowance is increased
by provisions for loan losses which are charged against income. As shown in the
table below, at September 30, 1996, the Bank's allowance for loan losses
amounted to 43.6% and 0.5% of the Bank's non-performing loans and total loans
receivable, respectively.
Effective December 21, 1993, the FDIC, in conjunction with the Office of
the Comptroller of the Currency, the Office of Thrift Supervision ("OTS") and
the Federal Reserve Board, issued the Policy Statement regarding an
institution's allowance for loan and lease losses. The Policy Statement, which
reflects the position of the issuing regulatory agencies and does not
necessarily constitute GAAP, includes guidance (i) on the responsibilities of
management for the assessment and establishment of an adequate allowance and
(ii) for the agencies' examiners to use in evaluating the adequacy of such
allowance and the policies utilized to determine such allowance. The Policy
Statement also sets forth quantitative measures for the allowance with respect
to assets classified substandard and doubtful and with respect to the remaining
portion of an institution's loan portfolio. Specifically, the Policy Statement
sets forth the following quantitative measures which examiners may use to
determine the reasonableness of an allowance: (i) 50% of the portfolio that is
classified doubtful; (ii) 15% of the portfolio that is classified substandard;
and (iii) for the portions of the portfolio that have not been classified
(including loans designated special mention), estimated credit losses over the
upcoming 12 months based on facts and circumstances available on the evaluation
date. While the Policy Statement sets forth this quantitative measure, such
guidance is not intended as a "floor" or "ceiling." The review of the Policy
Statement did not result in a material adjustment to the Bank's policy for
establishing loan losses.
-59-
<PAGE>
The following table describes the activity related to the Bank's allowance
for possible loan losses for the periods indicated.
Year Ended September 30,
------------------------
1996 1995
---------- ----------
(Dollars in Thousands)
Balance at beginning of period $ 74 $ 67
Charge-offs:
One-to-four family real estate loans (10) (10)
Consumer loans (2) --
Recoveries: one-to-four family real estate
loans 1 4
----- -----
Net charge-offs (11) (6)
Provision for losses on loans 80 13
----- -----
Balance at end of period $ 143 $ 74
===== =====
Allowance for loan losses as a percentage
of total loans outstanding 0.53% 0.31%
Allowance for loan losses as a percentage
of total non-performing loans 43.60% 34.26%
Ratio of net charge-offs to average loans
outstanding 0.04% 0.03%
-60-
<PAGE>
The following table presents an allocation of the allowance for loan
losses by the categories indicated and the percentage that loans in each
category bear to total loans. This allocation is used by management to assist in
its evaluation of the Bank's loan portfolio. It should be noted that allocations
are no more than estimates and are subject to revisions as conditions change.
Based upon historical loss experience and the Bank's assessment of its loan
portfolio, all of the Bank's allowance for loan losses have been allocated to
the categories of loans indicated. Allocations of these loans are based
primarily on the creditworthiness of each borrower. In addition, general
allocations are also made to each category based upon, among other things, the
current and future impact of economic conditions on the loan portfolio taken as
a whole. Losses on loans made to consumers are reasonably predictable based on
the prior loss experience and a review of current economic conditions.
At September 30,
-----------------------------------------------
1996 1995
---------------------- ----------------------
Percent of Percent of
Loans in Each Loans in Each
Category to Category to
Amount Total Loans Amount Total Loans
------ ------------- ------ -------------
(Dollars in Thousands)
Real estate mortgage loans:
One-to-four family $ 98 79.13 $53 79.53%
Multi-family -- 4.57 -- 4.80
Commercial real estate -- 2.89 -- 2.77
Real estate sold on contract 4 1.38 4 1.72
Real estate construction loans -- 1.26 -- 0.68
Commercial business loans 3 1.23 -- 1.00
Consumer loans 38 9.54 17 9.50
---- ------ --- ------
Total $143 100.00% $74 100.00%
==== ====== === ======
-61-
<PAGE>
Management of the Bank presently believes that its allowance for loan
losses is adequate to cover any potential losses in the Bank's loan portfolio.
However, future adjustments to this allowance may be necessary, and the Bank's
results of operations could be adversely affected if circumstances differ
substantially from the assumptions used by management in making its
determinations in this regard.
Investment Activities.
General. Interest income from mortgage-backed securities and investment
securities generally provides the second largest source of income to the Bank
after interest on loans. The Bank's Board of Directors has authorized investment
in U.S. Government and agency securities, obligations of the FHLB, and
mortgage-backed securities issued by FNMA, FHLMC and the Government National
Mortgage Association ("GNMA") as well as by certain state, county and municipal
securities. The Bank's objective is to use such investments to reduce interest
rate risk, enhance yields on assets and provide liquidity. On September 30,
1996, the Bank's investment securities portfolio amounted to $6.6 million,
including an net unrealized loss of $20,000, with respect to its securities
available for sale.
Mortgage-Backed Securities. As of September 30, 1996, the Bank's
mortgage-backed securities amounted to $3.5 million, or 9.9% of total assets.
The Bank's mortgage-backed securities portfolio provides a means of investing in
housing-related mortgage instruments without the costs associated with
originating mortgage loans for portfolio retention and with limited credit risk
of default which arises in holding a portfolio of loans to maturity.
Mortgage-backed securities (which also are known as mortgage participation
certificates or pass-through certificates) represent a participation interest in
a pool of single-family or multi-family mortgages. The principal and interest
payments on mortgage-backed securities are passed from the mortgage originators,
as servicer, through intermediaries (generally U.S. Government agencies and
government-sponsored enterprises) that pool and repackage the participation
interests in the form of securities, to investors such as the Bank. Such U.S.
Government agencies and government sponsored enterprises, which guarantee the
payment of principal and interest to investors, primarily include the FHLMC, the
FNMA and the GNMA.
The FHLMC is a public corporation chartered by the U.S. Government and
owned by the 12 FHLBs and federally insured savings institutions. The FHLMC
issues participation certificates backed principally by conventional mortgage
loans. The FHLMC guarantees the timely payment of interest and the ultimate
return of principal on participation certificates. The FNMA is a private
corporation chartered by the U.S. Congress with a mandate to establish a
secondary market for mortgage loans. The FNMA guarantees the timely payment of
principal and interest on FNMA securities. FHLMC and FNMA securities are not
backed by the full faith and credit of the United States, but because the FHLMC
and the FNMA are U.S. Government-sponsored enterprises, these securities are
considered to be among the highest quality investments with minimal credit
risks. The GNMA is a government agency within the Department of Housing and
Urban Development which is intended to help finance government-assisted housing
programs. GNMA securities are backed by FHA-insured and VA-guaranteed loans, and
the timely payment of principal and interest on GNMA securities are guaranteed
by the GNMA and backed by the full faith and credit of the U.S. Government.
Because the FHLMC, the FNMA and the GNMA were established to provide support for
low- and middle-income housing, there are limits to the maximum size of loans
that qualify for these programs which limit currently is $207,000.
Mortgage-backed securities typically are issued with stated principal
amounts, and the securities are backed by pools of mortgages that have loans
with interest rates that are within a range and have varying maturities. The
underlying pool of mortgages can be composed of either fixed-rate or
adjustable-rate loans. As a result, the risk characteristics of the underlying
pool of mortgages, (i.e., fixed rate or adjustable rate) as well as prepayment
risk, are passed on to the certificate holder. The life of a mortgage-backed
pass-through security thus approximates the life of the underlying mortgages.
The Bank's mortgage-backed securities portfolio includes investments in
mortgage-backed securities backed by ARMs or securities which otherwise have an
adjustable rate feature.
-62-
<PAGE>
Mortgage-backed securities generally yield less than the loans which
underlie such securities because of their payment guarantees or credit
enhancements which offer nominal credit risk. In addition, mortgage-backed and
related securities are more liquid than individual mortgage loans and may be
used to collateralize borrowings of the Bank in the event that the Bank
determined to utilize borrowings as a source of funds. Mortgage-backed
securities issued or guaranteed by the FNMA or the FHLMC (except interest-only
securities or the residual interests in CMOs) are weighted at no more than 20.0%
for risk-based capital purposes, compared to a weight of 50.0% to 100.0% for
residential loans. See "Regulation - The Bank - Capital Requirements."
As of September 30, 1996, all of the Bank's $3.5 million of
mortgage-backed securities were classified as held to maturity. See Note 3 of
the Notes to Consolidated Financial Statements.
At September 30, 1996, the weighted average contractual maturity of the
Bank's fixed-rate mortgage-backed securities was approximately 2.0 years. The
actual maturity of a mortgage-backed security may be less than its stated
maturity due to prepayments of the underlying mortgages. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations - Asset
and Liability Management." Prepayments that are faster than anticipated may
shorten the life of the security and adversely affect its yield to maturity. The
yield is based upon the interest income and the amortization of any premium or
discount related to the mortgage-backed security. In accordance with GAAP,
premiums and discounts are amortized over the estimated lives of the loans,
which decrease and increase interest income, respectively. The prepayment
assumptions used to determine the amortization period for premiums and discounts
can significantly affect the yield of the mortgage-backed security, and these
assumptions are reviewed periodically to reflect actual prepayments. Although
prepayments of underlying mortgages depend on many factors, including the type
of mortgages, the coupon rate, the age of mortgages, the geographical location
of the underlying real estate collateralizing the mortgages and general levels
of market interest rates, the difference between the interest rates on the
underlying mortgages and the prevailing mortgage interest rates generally is the
most significant determinant of the rate of prepayments.
During periods of rising mortgage interest rates, if the coupon rates of
the underlying mortgages are less than the prevailing market interest rates
offered for mortgage loans, refinancings generally decrease and slow the
prepayment of the underlying mortgages and the related securities. Conversely,
during periods of falling mortgage interest rates, if the coupon rates of the
underlying mortgages exceed the prevailing market interest rates offered for
mortgage loans, refinancing generally increases and accelerates the prepayment
of the underlying mortgages and the related securities. Under such
circumstances, the Bank may be subject to reinvestment risk because to the
extent that the Bank's mortgage-related securities amortize or prepay faster
than anticipated, the Bank may not be able to reinvest the proceeds of such
repayments and prepayments at a comparable rate.
Securities. The Bank's investments in investment securities other than
mortgage-backed securities consist primarily of securities issued by the U.S.
Treasury and federal government agency obligations except for $361,000 of
securities all of which are general obligations of Illinois municipalities. As
of September 30, 1996, $2.2 million of such securities portfolio were classified
available for sale. The remaining $861,000 of the Bank's investment securities
portfolio were classified as held to maturity. The Bank attempts to maintain a
high degree of liquidity in its investment securities portfolio and generally
does not invest in securities with terms to maturity exceeding ten years. As of
September 30, 1996, the estimated weighted average life of the Bank's investment
securities portfolio was 2.91 years.
-63-
<PAGE>
The following table sets forth certain information regarding the Bank's
investment securities at the dates indicated.
<TABLE>
<CAPTION>
September 30,
-------------------------------------------------------------
1996 1995
----------------------------- -----------------------------
Amortized Cost Market Value Amortized Cost Market Value
-------------- ------------ -------------- ------------
(In Thousands)
<S> <C> <C> <C> <C>
Available for sale:(1)
U.S. Treasury $ 250 $ 253 $ 198 $ 199
Federal agencies 1,992 1,969 1,286 1,287
------ ------ ------ ------
Total available for sale $2,242 $2,222 $1,484 $1,486
====== ====== ====== ======
Held to maturity:(1)
Federal agencies $ 500 $ 499 $2,196 $2,157
State and municipal 361 355 360 353
Mortgage-backed securities 3,476 3,473 4,260 4,256
------ ------ ------ ------
Total held to maturity $4,337 $4,327 $6,816 $6,766
====== ====== ====== ======
</TABLE>
- ----------
(1) The Bank adopted the provisions set forth in SFAS No. 115 on October 1,
1994, which requires entities to carry securities that are available for
sale at their market value while continuing to carry securities that are
held to maturity at their amortized cost.
-64-
<PAGE>
The following table sets forth certain information regarding the
maturities of the Bank's investment securities at September 30, 1996.
<TABLE>
<CAPTION>
Contractually Maturing
---------------------------------------------------------------------------------------
Weighted Weighted Weighted Weighted
Under 1 Average 1-5 Average 6-10 Average Over 10 Average
Year Yield Years Yield Years Yield Years Yield Total
------- -------- ----- -------- ----- -------- ------- ------- -----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Available for sale:
U.S. Treasury $ -- % $ 253 6.13% $ -- % $ -- % $ 253
Federal agencies 604 6.53 1,365 5.88 1,969
------ ------ ----- ----- ------
Total available for sale 604 1,618 2,222
------ ------ ----- ----- ------
Held to maturity:
Federal agencies 500 4.32 500
State and municipal(1) 165 4.65 196 4.85 361
Mortgage-backed securities 2,063 6.98 1,237 6.67 55 9.11 121 9.52 3,476
------ ------ ----- ----- ------
Total held to maturity 2,563 1,237 220 317 4,337
------ ------ ----- ----- ------
Total investment securities $3,167 $2,855 $ 220 $ 317 $6,559
====== ====== ===== ===== ======
</TABLE>
- ----------
(1) Yields on tax-exempt investments have not been computed on a
tax-equivalent basis.
-65-
<PAGE>
In addition, as a member of the FHLB of Chicago the Bank is required to
maintain an investment in stock of the FHLB of Chicago equal to the greater of
1% of the Bank's outstanding home mortgage related assets or 5% of its
outstanding advances from the FHLB of Chicago. As of September 30, 1996, the
Bank's investment in stock of the FHLB of Chicago amounted to $269,000. During
the year ended September 30, 1996, the Bank received $18,000 in dividends on its
FHLB stock. No ready market exists for such stock, which is carried at par
value.
Sources of Funds
General. The Bank's principal source of funds for use in lending and for
other general business purposes has traditionally come from deposits obtained
through the Bank's single retail office. The Bank also derives funds from
amortization and prepayments of outstanding loans and mortgage-related
securities, and from maturing investment securities. Loan repayments are a
relatively stable source of funds, while deposit inflows and outflows are
significantly influenced by general interest rates and money market conditions.
The Bank has made limited use of borrowings to supplement its deposits as a
source of funds.
Deposits. The Bank's current deposit products include savings accounts,
retirement savings accounts, NOW accounts, MMIA, certificates ranging in terms
from six months to five years and noninterest-bearing personal and business
checking accounts.
The Bank's deposits are obtained primarily from residents in its Primary
Market Area. The Bank attracts local deposit accounts by offering a wide variety
of accounts, competitive interest rates and a convenient location and convenient
service hours. The Bank utilizes traditional marketing methods to attract new
customers and savings deposits, including print and broadcast advertising and
direct mailings. However, the Bank does not solicit funds through deposit
brokers nor does it pay any brokerage fees if it accepts such deposits.
The Bank has been competitive in the types of accounts and in interest
rates it has offered on its deposit products but does not necessarily seek to
match the highest rates paid by competing institutions. With the decline in
interest rates paid on deposit products, the Bank in recent years has
experienced limited disintermediation of deposits into competing investment
products. See "Risk Factors - Potential Effects of Changes in Interest Rates."
See generally Note 7 of the Notes to Consolidated Financial Statements.
-66-
<PAGE>
The following table sets forth certain information relating to the Bank's
deposits by type, as of the dates indicated.
<TABLE>
<CAPTION>
September 30,
------------------------------------------------------------------------------
1996 1995
------------------------------------ -------------------------------------
Percent of Weighted Percent of Weighted
Total Average Total Average
Amount Deposits Nominal Rate Amount Deposits Nominal Rate
------ -------- ------------ ------ -------- ------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Transaction accounts:
NOW accounts $ 577 1.88% 1.42% $ 625 1.99% 2.09%
Money market 1,043 3.39 2.75 1,432 4.57 3.30
investment accounts
Savings and retirement accounts 5,350 17.42 4.58 4,965 15.85 4.57
------- ------ ------- ------
Total transaction accounts 6,970 22.69 7,022 22.41
------- ------ ------- ------
Certificates of deposit:
Within 1 year 16,995 55.32 6.02 14,134 45.12 5.73
1-2 years 4,369 14.22 5.85 7,681 24.52 6.84
2-3 years 1,599 5.20 5.51 1,856 5.92 5.63
3-4 years 293 0.95 6.50 339 1.08 5.07
4-5 years 498 1.62 5.95 299 0.95 7.00
------- ------ ------- ------
Total certificate accounts 23,754 77.31 5.81 24,309 77.59 5.87
------- ------ ------- ------
Total deposits $30,724 100.00% $31,331 100.00%
======= ====== ======= ======
</TABLE>
-67-
<PAGE>
The following table sets forth information relating to the Bank's deposit
flows during the periods shown:
At or for the year ended
September 30,
------------------------
1996 1995
---------- ----------
(In Thousands)
Net deposits (withdrawals) before interest
credited $(1,877) $ (567)
Interest credited 1,270 1,200
------- -------
Total increase (decrease) in deposits $ (607) $ 633
======= =======
-68-
<PAGE>
The following table shows the interest rate and maturity information for
the Bank's certificates at September 30, 1996.
<TABLE>
<CAPTION>
Maturity Date
----------------------------------------------------------------------------------------
One Year
Interest Rate or Less Over 1-2 Years Over 2-3 Years Over 3-4 Years Over 4-5 Years Total
- ------------- -------- -------------- -------------- -------------- -------------- ------
(In Thousands)
<S> <C> <C> <C> <C> <C> <C>
4.50 to 4.99% $ 200 $ -- $ -- $ -- $ -- $ 200
5.00 to 5.99% 9,450 2,835 1,586 -- 274 14,145
6.00 to 6.99% 4,265 1,534 13 293 224 6,329
7.00 to 7.10% 3,080 -- -- -- -- 3,080
------- ------- ------- ------- ------- -------
Total $16,995 $ 4,369 $ 1,599 $ 293 $ 498 $23,754
======= ======= ======= ======= ======= =======
</TABLE>
The following table sets for the maturities of the Bank's certificates
having principal amounts of $100,000 or more at September 30, 1996.
Maturity Period Amount
- ------------------------------------ -------
(In Thousands)
Three months or less $ 723
Over three through six months 656
Over six through twelve months 913
Over twelve months 483
-----
Total certificates of deposit with
balances of $100,00 or more $2,775
=====
-69-
<PAGE>
Borrowings. The Bank may obtain advances from the FHLB of Chicago upon the
security of the common stock it owns in that bank and certain of its residential
mortgage loans and securities held to maturity, provided certain standards
related to creditworthiness have been met. Such advances are made pursuant to
several credit programs, each of which has its own interest rate and range of
maturities. Prior to fiscal 1996, the Bank had not used such borrowings during
the most recent five-year period.
The following table sets forth the amounts of the Bank's borrowings and
the weighted average rates for the year ended September 30, 1996. The Bank had
no borrowings during the year ended September 30, 1995.
For the Year Ended
September 30, 1996
------------------
(Dollars
in Thousands)
FHLB advances:
Average balance outstanding
during the period(1).................. $1,917
======
Maximum amount outstanding
at any month-end during
the period............................ $2,000
======
Balance outstanding at end
of period............................. $2,000
======
Weighted average interest
rate during the period................ 5.58%
Weighted average interest
rate at the end of period............. 5.83%
======
- ----------
(1) The average balance was computed using an average of monthly balances
during the year.
-70-
<PAGE>
Subsidiaries
The Bank currently has one subsidiary, G.B.W. Service Corporation ("GBW").
GBW's primary activities are the collection of premiums on credit life and
credit disability insurance policies and the collection of interest on certain
real estate sales contracts. The Bank's investment totalled $118,000 as of
September 30, 1996.
Legal Proceedings
The Bank is involved in routine legal proceedings occurring in the
ordinary course of business which, in the aggregate except as noted below, are
believed by management to be immaterial to the financial condition of the Bank.
On December 30, 1992, Rosemary Frobose, a former officer of the Bank, filed a
lawsuit against the Bank in the United States District Court, Southern District
of Illinois, (subsequently transferred to the Central District of Illinois,
Peoria Division) alleging that she was the victim of a retaliatory discharge
based on common law rights and the federal "whistleblower statute," 12 USC ss.
1831j(a). The plaintiff seeks compensatory and punitive damages against the Bank
based upon her loss of income and employment for at least a ten-year period. She
has not sought a specific dollar amount in her complaint but at one point made a
demand of $900,000. Recently, the Court entered a summary judgment in favor of
the Bank on each count except one which was subsequently dismissed by the Court.
The Bank anticipates an appeal of the court's order against the plaintiff. The
Bank plans to continue to vigorously contest this lawsuit. In the judgment of
the Bank's litigation counsel, the likelihood that the plaintiff will prevail in
this case is remote. However, should the case be revised on appeal and a verdict
ultimately directed against the Bank by the trial court, the Bank's litigation
counsel believes that the range of potential loss is $250,000 to $1 million.
In the unlikely event of a verdict within that range, the resulting loss
would have a material adverse effect on the Bank.
Competition
The Bank faces strong competition both in attracting deposits and making
real estate loans. Its most direct competition for deposits has historically
come from other savings institutions, credit unions and commercial banks located
in its market area including many large financial institutions which have
greater financial and marketing resources available to them. As of June 30,
1996, the Bank's total deposits ranked sixth out of 17 commercial banks and
savings associations operating in Vermilion County, Illinois. In addition, as of
that same date, there were also 18 credit unions operating in Vermilion County.
While each of such institutions, as of June 30, 1995, had total deposits of less
than $20 million, including 15 with total deposits of less than $10 million, in
the aggregate they provide strong competition for the Bank, especially in the
consumer lending area. In addition, during times of high interest rates, the
Bank has faced significant competition for investors' funds from short-term
money market securities, mutual funds and other corporate and government
securities. The ability of the Bank to attract and retain savings deposits
depends on its ability to generally provide a rate of return, liquidity and risk
comparable to that offered by competing investment opportunities.
The Bank experiences strong competition for real estate loans principally
from other savings institutions, commercial banks and mortgage banking
companies. The Bank competes for loans principally through the interest rates
and loan fees it charges, the efficiency and quality of services it provides
borrowers and the convenient locations of its branch office network. Competition
may increase as a result of the continuing reduction of restrictions on the
interstate operations of financial institutions.
Employees
The Bank had eight full-time employees and two part-time employees as of
September 30, 1996. None of these employees is represented by a collective
bargaining agreement. The Bank believes that it enjoys excellent relations with
its personnel.
Offices and Properties
At September 30, 1996, the Bank conducted business from a single office
located in Danville, Illinois.
-71-
<PAGE>
The following table sets forth certain information relating to the Bank's
office at September 30, 1996.
Net Book Value of
Premises and
Owned or Equipment at Deposits at
Location Leased September 30, 1996 September 30, 1996
- -------------------------- -------- ------------------ ------------------
(In Thousands)
Main Office:
714 North Vermilion Street Owned $ 467 $30,726
Danville, Illinois 61832
REGULATION
Set forth below is a brief description of those laws and regulations
which, together with the descriptions of other laws and regulations contained
elsewhere herein, are deemed material to an investor's understanding of the
extent to which the Company and the Bank are regulated. The description of these
laws and regulations, as well as descriptions of laws and regulations contained
elsewhere herein, does not purport to be complete and is qualified in its
entirety by reference to applicable laws and regulations.
The Company
Financial institutions and their holding companies are extensively
regulated under federal and state law by various regulatory authorities
including the Federal Reserve Board, the FDIC and the Commissioner. The
financial performance of the Company and the Bank may be affected by such
regulation, although the extent to which they may be affected cannot be
predicted with a high degree of certainty.
Federal and state laws and regulations generally applicable to financial
institutions and their holding companies regulate, among other things, the scope
of business, investments, reserves against deposits, capital levels relative to
operations, the nature and amount of collateral for loans, the establishment of
branches, mergers, consolidations and dividends. The system of supervision and
regulation applicable to the Company and the Bank establishes a comprehensive
framework for their operations and is intended primarily for the protection of
the FDIC's deposit insurance funds and the depositors of the Bank, rather than
the stockholders of the Company.
The following references to material statutes and regulations affecting
the Company and the Bank are brief summaries thereof and are qualified in their
entirety by reference to such statutes and regulations. Any change in applicable
law or regulations may have a material effect on the business of the Company and
the Bank.
The Bank
General. The Bank is an Illinois-chartered savings bank, the deposit
accounts of which are insured by the SAIF of the FDIC. As a SAIF-insured,
Illinois-chartered savings bank, the Bank is subject to the examination,
supervision, reporting and enforcement requirements of the Commissioner, as the
chartering authority for Illinois savings banks, and the FDIC, as administrator
of the SAIF, and to the statutes and regulations administered by the
Commissioner and the FDIC governing such matters as capital standards, mergers,
establishment of branch offices, subsidiary investments and activities and
general investment authority. The Bank is required to file reports with the
Commissioner and the FDIC concerning its activities and financial condition and
will be required to obtain regulatory approvals prior to entering into certain
transactions, including mergers with, or acquisitions of, other financial
institutions.
-72-
<PAGE>
The Commissioner and the FDIC have extensive enforcement authority over
Illinois-chartered savings banks, such as the Bank. This enforcement authority
includes, among other things, the ability to issue cease-and-desist or removal
orders, to assess civil money penalties and to initiate injunctive actions. In
general, these enforcement actions may be initiated for violations of laws and
regulations and unsafe and unsound practices.
The Commissioner has established a schedule for the assessment of
"supervisory fees" upon all Illinois savings banks to fund the operations of the
Commissioner. These supervisory fees are computed on the basis of each savings
bank's total assets (including consolidated subsidiaries) and are payable at the
end of each calendar quarter. A schedule of fees has also been established for
certain filings made by Illinois savings banks with the Commissioner. The
Commissioner also assesses fees for examinations conducted by the Commissioner's
staff, based upon the number of hours spent by the Commissioner's staff
performing the examination. During the fiscal year ended September 30, 1996, the
Bank paid approximately $11,000 in supervisory fees and expenses.
The system of regulation and supervision applicable to the Bank
establishes a comprehensive framework for its operations and is intended
primarily for the protection of the FDIC's deposit insurance funds and the
depositors of the Bank. Changes in the regulatory framework could have a
material adverse effect on the Bank and its operations which, in turn, could
have a material adverse effect on the Holding Company.
Capital Requirements. Under the Illinois Savings Bank Act ("ISBA") and the
regulations of the Commissioner, an Illinois savings bank must maintain a
minimum level of total capital equal to the higher of 3% of total assets or the
amount required to maintain insurance of deposits by the FDIC. The Commissioner
has the authority to require an Illinois savings bank to maintain a higher level
of capital if the Commissioner deems such higher level necessary based on the
savings bank's financial condition, history, management or earnings prospects.
FDIC-insured institutions are required to follow certain capital adequacy
guidelines which prescribe minimum levels of capital and require that
institutions meet certain risk-based and leverage capital requirements. Under
the FDIC capital regulations, an FDIC-insured institution is required to meet
the following capital standards: (i) "Tier 1 capital", for all but the most
highly rated institutions in an amount not less than 4% of total assets; (ii)
"Tier 1 capital" in an amount not less than 4% of risk-weighted assets; and
(iii) "total capital" in an amount not less than 8% of risk-weighted assets.
FDIC-insured institutions in the strongest financial and managerial
condition (with a composite rating of "1" under the Uniform Financial
Institutions Rating System established by the Federal Financial Institutions
Examination Council) are required to maintain "Tier 1 capital" equal to at least
3% of total assets ( the "leverage limit" requirement). For all other
FDIC-insured institutions, the minimum leverage limit requirement is 3% of total
assets plus at least an additional 100 to 200 basis points. Tier 1 capital is
defined to include the sum of common stockholders' equity, noncumulative
perpetual preferred stock (including any related surplus), and minority
interests in consolidated subsidiaries, minus all intangible assets (other than
qualifying servicing rights, qualifying purchased credit-card relationships and
qualifying supervisory goodwill), certain identified losses (as defined in the
FDIC's regulations) and investments in certain subsidiaries.
FDIC-insured institutions also are required to adhere to certain
risk-based capital guidelines which are designed to provide a measure of capital
more sensitive to the risk profiles of individual banks. Under the risk-based
capital guidelines, capital is divided into two tiers: core (Tier 1) capital, as
defined above, and supplementary (Tier 2) capital. Tier 2 capital is limited to
100% of core capital and includes cumulative perpetual preferred stock,
perpetual preferred stock for which the dividend rate is reset periodically
based on current credit standing, regardless of whether dividends are cumulative
or non-cumulative, mandatory convertible debt securities, term subordinated
debt, intermediate-term preferred stock and the allowance for possible loan and
lease losses. The allowance for possible loan and lease losses includable in
Tier 2 capital is limited to a maximum of 1.25% of risk-weighted assets. Total
capital is the sum of Tier 1 and Tier 2 capital. The risk-based capital
framework assigns balance sheet assets to one of four broad risk categories
which are assigned risk weights ranging from 0% to 100% based primarily on the
degree of credit risk associated with the obligor. Off balance sheet items are
converted to an on-balance sheet
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"credit equivalent" amount utilizing certain conversion factors. The sum of the
four risk-weighted categories equals risk-weighted assets. At September 30, 1996
the Bank met each of its capital requirements.
Dividends. Under the ISBA, dividends may only be declared when the total
capital of the Bank is greater than that required by Illinois law. Dividends may
be paid by the Bank out of its net profits (i.e., earnings from current
operations, plus actual recoveries on loans, investments, and other assets after
deducting all current expenses, including dividends or interest on deposit
accounts, additions to reserves as may be required by the Illinois Commissioner,
actual losses, accrued dividends on preferred stock, if any, and all State and
federal taxes). The written approval of the Commissioner must be obtained,
however, before a savings bank having total capital of less than 6% of total
assets may declare dividends in any year in an amount in excess of 50% of its
net profits for that year. A savings bank may not declare dividends in excess of
its net profits in any year without the approval of the Commissioner. In
addition, before declaring a dividend on its capital stock, the Bank must
transfer no less than one-half of its net profits of the preceding half year to
its paid-in surplus until it shall have paid-in surplus equal to 20% of its
capital stock. Finally, the Bank will be unable to pay dividends in an amount
which would reduce its capital below the greater of (i) the amount required by
the FDIC, (ii) the amount required by the Commissioner or (iii) the amount
required for the liquidation account to be established by the Bank in connection
with the Conversion. The Commissioner and the FDIC also have the authority to
prohibit the payment of any dividends by the Bank if the Commissioner or the
FDIC determines that the distribution would constitute an unsafe or unsound
practice. For the year ended September 30, 1996, the Bank's net loss was
$71,000, and the Bank could have paid no dividends without the written approval
of the Commissioner.
Federal Home Loan Bank System. The Bank is a member of the FHLB System
which consists of 12 FHLBs under the jurisdiction of the Federal Housing Finance
Board ("FHFB"). As a member of the FHLB System, the Bank is required to acquire
and hold shares of capital stock of the FHLB of Chicago in an amount equal to
the greater of (i) 1.0% of the aggregate outstanding principal amount of the
Bank's aggregate unpaid loan principal, or (ii) 0.3% of the Bank's total assets.
The Bank's holdings of FHLB capital stock will be reviewed annually by the FHLB
of Chicago using calendar year-end financial data to ensure that the Bank is
holding the minimum required amount of FHLB capital stock. If the minimum amount
required is decreased, the FHLB-Chicago may in its discretion and upon
application of the Bank, retire excess shares of capital stock held by the Bank.
The Bank is in compliance with this requirement with an investment in FHLB
capital stock of $269,000 at September 30, 1996.
The FHLBs provide a central credit facility primarily for member
institutions. FHLBs make advances to member banks in accordance with each
Federal Home Loan Bank's policies and procedures established by the FHFB and the
Board of Directors of such FHLB. All long-term advances by a Federal Home Loan
Bank (advances having an original term to maturity greater than five years) must
be made only for the purpose of providing funds for residential housing finance.
Advances are made upon the note or obligation of a member bank, must be fully
secured and bear interest at a rate established by the FHFB. At September 30,
1996, the Bank had $2.0 million in advances outstanding from the FHLB of
Chicago. The Bank's aggregate outstanding advances from the FHLB of Chicago may
at no time exceed 20 times the amounts paid in by the Bank for its holding of
FHLB capital stock.
Lending Limitations. Under the ISBA, the Bank is prohibited from making
secured or unsecured loans for business, corporate, commercial or agricultural
purposes representing in the aggregate an amount in excess of 15% of its total
assets, unless the Commissioner authorizes in writing a higher percentage limit
for such loans upon the request of an institution. In addition, the regulations
of the Commissioner prohibit the Bank from making educational loans in excess of
5% of its total assets.
The Bank is also subject to a loans-to-one borrower limitation. Under the
ISBA, the total loans and extensions of credit, both direct and indirect, by the
Bank to any person (other than the United States or its agencies, the state of
Illinois or its agencies, and any municipal corporation for money borrowed)
outstanding at one time must not exceed the greater of $500,000 or 20% of the
Bank's total capital plus general loan loss reserves. In addition to the above,
the total loans and extensions of credit, both direct and indirect, by the Bank
to any person outstanding at one time and at least 100% secured by readily
marketable collateral must not exceed the greater of $500,000 or 10% of the
Bank's total capital plus general loan loss reserves.
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Brokered Deposits; Regulation of Deposit Rates. Under applicable laws and
regulations, an insured depository institution may be restricted in obtaining,
directly or indirectly, funds by or through any "deposit broker," as defined,
for deposit into one or more deposit accounts at the institution. The term
"deposit broker" generally includes any person engaged in the business of
placing deposits, or facilitating the placement of deposits, of third parties
with insured depository institutions or the business of placing deposits with
insured depository institutions for the purpose of selling interests in those
deposits to third parties. Under FDIC regulations, well-capitalized institutions
are subject to no brokered deposit limitations, while adequately capitalized
institutions are able to accept, renew or roll over brokered deposits only (i)
with a waiver from the FDIC and (ii) subject to the limitation that they do not
pay an effective yield on any such deposit which exceeds by more than (a) 75
basis points the effective yield paid on deposits of comparable size and
maturity in such institution's normal market area for deposits accepted in its
normal market area or (b) by 120% for retail deposits and 130% for wholesale
deposits, respectively, of the current yield on comparable maturity U.S.
Treasury obligations for deposits accepted outside the institution's normal
market area. Undercapitalized institutions are not permitted to accept brokered
deposits and may not solicit deposits by offering an effective yield that
exceeds by more than 75 basis points the prevailing effective yields on insured
deposits of comparable maturity in the institution's normal market area or in
the market area in which such deposits are being solicited. At September 30,
1996, the Bank was an adequately capitalized institution which was not subject
to restrictions on brokered deposits within the meaning of these regulations and
had no brokered deposits. See "Business - Sources of Funds - Deposits."
An institution that is not well-capitalized, even if meeting minimum
capital requirements, may not solicit deposits by offering interest rates that
are significantly higher than the relevant local or national rate as determined
under the regulations.
Community Reinvestment Act Requirements. The FDIC, the Federal Reserve
Board, the Office of Thrift Supervision and the OCC have jointly issued a final
rule (the "Final Rule") under the Community Reinvestment Act (the "CRA"). The
Final Rule eliminates the existing CRA regulation's twelve assessment factors
and substitutes a performance based evaluation system. The Final Rule will be
phased in over a period of time and become fully effective by July 1, 1997.
Under the Final Rule, an institution's performance in meeting the credit needs
of its entire community, including low- and moderate-income areas, as required
by the CRA, will generally be evaluated under three tests: the "lending test,"
the "investment test," and the "service test." A "small bank," defined to
include one with less than $250 million in assets, is subject to a special test,
involving consideration of loan to deposit ratio, the percentage of loans
located in the institution's "assessment area", the degree of lending to persons
of different income levels and to business and farms of different sizes,
geographic distribution of loans, and responsiveness to complaints about its
performance in meeting local credit needs. As an alternative, institutions may
submit a "strategic plan" approved by the FDIC. These tests and standards are
applied in a "performance context." The performance context includes information
on income levels, housing stock and costs in the local area, any information
about lending, investment and service opportunities in the area, the
association's product offerings and business strategy, the institution's
capacity and constraints, past performance and performance of similarly situated
lenders, and written comments placed in the association's public file.
Institutions receive a rating of "outstanding", "satisfactory", "needs to
improve" or "substantial noncompliance." These ratings are made publicly
available and are used when applications are filed with the agency to branch,
relocate an office, merge with or acquire other institutions, among other
transactions. Based upon a review of the Final Rule, management of the Company
does not anticipate that the new CRA regulations will adversely affect the Bank.
The Company
General. Upon consummation of the Conversion, the Company will become the
sole stockholder of the Bank. As such, the Holding Company will be a bank
holding company. As a bank holding company, the Company will be required to
register with, and will become subject to regulation by, the Federal Reserve
Board under the BHCA. In accordance with Federal Reserve Board policy, the
Company will be expected to act as a source of financial strength to the Bank
and to commit resources to support the Bank in circumstances where the Company
might not do so absent such policy. Under the BHCA, the Company will be subject
to periodic examination by the Federal
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Reserve Board and will be required to file periodic reports of its operations
and such additional information as the Federal Reserve Board may require.
Because the Bank is chartered under Illinois law, the Company will also be
subject to registration with, and regulation by, the Commissioner under the
ISBA.
The BHCA requires prior Federal Reserve Board approval for, among other
things, the acquisition by a bank holding company of direct or indirect
ownership or control of more than five percent of the voting shares or
substantially all the assets of any bank, or for a merger or consolidation of a
bank holding company with another bank holding company. With certain exceptions,
the BHCA prohibits a bank holding company from acquiring direct or indirect
ownership or control of voting shares of any company which is not a bank or bank
holding company and from engaging directly or indirectly in any activity other
than banking or managing or controlling banks or performing services for its
authorized subsidiaries. A bank holding company may, however, engage in or
acquire an interest in a company that engages in activities which the Federal
Reserve Board has determined by regulation or order to be so closely related to
banking or managing or controlling banks as to be a proper incident thereto.
A bank holding company is a legal entity separate and distinct from its
subsidiary bank or banks. Normally, the major source of a holding company's
revenue is dividends a holding company receives from its subsidiary banks. The
right of a bank holding company to participate as a stockholder in any
distribution of assets of its subsidiary banks upon their liquidation or
reorganization or otherwise is subject to the prior claims of creditors of such
subsidiary banks. The subsidiary banks are subject to claims by creditors for
long-term and short-term debt obligations, including substantial obligations for
federal funds purchased and securities sold under repurchase agreements, as well
as deposit liabilities. Under the Financial Institutions Reform, Recovery and
Enforcement Act of 1989, in the event of a loss suffered by the FDIC in
connection with a banking subsidiary of a bank holding company (whether due to a
default or the provision of FDIC assistance), other banking subsidiaries of the
holding company could be assessed for such loss.
Federal laws limit the transfer of funds by a subsidiary bank to its
holding company in the form of loans or extensions of credit, investments or
purchases of assets. Transfers of this kind are limited to ten percent of a
bank's capital and surplus with respect to each affiliate and to twenty percent
to all affiliates in the aggregate, and are also subject to certain collateral
requirements. These transactions, as well as other transactions between a
subsidiary bank and its holding company, must also be on terms substantially the
same as, or at least as favorable as, those prevailing at the time for
comparable transactions with non-affiliated companies or, in the absence of
comparable transactions, on terms or under circumstances, including credit
standards, that would be offered to, or would apply to, non-affiliated
companies.
Capital Requirements. The Federal Reserve Board has adopted capital
adequacy guidelines for bank holding companies (on a consolidated basis)
substantially similar to those of the FDIC for the Bank. On a pro forma basis
assuming consummation of the Conversion, the Company's pro forma Tier 1 and
total capital would significantly exceed the Federal Reserve Board's capital
adequacy requirements.
Other Regulations
FDICIA. FDICIA was enacted on December 19, 1991. In addition to providing
for the recapitalization of BIF, FDICIA represents a comprehensive and
fundamental change to banking supervision. FDICIA imposes relatively detailed
standards and mandates the development of additional regulations governing
nearly every aspect of the operations, management and supervision of banks and
bank holding companies like the Company and the Bank.
As required by FDICIA, and subsequently amended by the Riegle Community
Development and Regulatory Improvement Act of 1994, the federal banking
regulators have adopted (effective August 9, 1995) interagency guidelines
establishing standards for safety and soundness for depository institutions on
matters such as internal controls, loan documentation, credit underwriting,
interest-rate risk exposure, asset growth, and compensation and other benefits
(the "Guidelines"). In addition, the federal banking regulators have proposed
asset quality and earnings standards to be added to the Guidelines. The agencies
expect to request a compliance plan from an institution whose
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failure to meet one or more of the standards is of such severity that it could
threaten the safe and sound operation of the institution. FDIC regulations
enacted under FDICIA also require all depository institutions to be examined
annually by the banking regulators and depository institutions having $500
million or more in total assets to have an annual independent audit, an audit
committee comprised solely of outside directors, and to hire outside auditors to
evaluate the institution's internal control structure and procedures and
compliance with laws and regulations relating to safety and soundness. The FDIC,
in adopting the regulations, reiterated its belief that every depository
institution, regardless of size, should have an annual independent audit and an
independent audit committee.
FDICIA requires the banking regulators to take prompt corrective action
with respect to depository institutions that fall below certain capital levels
and prohibits any depository institution from making any capital distribution
that would cause it to be considered undercapitalized. Regulations establishing
five capital categories of well capitalized, adequately capitalized,
undercapitalized, significantly undercapitalized and critically undercapitalized
became effective December 19, 1992. Institutions that are not adequately
capitalized may be subjected to a broad range of restrictions on their
activities and will be required to submit a capital restoration plan which, to
be accepted by the regulators, must be guaranteed in part by any company having
control of the institution. Only well capitalized institutions and adequately
capitalized institutions receiving a waiver from the FDIC will be permitted to
accept brokered deposits, and only those institutions eligible to accept
brokered deposits may provide pass-through deposit insurance for participants in
employee benefit plans. In other respects, FDICIA provides for enhanced
supervisory authority, including greater authority for the appointment of a
conservator or receiver for undercapitalized institutions.
A range of other regulations adopted as a result of FDICIA include
requirements applicable to closure of branches; additional disclosures to
depositors with respect to terms and interest rates applicable to deposit
accounts; requirements for the banking agencies to adopt uniform regulations for
extensions of credit secured by real estate; modification of accounting
standards to conform to generally accepted accounting principles including the
reporting of off-balance sheet items and supplemental disclosure of estimated
fair market value of assets and liabilities in financial statements filed with
the banking regulators; increased penalties in making or failing to file
assessment reports with the FDIC; greater restrictions on extensions of credit
to directors, officers and principal stockholders; and increased reporting
requirements on agricultural loans and loans to small businesses.
As required by FDICIA, the FDIC has established a risk-based assessment
system for the deposit insurance provided to depositors at depository
institutions whereby assessments to each institution are calculated upon the
probability that the insurance fund will incur a loss with respect to the
institution, the likely amount of such loss, and the revenue needs of the
insurance fund. Under the system, deposit insurance premiums are based upon an
institution's assignment to one of three capital categories and a further
assignment to one of three supervisory subcategories within each capital
category. The result is a nine category assessment system with initial
assessment rates ranging from twenty-three cents to thirty-one cents per one
hundred dollars of deposits in an institution. The classification of an
institution into a category will depend, among other things, on the results of
off-site surveillance systems, capital ratio, and CAMEL rating (a supervisory
rating of capital, asset quality, management, earnings, and liquidity).
The CDR Act. On September 23, 1994, the Riegle Community Development and
Regulatory Improvement Act of 1994 (the "CDR Act") was enacted. The CDR Act
includes more than 50 regulatory relief provisions designed to streamline the
regulatory process for banks and thrifts and to eliminate certain duplicative
regulations and paperwork requirements established after, and largely as a
result of, the savings and loan debacle. Well run community banks with less than
$250 million in assets will be examined every 18 months rather than annually.
The application process for forming a bank holding company has been greatly
reduced. Also, the requirement that call report data be published in local
newspapers has been eliminated.
The CDR Act establishes dual programs and provides funding in the amount
of $382 million to provide for development services, lending and investment in
distressed urban and rural areas by community development financial institutions
and banks. In addition, the CDR Act includes provisions relating to flood
insurance reform, money laundering, regulation of high-cost mortgages, and small
business and commercial real estate loan securitization.
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The Branching Act. On September 29, 1994, the Riegle-Neal Interstate
Banking and Branching Efficiency Act of 1994 (the "Branching Act") was enacted.
Under the Branching Act, beginning September 29, 1995, adequately capitalized
and adequately managed bank holding companies will be allowed to acquire banks
across state lines, without regard to whether the transaction is prohibited by
state law; however, they will be required to maintain the acquired institutions
as separately chartered institutions. Any state law relating to the minimum age
of target banks (not to exceed five years) will be preserved. Under the
Branching Act, the Federal Reserve Board will not be permitted to approve any
acquisition if, after the acquisition, the bank holding company would control
more than 10% of the deposits of insured depository institutions nationwide or
30% or more of the deposits in the state where the target bank is located. The
Federal Reserve Board could approve an acquisition, notwithstanding the 30%
limit, if the state waives the limit either by statute, regulation or order of
the appropriate state official.
In addition, under the Branching Act beginning on June 1, 1997, banks will
be permitted to merge with one another across state lines and thereby create a
main bank with branches in separate states. After establishing branches in a
state through an interstate merger transaction, the bank could establish and
acquire additional branches at any location in the state where any bank involved
in the merger could have established or acquired branches under applicable
federal or state law.
The responsible federal agency will not be permitted to approve any merger
if, after the merger, the resulting entity would control more than 10% of the
deposits of insured depository institutions nationwide or 30% or more of the
deposits in any state affected by the merger. The responsible agency could
approve a merger, notwithstanding the 30% limit, if the home state waives the
limit either by statute, regulation or order of the appropriate state official.
Under the Branching Act, states may adopt legislation permitting
interstate mergers before June 1, 1997. In contrast, states may adopt
legislation before June 1, 1997, subject to certain conditions, opting out of
interstate branching. If a state opts out of interstate branching, no
out-of-state bank may establish a branch in that state through an acquisition or
de novo, and a bank whose home state opts out may not participate in an
interstate merger transaction. Illinois has adopted legislation permitting
interstate mergers beginning on June 1, 1997.
Recent Developments Affecting Deposit Insurance Premiums
On September 30, 1996, the Deposit Insurance Funds Act of 1996 ("Insurance
Act") was enacted into law. Among other things, the Insurance Act authorizes the
FDIC to impose a special assessment on each depository institution with
SAIF-assessable deposits so that the SAIF may achieve its designated reserve
ratio. The Bank's assessment was $206,000 on a pre-tax basis, and was accrued
during the quarter ended September 30, 1996. In addition, the Insurance Act
provides for the merger of the BIF and the SAIF into the Deposit Insurance Fund
on January 1, 1999, but only if no insured depository institution is a savings
association on that date. As a result of the enactment of the Insurance Act,
beginning January 1, 1997 the deposit insurance premium applicable to most
savings associations was reduced from $2.30 per $1,000 of deposits to $0.645 per
$1,000.
FEDERAL AND STATE TAXATION
Federal Taxation
General. The Company and the Bank are subject to the corporate tax
provisions of the Code, as well as certain additional provisions of the Code
which apply to thrift and other types of financial institutions. The following
discussion of tax matters is intended only as a summary and does not purport to
be a comprehensive description of the tax rules applicable to the Company and
the Bank.
Fiscal Year. The Company will file its federal income tax return on a
September 30 year end basis.
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Method of Accounting. The Bank maintains its books and records for federal
income tax purposes using the accrual method of accounting. The accrual method
of accounting generally requires that items of income be recognized when all
events have occurred that establish the right to receive the income and the
amount of income can be determined with reasonable accuracy, and that items of
expense be deducted at the later of (i) the time when all events have occurred
that establish the liability to pay the expense and the amount of such liability
can be determined with reasonable accuracy or (ii) the time when economic
performance with respect to the item of expense has occurred.
Bad Debt Reserves. Savings institutions, such as the Bank, which meet
certain definitional tests primarily relating to their assets and the nature of
their businesses, are permitted to establish a reserve for bad debts and to make
annual additions to the reserve. These additions may, within specified formula
limits, be deducted in arriving at the institution's taxable income. For
purposes of computing the deductible addition to its bad debt reserve, the
institution's loans are separated into "qualifying real property loans" (i.e.,
generally those loans secured by certain interests in real property) and all
other loans ("non-qualifying loans"). The deduction with respect to
non-qualifying loans must be computed under the experience method as described
below. The following formulas may be used to compute the bad debt deduction with
respect to qualifying real property loans: (i) actual loss experience, or (ii) a
percentage of taxable income. Reasonable additions to the reserve for losses on
non-qualifying loans must be based upon actual loss experience and would reduce
the current year's addition to the reserve for losses on qualifying real
property loans, unless that addition is also determined under the experience
method. The sum of the additions to each reserve for each year is the
institution's annual bad debt deduction.
Under the experience method, the deductible annual addition to the
institution's bad debt reserves is the amount necessary to increase the balance
of the reserve at the close of the taxable year to the greater of (a) the amount
which bears the same ratio to loans outstanding at the close of the taxable year
as the total net bad debts sustained during the current and five preceding
taxable years bear to the sum of the loans outstanding at the close of the six
years, or (b) the lower of (i) the balance of the reserve account at the close
of the Bank's "base year," which was its tax year ended December 31, 1987, or
(ii) if the amount of loans outstanding at the close of the taxable year is less
than the amount of loans outstanding at the close of the base year, the amount
which bears the same ratio to loans outstanding at the close of the taxable year
as the balance of the reserve at the close of the base year bears to the amount
of loans outstanding at the close of the base year.
Under the percentage of taxable income method, the bad debt deduction
equals 8% of taxable income determined without regard to that deduction and with
certain adjustments. The availability of the percentage of taxable income method
permits a qualifying savings institution to be taxed at a lower effective
Federal income tax rate than that applicable to corporations in general. This
resulted generally in an effective Federal income tax rate payable by a
qualifying savings institution fully able to use the maximum deduction permitted
under the percentage of taxable income method, in the absence of other factors
affecting taxable income, of 31.3% exclusive of any minimum tax or environmental
tax (as compared to 34% for corporations generally). For tax years beginning on
or after January 1, 1993, the maximum corporate tax rate was increased to 35%,
which increased the maximum effective federal income tax rate payable by a
qualifying savings institution fully able to use the maximum deduction to 32.2%.
Any savings institution at least 60% of whose assets are qualifying assets, as
described in the Code, will generally be eligible for the full deduction of 8%
of taxable income. As of December 31, 1995, 93.6% of the assets of the Bank were
"qualifying assets" as defined in the Code, and the Bank anticipates that at
least 60% of its assets will continue to be qualifying assets in the immediate
future. If this ceases to be the case, the institution may be required to
restore some portion of its bad debt reserve to taxable income in the future.
Under the percentage of taxable income method, the bad debt deduction for
an addition to the reserve for qualifying real property loans cannot exceed the
amount necessary to increase the balance in this reserve to an amount equal to
6% of such loans outstanding at the end of the taxable year. The bad debt
deduction is also limited to the amount which, when added to the addition to the
reserve for losses on non-qualifying loans, equals the amount by which 12% of
deposits at the close of the year exceeds the sum of surplus, undivided profits
and reserves at the beginning of the year. Based on experience, it is not
expected that these restrictions will be a limiting factor for the
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Bank in the foreseeable future. In addition, the deduction for qualifying real
property loans is reduced by an amount equal to all or part of the deduction for
non-qualifying loans.
At September 30, 1996, the Federal income tax reserves of the Bank
included $1.0 million for which no Federal income tax has been provided. Because
of these Federal income tax reserves and the liquidation account to be
established for the benefit of certain depositors of the Bank in connection with
the conversion of the Bank to stock form, the retained earnings of the Bank are
substantially restricted.
Pursuant to certain legislation which was recently enacted and which will
be effective for tax years beginning after 1995, a small thrift institution (one
with an adjusted basis of assets of less than $500 million), such as the Bank,
would no longer be permitted to make additions to its tax bad debt reserve under
the percentage of taxable income method. Such institutions would be permitted to
use the experience method in lieu of deducting bad debts only as they occur.
Such legilsation will require the Bank to realize increased tax liability over a
period of at least six years, beginning in 1996. Specifically, the legislation
will require a small thrift institution to recapture (i.e., take into income)
over a multi-year period the balance of its bad debt reserves in excess of the
lesser of (i) the balance of such reserves as of the end of its last taxable
year ending before 1988 or (ii) an amount that would have been the balance of
such reserves had the institution always computed its additions to its reserves
using the experience method. The recapture requirement would be suspended for
each of two successive taxable years beginning January 1, 1996 in which the Bank
originates an amount of certain kinds of residential loans which in the
aggregate are equal to or greater than the average of the principal amounts of
such loans made by the Bank during its six taxable years preceding 1996. It is
anticipated that any recapture of the Bank's bad debt reserves accumulated after
1987 would not have a material adverse effect on the Bank's financial condition
and results of operations. As of September 30, 1996, the Bank's accumulated bad
debt reserves after 1987 amounted to $129,600. See Note 9 to the Consolidated
Financial Statements.
Distributions. If the Bank were to distribute cash or property to its sole
stockholder, and the distribution was treated as being from its accumulated bad
debt reserves, the distribution would cause the Bank to have additional taxable
income. A distribution is deemed to have been made from accumulated bad debt
reserves to the extent that (a) the reserves exceed the amount that would have
been accumulated on the basis of actual loss experience, and (b) the
distribution is a "non-qualified distribution." A distribution with respect to
stock is a non-qualified distribution to the extent that, for federal income tax
purposes, (i) it is in redemption of shares, (ii) it is pursuant to a
liquidation of the institution, or (iii) in the case of a current distribution,
together with all other such distributions during the taxable year, it exceeds
the institution's current and post-1951 accumulated earnings and profits. The
amount of additional taxable income created by a non-qualified distribution is
an amount that when reduced by the tax attributable to it is equal to the amount
of the distribution.
Minimum Tax. The Code imposes an alternative minimum tax at a rate of 20%.
The alternative minimum tax generally applies to a base of regular taxable
income plus certain tax preferences ("alternative minimum taxable income" or
"AMTI") and is payable to the extent that tax calculated on AMTI in excess of an
exemption amount exceeds the regular tax liability. The Code provides that an
item of tax preference is the excess of the bad debt deduction allowable for a
taxable year pursuant to the percentage of taxable income method over the amount
allowable under the experience method. Other items of tax preference that
constitute AMTI include (a) tax-exempt interest on newly issued (generally,
issued on or after August 8, 1986) private activity bonds other than certain
qualified bonds and (b) 75% of the excess (if any) of (i) adjusted current
earnings as defined in the Code, over (ii) AMTI (determined without regard to
this preference and prior to reduction by net operating losses).
Net Operating Loss Carryovers. A financial institution may carry back net
operating losses ("NOLs") to the preceding three taxable years and forward to
the succeeding 15 taxable years. This provision applies to losses incurred in
taxable years beginning after 1986. At September 30, 1996, the Bank had no NOL
carryforwards for Federal income tax purposes.
Audit by IRS. The Bank's Federal income tax returns for taxable years
through September 30, 1992 have been closed for the purpose of examination by
the Internal Revenue Service.
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State and Local Taxation.
State of Illinois. The Company and the Bank will file a combined Illinois
income tax return. For Illinois income tax purposes, they are taxed at an
effective rate equal to 7.2% 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 Illinois taxable income. The Company is
also required to file an annual report with and pay an annual franchise tax to
the State of Illinois.
Delaware Taxation. As a Delaware holding company not earning income in
Delaware, the Company is exempt from Delaware corporate income tax but is
required to file an annual report with and pay an annual franchise tax to the
State of Delaware.
MANAGEMENT
Management of the Company
The Board of Directors is divided into three classes, each of which
contains one-third of the Board. The directors shall be elected by the
stockholders of the Company for staggered three-year terms, or until their
successors are elected and qualified. One class of directors, consisting of
Messrs. Ewbank and Ingram has a term of office expiring at the first annual
meeting of stockholders, a second class, consisting of Messrs. Busby and Norton
has a term of office expiring at the second annual meeting of stockholders and a
third class, consisting of Mr. Meyer has a term of office expiring at the third
annual meeting of stockholders. Their names and biographical information are set
forth under "- Management of the Bank."
The following individuals are executive officers of the Company and hold
the offices set forth below opposite their names.
Executive Position Held with Company
- ----------------- -------------------------------------
Thomas B. Meyer Chairman of the Board
Merrill G. Norton President and Chief Executive Officer
William T. Ingram Secretary
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 a majority vote of stockholders.
Since the formation of the Company, none of the executive officers,
directors or other personnel has received remuneration from the Company.
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" and "- Executive Officers Who Are Not
Directors." Directors and executive officers of the Company initially will not
be compensated by the Company but will serve and be compensated by the Bank. It
is not anticipated that separate compensation will be paid to directors and
officers of the Company until such time as such persons devote significant time
to the separate management of the Company's affairs, which is not expected to
occur until the Company becomes actively engaged in additional businesses other
than holding the stock of the Bank. The Company may determine that such
compensation is appropriate in the future.
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Management of the Bank
The following table sets forth certain information regarding the Board of
Directors of the Bank. Each member is elected annually.
Positions Held
With Director
Name Age(1) the Bank Since
- ------------------- ------ ------------------------------ --------
Thomas B. Meyer 51 Chairman of the Board 1972
Merrill G. Norton 50 Director, President and Chief
Executive Officer 1992
Carl W. Busby 67 Director 1993
Robert L. Ewbank 64 Director 1983
William T. Ingram 56 Director/Secretary 1990
- ----------
(1) As of December 31, 1995.
Set forth below is information with respect to the principal occupations
during at least the last five years for the directors of the Bank.
Thomas B. Meyer Mr. Meyer is an attorney in private practice in Danville,
Illinois. He has served as Chairman of the Board since 1992.
Merrill G. Norton Mr. Norton has served as the Bank's president and chief
executive officer since 1992. He was the sole proprietor of Merrill G. Norton,
C.P.A. from 1973 to 1992.
Carl W. Busby Mr. Busby is an auctioneer, farm and real estate appraiser
and agriculture real estate salesman. He is the president and owner with his
wife of Busby Farms, Inc. and Busby Land and Auction Co., Inc.
Dr. Robert L. Ewbank Dr. Ewbank has been a medical consultant since 1995
when he retired from his oral and maxillofacial surgery practice in Danville,
Illinois.
William T. Ingram Mr. Ingram operates a number of businesses in the
Danville, Illinois area, including Automobile Diagnostics, Quick Air Freight,
Ingram's Quicklube and Ingram's Apartments.
Committees and Meetings of the Board of the Bank
The Bank's Board of Directors holds regular meetings on the third
Wednesday of each month, as well as special meetings as necessary. The Board of
Directors held 15 meetings (including three special meetings) held in the fiscal
year ended September 30, 1996. The Board has established various committees to
which it has delegated certain responsibilities, including a nominating
committee, investment committee, audit committee, promotion and advertising
committee and interest rate risk/asset liability committee. No director attended
fewer than 75% of the total number of Board meetings and meetings of Board
committees on which he served during the fiscal year ended September 30, 1996.
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All of the Board members serve on the Investment Committee and the
Interest Rate Risk/Asset Liability Committee and all of the Board members except
for Mr. Norton serve on the Nominating Committee. The Audit Committee's current
members are Messrs. Meyer, Ewbank and Busby and the members of the Promotion and
Advertising Committee are Messrs. Norton and Ingram. During fiscal 1996, the
Investment Committee met 12 times, the Interest Rate Risk/Asset Liability
Committee met quarterly, the Promotion and Advertising Committee met three
times, the Audit Committee met twice and the Nominating Committee met once.
Directors' Compensation
Members of the Bank's Board of Directors receive $400 per month plus $300
per special meeting attended. Board fees are subject to adjustment by the Board
of Directors annually. Each of the Bank's directors also serves on GBW's board
of directors and receives a monthly fee of $50 for such service. In addition to
fees paid to directors for Board meetings, the Bank's directors are expected to
participate in the Stock Option Plan and Recognition Plan. See "- Benefits -
Stock Option Plan" and "- Recognition and Retention Plan."
Summary Compensation Table
The following table sets forth a summary of certain information concerning
the compensation paid by the Bank for services rendered in all capacities during
the year ended September 30, 1996 to the President and Chief Executive Officer
of the Bank. No other executive officers of the Bank had total annual
compensation in excess of $100,000 during fiscal 1996.
<TABLE>
<CAPTION>
====================================================================================================================================
Annual Compensation Long Term Compensation
-------------------------------------------------------------------------------------
Other
Annual Awards Payouts
Name and Year Salary Bonus Compensation(1) All Other
Principal Position Compensation
-----------------------------------------
Restricted Securities LTIP
Stock Underlying Payouts
Options
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Merrill G. Norton
President and Chief
Executive Officer 1996 $74,613 $ -0- -- -- -- -- $6,700(2)
====================================================================================================================================
</TABLE>
- ----------
(1) Does not include amounts attributable to miscellaneous benefits received
by the named executive officer. In the opinion of management of the Bank,
the costs to the Bank of providing such benefits to the named executive
officer during the year ended September 30, 1996 did not exceed the lesser
of $50,000 or 10% of the total of annual salary and bonus reported for the
individual.
(2) Consists of $6,700 allocated by the Bank on behalf of Mr. Norton pursuant
to the Bank's 401(k) plan.
Employment Agreements
The Bank intends to enter into an employment agreement with Mr. Norton
upon consummation of the Conversion. The Bank intends to agree to employ Mr.
Norton for a term of three years in his current position at an initial base
salary of $76,000. The agreement is terminable with or without cause by the
Bank. The officer shall have no right to compensation or other benefits pursuant
to the employment agreement for any period after voluntary termination or
termination by the Bank for cause, provided, however, that (i) in the event that
the Bank fails to comply with any material provision of the employment agreement
he shall be entitled to severance payments equal to his annual salary multiplied
by three or (ii) if certain adverse actions are taken with respect to the
officer's employment following a Change in Control of the Company, as defined,
Mr. Norton will be
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entitled to cash severance payments equal to his average annual compensation at
the date of termination multiplied by two. A Change in Control of the Company is
generally defined in the employment agreement to mean a change in control of a
nature that would be required to be reported in response to Item 6(c) of
Schedule 14A of Regulation 14A promulgated under the Securities Exchange Act of
1934, as amended. Mr. Norton's employment agreement provides that in the event
that any payments to be paid thereunder are deemed to constitute "excess
parachute payments" and, therefore, subject to an excise tax under Section 4999
of the Code, the amount of severance shall be reduced to an amount that will not
result in any excess parachute payments. Mr. Norton's agreement also provides
that in the event of Mr. Norton's disability, retirement or death during the
term of the agreement, Mr. Norton or his estate will receive payments equal to
the amount of compensation for 12 months at his then current base salary.
Based upon compensation levels at September 30, 1996, in the event of a
termination of employment following a Change in Control, Mr. Norton would
receive $149,200 in cash severance.
Although the above-described employment agreement could increase the cost
of any acquisition of control of the Company, management of the Company does not
believe that the terms thereof would have a significant anti-takeover effect.
Benefits
401(k) Profit Sharing Plan. The Bank maintains a 401(k) profit sharing
plan. The 401(k) Plan is designed to promote the future economic welfare of the
employees of the Bank and to encourage employee savings. Employee deferrals of
salary and employer contributions made under the 401(k) Plan, together with the
income thereon, are accumulated in individual accounts maintained in trust on
behalf of the employee participants, and is made available to the employee
participants upon retirement and under certain other circumstances as provided
in the 401(k) Plan. Since employee deferrals of salary and employer
contributions made under the 401(k) Plan are made on a tax deferred basis,
employee participants are able to enjoy significant income tax savings by
participating in the 401(k) Plan. Employees are also permitted to direct the
investment of their accounts among five mutual funds.
An employee of the Bank becomes eligible to participate in the 401(k) Plan
after he or she completes a year of service (provided he or she is at least age
21). A year of service is a 12 consecutive month period in which the employee
works at least 1,000 hours for the Bank. An employee will become a participant
in the 401(k) Plan on the first day of the month coinciding with or next
following the date he or she satisfies the eligibility requirements.
Participants may elect to defer amounts of up to 15% of their annual
compensation to the 401(k) Plan, subject to certain limits imposed by law. Each
year the Bank may make a discretionary matching contribution equal to a
percentage of compensation deferred and may make additional discretionary
contributions. Upon consummation of the Conversion, the Bank expects to
terminate the matching provision of the 401(k) Plan. The Bank may also make
discretionary profit sharing contributions, allocated to eligible employees on
the basis of relative compensation.
The 401(k) Plan was amended on January 15, 1996 to permit participants in
the plan to direct the administrator to invest their vested account balances
into an Employee Stock Fund which will be invested in shares of Common Stock of
the Company. However, no 401(k) Plan participant may purchase more than $50,000
in aggregate value of the Common Stock in the Conversion (subject to the overall
purchase limitations) through the 401(k) Plan's subscription rights. A
participant's ability to direct all or some of his vested account to purchase
Common Stock in the Subscription Offering will be dependent upon such individual
being an Eligible Account Holder, Supplemental Eligible Account Holder or Other
Member. A participant may directly vote shares of Common Stock held in his or
her 401(k) Plan account. During 1996, the Bank contributed $19,000 to the 401(k)
Plan, $6,700 of which was for the benefit of Mr. Norton.
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Employee Stock Ownership Plan and Trust. The Company has established the
ESOP for employees of the Company and the Bank to become effective upon the
consummation of the Conversion. Full-time employees of the Company and the Bank
who have been credited with at least 1,000 hours of service during a 12-month
period and who have attained age 21 are eligible to participate in the ESOP.
As part of the Conversion, in order to fund the purchase of up to 8.0% of
the Common Stock to be issued in the Conversion, or 27,600 shares assuming
shares are sold at the maximum of the Estimated Price Range, it is anticipated
that the ESOP will borrow funds from the Company. It is anticipated that such
loan will equal 100% of the aggregate purchase price of the Common Stock
acquired by the ESOP. The loan to the ESOP will be repaid principally from the
Company's contributions to the ESOP over a period of ten years, and the
collateral for the loan will be the Common Stock purchased by the ESOP. The
interest rate for the ESOP loan is expected to be ___%. The Company may, in any
plan year, make additional discretionary contributions for the benefit of plan
participants in either cash or shares of Common Stock, which may be acquired
through the purchase of outstanding shares in the market or from individual
stockholders, upon the original issuance of additional shares by the Company or
upon the sale of treasury shares by the Company. Such purchases, if made, would
be funded through additional borrowing by the ESOP or additional contributions
from the Company. The timing, amount and manner of future contributions to the
ESOP will be affected by various factors, including prevailing regulatory
policies, the requirements of applicable laws and regulations and market
conditions.
Shares purchased by the ESOP with the proceeds of the loan will be held in
a suspense account and released on a pro rata basis as debt service payments are
made. Discretionary contributions to the ESOP and shares released from the
suspense account will be allocated among participants on the basis of
compensation. Forfeitures will be reallocated among remaining participating
employees and may reduce any amount the Company might otherwise have contributed
to the ESOP. Participants will vest in their right to receive their account
balances within the ESOP at the rate of 25% per year. In the case of a "change
in control," as defined, however, participants will become immediately fully
vested in their account balances. Benefits may be payable upon retirement, early
retirement, disability or separation from service. The Company's contributions
to the ESOP are not fixed, so benefits payable under the ESOP cannot be
estimated.
Messrs. Meyer, Ingram and Norton will serve as trustees of the ESOP. Under
the ESOP, the trustees must vote all allocated shares held in the ESOP in
accordance with the instructions of the participating employees, and allocated
shares for which employees do not give instructions, and unallocated shares,
will be voted in the same ratio on any matter as to those shares for which
instructions are given.
See "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Recent Accounting Pronouncements" for a discussion of
SOP 93-6, which changes the measure of compensation expense recorded by
employers for leveraged ESOPs from the cost of ESOP shares to the fair value of
ESOP shares.
GAAP requires that any third party borrowing by the ESOP be reflected as a
liability on the Company's statement of financial condition. Since the ESOP is
borrowing from the Company, such obligation is not treated as a liability, but
will be excluded from stockholders' equity. If the ESOP purchases newly-issued
shares from the Company, total stockholders' equity would neither increase nor
decrease, but per share stockholders' equity and per share net earnings would
decrease because of the increase in the number of outstanding shares as those
shares become committed to be released.
The ESOP will be subject to the requirements of Employee Retirement Income
Security Act of 1974, as amended, and the regulations of the IRS and Department
of Labor thereunder.
Stock Option Plan. Following the Conversion, the Board of Directors of the
Company intends to submit the Stock Option Plan for approval to stockholders at
a special meeting of stockholders, which is expected to
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<PAGE>
be held not earlier than six months following consummation of the Conversion. No
options shall be awarded under the Stock Option Plan unless stockholder approval
is obtained.
The Stock Option Plan will be designed 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 reward key employees for outstanding performance and the
attainment of targeted goals. The Stock Option Plan will also be designed to
retain qualified directors for the Company. The Stock Option Plan will provide
for the grant of incentive stock options intended to comply with the
requirements of Section 422 of the Code ("incentive stock options"),
non-incentive or compensatory stock options and stock appreciation rights
(collectively "Awards"). Awards will be available for grant to directors and key
employees of the Company and any subsidiaries, except that directors will not be
eligible to receive incentive stock options. If stockholder approval is
obtained, it is expected that options to acquire shares of Common Stock will be
awarded to key employees of the Company and the Bank and directors of the
Company in accordance with applicable regulations. Regulations which apply to
the Stock Option Plan and the Recognition Plan provide that no individual
employee may receive more than 25% of the shares of any plan and non-employee
directors may not receive more than 5% of any plan individually or 30% in the
aggregate for all directors.
The Stock Option Plan will be administered and interpreted by a committee
of the Board of Directors ("Committee") which will be "disinterested" pursuant
to applicable regulations under the Federal securities laws. Unless sooner
terminated, the Stock Option Plan will be in effect for a period of ten years
from the earlier of adoption by the Board of Directors or approval by the
Company's stockholders.
Under the Stock Option Plan, the Committee will determine which officers
and key employees will be granted options, whether such options will be
incentive or compensatory options, the number of shares subject to each option,
whether such options may be exercised by delivering other shares of Common Stock
and when such options become exercisable. The per share exercise price of an
incentive and compensatory stock option shall be required to be at least equal
to the fair market value of a share of Common Stock on the date the option is
granted.
Stock options shall become vested and exercisable in the manner specified
by the Committee, which shall not be faster than 20% per year, beginning one
year from the date of grant. Each stock option or portion thereof shall be
exercisable at any time on or after it vests and is exercisable until ten years
after its date of grant or three months after the date on which the optionee's
employment terminates, unless extended by the Committee to a period not to
exceed one year from such termination. However, failure to exercise incentive
stock options within three months after the date on which the optionee's
employment terminates may result in adverse tax consequences to the optionee.
Stock options are non-transferable except by will or the laws of descent and
distribution.
The number of options to be granted to non-employee directors will be
specifically set forth in the Stock Option Plan and will be granted upon
approval of the Stock Option Plan by stockholders. Such stock options to
directors will become vested and exercisable under the same terms as options
granted by the Committee to officers and employees. If an optionee dies or
terminates service due to disability, while serving as an employee or
non-employee director, all unvested options are accelerated. Under such
circumstances, the optionee or, as the case may be, the optionee's executors,
administrators, legatees or distributees, shall have the right to exercise
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all unexercised options during the 12-month period following termination due to
disability or death, provided no option will be exercisable within six months
after the date of grant or more than ten years from the date it was granted.
The Company intends to reserve for future issuance pursuant to the
Stock Option Plan a number of authorized shares of Common Stock equal to 10%
of the Common Stock issued in the Conversion, or 34,500 shares, based on the
issuance of 345,000 shares at the maximum of the Estimated Price Range. In
the event of a stock split, reverse stock split or stock dividend, the number
of shares of Common Stock under the Stock Option Plan, the number of shares
to which any Award relates and the exercise price per share under any option
shall be adjusted to reflect such increase or decrease in the total number of
shares of the Common Stock outstanding.
Under current provisions of the Code, the Federal income tax treatment of
incentive stock options and compensatory stock options is different. As regards
incentive stock options, an optionee who meets certain holding period
requirements will not recognize income at the time the option is granted or at
the time the option is exercised, and a Federal income tax deduction generally
will not be available to the Company at any time as a result of such grant or
exercise. With respect to compensatory stock options, the difference between the
fair market value of the shares subject to the option on the date of exercise
and the option exercise price generally will be treated as compensation income
upon exercise, and the Company will be entitled to a deduction in the amount of
income so recognized by the optionee.
Although no specific award determinations have been made, assuming the
requisite receipt of stockholder approval, the Company intends to follow Federal
criteria with respect to awards of stock options under the Stock Option Plan.
Under such criteria, awards to individual non-employee directors may not exceed
5.0% of the options available under the plan and awards to all non-employee
directors may not exceed 30% of the plan in the aggregate. Awards to any
individual employee may not exceed 25% of the shares available under the plan.
Recognition and Retention Plan. Following the Conversion, the Board of
Directors of the Company intends to submit the Recognition Plan to stockholders
for approval at a special meeting of stockholders, which is expected to be held
not earlier than six months following completion of the Conversion. The
objective of the Recognition Plan will be to enable the Company to provide
directors, officers and employees with a proprietary interest in the Company as
an incentive to contribute to its success. The Recognition Plan will set forth
specific awards to be made to non-employee directors.
Assuming the receipt of stockholder approval, the Company expects to
acquire Common Stock on behalf of the Recognition Plan, in an amount equal to 4%
of the Common Stock issued in the Conversion, or 13,800 shares at the maximum of
the Estimated Price Range. These shares will be acquired through open market
purchases or from authorized but unissued shares. Although no specific award
determinations have been made, the Company intends to follow Federal criteria
for making awards under the Recognition Plan. Under such criteria, the
individual and aggregate award limitations under the Recognition Plan will be
the same as under the Stock Option Plan. See "- Stock Option Plan."
The Board of Directors of the Company will administer the Recognition Plan
as it pertains to directors and a Board Committee will administer the
Recognition Plan with respect to all other persons. The Committee will have the
responsibility to invest all funds contributed by the Company to the Recognition
Plan. Shares of Common Stock granted pursuant to the Recognition Plan generally
will be in the form of restricted stock payable over a period specified by the
administrators, which shall not be faster than 20% per year, beginning one year
from the date of the award. For accounting purposes, compensation expense in the
amount of the fair market
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value of the Common Stock at the date of the grant to the recipient will be
recognized pro rata over the number of years during which the shares are
payable. While restricted, shares may not be sold, pledged or otherwise disposed
of and are required to be held in the Trust. But, while restricted, a recipient
will be entitled to voting and other stockholder rights. If a recipient
terminates employment for reasons other than death, disability or retirement,
the recipient will forfeit all rights to the allocated shares under restriction.
If the recipient's termination is caused by death or disability, all
restrictions will expire and all allocated shares will become unrestricted. The
Board of Directors of the Company will be authorized to terminate the
Recognition Plan at any time, and if it does so, any shares not allocated will
revert to the Company.
Transactions With Certain Related Persons
The Bank's policy provides that all loans made by the Bank to its
directors and officers are made in the ordinary course of business, are made on
substantially the same terms, including interest rates and collateral, as those
prevailing at the time for comparable transactions with other persons and do not
involve more than the normal risk of collectibility or present other unfavorable
features. As of September 30, 1996, none of the Bank's directors or executive
officers had aggregate loan balances in excess of $60,000. All loans made to the
Bank's directors and executive officers are made in the ordinary course of
business, without favorable terms and do not involve more than the normal risk
of collectibility.
Subscriptions by Directors and Executive Officers
The following table sets forth the number of shares of Common Stock of the
Company proposed to be purchased by the Company's directors and by all directors
and executive officers as a group (including purchases by any associates of or
groups acting in concert with such persons), assuming shares of Common Stock are
issued at the maximum of the Estimated Price Range and that sufficient shares
will be available to satisfy their subscriptions.
At the Maximum
of the Estimated Price Range(1)
------------------------------------------
As a Percent
Number of Shares
Name Amount of Shares Offered
- --------------------------- ---------- ----------- -------------
Thomas B. Meyer $ 50,000 5,000 1.4%
Merrill G. Norton 150,000 15,000 4.3
Carl W. Busby 150,000 15,000 4.3
Robert L. Ewbank 150,000 15,000 4.3
William T. Ingram 150,000 15,000 4.3
All directors and executive
officers as a group
(5 persons) $650,000(2) 65,000 18.6%
- ----------
(1) Includes proposed subscriptions, if any, by associates. The ESOP intends
to acquire up to 8.0% of the Common Stock in the Conversion, or 27,600
shares at the maximum of the Estimated Price Range, which shares are not
reflected in the amounts to be purchased by the Company's directors and
officers in the table above. In addition, this does not include awards
pursuant to the Stock Option Plan or the Recognition Plan, which will be
submitted for approval to stockholders at a meeting of stockholders
expected to be held not earlier than six months following the completion
of the Conversion. See "- Benefits - Employee Stock Ownership Plan and
Trust."
(2) Includes purchases to be made by executive officers through the 401(k)
Plan.
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THE CONVERSION
THE BOARD OF DIRECTORS OF THE BANK AND THE COMMISSIONER 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
APPROVAL BY THE COMMISSIONER, HOWEVER, DOES NOT CONSTITUTE A RECOMMENDATION OR
ENDORSEMENT OF THE PLAN BY SUCH AGENCY.
General
On November 6, 1996, the Bank's Board of Directors unanimously adopted the
Plan, pursuant to which the Bank will be converted from an Illinois-chartered
mutual savings bank to an Illinois-chartered stock savings bank. It is intended
that all of the common stock of the Bank to be issued in the Conversion will be
held by the Company, which is incorporated under Delaware law. The Plan has been
approved by the Commissioner, subject to, among other things, approval of the
Plan by the Bank's members. In addition, the FDIC has issued its conditional
non-objection to the Plan and the Conversion. A Special Meeting of the Bank's
members has been called for the purpose of approving the Plan, which meeting is
to be held on March __, 1997.
In adopting the Plan, the Board of Directors of the Bank determined that
conversion was advisable and in the best interests of its members and the Bank,
and further determined that the interests of certain holders of its deposit
accounts in the net worth of the Bank would be equitably provided for and that
the Conversion would not have any adverse impact on the reserves and net worth
of the Bank. In determining to convert to the stock form of organization the
Board of Directors of the Bank considered a number of factors. The stock form of
organization is used by commercial banks, most business entities and thrift
institutions. The Board of Directors considered that converting will increase
the Bank's capital base and enhance its ability to support future growth. The
stock form also will facilitate the Bank's ability to engage in acquisition or
merger transactions with other entities. While the Bank currently has no
understandings, arrangements or agreements, written or oral, with any other
entity, the Board of Directors considered the continuing consolidation occurring
throughout the banking industry and concluded that converting to the stock form
may enhance the Bank's ability to engage in acquisition opportunities which may
arise in the future. The Board of Directors also considered that upon conversion
to the stock form, the Bank's employees could participate in stock-benefit
compensation plans, such as stock option and/or stock grant plans. Upon
consideration of these and other factors, the Board of Directors of the Bank
determined that converting from the mutual to the stock form was in the best
interests of the Bank.
The Company has applied for the approval of the Federal Reserve Board to
become a bank holding company and to acquire all of the common stock of the Bank
to be issued in the Conversion. The Company plans to retain 25% of the net
proceeds from the sale of the Common Stock, with all the remaining proceeds used
to purchase all of the then to be issued and outstanding capital stock of the
Bank. Based on the issuance of 345,000 shares at the Purchase Price at the
maximum of the Estimated Price Range, approximately $276,000 of the net proceeds
retained by the Company are intended to be used to loan funds to the ESOP to
enable the ESOP to purchase up to 8.0% of the shares issued in the Conversion.
The Conversion will be effected only upon completion of the sale of all of the
shares of Common Stock of the Company to be issued pursuant to the Plan.
The Plan provides generally that (i) the Bank will convert from an
Illinois-chartered mutual savings bank to an Illinois-chartered stock savings
bank and (ii) the Company will offer shares of Common Stock for sale in the
Subscription Offering to Eligible Account Holders, the ESOP, Supplemental
Eligible Account Holders, Other Voting Members, and in a concurrent Community
Offering to certain members of the general public, subject to the prior rights
of holders of subscription rights. See "- Subscription Offering and Subscription
Rights" and "- Community Offering." 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.
See "- Syndicated Community Offering." The Bank has the right to accept or
reject, in whole or in part, any
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orders to purchase shares of the Common Stock received in the Community Offering
or in the 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
$2,550,000 and $3,450,000, will be determined based upon an independent
appraisal 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 Subscription and Community
Offerings, if all shares are subscribed for, or at the completion of the
Syndicated Community Offering. The appraisal has been performed by RP Financial,
a consulting firm experienced in the valuation and appraisal of savings
institutions. See "- Stock Pricing and Number of Shares to be Issued" for more
information as to the determination of the estimated pro forma market value of
the Common Stock.
The Plan may be amended at any time with the concurrence of the
Commissioner and the receipt of any necessary approval from the FDIC. Amendments
to the Plan will require additional approval of the Bank's members, whether such
amendment is made before or after the Special Meeting of the Bank's members
called to consider the Plan, only if required by the Commissioner and/or the
FDIC. The Plan shall terminate if the Offerings are not completed within [12]
months of the date of the Special Meeting of the Bank's members called to
consider the Plan, subject to further extension by the Commissioner. Prior to
the Special Meeting of the Bank's members to consider the Plan, the Bank's Board
of Directors may terminate the Plan without approval of the Commissioner and,
thereafter, only with the Commissioner's approval.
The following is a brief summary of the material 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
Bank and at the offices of the Office. 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 an Illinois-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, most business entities and a growing number of savings
institutions. The Conversion will be important to the future growth and
performance of the institution by providing a larger capital base on which the
Bank may operate, enhanced future access to capital markets, enhanced ability to
support increased originations of commercial business loans and consumer loans
and to diversify into other financial services related activities, and enhanced
ability to render services to the public.
The holding company form of organization will provide additional
flexibility to diversify the Bank's business activities through existing or
newly formed subsidiaries, or through acquisition of other financial
institutions, as well as other companies. Although there are no current
arrangements, understandings or agreements regarding any such opportunities, the
Company will be in a better position after the Conversion, subject to regulatory
limitations and the Company's financial position, to take advantage of
opportunities which may arise.
After completion of the Conversion, the unissued common and preferred
stock authorized by the Company's Certificate of Incorporation will permit the
Company, subject to market conditions and applicable regulatory approvals, 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 possible issuance of additional shares to the Recognition Plan or
upon exercise of stock options. Following 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 - Management of
the Bank."
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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 net worth of
the institution based upon the balance in his 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 net worth of the
institution without any additional payment beyond the amount of the deposit. A
depositor who reduces or closes his account receives a portion or all of the
balance in the account but nothing for his ownership interest in the net worth
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
nonwithdrawable capital stock is created to represent the ownership of the
institution's net worth. The Bank's common stock and the Common Stock of the
Company 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 permanent stock. The stock certificates are
transferable and, therefore, the stock may be sold or traded if a purchaser is
available with no effect on any account the seller may hold in the institution.
Continuity. While the Conversion is being accomplished, 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
Commissioner and the FDIC. After Conversion, the Bank will continue to provide
services for depositors and borrowers under current policies by its present
management and staff.
The directors serving the Bank at the time of the Conversion will continue
to serve as directors of the Bank after the Conversion. The Directors of the
Company will consist of individuals currently serving on the Board of Directors
of the Bank. All officers of the Bank at the time of the Conversion will retain
their positions after the Conversion.
Effect on Deposit Accounts. Under the Plan, each depositor in the Bank at
the time of the Conversion will automatically continue as a depositor after the
Conversion to stock form, and each such deposit account will remain the same
with respect to deposit balance, interest rate and other terms. Each such
account will be insured by the FDIC to the same extent as before the Conversion.
Depositors will continue to hold their existing certificates, passbooks and
other evidences of their accounts.
Effect on Loans. 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 the Bank
are members of, and have voting rights in, the Bank as to all matters requiring
membership action. Upon Conversion, depositors 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 stockholder
of the Bank. Exclusive voting rights with respect to the Company will be vested
in the holders of Common Stock. Depositors of the Bank will not have voting
rights after the Conversion except to the extent that they become stockholders
of the Company through the purchase of Common Stock.
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Tax Effects. The Bank has received opinions with regard to Federal and
Illinois income taxation which indicates that the adoption and implementation of
the Plan of Conversion set forth herein will not be taxable for Federal or
Illinois tax purposes to the Bank or its Eligible Account Holders or
Supplemental Eligible Account Holders or the Company, except as discussed below.
See "- Tax Aspects."
Effect on Liquidation Rights. Were a mutual savings bank to liquidate, all
claims of creditors (including those of depositors, to the extent of deposit
balances) would be paid first. Thereafter, if there were any assets remaining,
depositors would receive such remaining assets, pro rata, based upon the deposit
balances in their deposit accounts immediately prior to liquidation. In the
unlikely event that the Bank were to liquidate after Conversion, all claims of
creditors (including those of depositors, to the extent of their deposit
balances) would also be paid first, followed by distribution of the "liquidation
account" to certain depositors (see "- Liquidation Rights"), with any assets
remaining thereafter distributed to the Company as the holder of the Bank's
capital stock. Pursuant to the rules and regulations of the Office, a
post-Conversion merger, consolidation, sale of bulk assets or similar
combination or transaction with another insured savings institution would not be
considered a liquidation and, in such a transaction, the liquidation account
would be required to be assumed by the surviving institution.
Stock Pricing and Number of Shares to be Issued
The Plan of Conversion requires that the aggregate purchase price of the
Common Stock sold in the Offerings 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 RP Financial to make such
valuation. For its services in making such appraisal and certain other services
(including assisting the Bank in the preparation of a business plan) rendered in
connection with the Conversion, RP Financial will receive a fee of $15,000, plus
reimbursement for reasonable expenses. The Bank and the Company have agreed to
indemnify RP Financial and its employees and affiliates against certain losses
(including any losses in connection with claims under the Federal securities
laws) arising out of its services as appraiser, except where RP Financial's
liability results from its negligence or willful misconduct.
An appraisal has been made by RP Financial in reliance upon the
information contained in this Prospectus, including the Consolidated Financial
Statement. RP Financial 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
marketing 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
institutions located in Illinois and other regions of the United States; the
aggregate size of the offering of the Common Stock; the impact of Conversion on
the Bank's net worth and earnings potential; and the trading market for
securities of comparable institutions and general conditions in the market for
such securities. In its review of the appraisal provided by RP Financial, the
Board of Directors reviewed the methodologies and the appropriateness of the
assumptions used by RP Financial in addition to the factors enumerated above.
On the basis of the foregoing, RP Financial has advised the Company and
the Bank that, in its opinion, dated November 15, 1996 the Estimated Price Range
of the Common Stock ranged from a minimum of $2,550,000 to a maximum of
$3,450,000 with a midpoint of $3,000,000. Based upon the Estimated Price Range
and the Purchase Price of $10.00 per share for the Common Stock established by
the Board of Directors, the Company expects to issue between 255,000 and 345,000
shares of Common Stock. The Estimated Price Range may be amended with the
approval of the Commissioner and non-objection of the FDIC, if required, if
necessitated by subsequent developments in the financial condition of the
Company or the Bank or market conditions generally. In the event the appraisal
is updated to amend the value of the Bank below $2,550,000 or above $3,967,500
(the maximum of the Estimated Price Range, as adjusted by 15%), the range of the
number of shares that may be issued will increase or decrease to conform with
the updated appraisal. Such appraisal
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will be filed with the SEC by post-effective amendment. The Conversion will not
be consummated unless the minimum of the Estimated Price Range is sold.
In the event the Company receives orders for Common Stock in excess of
$3,450,000 (the maximum of the Estimated Price Range) and up to $3,967,500 (the
maximum of the Estimated Price Range, as adjusted by 15%), the Company may
determine to accept all such orders. No assurances, however, can be made that
the Company will receive orders for Common Stock in excess of the maximum of the
Estimated Price Range or that, if such orders are received, that all such orders
will be accepted because the Company's final valuation and number of shares to
be issued are subject to the receipt of an updated appraisal from RP Financial
which reflects such an increase in the valuation and the approval of such
increase by the Commissioner and non-objection of the FDIC, if required. There
is no obligation or understanding on the part of management to take and/or pay
for any shares in order to complete the Conversion.
Such valuation, however, is not intended, and must not be construed, as a
recommendation of any kind as to the advisability of purchasing such shares. RP
Financial did not independently verify the Consolidated Financial Statement and
other information provided by the Bank, nor did RP Financial 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 396,750 shares
to reflect changes in the market and financial 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 Offering.
No sale of shares of Common Stock in the Conversion may be consummated
unless prior to such consummation RP Financial confirms that nothing of a
material nature has occurred which, taking into account all relevant factors,
would cause it to conclude that the aggregate price is materially incompatible
with the estimate of the pro forma valuation of the aggregate market value of
the Common Stock at the time of the sale of the Common Stock. If such is not the
case, a new Estimated Price Range may be set, a new Subscription and Community
Offering and/or Syndicated Community Offering may be held or such other action
may be taken as the Company and the Bank shall determine and the Commissioner
and FDIC may permit.
Depending upon market or financial conditions following the commencement
of the Subscription Offering, 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
Purchase Price is not below the minimum or more than 15% above the maximum of
the Estimated Price Range. 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,
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 with interest at the Bank's passbook rate of interest,
or be permitted to modify or rescind their subscriptions). Any change in the
Estimated Price Range must be approved by the Commissioner and requires the
non-objection of the FDIC.
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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 income
and stockholders' equity on a per share basis while increasing pro forma net
income 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 income and stockholders'
equity on a per share basis while decreasing pro forma net income and
stockholders' equity on an aggregate basis. See "Pro Forma Data."
Copies of the appraisal report of RP Financial, including any amendments
thereto, and the detailed memorandum of the appraiser setting forth the method
and assumptions for such appraisal are available for inspection at the main
office of the Bank and the other locations specified under "Additional
Information."
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) Eligible
Account Holders, (2) the ESOP, (3) Supplemental Eligible Account Holders, and
(4) Other Voting Members. All subscriptions received will be subject to the
availability of Common Stock after satisfaction of all subscriptions of all
persons having prior rights in the Subscription Offering and to the maximum and
minimum purchase limitations set forth in the Plan of Conversion and as
described below under "- Limitations on Common Stock Purchases."
Priority 1: Eligible Account Holders. Each Eligible Account Holder will
receive, without payment therefor, first priority, nontransferable subscription
rights to subscribe for in the Subscription Offering up to the greater of: (i)
$50,000 of Common Stock; (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
of which is the total amount of qualifying deposits of all Eligible Account
Holders, in each case on July 31, 1995 ("Eligibility Record Date"); in each case
subject to the overall purchase limitation. See "- Limitations on Common Stock
Purchases."
If there are not sufficient shares available to satisfy all subscriptions,
shares first will be allocated among subscribing Eligible Account Holders so as
to permit each such Eligible Account Holder, to the extent possible, to purchase
a number of shares which will make his total allocation equal to the lesser of
the number of shares subscribed for or 100 shares. Any available shares
remaining after each such subscribing Eligible Account Holder has been allocated
the lesser of the number of shares subscribed for or 100 shares shall be
allocated among the subscribing Eligible Account Holders in the proportion which
the amounts of the qualifying deposits of each such subscribing Eligible Account
Holder bears to the total amount of qualifying deposits of all such subscribing
Eligible Account Holders, provided that no fractional shares shall be issued.
The submission of multiple orders by an Eligible Account Holder or other
subscriber will result in a lower deposit credit per order in the event of an
allocation.
To ensure proper allocation of stock, each Eligible Account Holder must
list on his subscription order form all accounts in which he has an ownership
interest. Failure to list an account could result in less shares being allocated
than if all accounts had been disclosed. The subscription rights of Eligible
Account Holders who are also directors or officers of the 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 year
preceding July 31, 1995.
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Priority 2: Employee Stock Ownership Plan. The ESOP will receive, without
payment therefor, second priority non-transferable subscription rights to
purchase, in the aggregate, up to 8.0% of the Common Stock issued in the
Conversion. The subscription rights granted to the ESOP are subject to the
availability of shares after taking into account the shares purchased by
Eligible Account Holders, including any shares of Common Stock to be issued in
the Conversion as a result of an increase of up to 15% in the maximum of the
Estimated Price Range. The ESOP intends to purchase up to 8.0% of the shares to
be issued in the Conversion, or 20,400 shares and 27,600 shares, based on the
issuance of 255,000 shares and 345,000 shares, 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. In the event that
there are not sufficient shares available to satisfy the ESOP's purchase order,
it is anticipated that the ESOP will attempt to purchase additional shares of
Common Stock in the open market in order that the ESOP shall have purchased an
aggregate of 8.0% of the shares of Common Stock sold in the Offerings.
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) $50,000 of Common Stock; (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 of which is the total
amount of qualifying deposits of all Supplemental Eligible Account Holders, in
each case on December 31, 1996; and, in all cases, subject to the overall
purchase limitation. See "- Limitations on Common Stock Purchases."
If there are not sufficient shares available to satisfy all Supplemental
Eligible Account Holders, shares first will be allocated among subscribing
Supplemental Eligible Account Holders so as to permit each such Supplemental
Eligible Account Holder, to the extent possible, to purchase a number of shares
sufficient to make his total allocation (including the number of shares, if any,
allocated to such person as an Eligible Account Holder) equal to the lesser of
the number of shares subscribed for or 100 shares. Any remaining available
shares shall be allocated among such subscribing Supplemental Eligible Account
Holders in the proportion that the amount of their respective amount of
qualifying deposits bears to the total amount of the amount of qualifying
deposits of all subscribing Supplemental Eligible Account Holders, provided that
no fractional shares shall be issued. The submission of multiple orders by a
Supplemental Eligible Account Holder or other subscriber will result in a lower
deposit credit per order in the event of an allocation.
Priority 4: Other Voting Members. To the extent that there are sufficient
shares remaining after satisfaction of subscriptions by Eligible Account
Holders, the ESOP, and Supplemental Eligible Account Holders, each Other Voting
Member will receive, without payment therefor, third priority, nontransferable
subscription rights to subscribe for Common Stock in the Subscription Offering
up to the greater of: (i) $50,000 of Common Stock or (ii) one-tenth of one
percent (0.10%) of the total offering of shares of Common Stock; in each case
subject to the overall purchase limitation. See "- Limitations on Common Stock
Purchases."
In the event the Other Voting Members subscribe for a number of shares of
Conversion Stock in excess of the total number of shares of Conversion Stock
remaining, available shares shall be allocated among subscribing Other Voting
Members on a pro rata basis in the same proportion as each Other Voting Members'
subscription bears to the total subscriptions of all subscribing Other Voting
Members.
Expiration Date for the Subscription Offering. The Subscription Offering
will expire on [March __,] 1997, unless extended for up to 45 days or such
additional periods by the Bank and the Company with the approval of the
Commissioner of the Commissioner and, if required, the non-objection of the
FDIC. Subscription rights which have not been exercised prior to the
Subscription Expiration Date will become void.
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The Bank and the Company will not execute orders before the Subscription
Expiration Date and until at least the minimum number of shares of Common Stock
(255,000 shares) have been subscribed for or otherwise sold. If the Subscription
Offering is not completed within 45 days after the Subscription Expiration Date,
unless such period is extended, all funds delivered to the Bank pursuant to the
Subscription Offering will be returned promptly to the subscribers with interest
and all withdrawal authorizations will be cancelled. If an extension beyond the
45 day period following the Subscription Expiration Date is granted, the Bank
will notify subscribers of the extension of time and of any rights of
subscribers to modify or rescind their subscriptions.
Community Offering
To the extent that shares remain available for purchase after satisfaction
of all subscriptions of Eligible Account Holders, the ESOP, Supplemental
Eligible Account Holders, and Other Voting Members, the Bank may offer shares
pursuant to the Plan to certain members of the general public, with preference
given to natural persons residing in Vermilion County, Illinois ("Preferred
Subscribers"). Such persons, together with associates of and persons acting in
concert with such persons, may purchase up to the greater of (i) $50,000 of the
Common Stock offered in the Conversion, or (ii) one-tenth of one percent (0.10%)
of the total offering of shares of Common Stock, in each case subject to the
maximum purchase limitation. See "- Limitations on Common Stock Purchases." This
amount may be increased or decreased at the sole 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 its sole 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 Subscription Expiration Date. The Community Offering may be commenced at any
time during the Subscription Offering or subsequent thereto.
If there are not sufficient shares available 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 orders remain unsatisfied in the same proportion that the
unfilled subscription of each bears to the total unfilled subscriptions of all
Preferred Subscribers whose subscription remains unsatisfied. If there are any
shares remaining after all subscriptions by Preferred Subscribers, shares will
be allocated to other members of the general public who subscribe in the
Community Offering applying the same allocation described above for Preferred
Subscribers.
Persons in Nonqualified 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: (a) the number of persons otherwise eligible to subscribe for shares
under the Plan who reside in such jurisdiction is small; (b) the granting of
subscription rights or the offer or sale of shares of Common Stock to such
persons would require the Company, the Bank, or their officers, directors or
employees under the laws of such jurisdiction, to register as a broker, dealer,
salesman or selling agent or to register or otherwise qualify its securities for
sale in such jurisdiction or to qualify as a foreign corporation or file a
consent to service of process in such jurisdiction; and (c) such registration or
qualification in the Company's and the Bank's judgment would be impracticable or
unduly burdensome for reasons of cost or otherwise. 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.
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Marketing Arrangements
The Company and the Bank have engaged Trident as a financial advisor and
marketing agent in connection with the offering of the Common Stock, and Trident
has agreed to use its best efforts to solicit subscriptions and purchase orders
for shares of Common Stock in the Offerings. Trident is a member of the
National Association of Securities Dealers, Inc. ("NASD") and an SEC-registered
broker-dealer. Trident is headquartered in Raleigh, North Carolina, and its
telephone number is (919) 781-8900. Trident will provide various services
including, but not limited to, (1) training and educating the Bank's directors,
officers and employees regarding the mechanics and regulatory requirements of
the stock sales process; (2) providing its employees to staff the Stock Sales
Center to assist the Bank's customers and internal stock purchasers and to keep
records of orders for shares of Common Stock; (3) targeting the Company's sales
efforts, including preparation of marketing materials; and (4) assisting in the
solicitation of proxies of members for use at the Special Meeting. In the event
that a selected dealers agreement is entered into in connection with a
Syndicated Community Offering, the Bank will pay a to-be negotiated fee to such
selected dealers for shares sold by any NASD member firm pursuant to a selected
dealers agreement. Fees to Trident and to any other broker-dealer may be deemed
to be underwriting fees, and Trident and such broker-dealers may be deemed to be
underwriters. Trident will also be reimbursed for its reasonable out-of-pocket
expenses in an amount not to exceed $10,000 and reasonable legal fees not to
exceed $22,500. To date, Trident has received $10,000 from the Bank as an
advance payment of its anticipated expenses.
The Company and the Bank have agreed to indemnify Trident for reasonable
costs and expenses in connection with certain claims or liabilities, including
certain claims or liabilities arising out of or based upon any untrue or alleged
untrue statement of a material fact or the omission or alleged omission of a
material fact required to be stated or necessary to make not misleading any
statements contained in the Company's Registration Statement or the Prospectus.
Directors and executive officers of the Company and the Bank may
participate in the solicitation of offers to purchase Common Stock. Other
employees of the Bank may participate in the Offering 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. Questions of prospective
purchasers will be directed to executive officers or registered representatives.
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 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
before the Subscription Expiration Date 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 order form will confirm receipt or delivery in accordance with
Rule 15c2-8. Order forms will only be distributed with a Prospectus.
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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 order form),
must be received by the Bank at any of its offices by [12:00 noon, Central
Time,] on the Subscription Expiration Date. Order forms which are not received
by such time or are altered or executed defectively or are received without full
payment (or appropriate withdrawal instructions) are not required to be
accepted. In addition, the Bank will neither accept orders submitted on
photocopied or facsimilied order forms nor 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 depositors are properly identified as to their
stock purchase priority, depositors as of the Eligibility Record Date (July 31,
1995), the Supplemental Eligibility Record Date (December 31, 1996) and/or the
Voting Record Date (March __, 1997), must list all accounts on the stock order
form giving all names in each account and the account numbers.
Payment for subscriptions may be made (i) in cash if delivered in person
at the Bank, (ii) by check, bank draft or money order, or (iii) by authorization
of withdrawal from deposit accounts maintained with the Bank. Wire transfers
will not be accepted except at the discretion of the Company and the Bank.
Interest will be paid on payments made by check, bank draft or money order at
the Bank's passbook rate of interest from the date payment is received until
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.
If a subscriber authorizes the Bank to withdraw the amount of the purchase
price from his deposit account, the Bank will do so as of the effective date of
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, and the remaining balance will earn
interest at the passbook rate.
If the ESOP subscribes for shares during the Subscription Offering, such
plan 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
by such plan at the Purchase Price upon consummation of the Subscription and
Community Offering, if all shares are sold, or upon consummation of the
Syndicated Community Offering if shares remain to be sold in such offering,
provided that there is in force from the time of its subscription until such
time, a loan commitment 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.
Owners of self-directed IRAs may use the assets of such IRAs to purchase
shares of Common Stock in the Subscription and Community Offerings, provided
that the trustee of such IRA is not the Bank. Persons with self-directed 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. Subscriptions by IRAs will be credited only with the
balance of such IRA account in the event of an allocation. In order to ensure
that any necessary transfer is completed prior to the termination of the
Offering, any person desiring to transfer his or her account must notify the
Savings Bank on or before March __, 1997.
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Certificates representing shares of Common Stock purchased will be mailed
to purchasers at 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
Pursuant to the rules and regulations of the Office, no person with
subscription rights 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.
Such rights may be exercised only by the person to whom they are granted and
only for his account. Each person exercising such subscription rights will be
required to certify that he is purchasing shares solely for his own account and
that he has no agreement or understanding regarding the sale or transfer of such
shares. No person may offer, or make an announcement of an offer or 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 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 and Community
Offerings may be offered for sale to the general public in a Syndicated
Community Offering through a syndicate of registered broker-dealers to be
formed. The Bank and the Company expect to market any shares which remain
unsubscribed after the Subscription and Community Offerings through a Syndicated
Community Offering. The Company and the Bank have the right to reject orders in
whole or part in their sole discretion in the Syndicated Community Offering.
Neither the Agent 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, the Agent has agreed to use its best efforts in the sale of
shares in the Syndicated Community Offering. In the event that a selected
dealers agreement is entered into in connection with a Syndicated Community
Offering, the Bank will pay a to-be negotiated fee to such selected dealers for
shares sold by any NASD member firm pursuant to a selected dealers agreement.
The price at which Common Stock is sold in the Syndicated Community
Offering will be determined as described above under "- Stock Pricing and Number
of Shares to be Issued." 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
$50,000 of the Common Stock offered in the Conversion, without giving effect to
an increase in shares issued pursuant to an increase in the Estimated Price
Range by up to 15%.
Payments made in the form of a check, bank draft or money order 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 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 12:00 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
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dealers shall subsequently contact their customers who indicated an interest and
seek their confirmation as to their intent to purchase. Those indicating an
intent to purchase shall execute order forms and forward them to their selected
dealer or authorize the selected dealer to execute such forms. The selected
dealer will acknowledge receipt of the order to its customer in writing on the
following business day and will debit such customer's account on the third
business day after the customer has confirmed his intent to purchase (the "debit
date") and on or before 12:00 noon of the next business day following the debit
date will send order forms and funds to the Bank for deposit in a segregated
account. If such alternative procedure is employed, purchasers' funds are not
required to be in their accounts with selected dealers until the debit date.
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 and
the Bank with the approval of the Commissioner and, if required, the
non-objection of the FDIC. See "- Stock Pricing and Number of Shares to be
Issued" above for a discussion of rights of subscribers, if any, in the event an
extension is granted.
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 less than 25 shares;
(2) Each Eligible Account Holder (or persons exercising Subscrip-
tion Rights through a single account) may subscribe for and purchase in
the Subscription Offering up to the greater of (i) $50,000 of Common
Stock, subject to the overall limitation in (8) below, (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
qualifying deposit of the Eligible Account Holder and the denominator is
the total amount of qualifying deposits of all Eligible Account Holders,
in each case on the Eligibility Record Date, subject to the overall
limitation in (8) below;
(3) The ESOP may purchase in the aggregate up to 10% of the shares
of Common Stock issued in the Conversion, including any additional shares
issued in the event of an increase in the Estimated Price Range, after
taking into account the shares purchased by Eligible Account Holders;
(4) Each Supplemental Eligible Account Holder (or persons exer-
cising Subscription Rights through a single account) may subscribe for and
purchase in the Subscription Offering up to the greater of (i) $50,000 of
Common Stock, subject to the overall limitation in (8) below, (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
qualifying deposit of the Supplemental Eligible Account Holder and the
denominator is the total amount of qualifying deposits of all Supplemental
Eligible Account Holders, in each case on the Supplemental Eligibility
Record Date, subject to the overall limitation in (8) below;
(5) Each Other Voting Member (or persons exercising Subscription
Rights through a single account) may subscribe for and purchase in the
Subscription Offering up to the greater of (i) $50,000 of Common Stock,
subject to the overall limitation in (8) below, or (ii) one-tenth of one
percent (0.10%) of the total offering of shares of Common Stock, subject
to the overall limitation in (8) below;
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(6) Persons purchasing shares of Common Stock in the Community
Offering, together with associates of and groups of persons acting in
concert with such persons, may purchase in the Community Offering up to
the greater of (i) $50,000 of Common Stock, subject to the overall
limitation in (8) below or (ii) one-tenth of one percent (0.10%) of the
total offering of shares of Common Stock, subject to the overall
limitation in (8) below;
(7) Persons purchasing shares of Common Stock in the Syndicated
Community Offering, together with associates of and persons acting in
concert with such persons, may purchase in the Syndicated Community
Offering up to $50,000 of Common Stock, subject to the overall limitation
in (8) below;
(8) Eligible Account Holders, Supplemental Eligible Account Holders
and Other Voting Members may purchase stock in the Community and
Syndicated Community Offerings subject to the purchase limitations
described in (6) and (7) above, provided that, except for the ESOP, the
maximum number of shares of Common Stock subscribed for or purchased in
all categories of the Conversion by any person together with associates of
and groups of persons acting in concert with such persons, shall not
exceed $150,000 of the aggregate value of the shares of Common Stock sold
in the Conversion; and
(9) No more than 35% of the total number of shares offered for sale
in the Conversion may be purchased by directors and officers of the Bank
and their associates in the aggregate, excluding purchases by the ESOP.
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 purchase limitation may be increased to up to a maximum of 5% at the
sole discretion of the Company and the Bank. 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 the event
that an individual purchase limitation is decreased after commencement of the
Subscription or Community Offerings, the orders of any persons 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
maximum number of shares permitted to be subscribed for by participants. Unless
otherwise permitted by the FDIC, the Company and the Bank do not anticipate that
they would decrease the maximum purchase limitations below one-tenth of 1% of
the total shares of Common Stock permitted to be purchased in the Subscription
and Community Offerings.
The overall purchase limitation may not be reduced to less than 1.0% but
the individual amount permitted to be purchased may be reduced to less than
$50,000, subject to (2), (4) and (5) above. Each Eligible Account Holder,
Supplemental Eligible Account Holder or Other Voting Member may purchase in the
Subscription Offering $50,000 of the Common Stock offered, assuming that at
least $2.6 million of Common Stock is sold in the Offerings.
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) in the event that there is an
oversubscription by Eligible Account Holders, to fill unfulfilled subscriptions
of Eligible Account Holders; (ii) to fill the ESOP's subscription of 8.0% of the
Adjusted Maximum number of shares; (iii) in the event that there is an
oversubscription by Supplemental Eligible Account Holders, to fill unfulfilled
subscriptions of Supplemental Eligible Account Holders; (iv) in the event that
there is an oversubscription by Other Voting Members, to fill unfulfilled
subscriptions of Other Voting Members; and (v) to fill unfulfilled subscriptions
in the Community Offering to the extent possible.
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The term "associate" of a person is defined to mean: (i) any corporation
or other organization (other than the 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 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, provided, however, such term shall not
include any employee stock benefit plan of the Company or the Bank in which such
person has a substantial beneficial interest or serves as a trustee or in a
similar fiduciary capacity; 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 the Bank or the Company or any of their
subsidiaries.
Liquidation Rights
In the unlikely event of a complete liquidation of the Bank in its present
mutual form, each depositor would receive his 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 his 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, his claim would be
solely in the amount of the balance in his deposit account plus accrued
interest. He 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 net worth of the Bank as of the date of its latest statement of financial
condition contained in the final Prospectus used in connection with the
Conversion. Such liquidation account will not be reflected as an asset or
liability on the Company's or the Bank's financial statements subsequent to the
Conversion. Each Eligible Account Holder and Supplemental Eligible Account
Holder, if he were to continue to maintain his deposit account at the Bank,
would be entitled, on a complete liquidation of the Bank after Conversion, to an
interest in the liquidation account prior to any payment to the stockholders 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 accounts,
money market deposit accounts, and certificates of deposit, held in the Bank on
July 31, 1995 and December 31, 1996, respectively. Each Eligible Account Holder
and Supplemental Eligible Account Holder will have a pro rata interest in the
total liquidation account for each of his deposit accounts based on the
proportion that the balance of each such deposit account on the July 31, 1995
Eligibility Record Date or the December 31, 1996 Supplemental Eligibility Record
Date bore to the balance of qualifying deposits of all Eligible Account Holders
or Supplemental Eligible Account Holders on such dates. For deposit accounts in
existence at both the Eligibility Record Date and the Supplemental Eligibility
Record Date, separate initial subaccount balances will be determined for such
accounts on each of the Eligibility Record Date and the Supplemental Eligibility
Record Date.
If, however, on any July 31 or September 31, annual closing date of the
Bank, commencing after July 31, 1995 or December 31, 1996, the amount in any
deposit account is less than the amount in such deposit account on July 31, 1995
or December 31, 1996, 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 stockholder of the
Bank.
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Tax Aspects
The Bank has received an opinion of its counsel, Elias, Matz, Tiernan &
Herrick L.L.P., regarding the material effects of the Conversion for Federal
income tax purposes, which opinion states, 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 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 to the Bank or the Company upon the purchase of the Bank's
capital stock by the Company or to the Company upon the purchase of its Common
Stock in the Conversion; (iii) no gain or loss will be recognized by Eligible
Account Holders and 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 Supplemental Eligible Account Holder's interest in the liquidation
account will be zero; and (vi) the tax basis to the stockholders of the Common
Stock of the Company purchased in the Conversion will be the amount paid
therefor 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.
Geo. S. Olive & Co. LLC, has rendered an opinion to the effect that the
foregoing tax effects of the Conversion under Illinois law are substantially the
same as they are under Federal law. Certain portions of both the Federal and the
state tax opinions are based upon the opinion of RP Financial that subscription
rights issued in connection with the Conversion will have no value.
In the opinion of RP Financial, which opinion is not binding on the IRS,
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 subscribers are deemed to have an
ascertainable value, receipt of such rights would be taxable probably only to
those eligible subscribers who exercise the subscription rights (either as a
capital gain or ordinary income) in an amount equal to such value and the Bank
could recognize gain on such distribution. Eligible subscribers are encouraged
to consult with their own tax advisor as to the tax consequences in the event
that such subscription rights are deemed to have an ascertainable value.
Unlike private rulings, an opinion of counsel is not binding on the IRS
and the IRS could disagree with conclusions reached therein. In the event of
such disagreement, there can be no assurance that the IRS would not prevail in a
judicial or administrative proceeding. A copy of each of the above-referenced
opinions is included as an exhibit to the Company's registration statement on
Form SB-2 as filed with the SEC.
Delivery of Certificates
Certificates representing Common Stock issued in the Conversion will be
mailed by the Company's transfer agent to the persons entitled thereto at the
addresses of such persons appearing on the stock order form as soon as
practicable following consummation of the Conversion. Any certificates returned
as undeliverable will be held by the Company until claimed by persons legally
entitled thereto or otherwise disposed of in accordance with applicable law.
Until certificates for Common Stock are available and delivered to subscribers,
subscribers may not be able to sell the shares of Common Stock for which they
have subscribed, even though trading of the Common Stock may have commenced.
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 officer of the Company and 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 officer or
pursuant to a merger
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or similar transaction approved by the Office. 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 within this one year period 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 Company and
the Bank will also be subject to the insider trading rules promulgated pursuant
to the Exchange Act.
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 Company and the Bank after adoption of the Plan of Conversion)
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 Office. This restriction does not apply, however, to negotiated
transactions involving more than 1.0% of the Company's outstanding Common Stock
or to certain purchases of stock pursuant to an employee stock benefit plan.
The Company has no present plans with respect to any repurchase of shares
of Common Stock and will not undertake any repurchase of shares of Common Stock
within the one year period subsequent to the Conversion. Any repurchases of
Common Stock by the Company in the future will be subject to the receipt of any
necessary approvals from the Commissioner and/or the FRB and will be subject to
any applicable regulations and policies of the Commissioner and FRB.
RESTRICTIONS ON ACQUISITION OF THE COMPANY
General
The Bank's Plan of Conversion provides for the Conversion of the Bank from
the mutual to the stock form of organization and for the concurrent formation of
a holding company. As described below, certain provisions in the Company's
Certificate of Incorporation and Bylaws, together with provisions of Delaware
law, may have anti-takeover effects. 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 Certificate of Incorporation and Bylaws
General. A number of provisions of the Company's Certificate of
Incorporation and Bylaws deal with matters of corporate governance and certain
rights of stockholders. The following discussion is a general summary of certain
provisions of the Company's Certificate of Incorporation and Bylaws which might
be deemed to have a potential "anti-takeover" effect. These provisions may have
the effect of discouraging a future takeover attempt which is not approved by
the Board of Directors but which individual Company stockholders may deem to be
in their best interests or in which stockholders may receive a substantial
premium for their shares over then current market prices. As a result,
stockholders who might desire to participate in such a transaction may not have
an opportunity to do so. Such provisions will also render the removal of the
current Board of Directors or management of the Company more difficult. The
following description of certain of the provisions of the Certificate of
Incorporation and Bylaws of the Company is necessarily general and reference
should be made in each case to such Certificate of Incorporation and Bylaws,
which are incorporated herein by reference. See "Additional Information" as to
how to obtain a copy of these documents.
Limitation on Acquisition of Voting Stock and Voting Rights. Article X of
the Company's Certificate of Incorporation provides that for a period of five
years from the date of Conversion of the Bank from the mutual to the stock form,
no person shall directly or indirectly offer to acquire or acquire the
beneficial ownership of (i) more than 10% of the issued and outstanding shares
of any class of an equity security of the Company, or (ii) any securities
convertible into, or exercisable for, any equity securities of the Company if,
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assuming conversion or exercise by such person of all securities of which such
person is the beneficial owner which are convertible into, or exercisable for,
such equity securities (but of no securities convertible into, or exercisable
for, such equity securities of which such person is not the beneficial owner),
such person would be the beneficial owner of more than 10% of any class of an
equity security of the Company. The term "person" is broadly defined to prevent
circumvention of this restriction.
The foregoing restrictions do not apply to (i) any offer with a view
toward public resale made exclusively to the Company by underwriters or a
selling group acting on its behalf, (ii) any tax-qualified employee benefit plan
or arrangement established by the Company or the Bank and any trustee of such a
plan or arrangement, and (iii) any other offer or acquisition approved in
advance by the affirmative vote of two-thirds of the Company's entire Board of
Directors. In the event that shares are acquired in violation of Article X, 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 stockholders for a vote, and the Board of Directors may
cause such Excess Shares to be transferred to an independent trustee for sale on
the open market or otherwise, with the expenses of such trustee to be paid out
of the proceeds of the sale.
Board of Directors. Article VII of the Certificate of Incorporation of the
Company contains provisions relating to the Board of Directors and provides,
among other things, that the Board of Directors shall be divided into three
classes as nearly equal in number as possible with the term of office of one
class expiring each year. See "Management of the Company." The classified Board
is intended to provide for continuity of the Board of Directors and to make it
more difficult and time consuming for a stockholder group to fully use its
voting power to gain control of the Board of Directors without the consent of
the incumbent Board of Directors of the Company. Cumulative voting in the
election of directors is prohibited by the Certificate of Incorporation.
Elimination of cumulative voting will help to ensure continuity and stability of
the Company's Board of Directors and the policies adopted by it by making it
more difficult for the holders of a relatively small amount of the common stock
to elect their nominees to the Board of Directors and possibly by delaying,
deterring, or discouraging proxy contests.
Directors may be removed only with cause at a duly constituted meeting of
stockholders called expressly for that purpose upon the vote of the holders of
not less than a majority of the total votes eligible to be cast by stockholders.
Any vacancy occurring in the Board of Directors for any reason (including an
increase in the number of authorized directors) may be filled by the affirmative
vote of a majority of the Directors then in office, though less than a quorum of
the Board, or by the sole remaining director, and a director appointed to fill a
vacancy shall serve for the remainder of the term to which the director has been
elected, and until his successor has been elected and qualified.
Section 4.15 of the Bylaws governs nominations for election to the Board,
and provides that nominations for election to the Board of Directors may be made
by the Board of Directors or a committee thereof or by a stockholder eligible to
vote at an annual meeting of stockholders who has complied with the notice
provisions in that section. Written notice of a stockholder nomination must be
delivered to, or mailed to and received at, the principal executive offices of
the Company not less than ninety days prior to the anniversary date of the
mailing of proxy materials by the Company in connection with the immediately
preceding annual meeting, provided, however, that, with respect to the first
scheduled annual meeting following completion of the Conversion, which is
expected to be held on the third Wednesday of January 1998, nominations by the
stockholder must be so delivered or received no later than the close of business
on the third Wednesday of October 1997, notwithstanding a determination by the
Company to schedule such annual meeting at a date later than the third Wednesday
of January 1998. With respect to an election to be held at a special meeting of
stockholders for the election of directors, the notice must be delivered or
received no later than the close of business on the tenth day following the date
on which notice of such meeting is first given to stockholders. Each such notice
shall set forth: (a) the name and address of the stockholder who intends to make
the nomination and of the person or persons to be nominated; (b) a
representation that the stockholder is a holder of record
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of stock of the Company entitled to vote at such meeting and intends to appear
in person or by proxy at the meeting to nominate the person or persons specified
in the notice; (c) a description of all arrangements or understandings between
the stockholder and each nominee and any arrangements or understandings between
the stockholder and each nominee and any other person or persons (naming such
person or persons) pursuant to which the nomination or nominations are to be
made by such stockholders; (d) such other information regarding each nominee
proposed by such stockholder as would be required to be included in a proxy
statement filed pursuant to the proxy rules of the SEC; and (e) the consent of
each nominee to serve as a director of the Company if so elected.
The provisions regarding director elections and other provisions in the
Certificate of Incorporation and Bylaws discussed herein are generally designed
to protect the ability of the Board of Directors to negotiate with the proponent
of an unfriendly or unsolicited proposal to take over or restructure the Company
by making it more difficult and time-consuming to change majority control of the
Board, whether by proxy contest or otherwise. The general effect of these
provisions will be to require generally two annual stockholders meetings,
instead of one, to effect a change in control of the Board of Directors of the
Company even if holders of a majority of the Company's capital stock believe
that a change in the composition of the Board of Directors is desirable. Because
a majority of the directors at any given time will have prior experience as
directors, these requirements will help to ensure continuity and stability of
the Company's management and policies and facilitate long-range planning for the
Company's business. The provisions relating to removal of directors and filling
of vacancies are consistent with and supportive of a classified board of
directors.
The procedures regarding stockholder nominations will provide the Board of
Directors with sufficient time and information to evaluate a stockholder nominee
to the Board and other relevant information, such as existing stockholder
support for the nominee. The proposed procedures, however, will provide
incumbent directors advance notice of a dissident slate of nominees for
directors, and will make it easier for the Board to solicit proxies resisting
such nominees. This may make it easier for the incumbent directors to retain
their status as directors, even when certain stockholders view the dissident
nominations as in the best interests of the Company or its stockholders.
Limitation of Liability. Article IX of the Company's Certificate of
Incorporation provides that the personal liability of the directors and officers
of the Company for monetary damages shall be eliminated to the fullest extent
permitted by the General Corporation Law of the State of Delaware as it exists
on the effective date of the Certificate of Incorporation or as such law may be
thereafter in effect. Section 102(b)(7) of the Delaware General Corporation Law
currently provides that directors (but not officers) of corporations that have
adopted such a provision will not be so liable, except (i) for any breach of the
director's duty of loyalty to the corporation or its shareholders, (ii) for acts
or omissions not in good faith or that involve intentional misconduct or a
knowing violation of law, (iii) for the payment of certain unlawful dividends
and the making of certain stock purchases or redemptions, or (iv) for any
transaction from which the director derived an improper personal benefit. This
provision would absolve directors of personal liability for negligence in the
performance of their duties, including gross negligence. It would not permit a
director to be exculpated, however, for liability for actions involving
conflicts of interest or breaches of the traditional "duty of loyalty" to the
Company and its shareholders, and it would not affect the availability of
injunctive or other equitable relief as a remedy.
If Delaware law was amended in the future to provide for greater
limitations on the personal liability of directors or to permit corporations to
limit the personal liability of officers, the provision in the Company's
Certificate of Incorporation limiting the personal liability of directors and
officers would automatically incorporate such authorities without further action
by shareholders. Similarly, if Delaware law was amended in the future to
restrict the ability of a corporation to limit the personal lability of
directors, the Company's Certificate of Incorporation would automatically
incorporate such restrictions without further action by shareholders.
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Currently, the scope of the provision in the Company's Certificate of
Incorporation limiting the personal liability of directors is uncertain because
of the absence of judicial precedent interpreting similar provisions. In
addition, the SEC takes the position that similar provisions added to other
corporations' certificates of incorporation would not protect those
corporations' directors from liability for violations of the federal securities
laws. Federal banking regulators also may take the same position with respect to
violations of federal banking laws and regulations.
The provision limiting the personal liability of the Company's directors
does not eliminate or alter the duty of the Company's directors; it merely
limits personal lability for monetary damages to the maximum extent now or
hereafter permitted by the Delaware General Corporation Law. Moreover, it
currently applies only to claims against a director arising out of his role as a
director; it currently does not apply to claims arising out of his role as an
officer (if he is also an officer) or arising out of any other capacity in which
he serves because Section 102(b)(7) does not authorize such a limitation of
liability.
The provision in the Company's Certificate of Incorporation which limits
the personal liability of directors is designed to ensure that the ability of
the Company's directors to exercise their best business judgment in managing the
Company's affairs is not unreasonably impeded by exposure to the potentially
high personal costs or other uncertainties of litigation. The nature of the
tasks and responsibilities undertaken by directors of publicly-held corporations
often require such persons to make difficult judgments of great importance which
can expose such persons to personal liability, but from which they will acquire
no personal benefit. In recent years, litigation against publicly-held
corporations and their directors and officers challenging good faith business
judgments and involving no allegations of personal wrongdoing has become common.
Such litigation regularly involves damage claims in huge amounts which bear no
relationship to the amount of compensation received by the directors or
officers, particularly in the case of directors who are not employees of the
corporation. The expense of such litigation, whether it is well-founded or not,
can be enormous. The provisions of the Certificate of Incorporation relating to
director liability is intended to reduce, in appropriate cases, the risk
incident to serving as a director and to enable the Company to elect and retain
persons most qualified to serve as directors.
Indemnification of Directors, Officers, Employees and Agents. Article VI
of the Company's Bylaws provide that the Company shall 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, whether civil, criminal, administrative
or investigative, by reason of the fact that such person is or was a director,
officer, employee or agent of the Company or any predecessor of the Company, or
is or was serving at the request of the Company or any predecessor of the
Company as a director, officer, employee or agent of another corporation,
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 to the fullest extent authorized by Section 145 of the
General Corporation Law of the State of Delaware, provided that the Company
shall not be liable for any amounts which may be due in connection with a
settlement of any action, suit or proceeding effected without its prior written
consent or any action, suit or proceeding initiated by any person seeking
indemnification thereunder without its prior written consent.
Under Section 145 of the Delaware General Corporation Law as currently in
effect, other than in actions brought by or in the right of the Company, such
indemnification would apply if it was determined in the specific case that the
proposed indemnitee 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 Company and, with
respect to any criminal proceeding, if he or she had no reasonable cause to
believe that his or her conduct was unlawful. In actions brought by or in the
right of the Company, such indemnification would probably be limited to
reasonable expenses (including attorneys' fees), and would apply if it were
determined in the specific case that the proposed indemnitee 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 Company, except that no indemnification may be made with
respect to any claim, issue or matter as to which such person is adjudged liable
to the Company unless, and only to the extent that, the Delaware Court of
Chancery or the court in which that action was brought determines upon
application that, in view of all the circumstances of the
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case, the proposed indemnitee is fairly and reasonably entitled to indemnity for
such expenses as the court deems proper. To the extent that any director,
officer, employee or agent of the Company has been successful on the merits or
otherwise in defense of any proceeding, he or she must be indemnified against
reasonable expenses incurred by him or her in connection therewith.
The Company's Bylaws also provide that reasonable expenses (including
attorneys' fees) incurred by a director, officer, employee or agent of the
Company in defending any civil, criminal, administrative or investigative
action, suit or proceeding described above shall be paid by the Company in
advance of the final disposition of such action, suit or proceeding as
authorized by the Board of Directors upon receipt of an undertaking by or on
behalf of such person to repay such amount if it shall ultimately be determined
that the person is not entitled to be indemnified by the Company.
Authorized Shares and Issuance of Capital Stock. Article IV of the
Certificate of Incorporation authorizes the issuance of 1,600,000 shares of
Common Stock with a par value of $.01 per share and 400,000 shares of preferred
stock with a par value of $0.01 per share (the "Preferred Stock"). The shares of
Common Stock and Preferred Stock were authorized in an amount greater than that
to be issued in the Conversion to provide the Company's Board of Directors with
flexibility 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 currently has no plans
for the issuance of additional shares, other than the issuance of additional
shares pursuant to stock benefit plans.
Neither the Certificate of Incorporation nor the Bylaws of the Company
contain a restriction on the issuance of shares of capital stock to directors,
officers or controlling persons of the Company. Thus, stock- related
compensation plans such as the Stock Option Plan and the Recognition Plan could
be adopted by the Company without shareholder approval and shares of Company
capital stock could be issued directly to directors, officers or controlling
persons without shareholder approval. The Bylaws of the National Association of
Securities Dealers, Inc., however, generally require corporations with
securities which are quoted on the Nasdaq Stock Market to obtain shareholder
approval of most stock compensation plans for directors, officers and key
employees of the corporation. Moreover, although generally not required,
shareholder approval of stock-related compensation plans may be sought in
certain instances in order to qualify such plans for favorable federal income
tax and securities law treatment under current laws and regulations.
Special Meetings of Stockholders and Stockholder Proposals. Section 2.4 of
the Company's Bylaws provides that special meetings of the Company's
stockholders, for any purpose or purposes, may only be called by the affirmative
vote of a majority of the Board of Directors then in office.
Section 2.14 of the Company's Bylaws provides that only such business as
shall have been properly brought before an annual meeting of stockholders shall
be conducted at the annual meeting. In order to be properly brought before an
annual meeting following completion of the Conversion, business must be (a)
brought before the meeting by or at the direction of the Board of Directors or
(b) otherwise properly brought before the meeting by a stockholder who has given
timely notice thereof in writing to the Company. For stockholder proposals to be
included in the Company's proxy materials, the stockholder must comply with all
the timing and informational requirements of Rule 14a-8 of the Exchange Act.
With respect to stockholder proposals to be considered at the annual meeting of
stockholders but not included in the Company's proxy materials, the
stockholder's notice must be delivered to or mailed and received at the
principal executive offices of the Company not less than 90 days prior to the
anniversary date of the mailing of proxy materials by the Company
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in connection with the immediately preceding annual meeting; provided, however,
that with respect to the first scheduled annual meeting following completion of
the Conversion, which is expected to be held on the third Wednesday of January
1998, such written notice must be received by the Company not later than the
close of business on the third Wednesday of October 1997. In connection with
such first annual meeting, stockholder nominations will be required to be
received by the Company by the aforementioned date notwithstanding a
determination by the Company to schedule such annual meeting at a date later
than the third Wednesday of January 1998. A stockholder's notice shall set forth
as to each matter the stockholder proposes to bring before the annual meeting
(a) a brief description of the business desired to be brought before the annual
meeting, (b) the name and address, as they appear on the Company's books, of the
stockholder proposing such business, (c) the class and number of shares of the
Company which are beneficially owned by the stockholder, and (d) any financial
interest of the stockholder in such business. The presiding officer of an annual
meeting shall determine and declare to the meeting whether the business was
properly brought before the meeting in accordance with the provisions of Section
2.14 and any such business not properly brought before the meeting shall not be
transacted.
The procedures regarding stockholder proposals are designed to provide the
Board with sufficient time and information to evaluate a stockholder proposal
and other relevant information, such as existing stockholder support for the
proposal. The proposed procedures, however, will give incumbent directors
advance notice of a business proposal. This may make it easier for the incumbent
directors to defeat a stockholder proposal, even when certain stockholders view
such proposal as in the best interests of the Company or its stockholders.
Amendment of Certificate of Incorporation and Bylaws. Article 11 of the
Company's Certificate of Incorporation generally provides that any amendment of
the Certificate of Incorporation must be first approved by a majority of the
Board of Directors and, to the extent required by law, then by the holders of a
majority of the shares of the Company entitled to vote in an election of
directors, except that the approval of 75% of the shares of the Company entitled
to vote in an election of directors is required for any amendment to Articles
VII (directors), VIII (meetings of stockholders and bylaws), IX (limitation on
liability of directors and officers), X (restrictions on acquisitions) and 11
(amendment), unless any such proposed amendment is approved by a vote of 75% of
the Board of Directors then in office.
The Bylaws of the Company may be amended by a majority of the Board of
Directors or by the affirmative vote of a majority of the total shares entitled
to vote in an election of directors, except that the affirmative vote of at
least 75% of the total shares entitled to vote in an election of directors shall
be required to amend, adopt, alter, change or repeal any provision inconsistent
with certain specified provisions of the Bylaws, unless any such proposed
amendment is approved by a vote of 75% of the Board of Directors then in office.
Delaware General Corporation Law. In addition to the provisions contained
in the Company's Certificate of Incorporation, the Delaware General Corporation
Law includes certain provisions applicable to Delaware corporations, such as the
Company, which may be deemed to have an anti-takeover effect. Section 203 of the
Delaware General Corporation Law ("Section 203") imposes certain restrictions on
business combinations between the Company and large shareholders. Specifically,
Section 203 prohibits a "business combination" (as defined in Section 203,
generally including mergers, sales and leases of assets, issuances of securities
and similar transactions) between the Company or a subsidiary and an "interested
shareholder" (as defined in Section 203, generally the beneficial owner of 15%
or more of the Company's Common Stock) within three years after the person or
entity becomes an interested shareholder, unless (i) prior to the person or
entity becoming an interested shareholder, the business combination or the
transaction pursuant to which such person or entity became an interested
shareholder shall have been approved by the Company's Board of Directors, (ii)
upon consummation of the transaction in which the interested shareholder became
such, the interested shareholder holds at least 85% of the Company's Common
Stock (excluding shares held by persons who are both officers and directors and
shares held by certain employee benefit plans), or (iii) the business
combination is approved by the Company's Board of Directors and by the holders
of at least two-thirds of the outstanding Company Common Stock, excluding shares
owned by the interested shareholders.
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One of the effects of Section 203 may be to prevent highly leveraged
takeovers, which depend upon getting access to the acquired corporation's assets
to support or repay acquisition indebtedness and certain coercive acquisition
tactics. By requiring approval of the holders of two-thirds of the shares held
by disinterested shareholders for business combinations involving an interested
shareholder, Section 203 may prevent any interested shareholder from taking
advantage of its position as a substantial, if not controlling, shareholder and
engaging in transactions with the Company that may not be fair to the Company's
other shareholders or that may otherwise not be in the best interests of the
Company, its shareholders and other constituencies.
For similar reasons, however, these provisions may make more difficult or
discourage an acquisition of the Company, or the acquisition of control of the
Company by a principal shareholder, and thus the removal of incumbent
management, because a business combination within the specified three-year
period that is not approved by a majority of the Board of Directors prior to the
transaction in which a person becomes an interested shareholder will require the
approval of the Board of Directors and the holders of two-thirds of the shares
held by disinterested shareholders. In addition, to the extent that Section 203
discourages takeovers that would result in the change of the Company's
management, such a change may be less likely to occur.
Anti-Takeover Effects of the Certificate of Incorporation and Bylaws and
Management Remuneration Adopted in the Conversion
The foregoing provisions of the Certificate of Incorporation and Bylaws of
the Company could have the effect of discouraging an acquisition of the Company
or stock purchases in furtherance of an acquisition, and could accordingly,
under certain circumstances, discourage transactions which might otherwise have
a favorable effect on the price of the Company's Common Stock.
In addition, certain provisions of the proposed employment agreement with
the Company's and the Bank's President provide him with severance payments upon
his termination in connection with a change in control of the Company or the
Bank. See "Management of the Company - Employment Agreement." The foregoing
provisions may make it more difficult for companies or persons to acquire
control of the Company. Additionally, the provisions could deter offers to the
shareholders which might be viewed by such shareholders to be in their best
interests.
The Board of Directors believes that the provisions described above are
prudent and will reduce vulnerability to takeover attempts and certain other
transactions that are not negotiated with and approved by the Board of Directors
of the Company. The Board of Directors believes that these provisions are in the
best interests of the Company and its future stockholders. In the Board of
Directors' judgment, the Board of Directors is in the best position to determine
the true value of the Company and to negotiate more effectively for what may be
in the best interests of its stockholders. Accordingly, the Board of Directors
believes that it is in the best interests of the Company and its future
stockholders to encourage potential acquirors to negotiate directly with the
Board of Directors and that these provisions will encourage such negotiations
and discourage hostile 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 prices reflective of the true value of the Company and
where the transaction is in the best interests of all stockholders.
Despite the Board of Directors' belief as to the benefits to the Company's
stockholders of the foregoing provisions, these provisions also may have the
effect of discouraging a future takeover attempt in which stockholders might
receive a substantial premium for their shares over then current market prices
and may tend to perpetuate existing management. As a result, stockholders who
might desire to participate in such a transaction may not have an opportunity to
do so. The Board of Directors, however, has concluded that the potential
benefits of these provisions outweigh their possible disadvantages.
The Board of Directors of the Company and the Bank are not aware of any
effort that might be made to acquire control of the Bank or the Company.
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Regulatory Restrictions
The Change in Bank Control Act provides that no person, acting directly
or indirectly or through or in concert with one or more other persons, may
acquire control of a bank unless the FDIC has been given 60 days' prior
written notice. The Bank Holding Company Act provides that no company may
acquire "control" of a bank without the prior approval of the Federal Reserve
Board. Any company that acquires such control becomes a bank holding company
subject to registration, examination and regulation by the Federal Reserve
Board. Pursuant to federal regulations, control of a bank is conclusively
deemed to have been acquired by, among other things, the acquisition of more
than 25% of any class of voting stock of the bank or the ability to control
the election of a majority of the directors of a bank. The Federal Reserve
Board may prohibit an acquisition if (i) it would result in a monopoly or
substantially lessen competition, (ii) the financial condition of the
acquiring person might jeopardize the financial stability of the institution,
or (iii) the competence, experience or integrity of the acquiring person
indicates that it would not be in the interest of the depositors or of the
public to permit the acquisition of control by such person. Approval of a
change in control of an Illinois-chartered savings bank is also required from
the Office pursuant to the Savings Bank Act.
DESCRIPTION OF CAPITAL STOCK OF THE COMPANY
General
The Company is authorized to issue 1,600,000 shares of Common Stock having
a par value of $0.01 per share and 400,000 shares of preferred stock having a
par value of $0.01 per share (the "Preferred Stock"). The Company currently
expects to issue up to a maximum of 345,000 shares of Common Stock and no shares
of Preferred Stock in the Conversion. 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 of Conversion, all such stock will
be duly authorized, fully paid and nonassessable. Presented below is a
description of all aspects of the Company's capital stock which are deemed
material to an investment decision with respect to the Conversion.
The Common Stock of the Company will represent nonwithdrawable capital,
will not be an account of an insurable type, and will not be insured by the
FDIC.
Common Stock
Distributions. The Company can pay dividends if, as and when declared by
its Board of Directors, subject to compliance with limitations which are imposed
by law. See "Dividend Policy." The holders of Common Stock of the Company will
be entitled to receive and share equally in such dividends as may be declared by
the Board of Directors of the Company out of funds legally available therefor.
If the Company issues Preferred Stock, the holders thereof may have a priority
over the holders of the Common Stock with respect to dividends. During at least
the one-year period subsequent to the Conversion, the Company will take no
action to implement any distribution of a return of excess capital to
stockholders.
Voting Rights. Upon Conversion, the holders of Common Stock of the Company
will possess exclusive voting rights in the Company. They will elect the
Company's Board of Directors and act on such other matters as are required to be
presented to them under Delaware law or the Company's Certificate of
Incorporation or as are otherwise presented to them by the Board of Directors.
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. Cumulative voting
means that holders of stock of a corporation are entitled, in the election of
directors, to cast a number of votes equal to the number of shares which they
own multiplied by the number of directors to be elected Because a stockholder
entitled to cumulative voting may cast all of his votes for one nominee or
disperse his votes among nominees as he chooses, cumulative voting is generally
considered to increase the ability of minority stockholders to elect nominees to
a corporation's board of directors. Under certain circumstances, shares in
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excess of 10.0% of the issued and outstanding shares of Common Stock may be
considered "Excess Shares" and, accordingly, not be entitled to vote. See
"Restrictions on Acquisitions of the Company and the Bank." If the Company
issues Preferred Stock, holders of the Preferred Stock may also possess voting
rights.
As an Illinois-chartered 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 will 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 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 -
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
liquidation or dissolution.
Preemptive Rights. Holders of the Common Stock of the Company will not be
entitled to preemptive rights with respect to any shares which may be issued.
The Common Stock is not subject to redemption.
Preferred Stock
None of the shares of the Company's authorized Preferred Stock will be
issued in the Conversion. Such stock may be issued with such preferences and
designations as the Board of Directors may from time to time determine. The
Board of Directors can, without stockholder approval, issue preferred stock with
voting, dividend, liquidation and conversion rights which could dilute the
voting strength of the holders of the Common Stock and may assist management in
impeding an unfriendly takeover or attempted change in control. The Company has
no present plans to issue Preferred Stock.
DESCRIPTION OF CAPITAL STOCK OF THE BANK
General
The Amended and Restated Articles of Incorporation of the Bank, to be
effective upon the Conversion, authorizes the issuance of capital stock
consisting of 1,000,000 shares of common stock, par value $1.00 per share. 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 Amended and Restated
Articles of Incorporation without the approval of the Bank's stockholders. Upon
Conversion, all of the issued and outstanding common stock of the Bank will be
held by the Company as the Bank's sole stockholder. The capital stock of the
Bank will represent nonwithdrawable capital, will not be an account of an
insurable type, and will not be insured by the FDIC. Presented below is a
description of all aspects of the Bank's capital stock which are deemed material
to an investment decision with respect to the Conversion.
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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 therefore. See "Dividend Policy" for
certain restrictions on the payment of dividends.
Voting Rights
Immediately after the Conversion, the holders of the Bank's common stock,
which consist solely of the Company, 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 and there shall be no right to cumulate votes.
Liquidation
In the event of any liquidation, dissolution, or winding up of the Bank,
the holders of 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; 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.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Company's Common Stock is
___________________________.
EXPERTS
The consolidated financial statements of the Bank as of September 30, 1996
and 1995, and for each of the years in the two-year period ended September 30,
1996, included in the Prospectus have been audited by Geo. S. Olive & Co. LLC,
independent auditors, as stated in their report appearing elsewhere herein, and
have been so included in reliance upon the report of such firm, given upon their
authority as experts in accounting and auditing.
RP Financial 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.
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LEGAL AND TAX OPINIONS
The legality of the Common Stock and the Federal income tax consequences
of the Conversion will be passed upon for the Bank and the Company by Elias,
Matz, Tiernan & Herrick L.L.P., Washington, D.C., special counsel to the Bank
and the Company. The Illinois income tax consequences of the Conversion will be
passed upon for the Bank and the Company by Geo. Olive & Co. LLC. Certain legal
matters will be passed upon for Trident by Luse Lehman Gorman Pomerenk &
Schick, PC, Washington, D.C.
ADDITIONAL INFORMATION
The Company has filed with the SEC a 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.
The Commission maintains a World Wide Web site on the Internet that contains
reports, proxy and information statements and other information regarding
registrants such as the Company that file electronically with the Commission.
The address of such site is http://www.sec.gov.
The Bank has filed an Application for Conversion with the Commissioner
with respect to the Conversion. This Prospectus omits certain information
contained in that application. The Application may be examined at the offices of
the Commissioner, Office of Banks and Real Estate, 310 S. Michigan Avenue, 21st
Floor, Chicago, Illinois 60604-4278 and 500 E. Monroe Street, Springfield,
Illinois 62701-1532.
In connection with the Conversion, the Company will register its Common
Stock with the SEC under Section 12(g) of the Exchange Act, and, upon such
registration, the Company and the holders of its stock will become subject to
the proxy solicitation rules, reporting requirements and restrictions on stock
purchases and sales by directors, officers and greater than 10% stockholders,
the annual and periodic reporting and certain other requirements of the Exchange
Act. Under the Plan, the Company has undertaken that it will not terminate such
registration for a period of at least three years following the Conversion.
A copy of the Plan of Conversion and Articles of Incorporation and the
Bylaws of the Company and the Amended and Restated Articles of Incorporation and
Bylaws of the Bank are available without charge from the Bank. Requests for such
information should be directed to: Mr. Merrill Norton, President, American
Savings Bank of Danville, 714 North Vermilion Street, Danville, Illinois 61834.
Copies of the appraisal report of RP Financial, including any amendments
thereto, are available at the Bank's office and is also part of the Application
for Conversion and the Registration Statement.
-114-
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
----
Independent Auditors' Report.............................................. F-2
Consolidated Balance Sheet................................................ F-3
Consolidated Statement of Income......................................... 36
Consolidated Statement of Capital......................................... F-4
Consolidated Statement of Cash Flows ..................................... F-5
Notes to Consolidated Financial Statements................................ F-6
The financial statements of Vermilion Bancorp, Inc. ("VBI") have been omitted
because VBI had not yet issued any stock, has no assets or liabilities, and has
not conducted any business other than of an organization nature.
All schedules are omitted as the required information is not applicable or the
information is presented in the Consolidated Financial Statements.
F-1
<PAGE>
Independent Auditor's Report
Board of Directors
American Savings Bank of Danville
Danville, Illinois
We have audited the consolidated balance sheet of American Savings Bank of
Danville and subsidiary as of September 30, 1996 and 1995, and the related
consolidated statements of income, equity capital, and cash flows for the years
then ended. These consolidated financial statements are the responsibility of
the Bank's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements described above present
fairly, in all material respects, the consolidated financial position of
American Savings Bank of Danville and subsidiary as of September 30, 1996 and
1995, and the results of their operations and their cash flows for the years
then ended, in conformity with generally accepted accounting principles.
As discussed in the notes to the consolidated financial statements, the Bank
changed its method of accounting for investment securities in 1995.
/s/ Geo. S. Olive & Co. LLC
Champaign, Illinois
October 11, 1996,
except as to the subsequent
event note, which is as of
November 6, 1996
<PAGE>
AMERICAN SAVINGS BANK OF DANVILLE
AND SUBSIDIARY
Consolidated Balance Sheet
September 30 1996 1995
- --------------------------------------------------------------------------------
Assets
Cash and due from banks $ 359,747 $ 426,372
Interest-bearing demand deposits 429,451 144,220
----------------------------
Cash and cash equivalents 789,198 570,592
Interest-bearing time deposits 99,000 99,000
Investment securities
Available for sale 2,221,693 1,485,815
Held to maturity 4,336,559 6,816,446
----------------------------
Total investment securities 6,558,252 8,302,261
Loans 27,079,584 24,028,147
Allowance for loan losses 143,349 74,190
----------------------------
Net loans 26,936,235 23,953,957
Premises and equipment 466,928 495,251
Federal Home Loan Bank stock 269,000 255,000
Other assets 340,599 300,774
----------------------------
Total assets $35,459,212 $33,976,835
============================
Liabilities
Deposits
Noninterest-bearing $ 165,593 $ 105,078
Interest-bearing 30,558,460 31,226,360
----------------------------
Total deposits 30,724,053 31,331,438
Federal Home Loan Bank borrowings 2,000,000
Other liabilities 380,010 202,988
----------------------------
Total liabilities 33,104,063 31,534,426
----------------------------
Equity Capital
Retained earnings 2,370,504 2,441,672
Net unrealized gain (loss) on securities
available for sale (15,355) 737
----------------------------
Total equity capital 2,355,149 2,442,409
----------------------------
Total liabilities and equity capital $35,459,212 $33,976,835
============================
See notes to consolidated financial statements.
F-3
<PAGE>
AMERICAN SAVINGS BANK OF DANVILLE
AND SUBSIDIARY
Consolidated Statement of Equity Capital
Net Unrealized
Gain (Loss) on
Securities
Retained Available
Earnings For Sale Total
- --------------------------------------------------------------------------------
Balances, October 1, 1994 $2,341,357 $2,341,357
Net income for 1995 100,315 100,315
Cumulative effect of change in
method of accounting for
securities $(12,419) (12,419)
Net change in unrealized gain
(loss) on securities available
for sale 13,156 13,156
---------------------------------------------
Balances, September 30, 1995 2,441,672 737 2,442,409
Net loss for 1996 (71,168) (71,168)
Net change in unrealized gain
(loss) on securities available
for sale (16,092) (16,092)
---------------------------------------------
Balances, September 30, 1996 $2,370,504 $(15,355) $2,355,149
=============================================
See notes to consolidated financial statements.
F-4
<PAGE>
AMERICAN SAVINGS BANK OF DANVILLE
AND SUBSIDIARY
Consolidated Statement of Cash Flows
<TABLE>
<CAPTION>
Year Ended September 30 1996 1995
- -----------------------------------------------------------------------------------------
<S> <C> <C>
Operating Activities
Net income (loss) $ (71,168) $ 100,315
Adjustments to reconcile net income (loss) to net
cash provided by operating activities
Provision for loan losses 80,000 13,059
Investment securities gains (563)
Deferred income tax (41,577)
Investment securities amortization (accretion), net 11,049 (15,705)
Depreciation 33,594 35,742
Federal Home Loan Bank stock dividend (3,600)
Net change in:
Interest receivable (51,317) (16,370)
Interest payable 7,652 (5,594)
Other assets 58,567 (14,173)
Other liabilities 169,370 49,134
----------------------------
Net cash provided by operating activities 196,170 142,245
----------------------------
Investing Activities
Net change in interest-bearing deposits 595,000
Purchases of securities available for sale (550,000) (671,775)
Proceeds from maturities of securities available for sale 1,394,257 700,000
Proceeds from sales of securities available for sale 300,563
Proceeds from maturities of securities held to maturity 867,113 590,564
Net change in loans (3,062,278) (2,340,524)
Purchase of premises and equipment (5,271) (62,900)
Purchase of Federal Home Loan Bank stock (14,000) (15,300)
----------------------------
Net cash used by investing activities (1,370,179) (904,372)
----------------------------
Financing Activities
Net change in deposits (607,385) 633,385
Proceeds of Federal Home Loan Bank borrowings 2,000,000
----------------------------
Net cash provided by financing activities 1,392,615 633,385
----------------------------
Net Change in Cash and Cash Equivalents 218,606 (128,742)
Cash and Cash Equivalents, Beginning of Year 570,592 699,334
----------------------------
Cash and Cash Equivalents, End of Year $789,198 $570,592
============================
Additional Cash Flows Information
Interest paid $1,770,178 $1,593,598
Income tax paid 17,205 16,800
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE>
AMERICAN SAVINGS BANK OF DANVILLE
AND SUBSIDIARY
Notes to Consolidated Financial Statements
1) Nature of Operations and Summary of Significant Accounting Policies
The accounting and reporting policies of American Savings Bank of Danville (the
"Bank") and its wholly owned subsidiary, GBW Service Corporation (which services
contract sales of real estate), conform to generally accepted accounting
principles and reporting practices followed by the thrift industry. The more
significant of the policies are described below.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
The Bank operates under a state thrift charter and provides full banking
services. As a state-chartered thrift, the Bank is subject to regulation by the
State of Illinois Office of Banks and Real Estate and the Federal Deposit
Insurance Corporation.
The Bank generates commercial, mortgage and consumer loans and receives deposits
from customers located primarily in Danville and the immediately surrounding
communities. The Bank's loans are generally secured by specific items of
collateral including real property and consumer assets. Although the Bank has a
diversified loan portfolio, a substantial portion of its debtors' ability to
honor their contracts is dependent upon economic conditions in the Danville
area.
Consolidation--The consolidated financial statements include the accounts of the
Bank and subsidiary after elimination of all material intercompany transactions
and accounts.
Investment Securities--The Bank adopted Statement of Financial Accounting
Standards ("SFAS") No. 115, Accounting For Certain Investments in Debt and
Equity Securities, on October 1, 1994. Debt securities are classified as held to
maturity when the Bank has the positive intent and ability to hold the
securities to maturity. Securities held to maturity are carried at amortized
cost. Debt securities not classified as held to maturity are classified as
available for sale. Securities available for sale are carried at fair value with
unrealized gains and losses reported separately in equity capital, net of tax.
Amortization of premiums and accretion of discounts are recorded as interest
income from securities. Realized gains and losses are recorded as net security
gains (losses). Gains and losses on sales of securities are determined on the
specific-identification method.
At October 1, 1994, investment securities with an approximate carrying value of
$1,799,600 were reclassified as available for sale. This reclassification
resulted in a decrease in total equity, net of taxes, of $12,419.
F-6
<PAGE>
AMERICAN SAVINGS BANK OF DANVILLE
AND SUBSIDIARY
Notes to Consolidated Financial Statements
Loans are carried at the principal amount outstanding. Interest income is
accrued on the principal balances of loans. The accrual of interest on impaired
loans is discontinued when, in management's opinion, the borrower may be unable
to meet payments as they become due. Interest income is subsequently recognized
only to the extent cash payments are received. Certain loan fees and direct
costs are being deferred and amortized as an adjustment of yield on the loans.
Allowance for loan losses is maintained to absorb loan losses based on
management's continuing review and evaluation of the portfolio and its judgment
as to the impact of economic conditions on the portfolio. The evaluation by
management includes consideration of past loss experience, changes in the
composition of the portfolio, and the current condition and amount of loans
outstanding, and the probability of collecting all amounts due. Impaired loans
are measured by the present value of expected future cash flows, or the fair
value of the collateral of the loan, if collateral dependent.
In May 1993, the Financial Accounting Standards Board issued Statement No. 114
Accounting by Creditors for Impairment of a Loan which requires that impaired
loans that are within the scope of this statement be measured based on the
present value of expected future cash flows discounted at the loan's effective
interest rate or at the loan's market price or the fair value of the collateral
if the loan is collateral dependent. The Bank uses the loan-by-loan measurement
method for all loans, however, residential mortgage loans and consumer
installment loans are considered to be groups of smaller balance homogenous
loans and are collectively evaluated for impairment and are not subject to SFAS
114 measurement criteria. A loan is considered impaired when it is probable that
all contractual amounts due will not be collected in accordance with the terms
of the loan. A loan is not deemed to be impaired if a delay in receipt of
payment is expected to be less than 60 days or if, during a longer period of
delay, the Bank expects to collect all amounts due, including interest accrued
at the contractual rate during the period of the delay. Factors considered by
management include the property location, economic conditions and any unique
circumstances affecting the loan. Due to the composition of the Bank's loan
portfolio, the fair value of collateral is utilized to measure virtually all of
the Bank's impaired loans. If the fair value of an impaired loan is less than
the related recorded amount, a valuation allowance is established or the
writedown is charged against the allowance for loan losses if the impairment is
considered to be permanent.
Premises and equipment are carried at cost net of accumulated depreciation.
Depreciation is computed using both the straight-line and accelerated methods
based on the estimated useful lives of the assets. Maintenance and repairs are
expensed as incurred while major additions and improvements are capitalized.
Gains and losses on dispositions are included in current operations.
Federal Home Loan Bank stock is a required investment for institutions that are
members of the Federal Home Loan Bank ("FHLB") system. The required investment
in the common stock is based on a predetermined formula.
Income tax in the consolidated statement of income includes deferred income tax
provisions or benefits for all significant temporary differences in recognizing
income and expenses for financial reporting and income tax purposes. The Bank
files consolidated income tax returns with its subsidiary.
Reclassifications of certain amounts in the 1995 consolidated financial
statements have been made to conform to the 1996 presentation.
F-7
<PAGE>
AMERICAN SAVINGS BANK OF DANVILLE
AND SUBSIDIARY
Notes to Consolidated Financial Statements
2) Subsequent Events
On November 6, 1996, the Board of Directors adopted a Plan of Conversion (the
"Plan") whereby the Bank will convert from a state chartered mutual savings bank
to a state chartered stock savings bank. The Plan is subject to approval of
regulatory authorities and members at a special meeting. The stock of the 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 to eligible members of the
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 subscription price. 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 to be commenced
simultaneously with the subscription offering. The Plan provides that when the
conversion is completed, a liquidation account will be established in an amount
equal to the retained income of the 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 to the
assets of the Bank to qualifying depositors at July 31, 1995, who continue to
maintain deposits in the Bank after conversion. In the unlikely event of a
complete liquidation of the Bank, and only in such event, eligible account
holders would receive from the liquidation account a liquidation distribution
based on their proportionate share of the then total remaining qualifying
deposits.
Current regulations allow the 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 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 its capital level and supervisory condition.
No conversion costs have been incurred as of September 30, 1996. Costs of
conversion will be netted from proceeds of sale of common stock and recorded as
a reduction of additional paid-in capital or common stock. If the conversion is
not completed, such costs would be charged to expense.
F-8
<PAGE>
AMERICAN SAVINGS BANK OF DANVILLE
AND SUBSIDIARY
Notes to Consolidated Financial Statements
3) Investment Securities
<TABLE>
<CAPTION>
1996
-----------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
September 30 Cost Gains Losses Value
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Available for sale
U.S. Treasury $ 250,000 $ 3,250 $ 253,250
Federal agencies 1,992,166 5,025 $28,748 1,968,443
--------------------------------------------------------
Total available for sale 2,242,166 8,275 28,748 2,221,693
--------------------------------------------------------
Held to maturity
Federal agencies 499,798 928 498,870
State and municipal 361,177 6,759 354,418
Mortgage-back securities 3,475,584 30,440 32,713 3,473,311
--------------------------------------------------------
Total held to maturity 4,336,559 30,440 40,400 4,326,599
--------------------------------------------------------
Total investment securities $6,578,725 $38,715 $69,148 $6,548,292
========================================================
</TABLE>
<TABLE>
<CAPTION>
1995
-----------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
September 30 Cost Gains Losses Value
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Available for sale
U.S. Treasury $ 198,274 $ 400 $ 198,674
Federal agencies 1,286,424 3,749 $ 3,032 1,287,141
-------------------------------------------------------
Total available for sale 1,484,698 4,149 3,032 1,485,815
-------------------------------------------------------
Held to maturity
Federal agencies 2,196,132 2,363 41,891 2,156,604
State and municipal 360,201 7,165 353,036
Mortgage-backed securities 4,260,113 36,696 40,317 4,256,492
-------------------------------------------------------
Total held to maturity 6,816,446 39,059 89,373 6,766,132
-------------------------------------------------------
Total investment securities $8,301,144 $43,208 $92,405 $8,251,947
=======================================================
</TABLE>
F-9
<PAGE>
AMERICAN SAVINGS BANK OF DANVILLE
AND SUBSIDIARY
Notes to Consolidated Financial Statements
The amortized cost and fair value of securities available for sale and held to
maturity at September 30, 1996, by contractual maturity, are shown below.
Expected maturities will differ from contractual maturities because issuers may
have the right to call or prepay obligations with or without call or prepayment
penalties.
Available for Sale Held to Maturity
-----------------------------------------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
- --------------------------------------------------------------------------------
Within one year $ 600,000 $ 604,341 $ 499,798 $ 498,870
One to five years 1,642,166 1,617,352
Five to ten years 165,469 162,370
After ten years 195,708 192,048
----------------------------------------------------
2,242,166 2,221,693 860,975 853,288
Mortgage-backed securities 3,475,584 3,473,311
----------------------------------------------------
Totals $2,242,166 $2,221,693 $4,336,559 $4,326,599
====================================================
There were no pledged securities at September 30, 1996 or 1995.
Proceeds from the sale of a security available for sale during 1995 were
$300,563. A gross gain of $563 was realized on the sale. There were no sales of
securities during 1996.
On December 31, 1995, the Bank transferred certain securities from held to
maturity to available for sale in accordance with a transition reclassification
allowed by the Financial Accounting Standards Board. Such securities had a
carrying value of $1,600,000 and a fair value of $1,592,598.
F-10
<PAGE>
AMERICAN SAVINGS BANK OF DANVILLE
AND SUBSIDIARY
Notes to Consolidated Financial Statements
4) Loans And Allowance
September 30 1996 1995
- ----------------------------------------------------------------------
Real estate mortgage loans
One-to-four family $21,418,924 $19,181,018
Multi-family 1,236,140 1,157,351
Commercial real estate loans 780,848 669,127
Real estate sold on contract 373,846 414,915
Real estate construction loans 341,793 163,147
Commercial business loans 334,376 242,147
Consumer loans 2,581,152 2,290,163
-------------------------
Total loans 27,067,079 24,117,868
Plus
Deferred loan costs 38,121
Less
Undisbursed portion of loans 25,376 89,194
Unearned interest 240 527
-------------------------
$27,079,584 $24,028,147
=========================
Allowance for loan losses
Balances, October 1 $ 74,190 $ 67,309
Provision for losses 80,000 13,059
Recoveries on loans 1,296 4,158
Loans charged off (12,137) (10,336)
-------------------------
Balances, September 30 $ 143,349 $ 74,190
=========================
The Bank adopted SFAS No. 114 and No. 118, Accounting by Creditors for
Impairment of a Loan and Accounting by Creditors for Impairment of a Loan -
Income Recognition and Disclosures on October 1, 1995. The Bank did not have any
impaired loans at September 30, 1996 nor at any time during the year then ended
as defined in SFAS No. 114 and No. 118. Accordingly, the adoption of SFAS No.
114 and No. 118 did not have a material impact on the Bank's financial position
or results of operations.
Mortgage loans serviced for others are not included in the accompanying
consolidated balance sheet. The unpaid principal balances of mortgage loans
serviced for others were $432,071 and $525,065 at September 30, 1996 and 1995.
F-11
<PAGE>
AMERICAN SAVINGS BANK OF DANVILLE
AND SUBSIDIARY
Notes to Consolidated Financial Statements
5) Premises and Equipment
September 30 1996 1995
- ------------------------------------------------------------------------
Land $ 209,431 $ 209,431
Office building 568,593 568,593
Furniture and fixtures 292,129 286,858
---------------------------
Total cost 1,070,153 1,064,882
Accumulated depreciation (603,225) (569,631)
---------------------------
Net 466,928 $ 495,251
===========================
6) Other Assets and Other Liabilities
September 30 1996 1995
- ------------------------------------------------------------------------
Other assets
Interest receivable $147,719 $ 96,402
Cash value of life insurance annuity 53,284 58,654
Deferred income tax asset 97,963 50,888
Prepaid expenses and other 41,633 94,830
-------------------------
Total $340,599 $300,774
=========================
Other liabilities
Interest payable on deposits $ 17,917 $ 19,982
Interest payable on borrowings 9,717
Deferred compensation payable 79,831 74,831
Federal income tax payable 30,229 49,094
SAIF Assessment 207,307
Other 35,009 59,081
-------------------------
Total $380,010 $202,988
==========================
F-12
<PAGE>
AMERICAN SAVINGS BANK OF DANVILLE
AND SUBSIDIARY
Notes to Consolidated Financial Statements
7) Deposits
1996 1995
---------------------------
September 30 Amount Amount
- ---------------------------------------------------------------------------
NOW accounts $ 576,722 $ 625,170
Money market investment accounts 1,043,201 1,432,051
Savings and retirement accounts 5,350,222 4,964,863
Certificates 23,753,908 24,309,354
---------------------------
Total deposits $30,724,053 $31,331,438
===========================
Certificates maturing in years ending September 30:
1997 $16,995,124
1998 4,368,789
1999 1,598,821
2000 292,850
2001 498,324
-----------
$23,753,908
===========
The aggregate amount of certificates of deposit with a minimum denomination of
$100,000 was approximately $2,775,000 and $2,924,000 at December 31, 1996 and
1995.
8) Federal Home Loan Bank Borrowings
September 30 1996
- ---------------------------------------------------------------------------
Federal Home Loan Bank advances:
At 6.02%; due October,1997 $ 500,000
At 5.98%; due October, 1997 500,000
At 5.66%; due November, 1997 1,000,000
----------
Total FHLB borrowings $2,000,000
==========
The terms of security agreements with the FHLB require the Bank to pledge as
collateral for the advances qualifying first mortgage loans in an amount equal
to at least 170 percent of the advances and all stock in the FHLB.
F-13
<PAGE>
AMERICAN SAVINGS BANK OF DANVILLE
AND SUBSIDIARY
Notes to Consolidated Financial Statements
9) Income Tax
Year Ended September 30 1996 1995
- -------------------------------------------------------------------------------
Income tax expense (benefit)
Current federal $ 44,460 $15,230
Deferred federal (41,577)
-------------------------
Total income tax expense $ 2,883 $15,230
=========================
Reconciliation of federal statutory to actual
tax expense
Federal statutory income tax at 34% $(23,217) $39,285
Tax exempt interest (5,048) (10,687)
Graduated tax rates 7,467 (11,398)
Change in tax rate applicable to deferred taxes 18,404
Other 5,277 (1,970)
-------------------------
Actual tax expense $ 2,883 $15,230
=========================
A cumulative net deferred tax asset is included in other assets. The components
of the asset are as follows:
September 30 1996 1995
- --------------------------------------------------------------------------------
Differences in depreciation methods $ (530) $(4,255)
Differences in accounting for loan losses 32,408 27,713
Deferred compensation 19,958 29,185
Unrealized (gain) loss on securities available
for sale 5,118 (380)
Deferred loan costs (9,530)
SAIF assessment 51,439
Other (900) (1,375)
-------------------------
$ 97,963 $50,888
=========================
Assets $108,923 $57,278
Liabilities (10,960) (6,390)
-------------------------
$97,963 $50,888
=========================
There was no state income tax expense for 1996 or 1995.
F-14
<PAGE>
AMERICAN SAVINGS BANK OF DANVILLE
AND SUBSIDIARY
Notes to Consolidated Financial Statements
Retained earnings at September 30, 1996 and 1995, include approximately $995,000
for which no deferred income tax liability has been recognized. This amount
represents an allocation of income to bad debt deductions as of September 30,
1988, for tax purposes only. Reduction of amounts so allocated for purposes
other than tax bad debt losses or adjustments arising from carryback of net
operating losses would create income for tax purposes only, which income would
be subject to the then-current corporate income tax rate. The unrecorded
deferred income tax liability on the above amounts was approximately $338,300 at
September 30, 1996 and 1995.
10) Commitments and Contingent Liabilities
In the normal course of business there are outstanding commitments and
contingent liabilities, such as commitments to extend credit and standby letters
of credit, which are not included in the accompanying financial statements. The
Bank's exposure to credit loss in the event of nonperformance by the other party
to the financial instruments for commitments to extend credit and standby
letters of credit is represented by the contractual or notional amount of those
instruments. The Bank uses the same credit policies in making such commitments
as it does for instruments that are included in the consolidated balance sheet.
Financial instruments whose contract amount represents credit risk at September
30 were as follows:
1996 1995
- --------------------------------------------------------------------------------
Mortgage loan commitments at fixed rates $576,000 $386,000
Construction and home improvement loan commitments at
fixed rates 606,000 88,000
Standby letters of credit 23,000
At September 30, 1996, mortgage loan commitments have terms up to 30 days and
rates ranging from 7.25% to 9.00%. Construction and home improvement loan
commitments have terms up to 6 months and rates ranging from 9.50% to 10.50%.
At September 30, 1995, mortgage loan commitments had terms up to 30 days and
rates ranging from 7.00% to 8.50%. Construction and home improvement loan
commitments had terms up to 6 months and rates ranging from 10.00% to 10.50%.
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. Since many of the commitments are expected to expire
without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. The Bank evaluates each customer's credit
worthiness on a case-by-case basis. The amount of collateral obtained, if deemed
necessary by the Bank upon extension of credit, is based on management's credit
evaluation. Collateral held varies, but may include residential real estate,
income-producing commercial properties, or other assets of the borrower.
F-15
<PAGE>
AMERICAN SAVINGS BANK OF DANVILLE
AND SUBSIDIARY
Notes to Consolidated Financial Statements
Standby letters of credit are conditional commitments issued by the Bank to
guarantee the performance of a customer to a third party.
On December 30, 1992, a former employee filed a lawsuit against the Bank which
involves various accusations. A summary judgement has been issued by the court
in favor of the Bank on each count with the exception of one. Based on the
current status of the litigation, the Bank's attorneys have advised that, while
they are unable to express an opinion as to the ultimate disposition of the
claim, they believe that it is unlikely that the former employee will prevail on
the remaining count. No accrual for loss from this action has been recognized in
the accompanying financial statements.
In addition, the Bank and subsidiary are also subject to other claims and
lawsuits which arise primarily in the ordinary course of business. It is the
opinion of management that the disposition or ultimate determination of such
possible claims or lawsuits will not have a material adverse effect on the
consolidated financial position of the Bank.
11) Regulatory Capital
The Bank is subject to various regulatory capital requirements administered by
the federal banking agencies. Failure to meet minimum capital requirements can
initiate actions by the regulatory agencies that, if undertaken, could have a
material effect on the Bank's financial statements. Under capital adequacy
guidelines and the regulatory framework for prompt corrective action, the Bank
must meet specific capital guidelines that involve quantitative measures of the
Bank's assets, liabilities, and certain off-balance sheet items as calculated
under regulatory accounting practices. The Bank's capital amounts and
classification are also subject to qualitative judgements by the regulators
about components, risk weightings, and other factors.
At September 30, 1996, the management of the Bank believes that it meets all
capital adequacy requirements to which it is subject. The most recent
notification from the regulatory agency categorized the Bank as well capitalized
under the regulatory framework for prompt corrective action. There have been no
conditions or events since that notification that management believes have
changed this categorization.
The Bank's actual and required capital amounts (in thousands) and ratios are as
follows:
<TABLE>
<CAPTION>
1996
-----------------------------------------------------------
Required for To Be Well
Actual Adequate Capital(1) Capitalized(1)
-----------------------------------------------------------
September 30 Amount Ratio Amount Ratio Amount Ratio
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Total risk-based capital1 (to risk-
weighted assets) $2,514 15.33% $1,312 8.0% $1,640 10.0%
Tier 1 capital1 (to risk-weighted
assets) 2,371 14.45% 656 4.0% 984 6.0%
Tier 1 capital1 (to adjusted total
assets) 2,371 6.69% 1,418 4.0% 1,773 5.0%
</TABLE>
(1) As defined by regulatory agencies
F-16
<PAGE>
AMERICAN SAVINGS BANK OF DANVILLE
AND SUBSIDIARY
Notes to Consolidated Financial Statements
The Bank's tangible capital at September 30, 1996, was $2,371,000 which was 6.69
percent of tangible assets and exceeded the required ratio of 1.5 percent.
On September 30, 1996, legislation was enacted to recapitalize the Federal
Deposit Insurance Corporation's Savings Association Insurance Fund ("SAIF") as
well as to provide regulatory relief to SAIF insured institutions. As a result
of this legislation, a special assessment was levied on all SAIF assessable
deposits outstanding on March 31, 1995, at a rate of approximately .657 percent
of deposits. Accordingly, the Bank recorded an expense related to this special
assessment of approximately $155,000 net of taxes, on the date of enactment.
12) Benefit Plans
The Bank has a retirement savings Section 401(k) plan in which substantially all
employees may participate. The Bank contributes three percent of base salary for
each participant. In addition, the Bank matches 100 percent of the first four
percent of employees' base salary contributions. The Bank also matches 50
percent of the next 4 percent of base salary contributed by the participants.
The Bank's expense for the plan was approximately $19,000 for 1996 and $18,300
for 1995.
The Bank also has a deferred compensation plan for directors whereby
participating directors can elect to defer directors' fees in return for
inclusion in a deferred compensation plan which pays benefits to such
participating directors upon retirement or death. The Bank purchased a deferred
annuity, which is included in other assets, to fund the deferred compensation
plan benefits; however, this annuity is not restricted for that purpose. A
deferred compensation liability has been calculated and recorded in other
liabilities, which represents the present value of future benefits to be paid at
retirement for each participating director. Deferred compensation plan expense
included in the financial statements was $12,600 for both 1996 and 1995.
13) Fair Values of Financial Instruments
The following methods and assumptions were used to estimate the fair value of
each class of financial instrument:
Cash and Cash Equivalents--The fair value of cash and cash equivalents
approximates carrying value.
Interest-Bearing Time Deposits--The fair value of interest-bearing time deposits
approximates carrying value.
Securities and Mortgage-Backed Securities--Fair values are based on quoted
market prices.
Loans--For both short-term loans and variable-rate loans that reprice frequently
and with no significant change in credit risk, fair values are based on carrying
values. The fair value for other loans are estimated using discounted cash flow
analyses, using interest rates currently being offered for loans with similar
terms to borrowers of similar credit quality.
Interest Receivable/Payable--The fair values of interest receivable/payable
approximate carrying values.
F-17
<PAGE>
AMERICAN SAVINGS BANK OF DANVILLE
AND SUBSIDIARY
Notes to Consolidated Financial Statements
Federal Home Loan Bank Stock--Fair value of FHLB stock is based on the price at
which it may be resold to the FHLB.
Deposits--The fair values of noninterest-bearing, interest-bearing demand and
savings accounts are equal to the amount payable on demand at the balance sheet
date. Fair values for fixed-rate certificates of deposit are estimated using a
discounted cash flow calculation that applies interest rates currently being
offered on certificates to a schedule of aggregated expected monthly maturities
on such time deposits.
Federal Home Loan Bank Advances--The fair value of these borrowings are
estimated using a discounted cash flow calculation, based on current rates for
similar debt.
Off-Balance Sheet Commitments--Commitments include commitments to originate
mortgage loans and standby letters of credit and are generally of a short-term
nature. The fair value of such commitments are based on fees currently charged
to enter into similar agreements, taking into account the remaining terms of the
agreements and the counterparties' credit standing. The Bank currently does not
charge a commitment fee; accordingly, no value has been assigned to the Bank's
commitments to extend credit.
The estimated fair values of the Bank's financial instruments are as follows:
1996
----------------------------
September 30 Carrying Amount Fair Value
- -------------------------------------------------------------------------------
Assets
Cash and cash equivalents $ 789,189 $ 789,189
Interest-bearing time deposits 99,000 99,000
Investment securities available for sale 2,221,693 2,221,693
Investment securities held to maturity 4,336,559 4,326,599
Loans, net 26,936,235 27,000,354
Interest receivable 147,719 147,719
Stock in FHLB 269,000 269,000
Cash surrender value of life insurance 53,284 53,284
Liabilities
Deposits 30,724,053 30,852,791
FHLB borrowings 2,000,000 1,991,610
Interest payable 27,634 27,634
Off-Balance Sheet Assets (Liabilities)
Commitments to extend credit 0 0
Standby letters of credit 0 0
F-18
<PAGE>
NO DEALER, SALESMAN OR ANY
OTHER PERSON HAS BEEN
AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY
REPRESENTATION OTHER THAN AS
CONTAINED IN THIS PROSPECTUS
IN CONNECTION WITH THE
OFFERING MADE HEREBY, AND, IF
GIVEN OR MADE, SUCH OTHER
INFORMATION OR REPRESENTATION
MUST NOT BE RELIED UPON AS
HAVING BEEN AUTHORIZED BY
VERMILION BANCORP, INC., THE
BANK OR TRIDENT 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 VERMILION BANCORP, INC. OR
THE BANK SINCE ANY OF THE
DATES AS OF WHICH INFORMATION
IS FURNISHED HEREIN OR SINCE
THE DATE HEREOF.
_____________________
TABLE OF CONTENTS
_____________________
Page
-----
Summary Overview 4
Selected Consolidated Financial
Information 6
Recent Developments 8
Summary 12
Risk Factors 20
Vermilion Bancorp, Inc. 24
American Savings Bank 25
Use of Proceeds 26
Dividend Policy and
Return of Excess Capital 26
Market for the Common Stock 27
Capitalization 28
Pro Forma Data 30
Regulatory Capital
Requirements 33
American Savings Bank of Danville
and Subsidiary Consolidated
Statements of Operations 36
Management's Discussion and
Analysis
of Financial Condition and
Results
of Operations 37
Business of the Bank 49
Regulation 72
Federal and State Taxation 78
Management 81
The Conversion 89
Restrictions on Acquisition of
the Company 104
Description of Capital Stock
of the Company 111
Description of Capital Stock
of the Bank 112
Transfer Agent and Resistrar 113
Experts 113
Legal and Tax Opinions 114
Additional Information 114
Index to Consolidated
Financial Statements F-1
UNTIL ____________ __, 1997,
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.
345,000 Shares
VERMILION
BANCORP, INC.
(Proposed Holding Company for
American Savings Bank of Danville)
COMMON STOCK
_____________________
PROSPECTUS
_____________________
_______________________
February __, 1997
TRIDENT SECURITIES, INC.
<PAGE>
PROSPECTUS SUPPLEMENT
VERMILION BANCORP, INC.
COMMON STOCK, $0.01 PAR VALUE PER SHARE
American Savings Bank of Danville 401(k) Plan
(33,600 SHARES AND PARTICIPATION THEREIN)
This Prospectus Supplement relates to the offer and sale to employees of
American Savings Bank of Danville ("American Savings" or the "Employer") who are
participants ("Participants") in the American Savings Bank 401(k) Plan (the
"Plan") of up to 33,600 shares of Vermilion Bancorp, Inc. (the "Company") common
stock, par value $0.01 per share (the "Common Stock"), and participation
interests in the Plan, as set forth herein.
In connection with the proposed conversion of American Savings from mutual
to stock form (the "Conversion") and the formation of the Company as the holding
company of American Savings, the Company and American Savings have restated and
amended the Plan to provide, among other things that Participants in the Plan be
able to direct the investment of their account balances within the Plan into
alternative investment funds, including an investment fund consisting of Common
Stock (the "Employer Stock Fund"). The Plan will permit Participants in the
Plan to direct the trustee of the Plan (the "Trustee") to purchase Common Stock
with amounts in the Plan attributable to such Participants. This Prospectus
Supplement relates to the initial election of a Participant to direct the
purchase of Common Stock in the Conversion and also to purchases of Common Stock
after the Conversion.
The Prospectus dated February __, 1997 of the Company (the "Prospectus"),
which is attached to this Prospectus Supplement, includes detailed information
with respect to the Company, the Conversion, the Common Stock and the financial
condition, results of operations, and business of American Savings. This
Prospectus Supplement, which provides detailed information with respect to the
Plan, should be read only in conjunction with the Prospectus.
For a discussion of certain factors that should be considered by each
Participant, see "Risk Factors" in the Prospectus.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION, THE OFFICE OF BANKS AND REAL ESTATE INSTITUTIONS OF THE
STATE OF ILLINOIS OR ANY OTHER STATE OR FEDERAL AGENCY OR STATE SECURITIES
COMMISSION, NOR HAS SUCH COMMISSION, OFFICE, CORPORATION, OR OTHER AGENCY
OR 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 BY THE FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY
OTHER GOVERNMENT AGENCY.
The date of this Prospectus Supplement is February __, 1997.
<PAGE>
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THE PROSPECTUS OR THIS PROSPECTUS
SUPPLEMENT, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT
BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY, AMERICAN SAVINGS OR THE
PLAN. THIS PROSPECTUS SUPPLEMENT DOES NOT CONSTITUTE AN OFFER TO SELL OR
SOLICITATION OF AN OFFER TO BUY ANY SECURITIES IN ANY JURISDICTION TO ANY PERSON
TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION IN SUCH JURISDICTION.
NEITHER THE DELIVERY OF THIS PROSPECTUS SUPPLEMENT AND THE PROSPECTUS NOR ANY
SALE MADE HEREUNDER SHALL UNDER ANY CIRCUMSTANCES CREATE ANY IMPLICATION THAT
THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY, AMERICAN SAVINGS OR THE
PLAN SINCE THE DATE HEREOF OR THAT THE INFORMATION HEREIN CONTAINED OR
INCORPORATED BY REFERENCE IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE
HEREOF. THIS PROSPECTUS SUPPLEMENT SHOULD BE READ ONLY IN CONJUNCTION WITH THE
PROSPECTUS THAT IS ATTACHED HERETO AND SHOULD BE RETAINED FOR FUTURE REFERENCE.
TABLE OF CONTENTS
Page
The Offering 1
Securities Offered . . . . . . . . . . . . . . . . . . . . . . . 1
Election to Purchase Common Stock in the Conversion. . . . . . . 1
Description of the Plan. . . . . . . . . . . . . . . . . . . . . 1
Method of Directing Transfer . . . . . . . . . . . . . . . . . . 1
Time for Directing Transfer . . . . . . . . . . . . . . . . . . 2
Irrevocability of Transfer Direction . . . . . . . . . . . . . . 2
Direction to Purchase Common Stock After the Conversion. . . . . 2
Purchase Price of Common Stock . . . . . . . . . . . . . . . . . 2
Nature of Participant's Interest in the Common Stock . . . . . . 3
Voting and Tender Rights of Common Stock . . . . . . . . . . . . 3
Exhibits to Prospectus Supplement. . . . . . . . . . . . . . . . . . 4
<PAGE>
THE OFFERING
SECURITIES OFFERED
Up to 33,600 shares of Common Stock which may be acquired by the Plan for
the accounts of employees participating in the Plan, as well as participation
interests in the Plan, are offered hereby. Only employees of American Savings
may participate in the Plan. Information with regard to the Plan is contained
in this Prospectus Supplement and information with respect to the Company, the
Conversion and the financial condition, results of operations and business of
American Savings are contained in the attached Prospectus. The address of the
principal executive office of the Company is 714 North Vermilion Street,
Danville, Illinois 61832. The Company's telephone number is (217) 442-0270.
The address and telephone number of American Savings's principal office are the
same as the Company's.
ELECTION TO PURCHASE COMMON STOCK IN THE CONVERSION
In connection with the Conversion, the Plan is permitting each Participant
to direct that all or part of the funds which represent his or her beneficial
interest in the assets of the Plan may be transferred to the Employer Stock Fund
and used to purchase Common Stock in the Conversion. A Participant's ability to
direct that funds be used to purchase Common Stock in the Conversion will be
subject to the priority subscription rights which have been granted. A
Participant's ability to direct some or all of his or her investment be used to
purchase Common Stock in the Subscription Offering will be dependent upon such
individual being an Eligible Account Holder, Supplemental Eligible Account
Holder or Other Voting Member. The Plan permits this one-time election outside
the specific election dates as discussed below. See "Description of the Plan -
Investment of Contributions." The Trustee of the Plan will follow the
Participants' directions and exercise subscription rights granted to
Participants in the Plan to purchase Common Stock in the Conversion.
DESCRIPTION OF THE PLAN
Attached to this Prospectus Supplement is the Summary Plan Description and
most recent financial statements of the Plan, which provide detailed information
concerning the Plan and its terms. Also attached is information concerning the
investment return for each of the investment funds which Participants may
currently make contributions pursuant to the Plan for the past five calendar
years.
METHOD OF DIRECTING TRANSFER
Included with this Prospectus Supplement is a form to direct a transfer
among investment funds (the "Transfer Direction Form"). If a Participant wishes
to transfer all or part of his or her beneficial interest in the assets of the
Plan (other than in the Company common stock fund) to the purchase of Common
Stock in the Conversion, he or she should
1
<PAGE>
indicate that decision on the Transfer Direction Form. If a Participant does
not wish to make such an election, he or she does not need to take any action.
TIME FOR DIRECTING TRANSFER
The deadline for submitting a direction to transfer amounts to the Employer
Stock Fund in order to purchase Common Stock in the Conversion is March __,
1997. The Transfer Direction Form, along with a completed Vermilion Bancorp,
Inc. Subscription or Community Offering Stock Order Form ("Stock Order Form")
and Certification Form, should be returned to American Savings by 12:00 p.m.,
Central Time, on such date.
IRREVOCABILITY OF TRANSFER DIRECTION
A Participant's direction to transfer amounts credited in the Plan to his
or her accounts to the Employer Stock Fund in order to purchase Common Stock in
the Conversion shall be irrevocable. Subsequent to the Conversion, however,
Participants will be able to direct transfers within the Plan, as explained
below.
DIRECTION TO PURCHASE COMMON STOCK AFTER THE CONVERSION
After the Conversion, a Participant may use the Transfer Direction Form to
direct that a certain percentage of his or her interest in one or more of the
investment funds of the Plan be transferred to the Employer Stock Fund and
invested in Common Stock. Alternatively, a Participant may direct that a
certain percentage of his or her interest in the Employer Stock Fund be
transferred to other investment funds within the Plan when such funds become
available. However, following the initial election, the allocation of a
Participant's interest in the investment funds may be changed only as of the
next succeeding calendar quarter. Participants also will be permitted to direct
that future contributions made to the Plan on their behalf will be invested in
Common Stock.
PURCHASE PRICE OF COMMON STOCK
The funds transferred to the Employer Stock Fund for the purchase of Common
Stock in the Conversion will be used by the Trustee to purchase Common Stock
through the exercise of subscription rights granted to the Plan under American
Savings's plan of conversion ("Plan of Conversion"). The price paid for such
shares of Common Stock will be the same $10.00 price as is paid by all other
persons who purchase Common Stock in the Conversion. The prices paid by the
Trustee for shares of Common Stock will not exceed "adequate consideration" as
defined in Section 3(18) of the Employee Retirement Income Security Act of 1974,
as amended ("ERISA").
2
<PAGE>
NATURE OF A PARTICIPANT'S INTEREST IN THE COMMON STOCK
The Common Stock will be held in the name of the Trustee for the Plan.
Each Participant has an allocable interest in the investment funds of the Plan
but not in any particular assets of the Plan. Accordingly, a specific number of
shares of Common Stock will not be directly attributable to the account of any
Participant.
VOTING AND TENDER RIGHTS OF COMMON STOCK
The Trustee will generally exercise voting and tender rights attributable
to all Common Stock held by the Trust as directed by Participants with interests
in the Employer Stock Fund. For additional information on voting rights of
Common Stock, see "Description of the Plan - Investment of Contributions -
Voting and Tender Rights of Common Stock."
3
<PAGE>
EXHIBITS TO PROSPECTUS SUPPLEMENT
Exhibit A
Summary Plan Description of the
American Savings Bank of Danville 401(k) Plan
Exhibit B
American Savings Bank of Danville 401(k) Plan
Financial Statements
Exhibit C
Returns of Investment Options - 5-Year Period
4
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution.
SEC filing fees $ 1,200
Illinois Commissioner filing fees 10,000
NASD filing fees 900
Printing, Postage and mailing 35,000
Legal fees and expenses 55,000
Blue Sky and expenses 7,500
Accounting Fees 40,000
Appraiser's fees and expenses 15,000
Conversion agent and transfer agent fees and expenses 10,000
Agent's counsel fees and out-of-pocket expenses 22,500
Underwriter's Expenses 10,000
Underwriter's Management Fee 22,500
Miscellaneous 4,400
-------
Total $234,000
-------
-------
In addition to the foregoing expenses, the Agent will receive aggregate
fees of $29,710, $36,946, $44,183 and $52,530 at the minimum midpoint,
maximum and maximum, as adjusted, respectively, of the Estimated Price Range.
Item 14. Indemnification of Directors and Officers.
Section 145 of the Delaware General Corporation Law sets forth
circumstances under which directors, officers, employees and agents may be
insured or indemnified against liability which they may incur in their
capacity as such. The Bylaws of the Company provide that the directors,
officers, employees and agents of the Company shall be indemnified to the
full extent permitted by law. Such indemnity shall extend to expenses,
including attorney's fees, judgments, fines and amounts paid in the
settlement, prosecution or defense of the foregoing actions.
Article IX of the Registrant's Certificate of Incorporation provides as
follows:
The personal liability of the directors and officers of the Corporation
for monetary damages shall be eliminated to the fullest extent permitted by
the General Corporation Law of the State of Delaware as it exists on the
effective date of this Certificate of Incorporation or as such law may be
thereafter in effect. No amendment, modification or repeal of this Article
IX shall adversely affect the rights provided hereby with respect to any
claim, issue or matter in any
<PAGE>
proceeding that is based in any respect on any alleged action or failure to
act prior to such amendment, modification or repeal.
Article VI of the Registrant's Bylaws provides as follows:
6.1 Indemnification. The Corporation shall 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, whether civil, criminal,
administrative or investigative, by reason of the fact that such person is or
was a director, officer, employee or agent of the Corporation or any
predecessor of the Corporation, or is or was serving at the request of the
Corporation or any predecessor of the Corporation as a director, officer,
employee or agent of another corporation, 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 to the fullest
extent authorized by Section 145 of the General Corporation Law of the State
of Delaware, provided that the Corporation shall not be liable for any
amounts which may be due to any person in connection with a settlement of any
action, suit or proceeding effected without its prior written consent or any
action, suit or proceeding initiated by any person seeking indemnification
hereunder without its prior written consent.
6.2 Advancement of Expenses. Reasonable expenses (including attorneys'
fees) incurred by a director, officer or employee of the Corporation in
defending any civil, criminal, administrative or investigative action, suit
or proceeding described in Section 6.1 shall be paid by the Corporation in
advance of the final disposition of such action, suit or proceeding as
authorized by the Board of Directors only upon receipt of an undertaking by
or on behalf of such person to repay such amount if it shall ultimately be
determined that the person is not entitled to be indemnified by the
Corporation.
6.3 Other Rights and Remedies. The indemnification and advancement of
expenses provided by, or granted pursuant to, this Article VI shall not be
deemed exclusive of any other rights to which those seeking indemnification
or advancement of expenses may be entitled under the Corporation's
Certificate of Incorporation, any agreement, vote of stockholders or
disinterested directors or otherwise, both as to actions in their official
capacity and as to actions in another capacity while holding such office, and
shall continue as to a person who has ceased to be a director, officer or
employee and shall inure to the benefit of the heirs, executors and
administrators of such person.
6.4 Insurance. Upon resolution passed by the Board of Directors, the
Corporation may 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, partnership, joint venture, trust
or other enterprise, against any liability asserted against him or incurred
by him in any such capacity or arising out of his status as such, whether or
not the Corporation would have the power to indemnify him against such
liability under the provisions of its Certificate of Incorporation or this
Article VI.
2
<PAGE>
6.5 Modification. The duties of the Corporation to indemnify and to
advance expenses to a director, officer, employee or agent provided in this
Article VI shall be in the nature of a contract between the Corporation and
each such person, and no amendment or repeal of any provision of this Article
VI shall alter, to the detriment of such person, the right of such person to
the advance of expenses or indemnification related to a claim based on an act
or failure to act which took place prior to such amendment or repeal.
3
<PAGE>
Item 15. Recent Sales of Unregistered Securities
Not applicable.
Item 16. Exhibits and Financial Statements Schedules
The exhibits and financial statement schedules filed as a part of this
Registration Statement are as follows:
(a) List of Exhibits (filed herewith unless otherwise noted)
1.1* Engagement Letter with Trident Securities, Inc.
1.2* Agency Agreement with Trident Securities, Inc.
2.0* Plan of Conversion
3.1* Articles of Incorporation of Vermilion Bancorp, Inc.
3.2* Bylaws of Vermilion Bancorp, Inc.
3.3* Amended and Restated Articles of Incorporation of American
Savings Bank of Danville
3.4* Amended and Restated Bylaws of American Savings Bank of Danville
4.0* Form of Stock Certificate of Vermilion Bancorp, Inc.
5.0* Form of Opinion of Elias, Matz, Tiernan & Herrick L.L.P.
regarding legality of securities
8.1* Opinion of Elias, Matz, Tiernan & Herrick regarding federal tax
matters
8.2* Opinion of Geo. Olive & Co., llc regarding Illinois tax matters
8.3* Opinion of RP Financial, L.C. regarding subscription rights
10.1* Form of 1997 Stock Option Plan for Employees and Non-Employee
Directors
10.2* Employment Agreement between American Savings Bank of Danville and
Merrill G. Norton
23.1* Consent of Elias, Matz, Tiernan & Herrick L.L.P. (Included in
Exhibits 5.0 and 8.1, respectively)
23.2* Consent of Geo. Olive & Co. LLC
23.3* Consent of RP Financial, Inc.
24.0* Power of Attorney (included in Signature Page of this Registration
Statement)
99.1* Appraisal Report of RP Financial, L.C., dated November 15, 1996
99.2* Subscription Order Form and Instructions
99.3* Return Request Card
99.4* Transmittal Letters
99.5* Question and Answer Brochure
99.6* Proxygram
99.7* Proxy Statement and Form of Proxy
* Previously filed
4
<PAGE>
(b) Financial Statement Schedules
All schedules have been omitted as not applicable or not required under the
rules of Regulation S-X.
Item 17. Undertakings.
The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this Registration Statement:
(i) To include any Prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the Prospectus any facts or events arising after
the effective date of the Registration Statement (or the most recent
post-effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in the
Registration Statement. Notwithstanding the foregoing, any increase or
decrease in volume of securities offered (if the total dollar value of the
securities offered would not exceed that which was registered) and any
deviation from the low or high and 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 20 percent 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 furnish stock
certificates to or in accordance with the instructions of the respective
purchasers of the Common Stock, so as to make delivery to each purchaser
promptly following the closing under the Plan of Conversion.
5
<PAGE>
Insofar as indemnification 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 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 of whether such indemnification by it is against public policy as
expressed in the Act and will be governed by the final adjudication of such
issue.
6
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
Registrant has duly caused this registration statement to be signed on its
behalf by the undersigned, thereunto duly authorized.
VERMILION BANCORP, INC.
By: ---------------------------------
Merrill G. Norton
President, Chief Executive
Officer and Director
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated. Each person whose signature appears
below hereby makes, constitutes and appoints Merrill G. Norton his true and
lawful attorney with full power to sign for such person and in such person's
name and capacity indicated below, and with full power of substitution, any
and all amendments to this registration statement, hereby ratifying and
confirming such person's signature as it may be signed by said attorney to
any and an all amendments.
Name Title Date
- ---- ----- ----
- ----------------- President and Chief Executive February 3, 1997
Merrill G. Norton Officer an Director
- ----------------- Chairman of the Board February 3, 1997
Thomas B. Meyer
- ----------------- Director February 3, 1997
Carl W. Busby
<PAGE>
- ----------------- Director February 3, 1997
Robert L. Ewbank
- ----------------- Director February 3, 1997
William T. Ingram
- ----------------- President and Chief Executive February 3, 1997
Merrill G. Norton Officer (principal financial
accounting officer)
